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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 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 the global health and economic environments, including millions of confirmed cases and deaths, business slowdowns or shutdowns, labor shortfalls, supply chain challenges, regulatory challenges, inflationary pressures and market volatility. We discussed in some detail in our Annual Reports on Form 10-K for the fiscal years ended December 31, 2020, 2021, and 2022, and subsequent SEC filings, the pandemic, its impacts and risks, and actions taken up to the time of each filing. In this Form 10-Q, we provide a further update.
In May 2023, the World Health Organization declared an end to the global public health emergency for the COVID-19 pandemic. For the first half of 2023, direct impacts of the COVID-19 pandemic on our business remained limited. While we cannot predict the future course of COVID-19 or its consequences, we are not currently assuming significant additional direct COVID-19 related impacts on our business.
The company continues to work to monitor and address the global health environment, including its impact on our company, our employees, our customers, our suppliers and our communities. Our goals have been, and continue to be, to keep our employees safe, to lessen the potential adverse impacts, both health and economic, and to continue to position the company for long-term success. Like the communities in which we operate, our actions have varied, and
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will continue to vary, depending on the state of the global health environment, including as it relates to COVID-19 and other illnesses, applicable government requirements, and the needs of our stakeholders.
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; 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 June 30, 2023. We cannot clearly predict how long these macroeconomic challenges will continue, how they will change over time, or what additional resources will be available, but we expect to see this challenging macroeconomic environment continue adversely to impact the global economy, our customers, our industry and our company 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.
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In January 2023, the statutory debt ceiling was reached, and the Treasury Department reported that it began taking “extraordinary measures” to finance the government and avoid a breach of the debt ceiling. The Fiscal Responsibility Act of 2023 (FRA), signed in June 2023, suspended the debt limit through January 1, 2025 and provides for caps on defense and non-defense discretionary spending in FY 2024 and FY 2025. The FRA cap on discretionary spending for defense in FY 2024 and FY 2025 is $886 billion and $895 billion, respectively. If these spending caps are exceeded, the FRA provides for automatic spending cuts that could be imposed through sequestration.
The FRA also provides for across the board cuts to discretionary spending by one percent below current-year levels if a continuing resolution is in place on January 1, 2024 or 2025. Once full-year appropriations are enacted, the spending caps are to revert to original levels specified in the FRA. If a continuing resolution is still in place on April 30, 2024 or 2025, the FRA provides that a final sequestration order could be issued that would apply to the full fiscal year. While the discretionary spending caps only apply to FY 2024 and FY 2025, the FRA also attempts to limit most discretionary funding for FY 2026 through FY 2029, subject to Congress’s budgetary processes at that time. We anticipate that issues related to the debt ceiling, budgetary priorities and the spending caps imposed by the FRA will continue to be a subject of considerable debate, with a potentially significant impact on our programs and the company.
In July 2023, the House of Representatives and the Senate passed different versions of a National Defense Authorization Act. We expect this proposed legislation, and its potential impact on defense appropriations, including the duration of a possible continuing resolution, will also be the subject of considerable debate with potentially significant impacts.
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 June 30 | % | Six Months Ended June 30 | % | ||||||||||||||||||||||||||||||||
| $ in millions, except per share amounts | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||
| Sales | $ | 9,576 | $ | 8,801 | 9 | % | $ | 18,877 | $ | 17,598 | 7 | % | |||||||||||||||||||||||
| Operating costs and expenses | 8,609 | 7,847 | 10 | % | 16,963 | 15,747 | 8 | % | |||||||||||||||||||||||||||
| Operating costs and expenses as a % of sales | 89.9 | % | 89.2 | % | 89.9 | % | 89.5 | % | |||||||||||||||||||||||||||
| Operating income | 967 | 954 | 1 | % | 1,914 | 1,851 | 3 | % | |||||||||||||||||||||||||||
| Operating margin rate | 10.1 | % | 10.8 | % | 10.1 | % | 10.5 | % | |||||||||||||||||||||||||||
| Federal and foreign income tax expense | 175 | 204 | (14) | % | 331 | 393 | (16) | % | |||||||||||||||||||||||||||
| Effective income tax rate | 17.7 | % | 17.7 | % | 16.7 | % | 17.1 | % | |||||||||||||||||||||||||||
| Net earnings | 812 | 946 | (14) | % | 1,654 | 1,901 | (13) | % | |||||||||||||||||||||||||||
| Diluted earnings per share | $ | 5.34 | $ | 6.06 | (12) | % | $ | 10.83 | $ | 12.16 | (11) | % |
Sales
Current Quarter
Second quarter 2023 sales increased $775 million, or 9 percent, due to higher sales at all four sectors. Second quarter 2023 sales reflect continued strong demand and improving labor availability and supplier deliveries.
