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 2023 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 these events, including global unrest. The same is true for our suppliers and other business partners.

The ongoing conflicts in Ukraine and the escalating hostilities in the Middle East and threats elsewhere, particularly in the Pacific region, have increased global tensions and instability and highlighted security requirements globally, including in Europe, the Middle East and the Pacific region, as well as the U.S. These conflicts have resulted in and may continue to result in increased demand for defense products and services from allies and partner nations, particularly in those areas. For example, we have experienced, and, while difficult to predict, may continue to experience, an increase in demand for certain of our products and services directly and indirectly related to the conflict in Ukraine. Sales may occur directly or through the U.S. if it provides increased military assistance and support to Ukraine. We have not experienced, and do not anticipate experiencing, significant adverse financial impacts directly from the ongoing conflicts in Ukraine or the Middle East.

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

Global Economic Environment

Over the past several years, the global economic environment has experienced extraordinary challenges, including inflationary pressures; widespread delays and disruptions in supply chains; business slowdowns or shutdowns; workforce challenges and labor shortfalls; and market volatility. These macroeconomic factors have contributed, and we expect will continue to contribute, to increased costs, delays, disruptions and other performance challenges, as well as increased competing demands for limited resources to address such increased costs and other challenges, for our company, our suppliers and partners, and our customers. We continue to work hard to mitigate challenges caused by the macroeconomic environment on our business. We are seeing positive progress in the supply chain as on-time deliveries and quality have improved. In remaining areas of pressure, we are proactively working with our suppliers to ensure we meet our contract commitments. Although certain pockets of our business were adversely affected by the broader macroeconomic environment during the third quarter of 2024, the overall financial impact on our company has continued to subside.

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In addition, although the federal funds interest rate decreased in the third quarter of 2024, an overall increase in interest rates in recent years has raised the cost of borrowing for governments, and if rates were to increase again, it 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

The U.S. continues to face an uncertain and evolving political, budget and regulatory environment. In particular, it is difficult to predict the specific course of future defense budgets. Current and future requirements related to the conflicts in Ukraine and the Middle East, threats in the Pacific regions and other security priorities, as well as global inflation, the national debt, 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. The U.S. political environment, including the U.S. election cycle, may also impact defense budgets and priorities, issues related to the national debt, and government spending more broadly. We anticipate that issues related to budgetary priorities and defense spending levels, the debt ceiling, and the spending caps imposed by the Fiscal Responsibility Act of 2023 (FRA), particularly with respect to discretionary spending, will continue to be a subject of considerable debate, with a potentially significant impact on our programs and the company.

On March 11, 2024, the Administration released its budget request for FY 2025. The request included $895 billion for national security, $850 billion of which is for the DoD. FY 2025 appropriations have not been enacted and, on September 26, 2024, the President signed into law a continuing resolution (CR) to carry forward FY 2024 funding levels into FY 2025 while negotiations continue regarding full-year appropriations. The CR runs through December 20, 2024. It remains uncertain when the government will approve final FY 2025 appropriations, and the levels of funding that FY 2025 appropriations will provide. Government operations under an extended CR could have potential impacts on our programs and new starts, in particular.

On March 23, 2024, the President signed into law the Further Consolidated Appropriations Act for FY 2024, which provided funding for government agencies, including $825 billion for the DoD, through September 30, 2024. On April 24, 2024, the President signed into law bills providing $95 billion in supplemental funding for Ukraine, Israel and Indo-Pacific, which include $67 billion in DoD funding for the restock of U.S. munitions and additional capacity.

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

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			2024						2023						Change						2024						2023						Change
Sales			$	9,996					$	9,775					2		%				$	30,347					$	28,652					6		%
Operating costs and expenses			8,876						8,759						1		%				27,066						25,722						5		%
Operating costs and expenses as a % of sales			88.8		%				89.6		%										89.2		%				89.8		%
Operating income			1,120						1,016						10		%				3,281						2,930						12		%
Operating margin rate			11.2		%				10.4		%										10.8		%				10.2		%
Federal and foreign income tax expense			162						181						(10)		%				555						512						8		%
Effective income tax rate			13.6		%				16.2		%										16.0		%				16.5		%
Net earnings			1,026						937						9		%				2,910						2,591						12		%
Diluted earnings per share			$	7.00					$	6.18					13		%				$	19.69					$	17.00					16		%

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Sales

Current Quarter

Third quarter 2024 sales increased $221 million, or 2 percent, due to higher sales at Mission Systems, Aeronautics Systems and Defense Systems, partially offset by lower sales at Space Systems largely driven by a reduction of $224 million associated with wind-down of our work on the restricted space and NGI programs, as previously disclosed. Third quarter 2024 sales reflect continued strong demand for our products and services.

