INCOME TAXES
Income Tax Provision. We calculate our provision for federal, state and international income taxes based on current tax law. The reported tax provision differs from the amounts currently receivable or payable because some income and expense items are recognized in different time periods for financial reporting than for income tax purposes. The following is a summary of our net provision for income taxes for continuing operations:
|
| | | | | | | | | | | |
Year Ended December 31 | 2011 | | 2012 | | 2013 |
Current: | | | | | |
U.S. federal | $ | 951 |
| | $ | 892 |
| | $ | 857 |
|
State | 20 |
| | (9 | ) | | 28 |
|
International | 181 |
| | 138 |
| | 132 |
|
Total current | 1,152 |
| | 1,021 |
| | 1,017 |
|
Deferred: | | | | | |
U.S. federal | 87 |
| | (172 | ) | | 108 |
|
State | — |
| | (5 | ) | | 1 |
|
International | (73 | ) | | 29 |
| | (5 | ) |
Total deferred | 14 |
| | (148 | ) | | 104 |
|
Provision for income taxes, net | $ | 1,166 |
| | $ | 873 |
| | $ | 1,121 |
|
Net income tax payments | $ | 1,083 |
| | $ | 1,155 |
| | $ | 888 |
|
State and local income taxes allocable to U.S. government contracts are included in operating costs and expenses in the Consolidated Statements of Earnings (Loss) and, therefore, not included in the provision above.
The reconciliation from the statutory federal income tax rate to our effective income tax rate follows:
|
| | | | | | | | |
Year Ended December 31 | 2011 | | 2012 | | 2013 |
Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State tax on commercial operations, net of federal benefits | 0.4 |
| | (1.6 | ) | | 0.7 |
|
Impact of international operations | (1.0 | ) | | 53.8 |
| | — |
|
Domestic production deduction | (1.8 | ) | | (11.2 | ) | | (2.2 | ) |
Domestic tax credits | (0.6 | ) | | (1.4 | ) | | (0.8 | ) |
Goodwill impairment | — |
| | 92.1 |
| | — |
|
Other, net | (0.6 | ) | | (5.3 | ) | | (1.6 | ) |
Effective income tax rate | 31.4 | % | | 161.4 | % | | 31.1 | % |
In 2013, other, net primarily represents a tax benefit from the shutdown of the ruggedized hardware product line in our Information Systems and Technology business group.
Our 2012 effective tax rate was unfavorably impacted by two items. Due to the non-deductible nature of a substantial portion of our goodwill, there was a limited tax benefit recognized on the impairment. In addition, due to the unfavorable market conditions impacting certain of our international subsidiaries, a valuation allowance was established for their net deferred tax assets, including the operating losses resulting from the charges at our European Land Systems business in the fourth quarter of 2012 (see deferred tax assets table below).
Deferred Tax Assets. The tax effects of temporary differences between reported earnings and taxable earnings consisted of the following:
|
| | | | | | | |
December 31 | 2012 | | 2013 |
Retirement benefits | $ | 1,746 |
| | $ | 783 |
|
Tax loss and credit carryforwards | 561 |
| | 581 |
|
Salaries and wages | 261 |
| | 249 |
|
Workers’ compensation | 260 |
| | 272 |
|
A-12 contract termination | 94 |
| | 163 |
|
Other | 331 |
| | 311 |
|
Deferred assets | 3,253 |
| | 2,359 |
|
Valuation allowance | (335 | ) | | (383 | ) |
Net deferred assets | $ | 2,918 |
| | $ | 1,976 |
|
Intangible assets | $ | (950 | ) | | $ | (995 | ) |
Contract accounting methods | (367 | ) | | (322 | ) |
Property, plant and equipment (PP&E) | (231 | ) | | (269 | ) |
Capital Construction Fund | (239 | ) | | (240 | ) |
Other | (153 | ) | | (133 | ) |
Deferred liabilities | $ | (1,940 | ) | | $ | (1,959 | ) |
Net deferred tax asset | $ | 978 |
| | $ | 17 |
|
Our net deferred tax asset was included on the Consolidated Balance Sheets in other assets and liabilities as follows:
|
| | | | | | | |
December 31 | 2012 | | 2013 |
Current deferred tax asset | $ | 44 |
| | $ | 36 |
|
Current deferred tax liability | (173 | ) | | (298 | ) |
Noncurrent deferred tax asset | 1,251 |
| | 416 |
|
Noncurrent deferred tax liability | (144 | ) | | (137 | ) |
Net deferred tax asset | $ | 978 |
| | $ | 17 |
|
We believe it is more likely than not that we will generate sufficient taxable income in future periods to realize our deferred tax assets, subject to valuation allowances recognized.
Our retirement benefits deferred tax amount includes a deferred tax asset of $2.1 billion on December 31, 2012, and $1.2 billion on December 31, 2013, related to the amounts recorded in accumulated other comprehensive loss (AOCL) to recognize the funded status of our retirement plans. See Notes L and P for further discussion. The decrease in the December 31, 2013, deferred tax asset amount is due to improvement in the funded status of our defined-benefit retirement plans during the year.
With the settlement of the A-12 litigation, we expect to receive in 2014 the tax benefits from the contract termination. Further, we believe we are entitled to interest in accordance with the Internal Revenue Code that will be recognized when the amount is determined to be realizable. See Note N to the Consolidated Financial Statements for further discussion of the A-12 settlement.
One of our deferred tax liabilities results from our participation in the Capital Construction Fund (CCF). The CCF is a program, established by the U.S. government and administered by the Maritime Administration, that affects the timing of a portion of our tax payments. The program supports the acquisition, construction, reconstruction or operation of U.S. flag merchant marine vessels. It allows us to defer federal and state income taxes on earnings derived from eligible programs as long as the funds are deposited and used for qualified activities. Unqualified withdrawals are subject to taxation plus interest. The CCF is collateralized by qualified assets as defined by the Maritime Administration. We had U.S. government accounts receivable invested in the CCF of $684 on December 31, 2012, and $459 on December 31, 2013.
On December 31, 2013, we had net operating loss carryforwards of $1.5 billion that begin to expire in 2016 and R&D and investment tax credit carryforwards of $181 that begin to expire in 2014.
Earnings from continuing operations before income taxes included international income (loss) of $473 in 2011, ($194) in 2012 and $360 in 2013. We intend to reinvest indefinitely the undistributed earnings of some of our non-U.S. subsidiaries. On December 31, 2013, we had approximately $1.7 billion of undistributed earnings from these non-U.S. subsidiaries. In general, should these earnings be distributed, a portion would be treated as dividends under U.S. tax law and thus subject to U.S. federal income tax at the statutory rate of 35 percent, but would generate offsetting foreign tax credits.
Tax Uncertainties. For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than a 50 percent chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense.
We participate in the Internal Revenue Service (IRS) Compliance Assurance Process, a real-time audit of our consolidated corporate federal income tax return. The IRS has examined our consolidated federal income tax returns through 2011. We do not expect the resolution of tax matters for open years to have a material impact on our results of operations, financial condition, cash flows or effective tax rate.
Based on all known facts and circumstances and current tax law, we believe the total amount of unrecognized tax benefits on December 31, 2013, is not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate. We further believe that there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will significantly vary over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.
