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INCOME TAXES
 12 Months Ended
Jun. 30, 2023
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
Components of earnings (loss) before income taxes are as follows (in thousands): 
20232022
Domestic operations$16,927 $7,619 
Foreign operations8,975 13,900 
$25,902 $21,519 
The provision for (benefit from) income taxes consists of the following (in thousands):
20232022
Current:
Federal$159 $(319)
Foreign3,972 5,478 
State130 33 
Deferred:
Federal(447)2,256 
Foreign(394)(928)
State(606)121 
$2,814 $6,641 
Reconciliations of expected tax expense at the U.S. statutory rate to actual tax expense (benefit) are as follows (in thousands):
20232022
Expected tax expense$5,440 $4,519 
State taxes, net of federal effect741 321 
Foreign taxes, net of federal credits2,170 1,091 
Change in valuation allowance(5,128)247 
Tax reserve adjustments(181)127 
Return to provision and other adjustments(155)323 
Tax rate change applied to deferred tax balances(137)43 
Global intangible low taxed income582 322 
Other permanent items(518)(352)
Actual tax expense$2,814 $6,641 
Beginning in fiscal 2019, the Company incorporated certain provisions of the Tax Cuts and Jobs Act (“the Act”) in the calculation of the tax provision and effective tax rate, including the provisions related to the Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion Anti Abuse Tax (“BEAT”), as well as other provisions, which limit tax deductibility of expenses. Under the GILTI provisions, U.S. taxes are imposed on foreign income in excess of a deemed return on tangible assets of its foreign subsidiaries. The ability to benefit from a deduction and foreign tax credits against a portion of the GILTI income may be limited under the GILTI rules as a result of the utilization of net operating losses, foreign sourced income, and other potential limitations within the foreign tax credit calculation.
In January 2022, the IRS issued final foreign tax credit regulations that made changes to the rules relating to the creditability of foreign taxes, effective for tax years beginning after December 28, 2021. This results in an increase in tax expense from the GILTI inclusion and disallowance of the creditability of certain withholding taxes for the year ended June 30, 2023. In July 2023, the IRS released Notice 2023-55 which grants taxpayers temporary relief from applying these final foreign tax credit regulations for tax years beginning on or after December 28, 2021 and ending on or before December 31, 2023, while the IRS continues to analyze issues raised relating to these regulations and considers making modifications or extending the period granted relief. The impact of Notice 2023-55 on tax expense for the fiscal year ended June 30, 2023 will be recognized in the period that the Notice was issued, and absent of additional legislation enacted, is expected to result in a tax benefit.
The tax rate of 10.9% on pre-tax income of $25.9 million in the year ended June 30, 2023 is lower than the U.S. statutory tax rate of 21% primarily due to a tax benefit of $5.1 million related to the Company's partial release of its valuation allowance against its U.S. foreign tax credits and state net operating loss carryforwards, which are expected to be utilized based on demonstrated profitability and current and future forecasted income. Excluding the tax benefit related to the partial release of valuation allowance, the effective tax rate was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, and non-creditable foreign withholding tax.
The tax rate of 30.9% on pre-tax income of $21.5 million in the year ended June 30, 2022 is higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by discrete tax benefits recognized from excess stock compensation deductions, tax credits, and permanent deductions generated from research expenses.
Net deferred tax assets at June 30, 2023 were $17.1 million. While these deferred tax assets reflect the tax effect of temporary differences between book and taxable income in all jurisdictions in which the Company has operations, the majority of the assets relate to U.S. operations. U.S. net deferred assets are $14.7 million with a valuation allowance of $2.9 million. The Company has considered the positive and negative evidence to determine the need for a valuation allowance offsetting the deferred tax assets and has concluded that a partial valuation allowance is required against U.S. foreign tax credit carryforwards due to the uncertainty of generating sufficient foreign source income to utilize those credits in the future and certain state net operating loss carryforward that will expire in the near future. The Company maintains a full valuation allowance against deferred tax assets generated in China and Australia
Key positive evidence considered includes: a) domestic profitability in the current and prior two years; b) cost saving plans are continuing to be reviewed and implemented by the Company; c) indefinite federal loss carryforward periods d) forecasted domestic profits for future years and e) forecasted foreign sourced income. The negative evidence considered is: a) the limited
carryforward period of U.S. foreign tax credits and certain state net operating loss carryforwards and b) current and forecasted losses in Australia and China.
