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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 September 30, 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 October 25, 2021, 158,537,643 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 September 30Nine Months Ended September 30
$ in millions, except per share amounts2021202020212020
Sales
Product$6,845 $6,667 $21,060 $19,325 
Service1,875 2,416 5,968 7,262 
Total sales8,720 9,083 27,028 26,587 
Operating costs and expenses
Product5,352 5,346 16,662 15,425 
Service1,434 1,897 4,649 5,774 
General and administrative expenses891 855 2,788 2,475 
Total operating costs and expenses7,677 8,098 24,099 23,674 
Gain on sale of business  1,980  
Operating income1,043 985 4,909 2,913 
Other (expense) income
Interest expense(132)(154)(423)(433)
Non-operating FAS pension benefit367 302 1,101 907 
Other, net(3)34 6 36 
Earnings before income taxes1,275 1,167 5,593 3,423 
Federal and foreign income tax expense212 181 1,298 564 
Net earnings$1,063 $986 $4,295 $2,859 
Basic earnings per share$6.65 $5.91 $26.63 $17.11 
Weighted-average common shares outstanding, in millions159.8 166.8 161.3 167.1 
Diluted earnings per share$6.63 $5.89 $26.55 $17.05 
Weighted-average diluted shares outstanding, in millions160.4 167.3 161.8 167.7 
Net earnings (from above)$1,063 $986 $4,295 $2,859 
Other comprehensive loss
Change in unamortized prior service credit, net of tax(2)(10)(6)(31)
Change in cumulative translation adjustment and other, net(6)6 (6)7 
Other comprehensive loss, net of tax(8)(4)(12)(24)
Comprehensive income$1,055 $982 $4,283 $2,835 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-1-

Table of Contents

NORTHROP GRUMMAN CORPORATION                        
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
$ in millions, except par valueSeptember 30, 2021December 31, 2020
Assets
Cash and cash equivalents$4,055 $4,907 
Accounts receivable, net1,590 1,501 
Unbilled receivables, net5,674 5,140 
Inventoried costs, net872 759 
Prepaid expenses and other current assets737 1,402 
Assets of disposal group held for sale 1,635 
Total current assets12,928 15,344 
Property, plant and equipment, net of accumulated depreciation of $6,811 for 2021 and $6,335 for 2020
7,277 7,071 
Operating lease right-of-use assets1,552 1,533 
Goodwill17,516 17,518 
Intangible assets, net629 783 
Deferred tax assets418 311 
Other non-current assets2,026 1,909 
Total assets$42,346 $44,469 
Liabilities
Trade accounts payable$2,184 $1,806 
Accrued employee compensation1,811 1,997 
Advance payments and billings in excess of costs incurred2,594 2,517 
Other current liabilities2,230 3,002 
Liabilities of disposal group held for sale 258 
Total current liabilities8,819 9,580 
Long-term debt, net of current portion of $6 for 2021 and $742 for 2020
12,774 14,261 
Pension and other postretirement benefit plan liabilities5,667 6,498 
Operating lease liabilities1,367 1,343 
Other non-current liabilities2,302 2,208 
Total liabilities30,929 33,890 
Commitments and contingencies (Note 6)
Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding
  
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2021—158,761,485 and 2020—166,717,179
159 167 
Paid-in capital 58 
Retained earnings11,398 10,482 
Accumulated other comprehensive loss(140)(128)
Total shareholders’ equity11,417 10,579 
Total liabilities and shareholders’ equity$42,346 $44,469 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION                        
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months Ended September 30
$ in millions20212020
Operating activities
Net earnings$4,295 $2,859 
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization908 922 
Stock-based compensation71 61 
Deferred income taxes(105)369 
Gain on sale of business(1,980) 
Net periodic pension and OPB income(818)(612)
Pension and OPB contributions(108)(100)
Changes in assets and liabilities:
Accounts receivable, net(133)(632)
Unbilled receivables, net(596)(386)
Inventoried costs, net(113)(70)
Prepaid expenses and other assets6 (122)
Accounts payable and other liabilities49 283 
Income taxes payable, net663 111 
Other, net(14)20 
Net cash provided by operating activities2,125 2,703 
Investing activities
Divestiture of IT services business3,400  
Capital expenditures(682)(828)
Proceeds from sale of equipment to a customer84  
Other, net(3) 
Net cash provided by (used in) investing activities2,799 (828)
Financing activities
Net proceeds from issuance of long-term debt 2,239 
Payments of long-term debt(2,236)(27)
Payments to credit facilities (13)
