INCOME TAXES



	Three Months Ended September 30						Nine Months Ended September 30
$ in millions	2018			2017			2018			2017
Federal and foreign income tax expense	$	93		$	139		$	385		$	534
Effective income tax rate	7.5		%	17.8		%	13.0		%	22.4		%

Current Quarter

The company’s effective tax rate for the three months ended September 30, 2018 was lower as compared with the same period in 2017 principally due to the reduction of the U.S. corporate income tax rate from 35 percent to 21 percent as a result of the 2017 Tax Act. Both periods reflect comparable tax benefits associated with current year research credits. In addition, the company’s effective rate for the three months ended September 30, 2018 includes a $70 million benefit recognized for additional research credits and manufacturing deductions related to prior years and a $35 million benefit for pension contributions recognized in connection with the filing of our 2017 tax return. These benefits were partially offset by a $20 million income tax expense associated with tax reform guidance on executive compensation. The company’s effective tax rate for the three months ended September 30, 2017 included a $62 million benefit recognized for additional manufacturing deductions and research credits related to prior years and $27 million of tax benefits associated with manufacturing deductions.

Year to Date

The company’s effective tax rate for the nine months ended September 30, 2018 was lower as compared with the same period in 2017 principally due to the reduction of the U.S. corporate income tax rate and current quarter items described above. In addition, the company’s effective tax rate for the nine months ended September 30, 2018 includes $26 million of excess tax benefits related to employee share-based compensation. The company’s effective tax rate for the nine months ended September 30, 2017 included $57 million of tax benefits associated with manufacturing deductions, $47 million of excess tax benefits related to employee share-based compensation and a $42 million benefit recognized in connection with the Congressional Joint Committee on Taxation’s approval of the Internal Revenue Service (IRS) examination of the company’s 2012-2013 tax returns.

The company recognized the income tax effects of the 2017 Tax Act in the financial statements included in its 2017 Annual Report on Form 10-K in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. During the three months ended September 30, 2018, the company finalized its accounting for the income tax effects of the 2017 Tax Act and recognized the following measurement period adjustments to the provisional amounts recorded in its 2017 Annual Report on Form 10-K in connection with the 2017 Tax Act:

Transition Tax on Foreign Earnings

The company recognized a measurement period increase to income tax expense of $5 million related to the one-time transition tax on certain foreign earnings. This resulted in a corresponding decrease in deferred tax assets due to the utilization of foreign tax credit carryforwards.

Acceleration of Depreciation

The company recognized a measurement period increase to income taxes payable of $17 million and a corresponding increase in deferred tax assets attributable to the accelerated depreciation for certain assets placed into service after September 27, 2017.

In connection with the Merger, the company has initially recognized an increase in unrecognized tax benefits of approximately $150 million for matters associated with legacy Orbital ATK, principally related to federal and state research credits. In addition, during the three and nine months ended September 30, 2018, we increased our unrecognized tax benefits related to our methods of accounting associated with the 2017 Tax Act by approximately $25 million and $75 million, respectively, and it is reasonably possible that within the next twelve months those unrecognized tax benefits may change by up to $100 million.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2015 federal tax returns and refund claims related to its 2007-2011 federal tax returns are currently under IRS examination. In addition, legacy Orbital ATK federal tax returns for the year ended March 31, 2015 and nine-month transition period ended December 31, 2015 are currently under IRS examination. The company believes it is reasonably possible that within the next twelve months we may resolve certain matters related to the examination of the legacy Orbital ATK federal tax returns for these periods, which may result in reductions of our unrecognized tax benefits up to $35 million and income tax expense up to $30 million.