Northrop Grumman Corporation

01/27/2026 | Press release | Distributed by Public on 01/27/2026 15:03

Annual Report for Fiscal Year Ending 12/31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The following discussion should be read along with the financial statements included in this Form 10-K, as well as Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) of our Form 10-K for the year ended December 31, 2024 ("2024 Annual Report on Form 10-K"). To the extent the January 1, 2025 SSAS realignment impacted the disclosures in the 2024 Annual Report on Form 10-K, we recast those prior year disclosures herein.
Divestiture of Training Services Business
On May 24, 2025 (the "Divestiture date"), the company completed its previously announced sale of substantially all
of the Immersive Mission Solutions (IMS) operating unit of Defense Systems (the "training services" business or
"divestiture") for $333 million in cash and recorded a pre-tax gain on sale of $231 million. IMS is a provider of mission training and satellite ground network communications software for U.S. government customers. Operating results include sales and operating income for the training services business prior to the Divestiture date.
Global Security Environment
The U.S. and its allies continue to face a global security environment of heightened tensions and instability, threats from state and non-state actors, including in particular major global powers, as well as terrorist organizations, increasing nuclear tensions, diverse regional security concerns and political instability. The market for defense products, services and solutions globally is driven by these complex and evolving security challenges, considered in the broader context of political and socioeconomic circumstances and priorities. Our operations and financial performance, as well as demand for our products and services, are impacted by these events, including global unrest. The same is true for our suppliers and other business partners.
The ongoing conflict in Ukraine, recent events in Venezuela and threats elsewhere, particularly in the Middle East and the Western Pacific region, have increased global tensions and instability and highlighted security requirements globally, including in Europe, the Middle East, the Pacific region and Latin America, as well as the U.S. These conflicts have resulted in and may continue to result in increased demand for defense products and services from allies and partner nations, particularly in those regions. For example, we experienced an increase in demand for certain of our products and services directly and indirectly related to the conflict in Ukraine. We continue to monitor developments in these regions, but have not experienced, and do not anticipate experiencing, significant adverse financial impacts directly from these conflicts.
We believe the current global security environment, characterized by significant national security threats to the U.S. and its allies, continues to highlight the need for strong deterrence and robust defense capabilities, and we are actively evaluating both opportunities and risks associated with this environment. We believe our capabilities, particularly in space, C4ISR, air and missile defense, battle management, advanced weapons, strategic deterrence, 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 position us for long-term profitable business growth.
Global Economic Environment
Over the past several years, the global economic environment has experienced challenges, including inflationary pressures; widespread delays and disruptions in supply chains; business slowdowns or shutdowns; workforce challenges and labor shortfalls; and market volatility. These macroeconomic factors can and have contributed, and could 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. We continue to work to address challenges to our business caused by the macroeconomic environment. We have seen progress in the supply chain as on-time deliveries and quality continue to improve. In remaining areas of pressure, we are proactively working with our suppliers to help meet our contract commitments.
In addition, although interest rates have declined over the past year, they remain elevated compared to recent years and have raised the cost of borrowing for governments. If rates increase or remain elevated, it could impact government spending priorities (in the U.S. and allied countries, in particular), including the demand for defense products. Economic tensions and changes in international trade policies, including, for example, the widespread tariffs announced since last year by the U.S. on its major trading partners, higher tariffs on imported goods and materials and actions taken in response (such as retaliatory tariffs or other trade protectionist measures or the renegotiation of free trade agreements), could also further impact the global market for defense products, services and solutions. The full impact of these governmental actions on macroeconomic conditions and on our business is uncertain, difficult to predict and depends on a number of factors, including the extent and duration of tariffs, any
-27-
NORTHROP GRUMMAN CORPORATION
reversal or temporary suspension of announced tariffs, the availability of exemptions, changes in the amount and scope of tariffs, the imposition of new tariffs and other measures that target countries may take in response to U.S. trade policies, and possible resulting general inflationary pressures in the global economy. We are continuing to monitor the impact on our business, suppliers and customers, but do not believe that the tariffs in effect at this time will have a material adverse effect on our business.
U.S. Political, Budget and Regulatory Environment
The U.S. continues to face an uncertain and evolving political, budget and regulatory environment. In particular, it is difficult to predict the specific course of future defense budgets. Current and future requirements related to the conflict in Ukraine and threats in the Middle East, the Western Pacific and Latin America and other security priorities, as well as the macroeconomic environment, 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. The U.S. political environment may also impact defense budgets and priorities, issues related to the national debt, and government spending more broadly. We anticipate that issues related to budgetary priorities, defense spending levels and the debt ceiling will continue to be subjects of considerable debate, with a potentially significant impact on our programs and the company.
On July 4, 2025, the FY 2025 reconciliation bill titled the One Big Beautiful Bill Act (the "OBBBA") was enacted. The OBBBA allocates approximately $150 billion in funds for defense spending, including funding for air and missile defense, munitions, strategic deterrence, shipbuilding and supply chains and other military capabilities, and the appropriated funds will remain available to be obligated until September 30, 2029 and expended through FY 2034. The OBBBA is expected to result in increased investments by the DoW in defense modernization projects and Pacific region deterrence, among other programs. See Note 6 to the financial statements for additional information on key income tax provisions of the OBBBA.
Annual appropriations to fund the federal government for FY 2026 have not yet been enacted. On October 1, 2025, the U.S. Government entered a shutdown, which ended on November 12, 2025. The federal government is currently operating under a continuing resolution ("CR") that extends funding for most agencies (including DoW) until January 30, 2026. It remains uncertain when the government will approve FY 2026 appropriations and what levels of funding the appropriations will provide. Government operations under an extended CR or a government shutdown could have adverse impacts on our programs and new starts, in particular, and the U.S. Government's ability to make timely payments.
The Presidential Administration (the "Administration") has issued numerous executive orders, including orders to undertake a comprehensive overhaul of the Federal Acquisition Regulation, to reform the DoW defense acquisition process and, more recently, to address underperformance and insufficient prioritization of government contracts, insufficient investment in production and production speed and incentive compensation metrics applicable to defense contractors. See "Risk factors" for further discussion regarding risks associated with executive orders and regulatory changes. Some of the Administration's executive orders are subject to ongoing court challenges. Implementation of certain of these executive orders could adversely affect our business or create a more challenging or costly regulatory, operating and economic environment.
