INCOME TAXES

The components of income tax expense (benefit) are as follows:



	For the year ended December 31,
	2017		2016			2015
In thousands
Current:
Federal	$	16,979	$	20,405		$	25,170
State	1,301		2,312			349
Foreign	2,362		738			931
	20,642		23,455			26,450
Deferred:
Federal	23,498		10,133			5,474
State	251		(1,023		)	(2,682		)
Foreign	161		(1,715		)	(1,691		)
	23,910		7,395			1,101
Total	$	44,552	$	30,850		$	27,551

12. INCOME TAXES (CONTINUED)

During the fourth quarter of 2017, Tax Reform was enacted by the federal government. The SEC issued Staff Accounting Bulletin 118 ("SAB 118") in December 2017, which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period in which to finalize the accounting under Accounting Standards Codification 740, Income Taxes ("ASC 740") as it relates to Tax Reform. This measurement period should not extend beyond one year from the Tax Reform enactment date. In accordance with SAB 118, the Company is required to reflect the income tax effects of those aspects of the legislation for which the accounting under ASC 740 is complete. To the extent that the Company's accounting for certain of the income tax effects is incomplete, but the Company is capable of reasonably estimating the effects, the Company must record a provisional amount in the Company's Consolidated Financial Statements based on this estimate. To the extent the Company could not reasonably estimate the provisional impacts of Tax Reform, the Company is required to apply ASC 740 on the basis of tax law in place immediately prior to the enactment. In accordance with SAB 118, the revaluation of U.S. net deferred tax assets, the U.S. income tax attributable to Tax Reform's deemed repatriation provision (currently estimated to be zero) and the tax consequences relating to states with current conformity to the Internal Revenue Code are provisional amounts due to the enactment date and the complexities of Tax Reform. The new tax legislation provides for significant changes in corporate taxation, including a reduction in the applicable corporate tax rate from 35% to 21%, effective January 1, 2018. As a result of this rate reduction, the Company's U.S. net deferred tax assets were required to be revalued as of December 31, 2017. This resulted in a one-time charge to tax expense of $9.7 million in the fourth quarter of 2017. Other Tax Reform provisions that will impact the Company include the elimination of the deduction for manufacturing activities, changes to the deductibility of executive compensation and various international tax law changes.

One of the international tax law changes provided for with Tax Reform relates to the taxation of a corporation's global intangible low-taxed income ("GILTI") for tax years beginning after December 31, 2017. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of Tax Reform and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy change for either (1) treated taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred ("period cost method"), or (2) factoring such amounts into the Company's measurement of its deferred taxes ("deferred method"). The Company's selection of an accounting policy will depend, in part, on analyzing the Company's global income to determine whether the Company expects to have future U.S. inclusions in taxable income related to GILTI and, if so, the expected impact. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends not only on the Company's current structure and estimated future results of global operations, but also on the intent and ability to modify the Company's structure and/or business. As a result, the Company was not able to determine a reasonable estimate of the effect of this provision as of December 31, 2017. The Company has not made a policy decision regarding whether to record deferred taxes on GILTI and, therefore, the Company has not made any adjustments related to the potential GILTI tax on the Company's Consolidated Financial Statements.

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below:



	At December 31,
	2017			2016
In thousands
Deferred tax assets:
Deferred employee benefits	$	46,539		$	82,836
Inventories	5,528			9,694
Tax loss and credit carryforwards	20,813			19,216
Accrued liabilities and other items	7,031			12,433
Total deferred tax assets	79,911			124,179
Deferred tax liabilities:
Property, plant and equipment	(10,756		)	(15,653		)
Intangibles	(40,258		)	(48,785		)
Other items	(4,020		)	(3,100		)
Total deferred tax liabilities	(55,034		)	(67,538		)
Net deferred tax assets before valuation allowance	24,877			56,641
Valuation allowance	(5,298		)	(4,143		)
Net deferred tax assets after valuation allowance	$	19,579		$	52,498

12. INCOME TAXES (CONTINUED)

The $1.2 million change in the valuation allowance from December 31, 2016 to December 31, 2017, primarily relates to additional losses incurred by the Kaman UK entities and the cumulative tax effect of the reduction in the federal rate from 35% to 21% as a result of Tax Reform. Valuation allowances reduced the deferred tax asset attributable to these state and foreign loss and credit carryforwards to an amount that, based upon all available information, is more likely than not to be realized. Reversal of the valuation allowance is contingent upon the recognition of future taxable income in the respective jurisdictions or changes in circumstances which cause the realization of the benefits of carryforwards to become more likely than not.

