What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-26 compared with 2023-07-27 · 135 added, 132 removed, 318 unchanged (46% of the section changed)

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

More recently, the hostilities in Israel and the Gaza Strip have further heightened global tensions and instability.

At this time, it is unknown whether hostilities in this region will escalate into an even larger conflict.

The demand for our goods and services may increase, especially if the U.S.

provides increased military assistance and support to Israel.

We do not have a significant business presence in the region, and therefore do not anticipate significant adverse financial impacts directly from the current conflict.

More broadly, the ongoing conflicts in Ukraine and Israel and threats elsewhere, particularly in the Pacific region, have heightened tensions and highlighted security requirements globally, including in Europe, the Middle East 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.

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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.

Direct impacts of COVID-19 on our business year to date remained limited.

While we cannot

NORTHROP GRUMMAN CORPORATION

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

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.

Like the communities in which we operate, our actions have varied, and 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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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 June 30, 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.

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

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.

Current and future requirements related to the conflicts in Ukraine and Israel, 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.

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

NORTHROP GRUMMAN CORPORATION

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.

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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.

NORTHROP GRUMMAN CORPORATION

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.

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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.

The FRA also provides for across the board cuts to discretionary spending by one percent below current-year levels if a continuing resolution (CR) 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.

If a CR 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.

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

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

The FY 2024 NDAA is currently proceeding through the House and Senate at overall funding levels broadly consistent with the President’s request.

Congress set December 31, 2023 as a target for passing the NDAA.

In September, Congress passed a short-term CR that provides certain funds for the federal government through November 17, 2023.

The bill also includes $16 billion for disaster relief.

The CR generally maintains FY 2023 levels of funding for federal programs for 45 days, giving lawmakers more time to reach an agreement on full year FY 2024 appropriations bills.

If Congress does not pass full year appropriations or an additional CR before November 17, 2023, the federal government is expected to face a shutdown and to cease what are characterized as certain non-essential operations.

Depending on the nature and duration of a potential shutdown, businesses that rely on government funding, including defense contractors, could be significantly impacted.

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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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.

NORTHROP GRUMMAN CORPORATION

CONSOLIDATED OPERATING RESULTS

Selected financial highlights are presented in the table below:

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

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

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

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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.

NORTHROP GRUMMAN CORPORATION

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.

Third quarter 2023 sales increased $804 million, or 9 percent, due to higher sales at all four sectors.

Third quarter 2023 sales reflect continued strong demand for our products and services.

Year to date 2023 sales increased $2.1 billion, or 8 percent, due to higher sales at all four sectors.

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

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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.

Third quarter 2023 operating income increased $172 million, or 20 percent, due to higher segment operating income, lower unallocated corporate expense and a reduction in the FAS/CAS operating adjustment.

Third quarter 2023 operating margin rate increased to 10.4 percent principally due to the lower unallocated corporate expense and FAS/CAS operating adjustment.

Third quarter 2023 general and administrative (G&A) costs as a percentage of sales decreased to 10.5 percent from 10.9 percent in the prior year period primarily due to higher sales, which more than offset our continued investments for future business opportunities.

Year to date 2023 operating income increased $235 million, or 9 percent, due to lower unallocated corporate expense, a reduction in the FAS/CAS operating adjustment and higher segment operating income.

Year to date 2023 operating margin rate increased to 10.2 percent due to the lower unallocated corporate expense and FAS/CAS operating adjustment, partially offset by a lower segment operating margin rate.

Year to date 2023 G&A costs as a percentage of sales decreased to 10.9 percent from 11.1 percent in the prior year period primarily due to higher sales, which more than offset our continued investments for future business opportunities.

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

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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.

The third quarter 2023 ETR of 16.2 percent was comparable with the prior year period and reflects an increase in research credits, partially offset by higher interest expense on unrecognized tax benefits.

See Note 3 to the financial statements for additional information.

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.

NORTHROP GRUMMAN CORPORATION

The year to date 2023 ETR decreased to 16.5 percent from 16.8 percent in the prior year period principally due to an increase in research credits as well as more 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.

