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 ~~March 31,~~June 30, 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 ~~April~~July 24, 2023, ~~151,859,445~~151,299,696 shares of common stock were outstanding.

Table of Contents

NORTHROP GRUMMAN CORPORATION

TABLE OF CONTENTS


		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings and Comprehensive Income	1
	Condensed Consolidated Statements of Financial Position	2
	Condensed Consolidated Statements of Cash Flows	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity	4
	Notes to Condensed Consolidated Financial Statements
	1. Basis of Presentation	5
	2. Earnings Per Share, Share Repurchases and Dividends on Common Stock	67
	3. Income Taxes	78
	4. Fair Value of Financial Instruments	8
	5. Investigations, Claims and Litigation	910
	6. Commitments and Contingencies	10
	7. Retirement Benefits	12
	8. Stock Compensation Plans and Other Compensation Arrangements	1213
	9. Segment Information	13
	~~10. Subsequent~~ ~~Even~~t	1614
	Report of Independent Registered Public Accounting Firm	1718
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Overview	1819
	Consolidated Operating Results	2021
	Segment Operating Results	2123
	Product and Service Analysis	2628
	Backlog	2729
	Liquidity and Capital Resources	2729
	Critical Accounting Policies, Estimates and Judgments	2931
	Accounting Standards Updates	2931
	Forward-Looking Statements and Projections	2931
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3133
Item 4.	Controls and Procedures	3133

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	3234
Item 1A.	Risk Factors	3234
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3234
Item 5.	Other Information	34
Item 6.	Exhibits	3336
	Signatures	3437

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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 March 31			Three Months Ended June 30						Six Months Ended June 30
$ in millions, except per share amounts	$ in millions, except per share amounts		2023			2022		$ in millions, except per share amounts	2023		2022		2023		2022
Sales	Sales							Sales
Product	Product		$	7,271		$	6,841	Product	$	7,441	$	6,779	$	14,712	$	13,620
Service	Service		2,030			1,956		Service	2,135		2,022		4,165		3,978
Total sales	Total sales		9,301			8,797		Total sales	9,576		8,801		18,877		17,598
Operating costs and expenses	Operating costs and expenses							Operating costs and expenses
Product	Product		5,727			5,380		Product	5,876		5,281		11,603		10,661
Service	Service		1,589			1,544		Service	1,660		1,561		3,249		3,105
General and administrative expenses	General and administrative expenses		1,038			976		General and administrative expenses	1,073		1,005		2,111		1,981
Total operating costs and expenses	Total operating costs and expenses		8,354			7,900		Total operating costs and expenses	8,609		7,847		16,963		15,747
Operating income	Operating income		947			897		Operating income	967		954		1,914		1,851
Other (expense) income	Other (expense) income							Other (expense) income
Interest expense	Interest expense		(129)			(133)		Interest expense	(147)		(131)		(276)		(264)
Non-operating FAS pension benefit	Non-operating FAS pension benefit		132			376		Non-operating FAS pension benefit	133		377		265		753

Other, net	Other, net		48			4		Other, net	34		(50)		82		(46)
Earnings before income taxes	Earnings before income taxes		998			1,144		Earnings before income taxes	987		1,150		1,985		2,294
Federal and foreign income tax expense	Federal and foreign income tax expense		156			189		Federal and foreign income tax expense	175		204		331		393
Net earnings	Net earnings		$	842		$	955	Net earnings	$	812	$	946	$	1,654	$	1,901

Basic earnings per share	Basic earnings per share		$	5.52		$	6.12	Basic earnings per share	$	5.35	$	6.09	$	10.87	$	12.21
Weighted-average common shares outstanding, in millions	Weighted-average common shares outstanding, in millions		152.6			156.0		Weighted-average common shares outstanding, in millions	151.7		155.4		152.1		155.7
Diluted earnings per share	Diluted earnings per share		$	5.50		$	6.10	Diluted earnings per share	$	5.34	$	6.06	$	10.83	$	12.16
Weighted-average diluted shares outstanding, in millions	Weighted-average diluted shares outstanding, in millions		153.2			156.6		Weighted-average diluted shares outstanding, in millions	152.2		156.0		152.7		156.3

Net earnings (from above)	Net earnings (from above)		$	842		$	955	Net earnings (from above)	$	812	$	946	$	1,654	$	1,901
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax							Other comprehensive income (loss), net of tax
Change in cumulative translation adjustment	Change in cumulative translation adjustment		2			(2)		Change in cumulative translation adjustment	3		(13)		5		(15)
Change in other, net	Change in other, net		—			(1)		Change in other, net	(2)		—		(2)		(1)
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax		2			(3)		Other comprehensive income (loss), net of tax	1		(13)		3		(16)
Comprehensive income	Comprehensive income		$	844		$	952	Comprehensive income	$	813	$	933	$	1,657	$	1,885

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)


$ in millions, except par value	$ in millions, except par value	March 31, 2023		December 31, 2022		$ in millions, except par value	June 30, 2023		December 31, 2022
Assets	Assets					Assets
Cash and cash equivalents	Cash and cash equivalents	$	2,495	$	2,577	Cash and cash equivalents	$	3,384	$	2,577
Accounts receivable, net	Accounts receivable, net	2,061		1,511		Accounts receivable, net	2,096		1,511
Unbilled receivables, net	Unbilled receivables, net	6,215		5,983		Unbilled receivables, net	5,870		5,983
Inventoried costs, net	Inventoried costs, net	1,115		978		Inventoried costs, net	1,287		978
Prepaid expenses and other current assets	Prepaid expenses and other current assets	924		1,439		Prepaid expenses and other current assets	1,232		1,439

Total current assets	Total current assets	12,810		12,488		Total current assets	13,869		12,488
Property, plant and equipment, net of accumulated depreciation of $7,448 for 2023 and $7,258 for 2022		8,838		8,800
Property, plant and equipment, net of accumulated depreciation of $7,611 for 2023 and $7,258 for 2022						Property, plant and equipment, net of accumulated depreciation of $7,611 for 2023 and $7,258 for 2022	8,976		8,800
Operating lease right-of-use assets	Operating lease right-of-use assets	1,779		1,811		Operating lease right-of-use assets	1,763		1,811
Goodwill	Goodwill	17,516		17,516		Goodwill	17,517		17,516
Intangible assets, net	Intangible assets, net	364		384		Intangible assets, net	344		384
Deferred tax assets	Deferred tax assets	234		162		Deferred tax assets	452		162
Other non-current assets	Other non-current assets	2,703		2,594		Other non-current assets	2,688		2,594
Total assets	Total assets	$	44,244	$	43,755	Total assets	$	45,609	$	43,755

Liabilities	Liabilities					Liabilities
Trade accounts payable	Trade accounts payable	$	2,136	$	2,587	Trade accounts payable	$	2,056	$	2,587
Accrued employee compensation	Accrued employee compensation	1,646		2,057		Accrued employee compensation	1,878		2,057
Advance payments and billings in excess of costs incurred	Advance payments and billings in excess of costs incurred	3,211		3,609		Advance payments and billings in excess of costs incurred	3,397		3,609
Other current liabilities	Other current liabilities	3,490		3,334		Other current liabilities	4,226		3,334

Total current liabilities	Total current liabilities	10,483		11,587		Total current liabilities	11,557		11,587
Long-term debt, net of current portion of $1,082 for 2023 and $1,072 for 2022		13,770		11,805
Long-term debt, net of current portion of $1,097 for 2023 and $1,072 for 2022						Long-term debt, net of current portion of $1,097 for 2023 and $1,072 for 2022	13,796		11,805
Pension and other postretirement benefit plan liabilities	Pension and other postretirement benefit plan liabilities	1,173		1,188		Pension and other postretirement benefit plan liabilities	1,161		1,188
Operating lease liabilities	Operating lease liabilities	1,789		1,824		Operating lease liabilities	1,772		1,824

Other non-current liabilities	Other non-current liabilities	1,893		2,039		Other non-current liabilities	1,837		2,039
Total liabilities	Total liabilities	29,108		28,443		Total liabilities	30,123		28,443

Commitments and contingencies (Note 6)	Commitments and contingencies (Note 6)					Commitments and contingencies (Note 6)

Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding	Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding	—		—		Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2023—151,950,074 and 2022—153,157,924		152		153
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2023—151,388,972 and 2022—153,157,924						Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2023—151,388,972 and 2022—153,157,924	151		153
Paid-in capital	Paid-in capital	—		—		Paid-in capital	—		—
Retained earnings	Retained earnings	15,135		15,312		Retained earnings	15,485		15,312
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(151)		(153)		Accumulated other comprehensive loss	(150)		(153)
Total shareholders’ equity	Total shareholders’ equity	15,136		15,312		Total shareholders’ equity	15,486		15,312
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	44,244	$	43,755	Total liabilities and shareholders’ equity	$	45,609	$	43,755

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Three Months Ended March 31					Six Months Ended June 30
$ in millions	$ in millions	2023		2022		$ in millions	2023		2022
Operating activities	Operating activities					Operating activities
Net earnings	Net earnings	$	842	$	955	Net earnings	$	1,654	$	1,901
Adjustments to reconcile to net cash used in operating activities:
Adjustments to reconcile to net cash provided by (used in) operating activities:						Adjustments to reconcile to net cash provided by (used in) operating activities:
Depreciation and amortization	Depreciation and amortization	298		303		Depreciation and amortization	621		633

Stock-based compensation	Stock-based compensation	19		18		Stock-based compensation	47		42
Deferred income taxes	Deferred income taxes	(205)		(201)		Deferred income taxes	(423)		(399)
Net periodic pension and OPB income	Net periodic pension and OPB income	(76)		(298)		Net periodic pension and OPB income	(154)		(597)
Pension and OPB contributions	Pension and OPB contributions	(40)		(36)		Pension and OPB contributions	(75)		(71)
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Accounts receivable, net	Accounts receivable, net	(550)		(246)		Accounts receivable, net	(591)		(920)
Unbilled receivables, net	Unbilled receivables, net	(232)		(626)		Unbilled receivables, net	110		(719)
Inventoried costs, net	Inventoried costs, net	(137)		(27)		Inventoried costs, net	(331)		(98)
Prepaid expenses and other assets	Prepaid expenses and other assets	(54)		16		Prepaid expenses and other assets	66		114
Accounts payable and other liabilities	Accounts payable and other liabilities	(1,128)		(732)		Accounts payable and other liabilities	(1,043)		(724)
Income taxes payable, net	Income taxes payable, net	576		361		Income taxes payable, net	285		86

Other, net	Other, net	(15)		25		Other, net	51		67
Net cash used in operating activities		(702)		(488)
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	217		(685)

Investing activities	Investing activities					Investing activities

Capital expenditures	Capital expenditures	(309)		(244)		Capital expenditures	(613)		(507)

Other, net	Other, net	—		(5)		Other, net	1		39
Net cash used in investing activities	Net cash used in investing activities	(309)		(249)		Net cash used in investing activities	(612)		(468)

