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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 June 30, 2022
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 July 25, 2022, 154,711,299 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 June 30Six Months Ended June 30
$ in millions, except per share amounts2022202120222021
Sales
Product$6,779 $7,193 $13,620 $14,215 
Service2,022 1,958 3,978 4,093 
Total sales8,801 9,151 17,598 18,308 
Operating costs and expenses
Product5,281 5,620 10,661 11,310 
Service1,561 1,488 3,105 3,215 
General and administrative expenses1,005 999 1,981 1,897 
Total operating costs and expenses7,847 8,107 15,747 16,422 
Gain on sale of business   1,980 
Operating income954 1,044 1,851 3,866 
Other (expense) income
Interest expense(131)(136)(264)(291)
Non-operating FAS pension benefit377 367 753 734 
Other, net(50)27 (46)9 
Earnings before income taxes1,150 1,302 2,294 4,318 
Federal and foreign income tax expense204 265 393 1,086 
Net earnings$946 $1,037 $1,901 $3,232 
Basic earnings per share$6.09 $6.44 $12.21 $19.95 
Weighted-average common shares outstanding, in millions155.4 161.0 155.7 162.0 
Diluted earnings per share$6.06 $6.42 $12.16 $19.89 
Weighted-average diluted shares outstanding, in millions156.0 161.5 156.3 162.5 
Net earnings (from above)$946 $1,037 $1,901 $3,232 
Other comprehensive loss, net of tax
Change in unamortized prior service credit (2)(1)(4)
Change in cumulative translation adjustment and other, net(13)1 (15) 
Other comprehensive loss, net of tax(13)(1)(16)(4)
Comprehensive income$933 $1,036 $1,885 $3,228 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION                        
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
$ in millions, except par valueJune 30, 2022December 31, 2021
Assets
Cash and cash equivalents$1,169 $3,530 
Accounts receivable, net2,387 1,467 
Unbilled receivables, net6,211 5,492 
Inventoried costs, net909 811 
Prepaid expenses and other current assets961 1,126 
Total current assets11,637 12,426 
Property, plant and equipment, net of accumulated depreciation of $7,099 for 2022 and $6,819 for 2021
8,125 7,894 
Operating lease right-of-use assets1,669 1,655 
Goodwill17,518 17,515 
Intangible assets, net483 578 
Deferred tax assets239 200 
Other non-current assets2,243 2,311 
Total assets$41,914 $42,579 
Liabilities
Trade accounts payable$2,098 $2,197 
Accrued employee compensation1,741 1,993 
Advance payments and billings in excess of costs incurred2,734 3,026 
Other current liabilities2,403 2,314 
Total current liabilities8,976 9,530 
Long-term debt, net of current portion of $14 for 2022 and $6 for 2021
12,834 12,777 
Pension and other postretirement benefit plan liabilities2,692 3,269 
Operating lease liabilities1,654 1,590 
Deferred tax liabilities131 490 
Other non-current liabilities1,976 1,997 
Total liabilities28,263 29,653 
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: 2022—154,876,753 and 2021—156,284,423
155 156 
Paid-in capital  
Retained earnings13,655 12,913 
Accumulated other comprehensive loss(159)(143)
Total shareholders’ equity13,651 12,926 
Total liabilities and shareholders’ equity$41,914 $42,579 
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)
 Six Months Ended June 30
$ in millions20222021
Operating activities
Net earnings$1,901 $3,232 
Adjustments to reconcile to net cash (used in) provided by operating activities:
Depreciation and amortization633 594 
Stock-based compensation42 40 
Deferred income taxes(399)(121)
Gain on sale of business (1,980)
Net periodic pension and OPB income(597)(546)
Pension and OPB contributions(71)(74)
Changes in assets and liabilities:
Accounts receivable, net(920)(453)
Unbilled receivables, net(719)(312)
Inventoried costs, net(98)(104)
Prepaid expenses and other assets114 26 
Accounts payable and other liabilities(724)(202)
Income taxes payable, net86 881 
Other, net67 (19)
Net cash (used in) provided by operating activities(685)962 
Investing activities
Divestiture of IT services business 3,400 
Capital expenditures(507)(435)
Proceeds from sale of equipment to a customer 56 
Other, net39 1 
Net cash (used in) provided by investing activities(468)3,022 
Financing activities
Payments of long-term debt (2,236)
Common stock repurchases(640)(2,143)
Cash dividends paid(519)(486)
Payments of employee taxes withheld from share-based awards(48)(31)
Other, net(1)(54)
Net cash used in financing activities(1,208)(4,950)
Decrease in cash and cash equivalents(2,361)(966)
Cash and cash equivalents, beginning of year3,530 4,907 
Cash and cash equivalents, end of period$1,169 $3,941 
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 June 30Six Months Ended June 30
