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Item 7. Management’s Discussion and Analysis

2025-01-30 compared with 2024-01-25 · 203 added, 211 removed, 397 unchanged (51% of the section changed)

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The following discussion should be read along with the financial statements included in this Form 10-K, as well as Part II, “Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2022 (“2022 Annual Report on Form 10-K”).

Management's Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) of our Form 10-K for the year ended December 31, 2023 (“2023 Annual Report on Form 10-K”).

To the extent the July 1, 2024 SDS realignment impacted the disclosures in the 2023 Annual Report on Form 10-K, we recast those prior year MD&A disclosures herein.

Global Security Environment

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The market for defense products, services and solutions globally is driven by these complex and evolving security challenges, considered in the broader context of political and socioeconomic circumstances and priorities.

Our operations and financial performance, as well as demand for our products and services, are impacted by global events, including violence and unrest.

Our operations and financial performance, as well as demand for our products and services, are impacted by these events, including global unrest.

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.

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 a modest 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, the hostilities in Israel and the Gaza Strip have further heightened global tensions and instability.

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

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

provides increased military assistance and support to Israel.

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

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

The conflicts in Ukraine and the Middle East and threats elsewhere, particularly in the Pacific region, have increased global tensions and instability and highlighted security requirements globally, including in Europe, the Middle East and the Pacific region, as well as the U.S.

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

For example, we have experienced an increase in demand for certain of our products and services directly and indirectly related to the conflict in Ukraine.

We continue to monitor developments in these regions, but have not experienced, and do not anticipate experiencing, significant adverse financial impacts directly from the conflicts in Ukraine or the Middle East.

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 a robust defense capability.

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 its allies, and the need for strong deterrence and robust defense capabilities, and are actively evaluating both opportunities and risks associated with this environment.

We believe our capabilities, particularly in space, C4ISR, missile defense, battle management, advanced weapons, strategic deterrence, 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 Enviro nment

The global economic environment has experienced extraordinary challenges, including high rates of inflation and inflationary pressures;

Global Economic Environment

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

widespread delays and disruptions in supply chains;

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and market volatility.

Some of these challenges were due, in part, to the global health emergency caused by COVID-19, which the World Health organization declared ended in May 2023.

Direct impacts of COVID-19 on our business during 2023 were limited, and we are not currently expecting significant direct impacts on our business going forward.

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.

We continue to work hard to mitigate 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 year ended December 31, 2023.

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

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

These macroeconomic factors have contributed, and in the future could 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.

We continue to work to address challenges caused by the macroeconomic environment on our business.

We have seen positive progress in the supply chain as on-time deliveries and quality have improved.

In remaining areas of pressure, we are proactively working with our suppliers to ensure we meet our contract commitments.

Although certain pockets of our business were adversely affected by the broader macroeconomic environment during the fourth quarter of 2024, the overall financial impact on our company has continued to subside.

In addition, an overall increase in interest rates in recent years has raised the cost of borrowing for governments, and if rates further increase, it could impact government spending priorities (in the U.S.

and allied countries, in particular), including their demand for defense products.

Economic tensions and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could also further impact the global market for defense products, services and solutions.

Economic tensions and changes in international trade policies, including higher tariffs on imported goods and materials, the imposition of retaliatory tariffs or other trade protection measures and renegotiation of free trade agreements, could also further impact the global market for defense products, services and solutions.

Political, Budget and Regulatory Environment

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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.

Current and future requirements related to the conflicts in Ukraine and the Middle East, threats in the Pacific region and other security priorities, as well as the macroeconomic environment, 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.

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.

political environment may also impact defense budgets and priorities, issues related to the national debt, and

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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.

Annual appropriations to fund the federal government for FY 2024 have not been enacted.

Annual appropriations to fund the federal government for FY 2025 have not yet been enacted.

Congress continues to pass short-term continuing resolutions (CR) to fund the federal government.

The most recent “laddered” CR passed in January 2024 funds the government through March 2024, depending on the appropriation bill.

If Congress does not pass full year appropriations or an additional CR before current funding expires, the federal government (or select departments) could face a shutdown and 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.

If the federal government remains under a CR at the end of April 2024, the one percent discretionary spending cuts under the FRA could be triggered, potentially resulting in lower funding on the programs in which we participate.

In December 2023, the president signed the National Defense Authorization Act (NDAA) for FY 2024 which supports approximately $886 billion in FY 2024 funding for national defense, $842 billion of which is for the DoD.

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 most recent CR passed in December 2024 extends current funding levels until March 14, 2025.

It remains uncertain when the government will approve FY 2025 appropriations, and the levels of funding FY 2025 appropriations will provide.

Government operations under an extended CR could have potential impacts on our programs and new starts, in particular.

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

For further information on the global security and economic environment and U.S.

political, budget and regulatory environment, including the risks related thereto, see “Liquidity and Capital Resources,” “Quantitative and Qualitative Disclosures About Market Risks” and “Risks Factors” included in this Form 10-K.

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, commences 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.

For more information, see “Risk Factors”.

Disposition of IT and Mission Support Services Business

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

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

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

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

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

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

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

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 for a baseline total of 21 aircraft.

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.

In addition to the five LRIP options, Northrop Grumman and the U.S.

Air Force have established not to exceed (NTE) pricing for additional aircraft up to unit 40.

The average NTE value for these subsequent lots is above the average unit price of the five LRIP lots, and the NTE lots include an economic price adjustment clause to help protect against certain inflationary pressures.

Final terms, quantity, and pricing for these subsequent lots are not fully negotiated.

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

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

The company’s 2024 results reflect our current best estimate of our cost to complete the LRIP and NTE aircraft, as well as the outcome of ongoing discussions with our suppliers and our customer.

If our estimated cost to complete the aircraft changes or our assumptions regarding contract performance, quantities, supplier negotiations, 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.

Sentinel Program

In 2020, the U.S.

Air Force awarded Northrop Grumman a $13.3 billion contract for the EMD phase of the Sentinel program.

In January 2024, the U.S.

Air Force provided congressional notification that the Sentinel program was under a Nunn-McCurdy breach review, which is required when total program cost estimates exceed certain defined thresholds.

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

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

In July 2024, the Sentinel program was certified for continuation by the DoD upon completion of the Nunn-McCurdy breach review.

