Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

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



	For the twelve months ended December 31,
	2019			2018			2017
In thousands
Current:
Federal	$	(19,432	)	$	351		$	2,841
State	1,996			104			(626		)
Foreign	585			1,191			2,341
	(16,851		)	1,646			4,556
Deferred:
Federal	719			7,145			20,531
State	277			841			(60		)
Foreign	(4		)	(373		)	187
	992			7,613			20,658
Total	$	(15,859	)	$	9,259		$	25,214

16. INCOME TAXES (CONTINUED)

In the year ended December 31, 2019, the Company filed an entity classification election with regard to the investment in the Company's U.K. business, which had the effect of treating the subsidiary as a disregarded entity for U.S. tax purposes, but has no impact on operations or taxation in the U.K. This election resulted in a loss for U.S tax purposes and a significant tax benefit recognized by the Company in 2019. The loss was based on the tax basis of the Company's investment in the subsidiary and was not impacted by the carrying value of the Company's investment in the subsidiary for financial statement purposes. If a divestiture of the subsidiary occurs at some point in the future, the Company would expect to record a financial statement loss, for which no tax benefit would be recorded. Additionally, in 2019, the Company recognized additional benefits from research and development credits, relating to research completed in the three prior years. The credit was based upon the increases in qualified research expenditures over a base period. Based on the Company’s level of research, additional credits would be expected in future years.

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 ASC 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 years ended December 31, 2019 and 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 years ended December 31, 2019 and 2018, and expects to continue to benefit in future years.

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



	At December 31,
	2019			2018
In thousands
Deferred tax assets:
Deferred employee benefits	$	36,678		$	43,118
Tax loss and credit carryforwards	19,449			17,610
Accrued liabilities and other items	14,044			9,036
Total deferred tax assets	70,171			69,764
Deferred tax liabilities:
Property, plant and equipment	(6,410		)	(2,677		)
Intangibles	(27,147		)	(27,732		)
Other items	(226		)	(218		)
Total deferred tax liabilities	(33,783		)	(30,627		)
Net deferred tax assets before valuation allowance	36,388			39,137
Valuation allowance	(8,142		)	(8,243		)
Net deferred tax assets after valuation allowance	$	28,246		$	30,894

16. INCOME TAXES (CONTINUED)

The decrease in the valuation allowance from December 31, 2018 to December 31, 2019, primarily relates to a change in state tax law which will enable the Company to utilize additional state loss carryforwards, partially offset by additional losses incurred by the Kaman U.K. entities for which no tax benefit could be recorded. 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.

Tax loss and credit carryforwards associated with approximately $10.0 million of deferred tax assets have no expiration period. The remainder of the loss and credit carryforwards have varying expiration periods; however, most will expire prior to 2035.

Pre-tax losses from foreign operations amounted to $4.0 million and $27.1 million in 2019 and 2018, respectively, while pre-tax income from foreign operations amounted to $1.0 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 prior years, there were no accumulated earnings in foreign subsidiaries for which U.S income taxes were required to be provided in 2019.

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



	For the twelve months ended December 31,
	2019			2018			2017
In thousands
Federal tax at statutory rate⁽¹⁾	$	8,523		$	5,279		$	15,722
State income taxes, net of federal benefit⁽²⁾	1,839			773			(584		)
Tax effect:
Section 199 Manufacturing deduction	—			—			(1,616		)
Research and development credits	(3,480		)	(100		)	(100		)
Impact of entity classification election	(24,813		)	—			—
Foreign derived intangible income benefit	—			(2,186		)	—
Provision to return adjustments	(1,466		)	(1,612		)	366
Foreign losses for which no tax benefit has been recorded	1,282			2,685			—
Change in valuation allowance	976			3,161			861
Equity compensation benefit	(482		)	(910		)	(851		)
Nondeductible compensation	891			347			11
Nondeductible acquisition costs	546			—			—
Impact of tax rate changes, including Tax Reform	68			193			10,032
Other, net	257			1,629			1,373
Income tax (benefit) expense	$	(15,859	)	$	9,259		$	25,214

⁽¹⁾ The federal statutory tax rate was 21% for the years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017.

⁽²⁾ Included in state income taxes, net of federal benefit was the state impact of the entity classification election of $0.9 million for the year ended December 31, 2019.

The Company will realize tax benefits of approximately $3.4 million for the year ended December 31, 2019 associated with the FDII deduction; however, based on U.S. GAAP reporting requirements, this benefit was recorded in earnings from discontinued operations due to the loss in continuing operations. While the amount of the benefit is dependent upon the volume and profitability of the Company's export sales, as well as consolidated taxable income, the Company would expect such benefit to be associated with continuing operations in the future.

16. INCOME TAXES (CONTINUED)

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 $0.5 million, 0.9 million and $0.8 million for the years ended December 31, 2019, 2018 and 2017, 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, 2019, 2018 and 2017, the total liability for unrecognized tax benefits was $3.2 million, $3.5 million and $3.4 million, respectively (including interest and penalties of $0.2 million in 2019, $0.4 million in 2018 and $0.4 million in 2017).

The change in the liability for 2019, 2018 and 2017 is explained as follows:



	2019			2018			2017
In thousands
Balance at January 1	$	3,457		$	3,423		$	2,832
(Reductions) additions based on current year tax positions	(378		)	162			381
Changes for tax positions of prior years	135			(128		)	152
Settlements	—			—			58
Balance at December 31	$	3,214		$	3,457		$	3,423

Included in unrecognized tax benefits at December 31, 2019, were items approximating $2.8 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 2019, 2018 and 2017, $0.2 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 $47.8 million, $12.4 million and $16.6 million in 2019, 2018 and 2017, respectively.