$ in millions, except per share amounts2022202120222021
Common stock
Beginning of period$156 $161 $156 $167 
Common stock repurchased(1)(1)(2)(7)
Shares issued for employee stock awards and options  1  
End of period155 160 155 160 
Paid-in capital
Beginning of period 8  58 
Common stock repurchased (21) (60)
Stock compensation 13  2 
End of period    
Retained earnings
Beginning of period13,277 10,487 12,913 10,482 
Common stock repurchased(323)(134)(638)(2,089)
Net earnings946 1,037 1,901 3,232 
Dividends declared(270)(254)(516)(489)
Stock compensation25 8 (5)8 
End of period13,655 11,144 13,655 11,144 
Accumulated other comprehensive loss
Beginning of period(146)(131)(143)(128)
Other comprehensive loss, net of tax(13)(1)(16)(4)
End of period(159)(132)(159)(132)
Total shareholders’ equity$13,651 $11,172 $13,651 $11,172 
Cash dividends declared per share$1.73 $1.57 $3.30 $3.02 
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 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 former Information Solutions and Services (IS&S) division of Defense Systems (excluding the Vinnell Arabia business); select cyber, intelligence and missions support programs, which were part of the former Cyber and Intelligence Mission Solutions (CIMS) division of Mission Systems; and the former Space Technical Services business unit of Space Systems. Operating results include sales and operating income for the IT and mission support services business prior to the Divestiture date. Sales and pre-tax profit for the IT and mission support services business were $162 million and $20 million for the six months ended June 30, 2021, 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.
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 2021 Annual Report on Form 10-K.
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
Contract Estimates
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.
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NORTHROP GRUMMAN CORPORATION                        
The following table presents the effect of aggregate net EAC adjustments:
 Three Months Ended June 30Six Months Ended June 30
$ in millions, except per share data2022202120222021
Revenue$95 $160 $304 $362 
Operating income92 154 265 344 
Net earnings(1)
73 122 209 272 
Diluted earnings per share(1)
0.47 0.76 1.34 1.67 
(1)Based on a 21 percent statutory tax rate.
EAC adjustments on a single performance obligation can have a significant 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 three months ended March 31, 2022, we recorded a $67 million favorable EAC adjustment on the engineering, manufacturing and development phase of the B-21 program at Aeronautics Systems largely related to performance incentives. No such adjustments were material to the financial statements during the three months ended June 30, 2022 and 2021.
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 June 30, 2022 was $80.0 billion. Of our June 30, 2022 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 six months ended June 30, 2022 that was included in the December 31, 2021 contract liability balance was $466 million and $1.9 billion, respectively. The amount of revenue recognized for the three and six months ended June 30, 2021 that was included in the December 31, 2020 contract liability balance was $482 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.
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NORTHROP GRUMMAN CORPORATION                        
Property, Plant, and Equipment
During the six months ended June 30, 2022, the company acquired $46 million of internal use software through long-term financing directly with the supplier. The software was recorded in PP&E as a non-cash investing activity and the related liability was recorded in long-term debt as a non-cash financing activity. During the six months ended June 30, 2022, the company received lease incentives for landlord funded leasehold improvements of $63 million related to a Space Systems real estate lease, which were recorded in PP&E and included in non-cash investing activities. Non-cash investing activities also include capital expenditures incurred but not yet paid of $73 million and $56 million as of June 30, 2022 and 2021, respectively.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows:
$ in millionsJune 30, 2022December 31, 2021
Unamortized prior service credit$1 $2 
Cumulative translation adjustment and other, net(160)(145)
Total accumulated other comprehensive loss$(159)$(143)
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 June 30, 2022, 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 for the three and six months ended June 30, 2022 and 0.5 million shares for the three and six months ended June 30, 2021.
