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What changed in Northrop Grumman's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Northrop Grumman's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+337 added−382 removedSource: 10-K (2024-01-25) vs 10-K (2023-01-26)

Top changes in Northrop Grumman's 2023 10-K

337 paragraphs added · 382 removed · 265 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

48 edited+12 added−31 removed28 unchanged
Biggest changeNavy’s Advanced Anti-Radiation Guided Missile (AARGM), a medium-range, air-to-surface missile, and its extended range variant, AARGM-ER; • Guided Multiple Launch Rocket System (GMLRS) propulsion and warhead subsystems for a surface-to-surface system used to defeat targets using indirect precision fires up to 70-plus kilometers; • Precision Guidance Kit (PGK), replaces conventional fuzes for artillery and mortar munitions and transforms them into Global Positioning System enabled precision guided weapons; • Hypersonic Attack Cruise Missile (HACM) air-breathing, scramjet propulsion subsystem for the hypersonic air-launched cruise missile to travel at speeds of Mach 5 or greater; and -2- NORTHROP GRUMMAN CORPORATION • Forward Area Air Defense Command and Control (FAAD C2), the Army’s long-standing program of record for short range air defense and Counter Rocket, Artillery and Mortar (C-RAM), as well as the interim C2 for Counter Unmanned Aircraft Systems (C-UAS).
Biggest changeAir Force’s Stand-In Attack Weapon (SiAW), an advanced capability air-to-surface tactical missile for the F-35; • Hypersonic Attack Cruise Missile (HACM) air-breathing, scramjet propulsion subsystem for the hypersonic air-launched cruise missile to travel at speeds of Mach 5 or greater; • Global system sustainment and operations support for the F-35, B-2, P-3 Orion, E-6B Mercury, KC-30A multi-role tanker, C-27J transport, NATO AGS, Triton and restricted programs; • Precision Guidance Kit (PGK), replaces conventional fuzes for artillery and mortar munitions and transforms them into Global Positioning System enabled precision guided weapons; • Forward Area Air Defense Command and Control (FAAD C2), the Army’s long-standing program of record for short range air defense and Counter Rocket, Artillery and Mortar (C-RAM), as well as the interim C2 for Counter Unmanned Aircraft Systems (C-UAS); • AAQ-24 sensor sustainment and repair for U.S. military customers; • Special Electronics Mission Aircraft (SEMA) ISR support; and • Distributed Mission Operations Network (DMON), a live, virtual, constructive, and synthetic simulation program for global training and exercises. -2- NORTHROP GRUMMAN CORPORATION MISSION SYSTEMS Mission Systems is a leader in advanced mission solutions and multifunction systems, primarily for the U.S. defense and intelligence community, and international customers.
Air Force, Japan, and the Republic of Korea; • North Atlantic Treaty Organization (NATO) Alliance Ground Surveillance (AGS), a Global Hawk variant, for strategic ISR missions conducted in multinational theater operations; and • MQ-8B and MQ-8C Fire Scout, ship-based, VTOL tactical ISR systems that provide situational awareness and precision targeting for the U.S. Navy.
Air Force, Japan, and the Republic of Korea; • North Atlantic Treaty Organization (NATO) Alliance Ground Surveillance (AGS), a Global Hawk variant, for strategic ISR missions conducted in multinational theater operations; and • MQ-8C Fire Scout, ship-based, VTOL tactical ISR systems that provide situational awareness and precision targeting for the U.S. Navy.
We developed into one of the largest defense companies in the world through a series of acquisitions, as well as organic growth, including the following: • 1994 - Acquired Grumman Corporation, a premier military aircraft systems integrator.
We developed into one of the largest defense technology companies in the world through a series of acquisitions, as well as organic growth, including the following: • 1994 - Acquired Grumman Corporation, a premier military aircraft systems integrator.
The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information about SEC registrants, including Northrop Grumman Corporation. -9- NORTHROP GRUMMAN CORPORATION References to our website and the SEC’s website in this report are provided as a convenience and do not constitute, and should not be viewed as, incorporation by reference of the information contained on, or available through, such websites.
The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information about SEC registrants, including Northrop Grumman Corporation. -8- NORTHROP GRUMMAN CORPORATION References to our website and the SEC’s website in this report are provided as a convenience and do not constitute, and should not be viewed as, incorporation by reference of the information contained on, or available through, such websites.
Internal realignments are typically designed to leverage existing capabilities more fully and to enhance efficient development and delivery of products and services. At December 31, 2022, the company was aligned in four operating sectors, which also comprise our reportable segments: Aeronautics Systems, Defense Systems, Mission Systems and Space Systems.
Internal realignments are typically designed to leverage existing capabilities more fully and to enhance efficient development and delivery of products and services. At December 31, 2023, the company was aligned in four operating sectors, which also comprise our reportable segments: Aeronautics Systems, Defense Systems, Mission Systems and Space Systems.
For a discussion of risks associated with our operations, see “ Risk Factors. ” The company originally was formed in 1939 in Hawthorne, California as Northrop Aircraft Incorporated and was reincorporated in Delaware in 1985, as Northrop Corporation. Northrop Corporation was a principal developer of flying wing technology, including the B-2 Spirit bomber.
For a discussion of risks associated with our operations, see “ Risk Factors. ” The company originally was formed in 1939 in Hawthorne, California as Northrop Aircraft Incorporated and was reincorporated in Delaware in 1985, as Northrop Corporation. Northrop Corporation was a principal developer of flying wing technology, including the B-2 Spirit stealth aircraft.
RAW MATERIALS We have experienced challenges with access to certain raw materials due to macroeconomic factors and several global events such as microelectronics shortages, COVID-19 and geopolitical conflicts. In some cases, these challenges have significantly increased the cost and/or lead time required to obtain certain raw materials.
RAW MATERIALS We have experienced challenges with access to certain raw materials due to macroeconomic factors and several global events such as inflation, geopolitical conflicts and microelectronics shortages. In some cases, these challenges have significantly increased the cost and/or lead time required to obtain certain raw materials.
See Note 1 to the consolidated financial statements and “Risk Factors” for further information regarding our contracts and Note 16 to the consolidated financial statements for sales by contract type. -8- NORTHROP GRUMMAN CORPORATION The following table summarizes sales for the year ended December 31, 2022, recognized by contract type and customer category: $ in millions U.S.
See Note 1 to the consolidated financial statements and “Risk Factors” for further information regarding our contracts and Note 16 to the consolidated financial statements for sales by contract type. -7- NORTHROP GRUMMAN CORPORATION The following table summarizes sales for the year ended December 31, 2023, recognized by contract type and customer category: $ in millions U.S.
The consolidated financial statements and financial information in this Annual Report reflect the operating results of our entire company, including restricted programs. Contracts We generate the majority of our business from long-term contracts with the U.S. government for development, production and support activities.
The consolidated financial statements and financial information in this Annual Report reflect the operating results of our entire company, including restricted programs. -6- NORTHROP GRUMMAN CORPORATION Contracts We generate the majority of our business from long-term contracts with the U.S. government for development, production and support activities.
See “Risk Factors” and Notes 1 and 12 to the consolidated financial statements for further information regarding environmental matters. In 2022, we announced our next generation environmental sustainability goals.
See “Risk Factors” and Notes 1 and 12 to the consolidated financial statements for further information regarding environmental matters. In 2022, we announced our next generation environmental sustainability goals, and in 2023, we announced our goals for water and waste.
Major products and services include cyber; command, control, communications and computers, intelligence, surveillance and reconnaissance (C4ISR) systems; radar, electro-optical/infrared (EO/IR) and acoustic sensors; electronic warfare systems; advanced communications and network systems; cyber solutions; intelligence processing systems; navigation; and maritime power, propulsion and payload launch systems.
Major products and services include command, control, communications and computers, intelligence, surveillance and reconnaissance (C4ISR) systems; radar, electro-optical/infrared (EO/IR) and acoustic sensors; electronic warfare systems; advanced communications and network systems; full spectrum cyber solutions; intelligence processing systems; advanced microelectronics; navigation and positioning sensors; and maritime power, propulsion and payload launch systems.
Additional information regarding our human capital strategy is available in our Environmental, Social, and Governance (ESG) Report and Proxy Statement, which can be found on our company website. Information on our website, including our ESG Report (formerly our Sustainability Report), is not incorporated by reference into this Annual Report.
Additional information regarding our human capital strategy is available in our Environmental, Social, and Governance (ESG) Report, which can be found on our company website. Information on our website, including our ESG Report, is not incorporated by reference into this Annual Report.
Key programs include: • MQ-4C Triton, which provides wide area strategic ISR over vast ocean and coastal regions for maritime domain awareness to the U.S. Navy and Australia; • RQ-4 Global Hawk, which provides high resolution imagery of land masses for theater awareness and strategic ISR to the U.S.
Navy, Japan, and France; • MQ-4C Triton, which provides wide area strategic ISR over vast ocean and coastal regions for maritime domain awareness to the U.S. Navy and Australia; • RQ-4 Global Hawk, which provides high resolution imagery of land masses for theater awareness and strategic ISR to the U.S.
Army, Navy and Marines; • AC/MC 130J Radio Frequency Countermeasures system, which provides superior situational awareness and better enables aircraft survivability in operationally relevant environments; • Embedded Global Positioning System (GPS) / Inertial Navigation Systems-Modernization (EGI-M) program, which provides state-of-the-art airborne navigation capabilities with an open architecture that enables rapid responses to future threats; and • UH-60V Black Hawk integrated mission equipment package, which modernizes the U.S.
Army, Navy and Marines; • Exploitation and cyber programs, which provide cyber and intelligence domain support through unique intelligence and cyber capabilities; • AC/MC 130J Radio Frequency Countermeasures system, which provides superior situational awareness and better enables aircraft survivability in operationally relevant environments; • Embedded Global Positioning System (GPS) / Inertial Navigation Systems-Modernization (EGI-M) program, which provides state-of-the-art airborne navigation capabilities with an open architecture that enables rapid responses to future threats; and • UH-60V Black Hawk integrated mission equipment package, which modernizes the U.S.
Air Force B-21 Raider long-range strike bomber, as well as modernization and sustainment services for the B-2 Spirit bomber; • Fuselage production for the F/A-18 Super Hornet and the F-35 Lighting II Joint Strike Fighter for use by U.S. and international forces; • E-2D Advanced Hawkeye battle management aircraft production for the U.S.
Air Force B-21 Raider long-range strike aircraft that defines sixth-generation technologies; • Modernization and sustainment services for the B-2 Spirit stealth aircraft; • Fuselage production for the F/A-18 Super Hornet and the F-35 Lighting II Joint Strike Fighter for use by U.S. and international forces; • E-2D Advanced Hawkeye battle management aircraft production for the U.S.
Across our U.S. employee population, as of December 31, 2022, 25 percent are female, 37 percent are people of color, 18 percent are veterans and 8 percent are persons with disabilities. At the vice president level, 34 percent are female and 19 percent are people of color.
Across our U.S. employee population, as of December 31, 2023, 25 percent are female, 38 percent are people of color, 18 percent are veterans and 8 percent are persons with disabilities. At the vice president level, 35 percent are female and 20 percent are people of color.
It is not unusual to compete for a contract award with a peer company and, simultaneously, perform as a supplier to or a customer of that same competitor on other contracts, or vice versa.
It is not unusual to compete for a contract award with a peer company and, simultaneously, perform as a supplier to or a customer of that same competitor on other contracts, or vice versa. SEASONALITY No material portion of our business is considered to be seasonal.
We hold regular talent review discussions to ensure line of sight to talent at various levels of the organization. Succession plans are refreshed and reviewed to ensure a robust, diverse pipeline of talent and business continuity with a tight linkage to development. We focus on accelerating learning and development of our leaders by providing a combination of experiences and education.
We hold regular talent review discussions to ensure line of sight to talent at various levels of the organization. Succession plans are refreshed and reviewed to ensure a robust, diverse pipeline of talent and business continuity with a tight linkage to development.
Our employees are empowered to raise concerns without fear of reprisal. In addition to full-time ethics professionals, we also have over 140 business conduct advisors who promote values and an ethical culture within the company. Our annual engagement survey gives employees a voice and a mechanism to provide feedback on our culture.
Our employees are empowered to raise concerns without fear of reprisal. In addition to full-time ethics professionals, we also have over 150 business conduct advisors who promote values and an ethical culture within the company.
See “Risk Factors” for further discussion regarding risks related to our workforce and employee relations. REGULATORY MATTERS Government Contract Security Restrictions We are prohibited by the U.S. government from publicly discussing the details of certain classified programs. These programs are generally referred to as “restricted” in this Annual Report.
REGULATORY MATTERS Government Contract Security Restrictions We are prohibited by the U.S. government from publicly discussing the details of certain classified programs. These programs are generally referred to as “restricted” in this Annual Report.
Risk and hazard identification, abatement and prevention are key components of Northrop Grumman’s safety program. Everyone has a responsibility to identify workplace hazards and we empower employees to report these hazards without fear of repercussion. We evaluate the effectiveness of our health and safety programs externally, through benchmarking with industry peers and the U.S. Bureau of Labor Statistics.
Everyone has a responsibility to identify workplace hazards and we empower employees to report these hazards without fear of repercussion. We evaluate the effectiveness of our health and safety programs externally, through benchmarking with industry peers and the U.S. Bureau of Labor Statistics. Internally, we determine program effectiveness by conducting trend analyses of our past performance.
Much of this business is performed through restricted programs.
Approximately 30 percent of this business is performed through restricted programs.
Key programs include: • Ground Based Strategic Deterrent (GBSD) Engineering & Manufacturing Development (EMD) program; • Missile defense systems, interceptors, targets, mission processing and boosters for the Missile Defense Agency's (MDA) Next-Generation Interceptor (NGI), Ground-based Midcourse Defense Weapon Systems (GWS); • Development and production of solid rocket motors for NASA’s Space Launch System (SLS) heavy lift vehicle; • Antares rocket, used in the execution of our Commercial Resupply Services (CRS) contracts with the National Aeronautics and Space Administration (NASA); • 63-inch diameter Graphite Epoxy Motor (GEM 63) and the extended length variation (GEM 63XL) solid rocket boosters used to provide lift capability for the ATLAS V and Vulcan launch vehicles; • Medium-class solid rocket motors for the U.S.
Key unrestricted programs include: • Ground Based Strategic Deterrent (GBSD) Engineering & Manufacturing Development (EMD) program; • Missile defense systems, interceptors, targets, mission processing and boosters for the Missile Defense Agency's (MDA) Next-Generation Interceptor (NGI) and Ground-based Midcourse Defense Weapon Systems (GWS); • Space Development Agency Tracking and Transport layers providing missile warning/tracking and resilient, low-latency, high-volume data transport communication systems; • Next-Generation Overhead Persistent Infrared (Next Gen OPIR) program satellites and payloads providing data for missile defense; • Development and production of solid rocket motors for NASA’s Space Launch System (SLS) heavy lift vehicle; • 63-inch diameter Graphite Epoxy Motor (GEM 63) and the extended length variation (GEM 63XL) solid rocket boosters used to provide lift capability for the ATLAS V and Vulcan launch vehicles; • Medium-class solid rocket motors for the U.S.
These goals focus on Northrop Grumman’s facilities in addition to supply chain partners and customers: • Net zero greenhouse gas emissions in operations by 2035; • Source 50 percent of total electricity from renewable sources by 2030; • Strengthen leadership in operational footprint reduction through setting and achieving pioneering targets in environmental stewardship by 2025, including potable water use and solid waste to landfill; • In collaboration with key customers, work to develop a pioneering product stewardship program focused on material efficiency, product design and life cycle assessment; • Update the company’s "Standards of Business Conduct for Suppliers and Other Trading Partners" to incorporate industry-leading sustainability practices by 2023; • Expand Technology for Conservation initiatives in proximity to Northrop Grumman's U.S. locations by 2030, in collaboration with external partners.
These goals focus on Northrop Grumman’s facilities in addition to supply chain partners and customers: • Net zero greenhouse gas emissions in operations by 2035; • Source 50 percent of total electricity from renewable sources by 2030; • Reduce 10% of absolute water withdrawals, reuse 10% of water withdrawals and replenish 10% of water withdrawals, focusing in water-stressed regions — all by 2030; • Reduce solid waste sent to landfill and incineration by 10% by 2030; • In collaboration with key customers, work to develop a pioneering product stewardship program focused on material efficiency, product design and life cycle assessment; • Expand Technology for Conservation initiatives in proximity to Northrop Grumman's U.S. locations by 2030, in collaboration with external partners.
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.
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.
For further information, see “Backlog” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) and Note 1 to the consolidated financial statements. INTELLECTUAL PROPERTY We routinely apply for and own a number of U.S. and foreign patents related to the technologies we develop. We also develop and protect intellectual property as trade secrets.
INTELLECTUAL PROPERTY We routinely apply for and own a number of U.S. and foreign patents related to the technologies we develop. We also develop and protect intellectual property as trade secrets.
AERONAUTICS SYSTEMS Aeronautics Systems is a leader in the design, development, production, integration, sustainment and modernization of advanced aircraft systems for the U.S. Air Force, the U.S. Navy, other U.S. government agencies, and international customers. These aircraft systems support four mission areas: strike; air dominance; battle management -1- NORTHROP GRUMMAN CORPORATION and control; and intelligence, surveillance and reconnaissance (ISR).
AERONAUTICS SYSTEMS Aeronautics Systems is a leader in the design, development, production, integration, sustainment and modernization of military aircraft systems for the U.S. Air Force, the U.S. Navy, other U.S. government agencies, and international customers.
It is common in the defense industry for work on major programs to be shared among a number of companies. A company competing to be a prime contractor may, upon ultimate award of the contract to another competitor, serve as a subcontractor to the ultimate prime contracting company.
A company competing to be a prime contractor may, upon ultimate award of the contract to another competitor, serve as a subcontractor to the ultimate prime contracting company.
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.
