XML 22 R9.htm IDEA: XBRL DOCUMENT v3.22.2
Income Taxes (Unaudited)
 6 Months Ended
Jun. 30, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
 Three Months Ended June 30Six Months Ended June 30
$ in millions2022202120222021
Federal and foreign income tax expense$204 $265 $393 $1,086 
Effective income tax rate17.7 %20.4 %17.1 %25.2 %
Current Quarter
The second quarter 2022 effective tax rate (ETR) decreased to 17.7 percent from 20.4 percent in the prior year period. The company’s second quarter 2022 ETR includes benefits of $41 million for research credits and $15 million for foreign derived intangible income (FDII), which were partially offset by nondeductible losses on certain of the company’s marketable securities. The company’s second quarter 2021 ETR included benefits of $48 million for research credits and $10 million for FDII. The second quarter 2021 ETR was impacted by a change
made in tax revenue recognition on certain long term contracts, which increased taxable income in years prior to the 2017 Tax Cuts and Jobs Act at a rate above the current statutory rate.
Year to Date
The year to date 2022 ETR decreased to 17.1 percent from 25.2 percent in the prior year period. The company’s year to date 2022 ETR includes benefits of $82 million for research credits and $29 million for FDII. The company’s year to date 2021 ETR included benefits of $99 million for research credits and $20 million for FDII. The year to date 2021 ETR was impacted by additional federal income taxes resulting from the IT services divestiture, as well as the change in tax revenue recognition on certain contracts described above.
The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs and the 2017 Tax Cuts and Jobs Act, which includes related final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and procedural guidance issued in August 2021. As of June 30, 2022, we have approximately $1.7 billion in unrecognized tax benefits, including $458 million related to our position on IRC Section 451(b). If these matters, including our position on IRC Section 451(b), are unfavorably resolved, there could be a material impact on our future cash flows. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may increase by approximately $120 million.
Our current unrecognized tax benefits, which are included in Other current liabilities in the unaudited condensed consolidated statements of financial position, were $659 million and $590 million as of June 30, 2022 and December 31, 2021, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2018 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under Internal Revenue Service (IRS) examination. This quarter, the company’s 2014-2016 federal income tax returns and refund claims related to its 2007-2016 federal tax returns reverted back from IRS Appeals to IRS examination for additional factual review. In addition, legacy Orbital ATK (OATK) federal tax returns for the years ended March 31, 2014 and 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under review by the IRS Appeals Office. It is reasonably possible that within the next twelve months, unrecognized tax benefits claimed in legacy OATK’s 2014 to 2017 tax years may decline by up to $110 million through administrative resolution with IRS Appeals.