What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-01-25 compared with 2023-01-26 · 223 added, 222 removed, 1151 unchanged (28% of the section changed)

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▪ Comparing costs incurred to date to the costs management estimated to be incurred to date.

▪ Evaluating management’s ability to achieve the estimates of total cost and revenue by performing corroborating inquiries with the Company’s program and business management, and testing management’s process used to develop the estimates based on their work plans, engineering specifications, program labor, and supplier contracts.

This includes management’s process to identify macroeconomic impacts to programs, which could include forecasted cost impacts and assumptions on the ability to recover those costs.

▪ Comparing management’s estimates for the selected contracts to costs and revenues of similar performance obligations, when applicable.

▪ Evaluating management’s ability to achieve the estimates of cost and revenue by performing corroborating inquiries with the Company’s program and business management, and testing management’s process used to develop the estimates based on their work plans, engineering specifications, program labor, and supplier contracts.

This includes management’s process to identify macroeconomic impacts to certain programs, which could include forecasted cost impacts and assumptions on the ability to recover those costs.

▪ Evaluating selected changes to the estimates of costs and obtaining supporting documentation on timing and amounts of these changes in estimates.

– Tested the mathematical accuracy of management’s calculation of revenue recognized during the period for the performance obligations.

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principally related to state apportionment, the methods of accounting associated with the timing of revenue recognition and related costs, and the 2017 Tax Act.

Until the matters are resolved, the outcome is inherently uncertain and the Company discloses a summary of changes in their uncertain tax positions within the notes to their financial statements.

Auditing the assumptions associated with the Company’s uncertain tax positions involves especially challenging judgments given the complexity and inherent subjectivity involved in evaluating the potential outcomes of these matters.

Until the matters are resolved, the outcome is inherently uncertain.

Auditing certain assumptions associated with the Company’s uncertain tax positions involved especially challenging judgments given the complexity and inherent subjectivity involved in evaluating the potential outcomes of these matters.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the assumptions used in determining uncertain tax positions included the following, among others:

• We tested the effectiveness of internal controls relating to the identification and completeness of, and recognition for, uncertain tax positions, including management’s controls over the underlying key assumptions and inputs used to derive the estimates.

Our audit procedures related to certain assumptions used in determining uncertain tax positions included the following, among others:

• We tested the effectiveness of controls relating to the identification and completeness of, and recognition for, uncertain tax positions, including management’s controls over the underlying key assumptions and inputs used to derive the estimates.

• With the assistance of our income tax specialists, we selected specific uncertain tax positions for testing and performed the following procedures:

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– Obtained supporting documentation and evaluated how the Company supported the position, including the assumptions and estimates used for measurement, and how the taxing authorities have historically challenged the tax position, if applicable.

– Obtained and read opinions provided by external counsel, as applicable, regarding the tax position taken by the Company.

– Evaluated whether the uncertain tax position met the “more likely than not” recognition threshold.

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Non-operating FAS pension benefit 530 1,505 1,469

Mark-to-market pension and OPB benefit (expense) 1,232 2,355 ( 1,034 )

Mark-to-market pension and OPB (expense) benefit ( 422 ) 1,232 2,355

Other, net 246 4 19

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Net earnings (from above) $ 2,056 $ 4,896 $ 7,005

Other comprehensive loss, net of tax

Change in unamortized prior service credit ( 1 ) ( 8 ) ( 41 )

Change in cumulative translation adjustment and other, net ( 9 ) ( 7 ) 10

Other comprehensive loss, net of tax ( 10 ) ( 15 ) ( 31 )

Other comprehensive income (loss), net of tax

Change in cumulative translation adjustment 23 ( 16 ) ( 7 )

Change in other, net 2 6 ( 8 )

Other comprehensive income (loss), net of tax 25 ( 10 ) ( 15 )

Comprehensive income $ 2,081 $ 4,886 $ 6,990

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Operating lease liabilities 1,892 1,824

Deferred tax liabilities 132 490

Other non-current liabilities 2,839 2,039

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Depreciation and amortization 1,338 1,342 1,239

Mark-to-market pension and OPB (benefit) expense ( 1,232 ) ( 2,355 ) 1,034

Mark-to-market pension and OPB expense (benefit) 422 ( 1,232 ) ( 2,355 )

Stock-based compensation 87 99 94

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

B-21 charge 1,559 — —

Net periodic pension and OPB income ( 308 ) ( 1,193 ) ( 1,091 )

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Proceeds from sale of equipment to a customer — 155 84

Proceeds from sale of minority investments 197 — —

Other, net ( 4 ) 39 ( 11 )

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Payments of long-term debt ( 1,050 ) — ( 2,236 )

Payments to credit facilities — — ( 78 )

Common stock repurchases ( 1,500 ) ( 1,504 ) ( 3,705 )

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Net cash used in financing activities ( 1,761 ) ( 2,613 ) ( 7,002 )

(Decrease) increase in cash and cash equivalents ( 953 ) ( 1,377 ) 2,662

Increase (decrease) in cash and cash equivalents 532 ( 953 ) ( 1,377 )

Cash and cash equivalents, beginning of year 2,577 3,530 4,907

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Stock compensation — — 2

Other — — ( 5 )

End of year — — —

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Beginning of year ( 153 ) ( 143 ) ( 128 )

Other comprehensive loss, net of tax ( 10 ) ( 15 ) ( 31 )

Other comprehensive income (loss), net of tax 25 ( 10 ) ( 15 )

End of year ( 128 ) ( 153 ) ( 143 )

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Our broad portfolio is aligned to support national security priorities and our solutions equip our customers with capabilities they need to connect, protect and advance humanity.

The company is a leading provider of space systems, advanced aircraft, missile defense, advanced weapons and long-range fires capabilities, mission systems, networking and communications, strategic deterrence systems, and breakthrough technologies, such as artificial intelligence, advanced computing and cyber.

The company is a leading provider of space systems, military aircraft, missile defense, advanced weapons and long-range fires capabilities, mission systems, networking and communications, strategic deterrence systems, and breakthrough technologies, such as advanced computing, microelectronics and cyber.

We are focused on competing and winning programs that enable continued growth, performing on our commitments and affordably delivering capability our customers need.

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Basis of Presentation

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

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

select cyber, intelligence and missions support programs, which were part of the former CIMS division of Mission Systems;

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

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

See Note 2 for further information regarding the divestiture.