Financing activities	Financing activities					Financing activities
Net proceeds from issuance of long-term debt	Net proceeds from issuance of long-term debt	1,995		—		Net proceeds from issuance of long-term debt	1,995		—

Net borrowings on commercial paper						Net borrowings on commercial paper	768		—
Common stock repurchases	Common stock repurchases	(723)		(318)		Common stock repurchases	(931)		(640)
Cash dividends paid	Cash dividends paid	(270)		(251)		Cash dividends paid	(554)		(519)
Payments of employee taxes withheld from share-based awards	Payments of employee taxes withheld from share-based awards	(47)		(48)		Payments of employee taxes withheld from share-based awards	(50)		(48)
Other, net	Other, net	(26)		(2)		Other, net	(26)		(1)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	929		(619)		Net cash provided by (used in) financing activities	1,202		(1,208)
Decrease in cash and cash equivalents		(82)		(1,356)
Increase (decrease) in cash and cash equivalents						Increase (decrease) in cash and cash equivalents	807		(2,361)
Cash and cash equivalents, beginning of year	Cash and cash equivalents, beginning of year	2,577		3,530		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	$	2,495	$	2,174	Cash and cash equivalents, end of period	$	3,384	$	1,169

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


		Three Months Ended March 31			Three Months Ended June 30						Six Months Ended June 30
$ in millions, except per share amounts	$ in millions, except per share amounts		2023			2022		$ in millions, except per share amounts	2023		2022		2023		2022
Common stock	Common stock							Common stock
Beginning of period	Beginning of period		$	153		$	156	Beginning of period	$	152	$	156	$	153	$	156
Common stock repurchased	Common stock repurchased		(1)			(1)		Common stock repurchased	(1)		(1)		(2)		(2)
Shares issued for employee stock awards and options	Shares issued for employee stock awards and options		—			1		Shares issued for employee stock awards and options	—		—		—		1
End of period	End of period		152			156		End of period	151		155		151		155
Paid-in capital	Paid-in capital							Paid-in capital
Beginning of period	Beginning of period		—			—		Beginning of period	—		—		—		—

End of period	End of period		—			—		End of period	—		—		—		—
Retained earnings	Retained earnings							Retained earnings
Beginning of period	Beginning of period		15,312			12,913		Beginning of period	15,135		13,277		15,312		12,913
Common stock repurchased	Common stock repurchased		(726)			(315)		Common stock repurchased	(204)		(323)		(930)		(638)
Net earnings	Net earnings		842			955		Net earnings	812		946		1,654		1,901
Dividends declared	Dividends declared		(265)			(246)		Dividends declared	(284)		(270)		(549)		(516)
Stock compensation	Stock compensation		(28)			(30)		Stock compensation	26		25		(2)		(5)

End of period	End of period		15,135			13,277		End of period	15,485		13,655		15,485		13,655
Accumulated other comprehensive loss	Accumulated other comprehensive loss							Accumulated other comprehensive loss
Beginning of period	Beginning of period		(153)			(143)		Beginning of period	(151)		(146)		(153)		(143)
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax		2			(3)		Other comprehensive income (loss), net of tax	1		(13)		3		(16)
End of period	End of period		(151)			(146)		End of period	(150)		(159)		(150)		(159)
Total shareholders’ equity	Total shareholders’ equity		$	15,136		$	13,287	Total shareholders’ equity	$	15,486	$	13,651	$	15,486	$	13,651
Cash dividends declared per share	Cash dividends declared per share		$	1.73		$	1.57	Cash dividends declared per share	$	1.87	$	1.73	$	3.60	$	3.30

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

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NORTHROP GRUMMAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

Principles of Consolidation and Reporting

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

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 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 ~~statement~~statements of earnings and comprehensive income. Prior period amounts have been recast to conform to current period presentation. This change in presentation had no impact on our previously reported comprehensive income in total.

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

Accounting Estimates

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

Revenue Recognition

Contract Estimates

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

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


		Three Months Ended March 31			Three Months Ended June 30						Six Months Ended June 30
$ in millions, except per share data	$ in millions, except per share data		2023			2022		$ in millions, except per share data	2023		2022		2023		2022
Revenue	Revenue		$	62		$	209	Revenue	$	95	$	95	$	157	$	304
Operating income	Operating income		46			173		Operating income	76		92		122		265
Net earnings(1)	Net earnings(1)		36			137		Net earnings(1)	60		73		96		209
Diluted earnings per share(1)	Diluted earnings per share(1)		0.23			0.87		Diluted earnings per share(1)	0.39		0.47		0.63		1.34

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

EAC adjustments on a single performance obligation can have a significant effect on the company’s financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. During the three months ended ~~March 31, 2022,~~June 30, 2023, we recorded a ~~$67~~$36 million ~~favorable~~unfavorable

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NORTHROP GRUMMAN CORPORATION

EAC adjustment on the Habitation and Logistics Outpost (HALO) program at Space Systems largely due to cost growth stemming from evolving Lunar Gateway architecture and mission requirements combined with macroeconomic challenges. During the three months ended March 31, 2022, we recorded a $67 million favorable EAC adjustment on the engineering, manufacturing and development (EMD) phase of the B-21 program at Aeronautics Systems. No ~~such~~EAC adjustments ~~were material to~~on a single performance obligation had a significant impact on the financial statements during the three months ended March 31, ~~2023.~~2023 or June 30, 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 ~~March 31,~~June 30, 2023 was ~~$77.5~~$78.8 billion. Of our ~~March 31,~~June 30, 2023 backlog, we expect to recognize approximately 40 percent as revenue over the next 12 months and 65 percent as revenue over the next 24 months, with the remainder to be recognized thereafter.

Contract Assets and Liabilities

For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position. The amount of revenue recognized for the three and six months ended ~~March~~June 30, 2023 that was included in the December 31, ~~2023~~2022 contract liability balance was $899 million and $2.6 billion, respectively. The amount of revenue recognized for the three and six months ended June 30, 2022 that was included in the December 31, 2021 contract liability ~~balances at the beginning of each year~~balance was ~~$1.7 billion~~$466 million and ~~$1.4~~$1.9 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.

Property, Plant, and Equipment

During the ~~three~~six months ended ~~March 31,~~June 30, 2022, the company received lease incentives for landlord funded leasehold improvements of ~~$35~~$63 million related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities. During the ~~three~~six months ended ~~March 31,~~June 30, 2022, the company acquired $46 million of internal use software through long-term financing directly with the supplier. The software was recorded in PP&E as a non-cash investing activity and the related liability was recorded in long-term debt as a non-cash financing activity. Non-cash investing activities also include capital expenditures incurred but not yet paid of ~~$43~~$62 million and ~~$56~~$73 million as of ~~March 31,~~June 30, 2023 and 2022, respectively.

Sale of Minority Investment

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

Accumulated Other Comprehensive Loss

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


$ in millions	$ in millions	March 31, 2023		December 31, 2022		$ in millions	June 30, 2023		December 31, 2022
Cumulative translation adjustment	Cumulative translation adjustment	$	(159)	$	(161)	Cumulative translation adjustment	$	(156)	$	(161)
Other, net	Other, net	8		8		Other, net	6		8
Total accumulated other comprehensive loss	Total accumulated other comprehensive loss	$	(151)	$	(153)	Total accumulated other comprehensive loss	$	(150)	$	(153)

Related Party Transactions

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

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Accounting Standards Updates

Accounting standards updates adopted and/or issued, but not effective until after ~~March 31,~~June 30, 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.

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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 ~~each of~~ the three ~~month periods~~and six months ended ~~March 31,~~June 30, 2023, respectively, and 0.6 million shares for the three and six months ended June 30, 2022.

Share Repurchases

On 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 “2021 Repurchase Program”). Repurchases under the 2021 Repurchase Program commenced in October ~~2021. As of March 31, 2023, $10 million 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.

On January 24, 2022, the company’s board of directors authorized a new share repurchase program of up to an additional $2.0 billion in share repurchases of the company’s common stock (the “2022 Repurchase Program”). ~~By its terms,~~Repurchases under the 2022 Repurchase Program commenced in April 2023 upon completion of the 2021 Repurchase Program. As of June 30, 2023, repurchases under the 2022 Repurchase Program ~~will commence upon completion of~~totaled 0.3 billion; $1.7 billion remained under this share repurchase authorization. By its terms, the ~~2021~~2022 Repurchase Program ~~and~~ will expire when we have used all authorized funds for repurchases. ~~As of March 31, 2023, there have been no repurchases under the 2022 Repurchase Program, and the company’s total outstanding share repurchase authorization was $2.0 billion.~~

During the first quarter of 2023, the company entered into an accelerated share repurchase (ASR) agreement with Bank of America, N.A. (Bank of America) to repurchase $500 million of the company’s common stock as part of the 2021 and 2022 Repurchase Programs. Under the agreement, we made a payment of $500 million to Bank of America and received an initial delivery of 0.9 million shares valued at $400 million that were immediately canceled by the company. The remaining balance of $100 million ~~is included as~~was settled on April 27, 2023 with a ~~reduction to Retained earnings on the unaudited condensed consolidated statement~~final delivery of ~~financial position.~~0.2 million shares from Bank of America. The final ~~number of shares to be repurchased will be based on the company's daily volume-weighted~~ average ~~share~~purchase price ~~during the term of the agreement, less a discount. The ASR is expected to be completed in the second quarter of 2023.~~was $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.

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	Three Months Ended March 31		Repurchase Program Authorization Date	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share(1)		Date Completed	Six Months Ended June 30
							2023	2022								2023	2022

January 25, 2021	January 25, 2021	$	3,000	6.9	430.92		1.4	0.9	January 25, 2021	$	3,000	7.0	$	431.05	April 2023	1.4	1.6
January 24, 2022	January 24, 2022	$	2,000	—	—		—	—	January 24, 2022	$	2,000	0.6	$	452.91		0.6	—

(1)Includes commissions paid.

Dividends on Common Stock

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

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3. INCOME TAXES


		Three Months Ended March 31				Three Months Ended June 30								Six Months Ended June 30
$ in millions	$ in millions		2023				2022			$ in millions	2023			2022			2023			2022
Federal and foreign income tax expense	Federal and foreign income tax expense		$	156			$	189		Federal and foreign income tax expense	$	175		$	204		$	331		$	393
Effective income tax rate	Effective income tax rate		15.6		%		16.5		%	Effective income tax rate	17.7		%	17.7		%	16.7		%	17.1		%

Current Quarter

The ~~first~~company’s second quarter 2023 effective tax rate (ETR) of 17.7 percent was comparable with the prior year period and reflects higher interest expense on unrecognized tax benefits, offset by favorable returns on tax-exempt marketable securities. The second quarter 2023 ETR includes benefits of $38 million for research credits and $14 million for foreign derived intangible income (FDII). The second quarter 2022 ETR included benefits of $41 million for research credits and $15 million for FDII.