Share Repurchases
On December 4, 2018, the company’s board of directors authorized a share repurchase program of up to $3.0 billion of the company’s common stock (the “2018 Repurchase Program”). Repurchases under the 2018 Repurchase Program commenced in March 2020 and were completed in October 2021.
On January 25, 2021, 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 “2021 Repurchase Program”). Repurchases under the 2021 Repurchase Program commenced in October 2021 upon the completion of the 2018 Repurchase Program. As of June 30, 2022, repurchases under the 2021 Repurchase Program totaled $1.5 billion; $1.5 billion remained under this share repurchase authorization. By its terms, the 2021 Repurchase Program is set to expire when we have used all authorized funds for repurchases.
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NORTHROP GRUMMAN CORPORATION                        
On January 24, 2022, the company’s board of directors authorized a new share repurchase program of up to an additional $2.0 billion in share repurchases of the company’s common stock (the “2022 Repurchase Program”). By its terms, repurchases under the 2022 Repurchase Program will commence upon completion of the 2021 Repurchase Program and will expire when we have used all authorized funds for repurchases. As of June 30, 2022, there have been no repurchases under the 2022 Repurchase Program and the company’s total outstanding share repurchase authorization was $3.5 billion.
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.
During the fourth quarter of 2021, the company entered into an ASR agreement with Goldman Sachs to repurchase $500 million of the company’s common stock as part of the 2021 Repurchase Program. Under the agreement, we made a payment of $500 million to Goldman Sachs and received an initial delivery of 1.2 million shares valued at $425 million that were immediately canceled by the company. The remaining balance of $75 million was settled on February 1, 2022 with a final delivery of 0.1 million shares from Goldman Sachs. The final average purchase price was $374.79 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. During the six months ended June 30, 2022, the company repurchased $640 million of its outstanding shares.
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 CompletedSix Months Ended June 30
20222021
December 4, 2018$3,000 8.9 $337.18 October 2021 6.5 
January 25, 2021$3,000 3.8 393.76 1.6  
January 24, 2022$2,000     
(1)Includes commissions paid.
Dividends on Common Stock
In May 2022, the company increased the quarterly common stock dividend 10 percent to $1.73 per share from the previous amount of $1.57 per share.
3.    INCOME TAXES
 Three Months Ended June 30Six Months Ended June 30
$ in millions2022202120222021
Federal and foreign income tax expense$204 $265 $393 $1,086 
Effective income tax rate17.7 %20.4 %17.1 %25.2 %
Current Quarter
The second quarter 2022 effective tax rate (ETR) decreased to 17.7 percent from 20.4 percent in the prior year period. The company’s second quarter 2022 ETR includes benefits of $41 million for research credits and $15 million for foreign derived intangible income (FDII), which were partially offset by nondeductible losses on certain of the company’s marketable securities. The company’s second quarter 2021 ETR included benefits of $48 million for research credits and $10 million for FDII. The second quarter 2021 ETR was impacted by a change
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NORTHROP GRUMMAN CORPORATION                        
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.
Year to Date
The year to date 2022 ETR decreased to 17.1 percent from 25.2 percent in the prior year period. The company’s year to date 2022 ETR includes benefits of $82 million for research credits and $29 million for FDII. The company’s year to date 2021 ETR included benefits of $99 million for research credits and $20 million for FDII. The year to date 2021 ETR was impacted by additional federal income taxes resulting from the IT services divestiture, as well as the change in tax revenue recognition on certain contracts described above.
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 in August 2021. As of June 30, 2022, we have approximately $1.7 billion in unrecognized tax benefits, including $458 million related to our position on IRC Section 451(b). If these matters, including our position on IRC Section 451(b), are unfavorably resolved, there could be a material impact on our future cash flows. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may increase by approximately $120 million.
