Northrop Grumman(NOC) - 2024 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents Northrop Grumman's unaudited condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2024 Item 1. Financial Statements (Unaudited) This section presents Northrop Grumman's unaudited condensed consolidated financial statements and comprehensive notes for the three and nine months ended September 30, 2024 Condensed Consolidated Statements of Earnings and Comprehensive Income This section provides the condensed consolidated statements of earnings and comprehensive income for the three and nine months ended September 30, 2024 and 2023 Three Months Ended September 30 (in millions, except per share amounts) | Metric | 2024 | 2023 | | :----- | :--- | :--- | | Sales | $9,996 | $9,775 | | Operating Income | $1,120 | $1,016 | | Net Earnings | $1,026 | $937 | | Basic EPS | $7.02 | $6.20 | | Diluted EPS | $7.00 | $6.18 | Nine Months Ended September 30 (in millions, except per share amounts) | Metric | 2024 | 2023 | | :----- | :--- | :--- | | Sales | $30,347 | $28,652 | | Operating Income | $3,281 | $2,930 | | Net Earnings | $2,910 | $2,591 | | Basic EPS | $19.73 | $17.07 | | Diluted EPS | $19.69 | $17.00 | Condensed Consolidated Statements of Financial Position This section presents the condensed consolidated statements of financial position as of September 30, 2024, and December 31, 2023 As of September 30, 2024 vs. December 31, 2023 (in millions) | Category | Sep 30, 2024 | Dec 31, 2023 | | :-------------------------------- | :----------- | :----------- | | Assets | | | | Cash and cash equivalents | $3,326 | $3,109 | | Total current assets | $14,332 | $13,706 | | Total assets | $48,289 | $46,544 | | Liabilities | | | | Total current liabilities | $13,101 | $11,942 | | Long-term debt, net | $14,689 | $13,786 | | Total liabilities | $33,541 | $31,749 | | Shareholders' Equity | | | | Total shareholders' equity | $14,748 | $14,795 | Condensed Consolidated Statements of Cash Flows This section details the condensed consolidated statements of cash flows for the nine months ended September 30, 2024 and 2023 Nine Months Ended September 30 (in millions) | Activity | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Net cash provided by operating activities | $1,810 | $1,445 | | Net cash used in investing activities | $(951) | $(812) | | Net cash used in financing activities | $(642) | $(1,128) | | Increase (decrease) in cash and cash equivalents | $217 | $(495) | | Cash and cash equivalents, end of period | $3,326 | $2,082 | Condensed Consolidated Statements of Changes in Shareholders' Equity This section outlines the condensed consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2024 and 2023 Nine Months Ended September 30 (in millions, except per share amounts) | Metric | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Common stock, beginning of period | $150 | $153 | | Common stock repurchased | $(4) | $(2) | | Retained earnings, beginning of period | $14,773 | $15,312 | | Net earnings | $2,910 | $2,591 | | Dividends declared | $(885) | $(832) | | Total shareholders' equity, end of period | $14,748 | $15,928 | | Cash dividends declared per share | $5.99 | $5.47 | 1. Basis of Presentation This note describes the basis of presentation for the financial statements, including significant accounting policies and recent program updates - Effective July 1, 2024, the Strategic Deterrent Systems (SDS) division, including the Ground-Based Strategic Deterrent ("Sentinel") program, was realigned from Space Systems to Defense Systems[16] - The company recognized a projected loss of $1.56 billion across the five LRIP options for the B-21 program in Q4 2023, with no significant changes in Q3 2024. The remaining loss accrual is $1.4 billion as of September 30, 2024[20] - The Sentinel program was recertified for continuation by the DoD in July 2024 after a Nunn-McCurdy breach review, with a restructured program plan. No significant changes to estimated profitability were made in Q3 2024[21] - The company completed negotiations with NASA for the HALO program's engineering change proposal (ECP) in Q3 2024, resulting in a $39 million favorable EAC adjustment[22][23] Aggregate Net EAC Adjustments (in millions, except per share data) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $131 | $95 | $242 | $252 | | Operating Income | $136 | $58 | $268 | $180 | | Net Earnings | $107 | $46 | $212 | $142 | | Diluted Earnings Per Share | $0.73 | $0.30 | $1.43 | $0.93 | - Company backlog as of September 30, 2024, was $84.8 billion. Approximately 40% is expected to be recognized as revenue over the next 12 months and 65% over the next 24 months[25] - Unfunded backlog