Income Taxes (Unaudited)

9 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

	Three Months Ended September 30						Nine Months Ended September 30
$ in millions	2023			2022			2023			2022
Federal and foreign income tax expense	$	181		$	175		$	512		$	568
Effective income tax rate	16.2		%	16.1		%	16.5		%	16.8		%

Current Quarter

The company’s third quarter 2023 effective tax rate (ETR) of 16.2 percent was comparable with the prior year period and reflects an increase in research credits, partially offset by higher interest expense on unrecognized tax benefits. The third quarter 2023 ETR includes benefits of $62 million for research credits and $19 million for foreign derived intangible income (FDII), partially offset by $21 million of interest expense on unrecognized tax benefits. The third quarter 2022 ETR included benefits of $42 million for research credits and $16 million for FDII, partially offset by $11 million of interest expense on unrecognized tax benefits.

Year to Date

The company’s year to date 2023 ETR decreased to 16.5 percent from 16.8 percent in the prior year period principally due to an increase in research credits as well as more favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax benefits. The year to date 2023 ETR includes benefits of $140 million for research credits and $48 million for FDII, partially offset by $48 million of interest expense on unrecognized tax benefits. The year to date 2022 ETR included benefits of $124 million for

research credits and $46 million for FDII, partially offset by $26 million of interest expense on unrecognized tax benefits.

Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were $810 million as of September 30, 2023 and $850 million as of December 31, 2022.

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 September 30, 2023, we have approximately $1.9 billion in unrecognized tax benefits, including $807 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.

In the second quarter of 2023, the California Franchise Tax Board approved a resolution of the state examination primarily related to California state apportionment in the company’s 2007 to 2016 tax years, resulting in a $95 million reduction to our unrecognized tax benefits and an $11 million reduction to unallocated corporate expense.

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 2023, the company entered into an agreed Revenue Agent’s Report (“RAR”) for certain matters related to the company’s 2014-2017 federal income tax returns, resulting in a $90 million reduction to our unrecognized tax benefits and an immaterial impact to income tax expense.

Our current unrecognized tax benefits, which are included in Other current liabilities in the unaudited condensed consolidated statements of financial position, were $909 million and $728 million as of September 30, 2023 and December 31, 2022, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.