In connection with the certification, the DoD directed that the program be restructured, including plans for infrastructure related to the command and launch segment, which was the main driver of the increased cost estimates for the Production and Deployment phases.

We are partnering with our customer to establish a new program baseline as part of the restructuring activities.

During the fourth quarter of 2024, we reviewed our estimated profitability on the Sentinel program and made no significant changes.

The Sentinel EAC incorporates our best estimate of costs to complete the restructured EMD effort;

however, if the outcome is more or less favorable than what we have estimated, our financial position, results of operations and/or cash flows could be materially affected.

Operating Performance Assessment and Reporting

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As a result, sales tend to fluctuate in concert with costs incurred across our large portfolio of contracts.

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Due to the applicable FAR and CAS requirements that govern our U.S.

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For purposes of the operating results discussion below, we assess our performance using certain financial measures that are not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”).

Mark-to-market adjusted net earnings (MTM-adjusted net earnings) and MTM-adjusted earnings per share (MTM-adjusted EPS) exclude MTM pension and OPB (expense)/benefit and related tax impacts, which are generally only recognized during the fourth quarter.

Transaction-adjusted net earnings and transaction-adjusted earnings per share (transaction-adjusted EPS) exclude the MTM impacts noted above, as well as impacts related to the IT services divestiture, including the gain on sale of the business, associated federal and state income tax expenses, transaction costs, and the make-whole premium for early debt redemption.

These non-GAAP measures may be useful to investors and other users of our financial statements as supplemental measures in evaluating the company’s underlying financial performance by presenting the company’s operating results before the non-operational impact of pension and OPB actuarial gains and losses, and with regard to transaction-adjusted net earnings and EPS, the impact of certain divestiture activity.

These measures are also consistent with how management views the underlying performance of the business as the impact of MTM accounting and the IT services divestiture are not considered in management’s assessment of the company’s operating performance or in its determination of incentive compensation awards.

Mark-to-market adjusted net earnings (MTM-adjusted net earnings) and MTM-adjusted earnings per share (MTM-adjusted EPS) exclude MTM pension and OPB benefit/(expense) and related tax impacts, which are generally only recognized during the fourth quarter.

These measures are also consistent with how management views the underlying performance of the business as the impact of MTM accounting is not considered in management’s assessment of the company’s operating performance or in its determination of incentive compensation awards.

We reconcile these non-GAAP financial measures to their most directly comparable GAAP financial measures below.

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

NORTHROP GRUMMAN CORPORATION

Selected financial highlights are presented in the table below:

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Operating costs and expenses as a % of sales 89.4 % 93.5 % 90.2 %

Gain on sale of business — — 1,980 — % NM

Operating income 4,370 2,537 3,601 72 % (30) %

Operating margin rate 10.6 % 6.5 % 9.8 %

Mark-to-market pension and OPB (expense) benefit (422) 1,232 2,355 NM (48) %

Mark-to-market pension and OPB benefit (expense) 443 (422) 1,232 NM NM

Federal and foreign income tax expense 842 290 940 190 % (69) %

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Diluted earnings per share $ 28.34 $ 13.53 $ 31.47 109 % (57) %

2023 sales increased $2.7 billion, or 7 percent, due to higher sales at all four sectors.

2024 sales increased $1.7 billion, or 4 percent, due to a 12 percent growth in sales at Aeronautics Systems and higher sales at Mission Systems and Defense Systems, partially offset by lower sales at Space Systems largely driven by a reduction of $595 million associated with wind-down of work on the restricted space and NGI programs, as previously disclosed.

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

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

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Operating Income and Margin Rate

2023 operating income decreased $1.1 billion, or 30 percent, primarily due to a $1.56 billion charge on the B-21 program at Aeronautics Systems, partially offset by higher operating income at Space Systems and Defense Systems.

The B-21 charge relates to the low-rate initial production (LRIP) phase of the program and is due principally to a change in our assumptions regarding funding to mitigate the impact of macroeconomic disruptions on the program and higher projected manufacturing costs that reflect recent supplier negotiations and our experience in completing the first aircraft.

The decrease was also offset by $311 million of lower unallocated corporate expense, largely due to higher deferred state tax benefits associated with the MTM adjustment and B-21 charge and lower intangible asset amortization and PP&E step-up depreciation, as well as a $118 million reduction in the FAS/CAS operating adjustment.

2023 operating margin rate declined to 6.5 percent from 9.8 percent reflecting the items above.

2023 G&A costs as a percentage of sales decreased to 10.2 percent from 10.6 percent, primarily due to higher sales, which more than offset our continued investments for future business opportunities.

2024 operating income increased $1.8 billion, or 72 percent, primarily due to higher operating income at Aeronautics Systems, largely driven by the prior year $1.56 billion charge on the B-21 program, as well as higher operating income at Space Systems and Defense Systems.

2024 operating income also increased due to a $122 million increase in the FAS/CAS operating adjustment, partially offset by $73 million of higher unallocated corporate expense, largely due to a $127 million increase in deferred state taxes related to the MTM benefit (expense) and prior year B-21 charge and $25 million of lower intangible amortization and PP&E step-up depreciation.

2024 operating margin rate increased to 10.6 percent from 6.5 percent reflecting the items above.

2024 G&A costs as a percentage of sales decreased to 9.7 percent from 10.2 percent primarily due to higher sales.

For further information regarding product and service operating costs and expenses, see “Product and Service Analysis” below.

Mark-to-Market Pension and OPB Benefit/Expense

The primary components of pre-tax MTM (expense) benefit are presented in the table below:

The primary components of pre-tax MTM benefit (expense) are presented in the table below:

Year Ended December 31

$ in millions 2024 2023 2022

Actuarial (losses) gains on projected benefit obligation $ (1,489) $ 9,662 $ 1,163

Actuarial gains (losses) on plan assets 1,067 (8,430) 1,192

MTM (expense) benefit

Actuarial gains (losses) on projected benefit obligation $ 1,314 $ (1,489) $ 9,662

Actuarial (losses) gains on plan assets (871) 1,067 (8,430)

MTM benefit (expense)

$ 443 $ (422) $ 1,232

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The 2023 MTM expense of $422 million was primarily driven by a 39 basis point decrease in the discount rate from year end 2022, partially offset by actual net plan asset returns of 11.1 percent compared to our 7.5 percent asset return assumption.

