Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

7. INCOME TAXES

Federal and foreign income tax expense consisted of the following:

	Year Ended December 31
$ in millions	2022		2021		2020
Federal income tax expense:
Current	$	1,289	$	1,398	$	246
Deferred	(353)		518		288
Total federal income tax expense	936		1,916		534
Foreign income tax expense:
Current	3		6		3
Deferred	1		11		2
Total foreign income tax expense	4		17		5
Total federal and foreign income tax expense	$	940	$	1,933	$	539

Earnings before income taxes associated with the company’s foreign operations are not material in the periods presented.

Income tax expense differs from the amount computed by multiplying earnings before income taxes by the statutory federal income tax rate due to the following:

	Year Ended December 31
$ in millions	2022				2021				2020
Income tax expense at statutory rate	$	1,226	21.0	%	$	1,877	21.0	%	$	783	21.0	%
Research credit	(177)		(3.0)		(192)		(2.2)		(206)		(5.5)
Foreign derived intangible income	(66)		(1.1)		(50)		(0.6)		(55)		(1.5)
IT services divestiture nondeductible goodwill	—		—		250		2.8		—		—
Settlements with taxing authorities	(86)		(1.5)		—		—		—		—
Other, net	43		0.7		48		0.6		17		0.5
Total federal and foreign income taxes	$	940	16.1	%	$	1,933	21.6	%	$	539	14.5	%

The year to date 2022 ETR decreased to 16.1 percent from 21.6 percent in 2021 primarily due to an $86 million benefit resulting from the resolution of the IRS examination of certain legacy OATK tax returns, as well as additional federal income taxes in the prior year resulting from the IT services divestiture. The company’s 2022 MTM benefit increased the 2022 ETR by 1.2 percentage points; however, the MTM benefit in 2021 did not significantly impact the 2021 ETR.

The year to date 2021 ETR increased to 21.6 percent from 14.5 percent in 2020 primarily due to the federal income taxes resulting from the IT services divestiture described above. The company’s 2021 MTM benefit did not significantly impact the 2021 ETR; however, MTM expense in 2020 reduced the 2020 ETR by 1.3 percentage points.

Income tax payments, net of refunds received, were $1.5 billion, $1.3 billion and $312 million for the years ended December 31, 2022, 2021 and 2020, respectively. Taxes receivable, which are included in Prepaid expenses and other current assets in the consolidated statements of financial position, were $850 million and $571 million as of December 31, 2022 and 2021, respectively.

Uncertain Tax Positions

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2020 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under Internal Revenue Service (IRS) examination. During the second quarter of 2022, 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. During the fourth quarter of 2022, the U.S. Congressional Joint Committee on Taxation approved a resolution of the IRS examination of the legacy 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, which resulted in a $110 million reduction to our unrecognized tax benefits and an $86 million reduction to income tax expense.

Tax returns for open tax years related to state and foreign jurisdictions remain subject to examination. As state income taxes are generally considered allowable and allocable costs, any individual or aggregate state examination impacts are not expected to have a material impact on our financial results. Amounts currently subject to examination related to foreign jurisdictions are not material.

The change in unrecognized tax benefits during 2022, 2021 and 2020, excluding interest, is as follows:

	December 31
$ in millions	2022		2021		2020
Unrecognized tax benefits at beginning of the year	$	1,630	$	1,481	$	1,223
Additions based on tax positions related to the current year	262		355		187
Additions for tax positions of prior years	6		47		270
Reductions for tax positions of prior years	(124)		(251)		(190)
Settlements with taxing authorities	(110)		(1)		(7)
Other, net	(1)		(1)		(2)
Net change in unrecognized tax benefits	33		149		258
Unrecognized tax benefits at end of the year	$	1,663	$	1,630	$	1,481

Our 2022 increase in unrecognized tax benefits was primarily 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 December 31, 2022, we have approximately $1.7 billion in unrecognized tax benefits, including $543 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 may increase by approximately $120 million. Additionally, it is reasonably possible that within the next 12 months, unrecognized tax benefits claimed primarily related to California state apportionment in the company’s 2007 to 2016 tax years may decline by up to $100 million through administrative resolution with the California Franchise Tax Board.

Our current unrecognized tax benefits, which are included in Other current liabilities in the consolidated statements of financial position, were $728 million and $590 million as of December 31, 2022 and 2021, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities. These liabilities include $216 million and $175 million of accrued interest and penalties as of December 31, 2022 and 2021, respectively. If the income tax benefits from these tax positions are ultimately realized, $636 million of federal and foreign tax benefits would reduce the company’s ETR.

Net interest expense within the company’s federal, foreign and state income tax provisions was not material for all years presented.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax purposes. Net deferred tax assets and liabilities are classified as non-current in the consolidated statements of financial position.

The tax effects of temporary differences and carryforwards that gave rise to year-end deferred federal, state and foreign tax balances, as presented in the consolidated statements of financial position, are as follows:

	December 31
$ in millions	2022		2021
Deferred Tax Assets
Retiree benefits	$	117	$	804
Capitalized research and experimental expenditures	1,671		—
Accrued employee compensation	378		371
Provisions for accrued liabilities	65		156
Inventory	484		649
Stock-based compensation	37		39
Operating lease liabilities	556		493
Tax credits	464		431
Other	144		135
Gross deferred tax assets	3,916		3,078
Less: valuation allowance	(428)		(349)
Net deferred tax assets	3,488		2,729
Deferred Tax Liabilities
Goodwill	534		533
Purchased intangibles	98		148
Property, plant and equipment, net	854		755
Operating lease right-of-use assets	545		444
Contract accounting differences	1,348		1,036
Other	79		103
Deferred tax liabilities	3,458		3,019
Total net deferred tax assets (liabilities)	$	30	$	(290)

Realization of deferred tax assets is primarily dependent on generating sufficient taxable income in future periods. The company believes it is more-likely-than-not our net deferred tax assets will be realized.

At December 31, 2022, the company has available tax credits and unused net operating losses of $510 million and $349 million, respectively, that may be applied against future taxable income. The majority of tax credits and net operating losses expire in 2023 through 2046, however, some may be carried forward indefinitely. Due to the uncertainty of the realization of the tax credits and net operating losses, the company has recorded valuation allowances of $295 million and $32 million, respectively, as of December 31, 2022.

Undistributed Foreign Earnings

As of December 31, 2022, the company has accumulated undistributed earnings generated by our foreign subsidiaries and most have been taxed in the U.S. We intend to indefinitely reinvest these earnings, as well as future earnings from our foreign subsidiaries to fund our international operations. In addition, we expect future U.S. cash generation will be sufficient to meet future U.S. cash needs.