What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-04-25 compared with 2023-10-26 · 134 added, 242 removed, 211 unchanged (64% of the section changed)

12 unchanged sentences

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

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

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

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

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

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

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

We continue to not anticipate significant adverse financial impacts directly from the ongoing conflict.

We have experienced, and, while difficult to predict, may continue to experience an increase in demand for certain of our goods and services directly and indirectly related to the conflict in Ukraine, either through direct sales or if the U.S.

provides increased military assistance and support to Ukraine.

More recently, hostilities in the Middle East have further heightened global tensions and instability.

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

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

provides increased military assistance and support to Israel.

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

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

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

We are actively exploring both opportunities and risks.

Global Health Environment

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

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

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

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

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

While we cannot

NORTHROP GRUMMAN CORPORATION

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

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

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

Like the communities in which we operate, our actions have varied, and will continue to vary, depending on the state of the global health environment, including as it relates to COVID-19 and other illnesses, applicable government requirements, and the needs of our stakeholders.

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

These conflicts may result in increased demand for defense products and services from allies and partner nations, particularly in those areas.

We are actively exploring both opportunities and risks associated with the broader global security environment.

We believe the current global security environment highlights the significant national security threats to the U.S.

and its allies, and the need for strong deterrence and robust defense capabilities.

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

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

Global Economic Environment

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

Over the past several years, the global economic environment has experienced extraordinary challenges, including inflationary pressures;

widespread delays and disruptions in supply chains;

workforce challenges;

business slowdowns or shutdowns;

workforce challenges and labor shortfalls;

and market volatility.

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

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

However, the broader macroeconomic environment, including inflationary pressures and supply chain challenges, continued adversely to affect the company’s results for the quarter ended September 30, 2023.

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

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

NORTHROP GRUMMAN CORPORATION

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

Direct financial impacts on our business related to the broader macroeconomic environment have begun to subside;

however, pockets of our business continued to be adversely affected by the macroeconomic environment during the first quarter of 2024.

We cannot clearly predict how long these macroeconomic challenges will continue, how they will change over time, or what additional resources will be available, but we expect to see this challenging macroeconomic environment continue to adversely impact the global economy, our customers and suppliers, our industry and our company in 2024.

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

2 unchanged sentences

Political, Budget and Regulatory Environment

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

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

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

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

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

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

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

In addition to the U.S.

national security budget detailed above, the U.S.

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

Assistance includes transfers of weapons systems from U.S.

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

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

capabilities.

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

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

continues to face an uncertain and evolving political, budget and regulatory environment.

In particular, it is difficult to predict the specific course of future defense budgets.

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

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

Current tensions within Congress and the wider U.S.

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

NORTHROP GRUMMAN CORPORATION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The bill also includes $16 billion for disaster relief.

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

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

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

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

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

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

political environment, including the U.S.

election cycle, may also impact defense budgets and priorities, issues related to the national debt, and government spending more broadly.

We anticipate that issues related to budgetary priorities and defense spending levels, the debt ceiling, and the spending caps imposed by the Fiscal Responsibility Act of 2023 (FRA), particularly with respect to discretionary spending, will continue to be a subject of considerable debate, with a potentially significant impact on our programs and the company.

On March 11, 2024, the Administration released its budget request for FY 2025.

The request included $895 billion for national security, $850 billion of which is for the DoD.

On March 23, 2024, the President signed into law the Further Consolidated Appropriations Act for FY 2024, which provides funding for government agencies, including $825 billion for the DoD, through September 30, 2024.

On April 24, 2024, the President signed into law bills providing $95 billion in supplemental funding for Ukraine, Israel and Indo-Pacific, to include funding for the restock of U.S.

munitions and additional capacity.

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

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

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

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

Ground-Based Strategic Deterrent (“GBSD” or “Sentinel”) Program Nunn-McCurdy Breach Review

Due in part to the impact of macroeconomic factors, in January 2024 the customer provided congressional notification that the Sentinel program is currently under a Nunn-McCurdy breach review, which is required when total program cost estimates exceed certain defined thresholds.

This notification, which has been driven primarily by increases in construction and procurement cost projections for the Production and Deployment phases, commenced the process to achieve recertification for continuance of the program and update its baseline cost estimates.

We are currently executing under a cost-type contract for the Engineering and Manufacturing Development phase, and the Production and Deployment phases are yet to be priced and negotiated.

We are continuing to partner with our customer to address this critical mission.