The 2024 MTM benefit of $443 million was primarily driven by a 58 basis point increase in the discount rate from year end 2023, partially offset by actual net plan asset returns of 4.7 percent compared to our 7.5 percent asset return assumption.

Federal and Foreign Income Taxes

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

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

The 2024 effective tax rate (ETR) increased to 16.8 percent from 12.4 percent in 2023 primarily due to the impact of the prior year B-21 charge and the MTM adjustment on our ETR.

The 2024 MTM benefit increased the 2024 ETR by 0.4 percentage points, whereas the prior year B-21 charge and MTM expense collectively reduced the 2023 ETR by 3.8 percentage points.

The 2024 ETR also reflects a net reduction in tax reserves largely due to a recent federal court decision, partially offset by higher interest expense on unrecognized tax benefits.

See Note 6 to the consolidated financial statements for additional information.

The table below reconciles net earnings to MTM-adjusted net earnings and transaction-adjusted net earnings:

The table below reconciles net earnings to MTM-adjusted net earnings:

Year Ended December 31 % Change in

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Net earnings $ 4,174 $ 2,056 $ 4,896 103 % (58) %

MTM expense (benefit)

422 (1,232) (2,355) NM (48) %

MTM-related deferred state tax (benefit) expense (1)

(22) 65 124 NM (48) %

Federal tax (benefit) expense of items above (2)

(84) 245 469 NM (48) %

MTM adjustment, net of tax 316 (922) (1,762) NM (48) %

MTM-adjusted net earnings 2,372 3,974 5,243 (40) % (24) %

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

State tax impact (3)

MTM (benefit) expense

(443) 422 (1,232) NM NM

Transaction costs — — 32 NM NM

Make-whole premium — — 54 NM NM

Federal tax impact of items above (4)

MTM-related deferred state tax expense (benefit) (1)

23 (22) 65 NM NM

Transaction adjustment, net of tax — — (1,120) NM NM

Transaction-adjusted net earnings $ 2,372 $ 3,974 $ 4,123 (40) % (4) %

Federal tax expense (benefit) of items above (2)

88 (84) 245 NM NM

MTM adjustment, net of tax (332) 316 (922) NM NM

MTM-adjusted net earnings $ 3,842 $ 2,372 $ 3,974 62 % (40) %

(1) The deferred state tax impact in each period was calculated using the company’s blended state tax rate of 5.25 percent and is included in Unallocated corporate expense within operating income.

(2) The federal tax impact in each period was calculated by subtracting the deferred state tax impact from MTM benefit (expense) and applying the 21 percent federal statutory rate.

(3) The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.

(4) The federal tax impact was calculated by applying the 21 percent federal statutory rate to the adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.

2023 net earnings decreased $2.8 billion, or 58 percent, principally due to a $1.7 billion decrease in our MTM (expense) benefit, a $975 million reduction in the non-operating FAS pension benefit and the $1.1 billion decrease in operating income described above, partially offset by a $650 million decrease in income tax expense, a $107 million increase in returns on marketable securities related to our non-qualified benefit plans, and a $97 million gain recognized upon the sale of our minority investment in an Australian business.

2024 net earnings increased $2.1 billion, or 103 percent, primarily due to $1.8 billion of higher operating income, an $865 million increase in our MTM benefit (expense), and a $126 million increase in the non-operating FAS pension benefit.

These increases were partially offset by a $552 million increase in income tax expense, a $97 million gain

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recognized in the prior year upon the sale of our minority investment in an Australian business, and $76 million of higher interest expense on our long-term debt.

Diluted Earnings Per Share

The table below reconciles diluted earnings per share to MTM-adjusted EPS and transaction-adjusted EPS:

The table below reconciles diluted earnings per share to MTM-adjusted EPS:

Year Ended December 31 % Change in

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Diluted earnings per share $ 28.34 $ 13.53 $ 31.47 109 % (57) %

MTM expense (benefit) per share

2.78 (7.92) (14.64) NM (46) %

MTM-related deferred state tax (benefit) expense per share (1)

(0.14) 0.42 0.77 NM (45) %

Federal tax (benefit) expense of items above per share (2)

(0.56) 1.57 2.92 NM (46) %

MTM (benefit) expense per share

(3.02) 2.78 (7.92) NM NM

MTM-related deferred state tax expense (benefit) per share (1)

0.16 (0.14) 0.42 NM NM

Federal tax expense (benefit) of items above per share (2)

0.60 (0.56) 1.57 NM NM

MTM adjustment per share, net of tax

2.08 (5.93) (10.95) NM (46) %

(2.26) 2.08 (5.93) NM NM

MTM-adjusted EPS

$ 26.08 $ 15.61 $ 25.54 67 % (39) %

Gain on sale of business per share — — (12.31) NM NM

State tax impact (3) per share

— — 0.99 NM NM

Transaction costs per share — — 0.20 NM NM

Make-whole premium per share — — 0.34 NM NM

Federal tax impact of items above (4) per share

— — 3.82 NM NM

Transaction adjustment per share, net of tax — — (6.96) NM NM

Transaction-adjusted EPS $ 15.61 $ 25.54 $ 25.63 (39) % — %

(1) The deferred state tax impact in each period was calculated using the company’s blended state tax rate of 5.25 percent and is included in Unallocated corporate expense within operating income.

(2) The federal tax impact in each period was calculated by subtracting the deferred state tax impact from MTM benefit (expense) and applying the 21 percent federal statutory rate.

(3) The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.

2023 diluted earnings per share decreased $17.94, or 57 percent, reflecting the 58 percent decrease in net earnings described above and a 2 percent decrease in weighted-average diluted shares outstanding.

2024 diluted earnings per share increased $14.81, or 109 percent, reflecting the 103 percent increase in net earnings described above and a 3 percent reduction in weighted-average diluted shares outstanding.

SEGMENT OPERATING RESULTS

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

Effective July 1, 2024, the company realigned the Strategic Deterrent Systems (SDS) division, which includes the Ground-Based Strategic Deterrent (“Sentinel”) program, from Space Systems to Defense Systems.

This realignment is reflected in the financial information contained in this report.

Subsequent Realignment - Effective January 1, 2025, the company realigned the Strike and Surveillance Aircraft Solutions (SSAS) business unit from Defense Systems to Aeronautics Systems.

