Income Taxes

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 from continuing operations:



	Year Ended								One month ended
	December 31,		November 30,			November 30,			December 31,
	2016		2015			2014			2015
	(In millions)
Current
U.S. federal	$	3.2	$	33.0		$	19.0		$	7.9
State and local	3.2		3.4			4.1			1.2
	6.4		36.4			23.1			9.1
Deferred
U.S. federal	2.8		(41.2		)	(5.5		)	(6.2		)
State and local	2.0		5.1			(1.3		)	(0.9		)
	4.8		(36.1		)	(6.8		)	(7.1		)
Income tax provision	$	11.2	$	0.3		$	16.3		$	2.0

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



	Year Ended						One month ended
	December 31,		November 30,		November 30,		December 31,
	2016		2015		2014		2015
Statutory U.S. federal income tax rate - provision (benefit)	35.0	%	(35.0	)%	(35.0	)%	35.0	%
State and local income taxes, net of U.S. federal income tax effect	(2.3	)	16.2		11.4		4.8
Changes in state income tax rates	13.4		19.0		(0.7	)	0.1
Reserve adjustments	(1.0	)	2.2		(0.8	)	(0.3	)
Valuation allowance adjustments	—		—		0.3		—
Rescindable common stock interest and realized losses	—		—		0.9		—
Non-deductible convertible subordinated notes interest	2.9		8.0		7.0		1.2
Non-deductible premiums on repurchase of convertible subordinated notes	—		—		64.1		—
R&D credits	(14.1	)	—		4.0		(2.8	)
Retroactive change in federal tax law	—		(11.6	)	—		(19.4	)
Benefit of manufacturing deductions	1.5		(5.8	)	(4.3	)	(7.0	)
Lobbying costs	2.7		3.6		1.0		0.4
Deferred tax adjustment	(1.3	)	—		—		7.8
Other, net	1.4		5.2		1.5		2.4
Effective income tax rate - provision	38.2	%	1.8	%	49.4	%	22.2	%

In fiscal 2016, the Company’s effective tax rate was an income tax expense of 38.2% on pre-tax income of $29.3 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 expenditures which are permanently not deductible for tax purposes, partially offset by the impact of R&D credits.

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 benefits allowed by Section 199 of the Internal Revenue Service ("IRS") code allowed to manufacturers.

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% 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, benefits allowed by Section 199 of the IRS code allowed to manufacturers, and certain non-deductible interest expense.

In the one month ended December 31, 2015, the Company’s effective tax rate was an income tax expense of 22.2% on pre-tax income of $9.0 million. The Company’s effective tax rate differed from the 35% statutory federal income tax rate primarily due to the re-enactment of the federal R&D credit in December 2015 for calendar year 2015 which has been treated as a discrete event for the December 2015 one-month period, as well as impacts from state income taxes, benefits allowed by Section 199 of the IRS code allowed to manufacturers, and R&D credits.

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 December 31, 2016 and 2015, management has considered all available evidence, both positive and negative, including but not limited to the following:

Positive evidence


•	Positive results from continuing operations before income taxes for the year ended December 31, 2016;


•	The Company’s recent history of generating taxable income which has allowed for the utilization of tax credit carryforwards;


•	Cost Accounting Standards rules that allow the Company to recover certain tax-qualified defined benefit pension plan cash contributions through its U.S. government contracts;


•	Eligibility of some of the Company’s environmental costs for future recovery in the pricing of its products and services to the U.S. government and under existing third party agreements;


•	Establishment and execution of the Competitive Improvement Program evidencing increasing growth and profitability (see Note 10);


•	Increase in the Company’s contract backlog;


•	Lower interest costs as a result of the Company's fiscal 2016 debt refinancing efforts; and


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

Negative evidence


•	The three year comprehensive cumulative loss position as of December 31, 2016;


•	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; and


•	The interest expense arising from additional indebtedness incurred in fiscal 2016.

As of December 31, 2016 and 2015, 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 consisted of the following:



	Year Ended									One month ended
	December 31,			November 30,			November 30,			December 31,
	2016			2015			2014			2015
	(In millions)
Balances at beginning of fiscal year	$	7.1		$	6.8		$	7.9		$	6.7
Increases based on tax positions in prior years	25.8			1.0			0.6			0.6
Decreases based on tax position in prior years	(1.2		)	(1.8		)	(1.3		)	(0.2		)
Increases based on tax positions in current year	0.7			0.7			—			—
Lapse of statute of limitations	(2.9		)	—			(0.4		)	—
Balances at end of fiscal year	$	29.5		$	6.7		$	6.8		$	7.1

As of December 31, 2016, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $5.3 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2016, the Company’s accrued interest and penalties related to uncertain tax positions was $2.4 million. It is reasonably possible that a reduction of up to $29.3 million of unrecognized tax benefits and related interest and penalties may occur within the next 12 months as a result of the expiration of certain statutes of limitations.

The years ended November 30, 2012 through December 31, 2016 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 December 31, 2016 remain open to examination.

Deferred tax assets and liabilities were as follows:



	As of December 31,
	2016			2015
	(In millions)
Deferred Tax Assets
Accrued estimated costs	$	89.1		$	113.3
Basis difference in assets and liabilities	8.5			6.0
Tax losses and credit carryforwards	6.5			3.8
Net cumulative defined benefit pension plan losses	212.9			227.8
Retiree medical and life insurance benefits	16.2			19.6
Valuation allowance	(1.7		)	(1.2		)
Total deferred tax assets	331.5			369.3
Deferred Tax Liabilities
Revenue recognition differences	21.7			30.7
Basis differences in intangible assets	17.3			13.8
Total deferred tax liabilities	39.0			44.5
Total net deferred tax assets	$	292.5		$	324.8

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 period was as follows:



	Balance at Beginning of Period		Tax Valuation Allowance Charged to Income Tax Provision		Tax Valuation Allowance Credited to Income Tax Provision			Balance at End of Period
	(In millions)
Fiscal 2016	$	1.2	$	0.5	$	—		$	1.7
One month ended December 31, 2015	1.7		—		(0.5		)	1.2
Fiscal 2015	2.6		0.6		(1.5		)	1.7
Fiscal 2014	2.6		—		—			2.6

The Company’s state net operating loss carryforwards of $18.4 million as of December 31, 2016 are set to expire on December 31, 2017.

Approximately $1.2 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 $8.3 million of loss carryover in foreign jurisdictions which have no expiration date.

The Company has Federal and California credit carryovers of $2.8 million and $2.5 million, respectively. The federal credits will expire in 2036 and the state credits have no expiration date.