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NOC-9.30.2013-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ 
FORM 10-Q
______________________________________ 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-16411
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
 
80-0640649
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2980 Fairview Park Drive, Falls Church, Virginia 22042
www.northropgrumman.com
(Address of principal executive offices and internet site)
(703) 280-2900
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x
  
No *
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x
  
No *
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer x
  
Accelerated filer *
 
 
 
Non-accelerated filer * (Do not check if a smaller reporting company)
 
 Smaller reporting company  *
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes *
  
No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 18, 2013, 221,990,583 shares of common stock were outstanding.

Table of Contents

NORTHROP GRUMMAN CORPORATION                        

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

i
Table of Contents

NORTHROP GRUMMAN CORPORATION                        

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions, except per share amounts
2013
 
2012
 
2013
 
2012
Sales
 
 
 
 
 
 
 
Product

$3,330

 

$3,487

 

$10,344

 

$10,227

Service
2,776

 
2,783

 
8,160

 
8,515

Total sales
6,106

 
6,270

 
18,504

 
18,742

Operating costs and expenses
 
 
 
 
 
 
 
Product
2,499

 
2,629

 
7,833

 
7,760

Service
2,262

 
2,333

 
6,621

 
6,963

General and administrative expenses
555

 
572

 
1,695

 
1,713

Operating income
790

 
736

 
2,355

 
2,306

Other (expense) income
 
 
 
 
 
 
 
Interest expense
(70
)
 
(53
)
 
(183
)
 
(158
)
Other, net
—

 
12

 
(16
)
 
30

Earnings before income taxes
720

 
695

 
2,156

 
2,178

Federal and foreign income tax expense
223

 
236

 
682

 
733

Net earnings

$ 497

 

$ 459

 

$ 1,474

 

$ 1,445

 
 
 
 
 
 
 
 
Basic earnings per share

$ 2.18

 

$ 1.86

 

$ 6.33

 

$ 5.77

Weighted-average common shares outstanding, in millions
228.2

 
247.2

 
232.8

 
250.4

Diluted earnings per share

$ 2.14

 

$ 1.82

 

$ 6.22

 

$ 5.67

Weighted-average diluted shares outstanding, in millions
232.6

 
252.1

 
237.0

 
255.0

 
 
 
 
 
 
 
 
Net earnings (from above)

$ 497

 

$ 459

 

$ 1,474

 

$ 1,445

Other comprehensive income
 
 
 
 
 
 
 
Change in unamortized benefit plan costs, net of tax
78

 
50

 
237

 
154

Change in cumulative translation adjustment
15

 
12

 
8

 
3

Change in unrealized loss on marketable securities and cash flow hedges, net of tax
(1
)
 
(1
)
 
(1
)
 
(1
)
Other comprehensive income, net of tax
92

 
61

 
244

 
156

Comprehensive income

$ 589

 

$ 520

 

$ 1,718

 

$ 1,601

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

-1-
Table of Contents

NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
$ in millions
September 30,
2013
 
December 31,
2012
Assets
 
 
 
Cash and cash equivalents

$ 4,944

 

$ 3,862

Accounts receivable, net of progress payments
3,003

 
2,858

Inventoried costs, net of progress payments
784

 
798

Deferred tax assets
596

 
574

Prepaid expenses and other current assets
264

 
300

Total current assets
9,591

 
8,392

Property, plant and equipment, net of accumulated depreciation of $4,305 in 2013 and $4,146 in 2012
2,763

 
2,887

Goodwill
12,438

 
12,431

Non-current deferred tax assets
1,274

 
1,542

Other non-current assets
1,339

 
1,291

Total assets

$27,405

 

$26,543

 
 
 
 
Liabilities
 
 
 
Trade accounts payable

$ 1,221

 

$ 1,392

Accrued employee compensation
1,058

 
1,173

Advance payments and amounts in excess of costs incurred
1,698

 
1,759

Other current liabilities
1,785

 
1,732

Total current liabilities
5,762

 
6,056

Long-term debt, net of current portion
5,928

 
3,930

Pension and post-retirement benefit plan liabilities
5,374

 
6,085

Other non-current liabilities
985

 
958

Total liabilities
18,049

 
17,029

 
 
 
 
Commitments and contingencies (Note 7)

 

 
 
 
 
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: 2013— 223,775,721 and 2012—239,209,812
224

 
239

Paid-in capital
1,479

 
2,924

Retained earnings
12,196

 
11,138

Accumulated other comprehensive loss
(4,543
)
 
(4,787
)
Total shareholders’ equity
9,356

 
9,514

Total liabilities and shareholders’ equity

$27,405

 

$26,543

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

-2-
Table of Contents

NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30
$ in millions
2013
 
2012
Operating activities
 
 
 
Sources of cash
 
 
 
Cash received from customers
 
 
 
Collections on billings

$13,871

 

$15,632

Progress payments
4,281

 
3,233

Other cash receipts
66

 
67

Total sources of cash
18,218

 
18,932

Uses of cash
 
 
 
Cash paid to suppliers and employees
(15,555
)
 
(16,015
)
Pension contributions
(561
)
 
(349
)
Interest paid, net of interest received
(183
)
 
(177
)
Income taxes paid, net of refunds received
(579
)
 
(760
)
Other cash payments
(61
)
 
(48
)
Total uses of cash
(16,939
)
 
(17,349
)
Net cash provided by operating activities
1,279

 
1,583

Investing activities
 
 
 
Capital expenditures
(178
)
 
(196
)
Maturities of short-term investments
—

 
250

Other investing activities, net
9

 
7

Net cash (used in) provided by investing activities
(169
)
 
61

Financing activities
 
 
 
Net proceeds from issuance of long-term debt
2,841

 
—

Common stock repurchases
(1,661
)
 
(846
)
Payments of long-term debt
(877
)
 
—

Cash dividends paid
(411
)
 
(401
)
Proceeds from exercises of stock options
158

 
153

Other financing activities, net
(78
)
 
(27
)
Net cash used in financing activities
(28
)
 
(1,121
)
Increase in cash and cash equivalents
1,082

 
523

Cash and cash equivalents, beginning of year
3,862

 
3,002

Cash and cash equivalents, end of period

$ 4,944

 

$ 3,525

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




-3-
Table of Contents

NORTHROP GRUMMAN CORPORATION                        

 
Nine Months Ended September 30
$ in millions
2013
 
2012
Reconciliation of net earnings to net cash provided by operating activities
 
 
 
Net earnings

$1,474

 

$1,445

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
Depreciation and amortization
345

 
371

Stock-based compensation
118

 
111

Excess tax benefits from stock-based compensation
(37
)
 
(41
)
Deferred income taxes
89

 
47

(Increase) decrease in assets:
 
 
 
Accounts receivable, net
(147
)
 
(27
)
Inventoried costs, net
10

 
224

Prepaid expenses and other assets
(53
)
 
(90
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable and accruals
(296
)
 
(370
)
Income taxes payable
92

 
32

Retiree benefits
(331
)
 
(99
)
Other, net
15

 
(20
)
Net cash provided by operating activities

$1,279

 

$1,583

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

 

-4-
Table of Contents

NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
Nine Months Ended September 30
$ in millions, except per share amounts
2013
 
2012
Common stock
 
 
 
Beginning of year

$ 239

 

$ 254

Common stock repurchased
(21
)
 
(14
)
Shares issued for stock awards and options
6

 
6

End of period
224

 
246

Paid-in capital
 
 
 
Beginning of year
2,924

 
3,873

Common stock repurchased
(1,652
)
 
(831
)
Stock compensation and options exercised
212

 
249

Shipbuilding spin-off adjustment
(5
)
 
5

End of period
1,479

 
3,296

Retained earnings
 
 
 
Beginning of year
11,138

 
9,699

Net earnings
1,474

 
1,445

Dividends declared
(416
)
 
(405
)
End of period
12,196

 
10,739

Accumulated other comprehensive loss
 
 
 
Beginning of year
(4,787
)
 
(3,490
)
Other comprehensive income, net of tax
244

 
156

End of period
(4,543
)
 
(3,334
)
Total shareholders’ equity

$9,356

 

$10,947

Cash dividends declared per share

$ 1.77

 

$ 1.60

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

-5-
Table of Contents

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 include the accounts of Northrop Grumman Corporation and subsidiaries (herein referred to as "Northrop Grumman," the "company," "we," "us," or "our"). Material intercompany accounts, transactions, and profits are eliminated in consolidation. Investments in equity securities and joint ventures where the company has significant influence, but not control, are accounted for using the equity method.
The accompanying unaudited condensed consolidated financial statements of the company have been prepared by management in accordance with the rules of the Securities and Exchange Commission (SEC) for interim reporting purposes. These statements include adjustments of a normal recurring nature considered necessary by management for a fair presentation of the company's consolidated financial position, results of operations, and cash flows.
The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the information contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Annual Report on Form 10-K).
The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is management’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
The accompanying unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation thereof requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues 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.
The majority of our contracts are accounted for under the percentage-of-completion method. For such contracts, changes in estimates of contract sales, costs, or profits are recognized using the cumulative catch-up method of accounting. This method recognizes, in the current period, the cumulative effect of the changes on current and prior periods, and revenue and profit in future periods of contract performance are recognized as if the revised estimate had been used since contract inception. Changes in contract estimates occur for a variety of reasons, including changes in contract scope, estimated revenue and cost estimates. These changes are often driven by events such as changes in estimated incentive fees, unanticipated risks affecting contract costs, the resolution of risk at lower or higher cost than anticipated, and changes in indirect cost allocations, such as overhead and general and administrative expenses. We employ an extensive contract management process involving several functional organizations and numerous personnel who are skilled at managing contract activities. Changes in estimates are frequent; the company performs on a broad portfolio of long-term contracts, many of which include complex and customized aerospace and electronic equipment and software, that often includes technology at the forefront of science.
Significant changes in estimates on a single contract could have a material effect on the company's consolidated financial position or annual results of operations, and where such changes occur, separate disclosure is made of the nature, underlying conditions and financial impact of the change. During the three and nine months ended September 30, 2013, aggregate net changes in contract estimates recognized using the cumulative catch-up method of accounting increased operating income by $236 million ($0.66 per diluted share) and $657 million ($1.80 per diluted share), respectively. During the three and nine months ended September 30, 2012, such changes in contract estimates increased operating income by $214 million ($0.55 per diluted share) and $701 million ($1.79 per diluted share), respectively. No discrete event or adjustment to an individual contract was material to the condensed consolidated statements of earnings and comprehensive income for any of these periods.
As of September 30, 2013, the amounts related to claims and requests for equitable adjustment recognized in estimated contract values were not material individually or in aggregate.

-6-
Table of Contents

NORTHROP GRUMMAN CORPORATION                        

As of September 30, 2013, the company did not have any contract terminations in process that would have a material effect on our consolidated financial position or annual results of operations.
Related Party Transactions
For all periods presented, the company had no material related party transactions.
Accounting Standards Updates
Accounting standards updates effective after September 30, 2013, are not expected to have a material effect on the company’s consolidated financial position or annual results of operations.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
$ in millions
September 30,
2013
 
December 31,
2012
Unamortized benefit plan costs, net of tax benefit of $2,990 as of September 30, 2013, and $3,149 as of December 31, 2012
            $
(4,553
)
 
            $
(4,790
)
Cumulative translation adjustment
12

 
4

Net unrealized loss on marketable securities and cash flow hedges, net of tax benefit
(2
)
 
(1
)
Total accumulated other comprehensive loss
            $
(4,543
)
 
            $
(4,787
)
Unamortized benefit plan costs consist primarily of net after-tax actuarial losses totaling $4.8 billion and $5.1 billion as of September 30, 2013, and December 31, 2012, respectively. Net actuarial gains or losses are re-determined annually and principally arise from changes in the rate used to discount the benefit obligations and differences in expected and actual returns on plan assets.
Reclassifications from other comprehensive income to net earnings related to the amortization of benefit plan costs were $78 million and $237 million, net of taxes, for the three and nine months ended September 30, 2013, respectively, and were $50 million and $154 million, net of taxes, for the three and nine months ended September 30, 2012, respectively. The reclassifications represent the amortization of net actuarial losses and prior service credits for the company's retirement benefit plans, and are included in the computation of net periodic pension cost (See Note 8 for further information).
Reclassifications from other comprehensive income to net earnings, relating to cumulative translation adjustments, marketable securities and effective cash flow hedges for the three and nine months ended September 30, 2013 and 2012, respectively, were not material. Reclassifications for cumulative translation adjustments and marketable securities are recorded in other income, and reclassifications for effective cash flow hedges are recorded in operating income.
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 includes the dilutive effect of options and awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled 4.4 million shares and 4.2 million shares for the three and nine months ended September 30, 2013, respectively. The dilutive effect of these securities totaled 4.9 million shares and 4.6 million shares for the three and nine months ended September 30, 2012, respectively. The weighted-average diluted shares outstanding excludes anti-dilutive stock options because such options have exercise prices in excess of the average market price of the company’s common stock during the period. We had no anti-dilutive shares outstanding for the three and nine months ended September 30, 2013. The weighted-average diluted shares outstanding for the three and nine months ended September 30, 2012, exclude anti-dilutive stock options to purchase approximately 1.3 million shares and 2.7 million shares, respectively.

-7-
Table of Contents

NORTHROP GRUMMAN CORPORATION                        

Share Repurchases
The table below summarizes the company’s share repurchases:
 
 
 
 
 
 
 
 
 
 
Shares Repurchased
(in millions)
Repurchase Program
Authorization Date
 
Amount
Authorized
(in millions)
 
Total Shares Retired (in millions)
 
Average 
Price
Per Share(2)
 
Date Completed
 
Nine Months Ended September 30
 
2013
 
2012
June 16, 2010
 

$5,350

 
83.7

 

$63.86

 
September 2013
 
18.6

 
13.6

May 15, 2013(1)
 

$4,000

 
2.0

 

$96.39

 
 
 
2.0

 
—

(1)
On May 15, 2013, the company's board of directors authorized a share repurchase program of up to $4.0 billion of the company’s common stock. Repurchases under this program commenced upon the completion of the company's 2010 repurchase program in September 2013. As of September 30, 2013, our repurchases under the program totaled $196 million, and $3.8 billion remained under this share repurchase authorization.The repurchase program will expire when we have used all authorized funds for repurchase.
(2)
Includes commissions paid.
Share repurchases take place from time to time, subject to market conditions and management's discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and has not made any purchases of common stock other than in connection with these publicly announced repurchase program authorizations.
Dividends on Common Stock
In May 2013, the company increased the quarterly common stock dividend 11 percent to $0.61 per share from the previous amount of $0.55 per share.
In May 2012, the company increased the quarterly common stock dividend 10 percent to $0.55 per share from the previous amount of $0.50 per share.
3.    SEGMENT INFORMATION
The company is aligned into four segments: Aerospace Systems, Electronic Systems, Information Systems, and Technical Services. The United States (U.S.) Government is the primary customer for all four of our segments. The company, from time to time, acquires or disposes of businesses and realigns contracts, programs or business areas among and within its operating segments. Portfolio shaping and internal realignments are designed to more fully leverage existing capabilities and enhance development and delivery of products and services.

-8-
Table of Contents

NORTHROP GRUMMAN CORPORATION                        

The following table presents sales and operating income by segment:
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Sales
 
 
 
 
 
 
 
Aerospace Systems

$2,484

 

$2,586

 

$7,582

 

$7,373

Electronic Systems
1,774

 
1,707

 
5,266

 
5,175

Information Systems
1,619

 
1,776

 
4,982

 
5,476

Technical Services
713

 
748

 
2,152

 
2,281

Intersegment eliminations
(484
)
 
(547
)
 
(1,478
)
 
(1,563
)
Total sales
6,106

 
6,270

 
18,504

 
18,742

Operating income
 
 
 
 
 
 
 
Aerospace Systems
330

 
288

 
936

 
859

Electronic Systems
273

 
279

 
891

 
859

Information Systems
162

 
170

 
474

 
577

Technical Services
67

 
62

 
201

 
206

Intersegment eliminations
(69
)
 
(69
)
 
(194
)
 
(200
)
Total segment operating income
763


730

 
2,308

 
2,301

Reconciliation to total operating income:
 
 
 
 
 
 
 
Net FAS/CAS pension adjustment
61

 
34

 
125

 
101

Unallocated corporate expenses
(33
)
 
(27
)
 
(73
)
 
(89
)
Other
(1
)
 
(1
)
 
(5
)
 
(7
)
Total operating income

$ 790

 

$ 736

 

$2,355

 

$2,306

Net FAS/CAS Pension Adjustment
The net FAS (GAAP Financial Accounting Standards)/CAS (U.S. Government Cost Accounting Standards) pension adjustment is the difference between pension expense determined in accordance with GAAP and pension expense allocated to the operating segments determined in accordance with CAS. The change in net FAS/CAS pension adjustment from the prior year periods reflects an update for actual demographic experience as of January 1, 2013, which resulted in an increase to the company's 2013 CAS pension expense.
Unallocated Corporate Expenses
Unallocated corporate expenses include the portion of corporate expenses not considered allowable or allocable under applicable CAS regulations and the Federal Acquisition Regulation, and are therefore not allocated to the segments. Such costs consist of a portion of management and administration, legal, environmental, compensation costs, retiree benefits, and certain unallowable costs such as lobbying activities, among others.
4.    INCOME TAXES
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Federal and foreign income tax expense
      $223

 
      $236

 
      $682

 
$733

Effective income tax rate
31.0
%
 
34.0
%
 
31.6
%
 
33.7
%
The company's lower effective tax rate for the three months ended September 30, 2013, includes an additional $16 million benefit associated with the company's 2012 U.S. federal tax return and $6 million benefit for the American Taxpayer Relief Act, which reinstated research tax credits for 2012 and 2013. During the nine months ended September 30, 2013, the company recorded $29 million of research tax credits representing estimated full year 2012 research tax credits and three quarters of the expected 2013 research tax credits and an additional $16 million benefit associated with the 2012 U.S. federal tax return noted above.

-9-
Table of Contents

NORTHROP GRUMMAN CORPORATION                        

The company recognizes accrued interest and penalties related to uncertain tax positions in federal and foreign income tax expense. The company files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. The Internal Revenue Service (IRS) is conducting an examination of the company’s tax returns for the years 2007 through 2011. With respect to the tax years 2007 through 2009, the company has reached a tentative resolution with the IRS subject to final review by the U.S. Congressional Joint Committee on Taxation. It is reasonably possible that during the next twelve months, we will record a reduction in our unrecognized tax benefits up to $80 million and a reduction of our income tax expense up to $50 million. Other open tax years related to state and foreign jurisdictions remain subject to examination, but are not considered material.
5.    FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents fair value information for those assets and liabilities measured at fair value on a recurring basis:
 
September 30, 2013
 
December 31, 2012
$ in millions
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Financial Assets (Liabilities)
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Trading
     $
285

 
     $
285

 
     $
259

 
     $
259

Available-for-sale
2

 
2

 
3

 
3

Derivatives
(2
)
 
(2
)
 
(1
)
 
(1
)
Long-term debt, including current portion
     $
(5,930
)
 
     $
(6,358
)
 
     $
(3,935
)
 
     $
(4,834
)
There were no transfers of financial instruments between the three levels of fair value hierarchy during the nine months ended September 30, 2013.
The carrying value of cash and cash equivalents approximates fair value.
Investments in Marketable Securities
The company holds a portfolio of marketable securities to partially fund long-term deferred compensation programs. The portfolio consists of equity securities that are classified as either trading or available-for-sale, which can be liquidated without restriction. These assets are recorded at fair value, and substantially all of these instruments are valued using Level 1 inputs, with an immaterial amount valued using Level 2 inputs. As of September 30, 2013, and December 31, 2012, marketable securities of $287 million and $261 million, respectively, were included in other non-current assets in the condensed consolidated statements of financial position.
Derivative Financial Instruments and Hedging Activities
The company's derivative portfolio consists primarily of foreign currency forward contracts. The notional values for the company's derivative portfolio at September 30, 2013, and December 31, 2012, were $183 million and $164 million, respectively. The portion of notional values designated as cash flow hedges at September 30, 2013, and December 31, 2012, were $87 million and $110 million, respectively.
Derivative financial instruments are recognized as assets or liabilities in the financial statements and measured at fair value. Substantially all of these instruments are valued using Level 2 inputs.
Unrealized gains or losses on the effective portion of cash flow hedges are reclassified from other comprehensive income to operating income upon the settlement of the underlying transactions. The derivative fair values and related unrealized gains and losses at September 30, 2013, and December 31, 2012, were not material. Hedge contracts not designated for hedge accounting and the ineffective portion of cash flow hedges are recorded in other income.
Long-term Debt
The fair value of long-term debt is calculated using Level 2 inputs based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements.
Debt Issuance and Redemption
In May 2013, the company issued $2.85 billion of unsecured senior notes consisting of $850 million due June 1, 2018 with a fixed interest rate of 1.75 percent; $1.05 billion due August 1, 2023 with a fixed interest rate of 3.25 percent; and $950 million due June 1, 2043 with a fixed interest rate of 4.75 percent (collectively, the Notes). Interest on the Notes is payable semi-annually in arrears. The Notes are subject to redemption at the company’s

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NORTHROP GRUMMAN CORPORATION                        

discretion at any time, or from time to time, prior to maturity in whole or in part at the greater of the principal amount of the Notes or a “make-whole” amount, plus accrued and unpaid interest. The company used a portion of the net proceeds to fund the redemption of $350 million of the company's 3.70 percent unsecured senior notes due August 1, 2014, and $500 million of 1.85 percent unsecured senior notes due November 15, 2015. During the quarter ended June 30, 2013, the company recorded a pre-tax charge of $30 million principally related to the premiums paid on the redemption, which was recorded in other, net in the condensed consolidated statements of earnings and comprehensive income.
6.    LITIGATION, INVESTIGATIONS AND CLAIMS
Litigation
The company is one of several defendants in litigation brought by the Orange County Water District in Orange County Superior Court in California on December 17, 2004, for alleged contribution to volatile organic chemical contamination of the County's shallow groundwater. The lawsuit includes counts against the defendants for violation of the Orange County Water District Act, the California Super Fund Act, negligence, nuisance, trespass and declaratory relief. Among other things, the lawsuit seeks unspecified damages for the cost of remediation, payment of attorney fees and costs, and punitive damages. Trial on the statutory claims (those based on the Orange County Water District Act, the California Super Fund Act and declaratory relief) concluded on September 25, 2012. On December 11, 2012, the court issued a tentative decision on these claims in favor of the company and the other remaining defendants. On May 10, 2013, the court issued a supplemental tentative decision, which included additional findings supporting its earlier tentative decision in favor of the company and the other remaining defendants on the statutory causes of action tried in 2012. The court has not yet set a trial date for the remaining causes of action.
On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS have been delivered. The company's lawsuit is based on various theories of liability. The complaint seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company's assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company's obligations under the contract. The United States responded to the company's complaint with an answer, denying most of the company's claims, and counterclaims, seeking approximately $410 million, less certain amounts outstanding under the contract. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On April 2, 2013, the U.S. Department of Justice informed the company of a False Claims Act complaint relating to the FSS contract that was filed under seal by a relator in June 2011 in the U.S. District Court for the Eastern District of Virginia. On June 3, 2013, the United States filed a Notice informing the Court that the United States had decided not to intervene in this case. On August 26, 2013, the relator filed a corrected First Amended Complaint. The relator alleges that the company violated the False Claims Act in a number of ways with respect to the FSS contract, alleges damage to the USPS in an amount of at least approximately $179 million annually, and seeks an unspecified partial refund of the contract purchase price, penalties, attorney's fees and other costs of suit. Damages under the False Claims Act may be trebled upon a finding of liability. The relator also alleges he or she was improperly discharged in retaliation. Although the ultimate outcome of these matters, including any possible loss, cannot be predicted or estimated at this time, the company intends vigorously to pursue and defend these matters.
On August 8, 2013, the company received a court-appointed expert's report in litigation pending in the Second Federal Court of the Federal District in Brazil brought by the Brazilian Post and Telegraph Corporation (ECT) a Brazilian state-owned entity, against Solystic SAS (Solystic), a French subsidiary of the company, and two of its consortium partners. In this suit, commenced on December 17, 2004 and relatively inactive for some period of time, ECT alleges the consortium breached its contract with ECT and seeks damages of approximately $40 million (all damage amounts are stated in U.S. dollars and are subject to currency exchange fluctuations), plus interest, inflation adjustments, and attorneys’ fees, as authorized by Brazilian law, which amounts could be significant over time. 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 $42 million, plus interest, inflation adjustments, and attorneys’ fees, as authorized by Brazilian law. The Brazilian court retained the expert to consider certain issues pending before it. On August 8, 2013, the company received a report from the expert, which contains some recommended findings relating to liability and the damages calculations put forth by ECT. Some of the expert's

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findings are favorable to the company and others are favorable to ECT. The parties’ responses to the expert’s recommendations are due to be filed in October 2013. At some point thereafter, the court is expected to issue a decision that could accept or reject the expert’s recommended findings.
The company is a party to various investigations, lawsuits, claims and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, and other than with respect to the FSS matters discussed separately above, the company does not believe that the outcome of any matter pending against the company is likely to have a material adverse effect on the company's consolidated financial position as of September 30, 2013, or its annual results of operations or cash flows.
7.    COMMITMENTS AND CONTINGENCIES
Guarantees of Subsidiary Performance Obligations
From time to time in the ordinary course of business, the company guarantees obligations of its subsidiaries under certain contracts. Generally, the company is liable under such an arrangement only if its subsidiary is unable to perform under its contract. Historically, the company has not incurred any substantial liabilities resulting from these guarantees.
In addition, the company’s subsidiaries may enter into joint ventures, teaming and other business arrangements (collectively, Business Arrangements) to support the company’s products and services in domestic and international markets. The company generally strives to limit its exposure under these arrangements to its subsidiary’s investment in the Business Arrangements or to the extent of such subsidiary’s obligations under the applicable contract. In some cases, however, the company may be required to guarantee the performance of the Business Arrangements and, in such cases, the company generally obtains cross-indemnification from the other members of the Business Arrangements.
At September 30, 2013, the company is not aware of any significant existing event of default that would require it to satisfy any of these guarantees.
U.S. Government Cost Claims
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 the U.S. Government representatives engage in discussions to enable the company to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for matters raised by the U.S. Government. Such provisions are reviewed on a quarterly basis using the most recent information available. The company believes that it has adequately reserved for any disputed amounts and that the outcome of any such matters would not have a material adverse effect on its consolidated financial position as of September 30, 2013, or its annual results of operations or cash flows.
Environmental Matters
The company has been named a Potentially Responsible Party by the Environmental Protection Agency or similarly designated state or local agencies at certain current or formerly owned or leased sites. The estimated cost to complete remediation has been accrued where the company believes, based on the facts and circumstances known to the company, it is probable the company will incur costs to address environmental impacts. As of September 30, 2013, management estimates the range of reasonably possible future costs for environmental remediation is between $321 million and $812 million, before considering the amount recoverable through overhead charges on U.S. Government contracts. At September 30, 2013, the amount accrued for probable environmental remediation costs was $341 million, of which $92 million is accrued in other current liabilities and $249 million is accrued in other non-current liabilities. A portion of the environmental remediation costs is expected to be recoverable through overhead charges on government contracts and, accordingly, such amounts are deferred in inventoried costs and other non-current assets. As of September 30, 2013, $49 million is deferred in inventoried costs and $133 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 projects progress or changes in facts and circumstances will materially affect the estimated liability accrued, management does not anticipate future remediation expenditures will have a material adverse effect on the company's consolidated financial position as of September 30, 2013, or its annual results of operations or cash flows.