This realignment is not reflected in the financial information contained in this report;

it will be reflected in the company’s operating results beginning in the first quarter of 2025.

For a more complete description of each segment’s products and services, see “Business.”

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These non-GAAP measures may be useful to investors and other users of our financial statements as supplemental measures in evaluating the financial performance and operational trends of our sectors.

These measures may not be

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.

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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.

Year Ended December 31 % Change in

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FAS pension service expense 239 236 367 1 % (36) %

FAS/CAS operating adjustment 82 200 (130) (59) % (254) %

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

IT services divestiture – unallowable state taxes and transaction costs — — 192 — % NM

FAS/CAS operating adjustment (40) 82 200 NM (59) %

Intangible asset amortization and PP&E step-up depreciation 97 122 242 (20) % (50) %

Deferred state tax (benefit) expense (1) of MTM adjustment

(22) 65 124 (134) % (48) %

Deferred state tax expense (benefit) (1) of MTM adjustment

23 (22) 65 NM (134) %

Deferred state tax benefit of B-21 charge (1)

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Other unallocated corporate expense 94 123 145 (24) % (15) %

Unallocated corporate expense (income) 141 452 (1,304) (69) % (135) %

Unallocated corporate expense

214 141 452 52 % (69) %

Segment operating income $ 4,544 $ 2,760 $ 4,253 65 % (35) %

Segment operating margin rate 11.1 % 7.0 % 11.6 %

(1) Represents the deferred state tax (benefits) expenses associated with MTM (expense) benefit and the B-21 charge, which are recorded in Unallocated corporate expense (income) consistent with other changes in deferred state taxes.

(1) Represents the deferred state tax expense (benefit) associated with MTM benefit (expense) and the prior year B-21 charge, which are recorded in Unallocated corporate expense consistent with other changes in deferred state taxes.

Segment Operating Income and Margin Rate

2023 segment operating income decreased $1.5 billion, or 35 percent, and segment operating margin rate decreased to 7.0 percent primarily due to the B-21 charge at Aeronautics Systems.

Operating income at Space Systems and Defense Systems was higher than in the prior year period.

2024 segment operating income increased $1.8 billion, or 65 percent, primarily due to higher operating income at Aeronautics Systems, largely driven by the prior year $1.56 billion charge on the B-21 program, as well as higher operating income at Space Systems and Defense Systems.

Segment operating margin rate increased to 11.1 percent reflecting higher operating margin rates at Aeronautics Systems and Space Systems, partially offset by a lower operating margin rate at Mission Systems.

FAS/CAS Operating Adjustment

The decrease in our 2023 FAS/CAS operating adjustment is primarily due to lower FAS pension service expense resulting from changes in certain actuarial assumptions as of December 31, 2022.

Unallocated Corporate Expense (Income)

The decrease in 2023 unallocated corporate expense is primarily due to higher deferred state tax benefits associated with the MTM adjustment and B-21 charge and lower intangible asset amortization and PP&E step-up depreciation.

The 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

The increase in 2024 unallocated corporate expense is primarily due to a $127 million increase in deferred state taxes associated with the prior year B-21 charge and the MTM adjustment, partially offset by lower intangible asset amortization and PP&E step-up depreciation and a loss recognized in the prior year in connection with the divestiture of a small international subsidiary.

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

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airborne battle management and command and control systems;

and unmanned autonomous aircraft systems, including high-altitude long-endurance (HALE) strategic intelligence, surveillance and reconnaissance (ISR) systems and vertical take-off and landing (VTOL) tactical ISR systems.

and unmanned autonomous aircraft systems, including high-altitude long-endurance (HALE) strategic intelligence, surveillance and reconnaissance (ISR) systems.

Year Ended December 31 % Change in

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Sales $ 12,030 $ 10,786 $ 10,531 12 % 2 %

Operating (loss) income

(473) 1,116 1,093 NM 2 %

Operating income (loss)

1,182 (473) 1,116 NM NM

Operating margin rate 9.8 % (4.4) % 10.6 %

2023 sales increased $255 million, or 2 percent, primarily due to higher volume on restricted programs, partially offset by a $191 million decrease on the F/A-18 program largely due to post Multi-Year Procurement 4 (MYP4) contract award timing, a $131 million decrease on the Joint Surveillance and Target Attack Radar System (JSTARS) program as that program nears completion and a decrease on the E-2 program largely related to higher material volume in the prior year.

2024 sales increased $1.2 billion, or 12 percent, primarily due to the continuing transition to production on B-21 driving higher restricted volume, a $448 million increase in F-35 production and sustainment volume due, in part, to the timing of materials, a $134 million increase in Triton LRIP production volume, a $134 million increase in E-2 fleet sustainment and modernization work, and higher volume on Global Hawk sustainment activities.

Operating Income

2023 operating income decreased $1.6 billion and operating margin rate decreased to (4.4) percent primarily due to the previously described $1.56 billion charge recorded on the LRIP phase of the B-21 program, inclusive of a $143 million unfavorable EAC adjustment for the first LRIP lot.

The prior year period includes $133 million of favorable EAC adjustments on the engineering, manufacturing and development phase of the B-21 program and a $38 million gain on a property sale.

Apart from the B-21 EAC adjustments noted above, net EAC adjustments across the sector were $58 million higher than in the prior year.

2024 operating income increased $1.7 billion primarily due to the prior year $1.56 billion charge on the B-21 program as well as higher sales.

Operating margin rate increased to 9.8 percent principally due to the prior year B-21 charge.

DEFENSE SYSTEMS

Defense Systems is a leader in the design, development, integration and production of advanced tactical weapons and missile defense solutions, and a provider of sustainment, modernization and training services for manned and unmanned aircraft and electronics systems for the U.S.

Defense Systems is a leader in the design, engineering, development, integration and production of strategic deterrent systems, advanced tactical weapons, and missile defense solutions, and a provider of sustainment, modernization and training services for manned and unmanned aircraft and electronics systems for the U.S.

military and a broad range of international customers.

