General Dynamics 2015 Annual Report Download - page 49

D. FAIR VALUE
Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between marketplace participants.
Various valuation approaches can be used to determine fair value, each
requiring different valuation inputs. The following hierarchy classifies
the inputs used to determine fair value into three levels:
•Level 1 – quoted prices in active markets for identical assets or
liabilities;
•Level 2 – inputs, other than quoted prices, observable by a
marketplace participant either directly or indirectly; and
•Level 3 – unobservable inputs significant to the fair value
measurement.
We did not have any significant non-financial assets or liabilities
measured at fair value on December 31, 2015 or 2014, except for the
assets of our axle business that were classified as held for sale on
December 31, 2014, and were measured at fair value using Level 3
inputs. See Note A for further discussion.
Our financial instruments include cash and equivalents, marketable
securities and other investments; accounts receivable and accounts
payable; short- and long-term debt; and derivative financial instruments.
The carrying values of cash and equivalents, accounts receivable and
payable and short-term debt on the Consolidated Balance Sheets
approximate their fair value. The following tables present the fair values
of our other financial assets and liabilities on December 31, 2015 and
2014, and the basis for determining their fair values:
Carrying
Value
Fair
Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2) (a)
Financial Assets (liabilities) (b) December 31, 2015
Available-for-sale securities 186 $ 186 $ 124 $ 62
Derivatives (673) (673) – (673)
Long-term debt, including
current portion (3,425) (3,381) – (3,381)
December 31, 2014
Held-to-maturity marketable
securities (c) $ 500 $ 500 $ 10 $ 490
Available-for-sale securities 188 188 123 65
Derivatives (276) (276) – (276)
Long-term debt, including
current portion (3,925) (3,911) – (3,911)
(a) Determined under a market approach using valuation models that incorporate observable
inputs such as interest rates, bond yields and quoted prices for similar assets and liabilities.
(b) We had no Level 3 financial instruments on December 31, 2015 or 2014.
(c) Included in other current assets on the December 31, 2014, Consolidated Balance Sheet.
E. INCOME TAXES
Income Tax Provision. We calculate our provision for federal, state
and international income taxes based on current tax law. The reported
tax provision differs from the amounts currently receivable or payable
because some income and expense items are recognized in different
time periods for financial reporting than for income tax purposes. The
following is a summary of our net provision for income taxes for
continuing operations:
Year Ended December 31 2015 2014 2013
Current:
U.S. federal $ 841 $ 856 $ 850
State 31 31 28
International 98 106 132
Total current 970 993 1,010
Deferred:
U.S. federal 116 110 119
State 5 (3) 1
International 46 29 (5)
Total deferred 167 136 115
Provision for income taxes, net $ 1,137 $ 1,129 $ 1,125
Net income tax payments $ 871 $ 1,019 $ 888
State and local income taxes allocable to U.S. government contracts
are included in operating costs and expenses in the Consolidated
Statements of Earnings and, therefore, not included in the provision
above.
The reconciliation from the statutory federal income tax rate to our
effective income tax rate follows:
Year Ended December 31 2015 2014 2013
Statutory federal income tax rate 35.0% 35.0% 35.0%
State tax on commercial operations, net of
federal benefits 0.6 0.5 0.7
Impact of international operations (1.4) (2.6) –
Domestic production deduction (1.6) (1.9) (2.2)
Domestic tax credits (1.1) (0.7) (0.8)
Contract close-outs (2.9) – –
Other, net (0.9) (0.6) (1.5)
Effective income tax rate 27.7% 29.7% 31.2%
The decrease in the effective tax rate in 2015 from 2014 was due
primarily to the favorable impact of contract close-outs, largely resulting
from interest from the completion of a long-term contract triggered by
the prior settlement of litigation. The decrease in the effective tax rate in
2014 from 2013 was due primarily to increased income from non-U.S.
General Dynamics Annual Report 2015 45