Third quarter 2023 net earnings increased $22 million, or 2 percent, primarily due to $172 million of higher operating income and a $97 million gain recognized upon the sale of our minority investment in an Australian business, partially offset by a $244 million reduction in the non-operating FAS pension benefit.

Year to date 2023 net earnings decreased $225 million, or 8 percent, primarily due to a $732 million reduction in the non-operating FAS pension benefit, partially offset by $235 million of higher operating income, the $97 million gain on sale of a minority investment described above, a $96 million increase in returns on marketable securities related to our non-qualified benefit plans, and higher interest income on short-term investments.

Diluted Earnings Per Share

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.

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Third quarter 2023 diluted earnings per share increased 5 percent, reflecting a 2 percent increase in net earnings and a 2 percent reduction in weighted-average diluted shares outstanding.

Year to date 2023 diluted earnings per share decreased 6 percent, reflecting an 8 percent decrease in net earnings and a 2 percent reduction in weighted-average diluted shares outstanding.

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).

NORTHROP GRUMMAN CORPORATION

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 June 30 % Six Months Ended June 30 %

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

$ in millions 2023 2022 Change 2023 2022 Change

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Current Quarter

NORTHROP GRUMMAN CORPORATION

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.

Third quarter 2023 segment operating income increased $82 million, or 8 percent, primarily due to higher sales.

Third quarter 2023 segment operating margin rate was comparable with the prior year period.

Year to date 2023 segment operating income increased $26 million, or 1 percent.

Higher sales were partially offset by a lower segment operating margin rate, largely driven by lower net EAC adjustments.

Lower net EAC adjustments reflect a $36 million unfavorable EAC adjustment on the HALO program in the second quarter of 2023 and a prior year $67 million favorable EAC adjustment on the EMD phase of the B-21 program.

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

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.

Third 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.

The decrease in third quarter 2023 unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation as well as higher benefits from deferred state taxes.

NORTHROP GRUMMAN CORPORATION

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 higher benefits from deferred state taxes.

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 June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

$ in millions 2023 2022 2023 2022

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

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

$ in millions 2023 2022 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

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$ in millions 2023 2022 Change 2023 2022 Change

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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.

Third quarter 2023 sales increased $229 million, or 9 percent, primarily due to higher volume in Manned Aircraft.

Higher sales on restricted programs and E-2 were partially offset by lower volume on F/A-18 largely due to post Multi-Year Procurement 4 (MYP4) contract award timing.

Year to date 2023 sales increased $102 million, or 1 percent, due to higher volume in Manned Aircraft, partially offset by lower volume in Autonomous Systems.

Higher volume on restricted programs was partially offset by a $133 million decrease on F/A-18 due to post MYP4 contract award timing, $105 million decrease on E-2 largely related to higher material volume in the prior year, $104 million decrease on the Joint Surveillance and Target Attack Radar System (JSTARS) program as it nears completion, as well as lower volume on the Triton and Global Hawk programs.

Operating Income

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.

Third quarter 2023 operating income increased $21 million, or 8 percent, primarily due to higher sales.

Operating margin rate was comparable with the prior year period.

NORTHROP GRUMMAN CORPORATION

Year to date 2023 operating income decreased $29 million, or 4 percent, due to a lower operating margin rate, which more than offset higher sales.

Operating margin rate decreased to 10.1 percent from 10.6 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

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$ in millions 2023 2022 Change 2023 2022 Change

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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.

Third quarter 2023 sales increased $76 million, or 6 percent, primarily due to higher volume in Battle Management & Missile Systems, which was driven by several programs, including Integrated Air and Missile Defense Battle Command System (IBCS), ammunition programs, Guided Multiple Launch Rocket System (GMLRS), and Hypersonic Attack Cruise Missile (HACM).

Year to date 2023 sales increased $295 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.

Battle Management & Missile Systems sales increased primarily due to higher volume on ammunition programs, IBCS, HACM, Stand-in Attack Weapon (SiAW), and GMLRS.

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

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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.

NORTHROP GRUMMAN CORPORATION

Third quarter 2023 operating income increased $24 million, or 15 percent, due to a higher operating margin rate and higher sales.

