INCOME TAXES

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



	For the year ended December 31,
	2018			2017		2016
In thousands
Current:
Federal	$	6,011		$	16,979	$	20,405
State	2,148			1,301		2,312
Foreign	1,188			2,362		738
	9,347			20,642		23,455
Deferred:
Federal	10,988			23,498		10,133
State	1,196			251		(1,023		)
Foreign	(463		)	161		(1,715		)
	11,721			23,910		7,395
Total	$	21,068		$	44,552	$	30,850

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 has properly reflected the income tax effects of all aspects of the legislation for which the accounting under ASC 740 was impacted. The new tax legislation provided 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 impacted the Company included the elimination of the deduction for manufacturing activities, changes to the deductibility of executive compensation and various international tax law changes. All conclusions under SAB 118 were finalized during the fourth quarter of 2018 with no changes to the provisional amounts.

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. The Company has evaluated this provision of Tax Reform and the application of ASC 740, and has determined that GILTI had no impact on the Company for the year ended December 31, 2018. Another significant international change brought upon by Tax Reform was the foreign-derived intangible income ("FDII") provision, which is applicable for tax years beginning after December 31, 2017. FDII encourages U.S. manufacturing by allowing for what equates to a 13% U.S. tax rate on qualifying export sales. The Company benefited from this provision during the year ended December 31, 2018, and expects to continue to benefit in future years.

14. INCOME TAXES (CONTINUED)

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



	At December 31,
	2018			2017
In thousands
Deferred tax assets:
Deferred employee benefits	$	43,583		$	46,539
Inventories	2,210			5,528
Tax loss and credit carryforwards	20,736			20,813
Accrued liabilities and other items	11,046			7,031
Total deferred tax assets	77,575			79,911
Deferred tax liabilities:
Property, plant and equipment	(11,584		)	(10,756		)
Intangibles	(39,832		)	(40,258		)
Other items	(216		)	(4,020		)
Total deferred tax liabilities	(51,632		)	(55,034		)
Net deferred tax assets before valuation allowance	25,943			24,877
Valuation allowance	(8,533		)	(5,298		)
Net deferred tax assets after valuation allowance	$	17,410		$	19,579

The $3.2 million change in the valuation allowance from December 31, 2017 to December 31, 2018, primarily relates to additional losses incurred by the Kaman U.K. entities, including the loss on the U.K. Tooling business, and certain nondeductible executive compensation. 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, $1.3 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 losses from foreign operations amounted to $26.7 million and $5.0 million in 2018 and 2016, respectively, while pre-tax income from foreign operations amounted to $0.7 million in 2017. Tax Reform required the Company to effectively recognize all foreign earnings in U.S. taxable income in the year ended December 31, 2017. Due to this provision and foreign losses incurred in the year ended December 31, 2018, there were no accumulated earnings in foreign subsidiaries for which U.S income taxes were required to be provided in 2018.

14. INCOME TAXES (CONTINUED)

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



	For the year ended December 31,
	2018			2017			2016
In thousands
Federal tax at statutory rate^(a)	$	15,800		$	33,032		$	31,396
State income taxes, net of federal benefit	2,669			917			999
Tax effect of:
Section 199 Manufacturing deduction	—			(1,616		)	(2,153		)
Foreign derived intangible income benefit	(2,186		)	—			—
Provision to return adjustments	(2,298		)	396			253
Foreign losses for which no tax benefit has been recorded	2,685			—			—
Change in valuation allowance	3,097			941			(395		)
Equity compensation benefit	(910		)	(851		)	(514		)
Impact of tax rate changes, including Tax Reform	199			10,032			613
Other, net	2,012			1,701			651
Income tax expense	$	21,068		$	44,552		$	30,850

^(a) The federal statutory tax rate was 21% for the year ended December 31, 2018 and 35% for the years ended December 31, 2017 and 2016.

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 $0.9 million, 0.8 million and $0.5 million for the years ended December 31, 2018, 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, 2018, 2017 and 2016, the total liability for unrecognized tax benefits was $3.5 million, $3.4 million and $2.8 million, respectively (including interest and penalties of $0.4 million in 2018, $0.4 million in 2017 and $0.2 million in 2016).

The change in the liability for 2018, 2017 and 2016 is explained as follows:



	2018			2017		2016
In thousands
Balance at January 1	$	3,423		$	2,832	$	2,996
Additions based on current year tax positions	162			381		211
Changes for tax positions of prior years	(128		)	152		(96		)
Settlements	—			58		(155		)
Reductions due to lapses in statutes of limitation	—			—		(124		)
Balance at December 31	$	3,457		$	3,423	$	2,832

Included in unrecognized tax benefits at December 31, 2018, 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 2018, 2017 and 2016, $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 $12.4 million, $16.6 million and $24.8 million in 2018, 2017 and 2016, respectively.