UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q


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

For the Quarterly Period Ended June 30, ~~2022~~2023


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

Commission File Number 1-16411

NORTHROP GRUMMAN CORPORATION

(Exact name of registrant as specified in its charter)


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

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

(703) 280-2900

(Registrant’s telephone number, including area code)

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


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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large Accelerated Filer ☒ Accelerated Filer ☐

Non-accelerated Filer ☐ Smaller Reporting Company ☐

Emerging Growth Company ☐

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

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

Yes ☐ No ☒

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

As of July ~~25, 2022, 154,711,299~~24, 2023, 151,299,696 shares of common stock were outstanding.

Table of Contents

NORTHROP GRUMMAN CORPORATION

TABLE OF CONTENTS


		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings and Comprehensive Income	1
	Condensed Consolidated Statements of Financial Position	2
	Condensed Consolidated Statements of Cash Flows	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity	4
	Notes to Condensed Consolidated Financial Statements
	1. Basis of Presentation	5
	2. Earnings Per Share, Share Repurchases and Dividends on Common Stock	7
	3. Income Taxes	8
	4. Fair Value of Financial Instruments	98
	5. Investigations, Claims and Litigation	1110
	6. Commitments and Contingencies	1210
	7. Retirement Benefits	1312
	8. Stock Compensation Plans and Other Compensation Arrangements	1413
	9. Segment Information	1514
	Report of Independent Registered Public Accounting Firm	1918
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Overview	2019
	Consolidated Operating Results	2221
	Segment Operating Results	2523
	Product and Service Analysis	3028
	Backlog	3129
	Liquidity and Capital Resources	3129
	Critical Accounting Policies, Estimates and Judgments	3331
	Accounting Standards Updates	3331
	Forward-Looking Statements and Projections	3331
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3533
Item 4.	Controls and Procedures	3533

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	3634
Item 1A.	Risk Factors	3634
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3634
Item 5.	Other Information	34
Item 6.	Exhibits	3736
	Signatures	3837

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NORTHROP GRUMMAN CORPORATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Unaudited)


		Three Months Ended June 30				Six Months Ended June 30					Three Months Ended June 30				Six Months Ended June 30
$ in millions, except per share amounts	$ in millions, except per share amounts	2022		2021		2022		2021		$ in millions, except per share amounts	2023		2022		2023		2022
Sales	Sales									Sales
Product	Product	$	6,779	$	7,193	$	13,620	$	14,215	Product	$	7,441	$	6,779	$	14,712	$	13,620
Service	Service	2,022		1,958		3,978		4,093		Service	2,135		2,022		4,165		3,978
Total sales	Total sales	8,801		9,151		17,598		18,308		Total sales	9,576		8,801		18,877		17,598
Operating costs and expenses	Operating costs and expenses									Operating costs and expenses
Product	Product	5,281		5,620		10,661		11,310		Product	5,876		5,281		11,603		10,661
Service	Service	1,561		1,488		3,105		3,215		Service	1,660		1,561		3,249		3,105
General and administrative expenses	General and administrative expenses	1,005		999		1,981		1,897		General and administrative expenses	1,073		1,005		2,111		1,981
Total operating costs and expenses	Total operating costs and expenses	7,847		8,107		15,747		16,422		Total operating costs and expenses	8,609		7,847		16,963		15,747
Gain on sale of business		—		—		—		1,980
Operating income	Operating income	954		1,044		1,851		3,866		Operating income	967		954		1,914		1,851
Other (expense) income	Other (expense) income									Other (expense) income
Interest expense	Interest expense	(131)		(136)		(264)		(291)		Interest expense	(147)		(131)		(276)		(264)
Non-operating FAS pension benefit	Non-operating FAS pension benefit	377		367		753		734		Non-operating FAS pension benefit	133		377		265		753

Other, net	Other, net	(50)		27		(46)		9		Other, net	34		(50)		82		(46)
Earnings before income taxes	Earnings before income taxes	1,150		1,302		2,294		4,318		Earnings before income taxes	987		1,150		1,985		2,294
Federal and foreign income tax expense	Federal and foreign income tax expense	204		265		393		1,086		Federal and foreign income tax expense	175		204		331		393
Net earnings	Net earnings	$	946	$	1,037	$	1,901	$	3,232	Net earnings	$	812	$	946	$	1,654	$	1,901

Basic earnings per share	Basic earnings per share	$	6.09	$	6.44	$	12.21	$	19.95	Basic earnings per share	$	5.35	$	6.09	$	10.87	$	12.21
Weighted-average common shares outstanding, in millions	Weighted-average common shares outstanding, in millions	155.4		161.0		155.7		162.0		Weighted-average common shares outstanding, in millions	151.7		155.4		152.1		155.7
Diluted earnings per share	Diluted earnings per share	$	6.06	$	6.42	$	12.16	$	19.89	Diluted earnings per share	$	5.34	$	6.06	$	10.83	$	12.16
Weighted-average diluted shares outstanding, in millions	Weighted-average diluted shares outstanding, in millions	156.0		161.5		156.3		162.5		Weighted-average diluted shares outstanding, in millions	152.2		156.0		152.7		156.3

Net earnings (from above)	Net earnings (from above)	$	946	$	1,037	$	1,901	$	3,232	Net earnings (from above)	$	812	$	946	$	1,654	$	1,901
Other comprehensive loss, net of tax
Change in unamortized prior service credit		—		(2)		(1)		(4)
Change in cumulative translation adjustment and other, net		(13)		1		(15)		—
Other comprehensive loss, net of tax		(13)		(1)		(16)		(4)
Other comprehensive income (loss), net of tax										Other comprehensive income (loss), net of tax
Change in cumulative translation adjustment										Change in cumulative translation adjustment	3		(13)		5		(15)
Change in other, net										Change in other, net	(2)		—		(2)		(1)
Other comprehensive income (loss), net of tax										Other comprehensive income (loss), net of tax	1		(13)		3		(16)
Comprehensive income	Comprehensive income	$	933	$	1,036	$	1,885	$	3,228	Comprehensive income	$	813	$	933	$	1,657	$	1,885

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

$ in millions, except par value June 30, 2022 December 31, 2021
Assets
Cash and cash equivalents $ 1,169 $ 3,530
Accounts receivable, net 2,387 1,467
Unbilled receivables, net 6,211 5,492
Inventoried costs, net 909 811
Prepaid expenses and other current assets 961 1,126
Total current assets 11,637 12,426
Property, plant and equipment, net of accumulated depreciation of $7,099 for 2022 and $6,819 for 2021 8,125 7,894
Operating lease right-of-use assets 1,669 1,655
Goodwill 17,518 17,515
Intangible assets, net 483 578
Deferred tax assets 239 200
Other non-current assets 2,243 2,311
Total assets $ 41,914 $ 42,579
Liabilities
Trade accounts payable $ 2,098 $ 2,197
Accrued employee compensation 1,741 1,993
Advance payments and billings in excess of costs incurred 2,734 3,026
Other current liabilities 2,403 2,314
Total current liabilities 8,976 9,530
Long-term debt, net of current portion of $14 for 2022 and $6 for 2021 12,834 12,777
Pension and other postretirement benefit plan liabilities 2,692 3,269
Operating lease liabilities 1,654 1,590
Deferred tax liabilities 131 490
Other non-current liabilities 1,976 1,997
Total liabilities 28,263 29,653
Commitments and contingencies (Note 6) 0 0
Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; 0 shares issued and outstanding — —
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2022—154,876,753 and 2021—156,284,423 155 156
Paid-in capital — —
Retained earnings 13,655 12,913
Accumulated other comprehensive loss (159) (143)
Total shareholders’ equity 13,651 12,926
Total liabilities and shareholders’ equity $ 41,914 $ 42,579


$ in millions, except par value	June 30, 2023		December 31, 2022
Assets
Cash and cash equivalents	$	3,384	$	2,577
Accounts receivable, net	2,096		1,511
Unbilled receivables, net	5,870		5,983
Inventoried costs, net	1,287		978
Prepaid expenses and other current assets	1,232		1,439

Total current assets	13,869		12,488
Property, plant and equipment, net of accumulated depreciation of $7,611 for 2023 and $7,258 for 2022	8,976		8,800
Operating lease right-of-use assets	1,763		1,811
Goodwill	17,517		17,516
Intangible assets, net	344		384
Deferred tax assets	452		162
Other non-current assets	2,688		2,594
Total assets	$	45,609	$	43,755

Liabilities
Trade accounts payable	$	2,056	$	2,587
Accrued employee compensation	1,878		2,057
Advance payments and billings in excess of costs incurred	3,397		3,609
Other current liabilities	4,226		3,334

Total current liabilities	11,557		11,587
Long-term debt, net of current portion of $1,097 for 2023 and $1,072 for 2022	13,796		11,805
Pension and other postretirement benefit plan liabilities	1,161		1,188
Operating lease liabilities	1,772		1,824

Other non-current liabilities	1,837		2,039
Total liabilities	30,123		28,443

Commitments and contingencies (Note 6)

Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2023—151,388,972 and 2022—153,157,924	151		153
Paid-in capital	—		—
Retained earnings	15,485		15,312
Accumulated other comprehensive loss	(150)		(153)
Total shareholders’ equity	15,486		15,312
Total liabilities and shareholders’ equity	$	45,609	$	43,755

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Six Months Ended June 30					Six Months Ended June 30
$ in millions	$ in millions	2022		2021		$ in millions	2023		2022
Operating activities	Operating activities					Operating activities
Net earnings	Net earnings	$	1,901	$	3,232	Net earnings	$	1,654	$	1,901
Adjustments to reconcile to net cash (used in) provided by operating activities:
Adjustments to reconcile to net cash provided by (used in) operating activities:						Adjustments to reconcile to net cash provided by (used in) operating activities:
Depreciation and amortization	Depreciation and amortization	633		594		Depreciation and amortization	621		633

Stock-based compensation	Stock-based compensation	42		40		Stock-based compensation	47		42
Deferred income taxes	Deferred income taxes	(399)		(121)		Deferred income taxes	(423)		(399)
Gain on sale of business		—		(1,980)
Net periodic pension and OPB income	Net periodic pension and OPB income	(597)		(546)		Net periodic pension and OPB income	(154)		(597)
Pension and OPB contributions	Pension and OPB contributions	(71)		(74)		Pension and OPB contributions	(75)		(71)
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Accounts receivable, net	Accounts receivable, net	(920)		(453)		Accounts receivable, net	(591)		(920)
Unbilled receivables, net	Unbilled receivables, net	(719)		(312)		Unbilled receivables, net	110		(719)
Inventoried costs, net	Inventoried costs, net	(98)		(104)		Inventoried costs, net	(331)		(98)
Prepaid expenses and other assets	Prepaid expenses and other assets	114		26		Prepaid expenses and other assets	66		114
Accounts payable and other liabilities	Accounts payable and other liabilities	(724)		(202)		Accounts payable and other liabilities	(1,043)		(724)
Income taxes payable, net	Income taxes payable, net	86		881		Income taxes payable, net	285		86

Other, net	Other, net	67		(19)		Other, net	51		67
Net cash (used in) provided by operating activities		(685)		962
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	217		(685)

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

Capital expenditures	Capital expenditures	(507)		(435)		Capital expenditures	(613)		(507)
Proceeds from sale of equipment to a customer		—		56

Other, net	Other, net	39		1		Other, net	1		39
Net cash (used in) provided by investing activities		(468)		3,022
Net cash used in investing activities						Net cash used in investing activities	(612)		(468)

Financing activities	Financing activities					Financing activities

Payments of long-term debt		—		(2,236)
Net proceeds from issuance of long-term debt						Net proceeds from issuance of long-term debt	1,995		—

Net borrowings on commercial paper						Net borrowings on commercial paper	768		—
Common stock repurchases	Common stock repurchases	(640)		(2,143)		Common stock repurchases	(931)		(640)
Cash dividends paid	Cash dividends paid	(519)		(486)		Cash dividends paid	(554)		(519)
Payments of employee taxes withheld from share-based awards	Payments of employee taxes withheld from share-based awards	(48)		(31)		Payments of employee taxes withheld from share-based awards	(50)		(48)
Other, net	Other, net	(1)		(54)		Other, net	(26)		(1)
Net cash used in financing activities		(1,208)		(4,950)
Decrease in cash and cash equivalents		(2,361)		(966)
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	1,202		(1,208)
Increase (decrease) in cash and cash equivalents						Increase (decrease) in cash and cash equivalents	807		(2,361)
Cash and cash equivalents, beginning of year	Cash and cash equivalents, beginning of year	3,530		4,907		Cash and cash equivalents, beginning of year	2,577		3,530
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	1,169	$	3,941	Cash and cash equivalents, end of period	$	3,384	$	1,169

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

Three Months Ended June 30 Six Months Ended June 30
$ in millions, except per share amounts 2022 2021 2022 2021
Common stock
Beginning of period $ 156 $ 161 $ 156 $ 167
Common stock repurchased (1) (1) (2) (7)
Shares issued for employee stock awards and options — — 1 —
End of period 155 160 155 160
Paid-in capital
Beginning of period — 8 — 58
Common stock repurchased — (21) — (60)
Stock compensation — 13 — 2
End of period — — — —
Retained earnings
Beginning of period 13,277 10,487 12,913 10,482
Common stock repurchased (323) (134) (638) (2,089)
Net earnings 946 1,037 1,901 3,232
Dividends declared (270) (254) (516) (489)
Stock compensation 25 8 (5) 8
End of period 13,655 11,144 13,655 11,144
Accumulated other comprehensive loss
Beginning of period (146) (131) (143) (128)
Other comprehensive loss, net of tax (13) (1) (16) (4)
End of period (159) (132) (159) (132)
Total shareholders’ equity $ 13,651 $ 11,172 $ 13,651 $ 11,172
Cash dividends declared per share $ 1.73 $ 1.57 $ 3.30 $ 3.02


	Three Months Ended June 30				Six Months Ended June 30
$ in millions, except per share amounts	2023		2022		2023		2022
Common stock
Beginning of period	$	152	$	156	$	153	$	156
Common stock repurchased	(1)		(1)		(2)		(2)
Shares issued for employee stock awards and options	—		—		—		1
End of period	151		155		151		155
Paid-in capital
Beginning of period	—		—		—		—



End of period	—		—		—		—
Retained earnings
Beginning of period	15,135		13,277		15,312		12,913
Common stock repurchased	(204)		(323)		(930)		(638)
Net earnings	812		946		1,654		1,901
Dividends declared	(284)		(270)		(549)		(516)
Stock compensation	26		25		(2)		(5)

End of period	15,485		13,655		15,485		13,655
Accumulated other comprehensive loss
Beginning of period	(151)		(146)		(153)		(143)
Other comprehensive income (loss), net of tax	1		(13)		3		(16)
End of period	(150)		(159)		(150)		(159)
Total shareholders’ equity	$	15,486	$	13,651	$	15,486	$	13,651
Cash dividends declared per share	$	1.87	$	1.73	$	3.60	$	3.30

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

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NORTHROP GRUMMAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

Principles of Consolidation and Reporting

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

Effective January 30, 2021 (the “Divestiture date”), we completed the sale of our IT and mission support services business (the “IT services divestiture”) for $3.4 billion in cash and recorded a pre-tax gain on sale of $2.0 billion. The IT and mission support services business was comprised of the majority of the former Information Solutions and Services (IS&S) division of Defense Systems (excluding the Vinnell Arabia business); select cyber, intelligence and missions support programs, which were part of the former Cyber and Intelligence Mission Solutions (CIMS) division of Mission Systems; and the former Space Technical Services business unit of Space Systems. Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture date. Sales and pre-tax profit for the IT and mission support services business were $162 million and $20 million for the six months ended June 30, 2021, respectively.

