What changed in this filing

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Item 1. Financial Statements

2023-04-27 compared with 2022-10-27 · 131 added, 175 removed, 459 unchanged (40% of the section changed)

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions, except per share amounts 2023 2022

7 unchanged sentences

Total operating costs and expenses 8,354 7,900

Gain on sale of business — — — 1,980

Operating income 947 897

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Net earnings (from above) $ 842 $ 955

Other comprehensive loss, net of tax

Change in unamortized prior service credit — ( 2 ) ( 1 ) ( 6 )

Change in cumulative translation adjustment and other, net ( 7 ) ( 6 ) ( 22 ) ( 6 )

Other comprehensive loss, net of tax ( 7 ) ( 8 ) ( 23 ) ( 12 )

Other comprehensive income (loss), net of tax

Change in cumulative translation adjustment 2 ( 2 )

Change in other, net — ( 1 )

Other comprehensive income (loss), net of tax 2 ( 3 )

Comprehensive income $ 844 $ 952

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CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

$ in millions, except par value September 30, 2022 December 31, 2021

$ in millions, except par value March 31, 2023 December 31, 2022

Cash and cash equivalents $ 2,495 $ 2,577

20 unchanged sentences

Operating lease liabilities 1,789 1,824

Deferred tax liabilities 86 490

Other non-current liabilities 1,893 2,039

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2023 2022

1 unchanged sentence

Net earnings $ 842 $ 955

Adjustments to reconcile to net cash provided by operating activities:

Adjustments to reconcile to net cash used in operating activities:

Depreciation and amortization 298 303

1 unchanged sentence

Deferred income taxes ( 205 ) ( 201 )

Gain on sale of business — ( 1,980 )

Net periodic pension and OPB income ( 76 ) ( 298 )

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Other, net ( 15 ) 25

Net cash provided by operating activities 650 2,125

Net cash used in operating activities ( 702 ) ( 488 )

Investing activities

Divestiture of IT services business — 3,400

Capital expenditures ( 309 ) ( 244 )

Proceeds from sale of equipment to a customer 100 84

Other, net — ( 5 )

Net cash (used in) provided by investing activities ( 663 ) 2,799

Net cash used in investing activities ( 309 ) ( 249 )

Financing activities

Payments of long-term debt — ( 2,236 )

Net proceeds from issuance of long-term debt 1,995 —

Common stock repurchases ( 723 ) ( 318 )

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Other, net ( 26 ) ( 2 )

Net cash used in financing activities ( 1,851 ) ( 5,776 )

Net cash provided by (used in) financing activities 929 ( 619 )

Decrease in cash and cash equivalents ( 82 ) ( 1,356 )

4 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions, except per share amounts 2023 2022

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Beginning of period — —

Common stock repurchased — — — ( 60 )

Stock compensation — — — 2

End of period — —

8 unchanged sentences

Beginning of period ( 153 ) ( 143 )

Other comprehensive loss, net of tax ( 7 ) ( 8 ) ( 23 ) ( 12 )

Other comprehensive income (loss), net of tax 2 ( 3 )

End of period ( 151 ) ( 146 )

9 unchanged sentences

Investments in equity securities and joint ventures where the company has significant influence, but not control, are accounted for using the equity method.

Effective January 30, 2021 (the “Divestiture date”), we completed the sale of our IT and mission support services business (the “IT services divestiture”) for $ 3.4 billion in cash and recorded a pre-tax gain on sale of $ 2.0 billion.

The IT and mission support services business was comprised of the majority of the former Information Solutions and Services (IS&S) division of Defense Systems (excluding the Vinnell Arabia business);

select cyber, intelligence and missions support programs, which were part of the former Cyber and Intelligence Mission Solutions (CIMS) division of Mission Systems;

and the former Space Technical Services business unit of Space Systems.

Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture date.

Sales and pre-tax profit for the IT and mission support services business were $ 162 million and $ 20 million, respectively, for the nine months ended September 30, 2021.

These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”) and in accordance with the rules of the Securities and Exchange Commission (SEC) for interim reporting.

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These financial statements should be read in conjunction with the information contained in the company’s 2022 Annual Report on Form 10-K.

During the first quarter of 2023, we changed the presentation of the components of other comprehensive income (loss), net of tax in the Unaudited condensed consolidated statement of earnings and comprehensive income.

Prior period amounts have been recast to conform to current period presentation.

This change in presentation had no impact on our previously reported comprehensive income in total.

Quarterly information is labeled using a calendar convention;

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We recognize changes in estimated contract sales or costs and the resulting changes in contract profit on a cumulative basis.

