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Item 2. Management’s Discussion and Analysis

2025-07-22 compared with 2025-04-22 · 207 added, 114 removed, 262 unchanged (55% of the section changed)

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The following discussion should be read along with the financial statements included in this Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Liquidity and Capital Resources,” “Quantitative and Qualitative Disclosures About Market Risks” and “Risk Factors” in our 2024 Annual Report on Form 10-K, which provides additional information on our business, the environment in which we operate and our operating results.

Divestiture of Training Services Business

On May 24, 2025 (the “Divestiture date”), the company completed its previously announced sale of substantially all of the Immersive Mission Solutions (IMS) operating unit of Defense Systems (the “training services” business or “divestiture”) for $333 million in cash, subject to a final working capital adjustment, and recorded a pre-tax gain on sale of $231 million.

IMS is a provider of mission training and satellite ground network communications software for U.S.

government customers.

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

Global Security Environment

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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.

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 regions.

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 robust defense capabilities, and are actively evaluating both opportunities and risks associated with this environment.

We believe the current global security environment, characterized by significant national security threats to the U.S.

and its allies, continues to highlight the need for strong deterrence and robust defense capabilities, and we 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.

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

Global Economic Environment

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and market volatility.

These macroeconomic factors can and have contributed, and could 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.

These macroeconomic factors can and have contributed, and could continue to contribute, to increased costs, delays, disruptions and other performance

NORTHROP GRUMMAN CORPORATION

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.

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

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

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

NORTHROP GRUMMAN CORPORATION

particular), including their demand for defense products.

Economic tensions and changes in international trade policies, including, for example, the recent widespread tariffs announced by the U.S.

on its major trading partners, higher tariffs on imported goods and materials, actions taken in response (such as retaliatory tariffs or other trade protectionist measures or the renegotiation of free trade agreements), could also further impact the global market for defense products, services and solutions.

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

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

Economic tensions and changes in international trade policies, including, for example, the widespread tariffs announced this year by the U.S.

on its major trading partners, higher tariffs on imported goods and materials and actions taken in response (such as retaliatory tariffs or other trade protectionist measures or the renegotiation of free trade agreements), could also further impact the global market for defense products, services and solutions.

The full impact of these governmental actions on macroeconomic conditions and on our business is uncertain, difficult to predict and depends on a number of factors, including the extent and duration of tariffs, any reversal or temporary suspension of announced tariffs, the availability of exemptions, changes in the amount and scope of tariffs, the imposition of new tariffs and other measures that target countries may take in response to U.S.

trade policies, and possible resulting general inflationary pressures in the global economy.

We are currently evaluating the potential impact on our business, suppliers and customers, but do not believe that the tariffs in effect at this time will have a material adverse effect on our business.

We are continuing to monitor the impact on our business, suppliers and customers, but do not believe that the tariffs in effect at this time will have a material adverse effect on our business.

Political, Budget and Regulatory Environment

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political environment 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.

We anticipate that issues related to budgetary priorities, defense spending levels and the debt ceiling will continue to be subjects of considerable debate, with a potentially significant impact on our programs and the company.

On March 15, 2025, the Full-Year Continuing Appropriations and Extensions Act, 2025 was enacted to continue funding the government through the remainder of FY 2025.

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However, the full-year continuing resolution also provides the DoD with significant flexibility to allocate and spend funds, including authority to initiate new programs if certain requirements are met.

The current Presidential Administration (the Administration) has issued numerous executive orders, including orders that direct executive departments and agencies to put in place a regulatory freeze on pending rules, to effectuate the repeal of any regulation that an agency determines is unlawful and to reform the DoD defense acquisition process.

In the second quarter of 2025, the Presidential Administration (the “Administration”) submitted its budget request for FY 2026.

The request includes approximately $1 trillion for national security, approximately $962 billion of which is for the DoD, with $113 billion of such DoD funds included in the reconciliation bill described below.

The budget request for the DoD reflects an increase of 11.8 percent, or $101.6 billion, above FY 2025 enacted levels.

Congress is evaluating the Administration’s budget request as it drafts authorization and appropriations legislation for FY 2026.

On July 4, 2025, the FY 2025 reconciliation bill titled the One Big Beautiful Bill Act was enacted.

The OBBBA allocates approximately $150 billion in funds for defense spending, including funding for air and missile defense, munitions, shipbuilding and supply chains and other military capabilities, and the appropriated funds will remain available to be obligated until September 30, 2029 and expended through FY 2034.

The OBBBA is expected to result in increased investments by the DoD in defense modernization projects and Pacific region deterrence, among other programs.