Year to Date
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NORTHROP GRUMMAN CORPORATION
Year to date 2023 sales increased $1.3 billion, or 7 percent, due to higher sales at Space Systems, Defense Systems and Mission Systems, partially offset by lower sales at Aeronautics Systems.
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
Current Quarter
Second quarter 2023 operating income increased $13 million, or 1 percent, due to a reduction in the FAS/CAS operating adjustment, partially offset by lower segment operating income. Second quarter 2023 operating margin rate declined to 10.1 percent, due to a lower segment operating margin rate, partially offset by the lower FAS/CAS operating adjustment.
Second quarter 2023 general and administrative (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.
Year to Date
Year to date 2023 operating income increased $63 million, or 3 percent, due to lower unallocated corporate expense and a reduction in the FAS/CAS operating adjustment, partially offset by lower segment operating income. Year to date 2023 operating margin rate declined to 10.1 percent due to a lower segment operating margin rate, partially offset by the lower unallocated corporate expense and FAS/CAS operating adjustment.
Year to date 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.
Federal and Foreign Income Taxes
Current Quarter
The second quarter 2023 ETR of 17.7 percent was comparable with the prior year period and reflects higher interest expense on unrecognized tax benefits, offset by favorable returns on tax-exempt marketable securities. See Note 3 to the financial statements for additional information.
Year to Date
The year to date 2023 ETR decreased to 16.7 percent from 17.1 percent in the prior year period 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
Current Quarter
Second quarter 2023 net earnings decreased $134 million, or 14 percent, primarily due to a $244 million reduction in the non-operating FAS pension benefit, partially offset by a $51 million increase in returns on marketable securities related to our non-qualified benefit plans, higher operating income, higher interest income on short-term investments and lower income tax expense.
Year to Date
Year to date 2023 net earnings decreased $247 million, or 13 percent, primarily due to a $488 million reduction in the non-operating FAS pension benefit, partially offset by an $84 million increase in returns on marketable securities related to our non-qualified benefit plans, higher operating income, lower income tax expense and higher interest income on short-term investments.
Diluted Earnings Per Share
Current Quarter
Second quarter 2023 diluted earnings per share decreased 12 percent, reflecting a 14 percent decrease in net earnings and a 2 percent reduction in weighted-average diluted shares outstanding.
Year to Date
Year to date 2023 diluted earnings per share decreased 11 percent, reflecting a 13 percent decrease in net earnings and a 2 percent reduction in weighted-average diluted shares outstanding.
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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).
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 June 30 | % | Six Months Ended June 30 | % | ||||||||||||||||||||||||||||||||
| $ in millions | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||
| Operating income | $ | 967 | $ | 954 | 1 | % | $ | 1,914 | $ | 1,851 | 3 | % | |||||||||||||||||||||||
| Operating margin rate | 10.1 | % | 10.8 | % | 10.1 | % | 10.5 | % | |||||||||||||||||||||||||||
| Reconciliation to segment operating income: | |||||||||||||||||||||||||||||||||||
| CAS pension expense | (38) | (41) | (7) | % | (76) | (87) | (13) | % | |||||||||||||||||||||||||||
| FAS pension service expense | 59 | 92 | (36) | % | 118 | 184 | (36) | % | |||||||||||||||||||||||||||
| FAS/CAS operating adjustment | 21 | 51 | (59) | % | 42 | 97 | (57) | % | |||||||||||||||||||||||||||
| Intangible asset amortization and PP&E step-up depreciation | 31 | 61 | (49) | % | 61 | 121 | (50) | % | |||||||||||||||||||||||||||
| Other unallocated corporate expense | 33 | 7 | 371 | % | 37 | 41 | (10) | % | |||||||||||||||||||||||||||
| Unallocated corporate expense | 64 | 68 | (6) | % | 98 | 162 | (40) | % | |||||||||||||||||||||||||||
| Segment operating income | $ | 1,052 | $ | 1,073 | (2) | % | $ | 2,054 | $ | 2,110 | (3) | % | |||||||||||||||||||||||
| Segment operating margin rate | 11.0 | % | 12.2 | % | 10.9 | % | 12.0 | % |
Current Quarter
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NORTHROP GRUMMAN CORPORATION
Second quarter 2023 segment operating income decreased $21 million, or 2 percent. Higher sales were more than offset by a lower segment operating margin rate, which reflects a $36 million unfavorable EAC adjustment on the Habitation and Logistics Outpost (HALO) program at Space Systems. In addition, the prior year period includes a $38 million gain on a property sale at Aeronautics Systems and a $33 million benefit recognized in connection with a contract-related legal matter at Mission Systems.
