Note 8.

Income Taxes

The components of income (loss) from continuing operations before income taxes were as follows:

Year Ended June 30,	2014			2013		2012
($000)
U.S. income (loss)	$	(2,863	)	$	19,253	$	16,025
Non-U.S. income		48,504			58,233		72,453
Total Earnings Before Tax	$	45,641		$	77,486	$	88,478

The components of income tax expense (benefit) from continuing operations were as follows:

Year Ended June 30,	2014			2013		2012
($000)
Current:
Federal		(1,067	)	$	2,759	$	283
State	152				68		227
Foreign		12,675			13,977		16,673
Total Current	$	11,760		$	16,804	$	17,183
Deferred:
Federal		(16	)	$	1,721	$	3,409
State	148				113		(356	)
Foreign		(4,567	)		128		(2,476	)
Total Deferred	$	(4,435	)	$	1,962	$	577
Total Income Tax Expense	$	7,325		$	18,766	$	17,760

Principal items comprising deferred income taxes were as follows:

June 30,	2014			2013
($000)
Deferred income tax assets
Inventory capitalization	$	5,402		$	6,333
Non-deductible accruals		1,926			1,930
Accrued employee benefits		9,226			6,790
Net-operating loss and credit carryforwards		21,976			22,849
Share-based compensation expense		16,005			15,021
Other		577			205
Valuation allowances		(2,212	)		(2,885	)
Total deferred income tax assets	$	52,900		$	50,243
Deferred income tax liabilities
Tax over book accumulated depreciation		(17,625	)	$	(16,988	)
Intangible assets		(25,505	)		(21,561	)
Other		(2,786	)		(2,409	)
Total deferred income tax liabilities	$	(45,916	)	$	(40,958	)
Net deferred income taxes	$	6,984		$	9,285

The reconciliation of income tax expense at the statutory federal rate to the reported income tax expense is as follows:

Year Ended June 30,	2014			%			2013			%			2012			%
($000)
Taxes at statutory rate	$	15,974			35		$	27,120			35		$	30,967			35
Increase (decrease) in taxes resulting from:
State income taxes-net of federal benefit		254			1			168			-			(187	)		-
Taxes on non U.S. earnings		(6,672	)		(15	)		(6,991	)		(9	)		(9,841	)		(11	)
Settlement of unrecognized tax benefits		-			-			-			-			(842	)		(1	)
Research and manufacturing incentive deductions		(2,190	)		(5	)		(1,458	)		(2	)		(2,079	)		(3	)
Other		(41	)		-			(73	)		-			(258	)		-
	$	7,325			16		$	18,766			24		$	17,760			20

During the fiscal years ended June 30, 2014, 2013, and 2012, net cash paid by the Company for income taxes was $17.2 million, $11.9 million, and $13.2 million, respectively.

The cumulative amount of the Company’s foreign undistributed net earnings for which no deferred taxes have been provided was approximately $366 million at June 30, 2014. If the earnings of such foreign subsidiaries were not indefinitely reinvested, an additional deferred tax liability of approximately $74 million would have been required as of June 30, 2014. It is the Company’s intention to permanently reinvest undistributed earnings of its foreign subsidiaries; therefore, no provision has been made for future income taxes on the undistributed earnings of foreign subsidiaries, as they are considered indefinitely reinvested.

The sources of differences resulting in deferred income tax expense (benefit) from continuing operations and the related tax effect of each were as follows:

Year Ended June 30,	2014			2013			2012
($000)
Depreciation and amortization	$	(3,581	)	$	(2,825	)	$	38
Inventory capitalization		646			84			(1,947	)
Net operating loss and credit carryforwards net of valuation allowances	533				4,786			1,859
Share-based compensation expense		(984	)		(3,487	)		(2,442	)
Other		(1,049	)		3,404			3,069
	$	(4,435	)	$	1,962		$	577

The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2014:

Type	Amount		Expiration Date
($000)
Tax credit carryforwards:
Federal research and development credits	$	4,117	June 2019-June 2034
State tax credits		2,827	June 2014-June 2029
Operating loss carryforwards:
Loss carryforwards - federal	$	36,124	June 2022-June 2029
Loss carryforwards - state		25,116	June 2014-June 2034
Loss carryforwards - foreign		9,427	June 2016-June 2022

The Company has recorded a valuation allowance against the majority of the foreign loss carryforwards and select state tax credit carryforwards. The Company’s federal loss carryforwards, federal research and development credit carryforwards, and certain state tax credits resulted from the Company’s acquisitions of Photop Aegis and M Cubed and are subject to various annual limitations under Section 382 of the Internal Revenue Code.

Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2014, 2013 and 2012 were as follows:

	2014			2013			2012
($000)
Balance at Beginning of Year	$	3,181		$	2,850		$	4,744
Increases in current year tax positions		298			338			738
Increases in prior year tax positions	2				-			-
Decreases in prior year tax positions		-			(7	)		(41	)
Settlements		-			-			(1,788	)
Expiration of statute of limitations		(706	)		-			(803	)
Balance at End of Year	$	2,775		$	3,181		$	2,850

The Company classifies all estimated and actual interest and penalties as income tax expense. There was no interest and penalties within income tax expense for fiscal year 2014. During the fiscal years ended June 30, 2013 and 2012, the Company recognized $0.1 million of expense and $0.2 million of benefit, respectively, of interest and penalties within income tax expense. The Company had $0.2 million, $0.2 million, and $0.1 million of interest and penalties accrued at June 30, 2014, 2013, and 2012, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities as the amounts are not expected to be paid within one year. Including tax positions for which the Company determined that the tax position would not meet the more likely than not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate was approximately $2.8 million and $3.2 million at June 30, 2014 and 2013, respectively. The Company expects a decrease of $1.4 million of unrecognized tax benefits during the next twelve months due to the expiration of statutes of limitation.

In December 2011, the Internal Revenue Service completed its examination of the Company’s federal income tax return for fiscal year 2009 with no significant findings. As a result, during the fiscal year ended June 30, 2012, the Company reversed certain unrecognized tax benefits from fiscal year 2009 and recognized an income tax benefit of approximately $0.8 million.

Fiscal years 2011 to 2014 remain open to examination by the Internal Revenue Service, fiscal years 2010 to 2014 remain open to examination by certain state jurisdictions, and fiscal years 2007 to 2014 remain open to examination by certain foreign taxing jurisdictions. The Company’s fiscal years 2011 and 2012 California state income tax returns are currently under examination by the State of California’s Franchise Tax Board. The Company’s fiscal year 2011 Italian income tax return is currently under examination.