UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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



☒FORM			10-Q


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

For the Quarterly Period Ended March 31, ~~2020~~2021



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

Commission File Number 1-16411

NORTHROP GRUMMAN CORPORATION

(Exact name of registrant as specified in its charter)


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

~~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~~) (703) 280-2900

(Registrant’s telephone number, including area code)

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



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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large Accelerated Filer ☒ Accelerated Filer ☐

Non-accelerated Filer ☐ Smaller Reporting Company ☐

Emerging Growth Company ☐

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

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

Yes ☐ No ☒

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

As of April ~~24, 2020, 166,702,730~~26, 2021, 160,961,208 shares of common stock were outstanding.

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NORTHROP GRUMMAN CORPORATION

TABLE OF CONTENTS



		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings and Comprehensive Income	1
	Condensed Consolidated Statements of Financial Position	2
	Condensed Consolidated Statements of Cash Flows	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity	4
	Notes to Condensed Consolidated Financial Statements
	1. Basis of Presentation	5
	2. Earnings Per Share, Share Repurchases and Dividends on Common Stock	7
	3. Income Taxes	8
	4. Fair Value of Financial Instruments	8
	5. Investigations, Claims and Litigation	9
	6. Commitments and Contingencies	10
	7. Retirement Benefits	12
	8. Stock Compensation Plans and Other Compensation Arrangements	12
	9. Segment Information	13
	Report of Independent Registered Public Accounting Firm	17
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Overview	18
	Consolidated Operating Results	19
	Segment Operating Results	2022
	Product and Service Analysis	2426
	Backlog	2527
	Liquidity and Capital Resources	2527
	Critical Accounting Policies, Estimates and Judgments	2729
	Accounting Standards Updates	2729
	Forward-Looking Statements and Projections	2729
	Contractual Obligations	2830
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2830
Item 4.	Controls and Procedures	2830

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	2932
Item 1A.	Risk Factors	2932
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3032
Item 6.	Exhibits	3233
	Signatures	34

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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 March 31							Three Months Ended March 31
$ in millions, except per share amounts	2020			2019			$ in millions, except per share amounts		2021		2020
Sales							Sales
Product	$	6,176		$	5,728		Product		$	7,022	$	6,176
Service	2,444			2,461			Service		2,135		2,444
Total sales	8,620			8,189			Total sales		9,157		8,620
Operating costs and expenses							Operating costs and expenses
Product	4,952			4,517			Product		5,690		4,952
Service	1,946			1,976			Service		1,727		1,946
General and administrative expenses	788			760			General and administrative expenses		898		788
Total operating costs and expenses							Total operating costs and expenses		8,315		7,686
Gain on sale of business							Gain on sale of business		1,980		0
Operating income	934			936			Operating income		2,822		934
Other (expense) income							Other (expense) income
Interest expense	(125		)	(138		)	Interest expense		(155)		(125)
FAS (non-service) pension benefit	302			200
Non-operating FAS pension benefit							Non-operating FAS pension benefit		367		302

Other, net	(58		)	36			Other, net		(18)		(58)
Earnings before income taxes	1,053			1,034			Earnings before income taxes		3,016		1,053
Federal and foreign income tax expense	185			171			Federal and foreign income tax expense		821		185
Net earnings	$	868		$	863		Net earnings		$	2,195	$	868

Basic earnings per share	$	5.18		$	5.08		Basic earnings per share		$	13.46	$	5.18
Weighted-average common shares outstanding, in millions	167.7			170.0			Weighted-average common shares outstanding, in millions		163.1		167.7
Diluted earnings per share	$	5.15		$	5.06		Diluted earnings per share		$	13.43	$	5.15
Weighted-average diluted shares outstanding, in millions	168.4			170.7			Weighted-average diluted shares outstanding, in millions		163.5		168.4

Net earnings (from above)	$	868		$	863		Net earnings (from above)		$	2,195	$	868
Other comprehensive loss							Other comprehensive loss
Change in unamortized prior service credit, net of tax	(10		)	(11		)	Change in unamortized prior service credit, net of tax		(2)		(10)
Change in cumulative translation adjustment and other, net	(9		)	4			Change in cumulative translation adjustment and other, net		(1)		(9)
Other comprehensive loss, net of tax	(19		)	(7		)	Other comprehensive loss, net of tax		(3)		(19)
Comprehensive income	$	849		$	856		Comprehensive income		$	2,192	$	849

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)


$ in millions, except par value	March 31, 2020			December 31, 2019			$ in millions, except par value	March 31, 2021		December 31, 2020
Assets							Assets
Cash and cash equivalents	$	3,278		$	2,245		Cash and cash equivalents	$	3,517	$	4,907
Accounts receivable, net	2,136			1,326			Accounts receivable, net	1,710		1,501
Unbilled receivables, net	5,918			5,334			Unbilled receivables, net	5,519		5,140
Inventoried costs, net	785			783			Inventoried costs, net	860		759
Prepaid expenses and other current assets	1,011			997			Prepaid expenses and other current assets	647		1,402
Assets of disposal group held for sale							Assets of disposal group held for sale	0		1,635
Total current assets	13,128			10,685			Total current assets	12,253		15,344
Property, plant and equipment, net of accumulated depreciation of $5,952 for 2020 and $5,850 for 2019	6,956			6,912
Property, plant and equipment, net of accumulated depreciation of $6,471 for 2021 and $6,335 for 2020							Property, plant and equipment, net of accumulated depreciation of $6,471 for 2021 and $6,335 for 2020	7,093		7,071
Operating lease right-of-use assets	1,469			1,511			Operating lease right-of-use assets	1,552		1,533
Goodwill	18,698			18,708			Goodwill	17,518		17,518
Intangible assets, net	974			1,040			Intangible assets, net	732		783
Deferred tax assets	355			508			Deferred tax assets	311		311
Other non-current assets	1,623			1,725			Other non-current assets	1,964		1,909
Total assets	$	43,203		$	41,089		Total assets	$	41,423	$	44,469

Liabilities							Liabilities
Trade accounts payable	$	2,071		$	2,226		Trade accounts payable	$	1,895	$	1,806
Accrued employee compensation	1,472			1,865			Accrued employee compensation	1,542		1,997
Advance payments and billings in excess of costs incurred	2,027			2,237			Advance payments and billings in excess of costs incurred	2,393		2,517
Other current liabilities	4,607			3,106			Other current liabilities	2,537		3,002
Liabilities of disposal group held for sale							Liabilities of disposal group held for sale	0		258
Total current liabilities	10,177			9,434			Total current liabilities	8,367		9,580
Long-term debt, net of current portion of $1,790 for 2020 and $1,109 for 2019	14,299			12,770
Long-term debt, net of current portion of $42 for 2021 and $742 for 2020							Long-term debt, net of current portion of $42 for 2021 and $742 for 2020	12,764		14,261
Pension and other postretirement benefit plan liabilities	6,779			6,979			Pension and other postretirement benefit plan liabilities	6,217		6,498
Operating lease liabilities	1,280			1,308			Operating lease liabilities	1,354		1,343

Other non-current liabilities	1,606			1,779			Other non-current liabilities	2,196		2,208
Total liabilities	34,141			32,270			Total liabilities	30,898		33,890

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

Shareholders’ equity							Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2020—167,099,297 and 2019—167,848,424	167			168
Preferred stock, $1 par value; 10,000,000 shares authorized; 0 shares issued and outstanding							Preferred stock, $1 par value; 10,000,000 shares authorized; 0 shares issued and outstanding	0		0
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2021—160,960,496 and 2020—166,717,179							Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2021—160,960,496 and 2020—166,717,179	161		167
Paid-in capital	—			—			Paid-in capital	8		58
Retained earnings	9,011			8,748			Retained earnings	10,487		10,482
Accumulated other comprehensive loss	(116		)	(97		)	Accumulated other comprehensive loss	(131)		(128)
Total shareholders’ equity	9,062			8,819			Total shareholders’ equity	10,525		10,579
Total liabilities and shareholders’ equity	$	43,203		$	41,089		Total liabilities and shareholders’ equity	$	41,423	$	44,469

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31							Three Months Ended March 31
$ in millions	2020			2019			$ in millions	2021		2020
Operating activities							Operating activities
Net earnings	$	868		$	863		Net earnings	$	2,195	$	868
Adjustments to reconcile to net cash used in operating activities:							Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization	297			302			Depreciation and amortization	294		297

Stock-based compensation	18			26			Stock-based compensation	18		18
Deferred income taxes	156			33			Deferred income taxes	1		156
Gain on sale of business							Gain on sale of business	(1,980)		0
Changes in assets and liabilities:							Changes in assets and liabilities:
Accounts receivable, net	(810		)	(718		)	Accounts receivable, net	(253)		(810)
Unbilled receivables, net	(584		)	(759		)	Unbilled receivables, net	(357)		(584)
Inventoried costs, net	(2		)	(124		)	Inventoried costs, net	(101)		(2)
Prepaid expenses and other assets	56			(23		)	Prepaid expenses and other assets	(38)		56
Accounts payable and other liabilities	(833		)	(480		)	Accounts payable and other liabilities	(589)		(833)
Income taxes payable, net	10			140			Income taxes payable, net	1,028		10
Retiree benefits	(237		)	(142		)	Retiree benefits	(314)		(237)
Other, net	68			(31		)	Other, net	30		68
Net cash used in operating activities	(993		)	(913		)	Net cash used in operating activities	(66)		(993)

Investing activities							Investing activities
Divestiture of IT services business							Divestiture of IT services business	3,400		0
Capital expenditures	(272		)	(284		)	Capital expenditures	(205)		(272)

Other, net	2			4			Other, net	1		2
Net cash used in investing activities	(270		)	(280		)
Net cash provided by (used in) investing activities							Net cash provided by (used in) investing activities	3,196		(270)

Financing activities							Financing activities
Net proceeds from issuance of long-term debt	2,239			—			Net proceeds from issuance of long-term debt	0		2,239
Payments of long-term debt							Payments of long-term debt	(2,200)		0
Payments to credit facilities	(7		)	(20		)	Payments to credit facilities	0		(7)
Net borrowings on commercial paper	744			814			Net borrowings on commercial paper	0		744
Common stock repurchases	(344		)	(60		)	Common stock repurchases	(2,000)		(344)
Cash dividends paid	(227		)	(211		)	Cash dividends paid	(238)		(227)
Payments of employee taxes withheld from share-based awards	(63		)	(61		)	Payments of employee taxes withheld from share-based awards	(30)		(63)
Other, net	(46		)	—			Other, net	(52)		(46)
Net cash provided by financing activities	2,296			462
Increase (decrease) in cash and cash equivalents	1,033			(731		)
Net cash (used in) provided by financing activities							Net cash (used in) provided by financing activities	(4,520)		2,296
(Decrease) increase in cash and cash equivalents							(Decrease) increase in cash and cash equivalents	(1,390)		1,033
Cash and cash equivalents, beginning of year	2,245			1,579			Cash and cash equivalents, beginning of year	4,907		2,245
Cash and cash equivalents, end of period	$	3,278		$	848		Cash and cash equivalents, end of period	$	3,517	$	3,278

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

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NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


