What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-27 compared with 2023-04-27 · 159 added, 103 removed, 291 unchanged (47% of the section changed)

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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.

Since at least March 2020, when it was first characterized as a global pandemic, 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 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.

In May 2023, the World Health Organization declared an end to the global public health emergency for the COVID-19 pandemic.

For the first half of 2023, direct impacts of the COVID-19 pandemic on our business remained limited.

While we cannot predict the future course of COVID-19 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 global health environment, 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.

Like the communities in which we operate, our actions have varied, and

NORTHROP GRUMMAN CORPORATION

will continue to vary, depending on the state of the global health environment, including as it relates to COVID-19 and other illnesses, applicable government requirements, and the needs of our stakeholders.

Global Economic Environment

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widespread delays and disruptions in supply chains;

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

workforce challenges;

and market volatility.

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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.

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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

NORTHROP GRUMMAN CORPORATION

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.

The Fiscal Responsibility Act of 2023 (FRA), signed in June 2023, suspended the debt limit through January 1, 2025 and provides for caps on defense and non-defense discretionary spending in FY 2024 and FY 2025.

The FRA cap on discretionary spending for defense in FY 2024 and FY 2025 is $886 billion and $895 billion, respectively.

If these spending caps are exceeded, the FRA provides for automatic spending cuts that could be imposed through sequestration.

The FRA also provides for across the board cuts to discretionary spending by one percent below current-year levels if a continuing resolution is in place on January 1, 2024 or 2025.

Once full-year appropriations are enacted, the spending caps are to revert to original levels specified in the FRA.

If a continuing resolution is still in place on April 30, 2024 or 2025, the FRA provides that a final sequestration order could be issued that would apply to the full fiscal year.

While the discretionary spending caps only apply to FY 2024 and FY 2025, the FRA also attempts to limit most discretionary funding for FY 2026 through FY 2029, subject to Congress’s budgetary processes at that time.

We anticipate that issues related to the debt ceiling, budgetary priorities and the spending caps imposed by the FRA will continue to be a subject of considerable debate, with a potentially significant impact on our programs and the company.

In July 2023, the House of Representatives and the Senate passed different versions of a National Defense Authorization Act.

We expect this proposed legislation, and its potential impact on defense appropriations, including the duration of a possible continuing resolution, will also be the subject of considerable debate with potentially significant impacts.

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.

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Selected financial highlights are presented in the table below:

Three Months Ended March 31 %

$ in millions, except per share amounts 2023 2022 Change

Three Months Ended June 30 % Six Months Ended June 30 %

$ in millions, except per share amounts 2023 2022 Change 2023 2022 Change

Sales $ 9,576 $ 8,801 9 % $ 18,877 $ 17,598 7 %

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Diluted earnings per share $ 5.34 $ 6.06 (12) % $ 10.83 $ 12.16 (11) %

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.

Current Quarter

Second quarter 2023 sales increased $775 million, or 9 percent, due to higher sales at all four sectors.

Second quarter 2023 sales reflect continued strong demand and improving labor availability and supplier deliveries.

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Year to date 2023 sales increased $1.3 billion, or 7 percent, due to higher sales at Space Systems, Defense Systems and Mission Systems, partially offset by lower sales at Aeronautics Systems.

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

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Operating Income and Margin Rate

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.

Current Quarter

Second quarter 2023 operating income increased $13 million, or 1 percent, due to a reduction in the FAS/CAS operating adjustment, partially offset by lower segment operating income.

Second quarter 2023 operating margin rate declined to 10.1 percent, due to a lower segment operating margin rate, partially offset by the lower FAS/CAS operating adjustment.

Second quarter 2023 general and administrative (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.

Year to date 2023 operating income increased $63 million, or 3 percent, due to lower unallocated corporate expense and a reduction in the FAS/CAS operating adjustment, partially offset by lower segment operating income.

