Item 1. Financial Statements

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Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30				Nine Months Ended September 30
$ in millions, except per share amounts	2021		2020		2021		2020
Sales
Product	$	6,845	$	6,667	$	21,060	$	19,325
Service	1,875		2,416		5,968		7,262
Total sales	8,720		9,083		27,028		26,587
Operating costs and expenses
Product	5,352		5,346		16,662		15,425
Service	1,434		1,897		4,649		5,774
General and administrative expenses	891		855		2,788		2,475
Total operating costs and expenses	7,677		8,098		24,099		23,674
Gain on sale of business	—		—		1,980		—
Operating income	1,043		985		4,909		2,913
Other (expense) income
Interest expense	(132)		(154)		(423)		(433)
Non-operating FAS pension benefit	367		302		1,101		907

Other, net	(3)		34		6		36
Earnings before income taxes	1,275		1,167		5,593		3,423
Federal and foreign income tax expense	212		181		1,298		564
Net earnings	$	1,063	$	986	$	4,295	$	2,859

Basic earnings per share	$	6.65	$	5.91	$	26.63	$	17.11
Weighted-average common shares outstanding, in millions	159.8		166.8		161.3		167.1
Diluted earnings per share	$	6.63	$	5.89	$	26.55	$	17.05
Weighted-average diluted shares outstanding, in millions	160.4		167.3		161.8		167.7

Net earnings (from above)	$	1,063	$	986	$	4,295	$	2,859
Other comprehensive loss
Change in unamortized prior service credit, net of tax	(2)		(10)		(6)		(31)
Change in cumulative translation adjustment and other, net	(6)		6		(6)		7
Other comprehensive loss, net of tax	(8)		(4)		(12)		(24)
Comprehensive income	$	1,055	$	982	$	4,283	$	2,835

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

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CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)


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

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

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

Commitments and contingencies (Note 6)

Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2021—158,761,485 and 2020—166,717,179	159		167
Paid-in capital	—		58
Retained earnings	11,398		10,482
Accumulated other comprehensive loss	(140)		(128)
Total shareholders’ equity	11,417		10,579
Total liabilities and shareholders’ equity	$	42,346	$	44,469

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30
$ in millions	2021		2020
Operating activities
Net earnings	$	4,295	$	2,859
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization	908		922

Stock-based compensation	71		61
Deferred income taxes	(105)		369
Gain on sale of business	(1,980)		—
Net periodic pension and OPB income	(818)		(612)
Pension and OPB contributions	(108)		(100)
Changes in assets and liabilities:
Accounts receivable, net	(133)		(632)
Unbilled receivables, net	(596)		(386)
Inventoried costs, net	(113)		(70)
Prepaid expenses and other assets	6		(122)
Accounts payable and other liabilities	49		283
Income taxes payable, net	663		111

Other, net	(14)		20
Net cash provided by operating activities	2,125		2,703

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

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

Common stock repurchases	(2,724)		(490)
Cash dividends paid	(737)		(711)
Payments of employee taxes withheld from share-based awards	(33)		(66)
Other, net	(46)		(57)
Net cash (used in) provided by financing activities	(5,776)		875
(Decrease) increase in cash and cash equivalents	(852)		2,750
Cash and cash equivalents, beginning of year	4,907		2,245
Cash and cash equivalents, end of period	$	4,055	$	4,995

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

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


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

End of period	159		167		159		167
Paid-in capital
Beginning of period	—		10		58		—
Common stock repurchased	—		—		(60)		—
Stock compensation	—		23		2		33
Other	—		(6)		—		(6)
End of period	—		27		—		27
Retained earnings
Beginning of period	11,144		9,652		10,482		8,748
Common stock repurchased	(587)		—		(2,676)		(479)
Net earnings	1,063		986		4,295		2,859
Dividends declared	(252)		(244)		(741)		(709)
Stock compensation	30		—		38		(36)
Other	—		—		—		11
End of period	11,398		10,394		11,398		10,394
Accumulated other comprehensive loss
Beginning of period	(132)		(117)		(128)		(97)
Other comprehensive loss, net of tax	(8)		(4)		(12)		(24)
End of period	(140)		(121)		(140)		(121)
Total shareholders’ equity	$	11,417	$	10,467	$	11,417	$	10,467
Cash dividends declared per share	$	1.57	$	1.45	$	4.59	$	4.22

