UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q


☒						QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~September 30, 2022~~March 31, 2023


☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-16411

NORTHROP GRUMMAN CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		80-0640649
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2980 Fairview Park Drive
Falls Church,	Virginia	22042
(Address of principal executive offices)		(Zip Code)

(703) 280-2900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	NOC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer ☒ Accelerated Filer ☐

Non-accelerated Filer ☐ Smaller Reporting Company ☐

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of ~~October~~April 24, ~~2022, 153,912,156~~2023, 151,859,445 shares of common stock were outstanding.

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NORTHROP GRUMMAN CORPORATION

TABLE OF CONTENTS


		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings and Comprehensive Income	1
	Condensed Consolidated Statements of Financial Position	2
	Condensed Consolidated Statements of Cash Flows	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity	4
	Notes to Condensed Consolidated Financial Statements
	1. Basis of Presentation	5
	2. Earnings Per Share, Share Repurchases and Dividends on Common Stock	76
	3. Income Taxes	87
	4. Fair Value of Financial Instruments	98
	5. Investigations, Claims and Litigation	119
	6. Commitments and Contingencies	1210
	7. Retirement Benefits	1412
	8. Stock Compensation Plans and Other Compensation Arrangements	1412
	9. Segment Information	1513
	10. Subsequent Even t	16
	Report of Independent Registered Public Accounting Firm	1917
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Overview	2018
	Consolidated Operating Results	2220
	Segment Operating Results	2521
	Product and Service Analysis	3126
	Backlog	3227
	Liquidity and Capital Resources	3227
	Critical Accounting Policies, Estimates and Judgments	3429
	Accounting Standards Updates	3429
	Forward-Looking Statements and Projections	3429
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3631
Item 4.	Controls and Procedures	3631

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	3732
Item 1A.	Risk Factors	3732
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3732
Item 6.	Exhibits	3833
	Signatures	3934

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NORTHROP GRUMMAN CORPORATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Unaudited)


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended March 31
$ in millions, except per share amounts	$ in millions, except per share amounts	2022		2021		2022		2021		$ in millions, except per share amounts		2023		2022
Sales	Sales									Sales
Product	Product	$	6,979	$	6,845	$	20,599	$	21,060	Product		$	7,271	$	6,841
Service	Service	1,992		1,875		5,970		5,968		Service		2,030		1,956
Total sales	Total sales	8,971		8,720		26,569		27,028		Total sales		9,301		8,797
Operating costs and expenses	Operating costs and expenses									Operating costs and expenses
Product	Product	5,589		5,352		16,250		16,662		Product		5,727		5,380
Service	Service	1,564		1,434		4,669		4,649		Service		1,589		1,544
General and administrative expenses	General and administrative expenses	974		891		2,955		2,788		General and administrative expenses		1,038		976
Total operating costs and expenses	Total operating costs and expenses	8,127		7,677		23,874		24,099		Total operating costs and expenses		8,354		7,900
Gain on sale of business		—		—		—		1,980
Operating income	Operating income	844		1,043		2,695		4,909		Operating income		947		897
Other (expense) income	Other (expense) income									Other (expense) income
Interest expense	Interest expense	(122)		(132)		(386)		(423)		Interest expense		(129)		(133)
Non-operating FAS pension benefit	Non-operating FAS pension benefit	376		367		1,129		1,101		Non-operating FAS pension benefit		132		376

Other, net	Other, net	(8)		(3)		(54)		6		Other, net		48		4
Earnings before income taxes	Earnings before income taxes	1,090		1,275		3,384		5,593		Earnings before income taxes		998		1,144
Federal and foreign income tax expense	Federal and foreign income tax expense	175		212		568		1,298		Federal and foreign income tax expense		156		189
Net earnings	Net earnings	$	915	$	1,063	$	2,816	$	4,295	Net earnings		$	842	$	955

Basic earnings per share	Basic earnings per share	$	5.92	$	6.65	$	18.13	$	26.63	Basic earnings per share		$	5.52	$	6.12
Weighted-average common shares outstanding, in millions	Weighted-average common shares outstanding, in millions	154.6		159.8		155.3		161.3		Weighted-average common shares outstanding, in millions		152.6		156.0
Diluted earnings per share	Diluted earnings per share	$	5.89	$	6.63	$	18.06	$	26.55	Diluted earnings per share		$	5.50	$	6.10
Weighted-average diluted shares outstanding, in millions	Weighted-average diluted shares outstanding, in millions	155.3		160.4		155.9		161.8		Weighted-average diluted shares outstanding, in millions		153.2		156.6

Net earnings (from above)	Net earnings (from above)	$	915	$	1,063	$	2,816	$	4,295	Net earnings (from above)		$	842	$	955
Other comprehensive loss, net of tax
Change in unamortized prior service credit		—		(2)		(1)		(6)
Change in cumulative translation adjustment and other, net		(7)		(6)		(22)		(6)
Other comprehensive loss, net of tax		(7)		(8)		(23)		(12)
Other comprehensive income (loss), net of tax										Other comprehensive income (loss), net of tax
Change in cumulative translation adjustment										Change in cumulative translation adjustment		2		(2)
Change in other, net										Change in other, net		—		(1)
Other comprehensive income (loss), net of tax										Other comprehensive income (loss), net of tax		2		(3)
Comprehensive income	Comprehensive income	$	908	$	1,055	$	2,793	$	4,283	Comprehensive income		$	844	$	952

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

$ in millions, except par value September 30, 2022 December 31, 2021
Assets
Cash and cash equivalents $ 1,666 $ 3,530
Accounts receivable, net 1,936 1,467
Unbilled receivables, net 6,430 5,492
Inventoried costs, net 989 811
Prepaid expenses and other current assets 1,277 1,126
Total current assets 12,298 12,426
Property, plant and equipment, net of accumulated depreciation of $7,243 for 2022 and $6,819 for 2021 8,325 7,894
Operating lease right-of-use assets 1,680 1,655
Goodwill 17,516 17,515
Intangible assets, net 433 578
Deferred tax assets 233 200
Other non-current assets 2,248 2,311
Total assets $ 42,733 $ 42,579
Liabilities
Trade accounts payable $ 2,335 $ 2,197
Accrued employee compensation 1,831 1,993
Advance payments and billings in excess of costs incurred 3,107 3,026
Other current liabilities 3,539 2,314
Total current liabilities 10,812 9,530
Long-term debt, net of current portion of $1,069 for 2022 and $6 for 2021 11,803 12,777
Pension and other postretirement benefit plan liabilities 2,405 3,269
Operating lease liabilities 1,696 1,590
Deferred tax liabilities 86 490
Other non-current liabilities 1,988 1,997
Total liabilities 28,790 29,653
Commitments and contingencies (Note 6)
Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding — —
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2022—154,093,656 and 2021—156,284,423 154 156
Paid-in capital — —
Retained earnings 13,955 12,913
Accumulated other comprehensive loss (166) (143)
Total shareholders’ equity 13,943 12,926
Total liabilities and shareholders’ equity $ 42,733 $ 42,579


$ in millions, except par value	March 31, 2023		December 31, 2022
Assets
Cash and cash equivalents	$	2,495	$	2,577
Accounts receivable, net	2,061		1,511
Unbilled receivables, net	6,215		5,983
Inventoried costs, net	1,115		978
Prepaid expenses and other current assets	924		1,439

Total current assets	12,810		12,488
Property, plant and equipment, net of accumulated depreciation of $7,448 for 2023 and $7,258 for 2022	8,838		8,800
Operating lease right-of-use assets	1,779		1,811
Goodwill	17,516		17,516
Intangible assets, net	364		384
Deferred tax assets	234		162
Other non-current assets	2,703		2,594
Total assets	$	44,244	$	43,755

Liabilities
Trade accounts payable	$	2,136	$	2,587
Accrued employee compensation	1,646		2,057
Advance payments and billings in excess of costs incurred	3,211		3,609
Other current liabilities	3,490		3,334

Total current liabilities	10,483		11,587
Long-term debt, net of current portion of $1,082 for 2023 and $1,072 for 2022	13,770		11,805
Pension and other postretirement benefit plan liabilities	1,173		1,188
Operating lease liabilities	1,789		1,824

Other non-current liabilities	1,893		2,039
Total liabilities	29,108		28,443

Commitments and contingencies (Note 6)

Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2023—151,950,074 and 2022—153,157,924	152		153
Paid-in capital	—		—
Retained earnings	15,135		15,312
Accumulated other comprehensive loss	(151)		(153)
Total shareholders’ equity	15,136		15,312
Total liabilities and shareholders’ equity	$	44,244	$	43,755

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Nine Months Ended September 30					Three Months Ended March 31
$ in millions	$ in millions	2022		2021		$ in millions	2023		2022
Operating activities	Operating activities					Operating activities
Net earnings	Net earnings	$	2,816	$	4,295	Net earnings	$	842	$	955
Adjustments to reconcile to net cash provided by operating activities:
Adjustments to reconcile to net cash used in operating activities:						Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization	Depreciation and amortization	960		908		Depreciation and amortization	298		303

Stock-based compensation	Stock-based compensation	72		71		Stock-based compensation	19		18
Deferred income taxes	Deferred income taxes	(438)		(105)		Deferred income taxes	(205)		(201)
Gain on sale of business		—		(1,980)
Net periodic pension and OPB income	Net periodic pension and OPB income	(895)		(818)		Net periodic pension and OPB income	(76)		(298)
Pension and OPB contributions	Pension and OPB contributions	(106)		(108)		Pension and OPB contributions	(40)		(36)
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Accounts receivable, net	Accounts receivable, net	(469)		(133)		Accounts receivable, net	(550)		(246)
Unbilled receivables, net	Unbilled receivables, net	(1,038)		(596)		Unbilled receivables, net	(232)		(626)
Inventoried costs, net	Inventoried costs, net	(171)		(113)		Inventoried costs, net	(137)		(27)
Prepaid expenses and other assets	Prepaid expenses and other assets	(64)		6		Prepaid expenses and other assets	(54)		16
Accounts payable and other liabilities	Accounts payable and other liabilities	(57)		49		Accounts payable and other liabilities	(1,128)		(732)
Income taxes payable, net	Income taxes payable, net	(56)		663		Income taxes payable, net	576		361

Other, net	Other, net	96		(14)		Other, net	(15)		25
Net cash provided by operating activities		650		2,125
Net cash used in operating activities						Net cash used in operating activities	(702)		(488)

Investing activities	Investing activities					Investing activities
Divestiture of IT services business		—		3,400

Capital expenditures	Capital expenditures	(803)		(682)		Capital expenditures	(309)		(244)
Proceeds from sale of equipment to a customer		100		84

Other, net	Other, net	40		(3)		Other, net	—		(5)
Net cash (used in) provided by investing activities		(663)		2,799
Net cash used in investing activities						Net cash used in investing activities	(309)		(249)

Financing activities	Financing activities					Financing activities
Net proceeds from issuance of long-term debt						Net proceeds from issuance of long-term debt	1,995		—

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

Common stock repurchases	Common stock repurchases	(1,011)		(2,724)		Common stock repurchases	(723)		(318)
Cash dividends paid	Cash dividends paid	(786)		(737)		Cash dividends paid	(270)		(251)
Payments of employee taxes withheld from share-based awards	Payments of employee taxes withheld from share-based awards	(50)		(33)		Payments of employee taxes withheld from share-based awards	(47)		(48)
Other, net	Other, net	(4)		(46)		Other, net	(26)		(2)
Net cash used in financing activities		(1,851)		(5,776)
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	929		(619)
Decrease in cash and cash equivalents	Decrease in cash and cash equivalents	(1,864)		(852)		Decrease in cash and cash equivalents	(82)		(1,356)
Cash and cash equivalents, beginning of year	Cash and cash equivalents, beginning of year	3,530		4,907		Cash and cash equivalents, beginning of year	2,577		3,530
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	1,666	$	4,055	Cash and cash equivalents, end of period	$	2,495	$	2,174

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

Three Months Ended September 30 Nine Months Ended September 30
$ in millions, except per share amounts 2022 2021 2022 2021
Common stock
Beginning of period $ 155 $ 160 $ 156 $ 167
Common stock repurchased (1) (1) (3) (8)
Shares issued for employee stock awards and options — — 1 —
End of period 154 159 154 159
Paid-in capital
Beginning of period — — — 58
Common stock repurchased — — — (60)
Stock compensation — — — 2
End of period — — — —
Retained earnings
Beginning of period 13,655 11,144 12,913 10,482
Common stock repurchased (374) (587) (1,012) (2,676)
Net earnings 915 1,063 2,816 4,295
Dividends declared (269) (252) (785) (741)
Stock compensation 28 30 23 38
End of period 13,955 11,398 13,955 11,398
Accumulated other comprehensive loss
Beginning of period (159) (132) (143) (128)
Other comprehensive loss, net of tax (7) (8) (23) (12)
End of period (166) (140) (166) (140)
Total shareholders’ equity $ 13,943 $ 11,417 $ 13,943 $ 11,417
Cash dividends declared per share $ 1.73 $ 1.57 $ 5.03 $ 4.59


	Three Months Ended March 31
$ in millions, except per share amounts		2023		2022
Common stock
Beginning of period		$	153	$	156
Common stock repurchased		(1)		(1)
Shares issued for employee stock awards and options		—		1
End of period		152		156
Paid-in capital
Beginning of period		—		—



End of period		—		—
Retained earnings
Beginning of period		15,312		12,913
Common stock repurchased		(726)		(315)
Net earnings		842		955
Dividends declared		(265)		(246)
Stock compensation		(28)		(30)

End of period		15,135		13,277
Accumulated other comprehensive loss
Beginning of period		(153)		(143)
Other comprehensive income (loss), net of tax		2		(3)
End of period		(151)		(146)
Total shareholders’ equity		$	15,136	$	13,287
Cash dividends declared per share		$	1.73	$	1.57

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NORTHROP GRUMMAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

Principles of Consolidation and Reporting

These unaudited condensed consolidated financial statements (the “financial statements”) include the accounts of Northrop Grumman Corporation and its subsidiaries and joint ventures or other investments for which we consolidate the financial results (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”). Intercompany accounts, transactions and profits are eliminated in consolidation. Investments in equity securities and joint ventures where the company has significant influence, but not control, are accounted for using the equity method.

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 on sale 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 date. Sales and pre-tax profit for the IT and mission support services business were $162 million and $20 million, respectively, for the nine months ended September 30, 2021.

These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”) and in accordance with the rules of the Securities and Exchange Commission (SEC) for interim reporting. The financial statements include adjustments of a normal recurring nature considered necessary by management for a fair presentation of the company’s unaudited condensed consolidated financial position, results of operations and cash flows.

Results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the information contained in the company’s ~~2021~~2022 Annual Report on Form 10-K. During the first quarter of 2023, we changed the presentation of the components of other comprehensive income (loss), net of tax in the Unaudited condensed consolidated statement of earnings and comprehensive income. Prior period amounts have been recast to conform to current period presentation. This change in presentation had no impact on our previously reported comprehensive income in total.

Quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30 and third quarter as ending on September 30. It is the company’s long-standing practice to establish actual interim closing dates using a “fiscal” calendar, in which we close our books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. This practice is only used at interim periods within a reporting year.

Accounting Estimates

Preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Estimates have been prepared using the most current and best available information; however, actual results could differ materially from those estimates.

Revenue Recognition

Contract Estimates

We recognize changes in estimated contract sales or costs and the resulting changes in contract profit on a cumulative basis. ~~Cumulative~~Net estimate-at-completion (EAC) adjustments represent the cumulative effect of the changes on current and prior periods; sales and operating margins in future periods are recognized as if the revised estimates had been used since contract inception. If it is determined that a loss is expected to result on an individual performance obligation, the entire amount of the estimable future loss, including an allocation of general and administrative expense, is charged against income in the period the loss is identified.

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


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended March 31
$ in millions, except per share data	$ in millions, except per share data	2022		2021		2022		2021		$ in millions, except per share data		2023		2022
Revenue	Revenue	$	59	$	116	$	363	$	478	Revenue		$	62	$	209
Operating income	Operating income	45		109		310		453		Operating income		46		173
Net earnings(1)	Net earnings(1)	36		86		245		358		Net earnings(1)		36		137
Diluted earnings per share(1)	Diluted earnings per share(1)	0.23		0.54		1.57		2.21		Diluted earnings per share(1)		0.23		0.87

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

EAC adjustments on a single performance obligation can have a significant effect on the company’s financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. During the three months ended March 31, 2022, we recorded a $67 million favorable

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EAC adjustment on the engineering, manufacturing and development (EMD) phase of the B-21 program at Aeronautics Systems largely related to performance incentives. During the three months ended September 30, 2021, we recorded a $42 million unfavorable EAC adjustment on the F-35 program at Aeronautics Systems due to labor-related production inefficiencies largely driven by COVID-19-related impacts on the labor market and employee leave.Systems. No such adjustments were material to the financial statements during the three months ended ~~September 30, 2022.~~March 31, 2023.

Backlog

Backlog represents the future sales we expect to recognize on firm orders received by the company and is equivalent to the company’s remaining performance obligations at the end of each period. It comprises both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time an option or IDIQ task order is exercised or awarded.

Company backlog as of ~~September 30, 2022~~March 31, 2023 was ~~$79.6~~$77.5 billion. Of our ~~September 30, 2022~~March 31, 2023 backlog, we expect to recognize approximately 40 percent as revenue over the next 12 months and 6065 percent as revenue over the next 24 months, with the remainder to be recognized thereafter.

Contract Assets and Liabilities

For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position. The amount of revenue recognized for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 that was included in the ~~December 31, 2021~~ contract liability ~~balance~~balances at the beginning of each year was ~~$303 million~~$1.7 billion and $2.2 billion, respectively. The amount of revenue recognized for the three and nine months ended September 30, 2021 that was included in the December 31, 2020 contract liability balance was $261 million and $1.8$1.4 billion, respectively.

Disaggregation of Revenue

See Note 9 for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments. We believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

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~~NORTHROP GRUMMAN CORPORATION~~

Property, Plant, and Equipment

During the ~~nine~~three months ended ~~September 30,~~March 31, 2022, the company received lease incentives for landlord funded leasehold improvements of $35 million related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities. During the three months ended March 31, 2022, the company acquired $46 million of internal use software through long-term financing directly with the supplier. The software was recorded in PP&E as a non-cash investing activity and the related liability was recorded in long-term debt as a non-cash financing activity. During the nine months ended September 30, 2022, the company received lease incentives for landlord funded leasehold improvements of $96 million related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities. Non-cash investing activities also include capital expenditures incurred but not yet paid of ~~$118~~$43 million and ~~$105~~$56 million as of ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. In the fourth quarter of 2020, the company completed a sale of equipment to a customer on a restricted Aeronautics Systems program. During the nine months ended September 30, 2022 and 2021, the company received cash payments of $100 million and $84 million, respectively, related to the equipment sale and included it in Proceeds from sale of equipment to a customer in the unaudited condensed consolidated statement of cash flows.

Accumulated Other Comprehensive Loss

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


$ in millions	$ in millions	September 30, 2022		December 31, 2021		$ in millions	March 31, 2023		December 31, 2022
Unamortized prior service credit		$	1	$	2
Cumulative translation adjustment and other, net		(167)		(145)
Cumulative translation adjustment						Cumulative translation adjustment	$	(159)	$	(161)
Other, net						Other, net	8		8
Total accumulated other comprehensive loss	Total accumulated other comprehensive loss	$	(166)	$	(143)	Total accumulated other comprehensive loss	$	(151)	$	(153)

Related Party Transactions

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

Accounting Standards Updates

Accounting standards updates adopted and/or issued, but not effective until after ~~September 30, 2022,~~March 31, 2023, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.

2. EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK

Basic Earnings Per Share

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

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Diluted Earnings Per Share

Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled ~~0.7 million shares and~~ 0.6 million shares for each of the three month periods ended March 31, 2023 and nine months ended September 30, 2022, respectively. The dilutive effect of these securities totaled 0.6 million shares and 0.5 million shares for the three and nine months ended September 30, 2021, respectively.2022.

Share Repurchases

On ~~December 4, 2018,~~January 25, 2021, the company’s board of directors authorized a share repurchase program of up to $3.0 billion of the company’s common stock (the ~~“2018 Repurchase Program”). Repurchases under the 2018 Repurchase Program commenced in March 2020 and were completed in October 2021.~~

~~On January 25, 2021, the company’s board of directors authorized a share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the~~ “2021 Repurchase Program”). Repurchases under the 2021 Repurchase Program commenced in October ~~2021 upon the completion of the 2018 Repurchase Program.~~2021. As of ~~September 30, 2022, repurchases under the 2021 Repurchase Program totaled $1.9 billion; $1.1 billion~~March 31, 2023, $10 million remained under this share repurchase authorization. By its terms, the 2021 Repurchase Program is set to expire when we have used all authorized funds for repurchases.

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On January 24, 2022, the company’s board of directors authorized a new share repurchase program of up to an additional $2.0 billion in share repurchases of the company’s common stock (the “2022 Repurchase Program”). By its terms, repurchases under the 2022 Repurchase Program will commence upon completion of the 2021 Repurchase Program and will expire when we have used all authorized funds for repurchases. As of ~~September 30, 2022,~~March 31, 2023, there have been no repurchases under the 2022 Repurchase Program, and the company’s total outstanding share repurchase authorization was ~~$3.1~~$2.0 billion.

During the first quarter of ~~2021,~~2023, the company entered into an accelerated share repurchase (ASR) agreement with ~~Goldman Sachs & Co. LLC (Goldman Sachs) to repurchase $2.0 billion~~Bank of ~~the company’s common stock as part~~America, N.A. (Bank of the 2018 Repurchase Program. Under the agreement, we made a payment of $2.0 billion to Goldman Sachs and received an initial delivery of 5.9 million shares valued at $1.7 billion that were immediately canceled by the company. The remaining balance of $300 million was settled on June 1, 2021 with a final delivery of 0.2 million shares from Goldman Sachs. The final average purchase price was $327.29 per share.

~~During the fourth quarter of 2021, the company entered into an ASR agreement with Goldman Sachs~~America) to repurchase $500 million of the company’s common stock as part of the 2021 and 2022 Repurchase ~~Program.~~Programs. Under the agreement, we made a payment of $500 million to ~~Goldman Sachs~~Bank of America and received an initial delivery of ~~1.2~~0.9 million shares valued at ~~$425~~$400 million that were immediately canceled by the company. The remaining balance of ~~$75~~$100 million ~~was settled~~is included as a reduction to Retained earnings on ~~February 1, 2022 with a final delivery~~the unaudited condensed consolidated statement of ~~0.1 million shares from Goldman Sachs.~~financial position. The final number of shares to be repurchased will be based on the company's daily volume-weighted average ~~purchase~~share price ~~was $374.79 per share.~~during the term of the agreement, less a discount. The ASR is expected to be completed in the second quarter of 2023.

Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and, in the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs. ~~During the nine months ended September 30, 2022, the company repurchased $1.0 billion of its outstanding shares.~~

The table below summarizes the company’s share repurchases to date under the authorizations described above:


								Shares Repurchased (in millions)								Shares Repurchased (in millions)
Repurchase Program Authorization Date	Repurchase Program Authorization Date	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share(1)		Date Completed	Nine Months Ended September 30		Repurchase Program Authorization Date	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share(1)	Date Completed	Three Months Ended March 31
								2022	2021							2023	2022

December 4, 2018		$	3,000	8.9	$	337.18	October 2021	—	8.1

January 25, 2021	January 25, 2021	$	3,000	4.6	407.74			2.4	—	January 25, 2021	$	3,000	6.9	430.92		1.4	0.9
January 24, 2022	January 24, 2022	$	2,000	—	—			—	—	January 24, 2022	$	2,000	—	—		—	—

(1)Includes commissions paid.

Dividends on Common Stock

In May 2022, the company increased the quarterly common stock dividend 10 percent to $1.73 per share from the previous amount of ~~$1.57~~1.57 per share.

3. INCOME TAXES
Three Months Ended September 30 Nine Months Ended September 30
$ in millions 2022 2021 2022 2021
Federal and foreign income tax expense $ 175 $ 212 $ 568 $ 1,298
Effective income tax rate 16.1 % 16.6 % 16.8 % 23.2 %

~~Current Quarter~~


	Three Months Ended March 31
$ in millions		2023			2022
Federal and foreign income tax expense		$	156		$	189
Effective income tax rate		15.6		%	16.5		%

The ~~third~~first quarter ~~2022~~2023 effective tax rate (ETR) decreased to ~~16.1~~15.6 percent from ~~16.6~~16.5 percent ~~in the prior~~principally due to higher current year ~~period.~~ETR benefits associated with research credits and FDII deductions as well as favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax benefits. The company’s ~~third~~first quarter ~~2022~~2023 ETR includes benefits of ~~$42~~$40 million for research credits and ~~$16~~$15 million for foreign ~~derived intangible income (FDII). The company’s third quarter 2021 ETR included benefits of $43 million for research credits and $12 million for FDII.~~

~~Year to Date~~

The year to date 2022 ETR decreased to 16.8 percent from 23.2 percent in the prior year period. The company’s year to date 2022 ETR includes benefits of $124 million for research credits and $46 million for FDII. The company’s

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~~year to date 2021~~derived intangible income (FDII). The company’s first quarter 2022 ETR included benefits of ~~$142~~$41 million for research credits and ~~$32~~$15 million for FDII. The year to date 2021 ETR was impacted by additional federal income taxes resulting from the IT services divestiture, as well as a change in tax revenue recognition on certain long-term contracts, which increased taxable income in years prior to the 2017 Tax Cuts and Jobs Act at a rate above the current statutory rate.

Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were ~~$627~~$274 million as of ~~September 30, 2022~~March 31, 2023 and ~~$571~~$850 million as of December 31, ~~2021.~~2022.

The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs and the 2017 Tax Cuts and Jobs Act, which includes related final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and procedural guidance issued in August 2021. As of ~~September 30, 2022,~~March 31, 2023, we have approximately $1.7 billion in unrecognized tax benefits, including ~~$449~~$572 million related to our position on IRC Section 451(b). If these matters, including our position on IRC Section 451(b), are unfavorably resolved, there could be a material impact on our future cash flows. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may increase by approximately $120 million. Additionally, it is reasonably possible that within the next 12 months, unrecognized tax benefits claimed primarily related to California state apportionment in the company’s 2007 to 2016 tax years may decline by up to $100 million through administrative resolution with the California Franchise Tax Board.

Our current unrecognized tax benefits, which are included in Other current liabilities in the unaudited condensed consolidated statements of financial position, were ~~$657~~$769 million and ~~$590~~$728 million as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2020 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under Internal Revenue Service (IRS) examination. During the second quarter of 2022, the company’s 2014-2016 federal income tax returns and refund claims related to its 2007-2016 federal tax returns reverted back from IRS Appeals to IRS examination for additional factual review. In addition, legacy Orbital ATK (OATK) federal tax returns for the years ended March 31, 2014 and 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under review by the IRS Appeals Office. It is reasonably possible that within the next twelve months, unrecognized tax benefits claimed in legacy OATK’s 2014 to 2017 tax years may decline by up to $110 million through administrative resolution with IRS Appeals.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

The company holds a portfolio of marketable securities to partially fund non-qualified employee benefit plans. A portion of these securities are held in common/collective trust funds and are measured at fair value using net asset value (NAV) per share as a practical expedient; ~~and~~ therefore, they are not required to be categorized in the fair value hierarchy table below. Marketable securities are included in Other non-current assets in the unaudited condensed consolidated statements of financial position.

The company’s derivative portfolio consists primarily of foreign currency forward contracts. Where model-derived valuations are appropriate, the company utilizes the income approach to determine the fair value using internal models based on observable market inputs.

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


		September 30, 2022								December 31, 2021									March 31, 2023								December 31, 2022
$ in millions	$ in millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		$ in millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Assets	Financial Assets																	Financial Assets
Marketable securities	Marketable securities	$	299	$	—	$	8	$	307	$	393	$	1	$	7	$	401	Marketable securities	$	316	$	—	$	8	$	324	$	310	$	1	$	8	$	319
Marketable securities valued using NAV	Marketable securities valued using NAV							13								17		Marketable securities valued using NAV							10								13
Total marketable securities	Total marketable securities	299		—		8		320		393		1		7		418		Total marketable securities	316		—		8		334		310		1		8		332
Derivatives	Derivatives	—		4		—		4		—		(1)		—		(1)		Derivatives	—		5		—		5		—		7		—		7

The notional value of the company’s foreign currency forward contracts at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 was ~~$128~~$237 million and ~~$120~~$221 million, respectively. ~~At September 30, 2022 and December 31, 2021, no~~The portion of ~~the~~ notional value ~~was~~ designated as a cash flow ~~hedge.~~hedge at March 31, 2023 and December 31, 2022 was $88 million and $87 million, respectively.

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

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~~The derivative fair values and related unrealized gains/losses at September 30, 2022 and December 31, 2021 were not material.~~

There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023.

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

Long-term Debt

The estimated fair value of long-term debt was ~~$11.9~~$14.4 billion and ~~$15.1~~$12.1 billion as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.

~~On September 2, 2021,~~Unsecured Senior Notes

In February 2023, the company ~~completed an exchange offer~~issued $2.0 billion of unsecured senior notes for general corporate purposes, which may include debt repayment (including our 3.25% senior notes due in 2023), share repurchases, and working capital, as follows:

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

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

We refer to ~~eligible holders~~the 2033 Notes and the 2053 Notes, together, as the “notes.” Interest on the notes is payable semi-annually in arrears. The notes are generally subject to redemption, in whole or in part, at the company’s discretion at any time, or from time to time, prior to maturity at a redemption price equal to the greater of ~~the outstanding notes~~100% of ~~our direct wholly owned subsidiary, Northrop Grumman Systems Corporation (“NGSC”) maturing through 2036. An aggregate~~the principal amount of ~~$422 million of~~ the ~~NGSC~~ notes ~~was exchanged for $422 million of unregistered Northrop Grumman Corporation notes (the “Unregistered Notes”) with the same interest rates~~to be redeemed or an applicable “make-whole” amount, plus accrued and maturity dates as the NGSC notes exchanged. Because the debt instruments are not substantially different, the exchange was treated as a debt modification for accounting purposes with no gain or loss recognized.unpaid interest.

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

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

~~Repayments of Senior Notes~~

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

In March 2021, the company redeemed $1.5 billion of 2.55 percent unsecured notes due October 2022. The company recorded a pre-tax charge of $54 million principally related to the premium paid on the redemption, which was recorded in Other, net in the unaudited condensed consolidated statements of earnings and comprehensive income.

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5. INVESTIGATIONS, CLAIMS AND LITIGATION

~~On May 4, 2012, the company commenced an action,~~ ~~Northrop Grumman Systems Corp. v. United States~~, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed-price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS were delivered. The company’s lawsuit seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $410 million, less certain amounts outstanding under the contract. In the course of the litigation, the United States subsequently amended its counterclaim, reducing it to seek approximately $193 million. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On February 3, 2020, after extensive discovery and motions practice, the parties commenced what was expected to be a seven-week trial. After COVID-19-related interruptions, trial concluded on March 5, 2021. On October 12, 2021, the parties completed post-trial briefing, and on December 8, 2021 the court held a post-trial oral argument. On June 27, 2022, the judge issued a decision concluding that the company was entitled to approximately $63 million for unpaid portions of the contract price and $5 million in additional damages, as well as interest, which the company estimated was approximately $16 million (as of September 30, 2022) and such additional interest as may accrue until the date the government makes payment. The judge also concluded that the government was entitled to approximately $1 million in off-setting damages. On July 18, 2022, the government filed a motion for reconsideration, arguing that the government is entitled to further damages of approximately $57 million for particular periods of delay. On October 17, 2022, the court denied the government’s motion for reconsideration, making clear the government was not entitled to any such damages for delay. The court also determined that the past interest due to the company amounted to approximately $16 million. On October 19, 2022, the court entered judgment in the company’s favor in the amount of approximately $83 million, plus a currently estimated approximately $7 thousand of additional interest to accrue per day until the date the government makes payment. The parties have until December 19, 2022 to file an appeal.

The company is engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, the company has worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation (NYSDEC), the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. In December 2019, the State of New York issued an Amended Record of Decision seeking to impose additional remedial requirements beyond measures the company previously had been ~~taking; the State also communicated that it was assessing potential natural resource damages.~~taking. In December 2020, the parties reached a tentative agreement regarding the steps the company would take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. On September 22, 2021, the State of New York issued for public comment a new consent decree reflecting the agreement. On December 7, 2021, the public comment period closed. On August 3, 2022, the court approved the consent decree. We have also reached agreements with the Department of Defense and the Bethpage and South Farmingdale Water Districts to resolve claims involving these parties. ~~On May 24, 2022,~~Those agreements have also been approved by the ~~court approved the agreement~~courts as necessary. The company continues to be involved in related disputes with the ~~Bethpage Water District,~~Towns of Oyster Bay and ~~on August 2, 2022, the court approved the agreement with the Department of Defense. The agreement with the South Farmingdale Water District does not require court approval.~~Hempstead.

We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to the legacy Bethpage environmental conditions. It is also possible that applicable remediation standards and other requirements to which we are subject may continue to change, and that our costs may increase materially. In addition to disputes and legal proceedings related to environmental conditions and remediation at the site, we are a party to various individual lawsuits and a putative class action alleging personal injury and property damage in the Eastern District of New York. The filed individual lawsuits have been stayed, pending a court decision on class certification. We are also a party, and may become a party, to other lawsuits brought by or against insurance carriers, and by other individual plaintiffs and/or putative classes, as well as other parties. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these Bethpage lawsuits.

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

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on a non-discriminatory basis. The company has taken and continues to take robust actions to help ensure compliance with the terms of the Order. Similarly, the Compliance Officer, appointed under the Order, and the FTC have taken and continue to take various actions to oversee compliance. In October 2019, the company received a civil investigative demand (CID) from the FTC requesting certain information relating to a potential issue regarding the company’s compliance with the Order in connection with a then pending missile competition. The company promptly provided information in response to the request. In late 2021, the company resumed discussions with staff at the FTC regarding our response and their views on compliance issues. ~~Most~~More recently, the company received and ~~will be~~ is

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responding to a follow-on CID. We cannot predict the outcome of those discussions, but we do not believe they are likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of ~~September 30, 2022,~~March 31, 2023, or its annual results of operations and/or cash flows. We believe the company has been and continues to be in compliance with the Order.

The company received from the U.S. Department of Justice (DOJ) a criminal subpoena on December 9, 2022, and a civil investigative demand on February 2, 2023, both seeking information regarding financial and cost accounting and controls that appears focused on the interest rate assumptions the company used to determine our CAS pension expense, which we have previously discussed in Note 6 below. The company is engaging with the government and responding to the requests. We cannot at this point predict the outcome of this matter.

The company is a party to various other investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of ~~September 30, 2022,~~March 31, 2023, or its annual results of operations and/or cash flows.

6. COMMITMENTS AND CONTINGENCIES

U.S. Government Cost Claims and Contingencies

From time to time, the company is advised of claims by the U.S. government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and U.S. government representatives engage in discussions to enable the company to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for such potential disallowed costs. Such provisions are reviewed periodically using the most recent information available. The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of ~~September 30, 2022,~~March 31, 2023, or its annual results of operations and/or cash flows.

~~The U.S. government has~~In 2019, the Defense Contract Management Agency (DCMA) raised questions about an interest rate assumption used by the company to determine our CAS pension expense. On June 1, 2020, ~~the government~~DCMA provided written notice that the assumptions the company used during the period 2013-2019 were potentially noncompliant with CAS. We submitted a formal response on July 31, 2020, which we ~~believe~~believed demonstrates the appropriateness of the assumptions used. On November 24, 2020, ~~the government~~DCMA replied to the company’s response, disagreeing with our position and requesting additional input, which we provided on February 22, 2021. We ~~continue~~have continued to exchange correspondence and engage with ~~the government~~DCMA and DoD on this matter, including responding to requests for and providing additional information. As noted in Note 5 above, the company received from the the U.S. Department of Justice (DOJ) a criminal subpoena on December 9, 2022 and a civil investigative demand on February 2, 2023, both seeking information that appears related to the interest rate assumptions at issue in our discussions with DCMA. The company is engaging with the government and responding to the requests. We cannot at this point predict the outcome of this matter.The company is also continuing to engage with DCMA/DoD. As previously described, the sensitivity to changes in interest rate assumptions makes it reasonably possible the outcome of ~~this~~the DCMA matter could have a material adverse effect on our financial position, results of operations and/or cash flows, although we are not currently able to estimate a range of any potential loss.

B-21 Low-Rate Initial Production Options

In 2015, the U.S. Air Force awarded to Northrop Grumman the B-21 contract, including a base contract for engineering, manufacturing, and design (EMD) and five low-rate initial production (LRIP) options. The EMD phase of the program is largely cost type and began at contract award. The LRIP options are largely fixed price and are expected to be awarded and executed over the next decade. In the first quarter of 2023, we reviewed our estimated cost to complete the LRIP phase of the B-21 program. Principally due to the company’s estimate of the impact macroeconomic factors may have on our cost to complete the LRIP options, as well as ongoing discussions with our suppliers and our customer, we continue to believe it is reasonably possible one or more of the LRIP options could be performed at a loss and the range of such loss across the five LRIP options is between $0 and $1.2 billion. As we

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do not currently believe a loss is probable on any of the LRIP options, we have not recognized any such loss in our financial results for the period ended March 31, 2023.

Environmental Matters

The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S. government contracts as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:
$ in millions
Accrued Costs(1)(2)
Reasonably Possible Future Costs in Excess of Accrued Costs(2)
Deferred Costs(3)
September 30, 2022 $ 584 $ 357 $ 503
December 31, 2021 572 363 486


$ in millions	Accrued Costs(1)(2)		Reasonably Possible Future Costs in Excess of Accrued Costs(2)		Deferred Costs(3)
March 31, 2023	$	570	$	357	$	498
December 31, 2022	565		353		486

(1) As of ~~September 30, 2022,~~March 31, 2023, $200 million is recorded in Other current liabilities and ~~$384~~$370 million is recorded in Other non-current liabilities.

(2) Estimated remediation costs are not discounted to present value. The reasonably possible future costs in excess of accrued costs do not take into consideration amounts expected to be recoverable through overhead charges on U.S. government contracts.

(3) As of ~~September 30, 2022, $178~~March 31, 2023, $181 million is deferred in Prepaid expenses and other current assets and ~~$325~~$317 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.

Although management cannot predict whether (i) new information gained as our environmental remediation projects progress, (ii) changes in remediation standards or other requirements to which we are subject, or (iii) other changes in facts and circumstances will materially affect the estimated liability accrued, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of ~~September 30, 2022,~~March 31, 2023, or its annual results of operations and/or cash flows.

Financial Arrangements

In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At ~~September 30, 2022,~~March 31, 2023, there were ~~$393~~$367 million of stand-by letters of credit and guarantees and ~~$78~~$79 million of surety bonds outstanding.

Commercial Paper

The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to ~~$2.0~~$2.5 billion. At ~~September 30, 2022,~~March 31, 2023, there were no commercial paper borrowings outstanding.

Credit Facilities

~~In August 2022, the~~The company ~~entered into~~maintains a ~~new~~ five-year senior unsecured ~~revolving~~ credit facility in an aggregate principal amount of $2.5 billion (the “2022 Credit Agreement”)~~. The 2022 Credit Agreement replaced the company’s prior five-year, $2.0 billion revolving credit facility entered into on~~ that matures in August ~~17, 2018~~2027 and ~~as amended on October 17, 2019. The revolving credit facility established under the 2022 Credit Agreement~~ is intended to support the ~~company’s~~company's commercial paper program and other general corporate purposes. Commercial paper borrowings reduce the amount available for borrowing under the 2022 Credit Agreement. At ~~September 30, 2022,~~March 31, 2023, there were no borrowings outstanding under this facility.

The 2022 Credit Agreement contains generally customary terms and conditions, including covenants restricting the company’s ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other fundamental changes and incur liens. The company also cannot permit the ratio of its debt to capitalization (as set forth in the credit agreement) to exceed 65 percent.

At ~~September 30, 2022,~~March 31, 2023, the company was in compliance with all covenants under its credit agreements.

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NORTHROP GRUMMAN CORPORATION

7. RETIREMENT BENEFITS

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


		Three Months Ended September 30								Nine Months Ended September 30									Three Months Ended March 31
		Pension Benefits				OPB				Pension Benefits				OPB						Pension Benefits	OPB
$ in millions	$ in millions	2022		2021		2022		2021		2022		2021		2022		2021		$ in millions			2023		2022		2023		2022
Components of net periodic benefit cost (benefit)	Components of net periodic benefit cost (benefit)																	Components of net periodic benefit cost (benefit)
Service cost	Service cost	$	92	$	104	$	2	$	4	$	276	$	311	$	6	$	12	Service cost			$	59	$	92	$	1	$	2
Interest cost	Interest cost	285		263		12		13		853		790		36		40		Interest cost			392		284		17		12
Expected return on plan assets	Expected return on plan assets	(661)		(627)		(28)		(26)		(1,982)		(1,884)		(83)		(79)		Expected return on plan assets			(524)		(660)		(21)		(28)
Amortization of prior service (credit) cost		—		(3)		—		—		—		(7)		(1)		(1)

Net periodic benefit cost (benefit)	Net periodic benefit cost (benefit)	$	(284)	$	(263)	$	(14)	$	(9)	$	(853)	$	(790)	$	(42)	$	(28)	Net periodic benefit cost (benefit)			$	(73)	$	(284)	$	(3)	$	(14)

Employer Contributions

The company sponsors defined benefit pension and OPB plans, as well as defined contribution plans. We fund our defined benefit pension plans annually in a manner consistent with the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006.

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


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended March 31
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions		2023		2022
Defined benefit pension plans	Defined benefit pension plans	$	26	$	26	$	77	$	79	Defined benefit pension plans		$	29	$	26
OPB plans	OPB plans	9		8		29		29		OPB plans		11		10
Defined contribution plans	Defined contribution plans	108		99		429		476		Defined contribution plans		215		199

8. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS

Stock Awards

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


		Nine Months Ended September 30					Three Months Ended March 31
in millions	in millions	2022		2021		in millions	2023		2022
RSRs granted	RSRs granted	0.1		0.1		RSRs granted	0.1		0.1
RPSRs granted	RPSRs granted	0.2		0.2		RPSRs granted	0.1		0.2
Grant date aggregate fair value	Grant date aggregate fair value	$	94	$	89	Grant date aggregate fair value	$	100	$	88

RSRs typically vest on the third anniversary of the grant date, while RPSRs generally vest and pay out based on the achievement of certain performance metrics over a ~~three-year~~three-year period.

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~~NORTHROP GRUMMAN CORPORATION~~

Cash Awards

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


		Nine Months Ended September 30					Three Months Ended March 31
$ in millions	$ in millions	2022		2021		$ in millions	2023		2022
Minimum aggregate payout amount	Minimum aggregate payout amount	$	32	$	31	Minimum aggregate payout amount	$	34	$	32
Maximum aggregate payout amount	Maximum aggregate payout amount	183		178		Maximum aggregate payout amount	191		182

CUs typically vest and settle in cash on the third anniversary of the grant date, while CPUs generally vest and pay out in cash based on the achievement of certain performance metrics over a three-year period.

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NORTHROP GRUMMAN CORPORATION

9. SEGMENT INFORMATION

The following table presents sales and operating income by segment:


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended March 31
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions		2023		2022
Sales	Sales									Sales
Aeronautics Systems	Aeronautics Systems	$	2,537	$	2,725	$	7,774	$	8,628	Aeronautics Systems		$	2,515	$	2,703
Defense Systems	Defense Systems	1,345		1,409		3,922		4,398		Defense Systems		1,376		1,283
Mission Systems	Mission Systems	2,456		2,436		7,469		7,613		Mission Systems		2,563		2,497
Space Systems	Space Systems	3,163		2,681		8,997		7,950		Space Systems		3,350		2,855
Intersegment eliminations	Intersegment eliminations	(530)		(531)		(1,593)		(1,561)		Intersegment eliminations		(503)		(541)
Total sales	Total sales	8,971		8,720		26,569		27,028		Total sales		9,301		8,797
Operating income	Operating income									Operating income
Aeronautics Systems	Aeronautics Systems	262		265		827		873		Aeronautics Systems		237		307
Defense Systems	Defense Systems	158		175		481		529		Defense Systems		160		155
Mission Systems	Mission Systems	368		372		1,166		1,177		Mission Systems		360		385
Space Systems	Space Systems	290		288		861		865		Space Systems		313		261
Intersegment eliminations	Intersegment eliminations	(71)		(65)		(218)		(197)		Intersegment eliminations		(68)		(71)
Total segment operating income	Total segment operating income	1,007		1,035		3,117		3,247		Total segment operating income		1,002		1,037
FAS/CAS operating adjustment	FAS/CAS operating adjustment	(55)		61		(152)		98		FAS/CAS operating adjustment		(21)		(46)
Unallocated corporate (expense) income		(108)		(53)		(270)		1,564
Unallocated corporate expense										Unallocated corporate expense		(34)		(94)
Total operating income	Total operating income	$	844	$	1,043	$	2,695	$	4,909	Total operating income		$	947	$	897

FAS/CAS Operating Adjustment

For financial statement purposes, we account for our employee pension plans in accordance with FAS. However, the cost of these plans is charged to our contracts in accordance with applicable Federal Acquisition Regulation (FAR) and U.S. Government Cost Accounting Standards (CAS) requirements. The FAS/CAS operating adjustment reflects the difference between CAS pension expense included as cost in segment operating income and the service cost component of FAS expense included in total operating income.

Unallocated Corporate ~~(Expense) Income~~Expense

Unallocated corporate ~~(expense) income~~expense includes the portion of corporate costs not considered allowable or allocable under the applicable FAR and CAS requirements, and therefore not allocated to the segments, such as changes in deferred state income taxes and a portion of management and administration, legal, environmental, compensation, retiree benefits, advertising and other corporate unallowable costs. Unallocated corporate ~~(expense) income~~expense also includes costs not considered part of management’s evaluation of segment operating performance, such as amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business combinations, as well as certain compensation and other costs.

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NORTHROP GRUMMAN CORPORATION

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

Disaggregation of Revenue


Sales by Customer Type	Sales by Customer Type	Three Months Ended September 30								Nine Months Ended September 30								Sales by Customer Type	Three Months Ended March 31
		2022				2021				2022				2021						2023			2022
$ in millions	$ in millions	$		%(3)		$		%(3)		$		%(3)		$		%(3)		$ in millions			$		%(3)		$		%(3)
Aeronautics Systems	Aeronautics Systems																	Aeronautics Systems
U.S. government(1)	U.S. government(1)	$	2,138	85	%	$	2,312	85	%	$	6,564	85	%	$	7,366	85	%	U.S. government(1)			$	2,108	84	%	$	2,292	85	%
International(2)	International(2)	341		13	%	360		13	%	1,012		13	%	1,110		13	%	International(2)			331		13	%	343		13	%
Other customers	Other customers	—		—	%	5		—	%	17		—	%	15		—	%	Other customers			11		—	%	3		—	%
Intersegment sales	Intersegment sales	58		2	%	48		2	%	181		2	%	137		2	%	Intersegment sales			65		3	%	65		2	%
Aeronautics Systems sales	Aeronautics Systems sales	2,537		100	%	2,725		100	%	7,774		100	%	8,628		100	%	Aeronautics Systems sales			2,515		100	%	2,703		100	%
Defense Systems	Defense Systems																	Defense Systems
U.S. government(1)	U.S. government(1)	820		62	%	877		62	%	2,369		61	%	2,749		63	%	U.S. government(1)			803		59	%	775		60	%
International(2)	International(2)	312		23	%	316		22	%	933		24	%	1,002		23	%	International(2)			388		28	%	293		23	%
Other customers	Other customers	19		1	%	10		1	%	53		1	%	61		1	%	Other customers			16		1	%	16		1	%
Intersegment sales	Intersegment sales	194		14	%	206		15	%	567		14	%	586		13	%	Intersegment sales			169		12	%	199		16	%
Defense Systems sales	Defense Systems sales	1,345		100	%	1,409		100	%	3,922		100	%	4,398		100	%	Defense Systems sales			1,376		100	%	1,283		100	%
Mission Systems	Mission Systems																	Mission Systems
U.S. government(1)	U.S. government(1)	1,729		71	%	1,756		72	%	5,325		72	%	5,491		71	%	U.S. government(1)			1,935		75	%	1,794		72	%
International(2)	International(2)	452		18	%	417		17	%	1,300		17	%	1,338		18	%	International(2)			376		15	%	433		17	%
Other customers	Other customers	25		1	%	19		1	%	89		1	%	49		1	%	Other customers			15		1	%	24		1	%
Intersegment sales	Intersegment sales	250		10	%	244		10	%	755		10	%	735		10	%	Intersegment sales			237		9	%	246		10	%
Mission Systems sales	Mission Systems sales	2,456		100	%	2,436		100	%	7,469		100	%	7,613		100	%	Mission Systems sales			2,563		100	%	2,497		100	%
Space Systems	Space Systems																	Space Systems
U.S. government(1)	U.S. government(1)	2,967		94	%	2,507		94	%	8,473		94	%	7,401		93	%	U.S. government(1)			3,166		95	%	2,708		94	%
International(2)	International(2)	105		3	%	92		3	%	261		3	%	301		4	%	International(2)			71		2	%	72		3	%
Other customers	Other customers	63		2	%	49		2	%	173		2	%	145		2	%	Other customers			81		2	%	44		2	%
Intersegment sales	Intersegment sales	28		1	%	33		1	%	90		1	%	103		1	%	Intersegment sales			32		1	%	31		1	%
Space Systems sales	Space Systems sales	3,163		100	%	2,681		100	%	8,997		100	%	7,950		100	%	Space Systems sales			3,350		100	%	2,855		100	%
Total	Total																	Total
U.S. government(1)	U.S. government(1)	7,654		86	%	7,452		85	%	22,731		86	%	23,007		85	%	U.S. government(1)			8,012		86	%	7,569		86	%
International(2)	International(2)	1,210		13	%	1,185		14	%	3,506		13	%	3,751		14	%	International(2)			1,166		13	%	1,141		13	%
Other customers	Other customers	107		1	%	83		1	%	332		1	%	270		1	%	Other customers			123		1	%	87		1	%
Total Sales	Total Sales	$	8,971	100	%	$	8,720	100	%	$	26,569	100	%	$	27,028	100	%	Total Sales			$	9,301	100	%	$	8,797	100	%

(1) Sales to the U.S. government include sales from contracts for which we are the prime contractor, as well as those for which we are a subcontractor and the ultimate customer is the U.S. government. Each of the company’s segments derives substantial revenue from the U.S. government.

(2) International sales include sales from contracts for which we are the prime contractor, as well as those for which we are a subcontractor and the ultimate customer is an international customer. These sales include foreign military sales contracted through the U.S. government.

(3) Percentages calculated based on total segment sales.

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Sales by Contract Type	Sales by Contract Type	Three Months Ended September 30								Nine Months Ended September 30								Sales by Contract Type	Three Months Ended March 31
		2022				2021				2022				2021						2023			2022
$ in millions	$ in millions	$		%(1)		$		%(1)		$		%(1)		$		%(1)		$ in millions			$		%(1)		$		%(1)
Aeronautics Systems	Aeronautics Systems																	Aeronautics Systems
Cost-type	Cost-type	$	1,185	48	%	$	1,358	51	%	$	3,678	48	%	$	4,110	48	%	Cost-type			$	1,231	50	%	$	1,276	48	%
Fixed-price	Fixed-price	1,294		52	%	1,319		49	%	3,915		52	%	4,381		52	%	Fixed-price			1,219		50	%	1,362		52	%
Intersegment sales	Intersegment sales	58				48				181				137				Intersegment sales			65				65
Aeronautics Systems sales	Aeronautics Systems sales	2,537				2,725				7,774				8,628				Aeronautics Systems sales			2,515				2,703
Defense Systems	Defense Systems																	Defense Systems
Cost-type	Cost-type	366		32	%	433		36	%	1,075		32	%	1,376		36	%	Cost-type			423		35	%	336		31	%
Fixed-price	Fixed-price	785		68	%	770		64	%	2,280		68	%	2,436		64	%	Fixed-price			784		65	%	748		69	%
Intersegment sales	Intersegment sales	194				206				567				586				Intersegment sales			169				199
Defense Systems sales	Defense Systems sales	1,345				1,409				3,922				4,398				Defense Systems sales			1,376				1,283
Mission Systems	Mission Systems																	Mission Systems
Cost-type	Cost-type	881		40	%	746		34	%	2,591		39	%	2,419		35	%	Cost-type			961		41	%	835		37	%
Fixed-price	Fixed-price	1,325		60	%	1,446		66	%	4,123		61	%	4,459		65	%	Fixed-price			1,365		59	%	1,416		63	%
Intersegment sales	Intersegment sales	250				244				755				735				Intersegment sales			237				246
Mission Systems sales	Mission Systems sales	2,456				2,436				7,469				7,613				Mission Systems sales			2,563				2,497
Space Systems	Space Systems																	Space Systems
Cost-type	Cost-type	2,192		70	%	1,931		73	%	6,271		70	%	5,800		74	%	Cost-type			2,446		74	%	1,983		70	%
Fixed-price	Fixed-price	943		30	%	717		27	%	2,636		30	%	2,047		26	%	Fixed-price			872		26	%	841		30	%
Intersegment sales	Intersegment sales	28				33				90				103				Intersegment sales			32				31
Space Systems sales	Space Systems sales	3,163				2,681				8,997				7,950				Space Systems sales			3,350				2,855
Total	Total																	Total
Cost-type	Cost-type	4,624		52	%	4,468		51	%	13,615		51	%	13,705		51	%	Cost-type			5,061		54	%	4,430		50	%
Fixed-price	Fixed-price	4,347		48	%	4,252		49	%	12,954		49	%	13,323		49	%	Fixed-price			4,240		46	%	4,367		50	%
Total Sales	Total Sales	$	8,971			$	8,720			$	26,569			$	27,028			Total Sales			$	9,301			$	8,797

(1)Percentages calculated based on external customer sales.

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NORTHROP GRUMMAN CORPORATION


Sales by Geographic Region	Sales by Geographic Region	Three Months Ended September 30								Nine Months Ended September 30								Sales by Geographic Region	Three Months Ended March 31
		2022				2021				2022				2021						2023	2022
$ in millions	$ in millions	$		%(2)		$		%(2)		$		%(2)		$		%(2)		$ in millions			$		%(2)		$		%(2)
Aeronautics Systems	Aeronautics Systems																	Aeronautics Systems
United States	United States	$	2,138	85	%	$	2,317	87	%	$	6,581	87	%	$	7,381	86	%	United States			$	2,119	87	%	$	2,295	87	%
Asia/Pacific	Asia/Pacific	165		7	%	239		9	%	560		7	%	722		9	%	Asia/Pacific			147		6	%	190		7	%
Europe	Europe	163		7	%	108		4	%	413		5	%	335		4	%	Europe			174		7	%	137		5	%
All other(1)	All other(1)	13		1	%	13		—	%	39		1	%	53		1	%	All other(1)			10		—	%	16		1	%
Intersegment sales	Intersegment sales	58				48				181				137				Intersegment sales			65				65
Aeronautics Systems sales	Aeronautics Systems sales	2,537				2,725				7,774				8,628				Aeronautics Systems sales			2,515				2,703
Defense Systems	Defense Systems																	Defense Systems
United States	United States	839		72	%	887		74	%	2,422		72	%	2,810		74	%	United States			819		67	%	791		73	%
Asia/Pacific	Asia/Pacific	112		10	%	107		9	%	340		10	%	336		9	%	Asia/Pacific			117		10	%	105		10	%
Europe	Europe	101		9	%	78		6	%	297		9	%	233		6	%	Europe			128		11	%	101		9	%
All other(1)	All other(1)	99		9	%	131		11	%	296		9	%	433		11	%	All other(1)			143		12	%	87		8	%
Intersegment sales	Intersegment sales	194				206				567				586				Intersegment sales			169				199
Defense Systems sales	Defense Systems sales	1,345				1,409				3,922				4,398				Defense Systems sales			1,376				1,283
Mission Systems	Mission Systems																	Mission Systems
United States	United States	1,754		79	%	1,775		81	%	5,414		81	%	5,540		81	%	United States			1,950		83	%	1,818		81	%
Asia/Pacific	Asia/Pacific	159		7	%	114		5	%	435		6	%	372		5	%	Asia/Pacific			92		4	%	139		6	%
Europe	Europe	210		10	%	233		11	%	654		10	%	744		11	%	Europe			200		9	%	225		10	%
All other(1)	All other(1)	83		4	%	70		3	%	211		3	%	222		3	%	All other(1)			84		4	%	69		3	%
Intersegment sales	Intersegment sales	250				244				755				735				Intersegment sales			237				246
Mission Systems sales	Mission Systems sales	2,456				2,436				7,469				7,613				Mission Systems sales			2,563				2,497
Space Systems	Space Systems																	Space Systems
United States	United States	3,030		97	%	2,556		97	%	8,646		97	%	7,546		97	%	United States			3,247		98	%	2,752		98	%
Asia/Pacific	Asia/Pacific	33		1	%	10		—	%	86		1	%	39		—	%	Asia/Pacific			20		1	%	29		1	%
Europe	Europe	69		2	%	79		3	%	165		2	%	256		3	%	Europe			45		1	%	40		1	%
All other(1)	All other(1)	3		—	%	3		—	%	10		—	%	6		—	%	All other(1)			6		—	%	3		—	%
Intersegment sales	Intersegment sales	28				33				90				103				Intersegment sales			32				31
Space Systems sales	Space Systems sales	3,163				2,681				8,997				7,950				Space Systems sales			3,350				2,855
Total	Total																	Total
United States	United States	7,761		87	%	7,535		87	%	23,063		87	%	23,277		86	%	United States			8,135		87	%	7,656		87	%
Asia/Pacific	Asia/Pacific	469		5	%	470		5	%	1,421		5	%	1,469		5	%	Asia/Pacific			376		4	%	463		5	%
Europe	Europe	543		6	%	498		6	%	1,529		6	%	1,568		6	%	Europe			547		6	%	503		6	%
All other(1)	All other(1)	198		2	%	217		2	%	556		2	%	714		3	%	All other(1)			243		3	%	175		2	%
Total Sales	Total Sales	$	8,971			$	8,720			$	26,569			$	27,028			Total Sales			$	9,301			$	8,797

(1)All other is principally comprised of the Middle East.

(2)Percentages calculated based on external customer sales.

10. SUBSEQUENT EVENT

In April 2023, the company reached an agreement to sell its minority investment in an international business. The transaction, which is subject to final government approvals and closing conditions, is expected to be completed later this year. We currently expect to recognize a pre-tax gain of approximately $100 million when the transaction closes.

~~-18-~~

-16-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Northrop Grumman Corporation

Falls Church, Virginia

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of ~~September 30, 2022,~~March 31, 2023, and the related condensed consolidated statements of earnings and comprehensive income, cash flows, and changes in shareholders’ equity for the three-month ~~and nine-month~~ periods ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, and of cash flows for the nine-month periods ended September 30, 2022 and 2021,~~ and the related notes (collectively referred to as the “interim financial information”). Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of December 31, ~~2021,~~2022, and the related consolidated statements of earnings and comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January ~~26, 2022,~~25, 2023, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, ~~2021,~~2022, is fairly stated, in all material respects, in relation to the audited consolidated statement of financial position from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


/s/			Deloitte & Touche LLP
			McLean, Virginia
			~~October~~April 26, ~~2022~~2023

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global aerospace and defense technology company. We deliver a broad range of products, services and solutions to United States (U.S.) and international customers, and principally to the U.S Department of Defense (DoD) and intelligence community. Our broad portfolio is aligned to support national security priorities and our solutions equip our customers with capabilities they need to connect, protect and advance humanity.

The company is a leading provider of space systems, advanced aircraft, missile defense, advanced weapons and long-range fires capabilities, mission systems, networking and communications, strategic deterrence systems, and breakthrough technologies, such as artificial intelligence, advanced computing and cyber. We are focused on competing and winning programs that enable continued growth, performing on our commitments and affordably delivering capability our customers need. With the investments we've made in advanced technologies, combined with our talented workforce and digital transformation capabilities, Northrop Grumman is well positioned to meet our customers' needs today and in the future.

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 ~~2021~~2022 Annual Report on Form 10-K, which provides additional information on our business, ~~and~~ the environment in which we operate and our operating results.

~~Disposition~~Global Security Environment

The U.S. and its allies continue to face a global security environment of ITheightened tensions and ~~Mission Support Services Business~~instability, threats from state and non-state actors, including in particular major global powers, as well as terrorist organizations, increasing nuclear tensions, diverse regional security concerns and political instability. 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. The same is true for our suppliers and other business partners.

~~Effective January 30, 2021 (the “Divestiture date”), we completed the sale~~The conflict in Ukraine has increased global tensions and instability, highlighted threats and increased global demand, as well as further disrupted global supply chains and added costs. We have experienced a modest increase in demand for certain of our ITgoods and ~~mission support~~ services ~~business (the “IT services divestiture”) for $3.4 billion~~directly and indirectly related to the conflict in ~~cash~~the Ukraine. We also have experienced a slight disruption to some of our programs and ~~recorded~~supply chain, including unanticipated cost growth, as a ~~pre-tax gain of $2.0 billion. The IT and mission support services business was comprised~~result of the ~~majority of~~conflict in Ukraine and economic sanctions. However, we do not have sizable business dealings in Russia or Ukraine, and do not anticipate significant adverse impacts directly from the ~~former IS&S division of Defense Systems (excluding~~ongoing conflict.

More broadly, the ~~Vinnell Arabia business); select cyber, intelligence~~conflict in Ukraine and ~~missions support programs, which were part of the former CIMS division of Mission Systems;~~threats elsewhere have heightened tensions and highlighted security requirements globally, especially in Europe and the ~~former Space Technical Services business unit of Space Systems. Operating results include sales~~Pacific region, as well as the U.S. We have started to see, and ~~operating income~~expect to continue to see, increased demand for ~~the IT~~defense products and ~~mission support~~ services ~~business prior to the Divestiture date.~~from allies and partner nations, particularly in those areas. We are actively exploring both opportunities and risks.

~~COVID-19~~Global Health Environment

InSince at least March 2020, ~~the World Health Organization~~when it was first characterized ~~COVID-19~~ as a global pandemic, ~~and the President declared a national emergency concerning the~~ COVID-19 ~~outbreak. In the more than two years since then, the pandemic (including the first and subsequent variants of COVID-19)~~ has dramatically impacted and continues to impact the global health and economic environments, including millions of confirmed cases and deaths, business slowdowns or shutdowns, labor shortfalls, supply chain challenges, regulatory challenges, inflationary pressures and market volatility. We discussed in some detail in our Annual ~~Report~~Reports on Form 10-K for the fiscal years ended December 31, 2020, 2021, and ~~2021, as well as interim Form 10-Qs,~~2022, and subsequent SEC filings, the pandemic, its impacts and risks, and actions taken up to the time of each filing. In this Form 10-Q, we provide a further update.

~~At a macro level,~~In 2022, direct impacts of the ~~number of hospitalizations~~COVID-19 pandemic on our business generally declined, and ~~deaths,~~they have remained limited in the ~~U.S. in particular, have generally eased in 2022, as more people~~first quarter of 2023. While we cannot predict the future course of the pandemic or its consequences, we are ~~fully vaccinated, and communities have continued to open up. While it, of course, remains unclear whether that trajectory will continue, there is reason for optimism.~~ not currently assuming significant additional direct COVID-19 related impacts on our business.

The company continues to work to monitor and address the pandemic, ~~and related developments,~~ including ~~the~~its impact on our company, our employees, our customers, our suppliers and our communities. Our goals have been, and continue to be, to keep our employees safe, to lessen the potential adverse impacts, both health and economic, and to continue to position the company for long-term success. Like the communities in which we operate, our actions have varied, and will continue to vary, depending on the spread of COVID-19 and other illnesses, applicable government requirements, and the needs of our stakeholders.

During the third quarter of 2022, COVID-19 case rates and the health and economic impacts of the pandemic continued to fluctuate in different communities in the U.S. and globally, particularly with the spread of new variants. However, direct COVID-19-related impacts on our business continued generally to decline, including in the areas of employee absenteeism and leave-taking. While we cannot predict the future course of the pandemic, we are not currently assuming significant additional direct COVID-19-related impacts on our 2022 financial results.

During the third quarter of 2022, we continued to see a prolonged impact on the economy, our industry, and our company, with ongoing labor challenges, supply chain disruption, and inflation, among other impacts. Although we are working actively to address and mitigate these impacts, the broader macroeconomic environment, including, in particular, inflationary pressures and extended material lead times, continued adversely to affect the company’s third quarter results (including sales, net earnings and cash).

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For further information on the pandemic and the potential impact to the company of COVID-19, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources” below and “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K.

Global ~~Security and~~ Economic Environment

The U.S. and its allies continue to face a global security environment of heightened tensions and instability, threats from state and non-state actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional security concerns and political instability. The conflict in Ukraine has increased those tensions and instability, highlighted threats and increased demand, as well as further disrupted global supply chains and added costs. 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. The same is true for our suppliers and other business partners. We continue to experience an increased demand for certain of our goods and services directly related to the conflict in the Ukraine, in particular, but we have not seen a significant increase in those demands to date. We also continue to experience modest disruption to some of our programs and supply chain, including unanticipated cost growth,In part as a result of the ~~conflict, particularly with respect~~COVID-19 pandemic, the global economic environment has experienced, and continues to experience, extraordinary challenges, including high rates of inflation and inflationary pressures; widespread delays and disruptions in supply chains; workforce challenges, including labor shortages (especially in critical skill areas); and market volatility. These macroeconomic factors have contributed, and we expect will continue to contribute, to increased costs, delays and other performance challenges, as well as increased competing demands for limited resources to address such increased costs and other challenges, for our ~~Commercial Resupply Services contract. But we do not have sizable business dealings in Russia or Ukraine,~~company, our suppliers and ~~do not anticipate significant adverse impacts.~~ partners, and our customers.

We ~~are actively monitoring the situation and exploring both opportunities and risks, including measures~~continue to work hard to mitigate some of the ~~risk of future disruption~~challenges caused by the current macroeconomic environment on our business, including by taking steps to support our suppliers and ~~costs to~~small businesses and enhancing our ~~programs.~~

~~The global geopolitical~~workforce through extensive hiring, development and ~~economic environments continue to be impacted by uncertainty and stress, and global inflationary pressures. Geopolitical relationships have changed and are continuing to change. Global~~retention efforts. However, the broader macroeconomic environment, including inflationary pressures ~~are increasing costs, including~~and supply chain challenges, continued adversely to affect the company’s results for ~~various commodities and supplier products. Global economic growth is expected~~the quarter ended March 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 ~~remain in~~see this challenging macroeconomic environment continue adversely to impact the low single digits in 2022, reflecting, among other things, the continued impact of and uncertainty surrounding geopolitical tensions globally, financial market volatility, inflation and the COVID-19 pandemic. We expect still further impacts related to the conflict in Ukraine and economic sanctions imposed on Russia. The global economy, ~~may also be affected by the residual legal, regulatory~~our customers, our industry and ~~economic impacts of Britain’s exit from the European Union. Increased~~our company in 2023.

In addition, increased interest rates, raising the cost of borrowing for ~~the government,~~governments, could further 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.

U.S. Political, Budget and ~~Economic~~Regulatory Environment

On ~~March 15,~~December 23, 2022, the President signed ~~into law~~ the ~~Consolidated Appropriations~~National Defense Authorization Act (NDAA) for FY 2023, which supports approximately $858 billion in FY 2023 funding for national defense, $817 billion of which is for the DoD. In addition, the FY 2023 NDAA grants DoD discretionary authority under limited circumstances to provide extraordinary relief to contractors to address certain inflationary impacts, although the DoD has not yet exercised this authority.

On December 29, 2022, ~~which~~the President signed an Omnibus appropriations act for FY 2023 that provided ~~full-year funding through September 30, including $782~~$858 billion for national ~~defense. This represented nearly $30~~defense programs, approximately $45 billion more than the Administration initially requested for FY ~~2022,~~2023 and approximately 6$76 billion or 10 percent ~~or $42 billion~~ higher than itwhat was appropriated in FY ~~2021.~~2022. The Pentagon’s portion of the overall national defense budget ~~was $743~~for FY 2023 is $817 billion. InIt includes up to $1 billion for extraordinary relief in FY 2023.

On March ~~2022, Congress also approved $14~~9, 2023, the President proposed his budget for FY 2024 with $886 billion ~~in emergency aid to support security, economic, and humanitarian assistance~~ for ~~Ukraine and Central European partners. An additional $40~~national defense programs, which included $842 billion ~~in emergency~~for the DoD, an increase of 3 percent, or $25 billion, above the FY 2023 enacted levels. The request does not include supplemental ~~appropriations was approved by Congress in May 2022. Current and future~~defense spending ~~in connection~~associated with the conflict in Ukraine.

In addition to the U.S. national security budget detailed above, the U.S. has pledged over $100 billion in security assistance to address the ongoing conflict in Ukraine across FY 2022 and FY 2023, including approximately $50 billion in DoD spending. Assistance includes transfers of weapons systems from U.S. inventories, orders for production of additional weapons systems, both to backfill U.S. stockpiles and for Ukraine directly, and assistance from U.S. capabilities.

It is difficult to predict the specific course of future defense budgets. Current and future requirements related to the conflict in Ukraine, threats in the Pacific regions and other security priorities, as well as global inflation, the national debt, ~~and~~ the costs of the pandemic 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. ~~We expect the government, our customers and our industry will also continue to face challenges from the macroeconomic environment, including a tight labor market and supply chain disruptions.~~

~~The Administration’s current budget for FY 2023 proposes $813 billion for national defense programs,~~Current tensions within Congress and the ~~Pentagon’s portion of~~wider U.S. political environment may also impact defense budgets, issues related to the overall requested defense budget is $773 billion. On September 30, 2022, Congress enacted a continuing resolution (CR) to carry forward FY 2022 funding levels into FY 2023 while negotiations continue regarding full-year appropriations. The CR also included an additional $12 billion in aid to Ukraine, bringing total appropriations for Ukraine assistance to $39 billion. The CR runs through December 16, 2022,national debt, and ~~generally limits U.S.~~ government spending ~~to FY 2022 levels, which for DOD is around 4 percent lower than the amount requested for FY 2023.~~more broadly.

~~It is difficult to predict the specific course of future defense budgets. However, we~~We believe the ~~ongoing conflict in Ukraine, as well as actions in~~current global security environment highlights the ~~Pacific region, have highlighted some of the~~significant national security threats to our nation

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and our allies, and the need for strong deterrence and a robust defense ~~capability, as well as impacting our political and economic environment. More generally, the threat to U.S. national security remains very substantial and we~~capability. We believe ~~that~~ our capabilities, particularly in space, C4ISR, missile defense, battle management, ~~hypersonics, counter-hypersonics,~~advanced weapons, survivable aircraft and mission systems should help our customers in the U.S. and globally defend against current and future threats and, as a result, continue to allow for long-term profitable business growth.

~~The Bipartisan Budget Act of 2019 suspended the debt ceiling through July 31, 2021.~~ In ~~October 2021,~~January 2023, the statutory debt ~~limit~~ceiling was ~~increased by $480 billion~~reached, and ~~in December 2021, was further increased by $2.5 trillion, which is currently expected to allow~~ the Treasury Department reported that it began taking “extraordinary measures” to finance the government ~~into 2023.~~and avoid a breach of the debt ceiling. Issues related to the debt

~~During~~

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ceiling continue to be a subject of considerable debate. If the ~~third quarter~~existing debt ceiling is not raised, we may be required to continue to perform for some period of ~~2022,~~time on certain of our U.S. Government contracts even if the ~~Creating Helpful Incentives~~U.S. Government is unable to ~~Produce Semiconductors (CHIPS) Act~~make timely payments. An extended debt ceiling breach could negatively affect the availability and timing of ~~2022, which includes~~funding for our programs, including the timely payment of our billings, and could delay or otherwise impact purchasing decisions and/or program execution by the U.S. Government. We expect statutory action will be needed in 2023 to increase or suspend the debt ceiling.

More broadly, we have seen, and expect to continue to see, an ~~advanced manufacturing investment tax credit, among other provisions,~~accelerated pace of new rulemakings, new and expanded uses of existing authorities, changing legal rulings and landscapes, and aggressive enforcement actions. These changes and the ~~Inflation Reduction Act~~accelerated pace of ~~2022, which includes implementation of a new alternative minimum tax~~change, not only impose additional obligations and and a one percent excise tax on share repurchases, among other provisions, were signed into law. We expect the excise tax on share repurchases to impact us beginning in 2023; we are currently evaluating other provisions of the legislation to determine any potentially favorable and/or unfavorable impacts on the company.risk, but also create further uncertainty regarding our operating environment.

The political environment, federal budget, ~~and~~ debt ceiling and regulatory environment are expected to continue to be the subject of considerable debate, especially in light of the ongoing conflict in Ukraine and heightened global tensions, the inflationary environment ~~which~~and political tensions. The results of those debates could have material impacts on defense spending broadly and the company’s programs in particular.

~~For further information~~ We anticipate that the broader macroeconomic environment, with ongoing inflationary pressures, labor challenges, and supply chain disruption, among other considerations, will continue to play a significant role in the outcome of these debates and, in turn, on ~~the risks we face from the current political~~our industry and ~~economic environment, see “Risk Factors” in our 2021 Annual Report on Form 10-K.~~company.

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 IT services divestiture. 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 providing an understanding of our ongoing business and future sales trends by presenting the company’s sales before the impact of divestiture activity.

Transaction-adjusted net earnings and transaction-adjusted earnings per share (transaction-adjusted EPS) exclude 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. They also exclude the impact of mark-to-market pension and OPB (“MTM”) benefit/(expense) and related tax impacts, which are generally only recognized during the fourth quarter. 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 divestiture activity and pension and OPB actuarial gains and losses. These measures are also consistent with how management views the underlying performance of the business as the impact of the IT services divestiture and MTM accounting are 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.

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Selected financial highlights are presented in the table below:


		Three Months Ended September 30						%		Nine Months Ended September 30						%			Three Months Ended March 31				%
$ in millions, except per share amounts	$ in millions, except per share amounts	2022			2021			Change		2022			2021			Change		$ in millions, except per share amounts		2023			2022			Change
Sales	Sales	$	8,971		$	8,720		3	%	$	26,569		$	27,028		(2)	%	Sales		$	9,301		$	8,797		6	%
Operating costs and expenses	Operating costs and expenses	8,127			7,677			6	%	23,874			24,099			(1)	%	Operating costs and expenses		8,354			7,900			6	%
Operating costs and expenses as a % of sales	Operating costs and expenses as a % of sales	90.6		%	88.0		%			89.9		%	89.2		%			Operating costs and expenses as a % of sales		89.8		%	89.8		%
Gain on sale of business		—			—			NM		—			1,980			NM

Operating income	Operating income	844			1,043			(19)	%	2,695			4,909			(45)	%	Operating income		947			897			6	%
Operating margin rate	Operating margin rate	9.4		%	12.0		%			10.1		%	18.2		%			Operating margin rate		10.2		%	10.2		%
Federal and foreign income tax expense	Federal and foreign income tax expense	175			212			(17)	%	568			1,298			(56)	%	Federal and foreign income tax expense		156			189			(17)	%
Effective income tax rate	Effective income tax rate	16.1		%	16.6		%			16.8		%	23.2		%			Effective income tax rate		15.6		%	16.5		%
Net earnings	Net earnings	915			1,063			(14)	%	2,816			4,295			(34)	%	Net earnings		842			955			(12)	%
Diluted earnings per share	Diluted earnings per share	$	5.89		$	6.63		(11)	%	$	18.06		$	26.55		(32)	%	Diluted earnings per share		$	5.50		$	6.10		(10)	%

Sales

The table below reconciles sales to organic sales for the nine months ended September 30, 2022 and 2021. Sales for the three months ended September 30, 2022 and 2021 were not impacted by the sale of the company's IT services business:

Nine Months Ended September 30
2022 2021
$ in millions Sales IT services sales Organic
sales Sales IT services sales Organic
sales Organic sales % change
Aeronautics Systems $ 7,774 $ — $ 7,774 $ 8,628 $ — $ 8,628 (10) %
Defense Systems 3,922 — 3,922 4,398 (106) 4,292 (9) %
Mission Systems 7,469 — 7,469 7,613 (42) 7,571 (1) %
Space Systems 8,997 — 8,997 7,950 (16) 7,934 13 %
Intersegment eliminations (1,593) — (1,593) (1,561) 2 (1,559)
Total $ 26,569 $ — $ 26,569 $ 27,028 $ (162) $ 26,866 (1) %

~~Current~~ ~~Quarter~~

~~Third~~First quarter ~~2022~~2023 sales increased ~~$251~~$504 million, or 36 percent, ~~, primarily~~ due to ~~18 percent growth~~higher sales at Space Systems, Defense Systems and Mission Systems, partially offset by lower sales at Aeronautics ~~Systems and Defense~~ Systems. ~~Third~~First quarter ~~2022~~2023 sales reflect continued strong ~~demand and improving trends in labor availability, partially offset by supply chain delays.~~

~~Year to Date~~

Year to date 2022 sales decreased $459 million, or 2 percent, due, in part, to a $162 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales decreased $297 million, or 1 percent, primarily due to lower sales at Aeronautics Systems and Defense Systems, partially offset by 13 percent growth at Space Systems.demand.

See “Segment Operating Results” below for further information by segment and “Product and Service Analysis” for product and service detail. See Note 9 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

~~Current Quarter~~

~~Third~~First quarter ~~2022~~2023 operating income ~~decreased $199~~increased $50 million, or 196 percent, ~~primarily~~ due to lower unallocated corporate expense and a ~~$116 million~~ reduction in the FAS/CAS operating adjustment, ~~and $55 million in higher unallocated corporate expense due to a $60 million benefit for insurance settlements recognized in the prior year.~~Third quarter 2022 operating margin rate declined to 9.4 percent primarily due to the lower FAS/CAS operating adjustment and higher unallocated corporate expense, as well as a lower segment operating margin rate.

Third quarter 2022 general and administrative (G&A) costs as a percentage of sales increased to 10.9 percent from 10.2 percent in the prior year period primarily due to an increase in investments for future business opportunities.

~~Year to date~~

Year to date 2022 operating income decreased $2.2 billion, or 45 percent, primarily due to a $2.0 billion pre-tax gain on sale and $192 million of unallocated corporate expenses recognized in the prior year associated with the IT services divestiture. Operating income also decreased due to a $250 million reduction in the FAS/CAS operating adjustment and $130 million ofpartially offset by lower segment operating income. ~~Year to date 2022~~First quarter 2023 operating margin rate ~~declined to 10.1~~of 10.2 percent ~~largely due~~was comparable to the prior year ~~gain on sale of the IT services business and the lower FAS/CAS operating adjustment.~~period.

~~Year to date 2022~~First quarter 2023 G&A costs as a percentage of sales ~~increased to 11.1~~of 11.2 percent ~~from 10.3 percent in~~was comparable with the prior year period ~~primarily due to an increase in~~and reflects continued investments for future business opportunities.

See “Segment Operating Results” below for further information by segment. For information regarding product and service operating costs and expenses, see “Product and Service Analysis” below.

~~Federal and Foreign Income Taxes~~

~~Current Quarter~~

The third quarter 2022 ETR decreased to 16.1 percent from 16.6 percent in the prior year period principally due to higher benefits from foreign-derived intangible income. See Note 3 to the financial statements for additional information.

~~Year to Date~~

The year to date 2022 ETR decreased to 16.8 percent from 23.2 percent in the prior year period. The year to date 2021 ETR was impacted by additional federal income taxes resulting from the IT services divestiture, as well as a change in tax revenue recognition on certain long-term contracts, which increased taxable income in years prior to the 2017 Tax Cuts and Jobs Act at a rate above the current statutory rate. See Note 3 to the financial statements for additional information.

~~Net Earnings~~

~~The table below reconciles net earnings to transaction-adjusted net earnings:~~

Three Months Ended September 30 % Nine Months Ended September 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Net earnings $ 915 $ 1,063 (14) % $ 2,816 $ 4,295 (34) %
Gain on sale of business — — NM — (1,980) NM
State tax impact1
— — NM — 160 NM
Transaction costs — — NM — 32 NM
Make-whole premium — — NM — 54 NM
Federal tax impact of items above2
— — NM — 614 NM
Transaction adjustment, net of tax $ — $ — NM $ — $ (1,120) NM
Transaction-adjusted net earnings $ 915 $ 1,063 (14) % $ 2,816 $ 3,175 (11) %

~~(1)The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.~~

~~(2)~~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.

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~~Current Quarter~~Federal and Foreign Income Taxes

~~Third~~The first quarter ~~2022~~2023 ETR decreased to 15.6 percent from 16.5 percent principally due to higher current year ETR benefits associated with research credits and FDII deductions as well as favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax benefits. See Note 3 to the financial statements for additional information.

Net Earnings

First quarter 2023 net earnings decreased ~~$148~~$113 million, or ~~14 percent, primarily due to the lower operating income described above, partially offset by a lower effective tax rate.~~

~~Year to date 2022 net earnings decreased $1.5 billion, or 34~~12 percent, primarily due to a ~~$1.1 billion after-tax decline associated with~~$244 million reduction in the ~~IT services divestiture. Transaction-adjusted net earnings decreased $359 million, or 11 percent, primarily due to the lower~~non-operating FAS pension benefit, partially offset by higher operating income, ~~described above and $108~~a $34 million ~~of lower~~increase in returns on marketable securities related to our non-qualified benefit plans, and ~~other non-operating assets, partially offset by~~ a lower effective tax rate.

Diluted Earnings Per Share

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

Three Months Ended September 30 % Nine Months Ended September 30 %
2022 2021 Change 2022 2021 Change
Diluted EPS $ 5.89 $ 6.63 (11) % $ 18.06 $ 26.55 (32) %
Gain on sale of business per share — — NM — (12.24) NM
State tax impact per share1
— — NM — 0.99 NM
Transaction costs per share — — NM — 0.20 NM
Make-whole premium per share — — NM — 0.33 NM
Federal tax impact of line items above per share2
— — NM — 3.79 NM
Transaction adjustment per share, net of tax $ — $ — NM $ — $ (6.93) NM
Transaction-adjusted EPS $ 5.89 $ 6.63 (11) % $ 18.06 $ 19.62 (8) %

~~(1)The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.~~

~~Current Quarter~~

~~Third~~First quarter ~~2022~~2023 diluted earnings per share decreased 1110 percent, reflecting ~~a 14 percent decrease in~~lower net earnings and a ~~3 percent reduction in weighted-average diluted shares outstanding.~~

~~Year to Date~~

Year to date 2022 diluted earnings per share decreased 32 percent, principally due to a $6.93 after-tax decrease associated with the IT services divestiture. Transaction-adjusted earnings per share decreased $1.56, or 8 percent, reflecting an 11 percent decrease in transaction-adjusted net earnings and a 42 percent reduction in weighted-average diluted shares outstanding.

SEGMENT OPERATING RESULTS

Basis of Presentation

The company is aligned in four operating sectors, which also comprise our reportable segments: Aeronautics Systems, Defense Systems, Mission Systems and Space Systems. We present our sectors in the following business areas, which are reported in a manner reflecting core capabilities:

Aeronautics Systems

Defense Systems

Mission Systems

Space Systems

Autonomous Systems

Battle Management & Missile Systems

Airborne Multifunction Sensors

Launch & Strategic Missiles

Manned Aircraft

Mission Readiness

Maritime/Land Systems & Sensors

Space

Navigation, Targeting & Survivability

Networked Information Solutions

This section discusses segment sales, operating income and operating margin rates. In evaluating segment operating performance, we look primarily at changes in sales and operating income. Where applicable, significant fluctuations in operating performance attributable to individual contracts or programs, or changes in a specific cost element

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across multiple contracts, are described in our analysis. Based on this approach and the nature of our operations, the discussion of results of operations below first focuses on our four segments before distinguishing between products and services. Changes in sales are generally described in terms of volume, while changes in margin rates are generally described in terms of performance and/or contract mix. For purposes of this discussion, volume generally refers to increases or decreases in sales or cost from production/service activity levels and performance generally refers to non-volume related changes in profitability. 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

Segment operating income, as reconciled in the table below, and segment operating margin rate (segment operating income divided by sales) are non-GAAP measures that reflect the combined operating income of our four segments less the operating income associated with intersegment sales. Segment operating income includes pension expense allocated to our sectors under FAR and CAS and excludes FAS pension service expense and unallocated corporate items (certain corporate-level expenses, which are not considered allowable or allocable under applicable FAR and CAS requirements, and costs not considered part of management’s evaluation of segment operating performance). 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 defined and calculated by other companies in the same manner and should not be considered in isolation or as alternatives to operating results presented in accordance with GAAP.


		Three Months Ended September 30						%		Nine Months Ended September 30						%			Three Months Ended March 31				%
$ in millions	$ in millions	2022			2021			Change		2022			2021			Change		$ in millions		2023			2022			Change

Operating income	Operating income	$	844		$	1,043		(19)	%	$	2,695		$	4,909		(45)	%	Operating income		$	947		$	897		6	%
Operating margin rate																		Operating margin rate		10.2		%	10.2		%
Reconciliation to segment operating income:	Reconciliation to segment operating income:																	Reconciliation to segment operating income:
CAS pension expense	CAS pension expense	$	(37)		$	(165)		(78)	%	$	(124)		$	(409)		(70)	%	CAS pension expense		(38)			(46)			(17)	%
FAS pension service expense	FAS pension service expense	92			104			(12)	%	276			311			(11)	%	FAS pension service expense		59			92			(36)	%
FAS/CAS operating adjustment	FAS/CAS operating adjustment	55			(61)			(190)	%	152			(98)			(255)	%	FAS/CAS operating adjustment		21			46			(54)	%
Gain on sale of business		—			—			—	%	—			(1,980)			NM
IT services divestiture – unallowable state taxes and transaction costs		—			—			—	%	—			192			NM

Intangible asset amortization and PP&E step-up depreciation	Intangible asset amortization and PP&E step-up depreciation	60			62			(3)	%	181			191			(5)	%	Intangible asset amortization and PP&E step-up depreciation		30			60			(50)	%

Other unallocated corporate expense (income)		48			(9)			(633)	%	89			33			170	%
Unallocated corporate expense (income)		108			53			104	%	270			(1,564)			NM
Other unallocated corporate expense																		Other unallocated corporate expense		4			34			(88)	%
Unallocated corporate expense																		Unallocated corporate expense		34			94			(64)	%
Segment operating income	Segment operating income	$	1,007		$	1,035		(3)	%	$	3,117		$	3,247		(4)	%	Segment operating income		$	1,002		$	1,037		(3)	%
Segment operating margin rate	Segment operating margin rate	11.2		%	11.9		%			11.7		%	12.0		%			Segment operating margin rate		10.8		%	11.8		%

~~Current Quarter~~

~~Third~~First quarter ~~2022~~2023 segment operating income decreased ~~$28~~$35 million, or 3 percent, ~~due~~and includes an approximately $50 million reduction related to ~~a lower segment operating margin rate, partially offset by~~ higher ~~sales. Third quarter 2022 segment operating margin rate decreased to 11.2 percent from 11.9 percent principally due to lower net EAC adjustments due, in part, to inflationary pressures.~~

~~Year to Date~~

Year to date 2022 segment operating income decreased $130 million, or 4 percent. Year to date 2021 segment operating income included $20 million from the IT services business, as well as a benefit of approximately $100 million due to the impact of lower overhead ratesprojected CAS pension costs on the company’s fixed price contracts. ~~Year to date 2022 segment~~Segment operating margin rate decreased to ~~11.7~~10.8 percent from ~~12.0~~11.8 percent ~~principally due to~~and reflects lower ~~net EAC adjustments, including the prior year overhead~~operating margin rates at Aeronautics Systems, Mission Systems and Defense Systems, partially offset by a higher operating margin rate ~~benefit to fixed price contracts noted above.~~at Space Systems.

FAS/CAS Operating Adjustment

~~Third~~First quarter ~~2022 and year to date 2022~~2023 FAS/CAS operating adjustment decreased primarily due to lower ~~CAS~~FAS pension service expense resulting from ~~favorable plan asset returns in 2021 and~~ changes in certain ~~CAS~~ actuarial assumptions as of December 31, ~~2021. Third quarter 2021 CAS pension expense also included a $44 million benefit from updated demographic information.~~

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2022.

Unallocated Corporate Expense (Income)

~~Current Quarter~~

The ~~increase~~decrease in ~~third quarter 2022~~ unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation as well as a ~~$60 million benefit recognized~~reduction in ~~the prior year for insurance settlements related to shareholder litigation involving the former Orbital ATK.~~

~~Year to Date~~

~~The change in year to date 2022 unallocated~~unallowable corporate expense (income) is primarily due to the $2.0 billion pre-tax gain on sale and $192 million of unallowable state taxes and transaction costs recognized in the prior year associated with the IT services divestiture. The prior year also benefited from the $60 million of insurance settlements noted above.costs.

Net EAC Adjustments - We record changes in estimated contract earnings at completion (net EAC adjustments) using the cumulative catch-up method of accounting. Net EAC adjustments can have a significant effect on ~~reported sales and~~segment operating ~~income and~~income; the aggregate amounts are presented in the table below:


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended March 31
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions		2023		2022
Favorable EAC adjustments	Favorable EAC adjustments	$	306	$	273	$	980	$	930	Favorable EAC adjustments		$	326	$	357
Unfavorable EAC adjustments	Unfavorable EAC adjustments	(261)		(164)		(670)		(477)		Unfavorable EAC adjustments		(280)		(184)
Net EAC adjustments	Net EAC adjustments	$	45	$	109	$	310	$	453	Net EAC adjustments		$	46	$	173

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


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended March 31
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions		2023		2022
Aeronautics Systems	Aeronautics Systems	$	27	$	(2)	$	121	$	67	Aeronautics Systems		$	(6)	$	103
Defense Systems	Defense Systems	23		37		98		95		Defense Systems		27		25
Mission Systems	Mission Systems	14		43		100		192		Mission Systems		57		57
Space Systems	Space Systems	(13)		33		10		103		Space Systems		(32)		(8)
Eliminations	Eliminations	(6)		(2)		(19)		(4)		Eliminations		—		(4)
Net EAC adjustments	Net EAC adjustments	$	45	$	109	$	310	$	453	Net EAC adjustments		$	46	$	173

For purposes of the discussion in the remainder of this Segment Operating Results section, references to operating income and operating margin rate reflect segment operating income and segment operating margin rate, respectively.

AERONAUTICS SYSTEMS Three Months Ended September 30 % Nine Months Ended September 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Sales $ 2,537 $ 2,725 (7) % $ 7,774 $ 8,628 (10) %
Operating income 262 265 (1) % 827 873 (5) %
Operating margin rate 10.3 % 9.7 % 10.6 % 10.1 %

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AERONAUTICS SYSTEMS	Three Months Ended March 31				%
$ in millions		2023			2022			Change
Sales		$	2,515		$	2,703		(7)	%
Operating income		237			307			(23)	%
Operating margin rate		9.4		%	11.4		%

Sales

~~Current Quarter~~

~~Third~~First quarter ~~2022~~2023 sales decreased $188 million, or 7 percent, due to lower volume in both Manned Aircraft and Autonomous Systems, including ~~restricted programs,~~ E-2, F-35, F/A-18 and Global Hawk, as well as lower volume on the Joint Surveillance and Target Attack Radar System (JSTARS) program as it nears completion. These decreases were partially offset by higher volume on restricted programs.

Operating Income

First quarter 2023 operating income decreased $70 million, or 23 percent, due to a lower operating margin rate and lower sales. Operating margin rate decreased to 9.4 percent from 11.4 percent primarily due to lower net EAC adjustments. The prior year period includes a $67 million favorable EAC adjustment on the engineering, manufacturing and development (EMD) phase of the B-21 program.


DEFENSE SYSTEMS	Three Months Ended March 31				%
$ in millions		2023			2022			Change
Sales		$	1,376		$	1,283		7	%
Operating income		160			155			3	%
Operating margin rate		11.6		%	12.1		%

Sales

First quarter 2023 sales increased $93 million, or 7 percent, due to higher volume in both business areas. Battle Management & Missile Systems sales increased primarily due to higher volume on the Integrated Air and Missile Defense Battle Command System (IBCS) program and ramp-up on the 120mm Tank Training ammunition program. Mission Readiness sales increased primarily due to higher volume on an international training program, partially offset by wind-down of the JSTARS program.

Operating Income

First quarter 2023 operating income increased $5 million, or 3 percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 11.6 percent from 12.1 percent primarily due to lower net EAC adjustments at Battle Management & Missile Systems, partially offset by improved performance at Mission Readiness.


MISSION SYSTEMS	Three Months Ended March 31				%
$ in millions		2023			2022			Change
Sales		$	2,563		$	2,497		3	%
Operating income		360			385			(6)	%
Operating margin rate		14.0		%	15.4		%

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~~Year to Date~~Sales

~~Year to date 2022~~First quarter 2023 sales ~~decreased $854~~increased $66 million, or 103 percent, ~~due to lower~~and reflects higher volume in ~~both Manned Aircraft and Autonomous Systems,~~all four business areas, including ~~restricted programs, a $134 million decrease on E-2, a $125 million decrease on Global Hawk and lower volume on JSTARS as it nears completion.~~

~~Operating Income~~

~~Current Quarter~~

Third quarter 2022 operating income decreased $3 million, or 1 percent, due to lower sales, partially offset by a higher operating margin rate. Operating margin rate increased to 10.3 percent from 9.7 percent primarily due to higher net favorable EAC adjustments in Manned Aircraft. Prior year results included a $42 million unfavorable EAC adjustment on F-35.

~~Year to Date~~

Year to date 2022 operating income decreased $46 million, or 5 percent, due to lower sales, partially offset by a higher operating margin rate. Operating margin rate increased to 10.6 percent from 10.1 percent primarily due to a $38 million gain on a property sale and higher net favorable EAC adjustments. Higher net favorable EAC adjustments reflect a $67 million favorable EAC adjustment on the engineering, manufacturing and development phase of the B-21 program largely related to performance incentives, partially offset by lower net EAC adjustments associated with other restricted work. Prior year results included the $42 million unfavorable EAC adjustment on F-35 noted above.

DEFENSE SYSTEMS Three Months Ended September 30 % Nine Months Ended September 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Sales $ 1,345 $ 1,409 (5) % $ 3,922 $ 4,398 (11) %
Operating income 158 175 (10) % 481 529 (9) %
Operating margin rate 11.7 % 12.4 % 12.3 % 12.0 %

~~Sales~~

~~Current Quarter~~

Third quarter 2022 sales decreased $64 million, or 5 percent, primarily due to lower scope on an international training program, the completion of a Joint Services support program and wind down of the UKAWACS and JSTARS programs, partially offset by higher volume on the NATO Alliance Ground Surveillance In-Service Support (NATO AGS ISS) and advanced fuze programs.

~~Year to Date~~

Year to date 2022 sales decreased $476 million, or 11 percent, due, in part, to a $106 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales decreased $370 million, or 9 percent, principally due to a $155 million decrease from lower scope on an international training program, completion of a Joint Services support program, lower volume on the Advanced Anti-Radiation Guided Missile (AARGM) program and wind down of the UKAWACS program, partially offset by higher volume on NATO AGS ISS and advanced fuze programs.

~~Operating Income~~

~~Current Quarter~~

Third quarter 2022 operating income decreased $17 million, or 10 percent, primarily due to lower sales and a lower operating margin rate. Operating margin rate decreased to 11.7 percent from 12.4 percent primarily due to lower net favorable EAC adjustments at Battle Management and Missile Systems, partially offset by improved performance in the Mission Readiness business area.

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~~Year~~ ~~to Date~~

Year to date 2022 operating income decreased $48 million, or 9 percent, due, in part, to a $14 million reduction in operating income related to the IT services divestiture. Lower sales volume was partially offset by a higher operating margin rate, which increased to 12.3 percent from 12.0 percent primarily due to improved performance in the Mission Readiness business area.

MISSION SYSTEMS Three Months Ended September 30 % Nine Months Ended September 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Sales $ 2,456 $ 2,436 1 % $ 7,469 $ 7,613 (2) %
Operating income 368 372 (1) % 1,166 1,177 (1) %
Operating margin rate 15.0 % 15.3 % 15.6 % 15.5 %

~~Sales~~

~~Current Quarter~~

~~Third quarter 2022 sales increased $20 million, or 1 percent, primarily due to~~ higher restricted sales in the Networked Information Solutions business area as well as higher volume on the Surface Electronic Warfare Improvement Program (SEWIP) ~~volume.~~, marine systems programs and infrared countermeasure programs. These increases were partially offset by lower volume on ~~Navigation, Targeting~~the Ground/Air Task Oriented Radar (G/ATOR) program and ~~Survivability~~airborne radar programs, ~~and the Joint Counter Radio-Controlled Improvised Explosive Device Electronic Warfare (JCREW) program.~~

~~Year to Date~~

Year to date 2022 sales decreased $144 million, or 2 percent, due, in part, to a $42 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales decreased $102 million, or 1 percent, primarily due to lower volume on Navigation, Targeting and Survivability programs and the JCREW program. These decreases were partially offset by an increase in restricted sales in the Networked Information Solutions business area.including F-35.

Operating Income

~~Current Quarter~~

~~Third~~First quarter ~~2022~~2023 operating income decreased $4$25 million, or 16 percent, due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to ~~15.0~~14.0 percent from ~~15.3~~15.4 percent principally due to ~~lower net EAC adjustments, largely~~changes in ~~the Maritime/Land Systems & Sensors~~contract mix toward more cost-type content and ~~Navigation, Targeting & Survivability business areas, partially offset by improved performance on restricted programs at Networked Information Solutions.~~

~~Year to Date~~

~~Year to date 2022 operating income decreased $11 million, or 1 percent, due to lower sales, partially offset by~~ a ~~higher operating margin rate. Operating margin rate increased to 15.6 percent from 15.5 percent principally due to a $33 million benefit~~loss recognized in connection with ~~a contract-related legal matter, partially offset by the previously described overhead rate benefit to fixed price contracts in the prior year.~~an unconsolidated joint venture.


SPACE SYSTEMS	SPACE SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%		SPACE SYSTEMS	Three Months Ended March 31				%
$ in millions	$ in millions	2022			2021			Change		2022			2021			Change		$ in millions		2023			2022			Change
Sales	Sales	$	3,163		$	2,681		18	%	$	8,997		$	7,950		13	%	Sales		$	3,350		$	2,855		17	%
Operating income	Operating income	290			288			1	%	861			865			—	%	Operating income		313			261			20	%
Operating margin rate	Operating margin rate	9.2		%	10.7		%			9.6		%	10.9		%			Operating margin rate		9.3		%	9.1		%

Sales

~~Current Quarter~~

~~Third~~First quarter ~~2022~~2023 sales increased ~~$482~~$495 million, or 1817 percent, due to higher ~~sales~~volume in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a ~~$115~~$161 million increase on the Ground Based Strategic Deterrent (GBSD) program and ~~a $103 million increase~~higher volume on the Next Generation Interceptor (NGI) ~~program, as well as higher volume on the GEM63 program in support of Amazon’s Project Kuiper.~~and Ground-based Midcourse Defense Weapon Systems (GWS) programs. Sales in the Space business area ~~were driven by a $129 million increase~~increased primarily due to ~~ramp-up~~higher volume on restricted programs, the Next-Generation Overhead Persistent Infrared Polar (NextGen Polar) program and the Space Development Agency (SDA) Tranche 1 ~~Transport Layer and Tranche 1~~ Tracking Layer ~~programs awarded in 2022, as well as higher~~program. These increases were partially offset by lower volume ~~on restricted programs and the~~for Commercial Resupply Services (CRS) ~~program.~~

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Operating Income

~~Year to Date~~

~~Year to date 2022 sales~~First quarter 2023 operating income increased ~~$1.0 billion,~~$52 million, or ~~13 percent, and includes a $16 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales increased $1.1 billion, or 13~~20 percent, due to higher sales ~~in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $356 million increase on NGI~~ and a $327 million increase on GBSD. Sales in the Space business area were driven by a $208 million increase on the SDA Tranche 1 Transport Layer and Tranche 1 Tracking Layer programs awarded earlier this year, as well as higher ~~volume on restricted programs and CRS, partially offset by a $116 million decrease in sales for the James Webb Space Telescope after its successful launch in December 2021.~~

~~Operating Income~~

~~Current Quarter~~

~~Third quarter 2022 operating income was comparable to the prior year period and reflects higher sales and a lower~~ operating margin rate. Operating margin rate ~~decreased~~increased to ~~9.2~~9.3 percent from ~~10.7~~9.1 percent primarily due to a higher operating margin rate at Launch & Strategic Missiles, including the sale of a license to a customer, partially offset by lower net EAC adjustments ~~and higher volume on early-stage development programs, such as NGI and GBSD.~~

~~Year to Date~~

~~Year to date 2022 operating income was comparable to~~in the prior period and reflects higher sales and a lower operating margin rate. Operating margin rate decreased to 9.6 percent from 10.9 percent primarily due to lower net EAC adjustments and higher volume on early-stage development programs, such as NGI and GBSD. Prior year results include the previously described overhead rate benefit to fixed price contracts.Space business area.

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PRODUCT AND SERVICE ANALYSIS

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


		Three Months Ended September 30								Nine Months Ended September 30									Three Months Ended March 31
$ in millions	$ in millions	2022				2021				2022				2021				$ in millions		2023	2022
Segment Information:	Segment Information:	Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Segment Information:			Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses
Aeronautics Systems	Aeronautics Systems																	Aeronautics Systems
Product	Product	$	1,936	$	1,752	$	2,233	$	2,023	$	5,897	$	5,289	$	7,241	$	6,527	Product			$	1,907	$	1,740	$	2,045	$	1,804
Service	Service	542		471		444		393		1,695		1,501		1,250		1,104		Service			543		480		593		533
Intersegment eliminations	Intersegment eliminations	59		52		48		44		182		157		137		124		Intersegment eliminations			65		58		65		59
Total Aeronautics Systems	Total Aeronautics Systems	2,537		2,275		2,725		2,460		7,774		6,947		8,628		7,755		Total Aeronautics Systems			2,515		2,278		2,703		2,396
Defense Systems	Defense Systems																	Defense Systems
Product	Product	634		563		618		532		1,842		1,605		1,939		1,687		Product			678		598		610		527
Service	Service	517		452		585		523		1,513		1,334		1,873		1,664		Service			529		468		474		425
Intersegment eliminations	Intersegment eliminations	194		172		206		179		567		502		586		518		Intersegment eliminations			169		150		199		176
Total Defense Systems	Total Defense Systems	1,345		1,187		1,409		1,234		3,922		3,441		4,398		3,869		Total Defense Systems			1,376		1,216		1,283		1,128
Mission Systems	Mission Systems																	Mission Systems
Product	Product	1,711		1,475		1,766		1,498		5,221		4,457		5,300		4,506		Product			1,815		1,563		1,762		1,509
Service	Service	496		402		426		354		1,494		1,210		1,578		1,302		Service			511		441		489		396
Intersegment eliminations	Intersegment eliminations	249		211		244		212		754		636		735		628		Intersegment eliminations			237		199		246		207
Total Mission Systems	Total Mission Systems	2,456		2,088		2,436		2,064		7,469		6,303		7,613		6,436		Total Mission Systems			2,563		2,203		2,497		2,112
Space Systems	Space Systems																	Space Systems
Product	Product	2,698		2,453		2,228		1,991		7,639		6,898		6,580		5,865		Product			2,871		2,609		2,424		2,195
Service	Service	437		396		420		371		1,268		1,158		1,267		1,126		Service			447		400		400		371
Intersegment eliminations	Intersegment eliminations	28		24		33		31		90		80		103		94		Intersegment eliminations			32		28		31		28
Total Space Systems	Total Space Systems	3,163		2,873		2,681		2,393		8,997		8,136		7,950		7,085		Total Space Systems			3,350		3,037		2,855		2,594
Segment Totals	Segment Totals																	Segment Totals
Total Product	Total Product	$	6,979	$	6,243	$	6,845	$	6,044	$	20,599	$	18,249	$	21,060	$	18,585	Total Product			$	7,271	$	6,510	$	6,841	$	6,035
Total Service	Total Service	1,992		1,721		1,875		1,641		5,970		5,203		5,968		5,196		Total Service			2,030		1,789		1,956		1,725
Total Segment(1)	Total Segment(1)	$	8,971	$	7,964	$	8,720	$	7,685	$	26,569	$	23,452	$	27,028	$	23,781	Total Segment(1)			$	9,301	$	8,299	$	8,797	$	7,760

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

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Product Sales and Costs

~~Current Quarter~~

~~Third~~First quarter ~~2022~~2023 product sales increased ~~$134~~$430 million, or 26 percent, primarily due to an increase in product sales at Space Systems, partially offset by a decrease in product sales at Aeronautics Systems. The increase at Space Systems was driven by ramp-up on development programs, including GBSD and NGI, and ~~GBSD.~~higher volume on restricted programs, GWS, NextGen Polar and the SDA Tranche 1 Tracking Layer program. The decrease at Aeronautics Systems was ~~principally due to~~driven by lower volume on ~~restricted programs, as well as~~ the E-2, ~~program.~~F-35, and Global Hawk programs.

~~Third~~First quarter ~~2022~~2023 product costs increased ~~$199~~$475 million, or 38 percent, consistent with the higher product sales described above and reflect a lower ~~product~~operating margin ~~rates at Space Systems, Mission Systems and Defense Systems~~rate principally due to lower net EAC ~~adjustments.~~

~~Year to Date~~

~~Year to date 2022 product sales decreased $461 million, or 2 percent, primarily due to a decrease in product sales at~~adjustments on Aeronautics Systems partially offset by an increase in product sales at Space Systems. The decrease at Aeronautics Systems was principally due to lower volume on restricted programs, as well as the E-2 program. The increase at Space Systems is principally related to ramp-up on development programs including NGI and GBSD, as well as higher volume on the SDA Tranche 1 Transport Layer and Tranche 1 Tracking Layerproduction programs.

~~Year to date 2022 product costs decreased $336 million, or 2 percent, consistent with the lower product sales.~~

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Service Sales and Costs

~~Current Quarter~~

~~Third~~First quarter ~~2022~~2023 service sales increased ~~$117~~$74 million, or 64 percent, primarily due to an increase in service sales at ~~Aeronautics~~Defense Systems ~~principally on restricted programs,~~ and ~~Mission~~Space Systems, partially offset by a decrease in service sales at ~~Defense~~Aeronautics Systems. The ~~decrease~~increase at Defense Systems was driven by ~~lower scope on an international training program, the completion of a Joint Services support program and wind down of the UKAWACS program, partially offset by~~ higher ~~volume on the NATO AGS ISS programs.~~

Third quarter 2022 service costs increased $80 million, or 5 percent, consistent with the higher service sales described above and reflects higher service margin rates at Mission Systems, Defense Systems and Aeronautics Systems.

~~Year to Date~~

~~Year to date 2022 service sales were comparable with the prior year period. Higher service sales at Aeronautics Systems were offset by the IT services divestiture as well as lower~~ volume on an international training program. The increase at Space Systems was principally due to higher volume on the Specialized Warfighter Development Contract (SWDC) program, restricted programs and ~~completion of a Joint Services support~~the ICBM Ground Subsystem Support program. The decrease at Aeronautics Systems was driven by lower volume on the JSTARS program ~~at Defense Systems. Sales from the divested IT services business, which were largely included in service sales, were $162 million in the prior year period.~~as it nears completion.

~~Year to date 2022~~First quarter 2023 service costs ~~were comparable~~increased $64 million, or 4 percent, consistent with the ~~prior year period, consistent with the~~higher service sales described above.

BACKLOG

Backlog consisted of the following as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


		September 30, 2022						December 31, 2021					March 31, 2023						December 31, 2022
$ in millions	$ in millions	Funded		Unfunded		Total Backlog		Total Backlog		% Change in 2022		$ in millions	Funded		Unfunded		Total Backlog		Total Backlog		% Change in 2023
Aeronautics Systems	Aeronautics Systems	$	8,127	$	10,513	$	18,640	$	18,277	2	%	Aeronautics Systems	$	9,904	$	8,658	$	18,562	$	19,397	(4)	%
Defense Systems	Defense Systems	5,908		789		6,697		6,349		5	%	Defense Systems	5,933		1,431		7,364		7,515		(2)	%
Mission Systems	Mission Systems	10,192		4,554		14,746		14,306		3	%	Mission Systems	11,157		3,440		14,597		13,875		5	%
Space Systems	Space Systems	8,407		31,159		39,566		37,114		7	%	Space Systems	12,302		24,648		36,950		37,956		(3)	%
Total backlog	Total backlog	$	32,634	$	47,015	$	79,649	$	76,046	5	%	Total backlog	$	39,296	$	38,177	$	77,473	$	78,743	(2)	%

New Awards

~~Third~~First quarter ~~and year to date 2022~~2023 net awards totaled ~~$8.7~~$8.0 billion ~~and $30.2 billion, respectively,~~ and backlog totaled ~~$79.6~~$77.5 billion. Significant ~~third~~first quarter new awards include ~~$2.8~~$3.2 billion for restricted programs ~~(at Space Systems,~~(primarily at Mission Systems, Aeronautics Systems, and ~~Aeronautics~~Space Systems), ~~$1.3~~$0.3 billion for ~~Ground-based Midcourse~~ammunition programs at Defense ~~(GMD) and $0.8~~Systems, $0.3 billion for ~~SDA Tranche 1 Tracking Layer.~~the Multi-Role Electronically Scanned Array (MESA) program and $0.2 billion for SEWIP.

LIQUIDITY AND CAPITAL RESOURCES

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

At ~~September 30, 2022,~~March 31, 2023, we had ~~$1.7~~$2.5 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. ~~In August 2022, the~~The company ~~entered into~~has a ~~new~~ five-year senior unsecured credit facility in an aggregate principal amount of $2.5 ~~billion. The 2022 Credit Agreement replaced the company’s prior five-year, $2.0~~ billion, ~~revolving credit facility entered into~~and in ~~August 2018. In~~ April ~~2022,~~2023, we renewed our one-year $500 million uncommitted

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~~renewed our one-year $500 million uncommitted~~ credit facility. At ~~September 30, 2022,~~March 31, 2023, there were no borrowings outstanding under these credit facilities.

~~Effective January 30, 2021,~~ In February 2023, we ~~completed the IT services divestiture for $3.4 billion cash. Proceeds were primarily used in the first quarter of 2021 for a~~issued $2.0 billion ~~accelerated share repurchase and~~of unsecured senior notes. We intend to ~~fund redemption of $1.5 billion of the company’s 2.55 percent unsecured~~use those proceeds for general corporate purposes, which may include debt repayment (including our 3.25% senior notes due ~~October 2022.~~in 2023), share repurchases and working capital.

COVID-19 and the CARES Act

~~The~~Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) established a program with provisions to allow U.S. companies to defer the employer’s portion of social security taxes between March 27, 2020 and December 31, 2020 and pay such taxes in two installments in 2021 and 2022. Our first installment of deferred social security taxes of $200 million was paid in the fourth quarter of 2021 and the second installment of $200 million is due in the fourth quarter of 2022. Under Section 3610, the CARES Act also authorized the government to reimburse qualifying contractors for certain costs of providing paid leave to employees as a result of COVID-19. The company has sought and may continue to seek recovery for certain COVID-19-related costs under Section 3610 of the CARES Act and through our contract provisions, though it is unclear what funds will be available and how much we will be able to recover. In addition, during 2020, the ~~U.S. Department of Defense (DoD) has, to date, taken steps to increase~~DoD increased the rate for certain progress payments from 80 percent to 90 percent for costs incurred and work performed on relevant ~~contracts; it is unclear what steps~~contracts. Recently, the DoD ~~will continue~~has indicated it may revert to ~~take.~~the 80 percent progress payment rate on prospectively awarded contracts. We expect this reversion may occur during 2023, but that it would not have a material impact on our 2023 cash from operations.

Internal Revenue Code (IRC) Section 174

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) ~~eliminates~~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. ~~We have made~~Our 2022 cash from operations were reduced by approximately $900 million for federal tax payments ~~of approximately $670 million~~we made related to Section ~~174 during~~174. In the ~~first nine months of 2022 and expect our full year tax payments to approximate $1.0 billion.~~future, Congress ~~is considering, but has not passed,~~may consider legislation that would defer the amortization requirement to later ~~years. If legislation is passed during~~years, possibly with retroactive effect. In the ~~fourth quarter of 2022 and made effective retroactively to January 1, 2022,~~meantime, we expect to ~~immediately file for a refund of taxes paid during 2022, but do not expect we would receive that refund until 2023. As such, we expect the impact of~~continue to make additional federal tax payments based on the current Section 174 ~~legislation on~~tax law, which we estimate will reduce our ~~2022~~2023 cash from operations ~~to range between $670 million and $1.0 billion depending~~by approximately $720 million. The impact of Section 174 on ~~if and when Congress passes additional legislation, whether such legislation is made effective retroactively,~~our cash from operations depends on the amount of research and development expenditures incurred ~~and paid~~ by the company ~~during 2022,~~ and whether the IRS issues guidance on the provision which differs from our current ~~interpretation.~~interpretation, among other things.

Cash Flow Measures

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

Operating Cash Flow

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


		Nine Months Ended September 30			%					Three Months Ended March 31	%
$ in millions	$ in millions		2022		2021		Change		$ in millions		2023		2022		Change
Net earnings	Net earnings		$	2,816	$	4,295	(34)	%	Net earnings		$	842	$	955	(12)	%
Gain on sale of business			—		(1,980)		NM

Non-cash items(1)	Non-cash items(1)		(301)		56		(638)	%	Non-cash items(1)		36		(178)		(120)	%

Pension and OPB contributions	Pension and OPB contributions		(106)		(108)		(2)	%	Pension and OPB contributions		(40)		(36)		11	%
Changes in trade working capital	Changes in trade working capital		(1,855)		(124)		1,396	%	Changes in trade working capital		(1,525)		(1,254)		22	%

Other, net	Other, net		96		(14)		(786)	%	Other, net		(15)		25		(160)	%
Net cash provided by operating activities			$	650	$	2,125	(69)	%
Net cash used in operating activities									Net cash used in operating activities		$	(702)	$	(488)	44	%

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

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~~Year to date 2022~~First quarter 2023 net cash ~~provided by~~used in operating activities ~~decreased $1.5 billion~~increased $214 million as compared with the same period in ~~2021~~2022 principally due to increases in trade working ~~capital. During the nine months ended September 30, 2022, the company made $670 million of federal tax payments~~capital, largely related to the ~~current provisions~~timing of ~~IRC Section 174. During~~vendor payments. The net use of cash during the ~~nine months ended September 30, 2021,~~first quarter is consistent with the ~~company made $588 million~~company's historical timing of ~~tax payments related to~~operating cash flows, which are generally more heavily weighted towards the ~~IT services divestiture.~~second half of the year.

Adjusted Free Cash Flow

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

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pension contributions for consistency and comparability of financial performance. This measure may not be defined and calculated by other companies in the same manner. We use adjusted free cash flow as a key factor in our planning for, and consideration of, acquisitions, the payment of dividends and stock repurchases. 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 ~~provided by~~used in operating activities to adjusted free cash flow:


		Nine Months Ended September 30			%					Three Months Ended March 31	%
$ in millions	$ in millions		2022		2021		Change		$ in millions		2023		2022		Change
Net cash provided by operating activities			$	650	$	2,125	(69)	%
Net cash used in operating activities									Net cash used in operating activities		$	(702)	$	(488)	44	%
Capital expenditures	Capital expenditures		(803)		(682)		18	%	Capital expenditures		(309)		(244)		27	%
Proceeds from sale of equipment to a customer			100		84		19	%

Adjusted free cash flow	Adjusted free cash flow		$	(53)	$	1,527	(103)	%	Adjusted free cash flow		$	(1,011)	$	(732)	38	%

~~Year to date 2022~~First quarter 2023 adjusted free cash flow decreased ~~$1.6 billion~~$279 million as compared with the same period in ~~2021 principally~~2022 due to ~~lower~~higher net cash ~~provided by~~used in operating activities and an increase in capital expenditures.

Investing Cash Flow

~~Year to date 2022~~First quarter 2023 net cash used in investing activities increased $60 million as compared with the same period in 2022 principally due to higher capital expenditures.

Financing Cash Flow

First quarter 2023 net cash provided by financing activities was ~~$663~~$929 million compared to net cash ~~provided by investing~~used in financing activities of ~~$2.8 billion~~$619 million in the prior year period principally due to ~~$3.4~~the issuance of $2.0 billion in ~~cash received from the sale of our IT services business during the first quarter of 2021.~~

~~Financing Cash Flow~~

~~Year to date 2022 net cash used in financing activities decreased $3.9 billion as compared with the same period in 2021 principally due to~~long-term debt, partially offset by a ~~$2.2 billion decrease in debt repayments and a $1.7 billion reduction~~$405 million increase in share repurchases.

Credit Facilities, Commercial Paper and Financial Arrangements - See Note 6 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.

Long-term Debt - See Note 4 to the financial statements for further information.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

There have been no material changes to our critical accounting policies, estimates or judgments from those discussed in our ~~2021~~2022 Annual Report on Form 10-K.

ACCOUNTING STANDARDS UPDATES

See Note 1 to our financial statements for further information on accounting standards updates.

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

This Form 10-Q and the information we are incorporating by reference contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “will,” “expect,” “anticipate,” “intend,” “may,” “could,” “should,” “plan,” “project,” “forecast,” “believe,”

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~~“estimate,~~ “estimate,” “guidance,” “outlook,” “trends,” “goals” and similar expressions generally identify these forward-looking statements. Forward-looking statements include, among other things, statements relating to our future financial condition, results of operations and/or cash flows. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made, but which may change over time. These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict. Specific risks that could cause actual results to differ materially from those expressed or implied in these forward-looking statements include, but are not limited to, those identified and discussed more fully in the section entitled “Risk Factors” in our ~~2021~~2022 Annual Report on Form 10-K and from time to time in our other filings with the Securities and Exchange Commission (SEC). These risks and uncertainties are amplified by the global ~~COVID-19 pandemic~~macroeconomic, health, security and political environments, including inflationary pressures, labor and supply chain challenges and the ~~broader economic environment,~~COVID-19 pandemic, which have caused and will continue to cause significant challenges, instability and uncertainty. They include:

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Industry and Economic Risks

•our dependence on the U.S. government for a substantial portion of our business

•significant delays or reductions in appropriations and/or for our programs, and U.S. government funding and program support more broadly, including as a result of a prolonged continuing resolution and/or government shutdown, and/or related to hostilities and other global events

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

•the use of estimates when accounting for our contracts and the effect of contract cost growth and our efforts to recover or offset such costs and/or changes in estimated contract ~~revenues~~costs and ~~costs,~~revenues, including as a result of inflationary pressures, labor shortages, supply chain challenges and/or ~~inflationary~~other macroeconomic factors, and risks related to management’s judgments and assumptions in estimating and/or projecting contract revenue and performance which may be inaccurate

•continued pressures from macroeconomic trends, including inflation, supply chain delays and disruptions, and labor challenges, including on costs, schedules, performance and ability to meet expectations

•increased competition within our markets and bid protests

Legal and Regulatory Risks

•investigations, claims, disputes, enforcement actions, litigation (including criminal, civil and administrative) and/or other legal proceedings

•the improper conduct of employees, agents, subcontractors, suppliers, business partners or joint ventures in which we participate, ~~and~~including the impact on our reputation and our ability to do business

•changes in procurement and other laws, SEC, DoD and other rules and regulations, contract terms and practices applicable to our industry, findings by the U.S. government as to our compliance with such requirements, more aggressive enforcement of such requirements and changes in our customers’ business practices globally

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

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

Business and Operational Risks

•impacts ofrelated to health epidemics, pandemics, including the COVID-19 pandemic, (or future health epidemics, pandemics or similar outbreaks), including potential new variants, case surges or prolonged recovery periods, their effects on the broader environment, and varying related government requirements, on: our business, our ability to maintain a qualified and productive workforce, work slowdowns or stoppages,such as labor, ~~shortages,~~ supply chain ~~and logistics challenges, costs we cannot recover and liabilities for which we are not compensated, performance challenges (including~~or financial, schedule or cost ~~and schedule)~~impacts (without corresponding recovery), ~~government funding, changes in government acquisition priorities and processes, government payment rules and practices, insurance challenges, and potential~~among other impacts ~~on access to capital, the markets and the fair value of our assets~~

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

•our ability to attract and retain a qualified, talented and diverse workforce with the ~~required~~necessary security clearances ~~and requisite skills~~ to meet our performance obligations

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

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

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

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

•natural disasters

•products and services we provide related to hazardous and high risk operations, including the production and use of such products, which subject us to various environmental, regulatory, financial, reputational and other risks

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

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

General and Other Risk Factors

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

•the future investment performance of plan assets, gains or losses associated with changes in valuation of marketable securities related to our non-qualified benefit plans, changes in actuarial assumptions associated with our pension and other postretirement benefit plans and legislative or other regulatory actions impacting our pension and postretirement benefit obligations

•changes in business conditions that could impact business investments and/or recorded goodwill or the value of other long-lived assets, and other potential future liabilities

We urge you to consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of forward-looking statements. These forward-looking statements speak only as of the date this report is first filed or, in the case of any document incorporated by reference, the date of that document. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risks from those discussed in our ~~2021~~2022 Annual Report on Form 10-K. For more information regarding the economic environment, including global inflationary pressures, and the potential impact to the company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.

Item 4. Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

Our principal executive officer (Chair, Chief Executive Officer and President) and principal financial officer (Corporate Vice President and Chief Financial Officer) have evaluated the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) as of ~~September 30, 2022,~~March 31, 2023, and have concluded that these controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the three months ended ~~September 30, 2022,~~March 31, 2023, no changes occurred in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We have provided information about certain legal proceedings in which we are involved in Notes 5 and 6 to the financial statements.

We are a party to various investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. These types of matters could result in administrative, civil or criminal fines, penalties or other sanctions (which terms include judgments or convictions and consent or other voluntary decrees or agreements); compensatory, treble or other damages; non-monetary relief or actions; or other liabilities. Government regulations provide that certain allegations against a contractor may lead to suspension or debarment from future government contracts or suspension of export privileges for the company or one or more of its components. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. For additional information on pending matters, please see Notes 5 and 6 to the financial statements, and for further information on the risks we face from existing and future investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, please see “Risk Factors” in our ~~2021~~2022 Annual Report on Form 10-K.

Consistent with SEC Regulation S-K Item 103, we have elected to disclose those environmental proceedings with a governmental entity as a party where the company reasonably believes such proceeding would result in monetary sanctions, exclusive of interest and costs, of $1.0 million or more.

Item 1A. Risk Factors

For a discussion of our risk factors please see the section entitled “Risk Factors” in our ~~2021~~2022 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below summarizes our repurchases of common stock during the three months ended ~~September 30, 2022.~~March 31, 2023.

Period Total Number
of Shares
Purchased
Average Price
Paid per
Share(1)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the
Plans or Programs
($ in millions)
July 2, 2022 - July 29, 2022 234,422 $ 460.61 234,422 $ 3,386
July 30, 2022 - August 26, 2022 245,200 482.06 245,200 3,267
August 27, 2022 - September 30, 2022 307,400 482.16 307,400 3,119
Total 787,022 $ 475.71 787,022 $ 3,119


Period	Total Number of Shares Purchased	Average Price Paid per Share(1)(2)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs ($ in millions)
January 1, 2023 - January 27, 2023	150,723	$	477.68	150,723	$	2,561
January 28, 2023 - February 24, 2023	1,049,133	443.06		1,049,133		2,096
February 25, 2023 - March 31, 2023	187,828	457.54		187,828		2,010
Total	1,387,684	$	448.78	1,387,684	$	2,010

(1)Includes commissions paid.

(2)During the first quarter of 2023, the company entered into an accelerated share repurchase (ASR) agreement with Bank of America, N.A. to repurchase $500 million of the company's common stock and received an initial delivery of shares representing 80 percent of the share repurchase agreement.

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

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Item 6. Exhibits


~~10.1~~4.1			~~Credit Agreement,~~Eleventh Supplemental Indenture, dated as of ~~August 23, 2022, among~~February 8, 2023, between Northrop Grumman Corporation and The Bank of New York Mellon, as ~~borrower, Northrop Grumman Systems Corporation, as guarantor, the lenders party thereto and~~successor to JPMorgan Chase Bank, ~~N.A.,~~Trustee, to Indenture dated as ~~administrative agent~~of November 21, 2001 (incorporated by reference to Exhibit ~~10.1~~4.1 to Form 8-K filed ~~August 23, 2022,~~February 8, 2023, File No. 001-16411).

4.2			F orm of 4.700% Senior Note due 2033 (included in Exhibit 4.1) (incorporated by reference to Exhibit 4.2 to Form 8-K filed Febr u a ry 8, 2023, File No. 001-16411)

4.3			F orm of 4.950 % Senior Note due 2053 (included in Exhibit 4.1) (inc orporated by reference to Exhibit 4.3 to Form 8-K filed February 8, 2023, File No. 001-16411)

*+10.1			2023 Restricted Stock Rights Grant Agreement Specifying Terms and Conditions Applicable to 2023 Restricted Stock Rights Granted under the 2011 Long-Term Incentive Stock Plan

*+10.2			~~Transition~~2023 Restricted Performance Stock Rights Grant Agreement Specifying Terms and ~~Retirement Agreement dated as of September 9, 2022 by and between Northrop Grumman Systems Corporation and Mary D. Petryszyn~~Conditions Applicable to 2023 Restricted Performance Stock Rights Granted under the 2011 Long-Term Incentive Stock Plan

*+10.3			Group Personal Excess Liability Policy effective January 1, 2023

*15			Letter from Independent Registered Public Accounting Firm

*31.1			Certification of Kathy J. Warden pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*31.2			Certification of David F. Keffer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

**32.1			Certification of Kathy J. Warden pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

**32.2			Certification of David F. Keffer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*101			Northrop Grumman Corporation Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2022,~~March 31, 2023, formatted as inline XBRL (Extensible Business Reporting Language): (i) the Cover Page, (ii) Condensed Consolidated Statements of Earnings and Comprehensive Income, (iii) Condensed Consolidated Statements of Financial Position, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Shareholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

*104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


+			Management contract or compensatory plan or arrangement

*			Filed with this report

**			Furnished with this report

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


NORTHROP GRUMMAN CORPORATION (Registrant)

By:						/s/ Michael A. Hardesty
						Michael A. Hardesty Corporate Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)

Date: ~~October~~April 26, ~~2022~~2023

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Period	Total Number of Shares Purchased	Average Price Paid per Share(1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs ($ in millions)
July 2, 2022 - July 29, 2022	234,422	$	460.61	234,422	$	3,386
July 30, 2022 - August 26, 2022	245,200	482.06		245,200		3,267
August 27, 2022 - September 30, 2022	307,400	482.16		307,400		3,119
Total	787,022	$	475.71	787,022	$	3,119