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Item 2. Management’s Discussion and Analysis

2023-04-27 compared with 2022-10-27 · 192 added, 311 removed, 202 unchanged (71% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global aerospace and defense company.

Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global aerospace and defense technology company.

We deliver a broad range of products, services and solutions to United States (U.S.) and international customers, and principally to the U.S Department of Defense (DoD) and intelligence community.

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With the investments we've made in advanced technologies, combined with our talented workforce and digital transformation capabilities, Northrop Grumman is well positioned to meet our customers' needs today and in the future.

The following discussion should be read along with the financial statements included in this Form 10-Q, as well as our 2021 Annual Report on Form 10-K, which provides additional information on our business and the environment in which we operate and our operating results.

Disposition of IT and Mission Support Services Business

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 of $2.0 billion.

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

select cyber, intelligence and missions support programs, which were part of the former 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.

In March 2020, the World Health Organization characterized COVID-19 as a global pandemic, and the President declared a national emergency concerning the COVID-19 outbreak.

In the more than two years since then, the pandemic (including the first and subsequent variants of COVID-19) has dramatically impacted the global health and economic environments, including millions of confirmed cases and deaths, business slowdowns or shutdowns, labor shortfalls, supply chain challenges, regulatory challenges, inflationary pressures and market volatility.

We discussed in some detail in our Annual Report on Form 10-K for the fiscal years ended December 31, 2020 and 2021, as well as interim Form 10-Qs, the pandemic, its impacts and risks, and actions taken up to the time of each filing.

In this Form 10-Q, we provide a further update.

At a macro level, the number of hospitalizations and deaths, in the U.S.

in particular, have generally eased in 2022, as more people are fully vaccinated, and communities have continued to open up.

While it, of course, remains unclear whether that trajectory will continue, there is reason for optimism.

The company continues to work to monitor and address the pandemic and related developments, including the impact on our company, our employees, our customers, our suppliers and our communities.

Our goals have been, and continue to be, to lessen the potential adverse impacts, both health and economic, and to continue to position the company for long-term success.

Like the communities in which we operate, our actions have varied, and will continue to vary, depending on the spread of COVID-19 and applicable government requirements, and the needs of our stakeholders.

During the third quarter of 2022, COVID-19 case rates and the health and economic impacts of the pandemic continued to fluctuate in different communities in the U.S.

and globally, particularly with the spread of new variants.

However, direct COVID-19-related impacts on our business continued generally to decline, including in the areas of employee absenteeism and leave-taking.

While we cannot predict the future course of the pandemic, we are not currently assuming significant additional direct COVID-19-related impacts on our 2022 financial results.

During the third quarter of 2022, we continued to see a prolonged impact on the economy, our industry, and our company, with ongoing labor challenges, supply chain disruption, and inflation, among other impacts.

Although we are working actively to address and mitigate these impacts, the broader macroeconomic environment, including, in particular, inflationary pressures and extended material lead times, continued adversely to affect the company’s third quarter results (including sales, net earnings and cash).

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For further information on the pandemic and the potential impact to the company of COVID-19, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources” below and “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K.

Global Security and Economic Environment

and its allies continue to face a global security environment of heightened tensions and instability, threats from state and non-state actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional security concerns and political instability.

The conflict in Ukraine has increased those tensions and instability, highlighted threats and increased demand, as well as further disrupted global supply chains and added costs.

The following discussion should be read along with the financial statements included in this Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Liquidity and Capital Resources,” “Quantitative and Qualitative Disclosures About Market Risks” and “Risk Factors” in our 2022 Annual Report on Form 10-K, which provides additional information on our business, the environment in which we operate and our operating results.

Global Security Environment

and its allies continue to face a global security environment of heightened tensions and instability, threats from state and non-state actors, including in particular major global powers, as well as terrorist organizations, increasing nuclear tensions, diverse regional security concerns and political instability.

The market for defense products, services and solutions globally is driven by these complex and evolving security challenges, considered in the broader context of political and socioeconomic circumstances and priorities.

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The same is true for our suppliers and other business partners.

We continue to experience an increased demand for certain of our goods and services directly related to the conflict in the Ukraine, in particular, but we have not seen a significant increase in those demands to date.

We also continue to experience modest disruption to some of our programs and supply chain, including unanticipated cost growth, as a result of the conflict, particularly with respect to our Commercial Resupply Services contract.

But we do not have sizable business dealings in Russia or Ukraine, and do not anticipate significant adverse impacts.

We are actively monitoring the situation and exploring both opportunities and risks, including measures to mitigate the risk of future disruption and costs to our programs.

The global geopolitical and economic environments continue to be impacted by uncertainty and stress, and global inflationary pressures.

Geopolitical relationships have changed and are continuing to change.

Global inflationary pressures are increasing costs, including for various commodities and supplier products.

Global economic growth is expected to remain in the low single digits in 2022, reflecting, among other things, the continued impact of and uncertainty surrounding geopolitical tensions globally, financial market volatility, inflation and the COVID-19 pandemic.

We expect still further impacts related to the conflict in Ukraine and economic sanctions imposed on Russia.

The global economy may also be affected by the residual legal, regulatory and economic impacts of Britain’s exit from the European Union.

Increased interest rates, raising the cost of borrowing for the government, could impact government spending priorities (in the U.S.

The conflict in Ukraine has increased global tensions and instability, highlighted threats and increased global demand, as well as further disrupted global supply chains and added costs.

We have experienced a modest increase in demand for certain of our goods and services directly and indirectly related to the conflict in the Ukraine.

We also have experienced a slight disruption to some of our programs and supply chain, including unanticipated cost growth, as a result of the conflict in Ukraine and economic sanctions.

However, we do not have sizable business dealings in Russia or Ukraine, and do not anticipate significant adverse impacts directly from the ongoing conflict.

More broadly, the conflict in Ukraine and threats elsewhere have heightened tensions and highlighted security requirements globally, especially in Europe and the Pacific region, as well as the U.S.

We have started to see, and expect to continue to see, increased demand for defense products and services from allies and partner nations, particularly in those areas.

We are actively exploring both opportunities and risks.

Global Health Environment

Since at least March 2020, when it was first characterized as a global pandemic, COVID-19 has dramatically impacted and continues to impact the global health and economic environments, including millions of confirmed cases and deaths, business slowdowns or shutdowns, labor shortfalls, supply chain challenges, regulatory challenges, inflationary pressures and market volatility.

We discussed in some detail in our Annual Reports on Form 10-K for the fiscal years ended December 31, 2020, 2021, and 2022, and subsequent SEC filings, the pandemic, its impacts and risks, and actions taken up to the time of each filing.

In this Form 10-Q, we provide a further update.

In 2022, direct impacts of the COVID-19 pandemic on our business generally declined, and they have remained limited in the first quarter of 2023.

While we cannot predict the future course of the pandemic or its consequences, we are not currently assuming significant additional direct COVID-19 related impacts on our business.

The company continues to work to monitor and address the pandemic, including its impact on our company, our employees, our customers, our suppliers and our communities.

Our goals have been, and continue to be, to keep our employees safe, to lessen the potential adverse impacts, both health and economic, and to continue to position the company for long-term success.

Like the communities in which we operate, our actions have varied, and will continue to vary, depending on the spread of COVID-19 and other illnesses, applicable government requirements, and the needs of our stakeholders.

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Global Economic Environment

In part as a result of the COVID-19 pandemic, the global economic environment has experienced, and continues to experience, extraordinary challenges, including high rates of inflation and inflationary pressures;

widespread delays and disruptions in supply chains;

workforce challenges, including labor shortages (especially in critical skill areas);

and market volatility.