Operating margin rate increased to 12.8 percent from 11.7 percent primarily due to higher net EAC adjustments at Battle Management & Missile Systems.

Year to date 2023 operating income increased $27 million, or 6 percent, due to higher sales, partially offset by a lower operating margin rate.

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MISSION SYSTEMS

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$ in millions 2023 2022 Change 2023 2022 Change

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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.

Third quarter 2023 sales increased $172 million, or 7 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on marine systems programs, partially offset by lower volume on the Ground/Air Task Oriented Radar (G/ATOR) program largely driven by material receipts and full-rate production (FRP) 5 contract award timing.

Year to date 2023 sales increased $363 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 a $115 million decrease on G/ATOR largely driven by material receipts and FRP5 contract award timing, as well as lower volume on airborne radar programs.

NORTHROP GRUMMAN CORPORATION

Operating Income

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.

Third quarter 2023 operating income increased $18 million, or 5 percent, due to higher sales, partially offset by a lower operating margin rate.

Operating margin rate decreased to 14.7 percent from 15.0 percent primarily due to changes in contract mix toward more cost-type content.

Year to date 2023 operating income decreased $19 million, or 2 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

Operating margin rate decreased to 14.6 percent from 15.6 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 and a first quarter 2023 loss recognized in connection with an unconsolidated joint venture.

SPACE SYSTEMS

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$ in millions 2023 2022 Change 2023 2022 Change

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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.

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.

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.

Third quarter 2023 sales increased $343 million, or 11 percent, due to higher sales in both business areas.

Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including the Ground Based Strategic Deterrent (GBSD), and Next Generation Interceptor (NGI), as well as higher volume on the Space Launch System (SLS) booster program.

Sales in the Space business area were driven by higher volume on restricted programs and the Next-Generation Overhead Persistent Infrared Polar (NextGen Polar) program, partially offset by lower sales on the HALO program.

Year to date 2023 sales increased $1.3 billion, or 15 percent, due to higher sales in both business areas.

Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $386 million increase on GBSD, a $197 million increase on NGI and a $106 million increase on Ground-based Midcourse Defense (GMD), as well as higher volume on the SLS booster and Glide Phase Interceptor (GPI) programs.

Sales in the Space business area increased primarily due to higher volume on restricted programs, a $238 million increase on the NextGen Polar program and a $130 million increase on the Space Development Agency (SDA) Tranche 1 Tracking Layer program.

These increases were partially offset by a $146 million decrease for Commercial Resupply Services (CRS) missions and a $111 million decrease on the HALO program.

Operating Income

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.

Third quarter 2023 operating income increased $22 million, or 8 percent, due to higher sales, partially offset by a lower operating margin rate.

Operating margin rate decreased to 8.9 percent from 9.2 percent primarily due to lower net EAC adjustments, partially offset by a $16 million benefit from insurance recoveries in our commercial space business.

Year to date 2023 operating income increased $47 million, or 5 percent, due to higher sales, partially offset by a lower operating margin rate.

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

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

$ in millions 2023 2022 2023 2022

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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

Third quarter 2023 product sales increased $699 million, or 10 percent, due to an increase in product sales at all four sectors.

The increase was principally driven by higher restricted sales at Aeronautics Systems and Mission Systems, ramp-up on Space Systems development programs, including GBSD and NGI, and higher volume on IBCS, ammunition programs and GMLRS at Defense Systems.

Third quarter 2023 product costs increased $661 million, or 11 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.

Year to date 2023 product sales increased $1.8 billion, or 9 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.

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.

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

Year to date 2023 product costs increased $1.8 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 programs.

NORTHROP GRUMMAN CORPORATION

Service Sales and Costs

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

Third quarter 2023 service sales increased $105 million, or 5 percent, primarily due to an increase in service sales at Aeronautics Systems and Mission Systems.

The increase was principally driven by higher restricted sales at both sectors, as well as higher service volume on Global Hawk, partially offset by lower volume on the JSTARS program at Aeronautics Systems.

Third quarter 2023 service costs increased $61 million, or 4 percent, consistent with the higher service sales described above and reflects a higher operating margin rate on service sales at Space Systems.