Year to Date

Year to date 2024 sales increased $1.7 billion, or 6 percent, due to higher sales at all four sectors, including 12 percent growth 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 10 to the financial statements for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments.

Operating Income and Margin Rate

Current Quarter

Third quarter 2024 operating income increased $104 million, or 10 percent, primarily due to $57 million of higher segment operating income and a $40 million increase in the FAS/CAS operating adjustment. Operating margin rate increased to 11.2 percent from 10.4 percent primarily due to benefits associated with the FAS/CAS operating adjustment and a higher segment operating margin rate.

Third quarter 2024 general and administrative (G&A) costs as a percentage of sales decreased to 9.9 percent from 10.5 percent in the prior year period primarily due to cost management and higher sales.

Year to Date

Year to date 2024 operating income increased $351 million, or 12 percent, due to $208 million of higher segment operating income, a $94 million increase in the FAS/CAS operating adjustment and $49 million of lower unallocated corporate expense. Operating margin rate increased to 10.8 percent from 10.2 percent primarily due to benefits associated with the FAS/CAS operating adjustment and lower unallocated corporate expense.

Year to date 2024 G&A costs as a percentage of sales decreased to 10.4 percent from 10.9 percent in the prior year period primarily due to higher sales.

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 company’s third quarter 2024 ETR decreased to 13.6 percent from 16.2 percent in the prior year period principally driven by a net reduction in tax reserves largely due to a recent federal court decision, partially offset by higher interest expense on unrecognized tax benefits.

Year to Date

The year to date 2024 ETR decreased to 16.0 percent from 16.5 percent in the prior year period principally driven by a net reduction in tax reserves largely due to a recent federal court decision, partially offset by higher interest expense on unrecognized tax benefits.

See Note 4 to the financial statements for additional information.

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Net Earnings

Current Quarter

Third quarter 2024 net earnings increased $89 million, or 9 percent, primarily due to $104 million of higher operating income, a $36 million increase in the non-operating FAS pension benefit and a lower effective tax rate, partially offset by a $97 million gain recognized in the prior year upon the sale of a minority investment.

Year to Date

Year to date 2024 net earnings increased $319 million, or 12 percent, primarily due to $351 million of higher operating income and a $106 million increase in the non-operating FAS pension benefit, partially offset by a $97 million gain recognized in the prior year upon the sale of a minority investment and $44 million of higher interest expense.

Diluted Earnings Per Share

Current Quarter

Third quarter 2024 diluted earnings per share increased 13 percent, reflecting a 9 percent increase in net earnings and a 3 percent reduction in weighted-average diluted shares outstanding.

Year to Date

Year to date 2024 diluted earnings per share increased 16 percent, reflecting a 12 percent increase in net earnings and a 3 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.

Effective July 1, 2024, the company realigned the Strategic Deterrent Systems (SDS) division, which includes the Sentinel program, from Space Systems to Defense Systems. This realignment is reflected in the accompanying financial information.

Operating Performance Assessment and Reporting

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).

We periodically record losses and restructure contract terms, conditions and pricing for certain programs. For additional information on the B-21, Sentinel and HALO programs, please see Note 1 to the financial statements.

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Segment Operating Income and Margin Rate

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

			Three Months Ended September 30												%						Nine Months Ended September 30												%
$ in millions			2024						2023						Change						2024						2023						Change
Operating income			$	1,120					$	1,016					10		%				$	3,281					$	2,930					12		%
Operating margin rate			11.2		%				10.4		%										10.8		%				10.2		%
Reconciliation to segment operating income:
CAS pension expense			(80)						(39)						105		%				(211)						(115)						83		%
FAS pension service expense			60						59						2		%				179						177						1		%
FAS/CAS operating adjustment			(20)						20						NM						(32)						62						NM
Intangible asset amortization and PP&E step-up depreciation			23						31						(26)		%				72						92						(22)		%
Other unallocated corporate expense			23						22						5		%				30						59						(49)		%
Unallocated corporate expense			46						53						(13)		%				102						151						(32)		%
Segment operating income			$	1,146					$	1,089					5		%				$	3,351					$	3,143					7		%
Segment operating margin rate			11.5		%				11.1		%										11.0		%				11.0		%

Current Quarter

Third quarter 2024 segment operating income increased $57 million, or 5 percent, primarily due to a higher segment operating margin rate and higher sales. Segment operating margin rate increased to 11.5 percent and reflects higher operating margin rates at Space Systems and Aeronautics Systems, partially offset by lower operating margin rates at Mission Systems and Defense Systems.