Major products and services include integrated, all-domain command and control (C2) battle management systems, precision strike weapons;

advanced propulsion, including high speed air-breathing and hypersonic systems;

Major products and services include strategic missiles;

integrated, all-domain command and control (C2) systems;

precision strike weapons;

advanced propulsion, including tactical solid rocket motors and high speed air-breathing and hypersonic systems;

high-performance gun systems, ammunition, precision munitions and advanced fuzes;

aircraft and mission systems logistics support, sustainment, operations and modernization;

and warfighter training.

and aircraft and mission systems logistics support, sustainment, operations and modernization.

Year Ended December 31 % Change in

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NORTHROP GRUMMAN CORPORATION

2023 sales increased $283 million, or 5 percent, primarily due to higher volume on several programs, including ammunition programs, Guided Multiple Launch Rocket System (GMLRS), an international training program, Hypersonic Attack Cruise Missile (HACM), and Stand-in Attack Weapon (SiAW).

2024 sales increased $271 million, or 3 percent, primarily due to a $182 million increase on Sentinel as that program continues to ramp, a $163 million increase on certain military ammunition programs, a $124 million increase on Stand-in Attack Weapon (SiAW) as the program ramps and higher volume from timing of materials and increased order quantities on the Guided Multiple Launch Rocket System (GMLRS) program.

These increases were partially offset by a $262 million decrease due to the completion of an international training program and lower volume on the Special Electronic Mission Aircraft (SEMA) program as it nears completion.

2023 sales increased $660 million, or 9 percent, primarily due to a $426 million increase driven by Sentinel ramp-up, as well as higher volume on ammunition programs, GMLRS, an international training program, Hypersonic Attack Cruise Missile (HACM), and SiAW.

Operating Income

2023 operating income increased $46 million, or 7 percent, due to higher sales and a higher operating margin rate.

Operating margin rate increased to 12.1 percent from 11.9 percent primarily due to the write-down of an unconsolidated joint venture investment in the prior year.

2024 operating income increased $37 million, or 4 percent, primarily due to higher sales.

Operating margin rate was comparable to the prior period.

2023 operating income increased $48 million, or 6 percent, due to higher sales, partially offset by a lower operating margin rate.

Operating margin rate decreased to 10.0 percent from 10.2 percent, primarily due to lower net EAC adjustments.

MISSION SYSTEMS

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advanced communications and network systems;

full spectrum cyber solutions;

intelligence processing systems;

advanced microelectronics;

navigation and positioning sensors;

and maritime power, propulsion and payload launch systems.

maritime power, propulsion and payload launch systems;

full spectrum cyber solutions;

and intelligence processing systems.

Year Ended December 31 % Change in

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Operating margin rate 14.0 % 14.8 % 15.6 %

2023 sales increased $499 million, or 5 percent, primarily due to higher restricted sales on advanced microelectronics programs, as well as a $165 million increase on marine systems programs.

These increases were partially offset by a $107 million decrease on the Ground/Air Task Oriented Radar (G/ATOR) program largely driven by the timing of material receipts and full-rate production (FRP) 5 contract award, as well as lower volume on airborne radar programs.

2024 sales increased $504 million, or 5 percent, primarily due to higher volume on restricted advanced microelectronics and technology programs, increased marine systems sales due, in part, to the timing of materials, and higher Ground/Air Task Oriented Radar (G/ATOR) volume due to continued ramp-up on full-rate production (FRP) awards.

These increases were partially offset by lower sales on restricted airborne radar programs and the Scalable Agile Beam Radar (SABR) program.

Operating Income

2023 operating income decreased $9 million, or 1 percent, due to a lower operating margin rate, which more than offset higher sales.

Operating margin rate decreased to 14.8 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.

2024 operating income decreased $11 million, or 1 percent, due to a lower operating margin rate, partially offset by higher sales.

Operating margin rate decreased to 14.0 percent from 14.8 percent primarily due to lower net EAC adjustments on certain airborne radar production programs due, in part, to production inefficiencies that have driven higher labor costs, as well as changes in contract mix toward more cost-type content.

These decreases were partially offset by sales growth on higher margin advanced microelectronics programs.

NORTHROP GRUMMAN CORPORATION

SPACE SYSTEMS

Space Systems is a leader in delivering end-to-end mission solutions through the design, development, integration, production and operation of space, missile defense, launch and strategic missile systems for national security, civil government, commercial and international customers.

Space Systems is a leader in delivering end-to-end mission solutions through the design, development, integration, production and operation of space, missile defense, and launch systems for national security, civil government, commercial and international customers.

Major products include satellites and spacecraft systems, subsystems, sensors and payloads;

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missile defense systems and interceptors;

launch vehicles and related propulsion systems;

and strategic missiles.

and launch vehicles and related propulsion systems.

Year Ended December 31 % Change in

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Operating margin rate 10.7 % 9.5 % 10.2 %

2023 sales increased $1.7 billion, or 14 percent, primarily due to higher volume on restricted programs and ramp-up on development programs, including increases of $426 million on the Ground Based Strategic Deterrent (GBSD) program, $333 million on the Next-Generation Overhead Persistent Infrared Polar (NextGen Polar) program, $219 million on the Next Generation Interceptor (NGI) program, $119 million on the Space Development Agency (SDA) Tranche 1 Tracking Layer program and $102 million on the SDA Tranche 2 Transport Layer program.

These increases were partially offset by a $172 million decrease for Commercial Resupply Services (CRS) missions and a $109 million decrease on the Habitation and Logistics Outpost (HALO) program.

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2024 sales decreased $142 million, or 1 percent, primarily due to wind-down of work on the restricted space and NGI programs, which reduced sales by $595 million.

This reduction was partially offset by a $302 million increase on Space Development Agency (SDA) satellite programs and a $130 million increase on the Habitation and Logistics Outpost (HALO) program.

2023 sales increased $1.3 billion, or 12 percent, primarily due to higher volume on restricted programs and ramp-up on development programs, including $333 million on the Next-Gen Polar program, $219 million on the NGI program, $119 million on the SDA Tranche 1 Tracking Layer program and $102 million on the SDA Tranche 2 Transport Layer program.

These increases were partially offset by a $172 million decrease for CRS missions and a $109 million decrease on the HALO program.

Operating Income

2024 operating income increased $124 million, or 11 percent, primarily due to a higher operating margin rate.

Operating margin rate increased to 10.7 percent from 9.5 percent primarily due to higher net EAC adjustments largely driven by the HALO program as previously disclosed.

