noc-20210331
Q1FALSE2021December 31NORTHROP GRUMMAN CORP 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2021
or
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,Virginia22042
(Address of principal executive offices)(Zip Code)
(703) 280-2900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockNOCNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    Yes ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
    Yes ☒    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer ☒     Accelerated Filer ☐
Non-accelerated Filer ☐    Smaller Reporting Company                 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes     No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of April 26, 2021, 160,961,208 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 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 March 31
$ in millions, except per share amounts20212020
Sales
Product$7,022 $6,176 
Service2,135 2,444 
Total sales9,157 8,620 
Operating costs and expenses
Product5,690 4,952 
Service1,727 1,946 
General and administrative expenses898 788 
Total operating costs and expenses8,315 7,686 
Gain on sale of business1,980  
Operating income2,822 934 
Other (expense) income
Interest expense(155)(125)
Non-operating FAS pension benefit367 302 
Other, net(18)(58)
Earnings before income taxes3,016 1,053 
Federal and foreign income tax expense821 185 
Net earnings$2,195 $868 
Basic earnings per share$13.46 $5.18 
Weighted-average common shares outstanding, in millions163.1 167.7 
Diluted earnings per share$13.43 $5.15 
Weighted-average diluted shares outstanding, in millions163.5 168.4 
Net earnings (from above)$2,195 $868 
Other comprehensive loss
Change in unamortized prior service credit, net of tax(2)(10)
Change in cumulative translation adjustment and other, net(1)(9)
Other comprehensive loss, net of tax(3)(19)
Comprehensive income$2,192 $849 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-1-

Table of Contents

NORTHROP GRUMMAN CORPORATION                        
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
$ in millions, except par valueMarch 31, 2021December 31, 2020
Assets
Cash and cash equivalents$3,517 $4,907 
Accounts receivable, net1,710 1,501 
Unbilled receivables, net5,519 5,140 
Inventoried costs, net860 759 
Prepaid expenses and other current assets647 1,402 
Assets of disposal group held for sale 1,635 
Total current assets12,253 15,344 
Property, plant and equipment, net of accumulated depreciation of $6,471 for 2021 and $6,335 for 2020
7,093 7,071 
Operating lease right-of-use assets1,552 1,533 
Goodwill17,518 17,518 
Intangible assets, net732 783 
Deferred tax assets311 311 
Other non-current assets1,964 1,909 
Total assets$41,423 $44,469 
Liabilities
Trade accounts payable$1,895 $1,806 
Accrued employee compensation1,542 1,997 
Advance payments and billings in excess of costs incurred2,393 2,517 
Other current liabilities2,537 3,002 
Liabilities of disposal group held for sale 258 
Total current liabilities8,367 9,580 
Long-term debt, net of current portion of $42 for 2021 and $742 for 2020
12,764 14,261 
Pension and other postretirement benefit plan liabilities6,217 6,498 
Operating lease liabilities1,354 1,343 
Other non-current liabilities2,196 2,208 
Total liabilities30,898 33,890 
Commitments and contingencies (Note 6)
Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding
  
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2021—160,960,496 and 2020—166,717,179
161 167 
Paid-in capital8 58 
Retained earnings10,487 10,482 
Accumulated other comprehensive loss(131)(128)
Total shareholders’ equity10,525 10,579 
Total liabilities and shareholders’ equity$41,423 $44,469 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-2-

Table of Contents

NORTHROP GRUMMAN CORPORATION                        
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months Ended March 31
$ in millions20212020
Operating activities
Net earnings$2,195 $868 
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization294 297 
Stock-based compensation18 18 
Deferred income taxes1 156 
Gain on sale of business(1,980) 
Changes in assets and liabilities:
Accounts receivable, net(253)(810)
Unbilled receivables, net(357)(584)
Inventoried costs, net(101)(2)
Prepaid expenses and other assets(38)56 
Accounts payable and other liabilities(589)(833)
Income taxes payable, net1,028 10 
Retiree benefits(314)(237)
Other, net30 68 
Net cash used in operating activities(66)(993)
Investing activities
Divestiture of IT services business3,400  
Capital expenditures(205)(272)
Other, net1 2 
Net cash provided by (used in) investing activities3,196 (270)
Financing activities
Net proceeds from issuance of long-term debt 2,239 
Payments of long-term debt(2,200) 
Payments to credit facilities (7)
Net borrowings on commercial paper 744 
Common stock repurchases(2,000)(344)
Cash dividends paid(238)(227)
Payments of employee taxes withheld from share-based awards(30)(63)
Other, net(52)(46)
Net cash (used in) provided by financing activities(4,520)2,296 
(Decrease) increase in cash and cash equivalents(1,390)1,033 
