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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Third quarter 2026 segment operating income increased $68 million, or 5 percent, primarily due to $72 million of higher operating income at Aeronautics Systems. Third quarter 2026 segment operating margin rate of 12.1 percent reflects strong program performance and higher operating margin rates at Aeronautics Systems and Space Systems. Segment operating margin rate decreased from 12.3 percent in the third quarter of 2025 principally due to a prior year $68 million favorable EAC adjustment in the restricted advanced microelectronics portfolio at Mission Systems.

Year to date 2026 segment operating income increased $511 million, or 17 percent, primarily due to $601 million of higher operating income at Aeronautics Systems and $117 million of higher operating income at Mission Systems, partially offset by $78 million of lower operating income at Space Systems and $76 million of lower operating income at Defense Systems. Segment operating margin rate increased to 11.2 percent from 10.1 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 third 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

The decrease in third quarter 2026 unallocated corporate expense is primarily driven by lower intangible asset amortization and PP&E step-up depreciation.

The increase in year to date 2026 unallocated corporate expense is primarily due to the prior year $231 million gain on the training services 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

Third quarter 2026 sales increased $433 million, or 14 percent, primarily due to a $195 million increase on F-35 driven by the timing of material costs on production lots and increased sustainment volume, higher B-21 sales and an increase in B-2 sustainment volume.

Year to date 2026 sales increased $1.3 billion, or 14 percent, primarily due to higher sales on B-21 and other restricted programs, a $237 million increase on the E-130J TACAMO (“TACAMO”) program as it ramps up, a $229 million increase on F-35, and $116 million of higher B-2 sustainment volume. 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.

Third quarter 2026 operating income increased $72 million, or 24 percent, due to higher sales and a higher operating margin rate. Operating margin rate increased to 10.5 percent from 9.7 percent primarily due to higher net contract margin adjustments, including on certain mature production and sustainment programs.

Year to date 2026 operating income increased $601 million, or 136 percent, due to a higher operating margin rate and higher sales. Year to date 2026 operating margin rate of 10.1 percent reflects strong performance on certain mature production and sustainment programs. Operating margin rate increased from 4.9 percent in 2025 primarily due to the absence of the prior year B-21 loss provision.

Sales

Third quarter 2026 sales increased $248 million, or 12 percent, primarily due to a $180 million increase on Sentinel as the program continues to ramp, higher volume on the Guided Multiple Launch Rocket System Extended Range (GMLRS ER) program due to the timing of awards, and higher volume on various tactical solid rocket motor programs. These increases were partially offset by lower volume on armament programs, primarily on certain military ammunition programs.

Year to date 2026 sales increased $444 million, or 8 percent, primarily due to a $356 million increase on Sentinel as the program continues to ramp, a $114 million increase on various tactical solid rocket motor programs, and higher volume across the IBCS portfolio. These increases were partially offset by a $112 million reduction in sales related to the divested training services business and a $109 million decrease on armament programs, including certain military ammunition programs.

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Third quarter 2026 operating income increased $16 million, or 7 percent, primarily due to higher sales, partially offset by a lower operating margin rate. Operating margin rate decreased to 10.8 percent from 11.4 percent, primarily due to changes in contract mix toward more cost-type content.

Year to date 2026 operating income decreased $76 million, or 11 percent, primarily due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to 9.4 percent from 11.4 percent principally due to lower net EAC adjustments, largely due to the Q2 2026 unfavorable EAC adjustment on the Stand-in Attack Weapon (SiAW) program and the absence of a prior year favorable EAC adjustment on the EMD phase of the Sentinel program.

Sales

Third quarter 2026 sales increased $62 million, or 2 percent, primarily due to ramp-up on restricted airborne radar programs and higher volume on marine systems programs. These increases were partially offset by lower volume on restricted advanced microelectronics programs.

Year to date 2026 sales increased $209 million, or 2 percent, primarily due to ramp-up on restricted airborne radar programs, higher sales of $255 million on marine systems programs, and the timing of materials on F-35. These increases were partially offset by lower volume on restricted advanced microelectronics programs and a $129 million decrease on the Scalable Agile Beam Radar program.

Third quarter 2026 operating income decreased $15 million, or 3 percent, primarily due to a lower operating margin rate, partially offset by higher sales. Third quarter 2026 operating margin rate of 15.8 percent reflects strong program performance on marine systems and restricted airborne radar programs. Operating margin rate decreased from 16.7 percent in the third quarter of 2025 due, in part, to a prior year $68 million favorable EAC adjustment in the restricted advanced microelectronics portfolio.

Year to date 2026 operating income increased $117 million, or 9 percent, due to a higher operating margin rate and higher sales. Operating margin rate increased to 15.5 percent from 14.5 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.

Sales

Third quarter 2026 sales increased $51 million, or 2 percent, primarily due to ramp-up of programs in the restricted space portfolio, partially offset by $136 million of lower sales on Commercial Resupply Service missions due to launch timing.

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Year to date 2026 sales increased $70 million, or 1 percent, primarily due to ramp-up of programs in the restricted space portfolio, $141 million of higher intercompany sales in support of Sentinel, and $107 million of higher GPI sales. These increases were partially offset by a $159 million decrease on the Graphite Epoxy Motor (GEM) 63XL program and a $129 million decrease on the Next-Generation Overhead Persistent Infrared Polar program.

Third quarter 2026 operating income increased $14 million, or 5 percent, due to a higher operating margin rate and higher sales. Operating margin rate increased to 11.3 percent from 11.0 percent, primarily due to changes in contract mix toward more fixed-price content.

Year to date 2026 operating income decreased $78 million, or 9 percent, primarily due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to 9.8 percent from 10.9 percent, largely due to lower net EAC adjustments, partially offset by changes in contract mix toward more fixed-price content.