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

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

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

Accounting Estimates

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

Revenue Recognition

Contract Estimates

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

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~~NORTHROP GRUMMAN CORPORATION~~

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


		Three Months Ended June 30				Six Months Ended June 30					Three Months Ended June 30				Six Months Ended June 30
$ in millions, except per share data	$ in millions, except per share data	2022		2021		2022		2021		$ in millions, except per share data	2023		2022		2023		2022
Revenue	Revenue	$	95	$	160	$	304	$	362	Revenue	$	95	$	95	$	157	$	304
Operating income	Operating income	92		154		265		344		Operating income	76		92		122		265
Net earnings(1)	Net earnings(1)	73		122		209		272		Net earnings(1)	60		73		96		209
Diluted earnings per share(1)	Diluted earnings per share(1)	0.47		0.76		1.34		1.67		Diluted earnings per share(1)	0.39		0.47		0.63		1.34

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

EAC adjustments on a single performance obligation can have a significant effect on the company’s financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. During the three months ended June 30, 2023, we recorded a $36 million unfavorable

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NORTHROP GRUMMAN CORPORATION

EAC adjustment on the Habitation and Logistics Outpost (HALO) program at Space Systems largely due to cost growth stemming from evolving Lunar Gateway architecture and mission requirements combined with macroeconomic challenges. During the three months ended March 31, 2022, we recorded a $67 million favorable EAC adjustment on the engineering, manufacturing and development (EMD) phase of the B-21 program at Aeronautics ~~Systems largely related to~~Systems. No EAC adjustments on a single performance ~~incentives. No such adjustments were material to~~obligation had a significant impact on the financial statements during the three months ended March 31, 2023 or June 30, ~~2022 and 2021.~~2022.

Backlog

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

Company backlog as of June 30, ~~2022~~2023 was ~~$80.0~~$78.8 billion. Of our June 30, ~~2022~~2023 backlog, we expect to recognize approximately 40 percent as revenue over the next 12 months and 6065 percent as revenue over the next 24 months, with the remainder to be recognized thereafter.

Contract Assets and Liabilities

For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position. The amount of revenue recognized for the three and six months ended June 30, 2023 that was included in the December 31, 2022 contract liability balance was $899 million and $2.6 billion, respectively. The amount of revenue recognized for the three and six months ended June 30, 2022 that was included in the December 31, 2021 contract liability balance was $466 million and $1.9 billion, respectively. The amount of revenue recognized for the three and six months ended June 30, 2021 that was included in the December 31, 2020 contract liability balance was $482 million and $1.5 billion, respectively.

Disaggregation of Revenue

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

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Property, Plant, and Equipment

During the six months ended June 30, 2022, the company received lease incentives for landlord funded leasehold improvements of $63 million related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities. During the six months ended June 30, 2022, the company acquired $46 million of internal use software through long-term financing directly with the supplier. The software was recorded in PP&E as a non-cash investing activity and the related liability was recorded in long-term debt as a non-cash financing activity. During the six months ended June 30, 2022, the company received lease incentives for landlord funded leasehold improvements of $63 million related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities. Non-cash investing activities also include capital expenditures incurred but not yet paid of ~~$73~~$62 million and ~~$56~~$73 million as of June 30, 2023 and 2022, respectively.

Sale of Minority Investment

In April 2023, the company reached an agreement to sell its minority investment in an international business. The transaction, which is subject to final government approvals and ~~2021, respectively.~~closing conditions, is expected to be completed in the third quarter. We expect to recognize a pre-tax gain of approximately $100 million when the transaction closes.

Accumulated Other Comprehensive Loss

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


$ in millions	$ in millions	June 30, 2022		December 31, 2021		$ in millions	June 30, 2023		December 31, 2022
Unamortized prior service credit		$	1	$	2
Cumulative translation adjustment and other, net		(160)		(145)
Cumulative translation adjustment						Cumulative translation adjustment	$	(156)	$	(161)
Other, net						Other, net	6		8
Total accumulated other comprehensive loss	Total accumulated other comprehensive loss	$	(159)	$	(143)	Total accumulated other comprehensive loss	$	(150)	$	(153)

Related Party Transactions

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

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Accounting Standards Updates

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

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

Basic Earnings Per Share

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

Diluted Earnings Per Share

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

Share Repurchases

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

~~On January 25, 2021, the company’s board of directors authorized a share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the~~ “2021 Repurchase Program”). Repurchases under the 2021 Repurchase Program commenced in October 2021 upon the completion of the 2018 Repurchase Program. As of June 30, 2022, repurchases under the 2021 Repurchase Program totaled $1.5 billion; $1.5 billion remained under this share repurchase authorization. By its terms, the 2021 Repurchase Program is set to expire when we have used all authorized funds for repurchases.

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and were completed in April 2023.

On January 24, 2022, the company’s board of directors authorized a new share repurchase program of up to an additional $2.0 billion in share repurchases of the company’s common stock (the “2022 Repurchase Program”). ~~By its terms,~~Repurchases under the 2022 Repurchase Program commenced in April 2023 upon completion of the 2021 Repurchase Program. As of June 30, 2023, repurchases under the 2022 Repurchase Program ~~will commence upon completion of~~totaled 0.3 billion; $1.7 billion remained under this share repurchase authorization. By its terms, the ~~2021~~2022 Repurchase Program ~~and~~ will expire when we have used all authorized funds for repurchases. ~~As of June 30, 2022, there have been no repurchases under the 2022 Repurchase Program and the company’s total outstanding share repurchase authorization was $3.5 billion.~~

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

~~During the fourth quarter of 2021, the company entered into an ASR agreement with Goldman Sachs~~America) to repurchase $500 million of the company’s common stock as part of the 2021 and 2022 Repurchase ~~Program.~~Programs. Under the agreement, we made a payment of $500 million to ~~Goldman Sachs~~Bank of America and received an initial delivery of ~~1.2~~0.9 million shares valued at ~~$425~~$400 million that were immediately canceled by the company. The remaining balance of ~~$75~~$100 million was settled on ~~February 1, 2022~~April 27, 2023 with a final delivery of ~~0.1~~0.2 million shares from ~~Goldman Sachs.~~Bank of America. The final average purchase price was ~~$374.79~~$458.28 per share.

Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and, in the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs. ~~During the six months ended June 30, 2022, the company repurchased $640 million of its outstanding shares.~~

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


								Shares Repurchased (in millions)									Shares Repurchased (in millions)
Repurchase Program Authorization Date	Repurchase Program Authorization Date	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share(1)		Date Completed	Six Months Ended June 30		Repurchase Program Authorization Date	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share(1)		Date Completed	Six Months Ended June 30
								2022	2021								2023	2022

December 4, 2018		$	3,000	8.9	$	337.18	October 2021	—	6.5

January 25, 2021	January 25, 2021	$	3,000	3.8	393.76			1.6	—	January 25, 2021	$	3,000	7.0	$	431.05	April 2023	1.4	1.6
January 24, 2022	January 24, 2022	$	2,000	—	—			—	—	January 24, 2022	$	2,000	0.6	$	452.91		0.6	—

(1)Includes commissions paid.

Dividends on Common Stock

In May ~~2022,~~2023, the company increased the quarterly common stock dividend 108 percent to ~~$1.73~~$1.87 per share from the previous amount of ~~$1.57~~$1.73 per share.

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~~3. INCOME TAXES~~
Three Months Ended June 30 Six Months Ended June 30
$ in millions 2022 2021 2022 2021
Federal and foreign income tax expense $ 204 $ 265 $ 393 $ 1,086
Effective income tax rate 17.7 % 20.4 % 17.1 % 25.2 %

~~Current Quarter~~

The second quarter 2022 effective tax rate (ETR) decreased to 17.7 percent from 20.4 percent in the prior year period. The company’s second quarter 2022 ETR includes benefits of $41 million for research credits and $15 million for foreign derived intangible income (FDII), which were partially offset by nondeductible losses on certain of the company’s marketable securities. The company’s second quarter 2021 ETR included benefits of $48 million for research credits and $10 million for FDII. The second quarter 2021 ETR was impacted by a change

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~~made in~~3. INCOME TAXES


	Three Months Ended June 30						Six Months Ended June 30
$ in millions	2023			2022			2023			2022
Federal and foreign income tax expense	$	175		$	204		$	331		$	393
Effective income tax rate	17.7		%	17.7		%	16.7		%	17.1		%

Current Quarter

The company’s second quarter 2023 effective tax ~~revenue recognition~~rate (ETR) of 17.7 percent was comparable with the prior year period and reflects higher interest expense on ~~certain long term contracts, which increased taxable~~unrecognized tax benefits, offset by favorable returns on tax-exempt marketable securities. The second quarter 2023 ETR includes benefits of $38 million for research credits and $14 million for foreign derived intangible income ~~in years prior to the 2017 Tax Cuts~~(FDII). The second quarter 2022 ETR included benefits of $41 million for research credits and ~~Jobs Act at a rate above the current statutory rate.~~$15 million for FDII.

Year to Date

The company’s year to date 2023 ETR decreased to 16.7 percent from 17.1 percent in the prior year period principally due to higher current year ETR benefits associated with research credits and FDII deductions as well as favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax benefits. The year to date 2023 ETR includes benefits of $78 million for research credits and $29 million for FDII. The year to date 2022 ETR ~~decreased to 17.1 percent from 25.2 percent in the prior year period. The company’s year to date 2022 ETR includes~~included benefits of $82 million for research credits and $29 million for FDII. ~~The company’s year to date 2021 ETR~~

Taxes receivable, which are included ~~benefits~~in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of ~~$99~~financial position, were $566 million ~~for research credits~~as of June 30, 2023 and ~~$20~~$850 million ~~for FDII. The year to date 2021 ETR was impacted by additional federal income taxes resulting from the IT services divestiture,~~ as ~~well as the change in tax revenue recognition on certain contracts described above.~~of December 31, 2022.

The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs and the 2017 Tax Cuts and Jobs Act, which includes related final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and procedural guidance issued in August 2021. As of June 30, ~~2022,~~2023, we have approximately ~~$1.7~~$1.6 billion in unrecognized tax benefits, including ~~$458~~$601 million related to our position on IRC Section 451(b). If these matters, including our position on IRC Section 451(b), are unfavorably resolved, there could be a material impact on our future cash flows. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may increase by approximately $120 million.

In the second quarter of 2023, the California Franchise Tax Board approved a resolution of the state examination primarily related to California state apportionment in the company’s 2007 to 2016 tax years, resulting in a $95 million reduction to our unrecognized tax benefits and an $11 million reduction to unallocated corporate expense.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2020 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under Internal Revenue Service (IRS) examination. During the second quarter of 2023, the company entered into an agreed Revenue Agent’s Report (“RAR”) for certain matters related to the company’s 2014-2017 federal income tax returns, resulting in a $90 million reduction to our unrecognized tax benefits and an immaterial impact to income tax expense.

Our current unrecognized tax benefits, which are included in Other current liabilities in the unaudited condensed consolidated statements of financial position, were ~~$659~~$689 million and ~~$590~~$728 million as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2018 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under Internal Revenue Service (IRS) examination. This quarter, the company’s 2014-2016 federal income tax returns and refund claims related to its 2007-2016 federal tax returns reverted back from IRS Appeals to IRS examination for additional factual review. In addition, legacy Orbital ATK (OATK) federal tax returns for the years ended March 31, 2014 and 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under review by the IRS Appeals Office. It is reasonably possible that within the next twelve months, unrecognized tax benefits claimed in legacy OATK’s 2014 to 2017 tax years may decline by up to $110 million through administrative resolution with IRS Appeals.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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


		June 30, 2022								December 31, 2021									June 30, 2023								December 31, 2022
$ in millions	$ in millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		$ in millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Assets	Financial Assets																	Financial Assets
Marketable securities	Marketable securities	$	328	$	—	$	8	$	336	$	393	$	1	$	7	$	401	Marketable securities	$	316	$	—	$	8	$	324	$	310	$	1	$	8	$	319
Marketable securities valued using NAV	Marketable securities valued using NAV							14								17		Marketable securities valued using NAV							10								13
Total marketable securities	Total marketable securities	328		—		8		350		393		1		7		418		Total marketable securities	316		—		8		334		310		1		8		332
Derivatives	Derivatives	—		(1)		—		(1)		—		(1)		—		(1)		Derivatives	—		2		—		2		—		7		—		7

The notional value of the company’s foreign currency forward contracts at June 30, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~$114~~$271 million and ~~$120~~$221 million, respectively. ~~At June 30, 2022 and December 31, 2021, no~~The portion of ~~the~~ notional value ~~was~~ designated as a cash flow ~~hedge.~~hedge at June 30, 2023 and December 31, 2022 was $59 million and $87 million, respectively.

The derivative fair values and related unrealized gains/losses at June 30, ~~2022~~2023 and December 31, ~~2021~~2022 were not material.

There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the six months ended June 30, ~~2022.~~2023.

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

Long-term Debt

The estimated fair value of long-term debt was ~~$12.8~~$14.3 billion and ~~$15.1~~$12.1 billion as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.

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

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

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

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

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

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

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

~~Repayments of Senior Notes~~

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

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

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5. INVESTIGATIONS, CLAIMS AND LITIGATION

~~On May 4, 2012, the company commenced an action,~~ ~~Northrop Grumman Systems Corp. v. United States~~, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed-price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS were delivered. The company’s lawsuit seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $410 million, less certain amounts outstanding under the contract. In the course of the litigation, the United States subsequently amended its counterclaim, reducing it to seek approximately $193 million. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On February 3, 2020, after extensive discovery and motions practice, the parties commenced what was expected to be a seven-week trial. After COVID-19-related interruptions, trial concluded on March 5, 2021. On October 12, 2021, the parties completed post-trial briefing, and on December 8, 2021 the court held a post-trial oral argument. On June 27, 2022, the judge issued a decision concluding that the company was entitled to approximately $63 million for unpaid portions of the contract price and $5 million in additional damages, as well as interest, which the company estimates is approximately $15 million (as of June 30, 2022) and such additional interest as may accrue until the date the government makes payment. The judge also concluded that the government was entitled to approximately $1 million in off-setting damages. On July 18, 2022, the government filed a motion for reconsideration, arguing that the government is entitled to damages of approximately $57 million for particular periods of delay. Ultimately, after the court enters judgment, the parties will also have 60 days to file an appeal.

The company is engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, the company has worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation (NYSDEC), the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. In December 2019, the State of New York issued an Amended Record of Decision seeking to impose additional remedial requirements beyond measures the company previously had been ~~taking; the State also communicated that it was assessing potential natural resource damages.~~taking. In December 2020, the parties reached a tentative agreement regarding the steps the company ~~will~~would take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. On September 22, 2021, the State of New York issued for public comment a new consent decree reflecting the agreement. On December 7, 2021, the public comment period closed. On ~~July 13,~~August 3, 2022, the ~~State filed a motion seeking~~ court ~~approval of~~approved the consent decree. We have also reached agreements with the Department of Defense and the Bethpage and South Farmingdale Water ~~District~~Districts to resolve claims involving these parties. ~~On May 24, 2022,~~Those agreements have also been approved by the ~~court approved the agreement~~courts as necessary. The company continues to be involved in related disputes with the ~~Bethpage Water District. On July 18, 2022, the government filed a motion seeking court approval~~Towns of ~~the agreement with the Department of Defense. We are in discussions with the South Farmingdale Water District to explore whether we can also resolve their claims at this stage.~~Oyster Bay and Hempstead.

