UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ 
FORM 10-Q
______________________________________ 
x 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 20172018
or
o 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-16411
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 80-0640649
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
2980 Fairview Park Drive,
Falls Church, Virginia
 22042
(Address of principal executive offices) (Zip Code)
(703) 280-2900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x
 
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x
 
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer x
 
Accelerated filer o
   
Non-accelerated filer o(Do not check if a smaller reporting company)
 
Smaller reporting company o
   
Emerging growth company o
  
  
 Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o
 
No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 20, 201719, 2018, 174,078,522173,619,710 shares of common stock were outstanding.


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NORTHROP GRUMMAN CORPORATION                        

TABLE OF CONTENTS
 
  Page
  
Item 1. 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
Item 2. 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
   
  
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

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NORTHROP GRUMMAN CORPORATION                        

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended September 30 Nine Months Ended September 30Three Months Ended September 30 Nine Months Ended September 30
$ in millions, except per share amounts2017 2016 2017 20162018 2017 2018 2017
Sales              
Product$4,135
 $3,721
 $11,885
 $10,759
$5,614
 $4,183
 $14,693
 $12,217
Service2,392
 2,434
 7,284
 7,352
2,471
 2,386
 7,246
 7,235
Total sales6,527
 6,155
 19,169
 18,111
8,085
 6,569
 21,939
 19,452
Operating costs and expenses              
Product3,153
 2,760
 8,982
 7,992
4,229
 3,189
 11,188
 9,209
Service1,863
 1,907
 5,646
 5,819
1,861
 1,864
 5,629
 5,608
General and administrative expenses666
 662
 2,009
 1,938
817
 679
 2,267
 2,063
Operating income845
 826
 2,532
 2,362
1,178
 837
 2,855
 2,572
Other (expense) income              
Interest expense(73) (74) (224) (224)(133) (73) (420) (224)
Net FAS (non-service) pension benefit (expense)135
 2
 380
 (33)
Other, net13
 17
 57
 37
57
 16
 142
 67
Earnings before income taxes785
 769
 2,365
 2,175
1,237
 782
 2,957
 2,382
Federal and foreign income tax expense140
 167
 528
 500
93
 139
 385
 534
Net earnings$645
 $602
 $1,837
 $1,675
$1,144
 $643
 $2,572
 $1,848
              
Basic earnings per share$3.70
 $3.38
 $10.53
 $9.32
$6.57
 $3.69
 $14.76
 $10.59
Weighted-average common shares outstanding, in millions174.2
 178.1
 174.5
 179.8
174.1
 174.2
 174.3
 174.5
Diluted earnings per share$3.68
 $3.35
 $10.46
 $9.23
$6.54
 $3.67
 $14.68
 $10.52
Weighted-average diluted shares outstanding, in millions175.3
 179.6
 175.6
 181.5
174.9
 175.3
 175.2
 175.6
              
Net earnings (from above)$645
 $602
 $1,837
 $1,675
$1,144
 $643
 $2,572
 $1,848
Other comprehensive income              
Change in unamortized benefit plan costs, net of tax99
 101
 300
 302
84
 99
 256
 300
Change in cumulative translation adjustment
 (6) 
 (19)(2) 
 (4) 
Other, net
 (1) 3
 (1)(1) 
 (5) 3
Other comprehensive income, net of tax99
 94
 303
 282
81
 99
 247
 303
Comprehensive income$744
 $696
 $2,140
 $1,957
$1,225
 $742
 $2,819
 $2,151
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
$ in millionsSeptember 30,
2017
 December 31,
2016
September 30,
2018
 December 31,
2017
Assets      
Cash and cash equivalents$1,878
 $2,541
$1,228
 $11,225
Accounts receivable, net4,414
 3,299
1,702
 1,054
Unbilled receivables, net5,600
 3,465
Inventoried costs, net1,007
 816
719
 398
Prepaid expenses and other current assets300
 200
883
 445
Total current assets7,599
 6,856
10,132
 16,587
Property, plant and equipment, net of accumulated depreciation of $4,994 in 2017 and $4,831 in 20163,925
 3,588
Property, plant and equipment, net of accumulated depreciation of $5,307 for 2018 and $5,066 for 20176,025
 4,225
Goodwill12,456
 12,450
18,642
 12,455
Intangible assets, net1,460
 52
Deferred tax assets1,200
 1,462
69
 447
Other non-current assets1,333
 1,258
1,615
 1,362
Total assets$26,513
 $25,614
$37,943
 $35,128
      
Liabilities      
Trade accounts payable$1,507
 $1,554
$1,939
 $1,661
Accrued employee compensation1,309
 1,342
1,645
 1,382
Advance payments and amounts in excess of costs incurred1,290
 1,471
1,686
 1,761
Other current liabilities2,194
 1,263
2,769
 2,288
Total current liabilities6,300
 5,630
8,039
 7,092
Long-term debt, net of current portion of $863 in 2017 and $12 in 20166,227
 7,058
Long-term debt, net of current portion of $517 for 2018 and $867 for 201713,889
 14,399
Pension and other post-retirement benefit plan liabilities6,579
 6,818
5,394
 5,511
Other non-current liabilities914
 849
1,518
 994
Total liabilities20,020
 20,355
28,840
 27,996
      
Commitments and contingencies (Note 8)
 

 
      
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: 2017—174,077,667 and 2016—175,068,263174
 175
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2018—173,727,400 and 2017—174,085,619174
 174
Paid-in capital16
 

 44
Retained earnings11,546
 10,630
14,464
 11,632
Accumulated other comprehensive loss(5,243) (5,546)(5,535) (4,718)
Total shareholders’ equity6,493
 5,259
9,103
 7,132
Total liabilities and shareholders’ equity$26,513
 $25,614
$37,943
 $35,128
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30Nine Months Ended September 30
$ in millions2017 20162018 2017
Operating activities      
Net earnings$1,837
 $1,675
$2,572
 $1,848
Adjustments to reconcile to net cash provided by operating activities:      
Depreciation and amortization322
 322
534
 323
Stock-based compensation66
 61
82
 66
Deferred income taxes79
 (13)176
 86
Changes in assets and liabilities:      
Accounts receivable, net(1,115) (830)(52) (368)
Unbilled receivables, net(898) (1,049)
Inventoried costs, net(191) 14
(102) (20)
Prepaid expenses and other assets(86) (144)(109) (95)
Accounts payable and other liabilities(41) (292)(125) 80
Income taxes payable(58) 218
Income taxes payable, net(114) (58)
Retiree benefits235
 318
(447) 235
Other, net(42) (47)(67) (42)
Net cash provided by operating activities1,006
 1,282
1,450
 1,006
      
Investing activities      
Acquisition of Orbital ATK, net of cash acquired(7,657) 
Capital expenditures(650) (608)(786) (650)
Other, net21
 3
23
 21
Net cash used in investing activities(629) (605)(8,420) (629)
      
Financing activities      
Payments of long-term debt(2,276) 
Payments to credit facilities(314) 
Net borrowings on commercial paper499
 
Common stock repurchases(393) (1,149)(209) (393)
Payments of long-term debt
 (107)
Cash dividends paid(515) (482)(616) (515)
Payments of employee taxes withheld from share-based awards(91) (152)(84) (91)
Other, net(41) (3)(27) (41)
Net cash used in financing activities(1,040) (1,893)(3,027) (1,040)
Decrease in cash and cash equivalents(663) (1,216)(9,997) (663)
Cash and cash equivalents, beginning of year2,541
 2,319
11,225
 2,541
Cash and cash equivalents, end of period$1,878
 $1,103
$1,228
 $1,878
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
Nine Months Ended September 30Nine Months Ended September 30
$ in millions, except per share amounts2017 20162018 2017
Common stock      
Beginning of year$175
 $181
$174
 $175
Common stock repurchased(2) (6)(1) (2)
Shares issued for employee stock awards and options1
 2
1
 1
End of period174
 177
174
 174
Paid-in capital      
Beginning of year
 
44
 
Common stock repurchased(34) 
Stock compensation16
 
(10) 16
End of period16
 

 16
Retained earnings      
Beginning of year10,630
 10,661
11,632
 10,734
Impact from adoption of ASU 2018-02 and ASU 2016-01 (See Note 1)1,064
 
Common stock repurchased(371) (1,154)(179) (371)
Net earnings1,837
 1,675
2,572
 1,848
Dividends declared(511) (472)(616) (511)
Stock compensation(39) (82)(9) (39)
End of period11,546
 10,628
14,464
 11,661
Accumulated other comprehensive loss      
Beginning of year(5,546) (5,320)(4,718) (5,546)
Impact from adoption of ASU 2018-02 and ASU 2016-01 (See Note 1)(1,064) 
Other comprehensive income, net of tax303
 282
247
 303
End of period(5,243) (5,038)(5,535) (5,243)
Total shareholders’ equity$6,493
 $5,767
$9,103
 $6,608
Cash dividends declared per share$2.90
 $2.60
$3.50
 $2.90
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NORTHROP GRUMMAN CORPORATION                        

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.    BASIS OF PRESENTATION
Principles of Consolidation and Reporting
These unaudited condensed consolidated financial statements (the “financial statements”) include the accounts of Northrop Grumman Corporation and its subsidiaries and joint ventures or other investments for which we consolidate the financial results (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”). Material intercompany accounts, transactions and profits are eliminated in consolidation. Investments in equity securities and joint ventures where the company has significant influence, but not control, are accounted for using the equity method.
These unaudited condensedOn 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. See Note 2 to the financial statements for further information regarding the Merger.
The 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. TheseThe 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 unaudited condensed consolidated financial statements are not necessarily indicative of results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the information contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2016 (20162017 (2017 Annual Report on Form 10-K).
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’slegacy Northrop Grumman’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. Similarly, Innovation Systems uses a “fiscal” calendar by closing its books on a Sunday near these quarter-end dates and will continue this practice until its business processes are aligned with legacy Northrop Grumman’s. The Friday and Sunday closing dates noted herein are both labeled as September 30, consistent with our calendar convention described above. This practice is only used at interim periods within a reporting year.
As previously announced, effective January 1, 2018, we adopted Accounting Estimates
TheseStandards 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, using the full retrospective method. The adoption of these standards are reflected in the amounts and disclosures set forth in this Form 10-Q and the effect of these standards on the company’s unaudited condensed consolidated statements of earnings and comprehensive income for the three and nine months ended September 30, 2017 and unaudited condensed consolidated statement of financial position as of December 31, 2017 is reflected in Note 12.
Accounting Estimates
Preparation of the financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “FAS”). The preparation thereof 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. Governmentgovernment for the production of goods, the provision of services, or a combination of both. The company classifies sales as product or service based on the predominant attributes of each contract.
Under ASC Topic 606, the company recognizes revenue for each separately identifiable performance obligation in a contract representing a promise to transfer a distinct good or service to a customer. In most cases, goods and services

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NORTHROP GRUMMAN CORPORATION                        

provided under the company’s contracts are accounted for as single performance obligations due to the complex and integrated nature of our products and services. These contracts generally require significant integration of a group of goods and/or services to deliver a combined output. In some contracts, the company provides multiple distinct goods or services to a customer, most commonly when a contract covers multiple phases of the product lifecycle (development, production, maintenance and/or support). In those cases, the company accounts for the distinct contract deliverables as separate performance obligations and allocates the transaction price to each performance obligation based on its relative standalone selling price, which is generally estimated using the cost plus a reasonable margin approach of ASC Topic 606. Warranties are provided on certain contracts, but do not typically provide for services beyond standard assurances and are therefore not within the scope of ASC Topic 606. Likewise, our accounting for costs to obtain or fulfill a contract was not significantly impacted by the adoption of ASC Topic 606 as these costs are not material.
A contract modification exists when the parties to a contract approve a change in the scope or price of a contract. Contracts are often modified for changes in contract specifications or requirements. Most of the company’s contract modifications are for goods or services that are not distinct in the context of the contract and are therefore accounted for as part of the original performance obligation through a cumulative estimate-at-completion (EAC) adjustment.
The company recognizes revenue as control is transferred to the customer, either over time or at a point in time. In general, our U.S. government contracts contain termination for convenience clauses that generally entitle the customer to goods produced and/or in-process. Similarly, our non-U.S. government contracts generally contain contractual termination clauses or entitle the company to payment for work performed to date for goods and services that do not have an alternative use. As control is effectively transferred while we utilize eitherperform on our contracts and we are typically entitled to cost plus a reasonable margin for work in process if the contract is terminated for convenience, we generally recognize revenue over time using the cost-to-cost method or(cost incurred relative to total cost estimated at completion) as the units-of-deliverycompany believes this represents the most appropriate measurement towards satisfaction of its 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 percentage-of-completion accounting, with cost-to-cost being the predominant method.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 either as costs are incurred (cost-to-cost) or as units are delivered (units-of-delivery). The company classifies sales as product or service depending upon the predominant attributes of the contract.incurred. Significant judgment is used to estimate total revenue and cost at completion.
Contract sales may include estimated amounts not contractually agreed to or yet funded by the customer,estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), un-priced change orders, contract claims and requests for equitable adjustment (REAs). 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 areVariable consideration is included in total estimated contract sales when management believesto the extent it is probable the un-priced change order, claim and/or REA will resultthat a significant reversal in additional contract revenue and the amount canof 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 reliably estimated considering the facts and circumstances known to us at the time. Amounts recognized related to claims and REAs as of September 30, 2017 were not material individually or in aggregate.entitled.
Net Estimate-At-Completion (EAC) Adjustments - We recognize changes in estimated contract sales or costs and the resulting changes in contract operating margins using theprofit on a cumulative catch-up method of accounting. This method recognizes, in current period operating margin,basis. Cumulative EAC adjustments represent the cumulative effect of the changes on current and prior periods as net EAC adjustments;periods; sales and operating margins in future periods of contract performance are recognized as if the revised estimates had been used since contract inception. If it is determined that a loss willis expected to result from theon an individual performance of a contract,obligation, the entire amount of the estimable future loss, including an allocation of general and administrative (G&A) costs, is charged against income in the period the loss is identified. Each loss provision is first offset

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NORTHROP GRUMMAN CORPORATION                        

against costs included in unbilled accounts receivable or inventoried costs; remaining amounts are reflected in other current liabilities.
Significant EAC adjustments on a single contract could have a material effect on the company’s unaudited condensed consolidated financial position or results of operations.statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. No discrete event or adjustments to an individual contract were material to the financial statements during the three months ended September 30, 2018. During the three months ended September 30, 2017, wethe company recorded a $56 million favorable EAC adjustment on a restricted program at Aerospace Systems largely related to performance incentives.Systems.

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The following table presents the effect of aggregate net EAC adjustments:
Three Months Ended September 30 Nine Months Ended September 30Three Months Ended September 30 Nine Months Ended September 30
$ in millions, except per share data2017 2016 2017 20162018 2017 2018 2017
Operating Income$102
 $121
 $315
 $387
$149
 $114
 $408
 $357
Net Earnings(1)
66
 79
 205
 252
117
 74
 322
 232
Diluted earnings per share(1)
0.38
 0.44
 1.17
 1.39
0.67
 0.42
 1.84
 1.32
(1) 
Based on statutory tax rates in effect for each period presented.
Revenue recognized from performance obligations satisfied in previous reporting periods was $149 million and $438 million for the three and nine months ended September 30, 2018, respectively, and $122 million and $368 million for the three and nine months ended September 30, 2017, respectively.
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, 2018 was $52.6 billion. We expect to recognize approximately 50 percent and 75 percent of our September 30, 2018 backlog as revenue over the next 12 and 24 months, respectively, with the remainder to be recognized thereafter.
Contract Assets and Liabilities
For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Fixed-price contracts are typically billed to the customer either using progress payments, whereby amounts are billed monthly as costs are incurred or work is completed, or performance based payments, which are based upon the achievement of specific, measurable events or accomplishments defined and valued at contract inception. Cost-type contracts are typically billed to the customer on a monthly or semi-monthly basis.
Contract assets consist of unbilled receivables, primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Unbilled receivables are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected beyond one year due to the long-cycle nature of many of our contracts. Accumulated contract costs in unbilled receivables include costs such as direct production costs, factory and engineering overhead, production tooling costs, and allowable G&A. Unbilled receivables also include certain estimates of variable consideration described above. These contract assets are not considered a significant financing component of the company’s contracts as the payment terms are intended to protect the customer in the event the company does not perform on its obligations under the contract.
Contract liabilities include advance payments and billings in excess of revenue recognized. Certain customers make advance payments prior to the company’s satisfaction of its obligations on the contract. These amounts are recorded as contract liabilities until such obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made. Contract liabilities are not a significant financing component as they are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements.
Net contract assets (liabilities) are as follows:
$ in millionsSeptember 30,
2018
 December 31,
2017
$ Change% Change
Unbilled receivables, net$5,600
 $3,465
$2,135
62 %
Advance payments and amounts in excess of costs incurred(1,686) (1,761)75
(4)%
Net contract assets (liabilities)$3,914
 $1,704
$2,210
130 %
The change in the balances of the company’s contract assets and liabilities primarily results from timing differences between revenue recognition and customer billings and/or payments. The increase in net contract assets during the nine months ended September 30, 2018, is principally due to the addition of $1.3 billion of net contract assets from

