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 September 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 October ~~24, 2022, 153,912,156~~23, 2023, 150,792,605 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	9
	5. Investigations, Claims and Litigation	1110
	6. Commitments and Contingencies	1211
	7. Retirement Benefits	1413
	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	22
	Segment Operating Results	2523
	Product and Service Analysis	3128
	Backlog	3229
	Liquidity and Capital Resources	3229
	Critical Accounting Policies, Estimates and Judgments	3431
	Accounting Standards Updates	3431
	Forward-Looking Statements and Projections	3431
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3633
Item 4.	Controls and Procedures	3633

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	3734
Item 1A.	Risk Factors	3734
Item 2.	Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities	3734
Item 5.	Other Information	34
Item 6.	Exhibits	3835
	Signatures	3936

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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 September 30				Nine Months Ended September 30					Three Months Ended September 30				Nine Months Ended September 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	$	6,979	$	6,845	$	20,599	$	21,060	Product	$	7,678	$	6,979	$	22,390	$	20,599
Service	Service	1,992		1,875		5,970		5,968		Service	2,097		1,992		6,262		5,970
Total sales	Total sales	8,971		8,720		26,569		27,028		Total sales	9,775		8,971		28,652		26,569
Operating costs and expenses	Operating costs and expenses									Operating costs and expenses
Product	Product	5,589		5,352		16,250		16,662		Product	6,135		5,589		17,738		16,250
Service	Service	1,564		1,434		4,669		4,649		Service	1,599		1,564		4,848		4,669
General and administrative expenses	General and administrative expenses	974		891		2,955		2,788		General and administrative expenses	1,025		974		3,136		2,955
Total operating costs and expenses	Total operating costs and expenses	8,127		7,677		23,874		24,099		Total operating costs and expenses	8,759		8,127		25,722		23,874
Gain on sale of business		—		—		—		1,980
Operating income	Operating income	844		1,043		2,695		4,909		Operating income	1,016		844		2,930		2,695
Other (expense) income	Other (expense) income									Other (expense) income
Interest expense	Interest expense	(122)		(132)		(386)		(423)		Interest expense	(141)		(122)		(417)		(386)
Non-operating FAS pension benefit	Non-operating FAS pension benefit	376		367		1,129		1,101		Non-operating FAS pension benefit	132		376		397		1,129

Other, net	Other, net	(8)		(3)		(54)		6		Other, net	111		(8)		193		(54)
Earnings before income taxes	Earnings before income taxes	1,090		1,275		3,384		5,593		Earnings before income taxes	1,118		1,090		3,103		3,384
Federal and foreign income tax expense	Federal and foreign income tax expense	175		212		568		1,298		Federal and foreign income tax expense	181		175		512		568
Net earnings	Net earnings	$	915	$	1,063	$	2,816	$	4,295	Net earnings	$	937	$	915	$	2,591	$	2,816

Basic earnings per share	Basic earnings per share	$	5.92	$	6.65	$	18.13	$	26.63	Basic earnings per share	$	6.20	$	5.92	$	17.07	$	18.13
Weighted-average common shares outstanding, in millions	Weighted-average common shares outstanding, in millions	154.6		159.8		155.3		161.3		Weighted-average common shares outstanding, in millions	151.2		154.6		151.8		155.3
Diluted earnings per share	Diluted earnings per share	$	5.89	$	6.63	$	18.06	$	26.55	Diluted earnings per share	$	6.18	$	5.89	$	17.00	$	18.06
Weighted-average diluted shares outstanding, in millions	Weighted-average diluted shares outstanding, in millions	155.3		160.4		155.9		161.8		Weighted-average diluted shares outstanding, in millions	151.7		155.3		152.4		155.9

Net earnings (from above)	Net earnings (from above)	$	915	$	1,063	$	2,816	$	4,295	Net earnings (from above)	$	937	$	915	$	2,591	$	2,816
Other comprehensive loss, net of tax
Change in unamortized prior service credit		—		(2)		(1)		(6)
Change in cumulative translation adjustment and other, net		(7)		(6)		(22)		(6)
Other comprehensive loss, net of tax		(7)		(8)		(23)		(12)
Other comprehensive income (loss), net of tax										Other comprehensive income (loss), net of tax
Change in cumulative translation adjustment										Change in cumulative translation adjustment	6		(7)		11		(22)
Change in other, net										Change in other, net	(3)		—		(5)		(1)
Other comprehensive income (loss), net of tax										Other comprehensive income (loss), net of tax	3		(7)		6		(23)
Comprehensive income	Comprehensive income	$	908	$	1,055	$	2,793	$	4,283	Comprehensive income	$	940	$	908	$	2,597	$	2,793

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 September 30, 2022 December 31, 2021
Assets
Cash and cash equivalents $ 1,666 $ 3,530
Accounts receivable, net 1,936 1,467
Unbilled receivables, net 6,430 5,492
Inventoried costs, net 989 811
Prepaid expenses and other current assets 1,277 1,126
Total current assets 12,298 12,426
Property, plant and equipment, net of accumulated depreciation of $7,243 for 2022 and $6,819 for 2021 8,325 7,894
Operating lease right-of-use assets 1,680 1,655
Goodwill 17,516 17,515
Intangible assets, net 433 578
Deferred tax assets 233 200
Other non-current assets 2,248 2,311
Total assets $ 42,733 $ 42,579
Liabilities
Trade accounts payable $ 2,335 $ 2,197
Accrued employee compensation 1,831 1,993
Advance payments and billings in excess of costs incurred 3,107 3,026
Other current liabilities 3,539 2,314
Total current liabilities 10,812 9,530
Long-term debt, net of current portion of $1,069 for 2022 and $6 for 2021 11,803 12,777
Pension and other postretirement benefit plan liabilities 2,405 3,269
Operating lease liabilities 1,696 1,590
Deferred tax liabilities 86 490
Other non-current liabilities 1,988 1,997
Total liabilities 28,790 29,653
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: 2022—154,093,656 and 2021—156,284,423 154 156
Paid-in capital — —
Retained earnings 13,955 12,913
Accumulated other comprehensive loss (166) (143)
Total shareholders’ equity 13,943 12,926
Total liabilities and shareholders’ equity $ 42,733 $ 42,579


$ in millions, except par value	September 30, 2023		December 31, 2022
Assets
Cash and cash equivalents	$	2,082	$	2,577
Accounts receivable, net	1,764		1,511
Unbilled receivables, net	6,270		5,983
Inventoried costs, net	1,355		978
Prepaid expenses and other current assets	1,679		1,439
Total current assets	13,150		12,488
Property, plant and equipment, net of accumulated depreciation of $7,742 for 2023 and $7,258 for 2022	9,173		8,800
Operating lease right-of-use assets	1,714		1,811
Goodwill	17,514		17,516
Intangible assets, net	324		384
Deferred tax assets	330		162
Other non-current assets	2,691		2,594
Total assets	$	44,896	$	43,755

Liabilities
Trade accounts payable	$	2,260	$	2,587
Accrued employee compensation	1,927		2,057
Advance payments and billings in excess of costs incurred	3,458		3,609
Other current liabilities	2,660		3,334
Total current liabilities	10,305		11,587
Long-term debt, net of current portion of $64 for 2023 and $1,072 for 2022	13,793		11,805
Pension and other postretirement benefit plan liabilities	1,147		1,188
Operating lease liabilities	1,736		1,824
Other non-current liabilities	1,987		2,039
Total liabilities	28,968		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—150,864,851 and 2022—153,157,924	151		153
Paid-in capital	—		—
Retained earnings	15,924		15,312
Accumulated other comprehensive loss	(147)		(153)
Total shareholders’ equity	15,928		15,312
Total liabilities and shareholders’ equity	$	44,896	$	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)


		Nine Months Ended September 30					Nine Months Ended September 30
$ in millions	$ in millions	2022		2021		$ in millions	2023		2022
Operating activities	Operating activities					Operating activities
Net earnings	Net earnings	$	2,816	$	4,295	Net earnings	$	2,591	$	2,816
Adjustments to reconcile to net cash provided by operating activities:	Adjustments to reconcile to net cash provided by operating activities:					Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	960		908		Depreciation and amortization	938		960

Stock-based compensation	Stock-based compensation	72		71		Stock-based compensation	64		72
Deferred income taxes	Deferred income taxes	(438)		(105)		Deferred income taxes	(298)		(438)
Gain on sale of business		—		(1,980)
Net periodic pension and OPB income	Net periodic pension and OPB income	(895)		(818)		Net periodic pension and OPB income	(230)		(895)
Pension and OPB contributions	Pension and OPB contributions	(106)		(108)		Pension and OPB contributions	(108)		(106)
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Accounts receivable, net	Accounts receivable, net	(469)		(133)		Accounts receivable, net	(256)		(469)
Unbilled receivables, net	Unbilled receivables, net	(1,038)		(596)		Unbilled receivables, net	(287)		(1,038)
Inventoried costs, net	Inventoried costs, net	(171)		(113)		Inventoried costs, net	(396)		(171)
Prepaid expenses and other assets	Prepaid expenses and other assets	(64)		6		Prepaid expenses and other assets	(127)		(64)
Accounts payable and other liabilities	Accounts payable and other liabilities	(57)		49		Accounts payable and other liabilities	(443)		(57)
Income taxes payable, net	Income taxes payable, net	(56)		663		Income taxes payable, net	40		(56)

Other, net	Other, net	96		(14)		Other, net	(43)		96
Net cash provided by operating activities	Net cash provided by operating activities	650		2,125		Net cash provided by operating activities	1,445		650

Investing activities	Investing activities					Investing activities
Divestiture of IT services business		—		3,400
Capital expenditures	Capital expenditures	(803)		(682)		Capital expenditures	(972)		(803)
Proceeds from sale of equipment to a customer	Proceeds from sale of equipment to a customer	100		84		Proceeds from sale of equipment to a customer	—		100
Proceeds from sale of minority investment						Proceeds from sale of minority investment	157		—
Other, net	Other, net	40		(3)		Other, net	3		40
Net cash (used in) provided by investing activities		(663)		2,799
Net cash used in investing activities						Net cash used in investing activities	(812)		(663)

Financing activities	Financing activities					Financing activities

Net proceeds from issuance of long-term debt						Net proceeds from issuance of long-term debt	1,995		—
Payments of long-term debt	Payments of long-term debt	—		(2,236)		Payments of long-term debt	(1,050)		—

Common stock repurchases	Common stock repurchases	(1,011)		(2,724)		Common stock repurchases	(1,154)		(1,011)
Cash dividends paid	Cash dividends paid	(786)		(737)		Cash dividends paid	(834)		(786)
Payments of employee taxes withheld from share-based awards	Payments of employee taxes withheld from share-based awards	(50)		(33)		Payments of employee taxes withheld from share-based awards	(51)		(50)
Other, net	Other, net	(4)		(46)		Other, net	(34)		(4)
Net cash used in financing activities	Net cash used in financing activities	(1,851)		(5,776)		Net cash used in financing activities	(1,128)		(1,851)
Decrease in cash and cash equivalents	Decrease in cash and cash equivalents	(1,864)		(852)		Decrease in cash and cash equivalents	(495)		(1,864)
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	$	1,666	$	4,055	Cash and cash equivalents, end of period	$	2,082	$	1,666

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 September 30 Nine Months Ended September 30
$ in millions, except per share amounts 2022 2021 2022 2021
Common stock
Beginning of period $ 155 $ 160 $ 156 $ 167
Common stock repurchased (1) (1) (3) (8)
Shares issued for employee stock awards and options — — 1 —
End of period 154 159 154 159
Paid-in capital
Beginning of period — — — 58
Common stock repurchased — — — (60)
Stock compensation — — — 2
End of period — — — —
Retained earnings
Beginning of period 13,655 11,144 12,913 10,482
Common stock repurchased (374) (587) (1,012) (2,676)
Net earnings 915 1,063 2,816 4,295
Dividends declared (269) (252) (785) (741)
Stock compensation 28 30 23 38
End of period 13,955 11,398 13,955 11,398
Accumulated other comprehensive loss
Beginning of period (159) (132) (143) (128)
Other comprehensive loss, net of tax (7) (8) (23) (12)
End of period (166) (140) (166) (140)
Total shareholders’ equity $ 13,943 $ 11,417 $ 13,943 $ 11,417
Cash dividends declared per share $ 1.73 $ 1.57 $ 5.03 $ 4.59


	Three Months Ended September 30				Nine Months Ended September 30
$ in millions, except per share amounts	2023		2022		2023		2022
Common stock
Beginning of period	$	151	$	155	$	153	$	156
Common stock repurchased	—		(1)		(2)		(3)
Shares issued for employee stock awards and options	—		—		—		1
End of period	151		154		151		154
Paid-in capital
Beginning of period	—		—		—		—
End of period	—		—		—		—
Retained earnings
Beginning of period	15,485		13,655		15,312		12,913
Common stock repurchased	(232)		(374)		(1,162)		(1,012)
Net earnings	937		915		2,591		2,816
Dividends declared	(283)		(269)		(832)		(785)
Stock compensation	17		28		15		23
End of period	15,924		13,955		15,924		13,955
Accumulated other comprehensive loss
Beginning of period	(150)		(159)		(153)		(143)
Other comprehensive income (loss), net of tax	3		(7)		6		(23)
End of period	(147)		(166)		(147)		(166)
Total shareholders’ equity	$	15,928	$	13,943	$	15,928	$	13,943
Cash dividends declared per share	$	1.87	$	1.73	$	5.47	$	5.03

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, respectively, for the nine months ended September 30, 2021.