See Note 4 to the financial statements for additional information on key income tax provisions of the OBBBA.

The Administration has issued numerous executive orders, including orders that direct executive departments and agencies to put in place a regulatory freeze on pending rules, to effectuate the repeal of any regulation that an agency determines is unlawful, to undertake a comprehensive overhaul of the Federal Acquisition Regulation and to reform the DoD defense acquisition process.

Some of the Administration’s executive orders are subject to ongoing court challenges.

Implementation of executive orders could adversely affect our business or create a more challenging or costly regulatory, operating and economic environment.

Implementation of certain of these executive orders could adversely affect our business or create a more challenging or costly regulatory, operating and economic environment.

For example, on April 9, 2025, the President signed an executive order entitled Modernizing Defense Acquisitions and Spurring Innovation in the Defense Industrial Base.

The executive order directs the Secretary of Defense to submit, within 60 days of the issuance of the executive order, a plan for expediting DoD acquisitions that relies on existing authorities.

The plan, among other things, should include a first preference for commercial solutions and a general preference for Other Transaction Authority procurements.

The executive order directs the Secretary of Defense to submit a plan for expediting DoD

NORTHROP GRUMMAN CORPORATION

acquisitions that relies on existing authorities.

According to the executive order, the plan, among other things, should include a first preference for commercial solutions and a general preference for Other Transaction Authority procurements.

In addition, the executive order directs the DoD to review all major defense acquisition programs (MDAP).

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Implementation of this executive order, including changes in DoD priorities or regulations and results of the MDAP review, could lead to contract cancellations, disruptions and/or stop work orders, which could have a material adverse effect on our financial position, results of operations and/or cash flows.

In light of the ongoing conflicts and heightened global instability as well as political tensions and related legal challenges, we expect continued uncertainty in the U.S.

In light of the ongoing conflicts and heightened global instability as well as political tensions and related legal challenges, we expect continued uncertainty in the global security, U.S.

political, budget and regulatory environment.

Initiatives to reduce governmental spending, federal budget and debt ceiling action, and U.S.

government policy positions, including trade policy, potential tax reform and DoD policies or priorities, could materially impact defense spending broadly and the company’s programs in particular.

Initiatives to reduce governmental spending, federal budget and debt ceiling action, and further changes in U.S.

government policy positions, including trade policy, tax policy and DoD policies or priorities, could materially impact defense spending broadly and the company’s programs in particular.

In 2015, the U.S.

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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

NORTHROP GRUMMAN CORPORATION

approximately the end of the decade.

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.

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

We are in discussions with the U.S.

Air Force regarding the potential for an accelerated production rate on the program.

While the ultimate outcome of these discussions remains uncertain, we currently expect any agreement to accelerate production rate would require future investment by the company to expand production capacity along with the opportunity to earn improved returns on the LRIP and NTE phases of the program.

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

During the first quarter of 2025, we reviewed our estimated profitability on the program and recognized an additional $477 million loss across the five LRIP options.

This additional loss largely relates to higher manufacturing costs primarily resulting from a process change made by the company to enable an accelerated production ramp, as well as increases in the projected cost and quantity of general procurement materials.

The company’s first quarter 2025 results reflect our current best estimate of 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.

During the first quarter of 2025, we recognized an additional $477 million loss across the five LRIP options.

During the second quarter of 2025, we again reviewed our estimated profitability on the LRIP phase of the program and made no significant changes to the previously recognized loss.

The company’s second quarter 2025 results reflect our current best estimate of cost to complete the LRIP and NTE aircraft, as well as the outcome of ongoing discussions with our suppliers.

If our estimated cost to complete the aircraft changes, if we reach an agreement with the customer regarding an accelerated production rate, or if 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

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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 first quarter of 2025, 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.

During the second quarter of 2025, we partnered with the U.S.

Air Force in defining the preliminary execution framework necessary for successful restructure of the program.

The program restructure will include a revision to the acquisition strategy, joint establishment of a new program baseline, and other critical preparation activities necessary to re-accomplish Milestone B approval.

Based on this preliminary execution framework, we updated our

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estimated profitability on the program and recognized a $76 million favorable EAC adjustment largely related to our expectations for achieving certain contract incentives.

CONSOLIDATED OPERATING RESULTS

For purposes of the operating results discussion below, we assess our performance using certain financial measures that are not calculated in accordance with GAAP.

Organic sales is defined as total sales excluding sales attributable to the company's training services business.

This measure may be useful to investors and other users of our financial statements as a supplemental measure in evaluating the company’s underlying sales growth as well as in understanding our ongoing business and future sales trends by presenting the company’s sales adjusted for the impact of the divestiture.