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

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

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

Accounting Estimates

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Similarly, our non-U.S.

government contracts generally contain contractual termination clauses or entitle the company to payment for work performed to date for

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goods and services that do not have an alternative use.

government contracts generally contain contractual termination clauses or entitle the company to payment for work performed to date for goods and services that do not have an alternative use.

For most of our contracts, control is effectively transferred during the period of performance, so we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion).

The company believes this represents the most appropriate measurement towards satisfaction of its performance obligations.

The company believes this represents the most appropriate

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measurement towards satisfaction of its performance obligations.

Revenue for contracts in which the control of goods produced does not transfer until delivery to the customer is recognized at a point in time (i.e., typically upon delivery).

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Significant judgment is used to estimate total sales and cost at completion.

Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), contract claims and REAs.

Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), un-priced change orders, REAs and contract claims.

Variable consideration is included in total estimated sales to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

We estimate variable consideration as the most likely amount to which we expect to be entitled.

At the request of the National Aeronautics and Space Administration (NASA), Space Systems submitted an engineering change proposal (ECP) during the fourth quarter of 2023 for scope increases and other aspects of the Habitation and Logistics Outpost (HALO) contract largely stemming from evolving Lunar Gateway architecture and mission requirements.

The ECP addresses both work performed and work expected to be performed by the company resulting from scope changes previously approved by NASA, as well as changes NASA has requested the company to propose but has not yet directed the company to perform.

The company has begun negotiating with NASA on these various changes and other aspects of the HALO contract.

The company’s 2023 results include $ 100 million of unfavorable EAC adjustments on the HALO contract and reflect our current best estimate of the outcome of the ECP negotiations assuming the terms of the current contract;

however, if the outcome is less favorable than what we have assumed, it could have an adverse effect on our financial position, results of operations and/or cash flows.

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

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If it is determined that a loss is expected to result on an individual performance obligation, the entire amount of the estimable future loss, including an allocation of G&A costs, is charged against income in the period the loss is identified.

B-21 Low-Rate Initial Production Options

In 2015, the U.S.

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

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

The LRIP options are largely fixed price and are expected to be awarded and executed through approximately the end of the decade.

During the fourth quarter of 2023, the B-21 program entered flight testing and the company received an award for the first LRIP lot.

We previously disclosed it was reasonably possible one or more of the LRIP options could be performed at a loss principally due to the company’s estimate of the impact macroeconomic factors may have on our cost to complete the LRIP options, as well as ongoing discussions with our suppliers and our customer.

During the fourth quarter of 2023, we again reviewed our estimated profitability on the LRIP phase of the program, and we now believe it is probable each of the first five LRIP lots will be performed at a loss.

The loss is largely driven by a change in our assumptions regarding funding to mitigate the impact of macroeconomic disruptions on the LRIP phase of the program and higher projected manufacturing costs that reflect recent supplier negotiations and our experience in completing the first aircraft.

The projected loss across the five LRIP lots, which we recognized during the fourth quarter of 2023, is $ 1.56 billion.

The loss comprises a $ 143 million unfavorable EAC adjustment for the first LRIP lot and a $ 1.37 billion loss contingency accrual and $ 45 million reduction of inventoried costs for the unexercised LRIP lots.

As of December 31, 2023, $ 631 million of the loss contingency accrual is included in Other current liabilities and $ 740 million is included in Other non-current liabilities in the consolidated statement of financial position.

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If our estimated cost to complete the LRIP phase of the program changes or our assumptions regarding contract performance, quantities, or funding to mitigate the impact of macroeconomic disruptions are resolved more or less favorably than what we have estimated, our financial position, results of operations and/or cash flows could be materially affected.

Net EAC Adjustments

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

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

During the first and fourth quarters of 2022, we recorded favorable EAC adjustments of $ 67 million and $ 66 million, respectively, on the engineering, manufacturing and development (EMD) phase of the B-21 program at Aeronautics Systems largely related to an increase in the amount of performance incentives we expect to earn.

See Note 12 for a discussion of reasonably possible losses we may incur on the low-rate initial production (LRIP) phase of B-21.

During 2021, we recorded $ 135 million of unfavorable EAC adjustments on the F-35 program at Aeronautics Systems due to labor-related production impacts largely driven by COVID-19.

During the fourth quarter of 2023, we recorded a $ 143 million unfavorable EAC adjustment on the first LRIP lot of the B-21 program at Aeronautics Systems as described above.

During 2023, we recorded $ 100 million of unfavorable EAC adjustments on the HALO program at Space Systems largely due to cost growth stemming from evolving Lunar Gateway architecture and mission requirements combined with macroeconomic challenges.

During 2022, we recorded $ 133 million of favorable EAC adjustments on the EMD phase of the B-21 program at Aeronautics Systems.

During 2021, we recorded $ 135 million of unfavorable EAC adjustments on the F-35 program at Aeronautics Systems.

No other such adjustments were significant to the financial statements during the years ended December 31, 2023, 2022 and 2021.

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

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Company backlog as of December 31, 2023 was $ 84.2 billion.

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

Subsequent Event – In January 2024, the company received a termination for convenience in our restricted Space business.

The company expects to reduce backlog by approximately $ 2 billion during the first quarter of 2024 related to the termination.

Contract Assets and Liabilities

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These contract assets are not considered a significant financing component of the company’s contracts as the payment terms are intended to protect the customer in the event the company does not perform on its obligations under the contract.

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

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The change in the balances of the company’s contract assets and liabilities primarily results from timing differences between revenue recognition and customer billings and/or payments.

Net contract assets as of December 31, 2022 decreased 4 percent from the prior year, primarily due to decreases in net contracts assets at Aeronautics Systems and Space Systems, partially offset by an increase in net contract assets at Defense Systems.

Net contract assets as of December 31, 2023 decreased 37 percent from the prior year, primarily due to decreases in net contracts assets at Space Systems, Missions Systems and Aeronautics Systems.

The amount of revenue recognized for the years ended December 31, 2023, 2022 and 2021 that was included in the contract liability balance at the beginning of each year was $ 3.1 billion, $ 2.4 billion and $ 2.0 billion, respectively.

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Company-sponsored research and development activities primarily include efforts related to government programs.

Company-sponsored IR&D expenses totaled $ 1.2 billion, $ 1.1 billion and $ 1.1 billion in 2022, 2021 and 2020,

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respectively, which represented 3.3 percent, 3.2 percent and 2.9 percent of total sales, respectively.

