V2X, Inc. - 10-K filing on 2017-03-01

Income Taxes

12 Months Ended

Dec. 31, 2016

INCOME TAXES

Prior to September 27, 2014, our operating results were included in the consolidated U.S. Federal and state income tax returns of Exelis as well as in certain tax filings of Exelis for non-U.S. jurisdictions. Amounts presented in these Consolidated and Combined Financial Statements related to income taxes have been determined on a separate return basis. Our contribution to the tax position of Exelis on a separate return basis for the periods prior to September 27, 2014, has been included in these financial statements. Our separate return basis tax losses and tax credits may not reflect the tax positions taken or to be taken by Exelis. In many cases the tax losses and tax credits we generated have been available for use by Exelis and remain with Exelis.

We determine the provision for income taxes using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates. During the year ended December 31, 2016, we established a valuation allowance of $0.2 million for deferred tax assets that are not expected to be realized in the foreseeable future.

We provide for U.S. deferred taxes on the excess of financial reporting basis over the U.S. tax basis for our foreign earnings, when we do not plan to reinvest such earnings indefinitely outside the U.S.

The source of pre-tax income and the components of income tax expense at December 31, 2016, 2015 and 2014, respectively, are as follows:



(in thousands)	2016			2015			2014
Income Components
United States	$	37,276		$	33,274		36,377
Foreign	(89		)	157			514
Total pre-tax income from continuing operations	$	37,187		$	33,431		$	36,891
Income tax expense components
Current income tax provision
United States-Federal	$	15,106		$	10,549		$	2,385
United States-State and local	311			401			29
Foreign	371			910			382
Total current income tax provision	15,788			11,860			2,796
Deferred income tax provision (benefit)
United States-Federal	(1,733		)	(9,350		)	10,385
United States-State and local	(278		)	(42		)	898
Foreign	(245		)	(10		)	—
Total deferred income tax provision (benefit)	(2,256		)	(9,402		)	11,283
Total income tax expense	$	13,532		$	2,458		$	14,079
Effective income tax rate	36.4		%	7.4		%	38.2		%

A reconciliation of the income tax provision at the U.S. statutory rate to the effective income tax rate as reported is as follows:



	2016		2015		2014
Tax provision at U.S. statutory rate	35.0	%	35.0	%	35.0	%
State and local income tax, net of Federal benefit	0.1	%	0.7	%	1.6	%
Release of uncertain tax positions	—	%	(29.9	)%	—	%
Indemnity expense	—	%	3.3	%	—	%
Other	1.3	%	(1.7	)%	1.6	%
Effective income tax rate	36.4	%	7.4	%	38.2	%

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse. Deferred tax assets and liabilities include the following:



(in thousands)	2016			2015
Deferred Tax Assets
Costs incurred in excess of billings	$	506		$	2,477
Compensation and benefits	10,816			11,353
Reserves	2,660			2,371
Other	3,116			3,332
Net Operating Losses	168			106
Subtotal	$	17,266		$	19,639
Valuation allowance	(157		)	(96		)
Total deferred tax assets	$	17,109		$	19,543
Deferred Tax Liabilities
Goodwill	$	(77,171	)	$	(77,306	)
Property, plant and equipment, net	(769		)	(1,165		)
Unbilled receivables	(27,431		)	(31,218		)
Other liabilities	(1,178		)	(1,187		)
Total deferred tax liabilities	$	(106,549	)	$	(110,876	)

Deferred taxes are classified in the Consolidated Balance Sheets as follows:



(in thousands)	2016		2015
Non-current assets	$	227	$	10
Non-current liabilities	89,667		91,343
Net deferred tax liabilities	$	89,440	$	91,333

Uncertain Tax Position

A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 31, 2016, 2015 and 2014 is as follows:



(in thousands)	2016		2015			2014
Unrecognized tax benefits-January 1,	$	—	$	7,604		$	8,541
Additions for:
Current year tax positions	429		—			—
Prior year tax positions	—		—			6,954
Reductions for:
Prior year tax positions	—		(7,604		)	(7,891		)
Unrecognized tax benefits-December 31,	$	429	$	—		$	7,604

As of December 31, 2016, 2015 and 2014, unrecognized tax benefits from uncertain tax positions were $0.4 million, $0.0 million and $7.6 million, respectively. We effectively settled $6.9 million of unrecognized tax benefits during 2015 due to the resolution of examinations of tax returns of our Former Parent. The balance of $0.7 million was effectively settled with the filing of our 2014 income tax returns during 2015.

We classify interest relating to tax matters as a component of interest expense and tax penalties as a component of income tax expense in our Consolidated and Combined Statements of Income. During 2016, 2015 and 2014, we recognized interest expense related to tax matters of $0.0 million, $0.1 million and $0.0 million, respectively. As of December 31, 2016, 2015, and 2014, we had interest accrued for tax matters of $0.0 million, $0.0 million and $0.6 million, respectively.

The following table summarizes the Company's earliest open tax years by major jurisdiction;



Jurisdiction		Earliest Open Year
United States		2013

Tax Indemnifications

In connection with the Spin-off, pursuant to a Tax Matters Agreement with our Former Parent, our Former Parent agreed to indemnify us for up to $3.3 million of income tax return liabilities, which were settled with the filing of our Former Parent’s 2014 income tax return during the year ended December 31, 2015. As a result, as of December 31, 2015, we reduced the tax liabilities, which were included in “other long term liabilities” in the Consolidated Balance Sheets, from $3.2 million to zero, which provided an income tax benefit of $3.2 million. We had a corresponding indemnification receivable, net of interest of $0.1 million, which was included in “other non-current assets” in the Consolidated Balance Sheets. We reduced the indemnification receivable from $3.3 million to zero, creating an expense of $3.3 million, which is included in "selling, general and administrative expenses" in the Consolidated and Combined Statements of Income for the year ended December 31, 2015. The net settlement of these tax liabilities and the indemnification receivable had no impact on our net income.