In light of the ongoing conflicts and heightened global instability as well as political tensions and related legal challenges, we expect continued uncertainty in the global security, U.S. political, budget and regulatory environment. Initiatives to reduce governmental spending, federal budget and debt ceiling action, and further changes in U.S. government policy positions, including trade and foreign policy, tax policy and DoW policies or priorities, could materially impact defense spending broadly and the company's programs in particular.
B-21 Program
In 2015, the U.S. Air Force awarded Northrop Grumman the B-21 contract, which includes a base contract for engineering and manufacturing development (EMD) and five low-rate initial production (LRIP) options for a baseline total of 21 aircraft. The EMD phase of the program is largely cost type and began at contract award. The LRIP options are largely fixed price and are expected to continue to be awarded and executed through approximately the end of the decade. In addition to the five LRIP options, Northrop Grumman and the U.S. Air Force have established not to exceed (NTE) pricing for additional aircraft up to unit 40. The average NTE value for these subsequent lots is above the average unit price of the five LRIP lots, and the NTE lots include an economic price adjustment clause to help protect against certain inflationary pressures. Final terms, quantity, and pricing for these subsequent lots are not fully negotiated. We are in discussions with the U.S. Air Force regarding the potential for an accelerated production rate on the program. While the ultimate outcome of these discussions remains uncertain, we currently expect any agreement to accelerate production rate would require future investment by the
-28-
NORTHROP GRUMMAN CORPORATION
company to expand production capacity along with the opportunity to earn improved returns on the LRIP and NTE phases of the program.
During the fourth quarter of 2023, we recognized a projected loss of $1.56 billion across the five LRIP options. During the first quarter of 2025, we recognized an additional $477 million loss across the five LRIP options. During the fourth quarter of 2025, we again reviewed our estimated profitability on the LRIP phase of the program and made no significant changes to the previously recognized loss.
The company's 2025 results reflect our current best estimate of cost to complete the LRIP and NTE aircraft, as well as the outcome of ongoing discussions with our suppliers. If our estimated cost to complete the aircraft changes, if we reach an agreement with the customer regarding an accelerated production rate, or if our assumptions regarding contract performance, quantities, supplier negotiations, or funding to mitigate the impact of macroeconomic disruptions are resolved more or less favorably than what we have estimated, our financial position, results of operations and/or cash flows could be materially affected.
Sentinel Program
In 2020, the U.S. Air Force awarded Northrop Grumman a $13.3 billion contract for the EMD phase of the Sentinel program. In January 2024, the U.S. Air Force provided congressional notification that the Sentinel program was under a Nunn-McCurdy breach review, which is required when total program cost estimates exceed certain defined thresholds. This notification, which had been driven primarily by increases in cost estimates for the Production and Deployment phases, commenced the process to achieve certification for continuance of the program and update its baseline cost estimates. We are currently executing under a cost-type contract for the EMD phase, and the Production and Deployment phases are yet to be priced and negotiated.
In July 2024, the Sentinel program was certified for continuation by the DoW upon completion of the Nunn-McCurdy breach review. In connection with the certification, the DoW directed that the program be restructured, including plans for infrastructure related to the command and launch segment, which was the main driver of the increased cost estimates for the Production and Deployment phases.
During the second quarter of 2025, we partnered with the U.S. Air Force in defining the preliminary execution framework necessary for successful restructure of the program. The program restructure will include a revision to the acquisition strategy, joint establishment of a new program baseline, and other critical preparation activities necessary to re-accomplish Milestone B approval. Based on this preliminary execution framework, we updated our estimated profitability on the program and recognized a $76 million favorable estimate-at-completion (EAC) adjustment during the second quarter of 2025 largely related to our expectations for achieving certain contract incentives.
During the fourth quarter of 2025, we reviewed our estimated profitability on the Sentinel program and made no significant changes. If our estimated cost to complete the restructured EMD effort or our expectations for achieving contract incentives are more or less favorable than what we have estimated, our financial position, results of operations and/or cash flows could be materially affected.
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). We recognize sales from our portfolio of long-term contracts as control is transferred to the customer, primarily over time on a cost-to-cost basis (cost incurred relative to costs estimated at completion). As a result, sales tend to fluctuate in concert with costs incurred across our large portfolio of contracts. Due to the applicable FAR and CAS requirements that govern our U.S. government business, most types of costs are allocable to U.S. government contracts. As such, we do not focus on individual cost groupings (such as manufacturing, engineering and design labor, subcontractor, material, overhead and general and administrative (G&A) costs), as much as we do on total contract cost, which is the key driver of our sales and operating income.
In evaluating our operating performance, we primarily focus on changes in sales and operating margin rates. 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 operating 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, which are typically described in terms of changes in net EAC adjustments. Contract mix generally refers to changes in the ratio
-29-
NORTHROP GRUMMAN CORPORATION
of contract type and/or life cycle (e.g., cost-type, fixed-price, development, production, and/or sustainment). Contract mix can also refer to differences in the profitability of the programs that drive changes in sales (e.g., sales growth or decreases on programs with accretive or dilutive margin rates).
CONSOLIDATED OPERATING RESULTS
Non-GAAP Financial Measures
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"), as follows:
•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.
•Mark-to-market adjusted net earnings (MTM-adjusted net earnings) and MTM-adjusted earnings per share (MTM-adjusted EPS) exclude MTM pension and OPB benefit (expense) and related tax impacts, which are generally only recognized during the fourth quarter. 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. These measures are also consistent with how management views the underlying performance of the business as the impact of MTM accounting is 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 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.
Financial Highlights
Selected financial highlights are presented in the table below:
Year Ended December 31 % Change in
$ in millions, except per share amounts 2025 2024 2023 2025 2024
Sales $ 41,954 $ 41,033 $ 39,290 2 % 4 %
Operating costs and expenses 37,674 36,663 36,753 3 % - %
Operating costs and expenses as a % of sales 89.8 % 89.4 % 93.5 %
Gain on sale of business
231 - - NM - %
Operating income 4,511 4,370 2,537 3 % 72 %
Operating margin rate 10.8 % 10.6 % 6.5 %
Mark-to-market pension and OPB benefit (expense) 527 443 (422) 19 % NM
Federal and foreign income tax expense 886 842 290 5 % 190 %
Effective income tax rate 17.5 % 16.8 % 12.4 %
Net earnings 4,182 4,174 2,056 - % 103 %
Diluted earnings per share
$ 29.08 $ 28.34 $ 13.53 3 % 109 %
-30-
NORTHROP GRUMMAN CORPORATION
Sales
The table below reconciles sales to organic sales:
Year Ended December 31
% Change in
$ in millions
2025 2024 2023 2025 2024
Sales $ 41,954 $ 41,033 $ 39,290 2 % 4 %
Less: Training services sales
(112) (304) (302)
Organic sales
$ 41,842 $ 40,729 $ 38,988 3 % 4 %
2025 sales increased $921 million, or 2 percent, due to higher sales of $1.1 billion at Mission Systems, $603 million at Defense Systems, net of a $192 million reduction related to the training services divestiture, and $596 million at Aeronautics Systems. These increases were partially offset by $960 million of lower sales at Space Systems, largely due to a $738 million sales reduction associated with wind-down of work on the restricted space and NGI programs, and $425 million of higher intercompany eliminations.
See "Segment Operating Results" below for further information by segment and "Product and Service Analysis" for product and service detail. See Note 15 to the consolidated financial statements for information regarding the company's sales by customer type, contract type and geographic region for each of our segments.
Operating Income and Margin Rate
2025 operating income increased $141 million, or 3 percent, primarily due to a $231 million pre-tax gain on sale for the training services divestiture and a $218 million increase in the FAS/CAS operating adjustment. These increases were partially offset by a $167 million decrease in segment operating income, primarily driven by $423 million of lower operating income at Aeronautics Systems reflecting the first quarter B-21 loss provision, and a $126 million increase in non-divestiture-related unallocated corporate expense largely driven by higher deferred state tax expense. 2025 operating margin rate increased to 10.8 percent from 10.6 percent reflecting the items above.
2025 G&A costs as a percentage of sales of 9.6 percent were comparable to the prior year.
See "Segment Operating Results" below for further information by segment. For further information regarding product and service operating costs and expenses, see "Product and Service Analysis" below.
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 2025 2024 2023
Actuarial (losses) gains on projected benefit obligation $ (609) $ 1,314 $ (1,489)
Actuarial gains (losses) on plan assets 1,136 (871) 1,067
MTM benefit (expense)
$ 527 $ 443 $ (422)
The 2025 MTM benefit of $527 million was primarily driven by actual net plan asset returns of 11.3 percent compared to our 7.5 percent asset return assumption, partially offset by a 15 basis point decrease in the discount rate from year end 2024.
Federal and Foreign Income Taxes
In July 2025, the OBBBA was enacted. Key income tax-related provisions of the OBBBA include the repeal of mandatory capitalization of research and development expenditures under Internal Revenue Code (IRC) Section 174 (reinstating full expensing beginning in 2025), extension of bonus depreciation, and revisions to international tax regimes. The company recognized the income tax effects of the OBBBA in its 2025 financial statements.
-31-
NORTHROP GRUMMAN CORPORATION
2025 income tax expense increased $44 million, or 5 percent, due to a higher effective tax rate (ETR) and higher earnings before income taxes. The 2025 ETR increased to 17.5 percent from 16.8 percent in 2024 primarily due to a net reduction in tax reserves in the prior year, lower research credits principally due to enactment of the OBBBA, and additional income tax expense related to nondeductible goodwill in the divested training services business. These increases were partially offset by lower interest expense on unrecognized tax benefits. The MTM benefit in both 2025 and 2024 increased each respective year's ETR by 0.4 percentage points. See Note 6 to the consolidated financial statements for additional information.
Net Earnings
The table below reconciles net earnings to MTM-adjusted net earnings:
Year Ended December 31 % Change in
$ in millions 2025 2024 2023 2025 2024
Net earnings $ 4,182 $ 4,174 $ 2,056 - % 103 %
MTM (benefit) expense
(527) (443) 422 19 % NM
MTM-related deferred state tax expense (benefit)(1)
28 23 (22) 22 % NM
Federal tax expense (benefit) of items above(2)
105 88 (84) 19 % NM
MTM adjustment, net of tax (394) (332) 316 19 % NM
MTM-adjusted net earnings $ 3,788 $ 3,842 $ 2,372 (1) % 62 %
(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.
(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.
2025 net earnings were comparable to the prior year and reflect the $141 million increase in operating income described above and an $84 million increase in our MTM benefit, partially offset by a $115 million decrease in the non-operating FAS pension benefit, $44 million of higher interest expense and a $44 million increase in income tax expense.
Diluted Earnings Per Share
The table below reconciles diluted earnings per share to MTM-adjusted EPS:
Year Ended December 31 % Change in
2025 2024 2023 2025 2024
Diluted earnings per share $ 29.08 $ 28.34 $ 13.53 3 % 109 %
MTM (benefit) expense per share
(3.66) (3.02) 2.78 21 % NM
MTM-related deferred state tax expense (benefit) per share(1)
0.19 0.16 (0.14) 19 % NM
Federal tax expense (benefit) of items above per share(2)
0.73 0.60 (0.56) 22 % NM
MTM adjustment per share, net of tax
(2.74) (2.26) 2.08 21 % NM
MTM-adjusted EPS
$ 26.34 $ 26.08 $ 15.61 1 % 67 %
(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.
(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.
2025 diluted earnings per share increased $0.74, or 3 percent, reflecting comparable net earnings and a 2 percent reduction 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.
Effective January 1, 2025, the company realigned the Strike and Surveillance Aircraft Solutions (SSAS) business unit from Defense Systems to Aeronautics Systems. This realignment is reflected in the financial information contained in this report.
-32-
NORTHROP GRUMMAN CORPORATION
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. 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.
Year Ended December 31 % Change in
$ in millions 2025 2024 2023 2025 2024
Operating income $ 4,511 $ 4,370 $ 2,537 3 % 72 %
Operating margin rate 10.8 % 10.6 % 6.5 %
Reconciliation to segment operating income:
CAS pension expense (475) (279) (154) 70 % 81 %
FAS pension service expense 217 239 236 (9) % 1 %
FAS/CAS operating adjustment (258) (40) 82 545 % NM
Gain on sale of business
(231) - - NM - %
Training services divestiture - unallowable state taxes and transaction costs
20 5 - 300 % NM
Intangible asset amortization and PP&E step-up depreciation 84 97 122 (13) % (20) %
Deferred state tax expense (benefit) of MTM adjustment(1)
28 23 (22) 22 % NM
Deferred state tax benefit of B-21 loss provisions(1)
(25) - (82) NM NM
Other unallocated corporate expense 248 89 123 179 % (28) %
Unallocated corporate expense
124 214 141 (42) % 52 %
Segment operating income $ 4,377 $ 4,544 $ 2,760 (4) % 65 %
Segment operating margin rate 10.4 % 11.1 % 7.0 %
(1)Represents the deferred state tax expense (benefit) associated with MTM benefit (expense) and the B-21 loss provisions, which are recorded in Unallocated corporate expense consistent with other changes in deferred state taxes.
Segment Operating Income and Margin Rate
2025 segment operating income decreased $167 million, or 4 percent, primarily due to $423 million of lower operating income at Aeronautics Systems reflecting the first quarter B-21 loss provision and $71 million of lower operating income at Space Systems, partially offset by higher operating income of $229 million at Mission Systems and $155 million at Defense Systems. Segment operating margin rate decreased to 10.4 percent primarily due to the B-21 loss provision at Aeronautics Systems, partially offset by higher operating margin rates at Defense Systems, Mission Systems and Space Systems.
FAS/CAS Operating Adjustment
The 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 decrease in 2025 unallocated corporate expense is primarily due to a $231 million gain on the sale of our training services business. 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.
-33-
NORTHROP GRUMMAN CORPORATION
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 reported sales, operating income and margin rate.
The aggregate favorable and unfavorable EAC adjustments are presented in the table below:
Year Ended December 31
$ in millions 2025 2024 2023
Favorable EAC adjustments $ 1,696 $ 1,461 $ 1,314
Unfavorable EAC adjustments (1,487) (1,111) (1,230)
Net EAC adjustments $ 209 $ 350 $ 84
Net EAC adjustments by segment are presented in the table below:
Year Ended December 31
$ in millions 2025 2024 2023
Aeronautics Systems $ (186) $ 157 $ (38)
Defense Systems 168 90 82
Mission Systems 192 59 149
Space Systems 47 42 (101)
Eliminations (12) 2 (8)
Net EAC adjustments $ 209 $ 350 $ 84
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. Major products include strategic long-range strike aircraft; tactical fighter and air dominance aircraft; airborne battle management and command and control systems; and uncrewed autonomous aircraft systems, including high-altitude long-endurance (HALE) strategic intelligence, surveillance and reconnaissance (ISR) systems.
Year Ended December 31 % Change in
$ in millions 2025 2024 2023 2025 2024
Sales $ 12,992 $ 12,396 $ 11,164 5 % 11 %
Operating income (loss)
813 1,236 (416) (34) % NM
Operating margin rate 6.3 % 10.0 % (3.7) %
Sales
2025 sales increased $596 million, or 5 percent, primarily due to a $385 million increase on F-35 largely driven by material volume, a $379 million increase on TACAMO as that program ramps, and higher volume on the E-2 and B-21 programs. These increases were partially offset by lower sales on other restricted programs and a $106 million decrease on F/A-18 as final production deliveries were completed.
Operating Income
2025 operating income decreased $423 million and operating margin rate decreased to 6.3 percent primarily due to a $477 million loss provision recorded on the LRIP phase of the B-21 program in the first quarter of 2025. This was partially offset by higher net EAC adjustments across the portfolio.
DEFENSE SYSTEMS
Defense Systems is a leader in the design, engineering, development, integration and production of strategic deterrent systems, advanced tactical weapons, and missile defense solutions for the U.S. military and a broad range of international customers. Major products and services include strategic missiles; integrated, all-domain command and control (C2) systems; precision strike weapons; advanced propulsion, including tactical solid rocket motors and high speed air-breathing and hypersonic systems; high-performance gun systems, ammunition, precision munitions and advanced fuzes; and weapons integration, modernization, and sustainment.
-34-
NORTHROP GRUMMAN CORPORATION
Year Ended December 31 % Change in
$ in millions 2025 2024 2023 2025 2024
Sales $ 8,002 $ 7,399 $ 7,185 8 % 3 %
Less: Training services sales (112) (304) (302)
Organic sales $ 7,890 $ 7,095 $ 6,883 11 % 3 %
Operating income $ 871 $ 716 $ 684 22 % 5 %
Operating margin rate 10.9 % 9.7 % 9.5 %
Sales
2025 sales increased $603 million, or 8 percent, primarily due to a $224 million increase on Sentinel as that program continues to ramp, a $185 million increase on armament programs, including military ammunition programs, a $153 million increase in sales from new awards across the IBCS program portfolio, and higher volume due to material timing on the GMLRS program. These increases were partially offset by a $192 million reduction in sales related to the divested training services business.
Operating Income
2025 operating income increased $155 million, or 22 percent, due to a higher operating margin rate and higher sales. Operating margin rate increased to 10.9 percent from 9.7 percent primarily due to higher net EAC adjustments, including a $76 million favorable EAC adjustment on the Sentinel program during the second quarter of 2025.
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. Major products and services include radar, electro-optical/infrared (EO/IR) and acoustic sensors; command, control, communications and computers, intelligence, surveillance and reconnaissance (C4ISR) systems; electronic warfare systems; advanced communications and network systems; advanced microelectronics; navigation and positioning sensors; maritime power, propulsion and payload launch systems; full spectrum cyber solutions; and intelligence processing systems.
Year Ended December 31 % Change in
$ in millions 2025 2024 2023 2025 2024
Sales $ 12,506 $ 11,399 $ 10,895 10 % 5 %
Operating income 1,827 1,598 1,609 14 % (1) %
Operating margin rate 14.6 % 14.0 % 14.8 %
Sales
2025 sales increased $1.1 billion, or 10 percent, primarily due to continued ramp-up on restricted airborne radar programs, as well as higher sales of $161 million on marine systems programs, $141 million on international ground-based radar programs and $105 million on communications programs, as several programs ramp up following new awards.
Operating Income
2025 operating income increased $229 million, or 14 percent, due to higher sales and a higher operating margin rate. Operating margin rate increased to 14.6 percent from 14.0 percent primarily due to higher net EAC adjustments, including a $68 million favorable EAC adjustment recorded in the third quarter of 2025 in the restricted advanced microelectronics portfolio, partially offset by investments made by the sector in connection with restricted business opportunities during the first quarter of 2025.
-35-
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, and launch systems for national security, civil government, commercial and international customers. Major products include satellites and spacecraft systems, subsystems, sensors and payloads; ground systems; missile defense systems and interceptors; and launch vehicles and related propulsion systems.
Year Ended December 31 % Change in
$ in millions 2025 2024 2023 2025 2024
Sales $ 10,771 $ 11,731 $ 11,873 (8) % (1) %
Operating income 1,183 1,254 1,130 (6) % 11 %
Operating margin rate 11.0 % 10.7 % 9.5 %
Sales
2025 sales decreased $960 million, or 8 percent, primarily due to wind-down of work on the restricted space and NGI programs, which reduced sales by $738 million, as well as a $172 million decrease for the SDA satellite programs due to the timing of materials and a $102 million decrease driven by lower volume on the SLS Booster program. These decreases were partially offset by a $168 million increase on GEM 63 and higher volume on HALO as those programs continue to ramp.
Operating Income
2025 operating income decreased $71 million, or 6 percent, due to lower sales, partially offset by a higher operating margin rate. Operating margin rate increased to 11.0 percent from 10.7 percent principally due to more favorable contract mix.
-36-
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 2025 2024 2023
Segment Information: Sales Operating Costs and Expenses Sales Operating Costs and Expenses Sales Operating Costs and Expenses
Aeronautics Systems
Product $ 9,723 $ 9,340 $ 9,211 $ 8,383 $ 8,280 $ 9,053
Service 3,102 2,687 3,053 2,658 2,745 2,399
Intersegment eliminations 167 152 132 119 139 128
Total Aeronautics Systems 12,992 12,179 12,396 11,160 11,164 11,580
Defense Systems
Product 6,367 5,682 5,696 5,169 5,159 4,708
Service 1,425 1,263 1,532 1,365 1,875 1,659
Intersegment eliminations 210 186 171 149 151 134
Total Defense Systems 8,002 7,131 7,399 6,683 7,185 6,501
Mission Systems
Product 8,854 7,608 8,076 7,000 7,749 6,669
Service 2,218 1,861 2,146 1,805 2,092 1,730
Intersegment eliminations 1,434 1,210 1,177 996 1,054 887
Total Mission Systems 12,506 10,679 11,399 9,801 10,895 9,286
Space Systems
Product 8,797 7,827 9,743 8,711 9,709 8,844
Service 1,468 1,309 1,576 1,398 1,681 1,468
Intersegment eliminations 506 452 412 368 483 431
Total Space Systems 10,771 9,588 11,731 10,477 11,873 10,743
Total Product $ 33,741 $ 30,457 $ 32,726 $ 29,263 $ 30,897 $ 29,274
Total Service 8,213 7,120 8,307 7,226 8,393 7,256
Total Segment(1)
$ 41,954 $ 37,577 $ 41,033 $ 36,489 $ 39,290 $ 36,530
(1)A reconciliation of segment operating income to total operating income is included in "Segment Operating Results."
Product Sales and Costs
2025 product sales increased $1.0 billion, or 3 percent, primarily due to higher sales on restricted airborne radar, marine systems and international ground-based radar programs at Mission Systems, higher volume on Sentinel, military ammunition programs and the IBCS program portfolio at Defense Systems, and higher sales on the F-35, TACAMO, E-2, and B-21 programs at Aeronautics Systems. These increases were partially offset by wind-down of work on the restricted space and NGI programs and lower volume on SDA satellite programs at Space Systems.
2025 product costs increased $1.2 billion, or 4 percent, reflecting a lower operating margin rate principally due to the $477 million loss provision recorded on the B-21 program at Aeronautics Systems in the first quarter of 2025, partially offset by higher net EAC adjustments at Defense Systems largely driven by Sentinel.
Service Sales and Costs
2025 service sales decreased $94 million, or 1 percent, primarily due to lower restricted sales at Space Systems and lower service volume at Defense Systems due to the training services divestiture, partially offset by higher restricted sales at Mission Systems and higher volume on aircraft sustainment services at Aeronautics Systems.
2025 service costs decreased $106 million, or 1 percent, consistent with the change in services sales described above.
BACKLOG
Backlog represents the future sales we expect to recognize on firm orders received by the company and is equivalent to the company's remaining performance obligations at the end of each period. It comprises both funded backlog
-37-
NORTHROP GRUMMAN CORPORATION
(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.
Backlog consisted of the following at December 31, 2025 and 2024:
2025 2024
$ in millions Funded Unfunded Total
Backlog 		Total
Backlog
% Change in 2025
Aeronautics Systems $ 12,585 $ 10,467 $ 23,052 $ 25,202 (9) %
Defense Systems 8,610 19,186 27,796 26,614 4 %
Mission Systems 13,251 5,381 18,632 16,443 13 %
Space Systems 9,083 17,118 26,201 23,209 13 %
Total backlog $ 43,529 $ 52,152 $ 95,681 $ 91,468 5 %
2025 net awards totaled $46.3 billion. Significant 2025 new awards include $14.8 billion for restricted programs (primarily at Aeronautics Systems, Space Systems, and Mission Systems), $3.3 billion for F-35 (at Mission Systems and Aeronautics Systems), $2.5 billion for GEM 63, $1.8 billion for GWS, and $1.3 billion for Virginia Class submarines.
LIQUIDITY AND CAPITAL RESOURCES
We are focused on the efficient conversion of operating income into cash to provide for the company's material cash requirements, including working capital needs, satisfaction of contractual commitments, investment in our business through capital expenditures, funding of our pension and OPB plans, and shareholder returns.
As of December 31, 2025, we had cash and cash equivalents of $4.4 billion; $265 million was held outside of the U.S. by foreign subsidiaries. We expect cash and cash equivalents and cash generated from operating activities, supplemented by borrowings under credit facilities, commercial paper and/or in the capital markets through our shelf registration with the SEC, if needed, to be sufficient to provide liquidity to the company in the short-term and long-term. The company has a five-year senior unsecured credit facility in an aggregate principal amount of $3.0 billion, and in April 2025, we renewed our one-year $500 million uncommitted credit facility. At December 31, 2025, there were no borrowings outstanding under these credit facilities. In May 2025, we issued $1.0 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, 2025, we had $23.9 billion of purchase obligations, approximately half of which are short-term. 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 by the termination liability provisions within those contracts. As such, we do not believe they represent a material liquidity risk to the company. At December 31, 2025, we had capital expenditure commitments of $1.6 billion, which we expect to satisfy with cash on hand. We also had provisions for uncertain tax positions of $1.6 billion, some or all of which could result in future cash payments to various taxing authorities. At this time, we are unable to estimate the timing and amount of any future cash outflows related to these uncertain tax positions.
Refer to the respective notes to the consolidated financial statements for further information about our share repurchase programs (Note 2), commercial paper, credit facilities and long-term debt (Note 9), standby letters of credit and guarantees (Note 11), future minimum contributions for the company's pension and OPB plans (Note 12), and lease payment obligations (Note 14).
-38-
NORTHROP GRUMMAN CORPORATION
Cash Flow Measures
In addition to our cash position, we consider various cash flow measures in capital deployment decision-making, including cash provided by operating activities and free cash flow, a non-GAAP measure described in more detail below.
Operating Cash Flow
The table below summarizes key components of cash provided by operating activities:
Year Ended December 31
$ in millions 2025 2024 2023
Net earnings $ 4,182 $ 4,174 $ 2,056
Changes in trade working capital(1)
(100) (29) 199
Other, net 675 243 1,620
Net cash provided by operating activities $ 4,757 $ 4,388 $ 3,875
(1) Beginning in the fourth quarter of 2025, the company redefined trade working capital presented in this table to include accounts receivable, unbilled receivables, inventoried costs, trade accounts payable and advance payments and billings in excess of costs incurred. Prior period amounts and disclosures have been recast to conform to current period presentation.
2025 cash provided by operating activities increased $369 million, or 8 percent, primarily due to $149 million of lower net cash tax payments and improvements in trade working capital.
2024 cash provided by operating activities increased $513 million, or 13 percent, driven by $355 million lower net cash tax payments.
Free Cash Flow
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. This measure may not be defined and calculated by other companies in the same manner. We use free cash flow as a key factor in our planning for, and consideration of, acquisitions, the payment of dividends and stock repurchases. 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.
The table below reconciles net cash provided by operating activities to free cash flow:
Year Ended December 31 % Change in
$ in millions 2025 2024 2023 2025 2024
Net cash provided by operating activities $ 4,757 $ 4,388 $ 3,875 8 % 13 %
Capital expenditures (1,450) (1,767) (1,775) (18) % - %
Free cash flow
$ 3,307 $ 2,621 $ 2,100 26 % 25 %
2025 free cash flow increased $686 million, or 26 percent, due to higher net cash provided by operating activities as well as lower capital expenditures.
Investing Cash Flow
2025 net cash used in investing activities decreased $594 million as compared with 2024, principally due to $333 million in proceeds from the sale of the training services business and $317 million of lower capital expenditures.
Financing Cash Flow
2025 net cash used in financing activities increased $2.2 billion as compared with 2024, primarily due to a $3.0 billion net decrease in cash from long-term debt, partially offset by a $890 million decrease in share repurchases. Cash returned to shareholders through share repurchases and dividends totaled $2.9 billion in 2025 and $3.7 billion in 2024.
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. We employ judgment in making our estimates in consideration of historical experience, currently available information
-39-
NORTHROP GRUMMAN CORPORATION
and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from our estimates and assumptions, and any such differences could be material to our consolidated financial statements. We believe the following accounting policies are critical to the understanding of our consolidated financial statements and require the use of significant management judgment in their application. For a summary of our significant accounting policies, see Note 1 to the consolidated financial statements.
Revenue Recognition
Due to the long-term nature of our contracts, we generally recognize revenue over time using the cost-to-cost method, which requires us to make reasonable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services.
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. Variable consideration is included in total estimated sales to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate variable consideration as the most likely amount to which we expect to be entitled.
Our cost estimation process is based on the professional knowledge of our engineering, program management and financial professionals, and draws on their significant experience and judgment. We prepare EACs for our contracts and calculate an estimated contract profit based on total estimated contract sales and cost. Since our contracts often span a period of several years, estimation of revenue, cost, and progress toward completion requires significant judgment. Factors considered in these estimates include our historical performance, the availability, productivity and cost of labor, the nature and complexity of work to be performed, the effect of change orders, availability and cost of materials, components and subcontracts, the effect of any delays in performance and the level of indirect cost allocations.
We also consider the impact of macroeconomic factors on our estimates, in particular on contract EACs that span several years. For example, we have included in our EACs management's best estimate of the impact inflation and disruptions in the supply chain have had and may continue to have on our contracts. Although the overall financial impact these macroeconomic factors have had on our company has largely subsided, volatility of the recent macroeconomic environment has added complexity to our estimation process and may result in our 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.
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. These assessments require judgments and estimates that can be affected by any number of these factors over time, which may cause actual results to differ materially from those estimates as facts and circumstances change or become known to us.
The company performs on a broad portfolio of long-term contracts, including the development of complex and customized military platforms and systems, as well as advanced electronic equipment and software, that often include technology at the forefront of science. Cost estimates on fixed-price development contracts and early-stage/low-rate production contracts are inherently more uncertain as to future events than on mature, full-rate production contracts. As a result, there is typically more variability in those estimates and greater financial risk associated with unanticipated cost growth on fixed-price development contracts and early-stage/low-rate production contracts. Changes in estimates occur for a variety of reasons, including changes in contract scope, the resolution of risk at lower or higher cost than anticipated, unanticipated performance and other risks affecting contract costs, performance issues with subcontractors or suppliers, changes in indirect cost allocations, such as overhead and G&A costs, and changes in estimated award and incentive fees. Identified risks typically include technical, schedule and/or performance risk based on our evaluation of the contract effort. Similarly, the changes in estimates may include changes in, or resolution of, identified opportunities for operating margin improvement.
For the impacts of changes in estimates on our consolidated statements of earnings and comprehensive income, see "Segment Operating Results" and Note 1 to the consolidated financial statements.
Retirement Benefits
Overview- The determination of projected benefit obligations, the fair value of plan assets, and pension and OPB expense for our retirement benefit plans requires the use of estimates and actuarial assumptions. We perform an annual review of our actuarial assumptions in consultation with our actuaries. When we determine changes in the assumptions are warranted, or as a result of plan amendments, future pension and OPB expense and our projected
-40-
NORTHROP GRUMMAN CORPORATION
benefit obligation could increase or decrease materially. The principal estimates and assumptions that have a significant effect on our consolidated financial position and results of operations are the discount rate, cash balance crediting rate, expected long-term rate of return on plan assets, estimated fair market value of plan assets, and the mortality rate of those covered by our pension and OPB plans. The effects of actual results differing from our assumptions and the effects of changing assumptions (i.e., actuarial gains or losses) are recognized immediately through earnings upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.
Discount Rate- The discount rate represents the interest rate we use to determine the present value of future cash flows currently expected to be required to settle our pension and OPB obligations. The discount rate is generally based on the yield of high-quality corporate fixed-income investments. At the end of each year, we determine the discount rate using a theoretical bond portfolio model of bonds rated AA or better to match the notional cash outflows related to projected benefit payments for each of our significant benefit plans. Taking into consideration the factors noted above, our weighted-average composite pension discount rate was 5.58 percent at December 31, 2025 and 5.73 percent at December 31, 2024.
The effects of a hypothetical change in the discount rate may be nonlinear and asymmetrical for future years as the discount rate changes. Holding all other assumptions constant, an increase or decrease of 25 basis points in the December 31, 2025 discount rate assumption would have the following estimated effects on 2025 pension and OPB obligations, which would be reflected in the 2025 MTM (benefit) expense, and 2026 expected pension and OPB expense:
$ in millions 25 Basis Point Decrease in Rate 25 Basis Point Increase in Rate
2025 pension and OPB obligation and MTM expense (benefit)
$ 796 $ (761)
2026 pension and OPB (benefit) expense
(22) 21
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. 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. In general, the cash balance crediting rate tends to move in concert with the discount rate but has an offsetting effect on pension benefit obligations and the related MTM (benefit) expense. The minimum cash balance crediting rate allowed under the plan is 2.25 percent. The cash balance crediting rate assumption has been set to its current level of 4.84 percent as of December 31, 2025, increasing to 5.26 percent by 2031. Holding all other assumptions constant, an increase or decrease of 25 basis points in the December 31, 2025 cash balance crediting rate assumption would have the following estimated effects on the 2025 pension benefit obligation, which would be reflected in the 2025 MTM (benefit) expense, and 2026 expected pension expense:
$ in millions 25 Basis Point Decrease in Rate 25 Basis Point Increase in Rate
2025 pension obligation and MTM (benefit) expense
$ (106) $ 110
2026 pension (benefit) expense
(9) 10
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. EROA is a long-term assumption, which we review annually and adjust to reflect changes in our long-term view of expected market returns and/or significant changes in our plan asset investment policy. Due to the inherent uncertainty of this assumption, we consider multiple data points at the measurement date including the plan's target asset allocation, third-party projection models of expected long-term returns for each of the plans' strategic asset classes and historical plan asset returns. In addition to the data points themselves, we consider trends in the data points, including changes from the prior measurement date. The EROA assumptions we use for pension benefits are consistent with those used for OPB plans; however, we reduce the EROA for OPB plans to allow for the impact of tax on investment earnings, as certain Voluntary Employee Beneficiary Association trusts are taxable.
During 2025, 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 45% to 48%. The actual
-41-
NORTHROP GRUMMAN CORPORATION
asset allocation as of December 31, 2025 was approximately 43% fixed-income, 28% public equities, 27% alternatives, and 2% cash. At this time, the Investment Committee is not planning any significant changes to that mix. For further information on plan asset investments, see Note 12 to the consolidated financial statements.
Consistent with our past practice, we obtained long-term capital market forecasting models from several third parties and, using our target asset allocation, developed an expected rate of return on plan assets from each model. We considered not only the specific returns projected by those third-party models, but also changes in the models year-to-year when developing our EROA.
While historical market returns are not necessarily predictive of future market returns, given our long history of plan performance supported by the stability in our investment mix, investment managers, and active asset management, we believe our actual historical performance is a reasonable metric to consider when developing our EROA. Our average annual rate of return from 1976 to 2025 was approximately 10.6 percent and our 20-year and 30-year rolling average rates of return were approximately 7.5 percent and 8.3 percent, respectively, each determined on an arithmetic basis and net of expenses. Our 2025 return on plan assets, net of expenses, was approximately 11.3 percent.
For determining 2025 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 7.08 percent. For 2026 FAS expense, we have assumed an expected long-term rate of return of 7.5 percent on pension plan assets and 7.1 percent on OPB plans. Holding all other assumptions constant, an increase or decrease of 25 basis points in our December 31, 2025 EROA assumption would have the following estimated effects on 2026 expected pension and OPB expense (benefit):
$ in millions 25 Basis Point Decrease 25 Basis Point Increase
2026 pension and OPB expense (benefit)
$ 79 $ (79)
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 2026 MTM expense (benefit):
$ in millions 100 Basis Point Decrease 100 Basis Point Increase
2026 MTM expense (benefit)
$ 314 $ (314)
Estimated Fair Market Value of Plan Assets- For certain plan assets where the fair market value is not readily determinable, such as private equity, real estate, and other alternative investments, we develop estimates of fair value using the best information available. Estimated fair values on these plan assets are based on redemption values and net asset values (NAV), as well as valuation methodologies that include third-party appraisals, comparable transactions, discounted cash flow valuation models and public market data.
Mortality Rate - We use mortality assumptions to estimate life expectancies of plan participants. In October 2014, the Society of Actuaries Retirement Plans Experience Committee (RPEC) issued updated mortality tables and a mortality improvement scale, which reflected longer life expectancies than previously projected. In October 2019, the RPEC issued an updated mortality base table (the Private Retirement Plans Mortality table for 2012 (Pri-2012)), which we adopted after reviewing our own historical mortality experience. In October 2021, the RPEC released a new projection scale (MP-2021) that included additional underlying data for 2019, which included an increase in life expectancies relative to the prior year.
The RPEC has not released a projection scale since MP-2021, citing complexities in incorporating the substantial number of "excess deaths" in 2020 and 2021 into their existing model and uncertainties about future expectations primarily related to COVID-19. 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. We used these mortality assumptions to calculate our pension and OPB obligations recognized at December 31, 2025, and the amounts estimated for our 2026 pension and OPB expense.
For further information regarding our pension and OPB plans, see "Risk Factors" and Notes 1 and 12 to the consolidated financial statements.
-42-
NORTHROP GRUMMAN CORPORATION
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. We determine whether to accrue a loss 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 accrue a loss 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.
Environmental Matters- We are subject to environmental laws and regulations in the jurisdictions in which we do or have done business. Factors that could result in changes to the assessment of probability, range of reasonably estimated costs and environmental accruals include: modification of planned remedial actions; changes in the estimated time required to conduct remedial actions; discovery of more or less extensive (or different) contamination than anticipated; information regarding the potential causes and effects of contamination; results of efforts to involve other responsible parties; financial capabilities of other responsible parties; changes in laws and regulations, their interpretation or application; contractual obligations affecting remediation or responsibilities; and improvements in remediation technology. As we expect to recover a significant portion of environmental remediation liabilities through overhead charges on government contracts, such amounts are deferred in prepaid expenses and other current assets (current portion) and other non-current assets until charged to contracts. 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 are expensed when the liability is established. As of December 31, 2025, we expect approximately 92 percent of the company's environmental remediation costs to be recoverable. A 10 percentage point decrease in this assumption would result in approximately a $55 million reduction to operating income. To the extent our judgments on the recoverability of our environmental remediation costs change or the unallowable portion of our environmental remediation costs otherwise increase, there could be a significant impact on our consolidated financial position, annual results of operations and/or cash flows.
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. We establish reserves for uncertain tax positions when, despite the belief that our tax positions are supportable, there remains uncertainty in a tax position taken in our filed tax returns or planned to be taken in a future tax return or claim. The company follows a recognition and measurement approach, considering the facts, circumstances, and information available at the reporting date. We exercise judgment in determining the level of evidence necessary and appropriate to support our assessment using all available information. The technical merits of a given tax position are derived from sources of authority in the tax law and their applicability to the facts and circumstances of the position. In measuring the tax position, the company considers the amounts and probabilities of the outcomes that could be realized upon settlement. 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, 2025, we have approximately $1.6 billion in unrecognized tax benefits. 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.
For further information on litigation, commitments and contingencies, see "Risk Factors" and Note 1, Note 6, Note 10 and Note 11 to the consolidated financial statements.
Goodwill and Long-Lived Assets
Overview- We allocate the purchase price of acquired businesses to the underlying tangible and intangible assets acquired and liabilities assumed based upon their respective fair values, with the excess, as well as any adjustments during the initial measurement period, recorded as goodwill. Such fair value assessments require judgments and estimates that can be affected by contract performance and other factors over time, which may cause final amounts to differ materially from original estimates. Adjustments to the fair value of purchased assets and liabilities after the initial measurement period are recognized in net earnings.
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. However, the cost of PP&E utilized in support of our commercial business, including approximately $600 million of PP&E used in our
-43-
NORTHROP GRUMMAN CORPORATION
commercial space business, is not allocable to government contracts and is therefore subject to greater recoverability risk.
Impairment Testing- We test for impairment of goodwill annually as of December 31 at each of our reporting units, which comprise our operating segments, or more frequently if events occur or circumstances change such that it is more likely than not an impairment may exist. When testing for goodwill impairment, we may perform both qualitative and quantitative assessments. If we perform a qualitative assessment and conclude that it is more likely than not that the fair value of a reporting unit is less than the carrying value, then a quantitative assessment is performed. When a quantitative assessment is performed, we compare the carrying value of each reporting unit to its respective fair value and recognize an impairment loss to the extent that the fair value is less than the carrying value.
Our qualitative assessment evaluates relevant events and circumstances such as macroeconomic conditions, industry considerations, and reporting unit financial performance. If we perform a quantitative assessment, we primarily use the income approach based on the cash flows we expect the reporting units to generate in the future, consistent with our operating plans. This income valuation method requires management to project sales, operating expenses, working capital, capital spending and cash flows for the reporting units over a multi-year period, as well as to determine the weighted-average cost of capital (WACC) used as a discount rate and terminal value assumptions.
We performed qualitative assessments for each of our reporting units as of December 31, 2025 and determined that no adjustments to the carrying value of goodwill were necessary. We performed our most recent quantitative analysis as of December 31, 2024, where we determined the fair value of each of our reporting units substantially exceeded their respective carrying values.
We test for impairment of long-lived assets when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Our assessment is based on our projection of the undiscounted future operating cash flows of the related asset group. If such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amount, we recognize a non-cash impairment charge to reduce the carrying amount to fair value. There were no material impairment charges recorded in the years ended December 31, 2025, 2024 and 2023.
Impairment assessment inherently involves management judgments as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. 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.
-44-
NORTHROP GRUMMAN CORPORATION
Northrop Grumman Corporation published this content on January 27, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on January 27, 2026 at 21:04 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]