These macroeconomic factors have contributed, and we expect will continue to contribute, to increased costs, delays and other performance challenges, as well as increased competing demands for limited resources to address such increased costs and other challenges, for our company, our suppliers and partners, and our customers.

We continue to work hard to mitigate some of the challenges caused by the current macroeconomic environment on our business, including by taking steps to support our suppliers and small businesses and enhancing our workforce through extensive hiring, development and retention efforts.

However, the broader macroeconomic environment, including inflationary pressures and supply chain challenges, continued adversely to affect the company’s results for the quarter ended March 31, 2023.

We cannot clearly predict how long these macroeconomic challenges will continue, how they will change over time, or what additional resources will be available, but we expect to see this challenging macroeconomic environment continue adversely to impact the global economy, our customers, our industry and our company in 2023.

In addition, increased interest rates, raising the cost of borrowing for governments, could further impact government spending priorities (in the U.S.

and allied countries, in particular), including their demand for defense products.

Economic tensions and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could also impact the global market for defense products, services and solutions.

Political and Economic Environment

On March 15, 2022, the President signed into law the Consolidated Appropriations Act for FY 2022, which provided full-year funding through September 30, including $782 billion for national defense.

This represented nearly $30 billion more than the Administration initially requested for FY 2022, and approximately 6 percent, or $42 billion higher than it was in FY 2021.

The Pentagon’s portion of the overall national defense budget was $743 billion.

In March 2022, Congress also approved $14 billion in emergency aid to support security, economic, and humanitarian assistance for Ukraine and Central European partners.

An additional $40 billion in emergency supplemental appropriations was approved by Congress in May 2022.

Current and future spending in connection with the conflict in Ukraine and other priorities, global inflation, the national debt and the costs of the pandemic, among other things, in the U.S.

and globally, will continue to impact our customers’ budgets and priorities, and our industry.

We expect the government, our customers and our industry will also continue to face challenges from the macroeconomic environment, including a tight labor market and supply chain disruptions.

The Administration’s current budget for FY 2023 proposes $813 billion for national defense programs, and the Pentagon’s portion of the overall requested defense budget is $773 billion.

On September 30, 2022, Congress enacted a continuing resolution (CR) to carry forward FY 2022 funding levels into FY 2023 while negotiations continue regarding full-year appropriations.

The CR also included an additional $12 billion in aid to Ukraine, bringing total appropriations for Ukraine assistance to $39 billion.

The CR runs through December 16, 2022, and generally limits U.S.

government spending to FY 2022 levels, which for DOD is around 4 percent lower than the amount requested for FY 2023.

Economic tensions and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could also further impact the global market for defense products, services and solutions.

Political, Budget and Regulatory Environment

On December 23, 2022, the President signed the National Defense Authorization Act (NDAA) for FY 2023, which supports approximately $858 billion in FY 2023 funding for national defense, $817 billion of which is for the DoD.

In addition, the FY 2023 NDAA grants DoD discretionary authority under limited circumstances to provide extraordinary relief to contractors to address certain inflationary impacts, although the DoD has not yet exercised this authority.

On December 29, 2022, the President signed an Omnibus appropriations act for FY 2023 that provided $858 billion for national defense programs, approximately $45 billion more than the Administration initially requested for FY 2023 and approximately $76 billion or 10 percent higher than what was appropriated in FY 2022.

The Pentagon’s portion of the overall national defense budget for FY 2023 is $817 billion.

It includes up to $1 billion for extraordinary relief in FY 2023.

On March 9, 2023, the President proposed his budget for FY 2024 with $886 billion for national defense programs, which included $842 billion for the DoD, an increase of 3 percent, or $25 billion, above the FY 2023 enacted levels.

The request does not include supplemental defense spending associated with the conflict in Ukraine.

In addition to the U.S.

national security budget detailed above, the U.S.

has pledged over $100 billion in security assistance to address the ongoing conflict in Ukraine across FY 2022 and FY 2023, including approximately $50 billion in DoD spending.

Assistance includes transfers of weapons systems from U.S.

inventories, orders for production of additional weapons systems, both to backfill U.S.

stockpiles and for Ukraine directly, and assistance from U.S.

capabilities.

It is difficult to predict the specific course of future defense budgets.

However, we believe the ongoing conflict in Ukraine, as well as actions in the Pacific region, have highlighted some of the national security threats to our nation

Current and future requirements related to the conflict in Ukraine, threats in the Pacific regions and other security priorities, as well as global inflation, the national debt, the costs of the pandemic and other domestic priorities, among other things, in the U.S.

and globally, will continue to impact our customers’ budgets, spending and priorities, and our industry.

Current tensions within Congress and the wider U.S.

political environment may also impact defense budgets, issues related to the national debt, and government spending more broadly.

We believe the current global security environment highlights the significant national security threats to our nation and our allies, and the need for strong deterrence and a robust defense capability.

We believe our capabilities, particularly in space, C4ISR, missile defense, battle management, advanced weapons, survivable aircraft and mission systems should help our customers in the U.S.

and globally defend against current and future threats and, as a result, continue to allow for long-term profitable business growth.

In January 2023, the statutory debt ceiling was reached, and the Treasury Department reported that it began taking “extraordinary measures” to finance the government and avoid a breach of the debt ceiling.

Issues related to the debt

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and our allies, and the need for strong deterrence and a robust defense capability, as well as impacting our political and economic environment.

More generally, the threat to U.S.

national security remains very substantial and we believe that our capabilities, particularly in space, C4ISR, missile defense, battle management, hypersonics, counter-hypersonics, survivable aircraft and mission systems should help our customers defend against current and future threats and, as a result, continue to allow for long-term profitable business growth.

The Bipartisan Budget Act of 2019 suspended the debt ceiling through July 31, 2021.

In October 2021, the statutory debt limit was increased by $480 billion and, in December 2021, was further increased by $2.5 trillion, which is currently expected to allow the Treasury Department to finance the government into 2023.

During the third quarter of 2022, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022, which includes an advanced manufacturing investment tax credit, among other provisions, and the Inflation Reduction Act of 2022, which includes implementation of a new alternative minimum tax and and a one percent excise tax on share repurchases, among other provisions, were signed into law.

We expect the excise tax on share repurchases to impact us beginning in 2023;

we are currently evaluating other provisions of the legislation to determine any potentially favorable and/or unfavorable impacts on the company.

The political environment, federal budget and debt ceiling are expected to continue to be the subject of considerable debate, especially in light of the ongoing conflict in Ukraine and the inflationary environment, which could have material impacts on defense spending broadly and the company’s programs in particular.

For further information on the risks we face from the current political and economic environment, see “Risk Factors” in our 2021 Annual Report on Form 10-K.

ceiling continue to be a subject of considerable debate.

If the existing debt ceiling is not raised, we may be required to continue to perform for some period of time on certain of our U.S.

Government contracts even if the U.S.

Government is unable to make timely payments.

An extended debt ceiling breach could negatively affect the availability and timing of funding for our programs, including the timely payment of our billings, and could delay or otherwise impact purchasing decisions and/or program execution by the U.S.

We expect statutory action will be needed in 2023 to increase or suspend the debt ceiling.

More broadly, we have seen, and expect to continue to see, an accelerated pace of new rulemakings, new and expanded uses of existing authorities, changing legal rulings and landscapes, and aggressive enforcement actions.

These changes and the accelerated pace of change, not only impose additional obligations and risk, but also create further uncertainty regarding our operating environment.

The political environment, federal budget, debt ceiling and regulatory environment are expected to continue to be the subject of considerable debate, especially in light of the ongoing conflict in Ukraine and heightened global tensions, the inflationary environment and political tensions.