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

End of period	167			170			End of period	161		167
Paid-in capital							Paid-in capital
Beginning of period	—			—			Beginning of period	58		0
Common stock repurchased							Common stock repurchased	(39)		0
Stock compensation							Stock compensation	(11)		0

End of period	—			—			End of period	8		0
Retained earnings							Retained earnings
Beginning of period	8,748			8,068			Beginning of period	10,482		8,748
Common stock repurchased	(348		)	(62		)	Common stock repurchased	(1,955)		(348)
Net earnings	868			863			Net earnings	2,195		868
Dividends declared	(223		)	(206		)	Dividends declared	(235)		(223)
Stock compensation	(45		)	(35		)	Stock compensation	0		(45)
Other	11			—			Other	0		11
End of period	9,011			8,628			End of period	10,487		9,011
Accumulated other comprehensive (loss) income
Accumulated other comprehensive loss							Accumulated other comprehensive loss
Beginning of period	(97		)	(52		)	Beginning of period	(128)		(97)
Other comprehensive loss, net of tax	(19		)	(7		)	Other comprehensive loss, net of tax	(3)		(19)
End of period	(116		)	(59		)	End of period	(131)		(116)
Total shareholders’ equity	$	9,062		$	8,739		Total shareholders’ equity	$	10,525	$	9,062
Cash dividends declared per share	$	1.32		$	1.20		Cash dividends declared per share	$	1.45	$	1.32

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

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NORTHROP GRUMMAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

Principles of Consolidation and Reporting

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

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

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

Effective January 1, 2020, the company reorganized its operating sectors to better align the company’s broad portfolio to serve its customers’ needs. The four new sectors, which also comprise our reportable segments, are Aeronautics Systems, Defense Systems, Mission Systems and Space Systems.

The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the information contained in the company’s ~~2019~~2020 Annual Report on Form ~~10-K~~10-K. During the first quarter of 2021, we changed the naming convention for our FAS/CAS pension accounts. The Net FAS (service)/CAS pension adjustment is now referred to as the FAS/CAS operating adjustment and the ~~Form 8-K that we expect~~FAS (non-service) pension benefit is now referred to ~~file with~~as the ~~SEC immediately after filing this Form 10-Q, which recasts the disclosures in certain portions of the 2019 Annual Report on Form 10-K to reflect changes in the company’s reportable segments.~~Non-operating FAS pension benefit. This change does not impact any current or previously reported amounts.

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

Accounting Estimates

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

Revenue Recognition

The majority of our sales are derived from long-term contracts with the U.S. government for the development or production of goods, the provision of services, or a combination of both. We recognize revenue as control is transferred to the customer, either over time or at a point in time. AsFor most of our contracts, control is effectively transferred ~~while we perform on our contracts,~~during the period of performance, so we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion) ~~as the~~. The company believes this represents the most appropriate measurement towards satisfaction of our performance obligations. Revenue for contracts in which the control of goods produced does not transfer until delivery to the customer is recognized at a point in time (i.e., typically upon delivery).

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NORTHROP GRUMMAN CORPORATION

Contract Estimates

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

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

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~~NORTHROP GRUMMAN CORPORATION~~

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

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


	Three Months Ended March 31
$ in millions, except per share data		2021		2020
Revenue		$	202	$	136
Operating income		190		124
Net earnings(1)		150		98
Diluted earnings per share(1)		0.92		0.58

Three Months Ended March 31
$ in millions, except per share data 2020 2019
Revenue $ 136
$ 166
Operating income 124
138
Net earnings⁽¹⁾
98
109
Diluted earnings per share⁽¹⁾
0.58
0.64


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

EAC adjustments on a single performance obligation can have a material effect on the company’s financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. No such adjustments were material to the financial statements during the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.

Backlog

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

Company backlog as of March 31, ~~2020~~2021 was ~~$64.2~~$79.3 billion. WeOf our March 31, 2021 backlog, we expect to recognize approximately 4540 percent ~~and 70 percent of our March 31, 2020 backlog~~ as revenue over the next 12 months and 60 percent as revenue over the next 24 months, ~~respectively,~~ with the remainder to be recognized thereafter.

Contract Assets and Liabilities

For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position. The amount of revenue recognized for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 that was included in the contract liability balances at the beginning of each year was ~~$781 million~~$1.1 billion and ~~$674~~$781 million, respectively.

Disaggregation of Revenue

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

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NORTHROP GRUMMAN CORPORATION

Property, Plant, and Equipment

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

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:

$ in millions March 31,
2020 December 31,
2019
Unamortized prior service credit, net of tax expense of $13 for 2020 and $17 for 2019 $ 41
$ 51
Cumulative translation adjustment and other, net (157 ) (148 )
Total accumulated other comprehensive loss $ (116 ) $ (97 )


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

Related Party Transactions

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

Accounting Standards Updates

Accounting standards updates adopted and/or issued, but not effective until after March 31, ~~2020,~~2021, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.

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

Basic Earnings Per Share

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

Diluted Earnings Per Share

Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled ~~0.7~~0.4 million shares and 0.7 million shares for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively.

Share Repurchases

On September 16, 2015, the company’s board of directors authorized a share repurchase program of up to $4.0 billion of the company’s common stock (the “2015 Repurchase Program”). On December 4, 2018, the company’s board of directors authorized a share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the “2018 Repurchase Program”). Repurchases under the 2015 Repurchase Program commenced in March 2016 and were completed in March ~~2020.~~2020 at which time repurchases under the 2018 Repurchase Program commenced. As of March 31, 2021, repurchases under the 2018 Repurchase Program totaled $1.9 billion; $1.1 billion remained under this share repurchase authorization. By its terms, the 2018 Repurchase Program is set to expire when we have used all authorized funds for repurchases.

On ~~December 4, 2018,~~January 25, 2021, the company’s board of directors authorized a new share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the ~~“2018~~“2021 Repurchase Program”). ~~Repurchases~~By its terms, repurchases under the 2021 Repurchase Program will commence upon completion of the 2018 Repurchase Program commenced in March 2020 upon the completion of the company’s 2015 Repurchase Program. As of March 31, 2020, repurchases under the 2018 Repurchase Program totaled $20 million; $2.98 billion remained under this share repurchase authorization. By its terms, the 2018 Repurchase Program is set toand will expire when we have used all authorized funds for repurchases.

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

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

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the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.

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


							Shares Repurchased (in millions)
Repurchase Program Authorization Date	Amount Authorized (in millions)		Total Shares Retired (in millions)	Average Price Per Share(1)		Date Completed	Three Months Ended March 31
							2021	2020
September 16, 2015	$	4,000	15.4	$	260.33	March 2020	0	0.9
December 4, 2018	$	3,000	6.4	289.47			5.9	0.1
January 25, 2021	$	3,000	0	0			0	0

Shares Repurchased
(in millions)
Repurchase Program
Authorization Date Amount
Authorized
(in millions) Total
Shares Retired
(in millions)
Average
Price
Per Share⁽¹⁾
Date Completed Three Months Ended March 31
2020 2019
September 16, 2015 $ 4,000
15.4
$ 260.33
March 2020 0.9
1.1
December 4, 2018 $ 3,000
0.1
306.22

0.1
—

(1)Includes commissions paid.


⁽¹⁾	~~Includes commissions paid.~~

Dividends on Common Stock

In May ~~2019,~~2020, the company increased the quarterly common stock dividend 10 percent to ~~$1.32~~$1.45 per share from the previous amount of ~~$1.20~~$1.32 per share.

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3. INCOME TAXES


	Three Months Ended March 31							Three Months Ended March 31
$ in millions	2020			2019			$ in millions		2021			2020
Federal and foreign income tax expense	$	185		$	171		Federal and foreign income tax expense		$	821		$	185
Effective income tax rate	17.6		%	16.5		%	Effective income tax rate		27.2		%	17.6		%

The first quarter ~~2020~~2021 effective tax rate (ETR) increased to ~~17.6~~27.2 percent from ~~16.5~~17.6 percent in the first quarter of 2019 primarily due to nondeductible losses on marketable securities and an increase in reserves for uncertain tax positions. These were partially offset by an increase in research credits, which totaled $41 million in the first quarter of 2020 and $31 million in the prior year ~~period. Both periods benefited~~period primarily due to federal income taxes resulting from the IT services divestiture, including $250 million of income tax expense related to $1.2 billion of nondeductible goodwill in the divested business. The company’s first quarter 2021 ETR also includes $52 million of research credits. The company’s first quarter 2020 ETR includes $41 million of research credits and $13 million of excess tax benefits for employee share-based ~~compensation.~~compensation, partially offset by nondeductible losses on marketable securities.

InTaxes receivable are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position. We had 0 taxes receivable as of March ~~2020, the Coronavirus Aid, Relief,~~31, 2021 and Economic Security Act (the “CARES Act”) was enacted. The CARES Act includes certain changes to U.S. tax law that impact the company, including a technical correction to the 2017 Tax Cuts and Jobs Act, which makes certain qualified improvement property eligible for bonus depreciation. The CARES Act did not have a significant impact on the company’s first quarter 2020 effective tax rate.$792 million as of December 31, 2020.

The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs, and the 2017 Tax Cuts and Jobs Act. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to the final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and future regulatory interpretations of existing tax laws may change. At this time, we cannot reasonably estimate these matters may decrease by up to $60 million. Since enactment of the 2017 Tax Act, the IRS and U.S. Treasury Department have issued and are expected to further issue interpretive guidance that impacts taxpayers. We will continue to evaluate such guidance as it is issued.changes.

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

4.4. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

March 31, 2020 December 31, 2019
$ in millions Level 1 Level 2 Total Level 1 Level 2 Total
Financial Assets (Liabilities)
Marketable securities $ 288
$ 4
$ 292
$ 364
$ 1
$ 365
Marketable securities valued using NAV 16
17
Total marketable securities 288
4
308
364
1
382
Derivatives —
(3 ) (3 ) —
(3 ) (3 )


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

The notional value of the company’s foreign currency forward contracts at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 was ~~$85~~$144 million and ~~$98~~$133 million, respectively. ~~The~~At March 31, 2021 and December 31, 2020, 0 portion of the notional value was designated as a cash flow ~~hedge was $3 million and $7 million as of March 31, 2020 and December 31, 2019, respectively.~~

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hedge.

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

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

Long-term Debt

The estimated fair value of long-term debt was ~~$17.5~~$14.9 billion and ~~$15.1~~$18.2 billion as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The ~~carrying value of long-term debt was $16.1 billion and $13.9 billion as of March 31, 2020 and December 31, 2019, respectively. The~~ current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.