In fiscal 2023, the valuation allowance decreased by $5.1 million. Based upon cumulative profitability in the US and increases in future taxable income projections, management has determined that there is sufficient positive evidence to release a portion of valuation allowance previously provided against its foreign tax credits and certain state net operating losses. Valuation allowances are provided against the current year losses in Australia and China.
Deferred income taxes at June 30, 2023 and 2022 are attributable to the following (in thousands): 
20232022
Inventories$2,222 $2,009 
Employee benefits (other than pension)671 859 
Operating lease liabilities1,320 1,403 
Book reserves1,037 859 
Federal NOL, various carryforward periods849 2,440 
State NOL, various carryforward periods1,571 1,719 
Foreign NOL, various carryforward periods1,206 365 
Foreign tax credit carryforward, expiring 2023 – 20286,632 7,316 
Pension benefits2,699 5,527 
Retiree medical benefits341 382 
Accrued royalties1,272 717 
Depreciation(594)(336)
Intangibles(133)(272)
Right of use assets(1,298)(1,372)
Federal research and development and AMT credit carryforward1,072 894 
Contingency accruals200 92 
Other temporary taxable differences(14)(151)
Other temporary deductible differences1,931 1,423 
Total deferred tax assets20,984 23,874 
Valuation allowance(3,928)(8,950)
Net deferred tax asset$17,056 $14,924 
The Company is subject to U.S. federal income tax and various state, local and foreign income taxes in numerous jurisdictions. The Company’s domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files.
Reconciliations of the beginning and ending amount of unrecognized tax benefits are as follows (in thousands):
Balance June 30, 2021$(11,360)
Increase for tax positions taken during the current period(66)
Decrease for tax positions taken during the prior period— 
Effect of exchange rate changes98 
Decrease relating to lapse of applicable statute of limitations40 
Balance June 30, 2022(11,288)
Decrease for tax positions taken during the current period267 
Decrease for tax positions taken during the prior period60 
Effect of exchange rate changes(15)
Decrease relating to lapse of applicable statute of limitations174 
Balance June 30, 2023$(10,802)
As of June 30, 2023 and 2022 , the Company has unrecognized tax benefits of $10.8 million and $11.3 million, respectively, of which $7.3 million and $7.8 million, respectively, would favorably impact the effective tax rate if recognized. The long-term tax obligations as of June 30, 2023 and 2022 relate primarily to transfer pricing adjustments.
The Company has identified uncertain tax positions at June 30, 2023 for which it is possible that the total amount of unrecognized tax benefits will decrease within the next twelve months by less than $0.1 million. The Company recognizes interest and penalties related to income tax matters in income tax expense and has booked less than $0.1 million in fiscal 2023 for interest expense.
The Company’s U.S. federal tax returns for years prior to fiscal 2020 are no longer subject to U.S. federal examination by the Internal Revenue Service; however, tax losses and credits carried forward from earlier years are still subject to review and adjustment. As of June 30, 2023, the Company has resolved all open income tax audits. In international jurisdictions, the years that may be examined vary by country. The Company’s most significant foreign subsidiary in Brazil is subject to audit for the calendar years 2016 through 2022.
The federal tax loss carryforward of $4.0 million has an unlimited carryforward period. The state tax loss carryforwards tax effected of $1.4 million expires at various times in years 2024 through 2043 and $0.2 can be carried forward indefinitely. The state tax credit carryforwards of $0.3 million expires in the years 2024 through 2038 and $0.4 million can be carried forward indefinitely. The foreign tax credit carryforward of $6.6 million expires in the years 2024 through 2028. The research and development tax credit carryforward of $0.9 million expires in the years 2034 through 2043. The foreign tax loss carryforwards of $0.5 million expire in 2028 and $4.2 million can be carried forward indefinitely.
At June 30, 2023, the estimated amount of total earnings of foreign subsidiaries not remitted is $92.9 million. The foreign subsidiaries do not have the cash on hand to repatriate that amount. The Company has no plans to repatriate prior year earnings of its foreign subsidiaries and, accordingly, does not believe it is practicable to estimate the unrecognized deferred taxes related to these earnings as they are indefinitely reinvested. Although subsidiaries are asked, from time to time, to pay dividends when cash on hand is available to do so. Cash held in foreign subsidiaries is not available for use in the U.S. without the likely U.S. federal and state income and withholding tax consequences.