Year to date 2023 operating margin rate declined to 10.1 percent due to a lower segment operating margin rate, partially offset by the lower unallocated corporate expense and FAS/CAS operating adjustment.

Year to date 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

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.

Current Quarter

The second quarter 2023 ETR of 17.7 percent was comparable with the prior year period and reflects higher interest expense on unrecognized tax benefits, offset by favorable returns on tax-exempt marketable securities.

See Note 3 to the financial statements for additional information.

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.

The year to date 2023 ETR decreased to 16.7 percent from 17.1 percent in the prior year period 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.

Current Quarter

Second quarter 2023 net earnings decreased $134 million, or 14 percent, primarily due to a $244 million reduction in the non-operating FAS pension benefit, partially offset by a $51 million increase in returns on marketable securities related to our non-qualified benefit plans, higher operating income, higher interest income on short-term investments and lower income tax expense.

Year to date 2023 net earnings decreased $247 million, or 13 percent, primarily due to a $488 million reduction in the non-operating FAS pension benefit, partially offset by an $84 million increase in returns on marketable securities related to our non-qualified benefit plans, higher operating income, lower income tax expense and higher interest income on short-term investments.

Diluted Earnings Per Share

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.

Current Quarter

Second quarter 2023 diluted earnings per share decreased 12 percent, reflecting a 14 percent decrease in net earnings and a 2 percent reduction in weighted-average diluted shares outstanding.

Year to date 2023 diluted earnings per share decreased 11 percent, reflecting a 13 percent decrease in net earnings and a 2 percent reduction in weighted-average diluted shares outstanding.

NORTHROP GRUMMAN CORPORATION

SEGMENT OPERATING RESULTS

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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 March 31 %

$ in millions 2023 2022 Change

Three Months Ended June 30 % Six Months Ended June 30 %

$ in millions 2023 2022 Change 2023 2022 Change

Operating income $ 967 $ 954 1 % $ 1,914 $ 1,851 3 %

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Segment operating margin rate 11.0 % 12.2 % 10.9 % 12.0 %

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.

Current Quarter

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Second quarter 2023 segment operating income decreased $21 million, or 2 percent.

Higher sales were more than offset by a lower segment operating margin rate, which reflects a $36 million unfavorable EAC adjustment on the Habitation and Logistics Outpost (HALO) program at Space Systems.

In addition, the prior year period includes a $38 million gain on a property sale at Aeronautics Systems and a $33 million benefit recognized in connection with a contract-related legal matter at Mission Systems.

Year to date 2023 segment operating income decreased $56 million, or 3 percent.

Higher sales were more than offset by a lower segment operating margin rate, which reflects an approximately $50 million reduction related to higher projected CAS pension costs on the company’s fixed price contracts, as well as the $36 million unfavorable EAC adjustment on the HALO program described above.

In addition, the prior year period includes a $67 million favorable EAC adjustment on the EMD phase of the B-21 program at Aeronautics Systems, as well as the $38 million gain on a property sale and $33 million benefit recognized in connection with a contract-related legal matter described above.

FAS/CAS Operating Adjustment

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)

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.

Second quarter 2023 and year to date 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

Current Quarter

The decrease in second quarter 2023 unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation, partially offset by a loss recognized in connection with a pending divestiture of a small international subsidiary.

The decrease in year to date 2023 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.

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the aggregate amounts are presented in the table below:

Three Months Ended March 31

Three Months Ended June 30 Six Months Ended June 30

$ in millions 2023 2022 2023 2022

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Net EAC adjustments $ 76 $ 92 $ 122 $ 265

NORTHROP GRUMMAN CORPORATION

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

Three Months Ended March 31

Three Months Ended June 30 Six Months Ended June 30

$ in millions 2023 2022 2023 2022

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AERONAUTICS SYSTEMS

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Three Months Ended June 30 % Six Months Ended June 30 %

$ in millions 2023 2022 Change 2023 2022 Change

Sales $ 2,595 $ 2,534 2 % $ 5,110 $ 5,237 (2) %

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Operating margin rate 10.7 % 10.2 % 10.1 % 10.8 %

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.

