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Item 1. Financial Statements

2024-04-25 compared with 2023-10-26 · 168 added, 152 removed, 468 unchanged (41% of the section changed)

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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions, except per share amounts 2024 2023

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Net earnings (from above) $ 944 $ 842

Other comprehensive income (loss), net of tax

Other comprehensive (loss) income, net of tax

Change in cumulative translation adjustment 1 2

Change in other, net ( 16 ) —

Other comprehensive income (loss), net of tax 3 ( 7 ) 6 ( 23 )

Other comprehensive (loss) income, net of tax ( 15 ) 2

Comprehensive income $ 929 $ 844

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CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

$ in millions, except par value September 30, 2023 December 31, 2022

$ in millions, except par value March 31, 2024 December 31, 2023

Cash and cash equivalents $ 3,061 $ 3,109

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2024 2023

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Net earnings $ 944 $ 842

Adjustments to reconcile to net cash provided by operating activities:

Adjustments to reconcile to net cash used in operating activities:

Depreciation and amortization 299 298

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Other, net ( 7 ) ( 15 )

Net cash provided by operating activities 1,445 650

Net cash used in operating activities ( 706 ) ( 702 )

Investing activities

Capital expenditures ( 270 ) ( 309 )

Proceeds from sale of equipment to a customer — 100

Proceeds from sale of minority investment 157 —

Other, net 1 —

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Net proceeds from issuance of long-term debt 2,495 1,995

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

Common stock repurchases ( 1,190 ) ( 723 )

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Other, net ( 40 ) ( 26 )

Net cash used in financing activities ( 1,128 ) ( 1,851 )

Net cash provided by financing activities 927 929

Decrease in cash and cash equivalents ( 48 ) ( 82 )

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions, except per share amounts 2024 2023

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Common stock repurchased ( 2 ) ( 1 )

Shares issued for employee stock awards and options — — — 1

End of period 148 152

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Beginning of period ( 128 ) ( 153 )

Other comprehensive income (loss), net of tax 3 ( 7 ) 6 ( 23 )

Other comprehensive (loss) income, net of tax ( 15 ) 2

End of period ( 143 ) ( 151 )

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The financial statements include adjustments of a normal recurring nature considered necessary by management for a fair presentation of the company’s unaudited condensed consolidated financial position, results of operations and cash flows.

For classification of certain current assets and liabilities, we consider the duration of our customer contracts when defining our operating cycle, which is generally longer than one year.

Results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year.

These financial statements should be read in conjunction with the information contained in the company’s 2023 Annual Report on Form 10-K.

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

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

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

Quarterly information is labeled using a calendar convention;

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Contract Estimates

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.

Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), un-priced change orders, requests for equitable adjustment (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 is preparing engineering change proposals (ECPs) for scope increases and other aspects of the Habitation and Logistics Outpost (HALO) contract largely stemming from evolving Lunar Gateway architecture and mission requirements.

We expect the ECPs will address 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 plans to submit an ECP prior to the end of the year and begin negotiating with NASA on these various changes and other aspects of the HALO contract.

The company’s third quarter results 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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sales and operating margins in future periods are recognized as if the revised estimates had been used since contract inception.

If it is determined that a loss is expected to result on an individual performance

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

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 and manufacturing development (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 continue to be awarded and executed through approximately the end of the decade.

During the fourth quarter of 2023, we recognized a projected loss of $ 1.56 billion across the five LRIP options.

During the first quarter of 2024, we again reviewed our estimated profitability on the LRIP phase of the program and made no significant changes to the previously recognized loss.

The company’s first quarter 2024 results reflect our

NORTHROP GRUMMAN CORPORATION

obligation, the entire amount of the estimable future loss, including an allocation of general and administrative expense, is charged against income in the period the loss is identified.

current best estimate of our cost to complete the LRIP options, as well as the outcome of ongoing discussions with our suppliers and our customer.

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.

As of March 31, 2024, the remaining loss accrual is $ 1.5 billion, of which $ 994 million is included in Other current liabilities with the remainder included in Other non-current liabilities.

HALO Engineering Change Proposal

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.

During the first quarter of 2024, we again reviewed our estimated profitability on the HALO contract and made no significant changes.

The company’s first quarter 2024 results 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.

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

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions, except per share data 2024 2023

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Net earnings (1)

46 36 142 245

Diluted earnings per share (1)

0.30 0.23 0.93 1.57

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

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

EAC adjustments on a single performance obligation can have a significant effect on the company’s financial statements.