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

Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), un-priced change orders, REAs and contract claims. Variable consideration is included in total estimated sales to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate variable consideration as the most likely amount to which we expect to be entitled.

At the request of the National Aeronautics and Space Administration (NASA), Space Systems is preparing engineering change proposals (ECPs) for scope increases and other aspects of the Habitation and Logistics Outpost (HALO) contract largely stemming from evolving Lunar Gateway architecture and mission requirements. We expect the ECPs will address both work performed and work expected to be performed by the company resulting from scope changes previously approved by NASA, as well as changes NASA has requested the company to propose but has not yet directed the company to perform. The company plans to submit an ECP prior to the end of the year and begin negotiating with NASA on these various changes and other aspects of the HALO contract. The company’s third quarter results reflect our current best estimate of the outcome of the ECP negotiations assuming the terms of the current contract; however, if the outcome is less favorable than what we have assumed, it could have an adverse effect on our financial position, results of operations and/or cash flows.

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

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NORTHROP GRUMMAN CORPORATION

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 September 30				Nine Months Ended September 30					Three Months Ended September 30				Nine Months Ended September 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	$	59	$	116	$	363	$	478	Revenue	$	95	$	59	$	252	$	363
Operating income	Operating income	45		109		310		453		Operating income	58		45		180		310
Net earnings(1)	Net earnings(1)	36		86		245		358		Net earnings(1)	46		36		142		245
Diluted earnings per share(1)	Diluted earnings per share(1)	0.23		0.54		1.57		2.21		Diluted earnings per share(1)	0.30		0.23		0.93		1.57

(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 EAC adjustment on the HALO program at Space Systems. 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. During the three months ended September 30, 2021, we recorded~~obligation had a ~~$42 million unfavorable EAC adjustment~~significant impact on the F-35 program at Aeronautics Systems due to labor-related production inefficiencies largely driven by COVID-19-related impacts on the labor market and employee leave. No such adjustments were material to the financial statements during the three months ended September 30, 2023 or 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 September 30, ~~2022~~2023 was ~~$79.6~~$83.9 billion. Of our September 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 nine months ended September 30, 2023 that was included in the December 31, 2022 contract liability balance was $358 million and $2.9 billion, respectively. The amount of revenue recognized for the three and nine months ended September 30, 2022 that was included in the December 31, 2021 contract liability balance was $303 million and $2.2 billion, respectively. The amount of revenue recognized for the three and nine months ended September 30, 2021 that was included in the December 31, 2020 contract liability balance was $261 million and $1.8 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 nine months ended September 30, 2022, the company received lease incentives for landlord funded leasehold improvements of $96 million related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities. During the nine months ended September 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 nine months ended September 30, 2022, the company received lease incentives for landlord funded leasehold improvements of $96 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 ~~$118~~$134 million and ~~$105~~$118 million as of September 30, ~~2022~~2023 and ~~2021,~~2022, respectively. In the fourth quarter of 2020, the company completed a sale of equipment to a customer on a restricted Aeronautics Systems program. During the nine months ended September 30, 2022, ~~and 2021,~~ the company received cash payments of $100 million ~~and $84 million, respectively,~~ related to the equipment sale and included it in Proceeds from sale of equipment to a customer in the unaudited condensed consolidated statement of cash flows.

Sale of Minority Investment

In July 2023, the company sold its minority investment in an Australian business for AUD $235 million (the equivalent of $157 million upon settlement). The sale resulted in a pre-tax gain of $97 million, which is reflected in Other, net on the unaudited condensed consolidated statements of earnings and comprehensive income for the three and nine months ended September 30, 2023. Proceeds from the sale are included in investing activities on the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2023.

Accumulated Other Comprehensive Loss

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


$ in millions	$ in millions	September 30, 2022		December 31, 2021		$ in millions	September 30, 2023		December 31, 2022
Unamortized prior service credit		$	1	$	2
Cumulative translation adjustment and other, net		(167)		(145)
Cumulative translation adjustment						Cumulative translation adjustment	$	(150)	$	(161)
Other, net						Other, net	3		8
Total accumulated other comprehensive loss	Total accumulated other comprehensive loss	$	(166)	$	(143)	Total accumulated other comprehensive loss	$	(147)	$	(153)

Related Party Transactions

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

Accounting Standards Updates

Accounting standards updates adopted and/or issued, but not effective until after September 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 nine months ended September 30, 2023, respectively. The dilutive effect of these securities totaled 0.7 million shares and 0.6 million shares for the three and nine months ended September 30, 2022, respectively. ~~The dilutive effect of these securities totaled 0.6 million shares and 0.5 million shares for the three and nine months ended September 30, 2021, respectively.~~

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 September 30, 2022, repurchases under the 2021 Repurchase Program totaled $1.9 billion; $1.1 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.and were completed in April 2023.

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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 September 30, 2023, repurchases under the 2022 Repurchase Program ~~will commence upon completion of~~totaled 0.5 billion; $1.5 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 September 30, 2022, there have been no repurchases under the 2022 Repurchase Program and the company’s total outstanding share repurchase authorization was $3.1 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 nine months ended September 30, 2022, the company repurchased $1.0 billion 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	Nine Months Ended September 30		Repurchase Program Authorization Date	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share(1)		Date Completed	Nine Months Ended September 30
								2022	2021								2023	2022

December 4, 2018		$	3,000	8.9	$	337.18	October 2021	—	8.1
January 25, 2021	January 25, 2021	$	3,000	4.6	407.74			2.4	—	January 25, 2021	$	3,000	7.0	$	431.05	April 2023	1.4	2.4
January 24, 2022	January 24, 2022	$	2,000	—	—			—	—	January 24, 2022	$	2,000	1.1	$	445.53		1.1	—

(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.

3. INCOME TAXES
Three Months Ended September 30 Nine Months Ended September 30
$ in millions 2022 2021 2022 2021
Federal and foreign income tax expense $ 175 $ 212 $ 568 $ 1,298
Effective income tax rate 16.1 % 16.6 % 16.8 % 23.2 %


	Three Months Ended September 30						Nine Months Ended September 30
$ in millions	2023			2022			2023			2022
Federal and foreign income tax expense	$	181		$	175		$	512		$	568
Effective income tax rate	16.2		%	16.1		%	16.5		%	16.8		%

Current Quarter

The company’s third quarter ~~2022~~2023 effective tax rate (ETR) ~~decreased to 16.1~~of 16.2 percent ~~from 16.6 percent in~~was comparable with the prior year ~~period.~~period and reflects an increase in research credits, partially offset by higher interest expense on unrecognized tax benefits. The ~~company’s~~third quarter 2023 ETR includes benefits of $62 million for research credits and $19 million for foreign derived intangible income (FDII), partially offset by $21 million of interest expense on unrecognized tax benefits. The third quarter 2022 ETR ~~includes~~included benefits of $42 million for research credits and $16 million for ~~foreign derived intangible income (FDII).~~ FDII, partially offset by $11 million of interest expense on unrecognized tax benefits.

Year to Date

The company’s ~~third quarter 2021~~year to date 2023 ETR ~~included~~decreased to 16.5 percent from 16.8 percent in the prior year period principally due to an increase in research credits as well as more favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax benefits. The year to date 2023 ETR includes benefits of ~~$43~~$140 million for research credits and ~~$12~~$48 million for ~~FDII.~~

~~Year to Date~~

FDII, partially offset by $48 million of interest expense on unrecognized tax benefits. The year to date 2022 ETR ~~decreased to 16.8 percent from 23.2 percent in the prior year period. The company’s year to date 2022 ETR includes~~included benefits of $124 million for ~~research credits and $46 million for FDII. The company’s~~

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~~year to date 2021 ETR included benefits of $142 million for~~ research credits and ~~$32~~$46 million for ~~FDII. The year to date 2021 ETR was impacted~~FDII, partially offset by ~~additional federal income taxes resulting from the IT services divestiture, as well as a change in~~$26 million of interest expense on unrecognized tax ~~revenue recognition 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.~~benefits.

Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were ~~$627~~$810 million as of September 30, ~~2022~~2023 and ~~$571~~$850 million as of December 31, ~~2021.~~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 September 30, ~~2022,~~2023, we have approximately ~~$1.7~~$1.9 billion in unrecognized tax benefits, including ~~$449~~$807 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.

~~Our current unrecognized tax benefits, which are included in Other current liabilities~~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 ~~unaudited condensed consolidated statements of financial position, were $657~~company’s 2007 to 2016 tax years, resulting in a $95 million ~~and $590 million as of September 30, 2022 and December 31, 2021, respectively, with the remainder of~~reduction to our unrecognized tax benefits ~~included within Other non-current liabilities.~~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 ~~2022,~~2023, the company entered into an agreed Revenue Agent’s Report (“RAR”) for certain matters related to the company’s ~~2014-2016~~2014-2017 federal income tax returns, ~~and refund claims related~~resulting in a $90 million reduction 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,our unrecognized tax benefits ~~claimed~~and an immaterial impact to income tax expense.

Our current unrecognized tax benefits, which are included in ~~legacy OATK’s 2014 to 2017~~Other current liabilities in the unaudited condensed consolidated statements of financial position, were $909 million and $728 million as of September 30, 2023 and December 31, 2022, respectively, with the remainder of our unrecognized tax ~~years may decline by up to $110 million through administrative resolution with IRS Appeals.~~benefits included within Other non-current liabilities.

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.

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.

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:


		September 30, 2022								December 31, 2021									September 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	$	299	$	—	$	8	$	307	$	393	$	1	$	7	$	401	Marketable securities	$	301	$	—	$	8	$	309	$	310	$	1	$	8	$	319
Marketable securities valued using NAV	Marketable securities valued using NAV							13								17		Marketable securities valued using NAV							9								13
Total marketable securities	Total marketable securities	299		—		8		320		393		1		7		418		Total marketable securities	301		—		8		318		310		1		8		332
Derivatives	Derivatives	—		4		—		4		—		(1)		—		(1)		Derivatives	—		1		—		1		—		7		—		7

The notional value of the company’s foreign currency forward contracts at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~$128~~$215 million and ~~$120~~$221 million, respectively. ~~At September 30, 2022 and December 31, 2021, no~~The portion of ~~the~~ notional value ~~was~~ designated as a cash flow ~~hedge.~~hedge at September 30, 2023 and December 31, 2022 was $88 million and $87 million, respectively.

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The derivative fair values and related unrealized gains/losses at September 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 nine months ended September 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 ~~$11.9~~$12.5 billion and ~~$15.1~~$12.1 billion as of September 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, including debt repayment, 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~~unpaid interest.

In ~~March 2021,~~August 2023, the company repaid ~~$700 million~~$1.05 billion of ~~3.50~~3.25 percent unsecured senior 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.

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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 estimated was approximately $16 million (as of September 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 further damages of approximately $57 million for particular periods of delay. On October 17, 2022, the court denied the government’s motion for reconsideration, making clear the government was not entitled to any such damages for delay. The court also determined that the past interest due to the company amounted to approximately $16 million. On October 19, 2022, the court entered judgment in the company’s favor in the amount of approximately $83 million, plus a currently estimated approximately $7 thousand of additional interest to accrue per day until the date the government makes payment. The parties have until December 19, 2022 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 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 August 3, 2022, the court approved the consent decree. We have also reached agreements with the Department of Defense and the Bethpage and South Farmingdale Water 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,~~Towns of Oyster Bay and ~~on August 2, 2022, the court approved the agreement with the Department of Defense. The agreement with the South Farmingdale Water District does not require court approval.~~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 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, 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

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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

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civil investigative demand (CID) from the FTC requesting certain information relating to a potential issue regarding the company’s compliance with the Order in connection with a then pending missile competition. The company promptly provided information in response to the request. In late 2021, the company resumed discussions with staff at the FTC regarding our response and their views on compliance issues. ~~Most recently,~~In late 2022, the company received a follow-on CID; the company responded to it earlier this year. On October 20, 2023, the FTC informed the company that the FTC has now closed the investigation with no further action.