Year to date 2023 service sales increased $292 million, or 5 percent, due to an increase in service sales at all four sectors.

The increase was principally driven by higher restricted sales at Space Systems and Aeronautics Systems, higher service volume on F-35 sustainment and SEWIP integration at Mission Systems, and higher volume on an international training program at Defense Systems.

Year to date 2023 service costs increased $221 million, or 4 percent, consistent with the higher service sales described above and reflects a higher operating margin rate on service sales at Space Systems.

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

September 30, 2023 December 31, 2022

$ in millions Funded Unfunded Total

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Total backlog $ 36,513 $ 47,418 $ 83,931 $ 78,743 7 %

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.

Third quarter and year to date 2023 net awards totaled $15.0 billion and $33.9 billion, respectively, and backlog totaled $83.9 billion.

Significant third quarter new awards include $3.6 billion for restricted programs (primarily at Space Systems, Aeronautics Systems, and Mission Systems), $1.3 billion for E-2, $0.7 billion for SDA Tranche 2 Transport Layer and $0.5 billion for GMLRS.

LIQUIDITY AND CAPITAL RESOURCES

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.

At September 30, 2023, we had $2.1 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

NORTHROP GRUMMAN CORPORATION

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 August 2023), share repurchases and working capital.

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 credit facility.

At September 30, 2023, there were no borrowings outstanding under these credit facilities.

In February 2023, we issued $2.0 billion of unsecured senior notes for general corporate purposes, including debt repayment, share repurchases and working capital.

COVID-19 and the CARES Act

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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 what funds will be available and how much we will be able to recover.

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.

In addition, during 2020, the DoD increased the rate for certain

NORTHROP GRUMMAN CORPORATION

progress payments from 80 percent to 90 percent for costs incurred and work performed on relevant contracts.

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

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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.

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

As we finalized our 2022 federal tax return, we reduced the previously estimated impact of Section 174 on our tax liability for 2022 to approximately $700 million and we anticipate its impact on our tax liability for 2023 will be approximately $550 million.

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.

In the meantime, we expect to continue to make additional federal tax payments based on the current Section 174 tax law.

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.

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Operating Cash Flow

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

Six Months Ended June 30 %

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

Nine Months Ended September 30 %

$ in millions 2023 2022 Change

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Non-cash items (1)

91 (321) (128) %

Pension and OPB contributions (108) (106) 2 %

Changes in trade working capital (1,469) (1,855) (21) %

Other, net 51 67 (24) %

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

Other, net (43) 96 NM

Net cash provided by operating activities $ 1,445 $ 650 122 %

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

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.

Year to date 2023 net cash provided by operating activities increased $795 million as compared with the same period in 2022 and reflects improved trade working capital largely driven by increased billings and cash collections.

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

NORTHROP GRUMMAN CORPORATION

pension contributions for consistency and comparability of financial performance.

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

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

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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 provided by (used in) operating activities to adjusted free cash flow:

Six Months Ended June 30 %

NORTHROP GRUMMAN CORPORATION

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

Nine Months Ended September 30 %

$ in millions 2023 2022 Change

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

Net cash provided by operating activities $ 1,445 $ 650 122 %

Capital expenditures (972) (803) 21 %

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

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.

Proceeds from sale of equipment to a customer — 100 (100) %

Adjusted free cash flow $ 473 $ (53) NM

Year to date 2023 adjusted free cash flow increased $526 million as compared with the same period in 2022 principally due to higher net cash provided by operating activities, partially offset by an increase in capital expenditures.

Investing Cash Flow

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.

Year to date 2023 net cash used in investing activities increased $149 million as compared with the same period in 2022 largely due to higher capital expenditures.

Financing Cash Flow

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.

Year to date 2023 net cash used in financing activities decreased $723 million as compared with the same period in 2022 principally due to the issuance of $2.0 billion in long-term debt, partially offset by $1.05 billion in debt repayments and a $143 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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They include:

NORTHROP GRUMMAN CORPORATION

Industry and Economic Risks

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government for a substantial portion of our business

NORTHROP GRUMMAN CORPORATION

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

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

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

NORTHROP GRUMMAN CORPORATION

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

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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