Note H - Income Taxes

9 Months Ended

Mar. 25, 2016

H.	Income Taxes

For the three quarters ended March 25, 2016 and March 27, 2015, the Company’s effective income tax rate was 51.5% and 31.8% respectively. Global earnings were significantly lower in fiscal 2016, resulting in a consolidated net loss position. Foreign tax planning initiatives executed during the quarter, including recognizing foreign tax credits associated with the repatriation of $9,700 in cash from various European entities, resulted in additional tax benefits recorded of $2,400. This net benefit, when calculated with regards to the consolidated net loss position, increased the effective tax rate by 12.7%. The mix of earnings by jurisdiction during fiscal 2016 resulted in a higher overall applied tax benefit of $1,000. This resulted in an increase in the effective tax rate of 7.3%.

The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. Due to recent operating income in a certain foreign jurisdiction with a history of generating operating losses, the Company has evaluated the realizability of the net deferred tax assets related to this jurisdiction. This evaluation concluded that, based primarily upon recent cumulative losses in this jurisdiction and failure to achieve targeted levels of improvement, a full valuation allowance continues to be necessary. It is more likely than not that all other jurisdictions will realize deferred tax assets that have been recognized.

The Company has not provided for additional U.S. income taxes on cumulative earnings of consolidated foreign subsidiaries that are considered to be reinvested indefinitely. The Company reaffirms its position that these earnings remain permanently invested, and, with the exception of the foreign dividend payment made as part of the third quarter tax strategic initiatives, has no plans to repatriate funds related to these jurisdictions to the U.S. for the foreseeable future. Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation.

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter.

The Company has approximately $818 of unrecognized tax benefits, including related interest and penalties, as of March 25, 2016, which, if recognized, would favorably impact the effective tax rate. There was no significant change in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the quarter ended March 25, 2016. It appears possible that the amount of unrecognized tax benefits could change in the next twelve months due to on-going audit activity.

Annually, the Company files income tax returns in various taxing jurisdictions inside and outside the United States. In general, the tax years that remain subject to examination are 2011 through 2015 for the major operations in Italy, Canada, Belgium, and Japan. The tax years open to examination in the U.S. are for years subsequent to fiscal 2012. The state of Wisconsin income tax audit remains ongoing for the fiscal years 2010 through 2015. During the quarter the Company settled a transfer pricing audit in Belgium covering fiscal 2013 and fiscal 2014 with no material financial impact. It is reasonably possible that other audit cycles will be completed during fiscal 2016.