Note 5.

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 (benefit) provision from continuing operations are as follows:


	Year Ended
	2013			2012		2011
	(In millions)
Current
U.S. federal	$	(1.4	)	$	10.9	$	2.0
State and local		1.0			3.8		4.2

		(0.4	)		14.7		6.2

Deferred
U.S. federal		(143.4	)		3.2		(0.4	)
State and local		(50.1	)		1.0		0.3

		(193.5	)		4.2		(0.1	)

Income tax (benefit) provision	$	(193.9	)	$	18.9	$	6.1

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
	2013			2012			2011
Statutory U.S. federal income tax rate		(35.0	)%		35.0	%		35.0	%
State and local income taxes, net of U.S. federal income tax effect		(7.4	)		20.4			29.9
Changes in state income tax rates		(29.2	)		—			—
Tax settlements and refund claims, including interest		—			—			3.5
Reserve adjustments		5.6			21.5			0.8
Valuation allowance adjustments		(680.8	)		98.4			(44.0	)
Rescindable common stock interest and realized (gains) losses		(1.4	)		1.7			3.3
Non-deductible convertible subordinated notes interest		17.3			21.5			31.6
Deferred net operating loss to additional paid in capital		—			23.0			2.1
Research credits		(4.7	)		(75.3	)		—
Retroactive change in federal tax law		(5.3	)		—			—
Benefit of manufacturing deductions		—			(9.5	)		—
Other, net		0.8			6.5			5.3

Effective income tax rate		(740.1	)%		143.2	%		67.5	%

In fiscal 2013, the Company’s effective tax rate was an income tax benefit of 740.1% on a pre-tax loss of $26.2 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 evaluation as of November 30, 2013, management has considered all available evidence, both positive and negative, including but not limited to the following:

Positive evidence

•

The three year other comprehensive cumulative income position as of the end of fiscal 2013;

•

The improved pro forma historical operating results when combined with that of the Rocketdyne Business, continued growth in contract backlog, and the anticipated impact of the Rocketdyne Business financial results on the Company’s forecasted financial performance;

•

The decrease in the projected pension obligation at November 30, 2013 due to the upward trend in the discount rate during fiscal 2013, which lowered future projected pension expense;

•

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

•

Favorable trends with respect to Congressional action regarding sequestration from the Budget Control Act of 2011.

Negative evidence

•

The lack of objective, verifiable evidence to predict future aerospace and defense spending associated with the Budget Control Act of 2011, including which governmental spending accounts may be subject to sequestration, the percentage reduction with respect thereto, and the latitude agencies will have in selecting specific expenditures to cut;

•

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

•

The additional indebtedness incurred in fiscal 2013 related to the acquisition of the Rocketdyne Business.

As of November 30, 2013, 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 income tax provision of $18.9 million in fiscal 2012 is primarily related to: (i) current federal income taxes payable of $5.2 million; (ii) $3.0 million of current federal tax on earnings sheltered by net operating losses generated from equity based compensation, the benefit of which was recorded directly to equity; (iii) current change in the federal uncertain tax position reserve of $2.7 million; (iv) current state income taxes of $3.8 million; and (v) deferred taxes of $4.2 million, which represents the deferred tax expense from the tax amortization of goodwill plus the current period utilization of federal Alternative Minimum Tax (“AMT”) credits and California research and development credits.

The income tax provision of $6.1 million in fiscal 2011 is primarily related to: (i) current federal income taxes payable of $1.5 million; (ii) $0.2 million of current federal tax on earnings sheltered by net operating losses generated from equity based compensation, the benefit of which was recorded directly to equity; (iii) $0.3 million true-up of interest accrual on the pending federal refund claims filed in 2010; (iv) current state income taxes of $4.2 million; and (v) deferred tax benefits of $0.1 million from the increase in the federal AMT credits and California research and development credits, offset by deferred tax expense from the tax amortization of goodwill.

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 change in unrecognized tax benefits from December 1, 2010 is as follows (in millions):


Unrecognized tax benefits at November 30, 2010	$	4.8
Gross increases for tax positions taken during the year		0.1
Gross decreases for tax positions taken in prior year		(0.4	)

Unrecognized tax benefits at November 30, 2011		4.5
Gross increases for tax positions taken during the year		0.2
Gross increases for tax positions taken in the prior year		0.3
Gross decreases for tax positions taken in prior year		(0.1	)

Unrecognized tax benefits at November 30, 2012		4.9
Gross increases for tax positions taken during the year		0.2
Gross increases for tax positions taken in the prior year		2.3
Expiration of statutes of limitation		(0.9	)

Unrecognized tax benefits at November 30, 2013	$	6.5

As of November 30, 2013, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $5.6 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of November 30, 2013, the Company’s accrued interest and penalties related to uncertain tax positions is $0.2 million. It is reasonably possible that a reduction of up to $0.4 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 2013, the Company substantially completed a study relative to its federal and California research and development credits. Based upon the study results, the Company concluded that additional reserves of approximately $1.6 million were required.

The years ended November 30, 2010 through November 30, 2013 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 2013. For the Company’s other major taxing jurisdictions, the tax years ended November 30, 2003 through November 30, 2013 remain open to examination.

Deferred tax assets and liabilities are as follows:


	As of November 30,
	2013			2012
	(In millions)
Deferred Tax Assets
Accrued estimated costs	$	91.4		$	68.1
Basis difference in assets and liabilities		23.0			30.1
Tax losses and credit carryforwards		32.4			24.9
Net cumulative defined benefit pension plan losses		107.4			175.5
Retiree medical and life insurance benefits		27.4			30.1
Valuation allowance		(2.6	)		(288.1	)

Total deferred tax assets		279.0			40.6
Deferred Tax Liabilities
U.S. federal effect of state deferred taxes		12.6			10.6
Revenue recognition differences		53.4			26.1
Basis differences in intangible assets		20.3			15.5

Total deferred tax liabilities		86.3			52.2

Total net deferred tax assets (liabilities)	$	192.7		$	(11.6	)

As discussed above, the Company released a significant portion of its valuation allowance during fiscal 2013. The valuation allowance release of $282.4 million was recorded to operations and other comprehensive income in the amounts of $179.8 million and $102.6 million, respectively. The net change in the deferred tax assets is due largely to the release of the valuation allowance, changes to temporary differences for defined benefit pension plans and revenue recognition, and the inclusion of additional deferred tax assets as a result of the purchase of the Rocketdyne business of approximately $12.9 million.

The year of expiration for the Company’s federal and state net operating loss carryforwards as of November 30, 2013 is as follows (in millions):


	Federal		State
2015	$	—	$	24.7
2016		—		28.9
2017		—		29.9
2018		—		48.3
2019		—		105.6
2033		9.2		—

	$	9.2	$	237.4

Approximately $5.5 million of the state net operating loss carryforwards and $0.7 million of the federal net operating loss carryforwards relate to the exercise of stock options the benefit of which will be credited to equity when realized. In addition, the Company has U.S. federal and state capital loss carryforwards of approximately $1.6 million and $0.9 million, respectively, which begin expiring in fiscal 2015. The Company has approximately $2.2 million of loss carryover in foreign jurisdictions which have no expiration date.

The Company has federal and California research and development credit carryover of $4.6 million and $0.2 million, respectively. The federal credits begin to expire in 2031 and the state credits have no expiration date. The Company also has $2.7 million of federal alternative minimum tax credit which do not expire.