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Financial Arrangements
In the ordinary course of business, the company uses stand-by letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At September 30, 2013, there were $188 million of stand-by letters of credit, $224 million of bank guarantees, and $165 million of surety bonds outstanding.
Credit Facility
In August 2013, the company entered into a new five-year senior unsecured credit facility in an aggregate principal amount of $1.775 billion (the Credit Agreement). The Credit Agreement replaced the company’s prior five-year revolving credit facility in an aggregate principal amount of $1.5 billion entered into on September 8, 2011, and its 364-day revolving credit facility in an aggregate principal amount of $500 million entered into on September 4, 2012.
The Credit Agreement contains customary terms and conditions, including covenants restricting the company's ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other fundamental changes and incur liens. The company also cannot permit the ratio of its debt to capitalization (as set forth in the Credit Agreement) to exceed 65 percent. At September 30, 2013, there was no balance outstanding under this facility.
The company was in compliance with all covenants under its credit agreement on September 30, 2013.
Indemnifications
The company has retained certain environmental, income tax, and other potential liabilities in connection with certain of its divestitures. The settlement of these liabilities is not expected to have a material adverse effect on the company’s consolidated financial position as of September 30, 2013, or its annual results of operations or cash flows.
Operating Leases
Rental expense for operating leases for the three and nine months ended September 30, 2013, was $75 million and $223 million, respectively, and was $80 million and $260 million for the three and nine months ended September 30, 2012, respectively. These amounts are net of immaterial amounts of sublease rental income.
8.    RETIREMENT BENEFITS
The cost to the company of its retirement benefit plans is shown in the following table:
 
Three Months Ended September 30
Nine Months Ended September 30
 
Pension
Benefits
 
Medical and
Life Benefits
Pension
Benefits
 
Medical and
Life Benefits
$ in millions
2013
 
2012
 
2013
 
2012
2013
 
2012
 
2013
 
2012
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost

$129

 

$131

 

$ 9

 

$ 8


$ 387

 

$ 392

 

$27

 

$25

Interest cost
279

 
296

 
24

 
28

838

 
888

 
72

 
82

Expected return on plan assets
(452
)
 
(427
)
 
(19
)
 
(17
)
(1,357
)
 
(1,281
)
 
(57
)
 
(51
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service credit
(15
)
 
(15
)
 
(13
)
 
(13
)
(44
)
 
(44
)
 
(38
)
 
(38
)
Net loss from previous years
152

 
107

 
8

 
5

456

 
321

 
23

 
15

Other
—

 
—

 
—

 
—

—

 
2

 
—

 
—

Net periodic benefit cost

$ 93

 

$ 92

 

$ 9

 

$ 11


$ 280

 

$ 278

 

$27

 

$33

Employer Contributions
The company’s required minimum funding in 2013 for its defined benefit pension plans and its post-retirement benefit plans is approximately $66 million and $110 million, respectively. For the nine months ended September 30, 2013, contributions of $561 million have been made to the company’s defined benefit pension plans, including a voluntary contribution of $500 million in April 2013, and contributions of $87 million have been made to the company’s post-retirement benefit plans.

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NORTHROP GRUMMAN CORPORATION                        

The company also sponsors defined contribution plans. For the three months ended September 30, 2013 and 2012, contributions of $63 million and $66 million, respectively, were made to these plans. For the nine months ended September 30, 2013 and 2012, contributions of $213 million and $218 million, respectively, were made to these plans.
9.    STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Awards
In February 2013, the company granted 0.4 million restricted stock rights (RSRs) and 1.1 million restricted performance stocks rights (RPSRs) to certain employees under the company's long-term incentive stock plan, with a grant date aggregate fair value of $96 million. The RSRs will vest on the third anniversary of the grant date, while the RPSRs will vest and pay out based on the achievement of financial metrics for the three-year period ending December 31, 2015.
Cash Awards
In February 2013, the company granted 30 million cash units (CUs) and 69 million cash performance units (CPUs) to certain employees, with a minimum aggregate payout amount of $30 million and a maximum aggregate payout amount of $168 million. The CUs will vest and settle in cash on the third anniversary of the grant date, while the CPUs will vest and pay out in cash based on the achievement of financial metrics for the three-year period ending December 31, 2015.


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NORTHROP GRUMMAN CORPORATION                        

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Falls Church, Virginia
We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of September 30, 2013, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended September 30, 2013 and 2012, and cash flows and changes in shareholders' equity for the nine-month periods ended September 30, 2013 and 2012. These interim financial statements are the responsibility of the Corporation's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of December 31, 2012, and the related consolidated statements of earnings and comprehensive income, cash flows, and changes in shareholders' equity for the year then ended (not presented herein); and in our report dated February 4, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2012, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

/s/  Deloitte & Touche LLP
McLean, Virginia
October 22, 2013
 

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NORTHROP GRUMMAN CORPORATION                        

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global security company providing innovative systems, products and solutions in unmanned systems, cyber, C4ISR, and logistics and modernization to government and commercial customers worldwide through four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. We participate in many high-priority defense and government services programs in the United States (U.S.) and abroad as a prime contractor, principal subcontractor, partner, or preferred supplier. We conduct the majority 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 domestic and international commercial customers.
The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Form 10-Q, as well as our 2012 Annual Report on Form 10-K, which provides a more thorough discussion of our systems, products and solutions; political and economic environment; industry outlook; and business trends. See further discussions in the Consolidated Operating Results and Segment Operating Results sections that follow.
Political and Economic Environment
The U.S. Government continues to face substantial fiscal and economic challenges, which affect funding for its non-discretionary and discretionary budgets. Part I of the Budget Control Act of 2011 (Budget Control Act) provided for a reduction in planned defense budgets by at least $487 billion over a ten year period, and the fiscal year (FY) 2013 impacts were incorporated in the government's FY 2013 budget. Part II mandated substantial additional reductions, through a process known as “sequestration,” which took effect March 1, 2013, and resulted in approximately $40 billion of additional reductions to the FY 2013 defense budget.
On March 26, 2013, the President signed into law the Consolidated and Further Continuing Appropriations Act, 2013, which included specific appropriations for our major federal customers, including the DoD, subject to further reductions or sequestration under the Budget Control Act.
FY 2014 began on October 1, 2013 without appropriations legislation or a continuing resolution for FY 2014 and many parts of the U.S. Government temporarily shut down. Although Congress has not yet passed FY 2014 appropriations, on October 16, 2013, Congress passed a continuing resolution, which funds the government through January 15, 2014 and suspended the statutory limit on the amount of permissible federal debt (the debt ceiling) through February 7, 2014. It is unclear when or if annual appropriations bills will be enacted for FY 2014. The U.S. Government may operate under a continuing resolution for all of FY 2014, restricting new contract or program starts for that year.
Congressional appropriation and authorization of FY 2014 spending, including defense spending, and the application of sequestration remain marked by significant debate and an uncertain schedule. Congress and the Administration also continue to debate the debt ceiling, among other fiscal issues, as they negotiate plans for long-term national fiscal policy. The outcome of these debates could have a significant impact on future defense spending broadly and the company's programs, in particular.
Unless Congress passes appropriations legislation or provides for a continuing resolution throughout FY 2014, or if the existing debt ceiling is not raised, we may be required to continue to perform for some period of time on certain of our U.S. Government contracts even if the U.S. Government is unable to make timely payments. If a prolonged government shutdown occurs, it could result in program cancellations and stop work orders and could limit our ability to perform on our U.S. Government contracts. A debt ceiling breach could, among other impacts, negatively affect the U.S. Government's timely payment of our billings. Either a prolonged shutdown or a breach of the debt ceiling could have significant near and long-term consequences for our company, our employees, our suppliers and the defense industry. Either could result in delayed cash collections and/or have a material adverse effect on our financial position, results of operations and/or cash flows.  
The budget environment and sequestration as currently mandated remain a significant long-term risk. The President’s FY 2014 defense budget request of $527 billion (which largely reflects defense spending plans presented in the FY 2013 budget) is slightly lower than the final defense appropriations for FY 2013. Neither the President’s FY 2014 defense budget, nor the pending House and Senate defense appropriations bills, conforms to the reductions mandated by Part II of the Budget Control Act. If Congress does not take legislative action, sequestration will be applied to defense spending in FY 2014. The reductions in FY 2014 required by sequestration may well be greater

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than those applied in FY 2013. FY 2014 appropriations legislation or a continuing resolution could result in cancellations or major restructurings of our programs.
Considerable uncertainty exists regarding how budget reductions in the current fiscal year and beyond will be applied and what challenges the reductions will present for the defense industry. We believe sequestration will have serious negative consequences for the security of our country, the defense industrial base, including Northrop Grumman, and the customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial base. Although it is difficult to determine specific impacts, especially over the longer term, we expect the budget environment and/or sequestration, as currently provided for under the Budget Control Act, will result in lower awards, revenues, profits and cash flows for our company. Members of Congress continue to discuss various options to address sequestration in future budget planning, but we cannot predict the outcome of these efforts. It is likely budget decisions made in this environment will have long-term impacts on our company and the entire defense industry.
Faced with continued budget uncertainty and continued threats to national security, the DoD is reviewing the roles and structure of the U.S. military. In January 2012, the DoD announced a new defense strategy intended to guide its priorities and budgeting decisions. The strategy calls for the U.S. military to project power globally and operate effectively in all domains, including cyberspace, and places particular emphasis on Asia Pacific as an area of strategic focus. In March 2013, the Secretary of Defense directed senior Pentagon officials to conduct a comprehensive strategic review of the DoD strategy, including examination of the choices underlying the strategy, force posture, investments and institutional management in light of the budgetary and strategic environment. The DoD briefed the results of this review in late July and provided some broad indications of the choices being weighed. In examining budget constraints within a sequestration environment over the next decade, DoD determined reductions in personnel, compensation and benefits, force structure, and modernization likely would be necessary. On force planning, the review broadly outlined several options, some that favor current capacity and others that emphasize future investments. DoD has stated that while the review demonstrated various alternatives, final decisions have not yet been made. Program and budget deliberations for the FY 2015 defense plan, currently scheduled for delivery to Congress in February 2014, are ongoing within DoD. The next Quadrennial Defense Review is scheduled to be completed and delivered to Congress in 2014. These various strategic reviews, as well as budget plans, proposed by the Administration and considered by Congress, may impact future funding for the company's programs.
We believe spending on recapitalization, modernization and maintenance of defense, intelligence, and homeland security assets will continue to be a national priority. Future defense spending is expected to include the development and procurement of new manned and unmanned military platforms and systems, along with advanced electronics and software to enhance the capabilities of existing individual systems and provide real-time integration of surveillance, information management, strike and battle management platforms. We expect significant new competitive opportunities to include long range strike, missile defense, command and control, network communications, enhanced situational awareness, satellite systems, restricted programs, cybersecurity, technical services and information technology, as well as numerous homeland security programs.
The company believes it has additional international opportunities (direct and foreign military sales), beyond those realized today, to sell its products and services outside the U.S. market, particularly in the domains of unmanned systems, cyber, C4ISR, logistics and manned military aircraft. The Administration is addressing and supporting export control reforms that could enhance our ability to take advantage of these opportunities. The company is dedicating additional resources to expanding its international sales with emphases on Australia, the Middle East, Southeast Asia and Europe, through both organic growth and acquisitions. To the extent these efforts are successful, increases in international awards, revenues, profits and cash flows may offset, or partially offset, potential declines resulting from the U.S. political and economic environment described above.
We are continuing to evaluate our evolving environment, how it might impact our company, and how best to address the challenges and opportunities presented.
Operating Performance Assessment and Reporting
We manage and assess the performance of our business based on our performance on contracts and programs (two or more closely-related contracts), with consideration given to the Critical Accounting Policies, Estimates and Judgments described in Part II, Item 7 of our 2012 Annual Report on Form 10-K. Revenue on our portfolio of long-term contracts is primarily recognized using the cost-to-cost method of percentage of completion accounting, but in some cases the units-of-delivery method of percentage of completion accounting. As a result, sales tend to fluctuate in concert with costs across our large portfolio of contracts. Due to Federal Acquisition Regulation (FAR) rules that

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NORTHROP GRUMMAN CORPORATION                        

govern our business, most types of costs are allowable, and we do not focus on individual cost groupings (such as manufacturing, engineering and design labor costs, subcontractor costs, material costs, overhead costs, and general and administrative costs), as much as we do on total contract cost, which is the key driver of our sales and operating income.
Our contract management process involves the use of contract estimates-at-completion (EACs) that are generally prepared and evaluated on a bottoms-up basis at least annually and reviewed on a quarterly basis over the contract's period of performance. These EACs include an estimated contract operating margin based initially on the contract award amount, adjusted to reflect estimated risks related to contract performance. These risks typically include technical risk, schedule risk and performance risk based on our evaluation of the contract effort. Similarly, the EACs may include identified opportunities for operating margin rate improvement. Over the contract's period of performance, our program management organizations perform evaluations of contract performance and adjust the contract revenue and cost estimates to reflect the latest reliable information available.
Our business and program management organizations are comprised of skilled professional managers whose objective is to satisfy the customer's expectations, deliver high quality products and services, and manage contract cost risks and opportunities to achieve an appropriate operating margin rate on the contract. Our comprehensive business and contract management process is a coordinated process involving personnel with expertise from various disciplines including engineering, production control, contracts, cost management, mission assurance and quality, finance and supply chain, among others. As part of this overall contract management function, personnel monitor compliance with our critical accounting policies related to contract accounting and compliance with U.S. Government regulations. Contract operating income and period-to-period contract operating margin rates are adjusted over the contract's period of performance to reflect the latest estimated revenue and cost for the contract, including changes in the risks and opportunities affecting the contract. Such adjustments are accounted for under the cumulative catch-up method of accounting and may have a favorable or unfavorable effect on operating income depending upon the specific conditions affecting each contract.
In evaluating our operating performance, we look primarily at changes in sales and operating income, including the effects of meaningful changes in operating income as a result of changes in contract estimates. 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 first focuses on our four segments before distinguishing between products and services. Changes in sales are generally described in terms of volume, deliveries or other indicators of sales activity, and contract mix. For purposes of this discussion, volume generally refers to increases or decreases in cost or sales from production/service activity levels or delivery rates. Performance refers to changes in contract margin rates for the period, primarily related to the changes in estimates referred to above.
CONSOLIDATED OPERATING RESULTS
Selected financial highlights are presented in the table below:
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions, except per share amounts
2013
 
2012
 
2013
 
2012
Sales

$6,106

 

$6,270

 

$18,504

 

$18,742

Operating costs and expenses
5,316

 
5,534

 
16,149

 
16,436

Operating income
790

 
736

 
2,355

 
2,306

Operating margin rate
12.9
%
 
11.7
%
 
12.7
%
 
12.3
%
Federal and foreign income tax expense
223

 
236

 
682

 
733

Effective income tax rate
31.0
%
 
34.0
%
 
31.6
%
 
33.7
%
Diluted earnings per share
2.14

 
1.82

 
6.22

 
5.67

Net cash provided by operating activities

$ 950

 

$ 812

 

$ 1,279

 

$ 1,583

Sales
Sales for the three months ended September 30, 2013, decreased $164 million, or 3 percent, and for the nine months ended September 30, 2013, decreased $238 million, or 1 percent, as compared with the same periods in 2012.


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NORTHROP GRUMMAN CORPORATION                        

The table below shows the variances in segment sales from the prior year periods:
$ in millions
Three Month Variance
 
Nine Month Variance
Aerospace Systems
        $
(102
)
 
(4
%)
 
        $
209

 
3
%
Electronic Systems
67

 
4
%
 
91

 
2
%
Information Systems
(157
)
 
(9
%)
 
(494
)
 
(9
%)
Technical Services
(35
)
 
(5
%)
 
(129
)
 
(6
%)
Intersegment sales elimination
63

 
(12
%)
 
85

 
(5
%)
Total sales variance
        $
(164
)
 
(3
%)
 
        $
(238
)
 
(1
%)
For further information by segment refer to Segment Operating Results below, and for product and service detail, refer to the Product and Service Analysis section that follows Segment Operating Results.
Operating Costs and Expenses
Operating costs and expenses are primarily comprised of labor, material, subcontractor and overhead costs, and are generally allocated to contracts as incurred. In accordance with industry practice and the regulations that govern cost accounting requirements for government contracts, most general management and corporate expenses incurred at the segment and corporate locations are considered allowable and allocable costs. Allowable and allocable general and administrative costs are allocated on a systematic basis to contracts in progress.
Operating costs and expenses comprise the following:
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Product and service costs

$4,761

 

$4,962

 

$ 14,454

 

$ 14,723

General and administrative expenses
555

 
572

 
1,695

 
1,713

Operating costs and expenses

$5,316

 

$5,534

 

$ 16,149

 

$ 16,436

Product and service costs for the three months ended September 30, 2013, decreased $201 million, or 4 percent, as compared with the same period in 2012, consistent with the change in sales. General and administrative expenses as a percentage of total sales of 9.1 percent for the three months ended September 30, 2013, were comparable to the same period in 2012.
Product and service costs for the nine months ended September 30, 2013, decreased $269 million, or 2 percent, as compared with the same period in 2012, consistent with the change in sales. General and administrative expenses as a percentage of total sales of 9.2 percent for the nine months ended September 30, 2013, were comparable to the same period in 2012.
For the product and service costs detail, see the Product and Service Analysis section that follows the Segment Operating Results.
Operating Income
We define operating income as sales less operating costs and expenses, which includes general and administrative expenses. Changes in estimated contract operating income at completion, resulting from changes in estimated sales, operating costs and expenses, are recorded using the cumulative catch-up method of accounting. The aggregate effects of these changes in our estimated costs at completion, across our portfolio of contracts, can have a significant effect on our reported sales and operating income in each of our reporting periods. Cumulative catch-up operating income adjustments are presented in the table below:
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Favorable adjustments

$290

 

$277

 

$837

 

$ 886

Unfavorable adjustments
(54
)
 
(63
)
 
(180
)
 
(185
)
Net favorable adjustments

$236

 

$214

 

$657

 

$ 701


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NORTHROP GRUMMAN CORPORATION                        

Segment Operating Income
Segment operating income, as reconciled below, is a non-GAAP measure and is used by management as an internal measure for financial performance of our operating segments. Segment operating income is defined as operating income less certain corporate-level expenses that are not considered allowable or allocable under applicable Cost Accounting Standards (CAS) or FAR and net Financial Accounting Standards (FAS)/CAS pension differences.
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Segment operating income

$763

 

$730

 

$2,308

 

$2,301

Segment operating margin rate
12.5
%
 
11.6
%
 
12.5
%
 
12.3
%
Segment operating income increased for the three months ended September 30, 2013, due to improved performance and higher net favorable adjustments than in the prior period. Segment operating income increased for the nine months ended September 30, 2013, principally due to improved performance, partially offset by lower sales and lower net favorable adjustments than in the prior period. For further information by segment refer to Segment Operating Results below.
The table below reconciles segment operating income to total operating income:
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Segment operating income

$763

 

$730

 

$2,308

 

$2,301

FAS pension expense in accordance with GAAP
(93
)
 
(92
)
 
(280
)
 
(278
)
Pension expense in accordance with CAS
154

 
126

 
405

 
379

Net FAS/CAS pension adjustment
61

 
34

 
125

 
101

Unallocated corporate expenses
(33
)
 
(27
)
 
(73
)
 
(89
)
Other
(1
)
 
(1
)
 
(5
)
 
(7
)
Total operating income

$790

 

$736

 

$2,355

 

$2,306

For financial statement purposes, we account for our employee pension plans in accordance with GAAP under FAS. We charge the costs of these plans to our contracts in accordance with the FAR and the related CAS that govern such plans. The net FAS/CAS pension adjustment is pension expense determined in accordance with GAAP less pension expense charged to contracts and included in segment operating income. Unallocated corporate expenses generally include the portion of corporate expenses, other than FAS pension costs, not considered allowable or allocable under applicable CAS and FAR rules, and therefore not allocated to the segments, such as a portion of management and administration, legal, environmental, certain compensation and retiree benefits, and other expenses. The change in net FAS/CAS pension adjustment from the prior year periods reflects an update for actual demographic experience as of January 1, 2013, which resulted in an increase to the company's 2013 CAS pension expense.
Federal and Foreign Income Tax Expense
The effective tax rates for the three and nine months ended September 30, 2013, were 31.0 percent and 31.6 percent, respectively, compared with 34.0 percent and 33.7 percent for the three and nine months ended September 30, 2012, respectively. The company's lower effective tax rate for the three months ended September 30, 2013, includes an additional $16 million benefit associated with the company's 2012 U.S. federal tax return and a $6 million benefit for the American Taxpayer Relief Act, which reinstated research tax credits for 2012 and 2013. During the nine months ended September 30, 2013, the company recorded $29 million of research tax credits representing estimated full year 2012 research tax credits and three quarters of the expected 2013 research tax credits and an additional $16 million benefit associated with the 2012 U.S. federal tax return.
Diluted Earnings Per Share
Diluted earnings per share for the three months ended September 30, 2013, increased $0.32, or 18 percent, as compared with the same period in 2012. Diluted earnings per share for the nine months ended September 30, 2013, increased $0.55, or 10 percent, as compared with the same period in 2012. The higher diluted earnings per share for both periods reflects higher earnings and the impact of 2012 and 2013 share repurchases.

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NORTHROP GRUMMAN CORPORATION                        

Cash from Operating Activities
For the three months ended September 30, 2013, net cash from operating activities increased $138 million, as compared with the same period in 2012, principally driven by a $300 million voluntary pension contribution made in September 2012, partially offset by changes in trade working capital. For the nine months ended September 30, 2013, net cash from operating activities decreased $304 million, as compared with the same period in 2012, principally driven by higher pension contributions in 2013 and changes in trade working capital.
SEGMENT OPERATING RESULTS
Basis of Presentation
We are aligned into four segments: Aerospace Systems, Electronic Systems, Information Systems, and Technical Services. This section discusses segment sales, operating income and operating margin rates. The reconciliation of segment sales to total sales is provided in Note 3 to the condensed consolidated financial statements in Item 1, with the difference being intersegment sales eliminations. The reconciliation of segment operating income to total operating income, as well as a discussion of the reconciling items, is provided in Note 3 to the condensed consolidated financial statements in Item 1. For purposes of the discussion in this Segment Operating Results section, references to operating income and operating margin rate reflect segment operating income and segment operating margin rate.
AEROSPACE SYSTEMS
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Sales

$2,484

 

$2,586

 

$7,582

 

$7,373

Operating income
330

 
288

 
936

 
859

Operating margin rate
13.3
%
 
11.1
%
 
12.3
%
 
11.7
%
Current Quarter
Aerospace Systems sales for the three months ended September 30, 2013, decreased $102 million, or 4 percent, as compared with the same period in 2012, due to lower volume on manned military aircraft and unmanned programs, partially offset by higher volume on space programs. The decrease for manned military aircraft was primarily due to lower volume on the F-35 program, partially offset by higher volume on the F/A-18 and B-2 Stealth Bomber (B-2) programs. The decrease for unmanned programs reflects lower volume on the Global Hawk program, partially offset by increased volume due to ramp up on the NATO Alliance Ground Surveillance (AGS) program. The increase in space sales reflects higher volume on the James Webb Space Telescope (JWST) and Advanced Extremely High Frequency (AEHF) programs, partially offset by lower volume for restricted programs.
Operating income for the three months ended September 30, 2013, increased $42 million, or 15 percent, and operating margin rate increased to 13.3 percent from 11.1 percent. Higher operating income and operating margin rate reflect a $44 million increase in net favorable adjustments principally for space and manned military aircraft programs, compared with the prior period, which more than offset the lower sales volume described above.
Year to Date
Aerospace Systems sales for the nine months ended September 30, 2013, increased $209 million, or 3 percent, as compared with the same period in 2012, due to higher volume on manned military aircraft, unmanned and space programs. The increase for manned military aircraft was primarily due to higher volume on the F-35 program as a result of increased deliveries, as well as higher volume on the B-2 program. Higher unmanned volume reflects several program ramp-ups including the NATO AGS program, partially offset by lower volume on the Global Hawk program. The increase in space sales reflects higher volume for the JWST and AEHF programs, partially offset by lower volume for restricted programs.
Operating income for the nine months ended September 30, 2013, increased $77 million, or 9 percent, and operating margin rate increased to 12.3 percent, from 11.7 percent. Higher operating income and margin rate reflect a $59 million increase in net favorable adjustments principally on space programs compared with the prior period.

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NORTHROP GRUMMAN CORPORATION                        

ELECTRONIC SYSTEMS
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Sales

$1,774

 

$1,707

 

$5,266

 

$5,175

Operating income
273

 
279

 
891

 
859

Operating margin rate
15.4
%
 
16.3
%
 
16.9
%
 
16.6
%
Current Quarter
Electronic Systems sales for the three months ended September 30, 2013, increased $67 million, or 4 percent, as compared with the same period in 2012. Higher volume on international and combat avionics programs was partially offset by lower volume on navigation and maritime systems programs.
Operating income for the three months ended September 30, 2013, decreased $6 million, or 2 percent, and operating margin rate decreased to 15.4 percent from 16.3 percent. Operating income reflects a reduction in net favorable adjustments, which more than offset the higher sales volume described above.
Year to Date
Electronic Systems sales for the nine months ended September 30, 2013, increased $91 million, or 2 percent, as compared with the same period in 2012. Higher volume on international, tactical sensor, and space programs was partially offset by lower volume on navigation and maritime systems, laser systems and infrared countermeasures programs.
Operating income for the nine months ended September 30, 2013, increased $32 million, or 4 percent, and operating margin rate increased to 16.9 percent from 16.6 percent. Higher operating income and operating margin rate includes the reversal of a $26 million non-programmatic risk reserve and higher sales volume described above.
INFORMATION SYSTEMS
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Sales

$1,619

 

$1,776

 

$4,982

 

$5,476

Operating income
162

 
170

 
474

 
577

Operating margin rate
10.0
%
 
9.6
%
 
9.5
%
 
10.5
%
Current Quarter
Information Systems sales for the three months ended September 30, 2013, decreased $157 million, or 9 percent, as compared with the same period in 2012. The sales decline includes a $17 million impact for the transfer of intercompany efforts to our corporate shared services organization and portfolio shaping. Excluding the transfer and portfolio shaping, sales declined 8 percent due to lower funding levels and program completions across the portfolio, including programs impacted by in-theater force reductions and sequestration.
Operating income for the three months ended September 30, 2013, decreased $8 million, or 5 percent, and operating margin rate increased to 10.0 percent, from 9.6 percent. Lower operating income and higher operating margin rate were driven by the lower sales volume described above and improved performance compared with the prior period.
Year to Date
Information Systems sales for the nine months ended September 30, 2013, decreased $494 million, or 9 percent, as compared with the same period in 2012. The sales decline includes a $75 million impact for the transfer of intercompany efforts to our corporate shared services organization. Excluding the transfer, sales declined 8 percent due to lower funding levels and program completions across the portfolio, including programs impacted by in-theater force reductions and sequestration.
Operating income for the nine months ended September 30, 2013, decreased $103 million, or 18 percent, and operating margin rate decreased to 9.5 percent, from 10.5 percent. Lower operating income and operating margin rate were primarily driven by the lower sales volume described above and a $46 million reduction in net favorable adjustments compared with the prior period.