We reconcile this non-GAAP financial measure to its most directly comparable GAAP financial measure below.

This non-GAAP measure 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.

Selected financial highlights are presented in the table below:

Three Months Ended March 31 %

$ in millions, except per share amounts 2025 2024 Change

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

$ in millions, except per share amounts 2025 2024 Change 2025 2024 Change

Sales $ 10,351 $ 10,218 1 % $ 19,819 $ 20,351 (3) %

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Operating costs and expenses as a % of sales 88.5 % 89.3 % 91.1 % 89.4 %

Gain on sale of business 231 — NM 231 — NM

Operating income 1,425 1,090 31 % 1,998 2,161 (8) %

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Diluted earnings per share $ 8.15 $ 6.36 28 % $ 11.45 $ 12.69 (10) %

NORTHROP GRUMMAN CORPORATION

First quarter 2025 sales decreased $665 million, or 7 percent, driven by lower sales at Space Systems due, in part, to the wind-down of work on certain Space programs, as discussed in our segment operating results below, and lower sales at Aeronautics Systems.

These decreases were partially offset by higher sales at Mission Systems and Defense Systems.

The table below reconciles sales to organic sales:

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

$ in millions

2025 2024 Change 2025 2024 Change

Sales $ 10,351 $ 10,218 1 % $ 19,819 $ 20,351 (3) %

Training services sales

(40) (72) (112) (156)

Organic sales

$ 10,311 $ 10,146 2 % $ 19,707 $ 20,195 (2) %

Current Quarter

Second quarter 2025 sales increased $133 million, or 1 percent, primarily driven by higher sales at Mission Systems, Defense Systems and Aeronautics Systems, partially offset by lower sales at Space Systems due, in part, to the wind-down of work on certain Space programs, as discussed in our segment operating results below.

Year to date 2025 sales decreased $532 million, or 3 percent, primarily driven by lower sales at Space Systems due, in part, to the wind-down of work on certain Space programs, and lower sales at Aeronautics Systems, partially offset by higher sales at Mission Systems and Defense Systems.

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

See Note 10 to the financial statements for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments.

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Operating Income and Margin Rate

First quarter 2025 operating income decreased $498 million, or 46 percent, primarily due to a $477 million loss provision on the B-21 program at Aeronautics Systems and lower operating income at Space Systems and Mission Systems, partially offset by higher operating income at Defense Systems and a $57 million increase in the FAS/CAS operating adjustment.

Operating margin rate declined to 6.1 percent from 10.6 percent primarily due to the B-21 loss provision and a lower operating margin rate at Mission Systems, partially offset by higher operating margin rates at Defense Systems and Space Systems and a $57 million increase in the FAS/CAS operating adjustment.

First quarter 2025 G&A costs as a percentage of sales of 10.6 percent was comparable with the prior year period.

Current Quarter

Second quarter 2025 operating income increased $335 million, or 31 percent, primarily due to the training services divestiture, including a $231 million gain on sale and $19 million of unallocated corporate expense for unallowable state taxes and transaction costs.

Operating income also increased due to $118 million of higher segment operating income and a $57 million increase in the FAS/CAS operating adjustment, partially offset by a $52 million increase in non-divestiture-related unallocated corporate expense.

Operating margin rate increased to 13.8 percent from 10.7 percent reflecting the items above.

Second quarter 2025 general and administrative (G&A) costs as a percentage of sales decreased to 9.8 percent from 10.8 percent in the prior year period primarily due to cost management and higher sales.

Year to date 2025 operating income decreased $163 million, or 8 percent, due to a $418 million decrease in segment operating income, primarily driven by a $477 million loss provision recorded on the B-21 program at Aeronautics Systems in the first quarter of 2025 and a $70 million increase in non-divestiture-related unallocated corporate expense.

These decreases were partially offset by higher operating income due to the training services divestiture, including a $231 million pre-tax gain on sale and $20 million of unallocated corporate expense for unallowable state taxes and transaction costs, and a $114 million increase in the FAS/CAS operating adjustment.

Operating margin rate declined to 10.1 percent from 10.6 percent reflecting the items above.

Year to date 2025 G&A costs as a percentage of sales decreased to 10.2 percent from 10.6 percent in the prior year period primarily due to cost management, partially offset by lower sales.

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

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Federal and Foreign Income Taxes

The first quarter 2025 ETR increased to 16.8 percent from 16.5 percent in the prior year period.

The increase in our ETR was driven by interest expense on unrecognized tax benefits and excess tax benefits for employee share-based compensation, partially offset by research credits.

