Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

17. Income Taxes

Income before income taxes is summarized in the table below.

	Year Ended December 31,
	2011		2010		2009
	(in millions)
Domestic	$	1,064	$	1,258	$	1,210
Foreign		264		226		176
Income before income taxes	$	1,328	$	1,484	$	1,386

The components of the Company’s current and deferred portions of the provision for income taxes are presented in the table below.

	Year Ended December 31,
	2011		2010		2009
	(in millions)
Current income tax provision:
Federal	$	143	$	302	$	304
State and local		39		53		58
Foreign		71		52		39
Subtotal		253		407		401
Deferred income tax provision:
Federal		84		84		60
State and local		12		16		5
Foreign		11		11		9
Subtotal		107		111		74
Total provision for income taxes	$	360	$	518	$	475

A reconciliation of the statutory federal income tax rate to the effective income tax rate of the Company is presented in the table below.

	Year Ended December 31,
	2011			2010			2009
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal income tax benefit		2.5			3.0			3.1
Foreign income taxes		(2.2	)		(1.0	)		(0.5	)
Manufacturing benefits		(1.6	)		(1.4	)		(0.8	)
Research and experimentation and other tax credits		(1.0	)		(1.0	)		(1.3	)
Resolution of tax contingencies		(6.7	)		(0.6	)		(1.9	)
Goodwill impairment		1.1			—			—
Other, net		—			0.9			0.7
Effective income tax rate		27.1	%		34.9	%		34.3	%

The significant components of the Company’s net deferred tax assets and liabilities are presented in the table below.

	December 31,
	2011			2010
	(in millions)
Deferred tax assets:
Inventoried costs	$	27		$	24
Compensation and benefits		113			104
Pension and postretirement benefits		379			337
Loss carryforwards		19			14
Tax credit carryforwards		10			8
Other		103			113
Gross deferred tax assets		651			600
Less: valuation allowance		(14	)		(3	)
Net deferred tax assets		637			597
Deferred tax liabilities:
Goodwill and other intangible assets	$	670		$	606
Income recognition on contracts in process		102			97
Property, plant and equipment		101			66
Other		50			22
Gross deferred tax liabilities		923			791
Total net deferred tax liabilities	$	(286	)	$	(194	)

The following table presents the classification of the Company’s deferred tax assets and liabilities.

	December 31,
	2011			2010
	(in millions)
Current deferred tax assets	$	99		$	114
Non-current deferred tax liabilities		(385	)		(308	)
Total net deferred tax liabilities	$	(286	)	$	(194	)

At December 31, 2011, the Company had approximately $20 million of capital loss carryforwards that will expire, if unused in 2016. The realizability of the $7 million resulting deferred tax asset will depend on the Company generating a like amount of capital gains before the losses expire in 2016. The Company does not believe that it is more likely than not that it will generate sufficient capital gains during this time period, and has therefore established a full valuation allowance against the capital loss carryforward, In addition, the Company had $113 million of state net operating losses that will expire, if unused, between 2012 and 2031 and $20 million of foreign net operating losses that can be carried forward indefinitely. The Company also has $10 million of tax credit carryforwards related to state and foreign research and experimentation credits and investment tax credits that will expire, if unused, beginning in 2016. The Company believes that it will generate sufficient taxable income, of the appropriate character, to utilize $105 million of the state net operating losses, $2 million of the foreign net operating losses and substantially all of the state and foreign credit carryforwards before they expire.

As of December 31, 2011, the total amount of unrecognized tax benefits was $187 million, $76 million of which would reduce the effective income tax rate, if recognized. A reconciliation of the change in unrecognized income tax benefits, excluding potential interest and penalties, is presented in the table below.

	2011			2010			2009
	(in millions)
Balance at January 1	$	237		$	219		$	171
Additions for tax positions related to the current year		9			8			17
Additions for tax positions related to prior years		35			73			64
Reductions for tax positions related to prior years		(13	)		(63	)		—
Reductions for tax positions related to settlements with taxing authorities		(5	)		—			(2	)
Reduction for tax positions related to prior years as a result of a lapse of statute of limitations		(76	)		—			(31	)
Balance at December 31	$	187		$	237		$	219

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The U.S. federal income tax jurisdiction is the Company’s primary tax jurisdiction. The statutes of limitations for the Company’s U.S. Federal income tax returns for the years ended December 31, 2008 through 2010 are open as of December 31, 2011. As of December 31, 2011, the Company anticipates that unrecognized tax benefits will decrease by approximately $30 million over the next 12 months due to the potential resolution of unrecognized tax benefits involving several jurisdictions and tax periods. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.

In 2011, the Company reached an agreement with the Internal Revenue Service relating to the audit of the Company’s 2006 and 2007 U.S. Federal income tax returns. The Company also reached agreement on several state and foreign audits. As a result of these agreements, the Company reversed previously accrued income tax expense of $12 million, including interest and penalties. In addition, the statutes of limitations for the 2006 and 2007 U.S. Federal income tax returns, certain foreign tax returns and certain state tax returns expired in 2011. As a result, the Company reversed previously accrued income tax expense by $81 million, including interest and penalties.

In 2009, the statute of limitations for the 2004 and 2005 U.S. Federal income tax returns of the Company, certain foreign income tax returns and certain returns of its acquired subsidiaries expired. As a result, the Company reduced its income tax provision by $31 million for the reversal of previously accrued amounts.

As of December 31, 2011 and 2010, current and non-current income taxes payable include accrued potential interest of $14 million ($8 million after income taxes) and $22 million ($13 million after income taxes), respectively, and potential penalties of $13 million and $13 million, respectively. With respect to the interest related items, the Company’s income tax expense included a benefit of $5 million and $1 million for the years ended December 31, 2011 and 2010, respectively, and an expense of $3 million for the year ended December 31, 2009.

At December 31, 2011, the Company has not provided deferred U.S. income taxes and foreign withholding taxes for $288 million of undistributed earnings by its non-U.S. subsidiaries as such earnings are intended to be reinvested indefinitely. Quantification of additional taxes that may be payable on distribution is not practicable.