Year to Date

The company’s year to date 2023 ETR decreased to ~~15.6~~16.7 percent from ~~16.5~~17.1 percent in the prior year period principally due to higher current year ETR benefits associated with research credits and FDII deductions as well as favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax benefits. The ~~company’s first quarter~~year to date 2023 ETR includes benefits of ~~$40~~$78 million for research credits and ~~$15~~$29 million for ~~foreign~~

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~~derived intangible income (FDII).~~FDII. The ~~company’s first quarter~~year to date 2022 ETR included benefits of ~~$41~~$82 million for research credits and ~~$15~~$29 million for FDII.

Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were ~~$274~~$566 million as of ~~March 31,~~June 30, 2023 and $850 million as of December 31, 2022.

The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs and the 2017 Tax Cuts and Jobs Act, which includes related final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and procedural guidance issued in August 2021. As of ~~March 31,~~June 30, 2023, we have approximately ~~$1.7~~$1.6 billion in unrecognized tax benefits, including ~~$572~~$601 million related to our position on IRC Section 451(b). If these matters, including our position on IRC Section 451(b), are unfavorably resolved, there could be a material impact on our future cash flows. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may increase by approximately $120 million. ~~Additionally, it is reasonably possible that within~~

In the ~~next 12 months, unrecognized tax benefits claimed~~second quarter of 2023, the California Franchise Tax Board approved a resolution of the state examination primarily related to California state apportionment in the company’s 2007 to 2016 tax years, ~~may decline by up~~resulting in a $95 million reduction to ~~$100 million through administrative resolution with the California Franchise Tax Board.~~

Our current unrecognized tax benefits, which are included in Other current liabilities in the unaudited condensed consolidated statements of financial position, were $769 million and $728 million as of March 31, 2023 and December 31, 2022, respectively, with the remainder of 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, resulting in a $90 million reduction to our unrecognized tax benefits and ~~refund claims related~~an immaterial impact to ~~its 2007-2016 federal~~income tax ~~returns reverted back from IRS Appeals to IRS examination for additional factual review.~~expense.

Our current unrecognized tax benefits, which are included in Other current liabilities in the unaudited condensed consolidated statements of financial position, were $689 million and $728 million as of June 30, 2023 and December 31, 2022, respectively, with the remainder of our unrecognized tax 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; therefore, they are not ~~required to be~~ categorized in the fair value hierarchy table below. Marketable securities are included in Other non-current assets in the unaudited condensed consolidated statements of financial position.

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

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:


		March 31, 2023								December 31, 2022									June 30, 2023								December 31, 2022
$ in millions	$ in millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		$ in millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Assets	Financial Assets																	Financial Assets
Marketable securities	Marketable securities	$	316	$	—	$	8	$	324	$	310	$	1	$	8	$	319	Marketable securities	$	316	$	—	$	8	$	324	$	310	$	1	$	8	$	319
Marketable securities valued using NAV	Marketable securities valued using NAV							10								13		Marketable securities valued using NAV							10								13
Total marketable securities	Total marketable securities	316		—		8		334		310		1		8		332		Total marketable securities	316		—		8		334		310		1		8		332
Derivatives	Derivatives	—		5		—		5		—		7		—		7		Derivatives	—		2		—		2		—		7		—		7

The notional value of the company’s foreign currency forward contracts at ~~March 31,~~June 30, 2023 and December 31, 2022 was ~~$237~~$271 million and $221 million, respectively. The portion of notional value designated as a cash flow hedge at ~~March 31,~~June 30, 2023 and December 31, 2022 was ~~$88~~$59 million and $87 million, respectively.

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

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There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the ~~three~~six months ended ~~March 31,~~June 30, 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 ~~$14.4~~$14.3 billion and $12.1 billion as of ~~March 31,~~June 30, 2023 and December 31, 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.

Unsecured Senior Notes

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

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

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

We refer to 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 100% of the principal amount of the notes to be redeemed or an applicable “make-whole” amount, plus accrued and unpaid interest.

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5. INVESTIGATIONS, CLAIMS AND LITIGATION

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. 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. Those agreements have also been approved by the courts as necessary. The company continues to be involved in related disputes with the Towns of Oyster Bay and Hempstead.

We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to the legacy Bethpage environmental conditions. It is also possible that applicable remediation 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 on a non-discriminatory basis. The company has taken and continues to take robust actions to help ensure compliance with the terms of the Order. Similarly, the Compliance Officer, appointed under the Order, and the FTC have taken and continue to take various actions to oversee compliance. In October 2019, the company received a civil investigative demand (CID) from the FTC requesting certain information relating to a potential issue regarding the 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. ~~More recently,~~In late 2022, the company received ~~and is~~

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~~responding to~~ a follow-on ~~CID.~~CID; the company responded to it earlier this year. We cannot predict ~~the outcome of those discussions,~~any additional steps, but we do not believe they are likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of ~~March 31,~~June 30, 2023, or its annual results of operations and/or cash flows. We believe the company has been and continues to be in compliance with the Order.

The company received from the U.S. Department of Justice (DOJ) a criminal subpoena on December 9, 2022, and a civil investigative demand on February 2, 2023, both seeking information regarding financial and cost accounting and controls that appears focused on the interest rate assumptions the company used to determine our CAS pension expense, which we have previously discussed in Note 6 below. The company is engaging with the government and responding to the requests. We cannot at this point predict the outcome of ~~this matter.~~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 ~~March 31,~~June 30, 2023, or its annual results of operations and/or cash flows.

6. COMMITMENTS AND CONTINGENCIES

U.S. Government Cost Claims and Contingencies

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

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representatives engage in discussions to enable the company to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for such potential disallowed costs. Such provisions are reviewed periodically using the most recent information available. The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of ~~March 31,~~June 30, 2023, or its annual results of operations and/or cash flows.

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, 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 believed demonstrates the appropriateness of the assumptions used. On November 24, 2020, DCMA replied to the company’s response, disagreeing with our position and requesting additional input, which we provided on February 22, 2021. We have continued to exchange correspondence and engage with DCMA and DoD on this matter, including responding to requests for and providing additional information. As noted in Note 5 above, the company received from the ~~the U.S. Department of Justice (DOJ)~~DOJ a criminal subpoena on December 9, 2022 and a ~~civil investigative demand~~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 ~~this matter.~~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 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 ~~over~~through approximately the ~~next~~end of the decade. In the ~~first~~second quarter of 2023, we again reviewed our estimated cost to complete the LRIP phase of the B-21 program. Principally due to the company’s estimate of the impact macroeconomic factors may have on our cost to complete the LRIP options, as well as ongoing discussions with our suppliers and our customer, we continue to believe it is reasonably possible one or more of the LRIP options could be performed at a loss and the range of such loss across the five LRIP options is between $0 and $1.2 billion. As we

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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 ~~March 31,~~June 30, 2023.

Environmental Matters

The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S. government contracts as of ~~March 31,~~June 30, 2023 and December 31, 2022:


$ in millions	$ in millions	Accrued Costs(1)(2)		Reasonably Possible Future Costs in Excess of Accrued Costs(2)		Deferred Costs(3)		$ in millions	Accrued Costs(1)(2)		Reasonably Possible Future Costs in Excess of Accrued Costs(2)		Deferred Costs(3)
March 31, 2023		$	570	$	357	$	498
June 30, 2023								June 30, 2023	$	562	$	353	$	490
December 31, 2022	December 31, 2022	565		353		486		December 31, 2022	565		353		486

(1) As of ~~March 31,~~June 30, 2023, ~~$200~~$202 million is recorded in Other current liabilities and ~~$370~~$360 million is recorded in Other non-current liabilities.

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

(3) As of ~~March 31,~~June 30, 2023, $181 million is deferred in Prepaid expenses and other current assets and ~~$317~~$309 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.

Although management cannot predict whether (i) new information gained as our environmental remediation projects progress, (ii) changes in remediation standards or other requirements to which we are subject, or (iii) other changes in facts and circumstances will materially affect the estimated liability accrued, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of ~~March 31,~~June 30, 2023, or its annual results of operations and/or cash flows.

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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 ~~March 31,~~June 30, 2023, there were ~~$367~~$356 million of stand-by letters of credit and guarantees and $79 million of surety bonds outstanding.

Commercial Paper

The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to $2.5 billion. At ~~March 31,~~June 30, 2023, there were no$779 million of outstanding short-term commercial paper borrowings ~~outstanding.~~at a weighted-average interest rate of 5.73% that have original maturities of three months or less from the date of issuance. The outstanding balance of commercial paper borrowings is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.

Credit Facilities

The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of $2.5 billion (the “2022 Credit Agreement”) that matures in August 2027 and is intended to support the 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 ~~March 31,~~June 30, 2023, there were no borrowings outstanding under this ~~facility.~~facility; however, the amount available for borrowing was reduced by the $779 million of outstanding, short-term commercial paper borrowings described above.

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

At ~~March 31,~~June 30, 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 March 31				Three Months Ended June 30											Six Months Ended June 30
			Pension Benefits	OPB					Pension Benefits						OPB				Pension Benefits				OPB
$ in millions	$ in millions			2023			2022			2023		2022		$ 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			$	59		$	92		$	1	$	2	Service cost	$	59	$	92	$	1	$	2	$	118	$	184	$	2	$	4
Interest cost	Interest cost			392			284			17		12		Interest cost	392		284		16		12		784		568		33		24
Expected return on plan assets	Expected return on plan assets			(524)			(660)			(21)		(28)		Expected return on plan assets	(525)		(661)		(21)		(27)		(1,049)		(1,321)		(42)		(55)

Amortization of prior service (credit) cost														Amortization of prior service (credit) cost	—		—		—		(1)		—		—		—		(1)

Net periodic benefit cost (benefit)	Net periodic benefit cost (benefit)			$	(73)		$	(284)		$	(3)	$	(14)	Net periodic benefit cost (benefit)	$	(74)	$	(285)	$	(4)	$	(14)	$	(147)	$	(569)	$	(7)	$	(28)

Employer Contributions

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

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


		Three Months Ended March 31			Three Months Ended June 30						Six Months Ended June 30
$ in millions	$ in millions		2023			2022		$ in millions	2023		2022		2023		2022
Defined benefit pension plans	Defined benefit pension plans		$	29		$	26	Defined benefit pension plans	$	25	$	25	$	54	$	51
OPB plans	OPB plans		11			10		OPB plans	10		10		21		20
Defined contribution plans	Defined contribution plans		215			199		Defined contribution plans	146		122		361		321

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8. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS

Stock Awards

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


		Three Months Ended March 31					Six Months Ended June 30
in millions	in millions	2023		2022		in millions	2023		2022
RSRs granted	RSRs granted	0.1		0.1		RSRs granted	0.1		0.1
RPSRs granted	RPSRs granted	0.1		0.2		RPSRs granted	0.1		0.2
Grant date aggregate fair value	Grant date aggregate fair value	$	100	$	88	Grant date aggregate fair value	$	101	$	93

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

Cash Awards

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


		Three Months Ended March 31					Six Months Ended June 30
$ in millions	$ in millions	2023		2022		$ in millions	2023		2022
Minimum aggregate payout amount	Minimum aggregate payout amount	$	34	$	32	Minimum aggregate payout amount	$	34	$	32
Maximum aggregate payout amount	Maximum aggregate payout amount	191		182		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 period.