The company received from the U.S. Department of Justice (DOJ) a criminal subpoena on December 9, 2022, and ~~will be~~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 ~~a follow-on CID.~~the requests. We cannot at this point predict the outcome of those discussions, 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 September 30, 2022, 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.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 September 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 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 September 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. We ~~continue~~have continued to exchange correspondence and engage with ~~the government~~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 and responding to the requests. We cannot at this 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 third 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

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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 September 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 September 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)
September 30, 2022 $ 584 $ 357 $ 503
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)
September 30, 2023	$	574	$	368	$	511
December 31, 2022	565		353		486

(1) As of September 30, ~~2022, $200~~2023, $217 million is recorded in Other current liabilities and ~~$384~~$357 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 September 30, ~~2022, $178~~2023, $201 million is deferred in Prepaid expenses and other current assets and ~~$325~~$310 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 September 30, ~~2022,~~2023, 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 September 30, ~~2022,~~2023, there were ~~$393~~$374 million of stand-by letters of credit and guarantees and $78 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 September 30, ~~2022,~~2023, there were no commercial paper borrowings outstanding.

Credit Facilities

~~In August 2022, the~~The company ~~entered into~~maintains a ~~new~~ five-year senior unsecured ~~revolving~~ credit facility in an aggregate principal amount of $2.5 billion (the “2022 Credit Agreement”)~~. The 2022 Credit Agreement replaced the company’s prior five-year, $2.0 billion revolving credit facility entered into on~~ that matures in August ~~17, 2018~~2027 and ~~as amended on October 17, 2019. The revolving credit facility established under the 2022 Credit Agreement~~ 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 2022 Credit Agreement. At September 30, ~~2022,~~2023, there were no borrowings outstanding under this facility.

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

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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 September 30								Nine Months Ended September 30									Three Months Ended September 30								Nine Months Ended September 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	$	104	$	2	$	4	$	276	$	311	$	6	$	12	Service cost	$	59	$	92	$	2	$	2	$	177	$	276	$	4	$	6
Interest cost	Interest cost	285		263		12		13		853		790		36		40		Interest cost	392		285		17		12		1,176		853		50		36
Expected return on plan assets	Expected return on plan assets	(661)		(627)		(28)		(26)		(1,982)		(1,884)		(83)		(79)		Expected return on plan assets	(524)		(661)		(22)		(28)		(1,573)		(1,982)		(64)		(83)
Amortization of prior service (credit) cost	Amortization of prior service (credit) cost	—		(3)		—		—		—		(7)		(1)		(1)		Amortization of prior service (credit) cost	—		—		—		—		—		—		—		(1)

Net periodic benefit cost (benefit)	Net periodic benefit cost (benefit)	$	(284)	$	(263)	$	(14)	$	(9)	$	(853)	$	(790)	$	(42)	$	(28)	Net periodic benefit cost (benefit)	$	(73)	$	(284)	$	(3)	$	(14)	$	(220)	$	(853)	$	(10)	$	(42)

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 September 30				Nine Months Ended September 30					Three Months Ended September 30				Nine Months Ended September 30
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions	2023		2022		2023		2022
Defined benefit pension plans	Defined benefit pension plans	$	26	$	26	$	77	$	79	Defined benefit pension plans	$	26	$	26	$	80	$	77
OPB plans	OPB plans	9		8		29		29		OPB plans	7		9		28		29
Defined contribution plans	Defined contribution plans	108		99		429		476		Defined contribution plans	126		108		487		429

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:


		Nine Months Ended September 30					Nine Months Ended September 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	$	94	$	89	Grant date aggregate fair value	$	102	$	94

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.

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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:


		Nine Months Ended September 30					Nine Months Ended September 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.

9. SEGMENT INFORMATION

The following table presents sales and operating income by segment:


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended September 30				Nine Months Ended September 30
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions	2023		2022		2023		2022
Sales	Sales									Sales
Aeronautics Systems	Aeronautics Systems	$	2,537	$	2,725	$	7,774	$	8,628	Aeronautics Systems	$	2,766	$	2,537	$	7,876	$	7,774
Defense Systems	Defense Systems	1,345		1,409		3,922		4,398		Defense Systems	1,421		1,345		4,217		3,922
Mission Systems	Mission Systems	2,456		2,436		7,469		7,613		Mission Systems	2,628		2,456		7,832		7,469
Space Systems	Space Systems	3,163		2,681		8,997		7,950		Space Systems	3,506		3,163		10,344		8,997
Intersegment eliminations	Intersegment eliminations	(530)		(531)		(1,593)		(1,561)		Intersegment eliminations	(546)		(530)		(1,617)		(1,593)
Total sales	Total sales	8,971		8,720		26,569		27,028		Total sales	9,775		8,971		28,652		26,569
Operating income	Operating income									Operating income
Aeronautics Systems	Aeronautics Systems	262		265		827		873		Aeronautics Systems	283		262		798		827
Defense Systems	Defense Systems	158		175		481		529		Defense Systems	182		158		508		481
Mission Systems	Mission Systems	368		372		1,166		1,177		Mission Systems	386		368		1,147		1,166
Space Systems	Space Systems	290		288		861		865		Space Systems	312		290		908		861
Intersegment eliminations	Intersegment eliminations	(71)		(65)		(218)		(197)		Intersegment eliminations	(74)		(71)		(218)		(218)
Total segment operating income	Total segment operating income	1,007		1,035		3,117		3,247		Total segment operating income	1,089		1,007		3,143		3,117
FAS/CAS operating adjustment	FAS/CAS operating adjustment	(55)		61		(152)		98		FAS/CAS operating adjustment	(20)		(55)		(62)		(152)
Unallocated corporate (expense) income		(108)		(53)		(270)		1,564
Unallocated corporate expense										Unallocated corporate expense	(53)		(108)		(151)		(270)
Total operating income	Total operating income	$	844	$	1,043	$	2,695	$	4,909	Total operating income	$	1,016	$	844	$	2,930	$	2,695

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.

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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.

Disaggregation of Revenue


Sales by Customer Type	Sales by Customer Type	Three Months Ended September 30								Nine Months Ended September 30								Sales by Customer Type	Three Months Ended September 30								Nine Months Ended September 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)	$	2,138	85	%	$	2,312	85	%	$	6,564	85	%	$	7,366	85	%	U.S. government(1)	$	2,331	84	%	$	2,138	85	%	$	6,654	85	%	$	6,564	85	%
International(2)	International(2)	341		13	%	360		13	%	1,012		13	%	1,110		13	%	International(2)	377		14	%	341		13	%	1,016		13	%	1,012		13	%
Other customers	Other customers	—		—	%	5		—	%	17		—	%	15		—	%	Other customers	4		—	%	—		—	%	23		—	%	17		—	%
Intersegment sales	Intersegment sales	58		2	%	48		2	%	181		2	%	137		2	%	Intersegment sales	54		2	%	58		2	%	183		2	%	181		2	%
Aeronautics Systems sales	Aeronautics Systems sales	2,537		100	%	2,725		100	%	7,774		100	%	8,628		100	%	Aeronautics Systems sales	2,766		100	%	2,537		100	%	7,876		100	%	7,774		100	%
Defense Systems	Defense Systems																	Defense Systems
U.S. government(1)	U.S. government(1)	820		62	%	877		62	%	2,369		61	%	2,749		63	%	U.S. government(1)	841		60	%	820		62	%	2,492		60	%	2,369		61	%
International(2)	International(2)	312		23	%	316		22	%	933		24	%	1,002		23	%	International(2)	358		25	%	312		23	%	1,103		26	%	933		24	%
Other customers	Other customers	19		1	%	10		1	%	53		1	%	61		1	%	Other customers	19		1	%	19		1	%	55		1	%	53		1	%
Intersegment sales	Intersegment sales	194		14	%	206		15	%	567		14	%	586		13	%	Intersegment sales	203		14	%	194		14	%	567		13	%	567		14	%
Defense Systems sales	Defense Systems sales	1,345		100	%	1,409		100	%	3,922		100	%	4,398		100	%	Defense Systems sales	1,421		100	%	1,345		100	%	4,217		100	%	3,922		100	%
Mission Systems	Mission Systems																	Mission Systems
U.S. government(1)	U.S. government(1)	1,729		71	%	1,756		72	%	5,325		72	%	5,491		71	%	U.S. government(1)	1,917		73	%	1,729		71	%	5,729		73	%	5,325		72	%
International(2)	International(2)	452		18	%	417		17	%	1,300		17	%	1,338		18	%	International(2)	432		16	%	452		18	%	1,262		16	%	1,300		17	%
Other customers	Other customers	25		1	%	19		1	%	89		1	%	49		1	%	Other customers	16		1	%	25		1	%	58		1	%	89		1	%
Intersegment sales	Intersegment sales	250		10	%	244		10	%	755		10	%	735		10	%	Intersegment sales	263		10	%	250		10	%	783		10	%	755		10	%
Mission Systems sales	Mission Systems sales	2,456		100	%	2,436		100	%	7,469		100	%	7,613		100	%	Mission Systems sales	2,628		100	%	2,456		100	%	7,832		100	%	7,469		100	%
Space Systems	Space Systems																	Space Systems
U.S. government(1)	U.S. government(1)	2,967		94	%	2,507		94	%	8,473		94	%	7,401		93	%	U.S. government(1)	3,342		95	%	2,967		94	%	9,822		95	%	8,473		94	%
International(2)	International(2)	105		3	%	92		3	%	261		3	%	301		4	%	International(2)	72		2	%	105		3	%	226		2	%	261		3	%
Other customers	Other customers	63		2	%	49		2	%	173		2	%	145		2	%	Other customers	66		2	%	63		2	%	212		2	%	173		2	%
Intersegment sales	Intersegment sales	28		1	%	33		1	%	90		1	%	103		1	%	Intersegment sales	26		1	%	28		1	%	84		1	%	90		1	%
Space Systems sales	Space Systems sales	3,163		100	%	2,681		100	%	8,997		100	%	7,950		100	%	Space Systems sales	3,506		100	%	3,163		100	%	10,344		100	%	8,997		100	%
Total	Total																	Total
U.S. government(1)	U.S. government(1)	7,654		86	%	7,452		85	%	22,731		86	%	23,007		85	%	U.S. government(1)	8,431		86	%	7,654		86	%	24,697		86	%	22,731		86	%
International(2)	International(2)	1,210		13	%	1,185		14	%	3,506		13	%	3,751		14	%	International(2)	1,239		13	%	1,210		13	%	3,607		13	%	3,506		13	%
Other customers	Other customers	107		1	%	83		1	%	332		1	%	270		1	%	Other customers	105		1	%	107		1	%	348		1	%	332		1	%
Total Sales	Total Sales	$	8,971	100	%	$	8,720	100	%	$	26,569	100	%	$	27,028	100	%	Total Sales	$	9,775	100	%	$	8,971	100	%	$	28,652	100	%	$	26,569	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 September 30								Nine Months Ended September 30
	2023				2022				2023				2022
$ in millions	$		%(1)		$		%(1)		$		%(1)		$		%(1)
Aeronautics Systems
Cost-type	$	1,370	51	%	$	1,185	48	%	$	3,920	51	%	$	3,678	48	%
Fixed-price	1,342		49	%	1,294		52	%	3,773		49	%	3,915		52	%
Intersegment sales	54				58				183				181
Aeronautics Systems sales	2,766				2,537				7,876				7,774
Defense Systems
Cost-type	378		31	%	366		32	%	1,205		33	%	1,075		32	%
Fixed-price	840		69	%	785		68	%	2,445		67	%	2,280		68	%
Intersegment sales	203				194				567				567
Defense Systems sales	1,421				1,345				4,217				3,922
Mission Systems
Cost-type	1,002		42	%	881		40	%	2,920		41	%	2,591		39	%
Fixed-price	1,363		58	%	1,325		60	%	4,129		59	%	4,123		61	%
Intersegment sales	263				250				783				755
Mission Systems sales	2,628				2,456				7,832				7,469
Space Systems
Cost-type	2,511		72	%	2,192		70	%	7,529		73	%	6,271		70	%
Fixed-price	969		28	%	943		30	%	2,731		27	%	2,636		30	%
Intersegment sales	26				28				84				90
Space Systems sales	3,506				3,163				10,344				8,997
Total
Cost-type	5,261		54	%	4,624		52	%	15,574		54	%	13,615		51	%
Fixed-price	4,514		46	%	4,347		48	%	13,078		46	%	12,954		49	%
Total Sales	$	9,775			$	8,971			$	28,652			$	26,569

(1)Percentages calculated based on external customer sales.

