NORTHROP GRUMMAN CORP DE
For the period ended Dec 31, 2023. Filed Jan 25, 2024.
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FY2023 · Filed Jan 25, 2024
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7. Income Taxes
- INCOME TAXES
Federal and foreign income tax expense consisted of the following:
| $ in millions | 2023 | 2022 | 2021 |
|---|---|---|---|
| Federal income tax expense: | |||
| Current | $949 | $1,289 | $1,398 |
| Deferred | (670) | (353) | 518 |
| Total federal income tax expense | 279 | 936 | 1,916 |
| Foreign income tax expense: | |||
| Current | 15 | 3 | 6 |
| Deferred | (4) | 1 | 11 |
| Total foreign income tax expense | 11 | 4 | 17 |
| Total federal and foreign income tax expense | $290 | $940 | $1,933 |
Earnings before income taxes associated with the company’s foreign operations are not material in the periods presented.
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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:
| $ in millions · 2023 · 2022 · 2021 | ||||||
|---|---|---|---|---|---|---|
| Income tax expense at statutory rate | $493 | 21.0% | $1,226 | 21.0% | $1,877 | 21.0% |
| Research credit | (210) | (8.9) | (177) | (3.0) | (192) | (2.2) |
| Foreign derived intangible income | (63) | (2.7) | (66) | (1.1) | (50) | (0.6) |
| IT services divestiture nondeductible goodwill | — | — | — | — | 250 | 2.8 |
| Settlements with taxing authorities | (1) | — | (86) | (1.5) | — | — |
| Net interest expense | 69 | 2.9 | 22 | 0.4 | 17 | 0.2 |
| Other, net | 2 | 0.1 | 21 | 0.3 | 31 | 0.4 |
| Total federal and foreign income taxes | $290 | 12.4% | $940 | 16.1% | $1,933 | 21.6% |
The 2023 ETR decreased to 12.4 percent from 16.1 percent in 2022 primarily due to lower earnings before income taxes as a result of the B-21 charge and MTM expense, which collectively reduced the 2023 ETR by 3.8 percentage points. The 2022 MTM benefit increased the 2022 ETR by 1.2 percentage points.
The 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.
Income tax payments, net of refunds received, were $1.2 billion, $1.5 billion and $1.3 billion for the years ended December 31, 2023, 2022 and 2021, respectively. Taxes receivable, which are included in Prepaid expenses and other current assets in the consolidated statements of financial position, were $1.5 billion and $850 million as of December 31, 2023 and 2022, 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 2018-2020 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. The matters not addressed by the agreed RAR related to the company’s 2014-2017 federal income tax returns and refund claims related to its 2007-2016 federal tax returns are currently under review by the IRS Appeals Office.
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.
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.
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The change in unrecognized tax benefits during 2023, 2022 and 2021, excluding interest, is as follows:
| $ in millions | 2023 | 2022 | 2021 |
|---|---|---|---|
| Unrecognized tax benefits at beginning of the year | $1,663 | $1,630 | $1,481 |
| Additions based on tax positions related to the current year | 276 | 262 | 355 |
| Additions for tax positions of prior years | 254 | 6 | 47 |
| Reductions for tax positions of prior years | (9) | (124) | (251) |
| Settlements with taxing authorities | (189) | (110) | (1) |
| Other, net | (1) | (1) | (1) |
| Net change in unrecognized tax benefits | 331 | 33 | 149 |
| Unrecognized tax benefits at end of the year | $1,994 | $1,663 | $1,630 |
Our 2023 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, 2023, we have approximately $2.0 billion in unrecognized tax benefits, including $843 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 consolidated statements of financial position, were $964 million and $728 million as of December 31, 2023 and 2022, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities. These liabilities include $305 million and $216 million of accrued interest and penalties as of December 31, 2023 and 2022, respectively. If the income tax benefits from these tax positions are ultimately realized, $848 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 $62 million, $29 million, and $25 million for the years ended December 31, 2023, 2022, and 2021, respectively.
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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:
| $ in millions | 2023 | 2022 |
|---|---|---|
| Deferred Tax Assets | ||
| Retiree benefits | $115 | $117 |
| Capitalized research and experimental expenditures | 3,380 | 1,671 |
| Accrued employee compensation | 400 | 378 |
| Provisions for accrued liabilities | 509 | 65 |
| Inventory | 279 | 484 |
| Stock-based compensation | 35 | 37 |
| Operating lease liabilities | 575 | 556 |
| Tax credits | 557 | 464 |
| Other | 215 | 144 |
| Gross deferred tax assets | 6,065 | 3,916 |
| Less: valuation allowance | (517) | (428) |
| Net deferred tax assets | 5,548 | 3,488 |
| Deferred Tax Liabilities | ||
| Goodwill | 534 | 534 |
| Purchased intangibles | 83 | 98 |
| Property, plant and equipment, net | 805 | 854 |
| Operating lease right-of-use assets | 563 | 545 |
| Contract accounting differences | 2,437 | 1,348 |
| Other | 106 | 79 |
| Deferred tax liabilities | 4,528 | 3,458 |
| Total net deferred tax assets | $1,020 | $30 |
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, 2023, the company has available tax credits and unused net operating losses of $615 million and $358 million, respectively, that may be applied against future taxable income. The majority of tax credits and net operating losses expire in 2024 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 $344 million and $46 million, respectively, as of December 31, 2023.
Undistributed Foreign Earnings
As of December 31, 2023, 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.
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