Our current unrecognized tax benefits, which are included in Other current liabilities in the unaudited condensed consolidated statements of financial position, were $659 million and $590 million as of June 30, 2022 and December 31, 2021, respectively, with the remainder of our unrecognized tax benefits included within Other non-current liabilities.
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. This quarter, the company’s 2014-2016 federal income tax returns and refund claims related to its 2007-2016 federal tax returns reverted back from IRS Appeals to IRS examination for additional factual review. In addition, legacy Orbital ATK (OATK) federal tax returns for the years ended March 31, 2014 and 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under review by the IRS Appeals Office. It is reasonably possible that within the next twelve months, unrecognized tax benefits claimed in legacy OATK’s 2014 to 2017 tax years may decline by up to $110 million through administrative resolution with IRS Appeals.
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 using internal models based on observable market inputs.
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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:
June 30, 2022December 31, 2021
$ in millionsLevel 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Financial Assets
Marketable securities$328 $ $8 $336 $393 $1 $7 $401 
Marketable securities valued using NAV14 17 
Total marketable securities328  8 350 393 1 7 418 
Derivatives (1) (1) (1) (1)
The notional value of the company’s foreign currency forward contracts at June 30, 2022 and December 31, 2021 was $114 million and $120 million, respectively. At June 30, 2022 and December 31, 2021, no portion of the notional value was designated as a cash flow hedge.
The derivative fair values and related unrealized gains/losses at June 30, 2022 and December 31, 2021 were not material.
There were no transfers of financial instruments into or out of Level 3 of the fair value hierarchy during the six months ended June 30, 2022.
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 $12.8 billion and $15.1 billion as of June 30, 2022 and December 31, 2021, 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 unregistered Northrop Grumman Corporation notes (the “Unregistered 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.
On June 15, 2022, the company completed a registered exchange offer pursuant to which the company exchanged an aggregate principal amount of $414 million of the Unregistered Notes for $414 million of new notes registered under the Securities Act of 1933, as amended, (the “Registered Notes”) with the same interest rates and maturity dates as the Unregistered Notes.
Because the debt instruments were not substantially different in either of the exchange offers, both exchanges were treated as debt modifications 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 was recorded in Other, net in the unaudited condensed consolidated statements of earnings and comprehensive income.
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NORTHROP GRUMMAN CORPORATION                        
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. After COVID-19-related interruptions, trial concluded on March 5, 2021. On October 12, 2021, the parties completed post-trial briefing, and on December 8, 2021 the court held a post-trial oral argument. On June 27, 2022, the judge issued a decision concluding that the company was entitled to approximately $63 million for unpaid portions of the contract price and $5 million in additional damages, as well as interest, which the company estimates is approximately $15 million (as of June 30, 2022) and such additional interest as may accrue until the date the government makes payment. The judge also concluded that the government was entitled to approximately $1 million in off-setting damages. On July 18, 2022, the government filed a motion for reconsideration, arguing that the government is entitled to damages of approximately $57 million for particular periods of delay. Ultimately, after the court enters judgment, the parties will also have 60 days to file an appeal.
The company is 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, the company has 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. On December 7, 2021, the public comment period closed. On July 13, 2022, the State filed a motion seeking court approval of the consent decree. We have also reached agreements with the Department of Defense and the Bethpage Water District to resolve claims involving these parties. On May 24, 2022, the court approved the agreement with the Bethpage Water District. On July 18, 2022, the government filed a motion seeking court approval of the agreement with the Department of Defense. We are in discussions with the South Farmingdale Water District to explore whether we can also resolve their claims at this stage.
We have incurred, and expect to continue to incur, as included in Note 6, substantial remediation costs related to the legacy Bethpage environmental conditions. It is also possible that applicable remediation, allocation and allowability standards and other requirements to which we are subject may continue to change, and our costs may increase materially. In addition to disputes and legal proceedings related to environmental conditions at the site (including remediation, allocation and allowability), we are a party to various individual lawsuits and a putative class action alleging personal injury and property damage in the Eastern District of New York. The filed individual lawsuits have been stayed, pending a court decision on class certification. We are also a party, and may become a party, to other lawsuits brought by insurance carriers and other parties. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these Bethpage lawsuits.