Company-sponsored IR&D expenses totaled $ 1.2 billion, $ 1.2 billion and $ 1.1 billion in 2023, 2022 and 2021, respectively, which represented 3.0 percent, 3.3 percent and 3.2 percent of total sales, respectively.

Customer-funded research and development activities are charged directly to the related contracts.

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In accordance with applicable FAR and CAS requirements, current state and local income and franchise taxes are generally considered allowable and allocable costs to our U.S.

government contracts and, consistent with industry practice, are recorded in operating costs and expenses.

government contracts and are, therefore, recorded in operating costs and expenses.

The company generally recognizes changes in deferred state taxes and unrecognized state tax benefits in unallocated corporate expenses.

Uncertain tax positions reflect the company’s expected treatment of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim, which have not been reflected in measuring income tax expense or taxes payable for financial reporting purposes.

Uncertain tax positions reflect the company’s expected treatment of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim.

Until these positions are sustained by the taxing authorities or the statute of limitations concerning such issues lapses, the company does not generally recognize the tax benefits resulting from such positions and reports the tax effects as a liability for uncertain tax positions in its consolidated statements of financial position.

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Cash and Cash Equivalents

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For foreign currency forward contracts, where model-derived valuations are appropriate, the company utilizes the income approach to determine the fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties’ credit risks.

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The company does not use derivative financial instruments for trading or speculative purposes, nor does it use leveraged financial instruments.

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Inventoried Costs

Inventoried costs generally comprise costs associated with unsatisfied performance obligations on contracts accounted for using point in time revenue recognition, costs incurred in excess of existing contract requirements or funding that are probable of recovery and other accrued contract costs that are expected to be recoverable when allocated to specific contracts.

Inventoried costs generally comprise costs associated with unsatisfied performance obligations on contracts accounted for using point in time revenue recognition, costs incurred in excess of existing contract requirements that are probable of recovery and other accrued contract costs that are expected to be recoverable when allocated to specific contracts.

Product inventory primarily consists of raw materials and is stated at the lower of cost or net realizable value, generally using the average cost method.

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The company also has split-dollar life insurance policies on former officers and executives from acquired businesses, which are recorded at the lesser of their cash surrender value or premiums paid.

These policies are utilized as a partial funding source for deferred compensation and other non-qualified employee retirement plans.

These policies are utilized as a partial funding source for deferred compensation and other

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non-qualified employee retirement plans.

As of December 31, 2023 and 2022, the carrying values associated with these policies were $ 399 million and $ 367 million, respectively, and are recorded in Other non-current assets in the consolidated statements of financial position.

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Property, plant and equipment (PP&E) are depreciated over the estimated useful lives of individual assets.

Most assets are depreciated using declining-balance methods, with the remainder using the straight-line method.

Depreciation expense is generally an allowable and allocable cost in accordance with applicable FAR and CAS requirements and recorded in the same segment where the related assets are held.

However, the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business combinations is recorded in unallocated corporate expense within operating income as such depreciation is not allocable to government contracts and not considered part of management’s evaluation of segment operating performance.

Major classes of property, plant and equipment and their useful lives are as follows:

Machinery and other equipment is primarily depreciated using declining-balance methods.

The other asset categories are generally depreciated using the straight-line method.

Depreciation expense is generally an allowable and allocable cost in accordance with applicable FAR and CAS requirements and is recorded in the same segment where the related assets are held.

However, the additional depreciation expense related to the step-up in fair value of PP&E acquired through business combinations is recorded in unallocated corporate expense within operating income as such depreciation is not allocable to government contracts and not considered part of management’s evaluation of segment operating performance.

Major classes of PP&E and their useful lives are as follows:

Useful life in years, $ in millions Useful Life 2023 2022

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During the fourth quarter of 2020, the company completed a sale of equipment to a customer on a restricted Aeronautics Systems program for $ 444 million.

The company previously intended to use the equipment for internal purposes so we recognized the acquisition costs as capital expenditures and included the equipment in property, plant and equipment.

The company previously intended to use the equipment for internal purposes so we recognized the acquisition costs as capital expenditures and included the equipment in PP&E.

As we regularly sell this type of equipment to customers in the ordinary course of business, we recorded the sale as a revenue transaction and included the net book value of the equipment in Operating costs and expenses.

Although we generally classify proceeds from revenue transactions as cash inflows from operating activities, we recognized the proceeds from this transaction as cash inflows from investing activities, consistent with our prior recognition of the cost to acquire the equipment as capital expenditures.

The company received cash

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payments of $ 155 million, $ 84 million and $ 205 million related to the equipment sale during 2022, 2021 and 2020, respectively, and included it in Proceeds from sale of equipment to a customer in the consolidated statement of cash flows.

The company received cash payments of $ 155 million and $ 84 million related to the equipment sale during 2022 and 2021, respectively, and included it in Proceeds from sale of equipment to a customer in the consolidated statements of cash flows.

The company received no cash payments in 2023 related to the equipment sale.

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

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

During the years ended December 31, 2022 and 2021, the company received lease incentives for landlord funded leasehold improvements of $ 96 million and $ 150 million, respectively, related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities.

During the years ended December 31, 2023 and 2022, the company received lease incentives for landlord funded leasehold improvements of $ 55 million and $ 96 million, respectively, related to Space Systems real estate leases, which were recorded in PP&E and included in non-cash investing activities.

On December 28, 2022 the company acquired certain leased land in exchange for company-owned land, which had been used previously for production-related activities at Space Systems.

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Non-cash investing activities also include capital expenditures incurred but not yet paid of $ 75 million, $ 113 million and $ 91 million as of December 31, 2023, 2022 and 2021, respectively.

Sale of Minority Investment

In July 2023, the company sold its minority investment in an Australian business for AUD $ 235 million (the equivalent of $ 157 million upon settlement).

The sale resulted in a pre-tax gain of $ 97 million, which is reflected in

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Other, net on the consolidated statements of earnings and comprehensive income for the year ended December 31, 2023.

Proceeds from the sale are included in investing activities on the consolidated statement of cash flows for the year ended December 31, 2023.

Goodwill and Other Purchased Intangible Assets

The company tests goodwill for impairment at least annually as of December 31, or when an indicator of potential impairment exists.

When performing the goodwill impairment test, the company uses a discounted cash flow approach corroborated by comparative market multiples, where appropriate, to determine the fair value of its reporting units.