The results of those debates could have material impacts on defense spending broadly and the company’s programs in particular.

We anticipate that the broader macroeconomic environment, with ongoing inflationary pressures, labor challenges, and supply chain disruption, among other considerations, will continue to play a significant role in the outcome of these debates and, in turn, on our industry and company.

CONSOLIDATED OPERATING RESULTS

For purposes of the operating results discussion below, we assess our performance using certain financial measures that are not calculated in accordance with GAAP.

Organic sales is defined as total sales excluding sales attributable to the company's IT services divestiture.

This measure may be useful to investors and other users of our financial statements as a supplemental measure in evaluating the company’s underlying sales growth as well as in providing an understanding of our ongoing business and future sales trends by presenting the company’s sales before the impact of divestiture activity.

Transaction-adjusted net earnings and transaction-adjusted earnings per share (transaction-adjusted EPS) exclude impacts related to the IT services divestiture, including the gain on sale of the business, associated federal and state income tax expenses, transaction costs, and the make-whole premium for early debt redemption.

They also exclude the impact of mark-to-market pension and OPB (“MTM”) benefit/(expense) and related tax impacts, which are generally only recognized during the fourth quarter.

These non-GAAP measures may be useful to investors and other users of our financial statements as supplemental measures in evaluating the company’s underlying financial performance by presenting the company’s operating results before the non-operational impact of divestiture activity and pension and OPB actuarial gains and losses.

These measures are also consistent with how management views the underlying performance of the business as the impact of the IT services divestiture and MTM accounting are not considered in management’s assessment of the company’s operating performance or in its determination of incentive compensation awards.

We reconcile these non-GAAP financial measures to their most directly comparable GAAP financial measures below.

These non-GAAP measures may not be defined and calculated by other companies in the same manner and should not be considered in isolation or as an alternative to operating results presented in accordance with GAAP.

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Selected financial highlights are presented in the table below:

Three Months Ended September 30 % Nine Months Ended September 30 %

$ in millions, except per share amounts 2022 2021 Change 2022 2021 Change

Three Months Ended March 31 %

$ in millions, except per share amounts 2023 2022 Change

Sales $ 9,301 $ 8,797 6 %

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Operating costs and expenses as a % of sales 89.8 % 89.8 %

Gain on sale of business — — NM — 1,980 NM

Operating income 947 897 6 %

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Diluted earnings per share $ 5.50 $ 6.10 (10) %

The table below reconciles sales to organic sales for the nine months ended September 30, 2022 and 2021.

Sales for the three months ended September 30, 2022 and 2021 were not impacted by the sale of the company's IT services business:

Nine Months Ended September 30

$ in millions Sales IT services sales Organic

sales Sales IT services sales Organic

sales Organic sales % change

Aeronautics Systems $ 7,774 $ — $ 7,774 $ 8,628 $ — $ 8,628 (10) %

Defense Systems 3,922 — 3,922 4,398 (106) 4,292 (9) %

Mission Systems 7,469 — 7,469 7,613 (42) 7,571 (1) %

Space Systems 8,997 — 8,997 7,950 (16) 7,934 13 %

Intersegment eliminations (1,593) — (1,593) (1,561) 2 (1,559)

Total $ 26,569 $ — $ 26,569 $ 27,028 $ (162) $ 26,866 (1) %

Current Quarter

Third quarter 2022 sales increased $251 million, or 3 percent , primarily due to 18 percent growth at Space Systems, partially offset by lower sales at Aeronautics Systems and Defense Systems.

Third quarter 2022 sales reflect strong demand and improving trends in labor availability, partially offset by supply chain delays.

Year to date 2022 sales decreased $459 million, or 2 percent, due, in part, to a $162 million reduction in sales related to the IT services divestiture.

Year to date 2022 organic sales decreased $297 million, or 1 percent, primarily due to lower sales at Aeronautics Systems and Defense Systems, partially offset by 13 percent growth at Space Systems.

First quarter 2023 sales increased $504 million, or 6 percent, due to higher sales at Space Systems, Defense Systems and Mission Systems, partially offset by lower sales at Aeronautics Systems.

First quarter 2023 sales reflect continued strong demand.

See “Segment Operating Results” below for further information by segment and “Product and Service Analysis” for product and service detail.

See Note 9 to the financial statements for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments.

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Operating Income and Margin Rate

Current Quarter

Third quarter 2022 operating income decreased $199 million, or 19 percent, primarily due to a $116 million reduction in the FAS/CAS operating adjustment and $55 million in higher unallocated corporate expense due to a $60 million benefit for insurance settlements recognized in the prior year.

Third quarter 2022 operating margin rate declined to 9.4 percent primarily due to the lower FAS/CAS operating adjustment and higher unallocated corporate expense, as well as a lower segment operating margin rate.

Third quarter 2022 general and administrative (G&A) costs as a percentage of sales increased to 10.9 percent from 10.2 percent in the prior year period primarily due to an increase in investments for future business opportunities.

Year to date 2022 operating income decreased $2.2 billion, or 45 percent, primarily due to a $2.0 billion pre-tax gain on sale and $192 million of unallocated corporate expenses recognized in the prior year associated with the IT services divestiture.

Operating income also decreased due to a $250 million reduction in the FAS/CAS operating adjustment and $130 million of lower segment operating income.

Year to date 2022 operating margin rate declined to 10.1 percent, largely due to the prior year gain on sale of the IT services business and the lower FAS/CAS operating adjustment.

Year to date 2022 G&A costs as a percentage of sales increased to 11.1 percent from 10.3 percent in the prior year period primarily due to an increase in investments for future business opportunities.

First quarter 2023 operating income increased $50 million, or 6 percent, due to lower unallocated corporate expense and a reduction in the FAS/CAS operating adjustment, partially offset by lower segment operating income.

First quarter 2023 operating margin rate of 10.2 percent was comparable to the prior year period.

First quarter 2023 G&A costs as a percentage of sales of 11.2 percent was comparable with the prior year period and reflects continued investments for future business opportunities.

See “Segment Operating Results” below for further information by segment.

For information regarding product and service operating costs and expenses, see “Product and Service Analysis” below.

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Federal and Foreign Income Taxes

Current Quarter

The third quarter 2022 ETR decreased to 16.1 percent from 16.6 percent in the prior year period principally due to higher benefits from foreign-derived intangible income.

See Note 3 to the financial statements for additional information.

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

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.

The first quarter 2023 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.

See Note 3 to the financial statements for additional information.

The table below reconciles net earnings to transaction-adjusted net earnings:

Three Months Ended September 30 % Nine Months Ended September 30 %

$ in millions 2022 2021 Change 2022 2021 Change

Net earnings $ 915 $ 1,063 (14) % $ 2,816 $ 4,295 (34) %

Gain on sale of business — — NM — (1,980) NM

State tax impact 1

— — NM — 160 NM

Transaction costs — — NM — 32 NM

Make-whole premium — — NM — 54 NM

Federal tax impact of items above 2

— — NM — 614 NM

Transaction adjustment, net of tax $ — $ — NM $ — $ (1,120) NM

Transaction-adjusted net earnings $ 915 $ 1,063 (14) % $ 2,816 $ 3,175 (11) %

(1) The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.

(2) The federal tax impact was calculated by applying the 21 percent federal statutory rate to the adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.

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Current Quarter

Third quarter 2022 net earnings decreased $148 million, or 14 percent, primarily due to the lower operating income described above, partially offset by a lower effective tax rate.