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NORTHROP GRUMMAN CORPORATION                        

TECHNICAL SERVICES
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Sales

$713

 

$748

 

$2,152

 

$2,281

Operating income
67

 
62

 
201

 
206

Operating margin rate
9.4
%
 
8.3
%
 
9.3
%
 
9.0
%
Current Quarter
Technical Services sales for the three months ended September 30, 2013, decreased $35 million, or 5 percent, as compared with the same period in 2012. The decrease was due to lower volume on integrated logistics and modernization programs and the InterContinental Ballistic Missile (ICBM) program.
Operating income for the three months ended September 30, 2013, increased $5 million, or 8 percent, and operating margin rate increased to 9.4 percent from 8.3 percent. Higher operating income and operating margin rate reflects an increase in net favorable adjustments compared with the prior period, which more than offset the decline in sales.
Year to Date
Technical Services sales for the nine months ended September 30, 2013, decreased $129 million, or 6 percent, as compared with the same period in 2012. The decrease was primarily due to reductions on the KC-10 and ICBM logistics programs, as well as portfolio shaping efforts.
Operating income for the nine months ended September 30, 2013, decreased $5 million, or 2 percent, and operating margin rate increased to 9.3 percent from 9.0 percent. Lower operating income and higher operating margin rate were driven by lower sales volume described above and an increase in net favorable adjustments compared with the prior period.
PRODUCT AND SERVICE ANALYSIS
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Product sales

$3,330

 

$3,487

 

$10,344

 

$10,227

Product costs(1)
2,499

 
2,629

 
7,833

 
7,760

% of product sales
75.0
%
 
75.4
%
 
75.7
%
 
75.9
%
Service sales
2,776

 
2,783

 
8,160

 
8,515

Service costs(1)
2,262

 
2,333

 
6,621

 
6,963

% of service sales
81.5
%
 
83.8
%
 
81.1
%
 
81.8
%
(1)
Product and service costs do not include an allocation of general and administrative expenses.
Current Quarter
Product costs as a percentage of product sales decreased 40 basis points for the three months ended September 30, 2013, as compared with the same period in 2012. The lower product costs as a percentage of sales reflects higher net favorable adjustments at Aerospace Systems, partially offset by lower net favorable adjustments at Electronic Systems.
Service costs as a percentage of service sales decreased 230 basis points for the three months ended September 30, 2013, as compared with the same period in 2012. The lower service costs as a percentage of sales reflects improved performance compared to the prior period at Electronic Systems and Aerospace Systems.
Year to Date
Product costs as a percentage of product sales were comparable with the same period in 2012.
Service costs as a percentage of service sales decreased 70 basis points for the nine months ended September 30, 2013, as compared with the same period in 2012. The lower service costs as a percentage of sales reflects higher service operating margins at Electronic Systems, partially offset by lower service operating margins at Information Systems.

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NORTHROP GRUMMAN CORPORATION                        

The following table presents product and service sales and operating costs and expenses by segment:
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
2012
 
2013
2012
Segment Information:
Sales
Operating Costs and Expenses
Sales
Operating Costs and Expenses
 
Sales
Operating Costs and Expenses
Sales
Operating Costs and Expenses
Aerospace Systems
 
 
 
 
 
 
 
 
 
Product

$1,867


$1,620


$2,263


$1,996

 

$ 6,204


$ 5,450


$ 6,455


$ 5,714

Service
617

534

323

302

 
1,378

1,196

918

800

Electronic Systems
 
 
 
 
 
 
 
 
 
Product
1,377

1,149

1,270

1,023

 
4,063

3,365

3,969

3,243

Service
397

352

437

405

 
1,203

1,010

1,206

1,073

Information Systems
 
 
 
 
 
 
 
 
 
Product
260

226

384

339

 
669

598

522

457

Service
1,359

1,231

1,392

1,267

 
4,313

3,910

4,954

4,442

Technical Services
 
 
 
 
 
 
 
 
 
Product
36

38

140

129

 
141

130

147

134

Service
677

608

608

557

 
2,011

1,821

2,134

1,941

Segment Totals
 
 
 
 
 
 
 
 
 
Total Product

$3,540


$3,033


$4,057


$3,487

 

$11,077


$ 9,543


$11,093


$ 9,548

Total Service
3,050

2,725

2,760

2,531

 
8,905

7,937

9,212

8,256

Intersegment eliminations
(484
)
(415
)
(547
)
(478
)
 
(1,478
)
(1,284
)
(1,563
)
(1,363
)
Total segment(1)

$6,106


$5,343


$6,270


$5,540

 

$18,504


$16,196


$18,742


$16,441

(1) The reconciliation of segment operating income to total operating income, as well as a discussion of the reconciling items, is included in Note 3 to the condensed consolidated financial statements in Item 1.
Product Sales and Costs
Current Quarter
Product sales for the three months ended September 30, 2013, decreased $517 million, as compared with the same period in 2012. The decrease was primarily due to lower product sales at Aerospace Systems and Information Systems. The decrease at Aerospace Systems was primarily due to lower volume on manned military aircraft and unmanned programs as described in the Segment Operating Results section above. The decrease at Information Systems was primarily driven by lower intercompany volume.
Product costs for the three months ended September 30, 2013, decreased $454 million, as compared with the same period in 2012. The decrease was primarily due to lower volume on manned military aircraft and unmanned sales volume at Aerospace Systems.
Year to Date
Product sales for the nine months ended September 30, 2013, decreased $16 million, as compared with the same period in 2012. The decrease was primarily due to lower product sales at Aerospace Systems, partially offset by higher product sales at Information Systems and Electronic Systems. The decrease at Aerospace Systems was primarily driven by lower volume on certain unmanned programs. The increase at Information Systems was primarily due to newly awarded product contracts. The increase at Electronic Systems was primarily driven by higher international and space program volume as described in the Segment Operating Results section above.
Product costs for the nine months ended September 30, 2013, decreased $5 million, as compared with the same period in 2012. The decrease was consistent with lower sales on certain unmanned programs at Aerospace Systems. The decrease was partially offset by the higher sales volume at Electronic Systems and newly awarded product contracts at Information Systems, as described above.

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NORTHROP GRUMMAN CORPORATION                        

Service Sales and Costs
Current Quarter
Service sales for the three months ended September 30, 2013, increased $290 million, as compared with the same period in 2012, primarily due to higher service sales at Aerospace Systems from a revision in the classification of certain operations, maintenance, and sustainment contracts from product to service in the third quarter of 2013.
Service costs for the three months ended September 30, 2013, increased $194 million, as compared with the same period in 2012, primarily due to higher service sales consistent with the higher sales at Aerospace Systems described above.
Year to Date
Service sales for the nine months ended September 30, 2013, decreased $307 million, as compared with the same period in 2012, primarily due to lower service sales at Information Systems and Technical Services across a number of programs, as described in the Segment Operating Results section above.
Service costs for the nine months ended September 30, 2013, decreased $319 million, as compared with the same period in 2012, primarily due to lower service sales at Information Systems over a number of programs, as described in the Segment Operating Results section above.
BACKLOG
Total backlog includes both funded backlog (firm orders for which funding is authorized and appropriated by the customer) and unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time the option or IDIQ task order is exercised or awarded. For multiyear service contracts with non-U.S. Government customers having no stated contract values, backlog includes only the amounts committed by the customer. Backlog is converted into sales as costs are incurred or deliveries are made.
Backlog consisted of the following at September 30, 2013, and December 31, 2012:
 
September 30, 2013
 
December 31, 2012
$ in millions
Funded
 
Unfunded
 
Total
Backlog
 
Total
Backlog
Aerospace Systems

$10,413

 

$ 8,150

 

$18,563

 

$19,594

Electronic Systems
7,089

 
1,681

 
8,770

 
9,471

Information Systems
3,694

 
3,641

 
7,335

 
8,541

Technical Services
2,228

 
622

 
2,850

 
3,203

Total backlog

$23,424

 

$14,094

 

$37,518

 

$40,809

New Awards
The estimated value of new contract awards recorded during the nine months ended September 30, 2013, was $16.2 billion. On a net basis, awards during the nine months ended September 30, 2013, totaled $15.2 billion, reflecting $1.0 billion of adjustments during the first half of the year to reduce Information Systems unfunded backlog principally associated with expired periods of performance on active contracts, including several previously awarded task orders on IDIQ contracts. New awards during this period include $1.5 billion for the F-35 program, $1.3 billion for the E-2D Advanced Hawkeye program, $780 million for the AEHF program, $412 million for the Global Hawk program, and $346 million for the B-2 program.
LIQUIDITY AND CAPITAL RESOURCES
We endeavor to ensure the most efficient conversion of operating income into cash for deployment in our business and to maximize shareholder value. In addition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash provided by operating activities, free cash flow, net debt-to-equity, and net debt-to-capital. We believe these measures are useful to investors in assessing our financial performance and condition.
During the second quarter of 2013, the company's board of directors authorized a new share repurchase program of up to $4.0 billion of the company’s common stock. Repurchases under this program commenced upon the completion of the company's 2010 repurchase program in September 2013. At the same time, the company

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NORTHROP GRUMMAN CORPORATION                        

announced its plan to repurchase shares with the goal of retiring approximately 25 percent of its outstanding shares by the end of 2015, market conditions permitting.
During the second quarter of 2013, the company also issued $2.85 billion of unsecured senior notes (the Notes). The company used a portion of the net proceeds to redeem $850 million of unsecured senior notes due in 2014 and 2015 (see Note 5 in Part I, Item 1). The remaining net proceeds from the offering of the Notes will be used for general corporate purposes, including debt repayments, share repurchases, pension plan funding, acquisitions and working capital.
In August 2013, the company entered into a new five-year senior unsecured credit facility in an aggregate principal amount of $1.775 billion (the Credit Agreement). The Credit Agreement replaced the company’s prior five-year revolving credit facility in an aggregate principal amount of $1.5 billion entered into on September 8, 2011, and its 364-day revolving credit facility in an aggregate principal amount of $500 million entered into on September 4, 2012.
Cash balances and cash generated from operating activities, supplemented by borrowings under credit facilities and/or in the capital markets, if needed, is expected to be sufficient to fund our operations for at least the next 12 months.
The table below summarizes key components of cash flow provided by operating activities:
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Net earnings

$497

 

$459

 

$1,474

 

$1,445

Non-cash items(1)
213

 
219

 
515

 
488

Retiree benefit funding less than (in excess of) expense
66

 
(236
)
 
(331
)
 
(99
)
Trade working capital decrease (increase) and other
174

 
370

 
(379
)
 
(251
)
Net cash provided by operating activities

$950

 

$812

 

$1,279

 

$1,583

(1)
Includes depreciation and amortization, stock-based compensation expense and deferred income taxes
Free Cash Flow from Operations
Free cash flow from operations is defined as cash provided by operating activities less capital expenditures. We believe free cash flow from operations is a useful measure for investors to consider as it represents the cash flow the company has available after capital spending to invest for future growth, strengthen the balance sheet and/or return to shareholders through dividends and share repurchases. Free cash flow is a key factor in our planning for and consideration of strategic acquisitions, the payment of dividends and stock repurchases.
Free cash flow from operations is not a measure of financial performance under GAAP, and may not be defined and calculated by other companies in the same manner. This measure should not be considered in isolation as a measure of residual cash flow available for discretionary purposes or as an alternative to operating results presented in accordance with GAAP as indicators of performance.
The table below reconciles cash provided by operating activities to free cash flow from operations:
 
Three Months Ended September 30
 
Nine Months Ended September 30
$ in millions
2013
 
2012
 
2013
 
2012
Net cash provided by operating activities

$950

 

$812

 

$1,279

 

$1,583

Less: capital expenditures
(90
)
 
(64
)
 
(178
)
 
(196
)
Free cash flow provided by operations

$860

 

$748

 

$1,101

 

$1,387

Cash Flows
The following is a discussion of our major operating, investing and financing cash flows from operations for the nine months ended September 30, 2013 and 2012, as classified in the condensed consolidated statements of cash flows in Part I, Item 1.

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NORTHROP GRUMMAN CORPORATION                        

Operating Activities
Net cash from operating activities for the nine months ended September 30, 2013, decreased $304 million, as compared to the same period in 2012. The decrease was principally driven by higher pension contributions in 2013 and changes in trade working capital.
Investing Activities
Net cash from investing activities for the nine months ended September 30, 2013, decreased $230 million, as compared to the same period in 2012, due to $250 million in proceeds from the maturity of short-term investments in 2012.
Financing Activities
Net cash from financing activities for the nine months ended September 30, 2013, increased $1.1 billion, as compared to the same period in 2012. The increase was primarily due to the net proceeds of $2.0 billion from the debt transaction described above, which was partially offset by higher repurchases of common stock.
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 2012 Annual Report on Form 10-K.
ACCOUNTING STANDARDS UPDATES
Accounting standards updates effective after September 30, 2013, are not expected to have a material effect on the company’s consolidated financial position or annual results of operations.
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Form 10-Q and the information we are incorporating by reference contain statements, other than statements of historical fact, that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expect,” “intend,” “may,” “could,” “plan,” “project,” “forecast,” “believe,” “estimate,” “outlook,” “anticipate,” “trends,” "goals" and similar expressions generally identify these forward-looking statements. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made. These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict. Specific factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements include, but are not limited to, those identified under Risk Factors in our Form 10-K for the year ended December 31, 2012, as well as those identified in this report under Part II, Item 1A and other important factors disclosed in this report and from time to time in our other filings with the SEC.
You are urged to consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. The forward-looking statements speak only as of the date of this report 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 transactions, including associated interest, described in Note 5 of Part I, Item 1, and in the Liquidity and Capital Resources section, there have been no material changes to our contractual obligations from those discussed in our 2012 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 2012 Annual Report on Form 10-K.
Item 4.    Controls and Procedures
Disclosure Controls and Procedures
Our principal executive officer (Chairman, Chief Executive Officer and President) and principal financial officer (Corporate Vice President and Chief Financial Officer) have evaluated the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934, as amended) and have concluded that, as of September 30, 2013, these controls and procedures were effective.

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NORTHROP GRUMMAN CORPORATION                        

Changes in Internal Controls over Financial Reporting
During the three months ended September 30, 2013, no change occurred in our internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


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NORTHROP GRUMMAN CORPORATION                        

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We have provided information about certain legal proceedings in which we are involved in our 2012 Annual Report on Form 10-K, and updated that information in Note 6 to the condensed consolidated financial statements in Part I, Item 1 of this report.
We are a party to various investigations, lawsuits, claims and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary relief. United States (U.S.) Government regulations also provide that certain allegations against a contractor may lead to suspension or debarment from future U.S. Government contracts or suspension of export privileges for the company or one or more of its components. Suspension or debarment could have a material adverse effect on the company because of the company's reliance on government contracts and authorizations. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to us to date and other than as noted in our 2012 Annual Report on Form 10-K, as updated by Note 6 to the condensed consolidated financial statements in this report, we do not believe that the outcome of any matter pending against the company is likely to have a material adverse effect on the company's condensed consolidated financial position as of September 30, 2013, or its annual results of operations or cash flows.
Item 1A. Risk Factors
The following is an update to two of our risk factors described in our 2012 Annual Report on Form 10-K and should be read in conjunction with the risk factors therein.
Significant delays or reductions in appropriations for our programs and U.S. Government funding more broadly may negatively impact our business and programs and could have a material adverse effect on our financial position, results of operations or cash flows.
Our primary customer is the U.S. Government, from which we derived more than 90 percent of our total revenues during each of the past several years. U.S. Government programs are subject to annual congressional budget authorization and appropriation processes. For many programs, Congress appropriates funds on a fiscal year basis even though the program performance period may extend over several years. Consequently, programs are often partially funded initially and additional funds are committed only as Congress makes further appropriations. If we incur costs in excess of funds obligated on a contract, we may be at risk for reimbursement of those costs unless and until additional funds are obligated to the contract. We cannot predict the extent to which total funding and/or funding for individual programs will be included, increased or reduced as part of the annual budget process ultimately approved by Congress or in separate supplemental appropriations or continuing resolutions, as applicable. The impact, severity and duration of the current U.S. economic situation and plans adopted by the U.S. Government, along with pressures on, and uncertainty surrounding, the federal budget and the permissible federal debt limit, could adversely affect the funding for individual programs and delay purchasing or payment decisions by our customers. In the event that government funding for our significant programs becomes unavailable, or is reduced or delayed, our contract or subcontract under such programs may be terminated or adjusted by the U.S. Government or the prime contractor, which could have a material adverse effect on our financial position, results of operations and/or cash flows.
Part I of the Budget Control Act of 2011 (Budget Control Act) provided for a reduction in planned defense budgets of at least $487 billion over a ten year period, and the fiscal year (FY) 2013 impacts were incorporated in the government's FY 2013 budget. Part II mandated substantial additional reductions through a process known as "sequestration," which took effect March 1, 2013, and resulted in approximately $40 billion of additional reductions to the FY 2013 defense budget.
On March 26, 2013, the President signed into law the Consolidated and Further Continuing Appropriations Act, 2013, which included specific appropriations for our major federal customers, including the DoD, subject to further reductions or sequestration under the Budget Control Act.
FY 2014 began on October 1, 2013 without appropriations legislation or a continuing resolution for FY 2014 and many parts of the U.S. Government temporarily shut down. Although Congress has not yet passed FY 2014 appropriations, on October 16, 2013, Congress passed a continuing resolution, which funds the government through January 15, 2014 and suspended the statutory limit on the amount of permissible federal debt (the debt ceiling) through February 7, 2014. It is unclear when or if annual appropriations bills will be enacted for FY

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NORTHROP GRUMMAN CORPORATION                        

2014. The U.S. Government may operate under a continuing resolution for all of FY 2014, restricting new contract or program starts for that year.
Congressional appropriation and authorization of FY 2014 spending, including defense spending, and the application of sequestration remain marked by significant debate and an uncertain schedule. Congress and the Administration also continue to debate the debt ceiling, among other fiscal issues, as they negotiate plans for long-term national fiscal policy. The outcome of these debates could have a significant impact on future defense spending broadly and the company's programs, in particular.
Unless Congress passes appropriations legislation or provides for a continuing resolution throughout FY 2014, or if the existing debt ceiling is not raised, we may be required to continue to perform for some period of time on certain of our U.S. Government contracts even if the U.S. Government is unable to make timely payments. If a prolonged government shutdown occurs, it could result in program cancellations and stop work orders and could limit our ability to perform on our U.S. Government contracts. A debt ceiling breach could, among other impacts, negatively affect the U.S. Government's timely payment of our billings. Either a prolonged shutdown or a breach of the debt ceiling could have significant near and long-term consequences for our company, our employees, our suppliers and the defense industry. Either could result in delayed cash collections and/or have a material adverse effect on our financial position, results of operations and/or cash flows.
The budget environment and sequestration as currently mandated remain a significant long-term risk. The President’s FY 2014 defense budget request of $527 billion (which largely reflects defense spending plans presented in the FY 2013 budget) is slightly lower than the final defense appropriations for FY 2013. Neither the President’s FY 2014 defense budget, nor the pending House and Senate defense appropriations bills, conforms to the reductions mandated by Part II of the Budget Control Act. If Congress does not take legislative action, sequestration will be applied to defense spending in FY 2014. The reductions in FY 2014 required by sequestration may well be greater than those applied in FY 2013. FY 2014 appropriations legislation or a continuing resolution could result in cancellations or major restructurings of our programs.
Considerable uncertainty exists regarding how budget reductions in the current fiscal year and beyond will be applied and what challenges the reductions will present for the defense industry. We believe sequestration will have serious negative consequences for the security of our country, the defense industrial base, including Northrop Grumman, and the customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial base. Although it is difficult to determine specific impacts, especially over the longer term, we expect the budget environment and/or sequestration, as currently provided for under the Budget Control Act, will result in lower awards, revenues, profits and cash flows for our company. Members of Congress continue to discuss various options to address sequestration in future budget planning, but we cannot predict the outcome of these efforts. It is likely budget decisions made in this environment will have long-term impacts on our company and the entire defense industry. Long-term funding for certain programs in which we participate may be reduced, delayed or cancelled. In addition, cuts could adversely affect the viability of our suppliers and subcontractors, and our employee base. While we believe that our business is well-positioned in areas that the Department of Defense (DoD) has indicated are areas of focus for future defense spending, the impact of the Budget Control Act, other defense spending cuts, and the ongoing fiscal debates remains uncertain and our business and industry could be materially adversely affected.
Changes to business practices for U.S. Government contractors could have a significant adverse effect on current programs, potential new awards and the processes by which procurements are awarded and managed.
Our industry has experienced, and we expect it will continue to experience, significant changes to business practices as a result of an increased focus on affordability, efficiencies, and recovery of costs, among other items, and a reprioritization of available defense funds to key areas for future defense spending. For example, the DoD's Better Buying Power Initiative continues to evolve in its efforts to reduce costs, gain efficiencies, refocus priorities and enhance business practices used by the DoD, including those used to procure goods, services and solutions from defense contractors. In addition, the DCMA has implemented cost recovery initiatives designed to prioritize efforts to recover costs and close open audits. As a result of certain of these initiatives, we have experienced and may continue to experience an increased number of audits and/or a lengthened period of time required to close open audits. More recently, the thresholds for certain allowable costs, including compensation costs, are being challenged or debated. Significant changes to the thresholds for allowable costs could adversely affect our financial position, results of operations and cash flows.

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NORTHROP GRUMMAN CORPORATION                        

These efforts have had, and we expect them to continue to have, a significant impact on the contracting environment in which we do business. In support of the implementation of the Better Buying Power Initiative, the U.S. Government is issuing new regulations and requirements that are shifting additional responsibility and performance risks to the contractor. While the impact to our business as a result of these changes remains uncertain, our business and industry could be materially adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities – The table below summarizes our repurchases of common stock during the three months ended September 30, 2013:
Period
Number
of Shares
Purchased(1)
 
Average 
Price
Paid per
Share(2)
 
Numbers
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the
Plans or Programs
($ in millions)
July
1,147,875

 

$85.63

 
1,147,875

 
 

$4,458

August
3,234,892

 
94.18

 
3,234,892

 
 
4,154

September
3,677,148

 
95.10

 
3,677,148

 
 
3,804

Ending balance
8,059,915

 

$93.38

 
8,059,915

 
 

$3,804

(1)
On May 15, 2013, the company's board of directors authorized a share repurchase program of up to $4.0 billion of the company’s common stock. Repurchases under this program commenced upon the completion of the company's 2010 repurchase program in September 2013. As of September 30, 2013, our repurchases under the program totaled $196 million, and $3.8 billion remained under this share repurchase authorization. The repurchase program will expire when we have used all authorized funds for repurchase.
(2)
Includes commissions paid.
Share repurchases take place from time to time, subject to market conditions and management's discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and has not made any purchases of common stock other than in connection with these publicly announced repurchase program authorizations.
Item 3. Defaults Upon Senior Securities
No information is required in response to this item.
Item 4. Mine Safety Disclosures
No information is required in response to this item.
Item 5. Other Information
No information is required in response to this item.
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 29, 2011 (incorporated by reference to Exhibit 10.1 to Form 8-K filed April 4, 2011)
 
 
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)
 
 
4.1
Fifth Supplemental Indenture, dated as of May 31, 2013 between Northrop Grumman Corporation and The Bank of New York Mellon, as successor to JPMorgan Chase Bank, Trustee, to Indenture dated as of November 21, 2001 (incorporated by reference to Exhibit 4(a) to Form 8-K filed May 31, 2013
 
 

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NORTHROP GRUMMAN CORPORATION                        

4.2
Form of 1.750% Senior Note due 2018 (incorporated by reference to Exhibit 4(a) to Form 8-K filed May 31, 2013)
 
 
4.3
Form of 3.250% Senior Note due 2023 (incorporated by reference to Exhibit 4(a) to Form 8-K filed May 31, 2013)
 
 
4.4
Form of 4.750% Senior Note due 2043 (incorporated by reference to Exhibit 4(a) to Form 8-K filed May 31, 2013)
 
 
10.1
Credit Agreement dated as of August 29, 2013, among Northrop Grumman Corporation, as Borrower; Northrop Grumman Systems Corporation, as Guarantor; the Lenders party thereto; JPMorgan Chase Bank, N.A., as Administrative Agent; an Issuing Bank and a Swingline Lender, and The Royal Bank of Scotland plc, Citibank, N.A., and Wells Fargo Bank, National Association, as Issuing Banks and Syndication Agents (incorporated by reference to Exhibit 10.1 to Form 8-K filed August 30, 2013)
 
 
+10.2
Grant Certificate Specifying the Terms and Conditions Applicable to Special 2013 Restricted Stock Rights Granted to James F. Palmer Under the 2011 Long-Term Incentive Stock Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed September 23, 2013)
 
 
+*10.3
Appendix B to the Northrop Grumman Supplemental Plan 2: ERISA Supplemental Program 2 (Amended and Restated Effective as of October 1, 2013)
 
 
+*10.4
Northrop Grumman Savings Excess Plan (Amended and Restated Effective as of October 1, 2013)
 
 
+*10.5
Northrop Grumman Officers Retirement Account Contribution Plan (Amended and Restated Effective as of October 1, 2013)
 
 
*12(a)
Computation of Ratio of Earnings to Fixed Charges
 
 
*15
Letter from Independent Registered Public Accounting Firm
 
 
*31.1
Rule 13a-14(a)/15d-14(a) Certification of Wesley G. Bush (Section 302 of the Sarbanes-Oxley Act of 2002)
 
 
*31.2
Rule 13a-14(a)/15d-14(a) Certification of James F. Palmer (Section 302 of the Sarbanes-Oxley Act of 2002)
 
 
**32.1
Certification of Wesley G. Bush pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
**32.2
Certification of James F. Palmer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
*101
Northrop Grumman Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (Extensible Business Reporting Language); (i) the Condensed Consolidated Statements of Earnings and Comprehensive Income, (ii) Condensed Consolidated Statements of Financial Position, (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity, and (v) Notes to Condensed Consolidated Financial Statements

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

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NORTHROP GRUMMAN CORPORATION                        

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
NORTHROP GRUMMAN CORPORATION
(Registrant)
 
 
By:
 
 
/s/ Michael A. Hardesty
 
 
Michael A. Hardesty
Corporate Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
Date: October 22, 2013

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NOC-9.30.2013-Ex10.3
Exhibit 10.3


APPENDIX B
TO THE NORTHROP GRUMMAN SUPPLEMENTAL PLAN 2
ERISA Supplemental Program 2
(Amended and Restated Effective as of October 1, 2013)

Appendix B to the Northrop Grumman Supplemental Plan 2 (the "Appendix") is hereby amended and restated effective as of October 1, 2013. This restatement amends the January 1, 2011 restatement and includes changes that apply to Grandfathered Amounts.

Effective October 1, 2013, the Northrop Grumman ERISA Supplemental Plan (the "ERISA Supplemental Plan") was merged into the Appendix. For purposes of the Plan, the ERISA Supplemental Plan shall not be considered part of the Program described in this Appendix, and shall not be a separate Program of the Plan. The Appendix includes Exhibit 1 - Northrop Grumman ERISA Supplemental Plan, which contains the provisions applicable to eligible participants in, and benefits determined pursuant to, the ERISA Supplemental Plan. Accordingly, Exhibit 1 governs all terms of participation in, including without limitation, all benefits, rights and features of individuals covered by, the ERISA Supplemental Plan.

B.01
Purpose. The purpose of the Program is:

(a)
to restore benefits lost under the Pension Plans as a result of the compensation limit in Code section 401(a)(17), or any successor provision; and

(b)
to include compensation deferred under a Deferred Compensation Plan and deferrals required in connection with participation under the Northrop Grumman Electronic Systems Executive Pension Plan.

B.02
Eligibility. An employee of the Company, other than Charles H. Noski, is eligible to receive a benefit under this Program if he or she:

(a)
retires on or after January 1, 1989;

(b)
has vested in Pension Plan benefits that are reduced because of one or both of the following:

(1)
the Code section 401(a)(17) limit on compensation; or

(2)
participation in a Deferred Compensation Plan.



Exhibit 10.3


B.03
Amount of Benefit.

(a)
The benefit payable under this Program with respect to a Participant who commences benefits during his or her lifetime will equal the amounts described in (1) through (3) below.

