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 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 did not have sizable business dealings in Russia or Ukraine, and do not anticipate significant adverse impacts directly from the ongoing conflict.

More recently, the hostilities in Israel and the Gaza Strip have further heightened global tensions and instability. At this time, it is unknown whether hostilities in this region will escalate into an even larger conflict. The demand for our goods and services may increase, especially if the U.S. provides increased military assistance and support to Israel. We do not have a significant business presence in the region, and therefore do not anticipate significant adverse financial impacts directly from the current conflict.

More broadly, the ongoing conflicts in Ukraine and Israel and threats elsewhere, particularly in the Pacific region, have heightened tensions and highlighted security requirements globally, including in Europe, the Middle East 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. Direct impacts of COVID-19 on our business year to date remained limited. While we cannot

-19-

Table of Contents

NORTHROP GRUMMAN CORPORATION

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 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 September 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 through the end of 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 conflicts in Ukraine and Israel, 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.

-20-

Table of Contents

NORTHROP GRUMMAN CORPORATION

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. 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 (CR) 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 CR 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 (NDAA). We expect this proposed legislation, and its potential impact on defense appropriations, including the duration of possible CRs, will also be the subject of considerable debate with potentially significant impacts. The FY 2024 NDAA is currently proceeding through the House and Senate at overall funding levels broadly consistent with the President’s request. Congress set December 31, 2023 as a target for passing the NDAA. In September, Congress passed a short-term CR that provides certain funds for the federal government through November 17, 2023. The bill also includes $16 billion for disaster relief. The CR generally maintains FY 2023 levels of funding for federal programs for 45 days, giving lawmakers more time to reach an agreement on full year FY 2024 appropriations bills. If Congress does not pass full year appropriations or an additional CR before November 17, 2023, the federal government is expected to face a shutdown and to cease what are characterized as certain non-essential operations. Depending on the nature and duration of a potential shutdown, businesses that rely on government funding, including defense contractors, could be significantly impacted.

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.

-21-

Table of Contents

NORTHROP GRUMMAN CORPORATION

CONSOLIDATED OPERATING RESULTS

Selected financial highlights are presented in the table below:

			Three Months Ended September 30												%						Nine Months Ended September 30												%
$ in millions, except per share amounts			2023						2022						Change						2023						2022						Change
Sales			$	9,775					$	8,971					9		%				$	28,652					$	26,569					8		%
Operating costs and expenses			8,759						8,127						8		%				25,722						23,874						8		%
Operating costs and expenses as a % of sales			89.6		%				90.6		%										89.8		%				89.9		%
Operating income			1,016						844						20		%				2,930						2,695						9		%
Operating margin rate			10.4		%				9.4		%										10.2		%				10.1		%
Federal and foreign income tax expense			181						175						3		%				512						568						(10)		%
Effective income tax rate			16.2		%				16.1		%										16.5		%				16.8		%
Net earnings			937						915						2		%				2,591						2,816						(8)		%
Diluted earnings per share			$	6.18					$	5.89					5		%				$	17.00					$	18.06					(6)		%

Sales

Current Quarter

Third quarter 2023 sales increased $804 million, or 9 percent, due to higher sales at all four sectors. Third quarter 2023 sales reflect continued strong demand for our products and services.

Year to Date

Year to date 2023 sales increased $2.1 billion, or 8 percent, due to higher sales at all four sectors.

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

Third quarter 2023 operating income increased $172 million, or 20 percent, due to higher segment operating income, lower unallocated corporate expense and a reduction in the FAS/CAS operating adjustment. Third quarter 2023 operating margin rate increased to 10.4 percent principally due to the lower unallocated corporate expense and FAS/CAS operating adjustment.

Third quarter 2023 general and administrative (G&A) costs as a percentage of sales decreased to 10.5 percent from 10.9 percent in the prior year period primarily due to higher sales, which more than offset our continued investments for future business opportunities.

Year to Date

Year to date 2023 operating income increased $235 million, or 9 percent, due to lower unallocated corporate expense, a reduction in the FAS/CAS operating adjustment and higher segment operating income. Year to date 2023 operating margin rate increased to 10.2 percent due to the lower unallocated corporate expense and FAS/CAS operating adjustment, partially offset by a lower segment operating margin rate.