Year to Date
Year to date 2023 segment operating income decreased $56 million, or 3 percent. Higher sales were more than offset by a lower segment operating margin rate, which reflects an approximately $50 million reduction related to higher projected CAS pension costs on the company’s fixed price contracts, as well as the $36 million unfavorable EAC adjustment on the HALO program described above. In addition, the prior year period includes a $67 million favorable EAC adjustment on the EMD phase of the B-21 program at Aeronautics Systems, as well as the $38 million gain on a property sale and $33 million benefit recognized in connection with a contract-related legal matter described above.
FAS/CAS Operating Adjustment
Second quarter 2023 and year to date 2023 FAS/CAS operating adjustment decreased primarily due to lower FAS pension service expense resulting from changes in certain actuarial assumptions as of December 31, 2022.
Unallocated Corporate Expense
Current Quarter
The decrease in second quarter 2023 unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation, partially offset by a loss recognized in connection with a pending divestiture of a small international subsidiary.
Year to Date
The decrease in year to date 2023 unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation as well as 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 June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| $ in millions | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Favorable EAC adjustments | $ | 324 | $ | 317 | $ | 650 | $ | 674 | |||||||||||||||
| Unfavorable EAC adjustments | (248) | (225) | (528) | (409) | |||||||||||||||||||
| Net EAC adjustments | $ | 76 | $ | 92 | $ | 122 | $ | 265 |
Net EAC adjustments by segment are presented in the table below:
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| $ in millions | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Aeronautics Systems | $ | 42 | $ | (9) | $ | 36 | $ | 94 | |||||||||||||||
| Defense Systems | 20 | 50 | 47 | 75 | |||||||||||||||||||
| Mission Systems | 38 | 29 | 95 | 86 | |||||||||||||||||||
| Space Systems | (22) | 31 | (54) | 23 | |||||||||||||||||||
| Eliminations | (2) | (9) | (2) | (13) | |||||||||||||||||||
| Net EAC adjustments | $ | 76 | $ | 92 | $ | 122 | $ | 265 |
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 June 30 | % | Six Months Ended June 30 | % | |||||||||||||||||||||||||||||||
| $ in millions | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||
| Sales | $ | 2,595 | $ | 2,534 | 2 | % | $ | 5,110 | $ | 5,237 | (2) | % | |||||||||||||||||||||||
| Operating income | 278 | 258 | 8 | % | 515 | 565 | (9) | % | |||||||||||||||||||||||||||
| Operating margin rate | 10.7 | % | 10.2 | % | 10.1 | % | 10.8 | % |
Sales
Current Quarter
Second quarter 2023 sales increased $61 million, or 2 percent, due to higher volume in both Manned Aircraft and Autonomous Systems. Higher sales on restricted programs were partially offset by lower volume on E-2 and F/A-18, as well as the Joint Surveillance and Target Attack Radar System (JSTARS) program as it nears completion.
Year to Date
Year to date 2023 sales decreased $127 million, or 2 percent, due to lower volume in both Manned Aircraft and Autonomous Systems, including a $146 million decrease on the E-2 program and lower volume on F/A-18, JSTARS and Global Hawk. These decreases were partially offset by higher volume on restricted programs.
Operating Income
Current Quarter
Second quarter 2023 operating income increased $20 million, or 8 percent, due to higher sales and a higher operating margin rate. Operating margin rate increased to 10.7 percent from 10.2 percent primarily due to higher net favorable EAC adjustments on restricted work, partially offset by a $38 million gain on a property sale in the prior year.
