Income Taxes
The components of earnings before income taxes were:
|
| | | | | | | | | | | |
Years ended December 31, | 2013 |
| | 2012 |
| | 2011 |
|
U.S. |
| $5,946 |
| |
| $5,647 |
| |
| $5,083 |
|
Non-U.S. | 286 |
| | 263 |
| | 310 |
|
Total |
| $6,232 |
| |
| $5,910 |
| |
| $5,393 |
|
Income tax expense/(benefit) consisted of the following:
|
| | | | | | | | | | | |
Years ended December 31, | 2013 |
| | 2012 |
| | 2011 |
|
Current tax expense | | | | | |
U.S. federal |
| ($82 | ) | |
| $657 |
| |
| ($605 | ) |
Non-U.S. | 76 |
| | 52 |
| | 93 |
|
U.S. state | 11 |
| | 19 |
| | (22 | ) |
Total current | 5 |
| | 728 |
| | (534 | ) |
Deferred tax expense | | | | | |
U.S. federal | 1,531 |
| | 1,209 |
| | 1,856 |
|
Non-U.S. | 41 |
| | (13 | ) | | (8 | ) |
U.S. state | 69 |
| | 83 |
| | 68 |
|
Total deferred | 1,641 |
| | 1,279 |
| | 1,916 |
|
Total income tax expense |
| $1,646 |
| |
| $2,007 |
| |
| $1,382 |
|
Net income tax payments were $209, $410, and $57 in 2013, 2012 and 2011, respectively.
Our effective income tax rates were 26.4%, 34.0% and 25.6% for the years ended December 31, 2013, 2012 and 2011, respectively. Our 2013 effective tax rate is lower than 2012 primarily due to the inclusion of the U.S. research and development tax credit (research tax credit) in 2013, which was not available in 2012, and the recognition of previously unrecognized tax benefits as a result of new regulations described below. In 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 that retroactively renewed the research tax credit for 2012 and extended the credit through December 31, 2013. As tax law changes are recognized in the period in which new legislation is enacted, the 2012 research tax credit of $145 was recorded in the first quarter of 2013. Our 2012 effective tax rate was higher than 2011, primarily due to tax benefits of $397 recorded in 2011 as a result of federal income tax audit settlements in addition to research tax credits which were not available in 2012. The research tax credit expired on December 31, 2013. If the research tax credit is not extended there would be an unfavorable impact to our 2014 effective income tax rate.
On September 5, 2013, the Internal Revenue Service (IRS) issued proposed regulations that amend the definition of research and experimental (R&E) expenditures. The regulations provided clarity regarding the categories of expense that can be considered when computing the research tax credit. Based upon our analysis of the regulations, $212 of previously unrecognized tax benefits related to research tax credits were recorded as a reduction to tax expense in the fourth quarter of 2013.
The following is a reconciliation of the U.S. federal statutory tax rate of 35% to our effective income tax rate:
|
| | | | | | | | |
Years ended December 31, | 2013 |
| | 2012 |
| | 2011 |
|
U.S. federal statutory tax | 35.0 | % | | 35.0 | % | | 35.0 | % |
Research and development credits | (4.9 | ) | | 0.8 |
| | (2.7 | ) |
Proposed amendments to the R&E regulations | (3.4 | ) | |
|
| |
|
|
Tax on international activities | (0.1 | ) | | (1.2 | ) | | (0.6 | ) |
Tax deductible dividends | (0.6 | ) | | (0.7 | ) | | (0.8 | ) |
State income tax provision, net of effect on U.S. federal tax | 0.4 |
| | 0.8 |
| | 0.7 |
|
Federal audit settlement |
|
| |
|
| | (7.4 | ) |
Other provision adjustments |
|
| | (0.7 | ) | | 1.4 |
|
Effective income tax rate | 26.4 | % | | 34.0 | % | | 25.6 | % |
Federal income tax audits have been settled for all years prior to 2007. The years 2009-2010 are currently being examined by the IRS. The matters under consideration by IRS Appeals for tax years 2007-2008 are in the final phase of review with the Joint Committee on Taxation. We are also subject to examination in major state and international jurisdictions for the 2001-2013 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.