A portion of the net deferred tax assets, $1.6 million, is related to a capital loss recorded on the disposition of the Company's Distribution segment’s Mexico operations. The realization of these benefits is dependent in part on future taxable capital gains.

Pre-tax income from foreign operations amounted to $0.7 million in 2017, while pre-tax losses from foreign operations amounted to $5.0 million and $4.3 million in 2016 and 2015, respectively. U.S. income taxes have not been provided on $23.2 million of undistributed earnings of foreign subsidiaries since it is the Company’s intention to permanently reinvest such earnings or to distribute them only when it is tax efficient to do so. It is impracticable to estimate the total tax liability, if any, that would be created by the future distribution of these earnings. The Company is evaluating the impact of Tax Reform on its existing accounting position related to undistributed earnings. Due to the inherent complexities in determining any incremental U.S. Federal and State taxes and the non-U.S. taxes that may be due if the earnings were remitted to the U.S. and in accordance with SAB 118, this evaluation has not been completed and no provisional amount has been recorded in regards to this amount.

The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:



	For the year ended December 31,
	2017			2016			2015
In thousands
Federal tax at 35% statutory rate	$	33,032		$	31,396		$	30,796
State income taxes, net of federal benefit	917			999			(1,517		)
Tax effect of:
Section 199 Manufacturing deduction	(1,616		)	(2,153		)	(2,275		)
Impact of tax rate changes, including Tax Reform	10,032			613			(224		)
Other, net	2,187			(5		)	771
Income tax expense	$	44,552		$	30,850		$	27,551

During the fourth quarter of 2016, the Company elected to early adopt ASU 2016-09, "Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting". The objective of this standard update is to simplify several aspects of the accounting for share-based payment transactions, including, but not limited to, income tax consequences. The standard update was effective for fiscal years, and interim periods within those years, beginning after December 31, 2016. Pursuant to this standard the Company recorded tax benefits of $0.8 million and 0.5 million in 2017 and 2016, respectively.

The Company records a benefit for uncertain tax positions in the financial statements only when it determines it is more likely than not that such a position will be sustained upon examination by taxing authorities. Unrecognized tax benefits represent the difference between the position taken and the benefit reflected in the financial statements. On December 31, 2017, 2016 and 2015, the total liability for unrecognized tax benefits was $3.4 million, $2.8 million and $3.0 million, respectively (including interest and penalties of $0.4 million in 2017, $0.2 million in 2016 and $0.5 million in 2015).

12. INCOME TAXES (CONTINUED)

The change in the liability for 2017, 2016 and 2015 is explained as follows:



	2017		2016			2015
In thousands
Balance at January 1	$	2,832	$	2,996		$	2,441
Additions based on current year tax positions	381		211			117
Changes for tax positions of prior years	152		(96		)	(160		)
Settlements	58		(155		)	19
Additions due to acquired business	—		—			954
Reductions due to lapses in statutes of limitation	—		(124		)	(375		)
Balance at December 31	$	3,423	$	2,832		$	2,996

Included in unrecognized tax benefits at December 31, 2017, were items approximating $3.0 million that, if recognized, would favorably affect the Company’s effective tax rate in future periods. The Company files tax returns in numerous U.S. and foreign jurisdictions, with returns subject to examination for varying periods, but generally back to and including 2013. During 2017, 2016 and 2015, $0.1 million or less of interest and penalties was recognized each year as a component of income tax expense. It is the Company’s policy to record interest and penalties on unrecognized tax benefits as income taxes.

Cash payments for income taxes, net of refunds, were $16.6 million, $24.8 million and $35.7 million in 2017, 2016 and 2015, respectively.