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

Principles of Consolidation and Reporting

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

Effective January 30, 2021 (the “Divestiture date”), we completed the previously announced sale of our IT and mission support services business (the “IT services divestiture”) for $3.4 billion in cash and recorded a pre-tax gain on sale of $2.0 billion. The IT and mission support services business was comprised of the majority of the Information Solutions and Services (IS&S) division of Defense Systems (excluding our Vinnell Arabia business); select cyber, intelligence and missions support programs, which were part of the Cyber and Intelligence Mission Solutions (CIMS) division of Mission Systems; and the Space Technical Services business unit of Space Systems. The assets and liabilities of the IT and mission support services business were classified as held for sale in the consolidated statement of financial position as of December 31, 2020. Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture date. Sales for the IT and mission support services business were $162 million for the nine months ended September 30, 2021 and $602 million and $1.7 billion for the three and nine months ended September 30, 2020, respectively. Pre-tax profit was $20 million for the nine months ended September 30, 2021, and $69 million and $180 million for the three and nine months ended September 30, 2020, respectively.

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

The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the information contained in the company’s 2020 Annual Report on Form 10-K. During the first quarter of 2021, we changed the naming convention for our FAS/CAS pension accounts. The Net FAS (service)/CAS pension adjustment is now referred to as the FAS/CAS operating adjustment and the FAS (non-service) pension benefit is now referred to as the Non-operating FAS pension benefit. This change does not impact any current or previously reported amounts. During the second quarter of 2021, we changed the presentation of the retiree benefits components in the operating cash flow section of the Unaudited condensed consolidated statement of cash flows. Prior period amounts have been conformed to current period presentation and this change does not impact previously reported cash provided by operating activities.

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

Accounting Estimates

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

Revenue Recognition

The majority of our sales are derived from long-term contracts with the U.S. government for the development or production of goods, the provision of services, or a combination of both. We recognize revenue as control is transferred to the customer, either over time or at a point in time. For most of our contracts, control is effectively transferred during the period of performance, so we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion). The company believes this represents the most

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

Contract Estimates

Use of the cost-to-cost method requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. The company estimates profit on these contracts as the difference between total estimated sales and total estimated cost at completion and recognizes that profit as costs are incurred. Significant judgment is used to estimate total sales and cost at completion.

Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), contract claims and requests for equitable adjustment (REAs). Variable consideration is included in total estimated sales to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate variable consideration as the most likely amount to which we expect to be entitled.

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

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


	Three Months Ended September 30				Nine Months Ended September 30
$ in millions, except per share data	2021		2020		2021		2020
Revenue	$	116	$	124	$	478	$	385
Operating income	109		123		453		359
Net earnings(1)	86		97		358		284
Diluted earnings per share(1)	0.54		0.58		2.21		1.69

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

EAC adjustments on a single performance obligation can have a material effect on the company’s financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. During the third quarter of 2021, we recorded a $42 million unfavorable EAC adjustment on the F-35 program at Aeronautics Systems due to labor-related production inefficiencies largely driven by COVID-19-related impacts on the labor market and employee leave. No such adjustments were material to the financial statements during the three months ended September 30, 2020.

Backlog

Backlog represents the future sales we expect to recognize on firm orders received by the company and is equivalent to the company’s remaining performance obligations at the end of each period. It comprises both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time an option or IDIQ task order is exercised or awarded.

Company backlog as of September 30, 2021 was $74.8 billion. Of our September 30, 2021 backlog, we expect to recognize approximately 40 percent as revenue over the next 12 months and 60 percent as revenue over the next 24 months, with the remainder to be recognized thereafter.