NORTHROP GRUMMAN CORPORATION

1 unchanged sentence

Selected financial highlights are presented in the table below:

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

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

Three Months Ended March 31 %

$ in millions, except per share amounts 2024 2023 Change

Sales $ 10,133 $ 9,301 9 %

7 unchanged sentences

Diluted earnings per share $ 6.32 $ 5.50 15 %

Current Quarter

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

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

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

First quarter 2024 sales increased $832 million, or 9 percent, due to higher sales at all four sectors, including 18 percent growth at Aeronautics Systems.

First quarter 2024 sales reflect continued strong demand for our products and services.

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

1 unchanged sentence

Operating Income and Margin Rate

Current Quarter

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

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

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

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

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

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

First quarter 2024 operating income increased $124 million, or 13 percent, and operating margin rate increased to 10.6 percent, primarily due to higher segment operating income and a benefit associated with the FAS/CAS operating adjustment.

First quarter 2024 G&A costs as a percentage of sales decreased to 10.5 percent from 11.2 percent in the prior year period primarily due to higher sales.

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

1 unchanged sentence

Federal and Foreign Income Taxes

Current Quarter

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

See Note 3 to the financial statements for additional information.

NORTHROP GRUMMAN CORPORATION

The year to date 2023 ETR decreased to 16.5 percent from 16.8 percent in the prior year period principally due to an increase in research credits as well as more favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax benefits.

The first quarter 2024 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.

See Note 4 to the financial statements for additional information.

Current Quarter

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

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

First quarter 2024 net earnings increased $102 million, or 12 percent, primarily due to a 13 percent increase in operating income and a $36 million increase in the non-operating FAS pension benefit, partially offset by a higher effective tax rate.

Diluted Earnings Per Share

Current Quarter

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

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

First quarter 2024 diluted earnings per share increased 15 percent, reflecting higher net earnings and a 3 percent reduction in weighted-average diluted shares outstanding.

SEGMENT OPERATING RESULTS

2 unchanged sentences

Aeronautics Systems, Defense Systems, Mission Systems and Space Systems.

We present our sectors in the following business areas, which are reported in a manner reflecting core capabilities:

Aeronautics Systems Defense Systems Mission Systems Space Systems

Autonomous Systems Battle Management & Missile Systems Airborne Multifunction Sensors Launch & Strategic Missiles

Manned Aircraft Mission Readiness Maritime/Land Systems & Sensors Space

Navigation, Targeting & Survivability

Networked Information Solutions

This section discusses segment sales, operating income and operating margin rates.

1 unchanged sentence

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

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

Based on this approach and the nature of our operations, the

NORTHROP GRUMMAN CORPORATION

discussion of results of operations below first focuses on our four segments before distinguishing between products and services.

Changes in sales are generally described in terms of volume, while changes in margin rates are generally described in terms of performance and/or contract mix.

1 unchanged sentence

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

NORTHROP GRUMMAN CORPORATION

Segment Operating Income and Margin Rate

3 unchanged sentences

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

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

$ in millions 2023 2022 Change 2023 2022 Change

Three Months Ended March 31 %

$ in millions 2024 2023 Change

Operating income $ 1,071 $ 947 13 %

3 unchanged sentences

FAS pension service expense 60 59 2 %

FAS/CAS operating adjustment 20 55 (64) % 62 152 (59) %

FAS/CAS operating adjustment (6) 21 NM

Intangible asset amortization and PP&E step-up depreciation 25 30 (17) %

3 unchanged sentences

Segment operating margin rate 10.9 % 10.8 %

Current Quarter

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

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

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

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

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

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

First quarter 2024 segment operating income increased $102 million, or 10 percent, primarily due to higher sales.

Segment operating margin rate increased to 10.9 percent and reflects higher operating margin rates at Aeronautics Systems, Defense Systems and Mission Systems, partially offset by a lower operating margin rate at Space Systems.

FAS/CAS Operating Adjustment

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

First quarter 2024 FAS/CAS operating adjustment reflects higher CAS pension expense largely driven by plan asset returns in prior years and changes in certain CAS actuarial assumptions as of December 31, 2023.

Unallocated Corporate Expense

Current Quarter

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

NORTHROP GRUMMAN CORPORATION

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

The increase in unallocated corporate expense is primarily due to changes in deferred state taxes largely related to the deferral of research credits under IRC Section 174.