~~Unsecured~~Repayments of Senior Notes

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

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

~~$750 million of 4.40% senior~~ notes due ~~2030 (the “2030 Notes”),~~

~~$500~~October 2022. The company recorded a pre-tax charge of $54 million ~~of 5.15% senior notes due 2040 (the “2040 Notes”) and~~

~~$1.0 billion of 5.25% senior notes due 2050 (the “2050 Notes”).~~

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

5. INVESTIGATIONS, CLAIMS AND LITIGATION

On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately ~~$875~~$875 million firm fixed-price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS ~~have been~~were delivered. The company’s lawsuit ~~is based on various theories of liability. The complaint~~ seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $410 million, less certain amounts outstanding under the contract. In the course of the litigation, the United States subsequently amended its counterclaim, reducing it to seek approximately $193 million. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On April 2, 2013, the U.S. Department of Justice informed the company of a False Claims Act complaint relating to the FSS contract that was filed under seal by a relator in June 2011 in the U.S. District Court for the Eastern District of Virginia. On June 3, 2013, the United States filed a Notice informing the Court that the United States had decided not to intervene in this case. The relator alleged that the company violated the False Claims Act in a number of ways with respect to the FSS contract, alleged damage to the USPS in an amount of at least approximately $179 million annually, alleged that he was improperly discharged in retaliation, and sought an unspecified partial refund of the contract purchase price, penalties, attorney’s fees and other costs of suit. The relator later voluntarily dismissed his retaliation claim and reasserted it in a separate arbitration, which he also ultimately voluntarily dismissed. On September 5, 2014, the court granted the company’s motion for summary judgment and ordered the relator’s False Claims Act case be dismissed with prejudice. On February 16, 2018, both the company and the United States filed motions to dismiss many of the claims and counterclaims referenced above, in whole or in part. The United States also filed a motion seeking to amend its answer and counterclaim, including to reduce its counterclaim to approximately $193 million, which the court granted on June 11, 2018. On October 17, 2018, the court granted in part and denied in part the parties’ motions to dismiss. On February 3, 2020, after extensive discovery and motions practice, the parties commenced what was expected to be a seven-week trial. The first four weeks of trial ~~have~~ concluded, but the court postponed the remaining estimated three weeks ~~until May 2020~~ as a result of COVID-19-related concerns. After additional COVID-19-related interruptions, trial concluded on March 5, 2021 and the court scheduled post-trial briefing. Although the ultimate outcome of ~~these matters (“the FSS matters,” collectively),~~this matter, including any possible loss, cannot be predicted or reasonably estimated at this time, the company intends vigorously to pursue and defend the ~~FSS matters.~~matter.

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On August 8, 2013, the company received a court-appointed expert’s report in litigation pending in the Second Federal Court of the Federal District in Brazil brought by the Brazilian Post and Telegraph Corporation (ECT), a Brazilian state-owned entity, against Solystic SAS (Solystic), a French subsidiary of the company, and 2 of its consortium partners. In this suit, commenced on December 17, 2004, ECT alleges the consortium breached its contract with ECT and seeks damages of approximately R$111 million (the equivalent of approximately $22 million as of March 31, 2020), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law, which amounts could be significant over time. The original suit sought R$89 million (the equivalent of approximately $17 million as of March 31, 2020) in damages. In October 2013, ECT asserted an additional damage claim of R$22 million (the equivalent of approximately $4 million as of March 31, 2020). In its counterclaim, Solystic alleges ECT breached the contract by wrongfully refusing to accept the equipment Solystic had designed and built and seeks damages of approximately €31 million (the equivalent of approximately $34 million as of March 31, 2020), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law. The Brazilian court retained an expert to consider certain issues pending before it. On August 8, 2013 and September 10, 2014, the company received reports from the expert, which contain some recommended findings relating to liability and the damages calculations put forth by ECT. Some of the expert’s recommended findings were favorable to the company and others were favorable to ECT. In November 2014, the parties submitted comments on the expert’s most recent report. On June 16, 2015, the court published a decision denying the parties’ request to present oral testimony. In a decision dated November 13, 2018, the trial court ruled in ECT’s favor on one of its claims against Solystic, and awarded damages of R$41 million (the equivalent of approximately $8 million as of March 31, 2020) against Solystic and its consortium partners, with that amount to be adjusted for inflation and interest from November 2004 through any appeal, in accordance with the Manual of Calculations of the Federal Justice, as well as attorneys’ fees. On March 22, 2019, ECT appealed the trial court’s decision to the intermediate court of appeals. Solystic filed its appeal on April 11, 2019. The parties are assessing whether there is a possible path for a negotiated resolution of the dispute.

We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, we have worked closely with the United States Navy, the United States Environmental Protection Agency, the New

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York State Department of Environmental Conservation (NYSDEC), the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. In December 2019, the State of New York issued an Amended Record of Decision seeking to impose additional remedial requirements beyond measures the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company will take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. The State of New York is preparing to file a new consent decree reflecting the agreement and to seek court approval. We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to ~~these~~the legacy Bethpage environmental conditions. ~~The~~Applicable remediation standards orand other requirements to which we are subject ~~are being reconsidered and~~ may continue to change, ~~and~~our costs may increase ~~materially. As discussed in Note 6, the State of New York issued a Feasibility Study~~materially and an Amended Record of Decision, seeking to impose additional remedial requirements. The company is engaged in discussions with the State of New York and certain other potentially responsible parties. The State of New York has said that, among other things, it is also evaluating potential natural resource damages.those costs may not be fully recoverable. In addition, we are a party to various, and expect to become a party to additional, legal proceedings and disputes related to remediation, ~~costs, allowability and/or alleged~~ environmental impacts, ~~in Bethpage,~~costs, and the allowability of costs we incur, including with federal and state entities (including the Navy, Defense Contract Management Agency, the State, local municipalities and water ~~districts,~~districts) and insurance carriers, as well as class action and individual plaintiffs alleging personal injury and property damage and seeking both monetary and non-monetary relief. These Bethpage matters could result in additional costs, fines, penalties, sanctions, compensatory or other damages, ~~(including natural resource damages),~~ determinations on allocation, allowability and coverage, and non-monetary relief. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these aggregate Bethpage matters.

The company is a party to various other investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, ~~2020,~~2021, or its annual results of operations and/or cash flows.

6. COMMITMENTS AND CONTINGENCIES

U.S. Government Cost Claims and Contingencies

From time to time, the company is advised of claims by the U.S. government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and U.S. government representatives engage in discussions to enable the company to evaluate the merits of these claims, as

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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 March 31, ~~2020,~~2021, or its annual results of operations and/or cash flows.

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

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Environmental Matters

The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S. government contracts as of March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:

$ in millions
Accrued Costs⁽¹⁾⁽²⁾

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

Deferred Costs⁽³⁾
March 31, 2020 $ 533
$ 448
$ 439
December 31, 2019 531
448
436


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

⁽¹⁾As of March 31, ~~2020, $163~~2021, $246 million is recorded in Other current liabilities and ~~$370~~$375 million is recorded in Other non-current liabilities.

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

⁽³⁾As of March 31, ~~2020, $131~~2021, $218 million is deferred in Prepaid expenses and other current assets and ~~$308~~$316 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.

Although management cannot predict whether new information gained as our environmental remediation projects progress, or as changes in facts and circumstances occur, will materially affect the estimated liability accrued, except with respect to Bethpage, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, ~~2020,~~2021, or its annual results of operations and/or cash flows.

With respect to Bethpage, as discussed in Note 5, in December 2019, the State of New York issued ~~a Feasibility Study and~~ an Amended Record of Decision, ~~proposing~~seeking to impose additional remedial ~~requirements.~~requirements beyond those the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company will take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. The ~~company is engaged in discussions with the~~ State of New York is preparing to file a new consent decree reflecting the agreement and ~~other potentially responsible parties.~~to seek court approval. As discussed in Note 5, the applicable remediation standards orand other requirements to which we are subject ~~are being reconsidered and~~ may continue to change, ~~and~~our costs may increase ~~materially.~~materially, and those costs may not be fully recoverable.

Financial Arrangements

In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At March 31, ~~2020,~~2021, there were ~~$469~~$480 million of stand-by letters of credit and guarantees and ~~$182~~$80 million of surety bonds outstanding.

Commercial Paper

The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to $2.0 billion. At March 31, ~~2020,~~2021, there were ~~$744 million of outstanding short-term~~0 commercial paper borrowings at a weighted-average interest rate of 1.88 percent that have original maturities of three months or less from the date of issuance. The outstanding balance of commercial paper borrowings is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.outstanding.

Credit Facilities

The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of $2.0 billion (the “2018 Credit Agreement”) that matures in August 2024 and is intended to support the company’s commercial paper program and other general corporate purposes. Commercial paper borrowings reduce the amount available for

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borrowing under the 2018 Credit Agreement. At March 31, ~~2020,~~2021, there was 0 balance outstanding under this facility.

In December 2016, a subsidiary of the company entered into a two-year credit facility, with two additional one-year option periods, in an aggregate principal amount of £120 million (the equivalent of approximately $149 million as of March 31, 2020) (the “2016 Credit Agreement”). The company exercised the second option to extend the maturity to December 2020. The 2016 Credit Agreement is guaranteed by the company. At March 31, 2020, there was £55 million (the equivalent of approximately $68 million) outstanding under this facility, which bears interest at a rate of LIBOR plus 1.10 percent. All of the borrowings outstanding under this facility are recorded in Other current liabilities in the unaudited condensed consolidated statement of financial position.

~~At March 31, 2020,~~2021, the company was in compliance with all covenants under its credit agreements.

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7. RETIREMENT BENEFITS

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

Three Months Ended March 31
Pension
Benefits OPB
$ in millions 2020 2019 2020 2019
Components of net periodic benefit cost (benefit)
Service cost $ 102
$ 92
$ 4
$ 4
Interest cost 307
340
17
20
Expected return on plan assets (594 ) (525 ) (26 ) (23 )
Amortization of prior service credit (15 ) (15 ) 1
(1 )
Net periodic benefit cost (benefit) $ (200 ) $ (108 ) $ (4 ) $ —


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


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

Employer Contributions

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

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

Three Months Ended March 31
$ in millions 2020 2019
Defined benefit pension plans $ 20
$ 23
OPB plans 12
12
Defined contribution plans 256
191


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

8. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS

Stock Awards

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

Three Months Ended March 31
in millions 2020 2019
RSRs granted 0.1
0.1
RPSRs granted 0.2
0.2
Grant date aggregate fair value $ 87
$ 91


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

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

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Cash Awards

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

Three Months Ended March 31
$ in millions 2020 2019
Minimum aggregate payout amount $ 31
$ 36
Maximum aggregate payout amount 175
203


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

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

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NORTHROP GRUMMAN CORPORATION

9. SEGMENT INFORMATION

Effective January 1, 2020, the company reorganized its operating sectors to better align the company’s broad portfolio to serve its customers’ needs. The 4 new sectors, which also comprise our reportable segments, are Aeronautics Systems, Defense Systems, Mission Systems and Space Systems.