Current Quarter

Second quarter 2025 income tax expense increased $47 million, or 23 percent, due to higher earnings before income taxes, partially offset by a lower ETR.

The second quarter 2025 ETR decreased to 17.7 percent from 18.0 percent in the prior year period primarily due to lower interest expense on unrecognized tax benefits and higher research credits, partially offset by additional income tax expense related to nondeductible goodwill in the divested training services business.

Year to date 2025 income tax expense decreased $43 million, or 11 percent, due to lower earnings before income taxes, partially offset by a higher ETR.

The year to date 2025 ETR increased to 17.5 percent from 17.3 percent in the prior year period primarily due to additional income tax expense related to nondeductible goodwill in the divested training services business and lower benefits for FDII and employee share-based compensation.

These increases were partially offset by higher research credits and lower interest expense on unrecognized tax benefits.

See Note 4 to the financial statements for additional information.

First quarter 2025 net earnings decreased $463 million, or 49 percent, primarily due to the B-21 loss provision described above as well as a $38 million reduction in the non-operating FAS pension benefit and higher interest expense, partially offset by a $90 million decrease in income tax expense.

Current Quarter

Second quarter 2025 net earnings increased $234 million, or 25 percent, primarily due to the $335 million increase in operating income described above, partially offset by a $47 million increase in income tax expense, a $30 million reduction in the non-operating FAS pension benefit and higher interest expense.

Year to date 2025 net earnings decreased $229 million, or 12 percent, primarily due to the $163 million decrease in operating income described above, a $68 million reduction in the non-operating FAS pension benefit and higher interest expense, partially offset by a $43 million decrease in income tax expense.

Diluted Earnings Per Share

First quarter 2025 diluted earnings per share decreased 47 percent, reflecting a 49 percent decrease in net earnings and a 3 percent reduction in weighted-average diluted shares outstanding.

Current Quarter

Second quarter 2025 diluted earnings per share increased 28 percent, reflecting a 25 percent increase in net earnings and a 3 percent reduction in weighted-average diluted shares outstanding.

Year to date 2025 diluted earnings per share decreased 10 percent, reflecting a 12 percent decrease in net earnings and a 3 percent reduction in weighted-average diluted shares outstanding.

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SEGMENT OPERATING RESULTS

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

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Segment Operating Income and Margin Rate

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

Three Months Ended March 31 %

$ in millions 2025 2024 Change

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

$ in millions 2025 2024 Change 2025 2024 Change

Operating income $ 1,425 $ 1,090 31 % $ 1,998 $ 2,161 (8) %

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FAS/CAS operating adjustment (63) (6) 950 % (126) (12) 950 %

Gain on sale of business

(231) — NM (231) — NM

Training services divestiture - unallowable state taxes and transaction costs

19 — NM 20 — NM

Intangible asset amortization and PP&E step-up depreciation 21 24 (13) % 42 49 (14) %

Other unallocated corporate expense

Unallocated corporate expense

Other unallocated corporate expense (income)

48 (7) NM 84 7 1,100 %

Unallocated corporate (income) expense

(143) 17 NM (85) 56 NM

Segment operating income $ 1,219 $ 1,101 11 % $ 1,787 $ 2,205 (19) %

Segment operating margin rate 11.8 % 10.8 % 9.0 % 10.8 %

First quarter 2025 segment operating income decreased $536 million, or 49 percent, primarily due to the $477 million B-21 loss provision described above and lower operating income at Space Systems and Mission Systems, partially offset by higher operating income at Defense Systems.

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Current Quarter

Second quarter 2025 segment operating income increased $118 million, or 11 percent, due to higher operating income at Mission Systems, Defense Systems and Aeronautics Systems, partially offset by lower operating income at Space Systems.

Segment operating margin rate increased to 11.8 percent from 10.8 percent, due to higher operating margin rates at all four sectors.

Year to date 2025 segment operating income decreased $418 million, or 19 percent, due to lower operating income at Aeronautics Systems, primarily driven by a $477 million B-21 loss provision in the first quarter of 2025, and lower operating income at Space Systems, partially offset by higher operating income at Defense Systems and Mission Systems.

Segment operating margin rate decreased to 9.0 percent from 10.8 percent, primarily due to the B-21 loss provision and a lower operating margin rate at Mission Systems, partially offset by higher operating margin rates at Defense Systems and Space Systems.

FAS/CAS Operating Adjustment

The first quarter 2025 FAS/CAS operating adjustment increased primarily due to higher CAS pension expense largely driven by plan asset returns in prior years and changes in certain CAS actuarial assumptions as of December 31, 2024.