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

1 unchanged sentence

the aggregate amounts are presented in the table below:

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2024 2023

2 unchanged sentences

Net EAC adjustments $ 94 $ 46

NORTHROP GRUMMAN CORPORATION

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

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2024 2023

7 unchanged sentences

AERONAUTICS SYSTEMS

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

$ in millions 2023 2022 Change 2023 2022 Change

Three Months Ended March 31 %

$ in millions 2024 2023 Change

Sales $ 2,969 $ 2,515 18 %

1 unchanged sentence

Operating margin rate 10.0 % 9.4 %

Current Quarter

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

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

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

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

First quarter 2024 sales increased $454 million, or 18 percent, primarily due to higher volume on restricted programs, a $114 million increase on the F-35 program driven by higher volume on sustainment and production contracts, and higher volume on the E-2, Triton and Global Hawk programs.

The increases on F-35 and restricted programs are due, in part, to material timing in the first quarter.

Operating Income

Current Quarter

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

Operating margin rate was comparable with the prior year period.

NORTHROP GRUMMAN CORPORATION

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

Operating margin rate decreased to 10.1 percent from 10.6 percent primarily due to lower net EAC adjustments, largely driven by a $67 million favorable EAC adjustment on the EMD phase of the B-21 program in the prior year, as well as a $38 million gain on a property sale in the prior year.

First quarter 2024 operating income increased $60 million, or 25 percent, due to higher sales and a higher operating margin rate.

Operating margin rate increased to 10.0 percent from 9.4 percent principally due to higher net EAC adjustments largely driven by improved performance and cost efficiencies on certain production programs, including F-35 and F/A-18, which more than offset sales growth on a low margin restricted program.

DEFENSE SYSTEMS

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

$ in millions 2023 2022 Change 2023 2022 Change

Three Months Ended March 31 %

$ in millions 2024 2023 Change

Sales $ 1,412 $ 1,376 3 %

1 unchanged sentence

Operating margin rate 12.5 % 11.6 %

Current Quarter

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

Year to date 2023 sales increased $295 million, or 8 percent, due to higher volume in both business areas.

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

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

First quarter 2024 sales increased $36 million, or 3 percent, primarily due to ramp-up on the Stand-in Attack Weapon (SiAW) program and higher volume on Guided Multiple Launch Rocket Systems (GMLRS) and certain military ammunition and cannon systems programs, partially offset by lower volume due to the completion of an international training program.

Operating Income

Current Quarter

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

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

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

Operating margin rate decreased to 12.0 percent from 12.3 percent primarily due to lower net EAC adjustments.

First quarter 2024 operating income increased $17 million, or 11 percent, due to a higher operating margin rate and higher sales.

Operating margin rate increased to 12.5 percent from 11.6 percent principally due to improved performance driven by changes in contract mix and cost efficiencies.

NORTHROP GRUMMAN CORPORATION

MISSION SYSTEMS

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

$ in millions 2023 2022 Change 2023 2022 Change

Three Months Ended March 31 %

$ in millions 2024 2023 Change

Sales $ 2,659 $ 2,563 4 %

1 unchanged sentence

Operating margin rate 14.2 % 14.0 %

Current Quarter

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

Year to date 2023 sales increased $363 million, or 5 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on marine systems programs and the Surface Electronic Warfare Improvement Program (SEWIP).

These increases were partially offset by a $115 million decrease on G/ATOR largely driven by material receipts and FRP5 contract award timing, as well as lower volume on airborne radar programs.

NORTHROP GRUMMAN CORPORATION

First quarter 2024 sales increased $96 million, or 4 percent, primarily due to higher restricted sales on advanced microelectronics programs, partially offset by lower sales on the Scalable Agile Beam Radar (SABR) program.

Operating Income

Current Quarter

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

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

Year to date 2023 operating income decreased $19 million, or 2 percent, due to a lower operating margin rate, which more than offset higher sales.

Operating margin rate decreased to 14.6 percent from 15.6 percent primarily due to a prior year $33 million benefit recognized in connection with a contract-related legal matter, as well as changes in contract mix toward more cost-type content and a first quarter 2023 loss recognized in connection with an unconsolidated joint venture.

First quarter 2024 operating income increased $18 million, or 5 percent, due to higher sales and a higher operating margin rate.

Operating margin rate increased to 14.2 percent from 14.0 percent, primarily due to sales growth on higher margin advanced microelectronics programs and a prior year loss related to an unconsolidated joint venture.

These benefits were partially offset by lower net EAC adjustments on certain radar production programs.

