Northrop Grumman (NOC) 10-K risk factor changes: FY2018 vs FY2017

Our primary customer is the U.S. [removed: Government,] [added: government,] from which we derived [removed: 85] [added: 82] percent, [removed: 84] [added: 85] percent and [removed: 83] [added: 84] percent of our sales during the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015,] [added: 2016,] respectively; we have a number of large programs with the U.S. Air Force, in particular.

The U.S. [removed: Government] [added: government] has been implementing significant [removed: reductions in government] [added: changes and] spending [added: levels have fluctuated] and [removed: other significant program changes.][added: may continue to fluctuate over time.]

For many programs, Congress appropriates funds on [removed: a] [added: an annual] fiscal year basis even though the program performance period may extend over several years.

We cannot predict the extent to which total funding and/or funding for individual programs will be included, increased or reduced as part of the annual [removed: budget process] [added: appropriations] ultimately approved by Congress and the President or in separate supplemental appropriations or continuing resolutions, as applicable.

On January [removed: 22, 2018,] [added: 25, 2019,] a [removed: fourth] [added: third] continuing resolution was enacted, which funds [removed: the government] [added: these agencies] through February [removed: 8, 2018.][added: 15, 2019.]

The budget environment, including [removed: sequestration as currently mandated,] [added: budget caps mandated by the BCA for fiscal years 2020] and [added: 2021, and] uncertainty surrounding the [added: debt ceiling and the] appropriations processes, remain significant short and long-term risks.

Considerable uncertainty exists regarding how future budget and program decisions will unfold, including the defense spending priorities of the Administration and Congress, what challenges budget reductions (required by the BCA and otherwise) will present for the defense industry and whether [removed: an] annual appropriations [removed: bill] [added: bills for all agencies] will be enacted for FY [removed: 2018.][added: 2020.]

If [removed: an] annual appropriations [removed: bill is] [added: bills are] not timely enacted for FY [removed: 2018] [added: 2020] or beyond, the U.S. [removed: Government] [added: government] may continue to operate under a continuing resolution, restricting new contract or program starts, presenting resource allocation challenges and placing limitations on some planned program budgets, and we may face [removed: a] [added: another] government shutdown of unknown duration.

[added: If a prolonged government shutdown of the DoD were to occur, it could result in program cancellations, disruptions] and/or stop work orders and could limit [removed: our ability to perform on our U.S. Government contracts and] the U.S. [removed: Government’s] [added: government’s] ability [removed: to] effectively [added: to] progress programs and to make timely [removed: payments.][added: payments, and our ability to perform on our U.S. government contracts and successfully compete for new work.]

| ▪ | We are subject to various investigations, claims, disputes, enforcement actions, [removed: litigation] [added: litigation, arbitration] and other legal proceedings that could ultimately be resolved against us. |

We are and may become subject to investigations, claims, disputes, enforcement actions and administrative, civil or criminal [removed: litigation] [added: litigation, arbitration] or other legal proceedings globally and across a broad array of matters, including, but not limited to, government contracts, [added: commercial transactions,] false claims, false statements, mischarging, contract performance, [removed: products liability,] fraud, procurement integrity, [removed: environmental, shareholder derivative actions, intellectual property, tax, employees, export/import, anti-corruption, labor, health and safety, accidents, employee benefits and plans, including plan administration, and improper payments.][added: products liability, warranty liability, the use of hazardous materials, personal injury]

Investigations, claims, disputes, enforcement [removed: actions or] [added: actions,] litigation [added: or other legal proceedings] could have a material adverse effect on our financial position, results of operations and/or cash flows.

Our operating income can be adversely affected when [removed: we experience increased] estimated contract [removed: costs.][added: costs increase.]

Reasons for increased estimated contract costs may include: design issues; changes in estimates of the nature and complexity of the work to be performed, including technical or quality issues or requests to perform additional work at the direction of the customer; production challenges, including those resulting from the availability and timeliness of customer funding, unavailability or reduced productivity of qualified and timely cleared labor or the effect of any delays in performance; the availability, performance, quality or financial strength of significant subcontractors; supplier issues, including the costs, timeliness and availability of materials and components; the effect of any changes in laws or regulations; actions deemed necessary for long-term customer satisfaction; and natural disasters [added: or environmental matters.]

We may file requests for equitable adjustment or claims to seek recovery in whole or in part for our increased [removed: costs.][added: costs and aim to protect against these risks through contract terms and conditions when practical.]

In [removed: 2017,] [added: 2018,] approximately half of our sales were derived from fixed-price contracts.

We typically enter into fixed-price contracts where costs can be more reasonably estimated based on actual experience, such as for [removed: mature] production programs.

While management uses its best judgment to estimate costs associated with fixed-price development contracts, future events could result in [removed: either upward or downward] adjustments to those estimates.

Our international business (including our participation in joint [removed: ventures)] [added: ventures and other joint business arrangements)] is subject to numerous political and economic factors, legal requirements, cross-cultural considerations and other risks associated with doing business globally.

Our international business is subject to both U.S. and foreign laws and regulations, including, without limitation, laws and regulations relating to import-export controls, technology transfer restrictions, [added: government contracts and procurement,] data privacy and protection, investment, exchange rates and controls, the Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws, the anti-boycott provisions of the U.S. Export Administration Act, labor and employment, works councils and other labor groups, [added: anti-human trafficking,] taxes, environment, [added: immunity,] security restrictions and intellectual property.

Failure by us, our employees, affiliates, partners or others with whom we work to comply with [removed: these] [added: applicable] laws and regulations could result in administrative, [removed: civil] [added: civil, commercial] or criminal liabilities, including suspension or debarment from government contracts or suspension of our export privileges.

[removed: Termination] [added: Suspension or debarment, or termination] of a contract due to [removed: default] [added: default, in particular,] could have a material adverse effect on our reputation, our ability to compete for other contracts and our financial position, results of operations and/or cash flows.

Our international business may [removed: also] be impacted by changes in [added: U.S. and] foreign national policies and priorities, [added: and geopolitical relationships, any of] which may be influenced by changes in the threat environment, political leadership, geopolitical uncertainties, [added: world events, bilateral and multi-lateral relationships,] government budgets, and economic and political factors [added: more generally, and any of which could impact funding for programs, alter export authorizations, or delay purchasing decisions or customer payments.]

We also could be affected by the legal, regulatory and economic impacts of Britain’s [added: anticipated] exit from the European Union, the [added: full] impact of which is not known at this time.

They may include industrial cooperation agreements requiring specific in-country purchases, investments, manufacturing agreements or other [added: operational or] financial obligations, [removed: known as] [added: including] offset obligations, and provide for significant penalties if we fail to meet such requirements.

We also increasingly are dependent on in-country suppliers and we face risks related to their failure to perform in accordance with the [removed: contracts,] [added: contracts and applicable laws,] particularly where we rely on a sole source supplier.

More broadly, our ability effectively to pursue and execute contracts outside the U.S. also may be impacted by our ability to partner successfully with non-U.S. companies, including through joint ventures, teaming [removed: agreements or other arrangements, in support of such pursuits.][added: agreements, co-]

This risk includes the ability to [added: timely] identify and negotiate appropriate arrangements with local partners as well as potential exposure for their actions.

We have implemented policies, procedures, training and other compliance controls, and have negotiated terms designed to prevent misconduct by employees, agents or others working on our behalf or with us that would violate the applicable laws of the jurisdictions in which we operate, including laws governing improper payments to government officials, the protection of export controlled or classified information, false claims, procurement integrity, cost accounting and billing, [removed: competition] [added: competition, information security] and data privacy, or the terms of our contracts.

In the ordinary course of our business we form and are members of joint [removed: ventures.][added: ventures (with that term used throughout to refer to joint efforts or business arrangements of any type).]

Improper actions by those with whom or through whom we do business (including our employees, agents, subcontractors, suppliers, business partners and joint ventures) could subject us to administrative, civil or criminal investigations and enforcement actions; monetary and non-monetary penalties; liabilities; and [added: the loss of privileges and] other sanctions, including suspension and debarment, which could negatively impact our reputation and ability to conduct business and could have a material adverse effect on our financial position, results of operations and/or cash flows.

As a defense contractor, we face various cyber and other security threats, including attempts to gain unauthorized access to sensitive information and networks; insider threats; threats to the safety of our directors, officers and [added: employees; threats to the security of our facilities, infrastructure and supply chain; and threats from terrorist acts or other acts of aggression.]

These threats could lead to losses of sensitive information or capabilities; [added: theft of data;] harm to personnel, infrastructure or products; [removed: financial liabilities] and [added: financial liabilities, as well as] damage to our [removed: reputation.][added: reputation as a government contractor and provider of cyber-related or cyber-protected goods and services.]

The impact of these factors is difficult to predict, but one or more of them could result in the loss of information or capabilities, harm to individuals or property, damage to our reputation, loss of business, contractual or regulatory [removed: actions and potential liabilities, any one of which could have a material adverse effect on our financial position, results of operations and/or cash flows.]

We rely on other companies to provide raw [removed: materials] [added: materials, chemicals] and [removed: major] components and subsystems for our products and to produce hardware elements and sub-assemblies, provide software and intellectual property, and perform some of the services we provide to our customers, and to do so in compliance with all applicable laws, regulations and contract terms.

In some cases, there may be only one [removed: supplier] [added: supplier, or one domestic supplier,] for certain components.

If a [removed: sole source] supplier cannot [added: appropriately] meet our [removed: needs] [added: needs, experiences disruptions to production] or is otherwise [removed: unavailable,] [added: unavailable or not fully available,] we may be unable to find a suitable alternative.

We also rely on our subcontractors and suppliers effectively to mitigate the risk of cyber and security threats or other disruptions with respect to the products, components and services they deliver to us and the information entrusted to them by us or our customers and to comply with applicable [added: contractual terms and] laws and regulations, including [removed: our customer’s] cybersecurity requirements.

If [added: our subcontractors or suppliers fail to perform or] we are unable to [removed: procure] [added: procure,] or experience significant delays in [removed: subcontractor or supplier] deliveries [removed: of] [added: of,] needed [removed: materials, components, services, intellectual property] [added: products, materials] or [removed: parts; if our subcontractors] [added: services;] or [removed: suppliers fail to perform,] if they do not comply with all applicable laws, [removed: regulations] [added: regulations, requirements] and contract terms, [removed: or if the certifications we receive from them are inaccurate; or] [added: including] if what we receive is counterfeit or otherwise improper, [removed: it could have a material adverse effect on] our financial position, results of operations and/or cash [removed: flows.][added: flows could be materially adversely affected.]

New laws, regulations or procurement requirements or changes to current ones (including, for example, regulations related to cybersecurity, [added: privacy,] recovery of employee compensation costs, counterfeit parts, anti-human trafficking, specialty metals and conflict minerals) can significantly increase our costs and risks and reduce our profitability.

The U.S. continues to face an uncertain political environment and substantial fiscal and economic challenges, which affect funding for discretionary and non-discretionary budgets.

The Budget Control Act of 2011 (BCA) mandated spending caps for all federal discretionary spending across a ten-year period (FY 2012 through FY 2021), including specific limits for defense and non-defense spending.

In prior years, these spending caps have been revised by separate bills for specific fiscal years.

Most recently, on February 9, 2018, Congress passed the Bipartisan Budget Act (BBA) of 2018, which raised the statutory budget caps for defense spending, including for Overseas Contingency Operations (OCO), by $80 billion for FY 2018 and by $85 billion for FY 2019.

The BBA also raised non-defense spending by $63 billion for FY 2018 and $68 billion for FY 2019 and suspended the debt ceiling until March 1, 2019.

The original spending caps established by the BCA will return for FY 2020 and FY 2021 without another statutory change.

Similarly, the suspension of the debt ceiling is expected to end on March 1, 2019 absent further action.

On March 23, 2018, the President signed the Omnibus Appropriations Act for FY 2018, which provided $1.3 trillion in discretionary funding for federal agencies.

In total for FY 2018, Congress appropriated approximately $700 billion for national security, including approximately $630 billion for base discretionary funding and approximately $70 billion in OCO funding.

On September 28, 2018, full-year appropriations for FY 2019 were enacted representing over half of discretionary federal spending.

For FY 2019, Congress appropriated approximately $716 billion for national security, including approximately $647 billion for base discretionary funding and approximately $69 billion in OCO funding.

A continuing resolution was approved to provide further funding for other agencies (including NASA and other civil agencies) through December 7, 2018, which was subsequently extended through December 21, 2018.

On December 22, 2018, U.S. government agencies that had not yet received full-year appropriations and did not otherwise have funding entered into a temporary shutdown.

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

claims, environmental, shareholder derivative actions, prior acquisitions and divestitures, intellectual property, tax, employees, export/import, anti-corruption, labor, health and safety, accidents, launch failures, employee benefits and plans, including plan administration, and improper payments, as well as matters relating to the former Orbital ATK, Inc. and our acquisition of that company.

production or other arrangements, in support of such pursuits.

actions and potential liabilities, any one of which could have a material adverse effect on our financial position, results of operations and/or cash flows.

For example, a single domestic source currently supplies us, as well as the U.S. domestic solid propellant industry, with a principal raw material used in the production of solid rocket motors.

These agencies review performance under our contracts, our cost structure and our

We (again, including our subcontractors and others with whom we do business) also are subject to, and expected to perform in compliance with, a vast array of federal laws, regulations and requirements related to our industry, our products and the businesses we operate.

In addition, in a tightened labor market, we are facing increased competition for talent, both with traditional defense companies and commercial companies.

With our acquisition of legacy Orbital ATK, we have expanded our portfolio to include energetic materials, including products that involve highly explosive or flammable elements.

Certain of our Innovation Systems products, including products from its Defense Systems business, such as small, medium and large caliber ammunition, and its Flight Systems business, such as solid rocket motors and liquid propulsion engines, involve the use, manufacture and/or handling of a variety of explosive and flammable materials.

From time to time, these activities have resulted in incidents, such as an explosion at the Lake City Army Ammunition Plant in 2017, that have caused workplace injuries and fatalities, the temporary shut down or other disruption of manufacturing processes, production delays, environmental harm and expense, fines and liability to third parties.

We have safety and loss prevention programs which provide for detailed pre-construction reviews of process changes and new operations, along with routine safety audits of operations involving explosive materials, to mitigate such incidents, as well as insurance coverage.

We and our customers may experience similar or more serious incidents in the future which could result in various liabilities and production delays.

On June 6, 2018, the company completed the acquisition of Orbital ATK, Inc., which is now our new Innovation Systems sector.

We may not be

Goodwill accounts for approximately 50 percent of our total assets.

Additionally, we acquired a significant amount of purchased

\-18\-

NORTHROP GRUMMAN CORPORATION

intangible and other long-lived assets in the Merger, whose recovery is dependent, in part, on future business conditions.

The distribution (Distribution) by Alliant Techsystems Inc. (ATK) of the shares of Vista Outdoor Inc. (Vista) and ATK’s acquisition of Orbital Sciences Corporation (Orbital) to create then Orbital ATK (the Orbital-ATK Merger) were intended to qualify as tax-free to ATK, ATK’s stockholders, Vista and Orbital for U.S. income tax purposes.

However, there can be no assurance that the IRS or the courts will agree with the conclusion of the parties and their counsel regarding the tax treatment of the Distribution and Orbital-ATK Merger.

If the Distribution or certain related transactions were taxable, ATK’s shareholders immediately prior to the Distribution could be required to recognize income on their receipt of Vista Outdoor stock in the Distribution, ATK could be considered to have made a taxable sale of certain of its assets to Vista Outdoor and Vista could be subject to income taxes.

Under the tax matters agreement between Orbital ATK and Vista (the Tax Matters Agreement), in certain circumstances, and subject to certain limitations, Vista is required to indemnify Orbital ATK against taxes on the Distribution that arise as a result of actions or failures to act by Vista, or as a result of Section 355(e) of the Internal Revenue Code applying due to acquisitions of Vista stock after the Distribution.

In other cases, however, we might recognize a taxable gain on the Distribution without being entitled to an indemnification payment under the Tax Matters Agreement.

If such tax is imposed on Vista, then we may, depending on the circumstances, be required to indemnify Vista for that tax.

On November 2, 2015, the President signed the Bipartisan Budget Act of 2015 (the Budget Act).

The Budget Act raised the statutory limit on the amount of permissible federal debt (the debt ceiling) until March 2017 and raised the sequester caps imposed by the Budget Control Act of 2011 (the BCA) by $80 billion, split equally between defense and non-defense discretionary spending in FY 2016 and FY 2017 ($50 billion in FY 2016 and $30 billion in FY 2017).

In March 2017, the debt ceiling was reached and the Treasury Department began taking “extraordinary measures” to finance the government and avoid a breach of the debt ceiling.

On September 8, 2017, the debt ceiling was suspended for three months and on December 9, 2017, the Treasury Department again began taking extraordinary measures to finance the government.

It is currently estimated that the Treasury Department will run out of the ability to take extraordinary measures to finance the government in the first half of 2018.

If the debt ceiling is not raised and is breached, 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 not making timely payments.

Unforeseen circumstances could cause an extended debt ceiling breach and have significant near and long-term consequences for our company, our employees, our suppliers and the defense industry.

In May 2017, the President signed into law the FY 2017 Consolidated Appropriations Act.

In total for FY 2017, Congress appropriated $524 billion in base discretionary funding for the DoD, consistent with the Budget Act.

Congress also appropriated approximately $68 billion in Overseas Contingency Operation (OCO) funding and approximately $15 billion in additional DoD appropriations.

In May 2017, the President released his FY 2018 budget request, which seeks $575 billion for the DoD’s base budget, approximately $52 billion above the statutory caps provided for in the BCA.

The President’s budget request also seeks an additional $65 billion in OCO funding for expeditionary needs, not capped by the BCA.

On September 8, 2017, the President signed a continuing resolution which generally funded the government at FY 2017 levels through December 8, 2017.

The continuing resolution was extended to December 22, 2017 and further extended to January 19, 2018.

As Congress did not enact appropriations legislation or a new continuing resolution by January 19, 2018, on January 20, 2018, the U.S. Government temporarily shut down.

If a prolonged government shutdown were to occur, it could result in program cancellations, disruptions

or environmental matters.

We also are subject to various non-U.S. procurement and other laws applicable to our industry.

more generally, any of which could impact funding for programs or delay purchasing decisions or customer payments.

employees; threats to the security of our facilities, infrastructure and supply chain; and threats from terrorist acts or other acts of aggression.

These failures

Our business also may be subject to environmental disasters.

Natural and environmental disasters could also disrupt our and our subcontractors’ and suppliers’ workforce and the critical industrial infrastructure needed for normal business operations.

On September 17, 2017, the company entered into a definitive merger agreement to acquire Orbital ATK (the Orbital ATK Acquisition).

The Orbital ATK Acquisition is subject to the satisfaction of certain customary conditions, some of which are beyond our control and may prevent or otherwise negatively affect the consummation of the Orbital ATK Acquisition or the anticipated benefits therefrom.

These conditions include the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and satisfaction of the requirements of the European Commission.

We cannot predict whether or when these conditions will be satisfied or what requirements will be imposed in order to satisfy these conditions.

In addition, the merger agreement may be terminated if the Orbital ATK Acquisition is not completed by September 17, 2018 (subject to extension to December 17, 2018 in certain circumstances) and in certain other specified circumstances described in the merger agreement.

If the Orbital ATK Acquisition is not consummated, we will have incurred significant transaction-related costs, expenses and risks without realizing the anticipated benefits of the acquisition.

We are devoting and will be required to devote significant management attention and resources prior to the consummation of the Orbital ATK Acquisition to prepare for integration.

One area of integration will be internal controls processes and

procedures.

In the past, Orbital ATK restated its financial statements and identified material weaknesses in internal control over financial reporting, which we will need to address post-closing in the integration process.

development projects.

Although we currently have significant excess fair value of our reporting units over their respective carrying values, goodwill accounts for approximately 36 percent of our total assets.

[removed: Pending] Acquisition of Orbital ATK

We believe this acquisition will enable us to broaden our capabilities and offerings, [added: provide additional innovative solutions to meet our customers’ emerging requirements,] create value for [removed: shareholders,] [added: shareholders and] provide expanded opportunities for our combined [removed: employees and enhance our ability to provide innovative solutions to meet our customers’ emerging requirements.][added: employees.]

[removed: We expect to fund the Orbital ATK Acquisition] [added: The acquisition was financed] with [removed: the] proceeds from [removed: our] [added: the company’s] debt financing completed in October 2017 and cash on hand.

See Note [removed: 10] [added: 2] to the consolidated financial statements for further information [removed: on our] [added: regarding the acquisition of] Orbital [removed: ATK Acquisition financing.][added: ATK.]

[added: Share Repurchases –] See Note [removed: 7] [added: 3] to the consolidated financial statements for further information on [removed: the financial statement impact of the 2017 Tax Act.][added: our share repurchase programs.]

The U.S. and its allies continue to face a global security environment of heightened tensions and instability, threats from state and non-state actors as well as terrorist organizations, emerging nuclear [removed: tensions and] [added: tensions,] diverse regional security [removed: concerns.][added: concerns and political instability.]

[removed: Global] [added: Geopolitical relationships are changing and global] economic growth is expected to remain in the low single digits in [removed: 2018,] [added: 2019,] reflecting the impact of and uncertainty surrounding geopolitical tensions globally and financial market volatility.

The global economy may also be affected by Britain’s [added: anticipated] exit from the European Union, the [added: full] impact of which is not known at this time.

On January [removed: 22, 2018,] [added: 25, 2019,] a [removed: fourth] [added: third] continuing resolution was enacted, which funds [removed: the government] [added: these agencies] through February [removed: 8, 2018.][added: 15, 2019.]

The federal budget and debt ceiling are expected to continue to be the subject of considerable debate, which could have [removed: a] significant [removed: impact] [added: impacts] on defense spending broadly and the [removed: company's] [added: company’s] programs in particular.

As a result, sales tend to fluctuate in concert with costs incurred [removed: and units delivered] across our large portfolio of contracts.

Based on this approach and the nature of our operations, the discussion of results of operations below first focuses on our [removed: three] [added: four] segments before distinguishing between products and services.

Changes in [added: sales are generally described in terms of volume, while changes in] margin rates are generally described in terms of performance [removed: and] [added: 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 [removed: or delivery rates.][added: and performance generally refers to non-volume related changes in profitability.]

| $ in millions, except per share amounts | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2017] [added: 2018] | | | [removed: 2016] [added: 2017] | |

| Operating costs and expenses | [removed: 22,504] [added: 26,315] | | | | [removed: 21,315] [added: 22,786] | | | | [removed: 20,450] [added: 21,429] | | | | [removed: 6] [added: 15] | % | | [removed: 4] [added: 6] | % |

| Operating costs and expenses as a % of sales | [removed: 87.2] [added: 87.4] | | % | | [removed: 87.0] [added: 87.6] | | % | | [removed: 86.9] [added: 86.7] | | % | | | | | | |

| Operating margin rate | [removed: 12.8] [added: 13.0] | | % | | [removed: 13.0] [added: 12.6] | | % | | [removed: 13.1] [added: 13.2] | | % | | | | | | |

| Federal and foreign income tax expense | [removed: 1,034] [added: 513] | | | | [removed: 723] [added: 1,360] | | | | [removed: 800] [added: 638] | | | | [removed: 43] [added: (62] | [removed: %] [added: )%] | | [removed: (10] [added: 113] | [removed: )%] [added: %] |

| Effective income tax rate | [removed: 33.9] [added: 13.7] | | % | | [removed: 24.7] [added: 32.2] | | % | | [removed: 28.7] [added: 23.8] | | % | | | | | | |

| Diluted earnings per share | [removed: 11.47] [added: 18.49] | | | | [removed: 12.19] [added: 16.34] | | | | [removed: 10.39] [added: 11.32] | | | | [removed: (6] [added: 13] | [removed: )%] [added: %] | | [removed: 17] [added: 44] | % |

[removed: 2016] [added: 2017] – [removed: Sales] [added: Segment operating income for 2017] increased [removed: $982] [added: $39] million, or [removed: 4] [added: 1] percent, as compared with [removed: 2015,] [added: 2016,] primarily due to higher [removed: sales] [added: operating income] at Aerospace [added: Systems, partially offset by lower operating income at Mission] Systems and [removed: Mission Systems.][added: Technology Services.]

See [removed: “Revenue Recognition” in] Note [removed: 1] [added: 15] to the consolidated financial statements for [removed: further] information [removed: on] [added: regarding the company’s] sales by customer [removed: category.][added: type, contract type and geographic region for each of our segments.]

[added: |] Operating [removed: Income][added: income | 343 | | | | — | | | — | | | — | | — |]

2017 – Operating income [removed: increased $106] [added: for 2017 decreased $59] million, or [removed: 3] [added: 2] percent, as compared with 2016, primarily due to a [removed: $278] [added: $280] million increase in [added: unallocated corporate expense, partially offset by a $181 million increase in] our net [removed: FAS/CAS] [added: FAS (service)/CAS] pension adjustment and a [removed: $24] [added: $39] million increase in segment operating income, [removed: partially offset by a $197 million increase in unallocated corporate expenses, as described] [added: all of which are further discussed] in “Segment Operating Results.” Higher operating costs and expenses as a percentage of sales reduced our operating margin rate to [removed: 12.8] [added: 12.4] percent from [removed: 13.0] [added: 13.3] percent in the prior year period and [added: principally] was driven by the [added: previously noted] increase in unallocated corporate [removed: expenses] [added: expense] and a lower segment operating margin rate, as described in “Segment Operating Results,” partially offset by the increase in our net [removed: FAS/CAS] [added: FAS (service)/CAS] pension adjustment.

G&A as a percentage of sales decreased to [removed: 10.3] [added: 10.4] percent in 2017 from [removed: 10.5] [added: 10.7] percent in 2016, principally due to higher sales volume.

G&A as a percentage of sales decreased to [removed: 10.5] [added: 10.0] percent in [removed: 2016] [added: 2018] from [removed: 10.9] [added: 10.4] percent in [removed: 2015,] [added: 2017,] principally due to higher sales volume.

[removed: 2017 – Net] [added: Excluding these items, MTM-adjusted net] earnings [removed: for 2017] decreased [removed: $185] [added: by $168] million, or [removed: 8] [added: 6] percent, [removed: as compared with 2016,] primarily due to the higher effective tax rate [removed: discussed] [added: noted] above and [added: $59 million of] higher interest expense resulting from our debt issuance in October 2017, as described in Note 10 to the consolidated financial statements.

These decreases were partially offset by [removed: higher operating income and an] [added: a $92 million] increase in Other, net as a result of gains on the sale of two investments and higher interest income on short-term [removed: investments.][added: investments as well as an $88 million increase in our net FAS (non-service) pension benefit.]

[removed: The decrease is] [added: Excluding these items, MTM-adjusted diluted earnings per share decreased $0.55, or 4 percent,] primarily due to the [removed: 8] [added: 6] percent decline in [added: MTM-adjusted] net earnings discussed above, partially offset by a 3 percent reduction in weighted-average shares outstanding resulting principally from shares repurchased during 2016.

The company is aligned in [removed: three] [added: four] operating sectors, which also comprise our reportable segments: Aerospace Systems, [added: Innovation Systems,] Mission Systems and Technology Services.

| Aerospace Systems | | [added: Innovation Systems | |] Mission Systems | | Technology Services |

| [removed: Autonomous] [added: Space | | Space] Systems | | Sensors and Processing | | [removed: Global Logistics and] [added: System] Modernization [added: and Services] |

Segment operating income, as reconciled in the Reconciliation of Segment Operating Income to Total Operating Income section below, is a non-GAAP measure that reflects total earnings from our [removed: three] [added: four] segments, including allocated pension expense recognized under CAS, and excluding unallocated corporate items and FAS pension expense.

This [added: non-GAAP] measure may be useful to investors and other users of our financial statements as a supplemental measure in evaluating the financial performance and operational trends of our sectors.

This [added: non-GAAP] measure 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.

| $ in millions | [removed: 2017 | | | | 2016 | | | | 2015] [added: 2018] | | | | 2017 | | | [added: |] 2016 | | [added: |]

| Segment operating margin rate | 11.5 | | % | | [removed: 12.0] [added: 11.2] | | % | | [removed: 12.4] [added: 11.6] | | % | | | | | | |

[removed: 2017 -] [added: 2018 –] Segment operating income for [removed: 2017] [added: 2018] increased [removed: $24] [added: $544] million, or [removed: 1] [added: 19] percent, as compared with [removed: 2016] [added: 2017,] and includes [added: the addition of $343 million of operating income from Innovation Systems and] higher operating income at [removed: all three sectors.][added: Aerospace Systems and Mission Systems.]

The higher operating income includes a $56 million favorable EAC adjustment at Aerospace Systems on a restricted program largely related to performance incentives and $54 million recognized [removed: to date] in connection with a claim related to certain costs incurred in prior years (the [removed: “Cost] [added: “2017 Cost] Claim”).

Additionally, during the fourth quarter of 2018, we changed our GAAP accounting method related to the recognition of actuarial gains and losses for the company’s pension and other postretirement benefit (OPB) plans (the “Accounting change”).

Prior to the Accounting change, actuarial gains and losses were recognized as a component of Accumulated other comprehensive (loss) income upon annual remeasurement and were amortized into earnings in future periods on a plan-by-plan basis when they exceeded the accounting corridor, a defined range within which amortization of net gains and losses is not required.

Under the new method, actuarial gains and losses are immediately recognized in net periodic benefit cost through Mark-to-market pension and OPB (“MTM”) (expense) benefit upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.

Our 2017 and 2016 results below have been recast to reflect the impact of the adoption of ASC Topic 606 and ASU 2017-07 and the Accounting change as described in Notes 1, 13, 16, 17 and 18 to the consolidated financial statements.

On June 6, 2018 (the “Merger Date”), the company completed its previously announced acquisition of Orbital ATK, Inc. (“Orbital ATK”) (the “Merger”), by acquiring all of the outstanding shares of Orbital ATK for a purchase price of $7.7 billion in cash.

On the Merger date, Orbital ATK became a wholly-owned subsidiary of the company and its name was changed to Northrop Grumman Innovation Systems, Inc. We established Innovation Systems as a new, fourth business sector, whose main products include launch vehicles and related propulsion systems; missile products and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and advanced aerospace structures.

The global geopolitical and economic environments also continue to be impacted by uncertainty.

Additionally, economic tensions and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could impact the global market for defense products, services and solutions.

The Budget Control Act of 2011 (BCA) mandated spending caps for all federal discretionary spending across a ten-year period (FY 2012 through FY 2021), including specific limits for defense and non-defense spending.

In prior years, these spending caps have been revised by separate bills for specific fiscal years.

Most recently, on February 9, 2018, Congress passed the Bipartisan Budget Act (BBA) of 2018, which raised the statutory budget caps for defense spending, including for Overseas Contingency Operations (OCO), by $80 billion for FY 2018 and by $85 billion for FY 2019.

The BBA also raised non-defense spending by $63 billion for FY 2018 and $68 billion for FY 2019 and suspended the debt ceiling until March 1, 2019.

The original spending caps

established by the BCA will return for FY 2020 and FY 2021 without another statutory change.

Similarly, the suspension of the debt ceiling is expected to end on March 1, 2019 absent further action.

On March 23, 2018, the President signed the Omnibus Appropriations Act for FY 2018, which provided $1.3 trillion in discretionary funding for federal agencies.

In total for FY 2018, Congress appropriated approximately $700 billion for national security, including approximately $630 billion for base discretionary funding and approximately $70 billion in OCO funding.

On September 28, 2018, full-year appropriations for FY 2019 were enacted representing over half of discretionary federal spending.

For FY 2019, Congress appropriated approximately $716 billion for national security, including approximately $647 billion for base discretionary funding and approximately $69 billion in OCO funding.

A continuing resolution was approved to provide further funding for other agencies (including NASA and other civil agencies) through December 7, 2018, which was subsequently extended through December 21, 2018.

On December 22, 2018, U.S. government agencies that had not yet received full-year appropriations and did not otherwise have funding entered into a temporary shutdown.

We recognize sales from our portfolio of long-term contracts as control is transferred to the customer, primarily over time on a cost-to-cost basis (cost incurred relative to costs estimated at completion).

For purposes of the operating results discussion below, we assess our financial and operating performance using certain financial measures that are not calculated in accordance with GAAP.

These non-GAAP financial measures exclude MTM (expense) benefit and related tax impacts, and are described as MTM-adjusted net earnings and MTM-adjusted diluted earnings per share.

These non-GAAP measures may be useful to investors and other users of our financial statements as supplemental measures in evaluating the company’s underlying financial performance by presenting the company’s operating results before the non-operational impact of pension and OPB actuarial gains and losses.

These measures are also consistent with how management views the underlying performance of the business as the impact of MTM accounting is not considered in management’s assessment of the company’s operating performance or in its determination of incentive compensation awards.

We reconcile these non-GAAP financial measures to their most directly comparable GAAP financial measures below.

These non-GAAP measures may not be defined and calculated by other companies in the same manner and should not be considered in isolation or as an alternative to operating results presented in accordance with GAAP.

| Sales | $ | 30,095 | | | $ | 26,004 | | | $ | 24,706 | | | 16 | % | | 5 | % |

| Operating income | 3,780 | | | | 3,218 | | | | 3,277 | | | | 17 | % | | (2 | )% |

| Operating margin rate | 12.6 | | % | | 12.4 | | % | | 13.3 | | % | | | | | | |

| Mark-to-market pension and OPB (expense) benefit | (655 | | ) | | 536 | | | | (950 | | ) | | NM | | | NM | |

| Net earnings | 3,229 | | | | 2,869 | | | | 2,043 | | | | 13 | % | | 40 | % |

2018 – Sales increased $4.1 billion, or 16 percent, as compared with 2017, due to the addition of $3.3 billion of sales from Innovation Systems and higher sales at Aerospace Systems and Mission Systems, partially offset by lower sales at Technology Services.

2018 – Operating income increased $562 million, or 17 percent, as compared with 2017, primarily due to a $544 million increase in segment operating income, which includes the addition of $343 million of operating income from Innovation Systems, and a $42 million decrease in unallocated corporate expense, partially offset by a $25 million decrease in our net FAS (service)/CAS pension adjustment, all of which are further discussed in “Segment Operating Results.” Lower operating costs and expenses as a percentage of sales increased our operating margin rate to 12.6 percent from 12.4 percent in the prior year period and was principally driven by a higher segment operating margin rate, as described in “Segment Operating Results,” and the previously noted decrease in unallocated corporate expense, partially offset by the decrease in our net FAS (service)/CAS pension adjustment.

Mark-to-Market Pension and OPB Adjustment

The primary components of pre-tax MTM (expense) benefit are presented in the table below:

| Actuarial gains (losses) on projected benefit obligation | $ | 2,772 | | | $ | (1,570 | ) | | $ | (988 | ) |

| Actuarial (losses) gains on plan assets | (3,426 | | ) | | 2,119 | | | | 25 | | |

| MTM (expense) benefit | $ | (655 | ) | | $ | 536 | | | $ | (950 | ) |

On September 17, 2017, the company entered into a definitive merger agreement to acquire all of the outstanding shares of Orbital ATK, Inc. (Orbital ATK) for approximately $7.8 billion in cash, plus the assumption of approximately $1.4 billion in net debt (the “Orbital ATK Acquisition”).

See Item 1.01 in our Current Report on Form 8-K filed with the SEC on September 18, 2017 for a summary and copy of the merger agreement.

Under the terms of the merger agreement, Orbital ATK shareholders are to receive all-cash consideration of $134.50 per share.

On November 29, 2017, Orbital ATK shareholders approved the proposed Orbital ATK Acquisition.

We currently expect the transaction to close in the first half of 2018, after receiving regulatory approvals.

Upon completion of the Orbital ATK Acquisition, we plan to establish Orbital ATK as a new, fourth business sector named Northrop Grumman Innovation Systems.

U.S. Tax Reform

In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted.

The 2017 Tax Act represents major tax reform legislation that, among other provisions, reduces the U.S. corporate tax rate.

Certain income tax effects of the 2017 Tax Act, including $300 million of tax expense recorded principally due to the write-down of our net deferred tax assets, are reflected in our financial results in accordance with Staff Accounting Bulletin No. 118 (SAB 118), which provides SEC staff guidance regarding the application of Accounting Standards Codification (ASC) Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act became law.

The global economic environment also continues to be marked by uncertainty, instability and geopolitical tensions.

Global economic conditions could impact customer purchasing decisions.

Part I of the Budget Control Act of 2011 (the BCA) provided for a reduction in planned defense budgets by at least $487 billion over a ten year period.

Part II mandated substantial additional reductions, through a process known as “sequestration,” which took effect in March 2013.

On November 2, 2015, the President signed the Bipartisan Budget Act of 2015 (the Budget Act).

The Budget Act raised the debt ceiling until March 2017 and raised the sequester caps imposed by the BCA by $80 billion, split equally between defense and non-defense discretionary spending in the Government’s FY 2016 and FY 2017 ($50 billion in FY 2016 and $30 billion in FY 2017).

Sequestration spending caps under the BCA could reduce defense spending again in FY 2018.

On February 9, 2016, the President delivered his FY 2017 budget to Congress.

The FY 2017 budget reflected the FY 2017 spending caps established in the Budget Act and requested $583 billion for the DoD’s annual budget, including $59 billion for OCO.

The President signed a continuing resolution in September 2016, which was extended in December 2016 and provided funding for the U.S. Government at FY 2016 levels through April 28, 2017.

In March 2017, the debt ceiling was reached and the Treasury Department began taking “extraordinary measures” to finance the government and avoid a breach of the debt ceiling.

On September 8, 2017, the debt ceiling was suspended for three months and on December 9, 2017, the Treasury Department again began taking extraordinary

\-24\-

measures to finance the government.

It is expected that the Treasury Department will run out of the ability to take extraordinary measures to finance the government in the first half of 2018.

In May 2017, the President signed into law the FY 2017 Consolidated Appropriations Act.

In total for FY 2017, Congress appropriated $524 billion in base discretionary funding for the DoD, consistent with the Budget Act.

Congress also appropriated approximately $68 billion in OCO funding and approximately $15 billion in additional DoD appropriations.

In May 2017, the President released his FY 2018 budget request, which seeks $575 billion for the DoD’s base budget, approximately $52 billion above the statutory caps provided for in the BCA.

The President’s budget request also seeks an additional $65 billion in OCO funding for expeditionary needs, not capped by the BCA.

On September 8, 2017, the President signed a continuing resolution which generally funded the government at FY 2017 levels through December 8, 2017.

The continuing resolution was extended to December 22, 2017 and further extended to January 19, 2018.

As Congress did not enact appropriations legislation or a new continuing resolution by January 19, 2018, on January 20, 2018, the U.S. Government temporarily shut down.

We recognize sales from our portfolio of long-term contracts primarily using the cost-to-cost method of percentage of completion accounting, but in some cases we utilize the units-of-delivery method of percentage of completion accounting.

Changes in sales are generally described in terms of volume, deliveries or other indicators of sales activity.

Performance generally refers to non-volume related changes in profitability.

| Sales | $ | 25,803 | | | $ | 24,508 | | | $ | 23,526 | | | 5 | % | | 4 | % |

| Operating income | 3,299 | | | | 3,193 | | | | 3,076 | | | | 3 | % | | 4 | % |

| Net earnings | 2,015 | | | | 2,200 | | | | 1,990 | | | | (8 | )% | | 11 | % |

2016 – Operating income increased $117 million, or 4 percent, as compared with 2015, primarily due to a $137 million reduction in unallocated corporate expenses and higher sales volume, partially offset by a $32 million decrease in our net FAS/CAS pension adjustment and lower segment margin rates.

We are exposed to market risk with respect to our portfolio of [removed: trading and available-for-sale] marketable securities with a fair value of [removed: $353] [added: $335] million at December 31, [removed: 2017.][added: 2018.]

We are exposed to interest rate risk on variable-rate, short-term borrowings under our credit facilities, for which there was [removed: £100] [added: £85] million (the equivalent of approximately [removed: $134] [added: $108] million as of December 31, [removed: 2017)] [added: 2018)] outstanding at December 31, [removed: 2017.][added: 2018 and on our outstanding short-term commercial paper borrowings, for which there was $198 million outstanding at December 31, 2018.]

At December 31, [removed: 2017,] [added: 2018,] we have [removed: $15.3] [added: $14.4] billion of long-term debt, primarily consisting of fixed-rate debt, with a fair value of approximately [removed: $16.0] [added: $14.3] billion.

At December 31, [removed: 2017,] [added: 2018,] foreign currency forward contracts with a notional amount of [removed: $89] [added: $114] million were outstanding.

At December 31, [removed: 2017,] [added: 2018,] a 10 percent unfavorable foreign exchange rate movement would not have a material impact on our consolidated financial position, annual results of operations and/or cash flows.

COMMODITY PRICE RISK

In certain circumstances, we are exposed to commodity price risk on purchases of inventory such as copper and zinc.

We enter into forward contracts and purchase orders for the current expected production requirements for small-caliber ammunition supply contracts.

We do not hold or issue derivative financial instruments for trading purposes.

At December 31, 2018, we had commodity forward contracts outstanding that hedge forecasted commodity purchases of 10 million pounds of copper and 4 million pounds of zinc.

At December 31, 2018, a 10 percent unfavorable change in commodity prices would not have a material impact on our consolidated financial position, annual results of operations and/or cash flows.

\-42\-

\-40\-

We offer a broad portfolio of capabilities and technologies that enable us to deliver innovative [removed: products,] [added: platforms,] systems and solutions for applications that range from undersea to outer space and into cyberspace.

We provide [removed: products, systems and solutions] [added: capabilities] in autonomous systems; cyber; command, control, communications and computers, intelligence, surveillance and reconnaissance (C4ISR); [added: space;] strike; and logistics and modernization.

The company originally was formed in Hawthorne, [removed: California] [added: California,] in 1939, as Northrop Aircraft Incorporated and was reincorporated in Delaware in 1985, as Northrop Corporation.

Northrop [removed: Aircraft Incorporated] [added: Corporation] was a principal developer of flying wing technology, including the B-2 Spirit bomber.

In 2001, we acquired Litton Industries, [added: Inc.,] a global electronics and information technology company, and one of the nation’s leading full service shipbuilders.

Also in 2001, we acquired Newport News [removed: Shipbuilding,] [added: Shipbuilding Inc.,] a leading designer and builder of nuclear-powered aircraft carriers and submarines.

See Notes [removed: 2] [added: 1] and [removed: 10] [added: 15] to the consolidated financial statements [added: and “Risk Factors”] for further [removed: information.][added: information regarding our contracts.]

See Note [removed: 4] [added: 2] to [removed: our] [added: the] consolidated financial statements for further [removed: information.][added: information regarding the acquisition of Orbital ATK.]

Aerospace Systems’ customers, primarily the DoD and other U.S. [removed: Government] [added: government] agencies, use these systems in mission areas including intelligence, surveillance and reconnaissance (ISR), strike operations, communications, earth [removed: observation,] [added: observation] and space [removed: science and exploration.][added: science.]

Key programs include high-altitude long-endurance (HALE) systems, such as the Global Hawk system, which provides near real-time high resolution imagery of land masses for theater awareness; the Triton system, which provides real-time ISR over vast ocean and coastal regions for maritime domain awareness; and the North Atlantic Treaty Organization (NATO) Alliance Ground Surveillance (AGS) system for [added: multinational theater operations; and the ship-based vertical take off and landing (VTOL) Fire Scout system, which provides situational awareness for maritime forces and precision targeting support.]

Manned Aircraft – designs, develops, manufactures, and integrates [removed: airborne C4ISR systems,] long-range strike aircraft systems, [added: airborne C4ISR systems,] tactical aircraft systems and directed energy systems.

Key airborne C4ISR programs include the E-2D Advanced Hawkeye and Joint Surveillance Target Attack [removed: Radar System (JSTARS).]

Tactical aircraft [removed: includes] [added: programs include] the design, development, manufacture and integration of F-35 Lightning II center fuselage and F/A-18 Super Hornet center/aft fuselage sections.

Key [added: unrestricted] programs include the James Webb Space Telescope (JWST), a large infrared telescope being built for the National Aeronautics and Space Administration (NASA) that will be deployed in space to study the origins of the universe; Advanced Extremely High Frequency (AEHF) [added: and Enhanced Polar System (EPS)] payloads providing survivable, protected communications to U.S. forces; [added: and Next-Generation Overhead Persistent Infrared Program (OPIR) satellites and payloads and] Space-Based Infrared System (SBIRS) payloads providing data for missile surveillance, missile defense, technical intelligence and battlespace [removed: characterization; and restricted programs.][added: characterization.]

The sector is reported in three business areas, which reflect our core capabilities: [removed: Sensors and Processing,] [added: Advanced Capabilities,] Cyber and [removed: ISR,] [added: ISR] and [removed: Advanced Capabilities.][added: Sensors and Processing.]

Sensors and Processing – delivers products, systems and services that support ground-based and fixed wing and rotary wing aircraft platforms with radar, electronic warfare, [removed: communications, command and control (C2),] [added: C2,] Signals Intelligence (SIGINT), and situational awareness mission systems.

Cyber and ISR – delivers products, systems and services that support full-spectrum cyber solutions, space-based payload and exploitation systems, space-based [added: communications,] C2 and processing systems, and enterprise integration of multi-intelligence mission data across all domains.

Advanced Capabilities – provides integration and interoperability of net-enabled battle management, sensors, targeting and surveillance systems; air and missile defense [removed: C2;] [added: command] and [added: control (C2); and] global battlespace awareness.

Key programs include the Integrated Air and Missile Defense Battle Command System (IBCS); Ground-based Midcourse Defense (GMD) [added: system; Surface Electronic Warfare Improvement Program (SEWIP) Block III; the Embedded Global Positioning System (GPS)/Inertial Navigation Systems-Modernization; AQS-24B Minehunting System; and Trident and Virginia-Class payload launch systems.]

The sector is reported in three business areas, which reflect our core capabilities: [added: Advanced Defense Services;] Global Logistics and Modernization; [removed: Advanced Defense Services;] and System Modernization and Services.

Capabilities include: integration, delivery and global support of unmanned special mission aircraft solutions for platforms such as the MQ-5B Hunter, Global Hawk and [removed: Triton;] [added: Triton autonomous systems;] subsystem and component-level depot repair and modernization for [added: electronic/avionic] products such as AAQ-24, APN-241, ALQ-135 and ALQ-131A sensors; missile sustainment and modernization solutions for [removed: products, including] the Intercontinental Ballistic Missile Minuteman III; and weapon [removed: systems sustainment, refurbishment, overhaul, modernization and contractor logistics support for several unique low-density/high-demand platforms, including the B-2 Spirit bomber, JSTARS, KC-30A and UK Airborne Warning and Control System.]

Capabilities include fraud detection and compliance services, data analysis and decision support tools, [removed: and] software system [removed: sustainment;] [added: sustainment and modernization, and application migration to the cloud;] services to U.S. [removed: Government] [added: government] healthcare agencies, including benefits systems administration, fraud prevention, payment modernization, bioinformatics, and precision health; and information sharing and analysis solutions as well as sophisticated enterprise-wide solutions to design, build and manage resilient and secure [added: next generation] IT infrastructures.

SELECTED FINANCIAL DATA [removed: AND SEGMENT OPERATING RESULTS]

For [removed: a summary of selected consolidated financial information, see “Selected Financial Data.” For a more complete understanding of our segment financial] [added: further] information, see [removed: “Segment Operating Results”] [added: “Backlog”] in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) and Note [removed: 4] [added: 1] to the consolidated financial statements.

Sales to the U.S. [removed: Government] [added: government] accounted for [removed: 85] [added: 82] percent, [removed: 84] [added: 85] percent and [removed: 83] [added: 84] percent of sales during the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015,] [added: 2016,] respectively.

For further information on sales by customer category, see Note [removed: 1] [added: 15] to the consolidated financial statements.

We compete with many companies in the defense, intelligence and federal [added: civil] markets.

BAE Systems, Boeing, Booz Allen Hamilton, General Dynamics, Harris, L3 Technologies, Leidos, Leonardo, Lockheed Martin, Raytheon and [added: Thales are some of our primary competitors.]

We believe that we maintain good relations with our approximately [removed: 70,000] [added: 85,000] employees.

Approximately [removed: 2,300] [added: 4,800] are covered by [removed: 10] [added: 16] collective agreements in the U.S., of which we negotiated [removed: one renewal] [added: three renewals] in [removed: 2017] [added: 2018] and expect to negotiate two renewals in [removed: 2018.][added: 2019.]

Certain classified programs with the U.S. [removed: Government] [added: government] are prohibited by the customer from being publicly discussed and are therefore generally referred to as “restricted” in this Annual [removed: Report on Form 10-K.][added: Report.]

The consolidated financial statements and financial information in this Annual Report [removed: on Form 10-K] reflect the operating results of our entire company, including restricted programs.

We monitor our contracts on a regular basis for compliance with our policies and procedures and applicable government [removed: regulations and] laws [removed: to enhance compliance] and [removed: consistent application for contracts with similar terms][added: regulations.]

Our long-term contracts typically fall into one of two [removed: broad categories:][added: contract types:]

Cost-type contracts [removed: provide] generally [added: provide] for reimbursement of a contractor’s allowable costs incurred plus fee.

[removed: Award] [added: Fees on cost-type contracts can be fixed in terms of dollar value or can be variable due to award] and incentive [removed: fees] [added: fees, which] are generally based on performance criteria such as cost, schedule, quality and/or technical performance.

Incentive fees are generally based on cost [added: or schedule] and provide for an initially negotiated fee to be adjusted later, based on the relationship of total allowable costs to total target [removed: costs.][added: costs or as schedule milestones are met.]

These [removed: types of fixed-price incentive fee] contracts effectively become firm fixed-price contracts once the cost-share ceiling is reached.

See [removed: Note] [added: “Risk Factors” and Notes] 1 [added: and 12] to the consolidated financial statements [removed: and “Risk Factors.”][added: for further information regarding environmental matters.]

The following table summarizes sales for the year ended December 31, [removed: 2017,] [added: 2018,] recognized by contract type and customer category:

On June 6, 2018 (the “Merger date”), the company completed its previously announced acquisition of Orbital ATK, Inc. (“Orbital ATK”) (the “Merger”).

On the Merger date, Orbital ATK became a wholly-owned subsidiary of the company and its name was changed to Northrop Grumman Innovation Systems, Inc., which we established as a new, fourth business sector (“Innovation Systems”).

The operating results of Innovation Systems subsequent to the Merger date have been included in the company’s consolidated results of operations.

Radar System (JSTARS).

Much of this business is performed through restricted programs.

INNOVATION SYSTEMS

Innovation Systems, headquartered in Dulles, Virginia, is a leader in the design, development, integration and production of flight, armament and space systems to enable national security, civil government and commercial customers to achieve their critical missions.

Major products include launch vehicles and related propulsion systems; missile products and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and advanced aerospace structures.

The sector is reported in three business areas, which reflect our core capabilities: Defense Systems, Flight Systems and Space Systems.

Defense Systems – develops and produces small-, medium- and large-caliber ammunition; precision weapons and munitions; high-performance gun systems; and propellant and energetic materials.

Operations include the Lake City Army Ammunition Plant in Independence, Missouri, and a Naval Sea Systems Command facility in Rocket Center, West Virginia.

Competencies include tactical solid rocket motor development and production for a variety of air-, sea- and land-based missile systems propulsion control systems that support U.S. Missile Defense Agency (MDA) and NASA programs; airborne missile warning systems; advanced fuzes and defense electronics.

Key programs include the U.S. Navy’s Advanced Anti-Radiation Guided Missile (AARGM) and the development of advanced air-breathing propulsion systems and special-mission aircraft for defense applications.

Flight Systems – designs, develops and manufactures small- and medium-class space launch vehicles to place satellites into earth orbit and escape trajectories; interceptor and target vehicles for missile defense systems; and suborbital launch vehicles that place payloads into a variety of high-altitude trajectories.

Competencies also include the production of medium- and large-class rocket propulsion systems for human and cargo launch vehicles; missile defense interceptors; and target vehicles.

Key programs include the development and production of solid rocket motors for NASA’s Space Launch System (SLS) heavy lift vehicle; interceptor boosters for the MDA Ground-based Midcourse Defense (GMD) system; the Antares rocket used in the execution of our Commercial Resupply Services (CRS) contracts with NASA; medium-class solid rocket motors for the U.S. Navy's Trident II Fleet Ballistic Missile program; and production of the majority of the composite fuselage stringers and frames for the Airbus A350 XWB wide-body passenger jetliner.

Space Systems – develops and produces small- and medium- class satellites for global and regional communications and broadcasting, space-related scientific research, and national security; human-rated space systems for earth orbit and deep-space exploration, including delivering cargo to the International Space Station (ISS); and spacecraft components and subsystems as well as specialized engineering and operations services to U.S. government agencies.

Key programs include the Cygnus spacecraft used in the execution of our CRS contracts with NASA, restricted national security space programs and science and environmental satellite programs.

systems sustainment, refurbishment, overhaul, modernization and contractor logistics support for several unique small fleet, high-demand platforms, including the B-2 Spirit bomber, JSTARS E-8 surveillance aircraft, KC-30A multi-role tanker, C-27J transport, UK E-3D Airborne Early Warning and Control System, and special mission electronic surveillance aircraft.

Subsequent Realignment – Effective January 1, 2019, Advanced Defense Services and System Modernization and Services merged to create the Global Services business area.

This realignment is not reflected in the business descriptions above or in the financial information contained in this report.

For a summary of selected consolidated financial information, see “Selected Financial Data” under Part II - Item 6.

At December 31, 2018, total backlog, which is equivalent to the company’s remaining performance obligations, was $53.5 billion as compared with $42.6 billion at December 31, 2017.

Award and incentive fees are 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.

| Cost-type contracts | | $ | 14,234 | | | $ | 680 | | | $ | 90 | | | $ | 15,004 | | | 50 | % |

| Fixed-price contracts | | 10,562 | | | | 3,754 | | | | 775 | | | | 15,091 | | | | 50 | % |

| Total sales | | $ | 24,796 | | | $ | 4,434 | | | $ | 865 | | | $ | 30,095 | | | 100 | % |

On September 17, 2017, the company entered into a definitive merger agreement to acquire Orbital ATK, Inc. (Orbital ATK).

We currently expect the transaction to close in the first half of 2018, after receiving regulatory approvals.

Upon completion of the Orbital ATK Acquisition, we plan to establish Orbital ATK as a new, fourth business sector named Northrop Grumman Innovation Systems.

Organization

From time to time, we acquire or dispose of businesses and realign contracts, programs or businesses among and within our operating segments.

Internal realignments are typically designed to leverage existing capabilities more fully and to enhance development and delivery of products and services.

The operating results for all periods presented have been revised to reflect any such changes made through December 31, 2017.

The company is aligned in three operating sectors, which also comprise our reportable segments: Aerospace Systems, Mission Systems and Technology Services.

multinational theater operations; the ship-based vertical take off and landing (VTOL) Fire Scout system, which provides situational awareness for maritime forces and precision targeting support; and the Navy Unmanned Combat Air System demonstrating an unmanned combat air vehicle for carrier-based operations.

system; Surface Electronic Warfare Improvement Program (SEWIP) Block III; the Embedded Global Positioning System (GPS)/Inertial Navigation Systems-Modernization; AQS-24B Minehunting System; and Trident and Virginia-Class payload launch systems.

Thales are some of our primary competitors.

At December 31, 2017, total backlog was $42.9 billion, as compared with $45.3 billion at December 31, 2016.

For further information, see “Backlog” in MD&A.

RESEARCH AND DEVELOPMENT

Our strategy includes significant investment in research and development (R&D) to support future technologies and mission solutions.

In 2017, 2016 and 2015, we invested 2.5 percent, 2.9 percent and 3.0 percent of total sales in company-sponsored R&D.

For additional information on company-sponsored and customer-funded R&D, see Note 1 to the consolidated financial statements.

and conditions.

Fees on cost-type contracts can be fixed in terms of dollar value or percentage of costs.

Award and incentive fees that can reasonably be estimated and are deemed reasonably assured are recorded over the performance period of the contract.

| Cost-type contracts | | $ | 13,441 | | | $ | 641 | | | $ | 86 | | | $ | 14,168 | | | 55 | % |

| Fixed-price contracts | | 8,396 | | | | 2,661 | | | | 578 | | | | 11,635 | | | | 45 | % |

| Total sales | | $ | 21,837 | | | $ | 3,302 | | | $ | 664 | | | $ | 25,803 | | | 100 | % |

In 2010, we established goals for the reduction of greenhouse gas emissions and implementation of best management practices for water use and solid waste; those goals were achieved as of December 31, 2014.

See “Risk Factors” and Notes 1 and 12 to the consolidated financial statements.

We are a party to various investigations, lawsuits, [added: arbitration,] claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business.

For additional information on pending matters, please see [removed: Note] [added: Notes] 11 [added: and 12] to the consolidated financial statements, and for further information on the risks we face from existing and future investigations, lawsuits, [added: arbitration,] claims, enforcement actions and other legal proceedings, please see “Risk Factors.”

For the fiscal year ended December 31, [removed: 2017][added: 2018]

Indicate by check mark whether the registrant has submitted electronically [removed: and posted on its corporate Web site, if any,] every Interactive Data File required to be submitted [removed: and posted] pursuant to Rule 405 of Regulation S-T [added: (§232.405 of this chapter)] during the preceding 12 months (or for such shorter period that the registrant was required to submit [removed: and post] such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, [added: a] smaller reporting company or an emerging growth company.

| Non-accelerated filer o [removed: (Do not check if a smaller reporting company)] | | | | Emerging growth company o | | |

As of June 30, [removed: 2017,] [added: 2018,] the aggregate market value of the common stock (based upon the closing price of the stock on the New York Stock Exchange) of the registrant held by non-affiliates was approximately [removed: $44.5] [added: $53.4] billion.

As of January [removed: 25, 2018, 174,087,585] [added: 28, 2019, 169,737,507] shares of common stock were outstanding.

Portions of Northrop Grumman Corporation’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for the [removed: 2018] [added: 2019] Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.

| Item 1. | [removed: [Business](#s7523F63913105275BA7C47475A1D377A)] [added: [Business](#s79773DD301E55CF0A5B0AFABC1B1E45C)] | [removed: [1](#s7523F63913105275BA7C47475A1D377A)] [added: [1](#s79773DD301E55CF0A5B0AFABC1B1E45C)] |

| Item 1A. | [Risk [removed: Factors](#s5E8756A4A9A15867AFD38E902E463B6A)] [added: Factors](#s10F1A946211051188F6DE26258723834)] | [removed: [6](#s5E8756A4A9A15867AFD38E902E463B6A)] [added: [6](#s10F1A946211051188F6DE26258723834)] |

| Item 1B. | [Unresolved Staff [removed: Comments](#s1CCC7B862E0958279FB6255B97F501AD)] [added: Comments](#s0227A90D01F459D99A97C7BF75D7321B)] | [removed: [18](#s1CCC7B862E0958279FB6255B97F501AD)] [added: [19](#s0227A90D01F459D99A97C7BF75D7321B)] |

| Item 2. | [removed: [Properties](#s0855A6E8154D55EE8E48C7D72ACA5FD0)] [added: [Properties](#s859655249BEE5A37BB898D9EE5899E8E)] | [removed: [19](#s0855A6E8154D55EE8E48C7D72ACA5FD0)] [added: [20](#s859655249BEE5A37BB898D9EE5899E8E)] |

| Item 3. | [Legal [removed: Proceedings](#sDF33A1F12B87556191C750E82ABED292)] [added: Proceedings](#s53F20AE79BED56BEAC18639E02290CE0)] | [removed: [20](#sDF33A1F12B87556191C750E82ABED292)] [added: [21](#s53F20AE79BED56BEAC18639E02290CE0)] |

| Item 4. | [Mine Safety [removed: Disclosures](#sB0D8FD3FB50254BCB9D7D0FC499C796E)] [added: Disclosures](#s52339D511FE15EC286B73F69391556B6)] | [removed: [20](#sB0D8FD3FB50254BCB9D7D0FC499C796E)] [added: [21](#s52339D511FE15EC286B73F69391556B6)] |

| Item 5. | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#sCA4BB125CE255B628863F714A5CDDDB8)] [added: Securities](#s6FA92FE852DF526D96B47ECE23454C80)] | [removed: [21](#sCA4BB125CE255B628863F714A5CDDDB8)] [added: [22](#s6FA92FE852DF526D96B47ECE23454C80)] |

| Item 6. | [Selected Financial [removed: Data](#s190A0BED2E565EC0B39690A0425EE48F)] [added: Data](#s33662F1ECFC756C7A8ADB4776FBA3E18)] | [removed: [23](#s190A0BED2E565EC0B39690A0425EE48F)] [added: [24](#s33662F1ECFC756C7A8ADB4776FBA3E18)] |

| Item 7. | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#sA62B7BDA08575F55821C23B320FB55B0)] [added: Operations](#s1BF7333D367552A49C665602652DF1AC)] | [removed: [24](#sA62B7BDA08575F55821C23B320FB55B0)] [added: [25](#s1BF7333D367552A49C665602652DF1AC)] |

| | [Consolidated Operating [removed: Results](#sE74DE5E9B2C352189FF1AA35EF81ABEF)] [added: Results](#s63C52FEB18CF5B5D8D7721C8DC477EBE)] | [removed: [26](#sE74DE5E9B2C352189FF1AA35EF81ABEF)] [added: [26](#s63C52FEB18CF5B5D8D7721C8DC477EBE)] |

| | [Segment Operating [removed: Results](#s4B2E8444AE915D7FB4B7DEA29647E247)] [added: Results](#s33270907268B5B13B479C72F6B9ADC1D)] | [removed: [27](#s4B2E8444AE915D7FB4B7DEA29647E247)] [added: [29](#s33270907268B5B13B479C72F6B9ADC1D)] |

| | [Product and Service [removed: Analysis](#sE914C0EC1B9D5B29A0C3EF7990F1C3D3)] [added: Analysis](#s24F6D7CDF82E54BE913C67F7479DF33C)] | [removed: [31](#sE914C0EC1B9D5B29A0C3EF7990F1C3D3)] [added: [34](#s24F6D7CDF82E54BE913C67F7479DF33C)] |

| | [Liquidity and Capital [removed: Resources](#sE0D122662F365011AB2046A08B107B17)] [added: Resources](#s571AF22FFACC52C1AD286435433586D3)] | [removed: [32](#sE0D122662F365011AB2046A08B107B17)] [added: [35](#s571AF22FFACC52C1AD286435433586D3)] |

| | [Critical Accounting Policies, Estimates and [removed: Judgments](#s1D92A77261D352BFAFAF95F1B1F8D589)] [added: Judgments](#s31A7B32DD97651B3992E7B8CFE636C2B)] | [removed: [35](#s1D92A77261D352BFAFAF95F1B1F8D589)] [added: [37](#s31A7B32DD97651B3992E7B8CFE636C2B)] |

| | [Other [removed: Matters](#s990E58807EA550E5819F13B0F95CA7D4)] [added: Matters](#s085D641B92565DEFB60A3E7D7DBFD5C6)] | [removed: [39](#s990E58807EA550E5819F13B0F95CA7D4)] [added: [41](#s085D641B92565DEFB60A3E7D7DBFD5C6)] |

| Item 7A. | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#s9C71CFB22E735FD1AFB197907FB79F57)] [added: Risk](#sFEFE247F8A385BB890113CD7A9834F6C)] | [removed: [40](#s9C71CFB22E735FD1AFB197907FB79F57)] [added: [42](#sFEFE247F8A385BB890113CD7A9834F6C)] |

| Item 8. | [Financial Statements and Supplementary [removed: Data](#s84C83C0802D45EC8BB023811E05A24F7)] [added: Data](#s9665B431FEC650A3A645130EFA5A6F66)] | [removed: [41](#s84C83C0802D45EC8BB023811E05A24F7)] [added: [43](#s9665B431FEC650A3A645130EFA5A6F66)] |

| | [Report of Independent Registered Public Accounting [removed: Firm](#sCFF0094CCAD55A8FB08521A253D1DBD7)] [added: Firm](#s7A0B31CC908C5BC9B2C534A830706112)] | [removed: [41](#sCFF0094CCAD55A8FB08521A253D1DBD7)] [added: [43](#s7A0B31CC908C5BC9B2C534A830706112)] |

| | [Consolidated Statements of Earnings and Comprehensive [removed: Income](#sFE27E9DB0A865F23A0A8B177E36FE661)] [added: Income](#sF42B37951EE95A4BADC8FEA6ECFA93A8)] | [removed: [42](#sFE27E9DB0A865F23A0A8B177E36FE661)] [added: [44](#sF42B37951EE95A4BADC8FEA6ECFA93A8)] |

| | [Consolidated Statements of Financial [removed: Position](#s06F2DD34B51A570699F6FA57EBFD854C)] [added: Position](#sA394E1DF23BA5518B946C1614242F94F)] | [removed: [43](#s06F2DD34B51A570699F6FA57EBFD854C)] [added: [45](#sA394E1DF23BA5518B946C1614242F94F)] |

| | [Consolidated Statements of Cash [removed: Flows](#s47BDE7036B315C8C8DD0AFBB21A9D203)] [added: Flows](#sDE174486601A52488F69C4982A87475B)] | [removed: [44](#s47BDE7036B315C8C8DD0AFBB21A9D203)] [added: [46](#sDE174486601A52488F69C4982A87475B)] |

| | [Consolidated Statements of Changes in Shareholders’ [removed: Equity](#s451B932B28155C3E9E6DFD05B29E0FC0)] [added: Equity](#s2282623A9E185009AAFCD83554EFA3B2)] | [removed: [45](#s451B932B28155C3E9E6DFD05B29E0FC0)] [added: [47](#s2282623A9E185009AAFCD83554EFA3B2)] |

| | [Notes to Consolidated Financial [removed: Statements](#s5C8F255CB5A359C6B7A46D3A725E058E)] [added: Statements](#s113CA254A55658078A455650885299D0)] | [removed: [46](#s5C8F255CB5A359C6B7A46D3A725E058E)] [added: [48](#s113CA254A55658078A455650885299D0)] |

| | [1. Summary of Significant Accounting [removed: Policies](#sC64AC10072EC582C9A0542E32B2B0844)] [added: Policies](#s23EF15CCD66B51CF978DAD7420A2711B)] | [removed: [46](#sC64AC10072EC582C9A0542E32B2B0844)] [added: [48](#s23EF15CCD66B51CF978DAD7420A2711B)] |

| | [2. [removed: Pending] Acquisition of Orbital [removed: ATK](#s995048d14fd348b29ee20d7d2dd70d91)] [added: ATK](#s5C34B566384F51BAB018F7492824C79D)] | [removed: [53](#s995048d14fd348b29ee20d7d2dd70d91)] [added: [56](#s5C34B566384F51BAB018F7492824C79D)] |

| | [3. Earnings Per Share, Share Repurchases and Dividends on Common [removed: Stock](#s2B3328D3382E5D4299957692CE8969F4)] [added: Stock](#s1B0B90A25A405822A482E807E611180A)] | [removed: [53](#s2B3328D3382E5D4299957692CE8969F4)] [added: [58](#s1B0B90A25A405822A482E807E611180A)] |

| | [removed: [4.] [added: [15.] Segment [removed: Information](#sB6FDB706E35952DA8874AA5E13DD7CD4)] [added: Information](#sCA09578D04CC5EC8A81702595ACC68DC)] | [removed: [54](#sB6FDB706E35952DA8874AA5E13DD7CD4)] [added: [79](#sCA09578D04CC5EC8A81702595ACC68DC)] |

| | [removed: [5.] [added: [4.] Accounts Receivable, [removed: Net](#s0A4C7A889AF95C8FBA704060A23A1CB5)] [added: Net](#s2AF2786AEF3A59848C8D77FF07C0795B)] | [removed: [55](#s0A4C7A889AF95C8FBA704060A23A1CB5)] [added: [59](#s2AF2786AEF3A59848C8D77FF07C0795B)] |

| | [6. Inventoried Costs, [removed: Net](#s749123C342DA57828CF4E330A84A002E)] [added: Net](#s3C4FDFBCEE715CCC955F6B429BC4B162)] | [removed: [56](#s749123C342DA57828CF4E330A84A002E)] [added: [61](#s3C4FDFBCEE715CCC955F6B429BC4B162)] |

| | [7. Income [removed: Taxes](#s7F7142DB285E5F3C99D054DAE3DE83BC)] [added: Taxes](#s30571FF0D20F561097CB6D6ABA56A1B4)] | [removed: [56](#s7F7142DB285E5F3C99D054DAE3DE83BC)] [added: [61](#s30571FF0D20F561097CB6D6ABA56A1B4)] |

| | [8. Goodwill and Other Purchased Intangible [removed: Assets](#s723E660D1C455AA9B5A9D8CB7EDC6431)] [added: Assets](#s5C5A910A8FC85A8EB83EE9A8CC25C984)] | [removed: [60](#s723E660D1C455AA9B5A9D8CB7EDC6431)] [added: [64](#s5C5A910A8FC85A8EB83EE9A8CC25C984)] |

| | [9. Fair Value of Financial [removed: Instruments](#sF4F6896F6D965E04A9131DEB413BAFD6)] [added: Instruments](#s0DA9A8CBED06523EBF992698F6A9B26C)] | [removed: [61](#sF4F6896F6D965E04A9131DEB413BAFD6)] [added: [65](#s0DA9A8CBED06523EBF992698F6A9B26C)] |

| | [11. Investigations, Claims and [removed: Litigation](#sE7A6A9D5A21555579F5D60431564A301)] [added: Litigation](#sF2DE6D5A9F4F5C68A936A1B57A43754B)] | [removed: [64](#sE7A6A9D5A21555579F5D60431564A301)] [added: [68](#sF2DE6D5A9F4F5C68A936A1B57A43754B)] |

10-K 1 noc-12312018x10k.htm 10-K

| | [PART I](#s44DF293D31A45226970B00A01012EB02) | |

| | [PART II](#sE9E15DE5DD6F5E54A2DAE1E52E512FDB) | |

| | [Overview](#s2CCE8B1530E7574C9E04FE6D83F5873A) | [25](#s2CCE8B1530E7574C9E04FE6D83F5873A) |

| | [Backlog](#s22C155BAD2BC596A8EDB2D9C4B420BF1) | [35](#s22C155BAD2BC596A8EDB2D9C4B420BF1) |

| | [5. Unbilled Receivables, Net](#s4eddeef547794adfb8e672900def8637) | [60](#s4eddeef547794adfb8e672900def8637) |

| | [10. Debt](#s224470432CA7587897480BAFD0AC0513) | [66](#s224470432CA7587897480BAFD0AC0513) |

| | [17. 2018 Impact of Accounting Method Change](#sb1c02f527caf4341b0598a3481333c8a) | [86](#sb1c02f527caf4341b0598a3481333c8a) |

| | [18. Recast 2017 and 2016 Financial Information](#s14def98f08f041de81ea3b6652518aa0) | [88](#s14def98f08f041de81ea3b6652518aa0) |

| | [PART IV](#s43C701B20C7954469FBD891508EC5E6E) | |

| | [Signatures](#s5C3CF617341E59BD879E39279C5A28BD) | [109](#s5C3CF617341E59BD879E39279C5A28BD) |

10-K 1 noc-12312017x10k.htm 10-K

| | [PART I](#sEF3BB6843E6558DFB8C2BD84D52AFCFF) | |

| | [PART II](#sF2EF158EB4145E51ACB52D827F4108B3) | |

| | [Overview](#s83542592A7545479B8D50ACA1008B644) | [24](#s83542592A7545479B8D50ACA1008B644) |

| | [Backlog](#s76DDA39F82985FBA9B6F6041BBD38192) | [32](#s76DDA39F82985FBA9B6F6041BBD38192) |

| | [10. Long-term Debt](#s2A24F521A33F5D5B843E2F182EFA4DEF) | [61](#s2A24F521A33F5D5B843E2F182EFA4DEF) |

| | [PART IV](#sF22464AEA1125C8FB2932505F7A3B30A) | |

| | [Signatures](#s0C8D26E4327356C8AFAF725581D07E3A) | [91](#s0C8D26E4327356C8AFAF725581D07E3A) |

This Annual Report on Form 10-K and the information we are incorporating by reference contain [removed: statements, other than] statements [removed: of historical fact,] that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as “will,” “expect,” [added: “anticipate,”] “intend,” “may,” “could,” [added: “should,”] “plan,” “project,” “forecast,” “believe,” “estimate,” “outlook,” [removed: “anticipate,”] “trends,” “goals” and similar expressions generally identify these forward-looking statements.

| • | the performance and financial viability of our subcontractors and suppliers and the availability and pricing of raw [removed: materials] [added: materials, chemicals] and components |

| • | natural [removed: and/or environmental] disasters |

| • | products and services we provide related to hazardous and high risk operations, [added: 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 [removed: post-retirement] [added: postretirement] benefit plans and legislative or other regulatory actions impacting our pension, [removed: post-retirement] [added: postretirement] and health and welfare plans |

| • | [removed: the satisfaction of conditions (including regulatory approvals) to and successful consummation of the Orbital ATK Acquisition;] our ability successfully to integrate the Orbital ATK business and realize fully the anticipated benefits of the acquisition, without adverse consequences |

| • | unanticipated changes in our tax provisions or exposure to additional tax [removed: liabilities] [added: liabilities, including qualification of the Alliant Techsystems Inc. spin-off of Vista Outdoor Inc. as a tax-free transaction] |

\-19\-

\-18\-

At December 31, [removed: 2017,] [added: 2018,] we had approximately [removed: 35] [added: 53] million square feet of floor space at [removed: 424] [added: 548] separate locations, primarily in the U.S., for manufacturing, warehousing, research and testing, administration and various other uses.

At December 31, [removed: 2017,] [added: 2018,] we leased to third parties approximately [removed: 220,000] [added: 317,000] square feet of our owned and leased facilities.

At December 31, [removed: 2017,] [added: 2018,] we had major operations at the following locations:

Huntsville, AL; McClellan, Redondo Beach, San Diego, Sunnyvale and Woodland Hills, CA; Aurora and Colorado Springs, CO; Apopka, FL; Rolling Meadows, IL; Annapolis, Annapolis Junction, Elkridge, Halethorpe, Linthicum [added: and Sykesville, MD; Bethpage and Williamsville, NY; Beavercreek and Cincinnati, OH; Salt Lake City, UT; and Chantilly, Charlottesville, Fairfax, McLean and Richmond, VA.]

Sierra Vista, AZ; Warner Robins, GA; Lake Charles, LA; Baltimore, MD; and [removed: Chester and] Herndon, VA.

The following is a summary of our floor space at December 31, [removed: 2017:][added: 2018:]

| Technology Services | | 434 | | | [removed: 2,772] [added: 2,576] | | | [removed: 1] [added: —] | | | [removed: 3,207] [added: 3,010] | |

We maintain our properties in good operating condition and believe [removed: that] the productive capacity of our properties is adequate to meet current contractual requirements and those for the foreseeable future.

\-20\-

Innovation Systems

Chandler, Gilbert, Mesa and Tempe, AZ; Los Angeles and San Diego, CA; Beltsville, Cumberland and Elkton, MD; Eden Prairie, Elk River and Plymouth, MN; Independence, MO; Iuka, MS; Beavercreek, OH; Fort Worth, TX; Brigham City, Clearfield, Magna and Tremonton, UT; Dulles, Radford and Sterling, VA; and Rocket Center, WV.

| Aerospace Systems | | 6,780 | | | 7,146 | | | 3,209 | | | 17,135 | |

| Innovation Systems | | 6,161 | | | 6,165 | | | 5,394 | | | 17,720 | |

| Mission Systems | | 8,584 | | | 5,735 | | | — | | | 14,319 | |

| Corporate | | 614 | | | 485 | | | — | | | 1,099 | |

| Total | | 22,573 | | | 22,107 | | | 8,603 | | | 53,283 | |

\-19\-

and Sykesville, MD; Bethpage and Williamsville, NY; Beavercreek and Cincinnati, OH; Salt Lake City, UT; and Chantilly, Charlottesville, Fairfax, McLean and Richmond, VA.

| Aerospace Systems | | 6,775 | | | 7,164 | | | 2,761 | | | 16,700 | |

| Mission Systems | | 8,783 | | | 5,588 | | | — | | | 14,371 | |

| Corporate | | 657 | | | 444 | | | — | | | 1,101 | |

| Total | | 16,649 | | | 15,968 | | | 2,762 | | | 35,379 | |

\-21\-

\-20\-

We have 800,000,000 shares authorized at a $1 par value per share, of which [removed: 174,085,619] [added: 170,607,336] shares and [removed: 175,068,263] [added: 174,085,619] shares were issued and outstanding as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] respectively.

We have 10,000,000 shares authorized at a $1 par value per share, of which no shares were issued and outstanding as of December 31, [removed: 2017] [added: 2018] and [removed: 2016.][added: 2017.]

[removed: DIVIDENDS AND] MARKET INFORMATION

The approximate number of common stockholders was [removed: 23,420] [added: 22,385] as of January [removed: 25, 2018.][added: 28, 2019.]

[removed: We had no] [added: The table below summarizes our] repurchases of common stock during the three months ended December 31, [removed: 2017.][added: 2018:]

[removed: The approximate dollar value] [added: | Period | Total Number] of [removed: shares that may yet be purchased] [added: Shares Purchased | | | Average Price Paid per Share(1) | | | | Total Number of Shares Purchased] as [removed: part] [added: Part] of [removed: the company’s publicly announced plans] [added: Publicly Announced Plans] or [removed: programs is $2.3 billion as] [added: Programs | | | Approximate Dollar Value] of [removed: December 31, 2017.][added: Shares that May Yet Be Purchased under the Plans or Programs ($ in millions)(2) | | | |]

[removed: ][added: ]

| • | Assumes $100 invested at the close of business on December 31, [removed: 2012,] [added: 2013,] in Northrop Grumman Corporation common stock, Standard & Poor’s (S&P) 500 Index and the S&P Aerospace & Defense Index. |

| • | The S&P Aerospace & Defense Index is comprised of Arconic, Inc., The Boeing Company, General Dynamics Corporation, Harris Corporation, [added: Huntington Ingalls Industries Inc.,] L3 Technologies, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Company, [removed: Rockwell Collins, Inc.,] Textron, Inc., TransDigm Group and United Technologies Corporation. |

| | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | |

| September 29, 2018 - October 26, 2018 | 163,268 | | | $ | 302.39 | | | 163,268 | | | | $ | 2,084 | |

| October 27, 2018 - November 23, 2018(3) | 2,964,720 | | | 269.84 | | | | 2,964,720 | | | | 1,284 | | |

| November 24, 2018 - December 31, 2018 | — | | | — | | | | — | | | | 4,284 | | |

| Total | 3,127,988 | | | $ | 271.54 | | | 3,127,988 | | | | $ | 4,284 | |

| (1) | Includes commissions paid. |

| (2) | The value remaining on December 31, 2018 includes an additional $3.0 billion share repurchase authorization approved by the company’s board of directors on December 4, 2018. |

| (3) | The company entered into an accelerated share repurchase agreement with Goldman Sachs & Co. LLC to repurchase $1.0 billion of the company’s common stock and received an initial delivery of shares representing approximately 80 percent of the share repurchase agreement. |

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.

| | |

| --- | --- |

| | |

| --- | --- |

| | |

| --- | --- |

\-23\-

The following table sets forth, for the periods indicated, quarterly dividends declared per common share and the intraday low and high prices of our common stock as reported in the consolidated reporting system for the New York Stock Exchange Composite Transactions.

| | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | |

| | | Dividends per common share | | | | | | | | Stock prices (Low - High) | | |

| | | 2017 | | | | 2016 | | | | 2017 | | 2016 |

| First Quarter | | $ | 0.90 | | | $ | 0.80 | | | $223.88 - $249.43 | | $175.00 - $200.78 |

| Second Quarter | | | 1.00 | | | | 0.90 | | | 235.16 - 262.59 | | 198.75 - 223.42 |

| Third Quarter | | | 1.00 | | | | 0.90 | | | 256.65 - 287.81 | | 206.69 - 224.12 |

| Fourth Quarter | | | 1.00 | | | | 0.90 | | | 287.22 - 311.15 | | 212.02 - 253.80 |

| Total | | $ | 3.90 | | | $ | 3.50 | | | $223.88 - $311.15 | | $175.00 - $253.80 |

The company retires its common stock upon repurchase.

\-21\-

| $ in millions, except per share amounts | | [removed: 2017] [added: 2018(5)] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015(3)] | | | | [removed: 2013] [added: 2014(3)] | | |

| Cash dividends declared per common share | | [removed: 3.90] [added: 4.70] | | | | [removed: 3.50] [added: 3.90] | | | | [removed: 3.10] [added: 3.50] | | | | [removed: 2.71] [added: 3.10] | | | | [removed: 2.38] [added: 2.71] | | |

| Total assets | | $ | [removed: 34,917] [added: 37,653] | | | $ | [removed: 25,614] [added: 35,128] | | | $ | [removed: 24,424] [added: 25,815] | | | $ | [removed: 26,545] [added: 24,424] | | | $ | [removed: 26,351] [added: 26,545] | |

| Notes payable to banks and long-term debt | | [removed: 15,266] [added: 14,400] | | | | [removed: 7,070] [added: 15,266] | | | | [removed: 6,496] [added: 7,070] | | | | [removed: 5,901] [added: 6,496] | | | | [removed: 5,900] [added: 5,901] | | |

| Other long-term [removed: obligations(3)] [added: obligations(1)] | | [removed: 6,505] [added: 7,309] | | | | [removed: 7,667] [added: 6,505] | | | | [removed: 7,059] [added: 7,667] | | | | [removed: 7,520] [added: 7,059] | | | | [removed: 4,018] [added: 7,520] | | |

| Net cash provided by operating activities | | $ | [removed: 2,613] [added: 3,827] | | | $ | [removed: 2,813] [added: 2,613] | | | $ | [removed: 2,162] [added: 2,813] | | | $ | [removed: 2,593] [added: 2,162] | | | $ | [removed: 2,483] [added: 2,593] | |

| Free cash [removed: flow(4)] [added: flow(2)] | | [removed: 1,685] [added: 2,578] | | | | [removed: 1,893] [added: 1,685] | | | | [removed: 1,691] [added: 1,893] | | | | [removed: 2,032] [added: 1,691] | | | | [removed: 2,119] [added: 2,032] | | |

| Company-sponsored research and development expenses | | $ | [removed: 639] [added: 764] | | | $ | [removed: 705] [added: 639] | | | $ | [removed: 712] [added: 705] | | | $ | [removed: 569] [added: 712] | | | $ | [removed: 507] [added: 569] | |

| Total [removed: backlog] [added: backlog(4)] | | [removed: 42,878] [added: 53,500] | | | | [removed: 45,339] [added: 42,629] | | | | [removed: 35,923] [added: 45,339] | | | | [removed: 38,199] [added: 35,923] | | | | [removed: 37,033] [added: 38,199] | | |

| Square footage at year-end (in thousands) | | [removed: 35,379] [added: 53,283] | | | | [removed: 34,112] [added: 35,379] | | | | [removed: 34,392] [added: 34,112] | | | | [removed: 34,264] [added: 34,392] | | | | [removed: 34,500] [added: 34,264] | | |

| Number of employees at year-end | | [removed: 70,000] [added: 85,000] | | | | [removed: 67,000] [added: 70,000] | | | | [removed: 65,000] [added: 67,000] | | | | [removed: 64,300] [added: 65,000] | | | | [removed: 65,300] [added: 64,300] | | |

| [removed: (3)] [added: (1)] | Other long-term obligations include pension and [removed: other post-retirement benefit] [added: OPB] plan liabilities, [removed: deferred compensation,] unrecognized tax benefits, [added: deferred compensation,] environmental [added: liabilities, deferred tax] liabilities and other long-term obligations. |

| [removed: (4)] [added: (2)] | Free cash flow is a non-GAAP measure defined as net cash provided by operating activities less capital expenditures, and may not be defined and calculated by other companies in the same manner. We use free cash flow as a key factor in our planning for, and consideration of, acquisitions, [removed: stock repurchases, and] the payment of [removed: dividends.] [added: dividends and share repurchases.] This [added: 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 accounting principles generally accepted in the United States of America (“GAAP” or “FAS”). See “Liquidity and Capital Resources” – “Free Cash Flow” in Management’s Discussion and Analysis of Financial Conditions and Results of Operations (MD&A) for more information on this measure, including a reconciliation of free cash flow to net cash provided by operating activities. |

Selected financial data below reflects the retrospective effects from the January 1, 2018 adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and Accounting Standards Update (ASU) No. 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost and the fourth quarter 2018 change in accounting method related to the recognition of actuarial gains and losses for our pension and OPB plans (see Notes 1, 13, 16, 17 and 18 to the consolidated financial statements for further information on these changes).

| Sales | | $ | 30,095 | | | $ | 26,004 | | | $ | 24,706 | | | $ | 23,526 | | | $ | 23,979 | |

| Operating income | | 3,780 | | | | 3,218 | | | | 3,277 | | | | 2,984 | | | | 3,069 | | |

| Net earnings (loss) | | 3,229 | | | | 2,869 | | | | 2,043 | | | | 2,119 | | | | (233 | | ) |

| Basic earnings per share | | $ | 18.59 | | | $ | 16.45 | | | $ | 11.42 | | | $ | 11.19 | | | $ | (1.12 | ) |

| Diluted earnings per share | | 18.49 | | | | 16.34 | | | | 11.32 | | | | 11.06 | | | | (1.12 | | ) |

| (3) | Years prior to 2016 do not reflect the effects from our January 1, 2018 adoption of ASC Topic 606. |

| (4) | We applied the ASC Topic 606 transition practical expedient related to remaining performance obligations for reporting periods presented before the date of initial application. As such, years prior to 2017 have not been restated for the adoption of ASC Topic 606. For comparative purposes, we have recast our backlog as of December 31, 2017 to reflect the impact of ASC Topic 606. |

| | |

| --- | --- |

| (5) | Selected financial data includes the operating results of Innovation Systems subsequent to the Merger date. |

\-24\-

| Sales | | | | | | | | | | | | | | | | | | | | |

| U.S. Government(1) | | $ | 21,837 | | | $ | 20,573 | | | $ | 19,458 | | | $ | 20,085 | | | $ | 21,278 | |

| International(2) | | 3,302 | | | | 3,205 | | | | 3,339 | | | | 3,045 | | | | 2,493 | | |

| Other Customers | | 664 | | | | 730 | | | | 729 | | | | 849 | | | | 890 | | |

| Total sales | | 25,803 | | | | 24,508 | | | | 23,526 | | | | 23,979 | | | | 24,661 | | |

| Operating income | | 3,299 | | | | 3,193 | | | | 3,076 | | | | 3,196 | | | | 3,123 | | |

| Net earnings | | 2,015 | | | | 2,200 | | | | 1,990 | | | | 2,069 | | | | 1,952 | | |

| Basic earnings per share | | $ | 11.55 | | | $ | 12.30 | | | $ | 10.51 | | | $ | 9.91 | | | $ | 8.50 | |

| Diluted earnings per share | | 11.47 | | | | 12.19 | | | | 10.39 | | | | 9.75 | | | | 8.35 | | |

| (1) | Sales to the United States (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, direct sales with governments outside the U.S. and commercial sales outside the U.S. |

\-23\-

We have audited the accompanying consolidated statements of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] and the related consolidated statements of earnings and comprehensive [removed: income (loss),] [added: income,] changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, [removed: 2017,] [added: 2018,] and the related notes (collectively referred to as the “financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] and the results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2017,] [added: 2018,] in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January [removed: 29, 2018] [added: 30, 2019] expressed an unqualified opinion on the Company’s internal control over financial [removed: reporting.][added: reporting, which excludes Northrop Grumman Innovation Systems.]

| $ in millions, except per share amounts | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Total sales | [removed: |] 25,803 | | | | [removed: 24,508] [added: 201] | | | | [removed: 23,526] [added: —] | | | [added: | — | | | | 26,004 | | |]

| Service | [removed: |] 7,578 | | | | [removed: 7,729] [added: (42] | | [added: )] | | [removed: 7,551] [added: (12] | | [added: )] | [added: | 23 | | | | 7,547 | | |]

| General and administrative expenses | [removed: |] 2,655 | | | | [removed: 2,584] [added: 57] | | | | [removed: 2,566] [added: —] | | | [added: | — | | | | 2,712 | | |]

| Operating income | [removed: |] 3,299 | | | | [removed: 3,193] [added: (53] | | [added: )] | | [removed: 3,076] [added: 30] | | | [added: | (58 | | ) | | 3,218 | | |]

| Interest expense | | [removed: (360] [added: (562] | | ) | | [removed: (301] [added: (360] | | ) | | (301 | | ) |

| Other, net | [removed: |] 110 | | | | [removed: 31] [added: —] | | | | [removed: 15] [added: 14] | | | [added: | 12 | | | | 136 | | |]

| Earnings before income taxes | [removed: |] 3,049 | | | | [removed: 2,923] [added: (53] | | [added: )] | | [removed: 2,790] [added: —] | | | [added: | 1,233 | | | | 4,229 | | |]

| Federal and foreign income tax expense [added: (benefit)] | [added: 723] | [removed: 1,034] | | | [added: (24] | [removed: 723] | [added: )] | | [added: —] | [removed: 800] | | | [added: (61 | | ) | | 638 | | |]

| Net earnings | [removed: |] $ | 2,015 | | | $ | [removed: 2,200] [added: (20] | [added: )] | | $ | [removed: 1,990] [added: —] | | [added: | $ | 874 | | | $ | 2,869 | |]

| Basic earnings per share | [removed: |] $ | 11.55 | | | $ | [removed: 12.30] [added: (0.11] | [added: )] | | $ | [removed: 10.51] [added: —] | | [added: | $ | 5.01 | | | $ | 16.45 | |]

| Weighted-average common shares outstanding, in millions | | [removed: 174.4] [added: 173.7] | | | | [removed: 178.9] [added: 174.4] | | | | [removed: 189.4] [added: 178.9] | | |

| Diluted earnings per share | [removed: |] $ | 11.47 | | | $ | [removed: 12.19] [added: (0.11] | [added: )] | | $ | [removed: 10.39] [added: —] | | [added: | $ | 4.98 | | | $ | 16.34 | |]

| Weighted-average diluted shares outstanding, in millions | | [removed: 175.6] [added: 174.6] | | | | [removed: 180.5] [added: 175.6] | | | | [removed: 191.6] [added: 180.5] | | |

| Net earnings (from above) | [removed: |] $ | 2,015 | | | $ | [removed: 2,200] [added: (20] | [added: )] | | $ | [removed: 1,990] [added: —] | | [added: | $ | 874 | | | $ | 2,869 | |]

| Other comprehensive income (loss) | | | | | | | | | | | | | [added: | | | | | | |]

| Change in unamortized benefit plan costs, net of tax [removed: (expense) benefit] [added: expense] of [removed: ($383) in 2017, $89 in 2016 and ($45) in 2015 |] [added: $35] | 830 | | | | [removed: (175] [added: —] | | [added: | | — | | | | (874 | |] ) | | [removed: 75] [added: (44] | | [added: )] |

| Change in cumulative translation adjustment | | [removed: (4] [added: (8] | | ) | | [removed: (50] [added: (4] | | ) | | [removed: (41] [added: (50] | | ) |

| Other, net | | [removed: 2] [added: (6] | | [added: )] | | [removed: (1] [added: 2] | | [removed: )] | | [removed: 2] [added: (1] | | [added: )] |

| Other comprehensive income (loss), net of tax | [removed: |] 828 | | | | [removed: (226] [added: —] | | [added: | | — | | | | (874 | |] ) | | [removed: 36] [added: (46] | | [added: )] |

| Comprehensive income | [removed: |] $ | 2,843 | | | $ | [removed: 1,974] [added: (20] | [added: )] | | $ | [removed: 2,026] [added: —] | | [added: | $ | — | | | $ | 2,823 | |]

| $ in millions | | [added: 2018 | | | |] 2017 | | | | 2016 | | |

| Cash and cash equivalents | [removed: |] $ | 11,225 | | | $ | [removed: 2,541] [added: —] | | [added: | $ | — | | | $ | 11,225 | |]

| Accounts receivable, net | [added: 55] | [removed: 3,976] | | | [added: (9] | [removed: 3,299] | [added: )] | | [added: — | | | | 46 | | |]

| Inventoried costs, net | | [removed: 780] [added: (37] | | [added: )] | | [removed: 816] [added: 25] | | | [added: | (53 | | ) |]

| Prepaid expenses and other current assets | [removed: |] 368 | | | | [removed: 200] [added: 77] | | | [added: | — | | | | 445 | | |]

| Total current assets | [removed: |] 16,349 | | | | [removed: 6,856] [added: 238] | | | [added: | — | | | | 16,587 | | |]

| Property, plant and equipment, net of accumulated depreciation of $5,066 for 2017 [removed: and $4,831 for 2016] | [removed: |] 4,225 | | | | [removed: 3,588] [added: —] | | | [added: | — | | | | 4,225 | | |]

| Goodwill | [removed: |] 12,455 | | | | [removed: 12,450] [added: —] | | | [added: | — | | | | 12,455 | | |]

| Deferred tax assets | [removed: |] 475 | | | | [removed: 1,462] [added: (28] | | [added: )] | [added: | — | | | | 447 | | |]

| Other non-current assets | | [removed: 1,413 | | | | 1,258] [added: 151] | | |

| Total assets | [removed: |] $ | 34,917 | | | $ | [removed: 25,614] [added: 211] | | [added: | $ | — | | | $ | 35,128 | |]

| Trade accounts payable | [removed: |] $ | 1,661 | | | $ | [removed: 1,554] [added: —] | | [added: | — | | | | $ | 1,661 | |]

| Accrued employee compensation | [removed: |] 1,382 | | | | [removed: 1,342] [added: —] | | | [added: | — | | | | 1,382 | | |]

| Advance payments and amounts in excess of costs incurred | [removed: |] 1,617 | | | | [removed: 1,471] [added: 144] | | | [added: | — | | | | 1,761 | | |]

| Other current liabilities | [removed: |] 2,305 | | | | [removed: 1,263] [added: (17] | | [added: )] | [added: | — | | | | 2,288 | | |]

| Total current liabilities | [removed: |] 6,965 | | | | [removed: 5,630] [added: 127] | | | [added: | — | | | | 7,092 | | |]

Change in Accounting Principles

As discussed in Note 1 to the consolidated financial statements, the Company elected during 2018 to change its method of accounting for recognizing pension and other postretirement benefit plans actuarial gains and losses.

Also discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers due to the adoption of the new revenue standard during 2018.

The Company adopted both changes using the full retrospective approach.

| | January 30, 2019 |

| Product | | $ | 20,469 | | | $ | 16,364 | | | $ | 15,080 | |

| Service | | 9,626 | | | | 9,640 | | | | 9,626 | | |

| Product | | 15,785 | | | | 12,527 | | | | 11,197 | | |

| Service | | 7,519 | | | | 7,547 | | | | 7,600 | | |

| General and administrative expenses | | 3,011 | | | | 2,712 | | | | 2,632 | | |

| Operating income | | 3,780 | | | | 3,218 | | | | 3,277 | | |

| Net FAS (non-service) pension benefit | | 1,049 | | | | 699 | | | | 611 | | |

| Mark-to-market pension and OPB (expense) benefit | | (655 | | ) | | 536 | | | | (950 | | ) |

| Earnings before income taxes | | 3,742 | | | | 4,229 | | | | 2,681 | | |

| Federal and foreign income tax expense | | 513 | | | | 1,360 | | | | 638 | | |

| Net earnings | | $ | 3,229 | | | $ | 2,869 | | | $ | 2,043 | |

| Net earnings (from above) | | $ | 3,229 | | | $ | 2,869 | | | $ | 2,043 | |

| Other comprehensive loss | | | | | | | | | | | | |

| Change in unamortized prior service credit, net of tax expense of $19 in 2018, $35 in 2017 and $20 in 2016 | | (60 | | ) | | (44 | | ) | | (62 | | ) |

| Other comprehensive loss, net of tax | | (74 | | ) | | (46 | | ) | | (113 | | ) |

| Comprehensive income | | $ | 3,155 | | | $ | 2,823 | | | $ | 1,930 | |

| $ in millions, except par value | | 2018 | | | | 2017 | | |

| Cash and cash equivalents | | $ | 1,579 | | | $ | 11,225 | |

| Accounts receivable, net | | 1,448 | | | | 1,054 | | |

| Unbilled receivables, net | | 5,026 | | | | 3,465 | | |

| Inventoried costs, net | | 654 | | | | 398 | | |

| Prepaid expenses and other current assets | | 973 | | | | 445 | | |

| Total current assets | | 9,680 | | | | 16,587 | | |

| Property, plant and equipment, net of accumulated depreciation of $5,369 for 2018 and $5,066 for 2017 | | 6,372 | | | | 4,225 | | |

| Goodwill | | 18,672 | | | | 12,455 | | |

| Intangible assets, net | | 1,372 | | | | 52 | | |

| Other non-current assets | | 1,463 | | | | 1,362 | | |

| Total assets | | $ | 37,653 | | | $ | 35,128 | |

| Trade accounts payable | | $ | 2,182 | | | $ | 1,661 | |

| Accrued employee compensation | | 1,676 | | | | 1,382 | | |

| Advance payments and amounts in excess of costs incurred | | 1,917 | | | | 1,761 | | |

| Other current liabilities | | 2,499 | | | | 2,288 | | |

| Total current liabilities | | 8,274 | | | | 7,092 | | |

| Long-term debt, net of current portion of $517 for 2018 and $867 for 2017 | | 13,883 | | | | 14,399 | | |

| Pension and OPB plan liabilities | | 5,755 | | | | 5,511 | | |

| | January 29, 2018 |

\-41\-

| Product | | $ | 16,038 | | | $ | 14,738 | | | $ | 13,966 | |

| Service | | 9,765 | | | | 9,770 | | | | 9,560 | | |

| Product | | 12,271 | | | | 11,002 | | | | 10,333 | | |

\-42\-

| Beginning of year | | 10,630 | | | | 10,661 | | | | 12,392 | | |

In accounting for these contracts, we utilize either the cost-to-cost method or the units-of-delivery method of percentage-of-completion accounting, with cost-to-cost being the predominant method.

Generally, sales under cost-reimbursement contracts and construction-type contracts that provide for deliveries at lower volume rates are accounted for using the cost-to-cost method.

Under this method, sales, including estimated profits, are recorded as costs are incurred.

Generally, sales under contracts that provide for deliveries at higher volume rates are accounted for using the units-of-delivery method.

Under this method, cost and sales are recognized as units are delivered to the customer.

Further, as contracts are performed, change orders can be a regular occurrence and may be un-priced until negotiated with the customer.

Un-priced change orders, contract claims (including change orders unapproved as to both scope and price) and REAs are included in estimated contract sales when management believes it is probable the un-priced change order, claim and/or REA will result in additional contract revenue and the amount can be reliably estimated considering the facts and circumstances known to us at the time.

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

| Net earnings(1) | 236 | | | | 321 | | | | 377 | | |

Sales by Customer Category - The following table presents sales by customer category:

| | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | | | | |

| U.S. Government(1) | | $ | 21,837 | | 85 | % | | $ | 20,573 | | 84 | % | | $ | 19,458 | | 83 | % |

| International(2) | | 3,302 | | | 13 | % | | 3,205 | | | 13 | % | | 3,339 | | | 14 | % |

| Other Customers | | 664 | | | 2 | % | | 730 | | | 3 | % | | 729 | | | 3 | % |

for financial reporting purposes.

For available-for-sale securities, changes in unrealized gains and losses are reported as a component of other comprehensive income.

Accounts receivable include amounts billed and currently due from customers, as well as amounts currently due but unbilled (primarily related to costs incurred on contracts accounted for under the cost-to-cost method).

Accounts receivable also include certain estimated amounts for un-priced change orders, contract claims and/or REAs in negotiation that are probable of recovery and amounts retained by the customer pending contract completion.

Inventoried costs primarily relate to work in process on contracts accounted for under the units-of-delivery method.

These costs represent accumulated contract costs less the portion of such costs allocated to delivered items.

Accumulated contract costs in unbilled accounts receivable and inventoried costs include manufacturing, engineering and design labor, subcontractor, material, overhead and, for government contracts, allowable G&A costs.

According to the provisions of U.S. Government contracts, the customer asserts title to, or a security interest in, inventories related to such contracts as a result of contract advances, performance-based payments, and/or progress payments.

Payments received in excess of unbilled accounts receivable and inventoried costs on a contract by contract basis are recorded as advance payments and amounts in excess of costs incurred in the consolidated statements of financial position.

The company charges goodwill impairment, as well as the amortization of other purchased intangible assets, against the respective segment’s operating income.

Unamortized benefit plan costs consist primarily of accumulated net after-tax actuarial losses.

For GAAP reporting, net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they exceed the accounting corridor.

The accounting corridor is a defined range within which amortization of net gains and losses is not required and is equal to 10 percent of the greater of plan assets or benefit obligations.

For most of the company’s plans, gains or losses outside of the corridor are subject to amortization over the average future service period of active plan participants (approximately eight years).

For plans where all or almost all plan participants are inactive, gains or losses outside of the corridor are generally subject to amortization over the average remaining life expectancy of plan participants (approximately 20 years).

Our principal executive officer [removed: (Chairman and Chief] [added: (Chief] Executive [removed: Officer)] [added: Officer] and [added: 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 December 31, [removed: 2017,] [added: 2018,] 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 Securities and Exchange Commission’s rules and forms.

[removed: During] [added: Other than integrating such controls, during] the three months ended December 31, [removed: 2017,] [added: 2018,] no change occurred in our internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, our internal [removed: controls] [added: control] over financial reporting.

As previously discussed, we completed our acquisition of Orbital ATK during the second quarter of 2018 (see Note 2 to the consolidated financial statements).

We are in the process of integrating certain controls and related procedures for legacy Orbital ATK with those of legacy Northrop Grumman.

Based on its assessment, management has concluded that the company’s internal control over financial reporting was effective as of December 31, [removed: 2017.][added: 2018.]

Deloitte & Touche LLP issued an attestation report dated January [removed: 29, 2018,] [added: 30, 2019,] concerning the company’s internal control over financial reporting, which is contained in this Annual Report.

The company’s consolidated financial statements as of and for the year ended December 31, [removed: 2017,] [added: 2018,] have been audited by the independent registered public accounting firm of Deloitte & Touche LLP in accordance with the standards of the Public Company Accounting Oversight Board (United States).

[removed: Chairman and] Chief Executive Officer [added: and President]

We have audited the internal control over financial reporting of Northrop Grumman Corporation and subsidiaries (the “Company”) as of December 31, [removed: 2017,] [added: 2018,] based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, [removed: 2017] [added: 2018] of the Company and our report dated January [removed: 29, 2018] [added: 30, 2019] expressed an unqualified opinion on those financial [removed: statements.][added: statements and included an explanatory paragraph concerning the Company’s election during 2018 to change its method of accounting for recognizing pension and other postretirement benefit plans actuarial gains and losses as well as the change in the manner in which it accounts for revenue from contracts with customers due to the adoption of the new revenue standard during 2018.]

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become [removed: inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.]

\-93\-

In accordance with SEC rules, management elected to exclude Orbital ATK, acquired on June 6, 2018, from its assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2018.

Orbital ATK, which subsequently became Northrop Grumman Innovation Systems, represents approximately 10 percent of the company’s consolidated total assets, excluding the preliminary value of goodwill and purchased intangible assets, as of December 31, 2018 and 10 percent and 10 percent of the company’s consolidated sales and operating income, respectively, for the year ended December 31, 2018.

/s/ Kathy J.

Warden

January 30, 2019

\-94\-

As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Orbital ATK, Inc., which was acquired by the Company on June 6, 2018 and subsequently became Northrop Grumman Innovation Systems, and whose financial statements represent approximately 10 percent of the Company’s consolidated total assets, excluding the preliminary value of goodwill and purchased intangible assets, as of December 31, 2018, and 10 percent and 10 percent of the Company’s consolidated sales and operating income, respectively, for the year ended December 31, 2018.

Accordingly, our audit did not include the internal control over financial reporting at Northrop Grumman Innovation Systems.

\-95\-

inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

January 30, 2019

\-96\-

\-76\-

/s/ Wesley G.

Bush

January 29, 2018

\-77\-

January 29, 2018

\-78\-

Information about our Directors will be incorporated herein by reference to the Proxy Statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission (SEC) within 120 days after the end of the company’s fiscal year.

Our executive officers as of January [removed: 29, 2018,] [added: 30, 2019,] are listed below, along with their ages on that date, positions and offices held with the company, and principal occupations and employment, focused primarily on the past five years.

| Wesley G. Bush | | [removed: 56] [added: 57] | | | Chairman [removed: and Chief Executive Officer] | | [removed: 2011] [added: 2019] | | [added: Chairman and Chief Executive Officer (2018);] Chairman, Chief Executive Officer and President (2011-2017) |

| Patrick M. Antkowiak | | [removed: 57] [added: 58] | | | Corporate Vice President and Chief [added: Strategy and] Technology Officer | | [removed: 2014] [added: 2019] | | [added: Corporate] Vice President and [added: Chief Technology Officer (2014-2019);Vice President and] General Manager, Advanced Concepts and Technologies Division, Former Electronic Systems Sector (2010-2014) |