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9. SEGMENT INFORMATION

The following table presents sales and operating income by segment:


		Three Months Ended March 31			Three Months Ended June 30						Six Months Ended June 30
$ in millions	$ in millions		2023			2022		$ in millions	2023		2022		2023		2022
Sales	Sales							Sales
Aeronautics Systems	Aeronautics Systems		$	2,515		$	2,703	Aeronautics Systems	$	2,595	$	2,534	$	5,110	$	5,237
Defense Systems	Defense Systems		1,376			1,283		Defense Systems	1,420		1,294		2,796		2,577
Mission Systems	Mission Systems		2,563			2,497		Mission Systems	2,641		2,516		5,204		5,013
Space Systems	Space Systems		3,350			2,855		Space Systems	3,488		2,979		6,838		5,834
Intersegment eliminations	Intersegment eliminations		(503)			(541)		Intersegment eliminations	(568)		(522)		(1,071)		(1,063)
Total sales	Total sales		9,301			8,797		Total sales	9,576		8,801		18,877		17,598
Operating income	Operating income							Operating income
Aeronautics Systems	Aeronautics Systems		237			307		Aeronautics Systems	278		258		515		565
Defense Systems	Defense Systems		160			155		Defense Systems	166		168		326		323
Mission Systems	Mission Systems		360			385		Mission Systems	401		413		761		798
Space Systems	Space Systems		313			261		Space Systems	283		310		596		571
Intersegment eliminations	Intersegment eliminations		(68)			(71)		Intersegment eliminations	(76)		(76)		(144)		(147)
Total segment operating income	Total segment operating income		1,002			1,037		Total segment operating income	1,052		1,073		2,054		2,110
FAS/CAS operating adjustment	FAS/CAS operating adjustment		(21)			(46)		FAS/CAS operating adjustment	(21)		(51)		(42)		(97)
Unallocated corporate expense	Unallocated corporate expense		(34)			(94)		Unallocated corporate expense	(64)		(68)		(98)		(162)
Total operating income	Total operating income		$	947		$	897	Total operating income	$	967	$	954	$	1,914	$	1,851

FAS/CAS Operating Adjustment

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

Unallocated Corporate Expense

Unallocated corporate 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 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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Disaggregation of Revenue


Sales by Customer Type	Sales by Customer Type	Three Months Ended March 31				Sales by Customer Type	Three Months Ended June 30											Six Months Ended June 30
			2023			2022				2023						2022					2023				2022
$ in millions	$ in millions			$		%(3)		$			%(3)		$ in millions	$		%(3)			$		%(3)		$		%(3)		$		%(3)
Aeronautics Systems	Aeronautics Systems												Aeronautics Systems
U.S. government(1)	U.S. government(1)			$	2,108	84	%	$	2,292		85	%	U.S. government(1)	$	2,215	86	%		$	2,134	84	%	$	4,323	85	%	$	4,426	85	%
International(2)	International(2)			331		13	%	343			13	%	International(2)	308		12	%		328		13	%	639		12	%	671		13	%
Other customers	Other customers			11		—	%	3			—	%	Other customers	8		—	%		14		1	%	19		—	%	17		—	%
Intersegment sales	Intersegment sales			65		3	%	65			2	%	Intersegment sales	64		2	%		58		2	%	129		3	%	123		2	%
Aeronautics Systems sales	Aeronautics Systems sales			2,515		100	%	2,703			100	%	Aeronautics Systems sales	2,595		100	%		2,534		100	%	5,110		100	%	5,237		100	%
Defense Systems	Defense Systems												Defense Systems
U.S. government(1)	U.S. government(1)			803		59	%	775			60	%	U.S. government(1)	848		60	%		774		61	%	1,651		59	%	1,549		61	%
International(2)	International(2)			388		28	%	293			23	%	International(2)	357		25	%		328		25	%	745		27	%	621		24	%
Other customers	Other customers			16		1	%	16			1	%	Other customers	20		1	%		18		1	%	36		1	%	34		1	%
Intersegment sales	Intersegment sales			169		12	%	199			16	%	Intersegment sales	195		14	%		174		13	%	364		13	%	373		14	%
Defense Systems sales	Defense Systems sales			1,376		100	%	1,283			100	%	Defense Systems sales	1,420		100	%		1,294		100	%	2,796		100	%	2,577		100	%
Mission Systems	Mission Systems												Mission Systems
U.S. government(1)	U.S. government(1)			1,935		75	%	1,794			72	%	U.S. government(1)	1,877		71	%		1,802		72	%	3,812		73	%	3,596		72	%
International(2)	International(2)			376		15	%	433			17	%	International(2)	454		17	%		415		16	%	830		16	%	848		17	%
Other customers	Other customers			15		1	%	24			1	%	Other customers	27		1	%		40		2	%	42		1	%	64		1	%
Intersegment sales	Intersegment sales			237		9	%	246			10	%	Intersegment sales	283		11	%		259		10	%	520		10	%	505		10	%
Mission Systems sales	Mission Systems sales			2,563		100	%	2,497			100	%	Mission Systems sales	2,641		100	%		2,516		100	%	5,204		100	%	5,013		100	%
Space Systems	Space Systems												Space Systems
U.S. government(1)	U.S. government(1)			3,166		95	%	2,708			94	%	U.S. government(1)	3,314		95	%		2,798		94	%	6,480		95	%	5,506		94	%
International(2)	International(2)			71		2	%	72			3	%	International(2)	83		2	%		84		3	%	154		2	%	156		3	%
Other customers	Other customers			81		2	%	44			2	%	Other customers	65		2	%		66		2	%	146		2	%	110		2	%
Intersegment sales	Intersegment sales			32		1	%	31			1	%	Intersegment sales	26		1	%		31		1	%	58		1	%	62		1	%
Space Systems sales	Space Systems sales			3,350		100	%	2,855			100	%	Space Systems sales	3,488		100	%		2,979		100	%	6,838		100	%	5,834		100	%
Total	Total												Total
U.S. government(1)	U.S. government(1)			8,012		86	%	7,569			86	%	U.S. government(1)	8,254		86	%		7,508		85	%	16,266		86	%	15,077		86	%
International(2)	International(2)			1,166		13	%	1,141			13	%	International(2)	1,202		13	%		1,155		13	%	2,368		13	%	2,296		13	%
Other customers	Other customers			123		1	%	87			1	%	Other customers	120		1	%		138		2	%	243		1	%	225		1	%
Total Sales	Total Sales			$	9,301	100	%	$	8,797		100	%	Total Sales	$	9,576	100	%		$	8,801	100	%	$	18,877	100	%	$	17,598	100	%

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

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

(3) Percentages calculated based on total segment sales.

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Sales by Contract Type Three Months Ended March 31
2023 2022
$ in millions $
%(1)
$
%(1)
Aeronautics Systems
Cost-type $ 1,231 50 % $ 1,276 48 %
Fixed-price 1,219 50 % 1,362 52 %
Intersegment sales 65 65
Aeronautics Systems sales 2,515 2,703
Defense Systems
Cost-type 423 35 % 336 31 %
Fixed-price 784 65 % 748 69 %
Intersegment sales 169 199
Defense Systems sales 1,376 1,283
Mission Systems
Cost-type 961 41 % 835 37 %
Fixed-price 1,365 59 % 1,416 63 %
Intersegment sales 237 246
Mission Systems sales 2,563 2,497
Space Systems
Cost-type 2,446 74 % 1,983 70 %
Fixed-price 872 26 % 841 30 %
Intersegment sales 32 31
Space Systems sales 3,350 2,855
Total
Cost-type 5,061 54 % 4,430 50 %
Fixed-price 4,240 46 % 4,367 50 %
Total Sales $ 9,301 $ 8,797

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

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Sales by Geographic Region Three Months Ended March 31
2023 2022
$ in millions $
%(2)
$
%(2)
Aeronautics Systems
United States $ 2,119 87 % $ 2,295 87 %
Asia/Pacific 147 6 % 190 7 %
Europe 174 7 % 137 5 %
All other(1)
10 — % 16 1 %
Intersegment sales 65 65
Aeronautics Systems sales 2,515 2,703
Defense Systems
United States 819 67 % 791 73 %
Asia/Pacific 117 10 % 105 10 %
Europe 128 11 % 101 9 %
All other(1)
143 12 % 87 8 %
Intersegment sales 169 199
Defense Systems sales 1,376 1,283
Mission Systems
United States 1,950 83 % 1,818 81 %
Asia/Pacific 92 4 % 139 6 %
Europe 200 9 % 225 10 %
All other(1)
84 4 % 69 3 %
Intersegment sales 237 246
Mission Systems sales 2,563 2,497
Space Systems
United States 3,247 98 % 2,752 98 %
Asia/Pacific 20 1 % 29 1 %
Europe 45 1 % 40 1 %
All other(1)
6 — % 3 — %
Intersegment sales 32 31
Space Systems sales 3,350 2,855
Total
United States 8,135 87 % 7,656 87 %
Asia/Pacific 376 4 % 463 5 %
Europe 547 6 % 503 6 %
All other(1)
243 3 % 175 2 %
Total Sales $ 9,301 $ 8,797


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

(1)Percentages calculated based on external customer sales.

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Sales by Geographic Region	Three Months Ended June 30								Six Months Ended June 30
	2023				2022				2023				2022
$ in millions	$		%(2)		$		%(2)		$		%(2)		$		%(2)
Aeronautics Systems
United States	$	2,223	88	%	$	2,148	87	%	$	4,342	87	%	$	4,443	86	%
Asia/Pacific	138		5	%	205		8	%	285		6	%	395		8	%
Europe	165		7	%	113		5	%	339		7	%	250		5	%
All other(1)	5		—	%	10		—	%	15		—	%	26		1	%
Intersegment sales	64				58				129				123
Aeronautics Systems sales	2,595				2,534				5,110				5,237
Defense Systems
United States	868		71	%	792		71	%	1,687		70	%	1,583		72	%
Asia/Pacific	114		9	%	123		11	%	231		9	%	228		10	%
Europe	132		11	%	95		8	%	260		11	%	196		9	%
All other(1)	111		9	%	110		10	%	254		10	%	197		9	%
Intersegment sales	195				174				364				373
Defense Systems sales	1,420				1,294				2,796				2,577
Mission Systems
United States	1,904		81	%	1,842		81	%	3,854		82	%	3,660		81	%
Asia/Pacific	120		5	%	137		6	%	212		5	%	276		6	%
Europe	266		11	%	219		10	%	466		10	%	444		10	%
All other(1)	68		3	%	59		3	%	152		3	%	128		3	%
Intersegment sales	283				259				520				505
Mission Systems sales	2,641				2,516				5,204				5,013
Space Systems
United States	3,379		97	%	2,864		97	%	6,626		98	%	5,616		97	%
Asia/Pacific	25		1	%	24		1	%	45		1	%	53		1	%
Europe	38		1	%	56		2	%	83		1	%	96		2	%
All other(1)	20		1	%	4		—	%	26		—	%	7		—	%
Intersegment sales	26				31				58				62
Space Systems sales	3,488				2,979				6,838				5,834
Total
United States	8,374		88	%	7,646		87	%	16,509		88	%	15,302		87	%
Asia/Pacific	397		4	%	489		6	%	773		4	%	952		5	%
Europe	601		6	%	483		5	%	1,148		6	%	986		6	%
All other(1)	204		2	%	183		2	%	447		2	%	358		2	%
Total Sales	$	9,576			$	8,801			$	18,877			$	17,598

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

(2)Percentages calculated based on external customer sales.