Unallocated Corporate Expense

The increase in first quarter 2025 unallocated corporate expense is primarily due to higher deferred state tax expense associated with research and development expenditures and the utilization of state tax credit carryforwards.

The second quarter 2025 and year to date 2025 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, 2024.

Unallocated Corporate (Income) Expense

Current Quarter

The change in second quarter 2025 unallocated corporate (income) expense is primarily due to a $231 million gain on the sale of our training services business, partially offset by $19 million of unallowable state taxes and transaction costs associated with the divestiture.

Non-divestiture-related unallocated corporate expense increased primarily due to higher deferred state tax expense associated with research and development expenditures and the utilization of state tax credit carryforwards, as well as the prior year including a $26 million increase in our estimated recovery of certain environmental remediation costs.

The change in year to date 2025 unallocated corporate (income) expense is primarily due to a $231 million gain on the sale of our training services business, partially offset by $20 million of unallowable state taxes and transaction costs associated with the divestiture.

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

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The aggregate favorable and unfavorable EAC adjustments are presented in the table below:

Three Months Ended March 31

Three Months Ended June 30 Six Months Ended June 30

$ in millions 2025 2024 2025 2024

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

Three Months Ended March 31

Three Months Ended June 30 Six Months Ended June 30

$ in millions 2025 2024 2025 2024

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AERONAUTICS SYSTEMS

Three Months Ended March 31 %

$ in millions 2025 2024 Change

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

$ in millions 2025 2024 Change 2025 2024 Change

Sales $ 3,114 $ 3,060 2 % $ 5,928 $ 6,104 (3) %

Operating (loss) income

Operating income

321 312 3 % 138 618 (78) %

Operating margin rate 10.3 % 10.2 % 2.3 % 10.1 %

First quarter 2025 sales decreased $230 million, or 8 percent, primarily due to lower sales on B-21 and other restricted programs, as well as a decrease in F-35 sustainment volume due, in part, to the timing of materials.

Current Quarter

Second quarter 2025 sales increased $54 million, or 2 percent, primarily due to higher volume on B-21 and ramp-up on the E-130J TACAMO (“TACAMO”) program, partially offset by lower volume on restricted programs and a decrease on F/A-18 as production nears completion.

Year to date 2025 sales decreased $176 million, or 3 percent, primarily due to lower volume on restricted programs, commercial aerostructures programs and F/A-18 as production nears completion, partially offset by a $116 million increase on TACAMO as that program ramps.

Operating Income

First quarter 2025 operating income decreased $489 million and operating margin rate decreased to (6.5) percent primarily due to the previously described $477 million loss provision on the LRIP phase of the B-21 program, inclusive of a $226 million unfavorable EAC adjustment on the first and second LRIP lots.

Current Quarter

Second quarter 2025 operating income increased $9 million, or 3 percent, primarily due to higher sales.

Operating margin rate of 10.3 percent was comparable with the prior year period.

Year to date 2025 operating income decreased $480 million and operating margin rate decreased to 2.3 percent primarily due to the previously described $477 million loss provision recorded on the LRIP phase of the B-21 program in the first quarter of 2025, inclusive of a $226 million unfavorable EAC adjustment on the first and second LRIP lots.

DEFENSE SYSTEMS

Three Months Ended March 31 %

$ in millions 2025 2024 Change

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

$ in millions 2025 2024 Change 2025 2024 Change

Sales $ 1,991 $ 1,859 7 % $ 3,796 $ 3,596 6 %

Training services sales

(40) (72) (112) (156)

Organic sales

$ 1,951 $ 1,787 9 % $ 3,684 $ 3,440 7 %

Operating income $ 253 $ 191 32 % $ 432 $ 347 24 %

Operating margin rate 12.7 % 10.3 % 11.4 % 9.6 %

First quarter 2025 sales increased $68 million, or 4 percent, primarily due to continued ramp-up on the Sentinel program and higher volume on certain military ammunition programs, partially offset by lower sales on the Stand-in Attack Weapon (SiAW) program.

Current Quarter

Second quarter 2025 sales increased $132 million, or 7 percent, principally due to higher sales on the Sentinel program and military ammunition programs.

NORTHROP GRUMMAN CORPORATION

Year to date 2025 sales increased $200 million, or 6 percent, principally due to a $145 million increase in sales on the Sentinel program and higher volume on military ammunition programs and the Poland Integrated Battle Command System (IBCS) program.

Operating Income

First quarter 2025 operating income increased $23 million, or 15 percent, due to a higher operating margin rate and higher sales.