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Sales by Contract Type Three Months Ended September 30 Nine Months Ended September 30
2022 2021 2022 2021
$ in millions $
%(1)
$
%(1)
$
%(1)
$
%(1)
Aeronautics Systems
Cost-type $ 1,185 48 % $ 1,358 51 % $ 3,678 48 % $ 4,110 48 %
Fixed-price 1,294 52 % 1,319 49 % 3,915 52 % 4,381 52 %
Intersegment sales 58 48 181 137
Aeronautics Systems sales 2,537 2,725 7,774 8,628
Defense Systems
Cost-type 366 32 % 433 36 % 1,075 32 % 1,376 36 %
Fixed-price 785 68 % 770 64 % 2,280 68 % 2,436 64 %
Intersegment sales 194 206 567 586
Defense Systems sales 1,345 1,409 3,922 4,398
Mission Systems
Cost-type 881 40 % 746 34 % 2,591 39 % 2,419 35 %
Fixed-price 1,325 60 % 1,446 66 % 4,123 61 % 4,459 65 %
Intersegment sales 250 244 755 735
Mission Systems sales 2,456 2,436 7,469 7,613
Space Systems
Cost-type 2,192 70 % 1,931 73 % 6,271 70 % 5,800 74 %
Fixed-price 943 30 % 717 27 % 2,636 30 % 2,047 26 %
Intersegment sales 28 33 90 103
Space Systems sales 3,163 2,681 8,997 7,950
Total
Cost-type 4,624 52 % 4,468 51 % 13,615 51 % 13,705 51 %
Fixed-price 4,347 48 % 4,252 49 % 12,954 49 % 13,323 49 %
Total Sales $ 8,971 $ 8,720 $ 26,569 $ 27,028

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

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Sales by Geographic Region	Sales by Geographic Region	Three Months Ended September 30								Nine Months Ended September 30								Sales by Geographic Region	Three Months Ended September 30								Nine Months Ended September 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	$	2,138	85	%	$	2,317	87	%	$	6,581	87	%	$	7,381	86	%	United States	$	2,335	86	%	$	2,138	85	%	$	6,677	87	%	$	6,581	87	%
Asia/Pacific	Asia/Pacific	165		7	%	239		9	%	560		7	%	722		9	%	Asia/Pacific	163		6	%	165		7	%	448		6	%	560		7	%
Europe	Europe	163		7	%	108		4	%	413		5	%	335		4	%	Europe	204		8	%	163		7	%	543		7	%	413		5	%
All other(1)	All other(1)	13		1	%	13		—	%	39		1	%	53		1	%	All other(1)	10		—	%	13		1	%	25		—	%	39		1	%
Intersegment sales	Intersegment sales	58				48				181				137				Intersegment sales	54				58				183				181
Aeronautics Systems sales	Aeronautics Systems sales	2,537				2,725				7,774				8,628				Aeronautics Systems sales	2,766				2,537				7,876				7,774
Defense Systems	Defense Systems																	Defense Systems
United States	United States	839		72	%	887		74	%	2,422		72	%	2,810		74	%	United States	860		70	%	839		72	%	2,547		70	%	2,422		72	%
Asia/Pacific	Asia/Pacific	112		10	%	107		9	%	340		10	%	336		9	%	Asia/Pacific	93		8	%	112		10	%	324		9	%	340		10	%
Europe	Europe	101		9	%	78		6	%	297		9	%	233		6	%	Europe	146		12	%	101		9	%	406		11	%	297		9	%
All other(1)	All other(1)	99		9	%	131		11	%	296		9	%	433		11	%	All other(1)	119		10	%	99		9	%	373		10	%	296		9	%
Intersegment sales	Intersegment sales	194				206				567				586				Intersegment sales	203				194				567				567
Defense Systems sales	Defense Systems sales	1,345				1,409				3,922				4,398				Defense Systems sales	1,421				1,345				4,217				3,922
Mission Systems	Mission Systems																	Mission Systems
United States	United States	1,754		79	%	1,775		81	%	5,414		81	%	5,540		81	%	United States	1,933		82	%	1,754		79	%	5,787		83	%	5,414		81	%
Asia/Pacific	Asia/Pacific	159		7	%	114		5	%	435		6	%	372		5	%	Asia/Pacific	98		4	%	159		7	%	310		4	%	435		6	%
Europe	Europe	210		10	%	233		11	%	654		10	%	744		11	%	Europe	246		10	%	210		10	%	712		10	%	654		10	%
All other(1)	All other(1)	83		4	%	70		3	%	211		3	%	222		3	%	All other(1)	88		4	%	83		4	%	240		3	%	211		3	%
Intersegment sales	Intersegment sales	250				244				755				735				Intersegment sales	263				250				783				755
Mission Systems sales	Mission Systems sales	2,456				2,436				7,469				7,613				Mission Systems sales	2,628				2,456				7,832				7,469
Space Systems	Space Systems																	Space Systems
United States	United States	3,030		97	%	2,556		97	%	8,646		97	%	7,546		97	%	United States	3,408		98	%	3,030		97	%	10,034		98	%	8,646		97	%
Asia/Pacific	Asia/Pacific	33		1	%	10		—	%	86		1	%	39		—	%	Asia/Pacific	22		1	%	33		1	%	67		1	%	86		1	%
Europe	Europe	69		2	%	79		3	%	165		2	%	256		3	%	Europe	44		1	%	69		2	%	127		1	%	165		2	%
All other(1)	All other(1)	3		—	%	3		—	%	10		—	%	6		—	%	All other(1)	6		—	%	3		—	%	32		—	%	10		—	%
Intersegment sales	Intersegment sales	28				33				90				103				Intersegment sales	26				28				84				90
Space Systems sales	Space Systems sales	3,163				2,681				8,997				7,950				Space Systems sales	3,506				3,163				10,344				8,997
Total	Total																	Total
United States	United States	7,761		87	%	7,535		87	%	23,063		87	%	23,277		86	%	United States	8,536		87	%	7,761		87	%	25,045		87	%	23,063		87	%
Asia/Pacific	Asia/Pacific	469		5	%	470		5	%	1,421		5	%	1,469		5	%	Asia/Pacific	376		4	%	469		5	%	1,149		4	%	1,421		5	%
Europe	Europe	543		6	%	498		6	%	1,529		6	%	1,568		6	%	Europe	640		7	%	543		6	%	1,788		7	%	1,529		6	%
All other(1)	All other(1)	198		2	%	217		2	%	556		2	%	714		3	%	All other(1)	223		2	%	198		2	%	670		2	%	556		2	%
Total Sales	Total Sales	$	8,971			$	8,720			$	26,569			$	27,028			Total Sales	$	9,775			$	8,971			$	28,652			$	26,569

(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 September 30, ~~2022,~~2023, and the related condensed consolidated statements of earnings and comprehensive income and changes in shareholders’ equity for the three-month and nine-month periods ended September 30, ~~2022~~2023 and ~~2021,~~2022, and of cash flows for the nine-month periods ended September 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
			October ~~26, 2022~~25, 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~~Global Security Environment

The U.S. and its allies continue to face a global security environment of ITheightened tensions and ~~Mission Support Services Business~~instability, threats from state and non-state actors, including in particular major global powers, as well as terrorist organizations, increasing nuclear tensions, diverse regional security concerns and political instability. The market for defense products, services and solutions globally is driven by these complex and evolving security challenges, considered in the broader context of political and socioeconomic circumstances and priorities. Our operations and financial performance, as well as demand for our products and services, are impacted by global events, including violence and unrest. The same is true for our suppliers and other business partners.

~~Effective January 30, 2021 (the “Divestiture date”), we completed the sale~~The conflict in Ukraine has increased global tensions and instability, highlighted threats and increased global demand, as well as further disrupted global supply chains and added costs. We have experienced a modest increase in demand for certain of our ITgoods and ~~mission support~~ services ~~business (the “IT services divestiture”) for $3.4 billion~~directly and indirectly related to the conflict in ~~cash~~the Ukraine. We also experienced a slight disruption to some of our programs and ~~recorded~~supply chain, including unanticipated cost growth, as a ~~pre-tax gain of $2.0 billion. The IT and mission support services business was comprised~~result of the ~~majority of~~conflict in Ukraine and economic sanctions. However, we did not have sizable business dealings in Russia or Ukraine, and do not anticipate significant adverse impacts directly from the ~~former IS&S division of Defense Systems (excluding~~ongoing conflict.

More recently, the ~~Vinnell Arabia business); select cyber, intelligence and missions support programs, which were part of the former CIMS division of Mission Systems;~~hostilities in Israel and the ~~former Space Technical Services~~Gaza Strip have further heightened global tensions and instability.At this time, it is unknown whether hostilities in this region will escalate into an even larger conflict. The demand for our goods and services may increase, especially if the U.S. provides increased military assistance and support to Israel. We do not have a significant business ~~unit of Space Systems. Operating results include sales~~presence in the region, and ~~operating income~~therefore do not anticipate significant adverse financial impacts directly from the current conflict.

More broadly, the ongoing conflicts in Ukraine and Israel and threats elsewhere, particularly in the Pacific region, have heightened tensions and highlighted security requirements globally, including in Europe, the Middle East and the Pacific region, as well as the U.S. We have started to see, and expect to continue to see, increased demand for ~~the IT~~defense products and ~~mission support~~ services ~~business prior to the Divestiture date.~~from allies and partner nations, particularly in those areas. We are actively exploring both opportunities and risks.

~~COVID-19~~Global Health Environment

InSince at least March 2020, ~~the World Health Organization~~when it was first 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 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 ~~Report~~Reports on Form 10-K for the fiscal years ended December 31, 2020, 2021, and ~~2021, as well as interim Form 10-Qs,~~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.

~~At a macro level,~~In May 2023, the ~~number~~World Health Organization declared an end to the global public health emergency for the COVID-19 pandemic. Direct impacts of ~~hospitalizations and deaths, in~~COVID-19 on our business year to date remained limited. While we cannot

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predict the ~~U.S. in particular, have generally eased in 2022, as more people~~future course of COVID-19 or its consequences, we are ~~fully vaccinated, and communities have continued to open up. While it, of course, remains unclear whether that trajectory will continue, there is reason for optimism.~~ not currently assuming significant additional direct COVID-19 related impacts on our business.

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

~~During the third quarter of 2022, COVID-19 case rates and the health and economic impacts~~Global Economic Environment

In part as a result of the COVID-19 pandemic, ~~continued~~the global economic environment has experienced, and continues to ~~fluctuate~~experience, extraordinary challenges, including high rates of inflation and inflationary pressures; widespread delays and disruptions in ~~different communities 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 ~~U.S. and globally, particularly with~~challenges caused by the ~~spread of new variants. However, direct COVID-19-related impacts~~current macroeconomic environment on our business, ~~continued generally~~including by taking steps to ~~decline, including in the areas of employee absenteeism~~support our suppliers and ~~leave-taking. While we cannot predict the future course of the pandemic, we are not currently assuming significant additional direct COVID-19-related impacts on~~small businesses and enhancing our ~~2022 financial results.~~

~~During the third quarter of 2022, we continued to see a prolonged impact on the economy, our industry,~~workforce through extensive hiring, development and ~~our company, with ongoing labor challenges, supply chain disruption, and inflation, among other impacts. Although we are working actively to address and mitigate these impacts,~~retention efforts. However, the broader macroeconomic environment, including ~~in particular,~~ inflationary pressures and ~~extended material lead times,~~supply chain challenges, continued adversely to affect the company’s ~~third~~results for the quarter ~~results (including sales, net earnings and cash).~~

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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” 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~~ended September 30, 2023. We cannot clearly predict how long these macroeconomic challenges will continue, to face a global security environment of heightened tensions and instability, threats from state and non-state actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional security concerns and political instability. The conflict in Ukraine has increased those tensions and instability, highlighted threats and increased demand, as well as further disrupted global 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. We continue to experience an increased demand for certain of our goods and services directly related to the conflict in the Ukraine, in particular,how they will change over time, or what additional resources will be available, but we ~~have not seen a significant increase in those demands~~expect to ~~date. We also~~see this challenging macroeconomic environment continue adversely to ~~experience modest disruption to some of our programs and supply chain, including unanticipated cost growth, as a result of~~impact the conflict, particularly with respect to our Commercial Resupply Services contract. But we do not have sizable business dealings in Russia or Ukraine, and do not anticipate significant adverse impacts. We are actively monitoring the situation and exploring both opportunities and risks, including measures to mitigate the risk of future disruption and costs to our programs.