Cash and cash equivalents, beginning of year4,907 2,245 
Cash and cash equivalents, end of period$3,517 $3,278 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION                        
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 Three Months Ended March 31
$ in millions, except per share amounts20212020
Common stock
Beginning of period$167 $168 
Common stock repurchased(6)(1)
End of period161 167 
Paid-in capital
Beginning of period58  
Common stock repurchased(39) 
Stock compensation(11) 
End of period8  
Retained earnings
Beginning of period10,482 8,748 
Common stock repurchased(1,955)(348)
Net earnings2,195 868 
Dividends declared(235)(223)
Stock compensation (45)
Other 11 
End of period10,487 9,011 
Accumulated other comprehensive loss
Beginning of period(128)(97)
Other comprehensive loss, net of tax(3)(19)
End of period(131)(116)
Total shareholders’ equity$10,525 $9,062 
Cash dividends declared per share$1.45 $1.32 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION                        
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.    BASIS OF PRESENTATION
Principles of Consolidation and Reporting
These unaudited condensed consolidated financial statements (the “financial statements”) include the accounts of Northrop Grumman Corporation and its subsidiaries and joint ventures or other investments for which we consolidate the financial results (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”). Intercompany accounts, transactions and profits are eliminated in consolidation. Investments in equity securities and joint ventures where the company has significant influence, but not control, are accounted for using the equity method.
Effective January 30, 2021 (the “Divestiture date”), we completed the previously announced sale of our IT and mission support services business (the “IT services divestiture”) for $3.4 billion in cash and recorded a pre-tax gain on sale of $2.0 billion. The IT and mission support services business was comprised of the majority of the Information Solutions and Services (IS&S) division of Defense Systems (excluding our Vinnell Arabia business); select cyber, intelligence and missions support programs, which were part of the Cyber and Intelligence Mission Solutions (CIMS) division of Mission Systems; and the Space Technical Services business unit of Space Systems. The assets and liabilities of the IT and mission support services business were classified as held for sale in the consolidated statement of financial position as of December 31, 2020. Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture date. Sales for the IT and mission support services business were $162 million and $559 million for the three months ended March 31, 2021 and 2020 and pre-tax profit was $20 million and $51 million for the three months ended March 31, 2021 and 2020.
These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”) and in accordance with the rules of the Securities and Exchange Commission (SEC) for interim reporting. The financial statements include adjustments of a normal recurring nature considered necessary by management for a fair presentation of the company’s unaudited condensed consolidated financial position, results of operations and cash flows.
The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the information contained in the company’s 2020 Annual Report on Form 10-K. During the first quarter of 2021, we changed the naming convention for our FAS/CAS pension accounts. The Net FAS (service)/CAS pension adjustment is now referred to as the FAS/CAS operating adjustment and the FAS (non-service) pension benefit is now referred to as the Non-operating FAS pension benefit. This change does not impact any current or previously reported amounts.
The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30 and third quarter as ending on September 30. It is the company’s long-standing practice to establish actual interim closing dates using a “fiscal” calendar, in which we close our books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. This practice is only used at interim periods within a reporting year.
Accounting Estimates
Preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Estimates have been prepared using the most current and best available information; however, actual results could differ materially from those estimates.
Revenue Recognition
The majority of our sales are derived from long-term contracts with the U.S. government for the development or production of goods, the provision of services, or a combination of both. We recognize revenue as control is transferred to the customer, either over time or at a point in time. For most of our contracts, control is effectively transferred during the period of performance, so we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion). The company believes this represents the most appropriate measurement towards satisfaction of our performance obligations. Revenue for contracts in which the control of goods produced does not transfer until delivery to the customer is recognized at a point in time (i.e., typically upon delivery).