SPACE SYSTEMS

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

$ in millions 2023 2022 Change 2023 2022 Change

Three Months Ended March 31 %

$ in millions 2024 2023 Change

Sales $ 3,655 $ 3,350 9 %

1 unchanged sentence

Operating margin rate 9.1 % 9.3 %

Current Quarter

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

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

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

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

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

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

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

First quarter 2024 sales increased $305 million, or 9 percent, primarily due to a $117 million increase on the Space Development Agency (SDA) Tranche 2 Transport Layer (T2TL) programs and higher volume on restricted programs, Commercial Resupply Services (CRS) missions, hypersonics programs and the Glide Phase Interceptor (GPI) program.

These increases were partially offset by lower volume on the Ground-based Midcourse Defense (GMD) program.

Operating Income

Current Quarter

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

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

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

Operating margin rate decreased to 8.8 percent from 9.6 percent primarily due to lower net EAC adjustments, partially offset by a first quarter 2023 benefit recognized on the sale of a license to a customer.

First quarter 2024 operating income increased $19 million, or 6 percent, due to higher sales, partially offset by a lower operating margin rate.

Operating margin rate decreased to 9.1 percent from 9.3 percent principally due to a prior year benefit from the sale of a license to a customer, partially offset by an improvement in net EAC adjustments.

NORTHROP GRUMMAN CORPORATION

1 unchanged sentence

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

Three Months Ended September 30 Nine Months Ended September 30

Three Months Ended March 31

$ in millions 2024 2023

Segment Information:

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

Sales Operating Costs and Expenses Sales Operating Costs and Expenses

Aeronautics Systems

25 unchanged sentences

Product Sales and Costs

Current Quarter

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

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

Third quarter 2023 product costs increased $661 million, or 11 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Space Systems production programs.

Year to date 2023 product sales increased $1.8 billion, or 9 percent, primarily due to an increase in product sales at Space Systems.

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

Year to date 2023 product costs increased $1.8 billion, or 10 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Space Systems and Aeronautics Systems programs.

NORTHROP GRUMMAN CORPORATION

First quarter 2024 product sales increased $831 million, or 11 percent, primarily due to an increase in product sales at all four sectors.

The increase was principally driven by higher volume on restricted programs, F-35 and E-2 at Aeronautics Systems, growth on SDA T2TL and restricted programs at Space Systems, higher volume on the SiAW and GMLRS programs at Defense Systems, and higher restricted sales at Mission Systems.

First quarter 2024 product costs increased $733 million, or 11 percent, consistent with the higher product sales described above.

Service Sales and Costs

Current Quarter

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

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

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

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

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

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

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

September 30, 2023 December 31, 2022

First quarter 2024 service sales were comparable to the prior year period and reflect an increase in service sales at Aeronautics Systems driven by higher volume on restricted programs and the Global Hawk program, partially offset by a decrease in service sales at Defense Systems principally due to the completion of an international training program.

First quarter 2024 service costs were comparable to the prior year period, consistent with the service sales described above.

NORTHROP GRUMMAN CORPORATION

Backlog consisted of the following as of March 31, 2024 and December 31, 2023:

March 31, 2024 December 31, 2023

$ in millions Funded Unfunded Total

6 unchanged sentences

Total backlog $ 35,478 $ 43,442 $ 78,920 $ 84,230 (6) %

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

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

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.

First quarter 2024 net awards totaled $6.5 billion and backlog totaled $78.9 billion.

Significant first quarter new awards include $3.1 billion for restricted programs (primarily at Aeronautics Systems, Space Systems, and Mission Systems).

LIQUIDITY AND CAPITAL RESOURCES

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

At September 30, 2023, we had $2.1 billion in cash and cash equivalents.

At March 31, 2024, we had $3.1 billion in cash and cash equivalents.

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

The company has a five-year senior unsecured credit facility in an aggregate principal amount of $2.5 billion, and in April 2024, we renewed our one-year $500 million uncommitted credit facility.

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

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

COVID-19 and the CARES Act

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

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

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

NORTHROP GRUMMAN CORPORATION

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

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

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

Internal Revenue Code (IRC) Section 174

At March 31, 2024, there were no borrowings outstanding under these credit facilities.

In January 2024, we issued $2.5 billion of unsecured senior notes for general corporate purposes, including debt repayment, share repurchases and working capital.

IRC Section 174

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

Our 2023 cash from operations were reduced by approximately $500 million for federal estimated tax payments we made related to Section 174.

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

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

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

Congress is considering legislation that would defer the amortization requirement to later years, possibly with retroactive effect.