In June 2018, the FTC issued a Decision and Order enabling the company’s acquisition of OATK to proceed and providing generally for the company to continue to make solid rocket motors available to competing missile primes on a non-discriminatory basis. The company has taken and continues to take robust actions to help ensure compliance with the terms of the Order. Similarly, the Compliance Officer, appointed under the Order, and the FTC have taken and continue to take various actions to oversee compliance. In October 2019, the company received a civil investigative demand from the FTC requesting certain information relating to a potential issue regarding the
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NORTHROP GRUMMAN CORPORATION                        
company’s compliance with the Order in connection with a then pending missile competition. The company promptly provided information in response to the request. The company has resumed discussions with staff at the FTC regarding our response and their views on compliance issues. We cannot predict the outcome of those discussions, but we do not believe they are likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of June 30, 2022, or its annual results of operations and/or cash flows. We believe the company has been and continues to be in compliance with the Order.
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 June 30, 2022, 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 June 30, 2022, 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 and further discussed with the government. We continue to exchange correspondence and engage with the government on this matter. 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 June 30, 2022 and December 31, 2021:
$ in millions
Accrued Costs(1)(2)
Reasonably Possible Future Costs in Excess of Accrued Costs(2)
Deferred Costs(3)
June 30, 2022$574 $363 $486 
December 31, 2021572 363 486 
(1) As of June 30, 2022, $187 million is recorded in Other current liabilities and $387 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 June 30, 2022, $162 million is deferred in Prepaid expenses and other current assets and $324 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.
Although management cannot predict whether (i) new information gained as our environmental remediation projects progress, (ii) changes in remediation standards or other requirements to which we are subject, or (iii) other changes in facts and circumstances will materially affect the estimated liability accrued, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the
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NORTHROP GRUMMAN CORPORATION                        
company’s unaudited condensed consolidated financial position as of June 30, 2022, or its annual results of operations and/or cash flows.
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 June 30, 2022, there were $370 million of stand-by letters of credit and guarantees and $78 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 June 30, 2022, 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 June 30, 2022, there was no balance outstanding under this facility.
At June 30, 2022, 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 June 30Six Months Ended June 30
Pension
Benefits
OPBPension
Benefits
OPB
$ in millions20222021202220212022202120222021
Components of net periodic benefit cost (benefit)
Service cost$92 $103 $2 $4 $184 $207 $4 $8 
Interest cost284 264 12 14 568 527 24 27 
Expected return on plan assets(661)(629)(27)(27)(1,321)(1,257)(55)(53)
Amortization of prior service (credit) cost (2)(1)(1) (4)(1)(1)
Net periodic benefit cost (benefit)$(285)$(264)$(14)$(10)$(569)$(527)$(28)$(19)
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 June 30Six Months Ended June 30
$ in millions2022202120222021
Defined benefit pension plans$25 $26 $51 $53 
OPB plans10 10 20 21 
Defined contribution plans122 111 321 377 
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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:
Six Months Ended June 30
in millions20222021
RSRs granted0.1 0.1 
RPSRs granted0.2 0.2 
Grant date aggregate fair value$93 $88 
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:
Six Months Ended June 30
$ in millions20222021
Minimum aggregate payout amount$32 $31 
Maximum aggregate payout amount183 178 
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 June 30Six Months Ended June 30
$ in millions2022202120222021
Sales
Aeronautics Systems$2,534 $2,913 $5,237 $5,903 
Defense Systems1,294 1,427 2,577 2,989 
Mission Systems2,516 2,588 5,013 5,177 
Space Systems2,979 2,748 5,834 5,269 
Intersegment eliminations(522)(525)(1,063)(1,030)
Total sales8,801 9,151 17,598 18,308 
Operating income
Aeronautics Systems258 300 565 608 
Defense Systems168