Income Taxes (Tables)

12 Months Ended

Dec. 31, 2016

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,	2016		2015		2014
U.S. federal statutory tax	35.0	%	35.0	%	35.0	%
Research and development credits	(5.2	)	(3.4	)	(2.9	)
Tax basis adjustment ⁽¹⁾	(7.9	)			(3.6	)
U.S. manufacturing activity tax benefit	(3.8	)	(2.9	)	(1.2	)
Tax on international activities	(0.5	)	(0.6	)	(0.2	)
Excess tax benefits ⁽²⁾	(1.9	)
Federal audit settlements⁽³⁾	(3.2	)			(3.6	)
Other provision adjustments	(0.4	)	(0.4	)	0.2
Effective income tax rate	12.1	%	27.7	%	23.7	%


⁽¹⁾	In the third quarter of 2016 and the second quarter of 2014, we recorded incremental tax benefits of $440 and $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 (tax basis adjustment).


⁽²⁾	Throughout 2016, we recorded tax benefits of $105 as a result of the adoption of ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” which required excess tax benefits related to employee share-based payments to be recorded through tax expense.


⁽³⁾	In the third quarter of 2016, a tax benefit of $177 was recorded as a result of the settlement of the 2011-2012 federal tax audit. 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:



	2016			2015
Inventory and long-term contract methods of income recognition	(9,954		)	(10,401		)
Pension benefits	7,385			6,303
Retiree health care benefits	2,268			2,513
Fixed assets, intangibles and goodwill (net of valuation allowance $16 and $16)	(2,007		)	(1,837		)
Other employee benefits	1,225			1,339
Customer and commercial financing	(730		)	(777		)
Accrued expenses and reserves	587			609
Net operating loss, credit and capital loss carryovers (net of valuation allowance of $79 and $89)⁽¹⁾	277			216
Other	(57		)	(92		)
Net deferred tax (liabilities)/assets⁽²⁾		($1,006	)		($2,127	)


⁽¹⁾	Of the deferred tax asset for net operating loss and credit carryovers, $262 expires on or before December 31, 2036 and $15 may be carried over indefinitely.


⁽²⁾	Included in the net deferred tax (liabilities)/assets as of December 31, 2016 and 2015 are deferred tax assets in the amounts of $7,701 and $7,277 related to Accumulated other comprehensive loss.

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



	2016			2015
Deferred tax assets		$13,591			$13,128
Deferred tax liabilities	(14,502		)	(15,150		)
Valuation allowance	(95		)	(105		)
Net deferred tax (liabilities)/assets		($1,006	)		($2,127	)

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



	2016			2015			2014
Unrecognized tax benefits – January 1		$1,617			$1,312			$1,141
Gross increases – tax positions in prior periods	17			38			403
Gross decreases – tax positions in prior periods	(348		)	(25		)	(251		)
Gross increases – current-period tax positions	344			292			217
Settlements	(73		)				(197		)
Lapse of statute of limitations							(1		)
Unrecognized tax benefits – December 31		$1,557			$1,617			$1,312