Goodwill and other purchased intangible asset balances are included in the identifiable assets of their assigned business segment.

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We do not have any material restrictions or covenants in our lease agreements, sale-leaseback transactions, land easements or residual value guarantees.

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Litigation, Commitments and Contingencies

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We accrue for environmental liabilities when management determines that, based on the facts and circumstances known to the company, it is probable the company will incur costs to address environmental impacts and the costs are reasonably estimable.

When only a range of amounts is reasonably estimable and no amount within the range is more probable than another, we record the low end of the range.

When only a range of amounts is reasonably estimable and no amount within the range is more likely than another, we record the low end of the range.

The company typically projects environmental costs for up to 30 years, records environmental liabilities on an undiscounted basis, and excludes asset retirement obligations and certain legal costs.

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The company sponsors various defined benefit pension plans and defined contribution retirement plans covering substantially all of its employees.

In most cases, our defined contribution plans provide for a company match of employee contributions.

In most cases, our defined contribution plans provide for a company match of

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employee contributions.

The company also provides postretirement benefits other than pensions to eligible retirees and qualifying dependents, consisting principally of health care and life insurance benefits.

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As a result, annual retiree benefit plan expense amounts for FAS are different from the amounts for CAS in any given reporting period even though the ultimate cost of providing benefits over the life of the plans is the same under either method.

CAS retiree benefit plan costs are charged to contracts and are included in segment operating income, and the difference between the service cost component of FAS expense and total CAS expense is recorded in operating income at the consolidated company level.

Not all net periodic pension expense is recognized in net earnings in the year incurred because it is allocated as production costs and a portion remains in inventory at the end of a reporting period.

Actuarial gains and losses are immediately recognized in net periodic benefit cost for FAS through MTM benefit (expense) upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.

CAS retiree benefit plan costs are charged to contracts and are included in segment operating income, and the difference between the service cost component of FAS expense and total CAS expense (the “FAS/CAS operating adjustment”) is recorded in operating income at the consolidated company level.

Actuarial gains and losses are immediately recognized in net periodic benefit cost for FAS through MTM (expense) benefit upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.

Prior service credits are recognized as a component of Accumulated other comprehensive loss and amortized into earnings in future periods.

Stock Compensation

The company’s stock compensation plans are classified as equity plans and compensation expense is generally recognized over the vesting period of stock awards (typically three years ), net of estimated forfeitures.

The company’s stock compensation plans are classified as equity plans.

Compensation expense for stock awards is measured at the grant date based on the fair value of the award and is recognized over the vesting period (generally three years ), net of estimated forfeitures.

The company issues stock awards in the form of restricted performance stock rights and restricted stock rights.

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The fair value of market-based stock awards is determined at the grant date using a Monte Carlo simulation model.

For purposes of measuring compensation expense for performance awards, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria.

At each reporting date, the number of shares used to calculate compensation expense and diluted earnings per share is adjusted to reflect the number ultimately expected to vest.

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Accumulated Other Comprehensive Loss

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$ in millions 2023 2022

Unamortized prior service credit $ 1 $ 2

Cumulative translation adjustment and other, net ( 154 ) ( 145 )

Cumulative translation adjustment $ ( 138 ) $ ( 161 )

Other, net 10 8

Total accumulated other comprehensive loss $ ( 128 ) $ ( 153 )

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For all periods presented, the company had no material related party transactions.

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Accounting Standards Updates

Accounting standards updates adopted and/or issued, but not effective until after December 31, 2022, are not expected to have a material effect on the company’s consolidated financial position, annual results of operations and/or cash flows.

On November 27, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2023-07 Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.

Among other new disclosure requirements, ASU 2023-07 requires companies to disclose significant segment expenses that are regularly provided to the chief operating decision maker.

ASU 2023-07 will be effective for annual periods beginning on January 1, 2024 and interim periods beginning on January 1, 2025.

ASU 2023-07 must be applied retrospectively to all prior periods presented in the financial statements.

We are evaluating the disclosure impact of ASU 2023-07;

however, the standard will not have an impact on the company’s consolidated financial position, results of operations and/ or cash flows.

On December 14, 2023, the FASB issued ASU No.

2023-09 Income Taxes (Topic 740):

Improvements to Income Tax Disclosures .

ASU 2023-09 requires companies to disclose, on an annual basis, specific categories in the effective tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold.

In addition, ASU 2023-09 requires companies to disclose additional information about income taxes paid.

ASU 2023-09 will be effective for annual periods beginning January 1, 2025 and will be applied on a prospective basis with the option to apply the standard retrospectively.

We are evaluating the disclosure impact of ASU 2023-09;

however, the standard will not have an impact on the company’s consolidated financial position, results of operations and/or cash flows.

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

Disposition of IT and Mission Support Services Business

Effective January 30, 2021, we completed the IT services divestiture for $ 3.4 billion in cash and recorded a pre-tax gain of $ 2.0 billion.

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

select cyber, intelligence and missions support programs, which were part of the former CIMS division of Mission Systems;

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

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

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

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

therefore, no sales and operating income were recognized for this business during the year ended December 31, 2022.

The company recorded pre-tax profit of the IT and mission support services business of $ 20 million and $ 247 million for the years ended December 31, 2021 and 2020, respectively.

therefore, no sales and operating income were recognized for this business during the years ended December 31, 2023 and 2022.

The company recorded sales of $ 162 million and pre-tax profit of $ 20 million for the IT and mission support services business during the year ended December 31, 2021.

EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK

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Share Repurchases

On September 16, 2015, the company’s board of directors authorized a share repurchase program of up to $ 4.0 billion of the company’s common stock (the “2015 Repurchase Program”).

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

Repurchases under the 2015 Repurchase Program commenced in March 2016 and were completed in March 2020, at which time repurchases under the 2018 Repurchase Program commenced.

Repurchases under the 2018 Repurchase Program were completed in October 2021.

Share Repurchase Programs

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

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

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

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

As of December 31, 2022, repurchases under the 2021 Repurchase Program totaled $ 2.4 billion;

$ 0.6 billion remained under this share repurchase authorization.

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

Repurchases under the 2021 Repurchase Program commenced in October 2021 and were completed in April 2023.

NORTHROP GRUMMAN CORPORATION

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

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

Repurchases under the 2022 Repurchase Program commenced in April 2023 upon completion of the 2021 Repurchase Program.

As of December 31, 2023, repurchases under the 2022 Repurchase Program totaled $ 0.9 billion;

$ 1.1 billion remained under this share repurchase authorization.