(1)
Cash Balance Piece. Effective for periods after June 30, 2003, a Participant whose retirement benefit is determined under the terms of a Cash Balance Plan is credited under this Program with Benefit Credits (as defined under the Participant's Cash Balance Plan) he or she would have received:

(A)
but for the restrictions of Code sections 401(a)(17) or 415, as those limits are described by the applicable Cash Balance Plan; and

(B)
but for the fact the Participant made deferrals to a Deferred Compensation Plan.
    
For purposes of (B), the Benefit Credits earned are credited in accordance with the terms of the Cash Balance Plan applicable to Eligible Pay in excess of the Social Security Wage Base and any compensation deferred is only treated as compensation for benefit calculation purposes under this Program in the year(s) payment would otherwise have been made and not in the year(s) of actual payment.

(2)
Historical and Transition Piece. Effective for periods prior to July 1, 2003 the Participant is credited with the retirement benefit, if any, that would have been payable under the terms of the Pension Plan:

(A)
but for the restrictions of Code sections 401(a)(17) or 415, as those limits are described by the applicable Pension Plan; and

(B)
but for the fact that the Participant deferred compensation under either a Deferred Compensation Plan or in connection with the Northrop Grumman Electronic Systems Executive Pension Plan.
    
For purposes of (B), any compensation deferred is only treated as compensation for benefit calculation purposes under this Program in the year(s) payment would otherwise have been made and not in the year(s) of actual payment.

(3)
For Participants whose employment ceases after 2005, all Plan Years after 1996 (not just the last ten) shall be considered in determining the highest three years of eligible pay for purposes of calculating benefit amounts. All benefits resulting from this change in determining the highest three years of eligible pay shall be subject to Code section 409A.

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Exhibit 10.3


 
(b)
The benefit payable under this Program will be reduced by the combined amounts of Pension Plan Benefits and the Northrop Grumman ERISA Supplemental Plan benefits attributable to the applicable Pension Plan.

(c)
Notwithstanding any other provision of the Program, in accordance with Section G.05, a Participant's total accrued benefits under all plans, programs, and arrangements in which he or she participates, including the benefit accrued under Section B.03, may not exceed 60% of his or her Final Average Salary (as defined in Section G.02(c)), reduced for early retirement using the factors in Section G.09. If this limit is exceeded, the Participant's accrued benefit under Appendix F or G, whichever is applicable, will be reduced first, and the Participant's accrued benefit under this Program will then be reduced to the extent necessary to satisfy the limit.

(d)
Minimum Normal Retirement Benefits for Designated Participants.

(1)
"Minimum Normal Retirement Benefits for Designated Participants" are benefits provided only in the Pension Plan appendices (i.e., benefits in excess of the benefits provided by other portions of the Pension Plans).

(A)
These extra benefits are meant to partially restore benefits lost because of Code section 401(a)(17).

(B)
Therefore, they are not included in the "retirement benefit" in (a), but they are included for purposes of the offset in (b).

(2)
Example. An employee is initially entitled to an $85,000 annual benefit under the Pension Plans. The employee would be entitled, but for section 401(a)(17), to a $100,000 annual benefit under the Pension Plans, so that $15,000 is payable under this Program. The Company then adds the minimum normal retirement benefit appendices under the Pension Plans, which are intended to pay all or a portion of the benefits previously payable by this Program under the Pension Plans instead. Assume this results in the employee being entitled to an additional $10,000 annual benefit under the appendices to the Pension Plans, so that the Pension Plans now pay a total of $95,000. This Program restores to the employee only the difference between $100,000 and $95,000, or a $5,000 annual benefit.

(e)
Benefits under this Program will only be paid to supplement benefit payments actually made from a Pension Plan. If benefits are not payable under a Pension Plan because the Participant has failed to vest or for any other reason, no payments will be made under this Program with respect to such Pension Plan.


- 3 -
Exhibit 10.3


(f)
The following shall not be considered as compensation for purposes of determining the amount of any benefit under the Program:

(1)
any payment authorized by the Compensation Committee that is (1) calculated pursuant to the method for determining a bonus amount under the Annual Incentive Plan (AIP) for a given year, and (2) paid in lieu of such bonus in the year prior to the year the bonus would otherwise be paid under the AIP, and

(2)
any award payment under the Northrop Grumman Long-Term Incentive Cash Plan.

B.04
Preretirement Surviving Spouse Benefit.

(a)
Preretirement surviving spouse benefits will be payable under this Program on behalf of a Participant if such Participant's surviving spouse is eligible for benefits payable from a Pension Plan.

(b)
The benefit payable will be:

(1)
for periods after June 30, 2003, the amount which would have been payable under the Cash Balance Plan:

(A)
but for the restrictions of Code sections 401(a)(17) and 415 (or any successor sections), as those limits are described by the applicable Cash Balance Plan; and

(B)
but for the fact that the Participant deferred compensation under a Deferred Compensation Plan (with Benefit Credits determined by reference to amounts exceeding the Social Security Wage Base); and

(2)
for periods prior to July 1, 2003, the amount which would have been payable under the Pension Plan:

(A)
but for the restrictions of Code sections 401(a)(17) and 415 (or any successor sections), as those limits are described by the applicable Pension Plan; and

(B)
but for the fact that the Participant deferred compensation under either a Deferred Compensation Plan or in connection with the Northrop Grumman Electronic Systems Executive Pension Plan.

(3)
For Participants whose employment ceases after 2005, all Plan Years after 1996 (not just the last ten) shall be considered in determining the highest three years of eligible pay for purposes of calculating benefit amounts. All

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Exhibit 10.3


benefits resulting from this change in determining the highest three years of eligible pay shall be subject to Code section 409A.

(c)
For purposes of paragraph (b)(2) above, any compensation deferred will only be treated as compensation for benefit calculation purposes under this Program in the year(s) payment would otherwise have been made and not in the year(s) of actual payment.

(d)
The benefit payable under this Program will be reduced by the combined amounts of the Pension Plan Benefits and the Northrop Grumman Corporation ERISA Supplemental Plan benefits attributable to the applicable Pension Plan.

(e)
No benefit will be payable under this Program with respect to a spouse after the death of that spouse.

(f)
The following shall not be considered as compensation for purposes of determining the amount of any benefit under the Program:

(1)
any payment authorized by the Compensation Committee that is (1) calculated pursuant to the method for determining a bonus amount under the Annual Incentive Plan (AIP) for a given year, and (2) paid in lieu of such bonus in the year prior to the year the bonus would otherwise be paid under the AIP, and

(2)
any award payment under the Northrop Grumman Long-Term Incentive Cash Plan.

B.05
Plan Termination. No further benefits may be earned under this Program with respect to a particular Pension Plan after the termination of such Pension Plan.

B.06
Pension Plan Benefits. For purposes of this Appendix, the term "Pension Plan Benefits" generally means the benefits actually payable to a Participant, spouse, beneficiary or contingent annuitant under a Pension Plan. However, this Program is only intended to remedy pension reductions caused by the operation of section 401(a)(17) and not reductions caused for any other reason. In those instances where pension benefits are reduced for some other reason, the term "Pension Plan Benefits" shall be deemed to mean the benefits that actually would have been payable but for such other reason.

Examples of such other reasons include, but are not limited to, the following:

(a)
A reduction in pension benefits as a result of a distress termination (as described in ERISA § 4041(c) or any comparable successor provision of law) of a Pension Plan. In such a case, the Pension Plan Benefits will be deemed to refer to the payments that would have been made from the Pension Plan had it terminated on a fully funded basis as a standard termination (as described in ERISA § 4041(b) or any comparable successor provision of law).

- 5 -
Exhibit 10.3



(b)
A reduction of accrued benefits as permitted under Code section 412(c)(8), as amended, or any comparable successor provision of law.

(c)
A reduction of pension benefits as a result of payment of all or a portion of a Participant's benefits to a third party on behalf of or with respect to a Participant.

B.07
ISA Excess Plan Participants.

(a)
Background. Effective as of the ISA Eligibility Date, all liabilities for benefits accrued after that date under the Northrop Grumman Integrated Systems & Aerostructures (ISA) Sector ERISA Excess Plan (the "ISA Plan") are transferred to this Plan. This Section describes the treatment of those liabilities ("Transferred Liabilities") and the Participants to whom those liabilities relate ("Transferred Participants").
The "ISA Eligibility Date" is July 1, 2000.

(b)
Transferred Participants. This Section B.07 applies only to employees who: (1) were active participants in the ISA Plan as of the day before the ISA Eligibility Date; and (2) accrued a benefit under the terms of the ISA Plan on or after the ISA Eligibility Date.

(c)
Treatment of Transferred Liabilities. The Transferred Liabilities consist of any post-ISA Eligibility Date accruals under Article III of the ISA Plan. Those liabilities are treated as if they were accrued under Section B.03 of this Plan. Other provisions of this Plan govern as provided below.

(d)
Distributions. Distributions of benefits attributable to the Transferred Liabilities are generally made under Articles II and III of this Plan.

(e)
Other Provisions. The Transferred Liabilities and the Transferred Participants are fully subject to Articles I-III and Appendix B of this Plan. The amount of the Transferred Liabilities is, however, determined under Article III of the ISA Plan.

B.08
Grumman Excess Plan Spinoff.

(a)
Background. Effective as of the Grumman Spinoff Date, all liabilities for benefits accrued by Transferred Participants under the Northrop Grumman Excess Plan for the Grumman Pension Plan (the "Grumman Plan") were transferred to this Plan. This Section describes the treatment of those liabilities ("Transferred Liabilities") under this Plan.
The "Grumman Spinoff Date" is July 1, 2003.

(b)
Treatment of Transferred Liabilities. The Transferred Liabilities will generally be treated under the Plan like any other benefits under B.03.


- 6 -
Exhibit 10.3


(c)
Transferred Participants. The "Transferred Participants" are active employees who were eligible to participate in the Grumman Plan as of June 30, 2003. Grumman Plan benefits of individuals who terminated employment before July 1, 2003 remain subject to the Grumman Plan, and this Plan assumes no liabilities for those benefits.

(d)
Distributions. Distributions of amounts corresponding to the Transferred Liabilities will generally be made under Articles II and III.

(e)
Other Provisions. The Transferred Liabilities and the Transferred Participants are fully subject to Articles I-III and Appendix B.

B.09
Liabilities Transferred to HII. Northrop Grumman Corporation distributed its interest in Huntington Ingalls Industries, Inc. ("HII") to its shareholders on March 31, 2011 (the "HII Distribution Date"). Pursuant to an agreement between Northrop Grumman Corporation and HII, on the HII Distribution Date certain employees and former employees of HII ceased to participate in the Program and the liabilities for these participants" benefits under the Program were transferred to HII. On and after the HII Distribution Date, the Company and the Program, and any successors thereto, shall have no further obligation or liability to any such participant with respect to any benefit, amount, or right due under the Program.


* * *

IN WITNESS WHEREOF, this Plan is hereby executed by a duly authorized officer on this 27th day of September, 2013.

NORTHROP GRUMMAN CORPORATION

By: /s/ Denise Peppard            
Denise Peppard
Corporate Vice President and
Chief Human Resources Officer



- 7 -
Exhibit 10.3

EXHIBIT 1
NORTHROP GRUMMAN ERISA SUPPLEMENTAL PLAN

The Northrop Grumman ERISA Supplemental Plan (the “Plan”), formerly known as the Northrop Corporation ERISA Supplemental Plan 1, is hereby amended and restated effective as of October 1, 2013 in this Exhibit 1 to the Appendix B to the Northrop Grumman Supplemental Plan 2 (the "Appendix"). This restatement amends the January 1, 2013 restatement of the Plan and includes changes that apply to Grandfathered Amounts.

The Plan is intended to comply with Code section 409A and official guidance issued thereunder (except for Grandfathered Amounts). Notwithstanding any other provision of this Plan, this Plan shall be interpreted, operated and administered in a manner consistent with this intention.

Effective October 1, 2013, the Plan was merged into the Appendix. For purposes of the Northrop Grumman Supplemental Plan 2, the Plan shall not be considered part of the Program described in this Appendix, and shall not be a separate Program of the Northrop Grumman Supplemental Plan 2. This Exhibit 1 (including its Appendices A, B and C) contains the provisions of the Appendix applicable to eligible participants in, and benefits determined pursuant to, the Plan. Accordingly, this Exhibit 1 governs all terms of participation in, including without limitation, all benefits, rights and features, of individuals and benefits covered by, this Exhibit. All defined terms in this Exhibit 1 (including, but not limited to the term “Plan”) are defined solely within this Exhibit 1. The terms of the Appendix or of the Northrop Grumman Supplemental Plan 2 are not otherwise applicable to this Exhibit 1 for purposes of determining benefits due hereunder or otherwise.

ARTICLE I
Definitions
For purposes of the Plan, the following terms, when capitalized, will have the following meanings:
1.01
Affiliated Companies. The Company and any other entity related to the Company under the rules of section 414 of the Code. The Affiliated Companies include Northrop Grumman Corporation and its 80%-owned subsidiaries and may include other entities as well.
1.02
CIC Plans. Northrop Grumman Corporation Change-In-Control Severance Plan (effective August 1, 1996, as amended) or the Northrop Grumman Corporation March 2000 Change-In-Control Severance Plan.
1.03
Code. The Internal Revenue Code of 1986, as amended.
1.04
Company. The Company as designated in the Pension Plans.
1.05
Grandfathered Amounts. Plan benefits that were earned and vested as of December 31, 2004 within the meaning of Code section 409A and official guidance thereunder.


Exhibit 10.3



1.06
Key Employee    . An employee treated as a "specified employee" under Code section 409A(a)(2)(B)(i) of the Company or the Affiliated Companies (i.e., a key employee (as defined in Code section 416(i) without regard to paragraph (5) thereof)) if the Company's or an Affiliated Company's stock is publicly traded on an established securities market or otherwise. The Company shall determine in accordance with a uniform Company policy which Participants are Key Employees as of each December 31 in accordance with IRS regulations or other guidance under Code section 409A, provided that in determining the compensation of individuals for this purpose, the definition of compensation in Treas. Reg. § 1.415(c)-2(d)(3) shall be used. Such determination shall be effective for the twelve (12) month period commencing on April 1 of the following year.
1.07
Participant. Any employee who (a) is eligible for benefits under one or both Pension Plans, (b) meets the eligibility requirements of Section 2.02 of this Plan and (c) and has not received full payment under the Plan.
1.08
Payment Date. The 1st of the month coincident with or following the later of (a) the date the Participant attains age 55, or (b) the date the Participant Separates from Service.
1.09
Plan. The Northrop Grumman ERISA Supplemental Plan, formerly known as the Northrop Corporation ERISA Supplemental Plan 1.
1.10
Pension Plan Benefits. This term is defined in Section 2.08 of this Plan.
1.11
Pension Plan and Pension Plans. Any of the following:
(a)    The Northrop Grumman Retirement Plan
(b)    The Northrop Grumman Retirement Plan—Rolling Meadows Site
(c)
The Northrop Grumman Retirement Value Plan (effective as of January 1, 2000)
(d)
The Northrop Grumman Electronics Systems – Space Division Salaried Employees’ Pension Plan (effective as of the Aerojet Closing Date)
(e)
The Northrop Grumman Electronics Systems – Space Division Union Employees’ Pension Plan (effective as of the Aerojet Closing Date)
“Aerojet Closing Date” means the Closing Date specified in the April 19, 2001 Asset Purchase Agreement by and Between Aerojet-General Corporation and Northrop Grumman Systems Corporation.
1.12
Separation from Service or Separates from Service. A "separation from service" within the meaning of Code section 409A.
1.13
Termination of Employment. Complete termination of employment with the Affiliated Companies.
(a)
If a Participant leaves one Affiliated Company to go to work for another, he or she will not have a Termination of Employment.
(b)
A Participant will have a Termination of Employment if he or she leaves the Affiliated Companies because the affiliate he or she works for ceases to be an Affiliated Company because it is sold or spunoff.


- 2 -
Exhibit 10.3


ARTICLE II
Eligibility for and Amount of Benefits
2.01
Purpose. The purpose of this Plan is simply to restore to employees of the Company the benefits they lose under the Pension Plans as a result of the benefit limits in Code section 415, as amended, or any successor section (“section 415”), as the benefit limits are described in the applicable Pension Plan.
2.02
Eligibility. Each Participant is eligible to receive a benefit under this Plan if:
(a)
he or she has vested in benefits under one or more of the Pension Plans;
(b)
he or she has vested benefits reduced because of the application of section 415;
(c)
he or she is not eligible to receive a benefit under the Northrop Corporation Supplemental Retirement Income Program for Senior Executives or any other plan or program which bars an employee from participation in this Plan; and
(d)
he or she is not a “Participant” in the Charles H. Noski Executive Retirement Plan as that term is defined under that plan.
2.03
Amount of Benefit. The benefit payable from the Company under this Plan to a Participant will equal the retirement benefit, if any, which would have been payable to the Participant under the terms of a Pension Plan but for the restrictions of section 415 (as described in the applicable Pension Plan).
The benefit payable under this Plan will be reduced by the amount of Pension Plan Benefits attributable to the applicable Pension Plan.
Benefits under this Plan will only be paid to supplement benefit payments actually made from a Pension Plan. If benefits are not payable under a Pension Plan because the Participant has failed to vest or for any other reason, no payments will be made under this Plan with respect to such Pension Plan.
In no event, however, (1) will this Plan pay any amount of a Participant's retirement benefit, if any, attributable to the “2000 Ad Hoc Increase for Retirees” Appendix added to certain of the Company’s tax-qualified plans pursuant to the Board of Directors resolution adopted May 17, 2000, or (2) will a Participant be entitled to a benefit (or an increased benefit) from or as a result of participation in this Plan under the Board of Directors resolution adopted May 17, 2000.
The following shall not be considered as compensation for purposes of determining the amount of any benefit under the Plan:
(1)
any payment authorized by the Compensation Committee that is (a) calculated pursuant to the method for determining a bonus amount under the Annual Incentive Plan (AIP) for a given year, and (b) paid in lieu of such bonus in the year prior to the year the bonus would otherwise be paid under the AIP, and
(2)
any award payment under the Northrop Grumman Long-Term Incentive Cash Plan.
2.04
Preretirement Surviving Spouse Benefit. This Section only applies to Grandfathered Amounts.

- 3 -
Exhibit 10.3


Preretirement surviving spouse benefits will be payable under this Plan on behalf of a Participant if such Participant’s surviving spouse is eligible for preretirement surviving spouse benefits payable from a Pension Plan. The benefit payable will be the amount which would have been payable under the Pension Plan but for the restrictions of section 415 (as described in the applicable Pension Plan).
The benefit payable under this Plan will be reduced by the amount of Pension Plan Benefits attributable to the applicable Pension Plan.
No benefit will be payable under this Plan with respect to a spouse after the death of that spouse.
See Appendix A and Appendix B for the rules that apply to other benefits earned under the Plan.
2.05
Forms and Times of Benefit Payments. This Section only applies to Grandfathered Amounts.
The Company will determine the form and timing of benefit payments in its sole discretion. However, for payments made to supplement those of a particular Pension Plan, the Company will only select among the options available under that Pension Plan, and using the same actuarial adjustments used in that Pension Plan except in cases of lump sums.
Whenever the present value of the amount payable under the Plan does not exceed $10,000, it will be paid in the form of a single lump sum as of the first of the month following Termination of Employment. The lump sum will be calculated using the factors and methodology described in Section 3.08 below. (See Section 2.09 for the rule that applies as of January 1, 2008).
No payments will commence under this Plan until a Participant has a Termination of Employment, even in cases where benefits have commenced under a Pension Plan for Participants over age 70-1/2.
See Appendix A and Appendix B for the rules that apply to other benefits earned under the Plan.
2.06
Beneficiaries and Spouses. This Section only applies to Grandfathered Amounts.
If the Company selects a form of payment which includes a survivor benefit, the Participant may make a beneficiary designation, which may be changed at any time prior to commencement of benefits. A beneficiary designation must be in writing and will be effective only when received by the Company.
If a Participant is married on the date his or her benefits are scheduled to commence, his or her beneficiary will be his or her spouse unless some other beneficiary is named with spousal consent. Spousal consent, to be effective, must be submitted in writing before benefits commence and must be witnessed by a Plan representative or notary public. No spousal consent is necessary if the Company determines that there is no spouse or that the spouse cannot be found.
The Participant’s spouse will be the spouse as determined under the underlying Pension Plan.

- 4 -
Exhibit 10.3


See Appendix A and Appendix B for the rules that apply to other benefits earned under the Plan.
2.07
Plan Termination. No further benefits may be earned under this Plan with respect to a particular Pension Plan after the termination of such Pension Plan.
2.08
Pension Plan Benefits. The term “Pension Plan Benefits” generally means the benefits actually payable to a Participant, spouse, beneficiary or contingent annuitant under a Pension Plan. However, this Plan is only intended to remedy pension reductions caused by the operation of section 415 and not reductions caused for any other reason. In those instances where pension benefits are reduced for some other reason, the term “Pension Plan Benefits” shall be deemed to mean the benefits that would have been actually payable but for such other reason.
Examples of such other reasons include, but are not limited to, the following:
(a)
A reduction in pension benefits as a result of a distress termination (as described in ERISA § 4041(c) or any comparable successor provision of law) of a Pension Plan. In such a case, the Pension Plan Benefits will be deemed to refer to the payments that would have been made from the Pension Plan had it terminated on a fully funded basis as a standard termination (as described in ERISA § 4041(b) or any comparable successor provision of law).
(b)
A reduction of accrued benefits as permitted under Code section 412(c)(8), as amended, or any comparable successor provision of law.
(c)
A reduction of pension benefits as a result of payment of all or a portion of a Participant’s benefits to a third party on behalf of or with respect to a Participant.
2.09
Mandatory Cashout. Notwithstanding any other provisions in the Plan, Participants with Grandfathered Amounts who have not commenced payment of such benefits prior to January 1, 2008 will be subject to the following rules:

(a)
Post-2007 Terminations. Participants who have a Termination of Employment after 2007 will receive a lump sum distribution of the present value of their Grandfathered Amounts within two months of Termination of Employment (without interest), if such present value is below the Code section 402(g) limit in effect at the Termination of Employment.

(b)
Pre-2008 Terminations. Participants who had a Termination of Employment before 2008 will receive a lump sum distribution of the present value of their Grandfathered Amounts within two months of the time they commence payment of their underlying qualified pension plan benefits (without interest), if such present value is below the Code section 402(g) limit in effect at the time such payments commence.

For purposes of calculating present values under this Section, the actual assumptions and calculation procedures for lump sum distributions under the Northrop Grumman Pension Plan shall be used.


- 5 -
Exhibit 10.3


2.10
Optional Payment Forms. Participants with Grandfathered Amounts shall be permitted to elect (a) or (b) below:

(a)
To receive their Grandfathered Amounts in any form of distribution available under the Plan at October 3, 2004, provided that form remains available under the underlying qualified pension plan at the time payment of the Grandfathered Amounts commences. The conversion factors for these distribution forms will be based on the factors or basis in effect under this Plan on October 3, 2004.

(b)
To receive their Grandfathered Amounts in any life annuity form not included in (a) above but included in the underlying qualified pension plan distribution options at the time payment of the Grandfathered Amounts commences. The conversion factors will be based on the following actuarial assumptions:

Interest Rate:        6%

Mortality Table:
RP-2000 Mortality Table projected 15 years for future standardized cash balance factors

2.11
Special Tax Distribution. On the date a Participant's retirement benefit is reasonably ascertainable within the meaning of IRS regulations under Code section 3121(v)(2), an amount equal to the Participant's portion of the FICA tax withholding will be distributed in a single lump sum payment. This payment will be based on all benefits under the Plan, including Grandfathered Amounts. This payment will reduce the Participant's future benefit payments under the Plan on an actuarial basis.

ARTICLE III
Lump Sum Election    
This Article only applies with respect to Grandfathered Amounts. See Appendix A and Appendix B for the distribution rules that apply to other benefits earned under the Plan.
3.01
In General. This Article sets forth the rules under which Participants may elect to receive their benefits in a lump sum. Except as provided in Section 3.08, this Article does not apply to active employees (as defined in Section 3.04) in cases where benefits are automatically payable in lump sum form under Article II.
3.02
Retirees Election. Participants and Participants’ beneficiaries already receiving monthly benefits under the Plan at its inception will be given a one-time opportunity to elect a lump sum payout of future benefit payments.
(a)
The election must be made within a 60-day period determined by the Company. Within its discretion, the Company may delay the commencement of the 60-day period in instances where the Company is unable to timely communicate with a particular payee.
(b)
The determination as to whether a payee is already receiving monthly benefits will be made at the beginning of the 60-day period.

- 6 -
Exhibit 10.3


(c)
An election to take a lump sum must be accompanied by a waiver of the existing retiree medical benefits by those Participants (and their covered spouses or surviving spouses) entitled either to have such benefits entirely paid for by the Company or to receive such benefits as a result of their classification as an employee under Executive Class Code II.
Following the waiver, waiving Participants (and covered spouses or surviving spouses) will be entitled to the coverage offered to employees who are eligible for Senior Executive Retirement Insurance Benefits in effect as of July 1, 1993.
(d)
If the person receiving payments as of the beginning of the 60-day period dies prior to making a lump sum election, his or her beneficiary, if any, may not make the lump sum election.
(e)
Elections to receive a lump sum (and waivers under (c)) must be made in writing and must include spousal consent if the payee (whether the Participant or beneficiary) is married. Elections and spousal consent must be witnessed by a Plan representative or a notary public.
(f)
An election (with spousal consent, where required) to receive the lump sum made at any time during the 60-day period will be irrevocable. If no proper election has been made by the end of the 60-day period, payments will continue unchanged in the monthly form that had previously been applicable.
3.03
Retirees Lump Sum. If a retired Participant or beneficiary makes a valid election under Section 3.02 within the 60-day period, monthly payments will continue in the previously applicable form for 12 months (assuming the payees live that long).
(a)
As of the first of the 13th month, the present value of the remaining benefit payments will be paid in a single lump sum to the Participant, if alive, or, if not, to the beneficiary under the previously applicable form of payment.
(b)
No lump sum payment will be made if:
(1)
The Participant is receiving monthly benefit payments in a form that does not provide for survivor benefits and the Participant dies before the time the lump sum payment is due.
(2)
The Participant is receiving monthly benefit payments in a form that does provide for survivor benefits but the Participant and the beneficiary die before the time the lump sum payment is due.
(c)
The following rules apply where payment is being made in the form of a 10-year certain and continuous life annuity option:
(1)
If the Participant is deceased at the commencement of the 60-day election period, the surviving beneficiary may not make the election if there are less than 13 months left in the 10-year certain period.
(2)
If the Participant elects the lump sum and dies prior to the first of the 13th month:


- 7 -
Exhibit 10.3


(A)
if the 10-year certain period has already ended, all monthly payments will cease at the Participant’s death and no lump sum payment will be made;
(B)
if the 10-year certain period ends after the Participant’s death and before the beginning of the 13th month, monthly payments will end at the end of the 10-year certain period and no lump sum payment will be made; and
(C)
if the 10-year certain period ends after the beginning of the 13th month, monthly payments will continue through the 12th month, and a lump sum payment will be made as of the first of the 13th month, equal to the present value of the remaining benefit payments.
3.04
Actives Election. Active Participants may elect to have their benefits paid in the form of a single lump sum under this Section.
(a)
A Participant is considered to be “Active” under this Section if he or she is still employed by the Affiliated Companies on or after the beginning of the initial 60-day period referred to in Section 3.02.
(b)
An election to take a lump sum may be made at any time during the 60-day period prior to Termination of Employment and covers both—
(1)
Benefits payable to the Participant during his or her lifetime, and
(2)
Survivor benefits (if any) payable to the Participant’s beneficiary, including preretirement death benefits (if any) payable to the Participant’s spouse.
(c)
An election does not become effective until the earlier of
(1)
the Participant’s Termination of Employment, or
(2)
the Participant’s death.
Before the election becomes effective, it may be revoked.
If a Participant does not have a Termination of Employment within 60 days after making an election, the election will never take effect.
(d)
An election may only be made once. If it fails to become effective after 60 days or is revoked before becoming effective, it cannot be made again at a later time.
(e)
After a Participant has a Termination of Employment, no election can be made.
(f)
If a Participant dies before making a lump sum election, his or her spouse may not make a lump sum election with respect to any benefits which may be due the spouse.
(g)
Elections to receive a lump sum must be made in writing and must include spousal consent if the Participant is married. Elections and spousal consent must be witnessed by a Plan representative or a notary public.