Common stock repurchases(2,724)(490)
Cash dividends paid(737)(711)
Payments of employee taxes withheld from share-based awards(33)(66)
Other, net(46)(57)
Net cash (used in) provided by financing activities(5,776)875 
(Decrease) increase in cash and cash equivalents(852)2,750 
Cash and cash equivalents, beginning of year4,907 2,245 
Cash and cash equivalents, end of period$4,055 $4,995 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION                        
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 Three Months Ended September 30Nine Months Ended September 30
$ in millions, except per share amounts2021202020212020
Common stock
Beginning of period$160 $167 $167 $168 
Common stock repurchased(1) (8)(1)
End of period159 167 159 167 
Paid-in capital
Beginning of period 10 58  
Common stock repurchased  (60) 
Stock compensation 23 2 33 
Other (6) (6)
End of period 27  27 
Retained earnings
Beginning of period11,144 9,652 10,482 8,748 
Common stock repurchased(587) (2,676)(479)
Net earnings1,063 986 4,295 2,859 
Dividends declared(252)(244)(741)(709)
Stock compensation30  38 (36)
Other   11 
End of period11,398 10,394 11,398 10,394 
Accumulated other comprehensive loss
Beginning of period(132)(117)(128)(97)
Other comprehensive loss, net of tax(8)(4)(12)(24)
End of period(140)(121)(140)(121)
Total shareholders’ equity$11,417 $10,467 $11,417 $10,467 
Cash dividends declared per share$1.57 $1.45 $4.59 $4.22 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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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 for the nine months ended September 30, 2021 and $602 million and $1.7 billion for the three and nine months ended September 30, 2020, respectively. Pre-tax profit was $20 million for the nine months ended September 30, 2021, and $69 million and $180 million for the three and nine months ended September 30, 2020, respectively.
These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”) and in accordance with the rules of the Securities and Exchange Commission (SEC) for interim reporting. The financial statements include adjustments of a normal recurring nature considered necessary by management for a fair presentation of the company’s unaudited condensed consolidated financial position, results of operations and cash flows.
The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the information contained in the company’s 2020 Annual Report on Form 10-K. During the first quarter of 2021, we changed the naming convention for our FAS/CAS pension accounts. The Net FAS (service)/CAS pension adjustment is now referred to as the FAS/CAS operating adjustment and the FAS (non-service) pension benefit is now referred to as the Non-operating FAS pension benefit. This change does not impact any current or previously reported amounts. During the second quarter of 2021, we changed the presentation of the retiree benefits components in the operating cash flow section of the Unaudited condensed consolidated statement of cash flows. Prior period amounts have been conformed to current period presentation and this change does not impact previously reported cash provided by operating activities.
The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30 and third quarter as ending on September 30. It is the company’s long-standing practice to establish actual interim closing dates using a “fiscal” calendar, in which we close our books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. This practice is only used at interim periods within a reporting year.
Accounting Estimates
Preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Estimates have been prepared using the most current and best available information; however, actual results could differ materially from those estimates.
Revenue Recognition
The majority of our sales are derived from long-term contracts with the U.S. government for the development or production of goods, the provision of services, or a combination of both. We recognize revenue as control is transferred to the customer, either over time or at a point in time. For most of our contracts, control is effectively transferred during the period of performance, so we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion). The company believes this represents the most
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appropriate measurement towards satisfaction of our performance obligations. Revenue for contracts in which the control of goods produced does not transfer until delivery to the customer is recognized at a point in time (i.e., typically upon delivery).