~~10. SUBSEQUENT EVENT~~

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

~~-16-~~-17-

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 ~~March 31,~~June 30, 2023, and the related condensed consolidated statements of earnings and comprehensive income ~~cash flows,~~ and changes in shareholders’ equity for the three-month and six-month periods ended ~~March 31,~~June 30, 2023 and 2022, and of cash flows for the six-month periods ended June 30, 2023 and 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, 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 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, 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
			~~April~~July 26, 2023

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

OVERVIEW

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

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

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

Global Security Environment

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

The conflict in Ukraine has increased global tensions and instability, highlighted threats and increased global demand, as well as further disrupted global supply chains and added costs. We have experienced a modest increase in demand for certain of our goods and services directly and indirectly related to the conflict in the Ukraine. We also have experienced a slight disruption to some of our programs and supply chain, including unanticipated cost growth, as a result of the conflict in Ukraine and economic sanctions. However, we do not have sizable business dealings in Russia or Ukraine, and do not anticipate significant adverse impacts directly from the ongoing conflict.

More broadly, the conflict in Ukraine and threats elsewhere have heightened tensions and highlighted security requirements globally, especially in Europe and the Pacific region, as well as the U.S. We have started to see, and expect to continue to see, increased demand for defense products and services from allies and partner nations, particularly in those areas. We are actively exploring both opportunities and risks.

Global Health Environment

Since at least March 2020, when it was first characterized as a global pandemic, COVID-19 has dramatically impacted ~~and continues to impact~~ the global health and economic environments, including millions of confirmed cases and deaths, business slowdowns or shutdowns, labor shortfalls, supply chain challenges, regulatory challenges, inflationary pressures and market volatility. We discussed in some detail in our Annual Reports on Form 10-K for the fiscal years ended December 31, 2020, 2021, and 2022, and subsequent SEC filings, the pandemic, its impacts and risks, and actions taken up to the time of each filing. In this Form 10-Q, we provide a further update.

In ~~2022,~~May 2023, the World Health Organization declared an end to the global public health emergency for the COVID-19 pandemic. For the first half of 2023, direct impacts of the COVID-19 pandemic on our business ~~generally declined, and they have~~ remained ~~limited in the first quarter of 2023.~~limited. While we cannot predict the future course of ~~the pandemic~~COVID-19 or its consequences, we are not currently assuming significant additional direct COVID-19 related impacts on our business.

The company continues to work to monitor and address the ~~pandemic,~~global health environment, including its impact on our company, our employees, our customers, our suppliers and our communities. Our goals have been, and continue to be, to keep our employees safe, to lessen the potential adverse impacts, both health and economic, and to continue to position the company for long-term success. Like the communities in which we operate, our actions have varied, and ~~will continue to vary, depending on the spread of COVID-19 and other illnesses, applicable government requirements, and the needs of our stakeholders.~~

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

Global Economic Environment

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

We continue to work hard to mitigate some of the challenges caused by the current macroeconomic environment on our business, including by taking steps to support our suppliers and small businesses and enhancing our workforce through extensive hiring, development and retention efforts. However, the broader macroeconomic environment, including inflationary pressures and supply chain challenges, continued adversely to affect the company’s results for the quarter ended ~~March 31,~~June 30, 2023. We cannot clearly predict how long these macroeconomic challenges will continue, how they will change over time, or what additional resources will be available, but we expect to see this challenging macroeconomic environment continue adversely to impact the global economy, our customers, our industry and our company in 2023.

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

U.S. Political, Budget and Regulatory Environment

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

On December 29, 2022, the President signed an Omnibus appropriations act for FY 2023 that provided $858 billion for national defense programs, approximately $45 billion more than the Administration initially requested for FY 2023 and approximately $76 billion or 10 percent higher than what was appropriated in FY 2022. The Pentagon’s portion of the overall national defense budget for FY 2023 is $817 billion. It includes up to $1 billion for extraordinary relief in FY 2023.

On March 9, 2023, the President proposed his budget for FY 2024 with $886 billion for national defense programs, which included $842 billion for the DoD, an increase of 3 percent, or $25 billion, above the FY 2023 enacted levels. The request does not include supplemental defense spending associated with the conflict in Ukraine.

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

It is difficult to predict the specific course of future defense budgets. Current and future requirements related to the conflict in Ukraine, threats in the Pacific regions and other security priorities, as well as global inflation, the national debt, the costs of the pandemic and other domestic priorities, among other things, in the U.S. and globally, will continue to impact our customers’ budgets, spending and priorities, and our industry. Current tensions within Congress and the wider U.S. political environment may also impact defense budgets, issues related to the national debt, and government spending more broadly.

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

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

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

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ceiling, budgetary priorities and the spending caps imposed by the FRA will continue to be a subject of considerable ~~debate. If the existing debt ceiling is not raised, we may be required to continue to perform for some period of time~~debate, with a potentially significant impact on certain of our U.S. Government contracts even if the U.S. Government is unable to make timely payments. An extended debt ceiling breach could negatively affect the availability and timing of funding for our programs and the company.

In July 2023, the House of Representatives and the Senate passed different versions of a National Defense Authorization Act. We expect this proposed legislation, and its potential impact on defense appropriations, including the ~~timely payment~~duration of ~~our billings, and could delay or otherwise impact purchasing decisions and/or program execution by~~a possible continuing resolution, will also be the ~~U.S. Government. We expect statutory action will be needed in 2023 to increase or suspend the debt ceiling.~~subject of considerable debate with potentially significant impacts.

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

The political environment, federal budget, debt ceiling and regulatory environment are expected to continue to be the subject of considerable debate, especially in light of the ongoing conflict in Ukraine and heightened global tensions, the inflationary environment and political tensions. The results of those debates could have material impacts on defense spending broadly and the company’s programs in particular. We anticipate that the broader macroeconomic environment, with ongoing inflationary pressures, labor challenges, and supply chain disruption, among other considerations, will continue to play a significant role in the outcome of these debates and, in turn, on our industry and company.

CONSOLIDATED OPERATING RESULTS

Selected financial highlights are presented in the table below:


		Three Months Ended March 31				%			Three Months Ended June 30							%			Six Months Ended June 30					%
$ in millions, except per share amounts	$ in millions, except per share amounts		2023			2022				Change		$ in millions, except per share amounts	2023			2022			Change		2023			2022			Change
Sales	Sales		$	9,301		$	8,797			6	%	Sales	$	9,576		$	8,801		9	%	$	18,877		$	17,598		7	%
Operating costs and expenses	Operating costs and expenses		8,354			7,900				6	%	Operating costs and expenses	8,609			7,847			10	%	16,963			15,747			8	%
Operating costs and expenses as a % of sales	Operating costs and expenses as a % of sales		89.8		%	89.8		%				Operating costs and expenses as a % of sales	89.9		%	89.2		%			89.9		%	89.5		%

Operating income	Operating income		947			897				6	%	Operating income	967			954			1	%	1,914			1,851			3	%
Operating margin rate	Operating margin rate		10.2		%	10.2		%				Operating margin rate	10.1		%	10.8		%			10.1		%	10.5		%
Federal and foreign income tax expense	Federal and foreign income tax expense		156			189				(17)	%	Federal and foreign income tax expense	175			204			(14)	%	331			393			(16)	%
Effective income tax rate	Effective income tax rate		15.6		%	16.5		%				Effective income tax rate	17.7		%	17.7		%			16.7		%	17.1		%
Net earnings	Net earnings		842			955				(12)	%	Net earnings	812			946			(14)	%	1,654			1,901			(13)	%
Diluted earnings per share	Diluted earnings per share		$	5.50		$	6.10			(10)	%	Diluted earnings per share	$	5.34		$	6.06		(12)	%	$	10.83		$	12.16		(11)	%

Sales

~~First~~Current Quarter

Second quarter 2023 sales increased ~~$504~~$775 million, or 69 percent, due to higher sales at all four sectors. Second quarter 2023 sales reflect continued strong demand and improving labor availability and supplier deliveries.

Year to Date

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Year to date 2023 sales increased $1.3 billion, or 7 percent, due to higher sales at Space Systems, Defense Systems and Mission Systems, partially offset by lower sales at Aeronautics Systems. ~~First quarter 2023 sales reflect continued strong demand.~~

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

Operating Income and Margin Rate

~~First~~Current Quarter

Second quarter 2023 operating income increased ~~$50~~$13 million, or 61 percent, due to a reduction in the FAS/CAS operating adjustment, partially offset by lower segment operating income. Second quarter 2023 operating margin rate declined to 10.1 percent, due to a lower segment operating margin rate, partially offset by the lower FAS/CAS operating adjustment.

Second quarter 2023 general and administrative (G&A) costs as a percentage of sales of 11.2 percent was comparable with the prior year period and reflects continued investments for future business opportunities.

Year to Date

Year to date 2023 operating income increased $63 million, or 3 percent, due to lower unallocated corporate expense and a reduction in the FAS/CAS operating adjustment, partially offset by lower segment operating income. ~~First quarter~~Year to date 2023 operating margin rate ~~of 10.2~~declined to 10.1 percent ~~was comparable~~due to a lower segment operating margin rate, partially offset by the ~~prior year period.~~lower unallocated corporate expense and FAS/CAS operating adjustment.

~~First quarter~~Year to date 2023 G&A costs as a percentage of sales of 11.2 percent was comparable with the prior year period and reflects continued investments for future business opportunities.

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

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Federal and Foreign Income Taxes

Current Quarter

The ~~first~~second quarter 2023 ETR of 17.7 percent was comparable with the prior year period and reflects higher interest expense on unrecognized tax benefits, offset by favorable returns on tax-exempt marketable securities. See Note 3 to the financial statements for additional information.

Year to Date

The year to date2023 ETR decreased to ~~15.6~~16.7 percent from ~~16.5~~17.1 percent in the prior year period principally due to higher current year ETR benefits associated with research credits and FDII deductions as well as favorable returns on tax-exempt marketable securities, partially offset by higher interest expense on unrecognized tax benefits. See Note 3 to the financial statements for additional information.

Net Earnings

~~First~~Current Quarter

Second quarter 2023 net earnings decreased ~~$113~~$134 million, or 1214 percent, primarily due to a $244 million reduction in the non-operating FAS pension benefit, partially offset by ~~higher operating income,~~ a ~~$34~~$51 million increase in returns on marketable securities related to our non-qualified benefit plans, higher operating income, higher interest income on short-term investments and lower income tax expense.

Year to Date

Year to date 2023 net earnings decreased $247 million, or 13 percent, primarily due to a $488 million reduction in the non-operating FAS pension benefit, partially offset by an $84 million increase in returns on marketable securities related to our non-qualified benefit plans, higher operating income, lower ~~effective~~income tax ~~rate.~~expense and higher interest income on short-term investments.

Diluted Earnings Per Share

~~First~~Current Quarter

Second quarter 2023 diluted earnings per share decreased 1012 percent, reflecting ~~lower~~a 14 percent decrease in net earnings and a 2 percent reduction in weighted-average diluted shares outstanding.

Year to Date

Year to date 2023 diluted earnings per share decreased 11 percent, reflecting a 13 percent decrease in net earnings and a 2 percent reduction in weighted-average diluted shares outstanding.

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SEGMENT OPERATING RESULTS

Basis of Presentation

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

Aeronautics Systems

Defense Systems

Mission Systems

Space Systems

Autonomous Systems

Battle Management & Missile Systems

Airborne Multifunction Sensors

Launch & Strategic Missiles

Manned Aircraft

Mission Readiness

Maritime/Land Systems & Sensors

Space

Navigation, Targeting & Survivability

Networked Information Solutions

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

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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 March 31				%			Three Months Ended June 30							%			Six Months Ended June 30					%
$ in millions	$ in millions		2023			2022				Change		$ in millions	2023			2022			Change		2023			2022			Change

Operating income	Operating income		$	947		$	897			6	%	Operating income	$	967		$	954		1	%	$	1,914		$	1,851		3	%
Operating margin rate	Operating margin rate		10.2		%	10.2		%				Operating margin rate	10.1		%	10.8		%			10.1		%	10.5		%
Reconciliation to segment operating income:	Reconciliation to segment operating income:											Reconciliation to segment operating income:
CAS pension expense	CAS pension expense		(38)			(46)				(17)	%	CAS pension expense	(38)			(41)			(7)	%	(76)			(87)			(13)	%
FAS pension service expense	FAS pension service expense		59			92				(36)	%	FAS pension service expense	59			92			(36)	%	118			184			(36)	%
FAS/CAS operating adjustment	FAS/CAS operating adjustment		21			46				(54)	%	FAS/CAS operating adjustment	21			51			(59)	%	42			97			(57)	%

Intangible asset amortization and PP&E step-up depreciation	Intangible asset amortization and PP&E step-up depreciation		30			60				(50)	%	Intangible asset amortization and PP&E step-up depreciation	31			61			(49)	%	61			121			(50)	%

Other unallocated corporate expense	Other unallocated corporate expense		4			34				(88)	%	Other unallocated corporate expense	33			7			371	%	37			41			(10)	%
Unallocated corporate expense	Unallocated corporate expense		34			94				(64)	%	Unallocated corporate expense	64			68			(6)	%	98			162			(40)	%
Segment operating income	Segment operating income		$	1,002		$	1,037			(3)	%	Segment operating income	$	1,052		$	1,073		(2)	%	$	2,054		$	2,110		(3)	%
Segment operating margin rate	Segment operating margin rate		10.8		%	11.8		%				Segment operating margin rate	11.0		%	12.2		%			10.9		%	12.0		%

~~First~~Current Quarter

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Second quarter 2023 segment operating income decreased ~~$35~~$21 million, or 2 percent. Higher sales were more than offset by a lower segment operating margin rate, which reflects a $36 million unfavorable EAC adjustment on the Habitation and Logistics Outpost (HALO) program at Space Systems. In addition, the prior year period includes a $38 million gain on a property sale at Aeronautics Systems and a $33 million benefit recognized in connection with a contract-related legal matter at Mission Systems.

Year to Date

Year to date 2023 segment operating income decreased $56 million, or 3 ~~percent, and includes~~percent. Higher sales were more than offset by a lower segment operating margin rate, which reflects an approximately $50 million reduction related to higher projected CAS pension costs on the company’s fixed price ~~contracts. Segment operating margin rate decreased to 10.8 percent from 11.8 percent and reflects lower operating margin rates~~contracts, as well as the $36 million unfavorable EAC adjustment on the HALO program described above. In addition, the prior year period includes a $67 million favorable EAC adjustment on the EMD phase of the B-21 program at Aeronautics Systems, ~~Mission Systems~~as well as the $38 million gain on a property sale and ~~Defense Systems, partially offset by~~$33 million benefit recognized in connection with a ~~higher operating margin rate at Space Systems.~~contract-related legal matter described above.

FAS/CAS Operating Adjustment

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

Unallocated Corporate Expense ~~(Income)~~

Current Quarter

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

Year to Date

The decrease in year to date 2023 unallocated corporate expense is primarily due to lower intangible asset amortization and PP&E step-up depreciation as well as a reduction in unallowable corporate costs.

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

Three Months Ended March 31
$ in millions 2023 2022
Favorable EAC adjustments $ 326 $ 357
Unfavorable EAC adjustments (280) (184)
Net EAC adjustments $ 46 $ 173

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

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


		Three Months Ended March 31			Three Months Ended June 30						Six Months Ended June 30
$ in millions	$ in millions		2023			2022		$ in millions	2023		2022		2023		2022
Aeronautics Systems	Aeronautics Systems		$	(6)		$	103	Aeronautics Systems	$	42	$	(9)	$	36	$	94
Defense Systems	Defense Systems		27			25		Defense Systems	20		50		47		75
Mission Systems	Mission Systems		57			57		Mission Systems	38		29		95		86
Space Systems	Space Systems		(32)			(8)		Space Systems	(22)		31		(54)		23
Eliminations	Eliminations		—			(4)		Eliminations	(2)		(9)		(2)		(13)
Net EAC adjustments	Net EAC adjustments		$	46		$	173	Net EAC adjustments	$	76	$	92	$	122	$	265

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

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AERONAUTICS SYSTEMS	AERONAUTICS SYSTEMS	Three Months Ended March 31				%			AERONAUTICS SYSTEMS	Three Months Ended June 30							%			Six Months Ended June 30					%
$ in millions	$ in millions		2023			2022					Change		$ in millions	2023			2022			Change		2023			2022			Change
Sales	Sales		$	2,515		$	2,703				(7)	%	Sales	$	2,595		$	2,534		2	%	$	5,110		$	5,237		(2)	%
Operating income	Operating income		237			307					(23)	%	Operating income	278			258			8	%	515			565			(9)	%
Operating margin rate	Operating margin rate		9.4		%	11.4		%					Operating margin rate	10.7		%	10.2		%			10.1		%	10.8		%

Sales

~~First~~Current Quarter

Second quarter 2023 sales ~~decreased $188~~increased $61 million, or 72 percent, due to higher volume in both Manned Aircraft and Autonomous Systems. Higher sales on restricted programs were partially offset by lower volume on E-2 and F/A-18, as well as the Joint Surveillance and Target Attack Radar System (JSTARS) program as it nears completion.

Year to Date

Year to date 2023 sales decreased $127 million, or 2 percent, due to lower volume in both Manned Aircraft and Autonomous Systems, including a $146 million decrease on the E-2 ~~F-35, F/A-18~~program and ~~Global Hawk, as well as~~ lower volume on ~~the Joint Surveillance~~F/A-18, JSTARS and ~~Target Attack Radar System (JSTARS) program as it nears completion.~~Global Hawk. These decreases were partially offset by higher volume on restricted programs.

Operating Income

~~First~~Current Quarter

Second quarter 2023 operating income ~~decreased $70~~increased $20 million, or 238 percent, due to higher sales and a higher operating margin rate. Operating margin rate increased to 10.7 percent from 10.2 percent primarily due to higher net favorable EAC adjustments on restricted work, partially offset by a $38 million gain on a property sale in the prior year.

Year to Date

Year to date 2023 operating income decreased $50 million, or 9 percent, due to a lower operating margin rate and lower sales. Operating margin rate decreased to ~~9.4~~10.1 percent from ~~11.4~~10.8 percent primarily due to lower net EAC ~~adjustments. The prior year period includes~~adjustments, largely driven by a $67 million favorable EAC adjustment on the ~~engineering, manufacturing and development (EMD)~~EMD phase of the B-21 ~~program.~~program in the prior year, as well as a $38 million gain on a property sale in the prior year.


DEFENSE SYSTEMS	DEFENSE SYSTEMS	Three Months Ended March 31				%			DEFENSE SYSTEMS	Three Months Ended June 30							%			Six Months Ended June 30					%
$ in millions	$ in millions		2023			2022					Change		$ in millions	2023			2022			Change		2023			2022			Change
Sales	Sales		$	1,376		$	1,283				7	%	Sales	$	1,420		$	1,294		10	%	$	2,796		$	2,577		8	%
Operating income	Operating income		160			155					3	%	Operating income	166			168			(1)	%	326			323			1	%
Operating margin rate	Operating margin rate		11.6		%	12.1		%					Operating margin rate	11.7		%	13.0		%			11.7		%	12.5		%

Sales

~~First~~Current Quarter

Second quarter 2023 sales increased ~~$93~~$126 million, or 710 percent, due to higher volume in both business areas. Battle Management & Missile Systems sales increased primarily due to higher volume on ammunition programs and the Integrated Air and Missile Defense Battle Command System (IBCS), Hypersonic Attack Cruise Missile (HACM) and advanced fuze programs. Mission Readiness sales increased principally due to higher volume on the NATO Alliance Ground Surveillance In-Service Support (NATO AGS ISS) program and ~~ramp-up~~an international training program.

Year to Date

Year to date 2023 sales increased $219 million, or 8 percent, due to higher volume in both business areas. Battle Management & Missile Systems sales increased primarily due to higher volume on ~~the 120mm Tank Training~~ ammunition, ~~program.~~IBCS, advanced fuze and HACM programs. Mission Readiness sales increased primarily due to higher volume on an international training ~~program, partially offset by wind-down of the JSTARS~~ program.

Operating Income

~~First~~Current Quarter

Second quarter 2023 operating income ~~increased $5~~decreased $2 million, or 31 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 11.7 percent from 13.0 percent primarily due to lower net EAC adjustments.

Year to Date

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Year to date 2023 operating income increased $3 million, or 1 percent, due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to ~~11.6~~11.7 percent from ~~12.1~~12.5 percent primarily due to lower net EAC ~~adjustments at Battle Management & Missile Systems, partially offset by improved performance at Mission Readiness.~~adjustments.