Year to date 2023 G&A costs as a percentage of sales decreased to 10.9 percent from 11.1 percent in the prior year period primarily due to higher sales, which more than offset our continued investments for future business opportunities.

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

Federal and Foreign Income Taxes

Current Quarter

The third quarter 2023 ETR of 16.2 percent was comparable with the prior year period and reflects an increase in research credits, partially offset by higher interest expense on unrecognized tax benefits. See Note 3 to the financial statements for additional information.

-22-

Table of Contents

NORTHROP GRUMMAN CORPORATION

Year to Date

The year to date 2023 ETR decreased to 16.5 percent from 16.8 percent in the prior year period principally due to an increase in research credits as well as more 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

Third quarter 2023 net earnings increased $22 million, or 2 percent, primarily due to $172 million of higher operating income and a $97 million gain recognized upon the sale of our minority investment in an Australian business, partially offset by a $244 million reduction in the non-operating FAS pension benefit.

Year to Date

Year to date 2023 net earnings decreased $225 million, or 8 percent, primarily due to a $732 million reduction in the non-operating FAS pension benefit, partially offset by $235 million of higher operating income, the $97 million gain on sale of a minority investment described above, a $96 million increase in returns on marketable securities related to our non-qualified benefit plans, and higher interest income on short-term investments.

Diluted Earnings Per Share

Current Quarter

Third quarter 2023 diluted earnings per share increased 5 percent, reflecting a 2 percent increase 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 6 percent, reflecting an 8 percent decrease in 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).

-23-

Table of Contents

NORTHROP GRUMMAN CORPORATION

Segment Operating Income and Margin Rate

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

			Three Months Ended September 30												%						Nine Months Ended September 30												%
$ in millions			2023						2022						Change						2023						2022						Change
Operating income			$	1,016					$	844					20		%				$	2,930					$	2,695					9		%
Operating margin rate			10.4		%				9.4		%										10.2		%				10.1		%
Reconciliation to segment operating income:
CAS pension expense			(39)						(37)						5		%				(115)						(124)						(7)		%
FAS pension service expense			59						92						(36)		%				177						276						(36)		%
FAS/CAS operating adjustment			20						55						(64)		%				62						152						(59)		%
Intangible asset amortization and PP&E step-up depreciation			31						60						(48)		%				92						181						(49)		%
Other unallocated corporate expense			22						48						(54)		%				59						89						(34)		%
Unallocated corporate expense			53						108						(51)		%				151						270						(44)		%
Segment operating income			$	1,089					$	1,007					8		%				$	3,143					$	3,117					1		%
Segment operating margin rate			11.1		%				11.2		%										11.0		%				11.7		%

Current Quarter

Third quarter 2023 segment operating income increased $82 million, or 8 percent, primarily due to higher sales. Third quarter 2023 segment operating margin rate was comparable with the prior year period.

Year to Date

Year to date 2023 segment operating income increased $26 million, or 1 percent. Higher sales were partially offset by a lower segment operating margin rate, largely driven by lower net EAC adjustments. Lower net EAC adjustments reflect a $36 million unfavorable EAC adjustment on the HALO program in the second quarter of 2023 and a prior year $67 million favorable EAC adjustment on the EMD phase of the B-21 program. 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.

FAS/CAS Operating Adjustment

Third 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 third quarter 2023 unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation as well as higher benefits from deferred state taxes.

-24-

Table of Contents

NORTHROP GRUMMAN CORPORATION

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 higher benefits from deferred state taxes.

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 September 30												Nine Months Ended September 30
$ in millions			2023						2022						2023						2022
Favorable EAC adjustments			$	331					$	306					$	981					$	980
Unfavorable EAC adjustments			(273)						(261)						(801)						(670)
Net EAC adjustments			$	58					$	45					$	180					$	310

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

			Three Months Ended September 30												Nine Months Ended September 30
$ in millions			2023						2022						2023						2022
Aeronautics Systems			$	37					$	27					$	73					$	121
Defense Systems			29						23						76						98
Mission Systems			32						14						127						100
Space Systems			(38)						(13)						(92)						10
Eliminations			(2)						(6)						(4)						(19)
Net EAC adjustments			$	58					$	45					$	180					$	310

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

AERONAUTICS SYSTEMS			Three Months Ended September 30												%						Nine Months Ended September 30												%
$ in millions			2023						2022						Change						2023						2022						Change
Sales			$	2,766					$	2,537					9		%				$	7,876					$	7,774					1		%
Operating income			283						262						8		%				798						827						(4)		%
Operating margin rate			10.2		%				10.3		%										10.1		%				10.6		%

Sales

Current Quarter

Third quarter 2023 sales increased $229 million, or 9 percent, primarily due to higher volume in Manned Aircraft. Higher sales on restricted programs and E-2 were partially offset by lower volume on F/A-18 largely due to post Multi-Year Procurement 4 (MYP4) contract award timing.