The global geopolitical and economic environments continue to be impacted by uncertainty and stress, and global inflationary pressures. Geopolitical relationships have changed and are continuing to change. Global inflationary pressures are increasing costs, including for various commodities and supplier products. 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 to the conflict in Ukraine and economic sanctions imposed on Russia. The global economy, ~~may also be affected by~~our customers, our industry and our company through the ~~residual legal, regulatory and economic impacts~~end of ~~Britain’s exit from the European Union. Increased~~2023.

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

U.S. Political, Budget and ~~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~~the President signed an Omnibus appropriations act for FY 2023 that provided ~~full-year funding through September 30, including $782~~$858 billion for national ~~defense. This represented 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 ~~was $743~~for FY 2023 is $817 billion. InIt includes up to $1 billion for extraordinary relief in FY 2023.

On March ~~2022, Congress also approved $14~~9, 2023, the President proposed his budget for FY 2024 with $886 billion ~~in emergency aid to support security, economic, and humanitarian assistance~~ for ~~Ukraine and Central European partners. An additional $40~~national defense programs, which included $842 billion ~~in emergency~~for the DoD, an increase of 3 percent, or $25 billion, above the FY 2023 enacted levels. The request does not include supplemental ~~appropriations was approved by Congress in May 2022. Current and future~~defense spending ~~in connection~~associated with the conflict in Ukraine.

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

It is difficult to predict the specific course of future defense budgets. Current and future requirements related to the conflicts in Ukraine and Israel, threats in the Pacific regions and other security priorities, as well as global inflation, the national debt, ~~and~~ 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. ~~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 budget for FY 2023 proposes $813 billion for national defense programs,~~Current tensions within Congress and the ~~Pentagon’s portion of~~wider U.S. political environment may also impact defense budgets, issues related to the overall requested defense budget is $773 billion. On September 30, 2022, Congress enacted a continuing resolution (CR) to carry forward FY 2022 funding levels into FY 2023 while negotiations continue regarding full-year appropriations. The CR also included an additional $12 billion in aid to Ukraine, bringing total appropriations for Ukraine assistance to $39 billion. The CR runs through December 16, 2022,national debt, and ~~generally limits U.S.~~ government spending ~~to FY 2022 levels, which for DOD is around 4 percent lower than the amount requested for FY 2023.~~

It is difficult to predict the specific course of future defense budgets. However, we believe the ongoing conflict in Ukraine, as well as actions in the Pacific region, have highlighted some of the national security threats to our nationmore broadly.

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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, C4ISR, missile defense, battle management, ~~hypersonics, counter-hypersonics,~~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,~~January 2023, the statutory debt ~~limit~~ceiling was ~~increased by $480 billion~~reached, and ~~in December 2021, was further increased by $2.5 trillion, which is currently expected to allow~~ the Treasury Department reported that it began taking “extraordinary measures” to finance the government ~~into 2023.~~

~~During~~and avoid a breach of the ~~third quarter of 2022, the Creating Helpful Incentives to Produce Semiconductors (CHIPS)~~debt ceiling. The Fiscal Responsibility Act of ~~2022, which includes an advanced manufacturing investment tax credit, among other provisions,~~2023 (FRA), signed in June 2023, suspended the debt limit through January 1, 2025 and provides for caps on defense and non-defense discretionary spending in FY 2024 and FY 2025. The FRA cap on discretionary spending for defense in FY 2024 and FY 2025 is $886 billion and $895 billion, respectively. If these spending caps are exceeded, the FRA provides for automatic spending cuts that could be imposed through sequestration.

The FRA also provides for across the board cuts to discretionary spending by one percent below current-year levels if a continuing resolution (CR) is in place on January 1, 2024 or 2025. Once full-year appropriations are enacted, the spending caps are to revert to original levels specified in the FRA. If a CR is still in place on April 30, 2024 or 2025, the FRA provides that a final sequestration order could be issued that would apply to the full fiscal year. While the discretionary spending caps only apply to FY 2024 and FY 2025, the FRA also attempts to limit most discretionary funding for FY 2026 through FY 2029, subject to Congress’s budgetary processes at that time. We anticipate that issues related to the debt ceiling, budgetary priorities and the ~~Inflation Reduction Act~~spending caps imposed by the FRA will continue to be a subject of ~~2022, which includes implementation~~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 ~~new alternative minimum tax and and a one percent excise tax on share repurchases, among other provisions, were signed into law.~~National Defense Authorization Act (NDAA). We expect this proposed legislation, and its potential impact on defense appropriations, including the ~~excise tax~~duration of possible CRs, will also be the subject of considerable debate with potentially significant impacts. The FY 2024 NDAA is currently proceeding through the House and Senate at overall funding levels broadly consistent with the President’s request. Congress set December 31, 2023 as a target for passing the NDAA. In September, Congress passed a short-term CR that provides certain funds for the federal government through November 17, 2023. The bill also includes $16 billion for disaster relief. The CR generally maintains FY 2023 levels of funding for federal programs for 45 days, giving lawmakers more time to reach an agreement on ~~share repurchases~~full year FY 2024 appropriations bills. If Congress does not pass full year appropriations or an additional CR before November 17, 2023, the federal government is expected to ~~impact us beginning in 2023; we~~face a shutdown and to cease what are ~~currently evaluating other provisions of the legislation to determine any potentially favorable and/or unfavorable impacts~~characterized as certain non-essential operations. Depending on the ~~company.~~nature and duration of a potential shutdown, businesses that rely on government funding, including defense contractors, could be significantly impacted.

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

The political environment, federal budget, ~~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 on~~ We anticipate that the ~~risks we face from the current political~~broader macroeconomic environment, with ongoing inflationary pressures, labor challenges, and ~~economic environment, see “Risk Factors” in our 2021 Annual Report on Form 10-K.~~

~~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 attributablesupply chain disruption, among other considerations, will continue to ~~the company's IT services divestiture. This measure may be useful to investors and other users of our financial statements as~~play 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~~significant role in the ~~same manner~~outcome of these debates and, ~~should not be considered~~ in ~~isolation or as an alternative to operating results presented in accordance with GAAP.~~turn, on our industry and company.

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CONSOLIDATED OPERATING RESULTS

Selected financial highlights are presented in the table below:


		Three Months Ended September 30						%		Nine Months Ended September 30						%			Three Months Ended September 30						%		Nine Months Ended September 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	$	8,971		$	8,720		3	%	$	26,569		$	27,028		(2)	%	Sales	$	9,775		$	8,971		9	%	$	28,652		$	26,569		8	%
Operating costs and expenses	Operating costs and expenses	8,127			7,677			6	%	23,874			24,099			(1)	%	Operating costs and expenses	8,759			8,127			8	%	25,722			23,874			8	%
Operating costs and expenses as a % of sales	Operating costs and expenses as a % of sales	90.6		%	88.0		%			89.9		%	89.2		%			Operating costs and expenses as a % of sales	89.6		%	90.6		%			89.8		%	89.9		%
Gain on sale of business		—			—			NM		—			1,980			NM
Operating income	Operating income	844			1,043			(19)	%	2,695			4,909			(45)	%	Operating income	1,016			844			20	%	2,930			2,695			9	%
Operating margin rate	Operating margin rate	9.4		%	12.0		%			10.1		%	18.2		%			Operating margin rate	10.4		%	9.4		%			10.2		%	10.1		%
Federal and foreign income tax expense	Federal and foreign income tax expense	175			212			(17)	%	568			1,298			(56)	%	Federal and foreign income tax expense	181			175			3	%	512			568			(10)	%
Effective income tax rate	Effective income tax rate	16.1		%	16.6		%			16.8		%	23.2		%			Effective income tax rate	16.2		%	16.1		%			16.5		%	16.8		%
Net earnings	Net earnings	915			1,063			(14)	%	2,816			4,295			(34)	%	Net earnings	937			915			2	%	2,591			2,816			(8)	%
Diluted earnings per share	Diluted earnings per share	$	5.89		$	6.63		(11)	%	$	18.06		$	26.55		(32)	%	Diluted earnings per share	$	6.18		$	5.89		5	%	$	17.00		$	18.06		(6)	%

Sales

The table below reconciles sales to organic sales for the nine months ended September 30, 2022 and 2021. Sales for the three months ended September 30, 2022 and 2021 were not impacted by the sale of the company's IT services business:Current Quarter

Nine Months Ended September 30
2022 2021
$ in millions Sales IT services sales Organic
sales Sales IT services sales Organic
sales Organic sales % change
Aeronautics Systems $ 7,774 $ — $ 7,774 $ 8,628 $ — $ 8,628 (10) %
Defense Systems 3,922 — 3,922 4,398 (106) 4,292 (9) %
Mission Systems 7,469 — 7,469 7,613 (42) 7,571 (1) %
Space Systems 8,997 — 8,997 7,950 (16) 7,934 13 %
Intersegment eliminations (1,593) — (1,593) (1,561) 2 (1,559)
Total $ 26,569 $ — $ 26,569 $ 27,028 $ (162) $ 26,866 (1) %

~~Current~~ ~~Quarter~~

Third quarter ~~2022~~2023 sales increased ~~$251~~$804 million, or 39 percent, ~~, primarily~~ due to ~~18 percent growth at Space Systems, partially offset by lower~~higher sales at ~~Aeronautics Systems and Defense Systems.~~all four sectors. Third quarter ~~2022~~2023 sales reflect continued strong demand for our products and ~~improving trends in labor availability, partially offset by supply chain delays.~~services.

Year to Date

Year to date ~~2022~~2023 sales ~~decreased $459 million,~~increased $2.1 billion, or 28 percent, due ~~in part,~~ to ~~a $162 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales decreased $297 million, or 1 percent, primarily due to lower~~higher sales at ~~Aeronautics Systems and Defense Systems, partially offset by 13 percent growth at Space Systems.~~all four sectors.

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

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Operating Income and Margin Rate

Current Quarter

Third quarter ~~2022~~2023 operating income ~~decreased $199~~increased $172 million, or 1920 percent, ~~primarily~~ due to higher segment operating income, lower unallocated corporate expense and a ~~$116 million~~ reduction in the FAS/CAS operating ~~adjustment and $55 million in higher unallocated corporate expense due to a $60 million benefit for insurance settlements recognized in the prior year.~~adjustment. Third quarter ~~2022~~2023 operating margin rate ~~declined~~increased to ~~9.4~~10.4 percent ~~primarily~~principally due to the lower ~~FAS/CAS operating adjustment and higher~~ unallocated corporate expense ~~as well as a lower segment~~and FAS/CAS operating ~~margin rate.~~adjustment.

Third quarter ~~2022~~2023 general and administrative (G&A) costs as a percentage of sales ~~increased~~decreased to ~~10.9~~10.5 percent from ~~10.2~~10.9 percent in the prior year period primarily due to ~~an increase in~~higher sales, which more than offset our continued investments for future business opportunities.

Year to ~~date~~Date

Year to date ~~2022~~2023 operating income ~~decreased $2.2 billion,~~increased $235 million, or 459 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, a ~~$250 million~~ reduction in the FAS/CAS operating adjustment and ~~$130 million of lower~~higher segment operating income. Year to date ~~2022~~2023 operating margin rate ~~declined~~increased to ~~10.1~~10.2 percent ~~largely~~ due to the ~~prior year gain on sale of the IT services business~~lower unallocated corporate expense and ~~the lower~~ FAS/CAS operating ~~adjustment.~~adjustment, partially offset by a lower segment operating margin rate.

Year to date ~~2022~~2023 G&A costs as a percentage of sales ~~increased~~decreased to ~~11.1~~10.9 percent from ~~10.3~~11.1 percent in the prior year period primarily due to ~~an increase in~~higher sales, which more than offset our continued investments for future business opportunities.

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

Federal and Foreign Income Taxes

Current Quarter

The third quarter ~~2022~~2023 ETR ~~decreased to 16.1~~of 16.2 percent ~~from 16.6 percent in~~was comparable with the prior year period ~~principally due to~~and reflects an increase in research credits, partially offset by higher ~~benefits from foreign-derived intangible income.~~interest expense on unrecognized tax benefits. See Note 3 to the financial statements for additional information.

~~Year to Date~~

The year to date 2022 ETR decreased to 16.8 percent from 23.2 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 a change in tax revenue recognition 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.

~~Net Earnings~~

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

Three Months Ended September 30 % Nine Months Ended September 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Net earnings $ 915 $ 1,063 (14) % $ 2,816 $ 4,295 (34) %
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 $ 915 $ 1,063 (14) % $ 2,816 $ 3,175 (11) %

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

~~(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.

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Year to Date

The year to date2023 ETR decreased to 16.5 percent from 16.8 percent in the prior year period principally due to an increase in research credits as well as more favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax benefits. See Note 3 to the financial statements for additional information.