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

During the three months ended June 30, 2023, we recorded a $ 36 million unfavorable EAC adjustment on the HALO program at Space Systems.

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

No EAC adjustments on a single performance obligation had a significant impact on the financial statements during the three months ended September 30, 2023 or 2022.

No EAC adjustments on a single performance obligation had a significant impact on the financial statements during the three months ended March 31, 2024 or 2023.

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

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

Company backlog as of September 30, 2023 was $ 83.9 billion.

Of our September 30, 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.

Company backlog as of March 31, 2024 was $ 78.9 billion.

Of our March 31, 2024 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.

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

The company reduced unfunded backlog by $ 1.6 billion during the first quarter of 2024 related to the termination.

Contract Assets and Liabilities

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

The amount of revenue recognized for the three and nine months ended September 30, 2023 that was included in the December 31, 2022 contract liability balance was $ 358 million and $ 2.9 billion, respectively.

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

The amount of revenue

NORTHROP GRUMMAN CORPORATION

recognized for the three months ended March 31, 2024 and 2023 that was included in the contract liability balances at the beginning of each year was $ 1.9 billion and $ 1.7 billion, respectively.

Disaggregation of Revenue

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

NORTHROP GRUMMAN CORPORATION

Property, Plant, and Equipment

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

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

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.

Non-cash investing activities also include capital expenditures incurred but not yet paid of $ 134 million and $ 118 million as of September 30, 2023 and 2022, respectively.

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

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

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 Other, net on the unaudited condensed consolidated statements of earnings and comprehensive income for the three and nine months ended September 30, 2023.

Proceeds from the sale are included in investing activities on the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2023.

Non-cash investing activities include capital expenditures incurred but not yet paid of $ 63 million and $ 43 million as of March 31, 2024 and 2023, respectively.

Accumulated Other Comprehensive Loss

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

$ in millions September 30, 2023 December 31, 2022

$ in millions March 31, 2024 December 31, 2023

Cumulative translation adjustment $ ( 137 ) $ ( 138 )

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Accounting Standards Updates

Accounting standards updates adopted and/or issued, but not effective until after September 30, 2023, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.

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 continuing to evaluate 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 continuing to evaluate 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.

On March 6, 2024, the SEC issued its final climate disclosure rule, which requires registrants to include climate-related disclosures in registration statements and annual reports.

The final rule requires registrants to provide information about the financial statement impacts of severe weather events and other natural conditions.

The final rule also requires certain disclosures related to risk management and governance over climate-related risks, material climate targets and goals, and material Scope 1 and Scope 2 greenhouse gas emissions.

The requirements would be phased in beginning with fiscal year 2025.

On April 4, 2024, the SEC voluntarily stayed the final rule pending the completion of judicial review of cases pending in the Eighth Circuit.

We are continuing to evaluate the disclosure impact of the final rule.

Other accounting standards updates adopted and/or issued, but not effective until after March 31, 2024, are not expected to have a material effect on the company’s consolidated financial position, results of operations and/or cash flows.

EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK

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

NORTHROP GRUMMAN CORPORATION

Diluted Earnings Per Share

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

The dilutive effect of these securities totaled 0.5 million shares and 0.6 million shares for the three and nine months ended September 30, 2023, respectively.

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

The dilutive effect of these securities totaled 0.4 million shares and 0.6 million shares for the three months ended March 31, 2024 and 2023, respectively.

Share Repurchases

Share Repurchase Programs

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

Repurchases under the 2021 Repurchase Program commenced in October 2021 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”).

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

As of September 30, 2023, repurchases under the 2022 Repurchase Program totaled 0.5 billion;

Repurchases under the 2022 Repurchase Program commenced in April 2023 and were completed in February 2024.

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 commenced in February 2024 upon completion of the 2022 Repurchase Program.

As of March 31, 2024, repurchases under the 2023 Repurchase Program totaled $ 0.1 billion;

$ 2.4 billion remained under this share repurchase authorization.

By its terms, the 2023 Repurchase Program will expire when we have used all authorized funds for repurchases.

Accelerated Share Repurchase Agreements

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

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The final average purchase price was $ 458.28 per share.

During the first quarter of 2024, the company entered into an ASR agreement with Morgan Stanley & Co.