Year to Date

Year to date 2023 sales increased $102 million, or 1 percent, due to higher volume in Manned Aircraft, partially offset by lower volume in Autonomous Systems. Higher volume on restricted programs was partially offset by a $133 million decrease on F/A-18 due to post MYP4 contract award timing, $105 million decrease on E-2 largely related to higher material volume in the prior year, $104 million decrease on the Joint Surveillance and Target Attack Radar System (JSTARS) program as it nears completion, as well as lower volume on the Triton and Global Hawk programs.

Operating Income

Current Quarter

Third quarter 2023 operating income increased $21 million, or 8 percent, primarily due to higher sales. Operating margin rate was comparable with the prior year period.

-25-

Table of Contents

NORTHROP GRUMMAN CORPORATION

Year to Date

Year to date 2023 operating income decreased $29 million, or 4 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 10.1 percent from 10.6 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 September 30												%						Nine Months Ended September 30												%
$ in millions			2023						2022						Change						2023						2022						Change
Sales			$	1,421					$	1,345					6		%				$	4,217					$	3,922					8		%
Operating income			182						158						15		%				508						481						6		%
Operating margin rate			12.8		%				11.7		%										12.0		%				12.3		%

Sales

Current Quarter

Third quarter 2023 sales increased $76 million, or 6 percent, primarily due to higher volume in Battle Management & Missile Systems, which was driven by several programs, including Integrated Air and Missile Defense Battle Command System (IBCS), ammunition programs, Guided Multiple Launch Rocket System (GMLRS), and Hypersonic Attack Cruise Missile (HACM).

Year to Date

Year to date 2023 sales increased $295 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 programs, IBCS, HACM, Stand-in Attack Weapon (SiAW), and GMLRS. Mission Readiness sales increased primarily due to higher volume on an international training program.

Operating Income

Current Quarter

Third quarter 2023 operating income increased $24 million, or 15 percent, due to a higher operating margin rate and higher sales. Operating margin rate increased to 12.8 percent from 11.7 percent primarily due to higher net EAC adjustments at Battle Management & Missile Systems.

Year to Date

Year to date 2023 operating income increased $27 million, or 6 percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 12.0 percent from 12.3 percent primarily due to lower net EAC adjustments.

MISSION SYSTEMS			Three Months Ended September 30												%						Nine Months Ended September 30												%
$ in millions			2023						2022						Change						2023						2022						Change
Sales			$	2,628					$	2,456					7		%				$	7,832					$	7,469					5		%
Operating income			386						368						5		%				1,147						1,166						(2)		%
Operating margin rate			14.7		%				15.0		%										14.6		%				15.6		%

Sales

Current Quarter

Third quarter 2023 sales increased $172 million, or 7 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on marine systems programs, partially offset by lower volume on the Ground/Air Task Oriented Radar (G/ATOR) program largely driven by material receipts and full-rate production (FRP) 5 contract award timing.

Year to Date

Year to date 2023 sales increased $363 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 a $115 million decrease on G/ATOR largely driven by material receipts and FRP5 contract award timing, as well as lower volume on airborne radar programs.

-26-

Table of Contents

NORTHROP GRUMMAN CORPORATION

Operating Income

Current Quarter

Third quarter 2023 operating income increased $18 million, or 5 percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 14.7 percent from 15.0 percent primarily due to changes in contract mix toward more cost-type content.

Year to Date

Year to date 2023 operating income decreased $19 million, or 2 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 14.6 percent from 15.6 percent primarily due to a prior year $33 million benefit recognized in connection with a contract-related legal matter, as well as changes in contract mix toward more cost-type content and a first quarter 2023 loss recognized in connection with an unconsolidated joint venture.

