Note 2 - Significant Accounting Policies	12 Months Ended
Jun. 30, 2018
Notes to Financial Statements
Significant Accounting Policies [Text Block]	2. SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation : The consolidated financial statements include the accounts of The L. S. Starrett Company and its subsidiaries, all of which are wholly-owned. All intercompany items have been eliminated in consolidation. Financial instruments and derivatives : The Company’s financial instruments include cash, accounts receivable, and debt. The carrying value of cash and accounts receivable approximates fair value because of the short-term nature of these instruments. The carrying value of debt, which is at current market interest rates, also approximates its fair value. The Company’s U.K. subsidiary utilizes forward exchange contracts to reduce currency risk. The notional amount of contracts outstanding as of June 30, 2018 and June 30, 2017 amounted to $0.0 million and $1.4 million, respectively. Accounts receivable : Accounts receivable consist of trade receivables from customers. The expense for bad debts amounted to $0.5, $0.3, and $0.3 million in fiscal 2018, 2017 and 2016, respectively. In establishing the allowance for doubtful accounts, management considers historical losses, the aging of receivables and existing economic conditions. Inventories : Inventories are stated at the lower of cost or market. Substantially all United States inventories are valued using the last-in- first -out (“LIFO”) method. All non-U.S. subsidiaries use the first -in- first -out (“FIFO”) method or the average cost method. LIFO is not a permissible method of inventory costing for tax purposes outside the U.S. Property Plant and Equipment : The cost of buildings and equipment is depreciated using straight-line and accelerated methods over their estimated useful lives as follows: buildings and building improvements 10 to 50 years, machinery and equipment 3 to 12 years. Leases are capitalized under the criteria set forth in Accounting Standards Codification (ASC) 840, “Leases” which establishes the four criteria of a capital lease. At least one of the four following criteria must be met for a lease to be considered a capital lease: a transfer of ownership of the property to the lessee by the end of the lease term; a bargain purchase option; a lease term that is greater than or equal to 75 percent of the economic life of the leased property; present value of the future minimum lease payments equals or exceeds 90 percent of the fair market value of the leased property. If none of the aforementioned criteria are met, the lease will be treated as an operating lease. Property plant and equipment to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. A gain or loss is recorded on individual fixed assets when retired or disposed of. Included in buildings and building improvements and machinery and equipment at June 30, 2018 and June 30, 2017 were $1.2 million and $1.6 million, respectively, of construction in progress. Repairs and maintenance of equipment are expensed as incurred. Intangible assets : Identifiable intangibles are recorded at cost and are amortized on a straight-line basis over a 5 - 20 year period. The estimated useful lives of the intangible assets subject to amortization are: 10 - 15 years for patents, 14 - 20 years for trademarks and trade names, 10 years for completed technology, 8 years for non-compete agreements, 8 - 16 years for customer relationships and 5 years for software development. Long-Lived Asset Impairment : Impairment losses are recorded when indicators of impairment, such as plant closures, are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company continually reviews for such impairment and believes that long-lived assets are being carried at their appropriate value. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of such an asset may not be recoverable. Recoverability of the net book value of long-lived assets is determined by comparison of the carrying amount to estimated future undiscounted net cash flows the asset group is expected to generate. Estimating these cash flows and terminal values requires management to make judgments about the growth in demand for our products, sustainability of gross margins, and our ability to achieve economies of scale. If assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value. No events or circumstances arose in fiscal 2018 and 2017 which required management to perform an impairment analysis. In fiscal 2016 the Company determined that the carrying value of a building exceeded its fair value. Consequently, the Company recorded an impairment loss of $4.1 million, which represented the excess of the carrying value of a building over its fair value. See also Impairment of Assets and Restructuring Costs (Note 9 to the Consolidated Financial Statements.) Goodwill : Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not subject to amortization but is tested for impairment annually and at any time when events suggest impairment may have occurred. The Company annually tests the goodwill associated with the November 2011 acquisition of Bytewise in October and the February 2017 acquisition of a private software company in February. As of October 1, 2017, the Company performed a Step-One analysis of quantitative factors to determine whether the fair value of the Bytewise business is less than its carrying amount. Based on the Company's analysis of quantitative factors, the Company determined that the fair value assessment of the Bytewise goodwill exceeded its carrying amount, and that no goodwill impairment was determined to exist. As of February 1, 2018, the Company performed an analysis of qualitative factors to determine whether it was more likely than not that the fair value of the acquired software business was less than its carrying amount as a basis for determining whether it was necessary to perform the two -step goodwill impairment test. Based on the Company's analysis of qualitative factors, the Company determined that it was not