2023 operating income increased $52 million, or 5 percent, due to higher sales, partially offset by a lower operating margin rate.

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These decreases were partially offset by a $42 million benefit from insurance recoveries in our commercial space business during 2023.

NORTHROP GRUMMAN CORPORATION

PRODUCT AND SERVICE ANALYSIS

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Total Service 8,307 7,226 8,393 7,256 8,080 7,070

Total Company

Total Segment (1)

$ 41,033 $ 36,489 $ 39,290 $ 36,530 $ 36,602 $ 32,349

(1) A reconciliation of segment operating income to total operating income is included in “Segment Operating Results.”

Product Sales and Costs

2024 product sales increased $1.8 billion, or 6 percent, due to an increase in product sales at all four sectors.

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

The increase was principally driven by higher volume on restricted programs, F-35, Triton and E-2 at Aeronautics Systems, higher volume on Sentinel, certain military ammunition programs, SiAW and GMLRS at Defense Systems, higher restricted sales, partially offset by lower SABR volume, at Mission Systems and sales growth on SDA satellite programs and HALO, partially offset by wind-down of work on the restricted space and NGI programs, at Space Systems.

2023 product sales increased $2.4 billion, or 8 percent, due to an increase in product sales at all four sectors.

The increase was principally driven by higher volume on restricted programs and NGI at Space Systems, higher volume on Sentinel, ammunition programs, GMLRS, HACM, and the Integrated Battle Command System (IBCS) program at Defense Systems, and higher restricted sales at Mission Systems and Aeronautics Systems.

2024 product costs were comparable to the prior year, reflecting a higher operating margin rate principally due to the prior year $1.56 billion charge on the B-21 program at Aeronautics Systems and higher EAC adjustments at Space Systems, largely driven by the HALO program.

2023 product costs increased $4.0 billion, or 16 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to the previously described $1.56 billion charge on the B-21 program at Aeronautics Systems and lower net EAC adjustments on Space Systems production programs.

Service Sales and Costs

2023 service sales increased $313 million, or 4 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 volume on restricted programs and F-35 sustainment at Mission Systems, and higher volume on an international training program at Defense Systems.

NORTHROP GRUMMAN CORPORATION

Service Sales and Costs

2024 service sales decreased $86 million, or 1 percent, primarily due to a decrease in service sales at Defense Systems principally due to the completion of an international training program and lower volume on SEMA, partially offset by an increase in service sales at Aeronautics Systems driven by higher volume on restricted programs and Global Hawk.

2023 service sales increased $313 million, or 4 percent, due to an increase in service sales at Space Systems, Mission Systems, and Aeronautics Systems.

The increase was principally driven by higher restricted sales at Space Systems and Aeronautics Systems, and higher volume on restricted programs and F-35 sustainment at Mission Systems.

2024 service costs were comparable to the prior year, consistent with the change in services sales described above.

2023 service costs increased $186 million, or 3 percent, consistent with the higher service sales described above and reflects a higher operating margin rate on Space Systems service programs.

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2024 net awards totaled $50.6 billion.

Significant 2023 new awards include $15.5 billion for restricted programs (primarily at Space Systems, Aeronautics Systems and Mission Systems), $2.1 billion for F-35 programs (primarily at Aeronautics Systems and Mission Systems), $1.7 billion for E-2, $1.5 billion for Triton, $1.4 billion for SDA Tranche 2 Transport Layer, and $0.8 billion for GMLRS.

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

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

Significant 2024 new awards include $11.8 billion for restricted programs (primarily at Aeronautics Systems, Mission Systems, and Space Systems), $3.5 billion for the Take Charge and Move Out (TACAMO) mission, $3.5 billion for F-35 (primarily at Aeronautics Systems), $2.4 billion for E-2, $1.8 billion for Next-Gen OPIR Polar, $0.9 billion for Poland IBCS, and $0.8 billion for certain military ammunition programs.

During 2024, the company reduced unfunded backlog by $1.6 billion and $0.7 billion related to terminations for convenience in our restricted space business and on the NGI program at Space Systems, respectively.

LIQUIDITY AND CAPITAL RESOURCES

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At December 31, 2024, 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.

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

The company’s principal contractual commitments include purchase obligations, repayments of long-term debt and related interest, and payments under operating leases.

At December 31, 2024, we had $20.5 billion of purchase obligations, approximately half of which is short-term.

Purchase obligations are largely comprised of open purchase order commitments to suppliers and subcontractors under U.S.

Purchase obligations are largely comprised of open purchase

NORTHROP GRUMMAN CORPORATION

order commitments to suppliers and subcontractors under U.S.

government contracts.

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At this time, we are unable to estimate the timing and amount of any future cash outflows related to these uncertain tax positions.

Refer to the respective notes to the consolidated financial statements for further information about our share repurchase programs (Note 3), commercial paper, credit facilities and long-term debt (Note 10), standby letters of

NORTHROP GRUMMAN CORPORATION

credit and guarantees (Note 12), future minimum contributions for the company’s pension and OPB plans (Note 13), and lease payment obligations (Note 15).

Internal Revenue Code (IRC) Section 174

Refer to the respective notes to the consolidated financial statements for further information about our share repurchase programs (Note 2), commercial paper, credit facilities and long-term debt (Note 9), standby letters of credit and guarantees (Note 11), future minimum contributions for the company’s pension and OPB plans (Note 12), and lease payment obligations (Note 14).

Income Tax Matters

During the fourth quarter of 2024, the company entered into an agreed Revenue Agent’s Report (“RAR”) for certain matters related to the company’s 2018-2020 federal income tax returns, largely related to our methods of accounting associated with the timing of revenue recognition and related costs under IRC Section 451(b).

The company made a $956 million payment in December 2024, inclusive of associated interest, in connection with the agreed RAR.

Refer to Note 6 to the financial statements for further information about our unrecognized tax benefits.

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

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

As we finalized our 2022 federal tax return along with our continued analysis of research and development expenditures, we reduced the previously estimated impact of Section 174 on our tax liability for 2022 and 2023 to approximately $700 million and $500 million, respectively.

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.

Our 2024 and 2023 cash from operations were reduced for federal estimated tax payments we made related to Section 174 of approximately $350 million and $500 million, respectively.

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

In the meantime, we expect to continue to make additional federal tax payments based on the current Section 174 tax law, which we estimate will reduce our 2025 cash from operations by approximately $230 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.

