Astronics Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for the amount of tax benefits which are not expected to be realized. Investment tax credits are recognized on the flow through method.

The provision (benefit) for income taxes at December 31 consists of the following:


(In thousands)	2019		2018		2017
Current
U.S. Federal	$	23,798	$	7,540	$	8,436
State	4,471		(504)		2,054
Foreign	2,402		1,123		316
Current	30,671		8,159		10,806

Deferred
U.S. Federal	(16,250)		(1,799)		(3,850)
State	727		(1,584)		(326)
Foreign	1,138		703		(1,318)
Deferred	(14,385)		(2,680)		(5,494)
Total	$	16,286	$	5,479	$	5,312

The effective tax rates differ from the statutory federal income tax rate as follows:


	2019		2018		2017
Statutory Federal Income Tax Rate	21.0	%	21.0	%	35.0	%
Permanent Items
Stock Compensation Expense	(0.5)	%	(0.9)	%	1.1	%
Domestic Production Activity Deduction	—	%	—	%	(4.7)	%
Other	0.5	%	0.4	%	0.5	%
Foreign Tax Rate Differential	1.4	%	0.5	%	(5.6)	%
State Income Tax, Net of Federal Income Tax Effect	6.0	%	2.8	%	4.5	%
Revised State Filing Tax Benefit, Net of Federal Income Tax Effect, Net of Reserve	—	%	(6.7)	%	—	%
Research and Development Tax Credits	(4.6)	%	(6.2)	%	(11.5)	%
Change in Valuation Allowance	1.1	%	—	%	—	%
Net GILTI and FDII Tax Expense (Benefit)	(1.2)	%	0.2	%	—	%
Tax Expense (Benefit) on Deemed Repatriation of Foreign Earnings	—	%	(0.8)	%	5.6	%
Revaluation of Deferred Taxes for Federal Tax Rate Change	—	%	(0.1)	%	(3.5)	%
Other	0.1	%	0.3	%	(0.1)	%
Effective Tax Rate	23.8	%	10.5	%	21.3	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities at December 31, are as follows:


(In thousands)	2019		2018
Deferred Tax Assets:
Asset Reserves	$	17,071	$	8,808
Deferred Compensation	6,427		5,628
State Investment and Research and Development Tax Credit Carryforwards, Net of Federal Tax	854		1,066
Customer Advanced Payments and Deferred Revenue	3,472		875
Net Operating Loss Carryforwards and Other	8,212		7,407
ASC 606 Revenue Recognition	2,612		1,641
Lease Liabilities	7,466		1,743
Other	3,170		—
Total Gross Deferred Tax Assets	49,284		27,168
Valuation Allowance for Foreign Tax Credit, State Deferred Tax Assets and Tax Credit Carryforwards, Net of Federal Tax	(13,303)		(8,098)
Deferred Tax Assets	35,981		19,070
Deferred Tax Liabilities:
Depreciation	10,060		10,783
Goodwill and Intangible Assets	4,683		4,438
ASC 606 Revenue Recognition - Section 481(a) Adjustment	496		767
Lease Assets	6,377		904
Other	751		3,812
Deferred Tax Liabilities	22,367		20,704
Net Deferred Tax Assets (Liabilities)	$	13,614	$	(1,634)

The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31:


(In thousands)	2019		2018
Other Assets — Long-term	$	17,536	$	3,999
Assets Held for Sale	—		(1,528)
Deferred Tax Liabilities — Long-term	(3,922)		(3,199)
Liabilities Held for Sale	—		(906)
Net Deferred Tax Assets (Liabilities)	$	13,614	$	(1,634)

At December 31, 2019, state tax credit carryforwards amounted to approximately $0.8 million which will expire from 2020 through 2033.

At December 31, 2019, federal net operating loss carryforwards, which the Company expects to utilize, even with annual limitations under IRC Section 382, amounted to approximately $6 million and expire at various dates between 2038 and 2039.

At December 31, 2019, state net operating loss carryforwards which the Company expects to utilize amounted to approximately $6.9 million and expire at various dates between 2027 and 2038. Due to the uncertainty as to the Company’s ability to generate sufficient taxable income in certain states in the future and utilize certain of the Company’s state operating loss carryforwards before they expire, the Company has recorded a valuation allowance accordingly. These state net operating loss carryforwards amount to approximately $108.4 million and expire at various dates from 2022 through 2039.

The Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting during 2017 and beginning with 2017, the excess tax benefits associated with stock option exercises are no longer recorded directly to shareholders’ equity, but rather, are recorded in the provision for income taxes, when realized. A benefit of approximately $0.6 million, $0.7 million and $0.5 million was recorded in the provision for incomes taxes for the year ended December 31, 2019, 2018 and 2017, respectively.

At December 31, 2019, estimated foreign tax credit carryforwards, which the Company expects to utilize, amounted to approximately $0.2 million. The Company expects to generate general limitation foreign source income in the future and will utilize these foreign tax credits. Therefore, during 2019 the Company has removed the valuation allowance that was recorded at December 31, 2018.

During 2019, the Company recorded a valuation allowance on a deferred tax asset related to an equity investment impairment, as the Company does not expect to utilize the capital loss in the future. In addition, the Company also removed the state valuation allowance on the deferred tax assets of one of its subsidiaries, which are now expected to be utilized in the future. Finally, the Company added a state valuation allowance on the deferred tax assets of one of its subsidiaries, which are now expected not to be utilized in the future.

During the year ended December 31, 2018, the Company, determined that a revised state filing position could be taken which would reduce the taxable income apportioned for state income tax purposes. Based on the assessment performed, the Company concluded that amended state income tax returns would be filed for the open tax years of 2014 through 2017 to reflect this revised tax position and claim the associated tax benefits. The Company is also claiming the benefit of the revised filing position for 2018 and subsequent tax years. In addition, the revised state tax filing position also resulted in a deferred tax benefit due to the revaluation of deferred tax liabilities. Accordingly, the Company recognized the tax benefits, and related tax reserves, for the revised state filing position during the year ended December 31, 2019 and 2018. Absent a state tax audit notice related to the refund claim, the statute of limitations will expire on various dates in 2020 for the amended returns for tax years 2014 and 2015, at which time approximately $0.8 million of the unrecognized tax benefits is expected to be recognized. Absent a state tax audit notice related to the refund claim, the statute of limitations will expire one year from the date the refund checks are issued for the amended returns for tax years 2016 and 2017 and will expire in 2022 and 2023 for tax years 2018 and 2019, respectively.

The Company has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. Should the Company need to accrue a liability for uncertain tax benefits, any interest associated with that liability would be recorded as interest expense. Penalties, if any, would be recorded as operating expenses. During the year ended December 31, 2019, reserves for uncertain tax positions were recorded in association with revised state income tax filing positions pursuant to ASC Topic 740-10. No reserves for uncertain income tax positions

were deemed necessary for the year ended December 31, 2017. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:


(in thousands)	2019		2018		2017
Balance at Beginning of the Year	$	2,197	$	—	$	—
Decreases as a Result of Tax Positions Taken in Prior Years	—		—		—
Increases as a Result of Tax Positions Taken in the Current Year	368		2,197		—
Balance at End of the Year	2,565		$	2,197	$	—

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate amounted to $2.6 million and $2.2 million at December 31, 2019 and 2018, respectively. There are no material penalties or interest liabilities accrued as of December 31, 2019 or 2018, nor are any material penalties or interest costs included in expense for each of the years ended December 31, 2019, 2018 and 2017. The years under which we conducted our evaluation coincided with the tax years currently still subject to examination by major federal and state tax jurisdictions, those being 2016 through 2019 for federal purposes and 2015 through 2019 for state purposes.

Pretax income from the Company’s foreign subsidiaries amounted to $12.2 million, $7.3 million and $1.1 million for 2019, 2018 and 2017, respectively. The balance of pretax earnings for each of those years were domestic.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Act permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a 21% rate, effective January 1, 2018.

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Cuts and Jobs Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a $0.1 million tax benefit and a provisional $0.9 million tax benefit in the Company’s consolidated statement of income for the years ended December 31, 2018 and 2017 respectively.

The Tax Cuts and Jobs Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company had an estimated $10.3 million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional $1.4 million of income tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017. The Company made an adjustment to its provisional amounts included in its consolidated financial statements for the year ended December 31, 2017 resulting in a benefit of approximately $0.4 million recorded during the year ended December 31, 2018. No additional provision for U.S. federal or foreign taxes has been made as the foreign subsidiaries’ undistributed earnings (approximately $29.7 million at December 31, 2019) are considered to be permanently reinvested. It is not practicable to determine the amount of outside basis differences related to the investment in foreign subsidiaries and other taxes that would be payable if these amounts were repatriated to the U.S.

While the Tax Cuts and Jobs Act provides for a territorial tax system, beginning in 2018, it includes the foreign-derived intangible income (“FDII”) and global intangible low-taxed income (“GILTI”) provisions. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings from its Controlled Foreign Corporations (“CFCs”) in excess of an allowable return on the foreign subsidiary’s tangible assets. The GILTI tax expense resulted from excess net tested income over net deemed tangible income return from the CFCs. The GILTI expense would have been completely offset by a foreign tax credit absent the required allocations of interest expense to the GILTI income, which created a U.S. foreign tax credit limitation. The FDII provisions allow for a deduction equal to a percentage of the foreign-derived intangible income of a domestic corporation. As a result of these provisions, net, the Company recorded a tax benefit of approximately $0.8 million during the year ended December 31, 2019 and tax expense of approximately $0.2 million during the year ended December 31, 2018.

The Base Erosion and Anti-Abuse Tax (“BEAT”) provisions in the Tax Cuts and Jobs Act eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2019 and 2018.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. The Company had recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The accounting for these income tax effects of the Tax Cuts and Jobs Act was completed during the fourth quarter of 2018 and the provisional tax impacts were adjusted for the year ended December 31, 2018.