By its terms, the 2022 Repurchase Program will expire when we have used all authorized funds for repurchases.

On December 6, 2023, the company’s board of directors authorized a new share repurchase program of up to an additional $ 2.5 billion in share repurchases of the company’s common stock (the “2023 Repurchase Program”).

Repurchases under the 2023 Repurchase Program will commence upon completion of the 2022 Repurchase Program and will expire when we have used all authorized funds for repurchases.

As of December 31, 2023, there have been no repurchases under the 2023 Repurchase Program and the company’s total outstanding share repurchase authorization was $ 3.6 billion.

Accelerated Share Repurchase Agreements

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

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The final average purchase price was $ 374.79 per share.

During the first quarter of 2023, the company entered into an ASR agreement with Bank of America, N.A.

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

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

The remaining balance of $ 100 million was settled on April 27, 2023 with a final delivery of 0.2 million shares from Bank of America.

The final average purchase price was $ 458.28 per share.

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

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2023 2022 2021

September 16, 2015 $ 4,000 15.4 $ 260.33 March 2020 — — 0.9

December 4, 2018 $ 3,000 8.9 $ 337.18 October 2021 — — 8.4

January 25, 2021 $ 3,000 5.5 $ 426.46 3.3 2.2 —

January 25, 2021 $ 3,000 7.0 $ 431.05 April 2023 1.4 3.3 2.2

January 24, 2022 $ 2,000 1.9 $ 454.03 1.9 — —

(1) Includes commissions paid.

December 6, 2023 $ 2,500 — $ — — — —

(1) As a part of the 2023 Repurchase Program, the board of directors approved that the purchases under this program, and the authorization remaining under the 2022 program, be exclusive of brokerage commissions.

Commissions paid are included for the 2018 and 2021 Repurchase Programs.

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Dividends on Common Stock

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government either as the ultimate customer or in connection with foreign military sales.

NORTHROP GRUMMAN CORPORATION

Accounts receivable, net consisted of the following:

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(1) Includes receivables due from the U.S.

government associated with FMS sales.

For FMS, we contract with and are paid by the U.S.

government associated with foreign military sales, which are contracted with and paid by the U.S.

UNBILLED RECEIVABLES, NET

Unbilled receivables, net represent revenue recognized under the cost-to-cost method that exceeds amounts billed to customers.

Substantially all unbilled receivables at December 31, 2022 are expected to be billed and collected in 2023.

A large majority of the company’s unbilled receivables at December 31, 2023 are expected to be billed and collected in 2024.

Progress and performance-based payments are reflected as an offset to the related unbilled receivable balances.

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(1) Includes unbilled receivables due from the U.S.

government associated with FMS sales.

For FMS, we contract with and are paid by the U.S.

government associated with foreign military sales, which are contracted with and paid by the U.S.

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INVENTORIED COSTS, NET

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Inventoried costs associated with our commercial businesses, while less significant in total, are subject to a greater level of recoverability risk.

During the year ended December 31, 2022, the company recorded a $ 45 million write-down of commercial business inventory at Space Systems for which its cost exceeded net realizable value.

The company recorded write-downs of commercial business inventory at Space Systems for which its cost exceeded net realizable value of $ 43 million and $ 45 million during the years ended December 31, 2023 and 2022, respectively.

As discussed in Note 1, the company recognized a $ 45 million reduction of inventoried costs related to the B-21 program at Aeronautics Systems during the year ended December 31, 2023.

Inventoried costs, net consisted of the following:

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Product inventory:

Raw materials 338 325

Work in process 72 31

Finished goods 52 48

Total product inventory $ 462 $ 404

Inventoried costs, net $ 1,109 $ 978

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Federal and foreign income tax expense consisted of the following:

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Earnings before income taxes associated with the company’s foreign operations are not material in the periods presented.

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Income tax expense differs from the amount computed by multiplying earnings before income taxes by the statutory federal income tax rate due to the following:

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Settlements with taxing authorities ( 1 ) — ( 86 ) ( 1.5 ) — —

Net interest expense 69 2.9 22 0.4 17 0.2

Other, net 2 0.1 21 0.3 31 0.4

Total federal and foreign income taxes $ 290 12.4 % $ 940 16.1 % $ 1,933 21.6 %

The year to date 2022 ETR decreased to 16.1 percent from 21.6 percent in 2021 primarily due to an $ 86 million benefit resulting from the resolution of the IRS examination of certain legacy OATK tax returns, as well as additional federal income taxes in the prior year resulting from the IT services divestiture.

The 2023 ETR decreased to 12.4 percent from 16.1 percent in 2022 primarily due to lower earnings before income taxes as a result of the B-21 charge and MTM expense, which collectively reduced the 2023 ETR by 3.8 percentage points.

The 2022 MTM benefit increased the 2022 ETR by 1.2 percentage points.

The 2022 ETR decreased to 16.1 percent from 21.6 percent in 2021 primarily due to an $ 86 million benefit resulting from the resolution of the IRS examination of certain legacy OATK tax returns, as well as additional federal income taxes in the prior year resulting from the IT services divestiture.

The company’s 2022 MTM benefit increased the 2022 ETR by 1.2 percentage points;

however, the MTM benefit in 2021 did not significantly impact the 2021 ETR.

The year to date 2021 ETR increased to 21.6 percent from 14.5 percent in 2020 primarily due to the federal income taxes resulting from the IT services divestiture described above.

The company’s 2021 MTM benefit did not significantly impact the 2021 ETR;

however, MTM expense in 2020 reduced the 2020 ETR by 1.3 percentage points.

Income tax payments, net of refunds received, were $ 1.5 billion, $ 1.3 billion and $ 312 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Taxes receivable, which are included in Prepaid expenses and other current assets in the consolidated statements of financial position, were $ 850 million and $ 571 million as of December 31, 2022 and 2021, respectively.

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Income tax payments, net of refunds received, were $ 1.2 billion, $ 1.5 billion and $ 1.3 billion for the years ended December 31, 2023, 2022 and 2021, respectively.

Taxes receivable, which are included in Prepaid expenses and other current assets in the consolidated statements of financial position, were $ 1.5 billion and $ 850 million as of December 31, 2023 and 2022, respectively.

Uncertain Tax Positions

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federal jurisdiction and in various state and foreign jurisdictions.

The Northrop Grumman 2014-2020 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under Internal Revenue Service (IRS) examination.