Operating margin rate increased to 9.9 percent from 9.0 percent primarily due to higher net EAC adjustments.

Current Quarter

Second quarter 2025 operating income increased $62 million, or 32 percent, primarily due to a higher operating margin rate and higher sales.

Operating margin rate increased to 12.7 percent from 10.3 percent primarily due to higher net EAC adjustments, including a $76 million favorable EAC adjustment on the EMD phase of the Sentinel program largely related to our expectations for achieving certain contract incentives.

Year to date 2025 operating income increased $85 million, or 24 percent, primarily due to a higher operating margin rate and higher sales.

Operating margin rate increased to 11.4 percent from 9.6 percent primarily due to higher net EAC adjustments, including the $76 million favorable EAC adjustment on the Sentinel program described above.

MISSION SYSTEMS

Three Months Ended March 31 %

$ in millions 2025 2024 Change

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

$ in millions 2025 2024 Change 2025 2024 Change

Sales $ 3,157 $ 2,773 14 % $ 5,964 $ 5,432 10 %

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Operating margin rate 14.0 % 13.0 % 13.4 % 13.6 %

First quarter 2025 sales increased $148 million, or 6 percent, primarily due to higher sales on the Scalable Agile Beam Radar (SABR) program, ramp-up on electronic warfare self-protection and international ground-based radar

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programs, and higher volume on marine systems programs.

Current Quarter

Second quarter 2025 sales increased $384 million, or 14 percent, primarily due to the timing of a restricted award, which liquidated inventory purchased in advance of the award to support customer schedule, as well as higher volume on marine systems, international ground-based radar, advanced technologies and navigation systems programs.

Year to date 2025 sales increased $532 million, or 10 percent, primarily due to the restricted award timing described above, higher volume on the Scalable Agile Beam Radar (SABR) program and marine systems programs, and ramp-up on international ground-based radar programs.

These increases were partially offset by lower volume on restricted advanced microelectronics programs.

Operating Income

First quarter 2025 operating income decreased $17 million, or 4 percent, due to a lower operating margin rate, which more than offset higher sales.

Current Quarter

Second quarter 2025 operating income increased $80 million, or 22 percent, due to higher sales and a higher operating margin rate.

Operating margin rate increased to 14.0 percent from 13.0 percent, primarily due to higher net EAC adjustments driven by improved production efficiencies and program performance largely on airborne radar programs.

Year to date 2025 operating income increased $63 million, or 9 percent, primarily due to higher sales.

Operating margin rate decreased to 13.4 percent from 13.6 percent, primarily due to investments made by the sector in connection with restricted business opportunities and lower volume on restricted advanced microelectronics programs, which more than offset higher net EAC adjustments.

NORTHROP GRUMMAN CORPORATION

SPACE SYSTEMS

Three Months Ended March 31 %

$ in millions 2025 2024 Change

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

$ in millions 2025 2024 Change 2025 2024 Change

Sales $ 2,646 $ 3,002 (12) % $ 5,214 $ 6,151 (15) %

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Operating margin rate 10.6 % 10.1 % 10.8 % 10.3 %

First quarter 2025 sales decreased $581 million, or 18 percent, primarily due to wind-down of work on the restricted space and Next Generation Interceptor (NGI) programs, which reduced sales by $228 million, as well as decreases for Commercial Resupply Services (CRS) missions, Space Development Agency (SDA) satellite programs and other restricted space programs.

Current Quarter

Second quarter 2025 sales decreased $356 million, or 12 percent, primarily due to wind-down of work on the restricted space and Next Generation Interceptor (NGI) programs, which reduced sales by $283 million, as well as lower volume on Space Development Agency (SDA) satellite programs due to the timing of materials.

Year to date 2025 sales decreased $937 million, or 15 percent, primarily due to wind-down of work on the restricted space and NGI programs, which reduced sales by $511 million, as well as decreases for SDA satellite programs, Commercial Resupply Services (CRS) missions and other restricted space programs.

Operating Income

First quarter 2025 operating income decreased $47 million, or 14 percent, due to lower sales, partially offset by a higher operating margin rate.

Current Quarter

Second quarter 2025 operating income decreased $24 million, or 8 percent, primarily due to lower sales, partially offset by a higher operating margin rate.

Operating margin rate increased to 10.6 percent from 10.1 percent principally due to higher net EAC adjustments.

Year to date 2025 operating income decreased $71 million, or 11 percent, due to lower sales, partially offset by a higher operating margin rate.

Operating margin rate increased to 10.8 percent from 10.3 percent principally due to higher net EAC adjustments.

NORTHROP GRUMMAN CORPORATION

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

Three Months Ended March 31

Three Months Ended June 30 Six Months Ended June 30

$ in millions 2025 2024 2025 2024

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

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Product Sales and Costs

First quarter 2025 product sales decreased $581 million, or 7 percent, primarily due to the previously disclosed wind-down of work on the restricted space and NGI programs and lower sales for CRS missions, SDA satellite programs and other restricted programs at Space Systems, as well as lower sales on B-21 and other restricted programs at Aeronautics Systems.

These decreases were partially offset by ramp-up on Sentinel and higher volume on certain military ammunition programs at Defense Systems as well as higher sales on the SABR program at Mission Systems.

First quarter 2025 product costs decreased $60 million, or 1 percent.

The percentage decline in product costs was lower than the percentage decline in product sales largely due to the $477 million B-21 loss provision at Aeronautics Systems.

Service Sales and Costs

First quarter 2025 service sales decreased $84 million, or 4 percent, primarily due to lower restricted sales at Aeronautics Systems, as well as lower volume on the KC-30 program and completion of certain training programs at Defense Systems.

First quarter 2025 service costs decreased $69 million, or 4 percent, consistent with the lower service sales described above.

Current Quarter

Second quarter 2025 product sales increased $182 million, or 2 percent, primarily due to restricted award timing and higher volume on marine systems and international ground based radar programs at Mission Systems, higher sales on Sentinel and military ammunition programs at Defense Systems, and higher volume on the B-21 and TACAMO programs at Aeronautics Systems.

These increases were partially offset by the wind-down of work on the restricted space and NGI programs at Space Systems.

Second quarter 2025 product costs increased $57 million, or 1 percent, consistent with the higher product sales described above and reflects a higher operating margin rate on product sales at all four sectors.

NORTHROP GRUMMAN CORPORATION

Backlog consisted of the following as of March 31, 2025 and December 31, 2024:

March 31, 2025 December 31, 2024

Year to date 2025 product sales decreased $399 million, or 2 percent, primarily due to wind-down of work on the restricted space and NGI programs and lower sales for CRS missions and other restricted programs at Space Systems, as well as lower volume on restricted programs at Aeronautics Systems.

These decreases were partially offset by restricted award timing and higher volume on the SABR program at Mission Systems, as well as higher sales on Sentinel and military ammunition programs at Defense Systems.

Year to date 2025 product costs were comparable to the prior year, reflecting a lower operating margin rate principally due to the $477 million loss provision recorded on the B-21 program at Aeronautics Systems in the first quarter of 2025, partially offset by higher net EAC adjustments at Defense Systems largely driven by the Sentinel program.

Service Sales and Costs

Current Quarter

Second quarter 2025 service sales decreased $49 million, or 2 percent, primarily due to lower restricted sales at Aeronautics Systems and the training services divestiture at Defense Systems.

Second quarter 2025 sales from the training services business, which were largely included in service sales, were $40 million as compared to $72 million in the prior year period.

Second quarter 2025 service costs decreased $42 million, or 2 percent, consistent with the lower service sales described above.

Year to date 2025 service sales decreased $133 million, or 3 percent, primarily due to lower restricted sales at Aeronautics Systems and the training services divestiture at Defense Systems.

Year to date 2025 sales from the training services business, which were largely included in service sales, were $112 million as compared to $156 million in the prior year period.

Year to date 2025 service costs decreased $111 million, or 3 percent, consistent with the lower service sales described above.

Backlog consisted of the following as of June 30, 2025 and December 31, 2024:

June 30, 2025 December 31, 2024

$ in millions Funded Unfunded Total

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Total backlog $ 37,460 $ 52,277 $ 89,737 $ 91,468 (2) %

First quarter 2025 net awards totaled $10.8 billion, and backlog totaled $92.8 billion.

Significant first quarter new awards include $4.6 billion for restricted programs (primarily at Space Systems, Aeronautics Systems and Mission Systems), $1.1 billion for F-35 programs (primarily at Mission Systems and Aeronautics Systems), $0.5 billion for the Integrated Battle Command System (IBCS) program, $0.3 billion for Triton, and $0.3 billion for E-2.

Second quarter and year to date 2025 net awards totaled $7.4 billion and $18.2 billion, respectively.

Backlog totaled $89.7 billion and reflects a $150 million reduction of backlog in connection with the training services divestiture.

Significant second quarter new awards include $1.8 billion for restricted programs (primarily at Mission Systems, Aeronautics Systems and Space Systems), $0.5 billion for F-35 (primarily at Mission Systems), $0.3 billion for the Guided Multiple Launch Rocket System (GMLRS) program, and $0.2 billion for Triton.

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 March 31, 2025, we had $1.7 billion in cash and cash equivalents.

At June 30, 2025, we had $1.9 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 2025, we renewed our one-year $500 million uncommitted credit facility.

At March 31, 2025, there were no borrowings outstanding under these credit facilities;

however, as of March 31, 2025, we had $1.5 billion in commercial paper outstanding, which reduced the amount available for borrowing under our unsecured credit facility.

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 2024 cash from operations was reduced by approximately $350 million for federal estimated tax payments we made related to Section 174.

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.

The company has a five-year senior unsecured credit facility in an

NORTHROP GRUMMAN CORPORATION

aggregate principal amount of $2.5 billion, and in April 2025, we renewed our one-year $500 million uncommitted credit facility.

At June 30, 2025, there were no borrowings outstanding under these credit facilities;

however, as of June 30, 2025, we had $570 million in commercial paper outstanding, which reduced the amount available for borrowing under our unsecured credit facility.

In May 2025, we issued $1.0 billion of unsecured senior notes for general corporate purposes, including debt repayment, share repurchases, and working capital.

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 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 used in operating activities:

Three Months Ended March 31 %

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

Six Months Ended June 30 %

$ in millions 2025 2024 Change

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B-21 loss provision

Gain on sale of business (231) — NM

Non-cash items (1)

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Other, net 10 16 (38) %

Net cash used in operating activities $ (1,565) $ (706) (122) %

Net cash (used in) provided by operating activities $ (697) $ 719 (197) %

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

First quarter 2025 net cash from operating activities decreased $859 million as compared with the same period in 2024 primarily due to changes in trade working capital largely driven by a comparative increase in vendor payments as well as the timing of billings and collections.

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.

Year to date 2025 net cash used in operating activities was $697 million compared to net cash provided by operating activities of $719 million in the prior year period, primarily due to $1.0 billion of higher net cash taxes, due, in part, to a $500 million federal tax refund received in the prior year, as well as increased trade working capital largely driven by the timing of collections and advance payments.

Free Cash Flow

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

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

Three Months Ended March 31 %

The table below reconciles net cash (used in) provided by operating activities to free cash flow:

Six Months Ended June 30 %

$ in millions 2025 2024 Change

Net cash used in operating activities $ (1,565) $ (706) (122) %

Net cash (used in) provided by operating activities $ (697) $ 719 NM

Capital expenditures (487) (590) (17) %

Free cash flow $ (1,821) $ (976) (87) %

First quarter 2025 free cash flow decreased $845 million, or 87 percent, as compared with the same period in 2024 principally due to a decrease in net cash from operating activities.

Free cash flow $ (1,184) $ 129 NM

Year to date 2025 free cash flow decreased $1.3 billion as compared with the same period in 2024 principally due to a $1.4 billion increase in net cash used in operating activities, partially offset by a $103 million reduction in capital expenditures.

NORTHROP GRUMMAN CORPORATION

Investing Cash Flow

First quarter 2025 net cash used in investing activities decreased $17 million, or 6 percent, as compared with the same period in 2024 principally due to lower capital expenditures.

Year to date 2025 net cash used in investing activities decreased $399 million, or 68 percent, as compared with the same period in 2024 principally due to $333 million in proceeds from the sale of the training services business as well as lower capital expenditures.

Financing Cash Flow

First quarter 2025 net cash used in financing activities was $851 million compared to net cash provided by financing activities of $927 million in the prior year period.

This change is primarily due to a $2.5 billion net decrease in cash from long-term debt and commercial paper financing, partially offset by a $710 million decrease in share repurchases.

Year to date 2025 net cash used in financing activities was $1.6 billion compared to net cash provided by financing activities of $34 million in the prior year period.

This change is primarily due to a $2.4 billion net decrease in cash from long-term debt and commercial paper financing, partially offset by an $861 million decrease 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.

Share Repurchases - See Note 2 to the financial statements for further information on our share repurchase programs.

NORTHROP GRUMMAN CORPORATION

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

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• continued pressures from macroeconomic trends, including on costs, schedules, performance and ability to meet expectations

NORTHROP GRUMMAN CORPORATION

Legal and Regulatory Risks

5 unchanged sentences

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

NORTHROP GRUMMAN CORPORATION

Business and Operational Risks

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There have been no material changes to our market risks from those discussed in our 2024 Annual Report on Form 10-K.

NORTHROP GRUMMAN CORPORATION

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