Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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

	(In thousands) Years Ended December 31,
	2021		2020		2019
Current tax expense
Federal	$	31,171	$	2,525	$	5,802
State	2,829		(459)		1,067
	34,000		2,066		6,869
Deferred tax expense (benefit)
Federal	107		1,294		(650)
State	841		(553)		(917)
	948		741		(1,567)
Income tax expense	$	34,948	$	2,807	$	5,302

We recognized net income tax benefits from deductions of share-based payments in excess of compensation cost recognized for financial reporting purposes of $0.9 million, $0.4 million, and $0.8 million for the years ended December 31, 2021, 2020, and 2019, respectively.

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

	(In thousands) December 31,
	2021		2020
Deferred tax assets:
Accrued expenses	$	620	$	558
Allowance for doubtful accounts	269		371
Contract overrun reserves	680		546
Deferred compensation	272		113
Deferred revenue	1,570		18
Employment-related accruals	4,028		5,912
Environmental reserves	499		493
Federal tax credit carryforwards	133		133
Inventory reserves	2,957		2,684
Operating lease liabilities	8,145		4,186
Pension obligation	1,550		2,915
Federal and state net operating loss carryforwards	4,243		5,125
State tax credit carryforwards	7,123		9,271
Stock-based compensation	2,584		2,179
Other	2,503		1,526
Total gross deferred tax assets	37,176		36,030
Valuation allowance	(7,718)		(9,330)
Total gross deferred tax assets, net of valuation allowance	29,458		26,700
Deferred tax liabilities:
Depreciation	(11,986)		(11,255)
Goodwill	(6,557)		(5,493)
Intangibles	(20,337)		(22,298)
Operating lease right-of-use assets	(7,931)		(3,879)
Prepaid insurance	(534)		(385)
Other	(840)		(349)
Total gross deferred tax liabilities	(48,185)		(43,659)
Net deferred tax liabilities	$	(18,727)	$	(16,959)

We have federal and state tax net operating losses of $15.1 million and $18.2 million, respectively, as of December 31, 2021. The federal net operating losses acquired from the acquisition of Nobles are subject to an annual limitation under Internal Revenue Code Section 382; however, we expect to fully realize them under ASC Subtopic 740-10 before they begin to expire in 2033. The state net operating loss carryforwards include $10.7 million that is not expected to be realized due to various limitations and has been reduced by a valuation allowance. If not realized, the state net operating loss carryforwards, depending on the tax jurisdiction, will begin to expire between 2027 and 2038.

We have federal and state tax credit carryforwards of $0.1 million and $10.9 million, respectively, as of December 31, 2021. A valuation allowance of $9.0 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 tax carryforwards will begin to expire in 2032 and state tax credit carryforwards, depending on the tax jurisdiction, will begin to expire between 2022 and 2036.

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,
	2021	2020	2019
Statutory federal income tax rate	21.0%	21.0%	21.0%
State income taxes (net of federal benefit)	3.1	4.6	3.6
Foreign derived intangible income deduction	—	(0.4)	(1.2)
Stock-based compensation expense	(0.5)	(1.4)	(2.1)
Research and development tax credits (1)	(3.0)	(13.8)	(7.8)
Other tax credits	—	(0.3)	—
Changes in valuation allowance	(1.0)	(0.4)	(1.6)
Non-deductible book expenses	0.7	3.6	3.9
Changes in deferred tax assets	—	(0.2)	(2.2)
Changes in tax reserves	0.2	(4.6)	1.2
Other	—	0.7	(0.8)
Effective income tax rate	20.5%	8.8%	14.0%

(1)For 2020, (3.4)% is additional research and development tax credits related to 2019.

Our total amount of unrecognized tax benefits was $4.4 million, $4.1 million, and $5.7 million at December 31, 2021, 2020, and 2019, respectively. We record interest and penalty charges, 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, 2021, 2020, and 2019 were not significant. If recognized, $2.6 million would affect the effective income tax rate. As a result of statute of limitations set to expire in 2022, we expect decreases to our unrecognized tax benefits of approximately $0.7 million 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,
	2021		2020		2019
Balance at January 1,	$	4,069	$	5,663	$	5,283
Additions for tax positions related to the current year	562		418		408
Additions for tax positions related to prior years	180		157		—
Reductions for tax positions related to prior years	—		—		(28)
Reductions for lapse of statute of limitations	(376)		(2,169)		—
Balance at December 31,	$	4,435	$	4,069	$	5,663

We file U.S. Federal and state income tax returns. We are subject to examination by the Internal Revenue Service (“IRS”) for tax years after 2017 and by state taxing authorities for tax years after 2016. 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 authorities 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.

In March 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that provided tax relief to individuals and businesses affected by the coronavirus pandemic. We considered the provisions of the CARES Act and determined they do not have a material impact on our overall income taxes. We utilized the option to defer payment of the employer portion of payroll taxes (Social Security) that would otherwise be required to be made during the period beginning March 27, 2020 to December 31, 2020. As such, as of December 31, 2020, we deferred payment of income tax deductions related to payroll taxes of $6.1 million and recorded the related deferred tax asset of $1.4 million, which was included as part of the net deferred income taxes on the consolidated balance sheet. We were required to and made the payments for 50% of the deferred payroll taxes by December 31, 2021. As of December 31, 2021, the remaining unpaid deferred income tax deductions related to payroll taxes is $3.1 million and the related deferred tax asset of $0.7 million is included as part of the net deferred income taxes on the consolidated balance sheet.

In December 2020, the U.S. enacted the Consolidated Appropriations Act, 2021 (“Appropriations Act”) that provided additional tax relief to individuals and businesses affected by the coronavirus pandemic. We considered the provisions of the Appropriations Act and determined they do not have a material impact to our overall income taxes.

On March 11, 2021, the U.S. enacted the American Rescue Plan Act of 2021 (“Rescue Plan”). The amendment to Section 162(m) expanding the definition of covered employee to also include the next five highest compensated employees in the limitation will apply to us effective January 1, 2027. We do not expect any tax impacts to be material. We considered other provisions in the Rescue Plan and determined they have no or minimal impact to our overall income taxes.

The Tax Cuts and Jobs Act of 2017 (“TCJA”), which was signed into U.S. law in December 2017, eliminated the option to immediately deduct research and development expenditures in the year incurred under Section 174 effective January 1, 2022. The amended provision under Section 174 requires us to capitalize and amortize these expenditures over five years. Although there is proposed legislation to temporarily reinstate the current deduction of the expenditures after 2021 through 2025, we must consider the changes under the TCJA. If the provision is not deferred, modified, or repealed, with retroactive effect to January 1, 2022, it may result in a material impact on cash from operating activities and the balance of our deferred taxes. The actual impact will depend on if and when this provision is deferred, modified, or repealed by Congress, including if retroactively to January 1, 2022, and the amount of research and development expenditures incurred in 2022. We are monitoring legislation for any further changes to Section 174 and the impact to the financial statements in 2022.