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.

For purposes of the operating results discussion below, we assess our performance using certain financial measures that are not calculated in accordance with GAAP.

Organic Sales

In the operating results discussion below, we present the performance of our Defense Systems sector using organic sales, a financial measure that is not calculated in accordance with GAAP. Organic sales is defined as total sales excluding sales attributable to the company's former training services business. This measure may be useful to investors and other users of our financial statements as a supplemental measure in evaluating the company’s underlying sales growth as well as in understanding our ongoing business and future sales trends by presenting the company’s sales adjusted for the impact of the divestiture. We reconcile this non-GAAP financial measure to its most directly comparable GAAP financial measure below. This non-GAAP measure 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.

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.

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Second quarter 2026 segment operating income decreased $61 million, or 5 percent, primarily due to $97 million of lower operating income at Defense Systems and $44 million of lower operating income at Space Systems, partially offset by $60 million of higher operating income at Mission Systems and $41 million of higher operating income at Aeronautics Systems. Segment operating margin rate decreased to 10.6 percent from 11.8 percent primarily due to a lower operating margin rate at Defense Systems and Space Systems, partially offset by a higher operating margin rate at Mission Systems.

Year to date 2026 segment operating income increased $443 million, or 25 percent, primarily due to $529 million of higher operating income at Aeronautics Systems and $132 million of higher operating income at Mission Systems, partially offset by $92 million of lower operating income at both Defense Systems and Space Systems. Segment operating margin rate increased to 10.7 percent from 9.0 percent primarily due to a higher operating margin rate at Aeronautics Systems and Mission Systems, partially offset by a lower operating margin rate at Defense Systems and Space Systems.

FAS/CAS Operating Adjustment

The second quarter 2026 and year to date 2026 FAS/CAS operating adjustment reflects lower CAS pension expense largely driven by favorable plan asset returns in prior years.

Unallocated Corporate Expense (Income)

The change in second quarter 2026 unallocated corporate expense (income) is primarily driven by the prior year $231 million gain on the training services divestiture and $19 million of unallowable state taxes and transaction costs associated with the divestiture.

The change in year to date 2026 unallocated corporate expense (income) is primarily due to the prior year $231 million gain on the training services divestiture and $20 million of unallowable state taxes and transaction costs associated with the divestiture.

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:

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Sales

Second quarter 2026 sales increased $405 million, or 13 percent, primarily due to higher volume on B-21 and other restricted programs, a $106 million increase on the E-130J TACAMO (“TACAMO”) program as it ramps up, and higher volume on the B-2, F-35 and E-2 programs. These increases were partially offset by a decrease on F/A-18 as final production deliveries have completed.

Year to date 2026 sales increased $874 million, or 15 percent, primarily due to higher sales on B-21 and other restricted programs, a $193 million increase on the TACAMO program as it ramps up, as well as higher volume on the B-2 and F-35 programs. The higher B-21 sales reflect the company’s first quarter 2026 agreement with the U.S. Air Force to expand production capacity and increase the aircraft production rate, including the sale of a company-owned test asset. The sales increases were partially offset by a decrease on F/A-18 as final production deliveries have completed.

Second quarter 2026 operating income increased $41 million, or 13 percent, due to higher sales. Operating margin rate of 10.3 percent was comparable with the prior year period.

Year to date 2026 operating income increased $529 million, or 383 percent, primarily due to a higher operating margin rate. Operating margin rate increased to 9.8 percent primarily due to the absence of the prior year B-21 loss provision.

Sales

Second quarter 2026 sales increased $102 million, or 5 percent, primarily due to higher volume on Sentinel as the program continues to ramp and higher volume across the Integrated Battle Command System (IBCS) portfolio. These increases were partially offset by a $40 million reduction in sales related to the divested training services business.

Year to date 2026 sales increased $196 million, or 5 percent, primarily due to a $176 million increase on Sentinel as the program continues to ramp, as well as higher volume on tactical solid rocket motor programs and across the IBCS portfolio. These increases were partially offset by a $112 million reduction in sales related to the divested training services business as well as lower volume on armament programs, including certain military ammunition programs.

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Second quarter 2026 operating income decreased $97 million, or 38 percent, primarily due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to 7.5 percent from 12.7 percent primarily due to lower net EAC adjustments, including the absence of a prior year $76 million favorable adjustment on Sentinel. In the current quarter, we continued to invest in our missile prime business. We are projecting higher costs to mature production on the Extended Range version of the Advanced Anti-Radiation Guided Missile (AARGM-ER) and to develop and qualify the Stand-in Attack Weapon (SiAW), which resulted in a $68 million unfavorable EAC adjustment on SiAW. These investments were partially offset by a favorable EAC adjustment on Sentinel related to our recent achievement of certain contract incentives.

Year to date 2026 operating income decreased $92 million, or 21 percent, primarily due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to 8.5 percent from 11.4 percent principally due to lower net EAC adjustments, reflecting the SiAW and prior year Sentinel adjustments described above.

Sales

Second quarter 2026 sales increased $93 million, or 3 percent, primarily due to a $130 million increase on marine systems programs, the timing of materials on F-35 and ramp-up on restricted airborne radar programs. These increases were partially offset by lower volume on restricted advanced microelectronics programs.

Year to date 2026 sales increased $147 million, or 2 percent, primarily due to ramp-up on restricted airborne radar programs, higher sales of $163 million on marine systems programs, and the timing of materials on F-35. These increases were partially offset by a $106 million decrease on the Scalable Agile Beam Radar program and lower volume on restricted advanced microelectronics programs.

Second quarter 2026 operating income increased $60 million, or 14 percent, due to a higher operating margin rate and higher sales. Operating margin rate increased to 15.4 percent from 14.0 percent, primarily due to higher net EAC adjustments driven by improved performance.

Year to date 2026 operating income increased $132 million, or 16 percent, due to a higher operating margin rate and higher sales. Operating margin rate increased to 15.3 percent from 13.4 percent, primarily due to higher net EAC adjustments driven by improved performance, as well as prior year investments made by the sector in connection with restricted business opportunities.

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Sales

Second quarter 2026 sales increased $107 million, or 4 percent, primarily due to a $139 million increase for Commercial Resupply Service (CRS) missions as well as higher volume on the Glide Phase Interceptor (GPI) and Ground-based Midcourse Defense Weapon System (GMD WS) programs. These increases were partially offset by lower sales on the Graphite Epoxy Motor (GEM) 63XL program related to the unfavorable EAC adjustment described below and lower volume on the Habitation and Logistics Outpost (HALO) program.

Year to date 2026 sales were comparable to the prior period and reflect a $141 million increase for CRS missions offset by a $139 million decrease on the GEM 63XL program largely related to the unfavorable EAC adjustments described below.

Second quarter 2026 operating income decreased $44 million, or 16 percent, primarily due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to 8.6 percent from 10.6 percent, primarily due to lower net EAC adjustments, including a $91 million unfavorable adjustment on GEM 63XL largely related to increases in the projected cost to complete the program, partially offset by favorable changes in contract mix.

Year to date 2026 operating income decreased $92 million, or 16 percent, due to a lower operating margin rate. Operating margin rate decreased to 9.0 percent from 10.8 percent, largely due to lower net EAC adjustments, including $162 million of unfavorable adjustments on GEM 63XL, partially offset by favorable changes in contract mix.

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