Current Quarter

Second quarter 2023 sales increased $61 million, or 2 percent, due to higher volume in both Manned Aircraft and Autonomous Systems.

Higher sales on restricted programs were partially offset by lower volume on E-2 and F/A-18, as well as the Joint Surveillance and Target Attack Radar System (JSTARS) program as it nears completion.

Year to date 2023 sales decreased $127 million, or 2 percent, due to lower volume in both Manned Aircraft and Autonomous Systems, including a $146 million decrease on the E-2 program and lower volume on F/A-18, JSTARS and Global Hawk.

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

Operating Income

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.

Current Quarter

Second quarter 2023 operating income increased $20 million, or 8 percent, due to higher sales and a higher operating margin rate.

Operating margin rate increased to 10.7 percent from 10.2 percent primarily due to higher net favorable EAC adjustments on restricted work, partially offset by a $38 million gain on a property sale in the prior year.

Year to date 2023 operating income decreased $50 million, or 9 percent, due to a lower operating margin rate and lower sales.

Operating margin rate decreased to 10.1 percent from 10.8 percent primarily due to lower net EAC adjustments, largely driven by a $67 million favorable EAC adjustment on the EMD phase of the B-21 program in the prior year, as well as a $38 million gain on a property sale in the prior year.

DEFENSE SYSTEMS

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Three Months Ended June 30 % Six Months Ended June 30 %

$ in millions 2023 2022 Change 2023 2022 Change

Sales $ 1,420 $ 1,294 10 % $ 2,796 $ 2,577 8 %

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Operating margin rate 11.7 % 13.0 % 11.7 % 12.5 %

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.

Current Quarter

Second quarter 2023 sales increased $126 million, or 10 percent, due to higher volume in both business areas.

Battle Management & Missile Systems sales increased primarily due to higher volume on ammunition programs and the Integrated Air and Missile Defense Battle Command System (IBCS), Hypersonic Attack Cruise Missile (HACM) and advanced fuze programs.

Mission Readiness sales increased principally due to higher volume on the NATO Alliance Ground Surveillance In-Service Support (NATO AGS ISS) program and an international training program.

Year to date 2023 sales increased $219 million, or 8 percent, due to higher volume in both business areas.

Battle Management & Missile Systems sales increased primarily due to higher volume on ammunition, IBCS, advanced fuze and HACM programs.

Mission Readiness sales increased primarily due to higher volume on an international training program.

Operating Income

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.

Current Quarter

Second quarter 2023 operating income decreased $2 million, or 1 percent, due to a lower operating margin rate, which more than offset higher sales.

Operating margin rate decreased to 11.7 percent from 13.0 percent primarily due to lower net EAC adjustments.

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Year to date 2023 operating income increased $3 million, or 1 percent, due to higher sales, partially offset by a lower operating margin rate.

Operating margin rate decreased to 11.7 percent from 12.5 percent primarily due to lower net EAC adjustments.

MISSION SYSTEMS

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Three Months Ended June 30 % Six Months Ended June 30 %

$ in millions 2023 2022 Change 2023 2022 Change

Sales $ 2,641 $ 2,516 5 % $ 5,204 $ 5,013 4 %

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Operating margin rate 15.2 % 16.4 % 14.6 % 15.9 %

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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.

Current Quarter

Second quarter 2023 sales increased $125 million, or 5 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on marine systems programs and the Surface Electronic Warfare Improvement Program (SEWIP).

These increases were partially offset by lower volume on the Ground/Air Task Oriented Radar (G/ATOR) program.

Year to date 2023 sales increased $191 million, or 4 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on SEWIP and marine systems programs, partially offset by lower volume on G/ATOR.

Operating Income

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.