Year to Date

Year to date 2024 segment operating income increased $208 million, or 7 percent, primarily due to higher sales. Segment operating margin rate was comparable to the prior year period and reflects a higher operating margin rate at Space Systems, partially offset by a lower operating margin rate at Mission Systems.

FAS/CAS Operating Adjustment

Third quarter 2024 and year to date 2024 FAS/CAS operating adjustment reflects higher CAS pension expense largely driven by plan asset returns in prior years and changes in certain CAS actuarial assumptions as of December 31, 2023.

Unallocated Corporate Expense

Current Quarter

The decrease in third quarter 2024 unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation.

Year to Date

The decrease in year to date 2024 unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation and a loss recognized in the prior year in connection with the divestiture of a small international subsidiary.

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 and margin rate.

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

			Three Months Ended September 30												Nine Months Ended September 30
$ in millions			2024						2023						2024						2023
Favorable EAC adjustments			$	369					$	331					$	1,091					$	981
Unfavorable EAC adjustments			(233)						(273)						(823)						(801)
Net EAC adjustments			$	136					$	58					$	268					$	180

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

			Three Months Ended September 30												Nine Months Ended September 30
$ in millions			2024						2023						2024						2023
Aeronautics Systems			$	48					$	37					$	160					$	73
Defense Systems			10						14						50						64
Mission Systems			16						32						11						127
Space Systems			60						(23)						50						(80)
Eliminations			2						(2)						(3)						(4)
Net EAC adjustments			$	136					$	58					$	268					$	180

AERONAUTICS SYSTEMS			Three Months Ended September 30												%						Nine Months Ended September 30												%
$ in millions			2024						2023						Change						2024						2023						Change
Sales			$	2,878					$	2,766					4		%				$	8,810					$	7,876					12		%
Operating income			298						283						5		%				890						798						12		%
Operating margin rate			10.4		%				10.2		%										10.1		%				10.1		%

Sales

Current Quarter

Third quarter 2024 sales increased $112 million, or 4 percent, primarily due to higher F-35 production volume largely driven by the timing of materials, increased E-2 fleet sustainment and modernization work, higher Triton LRIP production volume and an increase in Global Hawk sustainment activities. These increases were partially offset by lower restricted sales.

Year to Date

Year to date 2024 sales increased $934 million, or 12 percent, primarily due to higher restricted sales, a $300 million increase in F-35 production and sustainment volume due, in part, to the timing of materials, a $137 million increase in Triton LRIP production volume, a $129 million increase in E-2 fleet sustainment and modernization work, and higher volume on Global Hawk sustainment activities.

Operating Income

Current Quarter

Third quarter 2024 operating income increased $15 million, or 5 percent, due to higher sales and a higher operating margin rate. Operating margin rate increased to 10.4 percent from 10.2 percent principally due to higher net EAC adjustments, largely driven by improved performance and cost efficiencies on certain mature production programs.

Year to Date

Year to date 2024 operating income increased $92 million, or 12 percent, due to higher sales and increased net EAC adjustments, largely driven by improved performance and cost efficiencies on certain mature production programs, partially offset by sales growth on low margin restricted programs.

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DEFENSE SYSTEMS			Three Months Ended September 30												%						Nine Months Ended September 30												%
$ in millions			2024						2023						Change						2024						2023						Change
Sales			$	2,084					$	2,050					2		%				$	6,227					$	6,058					3		%
Operating income			196						201						(2)		%				614						605						1		%
Operating margin rate			9.4		%				9.8		%										9.9		%				10.0		%

Sales

Current Quarter

Third quarter 2024 sales increased $34 million, or 2 percent, primarily due to higher volume on the Sentinel program, ramp-up on the Stand-in Attack Weapon (SiAW) program and higher volume on certain military ammunition programs. These increases were partially offset by lower volume due to the completion of an international training program and lower volume on the Special Electronic Mission Aircraft (SEMA) program as that program nears completion.