Contract Estimates
Use of the cost-to-cost method requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. The company estimates profit on these contracts as the difference between total estimated sales and total estimated cost at completion and recognizes that profit as costs are incurred. Significant judgment is used to estimate total sales and cost at completion.
Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), contract claims and requests for equitable adjustment (REAs). Variable consideration is included in total estimated sales to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate variable consideration as the most likely amount to which we expect to be entitled.
We recognize changes in estimated contract sales or costs and the resulting changes in contract profit on a cumulative basis. Cumulative estimate-at-completion (EAC) adjustments represent the cumulative effect of the changes on current and prior periods; sales and operating margins in future periods are recognized as if the revised estimates had been used since contract inception. If it is determined that a loss is expected to result on an individual performance obligation, the entire amount of the estimable future loss, including an allocation of general and administrative expense, is charged against income in the period the loss is identified.
The following table presents the effect of aggregate net EAC adjustments:
 Three Months Ended September 30Nine Months Ended September 30
$ in millions, except per share data2021202020212020
Revenue$116 $124 $478 $385 
Operating income109 123 453 359 
Net earnings(1)
86 97 358 284 
Diluted earnings per share(1)
0.54 0.58 2.21 1.69 
(1)Based on a 21 percent statutory tax rate.
EAC adjustments on a single performance obligation can have a material effect on the company’s financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. During the third quarter of 2021, we recorded a $42 million unfavorable EAC adjustment on the F-35 program at Aeronautics Systems due to labor-related production inefficiencies largely driven by COVID-19-related impacts on the labor market and employee leave. No such adjustments were material to the financial statements during the three months ended September 30, 2020.
Backlog
Backlog represents the future sales we expect to recognize on firm orders received by the company and is equivalent to the company’s remaining performance obligations at the end of each period. It comprises both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time an option or IDIQ task order is exercised or awarded.
Company backlog as of September 30, 2021 was $74.8 billion. Of our September 30, 2021 backlog, we expect to recognize approximately 40 percent as revenue over the next 12 months and 60 percent as revenue over the next 24 months, with the remainder to be recognized thereafter.
Contract Assets and Liabilities
For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position. The amount of revenue recognized for the three and nine months ended September 30, 2021 that was included in the December 31, 2020
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NORTHROP GRUMMAN CORPORATION                        
contract liability balances was $261 million and $1.8 billion, respectively. The amount of revenue recognized for the three and nine months ended September 30, 2020 that was included in the December 31, 2019 contract liability balance was $232 million and $1.5 billion, respectively.
Disaggregation of Revenue
See Note 9 for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments. We believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Property, Plant, and Equipment
In the fourth quarter of 2020, the company completed a sale of equipment to a customer on a restricted Aeronautics Systems program. During the nine months ended September 30, 2021, the company received cash payments of $84 million related to the equipment sale and included it in Proceeds from sale of equipment to a customer in the unaudited condensed consolidated statement of cash flows.
Non-cash investing activities include capital expenditures incurred but not yet paid of $105 million and $123 million as of September 30, 2021 and 2020, respectively.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
$ in millionsSeptember 30, 2021December 31, 2020
Unamortized prior service credit, net of tax expense of $1 for 2021 and $3 for 2020
$4 $10 
Cumulative translation adjustment and other, net(144)(138)
Total accumulated other comprehensive loss$(140)$(128)
Related Party Transactions
For all periods presented, the company had no material related party transactions.
Accounting Standards Updates
Accounting standards updates adopted and/or issued, but not effective until after September 30, 2021, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.
2.    EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK
Basic Earnings Per Share
We calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of common stock outstanding during each period.
Diluted Earnings Per Share
Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled 0.6 million shares and 0.5 million shares for the three and nine months ended September 30, 2021, respectively. The dilutive effect of these securities totaled 0.5 million shares and 0.6 million shares for the three and nine months ended September 30, 2020, respectively.
Share Repurchases
On September 16, 2015, the company’s board of directors authorized a share repurchase program of up to $4.0 billion of the company’s common stock (the “2015 Repurchase Program”). On December 4, 2018, the company’s board of directors authorized a share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the “2018 Repurchase Program”). Repurchases under the 2015 Repurchase Program commenced in March 2016 and were completed in March 2020 at which time repurchases under the 2018 Repurchase Program commenced. As of September 30, 2021, repurchases under the 2018 Repurchase Program totaled $2.9 billion; $0.1 billion remained under this share repurchase authorization. By its terms, the 2018 Repurchase Program is set to expire when we have used all authorized funds for repurchases.
On January 25, 2021, the company’s board of directors authorized a new share repurchase program of up to an additional $3.0 billion in share repurchases of the company’s common stock (the “2021 Repurchase Program”). By its terms, repurchases under the 2021 Repurchase Program will commence upon completion of the 2018 Repurchase Program and will expire when we have used all authorized funds for repurchases.
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NORTHROP GRUMMAN CORPORATION                        
During the first quarter of 2021, the company entered into an accelerated share repurchase (ASR) agreement with Goldman Sachs & Co. LLC (Goldman Sachs) to repurchase $2.0 billion of the company’s common stock as part of the 2018 Repurchase Program. Under the agreement, we made a payment of $2.0 billion to Goldman Sachs and received an initial delivery of 5.9 million shares valued at $1.7 billion that were immediately canceled by the company. The remaining balance of $300 million was settled on June 1, 2021 with a final delivery of 0.2 million shares from Goldman Sachs. The final average purchase price was $327.29 per share.
Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and, in the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.
The table below summarizes the company’s share repurchases to date under the authorizations described above:
Shares Repurchased
(in millions)
Repurchase Program
Authorization Date
Amount
Authorized
(in millions)
Total
Shares Retired
(in millions)
Average 
Price
Per Share
(1)
Date CompletedNine Months Ended September 30
20212020
September 16, 2015$4,000 15.4 $260.33 March 2020 0.9 
December 4, 2018$3,000 8.6 $335.62 8.1 0.5 
January 25, 2021$3,000     
(1)Includes commissions paid.
Dividends on Common Stock
In May 2021, the company increased the quarterly common stock dividend 8 percent to $1.57 per share from the previous amount of $1.45 per share.
3.    INCOME TAXES
 Three Months Ended September 30Nine Months Ended September 30
$ in millions2021202020212020
Federal and foreign income tax expense$212 $181 $1,298 $564 
Effective income tax rate16.6 %15.5 %23.2 %16.5 %
Current Quarter
The third quarter 2021 effective tax rate (ETR) increased to 16.6 percent from 15.5 percent in the prior year period primarily due to lower benefits from foreign-derived intangible income (FDII). The company’s third quarter 2021 ETR includes benefits of $43 million for research credits and $12 million for FDII. The company’s third quarter 2020 ETR included benefits of $45 million for research credits and $30 million for FDII, which reflects additional benefits after final regulations issued in July 2020 clarified Foreign Military Sales qualify for the deduction.
Year to Date
The year to date 2021 ETR increased to 23.2 percent from 16.5 percent in the prior period primarily due to federal income taxes resulting from the IT services divestiture, including $250 million of income tax expense related to $1.2 billion of nondeductible goodwill in the divested business. The company’s year to date 2021 ETR also includes additional tax expense related to a change made in tax revenue recognition on certain long-term contracts, which increased taxable income in years prior to the 2017 Tax Cuts and Jobs Act at a rate above the current statutory rate as well as benefits of $142 million for research credits and $32 million for FDII. The company’s year to date 2020 ETR included benefits of $135 million for research credits and $46 million for FDII.
Taxes receivable, which are included in Prepaid expenses and other current assets in the unaudited condensed consolidated statements of financial position, were $123 million as of September 30, 2021 and $792 million as of December 31, 2020.
The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs and the 2017 Tax Cuts and Jobs Act, which includes related final revenue recognition regulations issued in December 2020 under IRC Section 451(b) and procedural guidance issued
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in August 2021. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may increase by approximately $100 million.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2017-2018 federal tax returns are currently under Internal Revenue Service (IRS) examination. During the third quarter of 2021, the company requested an appeal with the IRS for the Northrop Grumman 2014-2016 federal income tax returns and refund claims related to its 2007-2016 federal tax returns. In addition, legacy Orbital ATK federal tax returns for the year ended March 31, 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under appeal with the IRS.
4.    FAIR VALUE OF FINANCIAL INSTRUMENTS
The company holds a portfolio of marketable securities to partially fund non-qualified employee benefit plans. A portion of these securities are held in common/collective trust funds and are measured at fair value using net asset value (NAV) per share as a practical expedient; and therefore are not required to be categorized in the fair value hierarchy table below. Marketable securities are included in Other non-current assets in the unaudited condensed consolidated statements of financial position.
The company’s derivative portfolio consists primarily of foreign currency forward contracts. Where model-derived valuations are appropriate, the company utilizes the income approach to determine the fair value and uses the applicable London Interbank Offered Rate (LIBOR) swap rates.
The following table presents the financial assets and liabilities the company records at fair value on a recurring basis identified by the level of inputs used to determine fair value:
September 30, 2021December 31, 2020
$ in millionsLevel 1Level 2TotalLevel 1Level 2Total
Financial Assets
Marketable securities$390 $ $390 $377 $1 $378 
Marketable securities valued using NAV16 18 
Total marketable securities390  406 377 1 396 
Derivatives 3 3    
The notional value of the company’s foreign currency forward contracts at September 30, 2021 and December 31, 2020 was $132 million and $133 million, respectively. At September 30, 2021 and December 31, 2020, no portion of the notional value was designated as a cash flow hedge.
The derivative fair values and related unrealized gains/losses at September 30, 2021 and December 31, 2020 were not material. There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the nine months ended September 30, 2021.
The carrying value of cash and cash equivalents and commercial paper approximates fair value.
Long-term Debt
The estimated fair value of long-term debt was $15.2 billion and $18.2 billion as of September 30, 2021 and December 31, 2020, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.
On September 2, 2021, the company completed an exchange offer to eligible holders of the outstanding notes of our direct wholly owned subsidiary, Northrop Grumman Systems Corporation (“NGSC”) maturing through 2036. An aggregate principal amount of $422 million of the NGSC notes was exchanged for $422 million of Northrop Grumman Corporation notes with the same interest rates and maturity dates as the NGSC notes exchanged. Because the debt instruments are not substantially different, the exchange was treated as a debt modification for accounting purposes with no gain or loss recognized.
Repayments of Senior Notes
In March 2021, the company repaid $700 million of 3.50 percent unsecured notes upon maturity.
In March 2021, the company redeemed $1.5 billion of 2.55 percent unsecured notes due October 2022. The company recorded a pre-tax charge of $54 million principally related to the premium paid on the redemption, which
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was recorded in Other, net in the unaudited condensed consolidated statements of earnings and comprehensive income.
5.    INVESTIGATIONS, CLAIMS AND LITIGATION
On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed-price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS were delivered. The company’s lawsuit seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $410 million, less certain amounts outstanding under the contract. In the course of the litigation, the United States subsequently amended its counterclaim, reducing it to seek approximately $193 million. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On February 3, 2020, after extensive discovery and motions practice, the parties commenced what was expected to be a seven-week trial. The first four weeks of trial concluded, but the court postponed the remaining estimated three weeks as a result of COVID-19-related concerns. After additional COVID-19-related interruptions, trial concluded on March 5, 2021. On October 12, 2021, the parties completed post-trial briefing, absent any further requests or unexpected developments. Although the ultimate outcome of this matter, including any possible loss, cannot be predicted or reasonably estimated at this time, the company intends to continue vigorously to pursue and defend the matter.
We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, we have worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation (NYSDEC), the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. In December 2019, the State of New York issued an Amended Record of Decision seeking to impose additional remedial requirements beyond measures the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company will take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. On September 22, 2021, the State of New York issued for public comment a new consent decree reflecting the agreement. We understand that the State will next seek court approval of the consent decree. We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to the legacy Bethpage environmental conditions. Applicable remediation standards and other requirements to which we are subject may continue to change, our costs may increase materially and those costs may not be fully recoverable. In addition, we are a party to various, and expect to become a party to additional, legal proceedings and disputes related to remediation, environmental impacts, costs, and the allowability of costs we incur, including with federal and state entities (including the Navy, Defense Contract Management Agency, the State, local municipalities and water districts) and insurance carriers, as well as class action and individual plaintiffs alleging personal injury and property damage and seeking both monetary and non-monetary relief. These Bethpage matters could result in additional costs, fines, penalties, sanctions, compensatory or other damages, determinations on allocation, allowability and coverage, and non-monetary relief. We are in discussions with the Department of Defense and the Bethpage Water District to explore whether claims involving these parties can be resolved at this stage. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these aggregate Bethpage matters.
The company is a party to various other investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2021, or its annual results of operations and/or cash flows.
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NORTHROP GRUMMAN CORPORATION                        
6.    COMMITMENTS AND CONTINGENCIES
U.S. Government Cost Claims and Contingencies
From time to time, the company is advised of claims by the U.S. government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and U.S. government representatives engage in discussions to enable the company to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for such potential disallowed costs. Such provisions are reviewed periodically using the most recent information available. The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and that the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of September 30, 2021, or its annual results of operations and/or cash flows.
The U.S. government has raised questions about an interest rate assumption used by the company to determine our CAS pension expense. On June 1, 2020, the government provided written notice that the assumptions the company used during the period 2013-2019 were potentially noncompliant with CAS. We submitted a formal response on July 31, 2020, which we believe demonstrates the appropriateness of the assumptions used. On November 24, 2020, the government replied to the company’s response, disagreeing with our position and requesting additional input, which we provided on February 22, 2021. We are engaging further with the government. The sensitivity to changes in interest rate assumptions makes it reasonably possible the outcome of this matter could have a material adverse effect on our financial position, results of operations and/or cash flows, although we are not currently able to estimate a range of any potential loss.
Environmental Matters
The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S. government contracts as of September 30, 2021 and December 31, 2020:
$ in millions
Accrued Costs(1)(2)
Reasonably Possible Future Costs in Excess of Accrued Costs(2)
Deferred Costs(3)
September 30, 2021$600 $366 $514 
December 31, 2020614 346 529 
(1) As of September 30, 2021, $235 million is recorded in Other current liabilities and $365 million is recorded in Other non-current liabilities.
(2) Estimated remediation costs are not discounted to present value. The reasonably possible future costs in excess of accrued costs do not take into consideration amounts expected to be recoverable through overhead charges on U.S. government contracts.
(3) As of September 30, 2021, $205 million is deferred in Prepaid expenses and other current assets and $309 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.
Although management cannot predict whether new information gained as our environmental remediation projects progress, or as changes in facts and circumstances occur, will materially affect the estimated liability accrued, except with respect to Bethpage, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of September 30, 2021, or its annual results of operations and/or cash flows.
With respect to Bethpage, as discussed in Note 5, in December 2019, the State of New York issued an Amended Record of Decision, seeking to impose additional remedial requirements beyond those the company previously had been taking; the State also communicated that it was assessing potential natural resource damages. In December 2020, the parties reached a tentative agreement regarding the steps the company will take to implement the State’s Amended Record of Decision and to resolve certain potential other claims, including for natural resource damages. On September 22, 2021, the State of New York issued for public comment a new consent decree reflecting the agreement. We understand that the State will next seek court approval of the consent decree. As discussed in Note 5, the applicable remediation standards and other requirements to which we are subject may continue to change, our costs may increase materially, and those costs may not be fully recoverable.
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NORTHROP GRUMMAN CORPORATION                        
Financial Arrangements
In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At September 30, 2021, there were $476 million of stand-by letters of credit and guarantees and $69 million of surety bonds outstanding.
Commercial Paper
The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to $2.0 billion. At September 30, 2021, there were no commercial paper borrowings outstanding.
Credit Facilities
The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of $2.0 billion (the “2018 Credit Agreement”) that matures in August 2024 and is intended to support the company’s commercial paper program and other general corporate purposes. Commercial paper borrowings reduce the amount available for borrowing under the 2018 Credit Agreement. At September 30, 2021, there was no balance outstanding under this facility.
At September 30, 2021, the company was in compliance with all covenants under its credit agreements.
7.    RETIREMENT BENEFITS
The cost to the company of its pension and other postretirement benefit (OPB) plans is shown in the following table:
 Three Months Ended September 30Nine Months Ended September 30
Pension
Benefits
OPBPension
Benefits
OPB
$ in millions20212020202120202021202020212020
Components of net periodic benefit cost (benefit)
Service cost$104 $102 $4 $4 $311 $306 $12 $13 
Interest cost263 307 13 17 790 920 40 50 
Expected return on plan assets(627)(594)(26)(26)(1,884)(1,782)(79)(77)
Amortization of prior service (credit) cost(3)(15) 1 (7)(45)(1)3 
Net periodic benefit cost (benefit)$(263)$(200)$(9)$(4)$(790)$(601)$(28)$(11)
Employer Contributions
The company sponsors defined benefit pension and OPB plans, as well as defined contribution plans. We fund our defined benefit pension plans annually in a manner consistent with the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006.
Contributions made by the company to its retirement plans are as follows:
 Three Months Ended September 30Nine Months Ended September 30
$ in millions2021202020212020
Defined benefit pension plans$26 $24 $79 $70 
OPB plans8 7 29 30 
Defined contribution plans99 116 476 472 
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NORTHROP GRUMMAN CORPORATION                        
8.    STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Awards
The following table presents the number of restricted stock rights (RSRs) and restricted performance stock rights (RPSRs) granted to employees under the company’s long-term incentive stock plan and the grant date aggregate fair value of those stock awards for the periods presented:
Nine Months Ended September 30
in millions20212020
RSRs granted0.1 0.1 
RPSRs granted0.2 0.2 
Grant date aggregate fair value$89 $91 
RSRs typically vest on the third anniversary of the grant date, while RPSRs generally vest and pay out based on the achievement of certain performance metrics over a three-year period.
Cash Awards
The following table presents the minimum and maximum aggregate payout amounts related to cash units (CUs) and cash performance units (CPUs) granted to employees in the periods presented:
Nine Months Ended September 30
$ in millions20212020
Minimum aggregate payout amount$31 $31 
Maximum aggregate payout amount178 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 September 30Nine Months Ended September 30
$ in millions2021202020212020
Sales
Aeronautics Systems$2,725 $2,914 $8,628 $8,682 
Defense Systems1,409 1,859 4,398 5,626 
Mission Systems2,436 2,551 7,613 7,344 
Space Systems2,681 2,198 7,950 6,194 
Intersegment eliminations(531)(439)(1,561)(1,259)
Total sales8,720 9,083 27,028 26,587 
Operating income
Aeronautics Systems265 294 873 867 
Defense Systems175 217 529 632 
Mission Systems372 370 1,177 1,070 
Space Systems288 224 865 635 
Intersegment eliminations(65)(56)(197)(157)
Total segment operating income1,035