- 8 -
Exhibit 10.3


3.05
Actives Lump Sum – Retirement Eligible. If a Participant with a valid lump sum election in effect under Section 3.04 has a Termination of Employment after he or she is entitled to commence benefits under the Pension Plans, payments will be made in accordance with this Section.
(a)
Monthly benefit payments will be made for up to 12 months, commencing the first of the month following Termination of Employment. Payments will be made:
(1)
in the case of a Participant who is not married on the date benefits are scheduled to commence, based on a straight life annuity for the Participant’s life and ceasing upon the Participant’s death should he or she die before the 12 months elapse, or
(2)
in the case of a Participant who is married on the date benefits are scheduled to commence, based on a joint and survivor annuity form —
(A)
with the survivor benefit equal to 50% of the Participant’s benefit;
(B)
with the Participant’s spouse as the survivor annuitant;
(C)
determined by using the contingent annuitant option factors used to convert straight life annuities to 50% joint and survivor annuities under the Northrop Retirement Plan; and
(D)
with all payments ceasing upon the death of both the Participant and his or her spouse should they die before the 12 months elapse.
(b)
As of the first of the 13th month, the present value of the remaining benefit payments will be paid in a single lump sum. Payment of the lump sum will be made to the Participant if he or she is still alive, or, if not, to his or her surviving spouse, if any.
(c)
No lump sum payment will be made if:
(1)
The Participant is receiving monthly benefit payments in the form of a straight life annuity and the Participant dies before the time the lump sum payment is due.
(2)
The Participant is receiving monthly benefit payments in a joint and survivor annuity form and the Participant and his or her spouse both die before the time the lump sum payment is due.
(d)
A lump sum will be payable to a Participant’s spouse as of the first of the month following the date of the Participant’s death, if:
(1)
the Participant dies after making a valid lump sum election but prior to commencement of any benefits under this Plan;
(2)
the Participant is survived by a spouse who is entitled to a preretirement surviving spouse benefit under this Plan; and
(3)
the spouse survives to the first of the month following the date of the Participant’s death.


- 9 -
Exhibit 10.3


3.06
Actives Lump Sum – Not Retirement Eligible. If a Participant with a valid lump sum election in effect under Section 3.04, has a Termination of Employment before he or she is entitled to commence benefits under the Pension Plans, payments will be made in accordance with this Section.
(a)
No monthly benefit payments will be made.
(b)
Following Termination of Employment, a single lump sum payment of the benefit will be made on the first of the month following 12 months after the date of the Participant’s Termination of Employment.
(c)
A lump sum will be payable to a Participant’s spouse as of the first of the month following the date of the Participant’s death, if:
(1)
the Participant dies after making a valid lump sum election but prior to commencement of any benefits under this Plan;
(2)
the Participant is survived by a spouse who is entitled to a preretirement surviving spouse benefit under this Plan; and
(3)
the spouse survives to the first of the month following the date of the Participant’s death.
(d)
No lump sum payment will be made if the Participant is unmarried at the time of death and dies before the time the lump sum payment is due.
3.07
Lump Sums with CIC Severance Plan Election. A Participant who elects lump sum payments of all his or her nonqualified benefits under the CIC Plans is entitled to have his or her benefits paid as a lump sum calculated under the terms of the applicable CIC Plan. Otherwise, benefit payments are governed by the general provisions of this Article, which provide different rules for calculating the amount of lump sum payments.
3.08
Calculation of Lump Sum. The factors to be used in calculating the lump sum are as follows:
Interest: Whichever of the following two rates that produces the smaller lump sum:
(1)
the discount rate used by the Company for purposes of Statement of Financial Accounting Standards No. 87 of the Financial Accounting Standards Board as disclosed in the Company’s annual report to shareholders for the year end immediately preceding the date of distribution, or
(2)
the applicable interest rate that would be used to calculate a lump sum value for the benefit under the Pension Plans.
Mortality: the applicable mortality table that would be used to calculate a lump sum value for the benefit under the Northrop Grumman Retirement Plan.
Increase in Section 415 Limit: 4% per year.
Age: Age rounded to the nearest month on the date the lump sum is payable.
Variable Unit Values: Variable Unit Values are presumed not to increase for future periods after the date the lump sum is payable.

- 10 -
Exhibit 10.3


The annuity to be converted to a lump sum will be the remaining annuity currently payable to the Participant or his or her beneficiary at the time the lump sum is due.
For example, assume a Participant is receiving benefit payments in the form of a 50% joint and survivor annuity.
If the Participant and the survivor annuitant are both still alive at the time the lump sum payment is due, the present value calculation will be based on the remaining benefits that would be paid to both the Participant and the survivor in the annuity form.
If only the survivor is alive, the calculation will be based solely on the remaining 50% survivor benefits that would be paid to the survivor.
If only the Participant is alive, the calculation will be based solely on the remaining benefits that would be paid to the Participant.
In the case of a Participant who dies prior to commencement of benefits under this Plan so that only a preretirement surviving spouse benefit (if any) is payable, the lump sum will be based solely on the value of the preretirement surviving spouse benefit.
In the case of a lump-sum under Section 3.07 (related to lump sums with a CIC Severance Plan election), the lump-sum amount will be calculated as described in that section and the rules of this Section 3.08 are not used.
3.09
Spousal Consent. Spousal consent, as required for elections as described above, need not be obtained if the Company determines that there is no spouse or the spouse cannot be located.

ARTICLE IV
Miscellaneous
4.01
Amendment and Plan Termination. The Company may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part for any reason. This includes the right to amend or eliminate any of the provisions of the Plan with respect to lump sum distributions, including any lump sum calculation factors, whether or not a Participant has already made a lump sum election. Notwithstanding the foregoing, no amendment or termination of the Plan shall reduce the amount of a Participant's accrued benefit under the Plan as of the date of such amendment or termination.
No amendment of the Plan shall apply to the Grandfathered Amounts, unless the amendment specifically provides that it applies to such amounts. The purpose of this restriction is to prevent a Plan amendment from resulting in an inadvertent "material modification" to the Grandfathered Amounts.

The Company may, in its sole discretion, seek reimbursement from the Pension Plans to the extent this Plan pays Pension Plan Benefits to which Participants were entitled to or became entitled to under the Pension Plans.


- 11 -
Exhibit 10.3


4.02
Not an Employment Agreement. Nothing contained in this Plan gives any Participant the right to be retained in the service of the Company, nor does it interfere with the right of the Company to discharge or otherwise deal with Participants without regard to the existence of this Plan.
4.03
Assignment of Benefits. A Participant, surviving spouse or beneficiary may not, either voluntarily or involuntarily, assign, anticipate, alienate, commute, sell, transfer, pledge or encumber any benefits to which he or she is or may become entitled under the Plan, nor may Plan benefits be subject to attachment or garnishment by any of their creditors or to legal process.
Notwithstanding the foregoing, all or a portion of a Participant's benefit may be paid to another person as specified in a domestic relations order that the plan administrator determines is qualified (a "Qualified Domestic Relations Order"). For this purpose, a Qualified Domestic Relations Order means a judgment, decree, or order (including the approval of a settlement agreement) which is:
(1)    issued pursuant to a State's domestic relations law;
(2)
relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of the Participant;
(3)
creates or recognizes the right of a spouse, former spouse, child or other dependent of the Participant to receive all or a portion of the Participant's benefits under the Plan; and
(4)
meets such other requirements established by the plan administrator.
The plan administrator shall determine whether any document received by it is a Qualified Domestic Relations Order. In making this determination, the plan administrator may consider the rules applicable to "domestic relations orders" under Code section 414(p) and ERISA section 206(d), and such other rules and procedures as it deems relevant.
4.04
Nonduplication of Benefits. This Section applies if, despite Section 4.03, with respect to any Participant (or his or her beneficiaries), the Company is required to make payments under this Plan to a person or entity other than the payees described in the Plan. In such a case, any amounts due the Participant (or his or her beneficiaries) under this Plan will be reduced by the actuarial value of the payments required to be made to such other person or entity.
Actuarial value will be determined using the factors and methodology described in Section 3.08 above (in the case of lump sums) and using the actuarial assumptions in the underlying Pension Plan in all other cases.
In dividing a Participant’s benefit between the Participant and another person or entity, consistent actuarial assumptions and methodologies will be used so that there is no increased actuarial cost to the Company.
4.05
Funding. Participants have the status of general unsecured creditors of the Company and the Plan constitutes a mere promise by the Company to make benefit payments in the future. The Company may, but need not, fund benefits under the Plan through a trust. If it does so, any trust created by the Company and any assets held by the trust to assist it in

- 12 -
Exhibit 10.3


meeting its obligations under the Plan will conform to the terms of the model trust, as described in Internal Revenue Service Revenue Procedure 92-64, but only to the extent required by Internal Revenue Service Revenue Procedure 92-65. It is the intention of the Company and Participants that the Plan be unfunded for tax purposes and for purposes of Title I of ERISA.
Any funding of benefits under this Plan will be in the Company’s sole discretion. The Company may set and amend the terms under which it will fund and may cease to fund at any time.
4.06
Construction. The Company shall have full discretionary authority to determine eligibility and to construe and interpret the terms of the Plan, including the power to remedy possible ambiguities, inconsistencies or omissions.
4.07
Governing Law. This Plan shall be governed by the law of the Commonwealth of Virginia, except to the extent superseded by federal law.
4.08
Actions By Company and Claims Procedures. Any powers exercisable by the Company under the Plan shall be utilized by written resolution adopted by the Board of Directors or its delegate. The Board may by written resolution delegate any of the Company’s powers under the Plan and any such delegations may provide for subdelegations, also by written resolution.
The Company's standardized "Northrop Grumman Nonqualified Retirement Plans Claims and Appeals Procedures" shall apply in handling claims and appeals under this Plan.
4.09
Plan Representatives. Those authorized to act as Plan representatives will be designated in writing by the Board of Directors or its delegate.
4.10
Number. The singular, where appearing in this Plan, will be deemed to include the plural, unless the context clearly indicates the contrary.
4.11
2001 Reorganization. Effective as of the 2001 Reorganization Date in (d), the corporate structure of Northrop Grumman Corporation and its affiliates was modified. Effective as of the Litton Acquisition Date in (e), Litton Industries, Inc. was acquired and became a subsidiary of the Northrop Grumman Corporation (the “Litton Acquisition”).
(a)
The former Northrop Grumman Corporation was renamed Northrop Grumman Systems Corporation. It became a wholly-owned subsidiary of the new parent of the reorganized controlled group.
(b)
The new parent corporation resulting from the restructuring is called Northrop Grumman Corporation. All references in this Plan to the former Northrop Grumman Corporation and its Board of Directors now refer to the new parent corporation bearing the same name and its Board of Directors.
(c)
As of the 2001 Reorganization Date, the new Northrop Grumman Corporation became the sponsor of this Plan, and its Board of Directors assumed authority over this Plan.
(d)
2001 Reorganization Date. The date as of which the corporate restructuring described in (a) and (b) occurred.


- 13 -
Exhibit 10.3


(e)
Litton Acquisition Date. The date as of which the conditions for the completion of the Litton Acquisition were satisfied in accordance with the “Amended and Restated Agreement and Plan of Merger Among Northrop Grumman Corporation, Litton Industries, Inc., NNG, Inc., and LII Acquisition Corp.
4.12
Liabilities Transferred to HII. Northrop Grumman Corporation distributed its interest in Huntington Ingalls Industries, Inc. ("HII) to its shareholders on March 31, 2011 (the "HII Distribution Date"). Pursuant to an agreement between Northrop Grumman Corporation and HII, on the HII Distribution Date certain employees and former employees of HII ceased to participate in the Plan and the liabilities for these participants' benefits under the Plan were transferred to HII. On and after the HII Distribution Date, the Company and the Plan, and any successors thereto, shall have no further obligation or liability to any such participant with respect to any benefit, amount, or right due under the Plan.






- 14 -
Exhibit 10.3

APPENDIX A TO EXHIBIT 1
2005-2007 TRANSITION RULES
This Appendix A provides the distribution rules that apply to the portion of benefits under the Plan subject to Code section 409A for Participants with benefit commencement dates after January 1, 2005 and before January 1, 2008.
A.01
Election. Participants scheduled to commence payments during 2005 may elect to receive both pre-2005 benefit accruals and 2005 benefit accruals in any optional form of benefit available under the Plan as of December 31, 2004. Participants electing optional forms of benefits under this provision will commence payments on the Participant's selected benefit commencement date.
A.02
2005 Commencements. Pursuant to IRS Notice 2005-1, Q&A-19 & Q&A-20, Participants commencing payments in 2005 from the Plan may elect a form of distribution from among those available under the Plan on December 31, 2004, and benefit payments shall begin at the time elected by the Participant.

(a)
Key Employees. A Key Employee Separating from Service on or after July 1, 2005, with Plan distributions subject to Code section 409A scheduled to be paid in 2006 and within six months of his date of Separation from Service, shall have such distributions delayed for six months from the Key Employee's date of Separation from Service. The delayed distributions shall be paid as a single sum with interest at the end of the six month period and Plan distributions will resume as scheduled at such time. Interest shall be computed using the retroactive annuity starting date rate in effect under the Northrop Grumman Pension Plan on a month-by-month basis during such period (i.e., the rate may change in the event the period spans two calendar years). Alternatively, the Key Employee may elect under IRS Notice 2005-1, Q&A-20 to have such distributions accelerated and paid in 2005 without the interest adjustment, provided, such election is made in 2005.
(b)
Lump Sum Option. During 2005, a temporary immediate lump sum feature shall be available as follows:
(i)
In order to elect a lump sum payment pursuant to IRS Notice 2005-1, Q&A-20, a Participant must be an elected or appointed officer of the Company and eligible to commence payments under the underlying qualified pension plan on or after June 1, 2005 and on or before December 1, 2005;
(ii)
The lump sum payment shall be made in 2005 as soon as feasible after the election; and
(iii)
Interest and mortality assumptions and methodology for calculating lump sum amount shall be based on the Plan's procedures for calculating lump sums as of December 31, 2004.


Exhibit 10.3


A.03
2006 and 2007 Commencements. Pursuant to IRS transition relief, for all benefit commencement dates in 2006 and 2007 (provided election is made in 2006 or 2007), distribution of Plan benefits subject to Code section 409A shall begin 12 months after the later of: (a) the Participant's benefit election date, or (b) the underlying qualified pension plan benefit commencement date (as specified in the Participant's benefit election form). Payments delayed during this 12-month period will be paid at the end of the period with interest. Interest shall be computed using the retroactive annuity starting date rate in effect under the Northrop Grumman Pension Plan on a month-by-month basis during such period (i.e., the rate may change in the event the period spans two calendar years).



- 2 -
Exhibit 10.3

APPENDIX B TO EXHIBIT 1

POST 2007 DISTRIBUTION OF 409A AMOUNTS

The provisions of this Appendix B shall apply only to the portion of benefits under the Plan that are subject to Code section 409A with benefit commencement dates on or after January 1, 2008. Distribution rules applicable to the Grandfathered Amounts are set forth in Articles II and III, and Appendix A addresses distributions of amounts subject to Code section 409A with benefit commencement dates after January 1, 2005 and prior to January 1, 2008.
B.01
Time of Distribution. Subject to the special rules provided in this Appendix B, distributions to a Participant of his vested retirement benefit shall commence as of the Payment Date.
B.02
Special Rule for Key Employees. If a Participant is a Key Employee and age 55 or older at his Separation from Service, distributions to the Participant shall commence on the first day of the seventh month following the date of his Separation from Service (or, if earlier, the date of the Participant's death). Amounts otherwise payable to the Participant during such period of delay shall be accumulated and paid on the first day of the seventh month following the Participant's Separation from Service, along with interest on the delayed payments. Interest shall be computed using the retroactive annuity starting date rate in effect under the Northrop Grumman Pension Plan on a month-by-month basis during such delay (i.e., the rate may change in the event the delay spans two calendar years).
B.03
Forms of Distribution. Subject to the special rules provided in this Appendix B, a Participant's vested retirement benefit shall be distributed in the form of a single life annuity. However, a Participant may elect an optional form of benefit up until the Payment Date. The optional forms of payment are:
(a)
50% joint and survivor annuity
(b)
75% joint and survivor annuity
(c)
100% joint and survivor annuity.
If a Participant is married on his Payment Date and elects a joint and survivor annuity, his survivor annuitant will be his spouse unless some other survivor annuitant is named with spousal consent. Spousal consent, to be effective, must be submitted in writing before the Payment Date and must be witnessed by a Plan representative or notary public. No spousal consent is necessary if the Company determines that there is no spouse or that the spouse cannot be found.
B.04
Death. If a married Participant dies before the Payment Date, a death benefit will be payable to the Participant's spouse commencing 90 days after the Participant's death. The death benefit will be a single life annuity in an amount equal to the survivor portion of a Participant's vested retirement benefit based on a 100% joint and survivor annuity determined on the Participant's date of death. This benefit is also payable to a Participant's domestic partner who is properly registered with the Company in accordance with procedures established by the Company.
B.05
Actuarial Assumptions. Except as provided in Section B.06, all forms of payment under this Appendix B shall be actuarially equivalent life annuity forms of payment, and all


Exhibit 10.3


conversions from one such form to another shall be based on the following actuarial assumptions:
Interest Rate:
6%
Mortality Table:
RP-2000 Mortality Table projected 15 years for future standardized cash balance factors
B.06
Accelerated Lump Sum Payouts.
(a)
Post-2007 Separations. Notwithstanding the provisions of this Appendix B, for Participants who Separate from Service on or after January 1, 2008, if the present value of (a) the vested portion of a Participant's retirement benefit and (b) other vested amounts under nonaccount balance plans that are aggregated with the retirement benefit under Code section 409A, determined on the first of the month coincident with or following the date of his Separation from Service, is less than or equal to $25,000, such benefit amount shall be distributed to the Participant (or his spouse or domestic partner, if applicable) in a lump sum payment. Subject to the special timing rule for Key Employees under Section B.02, the lump sum payment shall be made within 90 days after the first of the month coincident with or following the date of the Participant's Separation from Service.
(b)
Pre-2008 Separations. Notwithstanding the provisions of this Appendix B, for Participants who Separate from Service before January 1, 2008, if the present value of (a) the vested portion of a Participant's retirement benefit and (b) other vested amounts under nonaccount balance plans that are aggregated with the retirement benefit under Code section 409A, determined on the first of the month coincident with or following the date the Participant attains age 55, is less than or equal to $25,000, such benefit amount shall be distributed to the Participant (or his spouse or domestic partner, if applicable) in a lump sum payment within 90 days after the first of the month coincident with or following the date the Participant attains age 55, but no earlier that January 1, 2008.
(c)
Conflicts of Interest. The present value of a Participant's vested retirement benefit shall also be payable in an immediate lump sum to the extent required under conflict of interest rules for government service and permissible under Code section 409A.
(d)
Present Value Calculation. The conversion of a Participant's retirement benefit into a lump sum payment and the present value calculations under this Section B.06 shall be based on the actuarial assumptions in effect under the Northrop Grumman Pension Plan for purposes of calculating lump sum amounts, and will be based on the Participant's immediate benefit if the Participant is 55 or older at Separation from Service. Otherwise, the calculation will be based on the benefit amount the Participant will be eligible to receive at age 55.
B.07
Effect of Early Taxation. If a Participant's benefits under the Plan are includible in income pursuant to Code section 409A, the Company shall have the discretion to accelerate the distribution of all or a portion of such includible benefits to the Participant, provided that the Participant shall not be given a direct or indirect election as to whether such discretion is exercised.

- 2 -
Exhibit 10.3


B.08
Permitted Delays. Notwithstanding the foregoing, any payment to a Participant under the Plan shall be delayed upon the Company's reasonable anticipation of one or more of the following events:
(a)
The Company's deduction with respect to such payment would be eliminated by application of Code section 162(m); or
(b)
The making of the payment would violate Federal securities laws or other applicable law;
provided, that any payment delayed pursuant to this Section B.08 shall be paid in accordance with Code section 409A.


- 3 -
Exhibit 10.3

APPENDIX C TO EXHIBIT 1
COMMITTEES AND APPOINTMENTS
Notwithstanding anything to the contrary in this Plan, effective October 25, 2011, the Chief Executive Officer of Northrop Grumman Corporation shall appoint, and shall have the power to remove, the members of (1) an Administrative Committee that shall have responsibility for administering the Plan (including as such responsibilities are described in Article IV of the Plan) and (2) an Investment Committee that shall have responsibility for overseeing any rabbi trusts or other informal funding for the Plan.




NOC-9.30.2013-Ex10.4
Exhibit 10.4




NORTHROP GRUMMAN
SAVINGS EXCESS PLAN


(Amended and Restated Effective as of October 1, 2013)























Exhibit 10.4

TABLE OF CONTENTS
INTRODUCTION
2
ARTICLE I DEFINITIONS
2
            1.1 Definitions
2
ARTICLE II PARTICIPATION
6
            2.1 In General
6
            2.2 Disputes as to Employment Status
6
ARTICLE III DEFERRAL ELECTIONS
7
            3.1 Elections to Defer Eligible Compensation
7
            3.2 Contribution Amounts
7
            3.3 Crediting of Deferrals
8
            3.4 Maximum Contributions
8
            3.5 Investment Elections
8
            3.6 Investment Return Not Guaranteed
9
ARTICLE IV ACCOUNTS
9
            4.1 Accounts
9
            4.2 Valuation of Accounts
10
            4.3 Use of a Trust
10
ARTICLE V VESTING AND FORFEITURES
10
            5.1 In General
10
            5.2 Exceptions
10
ARTICLE VI DISTRIBUTIONS
11
            6.1 Distribution Rules for Non-RAC Amounts
11
            6.2 Distribution Rules for RAC Subaccount
12
            6.3 Effect of Taxation
12
            6.4 Permitted Delays
13
            6.5 Payments Not Received At Death
13
            6.6 Inability to Locate Participant
13
            6.7 Committee Rules
13
ARTICLE VII ADMINISTRATION
13
            7.1 Committees
13
            7.2 Committee Action
14
            7.3 Powers and Duties of the Administrative Committee
14
            7.4 Powers and Duties of the Investment Committee
15
            7.5 Construction and Interpretation
15
            7.6 Information
16
            7.7 Committee Compensation, Expenses and Indemnity
16
            7.8 Disputes
16
ARTICLE VIII MISCELLANEOUS
16
            8.1 Unsecured General Creditor
16
            8.2 Restriction Against Assignment
17
            8.3 Restriction Against Double Payment
17

i

Exhibit 10.4

            8.4 Withholding
18
            8.5 Amendment, Modification, Suspension or Termination
18
            8.6 Governing Law
18
            8.7 Receipt and Release
18
            8.8 Payments on Behalf of Persons Under Incapacity
18
            8.9 Limitation of Rights and Employment Relationship
19
            8.10 Headings
19
            8.11 Liabilities Transferred to HII
19
APPENDIX A - 2005 TRANSITION RELIEF
A1
            A.1 Cash-Out
A1
            A.2 Elections
A1
            A.3 Key Employees
A1
APPENDIX B - DISTRIBUTION RULES FO PRE-2005 AMOUNTS
B1
            B.1 Distribution of Contributions
B1
APPENDIX C - MERGED PLANS
C1
            C.1 Cash-Out
C1
            C.2 Merged Plans - General Rule
C1
APPENDIX D - COMMITTEES AND APPOINTMENTS
D1







ii

Exhibit 10.4

INTRODUCTION
The Northrop Grumman Savings Excess Plan (the "Plan") was last amended and restated effective as of January 1, 2013. This restatement amends that version of the Plan, and is effective October 1, 2013, and does not affect amounts earned and vested under the Plan prior to 2005.
Northrop Grumman Corporation (the "Company") established this Plan for participants in the Northrop Grumman Savings Plan who exceed the limits under sections 401(a)(17) or 415(c) of the Internal Revenue Code. This Plan is intended (1) to comply with section 409A of the Internal Revenue Code, as amended (the "Code") and official guidance issued thereunder (except with respect to amounts covered by Appendix B), and (2) to be "a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974. Notwithstanding any other provision of this Plan, this Plan shall be interpreted, operated and administered in a manner consistent with these intentions.
ARTICLE I

DEFINITIONS
1.1
Definitions
Whenever the following words and phrases are used in this Plan, with the first letter capitalized, they shall have the meanings specified below.
(a)    "Account" shall mean the recordkeeping account set up for each Participant to keep track of amounts to his or her credit.
(b)    "Administrative Committee" means the committee in charge of Plan administration, as described in Article VII.
(c)    "Affiliated Companies" shall mean the Company and any entity affiliated with the Company under Code sections 414(b) or (c).
(d)    "Base Salary" shall mean a Participant's annual base salary, excluding bonuses, commissions, incentive and all other remuneration for services rendered to the Affiliated Companies and prior to reduction for any salary contributions to a plan established pursuant to section 125 of the Code or qualified pursuant to section 401(k) of the Code.
(e)    "Basic Contributions" shall have the same meaning as that term is defined in the NGSP.
(f)    "Beneficiary" or "Beneficiaries" shall mean the person or persons, including a trustee, personal representative or other fiduciary, last designated in writing by a

2

Exhibit 10.4

Participant in accordance with procedures established by the Administrative Committee to receive the benefits specified hereunder in the event of the Participant's death.
(1)    No Beneficiary designation shall become effective until it is filed with the Administrative Committee.
(2)    Any designation shall be revocable at any time through a written instrument filed by the Participant with the Administrative Committee with or without the consent of the previous Beneficiary.
No designation of a Beneficiary other than the Participant's spouse shall be valid unless consented to in writing by such spouse. If there is no such designation or if there is no surviving designated Beneficiary, then the Participant's surviving spouse shall be the Beneficiary. If there is no surviving spouse to receive any benefits payable in accordance with the preceding sentence, the duly appointed and currently acting personal representative of the Participant's estate (which shall include either the Participant's probate estate or living trust) shall be the Beneficiary. In any case where there is no such personal representative of the Participant's estate duly appointed and acting in that capacity within 90 days after the Participant's death (or such extended period as the Administrative Committee determines is reasonably necessary to allow such personal representative to be appointed, but not to exceed 180 days after the Participant's death), then Beneficiary shall mean the person or persons who can verify by affidavit or court order to the satisfaction of the Administrative Committee that they are legally entitled to receive the benefits specified hereunder. Any payment made pursuant to such determination shall constitute a full release and discharge of the Plan, the Administrative Committee and the Company. Effective January 1, 2007, a Participant will automatically revoke a designation of a spouse as primary beneficiary upon the dissolution of their marriage.
(3)    In the event any amount is payable under the Plan to a minor, payment shall not be made to the minor, but instead be paid (a) to that person's living parent(s) to act as custodian, (b) if that person's parents are then divorced, and one parent is the sole custodial parent, to such custodial parent, or (c) if no parent of that person is then living, to a custodian selected by the Administrative Committee to hold the funds for the minor under the Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which the minor resides. If no parent is living and the Administrative Committee decides not to select another custodian to hold the funds for the minor, then payment shall be made to the duly appointed and currently acting guardian of the estate for the minor or, if no guardian of the estate for the minor is duly appointed and currently acting within 60 days after the date the amount becomes payable, payment shall be deposited with the court having jurisdiction over the estate of the minor. Any payment made pursuant to such determination shall constitute a full release and discharge of the Plan, the Administrative Committee and the Company.
(4)    Payment by the Affiliated Companies pursuant to any unrevoked Beneficiary designation, or to the Participant's estate if no such designation exists, of all benefits owed hereunder shall terminate any and all liability of the Affiliated Companies.
(g)    "Board" shall mean the Board of Directors of the Company.

