11.

INCOME TAXES

Components of earnings (loss) before income taxes are as follows (in thousands):

	2017			2016			2015
Domestic operations	$	(1,547	)	$	(17,541	)	$	8,118
Foreign operations		3,085			(2,834	)		1,824
	$	1,538		$	(20,375	)	$	9,942

The provision for (benefit from) income taxes consists of the following (in thousands):

	2017			2016			2015
Current:
Federal	$	(989	)	$	(317	)	$	1,744
Foreign		999			866			1,855
State		39			94			114
Deferred:
Federal		597			(6,092	)		670
Foreign		(85	)		47			(71	)
State		14			(843	)		386
	$	545		$	(6,245	)	$	4,698

Reconciliations of expected tax expense at the U.S. statutory rate to actual tax expense (benefit) are as follows (in thousands):

	2017			2016			2015
Expected tax expense	$	523		$	(6,928	)	$	3,380
State taxes, net of federal effect		9			(740	)		378
Foreign taxes, net of federal credits		(210	)		278			235
Change in valuation allowance		(107	)		196			(51	)
Tax reserve adjustments		272			250			361
Return to provision and other adjustments		(17	)		(167	)		(332	)
Losses not benefited		123			885			701
Tax rate change applied to deferred tax balances		315			-			-
Canada Real Estate Gain Deduction		(337	)		-			-
Other permanent items		(24	)		(19	)		26
Actual tax expense (benefit)	$	547		$	(6,245	)	$	4,698

The tax rate in fiscal

2017

is slightly higher than the U.S. statutory rate since the benefit of earnings in foreign jurisdictions with lower effective tax rates and a

one

-time tax benefit in Canada was more than offset by discrete tax charges including the impact of a tax rate change from

20%

17%

in the U.K. applied to deferred tax assets which increased tax expense by

$0.3

million.

As a result of closing and selling the warehouse and product assembly center in Canada, the Canadian subsidiary had cash in excess of its long term needs. Thus, there

was a dividend of

$2.0

million paid from the Company’s subsidiary in Canada to the U.S. parent company out of the subsidiary’s fiscal

2017

earnings. While the dividend is fully taxable in the U.S.,

the impact to tax expense was negligible due to the use of foreign tax credits.

The tax benefit rate of

30.7%

on the pre-tax loss of

$20.4

million in the year ended

June 30, 2016

was lower than the U.S. statutory rate due primarily to losses in foreign entities for which

tax benefit was taken. Substantial benefit was reflected for US federal and state income taxes primarily as a result of increases in deferred tax assets related to pension expense and the write-down of fixed assets. In fiscal

2016,

several of the subsidiaries in foreign countries reported financial losses. In these cases,

tax benefit from those losses was recognized and an additional valuation allowance was taken to reduce any deferred tax assets since future income is

not

more likely than

not

to be recognized.

The tax rate in fiscal

2015

was higher than the U.S. Statutory rate because of losses in foreign subsidiaries that were

not

able to be benefitted for tax purposes. There was a dividend of

$2.3

million paid from the Company’s subsidiary in Brazil to the U.S. parent company out of the subsidiary’s fiscal

2015

earnings. While the dividend is fully taxable in the U.S., the impact to tax expense was negligible due to the use of foreign tax credits.

Net deferred tax assets at

June 30, 2017

are

$26.0

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 operations in the U.S. where the Company had book losses in the current year. U.S. net deferred assets are

$22.9

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 in the U.S. and has concluded that it is more likely than

not

that the deferred tax assets net of the recorded valuation allowance will be realized.

Key positive evidence considered include: a) Significant domestic book profits in

2015

and

2014;

b) losses in fiscal

2016

are primarily due to

one

-time events including a

$19

million pension expense, most of which is

not

deductible for tax purposes until paid; c) cost saving plans are being implemented by the Company; d) prior year taxable income is available for carryback losses; e) tax planning opportunities, including an election to revoke the LIFO election; and f) forecasted domestic profits for future years. The negative evidence considered is that fiscal years

2017

and

2016

showed domestic book and tax losses.