Net Earnings

Current Quarter

Third quarter ~~2022~~2023 net earnings ~~decreased $148~~increased $22 million, or 142 percent, primarily due to ~~the lower~~$172 million of higher operating income ~~described above,~~and a $97 million gain recognized upon the sale of our minority investment in an Australian business, partially offset by a ~~lower effective tax rate.~~$244 million reduction in the non-operating FAS pension benefit.

Year to Date

Year to date ~~2022~~2023 net earnings decreased ~~$1.5 billion,~~$225 million, or 348 percent, primarily due to a ~~$1.1 billion after-tax decline associated with~~$732 million reduction in the ~~IT services divestiture. Transaction-adjusted net earnings decreased $359~~non-operating FAS pension benefit, partially offset by $235 million ~~or 11 percent, primarily due to the lower~~of higher operating income, the $97 million gain on sale of a minority investment described above, ~~and $108~~a $96 million ~~of lower~~increase in returns on marketable securities related to our non-qualified benefit plans, 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~~Current Quarter

Third quarter 2023 diluted earnings per share ~~to transaction-adjusted EPS:~~

Three Months Ended September 30 % Nine Months Ended September 30 %
2022 2021 Change 2022 2021 Change
Diluted EPS $ 5.89 $ 6.63 (11) % $ 18.06 $ 26.55 (32) %
Gain on sale of business per share — — NM — (12.24) NM
State tax impact per share1
— — NM — 0.99 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 — 3.79 NM
Transaction adjustment per share, net of tax $ — $ — NM $ — $ (6.93) NM
Transaction-adjusted EPS $ 5.89 $ 6.63 (11) % $ 18.06 $ 19.62 (8) %

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

~~Current Quarter~~

~~Third quarter 2022 diluted earnings per share decreased 11~~increased 5 percent, reflecting a 142 percent ~~decrease~~increase 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 ~~32 percent, principally due to a $6.93 after-tax decrease associated with the IT services divestiture. Transaction-adjusted earnings per share decreased $1.56, or 8~~6 percent, reflecting an 118 percent decrease in ~~transaction-adjusted~~ net earnings and a 42 percent reduction in weighted-average diluted shares outstanding.

SEGMENT OPERATING RESULTS

Basis of Presentation

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

Aeronautics Systems

Defense Systems

Mission Systems

Space Systems

Autonomous Systems

Battle Management & Missile Systems

Airborne Multifunction Sensors

Launch & Strategic Missiles

Manned Aircraft

Mission Readiness

Maritime/Land Systems & Sensors

Space

Navigation, Targeting & Survivability

Networked Information Solutions

This section discusses segment sales, operating income and operating margin rates. In evaluating segment operating performance, we look primarily at changes in sales and operating income. Where applicable, significant fluctuations in operating performance attributable to individual contracts or programs, or changes in a specific cost element

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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 September 30						%		Nine Months Ended September 30						%			Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions	$ in millions	2022			2021			Change		2022			2021			Change		$ in millions	2023			2022			Change		2023			2022			Change

Operating income	Operating income	$	844		$	1,043		(19)	%	$	2,695		$	4,909		(45)	%	Operating income	$	1,016		$	844		20	%	$	2,930		$	2,695		9	%
Operating margin rate																		Operating margin rate	10.4		%	9.4		%			10.2		%	10.1		%
Reconciliation to segment operating income:	Reconciliation to segment operating income:																	Reconciliation to segment operating income:
CAS pension expense	CAS pension expense	$	(37)		$	(165)		(78)	%	$	(124)		$	(409)		(70)	%	CAS pension expense	(39)			(37)			5	%	(115)			(124)			(7)	%
FAS pension service expense	FAS pension service expense	92			104			(12)	%	276			311			(11)	%	FAS pension service expense	59			92			(36)	%	177			276			(36)	%
FAS/CAS operating adjustment	FAS/CAS operating adjustment	55			(61)			(190)	%	152			(98)			(255)	%	FAS/CAS operating adjustment	20			55			(64)	%	62			152			(59)	%
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	60			62			(3)	%	181			191			(5)	%	Intangible asset amortization and PP&E step-up depreciation	31			60			(48)	%	92			181			(49)	%

Other unallocated corporate expense (income)		48			(9)			(633)	%	89			33			170	%
Unallocated corporate expense (income)		108			53			104	%	270			(1,564)			NM
Other unallocated corporate expense																		Other unallocated corporate expense	22			48			(54)	%	59			89			(34)	%
Unallocated corporate expense																		Unallocated corporate expense	53			108			(51)	%	151			270			(44)	%
Segment operating income	Segment operating income	$	1,007		$	1,035		(3)	%	$	3,117		$	3,247		(4)	%	Segment operating income	$	1,089		$	1,007		8	%	$	3,143		$	3,117		1	%
Segment operating margin rate	Segment operating margin rate	11.2		%	11.9		%			11.7		%	12.0		%			Segment operating margin rate	11.1		%	11.2		%			11.0		%	11.7		%

Current Quarter

Third quarter ~~2022~~2023 segment operating income ~~decreased $28~~increased $82 million, or 38 percent, primarily due to ~~a lower~~higher sales. Third quarter 2023 segment operating margin rate partially offset by higher sales. Third quarter 2022 segment operating margin rate decreased to 11.2 percent from 11.9 percent principally due to lower net EAC adjustments due, in part, to inflationary pressures.was comparable with the prior year period.

Year to Date

Year to date ~~2022~~2023 segment operating income ~~decreased $130~~increased $26 million, or 41 percent. ~~Year to date 2021 segment operating income included $20 million from the IT services business, as well as~~Higher sales were partially offset by 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 11.7 percent from 12.0 percent principally due to~~largely driven by lower net EAC adjustments. Lower net EAC adjustments ~~including~~reflect a $36 million unfavorable EAC adjustment on the HALO program in the second quarter of 2023 and a prior year $67 million favorable EAC adjustment on the EMD phase of the B-21 program. In addition, the prior year ~~overhead rate~~period includes a $38 million gain on a property sale at Aeronautics Systems and a $33 million benefit ~~to fixed price contracts noted above.~~recognized in connection with a contract-related legal matter at Mission Systems.

FAS/CAS Operating Adjustment

Third quarter ~~2022~~2023 and year to date ~~2022~~2023 FAS/CAS operating adjustment decreased primarily due to lower ~~CAS~~FAS pension service expense resulting from ~~favorable plan asset returns in 2021 and~~ changes in certain ~~CAS~~ actuarial assumptions as of December 31, ~~2021. Third~~2022.

Unallocated Corporate Expense

Current Quarter

The decrease in third quarter ~~2021 CAS pension~~2023 unallocated corporate expense ~~also included a $44 million benefit~~is primarily due to lower intangible asset amortization and PP&E step-up depreciation as well as higher benefits from ~~updated demographic information.~~deferred state taxes.

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~~Unallocated Corporate Expense (Income)~~

~~Current Quarter~~Year to Date

The ~~increase~~decrease in ~~third quarter 2022~~year to date 2023 unallocated corporate expense is primarily due to ~~a $60 million benefit recognized in the prior year for insurance settlements related to shareholder litigation involving the former Orbital ATK.~~

~~Year to Date~~

~~The change in year to date 2022 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 unallowable~~PP&E step-up depreciation as well as higher benefits from deferred state ~~taxes and transaction costs recognized in the prior year associated with the IT services divestiture. The prior year also benefited from the $60 million of insurance settlements noted above.~~taxes.

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


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended September 30				Nine Months Ended September 30
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions	2023		2022		2023		2022
Favorable EAC adjustments	Favorable EAC adjustments	$	306	$	273	$	980	$	930	Favorable EAC adjustments	$	331	$	306	$	981	$	980
Unfavorable EAC adjustments	Unfavorable EAC adjustments	(261)		(164)		(670)		(477)		Unfavorable EAC adjustments	(273)		(261)		(801)		(670)
Net EAC adjustments	Net EAC adjustments	$	45	$	109	$	310	$	453	Net EAC adjustments	$	58	$	45	$	180	$	310

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


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended September 30				Nine Months Ended September 30
$ in millions	$ in millions	2022		2021		2022		2021		$ in millions	2023		2022		2023		2022
Aeronautics Systems	Aeronautics Systems	$	27	$	(2)	$	121	$	67	Aeronautics Systems	$	37	$	27	$	73	$	121
Defense Systems	Defense Systems	23		37		98		95		Defense Systems	29		23		76		98
Mission Systems	Mission Systems	14		43		100		192		Mission Systems	32		14		127		100
Space Systems	Space Systems	(13)		33		10		103		Space Systems	(38)		(13)		(92)		10
Eliminations	Eliminations	(6)		(2)		(19)		(4)		Eliminations	(2)		(6)		(4)		(19)
Net EAC adjustments	Net EAC adjustments	$	45	$	109	$	310	$	453	Net EAC adjustments	$	58	$	45	$	180	$	310

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


AERONAUTICS SYSTEMS	AERONAUTICS SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%		AERONAUTICS SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions	$ in millions	2022			2021			Change		2022			2021			Change		$ in millions	2023			2022			Change		2023			2022			Change
Sales	Sales	$	2,537		$	2,725		(7)	%	$	7,774		$	8,628		(10)	%	Sales	$	2,766		$	2,537		9	%	$	7,876		$	7,774		1	%
Operating income	Operating income	262			265			(1)	%	827			873			(5)	%	Operating income	283			262			8	%	798			827			(4)	%
Operating margin rate	Operating margin rate	10.3		%	9.7		%			10.6		%	10.1		%			Operating margin rate	10.2		%	10.3		%			10.1		%	10.6		%

Sales

Current Quarter

Third quarter ~~2022~~2023 sales ~~decreased $188~~increased $229 million, or 79 percent, primarily due to higher volume in Manned Aircraft. Higher sales on restricted programs and E-2 were partially offset by lower volume on F/A-18 largely due to post Multi-Year Procurement 4 (MYP4) contract award timing.

Year to Date

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

Operating Income

Current Quarter

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

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Year to Date

Year to date ~~2022 sales~~2023 operating income decreased ~~$854~~$29 million, or 104 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 10.1 percent from 10.6 percent primarily due to lower net EAC adjustments, largely driven by a $67 million favorable EAC adjustment on the EMD phase of the B-21 program in the prior year, as well as a $38 million gain on a property sale in the prior year.


DEFENSE SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions	2023			2022			Change		2023			2022			Change
Sales	$	1,421		$	1,345		6	%	$	4,217		$	3,922		8	%
Operating income	182			158			15	%	508			481			6	%
Operating margin rate	12.8		%	11.7		%			12.0		%	12.3		%

Sales

Current Quarter

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

Year to Date

Year to date 2023 sales increased $295 million, or 8 percent, due to higher volume in both ~~Manned Aircraft and Autonomous~~business areas. Battle Management & Missile Systems ~~including restricted programs, a $134 million decrease on E-2, a $125 million decrease on Global Hawk and lower~~sales increased primarily due to higher volume on ~~JSTARS as it nears completion.~~ammunition programs, IBCS, HACM, Stand-in Attack Weapon (SiAW), and GMLRS. Mission Readiness sales increased primarily due to higher volume on an international training program.

Operating Income

Current Quarter

Third quarter ~~2022~~2023 operating income ~~decreased $3~~increased $24 million, or 115 percent, due to ~~lower sales, partially offset by~~ a higher operating margin ~~rate.~~rate and higher sales. Operating margin rate increased to ~~10.3~~12.8 percent from ~~9.7~~11.7 percent primarily due to higher net ~~favorable~~ EAC adjustments ~~in Manned Aircraft. Prior year results included a $42 million unfavorable EAC adjustment on F-35.~~at Battle Management & Missile Systems.

Year to Date

Year to date ~~2022~~2023 operating income ~~decreased $46~~increased $27 million, or 56 percent, due to ~~lower~~higher sales, partially offset by a higher operating margin rate. Operating margin rate increased to 10.6 percent from 10.1 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 included the $42 million unfavorable EAC adjustment on F-35 noted above.

DEFENSE SYSTEMS Three Months Ended September 30 % Nine Months Ended September 30 %
$ in millions 2022 2021 Change 2022 2021 Change
Sales $ 1,345 $ 1,409 (5) % $ 3,922 $ 4,398 (11) %
Operating income 158 175 (10) % 481 529 (9) %
Operating margin rate 11.7 % 12.4 % 12.3 % 12.0 %

~~Sales~~

~~Current Quarter~~

Third quarter 2022 sales decreased $64 million, or 5 percent, primarily due to lower scope on an international training program, the completion of a Joint Services support program and wind down of the UKAWACS and JSTARS programs, partially offset by higher volume on the NATO Alliance Ground Surveillance In-Service Support (NATO AGS ISS) and advanced fuze programs.