The company is a leading provider of space systems, military aircraft, missile defense, advanced weapons and long-range fires capabilities, mission systems, networking and communications, strategic deterrence systems, and breakthrough technologies, such as advanced computing, microelectronics 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.
Government (1) International (2) Other Customers Total Percentage of Total Sales Cost-type contracts $ 18,110 $ 594 $ 7 $ 18,711 51 % Fixed-price contracts 13,213 4,254 424 17,891 49 % Total sales $ 31,323 $ 4,848 $ 431 $ 36,602 100 % (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.
Government (1) International (2) Other Customers Total Percentage of Total Sales Cost-type contracts $ 20,170 $ 785 $ 24 $ 20,979 53 % Fixed-price contracts 13,712 4,120 479 18,311 47 % Total sales $ 33,882 $ 4,905 $ 503 $ 39,290 100 % (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.
Our culture and values enable us to continue attracting qualified talent, particularly those with security clearances and requisite skills in multiple areas, including science, technology, engineering and math.
Our culture and values enable us to continue attracting qualified talent, particularly those with security clearances and requisite skills in multiple areas, including science, technology, engineering and math. This focus on our culture and workforce was a factor in our ability to hire approximately 14,500 new employees in 2023, and as of December 31, 2023, we have approximately 101,000 employees.
The Boeing Company, General Dynamics, L3Harris Technologies, Lockheed Martin, and Raytheon Technologies are some of our primary competitors. Key characteristics of our industry include long operating cycles and intense competition, which is evident through the number of competitors bidding on program opportunities and the number of bid protests (competitor protests of U.S. government procurement awards).
Key characteristics of our industry include long operating cycles and intense competition, which is evident through the number of competitors bidding on program opportunities and the number of competitor protests of U.S. government procurement awards. It is common in the defense industry for work on major programs to be shared among a number of companies.
Key unrestricted programs include: -4- NORTHROP GRUMMAN CORPORATION • Cygnus spacecraft, used in the execution of our CRS contracts with NASA; • Habitation and Logistics Outpost (HALO) module in support of NASA’s Gateway; • Evolved Strategic SATCOM (ESS) and Protected Tactical SATCOM (PTS) satellites and payloads providing survivable, protected communications to U.S. forces; • Next-Generation Overhead Persistent Infrared (Next Gen OPIR) program satellites and payloads providing data for missile defense; • Space Development Agency Tracking and Transport layers providing missile warning/tracking and resilient, low-latency, high-volume data transport communication systems; and • James Webb Space Telescope (JWST) operations and sustainment contract.
Navy's Trident II Fleet Ballistic Missile program; • Evolved Strategic SATCOM (ESS) and Protected Tactical SATCOM (PTS) satellites and payloads providing survivable, protected communications to U.S. forces; • Intercontinental Ballistic Missile (ICBM) Ground Subsystem Support Contract (GSSC); • Cygnus spacecraft, used in the execution of our Commercial Resupply Services (CRS) contracts with NASA; • Habitation and Logistics Outpost (HALO) module in support of NASA’s Gateway; and • James Webb Space Telescope (JWST) operations and sustainment contract.
For further information on sales by customer type, contract type and geographic region, see Note 16 to the consolidated financial statements. See “Risk Factors” for further discussion regarding risks related to customer concentration. COMPETITIVE CONDITIONS We compete with many companies in the defense, intelligence and federal civil markets.
See “Risk Factors” for further discussion regarding risks related to customer concentration. COMPETITIVE CONDITIONS We compete with many companies in the defense, intelligence and federal civil markets. The Boeing Company, General Dynamics, L3Harris Technologies, Lockheed Martin, and RTX are some of our primary competitors.
Key unrestricted programs include: • LITENING Advanced Targeting Pod, an electro-optical infrared sensor system for targeting and surveillance that enables aircrews to detect, acquire, identify and track targets at long ranges; • Large Aircraft and Common Infrared Countermeasures (LAIRCM, DoN LAIRCM, CIRCM) systems, which protect large aircraft as well as rotary wing and medium fixed wing aircraft from infrared missiles using advanced laser technology; • APR-39 DV(2) and EV(2) Radar Warning Receiver programs, which produce a digital radar warning receiver for the U.S.
The centerpiece of the E-7 AEW&C aircraft is the Multi-role Electronically Scanned Array (MESA) radar which enables 360 degree long range advanced air moving target indicator (AMTI) capabilities for Battle Management, Command and Control, and Maritime Surveillance; • Large Aircraft and Common Infrared Countermeasures (LAIRCM, DoN LAIRCM, CIRCM) systems, which protect large aircraft as well as rotary wing and medium fixed wing aircraft from infrared missiles using advanced laser technology; • Battlefield Airborne Communications Node (BACN), one of the first airborne gateway systems that allows platforms to communicate and securely share data; • DDG Modernization, which is comprised of several subsystems to support modernization of Arleigh Burke-class guided missile destroyers including Integrated Bridge and Navigation Systems (IBNS) and ship control systems; • LITENING Advanced Targeting Pod, an electro-optical infrared sensor system for targeting and surveillance that enables aircrews to detect, acquire, identify and track targets at long ranges; • APR-39 DV(2) and EV(2) Radar Warning Receiver programs, which provide a digital radar warning receiver for the U.S.
Navy's Trident II Fleet Ballistic Missile program; and • Intercontinental Ballistic Missile (ICBM) Ground Subsystem Support Contract (GSSC). CUSTOMER CONCENTRATION Our largest customer is the U.S. government. Sales to the U.S. government accounted for 86 percent, 85 percent and 84 percent of sales during the years ended December 31, 2022, 2021 and 2020, respectively.
CUSTOMER CONCENTRATION Our largest customer is the U.S. government. Sales to the U.S. government accounted for 86 percent, 86 percent and 85 percent of sales during the years ended December 31, 2023, 2022 and 2021, respectively. For further information on sales by customer type, contract type and geographic region, see Note 16 to the consolidated financial statements.
Key unrestricted programs include : • Surface Electronic Warfare Improvement Program (SEWIP) Block III, which protects surface ships from anti-ship missiles, provides early detection, signal analysis and threat warning; • Ground/Air Task Oriented Radar (G/ATOR), a mobile multi-mode active electronically scanned array; • Littoral Combat Ship Mission Module Integration, which provides engineering design, support and production of mission modules for U.S.
Key unrestricted programs include: • Scalable Agile Beam Radar (SABR), an active electronically scanned array fire control radar system for F-16 aircraft; • F-35 fire control radar and Distributed Aperture System (DAS), which provides 360 degree field of view tracking, identifying, missile warning and night vision capabilities; • F-35 Communications, Navigation and Identification (CNI) integrated avionics system, which provides secure communications and interoperability capabilities; • Ground/Air Task Oriented Radar (G/ATOR), a mobile multi-mode active electronically scanned array; • Surface Electronic Warfare Improvement Program (SEWIP) Block III, which protects surface ships from anti-ship missiles, provides early detection, signal analysis and threat warning; • Airborne Early Warning & Control (AEW&C).
Army’s Black Hawk helicopters with a glass cockpit, including an integrated computational system, visual display system and control display units, extending the life and mission capabilities of the UH-60 platform.
Army’s Black Hawk helicopters with a glass cockpit, including an integrated computational system, visual display system and control display units, extending the life and mission capabilities of the UH-60 platform. -3- NORTHROP GRUMMAN CORPORATION SPACE SYSTEMS Space Systems is a leader in delivering end-to-end mission solutions through the design, development, integration, production and operation of space, missile defense, launch and strategic missile systems for national security, civil government, commercial and international customers.
Key programs include: • Integrated Air and Missile Defense Battle Command System (IBCS) for the U.S. Army and Poland, which is a system that integrates sensors and effectors to deliver among the most advanced C2 systems for joint and coalition forces; • U.S.
Key programs include: • Integrated Air and Missile Defense Battle Command System (IBCS) for the U.S.
Internally, we determine program effectiveness by conducting trend analyses of our past performance. -7- NORTHROP GRUMMAN CORPORATION Collective Agreements Approximately 4,000 employees are covered by 15 collective agreements in the U.S., of which we negotiated four renewals in 2022 and expect to negotiate one renewal in 2023.
Collective Agreements Approximately 4,100 employees are covered by 15 collective agreements in the U.S., of which we negotiated one renewal in 2023 and expect to negotiate five renewals in 2024. See “Risk Factors” for further discussion regarding risks related to our workforce and employee relations.
Navy, Japan, and France; and • E-8C Joint Surveillance Target Attack Radar System (JSTARS) aircraft sustainment and modernization for the U.S. Air Force. DEFENSE SYSTEMS Defense Systems is a leader in the design, development, production, integration, sustainment and modernization of weapon and mission systems for U.S. military and civilian agency customers, and a broad range of international customers.
DEFENSE SYSTEMS Defense Systems is a leader in the design, development, integration and production of advanced tactical weapons and missile defense solutions, and a provider of sustainment, modernization and training services for manned and unmanned aircraft and electronics systems for the U.S. military and a broad range of international customers.
In 2022, 79 percent of employees responded to the survey, an indication that our employees believe their feedback matters, and we were named a “High Performing -6- NORTHROP GRUMMAN CORPORATION Company” by the third party vendor based on our survey results.
In 2023, 81 percent of employees responded to the survey, an indication that our employees believe their feedback matters, and our survey results exceeded many of the global norms of our third party vendor for both engagement and inclusion.
SEASONALITY No material portion of our business is considered to be seasonal. -5- NORTHROP GRUMMAN CORPORATION BACKLOG At December 31, 2022, total backlog, which is equivalent to the company’s remaining performance obligations, was $78.7 billion as compared with $76.0 billion at December 31, 2021.
BACKLOG At December 31, 2023, total backlog, which is equivalent to the company’s remaining performance obligations, was $84.2 billion as compared with $78.7 billion at December 31, 2022. For further information, see “Backlog” in -4- NORTHROP GRUMMAN CORPORATION “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) and Note 1 to the consolidated financial statements.
Aeronautics Systems is reported in two business areas: Autonomous Systems and Manned Aircraft. Autonomous Systems – provides unmanned autonomous aircraft systems, including high-altitude long-endurance (HALE) strategic ISR systems and vertical take-off and landing (VTOL) tactical ISR systems.
Major products include strategic long-range strike aircraft; tactical fighter and air dominance aircraft; airborne battle management and command and control systems; and unmanned autonomous aircraft systems, including high-altitude long-endurance (HALE) strategic intelligence, surveillance and reconnaissance (ISR) -1- NORTHROP GRUMMAN CORPORATION systems and vertical take-off and landing (VTOL) tactical ISR systems.
Our leaders review the survey responses and work collaboratively with their teams to take meaningful actions based on survey results. Diversity, Equity and Inclusion Diversity, equity and inclusion (DE&I) is vital to our culture and our company’s success.
Our leaders review the survey responses and work collaboratively with their teams to take meaningful actions based on survey results. -5- NORTHROP GRUMMAN CORPORATION Diversity, Equity and Inclusion We value diversity and belonging in its broadest sense, as an enabling force that helps us pioneer, perform and deliver on quality, which results in value for our shareholders, customers, and employees.
SPACE SYSTEMS Space Systems is a leader in delivering end-to-end mission solutions through the design, development, integration, production and operation of space, missile defense, launch and strategic missile systems for national security, civil government, commercial and international customers. Major products include satellites and payloads; ground systems; missile defense systems and interceptors; launch vehicles and related propulsion systems; and strategic missiles.
Major products include satellites and spacecraft systems, subsystems, sensors and payloads; ground systems; missile defense systems and interceptors; launch vehicles and related propulsion systems; and strategic missiles. Approximately 35 percent of this business is performed through restricted programs.
Our employee development programs are designed to strengthen employee skills that align to our current and future business needs, encourage knowledge sharing and support career progression and growth. We utilize My Learning Experience, a machine learning enabled content aggregator designed to create a unique and personalized learning experience for each employee.
We focus on accelerating learning and development of our leaders by providing a combination of experiences, exposure and education. Our employee development programs strengthen employee skills aligned to our current and future business needs through on-the-job development, knowledge sharing and tools to support career growth.
Major products and services include integrated battle management systems, weapons systems and aircraft and mission systems sustainment and modernization. The sector is reported in two business areas: Battle Management & Missile Systems, and Mission Readiness. Battle Management & Missile Systems – designs, develops and integrates all-domain command and control (C2) and weapons systems, including munitions and missiles.
Major products and services include integrated, all-domain command and control (C2) battle management systems, precision strike weapons; advanced propulsion, including high speed air-breathing and hypersonic systems; high-performance gun systems, ammunition, precision munitions and advanced fuzes; aircraft and mission systems logistics support, sustainment, operations and modernization; and warfighter training. Less than 5 percent of this business is performed through restricted programs.
Removed
Manned Aircraft – provides strategic long-range strike aircraft, tactical fighter and air dominance aircraft, and airborne battle management and command and control systems. Key programs include: • Development and production of the U.S.
Added
Approximately 45 percent of this business is performed through restricted programs. Key programs include: • Development and production of the U.S.
Removed
The business provides integration and interoperability of net-enabled battle management, sensors, targeting and surveillance systems – a backbone architecture for Joint All-Domain Command and Control (JADC2) capable of integrating sensors and shooters, as well as air and missile defense C2 systems.
Added
Army and Poland, which is an open architecture system that seamlessly integrates sensors and effectors to deliver among the most advanced C2 systems for joint and coalition forces; • Medium (30mm and 20mm) and Large (120mm) caliber tactical and training ammunition production; • Guided Multiple Launch Rocket System (GMLRS) propulsion and warhead subsystems for a surface-to-surface system used to defeat targets using indirect precision fires; • U.S.
Removed
It also develops and produces precision strike weapons; advanced propulsion, including high speed air-breathing and hypersonic systems; and high-performance gun systems and precision munitions. Competencies include system and software development; integration of weapon systems; tactical missile and component development and production; and production of advanced fuzes, munitions and defense electronics.
Added
Navy’s Advanced Anti-Radiation Guided Missile (AARGM), a medium-range, air-to-surface missile, and its extended range variant, AARGM-ER; • U.S.
Removed
Mission Readiness – provides full life cycle service and support for software, weapons systems and aircraft, and logistics support, sustainment, operations and modernization for air, sea and ground systems. It also supports critical warfighter training for complex missions in a realistic virtual environment.
Added
Our annual Employee Experience Survey gives employees a voice and a mechanism to provide feedback on our culture and empower our leaders to enhance the employee experience. This anonymous survey encourages employee candor on key engagement and inclusion drivers, including belonging, respect, a sense of personal work accomplishment and recommending the company to others.
Removed
Competencies include aircraft, electronics and embedded software sustainment; digital engineering and extended reality training for platform logistics; and maintenance.
Added
We strive to reach all parts of the diverse talent pools available now and in the future because we recognize that we benefit from having coworkers with different ideas, perspectives and approaches to help us innovate.
Removed
Key programs include: • Global system sustainment and operations support for the F-35, B-2, P-3 Orion, E-6B Mercury, KC-30A multi-role tanker, C-27J transport, Global Hawk and Triton programs; • Special Electronics Mission Aircraft (SEMA) intelligence, surveillance and reconnaissance support; • AAQ-24 sensor sustainment and repair for U.S. military customers; and • APN-241 radar sustainment, repair and production for U.S. military and foreign military sales (FMS) customers.
Added
Talent Management Northrop Grumman’s talent strategy is focused on four key pillars: broadening talent pools; enhancing the employee experience; building leaders of the future; and enabling new ways of working. Our strategy addresses the external and internal landscape and ensures that we are able to attract, retain and develop the workforce necessary to support the continued success of the business.
Removed
MISSION SYSTEMS Mission Systems is a leader in advanced mission solutions and multifunction systems, primarily for the U.S. defense and intelligence community, and international customers.
Added
Employees utilize curated, career-specific resources such as My Learning Experience, a machine learning enabled content aggregator that creates a personalized learning experience for each employee. Our Education Assistance Program subsidizes tuition and other educational institution fees to support development through job-related degrees and certificates.
Removed
The sector is reported in four business areas: Airborne Multifunction Sensors; Maritime/Land Systems & Sensors; Navigation, Targeting & Survivability; and Networked Information Solutions. Airborne Multifunction Sensors – delivers products, systems and services that support airborne platforms with multi-function radio frequency (RF) and EO/IR systems; radar, electronic warfare and situational awareness mission systems; and high altitude ISR sensors.
Added
Our early-in-career rotation program, Pathways, develops talent pipelines with both depth of critical skills and breadth of experiences. Our technical cohort programs cultivate technical, domain expertise and collaborative thought leadership for early through advanced career levels. In a rapidly changing world, we maintain focus on keeping our team and our company prepared for the evolving future of work.
Removed
Competencies include fire control, surveillance and early warning and control radar systems; electronic attack and electronic support systems; and multi-sensor processing. Key unrestricted programs include: • Airborne Early Warning & Control (AEW&C).
Added
In addition to offering our employees flexible work arrangements, caregiver support and mental health services that help our employees make their careers work within their lives, we also help our employees build the careers that will serve them into the future.
Removed
The center piece of the E-7 AEW&C aircraft is the Multi-role Electronically Scanned Array (MESA) radar which enables 360 degree long range advanced air moving target indicator (AMTI) capabilities for Battle Management, Command and Control, and Maritime Surveillance; • F-35 fire control radar and Distributed Aperture System (DAS), which provides 360 degree field of view tracking, identifying, missile warning and night vision capabilities; • LONGBOW Fire Control Radar (FCR), which provides fire control radar capabilities for the global AH-64 helicopter fleet; and • Scalable Agile Beam Radar (SABR), an active electronically scanned array fire control radar system for F-16 aircraft.
Added
We ensure that our employees have the tools and resources to develop their knowledge base and skill sets, so that they can continue to thrive at Northrop Grumman even in the midst of change. When our employees succeed and grow at work, our business succeeds and grows.