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

In June 2018, the FTC issued a Decision and Order enabling the company’s acquisition of OATK to proceed and providing generally for the company to continue to make solid rocket motors available to competing missile primes on a non-discriminatory basis. The company has taken and continues to take robust actions to help ensure compliance with the terms of the Order. Similarly, the Compliance Officer, appointed under the Order, and the FTC have taken and continue to take various actions to oversee compliance. In October 2019, the company received a civil investigative demand (CID) from the FTC requesting certain information relating to a potential issue regarding the

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company’s compliance with the Order in connection with a then pending missile competition. The company promptly provided information in response to the request. ~~The~~In late 2021, the company ~~has~~ resumed discussions with staff at the FTC regarding our response and their views on compliance issues. In late 2022, the company received a follow-on CID; the company responded to it earlier this year. We cannot predict ~~the outcome of those discussions,~~any additional steps, but we do not believe they are likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of June 30, ~~2022,~~2023, or its annual results of operations and/or cash flows. We believe the company has been and continues to be in compliance with the Order.

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

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

6. COMMITMENTS AND CONTINGENCIES

U.S. Government Cost Claims and Contingencies

From time to time, the company is advised of claims by the U.S. government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and U.S. government

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representatives engage in discussions to enable the company to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for such potential disallowed costs. Such provisions are reviewed periodically using the most recent information available. The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of June 30, ~~2022,~~2023, or its annual results of operations and/or cash flows.

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

B-21 Low-Rate Initial Production Options

In 2015, the U.S. Air Force awarded to Northrop Grumman the B-21 contract, including a base contract for engineering, manufacturing, and design (EMD) and five low-rate initial production (LRIP) options. The EMD phase of the program is largely cost type and began at contract award. The LRIP options are largely fixed price and are expected to be awarded and executed through approximately the end of the decade. In the second quarter of 2023, we again reviewed our estimated cost to complete the LRIP phase of the B-21 program. Principally due to the company’s estimate of the impact macroeconomic factors may have on our cost to complete the LRIP options, as well as ongoing discussions with our suppliers and our customer, we continue to believe it is reasonably possible one or more of the LRIP options could be performed at a loss and the range of such loss across the five LRIP options is between $0 and $1.2 billion. As we do not currently believe a loss is probable on any of the LRIP options, we have not recognized any such loss in our financial results for the period ended June 30, 2023.

Environmental Matters

The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S. government contracts as of June 30, ~~2022~~2023 and December 31, ~~2021:~~2022:
$ in millions
Accrued Costs(1)(2)
Reasonably Possible Future Costs in Excess of Accrued Costs(2)
Deferred Costs(3)
June 30, 2022 $ 574 $ 363 $ 486
December 31, 2021 572 363 486


$ in millions	Accrued Costs(1)(2)		Reasonably Possible Future Costs in Excess of Accrued Costs(2)		Deferred Costs(3)
June 30, 2023	$	562	$	353	$	490
December 31, 2022	565		353		486

(1) As of June 30, ~~2022, $187~~2023, $202 million is recorded in Other current liabilities and ~~$387~~$360 million is recorded in Other non-current liabilities.

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

(3) As of June 30, ~~2022, $162~~2023, $181 million is deferred in Prepaid expenses and other current assets and ~~$324~~$309 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.

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

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~~company’s unaudited condensed consolidated financial position as of June 30, 2022, or its annual results of operations and/or cash flows.~~

Financial Arrangements

In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At June 30, ~~2022,~~2023, there were ~~$370~~$356 million of stand-by letters of credit and guarantees and ~~$78~~$79 million of surety bonds outstanding.

Commercial Paper

The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to ~~$2.0~~$2.5 billion. At June 30, ~~2022,~~2023, there were no$779 million of outstanding short-term commercial paper borrowings ~~outstanding.~~at a weighted-average interest rate of 5.73% that have original maturities of three months or less from the date of issuance. The outstanding balance of commercial paper borrowings is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.

Credit Facilities

The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of ~~$2.0~~$2.5 billion (the ~~“2018~~“2022 Credit Agreement”) that matures in August ~~2024~~2027 and is intended to support the ~~company’s~~company's commercial paper program and other general corporate purposes. Commercial paper borrowings reduce the amount available for borrowing under the ~~2018~~2022 Credit Agreement. At June 30, ~~2022,~~2023, there ~~was~~were no ~~balance~~borrowings outstanding under this ~~facility.~~facility; however, the amount available for borrowing was reduced by the $779 million of outstanding, short-term commercial paper borrowings described above.

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

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

7. RETIREMENT BENEFITS

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


		Three Months Ended June 30								Six Months Ended June 30									Three Months Ended June 30								Six Months Ended June 30
		Pension Benefits				OPB				Pension Benefits				OPB					Pension Benefits				OPB				Pension Benefits				OPB
$ in millions	$ in millions	2022		2021		2022		2021		2022		2021		2022		2021		$ in millions	2023		2022		2023		2022		2023		2022		2023		2022
Components of net periodic benefit cost (benefit)	Components of net periodic benefit cost (benefit)																	Components of net periodic benefit cost (benefit)
Service cost	Service cost	$	92	$	103	$	2	$	4	$	184	$	207	$	4	$	8	Service cost	$	59	$	92	$	1	$	2	$	118	$	184	$	2	$	4
Interest cost	Interest cost	284		264		12		14		568		527		24		27		Interest cost	392		284		16		12		784		568		33		24
Expected return on plan assets	Expected return on plan assets	(661)		(629)		(27)		(27)		(1,321)		(1,257)		(55)		(53)		Expected return on plan assets	(525)		(661)		(21)		(27)		(1,049)		(1,321)		(42)		(55)
Amortization of prior service (credit) cost	Amortization of prior service (credit) cost	—		(2)		(1)		(1)		—		(4)		(1)		(1)		Amortization of prior service (credit) cost	—		—		—		(1)		—		—		—		(1)

Net periodic benefit cost (benefit)	Net periodic benefit cost (benefit)	$	(285)	$	(264)	$	(14)	$	(10)	$	(569)	$	(527)	$	(28)	$	(19)	Net periodic benefit cost (benefit)	$	(74)	$	(285)	$	(4)	$	(14)	$	(147)	$	(569)	$	(7)	$	(28)

Employer Contributions

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

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


		Three Months Ended June 30				Six Months Ended June 30					Three Months Ended June 30				Six Months Ended June 30
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions	2023		2022		2023		2022
Defined benefit pension plans	Defined benefit pension plans	$	25	$	26	$	51	$	53	Defined benefit pension plans	$	25	$	25	$	54	$	51
OPB plans	OPB plans	10		10		20		21		OPB plans	10		10		21		20
Defined contribution plans	Defined contribution plans	122		111		321		377		Defined contribution plans	146		122		361		321

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8. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS

Stock Awards

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


		Six Months Ended June 30					Six Months Ended June 30
in millions	in millions	2022		2021		in millions	2023		2022
RSRs granted	RSRs granted	0.1		0.1		RSRs granted	0.1		0.1
RPSRs granted	RPSRs granted	0.2		0.2		RPSRs granted	0.1		0.2
Grant date aggregate fair value	Grant date aggregate fair value	$	93	$	88	Grant date aggregate fair value	$	101	$	93

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

Cash Awards

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


		Six Months Ended June 30					Six Months Ended June 30
$ in millions	$ in millions	2022		2021		$ in millions	2023		2022
Minimum aggregate payout amount	Minimum aggregate payout amount	$	32	$	31	Minimum aggregate payout amount	$	34	$	32
Maximum aggregate payout amount	Maximum aggregate payout amount	183		178		Maximum aggregate payout amount	192		183

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

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9. SEGMENT INFORMATION

The following table presents sales and operating income by segment:


		Three Months Ended June 30				Six Months Ended June 30					Three Months Ended June 30				Six Months Ended June 30
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions	2023		2022		2023		2022
Sales	Sales									Sales
Aeronautics Systems	Aeronautics Systems	$	2,534	$	2,913	$	5,237	$	5,903	Aeronautics Systems	$	2,595	$	2,534	$	5,110	$	5,237
Defense Systems	Defense Systems	1,294		1,427		2,577		2,989		Defense Systems	1,420		1,294		2,796		2,577
Mission Systems	Mission Systems	2,516		2,588		5,013		5,177		Mission Systems	2,641		2,516		5,204		5,013
Space Systems	Space Systems	2,979		2,748		5,834		5,269		Space Systems	3,488		2,979		6,838		5,834
Intersegment eliminations	Intersegment eliminations	(522)		(525)		(1,063)		(1,030)		Intersegment eliminations	(568)		(522)		(1,071)		(1,063)
Total sales	Total sales	8,801		9,151		17,598		18,308		Total sales	9,576		8,801		18,877		17,598
Operating income	Operating income									Operating income
Aeronautics Systems	Aeronautics Systems	258		300		565		608		Aeronautics Systems	278		258		515		565
Defense Systems	Defense Systems	168		177		323		354		Defense Systems	166		168		326		323
Mission Systems	Mission Systems	413		408		798		805		Mission Systems	401		413		761		798
Space Systems	Space Systems	310		301		571		577		Space Systems	283		310		596		571
Intersegment eliminations	Intersegment eliminations	(76)		(69)		(147)		(132)		Intersegment eliminations	(76)		(76)		(144)		(147)
Total segment operating income	Total segment operating income	1,073		1,117		2,110		2,212		Total segment operating income	1,052		1,073		2,054		2,110
FAS/CAS operating adjustment	FAS/CAS operating adjustment	(51)		18		(97)		37		FAS/CAS operating adjustment	(21)		(51)		(42)		(97)
Unallocated corporate (expense) income		(68)		(91)		(162)		1,617
Unallocated corporate expense										Unallocated corporate expense	(64)		(68)		(98)		(162)
Total operating income	Total operating income	$	954	$	1,044	$	1,851	$	3,866	Total operating income	$	967	$	954	$	1,914	$	1,851

FAS/CAS Operating Adjustment

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

Unallocated Corporate ~~(Expense) Income~~Expense

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

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

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Disaggregation of Revenue


Sales by Customer Type	Sales by Customer Type	Three Months Ended June 30								Six Months Ended June 30								Sales by Customer Type	Three Months Ended June 30								Six Months Ended June 30
		2022				2021				2022				2021					2023				2022				2023				2022
$ in millions	$ in millions	$		%(3)		$		%(3)		$		%(3)		$		%(3)		$ in millions	$		%(3)		$		%(3)		$		%(3)		$		%(3)
Aeronautics Systems	Aeronautics Systems																	Aeronautics Systems
U.S. government(1)	U.S. government(1)	$	2,134	84	%	$	2,513	86	%	$	4,426	85	%	$	5,054	86	%	U.S. government(1)	$	2,215	86	%	$	2,134	84	%	$	4,323	85	%	$	4,426	85	%
International(2)	International(2)	328		13	%	351		12	%	671		13	%	750		12	%	International(2)	308		12	%	328		13	%	639		12	%	671		13	%
Other customers	Other customers	14		1	%	4		—	%	17		—	%	10		—	%	Other customers	8		—	%	14		1	%	19		—	%	17		—	%
Intersegment sales	Intersegment sales	58		2	%	45		2	%	123		2	%	89		2	%	Intersegment sales	64		2	%	58		2	%	129		3	%	123		2	%
Aeronautics Systems sales	Aeronautics Systems sales	2,534		100	%	2,913		100	%	5,237		100	%	5,903		100	%	Aeronautics Systems sales	2,595		100	%	2,534		100	%	5,110		100	%	5,237		100	%
Defense Systems	Defense Systems																	Defense Systems
U.S. government(1)	U.S. government(1)	774		61	%	879		62	%	1,549		61	%	1,872		63	%	U.S. government(1)	848		60	%	774		61	%	1,651		59	%	1,549		61	%
International(2)	International(2)	328		25	%	335		23	%	621		24	%	686		22	%	International(2)	357		25	%	328		25	%	745		27	%	621		24	%
Other customers	Other customers	18		1	%	18		1	%	34		1	%	51		2	%	Other customers	20		1	%	18		1	%	36		1	%	34		1	%
Intersegment sales	Intersegment sales	174		13	%	195		14	%	373		14	%	380		13	%	Intersegment sales	195		14	%	174		13	%	364		13	%	373		14	%
Defense Systems sales	Defense Systems sales	1,294		100	%	1,427		100	%	2,577		100	%	2,989		100	%	Defense Systems sales	1,420		100	%	1,294		100	%	2,796		100	%	2,577		100	%
Mission Systems	Mission Systems																	Mission Systems
U.S. government(1)	U.S. government(1)	1,802		72	%	1,901		73	%	3,596		72	%	3,735		72	%	U.S. government(1)	1,877		71	%	1,802		72	%	3,812		73	%	3,596		72	%
International(2)	International(2)	415		16	%	419		16	%	848		17	%	921		18	%	International(2)	454		17	%	415		16	%	830		16	%	848		17	%
Other customers	Other customers	40		2	%	14		1	%	64		1	%	30		1	%	Other customers	27		1	%	40		2	%	42		1	%	64		1	%
Intersegment sales	Intersegment sales	259		10	%	254		10	%	505		10	%	491		9	%	Intersegment sales	283		11	%	259		10	%	520		10	%	505		10	%
Mission Systems sales	Mission Systems sales	2,516		100	%	2,588		100	%	5,013		100	%	5,177		100	%	Mission Systems sales	2,641		100	%	2,516		100	%	5,204		100	%	5,013		100	%
Space Systems	Space Systems																	Space Systems
U.S. government(1)	U.S. government(1)	2,798		94	%	2,568		93	%	5,506		94	%	4,894		93	%	U.S. government(1)	3,314		95	%	2,798		94	%	6,480		95	%	5,506		94	%
International(2)	International(2)	84		3	%	104		4	%	156		3	%	209		4	%	International(2)	83		2	%	84		3	%	154		2	%	156		3	%
Other customers	Other customers	66		2	%	45		2	%	110		2	%	96		2	%	Other customers	65		2	%	66		2	%	146		2	%	110		2	%
Intersegment sales	Intersegment sales	31		1	%	31		1	%	62		1	%	70		1	%	Intersegment sales	26		1	%	31		1	%	58		1	%	62		1	%
Space Systems sales	Space Systems sales	2,979		100	%	2,748		100	%	5,834		100	%	5,269		100	%	Space Systems sales	3,488		100	%	2,979		100	%	6,838		100	%	5,834		100	%
Total	Total																	Total
U.S. government(1)	U.S. government(1)	7,508		85	%	7,861		86	%	15,077		86	%	15,555		85	%	U.S. government(1)	8,254		86	%	7,508		85	%	16,266		86	%	15,077		86	%
International(2)	International(2)	1,155		13	%	1,209		13	%	2,296		13	%	2,566		14	%	International(2)	1,202		13	%	1,155		13	%	2,368		13	%	2,296		13	%
Other customers	Other customers	138		2	%	81		1	%	225		1	%	187		1	%	Other customers	120		1	%	138		2	%	243		1	%	225		1	%
Total Sales	Total Sales	$	8,801	100	%	$	9,151	100	%	$	17,598	100	%	$	18,308	100	%	Total Sales	$	9,576	100	%	$	8,801	100	%	$	18,877	100	%	$	17,598	100	%

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

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

(3) Percentages calculated based on total segment sales.