The following table presents sales and operating income by segment:

Three Months Ended March 31
$ in millions 2020 2019
Sales
Aeronautics Systems $ 2,843
$ 2,818
Defense Systems 1,881
1,768
Mission Systems 2,347
2,210
Space Systems 1,948
1,801
Intersegment eliminations (399 ) (408 )
Total sales 8,620
8,189
Operating income
Aeronautics Systems 259
308
Defense Systems 196
202
Mission Systems 348
319
Space Systems 199
188
Intersegment eliminations (49 ) (50 )
Total segment operating income 953
967
Net FAS (service)/CAS pension adjustment 105
108
Unallocated corporate expense (124 ) (139 )
Total operating income $ 934
$ 936


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

~~Net FAS (Service)/~~FAS/CAS ~~Pension~~Operating Adjustment

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

Unallocated Corporate ~~Expense~~Income (Expense)

Unallocated corporate ~~expense~~income (expense) includes the portion of corporate costs not considered allowable or allocable under applicable CAS or FAR, and therefore not allocated to the segments, such as a portion of management and administration, legal, environmental, compensation, retiree benefits, advertising and other corporate unallowable costs. Unallocated corporate ~~expense~~income (expense) also includes costs not considered part of management’s evaluation of segment

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~~NORTHROP GRUMMAN CORPORATION~~

operating performance, such as amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business ~~combinations.~~combinations, as well as certain compensation and other costs.

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

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Disaggregation of Revenue


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

Sales by Customer Type Three Months Ended March 31
2020 2019
$ in millions $
%⁽³⁾
$
%⁽³⁾
Aeronautics Systems
U.S. government⁽¹⁾
$ 2,361
83 % $ 2,334
83 %
International⁽²⁾
444
16 % 435
15 %
Other customers 12
— % 25
1 %
Intersegment sales 26
1 % 24
1 %
Aeronautics Systems sales 2,843
100 % 2,818
100 %
Defense Systems
U.S. government⁽¹⁾
1,259
67 % 1,141
65 %
International⁽²⁾
340
18 % 363
21 %
Other customers 111
6 % 97
5 %
Intersegment sales 171
9 % 167
9 %
Defense Systems sales 1,881
100 % 1,768
100 %
Mission Systems
U.S. government⁽¹⁾
1,671
71 % 1,613
73 %
International⁽²⁾
483
21 % 376
17 %
Other customers 17
1 % 24
1 %
Intersegment sales 176
7 % 197
9 %
Mission Systems sales 2,347
100 % 2,210
100 %
Space Systems
U.S. government⁽¹⁾
1,803
93 % 1,669
93 %
International⁽²⁾
68
3 % 43
2 %
Other customers 51
3 % 69
4 %
Intersegment sales 26
1 % 20
1 %
Space Systems sales 1,948
100 % 1,801
100 %
Total
U.S. government⁽¹⁾
7,094
83 % 6,757
83 %
International⁽²⁾
1,335
15 % 1,217
15 %
Other customers 191
2 % 215
2 %
Total Sales $ 8,620
100 % $ 8,189
100 %


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

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

⁽³⁾ Percentages calculated based on total segment sales.

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Sales by Contract Type	Three Months Ended March 31
		2021			2020
$ in millions			$		%(1)		$		%(1)
Aeronautics Systems
Cost-type			$	1,411	48	%	$	1,343	48	%
Fixed-price			1,535		52	%	1,474		52	%
Intersegment sales			44				26
Aeronautics Systems sales			2,990				2,843
Defense Systems
Cost-type			509		37	%	628		37	%
Fixed-price			868		63	%	1,082		63	%
Intersegment sales			185				171
Defense Systems sales			1,562				1,881
Mission Systems
Cost-type			865		37	%	846		39	%
Fixed-price			1,487		63	%	1,325		61	%
Intersegment sales			237				176
Mission Systems sales			2,589				2,347
Space Systems
Cost-type			1,844		74	%	1,398		73	%
Fixed-price			638		26	%	524		27	%
Intersegment sales			39				26
Space Systems sales			2,521				1,948
Total
Cost-type			4,629		51	%	4,215		49	%
Fixed-price			4,528		49	%	4,405		51	%
Total Sales			$	9,157			$	8,620

(1)Percentages calculated based on external customer sales.

Sales by Contract Type Three Months Ended March 31
2020 2019
$ in millions $
%⁽¹⁾
$
%⁽¹⁾
Aeronautics Systems

Cost-type $ 1,343
48 % $ 1,312
47 %
Fixed-price 1,474
52 % 1,482
53 %
Intersegment sales 26
24

Aeronautics Systems sales 2,843
2,818

Defense Systems
Cost-type 628
37 % 623
39 %
Fixed-price 1,082
63 % 978
61 %
Intersegment sales 171
167

Defense Systems sales 1,881
1,768

Mission Systems
Cost-type 846
39 % 835
41 %
Fixed-price 1,325
61 % 1,178
59 %
Intersegment sales 176
197

Mission Systems sales 2,347
2,210

Space Systems
Cost-type 1,398
73 % 1,306
73 %
Fixed-price 524
27 % 475
27 %
Intersegment sales 26
20

Space Systems sales 1,948
1,801

Total
Cost-type 4,215
49 % 4,076
50 %
Fixed-price 4,405
51 % 4,113
50 %
Total Sales $ 8,620
$ 8,189


⁽¹⁾	~~Percentages calculated based on external customer sales.~~

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Sales by Geographic Region	Three Months Ended March 31
		2021	2020
$ in millions			$		%(2)		$		%(2)
Aeronautics Systems
United States			$	2,547	87	%	$	2,373	84	%
Asia/Pacific			279		9	%	207		8	%
Europe			100		3	%	166		6	%
All other(1)			20		1	%	71		2	%
Intersegment sales			44				26
Aeronautics Systems sales			2,990				2,843
Defense Systems
United States			1,026		75	%	1,370		80	%
Asia/Pacific			103		7	%	82		5	%
Europe			76		6	%	70		4	%
All other(1)			172		12	%	188		11	%
Intersegment sales			185				171
Defense Systems sales			1,562				1,881
Mission Systems
United States			1,850		79	%	1,688		78	%
Asia/Pacific			160		7	%	176		8	%
Europe			269		11	%	225		10	%
All other(1)			73		3	%	82		4	%
Intersegment sales			237				176
Mission Systems sales			2,589				2,347
Space Systems
United States			2,376		95	%	1,854		97	%
Asia/Pacific			16		1	%	5		0	%
Europe			88		4	%	59		3	%
All other(1)			2		0	%	4		0	%
Intersegment sales			39				26
Space Systems sales			2,521				1,948
Total
United States			7,799		85	%	7,285		85	%
Asia/Pacific			558		6	%	470		5	%
Europe			533		6	%	520		6	%
All other(1)			267		3	%	345		4	%
Total Sales			$	9,157			$	8,620

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

Sales by Geographic Region Three Months Ended March 31
2020 2019
$ in millions $
%⁽²⁾
$
%⁽²⁾
Aeronautics Systems
United States $ 2,373
84 % $ 2,359
85 %
Asia/Pacific 207
8 % 233
8 %
All other⁽¹⁾
237
8 % 202
7 %
Intersegment sales 26
24

Aeronautics Systems sales 2,843
2,818

Defense Systems
United States 1,370
80 % 1,238
77 %
Asia/Pacific 82
5 % 88
6 %
All other⁽¹⁾
258
15 % 275
17 %
Intersegment sales 171
167

Defense Systems sales 1,881
1,768

Mission Systems
United States 1,688
78 % 1,637
81 %
Asia/Pacific 176
8 % 135
7 %
All other⁽¹⁾
307
14 % 241
12 %
Intersegment sales 176
197

Mission Systems sales 2,347
2,210

Space Systems
United States 1,854
97 % 1,738
98 %
Asia/Pacific 5
— % 12
— %
All other⁽¹⁾
63
3 % 31
2 %
Intersegment sales 26
20

Space Systems sales 1,948
1,801

Total
United States 7,285
85 % 6,972
85 %
Asia/Pacific 470
5 % 468
6 %
All other⁽¹⁾
865
10 % 749
9 %
Total Sales $ 8,620
$ 8,189

(2)Percentages calculated based on external customer sales.


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


⁽²⁾	~~Percentages calculated based on external customer sales.~~

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Northrop Grumman Corporation

Falls Church, Virginia

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of March 31, ~~2020,~~2021, and the related condensed consolidated statements of earnings and comprehensive income, cash flows and changes in shareholders’ equity for the three-month periods ended March 31, ~~2020~~2021 and ~~2019,~~2020, and the related notes (collectively referred to as the “interim financial information”). Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of December 31, ~~2019,~~2020, and the related consolidated statements of earnings and comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January ~~29, 2020,~~27, 2021, we expressed an unqualified opinion on those consolidated financial statements, which included an explanatory paragraph regarding the Company’s change in its method of accounting for leases in 2019 due to the adoption of ASC 842, Leases. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, ~~2019,~~2020, is fairly stated, in all material respects, in relation to the audited consolidated statement of financial position from which it has been derived.

Basis for Review Results

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

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

/s/ Deloitte & Touche LLP

McLean, Virginia

April 28, ~~2020~~2021

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global aerospace and defense company. We use our broad portfolio of capabilities and technologies to create and deliver innovative platforms, systems and solutions in space; manned and autonomous airborne systems, including strike; strategic deterrence systems; hypersonics; missile defense; weapons systems; cyber; command, control, communications and computers, intelligence, surveillance and reconnaissance (C4ISR); and logistics and modernization. We participate in many high-priority defense and government programs in the United States (U.S.) and abroad. We conduct most of our business with the U.S. government, principally the Department of Defense (DoD) and intelligence community. We also conduct business with foreign, state and local governments, as well as commercial customers.

The following discussion should be read along with the financial statements included in this Form 10-Q, as well as our ~~2019~~2020 Annual Report on Form 10-K, ~~and the Form 8-K that we expect to file with the SEC immediately after filing this Form 10-Q,~~ which ~~recasts the disclosures in certain portions of the 2019 Annual Report on Form 10-K to reflect changes in the company’s reportable segments. These documents provide~~provides additional information on our business and the environment in which we operate and our operating results.

Divestiture of IT and Mission Support Services Business

COVID-19

Coronavirus disease 2019 (“COVID-19”) was first reported in late 2019 and has since dramatically impacted the global health and economic environment, including millions of confirmed cases, business slowdowns or shutdowns, government challenges and market volatility. We discuss in some detail in our Annual Report on Form 10-K the pandemic, its impacts and actions taken up to the time of filing. In ~~March 2020, the World Health Organization characterized COVID-19 as a global pandemic,~~this Form 10-Q, we provide an update. We continue closely to monitor and ~~the President declared a national emergency concerning the COVID-19 outbreak. The company’s leadership and Crisis Management Teams have closely monitored~~address the developments, including the impact on our company, our employees, our customers, our suppliers and our communities. ~~They have considered~~The company continues to consider health data and guidance from the Centers for Disease Control and Prevention (CDC), other health organizations, ~~governments~~federal, state and local governmental authorities, and our ~~customers.~~customers, among others. In the first quarter of 2021, COVID-19 case rates and the health and economic impacts of the pandemic increased and decreased in different communities in the US and globally. In the U.S., the Food and Drug Administration (FDA) issued emergency use authorization for COVID-19 vaccines and the government began to administer them. The company has taken various steps to facilitate access for our employees, in accordance with federal guidelines and state and local vaccination plans. We have ~~taken,~~provided paid leave and ~~continue~~flexibility for employees to get vaccinated. The company continues to take robust actions globally to ~~help~~ protect the health, safety and well-being of our employees, and to serve our customers with continued performance. We also continue to take steps to support our suppliers, with a particular focus on critical small and ~~local communities, and~~midsized business partners, including passing through increased progress payments from the DoD to continue to serve our customers. Our goals have been to lessen the immediate potential adverse impacts, both health and economic, and to continue to position the company for long-term success. Among other actions, we have required employees to work from home or remotely where practicable, and expanded IT and communication support to enhance their productivity; adjusted work spaces and shift schedules to facilitate social distancing for those who continue to work in our facilities; implemented visitor protocols and enhanced cleaning and disinfecting procedures at our facilities; worked to procure and distribute personal protective equipment (“PPE”); restricted travel; provided additional paid time off for those most at risk; and contributed financial and manufacturing resources to supporting critical national requirements, such as for PPE. Along with the Northrop Grumman Foundation, we have provided grants for global, national and local organizations that support frontline healthcare workers, address food insecurity, advance efforts for vaccines, increase student access to technology and provide support to vulnerable populations; donated PPE items to emergency response teams and healthcare professionals, including N95 masks and Tyvek suits; and established a COVID-19 relief matching gift program for employees.