Cumulative estimate-at-completion (EAC) adjustments represent the cumulative effect of the changes on current and prior periods;

Net estimate-at-completion (EAC) adjustments represent the cumulative effect of the changes on current and prior periods;

sales and operating margins in future periods are recognized as if the revised estimates had been used since contract inception.

If it is determined that a loss is expected to result on an individual performance obligation, the entire amount of the estimable future loss, including an allocation of general and administrative expense, is charged against income in the period the loss is identified.

NORTHROP GRUMMAN CORPORATION

The following table presents the effect of aggregate net EAC adjustments:

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions, except per share data 2023 2022

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Net earnings (1)

36 86 245 358

Diluted earnings per share (1)

0.23 0.54 1.57 2.21

(1) Based on a 21 percent statutory tax rate .

1 unchanged sentence

When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments.

During the three months ended March 31, 2022, we recorded a $ 67 million favorable EAC adjustment on the engineering, manufacturing and development phase of the B-21 program at Aeronautics Systems largely related to performance incentives.

During the three months ended September 30, 2021, we recorded a $ 42 million unfavorable EAC adjustment on the F-35 program at Aeronautics Systems due to labor-related production inefficiencies largely driven by COVID-19-related impacts on the labor market and employee leave.

No such adjustments were material to the financial statements during the three months ended September 30, 2022.

During the three months ended March 31, 2022, we recorded a $ 67 million favorable

NORTHROP GRUMMAN CORPORATION

EAC adjustment on the engineering, manufacturing and development (EMD) phase of the B-21 program at Aeronautics Systems.

No such adjustments were material to the financial statements during the three months ended March 31, 2023.

Backlog represents the future sales we expect to recognize on firm orders received by the company and is equivalent to the company’s remaining performance obligations at the end of each period.

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Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time an option or IDIQ task order is exercised or awarded.

Company backlog as of September 30, 2022 was $ 79.6 billion.

Of our September 30, 2022 backlog, we expect to recognize approximately 40 percent as revenue over the next 12 months and 60 percent as revenue over the next 24 months, with the remainder to be recognized thereafter.

Company backlog as of March 31, 2023 was $ 77.5 billion.

Of our March 31, 2023 backlog, we expect to recognize approximately 40 percent as revenue over the next 12 months and 65 percent as revenue over the next 24 months, with the remainder to be recognized thereafter.

Contract Assets and Liabilities

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Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position.

The amount of revenue recognized for the three and nine months ended September 30, 2022 that was included in the December 31, 2021 contract liability balance was $ 303 million and $ 2.2 billion, respectively.

The amount of revenue recognized for the three and nine months ended September 30, 2021 that was included in the December 31, 2020 contract liability balance was $ 261 million and $ 1.8 billion, respectively.

The amount of revenue recognized for the three months ended March 31, 2023 and 2022 that was included in the contract liability balances at the beginning of each year was $ 1.7 billion and $ 1.4 billion, respectively.

Disaggregation of Revenue

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We believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

NORTHROP GRUMMAN CORPORATION

Property, Plant, and Equipment

During the nine months ended September 30, 2022, the company acquired $ 46 million of internal use software through long-term financing directly with the supplier.

During the three months ended March 31, 2022, the company received lease incentives for landlord funded leasehold improvements of $ 35 million related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities.

During the three months ended March 31, 2022, the company acquired $ 46 million of internal use software through long-term financing directly with the supplier.

The software was recorded in PP&E as a non-cash investing activity and the related liability was recorded in long-term debt as a non-cash financing activity.

During the nine months ended September 30, 2022, the company received lease incentives for landlord funded leasehold improvements of $ 96 million related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities.

Non-cash investing activities also include capital expenditures incurred but not yet paid of $ 118 million and $ 105 million as of September 30, 2022 and 2021, respectively.

In the fourth quarter of 2020, the company completed a sale of equipment to a customer on a restricted Aeronautics Systems program.

During the nine months ended September 30, 2022 and 2021, the company received cash payments of $ 100 million and $ 84 million, respectively, related to the equipment sale and included it in Proceeds from sale of equipment to a customer in the unaudited condensed consolidated statement of cash flows.

Non-cash investing activities also include capital expenditures incurred but not yet paid of $ 43 million and $ 56 million as of March 31, 2023 and 2022, respectively.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of tax, are as follows:

$ in millions September 30, 2022 December 31, 2021

Unamortized prior service credit $ 1 $ 2

Cumulative translation adjustment and other, net ( 167 ) ( 145 )

$ in millions March 31, 2023 December 31, 2022

Cumulative translation adjustment $ ( 159 ) $ ( 161 )

Other, net 8 8

Total accumulated other comprehensive loss $ ( 151 ) $ ( 153 )

2 unchanged sentences

Accounting Standards Updates

Accounting standards updates adopted and/or issued, but not effective until after September 30, 2022, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.