Contract Assets and Liabilities

For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position. The amount of revenue recognized for the three and nine months ended September 30, 2021 that was included in the December 31, 2020

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

Disaggregation of Revenue

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

Property, Plant, and Equipment

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

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

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:


$ in millions	September 30, 2021		December 31, 2020
Unamortized prior service credit, net of tax expense of $1 for 2021 and $3 for 2020	$	4	$	10
Cumulative translation adjustment and other, net	(144)		(138)
Total accumulated other comprehensive loss	$	(140)	$	(128)

Related Party Transactions

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

Accounting Standards Updates

Accounting standards updates adopted and/or issued, but not effective until after September 30, 2021, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.

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

Basic Earnings Per Share

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

Diluted Earnings Per Share

Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled 0.6 million shares and 0.5 million shares for the three and nine months ended September 30, 2021, respectively. The dilutive effect of these securities totaled 0.5 million shares and 0.6 million shares for the three and nine months ended September 30, 2020, respectively.

Share Repurchases

On September 16, 2015, the company’s board of directors authorized a share repurchase program of up to $4.0 billion of the company’s common stock (the “2015 Repurchase Program”). On December 4, 2018, the company’s board of directors authorized a share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the “2018 Repurchase Program”). Repurchases under the 2015 Repurchase Program commenced in March 2016 and were completed in March 2020 at which time repurchases under the 2018 Repurchase Program commenced. As of September 30, 2021, repurchases under the 2018 Repurchase Program totaled $2.9 billion; $0.1 billion remained under this share repurchase authorization. By its terms, the 2018 Repurchase Program is set to expire when we have used all authorized funds for repurchases.

On January 25, 2021, the company’s board of directors authorized a new share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the “2021 Repurchase Program”). By its terms, repurchases under the 2021 Repurchase Program will commence upon completion of the 2018 Repurchase Program and will expire when we have used all authorized funds for repurchases.

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During the first quarter of 2021, the company entered into an accelerated share repurchase (ASR) agreement with Goldman Sachs & Co. LLC (Goldman Sachs) to repurchase $2.0 billion of the company’s common stock as part of the 2018 Repurchase Program. Under the agreement, we made a payment of $2.0 billion to Goldman Sachs and received an initial delivery of 5.9 million shares valued at $1.7 billion that were immediately canceled by the company. The remaining balance of $300 million was settled on June 1, 2021 with a final delivery of 0.2 million shares from Goldman Sachs. The final average purchase price was $327.29 per share.

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

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


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

(1)Includes commissions paid.

Dividends on Common Stock

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

3. INCOME TAXES


	Three Months Ended September 30						Nine Months Ended September 30
$ in millions	2021			2020			2021			2020
Federal and foreign income tax expense	$	212		$	181		$	1,298		$	564
Effective income tax rate	16.6		%	15.5		%	23.2		%	16.5		%

Current Quarter

The third quarter 2021 effective tax rate (ETR) increased to 16.6 percent from 15.5 percent in the prior year period primarily due to lower benefits from foreign-derived intangible income (FDII). The company’s third quarter 2021 ETR includes benefits of $43 million for research credits and $12 million for FDII. The company’s third quarter 2020 ETR included benefits of $45 million for research credits and $30 million for FDII, which reflects additional benefits after final regulations issued in July 2020 clarified Foreign Military Sales qualify for the deduction.

Year to Date

The year to date 2021 ETR increased to 23.2 percent from 16.5 percent in the prior period primarily due to federal income taxes resulting from the IT services divestiture, including $250 million of income tax expense related to $1.2 billion of nondeductible goodwill in the divested business. The company’s year to date 2021 ETR also includes additional tax expense related to a change made in tax revenue recognition on certain long-term contracts, which increased taxable income in years prior to the 2017 Tax Cuts and Jobs Act at a rate above the current statutory rate as well as benefits of $142 million for research credits and $32 million for FDII. The company’s year to date 2020 ETR included benefits of $135 million for research credits and $46 million for FDII.

Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were $123 million as of September 30, 2021 and $792 million as of December 31, 2020.

The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs and the 2017 Tax Cuts and Jobs Act, which includes related final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and procedural guidance issued

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in August 2021. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may increase by approximately $100 million.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2017-2018 federal tax returns are currently under Internal Revenue Service (IRS) examination. During the third quarter of 2021, the company requested an appeal with the IRS for the Northrop Grumman 2014-2016 federal income tax returns and refund claims related to its 2007-2016 federal tax returns. In addition, legacy Orbital ATK federal tax returns for the year ended March 31, 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under appeal with the IRS.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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


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

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

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

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

Long-term Debt

The estimated fair value of long-term debt was $15.2 billion and $18.2 billion as of September 30, 2021 and December 31, 2020, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.

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

Repayments of Senior Notes

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

In March 2021, the company redeemed $1.5 billion of 2.55 percent unsecured notes due October 2022. The company recorded a pre-tax charge of $54 million principally related to the premium paid on the redemption, which

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

5. INVESTIGATIONS, CLAIMS AND LITIGATION

On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed-price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS were delivered. The company’s lawsuit seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $410 million, less certain amounts outstanding under the contract. In the course of the litigation, the United States subsequently amended its counterclaim, reducing it to seek approximately $193 million. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On February 3, 2020, after extensive discovery and motions practice, the parties commenced what was expected to be a seven-week trial. The first four weeks of trial concluded, but the court postponed the remaining estimated three weeks as a result of COVID-19-related concerns. After additional COVID-19-related interruptions, trial concluded on March 5, 2021. On October 12, 2021, the parties completed post-trial briefing, absent any further requests or unexpected developments. Although the ultimate outcome of this matter, including any possible loss, cannot be predicted or reasonably estimated at this time, the company intends to continue vigorously to pursue and defend the matter.

We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, we have worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation (NYSDEC), the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. In December 2019, the State of New York issued an Amended Record of Decision seeking to impose additional remedial requirements beyond measures the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company will take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. On September 22, 2021, the State of New York issued for public comment a new consent decree reflecting the agreement. We understand that the State will next seek court approval of the consent decree. We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to the legacy Bethpage environmental conditions. Applicable remediation standards and other requirements to which we are subject may continue to change, our costs may increase materially and those costs may not be fully recoverable. In addition, we are a party to various, and expect to become a party to additional, legal proceedings and disputes related to remediation, environmental impacts, costs, and the allowability of costs we incur, including with federal and state entities (including the Navy, Defense Contract Management Agency, the State, local municipalities and water districts) and insurance carriers, as well as class action and individual plaintiffs alleging personal injury and property damage and seeking both monetary and non-monetary relief. These Bethpage matters could result in additional costs, fines, penalties, sanctions, compensatory or other damages, determinations on allocation, allowability and coverage, and non-monetary relief. We are in discussions with the Department of Defense and the Bethpage Water District to explore whether claims involving these parties can be resolved at this stage. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these aggregate Bethpage matters.

The company is a party to various other investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2021, or its annual results of operations and/or cash flows.

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6. COMMITMENTS AND CONTINGENCIES

U.S. Government Cost Claims and Contingencies

From time to time, the company is advised of claims by the U.S. government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and U.S. government representatives engage in discussions to enable the company to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for such potential disallowed costs. Such provisions are reviewed periodically using the most recent information available. The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of September 30, 2021, or its annual results of operations and/or cash flows.

The U.S. government has raised questions about an interest rate assumption used by the company to determine our CAS pension expense. On June 1, 2020, the government provided written notice that the assumptions the company used during the period 2013-2019 were potentially noncompliant with CAS. We submitted a formal response on July 31, 2020, which we believe demonstrates the appropriateness of the assumptions used. On November 24, 2020, the government replied to the company’s response, disagreeing with our position and requesting additional input, which we provided on February 22, 2021. We are engaging further with the government. The sensitivity to changes in interest rate assumptions makes it reasonably possible the outcome of this matter could have a material adverse effect on our financial position, results of operations and/or cash flows, although we are not currently able to estimate a range of any potential loss.

Environmental Matters

The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S. government contracts as of September 30, 2021 and December 31, 2020:


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

(1) As of September 30, 2021, $235 million is recorded in Other current liabilities and $365 million is recorded in Other non-current liabilities.

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

(3) As of September 30, 2021, $205 million is deferred in Prepaid expenses and other current assets and $309 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.

Although management cannot predict whether new information gained as our environmental remediation projects progress, or as changes in facts and circumstances occur, will materially affect the estimated liability accrued, except with respect to Bethpage, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2021, or its annual results of operations and/or cash flows.

With respect to Bethpage, as discussed in Note 5, in December 2019, the State of New York issued an Amended Record of Decision, seeking to impose additional remedial requirements beyond those the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company will take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. On September 22, 2021, the State of New York issued for public comment a new consent decree reflecting the agreement. We understand that the State will next seek court approval of the consent decree. As discussed in Note 5, the applicable remediation standards and other requirements to which we are subject may continue to change, our costs may increase materially, and those costs may not be fully recoverable.

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Financial Arrangements

In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At September 30, 2021, there were $476 million of stand-by letters of credit and guarantees and $69 million of surety bonds outstanding.

Commercial Paper

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

Credit Facilities

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

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

7. RETIREMENT BENEFITS

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


	Three Months Ended September 30								Nine Months Ended September 30
	Pension Benefits				OPB				Pension Benefits				OPB
$ in millions	2021		2020		2021		2020		2021		2020		2021		2020
Components of net periodic benefit cost (benefit)
Service cost	$	104	$	102	$	4	$	4	$	311	$	306	$	12	$	13
Interest cost	263		307		13		17		790		920		40		50
Expected return on plan assets	(627)		(594)		(26)		(26)		(1,884)		(1,782)		(79)		(77)
Amortization of prior service (credit) cost	(3)		(15)		—		1		(7)		(45)		(1)		3


Net periodic benefit cost (benefit)	$	(263)	$	(200)	$	(9)	$	(4)	$	(790)	$	(601)	$	(28)	$	(11)

Employer Contributions

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

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


	Three Months Ended September 30				Nine Months Ended September 30
$ in millions	2021		2020		2021		2020
Defined benefit pension plans	$	26	$	24	$	79	$	70
OPB plans	8		7		29		30
Defined contribution plans	99		116		476		472

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8. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS

Stock Awards

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


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

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

Cash Awards

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


	Nine Months Ended September 30
$ in millions	2021		2020
Minimum aggregate payout amount	$	31	$	31
Maximum aggregate payout amount	178		175

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

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9. SEGMENT INFORMATION

The following table presents sales and operating income by segment:


	Three Months Ended September 30				Nine Months Ended September 30
$ in millions	2021		2020		2021		2020
Sales
Aeronautics Systems	$	2,725	$	2,914	$	8,628	$	8,682
Defense Systems	1,409		1,859		4,398		5,626
Mission Systems	2,436		2,551		7,613		7,344
Space Systems	2,681		2,198		7,950		6,194
Intersegment eliminations	(531)		(439)		(1,561)		(1,259)
Total sales	8,720		9,083		27,028		26,587
Operating income
Aeronautics Systems	265		294		873		867
Defense Systems	175		217		529		632
Mission Systems	372		370		1,177		1,070
Space Systems	288		224		865		635
Intersegment eliminations	(65)		(56)		(197)		(157)
Total segment operating income	1,035		1,049		3,247		3,047
FAS/CAS operating adjustment	61		108		98		316
Unallocated corporate (expense) income	(53)		(172)		1,564		(450)
Total operating income	$	1,043	$	985	$	4,909	$	2,913

FAS/CAS Operating Adjustment

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

Unallocated Corporate (Expense) Income

Unallocated corporate (expense) income includes the portion of corporate costs not considered allowable or allocable under applicable CAS or FAR, and therefore not allocated to the segments, such as changes in deferred state income taxes and a portion of management and administration, legal, environmental, compensation, retiree benefits, advertising and other corporate unallowable costs. Unallocated corporate (expense) income also includes costs not considered part of management’s evaluation of segment operating performance, such as amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business combinations, as well as certain compensation and other costs.

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

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Disaggregation of Revenue


Sales by Customer Type	Three Months Ended September 30								Nine Months Ended September 30
	2021				2020				2021				2020
$ in millions	$		%(3)		$		%(3)		$		%(3)		$		%(3)
Aeronautics Systems
U.S. government(1)	$	2,312	85	%	$	2,491	85	%	$	7,366	85	%	$	7,329	84	%
International(2)	360		13	%	382		13	%	1,110		13	%	1,233		14	%
Other customers	5		—	%	11		1	%	15		—	%	35		1	%
Intersegment sales	48		2	%	30		1	%	137		2	%	85		1	%
Aeronautics Systems sales	2,725		100	%	2,914		100	%	8,628		100	%	8,682		100	%
Defense Systems
U.S. government(1)	877		62	%	1,264		68	%	2,749		63	%	3,828		68	%
International(2)	316		22	%	307		17	%	1,002		23	%	963		17	%
Other customers	10		1	%	97		5	%	61		1	%	293		5	%
Intersegment sales	206		15	%	191		10	%	586		13	%	542		10	%
Defense Systems sales	1,409		100	%	1,859		100	%	4,398		100	%	5,626		100	%
Mission Systems
U.S. government(1)	1,756		72	%	1,884		74	%	5,491		71	%	5,331		73	%
International(2)	417		17	%	455		18	%	1,338		18	%	1,406		19	%
Other customers	19		1	%	19		1	%	49		1	%	54		1	%
Intersegment sales	244		10	%	193		7	%	735		10	%	553		7	%
Mission Systems sales	2,436		100	%	2,551		100	%	7,613		100	%	7,344		100	%
Space Systems
U.S. government(1)	2,507		94	%	2,020		92	%	7,401		93	%	5,734		93	%
International(2)	92		3	%	99		5	%	301		4	%	237		4	%
Other customers	49		2	%	54		2	%	145		2	%	144		2	%
Intersegment sales	33		1	%	25		1	%	103		1	%	79		1	%
Space Systems sales	2,681		100	%	2,198		100	%	7,950		100	%	6,194		100	%
Total
U.S. government(1)	7,452		85	%	7,659		84	%	23,007		85	%	22,222		84	%
International(2)	1,185		14	%	1,243		14	%	3,751		14	%	3,839		14	%
Other customers	83		1	%	181		2	%	270		1	%	526		2	%
Total Sales	$	8,720	100	%	$	9,083	100	%	$	27,028	100	%	$	26,587	100	%

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

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

(3) Percentages calculated based on total segment sales.

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

(1)Percentages calculated based on external customer sales.

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

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

(2)Percentages calculated based on external customer sales.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Northrop Grumman Corporation

Falls Church, Virginia

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of September 30, 2021, and the related condensed consolidated statements of earnings and comprehensive income and changes in shareholders’ equity for the three-month and nine-month periods ended September 30, 2021 and 2020, and of cash flows for the nine-month periods ended September 30, 2021 and 2020, and the related notes (collectively referred to as the “interim financial information”). Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of December 31, 2020, and the related consolidated statements of earnings and comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January 27, 2021, we expressed an unqualified opinion on those consolidated financial statements, which included an explanatory paragraph regarding the Company’s change in its method of accounting for leases in 2019 due to the adoption of ASC 842, Leases. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2020, is fairly stated, in all material respects, in relation to the audited consolidated statement of financial position from which it has been derived.

Basis for Review Results

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

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

/s/ Deloitte & Touche LLP

McLean, Virginia

October 27, 2021

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