was reduced by $1.6 billion in Q1 2024 due to a restricted space business termination and by $0.7 billion in Q2 2024 for the Next Generation Interceptor (NGI) program[25] Revenue Recognized from Contract Liability Balance (in millions) | Period | From Dec 31, 2023 Balance | From Dec 31, 2022 Balance | | :--------------------------- | :------------------------ | :------------------------ | | Three Months Ended Sep 30, 2024 | $354 | N/A | | Nine Months Ended Sep 30, 2024 | $3,400 | N/A | | Three Months Ended Sep 30, 2023 | N/A | $358 | | Nine Months Ended Sep 30, 2023 | N/A | $2,900 | Accumulated Other Comprehensive Loss (in millions) | Component | Sep 30, 2024 | Dec 31, 2023 | | :--------------------------------- | :----------- | :----------- | | Cumulative translation adjustment | $(136) | $(138) | | Other, net | $0 | $10 | | Total accumulated other comprehensive loss | $(136) | $(128) | 2. Earnings Per Share, Share Repurchases and Dividends on Common Stock This note details earnings per share calculations, share repurchase programs, and common stock dividends - Dilutive effect of stock-based compensation awards was 0.3 million shares for both the three and nine months ended September 30, 2024[35] - The 2023 Repurchase Program, authorized for up to $2.5 billion, commenced in February 2024. As of September 30, 2024, $0.9 billion has been repurchased, with $1.6 billion remaining[36] - In Q1 2024, the company entered into a $1.0 billion Accelerated Share Repurchase (ASR) agreement with Morgan Stanley, completing the 2022 Repurchase Program. The final average purchase price was $455.73 per share[38] Share Repurchase Program Summary (as of Sep 30, 2024) | Program | Amount Authorized (in millions) | Total Shares Retired (in millions) | Average Price Per Share | | :---------------- | :------------------------------ | :------------------------------- | :---------------------- | | 2021 Repurchase Program | $3,000 | 7.0 | $431.05 | | 2022 Repurchase Program | $2,000 | 4.4 | $455.01 | | 2023 Repurchase Program | $2,500 | 2.0 | $461.06 | - In May 2024, the quarterly common stock dividend increased by 10% to $2.06 per share from $1.87 per share[39] 3. Inventoried Costs, Net This note provides a breakdown of inventoried costs, net, as of September 30, 2024, and December 31, 2023 Inventoried Costs, Net (in millions) | Category | September 30, 2024 | December 31, 2023 | | :------------------- | :----------------- | :---------------- | | Contracts in process | $1,106 | $647 | | Product inventory | $540 | $462 | | Raw materials | $380 | $338 | | Work in process | $108 | $72 | | Finished goods | $52 | $52 | | Total inventoried costs, net | $1,646 | $1,109 | 4. Income Taxes This note presents information on federal and foreign income tax expense, effective tax rates, and unrecognized tax benefits Federal and Foreign Income Tax Expense and Effective Tax Rate (in millions) | Period | 2024 Tax Expense | 2023 Tax Expense | 2024 ETR | 2023 ETR | | :--------------------------- | :--------------- | :--------------- | :------- | :------- | | Three Months Ended Sep 30 | $162 | $181 | 13.6% | 16.2% | | Nine Months Ended Sep 30 | $555 | $512 | 16.0% | 16.5% | - The Q3 2024 effective tax rate decreased to 13.6% from 16.2% YoY, primarily due to a net reduction in tax reserves from a federal court decision, partially offset by higher interest expense on unrecognized tax benefits[43] - As of September 30, 2024, unrecognized tax benefits totaled approximately $2.1 billion, including $938 million related to IRC Section 451(b). A decrease of approximately $700 million is reasonably possible within the next 12 months due to ongoing IRS negotiations[44] - Pillar Two global minimum tax had no impact on Q3 or YTD 2024 ETR and is not expected to significantly impact it going forward[44] 5. Fair Value of Financial Instruments This note discloses the fair value of financial assets and liabilities, including marketable securities, derivatives, and long-term debt Fair Value of Financial Assets (in millions) | Category | Sep 30, 2024 Total | Dec 31, 2023 Total | | :--------------------------- | :----------------- | :----------------- | | Marketable securities | $361 | $339 | | Derivatives | $3 | $5 | - The estimated fair value of long-term debt was $16.1 billion as of September 30, 2024, up from $13.4 billion at December 31, 2023[47] - In January 2024, the company issued $2.5 billion of unsecured senior notes (4.60% due 2029, 4.90% due 2034, 5.20% due 2054) for general corporate purposes, including debt repayment, share repurchases, and working capital[48] 6. Investigations, Claims and Litigation This note outlines ongoing investigations, claims, and