Accounting standards updates adopted and/or issued, but not effective until after March 31, 2023, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.

EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK

1 unchanged sentence

We calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of common stock outstanding during each period.

NORTHROP GRUMMAN CORPORATION

Diluted Earnings Per Share

Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans.

The dilutive effect of these securities totaled 0.7 million shares and 0.6 million shares for the three and nine months ended September 30, 2022, respectively.

The dilutive effect of these securities totaled 0.6 million shares and 0.5 million shares for the three and nine months ended September 30, 2021, respectively.

The dilutive effect of these securities totaled 0.6 million shares for each of the three month periods ended March 31, 2023 and 2022.

Share Repurchases

On December 4, 2018, the company’s board of directors authorized a share repurchase program of up to $ 3.0 billion of the company’s common stock (the “2018 Repurchase Program”).

Repurchases under the 2018 Repurchase Program commenced in March 2020 and were completed in October 2021.

On January 25, 2021, the company’s board of directors authorized a share repurchase program of up to an additional $ 3.0 billion in share repurchases of the company’s common stock (the “2021 Repurchase Program”).

Repurchases under the 2021 Repurchase Program commenced in October 2021 upon the completion of the 2018 Repurchase Program.

As of September 30, 2022, repurchases under the 2021 Repurchase Program totaled $ 1.9 billion;

$ 1.1 billion remained under this share repurchase authorization.

On January 25, 2021, the company’s board of directors authorized a share repurchase program of up to $ 3.0 billion of the company’s common stock (the “2021 Repurchase Program”).

Repurchases under the 2021 Repurchase Program commenced in October 2021.

As of March 31, 2023, $ 10 million remained under this share repurchase authorization.

By its terms, the 2021 Repurchase Program is set to expire when we have used all authorized funds for repurchases.

NORTHROP GRUMMAN CORPORATION

On January 24, 2022, the company’s board of directors authorized a new share repurchase program of up to an additional $ 2.0 billion in share repurchases of the company’s common stock (the “2022 Repurchase Program”).

By its terms, repurchases under the 2022 Repurchase Program will commence upon completion of the 2021 Repurchase Program and will expire when we have used all authorized funds for repurchases.

As of September 30, 2022, there have been no repurchases under the 2022 Repurchase Program and the company’s total outstanding share repurchase authorization was $ 3.1 billion.

During the first quarter of 2021, the company entered into an accelerated share repurchase (ASR) agreement with Goldman Sachs & Co.

LLC (Goldman Sachs) to repurchase $ 2.0 billion of the company’s common stock as part of the 2018 Repurchase Program.

Under the agreement, we made a payment of $ 2.0 billion to Goldman Sachs and received an initial delivery of 5.9 million shares valued at $ 1.7 billion that were immediately canceled by the company.

The remaining balance of $ 300 million was settled on June 1, 2021 with a final delivery of 0.2 million shares from Goldman Sachs.

The final average purchase price was $ 327.29 per share.

During the fourth quarter of 2021, the company entered into an ASR agreement with Goldman Sachs to repurchase $ 500 million of the company’s common stock as part of the 2021 Repurchase Program.

Under the agreement, we made a payment of $ 500 million to Goldman Sachs and received an initial delivery of 1.2 million shares valued at $ 425 million that were immediately canceled by the company.

The remaining balance of $ 75 million was settled on February 1, 2022 with a final delivery of 0.1 million shares from Goldman Sachs.

The final average purchase price was $ 374.79 per share.

As of March 31, 2023, there have been no repurchases under the 2022 Repurchase Program, and the company’s total outstanding share repurchase authorization was $ 2.0 billion.

During the first quarter of 2023, the company entered into an accelerated share repurchase (ASR) agreement with Bank of America, N.A.

(Bank of America) to repurchase $ 500 million of the company’s common stock as part of the 2021 and 2022 Repurchase Programs.

Under the agreement, we made a payment of $ 500 million to Bank of America and received an initial delivery of 0.9 million shares valued at $ 400 million that were immediately canceled by the company.

The remaining balance of $ 100 million is included as a reduction to Retained earnings on the unaudited condensed consolidated statement of financial position.

The final number of shares to be repurchased will be based on the company's daily volume-weighted average share price during the term of the agreement, less a discount.

The ASR is expected to be completed in the second quarter of 2023.

Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the open market or in privately negotiated transactions.

The company retires its common stock upon repurchase and, in the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.

During the nine months ended September 30, 2022, the company repurchased $ 1.0 billion of its outstanding shares.