SPACE SYSTEMS			Three Months Ended September 30												%						Nine Months Ended September 30												%
$ in millions			2023						2022						Change						2023						2022						Change
Sales			$	3,506					$	3,163					11		%				$	10,344					$	8,997					15		%
Operating income			312						290						8		%				908						861						5		%
Operating margin rate			8.9		%				9.2		%										8.8		%				9.6		%

Sales

Current Quarter

Third quarter 2023 sales increased $343 million, or 11 percent, due to higher sales in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including the Ground Based Strategic Deterrent (GBSD), and Next Generation Interceptor (NGI), as well as higher volume on the Space Launch System (SLS) booster program. Sales in the Space business area were driven by higher volume on restricted programs and the Next-Generation Overhead Persistent Infrared Polar (NextGen Polar) program, partially offset by lower sales on the HALO program.

Year to Date

Year to date 2023 sales increased $1.3 billion, or 15 percent, due to higher sales in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $386 million increase on GBSD, a $197 million increase on NGI and a $106 million increase on Ground-based Midcourse Defense (GMD), as well as higher volume on the SLS booster and Glide Phase Interceptor (GPI) programs. Sales in the Space business area increased primarily due to higher volume on restricted programs, a $238 million increase on the NextGen Polar program and a $130 million increase on the Space Development Agency (SDA) Tranche 1 Tracking Layer program. These increases were partially offset by a $146 million decrease for Commercial Resupply Services (CRS) missions and a $111 million decrease on the HALO program.

Operating Income

Current Quarter

Third quarter 2023 operating income increased $22 million, or 8 percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 8.9 percent from 9.2 percent primarily due to lower net EAC adjustments, partially offset by a $16 million benefit from insurance recoveries in our commercial space business.

Year to Date

Year to date 2023 operating income increased $47 million, or 5 percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 8.8 percent from 9.6 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.

-27-

Table of Contents

NORTHROP GRUMMAN CORPORATION

PRODUCT AND SERVICE ANALYSIS

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

			Three Months Ended September 30															Nine Months Ended September 30
$ 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			$	2,102		$	1,902		$	1,936		$	1,752					$	5,934		$	5,368		$	5,897		$	5,289
Service			610			533			542			471						1,759			1,546			1,695			1,501
Intersegment eliminations			54			48			59			52						183			164			182			157
Total Aeronautics Systems			2,766			2,483			2,537			2,275						7,876			7,078			7,774			6,947
Defense Systems
Product			718			625			634			563						2,087			1,825			1,842			1,605
Service			500			434			517			452						1,563			1,382			1,513			1,334
Intersegment eliminations			203			180			194			172						567			502			567			502
Total Defense Systems			1,421			1,239			1,345			1,187						4,217			3,709			3,922			3,441
Mission Systems
Product			1,841			1,590			1,711			1,475						5,490			4,726			5,221			4,457
Service			524			431			496			402						1,559			1,301			1,494			1,210
Intersegment eliminations			263			221			249			211						783			658			754			636
Total Mission Systems			2,628			2,242			2,456			2,088						7,832			6,685			7,469			6,303
Space Systems
Product			3,017			2,787			2,698			2,453						8,879			8,166			7,639			6,898
Service			463			384			437			396						1,381			1,195			1,268			1,158
Intersegment eliminations			26			23			28			24						84			75			90			80
Total Space Systems			3,506			3,194			3,163			2,873						10,344			9,436			8,997			8,136
Segment Totals
Total Product			$	7,678		$	6,904		$	6,979		$	6,243					$	22,390		$	20,085		$	20,599		$	18,249
Total Service			2,097			1,782			1,992			1,721						6,262			5,424			5,970			5,203
Total Segment**(1)**			$	9,775		$	8,686		$	8,971		$	7,964					$	28,652		$	25,509		$	26,569		$	23,452

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

Product Sales and Costs

Current Quarter

Third quarter 2023 product sales increased $699 million, or 10 percent, due to an increase in product sales at all four sectors. The increase was principally driven by higher restricted sales at Aeronautics Systems and Mission Systems, ramp-up on Space Systems development programs, including GBSD and NGI, and higher volume on IBCS, ammunition programs and GMLRS at Defense Systems.

Third quarter 2023 product costs increased $661 million, or 11 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.

Year to Date

Year to date 2023 product sales increased $1.8 billion, or 9 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, NextGen Polar, SDA Tranche 1 Tracking Layer and GMD.

