Income Taxes

The following summarizes pretax income:



	2014		2013			2012
U.S.	$	194.2	$	(499.8	)	$	(33.6	)
International	68.2		69.0			45.0
Total	$	262.4	$	(430.8	)	$	11.4

The tax provision contains the following components:



	2014			2013			2012
Current
Federal	$	(91.0	)	$	(17.1	)	$	89.8
State	(0.9		)	(2.1		)	1.9
Foreign	4.0			4.2			4.3
Total current	$	(87.9	)	$	(15.0	)	$	96.0
Deferred
Federal	$	—		$	139.0		$	(104.0	)
State	(2.0		)	57.8			(19.0		)
Foreign	(6.0		)	9.3			2.9
Total deferred	(8.0		)	206.1			(120.1		)
Total tax (benefit) expense	$	(95.9	)	$	191.1		$	(24.1	)

The income tax provision from operations differs from the tax provision computed at the U.S. federal statutory income tax rate due to the following:



	2014					2013					2012
Tax at U.S. Federal statutory rate	$	91.8		35.0	%	$	(150.8	)	35.0	%	$	4.0		35.0	%
State income taxes, net of Federal benefit	4.1			1.6		(12.2		)	2.8		(1.8		)	(15.8	)
State income tax credits, net of Federal benefit	(9.0		)	(3.4	)	(7.7		)	1.8		(9.8		)	(86.0	)
Foreign rate differences	(12.3		)	(4.7	)	(6.8		)	1.6		(4.6		)	(40.4	)
Research and Experimentation	(3.0		)	(1.1	)	(10.9		)	2.5		(3.2		)	(28.1	)
Domestic Production Activities Deduction	—			—		—			—		(8.8		)	(77.2	)
Interest on assessments	(3.7		)	(1.4	)	(0.6		)	0.1		0.3			2.6
Valuation Allowance - U.S. Deferred Tax Asset	(167.2		)	(63.7	)	381.0			(88.4	)	—			—
Other	3.4			1.2		(0.9		)	0.2		(0.2		)	(1.5	)
Total (benefit) provision for income taxes	$	(95.9	)	(36.5	)%	$	191.1		(44.4	)%	$	(24.1	)	(211.4	)%

Significant tax effected temporary differences comprising the net deferred tax liability are as follows:



	2014			2013
Long-term contracts	$	207.8		$	409.9
Post-retirement benefits other than pensions	29.2			26.6
Pension and other employee benefit plans	(48.8		)	(68.0		)
Employee compensation accruals	69.3			45.8
Depreciation and amortization	(120.4		)	(123.7		)
Inventory	2.9			3.4
Interest swap contracts	(1.0		)	0.9
State income tax credits	70.5			61.1
Accruals and reserves	62.4			36.6
Deferred production	(3.3		)	4.1
Deferred gain — severe weather event	(21.2		)	(21.5		)
Net operating loss carryforward	6.5			1.3
Other	(1.6		)	4.2
Net deferred tax asset	252.3			380.7
Valuation allowance	(257.3		)	(396.5		)
Net deferred tax liability	$	(5.0	)	$	(15.8	)

Deferred tax detail above is included in the consolidated balance sheet and supplemental information as follows:



	2014			2013
Current deferred tax assets	$	53.2		$	26.9
Current deferred tax liabilities	(0.3		)	(0.5		)
Net current deferred tax asset	$	52.9		$	26.4
Non-current deferred tax assets	—			—
Non-current deferred tax liabilities	(57.9		)	(42.2		)
Net non-current deferred tax liability	$	(57.9	)	$	(42.2	)
Total deferred tax liability	$	(5.0	)	$	(15.8	)

The following is a roll forward of the deferred tax valuation allowance at December 31, 2014, 2013 and 2012:



Deferred Tax Asset Valuation Allowance	2014			2013		2012
Balance, January 1	$	396.5		$	10.4	$	8.2
US deferred tax asset	40.4			381.0		—
Income tax credits	9.1			3.7		1.9
Depreciation and amortization	16.3			0.2		0.3
Long-term contracts	(205.0		)	—		—
Other	—			1.2		—
Balance, December 31	$	257.3		$	396.5	$	10.4

At December 31, 2014 the valuation allowance for the Company’s U.S. entities’ net deferred tax asset was $256.8. All available evidence, both positive and negative, has been considered to determine whether, based on the weight of that evidence, a valuation allowance for those net assets is needed.