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NORTHROP GRUMMAN CORPORATION                        
Contract Estimates
Use of the cost-to-cost method requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. The company estimates profit on these contracts as the difference between total estimated sales and total estimated cost at completion and recognizes that profit as costs are incurred. Significant judgment is used to estimate total sales and cost at completion.
Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), contract claims and requests for equitable adjustment (REAs). Variable consideration is included in total estimated sales to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate variable consideration as the most likely amount to which we expect to be entitled.
We recognize changes in estimated contract sales or costs and the resulting changes in contract profit on a cumulative basis. Cumulative estimate-at-completion (EAC) adjustments represent the cumulative effect of the changes on current and prior periods; sales and operating margins in future periods are recognized as if the revised estimates had been used since contract inception. If it is determined that a loss is expected to result on an individual performance obligation, the entire amount of the estimable future loss, including an allocation of general and administrative (G&A) expense, is charged against income in the period the loss is identified.
The following table presents the effect of aggregate net EAC adjustments:
 Three Months Ended March 31
$ in millions, except per share data20212020
Revenue$202 $136 
Operating income190 124 
Net earnings(1)
150 98 
Diluted earnings per share(1)
0.92 0.58 
(1)Based on a 21 percent statutory tax rate.
EAC adjustments on a single performance obligation can have a material effect on the company’s financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. No such adjustments were material to the financial statements during the three months ended March 31, 2021 and 2020.
Backlog
Backlog represents the future sales we expect to recognize on firm orders received by the company and is equivalent to the company’s remaining performance obligations at the end of each period. It comprises both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time an option or IDIQ task order is exercised or awarded.
Company backlog as of March 31, 2021 was $79.3 billion. Of our March 31, 2021 backlog, we expect to recognize approximately 40 percent as revenue over the next 12 months and 60 percent as revenue over the next 24 months, with the remainder to be recognized thereafter.
Contract Assets and Liabilities
For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position. The amount of revenue recognized for the three months ended March 31, 2021 and 2020 that was included in the contract liability balances at the beginning of each year was $1.1 billion and $781 million, respectively.
Disaggregation of Revenue
See Note 9 for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments. We believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
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NORTHROP GRUMMAN CORPORATION                        
Property, Plant, and Equipment
Non-cash investing activities include capital expenditures incurred but not yet paid of $58 million and $92 million for the three months ended March 31, 2021 and 2020, respectively.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
$ in millionsMarch 31, 2021December 31, 2020
Unamortized prior service credit, net of tax expense of $2 for 2021 and $3 for 2020
$8 $10 
Cumulative translation adjustment and other, net(139)(138)
Total accumulated other comprehensive loss$(131)$(128)
Related Party Transactions
For all periods presented, the company had no material related party transactions.
Accounting Standards Updates
Accounting standards updates adopted and/or issued, but not effective until after March 31, 2021, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.
2.    EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK
Basic Earnings Per Share
We calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of common stock outstanding during each period.
Diluted Earnings Per Share
Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled 0.4 million shares and 0.7 million shares for the three months ended March 31, 2021 and 2020, respectively.
Share Repurchases
On September 16, 2015, the company’s board of directors authorized a share repurchase program of up to $4.0 billion of the company’s common stock (the “2015 Repurchase Program”). On December 4, 2018, the company’s board of directors authorized a share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the “2018 Repurchase Program”). Repurchases under the 2015 Repurchase Program commenced in March 2016 and were completed in March 2020 at which time repurchases under the 2018 Repurchase Program commenced. As of March 31, 2021, repurchases under the 2018 Repurchase Program totaled $1.9 billion; $1.1 billion remained under this share repurchase authorization. By its terms, the 2018 Repurchase Program is set to expire when we have used all authorized funds for repurchases.
On January 25, 2021, the company’s board of directors authorized a new share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the “2021 Repurchase Program”). By its terms, repurchases under the 2021 Repurchase Program will commence upon completion of the 2018 Repurchase Program and will expire when we have used all authorized funds for repurchases.