Year to date 2022 net earnings decreased $1.5 billion, or 34 percent, primarily due to a $1.1 billion after-tax decline associated with the IT services divestiture.

Transaction-adjusted net earnings decreased $359 million, or 11 percent, primarily due to the lower operating income described above and $108 million of lower returns on marketable securities related to our non-qualified benefit plans and other non-operating assets, partially offset by a lower effective tax rate.

First quarter 2023 net earnings decreased $113 million, or 12 percent, primarily due to a $244 million reduction in the non-operating FAS pension benefit, partially offset by higher operating income, a $34 million increase in returns on marketable securities related to our non-qualified benefit plans, and a lower effective tax rate.

Diluted Earnings Per Share

The table below reconciles diluted earnings per share to transaction-adjusted EPS:

Three Months Ended September 30 % Nine Months Ended September 30 %

2022 2021 Change 2022 2021 Change

Diluted EPS $ 5.89 $ 6.63 (11) % $ 18.06 $ 26.55 (32) %

Gain on sale of business per share — — NM — (12.24) NM

State tax impact per share 1

— — NM — 0.99 NM

Transaction costs per share — — NM — 0.20 NM

Make-whole premium per share — — NM — 0.33 NM

Federal tax impact of line items above per share 2

— — NM — 3.79 NM

Transaction adjustment per share, net of tax $ — $ — NM $ — $ (6.93) NM

Transaction-adjusted EPS $ 5.89 $ 6.63 (11) % $ 18.06 $ 19.62 (8) %

(1) The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.

Current Quarter

Third quarter 2022 diluted earnings per share decreased 11 percent, reflecting a 14 percent decrease in net earnings and a 3 percent reduction in weighted-average diluted shares outstanding.

Year to date 2022 diluted earnings per share decreased 32 percent, principally due to a $6.93 after-tax decrease associated with the IT services divestiture.

Transaction-adjusted earnings per share decreased $1.56, or 8 percent, reflecting an 11 percent decrease in transaction-adjusted net earnings and a 4 percent reduction in weighted-average diluted shares outstanding.

First quarter 2023 diluted earnings per share decreased 10 percent, reflecting lower net earnings and a 2 percent reduction in weighted-average diluted shares outstanding.

SEGMENT OPERATING RESULTS

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In evaluating segment operating performance, we look primarily at changes in sales and operating income.

Where applicable, significant fluctuations in operating performance attributable to individual contracts or programs, or changes in a specific cost element

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across multiple contracts, are described in our analysis.

Where applicable, significant fluctuations in operating performance attributable to individual contracts or programs, or changes in a specific cost element across multiple contracts, are described in our analysis.

Based on this approach and the nature of our operations, the discussion of results of operations below first focuses on our four segments before distinguishing between products and services.

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Contract mix generally refers to changes in the ratio of contract type and/or lifecycle (e.g., cost-type, fixed-price, development, production, and/or sustainment).

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Segment Operating Income and Margin Rate

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These measures may not be defined and calculated by other companies in the same manner and should not be considered in isolation or as alternatives to operating results presented in accordance with GAAP.

Three Months Ended September 30 % Nine Months Ended September 30 %

$ in millions 2022 2021 Change 2022 2021 Change

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Operating income $ 947 $ 897 6 %

Operating margin rate 10.2 % 10.2 %

Reconciliation to segment operating income:

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FAS/CAS operating adjustment 21 46 (54) %

Gain on sale of business — — — % — (1,980) NM

IT services divestiture – unallowable state taxes and transaction costs — — — % — 192 NM

Intangible asset amortization and PP&E step-up depreciation 30 60 (50) %

Other unallocated corporate expense (income) 48 (9) (633) % 89 33 170 %

Unallocated corporate expense (income) 108 53 104 % 270 (1,564) NM

Other unallocated corporate expense 4 34 (88) %

Unallocated corporate expense 34 94 (64) %

Segment operating income $ 1,002 $ 1,037 (3) %

Segment operating margin rate 10.8 % 11.8 %

Current Quarter

Third quarter 2022 segment operating income decreased $28 million, or 3 percent due to a lower segment operating margin rate, partially offset by higher sales.

Third quarter 2022 segment operating margin rate decreased to 11.2 percent from 11.9 percent principally due to lower net EAC adjustments due, in part, to inflationary pressures.

Year to date 2022 segment operating income decreased $130 million, or 4 percent.

Year to date 2021 segment operating income included $20 million from the IT services business, as well as a benefit of approximately $100 million due to the impact of lower overhead rates on the company’s fixed price contracts.

Year to date 2022 segment operating margin rate decreased to 11.7 percent from 12.0 percent principally due to lower net EAC adjustments, including the prior year overhead rate benefit to fixed price contracts noted above.

First quarter 2023 segment operating income decreased $35 million, or 3 percent, and includes an approximately $50 million reduction related to higher projected CAS pension costs on the company’s fixed price contracts.

Segment operating margin rate decreased to 10.8 percent from 11.8 percent and reflects lower operating margin rates at Aeronautics Systems, Mission Systems and Defense Systems, partially offset by a higher operating margin rate at Space Systems.

FAS/CAS Operating Adjustment

Third quarter 2022 and year to date 2022 FAS/CAS operating adjustment decreased primarily due to lower CAS pension expense resulting from favorable plan asset returns in 2021 and changes in certain CAS actuarial assumptions as of December 31, 2021.

Third quarter 2021 CAS pension expense also included a $44 million benefit from updated demographic information.

NORTHROP GRUMMAN CORPORATION

First quarter 2023 FAS/CAS operating adjustment decreased primarily due to lower FAS pension service expense resulting from changes in certain actuarial assumptions as of December 31, 2022.

Unallocated Corporate Expense (Income)

Current Quarter

The increase in third quarter 2022 unallocated corporate expense is primarily due to a $60 million benefit recognized in the prior year for insurance settlements related to shareholder litigation involving the former Orbital ATK.

The change in year to date 2022 unallocated corporate expense (income) is primarily due to the $2.0 billion pre-tax gain on sale and $192 million of unallowable state taxes and transaction costs recognized in the prior year associated with the IT services divestiture.

The prior year also benefited from the $60 million of insurance settlements noted above.

The decrease in unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation as well as a reduction in unallowable corporate costs.

Net EAC Adjustments - We record changes in estimated contract earnings at completion (net EAC adjustments) using the cumulative catch-up method of accounting.

Net EAC adjustments can have a significant effect on reported sales and operating income and the aggregate amounts are presented in the table below:

Three Months Ended September 30 Nine Months Ended September 30

Net EAC adjustments can have a significant effect on segment operating income;

the aggregate amounts are presented in the table below:

Three Months Ended March 31

$ in millions 2023 2022

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Net EAC adjustments $ 46 $ 173

NORTHROP GRUMMAN CORPORATION

Net EAC adjustments by segment are presented in the table below:

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2023 2022

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For purposes of the discussion in the remainder of this Segment Operating Results section, references to operating income and operating margin rate reflect segment operating income and segment operating margin rate, respectively.

NORTHROP GRUMMAN CORPORATION

AERONAUTICS SYSTEMS

Three Months Ended September 30 % Nine Months Ended September 30 %

$ in millions 2022 2021 Change 2022 2021 Change

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Sales $ 2,515 $ 2,703 (7) %

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Operating margin rate 9.4 % 11.4 %

Current Quarter

Third quarter 2022 sales decreased $188 million, or 7 percent, due to lower volume in both Manned Aircraft and Autonomous Systems, including restricted programs, E-2, and the Joint Surveillance and Target Attack Radar System (JSTARS) program as it nears completion.

