Income Taxes, (As Restated for fiscal 2014 and 2013)

The Company files a consolidated U.S. federal income tax return with its wholly-owned subsidiaries. The components of the Company’s income tax provision (benefit) from continuing operations are as follows:



	Year Ended
	2015			2014			2013
	(In millions)
Current
U.S. federal	$	33.0		$	19.0		$	1.8
State and local	3.4			4.1			1.0
	36.4			23.1			2.8
Deferred
U.S. federal	(41.2		)	(5.5		)	(150.3		)
State and local	5.1			(1.3		)	(50.9		)
	(36.1		)	(6.8		)	(201.2		)
Income tax provision (benefit)	$	0.3		$	16.3		$	(198.4	)

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate on earnings from continuing operations is as follows:



	Year Ended
	2015		2014		2013
Statutory U.S. federal income tax rate - provision (benefit)	(35.0	)%	(35.0	)%	(35.0	)%
State and local income taxes, net of U.S. federal income tax effect	16.2		11.4		(6.8	)
Changes in state income tax rates	19.0		(0.7	)	(21.5	)
Reserve adjustments	2.2		(0.8	)	4.1
Valuation allowance adjustments	—		0.3		(501.3	)
Rescindable common stock interest and realized losses (gains)	—		0.9		(1.0	)
Non-deductible convertible subordinated notes interest	8.0		7.0		7.9
Non-deductible premiums on repurchase of convertible subordinated notes	—		64.1		4.8
Research credits	—		4.0		(3.4	)
Retroactive change in federal tax law	(11.6	)	—		(3.9	)
Benefit of manufacturing deductions	(5.8	)	(4.3	)	(0.8	)
Lobbying costs	3.6		1.0		0.9
Other, net	5.2		1.5		0.3
Effective income tax rate - provision (benefit)	1.8	%	49.4	%	(555.7	)%

In fiscal 2015, the Company’s effective tax rate was an income tax expense of 1.8% on a pre-tax loss from continuing operations of $16.8 million. The Company’s effective tax rate differed from the 35.0% statutory federal income tax rate due largely to state income taxes and certain non-deductible interest expense partially offset by the retroactive reinstatement of the federal R&D credit and the benefit related to manufacturing deductions.

In fiscal 2014, the Company’s effective tax rate was an income tax expense of 49.4% on a pre-tax loss from continuing operations of $33.0 million. The Company’s effective tax rate differed from the 35.0% statutory federal income tax rate due largely to the non-deductible premiums paid upon the redemption of portions of the convertible debt, state income taxes, impacts from the final R&D credit study, the benefit related to manufacturing deductions, and certain non-deductible interest expense.

In fiscal 2013, the Company’s effective tax rate was an income tax benefit of 555.7% on a pre-tax loss from continuing operations of $35.7 million. The Company’s effective tax rate differed from the 35% statutory federal income tax rate due largely to the release of a significant portion of the valuation allowance previously recorded against deferred tax assets, the impact of state income taxes, and certain non-deductible interest expense. The Company released approximately $282.4 million of the valuation allowance that existed at the beginning of the year, of which approximately $178.7 million was recorded as an income tax benefit to continuing operations, $1.1 million to discontinued operations, and $102.6 million was recorded in other comprehensive income.

The timing of recording or releasing a valuation allowance requires significant management judgment. The amount of the valuation allowance released by the Company represents a portion of deferred tax assets that was deemed more-likely-than-not that the Company will realize the benefits based on the analysis in which the positive evidence outweighed the negative evidence.

A valuation allowance is required when it is more-likely-than-not that all or a portion of deferred tax assets may not be realized. Establishment and removal of a valuation allowance requires management to consider all positive and negative evidence and to make a judgmental decision regarding the amount of valuation allowance required as of a reporting date. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. In the evaluations as of November 30, 2015 and 2014, management has considered all available evidence, both positive and negative, including but not limited to the following:

Positive evidence


•	The three year comprehensive cumulative income position as of November 30, 2015;


•	Continuing positive results of operations from the acquisition of the Rocketdyne Business;


•	The Company’s recent history of generating taxable income which has allowed for the utilization of tax credit carryforwards, and the expected taxable income position for the current year;


•	Pension rules that allow the Company to recover pension funding cash contributions through its U.S. government contracts;


•	Establishment and execution of the Competitive Improvement Program evidencing increasing growth and profitability;


•	Increase in the Company's contract backlog; and


•	Favorable trends with respect to the market value of certain real estate assets.

Negative evidence


•	The Company’s exposure to environmental remediation obligations and the related uncertainty as to the ultimate exposure upon settlement;


•	The significance of the Company’s defined benefit pension obligation and related impact it could have in future years;


•	The additional indebtedness incurred in fiscal 2013 related to the acquisition of the Rocketdyne Business that continues to generate interest expense; and


•	Potential three-year cumulative loss position at the end of fiscal 2016.

As of November 30, 2015 and 2014, management believes that the weight of the positive evidence outweighed the negative evidence regarding the realization of the net deferred tax assets. Management will continue to evaluate the ability to realize the Company’s net deferred tax assets and the remaining valuation allowance on a quarterly basis.

The Company is routinely examined by domestic and foreign tax authorities. While it is difficult to predict the outcome or timing of a particular tax matter, the Company believes it has adequately provided reserves for any reasonable foreseeable outcome related to these matters.

A reconciliation of the beginning and ending amount of unrecognized tax benefits consists of the following:



	Year Ended
	2015			2014			2013
	(In millions)
Balances at beginning of fiscal year	$	6.8		$	7.9		$	4.9
Increases based on tax positions in prior years	1.0			0.6			3.7
Decreases based on tax position in prior years	(1.8		)	(1.3		)	—
Increases based on tax positions in current year	0.7			—			0.2
Lapse of statute of limitations	—			(0.4		)	(0.9		)
Balances at end of fiscal year	$	6.7		$	6.8		$	7.9

As of November 30, 2015, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $5.9 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of November 30, 2015, the Company’s accrued interest and penalties related to uncertain tax positions was $0.7 million. It is reasonably possible that a reduction of less than $4.2 million of unrecognized tax benefits and related interest may occur within the next 12 months as a result of the expiration of certain statutes of limitations. During fiscal 2014, the Company completed a study relative to its federal and California R&D credits. Based upon the study results, the Company concluded that no additional reserves were required.

The years ended November 30, 2012 through November 30, 2015 remain open to examination for U.S. federal income tax purposes. In addition, the years ended November 30, 2002 through November 30, 2005 remain open as they relate to selected tax attributes utilized during fiscal years 2010 through 2014. For the Company’s other major taxing jurisdictions, the tax years ended November 30, 2003 through November 30, 2015 remain open to examination.

Deferred tax assets and liabilities are as follows:



	As of November 30,
	2015			2014
	(In millions)
Deferred Tax Assets
Accrued estimated costs	$	112.4		$	99.7
Basis difference in assets and liabilities	7.4			18.2
Tax losses and credit carryforwards	8.2			13.0
Net cumulative defined benefit pension plan losses	222.2			192.3
Retiree medical and life insurance benefits	19.9			22.7
Valuation allowance	(1.7		)	(2.6		)
Total deferred tax assets	368.4			343.3
Deferred Tax Liabilities
Revenue recognition differences	39.7			47.6
Basis differences in intangible assets	13.9			14.4
Total deferred tax liabilities	53.6			62.0
Total net deferred tax assets	$	314.8		$	281.3

The deferred tax liabilities considered in the assessment of the realizability of deferred tax assets are of the same character as the temporary differences giving rise to the deferred tax assets. The remaining liabilities will reverse in the same period as the assets, if not sooner.

The changes in the Company's valuation allowance by fiscal year is as follows:



	Balance at Beginning of Period		Tax Valuation Allowance Charged to Income Tax Provision		Charged to Other Accounts			Tax Valuation Allowance Credited to Income Tax Provision			Balance at End of Period
	(In millions)
2015	$	2.6	$	0.6	$	—		$	(1.5	)	$	1.7
2014	2.6		—		—			—			2.6
2013	288.1		61.2		(100.4		)	(246.3		)	2.6

The year of expiration for the Company’s state net operating loss carryforwards as of November 30, 2015 is as follows (in millions):



2016	$	28.9
2017	26.8
2018	24.2
2019	46.3
	$	126.2

Approximately $5.5 million of the state net operating loss carryforwards relate to the exercise of stock options the benefit of which will be credited to equity when realized. The Company has approximately $5.9 million of loss carryover in foreign jurisdictions which have no expiration date.

The Company has a California R&D credit carryover of $0.1 million. The state credits have no expiration date.