litigation, including environmental and accounting-related matters - The company continues to incur substantial remediation costs for Bethpage, New York environmental conditions and is involved in related lawsuits, including a putative class action. Outcomes and liabilities are not reasonably estimable at this time[50] - The U.S. Department of Justice (DOJ) issued a criminal subpoena and civil investigative demand (CID) in late 2022/early 2023, seeking information on financial and cost accounting related to CAS pension expense interest rate assumptions. The outcome is unpredictable[50] 7. Commitments and Contingencies This note details the company's commitments and contingencies, including environmental remediation, letters of credit, and credit facilities - The Defense Contract Management Agency (DCMA) issued a non-final determination of noncompliance with CAS regarding interest rate assumptions for pension expense. The outcome could materially affect financial position, results, and/or cash flows, though a loss range is not estimable[51][52] Environmental Remediation Costs (in millions) | Category | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------ | :----------- | :----------- | | Accrued Costs | $568 | $584 | | Reasonably Possible Future Costs in Excess of Accrued Costs | $380 | $387 | | Deferred Costs (recoverable through U.S. government contracts) | $530 | $518 | - As of September 30, 2024, the company had $469 million in standby letters of credit and guarantees and $272 million in surety bonds outstanding[55] - The company maintains a $2.5 billion commercial paper program and a $2.5 billion senior unsecured credit facility, with no borrowings outstanding under either as of September 30, 2024[56][57] 8. Retirement Benefits This note provides information on net periodic benefit costs and employer contributions for defined benefit pension and other postretirement benefit plans Net Periodic Benefit Cost (Benefit) (in millions) | Component | Three Months Ended Sep 30, 2024 (Pension) | Three Months Ended Sep 30, 2023 (Pension) | Nine Months Ended Sep 30, 2024 (Pension) | Nine Months Ended Sep 30, 2023 (Pension) | | :-------------------------- | :-------------------------------------- | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Service cost | $60 | $59 | $179 | $177 | | Interest cost | $381 | $392 | $1,144 | $1,176 | | Expected return on plan assets | $(549) | $(524) | $(1,647) | $(1,573) | | Net periodic benefit cost (benefit) | $(108) | $(73) | $(324) | $(220) | | Component | Three Months Ended Sep 30, 2024 (OPB) | Three Months Ended Sep 30, 2023 (OPB) | Nine Months Ended Sep 30, 2024 (OPB) | Nine Months Ended Sep 30, 2023 (OPB) | | :-------------------------- | :------------------------------------ | :------------------------------------ | :----------------------------------- | :----------------------------------- | | Service cost | $1 | $2 | $3 | $4 | | Interest cost | $15 | $17 | $46 | $50 | | Expected return on plan assets | $(21) | $(22) | $(64) | $(64) | | Net periodic benefit cost (benefit) | $(5) | $(3) | $(15) | $(10) | Employer Contributions to Retirement Plans (in millions) | Plan Type | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Defined benefit pension plans | $17 | $26 | $66 | $80 | | OPB plans | $7 | $7 | $27 | $28 | | Defined contribution plans | $136 | $126 | $517 | $487 | 9. Stock Compensation Plans and Other Compensation Arrangements This note summarizes stock awards granted and cash awards payout amounts under the company's compensation arrangements Stock Awards Granted (in millions) | Award Type | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :---------------- | :----------------------------- | :----------------------------- | | RSRs granted | 0.1 | 0.1 | | RPSRs granted | 0.2 | 0.1 | | Grant date aggregate fair value | $109 | $102 | Cash Awards Payout Amounts (in millions) | Award Type | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------- | :----------------------------- | :----------------------------- | | Minimum aggregate payout amount | $35 | $34 | | Maximum aggregate payout amount | $200 | $192 | 10. Segment Information This note provides detailed financial information by segment, customer type, contract type, and geographic region Segment Sales and Operating Income (in millions) | Segment | Three Months Ended Sep 30, 2024 Sales | Three Months Ended Sep 30, 2023 Sales | Three Months Ended Sep 30, 2024 Operating Income | Three Months Ended Sep 30, 2023 Operating Income | | :---------------- | :------------------------------------ | :------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Aeronautics Systems | $2,878 | $2,766 | $298 | $283 | | Defense Systems | $2,084 | $2,050 | $196 | $201 | | Mission Systems | $2,823 | $2,628 | $390 | $386 | | Space Systems | $2,870 | $2,953 | $345 | $302 | | Total sales | $9,996 | $9,775 | N/A | N/A | | Total segment operating income | N/A | N/A | $1,146 | $1,089 | | Segment | Nine Months Ended Sep 30, 2024 Sales | Nine Months Ended Sep 30, 2023 Sales | Nine Months Ended Sep 30, 2024 Operating Income | Nine Months Ended Sep 30, 2023 Operating Income | | :---------------- | :----------------------------------- | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Aeronautics Systems | $8,810 | $7,876 | $890 | $798 | | Defense Systems | $6,227 | $6,058 | $614 | $605 | | Mission Systems | $8,255 | $7,832 | $1,129 | $1,147 | | Space Systems | $9,021 | $8,775 | $979 | $840 | | Total sales | $30,347 | $28,652 | N/A | N/A | | Total segment operating income | N/A | N/A | $3,351 | $3,143 | Sales by Customer Type (in millions) | Customer Type | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | U.S. government | $8,622 (86%) | $8,431 (86%) | $26,354 (87%) | $24,697 (86%) | | International | $1,218 (12%) | $1,239 (13%) | $3,565 (12%) | $3,607 (13%) | | Other customers | $156 (2%) | $105 (1%) | $428 (1%) | $348 (1%) | | Total Sales | $9,996 (100%) | $9,775 (100%) | $30,347 (100%) | $28,652 (100%) | Sales by Contract Type (in millions) | Contract Type | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost-type | $5,252 (53%) | $5,261 (54%) | $15,742 (52%) | $15,574 (54%) | | Fixed-price | $4,744 (47%) | $4,514 (46%) | $14,605 (48%) | $13,078 (46%) | | Total Sales | $9,996 | $9,775 | $30,347 | $28,652 | Sales by Geographic Region (in millions) | Region | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | $8,778 (88%) | $8,536 (87%) | $26,782 (88%) | $25,045 (87%) | | Asia/Pacific | $378 (4%) | $376 (4%) | $1,114 (4%) | $1,149 (4%) | | Europe | $685 (7%) | $640 (7%) | $2,028 (7%) | $1,788 (7%) | | All other | $155 (1%) | $223 (2%) | $423 (1%) | $670 (2%) | | Total Sales | $9,996 | $9,775 | $30,347 | $28,652 | Report of Independent Registered Public Accounting Firm This section presents the unqualified opinion from Deloitte & Touche LLP on the condensed consolidated interim financial information - Deloitte & Touche LLP issued an unqualified opinion on the condensed consolidated interim financial information, stating no material modifications are needed for conformity with GAAP[73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Northrop Grumman's financial performance, condition, and operational results for the three and nine months ended September 30, 2024 Overview This overview discusses Northrop Grumman's business, the global operating environment, and macroeconomic factors impacting its performance - Northrop Grumman is a leading global aerospace and defense technology company, providing products, services, and solutions primarily to the U.S. Department of Defense and intelligence community, aligned with national security priorities[76] - The global security environment, marked by conflicts in Ukraine and the Middle East, and threats in the Pacific, has increased demand for defense products and services, which is expected to drive long-term profitable business growth for the company[77] - Macroeconomic challenges like inflation, supply chain disruptions, and labor shortfalls have impacted costs and schedules, but the company is seeing positive progress in supply chain and overall financial impact has subsided in Q3 2024[78] - The U.S. political and budget environment, including the FY 2025 budget request ($895 billion for national security, $850 billion for DoD) and ongoing continuing resolutions, creates uncertainty for defense spending and new programs[81] Consolidated Operating Results This section analyzes the company's consolidated sales, operating income, net earnings, and diluted earnings per share for the periods presented Selected Financial Highlights (in millions, except per share amounts) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | % Change | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | % Change | | :----------------------------------- | :------------------------------ | :------------------------------ | :------- | :----------------------------- | :----------------------------- | :------- | | Sales | $9,996 | $9,775 | 2% | $30,347 | $28,652 | 6% | | Operating Income | $1,120 | $1,016 | 10% | $3,281 | $2,930 | 12% | | Operating Margin Rate | 11.2% | 10.4% | | 10.8% | 10.2% | | | Federal and Foreign Income Tax Expense | $162 | $181 | (10)% | $555 | $512 | 8% | | Effective Income Tax Rate | 13.6% | 16.2% | | 16.0% | 16.5% | | | Net Earnings | $1,026 | $937 | 9% | $2,910 | $2,591 | 12% | | Diluted Earnings Per Share | $7.00 | $6.18 | 13% | $19.69 | $17.00 | 16% | - Q3 2024 sales increased 2% YoY, driven by Mission Systems, Aeronautics Systems, and Defense Systems, partially offset by Space Systems due to wind-down of restricted space and NGI programs[84] - YTD 2024 operating income increased 12% YoY, primarily due to higher segment operating income, a $94 million increase in FAS/CAS operating adjustment, and lower unallocated corporate expense[86] - Q3 2024 diluted EPS increased 13% YoY, reflecting a 9% increase in net earnings and a 3% reduction in weighted-average diluted shares outstanding[91] Segment Operating Results This section provides a detailed analysis of sales and operating income for each of the company's operating segments - Effective July 1, 2024, the Strategic Deterrent Systems (SDS) division, including the Sentinel program, was realigned from Space Systems to Defense Systems[92] Segment Operating Income and Margin Rate (in millions) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | % Change | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | % Change | | :-------------------------- | :------------------------------ | :------------------------------ | :------- | :----------------------------- | :----------------------------- | :------- | | Segment Operating Income | $1,146 | $1,089 | 5% | $3,351 | $3,143 | 7% | | Segment Operating Margin Rate | 11.5% | 11.1% | | 11.0% | 11.0% | | - Q3 2024 segment operating income increased 5% due to a higher segment operating margin rate (driven by Space Systems and Aeronautics Systems) and higher sales[97] - YTD 2024 segment operating income increased 7% primarily due to higher sales, with the segment operating margin rate comparable to the prior year[97] Net EAC Adjustments by Segment (in millions) | Segment | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Aeronautics Systems | $48 | $37 | $160 | $73 | | Defense Systems | $10 | $14 | $50 | $64 | | Mission Systems | $16 | $32 | $11 | $127 | | Space Systems | $60 | $(23) | $50 | $(80) | | Total Net EAC Adjustments | $136 | $58 | $268 | $180 | - Aeronautics Systems: Q3 2024 sales increased 4% due to higher F-35 production, E-2 sustainment, Triton LRIP, and Global Hawk sustainment. Operating income increased 5% due to higher sales and margin rate, driven by improved performance on mature production programs[103][105] - Defense Systems: Q3 2024 sales increased 2% due to higher Sentinel program volume, SiAW ramp-up, and military ammunition programs. Operating income decreased 2% due to a lower operating margin rate from lower net EAC adjustments and contract mix changes[109][111] - Mission Systems: Q3 2024 sales increased 7% due to restricted advanced microelectronics, marine systems, and G/ATOR FRP ramp-up. Operating income increased 1% due to higher sales, partially offset by a lower margin rate from lower net EAC adjustments and a shift to more cost-type content[114][116] - Space Systems: Q3 2024 sales decreased 3% due to wind-down of restricted space and NGI programs, partially offset by SDA satellite programs. Operating income increased 14% due to a higher operating margin rate from improved net EAC adjustments, despite lower sales[119][121] Product and Service Analysis This section breaks down sales and operating costs by product and service categories for the reported periods Product and Service Sales and Operating Costs and Expenses (in millions) | Category | Three Months Ended Sep 30, 2024 Sales | Three Months Ended Sep 30, 2024 Operating Costs & Expenses | Three Months Ended Sep 30, 2023 Sales | Three Months Ended Sep 30, 2023 Operating Costs & Expenses | | :---------------- | :------------------------------------ | :--------------------------------------------------------- | :------------------------------------ | :--------------------------------------------------------- | | Total Product | $7,939 | $7,049 | $7,678 | $6,898 | | Total Service | $2,057 | $1,801 | $2,097 | $1,788 | | Total Segment | $9,996 | $8,850 | $9,775 | $8,686 | | Category | Nine Months Ended Sep 30, 2024 Sales | Nine Months Ended Sep 30, 2024 Operating Costs & Expenses | Nine Months Ended Sep 30, 2023 Sales | Nine Months Ended Sep 30, 2023 Operating Costs & Expenses | | :---------------- | :----------------------------------- | :-------------------------------------------------------- | :----------------------------------- | :-------------------------------------------------------- | | Total Product | $24,117 | $21,550 | $22,390 | $20,070 | | Total Service | $6,230 | $5,446 | $6,262 | $5,439 | | Total Segment | $30,347 | $26,996 | $28,652 | $25,509 | - Q3 2024 product sales increased 3% YoY, driven by Mission Systems (restricted sales) and Defense Systems (Sentinel, SiAW, military ammunition), partially offset by Space Systems (restricted space, NGI wind-down). Product costs increased 2%, reflecting a higher operating margin rate due to higher net EAC adjustments on Space Systems product programs[125] - Q3 2024 service sales decreased 2% YoY, primarily due to Defense Systems (international training program completion, SEMA lower volume), partially offset by Aeronautics Systems (restricted programs). Service costs increased 1%, reflecting a lower operating margin rate due to a prior year insurance recovery benefit at Space Systems, contract mix changes at Defense Systems, and lower net EAC adjustments on Mission Systems service programs[127] Backlog This section presents the company's funded and unfunded backlog, including significant new awards, as of September 30, 2024 Backlog (in millions) | Segment | Sep 30, 2024 Funded | Sep 30, 2024 Unfunded | Sep 30, 2024 Total Backlog | Dec 31, 2023 Total Backlog | % Change in 2024 | | :---------------- | :------------------ | :-------------------- | :------------------------- | :------------------------- | :--------------- | | Aeronautics Systems | $10,018 | $8,541 | $18,559 | $19,583 | (5)% | | Defense Systems | $10,171 | $17,398 | $27,569 | $20,198 | 36% | | Mission Systems | $11,625 | $5,256 | $16,881 | $16,108 | 5% | | Space Systems | $7,854 | $13,937 | $21,791 | $28,341 | (23)% | | Total backlog | $39,668 | $45,132 | $84,800 | $84,230 | 1% | - Total backlog increased 1% to $84.8 billion as of September 30, 2024. Q3 2024 net awards totaled $11.7 billion, and YTD 2024 net awards totaled $33.3 billion[129] - Significant Q3 new awards include $2.7 billion for restricted programs, $1.6 billion for E-2, and $0.7 billion for military ammunition programs[129] Liquidity and Capital Resources This section discusses the company's cash position, operating cash flow, free cash flow, and capital allocation strategies - As of September 30, 2024, the company had $3.3 billion in cash and cash equivalents. It expects cash from operations, credit facilities, and capital markets to provide sufficient liquidity[131] - The Tax Cuts and Jobs Act of 2017 (TCJA) IRC Section 174, requiring amortization of R&D expenditures, is estimated to reduce 2024 cash from operations by approximately $350 million[132] Key Components of Cash Provided by Operating Activities (in millions) | Component | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | % Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :------- | | Net earnings | $2,910 | $2,591 | 12% | | Non-cash items | $302 | $474 | (36)% | | Pension and OPB contributions | $(93) | $(108) | (14)% | | Changes in trade working capital | $(1,346) | $(1,469) | (8)% | | Net cash provided by operating activities | $1,810 | $1,445 | 25% | - YTD 2024 net cash provided by operating activities increased $365 million YoY, driven by higher net earnings and improved trade working capital, partially offset by timing of billings and cash collections[135] Free Cash Flow (in millions) | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | % Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :------- | | Net cash provided by operating activities | $1,810 | $1,445 | 25% | | Capital expenditures | $(951) | $(972) | (2)% | | Free cash flow | $859 | $473 | 82% | - YTD 2024 free cash flow increased 82% YoY, primarily due to higher net cash provided by operating activities[138] - YTD 2024 net cash used in investing activities increased 17% YoY, mainly due to $157 million proceeds from a minority investment sale in the prior year, partially offset by lower capital expenditures[139] - YTD 2024 net cash used in financing activities decreased 43% YoY, driven by $1.05 billion fewer debt repayments and a $500 million increase in long-term debt proceeds, partially offset by a $919 million increase in share repurchases and $53 million higher dividends paid[140] Critical Accounting Policies, Estimates and Judgments This section confirms no material changes to the company's critical accounting policies and estimates from its prior annual report - There have been no material changes to the company's critical accounting policies and estimates from those discussed in its 2023 Annual Report on Form 10-K[141] Accounting Standards Updates This section outlines recent accounting standards updates and their anticipated impact on the company's financial reporting - ASU 2023-07 (Segment Reporting) will be effective for annual periods beginning January 1, 2024, and interim periods beginning January 1, 2025, requiring new disclosures but no impact on financial position, results, or cash flows[33][142] - ASU 2023-09 (Income Taxes) will be effective for annual periods beginning January 1, 2025, requiring additional income tax disclosures but no impact on financial position, results, or cash flows[33][142] - The SEC's final climate disclosure rule, requiring climate-related disclosures, was voluntarily stayed pending judicial review. The company is evaluating its disclosure impact[33][142] Forward-Looking Statements and Projections This section highlights the inherent risks and uncertainties associated with forward-looking statements contained within the report - The report contains forward-looking statements subject to risks and uncertainties, including dependence on the U.S. government, budget delays, contract cost growth, macroeconomic pressures, legal/regulatory risks, and operational challenges[143][144] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes to the company's market risks since its 2023 Annual Report on Form 10-K - No material changes to market risks from those discussed in the 2023 Annual Report on Form 10-K[147] Item 4. Controls and Procedures This section confirms the effectiveness of Northrop Grumman's disclosure controls and procedures and reports no material changes in internal control over financial reporting - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2024[148] - No changes occurred in internal control over financial reporting during the three months ended September 30, 2024, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[149] PART II – OTHER INFORMATION This section provides additional information beyond the financial statements, covering legal proceedings, risk factors, equity sales, other disclosures, and exhibits Item 1. Legal Proceedings This section refers to detailed legal proceedings information in the financial statement notes, including disclosure thresholds for environmental matters - Information on legal proceedings is provided in Notes 6 and 7 to the financial statements[152] - The company discloses environmental proceedings with a governmental entity as a party where monetary sanctions are reasonably believed to be $1.0 million or more[153] Item 1A. Risk Factors This section directs readers to the comprehensive discussion of risk factors in the company's 2023 Annual Report on Form 10-K - For a discussion of risk factors, refer to the 'Risk Factors' section in the 2023 Annual Report on Form 10-K[154] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section summarizes common stock repurchases made during the third quarter of 2024 under authorized repurchase programs Common Stock Repurchases (Three Months Ended September 30, 2024) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--------------------------------- | :----------------------------- | :--------------------------- | | June 29, 2024 - July 26, 2024 | 283,079 | $437.69 | | July 27, 2024 - August 23, 2024 | 185,039 | $495.77 | | August 24, 2024 - September 27, 2024 | 182,754 | $520.80 | | Total | 650,872 | $477.54 | - As of September 30, 2024, approximately $1.563 billion remained under the authorized share repurchase programs[156] Item 5. Other Information This section details Rule 10b5-1 trading arrangements and non-Rule 10b5-1 trading arrangements entered into by directors and officers during the third quarter of 2024 Rule 10b5-1 Trading Arrangements by Directors/Officers (Q3 2024) | Name (Title) | Date of Adoption | Expiration Date | Aggregate Number of Securities to Be Purchased or Sold | | :------------------------------------------------ | :--------------- | :-------------- | :----------------------------------------------------- | | Kathy J. Warden (Chair, CEO and President) | August 22, 2024 | January 31, 2025 | Sale of 15,000 shares of common stock | | Benjamin R. Davies (Corporate VP and President, Defense Systems) | August 6, 2024 | March 14, 2025 | Sale of 1,449 shares of common stock; Sale of shares to be received upon payout of 2022 RPSRs and RSRs | Item 6. Exhibits This section lists all exhibits filed or furnished with the Form 10-Q, including certifications, the independent registered public accounting firm's letter, and XBRL-formatted financial data - Key exhibits include certifications (31.1, 31.2, 32.1, 32.2), the letter from the Independent Registered Public Accounting Firm (15), and the Inline XBRL financial statements (101, 104)[163] Signatures This section contains the official signature of Northrop Grumman Corporation by its Principal Accounting Officer, confirming the report's authorization and filing - The report is signed by Michael A. Hardesty, Corporate Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) on behalf of Northrop Grumman Corporation, dated October 23, 2024[165]