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Sales by Contract Type	Three Months Ended June 30								Six Months Ended June 30
	2023				2022				2023				2022
$ in millions	$		%(1)		$		%(1)		$		%(1)		$		%(1)
Aeronautics Systems
Cost-type	$	1,319	52	%	$	1,217	49	%	$	2,550	51	%	$	2,493	49	%
Fixed-price	1,212		48	%	1,259		51	%	2,431		49	%	2,621		51	%
Intersegment sales	64				58				129				123
Aeronautics Systems sales	2,595				2,534				5,110				5,237
Defense Systems
Cost-type	404		33	%	373		33	%	827		34	%	709		32	%
Fixed-price	821		67	%	747		67	%	1,605		66	%	1,495		68	%
Intersegment sales	195				174				364				373
Defense Systems sales	1,420				1,294				2,796				2,577
Mission Systems
Cost-type	957		41	%	875		39	%	1,918		41	%	1,710		38	%
Fixed-price	1,401		59	%	1,382		61	%	2,766		59	%	2,798		62	%
Intersegment sales	283				259				520				505
Mission Systems sales	2,641				2,516				5,204				5,013
Space Systems
Cost-type	2,572		74	%	2,096		71	%	5,018		74	%	4,079		71	%
Fixed-price	890		26	%	852		29	%	1,762		26	%	1,693		29	%
Intersegment sales	26				31				58				62
Space Systems sales	3,488				2,979				6,838				5,834
Total
Cost-type	5,252		55	%	4,561		52	%	10,313		55	%	8,991		51	%
Fixed-price	4,324		45	%	4,240		48	%	8,564		45	%	8,607		49	%
Total Sales	$	9,576			$	8,801			$	18,877			$	17,598

(1)Percentages calculated based on external customer sales.

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Sales by Contract Type Three Months Ended June 30 Six Months Ended June 30
2022 2021 2022 2021
$ in millions $
%(1)
$
%(1)
$
%(1)
$
%(1)
Aeronautics Systems
Cost-type $ 1,217 49 % $ 1,341 47 % $ 2,493 49 % $ 2,752 47 %
Fixed-price 1,259 51 % 1,527 53 % 2,621 51 % 3,062 53 %
Intersegment sales 58 45 123 89
Aeronautics Systems sales 2,534 2,913 5,237 5,903
Defense Systems
Cost-type 373 33 % 434 35 % 709 32 % 943 36 %
Fixed-price 747 67 % 798 65 % 1,495 68 % 1,666 64 %
Intersegment sales 174 195 373 380
Defense Systems sales 1,294 1,427 2,577 2,989
Mission Systems
Cost-type 875 39 % 808 35 % 1,710 38 % 1,673 36 %
Fixed-price 1,382 61 % 1,526 65 % 2,798 62 % 3,013 64 %
Intersegment sales 259 254 505 491
Mission Systems sales 2,516 2,588 5,013 5,177
Space Systems
Cost-type 2,096 71 % 2,025 75 % 4,079 71 % 3,869 74 %
Fixed-price 852 29 % 692 25 % 1,693 29 % 1,330 26 %
Intersegment sales 31 31 62 70
Space Systems sales 2,979 2,748 5,834 5,269
Total
Cost-type 4,561 52 % 4,608 50 % 8,991 51 % 9,237 50 %
Fixed-price 4,240 48 % 4,543 50 % 8,607 49 % 9,071 50 %
Total Sales $ 8,801 $ 9,151 $ 17,598 $ 18,308

~~(1)Percentages calculated based on external customer sales.~~

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Sales by Geographic Region	Sales by Geographic Region	Three Months Ended June 30								Six Months Ended June 30								Sales by Geographic Region	Three Months Ended June 30								Six Months Ended June 30
		2022				2021				2022				2021					2023				2022				2023				2022
$ in millions	$ in millions	$		%(2)		$		%(2)		$		%(2)		$		%(2)		$ in millions	$		%(2)		$		%(2)		$		%(2)		$		%(2)
Aeronautics Systems	Aeronautics Systems																	Aeronautics Systems
United States	United States	$	2,148	87	%	$	2,517	88	%	$	4,443	86	%	$	5,064	87	%	United States	$	2,223	88	%	$	2,148	87	%	$	4,342	87	%	$	4,443	86	%
Asia/Pacific	Asia/Pacific	205		8	%	204		7	%	395		8	%	483		8	%	Asia/Pacific	138		5	%	205		8	%	285		6	%	395		8	%
Europe	Europe	113		5	%	127		4	%	250		5	%	227		4	%	Europe	165		7	%	113		5	%	339		7	%	250		5	%
All other(1)	All other(1)	10		—	%	20		1	%	26		1	%	40		1	%	All other(1)	5		—	%	10		—	%	15		—	%	26		1	%
Intersegment sales	Intersegment sales	58				45				123				89				Intersegment sales	64				58				129				123
Aeronautics Systems sales	Aeronautics Systems sales	2,534				2,913				5,237				5,903				Aeronautics Systems sales	2,595				2,534				5,110				5,237
Defense Systems	Defense Systems																	Defense Systems
United States	United States	792		71	%	897		73	%	1,583		72	%	1,923		73	%	United States	868		71	%	792		71	%	1,687		70	%	1,583		72	%
Asia/Pacific	Asia/Pacific	123		11	%	126		10	%	228		10	%	229		9	%	Asia/Pacific	114		9	%	123		11	%	231		9	%	228		10	%
Europe	Europe	95		8	%	79		6	%	196		9	%	155		6	%	Europe	132		11	%	95		8	%	260		11	%	196		9	%
All other(1)	All other(1)	110		10	%	130		11	%	197		9	%	302		12	%	All other(1)	111		9	%	110		10	%	254		10	%	197		9	%
Intersegment sales	Intersegment sales	174				195				373				380				Intersegment sales	195				174				364				373
Defense Systems sales	Defense Systems sales	1,294				1,427				2,577				2,989				Defense Systems sales	1,420				1,294				2,796				2,577
Mission Systems	Mission Systems																	Mission Systems
United States	United States	1,842		81	%	1,915		82	%	3,660		81	%	3,765		80	%	United States	1,904		81	%	1,842		81	%	3,854		82	%	3,660		81	%
Asia/Pacific	Asia/Pacific	137		6	%	98		4	%	276		6	%	258		6	%	Asia/Pacific	120		5	%	137		6	%	212		5	%	276		6	%
Europe	Europe	219		10	%	242		11	%	444		10	%	511		11	%	Europe	266		11	%	219		10	%	466		10	%	444		10	%
All other(1)	All other(1)	59		3	%	79		3	%	128		3	%	152		3	%	All other(1)	68		3	%	59		3	%	152		3	%	128		3	%
Intersegment sales	Intersegment sales	259				254				505				491				Intersegment sales	283				259				520				505
Mission Systems sales	Mission Systems sales	2,516				2,588				5,013				5,177				Mission Systems sales	2,641				2,516				5,204				5,013
Space Systems	Space Systems																	Space Systems
United States	United States	2,864		97	%	2,614		97	%	5,616		97	%	4,990		96	%	United States	3,379		97	%	2,864		97	%	6,626		98	%	5,616		97	%
Asia/Pacific	Asia/Pacific	24		1	%	13		—	%	53		1	%	29		1	%	Asia/Pacific	25		1	%	24		1	%	45		1	%	53		1	%
Europe	Europe	56		2	%	89		3	%	96		2	%	177		3	%	Europe	38		1	%	56		2	%	83		1	%	96		2	%
All other(1)	All other(1)	4		—	%	1		—	%	7		—	%	3		—	%	All other(1)	20		1	%	4		—	%	26		—	%	7		—	%
Intersegment sales	Intersegment sales	31				31				62				70				Intersegment sales	26				31				58				62
Space Systems sales	Space Systems sales	2,979				2,748				5,834				5,269				Space Systems sales	3,488				2,979				6,838				5,834
Total	Total																	Total
United States	United States	7,646		87	%	7,943		86	%	15,302		87	%	15,742		86	%	United States	8,374		88	%	7,646		87	%	16,509		88	%	15,302		87	%
Asia/Pacific	Asia/Pacific	489		6	%	441		5	%	952		5	%	999		5	%	Asia/Pacific	397		4	%	489		6	%	773		4	%	952		5	%
Europe	Europe	483		5	%	537		6	%	986		6	%	1,070		6	%	Europe	601		6	%	483		5	%	1,148		6	%	986		6	%
All other(1)	All other(1)	183		2	%	230		3	%	358		2	%	497		3	%	All other(1)	204		2	%	183		2	%	447		2	%	358		2	%
Total Sales	Total Sales	$	8,801			$	9,151			$	17,598			$	18,308			Total Sales	$	9,576			$	8,801			$	18,877			$	17,598

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

(2)Percentages calculated based on external customer sales.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Northrop Grumman Corporation

Falls Church, Virginia

Results of Review of Interim Financial Information

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

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

Basis for Review Results

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

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


/s/			Deloitte & Touche LLP
			McLean, Virginia
			July ~~27, 2022~~26, 2023

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

OVERVIEW

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

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

The following discussion should be read along with the financial statements included in this Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Liquidity and Capital Resources,” “Quantitative and Qualitative Disclosures About Market Risks” and “Risk Factors” in our ~~2021~~2022 Annual Report on Form 10-K, which provides additional information on our business, ~~and~~ the environment in which we operate and our operating results.

~~Disposition of IT and Mission Support Services Business~~

Effective January 30, 2021 (the “Divestiture date”), we completed the sale of our IT and mission support services business (the “IT services divestiture”) for $3.4 billion in cash and recorded a pre-tax gain of $2.0 billion. The IT and mission support services business was comprised of the majority of the former IS&S division of Defense Systems (excluding the Vinnell Arabia business); select cyber, intelligence and missions support programs, which were part of the former CIMS division of Mission Systems; and the former Space Technical Services business unit of Space Systems. Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture date.

~~COVID-19~~

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

At a macro level, the number of hospitalizations and deaths, in the U.S. in particular, have generally eased in 2022, as more people are fully vaccinated, and communities have continued to open up. It, of course, remains unclear whether that trajectory will continue, but there is some reason for optimism. The company continues to work to monitor and address the pandemic and related developments, including the impact on our company, our employees, our customers, our suppliers and our communities. Our goals have been, and continue to be, to lessen the potential adverse impacts, both health and economic, and to continue to position the company for long-term success. Like the communities in which we operate, our actions have varied, and will continue to vary, depending on the spread of COVID-19 and applicable government requirements, and the needs of our stakeholders.

During the second quarter of 2022, COVID-19 case rates and the health and economic impacts of the pandemic fluctuated in different communities in the U.S. and globally, particularly with the spread of new variants. We continued to see a prolonged impact on the economy, our industry, and our company, with ongoing labor shortages, supply chain challenges, and inflation, among other impacts. Although direct COVID-19-related impacts on our business generally declined this quarter, including in the areas of employee absenteeism and leave-taking, the company’s second quarter 2022 revenue and operating income were reduced by the broader macroeconomic environment, including a tight labor market and extended material lead times, which we expect to continue. While we cannot predict the future course of the pandemic, we are not currently assuming significant additional direct COVID-19-related impacts on our 2022 financial results.

For further information on the pandemic and the potential impact to the company of COVID-19, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources”

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~~below and “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K.~~

Global Security ~~and Economic~~ Environment

The U.S. and its allies continue to face a global security environment of heightened tensions and instability, threats from state and non-state actors, including in particular major global powers, as well as terrorist organizations, ~~emerging~~increasing nuclear tensions, diverse regional security concerns and political instability. ~~The conflict in Ukraine has increased those tensions and instability, and highlighted threats, as well as disrupted supply chains and added costs.~~ The market for defense products, services and solutions globally is driven by these complex and evolving security challenges, considered in the broader context of political and socioeconomic circumstances and priorities.

Our operations and financial performance, as well as demand for our products and services, are impacted by global events, including violence and unrest. The same is true for our suppliers and other business partners.

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 ~~continue to experience an increased~~have experienced a modest increase in demand for certain of our goods and services directly and indirectly related to the conflict in the ~~Ukraine, in particular, but we have not seen a significant increase to date.~~Ukraine. We also ~~continue to experience modest~~have experienced a slight disruption to some of our programs and supply chain, including ~~with~~ unanticipated cost growth, as a result of the conflict ~~particularly with respect to our Commercial Resupply Services contract. We~~in Ukraine and economic sanctions. However, we do not have sizable business dealings in Russia or Ukraine, and do not anticipate significant adverse ~~impacts. We are actively monitoring~~impacts directly from the ~~situation and exploring both opportunities and risks, including measures to mitigate the risk of future disruption and costs to our programs.~~ongoing conflict.

The global geopolitical and economic environments also continue to be impacted by uncertainty and stress, and global inflationary pressures. Geopolitical relationships have changed and are continuing to change. Global economic growth is expected to remain in the low single digits in 2022, reflecting, among other things, the continued impact of and uncertainty surrounding geopolitical tensions globally, financial market volatility, inflation and the COVID-19 pandemic. We expect still further impacts related toMore broadly, the conflict in Ukraine and threats elsewhere have heightened tensions and highlighted security requirements globally, especially in Europe and the Pacific region, as well as the U.S. We have started to see, and expect to continue to see, increased demand for defense products and services from allies and partner nations, particularly in those areas. We are actively exploring both opportunities and risks.

Global Health Environment

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

In May 2023, the World Health Organization declared an end to the global public health emergency for the COVID-19 pandemic. For the first half of 2023, direct impacts of the COVID-19 pandemic on our business remained limited. While we cannot predict the future course of COVID-19 or its consequences, we are not currently assuming significant additional direct COVID-19 related impacts on our business.

The company continues to work to monitor and address the global health environment, including its impact on our company, our employees, our customers, our suppliers and our communities. Our goals have been, and continue to be, to keep our employees safe, to lessen the potential adverse impacts, both health and economic, and to continue to position the company for long-term success. Like the communities in which we operate, our actions have varied, and

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will continue to vary, depending on the state of the global health environment, including as it relates to COVID-19 and other illnesses, applicable government requirements, and the needs of our stakeholders.

Global Economic Environment

In part as a result of the COVID-19 pandemic, the global economic environment has experienced, and continues to experience, extraordinary challenges, including high rates of inflation and inflationary pressures; widespread delays and disruptions in supply chains; workforce challenges; and market volatility. These macroeconomic factors have contributed, and we expect will continue to contribute, to increased costs, delays and other performance challenges, as well as increased competing demands for limited resources to address such increased costs and other challenges, for our company, our suppliers and partners, and our customers.