NORTHROP GRUMMAN CORPORATION

Year to date 2022 sales decreased $854 million, or 10 percent, due to lower volume in both Manned Aircraft and Autonomous Systems, including restricted programs, a $134 million decrease on E-2, a $125 million decrease on Global Hawk and lower volume on JSTARS as it nears completion.

First quarter 2023 sales decreased $188 million, or 7 percent, due to lower volume in both Manned Aircraft and Autonomous Systems, including E-2, F-35, F/A-18 and Global Hawk, as well as lower volume on the Joint Surveillance and Target Attack Radar System (JSTARS) program as it nears completion.

These decreases were partially offset by higher volume on restricted programs.

Operating Income

Current Quarter

Third quarter 2022 operating income decreased $3 million, or 1 percent, due to lower sales, partially offset by a higher operating margin rate.

Operating margin rate increased to 10.3 percent from 9.7 percent primarily due to higher net favorable EAC adjustments in Manned Aircraft.

Prior year results included a $42 million unfavorable EAC adjustment on F-35.

Year to date 2022 operating income decreased $46 million, or 5 percent, due to lower sales, partially offset by a higher operating margin rate.

Operating margin rate increased to 10.6 percent from 10.1 percent primarily due to a $38 million gain on a property sale and higher net favorable EAC adjustments.

Higher net favorable EAC adjustments reflect a $67 million favorable EAC adjustment on the engineering, manufacturing and development phase of the B-21 program largely related to performance incentives, partially offset by lower net EAC adjustments associated with other restricted work.

Prior year results included the $42 million unfavorable EAC adjustment on F-35 noted above.

First quarter 2023 operating income decreased $70 million, or 23 percent, due to a lower operating margin rate and lower sales.

Operating margin rate decreased to 9.4 percent from 11.4 percent primarily due to lower net EAC adjustments.

The prior year period includes a $67 million favorable EAC adjustment on the engineering, manufacturing and development (EMD) phase of the B-21 program.

DEFENSE SYSTEMS

Three Months Ended September 30 % Nine Months Ended September 30 %

$ in millions 2022 2021 Change 2022 2021 Change

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Sales $ 1,376 $ 1,283 7 %

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Operating margin rate 11.6 % 12.1 %

Current Quarter

Third quarter 2022 sales decreased $64 million, or 5 percent, primarily due to lower scope on an international training program, the completion of a Joint Services support program and wind down of the UKAWACS and JSTARS programs, partially offset by higher volume on the NATO Alliance Ground Surveillance In-Service Support (NATO AGS ISS) and advanced fuze programs.

Year to date 2022 sales decreased $476 million, or 11 percent, due, in part, to a $106 million reduction in sales related to the IT services divestiture.

Year to date 2022 organic sales decreased $370 million, or 9 percent, principally due to a $155 million decrease from lower scope on an international training program, completion of a Joint Services support program, lower volume on the Advanced Anti-Radiation Guided Missile (AARGM) program and wind down of the UKAWACS program, partially offset by higher volume on NATO AGS ISS and advanced fuze programs.

First quarter 2023 sales increased $93 million, or 7 percent, due to higher volume in both business areas.

Battle Management & Missile Systems sales increased primarily due to higher volume on the Integrated Air and Missile Defense Battle Command System (IBCS) program and ramp-up on the 120mm Tank Training ammunition program.

Mission Readiness sales increased primarily due to higher volume on an international training program, partially offset by wind-down of the JSTARS program.

Operating Income

Current Quarter

Third quarter 2022 operating income decreased $17 million, or 10 percent, primarily due to lower sales and a lower operating margin rate.

Operating margin rate decreased to 11.7 percent from 12.4 percent primarily due to lower net favorable EAC adjustments at Battle Management and Missile Systems, partially offset by improved performance in the Mission Readiness business area.

NORTHROP GRUMMAN CORPORATION

Year to date 2022 operating income decreased $48 million, or 9 percent, due, in part, to a $14 million reduction in operating income related to the IT services divestiture.

Lower sales volume was partially offset by a higher operating margin rate, which increased to 12.3 percent from 12.0 percent primarily due to improved performance in the Mission Readiness business area.

First quarter 2023 operating income increased $5 million, or 3 percent, due to higher sales, partially offset by a lower operating margin rate.

Operating margin rate decreased to 11.6 percent from 12.1 percent primarily due to lower net EAC adjustments at Battle Management & Missile Systems, partially offset by improved performance at Mission Readiness.

MISSION SYSTEMS

Three Months Ended September 30 % Nine Months Ended September 30 %

$ in millions 2022 2021 Change 2022 2021 Change

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Sales $ 2,563 $ 2,497 3 %

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Operating margin rate 14.0 % 15.4 %

Current Quarter

Third quarter 2022 sales increased $20 million, or 1 percent, primarily due to higher restricted sales in the Networked Information Solutions business area as well as higher Surface Electronic Warfare Improvement Program (SEWIP) volume.

These increases were partially offset by lower volume on Navigation, Targeting and Survivability programs and the Joint Counter Radio-Controlled Improvised Explosive Device Electronic Warfare (JCREW) program.

Year to date 2022 sales decreased $144 million, or 2 percent, due, in part, to a $42 million reduction in sales related to the IT services divestiture.

Year to date 2022 organic sales decreased $102 million, or 1 percent, primarily due to lower volume on Navigation, Targeting and Survivability programs and the JCREW program.

These decreases were partially offset by an increase in restricted sales in the Networked Information Solutions business area.

NORTHROP GRUMMAN CORPORATION

First quarter 2023 sales increased $66 million, or 3 percent, and reflects higher volume in all four business areas, including higher restricted sales in the Networked Information Solutions business area as well as higher volume on the Surface Electronic Warfare Improvement Program (SEWIP), marine systems programs and infrared countermeasure programs.

These increases were partially offset by lower volume on the Ground/Air Task Oriented Radar (G/ATOR) program and airborne radar programs, including F-35.

Operating Income

Current Quarter

Third quarter 2022 operating income decreased $4 million, or 1 percent, due to a lower operating margin rate, partially offset by higher sales.

Operating margin rate decreased to 15.0 percent from 15.3 percent principally due to lower net EAC adjustments, largely in the Maritime/Land Systems & Sensors and Navigation, Targeting & Survivability business areas, partially offset by improved performance on restricted programs at Networked Information Solutions.

Year to date 2022 operating income decreased $11 million, or 1 percent, due to lower sales, partially offset by a higher operating margin rate.

Operating margin rate increased to 15.6 percent from 15.5 percent principally due to a $33 million benefit recognized in connection with a contract-related legal matter, partially offset by the previously described overhead rate benefit to fixed price contracts in the prior year.

First quarter 2023 operating income decreased $25 million, or 6 percent, due to a lower operating margin rate, partially offset by higher sales.

Operating margin rate decreased to 14.0 percent from 15.4 percent principally due to changes in contract mix toward more cost-type content and a loss recognized in connection with an unconsolidated joint venture.

SPACE SYSTEMS

Three Months Ended September 30 % Nine Months Ended September 30 %

$ in millions 2022 2021 Change 2022 2021 Change

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Sales $ 3,350 $ 2,855 17 %

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Operating margin rate 9.3 % 9.1 %

Current Quarter

Third quarter 2022 sales increased $482 million, or 18 percent, due to higher sales in both business areas.

Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $115 million increase on the Ground Based Strategic Deterrent (GBSD) program and a $103 million increase on the Next Generation Interceptor (NGI) program, as well as higher volume on the GEM63 program in support of Amazon’s Project Kuiper.

