. INCOME TAXES

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

	2020			2019		2018
Domestic operations	$	(24,450	)	$	1,507	$	1,351
Foreign operations		4,453			8,103		3,514
	$	(19,997	)	$	9,610	$	4,865

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

	2020			2019			2018
Current:
Federal	$	(19	)	$	(106	)	$	(991	)
Foreign		3,633			2,398			2,256
State		30			37			5
Deferred:
Federal		(1,514	)		1,139			6,772
Foreign		53			(172	)		(396	)
State		(341	)		235			852
	$	1,842		$	3,531		$	8,498

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

	2020			2019			2018
Expected tax (benefit) expense	$	(4,199	)	$	2,018		$	1,365
State taxes, net of federal effect		(1,042	)		(5	)		-
Foreign taxes, net of federal credits		1,210			(1,055	)		(1,010	)
Change in valuation allowance		1,996			1,744			2,074
Tax reserve adjustments		1,946			(66	)		(38	)
Return to provision and other adjustments		372			(57	)		(72	)
Goodwill impairment		130			-			-
Tax rate change applied to deferred tax balances		54			(129	)		6,324
Global intangible low taxed income		1,558			1,121			-
Other permanent items		(183	)		(40	)		(145	)
Actual tax (benefit) expense	$	1,842		$	3,531		$	8,498

December 22, 2017,

the Tax Cuts and Jobs Act (“the 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 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.

Beginning in fiscal

2019,

the Company incorporated certain provisions of 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. For fiscal

2020,

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.

Interpretive guidance on the accounting for GILTI states that an entity can make an accounting policy election to either recognized deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has made the accounting policy election to recognize GILTI as a period expense.

The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted in the United States on

March 27, 2020.

The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-

19.

While the CARES Act provides extensive tax changes in response to the COVID-

pandemic, the provisions are

not

expected to have a significant impact on the Company's financial results.

The tax rate of (

9.2%

) on pre-tax losses of (

$20.0

) million in the year ended

June 30, 2020

is lower than the U.S. statutory rate primarily as a result of the GILTI provisions, non-deductible goodwill impairment, as well as changes in the jurisdictional mix of earnings, particularly Brazil with a statutory tax rate of

34%.

The tax rate was also negatively impacted by the write-off of the long-term receivable previously established for competent authority relief for historic transfer pricing adjustments which the Company has determined is

longer feasible to pursue and an increase in the valuation allowance against foreign tax credits which the Company has determined are more likely than

not

to expire unutilized.

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.

Net deferred tax assets at

June 30, 2020

were

$21.0

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 U.S. operations. U.S. net deferred assets are

$26.9

million with a valuation allowance of

$8.8

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) 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

2020

showed domestic book and tax losses due to the impact of the COVID-

pandemic and charges recorded in the

fourth

quarter.

In fiscal

2020,

the valuation allowance increased by

$2.1

million due to the impact of the current year domestic loss generated and revised forecasts of income on the projected utilization of foreign tax credits that will expire at various dates through

2028.

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.

Deferred income taxes at

June 30, 2020

and

2019

are attributable to the following (in thousands):

	2020			2019
Inventories	$	1,339		$	1,361
Employee benefits (other than pension)		684			840
Operating lease liabilities		1,111			-
Book reserves		695			601
Federal NOL, various carryforward periods		716			66
State NOL, various carryforward periods		1,719			1,224
Foreign NOL, various carryforward periods		388			309
Foreign tax credit carryforward, expiring 2023 – 2028		7,212			7,329
Pension benefits		13,175			10,289
Retiree medical benefits		1,961			1,778
Depreciation		(186	)		(17	)
Intangibles		580			(630	)
Right of use assets		(1,088	)		-
Federal research and development and AMT credit carryforward		817			786
Other temporary taxable differences		(698	)		-
Other temporary deductible differences		1,404			1,446
Total deferred tax assets		29,828			25,382
Valuation allowance		(8,811	)		(6,743	)
Net deferred tax asset	$	21,018		$	18,639

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 July 1, 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	)

Increase for tax positions taken during the current period		(326	)
Increase for tax positions taken during the prior period		(188	)
Effect of exchange rate changes		299
Decrease relating to lapse of applicable statute of limitations		48
Balance at June 30, 2020	$	(11,106	)

As of

June 30, 2020,

2019

and

2018,

the Company has unrecognized tax benefits of

$11.1

million,

$10.9

million, and

$10.9

million, respectively, of which

$7.7

million,

$5.6

million and

$5.4

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

The long-term tax obligations as of

June 30, 2020,

2019

and

2018

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

$0.0

million and

$1.7

million at

June 30, 2020

and

2019,

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

The Company has identified uncertain tax positions at

June 30, 2020

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

twelve

months by

$0.1

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

$0.1

million in fiscal

2020

for interest expense.

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

2017

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, 2020,

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

2015

through

2019.

The federal tax loss carryforward of

$3.4

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

$1.7

million expires at various times beginning in

2021.

The state tax credit carryforwards of

$0.6

million expires in the years

2021

through

2035.

The foreign tax credit carryforward of

$7.2

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

2040.

The foreign tax loss carryforwards of

$2.3

million can be carried forward indefinitely.

June 30, 2020,

the estimated amount of total unremitted earnings of foreign subsidiaries is

$56.4

million. The Company has

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. 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.