Removed
Maritime/Land Systems & Sensors – delivers products, systems and services that enable maritime and ground platform mission capabilities via sensors, targeting and surveillance systems; electronic warfare systems; mission module integration; power, propulsion and control systems; and missile launchers.
Added
Through a focus on our employees, we remain agile and innovative, adapting to the future as it unfolds before us. We provide many avenues for our employees to feel included, so we can hire, develop and retain the best people to support our common mission and better pioneer together.
Removed
Competencies include ground and maritime radar systems; nuclear ship propulsion and power generation systems; shipboard missile and encapsulated payload launch systems; integrated bridge systems; unmanned maritime vehicles; high-resolution undersea sensors; deep-sea packaging; and mission integration.
Added
Employee Health and Safety Health and safety are a core focus in everything we do. People are our most valuable resource, and our goals have been, and continue to be, to keep our employees safe and position the company for long-term success. Risk and hazard identification, abatement and prevention are key components of Northrop Grumman’s safety program.
Removed
Navy littoral combat ships; and -3- NORTHROP GRUMMAN CORPORATION • DDG Modernization, which is comprised of several subsystems to support modernization of Arleigh Burke-class guided missile destroyers including Integrated Bridge and Navigation Systems (IBNS) and ship control systems.
Removed
Navigation, Targeting & Survivability – delivers products, systems and services that support aircraft platforms with targeting, self-protection and situational awareness mission systems; and provides embedded navigation and positioning sensors for a range of platforms including ships, aircraft, spacecraft and weapons. Competencies include EO/IR and RF self-protection; targeting and surveillance systems; digitized cockpits; and inertial navigation systems.
Removed
Networked Information Solutions – delivers products, systems and services in the areas of advanced communications and network systems, full spectrum cyber solutions, secure processing, transformational computing, advanced technology development, and Signals Intelligence (SIGINT) mission systems.
Removed
Competencies include software defined radios and network gateways, communications and counter-communications systems; cyber mission management; large scale cyber solutions for national security applications; cyber survivability; ground software systems; and SIGINT sensors and processing.
Removed
Key unrestricted programs include: • F-35 Communications, Navigation and Identification (CNI) integrated avionics system, which provides secure communications and interoperability capabilities; • Battlefield Airborne Communications Node (BACN), one of the first airborne gateway systems that allows platforms to communicate and securely share data; • Joint Counter Radio-Controlled Improvised Explosive Device Electronic Warfare (JCREW), a software-programmable jammer that provides protection from improvised explosive devices (IEDs); • Exploitation and cyber programs, which provide cyber and intelligence domain support through unique intelligence and cyber capabilities; and • Airborne Signals Intelligence Payload (ASIP), which delivers key signals intelligence capabilities to the warfighter by detecting, identifying, and locating radar and other types of electronic and modern communication signals.
Removed
The sector is reported in two business areas: Space and Launch & Strategic Missiles. Space – designs, develops, manufactures and integrates spacecraft systems, subsystems, sensors, payloads and ground systems to deliver mission capability to national security, science and environmental, communications, on-orbit servicing, and human-rated space systems for earth orbit and deep-space exploration missions.
Removed
Launch & Strategic Missiles – designs, develops, manufactures and integrates small- and medium-class space launch vehicles to place satellites into earth orbit; suborbital launch vehicles that place payloads into a variety of high-altitude trajectories; large strategic missile systems; and missile defense systems.
Removed
Competencies include large strategic missile design, integration, production and sustainment, as well as the production of medium- and large-class rocket propulsion systems for human and cargo launch vehicles, hypersonic boosters and missile defense interceptors.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

94 edited+19 added−35 removed111 unchanged
Biggest changeIf any or all of these items were to occur, we could experience adverse impacts on our overall performance, operations and financial results.
Biggest changeIf any or all of these items were to occur, we could experience material adverse impacts on our business, financial position, results of operations and/or cash flows. • Our future success depends, in part, on our ability to innovate, develop new products and technologies, progress and benefit from digital transformation and maintain technologies, facilities and equipment to win new competitions and meet the needs of our customers.
We rely on other companies to provide raw materials, chemicals and components and subsystems for our products, produce hardware elements and sub-assemblies, provide software and intellectual property, provide information about the parts they supply to us, and perform some of the services we need for our operations or provide to our customers, and to do so in compliance with all applicable laws, regulations and contract terms, while maintaining strong values and cultures.
We rely on other companies to provide raw materials, chemicals, parts and components and subsystems for our products, produce hardware elements and sub-assemblies, provide software and intellectual property, provide information about the parts they supply to us, and perform some of the services we need for our operations or provide to our customers, and to do so in compliance with all applicable laws, regulations and contract terms, while maintaining strong values and cultures.
If we are unable to meet our obligations, including due to issues regarding the design, development or manufacture of our products or services, or we experience launch, platform or satellite system failures, it could have a material adverse effect on our reputation, our ability to compete for other contracts and our financial position, results of operations and/or cash flows. ▪ Our business is subject to disruption caused by natural disasters that could adversely affect our profitability and our overall financial position.
If we are unable to meet our obligations, including due to issues regarding the design, development or manufacture of our products or services, or we experience launch, platform, satellite system or other failures, it could have a material adverse effect on our reputation, our ability to compete for other contracts and our financial position, results of operations and/or cash flows. • Our business is subject to disruption caused by natural disasters that could adversely affect our profitability and our overall financial position.
In addition, pressures on, as well as laws and plans relating to the federal budget, potential changes in priorities and defense spending, the timing and substance of the appropriations process, use of continuing resolutions (with restrictions, e.g., on new starts) and the federal debt limit (including a breach), have adversely affected and could adversely affect the amount and timing of funding for individual programs and delay purchasing or payments by our customers.
In addition, pressures on, as well as laws and plans relating to the federal budget, potential changes in priorities and defense spending, the timing and substance of the appropriations process, use of continuing resolutions (with restrictions, e.g., on new starts) and the federal debt limit (including a breach of the federal debt ceiling), have adversely affected and could adversely affect the amount and timing of funding for individual programs and delay purchasing or payments by our customers.
Under cost-type contracts, allowable costs are generally subject to reimbursement plus a fee. We often enter into cost-type contracts for development programs with complex design and technical challenges. These cost-type programs typically have award or incentive fees that are uncertain and may be earned over extended periods or towards the end of the contract.
Under cost-type contracts, allowable costs are generally subject to reimbursement plus a fee. We often enter into cost-type contracts for development programs with complex design and technical challenges. These cost-type programs may have award or incentive fees that are uncertain and may be earned over extended periods or towards the end of the contract.
We (again, including our subcontractors and others with whom we do business) also are subject to, and expected to perform in compliance with, a vast array of federal, state and local laws, regulations, contract terms and requirements related to our industry, our products and the businesses we operate, as well as those more broadly applicable to industry, such as securities laws and regulations.
We (including our subcontractors and others with whom we do business) also are subject to, and expected to perform in compliance with, a vast array of federal, state and local laws, regulations, contract terms and requirements related to our industry, our products and the businesses we operate, as well as those more broadly applicable to industry, such as securities laws and regulations.
The new proposed rules, depending on how they are finally adopted, as well as other changes the government might implement, could impose significant new burdens on the company and our suppliers, with significant costs and operational impacts, and adversely impact our ability to win business and operate successfully.
The proposed rules, depending on how they are finally adopted, as well as other changes the government might implement, could impose significant new burdens on the company and our suppliers, with significant potential costs and operational impacts, and adversely impact our ability to win business and operate successfully.
We operate in highly competitive markets and our competitors may have more financial capacity or more extensive or specialized engineering, manufacturing, or marketing capabilities. They may be willing to accept more risk or lower profitability in competing for contracts.
We operate in highly competitive markets and our competitors may have more financial capacity or more extensive or specialized engineering, manufacturing, marketing or servicing capabilities. They may be willing to accept more risk or lower profitability in competing for contracts.
In addition, our customers may use or misuse our products and services in ways that can be unusually hazardous or risky, or in ways that are not intended, which may create potential liabilities for our company, as well as reputational harm.
In addition, our customers may use our products and services in ways that can be unusually hazardous or risky, or in ways that are not intended, which may create potential liabilities for our company, as well as reputational harm.
Under some circumstances, the U.S. government and prime contractors may provide for certain indemnification and other protection, including pursuant to, or in connection with, Public Law 85-804, 10 U.S.C. 2354, the Price-Anderson Nuclear Industries Indemnity Act, the NASA Space Act, the Commercial Space Launch Act and the Terrorism Risk Insurance Reauthorization Act, for certain risks, but those protections may not be available or adequate.
Under some circumstances, the U.S. government and prime contractors may provide for certain indemnification and other protection, including pursuant to, or in connection with, Public Law 85-804, 10 U.S.C. 3861, the Price-Anderson Nuclear Industries Indemnity Act, the NASA Space Act, the Commercial Space Launch Act and the Terrorism Risk Insurance Reauthorization Act, for certain risks, but those protections may not be available or adequate.
Changes in political or economic conditions, including changes in demand, changes in the macroeconomic environment (including inflation and labor and supply chain challenges), changes in defense budgets and/or priorities, changes in export/import restrictions, evolving requirements, or changes in access to critical technology and materials (including metals and components), among others, have adversely affected and could in the future adversely affect the financial stability of our suppliers and/or their ability to perform effectively.
Changes in political or economic conditions, including changes in demand, changes in the macroeconomic environment (including inflation and labor and supply chain challenges), changes in defense budgets and/or priorities, changes in the global security environment, changes in export/import restrictions, evolving requirements, or changes in access to critical technology and materials (including metals and components), among others, have adversely affected and could in the future adversely affect the financial stability of our suppliers and/or their ability to perform effectively.
This risk of delays and disruptions in the supply chain, and supply chain challenges more broadly, has been and continues to be significantly heightened globally, in the current macroeconomic environment.
This risk of delays and disruptions in the supply chain, and supply chain challenges more broadly, has been and continues to be heightened globally, in the current macroeconomic environment.
Our primary customer is the U.S. government, from which we derived 86 percent of our sales in 2022; we have a number of large programs with the U.S. Department of the Air Force, in particular. The U.S. government has the ability to delay, modify or cancel ongoing competitions, procurements and programs, as well as to change its future acquisition strategy.
Our primary customer is the U.S. government, from which we derived 86 percent of our sales in 2023; we have a number of large programs with the U.S. Department of the Air Force, in particular. The U.S. government has the ability to delay, modify or cancel ongoing competitions, procurements and programs, as well as to change its future acquisition strategy.
However, given the complex and evolving nature of cyber and other security threats, including threats from targeting by more advanced and persistent adversaries, including nation states, these efforts may not be fully effective, particularly against previously unknown vulnerabilities that could go undetected for an extended period.
However, given the complex, continuing and evolving nature of cyber and other security threats, including threats from targeting by more advanced and persistent adversaries, including nation states and other actors, these efforts may not be fully effective, particularly against previously unknown vulnerabilities that could go undetected for an extended period.
Environmental, social and governance matters significantly impact our business and operations and present evolving risks and challenges. Environmental impacts, including climate change specifically, create short and long-term financial risks to our business globally. We have significant operations located in regions that have been, and may in the future be, exposed to significant weather events and other natural disasters.
Environmental matters may significantly impact our business and operations and present evolving risks and challenges. Environmental impacts, including climate change specifically, create short and long-term financial risks to our business globally. We have significant operations located in regions that have been, and may in the future be, exposed to significant weather events and other natural disasters.
Fixed-price contracts inherently tend to have more financial risk than cost-type contracts, including as a result of inflationary pressures, labor rates and shortages, and supplier challenges. In 2022, approximately half of our sales were derived from fixed-price contracts.
Fixed-price contracts inherently tend to have more financial risk than cost-type contracts, including as a result of inflationary pressures, labor rates and shortages, and supplier challenges. In 2023, approximately half of our sales were derived from fixed-price contracts.
However, our contracts may not enable full recovery, and/or the government may disagree with our requests and may not have funding to cover them. -11- NORTHROP GRUMMAN CORPORATION Our risk varies with the type of contract.
However, our contracts may not enable full recovery, and/or the government may disagree with our requests and may not have funding to cover them. -10- NORTHROP GRUMMAN CORPORATION Our risk varies with the type of contract.
Cyber threats, both on premises and in the cloud, are evolving and include, but are not limited to: malicious software, destructive malware, ransomware, attempts to gain unauthorized access to systems or data, disruption to operations, critical systems or denial of service attacks; unauthorized release of confidential, personal or other protected information (ours or that of our employees, customers or partners); corruption of data, networks or systems; harm to individuals; and loss of assets.
Cyber threats, both on premises and in the cloud, are evolving and include, but are not limited to: malicious software, destructive malware, ransomware, attempts to gain unauthorized access to systems or data, disruption to -15- NORTHROP GRUMMAN CORPORATION operations, critical systems or denial of service attacks; unauthorized release of confidential, personal or other protected information (ours or that of our employees, customers or partners); corruption of data, networks or systems; harm to individuals; and loss of assets.
If insurance or other sources are unavailable or insufficient to recover all costs or if we experience a significant disruption to our business due to a natural disaster, it could have a material adverse effect on our financial position, results of operations and/or cash flows. -21- NORTHROP GRUMMAN CORPORATION ▪ We provide products and services, including related to hazardous and high risk operations, which subjects us to various environmental, regulatory, financial, reputational and other risks.
If insurance or other sources are unavailable or insufficient to recover all costs or if we experience a significant disruption to our business due to a natural disaster, it could have a material adverse effect on our financial position, results of operations and/or cash flows. • We provide products and services, including related to hazardous and high risk operations, which subjects us to various environmental, regulatory, financial, reputational and other risks.
We are also subject to increasing government, customer and other cyber and security requirements, including disclosure obligations. We have robust measures in place to address and mitigate cyber-related risks. However, we have experienced cyber attacks and expect we will continue to experience additional attacks in the future, including from nation states and criminal actors.
We are also subject to increasing government, customer and other cyber and security requirements, including disclosure obligations. We have robust measures in place to address and mitigate cyber-related risks. However, we have experienced cyber attacks and expect we will continue to experience additional attacks in the future, including from nation states and non-state actors.
We cannot predict the impact on existing, follow-on, replacement or future programs from potential changes in the threat environment, defense spending levels, government priorities, political leadership, procurement practices and strategy, inflation and other macroeconomic trends, military strategy; or broader changes in social, economic or political demands and priorities.
We cannot predict the impact on existing, follow-on, replacement or future programs from potential changes in the threat and global security environment, defense spending levels, government and budgetary priorities, political leadership, procurement practices and strategy, inflation and other macroeconomic trends, military strategy; or broader changes in social, economic, security or political demands and priorities.
We have implemented policies, training and other compliance controls, and have negotiated terms designed to prevent misconduct by employees, agents or others working with us or on our behalf that would violate the applicable laws of the jurisdictions in which we operate, including laws governing improper payments to government officials, the protection of export controlled or classified information, false claims, procurement integrity, cost accounting and billing, competition, information security and data privacy, intellectual property and -13- NORTHROP GRUMMAN CORPORATION contract terms.
We have implemented policies, training and other compliance controls, and have negotiated contractual terms designed to prevent misconduct by employees, agents or others working with us or on our behalf that would violate the applicable laws of the jurisdictions in which we operate, including laws governing improper payments to government officials, the protection of export controlled or classified information, false claims, procurement integrity, cost accounting and billing, competition, information security and data privacy, intellectual property and contract terms.
If we or those with whom we do business do not comply with the laws, regulations, rules, contract terms and processes to which we are subject or if customer business practices or requirements change significantly, including with respect to allowable costs, it could affect our ability to compete and have a material adverse effect on our financial position, results of operations and/or cash flows. ▪ Environmental matters, including unforeseen costs associated with compliance and remediation efforts, and government and third party claims, could have a material adverse effect on our reputation and our financial position, results of operations and/or cash flows.
If we or those with whom we do business do not comply with the laws, regulations, rules, contract terms and processes to which we are subject or if customer business practices or requirements change significantly, including with respect to allowable costs, it could affect our ability to compete and have a material adverse effect on our financial position, results of operations and/or cash flows. -13- NORTHROP GRUMMAN CORPORATION • Environmental matters, including climate change, unforeseen costs associated with compliance and remediation efforts, and government and third party claims, could have a material adverse effect on our reputation and our financial position, results of operations and/or cash flows.
See “Critical Accounting Policies, Estimates and Judgments” in MD&A and Note 12 to the consolidated financial statements. ▪ The global macroeconomic environment could negatively impact our business and our financial position, results of operations and/or cash flows could be materially adversely affected.
See “Critical Accounting Policies and Estimates” in MD&A and Note 12 to the consolidated financial statements. • The global macroeconomic environment could negatively impact our business and our financial position, results of operations and/or cash flows could be materially adversely affected.
Our ability to develop innovative and technologically advanced products depends on the talent of our workforce, continued funding for, and investment in, research and development projects, continued access to assured suppliers of important technologies and components and our ability to provide the people, technologies, facilities, equipment and financial capacity needed to develop and deliver those products and services with maximum efficiency.
Our ability to develop innovative and technologically advanced products depends on the talent of our workforce, continued funding for, and investment in, research and development projects, continued access to assured suppliers of important technologies and components, our ability to compete (including with commercial companies) and our ability to provide the people, technologies, facilities, equipment and financial capacity needed to develop and deliver those products and services with maximum efficiency.
We have more often entered into fixed-price contracts where costs can be more reasonably estimated based on actual experience, such as for mature production programs. However, our customers may also seek fixed-price contracts for development programs, combined development and production programs, or low-rate initial production programs, where the risks are greater.
We have more often entered into fixed-price contracts where costs can be more reasonably estimated based on actual experience, such as for mature production programs. However, our customers have sought, and may in the future seek, fixed-price contracts for development programs, combined development and production programs, or low-rate initial production programs, where the risks are greater.
