NORTHROP GRUMMAN CORP /DE/

6. INCOME TAXES

In July 2025, the One Big Beautiful Bill Act (OBBBA) was enacted. Key income tax-related provisions of the OBBBA include the repeal of mandatory capitalization of research and development expenditures under Internal Revenue Code (IRC) Section 174 (reinstating full expensing beginning in 2025), extension of bonus depreciation, and revisions to international tax regimes. The company recognized the income tax effects of the OBBBA in its 2025 financial statements, including an increase of $319 million to taxes receivable and a decrease of $387 million to deferred tax assets as of December 31, 2025. As part of enactment of the OBBBA, the company became subject to the corporate alternative minimum tax (CAMT) and recorded CAMT credit carryforwards of $187 million during 2025. These CAMT credit carryforwards do not expire and may be used to offset future regular U.S. federal income tax liabilities. Given the company’s future taxable income projections, CAMT did not impact the company’s quarterly or annual effective tax rates during 2025.

As described in Note 1, effective for the year ended December 31, 2025, we adopted ASU 2023-09 and applied the disclosure requirements on a prospective basis. In accordance with prospective application, we did not recast prior period disclosures.

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Federal and Foreign Income Tax Expense

Federal and foreign income tax expense consisted of the following:

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:

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2025 income tax expense increased $44 million, or 5 percent, due to a higher ETR and higher earnings before income taxes. The 2025 ETR increased to 17.5 percent from 16.8 percent in 2024 primarily due to a net reduction in tax reserves in the prior year, lower research credits principally due to enactment of the OBBBA, and additional income tax expense related to nondeductible goodwill in the divested training services business. These increases were partially offset by lower interest expense on unrecognized tax benefits. The MTM benefit in both 2025 and 2024 increased each respective year’s ETR by 0.4 percentage points.

2024 income tax expense increased $552 million, or 190 percent, due to higher earnings before income taxes and a higher ETR. The 2024 ETR increased to 16.8 percent from 12.4 percent in 2023 primarily due tothe impact of the prior year B-21 loss provision and the MTM adjustment on our ETR. The 2024 MTM benefit increased the 2024 ETR by 0.4 percentage points, whereas the prior year B-21 loss provision and MTM expense collectively reduced the 2023 ETR by 3.8 percentage points. The 2024 ETR also reflects a net reduction in tax reserves largely due to a federal court decision in 2024, partially offset by higher interest expense on unrecognized tax benefits.

Net interest expense within the company’s federal, foreign and state income tax provisions was $106 million, $164 million and $62 million for the years ended December 31, 2025, 2024, and 2023, respectively.

The Organization for Economic Co-operation and Development issued Pillar Two model rules for a global minimum tax of 15% effective January 1, 2024. Pillar Two had no impact on our 2025 or 2024 ETR, and we do not currently expect Pillar Two to significantly impact our ETR going forward.

Income Taxes Paid

Income taxes paid, net of refunds received, consisted of the following:

Income tax payments, net of refunds received, were $880 million and $1.2 billion for the years ended December 31, 2024 and 2023, respectively.

Taxes receivable, which are included in Prepaid expenses and other current assets in the consolidated statements of financial position, were $924 million and $517 million as of December 31, 2025 and 2024, respectively.

Uncertain Tax Positions

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. During the fourth quarter of 2024, the company entered into an agreed Revenue Agent’s Report (“RAR”) for certain matters related to the company’s 2018-2020 federal income tax returns, largely related to our methods of accounting associated with the timing of revenue recognition and related costs under IRC Section 451(b), resulting in a $766 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 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 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 within operating income.

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

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The company’s unrecognized tax benefits, excluding accrued interest and penalties of $514 million, $373 million and $305 million as of December 31, 2025, 2024 and 2023, respectively, are presented below:

The 2025 increase in unrecognized tax benefits was primarily related to additional reserves on current year tax positions related to research credits and state apportionment.

If the income tax benefits from these tax positions are ultimately realized, $1.0 billion of federal and foreign tax benefits (and related interest and penalties) would reduce the company’s ETR.

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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:

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, 2025, in addition to the $187 million of CAMT credits noted above, the company has available tax credits and unused net operating losses of $717 million and $584 million, respectively, that may be applied against future taxable income. The majority of tax credits expire between 2026 and 2047, while some may be carried forward indefinitely. Most net operating losses may also 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 $358 million and $62 million, respectively, as of December 31, 2025.

Undistributed Foreign Earnings

As of December 31, 2025, 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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