The primary sources of negative evidence the Company considered were: 1) cumulative U.S. pre-tax losses during the last three years; 2) a history of recording material forward loss charges in the U.S. on the Company’s new and maturing programs within the same period; and 3) the ongoing operational and financial risks posed by certain of the Company’s newer to maturing programs.

The primary sources of positive evidence the Company considered were: 1) significant order backlog ($46.6 billion at December 31, 2014); 2) transfer of the Gulfstream loss programs to a third party at December 30, 2014; and 3) forecasts of future taxable income (exclusive of reversals of temporary differences and carryforwards).

The weight given to the positive and negative evidence is commensurate with the extent the evidence may be objectively verified. As such, the Company assigned the lowest weighting to the positive evidence regarding future taxable income (exclusive of reversing taxable temporary differences), increased weighting to the Gulfstream transfer and significant order backlog and the highest weighting to the negative evidence of cumulative recent pre-tax losses and forward loss charges, combined with the risks inherent in certain new and maturing programs mentioned above.

Continued profitable operations are required before the Company would change its judgment regarding the need for a full valuation allowance against its net deferred tax assets. Accordingly, although the Company was profitable in 2014, inclusive of the impact of the loss on sale related to the Gulfstream G280 and Gulfstream G650 programs, the Company continues to record a full valuation allowance against the net deferred tax assets in the U.S.

The Company will continue to evaluate all available positive and negative evidence for all future reporting periods and continued improvement in its operating results could lead to reversal of nearly all remaining valuation allowance. In the quarter in which the valuation allowance is released, the Company would record an abnormally large tax benefit reflecting the release, which would result in higher earnings per share from net income attributable to the Company.

During 2014, the Company released $167.2 of deferred tax valuation allowance into earnings. This release consists of two primary components: net utilization of underlying deferred tax assets consumed within the normal operations of the company ($49.1), and the realization of remaining deferred tax assets related to the Gulfstream G650 and G280 programs ($118.1). The utilization of these underlying deferred tax assets represent reductions to the Company’s 2014 taxable income and will offset current taxes and will be carried back to prior years to offset taxable income in the available carry back period.

Additionally, the Company maintains a $16.2 valuation allowances against separate company state income tax credits and other U.S. issues and $0.6 for other foreign issues which is an increase of $1.3 from the prior year.

The Company has recognized cumulative book income for its international operations. Prior to this year the Company had incurred cumulative taxable losses in the United Kingdom, primarily due to the manner in which the United Kingdom treats long-term contract income accounting and capital allowances. As of the 2013 tax year filing, the net operating loss carryforward has been fully utilized.

As of December 31, 2014, the Company has not provided U.S. tax on its cumulative undistributed earnings of foreign subsidiaries of approximately $259.0 because it is the Company’s intention to reinvest these earnings indefinitely. The Company considers the earnings of all non-US subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and specific plans for the reinvestment of those earnings. If earnings were distributed, the Company would be subject to estimated U.S. taxes and withholding taxes payable to foreign governments of approximately $85.5. Based on the facts and circumstances at that time, the Company would determine whether a credit for foreign taxes paid would be available to reduce or offset the U.S. tax liability. Should the Company decide to repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings will no longer be indefinitely invested outside the United States.

The beginning and ending unrecognized tax benefits reconciliation is as follows:



	2014			2013			2012
Beginning balance	$	18.4		$	16.9		$	15.5
Gross increases related to current period tax positions	—			3.8			4.2
Gross increases related to prior period tax positions	0.9			0.4			1.8
Gross decreases related to prior period tax positions	(13.4		)	(2.7		)	(3.8		)
Statute of limitations' expiration	—			—			(0.8		)
Settlements	—			—			—
Ending balance	$	5.9		$	18.4		$	16.9

Included in the December 31, 2014 balance was $3.8 in tax affected unrecognized tax benefits which, if ultimately recognized, will reduce the Company's effective tax rate. The Internal Revenue Service's examination of the Company's 2013 U.S. Federal income tax return is complete. The Company will continue to participate in the Compliance Assurance Process ("CAP") program for its 2014 tax year. Additionally, the Company has been selected for the Compliance Maintenance phase of the CAP program for the 2015 tax year. The CAP program's objective is to resolve issues in a timely, contemporaneous manner and eliminate the need for a lengthy post-filing examination. HM Revenue & Customs completed its examination of the Company’s 2009-2012 U.K income tax returns. The Directorate General of Public Finance is currently examining the Company’s 2011 and 2012 French income tax returns. While a change could result from the ongoing examinations, the Company expects no material change in its recorded unrecognized tax benefit liability in the next 12 months.

