Raytheon 2012 Annual Report Download - page 53

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45
Total Non-Operating (Income) Expense, Net
The increase in total non-operating (income) expense, net of $40 million in 2012 compared to 2011 was primarily due to the
$29 million pretax charge associated with the make-whole provision on the early repurchase of long-term debt in the fourth
quarter of 2012 and $29 million of higher interest expense, principally due to the issuance of $1.0 billion of fixed rate long-
term debt in the fourth quarter of 2011, partially offset by a $15 million change in the fair value of investments held in rabbi
trusts associated with certain of our non-qualified deferred compensation plans due to a net gain of $14 million in 2012
compared to a net loss of $1 million in 2011.
The decrease in total non-operating (income) expense, net of $9 million in 2011 compared to 2010 was primarily due to the
$73 million pretax charge associated with the make-whole provision on the early repurchase of long-term debt in the fourth
quarter of 2010, partially offset by $46 million of higher interest expense, principally due to the issuance of $2.0 billion of
fixed rate long-term debt in the fourth quarter of 2010, and an $18 million change in the fair value of investments held in rabbi
trusts associated with certain of our non-qualified deferred compensation plans due to a net loss of $1 million in 2011 compared
to a net gain of $17 million in 2010.
Federal and Foreign Income Taxes
Our effective tax rate, which is used to determine federal and foreign income tax expense, differs from the U.S. statutory rate
due to the following:
2012 2011 2010
Statutory tax rate 35.0 % 35.0 % 35.0 %
Research and development tax credit —% (1.0)% (1.1)%
Tax settlements and refund claims (0.8)% (2.6)% (8.0)%
Domestic manufacturing deduction benefit (1.9)% (1.8)% (1.7)%
Foreign income tax rate differential 0.3 % 0.2 % 0.8 %
Other items, net (1.0)% (0.4)% (0.8)%
Effective tax rate 31.6 % 29.4 % 24.2 %
Our effective tax rate reflects the 35% U.S. statutory rate adjusted for various permanent differences between book and tax
reporting. During 2012, we received final approval from the Internal Revenue Service (IRS) and U.S. Congressional Joint
Committee on Taxation of IRS Appeals Division settlement for the 2006–2008 IRS examination cycle (2012 Tax Settlement).
As a result, all federal income tax audits prior to 2009 are closed. During 2011, we received final approval from the IRS and
the U.S. Congressional Joint Committee on Taxation of our Minimum Tax Refund claim for the 2006–2008 IRS examination
cycle, which related to items not included in the 2012 Tax Settlement (2011 Tax Settlement). During 2010, we received final
approval from the IRS and the U.S. Congressional Joint Committee on Taxation for a settlement of the 1998-2005 IRS
examination cycle (2010 Tax Settlement).
The increase in our effective tax rate of 2.2% in 2012 was primarily due to the difference between the 2011 and 2012 Tax
Settlement amounts, which changed the rate by approximately 1.8%. Our effective tax rate in 2011 was 5.2% higher than
2010 primarily due to the difference between the 2010 and 2011 Tax Settlement amounts, which changed the rate by
approximately 5.4%.
Our effective tax rate in 2012 was lower than the statutory federal tax rate primarily due to the domestic manufacturing
deduction which decreased the rate by approximately 1.9%, and the 2012 Tax Settlement, which decreased the rate by
approximately 0.8%. Our effective tax rate in 2011 was lower than the statutory federal tax rate primarily due to the 2011 Tax
Settlement, which decreased the rate by approximately 2.6%, the domestic manufacturing deduction, which decreased the
rate by approximately 1.8%, and the U.S. research and development tax credit, which decreased the rate by approximately
1.0%.
Our effective tax rate in 2010 was lower than the U.S. statutory tax rate primarily due to the 2010 Tax Settlement, which
decreased the rate by approximately 8.0%, and the domestic manufacturing deduction, which decreased the rate by
approximately 1.7%.
The increase in federal and foreign income taxes of $96 million in 2012 compared to 2011 was primarily due to the difference
between the 2011 and 2012 Tax Settlement amounts described above and higher income from continuing operations before