Income Taxes

12 Months Ended

Dec. 31, 2020

INCOME TAXES

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


	For the twelve months ended December 31,
	2020		2019		2018
In thousands
Current:
Federal	$	1,693	$	(19,432)	$	351
State	(3,143)		1,996		104
Foreign	168		585		1,191
	(1,282)		(16,851)		1,646
Deferred:
Federal	(5,650)		719		7,145
State	899		277		841
Foreign	(1,697)		(4)		(373)
	(6,448)		992		7,613
Total	$	(7,730)	$	(15,859)	$	9,259

The Company's tax benefit of $7.7 million in the year ended December 31, 2020 was impacted by the goodwill impairment charge and impairment on assets held for sale associated with the anticipated sale of the Company's UK Composites business as neither charge had associated tax benefits. In the year ended December 31, 2019, the Company filed an entity classification election with regard to the investment in the Company's UK business, which had the effect of treating the subsidiary as a disregarded entity for U.S. tax purposes, but had no impact on operations or taxation in the UK. This election resulted in a loss for U.S tax purposes and a significant tax benefit was 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. As such, the tax loss associated with this investment was recognized in 2019, while the financial statement loss was recorded in 2020. Additionally, in 2019, the Company recognized benefits relating to research and development credits associated with research completed in the three prior years. The credits were based upon the increases in qualified research expenditures over a base period. The Company also recognized credits in 2020, and based on the Company’s level of research, additional credits would be expected 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,
	2020		2019
In thousands
Deferred tax assets:
Deferred employee benefits	$	30,701	$	36,678
Tax loss and credit carryforwards	33,065		19,449
Accrued liabilities and other items	17,420		14,044
Total deferred tax assets	81,186		70,171
Deferred tax liabilities:
Property, plant and equipment	(5,379)		(6,410)
Intangibles	(32,398)		(27,147)
Other items	(765)		(226)
Total deferred tax liabilities	(38,542)		(33,783)
Net deferred tax assets before valuation allowance	42,644		36,388
Valuation allowance	(10,216)		(8,142)
Net deferred tax assets after valuation allowance	$	32,428	$	28,246

16. INCOME TAXES (CONTINUED)

The increase in the valuation allowance from December 31, 2019 to December 31, 2020, primarily relates to restrictions on the deductibility of accrued expenses, as well as the additional losses incurred by the Kaman UK 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 $24.3 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 $36.9 million, $4.0 million and $27.1 million in 2020, 2019, and 2018 respectively. The significant losses in 2020 and 2018 were largely attributable to the goodwill impairment charge and other intangible asset impairment charge for the Company's UK business, respectively. 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 2020.

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,
	2020		2019		2018
In thousands
Federal tax at 21% statutory rate	$	(16,415)	$	8,523	$	5,279
State income taxes, net of federal benefit(1)	(2,208)		1,839		773
Tax effect:
Goodwill impairment charge	8,297		—		—
Impairment on business	7,620		—		—
Research and development credits	(821)		(3,480)		(100)
Impact of entity classification election	—		(24,813)		—
Foreign derived intangible income benefit	—		—		(2,186)
Provision to return adjustments	610		(1,466)		(1,612)
Foreign losses for which no tax benefit has been recorded	41		1,282		2,685
Change in valuation allowance	1,449		976		3,161
Equity compensation benefit	(209)		(482)		(910)
Nondeductible compensation	215		891		347
Nondeductible acquisition costs	—		546		—
Federal benefit of NOL Carryback	(3,885)		—		—
Other, net	(2,424)		325		1,822
Income tax (benefit) expense	$	(7,730)	$	(15,859)	$	9,259

(1) 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.

Due to the loss in the year ended December 31, 2020, the Company did not realize tax benefits associated with the foreign-derived intangible income ("FDII") deduction, which encourages U.S manufacturing by allowing for what equates to a 13% U.S. tax rate on export sales. The Company realized tax benefits of approximately $3.7 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 to have benefits relating to FDII recorded in continuing operations in the future.

16. INCOME TAXES (CONTINUED)

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, 2020, 2019 and 2018, the total liability for unrecognized tax benefits was $3.6 million, $3.2 million and $3.5 million, respectively (including interest and penalties of $0.4 million in 2020, $0.2 million in 2019 and $0.4 million in 2018).

The change in the liability for 2020, 2019 and 2018 is explained as follows:


	2020		2019		2018
In thousands
Balance at January 1	$	3,214	$	3,457	$	3,423
Additions (reductions) based on current year tax positions	481		(378)		162
Changes for tax positions of prior years	3		135		(128)
Settlements	(86)		—		—
Balance at December 31	$	3,612	$	3,214	$	3,457

Included in unrecognized tax benefits at December 31, 2020, were items approximating $3.1 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 2014. During 2020, 2019 and 2018, $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 $0.9 million, $47.8 million and $12.4 million in 2020, 2019 and 2018, respectively.