Raytheon 2012 Annual Report Download - page 127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
119
We accrue interest related to unrecognized tax benefits in tax expense. During 2012, primarily as a result of the 2012 Tax
Settlement, we recorded $2 million of income related to interest which, net of the federal tax expense, was $1 million. In the
twelve months ended December 31, 2011 and December 31, 2010, respectively, we recorded $14 million of interest income
and $90 million of interest income which, net of the federal tax, was $9 million and $57 million of interest income in 2011
and 2010, respectively. At December 31, 2012 and December 31, 2011, we had $17 million of interest accrued related to
unrecognized tax benefits, which, net of the federal tax benefit, was approximately $11 million. In the ordinary course of
business, we may take new tax positions that could increase or decrease our unrecognized tax benefits in future periods.
A rollforward of our unrecognized tax benefits was as follows:
(In millions) 2012 2011 2010
Unrecognized tax benefits, beginning of year $ 167 $ 188 $ 469
Additions based on current year tax positions 122 14
Additions based on prior year tax positions —12 32
Reductions and settlements based on prior year tax positions (39)(55)(327)
Unrecognized tax benefits, end of year $ 129 $ 167 $ 188
It is reasonably possible that within the next 12 months our unrecognized tax benefits, exclusive of interest, may decrease by
up to $75 million, as a result of resolving various issues in the currently open cycles, including the R&D tax credit. We expect
that the majority of the decrease would not impact earnings because the resolution on the issues is anticipated to be consistent
with the benefit previously recognized.
We generally account for our state income tax expense as a deferred contract cost, as we can generally recover this expense
through the pricing of our products and services to the U.S. Government. We include this deferred amount in contracts in
process, net until allocated to our contracts, which generally occurs upon payment or when otherwise agreed as allocable with
the U.S. Government. Net state income tax expense allocated to our contracts was $78 million, $16 million and $59 million
in 2012, 2011 and 2010, respectively. We include state income tax expense allocated to our contracts in administrative and
selling expenses.
Deferred income taxes consisted of the following at December 31:
(In millions) 2012 2011
Current deferred tax assets (liabilities)
Other accrued expenses and reserves $ 181 $ 165
Accrued employee compensation and benefits 226 203
Contracts in process and inventories (311)(147)
Deferred income taxes-current $ 96 $ 221
Noncurrent deferred tax assets (liabilities)
Net operating loss and tax credit carryforwards $ 148 $ 163
Pension benefits 2,490 1,922
Other retiree benefits 118 119
Depreciation and amortization (1,312)(1,368)
Other (86)(184)
Deferred income taxes-noncurrent $ 1,358 $ 652
As of December 31, 2012, we had foreign net operating loss carryforwards of approximately $530 million, of which $496
million was generated in the U.K. We believe that we will have sufficient taxable income to realize this deferred tax asset, as
any net operating loss generated in the U.K. may be carried forward indefinitely.
The federal tax expense (benefit) related to discontinued operations was $1 million, $2 million and $(110) million in 2012,
2011 and 2010, respectively.