~~Year to Date~~

Year to date 2022 sales decreased $476 million, or 11 percent, due, in part, to a $106 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales decreased $370 million, or 9 percent, principally due to a $155 million decrease from lower scope on an international training program, completion of a Joint Services support program, lower volume on the Advanced Anti-Radiation Guided Missile (AARGM) program and wind down of the UKAWACS program, partially offset by higher volume on NATO AGS ISS and advanced fuze programs.

~~Operating Income~~

~~Current Quarter~~

~~Third quarter 2022 operating income decreased $17 million, or 10 percent, primarily due to lower sales and~~ a lower operating margin rate. Operating margin rate decreased to ~~11.7~~12.0 percent from ~~12.4~~12.3 percent primarily due to lower net ~~favorable~~ EAC ~~adjustments at Battle Management and Missile Systems, partially offset by improved performance in the Mission Readiness business area.~~adjustments.

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~~Year~~ ~~to Date~~

Year to date 2022 operating income decreased $48 million, or 9 percent, due, in part, to a $14 million reduction in operating income related to the IT services divestiture. Lower sales volume was partially offset by a higher operating margin rate, which increased to 12.3 percent from 12.0 percent primarily due to improved performance in the Mission Readiness business area.


MISSION SYSTEMS	MISSION SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%		MISSION SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions	$ in millions	2022			2021			Change		2022			2021			Change		$ in millions	2023			2022			Change		2023			2022			Change
Sales	Sales	$	2,456		$	2,436		1	%	$	7,469		$	7,613		(2)	%	Sales	$	2,628		$	2,456		7	%	$	7,832		$	7,469		5	%
Operating income	Operating income	368			372			(1)	%	1,166			1,177			(1)	%	Operating income	386			368			5	%	1,147			1,166			(2)	%
Operating margin rate	Operating margin rate	15.0		%	15.3		%			15.6		%	15.5		%			Operating margin rate	14.7		%	15.0		%			14.6		%	15.6		%

Sales

Current Quarter

Third quarter ~~2022~~2023 sales increased ~~$20~~$172 million, or 17 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher ~~Surface Electronic Warfare Improvement Program (SEWIP) volume. These increases were~~volume on marine systems programs, partially offset by lower volume on ~~Navigation, Targeting~~the Ground/Air Task Oriented Radar (G/ATOR) program largely driven by material receipts and ~~Survivability programs and the Joint Counter Radio-Controlled Improvised Explosive Device Electronic Warfare (JCREW) program.~~full-rate production (FRP) 5 contract award timing.

Year to Date

Year to date ~~2022~~2023 sales ~~decreased $144~~increased $363 million, or ~~2 percent, due, in part, to a $42 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales decreased $102 million, or 1~~5 percent, primarily due to ~~lower volume on Navigation, Targeting and Survivability programs and the JCREW program. These decreases were partially offset by an increase in~~higher restricted sales in the Networked Information Solutions business ~~area.~~area, as well as higher volume on marine systems programs and the Surface Electronic Warfare Improvement Program (SEWIP). These increases were partially offset by a $115 million decrease on G/ATOR largely driven by material receipts and FRP5 contract award timing, as well as lower volume on airborne radar programs.

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Operating Income

Current Quarter

Third quarter ~~2022~~2023 operating income increased $18 million, or 5 percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 14.7 percent from 15.0 percent primarily due to changes in contract mix toward more cost-type content.

Year to Date

Year to date 2023 operating income decreased $4$19 million, or 12 percent, due to a lower operating margin rate, ~~partially~~which more than offset by higher sales. Operating margin rate decreased to ~~15.0~~14.6 percent from ~~15.3~~15.6 percent ~~principally~~primarily due to lower net EAC adjustments, largely in the Maritime/Land Systems & Sensors and Navigation, Targeting & Survivability business areas, partially offset by improved performance on restricted programs at Networked Information Solutions.

~~Year to Date~~

~~Year to date 2022 operating income decreased $11 million, or 1 percent, due to lower sales, partially offset by~~ a ~~higher operating margin rate. Operating margin rate increased to 15.6 percent from 15.5 percent principally due to a~~prior year $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~~as well as changes in ~~the prior year.~~contract mix toward more cost-type content and a first quarter 2023 loss recognized in connection with an unconsolidated joint venture.


SPACE SYSTEMS	SPACE SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%		SPACE SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions	$ in millions	2022			2021			Change		2022			2021			Change		$ in millions	2023			2022			Change		2023			2022			Change
Sales	Sales	$	3,163		$	2,681		18	%	$	8,997		$	7,950		13	%	Sales	$	3,506		$	3,163		11	%	$	10,344		$	8,997		15	%
Operating income	Operating income	290			288			1	%	861			865			—	%	Operating income	312			290			8	%	908			861			5	%
Operating margin rate	Operating margin rate	9.2		%	10.7		%			9.6		%	10.9		%			Operating margin rate	8.9		%	9.2		%			8.8		%	9.6		%

Sales

Current Quarter

Third quarter ~~2022~~2023 sales increased ~~$482~~$343 million, or 1811 percent, due to higher sales in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including the Ground Based Strategic Deterrent (GBSD), and Next Generation Interceptor (NGI), as well as higher volume on the Space Launch System (SLS) booster program. Sales in the Space business area were driven by higher volume on restricted programs and the Next-Generation Overhead Persistent Infrared Polar (NextGen Polar) program, partially offset by lower sales on the HALO program.

Year to Date

Year to date 2023 sales increased $1.3 billion, or 15 percent, due to higher sales in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a ~~$115~~$386 million increase on ~~the Ground Based Strategic Deterrent (GBSD) program and~~GBSD, a ~~$103~~$197 million increase on ~~the Next Generation Interceptor (NGI) program,~~NGI and a $106 million increase on Ground-based Midcourse Defense (GMD), as well as higher volume on the ~~GEM63 program in support of Amazon’s Project Kuiper.~~SLS booster and Glide Phase Interceptor (GPI) programs. Sales in the Space business area ~~were driven by~~increased primarily due to higher volume on restricted programs, a ~~$129~~$238 million increase ~~due to ramp-up~~on the NextGen Polar program and a $130 million increase on the Space Development Agency (SDA) Tranche 1 ~~Transport Layer and Tranche 1~~ Tracking Layer ~~programs awarded in 2022, as well as higher volume on restricted programs and the~~program. These increases were partially offset by a $146 million decrease for Commercial Resupply Services (CRS) ~~program.~~

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~~Year to Date~~

Year to date 2022 sales increased $1.0 billion, or 13 percent, and includes a $16 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales increased $1.1 billion, or 13 percent, due to higher sales in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a $356 million increase on NGImissions and a ~~$327~~$111 million ~~increase on GBSD. Sales in the Space business area were driven by a $208 million increase~~decrease on the SDA Tranche 1 Transport Layer and Tranche 1 Tracking Layer programs awarded earlier this year, as well as higher volume on restricted programs and CRS, partially offset by a $116 million decrease in sales for the James Webb Space Telescope after its successful launch in December 2021.HALO program.

Operating Income

Current Quarter

Third quarter ~~2022~~2023 operating income ~~was comparable~~increased $22 million, or 8 percent, due to ~~the prior year period and reflects~~ higher sales, ~~and~~partially offset by a lower operating margin rate. Operating margin rate decreased to ~~9.2~~8.9 percent from ~~10.7~~9.2 percent primarily due to lower net EAC adjustments, ~~and higher volume on early-stage development programs, such as NGI and GBSD.~~partially offset by a $16 million benefit from insurance recoveries in our commercial space business.

Year to Date

Year to date ~~2022~~2023 operating income ~~was comparable~~increased $47 million, or 5 percent, due to ~~the prior period and reflects~~ higher sales, ~~and~~partially offset by a lower operating margin rate. Operating margin rate decreased to ~~9.6~~8.8 percent from ~~10.9~~9.6 percent primarily due to lower net EAC adjustments, ~~and higher volume~~partially offset by a first quarter 2023 benefit recognized on ~~early-stage development programs, such as NGI and GBSD. 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 September 30								Nine Months Ended September 30									Three Months Ended September 30								Nine Months Ended September 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	$	1,936	$	1,752	$	2,233	$	2,023	$	5,897	$	5,289	$	7,241	$	6,527	Product	$	2,102	$	1,902	$	1,936	$	1,752	$	5,934	$	5,368	$	5,897	$	5,289
Service	Service	542		471		444		393		1,695		1,501		1,250		1,104		Service	610		533		542		471		1,759		1,546		1,695		1,501
Intersegment eliminations	Intersegment eliminations	59		52		48		44		182		157		137		124		Intersegment eliminations	54		48		59		52		183		164		182		157
Total Aeronautics Systems	Total Aeronautics Systems	2,537		2,275		2,725		2,460		7,774		6,947		8,628		7,755		Total Aeronautics Systems	2,766		2,483		2,537		2,275		7,876		7,078		7,774		6,947
Defense Systems	Defense Systems																	Defense Systems
Product	Product	634		563		618		532		1,842		1,605		1,939		1,687		Product	718		625		634		563		2,087		1,825		1,842		1,605
Service	Service	517		452		585		523		1,513		1,334		1,873		1,664		Service	500		434		517		452		1,563		1,382		1,513		1,334
Intersegment eliminations	Intersegment eliminations	194		172		206		179		567		502		586		518		Intersegment eliminations	203		180		194		172		567		502		567		502
Total Defense Systems	Total Defense Systems	1,345		1,187		1,409		1,234		3,922		3,441		4,398		3,869		Total Defense Systems	1,421		1,239		1,345		1,187		4,217		3,709		3,922		3,441
Mission Systems	Mission Systems																	Mission Systems
Product	Product	1,711		1,475		1,766		1,498		5,221		4,457		5,300		4,506		Product	1,841		1,590		1,711		1,475		5,490		4,726		5,221		4,457
Service	Service	496		402		426		354		1,494		1,210		1,578		1,302		Service	524		431		496		402		1,559		1,301		1,494		1,210
Intersegment eliminations	Intersegment eliminations	249		211		244		212		754		636		735		628		Intersegment eliminations	263		221		249		211		783		658		754		636
Total Mission Systems	Total Mission Systems	2,456		2,088		2,436		2,064		7,469		6,303		7,613		6,436		Total Mission Systems	2,628		2,242		2,456		2,088		7,832		6,685		7,469		6,303
Space Systems	Space Systems																	Space Systems
Product	Product	2,698		2,453		2,228		1,991		7,639		6,898		6,580		5,865		Product	3,017		2,787		2,698		2,453		8,879		8,166		7,639		6,898
Service	Service	437		396		420		371		1,268		1,158		1,267		1,126		Service	463		384		437		396		1,381		1,195		1,268		1,158
Intersegment eliminations	Intersegment eliminations	28		24		33		31		90		80		103		94		Intersegment eliminations	26		23		28		24		84		75		90		80
Total Space Systems	Total Space Systems	3,163		2,873		2,681		2,393		8,997		8,136		7,950		7,085		Total Space Systems	3,506		3,194		3,163		2,873		10,344		9,436		8,997		8,136
Segment Totals	Segment Totals																	Segment Totals
Total Product	Total Product	$	6,979	$	6,243	$	6,845	$	6,044	$	20,599	$	18,249	$	21,060	$	18,585	Total Product	$	7,678	$	6,904	$	6,979	$	6,243	$	22,390	$	20,085	$	20,599	$	18,249
Total Service	Total Service	1,992		1,721		1,875		1,641		5,970		5,203		5,968		5,196		Total Service	2,097		1,782		1,992		1,721		6,262		5,424		5,970		5,203
Total Segment(1)	Total Segment(1)	$	8,971	$	7,964	$	8,720	$	7,685	$	26,569	$	23,452	$	27,028	$	23,781	Total Segment(1)	$	9,775	$	8,686	$	8,971	$	7,964	$	28,652	$	25,509	$	26,569	$	23,452

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

Product Sales and Costs

Current Quarter

Third quarter ~~2022~~2023 product sales increased ~~$134~~$699 million, or 210 percent, due to an increase in product sales at all four sectors. The increase was principally driven by higher restricted sales at Aeronautics Systems and Mission Systems, ramp-up on Space Systems development programs, including GBSD and NGI, and higher volume on IBCS, ammunition programs and GMLRS at Defense Systems.

Third quarter 2023 product costs increased $661 million, or 11 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Space Systems production programs.

Year to Date

Year to date 2023 product sales increased $1.8 billion, or 9 percent, primarily due to an increase in product sales at Space ~~Systems, partially offset by a decrease in product sales at Aeronautics~~ Systems. The increase at Space Systems was driven by ramp-up on development programs, including GBSD and NGI, and ~~GBSD. The decrease at Aeronautics Systems was principally due to lower~~higher volume on restricted programs, ~~as well as the E-2 program.~~NextGen Polar, SDA Tranche 1 Tracking Layer and GMD.