In the event of an infringement of such intellectual property rights, a breach of a confidentiality agreement, a misuse or theft of our intellectual property or -22- NORTHROP GRUMMAN CORPORATION divulgence of proprietary information, we may not have adequate legal remedies. In addition, our trade secrets or other proprietary information may otherwise become known or be independently developed by competitors.
In the event of an infringement of such intellectual property rights, a breach of a confidentiality agreement, a misuse or theft of our intellectual property or divulgence of proprietary information, we may not have adequate legal remedies. In addition, our trade secrets or other proprietary information may otherwise become known or be independently developed by competitors.
When we or our subcontractors incur costs in excess of funds obligated on a contract, we are generally at risk for reimbursement unless and until additional funds are obligated to the contract. We cannot predict what funding will ultimately be approved for individual programs.
When we or our subcontractors incur costs in excess of funds obligated on a contract, we are generally at risk for reimbursement unless and until additional funds are obligated to the contract. We cannot -9- NORTHROP GRUMMAN CORPORATION predict what funding will ultimately be approved for individual programs.
Our ability to sell products globally could be adversely affected if we are unable to design our products on a cost effective basis or to obtain and retain all necessary export authorizations, which the U.S. government can deny, change or revoke.
Our ability to sell products globally could be adversely affected if we are unable to design our products on a cost effective basis or to obtain and retain all necessary export authorizations, which the U.S. government can deny, change or revoke for reasons outside our control.
We expect our facilities, operations, employees and communities in the future, particularly at facilities in coastal areas and areas prone to extreme weather events and water scarcity to continue to be at risk for future natural disasters or other weather events (which may be exacerbated by climate change).
We expect our facilities, operations, employees and communities in the future, particularly at facilities in coastal areas and areas prone to extreme weather events and water scarcity to continue to be at risk for future natural disasters or -19- NORTHROP GRUMMAN CORPORATION other weather events (which may be exacerbated by climate change).
We are subject to income and other taxes in the U.S. and foreign jurisdictions. Changes in applicable tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, have affected and -15- NORTHROP GRUMMAN CORPORATION could affect our tax expense.
We are subject to income and other taxes in the U.S. and foreign jurisdictions. Changes in applicable tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, have affected and could affect our tax expense.
Disputes with insurance carriers over the availability of coverage, and the insolvency of one or more of our insurers has affected and may continue to affect the availability or timing of recovery, as well as our ability to obtain -23- NORTHROP GRUMMAN CORPORATION insurance coverage at reasonable rates in the future.
Disputes with insurance carriers over the availability of coverage, and the insolvency of one or more of our insurers has affected and may continue to affect the availability or timing of recovery, as well as our ability to obtain insurance coverage at reasonable rates in the future.
Failure to meet our contractual obligations could adversely affect our profitability, reputation and future prospects. We design, develop and manufacture technologically advanced and innovative products and services, which are applied by our customers in a variety of environments, including highly demanding operating conditions, to accomplish challenging missions.
Failure to do so or meet our contractual obligations that require innovative design could adversely affect our profitability, reputation and future prospects. We design, develop and manufacture technologically advanced and innovative products and services, which are applied by our customers in a variety of environments, including highly demanding operating conditions, to accomplish challenging missions.
We have seen, and anticipate we will continue to see, increased -12- NORTHROP GRUMMAN CORPORATION competition in some of our core markets, especially as a result of our customers’ budget pressures, their focus on affordability and competition, and our own success in winning business.
We have seen, and anticipate we will continue to see, increased competition in some of our core markets, especially as a result of our customers’ budget pressures, their focus on affordability and competition, and our own success in winning business.
We depend on our customers, suppliers, and other business partners to implement adequate controls and safeguards to protect against and report cyber incidents. If they fail to deter, detect -16- NORTHROP GRUMMAN CORPORATION or report cyber incidents in a timely manner, we may suffer financial and other harm, including to our information, operations, performance, employees and reputation.
We depend on our customers, suppliers, and other business partners to implement and verify adequate controls and safeguards to protect against and report cyber incidents. If they fail to deter, detect or report cyber incidents in a timely manner, we may suffer financial and other harm, including to our information, operations, performance, employees and reputation.
Certain of our products, such as medium and large caliber ammunition and propulsion systems, involve the use, manufacture and/or handling of a variety of explosive and flammable materials.
Certain of our products, such as medium and large caliber ammunition and propulsion systems, involve the use, manufacture and/or handling of a variety of explosive and flammable materials or other hazardous substances.
In the event government -10- NORTHROP GRUMMAN CORPORATION funding for our significant programs is reduced, delayed or unavailable, or orders are reduced, our contracts or subcontracts, or competitions for such programs have at times been, and in the future may be, terminated or changed.
In the event government funding for our significant programs is reduced, delayed or unavailable, or orders are reduced, our contracts or subcontracts, or competitions for such programs have at times been, and in the future may be, terminated or changed.
While some aspects of the macroeconomic environment appear to be improving, and we have been able to mitigate some of the challenges (especially with respect to labor shortages), other challenges persist. We cannot predict the future trajectory of this risk, including how the macroeconomic environment will evolve or how it will continue to impact us.
While some aspects of the macroeconomic environment have improved, and we have been able to mitigate some of the challenges (especially with respect to labor shortages), other challenges persist. We cannot predict the future trajectory or duration of this risk, including how the macroeconomic environment will evolve or how it will continue to impact us.
While we believe that our business is well-positioned in areas for future defense spending, changing priorities, budget pressures, defense spending cuts, challenges in the appropriations process, the possibility of a year-long continuing resolution and breach of the debt ceiling, ongoing fiscal debates and the global economic environment increase uncertainties and risk.
While we believe that our business is well-positioned in areas for future defense spending, changing priorities, budget pressures, defense spending cuts, challenges in the appropriations process, the possibility of a long-term continuing resolution (or series of continuing resolutions) and breach of the debt ceiling, ongoing fiscal debates and the global economic and security environment increase uncertainties and risk.
They may also require us to enter into letters of credit, performance bonds, bank guarantees or other financial arrangements. If we are dependent on in-country suppliers, we face risks related to their failure to perform in accordance with legal requirements, particularly where we rely on a sole source supplier.
They may also require us to enter into letters of credit, performance bonds, bank guarantees or other financial arrangements. If we are dependent on certain suppliers, as in the U.S., we face risks related to their failure to perform in accordance with legal requirements, particularly where we rely on a sole source supplier.
We may be subject to substantial administrative, civil or criminal fines, penalties or other sanctions (including suspension and debarment) for violations.
We may be subject to substantial administrative, civil or criminal fines, penalties or other sanctions (including suspension and debarment) for violations of environmental laws.
Our business, financial position, results of operations and/or cash flows have been and may continue to be adversely impacted by the global macroeconomic environment. The global macroeconomic environment has experienced, and continues to experience, extraordinary challenges, including high rates of inflation; widespread disruptions in supply chains; workforce challenges, including labor shortages; and market volatility.
Our business, financial position, results of operations and/or cash flows have been and may continue to be adversely impacted by the global macroeconomic environment, which has experienced extraordinary challenges, including high rates of inflation; increased interest rates; widespread disruptions in supply chains; workforce challenges, including labor shortages; and market volatility, including exchange rate volatility.
However, new and evolving laws, regulations and rule makings globally are expected to impose different and more restrictive standards, and require greater disclosures. They could also require capital investments, including to transition to low emission technologies, could adversely impact our ongoing operations, and could require changes on a more accelerated time frame.
New and evolving laws, regulations and rule makings globally are expected to impose different and more restrictive standards and require greater disclosures. They could also require capital investments, could adversely impact our ongoing operations, and could require changes on a more accelerated time frame.
In addition, our success in competing and remaining cost-competitive depends, in part, on our ability successfully to effect our digital transformation strategy and to adopt and integrate new digital manufacturing and operating technologies into our products and services. Bid protests can result in contract modifications or the award decision being reversed and loss of the contract award.
Our success in competing depends, in part, on our ability to remain cost-competitive, accurately anticipate our customers’ needs and successfully to effect our digital transformation strategy and adopt and integrate new digital manufacturing and operating technologies into our products and services. Bid protests can result in contract modifications or the award decision being reversed and loss of the contract award.
Suspension or debarment, or termination of a contract due to default could have a material adverse effect on our reputation, our ability to compete for other contracts and our financial position, results of operations and/or cash flows.
Termination due to our default (or that of a teammate) could have a material adverse effect on our reputation, our ability to compete for other contracts and our financial position, results of operations and/or cash flows.
We aim to mitigate this risk through contract terms, and we have filed and may file requests for equitable adjustment or claims to seek recovery in whole or in part for our increased costs. We have also sought, and will seek, other avenues, as appropriate, to compensate the company for certain unexpected cost increases.
We aim to mitigate this risk through contract terms, and we have submitted and may submit requests for equitable adjustment (REAs), engineering change proposals or other claims to seek recovery in whole or in part for our increased costs. We have also sought, and will seek, other avenues, as appropriate, to compensate the company for certain unexpected cost increases.
New laws or other requirements, or changes to existing ones (including, for example, related to cyber, information protection, cost accounting, climate, environment, COVID-19, securities, competition, compensation costs, taxes, counterfeit parts, pensions, and use of certain non-US equipment) or changes in how government agencies interpret existing ones, can significantly increase our costs and risks and reduce our profitability.
New laws or other requirements, or changes to existing ones (including, for example, related to cyber, information protection, cost accounting, environment, sustainability, securities, competition, compensation costs, taxes, counterfeit parts, pensions, and use of certain non-US equipment) or more expansive interpretations or other changes in how government agencies construe existing ones, can significantly increase our costs and risks and reduce our profitability.
The U.S. government is also pursuing alternatives to shift additional responsibility and performance risks to the contractor. The U.S. government has been pursuing and may continue to pursue policies that could negatively impact our profitability.
The U.S. government has been pursuing and may continue to pursue policies that could negatively impact our profitability, including those that shift additional responsibility and performance risks to the contractor.
If we are unable to attract and retain a qualified workforce, we may be unable to maintain our competitive position or achieve our results, and it could have a material adverse effect on our financial position, results of operations and/or cash flows. • Our earnings and profitability depend, in part, on subcontractor and supplier performance and financial viability as well as raw material and component availability and pricing.
Any such expenses or delays could adversely affect our performance and results. -16- NORTHROP GRUMMAN CORPORATION If we are unable to attract and retain a qualified workforce, we may be unable to maintain our competitive position or achieve our results, and it could have a material adverse effect on our financial position, results of operations and/or cash flows. • Our earnings and profitability depend, in part, on subcontractor and supplier performance and financial viability as well as raw material and component availability and pricing.
Although we currently have excess fair value of our reporting units over their respective carrying values, changes in business conditions or in the market-based inputs used in our goodwill impairment test, could result in significant write-offs of goodwill or other long-lived assets, which could have a material adverse effect on our financial condition and/or results of operations.
Although the fair value of our reporting units and the net realizable value of our other long-lived assets currently exceed their respective carrying values, changes in business conditions, the market-based inputs used in our goodwill impairment test, or our assumptions related to the recoverability of our long-lived assets, could result in significant write-offs of goodwill or other long-lived assets, which could have a material adverse effect on our financial condition and/or results of operations.
Our international business is impacted by changes in U.S. and non-U.S. national policies and priorities, and geopolitical relationships, any of which may be influenced by changes in the threat environment, political leadership, geopolitical and economic uncertainties, world events, government budgets, inflationary pressures and economic and political factors more generally.
Our international business is impacted by changes in U.S. and non-U.S. national policies and priorities, and geopolitical relationships, any of which may be influenced by changes in the global threat environment, political leadership, geopolitical and economic uncertainties, world events, government budgets, inflationary pressures, sanctions imposed in countries where we do business or seek to do business, and economic and political factors more generally.
If insurance coverage, customer indemnifications and/or other legal protections are not available or are not sufficient to cover risks or losses, it could have a material adverse effect on our financial position, results of operations and/or cash flows. ▪ Pension and other postretirement benefit (OPB) obligations and related expenses and funding requirements may fluctuate significantly depending upon investment performance of plan assets, changes in actuarial assumptions, and legislative or other regulatory actions.
If insurance coverage, customer indemnifications and/or other legal protections are not available or are not sufficient to cover risks or losses, it could have a material adverse effect on our financial position, results of operations and/or cash flows. • Pension and other postretirement benefit (OPB) obligations and related expenses and funding requirements may fluctuate significantly depending upon investment performance of plan assets, changes in actuarial assumptions, and legislative or other regulatory actions. -21- NORTHROP GRUMMAN CORPORATION The company’s pension and OPB obligations and related expenses are dependent upon the investment performance of plan assets and various assumptions, including discount rates, mortality and the estimated long-term rates of return on plan assets.
However, the environment appears to be shifting, and if, for example, we experience difficulties with renewals and renegotiations of existing collective agreements, or if our employees pursue new collective representation, we could incur additional expenses and may be subject to work stoppages or other labor-related disruptions. Any such expenses or delays could adversely affect our performance and results.
However, the environment appears to be shifting, and if, for example, we experience difficulties with renewals and renegotiations of existing collective agreements, or if our employees pursue new collective representation, we could incur additional expenses and impacts on operating efficiency and may be subject to work stoppages or other labor-related disruptions.
If current macroeconomic pressures (especially from inflation and labor and supply chain challenges) are prolonged or worsen, and increased costs continue, then existing or anticipated appropriated and contracted funds may not be sufficient to cover costs incurred on existing or future programs.
If current macroeconomic pressures (especially from inflation and labor and supply chain challenges) are prolonged or worsen, and increased costs continue, then existing or anticipated appropriated and contracted funds may not be sufficient to cover costs incurred on existing or future programs. Future funding for certain programs in which we participate may be reduced, delayed or cancelled.
Changes in underlying assumptions, circumstances or estimates, and the failure to prevail on claims could have a material adverse effect on the profitability of one or more of our contracts and on our overall financial position, results of operations and/or cash flows.
Changes in underlying assumptions, circumstances or estimates, and the failure to recover on requests for equitable adjustments, engineering change proposals or other claims could have a material adverse effect on the profitability of one or more of our contracts and on our overall financial position, results of operations and/or cash flows.
The U.S. continues to face an uncertain and changing political environment, along with substantial fiscal and economic challenges, which affect funding. The budget and macroeconomic environment, political instability, and uncertainty surrounding the appropriations processes and the debt ceiling, remain significant short and long-term risks. See “Overview” in MD&A. Considerable uncertainty exists regarding how future budget and program decisions will unfold.
The U.S. continues to face an uncertain and changing political environment, along with substantial fiscal, economic and security challenges, which affect funding and budgetary priorities. The budget and macroeconomic environment, global security environment, political instability, and uncertainty surrounding the appropriations processes and the debt ceiling, remain significant short and long-term risks. See “Overview” in MD&A.
A prolonged shutdown could limit our ability to perform on our contracts and successfully compete for new work. If the statutory debt limit is not increased adequately, we could be obligated to work without receiving timely payments. A prolonged breach could have far-reaching adverse consequences.
If the statutory debt limit is not increased adequately, we could be obligated to work without receiving timely payments, and a prolonged breach could have far-reaching adverse consequences.
Even where a bid protest does not result in such a loss, it can delay execution and earnings.
Even where a bid protest does not result in such a loss, it can delay the start of contract activities and earnings.
This risk includes the ability to identify and negotiate appropriate arrangements with qualified and acceptable local partners, potential exposure for their actions, and the ability effectively to terminate these arrangements.
This risk includes the ability to identify and negotiate appropriate arrangements with qualified and acceptable local partners, potential exposure for their actions, and the ability effectively to terminate these arrangements. This risk is complicated further when we partner with government-affiliated entities.
As a result of our acquisition of OATK in 2018, we may be subject to future tax audits and legal challenges involving OATK (including its subsidiaries and their successors) or the spinoff of its then subsidiary Vista Outdoor, and we may be unable to obtain indemnification or we may be required to indemnify Vista.
We may be subject to future tax audits and legal challenges involving OATK, which we acquired in 2018, or the spinoff of its then subsidiary Vista Outdoor, and we may be unable to obtain indemnification or we may be required to indemnify Vista.
If, for example, the COVID-19 pandemic worsens, due to spread, new or additional variants, or if a new health epidemic or outbreak were to occur, we likely would experience broad and varied impacts, including potentially to our workforce and supply chain, with inflationary pressures and increased costs (which may or may not be fully recoverable or insured), schedule or production delays, market volatility and other financial impacts.
If a health -18- NORTHROP GRUMMAN CORPORATION epidemic, pandemic or similar outbreak were to occur or worsen, we likely would experience broad and varied impacts, including potentially to our workforce and supply chain, with inflationary pressures and increased costs (which may or may not be fully recoverable or insured), schedule and/or production delays, market volatility and other financial impacts.
These risks differ in some respects from those associated with our U.S. business and our exposure to such risks is expected to increase if and as our international business continues to grow.
These risks differ in some respects from those associated with our U.S. -17- NORTHROP GRUMMAN CORPORATION business and our exposure to such risks is expected to increase if and as our international business continues to grow. Our international business is generally subject to both U.S. and foreign laws, regulations and practices.
This risk is complicated further when we partner with government-affiliated entities. -20- NORTHROP GRUMMAN CORPORATION The products and services we provide, including those provided by suppliers and joint ventures, are sometimes in countries with unstable governments, economic or fiscal challenges, military or political conflicts, different business practices and/or developing legal systems.
The products and services we provide, including those provided by suppliers and joint ventures, are sometimes in countries with unstable governments, economic or fiscal challenges, military or political conflicts, different business practices and/or developing legal systems.
We are facing increasing competition in the U.S. and outside the U.S. from U.S., foreign and multinational firms, including new entrants. We are also facing increasing competition for, and more limited access to various critical products, services and other supplies.
We are facing increasing competition in the U.S. and outside the U.S. from U.S., foreign and multinational firms, including new entrants, and anticipate that acquisitions within our industry could further increase competition. We are also facing increasing competition for, -11- NORTHROP GRUMMAN CORPORATION and more limited access to various critical products, services and other supplies.