3

Exhibit 10.4

(h)    "Bonuses" shall mean the bonuses earned under the Company's formal incentive plans as defined by the Administrative Committee.
(i)    "Code" shall mean the Internal Revenue Code of 1986, as amended.
(j)    "Committees" shall mean the Committees appointed as provided in Article VII.
(k)    "Company" shall mean Northrop Grumman Corporation and any successor.
(l)    "Company Contributions" shall mean contributions by the Company to a Participant's Account.
(m)    "Compensation" shall be Compensation as defined by Section 5.01 of the NGSP.
(n)    "Disability" or "Disabled" shall mean the Participant's inability to perform each and every duty of his or her occupation or position of employment due to illness or injury as determined in the sole and absolute discretion of the Administrative Committee.
(o)    "Eligible Compensation" shall mean (1) Compensation prior to January 1, 2009, and (2) after 2008, Base Salary and Bonuses, reduced by the amount of any deferrals made from such amounts under the Northrop Grumman Deferred Compensation Plan.
(p)    "Eligible Employee" shall mean any Employee who meets the following conditions:
(1)    he or she is eligible to participate in the NGSP;
(2)    he or she is classified by the Affiliated Companies as an Employee and not as an independent contractor; and
(3)    he or she meets any additional eligibility criteria set by the Administrative Committee.
Additional eligibility criteria established by the Administrative Committee may include specifying classifications of Employees who are eligible to participate and the date as of which various groups of Employees will be eligible to participate. This includes, for example, Administrative Committee authority to delay eligibility for employees of newly acquired companies who become Employees.
(q)    "Employee" shall mean any common law employee of the Affiliated Companies who is classified as an employee by the Affiliated Companies.
(r)    "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.

4

Exhibit 10.4

(s)    "Investment Committee" means the committee in charge of investment aspects of the Plan, as described in Article VII.
(t)    "Key Employee" means an employee treated as a "specified employee" under Code section 409A(a)(2)(B)(i) of the Company or the Affiliated Companies (i.e., a key employee (as defined in Code section 416(i) without regard to paragraph (5) thereof)) if the Company's or an Affiliated Company's stock is publicly traded on an established securities market or otherwise. The Company shall determine in accordance with a uniform Company policy which Participants are Key Employees as of each December 31 in accordance with IRS regulations or other guidance under Code section 409A, provided that in determining the compensation of individuals for this purpose, the definition of compensation in Treas. Reg. § 1.415(c)-2(d)(3) shall be used. Such determination shall be effective for the twelve (12) month period commencing on April 1 of the following year.
(u)    "NGSP" means the Northrop Grumman Savings Plan.
(v)    "Open Enrollment Period" means the period designated by the Administrative Committee for electing deferrals for the following Plan Year.
(w)    "Participant" shall mean any Eligible Employee who participates in this Plan in accordance with Article II or any Employee who is a RAC Participant.
(x)    "Payment Date" shall mean:
(1)    for distributions upon early termination under Section B.1(a), a date after the end of the month in which termination of employment occurs; and
(2)    for distributions after Retirement, Disability or death under Section B.1(b), a date after the end of the month in which occurs Retirement, the determination of Disability by the Administrative Committee, or the notification of the Administrative Committee of the Participant's death (or later qualification of the Beneficiary or Beneficiaries), as applicable.

The exact date in each case will be determined by the Administrative Committee to allow time for administrative processing.
(y)    "Plan" shall be the Northrop Grumman Savings Excess Plan.
(z)    "Plan Year" shall be the calendar year.
(aa)    "RAC Contributions" shall mean the Company contributions under Section 3.2(b)(2) and Section 3.2(b)(4).
(bb)    "RAC Participant" shall mean an Employee who is eligible to participate in the NGSP, receives Retirement Account Contributions under the NGSP, and is classified by the Affiliated Companies as an Employee and not as an independent contractor. Notwithstanding the foregoing, an Employee who becomes eligible to participate in the Officers Supplemental Executive Retirement Program II ("OSERP II") under the Northrop Grumman Supplemental Plan 2 shall immediately cease to be eligible for RAC Contributions.

5

Exhibit 10.4

(cc)    "RAC Subaccount" shall mean the portion of a Participant's Account made up of RAC Contributions and earnings thereon.
(dd)    "Retirement" shall mean termination of employment with the Affiliated Companies after reaching age 55.
(ee)    "Separation from Service" or "Separates from Service" or "Separating from Service" means a "separation from service" within the meaning of Code section 409A.

ARTICLE II
PARTICIPATION
2.1
In General
(a)    An Eligible Employee may become a Participant by complying with the procedures established by the Administrative Committee for enrolling in the Plan. Anyone who becomes an Eligible Employee will be entitled to become a Participant during an Open Enrollment Period.
(b)    A RAC Participant will become a Participant when RAC Contributions are first made to his or her RAC Subaccount.
(c)    An individual will cease to be a Participant when he or she no longer has a positive balance to his or her Account under the Plan.
2.2
Disputes as to Employment Status
(a)    Because there may be disputes about an individual's proper status as an Employee or non-Employee, this Section describes how such disputes are to be handled with respect to Plan participation.
(b)    The Affiliated Companies will make the initial determination of an individual's employment status.
(1)    If an individual is not treated by the Affiliated Companies as a common law employee, then the Plan will not consider the individual to be an "Eligible Employee" and he or she will not be entitled to participate in the Plan.
(2)    This will be so even if the individual is told he or she is entitled to participate in the Plan and given a summary of the plan and enrollment forms or other actions are taken indicating that he or she may participate.
(c)    Disputes may arise as to an individual's employment status. As part of the resolution of the dispute, an individual's status may be changed by the Affiliated Companies from non-Employee to Employee. Such Employees are not Eligible Employees and will not be entitled to participate in the Plan.

6

Exhibit 10.4


 ARTICLE III
DEFERRAL ELECTIONS
3.1
Elections to Defer Eligible Compensation
(a)    Timing. An Eligible Employee who meets the requirements of Section 2.1(a) may elect to defer Eligible Compensation earned in a Plan Year by filing an election in the Open Enrollment Period for the Plan Year. An election to participate for a Plan Year is irrevocable.
(b)    Election Rules. An Eligible Employee's election may be made in writing, electronically, or as otherwise specified by the Administrative Committee. Such election shall specify the Eligible Employee's rate of deferral for contributions to the Plan, which shall be between 1% and 75%, and shall address distribution of the deferred amounts as described in Section 6.1. All elections must be made in accordance with the rules, procedures and forms provided by the Administrative Committee. The Administrative Committee may change the rules, procedures and forms from time to time and without prior notice to Participants.
(c)    Cancellation of Election. If a Participant becomes disabled (as defined under Code section 409A) during a Plan Year, his deferral election for such Plan Year shall be cancelled.
3.2
Contribution Amounts
(a)    Participant Contributions. An Eligible Employee's contributions under the Plan for a Plan Year will begin once his or her Compensation for the Plan Year exceeds the Code section 401(a)(17) limit for the Plan Year. The Participant's elected deferral percentage will be applied to his or her Eligible Compensation for the balance of the Plan Year.
(b)    Company Contributions. The Company will make Company Contributions to a Participant's Account as provided in (1), (2) and (3) below.
(1)    Matching Contributions. The Company will make a Company Contribution equal to the matching contribution rate for which the Participant is eligible under the NGSP for the Plan Year multiplied by the amount of the Participant's contributions under subsection (a).
(2)    RAC Contributions. Effective July 1, 2008, the Company will make RAC Contributions equal to a percentage of a RAC Participant's Compensation for a Plan Year in excess of the Code section 401(a)(17) limit. The percentage used to calculate a RAC Participant's contribution for a Plan Year shall be based on the RAC Participant's age on the last day of the Plan Year as follows:
(i)    Three percent if not yet age 35.
(ii)    Four percent if 35 or older, but not yet 50.

7

Exhibit 10.4

(iii)    Five percent if age 50 or older.
(3)    Make-Up Matching Contributions for Contribution Limitation. If an Eligible Employee's Basic Contributions under the NGSP for a Plan Year are limited by the Code section 415(c) contribution limit before the Eligible Employee's Basic Contributions under the NGSP are limited by the Code section 401(a)(17) compensation limit, the Company will make a Company Contribution equal to the amount of matching contributions for which the Eligible Employee would have been eligible under the NGSP were Code section 415(c) not applied, reduced by the actual amount of matching contributions made for the Plan Year under the NGSP.
(4)    Make-Up RAC Contributions for Contribution Limitation. If a RAC Participant’s Retirement Account Contributions under the NGSP for a Plan Year are limited by the Code section 415(c) contribution limit before the RAC Participant’s Retirement Account Contributions under the NGSP are limited by the Code section 401(a)(17) compensation limit, the Company will make a Company Contribution equal to the amount of Retirement Account Contributions for which the RAC Participant would have been eligible under the NGSP were Code section 415(c) not applied, reduced by the actual amount of Retirement Account Contributions made for the Plan Year under the NGSP.
3.3    Crediting of Deferrals
Amounts deferred by a Participant under the Plan shall be credited to the Participant's Account as soon as practicable after the amounts would have otherwise been paid to the Participant. Company contributions other than those under Section 3.2(b)(3) and Section 3.2(b)(4) will be credited to Accounts as soon as practicable after each payroll cycle in which they accrue. Company contributions under Section 3.2(b)(3) and Section 3.2(b)(4) will be credited to Accounts as soon as practicable after each Plan Year.
3.4
Maximum Contributions
Effective January 1, 2011, the total amount of contributions under Sections 3.2(a) and (b) made to the Plan on behalf of each Corporate Policy Council member ("CPC Participant") shall not exceed $5 million (the "Lifetime Cap"). The following items will not count toward the Lifetime Cap: (a) investment gains or earnings, and (b) amounts originally contributed to other plans that have been or are merged into the Plan. Notwithstanding the foregoing, Company Contributions shall continue to be made to a CPC Participant's Account until the end of the Plan Year in which the CPC Participant reaches the Lifetime Cap, and any deferral election made by a CPC Participant that is irrevocable under Code section 409A on the date the Lifetime Cap is reached shall remain effective.
3.5
Investment Elections
(a)    The Investment Committee will establish a number of different investment funds or other investment options for the Plan. The Investment Committee may change the funds or other investment options from time to time, without prior notice to Participants.

8

Exhibit 10.4

(b)    Participants may elect how their future contributions and existing Account balances will be deemed invested in the various investment funds and may change their elections from time to time. If a Participant does not elect how future contributions will be deemed invested, contributions will be deemed invested in the qualified default investment alternative ("QDIA") that applies to the Participant under the NGSP.
(c)    The deemed investments for a RAC Participant's RAC Subaccount must be the same as the deemed investments for the RAC Participant's Company contributions under Section 3.2(b)(1).
(d)    Selections of investments, changes and transfers must be made according to the rules and procedures of the Administrative Committee.
(1)    The Administrative Committee may prescribe rules that may include, among other matters, limitations on the amounts that may be transferred and procedures for electing transfers.
(2)    The Administrative Committee may prescribe valuation rules for purposes of investment elections and transfers. Such rules may, in the Administrative Committee's discretion, use averaging methods to determine values and accrue estimated expenses. The Administrative Committee may change the methods it uses for valuation from time to time.
(3)    The Administrative Committee may prescribe the periods and frequency with which Participants may change deemed investment elections and make transfers.
(4)    The Administrative Committee may change its rules and procedures from time to time and without prior notice to Participants.
(e)    Effective January 13, 2011, Participant investment elections involving a Company stock investment fund (e.g., transfers into or out of the fund) may be restricted, including in accordance with Company policies generally applicable to employee transactions in Company stock.
3.6
Investment Return Not Guaranteed
Investment performance under the Plan is not guaranteed at any level. Participants may lose all or a portion of their contributions due to poor investment performance.
ARTICLE IV

ACCOUNTS
4.1
Accounts
The Administrative Committee shall establish and maintain a recordkeeping Account for each Participant under the Plan.

9

Exhibit 10.4

4.2
Valuation of Accounts
The valuation of Participants' recordkeeping Accounts will reflect earnings, losses, expenses and distributions, and will be made in accordance with the rules and procedures of the Administrative Committee.
(a)    The Administrative Committee may set regular valuation dates and times and also use special valuation dates and times and procedures from time to time under unusual circumstances and to protect the financial integrity of the Plan.
(b)    The Administrative Committee may use averaging methods to determine values and accrue estimated expenses.
(c)    The Administrative Committee may change its valuation rules and procedures from time to time and without prior notice to Participants.
4.3
Use of a Trust
The Company may set up a trust to hold any assets or insurance policies that it may use in meeting its obligations under the Plan. Any trust set up will be a rabbi trust and any assets placed in the trust shall continue for all purposes to be part of the general assets of the Company and shall be available to its general creditors in the event of the Company's bankruptcy or insolvency.

ARTICLE V
VESTING AND FORFEITURES
5.1
In General
A Participant's interest in his or her Account will be nonforfeitable, subject to the exceptions in Section 5.2.
5.2
Exceptions
The following exceptions apply to the vesting rule in Section 5.1 above:
(a)    A RAC Participant shall become fully vested in his or her RAC Subaccount and earnings thereon upon the earliest of the following dates, provided he or she is an Employee at such time: (i) the date he or she completes three years of service, (ii) the date of his or her 65th birthday, (iii) the date of his or her death, (iv) the date he or she becomes Disabled, or (v) the date Company Contributions are completely discontinued or the Plan is terminated. Notwithstanding anything to the contrary, if a Participant terminates employment with the Affiliated Companies prior to vesting as set forth in this Section 5.2(a), his or her unvested RAC Subaccount and earnings thereon shall be immediately forfeited upon such termination. For this purpose, years of service shall be calculated in the same manner as for purposes of determining

10

Exhibit 10.4

vesting in Retirement Account Contributions under the NGSP (including the treatment of a break in service).
(b)    A Participant whose original date of hire with the Affiliated Companies is after April 30, 2012 shall become fully vested in his or her Company matching contributions under Sections 3.2(b)(1) and (3) and earnings thereon upon the earliest of the following dates, provided he or she is an Employee at such time: (i) the date he or she completes three years of service, (ii) the date of his or her 65th birthday, (iii) the date of his or her death, or (iv) the date he or she becomes Disabled, or (v) the date Company Contributions are completely discontinued or the Plan is terminated. Notwithstanding anything to the contrary, if a Participant terminates employment with the Affiliated Companies prior to vesting as set for in this Section 5.2(b), his or her unvested Company matching contributions under Sections 3.2(b)(1) and (3) and earnings thereon shall be immediately forfeited upon such termination. For this purpose, years of service shall be calculated in the same manner as for purposes of determining vesting in Retirement Account Contributions under the NGSP (including the treatment of a break in service).
(c)    Forfeitures on account of a lost payee. See Section 6.6.
(d)    Forfeitures under an escheat law.
(e)    Recapture of amounts improperly credited to a Participant's Account or improperly paid to or with respect to a Participant.
(f)    Expenses charged to a Participant's Account.
(g)    Investment losses.

ARTICLE VI
DISTRIBUTIONS
6.1
Distribution Rules for Non-RAC Amounts
The rules in this Section 6.1 apply to distribution of a Participant's Account other than the RAC Subaccount.
Notwithstanding the foregoing, Appendix B governs the distribution of amounts that were earned and vested (within the meaning of Code section 409A and regulations thereunder) under the Plan prior to 2005 (and earnings thereon) and are exempt from the requirements of Code section 409A. Thus, this Section 6.1 does not apply to these pre-2005 deferrals, but does apply to all other amounts deferred under the Plan.
(a)    Separate Distribution Election. A Participant must make a separate distribution election for each year's contributions. A Participant generally makes a distribution election at the same time the Participant makes the deferral election, i.e., during the Open Enrollment Period.

11

Exhibit 10.4

(b)    Distribution Upon Separation. A Participant may elect on a deferral form to have the vested portion of his Account related to amounts deferred under the deferral form and Company contributions for the same year (and earnings thereon) distributed in a lump sum or in quarterly or annual installments over a period of 1 to 15 years. Lump sum payments under the Plan will be made in the month following the Participant's Separation from Service. Installment payments shall commence in the March, June, September or December next following the month of Separation from Service. If a Participant does not make a distribution election and his vested Account balance exceeds $50,000 and the Participant is age 55 or older at the time the Participant Separates from Service, the Participant will receive quarterly installments over a 10-year period. Otherwise, a Participant not making an election will receive a lump sum payment. Notwithstanding the foregoing, if the Participant's vested Account balance is $50,000 or less or the Participant is under age 55 at the time the Participant Separates from Service, the full vested Account balance shall be distributed in a lump sum payment in the month following the Participant's Separation from Service.
Notwithstanding the timing rules in the foregoing paragraph, distributions may not be made to a Key Employee upon a Separation from Service before the date which is six months after the date of the Key Employee's Separation from Service (or, if earlier, the date of death of the Key Employee). Any payments that would otherwise be made during this period of delay shall be accumulated and paid six months after the date payments would have commenced absent the six month delay.
(c)    Changes in Form of Distribution. A Participant may make up to two subsequent elections to change the form of a distribution for any year's deferrals and Company contributions. Such an election, however, shall be effective only if the following conditions are satisfied:
(1)    The election may not take effect until at least twelve (12) months after the date on which the election is made; and
(2)    The distribution will be made exactly five (5) years from the date the distribution would have otherwise been made.
6.2
Distribution Rules for RAC Subaccount
The full vested balance in a RAC Subaccount shall be distributed in a lump sum upon a RAC Participant's Separation from Service. Notwithstanding the foregoing, distribution will not be made to a Key Employee upon a Separation from Service until the date which is six months after the date of the Key Employee's Separation from Service (or, if earlier, the date of death of the Key Employee).
6.3
Effect of Taxation
If a Participant's benefits under the Plan are includible in income pursuant to Code section 409A, the Company shall have the discretion to accelerate the distribution of all or a portion of such includible benefits to the Participant, provided that the Participant shall not be given a direct or indirect election as to whether such discretion is exercised.

12

Exhibit 10.4

6.4
Permitted Delays
Notwithstanding the foregoing, any payment to a Participant under the Plan shall be delayed upon the Committee's reasonable anticipation of one or more of the following events:
(a)    The Company's deduction with respect to such payment would be eliminated by application of Code section 162(m); or
(b)    The making of the payment would violate Federal securities laws or other applicable law;
(c)    provided, that any payment delayed pursuant to this Section 6.4 shall be paid in accordance with Code section 409A.
6.5
Payments Not Received At Death
In the event of the death of a Participant before receiving a payment, payment will be made to his or her estate if death occurs on or after the date of a check that has been issued by the Plan. Otherwise, payment of the amount will be made to the Participant's Beneficiary.
6.6
Inability to Locate Participant
In the event that the Administrative Committee is unable to locate a Participant or Beneficiary within two years following the required payment date, the amount allocated to the Participant's Account shall be forfeited. If, after such forfeiture and prior to termination of the Plan, the Participant or Beneficiary later claims such benefit, such benefit shall be reinstated without interest or earnings for the forfeiture period.
6.7
Committee Rules
All distributions are subject to the rules and procedures of the Administrative Committee. The Administrative Committee may also require the use of particular forms. The Administrative Committee may change its rules, procedures and forms from time to time and without prior notice to Participants.
ARTICLE VII
ADMINISTRATION
7.1
Committees
(a)    Effective April 27, 2006, the Administrative Committee shall be comprised of the individuals (in their corporate capacity) who are members of the Administrative Committee for Northrop Grumman Deferred Compensation Plan. If no such Administrative Committee exists, the members of the Administrative Committee for the Plan shall be individuals holding the following positions within the Company (as such titles may be modified from time to time), or their successors in office: the Corporate Vice President and Chief Human Resources and Administration Officer; the Corporate Vice President, Controller and Chief Accounting

13

Exhibit 10.4

Officer; the Vice President, Taxation; the Vice President, Compensation, Benefits and HRIS; and the Corporate Director, Benefits Administration and Services. A member of the Administrative Committee may resign by delivering a written notice of resignation to the Corporate Vice President and Chief Human Resources and Administration Officer.
(b)    Prior to April 27, 2006, the Administrative Committee shall be comprised of the individuals appointed by the Compensation Committee of the Board (the "Compensation Committee").
(c)    An Investment Committee (referred to together with the Administrative Committee as, the "Committees"), comprised of one or more persons, shall be appointed by and serve at the pleasure of the Board (or its delegate). The number of members comprising the Investment Committee shall be determined by the Board, which may from time to time vary the number of members. A member of the Investment Committee may resign by delivering a written notice of resignation to the Board. The Board may remove any member by delivering a certified copy of its resolution of removal to such member. Vacancies in the membership of the Investment Committee shall be filled promptly by the Board.
7.2
Committee Action
Each Committee shall act at meetings by affirmative vote of a majority of the members of that Committee. Any determination of action of a Committee may be made or taken by a majority of a quorum present at any meeting thereof, or without a meeting, by resolution or written memorandum signed by a majority of the members of the Committee then in office. A member of a Committee shall not vote or act upon any matter which relates solely to himself or herself as a Participant. The Chairman or any other member or members of each Committee designated by the Chairman may execute any certificate or other written direction on behalf of the Committee of which he or she is a member.
The Compensation Committee shall appoint a Chairman from among the members of the Administrative Committee and a Secretary who may or may not be a member of the Administrative Committee. The Administrative Committee shall conduct its business according to the provisions of this Article and the rules contained in the current edition of Robert's Rules of Order or such other rules of order the Administrative Committee may deem appropriate. The Administrative Committee shall hold meetings from time to time in any convenient location.
7.3
Powers and Duties of the Administrative Committee
The Administrative Committee shall enforce the Plan in accordance with its terms, shall be charged with the general administration of the Plan, and shall have all powers necessary to accomplish its purposes, including, but not by way of limitation, the following:
(a)    To construe and interpret the terms and provisions of this Plan and make all factual determinations;

14

Exhibit 10.4

(b)    To compute and certify to the amount and kind of benefits payable to Participants and their Beneficiaries;
(c)    To maintain all records that may be necessary for the administration of the Plan;
(d)    To provide for the disclosure of all information and the filing or provision of all reports and statements to Participants, Beneficiaries or governmental agencies as shall be required by law;
(e)    To make and publish such rules for the regulation of the Plan and procedures for the administration of the Plan as are not inconsistent with the terms hereof;
(f)    To appoint a Plan administrator or any other agent, and to delegate to them such powers and duties in connection with the administration of the Plan as the Administrative Committee may from time to time prescribe (including the power to subdelegate);
(g)    To exercise powers granted the Administrative Committee under other Sections of the Plan; and
(h)    To take all actions necessary for the administration of the Plan, including determining whether to hold or discontinue insurance policies purchased in connection with the Plan.
7.4
Powers and Duties of the Investment Committee
The Investment Committee shall have all powers necessary to accomplish its purposes, including, but not by way of limitation, the following:
(a)    To select types of investment and the actual investments against which earnings and losses will be measured;
(b)    To oversee any rabbi trust; and
(c)    To appoint agents, and to delegate to them such powers and duties in connection with its duties as the Investment Committee may from time to time prescribe (including the power to subdelegate).
7.5
Construction and Interpretation
The Administrative Committee shall have full discretion to construe and interpret the terms and provisions of this Plan, to make factual determinations and to remedy possible inconsistencies and omissions. The Administrative Committee's interpretations, constructions and remedies shall be final and binding on all parties, including but not limited to the Affiliated Companies and any Participant or Beneficiary. The Administrative Committee shall administer such terms and provisions in a uniform and nondiscriminatory manner and in full accordance with any and all laws applicable to the Plan.

15

Exhibit 10.4

7.6
Information
To enable the Committees to perform their functions, the Affiliated Companies adopting the Plan shall supply full and timely information to the Committees on all matters relating to the compensation of all Participants, their death or other events that cause termination of their participation in this Plan, and such other pertinent facts as the Committees may require.
7.7
Committee Compensation, Expenses and Indemnity
(a)    The members of the Committees shall serve without compensation for their services hereunder.
(b)    The Committees are authorized to employ such accounting, consultants or legal counsel as they may deem advisable to assist in the performance of their duties hereunder.
(c)    To the extent permitted by ERISA and applicable state law, the Company shall indemnify and hold harmless the Committees and each member thereof, the Board and any delegate of the Committees who is an employee of the Affiliated Companies against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise, as such indemnities are permitted under ERISA and state law.
7.8
Disputes
The Company's standardized "Northrop Grumman Nonqualified Retirement Plans Claims and Appeals Procedures" shall apply in handling claims and appeals under this Plan.

ARTICLE VIII
MISCELLANEOUS
8.1
Unsecured General Creditor
Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interest in any specific property or assets of the Affiliated Companies. No assets of the Affiliated Companies shall be held in any way as collateral security for the fulfilling of the obligations of the Affiliated Companies under this Plan. Any and all of the Affiliated Companies' assets shall be, and remain, the general unpledged, unrestricted assets of the Affiliated Companies. The obligation under the Plan of the Affiliated Companies adopting the Plan shall be merely that of an unfunded and unsecured promise of those Affiliated Companies to pay money in the future, and the rights of the Participants and Beneficiaries shall be no greater than those of unsecured general creditors. It is the intention of the Affiliated Companies that this Plan be unfunded for purposes of the Code and for purposes of Title I of ERISA.

16

Exhibit 10.4

8.2
Restriction Against Assignment
(a)    The Company shall pay all amounts payable hereunder only to the person or persons designated by the Plan and not to any other person or corporation. No part of a Participant's Accounts shall be liable for the debts, contracts, or engagements of any Participant, his or her Beneficiary, or successors in interest, nor shall a Participant's Accounts be subject to execution by levy, attachment, or garnishment or by any other legal or equitable proceeding, nor shall any such person have any right to alienate, anticipate, sell, transfer, commute, pledge, encumber, or assign any benefits or payments hereunder in any manner whatsoever. If any Participant, Beneficiary or successor in interest is adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, commute, assign, pledge, encumber or charge any distribution or payment from the Plan, voluntarily or involuntarily, the Administrative Committee, in its discretion, may cancel such distribution or payment (or any part thereof) to or for the benefit of such Participant, Beneficiary or successor in interest in such manner as the Administrative Committee shall direct.
(b)    The actions considered exceptions to the vesting rule under Section 5.2 will not be treated as violations of this Section.
(c)    Notwithstanding the foregoing, all or a portion of a Participant's vested Account balance may be paid to another person as specified in a domestic relations order that the Administrative Committee determines is qualified (a "Qualified Domestic Relations Order"). For this purpose, a Qualified Domestic Relations Order means a judgment, decree, or order (including the approval of a settlement agreement) which is:
(1)    issued pursuant to a State's domestic relations law;
(2)    relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of the Participant;
(3)    creates or recognizes the right of a spouse, former spouse, child or other dependent of the Participant to receive all or a portion of the Participant's benefits under the Plan; and
(4)    meets such other requirements established by the Administrative Committee.
The Administrative Committee shall determine whether any document received by it is a Qualified Domestic Relations Order. In making this determination, the Administrative Committee may consider the rules applicable to "domestic relations orders" under Code section 414(p) and ERISA section 206(d), and such other rules and procedures as it deems relevant.
8.3
Restriction Against Double Payment
If a court orders an assignment of benefits despite Section 8.2, the affected Participant's benefits will be reduced accordingly. The Administrative Committee may use any reasonable actuarial assumptions to accomplish the offset under this Section.

