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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-16411
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware   80-0640649
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification No.)
2980 Fairview Park Drive
Falls Church, Virginia 22042
(Address of principal executive offices) (Zip Code)
(703) 280-2900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock NOC New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    Yes ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
    Yes ☒    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer ☒     Accelerated Filer ☐
Non-accelerated Filer ☐    Smaller Reporting Company ☐                
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes ☐    No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 24, 2022, 153,912,156 shares of common stock were outstanding.


NORTHROP GRUMMAN CORPORATION                        
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Item 2.
Item 6.

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NORTHROP GRUMMAN CORPORATION                        
PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)
  Three Months Ended September 30 Nine Months Ended September 30
$ in millions, except per share amounts 2022 2021 2022 2021
Sales
Product $ 6,979  $ 6,845  $ 20,599  $ 21,060 
Service 1,992  1,875  5,970  5,968 
Total sales 8,971  8,720  26,569  27,028 
Operating costs and expenses
Product 5,589  5,352  16,250  16,662 
Service 1,564  1,434  4,669  4,649 
General and administrative expenses 974  891  2,955  2,788 
Total operating costs and expenses 8,127  7,677  23,874  24,099 
Gain on sale of business —  —  —  1,980 
Operating income 844  1,043  2,695  4,909 
Other (expense) income
Interest expense (122) (132) (386) (423)
Non-operating FAS pension benefit 376  367  1,129  1,101 
Other, net (8) (3) (54) 6 
Earnings before income taxes 1,090  1,275  3,384  5,593 
Federal and foreign income tax expense 175  212  568  1,298 
Net earnings $ 915  $ 1,063  $ 2,816  $ 4,295 
Basic earnings per share $ 5.92  $ 6.65  $ 18.13  $ 26.63 
Weighted-average common shares outstanding, in millions 154.6  159.8  155.3  161.3 
Diluted earnings per share $ 5.89  $ 6.63  $ 18.06  $ 26.55 
Weighted-average diluted shares outstanding, in millions 155.3  160.4  155.9  161.8 
Net earnings (from above) $ 915  $ 1,063  $ 2,816  $ 4,295 
Other comprehensive loss, net of tax
Change in unamortized prior service credit —  (2) (1) (6)
Change in cumulative translation adjustment and other, net (7) (6) (22) (6)
Other comprehensive loss, net of tax (7) (8) (23) (12)
Comprehensive income $ 908  $ 1,055  $ 2,793  $ 4,283 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION                        
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
$ in millions, except par value September 30, 2022 December 31, 2021
Assets
Cash and cash equivalents $ 1,666  $ 3,530 
Accounts receivable, net 1,936  1,467 
Unbilled receivables, net 6,430  5,492 
Inventoried costs, net 989  811 
Prepaid expenses and other current assets 1,277  1,126 
Total current assets 12,298  12,426 
Property, plant and equipment, net of accumulated depreciation of $7,243 for 2022 and $6,819 for 2021
 8,325  7,894 
Operating lease right-of-use assets 1,680  1,655 
Goodwill 17,516  17,515 
Intangible assets, net 433  578 
Deferred tax assets 233  200 
Other non-current assets 2,248  2,311 
Total assets $ 42,733  $ 42,579 
Liabilities
Trade accounts payable $ 2,335  $ 2,197 
Accrued employee compensation 1,831  1,993 
Advance payments and billings in excess of costs incurred 3,107  3,026 
Other current liabilities 3,539  2,314 
Total current liabilities 10,812  9,530 
Long-term debt, net of current portion of $1,069 for 2022 and $6 for 2021
 11,803  12,777 
Pension and other postretirement benefit plan liabilities 2,405  3,269 
Operating lease liabilities 1,696  1,590 
Deferred tax liabilities 86  490 
Other non-current liabilities 1,988  1,997 
Total liabilities 28,790  29,653 
Commitments and contingencies (Note 6)
Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding
 —  — 
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2022—154,093,656 and 2021—156,284,423
 154  156 
Paid-in capital —  — 
Retained earnings 13,955  12,913 
Accumulated other comprehensive loss (166) (143)
Total shareholders’ equity 13,943  12,926 
Total liabilities and shareholders’ equity $ 42,733  $ 42,579 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION                        
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  Nine Months Ended September 30
$ in millions 2022 2021
Operating activities
Net earnings $ 2,816  $ 4,295 
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 960  908 
Stock-based compensation 72  71 
Deferred income taxes (438) (105)
Gain on sale of business —  (1,980)
Net periodic pension and OPB income (895) (818)
Pension and OPB contributions (106) (108)
Changes in assets and liabilities:
Accounts receivable, net (469) (133)
Unbilled receivables, net (1,038) (596)
Inventoried costs, net (171) (113)
Prepaid expenses and other assets (64) 6 
Accounts payable and other liabilities (57) 49 
Income taxes payable, net (56) 663 
Other, net 96  (14)
Net cash provided by operating activities 650  2,125 
Investing activities
Divestiture of IT services business —  3,400 
Capital expenditures (803) (682)
Proceeds from sale of equipment to a customer 100  84 
Other, net 40  (3)
Net cash (used in) provided by investing activities (663) 2,799 
Financing activities
Payments of long-term debt —  (2,236)
Common stock repurchases (1,011) (2,724)
Cash dividends paid (786) (737)
Payments of employee taxes withheld from share-based awards (50) (33)
Other, net (4) (46)
Net cash used in financing activities (1,851) (5,776)
Decrease in cash and cash equivalents (1,864) (852)
Cash and cash equivalents, beginning of year 3,530  4,907 
Cash and cash equivalents, end of period $ 1,666  $ 4,055 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION                        
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
  Three Months Ended September 30 Nine Months Ended September 30
$ in millions, except per share amounts 2022 2021 2022 2021
Common stock
Beginning of period $ 155  $ 160  $ 156  $ 167 
Common stock repurchased (1) (1) (3) (8)
Shares issued for employee stock awards and options —  —  1  — 
End of period 154  159  154  159 
Paid-in capital
Beginning of period —  —  —  58 
Common stock repurchased —  —  —  (60)
Stock compensation —  —  —  2 
End of period —  —  —  — 
Retained earnings
Beginning of period 13,655  11,144  12,913  10,482 
Common stock repurchased (374) (587) (1,012) (2,676)
Net earnings 915  1,063  2,816  4,295 
Dividends declared (269) (252) (785) (741)
Stock compensation 28  30  23  38 
End of period 13,955  11,398  13,955  11,398 
Accumulated other comprehensive loss
Beginning of period (159) (132) (143) (128)
Other comprehensive loss, net of tax (7) (8) (23) (12)
End of period (166) (140) (166) (140)
Total shareholders’ equity $ 13,943  $ 11,417  $ 13,943  $ 11,417 
Cash dividends declared per share $ 1.73  $ 1.57  $ 5.03  $ 4.59 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION                        
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.    BASIS OF PRESENTATION
Principles of Consolidation and Reporting
These unaudited condensed consolidated financial statements (the “financial statements”) include the accounts of Northrop Grumman Corporation and its subsidiaries and joint ventures or other investments for which we consolidate the financial results (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”). Intercompany accounts, transactions and profits are eliminated in consolidation. Investments in equity securities and joint ventures where the company has significant influence, but not control, are accounted for using the equity method.
Effective January 30, 2021 (the “Divestiture date”), we completed the sale of our IT and mission support services business (the “IT services divestiture”) for $3.4 billion in cash and recorded a pre-tax gain on sale of $2.0 billion. The IT and mission support services business was comprised of the majority of the former Information Solutions and Services (IS&S) division of Defense Systems (excluding the Vinnell Arabia business); select cyber, intelligence and missions support programs, which were part of the former Cyber and Intelligence Mission Solutions (CIMS) division of Mission Systems; and the former Space Technical Services business unit of Space Systems. Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture date. Sales and pre-tax profit for the IT and mission support services business were $162 million and $20 million, respectively, for the nine months ended September 30, 2021.
These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”) and in accordance with the rules of the Securities and Exchange Commission (SEC) for interim reporting. The financial statements include adjustments of a normal recurring nature considered necessary by management for a fair presentation of the company’s unaudited condensed consolidated financial position, results of operations and cash flows.
Results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the information contained in the company’s 2021 Annual Report on Form 10-K.
Quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30 and third quarter as ending on September 30. It is the company’s long-standing practice to establish actual interim closing dates using a “fiscal” calendar, in which we close our books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. This practice is only used at interim periods within a reporting year.
Accounting Estimates
Preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Estimates have been prepared using the most current and best available information; however, actual results could differ materially from those estimates.
Revenue Recognition
Contract Estimates
We recognize changes in estimated contract sales or costs and the resulting changes in contract profit on a cumulative basis. Cumulative estimate-at-completion (EAC) adjustments represent the cumulative effect of the changes on current and prior periods; sales and operating margins in future periods are recognized as if the revised estimates had been used since contract inception. If it is determined that a loss is expected to result on an individual performance obligation, the entire amount of the estimable future loss, including an allocation of general and administrative expense, is charged against income in the period the loss is identified.
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NORTHROP GRUMMAN CORPORATION                        
The following table presents the effect of aggregate net EAC adjustments:
  Three Months Ended September 30 Nine Months Ended September 30
$ in millions, except per share data 2022 2021 2022 2021
Revenue $ 59  $ 116  $ 363  $ 478 
Operating income 45  109  310  453 
Net earnings(1)
 36  86  245  358 
Diluted earnings per share(1)
 0.23  0.54  1.57  2.21 
(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, we recorded a $67 million favorable EAC adjustment on the engineering, manufacturing and development phase of the B-21 program at Aeronautics Systems largely related to performance incentives. During the three months ended September 30, 2021, we recorded a $42 million unfavorable EAC adjustment on the F-35 program at Aeronautics Systems due to labor-related production inefficiencies largely driven by COVID-19-related impacts on the labor market and employee leave. No such adjustments were material to the financial statements during the three months ended September 30, 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.
Company backlog as of September 30, 2022 was $79.6 billion. Of our September 30, 2022 backlog, we expect to recognize approximately 40 percent as revenue over the next 12 months and 60 percent as revenue over the next 24 months, with the remainder to be recognized thereafter.
Contract Assets and Liabilities
For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position. The amount of revenue recognized for the three and nine months ended September 30, 2022 that was included in the December 31, 2021 contract liability balance was $303 million and $2.2 billion, respectively. The amount of revenue recognized for the three and nine months ended September 30, 2021 that was included in the December 31, 2020 contract liability balance was $261 million and $1.8 billion, respectively.
Disaggregation of Revenue
See Note 9 for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments. We believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
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NORTHROP GRUMMAN CORPORATION                        
Property, Plant, and Equipment
During the nine months ended September 30, 2022, the company acquired $46 million of internal use software through long-term financing directly with the supplier. The software was recorded in PP&E as a non-cash investing activity and the related liability was recorded in long-term debt as a non-cash financing activity. During the nine months ended September 30, 2022, the company received lease incentives for landlord funded leasehold improvements of $96 million related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities. Non-cash investing activities also include capital expenditures incurred but not yet paid of $118 million and $105 million as of September 30, 2022 and 2021, respectively. In the fourth quarter of 2020, the company completed a sale of equipment to a customer on a restricted Aeronautics Systems program. During the nine months ended September 30, 2022 and 2021, the company received cash payments of $100 million and $84 million, respectively, related to the equipment sale and included it in Proceeds from sale of equipment to a customer in the unaudited condensed consolidated statement of cash flows.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows:
$ in millions September 30, 2022 December 31, 2021
Unamortized prior service credit $ 1  $ 2 
Cumulative translation adjustment and other, net (167) (145)
Total accumulated other comprehensive loss $ (166) $ (143)
Related Party Transactions
For all periods presented, the company had no material related party transactions.
Accounting Standards Updates
Accounting standards updates adopted and/or issued, but not effective until after September 30, 2022, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.
2.    EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK
Basic Earnings Per Share
We calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of common stock outstanding during each period.
Diluted Earnings Per Share
Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled 0.7 million shares and 0.6 million shares for the three and nine months ended September 30, 2022, respectively. The dilutive effect of these securities totaled 0.6 million shares and 0.5 million shares for the three and nine months ended September 30, 2021, respectively.
Share Repurchases
On December 4, 2018, the company’s board of directors authorized a share repurchase program of up to $3.0 billion of the company’s common stock (the “2018 Repurchase Program”). Repurchases under the 2018 Repurchase Program commenced in March 2020 and were completed in October 2021.
On January 25, 2021, the company’s board of directors authorized a share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the “2021 Repurchase Program”). Repurchases under the 2021 Repurchase Program commenced in October 2021 upon the completion of the 2018 Repurchase Program. As of September 30, 2022, repurchases under the 2021 Repurchase Program totaled $1.9 billion; $1.1 billion remained under this share repurchase authorization. By its terms, the 2021 Repurchase Program is set to expire when we have used all authorized funds for repurchases.
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NORTHROP GRUMMAN CORPORATION                        
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 will commence upon completion of the 2021 Repurchase Program and will expire when we have used all authorized funds for repurchases. As of September 30, 2022, there have been no repurchases under the 2022 Repurchase Program and the company’s total outstanding share repurchase authorization was $3.1 billion.
During the first quarter of 2021, the company entered into an accelerated share repurchase (ASR) agreement with Goldman Sachs & Co. LLC (Goldman Sachs) to repurchase $2.0 billion of the company’s common stock as part of the 2018 Repurchase Program. Under the agreement, we made a payment of $2.0 billion to Goldman Sachs and received an initial delivery of 5.9 million shares valued at $1.7 billion that were immediately canceled by the company. The remaining balance of $300 million was settled on June 1, 2021 with a final delivery of 0.2 million shares from Goldman Sachs. The final average purchase price was $327.29 per share.
During the fourth quarter of 2021, the company entered into an ASR agreement with Goldman Sachs to repurchase $500 million of the company’s common stock as part of the 2021 Repurchase Program. Under the agreement, we made a payment of $500 million to Goldman Sachs and received an initial delivery of 1.2 million shares valued at $425 million that were immediately canceled by the company. The remaining balance of $75 million was settled on February 1, 2022 with a final delivery of 0.1 million shares from Goldman Sachs. The final average purchase price was $374.79 per share.
Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and, in the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs. During the nine months ended September 30, 2022, the company repurchased $1.0 billion of its outstanding shares.
The table below summarizes the company’s share repurchases to date under the authorizations described above:
Shares Repurchased
(in millions)
Repurchase Program
Authorization Date		 Amount
Authorized
(in millions)		 Total
Shares Retired
(in millions)
Average 
Price
Per Share(1)
 Date Completed Nine Months Ended September 30
2022 2021
December 4, 2018 $ 3,000  8.9  $ 337.18  October 2021 —  8.1 
January 25, 2021 $ 3,000  4.6  407.74  2.4  — 
January 24, 2022 $ 2,000  —  —  —  — 
(1)Includes commissions paid.
Dividends on Common Stock
In May 2022, the company increased the quarterly common stock dividend 10 percent to $1.73 per share from the previous amount of $1.57 per share.
3.    INCOME TAXES
  Three Months Ended September 30 Nine Months Ended September 30
$ in millions 2022 2021 2022 2021
Federal and foreign income tax expense $ 175  $ 212  $ 568  $ 1,298 
Effective income tax rate 16.1  % 16.6  % 16.8  % 23.2  %
Current Quarter
The third quarter 2022 effective tax rate (ETR) decreased to 16.1 percent from 16.6 percent in the prior year period. The company’s third quarter 2022 ETR includes benefits of $42 million for research credits and $16 million for foreign derived intangible income (FDII). The company’s third quarter 2021 ETR included benefits of $43 million for research credits and $12 million for FDII.
Year to Date
The year to date 2022 ETR decreased to 16.8 percent from 23.2 percent in the prior year period. The company’s year to date 2022 ETR includes benefits of $124 million for research credits and $46 million for FDII. The company’s
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NORTHROP GRUMMAN CORPORATION                        
year to date 2021 ETR included benefits of $142 million for research credits and $32 million for FDII. The year to date 2021 ETR was impacted by additional federal income taxes resulting from the IT services divestiture, as well as a change in tax revenue recognition on certain long-term contracts, which increased taxable income in years prior to the 2017 Tax Cuts and Jobs Act at a rate above the current statutory rate.
Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were $627 million as of September 30, 2022 and $571 million as of December 31, 2021.
The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs and the 2017 Tax Cuts and Jobs Act, which includes related final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and procedural guidance issued in August 2021. As of September 30, 2022, we have approximately $1.7 billion in unrecognized tax benefits, including $449 million related to our position on IRC Section 451(b). If these matters, including our position on IRC Section 451(b), are unfavorably resolved, there could be a material impact on our future cash flows. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may increase by approximately $120 million.
Our current unrecognized tax benefits, which are included in Other current liabilities in the unaudited condensed consolidated statements of financial position, were $657 million and $590 million as of September 30, 2022 and December 31, 2021, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2020 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, the company’s 2014-2016 federal income tax returns and refund claims related to its 2007-2016 federal tax returns reverted back from IRS Appeals to IRS examination for additional factual review. In addition, legacy Orbital ATK (OATK) federal tax returns for the years ended March 31, 2014 and 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under review by the IRS Appeals Office. It is reasonably possible that within the next twelve months, unrecognized tax benefits claimed in legacy OATK’s 2014 to 2017 tax years may decline by up to $110 million through administrative resolution with IRS Appeals.
4.    FAIR VALUE OF FINANCIAL INSTRUMENTS
The company holds a portfolio of marketable securities to partially fund non-qualified employee benefit plans. A portion of these securities are held in common/collective trust funds and are measured at fair value using net asset value (NAV) per share as a practical expedient; and therefore are not required to be categorized in the fair value hierarchy table below. Marketable securities are included in Other non-current assets in the unaudited condensed consolidated statements of financial position.
The company’s derivative portfolio consists primarily of foreign currency forward contracts. Where model-derived valuations are appropriate, the company utilizes the income approach to determine the fair value using internal models based on observable market inputs.
The following table presents the financial assets and liabilities the company records at fair value on a recurring basis identified by the level of inputs used to determine fair value:
September 30, 2022 December 31, 2021
$ in millions Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Financial Assets
Marketable securities $ 299  $ —  $ 8  $ 307  $ 393  $ 1  $ 7  $ 401 
Marketable securities valued using NAV 13  17 
Total marketable securities 299  —  8  320  393  1  7  418 
Derivatives —  4  —  4  —  (1) —  (1)
The notional value of the company’s foreign currency forward contracts at September 30, 2022 and December 31, 2021 was $128 million and $120 million, respectively. At September 30, 2022 and December 31, 2021, no portion of the notional value was designated as a cash flow hedge.
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NORTHROP GRUMMAN CORPORATION                        
The derivative fair values and related unrealized gains/losses at September 30, 2022 and December 31, 2021 were not material.
There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the nine months ended September 30, 2022.
The carrying value of cash and cash equivalents and commercial paper approximates fair value.
Long-term Debt
The estimated fair value of long-term debt was $11.9 billion and $15.1 billion as of September 30, 2022 and December 31, 2021, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.
On September 2, 2021, the company completed an exchange offer to eligible holders of the outstanding notes of our direct wholly owned subsidiary, Northrop Grumman Systems Corporation (“NGSC”) maturing through 2036. An aggregate principal amount of $422 million of the NGSC notes was exchanged for $422 million of unregistered Northrop Grumman Corporation notes (the “Unregistered Notes”) with the same interest rates and maturity dates as the NGSC notes exchanged. Because the debt instruments are not substantially different, the exchange was treated as a debt modification for accounting purposes with no gain or loss recognized.
On June 15, 2022, the company completed a registered exchange offer pursuant to which the company exchanged an aggregate principal amount of $414 million of the Unregistered Notes for $414 million of new notes registered under the Securities Act of 1933, as amended, (the “Registered Notes”) with the same interest rates and maturity dates as the Unregistered Notes.
Because the debt instruments were not substantially different in either of the exchange offers, both exchanges were treated as debt modifications for accounting purposes with no gain or loss recognized.
Repayments of Senior Notes
In March 2021, the company repaid $700 million of 3.50 percent unsecured notes upon maturity.
In March 2021, the company redeemed $1.5 billion of 2.55 percent unsecured notes due October 2022. The company recorded a pre-tax charge of $54 million principally related to the premium paid on the redemption, which was recorded in Other, net in the unaudited condensed consolidated statements of earnings and comprehensive income.
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NORTHROP GRUMMAN CORPORATION                        
5.    INVESTIGATIONS, CLAIMS AND LITIGATION
On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed-price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS were delivered. The company’s lawsuit seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $410 million, less certain amounts outstanding under the contract. In the course of the litigation, the United States subsequently amended its counterclaim, reducing it to seek approximately $193 million. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On February 3, 2020, after extensive discovery and motions practice, the parties commenced what was expected to be a seven-week trial. After COVID-19-related interruptions, trial concluded on March 5, 2021. On October 12, 2021, the parties completed post-trial briefing, and on December 8, 2021 the court held a post-trial oral argument. On June 27, 2022, the judge issued a decision concluding that the company was entitled to approximately $63 million for unpaid portions of the contract price and $5 million in additional damages, as well as interest, which the company estimated was approximately $16 million (as of September 30, 2022) and such additional interest as may accrue until the date the government makes payment. The judge also concluded that the government was entitled to approximately $1 million in off-setting damages. On July 18, 2022, the government filed a motion for reconsideration, arguing that the government is entitled to further damages of approximately $57 million for particular periods of delay. On October 17, 2022, the court denied the government’s motion for reconsideration, making clear the government was not entitled to any such damages for delay. The court also determined that the past interest due to the company amounted to approximately $16 million. On October 19, 2022, the court entered judgment in the company’s favor in the amount of approximately $83 million, plus a currently estimated approximately $7 thousand of additional interest to accrue per day until the date the government makes payment. The parties have until December 19, 2022 to file an appeal.
The company is engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, the company has worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation (NYSDEC), the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. In December 2019, the State of New York issued an Amended Record of Decision seeking to impose additional remedial requirements beyond measures the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company would take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. On September 22, 2021, the State of New York issued for public comment a new consent decree reflecting the agreement. On December 7, 2021, the public comment period closed. On August 3, 2022, the court approved the consent decree. We have also reached agreements with the Department of Defense and the Bethpage and South Farmingdale Water Districts to resolve claims involving these parties. On May 24, 2022, the court approved the agreement with the Bethpage Water District, and on August 2, 2022, the court approved the agreement with the Department of Defense. The agreement with the South Farmingdale Water District does not require court approval.
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 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 insurance carriers and other parties. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these Bethpage lawsuits.
In June 2018, the FTC issued a Decision and Order enabling the company’s acquisition of OATK to proceed and providing generally for the company to continue to make solid rocket motors available to competing missile primes
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NORTHROP GRUMMAN CORPORATION                        
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. Most recently, the company received and will be responding to a follow-on CID. We cannot predict the outcome of those discussions, but we do not believe they are likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2022, or its annual results of operations and/or cash flows. We believe the company has been and continues to be in compliance with the Order.
The company is a party to various other investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2022, or its annual results of operations and/or cash flows.
6.    COMMITMENTS AND CONTINGENCIES
U.S. Government Cost Claims and Contingencies
From time to time, the company is advised of claims by the U.S. government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and U.S. government representatives engage in discussions to enable the company to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for such potential disallowed costs. Such provisions are reviewed periodically using the most recent information available. The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of September 30, 2022, or its annual results of operations and/or cash flows.
The U.S. government has raised questions about an interest rate assumption used by the company to determine our CAS pension expense. On June 1, 2020, the government provided written notice that the assumptions the company used during the period 2013-2019 were potentially noncompliant with CAS. We submitted a formal response on July 31, 2020, which we believe demonstrates the appropriateness of the assumptions used. On November 24, 2020, the government replied to the company’s response, disagreeing with our position and requesting additional input, which we provided on February 22, 2021. We continue to exchange correspondence and engage with the government on this matter, including responding to requests for and providing additional information. The sensitivity to changes in interest rate assumptions makes it reasonably possible the outcome of this 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.
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NORTHROP GRUMMAN CORPORATION                        
Environmental Matters
The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S. government contracts as of September 30, 2022 and December 31, 2021:
$ in millions
Accrued Costs(1)(2)
Reasonably Possible Future Costs in Excess of Accrued Costs(2)
Deferred Costs(3)
September 30, 2022 $ 584  $ 357  $ 503 
December 31, 2021 572  363  486 
(1) As of September 30, 2022, $200 million is recorded in Other current liabilities and $384 million is recorded in Other non-current liabilities.
(2) Estimated remediation costs are not discounted to present value. The reasonably possible future costs in excess of accrued costs do not take into consideration amounts expected to be recoverable through overhead charges on U.S. government contracts.
(3) As of September 30, 2022, $178 million is deferred in Prepaid expenses and other current assets and $325 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.
Although management cannot predict whether (i) new information gained as our environmental remediation projects progress, (ii) changes in remediation standards or other requirements to which we are subject, or (iii) other changes in facts and circumstances will materially affect the estimated liability accrued, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2022, or its annual results of operations and/or cash flows.
Financial Arrangements
In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At September 30, 2022, there were $393 million of stand-by letters of credit and guarantees and $78 million of surety bonds outstanding.
Commercial Paper
The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to $2.0 billion. At September 30, 2022, there were no commercial paper borrowings outstanding.
Credit Facilities
In August 2022, the company entered into a new five-year senior unsecured revolving credit facility in an aggregate principal amount of $2.5 billion (the “2022 Credit Agreement”). The 2022 Credit Agreement replaced the company’s prior five-year, $2.0 billion revolving credit facility entered into on August 17, 2018 and as amended on October 17, 2019. The revolving credit facility established under the 2022 Credit Agreement 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 September 30, 2022, there were no borrowings outstanding under this facility.
The 2022 Credit Agreement contains generally customary terms and conditions, including covenants restricting the company’s ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other fundamental changes and incur liens. The company also cannot permit the ratio of its debt to capitalization (as set forth in the credit agreement) to exceed 65 percent.
At September 30, 2022, the company was in compliance with all covenants under its credit agreements.
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NORTHROP GRUMMAN CORPORATION                        
7.    RETIREMENT BENEFITS
The cost to the company of its pension and other postretirement benefit (OPB) plans is shown in the following table:
  Three Months Ended September 30 Nine Months Ended September 30
Pension
Benefits		 OPB Pension
Benefits		 OPB
$ in millions 2022 2021 2022 2021 2022 2021 2022 2021
Components of net periodic benefit cost (benefit)
Service cost $ 92  $ 104  $ 2  $ 4  $ 276  $ 311  $ 6  $ 12 
Interest cost 285  263  12  13  853  790  36  40 
Expected return on plan assets (661) (627) (28) (26) (1,982) (1,884) (83) (79)
Amortization of prior service (credit) cost —  (3) —  —  —  (7) (1) (1)
Net periodic benefit cost (benefit) $ (284) $ (263) $ (14) $ (9) $ (853) $ (790) $ (42) $ (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 September 30 Nine Months Ended September 30
$ in millions 2022 2021 2022 2021
Defined benefit pension plans $ 26  $ 26  $ 77  $ 79 
OPB plans 9  8  29  29 
Defined contribution plans 108  99  429  476 
8.    STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Awards
The following table presents the number of restricted stock rights (RSRs) and restricted performance stock rights (RPSRs) granted to employees under the company’s long-term incentive stock plan and the grant date aggregate fair value of those stock awards for the periods presented:
Nine Months Ended September 30
in millions 2022 2021
RSRs granted 0.1  0.1 
RPSRs granted 0.2  0.2 
Grant date aggregate fair value $ 94  $ 89 
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.
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NORTHROP GRUMMAN CORPORATION                        
Cash Awards
The following table presents the minimum and maximum aggregate payout amounts related to cash units (CUs) and cash performance units (CPUs) granted to employees in the periods presented:
Nine Months Ended September 30
$ in millions 2022 2021
Minimum aggregate payout amount $ 32  $ 31 
Maximum aggregate payout amount 183  178 
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.
9.    SEGMENT INFORMATION
The following table presents sales and operating income by segment:
Three Months Ended September 30 Nine Months Ended September 30
$ in millions 2022 2021 2022 2021
Sales
Aeronautics Systems $ 2,537  $ 2,725  $ 7,774  $ 8,628 
Defense Systems 1,345  1,409  3,922  4,398 
Mission Systems 2,456  2,436  7,469  7,613 
Space Systems 3,163  2,681  8,997  7,950 
Intersegment eliminations (530) (531) (1,593) (1,561)
Total sales 8,971  8,720  26,569  27,028 
Operating income
Aeronautics Systems 262  265  827  873 
Defense Systems 158  175  481  529 
Mission Systems 368  372  1,166  1,177 
Space Systems 290  288  861  865 
Intersegment eliminations (71) (65) (218) (197)
Total segment operating income 1,007  1,035  3,117  3,247 
FAS/CAS operating adjustment (55) 61  (152) 98 
Unallocated corporate (expense) income (108) (53) (270) 1,564 
Total operating income $ 844  $ 1,043  $ 2,695  $ 4,909 
FAS/CAS Operating Adjustment
For financial statement purposes, we account for our employee pension plans in accordance with FAS. However, the cost of these plans is charged to our contracts in accordance with applicable Federal Acquisition Regulation (FAR) and U.S. Government Cost Accounting Standards (CAS) requirements. The FAS/CAS operating adjustment reflects the difference between CAS pension expense included as cost in segment operating income and the service cost component of FAS expense included in total operating income.
Unallocated Corporate (Expense) Income
Unallocated corporate (expense) income includes the portion of corporate costs not considered allowable or allocable under the applicable FAR and CAS requirements, and therefore not allocated to the segments, such as changes in deferred state income taxes and a portion of management and administration, legal, environmental, compensation, retiree benefits, advertising and other corporate unallowable costs. Unallocated corporate (expense) income 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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NORTHROP GRUMMAN CORPORATION                        
During the first quarter of 2021, the $2.0 billion pre-tax gain on the sale of our IT services business and $192 million of unallowable state taxes and transaction costs associated with the divestiture were recorded in Unallocated corporate (expense) income.
Disaggregation of Revenue
Sales by Customer Type Three Months Ended September 30 Nine Months Ended September 30
2022 2021 2022 2021
$ in millions $
%(3)
 $
%(3)
 $
%(3)
 $
%(3)
Aeronautics Systems
U.S. government(1)
 $ 2,138  85  % $ 2,312  85  % $ 6,564  85  % $ 7,366  85  %
International(2)
 341  13  % 360  13  % 1,012  13  % 1,110  13  %
Other customers —  —  % 5  —  % 17  —  % 15  —  %
Intersegment sales 58  2  % 48  2  % 181  2  % 137  2  %
Aeronautics Systems sales 2,537  100  % 2,725  100  % 7,774  100  % 8,628  100  %
Defense Systems
U.S. government(1)
 820  62  % 877  62  % 2,369  61  % 2,749  63  %
International(2)
 312  23  % 316  22  % 933  24  % 1,002  23  %
Other customers 19  1  % 10  1  % 53  1  % 61  1  %
Intersegment sales 194  14  % 206  15  % 567  14  % 586  13  %
Defense Systems sales 1,345  100  % 1,409  100  % 3,922  100  % 4,398  100  %
Mission Systems
U.S. government(1)
 1,729  71  % 1,756  72  % 5,325  72  % 5,491  71  %
International(2)
 452  18  % 417  17  % 1,300  17  % 1,338  18  %
Other customers 25  1  % 19  1  % 89  1  % 49  1  %
Intersegment sales 250  10  % 244  10  % 755  10  % 735  10  %
Mission Systems sales 2,456  100  % 2,436  100  % 7,469  100  % 7,613  100  %
Space Systems
U.S. government(1)
 2,967  94  % 2,507  94  % 8,473  94  % 7,401  93  %
International(2)
 105  3  % 92  3  % 261  3  % 301  4  %
Other customers 63  2  % 49  2  % 173  2  % 145  2  %
Intersegment sales 28  1  % 33  1  % 90  1  % 103  1  %
Space Systems sales 3,163  100  % 2,681  100  % 8,997  100  % 7,950  100  %
Total
U.S. government(1)
 7,654  86  % 7,452  85  % 22,731  86  % 23,007  85  %
International(2)
 1,210  13  % 1,185  14  % 3,506  13  % 3,751  14  %
Other customers 107  1  % 83  1  % 332  1  % 270  1  %
Total Sales $ 8,971  100  % $ 8,720  100  % $ 26,569  100  % $ 27,028  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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NORTHROP GRUMMAN CORPORATION                        
Sales by Contract Type Three Months Ended September 30 Nine Months Ended September 30
2022   2021 2022   2021
$ in millions $
%(1)
 $
%(1)
 $
%(1)
 $
%(1)
Aeronautics Systems
Cost-type $ 1,185  48  % $ 1,358  51  % $ 3,678  48  % $ 4,110  48  %
Fixed-price 1,294  52  % 1,319  49  % 3,915  52  % 4,381  52  %
Intersegment sales 58  48  181  137 
Aeronautics Systems sales 2,537  2,725  7,774  8,628 
Defense Systems
Cost-type 366  32  % 433  36  % 1,075  32  % 1,376  36  %
Fixed-price 785  68  % 770  64  % 2,280  68  % 2,436  64  %
Intersegment sales 194  206  567  586 
Defense Systems sales 1,345  1,409  3,922  4,398 
Mission Systems
Cost-type 881  40  % 746  34  % 2,591  39  % 2,419  35  %
Fixed-price 1,325  60  % 1,446  66  % 4,123  61  % 4,459  65  %
Intersegment sales 250  244  755  735 
Mission Systems sales 2,456  2,436  7,469  7,613 
Space Systems
Cost-type 2,192  70  % 1,931  73  % 6,271  70  % 5,800  74  %
Fixed-price 943  30  % 717  27  % 2,636  30  % 2,047  26  %
Intersegment sales 28  33  90  103 
Space Systems sales 3,163  2,681  8,997  7,950 
Total
Cost-type 4,624  52  % 4,468  51  % 13,615  51  % 13,705  51  %
Fixed-price 4,347  48  % 4,252  49  % 12,954  49  % 13,323  49  %
Total Sales $ 8,971  $ 8,720  $ 26,569  $ 27,028 
(1)Percentages calculated based on external customer sales.
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NORTHROP GRUMMAN CORPORATION                        
Sales by Geographic Region Three Months Ended September 30 Nine Months Ended September 30
2022 2021 2022 2021
$ in millions $
%(2)
 $
%(2)
 $
%(2)
 $
%(2)
Aeronautics Systems                
United States $ 2,138  85  % $ 2,317  87  % $ 6,581  87  % $ 7,381  86  %
Asia/Pacific 165  7  % 239  9  % 560  7  % 722  9  %
Europe 163  7  % 108  4  % 413  5  % 335  4  %
All other(1)
 13  1  % 13  —  % 39  1  % 53  1  %
Intersegment sales 58  48  181  137 
Aeronautics Systems sales 2,537  2,725  7,774  8,628 
Defense Systems
United States 839  72  % 887  74  % 2,422  72  % 2,810  74  %
Asia/Pacific 112  10  % 107  9  % 340  10  % 336  9  %
Europe 101  9  % 78  6  % 297  9  % 233  6  %
All other(1)
 99  9  % 131  11  % 296  9  % 433  11  %
Intersegment sales 194  206  567  586 
Defense Systems sales 1,345  1,409  3,922  4,398 
Mission Systems
United States 1,754  79  % 1,775  81  % 5,414  81  % 5,540  81  %
Asia/Pacific 159  7  % 114  5  % 435  6  % 372  5  %
Europe 210  10  % 233  11  % 654  10  % 744  11  %
All other(1)
 83  4  % 70  3  % 211  3  % 222  3  %
Intersegment sales 250  244  755  735 
Mission Systems sales 2,456  2,436  7,469  7,613 
Space Systems
United States 3,030  97  % 2,556  97  % 8,646  97  % 7,546  97  %
Asia/Pacific 33  1  % 10  —  % 86  1  % 39  —  %
Europe 69  2  % 79  3  % 165  2  % 256  3  %
All other(1)
 3  —  % 3  —  % 10  —  % 6  —  %
Intersegment sales 28  33  90  103 
Space Systems sales 3,163  2,681  8,997  7,950 
Total
United States 7,761  87  % 7,535  87  % 23,063  87  % 23,277  86  %
Asia/Pacific 469  5  % 470  5  % 1,421  5  % 1,469  5  %
Europe 543  6  % 498  6  % 1,529  6  % 1,568  6  %
All other(1)
 198  2  % 217  2  % 556  2  % 714  3  %
Total Sales $ 8,971  $ 8,720  $ 26,569  $ 27,028 
(1)All other is principally comprised of the Middle East.
(2)Percentages calculated based on external customer sales.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Falls Church, Virginia
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of September 30, 2022, and the related condensed consolidated statements of earnings and comprehensive income and changes in shareholders’ equity for the three-month and nine-month periods ended September 30, 2022 and 2021, and of cash flows for the nine-month periods ended September 30, 2022 and 2021, and the related notes (collectively referred to as the “interim financial information”). Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of December 31, 2021, and the related consolidated statements of earnings and comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January 26, 2022, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2021, is fairly stated, in all material respects, in relation to the audited consolidated statement of financial position from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Deloitte & Touche LLP
McLean, Virginia
October 26, 2022

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NORTHROP GRUMMAN CORPORATION                        
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 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 our 2021 Annual Report on Form 10-K, which provides additional information on our business and the environment in which we operate and our operating results.
Disposition of IT and Mission Support Services Business
Effective January 30, 2021 (the “Divestiture date”), we completed the sale of our IT and mission support services business (the “IT services divestiture”) for $3.4 billion in cash and recorded a pre-tax gain of $2.0 billion. The IT and mission support services business was comprised of the majority of the former IS&S division of Defense Systems (excluding the Vinnell Arabia business); select cyber, intelligence and missions support programs, which were part of the former CIMS division of Mission Systems; and the former Space Technical Services business unit of Space Systems. Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture date.
COVID-19
In March 2020, the World Health Organization characterized COVID-19 as a global pandemic, and the President declared a national emergency concerning the COVID-19 outbreak. In the more than two years since then, the pandemic (including the first and subsequent variants of COVID-19) has dramatically impacted the global health and economic environments, including millions of confirmed cases and deaths, business slowdowns or shutdowns, labor shortfalls, supply chain challenges, regulatory challenges, inflationary pressures and market volatility. We discussed in some detail in our Annual Report on Form 10-K for the fiscal years ended December 31, 2020 and 2021, as well as interim Form 10-Qs, the pandemic, its impacts and risks, and actions taken up to the time of each filing. In this Form 10-Q, we provide a further update.
At a macro level, the number of hospitalizations and deaths, in the U.S. in particular, have generally eased in 2022, as more people are fully vaccinated, and communities have continued to open up. While it, of course, remains unclear whether that trajectory will continue, there is reason for optimism. The company continues to work to monitor and address the pandemic and related developments, including the impact on our company, our employees, our customers, our suppliers and our communities. Our goals have been, and continue to be, to lessen the potential adverse impacts, both health and economic, and to continue to position the company for long-term success. Like the communities in which we operate, our actions have varied, and will continue to vary, depending on the spread of COVID-19 and applicable government requirements, and the needs of our stakeholders.
During the third quarter of 2022, COVID-19 case rates and the health and economic impacts of the pandemic continued to fluctuate in different communities in the U.S. and globally, particularly with the spread of new variants. However, direct COVID-19-related impacts on our business continued generally to decline, including in the areas of employee absenteeism and leave-taking. While we cannot predict the future course of the pandemic, we are not currently assuming significant additional direct COVID-19-related impacts on our 2022 financial results.
During the third quarter of 2022, we continued to see a prolonged impact on the economy, our industry, and our company, with ongoing labor challenges, supply chain disruption, and inflation, among other impacts. Although we are working actively to address and mitigate these impacts, the broader macroeconomic environment, including, in particular, inflationary pressures and extended material lead times, continued adversely to affect the company’s third quarter results (including sales, net earnings and cash).
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NORTHROP GRUMMAN CORPORATION                        
For further information on the pandemic and the potential impact to the company of COVID-19, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources” below and “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K.
Global Security and Economic Environment
The U.S. and its allies continue to face a global security environment of heightened tensions and instability, threats from state and non-state actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional security concerns and political instability. The conflict in Ukraine has increased those tensions and instability, highlighted threats and increased demand, as well as further disrupted global supply chains and added costs. The market for defense products, services and solutions globally is driven by these complex and evolving security challenges, considered in the broader context of political and socioeconomic circumstances and priorities.
Our operations and financial performance, as well as demand for our products and services, are impacted by global events, including violence and unrest. The same is true for our suppliers and other business partners. We continue to experience an increased demand for certain of our goods and services directly related to the conflict in the Ukraine, in particular, but we have not seen a significant increase in those demands to date. We also continue to experience modest disruption to some of our programs and supply chain, including unanticipated cost growth, as a result of the conflict, particularly with respect to our Commercial Resupply Services contract. But we do not have sizable business dealings in Russia or Ukraine, and do not anticipate significant adverse impacts. We are actively monitoring the situation and exploring both opportunities and risks, including measures to mitigate the risk of future disruption and costs to our programs.
The global geopolitical and economic environments continue to be impacted by uncertainty and stress, and global inflationary pressures. Geopolitical relationships have changed and are continuing to change. Global inflationary pressures are increasing costs, including for various commodities and supplier products. Global economic growth is expected to remain in the low single digits in 2022, reflecting, among other things, the continued impact of and uncertainty surrounding geopolitical tensions globally, financial market volatility, inflation and the COVID-19 pandemic. We expect still further impacts related to the conflict in Ukraine and economic sanctions imposed on Russia. The global economy may also be affected by the residual legal, regulatory and economic impacts of Britain’s exit from the European Union. Increased interest rates, raising the cost of borrowing for the government, could 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 impact the global market for defense products, services and solutions.
U.S. Political and Economic Environment
On March 15, 2022, the President signed into law the Consolidated Appropriations Act for FY 2022, which provided full-year funding through September 30, including $782 billion for national defense. This represented nearly $30 billion more than the Administration initially requested for FY 2022, and approximately 6 percent, or $42 billion higher than it was in FY 2021. The Pentagon’s portion of the overall national defense budget was $743 billion. In March 2022, Congress also approved $14 billion in emergency aid to support security, economic, and humanitarian assistance for Ukraine and Central European partners. An additional $40 billion in emergency supplemental appropriations was approved by Congress in May 2022. Current and future spending in connection with the conflict in Ukraine and other priorities, global inflation, the national debt and the costs of the pandemic, among other things, in the U.S. and globally, will continue to impact our customers’ budgets and priorities, and our industry. We expect the government, our customers and our industry will also continue to face challenges from the macroeconomic environment, including a tight labor market and supply chain disruptions.
The Administration’s current budget for FY 2023 proposes $813 billion for national defense programs, and the Pentagon’s portion of the overall requested defense budget is $773 billion. On September 30, 2022, Congress enacted a continuing resolution (CR) to carry forward FY 2022 funding levels into FY 2023 while negotiations continue regarding full-year appropriations. The CR also included an additional $12 billion in aid to Ukraine, bringing total appropriations for Ukraine assistance to $39 billion. The CR runs through December 16, 2022, and generally limits U.S. government spending to FY 2022 levels, which for DOD is around 4 percent lower than the amount requested for FY 2023.
It is difficult to predict the specific course of future defense budgets. However, we believe the ongoing conflict in Ukraine, as well as actions in the Pacific region, have highlighted some of the national security threats to our nation
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NORTHROP GRUMMAN CORPORATION                        
and our allies, and the need for strong deterrence and a robust defense capability, as well as impacting our political and economic environment. More generally, the threat to U.S. national security remains very substantial and we believe that our capabilities, particularly in space, C4ISR, missile defense, battle management, hypersonics, counter-hypersonics, survivable aircraft and mission systems should help our customers defend against current and future threats and, as a result, continue to allow for long-term profitable business growth.
The Bipartisan Budget Act of 2019 suspended the debt ceiling through July 31, 2021. In October 2021, the statutory debt limit was increased by $480 billion and, in December 2021, was further increased by $2.5 trillion, which is currently expected to allow the Treasury Department to finance the government into 2023.
During the third quarter of 2022, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022, which includes an advanced manufacturing investment tax credit, among other provisions, and the Inflation Reduction Act of 2022, which includes implementation of a new alternative minimum tax and and a one percent excise tax on share repurchases, among other provisions, were signed into law. We expect the excise tax on share repurchases to impact us beginning in 2023; we are currently evaluating other provisions of the legislation to determine any potentially favorable and/or unfavorable impacts on the company.
The political environment, federal budget and debt ceiling are expected to continue to be the subject of considerable debate, especially in light of the ongoing conflict in Ukraine and the inflationary environment, which could have material impacts on defense spending broadly and the company’s programs in particular.
For further information on the risks we face from the current political and economic environment, see “Risk Factors” in our 2021 Annual Report on Form 10-K.
CONSOLIDATED OPERATING RESULTS
For purposes of the operating results discussion below, we assess our performance using certain financial measures that are not calculated in accordance with GAAP. Organic sales is defined as total sales excluding sales attributable to the company's IT services divestiture. This measure may be useful to investors and other users of our financial statements as a supplemental measure in evaluating the company’s underlying sales growth as well as in providing an understanding of our ongoing business and future sales trends by presenting the company’s sales before the impact of divestiture activity.
Transaction-adjusted net earnings and transaction-adjusted earnings per share (transaction-adjusted EPS) exclude impacts related to the IT services divestiture, including the gain on sale of the business, associated federal and state income tax expenses, transaction costs, and the make-whole premium for early debt redemption. They also exclude the impact of mark-to-market pension and OPB (“MTM”) benefit/(expense) and related tax impacts, which are generally only recognized during the fourth quarter. These non-GAAP measures may be useful to investors and other users of our financial statements as supplemental measures in evaluating the company’s underlying financial performance by presenting the company’s operating results before the non-operational impact of divestiture activity and pension and OPB actuarial gains and losses. These measures are also consistent with how management views the underlying performance of the business as the impact of the IT services divestiture and MTM accounting are not considered in management’s assessment of the company’s operating performance or in its determination of incentive compensation awards.
We reconcile these non-GAAP financial measures to their most directly comparable GAAP financial measures below. These non-GAAP measures may not be defined and calculated by other companies in the same manner and should not be considered in isolation or as an alternative to operating results presented in accordance with GAAP.
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NORTHROP GRUMMAN CORPORATION                        
Selected financial highlights are presented in the table below:
Three Months Ended September 30 % Nine Months Ended September 30 %
$ in millions, except per share amounts 2022 2021 Change 2022 2021 Change
Sales $ 8,971  $ 8,720  3  % $ 26,569  $ 27,028  (2) %
Operating costs and expenses 8,127  7,677  6  % 23,874  24,099  (1) %
Operating costs and expenses as a % of sales 90.6  % 88.0  % 89.9  % 89.2  %
Gain on sale of business —  —  NM —  1,980  NM
Operating income 844  1,043  (19) % 2,695  4,909  (45) %
Operating margin rate 9.4  % 12.0  % 10.1  % 18.2  %
Federal and foreign income tax expense 175  212  (17) % 568  1,298  (56) %
Effective income tax rate 16.1  % 16.6  % 16.8  % 23.2  %
Net earnings 915  1,063  (14) % 2,816  4,295  (34) %
Diluted earnings per share $ 5.89  $ 6.63  (11) % $ 18.06  $ 26.55  (32) %
Sales
The table below reconciles sales to organic sales for the nine months ended September 30, 2022 and 2021. Sales for the three months ended September 30, 2022 and 2021 were not impacted by the sale of the company's IT services business:
Nine Months Ended September 30
2022 2021
$ in millions Sales IT services sales Organic
sales		 Sales IT services sales Organic
sales		 Organic sales % change
Aeronautics Systems $ 7,774  $ —  $ 7,774  $ 8,628  $ —  $ 8,628  (10) %
Defense Systems 3,922  —  3,922  4,398  (106) 4,292  (9) %
Mission Systems 7,469  —  7,469  7,613  (42) 7,571  (1) %
Space Systems 8,997  —  8,997  7,950  (16) 7,934  13  %
Intersegment eliminations (1,593) —  (1,593) (1,561) 2  (1,559)
Total $ 26,569  $ —  $ 26,569  $ 27,028  $ (162) $ 26,866  (1) %
Current Quarter
Third quarter 2022 sales increased $251 million, or 3 percent , primarily due to 18 percent growth at Space Systems, partially offset by lower sales at Aeronautics Systems and Defense Systems. Third quarter 2022 sales reflect strong demand and improving trends in labor availability, partially offset by supply chain delays.
Year to Date
Year to date 2022 sales decreased $459 million, or 2 percent, due, in part, to a $162 million reduction in sales related to the IT services divestiture. Year to date 2022 organic sales decreased $297 million, or 1 percent, primarily due to lower sales at Aeronautics Systems and Defense Systems, partially offset by 13 percent growth at Space Systems.
See “Segment Operating Results” below for further information by segment and “Product and Service Analysis” for product and service detail. See Note 9 to the financial statements for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments.
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NORTHROP GRUMMAN CORPORATION                        
Operating Income and Margin Rate
Current Quarter
Third quarter 2022 operating income decreased $199 million, or 19 percent, primarily due to a $116 million reduction in the FAS/CAS operating adjustment and $55 million in higher unallocated corporate expense due to a $60 million benefit for insurance settlements recognized in the prior year. Third quarter 2022 operating margin rate declined to 9.4 percent primarily due to the lower FAS/CAS operating adjustment and higher unallocated corporate expense, as well as a lower segment operating margin rate.
Third quarter 2022 general and administrative (G&A) costs as a percentage of sales increased to 10.9 percent from 10.2 percent in the prior year period primarily due to an increase in investments for future business opportunities.
Year to date
Year to date 2022 operating income decreased $2.2 billion, or 45 percent, primarily due to a $2.0 billion pre-tax gain on sale and $192 million of unallocated corporate expenses recognized in the prior year associated with the IT services divestiture. Operating income also decreased due to a $250 million reduction in the FAS/CAS operating adjustment and $130 million of lower segment operating income. Year to date 2022 operating margin rate declined to 10.1 percent, largely due to the prior year gain on sale of the IT services business and the lower FAS/CAS operating adjustment.
Year to date 2022 G&A costs as a percentage of sales increased to 11.1 percent from 10.3 percent in the prior year period primarily due to an increase in investments for future business opportunities.
See “Segment Operating Results” below for further information by segment. For information regarding product and service operating costs and expenses, see “Product and Service Analysis” below.
Federal and Foreign Income