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Net earnings $ 4,174 $ 2,056 $ 4,896

Gain on sale of business — — (1,980)

B-21 charge — 1,559 —

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Net cash provided by operating activities $ 4,388 $ 3,875 $ 2,901

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

2023 cash provided by operating activities increased $974 million, or 34 percent, principally due to improved trade working capital largely driven by increased billings and cash collections, partially offset by higher supplier payments.

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

2024 cash provided by operating activities increased $513 million, or 13 percent, principally due to improved trade working capital, largely driven by lower net tax payments, as well as higher net earnings.

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, if any.

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

Adjusted free cash flow includes proceeds from the sale of equipment to a customer as

NORTHROP GRUMMAN CORPORATION

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.

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

NORTHROP GRUMMAN CORPORATION

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

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Capital expenditures (1,767) (1,775) (1,435) — % 24 %

Proceeds from sale of equipment to a customer — 155 84 (100) % 85 %

Proceeds from sale of equipment to a customer — — 155 NM (100) %

Adjusted free cash flow $ 2,621 $ 2,100 $ 1,621 25 % 30 %

2023 adjusted free cash flow increased $479 million, or 30 percent, principally due to higher net cash provided by operating activities, partially offset by an increase in capital expenditures.

2024 adjusted free cash flow increased $521 million, or 25 percent, principally due to higher net cash provided by operating activities.

Investing Cash Flow

2023 net cash used in investing activities increased $341 million principally due to higher capital expenditures.

Proceeds from the sale of minority investments in 2023 were largely offset by cash received in 2022 from the sale of equipment to a customer.

2024 net cash used in investing activities increased $167 million principally due to the receipt of proceeds from the sale of minority investments in the prior year.

Financing Cash Flow

2023 net cash used in financing activities decreased $852 million principally due to the issuance of $2.0 billion in long-term debt, partially offset by $1.05 billion in debt repayments.

Cash returned to shareholders through share repurchases and dividends totaled $2.6 billion in each period.

2024 net cash used in financing activities decreased $366 million primarily due to $1.05 billion of lower debt repayments and a $500 million increase in proceeds from long-term debt, partially offset by a $1.0 billion increase in share repurchases and a $70 million increase in dividends paid.

Cash returned to shareholders through share repurchases and dividends totaled $3.7 billion in 2024 and $2.6 billion in 2023.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Factors considered in these estimates include our historical performance, the availability, productivity and cost of labor, the nature and complexity of work to be performed, the effect of change orders, availability and cost of materials, components and subcontracts, the effect of any delays in performance and the level of indirect cost allocations.

We also consider the impact of macroeconomic factors on our estimates, in particular on contract EACs that span several years.

For example, during 2023, we included in our EACs management’s best estimate of the impact inflation has had and may continue to have on our contracts.

We also included our current best estimate of the impact on our EACs of disruptions we have experienced and continue to experience in the supply chain.

The volatility of the recent macroeconomic environment has added complexity to our estimation process and may result in our year end 2023 contract EACs having more variability in the future than they might otherwise have had if the estimates had been prepared in a more stable macroeconomic environment.

NORTHROP GRUMMAN CORPORATION

We also consider the impact of macroeconomic factors on our estimates, in particular on contract EACs that span several years.

For example, we have included in our EACs management’s best estimate of the impact inflation and disruptions in the supply chain have had and may continue to have on our contracts.

Although the overall financial impact these macroeconomic factors have had on our company has largely subsided, volatility of the recent macroeconomic environment has added complexity to our estimation process and may result in our contract EACs having more variability in the future than they might otherwise have had if the estimates had been prepared in a more stable macroeconomic environment.

We generally review and reassess our sales, cost and profit estimates for each significant contract at least annually or more frequently as determined by the occurrence of events, changes in circumstances and evaluations of contract performance to reflect the latest reliable information available.

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When we determine changes in the assumptions are warranted, or as a result of plan amendments, future pension and OPB expense and our projected benefit obligation could increase or decrease materially.

The principal estimates and assumptions that have a significant effect on our consolidated financial position and annual results of operations are the discount rate, cash balance crediting rate, expected long-term rate of return on plan assets, estimated fair market value of plan assets, and the mortality rate of those covered by our pension and OPB plans.

The principal estimates and assumptions that have a significant effect on our consolidated financial position and results of operations are the discount rate, cash balance crediting rate, expected long-term rate of return on plan assets, estimated fair market value of plan assets, and the mortality rate of those covered by our pension and OPB plans.

The effects of actual results differing from our assumptions and the effects of changing assumptions (i.e., actuarial gains or losses) are recognized immediately through earnings upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.

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Taking into consideration the factors noted above, our weighted-average composite pension discount rate was 5.73 percent at December 31, 2024 and 5.15 percent at December 31, 2023.

NORTHROP GRUMMAN CORPORATION

The effects of a hypothetical change in the discount rate may be nonlinear and asymmetrical for future years as the discount rate changes.

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2025 pension and OPB (benefit) expense

NORTHROP GRUMMAN CORPORATION

Cash Balance Crediting Rate – A portion of the company’s pension obligation and resulting pension expense is based on a cash balance formula, where participants’ hypothetical account balances are accumulated over time with pay-based credits and interest.

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The interest crediting rate is part of the cash balance formula and independent of actual pension investment returns.

The cash balance crediting rate used for FAS purposes tends to move in concert with the discount rate but has an offsetting effect on pension benefit obligations and the related MTM expense (benefit).

The cash balance crediting rate tends to move in concert with the discount rate but has an offsetting effect on pension benefit obligations and the related MTM expense (benefit).

The minimum cash balance crediting rate allowed under the plan is 2.25 percent.

The cash balance crediting rate assumption has been set to 4.02 percent for all years.

Holding all other assumptions constant, an increase or decrease of 25 basis points in the December 31, 2023 cash balance crediting rate assumption would have the following estimated effects on the 2023 pension benefit obligation, which would be reflected in the 2023 MTM expense (benefit), and 2024 expected pension expense:

The cash balance crediting rate assumption has been set to its current level of 4.78 percent as of December 31, 2024, increasing to 4.90 percent by 2030.

