NORTHROP GRUMMAN CORP /DE/

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.

Effective July 1, 2024, the company realigned the SDS division, which includes the Sentinel program, from Space Systems to Defense Systems. Effective January 1, 2025, the company realigned the SSAS business unit from Defense Systems to Aeronautics Systems. These realignments are reflected in the financial information contained in this report.

Operating Performance Assessment and Reporting

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

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Segment Operating Income and Margin Rate

Segment operating income, as reconciled in the table below, and segment operating margin rate (segment operating income divided by sales) are non-GAAP measures that reflect the combined operating income of our four segments less the operating income associated with intersegment sales. Segment operating income includes pension expense allocated to our sectors under FAR and CAS and excludes FAS pension service expense and unallocated corporate items (certain corporate-level expenses, which are not considered allowable or allocable under applicable FAR and CAS requirements, and costs not considered part of management’s evaluation of segment operating performance). These non-GAAP measures may be useful to investors and other users of our financial statements as supplemental measures in evaluating the financial performance and operational trends of our sectors. These measures may not be defined and calculated by other companies in the same manner and should not be considered in isolation or as alternatives to operating results presented in accordance with GAAP.

Third quarter 2025 segment operating income increased $131 million, or 11 percent, primarily due to higher operating income at Mission Systems and Defense Systems, partially offset by lower operating income at Space Systems. Segment operating margin rate increased to 12.3 percent from 11.5 percent due to higher operating margin rates at Mission Systems and Defense Systems, partially offset by lower operating margin rates at Space Systems and Aeronautics Systems.

Year to date 2025 segment operating income decreased $287 million, or 9 percent, due to lower operating income at Aeronautics Systems, primarily driven by a $477 million B-21 loss provision in the first quarter of 2025, and lower operating income at Space Systems, partially offset by higher operating income at Mission Systems and Defense Systems. Segment operating margin rate decreased to 10.1 percent from 11.0 percent primarily due to the B-21 loss provision, partially offset by higher operating margin rates at Defense Systems and Mission Systems.

FAS/CAS Operating Adjustment

The third quarter 2025 and year to date 2025 FAS/CAS operating adjustment reflects higher CAS pension expense largely driven by plan asset returns in prior years and changes in certain CAS actuarial assumptions as of December 31, 2024.

Unallocated Corporate Expense

The change in third quarter 2025 unallocated corporate expense is primarily due to higher deferred state tax expense largely related to the repeal of mandatory capitalization of research and development expenditures under IRC Section 174 upon enactment of the OBBBA.

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The change in year to date 2025 unallocated corporate expense is primarily due to a $231 million gain on the sale of our training services business, partially offset by an $18 million increase in unallowable state taxes and transaction costs associated with the divestiture. Non-divestiture-related unallocated corporate expense increased primarily due to higher deferred state tax expense largely related to the repeal of mandatory capitalization of research and development expenditures under IRC Section 174, as well as the prior year including a $26 million increase in our estimated recovery of certain environmental remediation costs.

Net EAC Adjustments - We record changes in estimated contract earnings at completion (net EAC adjustments) using the cumulative catch-up method of accounting. Net EAC adjustments can have a significant effect on segment operating income and margin rate.

The aggregate favorable and unfavorable EAC adjustments are presented in the table below:

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

Sales

Third quarter 2025 sales increased $181 million, or 6 percent, primarily due to a $110 million increase on the E-130J TACAMO (“TACAMO”) program as it ramps up and a $105 million increase on the F-35 program largely driven by materials volume, partially offset by a decrease on F/A-18 as production nears completion.

Year to date 2025 sales were comparable to the prior year period and reflect a $226 million increase on TACAMO as that program ramps and a $111 million increase on the F-35 program largely driven by materials volume, partially offset by lower sales on restricted programs, commercial aerostructures programs and on F/A-18 as production nears completion.

Third quarter 2025 operating income decreased $4 million, or 1 percent, due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to 9.7 percent from 10.4 percent, primarily due to lower net contract margin adjustments.

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Year to date 2025 operating income decreased $484 million and operating margin rate decreased to 4.9 percent primarily due to the previously described $477 million loss provision recorded on the LRIP phase of the B-21 program in the first quarter of 2025.

Sales

Third quarter 2025 sales increased $259 million, or 14 percent, primarily due to higher volume on armament programs, including military ammunition programs, increased volume from new awards across the Integrated Battle Command System (IBCS) program portfolio and higher sales on Sentinel. These increases were partially offset by a $70 million reduction in sales related to the training services divestiture.

Year to date 2025 sales increased $459 million, or 9 percent, primarily due to a $195 million increase in sales on Sentinel, higher volume on armament programs, including a $135 million increase on military ammunition programs, and increased volume from new awards across the IBCS program portfolio. These increases were partially offset by a $114 million reduction in sales related to the training services divestiture.

Third quarter 2025 operating income increased $74 million, or 46 percent, primarily due to a higher operating margin rate and higher sales. Operating margin rate increased to 11.4 percent from 8.9 percent principally due to higher net EAC adjustments and changes in mix toward more fixed-price contracts.

Year to date 2025 operating income increased $159 million, or 31 percent, primarily due to a higher operating margin rate and higher sales. Operating margin rate increased to 11.4 percent from 9.4 percent principally due to higher net EAC adjustments, including a $76 million favorable EAC adjustment on the Sentinel program during the second quarter of 2025.

Sales

Third quarter 2025 sales increased $270 million, or 10 percent, primarily due to higher sales on restricted advanced microelectronics programs, higher volume on marine systems programs and ramp-up on international ground-based radar programs.

Year to date 2025 sales increased $802 million, or 10 percent, primarily due to the timing of materials on restricted airborne radar programs, higher volume on marine systems programs, ramp-up on international ground-based radar programs and sales growth on the Scalable Agile Beam Radar (SABR) program.

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Third quarter 2025 operating income increased $125 million, or 32 percent, due to a higher operating margin rate and higher sales. Operating margin rate increased to 16.7 percent from 13.8 percent, principally due to higher net EAC adjustments, including a $68 million favorable EAC adjustment in the restricted advanced microelectronics portfolio largely driven by program efficiencies and risk mitigations.

Year to date 2025 operating income increased $188 million, or 17 percent, primarily due to higher sales and a higher operating margin rate. Operating margin rate increased to 14.5 percent from 13.7 percent, primarily due to higher net EAC adjustments, including the $68 million favorable EAC adjustment in the restricted advanced microelectronics portfolio described above, partially offset by investments made by the sector in connection with restricted business opportunities during the first quarter of 2025 and changes in mix toward more cost-type contracts.

Sales

Third quarter 2025 sales decreased $172 million, or 6 percent, primarily due to wind-down of work on the restricted space and Next Generation Interceptor (NGI) programs, which reduced sales by $124 million, as well as lower volume on Space Development Agency (SDA) satellite programs. These decreases were partially offset by a $100 million increase for Commercial Resupply Services (CRS) missions.

Year to date 2025 sales decreased $1.1 billion, or 12 percent, primarily due to wind-down of work on the restricted space and NGI programs, which reduced sales by $635 million, as well as a $195 million decrease for SDA satellite programs. The decrease was also driven by lower volume on other restricted space programs and the Space Launch System (SLS) Booster, Next Gen Polar (NGP) and Ground-Based Midcourse Defense (GMD) programs, partially offset by higher volume on GEM 63 as that program ramps.

Third quarter 2025 operating income decreased $47 million, or 14 percent, primarily due to a lower operating margin rate and lower sales. Operating margin rate decreased to 11.0 percent from 12.0 percent principally due to lower net EAC adjustments, including a prior year $39 million favorable EAC adjustment on the Habitation and Logistics Outpost program, partially offset by sales growth on programs with accretive margin rates.

Year to date 2025 operating income decreased $118 million, or 12 percent, due to lower sales. Operating margin rate of 10.9 percent was comparable with the prior year period.

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