. INCOME TAXES

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

	201 9		2018		2017
Domestic operations	$	1,507	$	1,351	$	(1,547	)
Foreign operations		8,103		3,514		3,085
	$	9,610	$	4,865	$	1,538

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

	2019			2018			2017
Current:
Federal	$	(106	)	$	(991	)	$	(989	)
Foreign		2,398			2,256			999
State		37			5			39
Deferred:
Federal		1,139			6,772			597
Foreign		(172	)		(396	)		(85	)
State		235			852			(14	)
	$	3,531		$	8,498		$	547

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

	2019			2018			2017
Expected tax expense	$	2,018		$	1,365		$	523
State taxes, net of federal effect		(5	)		-			9
Foreign taxes, net of federal credits		(1,055	)		(1,010	)		(210	)
Change in valuation allowance		1,744			2,074			(107	)
Tax reserve adjustments		(66	)		(38	)		272
Return to provision and other adjustments		(57	)		(72	)		(17	)
Losses not benefited		-			-			123
Tax rate change applied to deferred tax balances		(129	)		6,324			315
Canada real estate gain deduction		-			-			(337	)
Global intangible low taxed income		1,121			-			-
Other permanent items		(40	)		(145	)		(24	)
Actual tax expense	$	3,531		$	8,498		$	547

December 22, 2017,

the Tax Cuts and Jobs Act was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from a graduated rate of

35%

to a flat rate of

21%,

requires companies to pay a

one

-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Accounting Standard Codification (“ASC”)

740

requires filers to record the effect of tax law changes in the period enacted. However, the SEC issued Staff Accounting Bulletin

No.

118

(“SAB

118”

), that permits filers to record provisional amounts during a measurement period ending

later than

one

year from the date of the Act’s enactment.

During the fiscal year ended

June 30, 2018,

the Company recognized a provisional tax expense of

$6.3

million as a reasonable estimate of the impact of the provisions of the Act, which was included as a component of income tax expense in its Consolidated Statement of Operations. During the fiscal year ended

June 30, 2019,

the Company has completed the accounting for the tax effects of the enactment of the Act. The Company recorded additional foreign tax credits of (

$1.8

) million which were offset by a valuation allowance, resulting in a

nil

adjustment to the provisional tax expense previously recorded.

The Company has incorporated the other impacts of tax reform that became effective for the Company in fiscal

2019

including the provisions related to 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. For fiscal

2019,

the GILTI provisions have the most significant impact to the Company. Under the new law, U.S. taxes are imposed on foreign income in excess of a deemed return on tangible assets of its foreign subsidiaries. In general, this foreign income will effectively be taxed at an additional

10.5%

tax rate reduced by any available current year foreign tax credits. The ability to benefit foreign tax credits

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.

The tax rate of

36.7%

on pre-tax income of

$9.6

million in the year ended

June 30, 2019

is higher than the U.S. statutory rate primarily as a result of the GILTI provisions, which became effective in fiscal

2019,

as well as changes in the jurisdictional mix of earnings, particularly Brazil with a statutory tax rate of

34%.

The tax rate of

174.7%

on pre-tax income of

$4.9

million in the year ended

June 30, 2018

is higher than the U.S. statutory rate primarily as a result of the impact of the corporate tax rate reduction on the Company’s net deferred tax assets. Excluding the impacts of tax reform, the tax rate of

44.7%

for fiscal

2018

is higher than the U.S. statutory rate primarily as a result of an increase in the valuation allowance against foreign tax credits and state net operating loss carryforwards which the Company has determined are more likely than

not

to expire unutilized.

The tax rate of

35.6%

on pre-tax income of

$1.5

million in the year ended

June 30, 2017

was 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.

Net deferred tax assets at

June 30, 2019

are

$18.6

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

$22.4

million with a valuation allowance of

$6.6

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 a partial valuation allowance is required against 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.

Key positive evidence considered include: a) cumulative domestic profitability in

2019

and

2018;

b) cost saving plans are being implemented by the Company; c) indefinite federal loss carryforward periods and d) forecasted domestic profits for future years. The negative evidence considered is that fiscal years

2017

showed domestic book and tax losses.

In fiscal

2019,

the valuation allowance increased by

$1.7

million primarily due to an increase in foreign tax credits that became available as a result of the

one

-time transition tax on foreign earnings, in excess of the limitation on their use as a result of the Company’s overall domestic loss recapture. In fiscal

2018,

the valuation allowance increased by

$2.1

million primarily due to an increase in foreign tax credits in excess of the limitation on their use as a result of the Company’s overall domestic loss recapture resulting from the decreased federal tax rate and state net operating losses that will expire unutilized.

Deferred income taxes at

June 30, 2019

and

2018

are attributable to the following (in thousands):

	201 9			201 8
Deferred tax assets (liabilities):
Inventories	$	1,361		$	1,214
Employee benefits (other than pension)		840			700
Book reserves		601			504
Federal NOL, various carryforward periods		66			551
State NOL, various carryforward periods		1,224			1,034
Foreign NOL, various carryforward periods		309			148
Foreign tax credit carryforward, expiring 2023 – 2028		7,329			5,563
Pension benefits		10,289			8,881
Retiree medical benefits		1,778			1,622
Depreciation		(17	)		113
Intangibles		(630	)		(410	)
Federal research and development and AMT credit carryforward		786			638
Other		1,446			1,180
Total deferred tax assets		25,382			21,738
Valuation allowance		(6,743	)		(4,999	)
Net deferred tax asset	$	18,639		$	16,739

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, 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	)

Increase for tax positions taken during the current period		(287	)
Increase for tax positions taken during the prior period		(67	)
Effect of exchange rate changes		130
Decrease relating to lapse of applicable statute of limitations		930
Balance at June 30, 2018		(10,882	)

Increase for tax positions taken during the current period		(215	)
Decrease for tax positions taken during the prior period		5
Effect of exchange rate changes		16
Decrease relating to lapse of applicable statute of limitations		137
Balance at June 30, 2019	$	(10,939	)

As of

June 30, 2019,

2018

and

2017,

the Company has unrecognized tax benefits of

$10.9

million,

$10.9

million, and

$11.6

million, respectively, of which

$5.6

million,

$5.4

million and

$7.3

million, respectively, would favorably impact the effective tax rate if recognized.

The long-term tax obligations as of

June 30, 2019,

2018

and

2017

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

$1.7

million and

$1.8

million at

June 30, 2019

and

2018,

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

The Company has identified uncertain tax positions at

June 30, 2019

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

twelve

months by an immaterial amount. The Company recognizes interest and penalties related to income tax matters in income tax expense and has booked an immaterial amount in fiscal

2019

for interest expense.

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

2016

are

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, 2019,

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

2014

through

2018.

The federal tax loss carryforward of

$0.3

million has an unlimited carryforward period. The state tax loss carryforwards tax effected benefit of

$1.2

million expires at various times beginning in

2021.

The Company has state tax credit carryforwards of

$0.4

million that expire in the years

2020

through

2034.

The foreign tax credit carryforward of

$7.3

million expires in the years

2023

through

2028.

The research and development tax credit carryforward of

$0.8

million expires in the years

2029

through

2039.

The foreign tax loss carryforwards of

$0.3

million can be carried forward indefinitely.

June 30, 2019,

the estimated amount of total unremitted earnings of foreign subsidiaries is

$67.9

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

$2.0

million in fiscal

2017

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 and withholding tax consequences.