The table below summarizes the company’s share repurchases to date under the authorizations described above:

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Per Share (1)

Date Completed Nine Months Ended September 30

December 4, 2018 $ 3,000 8.9 $ 337.18 October 2021 — 8.1

Date Completed Three Months Ended March 31

January 25, 2021 $ 3,000 6.9 430.92 1.4 0.9

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In May 2022, the company increased the quarterly common stock dividend 10 percent to $ 1.73 per share from the previous amount of 1.57 per share.

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2023 2022

1 unchanged sentence

Effective income tax rate 15.6 % 16.5 %

Current Quarter

The third quarter 2022 effective tax rate (ETR) decreased to 16.1 percent from 16.6 percent in the prior year period.

The company’s third quarter 2022 ETR includes benefits of $ 42 million for research credits and $ 16 million for foreign derived intangible income (FDII).

The company’s third quarter 2021 ETR included benefits of $ 43 million for research credits and $ 12 million for FDII.

The year to date 2022 ETR decreased to 16.8 percent from 23.2 percent in the prior year period.

The company’s year to date 2022 ETR includes benefits of $ 124 million for research credits and $ 46 million for FDII.

The company’s

The first quarter 2023 effective tax rate (ETR) decreased to 15.6 percent from 16.5 percent principally due to higher current year ETR benefits associated with research credits and FDII deductions as well as favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax benefits.

The company’s first quarter 2023 ETR includes benefits of $ 40 million for research credits and $ 15 million for foreign

NORTHROP GRUMMAN CORPORATION

year to date 2021 ETR included benefits of $ 142 million for research credits and $ 32 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 a change 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.

Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were $ 627 million as of September 30, 2022 and $ 571 million as of December 31, 2021.

derived intangible income (FDII).

The company’s first quarter 2022 ETR included benefits of $ 41 million for research credits and $ 15 million for FDII.

Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were $ 274 million as of March 31, 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, 2022, we have approximately $ 1.7 billion in unrecognized tax benefits, including $ 449 million related to our position on IRC Section 451(b).

As of March 31, 2023, we have approximately $ 1.7 billion in unrecognized tax benefits, including $ 572 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 $ 657 million and $ 590 million as of September 30, 2022 and December 31, 2021, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.

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 unaudited condensed consolidated statements of financial position, were $ 769 million and $ 728 million as of March 31, 2023 and December 31, 2022, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.

We file income tax returns in the U.S.

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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.

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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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A portion of these securities are held in common/collective trust funds and are measured at fair value using net asset value (NAV) per share as a practical expedient;

and therefore are not required to be categorized in the fair value hierarchy table below.

therefore, they are not required to be categorized in the fair value hierarchy table below.

Marketable securities are included in Other non-current assets in the unaudited condensed consolidated statements of financial position.

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The following table presents the financial assets and liabilities the company records at fair value on a recurring basis identified by the level of inputs used to determine fair value:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

$ in millions Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

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Derivatives — 5 — 5 — 7 — 7

The notional value of the company’s foreign currency forward contracts at September 30, 2022 and December 31, 2021 was $ 128 million and $ 120 million, respectively.

At September 30, 2022 and December 31, 2021, no portion of the notional value was designated as a cash flow hedge.

The notional value of the company’s foreign currency forward contracts at March 31, 2023 and December 31, 2022 was $ 237 million and $ 221 million, respectively.

The portion of notional value designated as a cash flow hedge at March 31, 2023 and December 31, 2022 was $ 88 million and $ 87 million, respectively.

The derivative fair values and related unrealized gains/losses at March 31, 2023 and December 31, 2022 were not material.

NORTHROP GRUMMAN CORPORATION

The derivative fair values and related unrealized gains/losses at September 30, 2022 and December 31, 2021 were not material.

There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the nine months ended September 30, 2022.

There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the three months ended March 31, 2023.

The carrying value of cash and cash equivalents and commercial paper approximates fair value.

Long-term Debt

The estimated fair value of long-term debt was $ 11.9 billion and $ 15.1 billion as of September 30, 2022 and December 31, 2021, respectively.

The estimated fair value of long-term debt was $ 14.4 billion and $ 12.1 billion as of March 31, 2023 and December 31, 2022, respectively.

We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements.

The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.

On September 2, 2021, the company completed an exchange offer to eligible holders of the outstanding notes of our direct wholly owned subsidiary, Northrop Grumman Systems Corporation (“NGSC”) maturing through 2036.

An aggregate principal amount of $ 422 million of the NGSC notes was exchanged for $ 422 million of unregistered Northrop Grumman Corporation notes (the “Unregistered Notes”) with the same interest rates and maturity dates as the NGSC notes exchanged.