As a result of COVID-19, many state and local jurisdictions have implemented mandatory stay-at-home or shelter-in-place orders. To date, most of those orders have exempted some or all of the defense industrial base, including Northrop Grumman and many of our suppliers, as part of the essential or critical infrastructure. Our facilities have largely remained open and many of our employees who cannot work remotely are continuing to come to work and support our customers’ national security and mission-essential operations. Even though we have been able to continue many of our operations, we have experienced and expect to continue to experience certain increasing costs to maintain our operations and reductions in productivity, including as a result of actions to protect health; because of illness, quarantines, and absenteeism; as a result of government actions; and because of disruption and stress among our suppliers and ~~customers. We continue~~accelerating payments to monitor this situation closely and cannot predict how it will change. Our customers have generally continued to make timely payments, and we are working with them to consider the possibility of additional cost recoveries. Again, however, our customers are facing tremendous demands and we cannot predict how this may change and how they will continue to allocate resources.certain suppliers.

~~Financial impacts related to COVID-19, including our actions and costs in response to the pandemic, were not material to the~~The company’s first quarter ~~2020 financial position, results of operations or cash flows. Going forward, we currently expect the COVID–19 crisis to result in a reduction to 2020~~2021 revenue and operating ~~margins in portions of~~income were not significantly impacted by COVID-19. However, our ~~business driven primarily by supplier disruption, changes in employee productivity, and related program delays or challenges. Our~~ employees, suppliers and customers, the company and our global community ~~are facing~~

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continue to face tremendous challenges and we cannot predict how this dynamic situation will evolve or the impact it will ~~have.~~have on the company. For further information on the pandemic and the potential impact to the company of COVID-19, see “Liquidity and Capital Resources” below and “Risk Factors”. and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K.

U.S. Political and Economic Environment

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

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

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

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

CONSOLIDATED OPERATING RESULTS

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

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

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

Selected financial highlights are presented in the table below:


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

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Three Months Ended March 31 %
$ in millions, except per share amounts 2020 2019 Change
Sales $ 8,620
$ 8,189
5 %
Operating costs and expenses 7,686
7,253
6 %
Operating costs and expenses as a % of sales 89.2 % 88.6 %
Operating income 934
936
— %
Operating margin rate 10.8 % 11.4 %
Federal and foreign income tax expense 185
171
8 %
Effective income tax rate 17.6 % 16.5 %
Net earnings 868
863
1 %
Diluted earnings per share $ 5.15
$ 5.06
2 %
Sales

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


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

First quarter ~~2020~~2021 sales increased ~~$431~~$537 million, or 56 percent, due to higher sales at ~~all four sectors.~~Space Systems, Mission Systems and Aeronautics systems, partially offset by lower sales at Defense Systems principally due to the impact of the IT services divestiture. First quarter 2021 organic sales increased $934 million, or 12 percent. As a result of the company using a fiscal calendar convention for interim reporting periods (as described in Note 1 to the financial statements), sales at each sector during the first quarter of 2021 benefited approximately 5 percent from three additional working days when compared to the first quarter of 2020.

See “Segment Operating Results” below for further information by segment and “Product and Service Analysis” for product and service detail. See Note 9 to the financial statements for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments.

Operating Income and Margin Rate

First quarter ~~2020~~2021 operating income ~~was comparable~~increased $1.9 billion, or 202 percent, primarily due to the ~~prior year period. First quarter 2020 operating margin rate declined~~IT services divestiture, including the $2.0 billion pre-tax gain on sale and $192 million of unallocated corporate expense for unallowable state taxes and transaction costs. Operating income also increased due to ~~10.8 percent reflecting lower~~higher segment operating ~~margins at Aeronautics Systems and Defense Systems,~~income, partially offset by a ~~decrease in unallocated corporate expense.~~lower FAS/CAS operating adjustment. First quarter 2021 operating margin rate increased to 30.8 percent reflecting the items above.

First quarter ~~2020~~2021 general and administrative (G&A) costs as a percentage of sales ~~decreased~~increased to 9.8 percent from 9.1 percent ~~from 9.3 percent~~in the prior period primarily due to the timing of indirect cost ~~management and higher sales.~~recognition during the year.

See “Segment Operating Results” below for further information by segment. For information regarding product and service operating costs and expenses, see “Product and Service Analysis” below.

Federal and Foreign Income Taxes

The first quarter ~~2020~~2021 effective tax rate increased to ~~17.6~~27.2 percent from ~~16.5~~17.6 percent in the ~~first quarter of 2019~~prior year period primarily due to ~~nondeductible losses on marketable securities and an increase in reserves for uncertain tax positions. These were partially offset by an increase in research credits.~~federal income taxes resulting from the IT services divestiture. See Note 3 to the financial statements for additional information.

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Net Earnings

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


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

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

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

First quarter ~~2020~~2021 net earnings ~~were comparable~~increased $1.3 billion, or 153 percent, primarily due to the ~~prior year period~~IT services divestiture. Transaction-adjusted net earnings increased $207 million or 24 percent, primarily due to higher segment operating income and ~~include a $102 million increase~~increases in ~~our~~non-operating FAS ~~(non-service)~~ pension benefit ~~partially offset by a $94 million decrease in~~and Other, net, ~~as a result of lower~~principally due to favorable returns on marketable securities related to our non-qualified benefit plans.

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Diluted Earnings Per Share

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


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

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

First quarter ~~2020~~2021 diluted earnings per share increased 2161 percent, principally due to a $6.86 increase associated with the IT services divestiture. Transaction-adjusted earnings per share increased $1.42, or 28 percent, reflecting a 124 percent increase in transaction-adjusted net earnings and a 13 percent reduction in weighted-average diluted shares outstanding.

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SEGMENT OPERATING RESULTS

Basis of Presentation

~~Effective January 1, 2020, the~~The company ~~reorganized its~~is aligned in four operating ~~sectors to better align the company’s broad portfolio to serve its customers’ needs. The four new~~ sectors, which also comprise our reportable ~~segments, are~~segments: Aeronautics Systems, Defense Systems, Mission Systems and Space Systems. ~~This realignment is reflected in the accompanying financial information.~~

We present our sectors in the following business areas, which are reported in a manner reflecting core capabilities:

Aeronautics Systems

Defense Systems

Mission Systems

Space Systems

Autonomous Systems

Battle Management & Missile Systems

Airborne Multifunction Sensors ~~& Networks~~

Launch & Strategic Missiles

Manned Aircraft

Mission Readiness

~~Cyber & Intelligence Mission Solutions~~

~~Space~~

Maritime/Land Systems & Sensors

Space

Navigation, Targeting & Survivability

Networked Information Solutions

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

This section discusses segment sales, operating income and operating margin rates. In evaluating segment operating performance, we look primarily at changes in sales and operating income. Where applicable, significant fluctuations in operating performance attributable to individual contracts or programs, or changes in a specific cost element across multiple contracts, are described in our analysis. Based on this approach and the nature of our operations, the discussion of results of operations below first focuses on our four segments before distinguishing between products and services. Changes in sales are generally described in terms of volume, while changes in margin rates are generally described in terms of performance and/or contract mix. For purposes of this discussion, volume generally refers to increases or decreases in sales or cost from production/service activity levels and performance generally refers to non-volume related changes in profitability. Contract mix generally refers to changes in the ratio of contract type and/or lifecycle (e.g., cost-type, fixed-price, development, production, and/or sustainment).

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Segment Operating Income and Margin Rate

Segment operating income, as reconciled in the table below, and segment operating margin rate (segment operating income divided by sales) are non-GAAP (accounting principles generally accepted in the United States of America) measures that reflect total earnings from our four segments, including allocated pension expense we have recognized under the Federal Acquisition Regulation (FAR) and the related U.S. Government Cost Accounting Standards (CAS), and excluding FAS pension service expense and unallocated corporate items (certain corporate-level expenses, which are not considered allowable or allocable under applicable CAS or FAR, and costs not considered part of management’s evaluation of segment operating performance). These non-GAAP measures may be useful to investors and other users of our financial statements as supplemental measures in evaluating the financial performance and operational trends of our sectors. These measures may not be defined and calculated by other companies in the same manner and should not be considered in isolation or as alternatives to operating results presented in accordance with GAAP.


	Three Months Ended March 31						%			Three Months Ended March 31				%
$ in millions	2020			2019			Change		$ in millions		2021			2020			Change
Segment operating income	$	953		$	967		(1	)%	Segment operating income		$	1,095		$	967		13	%
Segment operating margin rate	11.1		%	11.8		%			Segment operating margin rate		12.0		%	11.2		%
CAS pension expense	207			200			4	%	CAS pension expense		123			207			(41)	%
Less: FAS (service) pension expense	(102		)	(92		)	11	%
Net FAS (service)/CAS pension adjustment	105			108			(3	)%
Less: FAS pension service expense									Less: FAS pension service expense		(104)			(102)			2	%
FAS/CAS operating adjustment									FAS/CAS operating adjustment		19			105			(82)	%
Gain on sale of business									Gain on sale of business		1,980			—			NM
IT services divestiture – unallowable state taxes and transaction costs									IT services divestiture – unallowable state taxes and transaction costs		(192)			—			NM
Intangible asset amortization and PP&E step-up depreciation	(82		)	(96		)	(15	)%	Intangible asset amortization and PP&E step-up depreciation		(65)			(82)			(21)	%

Other unallocated corporate expense	(42		)	(43		)	(2	)%	Other unallocated corporate expense		(15)			(56)			(73)	%
Unallocated corporate expense	(124		)	(139		)	(11	)%
Unallocated corporate income (expense)									Unallocated corporate income (expense)		1,708			(138)			NM
Operating income	$	934		$	936		—	%	Operating income		$	2,822		$	934		202	%

First quarter ~~2020~~2021 segment operating income ~~decreased $14~~increased $128 million, or 113 percent, and reflects ~~lower segment~~higher operating income at Space Systems, Aeronautics Systems and Mission Systems, partially offset by ~~higher~~lower operating income at Defense Systems due to the impact of the IT services divestiture. First quarter 2021 segment operating income from the IT services business was $20 million as compared to $51 million in the prior year period. First quarter 2021 segment operating income includes a benefit of approximately $100 million due to the impact of lower overhead rates on the company’s fixed price contracts. The lower projected overhead rates were principally driven by a reduction in projected CAS pension costs as well as operational performance at ~~Mission Systems and Space Systems.~~the sectors, which more than offset lower business base due to the IT services divestiture. Segment operating margin rate ~~decreased~~increased to ~~11.1~~12.0 percent from 11.2 percent and reflects higher operating margins at all four sectors largely as a result of the items discussed above.

FAS/CAS Operating Adjustment

The first quarter 2021 FAS/CAS operating adjustment decreased primarily due to lower ~~segment operating margins at Aeronautics Systems and Defense Systems.~~

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

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

Unallocated Corporate Income (Expense) ~~Income~~

~~The decrease in first quarter 2020~~Year to date 2021 unallocated corporate ~~expense is~~income (expense) increased primarily due to ~~$14~~a $2.0 billion pre-tax gain on the sale of our IT services business, partially offset by $192 million of unallowable state taxes and transaction costs associated with the divestiture. It also increased due to a net increase in deferred state tax assets principally resulting from certain state tax legislation adopted in 2020 that places temporary limitations on tax credits, as well as lower intangible asset amortization and PP&E step-up depreciation.

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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 March 31
$ in millions 2020 2019
Favorable EAC adjustments $ 276
$ 235
Unfavorable EAC adjustments (152 ) (97 )
Net EAC adjustments $ 124
$ 138

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	Three Months Ended March 31
$ in millions		2021		2020
Favorable EAC adjustments		$	348	$	276
Unfavorable EAC adjustments		(158)		(152)
Net EAC adjustments		$	190	$	124

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


	Three Months Ended March 31							Three Months Ended March 31
$ in millions	2020			2019			$ in millions		2021		2020
Aeronautics Systems	$	12		$	51		Aeronautics Systems		$	37	$	12
Defense Systems	22			32			Defense Systems		30		22
Mission Systems	79			35			Mission Systems		88		79
Space Systems	12			21			Space Systems		37		12
Eliminations	(1		)	(1		)	Eliminations		(2)		(1)
Net EAC adjustments	$	124		$	138		Net EAC adjustments		$	190	$	124

For purposes of the discussion in the remainder of this Segment Operating Results section, references to operating income and operating margin rate reflect segment operating income and segment operating margin rate, respectively.


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

AERONAUTICS SYSTEMS Three Months Ended March 31 %
$ in millions 2020 2019 Change
Sales $ 2,843
$ 2,818
1 %
Operating income 259
308
(16 )%
Operating margin rate 9.1 % 10.9 %

Sales

First quarter ~~2020~~2021 sales increased ~~$25~~$147 million, or 15 percent, due to higher sales in ~~both~~Manned Aircraft, partially offset by lower sales in Autonomous ~~Systems and~~Systems. Manned ~~Aircraft. Higher~~Aircraft sales reflect higher volume on restricted programs, as well as the E-2 and ~~Global Hawk were~~F-35 production programs, partially offset by a COVID-19-related reduction in A350 production activity and lower volume on the B-2 Defensive Management ~~System~~Systems Modernization program ~~and NATO AGS, which are both nearing~~as it nears completion. Autonomous Systems sales reflect lower volume on certain Global Hawk production programs as they near completion.

Operating Income

First quarter 2020 operating income decreased $49 million, or 16 percent, principally due to a lower operating margin rate. Operating margin rate decreased to 9.1 percent from 10.9 percent, due to lower net EAC adjustments at Autonomous Systems as well as the timing of F-35 risk retirements and contract mix at Manned Aircraft.

DEFENSE SYSTEMS Three Months Ended March 31 %
$ in millions 2020 2019 Change
Sales $ 1,881
$ 1,768
6 %
Operating income 196
202
(3 )%
Operating margin rate 10.4 % 11.4 %

~~Sales~~

First quarter 2020 sales increased $113 million or 6 percent, due to higher sales in both Battle Management & Missile Systems and Mission Readiness. Battle Management & Missile Systems sales increased primarily due to higher volume on the Guided Multiple Launch Rocket System (GMLRS), Advanced Anti-Radiation Guided Missile (AARGM) program and other missile products. Mission Readiness sales increased principally due to higher volume on an international training program and the Special Electronic Mission Aircraft program.

~~Operating Income~~

First quarter 2020 operating income decreased $6 million, or 3 percent, primarily due to a lower operating margin rate, partially offset by higher sales. Operating margin rate decreased to 10.4 percent from 11.4 percent primarily due to favorable adjustments on certain small caliber ammunition programs in the first quarter of 2019.

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MISSION SYSTEMS Three Months Ended March 31 %
$ in millions 2020 2019 Change
Sales $ 2,347
$ 2,210
6 %
Operating income 348
319
9 %
Operating margin rate 14.8 % 14.4 %

~~Sales~~

First quarter 2020 sales increased $137 million, or 6 percent, primarily due to higher volume on Airborne Sensors & Networks and Maritime/Land Systems & Sensors programs. Airborne Sensors & Networks sales increased principally due to higher airborne radar volume, including on the F-35 and SABR programs. Maritime/Land Systems & Sensors sales increased primarily due to higher volume on marine systems and restricted programs.

~~Operating Income~~

~~First quarter 2020~~2021 operating income increased ~~$29~~$45 million, or 917 percent, due to higher sales and a higher operating margin rate. Operating margin rate increased to ~~14.8~~10.3 percent from ~~14.4~~9.3 percent, principally due to higher net favorable EAC adjustments, which were largely driven by the previously described reduction in overhead rates.

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

Sales

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

Operating Income

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


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

Sales

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

SPACE SYSTEMS Three Months Ended March 31 %
$ in millions 2020 2019 Change
Sales $ 1,948
$ 1,801
8 %
Operating income 199
188
6 %
Operating margin rate 10.2 % 10.4 %

~~Sales~~Operating Income

First quarter ~~2020~~2021 operating income increased $44 million, or 12 percent, due to higher sales volume and a higher operating margin rate. Operating margin rate increased to 15.3 percent from 15.0 percent primarily due to higher net favorable EAC adjustments, which reflect a benefit for the previously described reduction in overhead rates and lower net favorable EAC adjustments at Networked Information Solutions.


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

Sales

First quarter 2021 sales increased ~~$147~~$573 million, or 829 percent, primarily due to higher sales in both the Launch & Strategic Missiles and Space business areas, partially offset by ~~lower~~a $28 million reduction in sales inrelated to the IT services divestiture. First quarter 2021 organic sales increased $601 million, or 32 percent. Launch & Strategic ~~Missiles.~~Missiles sales increased primarily due to ramp-up on GBSD and higher volume on hypersonics programs. Space

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sales were driven by higher volume on restricted programs, NASA Artemis programs and the Next Generation Overhead Persistent Infrared Radar (Next Gen OPIR) and the Arctic Satellite Broadband Mission (ASBM) program. Launch & Strategic Missiles sales reflect lower volume on the Ground-based Midcourse Defense (GMD) program and Space Launch System (SLS) Booster, partially offset by higher volume on hypersonic programs and the Ground Based Strategic Deterrent (GBSD) Technology Maturation Risk Reduction (TMRR) program.

Operating Income

First quarter ~~2020~~2021 operating income increased ~~$11~~$74 million, or 637 percent, ~~primarily~~ due to higher sales ~~partially offset by~~volume and a ~~lower~~higher operating margin rate. Operating margin rate ~~decreased~~increased to ~~10.2~~10.9 percent from 10.4 percent ~~principally~~primarily due to higher net favorable EAC adjustments, which were largely driven by the ~~timing of favorable negotiations on certain commercial contracts recognized~~previously described reduction in ~~the first quarter of 2019.~~overhead rates.

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PRODUCT AND SERVICE ANALYSIS

The following table presents product and service sales and operating costs and expenses by segment:


	Three Months Ended March 31									Three Months Ended March 31
$ in millions	2020				2019				$ in millions		2021	2020
Segment Information:	Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses		Segment Information:			Sales		Operating Costs and Expenses		Sales		Operating Costs and Expenses
Aeronautics Systems									Aeronautics Systems
Product	$	2,409	$	2,202	$	2,405	$	2,144	Product			$	2,524	$	2,274	$	2,409	$	2,199
Service	408		359		389		344		Service			422		369		408		358
Intersegment eliminations	26		23		24		22		Intersegment eliminations			44		39		26		23
Total Aeronautics Systems	2,843		2,584		2,818		2,510		Total Aeronautics Systems			2,990		2,682		2,843		2,580
Defense Systems									Defense Systems
Product	770		705		621		558		Product			680		595		770		704
Service	940		827		980		859		Service			697		624		940		826
Intersegment eliminations	171		153		167		149		Intersegment eliminations			185		166		171		153
Total Defense Systems	1,881		1,685		1,768		1,566		Total Defense Systems			1,562		1,385		1,881		1,683
Mission Systems									Mission Systems
Product	1,508		1,277		1,382		1,163		Product			1,760		1,493		1,508		1,274
Service	663		572		631		559		Service			592		497		663		570
Intersegment eliminations	176		150		197		169		Intersegment eliminations			237		202		176		150
Total Mission Systems	2,347		1,999		2,210		1,891		Total Mission Systems			2,589		2,192		2,347		1,994
Space Systems									Space Systems
Product	1,489		1,327		1,320		1,169		Product			2,058		1,829		1,489		1,325
Service	433		398		461		426		Service			424		381		433		397
Intersegment eliminations	26		24		20		18		Intersegment eliminations			39		35		26		24
Total Space Systems	1,948		1,749		1,801		1,613		Total Space Systems			2,521		2,245		1,948		1,746
Segment Totals									Segment Totals
Total Product	$	6,176	$	5,511	$	5,728	$	5,034	Total Product			$	7,022	$	6,191	$	6,176	$	5,502
Total Service	2,444		2,156		2,461		2,188		Total Service			2,135		1,871		2,444		2,151
Total Segment⁽¹⁾	$	8,620	$	7,667	$	8,189	$	7,222	Total Segment(1)			$	9,157	$	8,062	$	8,620	$	7,653


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

Product Sales and Costs

First quarter ~~2020~~2021 product sales increased ~~$448~~$846 million, or ~~8 percent.~~14 percent, principally due to increases in product sales at Space Systems and Mission Systems. The increase in product sales at Space Systems was ~~primarily due to~~driven by higher volume on restricted programs, NASA Artemis Programs and the Next Gen OPIR ~~programs at Space~~program, as well as ramp-up on the GBSD program. The increase in Mission Systems product sales was primarily driven by higher ~~sales~~volume on ~~missile products at Defense Systems and higher~~restricted, airborne radar and ~~F-35 volume at Mission Systems.~~land systems programs.

First quarter ~~2020~~2021 product costs increased ~~$477~~$689 million, or 913 percent, consistent with the higher product sales described ~~above and principally reflects a lower product margin at Aeronautics Systems due to lower net favorable EAC adjustments.~~above.

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Service Sales and Costs

First quarter ~~2020~~2021 service sales decreased ~~$17~~$309 million, or 113 percent, primarily due to ~~lower~~the IT services divestiture. First quarter 2021 sales from the IT services business, which were largely included in service sales, ~~at Defense Systems and Space Systems, partially offset by higher service sales at Mission Systems.~~were $162 million as compared to $559 million in the prior year period.

First quarter ~~2020~~2021 service costs decreased ~~$32~~$280 million, or 113 percent, consistent with the lower ~~service~~services sales described ~~above and reflects higher service margin rates at Mission Systems.~~above.

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BACKLOG

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


	March 31, 2021						December 31, 2020
$ in millions	Funded		Unfunded		Total Backlog		Total Backlog		% Change in 2021
Aeronautics Systems	$	11,886	$	10,337	$	22,223	$	24,002	(7)	%
Defense Systems	5,873		763		6,636		8,131		(18)	%
Mission Systems	10,453		3,314		13,767		13,805		—	%
Space Systems	7,249		29,448		36,697		35,031		5	%
Total backlog	$	35,461	$	43,862	$	79,323	$	80,969	(2)	%

March 31, 2020 December 31, 2019
$ in millions Funded Unfunded Total
Backlog
Total
Backlog
% Change in 2020
Aeronautics Systems $ 11,642
$ 13,544
$ 25,186
$ 26,021
(3 )%
Defense Systems 6,462
1,719
8,181
8,481
(4 )%
Mission Systems 9,336
4,840
14,176
14,226
— %
Space Systems 5,082
11,542
16,624
16,112
3 %
Total backlog $ 32,522
$ 31,645
$ 64,167
$ 64,840
(1 )%

New Awards

First quarter ~~2020~~2021 net awards totaled ~~$7.9~~$8.9 billion and backlog ~~totaled $64.2~~was $79.3 billion. Significant first quarter new awards include ~~restricted competitive prime space contracts totaling multiple billions of dollars in the aggregate; $339 million~~$2.6 billion for the ~~Scalable Agile Beam Radar (SABR)~~Next Generation Interceptor program, ~~$281 million~~$1.1 billion for restricted programs, $0.5 billion for SABR, $0.4 billion for F-35 and $0.2 billion for G/ATOR. In connection with the ~~Triton program, $165 million for~~IT services divestiture, the ~~Advanced Anti-Radiation Guided Missile (AARGM) program~~company reduced backlog by $1.4 billion during the first quarter ($1.0 billion at Defense Systems, $0.2 billion at Mission Systems and ~~$160 million for the Ground-based Midcourse Defense (GMD) program.~~$0.2 billion at Space Systems).

LIQUIDITY AND CAPITAL RESOURCES

We endeavor to ensure efficient conversion of operating income into cash and to increase shareholder value through cash deployment activities. In addition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash used in operating activities and adjusted free cash flow, a non-GAAP measure described in more detail below.

At March 31, ~~2020,~~2021, we had ~~$3.3~~$3.5 billion in cash and cash equivalents. ~~In March 2020,~~Effective January 30, 2021, we ~~issued $2.25~~completed the IT services divestiture for $3.4 billion in cash. Proceeds were primarily used in the first quarter of 2021 for a $2.0 billion accelerated share repurchase and to fund redemption of $1.5 billion of the company’s 2.55 percent unsecured ~~senior~~ notes to help preserve financial flexibility in light of uncertainty resulting from the COVID-19 pandemic. We intend to use those proceeds for general corporate purposes, which may include debt repayment and working capital.due October 2022. In April ~~2020,~~2021, we ~~entered into a~~renewed our one-year $500 million uncommitted credit ~~facility to provide an additional source of potential financing.~~facility.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) established a program with provisions to allow U.S. companies to defer the employer’s portion of social security taxes between March 27, 2020 and December 31, 2020 and pay such taxes in two installments in 2021 and 2022. Our first installment of deferred social security taxes of approximately $200 million is due in the fourth quarter of 2021. Under Section 3610, the CARES Act also authorized the government to reimburse qualifying contractors for certain costs of providing paid leave to employees as a result of COVID-19. The company continues to seek, and anticipates continuing to seek, recovery for certain COVID-19-related costs under Section 3610 of the CARES Act and through our contract provisions. In addition, the U.S. Department of Defense (DoD) has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent for costs incurred and work performed on relevant contracts. ~~We expect both of~~While it is unclear how much we will be able to recover, in particular under Section 3610, we believe these actions should ~~help~~continue to mitigate ~~COVID-19 related~~some COVID-19-related negative impacts to our operating cash flows ~~for the remainder~~in 2021.

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Cash and cash equivalents and cash generated from operating activities, supplemented by borrowings under credit facilities, commercial paper and/or in the capital markets, if needed, are expected to be sufficient to fund our operations for at least the next 12 months.

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Operating Cash Flow

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


	Three Months Ended March 31			%
$ in millions		2021		2020		Change
Net earnings		$	2,195	$	868	153	%
Gain on sale of business		(1,980)		—		NM
Non-cash items(1)		313		471		(34)	%
Changes in assets and liabilities:
Trade working capital		(310)		(2,163)		(86)	%
Retiree benefits		(314)		(237)		32	%
Other, net		30		68		(56)	%
Net cash used in operating activities		$	(66)	$	(993)	(93)	%

Three Months Ended March 31 %
$ in millions 2020 2019 Change
Net earnings $ 868
$ 863
1 %
Non-cash items⁽¹⁾
471
361
30 %
Changes in assets and liabilities:
Trade working capital (2,163 ) (1,964 ) 10 %
Retiree benefits (237 ) (142 ) 67 %
Other, net 68
(31 ) NM
Net cash used in operating activities $ (993 ) $ (913 ) (9 )%
(1)Includes depreciation and amortization, non-cash lease expense, stock based compensation expense and deferred income taxes.


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

First quarter ~~2020~~2021 cash used in operating activities ~~increased $80~~was $66 million as compared with $993 million in the prior year period. This $927 million improvement was principally due to ~~the timing of~~improved trade working capital. The net use of cash during the first quarter is ~~consistent with~~reflective of the ~~company’s~~company's historical timing of operating cash flows, which are generally more heavily weighted ~~toward~~towards the second half of the year.

Adjusted Free Cash Flow

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

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


	Three Months Ended March 31						%			Three Months Ended March 31			%
$ in millions	2020			2019			Change		$ in millions		2021		2020		Change
Net cash used in operating activities	$	(993	)	$	(913	)	(9	)%	Net cash used in operating activities		$	(66)	$	(993)	(93)	%
Less: capital expenditures	(272		)	(284		)	(4	)%
Free cash flow	$	(1,265	)	$	(1,197	)	(6	)%
Capital expenditures									Capital expenditures		(205)		(272)		(25)	%

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

First quarter ~~2020~~2021 adjusted free cash flow ~~decreased $68 million~~improved $1.0 billion principally due to ~~the increase in~~lower net cash used in operating ~~activities.~~activities and a decrease in capital expenditures as compared to the prior year period.

Investing Cash Flow

First quarter ~~2020~~2021 net cash provided by investing activities was $3.2 billion compared to net cash used in investing activities ~~decreased to~~of $270 million ~~from $280 million~~in the prior year period, principally due to ~~lower capital expenditures.~~$3.4 billion in cash received from the sale of our IT services business during the first quarter of 2021.

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Financing Cash Flow

First quarter ~~2020~~2021 net cash used in financing activities was $4.5 billion compared to net cash provided by financing activities ~~increased to~~of $2.3 billion ~~from $462 million~~in the prior year period, principally due to $2.2 billion in debt repayments and $2.0 billion paid in connection with an accelerated share repurchase during the first quarter of 2021 as compared to $2.2 billion of net proceeds from the issuance of long-term debt in the first quarter of ~~2020, partially offset by share repurchases in the quarter.~~2020.

Credit Facilities, Commercial Paper and Financial Arrangements - See Note 6 to the financial statements for further information on our credit facilities, commercial paper and our use of standby letters of credit and guarantees.

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

Long-term Debt - See Note 4 to the financial statements for further information.

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CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

There have been no material changes to our critical accounting policies, estimates or judgments from those discussed in our ~~2019~~2020 Annual Report on Form 10-K.

ACCOUNTING STANDARDS UPDATES

See Note 1 to our financial statements for further information on accounting standards updates.

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

This Form 10-Q and the information we are incorporating by reference contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “will,” “expect,” “anticipate,” “intend,” “may,” “could,” “should,” “plan,” “project,” “forecast,” “believe,” “estimate,” “outlook,” “trends,” “goals” and similar expressions generally identify these forward-looking statements. Forward-looking statements include, among other things, statements relating to our future financial condition, results of operations and/or cash flows. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made, but which may change over time. These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict. Specific risks that could cause actual results to differ materially from those expressed or implied in these forward-looking statements include, but are not limited to, those identified and discussed more fully in the section entitled “Risk Factors” in our ~~2019~~2020 Annual Report on Form 10-K ~~this Form 10-Q~~ and from time to time in our other filings with the Securities and Exchange Commission (SEC). These risks and uncertainties are amplified by the global COVID-19 pandemic, which has caused and will continue to cause significant challenges, instability and uncertainty. They include:

•the impact of the COVID-19 outbreak or future epidemics on our business, including the potential for worker absenteeism, facility closures, work slowdowns or stoppages, supply chain disruptions, additional costs and liabilities, program delays, our ability to recover costs under contracts, changing government funding and acquisition priorities and processes, changing government payment rules and practices, insurance challenges, and potential impacts on access to capital, the markets and the fair value of our assets

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

•

the impact of the COVID-19 outbreak or future epidemics on our business, including the potential for worker absenteeism, facility closures, work slowdowns or stoppages, supply chain disruptions, program delays, our ability to recover costs under contracts, changing government funding and acquisition priorities and processes, changing government payment rules and practices, and potential impacts on access to capital, the markets and the fair value of our assets;


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

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


•	•investigations, claims, disputes, enforcement actions, litigation and/or other legal proceedings •the use of estimates when accounting for our contracts and the effect of contract cost growth and/or changes in estimated contract revenues and costs •


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

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


•	•the improper conduct of employees, agents, subcontractors, suppliers, business partners or joint ventures in which we participate and the impact on our reputation and our ability to do business •cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners •


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

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

•

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

•increased competition within our markets and bid protests

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

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

•


•	~~increased competition within our markets and bid protests~~


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


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

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

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natural disasters


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

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

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

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

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

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


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

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

You are urged to consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of forward-looking statements. These forward-looking statements speak only as of the date this report is first filed or, in the case of any document incorporated by reference, the date of that document. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

CONTRACTUAL OBLIGATIONS

~~Other than the debt issuance, including associated interest, described in Note 4 of Part I, Item 1, there~~There have been no material changes to our contractual obligations from those discussed in our ~~2019~~2020 Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.4. Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

Our principal executive officer (Chairman, Chief Executive Officer and President) and principal financial officer (Corporate Vice President and Chief Financial Officer) have evaluated the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) as of March 31, ~~2020,~~2021, and have concluded that these controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit is accumulated and communicated to

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management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the three months ended March 31, ~~2020,~~2021, no changes occurred in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We have provided information about certain legal proceedings in which we are involved in Notes 5 and 6 to the financial statements.