Year to date 2023 product costs increased $1.8 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 programs.

-28-

Table of Contents

NORTHROP GRUMMAN CORPORATION

Service Sales and Costs

Current Quarter

Third quarter 2023 service sales increased $105 million, or 5 percent, primarily due to an increase in service sales at Aeronautics Systems and Mission Systems. The increase was principally driven by higher restricted sales at both sectors, as well as higher service volume on Global Hawk, partially offset by lower volume on the JSTARS program at Aeronautics Systems.

Third quarter 2023 service costs increased $61 million, or 4 percent, consistent with the higher service sales described above and reflects a higher operating margin rate on service sales at Space Systems.

Year to Date

Year to date 2023 service sales increased $292 million, or 5 percent, due to an increase in service sales at all four sectors. The increase was principally driven by higher restricted sales at Space Systems and Aeronautics Systems, higher service volume on F-35 sustainment and SEWIP integration at Mission Systems, and higher volume on an international training program at Defense Systems.

Year to date 2023 service costs increased $221 million, or 4 percent, consistent with the higher service sales described above and reflects a higher operating margin rate on service sales at Space Systems.

BACKLOG

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

						September 30, 2023																		December 31, 2022
$ in millions						Funded						Unfunded						Total Backlog						Total Backlog						% Change in 2023
Aeronautics Systems						$	9,009					$	9,338					$	18,347					$	19,397					(5)		%
Defense Systems						6,425						1,713						8,138						7,515						8		%
Mission Systems						11,260						4,247						15,507						13,875						12		%
Space Systems						9,819						32,120						41,939						37,956						10		%
Total backlog						$	36,513					$	47,418					$	83,931					$	78,743					7		%

New Awards

Third quarter and year to date 2023 net awards totaled $15.0 billion and $33.9 billion, respectively, and backlog totaled $83.9 billion. Significant third quarter new awards include $3.6 billion for restricted programs (primarily at Space Systems, Aeronautics Systems, and Mission Systems), $1.3 billion for E-2, $0.7 billion for SDA Tranche 2 Transport Layer and $0.5 billion for GMLRS.

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 September 30, 2023, we had $2.1 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 credit facility. At September 30, 2023, there were no borrowings outstanding under these credit facilities. In February 2023, we issued $2.0 billion of unsecured senior notes for general corporate purposes, including debt repayment, share repurchases and working capital.

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

-29-

Table of Contents

NORTHROP GRUMMAN CORPORATION

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 estimated tax payments we made related to Section 174. As we finalized our 2022 federal tax return, we reduced the previously estimated impact of Section 174 on our tax liability for 2022 to approximately $700 million and we anticipate its impact on our tax liability for 2023 will be approximately $550 million. 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. 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:

															Nine Months Ended September 30												%
$ in millions																					2023						2022						Change
Net earnings																					$	2,591					$	2,816					(8)		%
Non-cash items(1)																					474						(301)						NM
Pension and OPB contributions																					(108)						(106)						2		%
Changes in trade working capital																					(1,469)						(1,855)						(21)		%
Other, net																					(43)						96						NM
Net cash provided by operating activities																					$	1,445					$	650					122		%

(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 increased $795 million as compared with the same period in 2022 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 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.

-30-

Table of Contents

NORTHROP GRUMMAN CORPORATION

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

															Nine Months Ended September 30												%
$ in millions																					2023						2022						Change
Net cash provided by operating activities																					$	1,445					$	650					122		%
Capital expenditures																					(972)						(803)						21		%
Proceeds from sale of equipment to a customer																					—						100						(100)		%
Adjusted free cash flow																					$	473					$	(53)					NM

Year to date 2023 adjusted free cash flow increased $526 million as compared with the same period in 2022 principally 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 $149 million as compared with the same period in 2022 largely due to higher capital expenditures.

Financing Cash Flow

Year to date 2023 net cash used in financing activities decreased $723 million as compared with the same period in 2022 principally due to the issuance of $2.0 billion in long-term debt, partially offset by $1.05 billion in debt repayments and a $143 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:

Industry and Economic Risks

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

-31-

Table of Contents

NORTHROP GRUMMAN CORPORATION

• 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 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 and pandemics, including COVID-19

• 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

• 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

-32-

Table of Contents

NORTHROP GRUMMAN CORPORATION

• 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.