11.

INCOME TAXES

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

	201 8		201 7			201 6
Domestic operations	$	1,351	$	(1,547	)	$	(17,541	)
Foreign operations		3,514		3,085			(2,834	)
	$	4,865	$	1,538		$	(20,375	)

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

	201 8			201 7			201 6
Current:
Federal	$	(991	)	$	(989	)	$	(317	)
Foreign		2,256			999			866
State		5			39			94
Deferred:
Federal		6,772			597			(6,092	)
Foreign		(396	)		(85	)		47
State		852			(14	)		(843	)
	$	8,498		$	547		$	(6,245	)

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

	201 8			201 7			201 6
Expected tax expense	$	1,365		$	523		$	(6,928	)
State taxes, net of federal effect		-			9			(740	)
Foreign taxes, net of federal credits		(1,010	)		(210	)		278
Change in valuation allowance		2,074			(107	)		196
Tax reserve adjustments		(38	)		272			250
Return to provision and other adjustments		(72	)		(17	)		(167	)
Losses not benefited		-			123			885
Tax rate change applied to deferred tax balances		6,324			315			-
Canada Real Estate Gain Deduction		-			(337	)		-
Other permanent items		(145	)		(24	)		(19	)
Actual tax expense (benefit)	$	8,498		$	547		$	(6,245	)

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. The effect of the tax rate change is that the Company’s federal tax rate is reduced to a blended rate of

28%

from the previous graduated rate of

35%

for fiscal

2018,

and then will further reduce to the enacted

21%

in fiscal

2019

and beyond. 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.

As of

June 30, 2018,

the Company has

not

yet completed the accounting for the tax effects of the enactment of the Act, however, has made a reasonable estimate of the effects on its existing deferred tax balances and

one

-time transition tax. During the fiscal year ended

June 30, 2018,

the Company recognized a provisional tax expense amount of

$6.3

million, which is included as a component of income tax expense in its Consolidated Statements of Operations.

In addition to the reduction in the federal corporate tax rate and the

one

-time transition tax, which has been accounted for with provisional estimates as of

June 30 2018,

the Company will also continue to analyze and monitor the other impacts of the Act that become effective for the Company in fiscal

2019

including the provisions related to Global Intangible Low Taxed Income, Foreign Derived Intangible Income, Base Erosion Anti-Abuse Tax, as well as other provisions which would limit the deductibility of future expenses.

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.

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.

Net deferred tax assets at

June 30, 2018

are

$16.7

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. U.S. net deferred assets are

$18.8

million with a valuation allowance of

$5.0

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 book profits in

2018;

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) indefinite federal loss carryforward periods and e) forecasted domestic profits for future years. The negative evidence considered is that fiscal years

2017

and

2016

showed domestic book and tax losses.

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. In fiscal

2017,

the valuation allowance decreased by

$2.3

million primarily due to use of foreign net operating losses previously fully valued, partially offset by an increase in foreign tax credits in excess of the limitation on their future utilization due to limited foreign source income.

Deferred income taxes at

June 30, 2018

and

2017

are attributable to the following (in thousands):

	201 8			201 7
Deferred tax assets (liabilities):
Inventories	$	1,214		$	1,753
Employee benefits (other than pension)		700			807
Book reserves		504			725
Federal NOL, various carryforward periods		551			154
State NOL, various carryforward periods		1,034			786
Foreign NOL, various carryforward periods		148			452
Foreign tax credit carryforward, expiring 2018 – 2027		5,563			4,222
Pension benefits		8,881			16,074
Retiree medical benefits		1,622			2,679
Depreciation		113			134
Intangibles		(410	)		(269	)
Federal research and development and AMT credit carryforward		638			545
Other		1,180			892
Total deferred tax assets		21,738			28,954
Valuation allowance		(4,999	)		(2,922	)
Net deferred tax asset	$	16,739		$	26,032

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, 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	)
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	)

As of

June 30, 2018,

2017

and

2016,

the Company has unrecognized tax benefits of

$10.9

million,

$11.6

million, and

$10.8

million, respectively, of which

$5.4

million,

$7.3

million and

$7.0

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

The long-term tax obligations as of

June 30, 2018,

2017

and

2016

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

$1.8

million and

$2.6

million at

June 30, 2018

and

2017,

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

The Company has identified uncertain tax positions at

June 30, 2018

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 immaterial amount in fiscal

2018

for interest expense.

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

2015

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, 2018,

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

2013

through

2017.

The federal loss carryforward generated prior to fiscal

2018

$0.5

million begins to expire in

2030.

The federal loss carryforward of

$2.1

million generated in fiscal

2018

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

$1.0

million expires at various times over the next

years. The foreign tax credit carryforward of

$5.6

million expires in the years

2023

through

2028.

The research and development tax credit carryforward of

$0.6

million expires in the years

2029

through

2038.

June 30, 2018,

the estimated amount of total unremitted earnings of foreign subsidiaries is

$55.4

million. The Company received

cash dividend from foreign subsidiaries in fiscal

2018,

and

$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.