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Innovation Systems, higher volume on restricted programs at Aerospace Systems and higher volume on the F-35 program at Mission Systems.
The amount of revenue recognized that was included in the December 31, 2017 contract liability balance was $168 million and $1.2 billion for the three and nine months ended September 30, 2018, respectively. The amount of revenue recognized that was included in the December 31, 2016 contract liability balance was $162 million and $1.0 billion for the three and nine months ended September 30, 2017, respectively.
Disaggregation of Revenue
See Note 11 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.
Other Purchased Intangible Assets
Purchased intangible asset balances are included in the identifiable assets of their assigned business segment. Beginning in 2018, the company includes the amortization of purchased intangible assets in unallocated corporate expense within operating income as such amortization is no longer considered part of management’s evaluation of segment operating performance. The company’s customer-related intangible assets are generally amortized over their respective useful lives based on the pattern in which the future economic benefits of the intangible assets are expected to be consumed. Other purchased intangible assets are generally amortized on a straight-line basis over their estimated useful lives.
Property, Plant and Equipment
Property, plant and equipment are depreciated over the estimated useful lives of individual assets. Most assets are depreciated using declining-balance methods, with the remainder using the straight-line method. Depreciation expense is generally recorded in the same segment where the related assets are held. However, for assets acquired in the Merger, the additional depreciation expense related to the step-up in fair value of acquired property, plant and equipment is recorded in unallocated corporate expense within operating income as such depreciation is not considered part of management’s evaluation of segment operating performance.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
$ in millionsSeptember 30,
2017
 December 31,
2016
September 30,
2018
 December 31,
2017
Unamortized benefit plan costs, net of tax benefit of $3,257 in 2017 and $3,439 in 2016$(5,116) $(5,416)
Unamortized benefit plan costs, net of tax benefit of $1,912 for 2018 and $3,056 for 2017$(5,390) $(4,586)
Cumulative translation adjustment(132) (132)(140) (136)
Net unrealized gain on marketable securities and cash flow hedges, net of tax5
 2
Other, net(5) 4
Total accumulated other comprehensive loss$(5,243) $(5,546)$(5,535) $(4,718)
Unamortized benefit plan costs as of September 30, 2018 reflect a reclassification from accumulated other comprehensive loss to retained earnings of $1.1 billion of stranded tax effects resulting from the Tax Cuts and Jobs Act (the “2017 Tax Act”). This reclassification resulted from the company’s early adoption of ASU 2018-02 on January 1, 2018. See “Accounting Standards Updates” below for more information.
Unamortized benefit plan costs consist primarily of net after-tax actuarial losses totaling $5.2$5.5 billion and $5.6$4.7 billion as of September 30, 20172018 and December 31, 2016,2017, respectively. Net actuarial gains or losses are re-determinedredetermined annually or upon remeasurement events and principally arise from changes in the interest rate used to discount our benefit obligations and differences between expected and actual returns on plan assets.
Reclassifications from accumulated other comprehensive loss to net earnings related to the amortization of benefit plan costs were $86 million and $258 million, net of taxes, for the three and nine months ended September 30, 2018, respectively, and were $100 million and $299 million, net of taxes, for the three and nine months ended September 30, 2017, respectively, and were $101 million and $302 million, net of taxes, for the three and nine months ended September 30, 2016, respectively. The reclassifications represent the amortization of net actuarial losses and prior service credits, and are included in the computation of net periodic pension cost. See Note 9 for further information.
Reclassifications from accumulated other comprehensive loss to net earnings relating to cumulative translation adjustments marketable securities and effective cash flow hedges were not material for the three and nine months ended September 30, 20172018 and 2016.2017.

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Related Party Transactions
For all periods presented, theThe company had no material related party transactions.transactions in any period presented.
Accounting Standards Updates
On March 10, 2017,February 14, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows companies to reclassify stranded tax effects resulting from the 2017 Tax Act from accumulated other comprehensive income to retained earnings. As described above, the company elected to early adopt ASU 2018-02 on January 1, 2018, which resulted in a reclassification of $1.1 billion of stranded tax effects, principally related to our unamortized benefit plan costs, from accumulated other comprehensive loss to retained earnings. This reclassification included $73 million of other income tax effects related to a reduction in the federal benefit associated with state taxes. Adoption of ASU 2018-02 did not have a material impact on the company’s results of operations and/or cash flows.
On March 10, 2017, the FASB issued ASU No. 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires employers that sponsor defined benefit pension and/or other post-retirement benefit plans to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Employers are required to present the other components of net benefit costs in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component of net periodic pension cost will beis eligible for asset capitalization.
We expect adoption of ASU 2017-07 to result in a change in our net FAS/CAS pension adjustment within operating income, which will be offset by a corresponding change in Other, net to reflect the impact of presenting the interest

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cost, expected return on plan assets, and amortization of prior service credit and net actuarial loss components of net periodic benefit costs outside of operating income. In addition, interest on service cost and plan administrative expenses, which, in some cases, are currently included within service cost, will be presented in the interest cost and amortization of net actuarial loss components, respectively, in Other, net. We expect to adoptadopted ASU 2017-07 on January 1, 2018 using the retrospective method and do not anticipate a material change to our 2017 net FAS/CAS pension adjustment or other, net when they are recast to reflectmethod. See Note 12 for information regarding the standard. We also do not expecteffect of adopting ASU 2017-07 toon our unaudited condensed consolidated statement of earnings and comprehensive income for the three and nine months ended September 30, 2017. Adoption of ASU 2017-07 did not have a material impact on our unaudited condensed consolidated statements of financial position and/or cash flows.
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 supersedes existing lease guidance, including Accounting Standards Codification (ASC)ASC 840 - Leases. Among other things, ASU 2016-02 requires recognition of a right-of-use asset and liability for future lease payments for contracts that meet the definition of a lease and requires disclosure of certain information about leasing arrangements. ASU 2016-02 will be effective January 1, 2019, although early adoption is permitted, and it ispermitted. On July 30, 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which, among other things, allows companies to be applied usingelect an optional transition method to apply the new lease standard through a modified retrospective approach.cumulative-effect adjustment in the period of adoption. We expect to adopt the standard on January 1, 2019.2019 using the optional transition method. The company has made substantial progress in executing our implementation plan. We have revised our controls and processes to address the lease standard and have completed the implementation and data input for our lease accounting software tool. We are reviewing our leasescurrently evaluating the preliminary information produced by the system and expect to determinehave an estimate of the effectimpact of ASU 2016-02 will have on the company’s consolidated financial position annual resultsduring the fourth quarter of operations and/or2018. Topic ASU 2016-02 also requires expanded disclosure regarding the amounts, timing and uncertainties of cash flows.flows related to a company’s lease portfolio. We currently expectare evaluating these disclosure requirements and are incorporating the right-of-use assets and lease liabilities recognized upon adoption will each approximatecollection of relevant data into our future minimum lease payments, as disclosed in our 2016 Annual Report on Form 10-K.processes. We do not expect ASU 2016-02 to have a material impact on our annual results of operations and/or cash flows.
On January 5, 2016, the FASB issued ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments that are not accounted for under the equity method of accounting or that do not result in consolidation of the investee to be measured at fair value with changes recognized in net earnings. ASU 2016-01 also eliminates the available-for-sale classification for equity investments that recognized changes in fair value as a component of other comprehensive income. We adopted ASU 2016-01 on January 1, 2018 using the modified retrospective method, which resulted in a $4 million (net of tax) cumulative-effect adjustment from accumulated other comprehensive loss to retained earnings. Adoption of ASU 2016-01 did not have a material impact on our results of operations and/or cash flows.
On May 28, 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606). ASU 2014-09Topic 606 supersedes existingprevious revenue recognition guidance, including ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts, and outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time. On July 9, 2015, the FASB approved a one year deferralThe primary impact of the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. We expect to adopt the standard on January 1, 2018 and apply it retrospectively to all periods presented.
During 2016, we substantially completed our evaluation of ASU 2014-09, including the expected impact on our business processes, systems and controls, and potential differences in the timing and/or method of revenue recognition for our contracts. As a result of our evaluation, we identified changes to and are modifying certain of our accounting policies and practices. We also designed and implemented specific controls over our evaluation of the impact of ASU 2014-09, including our calculation of the cumulative effect of adopting ASU 2014-09. Although we do not expect significant changes to our accounting systems or controls upon adoption of ASU 2014-09, we have modified certain of our current controls to incorporate the revisions we have made to our accounting policies and practices.
Based on our evaluation of ASU 2014-09, we currently do not expect it to have a material impact on our results of operations or cash flows in the periods after adoption. Under ASU 2014-09, revenue is recognized as control transfers to the customer. As such, revenue for our contracts will generally be recognized over time using the cost-to-cost method, which is consistent with the revenue recognition model we currently use for the majority of our contracts. For those contracts where we currently recognize revenue as units are delivered,ASC Topic 606 was that, in most cases, the accounting for those contracts will changewhere we previously recognized revenue as units were delivered changed under ASU 2014-09ASC Topic 606 such that we willnow recognize revenue as costs are incurred. This change will generally result in an acceleration of revenue as compared with our current revenue recognition method for those contracts. In addition, for certain of our contracts, we expect the number of performance obligations to change under ASU 2014-09, which may alter the timing of revenue and margin recognition.
ASU 2014-09 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue, cash flow and customer contract balances, including how and when we satisfy our performance obligations and the relationship between revenue recognized and changes in contract balances during a reporting period. We have evaluated these disclosure requirements and are incorporating the collection of relevant data into our quarterly processes.
During the second quarter of 2017, we completed our assessment of the cumulative effect of adopting ASU 2014-09. Under the full retrospective method, we expect to recognize the cumulative effect of adoption as an increase in unbilled accounts receivable, a reduction in inventoried costs, an increase in advance payments and amounts in excess of costs incurred and a net increase in retained earnings as of January 1, 2016. During the second quarter of 2017, we also completed our assessment of the impact of adoption on our 2016 results. We currently expect adopting

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NORTHROP GRUMMAN CORPORATION                        

ASU 2014-09 to result in an increase in revenueincurred. In addition, for certain of approximately $200 million andour contracts, there is a decrease in operating income of approximately $70 million for the year ended December 31, 2016. These changes principally reflect the impact of converting contracts to the cost-to-cost method of accounting as well as changeschange in the number of performance obligations under ASC Topic 606, which has altered the timing of revenue and margin recognition.
We adopted ASC Topic 606 on January 1, 2018 using the full retrospective method. We applied the transition practical expedient related to remaining performance obligations for certain of our contracts. The impact of adopting ASU 2014-09 on our 2016 results of operations may not be indicative of the impact in future years. We will continue our evaluation of ASU 2014-09 (including how it may impact new contracts we receive as well as new or emerging interpretations of the standard) throughreporting periods presented before the date of adoption.initial application. No other practical expedients were applied. The cumulative effect of adopting ASC Topic 606 was a $148 million increase to retained earnings at January 1, 2016. See Note 12 for information regarding the effect of adopting ASC Topic 606 on our unaudited condensed consolidated statement of earnings and comprehensive income for the three and nine months ended September 30, 2017 and unaudited condensed consolidated statement of financial position as of December 31, 2017.
Other accounting standards updates adopted and/or issued, but not effective until after September 30, 2017,2018, 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.  PENDING ACQUISITION OF ORBITAL ATK
On September 17, 2017,June 6, 2018, the company entered intocompleted its previously announced acquisition of Orbital ATK, a definitive merger agreement to acquireglobal leader in aerospace and defense technologies, by acquiring all of the outstanding shares of Orbital ATK Inc. (Orbital ATK) for approximately $7.8a purchase price of $7.7 billion in cash, pluscash. On the assumption of approximately $1.4 billion in net debt (the “OrbitalMerger date, Orbital ATK Acquisition”). Under the termsbecame a wholly-owned subsidiary of the merger agreement, Orbital ATK shareholders arecompany and its name was changed to receive all-cash consideration of $134.50 per share.Northrop Grumman Innovation Systems, Inc. We expect to fund the Orbital ATK Acquisition with the proceeds from our recently completed debt financing and cash on hand. See Notes 8 and 11 for further information on our Orbital ATK Acquisition financing. The transaction is currently expected to close in the first half of 2018 and is subject to customary closing conditions, including regulatory and Orbital ATK shareholder approval. If the merger agreement is terminated under certain circumstances, Orbital ATK will be required to pay the company a termination fee of $275 million. Upon completion of the Orbital ATK Acquisition, we plan to establish Orbital ATKestablished Innovation Systems as a new, fourth business sector.sector, whose main products include launch vehicles and related propulsion systems; missile products, subsystems and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and advanced aerospace structures. The acquisition was financed with proceeds from the company’s debt financing completed in October 2017 and cash on hand. We believe this acquisition will enable us to broaden our capabilities and offerings, provide additional innovative solutions to meet our customers’ emerging requirements, create value for shareholders and provide expanded opportunities for our combined employees.
The operating results of Innovation Systems subsequent to the Merger date are included in the company's consolidated results of operations. Innovation Systems recognized sales of $1.4 billion and $1.8 billion, operating income of $161 million and $200 million and net earnings of $128 million and $158 million for the three and nine months ended September 30, 2018, respectively.
The company recognized $29 million of acquisition-related costs that were expensed as incurred during the nine months ended September 30, 2018. These costs are included in Product and Service cost in the unaudited condensed consolidated statement of earnings and comprehensive income.
Preliminary Purchase Price Allocation
The acquisition was accounted for as a purchase business combination. As such, the company recorded the assets acquired and liabilities assumed at fair value, with the excess of the purchase price over the fair value of assets acquired and liabilities assumed recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. In some cases, the company used discounted cash flow analyses, which were based on our best estimate of future sales, earnings and cash flows after considering such factors as general market conditions, customer budgets, existing firm and future orders, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.
During the three months ended June 30, 2018, the company completed a preliminary analysis to determine the fair values of the assets acquired and liabilities assumed and the amounts recorded reflected management’s initial assessment of fair value as of the Merger date. Based on additional information obtained during the three months ended September 30, 2018, the company refined its initial assessment of fair value and, as a result, recognized the following significant adjustments to our preliminary purchase price allocation: Intangible assets increased $220 million, Other current liabilities increased $94 million, Other current assets increased $67 million, Pension and other post-retirement benefit plan liabilities increased $50 million and Goodwill decreased $104 million. These adjustments did not result in a material impact on the financial results of prior periods.
The company expects to finalize its purchase price allocation within one year of the Merger date. We are continuing to analyze and assess relevant information in the following areas to determine the fair value of assets acquired and liabilities assumed as of the Merger Date: real estate; intangible assets; income tax; and certain existing or potential reserves, such as those for legal, environmental and contract-related matters. The final fair value determination could result in material adjustments to the values presented in the preliminary purchase price allocation table below.

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NORTHROP GRUMMAN CORPORATION                        

The Merger date fair value of the consideration transferred totaled $7.7 billion in cash, which was comprised of the following:
$ in millions, except per share amounts Purchase price
Shares of Orbital ATK common stock outstanding as of the Merger date 57,562,152
Cash consideration per share of Orbital ATK common stock $134.50
Total purchase price $7,742
The following preliminary purchase price allocation table presents the company’s refined estimate of the fair values of assets acquired and liabilities assumed at the Merger date:
$ in millions 
As of
June 6, 2018
Cash and cash equivalents $85
Accounts receivable, net 596
Unbilled receivables, net 1,237
Inventoried costs, net 220
Other current assets 260
Property, plant and equipment 1,509
Goodwill 6,191
Intangible assets 1,525
Deferred tax assets (264)
Other non-current assets 131
Total assets acquired 11,490
Trade accounts payable (397)
Accrued employee compensation (158)
Advance payments and amounts in excess of costs incurred (222)
Below market contracts(1)
 (151)
Other current liabilities (392)
Long-term debt (1,687)
Pension and other post-retirement benefit plan liabilities (607)
Other non-current liabilities (134)
Total liabilities assumed (3,748)
Total purchase price $7,742
(1)
Included in Other current liabilities.
Below market contracts represent liabilities on certain acquired programs where the expected costs at completion exceed the expected sales under contract. We measured these liabilities based on the estimated price to transfer the obligations to a market participant at the Merger date plus a reasonable profit margin. These liabilities will be reduced as the company incurs costs to complete its performance obligations on the underlying programs. This reduction will be included in sales and is estimated as follows: $37 million in 2018, $66 million in 2019, $46 million in 2020 and $2 million in 2021.
The following table presents a summary of purchased intangible assets and their related estimated useful lives:
  
Fair Value
(in millions)
 Estimated Useful Life in Years
Customer contracts $1,245
 9
Commercial customer relationships 280
 13
Total customer-related intangible assets $1,525
  

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NORTHROP GRUMMAN CORPORATION                        

The preliminary purchase price allocation resulted in the recognition of $6.2 billion of goodwill, a majority of which was allocated to the Innovation Systems sector (refer to Note 5). The goodwill recognized is attributable to expected revenue synergies generated by the integration of Aerospace Systems, Mission Systems and Technology Services products and technologies with those of legacy Orbital ATK, synergies resulting from the consolidation or elimination of certain costs, and intangible assets that do not qualify for separate recognition, such as the assembled workforce of Orbital ATK. None of the goodwill is expected to be deductible for tax purposes.
Supplemental Pro Forma Information
The following table presents unaudited pro forma financial information prepared in accordance with Article 11 of Regulation S-X and computed as if Orbital ATK had been included in our results as of January 1, 2017:
 Three Months Ended September 30 Nine Months Ended September 30
$ in millions, except per share amounts2017 2018 2017
Sales$7,744  $24,163
 $22,783
Net earnings655  2,749
 1,868
Basic earnings per share3.76  15.77
 10.70
Diluted earnings per share3.74  15.69
 10.64
The unaudited supplemental pro forma financial data has been calculated after applying our accounting policies and adjusting the historical results of Orbital ATK with pro forma adjustments, net of tax, that assume the acquisition occurred on January 1, 2017. Significant pro forma adjustments include the following:
1.The impact of the adoption of ASC Topic 606 on Orbital ATK’s historical sales of $2 million and $23 million, and cost of sales of $9 million and $18 million, for the three and nine months ended September 30, 2017, respectively.
2.The elimination of intercompany sales and costs of sales between the company and Orbital ATK of $80 million for the nine months ended September 30, 2018 and $43 million and $108 million for the three and nine months ended September 30, 2017, respectively.
3.The elimination of nonrecurring transaction costs incurred by the company and Orbital ATK in connection with the Merger of $71 million for the nine months ended September 30, 2018.
4.The recognition of additional depreciation expense, net of removal of historical depreciation expense, of $10 million for the nine months ended September 30, 2018, and $7 million and $21 million for the three and nine months ended September 30, 2017, respectively, related to the step-up in fair value of acquired property, plant and equipment.
5.Additional interest expense related to the debt issued to finance the Merger, including amortization of the debt issuance costs associated with the newly issued debt, of $66 million and $199 million for the three and nine months ended September 30, 2017. Interest expense and amortization of debt issuance costs have been included in the company's historical financial statements since the date of issuance (October 12, 2017).
6.The recognition of additional amortization expense, net of removal of historical amortization expense, of $101 million for the nine months ended September 30, 2018, and $73 million and $217 million for the three and nine months ended September 30, 2017, respectively, related to the fair value of acquired intangible assets.
7.The elimination of Orbital ATK's historical amortization of net actuarial losses and prior service credits and impact of the revised pension and other post-retirement net periodic benefit cost as determined under the company’s plan assumptions of $51 million for the nine months ended September 30, 2018 and $27 million and $81 million for the three and nine months ended September 30, 2017, respectively.
8.
The income tax effect of the pro forma adjustments, which was calculated using the federal statutory tax rate in effect in each respective period, of $(2) million for the nine months ended September 30, 2018 and $42 million and $124 million for the three and nine months ended September 30, 2017, respectively.
The unaudited pro forma financial information does not reflect the potential realization of revenue synergies or cost savings, nor does it reflect other costs relating to the integration of the two companies. This pro forma financial information should not be considered indicative of the results that would have actually occurred if the acquisition had been consummated on January 1, 2017, nor are they indicative of future results.

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NORTHROP GRUMMAN CORPORATION                        

3.    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 primarily include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled 1.10.8 million shares and 1.10.9 million shares for the three and nine months ended September 30, 2017,2018, respectively. The dilutive effect of these securities totaled 1.5 million and 1.71.1 million shares for both the three and nine months ended September 30, 2016, respectively.2017.
Share Repurchases
On December 4, 2014, the company’s board of directors authorized a share repurchase program of up to $3.0 billion of the company’s common stock (the “2014 Repurchase Program”). Repurchases under the 2014 Repurchase Program commenced in March 2015 and were completed in March 2016. On September 16, 2015, the company’s board of directors authorized a new share repurchase program of up to $4.0 billion of the company’s common stock (the “2015 Repurchase Program”). Repurchases under the 2015 Repurchase Program commenced in March 2016 upon completion of the company’s 2014 Repurchase Program.2016. As of September 30, 2017,2018, repurchases under the 2015 Repurchase Program totaled $1.7$1.9 billion; $2.3$2.1 billion remained under this share repurchase authorization. By its terms, the 2015 Repurchase Program is set to expire when we have used all authorized funds for repurchases.
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.

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NORTHROP GRUMMAN CORPORATION                        

The table below summarizes the company’s share repurchases to date under the authorizations described above:
       Shares Repurchased
(in millions)
       Shares Repurchased
(in millions)
Repurchase Program
Authorization Date
 Amount
Authorized
(in millions)
 Total
Shares Retired
(in millions)
 
Average 
Price
Per Share
(1)
 Date Completed Nine Months Ended September 30 Amount
Authorized
(in millions)
 Total
Shares Retired
(in millions)
 
Average 
Price
Per Share
(1)
 Date Completed Nine Months Ended September 30
2017 2016 2018 2017
December 4, 2014 $3,000
 18.0
 $166.70
 March 2016 
 1.4
September 16, 2015 $4,000
 7.4
 $222.93
 
 1.6
 4.2
 $4,000
 8.1
 $230.14
 
 0.7
 1.6
(1) 
Includes commissions paid.
Dividends on Common Stock
In May 2018, the company increased the quarterly common stock dividend 9 percent to $1.20 per share from the previous amount of $1.10 per share.
In January 2018, the company increased the quarterly common stock dividend 10 percent to $1.10 per share from the previous amount of $1.00 per share.
In May 2017, the company increased the quarterly common stock dividend 11 percent to $1.00 per share from the previous amount of $0.90 per share.
In May 2016,
4.    INCOME TAXES
 Three Months Ended September 30 Nine Months Ended September 30
$ in millions2018 2017 2018
2017
Federal and foreign income tax expense$93
 $139
 $385
 $534
Effective income tax rate7.5% 17.8% 13.0% 22.4%
Current Quarter
The company’s effective tax rate for the company increasedthree months ended September 30, 2018 was lower as compared with the quarterly common stock dividend 13same period in 2017 principally due to the reduction of the U.S. corporate income tax rate from 35 percent to $0.90 per share from21 percent as a result of the previous amount of $0.80 per share.
4.    SEGMENT INFORMATION
The company is aligned2017 Tax Act. Both periods reflect comparable tax benefits associated with current year research credits. In addition, the company’s effective rate for the three months ended September 30, 2018 includes a $70 million benefit recognized for additional research credits and manufacturing deductions related to prior years and a $35 million benefit for pension contributions recognized in three operating sectors, which also comprise our reportable segments: Aerospace Systems, Mission Systems and Technology Services.
The following table presents sales and operating income by segment:
 Three Months Ended September 30 Nine Months Ended September 30
$ in millions2017 2016 2017 2016
Sales       
Aerospace Systems$3,082
 $2,782
 $8,950
 $7,956
Mission Systems2,837
 2,698
 8,357
 8,081
Technology Services1,183
 1,190
 3,552
 3,617
Intersegment eliminations(575) (515) (1,690) (1,543)
Total sales6,527
 6,155
 19,169
 18,111
Operating income       
Aerospace Systems334
 311
 961
 909
Mission Systems363
 351
 1,090
 1,055
Technology Services133
 130
 398
 387
Intersegment eliminations(71) (61) (211) (188)
Total segment operating income759

731
 2,238
 2,163
Net FAS/CAS pension adjustment172
 91
 445
 234
Unallocated corporate expenses(85) 5
 (148) (31)
Other(1) (1) (3) (4)
Total operating income$845
 $826
 $2,532
 $2,362
Net FAS/CAS Pension Adjustment
For financial statement purposes, we account for our employee pension plans in accordance with FAS. However, the cost of these plans is charged to our contracts in accordanceconnection with the Federal Acquisition Regulation (FAR) and the related U.S. Government Cost Accounting Standards (CAS). The net FAS/CAS pension adjustment reflects the difference between CAS pensionfiling of our 2017 tax return. These benefits were partially offset by a $20 million income tax expense included as cost in segment operating income and FAS expense included in total operating income.
Unallocated Corporate Expenses
Unallocated corporate expenses include the portion of corporate expenses not considered allowable or allocable under applicable CAS or the FAR, and therefore not allocated to the segments. Such costs consist of a portion ofassociated with tax reform guidance on

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management and administration, legal, environmental, compensation, retiree benefits and corporate unallowable costs.
5.    INCOME TAXES
 Three Months Ended September 30 Nine Months Ended September 30
$ in millions2017 2016 2017
2016
Federal and foreign income tax expense$140
 $167
 $528
 $500
Effective income tax rate17.8% 21.7% 22.3% 23.0%
Current Quarter
executive compensation. The company’s effective tax rate of 17.8 percent for the three months ended September 30, 2017 included a $62 million benefit recognized for additional manufacturing deductions and research credits related to prior years and $27 million of tax benefits associated with manufacturing deductions.
Year to Date
The company’s effective tax rate for the nine months ended September 30, 2018 was lower as compared with the same period in 20162017 principally due to a $45 million increase in research credits related to the current period and the filing of our 2016 tax return, and a $35 million benefit recognized for additional manufacturing deductions related to prior years. The prior year period included a $42 million benefit recognized in connection with the resolutionreduction of the Internal Revenue Service (IRS) examination ofU.S. corporate income tax rate and current quarter items described above. In addition, the company’s 2007-2011 tax returns.
Year to Date
The company’s effective tax rate of 22.3 percent for the nine months ended September 30, 2017 was lower as compared with the same period in 2016 primarily due to a $552018 includes $26 million increase in research credits largelyof excess tax benefits related to our prior year tax returns and a $32 million benefit recognized for additional manufacturing deductions related to prior years.employee share-based compensation. The company’s effective tax rate for the nine months ended September 30, 2017 included $57 million of tax benefits associated with manufacturing deductions, $47 million of excess tax benefits related to employee share-based compensation and 2016 each include separatea $42 million benefitsbenefit recognized in connection with the resolutionCongressional Joint Committee on Taxation’s approval of IRS examinationsthe Internal Revenue Service (IRS) examination of the company’s prior year2012-2013 tax returns.
The company recognized the income tax effects of the 2017 Tax Act in the financial statements included in its 2017 Annual Report on Form 10-K in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. During the three months ended September 30, 2018, the company finalized its accounting for the income tax effects of the 2017 Tax Act and recognized the following measurement period adjustments to the provisional amounts recorded in its 2017 Annual Report on Form 10-K in connection with the 2017 Tax Act:
Transition Tax on Foreign Earnings
The company recognized a measurement period increase to income tax expense of $5 million related to the one-time transition tax on certain foreign earnings. This resulted in a corresponding decrease in deferred tax assets due to the utilization of foreign tax credit carryforwards.
Acceleration of Depreciation
The company recognized a measurement period increase to income taxes payable of $17 million and a corresponding increase in deferred tax assets attributable to the accelerated depreciation for certain assets placed into service after September 27, 2017.
In connection with the Merger, the company has initially recognized an increase in unrecognized tax benefits of approximately $150 million for matters associated with legacy Orbital ATK, principally related to federal and state research credits. In addition, during the three and nine months ended September 30, 2018, we increased our unrecognized tax benefits related to our methods of accounting associated with the 2017 Tax Act by approximately $25 million and $75 million, respectively, and it is reasonably possible that within the next twelve months those unrecognized tax benefits may change by up to $100 million.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. OurThe Northrop Grumman 2014-2015 federal tax returns and refund claims related to its 2007-2011 federal tax returns are currently under IRS examination and our 2007-2011examination. In addition, legacy Orbital ATK federal tax returns for the year ended March 31, 2015 and nine-month transition period ended December 31, 2015 are subject to examination due to the filing of refund claims for these years.currently under IRS examination. The company believes it is reasonably possible that within the next twelve months we may resolve certain matters related to the years under examination of the legacy Orbital ATK federal tax returns for these periods, which may result in reductions of our unrecognized tax benefits up to $110$35 million and income tax expense up to $30 million.
5. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Goodwill
As discussed in Note 2, Innovation Systems was established as a new, fourth business sector of the company. The Merger resulted in the recognition of $6.2 billion of goodwill, a majority of which was allocated to the Innovation Systems sector. A portion of this goodwill was allocated to the company’s other sectors based on expected revenue synergies generated by the integration of their products and technologies with those of Innovation Systems. The amount of goodwill recognized and allocated to the sectors is subject to change, pending the final determination of the fair value of assets acquired and liabilities assumed in connection with the Merger (see Note 2).

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Changes in the carrying amounts of goodwill were as follows:
$ in millions Aerospace Systems Innovation Systems Mission Systems Technology Services Total
Balance as of December 31, 2017 $3,742
 $
 $6,696
 $2,017
 $12,455
Acquisition of Orbital ATK 418
 5,225
 469
 79
 6,191
Other(1)
 
 
 (1) (3) (4)
Balance as of September 30, 2018 $4,160
 $5,225
 $7,164
 $2,093
 $18,642
(1)
Other consists primarily of adjustments for foreign currency translation.
Accumulated goodwill impairment losses at September 30, 2018 and December 31, 2017, totaled $570 million at the Aerospace Systems segment.
Other Purchased Intangible Assets
Net customer-related and other intangible assets, including the fair value of purchased intangible assets acquired in the Merger, are as follows:
  September 30,
2018
 December 31, 2017
$ in millions  
Gross customer-related and other intangible assets $3,358
 $1,833
Less accumulated amortization (1,898) (1,781)
Net customer-related and other intangible assets $1,460
 $52
Amortization expense for the three and nine months ended September 30, 2018 was $89 million and $117 million, respectively, and was $3 million and $10 million for the three and nine months ended September 30, 2017, respectively. The company’s customer-related intangible assets are generally amortized over their respective useful lives based on the pattern in which the future economic benefits of the intangible assets are expected to be consumed. Other purchased intangible assets are generally amortized on a straight-line basis over their estimated useful lives. The company’s purchased intangible assets are being amortized over an aggregate weighted-average period of 12 years. As of September 30, 2018, the expected future amortization of purchased intangibles for each of the next five years is as follows:
$ in millions  
2018 (remainder of year) $90
2019 331
2020 262
2021 204
2022 197
6.    FAIR VALUE OF FINANCIAL INSTRUMENTS
The company holds a portfolio of marketable securities consisting of securities that are classified as either trading or available-for-sale to partially fund non-qualified employee benefit plans. TheseA 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 otherOther non-current assets in the unaudited condensed consolidated statements of financial position.
The company's derivative portfolio consists primarily of commodity forward contracts and foreign currency forward contracts. WhereAs a result of the Merger, the company assumed commodity forward contracts, which Innovation Systems periodically uses to hedge forecasted purchases of certain commodities. The contracts generally establish a fixed price for the underlying commodity and are designated and qualify as effective cash flow hedges of such commodity purchases. Commodity derivatives are valued based on prices of future exchanges and recently reported transactions in the marketplace. For foreign currency forward contracts, where model-derived valuations are appropriate, the company utilizes the income approach to determine the fair value and uses the applicable London Interbank Offered Rate (LIBOR) swap rates.

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The following table presents the financial assets and liabilities we recordthe company records at fair value on a recurring basis identified by the level of inputs used to determine fair value:
 September 30, 2017 December 31, 2016 September 30, 2018 December 31, 2017
$ in millions Level 1 Level 2 Total Level 1 Level 2 Total Level 1 Level 2 Total Level 1 Level 2 Total
Financial Assets (Liabilities)                        
Marketable securities             $360
 $
 $360
 $352
 $1
 $353
Trading $333
 $1
 $334
 $321
 $2
 $323
Available-for-sale 11
 
 11
 7
 
 7
Marketable securities valued using NAV 
 
 15
 
 
 
Total marketable securities 360
 
 375
 352
 1
 353
Derivatives 
 4
 4
 
 8
 8
 
 (7) (7) 
 
 
At September 30, 2018, the company had commodity forward contracts outstanding that hedge forecasted commodity purchases of 13 million pounds of copper and 4 million pounds of zinc. Gains or losses on the commodity forward contracts are recognized in cost of sales as the performance obligations on related contracts are satisfied.
The notional value of the company’s derivative portfolioforeign currency forward contracts at September 30, 20172018 and December 31, 2016,2017 was $148$117 million and $147$89 million, respectively. The portion of the notional value designated as a cash flow hedgeshedge at September 30, 2018 and December 31, 2017 was $10 million. At December 31, 2016, no portion of the notional value was designated as a$2 million and $8 million, respectively.

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cash flow hedge. The derivative fair values and related unrealized gains/losses at September 30, 20172018 and December 31, 2016,2017 were not material.
There were no transfers of financial instruments between the three levels of the fair value hierarchy during the nine months ended September 30, 2017.2018.
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 $7.8$14.3 billion and $7.6$16.0 billion as of September 30, 20172018 and December 31, 2016,2017, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The carrying value of long-term debt was $7.1$14.4 billion and $15.3 billion as of September 30, 20172018 and December 31, 2016.2017, respectively. The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.
In connection with the Merger, the company assumed $1.7 billion of long-term debt, all of which was repaid as of September 30, 2018.
7.    INVESTIGATIONS, CLAIMS AND LITIGATION
Litigation
On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS have been delivered. The company’s lawsuit is based on various theories of liability. The complaint seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $410 million, less certain amounts outstanding under the contract. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On April 2, 2013, the U.S. Department of Justice informed the company of a False Claims Act complaint relating to the FSS contract that was filed under seal by a relator in June 2011 in the U.S. District Court for the Eastern District of Virginia. On June 3, 2013, the United States filed a Notice informing the Court that the United States had decided not to intervene in this case. The relator alleged that the company violated the False Claims Act in a number of ways with respect to the FSS contract, alleged damage to the USPS in an amount of at least approximately $179 million annually, alleged that he was improperly discharged in retaliation, and sought an unspecified partial refund of the contract purchase price, penalties, attorney’s fees and other costs of suit. The relator

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later voluntarily dismissed his retaliation claim and reasserted it in a separate arbitration, which he also ultimately voluntarily dismissed. On September 5, 2014, the court granted the company’s motion for summary judgment and ordered the relator’s False Claims Act case be dismissed with prejudice. On December 19, 2014, the company filed a motion for partial summary judgment asking the court to dismiss the principal counterclaim referenced above. On June 29, 2015, the Court heard argument and denied that motion without prejudice to filing a later motion to dismiss. On February 16, 2018, both the company and the United States filed motions to dismiss many of the claims and counterclaims in whole or in part. The United States also filed a motion seeking to amend its answer and counterclaim, including to reduce its counterclaim to approximately $193 million, which the court granted on June 11, 2018. Although the ultimate outcome of these matters (“the FSS matters,” collectively), including any possible loss, cannot be predicted or reasonably estimated at this time, the company intends vigorously to pursue and defend the FSS matters.
On August 8, 2013, the company received a court-appointed expert’s report in litigation pending in the Second Federal Court of the Federal District in Brazil brought by the Brazilian Post and Telegraph Corporation (ECT), a Brazilian state-owned entity, against Solystic SAS (Solystic), a French subsidiary of the company, and two of its consortium partners. In this suit, commenced on December 17, 2004, and relatively inactive for some period of time, ECT alleges the consortium breached its contract with ECT and seeks damages of approximately R$111 million (the equivalent of approximately $35$27 million as of September 30, 2017)2018), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law, which amounts could be significant over time. The original suit sought R$89 million (the equivalent of approximately $28$22 million as of September 30, 2017)2018) in damages. In October 2013, ECT asserted an additional damage claim of R$22 million (the equivalent of approximately $7$5 million as of September 30, 2017)2018). In its counterclaim, Solystic alleges ECT breached the contract by wrongfully refusing to accept the equipment Solystic had designed and built and seeks damages of approximately €31 million (the equivalent of approximately $37$36 million as of September 30, 2017)2018), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law. The Brazilian court retained an expert to consider certain issues pending before it. On August 8, 2013 and September 10, 2014, the company received reports from the expert, which

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contain some recommended findings relating to liability and the damages calculations put forth by ECT. Some of the expert’s recommended findings were favorable to the company and others were favorable to ECT. In November 2014, the parties submitted comments on the expert’s most recent report. On June 16, 2015, the court published a decision denying the parties’ request to present oral testimony. At some future point, the court is expected to issue a decision on the parties’ claims and counterclaims that could accept or reject, in whole or in part, the expert’s recommended findings.
The company previously identified and disclosed to the U.S. government various issues relating primarily to time-charging practices of some employees working on a particular program with remote deployments. The Department of Justice is continuing to investigate this matter and the company is cooperating. Depending upon the ultimate outcome of this matter, the company could be subject to damages, civil and criminal fines, other costs or payments, reputational harm, penalties or other sanctions, and suspension or debarment actions. Although the U.S. government and the company are in discussions, they have not reached resolution and the ultimate outcome of this matter has not been determined at this time.
We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, we have worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation, the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. We have incurred, and expect to continue to incur, as included in Note 8, substantial remediation costs related to these environmental conditions. The remediation standards or requirements to which we are subject may change and costs may increase materially. The State of New York has notified us that it intends to seek to impose additional remedial requirements and, among other things, is evaluating natural resource damages. In addition, we are and may become a party to various legal proceedings and disputes related to remediation and/or alleged environmental impacts in Bethpage, including with federal and state entities, local municipalities and water districts, insurance carriers and class action plaintiffs. These Bethpage matters could result in additional costs, fines, penalties, sanctions, compensatory or other damages (including natural resource damages), determinations on allocation, allowability and coverage, and non-monetary relief. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these aggregate Bethpage matters.
On August 12, 2016, a putative class action complaint, naming Orbital ATK and two of its then-officers as defendants, Steven Knurr, et al. v. Orbital ATK, Inc., No. 16-cv-01031 (TSE-MSN), was filed in the United States

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District Court for the Eastern District of Virginia. The complaint asserts claims on behalf of purchasers of Orbital ATK securities for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5, allegedly arising out of false and misleading statements and the failure to disclose that: (i) Orbital ATK lacked effective control over financial reporting; and (ii) as a result, it failed to record an anticipated loss on a long-term contract with the U.S. Army to manufacture and supply small caliber ammunition at the U.S. Army's Lake City Army Ammunition Plant. On April 24, 2017 and October 10, 2017, the plaintiffs filed amended complaints naming additional defendants and asserting claims for alleged violations of additional sections of the Exchange Act and alleged false and misleading statements in Orbital ATK’s Form S-4 filed in connection with the Orbital-ATK Merger. The complaint seeks damages, reasonable costs and expenses at trial, including counsel and expert fees, and such other relief as deemed appropriate by the Court. On August 8, 2018, plaintiffs sought leave to file an additional amended complaint; defendants filed an opposition. On August 29, 2018, the court stayed and administratively closed the case except for fact discovery, which is complete. The court subsequently extended the stay and closure until November 9, 2018. A mediation session is currently scheduled for November 6, 2018. The company intends vigorously to defend itself in connection with this matter, and we currently expect related contingencies will continue to be included in the company’s measurement period adjustments of the fair value of assets acquired and liabilities assumed in the Merger (see Note 2).
The SEC is investigating Orbital ATK’s historical accounting practices relating to the restatement of Orbital’s unaudited condensed consolidated financial statements for the quarterly periods ended July 5, 2015 and October 4, 2015 described in the Transition Report on Form 10-K for the nine-month period ending December 31, 2015 previously filed on March 15, 2016. The SEC is also investigating matters relating to a voluntary disclosure Orbital ATK made concerning the restatement described in Orbital ATK’s Form 10-K/A for the nine-month period ending December 31, 2015 filed on February 24, 2017. The ultimate outcome of these matters, including any possible loss, cannot be predicted or reasonably estimated at this time and the company intends to continue to cooperate with the SEC.
The company is a party to various other investigations, lawsuits, 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, and other than with respect to the FSS matters discussed separately above, the company does not believe that the outcome of any matterof 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, 2017,2018, or its annual results of operations and/or cash flows.
8.    COMMITMENTS AND CONTINGENCIES
U.S. Government Cost Claims
From time to time, the company is advised of claims by the U.S. Governmentgovernment concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and the U.S. Governmentgovernment 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, 2017,2018, or its annual results of operations and/or cash flows.

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Environmental Matters
The table below summarizes management’s estimate of the range of reasonably possible future costs for environmental remediation, the amount accrued within that range, and the deferred costs expected to be recoverable through overhead charges on U.S. Governmentgovernment contracts as of September 30, 20172018 and December 31, 2016:2017:
$ in millions 
Range of Reasonably Possible Future Costs(1)
 
Accrued Costs(2)
 
Deferred Costs(3)
September 30, 2017 $409 - $796 $416
 $210
December 31, 2016 379 - 774 385
 195
$ in millions 
Range of Reasonably Possible Future Costs(1)
 
Accrued Costs(2)
 
Deferred Costs(3)
September 30, 2018 $455 - $835 $469
 $348
December 31, 2017 405 - 792 410
 207
(1) 
Estimated remediation costs are not discounted to present value. The range of reasonably possible future costs does not take into consideration amounts expected to be recoverable through overhead charges on U.S. Governmentgovernment contracts.
(2) As of September 30, 2017, $1442018, $163 million is recorded in otherOther current liabilities and $272$306 million is recorded in otherOther non-current liabilities.
(3) As of September 30, 2017, $752018, $124 million is deferred in inventoried costsPrepaid expenses and $135other current assets and $224 million is deferred in otherOther non-current assets. These amounts reflect a $103 million increase during the third quarter of 2018 in our estimated recovery of certain environmental remediation costs and are evaluated for recoverability on a routine basis.
As a result of the Merger, we assumed certain environmental remediation liabilities that are included in the accrued costs above, along with the related deferred costs expected to be recoverable on U.S. government contracts.
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, 2017,2018, or its annual results of operations and/or cash flows. With respect to Bethpage, as described in Note 7, we cannot at this time estimate the range of reasonably possible additional future costs that could result from potential changes to remediation standards or requirements to which we are subject.
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, 2017,2018, there were $210$398 million of stand-by letters of credit and guarantees and $208$212 million of surety bonds outstanding.
Indemnifications
The company has provided indemnification for certain environmental, income tax and other potential liabilities in connection with certain of its divestitures. The settlement of these liabilities is not expected to have a material

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adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2017,2018, or its annual results of operations and/or cash flows.
Operating Leases
Rental expense for operating leases for the three and nine months ended September 30, 20172018 was $97 million and $270 million, respectively, and was $73 million and $227 million, respectively, and was $69 million and $228 million for the three and nine months ended September 30, 2016,2017, respectively. These amounts are net of immaterial amounts of sublease rental income.
Commercial Paper
In May 2018, the company commenced a commercial paper program that serves as a source of short-term financing. In September 2018, the company amended its commercial paper program to increase its capacity to issue unsecured commercial paper notes from $750 million up to $2.0 billion. The commercial paper notes outstanding have original maturities of 90 days or less from the date of issuance. At September 30, 2018, there were $499 million of outstanding short-term commercial paper borrowings at a weighted-average interest rate of 2.43 percent. The outstanding balance of commercial paper borrowings is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.
Credit Facilities
In August 2018, the company entered into a new five-year senior unsecured credit facility in an aggregate principal amount of $2.0 billion (the “2018 Credit Agreement”). The 2018 Credit Agreement replaced the company’s prior five-year revolving credit facility in an aggregate amount of $1.6 billion entered into on July 8, 2015. The revolving

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credit facility established under the 2018 Credit Agreement is intended to support the company’s commercial paper program and other general corporate purposes.
The 2018 Credit Agreement contains generally customary terms and conditions, including covenants restricting the company’s ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other fundamental changes and incur liens. The company also cannot permit the ratio of its debt to capitalization (as set forth in the credit agreement) to exceed 65 percent. At September 30, 2018, there was no balance outstanding under this facility; however, the outstanding balance of commercial paper borrowings reduces the amount available for borrowing under the 2018 Credit Agreement.
In December 2016, a subsidiary of the company entered into a two-year credit facility, with two additional one-year option periods, in an aggregate principal amount of £120 million (the equivalent of approximately $162$156 million as of September 30, 2017)2018) (the “2016 Credit Agreement”). The company exercised the first option to extend the maturity to December 2019. The 2016 Credit Agreement is guaranteed by the company. At September 30, 2017,2018, there was £110£90 million (the equivalent of approximately $149 million as of September 30, 2017)$117 million) outstanding under this facility, which bears interest at a rate of LIBOR plus 1.10 percent. All of the borrowings outstanding under this facility mature less than one year from the date of issuance, but may be renewed under the terms of the facility. Based on our intent and ability to refinance the obligations on a long-term basis, substantially all of the borrowings are classified as non-current.
The company also maintains a five-year unsecured credit facility in an aggregate principal amount of $1.6 billion that matures in July 2020. At September 30, 2017, there was no balance outstanding under this facility.
At September 30, 2017,2018, the company was in compliance with all covenants under its credit agreements.
Financing Commitment
On September 17, 2017, we entered into a commitment letter (the “Commitment Letter”) with JPMorgan Chase Bank, N.A. (JPMorgan), pursuant to which, subject to the terms and conditions set forth therein, JPMorgan committed to provide a 364-day senior unsecured bridge loan facility in an aggregate principal amount of up to $8.5 billion (the “Bridge Facility”), to finance the Orbital ATK Acquisition and to pay related fees and expenses. Under the terms of the Commitment Letter, the Bridge Facility availability is subject to reduction in equivalent amounts upon an incurrence by the company of term loans and/or the issuance of notes prior to the consummation of the Orbital ATK Acquisition and certain other specified events. In consideration for JPMorgan’s commitment to provide the Bridge Facility, we paid to JPMorgan a non-refundable commitment fee of $29.8 million, which has been amortized from inception to the date permanent financing was established as described below.
Subsequent Event
In October 2017, the company issued $8.25 billion of unsecured senior notes. The company intends to use the net proceeds to finance the Orbital ATK Acquisition and to pay related fees and expenses. See Note 11 for further information. As a result of the issuance of the unsecured senior notes, the company terminated the Commitment Letter.
9.    RETIREMENT BENEFITS
The cost to the company of its retirement plans is shown in the following table:
Three Months Ended September 30Nine Months Ended September 30Three Months Ended September 30Nine Months Ended September 30
Pension
Benefits
 Medical and
Life Benefits
Pension
Benefits
 Medical and
Life Benefits
Pension
Benefits
 Medical and
Life Benefits
Pension
Benefits
 Medical and
Life Benefits
$ in millions2017 2016 2017 20162017 2016 2017 20162018 2017 2018 20172018 2017 2018 2017
Components of net periodic benefit cost                          
Service cost$94
 $112
 $6
 $8
$322
 $335
 $19
 $23
$102
 $97
 $5
 $5
$301
 $291
 $15
 $16
Interest cost308
 321
 21
 24
925
 963
 63
 71
316
 312
 20
 21
906
 937
 58
 63
Expected return on plan assets(471) (464) (22) (21)(1,414) (1,390) (67) (64)(571) (471) (26) (22)(1,644) (1,414) (75) (67)
Amortization of:                          
Prior service credit(14) (15) (4) (6)(43) (45) (15) (17)(15) (14) (5) (4)(44) (43) (16) (15)
Net loss from previous years178
 179
 1
 3
534
 536
 6
 11
135
 171
 (2) 2
402
 553
 (2) 9
Net periodic benefit cost$95
 $133
 $2
 $8
$324
 $399
 $6
 $24
$(33) $95
 $(8) $2
$(79) $324
 $(20) $6
Changes in Presentation
As discussed in Note 1, we adopted ASU 2017-07 on January 1, 2018 using the retrospective method, which changed the financial statement presentation of service costs and the other components of net periodic benefit cost. The service cost component continues to be included in operating income; however, the other components are now presented in Net FAS (non-service) pension benefit (expense) in the unaudited condensed consolidated statements of earnings and comprehensive income. In addition, interest on service cost and plan administrative expenses which, in some cases, have historically been included in service cost are now consistently presented in the interest cost and amortization of net actuarial loss components, respectively. As a result, the company reclassified interest on service cost of $4 million and $12 million and plan administrative expense adjustments of $(7) million and $19 million from service cost to the interest cost and amortization of net actuarial loss components, respectively, for its pension plans in the three and nine months ended September 30, 2017, respectively, to conform to the current year presentation. For the company’s medical and life benefit plans, plan administrative expenses of $1 million and $3 million were reclassified from service cost to the amortization of net actuarial loss component for the three and nine months ended September 30, 2017, respectively, to conform to the current year presentation. This change in presentation had no impact on net periodic benefit cost.

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Employer Contributions
The company sponsors defined benefit pension and post-retirement 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, including making2006. Additionally, in the third quarter of 2018, we made a voluntary contributions from time to time.pension contribution of $250 million.
Contributions made by the company to its retirement plans are as follows:
Three Months Ended September 30 Nine Months Ended September 30Three Months Ended September 30 Nine Months Ended September 30
$ in millions2017 2016 2017 20162018 2017 2018 2017
Defined benefit pension plans$20
 $14
 $71
 $61
$273
 $20
 $318
 $71
Medical and life benefit plans11
 17
 35
 46
10
 11
 32
 35
Defined contribution plans91
 83
 267
 241
104
 91
 296
 267
10.    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 Nine Months Ended September 30
in millions 20172016 20182017
RSRs granted 0.1
0.2
 0.1
0.1
RPSRs granted 0.3
0.3
 0.2
0.3
Grant date aggregate fair value $92
$88
 $119
$92
RSRs typically vest on the third anniversary of the grant date, while RPSRs generally vest and pay out based on the achievement of financial metrics over a three-year period.
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 Nine Months Ended September 30
$ in millions 20172016 20182017
Minimum aggregate payout amount $36
$35
 $36
$36
Maximum aggregate payout amount 199
194
 205
199
CUs typically vest and settle in cash on the third anniversary of the grant date, while CPUs generally vest and pay out in cash based on the achievement of financial metrics over a three-year period.

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NORTHROP GRUMMAN CORPORATION                        

11.    SUBSEQUENT EVENTSEGMENT INFORMATION
Unsecured Senior NotesThe company is aligned in four operating sectors, which also comprise our reportable segments: Aerospace Systems, Innovation Systems, Mission Systems and Technology Services.
In October 2017,The following table presents sales and operating income by segment:
 Three Months Ended September 30 Nine Months Ended September 30
$ in millions2018 2017 2018 2017
Sales       
Aerospace Systems$3,282
 $3,125
 $9,899
 $9,112
Innovation Systems1,415
 
 1,815
 
Mission Systems2,911
 2,836
 8,668
 8,495
Technology Services1,040
 1,183
 3,232
 3,535
Intersegment eliminations(563) (575) (1,675) (1,690)
Total sales8,085
 6,569
 21,939
 19,452
Operating income       
Aerospace Systems376
 344
 1,074
 987
Innovation Systems161
 
 200
 
Mission Systems399
 359
 1,122
 1,102
Technology Services111
 124
 328
 378
Intersegment eliminations(68) (71) (204) (211)
Total segment operating income979

756
 2,520
 2,256
Net FAS (service)/CAS pension adjustment176
 170
 440
 478
Unallocated corporate income (expense)24
 (88) (102) (159)
Other(1) (1) (3) (3)
Total operating income$1,178
 $837
 $2,855
 $2,572
Net FAS (Service)/CAS Pension Adjustment
For financial statement purposes, we account for our employee pension plans in accordance with FAS. However, the company issued $8.25 billioncost of unsecured senior notesthese plans is charged to financeour contracts in accordance with the Orbital ATKFederal Acquisition Regulation (FAR) and to paythe related feesU.S. Government Cost Accounting Standards (CAS). The net FAS (service)/CAS pension adjustment reflects the difference between CAS pension expense included as cost in segment operating income and expensesthe service cost component of FAS expense included in total operating income. The non-service cost components of FAS expense, which include interest cost, expected return on plan assets, and amortization of prior service credit and net actuarial loss, are presented in Net FAS (non-service) pension benefit (expense) in the unaudited condensed consolidated statements of earnings and comprehensive income as follows:a result of our adoption of ASU 2017-07 discussed in Note 1.
$1.0 billionUnallocated Corporate Income (Expense)
Unallocated corporate expense includes the portion of 2.08 percent Senior Notes due 2020 (the “2020 Notes”),
$1.5 billion of 2.55 percent Senior Notes due 2022 (the “2022 Notes”),
$1.5 billion of 2.93 percent Senior Notes due 2025 (the “2025 Notes”),
$2.0 billion of 3.25 percent Senior Notes due 2028 (the “2028 Notes”)corporate costs not considered allowable or allocable under applicable CAS or FAR, and
$2.25 billion of 4.03 percent Senior Notes due 2047 (the “2047 Notes”).
We refer therefore not allocated to the 2020 Notes, the 2022 Notes, the 2025 Notes, the 2028 Notessegments, such as a portion of management and administration, legal, environmental, compensation, retiree benefits and other corporate unallowable costs. Unallocated corporate expense also includes costs not considered part of management’s evaluation of segment operating performance, such as amortization of purchased intangible assets and the 2047 Notes, together, asadditional depreciation expense related to the “notes.” Interest onstep-up in fair value of property, plant and equipment acquired in connection with the notes is payable semi-annually in arrears. The notes are generally subject to redemption, inMerger.

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NORTHROP GRUMMAN CORPORATION                        

whole or in part, atDisaggregation of Revenue
Sales by Customer TypeThree Months Ended September 30 Nine Months Ended September 30
 2018 2017 2018 2017
$ in millions$
%(3)
 $
%(3)
 $
%(3)
 $
%(3)
Aerospace Systems           
U.S. Government (1)
$2,926
89% $2,724
87% $8,633
87% $7,893
87%
International (2)
270
8% 295
10% 990
10% 876
10%
Other Customers44
2% 36
1% 124
1% 114
1%
Intersegment sales42
1% 70
2% 152
2% 229
2%
Aerospace Systems sales3,282
100% 3,125
100% 9,899
100% 9,112
100%
Innovation Systems           
U.S. Government (1)
972
69% 

 1,237
68% 

International (2)
272
19% 

 364
20% 

Other Customers134
9% 

 164
9% 

Intersegment sales37
3% 

 50
3% 

Innovation Systems sales1,415
100% 

 1,815
100% 

Mission Systems           
U.S. Government (1)
2,232
77% 2,193
77% 6,577
76% 6,606
78%
International (2)
374
12% 383
14% 1,144
13% 1,090
13%
Other Customers25
1% 27
1% 89
1% 81
1%
Intersegment sales280
10% 233
8% 858
10% 718
8%
Mission Systems sales2,911
100% 2,836
100% 8,668
100% 8,495
100%
Technology Services           
U.S. Government (1)
581
56% 630
53% 1,780
55% 1,938
55%
International (2)
183
17% 187
16% 596
18% 564
16%
Other Customers72
7% 94
8% 241
8% 290
8%
Intersegment sales204
20% 272
23% 615
19% 743
21%
Technology Services sales1,040
100% 1,183
100% 3,232
100% 3,535
100%
Total           
U.S. Government (1)
6,711
83% 5,547
85% 18,227
83% 16,437
85%
International (2)
1,099
14% 865
13% 3,094
14% 2,530
13%
Other Customers275
3% 157
2% 618
3% 485
2%
Total Sales$8,085
100% $6,569
100% $21,939
100% $19,452
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 company's discretion at any time, or from time to time, prior to maturity atprime contractor, as well as those for which we are a redemption price equal tosubcontractor and the greater of 100% ofultimate customer is an international customer. These sales include foreign military sales contracted through the principal amount ofU.S. government, direct sales with governments outside the notes to be redeemed or an applicable “make-whole” amount, plus accruedU.S. and unpaid interest.commercial sales with customers outside the U.S.
If the Orbital ATK Acquisition is not consummated(3) Percentages calculated based on or prior to December 17, 2018, or if the merger agreement relating to the Orbital ATK Acquisition is terminated prior to such date, then, in either case, the company will be required to redeem all of the outstanding 2020 Notes, 2022 Notes, 2025 Notes and 2047 Notes in a special mandatory redemption at a redemption price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest. The proceeds of the offering of such notes will not be deposited into an escrow account pending any special mandatory redemption of such notes.
The 2028 Notes are not subject to a special mandatory redemption. If the Orbital ATK Acquisition is not consummated, the company expects to use the net proceeds from the offering of the 2028 Notes for general corporate purposes, including debt repayment, share repurchases, pension plan funding, acquisitions and working capital.total segment sales.

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NORTHROP GRUMMAN CORPORATION                        

Sales by Contract TypeThree Months Ended September 30 Nine Months Ended September 30
 2018 2017 2018 2017
$ in millions$
%(1)
 $
%(1)
 $
%(1)
 $
%(1)
Aerospace Systems 
 
  
 
  
 
  
 
Cost-type$1,953
60% $1,782
58% $5,789
59% $5,449
61%
Fixed-price1,287
40% 1,273
42% 3,958
41% 3,434
39%
Intersegment sales42
  70
  152
  229
 
Aerospace System sales3,282
  3,125
  9,899
  9,112
 
Innovation Systems           
Cost-type373
27% 

 472
27% 

Fixed-price1,005
73% 

 1,293
73% 

Intersegment sales37
  
  50
  
 
Innovation System sales1,415
  
  1,815
  
 
Mission Systems           
Cost-type1,259
48% 1,315
51% 3,745
48% 3,984
51%
Fixed-price1,372
52% 1,288
49% 4,065
52% 3,793
49%
Intersegment sales280
  233
  858
  718
 
Mission System sales2,911
  2,836
  8,668
  8,495
 
Technology Services           
Cost-type373
45% 435
48% 1,195
46% 1,284
46%
Fixed-price463
55% 476
52% 1,422
54% 1,508
54%
Intersegment sales204
  272
  615
  743
 
Technology Services sales1,040
  1,183
  3,232
  3,535
 
Total           
Cost-type3,958
49% 3,532
54% 11,201
51% 10,717
55%
Fixed-price4,127
51% 3,037
46% 10,738
49% 8,735
45%
Total Sales$8,085
  $6,569
  $21,939
  $19,452
 
(1)
Percentages calculated based on external customer sales.

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NORTHROP GRUMMAN CORPORATION                        

Sales by Geographic RegionThree Months Ended September 30 Nine Months Ended September 30
 20182017 20182017
$ in millions$
%(2)
 $
%(2)
 $
%(2)
 $
%(2)
Aerospace Systems           
United States$2,970
92% $2,760
90% $8,757
90% $8,007
90%
Asia/Pacific121
4% 155
5% 499
5% 500
6%
All other (1)
149
4% 140
5% 491
5% 376
4%
Intersegment sales42
  70
  152
  229
 
Aerospace Systems sales3,282
  3,125
  9,899
  9,112
 
Innovation Systems           
United States1,105
80% 

 1,401
79% 

Asia/Pacific72
5% 

 96
6% 

All other (1)
201
15% 

 268
15% 

Intersegment sales37
  
  50
  
 
Innovation Systems sales1,415
  
  1,815
  
 
Mission Systems           
United States2,253
86% 2,220
85% 6,666
85% 6,688
86%
Asia/Pacific208
8% 161
6% 521
7% 470
6%
All other (1)
170
6% 222
9% 623
8% 619
8%
Intersegment sales280
  233
  858
  718
 
Mission Systems sales2,911
  2,836
  8,668
  8,495
 
Technology Services           
United States653
78% 723
79% 2,021
77% 2,228
80%
Asia/Pacific45
5% 28
3% 113
4% 102
4%
All other (1)
138
17% 160
18% 483
19% 462
16%
Intersegment sales204
  272
  615
  743
 
Technology Services sales1,040
  1,183
  3,232
  3,535
 
Total           
United States6,981
86% 5,703
87% 18,845
86% 16,923
87%
Asia/Pacific446
6% 344
5% 1,229
6% 1,072
6%
All other (1)
658
8% 522
8% 1,865
8% 1,457
7%
Total Sales$8,085
100% $6,569
100% $21,939
100% $19,452
100%
(1)
All other is principally comprised of Europe and the Middle East.
(2)
Percentages calculated based on external customer sales.

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NORTHROP GRUMMAN CORPORATION                        

12.    RECAST 2017 FINANCIAL INFORMATION
Our prior period financial statements were recast for the retrospective adoption of ASC Topic 606 and ASU 2017-07 as described in Note 1. The following tables summarize the effects of adopting these accounting standards on our unaudited condensed consolidated statement of earnings and comprehensive income for the three and nine months ended September 30, 2017 and unaudited condensed consolidated statement of financial position as of December 31, 2017. The adoption of ASC Topic 606 and ASU 2017-07 did not have a material impact on our unaudited condensed consolidated statements of cash flows and changes in shareholders’ equity for the nine months ended September 30, 2017.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)
 Three Months Ended September 30, 2017
 As ReportedEffect of the Adoption ofAs Adjusted
$ in millions, except per share amounts 
ASC
Topic 606
 ASU 2017-07 
Sales       
Product$4,135
 $48
 $
 $4,183
Service2,392
 (6) 
 2,386
Total sales6,527
 42
 
 6,569
Operating costs and expenses       
Product3,153
 33
 3
 3,189
Service1,863
 (1) 2
 1,864
General and administrative expenses666
 13
 
 679
Operating income845
 (3) (5) 837
Other (expense) income       
Interest expense(73) 
 
 (73)
Net FAS (non-service) pension benefit (expense)
 
 2
 2
Other, net13
 
 3
 16
Earnings before income taxes785
 (3) 
 782
Federal and foreign income tax expense140
 (1) 
 139
Net earnings$645
 $(2) $
 $643
        
Basic earnings per share$3.70
 $(0.01) $
 $3.69
Weighted-average common shares outstanding, in millions174.2
 
 
 174.2
Diluted earnings per share$3.68
 $(0.01) $
 $3.67
Weighted-average diluted shares outstanding, in millions175.3
 
 
 175.3
        
Net earnings (from above)$645
 $(2) $
 $643
Other comprehensive income       
Change in unamortized benefit plan costs, net of tax99
 
 
 99
Change in cumulative translation adjustment
 
 
 
Other, net
 
 
 
Other comprehensive income, net of tax99
 
 
 99
Comprehensive income$744
 $(2) $
 $742






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NORTHROP GRUMMAN CORPORATION                        


CONDENSED CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)
 Nine Months Ended September 30, 2017
 As ReportedEffect of the Adoption ofAs Adjusted
$ in millions, except per share amounts 
ASC
Topic 606
 ASU 2017-07 
Sales       
Product$11,885
 $332
 $
 $12,217
Service7,284
 (49) 
 7,235
Total sales19,169
 283
 
 19,452
Operating costs and expenses       
Product8,982
 241
 (14) 9,209
Service5,646
 (29) (9) 5,608
General and administrative expenses2,009
 54
 
 2,063
Operating income2,532
 17
 23
 2,572
Other (expense) income       
Interest expense(224) 
 
 (224)
Net FAS (non-service) pension benefit (expense)
 
 (33) (33)
Other, net57
 
 10
 67
Earnings before income taxes2,365
 17
 
 2,382
Federal and foreign income tax expense528
 6
 
 534
Net earnings$1,837
 $11
 $
 $1,848
        
Basic earnings per share$10.53
 $0.06
 $
 $10.59
Weighted-average common shares outstanding, in millions174.5
 
 
 174.5
Diluted earnings per share$10.46
 $0.06
 $
 $10.52
Weighted-average diluted shares outstanding, in millions175.6
 
 
 175.6
        
Net earnings (from above)$1,837
 $11
 $
 $1,848
Other comprehensive income       
Change in unamortized benefit plan costs, net of tax300
 
 
 300
Change in cumulative translation adjustment
 
 
 
Other, net3
 
 
 3
Other comprehensive income, net of tax303
 
 
 303
Comprehensive income$2,140
 $11
 $
 $2,151


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NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
 December 31, 2017
 As ReportedEffect of the Adoption ofAs Adjusted
$ in millions 
ASC
Topic 606
 ASU 2017-07 
Assets       
Cash and cash equivalents$11,225
 $
 $
 $11,225
Accounts receivable, net829
 225
 
 1,054
Unbilled receivables, net3,147
 318
 
 3,465
Inventoried costs, net780
 (382) 
 398
Prepaid expenses and other current assets368
 77
 
 445
Total current assets16,349
 238
 
 16,587
Property, plant and equipment, net of accumulated depreciation of $5,066 for 20174,225
 
 
 4,225
Goodwill12,455
 
 
 12,455
Deferred tax assets475
 (28) 
 447
Intangible assets, net52
 
 
 52
Other non-current assets1,361
 1
 
 1,362
Total assets$34,917
 $211
 $
 $35,128
        
Liabilities       
Trade accounts payable$1,661
 $
 $
 $1,661
Accrued employee compensation1,382
 
 
 1,382
Advance payments and amounts in excess of costs incurred1,617
 144
 
 1,761
Other current liabilities2,305
 (17) 
 2,288
Total current liabilities6,965
 127
 
 7,092
Long-term debt, net of current portion of $867 for 201714,399
 
 
 14,399
Pension and other post-retirement benefit plan liabilities5,511
 
 
 5,511
Other non-current liabilities994
 
 
 994
Total liabilities27,869
 127
 
 27,996
        
Commitments and contingencies (Note 8)       
        
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: 2017—174,085,619174
 
 
 174
Paid-in capital44
 
 
 44
Retained earnings11,548
 84
 
 11,632
Accumulated other comprehensive loss(4,718) 
 
 (4,718)
Total shareholders’ equity7,048
 84
 
 7,132
Total liabilities and shareholders’ equity$34,917
 $211
 $
 $35,128

-28-


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, 2017,2018, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended September 30, 20172018 and 2016,2017, and of cash flows and changes in shareholders’ equity for the nine-month periods ended September 30, 2018 and 2017, and 2016. Thesethe related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements areinformation for it to be in conformity with accounting principles generally accepted in the responsibilityUnited States of the Company’s management.America.
We conducted our reviewshave 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, 2017, and the related consolidated statements of earnings and comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended prior to retrospective adjustment for the change in the Company’s method of accounting for revenue transactions, (not presented herein); and in our report dated January 29, 2018, we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 1 and presented in Note 12 that were applied to retrospectively adjust the December 31, 2017 consolidated statement of financial position of the Company (not presented herein). In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated statement of financial position in deriving the accompanying retrospectively adjusted condensed consolidated statement of financial position as of December 31, 2017.
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 Public Company Accounting Oversight Board (United States),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.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them 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), the consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of December 31, 2016, and the related consolidated statements of earnings and comprehensive income, cash flows, and changes in shareholders’ equity for the year then ended (not presented herein); and in our report dated January 30, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

/s/  Deloitte & Touche LLP
McLean, Virginia
October 24, 201723, 2018


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NORTHROP GRUMMAN CORPORATION                        

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global security company. We offer a broad portfolio of capabilities and technologies that enable us to deliver innovative products, systems and solutions for applications that range from undersea to outer space and into cyberspace. We provide products, systems and solutions in autonomous systems; cyber; command, control, communications and computers, intelligence, surveillance and reconnaissance (C4ISR); space; strike; and logistics and modernization. We participate in many high-priority defense and government programs in the United States (U.S.) and abroad. We conduct most of our business with the U.S. Government,government, principally the Department of Defense (DoD) and intelligence community. We also conduct business with foreign, state and local governments, as well as commercial customers.
The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Form 10-Q, as well as our 20162017 Annual Report on Form 10-K, which provides additional information on our systems, productsbusiness and solutions;the environment in which we operate and our operating results;results. Our 2017 results have been recast to reflect the impact of the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and liquidity.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, using the full retrospective method.
Pending Acquisition of Orbital ATK
On September 17, 2017,June 6, 2018 (the “Merger date”), the company entered intocompleted its previously announced acquisition of Orbital ATK, a definitive merger agreement to acquireglobal leader in aerospace and defense technologies, by acquiring all of the outstanding shares of Orbital ATK Inc. (Orbital ATK) for approximately $7.8a purchase price of $7.7 billion in cash, pluscash. On the assumption of approximately $1.4 billion in net debt (the “OrbitalMerger date, Orbital ATK Acquisition”). See Item 1.01 in our Current Report on Form 8-K filed with the SEC on September 18, 2017 forbecame a summary and copywholly-owned subsidiary of the merger agreement. 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, subsystems and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and advanced aerospace structures. The acquisition was financed with proceeds from the company’s debt financing completed in October 2017 and cash on hand. We believe this acquisition will enable us to broaden our capabilities and offerings, create value for shareholders, provide expanded opportunities for our combined employees and enhance our ability to provideadditional innovative solutions to meet our customers’ emerging requirements.requirements, create value for shareholders and provide expanded opportunities for our combined employees. Under the terms of the merger agreement, Orbital ATK shareholders are to receive all-cash consideration of $134.50 per share. We expect to fund the Orbital ATK Acquisition with the proceeds from our recently completed debt financing and cash on hand. See Notes 8 and 11Note 2 to the unaudited condensed consolidated financial statements for further information on ourregarding the acquisition of Orbital ATK Acquisition financing. The transaction is currently expected to close in the first half of 2018 and is subject to customary closing conditions, including regulatory and Orbital ATK shareholder approval. If the merger agreement is terminated under certain circumstances, Orbital ATK will be required to pay the company a termination fee of $275 million. Upon completion of the Orbital ATK Acquisition, we plan to establish Orbital ATK as a new, fourth business sector.ATK.
Global Security and Economic Environment
The following is an update of events relating to the global security and economic environment since the filing of our 20162017 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the periods ended March 31, 2017 and June 30, 2017 (2017 Quarterly Reports on Form 10-Q).10-K.
The global security, geopolitical and economic environment continues to be impacted by uncertainty surrounding geopolitical tensions.uncertainty. During the third quarter, wethe environment continued to seebe characterized by global and regional security threats from state and non-state actors as well as terrorist organizations, and increasingly diverse regional security concerns. Any or allconcerns and political instability. Additionally, economic tensions and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of these types of eventsfree trade agreements, could impact the global market for defense products, services and solutions.
U.S. Political and Economic Environment
The following is an update of events relating to the U.S. political and economic environment since the filing of our 20162017 Annual Report on Form 10-K10-K.
On February 9, 2018, Congress passed the Bipartisan Budget Act (BBA) of 2018, which extended the continuing resolution funding the government through March 23, 2018 and our 2017 Quarterly Reports on Form 10-Q.
In March 2017,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 was reached and the Treasury Department began taking “extraordinary measures” to finance the government. until March 1, 2019.
On September 8, 2017,March 23, 2018, the President signed legislation suspending the debt ceiling through December 8, 2017, with the debt ceiling to be reset on December 9, 2017. If the debt ceiling is breached, we may be required to continue to performOmnibus Appropriations Act for some period of time on certain of our U.S. Government contracts even if the U.S. Government is not making timely payments.
In May 2017, the President signed into law the FY 2017 Consolidated Appropriations Act.2018, which provides $1.3 trillion in discretionary funding for federal agencies. In total for FY 2017,2018, Congress appropriated $524approximately $700 billion infor national security, including approximately $630 billion for base discretionary funding for the DoD, consistent with the 2015 Bipartisan 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 2011 Budget Control Act (BCA). The President’s budget request also seeks another $65$70 billion in OCO funding for expeditionary needs, not capped by the BCA. On September 8, 2017, the President signed a continuing resolution (CR) which generally funds thefunding.

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NORTHROP GRUMMAN CORPORATION                        

government atOn September 28, 2018, full-year appropriations for FY 2017 levels2019 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 is in place to provide funding for other agencies (including NASA and other civil agencies) through December 8, 2017. It is unclear when or if an annual appropriations bill will be enacted for FY 2018 or at what levels. 7, 2018.
The U.S. Government mayfederal budget and debt ceiling are expected to continue to operate under a continuing resolution for some or allbe the subject of FY 2018, restricting new contract or program starts for that year and placing limitations on some planned program budgets, and we mayconsiderable debate, which could have a government shutdown of unknown duration. If a prolonged government shutdown were to occur, it could result in program cancellations and/or stop work orders and could limit our ability to performsignificant impact on our U.S. Government contractsdefense spending broadly and the U.S. Government’s ability to make timely payments.company’s programs in particular.
Operating Performance Assessment and Reporting
We manage and assess our business based on our performance on contracts and programs (typically larger contracts or two or more closely-related contracts). We recognize sales from our portfolio of long-term contracts as control is transferred to the customer, primarily using theover time on a 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.basis (cost incurred relative to cost estimated at completion). As a result, sales tend to fluctuate in concert with costs incurred and units delivered across our large portfolio of contracts. Due to Federal Acquisition Regulation (FAR) rules that govern our U.S. Governmentgovernment business and related Cost Accounting Standards (CAS), most types of costs are allocable to U.S. Governmentgovernment contracts. As such, we do not focus on individual cost groupings (such as manufacturing, engineering and design labor, subcontractor, material, overhead and general and administrative (G&A) costs), as much as we do on total contract cost, which is the key driver of our sales and operating income.
In evaluating our operating performance, we look primarily at changes in sales and operating income. Where applicable, significant fluctuations in operating performance attributable to individual contracts or programs, or changes in a specific cost element across multiple contracts, are described in our analysis. Based on this approach and the nature of our operations, the discussion of results of operations below first focuses on our threefour segments before distinguishing between products and services. Changes in sales are generally described in terms of volume, deliveries or other indicators of sales activity. Changeswhile changes in margin rates are generally described in terms of performance andand/or contract mix. For purposes of this discussion, volume generally refers to increases or decreases in sales or cost from production/service activity levels or delivery rates. Performanceand performance generally refers to non-volume related changes in profitability. Contract mix generally refers to changes in the ratio of contract type and/or lifecycle (e.g., cost-type, fixed-price, development, production, sustainment, etc)and/or sustainment).
CONSOLIDATED OPERATING RESULTS
Selected financial highlights are presented in the table below:
Three Months Ended September 30 % Nine Months Ended September 30 %Three Months Ended September 30 % Nine Months Ended September 30 %
$ in millions, except per share amounts2017 2016 Change 2017 2016 Change2018 2017 Change 2018 2017 Change
Sales$6,527
 $6,155
 6 % $19,169
 $18,111
 6%$8,085
 $6,569
 23 % $21,939
 $19,452
 13 %
Operating costs and expenses5,682
 5,329
 7 % 16,637
 15,749
 6%6,907
 5,732
 20 % 19,084
 16,880
 13 %
Operating costs and expenses as a % of sales87.1% 86.6%   86.8% 87.0%  85.4% 87.3%   87.0% 86.8%  
Operating income845
 826
 2 % 2,532
 2,362
 7%1,178
 837
 41 % 2,855
 2,572
 11 %
Operating margin rate12.9% 13.4%   13.2% 13.0%  14.6% 12.7%   13.0% 13.2%  
Federal and foreign income tax expense140
 167
 (16)% 528
 500
 6%93
 139
 (33)% 385
 534
 (28)%
Effective income tax rate17.8% 21.7%   22.3% 23.0%  7.5% 17.8%   13.0% 22.4%  
Net earnings645
 602
 7 % 1,837
 1,675
 10%1,144
 643
 78 % 2,572
 1,848
 39 %
Diluted earnings per share$3.68
 $3.35
 10 % $10.46
 $9.23
 13%$6.54
 $3.67
 78 % $14.68
 $10.52
 40 %
Sales
Current Quarter
Sales for the three months ended September 30, 20172018 increased $372 million,$1.5 billion, or 623 percent, as compared with the same period in 2016, primarily2017, due to the addition of $1.4 billion of sales from Innovation Systems and higher sales at Aerospace Systems and Mission Systems.Systems, partially offset by lower sales at Technology Services.
Year to Date
Sales for the nine months ended September 30, 20172018 increased $1.1$2.5 billion, or 613 percent, as compared with the same period in 2016, primarily2017, due to the addition of $1.8 billion of sales from Innovation Systems and higher sales at Aerospace Systems.Systems and Mission Systems, partially offset by lower sales at Technology Services.

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

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NORTHROP GRUMMAN CORPORATION                        

our segments.
Operating Income
Current Quarter
Operating income for the three months ended September 30, 20172018 increased $19$341 million, or 241 percent, as compared with the same period in 2016,2017, primarily due to a $81 million increase in our net FAS/CAS pension adjustment and a $28$223 million increase in segment operating income, partially offset bywhich includes the addition of $161 million of operating income from Innovation Systems, and a $90$112 million increasedecrease in unallocated corporate expenses. Higher operating costs and expenses as a percentage of sales reduced our operating margin rate to 12.9 percent from 13.4 percent in the prior year period and was principally driven by higher unallocated corporate expenses and a lower segment operating margin rate,expense as described in “Segment Operating Results,Results. partially offset by the increase in our net FAS/CAS pension adjustment described above.
G&A as a percentage of sales for the three months ended September 30, 2017 decreased to 10.2 percent from 10.8 percent in the prior year period principally due to higher sales.
Year to Date
Operating income for the nine months ended September 30, 2017 increased $170 million, or 7 percent, as compared with the same period in 2016, primarily due to a $211 million increase in our net FAS/CAS pension adjustment and a $75 million increase in segment operating income, partially offset by a $117 million increase in unallocated corporate expenses. Lower operating costs and expenses as a percentage of sales increased our operating margin rate to 13.214.6 percent from 13.012.7 percent in the prior year period and was principally driven by the increasepreviously noted decrease in our net FAS/CAS pension adjustment described above, partially offset by higher unallocated corporate expensesexpense and a lowerhigher segment operating margin rate as described in “Segment Operating Results.”
G&A as a percentage of sales for the ninethree months ended September 30, 20172018 decreased to 10.510.1 percent from 10.710.3 percent in the prior year period primarily due to higher sales.the inclusion of Innovation Systems.
Year to Date
Operating income for the nine months ended September 30, 2018 increased $283 million, or 11 percent, as compared with the same period in 2017, primarily due to a $264 million increase in segment operating income, which includes the addition of $200 million of operating income from Innovation Systems, and a $57 million decrease in unallocated corporate expense, partially offset by a $38 million decrease in our net FAS (service)/CAS pension adjustment as described in “Segment Operating Results.” Higher operating costs and expenses as a percentage of sales reduced our operating margin rate to 13.0 percent from 13.2 percent in the prior year period and was principally driven by the addition of Innovation Systems and the previously noted decrease in our net FAS (service)/CAS pension adjustment, partially offset by the decrease in unallocated corporate expense.
G&A as a percentage of sales for the nine months ended September 30, 2018 decreased to 10.3 percent from 10.6 percent in the prior year period primarily due to the inclusion of Innovation Systems.
For further information regarding product and service operating costs and expenses, see “Product and Service Analysis” below.
Federal and Foreign Income Taxes
Current Quarter and Year to Date
Our effective tax rate for the three and nine months ended September 30, 20172018 was lower as compared withthan the same periods in 2016,2017, as discussed in Note 54 to the unaudited condensed consolidated financial statements.
While certain periods include discrete tax items that impact our effective tax rate, on an ongoing basis (absent the impact of discrete items and/or changes in federal tax legislation), we expect an annual effective tax rate of approximately 30 percent due principally to tax benefits associated with the manufacturing deduction and research credits.
Net Earnings
Current Quarter
Net earnings for the three months ended September 30, 20172018 increased $43$501 million, or 778 percent, as compared withto the same period in 2016,2017, primarily due to $223 million of higher segment operating income, a $133 million increase in our net FAS (non-service) pension benefit, the previously noted $112 million decrease in unallocated corporate expense and the lower effective tax rate anddescribed above. These increases were partially offset by $60 million of higher operating income described above.interest expense on long-term debt.
Year to Date
Net earnings for the nine months ended September 30, 20172018 increased $162$724 million, or 1039 percent, as compared with the same period in 2016,2017, primarily due to thea $413 million increase in our net FAS (non-service) pension benefit, $264 million of higher segment operating income, the lower effective tax rate described above.above, the previously noted $57 million decrease in unallocated corporate expense and $55 million of higher interest income on short-term investments. These increases were partially offset by $196 million of higher interest expense on long-term debt and the previously noted $38 million decrease in our net FAS (service)/CAS pension adjustment.
Diluted Earnings Per Share
Current Quarter
Diluted earnings per share for the three months ended September 30, 20172018 increased $0.33,$2.87, or 1078 percent, as compared with the same period in 2016. The increase is2017, primarily due to the 778 percent increase in net earnings described above and a 2 percent reduction in weighted-average shares outstanding resulting from shares repurchased during 2016 and 2017.discussed above.
Year to Date
Diluted earnings per share for the nine months ended September 30, 20172018 increased $1.23,$4.16, or 1340 percent, as compared with the same period in 2016. The increase is2017, primarily due to the 1039 percent increase in net earnings described above and a 3 percent reduction in weighted-average shares outstanding resulting from shares repurchased during 2016 and 2017.discussed above.

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NORTHROP GRUMMAN CORPORATION                        

SEGMENT OPERATING RESULTS
Basis of Presentation
The company is aligned in threefour operating sectors, which also comprise our reportable segments: Aerospace Systems, Innovation Systems, Mission Systems and Technology Services. As described above, on the effective date of the Merger, we established Innovation Systems as a new, fourth business sector. The segment operating results below include sales and operating income for Innovation Systems subsequent to the Merger date.
We present our sectors in the following business areas, which are reported in a manner reflecting core capabilities:
Aerospace SystemsInnovation Systems Mission Systems Technology Services
Autonomous SystemsFlight Systems Sensors and Processing Global Logistics and Modernization
Manned Aircraft Defense SystemsCyber and ISR Advanced Defense Services
SpaceSpace Systems Advanced Capabilities System Modernization and Services
This section discusses segment sales, operating income and operating margin rates. A reconciliation of segment operating income to total operating income is provided below.
Segment Operating Income and Margin Rate
Segment operating income, as reconciled in the Reconciliation of Segment Operating Income to Total Operating Income section below, is a non-GAAP (accounting principles generally accepted in the United States of America) measure that reflects total earnings from our threefour segments, including allocated pension expense recognized under CAS, and excluding unallocated corporate items and FAS pension expense. This 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 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.
Three Months Ended September 30 % Nine Months Ended September 30 %Three Months Ended September 30 % Nine Months Ended September 30 %
$ in millions2017 2016 Change 2017 2016 Change2018 2017 Change 2018 2017 Change
Segment operating income$759
 $731
 4% $2,238
 $2,163
 3%$979
 $756
 29% $2,520
 $2,256
 12%
Segment operating margin rate11.6% 11.9%   11.7% 11.9%  12.1% 11.5%   11.5% 11.6%  
Current Quarter
Segment operating income for the three months ended September 30, 20172018 increased $28$223 million, or 429 percent, as compared with the same period in 2016,2017, and includes the addition of $161 million of operating income from Innovation Systems and higher operating income at all three sectors. The higher operating income atMission Systems and Aerospace Systems includes a $56 million favorable EAC adjustment on a restricted program largely related to performance incentives.Systems. Segment operating margin rate decreasedincreased principally due to lower segment margin rates at Aerospace Systems and Mission Systems, partially offset by a higher segment margin rate at Technology Services.Mission Systems and Aerospace Systems.
Year to Date
Segment operating income for the nine months ended September 30, 20172018 increased $75$264 million, or 312 percent, as compared with the same period in 2016,2017, and includes the addition of $200 million of operating income from Innovation Systems and higher operating income at all three sectors includingAerospace Systems and Mission Systems, partially offset by lower operating income at Technology Services. Segment operating income in the $56 million favorable EAC adjustment described above andprior year period included $54 million recognized to date in connection with a claim related to certain costs incurred in prior years (the “Cost“2017 Cost Claim”). Segment operating margin rate decreased principally due to the 2017 Cost Claim and a lower segment margin rate at Aerospace Systems, partially offset by a higher segment margin rate at Technology Services.

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NORTHROP GRUMMAN CORPORATION                        

Reconciliation of Segment Operating Income to Total Operating Income - The table below reconciles segment operating income to total operating income by including the impact of the net FAS/FAS (service)/CAS pension adjustment, as well as unallocated corporate expensesexpense (certain corporate-level expenses,costs, which are not considered allowable or allocable under applicable CAS or the FAR)FAR, and costs not considered part of management’s evaluation of segment operating performance). See Note 411 to the unaudited condensed consolidated financial statements for further information on the net FAS/FAS (service)/CAS pension adjustment and unallocated corporate expenses.expense.
Three Months Ended September 30 Nine Months Ended September 30Three Months Ended September 30 Nine Months Ended September 30
$ in millions2017 2016 2017 20162018 2017 2018 2017
Segment operating income$759
 $731
 $2,238
 $2,163
$979
 $756
 $2,520
 $2,256
CAS pension expense267
 224
 769
 633
278
 267
 741
 769
Less: FAS pension expense(95) (133) (324) (399)
Net FAS/CAS pension adjustment172
 91
 445
 234
Unallocated corporate expenses(85) 5
 (148) (31)
Less: FAS (service) pension expense(102) (97) (301) (291)
Net FAS (service)/CAS pension adjustment176
 170
 440
 478
Merger-related items(1)
(97) 
 (127) 
Other unallocated corporate income (expense)121
 (88) 25
 (159)
Unallocated corporate income (expense)24
 (88) (102) (159)
Other(1) (1) (3) (4)(1) (1) (3) (3)
Total operating income$845
 $826
 $2,532
 $2,362
$1,178
 $837
 $2,855
 $2,572
(1)
Merger-related items include amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired in the Merger. These items are included in unallocated corporate expense as they are not considered part of management's evaluation of segment operating performance.
Net FAS/FAS (service)/CAS Pension Adjustment
Current Quarter and Year to Date
The increase in our net FAS/FAS (service)/CAS pension adjustment for the three and nine months ended September 30, 2017, as compared with the same periods in 2016, is due to higher CAS expense and lower FAS expense than in the prior year periods. The increase in CAS expense relates to the continued phase-in of CAS harmonization and the impact of actual demographic experience, partially offset by a change in our mortality assumption as of December 31, 2016. The reduction in FAS expense was principally driven by our year-end 2016 FAS pension assumptions, including the noted change in our mortality assumption offset by a lower discount rate.
Unallocated Corporate Expenses
Current Quarter
Unallocated corporate expenses increased for the three months ended September 30, 2017,2018, as compared with the same period in 2016,2017, is primarily due to $27 millionthe addition of costs associated with the Orbital ATK Acquisition. In addition, the prior year period includedInnovation Systems, which more than offset a $30 million benefit recognized for state tax refunds claimed on our prior year taxlower net FAS (service)/CAS pension adjustment at legacy Northrop Grumman resulting from lower CAS expense due to higher asset returns in 2017 and a $25 million benefit recognized for estimated prior year overhead claim recoveries.change in the legacy Northrop Grumman mortality assumption as of December 31, 2017.
Year to Date
Unallocated corporate expenses increasedThe decrease in our net FAS (service)/CAS pension adjustment for the nine months ended September 30, 2017,2018, as compared with the same period in 2016, principally2017, is primarily due to lower CAS expense for legacy Northrop Grumman resulting from higher asset returns in 2017 and a change in the legacy Northrop Grumman mortality assumption as of December 31, 2017, which more than offset the additional net FAS (service)/CAS pension adjustment from the addition of Innovation Systems.
Unallocated Corporate Income (Expense)
Current Quarter
Unallocated corporate expense decreased for the three months ended September 30, 2018, as compared with the same period in 2017, primarily due to a $223 million benefit recognized for the finalization of certain prior year corporate cost claims resulting in a reduction of overhead reserves and an increase in our estimated recovery of certain environmental remediation costs. This decrease was partially offset by $97 million of Merger-related costs, primarily amortization expense for purchased intangible assets and depreciation expense related to the step-up in fair value of Innovation Systems property, plant and equipment, as well as $32 million of higher deferred state taxes and legal expenses.
Year to Date
Unallocated corporate expense decreased for the nine months ended September 30, 2018, as compared with the same period in 2017, primarily due to the current quarter items discussed above andpreviously noted $223 million benefit recognized for the completionfinalization of our 2016 overhead cost submission. In addition, thecertain prior year period benefited from a reductioncorporate cost claims. This decrease was partially offset by $127 million of Merger-related costs, primarily amortization expense for purchased intangible assets and depreciation expense related to the step-up in provisions for overhead costs.fair value of Innovation Systems property, plant and equipment, as well as $59 million of higher deferred state taxes and legal expenses.

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NORTHROP GRUMMAN CORPORATION                        

Net EAC Adjustments - We record changes in estimated contract earnings at completion (net EAC adjustments) using the cumulative catch-up method of accounting. Net EAC adjustments can have a significant effect on reported sales and operating income and the aggregate amounts are presented in the table below:
 Three Months Ended September 30 Nine Months Ended September 30
$ in millions2017 2016 2017 2016
Favorable EAC adjustments$188
 $196
 $501
 $595
Unfavorable EAC adjustments(86) (75) (186) (208)
Net EAC adjustments$102
 $121
 $315
 $387

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NORTHROP GRUMMAN CORPORATION                        

 Three Months Ended September 30 Nine Months Ended September 30
$ in millions2018 2017 2018 2017
Favorable EAC adjustments$296
 $185
 $740
 $537
Unfavorable EAC adjustments(147) (71) (332) (180)
Net EAC adjustments$149
 $114
 $408
 $357
Net EAC adjustments by segment are presented in the table below:
Three Months Ended September 30 Nine Months Ended September 30Three Months Ended September 30 Nine Months Ended September 30
$ in millions2017 2016 2017 20162018 2017 2018 2017
Aerospace Systems$90
 $76
 $205
 $218
$80
 $91
 $229
 $206
Innovation Systems(1)
16
 
 16
 
Mission Systems8
 36
 80
 136
37
 17
 132
 106
Technology Services8
 16
 41
 53
22
 11
 42
 57
Eliminations(4) (7) (11) (20)(6) (5) (11) (12)
Net EAC adjustments$102
 $121
 $315
 $387
$149
 $114
 $408
 $357
(1)
Amounts reflect EAC adjustments after the percent complete on Innovation Systems contracts was reset to zero as of the Merger date.
For purposes of the discussion in the remainder of this Segment Operating Results section, references to operating income and operating margin rate reflect segment operating income and segment operating margin rate, respectively.
AEROSPACE SYSTEMS
Three Months Ended September 30 % Nine Months Ended September 30 %
AEROSPACE SYSTEMSThree Months Ended September 30 % Nine Months Ended September 30 %
$ in millions2017 2016 Change 2017 2016 Change2018 2017 Change 2018 2017 Change
Sales$3,082
 $2,782
 11% $8,950
 $7,956
 12%$3,282
 $3,125
 5% $9,899
 $9,112
 9%
Operating income334
 311
 7% 961
 909
 6%376
 344
 9% 1,074
 987
 9%
Operating margin rate10.8% 11.2%   10.7% 11.4%  11.5% 11.0%   10.8% 10.8%  
Current Quarter
Aerospace Systems sales for the three months ended September 30, 20172018 increased $300$157 million, or 115 percent, as compared with the same period in 2016, primarily2017, due to higher volume on Manned Aircraft andprograms, as well as Autonomous Systems programs, partially offset by lower volume on Space programs. Higher Manned Aircraft sales were driven by higher restricted, F-35 and E-2D Advanced Hawkeye volume. Autonomous Systems sales andreflect higher F/A-18 volume. Space sales increased primarily due to higher restricted sales,volume on Triton, partially offset by lower Global Hawk volume. Space sales reflect lower volume on the James Webb Space Telescope (JWST) program. Autonomous Systems sales also increased principally due to higher volume for several programs, including intercompany activities, partially offset by lower volume on the Global Hawk and NATO Alliancehigher Ground Surveillance (AGS) programs.Based Strategic Deterrent (GBSD) Technology Maturation Risk Reduction (TMRR) volume.
Operating income for the three months ended September 30, 20172018 increased $23$32 million, or 79 percent, primarily due to higher sales partially offset byand a lowerhigher operating margin rate. Operating margin rate decreasedincreased to 10.811.5 percent from 11.211.0 percent principally due to changes in contract miximproved performance on Manned Aircraft programs, partially offset by the previously discussedand Autonomous Systems programs. The prior year period includes a $56 million favorable EAC adjustment largely related to performance incentives.adjustment.
Year to Date
Aerospace Systems sales for the nine months ended September 30, 20172018 increased $994$787 million, or 129 percent, as compared with the same period in 2016, primarily2017, due to higher volume on Manned Aircraft programs, as well as Autonomous Systems programs, partially offset by lower volume on Space programs. Higher Manned Aircraft sales were driven by higher restricted, sales, increased F-35, deliveriesB-2 and higher F/A-18E-2D Advanced Hawkeye volume. Space sales increased primarily due to higher restricted sales, partially offset by lower volume on the Advanced Extremely High Frequency program and JWST. Autonomous Systems sales increased principally due toreflect higher volume foron several programs, including Triton, partially offset by lower NATO AGSGlobal Hawk volume.
Operating income for the nine months ended September 30, 2017 increased $52 million, or 6 percent, primarily due to higher Space sales partially offset by areflect lower operating margin rate. Operating margin rate decreased to 10.7 percent from 11.4 percent principally due to changes in contract mix on Manned Aircraft programs.

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NORTHROP GRUMMAN CORPORATION                        

MISSION SYSTEMSintercompany and James Webb Space Telescope volume, partially offset by higher GBSD TMRR and restricted volume.
Operating income for the nine months ended September 30, 2018 increased $87 million, or 9 percent, as compared with the same period in 2017, primarily due to higher sales. Operating margin rate was comparable with the prior period and reflects $69 million of favorable EAC adjustments on multiple restricted programs recorded in 2018 and the previously noted $56 million favorable EAC adjustment recorded in 2017.
Three Months Ended September 30 % Nine Months Ended September 30 %
INNOVATION SYSTEMSThree Months Ended September 30 % Nine Months Ended September 30 %
$ in millions2017 2016 Change 2017 2016 Change2018 2017 Change 2018 2017 Change
Sales$2,837
 $2,698
 5% $8,357
 $8,081
 3%$1,415
 $
  $1,815
 $
 
Operating income363
 351
 3% 1,090
 1,055
 3%161
 
  200
 
 
Operating margin rate12.8% 13.0%   13.0% 13.1%  11.4% 
 11.0% 
 
The sales and operating income above reflect the operating results of Innovation Systems subsequent to the Merger date. For purposes of our comparative discussion below, we reference pro forma sales prepared in accordance with Article 11 of Regulation S-X and computed as if the Merger had been completed as of January 1, 2017. Refer to Note 2 to the financial statements for additional supplemental consolidated pro forma financial information. This pro forma financial information should not be considered indicative of the results that would have actually occurred if the Merger had been consummated on January 1, 2017, nor are they indicative of future results.
Current Quarter
Innovation Systems sales were $1.4 billion for the three months ended September 30, 2018 and $1.2 billion, on a pro forma basis, for the three months ended September 30, 2017. The $197 million, or 16 percent, increase reflects higher volume in each business area. Defense Systems sales reflect increased volume on armament systems and missile products programs. Flight Systems sales were primarily driven by higher volume on propulsion systems and launch vehicle programs. Space Systems sales increased primarily due to higher government satellite volume.
Year to Date
Innovation Systems sales were $4.1 billion and $3.4 billion, each on a pro forma basis, for the nine months ended September 30, 2018 and 2017, respectively. The $679 million, or 20 percent, increase reflects higher volume in each business area. Defense Systems sales reflect higher volume across multiple programs, including armament systems and small caliber systems programs. Flight Systems sales were primarily driven by higher volume on propulsion systems and aerospace structures programs. Space Systems sales increased primarily due to higher government satellite volume.
MISSION SYSTEMSThree Months Ended September 30 % Nine Months Ended September 30 %
$ in millions2018 2017 Change 2018 2017 Change
Sales$2,911
 $2,836
 3% $8,668
 $8,495
 2%
Operating income399
 359
 11% 1,122
 1,102
 2%
Operating margin rate13.7% 12.7%   12.9% 13.0%  
Current Quarter
Mission Systems sales for the three months ended September 30, 20172018 increased $139$75 million, or 53 percent, as compared with the same period in 2016,2017, due to higher Sensors and Processing and Advanced Capabilities volume, partially offset by lower Advanced Capabilities and Cyber and ISR volume. Sensors and Processing sales increased principally due to higher volume on restricted programs, electro-optical/infrared (EO/IR) self-protection programs, communications programs and targeting programs, F-35 sensors and the Scalable Agile Beam Radar (SABR) program.F-35. Advanced Capabilities sales increased primarily due to higher volume on air and missile defense programs. Cyber and ISR sales decreased primarily due to lower volume on the Joint National Integration Center Research and Development (JRDC) program and follow on activity, partially offset by higher volume on the Integrated Air and Missile Defense Battle Command System (IBCS) program. Cyber and ISR programs.sales reflect ramp-down on an ISR program.
Operating income for the three months ended September 30, 20172018 increased $12$40 million, or 311 percent, primarily due to higher sales, partially offset by a lowerhigher operating margin rate.rate and higher sales. Operating margin rate decreasedincreased to 12.813.7 percent from 13.012.7 percent primarily due to lower margin ratesimproved performance across the sector, principally on Sensors and Processing and Cyber and ISR and Sensors and Processing programs, partially offset by improved margin rates on Advanced Capabilities programs.

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Year to Date
Mission Systems sales for the nine months ended September 30, 20172018 increased $276$173 million, or 32 percent, as compared with the same period in 2016,2017, primarily due to higher Sensors and Processing volume, partially offset by lower Cyber and ISR and Advanced Capabilities volume. Sensors and Processing sales increased principally due to higher volume on restricted programs, electro-optical/infrared self-protection programs, F-35 sensors, EO/IR self-protection and targeting programs and the SABR program. These increases were partially offset by lower volume on international ground-based radarcommunications programs. Cyber and ISR sales decreased primarily due to ramp-down on an ISR program. Advanced Capabilities sales reflect lower volume on ISR programs. Advanced Capabilities sales were comparable to the prior year.JRDC, partially offset by higher volume on several programs, including IBCS.
Operating income for the nine months ended September 30, 20172018 increased $35$20 million, or 32 percent, as compared with the same period in 2017, primarily due to $32 millionhigher sales. Operating margin rate decreased to 12.9 percent from 13.0 percent principally due to a benefit recognized in the prior year period in connection with the 2017 Cost Claim, described above. Operating margin rate was comparable with the prior year period.
TECHNOLOGY SERVICESpartially offset by improved performance during 2018 on Sensors and Processing and Cyber and ISR programs.
Three Months Ended September 30 % Nine Months Ended September 30 %
TECHNOLOGY SERVICESThree Months Ended September 30 % Nine Months Ended September 30 %
$ in millions2017 2016 Change 2017 2016 Change2018 2017 Change 2018 2017 Change
Sales$1,183
 $1,190
 (1)% $3,552
 $3,617
 (2)%$1,040
 $1,183
 (12)% $3,232
 $3,535
 (9)%
Operating income133
 130
 2 % 398
 387
 3 %111
 124
 (10)% 328
 378
 (13)%
Operating margin rate11.2% 10.9%   11.2% 10.7%  10.7% 10.5%   10.1% 10.7%  
Current Quarter
Technology Services sales for the three months ended September 30, 20172018 decreased $7$143 million, or 112 percent, as compared with the same period in 2016, primarily2017, due to lower volume on Advanced Defense Services and System Modernization and Services programs, partially offset by higher volume on Global Logistics and Modernization programs. Advanced Defense Services and System Modernization and Services sales decreased principallyprimarily due to the completion of several programs, in 2016including JRDC and 2017.the Virginia Information Technologies Agency (VITA) program. Global Logistics and Modernization sales increased primarily due to higher intercompany restricted sales and increased volume onfor several programs, including the Hunter and UKAWACS programs,Special Electronic Mission Aircraft (SEMA) program, partially offset by lower volume onfrom the completion of the KC-10 program as our contract nears completion.program.
Operating income for the three months ended September 30, 2017 increased $32018 decreased $13 million, or 210 percent, andprimarily due to lower sales, partially offset by a higher operating margin rate. Operating margin rate increased to 11.210.7 percent from 10.910.5 percent primarilyprincipally due to improved performance on Advanced Defense ServicesGlobal Logistics and System Modernization and Services programs.
Year to Date
Technology Services sales for the nine months ended September 30, 20172018 decreased $65$303 million, or 29 percent, as compared with the same period in 2016, primarily2017, due to lower volume on Advanced Defense Services and System Modernization and Services programs, partially offset by higher volume on Global Logistics and Modernization programs. Advanced Defense Services and System Modernization and Services sales decreased primarily due to the completion of several programs, including JRDC, partially offset by higher volume on the Saudi Arabian Ministry of National Guard Training Support program (through our interest in a joint venture for which we consolidate the financial results). Global Logistics and Modernization sales increased primarily due to higher volume for several programs, including SEMA, partially offset by lower volume from the completion of the KC-10 program.
Operating income for the nine months ended September 30, 2018 decreased $50 million, or 13 percent, as compared with the same period in 2017, primarily due to lower sales and a lower operating margin rate. Operating margin rate decreased to 10.1 percent from 10.7 percent principally due to an unfavorable EAC adjustment recorded upon receipt of a notice of termination on the VITA program and a benefit recognized in the prior year period in connection with the 2017 Cost Claim.

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programs. System Modernization and Services sales decreased principally due to the completion of several programs in 2016 and 2017.
Operating income for the nine months ended September 30, 2017 increased $11 million, or 3 percent, and operating margin rate increased to 11.2 percent from 10.7 percent primarily due to improved performance across the sector.
PRODUCT AND SERVICE ANALYSIS
The following table presents product and service sales and operating costs and expenses by segment:
Three Months Ended September 30 Nine Months Ended September 30Three Months Ended September 30 Nine Months Ended September 30
$ in millions20172016 2017201620182017 20182017
Segment Information:SalesOperating Costs and ExpensesSalesOperating Costs and Expenses SalesOperating Costs and ExpensesSalesOperating Costs and ExpensesSalesOperating Costs and ExpensesSalesOperating Costs and Expenses SalesOperating Costs and ExpensesSalesOperating Costs and Expenses
Aerospace Systems      
Product$2,775
$2,457
$2,615
$2,320
 $8,339
$7,436
$7,572
$6,737
Service507
449
510
461
 1,560
1,389
1,540
1,388
Innovation Systems   
Product$2,558
$2,274
$2,266
$2,005
 $7,369
$6,563
$6,480
$5,711
1,246
1,101


 1,600
1,418


Service524
474
516
466
 1,581
1,426
1,476
1,336
169
153


 215
197


Mission Systems      
Product1,731
1,501
1,604
1,395
 5,059
4,364
4,717
4,082
1,818
1,582
1,719
1,496
 5,349
4,624
5,196
4,488
Service1,106
973
1,094
952
 3,298
2,903
3,364
2,944
1,093
930
1,117
981
 3,319
2,922
3,299
2,905
Technology Services      
Product109
100
76
72
 282
259
239
220
132
119
113
103
 356
325
275
254
Service1,074
950
1,114
988
 3,270
2,895
3,378
3,010
908
810
1,070
956
 2,876
2,579
3,260
2,903
Segment Totals          
Total Product$4,398
$3,875
$3,946
$3,472
 $12,710
$11,186
$11,436
$10,013
$5,971
$5,259
$4,447
$3,919
 $15,644
$13,803
$13,043
$11,479
Total Service2,704
2,397
2,724
2,406
 8,149
7,224
8,218
7,290
2,677
2,342
2,697
2,398
 7,970
7,087
8,099
7,196
Intersegment eliminations(575)(504)(515)(454) (1,690)(1,479)(1,543)(1,355)(563)(495)(575)(504) (1,675)(1,471)(1,690)(1,479)
Total segment(1)
$6,527
$5,768
$6,155
$5,424
 $19,169
$16,931
$18,111
$15,948
$8,085
$7,106
$6,569
$5,813
 $21,939
$19,419
$19,452
$17,196
(1) 
A reconciliation of segment operating income to total operating income is included in “Segment Operating Results.”
Product Sales and Costs
Current Quarter
Product sales for the three months ended September 30, 20172018 increased $452 million,$1.5 billion, or 1134 percent, as compared with the same period in 2016,2017. The increase was primarily due to higherthe addition of $1.2 billion of product sales from Innovation Systems and higher restricted and F-35 volume at Aerospace Systems and Mission Systems. Higher Aerospace Systems product sales were primarily driven by increased restricted volume. The increase at Mission Systems was principally due to higher product volume on EO/IR self-protection and targeting programs, F-35 sensors and the SABR program.
Product costs for the three months ended September 30, 20172018 increased $403 million,$1.3 billion, or 1234 percent, as compared with the same period in 2016,2017, consistent with the higher product sales described above.
Year to Date
Product sales for the nine months ended September 30, 20172018 increased $1.3$2.6 billion, or 1120 percent, as compared with the same period in 2016,2017. The increase was primarily due to higherthe addition of $1.6 billion of product sales from Innovation Systems and higher restricted and F-35 volume at Aerospace Systems and Mission Systems. Higher Aerospace Systems product sales were primarily driven by increased restricted volume, partially offset by lower NATO AGS volume. The increase at Mission Systems was principally due to higher product volume on F-35 sensors, EO/IR self-protection and targeting programs and the SABR program.
Product costs for the nine months ended September 30, 20172018 increased $1.2$2.3 billion, or 1220 percent, as compared with the same period in 2016. The increase was2017, consistent with the higher product sales described above and reflects a lower product margin rate at Aerospace Systems due to changes in contract mix.above.

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Service Sales and Costs
Current Quarter
Service sales for the three months ended September 30, 20172018 decreased $20 million, or 1 percent, as compared with the same period in 2016.2017. The decrease was primarily driven bydue to lower service volume onsales at Technology Services principally due to the KC-10 program at

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Technology Services,several programs, partially offset by an increase inthe addition of $169 million of service sales on several Sensors and Processing programs at Missionfrom Innovation Systems.
Service costs for the three months ended September 30, 2017 were comparable2018 decreased $56 million, or 2 percent, as compared with the same period in 2016,2017, consistent with the lower service sales described above and reflects lowerhigher service margin rates at Aerospace Systems and Mission Systems.Systems principally due to improved performance.
Year to Date
Service sales for the nine months ended September 30, 20172018 decreased $69$129 million, or 12 percent, as compared with the same period in 2016.2017. The decrease was primarily due todriven by lower service volume on the KC-10 programsales at Technology Services and onprincipally due to the completion of several Cyber and ISR programs, at Mission Systems, partially offset by an increase inthe addition of $215 million of service sales on several Autonomous Systems and Manned Aircraft programs at Aerospacefrom Innovation Systems.
Service costs for the nine months ended September 30, 20172018 decreased $66$109 million, or 12 percent, as compared with the same period in 2016. The decrease was2017, consistent with the lower service sales described above.
BACKLOG
Total backlog includesBacklog 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 thean option or IDIQ task order is exercised or awarded. For multi-year service contracts with non-U.S. Government customers having no stated contract values, backlog includes only the amounts committed by the customer. Backlog is converted into sales primarily as costs are incurred or deliveries are made.incurred.
During the nine months endedCompany backlog as of September 30, 2018 and December 31, 2017 was $52.6 billion and $42.6 billion, respectively. As discussed in Note 1 to the company’s totalfinancial statements, we adopted ASC Topic 606 on January 1, 2018 using the full retrospective method and applied the transition practical expedient related to backlog declined modestly.for reporting periods presented before the date of initial application. However, for comparative purposes, we have recast our backlog as of December 31, 2017 to reflect the impact of adoption of ASC Topic 606.
LIQUIDITY AND CAPITAL RESOURCES
We endeavor to ensure the most efficient conversion of operating income into cash for deployment in our business and to maximize shareholder value through cash deployment activities. In addition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash provided by operating activities and free cash flow, a non-GAAP measure described in more detail below.
Cash and cash equivalents and cash generated from operating activities, supplemented by borrowings under credit facilities, commercial paper and/or in the capital markets, if needed, are expected to be sufficient to fund our operations for at least the next 12 months.
On September 17, 2017, we entered into a definitive merger agreement to acquire Orbital ATK for approximately $7.8 billion in cash, plus the assumption of approximately $1.4 billion in net debt. In October 2017, the company issued $8.25 billion of unsecured senior notes and intends to use the net proceeds to finance the Orbital ATK Acquisition and to pay related fees and expenses. See Notes 2, 8 and 11 to the unaudited condensed consolidated financial statements for further information.
Operating Cash Flow
The table below summarizes key components of cash flow provided by operating activities:
Nine Months Ended September 30Nine Months Ended September 30
$ in millions2017 20162018 2017
Net earnings$1,837
 $1,675
$2,572
 $1,848
Non-cash items(1)
467
 370
792
 475
Changes in assets and liabilities:      
Trade working capital(1,491) (1,034)(1,400) (1,510)
Retiree benefits235
 318
(447) 235
Other, net(42) (47)(67) (42)
Net cash provided by operating activities$1,006
 $1,282
$1,450
 $1,006
(1) 
Includes depreciation and amortization, stock based compensation expense and deferred income taxes.
Net cash provided by operating activities for the nine months ended September 30, 2017 decreased $276 million, as compared with the same period in 2016. Higher earnings were more than offset by an increase in trade working capital principally due to an increase in accounts receivable and inventoried costs.

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Net cash provided by operating activities for the nine months ended September 30, 2018 increased $444 million, as compared with the same period in 2017, principally due to higher net earnings and improved trade working capital performance, partially offset by a $250 million voluntary pre-tax pension contribution ($163 million after-tax) in the third quarter of 2018.
Free Cash Flow
Free cash flow, as reconciled in the table below, 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, stock repurchases, and the payment of dividends. This measure may be useful to investors and other users of our financial statements as a supplemental measure of our cash performance, but should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating cash flows presented in accordance with GAAP.
The table below reconciles net cash provided by operating activities to free cash flow:
Nine Months Ended September 30Nine Months Ended September 30
$ in millions2017 20162018 2017
Net cash provided by operating activities$1,006
 $1,282
$1,450
 $1,006
Less: capital expenditures(650) (608)(786) (650)
Free cash flow$356
 $674
$664
 $356
Free cash flow for the nine months ended September 30, 2017 decreased $3182018 increased $308 million, as compared with the same period in 2016,2017, principally due to the decreaseincrease in net cash provided by operating activities described above.above, partially offset by higher capital expenditures at Aerospace Systems and the inclusion of Innovation Systems’ capital expenditures.
Investing Cash Flow
Net cash used in investing activities for the nine months ended September 30, 20172018 increased to $629 million$8.4 billion from $605$629 million in the prior year period principally due to higher capital expenditures.$7.7 billion paid for the acquisition of Orbital ATK, net of cash acquired.
Financing Cash Flow
Net cash used in financing activities for the nine months ended September 30, 2017 decreased2018 increased to $1$3.0 billion from $1.9$1.0 billion in the prior year periodperiod. The increase was primarily due to $2.3 billion in debt repayments and $314 million in payments to credit facilities, partially offset by net commercial paper borrowings of $499 million and lower share repurchases during 2017 and a debt repayment of $107 million in the first quarter of 2016.2018.
Credit Facilities, Commercial Paper and Financial Arrangements - See Note 8 to the unaudited condensed consolidated financial statements for further information on our credit facilities, commercial paper and our use of standby letters of credit and guarantees.
Share Repurchases - See Note 3 to the unaudited condensed consolidated financial statements for further information on our share repurchase programs.
Unsecured Senior NotesLong-term Debt - See Note 116 to the unaudited condensed consolidated financial statements for further information.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
There have been no material changes to our critical accounting policies, estimates or judgments from those discussed in our 20162017 Annual Report on Form 10-K.10-K and as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
ACCOUNTING STANDARDS UPDATES
See Note 1 to our unaudited condensed consolidated financial statements for further information on accounting standards updates.
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Form 10-Q and the information we are incorporating by reference contain statements, other than statements 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,” “intend,” “may,” “could,” “plan,” “project,” “forecast,” “believe,

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“believe,” “estimate,” “outlook,” “anticipate,” “trends,” “goals” and similar expressions generally identify these forward-looking statements.
Forward-looking statements include, among other things, statements relating to our future financial condition, results of operations and/or cash flows, expected benefits and implications of the proposed Orbital ATK Acquisition and the timing and circumstances of the proposed acquisition.flows. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made, but which may change over time. These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict. Specific risks that could cause actual results to differ materially

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from those expressed or implied in these forward-looking statements include, but are not limited to, those identified and discussed more fully in the section entitled “Risk Factors” in our 20162017 Annual Report on Form 10-K, the section entitled “Risk Factors” in this report and in other filings with the Securities and Exchange Commission (SEC). They include:
our dependence on the U.S. Governmentgovernment for a substantial portion of our business
significant delays or reductions in appropriations for our programs and U.S. Governmentgovernment funding more broadly
investigations, claims, disputes, enforcement actions and/or litigation
the use of estimates when accounting for our contracts and the effect of contract cost growth and/or changes in estimated contract revenues and costs
our exposure to additional risks as a result of our international business, including risks related to geopolitical and economic factors, laws and regulations
the improper conduct of employees, agents, subcontractors, suppliers, business partners or joint ventures in which we participate and the impact on our reputation, our ability to do business, and our financial position, results of operations and/or cash flows
the use of estimates when accounting forcyber and other security threats or disruptions faced by us, our contractscustomers or our suppliers and the effect of contract cost growth and/or changes in estimated contract revenues and costsother partners
the performance and financial viability of our subcontractors and suppliers and the availability and pricing of raw materials, chemicals and components
cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners
changes in procurement and other laws, regulations and practices applicable to our industry, findings by the U.S. Government,government as to our compliance with such laws and regulations, and changes in our customers’ business practices globally
increased competition within our markets and bid protests
the ability to maintain a qualified workforce
inabilityour ability to meet performance obligations under our contracts, including obligations that are technologically complex, require certain manufacturing expertise or are dependent on factors not wholly within our control
environmental matters, including unforeseen environmental costs and government and third party claims
natural and/or environmental disasters
the adequacy and availability of our insurance coverage, customer indemnifications or other liability protections
products and services we provide related to hazardous and high risk operations, 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 post-retirement benefit plans and legislative or other regulatory actions impacting our pension, post-retirement and health and welfare plans
changes in business conditions that could impact business investments and/or recorded goodwill or the value of other long-lived assets
the satisfaction of conditions to (including regulatory approvals and Orbital ATK shareholder approval) 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
our ability to exploit or protect intellectual property rights
inabilityour ability to develop new products and technologies and maintain technologies, facilities, and equipment to win new competitions and meet the needs of our customers
the components, production and use of certain of our products involve hazardous and significant risks

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changes in business conditions that could impact business investments and/or recorded goodwill or the value of other long-lived assets
unanticipated changes in our tax provisions or exposure to additional tax liabilities
qualification of the Alliant Techsystems Inc. spin-off of Vista Outdoor Inc. as a tax-free transaction
Additional information regarding these risks and other important factors can be found in the section entitled “Risk Factors” in our 20162017 Annual Report on Form 10-K, and as disclosedthe section entitled “Risk Factors” in this report and from time to time in our other filings with the SEC.
You are urged to consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of forward-looking statements. These forward-looking statements speak only as of the date this report is first filed or, in the case of any document incorporated by reference, the date of that document. We

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undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
CONTRACTUAL OBLIGATIONS
There have been no material changes to our contractual obligations from those discussed in our 20162017 Annual Report on Form 10-K.10-K and as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risks from those discussed in our 20162017 Annual Report on Form 10-K.10-K and as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
Item 4.    Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive officer (Chairman and Chief Executive Officer and President)Officer) 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 September 30, 2017,2018, 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 SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
DuringAs previously discussed, we completed our acquisition of Orbital ATK during the second quarter of 2018 (see Note 2 to the financial statements). We are in the process of integrating certain controls and related procedures for legacy Orbital ATK with those of legacy Northrop Grumman. Other than integrating such controls, during the three months ended September 30, 2017,2018, no change occurred in our internal controlscontrol over financial reporting that materially affected, or is reasonably likely to materially affect, our internal controlscontrol over financial reporting.

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We have provided information about certain legal proceedings in which we are involved in our 20162017 Annual Report on Form 10-K, and updated that information in NoteNotes 7 and 8 to the unaudited condensed consolidated financial statements.
We are a party to various investigations, lawsuits, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. These types of matters could result in fines; penalties;administrative, civil or criminal fines, penalties or other sanctions (which terms include judgments or convictions and consent or other voluntary decrees or agreements); compensatory, treble or other damages; non-monetary relief or non-monetary relief.actions; or other liabilities. Government regulations also provide that certain allegations against a contractor may lead to suspension or debarment from future government contracts or suspension of export privileges for the company or one or more of its components. Suspension or debarment could have a material adverse effect on the company because of our reliance on government contracts and authorizations. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to us to date and other than as noted in our 20162017 Annual Report on Form 10-K, as updated by NoteNotes 7 and 8 to the unaudited condensed consolidated financial statements in this report, we do not believe that the outcome of any matter currently 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, 2017,2018 or its annual results of operations and/or cash flows. For further information on the risks we face from existing and future investigations, lawsuits, claims, enforcement actions and other legal proceedings, please see “Risk Factors” in our 20162017 Annual Report on Form 10-K.10-K and in this Form 10-Q.
Item 1A. Risk Factors
The following risk factor is in addition to the risk factors described in our 2016 Annual Report on Form 10-K and should be read in conjunction with the risk factors therein. For a discussion of our risk factors please see the section entitled "Risk Factors"“Risk Factors” in our 20162017 Annual Report on Form 10-K.
Anticipated benefits of10-K and the Orbital ATK Acquisition may not be realized.
On September 17, 2017, the company entered into a definitive merger agreement to acquire Orbital ATK. We believe this acquisition will enable us to broaden our capabilities and offerings, create value for shareholders, provide expanded opportunities for our combined employees and enhance our ability to provide innovative solutions to meet our customers’ emerging requirements. However, in the course of integrating our business with Orbital ATK’s business, we may discover additional information about Orbital ATK’s business (including its financial controls and potential risks, opportunities and liabilities) that alters our assessment of the anticipated benefits and risks of the Orbital ATK Acquisition. Additionally, our customers may not value our combined businesses and capabilities as much as we anticipate, in which case we may not realize the benefits of our combined business to the extent we currently anticipate or at all.
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 receiving the approval of Orbital ATK’s stockholders, 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 when these conditions will be satisfied, if at all, 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.
Our ability to realize the anticipated benefits of the Orbital ATK Acquisition will depend, to a large extent, on our ability to integrate the Orbital ATK business into ours. The integration of an independent business into our business is a complex, costly and time-consuming process. Costs may include, among other things, those associated with facilities and systems consolidation, operational impacts, severance and other potential employment-related costs, as well as fees paid to financial, legal and other advisors. We will be required to devote significant management attention and resources prior to the consummation of the Orbital ATK Acquisition to prepare for integration. We also will be required to devote significant management attention and resources following the consummation of the Orbital ATK Acquisition to integrate Orbital ATK’s business and operations into our business and to realize the anticipated benefits. 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 may need to address in the integration process. The integration process may disrupt our business and, if

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implemented ineffectively, may not result in the realization of the expected benefits of the Orbital ATK Acquisition. The consummation of the Orbital ATK Acquisition may trigger change in control and other similar provisions in certain agreements to which Orbital ATK is a party, or otherwise affect contractual relationships, which could have an adverse impact on the combined business if we are unable to address such issues. The failure to meet the challenges involved in integrating Orbital ATK’s business and to realize the anticipated benefits of the Orbital ATK Acquisition could cause an interruption of, or a loss of momentumsection entitled “Risk Factors” in our activities.
AssumingQuarterly Report on Form 10-Q for the Orbital ATK Acquisition closes, the above risks could have a material adverse effect on our future financial position, results of operations and/or cash flows.quarter ended June 30, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities – The table below summarizes our repurchases of common stock during the three months ended September 30, 2017:2018:
Period
Total Number
of Shares
Purchased
 
Average 
Price
Paid per
Share(1)
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the
Plans or Programs
($ in millions)
July 1, 2017 - July 28, 201777,200
 $263.15
 77,200
  $2,346
July 29, 2017 - August 25, 2017
 
 
  2,346
August 26, 2017 - September 29, 2017
 
 
  2,346
Total77,200
 $263.15
 77,200
  $2,346
PeriodTotal Number
of Shares
Purchased
 
Average 
Price
Paid per
Share
(1)
 Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the
Plans or Programs
($ in millions)
June 30, 2018 - July 27, 2018206,712
 $311.44
 206,712
  $2,233
July 28, 2018 - August 24, 2018155,221
 295.64
 155,221
  2,187
August 25, 2018 - September 28, 2018178,325
 304.66
 178,325
  2,133
Total540,258
 $304.66
 540,258
  $2,133
(1) 
Includes commissions paid.
Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and, in the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.
See Note 3 to the unaudited condensed consolidated financial statements for further information on our share repurchase programs.
Item 3. Defaults Upon Senior Securities
No information is required in response to this item.
Item 4. Mine Safety Disclosures
No information is required in response to this item.
Item 5. Other Information
No information is required in response to this item.

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Item 6. Exhibits
2.1
  
2.2
  
2.3
2.4
10.1
+10.2
+10.3
+10.4
+10.5
  
*12(a)
  
*15
  
*31.1
  
*31.2
  
**32.1
  
**32.2
  
*101Northrop Grumman Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings and Comprehensive Income, (ii) Condensed Consolidated Statements of Financial Position, (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity, and (v) Notes to Condensed Consolidated Financial Statements

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+Management contract or compensatory plan or arrangement
  
*Filed with this report
  
**Furnished with this report

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NORTHROP GRUMMAN CORPORATION                        

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

NORTHROP GRUMMAN CORPORATION
(Registrant)
  
By:
 
 /s/ Michael A. Hardesty
  
Michael A. Hardesty
Corporate Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
Date: October 24, 201723, 2018

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