Income Taxes

12 Months Ended

Dec. 31, 2022

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,
	2022		2021		2020
Current tax expense
Federal	$	12,902	$	31,171	$	2,525
State	1,023		2,829		(459)
	13,925		34,000		2,066
Deferred tax (benefit) expense
Federal	(8,624)		107		1,294
State	(768)		841		(553)
	(9,392)		948		741
Income tax expense	$	4,533	$	34,948	$	2,807

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, $0.9 million, and $0.4 million for the years ended December 31, 2022, 2021, and 2020, respectively.

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

	(In thousands) December 31,
	2022		2021
Deferred tax assets:
Accrued expenses	$	627	$	620
Allowance for doubtful accounts	152		269
Contract overrun reserves	952		680
Deferred compensation	234		272
Deferred revenue	943		1,570
Employment-related accruals	3,932		4,028
Environmental reserves	501		499
Federal tax credit carryforwards	133		133
Inventory reserves	3,572		2,957
Operating lease liabilities	8,672		8,145
Pension obligation	28		1,550
Federal and state net operating loss carryforwards	3,397		4,243
Research expenses	10,620		—
State tax credit carryforwards	6,974		7,123
Stock-based compensation	2,420		2,584
Other	1,525		2,503
Total gross deferred tax assets	44,682		37,176
Valuation allowance	(7,548)		(7,718)
Total gross deferred tax assets, net of valuation allowance	37,134		29,458
Deferred tax liabilities:
Depreciation	(11,286)		(11,986)
Goodwill	(8,630)		(6,557)
Intangibles	(18,310)		(20,337)
Interest rate hedge	(3,359)		—
Operating lease right-of-use assets	(8,346)		(7,931)
Prepaid insurance	(609)		(534)
Other	(547)		(840)
Total gross deferred tax liabilities	(51,087)		(48,185)
Net deferred tax liabilities	$	(13,953)	$	(18,727)

We have federal and state tax net operating losses of $11.4 million and $17.3 million, respectively, as of December 31, 2022. 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 2036. The state net operating loss carryforwards include $10.6 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, 2022. A valuation allowance of $8.8 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 2023 and 2037.

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,
	2022	2021	2020
Statutory federal income tax rate	21.0%	21.0%	21.0%
State income taxes (net of federal benefit)	4.0	3.1	4.6
Foreign derived intangible income deduction	(0.9)	—	(0.4)
Stock-based compensation expense	(0.6)	(0.5)	(1.4)
Research and development tax credits (1)	(14.8)	(3.0)	(13.8)
Other tax credits	(0.1)	—	(0.3)
Changes in valuation allowance	(0.5)	(1.0)	(0.4)
Non-deductible book compensation expenses	4.4	0.7	3.3
Changes in deferred tax assets	(0.2)	—	(0.2)
Changes in tax reserves	—	0.2	(4.6)
Other	1.3	—	1.0
Effective income tax rate	13.6%	20.5%	8.8%

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

Our total amount of unrecognized tax benefits was $4.9 million, $4.4 million, and $4.1 million at December 31, 2022, 2021, and 2020, 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, 2022, 2021, and 2020 were not significant. If recognized, $2.5 million would affect the effective income tax rate. As a result of statute of limitations set to expire in 2023, we expect decreases to our unrecognized tax benefits of approximately $0.6 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,
	2022		2021		2020
Balance at January 1,	$	4,435	$	4,069	$	5,663
Additions for tax positions related to the current year	1,177		562		418
Additions for tax positions related to prior years	15		180		157
Reductions for tax positions related to prior years	(13)		—		—
Reductions for lapse of statute of limitations	(670)		(376)		(2,169)
Balance at December 31,	$	4,944	$	4,435	$	4,069

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 2018 and by state taxing authorities for tax years after 2017. 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. We were required to and made the payments for the remaining 50% of the deferred payroll taxes by December 31, 2022.

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 (for U.S.-based research). As of December 31, 2022, we recorded an increase to income taxes payable of approximately $10.6 million

and a decrease to net deferred tax liabilities of a similar amount. We are monitoring legislation for any further changes to Section 174 and the potential impact to our financial statements in 2023.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”) which aims to curb inflation by reducing the deficit, lowering prescription drug prices, and investing in domestic energy production while promoting clean energy. We considered the provisions in the IRA and determined they have no or minimal impact to our overall income taxes.

On August 9, 2022, the U.S. enacted the Creating Helpful Incentives to Produce Semiconductors Act of 2022 (“CHIPS Act”) which provides new funding to boost domestic research and manufacturing of semiconductors in the United States. We are evaluating the provisions in the CHIPS Act. Any impact to our overall income taxes would be for 2023 and thereafter.