In the meantime, we expect to continue to make additional federal tax payments based on the current Section 174 tax law, which we estimate will reduce our 2024 cash from operations by approximately $350 million.

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

Cash Flow Measures

In addition to our cash position, we consider various cash flow measures in capital deployment decision-making, including cash provided by operating activities and adjusted free cash flow, a non-GAAP measure described in more detail below.

In addition to our cash position, we consider various cash flow measures in capital deployment decision-making, including cash provided by operating activities and free cash flow, a non-GAAP measure described in more detail below.

NORTHROP GRUMMAN CORPORATION

Operating Cash Flow

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

Nine Months Ended September 30 %

The table below summarizes key components of cash used in operating activities:

Three Months Ended March 31 %

$ in millions 2024 2023 Change

3 unchanged sentences

Changes in trade working capital (1,710) (1,525) 12 %

Other, net (43) 96 NM

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

Other, net (7) (15) (53) %

Net cash used in operating activities $ (706) $ (702) (1) %

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

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

Adjusted Free Cash Flow

Adjusted free cash flow, as reconciled in the table below, is a non-GAAP measure defined as net cash provided by or used in operating activities, less capital expenditures, plus proceeds from the sale of equipment to a customer (not otherwise included in net cash provided by or used in operating activities) and the after-tax impact of discretionary pension contributions.

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

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

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

We use adjusted free cash flow as a key factor in our planning for, and consideration of, acquisitions, the payment of dividends and stock repurchases.

First quarter 2024 net cash used in operating activities was comparable with the prior year period.

Higher net earnings were offset by changes in trade working capital.

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

Free Cash Flow

Free cash flow, as reconciled in the table below, is a non-GAAP measure defined as net cash provided by or used in operating activities less capital expenditures, and may not be defined and calculated by other companies in the same manner.

We use free cash flow as a key factor in our planning for, and consideration of, acquisitions, the payment of dividends and stock repurchases.

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

NORTHROP GRUMMAN CORPORATION

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

Nine Months Ended September 30 %

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

Three Months Ended March 31 %

$ in millions 2024 2023 Change

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

Net cash used in operating activities $ (706) $ (702) (1) %

Capital expenditures (270) (309) (13) %

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

Adjusted free cash flow $ 473 $ (53) NM

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

Free cash flow $ (976) $ (1,011) 3 %

First quarter 2024 free cash flow increased $35 million, or 3 percent, as compared with the same period in 2023 principally due to lower capital expenditures.

Investing Cash Flow

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

First quarter 2024 net cash used in investing activities decreased $40 million as compared with the same period in 2023 principally due to lower capital expenditures largely driven by timing.

Financing Cash Flow

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

First quarter 2024 net cash provided by financing activities was comparable with the prior year period and reflects a $500 million increase in proceeds from long-term debt, partially offset by a $467 million increase in share repurchases.

Credit Facilities, Commercial Paper and Financial Arrangements - See Note 7 to the financial statements for further information on our credit facilities, commercial paper and our use of standby letters of credit and guarantees.

1 unchanged sentence

Long-term Debt - See Note 5 to the financial statements for further information.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

There have been no material changes to our critical accounting policies, estimates or judgments from those discussed in our 2022 Annual Report on Form 10-K.

NORTHROP GRUMMAN CORPORATION

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates from those discussed in our 2023 Annual Report on Form 10-K.

ACCOUNTING STANDARDS UPDATES

6 unchanged sentences

These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict.

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

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

Specific risks that could cause actual results to differ materially from those expressed or implied in these forward-looking statements include, but are not limited to, those identified and discussed more fully in the section entitled “Risk Factors” in our 2023 Annual Report on Form 10-K and from time to time in our other filings with the SEC.

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

They include:

2 unchanged sentences

government for a substantial portion of our business

NORTHROP GRUMMAN CORPORATION

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

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

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

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

7 unchanged sentences

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

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

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

• unanticipated changes in our tax provisions or exposure to additional tax liabilities

Business and Operational Risks

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

NORTHROP GRUMMAN CORPORATION

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

1 unchanged sentence

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

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

• impacts related to health epidemics and pandemics and similar outbreaks

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

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

• our ability to innovate, develop new products and technologies, progress and benefit from digital transformation and maintain technologies to meet the needs of our customers

• natural disasters

1 unchanged sentence

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

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

General and Other Risk Factors

NORTHROP GRUMMAN CORPORATION

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

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis