SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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

(~~703~~) (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.

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).

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).

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

As of ~~July 27, 2020, 166,714,063~~April 26, 2021, 160,961,208 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	1110
			7. Retirement Benefits	12
			8. Stock Compensation Plans and Other Compensation Arrangements	1312
			9. Segment Information	1413
			Report of Independent Registered Public Accounting Firm	1817
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations
			Overview	1918
			Consolidated Operating Results	2019
			Segment Operating Results	2122
			Product and Service Analysis	2726
			Backlog	2827
			Liquidity and Capital Resources	2827
			Critical Accounting Policies, Estimates and Judgments	3029
			Accounting Standards Updates	3029
			Forward-Looking Statements and Projections	3029
			Contractual Obligations	3130
Item 3.			Quantitative and Qualitative Disclosures About Market Risk	3130
Item 4.			Controls and Procedures	3130

			PART II – OTHER INFORMATION
Item 1.			Legal Proceedings	3332
Item 1A.			Risk Factors	3332
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds	3332
Item 5.6.			~~Other Information~~Exhibits	3433
~~Item 6.~~			~~Exhibits~~Signatures	3534
	~~Signatures~~	36

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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 June 30						Six Months Ended June 30							Three Months Ended March 31
$ in millions, except per share amounts	2020			2019			2020			2019			$ in millions, except per share amounts		2021		2020
Sales													Sales
Product	$	6,482		$	5,880		$	12,658		$	11,608		Product		$	7,022	$	6,176
Service	2,402			2,576			4,846			5,037			Service		2,135		2,444
Total sales	8,884			8,456			17,504			16,645			Total sales		9,157		8,620
Operating costs and expenses													Operating costs and expenses
Product	5,127			4,661			10,079			9,178			Product		5,690		4,952
Service	1,931			2,065			3,877			4,041			Service		1,727		1,946
General and administrative expenses	832			784			1,620			1,544			General and administrative expenses		898		788
Total operating costs and expenses													Total operating costs and expenses		8,315		7,686
Gain on sale of business													Gain on sale of business		1,980		0
Operating income	994			946			1,928			1,882			Operating income		2,822		934
Other (expense) income													Other (expense) income
Interest expense	(154		)	(137		)	(279		)	(275		)	Interest expense		(155)		(125)
FAS (non-service) pension benefit	303			200			605			400
Non-operating FAS pension benefit													Non-operating FAS pension benefit		367		302

Other, net	60			19			2			55			Other, net		(18)		(58)
Earnings before income taxes	1,203			1,028			2,256			2,062			Earnings before income taxes		3,016		1,053
Federal and foreign income tax expense	198			167			383			338			Federal and foreign income tax expense		821		185
Net earnings	$	1,005		$	861		$	1,873		$	1,724		Net earnings		$	2,195	$	868

Basic earnings per share	$	6.02		$	5.07		$	11.20		$	10.15		Basic earnings per share		$	13.46	$	5.18
Weighted-average common shares outstanding, in millions	166.9			169.7			167.3			169.9			Weighted-average common shares outstanding, in millions		163.1		167.7
Diluted earnings per share	$	6.01		$	5.06		$	11.16		$	10.11		Diluted earnings per share		$	13.43	$	5.15
Weighted-average diluted shares outstanding, in millions	167.3			170.3			167.9			170.5			Weighted-average diluted shares outstanding, in millions		163.5		168.4

Net earnings (from above)	$	1,005		$	861		$	1,873		$	1,724		Net earnings (from above)		$	2,195	$	868
Other comprehensive loss													Other comprehensive loss
Change in unamortized prior service credit, net of tax	(11		)	(12		)	(21		)	(23		)	Change in unamortized prior service credit, net of tax		(2)		(10)
Change in cumulative translation adjustment and other, net	10			(4		)	1			—			Change in cumulative translation adjustment and other, net		(1)		(9)
Other comprehensive loss, net of tax	(1		)	(16		)	(20		)	(23		)	Other comprehensive loss, net of tax		(3)		(19)
Comprehensive income	$	1,004		$	845		$	1,853		$	1,701		Comprehensive income		$	2,192	$	849

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)


$ in millions, except par value	June 30, 2020			December 31, 2019			$ in millions, except par value	March 31, 2021		December 31, 2020
Assets							Assets
Cash and cash equivalents	$	4,178		$	2,245		Cash and cash equivalents	$	3,517	$	4,907
Accounts receivable, net	1,989			1,326			Accounts receivable, net	1,710		1,501
Unbilled receivables, net	5,460			5,334			Unbilled receivables, net	5,519		5,140
Inventoried costs, net	832			783			Inventoried costs, net	860		759
Prepaid expenses and other current assets	720			997			Prepaid expenses and other current assets	647		1,402
Assets of disposal group held for sale							Assets of disposal group held for sale	0		1,635
Total current assets	13,179			10,685			Total current assets	12,253		15,344
Property, plant and equipment, net of accumulated depreciation of $6,103 for 2020 and $5,850 for 2019	7,063			6,912
Property, plant and equipment, net of accumulated depreciation of $6,471 for 2021 and $6,335 for 2020							Property, plant and equipment, net of accumulated depreciation of $6,471 for 2021 and $6,335 for 2020	7,093		7,071
Operating lease right-of-use assets	1,528			1,511			Operating lease right-of-use assets	1,552		1,533
Goodwill	18,707			18,708			Goodwill	17,518		17,518
Intangible assets, net	909			1,040			Intangible assets, net	732		783
Deferred tax assets	346			508			Deferred tax assets	311		311
Other non-current assets	1,743			1,725			Other non-current assets	1,964		1,909
Total assets	$	43,475		$	41,089		Total assets	$	41,423	$	44,469

Liabilities							Liabilities
Trade accounts payable	$	2,006		$	2,226		Trade accounts payable	$	1,895	$	1,806
Accrued employee compensation	1,614			1,865			Accrued employee compensation	1,542		1,997
Advance payments and billings in excess of costs incurred	2,179			2,237			Advance payments and billings in excess of costs incurred	2,393		2,517
Other current liabilities	3,928			3,106			Other current liabilities	2,537		3,002
Liabilities of disposal group held for sale							Liabilities of disposal group held for sale	0		258
Total current liabilities	9,727			9,434			Total current liabilities	8,367		9,580
Long-term debt, net of current portion of $1,803 for 2020 and $1,109 for 2019	14,259			12,770
Long-term debt, net of current portion of $42 for 2021 and $742 for 2020							Long-term debt, net of current portion of $42 for 2021 and $742 for 2020	12,764		14,261
Pension and other postretirement benefit plan liabilities	6,582			6,979			Pension and other postretirement benefit plan liabilities	6,217		6,498
Operating lease liabilities	1,333			1,308			Operating lease liabilities	1,354		1,343

Other non-current liabilities	1,862			1,779			Other non-current liabilities	2,196		2,208
Total liabilities	33,763			32,270			Total liabilities	30,898		33,890

Commitments and contingencies (Note 6)							Commitments and contingencies (Note 6)	0		0

Shareholders’ equity							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—166,708,207 and 2019—167,848,424	167			168
Preferred stock, $1 par value; 10,000,000 shares authorized; 0 shares issued and outstanding							Preferred stock, $1 par value; 10,000,000 shares authorized; 0 shares issued and outstanding	0		0
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2021—160,960,496 and 2020—166,717,179							Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2021—160,960,496 and 2020—166,717,179	161		167
Paid-in capital	10			—			Paid-in capital	8		58
Retained earnings	9,652			8,748			Retained earnings	10,487		10,482
Accumulated other comprehensive loss	(117		)	(97		)	Accumulated other comprehensive loss	(131)		(128)
Total shareholders’ equity	9,712			8,819			Total shareholders’ equity	10,525		10,579
Total liabilities and shareholders’ equity	$	43,475		$	41,089		Total liabilities and shareholders’ equity	$	41,423	$	44,469

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30							Three Months Ended March 31
$ in millions	2020			2019			$ in millions	2021		2020
Operating activities							Operating activities
Net earnings	$	1,873		$	1,724		Net earnings	$	2,195	$	868
Adjustments to reconcile to net cash provided by operating activities:
Adjustments to reconcile to net cash used in operating activities:							Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization	605			606			Depreciation and amortization	294		297

Stock-based compensation	36			55			Stock-based compensation	18		18
Deferred income taxes	169			48			Deferred income taxes	1		156
Gain on sale of business							Gain on sale of business	(1,980)		0
Changes in assets and liabilities:							Changes in assets and liabilities:
Accounts receivable, net	(663		)	(384		)	Accounts receivable, net	(253)		(810)
Unbilled receivables, net	(126		)	(658		)	Unbilled receivables, net	(357)		(584)
Inventoried costs, net	(49		)	(156		)	Inventoried costs, net	(101)		(2)
Prepaid expenses and other assets	(16		)	(48		)	Prepaid expenses and other assets	(38)		56
Accounts payable and other liabilities	(374		)	(367		)	Accounts payable and other liabilities	(589)		(833)
Income taxes payable, net	330			194			Income taxes payable, net	1,028		10
Retiree benefits	(473		)	(285		)	Retiree benefits	(314)		(237)
Other, net	32			(35		)	Other, net	30		68
Net cash provided by operating activities	1,344			694
Net cash used in operating activities							Net cash used in operating activities	(66)		(993)

Investing activities							Investing activities
Divestiture of IT services business							Divestiture of IT services business	3,400		0
Capital expenditures	(541		)	(536		)	Capital expenditures	(205)		(272)

Other, net	2			1			Other, net	1		2
Net cash used in investing activities	(539		)	(535		)
Net cash provided by (used in) investing activities							Net cash provided by (used in) investing activities	3,196		(270)

Financing activities							Financing activities
Net proceeds from issuance of long-term debt	2,239			—			Net proceeds from issuance of long-term debt	0		2,239
Payments of long-term debt							Payments of long-term debt	(2,200)		0
Payments to credit facilities	(13		)	(20		)	Payments to credit facilities	0		(7)
Net borrowings on commercial paper	—			101			Net borrowings on commercial paper	0		744
Common stock repurchases	(490		)	(231		)	Common stock repurchases	(2,000)		(344)
Cash dividends paid	(469		)	(435		)	Cash dividends paid	(238)		(227)
Payments of employee taxes withheld from share-based awards	(64		)	(63		)	Payments of employee taxes withheld from share-based awards	(30)		(63)
Other, net	(75		)	(2		)	Other, net	(52)		(46)
Net cash provided by (used in) financing activities	1,128			(650		)
Increase (decrease) in cash and cash equivalents	1,933			(491		)
Net cash (used in) provided by financing activities							Net cash (used in) provided by financing activities	(4,520)		2,296
(Decrease) increase in cash and cash equivalents							(Decrease) increase in cash and cash equivalents	(1,390)		1,033
Cash and cash equivalents, beginning of year	2,245			1,579			Cash and cash equivalents, beginning of year	4,907		2,245
Cash and cash equivalents, end of period	$	4,178		$	1,088		Cash and cash equivalents, end of period	$	3,517	$	3,278

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


	Three Months Ended June 30						Six Months Ended June 30							Three Months Ended March 31
$ in millions, except per share amounts	2020			2019			2020			2019			$ in millions, except per share amounts	2021		2020
Common stock													Common stock
Beginning of period	$	167		$	170		$	168		$	171		Beginning of period	$	167	$	168
Common stock repurchased	—			(1		)	(1		)	(2		)	Common stock repurchased	(6)		(1)

End of period	167			169			167			169			End of period	161		167
Paid-in capital													Paid-in capital
Beginning of period	—			—			—			—			Beginning of period	58		0
Common stock repurchased													Common stock repurchased	(39)		0
Stock compensation	10			—			10			—			Stock compensation	(11)		0

End of period	10			—			10			—			End of period	8		0
Retained earnings													Retained earnings
Beginning of period	9,011			8,628			8,748			8,068			Beginning of period	10,482		8,748
Common stock repurchased	(131		)	(172		)	(479		)	(234		)	Common stock repurchased	(1,955)		(348)
Net earnings	1,005			861			1,873			1,724			Net earnings	2,195		868
Dividends declared	(242		)	(226		)	(465		)	(432		)	Dividends declared	(235)		(223)
Stock compensation	9			29			(36		)	(6		)	Stock compensation	0		(45)
Other	—			—			11			—			Other	0		11
End of period	9,652			9,120			9,652			9,120			End of period	10,487		9,011
Accumulated other comprehensive loss													Accumulated other comprehensive loss
Beginning of period	(116		)	(59		)	(97		)	(52		)	Beginning of period	(128)		(97)
Other comprehensive loss, net of tax	(1		)	(16		)	(20		)	(23		)	Other comprehensive loss, net of tax	(3)		(19)
End of period	(117		)	(75		)	(117		)	(75		)	End of period	(131)		(116)
Total shareholders’ equity	$	9,712		$	9,214		$	9,712		$	9,214		Total shareholders’ equity	$	10,525	$	9,062
Cash dividends declared per share	$	1.45		$	1.32		$	2.77		$	2.52		Cash dividends declared per share	$	1.45	$	1.32

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

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NORTHROP GRUMMAN CORPORATION

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.

Effective January 30, 2021 (the “Divestiture date”), we completed the previously announced sale of our IT and mission support services business (the “IT services divestiture”) for $3.4 billion in cash and recorded a pre-tax gain on sale of $2.0 billion. The IT and mission support services business was comprised of the majority of the Information Solutions and Services (IS&S) division of Defense Systems (excluding our Vinnell Arabia business); select cyber, intelligence and missions support programs, which were part of the Cyber and Intelligence Mission Solutions (CIMS) division of Mission Systems; and the Space Technical Services business unit of Space Systems. The assets and liabilities of the IT and mission support services business were classified as held for sale in the consolidated statement of financial position as of December 31, 2020. Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture date. Sales for the IT and mission support services business were $162 million and $559 million for the three months ended March 31, 2021 and 2020 and pre-tax profit was $20 million and $51 million for the three months ended March 31, 2021 and 2020.

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~~2020 Annual Report on Form ~~10-K,~~10-K. During the ~~Form 8-K that~~first quarter of 2021, we ~~filed with~~changed the ~~SEC on April 29, 2020, which recasts~~naming convention for our FAS/CAS pension accounts. The Net FAS (service)/CAS pension adjustment is now referred to as the ~~disclosures in certain portions of the 2019 Annual Report on Form 10-K to reflect changes in the company’s reportable segments,~~FAS/CAS operating adjustment and the ~~Quarterly Report on Form 10-Q for~~FAS (non-service) pension benefit is now referred to as the ~~quarter ended March 31, 2020.~~Non-operating FAS pension benefit. This change does not impact any current or previously reported amounts.

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 development or 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. AsFor most of our contracts, control is effectively transferred ~~while we perform on our contracts,~~during the period of performance, so we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion) ~~as the~~. 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).

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NORTHROP GRUMMAN CORPORATION

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.

We recognize changes in estimated contract sales or costs and the resulting changes in contract profit on a cumulative basis. Cumulative ~~EAC~~estimate-at-completion (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,~~expense, 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
$ in millions, except per share data		2021		2020
Revenue		$	202	$	136
Operating income		190		124
Net earnings(1)		150		98
Diluted earnings per share(1)		0.92		0.58

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


⁽¹⁾(1)Based on a 21 percent statutory tax rate.	~~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 ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

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 ~~June 30, 2020~~March 31, 2021 was ~~$70.0~~$79.3 billion. WeOf our March 31, 2021 backlog, we expect to recognize approximately 40 percent ~~and 65 percent of our June 30, 2020 backlog~~ as revenue over the next 12 months and 60 percent as revenue over the next 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 ~~June 30,~~March 31, 2021 and 2020 that was included in the ~~December 31, 2019~~ contract liability ~~balance~~balances at the beginning of each year was ~~$442~~$1.1 billion and $781 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 balance was $333 million and $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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Property, Plant, and Equipment

Non-cash investing activities include capital expenditures incurred but not yet paid of $58 million and $92 million for the three months ended March 31, 2021 and 2020, respectively.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:

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


$ in millions	March 31, 2021		December 31, 2020
Unamortized prior service credit, net of tax expense of $2 for 2021 and $3 for 2020	$	8	$	10
Cumulative translation adjustment and other, net	(139)		(138)
Total accumulated other comprehensive loss	$	(131)	$	(128)

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 ~~June 30, 2020,~~March 31, 2021, 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 0.4 million shares and ~~0.6~~0.7 million shares for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, respectively. ~~The dilutive effect of these securities totaled 0.6 million shares for the three and six months ended June 30, 2019.~~

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”). On December 4, 2018, the company’s board of directors authorized a 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 2015 Repurchase Program commenced in March 2016 and were completed in March ~~2020.~~2020 at which time repurchases under the 2018 Repurchase Program commenced. As of March 31, 2021, repurchases under the 2018 Repurchase Program totaled $1.9 billion; $1.1 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.

On ~~December 4, 2018,~~January 25, 2021, 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~~“2021 Repurchase Program”). ~~Repurchases~~By its terms, repurchases under the 2021 Repurchase Program will commence upon completion of the 2018 Repurchase Program commenced in March 2020 upon the completion of the company’s 2015 Repurchase Program. As of June 30, 2020, repurchases under the 2018 Repurchase Program totaled $0.2 billion; $2.8 billion remained under this share repurchase authorization. By its terms, the 2018 Repurchase Program is set toand will expire when we have used all authorized funds for ~~repurchases have been used.~~repurchases.

During the first quarter of 2021, the company entered into an accelerated share repurchase (ASR) agreement with Goldman Sachs & Co. LLC (Goldman Sachs) to repurchase $2.0 billion of the company’s common stock as part of the 2018 Repurchase Program. Under the agreement, we made a payment of $2.0 billion to Goldman Sachs and received an initial delivery of 5.9 million shares valued at $1.7 billion that were immediately canceled by the company. The remaining balance of $300 million is included as a reduction to Retained earnings on the consolidated statement of financial position. The final number of shares to be repurchased will be based on the company’s daily volume-weighted average share price during the term of the transaction, less a discount, and is expected to be completed in the second quarter of 2021. Goldman Sachs may be required to deliver additional shares of common stock to the company at final settlement or, under certain circumstances, the company may be required to either, at the company’s election, deliver shares or make a cash payment to Goldman Sachs.

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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.

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


							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
							2021	2020
September 16, 2015	$	4,000	15.4	$	260.33	March 2020	0	0.9
December 4, 2018	$	3,000	6.4	289.47			5.9	0.1
January 25, 2021	$	3,000	0	0			0	0

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

0.5
—

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.~~

3. INCOME TAXES


	Three Months Ended June 30						Six Months Ended June 30							Three Months Ended March 31
$ in millions	2020			2019			2020			2019			$ in millions		2021			2020
Federal and foreign income tax expense	$	198		$	167		$	383		$	338		Federal and foreign income tax expense		$	821		$	185
Effective income tax rate	16.5		%	16.2		%	17.0		%	16.4		%	Effective income tax rate		27.2		%	17.6		%

The ~~second~~first quarter ~~2020~~2021 effective tax rate ~~of 16.5~~(ETR) increased to 27.2 percent ~~was generally comparable to~~from 17.6 percent in the prior year ~~period.~~period primarily due to federal income taxes resulting from the IT services divestiture, including $250 million of income tax expense related to $1.2 billion of nondeductible goodwill in the divested business. The company’s ~~second~~first quarter 2021 ETR also includes $52 million of research credits. The company’s first quarter 2020 ~~effective tax rate~~ETR includes ~~$48~~$41 million of research credits ~~as compared to $51 million in the prior year period.~~

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

InTaxes receivable are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position. We had 0 taxes receivable as of March ~~2020, 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~~31, 2021 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 second quarter and year to date 2020 effective tax rate.$792 million as of December 31, 2020.

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 Cuts and Jobs Act. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to the final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and future regulatory interpretations of existing tax laws may change. At this time, we cannot reasonably estimate these matters may decrease by up to $70 million. Since enactment of the 2017 Tax Act, the 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.changes.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman ~~2014-2017~~2014-2018 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under ~~IRS~~Internal Revenue Service (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 appeal with the IRS.

4.4. 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:

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


	March 31, 2021						December 31, 2020
$ in millions	Level 1		Level 2		Total		Level 1		Level 2		Total
Financial Assets (Liabilities)
Marketable securities	$	397	$	1	$	398	$	377	$	1	$	378
Marketable securities valued using NAV					17						18
Total marketable securities	397		1		415		377		1		396
Derivatives	0		(1)		(1)		0		0		0

The notional value of the company’s foreign currency forward contracts at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was ~~$71~~$144 million and ~~$98~~$133 million, respectively. At ~~June 30,~~March 31, 2021 and December 31, 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 at December 31, 2019 was $7 million.~~

The derivative fair values and related unrealized gains/losses at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were not material. There were no transfers of financial instruments ~~between the three levels~~into or out of Level 3 of the fair value hierarchy during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021.

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

The estimated fair value of long-term debt was ~~$19.0~~$14.9 billion and ~~$15.1~~$18.2 billion as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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 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~~Repayments of Senior Notes

In March ~~2020,~~2021, the company ~~issued $2.25~~repaid $700 million of 3.50 percent unsecured notes upon maturity.

In March 2021, the company redeemed $1.5 billion of 2.55 percent unsecured ~~senior notes for general corporate purposes, including debt repayment and working capital, as follows:~~

~~We refer~~principally related to the ~~2030 Notes, the 2040 Notes and the 2050 Notes, together, as the “notes.” Interest~~premium paid on the ~~notes is payable semi-annually~~redemption, which was recorded in ~~arrears. The notes are generally subject to redemption,~~Other, net 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~~unaudited condensed consolidated statements of ~~100% of the principal amount of the notes to be redeemed or an applicable “make-whole” amount, plus accrued~~earnings and ~~unpaid interest.~~comprehensive income.

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~~$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~~were 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. In the course of the litigation, the United States subsequently amended its counterclaim, reducing it to seek approximately $193 million. 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, after extensive discovery and motions practice, the parties commenced what was expected to be a seven-week trial. The first four weeks of trial concluded, but the court postponed the remaining estimated three weeks as a result of COVID-19-related concerns. ~~Trial is currently~~After additional COVID-19-related interruptions, trial concluded on March 5, 2021 and the court scheduled ~~to resume in October 2020.~~post-trial briefing. Although the ultimate outcome of ~~these matters (“the FSS matters,” collectively),~~this matter, including any possible loss, cannot be predicted or reasonably estimated at this time, the company intends vigorously to pursue and defend the ~~FSS matters.~~matter.

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 $20 million as of 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 $16 million as of 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 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 $35 million as of 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 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 have executed a settlement agreement in this matter and have filed it with the court for 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

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York State Department of Environmental Conservation (NYSDEC), the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. In December 2019, the State of New York issued an Amended Record of Decision seeking to impose additional remedial requirements beyond measures the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company will take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. The State of New York is preparing to file a new consent decree reflecting the agreement and to seek court approval. We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to ~~these~~the legacy Bethpage environmental conditions. ~~The~~Applicable remediation standards orand other requirements to which we are subject ~~are being reconsidered and are changing and~~may continue to change, our costs may increase ~~materially. As discussed in Note 6, the State of New York issued a Feasibility Study~~materially 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.those costs may not be fully recoverable. 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,~~costs, and the allowability of costs we incur, including with federal and state entities (including the Navy, Defense Contract Management Agency, the ~~state,~~State, local municipalities and water 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 ~~June 30, 2020,~~March 31, 2021, 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 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 ~~June 30, 2020,~~March 31, 2021, or its annual results of operations and/or cash flows.

~~Recently, the~~The U.S. government has raised questions about an interest rate assumption used by the company to determine our CAS pension ~~expense in previous years and in our current forward pricing rate proposal.~~expense. 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 engaging with the government to address their questions, and are preparing our~~submitted a formal response on July 31, 2020, which we believe demonstrates the appropriateness of the assumptions used. ~~However,~~On November 24, 2020, the government replied to the company’s response, disagreeing with our position and requesting additional input, which we provided on February 22, 2021. We are engaging further with the government. 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.

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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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:

$ in millions
Accrued Costs⁽¹⁾⁽²⁾

Reasonably Possible Future Costs in Excess of Accrued Costs⁽²⁾

Deferred Costs⁽³⁾
June 30, 2020 $ 570
$ 452
$ 478
December 31, 2019 531
448
436


$ in millions	Accrued Costs(1)(2)		Reasonably Possible Future Costs in Excess of Accrued Costs(2)		Deferred Costs(3)
March 31, 2021	$	621	$	342	$	534
December 31, 2020	614		346		529

⁽¹⁾As of ~~June 30, 2020, $173~~March 31, 2021, $246 million is recorded in Other current liabilities and ~~$397~~$375 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 ~~June 30, 2020, $144~~March 31, 2021, $218 million is deferred in Prepaid expenses and other current assets and ~~$334~~$316 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 ~~June 30, 2020,~~March 31, 2021, or its annual results of operations and/or cash flows.

With respect to Bethpage, as discussed in Note 5, in December 2019, the State of New York issued ~~a Feasibility Study and~~ an Amended Record of Decision, ~~proposing~~seeking to impose additional remedial ~~requirements.~~requirements beyond those the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company will take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. The ~~company is engaged in discussions with the~~ State of New York is preparing to file a new consent decree reflecting the agreement and ~~other potentially~~

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~~responsible parties.~~to seek court approval. As discussed in Note 5, the applicable remediation standards orand other requirements to which we are subject ~~are being reconsidered and are changing and~~may continue to change, our costs may increase ~~materially.~~materially, and those costs may not be fully recoverable.

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 ~~June 30, 2020,~~March 31, 2021, there were ~~$460~~$480 million of stand-by letters of credit and guarantees and ~~$79~~$80 million of surety bonds outstanding.

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 ~~June 30, 2020,~~March 31, 2021, there were 0 commercial paper borrowings outstanding.

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 borrowing under the 2018 Credit Agreement. At ~~June 30, 2020,~~March 31, 2021, 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 $148 million as of 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 June 30, 2020, there was £50 million (the equivalent of approximately $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 June 30, 2020,~~March 31, 2021, the company was in compliance with all covenants under its credit agreements.

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


	Three Months Ended March 31
		Pension Benefits	OPB
$ in millions			2021		2020		2021		2020
Components of net periodic benefit cost (benefit)
Service cost			$	104	$	102	$	4	$	4
Interest cost			263		307		13		17
Expected return on plan assets			(628)		(594)		(26)		(26)
Amortization of prior service (credit) cost			(2)		(15)		0		1


Net periodic benefit cost (benefit)			$	(263)	$	(200)	$	(9)	$	(4)

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


	Three Months Ended March 31
$ in millions		2021		2020
Defined benefit pension plans		$	27	$	20
OPB plans		11		12
Defined contribution plans		266		256

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~~NORTHROP GRUMMAN CORPORATION~~

8. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS

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:

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


	Three Months Ended March 31
in millions	2021		2020
RSRs granted	0.1		0.1
RPSRs granted	0.2		0.2
Grant date aggregate fair value	$	88	$	87

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

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:

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


	Three Months Ended March 31
$ in millions	2021		2020
Minimum aggregate payout amount	$	31	$	31
Maximum aggregate payout amount	177		175

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~~certain performance metrics over a ~~three-year~~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 June 30 Six Months Ended June 30
$ in millions 2020 2019 2020 2019
Sales
Aeronautics Systems $ 2,925
$ 2,721
$ 5,768
$ 5,539
Defense Systems 1,886
1,916
3,767
3,684
Mission Systems 2,446
2,404
4,793
4,614
Space Systems 2,048
1,788
3,996
3,589
Intersegment eliminations (421 ) (373 ) (820 ) (781 )
Total sales 8,884
8,456
17,504
16,645
Operating income
Aeronautics Systems 310
299
573
610
Defense Systems 217
212
415
416
Mission Systems 347
338
700
661
Space Systems 209
193
411
383
Intersegment eliminations (52 ) (49 ) (101 ) (99 )
Total segment operating income 1,031

993
1,998
1,971
Net FAS (service)/CAS pension adjustment 103
107
208
215
Unallocated corporate expense (140 ) (154 ) (278 ) (304 )
Total operating income $ 994
$ 946
$ 1,928
$ 1,882


	Three Months Ended March 31
$ in millions		2021		2020
Sales
Aeronautics Systems		$	2,990	$	2,843
Defense Systems		1,562		1,881
Mission Systems		2,589		2,347
Space Systems		2,521		1,948
Intersegment eliminations		(505)		(399)
Total sales		9,157		8,620
Operating income
Aeronautics Systems		308		263
Defense Systems		177		198
Mission Systems		397		353
Space Systems		276		202
Intersegment eliminations		(63)		(49)
Total segment operating income		1,095		967
FAS/CAS operating adjustment		19		105
Unallocated corporate income (expense)		1,708		(138)
Total operating income		$	2,822	$	934

~~Net FAS (Service)/~~FAS/CAS ~~Pension~~Operating 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 FAS/CAS operating adjustment, previously referred to as 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~~Income (Expense)

Unallocated corporate ~~expense~~income (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~~income (expense) also includes costs not considered part of management’s evaluation of segment 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, as well as certain compensation and other costs.

During the first quarter of 2021, the $2.0 billion pre-tax gain on the sale of our IT services business and $192 million of unallowable state taxes and transaction costs associated with the divestiture were recorded in Unallocated corporate income (expense).

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Disaggregation of Revenue


Sales by Customer Type	Three Months Ended March 31
		2021			2020
$ in millions			$		%(3)		$		%(3)
Aeronautics Systems
U.S. government(1)			$	2,541	85	%	$	2,361	83	%
International(2)			399		14	%	444		16	%
Other customers			6		0	%	12		0	%
Intersegment sales			44		1	%	26		1	%
Aeronautics Systems sales			2,990		100	%	2,843		100	%
Defense Systems
U.S. government(1)			993		64	%	1,259		67	%
International(2)			351		22	%	340		18	%
Other customers			33		2	%	111		6	%
Intersegment sales			185		12	%	171		9	%
Defense Systems sales			1,562		100	%	1,881		100	%
Mission Systems
U.S. government(1)			1,834		71	%	1,671		71	%
International(2)			502		19	%	483		21	%
Other customers			16		1	%	17		1	%
Intersegment sales			237		9	%	176		7	%
Mission Systems sales			2,589		100	%	2,347		100	%
Space Systems
U.S. government(1)			2,326		92	%	1,803		93	%
International(2)			105		4	%	68		3	%
Other customers			51		2	%	51		3	%
Intersegment sales			39		2	%	26		1	%
Space Systems sales			2,521		100	%	1,948		100	%
Total
U.S. government(1)			7,694		84	%	7,094		83	%
International(2)			1,357		15	%	1,335		15	%
Other customers			106		1	%	191		2	%
Total Sales			$	9,157	100	%	$	8,620	100	%

Sales by Customer Type Three Months Ended June 30 Six Months Ended June 30
2020 2019 2020 2019
$ in millions $
%⁽³⁾
$
%⁽³⁾
$
%⁽³⁾
$
%⁽³⁾
Aeronautics Systems
U.S. government⁽¹⁾
$ 2,477
85 % $ 2,238
82 % $ 4,838
84 % $ 4,572
82 %
International⁽²⁾
407
14 % 439
16 % 851
15 % 874
16 %
Other customers 12
— % 20
1 % 24
— % 45
1 %
Intersegment sales 29
1 % 24
1 % 55
1 % 48
1 %
Aeronautics Systems sales 2,925
100 % 2,721
100 % 5,768
100 % 5,539
100 %
Defense Systems
U.S. government⁽¹⁾
1,305
69 % 1,281
67 % 2,564
68 % 2,422
66 %
International⁽²⁾
316
17 % 365
19 % 656
18 % 728
20 %
Other customers 85
4 % 106
5 % 196
5 % 203
5 %
Intersegment sales 180
10 % 164
9 % 351
9 % 331
9 %
Defense Systems sales 1,886
100 % 1,916
100 % 3,767
100 % 3,684
100 %
Mission Systems
U.S. government⁽¹⁾
1,776
73 % 1,746
73 % 3,447
72 % 3,359
73 %
International⁽²⁾
468
19 % 465
19 % 951
20 % 841
18 %
Other customers 18
1 % 29
1 % 35
1 % 53
1 %
Intersegment sales 184
7 % 164
7 % 360
7 % 361
8 %
Mission Systems sales 2,446
100 % 2,404
100 % 4,793
100 % 4,614
100 %
Space Systems
U.S. government⁽¹⁾
1,911
93 % 1,679
94 % 3,714
93 % 3,348
93 %
International⁽²⁾
70
4 % 32
2 % 138
3 % 75
2 %
Other customers 39
2 % 56
3 % 90
3 % 125
4 %
Intersegment sales 28
1 % 21
1 % 54
1 % 41
1 %
Space Systems sales 2,048
100 % 1,788
100 % 3,996
100 % 3,589
100 %
Total
U.S. government⁽¹⁾
7,469
84 % 6,944
82 % 14,563
83 % 13,701
82 %
International⁽²⁾
1,261
14 % 1,301
16 % 2,596
15 % 2,518
15 %
Other customers 154
2 % 211
2 % 345
2 % 426
3 %
Total Sales $ 8,884
100 % $ 8,456
100 % $ 17,504
100 % $ 16,645
100 %


⁽¹⁾(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.	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
		2021			2020
$ in millions			$		%(1)		$		%(1)
Aeronautics Systems
Cost-type			$	1,411	48	%	$	1,343	48	%
Fixed-price			1,535		52	%	1,474		52	%
Intersegment sales			44				26
Aeronautics Systems sales			2,990				2,843
Defense Systems
Cost-type			509		37	%	628		37	%
Fixed-price			868		63	%	1,082		63	%
Intersegment sales			185				171
Defense Systems sales			1,562				1,881
Mission Systems
Cost-type			865		37	%	846		39	%
Fixed-price			1,487		63	%	1,325		61	%
Intersegment sales			237				176
Mission Systems sales			2,589				2,347
Space Systems
Cost-type			1,844		74	%	1,398		73	%
Fixed-price			638		26	%	524		27	%
Intersegment sales			39				26
Space Systems sales			2,521				1,948
Total
Cost-type			4,629		51	%	4,215		49	%
Fixed-price			4,528		49	%	4,405		51	%
Total Sales			$	9,157			$	8,620

(1)Percentages calculated based on external customer sales.

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Sales by Contract Type Three Months Ended June 30 Six Months Ended June 30
2020 2019 2020 2019
$ in millions $
%⁽¹⁾
$
%⁽¹⁾
$
%⁽¹⁾
$
%⁽¹⁾
Aeronautics Systems

Cost-type $ 1,426
49 % $ 1,312
49 % $ 2,769
48 % $ 2,624
48 %
Fixed-price 1,470
51 % 1,385
51 % 2,944
52 % 2,867
52 %
Intersegment sales 29
24
55
48

Aeronautics Systems sales 2,925
2,721
5,768
5,539

Defense Systems
Cost-type 582
34 % 632
36 % 1,210
35 % 1,255
37 %
Fixed-price 1,124
66 % 1,120
64 % 2,206
65 % 2,098
63 %
Intersegment sales 180
164
351
331

Defense Systems sales 1,886
1,916
3,767
3,684

Mission Systems
Cost-type 895
40 % 870
39 % 1,741
39 % 1,705
40 %
Fixed-price 1,367
60 % 1,370
61 % 2,692
61 % 2,548
60 %
Intersegment sales 184
164
360
361

Mission Systems sales 2,446
2,404
4,793
4,614

Space Systems
Cost-type 1,468
73 % 1,298
73 % 2,866
73 % 2,604
73 %
Fixed-price 552
27 % 469
27 % 1,076
27 % 944
27 %
Intersegment sales 28
21
54
41

Space Systems sales 2,048
1,788
3,996
3,589

Total
Cost-type 4,371
49 % 4,112
49 % 8,586
49 % 8,188
49 %
Fixed-price 4,513
51 % 4,344
51 % 8,918
51 % 8,457
51 %
Total Sales $ 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
		2021	2020
$ in millions			$		%(2)		$		%(2)
Aeronautics Systems
United States			$	2,547	87	%	$	2,373	84	%
Asia/Pacific			279		9	%	207		8	%
Europe			100		3	%	166		6	%
All other(1)			20		1	%	71		2	%
Intersegment sales			44				26
Aeronautics Systems sales			2,990				2,843
Defense Systems
United States			1,026		75	%	1,370		80	%
Asia/Pacific			103		7	%	82		5	%
Europe			76		6	%	70		4	%
All other(1)			172		12	%	188		11	%
Intersegment sales			185				171
Defense Systems sales			1,562				1,881
Mission Systems
United States			1,850		79	%	1,688		78	%
Asia/Pacific			160		7	%	176		8	%
Europe			269		11	%	225		10	%
All other(1)			73		3	%	82		4	%
Intersegment sales			237				176
Mission Systems sales			2,589				2,347
Space Systems
United States			2,376		95	%	1,854		97	%
Asia/Pacific			16		1	%	5		0	%
Europe			88		4	%	59		3	%
All other(1)			2		0	%	4		0	%
Intersegment sales			39				26
Space Systems sales			2,521				1,948
Total
United States			7,799		85	%	7,285		85	%
Asia/Pacific			558		6	%	470		5	%
Europe			533		6	%	520		6	%
All other(1)			267		3	%	345		4	%
Total Sales			$	9,157			$	8,620

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

(2)Percentages calculated based on external customer sales.

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Sales by Geographic Region Three Months Ended June 30 Six Months Ended June 30
2020 2019 2020 2019
$ in millions $
%⁽²⁾
$
%⁽²⁾
$
%⁽²⁾
$
%⁽²⁾
Aeronautics Systems
United States $ 2,489
86 % $ 2,258
84 % $ 4,862
85 % $ 4,617
84 %
Asia/Pacific 202
7 % 215
8 % 409
7 % 448
8 %
All other⁽¹⁾
205
7 % 224
8 % 442
8 % 426
8 %
Intersegment sales 29
24
55
48

Aeronautics Systems sales 2,925
2,721
5,768
5,539

Defense Systems
United States 1,390
82 % 1,387
79 % 2,760
81 % 2,625
78 %
Asia/Pacific 107
6 % 125
7 % 189
5 % 213
6 %
All other⁽¹⁾
209
12 % 240
14 % 467
14 % 515
16 %
Intersegment sales 180
164
351
331

Defense Systems sales 1,886
1,916
3,767
3,684

Mission Systems
United States 1,794
79 % 1,775
79 % 3,482
79 % 3,412
80 %
Asia/Pacific 191
9 % 142
6 % 367
8 % 277
7 %
All other⁽¹⁾
277
12 % 323
15 % 584
13 % 564
13 %
Intersegment sales 184
164
360
361

Mission Systems sales 2,446
2,404
4,793
4,614

Space Systems
United States 1,950
97 % 1,735
98 % 3,804
97 % 3,473
98 %
Asia/Pacific 5
— % 2
— % 10
— % 14
— %
All other⁽¹⁾
65
3 % 30
2 % 128
3 % 61
2 %
Intersegment sales 28
21
54
41

Space Systems sales 2,048
1,788
3,996
3,589

Total
United States 7,623
86 % 7,155
84 % 14,908
85 % 14,127
85 %
Asia/Pacific 505
6 % 484
6 % 975
6 % 952
6 %
All other⁽¹⁾
756
8 % 817
10 % 1,621
9 % 1,566
9 %
Total Sales $ 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.~~

~~-17-~~

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 ~~June 30, 2020,~~March 31, 2021, 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 ~~June 30,~~March 31, 2021 and 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,~~2020, 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,~~27, 2021, 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,~~2020, 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, 2021

~~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; strategic deterrence systems; hypersonics; missile defense; weapons systems; 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~~2020 Annual Report on Form 10-K, ~~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, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. These documents provideprovides additional information on our business and the environment in which we operate and our operating results.

Divestiture of IT and Mission Support Services Business

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. We discuss in some detail in our Annual Report on Form 10-K the pandemic, its impacts and actions taken up to the time of filing. 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 business resumption teams, and local site leadershipthis Form 10-Q, we provide an update. We continue closely to monitor and address the developments, including the impact on our company, our employees, our customers, our suppliers and our communities. The company ~~has considered and~~ continues to consider health data and guidance from the Centers for Disease Control and Prevention (CDC), other health organizations, ~~governments~~federal, state and local governmental authorities, and our customers, among others. In the first quarter of 2021, COVID-19 case rates and the health and economic impacts of the pandemic increased and decreased in different communities in the US and globally. In the U.S., the Food and Drug Administration (FDA) issued emergency use authorization for COVID-19 vaccines and the government began to administer them. The company has taken various steps to facilitate access for our employees, in accordance with federal guidelines and state and local vaccination plans. We have ~~taken,~~provided paid leave and ~~continue~~flexibility for employees to get vaccinated. The company continues 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; 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.

Earlier in the COVID-19 pandemic, many state and local jurisdictions implemented mandatory stay-at-home or shelter-in-place orders. Most of those orders 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 actionsglobally 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.~~with continued performance. We ~~have~~ also ~~taken various~~continue to take steps ~~in efforts~~ to support our

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~~NORTHROP GRUMMAN CORPORATION~~

suppliers, with a particular focus on critical small and midsized business partners, including passing through increased progress payments from the 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 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, 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.

~~COVID-19-related impacts reduced the~~The company’s ~~second~~first quarter ~~2020~~2021 revenue and operating income ~~in 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.~~significantly impacted by COVID-19. However, our employees, suppliers and customers, the company and our global community ~~are facing~~continue to face tremendous challenges and we cannot predict how this dynamic situation will evolve or the impact it will have on the company. For further information on the pandemic and the potential impact to the company of COVID-19, see ~~the section entitled~~“Liquidity and Capital Resources” below and “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our ~~Quarterly~~2020 Annual Report on Form ~~10-Q for the quarter ended March 31, 2020.~~10-K.

U.S. Political and Economic Environment

Since the filing of our ~~2019~~2020 Annual Report on Form 10-K, the ~~President~~Administration has not released ~~his~~a budget request for fiscal year ~~2021 (FY21) on February 10, 2020. The FY21 budget~~2022. However, the Administration released a summary of the President’s discretionary funding request ~~includes $746~~for fiscal year 2022, which proposes $753 billion for national ~~security, which will be~~defense programs and $769 billion in non-defense discretionary funding. On March 11, 2021, the ~~subject~~American Rescue Plan Act of ~~debate in Congress.~~2021 was enacted to address certain impacts of the COVID-19 crisis and extend certain measures previously enacted under earlier relief bills. The ~~FY21 budget request addresses various capabilities highlighted in~~Administration also recently announced a $2 trillion infrastructure plan. The COVID-19 relief bill and, if enacted, an

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infrastructure bill, may have broader implications for the ~~U.S. National Security Strategy, the National Defense Strategy~~defense industry, our customers’ budgets and priorities, and the ~~Missile Defense Review. We~~overall economic environment, including the national debt. It is difficult to predict the specific course of future defense budgets. However, the threat to national security remains very substantial and we believe that our capabilities, particularly in space, missiles, missile defense, hypersonics, counter-hypersonics, survivable aircraft and mission systems ~~will~~should help our customers to meet the threats and, as a result, continue to allow for long-term profitable growth in our ~~business~~business.

The political environment, federal budget and debt ceiling are expected to continue to be the subject of considerable debate, which could have material impacts on defense spending broadly and the company’s programs in ~~support of~~particular.

For further information on the risks we face from the current political and economic environment, see “Risk Factors” in our ~~customers’ needs. Congress has enacted emergency COVID-19 relief bills addressing certain impacts of the pandemic and is continuing to consider other responses to the COVID-19 crisis.~~2020 Annual Report on Form 10-K.

CONSOLIDATED OPERATING RESULTS

For purposes of the operating results discussion below, we assess our performance using certain financial measures that are not calculated in accordance with GAAP. Organic sales is defined as total sales excluding sales attributable to the company's IT services divestiture. This measure may be useful to investors and other users of our financial statements as a supplemental measure in evaluating the company’s underlying sales growth as well as in providing an understanding of our ongoing business and future sales trends by presenting the company’s sales before the impact of divestiture activity.

Transaction-adjusted net earnings and transaction-adjusted earnings per share exclude impacts related to the IT services divestiture, including the gain on sale of the business, associated federal and state income tax expenses, transaction costs, and the make-whole premium for early debt redemption. They also exclude the impact of mark-to-market pension and OPB (“MTM”) expense and related tax impacts, which are generally only recognized during the fourth quarter. These non-GAAP measures may be useful to investors and other users of our financial statements as supplemental measures in evaluating the company’s underlying financial performance by presenting the company’s operating results before the non-operational impact of divestiture activity and pension and OPB actuarial gains and losses. These measures are also consistent with how management views the underlying performance of the business as the impact of the IT services divestiture and MTM accounting are not considered in management’s assessment of the company’s operating performance or in its determination of incentive compensation awards.

We reconcile these non-GAAP financial measures to their most directly comparable GAAP financial measures below. These non-GAAP measures may not be defined and calculated by other companies in the same manner and should not be considered in isolation or as an alternative to operating results presented in accordance with GAAP.

Selected financial highlights are presented in the table below:


	Three Months Ended March 31				%
$ in millions, except per share amounts		2021			2020			Change
Sales		$	9,157		$	8,620		6	%
Operating costs and expenses		8,315			7,686			8	%
Operating costs and expenses as a % of sales		90.8		%	89.2		%
Gain on sale of business		1,980			—			NM
Operating income		2,822			934			202	%
Operating margin rate		30.8		%	10.8		%
Federal and foreign income tax expense		821			185			344	%
Effective income tax rate		27.2		%	17.6		%
Net earnings		2,195			868			153	%
Diluted earnings per share		$	13.43		$	5.15		161	%

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

~~Sales~~The table below reconciles sales to organic sales:

~~Current Quarter~~


	Three Months Ended March 31
		2021						2020
$ in millions		Sales		IT services sales		Organic sales		Sales		IT services sales		Organic sales		Organic sales % change
Aeronautics Systems		$	2,990	$	—	$	2,990	$	2,843	$	—	$	2,843	5	%
Defense Systems		1,562		(106)		1,456		1,881		(389)		1,492		(2)	%
Mission Systems		2,589		(42)		2,547		2,347		(130)		2,217		15	%
Space Systems		2,521		(16)		2,505		1,948		(44)		1,904		32	%
Intersegment eliminations		(505)		2		(503)		(399)		4		(395)
Total		$	9,157	$	(162)	$	8,995	$	8,620	$	(559)	$	8,061	12	%

~~Second~~First quarter ~~2020~~2021 sales increased ~~$428~~$537 million, or 56 percent, ~~primarily~~ due to higher sales at Space Systems, Mission Systems and Aeronautics ~~Systems.~~

~~Year~~systems, partially offset by lower sales at Defense Systems principally due to ~~Date~~

~~Year to date 2020~~the impact of the IT services divestiture. First quarter 2021 organic sales increased ~~$859~~$934 million, or 12 percent. As a result of the company using a fiscal calendar convention for interim reporting periods (as described in Note 1 to the financial statements), sales at each sector during the first quarter of 2021 benefited approximately 5 percent ~~due~~from three additional working days when compared to ~~higher sales at all four sectors.~~

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2020.

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

~~Current Quarter~~

~~Second~~First quarter ~~2020~~2021 operating income increased ~~$48 million,~~$1.9 billion, or 5202 percent, primarily due to ~~an increase in~~the IT services divestiture, including the $2.0 billion pre-tax gain on sale and $192 million of unallocated corporate expense for unallowable state taxes and transaction costs. Operating income also increased due to higher segment operating income, ~~and~~partially offset by a lower ~~unallocated corporate expense. Second~~FAS/CAS operating adjustment. First quarter ~~2020~~2021 operating margin rate ~~of 11.2~~increased to 30.8 percent ~~was comparable to~~reflecting the ~~prior year period.~~items above.

~~Second~~First quarter ~~2020~~2021 general and administrative (G&A) costs as a percentage of sales ~~of 9.4~~increased to 9.8 percent ~~was comparable to~~from 9.1 percent in the prior ~~year period.~~

~~Year to Date~~

~~Year to date 2020 operating income increased $46 million, or 2 percent,~~period primarily due to an increase in segment operating income and 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~~the timing of ~~sales of 9.3 percent was comparable to~~indirect cost recognition during the ~~prior year period.~~year.

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 ~~second~~first quarter ~~2020~~2021 effective tax rate ~~of 16.5~~increased to 27.2 percent ~~was generally comparable to~~from 17.6 percent in the prior year ~~period.~~period primarily due to federal income taxes resulting from the IT services divestiture. See Note 3 to the financial statements for additional information.