During the first quarter of 2021, the company entered into an accelerated share repurchase (ASR) agreement with Goldman Sachs & Co. LLC (Goldman Sachs) to repurchase $2.0 billion of the company’s common stock as part of the 2018 Repurchase Program. Under the agreement, we made a payment of $2.0 billion to Goldman Sachs and received an initial delivery of 5.9 million shares valued at $1.7 billion that were immediately canceled by the company. The remaining balance of $300 million is included as a reduction to Retained earnings on the consolidated statement of financial position. The final number of shares to be repurchased will be based on the company’s daily volume-weighted average share price during the term of the transaction, less a discount, and is expected to be completed in the second quarter of 2021. Goldman Sachs may be required to deliver additional shares of common stock to the company at final settlement or, under certain circumstances, the company may be required to either, at the company’s election, deliver shares or make a cash payment to Goldman Sachs.
Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and, in
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NORTHROP GRUMMAN CORPORATION                        
the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.
The table below summarizes the company’s share repurchases to date under the authorizations described above:
Shares Repurchased
(in millions)
Repurchase Program
Authorization Date
Amount
Authorized
(in millions)
Total
Shares Retired
(in millions)
Average 
Price
Per Share
(1)
Date CompletedThree Months Ended March 31
20212020
September 16, 2015$4,000 15.4 $260.33 March 2020 0.9 
December 4, 2018$3,000 6.4 289.47 5.9 0.1 
January 25, 2021$3,000     
(1)Includes commissions paid.
Dividends on Common Stock
In May 2020, the company increased the quarterly common stock dividend 10 percent to $1.45 per share from the previous amount of $1.32 per share.
3.    INCOME TAXES
 Three Months Ended March 31
$ in millions20212020
Federal and foreign income tax expense$821 $185 
Effective income tax rate27.2 %17.6 %
The first quarter 2021 effective tax rate (ETR) increased to 27.2 percent from 17.6 percent in the prior year period primarily due to federal income taxes resulting from the IT services divestiture, including $250 million of income tax expense related to $1.2 billion of nondeductible goodwill in the divested business. The company’s first quarter 2021 ETR also includes $52 million of research credits. The company’s first quarter 2020 ETR includes $41 million of research credits and $13 million of excess tax benefits for employee share-based compensation, partially offset by nondeductible losses on marketable securities.
Taxes receivable are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position. We had no taxes receivable as of March 31, 2021 and $792 million as of December 31, 2020.
The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs, and the 2017 Tax Cuts and Jobs Act. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to the final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and future regulatory interpretations of existing tax laws may change. At this time, we cannot reasonably estimate these changes.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2018 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under Internal Revenue Service (IRS) examination. In addition, legacy Orbital ATK federal tax returns for the year ended March 31, 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under appeal with the IRS.
4.    FAIR VALUE OF FINANCIAL INSTRUMENTS
The company holds a portfolio of marketable securities to partially fund non-qualified employee benefit plans. A portion of these securities are held in common/collective trust funds and are measured at fair value using net asset value (NAV) per share as a practical expedient; and therefore are not required to be categorized in the fair value hierarchy table below. Marketable securities are included in Other non-current assets in the unaudited condensed consolidated statements of financial position.
The company’s derivative portfolio consists primarily of foreign currency forward contracts. Where model-derived valuations are appropriate, the company utilizes the income approach to determine the fair value and uses the applicable London Interbank Offered Rate (LIBOR) swap rates.
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NORTHROP GRUMMAN CORPORATION                        
The following table presents the financial assets and liabilities the company records at fair value on a recurring basis identified by the level of inputs used to determine fair value:
March 31, 2021December 31, 2020
$ in millionsLevel 1Level 2TotalLevel 1Level 2Total
Financial Assets (Liabilities)
Marketable securities$397 $1 $398 $377 $1 $378 
Marketable securities valued using NAV17 18 
Total marketable securities397 1 415 377 1 396 
Derivatives (1)(1)   
The notional value of the company’s foreign currency forward contracts at March 31, 2021 and December 31, 2020 was $144 million and $133 million, respectively. At March 31, 2021 and December 31, 2020, no portion of the notional value was designated as a cash flow hedge.
The derivative fair values and related unrealized gains/losses at March 31, 2021 and December 31, 2020 were not material. There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the three months ended March 31, 2021.
The carrying value of cash and cash equivalents and commercial paper approximates fair value.
Long-term Debt
The estimated fair value of long-term debt was $14.9 billion and $18.2 billion as of March 31, 2021 and December 31, 2020, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.
Repayments of Senior Notes
In March 2021, the company repaid $700 million of 3.50 percent unsecured notes upon maturity.
