Income Taxes

Our pre-tax income attributable to foreign operations was not material. The provision for income tax (benefit) expense consisted of the following:



	(In thousands) Years Ended December 31,
	2018			2017			2016
Current tax expense
Federal	$	474		$	2,387		$	5,953
State	1,260			525			2,982
	1,734			2,912			8,935
Deferred tax (benefit) expense
Federal	(789		)	(15,515		)	3,876
State	291			135			41
	(498		)	(15,380		)	3,917
Income tax expense (benefit)	$	1,236		$	(12,468	)	$	12,852

On December 22, 2017, the U. S. enacted the Tax Cuts and Jobs Act (the “2017 Tax Act”) which, among a broad range of tax reform measures, reduced the U.S. corporate tax rate from 35.0% to 21.0% effective January 1, 2018. The reduction in the corporate tax rate required the federal portion of our deferred tax assets and liabilities at December 31, 2017 to be re-measured at the enacted tax rate expected to apply when the temporary differences are to be realized or settled using 21.0%. As a result, we recorded a provisional deferred income tax benefit of $13.0 million related to the re-measurement for the year ended December 31, 2017. SEC Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), allowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the 2017 Tax Act was passed late in the fourth quarter of 2017, and ongoing tax guidance and accounting interpretation were expected during 2018, we considered the accounting of the deferred tax re-measurement and other items to be incomplete as of December 31, 2017. Based on our review of proposed tax regulations and related guidance issued and available as of December 22, 2018, we determined that no refinements were needed to the tax positions and provisional amounts recorded in the fourth quarter of 2017 and finalized the accounting of the tax effects of the 2017 Tax Act as of December 31, 2018.

ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), became effective beginning January 1, 2017 and required all the tax effects related to share-based payments be recorded through the income statement. We recognized net income tax benefits from deductions of share-based payments in excess of compensation cost recognized for financial reporting purposes of $0.2 million and $0.6 million for the years ended December 31, 2018 and 2017, respectively. Prior to January 1, 2017, the current income tax expense (benefit) excluded net (tax shortfalls) excess tax benefits which were previously recorded directly to additional paid-in-capital in the amount of $(0.1) million for the year ended December 31, 2016.

Deferred tax (liabilities) assets were comprised of the following:



	(In thousands) December 31,
	2018			2017
Deferred tax assets:
Accrued expenses	$	704		$	313
Allowance for doubtful accounts	267			208
Contract overrun reserves	1,263			294
Deferred compensation	302			177
Employment-related accruals	4,252			2,091
Environmental reserves	479			501
Federal tax credit carryforwards	288			5,613
Inventory reserves	1,757			1,315
Pension obligation	2,324			2,398
State net operating loss carryforwards	51			86
State tax credit carryforwards	9,075			9,051
Stock-based compensation	1,661			1,480
Workers’ compensation	51			75
Other	1,538			1,492
Total gross deferred tax assets	24,012			25,094
Valuation allowance	(9,083		)	(9,013		)
Total gross deferred tax assets, net of valuation allowance	14,929			16,081
Deferred tax liabilities:
Deferred revenue	(649		)	—
Depreciation	(7,951		)	(7,976		)
Goodwill	(3,963		)	(2,902		)
Intangibles	(19,905		)	(20,611		)
Prepaid insurance	(223		)	(312		)
Total gross deferred tax liabilities	(32,691		)	(31,801		)
Net deferred tax liabilities	$	(17,762	)	$	(15,720	)

We have net operating losses in various states of $2.0 million as of December 31, 2018. The state net operating loss carryforwards include $1.9 million that is not expected to be realized under ASC Subtopic 740-10 and has been reduced by a valuation allowance. If not realized, the state net operating loss carryforwards will begin to expire in 2030.

We have federal and state tax credit carryforwards of $2.6 million and $13.0 million, respectively, as of December 31, 2018. A valuation allowance of $11.5 million has been provided on state tax credit carryforwards that are not expected to be realized under ASC Subtopic 740-10. If not realized, the federal and state tax credit carryforwards will expire between 2019 and 2038.

We believe it is more likely than not that we will generate sufficient taxable income to realize the benefit of the remaining deferred tax assets.

The principal reasons for the variation between the statutory and effective tax rates were as follows:



	Years Ended December 31,
	2018	2017	2016
Statutory federal income tax rate	21.0%	35.0%	35.0%
State income taxes (net of federal benefit)	5.3	2.5	5.7
Qualified domestic production activities	—	(2.6)	(2.0)
Stock-based compensation expense	(1.9)	(8.2)	—
Research and development tax credits	(32.0)	(50.6)	(8.6)
Other tax credits	(1.2)	(7.5)	—
Changes in valuation allowance	0.7	10.6	0.9
Non-deductible book expenses	8.2	1.1	0.2
Changes in deferred tax assets	12.1	15.4	1.5
Re-measurement of deferred taxes for 2017 Tax Act	—	(171.3)	—
Changes in tax reserves	1.2	11.4	—
Other	(1.4)	0.4	1.0
Effective income tax (benefit) rate	12.0%	(163.8)%	33.7%

As a result of the 2017 Tax Act, we began utilizing the enacted U.S. corporate rate of 21.0% for the tax year 2018 and beyond.

Our total amount of unrecognized tax benefits was $5.3 million, $5.3 million, and $3.0 million at December 31, 2018, 2017, and 2016, respectively. We record interest and penalty charge, if any, related to uncertain tax positions as a component of tax expense and unrecognized tax benefits. The amounts accrued for interest and penalty charges as of December 31, 2018, 2017, and 2016 were not significant. If recognized, $3.6 million would affect the effective income tax rate. We do not reasonably expect significant increases or decreases to our unrecognized tax benefits in the next twelve months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:



	(In thousands) Years Ended December 31,
	2018			2017			2016
Balance at January 1,	$	5,271		$	3,036		$	2,963
Additions for tax positions related to the current year	419			422			476
Additions for tax positions related to prior years	92			1,953			385
Reductions for tax positions related to prior years	(499		)	(99		)	(567		)
Reductions for lapse of statute of limitations	—			(41		)	(221		)
Balance at December 31,	$	5,283		$	5,271		$	3,036

We file U.S. Federal and state income tax returns. During the fourth quarter of 2017, the Internal Revenue Service (“IRS”) completed the audit of tax years 2013, 2014, and 2015. Consequently, Federal income tax returns after 2015 are subject to examination. California franchise (income) tax returns after 2013 and other state income tax returns after 2013 are subject to examination. While we are no longer subject to examination prior to those periods, carryforwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing authority if they either have been or will be used in a subsequent period. We believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that could result from the examination and all open audit years.