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INCOME TAXES | 12 Months Ended
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Jun. 30, 2012
INCOME TAXES | 5. INCOME TAXES Income tax provision (benefit) consists of the following:
|  | Year Ended |
|  | June 30, 2012 |  |  | July 2, 2011 |  |  | July 3, 2010 |
|  | (in thousands) |
Current income tax provision: |  |  |  |  |  |  |  |  |  |  |  |
United States |  | $ | 1,483 |  |  | $ | 34 |  |  | $ | 162 |
Foreign |  |  | 511 |  |  |  | 242 |  |  |  | 496 |
|  |  | 1,994 |  |  |  | 276 |  |  |  | 658 |
Deferred income tax (benefit) provision: |  |  |  |  |  |  |  |  |  |  |  |
United States |  |  | (85 | ) |  |  | 1,250 |  |  |  | (3,588 | )
Foreign |  |  | 306 |  |  |  | (780 | ) |  |  | 1,526 |
|  |  | 221 |  |  |  | 470 |  |  |  | (2,062 | )
Total income tax (benefit) provision |  | $ | 2,215 |  |  | $ | 746 |  |  | $ | (1,404 | )
The Company has total tax credit carryforwards of approximately $10.2 million at June 30, 2012. Included in total tax credits carryforwards is approximately $6.8 million in research and development (R&D) tax credits. In accordance with ASC 740, Income Taxes, management assessed the Company’s estimated taxable income and determined a need for a valuation allowance of certain tax credits related to research and development activities which are anticipated to expire in 2012. A valuation allowance of approximately $257,000 has been recognized as of June 30, 2012 related to these 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. Therefore, no additional valuation allowance has been recognized. 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 2012. The Company currently estimates that future repatriations from foreign subsidiaries will approximate $7.5 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 $3.1 million. Both the domestic tax and estimated withholding tax have been recorded as part of deferred taxes as of June 30, 2012. Included in tax credits is $2.6 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 $7.8 million of earnings from foreign subsidiaries which are permanently reinvested outside the U.S. The unrecognized net tax provision that would be associated with these earnings would be approximately $1.0 million. 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 30, 2012. The Company is required to pay taxes in China on its statutory foreign profits. The Chinese subsidiary paid approximately $275,000 in income tax for the calendar year ended December 31, 2011 after utilization of all remaining NOL carryforwards from prior years. The Company’s effective tax rate differs from the federal tax rate as follows:
|  | Year Ended |
|  | June 30, 2012 |  |  | July 2, 2011 |  |  | July 3, 2010 |
|  | (in thousands) |
Federal income tax provision at statutory rates |  | $ | 4,706 |  |  | $ | 2,205 |  |  | $ | 2,477 |
Foreign tax rate differences |  |  | (361 | ) |  |  | (326 | ) |  |  | 99 |
Effect of income tax credits |  |  | (2,104 | ) |  |  | (1,249 | ) |  |  | — |
Effect of repatriation of foreign earnings, net |  |  | — |  |  |  | 72 |  |  |  | 2,158 |
Effect of change in applied Mexican tax regime |  |  | — |  |  |  | — |  |  |  | 1,526 |
Other |  |  | 288 |  |  |  | (86 | ) |  |  | 211 |
Change in valuation allowance |  |  | (462 | ) |  |  | 130 |  |  |  | (7,875 | )
Permanent difference |  |  | 148 |  |  |  | — |  |  |  | — |
Income tax provision (benefit) |  | $ | 2,215 |  |  | $ | 746 |  |  | $ | (1,404 | )
The domestic and foreign components of income before income taxes were:
|  | Year Ended |
|  | June 30, 2012 |  |  | July 2, 2011 |  |  | July 3, 2010 |
|  | (in thousands) |
Domestic |  | $ | 10,666 |  |  | $ | 4,048 |  |  | $ | 6,117 |
Foreign |  |  | 3,175 |  |  |  | 2,434 |  |  |  | 1,169 |
Income before income taxes |  | $ | 13,841 |  |  | $ | 6,482 |  |  | $ | 7,286 |
Deferred income tax assets and liabilities consist of the following at:
|  | June 30, 2012 |  |  | July 2, 2011 |
|  | (in thousands) |
Deferred tax assets: |  |  |  |  |  |  |  |
Net operating loss carryforwards |  | $ | — |  |  | $ | 4,565 |
Tax credit carryforwards, net |  |  | 4,559 |  |  |  | 3,488 |
Foreign subsidiaries – future tax credits |  |  | 2,600 |  |  |  | 2,445 |
Inventory |  |  | 396 |  |  |  | 224 |
Accruals |  |  | 3,069 |  |  |  | 1,789 |
Other |  |  | 740 |  |  |  | 503 |
Deferred income tax assets |  |  | 11,364 |  |  |  | 13,014 |
Valuation allowance |  |  | (257 | ) |  |  | (720 | )
Deferred income tax assets, net of valuation allowance |  | $ | 11,107 |  |  | $ | 12,294 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Foreign subsidiaries – unremitted earnings |  |  | (3,138 | ) |  |  | (3,173 | )
Fixed assets |  |  | (1,157 | ) |  |  | (1,542 | )
Other |  |  | (2 | ) |  |  | (1,783 | )
Deferred income tax liabilities |  | $ | (4,297 | ) |  | $ | (6,498 | )
Net deferred income tax assets |  | $ | 6,810 |  |  | $ | 5,796 |
Balance sheet caption reported in: |  |  |  |  |  |  |  |
Current deferred tax asset |  | $ | 5,201 |  |  | $ | 3,900 |
Long-term deferred tax asset |  |  | 2,703 |  |  |  | 4,219 |
Long term deferred income tax liability |  |  | (1,094 | ) |  |  | (1,542 | )
Other long term obligations |  |  | — |  |  |  | (781 | )
Net deferred income tax asset |  | $ | 6,810 |  |  | $ | 5,796 |
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 $6.8 million that have 15 or 20 year carryforwards before expiring. The Company’s R&D tax credits expire in various fiscal years from 2013 to 2032. The Company also has alternative minimum tax credits approximating $726,000. The alternative minimum tax credits do not expire. Uncertain Tax Positions As of June 30, 2012, the Company had unrecognized tax benefits of $3.0 million. The unrecognized tax benefits relate to certain R&D tax credits generated in 2012 and prior years. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at July 3, 2010 |  | $ | — |
Additions in fiscal 2011 |  |  | 781 |
Balance at July 2, 2011 |  | $ | 781 |
Additions in fiscal 2012 |  |  | 2,222 |
Balance at June 30, 2012 |  | $ | 3,003 |
The increase from the prior year is due to additional R&D credits that were recorded in 2012 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. The July 2, 2011 balance sheet in the accompanying financial statements includes two reclassifications that were not reflected in the July 2, 2011 Form 10-K. The reclassifications decreased the short term deferred tax asset by approximately $0.6 million with a corresponding decrease in the current portion of the deferred tax liability. There was also a reclassification to decrease the long term portion of the deferred tax asset by approximately $3.6 million with a corresponding decrease in the deferred tax liability. These balance sheet reclassifications related to the netting of the deferred tax accounts within the same tax jurisdiction did not impact the Company’s debt covenants, working capital, cash flows or income statement accounts and were not material to the July 2, 2011 consolidated financial statements.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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