~~Year to Date~~

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Net Earnings

The ~~year~~table below reconciles net earnings to ~~date 2020 effective~~transaction-adjusted net earnings:


	Three Months Ended March 31				%
$ in millions	2021		2020		Change
Net earnings	$	2,195	$	868	153	%
Gain on sale of business	(1,980)		—		NM
State tax impact1	160		—		NM
Transaction costs	32		—		NM
Make-whole premium	54		—		NM
Federal tax impact of items above2	614		—		NM
Adjustment, net of tax	$	(1,120)	$	—	NM
Transaction-adjusted net earnings	$	1,075	$	868	24	%

(1)The state tax ~~rate increased~~impact includes $62 million of incremental tax expense related to ~~17.0 percent from 16.4 percent~~$1.2 billion of nondeductible goodwill in the ~~prior period primarily due to an increase in reserves for uncertain~~divested business.

(2)The federal tax ~~positions. See Note 3~~impact was calculated by applying the 21 percent federal statutory rate to the ~~financial statements for additional information.~~

~~Net Earnings~~adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.

~~Current Quarter~~

~~Second~~First quarter ~~2020~~2021 net earnings increased ~~$144 million,~~$1.3 billion, or 17153 percent, primarily due to ~~a $103~~the IT services divestiture. Transaction-adjusted net earnings increased $207 million ~~increase in our FAS (non-service) pension benefit, a $48 million increase in~~or 24 percent, primarily due to higher segment operating income and ~~a $41 million increase~~increases in non-operating FAS pension benefit and Other, net, ~~largely~~principally due to ~~higher~~favorable returns on marketable securities related to our non-qualified benefit ~~plans, partially offset by a $31 million increase in tax expense.~~plans.

~~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, largely due to lower returns on marketable securities related to our non-qualified benefit plans, and a $45 million increase in tax expense.

Diluted Earnings Per Share

The table below reconciles diluted earnings per share to transaction-adjusted earnings per share:


	Three Months Ended March 31				%
	2021		2020		Change
Diluted EPS	$	13.43	$	5.15	161	%
Gain on sale of business per share	(12.11)		—		NM
State tax impact per share1	0.98		—		NM
Transaction costs per share	0.19		—		NM
Make-whole premium per share	0.33		—		NM
Federal tax impact of line items above per share2	3.75		—		NM
Adjustment, net of tax per share	$	(6.86)	$	—	NM
Transaction-adjusted earnings per share	$	6.57	$	5.15	28	%

(1)The state tax impact includes $62 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.

~~Current Quarter~~(2)The federal tax impact was calculated by applying the 21 percent federal statutory rate to the adjustment items and also includes $250 million of incremental tax expense related to $1.2 billion of nondeductible goodwill in the divested business.

~~Second~~First quarter ~~2020~~2021 diluted earnings per share increased 19161 percent, principally due to a $6.86 increase associated with the IT services divestiture. Transaction-adjusted earnings per share increased $1.42, or 28 percent, reflecting a 1724 percent increase in transaction-adjusted net earnings and a 23 percent reduction in weighted-average diluted shares outstanding.

~~Year to Date~~

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~~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.~~

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SEGMENT OPERATING RESULTS

Basis of Presentation

~~Effective January 1, 2020, the~~The company ~~reorganized its~~is aligned in four 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~~segments: Aeronautics Systems, Defense Systems, Mission Systems and Space Systems. ~~This realignment is reflected in the accompanying financial information.~~

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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 Multifunction Sensors ~~& Networks~~

Launch & Strategic Missiles

Manned Aircraft

Mission Readiness

~~Cyber & Intelligence Mission Solutions~~

~~Space~~

Maritime/Land Systems & Sensors

Space

Navigation, Targeting & Survivability

Networked Information Solutions

Effective during the first quarter of 2021 within Mission Systems, the businesses of the former Cyber & Intelligence Mission Solutions business area that remained with Northrop Grumman after the IT services divestiture were merged with the Communications business unit and F-35 Communications, Navigation and Identification programs within the former Airborne, Sensors & Networks business area to form the Networked Information Solutions business area. The Airborne Sensors & Networks business area was then renamed the Airborne Multifunction Sensors business area to better reflect its new portfolio. This change had no impact on the segment operating results of Mission Systems as a whole.

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 service 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				%
$ in millions		2021			2020			Change
Segment operating income		$	1,095		$	967		13	%
Segment operating margin rate		12.0		%	11.2		%
CAS pension expense		123			207			(41)	%
Less: FAS pension service expense		(104)			(102)			2	%
FAS/CAS operating adjustment		19			105			(82)	%
Gain on sale of business		1,980			—			NM
IT services divestiture – unallowable state taxes and transaction costs		(192)			—			NM
Intangible asset amortization and PP&E step-up depreciation		(65)			(82)			(21)	%

Other unallocated corporate expense		(15)			(56)			(73)	%
Unallocated corporate income (expense)		1,708			(138)			NM
Operating income		$	2,822		$	934		202	%

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

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~~Current Quarter~~

~~Second~~First quarter ~~2020~~2021 segment operating income increased ~~$38~~$128 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~~13 percent, and reflects higher operating income at ~~Mission~~Space Systems, Aeronautics Systems and ~~Space~~Mission Systems, partially offset by lower operating income at ~~Aeronautics Systems.~~Defense Systems due to the impact of the IT services divestiture. First quarter 2021 segment operating income from the IT services business was $20 million as compared to $51 million in the prior year period. First quarter 2021 segment operating income includes a benefit of approximately $100 million due to the impact of lower overhead rates on the company’s fixed price contracts. The lower projected overhead rates were principally driven by a reduction in projected CAS pension costs as well as operational performance at the sectors, which more than offset lower business base due to the IT services divestiture. Segment operating margin rate ~~decreased~~increased to ~~11.4~~12.0 percent from 11.2 percent and reflects higher operating margins at all four sectors largely as a result of the items discussed above.

FAS/CAS Operating Adjustment

The first quarter 2021 FAS/CAS operating adjustment decreased primarily due to a lower ~~segment operating margin rate at Aeronautics Systems.~~

~~Net FAS (service)/~~CAS ~~Pension Adjustment~~

~~The second quarter~~pension expense resulting from favorable plan asset returns in 2020 and ~~year to date 2020 net FAS (service)/CAS pension adjustments were comparable to the prior year period and reflect~~ changes in certain CAS actuarial assumptions as of December 31, ~~2019.~~2020.

Unallocated Corporate ~~Expense~~Income (Expense)

~~Current Quarter~~

~~The decrease in second quarter 2020~~Year to date 2021 unallocated corporate ~~expense is~~income (expense) increased primarily due to ~~$21~~a $2.0 billion pre-tax gain on the sale of our IT services business, partially offset by $192 million of unallowable state taxes and transaction costs associated with the divestiture. It also increased due to a net increase in deferred state tax assets principally resulting from certain state tax legislation adopted in 2020 that places temporary limitations on tax credits, as well as lower intangible asset amortization and PP&E step-up depreciation.

~~Year to Date~~

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~~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.~~

NORTHROP GRUMMAN CORPORATION

Net EAC Adjustments - We record changes in estimated contract earnings at completion (net EAC adjustments) using the cumulative catch-up method of accounting. Net EAC adjustments can have a significant effect on reported sales and operating income and the aggregate amounts are presented in the table below:


	Three Months Ended June 30						Six Months Ended June 30							Three Months Ended March 31
$ in millions	2020			2019			2020			2019			$ in millions		2021		2020
Favorable EAC adjustments	$	241		$	283		$	517		$	518		Favorable EAC adjustments		$	348	$	276
Unfavorable EAC adjustments	(129		)	(125		)	(281		)	(222		)	Unfavorable EAC adjustments		(158)		(152)
Net EAC adjustments	$	112		$	158		$	236		$	296		Net EAC adjustments		$	190	$	124

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


	Three Months Ended June 30						Six Months Ended June 30							Three Months Ended March 31
$ in millions	2020			2019			2020			2019			$ in millions		2021		2020
Aeronautics Systems	$	22		$	59		$	34		$	110		Aeronautics Systems		$	37	$	12
Defense Systems	39			38			61			70			Defense Systems		30		22
Mission Systems	59			52			138			87			Mission Systems		88		79
Space Systems	(7		)	16			5			37			Space Systems		37		12
Eliminations	(1		)	(7		)	(2		)	(8		)	Eliminations		(2)		(1)
Net EAC adjustments	$	112		$	158		$	236		$	296		Net EAC adjustments		$	190	$	124

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.


AERONAUTICS SYSTEMS	Three Months Ended March 31				%
$ in millions		2021			2020			Change
Sales		$	2,990		$	2,843		5	%
Operating income		308			263			17	%
Operating margin rate		10.3		%	9.3		%

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AERONAUTICS SYSTEMS Three Months Ended June 30 % Six Months Ended June 30 %
$ in millions 2020 2019 Change 2020 2019 Change
Sales $ 2,925
$ 2,721
7 % $ 5,768
$ 5,539
4 %
Operating income 310
299
4 % 573
610
(6 )%
Operating margin rate 10.6 % 11.0 % 9.9 % 11.0 %

~~Sales~~

~~Current Quarter~~

~~Second~~First quarter ~~2020~~2021 sales increased ~~$204~~$147 million, or 75 percent, due to higher sales in ~~both~~ Manned Aircraft, ~~and~~partially offset by lower sales in Autonomous Systems. ~~Higher~~Manned Aircraft sales reflect higher volume on restricted programs, ~~E-2D~~as well as the E-2 and ~~Triton were~~F-35 production programs, 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~~reduction in ~~both Manned Aircraft and Autonomous Systems. Higher volume on restricted programs and E-2D were partially offset by a COVID-19-related slowdown of F-35~~A350 production activity and lower volume on the B-2 Defensive Management ~~System~~Systems Modernization program as it nears completion. Autonomous Systems sales reflect lower volume on certain Global Hawk production programs as they near completion.

Operating Income

~~Current Quarter~~

~~Second~~First quarter ~~2020~~2021 operating income increased ~~$11~~$45 million, or 4 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 9.9 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.

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

~~Sales~~

~~Current Quarter~~

Second quarter 2020 sales decreased $30 million, or 2 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 GMLRS, AARGM and other missile 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 the Hunter sustainment program as it nears completion.

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~~Operating Income~~

~~Current Quarter~~

Second quarter 2020 operating income increased $5 million, or 2 percent, primarily due to a higher operating margin rate. Operating margin rate 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 11.0 percent from 11.3 percent primarily due to favorable adjustments on certain small caliber ammunition programs in the first quarter of 2019, partially offset by improved performance on Mission Readiness programs.

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

~~Sales~~

~~Current Quarter~~

Second quarter 2020 sales increased $42 million, or 2 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, 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 MESA, SABR and F-35 programs. Maritime/Land Systems & Sensors sales increased primarily due to higher volume on marine systems and restricted 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~~

~~Current Quarter~~

~~Second quarter 2020 operating income increased $9 million, or 3 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~~17 percent, due to higher sales and a higher operating margin rate. Operating margin rate increased to ~~14.6~~10.3 percent from ~~14.3~~9.3 percent, principally due to higher net favorable EAC adjustments, which were largely driven by the previously described reduction in overhead rates.

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DEFENSE SYSTEMS	Three Months Ended March 31				%
$ in millions		2021			2020			Change
Sales		$	1,562		$	1,881		(17)	%
Operating income		177			198			(11)	%
Operating margin rate		11.3		%	10.5		%

Sales

First quarter 2021 sales decreased $319 million, or 17 percent, primarily due to a $283 million reduction in sales related to the IT services divestiture. First quarter 2021 organic sales decreased $36 million, or 2 percent, due principally to the close-out of the contract at the Army’s Lake City ammunition plant, partially offset by higher volume on the Guided Missile Launch Rocket System and Advanced Anti-Radiation Guided Missile programs.

Operating Income

First quarter 2021 operating income decreased $21 million, or 11 percent, primarily due to the impact of the IT services divestiture. Operating margin rate increased to 11.3 percent from 10.5 percent primarily due to improved performance ~~on Airborne Sensors & Networks~~at Battle Management and ~~Cyber & Intelligence Mission Solutions programs,~~Missile Systems.


MISSION SYSTEMS	Three Months Ended March 31				%
$ in millions		2021			2020			Change
Sales		$	2,589		$	2,347		10	%
Operating income		397			353			12	%
Operating margin rate		15.3		%	15.0		%

Sales

First quarter 2021 sales increased $242 million, or 10 percent, due to higher volume across the sector, partially offset by an $88 million reduction in sales related to the IT services divestiture. First quarter 2021 organic sales increased $330 million, or 15 percent. Airborne Multifunction Sensors sales increased principally due to higher airborne radar volume, including the Scalable Agile Beam Radar (SABR) program, and higher restricted volume. Maritime/Land Systems and Sensors sales increased primarily due to higher volume on land systems, including the Ground/Air Task-Oriented Radar (G/ATOR) program, and higher marine systems volume. Navigation, Targeting and Survivability sales increased primarily due to higher volume on targeting and navigation programs, including LITENING, as well as higher intercompany volume on the Ground Based Strategic Deterrent (GBSD) program. Networked Information Solutions sales increased primarily due to higher volume on electronic warfare programs, including the Joint Counter Radio-Controlled Improvised Explosive Device Electronic Warfare (JCREW) program, and higher restricted volume.

Operating Income

First quarter 2021 operating income increased $44 million, or 12 percent, due to higher sales volume and a higher operating margin rate. Operating margin rate increased to 15.3 percent from 15.0 percent primarily due to higher net favorable EAC adjustments, which reflect a benefit for the previously described reduction in overhead rates and lower net favorable EAC adjustments ~~and changes in contract mix~~ at ~~Navigation, Targeting & Survivability.~~Networked Information Solutions.


SPACE SYSTEMS	Three Months Ended March 31				%
$ in millions		2021			2020			Change
Sales		$	2,521		$	1,948		29	%
Operating income		276			202			37	%
Operating margin rate		10.9		%	10.4		%

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

~~Sales~~

~~Current Quarter~~

~~Second~~First quarter ~~2020~~2021 sales increased ~~$260~~$573 million, or 1529 percent, primarily due to higher sales in both ~~Space and~~the Launch & Strategic ~~Missiles.~~Missiles and Space business areas, partially offset by a $28 million reduction in sales related to the IT services divestiture. First quarter 2021 organic sales increased $601 million, or 32 percent. Launch & Strategic Missiles sales increased primarily due to ramp-up on GBSD and higher volume on hypersonics programs. Space

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sales were driven by higher volume on restricted programs, NASA Artemis programs and the 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.

~~Year to Date~~Operating Income

~~Year to date 2020 sales~~First quarter 2021 operating income increased ~~$407~~$74 million, or 1137 percent, due to higher sales ~~in both Space~~volume and ~~Launch & Strategic Missiles. Space sales were driven by~~a higher volume on 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, partially offset by lower volume on GMD.

operating margin rate. Operating ~~Income~~

~~Current Quarter~~

~~Second quarter 2020 operating income~~margin rate increased ~~$16 million, or 8~~to 10.9 percent from 10.4 percent primarily due to higher ~~sales. Operating margin rate decreased to 10.2 percent from 10.8 percent principally due to delays~~net favorable EAC adjustments, which were largely driven by the previously described reduction in ~~production for certain commercial space components.~~overhead rates.

~~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 June 30								Six Months Ended June 30									Three Months Ended March 31
$ in millions	2020				2019				2020				2019				$ in millions		2021	2020
Segment Information:	Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Segment Information:			Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses
Aeronautics Systems																	Aeronautics Systems
Product	$	2,512	$	2,247	$	2,301	$	2,068	$	4,921	$	4,446	$	4,706	$	4,210	Product			$	2,524	$	2,274	$	2,409	$	2,199
Service	384		342		396		333		792		700		785		676		Service			422		369		408		358
Intersegment eliminations	29		26		24		21		55		49		48		43		Intersegment eliminations			44		39		26		23
Total Aeronautics Systems	2,925		2,615		2,721		2,422		5,768		5,195		5,539		4,929		Total Aeronautics Systems			2,990		2,682		2,843		2,580
Defense Systems																	Defense Systems
Product	753		676		697		626		1,523		1,380		1,318		1,183		Product			680		595		770		704
Service	953		831		1,055		931		1,893		1,657		2,035		1,789		Service			697		624		940		826
Intersegment eliminations	180		162		164		147		351		315		331		296		Intersegment eliminations			185		166		171		153
Total Defense Systems	1,886		1,669		1,916		1,704		3,767		3,352		3,684		3,268		Total Defense Systems			1,562		1,385		1,881		1,683
Mission Systems																	Mission Systems
Product	1,646		1,388		1,574		1,332		3,154		2,662		2,956		2,492		Product			1,760		1,493		1,508		1,274
Service	616		554		666		598		1,279		1,124		1,297		1,156		Service			592		497		663		570
Intersegment eliminations	184		157		164		136		360		307		361		305		Intersegment eliminations			237		202		176		150
Total Mission Systems	2,446		2,099		2,404		2,066		4,793		4,093		4,614		3,953		Total Mission Systems			2,589		2,192		2,347		1,994
Space Systems																	Space Systems
Product	1,571		1,402		1,308		1,163		3,060		2,727		2,628		2,330		Product			2,058		1,829		1,489		1,325
Service	449		413		459		412		882		810		920		838		Service			424		381		433		397
Intersegment eliminations	28		24		21		20		54		48		41		38		Intersegment eliminations			39		35		26		24
Total Space Systems	2,048		1,839		1,788		1,595		3,996		3,585		3,589		3,206		Total Space Systems			2,521		2,245		1,948		1,746
Segment Totals																	Segment Totals
Total Product	$	6,482	$	5,713	$	5,880	$	5,189	$	12,658	$	11,215	$	11,608	$	10,215	Total Product			$	7,022	$	6,191	$	6,176	$	5,502
Total Service	2,402		2,140		2,576		2,274		4,846		4,291		5,037		4,459		Total Service			2,135		1,871		2,444		2,151
Total Segment⁽¹⁾	$	8,884	$	7,853	$	8,456	$	7,463	$	17,504	$	15,506	$	16,645	$	14,674	Total Segment(1)			$	9,157	$	8,062	$	8,620	$	7,653


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

Product Sales and Costs

~~Current Quarter~~

~~Second~~First quarter ~~2020~~2021 product sales increased ~~$602~~$846 million, or ~~10 percent. The increase was primarily~~14 percent, principally due to ~~higher~~increases in product sales ~~on restricted programs and Next Gen OPIR~~ at Space Systems and ~~higher~~Mission Systems. The increase in product sales at Space Systems was driven by higher volume on restricted programs, NASA Artemis Programs and ~~E-2D at Aeronautics Systems.~~the Next Gen OPIR program, as well as ramp-up on the GBSD program. The increase in Mission Systems product sales was primarily driven by higher volume on restricted, airborne radar and land systems programs.

~~Second~~First quarter ~~2020~~2021 product costs increased ~~$524~~$689 million, or 1013 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 airborne radar and restricted programs at Mission Systems.

Year to date 2020 product costs increased $1.0 billion, or 10 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.

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Service Sales and Costs

~~Current~~ ~~Quarter~~

~~Second~~First quarter ~~2020~~2021 service sales decreased ~~$174~~$309 million, or 713 percent, primarily due to ~~a shift toward more product content~~the IT services divestiture. First quarter 2021 sales from the IT services business, which were largely included in service sales, were $162 million as compared to $559 million in the ~~lifecycle of several programs at Defense Systems and completion of certain service programs at Mission Systems.~~prior year period.

~~Second~~First quarter ~~2020~~2021 service costs decreased ~~$134~~$280 million, or 613 percent, consistent with the lower ~~service~~services sales described above.

~~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 consisted of the following as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:

June 30, 2020 December 31, 2019
$ in millions Funded Unfunded Total
Backlog
Total
Backlog
% Change in 2020
Aeronautics Systems $ 12,163
$ 12,556
$ 24,719
$ 26,021
(5 )%
Defense Systems 6,245
1,728
7,973
8,481
(6 )%
Mission Systems 9,548
3,997
13,545
14,226
(5 )%
Space Systems 5,908
17,903
23,811
16,112
48 %
Total backlog $ 33,864
$ 36,184
$ 70,048
$ 64,840
8 %

~~Second~~First quarter ~~and year to date 2020~~2021 net awards totaled ~~$14.8~~$8.9 billion and ~~$22.7 billion, respectively, and~~ backlog ~~totaled $70.0~~was $79.3 billion. Significant ~~second~~first quarter new awards include ~~$7.4~~$2.6 billion for the Next Generation Interceptor program, $1.1 billion for restricted programs, ~~$1.9 billion for Next Gen OPIR,~~ $0.5 billion for ~~E-2D,~~SABR, $0.4 billion for ~~four commercial satellites~~F-35 and ~~$0.3~~$0.2 billion for ~~Triton.~~G/ATOR. In connection with the IT services divestiture, the company reduced backlog by $1.4 billion during the first quarter ($1.0 billion at Defense Systems, $0.2 billion at Mission Systems and $0.2 billion at Space Systems).

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 ~~provided by~~used in operating activities and adjusted free cash flow, a non-GAAP measure described in more detail below.

At ~~June 30, 2020,~~March 31, 2021, we had ~~$4.2~~$3.5 billion in cash and cash equivalents. ~~In March 2020,~~Effective January 30, 2021, we ~~issued $2.25~~completed the IT services divestiture for $3.4 billion in cash. Proceeds were primarily used in the first quarter of 2021 for a $2.0 billion accelerated share repurchase and to fund redemption of $1.5 billion of the company’s 2.55 percent 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.due October 2022. In April ~~2020,~~2021, we ~~entered into a~~renewed our one-year $500 million uncommitted credit ~~facility to provide an additional source of potential financing.~~facility.

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~~Our first installment of ~~certain estimated income tax payments by extending the deadline for amounts~~deferred social security taxes of approximately $200 million is due in the ~~second~~fourth quarter ~~to July 15, 2020.~~of 2021. 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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continues 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. WeWhile it is unclear how much we will be able to recover, in particular under Section 3610, we believe these actions should continue to mitigate some COVID-19-related negative impacts to our operating cash flows ~~during the remainder~~in 2021.

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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.

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

Six Months Ended June 30 %
$ in millions 2020 2019 Change
Net earnings $ 1,873
$ 1,724
9 %
Non-cash items⁽¹⁾
810
709
14 %
Changes in assets and liabilities:
Trade working capital (898 ) (1,419 ) (37 )%
Retiree benefits (473 ) (285 ) 66 %
Other, net 32
(35 ) (191 )%
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.

~~Year to date 2020~~First quarter 2021 cash ~~provided by~~used in operating activities ~~increased $650~~was $66 million as compared with $993 million in the prior year period. This $927 million improvement was principally due to improved trade working ~~capital and higher~~capital. The net ~~earnings. The improvement in trade working capital reflects CARES Act payroll tax deferrals and increased DoD progress payment rates, partially offset by acceleration~~use of ~~payments to suppliers and pass through~~cash during the first quarter is reflective of ~~increased progress payments to suppliers.~~the company's historical timing of operating cash flows, which are generally more heavily weighted towards the second half of the year.

Adjusted Free Cash Flow

~~Free~~Adjusted free cash flow, as reconciled in the table below, is a non-GAAP measure defined as net cash ~~provided by~~used in operating activities less capital expenditures, plus proceeds from the sale of equipment to a customer (not otherwise included in net cash used in operating activities) and the after-tax impact of discretionary pension contributions. Adjusted free cash flow includes proceeds from the sale of equipment to a customer as such proceeds were generated in a customer sales transaction. It also includes the after-tax impact of discretionary pension contributions for consistency and comparability of financial performance. This measure may not be defined and calculated by other companies in the same manner. We use adjusted free cash flow as a key factor in our planning for, and consideration of, acquisitions, the payment of dividends and stock repurchases. This non-GAAP measure may be useful to investors and other users of our financial statements as a supplemental measure of our cash performance, but should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating cash flows presented in accordance with GAAP.

The table below reconciles net cash ~~provided by~~used in operating activities to adjusted free cash flow:


	Three Months Ended March 31			%
$ in millions		2021		2020		Change
Net cash used in operating activities		$	(66)	$	(993)	(93)	%
Capital expenditures		(205)		(272)		(25)	%


Adjusted free cash flow		$	(271)	$	(1,265)	(79)	%

Six Months Ended June 30 %
$ in millions 2020 2019 Change
Net cash provided by operating activities $ 1,344
$ 694
94 %
Less: capital expenditures (541 ) (536 ) 1 %
Free cash flow $ 803
$ 158
408 %

~~Year to date 2020~~First quarter 2021 adjusted free cash flow ~~increased $645 million~~improved $1.0 billion principally due to ~~the increase in net cash provided by operating activities.~~

~~Investing Cash Flow~~

~~Year to date 2020~~lower net cash used in ~~investing~~operating activities ~~was comparable~~and a decrease in capital expenditures as compared to the prior year period.

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~~Financing~~Investing Cash Flow

~~Year to date 2020~~First quarter 2021 net cash provided by ~~financing~~investing activities was ~~$1.1~~$3.2 billion compared to net cash used in investing activities of $270 million in the prior year period, principally due to $3.4 billion in cash received from the sale of our IT services business during the first quarter of 2021.

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First quarter 2021 net cash used in financing activities was $4.5 billion compared to net cash provided by financing activities of ~~$650 million~~$2.3 billion in ~~2019,~~the prior year period, principally due to $2.2 billion in debt repayments and $2.0 billion paid in connection with an accelerated share repurchase during the first quarter of 2021 as compared 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.~~2020.

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.

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~~2020 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~~2020 Annual Report on Form 10-K ~~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, additional costs and liabilities, program delays, our ability to recover costs under contracts, changing government funding and acquisition priorities and processes, changing government payment rules and practices, insurance challenges, 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

•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

•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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•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

•natural disasters

•health epidemics, pandemics and similar outbreaks

•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

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~~There have been no material changes to our contractual obligations from those discussed in our ~~2019~~2020 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~~2020 Annual Report on Form 10-K.

Item 4.4. 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 ~~June 30, 2020,~~March 31, 2021, 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

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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 ~~June 30, 2020,~~March 31, 2021, 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~~2020 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~~Consistent with SEC Regulation S-K Item 103, ~~because it involves potential~~we have elected to disclose those environmental proceedings with a governmental entity as a party where the company reasonably believes such proceeding would result in monetary ~~damages in excess~~sanctions, exclusive 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~~interest and ~~is now operated by Alliant Techsystems Operations LLC (“ATO”). ATO became an indirect subsidiary~~costs, 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 has disputed the allegations and is in discussions with the government.$1.0 million or more.

Item 1A. Risk Factors

~~There have been no material changes to~~For a discussion of our risk factors ~~since our 2019 Annual Report on Form 10-K, except with respect to the risk factor regarding COVID-19 that the company included in~~please see the section entitled “Risk Factors” in our ~~Quarterly~~2020 Annual Report on Form ~~10-Q for the quarter ended March 31, 2020.~~10-K.

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 ~~second quarter~~three months ended March 31, 2021.


Period	Total Number of Shares Purchased	Average Price Paid per Share(1)		Total 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)(2)
January 1, 2021 - January 29, 2021	—	$	—	—	$	5,849
January 30, 2021 - February 26, 2021(3)	5,931,405	286.61		5,931,405		4,149
February 27, 2021 - April 2, 2021	—	—		—		4,149
Total	5,931,405	$	286.61	5,931,405	$	4,149

(1)Includes commissions paid.

(2)The value remaining includes an additional $3.0 billion share repurchase authorization approved by the company’s board of ~~2020:~~directors on January 25, 2021.

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⁾(3)The company entered into an accelerated share repurchase agreement with Goldman Sachs & Co. LLC to repurchase $2.0 billion of the company’s common stock and received an initial delivery of shares representing approximately 85 percent of the share repurchase agreement.	~~Includes commissions paid.~~

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.

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

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NORTHROP GRUMMAN CORPORATION

~~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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~~NORTHROP GRUMMAN CORPORATION~~

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)



+10.1			~~Non-Employee Director Compensation Term Sheet,~~Group Personal E xcess Liability Policy effective ~~May 20, 2020~~January 1, 2021

*15+10.2			2021 Restricted Stock Rights Grant Agreement Specifying Terms and Conditions Applicable to 2021 Restricted Stock Rights Granted under the 2011 Long-Term Incentive Stock Plan
*+10.3			2021 Restricted Performance Stock Rights Grant Agreement Specifying Terms and Conditions Applicable to 2021 Restricted Performance Stock Rights Granted under the 2011 Long-Term Incentive Stock Plan
*+10.4			2021 Restricted Stock Rights Grant Agreement Specifying Terms and Conditions Applicable to Special 2021 Restricted Stock Rights Granted to Blake Larson under the 2011 Long-Term Incentive Stock Plan
*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


*101			Northrop Grumman Corporation Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2020,~~March 31, 2021, 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

~~-35-~~

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NORTHROP GRUMMAN CORPORATION

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: ~~July 29, 2020~~

April 28, 2021

~~-36-~~

-34-


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

~~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)



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



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



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


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


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


•	~~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~~


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


•	~~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



~~FORM~~	~~10-Q~~



☒FORM			10-Q


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



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



	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