They could also damage our reputation, disrupt performance, impact our ability to obtain future insurance coverage, and lead to loss of business, regulatory actions, liabilities or other financial losses, for which we do not have adequate sources of recovery. We also face threats to our physical security, including to our facilities and the safety and well-being of our people.
They could also damage our reputation, disrupt performance, impact our ability to obtain future insurance coverage, and lead to loss of business, regulatory actions, liabilities or other financial losses, for which we do not have adequate sources of recovery. We provide systems, products and services to various customers who also face cyber threats.
In addition, the macroeconomic environment, including continued challenges in the global labor market, may further affect our ability to hire, -17- NORTHROP GRUMMAN CORPORATION develop and retain the necessary talented and diverse workforce, and to maintain performance levels and our corporate culture. These challenges may be further compounded by a significant element of remote work.
In addition, the macroeconomic environment, including continued challenges in the global labor market, may further affect our ability to hire, develop and retain the necessary talented and diverse workforce, and to maintain performance levels and our corporate culture.
The policy limits and terms of coverage reasonably obtainable may not be sufficient to cover actual losses or liabilities. Even if insurance coverage is available, we are not always able to obtain it at a price or on terms acceptable to us or without increasing exclusions.
Even if insurance coverage is available, we are not always able to obtain it at a price or on terms acceptable to us or without increasing exclusions.
In addition, if we are unable to do that, we may face additional losses and liabilities under our current contracts and adversely impact the prospects for certain new ones. In connection with our U.S. government contracts, we are required to procure certain materials, components and parts from supply sources approved by the customer.
In addition, if we are unable to do that, we may face additional losses and liabilities under our current contracts and adversely impact the prospects for certain new ones.
In the ordinary course we form and are members of joint ventures (with that term used throughout to refer to joint efforts or business arrangements of any type). Notwithstanding our robust processes, we are unable to prevent any and all misconduct or violations of applicable laws by these joint ventures (including their officers, directors and employees) or our partners.
In the ordinary course we form and are members of joint ventures or other business arrangements and/or invest in third parties with whom we do business. Notwithstanding our robust processes, we may be unable to prevent misconduct or violations of applicable laws by these joint ventures (including their officers, directors and employees) or our -12- NORTHROP GRUMMAN CORPORATION partners.
If we are unable adequately to exploit our intellectual property rights, to protect our intellectual property rights, to obtain rights to intellectual property of others, it could have a material adverse effect on our reputation, ability to compete for and perform on contracts, financial position, results of operations and/or cash flows. ▪ Our future success depends, in part, on our ability to develop new products and new technologies, progress and benefit from digital transformation and maintain technologies, facilities and equipment to win new competitions and meet the needs of our customers.
If we are unable adequately to exploit our intellectual property rights, to protect our intellectual property rights, to obtain rights to intellectual property of others, it could have a material adverse effect on our reputation, ability to compete for and perform on contracts, financial position, results of operations and/or cash flows.
They include: macroeconomic trends (including inflation, labor shortages and supply chain challenges); delays or limitations in customer funding; design or other development challenges; production challenges (including from technical or quality issues and other performance concerns); inability to realize learning curves or other cost savings; changes in laws or regulations; actions necessary for long-term customer satisfaction; global pandemics, such as COVID-19; and natural disasters or environmental matters.
There are many reasons estimated contract costs can increase, including inflation, labor challenges, supply chain challenges, and market and exchange rate volatility; delays or limitations in customer funding; design or other development challenges; production challenges (including from technical or quality issues and other performance concerns); inability to realize learning curves or other cost savings; changes in laws or regulations; actions necessary for long-term customer satisfaction; challenges caused by the global health environment; and natural disasters or environmental matters.
The company is building on its strong environmental record, with a particular focus on the reduction of greenhouse gas emissions from our operations, and has set a goal to achieve net zero greenhouse gas emissions in our operations by 2035. The company is committed to working to achieve its climate change related objectives.
The company has set a goal to achieve net zero greenhouse gas emissions in our operations by 2035 and is committed to working to achieve its climate change and other sustainability goals.
We could also incur unanticipated costs to remediate impacts and lost business. We provide systems, products and services to various customers who also face cyber threats. Our systems, products and services may not be able to detect or deter threats, or effectively to mitigate resulting losses. These losses could adversely affect our customers and our company.
Our systems, products and services may not be able to detect or deter threats, or effectively to mitigate resulting losses. These losses could adversely affect our customers and our company. We also face increasing and evolving disclosure obligations related to cyber and other security events.
These threats could involve terrorism, insider threats, workplace violence, civil unrest, natural disasters, damaging weather, or fires, which could adversely affect our company. Our customers and suppliers face similar risks that, if realized, could also adversely impact our operations. Such acts could cause delays, manufacturing downtime, or other impacts that could detrimentally impact our ability to perform our operations.
We also face threats to our physical security, including to our facilities and the safety and well-being of our people. These threats could involve terrorism, insider threats, workplace violence, civil unrest, natural disasters, damaging weather, or fires, which could adversely affect our company. Our customers and suppliers face similar risks that, if realized, could also adversely impact our operations.
If annual appropriations bills are not timely enacted, the U.S. government may continue to operate under a continuing resolution, restricting new contract or program starts, presenting resource allocation challenges and placing limitations on budgets, and we may face a prolonged government shutdown that could lead to program cancellations, disruptions and/or stop work orders and could limit the U.S. government’s ability to progress programs and make timely payments.
If annual appropriations bills are not timely enacted, the U.S. government may continue to operate under a continuing resolution (potentially of extended duration), restricting new contract or program starts, presenting resource allocation challenges and placing limitations on budgets.
We own many forms of intellectual property, including U.S. and foreign patents, trademarks, copyrights and trade secrets and we license or otherwise obtain access to various intellectual property rights of third parties.
Increasing demands from our customers to access and obtain rights in our intellectual property, and positions taken by our suppliers and competitors challenge our ability to exploit, protect and access intellectual property. -20- NORTHROP GRUMMAN CORPORATION We own many forms of intellectual property, including U.S. and foreign patents, trademarks, copyrights and trade secrets and we license or otherwise obtain access to various intellectual property rights of third parties.
If our suppliers are not financially viable, incur increased costs of delays, fail to comply with legal requirements, or otherwise fail to address these risks and meet their obligations to us, it could have a material adverse effect on our financial position, results of operations and/or cash flows. -18- NORTHROP GRUMMAN CORPORATION • Risks associated with environmental, social and governance matters (ESG), including especially climate change and other environmental impacts, and increased focus and evolving views of our customers, shareholders and other stakeholders on these issues, could negatively affect our business and operations.
If our suppliers are not financially viable, incur increased costs of delays, fail to comply with legal requirements, or otherwise fail to address these risks or meet their obligations to us, it could have a material adverse effect on our financial position, results of operations and/or cash flows. • Our international business exposes us to additional risks, including risks related to geopolitical and economic factors, laws and regulations.
Business and Operational Risks ▪ We face various risks related to health epidemics, pandemics and similar outbreaks, which may have material adverse effects on our business, financial position, results of operations and/or cash flows. We face a wide variety of risks related to health epidemics, pandemics and similar outbreaks, especially of infectious diseases, including COVID-19.
The occurrence and impact of these factors is difficult to predict, but one or more of them could have a material adverse effect on our financial position, results of operations and/or cash flows. • We face various risks related to health epidemics, pandemics and similar outbreaks, which may have material adverse effects on our business, financial position, results of operations and/or cash flows.
Our subcontractors and other suppliers have also been, and may in the future be, subject to natural disasters that could cause disruption and affect their ability to deliver or perform. Disruptions also impact the availability and cost of materials needed for manufacturing and could increase insurance and other operating costs, or result in a lack of available coverage.
Disruptions also impact the availability and cost of materials needed for manufacturing and could increase insurance and other operating costs, or result in a lack of available coverage.
New or more stringent laws and regulations related to greenhouse gas emissions and other climate change related concerns have affected and will likely continue to affect us, our suppliers and our customers. Some of our facilities are, for example, engaged in manufacturing processes that produce greenhouse gas emissions, including carbon dioxide, or rely on products from others that do so.
New or more stringent laws and regulations related to greenhouse gas emissions and other climate change related concerns have affected and will likely continue to affect us, our suppliers and our customers.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeGovernment Owned/Leased Total Aeronautics Systems 3,170 6,427 3,302 12,899 Defense Systems 1,367 3,397 2,285 7,049 Mission Systems 7,995 4,331 — 12,326 Space Systems 9,350 8,659 548 18,557 Corporate 372 305 — 677 Total 22,254 23,119 6,135 51,508 We maintain our properties in good operating condition and believe the productive capacity of our properties is adequate to meet current contractual requirements and those for the foreseeable future. -26- NORTHROP GRUMMAN CORPORATION
Biggest changeGovernment Owned/Leased Total Aeronautics Systems 3,179 6,204 3,302 12,685 Defense Systems 1,367 3,328 2,285 6,980 Mission Systems 8,033 4,145 — 12,178 Space Systems 9,546 8,714 589 18,849 Corporate 372 246 — 618 Total 22,497 22,637 6,176 51,310 We maintain our properties in good operating condition and believe the productive capacity of our properties is adequate to meet current contractual requirements and those for the foreseeable future.
Corporate Falls Church, VA The following is a summary of our floor space at December 31, 2022: Square feet (in thousands) Owned Leased U.S.
Corporate Falls Church, VA The following is a summary of our floor space at December 31, 2023: Square feet (in thousands) Owned Leased U.S.
Defense Systems Huntsville, AL; Mesa and Sierra Vista, AZ; Los Angeles, CA; Warner Robins, GA; Lake Charles, LA; Elkton, MD; Elk River and Plymouth, MN; Dulles, McLean and Radford, VA; and Keyser, WV. Locations outside the U.S. include Australia.
Defense Systems Huntsville, AL; Mesa and Sierra Vista, AZ; Northridge, CA; Warner Robins, GA; Lake Charles, LA; Elkton, MD; Elk River and Plymouth, MN; Dulles, McLean and Radford, VA; and Keyser, WV. Locations outside the U.S. include Australia.
Space Systems Huntsville, AL; Chandler and Gilbert, AZ; Azusa, Carson, Los Angeles, Manhattan Beach, Oxnard, Redondo Beach and San Diego, CA; Aurora and Colorado Springs, CO; Beltsville, MD; Devens, MA; Brigham City, Clearfield, Magna, Ogden, Roy and Tremonton, UT; and Dulles and Sterling, VA.
Space Systems Huntsville, AL; Chandler and Gilbert, AZ; Azusa, Carson, Los Angeles, Manhattan Beach, Oxnard, Redondo Beach and San Diego, CA; Aurora, Boulder, and Colorado Springs, CO; Beltsville, MD; Devens, MA;Clearfield, Corinne, Magna, Ogden, Roy and Tremonton, UT; and Dulles and Sterling, VA.
Item 2. Properties At December 31, 2022, we had approximately 52 million square feet of floor space at 473 separate locations, primarily in the U.S., for manufacturing, warehousing, research and testing, administration and various other uses. We leased to third parties approximately 255,000 square feet of our owned and leased facilities.
Item 2. Properties At December 31, 2023, we had approximately 51 million square feet of floor space at 459 separate locations, primarily in the U.S., for manufacturing, warehousing, research and testing, administration and various other uses. We leased to third parties approximately 37,000 square feet of our owned and leased facilities.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeThese 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.
Biggest changeThese types of matters could result in administrative, civil or criminal fines, penalties or other sanctions (which terms -25- NORTHROP GRUMMAN CORPORATION 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.
Item 4. Mine Safety Disclosures No information is required in response to this item. -27- NORTHROP GRUMMAN CORPORATION PART II
Item 4. Mine Safety Disclosures No information is required in response to this item. -26- NORTHROP GRUMMAN CORPORATION PART II

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeManagement’s Discussion and Analysis of Financial Condition and Results of Operations 30 Overview 30 Consolidated Operating Results 33 Segment Operating Results 36 Product and Service Analysis 41 Backlog 42 Liquidity and Capital Resources 42 Critical Accounting Policies, Estimates and Judgments 44 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 50 Item 8.
Biggest changeManagement’s Discussion and Analysis of Financial Condition and Results of Operations 29 Overview 29 Consolidated Operating Results 31 Segment Operating Results 34 Product and Service Analysis 38 Backlog 39 Liquidity and Capital Resources 39 Critical Accounting Policies and Estimates 41 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 47 Item 8.
Item 4. Mine Safety Disclosures 27 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 28 Item 6. [Reserved] 29 Item 7.
Item 4. Mine Safety Disclosures 26 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27 Item 6. [Reserved] 29 Item 7.
Earnings Per Share, Share Repurchases and Dividends on Common Stock 65 4. Accounts Receivable, Net 66 5. Unbilled Receivables, Net 67 6. Inventoried Costs, Net 67 7. Income Taxes 68 8. Goodwill and Other Purchased Intangible Assets 71 9. Fair Value of Financial Instruments 71 10. Debt 72 11. Investigations, Claims and Litigation 74 12. Commitments and Contingencies 75 13.
Earnings Per Share, Share Repurchases and Dividends on Common Stock 63 4. Accounts Receivable, Net 65 5. Unbilled Receivables, Net 65 6. Inventoried Costs, Net 66 7. Income Taxes 66 8. Goodwill and Other Purchased Intangible Assets 70 9. Fair Value of Financial Instruments 70 10. Debt 71 11. Investigations, Claims and Litigation 73 12. Commitments and Contingencies 73 13.
Financial Statements and Supplementary Data 51 Report of Independent Registered Public Accounting Firm 51 Consolidated Statements of Earnings and Comprehensive Income 54 Consolidated Statements of Financial Position 55 Consolidated Statements of Cash Flows 56 Consolidated Statements of Changes in Shareholders’ Equity 57 Notes to Consolidated Financial Statements 58 1. Summary of Significant Accounting Policies 58 2. Dispositions 65 3.
Financial Statements and Supplementary Data 48 Report of Independent Registered Public Accounting Firm 48 Consolidated Statements of Earnings and Comprehensive Income 51 Consolidated Statements of Financial Position 52 Consolidated Statements of Cash Flows 53 Consolidated Statements of Changes in Shareholders’ Equity 54 Notes to Consolidated Financial Statements 55 1. Summary of Significant Accounting Policies 55 2. Dispositions 63 3.
Retirement Benefits 76 14. Stock Compensation Plans and Other Compensation Arrangements 81 15. Leases 84 16. Segment Information 85 i Page
Retirement Benefits 74 14. Stock Compensation Plans and Other Compensation Arrangements 80 15. Leases 82 i Page 16. Segment Information 83

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changePURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS The table below summarizes our repurchases of common stock during the three months ended December 31, 2022: Period Total Number of Shares Purchased Average Price Paid per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs ($ in millions) October 1, 2022 - October 28, 2022 235,900 $ 503.31 235,900 $ 3,000 October 29, 2022 - November 25, 2022 485,309 519.87 485,309 2,748 November 26, 2022 - December 31, 2022 215,725 532.61 215,725 2,633 Total 936,934 $ 518.63 936,934 $ 2,633 (1) Includes commissions paid.
Biggest changePURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Period Number of Shares Purchased Average Price Paid per Share (1) 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) (2) September 30, 2023 - October 27, 2023 85,824 $ 449.40 85,824 $ 1,441 October 28, 2023 - November 24, 2023 293,446 466.94 293,446 1,304 November 25, 2023 - December 31, 2023 379,654 470.52 379,654 3,625 Total 758,924 $ 466.75 758,924 $ 3,625 (1) Excludes commissions paid.
PREFERRED STOCK We have 10,000,000 shares authorized at a $1 par value per share, of which no shares were issued and outstanding as of December 31, 2022 and 2021. MARKET INFORMATION Our common stock is listed on the New York Stock Exchange and trades under the symbol NOC.
PREFERRED STOCK We have 10,000,000 shares authorized at a $1 par value per share, of which no shares were issued and outstanding as of December 31, 2023 and 2022. MARKET INFORMATION Our common stock is listed on the New York Stock Exchange and trades under the symbol NOC.
See Note 3 to the consolidated financial statements for further information on our share repurchase programs. -28- NORTHROP GRUMMAN CORPORATION STOCK PERFORMANCE GRAPH Comparison of Cumulative Five Year Total Return Among Northrop Grumman, the Standard & Poor’s (S&P) 500 Index and the S&P Aerospace & Defense (A&D) Index • Assumes $100 invested at the close of business on December 31, 2017, in Northrop Grumman Corporation common stock, the S&P 500 Index and the S&P A&D Index. • The cumulative total return assumes reinvestment of dividends. • The S&P A&D Index is comprised of The Boeing Company, General Dynamics Corporation, Howmet Aerospace Inc., Huntington Ingalls Industries Inc., L3Harris Technologies, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Technologies Corporation, Textron, Inc., and TransDigm Group Incorporated. • The total return is weighted according to market capitalization of each company at the beginning of each year. • This graph is not deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (the Exchange Act), and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Exchange Act.
See Note 3 to the consolidated financial statements for further information on our share repurchase programs. -27- NORTHROP GRUMMAN CORPORATION STOCK PERFORMANCE GRAPH Comparison of Cumulative Five Year Total Return Among Northrop Grumman, the Standard & Poor’s (S&P) 500 Index and the S&P Aerospace & Defense (A&D) Index • Assumes $100 invested at the close of business on December 31, 2018, in Northrop Grumman Corporation common stock, the S&P 500 Index and the S&P A&D Index. • The cumulative total return assumes reinvestment of dividends. • The S&P A&D Index is comprised of Axon Enterprise, Inc., The Boeing Company, General Dynamics Corporation, Howmet Aerospace Inc., Huntington Ingalls Industries Inc., L3Harris Technologies, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, RTX Corporation, Textron Inc., and TransDigm Group Incorporated. • This graph is not deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (the Exchange Act), and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Exchange Act.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities COMMON STOCK We have 800,000,000 shares authorized at a $1 par value per share, of which 153,157,924 shares and 156,284,423 shares were issued and outstanding as of December 31, 2022 and 2021, respectively.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities COMMON STOCK We have 800,000,000 shares authorized at a $1 par value per share, of which 150,109,271 shares and 153,157,924 shares were issued and outstanding as of December 31, 2023 and 2022, respectively.
Share repurchases take place from time to time, subject to market and regulatory 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 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.
HOLDERS As of January 23, 2023, there were 19,192 common shareholders of record.
HOLDERS As of January 22, 2024, there were 18,531 common shareholders of record.
Added
(2) The value remaining on December 31, 2023 includes an additional $2.5 billion share repurchase authorization approved by the company’s board of directors on December 6, 2023. Share repurchases take place from time to time, subject to market and regulatory conditions and management’s discretion, in the open market or in privately negotiated transactions.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

99 edited+40 added−50 removed60 unchanged
Biggest changeSelected financial highlights are presented in the table below: Year Ended December 31 % Change in $ in millions, except per share amounts 2022 2021 2020 2022 2021 Sales $ 36,602 $ 35,667 $ 36,799 3 % (3) % Operating costs and expenses 33,001 31,996 32,734 3 % (2) % Operating costs and expenses as a % of sales 90.2 % 89.7 % 89.0 % Gain on sale of business — 1,980 — NM NM Operating income 3,601 5,651 4,065 (36) % 39 % Operating margin rate 9.8 % 15.8 % 11.0 % Mark-to-market pension and OPB benefit (expense) 1,232 2,355 (1,034) (48) % (328) % Federal and foreign income tax expense 940 1,933 539 (51) % 259 % Effective income tax rate 16.1 % 21.6 % 14.5 % Net earnings 4,896 7,005 3,189 (30) % 120 % Diluted earnings per share $ 31.47 $ 43.54 $ 19.03 (28) % 129 % -33- NORTHROP GRUMMAN CORPORATION Sales The tables below reconcile sales to organic sales: Year Ended December 31 2022 2021 $ in millions Sales IT services sales Organic sales Sales IT services sales Organic sales Organic sales % change Aeronautics Systems $ 10,531 $ — $ 10,531 $ 11,259 $ — $ 11,259 (6) % Defense Systems 5,579 — 5,579 5,776 (106) 5,670 (2) % Mission Systems 10,396 — 10,396 10,134 (42) 10,092 3 % Space Systems 12,275 — 12,275 10,608 (16) 10,592 16 % Intersegment eliminations (2,179) — (2,179) (2,110) 2 (2,108) Total $ 36,602 $ — $ 36,602 $ 35,667 $ (162) $ 35,505 3 % Year Ended December 31 2021 2020 $ in millions Sales IT services sales Organic sales Sales IT services sales Organic sales Organic sales % change Aeronautics Systems $ 11,259 $ — $ 11,259 $ 12,169 $ — $ 12,169 (7) % Defense Systems 5,776 (106) 5,670 7,543 (1,637) 5,906 (4) % Mission Systems 10,134 (42) 10,092 10,080 (527) 9,553 6 % Space Systems 10,608 (16) 10,592 8,744 (182) 8,562 24 % Intersegment eliminations (2,110) 2 (2,108) (1,737) 17 (1,720) Total $ 35,667 $ (162) $ 35,505 $ 36,799 $ (2,329) $ 34,470 3 % 2022 sales increased $935 million and 2022 organic sales increased $1.1 billion, or 3 percent, due to higher sales at Space Systems and Mission Systems, partially offset by lower sales at Aeronautics Systems and Defense Systems. 2022 sales reflect strong demand, the timing of material receipts and improving trends in labor availability during the second half of the year.
Biggest changeThese 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. -31- NORTHROP GRUMMAN CORPORATION Selected financial highlights are presented in the table below: Year Ended December 31 % Change in $ in millions, except per share amounts 2023 2022 2021 2023 2022 Sales $ 39,290 $ 36,602 $ 35,667 7 % 3 % Operating costs and expenses 36,753 33,001 31,996 11 % 3 % Operating costs and expenses as a % of sales 93.5 % 90.2 % 89.7 % Gain on sale of business — — 1,980 — % NM Operating income 2,537 3,601 5,651 (30) % (36) % Operating margin rate 6.5 % 9.8 % 15.8 % Mark-to-market pension and OPB (expense) benefit (422) 1,232 2,355 NM (48) % Federal and foreign income tax expense 290 940 1,933 (69) % (51) % Effective income tax rate 12.4 % 16.1 % 21.6 % Net earnings 2,056 4,896 7,005 (58) % (30) % Diluted earnings per share $ 13.53 $ 31.47 $ 43.54 (57) % (28) % Sales 2023 sales increased $2.7 billion, or 7 percent, due to higher sales at all four sectors. 2023 sales reflect continued strong demand for our products and services.
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 measures are also consistent with how management views the underlying performance of the business as the impact of MTM accounting and the IT services divestiture 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.
(2) The federal tax impact in each period was calculated by subtracting the deferred state tax impact from MTM benefit (expense) and applying the 21 percent federal statutory rate. (3) The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.
(2) The federal tax impact in each period was calculated by subtracting the deferred state tax impact from MTM benefit (expense) and applying the 21 percent federal statutory rate. (3) The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.
We believe that 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.
We believe our capabilities, particularly in space, C4ISR, missile defense, battle management, advanced weapons, and survivable aircraft and mission systems should help our customers in the U.S. and globally defend against current and future threats and, as a result, continue to allow for long-term profitable business growth.
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.
We anticipate that the broader macroeconomic environment, with ongoing inflationary pressures, pockets of 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.
Due to the inherent uncertainty of this assumption, we consider multiple data points at the measurement date including the plan’s target asset allocation, historical asset returns and third party projection models of expected long-term returns for each of the plans’ strategic asset classes.
Due to the inherent uncertainty of this assumption, we consider multiple data points at the measurement date including the plan’s target asset allocation, historical plan asset returns and third party projection models of expected long-term returns for each of the plans’ strategic asset classes.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS Our consolidated financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements.
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 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, if any.
Such indicators may include, but are not limited to, the loss of significant business, significant reductions in federal government appropriations or other significant adverse changes in industry or market conditions. During 2022, we determined there were no impairment indicators requiring us to perform an interim goodwill impairment test.
Such indicators may include, but are not limited to, the loss of significant business, significant reductions in federal government appropriations or other significant adverse changes in industry or market conditions. During 2023, we determined there were no impairment indicators requiring us to perform an interim goodwill impairment test.
The company has a five-year senior unsecured credit facility in an aggregate principal amount of $2.5 billion, and in April 2022, we renewed our one-year $500 million uncommitted credit facility. At December 31, 2022, there were no borrowings outstanding under these credit facilities.
The company has a five-year senior unsecured credit facility in an aggregate principal amount of $2.5 billion, and in April 2023, we renewed our one-year $500 million uncommitted credit facility. At December 31, 2023, there were no borrowings outstanding under these credit facilities.
We also consider the impact of macroeconomic factors on our estimates, in particular on contract EACs that span several years. For example, during 2022, we included in our EACs management’s best estimate of the impact inflation has had and may continue to have on our contracts.
We also consider the impact of macroeconomic factors on our estimates, in particular on contract EACs that span several years. For example, during 2023, we included in our EACs management’s best estimate of the impact inflation has had and may continue to have on our contracts.
To the extent we prevail in matters for which reserves have been established or are required to pay amounts in excess of reserves, there could be a significant impact on our consolidated financial position and annual results of operations.
To the extent we prevail in matters for which reserves have been established or are required to pay amounts in excess of reserves, there could be a significant impact on our consolidated financial position, annual results of operations and/or cash flows.
The volatility of the recent macroeconomic environment has added complexity to our estimation process and may result in our year end 2022 contract EACs having more variability in the future than they might otherwise have had if the estimates had been prepared in a more stable macroeconomic environment. -44- NORTHROP GRUMMAN CORPORATION We generally review and reassess our sales, cost and profit estimates for each significant contract at least annually or more frequently as determined by the occurrence of events, changes in circumstances and evaluations of contract performance to reflect the latest reliable information available.
The volatility of the recent macroeconomic environment has added complexity to our estimation process and may result in our year end 2023 contract EACs having more variability in the future than they might otherwise have had if the estimates had been prepared in a more stable macroeconomic environment. -41- NORTHROP GRUMMAN CORPORATION We generally review and reassess our sales, cost and profit estimates for each significant contract at least annually or more frequently as determined by the occurrence of events, changes in circumstances and evaluations of contract performance to reflect the latest reliable information available.
The RPEC did not release a MP-2022 projection scale citing complexities in incorporating the substantial number of “excess deaths” in 2020 into their existing model and uncertainties about future expectations primarily related to COVID-19.
The RPEC did not release a MP-2022 or MP-2023 projection scale citing complexities in incorporating the substantial number of “excess deaths” in 2020 into their existing model and uncertainties about future expectations primarily related to COVID-19.
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.
We continue to work hard to mitigate 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.
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.
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.
As we determine changes in the assumptions are warranted, or as a result of plan amendments, future pension and OPB expense and our projected benefit obligation could increase or decrease.
When we determine changes in the assumptions are warranted, or as a result of plan amendments, future pension and OPB expense and our projected benefit obligation could increase or decrease materially.
However, the broader macroeconomic environment, including inflationary pressures and supply chain challenges, continued adversely to affect the company’s results for the year ended December 31, 2022.
However, the broader macroeconomic environment, including inflationary pressures and supply chain challenges, continued adversely to affect the company’s results for the year ended December 31, 2023.
Interest is credited monthly using the current 30-Year Treasury bond rate. The interest crediting rate is part of the cash balance formula and independent of actual pension investment earnings.
Interest is credited monthly using the current 30-Year Treasury bond rate. The interest crediting rate is part of the cash balance formula and independent of actual pension investment returns.
Refer to the respective notes to the consolidated financial statements for further information about our share repurchase programs (Note 3), commercial paper, credit facilities and long-term debt (Note 10), standby letters of credit and guarantees (Note 12), future minimum contributions for the company’s pension and OPB plans (Note 13), and lease payment obligations (Note 15).
Refer to the respective notes to the consolidated financial statements for further information about our share repurchase programs (Note 3), commercial paper, credit facilities and long-term debt (Note 10), standby letters of -39- NORTHROP GRUMMAN CORPORATION credit and guarantees (Note 12), future minimum contributions for the company’s pension and OPB plans (Note 13), and lease payment obligations (Note 15).
Since our contracts typically span a period of several years, estimation of revenue, cost, and progress toward completion requires the use of judgment.
Since our contracts often span a period of several years, estimation of revenue, cost, and progress toward completion requires the use of judgment.
Holding all other assumptions constant, an increase or decrease of 25 basis points in the December 31, 2022 cash balance crediting rate assumption would have the following estimated effects on the 2022 pension benefit obligation, which would be reflected in the 2022 MTM expense (benefit), and 2023 expected pension expense: $ in millions 25 Basis Point Decrease in Rate 25 Basis Point Increase in Rate 2022 pension obligation and MTM expense (benefit) $ (96) $ 100 2023 pension (benefit) expense (9) 9 Expected Long-Term Rate of Return on Plan Assets – The expected long-term rate of return on plan assets (EROA) assumption reflects the average rate of net earnings we expect on current and future benefit plan investments.
Holding all other assumptions constant, an increase or decrease of 25 basis points in the December 31, 2023 cash balance crediting rate assumption would have the following estimated effects on the 2023 pension benefit obligation, which would be reflected in the 2023 MTM expense (benefit), and 2024 expected pension expense: $ in millions 25 Basis Point Decrease in Rate 25 Basis Point Increase in Rate 2023 pension obligation and MTM expense (benefit) $ (105) $ 108 2024 pension (benefit) expense (9) 9 Expected Long-Term Rate of Return on Plan Assets – The expected long-term rate of return on plan assets (EROA) assumption reflects the average rate of net earnings we expect on current and future benefit plan investments.
Holding all other assumptions constant, an increase or decrease of 25 basis points in our December 31, 2022 EROA assumption would have the following estimated effects on 2023 expected pension and OPB expense: $ in millions 25 Basis Point Decrease 25 Basis Point Increase 2023 pension and OPB expense (benefit) $ 73 $ (73) -46- NORTHROP GRUMMAN CORPORATION In addition, holding all other assumptions constant, an increase or decrease of 100 basis points in actual versus expected return on plan assets would have the following estimated effects on our 2023 MTM expense (benefit): $ in millions 100 Basis Point Decrease 100 Basis Point Increase 2023 MTM expense (benefit) $ 292 $ (292) Estimated Fair Market Value of Plan Assets – For certain plan assets where the fair market value is not readily determinable, such as real estate, private equity, hedge funds and opportunistic investments, we develop estimates of fair value using the best information available.
Holding all other assumptions constant, an increase or decrease of 25 basis points in our December 31, 2023 EROA assumption would have the following estimated effects on 2024 expected pension and OPB expense: $ in millions 25 Basis Point Decrease 25 Basis Point Increase 2024 pension and OPB expense (benefit) $ 76 $ (76) -43- NORTHROP GRUMMAN CORPORATION In addition, holding all other assumptions constant, an increase or decrease of 100 basis points in actual versus expected return on plan assets would have the following estimated effects on our 2024 MTM expense (benefit): $ in millions 100 Basis Point Decrease 100 Basis Point Increase 2024 MTM expense (benefit) $ 305 $ (305) Estimated Fair Market Value of Plan Assets – For certain plan assets where the fair market value is not readily determinable, such as real estate, private equity, hedge funds and opportunistic investments, we develop estimates of fair value using the best information available.
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, 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.
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 conflicts 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.
Taking into consideration the factors noted above, our weighted-average composite pension discount rate was 5.54 percent at December 31, 2022 and 2.98 percent at December 31, 2021. The effects of a hypothetical change in the discount rate may be nonlinear and asymmetrical for future years as the discount rate changes.
Taking into consideration the factors noted above, our weighted-average composite pension discount rate was 5.15 percent at December 31, 2023 and 5.54 percent at December 31, 2022. The effects of a hypothetical change in the discount rate may be nonlinear and asymmetrical for future years as the discount rate changes.
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.
Transaction-adjusted net earnings and transaction-adjusted earnings per share (transaction-adjusted EPS) exclude the MTM impacts noted above, as well as 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.
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.
These measures may not be -34- NORTHROP GRUMMAN CORPORATION 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.
For determining 2022 FAS expense, we assumed an expected long-term rate of return on pension plan assets of 7.5 percent and an expected long-term rate of return on OPB plan assets of 7.19 percent. For 2023 FAS expense, we have assumed an expected long-term rate of return on pension plan assets of 7.5 percent and 7.23 percent on OPB plans.
For determining 2023 FAS expense, we assumed an expected long-term rate of return on pension plan assets of 7.5 percent and an expected long-term rate of return on OPB plan assets of 7.23 percent. For 2024 FAS expense, we have assumed an expected long-term rate of return on pension plan assets of 7.5 percent and 7.12 percent on OPB plans.
Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2021 (“2021 Annual Report on Form 10-K”).
Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2022 (“2022 Annual Report on Form 10-K”).
Holding all other assumptions constant, an increase or decrease of 25 basis points in the December 31, 2022 discount rate assumption would have the following estimated effects on 2022 pension and OPB obligations, which would be reflected in the 2022 MTM expense (benefit), and 2023 expected pension and OPB expense: $ in millions 25 Basis Point Decrease in Rate 25 Basis Point Increase in Rate 2022 pension and OPB obligation and MTM expense (benefit) $ 817 $ (781) 2023 pension and OPB (benefit) expense (20) 18 -45- NORTHROP GRUMMAN CORPORATION Cash Balance Crediting Rate – A portion of the company’s pension obligation and resulting pension expense is based on a cash balance formula, where participants’ hypothetical account balances are accumulated over time with pay-based credits and interest.
Holding all other assumptions constant, an increase or decrease of 25 basis points in the December 31, 2023 discount rate assumption would have the following estimated effects on 2023 pension and OPB obligations, which would be reflected in the 2023 MTM expense (benefit), and 2024 expected pension and OPB expense: $ in millions 25 Basis Point Decrease in Rate 25 Basis Point Increase in Rate 2023 pension and OPB obligation and MTM expense (benefit) $ 866 $ (827) 2024 pension and OPB (benefit) expense (23) 22 -42- NORTHROP GRUMMAN CORPORATION Cash Balance Crediting Rate – A portion of the company’s pension obligation and resulting pension expense is based on a cash balance formula, where participants’ hypothetical account balances are accumulated over time with pay-based credits and interest.
At December 31, 2022, we had capital expenditure commitments of $1.5 billion, which we expect to satisfy with cash on hand. We also had provisions for uncertain tax positions of $1.7 billion, some or all of which could result in future cash payments to various taxing authorities.
At December 31, 2023, we had capital expenditure commitments of $1.4 billion, which we expect to satisfy with cash on hand. We also had provisions for uncertain tax positions of $2.0 billion, some or all of which could result in future cash payments to various taxing authorities.
The company recorded pre-tax profit of the IT and mission support services business of $20 million and $247 million for the years ended December 31, 2021 and 2020, respectively. Operating Performance Assessment and Reporting We manage and assess our business based on our performance on contracts and programs (typically larger contracts or two or more closely-related contracts).
The company recorded sales of $162 million and pre-tax profit of $20 million for the IT and mission support services business during the year ended December 31, 2021. Operating Performance Assessment and Reporting We manage and assess our business based on our performance on contracts and programs (typically larger contracts or two or more closely-related contracts).
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 and priorities, and our industry.
Current and future requirements related to the conflicts in Ukraine and Israel, threats in the Pacific regions and other security priorities, as well as global inflation, the national debt, and 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.
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 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 pension and OPB actuarial gains and losses, and with regard to transaction-adjusted net earnings and EPS, the impact of certain divestiture activity.
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 -30- NORTHROP GRUMMAN CORPORATION resources to address such increased costs and other challenges, for our company, our suppliers and partners, and our customers.
The macroeconomic factors have contributed, and we expect will continue to contribute, to increased costs, delays, disruptions and other performance challenges, as well as increased competing demands for limited resources to address such increased costs and other challenges, for our company, our suppliers and partners, and our customers.
Net Earnings The table below reconciles net earnings to transaction-adjusted net earnings: Year Ended December 31 % Change in $ in millions 2022 2021 2020 2022 2021 Net earnings $ 4,896 $ 7,005 $ 3,189 (30) % 120 % MTM (benefit) expense (1,232) (2,355) 1,034 (48) % (328) % MTM-related deferred state tax expense (benefit) (1) 65 124 (54) (48) % (330) % Federal tax expense (benefit) of items above (2) 245 469 (206) (48) % (328) % MTM adjustment, net of tax (922) (1,762) 774 (48) % (328) % Gain on sale of business — (1,980) — NM NM State tax impact (3) — 160 — NM NM Transaction costs — 32 — NM NM Make-whole premium — 54 — NM NM Federal tax impact of items above (4) — 614 — NM NM Transaction adjustment, net of tax — (1,120) — NM NM Transaction-adjusted net earnings $ 3,974 $ 4,123 $ 3,963 (4) % 4 % (1) The deferred state tax impact in each period was calculated using the company’s blended state tax rate of 5.25 percent and is included in Unallocated corporate expense within operating income.
Net Earnings The table below reconciles net earnings to MTM-adjusted net earnings and transaction-adjusted net earnings: Year Ended December 31 % Change in $ in millions 2023 2022 2021 2023 2022 Net earnings $ 2,056 $ 4,896 $ 7,005 (58) % (30) % MTM expense (benefit) 422 (1,232) (2,355) NM (48) % MTM-related deferred state tax (benefit) expense (1) (22) 65 124 NM (48) % Federal tax (benefit) expense of items above (2) (84) 245 469 NM (48) % MTM adjustment, net of tax 316 (922) (1,762) NM (48) % MTM-adjusted net earnings 2,372 3,974 5,243 (40) % (24) % Gain on sale of business — — (1,980) NM NM State tax impact (3) — — 160 NM NM Transaction costs — — 32 NM NM Make-whole premium — — 54 NM NM Federal tax impact of items above (4) — — 614 NM NM Transaction adjustment, net of tax — — (1,120) NM NM Transaction-adjusted net earnings $ 2,372 $ 3,974 $ 4,123 (40) % (4) % (1) The deferred state tax impact in each period was calculated using the company’s blended state tax rate of 5.25 percent and is included in Unallocated corporate expense within operating income.
Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture date; therefore, no sales and operating income were recognized for this business during the year ended December 31, 2022.
Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture -30- NORTHROP GRUMMAN CORPORATION date; therefore, no sales and operating income were recognized for this business during the years ended December 31, 2023 and 2022.
Our average annual rate of return from 1976 to 2022 was approximately 10.7 percent and our 20-year and 30-year rolling average rates of return were approximately 8.6 percent and 8.8 percent, respectively, each determined on an arithmetic basis and net of expenses. Our 2022 losses on plan assets, net of expenses, were approximately 15.4 percent.
Our average annual rate of return from 1976 to 2023 was approximately 10.7 percent and our 20-year and 30-year rolling average rates of return were approximately 7.9 percent and 8.7 percent, respectively, each determined on an arithmetic basis and net of expenses. Our 2023 return on plan assets, net of expenses, were approximately 11.1 percent.
During 2022, the Investment Committee of the company’s benefit plans reviewed the plans’ major asset class allocations and approved an update to increase the target fixed-income asset allocation from 30% to 40%. The current asset allocation is now approximately 35% fixed-income, 30% public equities, 30% alternatives and 5% cash.
During 2023, the Investment Committee of the company’s benefit plans reviewed the plans’ major asset class allocations and approved an update to increase the target fixed-income asset allocation from 40% to 43%. The current asset allocation is now approximately 42% fixed-income, 27% public equities, 28% alternatives and 3% cash.
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.
Economic tensions and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could also further impact the global market for defense products, services and solutions. U.S. Political, Budget and Regulatory Environment The U.S. continues to face an uncertain and evolving political, budget and regulatory environment.
In most circumstances, our risk associated with the purchase obligations on our U.S. government contracts is limited to the termination liability provisions within those contracts. As such, we do not believe they represent a material liquidity risk to the company.
Purchase obligations are largely comprised of open purchase order commitments to suppliers and subcontractors under U.S. government contracts. In most circumstances, our risk associated with the purchase obligations on our U.S. government contracts is limited to the termination liability provisions within those contracts. As such, we do not believe they represent a material liquidity risk to the company.
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. -43- NORTHROP GRUMMAN CORPORATION The table below reconciles net cash provided by operating activities to adjusted free cash flow: Year Ended December 31 % Change in $ in millions 2022 2021 2020 2022 2021 Net cash provided by operating activities $ 2,901 $ 3,567 $ 4,305 (19) % (17) % Capital expenditures (1,435) (1,415) (1,420) 1 % — % Proceeds from sale of equipment to a customer 155 84 205 85 % (59) % After-tax discretionary pension contributions — — 593 NM (100) % Adjusted free cash flow $ 1,621 $ 2,236 $ 3,683 (28) % (39) % 2022 adjusted free cash flow decreased $615 million principally due to lower net cash provided by operating activities, partially offset by an increase in proceeds from the sale of equipment to a customer.
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. -40- NORTHROP GRUMMAN CORPORATION The table below reconciles net cash provided by operating activities to adjusted free cash flow: Year Ended December 31 % Change in $ in millions 2023 2022 2021 2023 2022 Net cash provided by operating activities $ 3,875 $ 2,901 $ 3,567 34 % (19) % Capital expenditures (1,775) (1,435) (1,415) 24 % 1 % Proceeds from sale of equipment to a customer — 155 84 (100) % 85 % Adjusted free cash flow $ 2,100 $ 1,621 $ 2,236 30 % (28) % 2023 adjusted free cash flow increased $479 million, or 30 percent, principally due to higher net cash provided by operating activities, partially offset by an increase in capital expenditures.
FAS/CAS Operating Adjustment The decrease in our 2022 FAS/CAS operating adjustment is due to lower CAS pension expense resulting from favorable plan asset returns in 2021 and changes in certain CAS actuarial assumptions as of December 31, 2021.
FAS/CAS Operating Adjustment The decrease in our 2023 FAS/CAS operating adjustment is primarily due to lower FAS pension service expense resulting from changes in certain actuarial assumptions as of December 31, 2022.
When it is more likely than not that a tax position will be sustained, we record the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority.
When it is more likely than not that a tax position will be sustained, we record the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority. As of December 31, 2023, we have approximately $2.0 billion in unrecognized tax benefits.
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 the option or IDIQ task order is exercised or awarded. Backlog is converted into sales as costs are incurred or deliveries are made.
Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time the option or IDIQ task order is exercised or awarded. Backlog is converted into sales as costs are incurred or deliveries are made.
Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), contract claims and requests for equitable adjustment (REAs).
Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), un-priced change orders, REAs and contract claims.
As of December 31, 2022, we had cash and cash equivalents of $2.6 billion; $316 million was held outside of the U.S. by foreign subsidiaries.
As of December 31, 2023, we had cash and cash equivalents of $3.1 billion; $277 million was held outside of the U.S. by foreign subsidiaries.
Year Ended December 31 % Change in $ in millions 2022 2021 2020 2022 2021 Operating income $ 3,601 $ 5,651 $ 4,065 (36) % 39 % Operating margin rate 9.8 % 15.8 % 11.0 % Reconciliation to segment operating income: CAS pension expense (167) (544) (827) (69) % (34) % FAS pension service expense 367 414 409 (11) % 1 % FAS/CAS operating adjustment 200 (130) (418) (254) % (69) % Gain on sale of business — (1,980) — NM NM IT services divestiture – unallowable state taxes and transaction costs — 192 — NM NM Intangible asset amortization and PP&E step-up depreciation 242 254 322 (5) % (21) % MTM-related deferred state tax expense (benefit) (1) 65 124 (54) (48) % (330) % Other unallocated corporate expense 145 106 273 37 % (61) % Unallocated corporate expense (income) 452 (1,304) 541 (135) % (341) % Segment operating income $ 4,253 $ 4,217 $ 4,188 1 % 1 % Segment operating margin rate 11.6 % 11.8 % 11.4 % (1) Represents the deferred state tax benefit associated with MTM benefit (expense), which is recorded in Unallocated corporate expense consistent with other changes in deferred state taxes.
Year Ended December 31 % Change in $ in millions 2023 2022 2021 2023 2022 Operating income $ 2,537 $ 3,601 $ 5,651 (30) % (36) % Operating margin rate 6.5 % 9.8 % 15.8 % Reconciliation to segment operating income: CAS pension expense (154) (167) (544) (8) % (69) % FAS pension service expense 236 367 414 (36) % (11) % FAS/CAS operating adjustment 82 200 (130) (59) % (254) % Gain on sale of business — — (1,980) — % NM IT services divestiture – unallowable state taxes and transaction costs — — 192 — % NM Intangible asset amortization and PP&E step-up depreciation 122 242 254 (50) % (5) % Deferred state tax (benefit) expense (1) of MTM adjustment (22) 65 124 (134) % (48) % Deferred state tax benefit of B-21 charge (1) (82) — — NM NM Other unallocated corporate expense 123 145 106 (15) % 37 % Unallocated corporate expense (income) 141 452 (1,304) (69) % (135) % Segment operating income $ 2,760 $ 4,253 $ 4,217 (35) % 1 % Segment operating margin rate 7.0 % 11.6 % 11.8 % (1) Represents the deferred state tax (benefits) expenses associated with MTM (expense) benefit and the B-21 charge, which are recorded in Unallocated corporate expense (income) consistent with other changes in deferred state taxes.
For further information on the risks we face from the current political and economic environment, see “Risk Factors.” 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.
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.
We use judgment to evaluate the recoverability of our environmental remediation costs, assessing, among other things, U.S. government regulations, our U.S. government contract mix and past practices.
We use judgment to evaluate the recoverability of our environmental remediation costs, assessing, among other things, U.S. government regulations, our U.S. government contract mix and past practices. Portions of the company’s environmental liabilities we do not expect to be recoverable have been expensed.
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.
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. We continue to not anticipate significant adverse financial impacts directly from the ongoing conflict.
There were no impairment charges recorded in the years ended December 31, 2022, 2021 and 2020. In addition to performing an annual goodwill impairment test, we may perform an interim impairment test if events occur or circumstances change that suggest goodwill in any of our reporting units may be impaired.
In addition to performing an annual goodwill impairment test, we may perform an interim impairment test if events occur or circumstances change that suggest goodwill in any of our reporting units may be impaired.
For further information regarding product and service operating costs and expenses, see “Product and Service Analysis” below. -34- NORTHROP GRUMMAN CORPORATION Mark-to-Market Pension and OPB Benefit/Expense The primary components of pre-tax MTM benefit (expense) are presented in the table below: Year Ended December 31 $ in millions 2022 2021 2020 Actuarial gains (losses) on projected benefit obligation $ 9,662 $ 1,163 $ (3,570) Actuarial (losses) gains on plan assets (8,430) 1,192 2,536 MTM benefit (expense) $ 1,232 $ 2,355 $ (1,034) 2022 MTM benefit (expense) of $1.2 billion was primarily driven by a 256 basis point increase in the discount rate from year end 2021, partially offset by losses of 15.4 percent on plan assets compared to our 7.5 percent asset return assumption.
Mark-to-Market Pension and OPB Benefit/Expense The primary components of pre-tax MTM (expense) benefit are presented in the table below: Year Ended December 31 $ in millions 2023 2022 2021 Actuarial (losses) gains on projected benefit obligation $ (1,489) $ 9,662 $ 1,163 Actuarial gains (losses) on plan assets 1,067 (8,430) 1,192 MTM (expense) benefit $ (422) $ 1,232 $ 2,355 -32- NORTHROP GRUMMAN CORPORATION The 2023 MTM expense of $422 million was primarily driven by a 39 basis point decrease in the discount rate from year end 2022, partially offset by actual net plan asset returns of 11.1 percent compared to our 7.5 percent asset return assumption.
Transaction-adjusted net earnings decreased $149 million, or 4 percent, primarily due to a $330 million reduction in the FAS/CAS operating adjustment and $97 million of lower returns on marketable securities, partially offset by lower income tax and interest expense and higher segment operating income. -35- NORTHROP GRUMMAN CORPORATION Diluted Earnings Per Share The table below reconciles diluted earnings per share to transaction-adjusted EPS: Year Ended December 31 % Change in 2022 2021 2020 2022 2021 Diluted earnings per share $ 31.47 $ 43.54 $ 19.03 (28) % 129 % MTM (benefit) expense per share (7.92) (14.64) 6.17 (46) % (337) % MTM-related deferred state tax expense (benefit) per share (1) 0.42 0.77 (0.32) (45) % (341) % Federal tax expense (benefit) of items above per share (2) 1.57 2.92 (1.23) (46) % (337) % MTM adjustment per share, net of tax (5.93) (10.95) 4.62 (46) % (337) % Gain on sale of business per share — (12.31) — NM NM State tax impact (3) per share — 0.99 — NM NM Transaction costs per share — 0.20 — NM NM Make-whole premium per share — 0.34 — NM NM Federal tax impact of items above (4) per share — 3.82 — NM NM Transaction adjustment per share, net of tax — (6.96) — NM NM Transaction-adjusted EPS $ 25.54 $ 25.63 $ 23.65 — % 8 % (1) The deferred state tax impact in each period was calculated using the company’s blended state tax rate of 5.25 percent and is included in Unallocated corporate expense within operating income.
(4) The federal tax impact was calculated by applying the 21 percent federal statutory rate to the adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business. 2023 net earnings decreased $2.8 billion, or 58 percent, principally due to a $1.7 billion decrease in our MTM (expense) benefit, a $975 million reduction in the non-operating FAS pension benefit and the $1.1 billion decrease in operating income described above, partially offset by a $650 million decrease in income tax expense, a $107 million increase in returns on marketable securities related to our non-qualified benefit plans, and a $97 million gain recognized upon the sale of our minority investment in an Australian business. -33- NORTHROP GRUMMAN CORPORATION Diluted Earnings Per Share The table below reconciles diluted earnings per share to MTM-adjusted EPS and transaction-adjusted EPS: Year Ended December 31 % Change in 2023 2022 2021 2023 2022 Diluted earnings per share $ 13.53 $ 31.47 $ 43.54 (57) % (28) % MTM expense (benefit) per share 2.78 (7.92) (14.64) NM (46) % MTM-related deferred state tax (benefit) expense per share (1) (0.14) 0.42 0.77 NM (45) % Federal tax (benefit) expense of items above per share (2) (0.56) 1.57 2.92 NM (46) % MTM adjustment per share, net of tax 2.08 (5.93) (10.95) NM (46) % MTM-adjusted EPS 15.61 25.54 32.59 (39) % (22) % Gain on sale of business per share — — (12.31) NM NM State tax impact (3) per share — — 0.99 NM NM Transaction costs per share — — 0.20 NM NM Make-whole premium per share — — 0.34 NM NM Federal tax impact of items above (4) per share — — 3.82 NM NM Transaction adjustment per share, net of tax — — (6.96) NM NM Transaction-adjusted EPS $ 15.61 $ 25.54 $ 25.63 (39) % — % (1) The deferred state tax impact in each period was calculated using the company’s blended state tax rate of 5.25 percent and is included in Unallocated corporate expense within operating income.
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.
Mark-to-market adjusted net earnings (MTM-adjusted net earnings) and MTM-adjusted earnings per share (MTM-adjusted EPS) exclude MTM pension and OPB (expense)/benefit and related tax impacts, which are generally only recognized during the fourth quarter.
Impairment assessment inherently involves management judgments as to assumptions about expected future cash flows and the impact of market conditions on those assumptions.
There were no impairment charges recorded in the years ended December 31, 2023, 2022 and 2021. Impairment assessment inherently involves management judgments as to assumptions about expected future cash flows and the impact of market conditions on those assumptions.
We record property, plant and equipment (PP&E) for capital assets used in operating our business. Depreciation expense associated with our PP&E is generally an allowable and allocable cost in accordance with applicable FAR and CAS requirements.
We record property, plant and equipment (PP&E) for capital assets used in operating our business. The cost of PP&E utilized in support of our government contracts is generally allowable and allocable cost in accordance with applicable FAR and CAS requirements, which limits our risk of impairment on those assets.
Operating Cash Flow The table below summarizes key components of cash flow provided by operating activities: Year Ended December 31 $ in millions 2022 2021 2020 Net earnings $ 4,896 $ 7,005 $ 3,189 Gain on sale of business — (1,980) — Non-cash items (1) (1,305) (1,510) 1,799 Pension and OPB contributions (136) (141) (887) Changes in trade working capital (600) 181 227 Other, net 46 12 (23) Net cash provided by operating activities $ 2,901 $ 3,567 $ 4,305 (1) Includes depreciation and amortization, non-cash lease expense, MTM benefit (expense), stock based compensation expense, deferred income taxes and net periodic pension and OPB income. 2022 cash provided by operating activities decreased $666 million principally due to lower CAS pension recoveries and changes in trade working capital, including approximately $900 million of federal tax payments related to the Section 174 tax legislation described above.
Operating Cash Flow The table below summarizes key components of cash provided by operating activities: Year Ended December 31 $ in millions 2023 2022 2021 Net earnings $ 2,056 $ 4,896 $ 7,005 Gain on sale of business — — (1,980) B-21 charge 1,559 — — Non-cash items (1) 551 (1,305) (1,510) Pension and OPB contributions (139) (136) (141) Changes in trade working capital (144) (600) 181 Other, net (8) 46 12 Net cash provided by operating activities $ 3,875 $ 2,901 $ 3,567 (1) Includes depreciation and amortization, non-cash lease expense, MTM (expense) benefit, stock based compensation expense, deferred income taxes and net periodic pension and OPB income. 2023 cash provided by operating activities increased $974 million, or 34 percent, principally due to improved trade working capital largely driven by increased billings and cash collections, partially offset by higher supplier payments.
A reconciliation of segment operating income to total operating income is provided below. -36- NORTHROP GRUMMAN CORPORATION 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.
For a more complete description of each segment’s products and services, see “Business.” 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.
Contract mix generally refers to changes in the ratio of contract type and/or life cycle (e.g., cost-type, fixed-price, development, production, and/or sustainment). -32- NORTHROP GRUMMAN CORPORATION 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 accounting principles generally accepted in the United States of America (“GAAP” or “FAS”).
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 accounting principles generally accepted in the United States of America (“GAAP” or “FAS”).
The Pentagon’s portion of the overall requested national defense budget was $773 billion. 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 December 2023, the president signed the National Defense Authorization Act (NDAA) for FY 2024 which supports approximately $886 billion in FY 2024 funding for national defense, $842 billion of which is for the DoD.
(4) The federal tax impact was calculated by applying the 21 percent federal statutory rate to the adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business. 2022 diluted earnings per share decreased $12.07, or 28 percent, principally due to a $6.96 decrease associated with the IT services divestiture, net of tax, and a $5.02 decrease in our 2022 MTM benefit, net of tax.
(4) The federal tax impact was calculated by applying the 21 percent federal statutory rate to the adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business. 2023 diluted earnings per share decreased $17.94, or 57 percent, reflecting the 58 percent decrease in net earnings described above and a 2 percent decrease in weighted-average diluted shares outstanding.
Impairment Testing – We test for impairment of goodwill annually at each of our reporting units, which comprise our operating segments. The results of our annual goodwill impairment tests as of December 31, 2022 and 2021, respectively, indicated that the estimated fair value of each reporting unit significantly exceeded its respective carrying value.
The results of our annual goodwill impairment tests as of December 31, 2023 and 2022, respectively, indicated that the estimated fair value of each reporting unit significantly exceeded its respective carrying value. There were no impairment charges recorded in the years ended December 31, 2023, 2022 and 2021.
We determine whether to record a reserve and, if so, what amount based on consideration of the facts and circumstances of each matter as then known to us. Determinations regarding whether to record a reserve and, if so, of what amount, reflect management’s assessment regarding what is likely to occur; they do not necessarily reflect what management believes should occur.
Determinations regarding whether to record a reserve and, if so, of what amount, reflect management’s assessment regarding what is likely to occur; they do not necessarily reflect what management believes should occur. The ultimate resolution of any such exposure to us may vary materially from earlier estimates as further facts and circumstances develop or become known to us.
Portions of the company’s environmental liabilities we do not expect to be recoverable have been expensed. -47- NORTHROP GRUMMAN CORPORATION Income Tax Matters – The evaluation of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim, requires the use of judgment.
Income Tax Matters – The evaluation of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim, requires the use of judgment.
Net EAC adjustments can have a significant effect on reported sales and operating income and the aggregate amounts are presented in the table below: Year Ended December 31 $ in millions 2022 2021 2020 Favorable EAC adjustments $ 1,337 $ 1,242 $ 1,082 Unfavorable EAC adjustments (977) (715) (616) Net EAC adjustments $ 360 $ 527 $ 466 Net EAC adjustments by segment are presented in the table below: Year Ended December 31 $ in millions 2022 2021 2020 Aeronautics Systems $ 174 $ 25 $ 77 Defense Systems 111 113 148 Mission Systems 138 263 216 Space Systems (38) 134 33 Eliminations (25) (8) (8) Net EAC adjustments $ 360 $ 527 $ 466 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.
Net EAC adjustments can have a significant effect on reported sales and operating income and the aggregate amounts are presented in the table below: Year Ended December 31 $ in millions 2023 2022 2021 Favorable EAC adjustments $ 1,314 $ 1,337 $ 1,242 Unfavorable EAC adjustments (1,230) (977) (715) Net EAC adjustments $ 84 $ 360 $ 527 -35- NORTHROP GRUMMAN CORPORATION Net EAC adjustments by segment are presented in the table below: Year Ended December 31 $ in millions 2023 2022 2021 Aeronautics Systems $ (44) $ 174 $ 25 Defense Systems 111 111 113 Mission Systems 149 138 263 Space Systems (121) (38) 134 Eliminations (11) (25) (8) Net EAC adjustments $ 84 $ 360 $ 527 AERONAUTICS SYSTEMS Aeronautics Systems is a leader in the design, development, production, integration, sustainment and modernization of military aircraft systems for the U.S.
We cannot clearly predict how long these macroeconomic challenges will continue, or 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.
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 and suppliers, our industry and our company in 2024. -29- NORTHROP GRUMMAN CORPORATION 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.
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); and market volatility.
Global Economic Enviro nment The global economic environment has experienced extraordinary challenges, including high rates of inflation and inflationary pressures; widespread delays and disruptions in supply chains; business slowdowns or shutdowns; workforce challenges and labor shortfalls; and market volatility.
Transaction-adjusted EPS was comparable with the prior year and reflects a 4 percent reduction in transaction-adjusted net earnings and a 3 percent decrease in weighted-average diluted shares outstanding. SEGMENT OPERATING RESULTS Basis of Presentation The company is aligned in four operating sectors, which also comprise our reportable segments: Aeronautics Systems, Defense Systems, Mission Systems and Space Systems.
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.
Operating income also decreased due to a $330 million reduction in the FAS/CAS operating adjustment, which more than offset higher segment operating income and lower non-divestiture-related unallocated corporate expense. 2022 operating margin rate declined to 9.8 percent from 15.8 percent reflecting the items above. 2022 G&A costs as a percentage of sales increased to 10.6 percent from 10.1 percent, primarily due to an increase in investments for future business opportunities.
The decrease was also offset by $311 million of lower unallocated corporate expense, largely due to higher deferred state tax benefits associated with the MTM adjustment and B-21 charge and lower intangible asset amortization and PP&E step-up depreciation, as well as a $118 million reduction in the FAS/CAS operating adjustment. 2023 operating margin rate declined to 6.5 percent from 9.8 percent reflecting the items above. 2023 G&A costs as a percentage of sales decreased to 10.2 percent from 10.6 percent, primarily due to higher sales, which more than offset our continued investments for future business opportunities.
Operating margin rate decreased to 9.4 percent from 10.6 percent primarily due to lower net EAC adjustments and a $45 million write-down of commercial inventory, partially offset by a $96 million gain recognized in connection with a land exchange transaction. -40- NORTHROP GRUMMAN CORPORATION PRODUCT AND SERVICE ANALYSIS The following table presents product and service sales and operating costs and expenses by segment: Year Ended December 31 $ in millions 2022 2021 2020 Segment Information: Sales Operating Costs and Expenses Sales Operating Costs and Expenses Sales Operating Costs and Expenses Aeronautics Systems Product $ 7,981 $ 7,161 $ 9,408 $ 8,534 $ 10,437 $ 9,435 Service 2,311 2,042 1,662 1,462 1,610 1,417 Intersegment eliminations 239 212 189 170 122 111 Total Aeronautics Systems 10,531 9,415 11,259 10,166 12,169 10,963 Defense Systems Product 2,717 2,385 2,564 2,243 3,024 2,740 Service 2,056 1,819 2,423 2,137 3,791 3,305 Intersegment eliminations 806 711 789 700 728 652 Total Defense Systems 5,579 4,915 5,776 5,080 7,543 6,697 Mission Systems Product 7,376 6,291 7,064 6,017 6,744 5,757 Service 2,005 1,639 2,077 1,695 2,557 2,201 Intersegment eliminations 1,015 848 993 843 779 663 Total Mission Systems 10,396 8,778 10,134 8,555 10,080 8,621 Space Systems Product 10,448 9,455 8,832 7,898 6,810 6,084 Service 1,708 1,557 1,637 1,464 1,826 1,672 Intersegment eliminations 119 105 139 125 108 95 Total Space Systems 12,275 11,117 10,608 9,487 8,744 7,851 Segment Totals Total Product $ 28,522 $ 25,292 $ 27,868 $ 24,692 $ 27,015 $ 24,016 Total Service 8,080 7,057 7,799 6,758 9,784 8,595 Total Segment (1) $ 36,602 $ 32,349 $ 35,667 $ 31,450 $ 36,799 $ 32,611 (1) A reconciliation of segment operating income to total operating income is included in “Segment Operating Results.” Product Sales and Costs 2022 product sales increased $654 million, or 2 percent, primarily due to an increase in product sales at Space Systems, partially offset by a decrease in product sales at Aeronautics Systems.
PRODUCT AND SERVICE ANALYSIS The following table presents product and service sales and operating costs and expenses by segment: Year Ended December 31 $ in millions 2023 2022 2021 Segment Information: Sales Operating Costs and Expenses Sales Operating Costs and Expenses Sales Operating Costs and Expenses Aeronautics Systems Product $ 8,157 $ 8,942 $ 7,981 $ 7,161 $ 9,408 $ 8,534 Service 2,389 2,099 2,311 2,042 1,662 1,462 Intersegment eliminations 240 218 239 212 189 170 Total Aeronautics Systems 10,786 11,259 10,531 9,415 11,259 10,166 Defense Systems Product 2,984 2,615 2,717 2,385 2,564 2,243 Service 2,080 1,836 2,056 1,819 2,423 2,137 Intersegment eliminations 798 701 806 711 789 700 Total Defense Systems 5,862 5,152 5,579 4,915 5,776 5,080 Mission Systems Product 7,749 6,669 7,376 6,291 7,064 6,017 Service 2,092 1,730 2,005 1,639 2,077 1,695 Intersegment eliminations 1,054 887 1,015 848 993 843 Total Mission Systems 10,895 9,286 10,396 8,778 10,134 8,555 Space Systems Product 12,007 11,067 10,448 9,455 8,832 7,898 Service 1,832 1,572 1,708 1,557 1,637 1,464 Intersegment eliminations 107 95 119 105 139 125 Total Space Systems 13,946 12,734 12,275 11,117 10,608 9,487 Total Product $ 30,897 $ 29,293 $ 28,522 $ 25,292 $ 27,868 $ 24,692 Total Service 8,393 7,237 8,080 7,057 7,799 6,758 Total Company $ 39,290 $ 36,530 $ 36,602 $ 32,349 $ 35,667 $ 31,450 Product Sales and Costs 2023 product sales increased $2.4 billion, or 8 percent, due to an increase in product sales at all four sectors.
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.
Our 2022 cash from operations were reduced by approximately $900 million for federal estimated tax payments we made related to Section 174.
Operating Income 2022 operating income increased $37 million, or 3 percent, due to higher sales, partially offset by a lower operating margin rate.
Operating Income 2023 operating income decreased $9 million, or 1 percent, due to a lower operating margin rate, which more than offset higher sales.
Due to the many variables inherent in the estimation of a business’ fair value and the relative size of our recorded goodwill and other purchased intangible assets, differences in assumptions may have a material effect on the results of our impairment analysis. -49- NORTHROP GRUMMAN CORPORATION
Due to the many variables inherent in developing the estimates used in our impairment analyses, differences in assumptions may have a material effect on the results of those impairment analyses. -46- NORTHROP GRUMMAN CORPORATION
We use industry multiples (including relevant control premiums) of operating earnings to -48- NORTHROP GRUMMAN CORPORATION corroborate the fair values of our reporting units determined under the market valuation method of the income approach.
We use industry multiples (including relevant control premiums) of operating earnings to corroborate the fair values of our reporting units determined under the market valuation method of the income approach. We test for impairment of our long-lived assets when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
Litigation, Commitments and Contingencies We are subject to a range of claims, disputes, enforcement actions, investigations, lawsuits, overhead cost claims, environmental matters, income tax matters and administrative proceedings that arise in the ordinary course of business. Estimating liabilities and costs associated with these matters requires judgment based upon the professional knowledge and experience of management.
For further information regarding our pension and OPB plans, see “Risk Factors” and Notes 1 and 13 to the consolidated financial statements. Litigation, Commitments and Contingencies We are subject to a range of claims, disputes, enforcement actions, investigations, lawsuits, overhead cost claims, environmental matters, income tax matters and administrative proceedings that arise in the ordinary course of business.
MISSION SYSTEMS Year Ended December 31 % Change in $ in millions 2022 2021 2020 2022 2021 Sales $ 10,396 $ 10,134 $ 10,080 3 % 1 % Operating income 1,618 1,579 1,459 2 % 8 % Operating margin rate 15.6 % 15.6 % 14.5 % Sales 2022 sales increased $262 million, or 3 percent, and includes a $42 million reduction in sales related to the IT services divestiture. 2022 organic sales increased $304 million, or 3 percent, primarily due to higher restricted sales in the Networked Information Solutions business area, $107 million of higher volume on airborne radar programs and a $107 million increase on the Surface Electronic Warfare Improvement Program (SEWIP).
Year Ended December 31 % Change in $ in millions 2023 2022 2021 2023 2022 Sales $ 10,895 $ 10,396 $ 10,134 5 % 3 % Operating income 1,609 1,618 1,579 (1) % 2 % Operating margin rate 14.8 % 15.6 % 15.6 % Sales 2023 sales increased $499 million, or 5 percent, primarily due to higher restricted sales on advanced microelectronics programs, as well as a $165 million increase on marine systems programs.
Current tensions within Congress and the wider U.S. political environment may also impact defense budgets 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 are actively exploring both opportunities and risks associated with the broader global security environment. We believe the current global security environment highlights the significant national security threats to the U.S. and its allies, and the need for strong deterrence and a robust defense capability.
As such, after considering the information released by the RPEC in October 2021 as well as the company’s recent mortality experience in light of the COVID-19 pandemic, we adopted the full MP-2021 projection scale while continuing to use the Pri-2012 White Collar table.
As such, after considering the information released by the RPEC in October 2021 as well as the company’s recent mortality experience, we adopted the full MP-2021 projection scale while continuing to use the Pri-2012 White Collar table, supplemented with 50% of the Gradual Wear-Off illustration as outlined in the RPEC’s 2022 Mortality Improvement Update paper to reflect the future impacts of COVID-19, to develop our mortality assumptions used in calculating our pension and OPB obligations recognized at December 31, 2023, and the amounts estimated for our 2024 pension and OPB expense.
The company’s principal contractual commitments include purchase obligations, repayments of long-term debt and related interest, and payments under operating leases. At December 31, 2022, we had $19.0 billion of purchase obligations, approximately half of which is short-term. Purchase obligations are largely comprised of open purchase order commitments to suppliers and subcontractors under U.S. government contracts.
In February 2023, we issued $2.0 billion of unsecured senior notes for general corporate purposes, including debt repayment, share repurchases and working capital. The company’s principal contractual commitments include purchase obligations, repayments of long-term debt and related interest, and payments under operating leases. At December 31, 2023, we had $20.7 billion of purchase obligations, approximately half of which is short-term.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeHowever, the company, its subcontractors and other suppliers, have experienced, and continue to experience, increased pressures from recent heightened levels of inflation and the challenges of the current macroeconomic environment, which we have not been able to fully mitigate.
Biggest changeThe company, its subcontractors and other suppliers, have experienced, and continue to experience, increased pressures from heightened levels of inflation and the challenges of the current macroeconomic environment, which we have not been able to fully mitigate on a number of our fixed-price contracts, in particular on the LRIP phase of the B-21 program at Aeronautics Systems.
We do not hold or issue derivative financial instruments for trading purposes. At December 31, 2022, foreign currency forward contracts with a notional amount of $221 million were outstanding. At December 31, 2022, a 10 percent unfavorable foreign exchange rate movement would not have a material impact on our consolidated financial position, annual results of operations and/or cash flows.
We do not hold or issue derivative financial instruments for trading purposes. At December 31, 2023, foreign currency forward contracts with a notional amount of $286 million were outstanding. At December 31, 2023, a 10 percent unfavorable foreign exchange rate movement would not have a material impact on our consolidated financial position, annual results of operations and/or cash flows.
INTEREST RATE RISK We are exposed to interest rate risk on variable-rate short-term credit facilities for which there were no borrowings outstanding at December 31, 2022. At December 31, 2022, we have $12.9 billion of long-term debt, primarily consisting of fixed-rate debt, with a fair value of approximately $12.1 billion.
INTEREST RATE RISK We are exposed to interest rate risk on variable-rate short-term credit facilities for which there were no borrowings outstanding at December 31, 2023. At December 31, 2023, we have $13.9 billion of long-term debt, primarily consisting of fixed-rate debt, with a fair value of approximately $13.4 billion.
If inflationary pressures continue to persist, they may continue to have an adverse impact on our consolidated financial position, results of operations and/or cash flows. -50-
If inflationary pressures continue to persist, they may continue to have an adverse impact on our consolidated financial position, results of operations and/or cash flow. -47-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk EQUITY RISK We are exposed to market risk with respect to our portfolio of marketable securities with a fair value of $332 million at December 31, 2022. These securities are exposed to market volatilities, changes in price and interest rates.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk EQUITY RISK We have been and continue to be exposed to market risk with respect to our portfolio of marketable securities with a fair value of $339 million at December 31, 2023. These securities are exposed to market volatilities, changes in price and interest rates.
INFLATION RISK The global macroeconomic environment has experienced, and continues to experience, extraordinary challenges, including the highest rates of inflation in 40 years. These macroeconomic factors have contributed, and we expect will continue to contribute, to increased costs, among other concerns.
INFLATION RISK The global macroeconomic environment has experienced extraordinary challenges, including the highest rates of inflation in 40 years.
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Historically, we generally have been able to anticipate such increases in costs when pricing our contracts, and our bids for longer-term firm fixed-price contracts have typically included assumptions regarding cost escalations in amounts that have been sufficient to cover most cost increases over the period of performance, including as offset by operational efficiencies.

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