Income Taxes (Tables)

12 Months Ended

Dec. 31, 2014

The components of earnings before income taxes were:

Income tax expense/(benefit) consisted of the following:

The following is a reconciliation of the U.S. federal statutory tax rate of 35% to our effective income tax rates:



Years ended December 31,	2014		2013		2012
U.S. federal statutory tax	35.0	%	35.0	%	35.0	%
Research and development credits ⁽¹⁾	(2.9	)	(4.9	)	0.8
Amendments to the R&E regulations ⁽²⁾			(3.4	)
Tax basis adjustment ⁽³⁾	(3.6	)
Tax on international activities	(0.2	)	(0.1	)	(1.2	)
Tax deductible dividends	(0.7	)	(0.6	)	(0.7	)
State income tax provision, net of effect on U.S. federal tax	0.7		0.4		0.8
Federal audit settlements⁽⁴⁾	(3.6	)
Other provision adjustments	(1.0	)			(0.7	)
Effective income tax rate	23.7	%	26.4	%	34.0	%


⁽¹⁾	In the fourth quarter of 2014, we recorded tax benefits of $188 related to the reinstatement of the research tax credit for 2014. Research tax credits for the 2013 and 2012 tax years were both recorded in 2013.


⁽²⁾	In 2013, we recorded $212 for the issuance of favorable regulations related to research and experimental (R&E) expenditures.


⁽³⁾	In the second quarter of 2014 we recorded an incremental tax benefit of $265 related to the application of a 2012 Federal Court of Claims decision which held that the tax basis in certain assets could be increased and realized upon the assets' disposition (tax basis adjustment).


⁽⁴⁾	In the second quarter of 2014, tax benefits of $116 and $143 were recorded as a result of the 2007-2008 and 2009-2010 federal tax audit settlements.

Significant components of our deferred tax (liabilities)/assets at December 31 were as follows:



	2014			2013
Inventory and long-term contract methods of income recognition, fixed assets and other (net of valuation allowance of $18 and $20)		($11,589	)		($9,948	)
Pension benefits	6,145			3,099
Retiree health care benefits	2,572			2,458
Other employee benefits	1,477			1,773
Customer and commercial financing	(853		)	(990		)
Net operating loss, credit and capital loss carryovers (net of valuation allowance of $63 and $105)⁽¹⁾	266			362
Other net unrealized losses	110			26
Unremitted earnings of non-U.S. subsidiaries	(37		)	(44		)
In-process research and development related to acquisitions	10			23
Partnerships and joint ventures	9			(62		)
Net deferred tax (liabilities)/assets⁽²⁾		($1,890	)		($3,303	)


⁽¹⁾	Of the deferred tax asset for net operating loss and credit carryovers, $252 expires in years ending from December 31, 2015 through December 31, 2034 and $14 may be carried over indefinitely.


⁽²⁾	Included in the net deferred tax (liabilities)/assets as of December 31, 2014 and 2013 are deferred tax assets in the amounts of $8,007 and $5,818 related to Accumulated other comprehensive loss.

Net deferred tax (liabilities)/assets at December 31 were as follows:



	2014			2013
Deferred tax assets		$14,219			$12,486
Deferred tax liabilities	(16,028		)	(15,664		)
Valuation allowance	(81		)	(125		)
Net deferred tax (liabilities)/assets		($1,890	)		($3,303	)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2014			2013			2012
Unrecognized tax benefits – January 1		$1,141			$1,055			$939
Gross increases – tax positions in prior periods	403			10			55
Gross decreases – tax positions in prior periods	(251		)	(125		)	(20		)
Gross increases – current-period tax positions	217			202			83
Gross decreases – current-period tax positions				(1		)	(1		)
Settlements	(197		)				(1		)
Lapse of statute of limitations	(1		)
Unrecognized tax benefits – December 31		$1,312			$1,141			$1,055