Sales in the Space business area were driven by a $129 million increase due to ramp-up on the Space Development Agency (SDA) Tranche 1 Transport Layer and Tranche 1 Tracking Layer programs awarded in 2022, as well as higher volume on restricted programs and the Commercial Resupply Services (CRS) program.

NORTHROP GRUMMAN CORPORATION

Year to date 2022 sales increased $1.0 billion, or 13 percent, and includes a $16 million reduction in sales related to the IT services divestiture.

Year to date 2022 organic sales increased $1.1 billion, or 13 percent, due to higher sales in both business areas.

Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $356 million increase on NGI and a $327 million increase on GBSD.

Sales in the Space business area were driven by a $208 million increase on the SDA Tranche 1 Transport Layer and Tranche 1 Tracking Layer programs awarded earlier this year, as well as higher volume on restricted programs and CRS, partially offset by a $116 million decrease in sales for the James Webb Space Telescope after its successful launch in December 2021.

First quarter 2023 sales increased $495 million, or 17 percent, due to higher volume in both business areas.

Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $161 million increase on the Ground Based Strategic Deterrent (GBSD) program and higher volume on the Next Generation Interceptor (NGI) and Ground-based Midcourse Defense Weapon Systems (GWS) programs.

Sales in the Space business area increased primarily due to higher volume on restricted programs, the Next-Generation Overhead Persistent Infrared Polar (NextGen Polar) program and the Space Development Agency (SDA) Tranche 1 Tracking Layer program.

These increases were partially offset by lower volume for Commercial Resupply Services (CRS) missions.

Operating Income

Current Quarter

Third quarter 2022 operating income was comparable to the prior year period and reflects higher sales and a lower operating margin rate.

Operating margin rate decreased to 9.2 percent from 10.7 percent primarily due to lower net EAC adjustments and higher volume on early-stage development programs, such as NGI and GBSD.

Year to date 2022 operating income was comparable to the prior period and reflects higher sales and a lower operating margin rate.

Operating margin rate decreased to 9.6 percent from 10.9 percent primarily due to lower net EAC adjustments and higher volume on early-stage development programs, such as NGI and GBSD.

Prior year results include the previously described overhead rate benefit to fixed price contracts.

First quarter 2023 operating income increased $52 million, or 20 percent, due to higher sales and a higher operating margin rate.

Operating margin rate increased to 9.3 percent from 9.1 percent primarily due to a higher operating margin rate at Launch & Strategic Missiles, including the sale of a license to a customer, partially offset by lower net EAC adjustments in the Space business area.

NORTHROP GRUMMAN CORPORATION

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The following table presents product and service sales and operating costs and expenses by segment:

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2023 2022

Segment Information:

Sales Operating Costs and Expenses Sales Operating Costs and Expenses Sales Operating Costs and Expenses Sales Operating Costs and Expenses

Sales Operating Costs and Expenses Sales Operating Costs and Expenses

Aeronautics Systems

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(1) A reconciliation of segment operating income to total operating income is included in “Segment Operating Results.”

Product Sales and Costs

Current Quarter

Third quarter 2022 product sales increased $134 million, or 2 percent, primarily due to an increase in product sales at Space Systems, partially offset by a decrease in product sales at Aeronautics Systems.

The increase at Space Systems was driven by ramp-up on development programs including NGI and GBSD.

The decrease at Aeronautics Systems was principally due to lower volume on restricted programs, as well as the E-2 program.

Third quarter 2022 product costs increased $199 million, or 3 percent, consistent with the higher product sales described above and reflect lower product margin rates at Space Systems, Mission Systems and Defense Systems principally due to lower net EAC adjustments.

Year to date 2022 product sales decreased $461 million, or 2 percent, primarily due to a decrease in product sales at Aeronautics Systems, partially offset by an increase in product sales at Space Systems.

The decrease at Aeronautics Systems was principally due to lower volume on restricted programs, as well as the E-2 program.

The increase at Space Systems is principally related to ramp-up on development programs including NGI and GBSD, as well as higher volume on the SDA Tranche 1 Transport Layer and Tranche 1 Tracking Layer programs.

Year to date 2022 product costs decreased $336 million, or 2 percent, consistent with the lower product sales.

NORTHROP GRUMMAN CORPORATION

Product Sales and Costs

First quarter 2023 product sales increased $430 million, or 6 percent, primarily due to an increase in product sales at Space Systems, partially offset by a decrease in product sales at Aeronautics Systems.

The increase at Space Systems was driven by ramp-up on development programs, including GBSD and NGI, and higher volume on restricted programs, GWS, NextGen Polar and the SDA Tranche 1 Tracking Layer program.

The decrease at Aeronautics Systems was driven by lower volume on the E-2, F-35, and Global Hawk programs.

First quarter 2023 product costs increased $475 million, or 8 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Aeronautics Systems production programs.

Service Sales and Costs

Current Quarter

Third quarter 2022 service sales increased $117 million, or 6 percent, primarily due to an increase in service sales at Aeronautics Systems, principally on restricted programs, and Mission Systems, partially offset by a decrease in service sales at Defense Systems.

The decrease at Defense Systems was driven by lower scope on an international training program, the completion of a Joint Services support program and wind down of the UKAWACS program, partially offset by higher volume on the NATO AGS ISS programs.

Third quarter 2022 service costs increased $80 million, or 5 percent, consistent with the higher service sales described above and reflects higher service margin rates at Mission Systems, Defense Systems and Aeronautics Systems.

Year to date 2022 service sales were comparable with the prior year period.

Higher service sales at Aeronautics Systems were offset by the IT services divestiture as well as lower volume on an international training program and completion of a Joint Services support program at Defense Systems.

Sales from the divested IT services business, which were largely included in service sales, were $162 million in the prior year period.

Year to date 2022 service costs were comparable with the prior year period, consistent with the service sales described above.

First quarter 2023 service sales increased $74 million, or 4 percent, primarily due to an increase in service sales at Defense Systems and Space Systems, partially offset by a decrease in service sales at Aeronautics Systems.

The increase at Defense Systems was driven by higher volume on an international training program.

The increase at Space Systems was principally due to higher volume on the Specialized Warfighter Development Contract (SWDC) program, restricted programs and the ICBM Ground Subsystem Support program.

The decrease at Aeronautics Systems was driven by lower volume on the JSTARS program as it nears completion.

First quarter 2023 service costs increased $64 million, or 4 percent, consistent with the higher service sales described above.

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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Backlog is converted into sales as costs are incurred or deliveries are made.

Backlog consisted of the following as of September 30, 2022 and December 31, 2021:

September 30, 2022 December 31, 2021

Backlog consisted of the following as of March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

$ in millions Funded Unfunded Total

6 unchanged sentences

Total backlog $ 39,296 $ 38,177 $ 77,473 $ 78,743 (2) %

Third quarter and year to date 2022 net awards totaled $8.7 billion and $30.2 billion, respectively, and backlog totaled $79.6 billion.

Significant third quarter new awards include $2.8 billion for restricted programs (at Space Systems, Mission Systems and Aeronautics Systems), $1.3 billion for Ground-based Midcourse Defense (GMD) and $0.8 billion for SDA Tranche 1 Tracking Layer.

First quarter 2023 net awards totaled $8.0 billion and backlog totaled $77.5 billion.

Significant first quarter new awards include $3.2 billion for restricted programs (primarily at Mission Systems, Aeronautics Systems, and Space Systems), $0.3 billion for ammunition programs at Defense Systems, $0.3 billion for the Multi-Role Electronically Scanned Array (MESA) program and $0.2 billion for SEWIP.

