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:



	Year Ended								One month ended
	December 31,			December 31,		November 30,			December 31,
	2017			2016		2015			2015
	(In millions)
Current
U.S. federal	$	(30.6	)	$	3.2	$	33.0		$	7.9
State and local	1.0			3.2		3.4			1.2
	(29.6		)	6.4		36.4			9.1
Deferred
U.S. federal	116.0			2.8		(41.2		)	(6.2		)
State and local	9.7			2.0		5.1			(0.9		)
	125.7			4.8		(36.1		)	(7.1		)
Income tax provision	$	96.1		$	11.2	$	0.3		$	2.0

The following table shows the reconciling items between the income tax provision using the U.S. federal statutory rate and the Company's reported income tax provision.



	Year Ended									One month ended
	December 31,			December 31,			November 30,			December 31,
	2017			2016			2015			2015
Statutory U.S. federal income tax - provision (benefit)	$	30.4		$	10.2		$	(5.6	)	$	3.1
State income taxes	7.0			3.2			5.9			0.4
Reserve adjustments	(4.6		)	(0.3		)	0.4			—
Non-deductible convertible subordinated notes interest	—			0.8			1.4			0.1
R&D credits	(1.2		)	(4.1		)	—			(0.2		)
Retroactive change in federal tax law	—			—			(1.9		)	(1.7		)
Benefit of manufacturing deductions	—			0.5			(1.0		)	(0.6		)
Lobbying costs	0.7			0.8			0.6			—
Deferred tax adjustment	(0.1		)	(0.4		)	—			0.7
Stock compensation excess tax benefits	(1.4		)	—			—			—
Other, net	0.7			0.5			0.5			0.2
New legislation - tax rate changes	64.6			—			—			—
Income tax provision	$	96.1		$	11.2		$	0.3		$	2.0

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



	Year Ended						One month ended
	December 31,		December 31,		November 30,		December 31,
	2017		2016		2015		2015
Statutory U.S. federal income tax rate	35.0	%	35.0	%	(35.0	)%	35.0	%
State income taxes	8.0		11.0		35.2		4.9
Reserve adjustments	(5.3	)	(1.0	)	2.2		(0.3	)
Non-deductible convertible subordinated notes interest	—		2.7		8.0		1.2
R&D credits	(1.4	)	(14.0	)	—		(2.8	)
Retroactive change in federal tax law	—		—		(11.6	)	(19.4	)
Benefit of manufacturing deductions	—		1.7		(5.8	)	(7.0	)
Lobbying costs	0.8		2.7		3.6		0.4
Deferred tax adjustment	(0.1	)	(1.4	)	—		7.8
Stock compensation excess tax benefits	(1.6	)	—		—		—
Other, net	0.8		1.7		5.3		2.4
New legislation - tax rate changes	74.4		—		—		—
Effective income tax rate	110.6	%	38.4	%	1.9	%	22.2	%

In fiscal 2017, the Company’s effective tax rate was an income tax expense of 110.6% on pre-tax income of $86.9 million. The Company’s effective tax rate differed from the 35.0% statutory federal income tax rate primarily due to the change in the federal statutory tax rate from 35% to 21% under the recently enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). In accordance with the rate reduction, the Company wrote down its net deferred tax assets by $64.6 million which unfavorably affected the effective tax rate by 74.4%. The effective tax rate also includes an increase from state income taxes partially offset by favorable adjustments to the Company's uncertain tax positions and R&D credits.

In fiscal 2016, the Company’s effective tax rate was an income tax expense of 38.4% on pre-tax income of $29.2 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 1.9% on a pre-tax loss of $15.9 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 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 evaluation as of December 31, 2017, management has considered all available evidence, both positive and negative, including but not limited to the following:

Positive evidence


•	The Company is in a three year cumulative income position as of December 31, 2017;


•	Positive operating results before income taxes for fiscal 2017;


•	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; and


•	Increase in the Company’s contract backlog.

Negative evidence


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


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

As of December 31, 2017, 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.

Tax returns for the years ended November 30, 2014 through December 31, 2016 remain open to examination for U.S. federal tax jurisdiction. Tax returns for the years ended November 30, 2013 through December 31, 2016 remain open to examination for state income tax jurisdictions.

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



	Year Ended									One month ended
	December 31,			December 31,			November 30,			December 31,
	2017			2016			2015			2015
	(In millions)
Balances at beginning of fiscal year	$	29.5		$	7.1		$	6.8		$	6.7
Increases based on tax positions in prior years	1.0			25.8			1.0			0.6
Decreases based on tax position in prior years	(25.1		)	(1.2		)	(1.8		)	(0.2		)
Increases based on tax positions in current year	0.4			0.7			0.7			—
Lapse of statute of limitations	(1.4		)	(2.9		)	—			—
Balances at end of fiscal year	$	4.4		$	29.5		$	6.7		$	7.1

As of December 31, 2017, the total amount of unrecognized tax benefits is $4.4 million. Of the $4.4 million of unrecognized tax benefits, $4.2 million would affect the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017, the Company’s accrued interest and penalties related to uncertain tax positions was $0.3 million. It is reasonably possible that a reduction of up to $0.5 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.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the Company’s assets and liabilities for financial reporting and income tax purposes. Deferred tax assets and liabilities are determined by multiplying such differences by the enacted tax rates expected to be in effect when such differences are recovered or settled. In December 2017, as a result of the Tax Act, the Company remeasured its federal deferred tax assets and liabilities from 35% to 21%.

Deferred tax assets and liabilities were as follows:



	As of December 31,
	2017			2016
	(In millions)
Deferred Tax Assets
Accrued estimated costs	$	56.1		$	82.0
Basis difference in assets and liabilities	2.1			8.5
Tax losses and credit carryforwards	12.9			6.5
Net cumulative defined benefit pension plan losses	114.7			212.9
Retiree medical and life insurance benefits	9.2			16.2
Valuation allowance	(1.7		)	(1.7		)
Total deferred tax assets	193.3			324.4
Deferred Tax Liabilities
Revenue recognition differences	40.4			21.7
Basis differences in intangible assets	7.1			10.2
Total deferred tax liabilities	47.5			31.9
Total net deferred tax assets	$	145.8		$	292.5

Realization of deferred tax assets is primarily dependent on generating sufficient taxable income in future periods. The Company believes it is more-likely-than not its deferred tax assets, net of valuation allowances, will be realized. The Company’s valuation allowance of $1.7 million remained unchanged from prior year. 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 2017	$	1.7	$	—	$	—		$	1.7
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

The Company’s federal net operating loss carryforwards of $20.4 million are set to expire from December 31, 2036 through December 31, 2037. The Company’s state net operating loss carryforwards of $33.0 million are set to expire from December 31, 2032 through December 31, 2037. The Company’s foreign net operating loss carryforwards of $8.0 million have a full valuation allowance and no expiration date.

The Company’s federal and California credit carryovers are $3.4 million and $3.4 million, respectively. The federal credit carryovers are set to expire from December 31, 2036 through December 31, 2037. The Company’s California credit carryovers have no expiration date.