Income Taxes

During fiscal

201

we recorded U.S.-based domestic tax expense of

$2.2

million. During fiscal

2016,

we recorded U.S.-based domestic tax expense of

$3.6

million on U.S.-based income, which was offset by the release of our deferred tax asset valuation of

$193,000

resulting in a net domestic tax expense of

$3.4

million. The release of our deferred tax asset valuation was based on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. The valuation allowance activity did

not

have any impact on the tax expense and related liability recorded for operating income recognized by NAIE during the years ended

June

30,

2017

June

30,

2016.

The provision for income taxes for the years

ended

June

consisted of the following (in thousands):

	201 7		2016
Current:
Federal	$	1,791	$	3,339
State		90		138
Foreign		646		629
Total current		2,527		4,106
Deferred:
Federal		305		46
State		44		67
Valuation allowance		—		(193	)
Total deferred		349		(80	)
Total provision for income taxes	$	2,876	$	4,026

Net deferred tax assets and deferred tax

liabilities as of

June

were as follows (in thousands):

	201 7			2016
Deferred tax assets:
Inventory capitalization	$	438		$	576
Inventory reserves		178			103
Pension liability		241			403
Accrued bonus		114			391
Net operating loss carry forward		240			298
Deferred rent		193			175
Accumulated depreciation and amortization		8			158
Stock-based compensation		195			154
Tax credit carry forward		176			138
Accrued vacation expense		111			130
Other, net		256			15
Total gross deferred tax assets		2,150			2,541

Deferred tax liabilities:
Prepaid expenses		(148	)		(260	)
Other, net		—			(54	)
Deferred tax liabilities		(148	)		(314	)
Valuation allowance		—			—
Net deferred tax assets	$	2,002		$	2,227

June

30,

2017,

we had state tax net operating loss carry forwards of approximately

$4.1

million. Under California tax law, net operating loss deductions were suspended for tax years beginning in

2008

2009,

2010

and

2011

and the carry forward periods of any net operating losses

not

utilized due to such suspension were extended.

Our state tax loss carry forwards will begin to expire in fiscal

2032,

unless used before their expiration.

Pursuant to Section

382

of the Internal Revenue Code of

1986,

as amended (the “Code”), the annual use of the net operating loss carry forwards and research and development tax credits could be limited by any greater than

50%

ownership change during any

three

-year testing period. We did

not

have any ownership changes that met this criterion during the fiscal years ended

June

30,

2017

and

June

30,

2016.

We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended

June

30,

2014

and forward are subject to examination by the U.S. tax authorities and our years for the fiscal year ended

June 30, 2007

and forward are subject to examination by the state tax authorities. Our tax years for the fiscal year ended

June

30,

2015

and forward are subject to examination by the Switzerland tax authorities.

NAIE

’s effective tax rate for Swiss federal, cantonal and communal taxes is approximately

17.5%.

NAIE had net income of

$3.1

million for the fiscal year ended

June

30,

2017.

Undistributed earnings of NAIE amounted to approximately

$20.9

million at

June

30,

2017.

These earnings are considered to be indefinitely reinvested and, accordingly,

provision for U.S. federal taxes has been provided thereon.

A reconciliation of income tax provision computed by applying the statutory federal income tax rate of

34%

to net income before income taxes for the year ended

June

is as follows (dollars in thousands):

	2017			2016
Income taxes computed at statutory federal income tax rate	$	3,438		$	4,614
State income taxes, net of federal income tax expense		95			179
Expenses not deductible for tax purposes		29			19
Foreign tax rate differential		(613	)		(514	)
Adjust state deferred due to change in apportionment		6			(18	)
Change in valuation allowance		—			(193	)
Other, net		(79	)		(61	)
Income tax provision as reported	$	2,876		$	4,026
Effective tax rate		28.4	%		29.7	%