

	Fiscal Year Ended
	June 29, 2019			June 30, 2018			July 1, 2017
	(in thousands)
Current income tax provision (benefit):
United States	$	(537	)	$	(221	)	$	1,231
Foreign	895			1,722			1,206
	358			1,501			2,437
Deferred income tax provision (benefit):
United States	(910		)	(795		)	(539		)
Foreign	(206		)	(823		)	(259		)
	(1,116		)	(1,618		)	(798		)
Total income tax provision (benefit)	$	(758	)	$	(117	)	$	1,639

The Company has gross tax credit carryforwards of approximately $9.1 million at June 29, 2019. Included in total tax credits carryforwards is approximately $9.0 million in research and development (R&D) tax credits.

Management has reviewed all deferred tax assets for purposes of determining whether or not a valuation allowance may be required. A valuation allowance against deferred tax assets is required if it is more likely than not that some of the deferred tax assets will not be realized. Based upon the Company’s profitability, forecasted income, and evaluation of all other positive and negative evidence, management determined that it is more likely than not that the deferred tax assets will be realized.

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act reduced Federal corporate tax rates effective January 1, 2018, and changed certain other provisions, many of which were not effective until fiscal year 2019. Effective tax rates for fiscal year 2018, were blended rates reflecting the benefit of two quarters of Federal tax rate reductions. These benefits were offset by discrete expenses relating to the revaluation of our U.S. net deferred tax assets, an adjustment relating to foreign exchange, and required adjustments associated with the transition from a global to a territorial tax system (discussed further below).

As a result of the U.S. tax system under the Tax Act from a global to a territorial model, a deemed one-time repatriation of all accumulated earnings and profits (AE&P) in Mexico and China occurred on December 31, 2017. For purposes of calculating the toll tax associated with this deemed repatriation, AE&P pools are stratified into two asset categories, subjected to certain allowable deductions and then the net amounts were subjected to the toll tax (15.5% for cash/cash equivalents and 8% for illiquid assets).

On December 22, 2017, the staff of the SEC issued Staff Accounting Bulletin No. 118 (“SAB No. 118”). SAB No. 118 provided guidance on accounting for the tax effects of the 2017 Tax Act and allowed registrants to record provisional amounts for a period of up to one year from the date of enactment of the 2017 Tax Act. In fiscal year 2019, we finalized the toll tax calculation, resulting in a net toll tax amount of $0.8 million, a decrease of $0.4 million for the fiscal year.

In addition to the $0.8 million toll tax described above, the Company recognized a $1.3 million discrete expense in fiscal year 2018 due to the revaluation of our U.S. net deferred tax assets. Offsetting these amounts, because of the shift to a territorial system of taxation in the U.S., the Company recognized a discrete benefit of approximately $1.3 million related to reversing its previously recognized estimated liability associated with estimated future repatriations from Mexico and China.

In future years, because of the toll tax on AE&P described above, repatriations of cash will generally be tax-free in the U.S. However, withholding taxes in China and Mexico may still apply to any such future repatriations. Management has not changed its indefinite investment assertions with regards to the portion of AE&P in China that may be repatriated in the future. Accordingly, management estimates that future repatriations of cash from China may result in approximately $0.8 million of withholding tax. There would be no offsetting foreign tax credits in the U.S. and as such, this potential liability is a direct cost associated with actual repatriations.

Under Mexican tax law, any previously taxed earnings from before 2014 (“CUFIN”) are not subject to withholding when monies are repatriated to another country. In the second quarter of fiscal year 2019, the U.S. parent company received a distribution of the remaining CUFIN amount. As such, future distributions from Mexico will be subject to withholding tax. The currently remaining earnings in Mexico are permanently reinvested; therefore, no withholding tax liability has been recognized as of June 29, 2019. If, in the future, repatriations from Mexico are expected, the Company could be required to recognize a withholding tax as a deferred tax liability at that time. Similar to China, this withholding would not be creditable and would be a direct cost associated with the actual repatriation.