LLC (Morgan Stanley) to repurchase $ 1.0 billion of the company’s common stock as part of the 2022 Repurchase Program.

Under the agreement, we made a payment of $ 1.0 billion to Morgan Stanley and received an initial delivery of 1.8 million shares valued at $ 800 million that were immediately canceled by the company.

The remaining balance of $ 200 million is included as a reduction to Retained earnings on the unaudited condensed consolidated statement of financial position.

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

The ASR is expected to be completed in the second quarter of 2024.

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

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Per Share (1)(2)

Date Completed Nine Months Ended September 30

Date Completed Three Months Ended March 31

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

January 24, 2022 $ 2,000 1.1 $ 445.53 1.1 —

(1) Includes commissions paid.

January 24, 2022 $ 2,000 4.0 NM February 2024 2.1 —

December 6, 2023 $ 2,500 0.1 $ 462.77 0.1 —

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

Commissions paid are included for the 2021 Repurchase Program.

(2) The 2022 Share Repurchase program completed in February 2024;

however, it includes the $ 1.0 billion ASR for which the final delivery of shares is still outstanding.

The final average share price for shares purchased under the 2022 Repurchase Program will be determined once the ASR has completed and all related shares have been delivered.

NORTHROP GRUMMAN CORPORATION

Dividends on Common Stock

In May 2023, the company increased the quarterly common stock dividend 8 percent to $ 1.87 per share from the previous amount of $ 1.73 per share.

Three Months Ended September 30 Nine Months Ended September 30

INVENTORIED COSTS, NET

Inventoried costs, net consist of the following:

$ in millions March 31, 2024 December 31, 2023

Contracts in process $ 862 $ 647

Product inventory:

Raw materials 357 338

Work in process 92 72

Finished goods 59 52

Total product inventory 508 462

Inventoried costs, net $ 1,370 $ 1,109

Three Months Ended March 31

$ in millions 2024 2023

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Effective income tax rate 16.5 % 15.6 %

Current Quarter

The company’s third quarter 2023 effective tax rate (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.

The third quarter 2023 ETR includes benefits of $ 62 million for research credits and $ 19 million for foreign derived intangible income (FDII), partially offset by $ 21 million of interest expense on unrecognized tax benefits.

The third quarter 2022 ETR included benefits of $ 42 million for research credits and $ 16 million for FDII, partially offset by $ 11 million of interest expense on unrecognized tax benefits.

The company’s 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.

The year to date 2023 ETR includes benefits of $ 140 million for research credits and $ 48 million for FDII, partially offset by $ 48 million of interest expense on unrecognized tax benefits.

The year to date 2022 ETR included benefits of $ 124 million for

NORTHROP GRUMMAN CORPORATION

research credits and $ 46 million for FDII, partially offset by $ 26 million of interest expense on unrecognized tax benefits.

Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were $ 810 million as of September 30, 2023 and $ 850 million as of December 31, 2022.

The company’s first quarter 2024 effective tax rate (ETR) increased to 16.5 percent from 15.6 percent in the prior year period principally due to higher interest expense on unrecognized tax benefits.

The first quarter 2024 ETR includes benefits of $ 44 million for research credits and $ 15 million for foreign derived intangible income (FDII), partially offset by $ 21 million of interest expense on unrecognized tax benefits.

The first quarter 2023 ETR included benefits of $ 40 million for research credits and $ 15 million for FDII, partially offset by $ 13 million of interest expense on unrecognized tax benefits.

Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were $ 1.3 billion as of March 31, 2024 and $ 1.5 billion as of December 31, 2023.

The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs and the 2017 Tax Cuts and Jobs Act, which includes related final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and procedural guidance issued in August 2021.

As of September 30, 2023, we have approximately $ 1.9 billion in unrecognized tax benefits, including $ 807 million related to our position on IRC Section 451(b).

As of March 31, 2024, we have approximately $ 2.1 billion in unrecognized tax benefits, including $ 872 million related to our position on IRC Section 451(b).

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

It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may increase by approximately $ 90 million.

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.

Our current unrecognized tax benefits, which are included in Other current liabilities in the unaudited condensed consolidated statements of financial position, were $ 1.0 billion and $ 964 million as of March 31, 2024 and December 31, 2023, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.

We file income tax returns in the U.S.

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.

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.

Our current unrecognized tax benefits, which are included in Other current liabilities in the unaudited condensed consolidated statements of financial position, were $ 909 million and $ 728 million as of September 30, 2023 and December 31, 2022, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.

