INCOME TAXES

Income tax provision consists of the following:



	Year Ended
	June 29, 2013		June 30, 2012			July 2, 2011
	(in thousands)
Current income tax provision:
United States	$	1,729	$	1,483		$	34
Foreign	1,050		511			242
	2,779		1,994			276
Deferred income tax provision:
United States	2,049		(85		)	1,250
Foreign	444		306			(780		)
	2,493		221			470
Total income tax provision	$	5,272	$	2,215		$	746

The Company has total tax credit carryforwards of approximately $7.9 million at June 29, 2013. Included in total tax credits carryforwards is approximately $5.7 million in research and development (R&D) tax credits.

Management also has reviewed its other deferred tax assets for purposes of determining whether or not a valuation allowance may be required. A valuation allowance against these deferred tax assets is required if it is more likely than not that some of the deferred tax assets will not be realized. Based on the Company’s increased profitability and estimated future repatriations from foreign subsidiaries, it has been determined that it is more likely than not that the deferred tax assets will be realized.

Management has reviewed and updated as necessary estimates of future repatriations of the undistributed earnings of its foreign subsidiaries. Based on this analysis, management expects to repatriate a portion of the foreign undistributed earnings based on increased sales growth driving additional U.S. capital requirements, cash requirements for potential acquisitions and to potentially implement certain tax strategies. No foreign earnings were repatriated from either foreign subsidiary during fiscal 2013 or 2012. The Company currently estimates that future repatriations from foreign subsidiaries will approximate $9.3 million. As such, as earnings are recognized in the United States, the Company would be subject to U.S. federal and state income taxes and potential withholding taxes estimated to be approximately $4.6 million. Both the domestic tax and estimated withholding tax have been recorded as part of deferred taxes as of June 29, 2013. Included in tax credits is $3.9 million related to foreign tax credits that can be used to offset future domestic income tax. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed asset purchases in foreign locations.

The Company has not provided for U.S. income taxes or foreign withholding taxes on approximately $9.8 million of earnings from foreign subsidiaries which are permanently reinvested outside the U.S. The unrecognized net tax provision, after netting U.S. federal and state income tax and any related foreign tax credits, would be approximately $1.2 million associated to these earnings.

The Company has a wholly owned foreign subsidiary in Mexico that applies certain tax credits related to production assets that currently offset all of the income tax liabilities under general Mexican income tax law. However, the Company is subject to a Mexican business flat tax called Impuesto Empresarial a Tasa Unica (IETU). The Company anticipates that it will be taxable under IETU for the foreseeable future based on projected assets used in its operations and anticipated future cash flows. The effect of IETU and the associated presidential decrees have been included in the effective tax rate for the year ended June 29, 2013.

The Company’s effective tax rate differs from the federal tax rate as follows:



	Year Ended
	June 29, 2013			June 30, 2012			July 2, 2011
	(in thousands)
Federal income tax provision at statutory rates	$	6,071		$	4,706		$	2,205
Foreign tax rate differences	(625		)	(361		)	(326		)
Effect of income tax credits	(340		)	(2,104		)	(1,249		)
Effect of repatriation of foreign earnings, net	188			—			72
Other	235			436			(86		)
Change in valuation allowance	(257		)	(462		)	130
Income tax provision	$	5,272		$	2,215		$	746

The domestic and foreign components of income before income taxes were:



	Year Ended
	June 29, 2013		June 30, 2012		July 2, 2011
	(in thousands)
Domestic	$	12,863	$	10,666	$	4,048
Foreign	4,992		3,175		2,434
Income before income taxes	$	17,855	$	13,841	$	6,482

Deferred income tax assets and liabilities consist of the following at:



	June 29, 2013			June 30, 2012
	(in thousands)
Deferred tax assets:
Tax credit carryforwards, net	$	3,414		$	4,559
Foreign subsidiaries – future tax credits	3,389			2,600
Inventory	131			396
Accruals	1,925			3,069
Fixed Assets	755			378
Other	185			362
Deferred income tax assets	9,799			11,364
Valuation allowance	—			(257		)
Deferred income tax assets, net of valuation allowance	$	9,799		$	11,107
Deferred tax liabilities:
Foreign subsidiaries – unremitted earnings	(4,115		)	(3,138		)
Fixed assets	(1,617		)	(1,157		)
Other	(706		)	(2		)
Deferred income tax liabilities	$	(6,438	)	$	(4,297	)
Net deferred income tax assets	$	3,361		$	6,810
Balance sheet caption reported in:
Current deferred tax asset	$	1,767		$	5,201
Long-term deferred tax asset	3,179			2,703
Long term deferred income tax liability	(1,585		)	(1,094		)
Net deferred income tax asset	$	3,361		$	6,810

At June 30, 2012 the Company utilized all its NOLs carried forward from prior years in both the U. S. and Chinese jurisdictions. The Company has R&D tax credits that approximate $5.7 million that have 20 year carryforwards before expiring. The Company’s R&D tax credits expire in various fiscal years from 2019 to 2033. The Company also has alternative minimum tax credits, which do not expire, approximating $726,000.

Uncertain Tax Positions

As of June 29, 2013, the Company had unrecognized tax benefits of $3.0 million related to its gross R&D tax credits. The unrecognized tax benefits relate to certain R&D tax credits generated from 1999 to 2013.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



Balances, July 2, 2011	$	781
Additions in fiscal 2012	2,222
Balances, June 30, 2012	$	3,003
Additions in fiscal 2013	97
Deletions in fiscal 2013	(69		)
Balances, June 29, 2013	$	3,031

The increase from the prior year is due to additional R&D credits that were recorded in 2013 as discussed above. Management does not anticipate any material changes to this amount during the next 12 months.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties in its income tax provision. The Company has not recognized any interest or penalties in the fiscal years presented in these financial statements. The Company is subject to income tax in the U.S. federal jurisdiction, Mexico and China. Certain years remain subject to examination but there are currently no ongoing exams in any taxing jurisdictions.