~~Third quarter 2022~~Year to date 2023 product costs increased ~~$199 million,~~$1.8 billion, or 310 percent, consistent with the higher product sales described above and reflect a lower ~~product~~operating margin ~~rates at Space Systems, Mission Systems and Defense Systems~~rate principally due to lower net EAC ~~adjustments.~~

~~Year to Date~~

~~Year to date 2022 product sales decreased $461 million, or 2 percent, primarily due to a decrease in product sales at~~adjustments on Space Systems and 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 program. The increase at Space Systems is principally related to ramp-up on development programs including NGI and GBSD, as well as higher volume on the SDA Tranche 1 Transport Layer and Tranche 1 Tracking Layer programs.

~~Year to date 2022 product costs decreased $336 million, or 2 percent, consistent with the lower product sales.~~

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Service Sales and Costs

Current Quarter

Third quarter ~~2022~~2023 service sales increased ~~$117~~$105 million, or 65 percent, primarily due to an increase in service sales at Aeronautics Systems ~~principally on restricted programs,~~ and Mission ~~Systems,~~Systems. The increase was principally driven by higher restricted sales at both sectors, as well as higher service volume on Global Hawk, partially offset by ~~a decrease in service sales at Defense Systems. The decrease at Defense Systems was driven by~~ lower ~~scope on an international training program, the completion of a Joint Services support program and wind down of the UKAWACS program, partially offset by higher~~ volume on the ~~NATO AGS ISS programs.~~JSTARS program at Aeronautics Systems.

Third quarter ~~2022~~2023 service costs increased ~~$80~~$61 million, or 54 percent, consistent with the higher service sales described above and reflects a higher operating margin rate on service ~~margin rates~~sales at ~~Mission Systems, Defense Systems and Aeronautics~~Space Systems.

Year to Date

Year to date ~~2022~~2023 service sales ~~were comparable with the prior year period. Higher~~increased $292 million, or 5 percent, due to an increase in service sales at all four sectors. The increase was principally driven by higher restricted sales at Space Systems and Aeronautics Systems, ~~were offset by the IT services divestiture as well as lower~~higher service volume on F-35 sustainment and SEWIP integration at Mission Systems, and higher 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.~~

Year to date ~~2022~~2023 service costs ~~were comparable with the prior year period,~~increased $221 million, or 4 percent, consistent with the higher service sales described ~~above.~~above and reflects a higher operating margin rate on service sales at Space Systems.

BACKLOG

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


		September 30, 2022						December 31, 2021					September 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	$	8,127	$	10,513	$	18,640	$	18,277	2	%	Aeronautics Systems	$	9,009	$	9,338	$	18,347	$	19,397	(5)	%
Defense Systems	Defense Systems	5,908		789		6,697		6,349		5	%	Defense Systems	6,425		1,713		8,138		7,515		8	%
Mission Systems	Mission Systems	10,192		4,554		14,746		14,306		3	%	Mission Systems	11,260		4,247		15,507		13,875		12	%
Space Systems	Space Systems	8,407		31,159		39,566		37,114		7	%	Space Systems	9,819		32,120		41,939		37,956		10	%
Total backlog	Total backlog	$	32,634	$	47,015	$	79,649	$	76,046	5	%	Total backlog	$	36,513	$	47,418	$	83,931	$	78,743	7	%

New Awards

Third quarter and year to date ~~2022~~2023 net awards totaled ~~$8.7~~$15.0 billion and ~~$30.2~~$33.9 billion, respectively, and backlog totaled ~~$79.6~~$83.9 billion. Significant third quarter new awards include ~~$2.8~~$3.6 billion for restricted programs ~~(at~~(primarily at Space Systems, ~~Mission~~Aeronautics Systems, and ~~Aeronautics~~Mission Systems), $1.3 billion for ~~Ground-based Midcourse Defense (GMD) and $0.8~~E-2, $0.7 billion for SDA Tranche ~~1 Tracking Layer.~~2 Transport Layer and $0.5 billion for GMLRS.

LIQUIDITY AND CAPITAL RESOURCES

We are focused on the efficient conversion of operating income into cash ~~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 September 30, ~~2022,~~2023, we had ~~$1.7~~$2.1 billion in cash and cash equivalents. We expect cash and cash equivalents and cash generated from operating activities, supplemented by borrowings under credit facilities, commercial paper and/or in the capital markets through our shelf registration with the SEC, if needed, to be sufficient to provide liquidity to the company in the short-term and long-term. ~~In August 2022, the~~The company ~~entered into~~has a ~~new~~ five-year senior unsecured credit facility in an aggregate principal amount of $2.5 ~~billion. The 2022 Credit Agreement replaced the company’s prior five-year, $2.0~~ billion, ~~revolving credit facility entered into~~and in ~~August 2018. In~~ April ~~2022,~~2023, we

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renewed our one-year $500 million uncommitted credit facility. At September 30, ~~2022,~~2023, there were no borrowings outstanding under these credit facilities.

~~Effective January 30, 2021,~~ In February 2023, we ~~completed the IT services divestiture for $3.4 billion cash. Proceeds were primarily used in the first quarter of 2021 for a~~issued $2.0 billion ~~accelerated~~of unsecured senior notes for general corporate purposes, including debt repayment, share ~~repurchase~~repurchases and ~~to fund redemption of $1.5 billion of the company’s 2.55 percent unsecured notes due October 2022.~~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 has sought and may continue to seek recovery for certain COVID-19-related costs under Section 3610 of the CARES Act and through our contract provisions, though it is unclear what funds will be available and how much we will be able to recover. In addition, during 2020, the ~~U.S. Department of Defense (DoD) has, to date, taken steps to increase~~DoD increased the rate for certain

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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 in the current year and requires taxpayers to amortize them over five years pursuant to IRC Section 174. ~~We have made~~Our 2022 cash from operations were reduced by approximately $900 million for federal estimated tax payments ~~of approximately $670 million~~we made related to Section 174. As we finalized our 2022 federal tax return, we reduced the previously estimated impact of Section 174 ~~during~~on our tax liability for 2022 to approximately $700 million and we anticipate its impact on our tax liability for 2023 will be approximately $550 million. In the ~~first nine months of 2022 and expect our full year tax payments to approximate $1.0 billion.~~future, Congress ~~is considering, but has not passed,~~may consider legislation that would defer the amortization requirement to later ~~years. If legislation is passed during~~years, possibly with retroactive effect. In the ~~fourth quarter of 2022 and made effective retroactively to January 1, 2022,~~meantime, we expect to ~~immediately file for a refund of taxes paid during 2022, but do not expect we would receive that refund until 2023. As such, we expect the impact of~~continue to make additional federal tax payments based on the current Section 174 ~~legislation~~tax law. The impact of Section 174 on our ~~2022~~ cash from operations ~~to range between $670 million and $1.0 billion depending~~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.~~interpretation, among other things.

Cash Flow Measures

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

Operating Cash Flow

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


		Nine Months Ended September 30			%					Nine Months Ended September 30	%
$ in millions	$ in millions		2022		2021		Change		$ in millions		2023		2022		Change
Net earnings	Net earnings		$	2,816	$	4,295	(34)	%	Net earnings		$	2,591	$	2,816	(8)	%
Gain on sale of business			—		(1,980)		NM
Non-cash items(1)	Non-cash items(1)		(301)		56		(638)	%	Non-cash items(1)		474		(301)		NM

Pension and OPB contributions	Pension and OPB contributions		(106)		(108)		(2)	%	Pension and OPB contributions		(108)		(106)		2	%
Changes in trade working capital	Changes in trade working capital		(1,855)		(124)		1,396	%	Changes in trade working capital		(1,469)		(1,855)		(21)	%

Other, net	Other, net		96		(14)		(786)	%	Other, net		(43)		96		NM
Net cash provided by operating activities	Net cash provided by operating activities		$	650	$	2,125	(69)	%	Net cash provided by operating activities		$	1,445	$	650	122	%

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

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Year to date ~~2022~~2023 net cash provided by operating activities ~~decreased $1.5 billion~~increased $795 million as compared with the same period in ~~2021 principally due to increases in~~2022 and reflects improved trade working capital. During the nine months ended September 30, 2022, the company made $670 million of federal tax payments related to the current provisions of IRC Section 174. During the nine months ended September 30, 2021, the company made $588 million of tax payments related to the IT services divestiture.capital largely driven by increased billings and cash collections.

Adjusted Free Cash Flow

Adjusted free cash flow, as reconciled in the table below, is a non-GAAP measure defined as net cash provided by or used in operating activities, less capital expenditures, plus proceeds from the sale of equipment to a customer (not otherwise included in net cash provided by or used in operating activities) and the after-tax impact of discretionary pension contributions. Adjusted free cash flow includes proceeds from the sale of equipment to a customer as such proceeds were generated in a customer sales transaction. It also includes the after-tax impact of discretionary pension contributions for consistency and comparability of financial performance. This measure may not be defined and calculated by other companies in the same manner. We use adjusted free cash flow as a key factor in our planning for, and consideration of, acquisitions, the payment of dividends and stock repurchases. This non-GAAP measure may be useful to investors and other users of our financial statements as a supplemental measure of our cash performance, but should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating cash flows presented in accordance with GAAP.

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


		Nine Months Ended September 30			%					Nine Months Ended September 30	%
$ in millions	$ in millions		2022		2021		Change		$ in millions		2023		2022		Change
Net cash provided by operating activities	Net cash provided by operating activities		$	650	$	2,125	(69)	%	Net cash provided by operating activities		$	1,445	$	650	122	%
Capital expenditures	Capital expenditures		(803)		(682)		18	%	Capital expenditures		(972)		(803)		21	%
Proceeds from sale of equipment to a customer	Proceeds from sale of equipment to a customer		100		84		19	%	Proceeds from sale of equipment to a customer		—		100		(100)	%

Adjusted free cash flow	Adjusted free cash flow		$	(53)	$	1,527	(103)	%	Adjusted free cash flow		$	473	$	(53)	NM

Year to date ~~2022~~2023 adjusted free cash flow ~~decreased $1.6 billion~~increased $526 million as compared with the same period in ~~2021~~2022 principally due to ~~lower~~higher net cash 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 ~~was $663~~increased $149 million as compared ~~to net cash provided by investing activities of $2.8 billion~~with the same period in ~~the prior year period principally~~2022 largely due to ~~$3.4 billion in cash received from the sale of our IT services business during the first quarter of 2021.~~higher capital expenditures.

Financing Cash Flow

Year to date ~~2022~~2023 net cash used in financing activities decreased ~~$3.9 billion~~$723 million as compared with the same period in ~~2021~~2022 principally due to ~~a $2.2~~the issuance of $2.0 billion ~~decrease~~in long-term debt, partially offset by $1.05 billion in debt repayments and a ~~$1.7 billion reduction~~$143 million increase in share repurchases.

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

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

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

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

There have been no material changes to our critical accounting policies, estimates or judgments from those discussed in our ~~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 “will,” “expect,” “anticipate,” “intend,” “may,” “could,” “should,” “plan,” “project,” “forecast,” “believe,”

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~~“estimate,~~ “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 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:

Industry and Economic Risks

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

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

•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

•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

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•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. For more information regarding the economic environment, including global inflationary pressures, and the potential impact to the company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.

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 September 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 September 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, and Issuer Purchases of Equity Securities

The table below summarizes our repurchases of common stock during the three months ended September 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)
July 2, 2022 - July 29, 2022 234,422 $ 460.61 234,422 $ 3,386
July 30, 2022 - August 26, 2022 245,200 482.06 245,200 3,267
August 27, 2022 - September 30, 2022 307,400 482.16 307,400 3,119
Total 787,022 $ 475.71 787,022 $ 3,119


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)
July 1, 2023 - July 28, 2023	124,605	$	451.06	124,605	$	1,653
July 29, 2023 - August 25, 2023	179,660	$	434.71	179,660		1,575
August 26, 2023 - September 29, 2023	222,868	$	431.06	222,868		1,479
Total	527,133	$	437.03	527,133	$	1,479

(1)Includes commissions paid.

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

Item 5. Other Information

During the quarter ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement”, as those terms are defined in Item 408 of Regulation S-K.

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Item 6. Exhibits


~~10.1~~			Credit Agreement, dated as of August 23, 2022, among Northrop Grumman Corporation, as borrower, Northrop Grumman Systems Corporation, as guarantor, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to Form 8-K filed August 23, 2022, File No. 001-16411).

*+10.2			~~Transition and Retirement Agreement dated as of September 9, 2022 by and between Northrop Grumman Systems Corporation and Mary D. Petryszyn~~

*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 September 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: October ~~26, 2022~~25, 2023

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