Current Quarter

Second quarter 2023 operating income decreased $12 million, or 3 percent, due to a lower operating margin rate, which more than offset higher sales.

Operating margin rate decreased to 15.2 percent from 16.4 percent primarily due to a prior year $33 million benefit recognized in connection with a contract-related legal matter, as well as changes in contract mix toward more cost-type content.

Year to date 2023 operating income decreased $37 million, or 5 percent, due to a lower operating margin rate, which more than offset higher sales.

Operating margin rate decreased to 14.6 percent from 15.9 percent primarily due to the prior year $33 million benefit recognized in connection with a contract-related legal matter described above, as well as changes in contract mix toward more cost-type content and a first quarter 2023 loss recognized in connection with an unconsolidated joint venture.

NORTHROP GRUMMAN CORPORATION

SPACE SYSTEMS

Three Months Ended March 31 %

$ in millions 2023 2022 Change

Three Months Ended June 30 % Six Months Ended June 30 %

$ in millions 2023 2022 Change 2023 2022 Change

Sales $ 3,488 $ 2,979 17 % $ 6,838 $ 5,834 17 %

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Operating margin rate 8.1 % 10.4 % 8.7 % 9.8 %

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

Current Quarter

Second quarter 2023 sales increased $509 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 $156 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.

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

Year to date 2023 sales increased $1.0 billion, 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 $316 million increase on GBSD, a $152 million increase on NGI and a $112 million increase on GWS.

Sales in the Space business area increased primarily due to higher volume on restricted programs, a $173 million increase on the NextGen Polar program and a $132 million increase on the SDA Tranche 1 Tracking Layer program.

These increases were partially offset by a $124 million decrease for Commercial Resupply Services (CRS) missions and lower volume on the HALO program.

Operating Income

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.

Current Quarter

Second quarter 2023 operating income decreased $27 million, or 9 percent, due to a lower operating margin rate, which more than offset higher sales.

Operating margin rate decreased to 8.1 percent from 10.4 percent primarily due to lower net EAC adjustments, including a $36 million unfavorable EAC adjustment on the HALO program largely due to cost growth stemming from evolving Lunar Gateway architecture and mission requirements combined with macroeconomic challenges, and a $15 million write-down of commercial inventory.

Year to date 2023 operating income increased $25 million, or 4 percent, due to higher sales, partially offset by a lower operating margin rate.

Operating margin rate decreased to 8.7 percent from 9.8 percent primarily due to lower net EAC adjustments, partially offset by a first quarter 2023 benefit recognized on the sale of a license to a customer.

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

Three Months Ended March 31

Three Months Ended June 30 Six Months Ended June 30

$ in millions 2023 2022 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.”

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.

Current Quarter

Second quarter 2023 product sales increased $662 million, or 10 percent, primarily due to an increase in product sales at Space Systems, Defense Systems and Mission Systems.

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

The increase at Defense Systems was primarily due to higher volume on ammunition programs, IBCS, HACM and advanced fuze programs.

The increase at Mission Systems was primarily driven by higher volume on restricted programs.

Second quarter 2023 product costs increased $700 million, or 12 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Space Systems production programs, including the $36 million unfavorable EAC adjustment on the HALO program described above.

NORTHROP GRUMMAN CORPORATION

Year to date 2023 product sales increased $1.1 billion, or 8 percent, primarily due to an increase in product sales at Space 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.

Year to date 2023 product costs increased $1.2 billion, or 10 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Space Systems and Aeronautics Systems production programs.

Service Sales and Costs

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.

It comprises both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog.

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.

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

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

March 31, 2023 December 31, 2022

Current Quarter

Second quarter 2023 service sales increased $113 million, or 6 percent, primarily due to an increase in service sales at Aeronautics Systems and Space Systems.

The increase at Aeronautics Systems was principally due to higher sales on restricted programs, partially offset by lower volume on the JSTARS program as it nears completion.