During the second quarter of 2022, the company’s 2014-2016 federal income tax returns and refund claims related to its 2007-2016 federal tax returns reverted back from IRS Appeals to IRS examination for additional factual review.

During the fourth quarter of 2022, the U.S.

Congressional Joint Committee on Taxation approved a resolution of the IRS examination of the legacy OATK federal tax returns for the years ended March 31, 2014 and 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017, which resulted in a $ 110 million reduction to our unrecognized tax benefits and an $ 86 million reduction to income tax expense.

The Northrop Grumman 2018-2020 federal tax returns are currently under Internal Revenue Service (IRS) examination.

During the second quarter of 2023, the company entered into an agreed Revenue Agent’s Report (“RAR”) for certain matters related to the company’s 2014-2017 federal income tax returns, resulting in a $ 90 million reduction to our unrecognized tax benefits and an immaterial impact to income tax expense.

The matters not addressed by the agreed RAR related to the company’s 2014-2017 federal income tax returns and refund claims related to its 2007-2016 federal tax returns are currently under review by the IRS Appeals Office.

In the second quarter of 2023, the California Franchise Tax Board approved a resolution of the state examination primarily related to California state apportionment in the company’s 2007 to 2016 tax years, resulting in a $ 95 million reduction to our unrecognized tax benefits and an $ 11 million reduction to unallocated corporate expense.

Tax returns for open tax years related to state and foreign jurisdictions remain subject to examination.

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Amounts currently subject to examination related to foreign jurisdictions are not material.

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The change in unrecognized tax benefits during 2023, 2022 and 2021, excluding interest, is as follows:

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If these matters, including our position on IRC Section 451(b), are unfavorably resolved, there could be a material impact on our future cash flows.

It is reasonably possible that within the next 12 months our unrecognized tax benefits may increase by approximately $ 120 million.

Additionally, it is reasonably possible that within the next 12 months, unrecognized tax benefits claimed primarily related to California state apportionment in the company’s 2007 to 2016 tax years may decline by up to $ 100 million through administrative resolution with the California Franchise Tax Board.

It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may increase by approximately $ 120 million.

Our current unrecognized tax benefits, which are included in Other current liabilities in the consolidated statements of financial position, were $ 964 million and $ 728 million as of December 31, 2023 and 2022, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.

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If the income tax benefits from these tax positions are ultimately realized, $ 848 million of federal and foreign tax benefits would reduce the company’s ETR.

Net interest expense within the company’s federal, foreign and state income tax provisions was not material for all years presented.

Net interest expense within the company’s federal, foreign and state income tax provisions was $ 62 million, $ 29 million, and $ 25 million for the years ended December 31, 2023, 2022, and 2021, respectively.

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Deferred tax liabilities 4,528 3,458

Total net deferred tax assets (liabilities) $ 30 $ ( 290 )

Total net deferred tax assets $ 1,020 $ 30

Realization of deferred tax assets is primarily dependent on generating sufficient taxable income in future periods.

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Balance as of December 31, 2021 $ 3,467 $ 3,412 $ 5,881 $ 4,755 $ 17,515

— ( 3 ) — — ( 3 )

Balance as of December 31, 2022 $ 3,467 $ 3,413 $ 5,881 $ 4,755 $ 17,516

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Derivatives — 5 — 5 — 7 — 7

The notional value of the company’s foreign currency forward contracts at December 31, 2022 and 2021 was $ 221 million and $ 120 million, respectively.

The portion of notional value designated as a cash flow hedge at December

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31, 2022, was $ 87 million.

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

The notional value of the company’s foreign currency forward contracts at December 31, 2023 and 2022 was $ 286 million and $ 221 million, respectively.

The portion of notional value designated as a cash flow hedge at December 31, 2023 and 2022 was $ 162 million and $ 87 million, respectively.

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

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Commercial Paper

The company maintains a commercial paper program that serves as a source of short-term financing.

In December 2022, the company amended its commercial paper program to increase its capacity to issue unsecured commercial paper notes from $ 2.0 billion to $ 2.5 billion.

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

There were no commercial paper borrowings outstanding at December 31, 2023 and December 31, 2022, respectively.

The outstanding balance of commercial paper borrowings is recorded in Other current liabilities in the consolidated statements of financial position.

Credit Facility

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

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

The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of $ 2.5 billion (the “2022 Credit Agreement”) that matures in August 2027.

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

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Unsecured Senior Notes

Issuance of Senior Notes

In February 2023, the company issued $ 2.0 billion of unsecured senior notes for general corporate purposes, including debt repayment, share repurchases, and working capital, as follows:

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

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

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

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

Repayments of Senior Notes

In August 2023, the company repaid $ 1.05 billion of 3.25 percent unsecured senior notes upon maturity.

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

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

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

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

Debt Exchange

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

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

NORTHROP GRUMMAN CORPORATION

Long-term debt consists of the following:

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2047 4.03 % 2,250 2,250

2050 5.25 % 1,000 1,000

2053 4.95 % 1,000 —

Other Various 332 293

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Interest on these fixed rate notes and debentures are payable semi-annually in arrears.

Total interest payments, net of interest received, were $ 474 million, $ 570 million and $ 572 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Total interest payments, net of interest received and capitalized, were $ 437 million, $ 474 million and $ 570 million for the years ended December 31, 2023, 2022 and 2021, respectively.

The company capitalized interest expense of $ 95 million, $ 53 million and $ 17 million during the years ended December 31, 2023, 2022 and 2021, respectively.

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Maturities of long-term debt as of December 31, 2023, are as follows:

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Total long-term debt $ 13,856

NORTHROP GRUMMAN CORPORATION

INVESTIGATIONS, CLAIMS AND LITIGATION

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

United States , in the U.S.

Court of Federal Claims.

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

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

The FSS were delivered.

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

The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $ 410 million, primarily for delay and lost savings.

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

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

On June 27, 2022, the judge issued a decision in the company’s favor.

On July 18, 2022, the government filed a motion for reconsideration.

On October 17, 2022, the court denied the government’s motion for reconsideration and on October 19, 2022, the court entered judgment in the company’s favor.

On November 9, 2022, the Postal Service paid the company the full judgment amount of approximately $ 83 million.

Neither party appealed prior to the December 19, 2022 deadline.

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

For over 20 years, the company has worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation (NYSDEC), the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage.