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.

NORTHROP GRUMMAN CORPORATION

The Organization for Economic Co-operation and Development (OECD) has issued Pillar Two model rules for a new global minimum tax of 15% effective January 1, 2024.

While it is uncertain whether the United States will enact legislation to adopt Pillar Two, certain countries in which we operate have adopted legislation, and other countries are in the process of introducing legislation to implement Pillar Two.

Pillar Two had no impact on our first quarter 2024 effective tax rate, and we do not currently expect Pillar Two to significantly impact our effective tax rate going forward.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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

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Derivatives — 2 — 2 — 5 — 5

The notional value of the company’s foreign currency forward contracts at September 30, 2023 and December 31, 2022 was $ 215 million and $ 221 million, respectively.

The portion of notional value designated as a cash flow hedge at September 30, 2023 and December 31, 2022 was $ 88 million and $ 87 million, respectively.

NORTHROP GRUMMAN CORPORATION

The derivative fair values and related unrealized gains/losses at September 30, 2023 and December 31, 2022 were not material.

There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the nine months ended September 30, 2023.

The notional value of the company’s foreign currency forward contracts at March 31, 2024 and December 31, 2023 was $ 273 million and $ 286 million, respectively.

The portion of notional value designated as a cash flow hedge at March 31, 2024 and December 31, 2023 was $ 133 million and $ 162 million, respectively.

The derivative fair values and related unrealized gains/losses at March 31, 2024 and December 31, 2023 were not material.

There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the three months ended March 31, 2024.

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

Long-term Debt

The estimated fair value of long-term debt was $ 12.5 billion and $ 12.1 billion as of September 30, 2023 and December 31, 2022, respectively.

The estimated fair value of long-term debt was $ 15.5 billion and $ 13.4 billion as of March 31, 2024 and December 31, 2023, respectively.

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

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Unsecured Senior Notes

In January 2024, the company issued $ 2.5 billion of unsecured senior notes for general corporate purposes, including debt repayment, share repurchases, and working capital, as follows:

• $ 500 million of 4.60 % senior notes due 2029 (the “2029 Notes”),

• $ 850 million of 4.90 % senior notes due 2034 (the “2034 Notes”), and

• $ 1.15 billion of 5.20 % senior notes due 2054 (the “2054 Notes”).

NORTHROP GRUMMAN CORPORATION

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:

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• $ 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.

We refer to the 2029 Notes, 2033 Notes, 2034 Notes, 2053 Notes and 2054 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.

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

INVESTIGATIONS, CLAIMS AND LITIGATION

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.

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 6, 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 7, substantial remediation costs related to these Bethpage environmental conditions, including potential costs relating to unanticipated developments such as new discoveries of potential contaminants.

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 and we continue remediation consistent with agreements through which those disputes were resolved.

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

NORTHROP GRUMMAN CORPORATION

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.

In late 2022, the company received a follow-on CID;

the company responded to it earlier this year.

On October 20, 2023, the FTC informed the company that the FTC has now closed the investigation with no further action.

The company received from the U.S.

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

Department of Justice (DOJ) a criminal subpoena on December 9, 2022, and a civil investigative demand (CID) 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 7 below.

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

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

However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2023, or its annual results of operations and/or cash flows.

However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, 2024, or its annual results of operations and/or cash flows.

COMMITMENTS AND CONTINGENCIES

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

The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of September 30, 2023, or its annual results of operations and/or cash flows.

The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of March 31, 2024, or its annual results of operations and/or cash flows.

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

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

On February 15, 2024, DCMA sent to the company a Contracting Officer’s determination of noncompliance with CAS, which is an interim, non-final determination, and the parties are engaged in ongoing discussions.

As noted in Note 6 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.

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

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

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

B-21 Low-Rate Initial Production Options

In 2015, the U.S.

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

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

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

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

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

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is between $ 0 and $ 1.2 billion.

As we do not currently believe a loss is probable on any of the LRIP options, we have not recognized any such loss in our financial results for the period ended September 30, 2023.

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.

Environmental Matters

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

government contracts as of September 30, 2023 and December 31, 2022:

government contracts as of March 31, 2024 and December 31, 2023:

$ in millions Accrued Costs (1)(2)

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Deferred Costs (3)

September 30, 2023 $ 574 $ 368 $ 511

March 31, 2024 $ 587 $ 381 $ 520

December 31, 2023 584 387 518

(1) As of September 30, 2023, $ 217 million is recorded in Other current liabilities and $ 357 million is recorded in Other non-current liabilities.