necessary to perform the two -step goodwill impairment test. Revenue recognition : Sales of merchandise and freight billed to customers are recognized when products have shipped, title and risk of loss has passed to the customer, no significant post-delivery obligations remain and collection of the resulting receivable is reasonably assured. Sales are presented net of provisions for cash discounts, returns, customer discounts (such as volume or trade discounts), and other sales related discounts. Cooperative advertising payments made to customers are included in selling, general and administrative expenses in the Consolidated Statements of Operations. While the Company does allow its customers the right to return in certain circumstances, revenue is not deferred, rather a reserve for sales returns is provided based on experience, which historically has not been significant. Advertising costs : The Company’s policy is to generally expense advertising costs as incurred, except catalogs costs, which are deferred until mailed. Advertising costs were expensed as follows: $5.1 million in fiscal 2018, $5.2 million in fiscal 2017 and $5.0 million in fiscal 2016 and are included in selling, general and administrative expenses. Freight costs : The cost of outbound freight and the cost for inbound freight included in material purchase costs are both included in cost of sales. Warranty expense : The Company’s warranty obligation is generally one year from shipment to the end user and is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Historically, the Company has not incurred significant warranty expense and consequently its warranty reserves are not material. Pension and Other Postretirement Benefits: The Company has two defined benefit pension plans, one for U.S. employees and another for U.K. employees. The Company also has defined contribution plans. The Company amended its Postretirement Medical Plan effective December 31, 2013, whereby the Company terminated eligibility for employees under the age of 65. On December 21, 2016, the Company amended the U.S. defined benefit pension plan to freeze benefit accruals effective December 31, 2016. Consequently, the Plan is closed to new participants and current participants no longer earn additional benefits after December 31, 2016. The Company sponsors funded U.S. and non-U.S. defined benefit pension plans covering the majority of our U.S. and U.K. employees. The Company also sponsors an unfunded postretirement benefit plan that provides health care benefits and life insurance coverage to eligible U.S. retirees. Under the Company’s current accounting method, both pension plans use fair value as the market-related value of plan assets and continue to recognize actuarial gains or losses within the corridor in other comprehensive income (loss) but instead of amortizing net actuarial gains or losses in excess of the corridor in future periods, such excess gains and losses, if any, are recognized in net periodic benefit cost as of the plan measurement date, which is the same as the fiscal year end of the Company (MTM adjustment). This method is a permitted option which results in immediate recognition of excess net actuarial gains and losses in net periodic benefit cost instead of in other comprehensive income (loss). Such immediate recognition in net periodic benefit cost increases the volatility of net periodic benefit cost. The MTM adjustments to net periodic benefit cost for 2018, 2017 and 2016 were $0.1 million, $0.2 million, and $17.8 million, respectively. Income taxes : Deferred tax expense results from differences in the timing of certain transactions for financial reporting and tax purposes. Deferred taxes have not been recorded on approximately $55.4 million of undistributed earnings of foreign subsidiaries as of June 30, 2018 and the related unrealized translation adjustments because such amounts are considered permanently invested. In addition, it is possible that remittance taxes, if any, would be reduced by U.S. foreign tax credits to the extent available, after consideration of U.S. tax reform and the dividends received deduction. Valuation allowances are recognized if, based on the available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized. Research and development : Research and development costs are expensed, primarily in selling, general and administrative expenses, and were as follows: $3.6 million in fiscal 2018, $3.5 million in fiscal 2017, and $2.9 million in fiscal 2016 and are included in selling general and administrative expenses in the Consolidated Statements of Operations. Earnings per share (EPS) : Basic EPS is computed by dividing earnings (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution by securities that could share in the earnings. The Company had 23,771, 32,674, and 32,833, of potentially dilutive common shares in fiscal 2018, 2017 and 2016, respectively, resulting from shares issuable under its stock option plans. These additional shares are not used in the diluted EPS calculation in loss years. Translation of foreign currencies : The financial statements of our foreign subsidiaries, where the local currency is the functional currency, are translated at exchange rates in effect on reporting dates, and income and expense items are translated at average rates or rates in effect on transaction dates as appropriate. The resulting foreign currency translation adjustments are charged or credited directly to the other comprehensive income (loss) as noted in the Consolidated Statements of Comprehensive Income (Loss). Net foreign currency gains (losses) are disclosed in Note 10. Use of accounting estimates : The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Judgments, assumptions and estimates are used for, but not limited to: the allowances for doubtful accounts receivable and returned goods; inventory allowances; goodwill; income tax valuation allowances, uncertain tax positions and pension obligations. Amounts ultimately realized could differ from those estimates. Recent Accounting Pronouncements : In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014 - 09, "Revenues from Contracts with Customers (Topic 606 )," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements comprehensive information about the nature, amounts, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. ASU 2014 - 09 defines a five -step process to achieve this core principle and in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than are required under existing guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to separate performance obligations, among others. The new standard will be effective for the Company beginning July 1, 2018. The FASB issued four subsequent standards in 2016 containing implementation guidance related to the new standard. These standards provide additional guidance related to principal versus agent considerations, licensing, and identifying performance obligations. Additionally, these standards provide narrow-scope improvements and practical expedients as well as technical corrections and improvements. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company will be adopting the standard using the modified retrospective method effective July 1, 2018. The Company has completed its implementation procedures with respect to the new revenue recognition standard. The Company's revenues are primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks and rewards transfer. The timing of revenue recognition for these product sales are not materially impacted by the new standard. However, the Company utilized a comprehensive approach to assess the impact of the guidance on our current contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts, including evaluation of performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and accounting treatment of costs to obtain and fulfill contracts. In addition, as part of completing its quantitative assessment, the Company updated its internal controls over financial reporting and reviewed the tax impact the adoption of the new standard would have. Based on the reviews and procedures performed, the Company has concluded that its previously recorded and future revenue will not be materially impacted by the implementation of this guidance. In February 2016, the FASB issued ASU No. 2016 - 02, “Leases (Topic 842 )”. The ASU requires that organizations that lease assets recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. The ASU will affect the presentation of lease related expenses on the income statement and statement of cash flows and will increase the required disclosures related to leases. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2016 - 02 on its consolidated financial statements. It is expected that a key change upon adoption will be the balance sheet recognition of leased assets and liabilities. In October 2016, the FASB issued ASU No. 2016 - 16, "Income Taxes (Topic 740 ): Intra-Entity Transfers of Assets Other Than Inventory," which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The adoption of ASU No. 2016 - 16 is not expected to have a material impact on the Company’s consolidated financial statements. . In January 2017, the FASB issued ASU No. 2017 - 01, "Business Combinations (Topic 805 ) - Clarifying the Definition of a Business," with the objective to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The amendments in ASU 2017 - 01 provide a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen is expected to reduce the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017 - 01 (i) require that to be considered a business, a set of assets and liabilities acquired must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output; and (ii) remove the evaluation of whether a market participant could replace missing elements. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017 and should be applied prospectively. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date of ASU 2017 - 01, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The adoption of ASU No. 2017 - 01 had no material impact on the Company’s consolidated financial statements. In January 2017, the FASB issued ASU No. 2017 - 04, "Intangibles-Goodwill and Other (Topic 350 ): Simplifying the Test for Goodwill Impairment." Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the requirement to calculate goodwill impairment using Step 2, which calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019 and should be applied prospectively for annual and any interim goodwill impairment tests. Early adoption is permitted for entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the update on our consolidated financial statements. In February 2018, the FASB issued ASU No. 2018 - 02, “Income Statement – Reporting Comprehensive Income (Topic 220 ): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. For deferred tax items recognized in Accumulated Other Comprehensive Income (AOCI), changes in tax rates can leave amounts “stranded” in AOCI. Under ASU 2018 - 02, FASB has given companies an option to reclassify the stranded tax effects resulting from the tax law and tax rate changes under the Tax Cuts and Jobs Act of 2017 from AOCI to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018 and requires companies to disclosure whether they are or are not opting to reclassify the income tax effects from the new 2017 tax act. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements. In February 2018, the FASB issued ASU 2018 - 05, “Income Taxes (Topic 740 ): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. This update codified the guidance provided in SAB 118 on applying ASC 740, Income Taxes, if the accounting for certain income tax effects of the Tax Cuts and Jobs Act of 2017 is incomplete when the financial statements are issued for a reporting period. This update was effective upon issuance. Therefore, the Company has applied the guidance in this update within our consolidated financial statements for the year ended June 30, 2018. See Note 11: “Income Taxes”, of this Form 10 -K for more information on the adoption of this guidance.

SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

: The consolidated financial statements include the accounts of The L. S. Starrett Company and its subsidiaries, all of which are wholly-owned. All intercompany items have been eliminated in consolidation.

Financial instruments and derivatives

: The Company’s financial instruments include cash, accounts receivable, and debt. The carrying value of cash and accounts receivable approximates fair value because of the short-term nature of these instruments. The carrying value of debt, which is at current market interest rates, also approximates its fair value. The Company’s U.K. subsidiary utilizes forward exchange contracts to reduce currency risk. The notional amount of contracts outstanding as of

June 30, 2018

and

June 30, 2017

amounted to

$0.0

million and

$1.4

million, respectively.

Accounts receivable

: Accounts receivable consist of trade receivables from customers. The expense for bad debts amounted to

$0.5,

$0.3,

and

$0.3

million in fiscal

2018,

2017

and

2016,

respectively. In establishing the allowance for doubtful accounts, management considers historical losses, the aging of receivables and existing economic conditions.

Inventories

: Inventories are stated at the lower of cost or market. Substantially all United States inventories are valued using the last-in-

first

-out (“LIFO”) method. All non-U.S. subsidiaries use the

first

-in-

first

-out (“FIFO”) method or the average cost method. LIFO is

not

a permissible method of inventory costing for tax purposes outside the U.S.

Property Plant and Equipment

: The cost of buildings and equipment is depreciated using straight-line and accelerated methods over their estimated useful lives as follows: buildings and building improvements

years, machinery and equipment

years. Leases are capitalized under the criteria set forth in Accounting Standards Codification (ASC)

840,

“Leases” which establishes the

four

criteria of a capital lease. At least

one

of the

four

following criteria must be met for a lease to be considered a capital lease: a transfer of ownership of the property to the lessee by the end of the lease term; a bargain purchase option; a lease term that is greater than or equal to

percent of the economic life of the leased property; present value of the future minimum lease payments equals or exceeds

percent of the fair market value of the leased property. If

none

of the aforementioned criteria are met, the lease will be treated as an operating lease. Property plant and equipment to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. A gain or loss is recorded on individual fixed assets when retired or disposed of. Included in buildings and building improvements and machinery and equipment at

June 30, 2018

and

June 30, 2017

were

$1.2

million and

$1.6

million, respectively, of construction in progress. Repairs and maintenance of equipment are expensed as incurred.