LIQUIDITY AND CAPITAL RESOURCES

We are focused on the efficient conversion of operating income into cash and to provide for the company’s material cash requirements, including working capital needs, satisfaction of contractual commitments, funding of our pension and OPB plans, investment in our business through capital expenditures, and shareholder return through dividend payments and share repurchases.

At September 30, 2022, we had $1.7 billion in cash and cash equivalents.

At March 31, 2023, we had $2.5 billion in cash and cash equivalents.

We expect cash and cash equivalents and cash generated from operating activities, supplemented by borrowings under credit facilities, commercial paper and/or in the capital markets through our shelf registration with the SEC, if needed, to be sufficient to provide liquidity to the company in the short-term and long-term.

In August 2022, the company entered into a new five-year senior unsecured credit facility in an aggregate principal amount of $2.5 billion.

The 2022 Credit Agreement replaced the company’s prior five-year, $2.0 billion revolving credit facility entered into in August 2018.

In April 2022, we

The company has a five-year senior unsecured credit facility in an aggregate principal amount of $2.5 billion, and in April 2023, we renewed our one-year $500 million uncommitted

NORTHROP GRUMMAN CORPORATION

renewed our one-year $500 million uncommitted credit facility.

At September 30, 2022, there were no borrowings outstanding under these credit facilities.

Effective January 30, 2021, we completed the IT services divestiture for $3.4 billion cash.

Proceeds were primarily used in the first quarter of 2021 for a $2.0 billion accelerated share repurchase and to fund redemption of $1.5 billion of the company’s 2.55 percent unsecured notes due October 2022.

credit facility.

At March 31, 2023, there were no borrowings outstanding under these credit facilities.

In February 2023, we issued $2.0 billion of unsecured senior notes.

We intend to use those proceeds for general corporate purposes, which may include debt repayment (including our 3.25% senior notes due in 2023), share repurchases and working capital.

COVID-19 and the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) established a program with provisions to allow U.S.

companies to defer the employer’s portion of social security taxes between March 27, 2020 and December 31, 2020 and pay such taxes in two installments in 2021 and 2022.

Our first installment of deferred social security taxes of $200 million was paid in the fourth quarter of 2021 and the second installment of $200 million is due in the fourth quarter of 2022.

Under Section 3610, the CARES Act also authorized the government to reimburse qualifying contractors for certain costs of providing paid leave to employees as a result of COVID-19.

The company has sought and may continue to seek recovery for certain COVID-19-related costs under Section 3610 of the CARES Act and through our contract provisions, though it is unclear how much we will be able to recover.

In addition, the U.S.

Department of Defense (DoD) has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent for costs incurred and work performed on relevant contracts;

it is unclear what steps the DoD will continue to take.

Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) authorized the government to reimburse qualifying contractors for certain costs of providing paid leave to employees as a result of COVID-19.

In addition, during 2020, the DoD increased the rate for certain progress payments from 80 percent to 90 percent for costs incurred and work performed on relevant contracts.

Recently, the DoD has indicated it may revert to the 80 percent progress payment rate on prospectively awarded contracts.

We expect this reversion may occur during 2023, but that it would not have a material impact on our 2023 cash from operations.

Internal Revenue Code (IRC) Section 174

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminates the option to deduct research and development expenditures in the current year and requires taxpayers to amortize them over five years pursuant to IRC Section 174.

We have made federal tax payments of approximately $670 million related to Section 174 during the first nine months of 2022 and expect our full year tax payments to approximate $1.0 billion.

Congress is considering, but has not passed, legislation that would defer the amortization requirement to later years.

If legislation is passed during the fourth quarter of 2022 and made effective retroactively to January 1, 2022, we expect to immediately file for a refund of taxes paid during 2022, but do not expect we would receive that refund until 2023.

As such, we expect the impact of the current Section 174 legislation on our 2022 cash from operations to range between $670 million and $1.0 billion depending on if and when Congress passes additional legislation, whether such legislation is made effective retroactively, the amount of research and development expenditures incurred and paid by the company during 2022, and whether the IRS issues guidance on the provision which differs from our current interpretation.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to amortize them over five years pursuant to IRC Section 174.

Our 2022 cash from operations were reduced by approximately $900 million for federal tax payments we made related to Section 174.

In the future, Congress may consider legislation that would defer the amortization requirement to later years, possibly with retroactive effect.

In the meantime, we expect to continue to make additional federal tax payments based on the current Section 174 tax law, which we estimate will reduce our 2023 cash from operations by approximately $720 million.

The impact of Section 174 on our cash from operations depends on the amount of research and development expenditures incurred by the company and whether the IRS issues guidance on the provision which differs from our current interpretation, among other things.

Cash Flow Measures

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The table below summarizes key components of cash provided by operating activities:

Nine Months Ended September 30 %

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Net earnings $ 842 $ 955 (12) %

Gain on sale of business — (1,980) NM

Non-cash items (1)

3 unchanged sentences

Other, net (15) 25 (160) %

Net cash provided by operating activities $ 650 $ 2,125 (69) %

Net cash used in operating activities $ (702) $ (488) 44 %

(1) Includes depreciation and amortization, non-cash lease expense, stock based compensation expense, deferred income taxes and net periodic pension and OPB income.

NORTHROP GRUMMAN CORPORATION

Year to date 2022 net cash provided by operating activities decreased $1.5 billion as compared with the same period in 2021 principally due to increases in trade working capital.

During the nine months ended September 30, 2022, the company made $670 million of federal tax payments related to the current provisions of IRC Section 174.

During the nine months ended September 30, 2021, the company made $588 million of tax payments related to the IT services divestiture.

First quarter 2023 net cash used in operating activities increased $214 million as compared with the same period in 2022 principally due to increases in trade working capital, largely related to the timing of vendor payments.

The net use of cash during the first quarter is consistent with the company's historical timing of operating cash flows, which are generally more heavily weighted towards the second half of the year.

Adjusted Free Cash Flow

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Adjusted free cash flow includes proceeds from the sale of equipment to a customer as such proceeds were generated in a customer sales transaction.

It also includes the after-tax impact of discretionary pension contributions for consistency and comparability of financial performance.

It also includes the after-tax impact of discretionary

NORTHROP GRUMMAN CORPORATION

pension contributions for consistency and comparability of financial performance.

This measure may not be defined and calculated by other companies in the same manner.

1 unchanged sentence

This non-GAAP measure may be useful to investors and other users of our financial statements as a supplemental measure of our cash performance, but should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating cash flows presented in accordance with GAAP.

The table below reconciles net cash provided by operating activities to adjusted free cash flow:

Nine Months Ended September 30 %

The table below reconciles net cash used in operating activities to adjusted free cash flow:

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Net cash provided by operating activities $ 650 $ 2,125 (69) %

Net cash used in operating activities $ (702) $ (488) 44 %

Capital expenditures (309) (244) 27 %

Proceeds from sale of equipment to a customer 100 84 19 %

Adjusted free cash flow $ (1,011) $ (732) 38 %

Year to date 2022 adjusted free cash flow decreased $1.6 billion as compared with the same period in 2021 principally due to lower net cash provided by operating activities and an increase in capital expenditures.

First quarter 2023 adjusted free cash flow decreased $279 million as compared with the same period in 2022 due to higher net cash used in operating activities and an increase in capital expenditures.

Investing Cash Flow

Year to date 2022 net cash used in investing activities was $663 million compared to net cash provided by investing activities of $2.8 billion in the prior year period principally due to $3.4 billion in cash received from the sale of our IT services business during the first quarter of 2021.

First quarter 2023 net cash used in investing activities increased $60 million as compared with the same period in 2022 principally due to higher capital expenditures.