We continue to work hard to mitigate some of the challenges caused by the current macroeconomic environment on our business, including by taking steps to support our suppliers and small businesses and enhancing our workforce through extensive hiring, development and retention efforts. However, the broader macroeconomic environment, including inflationary pressures and supply chain challenges, continued adversely to affect the company’s results for the quarter ended June 30, 2023. We cannot clearly predict how long these macroeconomic challenges will continue, how they will change over time, or what additional resources will be available, but we expect to see this challenging macroeconomic environment continue adversely to impact the global economy, ~~may also be affected by the residual legal, regulatory~~our customers, our industry and ~~economic impacts of Britain’s exit from the European Union. Rising inflation has led to higher costs of various commodities and supplier products. Increased~~our company in 2023.

In addition, increased interest rates, raising the cost of borrowing for governments, could further impact government spending priorities (in the ~~federal government, could impact other spending priorities.~~U.S. and allied countries, in particular), including their demand for defense products. Economic tensions and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could also further impact the global market for defense products, services and solutions.

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

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

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

On March 2022, Congress also approved $14 billion in emergency aid to support security, economic, and humanitarian assistance for Ukraine and Central European partners. An additional $40 billion in emergency supplemental appropriations was approved by Congress in May 2022. Current and future spending in connection with9, 2023, the conflict in Ukraine and other priorities, global inflation, the national debt and the costs of the pandemic, among other things, will continue to impact our customers’ budgets and priorities, and our industry. We expect the government, our customers and our industry will also continue to face challenges from the macroeconomic environment, including a tight labor market and supply chain disruptions.

~~The Administration’s current~~President proposed his budget for FY ~~2023 proposes $813~~2024 with $886 billion for national defense programs, ~~and~~which included $842 billion for the ~~Pentagon’s portion~~DoD, an increase of 3 percent, or $25 billion, above the ~~overall~~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 ~~is $773 billion. On July 18, 2022,~~detailed above, the ~~Senate Armed Services Committee released its annual defense bill, which authorizes $847~~U.S. has pledged over $100 billion in ~~defense spending, an increase over~~security assistance to address the ~~Administration’s budget request.~~ 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. ~~However, we believe~~Current and future requirements related to the ~~ongoing~~ conflict in Ukraine, ~~has highlighted some~~threats in the Pacific regions and other security priorities, as well as global inflation, the national debt, the costs of the pandemic and other domestic priorities, among other things, in the U.S. and globally, will continue to impact our customers’ budgets, spending and priorities, and our industry. Current tensions within Congress and the wider U.S. political environment may also impact defense budgets, issues related to the national debt, and government spending more broadly.

We believe the current global security environment highlights the significant national security threats to our nation and our allies, and the need for strong deterrence and a robust defense ~~capability, as well as impacting our political and economic environment. More generally, the threat to U.S. national security remains very substantial and we~~capability. We believe ~~that~~ our capabilities, particularly in space, ~~missiles,~~C4ISR, missile defense, ~~hypersonics, counter-hypersonics,~~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.

The Bipartisan Budget Act of 2019 suspended the debt ceiling through July 31, 2021. In October 2021, the statutory debt limit was increased by $480 billion and, in December 2021, was further increased by $2.5 trillion, which is currently expected to allow the Treasury Department to finance the government into 2023.

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In January 2023, the statutory debt ceiling was reached, and the Treasury Department reported that it began taking “extraordinary measures” to finance the government and avoid a breach of the debt ceiling. The Fiscal Responsibility Act of 2023 (FRA), signed in June 2023, suspended the debt limit through January 1, 2025 and provides for caps on defense and non-defense discretionary spending in FY 2024 and FY 2025. The FRA cap on discretionary spending for defense in FY 2024 and FY 2025 is $886 billion and $895 billion, respectively. If these spending caps are exceeded, the FRA provides for automatic spending cuts that could be imposed through sequestration.

The FRA also provides for across the board cuts to discretionary spending by one percent below current-year levels if a continuing resolution is in place on January 1, 2024 or 2025. Once full-year appropriations are enacted, the spending caps are to revert to original levels specified in the FRA. If a continuing resolution is still in place on April 30, 2024 or 2025, the FRA provides that a final sequestration order could be issued that would apply to the full fiscal year. While the discretionary spending caps only apply to FY 2024 and FY 2025, the FRA also attempts to limit most discretionary funding for FY 2026 through FY 2029, subject to Congress’s budgetary processes at that time. We anticipate that issues related to the debt ceiling, budgetary priorities and the spending caps imposed by the FRA will continue to be a subject of considerable debate, with a potentially significant impact on our programs and the company.

In July 2023, the House of Representatives and the Senate passed different versions of a National Defense Authorization Act. We expect this proposed legislation, and its potential impact on defense appropriations, including the duration of a possible continuing resolution, will also be the subject of considerable debate with potentially significant impacts.

More broadly, we have seen, and expect to continue to see, an accelerated pace of new rulemakings, new and expanded uses of existing authorities, changing legal rulings and landscapes, and aggressive enforcement actions. These changes and the accelerated pace of change, not only impose additional obligations and risk, but also create further uncertainty regarding our operating environment.

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

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

CONSOLIDATED OPERATING RESULTS

For purposes of the operating results discussion below, we assess our performance using certain financial measures that are not calculated in accordance with GAAP. Organic sales is defined as total sales excluding sales attributable to the company's IT services divestiture. This measure may be useful to investors and other users of our financial statements as a supplemental measure in evaluating the company’s underlying sales growth as well as in providing an understanding of our ongoing business and future sales trends by presenting the company’s sales before the impact of divestiture activity.

Transaction-adjusted net earnings and transaction-adjusted earnings per share (transaction-adjusted EPS) exclude impacts related to the IT services divestiture, including the gain on sale of the business, associated federal and state income tax expenses, transaction costs, and the make-whole premium for early debt redemption. They also exclude the impact of mark-to-market pension and OPB (“MTM”) benefit/(expense) and related tax impacts, which are generally only recognized during the fourth quarter. These non-GAAP measures may be useful to investors and other users of our financial statements as supplemental measures in evaluating the company’s underlying financial performance by presenting the company’s operating results before the non-operational impact of divestiture activity and pension and OPB actuarial gains and losses. These measures are also consistent with how management views the underlying performance of the business as the impact of the IT services divestiture and MTM accounting are not considered in management’s assessment of the company’s operating performance or in its determination of incentive compensation awards.

We reconcile these non-GAAP financial measures to their most directly comparable GAAP financial measures below. These non-GAAP measures may not be defined and calculated by other companies in the same manner and should not be considered in isolation or as an alternative to operating results presented in accordance with GAAP.

Selected financial highlights are presented in the table below:


		Three Months Ended June 30						%		Six Months Ended June 30						%			Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions, except per share amounts	$ in millions, except per share amounts	2022			2021			Change		2022			2021			Change		$ in millions, except per share amounts	2023			2022			Change		2023			2022			Change
Sales	Sales	$	8,801		$	9,151		(4)	%	$	17,598		$	18,308		(4)	%	Sales	$	9,576		$	8,801		9	%	$	18,877		$	17,598		7	%
Operating costs and expenses	Operating costs and expenses	7,847			8,107			(3)	%	15,747			16,422			(4)	%	Operating costs and expenses	8,609			7,847			10	%	16,963			15,747			8	%
Operating costs and expenses as a % of sales	Operating costs and expenses as a % of sales	89.2		%	88.6		%			89.5		%	89.7		%			Operating costs and expenses as a % of sales	89.9		%	89.2		%			89.9		%	89.5		%
Gain on sale of business		—			—			—	%	—			1,980			NM

Operating income	Operating income	954			1,044			(9)	%	1,851			3,866			(52)	%	Operating income	967			954			1	%	1,914			1,851			3	%
Operating margin rate	Operating margin rate	10.8		%	11.4		%			10.5		%	21.1		%			Operating margin rate	10.1		%	10.8		%			10.1		%	10.5		%
Federal and foreign income tax expense	Federal and foreign income tax expense	204			265			(23)	%	393			1,086			(64)	%	Federal and foreign income tax expense	175			204			(14)	%	331			393			(16)	%
Effective income tax rate	Effective income tax rate	17.7		%	20.4		%			17.1		%	25.2		%			Effective income tax rate	17.7		%	17.7		%			16.7		%	17.1		%
Net earnings	Net earnings	946			1,037			(9)	%	1,901			3,232			(41)	%	Net earnings	812			946			(14)	%	1,654			1,901			(13)	%
Diluted earnings per share	Diluted earnings per share	$	6.06		$	6.42		(6)	%	$	12.16		$	19.89		(39)	%	Diluted earnings per share	$	5.34		$	6.06		(12)	%	$	10.83		$	12.16		(11)	%

Sales

Current Quarter

Second quarter 2023 sales increased $775 million, or 9 percent, due to higher sales at all four sectors. Second quarter 2023 sales reflect continued strong demand and improving labor availability and supplier deliveries.

Year to Date

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~~Sales~~

~~The table below reconciles~~Year to date 2023 sales ~~to organic sales for the six months ended June 30, 2022. Sales for the three months ended June 30, 2022 and 2021 were not impacted by the sale of the company's IT services business:~~

Six Months Ended June 30
2022 2021
$ in millions Sales IT services sales Organic
sales Sales IT services sales Organic
sales Organic sales % change
Aeronautics Systems $ 5,237 $ — $ 5,237 $ 5,903 $ — $ 5,903 (11) %
Defense Systems 2,577 — 2,577 2,989 (106) 2,883 (11) %
Mission Systems 5,013 — 5,013 5,177 (42) 5,135 (2) %
Space Systems 5,834 — 5,834 5,269 (16) 5,253 11 %
Intersegment eliminations (1,063) — (1,063) (1,030) 2 (1,028)
Total $ 17,598 $ — $ 17,598 $ 18,308 $ (162) $ 18,146 (3) %

~~Current Quarter~~

~~Second quarter 2022 sales decreased $350 million~~increased $1.3 billion, or 7 percent, due to ~~lower~~higher sales at ~~Aeronautics~~Space Systems, Defense Systems and Mission Systems, partially offset by 8 percent growth at Space Systems. Second quarter 2022 sales reflect continued headwinds from the macroeconomic environment, including a tight labor market and extended material lead times, which are affecting the timing of sales.

~~Year to Date~~

Year to date 2022 sales decreased $710 million due, in part, to a $162 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales decreased $548 million, or 3 percent, primarily due to lower sales at Aeronautics ~~Systems and Defense Systems, partially offset by 11 percent growth at Space~~ Systems.

See “Segment Operating Results” below for further information by segment and “Product and Service Analysis” for product and service detail. See Note 9 to the financial statements for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments.

Operating Income and Margin Rate

Current Quarter

Second quarter ~~2022~~2023 operating income ~~decreased $90~~increased $13 million, or 91 percent, ~~primarily~~ due to a ~~$69 million~~ reduction in the ~~FAS/CAS operating adjustment and lower sales. Second quarter 2022 operating margin rate declined to 10.8 percent due to the lower~~ FAS/CAS operating adjustment, partially offset by lower ~~unallocated corporate expense.~~segment operating income. Second quarter 2023 operating margin rate declined to 10.1 percent, due to a lower segment operating margin rate, partially offset by the lower FAS/CAS operating adjustment.

Second quarter ~~2022~~2023 general and administrative (G&A) costs as a percentage of sales ~~increased to 11.4~~of 11.2 percent ~~from 10.9 percent in~~was comparable with the prior year period ~~primarily due to an increase in~~and reflects continued investments for future business opportunities.

Year to ~~date~~Date

Year to date ~~2022~~2023 operating income ~~decreased $2.0 billion,~~increased $63 million, or 523 percent, ~~primarily~~ due to ~~a $2.0 billion pre-tax gain on sale and $192 million of~~lower unallocated corporate ~~expenses recognized in the prior year associated with the IT services divestiture. Operating income also decreased due to~~expense and a ~~$134 million~~ reduction in the FAS/CAS operating adjustment, ~~and~~partially offset by lower ~~sales.~~segment operating income. Year to date ~~2022~~2023 operating margin rate declined to ~~10.5~~10.1 percent ~~largely~~ due to a lower segment operating margin rate, partially offset by the ~~prior year gain on sale of the IT services business.~~lower unallocated corporate expense and FAS/CAS operating adjustment.

Year to date ~~2022~~2023 G&A costs as a percentage of sales ~~increased to 11.3~~of 11.2 percent ~~from 10.4 percent in~~was comparable with the prior year period ~~primarily due to an increase in~~and reflects continued investments for future business opportunities.

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

Federal and Foreign Income Taxes

Current Quarter

The second quarter ~~2022~~2023 ETR ~~decreased to~~of 17.7 percent ~~from 20.4 percent in~~was comparable with the prior year ~~period. The second quarter 2021 ETR was impacted~~period and reflects higher interest expense on unrecognized tax benefits, offset by ~~a change made in tax revenue recognition~~favorable returns on certain long term contracts, which increased taxable income in years prior to the 2017 Tax Cuts and Jobs Act at a rate above the current statutory rate.See Note 3 to the financial statements for additional information.

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~~Year to Date~~

The year to date 2022 ETR decreased to 17.1 percent from 25.2 percent in the prior year period. The year to date 2021 ETR was impacted by additional federal income taxes resulting from the IT services divestiture, as well as the change in tax revenue recognition on certain contracts described above.tax-exempt marketable securities. See Note 3 to the financial statements for additional information.

~~Net Earnings~~

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

Three Months Ended June 30 % Six Months Ended June 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Net earnings $ 946 $ 1,037 (9) % $ 1,901 $ 3,232 (41) %
Gain on sale of business — — NM — (1,980) NM
State tax impact1
— — NM — 160 NM
Transaction costs — — NM — 32 NM
Make-whole premium — — NM — 54 NM
Federal tax impact of items above2
— — NM — 614 NM
Transaction adjustment, net of tax $ — $ — NM $ — $ (1,120) NM
Transaction-adjusted net earnings $ 946 $ 1,037 (9) % $ 1,901 $ 2,112 (10) %
Date

~~(1)~~The year to date~~The state tax impact includes $62 million of incremental tax expense related~~2023 ETR decreased to ~~$1.2 billion of nondeductible goodwill~~16.7 percent from 17.1 percent in the ~~divested business.~~

~~(2)The federal~~prior year period principally due to higher current year ETR benefits associated with research credits and FDII deductions as well as favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax ~~impact was calculated by applying the 21 percent federal statutory rate~~benefits. See Note 3 to the ~~adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.~~financial statements for additional information.

Net Earnings

Current Quarter

Second quarter ~~2022~~2023 net earnings decreased ~~$91~~$134 million, or 914 percent, primarily due to a $244 million reduction in the ~~lower operating income described above and $60~~non-operating FAS pension benefit, partially offset by a $51 million ~~of lower~~increase in returns on marketable securities related to our non-qualified benefit plans, higher operating income, higher interest income on short-term investments and ~~other non-operating assets, partially offset by a~~ lower ~~effective~~income tax ~~rate.~~expense.

Year to Date

Year to date ~~2022~~2023 net earnings decreased ~~$1.3 billion,~~$247 million, or 4113 percent, primarily due to a ~~$1.1 billion after-tax decline associated with~~$488 million reduction in the ~~IT services divestiture. Transaction-adjusted net earnings decreased $211~~non-operating FAS pension benefit, partially offset by an $84 million ~~or 10 percent, primarily due to the lower operating income described above and $93 million of lower~~increase in returns on marketable securities related to our non-qualified benefit plans, higher operating income, lower income tax expense and ~~other non-operating assets, partially offset by a lower effective tax rate.~~higher interest income on short-term investments.