The increase at Space Systems was primarily driven by higher volume on restricted programs.

Second quarter 2023 service costs increased $96 million, or 5 percent, consistent with the higher service sales described above.

Year to date 2023 service sales increased $187 million, or 5 percent, primarily due to an increase in service sales at Space Systems and Defense Systems.

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

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

Year to date 2023 service costs increased $160 million, or 5 percent, consistent with the higher service sales described above.

Backlog consisted of the following as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

$ in millions Funded Unfunded Total

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Total backlog $ 37,896 $ 40,909 $ 78,805 $ 78,743 — %

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.

Second quarter and year to date 2023 net awards totaled $10.9 billion and $18.9 billion, respectively, and backlog totaled $78.8 billion.

Significant second quarter new awards include $5.4 billion for restricted programs (primarily at Space Systems, Aeronautics Systems and Mission Systems), $0.6 billion for F-35 (primarily at Aeronautics Systems and Mission Systems), $0.3 billion for the Missile Defense Agency's Ballistic Missile Defense System Overhead Persistent Infrared Architecture (BOA) and $0.3 billion for Virginia-Class submarines.

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

We are focused on the efficient conversion of operating income into cash 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 June 30, 2023, we had $3.4 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.

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

The company has a five-year senior unsecured credit facility in an

NORTHROP GRUMMAN CORPORATION

credit facility.

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

aggregate principal amount of $2.5 billion, and in April 2023, we renewed our one-year $500 million uncommitted credit facility.

At June 30, 2023, there were no borrowings outstanding under these credit facilities;

however, in May 2023, we issued $779 million in commercial paper, which reduced the amount available for borrowing under our unsecured credit facility.

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.

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

COVID-19 and the CARES Act

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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.

In July 2023, the DoD reverted back to the 80 percent progress payment rate on prospectively awarded contracts.

We do not expect this change will have a material impact on our 2023 cash from operations.

Internal Revenue Code (IRC) Section 174

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Operating Cash Flow

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

Three Months Ended March 31 %

The table below summarizes key components of cash provided by (used in) operating activities:

Six Months Ended June 30 %

$ in millions 2023 2022 Change

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Other, net 51 67 (24) %

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

Net cash provided by (used in) operating activities $ 217 $ (685) (132) %

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

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.

Year to date 2023 net cash provided by operating activities was $217 million compared to net cash used in operating activities of $685 million in the prior year period and reflects improved trade working capital largely driven by increased billings and cash collections.

Adjusted Free Cash Flow

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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 used in operating activities to adjusted free cash flow:

Three Months Ended March 31 %

The table below reconciles net cash provided by (used in) operating activities to adjusted free cash flow:

Six Months Ended June 30 %

$ in millions 2023 2022 Change

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

Net cash provided by (used in) operating activities $ 217 $ (685) (132) %

Capital expenditures (613) (507) 21 %

Adjusted free cash flow $ (396) $ (1,192) (67) %

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.

Year to date 2023 adjusted free cash flow increased $796 million as compared with the same period in 2022 due to higher net cash provided by operating activities, partially offset by an increase in capital expenditures.

Investing Cash Flow

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.

Year to date 2023 net cash used in investing activities increased $144 million as compared with the same period in 2022 principally due to higher capital expenditures.

Financing Cash Flow

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.

Year to date 2023 net cash provided by financing activities was $1.2 billion compared to net cash used in financing activities of $1.2 billion in the prior year period principally due to the issuance of $2.0 billion in long-term debt and net borrowings on commercial paper of $768 million, partially offset by a $291 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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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 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.

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

They include:

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• 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

• continued pressures from macroeconomic trends, including on costs, schedules, performance and ability to meet expectations

• increased competition within our markets and bid protests

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Business and Operational Risks

• 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

• impacts related to health epidemics and pandemics, including COVID-19

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

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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 2. Management’s Discussion and Analysis