Year to Date

Year to date 2024 sales increased $169 million, or 3 percent, primarily due to a $115 million increase on certain military ammunition programs, a $112 million increase on the Guided Multiple Launch Rocket System (GMLRS) program driven by the timing of materials and increased order quantities, a $108 million increase on SiAW as the program ramps, and higher volume on the Sentinel program. These increases were partially offset by a $212 million decrease due to the completion of an international training program and lower volume on the SEMA program as it nears completion.

Operating Income

Current Quarter

Third quarter 2024 operating income decreased $5 million, or 2 percent, due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to 9.4 percent from 9.8 percent principally due to lower net EAC adjustments and changes in contract mix.

Year to Date

Year to date 2024 operating income increased $9 million, or 1 percent, principally due to higher sales. Operating margin rate was comparable to the prior period.

MISSION SYSTEMS			Three Months Ended September 30												%						Nine Months Ended September 30												%
$ in millions			2024						2023						Change						2024						2023						Change
Sales			$	2,823					$	2,628					7		%				$	8,255					$	7,832					5		%
Operating income			390						386						1		%				1,129						1,147						(2)		%
Operating margin rate			13.8		%				14.7		%										13.7		%				14.6		%

Sales

Current Quarter

Third quarter 2024 sales increased $195 million, or 7 percent, primarily due to higher volume on restricted advanced microelectronics and technology programs, increased marine systems sales due, in part, to the timing of materials, and higher Ground/Air Task Oriented Radar (G/ATOR) volume due to continued ramp-up on full-rate production (FRP) awards.

Year to Date

Year to date 2024 sales increased $423 million, or 5 percent, primarily due to higher volume on restricted advanced microelectronics and technology programs, the timing of materials on marine systems programs and FRP ramp-up on G/ATOR. These increases were partially offset by lower sales on the Scalable Agile Beam Radar (SABR) and F-35 programs.

Operating Income

Current Quarter

Third quarter 2024 operating income increased $4 million, or 1 percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 13.8 percent from 14.7 percent primarily due to lower net EAC adjustments and changes in contract mix toward more cost-type content.

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Year to Date

Year to date 2024 operating income decreased $18 million, or 2 percent, due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to 13.7 percent from 14.6 percent, primarily due to lower net EAC adjustments on certain airborne radar production programs due, in part, to production inefficiencies that have driven higher labor costs, as well as changes in contract mix toward more cost-type content. These decreases were partially offset by sales growth on higher margin advanced microelectronics programs.

SPACE SYSTEMS			Three Months Ended September 30												%						Nine Months Ended September 30												%
$ in millions			2024						2023						Change						2024						2023						Change
Sales			$	2,870					$	2,953					(3)		%				$	9,021					$	8,775					3		%
Operating income			345						302						14		%				979						840						17		%
Operating margin rate			12.0		%				10.2		%										10.9		%				9.6		%

Sales

Current Quarter

Third quarter 2024 sales decreased $83 million, or 3 percent, primarily due to wind-down of our work on the restricted space and NGI programs, which reduced sales by $224 million. This reduction was partially offset by a $129 million increase on Space Development Agency (SDA) satellite programs and higher sales across our remaining restricted space portfolio.

Year to Date

Year to date 2024 sales increased $246 million, or 3 percent, primarily due to a $322 million increase on SDA satellite programs, a $123 million increase on HALO, and higher materials volume on the GEM 63 program in support of Amazon’s Project Kuiper. These increases were partially offset by $365 million of lower sales associated with wind-down of our work on the restricted space and NGI programs. Lower sales associated with the wind-down of our work on the restricted space program were largely offset by higher sales across our remaining restricted space portfolio.

Operating Income

Current Quarter

Third quarter 2024 operating income increased $43 million, or 14 percent, due to a higher operating margin rate, which more than offset lower sales. Operating margin rate increased to 12.0 percent from 10.2 percent principally due to an improvement in net EAC adjustments, partially offset by a $16 million benefit in the prior year from insurance recoveries in our commercial space business.

Year to Date

Year to date 2024 operating income increased $139 million, or 17 percent, due to a higher operating margin rate and higher sales. Operating margin rate increased to 10.9 percent from 9.6 percent principally due to an improvement in net EAC adjustments, partially offset by a $16 million benefit in the prior year from insurance recoveries in our commercial space business.