As indicated above, the Company participates in the Internal Revenue Service’s CAP program and all years through 2013 have been examined. However, the statute of limitations in various states and foreign jurisdictions remain open for the 2009-2014 tax years and it may be subject to examination for those periods.

The Company reports interest and penalties, if any, related to unrecognized tax benefits in the income tax provision. As of December 31, 2014 and December 31, 2013, accrued interest on its unrecognized tax benefit liability included in the consolidated balance sheets was zero and $0.1, respectively. The impact of interest on the Company's unrecognized tax benefit liability during 2014 and 2013 was zero and ($0.6), respectively.

The Company continues to operate under a tax holiday in Malaysia effective through September 2024. During the current year, the Company received formal approval of the tax holiday from the Malaysian tax authorities, with conditional renewals once every five years beginning in September 2014. As a result of this formal approval, the Company released $12.2 of tax reserves and $0.7 of deferred tax liabilities into earnings in the year. In the fourth quarter, the Company received formal approval from the Malaysian tax authorities to extend the tax holiday through September 2019.

At December 31, 2014, the Company had total state net operating loss carryforwards of $47.1. Of that amount $20.9 is related to North Carolina net operating loss carryforwards that expire in 2026 and $25.3 related to Kansas net operating loss carryforwards that expire in 2024.

At December 31, 2014, the Company had $1.1 of U.S. Foreign Tax Credit carryforwards, a portion of which will expire beginning in 2018.

On December 19, 2014, the President signed legislation retroactively extending the U.S. Research Tax Credit for one year so that it applies through December 31, 2014. The Company's income tax expense for 2014 reflects the benefit of the Research Tax Credit attributable to 2014 of $3.0.

Included in the deferred tax assets at December 31, 2014 are $45.3 in Kansas High Performance Incentive Program ("HPIP") Credit, $7.3 in Kansas Research & Development ("R&D") Credit, and $2.7 in Kansas Business and Jobs Development Credit, totaling $55.3 in gross Kansas state income tax credit carryforwards, net of federal benefit. The HPIP Credit provides a 10% investment tax credit for qualified business facilities located in Kansas for which $5.9 expires in 2024, $0.7 expires in 2025, $3.5 expires in 2026, $5.0 expires in 2027, $9.7 expires in 2028, $11.7 expires in 2029, and the remainder expires in 2030. The R&D Credit provides a credit for qualified research and development expenditures conducted within Kansas. This credit can be carried forward indefinitely. The Business and Jobs Development Credit provides a tax credit for increased employment in Kansas. This credit can be carried forward indefinitely. As previously discussed, management determined that it was necessary to maintain a valuation allowance against nearly all of its net U.S. deferred tax assets at December 31, 2014. As a result, a full valuation allowance against all Kansas credits included as deferred tax assets is reflected within the total valuation allowance amount.

Included in the deferred tax assets at December 31, 2014 are $8.1 in North Carolina Investing in Business Property Credit, $3.9 in North Carolina Investment in Real Property Credit, and $3.2 in North Carolina Creating Jobs Credit, totaling $15.2 in gross North Carolina state income tax credit carryforwards, net of federal benefit. The Investing in Business Property Credit provides a 7% investment tax credit for property located in a North Carolina development area and the Investment in Real Property Credit provides a 30% investment tax credit for real property located in a North Carolina development area. The Creating Jobs Credit provides a tax credit for increased employment in North Carolina. These North Carolina state income tax credits can be carried forward 20 years. It is management's opinion that $1.8 of these North Carolina state income tax credits will be utilized before they expire and a $13.4 valuation allowance was recorded, net of federal benefit.

The Company had $248.9 and $75.4 of income tax receivable as of December 31, 2014 and December 31, 2013, respectively, which is reflected within other current assets on the Consolidated Balance Sheet.