Year to Date
Year to date 2023 operating income decreased $50 million, or 9 percent, due to a lower operating margin rate and lower sales. Operating margin rate decreased to 10.1 percent from 10.8 percent primarily due to lower net EAC adjustments, largely driven by a $67 million favorable EAC adjustment on the EMD phase of the B-21 program in the prior year, as well as a $38 million gain on a property sale in the prior year.
| DEFENSE SYSTEMS | Three Months Ended June 30 | % | Six Months Ended June 30 | % | |||||||||||||||||||||||||||||||
| $ in millions | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||
| Sales | $ | 1,420 | $ | 1,294 | 10 | % | $ | 2,796 | $ | 2,577 | 8 | % | |||||||||||||||||||||||
| Operating income | 166 | 168 | (1) | % | 326 | 323 | 1 | % | |||||||||||||||||||||||||||
| Operating margin rate | 11.7 | % | 13.0 | % | 11.7 | % | 12.5 | % |
Sales
Current Quarter
Second quarter 2023 sales increased $126 million, or 10 percent, due to higher volume in both business areas. Battle Management & Missile Systems sales increased primarily due to higher volume on ammunition programs and the Integrated Air and Missile Defense Battle Command System (IBCS), Hypersonic Attack Cruise Missile (HACM) and advanced fuze programs. Mission Readiness sales increased principally due to higher volume on the NATO Alliance Ground Surveillance In-Service Support (NATO AGS ISS) program and an international training program.
Year to Date
Year to date 2023 sales increased $219 million, or 8 percent, due to higher volume in both business areas. Battle Management & Missile Systems sales increased primarily due to higher volume on ammunition, IBCS, advanced fuze and HACM programs. Mission Readiness sales increased primarily due to higher volume on an international training program.
Operating Income
Current Quarter
Second quarter 2023 operating income decreased $2 million, or 1 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 11.7 percent from 13.0 percent primarily due to lower net EAC adjustments.
Year to Date
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NORTHROP GRUMMAN CORPORATION
Year to date 2023 operating income increased $3 million, or 1 percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 11.7 percent from 12.5 percent primarily due to lower net EAC adjustments.
| MISSION SYSTEMS | Three Months Ended June 30 | % | Six Months Ended June 30 | % | |||||||||||||||||||||||||||||||
| $ in millions | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||
| Sales | $ | 2,641 | $ | 2,516 | 5 | % | $ | 5,204 | $ | 5,013 | 4 | % | |||||||||||||||||||||||
| Operating income | 401 | 413 | (3) | % | 761 | 798 | (5) | % | |||||||||||||||||||||||||||
| Operating margin rate | 15.2 | % | 16.4 | % | 14.6 | % | 15.9 | % |
Sales
Current Quarter
Second quarter 2023 sales increased $125 million, or 5 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on marine systems programs and the Surface Electronic Warfare Improvement Program (SEWIP). These increases were partially offset by lower volume on the Ground/Air Task Oriented Radar (G/ATOR) program.
Year to Date
Year to date 2023 sales increased $191 million, or 4 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on SEWIP and marine systems programs, partially offset by lower volume on G/ATOR.
Operating Income
Current Quarter
Second quarter 2023 operating income decreased $12 million, or 3 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 15.2 percent from 16.4 percent primarily due to a prior year $33 million benefit recognized in connection with a contract-related legal matter, as well as changes in contract mix toward more cost-type content.
Year to Date
Year to date 2023 operating income decreased $37 million, or 5 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 14.6 percent from 15.9 percent primarily due to the prior year $33 million benefit recognized in connection with a contract-related legal matter described above, as well as changes in contract mix toward more cost-type content and a first quarter 2023 loss recognized in connection with an unconsolidated joint venture.
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NORTHROP GRUMMAN CORPORATION
| SPACE SYSTEMS | Three Months Ended June 30 | % | Six Months Ended June 30 | % | |||||||||||||||||||||||||||||||
| $ in millions | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||
| Sales | $ | 3,488 | $ | 2,979 | 17 | % | $ | 6,838 | $ | 5,834 | 17 | % | |||||||||||||||||||||||
| Operating income | 283 | 310 | (9) | % | 596 | 571 | 4 | % | |||||||||||||||||||||||||||
| Operating margin rate | 8.1 | % | 10.4 | % | 8.7 | % | 9.8 | % |
Sales
Current Quarter
Second quarter 2023 sales increased $509 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 $156 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.