We are a party to various investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. These types of matters could result in administrative, civil or criminal fines, penalties or other sanctions (which terms include judgments or convictions and consent or other voluntary decrees or agreements); compensatory, treble or other damages; non-monetary relief or actions; or other liabilities. Government regulations provide that certain allegations against a contractor may lead to suspension or debarment from future government contracts or suspension of export privileges for the company or one or more of its components. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. For additional information on pending matters, please see Notes 5 and 6 to the financial statements, and for further information on the risks we face from existing and future investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, please see “Risk Factors” in our ~~2019~~2020 Annual Report on Form 10-K.

~~Environmental Matters Involving Potential Monetary Damages in Excess of $100,000~~

~~The following environmental matter is reported pursuant to~~Consistent with SEC Regulation S-K Item 103, ~~because it involves potential~~we have elected to disclose those environmental proceedings with a governmental entity as a party where the company reasonably believes such proceeding would result in monetary ~~damages in excess~~sanctions, exclusive of ~~$100,000. In June 2016, the U.S. Environmental Protection Agency (EPA) conducted an environmental inspection at the Allegheny Ballistics Laboratory in Rocket Center, WV, which was then~~interest and ~~is now operated by Alliant Techsystems Operations LLC (“ATO”). ATO became an indirect subsidiary~~costs, of the Company approximately 2 years later, in June 2018. On March 3, 2020, EPA notified ATO of a proposed penalty for alleged noncompliance with certain air emission, water discharge and waste management permitting and regulatory requirements. EPA proposed a civil penalty totaling $497,635 and certain non-monetary actions. The Company disputes the allegations and is in discussions with the government.$1.0 million or more.

Item 1A. Risk Factors

~~The following updates and supplements the~~For a discussion of our risk factors ~~described in~~please see the section entitled “Risk Factors” in our ~~2019~~2020 Annual Report on Form 10-K, as updated by the Current Report on Form 8-K filed on March 19, 2020. It should be read in conjunction with the risk factors in the 2019 Annual Report on Form 10-K. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in the 2019 Form 10-K which could materially affect our business, financial condition or future results. The COVID-19 pandemic has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in the 2019 Form 10-K, and the risk factor disclosure in the 2019 Form 10-K is qualified by the information relating to COVID-19 that is described in this Quarterly Report on Form 10-Q, including the updated risk factor set forth below. Except as otherwise described herein, there have been no other material changes from the risk factors previously disclosed in the 2019 Form 10-K.

We face various risks related to health epidemics, pandemics and similar outbreaks, which may have material adverse effects on our business, financial position, results of operations and/or cash flows.

We face various risks related to health epidemics, pandemics and similar outbreaks, including the global outbreak of coronavirus disease 2019 (“COVID-19”). Since first reported in late 2019, the COVID-19 pandemic has dramatically impacted the global health and economic environment, including millions of confirmed cases, business slowdowns or shutdowns, government challenges and market volatility of an unprecedented nature. Although we have, to date, managed to continue most of our operations, we cannot predict the future course of events nor can we assure that this global pandemic, including its economic impact, will not have a material adverse impact on our business, financial position, results of operations and/or cash flows. (For further information relating to our company’s experience to date, and certain steps taken to approach the risks presented by the COVID-19 pandemic, see Management’s Discussion and Analysis of Financial Condition and Results of Operations).

If significant portions of our workforce are unable to work effectively, including because of illness, quarantines or absenteeism; steps the company has taken to protect health and challenges with additional steps (such as securing personal protective equipment and testing); government actions; facility closures; work slowdowns or stoppages; limited supplies or resources; or other circumstances related to COVID-19, our operations will be further impacted. We may be unable to perform fully on our contracts and we may incur liabilities and suffer losses as a result. In addition, we will continue to incur additional costs as a result of the COVID-19 outbreak, including to protect the well-being of our employees, which will likely not be fully recoverable. The continued spread of COVID-19 may

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~~also affect our ability to hire, develop and retain our talented and diverse workforce, and to maintain our corporate culture.~~

The continued spread of COVID-19, including the global pandemic and the economic impact, are likely also to cause further disruption in our supply chain. If our suppliers have increased challenges with their workforce (including as a result of illness, absenteeism or government orders), access to necessary components and supplies, access to capital, and access to fundamental support services (such as shipping and transportation), they may be unable to provide the agreed-upon goods and services in a timely, compliant and cost-effective manner. We may incur additional costs and delays in our business, including as a result of higher prices, schedule delays or the need to identify and develop alternative suppliers, and we may need to provide additional resources to support our suppliers or otherwise continue performance under our contracts. In some instances, we may be unable to do that, incurring additional liabilities under our current contracts and hampering new ones.

The global COVID-19 crisis is putting extraordinary pressures on the U.S. government and governments around the world. It could cause delays or limits in the ability of the government and other customers to perform, including making timely payments and awards to us, negotiating contracts and agreeing appropriate costs for recovery, performing quality inspections, supporting testing, accepting delivery, approving security clearances (for individuals and facilities), and providing necessary personnel, equipment and facilities. In addition, as a result of the COVID-19 crisis, there may be changes in our customers’ priorities and practices, as our customers in both the United States and globally confront competing budget priorities and more limited resources. These changes may impact current and future programs, government payments and other practices, procurements, and funding decisions.

While we have significant sources of cash and liquidity and access to committed and uncommitted credit lines, a prolonged period of generating lower cash from operations could adversely affect both our financial condition and the achievement of our strategic objectives. Additionally, there can be no assurance that we will not face credit rating downgrades, and such downgrades could adversely affect our cost of funds, liquidity and access to capital markets. The current market volatility will likely also impact investment performance and our expected asset valuations and returns, which can materially impact the calculation of long-term liabilities such as our pension obligations.

We continue to work with our stakeholders (including customers, employees, suppliers and local communities) in an effort to address responsibly this global pandemic. We continue to monitor the situation, to assess further possible implications to our business, supply chain and customers, and to take certain actions in an effort to mitigate various adverse consequences.

We expect that the longer the COVID-19 pandemic, including its economic disruption, continues, the greater the adverse impact on our business operations, financial performance and results of operations will be. Given the tremendous uncertainties and variables, we cannot at this time predict the impact of the global COVID-19 pandemic, but it could have a material adverse impact on our business, financial position, results of operations and/or cash flows.

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


Period	Total Number of Shares Purchased	Average Price Paid per Share(1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs ($ in millions)(2)
January 1, 2021 - January 29, 2021	—	$	—	—	$	5,849
January 30, 2021 - February 26, 2021(3)	5,931,405	286.61		5,931,405		4,149
February 27, 2021 - April 2, 2021	—	—		—		4,149
Total	5,931,405	$	286.61	5,931,405	$	4,149

(1)Includes commissions paid.

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

Period Number
of Shares
Purchased
Average Price
Paid per
Share⁽¹⁾
Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the
Plans or Programs
($ in millions)
January 1, 2020 - January 24, 2020 204,200
$ 374.96
204,200
$ 3,253
January 25, 2020 - February 21, 2020 207,300
369.78
207,300
3,176
February 22, 2020 - March 27, 2020 625,975
313.11
625,975
2,980
Total 1,037,475
$ 336.61
1,037,475
$ 2,980


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

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the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.

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

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Item 6. Exhibits



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

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

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

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

~~4.1~~

*+10.1		Ninth Supplemental Indenture, dated as of March 23, 3030, between Northrop Grumman Corporation and The Bank of New York Mellon, as successor to JPMorgan Chase, Trustee, to Indenture dated as of November 21, 2001 (Incorporated by reference to Exhibit 4.1 to Form 8-K filed March 24, 2020, File No. 001-16411)Group Personal E xcess Liability Policy effective January 1, 2021

~~4.2~~*+10.2		~~Form of 4.400% Senior Note due 2030 (incorporated by reference to Exhibit 4.2 to Form 8-K filed March 24, 2020, File No. 001-16411)~~

~~4.3~~	~~Form of 5.150% Senior Note due 2040 (incorporated by reference to Exhibit 4.3 to Form 8-K filed March 24, 2020, File No. 001-16411)~~

~~4.4~~	~~Form of 5.250% Senior Note due 2050 (incorporated by reference to Exhibit 4.4 to Form 8-K filed March 24, 2020, File No. 001-16411)~~

~~+*10.1~~	2021 Restricted Stock Rights Grant ~~Certificate~~Agreement Specifying ~~the~~ Terms and Conditions Applicable to ~~2020~~2021 Restricted Stock Rights Granted under the 2011 Long-Term Incentive Stock Plan

+10.210.3	2021 Restricted Performance Stock Rights Grant ~~Certificate~~Agreement Specifying ~~the~~ Terms and Conditions Applicable to ~~2020~~2021 Restricted Performance Stock ~~Performance~~ Rights Granted under the 2011 Long-Term Incentive Stock Plan

+10.310.4	2021 Restricted Stock Rights Grant ~~Certificate~~Agreement Specifying ~~the~~ Terms and Conditions Applicable to Special ~~2020~~2021 Restricted Stock Rights Granted to Blake Larson ~~and Janis Pamiljans~~ under the 2011 Long-Term Incentive Stock Plan

+*~~10.4~~15	~~Letter dated February 3, 2020 from Northrop Grumman Corporation to David Keffer regarding compensation effective February 17, 2020~~

~~+10.5~~	Separation Agreement and General Release dated February 5, 2020 from Northrop Grumman Corporation to Kenneth Bedingfield (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 6, File No. 001-16411)

*15	Letter from Independent Registered Public Accounting Firm

*31.1		Certification of Kathy J. Warden pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*31.2		Certification of David F. Keffer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

**32.1		Certification of Kathy J. Warden pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

**32.2		Certification of David F. Keffer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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*101			Northrop Grumman Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2020,~~2021, formatted in XBRL (Extensible Business Reporting Language): (i) the Cover Page, (ii) Condensed Consolidated Statements of Earnings and Comprehensive Income, (iii) Condensed Consolidated Statements of Financial Position, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Shareholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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



+			Management contract or compensatory plan or arrangement

*			Filed with this report

**			Furnished with this report

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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: April 28, ~~2020~~2021

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	March 31, 2020								December 31, 2019
$ in millions	Level 1		Level 2			Total			Level 1		Level 2			Total
Financial Assets (Liabilities)
Marketable securities	$	288	$	4		$	292		$	364	$	1		$	365
Marketable securities valued using NAV						16								17
Total marketable securities	288		4			308			364		1			382
Derivatives	—		(3		)	(3		)	—		(3		)	(3		)



$ in millions	Accrued Costs⁽¹⁾⁽²⁾		Reasonably Possible Future Costs in Excess of Accrued Costs⁽²⁾		Deferred Costs⁽³⁾
March 31, 2020	$	533	$	448	$	439
December 31, 2019	531		448		436



Period	Number of Shares Purchased	Average Price Paid per Share⁽¹⁾		Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs ($ in millions)
January 1, 2020 - January 24, 2020	204,200	$	374.96	204,200		$	3,253
January 25, 2020 - February 21, 2020	207,300	369.78		207,300		3,176
February 22, 2020 - March 27, 2020	625,975	313.11		625,975		2,980
Total	1,037,475	$	336.61	1,037,475		$	2,980