Financing Cash Flow

Year to date 2022 net cash used in financing activities decreased $3.9 billion as compared with the same period in 2021 principally due to a $2.2 billion decrease in debt repayments and a $1.7 billion reduction in share repurchases.

First quarter 2023 net cash provided by financing activities was $929 million compared to net cash used in financing activities of $619 million in the prior year period principally due to the issuance of $2.0 billion in long-term debt, partially offset by a $405 million increase in share repurchases.

Credit Facilities, Commercial Paper and Financial Arrangements - See Note 6 to the financial statements for further information on our credit facilities, commercial paper and our use of standby letters of credit and guarantees.

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This Form 10-Q and the information we are incorporating by reference contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as “will,” “expect,” “anticipate,” “intend,” “may,” “could,” “should,” “plan,” “project,” “forecast,” “believe,”

NORTHROP GRUMMAN CORPORATION

“estimate,” “outlook,” “trends,” “goals” and similar expressions generally identify these forward-looking statements.

Words such as “will,” “expect,” “anticipate,” “intend,” “may,” “could,” “should,” “plan,” “project,” “forecast,” “believe,” “estimate,” “guidance,” “outlook,” “trends,” “goals” and similar expressions generally identify these forward-looking statements.

Forward-looking statements include, among other things, statements relating to our future financial condition, results of operations and/or cash flows.

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Specific risks that could cause actual results to differ materially from those expressed or implied in these forward-looking statements include, but are not limited to, those identified and discussed more fully in the section entitled “Risk Factors” in our 2022 Annual Report on Form 10-K and from time to time in our other filings with the Securities and Exchange Commission (SEC).

These risks and uncertainties are amplified by the global COVID-19 pandemic and the broader economic environment, which have caused and will continue to cause significant challenges, instability and uncertainty.

These risks and uncertainties are amplified by the global macroeconomic, health, security and political environments, including inflationary pressures, labor and supply chain challenges and the COVID-19 pandemic, which have caused and will continue to cause significant challenges, instability and uncertainty.

They include:

NORTHROP GRUMMAN CORPORATION

Industry and Economic Risks

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government for a substantial portion of our business

• significant delays or reductions in appropriations for our programs, and U.S.

government funding and program support more broadly, including related to hostilities and other global events

• the use of estimates when accounting for our contracts and the effect of contract cost growth and/or changes in estimated contract revenues and costs, including as a result of labor shortages and/or inflationary pressures

• significant delays or reductions in appropriations and/or for our programs, and U.S.

government funding and program support more broadly, including as a result of a prolonged continuing resolution and/or government shutdown, and/or related to hostilities and other global events

• significant delays or reductions in payments as a result of or related to a breach of the debt ceiling

• the use of estimates when accounting for our contracts and the effect of contract cost growth and our efforts to recover or offset such costs and/or changes in estimated contract costs and revenues, including as a result of inflationary pressures, labor shortages, supply chain challenges and/or other macroeconomic factors, and risks related to management’s judgments and assumptions in estimating and/or projecting contract revenue and performance which may be inaccurate

• continued pressures from macroeconomic trends, including inflation, supply chain delays and disruptions, and labor challenges, including on costs, schedules, performance and ability to meet expectations

• increased competition within our markets and bid protests

Legal and Regulatory Risks

• investigations, claims, disputes, enforcement actions, litigation and/or other legal proceedings

• the improper conduct of employees, agents, subcontractors, suppliers, business partners or joint ventures in which we participate and the impact on our reputation and our ability to do business

• changes in procurement and other laws, SEC and other regulations, contract terms and practices applicable to our industry, findings by the U.S.

government as to our compliance with such requirements, and changes in our customers’ business practices globally

• investigations, claims, disputes, enforcement actions, litigation (including criminal, civil and administrative) and/or other legal proceedings

• the improper conduct of employees, agents, subcontractors, suppliers, business partners or joint ventures in which we participate, including the impact on our reputation and our ability to do business

• changes in procurement and other laws, SEC, DoD and other rules and regulations, contract terms and practices applicable to our industry, findings by the U.S.

government as to our compliance with such requirements, more aggressive enforcement of such requirements and changes in our customers’ business practices globally

• environmental matters, including unforeseen environmental costs and government and third party claims

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Business and Operational Risks

• impacts of the COVID-19 pandemic (or future health epidemics, pandemics or similar outbreaks), including potential new variants, case surges or prolonged recovery periods, their effects on the broader environment, and varying related government requirements, on:

our business, our ability to maintain a qualified and productive workforce, work slowdowns or stoppages, labor shortages, supply chain and logistics challenges, costs we cannot recover and liabilities for which we are not compensated, performance challenges (including cost and schedule), government funding, changes in government acquisition priorities and processes, government payment rules and practices, insurance challenges, and potential impacts on access to capital, the markets and the fair value of our assets

• impacts related to health epidemics, pandemics, including the COVID-19 pandemic, such as labor, supply chain or financial, schedule or cost impacts (without corresponding recovery), among other impacts

• cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners, and changes in related regulations

• our ability to attract and retain a qualified workforce with the required security clearances and requisite skills to meet our performance obligations

• the performance and viability of our subcontractors and suppliers and the availability and pricing of raw materials and components, particularly with inflationary pressures, increased costs, supply chain disruptions, and extended material lead times

• climate change, its impacts on our company, our operations and our stakeholders (employees, suppliers, customers, shareholders and regulators), and changes in laws, regulations and priorities related to greenhouse gas emissions and other climate change related concerns

• our exposure to additional risks as a result of our international business, including risks related to geopolitical and economic factors, suppliers, laws and regulations

NORTHROP GRUMMAN CORPORATION

• our ability to attract and retain a qualified, talented and diverse workforce with the necessary security clearances to meet our performance obligations

• the performance and viability of our subcontractors and suppliers and the availability and pricing of raw materials and components, particularly with inflationary pressures, increased costs, shortages in labor and financial resources, supply chain disruptions, and extended material lead times

• environmental, social and governance matters, including especially climate change, their impacts on our company, our operations and our stakeholders (employees, suppliers, customers, shareholders and regulators), and changes in laws, regulations and priorities related to these issues

• our exposure to additional risks as a result of our international business, including risks related to global security, geopolitical and economic factors, misconduct, suppliers, laws and regulations

• our ability to meet performance obligations under our contracts, including obligations that require innovative design capabilities, are technologically complex, require certain manufacturing expertise or are dependent on factors not wholly within our control

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• our ability appropriately to exploit and/or protect intellectual property rights

• our ability to develop new products and technologies and maintain technologies, facilities, and equipment to win new competitions and meet the needs of our customers

NORTHROP GRUMMAN CORPORATION

• our ability to develop new products and technologies, progress digital transformation, and maintain technologies, facilities, and equipment to win new competitions and meet the needs of our customers

General and Other Risk Factors

• the adequacy and availability of our insurance coverage, customer indemnifications or other liability protections

• the adequacy and availability of, and ability to obtain, insurance coverage, customer indemnifications or other liability protections

• the future investment performance of plan assets, gains or losses associated with changes in valuation of marketable securities related to our non-qualified benefit plans, changes in actuarial assumptions associated with our pension and other postretirement benefit plans and legislative or other regulatory actions impacting our pension and postretirement benefit obligations

• changes in business conditions that could impact business investments and/or recorded goodwill or the value of other long-lived assets

• changes in business conditions that could impact business investments and/or recorded goodwill or the value of other long-lived assets, and other potential future liabilities

We urge you to consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of forward-looking statements.

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We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risks from those discussed in our 2022 Annual Report on Form 10-K.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis