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

Global Security 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 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.

The conflict in Ukraine has increased global tensions and instability, highlighted threats and increased global demand, as well as further disrupted global supply chains and added costs. We have experienced a modest increase in demand for certain of our goods and services directly and indirectly related to the conflict in the Ukraine. We also have experienced a slight disruption to some of our programs and supply chain, including unanticipated cost growth, as a result of the conflict in Ukraine and economic sanctions. However, we do not have sizable business dealings in Russia or Ukraine, and do not anticipate significant adverse impacts directly from the ongoing conflict.

More broadly, the conflict in Ukraine and threats elsewhere have heightened tensions and highlighted security requirements globally, especially in Europe and the Pacific region, as well as the U.S. We have started to see, and expect to continue to see, increased demand for defense products and services from allies and partner nations, particularly in those areas. We are actively exploring both opportunities and risks.

Global Health Environment

Since at least March 2020, when it was first characterized as a global pandemic, COVID-19 has dramatically impacted 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 Reports on Form 10-K for the fiscal years ended December 31, 2020, 2021, and 2022, and subsequent SEC filings, the pandemic, its impacts and risks, and actions taken up to the time of each filing. In this Form 10-Q, we provide a further update.

In 2022, direct impacts of the COVID-19 pandemic on our business generally declined, and they have remained limited in the first quarter of 2023. While we cannot predict the future course of the pandemic or its consequences, we are not currently assuming significant additional direct COVID-19 related impacts on our business.

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

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Global Economic Environment

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

We continue to work hard to mitigate some of the challenges caused by the current macroeconomic environment on our business, including by taking steps to support our suppliers and small businesses and enhancing our workforce through extensive hiring, development and retention efforts. However, the broader macroeconomic environment, including inflationary pressures and supply chain challenges, continued adversely to affect the company’s results for the quarter ended 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 see this challenging macroeconomic environment continue adversely to impact the global economy, our customers, our industry and our company in 2023.

In addition, increased interest rates, raising the cost of borrowing for 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 Regulatory Environment

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

On December 29, 2022, the President signed an Omnibus appropriations act for FY 2023 that provided $858 billion for national defense programs, approximately $45 billion more than the Administration initially requested for FY 2023 and approximately $76 billion or 10 percent higher than what was appropriated in FY 2022. The Pentagon’s portion of the overall national defense budget for FY 2023 is $817 billion. It includes up to $1 billion for extraordinary relief in FY 2023.

On March 9, 2023, the President proposed his budget for FY 2024 with $886 billion for national defense programs, which included $842 billion for the DoD, an increase of 3 percent, or $25 billion, above the FY 2023 enacted levels. The request does not include supplemental defense spending associated with the conflict in Ukraine.

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

It is difficult to predict the specific course of future defense budgets. Current and future requirements related to the conflict in Ukraine, threats in the Pacific regions and other security priorities, as well as global inflation, the national debt, the costs of the pandemic and other domestic priorities, among other things, in the U.S. and globally, will continue to impact our customers’ budgets, spending and priorities, and our industry. Current tensions within Congress and the wider U.S. political environment may also impact defense budgets, issues related to the national debt, and government spending more broadly.

We believe the current global security environment highlights the significant national security threats to our nation and our allies, and the need for strong deterrence and a robust defense capability. We believe our capabilities, particularly in space, C4ISR, missile defense, battle management, advanced weapons, survivable aircraft and mission systems should help our customers in the U.S. and globally defend against current and future threats and, as a result, continue to allow for long-term profitable business growth.

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

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ceiling continue to be a subject of considerable debate. If the existing debt ceiling is not raised, we may be required to continue to perform for some period of time on certain of our U.S. Government contracts even if the U.S. Government is unable to make timely payments. An extended debt ceiling breach could negatively affect the availability and timing of 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 accelerated pace of new rulemakings, new and expanded uses of existing authorities, changing legal rulings and landscapes, and aggressive enforcement actions. These changes and the accelerated pace of change, not only impose additional obligations and risk, but also create further uncertainty regarding our operating environment.

The political environment, federal budget, debt ceiling and regulatory environment are expected to continue to be the subject of considerable debate, especially in light of the ongoing conflict in Ukraine and heightened global tensions, the inflationary environment and political tensions. The results of those debates could have material impacts on defense spending broadly and the company’s programs in particular. We anticipate that the broader macroeconomic environment, with ongoing inflationary pressures, labor challenges, and supply chain disruption, among other considerations, will continue to play a significant role in the outcome of these debates and, in turn, on our industry and company.

CONSOLIDATED OPERATING RESULTS

Selected financial highlights are presented in the table below:

															Three Months Ended March 31												%
$ in millions, except per share amounts																					2023						2022						Change
Sales																					$	9,301					$	8,797					6		%
Operating costs and expenses																					8,354						7,900						6		%
Operating costs and expenses as a % of sales																					89.8		%				89.8		%
Operating income																					947						897						6		%
Operating margin rate																					10.2		%				10.2		%
Federal and foreign income tax expense																					156						189						(17)		%
Effective income tax rate																					15.6		%				16.5		%
Net earnings																					842						955						(12)		%
Diluted earnings per share																					$	5.50					$	6.10					(10)		%

Sales

First quarter 2023 sales increased $504 million, or 6 percent, due to higher sales at Space Systems, Defense Systems and Mission Systems, partially offset by lower sales at Aeronautics Systems. First quarter 2023 sales reflect continued strong 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.

Operating Income and Margin Rate

First quarter 2023 operating income increased $50 million, or 6 percent, due to lower unallocated corporate expense and a reduction in the FAS/CAS operating adjustment, partially offset by lower segment operating income. First quarter 2023 operating margin rate of 10.2 percent was comparable to the prior year period.

First quarter 2023 G&A costs as a percentage of sales of 11.2 percent was comparable with the prior year period 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.

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Federal and Foreign Income Taxes

The first quarter 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 $113 million, or 12 percent, primarily due to a $244 million reduction in the non-operating FAS pension benefit, partially offset by higher operating income, a $34 million increase in returns on marketable securities related to our non-qualified benefit plans, and a lower effective tax rate.

Diluted Earnings Per Share

First quarter 2023 diluted earnings per share decreased 10 percent, reflecting lower net earnings and a 2 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 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 March 31												%
$ in millions																					2023						2022						Change
Operating income																					$	947					$	897					6		%
Operating margin rate																					10.2		%				10.2		%
Reconciliation to segment operating income:
CAS pension expense																					(38)						(46)						(17)		%
FAS pension service expense																					59						92						(36)		%
FAS/CAS operating adjustment																					21						46						(54)		%
Intangible asset amortization and PP&E step-up depreciation																					30						60						(50)		%
Other unallocated corporate expense																					4						34						(88)		%
Unallocated corporate expense																					34						94						(64)		%
Segment operating income																					$	1,002					$	1,037					(3)		%
Segment operating margin rate																					10.8		%				11.8		%

First quarter 2023 segment operating income decreased $35 million, or 3 percent, and includes an approximately $50 million reduction related to higher projected CAS pension costs on the company’s fixed price contracts. Segment operating margin rate decreased to 10.8 percent from 11.8 percent and reflects lower operating margin rates at Aeronautics Systems, Mission Systems and Defense Systems, partially offset by a higher operating margin rate at Space Systems.

FAS/CAS Operating Adjustment

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

Unallocated Corporate Expense (Income)

The decrease in unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation as well as a reduction in unallowable corporate 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 segment operating income; the aggregate amounts are presented in the table below:

									Three Months Ended March 31
$ in millions															2023						2022
Favorable EAC adjustments															$	326					$	357
Unfavorable EAC adjustments															(280)						(184)
Net EAC adjustments															$	46					$	173

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

									Three Months Ended March 31
$ in millions															2023						2022
Aeronautics Systems															$	(6)					$	103
Defense Systems															27						25
Mission Systems															57						57
Space Systems															(32)						(8)
Eliminations															—						(4)
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.

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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

First quarter 2023 sales decreased $188 million, or 7 percent, due to lower volume in both Manned Aircraft and Autonomous Systems, including 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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Sales

First quarter 2023 sales increased $66 million, or 3 percent, and reflects higher volume in all four business areas, including higher restricted sales in the Networked Information Solutions business area as well as higher volume on the Surface Electronic Warfare Improvement Program (SEWIP), marine systems programs and infrared countermeasure programs. These increases were partially offset by lower volume on the Ground/Air Task Oriented Radar (G/ATOR) program and airborne radar programs, including F-35.

Operating Income

First quarter 2023 operating income decreased $25 million, or 6 percent, due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to 14.0 percent from 15.4 percent principally due to changes in contract mix toward more cost-type content and a loss recognized in connection with an unconsolidated joint venture.

SPACE SYSTEMS															Three Months Ended March 31												%
$ in millions																					2023						2022						Change
Sales																					$	3,350					$	2,855					17		%
Operating income																					313						261						20		%
Operating margin rate																					9.3		%				9.1		%

Sales

First quarter 2023 sales increased $495 million, or 17 percent, due to higher volume in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $161 million increase on the Ground Based Strategic Deterrent (GBSD) program and higher volume on the Next Generation Interceptor (NGI) and Ground-based Midcourse Defense Weapon Systems (GWS) programs. Sales in the Space business area increased primarily due to higher volume on restricted programs, the Next-Generation Overhead Persistent Infrared Polar (NextGen Polar) program and the Space Development Agency (SDA) Tranche 1 Tracking Layer program. These increases were partially offset by lower volume for Commercial Resupply Services (CRS) missions.

Operating Income

First quarter 2023 operating income increased $52 million, or 20 percent, due to higher sales and a higher operating margin rate. Operating margin rate increased to 9.3 percent from 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 in the 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 March 31
$ in millions												2023						2022
Segment Information:																		Sales			Operating Costs and Expenses			Sales			Operating Costs and Expenses
Aeronautics Systems
Product																		$	1,907		$	1,740		$	2,045		$	1,804
Service																		543			480			593			533
Intersegment eliminations																		65			58			65			59
Total Aeronautics Systems																		2,515			2,278			2,703			2,396
Defense Systems
Product																		678			598			610			527
Service																		529			468			474			425
Intersegment eliminations																		169			150			199			176
Total Defense Systems																		1,376			1,216			1,283			1,128
Mission Systems
Product																		1,815			1,563			1,762			1,509
Service																		511			441			489			396
Intersegment eliminations																		237			199			246			207
Total Mission Systems																		2,563			2,203			2,497			2,112
Space Systems
Product																		2,871			2,609			2,424			2,195
Service																		447			400			400			371
Intersegment eliminations																		32			28			31			28
Total Space Systems																		3,350			3,037			2,855			2,594
Segment Totals
Total Product																		$	7,271		$	6,510		$	6,841		$	6,035
Total Service																		2,030			1,789			1,956			1,725
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

First quarter 2023 product sales increased $430 million, or 6 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 higher volume on restricted programs, GWS, NextGen Polar and the SDA Tranche 1 Tracking Layer program. The decrease at Aeronautics Systems was driven by lower volume on the E-2, F-35, and Global Hawk programs.

First quarter 2023 product costs increased $475 million, or 8 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Aeronautics Systems production programs.

Service Sales and Costs

First quarter 2023 service sales increased $74 million, or 4 percent, primarily due to an increase in service sales at Defense Systems and Space Systems, partially offset by a decrease in service sales at Aeronautics Systems. The increase at Defense Systems was driven by higher 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 the ICBM Ground Subsystem Support program. The decrease at Aeronautics Systems was driven by lower volume on the JSTARS program as it nears completion.

First quarter 2023 service costs increased $64 million, or 4 percent, consistent with the higher service sales described above.

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

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

						March 31, 2023																		December 31, 2022
$ in millions						Funded						Unfunded						Total Backlog						Total Backlog						% Change in 2023
Aeronautics Systems						$	9,904					$	8,658					$	18,562					$	19,397					(4)		%
Defense Systems						5,933						1,431						7,364						7,515						(2)		%
Mission Systems						11,157						3,440						14,597						13,875						5		%
Space Systems						12,302						24,648						36,950						37,956						(3)		%
Total backlog						$	39,296					$	38,177					$	77,473					$	78,743					(2)		%

New Awards

First quarter 2023 net awards totaled $8.0 billion and backlog totaled $77.5 billion. Significant first quarter new awards include $3.2 billion for restricted programs (primarily at Mission Systems, Aeronautics Systems, and Space Systems), $0.3 billion for ammunition programs at Defense Systems, $0.3 billion for 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 March 31, 2023, we had $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. The company has a five-year senior unsecured credit facility in an aggregate principal amount of $2.5 billion, and in April 2023, we renewed our one-year $500 million uncommitted

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credit facility. At March 31, 2023, there were no borrowings outstanding under these credit facilities. In February 2023, we issued $2.0 billion of unsecured senior notes. We intend to use those proceeds for general corporate purposes, which may include debt repayment (including our 3.25% senior notes due in 2023), share repurchases and working capital.

COVID-19 and the CARES Act

Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) authorized the government to reimburse qualifying contractors for certain costs of providing paid leave to employees as a result of COVID-19. The company has sought and may continue to seek recovery for certain COVID-19-related costs under Section 3610 of the CARES Act and through our contract provisions, though it is unclear what funds will be available and how much we will be able to recover. In addition, during 2020, the DoD increased the rate for certain progress payments from 80 percent to 90 percent for costs incurred and work performed on relevant contracts. Recently, the DoD has indicated it may revert to 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”) eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to amortize them over five years pursuant to IRC Section 174. Our 2022 cash from operations were reduced by approximately $900 million for federal tax payments we made related to Section 174. In the future, Congress may consider legislation that would defer the amortization requirement to later years, possibly with retroactive effect. In the meantime, we expect to continue to make additional federal tax payments based on the current Section 174 tax law, which we estimate will reduce our 2023 cash from operations by approximately $720 million. The impact of Section 174 on our cash from operations depends on the amount of research and development expenditures incurred by the company and whether the IRS issues guidance on the provision which differs from our current interpretation, among other things.

Cash Flow Measures

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

Operating Cash Flow

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

															Three Months Ended March 31												%
$ in millions																					2023						2022						Change
Net earnings																					$	842					$	955					(12)		%
Non-cash items(1)																					36						(178)						(120)		%
Pension and OPB contributions																					(40)						(36)						11		%
Changes in trade working capital																					(1,525)						(1,254)						22		%
Other, net																					(15)						25						(160)		%
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.

First quarter 2023 net cash used in operating activities increased $214 million as compared with the same period in 2022 principally due to increases in trade working capital, largely related to the timing of vendor payments. The net use of cash during the first quarter is consistent with the company's historical timing of operating cash flows, which are generally more heavily weighted towards the second half of the year.

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 used in operating activities to adjusted free cash flow:

															Three Months Ended March 31												%
$ in millions																					2023						2022						Change
Net cash used in operating activities																					$	(702)					$	(488)					44		%
Capital expenditures																					(309)						(244)						27		%
Adjusted free cash flow																					$	(1,011)					$	(732)					38		%

First quarter 2023 adjusted free cash flow decreased $279 million as compared with the same period in 2022 due to higher net cash used in operating activities and an increase in capital expenditures.

Investing Cash Flow

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 $929 million compared to net cash used in financing activities of $619 million in the prior year period principally due to the issuance of $2.0 billion in long-term debt, partially offset by a $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 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,” “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 2022 Annual Report on Form 10-K and from time to time in our other filings with the Securities and Exchange Commission (SEC). These risks and uncertainties are amplified by the global macroeconomic, health, security and political environments, including inflationary pressures, labor and supply chain challenges and the 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 costs and revenues, including as a result of inflationary pressures, labor shortages, supply chain challenges and/or 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, 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 related to health epidemics, pandemics, including the COVID-19 pandemic, such as labor, supply chain or financial, schedule or cost impacts (without corresponding recovery), among other impacts

• 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 necessary security clearances 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, their impacts on our company, our operations and our stakeholders (employees, suppliers, customers, shareholders and regulators), and changes in laws, regulations and priorities related to these issues

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

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

• 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, 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.