17

Exhibit 10.4

8.4
Withholding
There shall be deducted from each payment made under the Plan or any other compensation payable to the Participant (or Beneficiary) all taxes, which are required to be withheld by the Affiliated Companies in respect to such payment or this Plan. The Affiliated Companies shall have the right to reduce any payment (or compensation) by the amount of cash sufficient to provide the amount of said taxes.
8.5
Amendment, Modification, Suspension or Termination
The Company may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part for any reason. Notwithstanding the foregoing, no amendment or termination of the Plan shall reduce the amount of a Participant's Account balance as of the date of such amendment or termination. Upon termination of the Plan, distribution of balances in Accounts shall be made to Participants and Beneficiaries in the manner and at the time described in Article VI, unless the Company determines in its sole discretion that all such amounts shall be distributed upon termination in accordance with the requirements under Code section 409A.
Notwithstanding the foregoing, no amendment of the Plan shall apply to amounts that were earned and vested (within the meaning of Code section 409A and regulations thereunder) under the Plan prior to 2005, unless the amendment specifically provides that it applies to such amounts. The purpose of this restriction is to prevent a Plan amendment from resulting in an inadvertent "material modification" to amounts that are "grandfathered" and exempt from the requirements of Code section 409A.
8.6
Governing Law
To the extent not preempted by ERISA, this Plan shall be construed, governed and administered in accordance with the laws of Delaware.
8.7
Receipt and Release
Any payment to a payee in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Plan, the Committees and the Affiliated Companies. The Administrative Committee may require such payee, as a condition precedent to such payment, to execute a receipt and release to such effect.
8.8
Payments on Behalf of Persons Under Incapacity
In the event that any amount becomes payable under the Plan to a person who, in the sole judgment of the Administrative Committee, is considered by reason of physical or mental condition to be unable to give a valid receipt therefore, the Administrative Committee may direct that such payment be made to any person found by the Committee, in its sole judgment, to have assumed the care of such person. Any payment made pursuant to such determination shall constitute a full release and discharge of the Administrative Committee and the Company.

18

Exhibit 10.4

8.9
Limitation of Rights and Employment Relationship
Neither the establishment of the Plan, any trust nor any modification thereof, nor the creating of any fund or account, nor the payment of any benefits shall be construed as giving to any Participant, or Beneficiary or other person any legal or equitable right against the Affiliated Companies or any trustee except as provided in the Plan and any trust agreement; and in no event shall the terms of employment of any Employee or Participant be modified or in any way be affected by the provisions of the Plan and any trust agreement.
8.10
Headings
Headings and subheadings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof.
8.11
Liabilities Transferred to HII
Northrop Grumman Corporation distributed its interest in Huntington Ingalls Industries, Inc. ("HII) to its shareholders on March 31, 2011 (the "HII Distribution Date"). Pursuant to an agreement between Northrop Grumman Corporation and HII, on the HII Distribution Date certain employees and former employees of HII ceased to participate in the Plan and the liabilities for these participants' benefits under the Plan were transferred to HII. On and after the HII Distribution Date, the Company and the Plan, and any successors thereto, shall have no further obligation or liability to any such participant with respect to any benefit, amount, or right due under the Plan.

* * *


IN WITNESS WHEREOF, this Amendment and Restatement is hereby executed by a duly authorized officer on this 27th day of September, 2013.

NORTHROP GRUMMAN CORPORATION

By: /s/ Denise Peppard            
Denise Peppard
Corporate Vice President and
Chief Human Resources Officer



19

Exhibit 10.4


APPENDIX A – 2005 TRANSITION RELIEF
The following provisions apply only during 2005, pursuant to transition relief granted in IRS Notice 2005-1:
A.1    Cash-Out
Participants Separating from Service during 2005 for any reason before age 55 will receive an immediate lump sum distribution of their Account balances. Other Participants Separating from Service in 2005 will receive payments in accordance with their prior elections.
A.2    Elections
During the Plan's open enrollment period in June 2005 Participants may fully or partially cancel 2005 deferral elections and receive in 2005 a refund of amounts previously deferred in 2005.
In addition, individuals working in Company facilities impacted by Hurricane Katrina may stop or reduce 2005 elective contributions to the Plan at any time during 2005. All payments under this Section A.2 will be made before the end of calendar year 2005.
A.3    Key Employees
Key Employees Separating from Service on or after July 1, 2005, with distributions subject to Code section 409A and scheduled for payment in 2006 within six months of Separation from Service, may choose I or II below, subject to III:
I.
Delay the distributions described above for six months from the date of Separation from Service. The delayed payments will be paid as a single sum with interest at the end of the six month period, with the remaining payments resuming as scheduled.
II.
Accelerate the distributions described above into a payment in 2005 without interest adjustments.
III.
Key Employees must elect I or II during 2005.



A 1

Exhibit 10.4


APPENDIX B – DISTRIBUTION RULES FOR PRE-2005 AMOUNTS

Distribution of amounts earned and vested (within the meaning of Code section 409A and regulations thereunder) under the Plan or a Merged Plan prior to 2005 (and earnings thereon) are exempt from the requirements of Code section 409A and shall be made in accordance with the Plan or the applicable Merged Plan terms as in effect on December 31, 2004 and as summarized in the following provisions, except as otherwise provided in Appendix C.
B.1    Distribution of Contributions
(a)    Distributions Upon Early Termination.
(1)    Voluntary Termination. If a Participant voluntarily terminates employment with the Affiliated Companies before age 55 or Disability, distribution of his or her Account will be made in a lump sum on the Participant's Payment Date.
(2)    Involuntary Termination. If a Participant involuntarily terminates employment with the Affiliated Companies before age 55, distribution of his or her Account will generally be made in quarterly or annual installments over a fixed number of whole years not to exceed 15 years, commencing on the Participant's Payment Date, in accordance with the Participant's original election on his or her deferral election form. Payment will be made in a lump sum if the Participant had originally elected a lump sum, if the Account balance is $50,000 or less, or if the Administrative Committee so specifies.
(b)    Distribution After Retirement, Disability or Death. In the case of a Participant who separates from service with the Affiliated Companies on account of Retirement, Disability or death and has an Account balance of more than $50,000, the Account shall be paid to the Participant (and after his or her death to his or her Beneficiary) in substantially equal quarterly installments over 10 years commencing on the Participant's Payment Date unless an optional form of benefit has been specified pursuant to Section B.1(b)(1).
(1)    An optional form of benefit may be elected by the Participant, on the form provided by Administrative Committee, during his or her initial election period from among those listed below:
(i)    A lump sum distribution on the Participant's Payment Date.
(ii)    Quarterly installments over a period of at least 1 and no more than 15 years beginning on the Participant's Payment Date.
(iii)    Annual installments over a period of at least 2 and no more than 15 years beginning on the Participant's Payment Date.
(2)    A Participant from time to time may modify the form of benefit that he or she has previously elected. Upon his or her separation from service, the most recently

B1

Exhibit 10.4


elected form of distribution submitted at least 12 months prior to separation will govern. If no such election exists, distributions will be paid under the 10-year installment method.
(3)    In the case of a Participant who terminates employment with the Affiliated Companies on account of Retirement, Disability or death with an Account balance of $50,000 or less, the Account shall be paid to the Participant in a lump sum distribution on the Participant's Payment Date.
(4)    In general, upon the Participant's death, payment of any remaining Account balance will be made to the Beneficiary in a lump sum on the Payment Date. But the Beneficiary will receive any remaining installments (starting on the Payment Date) if the Participant was receiving installments, or if the Participant died on or after age 55 with an Account balance over $50,000 and with an effective installment payout election in place. In such cases, the Beneficiary may still elect a lump sum payment of the remaining Account balance, but only with the Administrative Committee's consent.
(5)    In the event that this Plan is terminated, the amounts allocated to a Participant's Account shall be distributed to the Participant or, in the event of his or her death, to his or her Beneficiary in a lump sum.


B2

Exhibit 10.4



APPENDIX C – MERGED PLANS

C.1    Plan Mergers
(a)    Merged Plans. As of their respective effective dates, the plans listed in (c) (the "Merged Plans") are merged into this Plan. All amounts from those plans that were merged into this Plan are held in their corresponding Accounts.
(b)    Accounts. Effective as of the dates below, Accounts are established for individuals who, before the merger, had account balances under the merged plans. These individuals will not accrue benefits under this Plan unless they become Participants by virtue of being hired into a covered position with an Affiliated Company, but they will be considered Participants for purposes of the merged accounts. The balance credited to the Participant's merged plan account will, effective as of the date provided in the table below, be invested in accordance with the terms of this Plan. Except as provided in section C.2 below, amounts merged into this Plan from the merged plans are governed by the terms of this Plan.
(c)    Table.

Name of Merged Plans
Merger Effective Dates
Merged Account Names

Northrop Grumman Benefits Equalization Plan

December 10, 2004
NG BEP Account
Northrop Grumman Space & Mission Systems Corp. Deferred Compensation Plan
December 10, 2004
S & MS Deferred Compensation Account
BDM International, Inc. 1997
Executive Deferred Compensation Plan ("BDM Plan")
April 29, 2005
BDM Account
PRC Inc. Executive Deferred Compensation Plan ("PRC Plan")
November 9, 2012
PRC EDCP Account (or Sub-Account, as applicable)

C.2    Merged Plans – General Rule
(a)    NG BEP Account and S & MS Deferred Compensation Account. Distributions from Participants' NG BEP and S & MS Deferred Compensation Accounts are made under the provisions of Appendix B, except as provided in this Section.

C1

Exhibit 10.4


(1)    Amounts in the Participant's NG BEP Account and the S & MS Deferred Compensation Account shall be paid out in accordance with elections made under the Merged Plans.
(2)    The Participant's "Payment Date" for amounts in the NG BEP Account and the S & MS Deferred Compensation Account shall be deemed to be the end of January following the Participant's termination of employment.
(3)    The reference to $50,000 in the provisions of Appendix B shall be deemed to be $5,000 with respect to amounts in the NG BEP Account and the S & MS Deferred Compensation Account.
(4)    The Administrative Committee shall assume the rights and responsibilities of the Directors/Committee with respect to determining whether a Participant's NG BEP Account may be paid out in a form other than the automatic form of payment.
(5)    The Administrative Committee shall assume the rights and responsibilities of the Committee or Special Committee with respect to determining whether a Participant's S & MS Deferred Compensation Account may be paid out in a form other than the automatic form of payment.
(6)    For purposes of determining the time of payment of a Participant's NG BEP Account, a Participant's employment will not be deemed to have terminated following the Participant's layoff until the earlier of the end of the twelve-month period following layoff (without a return to employment with the Affiliated Companies) or the date on which the Participant retires under any pension plan maintained by the Affiliated Companies.
(7)    A Participant's S & MS Deferred Compensation Account shall be paid to the Participant no later than the January 5 next preceding the Participant's 80th birthday.
(8)    In no event will payments of amounts in the Participant's NG BEP Account and the S & MS Deferred Compensation Account be accelerated or deferred beyond the payment schedule provided under the Merged Plans. However, any election to change the time or form of payment for such an amount may be made based on the terms of the relevant Merged Plan as in effect on October 3, 2004.
(b)    BDM Account. Distributions of a Participant's vested BDM Account balance shall be made in accordance with this Section C.2(b), and Article VI shall not apply to such distributions. A Participant shall be vested in his BDM Account balance in accordance with the vesting provisions of the BDM Plan.
(1)    Timing of Payment: A Participant's vested BDM Account balance shall be distributed in accordance with elections made under the BDM Plan. For those Participants who have not commenced distributions as of April 29, 2005, payments from the BDM Account will commence at the time designated on his or her BDM enrollment and election form, unless extended prior to such date. However, if such a Participant did not elect a fixed date (or elect the earlier of a fixed date or termination of employment), his or her vested BDM

C2

Exhibit 10.4


Account balance will be paid as soon as administratively practicable following termination of employment in the form designated under Section C.2(b)(2) below.
(2)    Form of Payment: A Participant's vested BDM Account balance shall be paid in cash. The vested BDM Account balance will be paid in (i) a lump sum, (ii) five (5) or ten (10) substantially equal annual installments (adjusted for gains and losses), or (iii) a combination thereof, as selected by the Participant (or Beneficiary) prior to the date on which amounts are first payable to the Participant (or Beneficiary) under Section C.2(b)(1) above. If the Participant fails to designate properly the manner of payment, such payment will be made in a lump sum.
(3)    Death Benefits: If a Participant dies before commencement of payment of his BDM Account balance, the entire Account balance will be paid at the times provided in Section C.2(b)(2) above to his or her Beneficiary. If a Participant dies after commencement but before he or she has received all payments from his vested BDM Account balance, the remaining installments shall be paid annually to the Beneficiary. For purposes of this Section C.2(b), a Participant's Beneficiary, unless subsequently changed, will be the designated beneficiary(ies) under the BDM Plan or if none, the Participant's spouse, if then living, but otherwise the Participant's then living descendants, if any, per stirpes, but, if none, the Participant's estate.
(4)    Lost Participant: In the event that the Administrative Committee is unable to locate a Participant or Beneficiary within three years following the payment date under Section C.2(b)(1) above, the amount allocated to the Participant's BDM Account shall be forfeited. If, after such forfeiture and prior to termination of the Plan, the Participant or Beneficiary later claims such benefit, such benefit shall be reinstated without interest or earnings for the forfeiture period. In lieu of such a forfeiture, the Administrative Committee has the discretion to direct distribution of the vested BDM Account balance to any one or more or all of the Participant's next of kin, and in the proportions as the Administrative Committee determines.
(5)    Committee Rules: All distributions are subject to the rules and procedures of the Administrative Committee. The Administrative Committee may also require the use of particular forms. The Administrative Committee may change its rules, procedures and forms from time to time and without prior notice to Participants.
(6)    Payment Schedule: In no event will payments of amounts in the Participant's BDM Account be accelerated or deferred beyond the payment schedule provided under the BDM Plan.
(7)    Application to Trustee: BDM International, Inc. set aside amounts in a grantor trust to assist it in meeting its obligations under the BDM Plan. Notwithstanding Section C.2(b)(5) above and the claims procedures provided in Section 7.8, a Participant may make application for payment of benefits under this Section C.2(b) directly to the trustee of such trust.
(c)    PRC EDCP Account. Notwithstanding anything to the contrary, the following provisions in this Section C.2(c) summarize the distribution rules in effect under the

C3

Exhibit 10.4


PRC Plan with respect to the PRC EDCP Account balances, and those PRC Plan distribution terms shall continue to govern the distributions of the PRC EDCP Account balances. Article VI and Appendix B shall not apply to the PRC EDCP Account balances. Nothing in this Section C.2(c) shall change or alter the distribution terms of the PRC Plan in effect as of any date. All capitalized terms in this Section C.2(c) not otherwise defined in the Plan shall be defined in accordance with the terms of the PRC Plan as in effect immediately prior to the PRC Plan's merger with the Plan on November 9, 2012.
(1)    Vesting. All Participants are vested in their PRC EDCP Account balances in accordance with the vesting provisions of the PRC Plan.
(2)    Fixed Payment Dates; Termination of Employment. A Participant's vested PRC EDCP Account balance shall be distributed in accordance with his elections made under the PRC Plan. However, if such a Participant did not elect a fixed date or termination of employment with all Employers (or elect the earlier of a fixed date or termination of employment) for any particular portion of his or her vested PRC EDCP Account, such portion of his or her PRC EDCP Account balance will be valued and payable at or commence at such Participant's termination of employment according to the provisions of Sections C.2(c)(4) and (5).
(3)    Hardship Distributions. In the event of financial hardship of the Participant, as hereinafter defined, the Participant may apply to the Administrative Committee for the distribution of all or any part or his or her vested PRC EDCP Account. The Administrative Committee shall consider the circumstances of each such case, and the best interests of the Participant and his or her family, and shall have the right, in its sole and absolute discretion, if applicable, to allow such distribution, or, if applicable, to direct a distribution of part of the amount requested, or to refuse to allow any distribution. Upon a finding of financial hardship, the Administrative Committee shall make or cause the appropriate distribution to be made to the Participant from amounts held by the Company or the Trustee in respect of the Participant's vested PRC EDCP Account. In no event shall the aggregate amount of the distribution exceed either the full value of the Participant's vested PRC EDCP Account or the amount determined by the Administrative Committee, in its sole and absolute discretion, to be necessary to alleviate the Participant's financial hardship (which financial hardship may be considered to include any taxes due because of the distribution occurring because of this Section), and which is not reasonably available from other resources of the Participant. For purposes of this Section, the value of the Participant's vested PRC EDCP Account shall be determined as of the date of the distribution. "Financial hardship" means (i) a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Code section 152(a)) of the Participant, (ii) loss of the Participant's property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, each as determined to exist by the Administrative Committee. A distribution may be made under this Section only with the consent of the Administrative Committee.
(4)    Amount and Time of Payment. Subject to Section C.2(c)(3), a Participant (or his or her Beneficiary) shall become entitled to receive a vested PRC EDCP Sub-Account balance commencing on the Payment Date for such sub-account. For this purpose, the

C4

Exhibit 10.4


"Payment Date" will be the relevant date or event triggering payment as provided under Section C.2(c)(2). Notwithstanding the foregoing, a Participant may elect to postpone a Payment Date to a later date, provided the election is made at least 12 months prior to the scheduled Payment Date. For example, a Participant could elect (i) to postpone a fixed payment date to a later fixed payment date, or (ii) elect to postpone the payment date for an amount payable upon termination of employment to a date that necessarily occurs after termination of employment (e.g., two years after termination of employment). There is no limit on the number of such elections a Participant may make. Any payment due hereunder from the Trust which is not paid by the Trust for any reason will be paid by the Employer from its general assets.
(5)    Method of Payment.
(i)    Form of Payment. Unless otherwise elected by the Participant and permitted by the Trustee in its sole and absolute discretion, a Participant's vested PRC EDCP Account balance shall be paid in cash. In the case of distributions to a Participant or his or her Beneficiary by virtue of an entitlement pursuant to Section C.2(c)(2), an aggregate amount equal to the Participant's vested PRC EDCP Sub-Account will be paid by the Trust or the Employer, as provided by Section C.2(c)(4), in a lump sum or in five (5) or ten (10) substantially equal annual installments (adjusted for gains and losses, and reduced by any required withholding or other deductions from such payments), as selected by the Participant on his or her Participant Enrollment and Election Form for such sub-account. If the Participant fails to designate properly the manner of payment, such payment will be made in a lump sum.

If a Participant receiving installment distributions pursuant to Section C.2(c)(7) is re-employed by the Employer, the remaining distributions due to the Participant shall be suspended until such time as the Participant (or his or her Beneficiary) once again becomes eligible for benefit payments, at which time such distribution shall commence, subject to the limitations and conditions contained in the PRC Plan.
(ii)    Subsequent Deferral Elections. Such form of payment may be changed by the Participant provided (A) the election is made at least 12 months prior to the payment date for the PRC EDCP Sub-Account provided under Section C.2(c)(4) and (B) the form of payment is not accelerated (i.e., an election of installments may not be changed to a lump sum and an election of 10 annual installments may not be changed to 5 annual installments). There is no limit on the number of such elections a Participant may make.
(6)    Death Benefits    . If a Participant dies before terminating his or her employment with the Employer and before the commencement of payments to the Participant hereunder, the entire value of the Participant's PRC EDCP Account (which may include credits for insurance contract death benefits deemed to be received by the PRC EDCP Account) shall be paid, as provided in Section C.2(c)(5), to the Beneficiary designated under the Plan, unless the Employer elects a more rapid form or schedule of distribution.

Upon the death of a Participant after payments hereunder have begun but before he or she has received all payments to which he or she is entitled under the Plan, the remaining benefit payments shall be paid to the Beneficiary designated under the Plan, in the manner in which such

C5

Exhibit 10.4


benefits were payable to the Participant, unless the Employer elects a more rapid form or schedule of distribution.
(7)    Application to Trustee. Notwithstanding Section 6.7 above and the claims procedures provided in Section 7.8, on the date or dates on which a Participant or Beneficiary is entitled to payment under Section C.2(c)(2), the Participant or Beneficiary need not make application for payment to the Administrative Committee, but instead may make application for payment directly to the Trustee who shall, subject to any restrictions or limitations contained in the Trust, pay the Participant or Beneficiary the appropriate amount directly from the Trust without the consent of PRC or the Employer. The Trustee shall report the amount of each such payment, and any withholding thereon, to the Company.




C6

Exhibit 10.4


APPENDIX D – COMMITTEES AND APPOINTMENTS

Notwithstanding anything to the contrary in this Plan, effective October 25, 2011, the Chief Executive Officer of Northrop Grumman Corporation shall appoint, and shall have the power to remove, the members of (1) an Administrative Committee that shall have responsibility for administering the Plan (including as such responsibilities are described in Article VII of the Plan) and (2) an Investment Committee that shall have responsibility for overseeing any rabbi trusts or other informal funding for the Plan.

D1

NOC-9.30.2013-Ex10.5
Exhibit 10.5



NORTHROP GRUMMAN
OFFICERS RETIREMENT ACCOUNT CONTRIBUTION PLAN


(Amended and Restated Effective as of October 1, 2013)























Exhibit 10.5

TABLE OF CONTENTS
INTRODUCTION
1
ARTICLE I DEFINITIONS
1
            1.1 Definitions
1
ARTICLE II PARTICIPATION
4
            2.1 In General
4
            2.2 Disputes as to Employment Status
4
ARTICLE III CREDITS TO ACCOUNTS
5
            3.1 Accounts
5
            3.2 Company Contribution Credits
5
            3.3 Earnings Credits
5
            3.4 Valuation of Accounts
5
            3.5 Use of a Trust
6
            3.6 Investment Return Not Guaranteed
6
ARTICLE IV VESTING AND FORFEITURES
6
            4.1 In General
6
            4.2 Exceptions
6
ARTICLE V DISTRIBUTIONS
7
            5.1 Normal Distribution Rules
7
            5.2 Effect of Taxation
7
            5.3 Permitted Delays
7
            5.4 Payments Not Received At Death
7
            5.5 Inability to Locate Participant
7
            5.6 Committee Rules
8
ARTICLE VI ADMINISTRATION
8
            6.1 Committees
8
            6.2 Committee Action
8
            6.3 Powers and Duties of the Administrative Committee
8
            6.4 Powers and Duties of the Investment Committee
9
            6.5 Construction and Interpretation
9
            6.6 Information
10
            6.7 Committee Compensation, Expenses and Indemnity
10
            6.8 Claims
10
ARTICLE VII MISCELLANEOUS
10
            7.1 Unsecured General Creditor
10
            7.2 Restriction Against Assignment
11
            7.3 Restriction Against Double Payment
11
            7.4 Withholding
12
            7.5 Amendment, Modification, Suspension or Termination
12
            7.6 Governing Law
12
            7.7 Receipt and Release
12
            7.8 Payments on Behalf of Persons Under Incapacity
12

i

Exhibit 10.5

            7.9 Limitation of Rights and Employment Relationship
12
            7.10 Headings
13
            7.11 Liabilities Transferred to HII
13
ARTICLE VIII FORFEITURE OF BENEFITS
13
            8.1 In General
13
            8.2 Determination of a Forfeiture Event
13
            8.3 No Forfeiture Event for Certain Terminations after Change in Control
13
            8.4 Forfeiture Event Defined
14
            8.5 Amount of Forfeiture
14
            8.6 Notice and Claims Procedure
14
            8.7 Application
16
APPENDIX A - COMMITTES AND APPOINTMENTS
A-1




ii

Exhibit 10.5


INTRODUCTION
The Northrop Grumman Officers Retirement Account Contribution Plan (the "Plan") was adopted effective as of October 1, 2009. The Plan is hereby amended and restated effective as of October 1, 2013, except as otherwise provided. This restatement amends the January 1, 2013 restatement of the Plan.
This Plan is intended (1) to comply with section 409A of the Internal Revenue Code, as amended (the "Code") and official guidance issued thereunder, and (2) to be "a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974. Notwithstanding any other provision of this Plan, this Plan shall be interpreted, operated and administered in a manner consistent with these intentions.

ARTICLE I

DEFINITIONS
1.1
Definitions
Whenever the following words and phrases are used in this Plan, with the first letter capitalized, they shall have the meanings specified below.
"Account" shall mean the recordkeeping account set up for each Participant to keep track of amounts to his or her credit.
"Administrative Committee" means the committee in charge of Plan administration, as described in Article VI.
"Affiliated Companies" shall mean the Company and any entity affiliated with the Company under Code sections 414(b) or (c).
"Beneficiary" or "Beneficiaries" shall mean the person or persons, including a trustee, personal representative or other fiduciary, last designated in writing by a Participant in accordance with procedures established by the Administrative Committee to receive the benefits specified hereunder in the event of the Participant's death.
(a)    No Beneficiary designation shall become effective until it is filed with the Administrative Committee.
(b)    Any designation shall be revocable at any time through a written instrument filed by the Participant with the Administrative Committee with or without the consent of the previous Beneficiary.



1

Exhibit 10.5


No designation of a Beneficiary other than the Participant's spouse shall be valid unless consented to in writing by such spouse. If there is no such designation or if there is no surviving designated Beneficiary, then the Participant's surviving spouse shall be the Beneficiary. If there is no surviving spouse to receive any benefits payable in accordance with the preceding sentence, the duly appointed and currently acting personal representative of the Participant's estate (which shall include either the Participant's probate estate or living trust) shall be the Beneficiary. In any case where there is no such personal representative of the Participant's estate duly appointed and acting in that capacity within 90 days after the Participant's death (or such extended period as the Administrative Committee determines is reasonably necessary to allow such personal representative to be appointed, but not to exceed 180 days after the Participant's death), then Beneficiary shall mean the person or persons who can verify by affidavit or court order to the satisfaction of the Administrative Committee that they are legally entitled to receive the benefits specified hereunder. Any payment made pursuant to such determination shall constitute a full release and discharge of the Plan, the Administrative Committee and the Company. A Participant will automatically revoke a designation of a spouse as primary beneficiary upon the dissolution of their marriage.
(c)    In the event any amount is payable under the Plan to a minor, payment shall not be made to the minor, but instead be paid (1) to that person's living parent(s) to act as custodian, (2) if that person's parents are then divorced, and one parent is the sole custodial parent, to such custodial parent, or (3) if no parent of that person is then living, to a custodian selected by the Administrative Committee to hold the funds for the minor under the Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which the minor resides. If no parent is living and the Administrative Committee decides not to select another custodian to hold the funds for the minor, then payment shall be made to the duly appointed and currently acting guardian of the estate for the minor or, if no guardian of the estate for the minor is duly appointed and currently acting within 60 days after the date the amount becomes payable, payment shall be deposited with the court having jurisdiction over the estate of the minor. Any payment made pursuant to such determination shall constitute a full release and discharge of the Plan, the Administrative Committee and the Company.
(d)    Payment by the Affiliated Companies pursuant to any unrevoked Beneficiary designation, or to the Participant's estate if no such designation exists, of all benefits owed hereunder shall terminate any and all liability of the Affiliated Companies.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committees" shall mean the Committees appointed as provided in Article VI.
"Company" shall mean Northrop Grumman Corporation and any successor.
"Company Contributions" shall mean credits to a Participant's Account, as described in Section 3.2.
"Compensation" shall be "compensation" as defined by Section 5.01 of the NGSP.


2

Exhibit 10.5


"Compensation Committee" shall mean the Compensation Committee of the Company's Board of Directors.
"Disability" or "Disabled" shall mean the Participant's inability to perform each and every duty of his or her occupation or position of employment due to illness or injury as determined in the sole and absolute discretion of the Administrative Committee.
"Eligible Employee" shall mean any Employee who meets the following conditions:
(a)    Prior to January 1, 2015:
(1)    he or she is an elected or appointed officer of an Affiliated Company other than Vinnell Corporation, Component Technologies or Premier America Credit Union;
(2)    he or she is not eligible to actively accrue benefits under Appendix F ("CPC SERP"), Appendix G ("OSERP"), or Appendix I ("OSERP II") of the Northrop Grumman Supplemental Plan 2; and
(3)    he or she is not otherwise designated as being ineligible to participate in the Plan.
(b)    On or after January 1, 2015:
(1)    he or she is an elected or appointed officer of an Affiliated Company other than Vinnell Corporation, Component Technologies or Premier America Credit Union; and
(2)    he or she is not otherwise designated as being ineligible to participate in the Plan.
"Employee" shall mean any common law employee of the Affiliated Companies who is classified as an employee by the Affiliated Companies.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.
"Investment Committee" means the committee in charge of investment aspects of the Plan, as described in Article VI.
"Key Employee" means an employee treated as a "specified employee" under Code section 409A(a)(2)(B)(i) of the Company or the Affiliated Companies (i.e., a key employee (as defined in Code section 416(i) without regard to paragraph (5) thereof)) if the Company's or an Affiliated Company's stock is publicly traded on an established securities market or otherwise. The Company shall determine in accordance with a uniform Company policy which Participants are Key Employees as of each December 31 in accordance with IRS regulations or other guidance under Code section 409A, provided that in determining the compensation of


3

Exhibit 10.5


individuals for this purpose, the definition of compensation in Treas. Reg. § 1.415(c)-2(d)(3) shall be used. Such determination shall be effective for the twelve (12) month period commencing on April 1 of the following year.
"NGSP" means the Northrop Grumman Savings Plan.
"Participant" shall mean any Eligible Employee who participates in this Plan in accordance with Article II.
"Plan" shall be the Northrop Grumman Officers Retirement Account Contribution Plan.
"Separation from Service" means a "separation from service" within the meaning of Code section 409A.

ARTICLE II

PARTICIPATION
2.1
In General
(a)    An Employee shall automatically become a Participant and eligible for Company Contributions as of the later of October 1, 2009 or the date the Employee becomes an Eligible Employee.
(b)    An individual will cease to be a Participant when he or she no longer has a positive balance in his or her Account.
2.2
Disputes as to Employment Status
(a)    Because there may be disputes about an individual's proper status as an Employee or non-Employee, this Section describes how such disputes are to be handled with respect to Plan participation.
(b)    The Affiliated Companies will make the initial determination of an individual's employment status.
(1)    If an individual is not treated by the Affiliated Companies as a common law employee, then the Plan will not consider the individual to be an "Eligible Employee" and he or she will not be entitled to participate in the Plan.
(2)    This will be so even if the individual is told he or she is entitled to participate in the Plan and given a summary of the plan or other actions are taken indicating that he or she may participate.
(c)    Disputes may arise as to an individual's employment status. As part of the resolution of the dispute, an individual's status may be changed by the Affiliated Companies


4

Exhibit 10.5


from non-Employee to Employee. Such Employees are not Eligible Employees and will not be entitled to participate in the Plan.


ARTICLE III

CREDITS TO ACCOUNTS
3.1
Accounts
The Administrative Committee shall establish and maintain a recordkeeping Account for each Participant under the Plan.
3.2
Company Contribution Credits
If a Participant qualifies as an Eligible Employee during a payroll period, the Participant's Account shall be credited with a Company Contribution as soon as practicable after the end of the payroll period. The Company Contribution for a payroll period shall equal 4% of the Participant's Compensation for the payroll period.
3.3
Earnings Credits
A Participant's Account will be periodically credited with earnings, gains and losses as if the Account was invested in the same investment options as the Participant's RAC Subaccount in the Northrop Grumman Savings Excess Plan. If a Participant does not have such a RAC Subaccount, his Account will be credited with earnings, gains and losses as if the Account was invested in the qualified default investment alternative ("QDIA") that applies to the Participant under the NGSP.
3.4
Valuation of Accounts
(a)    The valuation of Participants' Accounts will reflect earnings, losses, expenses and distributions, and will be made in accordance with the rules and procedures of the Administrative Committee.
(b)    The Administrative Committee may set regular valuation dates and times and also use special valuation dates and times and procedures from time to time under unusual circumstances and to protect the financial integrity of the Plan.
(c)    The Administrative Committee may use averaging methods to determine values and accrue estimated expenses.
(d)    The Administrative Committee may change its valuation rules and procedures from time to time and without prior notice to Participants.



5

Exhibit 10.5


3.5
Use of a Trust
The Company may set up a trust to hold any assets or insurance policies that it may use in meeting its obligations under the Plan. Any trust set up will be a rabbi trust and any assets placed in the trust shall continue for all purposes to be part of the general assets of the Company and shall be available to its general creditors in the event of the Company's bankruptcy or insolvency.
3.6
Investment Return Not Guaranteed
Investment performance under the Plan is not guaranteed at any level. Participants may lose all or a portion of the Company Contributions credited to their Accounts due to poor investment performance.


ARTICLE IV

VESTING AND FORFEITURES
4.1
In General
Except as provided in Section 4.2 below, a Participant shall become fully vested in his or her Account balance upon the earliest of the following dates, provided he or she is an Employee at such time: (i) the date he or she completes three years of service, (ii) the date of his or her 65th birthday, (iii) the date of his or her death, (iv) the date he or she becomes Disabled, or (v) the date Company Contributions are completely discontinued or the Plan is terminated. Notwithstanding the foregoing, any elected or appointed officer of an Affiliated Company as of December 31, 2011 shall be 100% vested in his or her Account balance upon entry to the Plan if the officer becomes a Participant in the Plan on January 1, 2015. Notwithstanding anything to the contrary, if a Participant terminates employment with the Affiliated Companies prior to vesting as set forth in this Section 4.1, his or her unvested Account balance and earnings thereon shall be immediately forfeited upon such termination. For this purpose, years of service shall be calculated in the same manner as for purposes of determining vesting in Retirement Account Contributions under the NGSP (including the treatment of a break in service).
4.2
Exceptions
The following exceptions apply to the vesting rules in Sections 4.1 above:
(a)    Forfeitures on account of a lost payee. See Section 5.5.
(b)    Forfeitures under an escheat law.
(c)    Recapture of amounts improperly credited to a Participant's Account or improperly paid to or with respect to a Participant.
(d)    Expenses charged to a Participant's Account.



6

Exhibit 10.5


(e)    Investment losses.
ARTICLE V
DISTRIBUTIONS
5.1
Normal Distribution Rules
The vested balance in a Participant's Account shall be distributed in a lump sum upon a Participant's Separation from Service. Notwithstanding the foregoing, distribution will not be made to a Key Employee upon a Separation from Service until the date which is six months after the date of the Key Employee's Separation from Service (or, if earlier, the date of death of the Key Employee).
5.2
Effect of Taxation
If a Participant's benefits under the Plan are includible in income pursuant to Code section 409A, the Company shall have the discretion to accelerate the distribution of all or a portion of such includible benefits to the Participant, provided that the Participant shall not be given a direct or indirect election as to whether such discretion is exercised.
5.3
Permitted Delays
Notwithstanding the foregoing, any payment to a Participant under the Plan shall be delayed upon the Administrative Committee's reasonable anticipation of one or more of the following events:
(a)    The Company's deduction with respect to such payment would be eliminated by application of Code section 162(m); or
(b)    The making of the payment would violate Federal securities laws or other applicable law;
(c)    provided, that any payment delayed pursuant to this Section 5.3 shall be paid in accordance with Code section 409A.
5.4
Payments Not Received At Death
In the event of the death of a Participant before receiving a payment, payment will be made to his or her estate if death occurs on or after the date of a check that has been issued by the Company. Otherwise, payment of the amount will be made to the Participant's Beneficiary.
5.5
Inability to Locate Participant
In the event that the Administrative Committee is unable to locate a Participant or Beneficiary within two years following the required payment date, the amount allocated to the Participant's Account shall be forfeited.



7

Exhibit 10.5


5.6
Committee Rules
All distributions are subject to the rules and procedures of the Administrative Committee. The Administrative Committee may also require the use of particular forms. The Administrative Committee may change its rules, procedures and forms from time to time and without prior notice to Participants.

ARTICLE VI

ADMINISTRATION
6.1
Committees
(a)    The Administrative Committee shall be appointed by the Company.
(b)    An Investment Committee (referred to together with the Administrative Committee as, the "Committees"), comprised of one or more persons, shall be appointed by and serve at the pleasure of the Board (or its delegate). The number of members comprising the Investment Committee shall be determined by the Board, which may from time to time vary the number of members. A member of the Investment Committee may resign by delivering a written notice of resignation to the Board. The Board may remove any member by delivering a certified copy of its resolution of removal to such member. Vacancies in the membership of the Investment Committee shall be filled promptly by the Board.
6.2
Committee Action
Each Committee shall act at meetings by affirmative vote of a majority of the members of that Committee. Any determination of action of a Committee may be made or taken by a majority of a quorum present at any meeting thereof, or without a meeting, by resolution or written memorandum signed by a majority of the members of the Committee then in office. A member of a Committee shall not vote or act upon any matter which relates solely to himself or herself as a Participant. The Chairman or any other member or members of each Committee designated by the Chairman may execute any certificate or other written direction on behalf of the Committee of which he or she is a member.
The Company shall appoint a Chairman from among the members of the Administrative Committee and a Secretary who may or may not be a member of the Administrative Committee. The Administrative Committee shall conduct its business according to the provisions of this Article and the rules contained in the current edition of Robert's Rules of Order or such other rules of order the Administrative Committee may deem appropriate. The Administrative Committee shall hold meetings from time to time in any convenient location.
6.3
Powers and Duties of the Administrative Committee
The Administrative Committee shall enforce the Plan in accordance with its terms, shall be charged with the general administration of the Plan, and shall have all powers necessary to accomplish its purposes, including, but not by way of limitation, the following:


8

Exhibit 10.5


(a)    To construe and interpret the terms and provisions of this Plan and make all factual determinations;
(b)    To compute and certify to the amount and kind of benefits payable to Participants and their Beneficiaries;
(c)    To maintain all records that may be necessary for the administration of the Plan;
(d)    To provide for the disclosure of all information and the filing or provision of all reports and statements to Participants, Beneficiaries or governmental agencies as shall be required by law;
(e)    To make and publish such rules for the regulation of the Plan and procedures for the administration of the Plan as are not inconsistent with the terms hereof;
(f)    To appoint a Plan administrator or any other agent, and to delegate to them such powers and duties in connection with the administration of the Plan as the Administrative Committee may from time to time prescribe (including the power to subdelegate);
(g)    To exercise powers granted the Administrative Committee under other Sections of the Plan; and
(h)    To take all actions necessary for the administration of the Plan, including determining whether to hold or discontinue insurance policies purchased in connection with the Plan.
6.4
Powers and Duties of the Investment Committee
The Investment Committee shall have all powers necessary to accomplish its purposes, including, but not by way of limitation, the following:
(a)    To oversee any rabbi trust; and
(b)    To appoint agents, and to delegate to them such powers and duties in connection with its duties as the Investment Committee may from time to time prescribe (including the power to subdelegate).
6.5
Construction and Interpretation
The Administrative Committee shall have full discretion to construe and interpret the terms and provisions of this Plan, to make factual determinations and to remedy possible inconsistencies and omissions. The Administrative Committee's interpretations, constructions and remedies shall be final and binding on all parties, including but not limited to the Affiliated Companies and any Participant or Beneficiary. The Administrative Committee shall administer such terms and provisions in a uniform and nondiscriminatory manner and in full accordance with any and all laws applicable to the Plan.


9

Exhibit 10.5



6.6
Information
To enable the Committees to perform their functions, the Affiliated Companies adopting the Plan shall supply full and timely information to the Committees on all matters relating to the compensation of all Participants, their death or other events that cause termination of their participation in this Plan, and such other pertinent facts as the Committees may require.
6.7
Committee Compensation, Expenses and Indemnity
(a)    The members of the Committees shall serve without compensation for their services hereunder.
(b)    The Committees are authorized to employ such accounting, consultants or legal counsel as they may deem advisable to assist in the performance of their duties hereunder.
(c)    To the extent permitted by ERISA and applicable state law, the Company shall indemnify and hold harmless the Committees and each member thereof, the Board and any delegate of the Committees who is an employee of the Affiliated Companies against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise, as such indemnities are permitted under ERISA and state law.
6.8
Claims
The Company's standardized "Northrop Grumman Nonqualified Retirement Plans Claims and Appeals Procedures" (the "Claims Procedures") shall apply in handling claims and appeals under this Plan.

ARTICLE VII

MISCELLANEOUS
7.1
Unsecured General Creditor
Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interest in any specific property or assets of the Affiliated Companies. No assets of the Affiliated Companies shall be held in any way as collateral security for the fulfilling of the obligations of the Affiliated Companies under this Plan. Any and all of the Affiliated Companies' assets shall be, and remain, the general unpledged, unrestricted assets of the Affiliated Companies. The obligation under the Plan of the Affiliated Companies adopting the Plan shall be merely that of an unfunded and unsecured promise of those Affiliated Companies to pay money in the future, and the rights of the Participants and Beneficiaries shall be no greater


10

Exhibit 10.5


than those of unsecured general creditors. It is the intention of the Affiliated Companies that this Plan be unfunded for purposes of the Code and for purposes of Title I of ERISA.
7.2
Restriction Against Assignment
(a)    The Company shall pay all amounts payable hereunder only to the person or persons designated by the Plan and not to any other person or corporation. No part of a Participant's Accounts shall be liable for the debts, contracts, or engagements of any Participant, his or her Beneficiary, or successors in interest, nor shall a Participant's Accounts be subject to execution by levy, attachment, or garnishment or by any other legal or equitable proceeding, nor shall any such person have any right to alienate, anticipate, sell, transfer, commute, pledge, encumber, or assign any benefits or payments hereunder in any manner whatsoever. If any Participant, Beneficiary or successor in interest is adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, commute, assign, pledge, encumber or charge any distribution or payment from the Plan, voluntarily or involuntarily, the Administrative Committee, in its discretion, may cancel such distribution or payment (or any part thereof) to or for the benefit of such Participant, Beneficiary or successor in interest in such manner as the Administrative Committee shall direct.
(b)    The actions considered exceptions to the vesting rule under Section 4.2 will not be treated as violations of this Section.
(c)    Notwithstanding the foregoing, all or a portion of a Participant's vested Account balance may be paid to another person as specified in a domestic relations order that the Administrative Committee determines is qualified (a "Qualified Domestic Relations Order"). For this purpose, a Qualified Domestic Relations Order means a judgment, decree, or order (including the approval of a settlement agreement) which is:
(1)    issued pursuant to a State's domestic relations law;
(2)    relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of the Participant;
(3)    creates or recognizes the right of a spouse, former spouse, child or other dependent of the Participant to receive all or a portion of the Participant's benefits under the Plan; and
(4)    meets such other requirements established by the Administrative Committee.
The Administrative Committee shall determine whether any document received by it is a Qualified Domestic Relations Order. In making this determination, the Administrative Committee may consider the rules applicable to "domestic relations orders" under Code section 414(p) and ERISA section 206(d), and such other rules and procedures as it deems relevant.
7.3
Restriction Against Double Payment



11

Exhibit 10.5



If a court orders an assignment of benefits despite Section 7.2, the affected Participant's benefits will be reduced accordingly. The Administrative Committee may use any reasonable actuarial assumptions to accomplish the offset under this Section.
7.4
Withholding
There shall be deducted from each payment made under the Plan or any other compensation payable to the Participant (or Beneficiary) all taxes, which are required to be withheld by the Affiliated Companies in respect to such payment or this Plan. The Affiliated Companies shall have the right to reduce any payment (or compensation) by the amount of cash sufficient to provide the amount of said taxes.
7.5
Amendment, Modification, Suspension or Termination
The Company may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part for any reason. Notwithstanding the foregoing, no amendment or termination of the Plan shall reduce the amount of a Participant's Account balance as of the date of such amendment or termination. Upon termination of the Plan, distribution of balances in Accounts shall be made to Participants and Beneficiaries in the manner and at the time described in Article V, unless the Company determines in its sole discretion that all such amounts shall be distributed upon termination in accordance with the requirements under Code section 409A.
7.6
Governing Law
To the extent not preempted by ERISA, this Plan shall be construed, governed and administered in accordance with the laws of Delaware.
7.7
Receipt and Release
Any payment to a payee in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Plan, the Committees and the Affiliated Companies. The Administrative Committee may require such payee, as a condition precedent to such payment, to execute a receipt and release to such effect.
7.8
Payments on Behalf of Persons Under Incapacity
In the event that any amount becomes payable under the Plan to a person who, in the sole judgment of the Administrative Committee, is considered by reason of physical or mental condition to be unable to give a valid receipt therefore, the Administrative Committee may direct that such payment be made to any person found by the Committee, in its sole judgment, to have assumed the care of such person. Any payment made pursuant to such determination shall constitute a full release and discharge of the Administrative Committee and the Company.
7.9
Limitation of Rights and Employment Relationship


12

Exhibit 10.5


Neither the establishment of the Plan, any trust nor any modification thereof, nor the creating of any fund or account, nor the payment of any benefits shall be construed as giving to any Participant, or Beneficiary or other person any legal or equitable right against the Affiliated Companies or any trustee except as provided in the Plan and any trust agreement; and in no event shall the terms of employment of any Employee or Participant be modified or in any way be affected by the provisions of the Plan and any trust agreement.
7.10
Headings
Headings and subheadings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof.
7.11
Liabilities Transferred to HII
Northrop Grumman Corporation distributed its interest in Huntington Ingalls Industries, Inc. ("HII) to its shareholders on March 31, 2011 (the "HII Distribution Date"). Pursuant to an agreement between Northrop Grumman Corporation and HII, on the HII Distribution Date certain employees and former employees of HII ceased to participate in the Plan and the liabilities for these participants' benefits under the Plan were transferred to HII. On and after the HII Distribution Date, the Company and the Plan, and any successors thereto, shall have no further obligation or liability to any such participant with respect to any benefit, amount, or right due under the Plan.

ARTICLE VIII

FORFEITURE OF BENEFITS
8.1
In General
Notwithstanding any other provision of this Plan, this Article VIII applies to the portion of a Participant's Account balance accrued after 2011.
8.2
Determination of a Forfeiture Event
The Compensation Committee or its delegate will, in its sole discretion, determine whether a Forfeiture Event (as defined in Section 8.4) has occurred; provided that no Forfeiture Event shall be incurred by a Participant who has a termination of employment due to mandatory retirement pursuant to Company policy. Such a determination may be made by the Compensation Committee or its delegate for up to one year following the date that the Compensation Committee has actual knowledge of the circumstances that could constitute a Forfeiture Event.
8.3
No Forfeiture Event for Certain Terminations after Change in Control
Notwithstanding the foregoing, no Forfeiture Event shall be incurred by a Participant who, within the two year period following a Change in Control (as defined in the Northrop Grumman 2011 Long-Term Incentive Stock Plan or successor plan in effect at the time


13

Exhibit 10.5


the relevant event occurs ("LTISP")), is involuntarily terminated for reasons other than Cause or voluntarily terminates for Good Reason. The terms "Cause" and "Good Reason" shall be defined in accordance with the LTISP and its associated grant certificates. This Article VIII may not be amended during the two year period commencing on the date of such a Change in Control.
8.4
Forfeiture Event Defined
A “Forfeiture Event” means that, while employed by any of the Affiliated Companies or at any time in the two year period immediately following the Participant’s last day of employment by one of the Affiliated Companies, the Participant, either directly or indirectly through any other person, is employed by, renders services (as a director, consultant or otherwise) to, has any ownership interest in, or otherwise participates in the financing, operation, management or control of, any business that is then in competition with the business of any of the Affiliated Companies. A Participant will not, however, be considered to have incurred a Forfeiture Event solely by reason of owning up to (and not more than) two percent (2%) of any class of capital stock of a corporation that is registered under the Securities Exchange Act of 1934.
8.5
Amount of Forfeiture
(a)    If the Compensation Committee or its delegate determines that a Forfeiture Event has occurred, the relevant Participant may forfeit up to 100% of his or her Account balance accrued after 2011. The amount forfeited, if any, will be determined by the Compensation Committee or its delegate in its sole discretion, and may consist of all or a portion of the Account balance accrued after 2011 and not yet paid.
(b)    Any forfeiture pursuant to this Article VIII will also apply with respect to survivor benefits or benefits assigned under a Qualified Domestic Relations Order.
8.6
Notice and Claims Procedure
(a)    The Company will provide timely notice to any Participant who incurs a forfeiture pursuant to this Article VIII. Any delay by the Company in providing such notice will not otherwise affect the amount or timing of any forfeiture determined by the Compensation Committee or its delegate.
(b)    The procedures set forth in the Claims Procedures will apply to any claims and appeals arising out of or related to any forfeiture under this Article VIII, except as provided below:
(1)    The Compensation Committee, or its delegate, will serve in place of the designated decision-makers on any such claims and appeals.
(2)    After a claimant has exhausted his remedies under the Claims Procedures, including the appeal stage, the claimant forgoes any right to file a civil action under ERISA section 502(a), but instead may present any claims arising out of or related to any forfeiture under this Article VIII to final and binding arbitration in the manner described below:


14

Exhibit 10.5


(A)    A claimant must file a demand for arbitration no later than one year following a final decision on the appeal under the Claims Procedures. After such period, no claim for arbitration may be filed, and the decision becomes final. A claimant must deliver a demand for arbitration to the Company's General Counsel.
(B)    Any claims presented shall be settled by arbitration consistent with the Federal Arbitration Act, and consistent with the then-current Arbitration Rules and Procedures for Employment Disputes, or equivalent, established by JAMS, a provider of private dispute resolution services.
(C)    The parties will confer to identify a mutually acceptable arbitrator. If the parties are unable to agree on an arbitrator, the parties will request a list of proposed arbitrators from JAMS and:
(i)    If there is an arbitrator on the list acceptable to both parties, that person will be selected. If there is more than one arbitrator on the list acceptable to both parties, each party will rank each arbitrator in order of preference, and the arbitrator with the highest combined ranking will be selected.
(ii)    If there is no arbitrator acceptable to both parties on the list, the parties will alternately strike names from the list until only one name remains, who will be selected.
(D)    The fees and expenses of the arbitrator will be borne equally by the claimant and the Company. Each side will be entitled to use a representative, including an attorney, at the arbitration.  Each side will bear its own deposition, witness, expert, attorneys' fees, and other expenses to the same extent as if the matter were being heard in court.  If, however, any party prevails on a claim, which (if brought in court) affords the prevailing party attorneys' fees and/or costs, then the arbitrator may award reasonable fees and/or costs to the prevailing party to the same extent as would apply in court.  The arbitrator will resolve any dispute as to who is the prevailing party and as to the reasonableness of any fee or cost.
(E)    The arbitrator will take into account all comments, documents, records, other information, arguments, and theories submitted by the claimant relating to the claim, or considered by the Compensation Committee or its delegate relating to the claim, but only to the extent that it was previously provided as part of the initial decision or appeal request on the claim.
The arbitrator may grant a claimant's claim only if the arbitrator determines it is justified based on: (i) the Compensation Committee, or its


15

Exhibit 10.5


delegate erred upon an issue of law in the appeal request, or (ii) the Compensation Committee's, or its delegate's, findings of fact during the appeal process were not supported by the evidence.
(F)    The arbitrator shall issue a written opinion to the parties stating the essential findings and conclusions upon which the arbitrator's award is based. The decision of the arbitrator will be final and binding upon the claimant and the Company.  A reviewing court may only confirm, correct, or vacate an award in accordance with the standards set forth in the Federal Arbitration Act, 9 U.S.C. §§ 1-16.
(G)    In the event any court finds any portion of this procedure to be unenforceable, the unenforceable section(s) or provision(s) will be severed from the rest, and the remaining section(s) or provisions(s) will be otherwise enforced as written.
8.7
Application
Should a Forfeiture Event occur, this Article VIII is in addition to, and does not in any way limit, any other right or remedy of the Affiliated Companies, at law or otherwise, in connection with such Forfeiture Event.

* * *

IN WITNESS WHEREOF, this Plan is hereby executed by a duly authorized officer on this 27th day of September, 2013.

NORTHROP GRUMMAN CORPORATION

By: /s/ Denise Peppard            
Denise Peppard
Corporate Vice President and
Chief Human Resources Officer




16

Exhibit 10.5


APPENDIX A – COMMITTEES AND APPOINTMENTS
Notwithstanding anything to the contrary in this Plan, effective as of October 25, 2011, the Chief Executive Officer of the Company shall appoint, and shall have the power to remove, the members of (1) an Administrative Committee that shall have responsibility for administering the Plan (including as such responsibilities are described in Article VI of the Plan) and (2) an Investment Committee that shall have responsibility for overseeing any rabbi trusts or other informal funding for the Plan.


A-1

NOC-9.30.2013-Ex12a


NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 12(a)
NORTHROP GRUMMAN CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES

$ in millions
Nine Months Ended September 30
 
Year Ended December 31
Earnings:
2013
 
2012
 
2012
2011
2010
2009
2008
Earnings from continuing operations before income taxes
      $
2,156

 
     $
2,178

 
      $
2,965

      $
3,083

      $
2,366

      $
2,070

      $
1,841

Fixed Charges:
 
 
 
 
 
 
 
 
 
Interest expense, including amortization of debt premium
183

 
158

 
212

221

269

269

271

Portion of rental expenses on operating leases deemed to be representative of the interest factor
74

 
87

 
116

140

149

167

177

Earnings from continuing operations before income taxes and fixed charges
      $
2,413

 
     $
2,423

 
      $
3,293

      $
3,444

      $
2,784

      $
2,506

      $
2,289

Fixed Charges:
      $
257

 
     $
245

 
      $
328

      $
361

      $
418

      $
436

      $
448

Ratio of earnings to fixed charges
9.4

 
9.9

 
10.0

9.5

6.7

5.7

5.1


  



NOC-9.30.2013-Ex15


NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 15

LETTER FROM INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

October 22, 2013

Northrop Grumman Corporation
2980 Fairview Park Drive
Falls Church, Virginia 22042
We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of Northrop Grumman Corporation and subsidiaries for the periods ended September 30, 2013 and 2012, as indicated in our report dated October 22, 2013; because we did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, is incorporated by reference in Registration Statement Nos. 033-59815, 033-59853, 333-67266, 333-100179, 333-107734, 333-121104, 333-125120, 333-127317, and 333-175798 on Form S-8; and Registration Statement No. 333-175818 on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

/s/ Deloitte & Touche LLP
McLean, Virginia




NOC-9.30-2013-Ex311


NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Wesley G. Bush, certify that:
1.
I have reviewed this report on Form 10-Q of Northrop Grumman Corporation (“company”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4.
The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5.
The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

Date: October 22, 2013
 
/s/ Wesley G. Bush
Wesley G. Bush
Chairman, Chief Executive Officer and President



NOC-9.30.2013-Ex312


NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James F. Palmer, certify that:
1.
I have reviewed this report on Form 10-Q of Northrop Grumman Corporation (“company”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4.
The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5.
The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

Date: October 22, 2013
 
/s/ James F. Palmer
James F. Palmer
Corporate Vice President and Chief Financial Officer


NOC-9.30.2013-Ex321


NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Northrop Grumman Corporation (the “company”) on Form 10-Q for the period ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Wesley G. Bush, Chairman, Chief Executive Officer and President of the company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
 
Date: October 22, 2013
 
/s/ Wesley G. Bush
Wesley G. Bush
Chairman, Chief Executive Officer and President




NOC-9.30.2013-Ex322


NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Northrop Grumman Corporation (the “company”) on Form 10-Q for the period ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James F. Palmer, Corporate Vice President and Chief Financial Officer of the company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
 
Date: October 22, 2013 
 
/s/ James F. Palmer
James F. Palmer
Corporate Vice President and Chief Financial Officer