Holding all other assumptions constant, an increase or decrease of 25 basis points in the December 31, 2024 cash balance crediting rate assumption would have the following estimated effects on the 2024 pension benefit obligation, which would be reflected in the 2024 MTM (benefit) expense, and 2025 expected pension expense:

$ in millions 25 Basis Point Decrease in Rate 25 Basis Point Increase in Rate

2023 pension obligation and MTM expense (benefit)

2024 pension obligation and MTM (benefit) expense

$ (101) $ 104

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During 2024, the Investment Committee of the company’s benefit plans reviewed the plans’ major asset class allocations and approved an update to increase the target fixed-income asset allocation from 43% to 45%.

The current asset allocation is now approximately 42% fixed-income, 27% public equities, 28% alternatives and 3% cash.

The actual asset allocation as of December 31, 2024 was approximately 41% fixed-income, 29% public equities, 23% alternatives, 6% private credit and 1% cash.

At this time, the Investment Committee is not planning any significant changes to that mix.

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Our average annual rate of return from 1976 to 2024 was approximately 10.5 percent and our 20-year and 30-year rolling average rates of return were approximately 7.5 percent and 8.9 percent, respectively, each determined on an arithmetic basis and net of expenses.

Our 2023 return on plan assets, net of expenses, were approximately 11.1 percent.

Our 2024 return on plan assets, net of expenses, was approximately 4.7 percent.

Consistent with our past practice, we obtained long-term capital market forecasting models from several third parties and, using our target asset allocation, developed an expected rate of return on plan assets from each model.

We considered not only the specific returns projected by those third party models, but also changes in the models year-to-year when developing our EROA.

NORTHROP GRUMMAN CORPORATION

considered not only the specific returns projected by those third-party models, but also changes in the models year-to-year when developing our EROA.

For determining 2024 FAS expense, we assumed an expected long-term rate of return on pension plan assets of 7.5 percent and an expected long-term rate of return on OPB plan assets of 7.12 percent.

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2025 pension and OPB expense (benefit)

NORTHROP GRUMMAN CORPORATION

In addition, holding all other assumptions constant, an increase or decrease of 100 basis points in actual versus expected return on plan assets would have the following estimated effects on our 2025 MTM expense (benefit):

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Estimated fair values on these plan assets are based on redemption values and net asset values (NAV), as well as valuation methodologies that include third-party appraisals, comparable transactions, discounted cash flow valuation models and public market data.

Mortality Rate – Mortality assumptions are used to estimate life expectancies of plan participants.

Mortality Rate – We use mortality assumptions to estimate life expectancies of plan participants.

In October 2014, the Society of Actuaries Retirement Plans Experience Committee (RPEC) issued updated mortality tables and a mortality improvement scale, which reflected longer life expectancies than previously projected.

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In October 2021, the RPEC released a new projection scale (MP-2021) that included additional underlying data for 2019, which included an increase in life expectancies relative to the prior year.

The RPEC did not release a MP-2022 or MP-2023 projection scale citing complexities in incorporating the substantial number of “excess deaths” in 2020 into their existing model and uncertainties about future expectations primarily related to COVID-19.

The RPEC has not released a projection scale since MP-2021, citing complexities in incorporating the substantial number of “excess deaths” in 2020 and 2021 into their existing model and uncertainties about future expectations primarily related to COVID-19.

As such, after considering the information released by the RPEC in October 2021 as well as the company’s recent mortality experience, we adopted the full MP-2021 projection scale while continuing to use the Pri-2012 White Collar table, supplemented with 50% of the Gradual Wear-Off illustration as outlined in the RPEC’s 2022 Mortality Improvement Update paper to reflect the future impacts of COVID-19, to develop our mortality assumptions used in calculating our pension and OPB obligations recognized at December 31, 2024, and the amounts estimated for our 2025 pension and OPB expense.

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changes in the estimated time required to conduct remedial actions;

discovery of more or less extensive (or different) contamination than anticipated;

discovery of more or less extensive (or different) contamination

NORTHROP GRUMMAN CORPORATION

than anticipated;

information regarding the potential causes and effects of contamination;

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and improvements in remediation technology.

As we expect to be able to recover a portion of environmental remediation liabilities through overhead charges on government contracts, such amounts are deferred in prepaid expenses and other current assets (current portion) and other non-current assets until charged to contracts.

As we expect to recover a significant portion of environmental remediation liabilities through overhead charges on government contracts, such amounts are deferred in prepaid expenses and other current assets (current portion) and other non-current assets until charged to contracts.

We use judgment to evaluate the recoverability of our environmental remediation costs, assessing, among other things, U.S.

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As of December 31, 2024, we expect approximately 93 percent of the company’s environmental remediation costs to be recoverable;

however, to the extent our judgments on the recoverability of our environmental remediation costs change or the unallowable portion of our environmental

NORTHROP GRUMMAN CORPORATION

remediation costs otherwise increase, there could be a significant impact on our consolidated financial position, annual results of operations and/or cash flows.

however, to the extent our judgments on the recoverability of our environmental remediation costs change or the unallowable portion of our environmental remediation costs otherwise increase, there could be a significant impact on our consolidated financial position, annual results of operations and/or cash flows.

Income Tax Matters – The evaluation of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim, requires the use of judgment.

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To determine the fair value of our reporting units, we primarily use the income approach based on the cash flows we expect the reporting units to generate in the future, consistent with our operating plans.

This income valuation method requires management to project sales, operating expenses, working capital, capital spending and cash flows for the reporting units over a multi-year period, as well as to determine the weighted-average cost of capital (WACC) used as a discount rate and terminal value assumptions.

This income valuation method requires management to project sales, operating expenses, working capital, capital

NORTHROP GRUMMAN CORPORATION

spending and cash flows for the reporting units over a multi-year period, as well as to determine the weighted-average cost of capital (WACC) used as a discount rate and terminal value assumptions.

The WACC takes into account the relative weights of each component of our consolidated capital structure (equity and debt) and represents the expected cost of new capital adjusted as appropriate to consider lower risk profiles associated with longer-term contracts and barriers to market entry.

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We test for impairment of our long-lived assets when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

Our assessment is based on our projection of the undiscounted future

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operating cash flows of the related asset group.

Our assessment is based on our projection of the undiscounted future operating cash flows of the related asset group.

If such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amount, we recognize a non-cash impairment charge to reduce the carrying amount to fair value.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis