UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM	10-Q



☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~March 31,~~June 30, 2020



☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-16411

NORTHROP GRUMMAN CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		80-0640649
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2980 Fairview Park Drive
Falls Church,	Virginia	22042
(Address of principal executive offices)		(Zip Code)

(703) 280-2900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	NOC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer ☒ Accelerated Filer ☐

Non-accelerated Filer ☐ Smaller Reporting Company ☐

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of ~~April 24,~~July 27, 2020,~~, 166,702,730~~ 166,714,063 shares of common stock were outstanding.

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NORTHROP GRUMMAN CORPORATION

TABLE OF CONTENTS



		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings and Comprehensive Income	1
	Condensed Consolidated Statements of Financial Position	2
	Condensed Consolidated Statements of Cash Flows	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity	4
	Notes to Condensed Consolidated Financial Statements
	1. Basis of Presentation	5
	2. Earnings Per Share, Share Repurchases and Dividends on Common Stock	7
	3. Income Taxes	8
	4. Fair Value of Financial Instruments	8
	5. Investigations, Claims and Litigation	9
	6. Commitments and Contingencies	1011
	7. Retirement Benefits	12
	8. Stock Compensation Plans and Other Compensation Arrangements	1213
	9. Segment Information	1314
	Report of Independent Registered Public Accounting Firm	1718
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Overview	1819
	Consolidated Operating Results	1920
	Segment Operating Results	2021
	Product and Service Analysis	2427
	Backlog	2528
	Liquidity and Capital Resources	2528
	Critical Accounting Policies, Estimates and Judgments	2730
	Accounting Standards Updates	2730
	Forward-Looking Statements and Projections	2730
	Contractual Obligations	2831
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2831
Item 4.	Controls and Procedures	2831

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	2933
Item 1A.	Risk Factors	2933
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3033
Item 5.	Other Information	34
Item 6.	Exhibits	3235
	Signatures	3436

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NORTHROP GRUMMAN CORPORATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended March 31						Three Months Ended June 30						Six Months Ended June 30
$ in millions, except per share amounts	2020			2019			2020			2019			2020			2019
Sales
Product	$	6,176		$	5,728		$	6,482		$	5,880		$	12,658		$	11,608
Service	2,444			2,461			2,402			2,576			4,846			5,037
Total sales	8,620			8,189			8,884			8,456			17,504			16,645
Operating costs and expenses
Product	4,952			4,517			5,127			4,661			10,079			9,178
Service	1,946			1,976			1,931			2,065			3,877			4,041
General and administrative expenses	788			760			832			784			1,620			1,544
Operating income	934			936			994			946			1,928			1,882
Other (expense) income
Interest expense	(125		)	(138		)	(154		)	(137		)	(279		)	(275		)
FAS (non-service) pension benefit	302			200			303			200			605			400
Other, net	(58		)	36			60			19			2			55
Earnings before income taxes	1,053			1,034			1,203			1,028			2,256			2,062
Federal and foreign income tax expense	185			171			198			167			383			338
Net earnings	$	868		$	863		$	1,005		$	861		$	1,873		$	1,724

Basic earnings per share	$	5.18		$	5.08		$	6.02		$	5.07		$	11.20		$	10.15
Weighted-average common shares outstanding, in millions	167.7			170.0			166.9			169.7			167.3			169.9
Diluted earnings per share	$	5.15		$	5.06		$	6.01		$	5.06		$	11.16		$	10.11
Weighted-average diluted shares outstanding, in millions	168.4			170.7			167.3			170.3			167.9			170.5

Net earnings (from above)	$	868		$	863		$	1,005		$	861		$	1,873		$	1,724
Other comprehensive loss
Change in unamortized prior service credit, net of tax	(10		)	(11		)	(11		)	(12		)	(21		)	(23		)
Change in cumulative translation adjustment and other, net	(9		)	4			10			(4		)	1			—
Other comprehensive loss, net of tax	(19		)	(7		)	(1		)	(16		)	(20		)	(23		)
Comprehensive income	$	849		$	856		$	1,004		$	845		$	1,853		$	1,701

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)


$ in millions, except par value	March 31, 2020			December 31, 2019			June 30, 2020			December 31, 2019
Assets
Cash and cash equivalents	$	3,278		$	2,245		$	4,178		$	2,245
Accounts receivable, net	2,136			1,326			1,989			1,326
Unbilled receivables, net	5,918			5,334			5,460			5,334
Inventoried costs, net	785			783			832			783
Prepaid expenses and other current assets	1,011			997			720			997
Total current assets	13,128			10,685			13,179			10,685
Property, plant and equipment, net of accumulated depreciation of $5,952 for 2020 and $5,850 for 2019	6,956			6,912
Property, plant and equipment, net of accumulated depreciation of $6,103 for 2020 and $5,850 for 2019							7,063			6,912
Operating lease right-of-use assets	1,469			1,511			1,528			1,511
Goodwill	18,698			18,708			18,707			18,708
Intangible assets, net	974			1,040			909			1,040
Deferred tax assets	355			508			346			508
Other non-current assets	1,623			1,725			1,743			1,725
Total assets	$	43,203		$	41,089		$	43,475		$	41,089

Liabilities
Trade accounts payable	$	2,071		$	2,226		$	2,006		$	2,226
Accrued employee compensation	1,472			1,865			1,614			1,865
Advance payments and billings in excess of costs incurred	2,027			2,237			2,179			2,237
Other current liabilities	4,607			3,106			3,928			3,106
Total current liabilities	10,177			9,434			9,727			9,434
Long-term debt, net of current portion of $1,790 for 2020 and $1,109 for 2019	14,299			12,770
Long-term debt, net of current portion of $1,803 for 2020 and $1,109 for 2019							14,259			12,770
Pension and other postretirement benefit plan liabilities	6,779			6,979			6,582			6,979
Operating lease liabilities	1,280			1,308			1,333			1,308
Other non-current liabilities	1,606			1,779			1,862			1,779
Total liabilities	34,141			32,270			33,763			32,270

Commitments and contingencies (Note 6)

Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding	—			—			—			—
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2020—167,099,297 and 2019—167,848,424	167			168
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2020—166,708,207 and 2019—167,848,424							167			168
Paid-in capital	—			—			10			—
Retained earnings	9,011			8,748			9,652			8,748
Accumulated other comprehensive loss	(116		)	(97		)	(117		)	(97		)
Total shareholders’ equity	9,062			8,819			9,712			8,819
Total liabilities and shareholders’ equity	$	43,203		$	41,089		$	43,475		$	41,089

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31						Six Months Ended June 30
$ in millions	2020			2019			2020			2019
Operating activities
Net earnings	$	868		$	863		$	1,873		$	1,724
Adjustments to reconcile to net cash used in operating activities:
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization	297			302			605			606
Stock-based compensation	18			26			36			55
Deferred income taxes	156			33			169			48
Changes in assets and liabilities:
Accounts receivable, net	(810		)	(718		)	(663		)	(384		)
Unbilled receivables, net	(584		)	(759		)	(126		)	(658		)
Inventoried costs, net	(2		)	(124		)	(49		)	(156		)
Prepaid expenses and other assets	56			(23		)	(16		)	(48		)
Accounts payable and other liabilities	(833		)	(480		)	(374		)	(367		)
Income taxes payable, net	10			140			330			194
Retiree benefits	(237		)	(142		)	(473		)	(285		)
Other, net	68			(31		)	32			(35		)
Net cash used in operating activities	(993		)	(913		)
Net cash provided by operating activities							1,344			694

Investing activities
Capital expenditures	(272		)	(284		)	(541		)	(536		)
Other, net	2			4			2			1
Net cash used in investing activities	(270		)	(280		)	(539		)	(535		)

Financing activities
Net proceeds from issuance of long-term debt	2,239			—			2,239			—
Payments to credit facilities	(7		)	(20		)	(13		)	(20		)
Net borrowings on commercial paper	744			814			—			101
Common stock repurchases	(344		)	(60		)	(490		)	(231		)
Cash dividends paid	(227		)	(211		)	(469		)	(435		)
Payments of employee taxes withheld from share-based awards	(63		)	(61		)	(64		)	(63		)
Other, net	(46		)	—			(75		)	(2		)
Net cash provided by financing activities	2,296			462
Net cash provided by (used in) financing activities							1,128			(650		)
Increase (decrease) in cash and cash equivalents	1,033			(731		)	1,933			(491		)
Cash and cash equivalents, beginning of year	2,245			1,579			2,245			1,579
Cash and cash equivalents, end of period	$	3,278		$	848		$	4,178		$	1,088

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


	Three Months Ended March 31						Three Months Ended June 30						Six Months Ended June 30
$ in millions, except per share amounts	2020			2019			2020			2019			2020			2019
Common stock
Beginning of period	$	168		$	171		$	167		$	170		$	168		$	171
Common stock repurchased	(1		)	(1		)	—			(1		)	(1		)	(2		)
End of period	167			170			167			169			167			169
Paid-in capital
Beginning of period	—			—			—			—			—			—
Stock compensation							10			—			10			—
End of period	—			—			10			—			10			—
Retained earnings
Beginning of period	8,748			8,068			9,011			8,628			8,748			8,068
Common stock repurchased	(348		)	(62		)	(131		)	(172		)	(479		)	(234		)
Net earnings	868			863			1,005			861			1,873			1,724
Dividends declared	(223		)	(206		)	(242		)	(226		)	(465		)	(432		)
Stock compensation	(45		)	(35		)	9			29			(36		)	(6		)
Other	11			—			—			—			11			—
End of period	9,011			8,628			9,652			9,120			9,652			9,120
Accumulated other comprehensive (loss) income
Accumulated other comprehensive loss
Beginning of period	(97		)	(52		)	(116		)	(59		)	(97		)	(52		)
Other comprehensive loss, net of tax	(19		)	(7		)	(1		)	(16		)	(20		)	(23		)
End of period	(116		)	(59		)	(117		)	(75		)	(117		)	(75		)
Total shareholders’ equity	$	9,062		$	8,739		$	9,712		$	9,214		$	9,712		$	9,214
Cash dividends declared per share	$	1.32		$	1.20		$	1.45		$	1.32		$	2.77		$	2.52

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

Principles of Consolidation and Reporting

These unaudited condensed consolidated financial statements (the “financial statements”) include the accounts of Northrop Grumman Corporation and its subsidiaries and joint ventures or other investments for which we consolidate the financial results (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”). Intercompany accounts, transactions and profits are eliminated in consolidation. Investments in equity securities and joint ventures where the company has significant influence, but not control, are accounted for using the equity method.

These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”) and in accordance with the rules of the Securities and Exchange Commission (SEC) for interim reporting. The financial statements include adjustments of a normal recurring nature considered necessary by management for a fair presentation of the company’s unaudited condensed consolidated financial position, results of operations and cash flows.

Effective January 1, 2020, the company reorganized its operating sectors to better align the company’s broad portfolio to serve its customers’ needs. The four new sectors, which also comprise our reportable segments, are Aeronautics Systems, Defense Systems, Mission Systems and Space Systems.

Beginning in the second quarter of 2020, the company no longer considers certain unallowable costs and environmental matters that are principally managed at the corporate office as part of management’s evaluation of segment operating performance. As a result, certain unallowable compensation and other costs, which were previously included in segment operating results, are now reported in Unallocated corporate expense within operating income. In addition, certain accrued and deferred costs, as well as unallowable costs, if any, associated with certain environmental matters that were previously reflected in segment assets and operating results are now reflected in corporate assets and Unallocated corporate expense within operating income. The impact of these changes are reflected in the amounts in this Form 10-Q. See Note 9 and Part II, Item 5 for further information regarding the impact of these changes on the company’s current and prior period segment operating income.

The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the information contained in the company’s 2019 Annual Report on Form 10-K, ~~and~~ the Form 8-K that we ~~expect to file~~filed with the SEC ~~immediately after filing this Form 10-Q,~~on April 29, 2020, which recasts the disclosures in certain portions of the 2019 Annual Report on Form 10-K to reflect changes in the company’s reportable ~~segments.~~segments, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30 and third quarter as ending on September 30. It is the company’s long-standing practice to establish actual interim closing dates using a “fiscal” calendar, in which we close our books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. This practice is only used at interim periods within a reporting year.

Accounting Estimates

Preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Estimates have been prepared using the most current and best available information; however, actual results could differ materially from those estimates.

Revenue Recognition

The majority of our sales are derived from long-term contracts with the U.S. government for the production of goods, the provision of services, or a combination of both. We recognize revenue as control is transferred to the customer, either over time or at a point in time. As control is effectively transferred while we perform on our contracts, we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion) as the company believes this represents the most appropriate measurement towards satisfaction of our performance obligations. Revenue for contracts in which the control of goods produced does not transfer until delivery to the customer is recognized at a point in time (i.e., typically upon delivery).

Contract Estimates

Use of the cost-to-cost method requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. The company estimates profit on

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NORTHROP GRUMMAN CORPORATION

these contracts as the difference between total estimated sales and total estimated cost at completion and recognizes that profit as costs are incurred. Significant judgment is used to estimate total sales and cost at completion.

Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), contract claims and requests for equitable adjustment (REAs). 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.

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~~NORTHROP GRUMMAN CORPORATION~~

We recognize changes in estimated contract sales or costs and the resulting changes in contract profit on a cumulative basis. Cumulative ~~Estimate-at-Completion (EAC)~~EAC adjustments represent the cumulative effect of the changes on current and prior periods; sales and operating margins in future periods are recognized as if the revised estimates had been used since contract inception. If it is determined that a loss is expected to result on an individual performance obligation, the entire amount of the estimable future loss, including an allocation of general and administrative (G&A) costs, is charged against income in the period the loss is identified.

The following table presents the effect of aggregate net EAC adjustments:


	Three Months Ended March 31				Three Months Ended June 30				Six Months Ended June 30
$ in millions, except per share data	2020		2019		2020		2019		2020		2019
Revenue	$	136	$	166	$	125	$	154	$	261	$	320
Operating income	124		138		112		158		236		296
Net earnings⁽¹⁾	98		109		88		125		186		234
Diluted earnings per share⁽¹⁾	0.58		0.64		0.53		0.73		1.11		1.37


⁽¹⁾	Based on a 21 percent statutory tax rate.

EAC adjustments on a single performance obligation can have a material effect on the company’s financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. No such adjustments were material to the financial statements during the three months ended ~~March 31,~~June 30, 2020 and 2019.

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 (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 an option or IDIQ task order is exercised or awarded.

Company backlog as of ~~March 31,~~June 30, 2020 was ~~$64.2~~$70.0 billion. We expect to recognize approximately 4540 percent and 7065 percent of our ~~March 31,~~June 30, 2020 backlog as revenue over the next 12 and 24 months, respectively, with the remainder to be recognized thereafter.

Contract Assets and Liabilities

For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position. The amount of revenue recognized for the three and six months ended ~~March~~June 30, 2020 that was included in the December 31, ~~2020~~2019 contract liability balance was $442 million and $1.2 billion, respectively. The amount of revenue recognized for the three and six months ended June 30, 2019 that was included in the December 31, 2018 contract liability ~~balances at the beginning of each year~~balance was ~~$781~~$333 million and ~~$674 million,~~$1.0 billion, respectively.

Disaggregation of Revenue

See Note 9 for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments. We believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

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Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:


$ in millions	March 31, 2020			December 31, 2019			June 30, 2020			December 31, 2019
Unamortized prior service credit, net of tax expense of $13 for 2020 and $17 for 2019	$	41		$	51
Unamortized prior service credit, net of tax expense of $10 for 2020 and $17 for 2019							$	30		$	51
Cumulative translation adjustment and other, net	(157		)	(148		)	(147		)	(148		)
Total accumulated other comprehensive loss	$	(116	)	$	(97	)	$	(117	)	$	(97	)

Related Party Transactions

For all periods presented, the company had no material related party transactions.

Accounting Standards Updates

Accounting standards updates adopted and/or issued, but not effective until after ~~March 31,~~June 30, 2020, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.

2. EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK

Basic Earnings Per Share

We calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of common stock outstanding during each period.

Diluted Earnings Per Share

Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled ~~0.7~~0.4 million shares and ~~0.7~~0.6 million shares for the three and six months ended ~~March 31,~~June 30, 2020, respectively. The dilutive effect of these securities totaled 0.6 million shares for the three and ~~2019, respectively.~~six months ended June 30, 2019.

Share Repurchases

On September 16, 2015, the company’s board of directors authorized a share repurchase program of up to $4.0 billion of the company’s common stock (the “2015 Repurchase Program”). Repurchases under the 2015 Repurchase Program commenced in March 2016 and were completed in March 2020.

On December 4, 2018, the company’s board of directors authorized a new share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the “2018 Repurchase Program”). Repurchases under the 2018 Repurchase Program commenced in March 2020 upon the completion of the company’s 2015 Repurchase Program. As of ~~March 31,~~June 30, 2020, repurchases under the 2018 Repurchase Program totaled ~~$20 million; $2.98~~$0.2 billion; $2.8 billion remained under this share repurchase authorization. By its terms, the 2018 Repurchase Program is set to expire when ~~we have used~~ all authorized funds for ~~repurchases.~~repurchases have been used.

Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and, in the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.

The table below summarizes the company’s share repurchases to date under the authorizations described above:


							Shares Repurchased (in millions)								Shares Repurchased (in millions)
Repurchase Program Authorization Date	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share⁽¹⁾		Date Completed	Three Months Ended March 31		Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share⁽¹⁾		Date Completed	Six Months Ended June 30
Repurchase Program Authorization Date	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share⁽¹⁾		Date Completed	2020	2019	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share⁽¹⁾		Date Completed	2020	2019
September 16, 2015	$	4,000	15.4	$	260.33	March 2020	0.9	1.1	$	4,000	15.4	$	260.33	March 2020	0.9	1.7
December 4, 2018	$	3,000	0.1	306.22			0.1	—	$	3,000	0.5	326.20			0.5	—


⁽¹⁾	Includes commissions paid.

Dividends on Common Stock

In May 2020, the company increased the quarterly common stock dividend 10 percent to $1.45 per share from the previous amount of $1.32 per share.

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In May 2019, the company increased the quarterly common stock dividend 10 percent to $1.32 per share from the previous amount of $1.20 per share.

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3. INCOME TAXES


	Three Months Ended March 31						Three Months Ended June 30						Six Months Ended June 30
$ in millions	2020			2019			2020			2019			2020			2019
Federal and foreign income tax expense	$	185		$	171		$	198		$	167		$	383		$	338
Effective income tax rate	17.6		%	16.5		%	16.5		%	16.2		%	17.0		%	16.4		%

Current Quarter

The ~~first~~second quarter 2020 effective tax rate of 16.5 percent was generally comparable to the prior year period. The company’s second quarter 2020 effective tax rate includes $48 million of research credits, as compared to $51 million in the prior year period.

Year to Date

The year to date 2020 effective tax rate increased to ~~17.6~~17.0 percent from ~~16.5~~16.4 percent in the ~~first quarter of 2019~~prior period primarily due to ~~nondeductible losses on marketable securities and~~ an increase in reserves for uncertain tax positions. ~~These were partially offset by an increase in~~The company’s year to date 2020 effective tax rate includes $90 million of research credits, ~~which totaled $41 million in the first quarter of 2020 and $31~~as compared to $82 million in the prior year period. Both periods benefited from $13 million of excess tax benefits for employee share-based compensation.

In March 2020, the ~~Coronavirus Aid, Relief, and Economic Security~~CARES Act ~~(the “CARES Act”)~~ was enacted. The CARES Act includes certain changes to U.S. tax law that impact the company, including a technical correction to the 2017 Tax Cuts and Jobs Act, which makes certain qualified improvement property eligible for bonus depreciation. The CARES Act did not have a significant impact on the company’s ~~first~~second quarter and year to date 2020 effective tax rate.

The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs, and the 2017 Tax Act. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may decrease by up to ~~$60~~$70 million. Since enactment of the 2017 Tax Act, the ~~IRS~~Internal Revenue Service (IRS) and U.S. Treasury Department have issued and are expected to further issue interpretive guidance that impacts taxpayers. We will continue to evaluate such guidance as it is issued.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2017 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under IRS examination. In addition, legacy Orbital ATK federal tax returns for the year ended March 31, 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under ~~IRS examination.~~appeal with the IRS.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

The company holds a portfolio of marketable securities consisting of securities to partially fund non-qualified employee benefit plans. A portion of these securities are held in common/collective trust funds and are measured at fair value using net asset value (NAV) per share as a practical expedient; and therefore are not required to be categorized in the fair value hierarchy table below. Marketable securities are included in Other non-current assets in the unaudited condensed consolidated statements of financial position.

The company’s derivative portfolio consists primarily of foreign currency forward contracts. Where model-derived valuations are appropriate, the company utilizes the income approach to determine the fair value and uses the applicable London Interbank Offered Rate (LIBOR) swap rates.

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The following table presents the financial assets and liabilities the company records at fair value on a recurring basis identified by the level of inputs used to determine fair value:


	March 31, 2020								December 31, 2019								June 30, 2020								December 31, 2019
$ in millions	Level 1		Level 2			Total			Level 1		Level 2			Total			Level 1		Level 2			Total			Level 1		Level 2			Total
Financial Assets (Liabilities)
Marketable securities	$	288	$	4		$	292		$	364	$	1		$	365		$	331	$	1		$	332		$	364	$	1		$	365
Marketable securities valued using NAV						16								17								16								17
Total marketable securities	288		4			308			364		1			382			331		1			348			364		1			382
Derivatives	—		(3		)	(3		)	—		(3		)	(3		)	—		(1		)	(1		)	—		(3		)	(3		)

The notional value of the company’s foreign currency forward contracts at ~~March 31,~~June 30, 2020 and December 31, 2019 was ~~$85~~$71 million and $98 million, respectively. At June 30, 2020, 0 portion of the notional value was designated as a cash flow hedge. The portion of the notional value designated as a cash flow hedge ~~was $3 million and $7 million as of March 31, 2020 and~~at December 31, 2019 ~~respectively.~~

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was $7 million.

The derivative fair values and related unrealized gains/losses at ~~March 31,~~June 30, 2020 and December 31, 2019 were not material. There were no transfers of financial instruments between the three levels of the fair value hierarchy during the ~~three~~six months ended ~~March 31,~~June 30, 2020.

The carrying value of cash and cash equivalents and commercial paper approximates fair value.

Long-term Debt

The estimated fair value of long-term debt was ~~$17.5~~$19.0 billion and $15.1 billion as of ~~March 31,~~June 30, 2020 and December 31, 2019, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The carrying value of long-term debt was $16.1 billion and $13.9 billion as of ~~March 31,~~June 30, 2020 and December 31, 2019, respectively. The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.

Unsecured Senior Notes

In March 2020, the company issued $2.25 billion of unsecured senior notes for general corporate purposes, including debt repayment and working capital, as follows:

$750 million of 4.40% senior notes due 2030 (the “2030 Notes”),

$500 million of 5.15% senior notes due 2040 (the “2040 Notes”) and

$1.0 billion of 5.25% senior notes due 2050 (the “2050 Notes”).

We refer to the 2030 Notes, the 2040 Notes and the 2050 Notes, together, as the “notes.” Interest on the notes is payable semi-annually in arrears. The notes are generally subject to redemption, in whole or in part, at the company’s discretion at any time, or from time to time, prior to maturity at a redemption price equal to the greater of 100% of the principal amount of the notes to be redeemed or an applicable “make-whole” amount, plus accrued and unpaid interest.

5. INVESTIGATIONS, CLAIMS AND LITIGATION

On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed-price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS have been delivered. The company’s lawsuit is based on various theories of liability. The complaint seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $410 million, less certain amounts outstanding under the contract. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On April 2, 2013, the U.S. Department of Justice informed the company of a False Claims Act complaint relating to the FSS contract that was filed under seal by a relator in June 2011 in the U.S. District

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Court for the Eastern District of Virginia. On June 3, 2013, the United States filed a Notice informing the Court that the United States had decided not to intervene in this case. The relator alleged that the company violated the False Claims Act in a number of ways with respect to the FSS contract, alleged damage to the USPS in an amount of at least approximately $179 million annually, alleged that he was improperly discharged in retaliation, and sought an unspecified partial refund of the contract purchase price, penalties, attorney’s fees and other costs of suit. The relator later voluntarily dismissed his retaliation claim and reasserted it in a separate arbitration, which he also ultimately voluntarily dismissed. On September 5, 2014, the court granted the company’s motion for summary judgment and ordered the relator’s False Claims Act case be dismissed with prejudice. On February 16, 2018, both the company and the United States filed motions to dismiss many of the claims and counterclaims referenced above, in whole or in part. The United States also filed a motion seeking to amend its answer and counterclaim, including to reduce its counterclaim to approximately $193 million, which the court granted on June 11, 2018. On October 17, 2018, the court granted in part and denied in part the parties’ motions to dismiss. On February 3, 2020, the parties commenced what was expected to be a seven-week trial. The first four weeks of trial ~~have~~ concluded, but the court postponed the remaining estimated three weeks ~~until May 2020~~ as a result of COVID-19-related concerns. Trial is currently scheduled to resume in October 2020. Although the ultimate outcome of these matters (“the FSS matters,” collectively), including any possible loss, cannot be predicted or reasonably estimated at this time, the company intends vigorously to pursue and defend the FSS matters.

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On August 8, 2013, the company received a court-appointed expert’s report in litigation pending in the Second Federal Court of the Federal District in Brazil brought by the Brazilian Post and Telegraph Corporation (ECT), a Brazilian state-owned entity, against Solystic SAS (Solystic), a French subsidiary of the company, and 2 of its consortium partners. In this suit, commenced on December 17, 2004, ECT alleges the consortium breached its contract with ECT and seeks damages of approximately R$111 million (the equivalent of approximately ~~$22~~$20 million as of ~~March 31,~~June 30, 2020), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law, which amounts could be significant over time. The original suit sought R$89 million (the equivalent of approximately ~~$17~~$16 million as of ~~March 31,~~June 30, 2020) in damages. In October 2013, ECT asserted an additional damage claim of R$22 million (the equivalent of approximately $4 million as of ~~March 31,~~June 30, 2020). In its counterclaim, Solystic alleges ECT breached the contract by wrongfully refusing to accept the equipment Solystic had designed and built and seeks damages of approximately €31 million (the equivalent of approximately ~~$34~~$35 million as of ~~March 31,~~June 30, 2020), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law. The Brazilian court retained an expert to consider certain issues pending before it. On August 8, 2013 and September 10, 2014, the company received reports from the expert, which contain some recommended findings relating to liability and the damages calculations put forth by ECT. Some of the expert’s recommended findings were favorable to the company and others were favorable to ECT. In November 2014, the parties submitted comments on the expert’s most recent report. On June 16, 2015, the court published a decision denying the parties’ request to present oral testimony. In a decision dated November 13, 2018, the trial court ruled in ECT’s favor on one of its claims against Solystic, and awarded damages of R$41 million (the equivalent of approximately $8 million as of ~~March 31,~~June 30, 2020) against Solystic and its consortium partners, with that amount to be adjusted for inflation and interest from November 2004 through any appeal, in accordance with the Manual of Calculations of the Federal Justice, as well as attorneys’ fees. On March 22, 2019, ECT appealed the trial court’s decision to the intermediate court of appeals. Solystic filed its appeal on April 11, 2019. The parties ~~are assessing whether there is~~have executed a ~~possible path~~settlement agreement in this matter and have filed it with the court for ~~a negotiated resolution of the dispute.~~approval.

We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, we have worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation, the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to these environmental conditions. The remediation standards or requirements to which we are subject are being reconsidered and ~~may change~~are changing and costs may increase materially. As discussed in Note 6, the State of New York issued a Feasibility Study and an Amended Record of Decision, seeking to impose additional remedial requirements. The company is engaged in discussions with the State of New York and certain other potentially responsible parties. The State of New York has said that, among other things, it is also evaluating potential natural resource damages. In addition, we are a party to various, and expect to become a party to additional, legal proceedings and disputes related to remediation, costs, allowability and/or alleged environmental impacts in Bethpage, including with federal and state entities (including the Navy, Defense Contract Management Agency, the state, local municipalities and water ~~districts,~~districts) and insurance carriers, as well as class action and individual plaintiffs alleging personal injury and property

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damage and seeking both monetary and non-monetary relief. These Bethpage matters could result in additional costs, fines, penalties, sanctions, compensatory or other damages (including natural resource damages), determinations on allocation, allowability and coverage, and non-monetary relief. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these aggregate Bethpage matters.

The company is a party to various other investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of ~~March 31,~~June 30, 2020, or its annual results of operations and/or cash flows.

6. COMMITMENTS AND CONTINGENCIES

U.S. Government Cost Claims and Contingencies

From time to time, the company is advised of claims by the U.S. government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and U.S. government representatives engage in discussions to enable the company to evaluate the merits of these claims, as

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well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for such potential disallowed costs. Such provisions are reviewed periodically using the most recent information available. The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of ~~March 31,~~June 30, 2020, or its annual results of operations and/or cash flows.

Recently, the U.S. government has raised questions about an interest rate assumption used by the company to determine our CAS pension ~~cost~~expense in previous ~~years.~~years and in our current forward pricing rate proposal. On June 1, 2020, the government provided written notice that the assumptions the company used during the period 2013-2019 were potentially noncompliant with CAS. We are ~~currently~~ engaging with the government to address their ~~questions. Although~~questions, and are preparing our formal response, which we believe ~~our pension-related~~demonstrates the appropriateness of the assumptions ~~are appropriate,~~used. However, the sensitivity to changes in interest rate assumptions makes it reasonably possible the outcome of this matter could have a material adverse effect on our financial position, results of operations and/or cash flows, although we are not currently able to estimate a range of any potential loss.

Environmental Matters

The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S. government contracts as of ~~March 31,~~June 30, 2020 and December 31, 2019:


$ in millions	Accrued Costs⁽¹⁾⁽²⁾		Reasonably Possible Future Costs in Excess of Accrued Costs⁽²⁾		Deferred Costs⁽³⁾		Accrued Costs⁽¹⁾⁽²⁾		Reasonably Possible Future Costs in Excess of Accrued Costs⁽²⁾		Deferred Costs⁽³⁾
March 31, 2020	$	533	$	448	$	439
June 30, 2020							$	570	$	452	$	478
December 31, 2019	531		448		436		531		448		436

⁽¹⁾As of ~~March 31,~~June 30, 2020, ~~$163~~$173 million is recorded in Other current liabilities and ~~$370~~$397 million is recorded in Other non-current liabilities.

⁽²⁾Estimated remediation costs are not discounted to present value. The reasonably possible future costs in excess of accrued costs do not take into consideration amounts expected to be recoverable through overhead charges on U.S. government contracts.

⁽³⁾As of ~~March 31,~~June 30, 2020, ~~$131~~$144 million is deferred in Prepaid expenses and other current assets and ~~$308~~$334 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.

Although management cannot predict whether new information gained as our environmental remediation projects progress, or as changes in facts and circumstances occur, will materially affect the estimated liability accrued, except with respect to Bethpage, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of ~~March 31,~~June 30, 2020, or its annual results of operations and/or cash flows. With respect to Bethpage, the State of New York issued a Feasibility Study and an Amended Record of Decision, proposing to impose additional remedial requirements. The company is engaged in discussions with the State of New York and other potentially

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responsible parties. As discussed in Note 5, the remediation standards or requirements to which we are subject are being reconsidered and ~~may change~~are changing and costs may increase materially.

Financial Arrangements

In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At ~~March 31,~~June 30, 2020, there were ~~$469~~$460 million of stand-by letters of credit and guarantees and ~~$182~~$79 million of surety bonds outstanding.

Commercial Paper

The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to $2.0 billion. At ~~March 31,~~June 30, 2020, there were ~~$744 million of outstanding short-term~~0 commercial paper borrowings at a weighted-average interest rate of 1.88 percent that have original maturities of three months or less from the date of issuance. The outstanding balance of commercial paper borrowings is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.outstanding.

Credit Facilities

The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of $2.0 billion (the “2018 Credit Agreement”) that matures in August 2024 and is intended to support the company’s commercial paper program and other general corporate purposes. Commercial paper borrowings reduce the amount available for

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borrowing under the 2018 Credit Agreement. At ~~March 31,~~June 30, 2020, there was 0 balance outstanding under this facility.

In December 2016, a subsidiary of the company entered into a two-year credit facility, with two additional one-year option periods, in an aggregate principal amount of £120 million (the equivalent of approximately ~~$149~~$148 million as of ~~March 31,~~June 30, 2020) (the “2016 Credit Agreement”). The company exercised the second option to extend the maturity to December 2020. The 2016 Credit Agreement is guaranteed by the company. At ~~March 31,~~June 30, 2020, there was ~~£55~~£50 million (the equivalent of approximately ~~$68~~$62 million) outstanding under this facility, which bears interest at a rate of LIBOR plus 1.10 percent. All of the borrowings outstanding under this facility are recorded in Other current liabilities in the unaudited condensed consolidated statement of financial position.

At ~~March 31,~~June 30, 2020, the company was in compliance with all covenants under its credit agreements.

7. RETIREMENT BENEFITS

The cost to the company of its pension and other postretirement benefit (OPB) plans is shown in the following table:


	Three Months Ended March 31												Three Months Ended June 30												Six Months Ended June 30
	Pension Benefits						OPB						Pension Benefits						OPB						Pension Benefits						OPB
$ in millions	2020			2019			2020			2019			2020			2019			2020			2019			2020			2019			2020			2019
Components of net periodic benefit cost (benefit)
Service cost	$	102		$	92		$	4		$	4		$	102		$	92		$	5		$	4		$	204		$	184		$	9		$	8
Interest cost	307			340			17			20			306			340			16			20			613			680			33			40
Expected return on plan assets	(594		)	(525		)	(26		)	(23		)	(594		)	(526		)	(25		)	(23		)	(1,188		)	(1,051		)	(51		)	(46		)
Amortization of prior service credit	(15		)	(15		)	1			(1		)	(15		)	(14		)	1			—			(30		)	(29		)	2			(1		)
Net periodic benefit cost (benefit)	$	(200	)	$	(108	)	$	(4	)	$	—		$	(201	)	$	(108	)	$	(3	)	$	1		$	(401	)	$	(216	)	$	(7	)	$	1

Employer Contributions

The company sponsors defined benefit pension and OPB plans, as well as defined contribution plans. We fund our defined benefit pension plans annually in a manner consistent with the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006.

Contributions made by the company to its retirement plans are as follows:


	Three Months Ended March 31				Three Months Ended June 30				Six Months Ended June 30
$ in millions	2020		2019		2020		2019		2020		2019
Defined benefit pension plans	$	20	$	23	$	26	$	23	$	46	$	46
OPB plans	12		12		11		12		23		24
Defined contribution plans	256		191		100		88		356		279

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8. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS

Stock Awards

The following table presents the number of restricted stock rights (RSRs) and restricted performance stock rights (RPSRs) granted to employees under the company’s long-term incentive stock plan and the grant date aggregate fair value of those stock awards for the periods presented:


	Three Months Ended March 31				Six Months Ended June 30
in millions	2020		2019		2020		2019
RSRs granted	0.1		0.1		0.1		0.1
RPSRs granted	0.2		0.2		0.2		0.2
Grant date aggregate fair value	$	87	$	91	$	91	$	92

RSRs typically vest on the third anniversary of the grant date, while RPSRs generally vest and pay out based on the achievement of financial metrics over a three-year period.

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Cash Awards

The following table presents the minimum and maximum aggregate payout amounts related to cash units (CUs) and cash performance units (CPUs) granted to employees in the periods presented:


	Three Months Ended March 31				Six Months Ended June 30
$ in millions	2020		2019		2020		2019
Minimum aggregate payout amount	$	31	$	36	$	31	$	36
Maximum aggregate payout amount	175		203		175		203

CUs typically vest and settle in cash on the third anniversary of the grant date, while CPUs generally vest and pay out in cash based on the achievement of financial metrics over a three-year period.

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9. SEGMENT INFORMATION

Effective January 1, 2020, the company reorganized its operating sectors to better align the company’s broad portfolio to serve its customers’ needs. The 4 new sectors, which also comprise our reportable segments, are Aeronautics Systems, Defense Systems, Mission Systems and Space Systems.

As discussed in Note 1, beginning in the second quarter of 2020, the company no longer considers certain unallowable costs as part of management’s evaluation of segment operating performance. As a result, certain unallowable costs, which were previously included in segment operating results, are now reported in Unallocated corporate expense within operating income. This change has been applied retrospectively in the amounts below. See Part II, Item 5 for further information regarding the impact of this change on the company’s current and prior period segment information.

The following table presents sales and operating income by segment:


	Three Months Ended March 31						Three Months Ended June 30						Six Months Ended June 30
$ in millions	2020			2019			2020			2019			2020			2019
Sales
Aeronautics Systems	$	2,843		$	2,818		$	2,925		$	2,721		$	5,768		$	5,539
Defense Systems	1,881			1,768			1,886			1,916			3,767			3,684
Mission Systems	2,347			2,210			2,446			2,404			4,793			4,614
Space Systems	1,948			1,801			2,048			1,788			3,996			3,589
Intersegment eliminations	(399		)	(408		)	(421		)	(373		)	(820		)	(781		)
Total sales	8,620			8,189			8,884			8,456			17,504			16,645
Operating income
Aeronautics Systems	259			308			310			299			573			610
Defense Systems	196			202			217			212			415			416
Mission Systems	348			319			347			338			700			661
Space Systems	199			188			209			193			411			383
Intersegment eliminations	(49		)	(50		)	(52		)	(49		)	(101		)	(99		)
Total segment operating income	953			967			1,031			993			1,998			1,971
Net FAS (service)/CAS pension adjustment	105			108			103			107			208			215
Unallocated corporate expense	(124		)	(139		)	(140		)	(154		)	(278		)	(304		)
Total operating income	$	934		$	936		$	994		$	946		$	1,928		$	1,882

Net FAS (Service)/CAS Pension Adjustment

For financial statement purposes, we account for our employee pension plans in accordance with FAS. However, the cost of these plans is charged to our contracts in accordance with the Federal Acquisition Regulation (FAR) and the related U.S. Government Cost Accounting Standards (CAS). The net FAS (service)/CAS pension adjustment reflects the difference between CAS pension expense included as cost in segment operating income and the service cost component of FAS expense included in total operating income.

Unallocated Corporate Expense

Unallocated corporate expense includes the portion of corporate costs not considered allowable or allocable under applicable CAS or FAR, and therefore not allocated to the segments, such as a portion of management and administration, legal, environmental, compensation, retiree benefits, advertising and other corporate unallowable costs. Unallocated corporate expense also includes costs not considered part of management’s evaluation of segment

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operating performance, such as amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business ~~combinations.~~combinations, as well as certain compensation and other costs.

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Disaggregation of Revenue


Sales by Customer Type	Three Months Ended March 31								Three Months Ended June 30								Six Months Ended June 30
	2020				2019				2020				2019				2020				2019
$ in millions	$		%⁽³⁾		$		%⁽³⁾		$		%⁽³⁾		$		%⁽³⁾		$		%⁽³⁾		$		%⁽³⁾
Aeronautics Systems
U.S. government⁽¹⁾	$	2,361	83	%	$	2,334	83	%	$	2,477	85	%	$	2,238	82	%	$	4,838	84	%	$	4,572	82	%
International⁽²⁾	444		16	%	435		15	%	407		14	%	439		16	%	851		15	%	874		16	%
Other customers	12		—	%	25		1	%	12		—	%	20		1	%	24		—	%	45		1	%
Intersegment sales	26		1	%	24		1	%	29		1	%	24		1	%	55		1	%	48		1	%
Aeronautics Systems sales	2,843		100	%	2,818		100	%	2,925		100	%	2,721		100	%	5,768		100	%	5,539		100	%
Defense Systems
U.S. government⁽¹⁾	1,259		67	%	1,141		65	%	1,305		69	%	1,281		67	%	2,564		68	%	2,422		66	%
International⁽²⁾	340		18	%	363		21	%	316		17	%	365		19	%	656		18	%	728		20	%
Other customers	111		6	%	97		5	%	85		4	%	106		5	%	196		5	%	203		5	%
Intersegment sales	171		9	%	167		9	%	180		10	%	164		9	%	351		9	%	331		9	%
Defense Systems sales	1,881		100	%	1,768		100	%	1,886		100	%	1,916		100	%	3,767		100	%	3,684		100	%
Mission Systems
U.S. government⁽¹⁾	1,671		71	%	1,613		73	%	1,776		73	%	1,746		73	%	3,447		72	%	3,359		73	%
International⁽²⁾	483		21	%	376		17	%	468		19	%	465		19	%	951		20	%	841		18	%
Other customers	17		1	%	24		1	%	18		1	%	29		1	%	35		1	%	53		1	%
Intersegment sales	176		7	%	197		9	%	184		7	%	164		7	%	360		7	%	361		8	%
Mission Systems sales	2,347		100	%	2,210		100	%	2,446		100	%	2,404		100	%	4,793		100	%	4,614		100	%
Space Systems
U.S. government⁽¹⁾	1,803		93	%	1,669		93	%	1,911		93	%	1,679		94	%	3,714		93	%	3,348		93	%
International⁽²⁾	68		3	%	43		2	%	70		4	%	32		2	%	138		3	%	75		2	%
Other customers	51		3	%	69		4	%	39		2	%	56		3	%	90		3	%	125		4	%
Intersegment sales	26		1	%	20		1	%	28		1	%	21		1	%	54		1	%	41		1	%
Space Systems sales	1,948		100	%	1,801		100	%	2,048		100	%	1,788		100	%	3,996		100	%	3,589		100	%
Total
U.S. government⁽¹⁾	7,094		83	%	6,757		83	%	7,469		84	%	6,944		82	%	14,563		83	%	13,701		82	%
International⁽²⁾	1,335		15	%	1,217		15	%	1,261		14	%	1,301		16	%	2,596		15	%	2,518		15	%
Other customers	191		2	%	215		2	%	154		2	%	211		2	%	345		2	%	426		3	%
Total Sales	$	8,620	100	%	$	8,189	100	%	$	8,884	100	%	$	8,456	100	%	$	17,504	100	%	$	16,645	100	%


⁽¹⁾	Sales to the U.S. government include sales from contracts for which we are the prime contractor, as well as those for which we are a subcontractor and the ultimate customer is the U.S. government. Each of the company’s segments derives substantial revenue from the U.S. government.

⁽²⁾ International sales include sales from contracts for which we are the prime contractor, as well as those for which we are a subcontractor and the ultimate customer is an international customer. These sales include foreign military sales contracted through the U.S. government.

⁽³⁾ Percentages calculated based on total segment sales.

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Sales by Contract Type	Three Months Ended March 31								Three Months Ended June 30								Six Months Ended June 30
	2020				2019				2020				2019				2020				2019
$ in millions	$		%⁽¹⁾		$		%⁽¹⁾		$		%⁽¹⁾		$		%⁽¹⁾		$		%⁽¹⁾		$		%⁽¹⁾
Aeronautics Systems
Cost-type	$	1,343	48	%	$	1,312	47	%	$	1,426	49	%	$	1,312	49	%	$	2,769	48	%	$	2,624	48	%
Fixed-price	1,474		52	%	1,482		53	%	1,470		51	%	1,385		51	%	2,944		52	%	2,867		52	%
Intersegment sales	26				24				29				24				55				48
Aeronautics Systems sales	2,843				2,818				2,925				2,721				5,768				5,539
Defense Systems
Cost-type	628		37	%	623		39	%	582		34	%	632		36	%	1,210		35	%	1,255		37	%
Fixed-price	1,082		63	%	978		61	%	1,124		66	%	1,120		64	%	2,206		65	%	2,098		63	%
Intersegment sales	171				167				180				164				351				331
Defense Systems sales	1,881				1,768				1,886				1,916				3,767				3,684
Mission Systems
Cost-type	846		39	%	835		41	%	895		40	%	870		39	%	1,741		39	%	1,705		40	%
Fixed-price	1,325		61	%	1,178		59	%	1,367		60	%	1,370		61	%	2,692		61	%	2,548		60	%
Intersegment sales	176				197				184				164				360				361
Mission Systems sales	2,347				2,210				2,446				2,404				4,793				4,614
Space Systems
Cost-type	1,398		73	%	1,306		73	%	1,468		73	%	1,298		73	%	2,866		73	%	2,604		73	%
Fixed-price	524		27	%	475		27	%	552		27	%	469		27	%	1,076		27	%	944		27	%
Intersegment sales	26				20				28				21				54				41
Space Systems sales	1,948				1,801				2,048				1,788				3,996				3,589
Total
Cost-type	4,215		49	%	4,076		50	%	4,371		49	%	4,112		49	%	8,586		49	%	8,188		49	%
Fixed-price	4,405		51	%	4,113		50	%	4,513		51	%	4,344		51	%	8,918		51	%	8,457		51	%
Total Sales	$	8,620			$	8,189			$	8,884			$	8,456			$	17,504			$	16,645


⁽¹⁾	Percentages calculated based on external customer sales.

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Sales by Geographic Region	Three Months Ended March 31								Three Months Ended June 30								Six Months Ended June 30
	2020				2019				2020				2019				2020				2019
$ in millions	$		%⁽²⁾		$		%⁽²⁾		$		%⁽²⁾		$		%⁽²⁾		$		%⁽²⁾		$		%⁽²⁾
Aeronautics Systems
United States	$	2,373	84	%	$	2,359	85	%	$	2,489	86	%	$	2,258	84	%	$	4,862	85	%	$	4,617	84	%
Asia/Pacific	207		8	%	233		8	%	202		7	%	215		8	%	409		7	%	448		8	%
All other⁽¹⁾	237		8	%	202		7	%	205		7	%	224		8	%	442		8	%	426		8	%
Intersegment sales	26				24				29				24				55				48
Aeronautics Systems sales	2,843				2,818				2,925				2,721				5,768				5,539
Defense Systems
United States	1,370		80	%	1,238		77	%	1,390		82	%	1,387		79	%	2,760		81	%	2,625		78	%
Asia/Pacific	82		5	%	88		6	%	107		6	%	125		7	%	189		5	%	213		6	%
All other⁽¹⁾	258		15	%	275		17	%	209		12	%	240		14	%	467		14	%	515		16	%
Intersegment sales	171				167				180				164				351				331
Defense Systems sales	1,881				1,768				1,886				1,916				3,767				3,684
Mission Systems
United States	1,688		78	%	1,637		81	%	1,794		79	%	1,775		79	%	3,482		79	%	3,412		80	%
Asia/Pacific	176		8	%	135		7	%	191		9	%	142		6	%	367		8	%	277		7	%
All other⁽¹⁾	307		14	%	241		12	%	277		12	%	323		15	%	584		13	%	564		13	%
Intersegment sales	176				197				184				164				360				361
Mission Systems sales	2,347				2,210				2,446				2,404				4,793				4,614
Space Systems
United States	1,854		97	%	1,738		98	%	1,950		97	%	1,735		98	%	3,804		97	%	3,473		98	%
Asia/Pacific	5		—	%	12		—	%	5		—	%	2		—	%	10		—	%	14		—	%
All other⁽¹⁾	63		3	%	31		2	%	65		3	%	30		2	%	128		3	%	61		2	%
Intersegment sales	26				20				28				21				54				41
Space Systems sales	1,948				1,801				2,048				1,788				3,996				3,589
Total
United States	7,285		85	%	6,972		85	%	7,623		86	%	7,155		84	%	14,908		85	%	14,127		85	%
Asia/Pacific	470		5	%	468		6	%	505		6	%	484		6	%	975		6	%	952		6	%
All other⁽¹⁾	865		10	%	749		9	%	756		8	%	817		10	%	1,621		9	%	1,566		9	%
Total Sales	$	8,620			$	8,189			$	8,884			$	8,456			$	17,504			$	16,645


⁽¹⁾	All other is principally comprised of Europe and the Middle East.


⁽²⁾	Percentages calculated based on external customer sales.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Northrop Grumman Corporation

Falls Church, Virginia

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of ~~March 31,~~June 30, 2020, and the related condensed consolidated statements of earnings and comprehensive income ~~cash flows~~ and changes in shareholders’ equity for the three-month and six-month periods ended ~~March 31,~~June 30, 2020 and 2019, and of cash flows for the six-month periods ended June 30, 2020 and 2019, and the related notes (collectively referred to as the “interim financial information”). Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of December 31, 2019, and the related consolidated statements of earnings and comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January 29, 2020, we expressed an unqualified opinion on those consolidated financial statements, which included an explanatory paragraph regarding the Company’s change in its method of accounting for leases in 2019 due to the adoption of ASC 842, Leases. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2019, is fairly stated, in all material respects, in relation to the audited consolidated statement of financial position from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Deloitte & Touche LLP

McLean, Virginia

~~April 28,~~July 29, 2020

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global aerospace and defense company. We use our broad portfolio of capabilities and technologies to create and deliver innovative platforms, systems and solutions in space; manned and autonomous airborne systems, including strike; hypersonics; cyber; command, control, communications and computers, intelligence, surveillance and reconnaissance (C4ISR); and logistics and modernization. We participate in many high-priority defense and government programs in the United States (U.S.) and abroad. We conduct most of our business with the U.S. government, principally the Department of Defense (DoD) and intelligence community. We also conduct business with foreign, state and local governments, as well as commercial customers.

The following discussion should be read along with the financial statements included in this Form 10-Q, as well as our 2019 Annual Report on Form 10-K, ~~and~~ the Form 8-K that we ~~expect to file~~filed with the SEC ~~immediately after filing this Form 10-Q,~~on April 29, 2020, which recasts the disclosures in certain portions of the 2019 Annual Report on Form 10-K to reflect changes in the company’s reportable ~~segments.~~segments, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. These documents provide additional information on our business and the environment in which we operate and our operating results.

COVID-19

Coronavirus disease 2019 (“COVID-19”) was first reported in late 2019 and has since dramatically impacted the global health and economic environment, including millions of confirmed cases, business slowdowns or shutdowns, government challenges and market volatility. In March 2020, the World Health Organization characterized COVID-19 as a global pandemic, and the President declared a national emergency concerning the COVID-19 outbreak. The company’s leadership, our crisis management and ~~Crisis Management Teams have~~business resumption teams, and local site leadership continue closely ~~monitored~~to monitor and address the developments, including the impact on our company, our employees, our customers, our suppliers and our communities. ~~They have~~The company has considered and continues to consider guidance from the Centers for Disease Control (CDC), other health organizations, governments and our ~~customers.~~customers, among others. We have taken, and continue to take, robust actions to help protect the health, safety and well-being of our employees, to support our suppliers and local communities, and to continue to serve our customers. Our goals have been to lessen the immediate potential adverse impacts, both health and economic, and to continue to position the company for long-term success. Like the communities in which we serve, our actions have varied depending on the spread of COVID-19 and local health requirements, the needs of our employees and the needs of our business. Among other actions, we have required or enabled employees to work from home or remotely where practicable, and expanded IT and communication support to enhance their productivity; adjusted work spaces and shift schedules to facilitate social distancing for those who continue to work in our facilities; ~~implemented visitor protocols and~~ enhanced cleaning and disinfecting procedures at our facilities; required face coverings and worked to procure and distribute personal protective equipment (“PPE”); implemented health checks and visitor protocols; restricted travel; provided additional benefits including paid time off for those most at risk; and contributed financial and manufacturing resources to supporting critical national requirements, such as for PPE. Along with the Northrop Grumman Foundation, we have provided grants for global, national and local organizations that support frontline healthcare workers, address food insecurity, advance efforts for vaccines, increase student access to technology and provide support to vulnerable populations; donated PPE items to emergency response teams and healthcare professionals, including N95 masks and Tyvek suits; and established a COVID-19 relief matching gift program for employees.

~~As a result of~~Earlier in the COVID-19 pandemic, many state and local jurisdictions ~~have~~ implemented mandatory stay-at-home or shelter-in-place orders. ~~To date, most~~Most of those orders ~~have~~ exempted some or all of the defense industrial base, including Northrop Grumman and many of our suppliers, as part of the essential or critical infrastructure. Our facilities have largely remained open and many of our employees who cannot work remotely are continuing to come to work and support our customers’ national security and mission-essential operations. More recently, state and local jurisdictions started to lift mandatory stay-at-home or shelter-in-place orders and started gradually to ease restrictions. We started to implement return to office plans to allow some employees who had been working remotely slowly to return to the workplace. At our facilities, we generally saw employee absenteeism decrease and productivity increase during the second quarter. Most recently, as cases have resurged in parts of our country, including areas in which we maintain large facilities, we have seen governments slow or reverse efforts to reopen or shift into later phases of recovery, with increased risks to our operations. Throughout, we have worked to adapt and to take robust actions to protect the health, safety and well-being of our employees and to serve our customers, considering, among other things, state and local requirements and guidance from the CDC. We have also taken various steps in efforts to support our

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suppliers, with a particular focus on critical small and midsized business partners, including passing through increased progress payments from DoD to our suppliers and accelerating payments to certain suppliers.

Even though we have been able to continue many of our operations, we have experienced and expect to continue to experience certain ~~increasing~~increased costs to maintain our operations and address reductions in productivity, including as a result of actions to protect health; because of illness, quarantines, and absenteeism; as a result of government actions; and because of disruption and stress among our suppliers and customers. We continue to monitor this situation closely and cannot predict how it will ~~change.~~change, including the extent of any increase in the number of COVID-19 cases and the costs and impacts to us. Our customers have generally continued to make timely payments, and we are working with them to consider the possibility of additional cost recoveries. Again, however, our customers are facing tremendous demands and we cannot predict how this may change and how they will continue to allocate resources.

~~Financial~~COVID-19-related impacts ~~related to COVID-19, including our actions and costs in response to the pandemic, were not material to~~reduced the company’s ~~first~~second quarter ~~2020 financial position, results of operations or cash flows. Going forward, we currently expect the COVID–19 crisis to result in a reduction to~~ 2020 revenue and operating ~~margins~~income, in ~~portions~~particular at Aeronautics and Mission Systems; however, those impacts were less significant than we initially expected. Based on what we understand today, we do not currently expect COVID-19-related impacts to materially reduce our revenue or operating income during the second half of the year. However, our ~~business driven primarily by supplier disruption, changes in employee productivity, and related program delays or challenges. Our~~ employees, suppliers and customers, the company and our global community are facing

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tremendous challenges and we cannot predict how this dynamic situation will evolve or the impact it will ~~have.~~have on the company. For further information on the potential impact to the company of COVID-19, see the section entitled “Risk Factors”. in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

U.S. Political and Economic Environment

Since the filing of our 2019 Annual Report on Form 10-K, the President released his budget request for fiscal year 2021 (FY21) on February 10, 2020. The FY21 budget request includes $746 billion for national security, which will be the subject of debate in Congress. The FY21 budget request addresses various capabilities highlighted in the U.S. National Security Strategy, the National Defense Strategy and the Missile Defense Review. We believe our capabilities, particularly in space, missiles, missile defense, hypersonics, counter-hypersonics, survivable aircraft and ~~cyber~~mission systems will continue to allow for long-term profitable growth in our business in support of our customers’ needs. Congress has enacted emergency COVID-19 relief bills addressing certain impacts of the ~~pandemic.~~pandemic and is continuing to consider other responses to the COVID-19 crisis.

CONSOLIDATED OPERATING RESULTS

Selected financial highlights are presented in the table below:


	Three Months Ended March 31						%		Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions, except per share amounts	2020			2019			Change		2020			2019			Change		2020			2019			Change
Sales	$	8,620		$	8,189		5	%	$	8,884		$	8,456		5	%	$	17,504		$	16,645		5	%
Operating costs and expenses	7,686			7,253			6	%	7,890			7,510			5	%	15,576			14,763			6	%
Operating costs and expenses as a % of sales	89.2		%	88.6		%			88.8		%	88.8		%			89.0		%	88.7		%
Operating income	934			936			—	%	994			946			5	%	1,928			1,882			2	%
Operating margin rate	10.8		%	11.4		%			11.2		%	11.2		%			11.0		%	11.3		%
Federal and foreign income tax expense	185			171			8	%	198			167			19	%	383			338			13	%
Effective income tax rate	17.6		%	16.5		%			16.5		%	16.2		%			17.0		%	16.4		%
Net earnings	868			863			1	%	1,005			861			17	%	1,873			1,724			9	%
Diluted earnings per share	$	5.15		$	5.06		2	%	$	6.01		$	5.06		19	%	$	11.16		$	10.11		10	%

Sales

~~First~~Current Quarter

Second quarter 2020 sales increased ~~$431~~$428 million or 5 percent, primarily due to higher sales at Space Systems and Aeronautics Systems.

Year to Date

Year to date 2020 sales increased $859 million, or 5 percent, due to higher sales at all four sectors.

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See “Segment Operating Results” below for further information by segment and “Product and Service Analysis” for product and service detail. See Note 9 to the 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

~~First~~Current Quarter

Second quarter 2020 operating income increased $48 million, or 5 percent, primarily due to an increase in segment operating income and lower unallocated corporate expense. Second quarter 2020 operating margin rate of 11.2 percent was comparable to the prior year period. First quarter 2020 operating margin rate declined to 10.8 percent reflecting lower segment operating margins at Aeronautics Systems and Defense Systems, partially offset by a decrease in unallocated corporate expense.

~~First~~Second quarter 2020 general and administrative (G&A) costs as a percentage of sales ~~decreased~~of 9.4 percent was comparable to ~~9.1 percent from 9.3~~the prior year period.

Year to Date

Year to date 2020 operating income increased $46 million, or 2 percent, primarily due to ~~cost management~~an increase in segment operating income and ~~higher sales.~~lower unallocated corporate expense. Year to date 2020 operating margin rate declined to 11.0 percent reflecting a lower segment operating margin rate, partially offset by a decrease in unallocated corporate expense.

Year to date 2020general and administrative (G&A) costs as a percentage of sales of 9.3 percent was comparable to the prior year period.

See “Segment Operating Results” below for further information by segment. For information regarding product and service operating costs and expenses, see “Product and Service Analysis” below.

Federal and Foreign Income Taxes

Current Quarter

The ~~first~~second quarter 2020 effective tax rate of 16.5 percent was generally comparable to the prior year period. See Note 3 to the financial statements for additional information.

Year to Date

Net Earnings

~~First~~Current Quarter

Second quarter 2020 net earnings ~~were comparable~~increased $144 million, or 17 percent, primarily due to ~~the prior year period and include~~ a ~~$102~~$103 million increase in our FAS (non-service) pension benefit, a $48 million increase in operating income and a $41 million increase in Other, net, largely due to higher returns on marketable securities related to our non-qualified benefit plans, partially offset by a ~~$94~~$31 million increase in tax expense.

Year to Date

Year to date 2020 net earnings increased $149 million, or 9 percent, primarily due to a $205 million increase in our FAS (non-service) pension benefit and a $46 million increase in operating income, partially offset by a $53 million decrease in Other, net, ~~as a result of~~largely due to lower returns on marketable securities related to our non-qualified benefit ~~plans.~~

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plans, and a $45 million increase in tax expense.

Diluted Earnings Per Share

~~First~~Current Quarter

Second quarter 2020 diluted earnings per share increased 219 percent, reflecting a 117 percent increase in net earnings and a 12 percent reduction in weighted-average diluted shares outstanding.

Year to Date

Year to date 2020 diluted earnings per share increased 10 percent, reflecting a 9 percent increase in net earnings and a 2 percent reduction in weighted-average diluted shares outstanding.

SEGMENT OPERATING RESULTS

Basis of Presentation

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Beginning in the second quarter of 2020, the company no longer considers certain unallowable costs as part of management’s evaluation of segment operating performance. As a result, certain unallowable costs, which were previously included in segment operating results, are now reported in Unallocated corporate expense within operating income. This change has been applied retrospectively in the accompanying financial information. See Notes 1 and 9 to the financial statements and Part II, Item 5 for further information regarding the impact of this change on the company’s current and prior period segment information.

We present our sectors in the following business areas, which are reported in a manner reflecting core capabilities:



Aeronautics Systems	Defense Systems	Mission Systems	Space Systems
Autonomous Systems	Battle Management & Missile Systems	Airborne Sensors & Networks	Launch & Strategic Missiles
Manned Aircraft	Mission Readiness	Cyber & Intelligence Mission Solutions	Space
		Maritime/Land Systems & Sensors
		Navigation, Targeting & Survivability

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

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Segment Operating Income and Margin Rate

Segment operating income, as reconciled in the table below, and segment operating margin rate (segment operating income divided by sales) are non-GAAP (accounting principles generally accepted in the United States of America) measures that reflect total earnings from our four segments, including allocated pension expense we have recognized under the Federal Acquisition Regulation (FAR) and the related U.S. Government Cost Accounting Standards (CAS), and excluding FAS pension expense and unallocated corporate items (certain corporate-level expenses, which are not considered allowable or allocable under applicable CAS or FAR, 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.


	Three Months Ended March 31						%		Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions	2020			2019			Change		2020			2019			Change		2020			2019			Change
Segment operating income	$	953		$	967		(1	)%	$	1,031		$	993		4	%	$	1,998		$	1,971		1	%
Segment operating margin rate	11.1		%	11.8		%			11.6		%	11.7		%			11.4		%	11.8		%
CAS pension expense	207			200			4	%	205			199			3	%	412			399			3	%
Less: FAS (service) pension expense	(102		)	(92		)	11	%	(102		)	(92		)	11	%	(204		)	(184		)	11	%
Net FAS (service)/CAS pension adjustment	105			108			(3	)%	103			107			(4	)%	208			215			(3	)%
Intangible asset amortization and PP&E step-up depreciation	(82		)	(96		)	(15	)%	(77		)	(98		)	(21	)%	(159		)	(194		)	(18	)%
Other unallocated corporate expense	(42		)	(43		)	(2	)%	(63		)	(56		)	13	%	(119		)	(110		)	8	%
Unallocated corporate expense	(124		)	(139		)	(11	)%	(140		)	(154		)	(9	)%	(278		)	(304		)	(9	)%
Operating income	$	934		$	936		—	%	$	994		$	946		5	%	$	1,928		$	1,882		2	%

~~First~~

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Current Quarter

Second quarter 2020 segment operating income ~~decreased $14~~increased $38 million, or 4 percent, and reflects higher segment operating income at all four sectors. Segment operating margin rate was comparable to the prior year period and reflects lower segment operating margin rates at Space Systems and Aeronautics Systems, partially offset by a higher segment operating margin rate at Defense Systems.

Year to Date

Year to date 2020 segment operating income increased $27 million, or 1 percent, and reflects ~~lower segment operating income at Aeronautics Systems, partially offset by~~ higher ~~segment~~ operating income at Mission Systems and Space Systems, partially offset by lower operating income at Aeronautics Systems. Segment operating margin rate decreased to ~~11.1~~11.4 percent primarily due to a lower segment operating ~~margins~~margin rate at Aeronautics ~~Systems and Defense~~ Systems.

Net FAS (service)/CAS Pension Adjustment

The ~~first~~second quarter 2020 and year to date 2020 net FAS (service)/CAS pension ~~adjustment is~~adjustments were comparable to the prior year period and ~~reflects~~reflect changes in actuarial assumptions as of December 31, 2019.

Unallocated Corporate ~~(Expense) Income~~Expense

Current Quarter

The decrease in ~~first~~second quarter 2020 unallocated corporate expense is primarily due to ~~$14~~$21 million of lower intangible asset amortization and PP&E step-up depreciation.

Year to Date

The decrease in year to date 2020 unallocated corporate expense is primarily due to $35 million of lower intangible asset amortization and PP&E step-up depreciation.

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 and operating income and the aggregate amounts are presented in the table below:

Three Months Ended March 31
$ in millions 2020 2019
Favorable EAC adjustments $ 276
$ 235
Unfavorable EAC adjustments (152 ) (97 )
Net EAC adjustments $ 124
$ 138

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	Three Months Ended June 30						Six Months Ended June 30
$ in millions	2020			2019			2020			2019
Favorable EAC adjustments	$	241		$	283		$	517		$	518
Unfavorable EAC adjustments	(129		)	(125		)	(281		)	(222		)
Net EAC adjustments	$	112		$	158		$	236		$	296

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


	Three Months Ended March 31						Three Months Ended June 30						Six Months Ended June 30
$ in millions	2020			2019			2020			2019			2020			2019
Aeronautics Systems	$	12		$	51		$	22		$	59		$	34		$	110
Defense Systems	22			32			39			38			61			70
Mission Systems	79			35			59			52			138			87
Space Systems	12			21			(7		)	16			5			37
Eliminations	(1		)	(1		)	(1		)	(7		)	(2		)	(8		)
Net EAC adjustments	$	124		$	138		$	112		$	158		$	236		$	296

For purposes of the discussion in the remainder of this Segment Operating Results section, references to operating income and operating margin rate reflect segment operating income and segment operating margin rate, respectively.

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AERONAUTICS SYSTEMS	Three Months Ended March 31						%		Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions	2020			2019			Change		2020			2019			Change		2020			2019			Change
Sales	$	2,843		$	2,818		1	%	$	2,925		$	2,721		7	%	$	5,768		$	5,539		4	%
Operating income	259			308			(16	)%	310			299			4	%	573			610			(6	)%
Operating margin rate	9.1		%	10.9		%			10.6		%	11.0		%			9.9		%	11.0		%

Sales

~~First~~Current Quarter

Second quarter 2020 sales increased ~~$25~~$204 million, or 17 percent, due to higher sales in both Manned Aircraft and Autonomous ~~Systems~~Systems. Higher volume on restricted programs, E-2D and Triton were partially offset by a COVID-19-related slowdown of F-35 production activity.

Year to Date

Year to date 2020 sales increased $229 million, or 4 percent, due to higher sales in both Manned ~~Aircraft.~~Aircraft and Autonomous Systems. Higher volume on restricted programs and ~~Global Hawk~~E-2D were partially offset by a COVID-19-related slowdown of F-35 production activity and lower volume on the B-2 Defensive Management System Modernization program ~~and NATO AGS, which are both nearing~~as it nears completion.

Operating Income

~~First~~Current Quarter

Second quarter 2020 operating income ~~decreased $49~~increased $11 million, or 164 percent, primarily due to higher sales. Operating margin rate decreased to 10.6 percent from 11.0 percent, principally due to lower net favorable EAC adjustments at Autonomous Systems as well as changes in contract mix at Manned Aircraft, partially offset by a $21 million benefit recognized in connection with the resolution of a government accounting matter.

Year to Date

Year to date 2020 operating income decreased $37 million, or 6 percent, principally due to a lower operating margin rate. Operating margin rate decreased to ~~9.1~~9.9 percent from ~~10.9~~11.0 percent, principally due to lower net favorable EAC adjustments at Autonomous Systems as well as ~~the timing of F-35 risk retirements and~~changes in contract mix at Manned Aircraft.


DEFENSE SYSTEMS	Three Months Ended March 31						%		Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions	2020			2019			Change		2020			2019			Change		2020			2019			Change
Sales	$	1,881		$	1,768		6	%	$	1,886		$	1,916		(2	)%	$	3,767		$	3,684		2	%
Operating income	196			202			(3	)%	217			212			2	%	415			416			—	%
Operating margin rate	10.4		%	11.4		%			11.5		%	11.1		%			11.0		%	11.3		%

Sales

~~First~~Current Quarter

Second quarter 2020 sales ~~increased $113~~decreased $30 million, or 62 percent, due to lower volume in Battle Management & Missile Systems, partially offset by higher volume on Mission Readiness programs. Battle Management & Missile Systems sales decreased principally due to lower volume on programs nearing completion, including an international weapons program and several small caliber ammunition programs, partially offset by higher volume on the Guided Multiple Launch Rocket System (GMLRS), the Advanced Anti-Radiation Guided Missile (AARGM) program and other missile products. Mission Readiness sales increased primarily due to higher restricted volume, partially offset by lower volume on the Hunter sustainment program as it nears completion.

Year to Date

Year to date 2020 sales increased $83 million or 2 percent, due to higher sales in both Battle Management & Missile Systems and Mission Readiness. Battle Management & Missile Systems sales increased primarily due to higher volume on ~~the Guided Multiple Launch Rocket System (GMLRS), Advanced Anti-Radiation Guided Missile (AARGM) program~~GMLRS, AARGM and other missile ~~products.~~products, partially offset by lower volume on an international weapons program as it nears completion. Mission Readiness sales increased principally due to higher restricted volume, partially offset by lower volume on ~~an international training~~the Hunter sustainment program ~~and the Special Electronic Mission Aircraft program.~~as it nears completion.

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Operating Income

~~First~~Current Quarter

Second quarter 2020 operating income ~~decreased $6~~increased $5 million, or 32 percent, primarily due to a ~~lower~~higher operating margin rate. Operating margin rate ~~partially offset by higher sales.~~increased to 11.5 percent from 11.1 percent primarily due to improved performance on Mission Readiness programs.

Year to Date

Year to date 2020 operating income was comparable to the prior year period. Operating margin rate decreased to ~~10.4~~11.0 percent from ~~11.4~~11.3 percent primarily due to favorable adjustments on certain small caliber ammunition programs in the first quarter of ~~2019.~~

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2019, partially offset by improved performance on Mission Readiness programs.


MISSION SYSTEMS	Three Months Ended March 31						%		Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions	2020			2019			Change		2020			2019			Change		2020			2019			Change
Sales	$	2,347		$	2,210		6	%	$	2,446		$	2,404		2	%	$	4,793		$	4,614		4	%
Operating income	348			319			9	%	347			338			3	%	700			661			6	%
Operating margin rate	14.8		%	14.4		%			14.2		%	14.1		%			14.6		%	14.3		%

Sales

~~First~~Current Quarter

Second quarter 2020 sales increased ~~$137~~$42 million, or 62 percent, primarily due to higher volume on Airborne Sensors & Networks programs, partially offset by lower volume on Cyber & Intelligence Mission Solutions programs. Airborne Sensors & Networks sales increased primarily due to higher airborne radar volume, including on the Multi-role Electronically Scanned Array (MESA) and Scalable Agile Beam Radar (SABR) programs. Cyber & Intelligence Mission Solutions sales decreased principally due to lower volume on an intelligence program as it nears completion.

Year to Date

Year to date 2020 sales increased $179 million, or 4 percent, primarily due to higher volume on Airborne Sensors & Networks and Maritime/Land Systems & Sensors ~~programs.~~programs, partially offset by lower volume on Cyber & Intelligence Mission Solutions. Airborne Sensors & Networks sales increased principally due to higher airborne radar volume, including on the ~~F-35~~MESA, SABR and ~~SABR~~F-35 programs. Maritime/Land Systems & Sensors sales increased primarily due to higher volume on marine systems and restricted ~~programs.~~programs, partially offset by lower international volume. Cyber & Intelligence Mission Solutions sales decreased principally due to lower volume on an intelligence program as it nears completion.

Operating Income

~~First~~Current Quarter

Second quarter 2020 operating income increased ~~$29~~$9 million, or 93 percent, principally due to higher sales. Operating margin rate was comparable to the prior year period.

Year to Date

Year to date 2020 operating income increased $39 million, or 6 percent, due to higher sales and a higher operating margin rate. Operating margin rate increased to ~~14.8~~14.6 percent from ~~14.4~~14.3 percent primarily due to improved performance on Airborne Sensors & Networks and Cyber & Intelligence Mission Solutions programs, partially offset by lower net favorable adjustments and changes in contract mix ~~at Maritime/Land Systems & Sensors and the timing of risk retirements~~ at Navigation, Targeting & Survivability.


SPACE SYSTEMS	Three Months Ended March 31						%		Three Months Ended June 30						%		Six Months Ended June 30						%
$ in millions	2020			2019			Change		2020			2019			Change		2020			2019			Change
Sales	$	1,948		$	1,801		8	%	$	2,048		$	1,788		15	%	$	3,996		$	3,589		11	%
Operating income	199			188			6	%	209			193			8	%	411			383			7	%
Operating margin rate	10.2		%	10.4		%			10.2		%	10.8		%			10.3		%	10.7		%

Sales

~~First~~Current Quarter

Second quarter 2020 sales increased ~~$147~~$260 million, or 815 percent, ~~primarily~~ due to higher sales in both Space ~~partially offset by lower sales in~~and Launch & Strategic Missiles. Space sales were driven by higher volume on restricted programs, Next Generation Overhead Persistent Infrared Radar (Next Gen OPIR) and the Arctic Satellite Broadband Mission (ASBM) program. Launch &

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Strategic Missiles sales reflect higher volume on hypersonics and launch vehicle programs, partially offset by lower volume on the Ground-based Midcourse Defense (GMD) ~~program~~program.

Year to Date

Year to date 2020 sales increased $407 million, or 11 percent, due to higher sales in both Space and Launch & Strategic Missiles. Space ~~Launch System (SLS) Booster, partially offset~~sales were driven by higher volume on ~~hypersonic~~restricted programs, Next Gen OPIR and ASBM. Launch & Strategic Missiles sales reflect higher volume on hypersonics programs and the Ground Based Strategic Deterrent (GBSD) Technology Maturation Risk Reduction (TMRR) ~~program.~~program, partially offset by lower volume on GMD.

Operating Income

~~First~~Current Quarter

Second quarter 2020 operating income increased ~~$11~~$16 million, or 68 percent, primarily due to higher ~~sales, partially offset by a lower operating margin rate.~~sales. Operating margin rate decreased to 10.2 percent from ~~10.4~~10.8 percent principally due to delays in production for certain commercial space components.

Year to Date

Year to date 2020 operating income increased $28 million, or 7 percent, primarily due to higher sales. Operating margin rate decreased to 10.3 percent from 10.7 percent principally due to delays in production for certain commercial space components and the timing of favorable negotiations on certain commercial contracts recognized in the first quarter of 2019.

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PRODUCT AND SERVICE ANALYSIS

The following table presents product and service sales and operating costs and expenses by segment:


	Three Months Ended March 31								Three Months Ended June 30								Six Months Ended June 30
$ in millions	2020				2019				2020				2019				2020				2019
Segment Information:	Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses
Aeronautics Systems
Product	$	2,409	$	2,202	$	2,405	$	2,144	$	2,512	$	2,247	$	2,301	$	2,068	$	4,921	$	4,446	$	4,706	$	4,210
Service	408		359		389		344		384		342		396		333		792		700		785		676
Intersegment eliminations	26		23		24		22		29		26		24		21		55		49		48		43
Total Aeronautics Systems	2,843		2,584		2,818		2,510		2,925		2,615		2,721		2,422		5,768		5,195		5,539		4,929
Defense Systems
Product	770		705		621		558		753		676		697		626		1,523		1,380		1,318		1,183
Service	940		827		980		859		953		831		1,055		931		1,893		1,657		2,035		1,789
Intersegment eliminations	171		153		167		149		180		162		164		147		351		315		331		296
Total Defense Systems	1,881		1,685		1,768		1,566		1,886		1,669		1,916		1,704		3,767		3,352		3,684		3,268
Mission Systems
Product	1,508		1,277		1,382		1,163		1,646		1,388		1,574		1,332		3,154		2,662		2,956		2,492
Service	663		572		631		559		616		554		666		598		1,279		1,124		1,297		1,156
Intersegment eliminations	176		150		197		169		184		157		164		136		360		307		361		305
Total Mission Systems	2,347		1,999		2,210		1,891		2,446		2,099		2,404		2,066		4,793		4,093		4,614		3,953
Space Systems
Product	1,489		1,327		1,320		1,169		1,571		1,402		1,308		1,163		3,060		2,727		2,628		2,330
Service	433		398		461		426		449		413		459		412		882		810		920		838
Intersegment eliminations	26		24		20		18		28		24		21		20		54		48		41		38
Total Space Systems	1,948		1,749		1,801		1,613		2,048		1,839		1,788		1,595		3,996		3,585		3,589		3,206
Segment Totals
Total Product	$	6,176	$	5,511	$	5,728	$	5,034	$	6,482	$	5,713	$	5,880	$	5,189	$	12,658	$	11,215	$	11,608	$	10,215
Total Service	2,444		2,156		2,461		2,188		2,402		2,140		2,576		2,274		4,846		4,291		5,037		4,459
Total Segment⁽¹⁾	$	8,620	$	7,667	$	8,189	$	7,222	$	8,884	$	7,853	$	8,456	$	7,463	$	17,504	$	15,506	$	16,645	$	14,674


⁽¹⁾	A reconciliation of segment operating income to total operating income is included in “Segment Operating Results.”

Product Sales and Costs

~~First~~Current Quarter

Second quarter 2020 product sales increased ~~$448~~$602 million, or 810 percent. The increase was primarily due to higher ~~volume~~product sales on restricted programs and Next Gen OPIR ~~programs~~ at Space Systems and higher product sales on restricted programs and E-2D at Aeronautics Systems.

Second quarter 2020 product costs increased $524 million, or 10 percent, consistent with the higher product sales described above.

Year to Date

Year to date 2020 product sales increased $1.1 billion, or 9 percent, principally due to higher volume on restricted programs and Next Gen OPIR at Space Systems, restricted programs and E-2D at Aeronautics Systems, missile products at Defense Systems and ~~higher~~ airborne radar and ~~F-35 volume~~restricted programs at Mission Systems.

~~First quarter~~Year to date 2020 product costs increased ~~$477 million,~~$1.0 billion, or 910 percent, consistent with the higher product sales described above and principally reflects a lower product margin at Aeronautics Systems due to lower net favorable EAC adjustments.

~~Service Sales and Costs~~

~~First quarter 2020 service sales decreased $17 million, or 1 percent, due to lower service sales at Defense Systems and Space Systems, partially offset by higher service sales at Mission Systems.~~

~~First quarter 2020 service costs decreased $32 million, or 1 percent, consistent with the lower service sales described above and reflects higher service margin rates at Mission Systems.~~

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Service Sales and Costs

Current Quarter

Second quarter 2020 service sales decreased $174 million, or 7 percent, primarily due to a shift toward more product content in the lifecycle of several programs at Defense Systems and completion of certain service programs at Mission Systems.

Second quarter 2020 service costs decreased $134 million, or 6 percent, consistent with the lower service sales described above.

Year to Date

Year to date 2020 service sales decreased $191 million, or 4 percent, primarily due to a shift toward more product content in the lifecycle of several programs at Defense Systems.

Year to date 2020 service costs decreased $168 million, or 4 percent, consistent with the lower service sales described above.

BACKLOG

Backlog consisted of the following as of ~~March 31,~~June 30, 2020 and December 31, 2019:


	March 31, 2020						December 31, 2019				June 30, 2020						December 31, 2019
$ in millions	Funded		Unfunded		Total Backlog		Total Backlog		% Change in 2020		Funded		Unfunded		Total Backlog		Total Backlog		% Change in 2020
Aeronautics Systems	$	11,642	$	13,544	$	25,186	$	26,021	(3	)%	$	12,163	$	12,556	$	24,719	$	26,021	(5	)%
Defense Systems	6,462		1,719		8,181		8,481		(4	)%	6,245		1,728		7,973		8,481		(6	)%
Mission Systems	9,336		4,840		14,176		14,226		—	%	9,548		3,997		13,545		14,226		(5	)%
Space Systems	5,082		11,542		16,624		16,112		3	%	5,908		17,903		23,811		16,112		48	%
Total backlog	$	32,522	$	31,645	$	64,167	$	64,840	(1	)%	$	33,864	$	36,184	$	70,048	$	64,840	8	%

New Awards

~~First~~Second quarter and year to date 2020 net awards totaled ~~$7.9~~$14.8 billion and $22.7 billion, respectively, and backlog totaled ~~$64.2~~$70.0 billion. Significant ~~first~~second quarter new awards include $7.4 billion for restricted ~~competitive prime space contracts totaling multiple billions of dollars in the aggregate; $339 million~~programs, $1.9 billion for ~~the Scalable Agile Beam Radar (SABR) program, $281 million~~Next Gen OPIR, $0.5 billion for ~~the Triton program, $165 million~~E-2D, $0.4 billion for ~~the Advanced Anti-Radiation Guided Missile (AARGM) program~~four commercial satellites and ~~$160 million~~$0.3 billion for ~~the Ground-based Midcourse Defense (GMD) program.~~Triton.

LIQUIDITY AND CAPITAL RESOURCES

We endeavor to ensure efficient conversion of operating income into cash and to increase shareholder value through cash deployment activities. In addition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash ~~used in~~provided by operating activities and free cash flow, a non-GAAP measure described in more detail below.

At ~~March 31,~~June 30, 2020, we had ~~$3.3~~$4.2 billion in cash and cash equivalents. In March 2020, we issued $2.25 billion of unsecured senior notes to help preserve financial flexibility in light of uncertainty resulting from the COVID-19 pandemic. We intend to use those proceeds for general corporate purposes, which may include debt repayment and working capital. In April 2020, we entered into a one-year $500 million uncommitted credit facility to provide an additional source of potential financing.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) established a program with provisions to allow U.S. companies to defer the employer’s portion of social security taxes between March 27, 2020 and December 31, 2020 and pay such taxes in two installments in 2021 and 2022. The CARES Act also provided for a deferral of certain estimated income tax payments by extending the deadline for amounts due in the second quarter to July 15, 2020. Under Section 3610, the CARES Act also authorized the government to reimburse qualifying contractors for certain costs of providing paid leave to employees as a result of COVID-19. The company has begun

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to seek, and anticipates continuing to seek, recovery for certain COVID-19-related costs under Section 3610 of the CARES Act and through our contract provisions. In addition, the U.S. Department of Defense (DoD) has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent for costs incurred and work performed on relevant contracts. We ~~expect both of~~believe these actions should ~~help~~continue to mitigate ~~COVID-19 related~~some COVID-19-related negative impacts to our operating cash flows ~~for~~during the remainder of the year.

Cash and cash equivalents and cash generated from operating activities, supplemented by borrowings under credit facilities, commercial paper and/or in the capital markets, if needed, are expected to be sufficient to fund our operations for at least the next 12 months.

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Operating Cash Flow

The table below summarizes key components of cash flow ~~used in~~provided by operating activities:


	Three Months Ended March 31						%		Six Months Ended June 30						%
$ in millions	2020			2019			Change		2020			2019			Change
Net earnings	$	868		$	863		1	%	$	1,873		$	1,724		9	%
Non-cash items⁽¹⁾	471			361			30	%	810			709			14	%
Changes in assets and liabilities:
Trade working capital	(2,163		)	(1,964		)	10	%	(898		)	(1,419		)	(37	)%
Retiree benefits	(237		)	(142		)	67	%	(473		)	(285		)	66	%
Other, net	68			(31		)	NM		32			(35		)	(191	)%
Net cash used in operating activities	$	(993	)	$	(913	)	(9	)%
Net cash provided by operating activities									$	1,344		$	694		94	%


⁽¹⁾	Includes depreciation and amortization, non-cash lease expense, stock based compensation expense and deferred income taxes.

~~First quarter~~Year to date 2020 cash ~~used in~~provided by operating activities increased ~~$80~~$650 million principally due to ~~the timing of~~improved trade working ~~capital.~~capital and higher net earnings. The ~~net use~~improvement in trade working capital reflects CARES Act payroll tax deferrals and increased DoD progress payment rates, partially offset by acceleration of ~~cash during the first quarter is consistent with the company’s historical timing~~payments to suppliers and pass through of ~~operating cash flows, which are generally more heavily weighted toward the second half of the year.~~increased progress payments to suppliers.

Free Cash Flow

Free cash flow, as reconciled in the table below, is a non-GAAP measure defined as net cash ~~used in~~provided by operating activities less capital expenditures, and 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 ~~used in~~provided by operating activities to free cash flow:


	Three Months Ended March 31						%		Six Months Ended June 30						%
$ in millions	2020			2019			Change		2020			2019			Change
Net cash used in operating activities	$	(993	)	$	(913	)	(9	)%
Net cash provided by operating activities									$	1,344		$	694		94	%
Less: capital expenditures	(272		)	(284		)	(4	)%	(541		)	(536		)	1	%
Free cash flow	$	(1,265	)	$	(1,197	)	(6	)%	$	803		$	158		408	%

~~First quarter~~Year to date 2020 free cash flow ~~decreased $68~~increased $645 million principally due to the increase in net cash ~~used in~~provided by operating activities.

Investing Cash Flow

~~First quarter~~Year to date 2020 net cash used in investing activities ~~decreased~~was comparable to ~~$270 million from $280 million principally due to lower capital expenditures.~~the prior year period.

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Financing Cash Flow

~~First quarter~~Year to date 2020 net cash provided by financing activities ~~increased~~was $1.1 billion compared to ~~$2.3 billion from $462~~net cash used in financing activities of $650 million in 2019, principally due to $2.2 billion of net proceeds from the issuance of long-term debt in the first quarter of 2020, partially offset by higher share ~~repurchases in the quarter.~~repurchases.

Credit Facilities, Commercial Paper and Financial Arrangements - See Note 6 to the financial statements for further information on our credit facilities, commercial paper and our use of standby letters of credit and guarantees.

Share Repurchases - See Note 2 to the financial statements for further information on our share repurchase programs.

Long-term Debt - See Note 4 to the financial statements for further information.

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CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

There have been no material changes to our critical accounting policies, estimates or judgments from those discussed in our 2019 Annual Report on Form 10-K.

ACCOUNTING STANDARDS UPDATES

See Note 1 to our financial statements for further information on accounting standards updates.

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

This Form 10-Q and the information we are incorporating by reference contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “will,” “expect,” “anticipate,” “intend,” “may,” “could,” “should,” “plan,” “project,” “forecast,” “believe,” “estimate,” “outlook,” “trends,” “goals” and similar expressions generally identify these forward-looking statements. Forward-looking statements include, among other things, statements relating to our future financial condition, results of operations and/or cash flows. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made, but which may change over time. These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict. Specific risks that could cause actual results to differ materially from those expressed or implied in these forward-looking statements include, but are not limited to, those identified and discussed more fully in the section entitled “Risk Factors” in our 2019 Annual Report on Form 10-K, ~~this~~in the section entitled “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and from time to time in our other filings with the Securities and Exchange Commission (SEC). These risks and uncertainties are amplified by the global COVID-19 pandemic, which has caused and will continue to cause significant challenges, instability and uncertainty. They include:

•

the impact of the COVID-19 outbreak or future epidemics on our business, including the potential for worker absenteeism, facility closures, work slowdowns or stoppages, supply chain disruptions, program delays, our ability to recover costs under contracts, changing government funding and acquisition priorities and processes, changing government payment rules and practices, and potential impacts on access to capital, the markets and the fair value of our assets;


•	our dependence on the U.S. government for a substantial portion of our business

significant delays or reductions in appropriations for our programs, and U.S. government funding and program support more broadly


•	investigations, claims, disputes, enforcement actions, litigation and/or other legal proceedings


•	the use of estimates when accounting for our contracts and the effect of contract cost growth and/or changes in estimated contract revenues and costs

our exposure to additional risks as a result of our international business, including risks related to geopolitical and economic factors, suppliers, laws and regulations


•	the improper conduct of employees, agents, subcontractors, suppliers, business partners or joint ventures in which we participate and the impact on our reputation and our ability to do business


•	cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners

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the performance and financial viability of our subcontractors and suppliers and the availability and pricing of raw materials and components


•	changes in procurement and other laws, regulations, contract terms and practices applicable to our industry, findings by the U.S. government as to our compliance with such requirements, and changes in our customers’ business practices globally


•	increased competition within our markets and bid protests


•	the ability to maintain a qualified workforce with the required security clearances and requisite skills


•	our ability to meet performance obligations under our contracts, including obligations that require innovative design capabilities, are technologically complex, require certain manufacturing expertise or are dependent on factors not wholly within our control

environmental matters, including unforeseen environmental costs and government and third party claims

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natural disasters


•	health epidemics, pandemics and similar outbreaks, including the global COVID-19 pandemic

the adequacy and availability of our insurance coverage, customer indemnifications or other liability protections

products and services we provide related to hazardous and high risk operations, including the production and use of such products, which subject us to various environmental, regulatory, financial, reputational and other risks

the future investment performance of plan assets, changes in actuarial assumptions associated with our pension and other postretirement benefit plans and legislative or other regulatory actions impacting our pension and postretirement benefit obligations

our ability appropriately to exploit and/or protect intellectual property rights

our ability to develop new products and technologies and maintain technologies, facilities, and equipment to win new competitions and meet the needs of our customers


•	unanticipated changes in our tax provisions or exposure to additional tax liabilities

changes in business conditions that could impact business investments and/or recorded goodwill or the value of other long-lived assets

You are urged to consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of forward-looking statements. These forward-looking statements speak only as of the date this report is first filed or, in the case of any document incorporated by reference, the date of that document. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

CONTRACTUAL OBLIGATIONS

Other than the debt issuance, including associated interest, described in Note 4 of Part I, Item 1, there have been no material changes to our contractual obligations from those discussed in our 2019 Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risks from those discussed in our 2019 Annual Report on Form 10-K.

Item 4. Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

Our principal executive officer (Chairman, Chief Executive Officer and President) and principal financial officer (Corporate Vice President and Chief Financial Officer) have evaluated the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) as of ~~March 31,~~June 30, 2020, and have concluded that these controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that

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information required to be disclosed in the reports that we file or submit is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the three months ended ~~March 31,~~June 30, 2020, no changes occurred in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We have provided information about certain legal proceedings in which we are involved in Notes 5 and 6 to the financial statements.

We are a party to various investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. These types of matters could result in administrative, civil or criminal fines, penalties or other sanctions (which terms include judgments or convictions and consent or other voluntary decrees or agreements); compensatory, treble or other damages; non-monetary relief or actions; or other liabilities. Government regulations provide that certain allegations against a contractor may lead to suspension or debarment from future government contracts or suspension of export privileges for the company or one or more of its components. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. For additional information on pending matters, please see Notes 5 and 6 to the financial statements, and for further information on the risks we face from existing and future investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, please see “Risk Factors” in our 2019 Annual Report on Form 10-K.

Environmental Matters Involving Potential Monetary Damages in Excess of $100,000

The following environmental matter is reported pursuant to SEC Regulation S-K Item 103 because it involves potential monetary damages in excess of $100,000. In June 2016, the U.S. Environmental Protection Agency (EPA) conducted an environmental inspection at the Allegheny Ballistics Laboratory in Rocket Center, WV, which was then and is now operated by Alliant Techsystems Operations LLC (“ATO”). ATO became an indirect subsidiary of the Company approximately 2 years later, in June 2018. On March 3, 2020, EPA notified ATO of a proposed penalty for alleged noncompliance with certain air emission, water discharge and waste management permitting and regulatory requirements. EPA proposed a civil penalty totaling $497,635 and certain non-monetary actions. The Company ~~disputes~~has disputed the allegations and is in discussions with the government.

Item 1A. Risk Factors

~~The following updates and supplements~~There have been no material changes to our risk factors since our 2019 Annual Report on Form 10-K, except with respect to the risk ~~factors described~~factor regarding COVID-19 that the company included in the section entitled “Risk Factors” in our 2019 Annual Report on Form 10-K, as updated by the Current Report on Form 8-K filed on March 19, 2020. It should be read in conjunction with the risk factors in the 2019 Annual Report on Form 10-K. In addition to the other information set forth in this Quarterly Report on Form 10-Q ~~you should carefully consider~~for the factors discussed in Part I, Item 1A Risk Factors in the 2019 Form 10-K which could materially affect our business, financial condition or future results. The COVID-19 pandemic has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in the 2019 Form 10-K, and the risk factor disclosure in the 2019 Form 10-K is qualified by the information relating to COVID-19 that is described in this Quarterly Report on Form 10-Q, including the updated risk factor set forth below. Except as otherwise described herein, there have been no other material changes from the risk factors previously disclosed in the 2019 Form 10-K.

We face various risks related to health epidemics, pandemics and similar outbreaks, which may have material adverse effects on our business, financial position, results of operations and/or cash flows.

We face various risks related to health epidemics, pandemics and similar outbreaks, including the global outbreak of coronavirus disease 2019 (“COVID-19”). Since first reported in late 2019, the COVID-19 pandemic has dramatically impacted the global health and economic environment, including millions of confirmed cases, business slowdowns or shutdowns, government challenges and market volatility of an unprecedented nature. Although we have, to date, managed to continue most of our operations, we cannot predict the future course of events nor can we assure that this global pandemic, including its economic impact, will not have a material adverse impact on our business, financial position, results of operations and/or cash flows. (For further information relating to our company’s experience to date, and certain steps taken to approach the risks presented by the COVID-19 pandemic, see Management’s Discussion and Analysis of Financial Condition and Results of Operations).

If significant portions of our workforce are unable to work effectively, including because of illness, quarantines or absenteeism; steps the company has taken to protect health and challenges with additional steps (such as securing personal protective equipment and testing); government actions; facility closures; work slowdowns or stoppages; limited supplies or resources; or other circumstances related to COVID-19, our operations will be further impacted. We may be unable to perform fully on our contracts and we may incur liabilities and suffer losses as a result. In addition, we will continue to incur additional costs as a result of the COVID-19 outbreak, including to protect the well-being of our employees, which will likely not be fully recoverable. The continued spread of COVID-19 may

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~~also affect our ability to hire, develop and retain our talented and diverse workforce, and to maintain our corporate culture.~~

The continued spread of COVID-19, including the global pandemic and the economic impact, are likely also to cause further disruption in our supply chain. If our suppliers have increased challenges with their workforce (including as a result of illness, absenteeism or government orders), access to necessary components and supplies, access to capital, and access to fundamental support services (such as shipping and transportation), they may be unable to provide the agreed-upon goods and services in a timely, compliant and cost-effective manner. We may incur additional costs and delays in our business, including as a result of higher prices, schedule delays or the need to identify and develop alternative suppliers, and we may need to provide additional resources to support our suppliers or otherwise continue performance under our contracts. In some instances, we may be unable to do that, incurring additional liabilities under our current contracts and hampering new ones.

The global COVID-19 crisis is putting extraordinary pressures on the U.S. government and governments around the world. It could cause delays or limits in the ability of the government and other customers to perform, including making timely payments and awards to us, negotiating contracts and agreeing appropriate costs for recovery, performing quality inspections, supporting testing, accepting delivery, approving security clearances (for individuals and facilities), and providing necessary personnel, equipment and facilities. In addition, as a result of the COVID-19 crisis, there may be changes in our customers’ priorities and practices, as our customers in both the United States and globally confront competing budget priorities and more limited resources. These changes may impact current and future programs, government payments and other practices, procurements, and funding decisions.

While we have significant sources of cash and liquidity and access to committed and uncommitted credit lines, a prolonged period of generating lower cash from operations could adversely affect both our financial condition and the achievement of our strategic objectives. Additionally, there can be no assurance that we will not face credit rating downgrades, and such downgrades could adversely affect our cost of funds, liquidity and access to capital markets. The current market volatility will likely also impact investment performance and our expected asset valuations and returns, which can materially impact the calculation of long-term liabilities such as our pension obligations.

We continue to work with our stakeholders (including customers, employees, suppliers and local communities) in an effort to address responsibly this global pandemic. We continue to monitor the situation, to assess further possible implications to our business, supply chain and customers, and to take certain actions in an effort to mitigate various adverse consequences.

We expect that the longer the COVID-19 pandemic, including its economic disruption, continues, the greater the adverse impact on our business operations, financial performance and results of operations will be. Given the tremendous uncertainties and variables, we cannot at this time predict the impact of the global COVID-19 pandemic, but it could have a material adverse impact on our business, financial position, results of operations and/or cash flows.quarter ended March 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities – The table below summarizes our repurchases of common stock during the ~~first~~second quarter of 2020:

Period Number
of Shares
Purchased
Average Price
Paid per
Share⁽¹⁾
Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the
Plans or Programs
($ in millions)
January 1, 2020 - January 24, 2020 204,200
$ 374.96
204,200
$ 3,253
January 25, 2020 - February 21, 2020 207,300
369.78
207,300
3,176
February 22, 2020 - March 27, 2020 625,975
313.11
625,975
2,980
Total 1,037,475
$ 336.61
1,037,475
$ 2,980



Period	Number of Shares Purchased	Average Price Paid per Share⁽¹⁾		Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs ($ in millions)
March 28, 2020 - April 24, 2020	397,447	$	329.41	397,447		$	2,849
April 25, 2020 - May 22, 2020	—	—		—		2,849
May 23, 2020 - June 26, 2020	—	—		—		2,849
Total	397,447	$	329.41	397,447		$	2,849


⁽¹⁾	Includes commissions paid.

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the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.

See Note 2 to the financial statements for further information on our share repurchase programs.

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Item 5. Other Information

As discussed in Notes 1 and 9 to the financial statements, beginning in the second quarter of 2020, the company no longer considers certain unallowable costs as part of management’s evaluation of segment operating performance. As a result, certain unallowable costs, which were previously included in segment operating results, are now reported in Unallocated corporate expense within operating income.

The following tables summarize the effect of this change on our segment information for the three months ended March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019 and the years ended December 31, 2019, 2018 and 2017. This change has no impact on consolidated operating results. The tables should be read in conjunction with the information contained in the company’s 2019 Annual Report on Form 10-K and the Form 8-K that we filed with the SEC on April 29, 2020, which recasts the disclosures in certain portions of the 2019 Annual Report on Form 10-K to reflect changes in the company’s reportable segments.

As Previously Reported



	2017			2018			2019			2019												2020
	Total			Total			Total			Three Months Ended
$ in millions	Year			Year			Year			Mar 31			Jun 30			Sep 30			Dec 31			Mar 31
Operating income
Aeronautics Systems	$	848		$	1,107		$	1,170		$	308		$	295		$	265		$	302		$	259
Defense Systems	534			690			781			202			209			199			171			196
Mission Systems	1,157			1,215			1,382			319			332			346			385			348
Space Systems	578			635			781			188			191			187			215			199
Intersegment eliminations	(214		)	(200		)	(205		)	(50		)	(49		)	(57		)	(49		)	(49		)
Total segment operating income	2,903			3,447			3,909			967			978			940			1,024			953
Net FAS (service)/CAS pension adjustment	638			613			465			108			107			131			119			105
Unallocated corporate expense	(323		)	(280		)	(405		)	(139		)	(139		)	(120		)	(7		)	(124		)
Total operating income	$	3,218		$	3,780		$	3,969		$	936		$	946		$	951		$	1,136		$	934

As Recast



	2017			2018			2019			2019												2020
	Total			Total			Total			Three Months Ended
$ in millions	Year			Year			Year			Mar 31			Jun 30			Sep 30			Dec 31			Mar 31
Operating income
Aeronautics Systems	$	859		$	1,128		$	1,188		$	311		$	299		$	269		$	309		$	263
Defense Systems	539			697			793			204			212			201			176			198
Mission Systems	1,179			1,245			1,408			323			338			351			396			353
Space Systems	582			644			794			190			193			191			220			202
Intersegment eliminations	(214		)	(200		)	(205		)	(50		)	(49		)	(57		)	(49		)	(49		)
Total segment operating income	2,945			3,514			3,978			978			993			955			1,052			967
Net FAS (service)/CAS pension adjustment	638			613			465			108			107			131			119			105
Unallocated corporate expense	(365		)	(347		)	(474		)	(150		)	(154		)	(135		)	(35		)	(138		)
Total operating income	$	3,218		$	3,780		$	3,969		$	936		$	946		$	951		$	1,136		$	934

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Item 6. Exhibits



2.1	Agreement and Plan of Merger among Titan II, Inc. (formerly Northrop Grumman Corporation), Northrop Grumman Corporation (formerly New P, Inc.) and Titan Merger Sub Inc., dated March 30, 2011 (incorporated by reference to Exhibit 10.1 to Form 8-K filed April 4, 2011, File No. 001-16411)

2.2	Separation and Distribution Agreement dated as of March 29, 2011, among Titan II, Inc. (formerly Northrop Grumman Corporation), Northrop Grumman Corporation (formerly New P, Inc.), Huntington Ingalls Industries, Inc., Northrop Grumman Shipbuilding, Inc. and Northrop Grumman Systems Corporation (incorporated by reference to Exhibit 10.2 to Form 8-K filed April 4, 2011, File No. 001-16411)

2.3	Agreement and Plan of Merger, dated as of September 17, 2017, among Northrop Grumman Corporation, Neptune Merger, Inc. and Orbital ATK, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K filed September 18, 2017)

2.4	Transaction Agreement, dated as of April 28, 2014, among Alliant Techsystems Inc., Vista Spinco Inc., Vista Merger Sub Inc. and Orbital Sciences Corporation (incorporated by reference to Exhibit 2.1 to Alliant Techsystems Inc. (now known as Northrop Grumman Innovation Systems, Inc.) Form 8-K filed May 2, 2014)

~~4.1~~	Ninth Supplemental Indenture, dated as of March 23, 3030, between Northrop Grumman Corporation and The Bank of New York Mellon, as successor to JPMorgan Chase, Trustee, to Indenture dated as of November 21, 2001 (Incorporated by reference to Exhibit 4.1 to Form 8-K filed March 24, 2020, File No. 001-16411)

~~4.2~~	~~Form of 4.400% Senior Note due 2030 (incorporated by reference to Exhibit 4.2 to Form 8-K filed March 24, 2020, File No. 001-16411)~~

~~4.3~~	~~Form of 5.150% Senior Note due 2040 (incorporated by reference to Exhibit 4.3 to Form 8-K filed March 24, 2020, File No. 001-16411)~~

~~4.4~~	~~Form of 5.250% Senior Note due 2050 (incorporated by reference to Exhibit 4.4 to Form 8-K filed March 24, 2020, File No. 001-16411)~~

+*10.1	~~Grant Certificate Specifying the Terms and Conditions Applicable to~~Non-Employee Director Compensation Term Sheet, effective May 20, 2020 ~~Restricted Stock Rights Granted under the 2011 Long-Term Incentive Stock Plan~~

~~+*10.2~~	~~Grant Certificate Specifying the Terms and Conditions Applicable to 2020 Restricted Stock Performance Rights Granted under the 2011 Long-Term Incentive Stock Plan~~

~~+*10.3~~	~~Grant Certificate Specifying the Terms and Conditions Applicable to Special 2020 Restricted Stock Rights Granted to Blake Larson and Janis Pamiljans under the 2011 Long-Term Incentive Stock Plan~~

~~+*10.4~~	~~Letter dated February 3, 2020 from Northrop Grumman Corporation to David Keffer regarding compensation effective February 17, 2020~~

~~+10.5~~	Separation Agreement and General Release dated February 5, 2020 from Northrop Grumman Corporation to Kenneth Bedingfield (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 6, File No. 001-16411)

*15	Letter from Independent Registered Public Accounting Firm

*31.1	Certification of Kathy J. Warden pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*31.2	Certification of David F. Keffer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

**32.1	Certification of Kathy J. Warden pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

**32.2	Certification of David F. Keffer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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*101	Northrop Grumman Corporation Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~June 30, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Cover Page, (ii) Condensed Consolidated Statements of Earnings and Comprehensive Income, (iii) Condensed Consolidated Statements of Financial Position, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Shareholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

*104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)



+	Management contract or compensatory plan or arrangement

*	Filed with this report

**	Furnished with this report

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



NORTHROP GRUMMAN CORPORATION (Registrant)

By:		/s/ Michael A. Hardesty
		Michael A. Hardesty Corporate Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)

Date: ~~April 28,~~July 29, 2020

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