Year to Date
Year to date 2023 sales increased $1.0 billion, 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 $316 million increase on GBSD, a $152 million increase on NGI and a $112 million increase on GWS. Sales in the Space business area increased primarily due to higher volume on restricted programs, a $173 million increase on the NextGen Polar program and a $132 million increase on the SDA Tranche 1 Tracking Layer program. These increases were partially offset by a $124 million decrease for Commercial Resupply Services (CRS) missions and lower volume on the HALO program.
Operating Income
Current Quarter
Second quarter 2023 operating income decreased $27 million, or 9 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 8.1 percent from 10.4 percent primarily due to lower net EAC adjustments, including a $36 million unfavorable EAC adjustment on the HALO program largely due to cost growth stemming from evolving Lunar Gateway architecture and mission requirements combined with macroeconomic challenges, and a $15 million write-down of commercial inventory.
Year to Date
Year to date 2023 operating income increased $25 million, or 4 percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 8.7 percent from 9.8 percent primarily due to lower net EAC adjustments, partially offset by a first quarter 2023 benefit recognized on the sale of a license to a customer.
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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 June 30 | Six Months Ended June 30 | ||||||||||||||||||||||||||||
| $ in millions | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
| Segment Information: | Sales | Operating Costs and Expenses | Sales | Operating Costs and Expenses | Sales | Operating Costs and Expenses | Sales | Operating Costs and Expenses | |||||||||||||||||||||
| Aeronautics Systems | |||||||||||||||||||||||||||||
| Product | $ | 1,925 | $ | 1,726 | $ | 1,916 | $ | 1,733 | $ | 3,832 | $ | 3,466 | $ | 3,961 | $ | 3,537 | |||||||||||||
| Service | 606 | 533 | 560 | 497 | 1,149 | 1,013 | 1,153 | 1,030 | |||||||||||||||||||||
| Intersegment eliminations | 64 | 58 | 58 | 46 | 129 | 116 | 123 | 105 | |||||||||||||||||||||
| Total Aeronautics Systems | 2,595 | 2,317 | 2,534 | 2,276 | 5,110 | 4,595 | 5,237 | 4,672 | |||||||||||||||||||||
| Defense Systems | |||||||||||||||||||||||||||||
| Product | 691 | 602 | 598 | 515 | 1,369 | 1,200 | 1,208 | 1,042 | |||||||||||||||||||||
| Service | 534 | 480 | 522 | 457 | 1,063 | 948 | 996 | 882 | |||||||||||||||||||||
| Intersegment eliminations | 195 | 172 | 174 | 154 | 364 | 322 | 373 | 330 | |||||||||||||||||||||
| Total Defense Systems | 1,420 | 1,254 | 1,294 | 1,126 | 2,796 | 2,470 | 2,577 | 2,254 | |||||||||||||||||||||
| Mission Systems | |||||||||||||||||||||||||||||
| Product | 1,834 | 1,573 | 1,748 | 1,473 | 3,649 | 3,136 | 3,510 | 2,982 | |||||||||||||||||||||
| Service | 524 | 429 | 509 | 412 | 1,035 | 870 | 998 | 808 | |||||||||||||||||||||
| Intersegment eliminations | 283 | 238 | 259 | 218 | 520 | 437 | 505 | 425 | |||||||||||||||||||||
| Total Mission Systems | 2,641 | 2,240 | 2,516 | 2,103 | 5,204 | 4,443 | 5,013 | 4,215 | |||||||||||||||||||||
| Space Systems | |||||||||||||||||||||||||||||
| Product | 2,991 | 2,770 | 2,517 | 2,250 | 5,862 | 5,379 | 4,941 | 4,445 | |||||||||||||||||||||
| Service | 471 | 411 | 431 | 391 | 918 | 811 | 831 | 762 | |||||||||||||||||||||
| Intersegment eliminations | 26 | 24 | 31 | 28 | 58 | 52 | 62 | 56 | |||||||||||||||||||||
| Total Space Systems | 3,488 | 3,205 | 2,979 | 2,669 | 6,838 | 6,242 | 5,834 | 5,263 | |||||||||||||||||||||
| Segment Totals | |||||||||||||||||||||||||||||
| Total Product | $ | 7,441 | $ | 6,671 | $ | 6,779 | $ | 5,971 | $ | 14,712 | $ | 13,181 | $ | 13,620 | $ | 12,006 | |||||||||||||
| Total Service | 2,135 | 1,853 | 2,022 | 1,757 | 4,165 | 3,642 | 3,978 | 3,482 | |||||||||||||||||||||
| Total Segment**(1)** | $ | 9,576 | $ | 8,524 | $ | 8,801 | $ | 7,728 | $ | 18,877 | $ | 16,823 | $ | 17,598 | $ | 15,488 |
(1)A reconciliation of segment operating income to total operating income is included in “Segment Operating Results.”