Diluted Earnings Per Share

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

Three Months Ended June 30 % Six Months Ended June 30 %
2022 2021 Change 2022 2021 Change
Diluted EPS $ 6.06 $ 6.42 (6) % $ 12.16 $ 19.89 (39) %
Gain on sale of business per share — — NM — (12.18) NM
State tax impact per share1
— — NM — 0.98 NM
Transaction costs per share — — NM — 0.20 NM
Make-whole premium per share — — NM — 0.33 NM
Federal tax impact of line items above per share2
— — NM — 3.78 NM
Transaction adjustment per share, net of tax $ — $ — NM $ — $ (6.89) NM
Transaction-adjusted EPS $ 6.06 $ 6.42 (6) % $ 12.16 $ 13.00 (6) %

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

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~~(2)~~The federal tax impact was calculated by applying the 21 percent federal statutory rate to the adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.

Current Quarter

Second quarter ~~2022~~2023 diluted earnings per share decreased 612 percent, reflecting a 914 percent decrease in net earnings and a 32 percent reduction in weighted-average diluted shares outstanding.

Year to Date

Year to date ~~2022~~2023 diluted earnings per share decreased ~~39 percent, principally due to a $6.89 after-tax decrease associated with the IT services divestiture. Transaction-adjusted earnings per share decreased $0.84, or 6~~11 percent, reflecting a 1013 percent decrease in ~~transaction-adjusted~~ net earnings and a 42 percent reduction in weighted-average diluted shares outstanding.

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SEGMENT OPERATING RESULTS

Basis of Presentation

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

Aeronautics Systems

Defense Systems

Mission Systems

Space Systems

Autonomous Systems

Battle Management & Missile Systems

Airborne Multifunction Sensors

Launch & Strategic Missiles

Manned Aircraft

Mission Readiness

Maritime/Land Systems & Sensors

Space

Navigation, Targeting & Survivability

Networked Information Solutions

This section discusses segment sales, operating income and operating margin rates. In evaluating segment operating performance, we look primarily at changes in sales and operating income. Where applicable, significant fluctuations in operating performance attributable to individual contracts or programs, or changes in a specific cost element across multiple contracts, are described in our analysis. Based on this approach and the nature of our operations, the discussion of results of operations below first focuses on our four segments before distinguishing between products and services. Changes in sales are generally described in terms of volume, while changes in margin rates are generally described in terms of performance and/or contract mix. For purposes of this discussion, volume generally refers to increases or decreases in sales or cost from production/service activity levels and performance generally refers to non-volume related changes in profitability. Contract mix generally refers to changes in the ratio of contract type and/or lifecycle (e.g., cost-type, fixed-price, development, production, and/or sustainment).

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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 June 30						%		Six Months Ended June 30						%			Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions	$ in millions	2022			2021			Change		2022			2021			Change		$ in millions	2023			2022			Change		2023			2022			Change

Operating income	Operating income	$	954		$	1,044		(9)	%	$	1,851		$	3,866		(52)	%	Operating income	$	967		$	954		1	%	$	1,914		$	1,851		3	%
Operating margin rate																		Operating margin rate	10.1		%	10.8		%			10.1		%	10.5		%
Reconciliation to segment operating income:	Reconciliation to segment operating income:																	Reconciliation to segment operating income:
CAS pension expense	CAS pension expense	$	(41)		$	(121)		(66)	%	$	(87)		$	(244)		(64)	%	CAS pension expense	(38)			(41)			(7)	%	(76)			(87)			(13)	%
FAS pension service expense	FAS pension service expense	92			103			(11)	%	184			207			(11)	%	FAS pension service expense	59			92			(36)	%	118			184			(36)	%
FAS/CAS operating adjustment	FAS/CAS operating adjustment	51			(18)			NM		97			(37)			NM		FAS/CAS operating adjustment	21			51			(59)	%	42			97			(57)	%
Gain on sale of business		—			—			—	%	—			(1,980)			NM
IT services divestiture – unallowable state taxes and transaction costs		—			—			—	%	—			192			NM

Intangible asset amortization and PP&E step-up depreciation	Intangible asset amortization and PP&E step-up depreciation	61			64			(5)	%	121			129			(6)	%	Intangible asset amortization and PP&E step-up depreciation	31			61			(49)	%	61			121			(50)	%

Other unallocated corporate expense	Other unallocated corporate expense	7			27			(74)	%	41			42			(2)	%	Other unallocated corporate expense	33			7			371	%	37			41			(10)	%
Unallocated corporate expense (income)		68			91			(25)	%	162			(1,617)			NM
Unallocated corporate expense																		Unallocated corporate expense	64			68			(6)	%	98			162			(40)	%
Segment operating income	Segment operating income	$	1,073		$	1,117		(4)	%	$	2,110		$	2,212		(5)	%	Segment operating income	$	1,052		$	1,073		(2)	%	$	2,054		$	2,110		(3)	%
Segment operating margin rate	Segment operating margin rate	12.2		%	12.2		%			12.0		%	12.1		%			Segment operating margin rate	11.0		%	12.2		%			10.9		%	12.0		%

Current Quarter

Second quarter 2022 segment operating income decreased $44 million, or 4 percent due to lower sales. Second quarter 2022 segment operating margin rate was comparable to the prior year period and reflects higher operating margin rates at Mission Systems and Defense Systems, offset by lower operating margin rates at Space Systems and Aeronautics Systems.

~~Year to Date~~

Year to date 2022 segment operating income decreased $102 million, or 5 percent. Year to date 2021 segment operating income included $20 million from the IT services business, as well as a benefit of approximately $100 million due to the impact of lower overhead rates on the company’s fixed price contracts. Year to date 2022 segment operating margin rate decreased to 12.0 percent from 12.1 percent and reflects a lower operating margin rate at Space Systems, partially offset by higher operating margin rates at each of the other sectors.

~~FAS/CAS Operating Adjustment~~

Second quarter 2022 and year to date 2022 FAS/CAS operating adjustment decreased primarily due to lower CAS pension expense resulting from favorable plan asset returns in 2021 and changes in certain CAS actuarial assumptions as of December 31, 2021.

~~Unallocated Corporate Expense (Income)~~

~~Current Quarter~~

~~The decrease in second quarter 2022 unallocated corporate expense is primarily due to a reduction in corporate unallowable costs.~~

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Second quarter 2023 segment operating income decreased $21 million, or 2 percent. Higher sales were more than offset by a lower segment operating margin rate, which reflects a $36 million unfavorable EAC adjustment on the Habitation and Logistics Outpost (HALO) program at Space Systems. In addition, the prior year period includes a $38 million gain on a property sale at Aeronautics Systems and a $33 million benefit recognized in connection with a contract-related legal matter at Mission Systems.

Year to Date

Year to date 2023 segment operating income decreased $56 million, or 3 percent. Higher sales were more than offset by a lower segment operating margin rate, which reflects an approximately $50 million reduction related to higher projected CAS pension costs on the company’s fixed price contracts, as well as the $36 million unfavorable EAC adjustment on the HALO program described above. In addition, the prior year period includes a $67 million favorable EAC adjustment on the EMD phase of the B-21 program at Aeronautics Systems, as well as the $38 million gain on a property sale and $33 million benefit recognized in connection with a contract-related legal matter described above.

FAS/CAS Operating Adjustment

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

Unallocated Corporate Expense

Current Quarter

The decrease in second quarter 2023 unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation, partially offset by a loss recognized in connection with a pending divestiture of a small international subsidiary.

Year to Date

The ~~change~~decrease in year to date ~~2022~~2023 unallocated corporate expense ~~(income)~~ is primarily due to ~~the $2.0 billion pre-tax gain on sale~~lower intangible asset amortization and ~~$192 million of~~PP&E step-up depreciation as well as a reduction in unallowable ~~state taxes and transaction costs recognized in the prior year associated with the IT services divestiture.~~corporate costs.

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


		Three Months Ended June 30				Six Months Ended June 30					Three Months Ended June 30				Six Months Ended June 30
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions	2023		2022		2023		2022
Favorable EAC adjustments	Favorable EAC adjustments	$	317	$	309	$	674	$	657	Favorable EAC adjustments	$	324	$	317	$	650	$	674
Unfavorable EAC adjustments	Unfavorable EAC adjustments	(225)		(155)		(409)		(313)		Unfavorable EAC adjustments	(248)		(225)		(528)		(409)
Net EAC adjustments	Net EAC adjustments	$	92	$	154	$	265	$	344	Net EAC adjustments	$	76	$	92	$	122	$	265

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


		Three Months Ended June 30				Six Months Ended June 30					Three Months Ended June 30				Six Months Ended June 30
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions	2023		2022		2023		2022
Aeronautics Systems	Aeronautics Systems	$	(9)	$	32	$	94	$	69	Aeronautics Systems	$	42	$	(9)	$	36	$	94
Defense Systems	Defense Systems	50		28		75		58		Defense Systems	20		50		47		75
Mission Systems	Mission Systems	29		61		86		149		Mission Systems	38		29		95		86
Space Systems	Space Systems	31		33		23		70		Space Systems	(22)		31		(54)		23
Eliminations	Eliminations	(9)		—		(13)		(2)		Eliminations	(2)		(9)		(2)		(13)
Net EAC adjustments	Net EAC adjustments	$	92	$	154	$	265	$	344	Net EAC adjustments	$	76	$	92	$	122	$	265

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

AERONAUTICS SYSTEMS Three Months Ended June 30 % Six Months Ended June 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Sales $ 2,534 $ 2,913 (13) % $ 5,237 $ 5,903 (11) %
Operating income 258 300 (14) % 565 608 (7) %
Operating margin rate 10.2 % 10.3 % 10.8 % 10.3 %

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AERONAUTICS SYSTEMS	Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions	2023			2022			Change		2023			2022			Change
Sales	$	2,595		$	2,534		2	%	$	5,110		$	5,237		(2)	%
Operating income	278			258			8	%	515			565			(9)	%
Operating margin rate	10.7		%	10.2		%			10.1		%	10.8		%

Sales

Current Quarter

Second quarter ~~2022~~2023 sales increased $61 million, or 2 percent, due to higher volume in both Manned Aircraft and Autonomous Systems. Higher sales on restricted programs were partially offset by lower volume on E-2 and F/A-18, as well as the Joint Surveillance and Target Attack Radar System (JSTARS) program as it nears completion.

Year to Date

Year to date 2023 sales decreased ~~$379~~$127 million, or 132 percent, due to lower volume in both Manned Aircraft and Autonomous Systems, including ~~restricted programs, F-35, Global Hawk,~~a $146 million decrease on the E-2 program and ~~the NATO Alliance Ground Surveillance (AGS) program, as Full System Handover occurred early in the second quarter of 2022.~~

~~Year to Date~~

~~Year to date 2022 sales decreased $666 million, or 11 percent, due to~~ lower volume ~~in both Manned Aircraft~~on F/A-18, JSTARS and ~~Autonomous Systems, including~~Global Hawk. These decreases were partially offset by higher volume on restricted ~~programs and the E-2, Global Hawk, F-35 and Triton~~ programs.

Operating Income

Current Quarter

Second quarter ~~2022~~2023 operating income ~~decreased $42~~increased $20 million, or 148 percent, due to higher sales and a higher operating margin rate. Operating margin rate increased to 10.7 percent from 10.2 percent primarily due to ~~lower sales. Operating margin rate decreased to 10.2 percent from 10.3 percent primarily due to lower~~higher net favorable EAC adjustments ~~principally associated with~~on restricted work, ~~and close-out of an international program,~~ partially offset by a $38 million gain on a property ~~sale.~~sale in the prior year.

Year to Date

Year to date 2023 operating income decreased $50 million, or 9 percent, due to a lower operating margin rate and lower sales. Operating margin rate decreased to 10.1 percent from 10.8 percent primarily due to lower net EAC adjustments, largely driven by a $67 million favorable EAC adjustment on the EMD phase of the B-21 program in the prior year, as well as a $38 million gain on a property sale in the prior year.


DEFENSE SYSTEMS	Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions	2023			2022			Change		2023			2022			Change
Sales	$	1,420		$	1,294		10	%	$	2,796		$	2,577		8	%
Operating income	166			168			(1)	%	326			323			1	%
Operating margin rate	11.7		%	13.0		%			11.7		%	12.5		%

Sales

Current Quarter

Second quarter 2023 sales increased $126 million, or 10 percent, due to higher volume in both business areas. Battle Management & Missile Systems sales increased primarily due to higher volume on ammunition programs and the Integrated Air and Missile Defense Battle Command System (IBCS), Hypersonic Attack Cruise Missile (HACM) and advanced fuze programs. Mission Readiness sales increased principally due to higher volume on the NATO Alliance Ground Surveillance In-Service Support (NATO AGS ISS) program and an international training program.

Year to Date

Year to date 2023 sales increased $219 million, or 8 percent, due to higher volume in both business areas. Battle Management & Missile Systems sales increased primarily due to higher volume on ammunition, IBCS, advanced fuze and HACM programs. Mission Readiness sales increased primarily due to higher volume on an international training program.

Operating Income

Current Quarter

Second quarter 2023 operating income decreased $2 million, or 1 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 11.7 percent from 13.0 percent primarily due to lower net EAC adjustments.

Year to Date

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Year to ~~Date~~

~~Year to~~ date 2022 operating income decreased $43 million, or 7 percent, due to lower sales, partially offset by a higher operating margin rate. Operating margin rate increased to 10.8 percent from 10.3 percent primarily due to a $38 million gain on a property sale and higher net favorable EAC adjustments. Higher net favorable EAC adjustments reflect a $67 million favorable EAC adjustment on the engineering, manufacturing and development phase of the B-21 program largely related to performance incentives, partially offset by lower net EAC adjustments associated with other restricted work. Prior year results include the previously described overhead rate benefit to fixed price contracts.

DEFENSE SYSTEMS Three Months Ended June 30 % Six Months Ended June 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Sales $ 1,294 $ 1,427 (9) % $ 2,577 $ 2,989 (14) %
Operating income 168 177 (5) % 323 354 (9) %
Operating margin rate 13.0 % 12.4 % 12.5 % 11.8 %

~~Sales~~

~~Current Quarter~~

Second quarter 2022 sales decreased $133 million, or 9 percent, primarily due to completion of a Joint Services support program, lower scope on an international training program, and wind down of the UKAWACS and JSTARS programs.

~~Year to Date~~

Year to date 2022 sales decreased $412 million, or 14 percent, due, in part, to a $106 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales decreased $306 million, or 11 percent, principally due to lower scope on an international training program, completion of a Joint Services support program, and lower volume on the Advanced Anti-Radiation Guided Missile (AARGM).

~~Operating Income~~

~~Current Quarter~~

Second quarter 2022 operating income decreased $9 million, or 5 percent, due to lower sales, partially offset by a higher operating margin rate. Operating margin rate increased to 13.0 percent from 12.4 percent primarily due to improved performance in Battle Management and Missile Systems.

~~Year to Date~~

Year to date 2022 operating income decreased $31 million, or 9 percent, due, in part, to a $14 million reduction in operating income related to the IT services divestiture. Lower organic sales volume was partially offset by a higher operating margin rate, which increased to 12.5 percent from 11.8 percent primarily due to improved performance in Battle Management and Missile Systems.