The Company expects to repatriate a portion of its foreign earnings based on increased net sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company expects to repatriate approximately $7.8 million from China, in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations.

During the second quarter of fiscal year 2017, the Company signed a unilateral advance pricing agreement (APA) with the Large Taxpayer Division of Mexico’s Servicio de Administración Tributaria (SAT) under an elective framework that has been agreed to by the U.S. and Mexican authorities. The APA is part of a larger program affecting hundreds of U.S. companies with maquiladora operations in Mexico. The general impact of the APA is to increase margins between the maquiladora and U.S. parent company, shifting profits to Mexico from the U.S. The APA was finalized during the fourth quarter of fiscal 2017; the overall impact to the financial statements was not material.

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



	Fiscal Year Ended
	June 29, 2019			June 30, 2018			July 1, 2017
	(in thousands)
Federal income tax provision at statutory rates	$	(1,836	)	$	(397	)	$	2,467
State income taxes, net of federal tax effect	(158		)	(4		)	175
Foreign tax rate differences	251			103			(156		)
Tax rate change	—			1,634			—
Provisional transition tax on accumulated foreign earnings	(384		)	1,190			—
Effect of income tax credits	(861		)	(687		)	(738		)
Effect of repatriation of foreign earnings, net	(42		)	(1,484		)	199
Goodwill write-off	1,726			—			—
Global Intangible Low-Taxed Income (GILTI) tax	150			—			—
Provision to return reconciliation	630			(401		)	8
Other	(234		)	(71		)	(316		)
Income tax provision (benefit)	$	(758	)	$	(117	)	$	1,639



	Fiscal Year Ended
	June 29, 2019			June 30, 2018			July 1, 2017
	(in thousands)
Domestic	$	(12,220	)	$	(4,593	)	$	3,553
Foreign	3,480			3,151			3,703
Income (loss) before income taxes	$	(8,740	)	$	(1,442	)	$	7,256



	June 29, 2019			June 30, 2018
	(in thousands)
Deferred tax assets:
Net operating loss	$	33		$	—
Tax credit carryforwards, net	$	4,986		$	3,946
Inventory	1,087			667
Identifiable intangibles	407			—
Interest expense carryforward	474			—
Accruals	3,549			3,830
Research and development expenses	232			—
Mark-to-market adjustments	—			247
Arbitration settlement	—			1,100
Other	30			33
Deferred income tax assets	$	10,798		$	9,823
Deferred tax liabilities:
Accrued withholding tax - unremitted earnings	(820		)	(822		)
Fixed assets	(443		)	(289		)
Mart-to-market adjustments	(730		)	—
Deferred revenue	(790		)	—
Identifiable intangibles	—			(670		)
Other	(175		)	(160		)
Deferred income tax liabilities	$	(2,958	)	$	(1,941	)
Net deferred income tax assets	$	7,840		$	7,882
Balance sheet caption reported in:
Long-term deferred income tax asset	$	7,840		$	7,882
Net deferred income tax asset	$	7,840		$	7,882

The Company has R&D tax credits that approximate $9.0 million that have 20 year carryforwards before expiring. The Company’s R&D tax credits expire in various fiscal years from 2025 to 2039. The Company also has alternative minimum tax credits, which do not expire, approximating $726,000, which are now classified as a receivable due to the repeal of the alternative minimum tax.

As of June 29, 2019, the Company had unrecognized tax benefits of $4.1 million related to its gross R&D tax credits. The unrecognized tax benefits relate to certain R&D tax credits generated from 1997 to 2019.



	Fiscal Year Ended
	June 29, 2019		June 30, 2018		July 1, 2017
	(in thousands)
Beginning Balance	$	4,011	$	3,947	$	3,760
Additions based on tax positions related to the current year	88		64		187
Ending Balance	$	4,099	$	4,011	$	3,947

The increase from the prior year is due to additional R&D credits that were recorded in 2019 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, various state jurisdictions, Mexico and China. Certain years remain subject to examination but there are currently no ongoing exams in any taxing jurisdictions.