Product Sales and Costs
Current Quarter
Second quarter 2023 product sales increased $662 million, or 10 percent, primarily due to an increase in product sales at Space Systems, Defense Systems and Mission Systems. The increase at Space Systems was principally due to ramp-up on development programs, including GBSD and NGI, as well as higher volume on the SDA Tranche 1 Tracking Layer program. The increase at Defense Systems was primarily due to higher volume on ammunition programs, IBCS, HACM and advanced fuze programs. The increase at Mission Systems was primarily driven by higher volume on restricted programs.
Second quarter 2023 product costs increased $700 million, or 12 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Space Systems production programs, including the $36 million unfavorable EAC adjustment on the HALO program described above.
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Year to Date
Year to date 2023 product sales increased $1.1 billion, or 8 percent, primarily due to an increase in product sales at Space Systems. The increase at Space Systems was driven by ramp-up on development programs, including GBSD and NGI, and higher volume on restricted programs, GWS, NextGen Polar and the SDA Tranche 1 Tracking Layer program.
Year to date 2023 product costs increased $1.2 billion, or 10 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Space Systems and Aeronautics Systems production programs.
Service Sales and Costs
Current Quarter
Second quarter 2023 service sales increased $113 million, or 6 percent, primarily due to an increase in service sales at Aeronautics Systems and Space Systems. The increase at Aeronautics Systems was principally due to higher sales on restricted programs, partially offset by lower volume on the JSTARS program as it nears completion. The increase at Space Systems was primarily driven by higher volume on restricted programs.
Second quarter 2023 service costs increased $96 million, or 5 percent, consistent with the higher service sales described above.
Year to Date
Year to date 2023 service sales increased $187 million, or 5 percent, primarily due to an increase in service sales at Space Systems and Defense Systems. The increase at Space Systems was principally due to higher volume on restricted programs, the Specialized Warfighter Development Contract (SWDC) and the ICBM Ground Subsystem Support program. The increase at Defense Systems was primarily driven by higher volume on an international training program.
Year to date 2023 service costs increased $160 million, or 5 percent, consistent with the higher service sales described above.
BACKLOG
Backlog consisted of the following as of June 30, 2023 and December 31, 2022:
| June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||
| $ in millions | Funded | Unfunded | Total Backlog | Total Backlog | % Change in 2023 | |||||||||||||||||||||||||||
| Aeronautics Systems | $ | 9,398 | $ | 9,145 | $ | 18,543 | $ | 19,397 | (4) | % | ||||||||||||||||||||||
| Defense Systems | 5,725 | 1,445 | 7,170 | 7,515 | (5) | % | ||||||||||||||||||||||||||
| Mission Systems | 11,517 | 3,270 | 14,787 | 13,875 | 7 | % | ||||||||||||||||||||||||||
| Space Systems | 11,256 | 27,049 | 38,305 | 37,956 | 1 | % | ||||||||||||||||||||||||||
| Total backlog | $ | 37,896 | $ | 40,909 | $ | 78,805 | $ | 78,743 | — | % |
New Awards
Second quarter and year to date 2023 net awards totaled $10.9 billion and $18.9 billion, respectively, and backlog totaled $78.8 billion. Significant second quarter new awards include $5.4 billion for restricted programs (primarily at Space Systems, Aeronautics Systems and Mission Systems), $0.6 billion for F-35 (primarily at Aeronautics Systems and Mission Systems), $0.3 billion for the Missile Defense Agency's Ballistic Missile Defense System Overhead Persistent Infrared Architecture (BOA) and $0.3 billion for Virginia-Class submarines.