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

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

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

On September 22, 2021, the State of New York issued for public comment a new consent decree reflecting the agreement.

On December 7, 2021, the public comment period closed.

On August 3, 2022, the court approved the consent decree.

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

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

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

We have incurred, and expect to continue to incur, as included in Note 12, substantial remediation costs related to the legacy Bethpage environmental conditions.

For over 25 years, the company has worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation, the New York State Department of Health and other federal, state and local governmental authorities, to address environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York.

We have incurred, and expect to continue to incur, as included in Note 12, substantial remediation costs related to these Bethpage environmental conditions.

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

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

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

In 2022, we resolved several disputes and regulatory proceedings concerning the scope and allocation of remediation responsibilities and costs related to this site.

The company continues to be involved in related disputes, none of which are material individually or in the aggregate.

We are also a party to various individual lawsuits and a putative class action in the Eastern District of New York alleging personal injury and property damage related to the legacy Bethpage environmental conditions.

The court has stayed the filed individual lawsuits, pending its decision on class certification.

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

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

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

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

Similarly, the Compliance Officer, appointed under the Order, and the FTC have taken and continue to take various actions to oversee compliance.

In October 2019, the company received a civil investigative demand (CID) from the FTC requesting certain information relating to a potential issue regarding the company’s compliance with the Order in connection with a then pending missile competition.

The company promptly provided information in response to the request.

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

More recently, the company received and is responding to a follow-on CID.

We cannot predict the outcome of those discussions, but we do not believe they are likely to have a material adverse effect on the company’s consolidated financial position as of December 31, 2022, or its annual results of operations and/or cash flows.

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

On December 9, 2022, the company received from the U.S.

Department of Justice (DOJ) a criminal subpoena seeking information regarding financial and cost accounting and controls that appears focused on the interest rate

NORTHROP GRUMMAN CORPORATION

assumptions the company used to determine our CAS pension expense, which we have previously discussed in Note 12 below.

The company has begun discussions with DOJ regarding the scope of the subpoena and is preparing to respond to it.

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

The company received from the U.S.

Department of Justice (DOJ) a criminal subpoena on December 9, 2022, and a civil investigative demand on February 2, 2023, both seeking information regarding financial and cost accounting and controls that appears focused on the interest rate assumptions the company used to determine our CAS pension expense, which we discuss in Note 12 below.

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

We cannot at this point predict the outcome of these matters.

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

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

NORTHROP GRUMMAN CORPORATION

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

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

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

As noted in Note 11 above, on December 8, 2022, the U.S.

Department of Justice (DOJ) issued to the company a criminal subpoena seeking information that appears related to the interest rate assumptions at issue in our discussions with DCMA.

The company has begun discussions with DOJ regarding the scope of the subpoena and is preparing to respond to it.

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

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

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

As noted in Note 11 above, the company received from the DOJ a criminal subpoena on December 9, 2022, and a CID on February 2, 2023, both seeking information that appears related to the interest rate assumptions at issue in our discussions with DCMA.

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

We cannot at this point predict the outcome of these matters.

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

B-21 Low-Rate Initial Production Options

In 2015, the U.S.

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

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

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

In the fourth quarter of 2022, we updated our estimated cost to complete the LRIP phase of the B-21 program.

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

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not currently believe a loss is probable on any of the LRIP options, we have not recognized any such loss in our financial results for the period ended December 31, 2022.

Environmental Matters

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Pension benefits for most participants are based on years of service, age and compensation.

It is our policy to fund at least the minimum amount required for qualified plans, using actuarial cost methods and assumptions acceptable under U.S.

It is our policy to fund at

NORTHROP GRUMMAN CORPORATION

least the minimum amount required for qualified plans, using actuarial cost methods and assumptions acceptable under U.S.

government regulations, by making payments into benefit trusts separate from the company.

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Some of these plans are funded using benefit trusts separate from the company.

NORTHROP GRUMMAN CORPORATION

Medical and Life Benefits – The company funds a portion of the costs for certain health care and life insurance benefits for a substantial number of its active and retired employees.

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Expected return on plan assets ( 2,098 ) ( 2,641 ) ( 2,512 ) ( 85 ) ( 110 ) ( 105 )

Amortization of prior service (credit) cost — ( 9 ) ( 59 ) ( 1 ) ( 1 ) 4

Mark-to-market (benefit) expense ( 1,262 ) ( 1,921 ) 1,034 30 ( 434 ) —

Amortization of prior service credit — — ( 9 ) ( 1 ) ( 1 ) ( 1 )

Mark-to-market expense (benefit) 442 ( 1,262 ) ( 1,921 ) ( 20 ) 30 ( 434 )

Other — — ( 1 ) — — —

Net periodic benefit cost (benefit) $ 148 $ ( 2,400 ) $ ( 2,975 ) $ ( 34 ) $ ( 25 ) $ ( 471 )

NORTHROP GRUMMAN CORPORATION

The table below summarizes the components of changes in unamortized prior service credit (cost) for the years ended December 31, 2021, 2022 and 2023:

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The company uses a December 31 measurement date for its plans.

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Pension Benefits Medical and Life Benefits

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Fair value of plan assets at beginning of year $ 28,920 $ 36,236 $ 1,226 $ 1,588

Net (loss) gain on plan assets ( 5,422 ) 3,637 ( 257 ) 170

Net gain (loss) on plan assets 3,104 ( 5,422 ) 146 ( 257 )

Employer contributions 105 101 34 35

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Participant contributions 6 7 27 24

Actuarial loss ( 9,325 ) ( 794 ) ( 337 ) ( 369 )

Actuarial loss (gain) 1,447 ( 9,325 ) 42 ( 337 )

Benefits paid ( 1,894 ) ( 1,973 ) ( 159 ) ( 164 )

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Funded status $ ( 192 ) $ ( 147 ) $ 28 $ ( 38 )

The decrease in the fair value of our plan assets for the year ended December 31, 2022 was principally driven by losses of 15.4 percent on plan assets and $ 2.1 billion of benefit payments.

The decrease in our projected benefit obligation for the year ended December 31, 2022, was primarily driven by a 256 basis point increase in the discount rate from year end 2021 and $ 2.1 billion of benefit payments, partially offset by $ 1.2 billion of interest cost.

The increase in the fair value of our plan assets for the year ended December 31, 2023 was principally driven by net plan asset returns of 11.1 percent, partially offset by $ 2.1 billion of benefit payments.