Significant components of our deferred tax assets, net of deferred tax liabilities, at December 31 were as follows:
|
| | | | | | | |
| 2013 |
| | 2012 |
|
Retiree health care accruals |
| $2,458 |
| |
| $2,867 |
|
Inventory and long-term contract methods of income recognition, fixed assets and other (net of valuation allowance of $20 and $27) | (9,948 | ) | | (7,151 | ) |
Partnerships and joint ventures | (62 | ) | | (162 | ) |
Other employee benefits accruals | 1,773 |
| | 1,427 |
|
In-process research and development related to acquisitions | 23 |
| | 37 |
|
Net operating loss, credit and capital loss carryovers (net of valuation allowance of $105 and $94) | 362 |
| | 307 |
|
Pension asset | 3,099 |
| | 6,232 |
|
Customer and commercial financing | (990 | ) | | (1,078 | ) |
Unremitted earnings of non-U.S. subsidiaries | (44 | ) | | (49 | ) |
Other net unrealized losses | 26 |
| | (17 | ) |
Net deferred tax (liabilities)/assets(1) |
| ($3,303 | ) | |
| $2,413 |
|
| |
(1) | Of the deferred tax asset for net operating loss and credit carryovers, $295 expires in years ending from December 31, 2014 through December 31, 2033 and $67 may be carried over indefinitely. Included in the net deferred tax (liabilities)/assets as of December 31, 2013 and 2012 are deferred tax assets in the amounts of $5,818 and $10,210 related to Accumulated other comprehensive loss. |
Net deferred tax (liabilities)/assets at December 31 were as follows:
|
| | | | | | | |
| 2013 |
| | 2012 |
|
Deferred tax assets |
| $12,486 |
| |
| $16,580 |
|
Deferred tax liabilities | (15,664 | ) | | (14,046 | ) |
Valuation allowance | (125 | ) | | (121 | ) |
Net deferred tax (liabilities)/assets |
| ($3,303 | ) | |
| $2,413 |
|
The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more-likely-than-not that some or all of the deferred tax assets will not be realized.
We have provided for U.S. deferred income taxes and foreign withholding tax in the amount of $44 on undistributed earnings not considered indefinitely reinvested in our non-U.S. subsidiaries. We have not provided for U.S. deferred income taxes or foreign withholding tax on the remainder of undistributed earnings from our non-U.S. subsidiaries of approximately $775 because such earnings are considered to be indefinitely reinvested and it is not practicable to estimate the amount of tax that may be payable upon distribution.
As of December 31, 2013 and 2012, the amounts accrued for the payment of income tax-related interest and penalties included in the Consolidated Statements of Financial Position were as follows: interest of $12 and $11 and penalties of $8 and $11. The amounts of interest benefit included in the Consolidated Statements of Operations were $4, $43, and $94 for the years ended December 31, 2013, 2012 and 2011, respectively. The interest benefit recorded during 2012 was primarily related to the settlement of non-US audits. The interest benefit recorded during 2011 was primarily related to federal audit settlements.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| 2013 |
| | 2012 |
| | 2011 |
|
Unrecognized tax benefits – January 1 |
| $1,055 |
| |
| $939 |
| |
| $1,198 |
|
Gross increases – tax positions in prior periods | 10 |
| | 55 |
| | 154 |
|
Gross decreases – tax positions in prior periods | (125 | ) | | (20 | ) | | (383 | ) |
Gross increases – current-period tax positions | 202 |
| | 83 |
| | 28 |
|
Gross decreases – current-period tax positions | (1 | ) | | (1 | ) | | (15 | ) |
Settlements |
|
| | (1 | ) | | (42 | ) |
Lapse of statute of limitations |
|
| |
|
| | (1 | ) |
Unrecognized tax benefits – December 31 |
| $1,141 |
| |
| $1,055 |
| |
| $939 |
|
As of December 31, 2013, 2012 and 2011, the total amount of unrecognized tax benefits was $1,141, $1,055, and $939 of which $1,018, $945, and $838 would affect the effective tax rate, if recognized. As of December 31, 2013, these amounts are primarily associated with U.S. federal tax issues such as the amount of research tax credits claimed, the domestic production activities deductions claimed and U.S. taxation of foreign earnings. Also included in these amounts are accruals for domestic state tax issues such as the allocation of income among various state tax jurisdictions and the amount of state tax credits claimed.
Audit outcomes and the timing of audit settlements are subject to significant uncertainty. It is reasonably possible that within the next 12 months we will resolve the matters presently under consideration for the 2007-2010 tax years with the IRS. Depending on the timing and outcome of the audit settlements, unrecognized tax benefits that affect the effective tax rate could increase earnings by up to $245 based on current estimates.