MISSION SYSTEMS Three Months Ended March 31 %
$ in millions 2023 2022 Change
Sales $ 2,563 $ 2,497 3 %
Operating income 360 385 (6) %
Operating margin rate 14.0 % 15.4 %

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

Sales

~~First~~Current Quarter

Second quarter 2023 sales increased ~~$66~~$125 million, or 35 percent, ~~and reflects higher volume in all four business areas, including~~primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on marine systems programs and the Surface Electronic Warfare Improvement Program (SEWIP)~~, marine systems programs and infrared countermeasure programs.~~. These increases were partially offset by lower volume on the Ground/Air Task Oriented Radar (G/ATOR) ~~program~~program.

Year to Date

Year to date 2023 sales increased $191 million, or 4 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, as well as higher volume on SEWIP and ~~airborne radar~~marine systems programs, ~~including F-35.~~partially offset by lower volume on G/ATOR.

Operating Income

~~First~~Current Quarter

Second quarter 2023 operating income decreased ~~$25~~$12 million, or 63 percent, due to a lower operating margin rate, ~~partially~~which more than offset by higher sales. Operating margin rate decreased to ~~14.0~~15.2 percent from ~~15.4~~16.4 percent ~~principally~~primarily due to a prior year $33 million benefit recognized in connection with a contract-related legal matter, as well as changes in contract mix toward more cost-type content.

Year to Date

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

SPACE SYSTEMS Three Months Ended March 31 %
$ in millions 2023 2022 Change
Sales $ 3,350 $ 2,855 17 %
Operating income 313 261 20 %
Operating margin rate 9.3 % 9.1 %

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

Sales

~~First~~Current Quarter

Second quarter 2023 sales increased ~~$495~~$509 million, or 17 percent, due to higher volume in both business areas. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, including a ~~$161~~$156 million increase on the Ground Based Strategic Deterrent (GBSD) program and higher volume on the Next Generation Interceptor (NGI) and Ground-based Midcourse Defense Weapon Systems (GWS) programs. Sales in the Space business area increased primarily due to higher volume on restricted programs, the Next-Generation Overhead Persistent Infrared Polar (NextGen Polar) program and the Space Development Agency (SDA) Tranche 1 Tracking Layer program. These increases were partially offset by lower volume for Commercial Resupply Services (CRS) missions.

Year to Date

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

Operating Income

~~First~~Current Quarter

Second quarter 2023 operating income ~~increased $52~~decreased $27 million, or 209 percent, due to a lower operating margin rate, which more than offset higher sales. Operating margin rate decreased to 8.1 percent from 10.4 percent primarily due to lower net EAC adjustments, including a $36 million unfavorable EAC adjustment on the HALO program largely due to cost growth stemming from evolving Lunar Gateway architecture and mission requirements combined with macroeconomic challenges, and a $15 million write-down of commercial inventory.

Year to Date

Year to date 2023 operating income increased $25 million, or 4 percent, due to higher sales, ~~and~~partially offset by a ~~higher~~lower operating margin rate. Operating margin rate ~~increased~~decreased to ~~9.3~~8.7 percent from ~~9.1~~9.8 percent primarily due to lower net EAC adjustments, partially offset by a ~~higher operating margin rate at Launch & Strategic Missiles, including~~first quarter 2023 benefit recognized on the sale of a license to a ~~customer, partially offset by lower net EAC adjustments in the Space business area.~~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 March 31						Three Months Ended June 30											Six Months Ended June 30
$ in millions	$ in millions		2023	2022					$ in millions		2023				2022						2023		2022
Segment Information:	Segment Information:			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			$	1,907	$	1,740		$	2,045		$	1,804	Product	$	1,925	$	1,726	$	1,916	$	1,733	$	3,832	$	3,466	$	3,961	$	3,537
Service	Service			543		480			593			533		Service	606		533		560		497		1,149		1,013		1,153		1,030
Intersegment eliminations	Intersegment eliminations			65		58			65			59		Intersegment eliminations	64		58		58		46		129		116		123		105
Total Aeronautics Systems	Total Aeronautics Systems			2,515		2,278			2,703			2,396		Total Aeronautics Systems	2,595		2,317		2,534		2,276		5,110		4,595		5,237		4,672
Defense Systems	Defense Systems													Defense Systems
Product	Product			678		598			610			527		Product	691		602		598		515		1,369		1,200		1,208		1,042
Service	Service			529		468			474			425		Service	534		480		522		457		1,063		948		996		882
Intersegment eliminations	Intersegment eliminations			169		150			199			176		Intersegment eliminations	195		172		174		154		364		322		373		330
Total Defense Systems	Total Defense Systems			1,376		1,216			1,283			1,128		Total Defense Systems	1,420		1,254		1,294		1,126		2,796		2,470		2,577		2,254
Mission Systems	Mission Systems													Mission Systems
Product	Product			1,815		1,563			1,762			1,509		Product	1,834		1,573		1,748		1,473		3,649		3,136		3,510		2,982
Service	Service			511		441			489			396		Service	524		429		509		412		1,035		870		998		808
Intersegment eliminations	Intersegment eliminations			237		199			246			207		Intersegment eliminations	283		238		259		218		520		437		505		425
Total Mission Systems	Total Mission Systems			2,563		2,203			2,497			2,112		Total Mission Systems	2,641		2,240		2,516		2,103		5,204		4,443		5,013		4,215
Space Systems	Space Systems													Space Systems
Product	Product			2,871		2,609			2,424			2,195		Product	2,991		2,770		2,517		2,250		5,862		5,379		4,941		4,445
Service	Service			447		400			400			371		Service	471		411		431		391		918		811		831		762
Intersegment eliminations	Intersegment eliminations			32		28			31			28		Intersegment eliminations	26		24		31		28		58		52		62		56
Total Space Systems	Total Space Systems			3,350		3,037			2,855			2,594		Total Space Systems	3,488		3,205		2,979		2,669		6,838		6,242		5,834		5,263
Segment Totals	Segment Totals													Segment Totals
Total Product	Total Product			$	7,271	$	6,510		$	6,841		$	6,035	Total Product	$	7,441	$	6,671	$	6,779	$	5,971	$	14,712	$	13,181	$	13,620	$	12,006
Total Service	Total Service			2,030		1,789			1,956			1,725		Total Service	2,135		1,853		2,022		1,757		4,165		3,642		3,978		3,482
Total Segment(1)	Total Segment(1)			$	9,301	$	8,299		$	8,797		$	7,760	Total Segment(1)	$	9,576	$	8,524	$	8,801	$	7,728	$	18,877	$	16,823	$	17,598	$	15,488

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

Product Sales and Costs

Current Quarter

Second quarter 2023 product sales increased $662 million, or 10 percent, primarily due to an increase in product sales at Space Systems, Defense Systems and Mission Systems. The increase at Space Systems was principally due to ramp-up on development programs, including GBSD and NGI, as well as higher volume on the SDA Tranche 1 Tracking Layer program. The increase at Defense Systems was primarily due to higher volume on ammunition programs, IBCS, HACM and advanced fuze programs. The increase at Mission Systems was primarily driven by higher volume on restricted programs.

Second quarter 2023 product costs increased $700 million, or 12 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Space Systems production programs, including the $36 million unfavorable EAC adjustment on the HALO program described above.

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~~Product Sales and Costs~~Year to Date

~~First quarter~~Year to date 2023 product sales increased ~~$430 million,~~$1.1 billion, or 68 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 higher volume on restricted programs, GWS, NextGen Polar and the SDA Tranche 1 Tracking Layer program. ~~The decrease at Aeronautics Systems was driven by lower volume on the E-2, F-35, and Global Hawk programs.~~

~~First quarter~~Year to date 2023 product costs increased ~~$475 million,~~$1.2 billion, or 810 percent, consistent with the higher product sales described above and reflect a lower operating margin rate principally due to lower net EAC adjustments on Space Systems and Aeronautics Systems production programs.

Service Sales and Costs

~~First~~Current Quarter

Second quarter 2023 service sales increased ~~$74~~$113 million, or 46 percent, primarily due to an increase in service sales at ~~Defense~~Aeronautics Systems and Space ~~Systems, partially offset by a decrease in service sales at Aeronautics~~ Systems. The increase at ~~Defense~~Aeronautics Systems was principally due to higher sales on restricted programs, partially offset by lower volume on the JSTARS program as it nears completion. The increase at Space Systems was primarily driven by higher volume on restricted programs.

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

Year to Date

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

~~First quarter~~Year to date 2023 service costs increased ~~$64~~$160 million, or 45 percent, consistent with the higher service sales described above.

BACKLOG

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


		March 31, 2023						December 31, 2022					June 30, 2023						December 31, 2022
$ in millions	$ in millions	Funded		Unfunded		Total Backlog		Total Backlog		% Change in 2023		$ in millions	Funded		Unfunded		Total Backlog		Total Backlog		% Change in 2023
Aeronautics Systems	Aeronautics Systems	$	9,904	$	8,658	$	18,562	$	19,397	(4)	%	Aeronautics Systems	$	9,398	$	9,145	$	18,543	$	19,397	(4)	%
Defense Systems	Defense Systems	5,933		1,431		7,364		7,515		(2)	%	Defense Systems	5,725		1,445		7,170		7,515		(5)	%
Mission Systems	Mission Systems	11,157		3,440		14,597		13,875		5	%	Mission Systems	11,517		3,270		14,787		13,875		7	%
Space Systems	Space Systems	12,302		24,648		36,950		37,956		(3)	%	Space Systems	11,256		27,049		38,305		37,956		1	%
Total backlog	Total backlog	$	39,296	$	38,177	$	77,473	$	78,743	(2)	%	Total backlog	$	37,896	$	40,909	$	78,805	$	78,743	—	%

New Awards

~~First~~Second quarter and year to date 2023 net awards totaled ~~$8.0~~$10.9 billion and $18.9 billion, respectively, and backlog totaled ~~$77.5~~$78.8 billion. Significant ~~first~~second quarter new awards include ~~$3.2~~$5.4 billion for restricted programs (primarily at ~~Mission~~Space Systems, Aeronautics Systems and ~~Space~~Mission Systems), $0.6 billion for F-35 (primarily at Aeronautics Systems and Mission Systems), $0.3 billion for ~~ammunition programs at~~the Missile Defense ~~Systems,~~Agency's Ballistic Missile Defense System Overhead Persistent Infrared Architecture (BOA) and $0.3 billion for ~~the Multi-Role Electronically Scanned Array (MESA) program and $0.2 billion for SEWIP.~~Virginia-Class submarines.