MISSION SYSTEMS Three Months Ended June 30 % Six Months Ended June 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Sales $ 2,516 $ 2,588 (3) % $ 5,013 $ 5,177 (3) %
Operating income 413 408 1 % 798 805 (1) %
Operating margin rate 16.4 % 15.8 % 15.9 % 15.5 %

~~Sales~~

~~Current Quarter~~

Second quarter 2022 sales decreased $72 million, or 3 percent, primarily due to lower volume on Navigation, Targeting and Survivability programs, the Joint Counter Radio-Controlled Improvised Explosive Device Electronic Warfare (JCREW) program, and airborne radar programs. These decreases were partially offset by an increase in restricted sales in the Networked Information Solutions business area and higher volume on Ground/Air Task-Oriented Radar (G/ATOR) and Surface Electronic Warfare Improvement Program (SEWIP).

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~~Year to Date~~

Year to date 2022 sales decreased $164 million, or 3 percent, due, in part, to a $42 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales decreased $122 million, or 2 percent, primarily due to lower volume on Navigation, Targeting and Survivability programs, the JCREW program and airborne radar programs. These decreases were partially offset by an increase in restricted sales in the Networked Information Solutions business area and higher volume on G/ATOR and SEWIP.

~~Operating Income~~

~~Current Quarter~~

~~Second quarter 2022~~2023 operating income increased $5$3 million, or 1 percent, due to a higher operating margin rate. Operating margin rate increased to 16.4 percent from 15.8 percent principally due to a $33 million benefit recognized in connection with a contract-related legal matter, partially offset by lower net EAC adjustments at Maritime/Land Systems and Sensors.

~~Year to Date~~

Year to date 2022 operating income decreased $7 million, or 1 percent, principally due to lower sales, partially offset by a higher operating margin rate. Operating margin rate increased to 15.9 percent from 15.5 percent principally due to a $33 million benefit recognized in connection with a contract-related legal matter, partially offset by the previously described overhead rate benefit to fixed price contracts in the prior year.

SPACE SYSTEMS Three Months Ended June 30 % Six Months Ended June 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Sales $ 2,979 $ 2,748 8 % $ 5,834 $ 5,269 11 %
Operating income 310 301 3 % 571 577 (1) %
Operating margin rate 10.4 % 11.0 % 9.8 % 11.0 %

~~Sales~~

~~Current Quarter~~

Second quarter 2022 sales increased $231 million, or 8 percent, primarily due to higher sales in the Launch & Strategic Missiles business area due to ramp-up on development programs, including a $123 million increase on the Next Generation Interceptor (NGI) program and a $95 million increase on the Ground Based Strategic Deterrent (GBSD) program. Sales in the Space business area were comparable with the prior year period and reflect higher volume on restricted programs and the Space Development Agency (SDA) Tranche 1 Transport Layer (T1TL) program, partially offset by lower volume on the James Webb Space Telescope after its successful launch in December 2021.

~~Year to Date~~

Year to date 2022 sales increased $565 million, or 11 percent, and includes a $16 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales increased $581 million, or 11 percent, due to higher sales in both the Launch & Strategic Missiles and Space business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $253 million increase on NGI and a $212 million increase on GBSD. Sales in the Space business area were driven by higher volume on restricted programs, SDA T1TL, and the Commercial Resupply Services program, partially offset by lower volume on the James Webb Space Telescope and other commercial space programs.

~~Operating Income~~

~~Current Quarter~~

~~Second quarter 2022 operating income increased $9 million, or 3~~ percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to ~~10.4~~11.7 percent from ~~11.0~~12.5 percent primarily due to lower net EAC adjustments.


MISSION SYSTEMS	Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions	2023			2022			Change		2023			2022			Change
Sales	$	2,641		$	2,516		5	%	$	5,204		$	5,013		4	%
Operating income	401			413			(3)	%	761			798			(5)	%
Operating margin rate	15.2		%	16.4		%			14.6		%	15.9		%

Sales

Current Quarter

Second quarter 2023 sales increased $125 million, or 5 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on ~~early-stage development~~marine systems programs ~~such as NGI~~ and ~~GBSD.~~the Surface Electronic Warfare Improvement Program (SEWIP). These increases were partially offset by lower volume on the Ground/Air Task Oriented Radar (G/ATOR) program.

Year to Date

Year to date ~~2022~~2023 sales increased $191 million, or 4 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on SEWIP and marine systems programs, partially offset by lower volume on G/ATOR.

Operating Income

Current Quarter

Second quarter 2023 operating income decreased $6$12 million, or 13 percent, due to a lower operating margin rate, ~~partially~~which more than offset by higher sales. Operating margin rate decreased to ~~9.8~~15.2 percent from ~~11.0~~16.4 percent primarily due to a prior year $33 million benefit recognized in connection with a contract-related legal matter, as well as changes in contract mix toward more cost-type content.

Year to Date

Year to date 2023 operating income decreased $37 million, or 5 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 14.6 percent from 15.9 percent primarily due to the prior year $33 million benefit recognized in connection with a contract-related legal matter described above, as well as changes in contract mix toward more cost-type content and a first quarter 2023 loss recognized in connection with an unconsolidated joint venture.

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SPACE SYSTEMS	Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions	2023			2022			Change		2023			2022			Change
Sales	$	3,488		$	2,979		17	%	$	6,838		$	5,834		17	%
Operating income	283			310			(9)	%	596			571			4	%
Operating margin rate	8.1		%	10.4		%			8.7		%	9.8		%

Sales

Current Quarter

Second quarter 2023 sales increased $509 million, or 17 percent, due to higher volume in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $156 million increase on the Ground Based Strategic Deterrent (GBSD) program and higher volume on the Next Generation Interceptor (NGI) and Ground-based Midcourse Defense Weapon Systems (GWS) programs. Sales in the Space business area increased primarily due to higher volume on restricted programs, the Next-Generation Overhead Persistent Infrared Polar (NextGen Polar) program and the Space Development Agency (SDA) Tranche 1 Tracking Layer program. These increases were partially offset by lower volume for Commercial Resupply Services (CRS) missions.

Year to Date

Year to date 2023 sales increased $1.0 billion, or 17 percent, due to higher volume in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $316 million increase on GBSD, a $152 million increase on NGI and a $112 million increase on GWS. Sales in the Space business area increased primarily due to higher volume on restricted programs, a $173 million increase on the NextGen Polar program and a $132 million increase on the SDA Tranche 1 Tracking Layer program. These increases were partially offset by a $124 million decrease for Commercial Resupply Services (CRS) missions and lower volume on the HALO program.

Operating Income

Current Quarter

Second quarter 2023 operating income decreased $27 million, or 9 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 8.1 percent from 10.4 percent primarily due to lower net EAC adjustments, including a $36 million unfavorable EAC adjustment on the HALO program largely due to cost growth stemming from evolving Lunar Gateway architecture and mission requirements combined with macroeconomic challenges, and a $15 million write-down of commercial inventory.

Year to Date

Year to date 2023 operating income increased $25 million, or 4 percent, due to higher ~~volume~~sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 8.7 percent from 9.8 percent primarily due to lower net EAC adjustments, partially offset by a first quarter 2023 benefit recognized on ~~early-stage development programs. Prior year results include~~ the ~~previously described overhead rate benefit~~sale of a license to ~~fixed price contracts.~~a customer.

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PRODUCT AND SERVICE ANALYSIS

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


		Three Months Ended June 30								Six Months Ended June 30									Three Months Ended June 30								Six Months Ended June 30
$ in millions	$ in millions	2022				2021				2022				2021				$ in millions	2023				2022				2023				2022
Segment Information:	Segment Information:	Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Segment Information:	Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses
Aeronautics Systems	Aeronautics Systems																	Aeronautics Systems
Product	Product	$	1,916	$	1,733	$	2,484	$	2,230	$	3,961	$	3,537	$	5,008	$	4,504	Product	$	1,925	$	1,726	$	1,916	$	1,733	$	3,832	$	3,466	$	3,961	$	3,537
Service	Service	560		497		384		342		1,153		1,030		806		711		Service	606		533		560		497		1,149		1,013		1,153		1,030
Intersegment eliminations	Intersegment eliminations	58		46		45		41		123		105		89		80		Intersegment eliminations	64		58		58		46		129		116		123		105
Total Aeronautics Systems	Total Aeronautics Systems	2,534		2,276		2,913		2,613		5,237		4,672		5,903		5,295		Total Aeronautics Systems	2,595		2,317		2,534		2,276		5,110		4,595		5,237		4,672
Defense Systems	Defense Systems																	Defense Systems
Product	Product	598		515		641		560		1,208		1,042		1,321		1,155		Product	691		602		598		515		1,369		1,200		1,208		1,042
Service	Service	522		457		591		517		996		882		1,288		1,141		Service	534		480		522		457		1,063		948		996		882
Intersegment eliminations	Intersegment eliminations	174		154		195		173		373		330		380		339		Intersegment eliminations	195		172		174		154		364		322		373		330
Total Defense Systems	Total Defense Systems	1,294		1,126		1,427		1,250		2,577		2,254		2,989		2,635		Total Defense Systems	1,420		1,254		1,294		1,126		2,796		2,470		2,577		2,254
Mission Systems	Mission Systems																	Mission Systems
Product	Product	1,748		1,473		1,774		1,515		3,510		2,982		3,534		3,008		Product	1,834		1,573		1,748		1,473		3,649		3,136		3,510		2,982
Service	Service	509		412		560		451		998		808		1,152		948		Service	524		429		509		412		1,035		870		998		808
Intersegment eliminations	Intersegment eliminations	259		218		254		214		505		425		491		416		Intersegment eliminations	283		238		259		218		520		437		505		425
Total Mission Systems	Total Mission Systems	2,516		2,103		2,588		2,180		5,013		4,215		5,177		4,372		Total Mission Systems	2,641		2,240		2,516		2,103		5,204		4,443		5,013		4,215
Space Systems	Space Systems																	Space Systems
Product	Product	2,517		2,250		2,294		2,045		4,941		4,445		4,352		3,874		Product	2,991		2,770		2,517		2,250		5,862		5,379		4,941		4,445
Service	Service	431		391		423		374		831		762		847		755		Service	471		411		431		391		918		811		831		762
Intersegment eliminations	Intersegment eliminations	31		28		31		28		62		56		70		63		Intersegment eliminations	26		24		31		28		58		52		62		56
Total Space Systems	Total Space Systems	2,979		2,669		2,748		2,447		5,834		5,263		5,269		4,692		Total Space Systems	3,488		3,205		2,979		2,669		6,838		6,242		5,834		5,263
Segment Totals	Segment Totals																	Segment Totals
Total Product	Total Product	$	6,779	$	5,971	$	7,193	$	6,350	$	13,620	$	12,006	$	14,215	$	12,541	Total Product	$	7,441	$	6,671	$	6,779	$	5,971	$	14,712	$	13,181	$	13,620	$	12,006
Total Service	Total Service	2,022		1,757		1,958		1,684		3,978		3,482		4,093		3,555		Total Service	2,135		1,853		2,022		1,757		4,165		3,642		3,978		3,482
Total Segment(1)	Total Segment(1)	$	8,801	$	7,728	$	9,151	$	8,034	$	17,598	$	15,488	$	18,308	$	16,096	Total Segment(1)	$	9,576	$	8,524	$	8,801	$	7,728	$	18,877	$	16,823	$	17,598	$	15,488

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

Product Sales and Costs

Current Quarter

Second quarter ~~2022~~2023 product sales ~~decreased $414~~increased $662 million, or 610 percent, primarily due to ~~a decrease in product sales at Aeronautics Systems, partially offset by~~ an increase in product sales at Space ~~Systems. The decrease at Aeronautics~~ Systems, ~~was principally due to lower volume on restricted programs, as well as the F-35, Global Hawk~~Defense Systems and ~~NATO AGS programs.~~Mission Systems. The increase at Space Systems was ~~driven by ramp-up on development programs including NGI and GBSD.~~

~~Second quarter 2022 product costs decreased $379 million, or 6 percent, consistent with the lower product sales.~~

~~Year to Date~~

Year to date 2022 product sales decreased $595 million, or 4 percent, primarily due to a decrease in product sales at Aeronautics Systems, partially offset by an increase in product sales at Space Systems. The decrease at Aeronautics Systems was principally due ~~to lower volume on restricted programs, as well as the E-2, Global Hawk, and F-35 programs. The increase at Space Systems is principally related~~ to ramp-up on development programs, including ~~NGI~~GBSD and ~~GBSD,~~NGI, as well as higher volume on the SDA Tranche 1 Tracking Layer program. The increase at Defense Systems was primarily due to higher volume on ammunition programs, IBCS, HACM and advanced fuze programs. The increase at Mission Systems was primarily driven by higher volume on restricted ~~space~~ programs.

~~Year to date 2022~~Second quarter 2023 product costs ~~decreased $535~~increased $700 million, or 412 percent, consistent with the higher product sales described above and reflect a lower ~~product sales.~~operating margin rate principally due to lower net EAC adjustments on Space Systems production programs, including the $36 million unfavorable EAC adjustment on the HALO program described above.

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Year to Date

Year to date 2023 product sales increased $1.1 billion, or 8 percent, primarily due to an increase in product sales at Space Systems. The increase at Space Systems was driven by ramp-up on development programs, including GBSD and NGI, and higher volume on restricted programs, GWS, NextGen Polar and the SDA Tranche 1 Tracking Layer program.

Year to date 2023 product costs increased $1.2 billion, or 10 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Space Systems and Aeronautics Systems production programs.

Service Sales and Costs

Current Quarter

Second quarter ~~2022~~2023 service sales increased ~~$64~~$113 million, or 36 percent, primarily due to an increase in service sales at Aeronautics Systems ~~partially offset by a decrease in service sales at Defense~~and Space Systems. The increase at Aeronautics Systems was principally due to higher ~~service~~sales on restricted programs, partially offset by lower volume on the JSTARS program as it nears completion. The increase at Space Systems was primarily driven by higher volume on restricted programs.

Second quarter 2023 service costs increased $96 million, or 5 percent, consistent with the higher service sales described above.

Year to Date

Year to date 2023 service sales increased $187 million, or 5 percent, primarily due to an increase in service sales at Space Systems and Defense Systems. The ~~decrease~~increase at Space Systems was principally due to higher volume on restricted programs, the Specialized Warfighter Development Contract (SWDC) and the ICBM Ground Subsystem Support program. The increase at Defense Systems was primarily driven by ~~the completion of a Joint Services support program and lower~~higher volume on an international training program.

~~Second quarter 2022~~Year to date 2023 service costs increased ~~$73~~$160 million, or 45 percent, ~~due to~~consistent with the higher service sales ~~partially offset by lower margins on Space Systems service programs.~~

~~Year to Date~~

Year to date 2022 service sales decreased $115 million, or 3 percent, primarily due to the IT services divestiture as well as lower volume on an international training program and completion of a Joint Services support program at Defense Systems. Sales from the divested IT services business, which were largely included in service sales, were $162 million in the prior year period. The decreases were partially offset by higher service volume on restricted programs at Aeronautics Systems.

~~Year to date 2022 service costs decreased $73 million, or 2 percent, due to lower services sales, partially offset by higher margins on Mission Systems service programs.~~described above.