LIQUIDITY AND CAPITAL RESOURCES
We are focused on the efficient conversion of operating income into cash to provide for the company’s material cash requirements, including working capital needs, satisfaction of contractual commitments, funding of our pension and OPB plans, investment in our business through capital expenditures, and shareholder return through dividend payments and share repurchases.
At June 30, 2023, we had $3.4 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
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aggregate principal amount of $2.5 billion, and in April 2023, we renewed our one-year $500 million uncommitted credit facility. At June 30, 2023, there were no borrowings outstanding under these credit facilities; however, in May 2023, we issued $779 million in commercial paper, which reduced the amount available for borrowing under our unsecured credit facility. 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 August 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. In July 2023, the DoD reverted back to the 80 percent progress payment rate on prospectively awarded contracts. We do not expect this change will have a material impact on our 2023 cash from operations.
Internal Revenue Code (IRC) Section 174
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 (used in) operating activities:
| Six Months Ended June 30 | % | ||||||||||||||||||||||||||||||||||
| $ in millions | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||
| Net earnings | $ | 1,654 | $ | 1,901 | (13) | % | |||||||||||||||||||||||||||||
| Non-cash items(1) | 91 | (321) | (128) | % | |||||||||||||||||||||||||||||||
| Pension and OPB contributions | (75) | (71) | 6 | % | |||||||||||||||||||||||||||||||
| Changes in trade working capital | (1,504) | (2,261) | (33) | % | |||||||||||||||||||||||||||||||
| Other, net | 51 | 67 | (24) | % | |||||||||||||||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 217 | $ | (685) | (132) | % |
(1)Includes depreciation and amortization, non-cash lease expense, stock based compensation expense, deferred income taxes and net periodic pension and OPB income.
Year to date 2023 net cash provided by operating activities was $217 million compared to net cash used in operating activities of $685 million in the prior year period and reflects improved trade working capital largely driven by increased billings and cash collections.
Adjusted Free Cash Flow
Adjusted free cash flow, as reconciled in the table below, is a non-GAAP measure defined as net cash provided by or used in operating activities, less capital expenditures, plus proceeds from the sale of equipment to a customer (not otherwise included in net cash provided by or used in operating activities) and the after-tax impact of discretionary pension contributions. Adjusted free cash flow includes proceeds from the sale of equipment to a customer as such proceeds were generated in a customer sales transaction. It also includes the after-tax impact of discretionary
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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:
| Six Months Ended June 30 | % | ||||||||||||||||||||||||||||||||||
| $ in millions | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 217 | $ | (685) | (132) | % | |||||||||||||||||||||||||||||
| Capital expenditures | (613) | (507) | 21 | % | |||||||||||||||||||||||||||||||
| Adjusted free cash flow | $ | (396) | $ | (1,192) | (67) | % | |||||||||||||||||||||||||||||
Year to date 2023 adjusted free cash flow increased $796 million as compared with the same period in 2022 due to higher net cash provided by operating activities, partially offset by an increase in capital expenditures.
Investing Cash Flow
Year to date 2023 net cash used in investing activities increased $144 million as compared with the same period in 2022 principally due to higher capital expenditures.
Financing Cash Flow
Year to date 2023 net cash provided by financing activities was $1.2 billion compared to net cash used in financing activities of $1.2 billion in the prior year period principally due to the issuance of $2.0 billion in long-term debt and net borrowings on commercial paper of $768 million, partially offset by a $291 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 COVID-19, which have caused and will continue to cause significant challenges, instability and uncertainty. They include:
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Industry and Economic Risks
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our dependence on the U.S. government for a substantial portion of our business
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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
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significant delays or reductions in payments as a result of or related to a breach of the debt ceiling
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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
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continued pressures from macroeconomic trends, including on costs, schedules, performance and ability to meet expectations
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increased competition within our markets and bid protests
Legal and Regulatory Risks
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investigations, claims, disputes, enforcement actions, litigation (including criminal, civil and administrative) and/or other legal proceedings
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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
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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
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environmental matters, including unforeseen environmental costs and government and third party claims
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unanticipated changes in our tax provisions or exposure to additional tax liabilities
Business and Operational Risks
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impacts related to health epidemics and pandemics, including COVID-19
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cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners, and changes in related regulations
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our ability to attract and retain a qualified, talented and diverse workforce with the necessary security clearances to meet our performance obligations
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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
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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
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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
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natural disasters
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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
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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.
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