LIQUIDITY AND CAPITAL RESOURCES

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

At ~~March 31,~~June 30, 2023, we had ~~$2.5~~$3.4 billion in cash and cash equivalents. We expect cash and cash equivalents and cash generated from operating activities, supplemented by borrowings under credit facilities, commercial paper and/or in the capital markets through our shelf registration with the SEC, if needed, to be sufficient to provide liquidity to the company in the short-term and long-term. The company has a five-year senior unsecured credit facility in an

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aggregate principal amount of $2.5 billion, and in April 2023, we renewed our one-year $500 million uncommitted

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credit facility. At ~~March 31,~~June 30, 2023, there were no borrowings outstanding under these credit ~~facilities.~~facilities; however, in May 2023, we issued $779 million in commercial paper, which reduced the amount available for borrowing under our unsecured credit facility. In February 2023, we issued $2.0 billion of unsecured senior notes. We intend to use those proceeds for general corporate purposes, which may include debt repayment (including our 3.25% senior notes due in August 2023), share repurchases and working capital.

COVID-19 and the CARES Act

Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) authorized the government to reimburse qualifying contractors for certain costs of providing paid leave to employees as a result of COVID-19. The company has sought and may continue to seek recovery for certain COVID-19-related costs under Section 3610 of the CARES Act and through our contract provisions, though it is unclear what funds will be available and how much we will be able to recover. In addition, during 2020, the DoD increased the rate for certain progress payments from 80 percent to 90 percent for costs incurred and work performed on relevant contracts. ~~Recently,~~In July 2023, the DoD ~~has indicated it may revert~~reverted back to the 80 percent progress payment rate on prospectively awarded contracts. We do not expect this ~~reversion may occur during 2023, but that it would not~~change will have a material impact on our 2023 cash from operations.

Internal Revenue Code (IRC) Section 174

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to amortize them over five years pursuant to IRC Section 174. Our 2022 cash from operations were reduced by approximately $900 million for federal tax payments we made related to Section 174. In the future, Congress may consider legislation that would defer the amortization requirement to later years, possibly with retroactive effect. In the meantime, we expect to continue to make additional federal tax payments based on the current Section 174 tax law, which we estimate will reduce our 2023 cash from operations by approximately $720 million. The impact of Section 174 on our cash from operations depends on the amount of research and development expenditures incurred by the company and whether the IRS issues guidance on the provision which differs from our current interpretation, among other things.

Cash Flow Measures

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

Operating Cash Flow

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


		Three Months Ended March 31			%					Six Months Ended June 30	%
$ in millions	$ in millions		2023		2022		Change		$ in millions		2023		2022		Change
Net earnings	Net earnings		$	842	$	955	(12)	%	Net earnings		$	1,654	$	1,901	(13)	%

Non-cash items(1)	Non-cash items(1)		36		(178)		(120)	%	Non-cash items(1)		91		(321)		(128)	%

Pension and OPB contributions	Pension and OPB contributions		(40)		(36)		11	%	Pension and OPB contributions		(75)		(71)		6	%
Changes in trade working capital	Changes in trade working capital		(1,525)		(1,254)		22	%	Changes in trade working capital		(1,504)		(2,261)		(33)	%

Other, net	Other, net		(15)		25		(160)	%	Other, net		51		67		(24)	%
Net cash used in operating activities			$	(702)	$	(488)	44	%
Net cash provided by (used in) operating activities									Net cash provided by (used in) operating activities		$	217	$	(685)	(132)	%

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

~~First quarter~~Year to date 2023 net cash provided by operating activities was $217 million compared to net cash used in operating activities ~~increased $214~~of $685 million ~~as compared with~~in the ~~same~~prior year period ~~in 2022 principally due to increases in~~and reflects improved trade working capital largely ~~related to the timing of vendor payments. The net use of~~driven by increased billings and cash ~~during the first quarter is consistent with the company's historical timing of operating cash flows, which are generally more heavily weighted towards the second half of the year.~~collections.

Adjusted Free Cash Flow

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

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

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


		Three Months Ended March 31			%					Six Months Ended June 30	%
$ in millions	$ in millions		2023		2022		Change		$ in millions		2023		2022		Change
Net cash used in operating activities			$	(702)	$	(488)	44	%
Net cash provided by (used in) operating activities									Net cash provided by (used in) operating activities		$	217	$	(685)	(132)	%
Capital expenditures	Capital expenditures		(309)		(244)		27	%	Capital expenditures		(613)		(507)		21	%

Adjusted free cash flow	Adjusted free cash flow		$	(1,011)	$	(732)	38	%	Adjusted free cash flow		$	(396)	$	(1,192)	(67)	%

~~First quarter~~Year to date 2023 adjusted free cash flow ~~decreased $279~~increased $796 million as compared with the same period in 2022 due to higher net cash ~~used in~~provided by operating activities, ~~and~~partially offset by an increase in capital expenditures.

Investing Cash Flow

~~First quarter~~Year to date 2023 net cash used in investing activities increased ~~$60~~$144 million as compared with the same period in 2022 principally due to higher capital expenditures.

Financing Cash Flow

~~First quarter~~Year to date 2023 net cash provided by financing activities was ~~$929 million~~$1.2 billion compared to net cash used in financing activities of ~~$619 million~~$1.2 billion in the prior year period principally due to the issuance of $2.0 billion in long-term debt and net borrowings on commercial paper of $768 million, partially offset by a ~~$405~~$291 million increase in share repurchases.

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

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

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

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

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

ACCOUNTING STANDARDS UPDATES

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

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

This Form 10-Q and the information we are incorporating by reference contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “will,” “expect,” “anticipate,” “intend,” “may,” “could,” “should,” “plan,” “project,” “forecast,” “believe,” “estimate,” “guidance,” “outlook,” “trends,” “goals” and similar expressions generally identify these forward-looking statements. Forward-looking statements include, among other things, statements relating to our future financial condition, results of operations and/or cash flows. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made, but which may change over time. These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict. Specific risks that could cause actual results to differ materially from those expressed or implied in these forward-looking statements include, but are not limited to, those identified and discussed more fully in the section entitled “Risk Factors” in our 2022 Annual Report on Form 10-K and from time to time in our other filings with the Securities and Exchange Commission (SEC). These risks and uncertainties are amplified by the global macroeconomic, health, security and political environments, including inflationary pressures, labor and supply chain challenges and ~~the~~ COVID-19, ~~pandemic,~~ which have caused and will continue to cause significant challenges, instability and uncertainty. They include:

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Industry and Economic Risks

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

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

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

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

•continued pressures from macroeconomic trends, including ~~inflation, supply chain delays and disruptions, and labor challenges, including~~ on costs, schedules, performance and ability to meet expectations

•increased competition within our markets and bid protests

Legal and Regulatory Risks

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

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

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

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

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

Business and Operational Risks

•impacts related to health epidemics and pandemics, including ~~the~~ COVID-19 ~~pandemic, such as labor, supply chain or financial, schedule or cost impacts (without corresponding recovery), among other impacts~~

•cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners, and changes in related regulations

•our ability to attract and retain a qualified, talented and diverse workforce with the necessary security clearances to meet our performance obligations

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

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

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

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

•natural disasters

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

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

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

General and Other Risk Factors

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

Our principal executive officer (Chair, Chief Executive Officer and President) and principal financial officer (Corporate Vice President and Chief Financial Officer) have evaluated the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) as of ~~March 31,~~June 30, 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 ~~March 31,~~June 30, 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 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 2022 Annual Report on Form 10-K.

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

The table below summarizes our repurchases of common stock during the three months ended ~~March 31,~~June 30, 2023.

Period Total Number
of Shares
Purchased
Average Price
Paid per
Share(1)(2)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the
Plans or Programs
($ in millions)
January 1, 2023 - January 27, 2023 150,723 $ 477.68 150,723 $ 2,561
January 28, 2023 - February 24, 2023 1,049,133 443.06 1,049,133 2,096
February 25, 2023 - March 31, 2023 187,828 457.54 187,828 2,010
Total 1,387,684 $ 448.78 1,387,684 $ 2,010


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

(1)Includes commissions paid.

(2)During the first quarter of 2023, the company entered into an accelerated share repurchase (ASR) agreement with Bank of America, N.A., which was completed on April 27, 2023. Pursuant to ~~repurchase $500 million~~the terms of the ~~company's~~ASR, a total of approximately 1.1 million shares of our common stock were repurchased with an average final purchase price of $458.28 (0.9 million shares in February 2023 and ~~received an initial delivery of~~0.2 million shares ~~representing 80 percent of the share repurchase agreement.~~in April 2023).

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

Item 5. Other Information

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

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NORTHROP GRUMMAN CORPORATION

Name
(Title)

Type of Trading Arrangement

Date of Adoption or Termination

Expiration Date of Trading Arrangement

Aggregate Number of Securities to Be Purchased or Sold

Michael A. Hardesty

Rule 10b5-1 Trading Arrangement

May 3, 2023

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

Sale of 140 shares of common stock

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

Gift of up to 800 shares of common stock

(Corporate Vice President, Controller and Chief Accounting Officer)

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

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NORTHROP GRUMMAN CORPORATION

Item 6. Exhibits


~~4.1~~3.1			~~Eleventh Supplemental Indenture, dated as~~Amended and Restated Certificate of ~~February 8, 2023, between~~Incorporation of Northrop Grumman Corporation ~~and The Bank of New York Mellon, as successor to JPMorgan Chase Bank, Trustee, to Indenture~~ dated ~~as of November 21, 2001~~May 17, 2023 (incorporated by reference to Exhibit ~~4.1~~3.1 to Form 8-K, filed ~~February 8,~~May 19, 2023, File No. 001-16411)

~~4.2~~3.2			F ~~orm~~Amended and Restated Bylaws of ~~4.700% Senior Note due 2033 (included in Exhibit 4.1)~~Northrop Grumman Corporation dated May 17, 2023 (incorporated by reference to Exhibit 4.23.2 to Form 8-K filed ~~Febr~~u a ~~ry 8, 2023, File No. 001-16411)~~

~~4.3~~			F ~~orm of 4.950% Senior Note~~ ~~due 2053 (included in Exhibit 4.1) (incorporated by reference to Exhibit 4.3 to Form 8-K filed February 8,~~May 19, 2023, File No. 001-16411)

*+10.1			Non-Employee Director Compensation Term Sheet, effective May 17, 2023 ~~Restricted Stock Rights Grant Agreement Specifying Terms~~ ~~and~~ ~~Conditions Applicable~~ to ~~2023 Restricted Stock Rights Granted under the 2011 Long-Term Incentive Stock Plan~~

*+10.2			~~2023 Restricted Performance Stock Rights Grant Agreement Specifying Terms~~Northrop Grumman Savings Excess Plan (Amended and ~~Conditions Applicable to 2023 Restricted Performance Stock Rights Granted under the 2011 Long-Term Incentive Stock Plan~~

*+10.3			~~Group Personal Excess Liability Policy effective January~~Restated Effective as of July 1, ~~2023~~2023)

*15			Letter from Independent Registered Public Accounting Firm

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

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

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

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


*101			Northrop Grumman Corporation Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~June 30, 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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NORTHROP GRUMMAN CORPORATION

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: ~~April~~July 26, 2023

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