UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q


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

For the Quarterly Period Ended ~~June~~September 30, 2021


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

Commission File Number 1-16411

NORTHROP GRUMMAN CORPORATION

(Exact name of registrant as specified in its charter)


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

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

(703) 280-2900

(Registrant’s telephone number, including area code)

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


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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large Accelerated Filer ☒ Accelerated Filer ☐

Non-accelerated Filer ☐ Smaller Reporting Company ☐

Emerging Growth Company ☐

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

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

Yes ☐ No ☒

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

As of ~~July 26,~~October 25, 2021, ~~160,109,103~~158,537,643 shares of common stock were outstanding.

Table of Contents

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	9
	5. Investigations, Claims and Litigation	10
	6. Commitments and Contingencies	1011
	7. Retirement Benefits	12
	8. Stock Compensation Plans and Other Compensation Arrangements	1213
	9. Segment Information	1314
	Report of Independent Registered Public Accounting Firm	1718
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Overview	1819
	Consolidated Operating Results	1921
	Segment Operating Results	2325
	Product and Service Analysis	2830
	Backlog	2931
	Liquidity and Capital Resources	3032
	Critical Accounting Policies, Estimates and Judgments	3133
	Accounting Standards Updates	3133
	Forward-Looking Statements and Projections	3133
	Contractual Obligations	3335
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3335
Item 4.	Controls and Procedures	3335

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	3436
Item 1A.	Risk Factors	3436
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3436
Item 6.	Exhibits	3537
	Signatures	3639

Table of Contents

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 September 30				Nine Months Ended September 30
$ in millions, except per share amounts	$ in millions, except per share amounts	2021		2020		2021		2020		$ in millions, except per share amounts	2021		2020		2021		2020
Sales	Sales									Sales
Product	Product	$	7,193	$	6,482	$	14,215	$	12,658	Product	$	6,845	$	6,667	$	21,060	$	19,325
Service	Service	1,958		2,402		4,093		4,846		Service	1,875		2,416		5,968		7,262
Total sales	Total sales	9,151		8,884		18,308		17,504		Total sales	8,720		9,083		27,028		26,587
Operating costs and expenses	Operating costs and expenses									Operating costs and expenses
Product	Product	5,620		5,127		11,310		10,079		Product	5,352		5,346		16,662		15,425
Service	Service	1,488		1,931		3,215		3,877		Service	1,434		1,897		4,649		5,774
General and administrative expenses	General and administrative expenses	999		832		1,897		1,620		General and administrative expenses	891		855		2,788		2,475
Total operating costs and expenses	Total operating costs and expenses	8,107		7,890		16,422		15,576		Total operating costs and expenses	7,677		8,098		24,099		23,674
Gain on sale of business	Gain on sale of business	0		0		1,980		0		Gain on sale of business	—		—		1,980		—
Operating income	Operating income	1,044		994		3,866		1,928		Operating income	1,043		985		4,909		2,913
Other (expense) income	Other (expense) income									Other (expense) income
Interest expense	Interest expense	(136)		(154)		(291)		(279)		Interest expense	(132)		(154)		(423)		(433)
Non-operating FAS pension benefit	Non-operating FAS pension benefit	367		303		734		605		Non-operating FAS pension benefit	367		302		1,101		907

Other, net	Other, net	27		60		9		2		Other, net	(3)		34		6		36
Earnings before income taxes	Earnings before income taxes	1,302		1,203		4,318		2,256		Earnings before income taxes	1,275		1,167		5,593		3,423
Federal and foreign income tax expense	Federal and foreign income tax expense	265		198		1,086		383		Federal and foreign income tax expense	212		181		1,298		564
Net earnings	Net earnings	$	1,037	$	1,005	$	3,232	$	1,873	Net earnings	$	1,063	$	986	$	4,295	$	2,859

Basic earnings per share	Basic earnings per share	$	6.44	$	6.02	$	19.95	$	11.20	Basic earnings per share	$	6.65	$	5.91	$	26.63	$	17.11
Weighted-average common shares outstanding, in millions	Weighted-average common shares outstanding, in millions	161.0		166.9		162.0		167.3		Weighted-average common shares outstanding, in millions	159.8		166.8		161.3		167.1
Diluted earnings per share	Diluted earnings per share	$	6.42	$	6.01	$	19.89	$	11.16	Diluted earnings per share	$	6.63	$	5.89	$	26.55	$	17.05
Weighted-average diluted shares outstanding, in millions	Weighted-average diluted shares outstanding, in millions	161.5		167.3		162.5		167.9		Weighted-average diluted shares outstanding, in millions	160.4		167.3		161.8		167.7

Net earnings (from above)	Net earnings (from above)	$	1,037	$	1,005	$	3,232	$	1,873	Net earnings (from above)	$	1,063	$	986	$	4,295	$	2,859
Other comprehensive loss	Other comprehensive loss									Other comprehensive loss
Change in unamortized prior service credit, net of tax	Change in unamortized prior service credit, net of tax	(2)		(11)		(4)		(21)		Change in unamortized prior service credit, net of tax	(2)		(10)		(6)		(31)
Change in cumulative translation adjustment and other, net	Change in cumulative translation adjustment and other, net	1		10		0		1		Change in cumulative translation adjustment and other, net	(6)		6		(6)		7
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	(1)		(1)		(4)		(20)		Other comprehensive loss, net of tax	(8)		(4)		(12)		(24)
Comprehensive income	Comprehensive income	$	1,036	$	1,004	$	3,228	$	1,853	Comprehensive income	$	1,055	$	982	$	4,283	$	2,835

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

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Table of Contents

NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)


$ in millions, except par value	$ in millions, except par value	June 30, 2021		December 31, 2020		$ in millions, except par value	September 30, 2021		December 31, 2020
Assets	Assets					Assets
Cash and cash equivalents	Cash and cash equivalents	$	3,941	$	4,907	Cash and cash equivalents	$	4,055	$	4,907
Accounts receivable, net	Accounts receivable, net	1,910		1,501		Accounts receivable, net	1,590		1,501
Unbilled receivables, net	Unbilled receivables, net	5,418		5,140		Unbilled receivables, net	5,674		5,140
Inventoried costs, net	Inventoried costs, net	863		759		Inventoried costs, net	872		759
Prepaid expenses and other current assets	Prepaid expenses and other current assets	630		1,402		Prepaid expenses and other current assets	737		1,402
Assets of disposal group held for sale	Assets of disposal group held for sale	0		1,635		Assets of disposal group held for sale	—		1,635
Total current assets	Total current assets	12,762		15,344		Total current assets	12,928		15,344
Property, plant and equipment, net of accumulated depreciation of $6,640 for 2021 and $6,335 for 2020		7,164		7,071
Property, plant and equipment, net of accumulated depreciation of $6,811 for 2021 and $6,335 for 2020						Property, plant and equipment, net of accumulated depreciation of $6,811 for 2021 and $6,335 for 2020	7,277		7,071
Operating lease right-of-use assets	Operating lease right-of-use assets	1,575		1,533		Operating lease right-of-use assets	1,552		1,533
Goodwill	Goodwill	17,518		17,518		Goodwill	17,516		17,518
Intangible assets, net	Intangible assets, net	680		783		Intangible assets, net	629		783
Deferred tax assets	Deferred tax assets	433		311		Deferred tax assets	418		311
Other non-current assets	Other non-current assets	2,010		1,909		Other non-current assets	2,026		1,909
Total assets	Total assets	$	42,142	$	44,469	Total assets	$	42,346	$	44,469

Liabilities	Liabilities					Liabilities
Trade accounts payable	Trade accounts payable	$	2,001	$	1,806	Trade accounts payable	$	2,184	$	1,806
Accrued employee compensation	Accrued employee compensation	1,746		1,997		Accrued employee compensation	1,811		1,997
Advance payments and billings in excess of costs incurred	Advance payments and billings in excess of costs incurred	2,526		2,517		Advance payments and billings in excess of costs incurred	2,594		2,517
Other current liabilities	Other current liabilities	2,318		3,002		Other current liabilities	2,230		3,002
Liabilities of disposal group held for sale	Liabilities of disposal group held for sale	0		258		Liabilities of disposal group held for sale	—		258
Total current liabilities	Total current liabilities	8,591		9,580		Total current liabilities	8,819		9,580
Long-term debt, net of current portion of $6 for 2021 and $742 for 2020	Long-term debt, net of current portion of $6 for 2021 and $742 for 2020	12,764		14,261		Long-term debt, net of current portion of $6 for 2021 and $742 for 2020	12,774		14,261
Pension and other postretirement benefit plan liabilities	Pension and other postretirement benefit plan liabilities	5,942		6,498		Pension and other postretirement benefit plan liabilities	5,667		6,498
Operating lease liabilities	Operating lease liabilities	1,389		1,343		Operating lease liabilities	1,367		1,343

Other non-current liabilities	Other non-current liabilities	2,284		2,208		Other non-current liabilities	2,302		2,208
Total liabilities	Total liabilities	30,970		33,890		Total liabilities	30,929		33,890

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

Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
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—160,384,110 and 2020—166,717,179		160		167
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding						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: 2021—158,761,485 and 2020—166,717,179						Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2021—158,761,485 and 2020—166,717,179	159		167
Paid-in capital	Paid-in capital	0		58		Paid-in capital	—		58
Retained earnings	Retained earnings	11,144		10,482		Retained earnings	11,398		10,482
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(132)		(128)		Accumulated other comprehensive loss	(140)		(128)
Total shareholders’ equity	Total shareholders’ equity	11,172		10,579		Total shareholders’ equity	11,417		10,579
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	42,142	$	44,469	Total liabilities and shareholders’ equity	$	42,346	$	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					Nine Months Ended September 30
$ in millions	$ in millions	2021		2020		$ in millions	2021		2020
Operating activities	Operating activities					Operating activities
Net earnings	Net earnings	$	3,232	$	1,873	Net earnings	$	4,295	$	2,859
Adjustments to reconcile to net cash provided by operating activities:	Adjustments to reconcile to net cash provided by operating activities:					Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	594		605		Depreciation and amortization	908		922

Stock-based compensation	Stock-based compensation	40		36		Stock-based compensation	71		61
Deferred income taxes	Deferred income taxes	(121)		169		Deferred income taxes	(105)		369
Gain on sale of business	Gain on sale of business	(1,980)		0		Gain on sale of business	(1,980)		—
Net periodic pension and OPB income	Net periodic pension and OPB income	(546)		(408)		Net periodic pension and OPB income	(818)		(612)
Pension and OPB contributions	Pension and OPB contributions	(74)		(69)		Pension and OPB contributions	(108)		(100)
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Accounts receivable, net	Accounts receivable, net	(453)		(663)		Accounts receivable, net	(133)		(632)
Unbilled receivables, net	Unbilled receivables, net	(312)		(126)		Unbilled receivables, net	(596)		(386)
Inventoried costs, net	Inventoried costs, net	(104)		(49)		Inventoried costs, net	(113)		(70)
Prepaid expenses and other assets	Prepaid expenses and other assets	26		(16)		Prepaid expenses and other assets	6		(122)
Accounts payable and other liabilities	Accounts payable and other liabilities	(202)		(374)		Accounts payable and other liabilities	49		283
Income taxes payable, net	Income taxes payable, net	881		330		Income taxes payable, net	663		111

Other, net	Other, net	(19)		36		Other, net	(14)		20
Net cash provided by operating activities	Net cash provided by operating activities	962		1,344		Net cash provided by operating activities	2,125		2,703

Investing activities	Investing activities					Investing activities
Divestiture of IT services business	Divestiture of IT services business	3,400		0		Divestiture of IT services business	3,400		—
Capital expenditures	Capital expenditures	(435)		(541)		Capital expenditures	(682)		(828)
Proceeds from sale of equipment to a customer	Proceeds from sale of equipment to a customer	56		0		Proceeds from sale of equipment to a customer	84		—
Other, net	Other, net	1		2		Other, net	(3)		—
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	3,022		(539)		Net cash provided by (used in) investing activities	2,799		(828)

Financing activities	Financing activities					Financing activities
Net proceeds from issuance of long-term debt	Net proceeds from issuance of long-term debt	0		2,239		Net proceeds from issuance of long-term debt	—		2,239
Payments of long-term debt	Payments of long-term debt	(2,236)		(27)		Payments of long-term debt	(2,236)		(27)
Payments to credit facilities	Payments to credit facilities	0		(13)		Payments to credit facilities	—		(13)

Common stock repurchases	Common stock repurchases	(2,143)		(490)		Common stock repurchases	(2,724)		(490)
Cash dividends paid	Cash dividends paid	(486)		(469)		Cash dividends paid	(737)		(711)
Payments of employee taxes withheld from share-based awards	Payments of employee taxes withheld from share-based awards	(31)		(64)		Payments of employee taxes withheld from share-based awards	(33)		(66)
Other, net	Other, net	(54)		(48)		Other, net	(46)		(57)
Net cash (used in) provided by financing activities	Net cash (used in) provided by financing activities	(4,950)		1,128		Net cash (used in) provided by financing activities	(5,776)		875
(Decrease) increase in cash and cash equivalents	(Decrease) increase in cash and cash equivalents	(966)		1,933		(Decrease) increase in cash and cash equivalents	(852)		2,750
Cash and cash equivalents, beginning of year	Cash and cash equivalents, beginning of year	4,907		2,245		Cash and cash equivalents, beginning of year	4,907		2,245
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	3,941	$	4,178	Cash and cash equivalents, end of period	$	4,055	$	4,995

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 September 30				Nine Months Ended September 30
$ in millions, except per share amounts	$ in millions, except per share amounts	2021		2020		2021		2020		$ in millions, except per share amounts	2021		2020		2021		2020
Common stock	Common stock									Common stock
Beginning of period	Beginning of period	$	161	$	167	$	167	$	168	Beginning of period	$	160	$	167	$	167	$	168
Common stock repurchased	Common stock repurchased	(1)		0		(7)		(1)		Common stock repurchased	(1)		—		(8)		(1)

End of period	End of period	160		167		160		167		End of period	159		167		159		167
Paid-in capital	Paid-in capital									Paid-in capital
Beginning of period	Beginning of period	8		0		58		0		Beginning of period	—		10		58		—
Common stock repurchased	Common stock repurchased	(21)		0		(60)		0		Common stock repurchased	—		—		(60)		—
Stock compensation	Stock compensation	13		10		2		10		Stock compensation	—		23		2		33

Other										Other	—		(6)		—		(6)
End of period	End of period	0		10		0		10		End of period	—		27		—		27
Retained earnings	Retained earnings									Retained earnings
Beginning of period	Beginning of period	10,487		9,011		10,482		8,748		Beginning of period	11,144		9,652		10,482		8,748
Common stock repurchased	Common stock repurchased	(134)		(131)		(2,089)		(479)		Common stock repurchased	(587)		—		(2,676)		(479)
Net earnings	Net earnings	1,037		1,005		3,232		1,873		Net earnings	1,063		986		4,295		2,859
Dividends declared	Dividends declared	(254)		(242)		(489)		(465)		Dividends declared	(252)		(244)		(741)		(709)
Stock compensation	Stock compensation	8		9		8		(36)		Stock compensation	30		—		38		(36)
Other	Other	0		0		0		11		Other	—		—		—		11
End of period	End of period	11,144		9,652		11,144		9,652		End of period	11,398		10,394		11,398		10,394
Accumulated other comprehensive loss	Accumulated other comprehensive loss									Accumulated other comprehensive loss
Beginning of period	Beginning of period	(131)		(116)		(128)		(97)		Beginning of period	(132)		(117)		(128)		(97)
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	(1)		(1)		(4)		(20)		Other comprehensive loss, net of tax	(8)		(4)		(12)		(24)
End of period	End of period	(132)		(117)		(132)		(117)		End of period	(140)		(121)		(140)		(121)
Total shareholders’ equity	Total shareholders’ equity	$	11,172	$	9,712	$	11,172	$	9,712	Total shareholders’ equity	$	11,417	$	10,467	$	11,417	$	10,467
Cash dividends declared per share	Cash dividends declared per share	$	1.57	$	1.45	$	3.02	$	2.77	Cash dividends declared per share	$	1.57	$	1.45	$	4.59	$	4.22

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 for the ~~six~~nine months ended ~~June~~September 30, 2021 and ~~$585~~$602 million and ~~$1.1~~$1.7 billion for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. Pre-tax profit was $20 million for the ~~six~~nine months ended ~~June~~September 30, 2021, and ~~$60~~$69 million and ~~$111~~$180 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively.

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.

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 2020 Annual Report on Form 10-K. During the first quarter of 2021, we changed the naming convention for our FAS/CAS pension accounts. The Net FAS (service)/CAS pension adjustment is now referred to as the FAS/CAS operating adjustment and the FAS (non-service) pension benefit is now referred to as the Non-operating FAS pension benefit. This change does not impact any current or previously reported amounts. During the second quarter of 2021, we changed the presentation of the retiree benefits components in the operating cash flow section of the Unaudited condensed consolidated statement of cash flows. Prior period amounts have been conformed to current period presentation and this change does not impact previously reported cash provided by operating activities.

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. For most of our contracts, control is effectively transferred 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). The company believes this represents the most

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appropriate measurement towards satisfaction of our performance obligations. Revenue for contracts in which the control of goods produced does not transfer until delivery to the customer is recognized at a point in time (i.e., typically upon delivery).

Contract Estimates

Use of the cost-to-cost method requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. The company estimates profit on 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 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 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 June 30				Six Months Ended June 30					Three Months Ended September 30				Nine Months Ended September 30
$ in millions, except per share data	$ in millions, except per share data	2021		2020		2021		2020		$ in millions, except per share data	2021		2020		2021		2020
Revenue	Revenue	$	160	$	125	$	362	$	261	Revenue	$	116	$	124	$	478	$	385
Operating income	Operating income	154		112		344		236		Operating income	109		123		453		359
Net earnings(1)	Net earnings(1)	122		88		272		186		Net earnings(1)	86		97		358		284
Diluted earnings per share(1)	Diluted earnings per share(1)	0.76		0.53		1.67		1.11		Diluted earnings per share(1)	0.54		0.58		2.21		1.69

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

EAC adjustments on a single performance obligation can have a material effect on the company’s financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. During the third quarter of 2021, we recorded a $42 million unfavorable EAC adjustment on the F-35 program at Aeronautics Systems due to labor-related production inefficiencies largely driven by COVID-19-related impacts on the labor market and employee leave. No such adjustments were material to the financial statements during the three months ended ~~June~~September 30, ~~2021 and~~ 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~~September 30, 2021 was ~~$76.6~~$74.8 billion. Of our ~~June~~September 30, 2021 backlog, we expect to recognize approximately 40 percent as revenue over the next 12 months and 60 percent as revenue over the next 24 months, 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~~nine months ended ~~June~~September 30, 2021 that was included in the December 31, 2020 ~~contract liability balances was $482 million and $1.5 billion, respectively. The amount of revenue recognized for the three~~

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contract liability balances was $261 million and ~~six~~$1.8 billion, respectively. The amount of revenue recognized for the three and nine months ended ~~June~~September 30, 2020 that was included in the December 31, 2019 contract liability balance was ~~$442~~$232 million and ~~$1.2~~$1.5 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.

Property, Plant, and Equipment

~~During~~In the fourth quarter of 2020, the company completed a sale of equipment to a customer on a restricted Aeronautics Systems program. ~~The~~During the nine months ended September 30, 2021, the company received cash payments of ~~$56~~$84 million related to the equipment sale ~~during the second quarter of 2021,~~ and included it in Proceeds from sale of equipment to a customer in the unaudited condensed consolidated statement of cash flows.

Non-cash investing activities include capital expenditures incurred but not yet paid of ~~$56~~$105 million and ~~$99~~$123 million as of ~~June~~September 30, 2021 and 2020, respectively.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:


$ in millions	$ in millions	June 30, 2021		December 31, 2020		$ in millions	September 30, 2021		December 31, 2020
Unamortized prior service credit, net of tax expense of $2 for 2021 and $3 for 2020		$	6	$	10
Unamortized prior service credit, net of tax expense of $1 for 2021 and $3 for 2020						Unamortized prior service credit, net of tax expense of $1 for 2021 and $3 for 2020	$	4	$	10
Cumulative translation adjustment and other, net	Cumulative translation adjustment and other, net	(138)		(138)		Cumulative translation adjustment and other, net	(144)		(138)
Total accumulated other comprehensive loss	Total accumulated other comprehensive loss	$	(132)	$	(128)	Total accumulated other comprehensive loss	$	(140)	$	(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~~September 30, 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 0.6 million shares and 0.5 million shares for the three and ~~six~~nine months ended ~~June~~September 30, ~~2021.~~2021, respectively. The dilutive effect of these securities totaled ~~0.4~~0.5 million shares and 0.6 million shares for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively.

Share Repurchases

On September 16, 2015, the company’s board of directors authorized a share repurchase program of up to $4.0 billion of the company’s common stock (the “2015 Repurchase Program”). 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 at which time repurchases under the 2018 Repurchase Program commenced. As of ~~June~~September 30, 2021, repurchases under the 2018 Repurchase Program totaled ~~$2.3~~$2.9 billion; ~~$0.7~~$0.1 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 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 “2021 Repurchase Program”). By its terms, repurchases under the 2021 Repurchase Program will commence upon completion of the 2018 Repurchase Program and will expire when we have used all authorized funds for repurchases.

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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 was settled on June 1, 2021 with a final delivery of 0.2 million shares from Goldman Sachs. The final average purchase price was $327.29 per share.

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

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


								Shares Repurchased (in millions)									Shares Repurchased (in millions)
Repurchase Program Authorization Date	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		Repurchase Program Authorization Date	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share(1)		Date Completed	Nine Months Ended September 30
								2021	2020								2021	2020
September 16, 2015	September 16, 2015	$	4,000	15.4	$	260.33	March 2020	0	0.9	September 16, 2015	$	4,000	15.4	$	260.33	March 2020	—	0.9
December 4, 2018	December 4, 2018	$	3,000	7.0	329.81			6.5	0.5	December 4, 2018	$	3,000	8.6	$	335.62		8.1	0.5
January 25, 2021	January 25, 2021	$	3,000	0	0			0	0	January 25, 2021	$	3,000	—	—			—	—

(1)Includes commissions paid.

Dividends on Common Stock

In May 2021, the company increased the quarterly common stock dividend 8 percent to $1.57 per share from the previous amount of $1.45 per share.

3. INCOME TAXES


		Three Months Ended June 30						Six Months Ended June 30							Three Months Ended September 30						Nine Months Ended September 30
$ in millions	$ in millions	2021			2020			2021			2020			$ in millions	2021			2020			2021			2020
Federal and foreign income tax expense	Federal and foreign income tax expense	$	265		$	198		$	1,086		$	383		Federal and foreign income tax expense	$	212		$	181		$	1,298		$	564
Effective income tax rate	Effective income tax rate	20.4		%	16.5		%	25.2		%	17.0		%	Effective income tax rate	16.6		%	15.5		%	23.2		%	16.5		%

Current Quarter

The ~~second~~third quarter 2021 effective tax rate (ETR) increased to ~~20.4~~16.6 percent from ~~16.5~~15.5 percent in the prior year period primarily due to ~~a change made~~lower benefits from foreign-derived intangible income (FDII). The company’s third quarter 2021 ETR includes benefits of $43 million for research credits and $12 million for FDII. The company’s third quarter 2020 ETR included benefits of $45 million for research credits and $30 million for FDII, which reflects additional benefits after final regulations issued in ~~tax revenue recognition on certain long-term contracts, which increased taxable income in years prior to~~July 2020 clarified Foreign Military Sales qualify for the ~~2017 Tax Cuts and Jobs Act at a rate above the current statutory rate. Both periods include $48 million of research credits.~~deduction.

Year to Date

The year to date 2021 ETR increased to ~~25.2~~23.2 percent from ~~17.0~~16.5 percent in the prior 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 year to date 2021 ETR also includes additional tax expense related to ~~the~~a change made in tax revenue recognition ~~change discussed~~on certain long-term contracts, which increased taxable income in years prior to the 2017 Tax Cuts and Jobs Act at a rate above the current statutory rate as well as benefits of ~~$99~~$142 million for research credits ~~as compared~~and $32 million for FDII. The company’s year to ~~$90~~date 2020 ETR included benefits of $135 million ~~in the prior year period.~~for research credits and $46 million for FDII.

Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial ~~position. We had 0 taxes receivable~~position, were $123 million as of ~~June~~September 30, 2021 and $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.~~Act, which includes related final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and procedural guidance issued

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in August 2021. 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~~these matters may ~~change. At this time, we cannot reasonably estimate these changes.~~increase by approximately $100 million.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman ~~2014-2018~~2017-2018 federal tax returns are currently under Internal Revenue Service (IRS) examination. During the third quarter of 2021, the company requested an appeal with the IRS for the Northrop Grumman 2014-2016 federal income tax returns and refund claims related to its 2007-2016 federal tax ~~returns are~~

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~~currently under Internal Revenue Service (IRS) examination.~~returns. 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. FAIR VALUE OF FINANCIAL INSTRUMENTS

The company holds a portfolio of marketable 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.

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, 2021						December 31, 2020							September 30, 2021						December 31, 2020
$ in millions	$ in millions	Level 1		Level 2		Total		Level 1		Level 2		Total		$ in millions	Level 1		Level 2		Total		Level 1		Level 2		Total
Financial Assets	Financial Assets													Financial Assets
Marketable securities	Marketable securities	$	404	$	0	$	404	$	377	$	1	$	378	Marketable securities	$	390	$	—	$	390	$	377	$	1	$	378
Marketable securities valued using NAV	Marketable securities valued using NAV					17						18		Marketable securities valued using NAV					16						18
Total marketable securities	Total marketable securities	404		0		421		377		1		396		Total marketable securities	390		—		406		377		1		396
Derivatives	Derivatives	0		1		1		0		0		0		Derivatives	—		3		3		—		—		—

The notional value of the company’s foreign currency forward contracts at ~~June~~September 30, 2021 and December 31, 2020 was ~~$138~~$132 million and $133 million, respectively. At ~~June~~September 30, 2021 and December 31, 2020, 0no portion of the notional value was designated as a cash flow hedge.

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

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

Long-term Debt

The estimated fair value of long-term debt was ~~$15.3~~$15.2 billion and $18.2 billion as of ~~June~~September 30, 2021 and December 31, 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 current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.

On September 2, 2021, the company completed an exchange offer to eligible holders of the outstanding notes of our direct wholly owned subsidiary, Northrop Grumman Systems Corporation (“NGSC”) maturing through 2036. An aggregate principal amount of $422 million of the NGSC notes was exchanged for $422 million of Northrop Grumman Corporation notes with the same interest rates and maturity dates as the NGSC notes exchanged. Because the debt instruments are not substantially different, the exchange was treated as a debt modification for accounting purposes with no gain or loss recognized.

Repayments of Senior Notes

In March 2021, the company 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 notes due October 2022. The company recorded a pre-tax charge of $54 million principally related to the premium paid on the redemption, which

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was recorded in Other, net in the unaudited condensed consolidated statements of earnings and comprehensive income.

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5. INVESTIGATIONS, CLAIMS AND LITIGATION

On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed-price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS were delivered. The company’s lawsuit 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 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. After additional COVID-19-related interruptions, trial concluded on March 5, 2021. On October 12, 2021, ~~and~~ the ~~court scheduled~~parties completed post-trial ~~briefing.~~briefing, absent any further requests or unexpected developments. Although the ultimate outcome of this matter, including any possible loss, cannot be predicted or reasonably estimated at this time, the company intends to continue vigorously to pursue and defend the matter.

We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, we have worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation (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~~On September 22, 2021, the State of New York ~~is preparing to file~~issued for public comment a new consent decree reflecting the ~~agreement and to~~agreement. We understand that the State will next seek court ~~approval.~~approval of the consent decree. We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to the legacy Bethpage environmental conditions. Applicable remediation standards and other requirements to which we are subject may continue to change, our costs may increase materially and 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, environmental impacts, costs, and the allowability of costs we incur, including with federal and state entities (including the Navy, Defense Contract Management Agency, the State, local municipalities and water districts) and insurance carriers, as well as class action and individual plaintiffs alleging personal injury and property damage and seeking both monetary and non-monetary relief. These Bethpage matters could result in additional costs, fines, penalties, sanctions, compensatory or other damages, determinations on allocation, allowability and coverage, and non-monetary relief. We are in discussions with the Department of Defense and the Bethpage Water District to explore whether claims involving these parties can be resolved at this stage. 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~~September 30, 2021, or its annual results of operations and/or cash flows.

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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

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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~~September 30, 2021, or its annual results of operations and/or cash flows.

The U.S. government has raised questions about an interest rate assumption used by the company to determine our CAS pension 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 submitted a formal response on July 31, 2020, which we believe demonstrates the appropriateness of the assumptions used. 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.

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~~September 30, 2021 and December 31, 2020:


$ in millions	$ in millions	Accrued Costs(1)(2)		Reasonably Possible Future Costs in Excess of Accrued Costs(2)		Deferred Costs(3)		$ in millions	Accrued Costs(1)(2)		Reasonably Possible Future Costs in Excess of Accrued Costs(2)		Deferred Costs(3)
June 30, 2021		$	611	$	364	$	525
September 30, 2021								September 30, 2021	$	600	$	366	$	514
December 31, 2020	December 31, 2020	614		346		529		December 31, 2020	614		346		529

(1) As of ~~June~~September 30, 2021, ~~$250~~$235 million is recorded in Other current liabilities and ~~$361~~$365 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~~September 30, 2021, ~~$221~~$205 million is deferred in Prepaid expenses and other current assets and ~~$304~~$309 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~~September 30, 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 an Amended Record of Decision, seeking to impose additional remedial 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~~On September 22, 2021, the State of New York ~~is preparing to file~~issued for public comment a new consent decree reflecting the ~~agreement and to~~agreement. We understand that the State will next seek court ~~approval.~~approval of the consent decree. As discussed in Note 5, the applicable remediation standards and other requirements to which we are subject may continue to change, our costs may increase materially, and those costs may not be fully recoverable.

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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~~September 30, 2021, there were ~~$499~~$476 million of stand-by letters of credit and guarantees and ~~$79~~$69 million of surety bonds outstanding.

Commercial Paper

The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to $2.0 billion. At ~~June~~September 30, 2021, there were 0no commercial paper borrowings outstanding.

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Credit Facilities

The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of $2.0 billion (the “2018 Credit Agreement”) that matures in August 2024 and is intended to support the company’s commercial paper program and other general corporate purposes. Commercial paper borrowings reduce the amount available for borrowing under the 2018 Credit Agreement. At ~~June~~September 30, 2021, there was 0no balance outstanding under this facility.

At ~~June~~September 30, 2021, the company was in compliance with all covenants under its credit agreements.

7. RETIREMENT BENEFITS

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


		Three Months Ended June 30								Six Months Ended June 30									Three Months Ended September 30								Nine Months Ended September 30
		Pension Benefits				OPB				Pension Benefits				OPB					Pension Benefits				OPB				Pension Benefits				OPB
$ in millions	$ in millions	2021		2020		2021		2020		2021		2020		2021		2020		$ in millions	2021		2020		2021		2020		2021		2020		2021		2020
Components of net periodic benefit cost (benefit)	Components of net periodic benefit cost (benefit)																	Components of net periodic benefit cost (benefit)
Service cost	Service cost	$	103	$	102	$	4	$	5	$	207	$	204	$	8	$	9	Service cost	$	104	$	102	$	4	$	4	$	311	$	306	$	12	$	13
Interest cost	Interest cost	264		306		14		16		527		613		27		33		Interest cost	263		307		13		17		790		920		40		50
Expected return on plan assets	Expected return on plan assets	(629)		(594)		(27)		(25)		(1,257)		(1,188)		(53)		(51)		Expected return on plan assets	(627)		(594)		(26)		(26)		(1,884)		(1,782)		(79)		(77)
Amortization of prior service (credit) cost	Amortization of prior service (credit) cost	(2)		(15)		(1)		1		(4)		(30)		(1)		2		Amortization of prior service (credit) cost	(3)		(15)		—		1		(7)		(45)		(1)		3

Net periodic benefit cost (benefit)	Net periodic benefit cost (benefit)	$	(264)	$	(201)	$	(10)	$	(3)	$	(527)	$	(401)	$	(19)	$	(7)	Net periodic benefit cost (benefit)	$	(263)	$	(200)	$	(9)	$	(4)	$	(790)	$	(601)	$	(28)	$	(11)

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					Three Months Ended September 30				Nine Months Ended September 30
$ in millions	$ in millions	2021		2020		2021		2020		$ in millions	2021		2020		2021		2020
Defined benefit pension plans	Defined benefit pension plans	$	26	$	26	$	53	$	46	Defined benefit pension plans	$	26	$	24	$	79	$	70
OPB plans	OPB plans	10		11		21		23		OPB plans	8		7		29		30
Defined contribution plans	Defined contribution plans	111		100		377		356		Defined contribution plans	99		116		476		472

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8. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS

Stock Awards

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


		Six Months Ended June 30					Nine Months Ended September 30
in millions	in millions	2021		2020		in millions	2021		2020
RSRs granted	RSRs granted	0.1		0.1		RSRs granted	0.1		0.1
RPSRs granted	RPSRs granted	0.2		0.2		RPSRs granted	0.2		0.2
Grant date aggregate fair value	Grant date aggregate fair value	$	88	$	91	Grant date aggregate fair value	$	89	$	91

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

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Cash Awards

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


		Six Months Ended June 30					Nine Months Ended September 30
$ in millions	$ in millions	2021		2020		$ in millions	2021		2020
Minimum aggregate payout amount	Minimum aggregate payout amount	$	31	$	31	Minimum aggregate payout amount	$	31	$	31
Maximum aggregate payout amount	Maximum aggregate payout amount	178		175		Maximum aggregate payout amount	178		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 certain performance metrics over a three-year period.

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NORTHROP GRUMMAN CORPORATION

9. SEGMENT INFORMATION

The following table presents sales and operating income by segment:


		Three Months Ended June 30				Six Months Ended June 30					Three Months Ended September 30				Nine Months Ended September 30
$ in millions	$ in millions	2021		2020		2021		2020		$ in millions	2021		2020		2021		2020
Sales	Sales									Sales
Aeronautics Systems	Aeronautics Systems	$	2,913	$	2,925	$	5,903	$	5,768	Aeronautics Systems	$	2,725	$	2,914	$	8,628	$	8,682
Defense Systems	Defense Systems	1,427		1,886		2,989		3,767		Defense Systems	1,409		1,859		4,398		5,626
Mission Systems	Mission Systems	2,588		2,446		5,177		4,793		Mission Systems	2,436		2,551		7,613		7,344
Space Systems	Space Systems	2,748		2,048		5,269		3,996		Space Systems	2,681		2,198		7,950		6,194
Intersegment eliminations	Intersegment eliminations	(525)		(421)		(1,030)		(820)		Intersegment eliminations	(531)		(439)		(1,561)		(1,259)
Total sales	Total sales	9,151		8,884		18,308		17,504		Total sales	8,720		9,083		27,028		26,587
Operating income	Operating income									Operating income
Aeronautics Systems	Aeronautics Systems	300		310		608		573		Aeronautics Systems	265		294		873		867
Defense Systems	Defense Systems	177		217		354		415		Defense Systems	175		217		529		632
Mission Systems	Mission Systems	408		347		805		700		Mission Systems	372		370		1,177		1,070
Space Systems	Space Systems	301		209		577		411		Space Systems	288		224		865		635
Intersegment eliminations	Intersegment eliminations	(69)		(52)		(132)		(101)		Intersegment eliminations	(65)		(56)		(197)		(157)
Total segment operating income	Total segment operating income	1,117		1,031		2,212		1,998		Total segment operating income	1,035		1,049		3,247		3,047
FAS/CAS operating adjustment	FAS/CAS operating adjustment	18		103		37		208		FAS/CAS operating adjustment	61		108		98		316
Unallocated corporate (expense) income	Unallocated corporate (expense) income	(91)		(140)		1,617		(278)		Unallocated corporate (expense) income	(53)		(172)		1,564		(450)
Total operating income	Total operating income	$	1,044	$	994	$	3,866	$	1,928	Total operating income	$	1,043	$	985	$	4,909	$	2,913

FAS/CAS 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

Unallocated corporate (expense) income 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 changes in deferred state income taxes and a portion of management and administration, legal, environmental, compensation, retiree benefits, advertising and other corporate unallowable costs. Unallocated corporate (expense) income 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.

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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 (expense) income.

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Disaggregation of Revenue


Sales by Customer Type	Sales by Customer Type	Three Months Ended June 30								Six Months Ended June 30								Sales by Customer Type	Three Months Ended September 30								Nine Months Ended September 30
		2021				2020				2021				2020					2021				2020				2021				2020
$ in millions	$ in millions	$		%(3)		$		%(3)		$		%(3)		$		%(3)		$ in millions	$		%(3)		$		%(3)		$		%(3)		$		%(3)
Aeronautics Systems	Aeronautics Systems																	Aeronautics Systems
U.S. government(1)	U.S. government(1)	$	2,513	86	%	$	2,477	85	%	$	5,054	86	%	$	4,838	84	%	U.S. government(1)	$	2,312	85	%	$	2,491	85	%	$	7,366	85	%	$	7,329	84	%
International(2)	International(2)	351		12	%	407		14	%	750		12	%	851		15	%	International(2)	360		13	%	382		13	%	1,110		13	%	1,233		14	%
Other customers	Other customers	4		—	%	12		—	%	10		—	%	24		—	%	Other customers	5		—	%	11		1	%	15		—	%	35		1	%
Intersegment sales	Intersegment sales	45		2	%	29		1	%	89		2	%	55		1	%	Intersegment sales	48		2	%	30		1	%	137		2	%	85		1	%
Aeronautics Systems sales	Aeronautics Systems sales	2,913		100	%	2,925		100	%	5,903		100	%	5,768		100	%	Aeronautics Systems sales	2,725		100	%	2,914		100	%	8,628		100	%	8,682		100	%
Defense Systems	Defense Systems																	Defense Systems
U.S. government(1)	U.S. government(1)	879		62	%	1,305		69	%	1,872		63	%	2,564		68	%	U.S. government(1)	877		62	%	1,264		68	%	2,749		63	%	3,828		68	%
International(2)	International(2)	335		23	%	316		17	%	686		22	%	656		18	%	International(2)	316		22	%	307		17	%	1,002		23	%	963		17	%
Other customers	Other customers	18		1	%	85		4	%	51		2	%	196		5	%	Other customers	10		1	%	97		5	%	61		1	%	293		5	%
Intersegment sales	Intersegment sales	195		14	%	180		10	%	380		13	%	351		9	%	Intersegment sales	206		15	%	191		10	%	586		13	%	542		10	%
Defense Systems sales	Defense Systems sales	1,427		100	%	1,886		100	%	2,989		100	%	3,767		100	%	Defense Systems sales	1,409		100	%	1,859		100	%	4,398		100	%	5,626		100	%
Mission Systems	Mission Systems																	Mission Systems
U.S. government(1)	U.S. government(1)	1,901		73	%	1,776		73	%	3,735		72	%	3,447		72	%	U.S. government(1)	1,756		72	%	1,884		74	%	5,491		71	%	5,331		73	%
International(2)	International(2)	419		16	%	468		19	%	921		18	%	951		20	%	International(2)	417		17	%	455		18	%	1,338		18	%	1,406		19	%
Other customers	Other customers	14		1	%	18		1	%	30		1	%	35		1	%	Other customers	19		1	%	19		1	%	49		1	%	54		1	%
Intersegment sales	Intersegment sales	254		10	%	184		7	%	491		9	%	360		7	%	Intersegment sales	244		10	%	193		7	%	735		10	%	553		7	%
Mission Systems sales	Mission Systems sales	2,588		100	%	2,446		100	%	5,177		100	%	4,793		100	%	Mission Systems sales	2,436		100	%	2,551		100	%	7,613		100	%	7,344		100	%
Space Systems	Space Systems																	Space Systems
U.S. government(1)	U.S. government(1)	2,568		93	%	1,911		93	%	4,894		93	%	3,714		93	%	U.S. government(1)	2,507		94	%	2,020		92	%	7,401		93	%	5,734		93	%
International(2)	International(2)	104		4	%	70		4	%	209		4	%	138		3	%	International(2)	92		3	%	99		5	%	301		4	%	237		4	%
Other customers	Other customers	45		2	%	39		2	%	96		2	%	90		3	%	Other customers	49		2	%	54		2	%	145		2	%	144		2	%
Intersegment sales	Intersegment sales	31		1	%	28		1	%	70		1	%	54		1	%	Intersegment sales	33		1	%	25		1	%	103		1	%	79		1	%
Space Systems sales	Space Systems sales	2,748		100	%	2,048		100	%	5,269		100	%	3,996		100	%	Space Systems sales	2,681		100	%	2,198		100	%	7,950		100	%	6,194		100	%
Total	Total																	Total
U.S. government(1)	U.S. government(1)	7,861		86	%	7,469		84	%	15,555		85	%	14,563		83	%	U.S. government(1)	7,452		85	%	7,659		84	%	23,007		85	%	22,222		84	%
International(2)	International(2)	1,209		13	%	1,261		14	%	2,566		14	%	2,596		15	%	International(2)	1,185		14	%	1,243		14	%	3,751		14	%	3,839		14	%
Other customers	Other customers	81		1	%	154		2	%	187		1	%	345		2	%	Other customers	83		1	%	181		2	%	270		1	%	526		2	%
Total Sales	Total Sales	$	9,151	100	%	$	8,884	100	%	$	18,308	100	%	$	17,504	100	%	Total Sales	$	8,720	100	%	$	9,083	100	%	$	27,028	100	%	$	26,587	100	%

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

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

(3) Percentages calculated based on total segment sales.

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Sales by Contract Type Three Months Ended June 30 Six Months Ended June 30
2021 2020 2021 2020
$ in millions $
%(1)
$
%(1)
$
%(1)
$
%(1)
Aeronautics Systems
Cost-type $ 1,341 47 % $ 1,426 49 % $ 2,752 47 % $ 2,769 48 %
Fixed-price 1,527 53 % 1,470 51 % 3,062 53 % 2,944 52 %
Intersegment sales 45 29 89 55
Aeronautics Systems sales 2,913 2,925 5,903 5,768
Defense Systems
Cost-type 434 35 % 582 34 % 943 36 % 1,210 35 %
Fixed-price 798 65 % 1,124 66 % 1,666 64 % 2,206 65 %
Intersegment sales 195 180 380 351
Defense Systems sales 1,427 1,886 2,989 3,767
Mission Systems
Cost-type 808 35 % 895 40 % 1,673 36 % 1,741 39 %
Fixed-price 1,526 65 % 1,367 60 % 3,013 64 % 2,692 61 %
Intersegment sales 254 184 491 360
Mission Systems sales 2,588 2,446 5,177 4,793
Space Systems
Cost-type 2,025 75 % 1,468 73 % 3,869 74 % 2,866 73 %
Fixed-price 692 25 % 552 27 % 1,330 26 % 1,076 27 %
Intersegment sales 31 28 70 54
Space Systems sales 2,748 2,048 5,269 3,996
Total
Cost-type 4,608 50 % 4,371 49 % 9,237 50 % 8,586 49 %
Fixed-price 4,543 50 % 4,513 51 % 9,071 50 % 8,918 51 %
Total Sales $ 9,151 $ 8,884 $ 18,308 $ 17,504

~~(1)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
2021 2020 2021 2020
$ in millions $
%(2)
$
%(2)
$
%(2)
$
%(2)
Aeronautics Systems
United States $ 2,517 88 % $ 2,489 86 % $ 5,064 87 % $ 4,862 85 %
Asia/Pacific 204 7 % 202 7 % 483 8 % 409 7 %
Europe 127 4 % 150 5 % 227 4 % 316 6 %
All other(1)
20 1 % 55 2 % 40 1 % 126 2 %
Intersegment sales 45 29 89 55
Aeronautics Systems sales 2,913 2,925 5,903 5,768
Defense Systems
United States 897 73 % 1,390 82 % 1,923 73 % 2,760 81 %
Asia/Pacific 126 10 % 107 6 % 229 9 % 189 5 %
Europe 79 6 % 70 4 % 155 6 % 140 4 %
All other(1)
130 11 % 139 8 % 302 12 % 327 10 %
Intersegment sales 195 180 380 351
Defense Systems sales 1,427 1,886 2,989 3,767
Mission Systems
United States 1,915 82 % 1,794 79 % 3,765 80 % 3,482 79 %
Asia/Pacific 98 4 % 191 9 % 258 6 % 367 8 %
Europe 242 11 % 191 9 % 511 11 % 416 9 %
All other(1)
79 3 % 86 3 % 152 3 % 168 4 %
Intersegment sales 254 184 491 360
Mission Systems sales 2,588 2,446 5,177 4,793
Space Systems
United States 2,614 97 % 1,950 97 % 4,990 96 % 3,804 97 %
Asia/Pacific 13 — % 5 — % 29 1 % 10 — %
Europe 89 3 % 63 3 % 177 3 % 122 3 %
All other(1)
1 — % 2 — % 3 — % 6 — %
Intersegment sales 31 28 70 54
Space Systems sales 2,748 2,048 5,269 3,996
Total
United States 7,943 86 % 7,623 86 % 15,742 86 % 14,908 85 %
Asia/Pacific 441 5 % 505 6 % 999 5 % 975 6 %
Europe 537 6 % 474 5 % 1,070 6 % 994 6 %
All other(1)
230 3 % 282 3 % 497 3 % 627 3 %
Total Sales $ 9,151 $ 8,884 $ 18,308 $ 17,504


Sales by Contract Type	Three Months Ended September 30								Nine Months Ended September 30
	2021				2020				2021				2020
$ in millions	$		%(1)		$		%(1)		$		%(1)		$		%(1)
Aeronautics Systems
Cost-type	$	1,358	51	%	$	1,436	50	%	$	4,110	48	%	$	4,205	49	%
Fixed-price	1,319		49	%	1,448		50	%	4,381		52	%	4,392		51	%
Intersegment sales	48				30				137				85
Aeronautics Systems sales	2,725				2,914				8,628				8,682
Defense Systems
Cost-type	433		36	%	549		33	%	1,376		36	%	1,759		35	%
Fixed-price	770		64	%	1,119		67	%	2,436		64	%	3,325		65	%
Intersegment sales	206				191				586				542
Defense Systems sales	1,409				1,859				4,398				5,626
Mission Systems
Cost-type	746		34	%	948		40	%	2,419		35	%	2,689		40	%
Fixed-price	1,446		66	%	1,410		60	%	4,459		65	%	4,102		60	%
Intersegment sales	244				193				735				553
Mission Systems sales	2,436				2,551				7,613				7,344
Space Systems
Cost-type	1,931		73	%	1,563		72	%	5,800		74	%	4,429		72	%
Fixed-price	717		27	%	610		28	%	2,047		26	%	1,686		28	%
Intersegment sales	33				25				103				79
Space Systems sales	2,681				2,198				7,950				6,194
Total
Cost-type	4,468		51	%	4,496		49	%	13,705		51	%	13,082		49	%
Fixed-price	4,252		49	%	4,587		51	%	13,323		49	%	13,505		51	%
Total Sales	$	8,720			$	9,083			$	27,028			$	26,587

(1)Percentages calculated based on external customer sales.

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Sales by Geographic Region	Three Months Ended September 30								Nine Months Ended September 30
	2021				2020				2021				2020
$ in millions	$		%(2)		$		%(2)		$		%(2)		$		%(2)
Aeronautics Systems
United States	$	2,317	87	%	$	2,502	87	%	$	7,381	86	%	$	7,364	86	%
Asia/Pacific	239		9	%	217		7	%	722		9	%	626		7	%
Europe	108		4	%	129		5	%	335		4	%	445		5	%
All other(1)	13		—	%	36		1	%	53		1	%	162		2	%
Intersegment sales	48				30				137				85
Aeronautics Systems sales	2,725				2,914				8,628				8,682
Defense Systems
United States	887		74	%	1,361		82	%	2,810		74	%	4,121		81	%
Asia/Pacific	107		9	%	103		6	%	336		9	%	292		6	%
Europe	78		6	%	73		4	%	233		6	%	213		4	%
All other(1)	131		11	%	131		8	%	433		11	%	458		9	%
Intersegment sales	206				191				586				542
Defense Systems sales	1,409				1,859				4,398				5,626
Mission Systems
United States	1,775		81	%	1,903		81	%	5,540		81	%	5,385		79	%
Asia/Pacific	114		5	%	122		5	%	372		5	%	489		7	%
Europe	233		11	%	253		11	%	744		11	%	669		10	%
All other(1)	70		3	%	80		3	%	222		3	%	248		4	%
Intersegment sales	244				193				735				553
Mission Systems sales	2,436				2,551				7,613				7,344
Space Systems
United States	2,556		97	%	2,074		96	%	7,546		97	%	5,878		96	%
Asia/Pacific	10		—	%	5		—	%	39		—	%	15		—	%
Europe	79		3	%	90		4	%	256		3	%	212		4	%
All other(1)	3		—	%	4		—	%	6		—	%	10		—	%
Intersegment sales	33				25				103				79
Space Systems sales	2,681				2,198				7,950				6,194
Total
United States	7,535		87	%	7,840		86	%	23,277		86	%	22,748		86	%
Asia/Pacific	470		5	%	447		5	%	1,469		5	%	1,422		5	%
Europe	498		6	%	545		6	%	1,568		6	%	1,539		6	%
All other(1)	217		2	%	251		3	%	714		3	%	878		3	%
Total Sales	$	8,720			$	9,083			$	27,028			$	26,587

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

(2)Percentages calculated based on external customer sales.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Northrop Grumman Corporation

Falls Church, Virginia

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of ~~June~~September 30, 2021, and the related condensed consolidated statements of earnings and comprehensive income and changes in shareholders’ equity for the three-month and ~~six-month~~nine-month periods ended ~~June~~September 30, 2021 and 2020, and of cash flows for the ~~six-month~~nine-month periods ended ~~June~~September 30, 2021 and 2020, 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, 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 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, 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

~~July 28,~~October 27, 2021

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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 other governments, including foreign ~~state~~governments, 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 2020 Annual Report on Form 10-K, which provides 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”)~~which was first reported in late 2019, and ~~has since~~subsequent variants (collectively “COVID-19” or the “pandemic”), have dramatically impacted the global health and economic environment, including millions of confirmed cases and deaths, business slowdowns or shutdowns, ~~government~~labor shortfalls, supply chain challenges, regulatory challenges, and market volatility. We discuss in some detail in our Annual Report on Form 10-K, and subsequent SEC filings, the pandemic, its impacts and risks, and actions taken up to the time of filing. In this Form 10-Q, we provide ana further 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 continues to consider and be guided by health data and evolving guidance from the Centers for Disease Control and Prevention (CDC), in particular, as well as other health organizations globally, federal, state and local governmental authorities, and our customers, among others. During the ~~first half~~course of ~~2021,~~this year, COVID-19 case rates and the health ~~and economic~~ impacts of the pandemic ~~increased and decreased~~have fluctuated dramatically in different communities in the U.S. and globally. We have continued to see a prolonged impact on the economy, our industry, and our company, with increased challenges for customers and suppliers, labor shortages (including greater leave-taking), supply chain challenges, and increasing inflation, among other impacts. We expect these and other impacts to continue and they could worsen, depending on the future course of the pandemic and actions taken in connection with it.

In the U.S., the Food and Drug Administration ~~(FDA)~~ issued emergency use authorization for COVID-19 vaccines and the government began extensive efforts to administer them. The company also has taken various steps to facilitate vaccination access for our employees, in accordance with federal ~~guidelines and state and local vaccination plans.~~guidance. We have provided paid leave and flexibility for employees to get ~~vaccinated. During~~vaccinated, and strongly encouraged our workforce to take care of themselves and their colleagues. In September 2021, the ~~second quarter~~White House issued an executive order and guidance from the Safer Federal Workforce Task Force broadly requiring many U.S.-based federal contractors to be fully vaccinated by December 8, 2021 (with exceptions including where an employee is legally entitled to an accommodation). We are taking steps to comply with the executive order, guidance, and related contract terms, broadly requiring vaccination among our U.S.-based employees. We are continuing to evaluate these evolving requirements, especially as our customers determine when and how to implement new contractual obligations, but we cannot at this stage predict the various impacts they may have on our workforce, our suppliers, or our company. The Occupational Safety and Health Administration has said it is developing an emergency temporary standard for employers with 100 or more employees to ensure their workers are fully vaccinated or undergo weekly testing. State and local governments are also taking actions related to the pandemic, imposing additional and varying requirements on industry. These evolving government requirements, including regarding a vaccine mandate, along with the broader impacts of ~~2021,~~the continuing pandemic, could significantly impact our workforce and performance, as well as those of our suppliers,

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and result in costs that we ~~began a phased transition back~~may not be able to ~~our facilities for most employees who have been working remotely.~~recover fully. The company continues to take robust actions globally to protect the health, safety and well-being of our employees, and to serve our customers with continued performance. We also continue to take steps to support our 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.

The company’s ~~second~~third quarter 2021 revenue and operating income were ~~not significantly impacted~~affected by ~~COVID-19. However, our employees, suppliers and customers,~~the impact of the COVID-19 pandemic on the company and the broader economic environment, including through a tightened labor market, elevated levels of employee leave, evolving government requirements, and supply chain challenges. These factors could worsen and affect further our ability (and that of our suppliers) to maintain a qualified workforce and to perform fully for our customers (including with respect to cost and schedule), with reduced sales and additional liabilities, losses and costs, that we may not be able to recover fully. Our employees, customers and suppliers, the company, our economy and our global community continue to face both continuing and new or evolving challenges, including related to the vaccine mandate, and we cannot predict how this dynamic situation will evolve or the impact it will have on the ~~company.~~company, or our financial position, results of operations and/or cash flows. For further information on the pandemic and the potential impact to the company of COVID-19, see “Liquidity and Capital Resources” below and “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form ~~10-K.~~10-K and Quarterly Reports on Form 10-Q.

U.S. Political and Economic Environment

On May 28, 2021, the Administration released its budget request for fiscal year (FY) 2022. The budget proposes $753 billion for national defense programs and $770 billion in non-defense discretionary ~~funding. The Congress is expected~~funding, and continues to ~~continue to~~be the subject of debate ~~the defense budget. If not agreed, the government may be required to operate under a continuing resolution into fiscal year 2022, which could impact our programs and new starts,~~ in ~~particular.~~Congress. The Administration’s budget request includes funding for the American Jobs Plan, a $2.3 trillion infrastructure and

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economic recovery plan, and the American Families Plan, a $1.8 trillion education and economic support plan. If some or all of these plans are enacted, they may have broader implications for the defense industry, our customers’ budgets and priorities, and the 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 should help our customers to meet the threats and, as a result, continue to allow for long-term profitable growth in our business.

~~We understand that~~FY 2022 appropriations have not been enacted, to date, and, on September 30, 2021, a continuing resolution was enacted, providing funding generally at FY 2021 levels through December 3, 2021. The Congress’ FY 2022 deliberations have demonstrated broad support for national security, and in key pieces of legislation, have proposed increased funding for national defense above the Administration’s budget request. It remains uncertain whether and, if so, when the government ~~expects~~will approve FY 2022 appropriations, with which programs funded at what levels, and for how long the government will operate under a continuing resolution, with potential impacts on our programs and new starts, in particular.

On October 14, 2021, the statutory debt ~~ceiling will be breached around the end of July 2021 and~~limit was increased by $480 billion, which reportedly allows the Treasury Department ~~will then begin taking “extraordinary measures”~~ to finance the ~~government.~~government through approximately early December 2021. If the debt limit is not lifted, or further increased, and the debt ceiling is breached, there may be significant consequences for our customers and programs, and we may be required to continue to perform for some period of time on certain of our U.S. Government contracts even if the U.S. Government is unable to make timely payments.

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 particular.

For further information on the risks we face from the current political and economic environment, see “Risk Factors” in our 2020 Annual Report on Form 10-K.

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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 (transaction-adjusted EPS) 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 June 30						%		Six Months Ended June 30						%			Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions, except per share amounts	$ in millions, except per share amounts	2021			2020			Change		2021			2020			Change		$ in millions, except per share amounts	2021			2020			Change		2021			2020			Change
Sales	Sales	$	9,151		$	8,884		3	%	$	18,308		$	17,504		5	%	Sales	$	8,720		$	9,083		(4)	%	$	27,028		$	26,587		2	%
Operating costs and expenses	Operating costs and expenses	8,107			7,890			3	%	16,422			15,576			5	%	Operating costs and expenses	7,677			8,098			(5)	%	24,099			23,674			2	%
Operating costs and expenses as a % of sales	Operating costs and expenses as a % of sales	88.6		%	88.8		%			89.7		%	89.0		%			Operating costs and expenses as a % of sales	88.0		%	89.2		%			89.2		%	89.0		%
Gain on sale of business	Gain on sale of business	—			—			NM		1,980			—			NM		Gain on sale of business	—			—			NM		1,980			—			NM
Operating income	Operating income	1,044			994			5	%	3,866			1,928			101	%	Operating income	1,043			985			6	%	4,909			2,913			69	%
Operating margin rate	Operating margin rate	11.4		%	11.2		%			21.1		%	11.0		%			Operating margin rate	12.0		%	10.8		%			18.2		%	11.0		%
Federal and foreign income tax expense	Federal and foreign income tax expense	265			198			34	%	1,086			383			184	%	Federal and foreign income tax expense	212			181			17	%	1,298			564			130	%
Effective income tax rate	Effective income tax rate	20.4		%	16.5		%			25.2		%	17.0		%			Effective income tax rate	16.6		%	15.5		%			23.2		%	16.5		%
Net earnings	Net earnings	1,037			1,005			3	%	3,232			1,873			73	%	Net earnings	1,063			986			8	%	4,295			2,859			50	%
Diluted earnings per share	Diluted earnings per share	$	6.42		$	6.01		7	%	$	19.89		$	11.16		78	%	Diluted earnings per share	$	6.63		$	5.89		13	%	$	26.55		$	17.05		56	%

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Sales

The tables below reconcile sales to organic sales:


		Three Months Ended June 30																Three Months Ended September 30
			2021						2020										2021						2020
$ in millions	$ in millions		Sales		IT services sales		Organic sales		Sales		IT services sales		Organic sales		Organic sales % change		$ in millions		Sales		IT services sales		Organic sales		Sales		IT services sales		Organic sales		Organic sales % change
Aeronautics Systems	Aeronautics Systems		$	2,913	$	—	$	2,913	$	2,925	$	—	$	2,925	—	%	Aeronautics Systems		$	2,725	$	—	$	2,725	$	2,914	$	—	$	2,914	(6)	%
Defense Systems	Defense Systems		1,427		—		1,427		1,886		(416)		1,470		(3)	%	Defense Systems		1,409		—		1,409		1,859		(425)		1,434		(2)	%
Mission Systems	Mission Systems		2,588		—		2,588		2,446		(131)		2,315		12	%	Mission Systems		2,436		—		2,436		2,551		(133)		2,418		1	%
Space Systems	Space Systems		2,748		—		2,748		2,048		(43)		2,005		37	%	Space Systems		2,681		—		2,681		2,198		(48)		2,150		25	%
Intersegment eliminations	Intersegment eliminations		(525)		—		(525)		(421)		5		(416)				Intersegment eliminations		(531)		—		(531)		(439)		4		(435)
Total	Total		$	9,151	$	—	$	9,151	$	8,884	$	(585)	$	8,299	10	%	Total		$	8,720	$	—	$	8,720	$	9,083	$	(602)	$	8,481	3	%


		Six Months Ended June 30																Nine Months Ended September 30
			2021						2020										2021						2020
$ in millions	$ in millions		Sales		IT services sales		Organic sales		Sales		IT services sales		Organic sales		Organic sales % change		$ in millions		Sales		IT services sales		Organic sales		Sales		IT services sales		Organic sales		Organic sales % change
Aeronautics Systems	Aeronautics Systems		$	5,903	$	—	$	5,903	$	5,768	$	—	$	5,768	2	%	Aeronautics Systems		$	8,628	$	—	$	8,628	$	8,682	$	—	$	8,682	(1)	%
Defense Systems	Defense Systems		2,989		(106)		2,883		3,767		(805)		2,962		(3)	%	Defense Systems		4,398		(106)		4,292		5,626		(1,230)		4,396		(2)	%
Mission Systems	Mission Systems		5,177		(42)		5,135		4,793		(261)		4,532		13	%	Mission Systems		7,613		(42)		7,571		7,344		(394)		6,950		9	%
Space Systems	Space Systems		5,269		(16)		5,253		3,996		(87)		3,909		34	%	Space Systems		7,950		(16)		7,934		6,194		(135)		6,059		31	%
Intersegment eliminations	Intersegment eliminations		(1,030)		2		(1,028)		(820)		9		(811)				Intersegment eliminations		(1,561)		2		(1,559)		(1,259)		13		(1,246)
Total	Total		$	18,308	$	(162)	$	18,146	$	17,504	$	(1,144)	$	16,360	11	%	Total		$	27,028	$	(162)	$	26,866	$	26,587	$	(1,746)	$	24,841	8	%

Current Quarter

~~Second~~Third quarter 2021 sales ~~increased $267~~decreased $363 million, or 4 percent, due to lower sales at Defense Systems and Missions Systems, principally due to the impact of the IT services divestiture, and lower sales at Aeronautics Systems, partially offset by 22 percent sales growth at Space Systems. Third quarter 2021 sales were affected by the impact of COVID-19 on the broader economic environment, including a tight labor market, elevated levels of employee leave, and supply chain challenges. Third quarter 2021 organic sales increased $239 million, or 3 percent.

Year to Date

Year to date 2021 sales increased $441 million, or 2 percent, primarily due to higher sales at Space Systems and Mission Systems, partially offset by lower sales at Defense Systems, principally due to the impact of the IT services divestiture. ~~Second quarter 2021 organic sales increased $852 million, or 10 percent.~~

~~Year to Date~~

Year to date 2021 sales increased $804 million, or 5 percent, due to higher sales at Space Systems, Mission Systems and Aeronautics systems, partially offset by lower sales at Defense Systems principally due to the impact of the IT services divestiture. Year to date 2021 organic sales increased ~~$1.8~~$2.0 billion, or 118 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), year to date 2021 sales at each sector benefited approximately 2 percent from three additional working days when compared to the prior year period.

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.

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Operating Income and Margin Rate

Current Quarter

~~Second~~Third quarter 2021 operating income increased ~~$50~~$58 million, or 56 percent, primarily due to ~~higher segment operating income and~~ lower unallocated corporate expense, partially offset by a lower FAS/CAS operating adjustment. ~~Second~~Third quarter 2021 operating margin rate increased to ~~11.4~~12.0 percent reflecting a higher segment operating margin rate in addition to the items above.

~~Second~~Third quarter 2021 general and administrative (G&A) costs as a percentage of sales increased to ~~10.9~~10.2 percent from 9.4 percent in the prior year period primarily due to an increase in investments for future business opportunities as well as the timing of indirect cost recognition during the quarter.

Year to Date

Year to date 2021 operating income increased ~~$1.9~~$2.0 billion, or ~~101~~69 percent, primarily due to 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~~ lower non-divestiture-related unallocated corporate expenses and higher segment operating income, partially offset by a lower FAS/CAS operating adjustment. Year to date 2021 operating margin rate increased to ~~21.1~~18.2 percent reflecting the items above.

Year to date 2021 G&A costs as a percentage of sales increased to ~~10.4~~10.3 percent from 9.3 percent in the prior year period primarily due to an increase in investments for future business opportunities as well as the timing of indirect cost recognition during the 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~~third quarter 2021 effective tax rate (ETR) increased to ~~20.4~~16.6 percent from ~~16.5~~15.5 percent in the prior year period primarily due to ~~a change made in tax revenue recognition on certain long-term contracts, which increased taxable income in years prior to the 2017 Tax Cuts and Jobs Act at a rate above the current statutory rate.~~lower benefits from foreign-derived intangible income. See Note 3 to the financial statements for additional information.

Year to Date

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Net Earnings

The table below reconciles net earnings to transaction-adjusted net earnings:


		Three Months Ended June 30				%		Six Months Ended June 30				%			Three Months Ended September 30				%		Nine Months Ended September 30				%
$ in millions	$ in millions	2021		2020		Change		2021		2020		Change		$ in millions	2021		2020		Change		2021		2020		Change
Net earnings	Net earnings	$	1,037	$	1,005	3	%	$	3,232	$	1,873	73	%	Net earnings	$	1,063	$	986	8	%	$	4,295	$	2,859	50	%
Gain on sale of business	Gain on sale of business	—		—		NM		(1,980)		—		NM		Gain on sale of business	—		—		NM		(1,980)		—		NM
State tax impact1	State tax impact1	—		—		NM		160		—		NM		State tax impact1	—		—		NM		160		—		NM
Transaction costs	Transaction costs	—		—		NM		32		—		NM		Transaction costs	—		—		NM		32		—		NM
Make-whole premium	Make-whole premium	—		—		NM		54		—		NM		Make-whole premium	—		—		NM		54		—		NM
Federal tax impact of items above2	Federal tax impact of items above2	—		—		NM		614		—		NM		Federal tax impact of items above2	—		—		NM		614		—		NM
Adjustment, net of tax	Adjustment, net of tax	$	—	$	—	NM		$	(1,120)	$	—	NM		Adjustment, net of tax	$	—	$	—	NM		$	(1,120)	$	—	NM
Transaction-adjusted net earnings	Transaction-adjusted net earnings	$	1,037	$	1,005	3	%	$	2,112	$	1,873	13	%	Transaction-adjusted net earnings	$	1,063	$	986	8	%	$	3,175	$	2,859	11	%

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

(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.

Current Quarter

~~Second~~Third quarter 2021 net earnings increased ~~$32~~$77 million, or 38 percent, primarily due to ~~higher operating income and~~ an increase in non-operating FAS pension benefit and higher operating income, partially offset by an increase in income tax expense.

Year to Date

Year to date 2021 net earnings increased $1.4 billion, or 7350 percent, primarily due to the IT services divestiture. Transaction-adjusted net earnings increased ~~$239~~$316 million or 1311 percent, primarily due to higher segment operating income and an increase in non-operating FAS pension benefit, partially offset by an increase in income tax expense.

Diluted Earnings Per Share

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


		Three Months Ended June 30				%		Six Months Ended June 30				%			Three Months Ended September 30				%		Nine Months Ended September 30				%
		2021		2020		Change		2021		2020		Change			2021		2020		Change		2021		2020		Change
Diluted EPS	Diluted EPS	$	6.42	$	6.01	7	%	$	19.89	$	11.16	78	%	Diluted EPS	$	6.63	$	5.89	13	%	$	26.55	$	17.05	56	%
Gain on sale of business per share	Gain on sale of business per share	—		—		NM		(12.18)		—		NM		Gain on sale of business per share	—		—		NM		(12.24)		—		NM
State tax impact per share1	State tax impact per share1	—		—		NM		0.98		—		NM		State tax impact per share1	—		—		NM		0.99		—		NM
Transaction costs per share	Transaction costs per share	—		—		NM		0.20		—		NM		Transaction costs per share	—		—		NM		0.20		—		NM
Make-whole premium per share	Make-whole premium per share	—		—		NM		0.33		—		NM		Make-whole premium per share	—		—		NM		0.33		—		NM
Federal tax impact of line items above per share2	Federal tax impact of line items above per share2	—		—		NM		3.78		—		NM		Federal tax impact of line items above per share2	—		—		NM		3.79		—		NM
Adjustment, net of tax per share	Adjustment, net of tax per share	$	—	$	—	NM		$	(6.89)	$	—	NM		Adjustment, net of tax per share	$	—	$	—	NM		$	(6.93)	$	—	NM
Transaction-adjusted EPS	Transaction-adjusted EPS	$	6.42	$	6.01	7	%	$	13.00	$	11.16	16	%	Transaction-adjusted EPS	$	6.63	$	5.89	13	%	$	19.62	$	17.05	15	%

(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

~~Second~~Third quarter 2021 diluted earnings per share increased 713 percent, reflecting ~~a 3~~an 8 percent increase in net earnings and a 34 percent reduction in weighted-average diluted shares outstanding.

Year to Date

Year to date 2021 diluted earnings per share increased 7856 percent, principally due to a ~~$6.89~~$6.93 increase associated with the IT services divestiture. Transaction-adjusted earnings per share increased ~~$1.84,~~$2.57, or 1615 percent, reflecting ~~a 13~~an 11 percent increase in transaction-adjusted net earnings and a 34 percent reduction in weighted-average diluted shares outstanding.

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SEGMENT OPERATING RESULTS

Basis of Presentation

The company is aligned in four operating sectors, which also comprise our reportable segments: Aeronautics Systems, Defense Systems, Mission Systems and Space Systems. 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

Launch & Strategic Missiles

Manned Aircraft

Mission Readiness

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 requirements in the 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 June 30						%		Six Months Ended June 30						%			Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions	$ in millions	2021			2020			Change		2021			2020			Change		$ in millions	2021			2020			Change		2021			2020			Change
Segment operating income	Segment operating income	$	1,117		$	1,031		8	%	$	2,212		$	1,998		11	%	Segment operating income	$	1,035		$	1,049		(1)	%	$	3,247		$	3,047		7	%
Segment operating margin rate	Segment operating margin rate	12.2		%	11.6		%			12.1		%	11.4		%			Segment operating margin rate	11.9		%	11.5		%			12.0		%	11.5		%
CAS pension expense	CAS pension expense	121			205			(41)	%	244			412			(41)	%	CAS pension expense	165			210			(21)	%	409			622			(34)	%
Less: FAS pension service expense	Less: FAS pension service expense	(103)			(102)			1	%	(207)			(204)			1	%	Less: FAS pension service expense	(104)			(102)			2	%	(311)			(306)			2	%
FAS/CAS operating adjustment	FAS/CAS operating adjustment	18			103			(83)	%	37			208			(82)	%	FAS/CAS operating adjustment	61			108			(44)	%	98			316			(69)	%
Gain on sale of business	Gain on sale of business	—			—			NM		1,980			—			NM		Gain on sale of business	—			—			NM		1,980			—			NM
IT services divestiture – unallowable state taxes and transaction costs	IT services divestiture – unallowable state taxes and transaction costs	—			—			NM		(192)			—			NM		IT services divestiture – unallowable state taxes and transaction costs	—			—			NM		(192)			—			NM
Intangible asset amortization and PP&E step-up depreciation	Intangible asset amortization and PP&E step-up depreciation	(64)			(77)			(17)	%	(129)			(159)			(19)	%	Intangible asset amortization and PP&E step-up depreciation	(62)			(81)			(23)	%	(191)			(240)			(20)	%

Other unallocated corporate expense	Other unallocated corporate expense	(27)			(63)			(57)	%	(42)			(119)			(65)	%	Other unallocated corporate expense	9			(91)			(110)	%	(33)			(210)			(84)	%
Unallocated corporate (expense) income	Unallocated corporate (expense) income	(91)			(140)			(35)	%	1,617			(278)			(682)	%	Unallocated corporate (expense) income	(53)			(172)			(69)	%	1,564			(450)			(448)	%
Operating income	Operating income	$	1,044		$	994		5	%	$	3,866		$	1,928		101	%	Operating income	$	1,043		$	985		6	%	$	4,909		$	2,913		69	%

Current Quarter

~~Second~~Third quarter 2021 segment operating income ~~increased $86~~decreased $14 million, or 81 percent, due to ~~higher~~lower sales, ~~and~~partially offset by a higher segment operating margin rate. ~~Higher~~Third quarter 2020 segment operating income ~~at Space Systems and Mission Systems~~from the IT services business was ~~partially offset by lower~~$69 million. Lower operating income at Defense Systems, principally due to the impact of the IT services divestiture, and Aeronautics ~~Systems. Second quarter 2020 segment~~Systems was partially offset by higher operating income ~~from the IT services business was $60 million.~~at Space Systems. Segment operating margin rate increased to ~~12.2~~11.9 percent from ~~11.6~~11.5 percent due to higher operating margin rates at Mission Systems, Defense Systems and Space Systems, partially offset by a lower operating margin rate at Aeronautics Systems.

Year to Date

Year to date 2021 segment operating income increased ~~$214~~$200 million, or 117 percent, due to higher sales and a higher segment operating margin rate. Higher operating income at Space Systems ~~Mission Systems~~ and ~~Aeronautics~~Mission Systems was partially offset by lower operating income at Defense Systems due to the impact of the IT services divestiture. Year to date 2021 segment operating income from the IT services business was $20 million as compared to ~~$111~~$180 million in the prior year period. Year to date 2021 segment operating income includes a first quarter 2021 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 increased to ~~12.1~~12.0 percent from ~~11.4~~11.5 percent and reflects higher operating margin rates at all four sectors largely as a result of the items discussed above.

FAS/CAS Operating Adjustment

~~Second~~Third quarter 2021 and year to date 2021 FAS/CAS operating adjustment decreased primarily due to lower CAS pension expense resulting from favorable plan asset returns in 2020 and changes in certain CAS actuarial assumptions as of December 31, 2020. Third quarter 2021 CAS pension expense also reflects a $44 million benefit from updated demographic information.

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Unallocated Corporate (Expense) Income

Current Quarter

The decrease in ~~second~~third quarter 2021 unallocated corporate ~~(expense) income~~expense is ~~primarily~~ due, in part, to a $60 million benefit from insurance settlements related to shareholder litigation involving the former Orbital ATK prior to the ~~deferred state tax impact of~~ company’s acquisition, that was resolved in June 2019. Unallocated corporate expense also decreased due toa change in ~~tax~~deferred state income taxes related to our methods of timing of revenue recognition ~~on certain contracts,~~and related costs as well as lower intangible asset amortization and PP&E step-up depreciation.

Year to Date

The increase in year to date 2021 unallocated corporate (expense) income is primarily due to 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. Unallocated corporate (expense) income also increased due to the current quarter items described above, as well as a net increase in deferred state tax assets ~~principally resulting from~~related to certain state tax legislation adopted in 2020 that places temporary limitations on tax credits and a change in tax revenue recognition on certain ~~contracts, as well as lower intangible asset amortization and PP&E step-up depreciation.~~contracts.

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 September 30				Nine Months Ended September 30
$ in millions	$ in millions	2021		2020		2021		2020		$ in millions	2021		2020		2021		2020
Favorable EAC adjustments	Favorable EAC adjustments	$	309	$	241	$	657	$	517	Favorable EAC adjustments	$	273	$	271	$	930	$	788
Unfavorable EAC adjustments	Unfavorable EAC adjustments	(155)		(129)		(313)		(281)		Unfavorable EAC adjustments	(164)		(148)		(477)		(429)
Net EAC adjustments	Net EAC adjustments	$	154	$	112	$	344	$	236	Net EAC adjustments	$	109	$	123	$	453	$	359

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


		Three Months Ended June 30				Six Months Ended June 30					Three Months Ended September 30				Nine Months Ended September 30
$ in millions	$ in millions	2021		2020		2021		2020		$ in millions	2021		2020		2021		2020
Aeronautics Systems	Aeronautics Systems	$	32	$	22	$	69	$	34	Aeronautics Systems	$	(2)	$	—	$	67	$	34
Defense Systems	Defense Systems	28		39		58		61		Defense Systems	37		58		95		119
Mission Systems	Mission Systems	61		59		149		138		Mission Systems	43		58		192		196
Space Systems	Space Systems	33		(7)		70		5		Space Systems	33		10		103		15
Eliminations	Eliminations	—		(1)		(2)		(2)		Eliminations	(2)		(3)		(4)		(5)
Net EAC adjustments	Net EAC adjustments	$	154	$	112	$	344	$	236	Net EAC adjustments	$	109	$	123	$	453	$	359

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	AERONAUTICS SYSTEMS	Three Months Ended June 30						%		Six Months Ended June 30						%		AERONAUTICS SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions	$ in millions	2021			2020			Change		2021			2020			Change		$ in millions	2021			2020			Change		2021			2020			Change
Sales	Sales	$	2,913		$	2,925		—	%	$	5,903		$	5,768		2	%	Sales	$	2,725		$	2,914		(6)	%	$	8,628		$	8,682		(1)	%
Operating income	Operating income	300			310			(3)	%	608			573			6	%	Operating income	265			294			(10)	%	873			867			1	%
Operating margin rate	Operating margin rate	10.3		%	10.6		%			10.3		%	9.9		%			Operating margin rate	9.7		%	10.1		%			10.1		%	10.0		%

Sales

Current Quarter

~~Second~~Third quarter 2021 sales ~~were comparable~~decreased $189 million, or 6 percent, due to ~~the prior year period. Higher restricted and E-2 production volume was offset by a reduction in A350 production activity and~~ lower volume onin both Manned Aircraft and Autonomous Systems, including restricted programs, F-35, the B-2 Defensive Management Systems Modernization (DMS) program ~~as well as~~and certain Global Hawk ~~programs as they near completion.~~

~~Year to Date~~

~~Year to date 2021 sales increased $135 million, or 2 percent, due to higher volume on restricted programs and the E-2 and F-35 production~~ programs. ~~These increases more than offset lower volume on A350 production activity and B-2 DMS as well as certain Global Hawk programs as they near completion.~~

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~~Operating Income~~

~~Current Quarter~~

Second quarter 2021 operating income decreased $10 million, or 3 percent, due to a lower operating margin rate. Operating margin rate decreased to 10.3 percent from 10.6 percent principally due to a $21 million benefit recognized in the prior period in connection with the resolution of a government accounting matter, partially offset by higher net favorable EAC adjustments.

~~Year to Date~~

Year to date 2021 operating income increased $35 million, or 6 percent, due to a higher operating margin rate and higher sales. Operating margin rate increased to 10.3 percent from 9.9 percent principally due to higher net favorable EAC adjustments, which were largely driven by the previously described first quarter 2021 reduction in overhead rates.

DEFENSE SYSTEMS Three Months Ended June 30 % Six Months Ended June 30 %
$ in millions 2021 2020 Change 2021 2020 Change
Sales $ 1,427 $ 1,886 (24) % $ 2,989 $ 3,767 (21) %
Operating income 177 217 (18) % 354 415 (15) %
Operating margin rate 12.4 % 11.5 % 11.8 % 11.0 %

~~Sales~~

~~Current Quarter~~

Second quarter 2021 sales decreased $459 million, or 24 percent, primarily due to a $416 million reduction in sales related to the IT services divestiture. Second quarter 2021 organic sales decreased $43 million, or 3 percent, principally due to the close-out of the contract at the Army’s Lake City ammunition plant (Lake City), partially offset by higher volume on the Guided Missile Launch Rocket System (GMLRS) program, Republic of Korea Global Hawk Contractor Logistics Support (ROK Global Hawk CLS) program and production ramp-up on advanced fuze programs.

~~Year to Date~~

Year to date 2021 sales decreased $778 million, or 21 percent, primarily due to a $699 million reduction in sales related to the IT services divestiture. Year to date 2021 organic sales decreased $79 million, or 3 percent, principally due to the close-out of Lake City, partially offset by higher volume on several programs including GMLRS, RoK Global Hawk CLS, advanced fuzes, B-2 sustainment and the Advanced Anti-Radiation Guided Missile program.

~~Operating Income~~

~~Current Quarter~~

Second quarter 2021 operating income decreased $40 million, or 18 percent, primarily due to the impact of the IT services divestiture. Operating margin rate increased to 12.4 percent from 11.5 percent and reflects improved performance at Battle Management and Missile Systems due, in part, to changes in mix as a result of recent contract completions.

~~Year to Date~~

Year to date 2021 operating income decreased $61 million, or 15 percent, primarily due to the impact of the IT services divestiture. Operating margin rate increased to 11.8 percent from 11.0 percent primarily due to improved performance at Battle Management and Missile Systems due to the items discussed above.

MISSION SYSTEMS Three Months Ended June 30 % Six Months Ended June 30 %
$ in millions 2021 2020 Change 2021 2020 Change
Sales $ 2,588 $ 2,446 6 % $ 5,177 $ 4,793 8 %
Operating income 408 347 18 % 805 700 15 %
Operating margin rate 15.8 % 14.2 % 15.5 % 14.6 %

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~~Sales~~

~~Current Quarter~~

Second quarter 2021 sales increased $142 million, or 6 percent, due to higher volume across the sector, partially offset by a $131 million reduction in sales related to the IT services divestiture. Second quarter 2021 organic sales increased $273 million, or 12 percent. 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 and international volume. Navigation, Targeting and Survivability sales increased primarily due to higher intercompany volume on the Ground Based Strategic Deterrent (GBSD) program. Airborne Multifunction Sensors sales increased principally due to higher airborne radar volume, including the Scalable Agile Beam Radar (SABR) and Multi-role Electronically Scanned Array (MESA) programs. 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.

~~Year to Date~~

Year to date 2021 sales increased $384 million, or 8 percent, due to higher volume across the sector, partially offset by a $219 million reduction in sales related to the IT services divestiture. Year to date 2021 organic sales increased $603 million, or 13 percent. Maritime/Land Systems and Sensors sales increased primarily due to higher volume on land systems, including G/ATOR, and higher marine systems and restricted volume. Airborne Multifunction Sensors sales increased principally due to higher airborne radar volume, including SABR and MESA, and higher restricted volume. Navigation, Targeting and Survivability sales increased primarily due to higher intercompany volume on GBSD as well as higher volume on targeting, infrared countermeasures and navigation programs. Networked Information Solutions sales increased primarily due to higher volume on electronic warfare programs, including JCREW.

~~Operating Income~~

~~Current Quarter~~

Second quarter 2021 operating income increased $61 million, or 18 percent, due to higher sales volume and a higher operating margin rate. Operating margin rate increased to 15.8 percent from 14.2 percent principally due to the favorable resolution of certain government accounting matters and changes in contract mix toward more fixed-price content, largely as a result of the IT services divestiture.

~~Year to Date~~

Year to date 2021 operating income increased $105 million, or 15 percent, due to higher sales volume and a higher operating margin rate. Operating margin rate increased to 15.5 percent from 14.6 percent and reflects a benefit for the previously described first quarter 2021 reduction in overhead rates as well as the matters discussed above.

SPACE SYSTEMS Three Months Ended June 30 % Six Months Ended June 30 %
$ in millions 2021 2020 Change 2021 2020 Change
Sales $ 2,748 $ 2,048 34 % $ 5,269 $ 3,996 32 %
Operating income 301 209 44 % 577 411 40 %
Operating margin rate 11.0 % 10.2 % 11.0 % 10.3 %

~~Sales~~

~~Current Quarter~~

Second quarter 2021 sales increased $700 million, or 34 percent, primarily due to higher sales in both the Launch & Strategic Missiles and Space business areas, partially offset by a $43 million reduction in sales related to the IT services divestiture. Second quarter 2021 organic sales increased $743 million, or 37 percent. Launch & Strategic Missiles sales increased primarily due to ramp-up on GBSD and the Next Generation Interceptor (NGI) program as well as higher volume on Commercial Resupply Service (CRS) missions and hypersonics programs. Space sales were driven by higher volume on restricted programs, Artemis and the Next Generation Overhead Persistent Infrared (Next Gen OPIR) program.

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Year to Date

Year to date 2021 sales decreased $54 million, or 1 percent, due to lower volume at Autonomous Systems, which was partially offset by higher volume at Manned Aircraft. Lower A350 production activity, and lower volume on B-2 DMS and certain Global Hawk programs, was partially offset by higher volume on E-2 and restricted programs.

Operating Income

Current Quarter

Third quarter 2021 operating income decreased $29 million, or 10 percent, due to lower sales and a lower operating margin rate. Operating margin rate decreased to 9.7 percent from 10.1 percent principally due to a $42 million unfavorable EAC adjustment on F-35 due to labor-related production inefficiencies largely driven by COVID-19-related impacts on the labor market and employee leave. This was partially offset by higher net favorable EAC adjustments at Autonomous Systems.

Year to Date

Year to date 2021 operating income was consistent with the prior year period and operating margin rate increased ~~$1.27~~to 10.1 percent from 10.0 percent principally due to higher net favorable EAC adjustments, which were largely driven by the first quarter 2021 reduction in overhead rates, partially offset by the unfavorable F-35 adjustment discussed above.


DEFENSE SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions	2021			2020			Change		2021			2020			Change
Sales	$	1,409		$	1,859		(24)	%	$	4,398		$	5,626		(22)	%
Operating income	175			217			(19)	%	529			632			(16)	%
Operating margin rate	12.4		%	11.7		%			12.0		%	11.2		%

Sales

Current Quarter

Third quarter 2021 sales decreased $450 million, or 24 percent, primarily due to a $425 million reduction in sales related to the IT services divestiture. Third quarter 2021 organic sales decreased $25 million, or 2 percent, principally due to the close-out of the contract at the Army’s Lake City ammunition plant (Lake City), partially offset by higher volume on several Mission Readiness programs, including the U.S. Customs and Border Protection P-3 (CBP P-3) program.

Year to Date

Year to date 2021 sales decreased $1.2 billion, or 3222 percent, primarily due to a $1.1 billion reduction in sales related to the IT services divestiture. Year to date 2021 organic sales decreased $104 million, or 2 percent, principally due to the close-out of Lake City, partially offset by higher volume on several programs including the Guided Missile Launch Rocket System, Republic of Korea Global Hawk Contractor Logistics Support (ROK Global Hawk CLS), CBP P-3, B-2 sustainment and advanced fuzes.

Operating Income

Current Quarter

Third quarter 2021 operating income decreased $42 million, or 19 percent, primarily due to the impact of the IT services divestiture. Operating margin rate increased to 12.4 percent from 11.7 percent and reflects improved performance at Battle Management and Missile Systems due to changes in mix as a result of recent contract completions, partially offset by lower net favorable EAC adjustments.

Year to Date

Year to date 2021 operating income decreased $103 million, or 16 percent, primarily due to the impact of the IT services divestiture. Operating margin rate increased to 12.0 percent from 11.2 percent primarily due to improved performance at Battle Management and Missile Systems and lower net favorable EAC adjustments as described above.

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MISSION SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions	2021			2020			Change		2021			2020			Change
Sales	$	2,436		$	2,551		(5)	%	$	7,613		$	7,344		4	%
Operating income	372			370			1	%	1,177			1,070			10	%
Operating margin rate	15.3		%	14.5		%			15.5		%	14.6		%

Sales

Current Quarter

Third quarter 2021 sales decreased $115 million, or 5 percent, due to a $133 million reduction in sales related to the IT services divestiture. Third quarter 2021 organic sales increased $18 million, or 1 percent. Navigation, Targeting and Survivability sales increased primarily due to higher intercompany volume on the ramp up of the Ground Based Strategic Deterrent (GBSD) program. Maritime/Land Systems and Sensors sales increased principally due to higher volume on land systems, including the Ground/Air Task-Oriented Radar (G/ATOR) program. Networked Information Solutions sales decreased primarily due to lower volume on F-35 and restricted programs, partially offset by higher volume on the Joint Counter Radio-Controlled Improvised Explosive Device Electronic Warfare (JCREW) program.

Year to Date

Year to date 2021 sales increased $269 million, or 4 percent, due to higher volume across the sector, partially offset by a $352 million reduction in sales related to the IT services divestiture. Year to date 2021 organic sales increased $621 million, or 9 percent. Maritime/Land Systems and Sensors sales increased primarily due to higher volume on land systems, including G/ATOR, and higher marine systems, restricted and international volume. Navigation, Targeting and Survivability sales increased principally due to higher intercompany volume on GBSD ramp up as well as higher volume on infrared countermeasures and targeting programs. Airborne Multifunction Sensors sales increased principally due to higher airborne radar volume, including on the Scalable Agile Beam Radar (SABR) program, and higher restricted volume. Networked Information Solutions sales increased principally due to higher volume on electronic warfare programs, including JCREW.

Operating Income

Current Quarter

Third quarter 2021 operating income was consistent with the prior year period and reflects a higher operating margin rate and lower sales. Operating margin rate increased to 15.3 percent from 14.5 percent principally due to improved performance and changes in contract mix toward more fixed-price content, largely as a result of the IT services divestiture, partially offset by lower net favorable EAC adjustments.

Year to Date

Year to date 2021 operating income increased $107 million, or 10 percent, due to higher sales volume and a higher operating margin rate. Operating margin rate increased to 15.5 percent from 14.6 percent and reflects improved performance, the favorable resolution of certain government accounting matters in the second quarter of 2021 and mix changes largely related to the IT services divestiture, as discussed above.


SPACE SYSTEMS	Three Months Ended September 30						%		Nine Months Ended September 30						%
$ in millions	2021			2020			Change		2021			2020			Change
Sales	$	2,681		$	2,198		22	%	$	7,950		$	6,194		28	%
Operating income	288			224			29	%	865			635			36	%
Operating margin rate	10.7		%	10.2		%			10.9		%	10.3		%

Sales

Current Quarter

Third quarter 2021 sales increased $483 million, or 22 percent, due to higher sales in both the Launch & Strategic Missiles and Space business areas, partially offset by a ~~$71~~$48 million reduction in sales related to the IT services divestiture. Third quarter 2021 organic sales increased $531 million, or 25 percent. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, such as GBSD and the Next Generation Interceptor (NGI) program. Space sales were driven by higher volume on restricted programs.

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Year to Date

Year to date 2021 sales increased $1.8 billion, or 28 percent, due to higher sales in both the Launch & Strategic Missiles and Space business areas, partially offset by a $119 million reduction in sales related to the IT services divestiture. Year to date 2021 organic sales increased ~~$1.34~~$1.9 billion, or 3431 percent. Launch & Strategic Missiles sales increased primarily due to ramp-up on development programs, such as GBSD and NGI, as well as higher volume on hypersonics and ~~CRS~~Commercial Resupply Services (CRS) programs. Space sales were driven by higher volume on restricted programs, Artemis and the Next Generation Overhead Persistent Infrared (Next Gen ~~OPIR~~OPIR) program.

Operating Income

Current Quarter

~~Second~~Third quarter 2021 operating income increased ~~$92~~$64 million, or 4429 percent, due to higher sales volume and a higher operating margin rate. Operating margin rate increased to ~~11.0~~10.7 percent from 10.2 percent principally due to higher net favorable EAC adjustments, which were largely driven by improved performance on ~~commercial space~~restricted programs.

Year to Date

Year to date 2021 operating income increased ~~$166~~$230 million, or 4036 percent, due to higher sales volume and a higher operating margin rate. Operating margin rate increased to ~~11.0~~10.9 percent from 10.3 percent primarily due to higher net favorable EAC adjustments, which were largely driven by improved performance on commercial space programs ~~as well as~~and the ~~previously described~~first quarter 2021 reduction in overhead rates.

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 September 30								Nine Months Ended September 30
$ in millions	$ in millions	2021				2020				2021				2020				$ in millions	2021				2020				2021				2020
Segment Information:	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		Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses
Aeronautics Systems	Aeronautics Systems																	Aeronautics Systems
Product	Product	$	2,484	$	2,230	$	2,512	$	2,247	$	5,008	$	4,504	$	4,921	$	4,446	Product	$	2,233	$	2,023	$	2,469	$	2,231	$	7,241	$	6,527	$	7,390	$	6,677
Service	Service	384		342		384		342		806		711		792		700		Service	444		393		415		362		1,250		1,104		1,207		1,062
Intersegment eliminations	Intersegment eliminations	45		41		29		26		89		80		55		49		Intersegment eliminations	48		44		30		27		137		124		85		76
Total Aeronautics Systems	Total Aeronautics Systems	2,913		2,613		2,925		2,615		5,903		5,295		5,768		5,195		Total Aeronautics Systems	2,725		2,460		2,914		2,620		8,628		7,755		8,682		7,815
Defense Systems	Defense Systems																	Defense Systems
Product	Product	641		560		753		676		1,321		1,155		1,523		1,380		Product	618		532		735		661		1,939		1,687		2,258		2,041
Service	Service	591		517		953		831		1,288		1,141		1,893		1,657		Service	585		523		933		812		1,873		1,664		2,826		2,469
Intersegment eliminations	Intersegment eliminations	195		173		180		162		380		339		351		315		Intersegment eliminations	206		179		191		169		586		518		542		484
Total Defense Systems	Total Defense Systems	1,427		1,250		1,886		1,669		2,989		2,635		3,767		3,352		Total Defense Systems	1,409		1,234		1,859		1,642		4,398		3,869		5,626		4,994
Mission Systems	Mission Systems																	Mission Systems
Product	Product	1,774		1,515		1,646		1,388		3,534		3,008		3,154		2,662		Product	1,766		1,498		1,735		1,506		5,300		4,506		4,889		4,168
Service	Service	560		451		616		554		1,152		948		1,279		1,124		Service	426		354		623		511		1,578		1,302		1,902		1,635
Intersegment eliminations	Intersegment eliminations	254		214		184		157		491		416		360		307		Intersegment eliminations	244		212		193		164		735		628		553		471
Total Mission Systems	Total Mission Systems	2,588		2,180		2,446		2,099		5,177		4,372		4,793		4,093		Total Mission Systems	2,436		2,064		2,551		2,181		7,613		6,436		7,344		6,274
Space Systems	Space Systems																	Space Systems
Product	Product	2,294		2,045		1,571		1,402		4,352		3,874		3,060		2,727		Product	2,228		1,991		1,728		1,550		6,580		5,865		4,788		4,277
Service	Service	423		374		449		413		847		755		882		810		Service	420		371		445		401		1,267		1,126		1,327		1,211
Intersegment eliminations	Intersegment eliminations	31		28		28		24		70		63		54		48		Intersegment eliminations	33		31		25		23		103		94		79		71
Total Space Systems	Total Space Systems	2,748		2,447		2,048		1,839		5,269		4,692		3,996		3,585		Total Space Systems	2,681		2,393		2,198		1,974		7,950		7,085		6,194		5,559
Segment Totals	Segment Totals																	Segment Totals
Total Product	Total Product	$	7,193	$	6,350	$	6,482	$	5,713	$	14,215	$	12,541	$	12,658	$	11,215	Total Product	$	6,845	$	6,044	$	6,667	$	5,948	$	21,060	$	18,585	$	19,325	$	17,163
Total Service	Total Service	1,958		1,684		2,402		2,140		4,093		3,555		4,846		4,291		Total Service	1,875		1,641		2,416		2,086		5,968		5,196		7,262		6,377
Total Segment(1)	Total Segment(1)	$	9,151	$	8,034	$	8,884	$	7,853	$	18,308	$	16,096	$	17,504	$	15,506	Total Segment(1)	$	8,720	$	7,685	$	9,083	$	8,034	$	27,028	$	23,781	$	26,587	$	23,540

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

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Product Sales and Costs

Current Quarter

~~Second~~Third quarter 2021 product sales increased ~~$711~~$178 million, or 113 percent, primarily due to ~~higher~~an increase in product sales at Space Systems, partially offset by decreases in product sales at Aeronautics Systems and Defense Systems. The increase at Space Systems was principally due to ramp-up on GBSD and NGI. The decrease at Aeronautics Systems was driven by lower volume on restricted programs and F-35. The decrease at Defense Systems was primarily driven by the ~~GBSD, restricted, Artemis, Next Gen OPIR and NGI programs at Space Systems.~~close-out of Lake City.

~~Second~~Third quarter 2021 product costs increased ~~$637~~$96 million, or 112 percent, consistent with the ~~higher~~increase in product sales ~~described~~ above.

Year to Date

Year to date 2021 product sales increased ~~$1.6~~$1.7 billion, or 129 percent, principally due to ~~increases~~an increase in product sales at Space Systems and Mission Systems, partially offset by a decrease at Defense Systems. The increase at Space Systems was primarily driven by higher volume on ~~the~~ GBSD, restricted programs, Artemis, Next Gen OPIR and ~~NGI programs.~~NGI. The increase at Mission Systems was driven by higher volume across the sector. The decrease at Defense Systems was primarily driven by the close-out of Lake City.

Year to date 2021 product costs increased ~~$1.3~~$1.4 billion, or 128 percent, consistent with the higher product sales described above.

Service Sales and Costs

Current Quarter

~~Second~~Third quarter 2021 service sales decreased ~~$444~~$541 million, or 1822 percent, primarily due to the IT services divestiture. ~~Second~~Third quarter 2020 sales from the IT services business, which were largely included in service sales, were ~~$585~~$602 million. The reductions associated with the IT services divestiture were partially offset by higher ~~service~~ volume on ~~several programs~~the CBP P-3 program at Defense ~~Systems and Mission~~ Systems.

~~Second~~Third quarter 2021 service costs decreased ~~$456~~$445 million, or 21 percent, consistent with the lower service sales ~~described above and reflect higher net favorable EAC adjustments on Mission Systems service programs.~~above.

Year to Date

Year to date 2021 service sales decreased ~~$753 million,~~$1.3 billion, or 1618 percent, primarily due to the IT services divestiture. Year to date 2021 sales from the IT services business, which were largely included in service sales, were $162 million as compared to ~~$1.1~~$1.7 billion in the prior year period. The reductions associated with the IT services divestiture were partially offset by higher ~~service~~ volume on ~~several~~the ROK Global Hawk CLS and CBP P-3 programs at Defense ~~Systems and Mission~~ Systems.

Year to date 2021 service costs decreased ~~$736 million,~~$1.2 billion, or 1719 percent, consistent with the lower services sales described above.

BACKLOG

Backlog consisted of the following as of ~~June~~September 30, 2021 and December 31, 2020:

June 30, 2021 December 31, 2020
$ in millions Funded Unfunded Total
Backlog Total
Backlog % Change in 2021
Aeronautics Systems $ 10,635 $ 10,325 $ 20,960 $ 24,002 (13) %
Defense Systems 5,988 683 6,671 8,131 (18) %
Mission Systems 10,032 3,337 13,369 13,805 (3) %
Space Systems 6,449 29,197 35,646 35,031 2 %
Total backlog $ 33,104 $ 43,542 $ 76,646 $ 80,969 (5) %

~~New Awards~~

Second quarter and year to date 2021 net awards totaled $6.5 billion and $15.4 billion, respectively, and backlog totaled $76.6 billion. Significant second quarter new awards include $1.7 billion for restricted programs, $0.4 billion


	September 30, 2021						December 31, 2020
$ in millions	Funded		Unfunded		Total Backlog		Total Backlog		% Change in 2021
Aeronautics Systems	$	9,115	$	9,938	$	19,053	$	24,002	(21)	%
Defense Systems	5,786		529		6,315		8,131		(22)	%
Mission Systems	9,375		3,942		13,317		13,805		(4)	%
Space Systems	6,003		30,137		36,140		35,031		3	%
Total backlog	$	30,279	$	44,546	$	74,825	$	80,969	(8)	%

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~~for F-35, $0.3~~New Awards

Third quarter and year to date 2021 net awards totaled $6.9 billion and $22.3 billion, respectively, and backlog totaled $74.8 billion. Significant third quarter new awards include $1.8 billion for ~~GMLRS, $0.3~~restricted programs, principally at Space and Mission Systems, $0.9 billion for ~~E-2~~NASA’s Habitation and ~~$0.2~~Logistics Outpost (HALO) module and $0.5 billion for ~~Global Hawk.~~F-35. In connection with the IT services divestiture, the company reduced backlog by $1.4 billion during the first quarter of 2021 ($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 operating activities and adjusted free cash flow, a non-GAAP measure described in more detail below.

At ~~June~~September 30, 2021, we had ~~$3.9~~$4.1 billion in cash and cash equivalents. Effective January 30, 2021, we 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 notes due October 2022. In April 2021, we renewed our one-year $500 million uncommitted credit 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. Our first installment of deferred social security taxes of approximately $200 million is due in the fourth quarter 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 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, though it is unclear how much we will be able to recover. 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.

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.

Operating Cash Flow

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


		Six Months Ended June 30			%					Nine Months Ended September 30	%
$ in millions	$ in millions		2021		2020		Change		$ in millions		2021		2020		Change
Net earnings	Net earnings		$	3,232	$	1,873	73	%	Net earnings		$	4,295	$	2,859	50	%
Gain on sale of business	Gain on sale of business		(1,980)		—		NM		Gain on sale of business		(1,980)		—		NM
Non-cash items(1)	Non-cash items(1)		(33)		402		(108)	%	Non-cash items(1)		56		740		(92)	%

Pension and OPB contributions	Pension and OPB contributions		(74)		(69)		7	%	Pension and OPB contributions		(108)		(100)		8	%
Changes in trade working capital	Changes in trade working capital		(164)		(898)		(82)	%	Changes in trade working capital		(124)		(816)		(85)	%

Other, net	Other, net		(19)		36		(153)	%	Other, net		(14)		20		(170)	%
Net cash provided by operating activities	Net cash provided by operating activities		$	962	$	1,344	(28)	%	Net cash provided by operating activities		$	2,125	$	2,703	(21)	%

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

Year to date 2021 cash provided by operating activities decreased ~~$382~~$578 million principally due to ~~$390~~$588 million of federal and state taxes paid in connection with the IT services divestiture.

Adjusted Free Cash Flow

Adjusted free cash flow, as reconciled in the table below, is a non-GAAP measure defined as net cash provided by or used in operating activities less capital expenditures, plus proceeds from the sale of equipment to a customer (not otherwise included in net cash provided by or used in operating activities) and the after-tax impact of discretionary

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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

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planning for, and consideration of, acquisitions, the payment of dividends and stock repurchases. This non-GAAP measure may be useful to investors and other users of our financial statements as a supplemental measure of our cash performance, but should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating cash flows presented in accordance with GAAP.

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


		Six Months Ended June 30			%					Nine Months Ended September 30	%
$ in millions	$ in millions		2021		2020		Change		$ in millions		2021		2020		Change
Net cash provided by operating activities	Net cash provided by operating activities		$	962	$	1,344	(28)	%	Net cash provided by operating activities		$	2,125	$	2,703	(21)	%
Capital expenditures	Capital expenditures		(435)		(541)		(20)	%	Capital expenditures		(682)		(828)		(18)	%
Proceeds from sale of equipment to a customer	Proceeds from sale of equipment to a customer		56		—		NM		Proceeds from sale of equipment to a customer		84		—		NM

Adjusted free cash flow	Adjusted free cash flow		$	583	$	803	(27)	%	Adjusted free cash flow		$	1,527	$	1,875	(19)	%

Year to date 2021 adjusted free cash flow decreased ~~$220~~$348 million due to lower net cash provided by operating activities, partially offset by a decrease in capital expenditures and the receipt of additional proceeds from the fourth quarter 2020 sale of equipment to a customer.

Investing Cash Flow

Year to date 2021 net cash provided by investing activities was ~~$3.0~~$2.8 billion compared to net cash used in investing activities of ~~$539~~$828 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.

Financing Cash Flow

Year to date 2021 net cash used in financing activities was ~~$5.0~~$5.8 billion compared to net cash provided by financing activities of ~~$1.1 billion~~$875 million in the prior year period, principally due to $2.7 billion of share repurchases, $2.2 billion in debt repayments ~~$2.1 billion of share repurchases~~ and ~~$486~~$737 million of dividends paid in the current year period as compared to $2.2 billion of net proceeds from the issuance of long-term debt, $490 million of share repurchases and ~~$469~~$711 million of dividends paid in the prior year period.

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 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

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forward-looking statements include, but are not limited to, those identified and discussed more fully in the section entitled “Risk Factors” in our 2020 Annual Report on Form 10-K 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

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pandemic and the related effects on the broader economic environment, which ~~has~~have caused and will continue to cause significant challenges, instability and uncertainty. They include:

•the impact of the COVID-19 ~~outbreak~~pandemic (or future health epidemics, pandemics or ~~future epidemics~~similar outbreaks), and the related effects on the broader economic environment, on our business, including our ability to maintain a qualified workforce, the potential for worker absenteeism and leave taking, facility closures, work slowdowns or stoppages, labor shortages, supply chain ~~disruptions,~~challenges, evolving and varying government requirements, including related to a vaccine mandate, additional costs and liabilities for which we are not compensated, performance challenges, 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

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

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

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

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

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

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

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

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

•increased competition within our markets and bid protests

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

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

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

•natural disasters

•~~health epidemics, pandemics and similar outbreaks~~

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

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

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

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

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

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

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

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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

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

Item 4. Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

Our principal executive officer (Chairman, Chief Executive Officer and President) and principal financial officer (Corporate Vice President and Chief Financial Officer) have evaluated the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) as of ~~June~~September 30, 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 information required to be disclosed in the reports that we file or submit is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the three months ended ~~June~~September 30, 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 2020 Annual Report on Form 10-K.

Consistent with SEC Regulation S-K Item 103, 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 sanctions, exclusive of interest and costs, of $1.0 million or more.

Item 1A. Risk Factors

For a discussion of our risk factors please see the section entitled “Risk Factors” in our 2020 Annual Report on Form 10-K.

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

The table below summarizes our repurchases of common stock during the three months ended ~~June~~September 30, 2021.

Period Total Number
of Shares
Purchased
Average Price
Paid per
Share(1)(2)
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)
April 3, 2021 - April 30, 2021 — $ — — $ 4,149
May 1, 2021 - May 28, 2021 179,356
NM(2)
179,356 3,849
May 29, 2021 - July 2, 2021 422,270 370.15 422,270 3,693
Total 601,626
NM(2)
601,626 $ 3,693


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)
July 3, 2021 - July 30, 2021	379,145	$	363.79	379,145	$	3,555
July 31, 2021 - August 27, 2021	531,862	363.23		531,862		3,362
August 28, 2021 - October 1, 2021	719,372	356.93		719,372		3,105
Total	1,630,379	$	360.58	1,630,379	$	3,105

(1)Includes commissions paid.

~~(2)During the first quarter of 2021, the company entered into an accelerated share repurchase (ASR) agreement with Goldman Sachs & Co. LLC, which was completed on~~ ~~June 1, 2021. Pursuant to the terms of the ASR, a total of approximately 6.1 million shares of our common stock were repurchased with an average final purchase price of $327.29 per share.~~

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

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Item 6. Exhibits


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

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

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

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



*10.14.1			~~Non-Employee Director Compensation Term Sheet, effective~~Twelfth Supplemental Indenture, dated as of August 25, 2021, to the Indenture dated as of May ~~19, 2021~~1, 1986, by and among Northrop Grumman Systems Corporation, Northrop Grumman Corporation and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to Form 8-K filed August 27, 2021)

*+10.24.2			Thirteenth Supplemental Indenture, dated as of August 25, 2021, to the Indenture dated as of May 1, 1986, by and among Northrop Grumman ~~2006 Annual Incentive Plan~~Systems Corporation, Northrop Grumman Corporation and ~~Incentive Compensation Plan,~~The Bank of New York Mellon, as ~~amended and restated, effective January 1, 2022~~trustee (incorporated by reference to Exhibit 4.2 to Form 8-K filed August 27, 2021)

4.3			Tenth Supplemental Indenture, dated as of September 2, 2021, between Northrop Grumman Corporation and The Bank of New York Mellon, as successor to JPMorgan Chase Bank, Trustee, to Indenture dated as of November 2, 2001 (incorporated by reference to Exhibit 4.1 to Form 8-K filed September 3, 2021)

4.4			Form of 7.875% Senior Note due 2026 (incorporated by reference to Exhibit A in Exhibit 4.1 to Form 8-K filed September 3, 2021)

4.5			Form of 7.750% Senior Note due 2026 (incorporated by reference to Exhibit B in Exhibit 4.1 to Form 8-K filed September 3, 2021)

4.6			Form of 6.650% Senior Note due 2028 (incorporated by reference to Exhibit C in Exhibit 4.1 to Form 8-K filed September 3, 2021)

4.7			Form of 7.750% Senior Note due 2029 (incorporated by reference to Exhibit D in Exhibit 4.1 to Form 8-K filed September 3, 2021)

4.8			Form of 7.750% Senior Note due 20 31 (incorporated by reference to Exhibit E in Exhibit 4.1 to Form 8-K filed September 3, 2021)

4.9			Form of 6.980% Senior Note due 2036 (incorporated by reference to Exhibit F in Exhibit 4.1 to Form 8-K filed September 3, 2021)

4.10			Registration Rights Agreement, dated as of September 2, 2021, between Northrop Grumman Corporation and BofA Securities, Inc., BNP Paribas Securities Corp. and Wells Fargo Securities, LLC, as dealer managers (incorporated by reference to Exhibit 4.8 to Form 8-K filed September 3, 2021)

10.1			First Amendment to Guarantee, dated as of August 25, 2021, to the Guarantee dated as of March 27, 2003, by and among Northrop Grumman Systems Corporation, Northrop Grumman Corporation and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 10.1 to Form 8-K filed August 27, 2021)

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NORTHROP GRUMMAN CORPORATION


*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~~September 30, 2021, formatted inas inline XBRL (Extensible Business Reporting Language): (i) the Cover Page, (ii) Condensed Consolidated Statements of Earnings and Comprehensive Income, (iii) Condensed Consolidated Statements of Financial Position, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Shareholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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


+			~~Management contract or compensatory plan or arrangement~~

*			Filed with this report

**			Furnished with this report

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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 28,~~October 27, 2021

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Period	Total Number of Shares Purchased	Average Price Paid per Share(1)(2)		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)
April 3, 2021 - April 30, 2021	—	$	—	—	$	4,149
May 1, 2021 - May 28, 2021	179,356	NM(2)		179,356		3,849
May 29, 2021 - July 2, 2021	422,270	370.15		422,270		3,693
Total	601,626	NM(2)		601,626	$	3,693