In March 2021, the company redeemed $1.5 billion of 2.55 percent unsecured notes due October 2022. The company recorded a pre-tax charge of $54 million principally related to the premium paid on the redemption, which was recorded in Other, net in the unaudited condensed consolidated statements of earnings and comprehensive income.
5.    INVESTIGATIONS, CLAIMS AND LITIGATION
On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed-price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS were delivered. The company’s lawsuit seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $410 million, less certain amounts outstanding under the contract. In the course of the litigation, the United States subsequently amended its counterclaim, reducing it to seek approximately $193 million. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On February 3, 2020, after extensive discovery and motions practice, the parties commenced what was expected to be a seven-week trial. The first four weeks of trial concluded, but the court postponed the remaining estimated three weeks as a result of COVID-19-related concerns. After additional COVID-19-related interruptions, trial concluded on March 5, 2021 and the court scheduled post-trial briefing. Although the ultimate outcome of this matter, including any possible loss, cannot be predicted or reasonably estimated at this time, the company intends vigorously to pursue and defend the matter.
We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, we have worked closely with the United States Navy, the United States Environmental Protection Agency, the New
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NORTHROP GRUMMAN CORPORATION                        
York State Department of Environmental Conservation (NYSDEC), the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. In December 2019, the State of New York issued an Amended Record of Decision seeking to impose additional remedial requirements beyond measures the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company will take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. The State of New York is preparing to file a new consent decree reflecting the agreement and to seek court approval. We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to the legacy Bethpage environmental conditions. Applicable remediation standards and other requirements to which we are subject may continue to change, our costs may increase materially and those costs may not be fully recoverable. In addition, we are a party to various, and expect to become a party to additional, legal proceedings and disputes related to remediation, environmental impacts, costs, and the allowability of costs we incur, including with federal and state entities (including the Navy, Defense Contract Management Agency, the State, local municipalities and water districts) and insurance carriers, as well as class action and individual plaintiffs alleging personal injury and property damage and seeking both monetary and non-monetary relief. These Bethpage matters could result in additional costs, fines, penalties, sanctions, compensatory or other damages, determinations on allocation, allowability and coverage, and non-monetary relief. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these aggregate Bethpage matters.
The company is a party to various other investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, 2021, or its annual results of operations and/or cash flows.
6.    COMMITMENTS AND CONTINGENCIES
U.S. Government Cost Claims and Contingencies
From time to time, the company is advised of claims by the U.S. government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and U.S. government representatives engage in discussions to enable the company to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for such potential disallowed costs. Such provisions are reviewed periodically using the most recent information available. The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of March 31, 2021, or its annual results of operations and/or cash flows.
The U.S. government has raised questions about an interest rate assumption used by the company to determine our CAS pension expense. On June 1, 2020, the government provided written notice that the assumptions the company used during the period 2013-2019 were potentially noncompliant with CAS. We submitted a formal response on July 31, 2020, which we believe demonstrates the appropriateness of the assumptions used. On November 24, 2020, the government replied to the company’s response, disagreeing with our position and requesting additional input, which we provided on February 22, 2021. We are engaging further with the government. The sensitivity to changes in interest rate assumptions makes it reasonably possible the outcome of this matter could have a material adverse effect on our financial position, results of operations and/or cash flows, although we are not currently able to estimate a range of any potential loss.
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NORTHROP GRUMMAN CORPORATION                        
Environmental Matters
The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S. government contracts as of March 31, 2021 and December 31, 2020:
$ in millions
Accrued Costs(1)(2)
Reasonably Possible Future Costs in Excess of Accrued Costs(2)
Deferred Costs(3)
March 31, 2021$621 $342 $534 
December 31, 2020614 346 529 
(1) As of March 31, 2021, $246 million is recorded in Other current liabilities and $375 million is recorded in Other non-current liabilities.
(2) Estimated remediation costs are not discounted to present value. The reasonably possible future costs in excess of accrued costs do not take into consideration amounts expected to be recoverable through overhead charges on U.S. government contracts.
(3) As of March 31, 2021, $218 million is deferred in Prepaid expenses and other current assets and $316 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.
Although management cannot predict whether new information gained as our environmental remediation projects progress, or as changes in facts and circumstances occur, will materially affect the estimated liability accrued, except with respect to Bethpage, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, 2021, or its annual results of operations and/or cash flows.
With respect to Bethpage, as discussed in Note 5, in December 2019, the State of New York issued an Amended Record of Decision, seeking to impose additional remedial requirements beyond those the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company will take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. The State of New York is preparing to file a new consent decree reflecting the agreement and to seek court approval. As discussed in Note 5, the applicable remediation standards and other requirements to which we are subject may continue to change, our costs may increase materially, and those costs may not be fully recoverable.
Financial Arrangements
In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At March 31, 2021, there were $480 million of stand-by letters of credit and guarantees and $80 million of surety bonds outstanding.
Commercial Paper
The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to $2.0 billion. At March 31, 2021, there were no commercial paper borrowings outstanding.
Credit Facilities
The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of $2.0 billion (the “2018 Credit Agreement”) that matures in August 2024 and is intended to support the company’s commercial paper program and other general corporate purposes. Commercial paper borrowings reduce the amount available for borrowing under the 2018 Credit Agreement. At March 31, 2021, there was no balance outstanding under this facility.
At March 31, 2021, the company was in compliance with all covenants under its credit agreements.
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NORTHROP GRUMMAN CORPORATION                        
7.    RETIREMENT BENEFITS
The cost to the company of its pension and other postretirement benefit (OPB) plans is shown in the following table:
 Three Months Ended March 31
Pension
Benefits
OPB
$ in millions2021202020212020
Components of net periodic benefit cost (benefit)
Service cost$104 $102 $4 $4 
Interest cost263 307 13 17 
Expected return on plan assets(628)(594)(26)(26)
Amortization of prior service (credit) cost(2)(15) 1 
Net periodic benefit cost (benefit)$(263)$(200)$(9)$(4)
Employer Contributions
The company sponsors defined benefit pension and OPB plans, as well as defined contribution plans. We fund our defined benefit pension plans annually in a manner consistent with the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006.
Contributions made by the company to its retirement plans are as follows:
 Three Months Ended March 31
$ in millions20212020
Defined benefit pension plans$27 $20 
OPB plans11 12 
Defined contribution plans266 256 
8.    STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Awards
The following table presents the number of restricted stock rights (RSRs) and restricted performance stock rights (RPSRs) granted to employees under the company’s long-term incentive stock plan and the grant date aggregate fair value of those stock awards for the periods presented:
Three Months Ended March 31
in millions20212020
RSRs granted0.1 0.1 
RPSRs granted0.2 0.2 
Grant date aggregate fair value$88 $87 
RSRs typically vest on the third anniversary of the grant date, while RPSRs generally vest and pay out based on the achievement of certain performance metrics over a three-year period.
Cash Awards
The following table presents the minimum and maximum aggregate payout amounts related to cash units (CUs) and cash performance units (CPUs) granted to employees in the periods presented:
Three Months Ended March 31
$ in millions20212020
Minimum aggregate payout amount$31 $31 
Maximum aggregate payout amount177 175 
CUs typically vest and settle in cash on the third anniversary of the grant date, while CPUs generally vest and pay out in cash based on the achievement of certain performance metrics over a three-year period.
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NORTHROP GRUMMAN CORPORATION                        
9.    SEGMENT INFORMATION
The following table presents sales and operating income by segment:
Three Months Ended March 31
$ in millions20212020
Sales
Aeronautics Systems$2,990 $2,843 
Defense Systems1,562 1,881 
Mission Systems2,589 2,347 
Space Systems2,521 1,948 
Intersegment eliminations(505)(399)
Total sales9,157 8,620 
Operating income
Aeronautics Systems308 263 
Defense Systems177 198 
Mission Systems397 353 
Space Systems276 202 
Intersegment eliminations(63)(49)
Total segment operating income1,095 967 
FAS/CAS operating adjustment19 105 
Unallocated corporate income (expense)1,708 (138)
Total operating income$2,822 $934 
FAS/CAS Operating Adjustment
For financial statement purposes, we account for our employee pension plans in accordance with FAS. However, the cost of these plans is charged to our contracts in accordance with the Federal Acquisition Regulation (FAR) and the related U.S. Government Cost Accounting Standards (CAS). The FAS/CAS operating adjustment, previously referred to as the net FAS (service)/CAS pension adjustment, reflects the difference between CAS pension expense included as cost in segment operating income and the service cost component of FAS expense included in total operating income.
Unallocated Corporate Income (Expense)
Unallocated corporate income (expense) includes the portion of corporate costs not considered allowable or allocable under applicable CAS or FAR, and therefore not allocated to the segments, such as a portion of management and administration, legal, environmental, compensation, retiree benefits, advertising and other corporate unallowable costs. Unallocated corporate income (expense) also includes costs not considered part of management’s evaluation of segment operating performance, such as amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business combinations, as well as certain compensation and other costs.
During the first quarter of 2021, the $2.0 billion pre-tax gain on the sale of our IT services business and $192 million of unallowable state taxes and transaction costs associated with the divestiture were recorded in Unallocated corporate income (expense).
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NORTHROP GRUMMAN CORPORATION                        
Disaggregation of Revenue
Sales by Customer TypeThree Months Ended March 31
20212020
$ in millions$
%(3)
$
%(3)
Aeronautics Systems
U.S. government(1)
$2,541 85 %$2,361 83 %
International(2)
399 14 %444 16 %
Other customers6  %12  %
Intersegment sales44 1 %26 1 %
Aeronautics Systems sales2,990 100 %2,843 100 %
Defense Systems
U.S. government(1)
993 64 %1,259 67 %
International(2)
351 22 %340 18 %
Other customers33 2 %111 6 %
Intersegment sales185 12 %171 9 %
Defense Systems sales1,562 100 %1,881 100 %
Mission Systems
U.S. government(1)
1,834 71 %1,671 71 %
International(2)
502 19 %483 21 %
Other customers16 1 %17 1 %
Intersegment sales237 9 %176 7 %
Mission Systems sales2,589 100 %2,347 100 %
Space Systems
U.S. government(1)
2,326 92 %1,803 93 %
International(2)
105 4 %68 3 %
Other customers51 2 %51 3 %
Intersegment sales39 2 %26 1 %
Space Systems sales2,521 100 %1,948 100 %
Total
U.S. government(1)
7,694 84 %7,094 83 %
International(2)
1,357 15 %1,335 15 %
Other customers106 1 %191 2 %
Total Sales$9,157 100 %$8,620 100 %
(1) Sales to the U.S. government include sales from contracts for which we are the prime contractor, as well as those for which we are a subcontractor and the ultimate customer is the U.S. government. Each of the company’s segments derives substantial revenue from the U.S. government.
(2) International sales include sales from contracts for which we are the prime contractor, as well as those for which we are a subcontractor and the ultimate customer is an international customer. These sales include foreign military sales contracted through the U.S. government.
(3) Percentages calculated based on total segment sales.
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NORTHROP GRUMMAN CORPORATION                        
Sales by Contract TypeThree Months Ended March 31
2021 2020
$ in millions$
%(1)
$
%(1)
Aeronautics Systems     
Cost-type$1,411 48 %$1,343 48 %
Fixed-price1,535 52 %1,474 52 %
Intersegment sales44 26 
Aeronautics Systems sales2,990 2,843 
Defense Systems
Cost-type509 37 %628 37 %
Fixed-price868 63 %1,082 63 %
Intersegment sales185 171 
Defense Systems sales1,562 1,881 
Mission Systems
Cost-type865 37 %846 39 %
Fixed-price1,487 63 %1,325 61 %
Intersegment sales237 176 
Mission Systems sales2,589 2,347 
Space Systems
Cost-type1,844 74 %1,398 73 %
Fixed-price638 26 %524 27 %
Intersegment sales39 26 
Space Systems sales2,521 1,948 
Total
Cost-type4,629 51 %4,215 49 %
Fixed-price4,528 49 %4,405 51 %
Total Sales$9,157 $8,620 
(1)Percentages calculated based on external customer sales.
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NORTHROP GRUMMAN CORPORATION                        
Sales by Geographic RegionThree Months Ended March 31
20212020
$ in millions$
%(2)
$
%(2)
Aeronautics Systems     
United States$2,547 87 %$2,373 84 %
Asia/Pacific279 9 %207 8 %
Europe100 3 %166 6 %
All other(1)
20 1 %71 2 %
Intersegment sales44 26 
Aeronautics Systems sales2,990 2,843 
Defense Systems
United States1,026 75 %1,370 80 %
Asia/Pacific103 7 %82 5 %
Europe