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PRODUCT AND SERVICE ANALYSIS

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

			Three Months Ended September 30															Nine Months Ended September 30
$ in millions			2024						2023									2024						2023
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			$	2,131		$	1,921		$	2,102		$	1,902					$	6,573		$	5,951		$	5,934		$	5,368
Service			687			605			610			533						2,059			1,811			1,759			1,546
Intersegment eliminations			60			54			54			48						178			158			183			164
Total Aeronautics Systems			2,878			2,580			2,766			2,483						8,810			7,920			7,876			7,078
Defense Systems
Product			1,431			1,304			1,305			1,196						4,231			3,856			3,819			3,482
Service			436			394			548			480						1,369			1,207			1,690			1,486
Intersegment eliminations			217			190			197			173						627			550			549			485
Total Defense Systems			2,084			1,888			2,050			1,849						6,227			5,613			6,058			5,453
Mission Systems
Product			2,014			1,747			1,841			1,590						5,793			5,037			5,490			4,726
Service			534			451			524			431						1,613			1,372			1,559			1,301
Intersegment eliminations			275			235			263			221						849			717			783			658
Total Mission Systems			2,823			2,433			2,628			2,242						8,255			7,126			7,832			6,685
Space Systems
Product			2,363			2,077			2,430			2,210						7,520			6,706			7,147			6,494
Service			400			351			415			344						1,189			1,056			1,254			1,106
Intersegment eliminations			107			97			108			97						312			280			374			335
Total Space Systems			2,870			2,525			2,953			2,651						9,021			8,042			8,775			7,935
Segment Totals
Total Product			$	7,939		$	7,049		$	7,678		$	6,898					$	24,117		$	21,550		$	22,390		$	20,070
Total Service			2,057			1,801			2,097			1,788						6,230			5,446			6,262			5,439
Total Segment**(1)**			$	9,996		$	8,850		$	9,775		$	8,686					$	30,347		$	26,996		$	28,652		$	25,509

(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 2024 product sales increased $261 million, or 3 percent, primarily due to an increase in product sales at Mission Systems and Defense Systems, partially offset by a decrease in product sales at Space Systems. The increases were principally due to higher restricted sales at Mission Systems and higher volume on Sentinel, SiAW and certain military ammunition programs at Defense Systems. The Space Systems decrease was principally due to wind-down of our work on the restricted space and NGI programs, partially offset by higher volume on the SDA T2TL programs at Space Systems.

Third quarter 2024 product costs increased $151 million, or 2 percent, consistent with the higher product sales described above and reflect a higher operating margin rate principally due to higher net EAC adjustments on Space Systems product programs.

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NORTHROP GRUMMAN CORPORATION

Year to Date

Year to date 2024 product sales increased $1.7 billion, or 8 percent, primarily due to an increase in product sales at all four sectors. The increase was principally driven by higher volume on restricted programs, F-35, E-2 and Triton at Aeronautics Systems, higher volume on SiAW, certain military ammunition programs and GMLRS at Defense Systems, sales growth on SDA T2TL, HALO and GEM 63 at Space Systems, and higher restricted sales, partially offset by lower SABR and F-35 volume, at Mission Systems.

Year to date 2024 product costs increased $1.5 billion, or 7 percent, consistent with the higher product sales described above and reflect a higher operating margin rate principally due to higher net EAC adjustments on Space Systems product programs.

Service Sales and Costs

Current Quarter

Third quarter 2024 service sales decreased $40 million, or 2 percent, primarily due to a decrease in service sales at Defense Systems principally due to the completion of an international training program and lower volume on SEMA, partially offset by an increase in service sales at Aeronautics Systems driven by higher volume on restricted programs.

Third quarter 2024 service costs increased $13 million, or 1 percent, reflecting a lower operating margin rate principally due to a $16 million prior year benefit for insurance recoveries at Space Systems, changes in contract mix at Defense Systems and lower net EAC adjustments on Mission Systems service programs.

Year to Date

Year to date 2024 service sales decreased $32 million, or 1 percent, primarily due to a decrease in service sales at Defense Systems principally due to the completion of an international training program and lower volume on SEMA, partially offset by an increase in service sales at Aeronautics Systems driven by higher volume on restricted programs and Global Hawk.