BACKLOG

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


		June 30, 2022						December 31, 2021					June 30, 2023						December 31, 2022
$ in millions	$ in millions	Funded		Unfunded		Total Backlog		Total Backlog		% Change in 2022		$ in millions	Funded		Unfunded		Total Backlog		Total Backlog		% Change in 2023
Aeronautics Systems	Aeronautics Systems	$	9,466	$	10,482	$	19,948	$	18,277	9	%	Aeronautics Systems	$	9,398	$	9,145	$	18,543	$	19,397	(4)	%
Defense Systems	Defense Systems	5,522		826		6,348		6,349		—	%	Defense Systems	5,725		1,445		7,170		7,515		(5)	%
Mission Systems	Mission Systems	10,557		4,224		14,781		14,306		3	%	Mission Systems	11,517		3,270		14,787		13,875		7	%
Space Systems	Space Systems	8,850		30,054		38,904		37,114		5	%	Space Systems	11,256		27,049		38,305		37,956		1	%
Total backlog	Total backlog	$	34,395	$	45,586	$	79,981	$	76,046	5	%	Total backlog	$	37,896	$	40,909	$	78,805	$	78,743	—	%

New Awards

Second quarter and year to date ~~2022~~2023 net awards totaled ~~$13.0~~$10.9 billion and ~~$21.5~~$18.9 billion, respectively, and backlog totaled ~~$80.0~~$78.8 billion. Significant second quarter new awards include ~~$3.5 billion for F-35 at Aeronautics Systems, largely related to Lots 15-17, $2.2~~$5.4 billion for restricted programs ~~(at~~(primarily at Space Systems, Aeronautics ~~Systems, Space~~ Systems and Mission Systems), ~~$2.1~~$0.6 billion for ~~GEM63 solid rocket boosters, largely related to Amazon’s Project Kuiper,~~F-35 (primarily at Aeronautics Systems and ~~$0.5~~Mission Systems), $0.3 billion for ~~Triton.~~the Missile Defense Agency's Ballistic Missile Defense System Overhead Persistent Infrared Architecture (BOA) and $0.3 billion for Virginia-Class submarines.

LIQUIDITY AND CAPITAL RESOURCES

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

At June 30, ~~2022,~~2023, we had ~~$1.2~~$3.4 billion in cash and cash equivalents. We expect cash and cash equivalents and cash generated from operating activities, supplemented by borrowings under credit facilities, commercial paper and/or in the capital markets through our shelf registration with the SEC, if needed, to be sufficient to provide liquidity to the company in the short-term and long-term. The company has a five-year senior unsecured credit facility in an

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aggregate principal amount of ~~$2.0~~$2.5 billion, and in April ~~2022,~~2023, we renewed our one-year $500 million uncommitted credit facility. At June 30, ~~2022,~~2023, there ~~was~~were no ~~balance~~borrowings outstanding under these credit ~~facilities.~~

~~Effective January 30, 2021,~~facilities; however, in May 2023, we ~~completed~~issued $779 million in commercial paper, which reduced the ~~IT services divestiture~~amount available for ~~$3.4 billion cash. Proceeds were primarily used in the first quarter of 2021 for a~~borrowing under our unsecured credit facility. In February 2023, we issued $2.0 billion ~~accelerated share repurchase and~~of unsecured senior notes. We intend to ~~fund redemption of $1.5 billion of the company’s 2.55 percent unsecured~~use those proceeds for general corporate purposes, which may include debt repayment (including our 3.25% senior notes due ~~October 2022.~~in August 2023), share repurchases and working capital.

COVID-19 and the CARES Act

~~The~~Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) established a program with provisions to allow U.S. companies to defer the employer’s portion of social security taxes between March 27, 2020 and December 31, 2020 and pay such taxes in two installments in 2021 and 2022. Our first installment of deferred social security taxes of $200 million was paid in the fourth quarter of 2021 and the second installment of $200 million is due in the fourth quarter of 2022. Under Section 3610, the CARES Act also authorized the government to reimburse qualifying contractors for certain costs of providing paid leave to employees as a result of COVID-19. The company ~~continues to seek,~~has sought and ~~anticipates continuing~~may continue to seek recovery for certain COVID-19-related costs under Section 3610 of the CARES Act and through our contract provisions, though it is unclear what funds will be available and how much we will be able to recover. In addition, during 2020, the ~~U.S. Department of Defense (DoD) has, to date, taken steps to increase~~DoD increased the rate for certain progress payments from 80 percent to 90 percent for costs incurred and work performed on relevant ~~contracts; it is unclear what steps~~contracts. 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 ~~continue to take.~~have a material impact on our 2023 cash from operations.

Internal Revenue Code (IRC) Section 174

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) ~~eliminates~~eliminated the option to deduct research and development expenditures ~~currently~~in the current year and requires taxpayers to amortize them over five years pursuant to IRC Section 174. Our 2022 cash from operations were reduced by approximately $900 million for federal tax payments we made related to Section 174. In the future, Congress ~~is considering, but has not passed,~~may consider legislation that would defer the amortization requirement to later ~~years. If legislation is not passed and made effective retroactively~~years, possibly with retroactive effect. In the meantime, we expect to ~~January 1, 2022,~~continue to make additional federal tax payments based on the current Section 174 tax law, which we estimate ~~the provisions currently in effect~~ will reduce our 2023 cash from operations ~~for the year ended December 31, 2022~~ by approximately ~~$1 billion.~~$720 million. The ~~actual~~ impact of Section 174 on ~~2022~~our cash from operations ~~will depend~~depends on ~~if and when Congress passes additional legislation, whether such legislation is made effective retroactively,~~ the amount of research and development expenditures incurred ~~and paid~~ by the company ~~during 2022,~~ and whether the IRS issues guidance on the provision which differs from our current ~~interpretation. We have made federal tax payments of approximately $450 million related to Section 174 during the six months ended June 30, 2022.~~interpretation, among other things.

Cash Flow Measures

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

Operating Cash Flow

The table below summarizes key components of cash provided by (used in) ~~provided by~~ operating activities:


		Six Months Ended June 30			%					Six Months Ended June 30	%
$ in millions	$ in millions		2022		2021		Change		$ in millions		2023		2022		Change
Net earnings	Net earnings		$	1,901	$	3,232	(41)	%	Net earnings		$	1,654	$	1,901	(13)	%
Gain on sale of business			—		(1,980)		NM

Non-cash items(1)	Non-cash items(1)		(321)		(33)		873	%	Non-cash items(1)		91		(321)		(128)	%

Pension and OPB contributions	Pension and OPB contributions		(71)		(74)		(4)	%	Pension and OPB contributions		(75)		(71)		6	%
Changes in trade working capital	Changes in trade working capital		(2,261)		(164)		1,279	%	Changes in trade working capital		(1,504)		(2,261)		(33)	%

Other, net	Other, net		67		(19)		(453)	%	Other, net		51		67		(24)	%
Net cash (used in) provided by operating activities			$	(685)	$	962	(171)	%
Net cash provided by (used in) operating activities									Net cash provided by (used in) operating activities		$	217	$	(685)	(132)	%

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

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Year to date ~~2022~~2023 net cash provided by operating activities was $217 million compared to net cash used in operating activities ~~was~~of $685 ~~million compared to net cash provided by operating activities of $962~~ million in the prior year ~~period. This change~~period and reflects ~~increases in~~improved trade working capital ~~due, in part, to unexpected delays in the timing of customer payments near the end of the quarter, which pushed certain~~largely driven by increased billings and cash receipts into the early part of the third quarter. In the second quarter of 2022, the company made $450 million of federal tax payments related to the current provisions of IRC Section 174. In the second quarter of 2021, the company made $390 million of tax payments related to the IT services divestiture.collections.

Adjusted Free Cash Flow

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

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pension contributions for consistency and comparability of financial performance. This measure may not be defined and calculated by other companies in the same manner. We use adjusted free cash flow as a key factor in our planning for, and consideration of, acquisitions, the payment of dividends and stock repurchases. This non-GAAP measure may be useful to investors and other users of our financial statements as a supplemental measure of our cash performance, but should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating cash flows presented in accordance with GAAP.

The table below reconciles net cash ~~used in~~provided by (used in) operating activities to adjusted free cash flow:


		Six Months Ended June 30			%					Six Months Ended June 30	%
$ in millions	$ in millions		2022		2021		Change		$ in millions		2023		2022		Change
Net cash (used in) provided by operating activities			$	(685)	$	962	(171)	%
Net cash provided by (used in) operating activities									Net cash provided by (used in) operating activities		$	217	$	(685)	(132)	%
Capital expenditures	Capital expenditures		(507)		(435)		17	%	Capital expenditures		(613)		(507)		21	%
Proceeds from sale of equipment to a customer			—		56		NM

Adjusted free cash flow	Adjusted free cash flow		$	(1,192)	$	583	(304)	%	Adjusted free cash flow		$	(396)	$	(1,192)	(67)	%

Year to date ~~2022~~2023 adjusted free cash flow ~~decreased $1.8 billion,~~increased $796 million as compared with the same period in ~~2021,~~2022 due to higher net cash ~~used in~~provided by operating activities, ~~and~~partially offset by an increase in capital expenditures.

Investing Cash Flow

Year to date ~~2022~~2023 net cash used in investing activities increased $144 million as compared with the same period in 2022 principally due to higher capital expenditures.

Financing Cash Flow

Year to date 2023 net cash provided by financing activities was ~~$468 million~~$1.2 billion compared to net cash ~~provided by investing~~used in financing activities of ~~$3.0~~$1.2 billion in the prior year period principally due to ~~$3.4~~the issuance of $2.0 billion in ~~cash received from the sale~~long-term debt and net borrowings on commercial paper of ~~our IT services business during the first quarter of 2021.~~

~~Financing Cash Flow~~

~~Year to date 2022 net cash used in financing activities decreased $3.7 billion, as compared with the same period in 2021, principally due to~~$768 million, partially offset by a ~~$2.2 billion decrease in debt repayments and a $1.5 billion reduction~~$291 million increase in share repurchases.

Credit Facilities, Commercial Paper and Financial Arrangements - See Note 6 to the financial statements for further information on our credit facilities, commercial paper and our use of standby letters of credit and guarantees.

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

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

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

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

ACCOUNTING STANDARDS UPDATES

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

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

This Form 10-Q and the information we are incorporating by reference contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as

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~~“will,~~ “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 ~~2021~~2022 Annual Report on Form 10-K and from time to time in our other filings with the Securities and Exchange Commission (SEC). These risks and uncertainties are amplified by the global ~~COVID-19 pandemic~~macroeconomic, health, security and ~~the related effects on the broader economic environment,~~political environments, including inflationary pressures, labor and supply chain challenges and COVID-19, which have caused and will continue to cause significant challenges, instability and uncertainty. They include:

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Industry and Economic Risks

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

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

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

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

•continued pressures from macroeconomic trends, including on costs, schedules, performance and ability to meet expectations

•increased competition within our markets and bid protests

Legal and Regulatory Risks

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

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

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

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

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

Business and Operational Risks

•impacts ~~of the COVID-19 pandemic (or future~~related to health epidemics and pandemics, ~~or similar outbreaks),~~ including potential new variants, case surges or prolonged recovery periods, their effects on the broader environment, and varying related government requirements, on: our business, our ability to maintain a qualified and productive workforce, work slowdowns or stoppages, labor shortages, supply chain and logistics challenges, costs we cannot recover and liabilities for which we are not compensated, performance challenges (including cost and schedule), government funding, changes in government acquisition priorities and processes, government payment rules and practices, insurance challenges, and potential impacts on access to capital, the markets and the fair value of our assetsCOVID-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 ~~required~~necessary security clearances ~~and requisite skills~~ to meet our performance obligations

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

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

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

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

•natural disasters

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

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

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

General and Other Risk Factors

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risks from those discussed in our ~~2021~~2022 Annual Report on Form 10-K.

Item 4. Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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

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

Item 1A. Risk Factors

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

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

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

Period Total Number
of Shares
Purchased
Average Price
Paid per
Share(1)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the
Plans or Programs
($ in millions)
April 2, 2022 - April 29, 2022 187,598 $ 456.67 187,598 $ 3,732
April 30, 2022 - May 27, 2022 253,224 455.19 253,224 3,617
May 28, 2022 - July 1, 2022 265,638 463.38 265,638 3,494
Total 706,460 $ 458.66 706,460 $ 3,494


Period	Total Number of Shares Purchased	Average Price Paid per Share(1)(2)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs ($ in millions)
April 1, 2023 - April 28, 2023	310,435	NM(2)		310,435	$	1,851
April 29, 2023 - May 26, 2023	187,883	$	442.25	187,883		1,768
May 27, 2023 - June 30, 2023	130,374	$	447.76	130,374		1,710
Total	628,692	NM(2)		628,692	$	1,710

(1)Includes commissions paid.

(2)During the first quarter of 2023, the company entered into an accelerated share repurchase (ASR) agreement with Bank of America, N.A., which was completed on April 27, 2023. Pursuant to the terms of the ASR, a total of approximately 1.1 million shares of our common stock were repurchased with an average final purchase price of $458.28 (0.9 million shares in February 2023 and 0.2 million shares in April 2023).

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

Item 5. Other Information

Consistent with Item 408 of Regulation S-K, the following table reflects Rule 10b5-1 trading arrangements and non-Rule 10b5-1 trading arrangements (as defined in Item 408) entered into during the quarter ended June 30, 2023.

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Name
(Title)

Type of Trading Arrangement

Date of Adoption or Termination

Expiration Date of Trading Arrangement

Aggregate Number of Securities to Be Purchased or Sold

Michael A. Hardesty

Rule 10b5-1 Trading Arrangement

May 3, 2023

Until May 1, 2024 or such earlier date upon the completion of all trades under the plan (or the expiration of the orders relating to such trades without execution) or the occurrence of such other termination events as specified in the plan.

Sale of 140 shares of common stock

Sale of shares to be received upon payout of 2021 RPSRs and RSRs(1)

Gift of up to 800 shares of common stock

(Corporate Vice President, Controller and Chief Accounting Officer)

(1) The aggregate number of shares to be sold will depend, in part, on future company performance.

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Item 6. Exhibits


3.1			Amended and Restated Certificate of Incorporation of Northrop Grumman Corporation dated May 17, 2023 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed May 19, 2023, File No. 001-16411)

3.2			Amended and Restated Bylaws of Northrop Grumman Corporation dated May 17, 2023 (incorporated by reference to Exhibit 3.2 to Form 8-K filed May 19, 2023, File No. 001-16411)

*+10.1			Non-Employee Director Compensation Term Sheet, effective May ~~18, 2022~~17, 2023

*+10.2			~~Consultant Contract dated~~Northrop Grumman Savings Excess Plan (Amended and Restated Effective as of ~~April 11, 2022 by and~~ ~~between Northrop Grumman Systems Corporation and Blake E. Larson~~July 1, 2023)

*15			Letter from Independent Registered Public Accounting Firm

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

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

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

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


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

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


+			Management contract or compensatory plan or arrangement

*			Filed with this report

**			Furnished with this report

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SIGNATURES

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


NORTHROP GRUMMAN CORPORATION (Registrant)

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

Date: July ~~27, 2022~~26, 2023

~~-38-~~-37-


Period	Total Number of Shares Purchased	Average Price Paid per Share(1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs ($ in millions)
April 2, 2022 - April 29, 2022	187,598	$	456.67	187,598	$	3,732
April 30, 2022 - May 27, 2022	253,224	455.19		253,224		3,617
May 28, 2022 - July 1, 2022	265,638	463.38		265,638		3,494
Total	706,460	$	458.66	706,460	$	3,494