Because the debt instruments are not substantially different, the exchange was treated as a debt modification for accounting purposes with no gain or loss recognized.

On June 15, 2022, the company completed a registered exchange offer pursuant to which the company exchanged an aggregate principal amount of $ 414 million of the Unregistered Notes for $ 414 million of new notes registered under the Securities Act of 1933, as amended, (the “Registered Notes”) with the same interest rates and maturity dates as the Unregistered Notes.

Because the debt instruments were not substantially different in either of the exchange offers, both exchanges were treated as debt modifications for accounting purposes with no gain or loss recognized.

Repayments of Senior Notes

In March 2021, the company repaid $ 700 million of 3.50 percent unsecured notes upon maturity.

In March 2021, the company redeemed $ 1.5 billion of 2.55 percent unsecured notes due October 2022.

The company recorded a pre-tax charge of $ 54 million principally related to the premium paid on the redemption, which was recorded in Other, net in the unaudited condensed consolidated statements of earnings and comprehensive income.

NORTHROP GRUMMAN CORPORATION

Unsecured Senior Notes

In February 2023, the company issued $ 2.0 billion of unsecured senior notes for general corporate purposes, which may include debt repayment (including our 3.25% senior notes due in 2023), share repurchases, and working capital, as follows:

• $ 1.0 billion of 4.70 % senior notes due 2033 (the “2033 Notes”) and

• $ 1.0 billion of 4.95 % senior notes due 2053 (the “2053 Notes”).

We refer to the 2033 Notes and the 2053 Notes, together, as the “notes.” Interest on the notes is payable semi-annually in arrears.

The notes are generally subject to redemption, in whole or in part, at the company’s discretion at any time, or from time to time, prior to maturity at a redemption price equal to the greater of 100% of the principal amount of the notes to be redeemed or an applicable “make-whole” amount, plus accrued and unpaid interest.

INVESTIGATIONS, CLAIMS AND LITIGATION

On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp.

United States , in the U.S.

Court of Federal Claims.

This lawsuit relates to an approximately $ 875 million firm fixed-price contract awarded to the company in 2007 by the U.S.

Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program.

The FSS were delivered.

The company’s lawsuit seeks approximately $ 63 million for unpaid portions of the contract price, and approximately $ 115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract.

The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $ 410 million, less certain amounts outstanding under the contract.

In the course of the litigation, the United States subsequently amended its counterclaim, reducing it to seek approximately $ 193 million.

The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected.

On February 3, 2020, after extensive discovery and motions practice, the parties commenced what was expected to be a seven-week trial.

After COVID-19-related interruptions, trial concluded on March 5, 2021.

On October 12, 2021, the parties completed post-trial briefing, and on December 8, 2021 the court held a post-trial oral argument.

On June 27, 2022, the judge issued a decision concluding that the company was entitled to approximately $ 63 million for unpaid portions of the contract price and $ 5 million in additional damages, as well as interest, which the company estimated was approximately $ 16 million (as of September 30, 2022) and such additional interest as may accrue until the date the government makes payment.

The judge also concluded that the government was entitled to approximately $ 1 million in off-setting damages.

On July 18, 2022, the government filed a motion for reconsideration, arguing that the government is entitled to further damages of approximately $ 57 million for particular periods of delay.

On October 17, 2022, the court denied the government’s motion for reconsideration, making clear the government was not entitled to any such damages for delay.

The court also determined that the past interest due to the company amounted to approximately $ 16 million.

On October 19, 2022, the court entered judgment in the company’s favor in the amount of approximately $ 83 million, plus a currently estimated approximately $ 7 thousand of additional interest to accrue per day until the date the government makes payment.

The parties have until December 19, 2022 to file an appeal.

The company is engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York.

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In December 2019, the State of New York issued an Amended Record of Decision seeking to impose additional remedial requirements beyond measures the company previously had been taking.

the State also communicated that it was assessing potential natural resource damages.

In December 2020, the parties reached a tentative agreement regarding the steps the company would take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages.

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We have also reached agreements with the Department of Defense and the Bethpage and South Farmingdale Water Districts to resolve claims involving these parties.

On May 24, 2022, the court approved the agreement with the Bethpage Water District, and on August 2, 2022, the court approved the agreement with the Department of Defense.

The agreement with the South Farmingdale Water District does not require court approval.

Those agreements have also been approved by the courts as necessary.

The company continues to be involved in related disputes with the Towns of Oyster Bay and Hempstead.

We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to the legacy Bethpage environmental conditions.