Year to date 2024 service costs were comparable with the prior year period reflecting a lower operating margin rate principally due to lower net EAC adjustments on Mission Systems service programs, as well as a $16 million prior year benefit for insurance recoveries at Space Systems.

BACKLOG

Backlog consisted of the following as of September 30, 2024 and December 31, 2023:

						September 30, 2024																		December 31, 2023
$ in millions						Funded						Unfunded						Total Backlog						Total Backlog						% Change in 2024
Aeronautics Systems						$	10,018					$	8,541					$	18,559					$	19,583					(5)		%
Defense Systems						10,171						17,398						27,569						20,198						36		%
Mission Systems						11,625						5,256						16,881						16,108						5		%
Space Systems						7,854						13,937						21,791						28,341						(23)		%
Total backlog						$	39,668					$	45,132					$	84,800					$	84,230					1		%

Third quarter and year to date 2024 net awards totaled $11.7 billion and $33.3 billion, respectively, and backlog totaled $84.8 billion. Significant third quarter new awards include $2.7 billion for restricted programs (primarily at Mission Systems, Aeronautics Systems, and Space Systems), $1.6 billion for E-2 and $0.7 billion for certain military ammunition programs.

During the first quarter of 2024, the company reduced unfunded backlog by $1.6 billion related to a termination for convenience in our restricted space business.

During the second quarter of 2024, the company reduced unfunded backlog by $0.7 billion related to a termination for convenience on the Next Generation Interceptor (NGI) program at Space Systems.

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.

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At September 30, 2024, we had $3.3 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 2024, we renewed our one-year $500 million uncommitted credit facility. At September 30, 2024, there were no borrowings outstanding under these credit facilities. In January 2024, we issued $2.5 billion of unsecured senior notes for general corporate purposes, including debt repayment, share repurchases and working capital.

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 2023 cash from operations were reduced by approximately $500 million for federal estimated tax payments we made related to Section 174. In the future, Congress may consider legislation that would defer the amortization requirement to later years, possibly with retroactive effect. In the meantime, we expect to continue to make additional federal tax payments based on the current Section 174 tax law, which we estimate will reduce our 2024 cash from operations by approximately $350 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 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																					2024						2023						Change
Net earnings																					$	2,910					$	2,591					12		%
Non-cash items(1)																					302						474						(36)		%
Pension and OPB contributions																					(93)						(108)						(14)		%
Changes in trade working capital																					(1,346)						(1,469)						(8)		%
Other, net																					37						(43)						NM
Net cash provided by operating activities																					$	1,810					$	1,445					25		%

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

Year to date 2024 net cash provided by operating activities increased $365 million as compared with the same period in 2023 primarily due to higher net earnings and improved trade working capital, largely driven by lower net federal tax payments, partially offset by the timing of billings and cash collections.

Free Cash Flow

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, and may not be defined and calculated by other companies in the same manner. We use 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.

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

															Nine Months Ended September 30												%
$ in millions																					2024						2023						Change
Net cash provided by operating activities																					$	1,810					$	1,445					25		%
Capital expenditures																					(951)						(972)						(2)		%
Free cash flow																					$	859					$	473					82		%

Year to date 2024 free cash flow increased $386 million, or 82 percent, as compared with the same period in 2023 principally due to higher net cash provided by operating activities.

Investing Cash Flow

Year to date 2024 net cash used in investing activities increased $139 million, or 17 percent, as compared with the same period in 2023 principally due to $157 million of proceeds received in the prior year from the sale of a minority investment, partially offset by lower capital expenditures largely driven by timing.

Financing Cash Flow

Year to date 2024 net cash used in financing activities decreased $486 million, or 43 percent, as compared with the same period in 2023, primarily due to $1.05 billion of fewer debt repayments and a $500 million increase in proceeds from long-term debt, partially offset by a $919 million increase in share repurchases and a $53 million increase in dividends paid.

Credit Facilities, Commercial Paper and Financial Arrangements - See Note 7 to the financial statements for further information on our credit facilities, commercial paper and our use of standby letters of credit and guarantees.

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates from those discussed in our 2023 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 2023 Annual Report on Form 10-K and from time to time in our other filings with the SEC. They include:

Industry and Economic Risks

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

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

• 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

• 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 climate change, 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

• 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

• impacts related to health epidemics and pandemics and similar outbreaks

• 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 innovate, develop new products and technologies, progress and benefit from digital transformation and maintain technologies to meet the needs of our customers

• 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

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

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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.