(1) As of March 31, 2024, $ 226 million is recorded in Other current liabilities and $ 361 million is recorded in Other non-current liabilities.

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

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government contracts.

(3) As of September 30, 2023, $ 201 million is deferred in Prepaid expenses and other current assets and $ 310 million is deferred in Other non-current assets.

(3) As of March 31, 2024, $ 208 million is deferred in Prepaid expenses and other current assets and $ 312 million is deferred in Other non-current assets.

These amounts are evaluated for recoverability on a routine basis.

Although management cannot predict whether (i) new information gained as our environmental remediation projects progress, (ii) changes in remediation standards or other requirements to which we are subject, or (iii) other changes in facts and circumstances will materially affect the estimated liability accrued, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2023, or its annual results of operations and/or cash flows.

Although management cannot predict whether (i) new information gained as our environmental remediation projects progress, (ii) changes in remediation standards or other requirements to which we are subject, or (iii) other changes in facts and circumstances will materially affect the estimated liability accrued, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, 2024, or its annual results of operations and/or cash flows.

Financial Arrangements

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

At September 30, 2023, there were $ 374 million of stand-by letters of credit and guarantees and $ 78 million of surety bonds outstanding.

At March 31, 2024, there were $ 363 million of stand-by letters of credit and guarantees and $ 263 million of surety bonds outstanding.

Commercial Paper

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

At September 30, 2023, there were no commercial paper borrowings outstanding.

At March 31, 2024, there were no commercial paper borrowings outstanding.

Credit Facilities

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

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

At September 30, 2023, there were no borrowings outstanding under this facility.

Commercial paper borrowings reduce the amount available for

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borrowing under the 2022 Credit Agreement.

At March 31, 2024, there were no borrowings outstanding under this facility.

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

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

At September 30, 2023, the company was in compliance with all covenants under its credit agreements.

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At March 31, 2024, the company was in compliance with all covenants under its credit agreements.

RETIREMENT BENEFITS

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

Three Months Ended September 30 Nine Months Ended September 30

Benefits OPB Pension

Three Months Ended March 31

$ in millions 2024 2023 2024 2023

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Expected return on plan assets ( 549 ) ( 524 ) ( 21 ) ( 21 )

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

Net periodic benefit cost (benefit) $ ( 108 ) $ ( 73 ) $ ( 5 ) $ ( 3 )

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

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2024 2023

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

Nine Months Ended September 30

Three Months Ended March 31

in millions 2024 2023

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

Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2024 2023

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The following table presents sales and operating income by segment:

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2024 2023

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Total operating income $ 1,071 $ 947

Other (expense) income

Interest expense ( 146 ) ( 129 )

Non-operating FAS pension benefit 168 132

Other, net 38 48

Earnings before income taxes $ 1,131 $ 998

FAS/CAS Operating Adjustment

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Unallocated Corporate Expense

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

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

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benefits, advertising and other corporate unallowable costs.

Disaggregation of Revenue

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

2023 2022 2023 2022

Sales by Customer Type Three Months Ended March 31

$ in millions $ % (3)

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

2023 2022 2023 2022

Sales by Contract Type Three Months Ended March 31

$ in millions $ % (1)

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

2023 2022 2023 2022

Sales by Geographic Region Three Months Ended March 31

$ in millions $ % (2)

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All other (1)

10 — % 13 1 % 25 — % 39 1 %

Intersegment sales 59 65

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All other (1)

6 — % 3 — % 32 — % 10 — %

Intersegment sales 27 32

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Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of September 30, 2023, and the related condensed consolidated statements of earnings and comprehensive income and changes in shareholders’ equity for the three-month and nine-month periods ended September 30, 2023 and 2022, and of cash flows for the nine-month periods ended September 30, 2023 and 2022 and the related notes (collectively referred to as the “interim financial information”).

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

We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of March 31, 2024, and the related condensed consolidated statements of earnings and comprehensive income, cash flows, and changes in shareholders’ equity for the three-month periods ended March 31, 2024 and 2023, and the related notes (collectively referred to as the “interim financial information”).

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of December 31, 2023, and the related consolidated statements of earnings and comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein);

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McLean, Virginia

October 25, 2023

April 24, 2024

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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 1. Financial Statements