It is also possible that applicable remediation standards and other requirements to which we are subject may continue to change, and our costs may increase materially.

It is also possible that applicable remediation standards and other requirements to which we are subject may continue to change, and that our costs may increase materially.

In addition to disputes and legal proceedings related to environmental conditions and remediation at the site, we are a party to various individual lawsuits and a putative class action alleging personal injury and property damage in the Eastern District of New York.

The filed individual lawsuits have been stayed, pending a court decision on class certification.

We are also a party, and may become a party, to other lawsuits brought by insurance carriers and other parties.

We are also a party, and may become a party, to other lawsuits brought by or against insurance carriers, and by other individual plaintiffs and/or putative classes, as well as other parties.

We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these Bethpage lawsuits.

In June 2018, the FTC issued a Decision and Order enabling the company’s acquisition of OATK to proceed and providing generally for the company to continue to make solid rocket motors available to competing missile primes

NORTHROP GRUMMAN CORPORATION

on a non-discriminatory basis.

The company has taken and continues to take robust actions to help ensure compliance with the terms of the Order.

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In late 2021, the company resumed discussions with staff at the FTC regarding our response and their views on compliance issues.

Most recently, the company received and will be responding to a follow-on CID.

We cannot predict the outcome of those discussions, but we do not believe they are likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2022, or its annual results of operations and/or cash flows.

More recently, the company received and is

NORTHROP GRUMMAN CORPORATION

responding to a follow-on CID.

We cannot predict the outcome of those discussions, but we do not believe they are likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, 2023, or its annual results of operations and/or cash flows.

We believe the company has been and continues to be in compliance with the Order.

The company received from the U.S.

Department of Justice (DOJ) a criminal subpoena on December 9, 2022, and a civil investigative demand on February 2, 2023, both seeking information regarding financial and cost accounting and controls that appears focused on the interest rate assumptions the company used to determine our CAS pension expense, which we have previously discussed in Note 6 below.

The company is engaging with the government and responding to the requests.

We cannot at this point predict the outcome of this matter.

The company is a party to various other investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business.

The nature of legal proceedings is such that we cannot assure the outcome of any particular matter.

However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2022, or its annual results of operations and/or cash flows.

However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, 2023, or its annual results of operations and/or cash flows.

COMMITMENTS AND CONTINGENCIES

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Such provisions are reviewed periodically using the most recent information available.

The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of September 30, 2022, or its annual results of operations and/or cash flows.

government has raised questions about an interest rate assumption used by the company to determine our CAS pension expense.

On June 1, 2020, the government provided written notice that the assumptions the company used during the period 2013-2019 were potentially noncompliant with CAS.

We submitted a formal response on July 31, 2020, which we believe demonstrates the appropriateness of the assumptions used.

On November 24, 2020, the government replied to the company’s response, disagreeing with our position and requesting additional input, which we provided on February 22, 2021.

We continue to exchange correspondence and engage with the government on this matter, including responding to requests for and providing additional information.

The sensitivity to changes in interest rate assumptions makes it reasonably possible the outcome of this matter could have a material adverse effect on our financial position, results of operations and/or cash flows, although we are not currently able to estimate a range of any potential loss.

The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of March 31, 2023, or its annual results of operations and/or cash flows.

In 2019, the Defense Contract Management Agency (DCMA) raised questions about an interest rate assumption used by the company to determine our CAS pension expense.

On June 1, 2020, DCMA provided written notice that the assumptions the company used during the period 2013-2019 were potentially noncompliant with CAS.

We submitted a formal response on July 31, 2020, which we believed demonstrates the appropriateness of the assumptions used.

On November 24, 2020, DCMA replied to the company’s response, disagreeing with our position and requesting additional input, which we provided on February 22, 2021.

We have continued to exchange correspondence and engage with DCMA and DoD on this matter, including responding to requests for and providing additional information.

As noted in Note 5 above, the company received from the the U.S.

Department of Justice (DOJ) a criminal subpoena on December 9, 2022 and a civil investigative demand on February 2, 2023, both seeking information that appears related to the interest rate assumptions at issue in our discussions with DCMA.

The company is engaging with the government and responding to the requests.

We cannot at this point predict the outcome of this matter.

The company is also continuing to engage with DCMA/DoD.

As previously described, the sensitivity to changes in interest rate assumptions makes it reasonably possible the outcome of the DCMA matter could have a material adverse effect on our financial position, results of operations and/or cash flows, although we are not currently able to estimate a range of any potential loss.

B-21 Low-Rate Initial Production Options

In 2015, the U.S.

Air Force awarded to Northrop Grumman the B-21 contract, including a base contract for engineering, manufacturing, and design (EMD) and five low-rate initial production (LRIP) options.