A valuation allowance has been provided on foreign deferred tax assets related to foreign tax loss carryforwards (NOLs) due to the uncertainty of generating future taxable income in those jurisdictions. Similarly, a partial valuation allowance has been provided for foreign tax credit carryforwards due to the uncertainty of generating sufficient foreign source income to utilize those credits in the future.

In fiscal

2017,

the valuation allowance decreased by

$2.3

million primarily due to the use of foreign net operating losses previously fully valued. This was partly offset by an increase in foreign tax credits in excess of the limitation on their use as a result of limited foreign source income. In fiscal

2016,

the valuation allowance increased by

$0.7

million primarily due to the increase in foreign losses.

Deferred income taxes at

June 30, 2017

and

2016

are attributable to the following (in thousands):

	2017			2016
Deferred tax assets (liabilities):
Inventories	$	1,753		$	2,888
Employee benefits (other than pension)		807			988
Book reserves		725			1,347
State NOL, various carryforward periods		786			975
Foreign NOL, various carryforward periods		452			1,738
Foreign tax credit carryforward, expiring 2018 – 2027		4,222			2,638
Pension benefits		16,074			19,573
Retiree medical benefits		2,679			2,790
Depreciation		134			99
Intangibles		(269	)		1,243
Federal research and development and AMT credit carryforward		545			-
Other		1,046			582
Total deferred tax assets		28,954			34,861
Valuation allowance		(2,922	)		(5,246	)
Net deferred tax asset	$	26,032		$	29,615

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 at June 30, 2014	$	(11,209	)
Increase for tax positions taken during the current period		(405	)
Effect of exchange rate changes		440
Decrease relating to lapse of applicable statute of limitations		42
Balance at June 30, 2015		(11,132	)
Increase for tax positions taken during the current period		(184	)
Effect of exchange rate changes		82
Decrease relating to lapse of applicable statute of limitations		414
Balance at June 30, 2016		(10,820	)
Increase for tax positions taken during the current period		(813	)
Effect of exchange rate changes		38
Decrease relating to lapse of applicable statute of limitations		7
Balance at June 30, 2017	$	(11,588	)

The long-term tax obligations as of

June 30, 2017,

2016

and

2015

relate primarily to transfer pricing adjustments. The Company has also recorded a non-current tax receivable for

$2.6

million and

$2.7

million at

June 30, 2017

and

2016,

respectively, representing the corollary effect of transfer pricing competent authority adjustments.

The Company has identified uncertain tax positions at

June 30, 2017

for which it is possible that the total amount of unrecognized tax benefits will decrease within the next

twelve

months by

$0.2

million. The Company recognizes interest and penalties related to income tax matters in income tax expense and has booked an increase of

$0.1

million in fiscal

2017

for interest expense.

The Company’s U.S. federal tax returns for years prior to fiscal

2014

are

longer subject to U.S. federal examination by the Internal Revenue Service; however, tax losses carried forward from earlier years are still subject to review and adjustment. As of

June 30, 2017,

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

2012

through

2016.

The state tax loss carryforwards tax effected benefit of

$0.8

million expires at various times over the next

years. The foreign tax credit carryforward of

$4.2

million expires in the years

2018

through

2027;

amounts expiring in the next

years have a full valuation allowance against it. The research and development tax credit carryforward of

$0.5

million expires in the years

2022

through

2036.

June 30, 2017,

the estimated amount of total unremitted earnings of foreign subsidiaries is

$65

million. The Company received a cash dividend from foreign subsidiaries of

$2.0

million in fiscal

2017

and of

$2.3

million in fiscal

2015

out of earnings for those years. The Company has

plans to repatriate prior year earnings of its foreign subsidiaries and, accordingly,

estimate of the unrecognized deferred taxes related to these earnings has been made. Cash held in foreign subsidiaries is

not

available for use in the U.S. without the likely incurrence of U.S. federal and state income tax consequences.