The increase in our projected benefit obligation for the year ended December 31, 2023, was primarily driven by $ 1.6 billion of interest cost and a 39 basis point decrease in the discount rate from year end 2022, partially offset by $ 2.1 billion of benefit payments.

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Pension Benefits Medical and Life Benefits

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Fair value of plan assets 3 2

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Plan Assumptions

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Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term.

Through consultation with our investment management team and outside investment advisers, management develops expected long-term returns for each of the plans’ strategic asset classes.

In doing so, we consider a number of factors, including our historical investment performance, current market data such as yields/price-earnings ratios, historical market returns over long periods and periodic surveys of investment managers’ expectations.

Liability studies are conducted on a regular basis to provide guidance in setting investment goals with an objective to balance risk.

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Derivatives are used for transitioning assets, asset class rebalancing, managing currency risk and for management of fixed-income and alternative investments.

NORTHROP GRUMMAN CORPORATION

For the majority of the plans’ assets, the investment policies require that the asset allocation be maintained within the following ranges as of December 31, 2023:

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Alternative investments 12 % - 32 %

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The table below provides the fair values of the company’s pension and Voluntary Employees’ Beneficiary Association (VEBA) trust plan assets at December 31, 2023 and 2022, by asset category.

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Cash and cash equivalents are predominantly held in money market or short-term investment funds.

and international equities consist primarily of common stocks and institutional common trust funds.

NORTHROP GRUMMAN CORPORATION

international equities consist primarily of common stocks and institutional common trust funds.

Investments in certain equity securities, which include domestic and international securities and registered investment companies, and exchange-traded funds with fixed income strategies are valued at the last reported sales or quoted price on the last business day of the reporting period.

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Derivative instruments may include exchange traded futures contracts, interest rate swaps, options on futures and swaps, currency contracts, total return swaps and credit default swaps.

Notional amounts do not quantify risk or represent assets or liabilities of the pension and VEBA trusts, but are used in the

NORTHROP GRUMMAN CORPORATION

calculation of cash settlement under the contracts.

Notional amounts do not quantify risk or represent assets or liabilities of the pension and VEBA trusts, but are used in the calculation of cash settlement under the contracts.

The volume of derivative activity is commensurate with the amounts disclosed at year-end.

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Generally, redemption periods are daily, monthly or quarterly with a notice requirement less than 90 days.

As of December 31, 2022, there were no unfunded commitments.

As of December 31, 2021, unfunded commitments were $ 100 million.

As of December 31, 2023 and 2022, there were no unfunded commitments.

Fixed-income funds:

Generally, redemption periods are daily, monthly or quarterly with a notice requirement of two days .

There were no unfunded commitments as of December 31, 2022 and 2021.

As o f December 31, 2023 and 2022 there were no unfunded commitments.

Consist of closed-end funds with a 5 - 10 year life as well as funds that allow redemption requests subject to the liquidity limitations of the underlying investments.

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During the year ended December 31, 2023, the company made no discretionary pension contributions.

NORTHROP GRUMMAN CORPORATION

STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS

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as of December 31, 2023, 4.4 million shares remain available for issuance.

NORTHROP GRUMMAN CORPORATION

The 2011 Plan provides for the following equity awards:

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These amounts are expected to be charged to expense over a weighted-average period of 1.3 years.

Compensation expense for stock awards is measured at the grant date based on the fair value of the award and is recognized over the vesting period (generally three years ).

The fair value of stock awards and performance stock awards is determined based on the closing market price of the company’s common stock on the grant date.

The fair value of market-based stock awards is determined at the grant date using a Monte Carlo simulation model.

NORTHROP GRUMMAN CORPORATION

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Weighted average discount rate 3.9 % 3.4 %

NORTHROP GRUMMAN CORPORATION

Maturities of Lease Liabilities

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These leases are expected to commence in 2024 and 2025 with lease terms of 5 to 20 years.

NORTHROP GRUMMAN CORPORATION

SEGMENT INFORMATION

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Total operating income $ 2,537 $ 3,601 $ 5,651

Other (expense) income

Interest expense ( 545 ) ( 506 ) ( 556 )

Non-operating FAS pension benefit 530 1,505 1,469

Mark-to-market pension and OPB (expense) benefit ( 422 ) 1,232 2,355

Other, net 246 4 19

Earnings before income taxes $ 2,346 $ 5,836 $ 8,938

NORTHROP GRUMMAN CORPORATION

FAS/CAS Operating Adjustment

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However, the cost of these plans is charged to our contracts in accordance with applicable FAR and CAS requirements.

The FAS/CAS operating adjustment, previously referred to as the net FAS (service)/CAS pension adjustment, reflects the difference between CAS pension expense included as cost in segment operating income and the service cost component of FAS expense included in total operating income.

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

Unallocated Corporate (Expense) Income

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

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

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

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

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

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See Note 1 for additional information.

The following table presents intersegment sales and operating income before eliminations:

The following table presents intersegment sales and operating income:

Year Ended December 31

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Total $ 2,199 $ 298 $ 2,179 $ 303 $ 2,110 $ 272

Substantially all of the company’s operating assets are located in the U.S.

The following table presents assets by segment:

$ in millions 2022 2021

Aeronautics Systems $ 9,701 $ 9,423

Defense Systems 6,163 5,911

Mission Systems 10,120 9,869

Space Systems 11,540 10,760

Corporate assets (1)

Total assets $ 43,755 $ 42,579

(1) Corporate assets principally consist of cash and cash equivalents, refundable taxes, deferred tax assets, property, plant and equipment, marketable securities and deferred costs associated with certain environmental matters.

Capital Expenditures and Depreciation and Amortization

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Total $ 1,775 $ 1,435 $ 1,415 $ 1,338 $ 1,342 $ 1,239

(1) Corporate amounts include the amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business combinations as they are not considered part of management’s evaluation of segment operating performance.

(2) Beginning in 2022, depreciation and amortization amounts include the amortization expense related to the company’s right-of-use assets.

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

This change in presentation had no impact on depreciation and amortization expense in the consolidated statements of earnings and comprehensive income.

(1) Corporate amounts include the amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of PP&E acquired through business combinations as they are not considered part of management’s evaluation of segment operating performance.

Our chief operating decision maker does not use assets by segment to evaluate segment performance or allocate resources.

Therefore, we do not disclose assets by segment.

NORTHROP GRUMMAN CORPORATION

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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-K

Item 8. Financial Statements and Supplementary Data