The EMD phase of the program is largely cost type and began at contract award.

The LRIP options are largely fixed price and are expected to be awarded and executed over the next decade.

In the first quarter of 2023, we reviewed our estimated cost to complete the LRIP phase of the B-21 program.

Principally due to the company’s estimate of the impact macroeconomic factors may have on our cost to complete the LRIP options, as well as ongoing discussions with our suppliers and our customer, we continue to believe it is reasonably possible one or more of the LRIP options could be performed at a loss and the range of such loss across the five LRIP options is between $ 0 and $ 1.2 billion.

NORTHROP GRUMMAN CORPORATION

do not currently believe a loss is probable on any of the LRIP options, we have not recognized any such loss in our financial results for the period ended March 31, 2023.

Environmental Matters

The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S.

government contracts as of September 30, 2022 and December 31, 2021:

government contracts as of March 31, 2023 and December 31, 2022:

$ in millions Accrued Costs (1)(2)

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Deferred Costs (3)

September 30, 2022 $ 584 $ 357 $ 503

March 31, 2023 $ 570 $ 357 $ 498

December 31, 2022 565 353 486

(1) As of September 30, 2022, $ 200 million is recorded in Other current liabilities and $ 384 million is recorded in Other non-current liabilities.

(1) As of March 31, 2023, $ 200 million is recorded in Other current liabilities and $ 370 million is recorded in Other non-current liabilities.

(2) Estimated remediation costs are not discounted to present value.

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government contracts.

(3) As of September 30, 2022, $ 178 million is deferred in Prepaid expenses and other current assets and $ 325 million is deferred in Other non-current assets.

(3) As of March 31, 2023, $ 181 million is deferred in Prepaid expenses and other current assets and $ 317 million is deferred in Other non-current assets.

These amounts are evaluated for recoverability on a routine basis.

Although management cannot predict whether (i) new information gained as our environmental remediation projects progress, (ii) changes in remediation standards or other requirements to which we are subject, or (iii) other changes in facts and circumstances will materially affect the estimated liability accrued, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2022, or its annual results of operations and/or cash flows.

Although management cannot predict whether (i) new information gained as our environmental remediation projects progress, (ii) changes in remediation standards or other requirements to which we are subject, or (iii) other changes in facts and circumstances will materially affect the estimated liability accrued, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, 2023, or its annual results of operations and/or cash flows.

Financial Arrangements

In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations.

At September 30, 2022, there were $ 393 million of stand-by letters of credit and guarantees and $ 78 million of surety bonds outstanding.

At March 31, 2023, there were $ 367 million of stand-by letters of credit and guarantees and $ 79 million of surety bonds outstanding.

Commercial Paper

The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to $ 2.5 billion.

At September 30, 2022, there were no commercial paper borrowings outstanding.

At March 31, 2023, there were no commercial paper borrowings outstanding.

Credit Facilities

In August 2022, the company entered into a new five-year senior unsecured revolving credit facility in an aggregate principal amount of $ 2.5 billion (the “2022 Credit Agreement”).

The 2022 Credit Agreement replaced the company’s prior five-year, $ 2.0 billion revolving credit facility entered into on August 17, 2018 and as amended on October 17, 2019.

The revolving credit facility established under the 2022 Credit Agreement is intended to support the company’s commercial paper program and other general corporate purposes.

The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of $ 2.5 billion (the “2022 Credit Agreement”) that matures in August 2027 and is intended to support the company's commercial paper program and other general corporate purposes.

Commercial paper borrowings reduce the amount available for borrowing under the 2022 Credit Agreement.

At September 30, 2022, there were no borrowings outstanding under this facility.

At March 31, 2023, there were no borrowings outstanding under this facility.

The 2022 Credit Agreement contains generally customary terms and conditions, including covenants restricting the company’s ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other fundamental changes and incur liens.

The company also cannot permit the ratio of its debt to capitalization (as set forth in the credit agreement) to exceed 65 percent.

At September 30, 2022, the company was in compliance with all covenants under its credit agreements.

At March 31, 2023, the company was in compliance with all covenants under its credit agreements.