Intangible assets

: Identifiable intangibles are recorded at cost and are amortized on a straight-line basis over a

year period. The estimated useful lives of the intangible assets subject to amortization are:

years for patents,

years for trademarks and trade names,

years for completed technology,

years for non-compete agreements,

years for customer relationships and

years for software development.

Long-Lived Asset Impairment

: Impairment losses are recorded when indicators of impairment, such as plant closures, are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company continually reviews for such impairment and believes that long-lived assets are being carried at their appropriate value. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of such an asset

may

not

be recoverable.

Recoverability of the net book value of long-lived assets is determined by comparison of the carrying amount to estimated future undiscounted net cash flows the asset group is expected to generate. Estimating these cash flows and terminal values requires management to make judgments about the growth in demand for our products, sustainability of gross margins, and our ability to achieve economies of scale. If assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.

events or circumstances arose in fiscal

2018

and

2017

which required management to perform an impairment analysis. In fiscal

2016

the Company determined that the carrying value of a building exceeded its fair value. Consequently, the Company recorded an impairment loss of

$4.1

million, which represented the excess of the carrying value of a building over its fair value. See also Impairment of Assets and Restructuring Costs (Note

to the Consolidated Financial Statements.)

Goodwill

: Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is

not

subject to amortization but is tested for impairment annually and at any time when events suggest impairment

may

have occurred. The Company annually tests the goodwill associated with the

November 2011

acquisition of Bytewise in

October

and the

February 2017

acquisition of a private software company in

February.

As of

October 1, 2017,

the Company performed a Step-One analysis of quantitative factors to determine whether the fair value of the Bytewise business is less than its carrying amount. Based on the Company's analysis of quantitative factors, the Company determined that the fair value assessment of the Bytewise goodwill exceeded its carrying amount, and that

goodwill impairment was determined to exist. As of

February 1, 2018,

the Company performed an analysis of qualitative factors to determine whether it was more likely than

not

that the fair value of the acquired software business was less than its carrying amount as a basis for determining whether it was necessary to perform the

two

-step goodwill impairment test. Based on the Company's analysis of qualitative factors, the Company determined that it was

not

necessary to perform the

two

-step goodwill impairment test.

Revenue recognition

: Sales of merchandise and freight billed to customers are recognized when products have shipped, title and risk of loss has passed to the customer,

significant post-delivery obligations remain and collection of the resulting receivable is reasonably assured. Sales are presented net of provisions for cash discounts, returns, customer discounts (such as volume or trade discounts), and other sales related discounts. Cooperative advertising payments made to customers are included in selling, general and administrative expenses in the Consolidated Statements of Operations. While the Company does allow its customers the right to return in certain circumstances, revenue is

not

deferred, rather a reserve for sales returns is provided based on experience, which historically has

not

been significant.

Advertising costs

: The Company’s policy is to generally expense advertising costs as incurred, except catalogs costs, which are deferred until mailed. Advertising costs were expensed as follows:

$5.1

million in fiscal

2018,

$5.2

million in fiscal

2017

and

$5.0

million in fiscal

2016

and are included in selling, general and administrative expenses.

Freight costs

: The cost of outbound freight and the cost for inbound freight included in material purchase costs are both included in cost of sales.

Warranty expense

: The Company’s warranty obligation is generally

one

year from shipment to the end user and is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Historically, the Company has

not

incurred significant warranty expense and consequently its warranty reserves are

not

material.

Pension and Other Postretirement Benefits:

The Company has

two

defined benefit pension plans,

one

for U.S. employees and another for U.K. employees. The Company also has defined contribution plans. The Company amended its Postretirement Medical Plan effective

December 31, 2013,

whereby the Company terminated eligibility for employees under the age of

65.

December 21, 2016,

the Company amended the U.S. defined benefit pension plan to freeze benefit accruals effective

December 31, 2016.

Consequently, the Plan is closed to new participants and current participants

longer earn additional benefits after

December 31, 2016.

The Company sponsors funded U.S. and non-U.S. defined benefit pension plans covering the majority of our U.S. and U.K. employees. The Company also sponsors an unfunded postretirement benefit plan that provides health care benefits and life insurance coverage to eligible U.S. retirees. Under the Company’s current accounting method, both pension plans use fair value as the market-related value of plan assets and continue to recognize actuarial gains or losses within the corridor in other comprehensive income (loss) but instead of amortizing net actuarial gains or losses in excess of the corridor in future periods, such excess gains and losses, if any, are recognized in net periodic benefit cost as of the plan measurement date, which is the same as the fiscal year end of the Company (MTM adjustment). This method is a permitted option which results in immediate recognition of excess net actuarial gains and losses in net periodic benefit cost instead of in other comprehensive income (loss). Such immediate recognition in net periodic benefit cost increases the volatility of net periodic benefit cost. The MTM adjustments to net periodic benefit cost for

2018,

2017

and

2016

were

$0.1

million,

$0.2

million, and

$17.8

million, respectively.

Income taxes

: Deferred tax expense results from differences in the timing of certain transactions for financial reporting and tax purposes. Deferred taxes have

not

been recorded on approximately

$55.4

million of undistributed earnings of foreign subsidiaries as of

June 30, 2018

and the related unrealized translation adjustments because such amounts are considered permanently invested. In addition, it is possible that remittance taxes, if any, would be reduced by U.S. foreign tax credits to the extent available, after consideration of U.S. tax reform and the dividends received deduction. Valuation allowances are recognized if, based on the available evidence, it is more likely than

not

that some portion of the deferred tax assets will

not

be realized.

Research and development

: Research and development costs are expensed, primarily in selling, general and administrative expenses, and were as follows:

$3.6

million in fiscal

2018,

$3.5

million in fiscal

2017,

and

$2.9

million in fiscal

2016

and are included in selling general and administrative expenses in the Consolidated Statements of Operations.

Earnings per share (EPS)

: Basic EPS is computed by dividing earnings (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution by securities that could share in the earnings. The Company had

23,771,

32,674,

and

32,833,

of potentially dilutive common shares in fiscal

2018,

2017

and

2016,

respectively, resulting from shares issuable under its stock option plans. These additional shares are

not

used in the diluted EPS calculation in loss years.

Translation of foreign currencies

: The financial statements of our foreign subsidiaries, where the local currency is the functional currency, are translated at exchange rates in effect on reporting dates, and income and expense items are translated at average rates or rates in effect on transaction dates as appropriate. The resulting foreign currency translation adjustments are charged or credited directly to the other comprehensive income (loss) as noted in the Consolidated Statements of Comprehensive Income (Loss). Net foreign currency gains (losses) are disclosed in Note

10.

Use of accounting estimates

: The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Judgments, assumptions and estimates are used for, but

not

limited to: the allowances for doubtful accounts receivable and returned goods; inventory allowances; goodwill; income tax valuation allowances, uncertain tax positions and pension obligations. Amounts ultimately realized could differ from those estimates.

Recent Accounting Pronouncements

May 2014,

the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")

2014

09,

"Revenues from Contracts with Customers (Topic

606

)," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements comprehensive information about the nature, amounts, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. ASU

2014

defines a

five

-step process to achieve this core principle and in doing so, it is possible that more judgment and estimates

may

be required within the revenue recognition process than are required under existing guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to separate performance obligations, among others. The new standard will be effective for the Company beginning

July 1, 2018.

The FASB issued

four

subsequent standards in

2016

containing implementation guidance related to the new standard. These standards provide additional guidance related to principal versus agent considerations, licensing, and identifying performance obligations. Additionally, these standards provide narrow-scope improvements and practical expedients as well as technical corrections and improvements.

The guidance permits

two

methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company will be adopting the standard using the modified retrospective method effective

July 1, 2018.

The Company has completed its implementation procedures with respect to the new revenue recognition standard. The Company's revenues are primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks and rewards transfer. The timing of revenue recognition for these product sales are

not

materially impacted by the new standard. However, the Company utilized a comprehensive approach to assess the impact of the guidance on our current contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts, including evaluation of performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and accounting treatment of costs to obtain and fulfill contracts. In addition, as part of completing its quantitative assessment, the Company updated its internal controls over financial reporting and reviewed the tax impact the adoption of the new standard would have. Based on the reviews and procedures performed, the Company has concluded that its previously recorded and future revenue will

not

be materially impacted by the implementation of this guidance.

February 2016,

the FASB issued ASU

No.

2016

02,

“Leases (Topic

842

)”. The ASU requires that organizations that lease assets recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. The ASU will affect the presentation of lease related expenses on the income statement and statement of cash flows and will increase the required disclosures related to leases. This ASU is effective for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of ASU

No.

2016

on its consolidated financial statements. It is expected that a key change upon adoption will be the balance sheet recognition of leased assets and liabilities.

October 2016,

the FASB issued ASU

No.

2016

16,

"Income Taxes (Topic

740

): Intra-Entity Transfers of Assets Other Than Inventory," which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a

third

party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after

December 15, 2017.

Early adoption is permitted. The adoption of ASU

No.

2016

not

expected to have a material impact on the Company’s consolidated financial statements.

January 2017,

the FASB issued ASU

No.

2017

01,

"Business Combinations (Topic

805

) - Clarifying the Definition of a Business," with the objective to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The amendments in ASU

2017

provide a screen to determine when a set of assets and activities is

not

a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is

not

a business. This screen is expected to reduce the number of transactions that need to be further evaluated. If the screen is

not

met, the amendments in ASU

2017

(i) require that to be considered a business, a set of assets and liabilities acquired must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output; and (ii) remove the evaluation of whether a market participant could replace missing elements. The amendments in this ASU are effective for annual and interim periods beginning after

December 15, 2017

and should be applied prospectively. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date of ASU

2017

01,

only when the transaction has

not

been reported in financial statements that have been issued or made available for issuance. The adoption of ASU

No.

2017

had

material impact on the Company’s consolidated financial statements.

January 2017,

the FASB issued ASU

No.

2017

04,

"Intangibles-Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment." Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the requirement to calculate goodwill impairment using Step

which calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount. The standard does

not

change the guidance on completing Step

of the goodwill impairment test. The amendments in this ASU are effective for annual and interim periods beginning after

December 15, 2019

and should be applied prospectively for annual and any interim goodwill impairment tests. Early adoption is permitted for entities for interim or annual goodwill impairment tests performed on testing dates after

January 1, 2017.

The Company is currently evaluating the impact of the update on our consolidated financial statements.

February 2018,

the FASB issued ASU

No.

2018

02,

“Income Statement – Reporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. For deferred tax items recognized in Accumulated Other Comprehensive Income (AOCI), changes in tax rates can leave amounts “stranded” in AOCI. Under ASU

2018

02,

FASB has given companies an option to reclassify the stranded tax effects resulting from the tax law and tax rate changes under the Tax Cuts and Jobs Act of

2017

from AOCI to retained earnings. This guidance is effective for fiscal years beginning after

December 15, 2018

and requires companies to disclosure whether they are or are

not

opting to reclassify the income tax effects from the new

2017

tax act. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.

February 2018,

the FASB issued ASU

2018

05,

“Income Taxes (Topic

740

): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin

No.

118”.

This update codified the guidance provided in SAB

118

on applying ASC

740,

Income Taxes, if the accounting for certain income tax effects of the Tax Cuts and Jobs Act of

2017

is incomplete when the financial statements are issued for a reporting period. This update was effective upon issuance. Therefore, the Company has applied the guidance in this update within our consolidated financial statements for the year ended

June 30, 2018.

See Note

11:

“Income Taxes”, of this Form

-K for more information on the adoption of this guidance.