NORTHROP GRUMMAN CORPORATION

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The cost to the company of its pension and other postretirement benefit (OPB) plans is shown in the following table:

Three Months Ended September 30 Nine Months Ended September 30

Benefits OPB Pension

Three Months Ended March 31

$ in millions 2023 2022 2023 2022

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Expected return on plan assets ( 524 ) ( 660 ) ( 21 ) ( 28 )

Amortization of prior service (credit) cost — ( 3 ) — — — ( 7 ) ( 1 ) ( 1 )

Net periodic benefit cost (benefit) $ ( 73 ) $ ( 284 ) $ ( 3 ) $ ( 14 )

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Contributions made by the company to its retirement plans are as follows:

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2023 2022

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The following table presents the number of restricted stock rights (RSRs) and restricted performance stock rights (RPSRs) granted to employees under the company’s long-term incentive stock plan and the grant date aggregate fair value of those stock awards for the periods presented:

Nine Months Ended September 30

Three Months Ended March 31

in millions 2023 2022

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RSRs typically vest on the third anniversary of the grant date, while RPSRs generally vest and pay out based on the achievement of certain performance metrics over a three-year period.

NORTHROP GRUMMAN CORPORATION

The following table presents the minimum and maximum aggregate payout amounts related to cash units (CUs) and cash performance units (CPUs) granted to employees in the periods presented:

Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2023 2022

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CUs typically vest and settle in cash on the third anniversary of the grant date, while CPUs generally vest and pay out in cash based on the achievement of certain performance metrics over a three-year period.

NORTHROP GRUMMAN CORPORATION

SEGMENT INFORMATION

The following table presents sales and operating income by segment:

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2023 2022

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FAS/CAS operating adjustment ( 21 ) ( 46 )

Unallocated corporate (expense) income ( 108 ) ( 53 ) ( 270 ) 1,564

Unallocated corporate expense ( 34 ) ( 94 )

Total operating income $ 947 $ 897

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The FAS/CAS operating adjustment reflects the difference between CAS pension expense included as cost in segment operating income and the service cost component of FAS expense included in total operating income.

Unallocated Corporate (Expense) Income

Unallocated corporate (expense) income includes the portion of corporate costs not considered allowable or allocable under the applicable FAR and CAS requirements, and therefore not allocated to the segments, such as changes in deferred state income taxes and a portion of management and administration, legal, environmental, compensation, retiree benefits, advertising and other corporate unallowable costs.

Unallocated corporate (expense) income also includes costs not considered part of management’s evaluation of segment operating performance, such as amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business combinations, as well as certain compensation and other costs.

Unallocated Corporate Expense

Unallocated corporate expense includes the portion of corporate costs not considered allowable or allocable under the applicable FAR and CAS requirements, and therefore not allocated to the segments, such as changes in deferred state income taxes and a portion of management and administration, legal, environmental, compensation, retiree benefits, advertising and other corporate unallowable costs.

Unallocated corporate expense also includes costs not considered part of management’s evaluation of segment operating performance, such as amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business combinations, as well as certain compensation and other costs.

NORTHROP GRUMMAN CORPORATION

During the first quarter of 2021, the $ 2.0 billion pre-tax gain on the sale of our IT services business and $ 192 million of unallowable state taxes and transaction costs associated with the divestiture were recorded in Unallocated corporate (expense) income.

Disaggregation of Revenue

Sales by Customer Type Three Months Ended September 30 Nine Months Ended September 30

2022 2021 2022 2021

Sales by Customer Type Three Months Ended March 31

$ in millions $ % (3)

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NORTHROP GRUMMAN CORPORATION

Sales by Contract Type Three Months Ended September 30 Nine Months Ended September 30

2022 2021 2022 2021

Sales by Contract Type Three Months Ended March 31

$ in millions $ % (1)

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NORTHROP GRUMMAN CORPORATION

Sales by Geographic Region Three Months Ended September 30 Nine Months Ended September 30

2022 2021 2022 2021

Sales by Geographic Region Three Months Ended March 31

$ in millions $ % (2)

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All other (1)

3 — % 3 — % 10 — % 6 — %

Intersegment sales 32 31

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(2) Percentages calculated based on external customer sales.

SUBSEQUENT EVENT

In April 2023, the company reached an agreement to sell its minority investment in an international business.

The transaction, which is subject to final government approvals and closing conditions, is expected to be completed later this year.

We currently expect to recognize a pre-tax gain of approximately $ 100 million when the transaction closes.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of September 30, 2022, and the related condensed consolidated statements of earnings and comprehensive income and changes in shareholders’ equity for the three-month and nine-month periods ended September 30, 2022 and 2021, and of cash flows for the nine-month periods ended September 30, 2022 and 2021, and the related notes (collectively referred to as the “interim financial information”).

We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of March 31, 2023, and the related condensed consolidated statements of earnings and comprehensive income, cash flows, and changes in shareholders’ equity for the three-month periods ended March 31, 2023 and 2022, and the related notes (collectively referred to as the “interim financial information”).

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

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McLean, Virginia

October 26, 2022

April 26, 2023

NORTHROP GRUMMAN CORPORATION

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements