2013
Annual Report
SELECTED FINANCIAL HIGHLIGHTS
2
1
4
6
2
$
,
8
1
2
,
5
2
$
1
6
6
4
2
$
,
3
2
1
,
3
$
0
3
1
,
3
$
6
7
2
,
3
$
5
3
8
$
.
1
8
7.
$
1
4
7.
$
13
12
11
13
12
11
13
12
11
SALES
( $ in millions )
OPERATING INCOME
( $ in millions )
DILUTED EPS FROM
CONTINUING OPERATIONS
8
3
2
$
.
5
1
2
$
.
7
9
1
$
.
5
9
9
2
$
,
6
0
8
,
2
$
3
3
8
2
$
,
2
0
5
,
2
$
3
0
5
,
2
$
2
4
4
,
2
$
13
12
11
13
12
11
13
12
11
CASH DIVIDENDS DECLARED
( per common share )
ADJUSTED CASH
PROVIDED BY CONTINUING
OPERATIONS*
( $ in millions )
ADJUSTED FREE CASH
FLOW FROM CONTINUING
OPERATIONS*
( $ in millions )
* Non-GAAP measures
Non-GAAP definitions and reconciliations:
Adjusted cash provided by operations is cash
provided by operations as defined by GAAP
before the after-tax impact of discretionary
pension contributions of $323 million,
$193 million, and $648 million for years
2013, 2012 and 2011, respectively.
Free cash flow is cash provided by operations
less capital expenditures. Free cash flow is
reconciled to cash provided by operations in
the table on page 35 of Part II, Item 7, “Liquidity
and Capital Resources,” in the Form 10-K
included in these materials.
Adjusted free cash flow is free cash flow
as defined and not reconciled above before
the after-tax impact of discretionary
pension contributions of $323 million,
$193 million, and $648 million for years
2013, 2012 and 2011, respectively.
DEAR FELLOW SHAREHOLDERS
Northrop Grumman achieved strong financial performance in
In 2013, we expanded our business with U.S. allies around the globe,
2013, reflecting the results of superior program performance,
increasing our international sales by approximately 20 percent to
affordability initiatives, innovation, and portfolio decisions
$2.5 billion; slightly more than 10 percent of total revenue.
across our four businesses. Financial highlights in 2013 included:
increased earnings per share from continuing operations by
7 percent to $8.35 per diluted share; a record pension-adjusted
operating margin rate of 12 percent; and free cash flow of $2.4
billion before discretionary pension contributions. Through share
repurchases and dividends, we returned $2.9 billion in cash to our
shareholders, or approximately 140 percent of 2013 reported
For both U.S. and global markets, our strategy remains focused on
four key business areas where we believe our customers will invest
most aggressively for the future – unmanned systems, C4ISR, cyber
and logistics and modernization – as well as manned strike aircraft.
We are cognizant of our responsibility to the communities in
which we work and live. In 2013, Northrop Grumman and the
Northrop Grumman Foundation contributed a total of $38.1
free cash flow.
Since the end of 2009,
sales have declined about
11 percent, due in part to
portfolio reshaping.
During that same period,
“We are proud to have achieved strong 2013
results. Our attention remains keenly focused
on driving performance for our shareholders,
customers and employees.”
million to philanthropic
efforts, supporting science,
technology, engineering and
math programs and assisting
veterans, service members
our focus on performance has generated a 17 percent increase in
absolute segment operating income and more than a 30 percent
improvement in segment operating margin rate. As a result, in
combination with effective cash deployment, earnings per share
from continuing operations have grown by a compound annual
growth rate of 17 percent. This improvement was primarily driven
by superior program performance and portfolio shaping, while we
also significantly reduced our cost structure.
and their families. As we continue to expand our global presence,
our philanthropic commitment will become increasingly global.
I encourage you to take a few minutes to read our 2013 Corporate
Responsibility report.
We are proud to have achieved strong 2013 results while
demonstrating the highest levels of ethics and integrity. Our
attention remains keenly focused on driving performance for our
shareholders, customers and employees. We thank you for your
continued investment in Northrop Grumman.
WES BUSH
Chairman, CEO and President
March 14, 2014
PAGE 1
NORTHROP GRUMMAN 2013 ANNUAL REPORT OUR BUSINESS SECTORS
Northrop Grumman broadened its business focus to one that
Northrop Grumman offers an
is increasingly global, looking for opportunities to expand the
extraordinary portfolio of capabilities
delivery of products and services into attractive global markets by
leveraging our core positions in C4ISR, unmanned systems, cyber
and logistics. Country chief executives were appointed in each of
four country markets aimed at strengthening in-country presence:
UK & Europe, Australia, United Arab Emirates, Kingdom of Saudi
Arabia. This increased global presence will enable us to work more
closely with our customers, understand and address their needs,
and offer integrated solutions.
and technologies that enable us
to deliver innovative systems and
solutions for applications that
range from undersea to outer space
and into cyberspace. Our core
competencies are aligned with the
current and future needs of our
customers and address emerging
global security challenges in key
areas, such as unmanned systems,
cyber, C4ISR, and logistics and
modernization that are critical to the
defense of our nation and its allies.
PAGE 2
NORTHROP GRUMMAN 2013 ANNUAL REPORT Northrop Grumman broadened its business focus to one that
is increasingly global, looking for opportunities to expand the
delivery of products and services into attractive global markets by
leveraging our core positions in C4ISR, unmanned systems, cyber
and logistics. Country chief executives were appointed in each of
four country markets aimed at strengthening in-country presence:
UK & Europe, Australia, United Arab Emirates, Kingdom of Saudi
Arabia. This increased global presence will enable us to work more
closely with our customers, understand and address their needs,
and offer integrated solutions.
AEROSPACE
SYSTEMS
ELECTRONIC
SYSTEMS
INFORMATION
SYSTEMS
TECHNICAL
SERVICES
A premier provider of manned
and unmanned aircraft,
satellites and space systems,
and advanced technologies
critical to the nation’s security.
Key products include
the Global Hawk enterprise
(Global Hawk, Triton and
NATO AGS), Fire Scout, and
X-47B UCAS-D unmanned
aircraft systems; the B-2
Bomber, E-2 Hawkeye, F-18,
F-35, Joint STARS targeting
and battle management
system; the James Webb
Space Telescope, Space
Tracking and Surveillance
System, and advanced
communications payloads.
A leading provider of
sensor systems for a
variety of global security
applications including
situational awareness
and self-protection. Key
products include combat
avionics radars for fighter
aircraft; satellite-based
space sensors; airborne
surveillance systems;
ground- and vehicle-
based radars; shipboard
radars; navigation systems;
systems for unmanned
aircraft; laser systems
for both targeting and
infrared countermeasures
applications; advanced
electronic systems covering
the electro-optical, RF, and
IR spectrums; and networked
systems to process and
disseminate C4ISR data.
A leading global provider
of advanced information
systems solutions including
cyber, communications,
command and control, ISR,
civil security, and health
IT in support of the U.S.
and its allies. Key solutions
include full-spectrum cyber;
airborne communications
networks, command and
control systems, air and
missile defense systems,
unmanned ground systems;
SIGINT solutions; ground
terminals for space
communication; fraud
prevention systems; critical
infrastructure protection;
and secure mobile public
safety solutions.
A premier supplier of
life cycle solutions and
innovative technical support
and services for customers
globally. Key capabilities
include platform sustainment
and modernization,
advanced training solutions,
including the U.S. Army’s
Combat Training Center
Instrumentation System,
high-technology engineering
services and operationally
responsive systems for
programs such as KC-10
Extender refueling aircraft;
U.S. Army Mission Command
Training Program; Hunter
unmanned aerial system life
cycle support; Intercontinental
Ballistic Missile Program
and the U.S. Army’s National
Training Center combat and
tactical wheel vehicle fleet
management.
PAGE 3
NORTHROP GRUMMAN 2013 ANNUAL REPORT ELECTED OFFICERS (As of December 31, 2013)
WESLEY G. BUSH
Chairman, Chief Executive Officer
and President
SID ASHWORTH
Corporate Vice President,
Government Relations
MARK A. CAYLOR
Corporate Vice President
and President,
Enterprise Shared Services
SHEILA C. CHESTON
Corporate Vice President
and General Counsel
GLORIA A. FLACH
Corporate Vice President
and President,
Electronic Systems
DARRYL M. FRASER
Corporate Vice President,
Communications
MICHAEL A. HARDESTY
Corporate Vice President,
Controller and
Chief Accounting Officer
CHRISTOPHER T. JONES
Corporate Vice President
and President,
Technical Services
JENNIFER C. MCGAREY
Corporate Vice President
and Secretary
LINDA A. MILLS
Corporate Vice President,
Operations
PRABU NATARAJAN
Corporate Vice President
and Treasurer
BOARD OF DIRECTORS (As of December 31, 2013)
WESLEY G. BUSH
Chairman, Chief Executive Officer
and President,
Northrop Grumman Corporation
VICTOR H. FAZIO 1 3
Senior Advisor, Akin Gump
Strauss Hauer & Feld LLP (law firm)
and Former Member of Congress
DONALD E. FELSINGER 2 4
Lead Independent Director,
Northrop Grumman Corporation
Former Chairman and
Chief Executive Officer,
Sempra Energy
(energy services company)
STEPHEN E. FRANK 1 3†
Former Chairman, President
and Chief Executive Officer,
Southern California Edison
(electric utility company)
BRUCE S. GORDON 1† 4
Former President
and Chief Executive Officer,
NAACP and Former President,
Retail Markets Group,
Verizon Communications Inc.
(telecommunications company)
PAGE 4
WILLIAM H. HERNANDEZ 1 3
Former Senior Vice President
and Chief Financial Officer,
PPG Industries, Inc.
(chemical and industrial
products manufacturer)
MADELEINE A. KLEINER 2 3
Former Executive Vice President
and General Counsel,
Hilton Hotels Corporation
(hotel and resort company)
KARL J. KRAPEK 2† 4
Former President and
Chief Operating Officer,
United Technologies Corporation
(aerospace and building
systems company)
RICHARD B. MYERS 1 4
General, United States Air Force
(Ret.) and Former Chairman of
the Joint Chiefs of Staff
AULANA L. PETERS 2 3
Former Partner,
Gibson, Dunn & Crutcher
(law firm)
JAMES F. PALMER
Corporate Vice President and
Chief Financial Officer
DENISE M. PEPPARD
Corporate Vice President
and Chief Human Resources Officer
DAVID T. PERRY
Corporate Vice President
and Chief Global Business
Development Officer
THOMAS E. VICE
Corporate Vice President
and President,
Aerospace Systems
KATHY J. WARDEN
Corporate Vice President
and President,
Information Systems
GARY ROUGHEAD 1 3
Admiral, United States Navy (Ret.)
and Former Chief of Naval Operations
THOMAS M. SCHOEWE 1 3
Former Executive Vice President
and Chief Financial Officer,
Wal-Mart Stores, Inc.
(operator of retail stores)
KEVIN W. SHARER 2 4†
Senior Lecturer at Harvard
Business School and
Former Chairman,
Chief Executive Officer
and President, Amgen, Inc.
(biotechnology company)
1 Member of Policy Committee
2 Member of Governance Committee
3 Member of Audit Committee
4 Member of Compensation Committee
† Committee Chairperson
NORTHROP GRUMMAN 2013 ANNUAL REPORT UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
_____________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2013
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to Commission file number 1-16411
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
80-0640649
(I.R.S. Employer
Identification Number)
2980 Fairview Park Drive, Falls Church, Virginia 22042 (703) 280-2900
(Address and telephone number of principal executive offices)
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Common Stock, $1 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes
No
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 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 and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
(Do not check if a smaller reporting company)
As of June 28, 2013, the aggregate market value of the common stock (based upon the closing price of the stock on the New York
Stock Exchange) of the registrant held by non-affiliates was approximately $19.1 billion.
Yes
No
As of January 30, 2014, 216,737,248 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Northrop Grumman Corporation’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A for the 2014 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
NORTHROP GRUMMAN CORPORATION
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Item 7.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Consolidated Operating Results
Segment Operating Results
Product and Service Analysis
Backlog
Liquidity and Capital Resources
Critical Accounting Policies, Estimates, and Judgments
Other Matters
Item 7A.
Item 8.
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings and Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders' Equity
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
2. Earnings Per Share, Share Repurchases and Dividends on Common Stock
3. Business Dispositions
4. Segment Information
5. Accounts Receivable, Net
6. Inventoried Costs, Net
7. Income Taxes
8. Goodwill and Other Purchased Intangible Assets
9. Fair Value of Financial Instruments
Page
1
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i
10. Long-term Debt
11. Investigations, Claims and Litigation
12. Commitments and Contingencies
13. Retirement Benefits
14. Stock Compensation Plans and Other Compensation Arrangements
15. Unaudited Selected Quarterly Data
Item 9.
Item 9A.
Item 9B.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
PART IV
Page
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[THIS PAGE INTENTIONALLY LEFT BLANK]
NORTHROP GRUMMAN CORPORATION
Item 1. Business
HISTORY AND ORGANIZATION
PART I
History
Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”)
is a leading global security company. We provide innovative systems, products and solutions in unmanned systems;
cybersecurity; command, control, communications and computers (C4) intelligence, surveillance, and
reconnaissance (C4ISR); and logistics and modernization to government and commercial customers worldwide
through our four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services.
We participate in many high-priority defense and government services programs in the United States (U.S.) and
abroad. We offer a broad portfolio of capabilities and technologies that enable us to deliver innovative systems and
solutions for applications that range from undersea to outer space and into cyberspace. We conduct most of our
business with the U.S. Government, principally the Department of Defense (DoD) and intelligence community. We
also conduct business with local, state, and foreign governments and domestic and international commercial
customers. For a discussion of risks associated with our operations, see Risk Factors in Part I, Item 1A.
The company originally was formed in Hawthorne, California in 1939, as Northrop Aircraft Incorporated and was
reincorporated in Delaware in 1985, as Northrop Corporation. Northrop Aircraft Incorporated was a principal
developer of the flying wing technology, including the B-2 Stealth Bomber. The company developed into one of the
largest defense contractors in the world through a series of acquisitions, as well as organic growth. In 1994, we
acquired Grumman Corporation (Grumman), after which time the company was renamed Northrop Grumman
Corporation. Grumman was a premier military aircraft systems integrator and builder of the Lunar Module that first
delivered men to the surface of the moon. In 1996, we acquired the defense and electronics businesses of
Westinghouse Electric Corporation (Westinghouse), a world leader in the development and production of
sophisticated radar and other electronic systems for the nation’s defense, civil aviation, and other international and
domestic applications. In 2001, we acquired Litton Industries, a global electronics and information technology
company, and one of the nation's leading full service shipbuilders. In 2002, we acquired TRW Inc. (TRW), a leading
developer of military and civil space systems and satellite payloads, as well as a leading global integrator of
complex, mission-enabling systems and services.
Effective as of March 31, 2011, the company completed the spin-off to its shareholders of Huntington Ingalls
Industries, Inc. (HII). HII operates our former Shipbuilding business, which was acquired in 2001, through the
acquisition of Newport News Shipbuilding and a portion of the Litton acquisition. As a result of the spin-off, assets,
liabilities and results of operations for the former Shipbuilding segment have been reclassified as discontinued
operations for all periods presented. See Note 3 to our consolidated financial statements in Part II, Item 8 for further
information.
Organization
From time to time, we acquire or dispose of businesses and realign contracts, programs or business areas among and
within our operating segments, such as where they possess similar customers, expertise, and capabilities. Internal
realignments are designed to more fully leverage existing capabilities and enhance development and delivery of
products and services. The operating results for all periods presented have been revised to reflect these changes
made through December 31, 2013. We are currently aligned into four operating segments: Aerospace Systems,
Electronic Systems, Information Systems and Technical Services. See Note 4 to our consolidated financial
statements in Part II, Item 8 for further information.
AEROSPACE SYSTEMS
Aerospace Systems, headquartered in Redondo Beach, California, is a leader in the design, development, integration
and production of manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics and
other systems and subsystems. Aerospace Systems' customers, primarily U.S. government agencies, use these
systems in mission areas including intelligence, surveillance and reconnaissance (ISR), communications, battle
management, strike operations, electronic warfare, earth observation, satellite communications, space science and
space exploration. The segment consists of four business areas: Unmanned Systems, Military Aircraft Systems,
Space Systems, and Strategic Programs & Technology.
Unmanned Systems - designs, develops, manufactures, and integrates ISR unmanned systems for tactical and
strategic systems. Key ISR programs include the RQ-4 Global Hawk reconnaissance system, a proven high-altitude
long-endurance system providing near real-time high resolution imagery of large geographical areas; the Triton
-1-
NORTHROP GRUMMAN CORPORATION
aircraft system providing real-time ISR over vast ocean and coastal regions; the trans-Atlantic NATO Alliance
Ground Surveillance system for multinational theater operations, peacekeeping missions, and disaster relief efforts;
the Fire Scout aircraft system providing unprecedented situational awareness and precision targeting support; and
the Navy Unmanned Combat Air System for the demonstration unmanned combat air vehicle for carrier based
operations.
Military Aircraft Systems - designs, develops, manufactures, and integrates airborne C4ISR, electronic warfare
mission systems, and long range strike and tactical aircraft systems. Key airborne C4ISR programs include the E-2D
Advanced Hawkeye and Joint Surveillance Target Attack Radar System (JSTARS). Electronic warfare includes the
EA-18G Growler and EA-6B Prowler airborne electronic attack weapon systems in addition to the design,
development, and integration of laser weapon systems for air, sea, and ground platforms. This business area also
designed, developed and manufactured the B-2 Spirit bomber and now provides sustainment and upgrade services
for the B-2, the nation's most advanced long range strike aircraft system. Tactical aircraft includes the design,
development, manufacture and integration of F/A-18 aft sections and F-35 center sections.
Space Systems - designs, develops, manufactures, and integrates spacecraft systems, subsystems, sensors and
communications payloads in support of space science and C4ISR. Key programs include the James Webb Space
Telescope (JWST), a large infrared telescope being built for NASA that will be deployed in space to study the
origins of the universe; Advanced Extremely High Frequency (AEHF) payloads providing survivable, protected
communications to U.S. forces; and restricted programs.
Strategic Programs & Technology - creates and matures advanced technologies and innovative concepts to provide
affordable solutions addressing current and future customer needs. The Strategic Programs & Technology business
area maintains a broad portfolio of contracts ranging from development of components to prototypes to initial
operational systems across the air, land and space domains.
ELECTRONIC SYSTEMS
Electronic Systems, headquartered in Linthicum, Maryland, is a leader in the design, development, manufacture and
support of solutions for sensing, understanding, anticipating and controlling the operating environment for our
global military, civil and commercial customers. Electronic Systems provides a variety of defense electronics and
systems, airborne fire control radars, situational awareness systems, early warning systems, airspace management
systems, navigation systems, communications systems, marine power and propulsion systems, space systems and
logistics services. The segment consists of three business areas: Intelligence, Surveillance, Reconnaissance &
Targeting Systems, Land & Self Protection Systems, and Navigation & Maritime Systems.
Intelligence, Surveillance, Reconnaissance & Targeting Systems - delivers products and services for space satellite
applications, airborne and ground-based surveillance, multi-sensor processing, analysis and dissemination for
combat units and national agencies, both domestic and international. These systems provide battle space awareness,
missile defense, command and control, combat avionics (fire control radars, multi-function apertures and pods),
airborne electro-optical/infrared (EO/IR) targeting systems and postal automation systems. Key programs include
airborne fire control radars such as the Scalable Agile Beam Radar (SABR), which provides affordable Active
Electronically Scanned Array (AESA) capabilities for domestic and international fighters; the F-35 fire control
radar, a multi-function AESA radar for the U.S. Armed Forces and a large number of international partners; EO/IR
systems such as the LITENING targeting pod and the Distributed Aperture System (DAS), a 360 degree spherical
situational awareness system; airborne surveillance radars such as the Multirole Electronically Scanned Array
(MESA) for Airborne Early Warning & Control (AEW&C), which provides air-to-air and air-to-surface coverage;
and space systems such as the Space-Based Infrared System (SBIRS), which provides data for missile surveillance,
missile defense, technical intelligence and battlespace characterization.
Land & Self Protection Systems - delivers products, systems and services that support ground-based, helicopter and
fixed wing platforms (manned and unmanned) with sensor and protection systems. A major product line of this
business area consists of systems that perform threat detection and countermeasures that defeat infrared and radio
frequency (RF) guided missile and tracking systems. This business area also provides integrated electronic warfare
capability, communications and intelligence systems, unattended ground sensors, automatic test equipment,
advanced threat simulators, ground-based air defense and multi-function radars, situational awareness systems and
laser/electro-optical systems. Key programs include the Ground/Air Task Oriented Radar (G/ATOR), which is a
ground-based multi-mission radar designed to detect and track a wide variety of threats; the TPS-78 ground-based
radar, which provides air defense and air surveillance for the global market; the Large Aircraft Infrared
Countermeasures (LAIRCM), which is an infrared countermeasure system designed to protect aircraft against man-
-2-
NORTHROP GRUMMAN CORPORATION
portable (shoulder-launched) infrared-guided surface-to-air missiles; and the AN/APR-39, which provides rapid
identification and continuous radar threat warning for today's complex battlefields.
Navigation & Maritime Systems - delivers products and services to domestic and international defense, civil and
commercial customers supporting smart navigation, shipboard radar surveillance, ship control, machinery control
and integrated combat management systems for naval surface ships; high-resolution undersea sensors for mine
hunting, situational awareness and other applications; unmanned marine vehicles; shipboard missile and
encapsulated payload launch systems, propulsion and power generation systems, nuclear reactor instrumentation and
control and acoustic sensors for submarines and aircraft carriers; inertial navigation systems for all domains (air,
land, sea, and space); and embedded Global Positioning Systems. Key programs include the AN/SPQ-9B Anti-Ship
Missile Defense radar, which provides the US Navy’s cruisers and destroyers with situational awareness and contact
information from aircraft, cruise missiles, surface vessels and periscope detection; inertial navigation and
positioning products for a range of platforms including ships, aircraft, spacecraft and weapons systems.
In addition to the product and service lines discussed above, our Electronic Systems segment also includes an
Advanced Concepts & Technologies Division (AC&TD), which develops next-generation systems to position the
segment in key developing markets. AC&TD focuses on understanding customer mission needs; conceiving
affordable, innovative and open solutions; and demonstrating the readiness and effectiveness of Electronic Systems'
products. AC&TD focuses on the following enterprise-wide and cross cutting technology development thrust areas:
RF systems; EO/IR systems; multi-function systems; modular open systems architectural approaches and designs;
precision navigation and timing capabilities; and secure and trusted solutions.
INFORMATION SYSTEMS
Information Systems, headquartered in McLean, Virginia, is a leading global provider of advanced solutions for the
DoD, national intelligence, federal civilian and state agencies, commercial and international customers. Products and
services focus on the fields of command and control (C2), communications, cybersecurity, air and missile defense,
intelligence processing, civil security, health information technology, government support systems and systems
engineering and integration.
Within C4ISR, we are a major end-to-end provider of net-enabled C2, net-enabled Battle Management,
communications and network gateway systems, mission-enabling solutions and decision superiority. Our systems
are installed in operational and command centers world-wide and across DoD services, joint commands and the
international security community. We also deliver intelligence-related systems and services to the U.S. Government
in several mission areas including Signals Intelligence (SIGINT) systems, geospatial intelligence and multi-source
intelligence data fusion.
Cybersecurity offerings span intelligence, defense, federal, civilian, state and international customers, providing
dynamic cyber defense and specialized cyber systems and services in support of critical government missions.
Applications are predominantly for high end intelligence and defense missions, but also include health, homeland
security, public safety, civil, financial and commercial applications. Most intelligence community programs are
restricted. Defense and civil cybersecurity customers include the DoD, intelligence community, Department of
Homeland Security, Centers for Disease Control and select state and international agencies.
The segment consists of four business areas: Cyber Solutions, Defense Systems, Federal & Defense Technologies,
and Intelligence Systems.
Cyber Solutions - provides cyber defense, exploitation and full spectrum solutions that address cybersecurity threats,
cyber mission management, cross function/agency cyber management and special cyber systems that target our
nation’s adversaries.
Defense Systems - is a major end-to-end provider of net-enabled C2, communications, networks and gateways,
decision support systems, command center integration, combat support systems and critical infrastructure protection
systems.
Federal & Defense Technologies - is an integrator of air and missile defense systems and a major provider of net-
enabled Battle Management C4 systems, defense enterprise information technology (IT) and civilian IT solutions.
Intelligence Systems - is focused on the delivery of intelligence-related systems and services in airborne
reconnaissance, SIGINT, geospatial and multi-source data fusion.
Key programs include the Joint National Integration Center Research and Development Contract (JRDC), which
supports the technical infrastructure, modeling and simulation, test and evaluation, and management of the Missile
Defense Agency network at multiple sites; the Battlefield Airborne Communications Node (BACN), a high-altitude,
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airborne communications and information gateway system that provides situational awareness and C2 coordination
between warfighters and commanders; and the Consolidated Afloat Networks and Enterprise Services (CANES)
program, which consolidates US Navy C4 intelligence, computing and network infrastructure for ships, submarines
and shore C2 facilities.
TECHNICAL SERVICES
Technical Services, headquartered in Herndon, Virginia, is a leader in innovative and affordable logistics,
modernization and sustainment support and also provides an array of other advanced technology and engineering
services, including space, missile defense, nuclear security, training and simulation. The segment consists of three
business areas: Integrated Logistics and Modernization, Defense and Government Services, and Training Solutions.
Integrated Logistics and Modernization - provides complete life cycle support and weapon system sustainment and
modernization products and services, and provides direct support to warfighters while delivering aircraft and
subsystem maintenance, repair and overhaul (MRO). Competencies include aircraft and electronics sustaining
engineering, supply chain management services, manned and unmanned weapons systems deployed logistics
support, field services and on-going maintenance and technical assistance, and delivering rapid response in support
of global customers. Key programs include KC-10 Contractor Logistics Support (CLS), which provides total
weapons systems CLS to the Air Force for the entire fleet of 59 KC-10 aircraft; UK Airborne Warning and Control
System (AWACS), which provides through life management of the UK Royal Air Force fleet of E-3D AWACS
aircraft; and AAQ24 Large Aircraft Infrared Counter Measures (LAIRCM), which provides repair, testing,
component spare procurement, logistics, and data collection related to directional infrared counter measures systems
used on multiple fixed and rotary wing aircraft.
Defense and Government Services - provides sustainment and modernization of tactical vehicles, high technology
and engineering services in the areas of nuclear security, space and launch services, civil engineering and military
range-sensor-instrumentation operations. Key programs include Intercontinental Ballistic Missile (ICBM) Systems,
which provides systems engineering and integration for the land-based leg of the United States nuclear deterrent
force; Fort Irwin Logistics Services Support; and Combined Tactical Training Ranges (CTTR), which provides
engineering, operations and maintenance support to facilitate a live and virtual multi-service aircrew tactical training
requirement as defined by the Fleet Response Training Plan (FRTP).
Training Solutions - provides realistic and comprehensive training through live, virtual and constructive domains,
ranging from senior military leadership to warfighters, for both U.S. and international peacekeeping forces. The
business area designs and develops future conflict training scenarios and provides warfighters and allies with live,
virtual and constructive training programs. The business area has supported the training of America’s senior
battlefield commanders for every major contingency beginning with Gulf War I through operations today. The
business area also offers innovative and diverse training applications ranging from battle command to professional
military education. Key programs include the Saudi Arabian National Guard (SANG), which provides equipment
fielding, training and maintenance, simulator training and operations, tactical exercise development, logistics and
operations support and English language training to the Saudi Arabian National Guard; the Joint Coalition
Warfighting Center (JWFC), which designs and executes distributed joint and multinational exercises and training
events, joint doctrine development and joint training analysis for the Joint and Coalition Warfighting Center; and the
Mission Command Training Program (MCTP), the Army's premier leadership and staff training exercise program at
the tactical and operational level.
SELECTED FINANCIAL DATA AND SEGMENT OPERATING RESULTS
For a more complete understanding of our business, see Selected Financial Data in Part II, Item 6. For a more
complete understanding of our segment financial information, see Segment Operating Results in Part II, Item 7, and
Note 4 to the consolidated financial statements in Part II, Item 8.
CUSTOMER CONCENTRATION
Our primary customer is the U.S. Government. Revenue from the U.S. Government (which excludes foreign
military sales - a method to sell U.S. defense equipment and services to foreign governments through the DoD)
accounted for 86 percent or more of total revenues in each of the years ended December 31, 2013, 2012 and 2011.
International sales (which include foreign military sales) accounted for $2.5 billion, $2.1 billion and $2.1 billion, or
10 percent, 8 percent and 8 percent, of total revenue for the years ended December 31, 2013, 2012 and 2011,
respectively. No single program accounted for more than ten percent of total revenue during any period presented.
See Risk Factors in Part I, Item 1A.
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COMPETITIVE CONDITIONS
We compete with many companies in the defense, intelligence and federal markets. Airbus Group, BAE Systems,
Boeing, Booz Allen Hamilton, Finmeccanica, General Dynamics, L-3 Communications, Leidos, Lockheed Martin,
Raytheon and Thales are some of our primary competitors. Key characteristics of our industry include long
operating cycles and intense competition, which is evident through the number of bid protests (competitor protests
of U.S. government procurement awards) and the number of competitors bidding on program opportunities.
It is common in the defense industry for work on major programs to be shared among a number of companies. A
company competing to be a prime contractor may, upon ultimate award of the contract to another competitor,
become a subcontractor for the ultimate prime contracting company. It is not unusual to compete for a contract
award with a peer company and, simultaneously, perform as a supplier to or a customer of that same competitor on
other contracts, or vice versa.
SEASONALITY
No material portion of our business is considered to be seasonal.
BACKLOG
Total backlog includes 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 the option or IDIQ task order is exercised or awarded. For multi-year service
contracts with non-U.S. Government customers having no stated contract values, backlog includes only the amounts
committed by the customer. Backlog is converted into sales as costs are incurred or deliveries are made. At
December 31, 2013, total backlog was $37.0 billion, compared with $40.8 billion at the end of 2012. Of the backlog
at December 31, 2013, approximately $19.6 billion is expected to be converted into sales in 2014. For backlog by
segment, see Backlog in Part II, Item 7.
RESEARCH AND DEVELOPMENT
Our research and development activities primarily include independent research and development (IR&D) efforts
related to U.S. Government programs. Company-sponsored IR&D efforts are included in general and administrative
expenses and are generally allocated to U.S. Government contracts, while customer-sponsored research and
development efforts are charged directly to the related contracts. Company-sponsored IR&D expenses totaled $507
million, $520 million and $543 million in 2013, 2012 and 2011, respectively. See Note 1 to the consolidated
financial statements in Part II, Item 8.
PATENTS
We routinely apply for and own a number of U.S. and foreign patents related to the products and services we
provide. In addition to owning a large portfolio of proprietary intellectual property, we license some intellectual
property rights to and from third parties. The U.S. Government generally holds licenses to patents developed in the
performance of U.S. Government contracts and may use or authorize others to use the inventions covered by these
patents. Although these intellectual property rights are important to the operation of our business, no existing patent,
license or other intellectual property right is of such importance that its loss or termination would, in our opinion,
have a material adverse effect on our financial position, annual results of operations and/or cash flows. See Risk
Factors in Part I, Item 1A.
RAW MATERIALS
We have not experienced significant delays in the supply or availability of raw materials, nor have we experienced a
significant price increase for raw materials, that would have a material adverse effect on our financial position,
annual results of operations and/or cash flows. See Risk Factors in Part I, Item 1A and Overview in Part II, Item 7.
EMPLOYEE RELATIONS
We believe that we maintain good relations with our 65,300 employees, of which approximately 3,300 are covered
by 16 collective bargaining agreements. We negotiated renewals of three of our collective bargaining agreements in
2013 and expect to negotiate renewals of two of our collective bargaining agreements in 2014. These negotiations
did not have a material adverse effect on our financial position, annual results of operations and/or cash flows. For
risks associated with collective bargaining agreements, see Risk Factors in Part I, Item 1A.
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REGULATORY MATTERS
Government Contract Regulation
Our businesses are affected by numerous laws and regulations, including those relating to the award, administration
and performance of U.S. Government contracts. The U.S. Government generally has the ability to terminate our
contracts, in whole or in part, without prior notice, for convenience or for default based on performance. If a U.S.
Government contract were to be terminated for convenience, we generally would be protected by provisions
covering reimbursement for costs incurred on the contract and profit on those costs up to the amount authorized
under the contract, but not the anticipated profit that would have been earned had the contract been completed.
Termination resulting from our default may expose us to liability and could have a material adverse effect on our
ability to compete for other contracts. The U.S. Government also has the ability to stop work under a contract for a
limited period of time for its convenience. In the event of a stop work order, we generally would be protected by
provisions covering reimbursement for costs incurred on the contract to date and for costs associated with the
temporary stoppage of work on the contract. However, such temporary stoppages and delays could introduce
inefficiencies for which we may not be able to negotiate full recovery from the U.S. Government, and could
ultimately result in termination for convenience or reduced future orders on certain contracts. Additionally, we may
be required to continue to perform for some period of time on certain of our U.S. Government contracts, even if the
U.S. Government is unable to make timely payments. See Risk Factors in Part I, Item 1A.
Certain programs with the U.S. Government that are prohibited by the customer from being publicly discussed in
detail are referred to as “restricted” in this Form 10-K. The consolidated financial statements and financial
information in this Form 10-K reflect the operating results of our entire company, including such restricted programs
under accounting principles generally accepted in the United States of America (GAAP).
Contracts
We generate the majority of our business from long-term contracts with the U.S. Government for development,
production, and support activities. Due to the long-term nature of our contracts with the U.S. Government and the
products and services covered by these contracts, we generally recognize revenue using the percentage of
completion method of accounting. Under the percentage of completion method of accounting, revenues are
generally recognized as costs are incurred (cost-to-cost method) or as units are delivered (units-of-delivery method).
Unless otherwise specified in a contract, allowable and allocable costs are billed to contracts with the U.S.
Government under the requirements of the Federal Acquisition Regulation (FAR) and Cost Accounting Standards
(CAS) regulations. Examples of costs incurred by us and not billed to the U.S. Government in accordance with the
requirements of the FAR and CAS regulations include, but are not limited to, lobbying costs, certain legal costs,
charitable donations, advertising costs and interest expense. Our long-term contracts typically fall into one of two
broad categories:
Cost-type contracts – Cost-type contracts include cost plus fixed fee, award fee, and incentive fee contracts. Cost-
type contracts provide for reimbursement of the contractor’s allowable costs incurred plus a fee. Cost-type contracts
generally require that the contractor use its best efforts to accomplish the scope of the work within some specified
time and some stated dollar limitation. Fees on cost-type contracts can be fixed in terms of dollar value or
percentage of costs. Award and incentive fees are based on performance criteria such as cost, schedule, quality, and
technical performance. Award fees are determined and earned based on customer evaluation of the company's
performance against negotiated criteria, and are intended to provide motivation for excellence in contract
performance. Incentive fees that are based on cost provide for an initially negotiated fee to be adjusted later,
typically using a formula to measure performance against the associated criteria, based on the relationship of total
allowable costs to total target costs. Award and incentive fees that can reasonably be estimated and are deemed
reasonably assured are recorded over the performance period of the contract.
Fixed-price contracts – A firm fixed-price contract is a contract in which the specified scope of work is agreed to for
a price that is a pre-determined, negotiated amount and not generally subject to adjustment regardless of costs
incurred by the contractor, absent changes in scope by the customer. Certain fixed-price incentive fee contracts
provide for reimbursement of the contractor’s allowable costs plus a fee up to a ceiling amount, typically through a
cost-sharing limit that affects profitability. These types of fixed-price incentive fee contracts effectively become firm
fixed-price contracts once the cost-share limit is reached. Time-and-materials contracts are considered fixed-price
contracts as they specify a fixed hourly rate for each labor hour charged.
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The following table summarizes sales for the year ended December 31, 2013, recognized by contract type and
customer:
($ in millions)
Cost-type contracts
Fixed-price contracts
Total sales
U.S.
Government
$12,523
8,755
$21,278
Other
Customers(1)
$ 476
2,907
$3,383
Total
$12,999
11,662
$24,661
Percent
of Total
53%
47%
100%
(1) Other customer sales include foreign military sales.
Profit margins may vary materially depending on, among other things, the negotiated contract fee arrangements, the
achievement of performance objectives and the stage of performance at which the right to receive fees, particularly
under incentive and award fee contracts, is finally determined.
We monitor our policies and procedures with respect to our contracts on a regular basis to enhance consistent
application under similar terms and conditions, as well as compliance with all applicable government regulations
and laws. In addition, costs incurred and allocated to contracts with the U.S. Government are routinely audited by
the Defense Contract Audit Agency.
Environmental
Our manufacturing operations are subject to and affected by federal, state, foreign, and local laws and regulations
relating to the protection of the environment. The estimated cost to complete remediation is accrued when it is
probable that the company will incur costs to address environmental impacts and the costs are estimable. To assess
the potential impact on the company’s financial statements, management estimates the range of reasonably possible
remediation costs that could be incurred by the company, taking into account the facts currently available to the
company regarding each site, as well as the current state of technology and prior experience. These estimates are
reviewed periodically and adjusted to reflect changes in facts and circumstances. See Risk Factors in Part I, Item 1A,
as well as Note 12 to the consolidated financial statements in Part II, Item 8.
In 2009, we established a goal of reducing our greenhouse gas emissions over a five-year period through
December 31, 2014. In 2010, we established goals for water usage and solid waste generation. We have exceeded
our goal for the reduction of greenhouse gas emissions and are on track to achieve our goals on water usage and
solid waste generation.
We have incurred and expect to continue to incur capital and operating costs to comply with applicable
environmental laws and regulations and satisfy green initiatives, including our goals. At this time, these costs have
not had, and we do not expect that these costs will have, a material adverse effect on our consolidated financial
position, annual results of operations and/or cash flows.
EXECUTIVE OFFICERS
See Part III, Item 10, for information about our executive officers.
AVAILABLE INFORMATION
Our principal executive offices are located at 2980 Fairview Park Drive, Falls Church, Virginia 22042. Our
telephone number is (703) 280-2900 and our home page on the Internet is www.northropgrumman.com.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy
statement for the annual shareholders’ meeting, as well as any amendments to those reports, are available free of
charge through our Web site as soon as reasonably practicable after we file them with the Securities and Exchange
Commission (SEC). You can learn more about us by reviewing our SEC filings on the investor relations page of our
Web site.
The SEC also maintains a Web site at www.sec.gov that contains reports, proxy statements and other information
about SEC registrants, including Northrop Grumman Corporation. You may also obtain these materials at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
References to our Web site and the SEC’s Web site in this report are provided as a convenience and do not
constitute, and should not be viewed as, incorporation by reference of the information contained on, or available
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through, such Web sites. Such information should not be considered a part of this report, unless otherwise expressly
incorporated by reference in this report.
Item 1A. Risk Factors
Our consolidated financial position, results of operations and cash flows are subject to various risks, many of which
are not exclusively within our control, that may cause actual performance to differ materially from historical or
projected future performance. We urge you to consider carefully the risk factors described below in evaluating the
information contained in this report as the outcome of one or more of these risks could have a material adverse effect
on our financial position, results of operations and/or cash flows.
We depend heavily on a single customer, the U.S. Government, for a substantial portion of our business. Changes
in this customer’s priorities and spending could have a material adverse effect on our financial position, results
of operations and/or cash flows.
Our primary customer is the U.S. Government, from which we derived more than 86 percent of our total revenues
during each of the past several years. The U.S. Government is implementing significant reductions in government
spending and other significant program changes. We cannot predict the impact on existing, follow-on, replacement
or future programs from potential changes in priorities due to changes in defense spending levels, military strategy
and planning and/or changes in social-political priorities. A shift in government priorities to programs in which we
do not participate and/or reductions in funding for or the termination of programs in which we do participate, unless
offset by other programs and opportunities, could have a material adverse effect on our financial position, results of
operations and/or cash flows.
The U.S. Government generally has the ability to terminate contracts, in whole or in part, without prior notice, for its
convenience or for default based on performance. In the event of termination for the U.S. Government’s
convenience, contractors are generally protected by provisions covering reimbursement for costs incurred on the
contracts and profit on those costs up to the amount authorized under the contract, but not the anticipated profit that
would have been earned had the contract been completed. Termination by the U.S. Government of a contract due to
our default could require us to pay for re-procurement costs in excess of the original contract price, net of the value
of work accepted from the original contract, as well as other damages. Termination of a contract due to our default
could have a material adverse effect on our financial position, results of operations and/or cash flows and could have
a material adverse effect on our ability to compete for other contracts.
The U.S. Government also has the ability to stop work under a contract for a limited period of time for its
convenience. It is possible that the U.S. Government could invoke this ability across a limited or broad number of
contracts in this challenging fiscal environment. In the event of a stop work order, contractors are generally
protected by provisions covering reimbursement for costs incurred on the contract to date and for costs associated
with the temporary stoppage of work on the contract. However, such temporary stoppages and delays could
introduce inefficiencies for which we may not be able to negotiate full recovery from the U.S. Government, and
could ultimately result in termination for convenience or reduced future orders on certain contracts. In this
challenging environment, our business and industry could face terminations, change orders and stop work orders,
which depending on their volume could further delay and jeopardize the ability to recover costs.
Significant delays or reductions in appropriations for our programs and U.S. Government funding more broadly
may negatively impact our business and programs and could have a material adverse effect on our financial
position, results of operations and/or cash flows.
U.S. Government programs are subject to annual congressional budget authorization and appropriation processes.
For many programs, Congress appropriates funds on a fiscal year basis even though the program performance period
may extend over several years. Consequently, programs are often partially funded initially and additional funds are
committed only as Congress makes further appropriations. If we incur costs in excess of funds obligated on a
contract, we may be at risk for reimbursement of those costs unless and until additional funds are obligated to the
contract. We cannot predict the extent to which total funding and/or funding for individual programs will be
included, increased or reduced as part of the annual budget process ultimately approved by Congress or in separate
supplemental appropriations or continuing resolutions, as applicable. The impact, severity and duration of the
current U.S. economic situation and plans adopted by the U.S. Government, along with pressures on, and
uncertainty surrounding, the federal budget and the permissible federal debt limit, could adversely affect the funding
for individual programs and delay purchasing or payment decisions by our customers. In the event government
funding for our significant programs becomes unavailable, or is reduced or delayed, our contract or subcontract
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NORTHROP GRUMMAN CORPORATION
under such programs may be terminated or adjusted by the U.S. Government or the prime contractor, which could
have a material adverse effect on our financial position, results of operations and/or cash flows.
Part I of the Budget Control Act of 2011 (Budget Control Act) provided for a reduction in planned defense budgets
of at least $487 billion over a ten year period. Part II mandated substantial additional reductions through a process
known as "sequestration," which took effect March 1, 2013, and resulted in approximately $40 billion of additional
reductions to the FY 2013 defense budget.
In March 2013, the President signed into law the Consolidated and Further Continuing Appropriations Act (2013)
which included specific appropriations for our major federal customers, including the DoD, subject to further
reductions or sequestration under the Budget Control Act.
In October 2013, Congress passed a continuing resolution to fund the government through January 15, 2014
(subsequently extended through January 18, 2014), and suspended the statutory limit on the amount of permissible
federal debt (the debt ceiling) through February 7, 2014.
In December 2013, Congress passed the National Defense Authorization Act (NDAA) for FY 2014. Congress also
passed, and the President signed into law, the Bipartisan Budget Act of 2013, which set discretionary spending levels
for FY 2014 and FY 2015. The legislation provides for additional budget funding of approximately $63 billion over
FY 2014 and FY 2015. The additional funding is expected to alleviate some budget cuts that would otherwise have
been instituted through sequestration in FY 2014 and FY 2015, with approximately $45 billion (generally split
equally between defense and non-defense spending) applied to FY 2014.
On January 16, 2014, Congress passed the Consolidated Appropriations Act of 2014, providing for federal spending
levels consistent with the Bipartisan Budget Act of 2013. The President signed the legislation into law on January
17, 2014. The discretionary spending levels for FY 2014 total approximately $1.1 trillion, of which the defense
spending level is $572 billion, comprised of $487 billion in base defense and $85 billion in overseas contingency
operations (OCO) funds.
The President's budget request for FY 2015 is currently due to Congress in February 2014. Congressional
appropriation and authorization of spending for FY 2015 and beyond, including defense spending, and the
application of sequestration remain marked by significant debate and an uncertain schedule. Congress and the
Administration also continue to debate the debt ceiling, among other fiscal issues, as they negotiate plans for long-
term national fiscal policy. The outcome of these debates could have a significant impact on defense spending
broadly and the company's programs in particular.
If the existing debt ceiling is not raised, we may be required to continue to perform for some period of time on
certain of our U.S. Government contracts even if the U.S. Government is unable to make timely payments. A debt
ceiling breach could, among other impacts, have significant near and long-term consequences for our company, our
employees, our suppliers and the defense industry. It could negatively affect the U.S. Government's timely payment
of our billings, result in delayed cash collections and have a material adverse effect on our financial position, results
of operations and/or cash flows.
The budget environment, including sequestration as currently mandated, remain a significant long-term risk.
Considerable uncertainty exists regarding how future budget and program decisions will unfold and what challenges
budget reductions will present for the defense industry. We believe continued budget pressures will have serious
negative consequences for the security of our country, the defense industrial base, including Northrop Grumman,
and the customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial
base. Although it is difficult to determine specific impacts, we expect that over the longer term, the budget
environment may result in lower awards, revenues, profits and cash flows from our U.S. Government contracts.
Members of Congress continue to discuss various options to address sequestration in future budget planning, but we
cannot predict the outcome of these efforts. It is likely budget and program decisions made in this environment will
have long-term impacts on our company and the entire defense industry.
Long term funding for certain programs in which we participate may be reduced, delayed or cancelled. In addition,
budget cuts could adversely affect the viability of our subcontractors and suppliers, and our employee base. While
we believe that our business is well-positioned in areas that the Department of Defense (DoD) has indicated are
areas of focus for future defense spending, the long-term impact of the Budget Control Act, other defense spending
cuts, and the ongoing fiscal debates remain uncertain and our business and industry could be materially adversely
affected.
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As a U.S. Government contractor, we are subject to various procurement and other laws and regulations and
could be adversely affected by changes in such laws and regulations or any negative findings from a U.S.
Government audit or investigation.
U.S. Government contractors must comply with many significant procurement regulations and other specific legal
requirements. These regulations and requirements, although customary in government contracts, increase our
performance and compliance costs and are regularly evolving. New laws, regulations or procurement requirements
or changes to current ones (including, for example, regulations related to allowability of compensation costs,
counterfeit parts, specialty metals and conflict minerals), can increase our costs and risks and reduce our
profitability.
We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. Government and
its agencies, such as the Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA)
and the DoD Inspector General. These agencies review performance under our contracts, our cost structure and our
compliance with applicable laws, regulations and standards, as well as the adequacy of, and our compliance with,
our internal control systems and policies. Costs ultimately found to be unallowable or improperly allocated to a
specific contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or
illegal activities, we may be subject to civil and criminal penalties, sanctions, forfeiture of profits or suspension or
debarment. Whether or not illegal activities are alleged, the U.S. Government also has the ability to decrease or
withhold certain payments when it deems systems subject to its review to be inadequate. In addition, we could suffer
serious reputational harm if allegations of impropriety were made against us.
We are from time to time subject to U.S. Government investigations relating to our operations. We also are subject
to and expected to perform in compliance with a vast array of federal laws, including but not limited to the Truth in
Negotiations Act, the False Claims Act, the Procurement Integrity Act, Cost Accounting Standards (CAS), Federal
Acquisition Regulation (FAR), the International Traffic in Arms Regulations promulgated under the Arms Export
Control Act, the Close the Contractor Fraud Loophole Act and the Foreign Corrupt Practices Act. If we are found to
have violated the law, or are found not to have acted responsibly as defined by the law, we may be subject to
reductions of the value of contracts; contract modifications or termination; the loss of export privileges; the
assessment of penalties, fines, or compensatory, treble or other damages; or suspension or debarment, any of which
could have a material adverse effect on our financial position, results of operations and/or cash flows.
Our international business exposes us to additional risks.
Sales to customers outside the U.S. are an increasingly important component of our strategy. Our international
business is subject to numerous political and economic factors, legal requirements, cross-cultural considerations and
other risks associated with doing business in foreign countries. These risks differ in some respects from those
associated with our U.S. business and our exposure to such risks may increase if our international business continues
to grow as we anticipate.
Our international business is subject to both U.S. and foreign laws and regulations, including, without limitation,
regulations relating to import-export controls, technology transfer restrictions, repatriation of earnings, data
protection, investment, exchange controls, the Foreign Corrupt Practices Act and other anti-corruption laws, the anti-
boycott provisions of the U.S. Export Administration Act, labor and employment, taxes, security restrictions and
intellectual property. Failure by us, our employees, or others working on our behalf to comply with these laws and
regulations could result in administrative, civil, or criminal liabilities, including suspension or debarment from
government contracts or suspension of our export privileges, which could have a material adverse effect on our
financial position, results of operations and/or cash flows.
Changes in regulations, political environments or security risks may affect our ability to conduct business in
international markets. Our international business may also be impacted by changes in foreign national priorities and
government budgets and may be further impacted by global economic conditions and fluctuations in foreign
currency exchange rates. In addition, our international contracts may include industrial cooperation agreements
requiring specific in-country purchases, investments, manufacturing agreements or other financial obligations,
known as offset obligations, and provide for significant penalties if we fail to meet such requirements.
The services and products we provide internationally, including those provided by subcontractors, are sometimes in
countries with unstable governments and/or developing legal systems, in areas of military conflict or at military
installations. This increases the risk of an incident resulting in harm or loss of life to our employees, subcontractors
or other third parties or damage to our products. It also exposes the company to additional financial, contractual and
legal risks.
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NORTHROP GRUMMAN CORPORATION
We maintain insurance and take other steps to mitigate the risk and potential liabilities related to our international
operations, but these steps may not be adequate to prevent loss or to cover resulting claims and liabilities, and we
may be forced to bear substantial costs. In addition, any accidents or incidents that occur in connection with our
international operations could result in negative publicity, which could adversely affect our reputation and make it
more difficult for us to compete for future contracts or attract and retain employees or result in the loss of existing
and future contracts. The impact of these factors is difficult to predict, but one or more of them could have a material
adverse effect on our financial position, results of operations and/or cash flows.
We are subject to various claims and litigation that could ultimately be resolved against us.
The size, nature and complexity of our business make us highly susceptible to claims and litigation. We are and may
become subject to various administrative, civil or criminal litigation, environmental claims, income tax matters,
compliance matters, claims and investigations, which could divert financial and management resources and result in
fines, penalties, compensatory, treble or other damages or non-monetary relief. Government regulations also provide
that certain allegations against a contractor may lead to suspension or debarment from government contracts or
suspension of export privileges for the company or one or more of its components. Suspension or debarment could
have a material adverse effect on the company because of our reliance on government contracts and authorizations.
Investigations, claims or litigation, if ultimately resolved against us, could have a material adverse effect on our
financial position, results of operations and/or cash flows. Any investigation, claim, or litigation, even if fully
indemnified or insured, could negatively impact our reputation among our customers and the public, and make it
more difficult for us to compete effectively or obtain adequate insurance in the future.
Our reputation and our ability to do business may be impacted by the improper conduct of employees, agents or
business partners.
We have implemented extensive policies, procedures, training and other compliance controls to prevent misconduct
by employees, agents or others working on our behalf that would violate the applicable laws of the jurisdictions in
which we operate, including laws governing improper payments to government officials, the protection of export
controlled or classified information, cost accounting and billing, competition and data privacy. However, we cannot
ensure that we will prevent all such misconduct committed by our employees, agents or others working on our
behalf, and the risk of improper conduct may be expected to increase in the current environment and as we expand
globally. Such improper actions could subject us to administrative, civil or criminal investigations and monetary and
non-monetary penalties, including suspension and debarment, which could negatively impact our reputation and
ability to conduct business and could have a material adverse effect on our financial position, results of operations
and/or cash flows.
Competition within our markets and an increase in bid protests may reduce our revenues and market share.
We operate in highly competitive markets and our competitors may have more extensive or more specialized
engineering, manufacturing and marketing capabilities or be willing to accept more risk or lower profitability in
competing for contracts. We have seen, and anticipate we will continue to see, increased competition in some of our
core markets, especially as a result of the reduction in budgets for many U.S. Government agencies, fewer new
program starts and an increased focus on affordability. Changes in U.S. defense spending may limit certain future
market opportunities. We are facing increasing competition in our domestic and international markets from U.S.,
foreign and multinational firms. Additionally, some customers, including the DoD, may turn to commercial
contractors, rather than traditional defense contractors, for information technology and other support work, or may
utilize small business contractors or determine to source work internally rather than hiring a contractor. If we are
unable to continue to compete successfully against our current or future competitors, we will experience declines in
revenues and market share, which would negatively impact our financial position, results of operations and/or cash
flows.
We also are seeing an increasing number of bid protests from unsuccessful bidders on new program awards. Bid
protests could result in significant expense to the company, contract modifications or the award decision being
overturned and loss of the contract award. Even where a bid protest does not result in the loss of an award, the
resolution can extend the time until the contract activity can begin, and delay earnings.
Our future success depends, in part, on our ability to develop new products and new technologies and maintain
technologies, facilities, equipment and a qualified workforce to meet the needs of our customers.
Many of the markets in which we operate are characterized by rapidly changing technologies. The product, program
and service needs of our customers change and evolve regularly. Our success in the competitive defense industry
depends upon our ability to develop and market our products and services and our ability to provide the people,
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technologies, facilities, equipment and financial capacity needed to deliver those products and services with
maximum efficiency. If we fail to maintain our competitive position, we could lose a significant amount of future
business to our competitors, which would have a material adverse effect on our ability to generate favorable
financial results and maintain market share.
Our operating results are heavily dependent upon our ability to attract and retain sufficient personnel with requisite
skills and/or security clearances. If qualified personnel become scarce or difficult to attract or retain in our industry
for compensation-related or other reasons, we could experience higher labor, recruiting or training costs in order to
attract and retain necessary employees. Failure to maintain a qualified workforce would result in significant
difficulty in performing under our contracts.
Approximately 3,300 of our 65,300 employees are covered by an aggregate of 16 collective bargaining agreements,
and we expect to negotiate renewals of two of our collective bargaining agreements in 2014. Collective bargaining
agreements generally expire after three to five years, and are subject to renegotiation upon expiration. If we
experience difficulties with renewals and renegotiations of existing collective bargaining agreements, we could incur
additional expenses and may be subject to work stoppages. Any such expenses or delays could adversely affect
programs served by employees who are covered by collective bargaining agreements.
Many of our contracts contain performance obligations that require innovative design capabilities, are
technologically complex, require state-of-the-art manufacturing expertise or are dependent upon factors not
wholly within our control. Failure to meet these obligations could adversely affect our profitability and future
prospects.
We design, develop and manufacture technologically advanced and innovative products and services, which are
applied by our customers in a variety of environments. Problems and delays in development or delivery as a result of
issues with respect to design, technology, licensing and intellectual property rights, labor, inability to achieve
learning curve assumptions, manufacturing materials or components could prevent us from meeting requirements.
In addition, our products cannot be tested and proven in all situations and are otherwise subject to unforeseen
problems. Examples of unforeseen problems that could negatively affect revenue and profitability include loss on
launch of spacecraft, premature failure of products that cannot be accessed for repair or replacement, problems with
quality and workmanship, country of origin, delivery of subcontractor components or services and degradation of
product performance. These failures could result, either directly or indirectly, in loss of life or property. Among the
factors that may affect revenue and profitability could be inaccurate cost estimates, design issues, unforeseen costs
and expenses not covered by insurance or indemnification from the customer, diversion of management focus in
responding to unforeseen problems, loss of follow-on work, and, in the case of certain contracts, repayment to the
government customer of contract cost and fee payments we previously received.
Certain contracts, primarily involving space satellite systems, contain provisions that entitle the customer to recover
fees in the event of partial or complete failure of the system upon launch or subsequent deployment for less than a
specified period of time. Under such terms, we could be required to forfeit fees previously recognized and/or
collected. We have not experienced any material losses in the last decade in connection with such contract
performance incentive provisions. However, if we were to experience launch failures or complete satellite system
failures in the future, for example, such events could have a material adverse effect on our financial position, results
of operations and/or cash flows.
Contract cost growth on fixed-price and other contracts that do not result in increased contract value exposes us
to reduced profitability and the potential loss of future business.
Our operating income is adversely affected when we incur certain contract costs or certain increases in contract costs
that cannot be billed to customers. This cost growth can occur if estimates to complete increase or initial estimates
used for calculating the contract cost were incorrect. The cost estimation process requires significant judgment and
expertise. Reasons for cost growth may include unavailability or reduced productivity of labor, the nature and
complexity of the work to be performed, technical or quality issues, the costs, timeliness and availability of
materials and components, issues with significant subcontractors (availability, performance, quality, financial
strength), the effect of any delays in performance, availability and timing of funding from the customer, the effect of
any changes in law or regulation, and natural or environmental disasters. Further, items affecting our contract value
may include the inability to recover any claims included in the estimates to complete. A significant change in
estimates on one or more programs could have a material adverse effect on our financial position, results of
operations and/or cash flows.
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Our risk varies with the type of contract. Due to their nature, fixed-price contracts inherently have more risk than
cost type contracts. In 2013, approximately 47 percent of our annual revenues were derived from fixed-price
contracts. We typically enter into fixed-price contracts where costs can be more reasonably estimated based on
experience. In addition, our contracts contain provisions relating to cost controls and audit rights. If the terms
specified in our contracts are not met, our profitability may be reduced and we may incur a loss. Fixed-price
development work comprises a small portion of our fixed-price contracts. This type of work is inherently more
uncertain as to future events than production contracts, and, as a result, there is typically more variability in
estimates of the costs to complete the development stage. As work progresses through the development stage into
production, the risks associated with estimating the total costs of the contract are typically reduced. While
management uses its best judgment to estimate costs associated with fixed-price development contracts, future
events could result in either upward or downward adjustments to those estimates.
Other contracts are also subject to risk, for example, under a fixed-price incentive contract, the allowable costs
incurred by the contractor are paid up to a ceiling, which can affect profitability. Further, under a cost type contract,
the allowable costs incurred by the contractor are also subject to reimbursement plus a fee. We often enter into cost
type contracts for development programs with complex design and technical challenges. These cost type programs
typically have award or incentive fees that are subject to uncertainty and may be earned over extended periods or
towards the end of the contract. In these cases, the associated financial risks are primarily in recognizing profit,
which ultimately may not be earned, or program cancellation if cost, schedule, or technical performance issues arise.
We use estimates when accounting for contracts. Changes in estimates could affect our profitability and our
overall financial position.
When agreeing to contractual terms, we make assumptions and projections about future conditions and events, many
of which extend over long periods. These assumptions and projections assess the cost, productivity and availability
of labor, future levels of business base, complexity of the work to be performed, cost and availability of materials
and components, impact of potential delays in performance and timing of product deliveries. Contract accounting
requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for
schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues
and costs at completion is complicated and subject to many variables. Incentives, awards or penalties related to
performance on contracts are considered in estimating revenue and profit rates when there is sufficient information
to assess anticipated performance. Suppliers’ assertions are also assessed and considered in estimating costs and
profitability.
Because of the significance of the judgment and estimation processes described above, it is possible that materially
different amounts could be obtained if different assumptions were used or if the underlying circumstances were to
change. Changes in underlying assumptions, circumstances or estimates could have a material adverse effect upon
the profitability of one or more of the affected contracts and on our overall financial position, results of operations
and/or cash flows. See Critical Accounting Policies, Estimates, and Judgments in Part II, Item 7.
Our business could be negatively impacted by security threats, including physical and cybersecurity threats, and
other disruptions.
As a defense contractor, we face various cyber and other security threats, including attempts to gain unauthorized
access to sensitive information and networks; threats to the safety of our directors, officers and employees; threats to
the security of our facilities and infrastructure; and threats from terrorist acts. Although we utilize various
procedures and controls to monitor and mitigate the risk of these threats, there can be no assurance that these
procedures and controls will be sufficient. These threats could lead to losses of sensitive information or capabilities,
harm to personnel or infrastructure, and/or damage to our reputation. They could have a material adverse effect on
our financial position, results of operations and/or cash flows.
Cybersecurity threats are evolving and include, but are not limited to, malicious software, attempts to gain
unauthorized access to data, disruption or denial of service attacks, and other electronic security breaches that could
lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected
information (ours or that of our customers or partners), and corruption of data, networks or systems. These events, if
not prevented or effectively mitigated, could damage our reputation and lead to financial losses from remedial
actions, loss of business or potential liability. They could have a material adverse effect on our financial position,
results of operations and/or cash flows.
We provide cyber and information technology systems, products and services to various customers (government and
commercial) and other third parties who also face these types of cybersecurity threats. Our systems, products and
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services may themselves be subject to cybersecurity threats and/or they may not be able to detect or deter such
threats to our customers, or effectively to mitigate resulting losses. These losses could adversely affect our
customers and our company. They could result in damage to our reputation, loss of business and potential liability,
any one of which could have a material adverse effect on our financial position, results of operations and/or cash
flows.
Changes to business practices for U.S. Government contractors could have a significant adverse effect on current
programs, potential new awards and the processes by which procurements are awarded and managed.
Our industry has experienced, and we expect it will continue to experience, significant changes to business practices
as a result of, among other items, an increased focus on affordability, efficiencies, recovery of costs and a
reprioritization of available defense funds to key areas for future defense spending. The DoD continues to adjust its
procurement practices, requirements criteria and source selection methodology in its ongoing efforts to reduce costs,
gain efficiencies and enhance program management and control. Further, the DCMA/DCAA have implemented cost
recovery/cost savings initiatives designed to prioritize efforts to recover costs. As a result of certain of these
initiatives, we have experienced and may continue to experience an increased number of audits and/or a lengthened
period of time required to close open audits. More recently, the thresholds for certain allowable costs, including
compensation costs, have been significantly reduced; others are being challenged, debated and, in certain cases,
modified. Significant changes to the thresholds for allowable costs could adversely affect our financial position,
results of operations and/or cash flows.
These efforts have had, and we expect them to continue to have, a significant impact on the contracting environment
in which we do business. In connection with these cost reduction initiatives, the U.S. Government is also pursuing
alternatives to shift additional responsibility and performance risks to the contractor. While the impact to our
business as a result of these changes remains uncertain, our business and industry could be materially adversely
affected.
Our earnings and profitability depend, in part, on subcontractor performance as well as raw material and
component availability and pricing. Adverse capital and credit market conditions may affect our suppliers' ability
to perform.
We rely on other companies to provide raw materials and major components and subsystems for our products and to
produce hardware elements and sub-assemblies, provide intellectual property, and perform some of the services we
provide to our customers. Disruptions or performance problems caused by our subcontractors and suppliers could
have an adverse effect on our ability to meet our commitments to customers.
Our ability to perform our obligations on time as a prime contractor could be adversely affected if one or more of
our subcontractors or suppliers were unable to provide the agreed-upon products or materials or perform the agreed-
upon services in a timely and cost-effective manner. Changes in economic conditions, including changes in defense
budgets or credit availability, could adversely affect the financial stability of our subcontractors and suppliers and/or
their ability to perform. The inability of our suppliers to perform could also result in the need for us to transition to
alternate suppliers, which could result in significant incremental cost and delay or the need for us to provide other
supplemental means to support our existing suppliers.
Our costs may increase over the term of our contracts. Through cost escalation provisions contained in some of our
U.S. Government contracts, we may be protected from increases in certain costs to the extent the increases in our
costs are in line with the escalation provisions in those contracts. However, the difference in basis between our
actual costs and these escalation provisions may expose us to cost growth even with these provisions. A significant
delay in supply deliveries of our key raw materials, components or intellectual property required in our production
processes could have a material adverse effect on our financial position, results of operations and/or cash flows.
In connection with our government contracts, we are required to procure certain materials, components and parts
from supply sources approved by the customer. There are currently several components for which there may only be
one supplier. If a sole source supplier cannot meet our needs, we may be unable to find a suitable alternative.
Consistent with the industry’s efforts, our procurement practices are intended to reduce the likelihood of our
procurement of conflict materials or counterfeit or unauthorized parts or materials. In some circumstances, we must
rely on certifications from our subcontractors and suppliers regarding their compliance with applicable laws and
regulations regarding the parts or materials we procure. If certifications received from our subcontractors or
suppliers are inaccurate, if we are unable to procure needed materials, components or parts, or if the parts we
procure are counterfeit or not authorized, it could have a material adverse effect on our financial position, results of
operations and/or cash flows.
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NORTHROP GRUMMAN CORPORATION
Changes in economic conditions, as well as changes in the defense budget, can adversely affect the ability of our
subcontractors and suppliers to perform and further increase this risk.
Changes in future business conditions could cause business investments and/or recorded goodwill and other
long-lived assets to become impaired, resulting in substantial losses and write-downs that would reduce our
operating income.
Goodwill accounts for approximately half of our total assets. We test goodwill amounts for impairment at least
annually and consider whether an interim test is required if we believe potential impairment exists. The annual
impairment test is based on several factors requiring judgment. We face continued uncertainty in our business
environment due to the substantial fiscal and economic challenges facing the U.S. Government, our primary
customer, including the impact of reductions to the defense budget and issues surrounding the national debt ceiling.
If our contracts are cancelled, modified or terminated as a result of the resolution of these issues or otherwise, our
revenues, profits and cash flows could be substantially lower than our current projections. In addition, market-based
inputs to the calculations in the impairment test, such as weighted average cost of capital and terminal value (based
on market comparisons) could be negatively impacted. Such circumstances may result in an impairment of our
goodwill. Further, the carrying values of our reporting units are significantly influenced by a number of factors
including the discount rate used to determine our net pension liability. Therefore, the impact of changes in the
discount rate on our pension liability could result in an impairment of goodwill absent any changes discussed above.
We continue to monitor the recoverability of the carrying value of our goodwill and other long-lived assets.
Significant write-offs of goodwill or other long-lived assets could have an adverse impact on our financial condition
or results of operations.
As part of our overall strategy, we may, from time to time, acquire an interest in a business. Even after careful
integration efforts, actual operating results may vary significantly from initial estimates and we may experience
unforeseen issues that adversely affect the value of our goodwill or other long-lived assets.
Unforeseen environmental costs could have a material adverse effect on our financial position, results of
operations and/or cash flows.
Our operations are subject to and affected by a variety of federal, state, local and foreign environmental laws and
regulations. In addition, we could be affected by future laws or regulations, including those imposed in response to
climate change concerns and other actions. Compliance with current and future environmental laws and regulations
currently requires, and is expected to continue to require, significant operating and capital costs.
Environmental laws and regulations provide for substantial fines and criminal sanctions for violations. These laws
and regulations may limit our operations or require the installation of costly pollution control equipment or
operational changes to limit pollution emissions or discharges and/or decrease the likelihood of accidental hazardous
substance releases. We also incur, and expect to continue to incur, costs to comply with current environmental laws
and regulations related to the cleanup of pollutants previously released into the environment. In addition, if we were
found to be in violation of the Federal Clean Air Act or the Clean Water Act, the facility or facilities involved in the
violation could be placed by the Environmental Protection Agency (EPA) on the “Excluded Parties List” maintained
by the General Services Administration. The listing could continue until the EPA concludes that the cause of the
violation has been corrected. Because listed facilities generally cannot be used in performing any U.S. Government
contract until the violation is corrected, if we were listed on the Excluded Parties List it could have a material
adverse effect on our financial position, results of operations and/or cash flows.
The adoption of new laws and regulations, stricter enforcement of existing laws and regulations, imposition of new
cleanup requirements, discovery of previously unknown or more extensive contamination, litigation involving
environmental impacts, sanctions or penalties, could negatively impact our ability to recover such costs under
previously priced contracts or financial insolvency of other responsible parties could cause us to incur costs in the
future that could have a material adverse effect on our financial position, results of operations and/or cash flows.
We may be unable adequately to protect our intellectual property rights, which could affect our ability to compete.
We own many U.S. and foreign patents, trademarks, copyrights, and other forms of intellectual property, and we
license certain intellectual property rights to and from third parties. The U.S. Government generally holds licenses to
certain intellectual property that we develop in performance of government contracts, and it may use or authorize
others to use certain such intellectual property, typically for government purposes. More recently, we believe the
U.S. Government has asserted or sought to obtain more extensive rights in intellectual property. The U.S.
Government's efforts could result in a decrease in our ability to control the use of certain of our intellectual property
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NORTHROP GRUMMAN CORPORATION
rights in a government contracting environment. Our intellectual property is also subject to challenge, invalidation,
misappropriation or circumvention by third parties.
We also rely significantly upon proprietary technology, information, processes and know-how that are not protected
by patents. We seek to protect this information through trade secret or confidentiality agreements with our
employees, consultants, subcontractors and other parties, as well as through other measures. These agreements and
other measures may not provide adequate protection for our unpatented proprietary information. In the event of an
infringement of our intellectual property rights, a breach of a confidentiality agreement or divulgence of proprietary
information, we may not have adequate legal remedies to maintain our intellectual property. Litigation to determine
the scope of intellectual property rights, even if ultimately successful, could be costly and could divert
management’s attention away from other aspects of our business. In addition, our trade secrets may otherwise
become known or be independently developed by competitors. In some instances, we have licensed the proprietary
intellectual property of others, but we may be unable in the future to secure the necessary licenses to use such
intellectual property on commercially reasonable terms. If we are unable adequately to protect our intellectual
property rights, against claims by the U.S. Government or others, our business could be adversely affected.
Moreover, the laws concerning intellectual property rights vary among countries and the protection provided to our
intellectual property by these laws and foreign courts may not be the same as the remedies available under U.S. law.
Our business is subject to disruption caused by natural disasters and environmental disasters that could adversely
affect our profitability and our overall financial position.
We have significant operations located in regions that may be exposed to earthquakes, damaging storms and other
natural disasters. Our business also may be subject to environmental disasters. Although preventative measures may
help to mitigate damage, the damage and disruption resulting from natural and environmental disasters may be
significant. If insurance or other risk transfer mechanisms are unavailable or insufficient to recover all costs, it could
have a material adverse effect on our financial position, results of operations and/or cash flows.
Our subcontractors and suppliers are also subject to natural and environmental disasters that could affect their ability
to deliver or perform under a contract. Performance failures by our subcontractors due to natural and environmental
disasters may adversely affect our ability to perform our obligations on the prime contract. Damages or other costs
that may not be fully recoverable from the subcontractor or from the customer could reduce our profitability or
result in a termination of the prime contract, which could have an adverse effect on our ability to compete for future
contracts.
Natural and environmental disasters could also disrupt our workforce, electrical and other power distribution
networks, including computer and internet operation and accessibility, and the critical industrial infrastructure
needed for normal business operations. These disruptions could cause adverse effects on our profitability and
performance.
Our insurance coverage, customer indemnifications or other liability protections may be inadequate to cover all
of our significant risks or our insurers may deny coverage of or be unable to pay for material losses we incur,
which could adversely affect our profitability and overall financial position.
We endeavor to obtain insurance agreements from financially solid, highly rated counterparties in established
markets to cover significant risks and liabilities (including, for example, natural disasters and product liability). Not
every risk or liability can be insured, and, for risks that are insurable, the policy limits and terms of coverage
reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. Even if
insurance coverage is available, we may not be able to obtain it at a price or on terms acceptable to us.
Disputes with insurance carriers over policy terms or the insolvency of one or more of our insurers may significantly
affect the amount or timing of cash flows and, if litigation over coverage terms with the insurer becomes necessary,
an outcome unfavorable to us may have a material adverse effect on our financial position, results of operations and/
or cash flows.
In some circumstances we may be entitled to certain legal protections or indemnifications from our customers
through contractual provisions, laws, regulations or otherwise. However, these protections are not always available,
are typically subject to certain terms or limitations and may not be sufficient to cover all losses or liabilities
incurred.
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NORTHROP GRUMMAN CORPORATION
Anticipated benefits of mergers, acquisitions, joint ventures, spin-offs or strategic alliances may not be realized.
As part of our overall strategy, we may, from time to time, merge with or acquire businesses, dispose of or spin-off
businesses, form joint ventures or create strategic alliances. Whether we realize the anticipated benefits from these
transactions depends, in part, upon the integration between the businesses involved, the performance of the
underlying products, capabilities or technologies, the adequacy of the due diligence, the management of the
operations and market conditions following these transactions. Accordingly, our financial results could be adversely
affected by unanticipated performance issues, transaction-related charges, liabilities, amortization of expenses
related to intangibles, charges for impairment of long-lived assets, guarantees, partner performance and
indemnifications. Divestitures may result in continued financial involvement in the divested business, such as
through guarantees, indemnifications, or other financial arrangements, following the transaction. Although we have
established procedures and processes to mitigate these risks, there is no assurance that these transactions will be
successful.
Pension and medical expenses associated with our retirement benefit plans may fluctuate significantly depending
upon changes in actuarial assumptions, future investment performance of plan assets, future health care costs
and legislative or other regulatory actions.
A substantial portion of our current and retired employee population is covered by pension and other post-retirement
benefit plans, the costs of which are dependent upon various assumptions, including estimates of rates of return on
benefit plan assets, discount rates for future payment obligations, rates of future cost growth and trends for future
costs. In addition, funding requirements for benefit obligations of our pension and other post-retirement benefit
plans are subject to legislative and other government regulatory actions. Variances from these estimates could have a
material adverse effect on our financial position, results of operations and/or cash flows.
Additionally, due to government regulations, pension plan cost recoveries under our U.S. Government contracts
occur in different periods from when those pension costs are recognized for financial statement purposes or when
pension funding is made. These timing differences could have a material adverse effect on our cash flows. The cost
accounting rules have been revised in order to partially harmonize the measurement and period of assignment of
defined benefit pension plan costs allocable to U.S. Government contracts and the minimum required contribution
under the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act
(PPA) of 2006. These rules better align, but do not eliminate, mismatches between ERISA funding requirements and
CAS pension costs for U.S. Government CAS covered contracts.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our
profitability and cash flow.
We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in
determining our worldwide provision for income taxes. In the ordinary course of business, there are many
transactions and calculations where the ultimate tax determination is uncertain. Furthermore, changes in applicable
domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income
tax rates assessed or changes in the taxability of certain sales or the deductibility of certain expenses, thereby
affecting our income tax expense and profitability. Deferred tax assets are required to be measured at the statutory
tax rate currently in effect; therefore a change in the U.S. corporate tax rate would result in a remeasurement of our
net deferred tax assets through the income tax provision. The final determination of any tax audits or related
litigation could be materially different from our historical income tax provisions and accruals. Additionally, changes
in our tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in
our overall profitability, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities,
changes in differences between financial reporting income and taxable income, the results of audits and the
examination of previously filed tax returns by taxing authorities and continuing assessments of our tax exposures
could impact our tax liabilities and significantly affect our financial position, results of operations and/or cash flows.
Our nuclear-related operations subject us to various environmental, regulatory, financial and other risks.
Our nuclear-related operations subject us to various risks, including potential liabilities relating to harmful effects on
the environment and human health that may result from nuclear-related operations and the storage, handling and
disposal of radioactive materials. We are also subject to reputational harm and potential liabilities arising out of a
nuclear incident, whether or not it is within our control. The U.S. Government and prime contractors sometimes
provide certain indemnity and other protection under certain of our government related contracts pursuant to, or in
connection with, Public Law 85-804 and the Price-Anderson Nuclear Industries Indemnity Act for certain nuclear-
related risks. If there was a nuclear incident and that indemnity or other protection (especially in connection with a
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commercial contract) was not available to cover our losses and liabilities, it could have a material adverse effect on
our financial position, results of operations and/or cash flows.
If all or any portion of the spin-off of our former Shipbuilding business or certain internal transactions
undertaken in anticipation of the spin-off transaction are determined to be taxable for U.S. federal income tax
purposes, we and our shareholders that are subject to U.S. federal income tax may incur significant U.S. federal
income tax liabilities.
In connection with the spin-off of our former Shipbuilding business, we received a letter ruling from the IRS and an
opinion of counsel confirming that we and our shareholders would not recognize any taxable income, gain or loss
for U.S. federal income tax purposes as a result of the merger, the internal reorganization or the distribution, except
that our shareholders who receive cash in lieu of fractional shares would recognize gain or loss with respect to such
cash. The ruling and the opinion relied on certain facts, assumptions, representations and undertakings from us and
HII regarding the past and future conduct of the companies’ respective businesses and other matters.
We are not aware of any facts or circumstances that would cause any of the factual statements or representations in
the IRS ruling or the opinion to be incomplete or untrue at the time of the spin-off transaction. Nevertheless, if the
IRS determines that any of the factual statements or representations that the IRS ruling or the opinion was based on
were incomplete or untrue, or if certain facts or circumstances upon which the IRS ruling or the opinion was based
were materially different from those at the time of the spin-off, we and our shareholders may not be able to rely on
the IRS ruling or the opinion of counsel and could be subject to significant tax liabilities, which could have a
material adverse effect on our financial position, results of operations and/or cash flows.
The spin-off of our former Shipbuilding business may expose us to potential claims and liabilities.
In connection with the spin-off transaction, we entered into a number of agreements with HII setting forth certain
rights and obligations of the parties after the separation. For example, under the Separation and Distribution
Agreement, from and after the spin-off transaction, each of HII and Northrop Grumman is generally responsible for
the debts, liabilities and other obligations related to the business or businesses that it owns and operates following
the consummation of the spin-off. It is possible that a court would disregard the allocation agreed to between us and
HII, and require that we assume responsibility for certain obligations allocated to HII (for example, tax and/or
environmental liabilities), particularly if HII were to refuse or were unable to pay or perform such obligations.
In addition, third parties could seek to hold us responsible for any of the liabilities or obligations for which HII has
agreed to be responsible and/or to indemnify us, directly or indirectly. The indemnity related rights we have under
our agreements with HII may not be sufficient to protect us against such liabilities. Even if we ultimately succeed in
recovering from HII or the U.S. Government any amounts for which we are held liable, we may be required to
record these losses ourselves until such time as the indemnity contribution is paid. In addition, certain indemnities
that we may be required to provide HII are not subject to a cap, may be significant, and could negatively impact our
business. These risks could negatively affect our business and could have a material adverse effect on our financial
position, results of operations, and/or cash flows.
Item 1B. Unresolved Staff Comments
None.
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Form 10-K and the information we are incorporating by reference contain statements, other than statements of
historical fact, that constitute “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. Words such as “expect,” “intend,” “may,” “could,” “plan,” “project,” “forecast,” “believe,”
“estimate,” “outlook,” “anticipate,” “trends,” "goals," and similar expressions generally identify these forward-
looking statements. Forward-looking statements include, among other things, statements relating to our future
financial condition, results of operations and cash flows. Forward-looking statements are based upon assumptions,
expectations, plans and projections that we believe to be reasonable when made, but which may change over time.
These statements are not guarantees of future performance and inherently involve a wide range of risks and
uncertainties that are difficult to predict. Specific risks that could cause actual results to differ materially from those
expressed or implied in these forward-looking statements include, but are not limited to, those identified under Risk
Factors in Part I, Item 1A and other important factors disclosed in this report and from time to time in our other
filings with the SEC.
You are urged to consider the limitations on, and risks associated with, forward-looking statements and not unduly
rely on the accuracy of forward-looking statements. These forward-looking statements speak only as of the date this
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NORTHROP GRUMMAN CORPORATION
report is first filed or, in the case of any document incorporated by reference, the date of that document. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by applicable law.
Item 2. Properties
At December 31, 2013, we owned or leased approximately 35 million square feet of floor space at approximately
502 separate locations, primarily in the U.S., for manufacturing, warehousing, research and testing, administration
and various other uses. At December 31, 2013, we leased to third parties approximately 307,000 square feet of our
owned and leased facilities, and had vacant floor space of approximately 604,000 square feet.
At December 31, 2013, we had major operations at the following locations:
AEROSPACE SYSTEMS
Carson, El Segundo, Manhattan Beach, Mojave, Palmdale, Redondo Beach and San Diego, CA; Melbourne and St.
Augustine, FL; Devens, MA; Moss Point, MS; and Bethpage, NY.
ELECTRONIC SYSTEMS
Azusa, Sunnyvale and Woodland Hills, CA; Apopka, FL; Rolling Meadows, IL; Annapolis, Elkridge, Halethorpe,
Linthicum and Sykesville, MD; Williamsville, NY; Cincinnati, OH; Salt Lake City, UT; and Charlottesville, VA.
Locations outside the U.S. include France, Germany and Italy.
INFORMATION SYSTEMS
Huntsville, AL; Carson, McClellan, Redondo Beach, San Diego and San Jose, CA; Aurora and Colorado Springs
CO; Annapolis Junction, MD; Bellevue, NE; Beavercreek, OH; and Chantilly, Chester, Fairfax, Herndon, McLean
and Richmond, VA.
TECHNICAL SERVICES
Sierra Vista, AZ; Warner Robins, GA; Lake Charles, LA; Hill Air Force Base, UT; and Herndon, VA.
CORPORATE
Falls Church and Lebanon, VA; and Irving, TX.
The following is a summary of our floor space at December 31, 2013:
Square feet (in thousands)
Aerospace Systems
Electronic Systems
Information Systems
Technical Services
Corporate
Total
Owned
Leased
U.S. Government
Owned/Leased
Total
6,338
8,217
658
145
657
16,015
5,410
2,680
6,082
1,818
564
16,554
1,930
—
—
1
—
1,931
13,678
10,897
6,740
1,964
1,221
34,500
We maintain our properties in good operating condition and believe that the productive capacity of our properties is
adequate to meet current contractual requirements and those for the foreseeable future.
Item 3. Legal Proceedings
We have provided information about certain legal proceedings in which we are involved in Note 11 to the
consolidated financial statements in Part II, Item 8.
We are a party to various investigations, lawsuits, claims and other legal proceedings, including government
investigations and claims, that arise in the ordinary course of our business. These types of matters could result in
fines; penalties; compensatory, treble or other damages; or non-monetary relief. U.S. Government regulations also
provide that certain allegations against a contractor may lead to suspension or debarment from future U.S.
Government contracts or suspension of export privileges for the company or one or more of its components.
Suspension or debarment could have a material adverse effect on the company because of the company's reliance on
government contracts and authorizations. The nature of legal proceedings is such that we cannot assure the outcome
of any particular matter. However, based on information available to us to date and other than as noted in Note 11 to
the consolidated financial statements, we do not believe that the outcome of any matter pending against the company
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NORTHROP GRUMMAN CORPORATION
is likely to have a material adverse effect on the company's consolidated financial position as of December 31, 2013,
its annual results of operations and/or cash flows. For further information on the risks we face from existing and
future investigations, lawsuits, claims and other legal proceedings, please see Risk Factors in Part I, Item 1A.
Item 4. Mine Safety Disclosures
No information is required in response to this item.
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NORTHROP GRUMMAN CORPORATION
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
PART II
COMMON STOCK
We have 800,000,000 shares authorized at a $1 par value per share, of which 217,599,230 shares and 239,209,812
shares were outstanding as of December 31, 2013 and 2012, respectively.
PREFERRED STOCK
We have 10,000,000 shares authorized at a $1 par value per share, of which no shares were issued and outstanding
as of December 31, 2013 and 2012.
MARKET INFORMATION
Our common stock is listed on the New York Stock Exchange and trades under the symbol NOC.
The following table sets forth, for the periods indicated, the high and low sale prices of our common stock as
reported in the consolidated reporting system for the New York Stock Exchange Composite Transactions.
January to March
April to June
July to September
October to December
HOLDERS
2013
2012
$64.20 to $70.21
69.13 to 84.34
81.74 to 99.10
92.51 to 116.19
$57.31 to $62.31
56.59 to 65.78
61.86 to 70.20
62.80 to 71.25
The approximate number of common stockholders was 27,914 as of January 30, 2014.
DIVIDENDS
Quarterly dividends per common share for the most recent two years are as follows:
January to March
April to June
July to September
October to December
Total
2013
$0.55
0.61
0.61
0.61
$2.38
2012
$0.50
0.55
0.55
0.55
$2.15
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NORTHROP GRUMMAN CORPORATION
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFLIATED PURCHASERS
The table below summarizes our repurchases of common stock during the three months ended December 31, 2013:
Period
October
November
December
Total
Number
of Shares
Purchased(1)
2,548,724
1,827,800
2,249,602
6,626,126
Average
Price
Paid per
Share(2)
$ 97.38
109.38
111.57
$105.51
Numbers of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Approximate Dollar
Value of Shares that
May Yet Be
Purchased under the
Plans or Programs
($ in millions)
2,548,724
1,827,800
2,249,602
6,626,126
$3,556
3,356
3,105
$3,105
(1) On May 15, 2013, the company's board of directors authorized a share repurchase program of up to $4.0 billion
of the company’s common stock. Repurchases under this program commenced in September 2013 upon the
completion of the company's 2010 repurchase program. As of December 31, 2013, repurchases under the
program totaled $895 million, and $3.1 billion remained under this share repurchase authorization. The
repurchase program is expected to expire when we have used all authorized funds for repurchase.
(2) Includes commissions paid.
Share repurchases take place from time to time, subject to market conditions and management's discretion, in the
open market or in privately negotiated transactions. The company retires its common stock upon repurchase and has
not made any purchases of common stock other than in connection with these publicly announced repurchase
program authorizations.
In connection with the spin-off of our former shipbuilding business, we obtained a Private Letter Ruling from the
Internal Revenue Service (IRS) that generally limited our share repurchases to approximately 88 million shares
within two years of the spin-off. The limitation expired on March 31, 2013. During this two year period, we
repurchased approximately 67 million shares of our common stock.
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NORTHROP GRUMMAN CORPORATION
STOCK PERFORMANCE GRAPH
Comparison of Cumulative Five Year Total Return
Among Northrop Grumman Corporation, the S&P 500 Index,
and the S&P Aerospace & Defense Index
(1) Assumes $100 invested at the close of business on December 31, 2008, in Northrop Grumman
Corporation common stock, Standard & Poor’s (S&P) 500 Index and the S&P Aerospace & Defense
Index.
(2) The cumulative total return assumes reinvestment of dividends. In March 2011, we completed the spin-
off of Huntington Ingalls Industries, Inc. (HII). Our shareholders received one share of HII common
stock for every six shares of our common stock held on the record date. The effect of the spin-off is
reflected in the cumulative total return as a reinvested dividend.
(3) The S&P Aerospace & Defense Index is comprised of The Boeing Company, General Dynamics
Corporation, Honeywell International Inc., L-3 Communications, Lockheed Martin Corporation,
Northrop Grumman Corporation, Precision Castparts Corporation, Raytheon Company, Rockwell
Collins, Inc., Textron, Inc. and United Technologies Corporation.
(4) The total return is weighted according to market capitalization of each company at the beginning of each
year.
(5) This graph is not deemed to be "filed" with the U.S. Securities and Exchange Commission or subject to
the liabilities of Section 18 of the Securities and Exchange Act of 1934 (the Exchange Act), and should
not be deemed to be incorporated by reference into any of our prior or subsequent filings under the
Securities Act of 1933 or the Exchange Act.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
For a description of securities authorized under our equity compensation plans, see Note 14 to our consolidated
financial statements in Part II, Item 8.
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NORTHROP GRUMMAN CORPORATION
Item 6. Selected Financial Data
The data presented in the following table is derived from the audited consolidated financial statements and other
information, all adjusted to reflect the effects of discontinued operations. See also Other Matters – Business
Dispositions in Part II, Item 7.
Selected Financial Data
$ in millions, except per share amounts
2013
2012
2011
2010
2009
Year Ended December 31
Sales
U.S. Government
Other customers(1)
Total sales
Operating income
Earnings from continuing operations
Basic earnings per share, from continuing operations
$
Diluted earnings per share, from continuing operations
Cash dividends declared per common share
Year-End Financial Position
$ 21,278
$ 22,268
$ 23,432
$ 25,061
$ 24,423
3,383
2,950
2,980
3,082
3,227
24,661
25,218
26,412
28,143
27,650
3,123
1,952
8.50
8.35
2.38
$
3,130
1,978
7.96
7.81
2.15
$
3,276
2,086
7.54
7.41
1.97
$
2,827
1,904
6.41
6.32
1.84
$
2,274
1,434
4.49
4.44
1.69
Total assets
Notes payable to banks and long-term debt
Total long-term obligations(2)
Financial Metrics
Cash provided by continuing operations
Free cash flow from continuing operations(3)
Other Information
$ 26,381
$ 26,543
$ 25,411
$ 31,410
$ 30,297
5,930
9,946
3,935
10,973
3,948
8,940
4,724
7,947
4,011
8,959
$ 2,483
$ 2,640
$ 2,347
$ 2,056
$ 1,995
2,119
2,309
1,855
1,471
1,454
Company-sponsored research and development expenses
$
507
$
520
$
543
$
580
$
588
Total backlog
Square footage at year-end (in thousands)
Number of employees at year-end
37,033
34,500
65,300
40,809
35,053
68,100
39,515
37,397
72,500
46,842
38,218
79,600
48,741
37,990
81,800
(1) Other customer sales includes foreign military sales.
(2)
(3)
Total long-term obligations includes the long-term portions of debt, pension and other post-retirement benefit
plan liabilities, deferred compensation, unrecognized tax benefits, environmental liabilities and other long-
term obligations.
Free cash flow from continuing operations is a non-GAAP financial measure and is calculated as cash
provided by continuing operations less capital expenditures. See Liquidity and Capital Resources – Free Cash
Flow from Continuing Operations in Part II, Item 7 for more information on this measure.
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NORTHROP GRUMMAN CORPORATION
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Political and Economic Environment
The U.S. Government continues to face substantial fiscal and economic challenges, which affect funding for its
discretionary and non-discretionary budgets. Part I of the Budget Control Act of 2011 (Budget Control Act) provided
for a reduction in planned defense budgets by at least $487 billion over a ten year period, and the fiscal year (FY)
2013 impacts were incorporated in the U.S. Government's FY 2013 budget. Part II mandated substantial additional
reductions, through a process known as “sequestration,” which took effect March 1, 2013, and resulted in
approximately $40 billion of additional reductions to the FY 2013 defense budget.
In March 2013, the President signed into law the Consolidated and Further Continuing Appropriations Act (2013)
which included specific appropriations for our major federal customers, including the DoD, subject to further
reductions or sequestration under the Budget Control Act.
In October 2013, Congress passed a continuing resolution to fund the government through January 15, 2014
(subsequently extended through January 18, 2014), and suspended the statutory limit on the amount of permissible
federal debt (the debt ceiling) through February 7, 2014.
In December 2013, Congress passed the National Defense Authorization Act (NDAA) for FY 2014. Congress also
passed, and the President signed into law, the Bipartisan Budget Act of 2013, which set discretionary spending levels
for FY 2014 and FY 2015. The legislation provides for additional budget funding of approximately $63 billion over
FY 2014 and FY 2015. The additional funding is expected to alleviate some budget cuts that would otherwise have
been instituted through sequestration in FY 2014 and FY 2015, with approximately $45 billion (generally split
equally between defense and non-defense spending) applied to FY 2014.
On January 16, 2014, Congress passed the Consolidated Appropriations Act of 2014, providing for federal spending
levels consistent with the Bipartisan Budget Act of 2013. The President signed the legislation into law on January
17, 2014. The discretionary spending levels for FY 2014 total approximately $1.1 trillion, of which the defense
spending level is $572 billion, comprised of $487 billion in base defense and $85 billion in overseas contingency
operations (OCO) funds.
The President's budget request for FY 2015 is currently due to Congress in February 2014. Congressional
appropriation and authorization of spending for FY 2015 and beyond, including defense spending, and the
application of sequestration remain marked by significant debate and an uncertain schedule. Congress and the
Administration also continue to debate the debt ceiling, among other fiscal issues, as they negotiate plans for long-
term national fiscal policy. The outcome of these debates could have a significant impact on defense spending
broadly and the company's programs in particular.
If the existing debt ceiling is not raised, we may be required to continue to perform for some period of time on
certain of our U.S. Government contracts even if the U.S. Government is unable to make timely payments. A debt
ceiling breach could, among other impacts, have significant near and long-term consequences for our company, our
employees, our suppliers and the defense industry. It could negatively affect the U.S. Government's timely payment
of our billings, result in delayed cash collections and have a material adverse effect on our financial position, results
of operations and/or cash flows.
The budget environment, including sequestration as currently mandated, remain a significant long-term risk.
Considerable uncertainty exists regarding how future budget and program decisions will unfold and what challenges
budget reductions will present for the defense industry. We believe continued budget pressures will have serious
negative consequences for the security of our country, the defense industrial base, including Northrop Grumman,
and the customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial
base. Although it is difficult to determine specific impacts, we expect that over the longer term, the budget
environment may result in lower awards, revenues, profits and cash flows from our U.S. Government contracts.
Members of Congress continue to discuss various options to address sequestration in future budget planning, but we
cannot predict the outcome of these efforts. It is likely budget and program decisions made in this environment will
have long-term impacts on our company and the entire defense industry.
Faced with continued budget uncertainty and continued threats to national security, the DoD is reviewing the roles
and structure of the U.S. military. In January 2012, the DoD announced a new defense strategy intended to guide its
priorities and budgeting decisions. The strategy calls for the U.S. military to project power globally and operate
effectively in all domains, including cyberspace, and places particular emphasis on Asia Pacific as an area of
strategic focus. In March 2013, the Secretary of Defense directed senior Pentagon officials to conduct a
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NORTHROP GRUMMAN CORPORATION
comprehensive strategic review of the DoD strategy, including examination of the choices underlying the strategy,
force posture, investments and institutional management in light of the budgetary and strategic environment. The
DoD briefed the results of this review in late July 2013 and provided some broad indications of the choices being
weighed. In examining budget constraints within a sequestration environment over the next decade, the DoD
determined reductions in personnel, compensation and benefits, force structure, and modernization likely would be
necessary. On force planning, the review broadly outlined several options, some that favor current capacity and
others that emphasize future investments. The DoD has stated that while the review demonstrated various
alternatives, decisions are still being finalized. Program and budget deliberations for the FY 2015 defense plan,
currently scheduled for delivery to Congress in February 2014, are ongoing within the DoD. The next Quadrennial
Defense Review is scheduled to be completed and delivered to Congress in 2014. These various strategic reviews, as
well as budget plans, proposed by the Administration and considered by Congress, may impact future funding for
the company's programs.
We believe spending on recapitalization, modernization and maintenance of defense, intelligence, and homeland
security assets will continue to be a national priority. Future defense spending is expected to include the
development and procurement of new manned and unmanned military platforms and systems, along with advanced
electronics and software to enhance the capabilities of existing individual systems and provide real-time integration
of surveillance, information management, strike and battle management platforms. We expect significant new
competitive opportunities to include long range strike, missile defense, command and control, network
communications, enhanced situational awareness, satellite systems, restricted programs, cybersecurity, technical
services and information technology, as well as numerous homeland security programs.
The company believes it has additional international opportunities (direct and foreign military sales), beyond those
realized today, to sell its products and services outside the U.S. market, particularly in the domains of unmanned
systems, cyber, C4ISR, logistics and manned military aircraft. The Administration is addressing and supporting
export control reforms that could enhance our ability to take advantage of these opportunities. The company is
dedicating additional resources to expanding its international sales with emphases on Australia, the Middle East,
Asia and Europe, through both organic growth and acquisitions. To the extent these efforts are successful, increases
in international awards, revenues, profits and cash flows may offset, or partially offset, potential declines resulting
from the U.S. political and economic environment described above.
See Risk Factors located in Part I, Item 1A for a more complete description of risks we face.
Operating Performance Assessment and Reporting
We manage and assess our business based on our performance on contracts and programs (two or more closely-
related contracts), with consideration given to the Critical Accounting Policies, Estimates and Judgments described
later in this section. Sales on our portfolio of long-term contracts is primarily recognized using the cost-to-cost
method of percentage of completion accounting, but in some cases the units-of-delivery method of percentage of
completion accounting. As a result, sales tend to fluctuate in concert with costs across our large portfolio of
contracts. Due to Federal Acquisition Regulation (FAR) rules that govern our business, most types of costs are
allowable, and we do not focus on individual cost groupings (such as manufacturing, engineering and design labor
costs, subcontractor costs, material costs, overhead costs, and general and administrative costs), as much as we do
on total contract cost, which is the key driver of our sales and operating income.
Our contract management process involves the use of contract estimates-at-completion (EACs) that are generally
prepared and evaluated on a bottoms-up basis at least annually and reviewed on a quarterly basis over the contract's
period of performance. These EACs include an estimated contract operating margin based initially on the contract
award amount, adjusted to reflect estimated risks related to contract performance. These risks typically include
technical risk, schedule risk and performance risk based on our evaluation of the contract effort. Similarly, the EACs
may include identified opportunities for operating margin rate improvement. Over the contract's period of
performance, our program management organizations perform evaluations of contract performance and adjust the
contract revenue and cost estimates to reflect the latest reliable information available.
Our business and program management organizations are comprised of skilled professional managers whose
objective is to satisfy the customer's expectations, deliver high quality products and services, and manage contract
cost risks and opportunities to achieve an appropriate operating margin rate on the contract. Our comprehensive
business and contract management process is a coordinated process involving personnel with expertise from various
disciplines including engineering, production control, contracts, cost management, mission assurance and quality,
finance and supply chain, among others. As part of this overall contract management function, personnel monitor
compliance with our critical accounting policies related to contract accounting and compliance with U.S.
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NORTHROP GRUMMAN CORPORATION
Government regulations. Contract operating income and period-to-period contract operating margin rates are
adjusted over the contract's period of performance to reflect the latest estimated revenue and cost for the contract,
including changes in the risks and opportunities affecting the contract. Such adjustments are accounted for under the
cumulative catch-up method of accounting and may have a favorable or unfavorable effect on operating income
depending upon the specific conditions affecting each contract.
In evaluating our operating performance, we look primarily at changes in sales and operating income, including the
effects of meaningful changes in operating income as a result of changes in contract estimates. Where applicable,
significant fluctuations in operating performance attributable to individual contracts or programs, or changes in a
specific cost element across multiple contracts, are described in our analysis. Based on this approach and the nature
of our operations, the discussion of results of operations first focuses on our four segments before distinguishing
between products and services. Changes in sales are generally described in terms of volume, deliveries or other
indicators of sales activity, and contract mix. For purposes of this discussion, volume generally refers to increases or
decreases in cost or sales from production/service activity levels or delivery rates. Performance refers to changes in
contract margin rates for the period, primarily related to the changes in estimates referred to above.
CONSOLIDATED OPERATING RESULTS
Selected financial highlights, excluding the results of discontinued operations, are presented in the table below:
$ in millions, except per share amounts
Sales
Operating costs and expenses
Operating income
Operating margin rate
Federal and foreign income tax expense
Effective income tax rate
Diluted earnings per share
Cash provided by continuing operations
Year Ended December 31
2012
$25,218
22,088
3,130
12.4%
2013
$24,661
21,538
3,123
12.7%
2011
$26,412
23,136
3,276
12.4%
$ 911
$ 987
$ 997
31.8%
33.3%
32.3%
$ 8.35
$ 2,483
$ 7.81
$ 2,640
$ 7.52
$ 2,347
Sales
Sales for 2013 decreased $557 million, or 2 percent, as compared with 2012. Sales for 2012 decreased $1.2 billion,
or 5 percent, as compared with 2011.
The table below shows the variances in segment sales from the respective prior years:
$ in millions
Aerospace Systems
Electronic Systems
Information Systems
Technical Services
Intersegment sales elimination
Total sales variance
Variance from Prior Year
2013
2012
$ 37
199
(760)
(176)
143
($557)
0%
3%
(10%)
(6%)
(7%)
(2%)
$ 13
(422)
(565)
(174)
(46)
($1,194)
0%
(6%)
(7%)
(5%)
2%
(5%)
For further information by segment refer to Segment Operating Results below, and for product and service detail,
refer to the Product and Service Analysis section that follows Segment Operating Results.
Operating Costs and Expenses
Operating costs and expenses are primarily comprised of labor, material, subcontractor and overhead costs, and are
generally allocated to contracts as incurred. In accordance with industry practice and the regulations that govern cost
accounting requirements for government contracts, most general management and corporate expenses incurred at the
segment and corporate locations are considered allowable and allocable costs. Allowable and allocable general and
administrative costs are allocated on a systematic basis to contracts in progress.
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NORTHROP GRUMMAN CORPORATION
Operating costs and expenses comprise the following:
$ in millions
Product and service costs
General and administrative expenses
Operating costs and expenses
Year Ended December 31
2013
2012
2011
$19,282
$19,638
$20,786
2,256
2,450
2,350
$21,538
$22,088
$23,136
2013 – Product and service costs for 2013 decreased $356 million, or 2 percent, as compared with 2012, consistent
with the change in sales. General and administrative expenses as a percentage of total sales decreased to 9.1 percent
in 2013, from 9.7 percent in 2012; the decrease reflects lower indirect costs principally related to cost reduction
initiatives at Information Systems, as well as lower bid and proposal expenses.
2012 – Product and service costs for 2012 decreased $1.1 billion, or 6 percent, as compared with 2011. The primary
driver of the reduction in product and service costs was reduced volume at Electronic Systems, Information Systems
and Technical Services. General and administrative expenses as a percentage of total sales increased to 9.7 percent
in 2012, from 8.9 percent in 2011; the increase includes the impact of lower sales, higher indirect costs related to
compensation accruals and cost classification changes to standardize cost accounting practices at one of our
segments, as well as higher bid and proposal expenses.
For the product and service costs detail, see the Product and Service Analysis section that follows Segment
Operating Results.
Operating Income
We define operating income as sales less operating costs and expenses, which includes general and administrative
expenses. Changes in estimated contract operating income at completion, resulting from changes in estimated sales,
operating costs and expenses, are recorded using the cumulative catch-up method of accounting. The aggregate
effects of these changes in our estimated costs at completion, across our portfolio of contracts, can have a significant
effect on our reported sales and operating income in each of our reporting periods. Cumulative catch-up adjustments
are presented in the table below:
$ in millions
Favorable adjustments
Unfavorable adjustments
Net favorable adjustments
Year Ended December 31
2013
2012
2011
$1,044
(291)
$ 753
$1,270
(285)
$ 985
$1,123
(385)
$ 738
Federal and Foreign Income Taxes
2013 – The effective tax rate on earnings from continuing operations for 2013 was 31.8 percent, as compared with
33.3 percent in 2012. The company's lower effective tax rate for 2013 includes a $37 million benefit for the
American Taxpayer Relief Act, enacted in January 2013, which reinstated research tax credits for 2012 and 2013,
and a $21 million benefit for higher section 199 manufacturing deductions than in the prior year.
2012 – The effective tax rate on earnings from continuing operations for 2012 was 33.3 percent, as compared with
32.3 percent in 2011. The higher effective tax rate reflects the change in net tax benefits related to the absence of
research tax credits, which expired at the end of 2011. Although the American Taxpayer Relief Act of 2012 extended
the research tax credit through 2013, it was not enacted until January 2013.
Diluted Earnings Per Share
2013 – Diluted earnings per share for 2013 increased by $0.54, or 7 percent, as compared with 2012. The higher
diluted earnings per share is primarily due to the benefit of 2012 and 2013 share repurchases.
2012 – Diluted earnings per share for 2012 increased by $0.29, or 4 percent, as compared with 2011. The higher
diluted earnings per share reflects the benefit of 2011 and 2012 share repurchases and higher segment operating
income, partially offset by lower earnings reflecting the lower net Financial Accounting Standards/Cost Accounting
Standards (FAS/CAS) pension adjustment.
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NORTHROP GRUMMAN CORPORATION
Cash Provided by Continuing Operations
2013 – Net cash provided by continuing operations for 2013 decreased by $157 million, or 6 percent, as compared
with 2012, principally due to higher voluntary pension contributions in 2013, partially offset by changes in trade
working capital. In 2013, we contributed $579 million to our pension plans, of which $500 million was voluntarily
pre-funded, as compared with $367 million in 2012, of which $300 million was voluntarily pre-funded.
2012 – Net cash provided by continuing operations for 2012 increased by $293 million, or 12 percent, as compared
with 2011, principally driven by lower pension contributions, partially offset by higher income taxes paid. In 2012,
we voluntarily pre-funded our pension plans by $300 million, as compared to $1.0 billion in 2011.
SEGMENT OPERATING RESULTS
Basis of Presentation
We are aligned in four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical
Services. This section discusses segment sales, operating income and operating margin rates. The reconciliation of
segment sales to total sales is provided in Note 4 to the consolidated financial statements in Part II, Item 8, with the
difference being intersegment sales eliminations. For purposes of the discussion in this Segment Operating Results
section, references to operating income and operating income margin rate reflect segment operating income and
segment operating margin rate.
For a more complete description of each segment’s products and services, see the business descriptions in Part I,
Item 1.
Segment Operating Income
Segment operating income, as reconciled below, is a non-GAAP measure and is used by management as an internal
measure for financial performance of our operating segments. Segment operating income is defined as operating
income less certain corporate-level expenses that are not considered allowable or allocable under applicable CAS or
FAR and net FAS/CAS pension differences.
$ in millions
Segment operating income
Segment operating margin rate
Year Ended December 31
2013
$3,080
2012
$3,176
2011
$3,055
12.5%
12.6%
11.6%
2013 - Segment operating income for 2013 decreased by $96 million, or 3 percent, as compared with 2012. The
decrease in segment operating income was principally due to lower sales. The decrease in operating margin rate
reflects lower net favorable adjustments in 2013, partially offset by higher contract margin rates across our portfolio
resulting from several factors, including the continuing effect of prior net favorable adjustments.
2012 - Segment operating income for 2012 increased by $121 million, or 4 percent, as compared with 2011, due to a
number of factors including improved performance, particularly at Electronic Systems. The improved performance
reflects mitigation of contract risks and cost reduction initiatives, as well as portfolio shaping efforts. The increase in
segment operating margin rate reflects this improved segment performance on lower sales.
The table below reconciles segment operating income to total operating income:
$ in millions
Segment operating income
FAS pension expense in accordance with GAAP
Pension expense in accordance with CAS
Net FAS/CAS pension adjustment
Unallocated corporate expenses
Other
Total operating income
Year Ended December 31
2013
2012
2011
$3,080
(374)
542
168
(119)
(6)
$3,123
$3,176
(374)
506
132
(168)
(10)
$3,130
$3,055
(238)
638
400
(166)
(13)
$3,276
For financial statement purposes, we account for our employee pension plans in accordance with GAAP under FAS.
We charge the costs of these plans to our contracts in accordance with the FAR and the related CAS that govern such
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NORTHROP GRUMMAN CORPORATION
plans. The net FAS/CAS pension adjustment is pension expense determined in accordance with GAAP less pension
expense charged to contracts and included in segment operating income. The increase in net FAS/CAS pension
adjustment during 2013 reflects an update for actual demographic experience as of January 1, 2013, which resulted
in an increase to the company's 2013 CAS pension expense.
Unallocated corporate expenses generally include the portion of corporate expenses, other than FAS pension costs,
not considered allowable or allocable under applicable CAS and FAR rules, and therefore not allocated to the
segments, such as a portion of management and administration, legal, environmental, certain compensation and
retiree benefits, and other expenses. The decrease in unallocated corporate expenses for 2013, as compared to 2012,
is primarily due to lower year-over-year provisions for disallowed costs and litigation matters and the favorable
settlement of overhead claims, partially offset by changes in deferred tax assets due to lower blended state income
tax rates.
AEROSPACE SYSTEMS
$ in millions
Sales
Operating income
Operating margin rate
Year Ended December 31
2012
$9,977
1,218
12.2%
2013
$10,014
1,215
12.1%
2011
$9,964
1,217
12.2%
2013 - Aerospace Systems sales for 2013 were slightly higher than 2012, due to higher volume on manned military
aircraft programs, offset by lower volume on unmanned and space programs. The increase in manned military
aircraft programs reflects higher sales of $107 million from increased deliveries on the F-35 program, as well as
higher volume on the B-2 and E-2D Advanced Hawkeye programs, partially offset by lower volume on various
other programs. The decrease for unmanned programs reflects lower sales of $295 million on the Global Hawk
program largely due to ramp-down on sustainment, support and logistics contracts, partially offset by higher sales of
$187 million on the NATO Alliance Ground Surveillance (AGS) program resulting from ramp-up activities. The
decrease in space programs reflects lower volume for restricted programs due to ramp-down activities, and higher
volume on the James Webb Space Telescope (JWST) and Advanced Extremely High Frequency (AEHF) programs.
Operating income and operating margin rate for 2013 were comparable to 2012. Operating income and operating
margin rate also reflect the impact of a forward loss recognized on a restricted program, which was offset by the
continuing effect of higher contract margin rates across the segment principally related to prior net favorable
adjustments.
2012 - Aerospace Systems sales for 2012 were comparable to 2011. Sales of unmanned systems increased
approximately $280 million, primarily related to ramping up on the NATO AGS and Fire Scout programs.
Additionally, there was higher volume of approximately $200 million on the F-35 program due to deliveries on
LRIP 5, the first F-35 contract accounted for under the units-of-delivery method. These increases were offset by the
termination of a weather satellite program, which reduced sales by approximately $175 million, as well as lower
sales on the Joint Surveillance Target Attack Radar System (JSTARS), F/A-18 and certain restricted space programs.
Operating income and operating margin rate for 2012 were comparable to 2011. The operating income and operating
margin rate reflect approximately $90 million lower operating income from the F/A-18 program's lower volume and
transition from the multi-year 2 contract to the lower margin multi-year 3 contract, principally offset by performance
improvements in space systems and higher operating margin rates and volume on sales of unmanned systems.
ELECTRONIC SYSTEMS
$ in millions
Sales
Operating income
Operating margin rate
Year Ended December 31
2012
$6,950
1,187
17.1%
2013
$7,149
1,226
17.1%
2011
$7,372
1,070
14.5%
2013 - Electronic Systems sales for 2013 increased $199 million, or 3 percent, as compared with 2012. The increase
was due to higher sales on international programs of $244 million and space programs, partially offset by lower
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NORTHROP GRUMMAN CORPORATION
sales on navigation and maritime systems programs of $132 million due to decreased deliveries, as well as lower
volume on laser systems programs associated with in-theater force reductions.
Operating income for 2013 increased $39 million, or 3 percent, as compared with 2012, consistent with the higher
sales volume described above. Operating margin rate was comparable with 2012, and reflects higher margin rates on
our current portfolio of programs, a reduction in net favorable adjustments and the reversal of a $26 million non-
programmatic risk reserve.
2012 - Electronic Systems sales for 2012 decreased $422 million, or 6 percent, as compared with 2011. The decrease
was largely due to lower volume of approximately $160 million on infrared countermeasures sales and
approximately $250 million lower postal automation sales, including approximately $150 million from our decision
to de-emphasize our U.S. postal automation business. These declines, as well as declines due to troop draw down
and reduced overseas contingency operations funding, were partially offset by approximately $190 million higher
volume on space programs.
Operating income for 2012 increased $117 million, or 11 percent, as compared with 2011. Operating margin rate
increased to 17.1 percent in 2012 from 14.5 percent in 2011. The higher operating income and operating margin rate
reflect approximately $160 million of additional performance improvements over 2011, primarily on several combat
avionics programs. These performance improvements include the effect of unfavorable adjustments of
approximately $50 million on a domestic postal automation program in the prior year that did not recur in 2012.
INFORMATION SYSTEMS
$ in millions
Sales
Operating income
Operating margin rate
Year Ended December 31
2012
$7,356
761
10.3%
2013
$6,596
633
9.6%
2011
$7,921
766
9.7%
2013 - Information Systems sales for 2013 decreased $760 million, or 10 percent, as compared with 2012. The sales
decline includes a $98 million impact for the transfer of intercompany efforts to our corporate shared services
organization. Excluding the transfer, 2013 sales declined 9 percent due to lower funding levels, including the
impacts of sequestration, and lower volume for programs impacted by in-theater force reductions and contract
completions.
Operating income for 2013 decreased $128 million, or 17 percent, as compared with 2012. Operating margin rate
decreased to 9.6 percent in 2013 from 10.3 percent in 2012. Lower operating income and operating margin rate were
primarily due to the lower sales volume described above and a $73 million reduction in net favorable adjustments
compared with the prior year.
2012 - Information Systems sales for 2012 decreased $565 million, or 7 percent, as compared with 2011, with no
single program driving a significant portion. The decline in sales reflects the termination or wind-down on a number
of programs, including the Joint Tactical Radio Systems Airborne, Maritime and Fixed (JTRS AMF), Installation
Kits (I-KITS), Enterprise Network Management (ENM) and F-22 programs, partially offset by higher volume of
approximately $110 million on the Encore II Information Technology support program, as well as higher volume on
the Air and Space Operations Center, Enterprise System Development, and Ground Combat Vehicle programs.
Further reducing sales was lower volume on restricted programs, as well as the sale of the County of San Diego IT
outsourcing contract and the sale of Park Air Norway, which together reduced sales by approximately $100 million,
as compared to 2011.
Operating income for 2012 decreased $5 million, or 1 percent, as compared with 2011. Operating margin rate
increased to 10.3 percent in 2012 from 9.7 percent in 2011. The higher operating margin rate is primarily driven by
performance improvements across a number of contracts, which largely offset the impact of lower volume on
operating income.
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NORTHROP GRUMMAN CORPORATION
TECHNICAL SERVICES
$ in millions
Sales
Operating income
Operating margin rate
Year Ended December 31
2012
$3,019
268
8.9%
2013
$2,843
262
9.2%
2011
$3,193
260
8.1%
2013 - Technical Services sales for 2013 decreased $176 million, or 6 percent, as compared with 2012. The decrease
was primarily due to lower sales of $127 million on the Intercontinental Ballistic Missile (ICBM) and integrated
logistics and modernization programs, as well as portfolio shaping efforts.
Operating income for 2013 decreased $6 million, or 2 percent, as compared with 2012. Operating margin rate
increased to 9.2 percent in 2013 from 8.9 percent in 2012. Lower operating income was driven by the lower sales
volume described above, partially offset by higher operating margin rate primarily due to improved performance
across a number of programs.
2012 - Technical Services sales for 2012 decreased $174 million, or 5 percent, as compared with 2011. The decrease
was primarily due to reduced volume from portfolio shaping of approximately $70 million as we focused our
operations into core areas, lower KC-10 logistics activity of approximately $60 million and lower ICBM logistics
and modernization activity of approximately $50 million.
Operating income for 2012 increased $8 million, or 3 percent, as compared with 2011. Operating margin rate
increased to 8.9 percent in 2012 from 8.1 percent in 2011. The higher operating income and operating margin rate
were primarily due to improved performance on the KC-10 program, partially offset by lower sales volume as
described above.
PRODUCT AND SERVICE ANALYSIS
$ in millions
Product sales
Product costs(1)
% of product sales
Service sales
Service costs(1)
% of service sales
Year Ended December 31
2013
2012
2011
$14,033
$13,838
$15,073
10,623
10,415
11,491
75.7%
75.3%
76.2%
$10,628
$11,380
$11,339
8,659
81.5%
9,223
81.0%
9,295
82.0%
(1) Product and service costs do not include an allocation of general and administrative expenses.
2013 - Product costs as a percentage of product sales for 2013 increased 40 basis points, as compared with 2012.
The increase is primarily due to lower product operating margins in newly awarded programs at Information
Systems.
Service costs as a percentage of service sales for 2013 increased 50 basis points, as compared with 2012. The
increase is primarily due to lower service operating margins at Aerospace Systems and Information Systems.
2012 - Product costs as a percentage of product sales for 2012 decreased 90 basis points, as compared with 2011.
This improvement reflects higher margins on combat avionics at Electronic Systems.
Service costs as a percentage of service sales for 2012 decreased 100 basis points, as compared with 2011. This
improvement reflects higher service margins in all four business segments. The improvement is principally driven
by higher margins on certain military aircraft programs at Aerospace Systems and an increase in favorable
performance adjustments across a number of programs at Electronic Systems.
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NORTHROP GRUMMAN CORPORATION
The following table presents product and service sales and operating costs and expenses by segment:
$ in millions
Segment Information:
Aerospace Systems
Product
Service
Electronic Systems
Product
Service
Information Systems
Product
Service
Technical Services
Product
Service
Segment Totals
Total Product
Total Service
Intersegment eliminations
Total Segment(1)
2013
Year Ended December 31
2012
2011
Sales
Costs
Sales
Costs
Sales
Costs
$ 8,210
1,804
$ 7,197
1,602
$ 8,729
1,248
$ 7,704
1,055
$ 8,701
1,263
$ 7,622
1,125
5,574
1,575
990
5,606
210
2,633
4,612
1,311
895
5,068
191
2,390
5,346
1,604
708
6,648
213
2,806
4,438
1,325
606
5,989
196
2,555
6,041
1,331
486
7,435
501
2,692
5,161
1,141
430
6,725
456
2,477
$14,984
11,618
(1,941)
$ 12,895
10,371
(1,685)
$14,996
12,306
(2,084)
$12,944
10,924
(1,826)
$15,729
12,721
(2,038)
$13,669
11,468
(1,780)
$24,661
$ 21,581
$25,218
$22,042
$26,412
$23,357
(1) The reconciliation of segment operating income to total operating income, as well as a discussion of the
reconciling items, is included in the Segment Operating Results section above.
Product Sales and Product Costs
2013 - Product sales for 2013 were comparable with 2012, primarily due to lower product sales at Aerospace
Systems, offset by higher product sales at Information Systems and Electronic Systems. The decrease at Aerospace
Systems reflects the revision in the classification of certain operations, maintenance, and sustainment contracts from
product to service in 2013. The increase at Information Systems was primarily due to newly awarded product
contracts and the increase at Electronic Systems was primarily driven by higher volume as described in the Segment
Operating Results section above.
Product costs for 2013 were comparable with 2012, primarily due to lower product costs at Aerospace Systems,
offset by higher product costs at Information Systems and Electronic Systems. The decrease at Aerospace Systems
was consistent with the classification change noted above. The decrease was offset by newly awarded product
contracts at Information System and higher sales volume at Electronic Systems, as described above.
2012 - Product sales for 2012 decreased $733 million, or 5 percent, as compared with 2011, primarily due to lower
product sales at Electronic Systems and Technical Services, partially offset by higher product sales at Information
Systems. The decrease at Electronic Systems primarily relates to lower volume of approximately $90 million in
combat avionics and approximately $250 million in domestic and international postal automation programs. The
decline at Technical Services was due to the change in classification of the ICBM program from product to service
at the beginning of 2012, as the program transitioned from modernization to predominantly sustainment services.
The increase at Information Systems was primarily driven by higher intercompany volume.
Product costs for 2012 decreased by $725 million, or 5 percent, as compared with 2011, primarily due to lower sales
volume and increased performance improvement adjustments at Electronic Systems and the change in classification
of the ICBM program at Technical Services, offset by higher product volume at Information Systems, as described
above.
Service Sales and Service Costs
2013 - Service sales for 2013 decreased $688 million, or 6 percent, as compared with 2012, primarily due to lower
service sales at Information Systems, partially offset by higher service sales at Aerospace Systems. The decrease at
Information Systems is due to lower service sales across a number of programs, as described in the Segment
Operating Results section above. The higher service sales at Aerospace Systems reflects the revision in the
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NORTHROP GRUMMAN CORPORATION
classification from product to service, as described above, and higher volume on certain military aircraft service
contracts in 2013.
Service costs for 2013 decreased $553 million, or 5 percent, as compared with 2012, primarily due to lower service
volume at Information Systems, partially offset by higher service sales at Aerospace Systems, consistent with the
change in service sales described above.
2012 - Service sales for 2012 decreased $415 million, or 3 percent, as compared with 2011, primarily due to lower
service sales at Information Systems across a number of programs, partially offset by the transition of the ICBM
program from product to service at Technical Services and higher service volume at Electronic Systems.
Service costs for 2012 decreased $544 million, or 5 percent, as compared with 2011, due to lower sales at
Information Systems, partially offset by the transition of the ICBM program from product to service at Technical
Services, as described above, and higher service volume at Electronic Systems. The service activities at Aerospace
Systems and Electronic Systems were performed at higher operating margin rates than in 2011, resulting in service
costs decreasing more than service sales.
BACKLOG
Total backlog includes 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 the option or IDIQ task order is exercised or awarded. For multi-year service
contracts with non-U.S. Government customers having no stated contract values, backlog includes only the amounts
committed by the customer. Backlog is converted into sales as costs are incurred or deliveries are made.
Backlog consisted of the following at December 31, 2013 and 2012:
$ in millions
Aerospace Systems
Electronic Systems
Information Systems
Technical Services
Total backlog
2013
Unfunded
$ 8,260
2,045
3,579
605
$14,489
Funded
$10,061
6,992
3,285
2,206
$22,544
Total
Backlog
$18,321
9,037
6,864
2,811
$37,033
2012
Total
Backlog
$19,594
9,471
8,541
3,203
$40,809
Approximately $19.6 billion of the $37.0 billion total backlog at December 31, 2013, is expected to be converted
into sales in 2014. U.S. Government orders comprised 80 percent of total backlog at the end of 2013. International
orders, including foreign military sales, accounted for 14 percent of total backlog at the end of 2013. Domestic
commercial backlog represented 6 percent of total backlog at the end of 2013.
New Awards
2013 - The estimated value of contract awards recorded during 2013 was $21.9 billion. On a net basis, awards
during 2013 totaled $20.9 billion, reflecting $1.0 billion of adjustments during the first half of the year to reduce
Information Systems unfunded backlog principally associated with expired periods of performance on active
contracts, including several previously awarded task orders on IDIQ contracts. Significant new awards during 2013
include $2.2 billion for the F-35 program, $1.3 billion for the E-2D Advanced Hawkeye program, $866 million for
the AEHF program, $694 million for the B-2 program, and $632 million for the Triton program.
2012 - The estimated value of contract awards recorded during 2012 was $26.5 billion. Significant new awards in
2012 included $1.7 billion for the NATO AGS Unmanned System program, $1.4 billion for the JWST program, $1.3
billion for the F-35 program, $1.2 billion for the E-2D Advanced Hawkeye program, $1.0 billion for international air
defense programs and $689 million for the Global Hawk program.
LIQUIDITY AND CAPITAL RESOURCES
We endeavor to ensure the most efficient conversion of operating earnings into cash for deployment in our business
and to maximize shareholder value. In addition to our cash position, we use various financial measures to assist in
capital deployment decision-making, including net cash provided by operating activities, free cash flow, net debt-to-
equity and net debt-to-capital. We believe these measures are useful to investors in assessing our financial
performance and condition.
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NORTHROP GRUMMAN CORPORATION
During the second quarter of 2013, the company's board of directors authorized a new share repurchase program of
up to $4.0 billion of the company’s common stock. At the same time, the company announced its plan to repurchase
shares with the goal of retiring approximately 25 percent of its then outstanding shares (60 million shares) by the
end of 2015, market conditions permitting. As of December 31, 2013, we had repurchased 20.8 million shares
towards that goal.
During the second quarter of 2013, the company also issued $2.85 billion of unsecured senior notes (the Notes). The
company used a portion of the net proceeds to redeem $850 million of unsecured senior notes due in 2014 and 2015
(see Note 10 in Part II, Item 8). The remaining net proceeds from the offering of the Notes will be used for general
corporate purposes, including debt repayments, share repurchases, pension plan funding, acquisitions and working
capital.
Cash balances and cash generated from continuing operations, supplemented by borrowings under credit facilities
and/or in the capital markets, if needed, is expected to be sufficient to fund our operations for at least the next 12
months. As of December 31, 2013, the amount of cash, cash equivalents, and marketable securities held outside of
the U.S. by foreign subsidiaries was $597 million. We currently do not anticipate repatriating these balances to fund
domestic operations. Capital expenditure commitments were $524 million at December 31, 2013, and are expected
to be paid with cash on hand.
The table below summarizes key components of cash flow provided by operating activities from continuing
operations:
$ in millions
Net earnings
Net earnings from discontinued operations
Non-cash items(1)
Retiree benefit funding in excess of expense
Trade working capital decrease and other
Cash provided by continuing operations
Year Ended December 31
2012
2013
$1,952
—
724
(281)
88
$2,483
$1,978
—
726
(71)
7
$2,640
2011
$2,118
(32)
1,108
(904)
57
$2,347
(1) Includes depreciation and amortization, stock based compensation expense and deferred income taxes.
Free Cash Flow from Continuing Operations
Free cash flow from continuing operations is defined as cash provided by operating activities from continuing
operations less capital expenditures. We believe free cash flow from continuing operations is a useful measure for
investors to consider as it represents the cash flow the company has available after capital spending to invest for
future growth, strengthen the balance sheet and/or return to shareholders through dividends and share repurchases.
Free cash flow is a key factor in our planning for and consideration of strategic acquisitions, the payment of
dividends and stock repurchases.
Free cash flow from continuing operations is not a measure of financial performance under GAAP, and may not be
defined and calculated by other companies in the same manner. This measure should not be considered in isolation,
as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating results
presented in accordance with GAAP as indicators of performance.
The table below reconciles cash provided by continuing operations to free cash flow from continuing operations:
$ in millions
Cash provided by continuing operations
Less: Capital expenditures
Free cash flow provided by continuing operations
Year Ended December 31
2012
2013
$2,483
(364)
$2,119
$2,640
(331)
$2,309
2011
$2,347
(492)
$1,855
Cash Flows
The following is a discussion of our major operating, investing and financing activities from continuing operations
for each of the three years in the period ended December 31, 2013, as classified on the consolidated statements of
cash flows in Part II, Item 8.
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NORTHROP GRUMMAN CORPORATION
Operating Activities
2013 – Cash provided by continuing operations for 2013 decreased $157 million, or 6 percent, as compared with
2012. The decrease was principally driven by higher voluntary pension contributions in 2013, partially offset by
changes in trade working capital. In 2013, we contributed $579 million to our pension plans, of which $500 million
was voluntarily pre-funded, as compared with $367 million in 2012, of which $300 million was voluntarily pre-
funded.
2012 – Cash provided by continuing operations for 2012 increased $293 million, or 12 percent, as compared with
2011, primarily due to lower pension contributions, partially offset by higher income taxes paid. In 2012, we
contributed $367 million to our pension plans, of which $300 million was voluntarily pre-funded, as compared with
$1.1 billion in 2011, of which $1.0 billion was voluntarily pre-funded.
Investing Activities
2013 – Cash used in investing activities from continuing operations for 2013 increased $262 million, or 312 percent,
as compared with 2012, primarily due to $250 million in proceeds from the maturity of short-term investments in
2012.
2012 – Cash used in investing activities from continuing operations for 2012 was $84 million, as compared to the
cash provided by investing activities in 2011, reflecting a $1.4 billion contribution received from the spin-off of our
former Shipbuilding business in 2011, partially offset by $250 million in proceeds from the maturity of short-term
investments in 2012 that were purchased in 2011.
Financing Activities
2013 – Net cash used in financing activities for 2013 decreased $847 million, or 50 percent, as compared with 2012.
The decrease was primarily due to the $2.0 billion of net proceeds received from the debt transactions described
above, partially offset by higher repurchases of common stock in 2013.
2012 – Net cash used in financing activities for 2012 decreased $1.8 billion, or 51 percent, as compared with 2011,
reflecting approximately $980 million lower repurchases of common stock and $768 million of debt repayments in
2011 that did not recur in 2012.
Credit Facilities
In August 2013, the company entered into a new five-year senior unsecured credit facility in an aggregate principal
amount of $1.775 billion (the Credit Agreement). The Credit Agreement replaced the company’s prior five-year
revolving credit facility in an aggregate principal amount of $1.5 billion entered into on September 8, 2011, and its
364-day revolving credit facility in an aggregate principal amount of $500 million entered into on September 4,
2012.
The Credit Agreement contains customary terms and conditions, including covenants restricting the company's
ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other
fundamental changes and incur liens. The company also cannot permit the ratio of its debt to capitalization (as set
forth in the Credit Agreement) to exceed 65 percent. The company is in compliance with all covenants under the
Credit Agreement. At December 31, 2013, there was no balance outstanding under this facility.
Other Sources and Uses of Capital
Additional Capital – We believe we can obtain additional capital, if necessary for long-term liquidity, from such
sources as the public or private capital markets, the sale of assets, sale and leaseback of operating assets, and leasing
rather than purchasing new assets. We have an effective shelf registration statement on file with the Securities and
Exchange Commission (SEC), which allows us to access capital in a timely manner.
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 December 31, 2013, there were $345 million of stand-by letters of credit
and guarantees, and $157 million of surety bonds outstanding.
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NORTHROP GRUMMAN CORPORATION
Contractual Obligations
The following table presents our contractual obligations as of December 31, 2013, and the estimated timing of future
cash payments:
$ in millions
Long-term debt
Interest payments on long-term debt
Operating leases
Purchase obligations(1)
Other long-term liabilities(2)
Total contractual obligations
Total
$ 5,928
3,996
943
7,922
1,153
$19,942
2014
$ 2
285
277
4,601
308
$5,473
2015-
2016
$ 113
554
408
2,515
320
$3,910
2017-
2018
$1,056
527
168
654
131
$2,536
2019 and
beyond
$4,757
2,630
90
152
394
$8,023
(1) A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and legally
binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum, or variable price provisions; and the approximate timing of the transaction. These amounts are
primarily comprised of open purchase order commitments to suppliers and subcontractors pertaining to funded
contracts.
(2) Other long-term liabilities primarily consist of total accrued environmental reserves, deferred compensation,
and other miscellaneous liabilities, of which $100 million is related to environmental reserves recorded in other
current liabilities. It excludes obligations for uncertain tax positions of $272 million, as the timing of such
payments, if any, cannot be reasonably estimated.
The table above also excludes estimated minimum funding requirements for retirement and other post-retirement
benefit plans, as set forth by the Employee Retirement Income Security Act (ERISA). For further information about
future minimum contributions for these plans, see Note 13 to the consolidated financial statements in Part II, Item 8.
Further details regarding long-term debt and operating leases can be found in Notes 10 and 12, respectively, to the
consolidated financial statements in Part II, Item 8.
CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS
Revenue Recognition
We generate the majority of our business from long-term contracts with the U.S. Government for development,
production and support activities. We classify contract revenues as product or service depending on the predominant
attributes of the underlying contract. We consider the nature of our contracts and the types of products and services
provided when determining the proper accounting method for a particular contract.
Due to the long-term nature of our contracts, we generally recognize revenue using the percentage-of-completion
method of accounting as work on our contracts progresses, which requires us to make reasonably dependable
estimates for the design, manufacture, and delivery of our products and services. Contract revenues may include
estimated amounts not contractually agreed to by the customer, including price redetermination, cost or performance
incentives (such as award and incentive fees), un-priced change orders, claims, and requests for equitable
adjustment. Amounts pertaining to provisions for price redetermination or for cost and/or performance incentives are
included in sales when they are reasonably estimable. Our cost estimation process is based on the professional
knowledge of our engineers, program managers and financial professionals, and draws on their significant
experience and judgment. Such costs are typically incurred over a period of several years, and estimation of these
costs requires the use of judgment. Factors considered in estimating the cost of the work to be completed include the
availability, productivity and cost of labor, the nature and complexity of the work to be performed, the effect of
change orders, the availability and cost of materials, the effect of any delays in performance and the level of indirect
cost allocations.
We update our contract estimates at least annually and more frequently as determined by the occurrence of events or
changes in circumstances. We generally review and reassess our revenue, cost and profit estimates for each
significant contract on a quarterly basis. We recognize changes in estimates using the cumulative catch-up method of
accounting. This method recognizes, in the current period, the cumulative effect of the changes on current and prior
periods. Revenue and profit on future periods of contract performance are recognized as if the revised estimate had
been used since contract inception. If it is determined that a loss will result from the performance of a contract, the
entire amount of the estimable future loss is charged against income in the period the loss is identified. Loss
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NORTHROP GRUMMAN CORPORATION
provisions are first offset against costs that are included in unbilled accounts receivable or inventoried costs, and any
remaining amount is reflected in liabilities.
Changes in contract estimates occur for a variety of reasons, including changes in contract scope, estimated
revenue, and cost estimates. These changes are often driven by events such as changes in estimated incentive fees,
unanticipated risks affecting contract costs, the resolution of risk at lower or higher cost than anticipated, and
changes in indirect cost allocations, such as overhead and general and administrative expenses. We employ an
extensive contract management process involving several functional organizations and numerous personnel who are
skilled at managing contract activities. Changes in estimates are frequent; the company performs on a broad
portfolio of long-term contracts, many of which include complex and customized aerospace and electronic
equipment and software, that often includes technology at the forefront of science. Significant changes in estimates
on a single contract could have a material effect on the company's consolidated financial position or annual results
of operations, and where such changes occur, separate disclosure is made of the nature, underlying conditions and
financial impact of the change. For the impacts of changes in estimates on our consolidated statement of earnings
and comprehensive income, see the Consolidating Operating Results section above and Note 1 to the consolidated
financial statements in Part II, Item 8.
Goodwill
Overview – We allocate the purchase price of acquired businesses to the underlying tangible and intangible assets
acquired and liabilities assumed based upon their respective fair values, with the excess recorded as goodwill. Such
fair value assessments require judgments and estimates that can be affected by contract performance and other
factors over time, which may cause final amounts to differ materially from original estimates. Adjustments to the
fair value of purchased assets and liabilities after the initial measurement period are recognized in net earnings.
Impairment Testing – In the fourth quarter of 2013, the company changed the date of its annual goodwill impairment
test from November 30 to December 31. This change in accounting principle is preferable as it aligns the timing of
our annual goodwill impairment test with our year-end financial reporting process. This change did not result in the
acceleration, delay or avoidance of an impairment charge. The company applied the change in the annual
impairment date retrospectively to January 1, 2011; it is impracticable to objectively determine valuation estimates
necessary to apply the change in periods prior to that date. There were no changes in previously reported amounts as
a result of retrospectively applying the change in the annual impairment testing date. As a result of this change,
during 2013, we performed an annual goodwill impairment test as of November 30 and as of December 31.
The results of our annual goodwill impairment test as of November 30, 2013, and as of December 31, 2013,
indicated that the estimated fair value of each reporting unit substantially exceeded its respective carrying value. The
prior year's annual goodwill impairment test as of November 30, 2012, indicated one of our reporting units,
Information Systems, had a fair value that exceeded carrying value by approximately five percent. Since the prior
year, the fair value of Information System has substantially increased principally due to expansion in market
valuations. There were no impairment charges recorded in the years ended December 31, 2013, 2012 and 2011.
In addition to performing an annual goodwill impairment test, an interim impairment test may be required if events
occur or circumstances change that suggest goodwill may be impaired during an interim period. Such indicators may
include, but are not limited to, the loss of significant business, significant decreases in federal government
appropriations or other significant adverse changes in industry or market conditions.
When testing goodwill for impairment, we compare the fair values of each of our four reporting units to their
respective carrying values. To determine the fair value of our reporting units, we primarily use the income approach
based on the cash flows that the reporting unit expects to generate in the future, consistent with our operating plans.
This income valuation method requires management to project sales, operating expenses, working capital, capital
spending and cash flows for the reporting units over a multi-year period, as well as determine the weighted-average
cost of capital (WACC) used as a discount rate and terminal value assumptions.
The WACC takes into account the relative weights of each component of our consolidated capital structure (equity
and debt) and represents the expected cost of new capital adjusted as appropriate to consider lower risk profiles
associated with longer-term contracts and barriers to market entry. The terminal value assumptions are applied to the
final year of the discounted cash flow model. Impairment assessment inherently involves management judgments as
to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Due to
the many variables inherent in the estimation of a business’ fair value and the relative size of our recorded goodwill,
differences in assumptions may have a material effect on the results of our impairment analysis.
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NORTHROP GRUMMAN CORPORATION
We also corroborate the fair values determined under the income approach using the market valuation method to
estimate the fair value of our reporting units, by utilizing industry multiples (including relevant control premiums) of
operating earnings. If the carrying value of a reporting unit exceeds its fair value, we determine the fair value of the
reporting unit’s individual assets and liabilities and calculate the implied fair value of goodwill.
Retirement Benefits
Overview – For financial statement purposes, we account for our employee pension and other post-retirement plans
in accordance with GAAP. We recognize the funded status of our retirement benefit plans on a plan-by-plan basis, as
either an asset or a liability in the consolidated statement of financial position. Unamortized benefit plan costs are
recorded as accumulated other comprehensive income/loss within shareholders’ equity, and are then amortized to
expense in future periods. Net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they
exceed the accounting corridor. The accounting corridor is a defined range within which amortization of net gains
and losses is not required and is equal to 10 percent of the greater of the plan assets or benefit obligations. Gains or
losses outside of the corridor are subject to amortization over our average employee future service period of
approximately nine years.
We perform an annual review of the assumptions used in determining projected benefit obligations and the fair
values of plan assets for our pension plans and other post-retirement benefit plans in consultation with our outside
actuaries. In the event we determine changes in the assumptions are warranted, or as a result of plan amendments,
future pension and other post-retirement benefit expense could increase or decrease. The principal assumptions that
have a significant effect on our consolidated financial position and annual results of operations are the discount rate,
cash balance crediting rate, the expected long-term rate of return on plan assets and the estimated fair market value
of plan assets.
The company’s 2014 FAS pension expense is expected to be $115 million. The decrease in expected 2014 pension
expense of $259 million, as compared to 2013, is primarily due to the increase in the company’s discount rate
assumption as of December 31, 2013.
Discount Rate – The discount rate represents the interest rate that is used to determine the present value of future
cash flows currently expected to be required to settle our pension and other post-retirement benefit obligations. The
discount rate is generally based on the yield of high-quality corporate fixed-income investments. At the end of each
year, the discount rate is determined using a portfolio of bonds matching the notional cash outflows related to
benefit payments for each significant benefit plan. Taking into consideration the factors noted above, our weighted-
average pension composite discount rate was 4.99 percent at December 31, 2013, and 4.12 percent at December 31,
2012.
The effects of hypothetical changes in the discount rate for a single year may not be representative and may be
asymmetrical or nonlinear for future years because of the application of the accounting corridor. Holding all other
assumptions constant, an increase or decrease of 25 basis points in the December 31, 2013, discount rate assumption
would have the following estimated effects on 2013 pension and other post-retirement benefit obligations and 2014
expected pension and other post-retirement expense:
$ increase/(decrease) in millions
Pension expense
Other post-retirement benefit expense
Pension obligation
Other post-retirement benefit obligation
25 Basis Point
Decrease in
Rate
25 Basis Point
Increase in
Rate
$ 83
2
828
58
($ 81)
(2)
(792)
(55)
Cash Balance Crediting Rate - A portion of the company’s pension obligation and resulting pension expense is
based on a cash balance formula, where participants’ hypothetical account balances are accumulated over time with
pay-based credits and interest. Interest is credited monthly using the 30-Year Treasury bond rate. The interest
crediting rate is part of the cash balance formula and independent of actual pension investment earnings. Although
current 30-Year Treasury bond rates are near historically low levels, we expect such bond rates to rise in the
future. The cash balance crediting rate assumption has been set to its current level of 3.9 percent as of December 31,
2013, growing to 4.7 percent by 2019. Holding all other assumptions constant, an increase or decrease of 25 basis
points in the December 31, 2013, cash balance crediting rate assumption would have the following estimated effects
on 2013 pension benefit obligations and 2014 expected pension expense:
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NORTHROP GRUMMAN CORPORATION
$ increase/(decrease) in millions
Pension expense
Pension obligation
25 Basis Point
Decrease in
Rate
25 Basis Point
Increase in
Rate
(25)
(115)
27
121
Expected Long-Term Rate of Return on Plan Assets – The expected long-term rate of return on plan assets represents
the average rate of earnings expected on funds invested. For 2013 and 2012, we assumed an expected long-term rate
of return on pension plan assets of 8.0 percent and 8.25 percent, respectively, and assumed an expected long-term
rate of return on other post-retirement benefit plan assets of 7.33 percent and 7.44 percent, respectively. For 2014,
we have assumed an expected long-term rate of return on plan assets of 8.0 percent on pension plans and 7.45
percent on other post-retirement benefit plans. Holding all other assumptions constant, an increase or decrease of 25
basis points in the December 31, 2013, expected long-term rate of return on plan asset assumption would have the
following estimated effects on 2014 pension and other post-retirement expense:
$ increase/(decrease) in millions
Pension expense
Other post-retirement benefit expense
25 Basis Point
Decrease
25 Basis Point
Increase
$59
3
($59)
(3)
Estimated Fair Market Value of Plan Assets – For certain plan assets where the fair market value is not readily
determinable, such as real estate, private equity and hedge funds, estimates of fair value are determined using the
best information available. Estimated fair values on these plan assets are based on redemption values and net asset
values, as well as valuation methodologies that include third party appraisals, comparable transactions, discounted
cash flow valuation models and public market data.
Litigation, Commitments and Contingencies
We are subject to a range of claims, investigations, lawsuits, overhead cost claims, environmental matters, income
tax matters and administrative proceedings that arise in the ordinary course of business. Estimating liabilities and
costs associated with these matters requires judgment based upon the professional knowledge and experience of
management and counsel. We determine whether to record a charge to earnings and, if so, what amount based on
consideration of the facts and circumstances of each matter as then known to us, including any settlement offers, and
our assessment of the probability of liabilities and whether the amount of the loss can be reasonably estimated.
When we believe, based on the facts available to us, that a liability is probable and the loss is reasonably estimable,
we record our best estimate of the amount of the ultimate loss. When a range of costs is reasonably estimable, but no
amount within that range is a better estimate than another, we record what we estimate as the low end of the range.
Determinations whether to record a charge and, if so, of what amount, reflect management's assessment regarding
what is likely to occur; they do not necessarily reflect what management believes should occur. The ultimate
resolution of any such exposure to us may vary materially from earlier estimates as further facts and circumstances
develop or become known to us. For further information on the treatment of these contingencies, see Note 1, Note
11 and Note 12 to the consolidated financial statements in Part II, Item 8.
U.S. Government Cost Claims - From time to time, our customers advise us of ordinary course claims and penalties
concerning certain potential disallowed costs. When such findings are presented, we engage U.S. Government
representatives in discussions to enable us to evaluate the merits of these claims, as well as to assess the amounts
being claimed. Where appropriate, provisions are made to reflect our expected exposure to matters raised by the
U.S. Government representatives.
Environmental Accruals - We are subject to environmental laws and regulations in the jurisdictions in which we
conduct operations. Factors that could result in changes to the assessment of probability, range of estimated costs,
and environmental accruals include: modification of planned remedial actions, increase or decrease in the estimated
time required to remediate, discovery of more or less extensive contamination than anticipated, results of efforts to
involve other responsible parties, financial capabilities of other responsible parties, changes in laws and regulations
or contractual obligations affecting remediation requirements or other obligations, and improvements in remediation
technology.
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NORTHROP GRUMMAN CORPORATION
OTHER MATTERS
Accounting Standards Updates
Accounting standards updates effective after December 31, 2013, are not expected to have a material effect on the
company’s financial position, annual results of operations and/or cash flows.
Business Dispositions
There were no material business dispositions in 2013 or 2012; however, in 2011 we completed the spin-off to our
shareholders of HII effective March 31, 2011. HII operates the business that was previously the Shipbuilding
segment (Shipbuilding) of the company prior to the spin-off. We made a pro rata distribution to our shareholders of
one share of HII common stock for every six shares of our common stock held on the record date of March 30, 2011,
or 48.8 million shares of HII common stock. There was no gain or loss recognized by the company as a result of the
spin-off transaction. In connection with the spin-off, HII issued senior notes and entered into a credit facility with
third-party lenders, and HII used a portion of the proceeds of the notes and credit facility to fund a $1.4 billion cash
contribution to us. The assets, liabilities and operating results of this business unit are reported as discontinued
operations in the consolidated financial statements for all periods presented.
Discontinued Operations – Results of operations for Shipbuilding, and an adjustment to the gain on a previous
divestiture, were as follows:
$ in millions
Sales
Earnings from discontinued operations
Income tax expense
Earnings, net of tax
Gain on divestiture, net of income tax expense of $1
Earnings from discontinued operations, net of tax
Year Ended
December 31,
2011
$1,646
59
(28)
31
1
$ 32
Off-Balance Sheet Arrangements
As of December 31, 2013, we had no significant off-balance sheet arrangements other than operating leases. For a
description of our operating leases, see Note 12 to the consolidated financial statements in Part II, Item 8.
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NORTHROP GRUMMAN CORPORATION
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
EQUITY RISK
We are exposed to market risk with respect to our portfolio of trading and available-for-sale marketable securities
with a fair value of $310 million at December 31, 2013. These securities are exposed to market volatilities, changes
in price and interest rates.
INTEREST RATE RISK
We are exposed to interest rate risk with respect to our holdings of cash and cash equivalents of $5.2 billion at
December 31, 2013, and we are also exposed to interest rate risk on variable-rate short-term credit facilities for
which there were no borrowings outstanding at December 31, 2013. At December 31, 2013, we have $5.9 billion of
long-term debt, primarily consisting of fixed rate debt, with a fair value of approximately $6.2 billion.
From time to time, we may enter into interest rate swap agreements to manage our exposure to interest rate
fluctuations. At December 31, 2013, we have no interest rate swap agreements in effect.
FOREIGN CURRENCY RISK
We are exposed to foreign currency risk with respect to our international operations. We enter into foreign currency
forward contracts to manage a portion of the exchange rate risk related to receipts from customers and payments to
suppliers denominated in foreign currencies. We do not hold or issue derivative financial instruments for trading
purposes. At December 31, 2013, foreign currency forward contracts with a notional amount of $149 million were
outstanding.
INFLATION RISK
We have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer-term firm
fixed-price contracts typically include assumptions for labor and other cost escalations in amounts that historically
have been sufficient to cover cost increases over the period of performance.
A 10 percent change in interest rates or foreign currency exchange rates would not have a material impact to our
consolidated financial position, annual results of operations and/or cash flows.
-42-
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Falls Church, Virginia
We have audited the accompanying consolidated statements of financial position of Northrop Grumman Corporation
and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of
earnings and comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2013. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Northrop Grumman Corporation and subsidiaries at December 31, 2013 and 2012, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December 31, 2013, based on the criteria
established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 3, 2014 expressed an unqualified opinion
on the Company’s internal control over financial reporting.
/s/
Deloitte & Touche LLP
McLean, Virginia
February 3, 2014
-43-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
$ in millions, except per share amounts
Sales
Product
Service
Total sales
Operating costs and expenses
Product
Service
General and administrative expenses
Operating income
Other (expense) income
Interest expense
Other, net
Earnings from continuing operations before income taxes
Federal and foreign income tax expense
Earnings from continuing operations
Earnings from discontinued operations, net of tax
Net earnings
Basic earnings per share
Continuing operations
Discontinued operations
Basic earnings per share
Weighted-average common shares outstanding, in millions
Diluted earnings per share
Continuing operations
Discontinued operations
Diluted earnings per share
Weighted-average diluted shares outstanding, in millions
Year Ended December 31
2012
2011
2013
$14,033
10,628
24,661
$13,838
11,380
25,218
$15,073
11,339
26,412
10,623
8,659
2,256
3,123
(257)
(3)
2,863
911
1,952
—
$ 1,952
$ 8.50
—
$ 8.50
229.6
$ 8.35
—
$ 8.35
233.9
10,415
9,223
2,450
3,130
(212)
47
2,965
987
1,978
—
$ 1,978
$ 7.96
—
$ 7.96
248.6
$ 7.81
—
$ 7.81
253.4
11,491
9,295
2,350
3,276
(221)
28
3,083
997
2,086
32
$ 2,118
$ 7.54
0.11
$ 7.65
276.8
$ 7.41
0.11
$ 7.52
281.6
Net earnings (from above)
Other comprehensive income
Change in unamortized benefit plan costs, net of tax (expense) benefit
of ($1,177) in 2013, $860 in 2012 and $823 in 2011
Change in cumulative translation adjustment
Change in unrealized loss on marketable securities and cash flow
hedges, net of tax benefit of $1 in 2013, $0 in 2012 and $2 in 2011
Other comprehensive income (loss), net of tax
Comprehensive income
$ 1,952
$ 1,978
$ 2,118
1,790
14
(1,303)
8
(1,249)
(4)
(1)
1,803
$ 3,755
(2)
(1,297)
$ 681
(4)
(1,257)
$ 861
The accompanying notes are an integral part of these consolidated financial statements.
-44-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
$ in millions
Assets
Cash and cash equivalents
Accounts receivable, net
Inventoried costs, net
Deferred tax assets
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net of accumulated depreciation of $4,337 in 2013 and
$4,146 in 2012
Goodwill
Non-current deferred tax assets
Other non-current assets
Total assets
Liabilities
Trade accounts payable
Accrued employee compensation
Advance payments and amounts in excess of costs incurred
Other current liabilities
Total current liabilities
Long-term debt, net of current portion of $2 in 2013 and $5 in 2012
Pension and other post-retirement benefit plan liabilities
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note 12)
Shareholders’ equity
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and
outstanding
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding:
2013—217,599,230 and 2012—239,209,812
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
December 31
2013
2012
$ 5,150
2,685
698
605
350
9,488
2,806
12,438
209
1,440
$26,381
$ 1,229
1,169
1,722
1,695
5,815
5,928
2,954
1,064
15,761
$ 3,862
2,858
798
574
300
8,392
2,887
12,431
1,542
1,291
$26,543
$ 1,392
1,173
1,759
1,732
6,056
3,930
6,085
958
17,029
—
—
218
848
12,538
(2,984)
10,620
$26,381
239
2,924
11,138
(4,787)
9,514
$26,543
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NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
$ in millions
Operating activities
Sources of cash—continuing operations
Cash received from customers
Other cash receipts
Total sources of cash—continuing operations
Uses of cash—continuing operations
Cash paid to suppliers and employees
Pension contributions
Interest paid, net of interest received
Income taxes paid, net of refunds received
Other cash payments
Total uses of cash—continuing operations
Cash provided by continuing operations
Cash used in discontinued operations
Net cash provided by operating activities
Investing activities
Continuing operations
Capital expenditures
Maturities of short-term investments
Contribution received from the spin-off of shipbuilding business
Purchases of short-term investments
Other investing activities, net
Cash (used in) provided by investing activities from continuing
operations
Cash used in investing activities from discontinued operations
Net cash (used in) provided by investing activities
Financing activities
Net proceeds from issuance of long-term debt
Common stock repurchases
Payments of long-term debt
Cash dividends paid
Proceeds from exercises of stock options
Other financing activities, net
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Year Ended December 31
2012
2011
2013
$ 24,631
99
24,730
$ 25,364
99
25,463
$ 26,431
149
26,580
(20,473)
(579)
(234)
(880)
(81)
(22,247)
2,483
—
2,483
(364)
—
—
—
18
(346)
—
(346)
2,841
(2,371)
(877)
(545)
184
(81)
(849)
1,288
3,862
$ 5,150
(21,074)
(367)
(200)
(1,119)
(63)
(22,823)
2,640
—
2,640
(331)
250
—
—
(3)
(84)
—
(84)
—
(1,316)
—
(535)
188
(33)
(1,696)
860
3,002
$ 3,862
(22,059)
(1,084)
(227)
(810)
(53)
(24,233)
2,347
(232)
2,115
(492)
200
1,429
(450)
56
743
(63)
680
—
(2,295)
(768)
(543)
101
11
(3,494)
(699)
3,701
$ 3,002
The accompanying notes are an integral part of these consolidated financial statements.
-46-
NORTHROP GRUMMAN CORPORATION
$ in millions
Reconciliation of net earnings to net cash provided by operating
activities
Net earnings
Net earnings from discontinued operations
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
Excess tax benefits from stock-based compensation
Deferred income taxes
(Increase) decrease in assets:
Accounts receivable, net
Inventoried costs, net
Prepaid expenses and other assets
Increase (decrease) in liabilities:
Accounts payable and accruals
Income taxes payable
Retiree benefits
Other, net
Cash provided by continuing operations
Cash used in discontinued operations
Net cash provided by operating activities
Year Ended December 31
2012
2011
2013
$1,952
—
$1,978
—
$2,118
(32)
495
144
(43)
128
171
101
(51)
(169)
2
(281)
34
2,483
—
$2,483
510
183
(45)
78
90
46
(65)
23
(75)
(71)
(12)
2,640
—
$2,640
544
140
(17)
441
350
(2)
16
(341)
(32)
(904)
66
2,347
(232)
$2,115
The accompanying notes are an integral part of these consolidated financial statements.
-47-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
$ in millions, except per share amounts
Common stock
Beginning of year
Common stock repurchased
Shares issued for stock awards and options
End of year
Paid-in capital
Beginning of year
Common stock repurchased
Stock compensation and options exercised
Shipbuilding spin-off adjustment
End of year
Retained earnings
Beginning of year
Net earnings
Dividends declared
End of year
Accumulated other comprehensive loss
Beginning of year
Other comprehensive income, net of tax
Shipbuilding spin-off adjustment
End of year
Total shareholders’ equity
Cash dividends declared per share
Year Ended December 31
2012
2011
2013
$ 239
(27)
6
218
2,924
(2,345)
274
(5)
848
11,138
1,952
(552)
12,538
(4,787)
1,803
—
(2,984)
$10,620
$ 2.38
$ 254
(21)
6
239
3,873
(1,310)
359
2
2,924
9,699
1,978
(539)
11,138
(3,490)
(1,297)
—
(4,787)
$ 9,514
$ 2.15
$ 291
(40)
3
254
7,778
(2,264)
236
(1,877)
3,873
8,124
2,118
(543)
9,699
(2,757)
(1,257)
524
(3,490)
$10,336
$ 1.97
The accompanying notes are an integral part of these consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”)
is a leading global security company providing innovative systems, products and solutions in unmanned systems,
cybersecurity, C4ISR, and logistics and modernization to government and commercial customers worldwide through
four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. We participate
in many high-priority defense and government services programs in the United States (U.S.) and abroad as a prime
contractor, principal subcontractor, partner, or preferred supplier. We conduct the majority of our business with the
U.S. Government, principally the Department of Defense (DoD) and intelligence community. We also conduct
business with foreign, state, and local governments, as well as domestic and international commercial customers.
Principles of Consolidation
The consolidated financial statements include the accounts of Northrop Grumman and its subsidiaries. All material
intercompany accounts, transactions, and profits are eliminated in consolidation. Investments in equity securities and
joint ventures where the company has significant influence, but not control, are accounted for using the equity
method.
Accounting Estimates
The company’s financial statements are prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP). The preparation thereof requires management to make estimates and judgments
that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the
financial statements, as well as the reported amounts of revenues and expenses during the reporting period.
Estimates have been prepared using the most current and best available information; however, actual results could
differ materially from those estimates.
Related Party Transactions
For all periods presented, the company had no material related party transactions.
Revenue Recognition
The majority of our business results are derived from long-term contracts with the U.S. Government for the
production of goods, the provision of services, or in some cases, a combination of both. In accounting for these
contracts, we utilize either the cost-to-cost or the units-of-delivery method of percentage-of-completion accounting.
Generally, sales under cost-reimbursement contracts and construction-type contracts that provide for deliveries at
lower volume rates per year or a small number of units are accounted for using the cost-to-cost method. Under this
method, sales, including estimated profits, are recorded as costs are incurred. Generally, sales under contracts that
provide for deliveries at higher volume rates per year or a large number of units are accounted for using the units-of-
delivery method. Under this method, sales are recognized as units are delivered to the customer. The company
estimates profit on contracts as the difference between total estimated revenue and total estimated cost of a contract
at completion and recognizes that profit either as costs are incurred (cost-to-cost) or as units are delivered (units-of-
delivery). The company classifies revenue as product or service depending upon the predominant attributes of the
contract.
Contract revenues may include estimated amounts not contractually agreed to by the customer, including price
redetermination, cost or performance incentives (such as award and incentive fees), un-priced change orders, claims,
and requests for equitable adjustment. Amounts pertaining to provisions for price redetermination or for cost and/or
performance incentives are included in sales when they are reasonably estimable. Further, as contracts are
performed, change orders can be a regular occurrence and may be un-priced until negotiated with the customer. Un-
priced change orders are included in revenue when they are probable of recovery in an amount at least equal to the
cost. Amounts representing claims (including change orders unapproved as to both scope and price) and requests for
equitable adjustment are included in estimated contract revenue only when they are reliably estimable and
realization is probable. As of December 31, 2013, the recognized amounts related to claims and requests for
equitable adjustment are not material individually or in the aggregate.
The company's U.S. Government contracts generally contain provisions that enable the customer to terminate a
contract for default, or for the convenience of the government. If a contract is terminated for default, the contractor
may not be entitled to recover any of its costs on partially completed work and may be liable to the government for
re-procurement costs of acquiring similar products or services from another contractor, and for certain other
damages. Termination of a contract for the convenience of the government may occur when the government
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NORTHROP GRUMMAN CORPORATION
concludes it is in the best interests of the government that the contract be terminated. Under a termination for
convenience, the contractor is typically entitled to be paid in accordance with the contract’s terms for costs incurred
prior to the effective date of termination, plus a reasonable profit and settlement expenses. At December 31, 2013,
the company does not have any contract terminations in process that would have a material effect on our
consolidated financial position, annual results of operations and/or cash flows.
Changes in estimates of contract sales, costs, or profits are recognized using the cumulative catch-up method of
accounting. This method recognizes, in the current period, the cumulative effect of the changes on current and prior
periods. Revenue and profit on future periods of contract performance are recognized as if the revised estimate had
been used since contract inception. If it is determined that a loss will result from the performance of a contract, the
entire amount of the estimable future loss is charged against income in the period the loss is identifiable. Loss
provisions are first offset against costs that are included in unbilled accounts receivable or inventoried costs, and any
remaining amount is reflected in liabilities.
Changes in contract estimates occur for a variety of reasons, including changes in contract scope, estimated revenue
and cost estimates. These changes are often driven by events such as changes in estimated incentive fees,
unanticipated risks affecting contract costs, the resolution of risk at lower or higher cost than anticipated, and
changes in indirect cost allocations, such as overhead and general and administrative expenses. We employ an
extensive contract management process involving several functional organizations and numerous personnel who are
skilled at managing contract activities. Changes in estimates are frequent; the company performs on a broad
portfolio of long-term contracts, many of which include complex and customized aerospace and electronic
equipment and software, that often include technology at the forefront of science.
Significant changes in estimates on a single contract could have a material effect on the company's consolidated
financial position or annual results of operations, and where such changes occur, separate disclosure is made of the
nature, underlying conditions and financial impact of the change. Aggregate net changes in contract estimates
recognized using the cumulative catch-up method of accounting increased operating income by $753 million ($2.09
per diluted share) in 2013, $985 million ($2.53 per diluted share) in 2012 and $738 million ($1.70 per diluted share)
in 2011. No discrete event or adjustments to an individual contract were material to the consolidated statements of
earnings and comprehensive income for any of these periods.
General and Administrative Expenses
In accordance with industry practice and regulations that govern the cost accounting requirements for government
contracts, most general and administrative expenses incurred at both the segment and corporate locations are
considered allowable and allocable costs on government contracts. These costs are allocated to contracts in progress
on a systematic basis and are included as a component of total contract costs, including any provision for loss
contracts.
Research and Development
Company-sponsored research and development activities primarily include independent research and development
(IR&D) efforts related to government programs. Company-sponsored IR&D expenses are included in general and
administrative expenses in the consolidated statements of earnings and comprehensive income and are generally
allocated to government contracts. Company-sponsored IR&D expenses totaled $507 million, $520 million and
$543 million, in 2013, 2012 and 2011, respectively. Expenses for research and development funded by the customer
are charged directly to the related contracts.
Environmental Costs
Environmental liabilities are accrued when the company determines that, based on the facts and circumstances
known to the company, such amounts are reasonably estimable and it is probable a liability will be found to have
been incurred. When only a range of amounts is established and no amount within the range is more probable than
another, the low end of the range is recorded. The company typically projects environmental costs for up to 30 years
and records environmental liabilities on an undiscounted basis, and does not include legal costs or asset retirement
obligations. At sites involving multiple parties, the company accrues environmental liabilities based upon our
expected share of liability, taking into account the financial viability of other jointly liable parties. Environmental
expenditures are capitalized or expensed, as appropriate. As a portion of environmental remediation costs is
expected to be recoverable through overhead charges on government contracts, such amounts are deferred in
inventoried costs (current portion) and other non-current assets. Certain capitalized expenditures relate to long-lived
improvements in currently operating facilities. The portion of environmental expenditures not expected to be
recoverable is expensed. The company does not record insurance recoveries before collection is probable. At
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NORTHROP GRUMMAN CORPORATION
December 31, 2013 and 2012, the company did not have any accrued receivables related to insurance
reimbursements.
Fair Value of Financial Instruments
The company utilizes fair value measurement guidance prescribed by GAAP to value its financial instruments. The
guidance includes a definition of fair value, prescribes methods for measuring fair value, establishes a fair value
hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value
measurements.
The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect
market data obtained from independent sources, while unobservable inputs reflect internal market assumptions.
These two types of inputs create the following fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments
in markets that are not active; and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
Level 3 - Significant inputs to the valuation model are unobservable.
Marketable securities accounted for as trading and available-for-sale are recorded at fair value. For available-for-sale
securities, any changes in unrealized gains and losses are reported as a component of other comprehensive income.
Changes in unrealized gains and losses on trading securities are included in other, net in the consolidated statements
of earnings and comprehensive income. In addition, investments in held-to-maturity instruments with original
maturities greater than three months are recorded at amortized cost.
Derivative financial instruments are recognized as assets or liabilities in the financial statements and measured at
fair value. Changes in the fair value of derivative financial instruments that qualify and are designated as fair value
hedges are recorded in earnings from continuing operations, while the effective portion of the changes in the fair
value of derivative financial instruments that qualify and are designated as cash flow hedges are recorded as a
component of other comprehensive income. The company may use derivative financial instruments to manage its
exposure to interest rate and foreign currency exchange risks and to balance its fixed and variable rate long-term
debt portfolio. The company does not use derivative financial instruments for trading or speculative purposes, nor
does it use leveraged financial instruments. Credit risk related to derivative financial instruments is considered
minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of
positions. For derivative financial instruments not designated as cash flow hedging instruments, gains or losses
resulting from changes in the fair value are reported in other, net in the consolidated statements of earnings and
comprehensive income.
Income Taxes
Provisions for federal and foreign income taxes are calculated on reported financial statement pre-tax income based
on current tax law and include the cumulative effect of any changes in tax rates from those used previously in
determining deferred tax assets and liabilities. Such provisions differ from the amounts currently payable because
certain items of income and expense are recognized in different periods for financial reporting purposes than for
income tax purposes. The company recognizes federal interest accrued related to unrecognized tax benefits in
income tax expense. Federal penalties are recognized as a component of income tax expense. In accordance with
industry practice and regulations that govern the cost accounting requirements for government contracts, state and
local income and franchise taxes are considered allowable and allocable costs on government contracts and are
therefore recorded in operating costs and expenses. The company recognizes state interest accrued related to
unrecognized tax benefits in unallowable operating costs and expenses.
Uncertain tax position represents the company’s expected treatment of a tax position taken in a filed tax return, or
planned to be taken in a future tax return or claim, that has not been reflected in measuring income tax expense for
financial reporting purposes. Until these positions are sustained by the taxing authorities or the statute of limitations
concerning such issues lapses, the company does not recognize the tax benefits resulting from such positions and
reports the tax effects as a liability for uncertain tax positions in its consolidated statements of financial position.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of
three months or less, primarily consisting of bank time deposits and investments in institutional money market
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NORTHROP GRUMMAN CORPORATION
funds. The company does not invest in high yield or high risk securities. Cash in bank accounts at times may exceed
federally insured limits.
Accounts Receivable and Inventoried Costs
Accounts receivable include amounts billed and currently due from customers, as well as amounts currently due but
unbilled (primarily related to costs incurred on contracts accounted for under the cost-to-cost method of percentage-
of-completion accounting). Accounts receivable also include certain estimated contract change amounts, claims or
requests for equitable adjustment in negotiation that are probable of recovery and amounts retained by the customer
pending contract completion.
Accumulated contract costs in unbilled accounts receivable and inventoried costs include direct production costs,
factory and engineering overhead, production tooling costs, and, for government contracts, allowable general and
administrative expenses. According to the provisions of U.S. Government contracts, the customer asserts title to, or a
security interest in, inventories related to such contracts as a result of contract advances, performance-based
payments, and progress payments. In accordance with industry practice, unbilled accounts receivable and
inventoried costs are classified as current assets and include amounts related to contracts having production cycles
longer than one year. Payments received in excess of inventoried costs and unbilled accounts receivable amounts on
a contract by contract basis are recorded as advance payments and amounts in excess of costs incurred in the
consolidated statements of financial position.
Inventoried costs primarily relate to work in process on contracts accounted for under the units-of-delivery method
of percentage-of-completion accounting. These costs represent accumulated contract costs less the portion of such
costs allocated to delivered items. Product inventory primarily consists of raw materials and is stated at the lower of
cost or market, generally using the average cost method.
Property, Plant and Equipment
Property, plant and equipment are depreciated over the estimated useful lives of individual assets. Most of these
assets are depreciated using declining-balance methods, with the remainder using the straight-line method. Major
classes of property, plant and equipment and their useful lives are as follows:
Useful life in years, $ in millions
Land and land improvements
Buildings and improvements
Machinery and other equipment
Capitalized software costs
Leasehold improvements
Property, plant and equipment, at cost
Accumulated depreciation
Property, plant and equipment, net
Useful Life
Up to 40(1)
Up to 45
Up to 20
3-5
Length of Lease(1)
December 31
2013
2012
$ 373
1,450
4,243
418
659
7,143
(4,337)
$2,806
$ 373
1,421
4,233
413
593
7,033
(4,146)
$2,887
(1)
Land is not a depreciable asset. Leasehold improvements are depreciated over the useful life of the asset if it is
shorter than the length of the lease.
Leases
The company uses its incremental borrowing rate in the assessment of lease classification as capital or operating and
defines the initial lease term to include renewal options determined to be reasonably assured. The majority of our
leases are operating leases.
Many of the company’s real property lease agreements contain incentives for tenant improvements, rent holidays, or
rent escalation clauses. For tenant improvement incentives, the company records a deferred rent liability and
amortizes the deferred rent over the term of the lease as a reduction to rent expense. For rent holidays and rent
escalation clauses during the lease term, the company records rental expenses on a straight-line basis over the term
of the lease. For purposes of recognizing lease incentives, the company uses the date of initial possession as the
commencement date, which is generally when the company is given the right of access to the space and begins to
make improvements in preparation of intended use.
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NORTHROP GRUMMAN CORPORATION
Goodwill and Other Purchased Intangible Assets
The company performs impairment tests for goodwill annually or when the company believes a potential
impairment exists. When it is determined that impairment has occurred, a charge to operations is recorded. Goodwill
and other purchased intangible asset balances are included in the identifiable assets of the business segment to which
they have been assigned. Purchased intangible assets are generally amortized on a straight-line basis over their
estimated useful lives. In the fourth quarter of 2013, the company changed the date of its annual goodwill
impairment test from November 30 to December 31. This change in accounting principle is preferable as it aligns
the timing of our annual goodwill impairment test with our year-end financial reporting process. This change did not
result in the acceleration, delay or avoidance of an impairment charge. The company applied the change in the
annual impairment date retrospectively to January 1, 2011; it is impracticable to objectively determine valuation
estimates necessary to apply the change in periods prior to that date. There were no changes in previously reported
amounts as a result of retrospectively applying the change in the annual impairment testing date. As a result of this
change, during 2013, we performed an annual goodwill impairment test as of November 30 and as of December 31.
Cash Surrender Value of Life Insurance Policies
The company maintains whole life insurance policies on a group of executives, which are recorded at their cash
surrender value as determined by the insurance carrier. The company also has split-dollar life insurance policies on
former officers and executives from acquired businesses, which are recorded at the lesser of their cash surrender
value or premiums paid. These policies are utilized as a partial funding source for deferred compensation and other
non-qualified employee retirement plans. As of December 31, 2013 and 2012, the carrying values associated with
these policies are $287 million and $271 million, respectively, and are recorded in other non-current assets in the
consolidated statements of financial position.
Litigation, Commitments and Contingencies
Amounts associated with litigation, commitments, and contingencies are recorded as charges to earnings when
management, after taking into consideration the facts and circumstances of each matter as then known to
management, including any settlement offers, has determined it is probable a liability will be found to have been
incurred and the amount of the loss can be reasonably estimated. When only a range of amounts is established and
no amount within the range is more likely than another, the low end of the range is recorded. Legal fees are
expensed as incurred.
Retirement Benefits
The company sponsors various pension plans covering substantially all employees. The company also provides post-
retirement benefit plans other than pensions, consisting principally of health care and life insurance benefits, to
eligible retirees and qualifying dependents. The liabilities, unamortized benefit plan costs and annual income or
expense of the company’s pension and other post-retirement benefit plans are determined using methodologies that
involve several actuarial assumptions, the most significant of which are the discount rate, the expected long-term
rate of return on plan assets, and the cash balance crediting rate. Unamortized benefit plan costs consist primarily of
accumulated net after-tax actuarial losses.
Because U.S. Government regulations require that the costs of pension and other post-retirement plans be charged to
our contracts with customers in accordance with the Federal Acquisition Regulation and the related CAS (U.S.
Government Cost Accounting Standards) that govern such plans, we calculate retiree benefit plan costs under both
CAS and FAS (GAAP Financial Accounting Standards) methods. While both FAS and CAS recognize a normal
service cost component in measuring periodic pension cost, there are differences in the way the remaining
components of annual pension costs are calculated under each method. Measuring plan obligations under FAS and
CAS methods utilize different assumptions and models, such as in estimating earnings on plan assets and calculating
interest expense. In addition, the periods over which gains/losses related to pension assets and actuarial changes are
amortized are different under each FAS/CAS method. As a result, annual retiree benefit plan expense amounts for
FAS are different from the amounts for CAS even though the ultimate cost of providing benefits is the same under
either method. CAS retiree benefit plan costs are charged to contracts and are included in segment operating income,
and the difference between CAS and FAS expense is recorded in operating income at the consolidated company
level.
Net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they exceed the accounting
corridor. The accounting corridor is a defined range within which amortization of net gains and losses is not required
and is equal to 10 percent of the greater of the plan assets or benefit obligations. Gains or losses outside of the
corridor are subject to amortization over our average employee future service period of approximately nine years.
The fair values of plan assets are determined based on prevailing market prices or estimated fair value for
investments with no available quoted prices. Not all net periodic pension expense is recognized in net earnings in the
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NORTHROP GRUMMAN CORPORATION
year incurred because it is allocated as production costs and a portion remains in inventory at the end of a reporting
period. The company’s funding policy for the qualified pension plans is to contribute, at a minimum, the statutorily
required amount to an irrevocable trust.
Stock Compensation
The company’s stock compensation plans are classified as equity plans and compensation expense is recognized
over the vesting period (generally three years), net of estimated forfeitures. The company issues stock awards in the
form of restricted performance stock rights and restricted stock rights under its existing plans. The fair value of stock
awards is determined based on the closing market price of the company’s common stock on the grant date. At each
reporting date, the number of shares is adjusted to equal the number ultimately expected to vest.
Foreign Currency Translation
For operations outside the U.S. that have functional currencies other than the U.S. dollar, results of operations and
cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at end-
of-period exchange rates. Translation adjustments are generally included as a component of other comprehensive
income in the consolidated statements of earnings and comprehensive income.
Accounting Standards Updates
Accounting standards updates effective after December 31, 2013, are not expected to have a material effect on the
company’s financial position, annual results of operations and/or cash flows.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
$ in millions
Unamortized benefit plan costs, net of tax benefit of $1,972 in 2013 and $3,149 in 2012
Cumulative translation adjustment
Net unrealized loss on marketable securities and cash flow hedges, net of tax benefit of
$1 in 2013 and $0 in 2012
Total accumulated other comprehensive loss
December 31
2013
($3,000)
18
2012
($4,790)
4
(2)
($2,984)
(1)
($4,787)
Unamortized benefit plan costs consist primarily of net after-tax actuarial losses totaling $3.3 billion and $5.1 billion
as of December 31, 2013 and 2012, respectively. Net actuarial gains or losses are re-determined annually and
principally arise from changes in the rate used to discount our benefit obligations, as well as differences in expected
and actual returns on plan assets.
Reclassifications from other comprehensive income to net earnings related to the amortization of benefit plan costs
were losses of $319 million, $204 million and $91 million, net of taxes, for the years ended December 31, 2013,
2012 and 2011, respectively. The reclassifications represent the amortization of net actuarial losses and prior service
credits for the company's retirement benefit plans, and are included in the computation of net periodic pension cost
(See Note 13 for further information).
Reclassifications from other comprehensive income to net earnings, relating to cumulative translation adjustments,
marketable securities and effective cash flow hedges for the years ended December 31, 2013, 2012 and 2011,
respectively, were not material. Reclassifications for cumulative translation adjustments and marketable securities
are recorded in other income, and reclassifications for effective cash flow hedges are recorded in operating income.
2. EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK
Basic Earnings Per Share
Basic earnings per share from both continuing and discontinued operations are calculated by dividing the respective
earnings by the weighted-average number of shares of common stock outstanding during each period.
Diluted Earnings Per Share
Diluted earnings per share includes the dilutive effect of awards granted to employees under stock-based
compensation plans. The dilutive effect of these securities totaled 4.3 million, 4.8 million and 4.8 million shares for
the years ended December 31, 2013, 2012 and 2011, respectively. The weighted-average diluted shares outstanding
for the years ended December 31, 2012 and 2011, excludes anti-dilutive stock options to purchase approximately 1.8
million and 2.8 million shares, respectively, because such options have exercise prices in excess of the average
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NORTHROP GRUMMAN CORPORATION
market price of the company’s common stock during the year. We had no anti-dilutive stock options outstanding for
the year ended December 31, 2013.
Share Repurchases
The table below summarizes the company’s share repurchases:
Repurchase Program
Authorization Date
June 16, 2010
May 15, 2013(1)
Amount
Authorized
(in millions)
Total
Shares
Retired
(in millions)
$5,350
$4,000
83.7
8.7
Average
Price
Per Share(2) Date Completed
$ 63.86 September 2013
$103.37
Shares Repurchased
(in millions)
Year Ended
December 31
2012
20.9
18.6
2011
40.2
2013
8.7
27.3
—
20.9
—
40.2
(1) On May 15, 2013, the company's board of directors authorized a share repurchase program of up to $4.0
billion of the company’s common stock. Repurchases under this program commenced in September 2013
upon the completion of the company's 2010 repurchase program. As of December 31, 2013, repurchases
under the program totaled $895 million, and $3.1 billion remained under this share repurchase
authorization. The repurchase program is expected to expire when we have used all authorized funds for
repurchase.
(2) Includes commissions paid.
Share repurchases take place from time to time, subject to market conditions and management's discretion, in the
open market or in privately negotiated transactions. The company retires its common stock upon repurchase and has
not made any purchases of common stock other than in connection with these publicly announced repurchase
program authorizations.
In connection with the spin-off of our former shipbuilding business, we obtained a Private Letter Ruling from the
Internal Revenue Service (IRS) that generally limited our share repurchases to approximately 88 million shares
within two years of the spin-off. The limitation expired on March 31, 2013. During this two year period, we
repurchased approximately 67 million shares of our common stock.
Dividends on Common Stock
In May 2013, the company increased the quarterly common stock dividend 11 percent to $0.61 per share from the
previous amount of $0.55 per share.
In May 2012, the company increased the quarterly common stock dividend 10 percent to $0.55 per share from the
previous amount of $0.50 per share.
In May 2011, the company increased the quarterly common stock dividend 6 percent to $0.50 per share from the
previous amount of $0.47 per share.
3. BUSINESS DISPOSITIONS
There were no material dispositions in 2013 and 2012.
Huntington Ingalls Industries, Inc. (HII)
Effective March 31, 2011, the company completed the spin-off to its shareholders of HII. HII was formed to operate
the company's former shipbuilding business. The company made a pro rata distribution to its shareholders of one
share of HII common stock for every six shares of the company’s common stock held on the record date of
March 30, 2011, or 48.8 million shares of HII common stock. HII paid a $1.4 billion cash contribution to the
company. There was no gain or loss recognized as a result of the spin-off transaction.
Prior to the completion of the spin-off, the company and HII entered into a Separation and Distribution Agreement
dated March 29, 2011, and several other agreements that govern the post-separation relationship. These agreements
generally provide that each party is responsible for its respective assets, liabilities and obligations following the
spin-off, including employee benefits, intellectual property, information technology, insurance and tax-related assets
and liabilities.
In connection with the spin-off, the company incurred $28 million of non-deductible transaction costs for the year
ended December 31, 2011, which were included in discontinued operations.
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NORTHROP GRUMMAN CORPORATION
Discontinued Operations
Earnings for the former shipbuilding business and an adjustment to the gain from a previous divestiture, are reported
as discontinued operations, as presented in the following table:
$ in millions
Sales
Earnings from discontinued operations
Income tax expense
Earnings, net of tax
Gain on divestiture, net of income tax expense of $1
Earnings from discontinued operations, net of tax
Year Ended
December 31,
2011
$1,646
59
(28)
31
1
$ 32
Tax rates on discontinued operations vary from the company’s effective tax rate generally due to the non-
deductibility of goodwill for tax purposes and the effects, if any, of capital loss carryforwards.
There were no assets or liabilities related to these discontinued operations included in the consolidated statements of
financial position as of December 31, 2013, 2012 or 2011.
4. SEGMENT INFORMATION
The company is aligned into four segments: Aerospace Systems, Electronic Systems, Information Systems, and
Technical Services.
The company, from time to time, acquires or disposes of businesses and realigns contracts, programs or business
areas among and within its operating segments. Portfolio shaping and internal realignments are designed to more
fully leverage existing capabilities and enhance development and delivery of products and services.
U.S. Government Sales
Sales to the U.S. Government include sales from contracts for which Northrop Grumman is the prime contractor, as
well as those for which the company is a subcontractor and the ultimate customer is the U.S. Government. Each of
the company’s segments derives substantial revenue from the U.S. Government. Sales to the U.S. Government
amounted to $21.3 billion, $22.3 billion and $23.4 billion, or 86 percent, 88 percent and 89 percent, of total sales for
the years ended December 31, 2013, 2012 and 2011, respectively.
International Sales
International sales (which include foreign military sales) amounted to $2.5 billion, $2.1 billion and $2.1 billion, or
10 percent, 8 percent and 8 percent, of total sales for the years ended December 31, 2013, 2012 and 2011,
respectively.
Discontinued Operations
The company’s discontinued operations are excluded from the amounts in the following tables.
Assets
Substantially all of the company’s operating assets are located or maintained in the U.S.
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NORTHROP GRUMMAN CORPORATION
Results of Operations By Segment
The following table presents sales and operating income by segment:
$ in millions
Sales
Aerospace Systems
Electronic Systems
Information Systems
Technical Services
Intersegment eliminations
Total sales
Operating income
Aerospace Systems
Electronic Systems
Information Systems
Technical Services
Intersegment eliminations
Total segment operating income
Reconciliation to operating income:
Net FAS/CAS pension adjustment
Unallocated corporate expenses
Other
Total operating income
Year Ended December 31
2012
2011
2013
$10,014
7,149
6,596
2,843
(1,941)
24,661
1,215
1,226
633
262
(256)
3,080
$ 9,977
6,950
7,356
3,019
(2,084)
25,218
1,218
1,187
761
268
(258)
3,176
$ 9,964
7,372
7,921
3,193
(2,038)
26,412
1,217
1,070
766
260
(258)
3,055
168
(119)
(6)
$ 3,123
132
(168)
(10)
$3,130
400
(166)
(13)
$ 3,276
Net FAS/CAS Pension Adjustment
The net FAS/CAS pension adjustment is the difference between pension expense determined in accordance with
GAAP and pension expense allocated to the operating segments determined in accordance with CAS. The increase
in net FAS/CAS pension adjustment for 2013, as compared to 2012, reflects an update for actual demographic
experience as of January 1, 2013, which resulted in an increase to the company's 2013 CAS pension expense. The
decrease in the 2012 net FAS/CAS pension adjustment, as compared to 2011, is primarily due to increased GAAP
pension expense resulting from amortization of prior year actuarial losses and reduced CAS pension expense
resulting from a plan amendment in 2011.
Unallocated Corporate Expenses
Unallocated corporate expenses include the portion of corporate expenses not considered allowable or allocable
under applicable CAS regulations and the Federal Acquisition Regulation, and are therefore not allocated to the
segments. Such costs consist of a portion of management and administration, legal, environmental, compensation
costs, retiree benefits, and certain unallowable costs such as lobbying activities, among others. The decrease in
unallocated corporate expenses for 2013, as compared to 2012, is primarily due to lower year-over-year provisions
for disallowed costs and litigation matters and the favorable settlement of overhead claims, partially offset by
changes in deferred tax assets due to lower blended state income tax rates.
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NORTHROP GRUMMAN CORPORATION
Intersegment Sales and Operating Income
Sales between segments are recorded at values that include hypothetical operating income for the performing
segment based on that segment’s estimated operating margin rate for external sales. Such hypothetical operating
income is eliminated in consolidation. Intersegment sales and operating income before eliminations were as follows:
$ in millions
Intersegment sales and operating income
Aerospace Systems
Electronic Systems
Information Systems
Technical Services
Total
Other Financial Information
2013
Year Ended December 31
2012
2011
Sales
Operating
Income
Sales
Operating
Income
Sales
Operating
Income
$ 149
629
504
659
$1,941
$ 18
125
63
50
$256
$ 171
607
682
624
$2,084
$ 20
110
78
50
$258
$ 134
649
687
568
$2,038
$ 18
131
68
41
$258
$ in millions
Assets
Aerospace Systems
Electronic Systems
Information Systems
Technical Services
Segment assets
Corporate assets (1)
Total assets
December 31
2013
2012
$ 6,490
4,400
6,887
1,367
19,144
7,237
$26,381
$ 6,657
4,551
6,940
1,313
19,461
7,082
$26,543
(1) Corporate assets principally consist of cash and cash equivalents and deferred tax assets.
$ in millions
Aerospace Systems
Electronic Systems
Information Systems
Technical Services
Corporate
Total from continuing operations
Capital Expenditures
2012
2013
2011
Depreciation and Amortization
2013
2011
2012
$198
76
27
3
60
$364
$154
84
40
3
50
$331
$184
121
45
1
141
$492
$210
134
81
4
66
$495
$196
139
100
4
71
$510
$200
144
121
4
75
$544
The depreciation and amortization expense above includes amortization of purchased intangible assets, as well as
amortization of deferred and other outsourcing costs.
5. ACCOUNTS RECEIVABLE, NET
Unbilled amounts represent sales for which billings have not been presented to customers by period-end. These
amounts are usually billed and collected within one year. Substantially all accounts receivable at December 31,
2013, are expected to be collected in 2014. The company does not believe it has significant exposure to credit risk,
as accounts receivable and the related unbilled amounts are primarily from contracts where the U.S. Government is
the primary customer.
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NORTHROP GRUMMAN CORPORATION
Accounts receivable consisted of the following:
$ in millions
Due from U.S. Government
Billed
Unbilled
Progress and performance-based payments received
Due from Other Customers (inclusive of foreign military sales)
Billed
Unbilled
Progress and performance-based payments received
Total accounts receivable
Allowance for doubtful accounts
Total accounts receivable, net
6. INVENTORIED COSTS, NET
Inventoried costs consisted of the following:
$ in millions
Production costs of contracts in process
General and administrative expenses
Progress and performance-based payments received
Product inventory
Total inventoried costs, net
7. INCOME TAXES
December 31
2013
2012
$ 596
5,801
(4,385)
2,012
296
2,830
(2,384)
742
2,754
(69)
$2,685
$ 783
5,284
(3,907)
2,160
325
1,992
(1,559)
758
2,918
(60)
$2,858
December 31
2013
$ 1,342
259
1,601
(1,005)
596
102
$ 698
2012
$ 1,593
262
1,855
(1,167)
688
110
$ 798
Federal and foreign income tax expense consisted of the following:
$ in millions
Income Taxes on Continuing Operations
Currently payable
Federal income taxes
Foreign income taxes
Total federal and foreign income taxes currently payable
Deferred federal and foreign income taxes
Total federal and foreign income taxes
Year Ended December 31
2013
2011
2012
$803
28
831
80
$911
$912
15
927
60
$987
$592
18
610
387
$997
Earnings from foreign continuing operations before income taxes are not material for all periods presented.
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NORTHROP GRUMMAN CORPORATION
Income tax expense differs from the amount computed by multiplying the statutory federal income tax rate times the
earnings from continuing operations before income taxes due to the following:
$ in millions
Income tax expense on continuing operations at statutory rate
Manufacturing deduction
Research tax credit
Other, net
Total federal and foreign income taxes
Year Ended December 31
2012
$1,038
(42)
—
(9)
$ 987
2013
$1,002
(63)
(37)
9
$ 911
2011
$1,079
(32)
(17)
(33)
$ 997
The company’s effective tax rate on earnings from continuing operations for the year ended December 31, 2013, was
31.8 percent, as compared with 33.3 percent and 32.3 percent for the years ended December 31, 2012 and 2011,
respectively. The American Taxpayer Relief Act, enacted in January 2013, reinstated research tax credits for tax
years 2012 and 2013, which the company recognized in 2013.
Uncertain Tax Positions
The company files income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions.
The IRS is currently conducting an examination of the company's tax returns for the years 2007 through 2011. With
respect to the tax years 2007 through 2009, the company has reached a tentative resolution with the IRS subject to
final review by the U.S. Congressional Joint Committee on Taxation, which has returned one issue to the IRS
examination team for further development. It is reasonably possible that during the next twelve months, we will
record a reduction in our unrecognized tax benefits up to $80 million and a reduction of our income tax expense up
to $50 million. Open tax years related to state and foreign jurisdictions remain subject to examination, but are not
considered material.
Although the company believes that it has adequately provided for all of its tax positions, amounts asserted by
taxing authorities in future years could be greater than the company’s accrued positions. Accordingly, additional
provisions on income tax related matters could be recorded in the future due to revised estimates, settlement or other
resolution of the underlying tax matters.
The change in unrecognized tax benefits during 2013, 2012 and 2011, excluding interest, is as follows:
$ in millions
Unrecognized tax benefits at beginning of the year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Other, net
Net change in unrecognized tax benefits
Unrecognized tax benefits at end of the year
December 31
2012
2013
2011
$156
56
44
(15)
85
$241
$118
12
28
(2)
38
$156
$126
11
31
(50)
(8)
$118
These liabilities, along with $31 million of accrued interest and penalties, are included in other non-current liabilities
in the consolidated statements of financial position. If the income tax benefits from these tax positions are ultimately
realized, $190 million of federal and foreign benefits would reduce the company’s effective tax rate.
Net interest expense within the company's federal, foreign and state income tax provisions were not material for the
years ended December 31, 2013, 2012 and 2011.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and tax purposes. Such amounts are classified in the consolidated
statements of financial position as current or non-current assets or liabilities, based upon the classification of the
related assets and liabilities.
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NORTHROP GRUMMAN CORPORATION
The tax effects of significant temporary differences and carryforwards that gave rise to year-end deferred federal,
state and foreign tax balances, as presented in the consolidated statements of financial position, are as follows:
$ in millions
Deferred Tax Assets
Retirement benefits
Provisions for accrued liabilities
Stock-based compensation
Other
Gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred Tax Liabilities
Goodwill
Property, plant, and equipment, net
Contract accounting differences
Other
Gross deferred tax liabilities
Total net deferred tax assets
December 31
2013
2012
$1,308
646
109
144
2,207
(55)
2,152
806
348
134
50
1,338
$ 814
$2,710
675
146
151
3,682
(52)
3,630
804
376
199
135
1,514
$2,116
Realization of deferred tax assets is primarily dependent on generating sufficient taxable income in future periods.
The company believes it is more-likely-than-not all deferred tax assets will be realized, net of any valuation
allowances currently established.
At December 31, 2013, the company has available unused net operating losses of $189 million that may be applied
against future taxable income, primarily in the United Kingdom that may be used indefinitely. A valuation allowance
of $55 million has been recorded against certain deferred tax assets due to the uncertainty of the realization of these
net operating losses and other deferred tax assets, principally in foreign jurisdictions.
Undistributed Foreign Earnings
As of December 31, 2013, the company has accumulated undistributed earnings generated by its foreign
subsidiaries. No deferred tax liability has been recorded on these earnings since the company intends to permanently
reinvest these earnings. Should these earnings be distributed in the form of dividends or otherwise, the distributions
would be subject to U.S. federal income tax at the statutory rate of 35 percent, less foreign tax credits available to
offset such distributions, if any. In addition, such distributions may be subject to withholding taxes in the various tax
jurisdictions.
8. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Goodwill
Goodwill and other purchased intangible assets are included in the identifiable assets of the segment to which the
operations of the acquired entity have been assigned. Impairment tests are performed at least annually and more
often as circumstances require. Any goodwill impairment, as well as the amortization of other purchased intangible
assets, is charged against the respective segment’s operating income. Historically, our annual goodwill impairment
test has been performed as of November 30. As discussed in Note 1, during the fourth quarter of 2013, the company
changed the date of its annual goodwill impairment test from November 30 to December 31. As a result of this
change, during 2013, we performed an annual goodwill impairment test as of November 30 and as of December 31.
In performing the goodwill impairment tests, the company uses a discounted cash flow approach corroborated by
comparative market multiples, where appropriate, to determine the fair value of its businesses. Accumulated
goodwill impairment losses at December 31, 2013 and 2012, totaled $570 million at the Aerospace Systems
segment.
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NORTHROP GRUMMAN CORPORATION
The changes in the carrying amounts of goodwill for the years ended December 31, 2013 and 2012, were as follows:
$ in millions
Balance as of December 31, 2011
Businesses acquired, sold and other
Balance as of December 31, 2012
Businesses acquired
Balance as of December 31, 2013
Aerospace
Systems
Electronic
Systems
Information
Systems
Technical
Services
$3,801
(43)
$3,758
—
$3,758
$2,400
10
$2,410
—
$2,410
$5,248
39
$5,287
7
$5,294
$925
51
$976
—
$976
Total
$12,374
57
$12,431
7
$12,438
Purchased Intangible Assets
Net contract, program, and other intangible assets were comprised of the following:
$ in millions
Gross contract, program and other intangible assets
Less accumulated amortization
Net contract, program and other intangible assets
December 31
2013
2012
$ 1,812
(1,708)
$ 104
$ 1,819
(1,682)
$ 137
Amortization expense for 2013, 2012 and 2011, was $26 million, $36 million and $37 million, respectively. The
company’s purchased intangible assets are being amortized on a straight-line basis over an aggregate weighted-
average period of 21 years and are included in other non-current assets in the consolidated statements of financial
position. As of December 31, 2013, the expected future amortization of purchased intangibles for each of the next
five years is as follows:
$ in millions
Year Ending December 31
2014
2015
2016
2017
2018
$20
18
12
10
9
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the fair value information for those assets and liabilities measured at fair value on a
recurring basis:
$ in millions
Financial Assets (Liabilities)
Marketable securities
Trading
Available-for-sale
Derivatives
Long-term debt, including current portion
December 31, 2013
Fair
Carrying
Value
Value
December 31, 2012
Fair
Carrying
Value
Value
$ 308
2
(2)
(5,930)
$ 308
2
(2)
(6,227)
$ 259
3
(1)
(3,935)
$ 259
3
(1)
(4,834)
There were no transfers of financial instruments between the three levels of fair value hierarchy during the years
ended December 31, 2013 and 2012.
The carrying value of cash and cash equivalents approximate fair value.
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NORTHROP GRUMMAN CORPORATION
Investments in Marketable Securities
The company holds a portfolio of marketable securities to partially fund long-term deferred compensation programs,
consisting of equity securities that are classified as either trading or available-for-sale, which can be liquidated
without restriction. These assets are recorded at fair value and substantially all of these instruments are valued using
Level 1 inputs, with an immaterial amount valued using Level 2 inputs. As of December 31, 2013 and 2012,
marketable securities of $310 million and $261 million, respectively, were included in other non-current assets in the
consolidated statements of financial position.
Derivative Financial Instruments and Hedging Activities
The company's derivative portfolio consists primarily of foreign currency forward contracts, which are used to
manage foreign currency exchange risk related to receipts from customers and payments to suppliers denominated in
foreign currencies. The notional values for the company's derivative portfolio at December 31, 2013 and 2012, were
$161 million and $164 million, respectively. The portion of the notional values designated as cash flow hedges at
December 31, 2013 and 2012, were $77 million and $110 million, respectively.
Derivative financial instruments are recognized as assets or liabilities in the financial statements and measured at
fair value. Substantially all of these instruments are valued using Level 2 inputs. 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.
Unrealized gains or losses on the effective portion of cash flow hedges are reclassified from other comprehensive
income to operating income upon the settlement of the underlying transactions. The derivative fair values and
related unrealized gains/losses at December 31, 2013 and 2012, were not material. Hedge contracts not designated
for hedge accounting and the ineffective portion of cash flow hedges are recorded in other income.
Long-Term Debt
The fair value of long-term debt is calculated using Level 2 inputs, based on interest rates available for debt with
terms and maturities similar to the company’s existing debt arrangements.
10. LONG-TERM DEBT
Lines of Credit
The company has available uncommitted short term credit lines in the form of money market facilities with several
banks. The amount and conditions for borrowing under these credit lines depend on the availability and terms
prevailing in the marketplace. No fees or compensating balances are required for these credit facilities.
Credit Facility
In August 2013, the company entered into a new five-year senior unsecured credit facility in an aggregate principal
amount of $1.775 billion (the Credit Agreement). The Credit Agreement replaced the company’s prior five-year
revolving credit facility in an aggregate principal amount of $1.5 billion entered into on September 8, 2011, and its
364-day revolving credit facility in an aggregate principal amount of $500 million entered into on September 4,
2012.
The Credit Agreement contains customary terms and conditions, including covenants restricting the company's
ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other
fundamental changes and incur liens. The company also cannot permit the ratio of its debt to capitalization (as set
forth in the Credit Agreement) to exceed 65 percent. The company is in compliance with all covenants under the
Credit Agreement. At December 31, 2013, there was no balance outstanding under this facility.
Issuance and Redemption
In May 2013, the company issued $2.85 billion of unsecured senior notes consisting of $850 million due June 1,
2018, with a fixed interest rate of 1.75 percent; $1.05 billion due August 1, 2023, with a fixed interest rate of 3.25
percent; and $950 million due June 1, 2043, with a fixed interest rate of 4.75 percent (collectively, the Notes).
Interest on the Notes is payable semi-annually in arrears. The Notes are subject to redemption at the company's
discretion at any time, or from time to time, prior to maturity in whole or in part at the greater of the principal
amount of the Notes or a "make-whole" amount, plus accrued and unpaid interest. The company used a portion of
the net proceeds to fund the redemption of $350 million of the company's 3.70 percent unsecured senior notes due
August 1, 2014, and $500 million of 1.85 percent unsecured senior notes due November 15, 2015. The company
recorded a pre-tax charge of $30 million principally related to the premiums paid on the redemptions, which was
recorded in other, net in the consolidated statements of earnings and comprehensive income.
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NORTHROP GRUMMAN CORPORATION
Long-term debt consists of the following:
$ in millions
Fixed-rate notes and debentures, maturing in
2014
2015
2016
2018
2019
2021
2023
2026
2031
2040
2043
Capital leases
Other
Total long-term debt
Less: current portion
Long-term debt, net of current portion
Interest rate
3.70%
1.85%
7.75%
1.75% - 6.75%
5.05%
3.50%
3.25%
7.75% - 7.88%
7.75%
5.05%
4.75%
Various
Various
December 31
2013
2012
$ —
—
107
1,050
500
700
1,050
527
466
300
950
35
245
5,930
2
$5,928
$ 350
500
107
200
500
700
—
527
466
300
—
32
253
3,935
5
$3,930
Indentures underlying long-term debt issued by the company or its subsidiaries contain various restrictions with
respect to the issuer, including one or more restrictions relating to limitations on liens, sale-leaseback arrangements,
and funded debt of subsidiaries. The majority of these fixed rate notes and debentures are subject to redemption at
the company’s discretion at any time prior to maturity in whole or in part at the principal amount plus any make-
whole premium and accrued and unpaid interest. Interest on these fixed rate notes and debentures are payable semi-
annually in arrears.
Maturities of long-term debt as of December 31, 2013, are as follows:
$ in millions
Year Ending December 31
2014
2015
2016
2017
2018
Thereafter
Total principal payments
Unamortized premium on long-term debt, net of discount
Total long-term debt
The premium on long-term debt primarily represents non-cash fair market value adjustments resulting from
acquisitions, which are amortized over the life of the related debt.
$ 2
3
110
3
1,053
4,757
5,928
2
$5,930
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NORTHROP GRUMMAN CORPORATION
11. INVESTIGATIONS, CLAIMS AND LITIGATION
Litigation
The company is one of several defendants in litigation brought by the Orange County Water District in Orange
County Superior Court in California on December 17, 2004, for alleged contribution to volatile organic chemical
contamination of the County's shallow groundwater. The lawsuit includes counts against the defendants for violation
of the Orange County Water District Act, the California Super Fund Act, negligence, nuisance, trespass and
declaratory relief. Among other things, the lawsuit seeks unspecified damages for the cost of remediation, payment
of attorney fees and costs, and punitive damages. Trial on the statutory claims (those based on the Orange County
Water District Act, the California Super Fund Act and declaratory relief) concluded on September 25, 2012. On
December 11, 2012, the court issued a tentative decision on these claims in favor of the company and the other
remaining defendants. On May 10, 2013, the court issued a supplemental tentative decision, which included
additional findings supporting its earlier tentative decision in favor of the company and the other remaining
defendants on the statutory causes of action tried in 2012. On October 29, 2013, the court incorporated its two
tentative decisions into a final decision, which it issued in favor of the defendants on the statutory claims. The court
has scheduled an April 22, 2014, hearing on defendants' dispositive motions on the remaining tort causes of action.
On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the
U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed price contract
awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats
sequencing systems (FSS) as part of the postal automation program. The FSS have been delivered. The company's
lawsuit is based on various theories of liability. The complaint seeks approximately $63 million for unpaid portions
of the contract price, and approximately $115 million based on the company's assertions that, through various acts
and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and
materially altered the company's obligations under the contract. The United States responded to the company's
complaint with an answer, denying most of the company's claims, and counterclaims, seeking approximately $410
million, less certain amounts outstanding under the contract. The principal counterclaim alleges that the company
delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as
early as it had expected. On April 2, 2013, the U.S. Department of Justice informed the company of a False Claims
Act complaint relating to the FSS contract that was filed under seal by a relator in June 2011, in the U.S. District
Court for the Eastern District of Virginia. On June 3, 2013, the United States filed a Notice informing the Court that
the United States had decided not to intervene in this case. On August 26, 2013, the relator filed a corrected First
Amended Complaint. The relator alleged that the company violated the False Claims Act in a number of ways with
respect to the FSS contract, alleged damage to the USPS in an amount of at least approximately $179 million
annually, and sought an unspecified partial refund of the contract purchase price, penalties, attorney's fees and other
costs of suit. Damages under the False Claims Act may be trebled upon a finding of liability. The relator also alleged
he was improperly discharged in retaliation. On November 22, 2013, the company filed a motion to dismiss the First
Amended Complaint. By Order dated December 11, 2013, based on the relator's stipulation, the court dismissed the
relator's retaliation claim. By Order dated December 13, 2013, the court dismissed the remaining allegations without
prejudice and granted the relator leave to file an Amended Complaint. On January 3, 2014, the relator filed a Second
Amended Complaint that, with the exception of the retaliation claim which is now the subject of an arbitration
demand, includes the same allegations as the First Amended Complaint. Although the ultimate outcome of this
matter, including any possible loss, cannot be predicted or estimated at this time, the company intends vigorously to
pursue and defend this matter.
On August 8, 2013, the company received a court-appointed expert's report in litigation pending in the Second
Federal Court of the Federal District in Brazil brought by the Brazilian Post and Telegraph Corporation (ECT) a
Brazilian state-owned entity, against Solystic SAS (Solystic), a French subsidiary of the company, and two of its
consortium partners. In this suit, commenced on December 17, 2004, and relatively inactive for some period of time,
ECT alleges the consortium breached its contract with ECT and seeks damages of approximately R$111 million (the
equivalent of approximately $47 million as of December 31, 2013), plus interest, inflation adjustments, and
attorneys’ fees, as authorized by Brazilian law, which amounts could be significant over time. The original suit
sought R$89 million (the equivalent of approximately $38 million as of December 31, 2013) in damages. In October
2013, ECT asserted an additional damage claim of R$22 million (the equivalent of approximately $9 million as of
December 31, 2013). In its counterclaim, Solystic alleges ECT breached the contract by wrongfully refusing to
accept the equipment Solystic had designed and built and seeks damages of approximately €31 million (the
equivalent of approximately $43 million as of December 31, 2013), plus interest, inflation adjustments, and
attorneys’ fees, as authorized by Brazilian law. The Brazilian court retained an expert to consider certain issues
pending before it. On August 8, 2013, the company received a report from the expert, which contains some
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NORTHROP GRUMMAN CORPORATION
recommended findings relating to liability and the damages calculations put forth by ECT. Some of the expert's
findings were favorable to the company and others were favorable to ECT. On November 14, 2013, the court
requested the expert to prepare a supplemental report addressing responses filed by the parties in October 2013. At
some point after the supplemental report is filed, the court is expected to issue a decision that could accept or reject
the expert’s recommended findings.
The company is a party to various investigations, lawsuits, claims and other legal proceedings, including
government investigations and claims, that arise in the ordinary course of our business. The nature of legal
proceedings is such that we cannot assure the outcome of any particular matter. However, based on information
available to the company to date, and other than with respect to the FSS matters discussed separately above, the
company does not believe that the outcome of any matter pending against the company is likely to have a material
adverse effect on the company's consolidated financial position as of December 31, 2013, its annual results of
operations and/or cash flows.
12. COMMITMENTS AND CONTINGENCIES
Guarantees of Subsidiary Performance Obligations
From time to time in the ordinary course of business, the company guarantees obligations of its subsidiaries under
certain contracts. Generally, the company is liable under such an arrangement only if its subsidiary is unable to
perform under its contract. Historically, the company has not incurred any substantial liabilities resulting from these
guarantees.
In addition, the company’s subsidiaries may enter into joint ventures, teaming and other business arrangements
(collectively, Business Arrangements) to support the company’s products and services in domestic and international
markets. The company generally strives to limit its exposure under these arrangements to its subsidiary’s investment
in the Business Arrangements or to the extent of such subsidiary’s obligations under the applicable contract. In some
cases, however, the company may be required to guarantee performance by the Business Arrangements and, in such
cases, the company generally obtains cross-indemnification from the other members of the Business Arrangements.
At December 31, 2013, the company is not aware of any existing event of default that would require it to satisfy any
of these guarantees.
U.S. Government Cost Claims
From time to time, the company is advised of claims by the U.S. Government concerning certain potential
disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and the U.S.
Government representatives engage in discussions to enable the company to evaluate the merits of these claims, as
well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s
estimated exposure for matters raised by the U.S. Government. Such provisions are reviewed on a quarterly basis
using the most recent information available. The company believes it has adequately reserved for disputed amounts
that are probable and estimable, and the outcome of any such matters would not have a material adverse effect on its
consolidated financial position as of December 31, 2013, or its annual results of operations and/or cash flows.
Environmental Matters
The company has been named a Potentially Responsible Party by the Environmental Protection Agency or similarly
designated state or local agencies at certain current or formerly owned or leased sites. The estimated cost to
complete remediation has been accrued where the company believes, based on the facts and circumstances known to
the company, it is probable the company will incur costs to address environmental impacts. As of December 31,
2013, management estimates that the range of reasonably possible future costs for environmental remediation is
between $319 million and $806 million, before considering the amount recoverable through overhead charges on
U.S. Government contracts. At December 31, 2013, the amount accrued for probable environmental remediation
costs was $338 million, of which $100 million is accrued in other current liabilities and $238 million is accrued in
other non-current liabilities. A portion of the environmental remediation costs is expected to be recoverable through
overhead charges on U.S. government contracts and, accordingly, such amounts are deferred in inventoried costs and
other non-current assets. As of December 31, 2013, $51 million is deferred in inventoried costs and $128 million is
deferred in other non-current assets. These amounts are evaluated for recoverability on a routine basis. Although
management cannot predict whether new information gained as projects progress, or as changes in facts and
circumstances occur, will materially affect the estimated liability accrued, management does not anticipate that
future remediation expenditures will have a material adverse effect on the company's consolidated financial position
as of December 31, 2013, or its annual results of operations and/or cash flows.
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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 December 31, 2013, there were $345 million of stand-by letters of credit and guarantees, and $157
million of surety bonds outstanding.
Indemnifications
The company has retained certain environmental, income tax and other potential liabilities in connection with
certain of its divestitures. The settlement of these liabilities is not expected to have a material adverse effect on the
company’s consolidated financial position as of December 31, 2013, or its annual results of operations and/or cash
flows.
Operating Leases
Rental expense for operating leases, excluding discontinued operations, was $298 million in 2013, $347 million in
2012, and $420 million in 2011. These amounts are net of immaterial amounts of sublease rental income. Minimum
rental commitments under long-term non-cancelable operating leases as of December 31, 2013, are payable as
follows:
$ in millions
Year Ending December 31
2014
2015
2016
2017
2018
Thereafter
Total Minimum Lease Payments
13. RETIREMENT BENEFITS
$277
232
176
107
61
90
$943
Plan Descriptions
Defined Benefit Pension Plans – The company sponsors several defined benefit pension plans in the U.S. covering
the majority of its employees. Pension benefits for most employees are based on the employee’s years of service,
age and compensation. It is the policy of the company to fund at least the minimum amount required for all qualified
plans, using actuarial cost methods and assumptions acceptable under U.S. Government regulations, by making
payments into benefit trusts separate from the company.
Defined Contribution Plans – The company also sponsors 401(k) defined contribution plans in which most
employees are eligible to participate, including certain employees covered under collective bargaining agreements.
Company contributions for most plans are based on a cash matching of employee contributions up to 4 percent of
compensation. In addition to the 401(k) defined contribution benefit, certain employees hired after June 30, 2008,
are eligible to participate in a defined contribution program in lieu of a defined benefit pension plan. The company’s
contributions to these defined contribution plans for the years ended December 31, 2013, 2012 and 2011, were $285
million, $293 million and $297 million, respectively.
Non-U.S. Benefit Plans – The company sponsors several benefit plans for non-U.S. employees. These plans are
designed to provide benefits appropriate to local practice and in accordance with local regulations. Some of these
plans are funded using benefit trusts that are separate from the company.
Medical and Life Benefits – The company provides a portion of the costs for certain health care and life insurance
benefits for a substantial number of its active and retired employees. Certain covered employees achieve eligibility
to participate in these contributory plans upon retirement from active service if they meet specified age and years of
service requirements. Qualifying dependents are also eligible for medical coverage. Approximately 62 percent of the
company’s current pension retirees participate in the medical plans. The company reserves the right to amend or
terminate the plans at any time. The company has capped the amount of its contributions to substantially all of its
remaining post retirement medical and life benefit plans.
In addition to a company and employee cost-sharing feature, the plans also have provisions for deductibles, co-
payments, coinsurance percentages, out-of-pocket limits, conformance to a schedule of reasonable fees, the use of
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NORTHROP GRUMMAN CORPORATION
managed care providers, and coordination of benefits with other plans. The plans also provide for a Medicare carve-
out. Subsequent to January 1, 2005 (or earlier at some segments), newly hired employees are not eligible for post
retirement medical and life benefits.
Summary Plan Results
The cost to the company of its retirement benefit plans in each of the three years ended December 31 is shown in the
following table:
$ in millions
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service (credit) cost
Net loss from previous years
Other
Net periodic benefit cost
Year Ended December 31
Pension Benefits
2012
2013
2011
2013
Medical and
Life Benefits
2012
2011
$ 516
1,117
(1,809)
(58)
608
—
$ 374
$ 522
1,184
(1,708)
(58)
427
7
$ 374
$ 520
1,223
(1,690)
23
162
—
$ 238
$ 36
96
(75)
(51)
30
—
$ 36
$ 34
109
(68)
(51)
21
—
$ 45
$ 32
114
(62)
(51)
17
(6)
$ 44
The table below summarizes the components of changes in unamortized benefit plan costs for the years ended
December 31, 2013, 2012 and 2011:
$ in millions
Changes in unamortized benefit plan costs
Change in net actuarial loss
Change in prior service cost
Amortization of:
Prior service (cost) credit
Net loss from previous years
Tax benefit related to above items
Change in unamortized benefit plan costs – 2011
Change in net actuarial loss
Change in prior service cost
Amortization of:
Prior service credit
Net loss from previous years
Tax benefit related to above items
Change in unamortized benefit plan costs – 2012
Change in net actuarial loss
Amortization of:
Prior service credit
Net loss from previous years
Tax expense related to above items
Change in unamortized benefit plan costs – 2013
Pension
Benefits
Medical and
Life Benefits
Total
$2,687
(608)
(23)
(162)
(752)
$1,142
$2,353
(2)
58
(427)
(788)
$1,194
($2,158)
58
(608)
1,075
($1,633)
$138
6
51
(17)
(71)
$107
$151
—
51
(21)
(72)
$109
($280)
51
(30)
102
($157)
$2,825
(602)
28
(179)
(823)
$1,249
$2,504
(2)
109
(448)
(860)
$1,303
($2,438)
109
(638)
1,177
($1,790)
Unamortized benefit plan costs consist primarily of accumulated actuarial losses totaling $3.3 billion and $5.1
billion, both after tax, as of December 31, 2013 and 2012, respectively. The change in net actuarial loss from
pension benefits in 2013 was primarily due to the increase in the discount rate assumption to 4.99 percent at
December 31, 2013, from 4.12 percent at December 31, 2012.
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NORTHROP GRUMMAN CORPORATION
In December 2011, the company adopted certain changes in its defined benefit pension plans designed to enable the
company to remain competitive within its marketplace and provide the affordability its customers require. These
changes represent modifications to the defined benefits available to employees hired prior to July 1, 2008, who retire
beginning after December 31, 2012. As a result of these changes, the company recognized a reduction of
approximately $640 million in its projected benefit obligations for the affected employee groups as of December 31,
2011. Due to these changes, certain nonqualified benefit plans experienced curtailments, however the net impact of
these curtailment events was not material.
$ in millions
Amounts recorded in accumulated other comprehensive loss
Net actuarial loss
Prior service credit
Income tax benefits related to above items
Unamortized benefit plan costs
Pension
Benefits
Medical and Life
Benefits
2013
2012
2013
2012
($5,291)
423
1,928
($2,940)
($8,057)
481
3,003
($4,573)
($151)
47
44
($ 60)
($461)
98
146
($217)
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NORTHROP GRUMMAN CORPORATION
The following tables set forth the funded status and amounts recognized in the consolidated statements of financial
position for the company’s defined benefit pension and retiree health care and life insurance benefit plans. Pension
benefits data includes the qualified plans, foreign plans, as well as 11 domestic unfunded non-qualified plans for
benefits provided to directors, officers and certain employees. The company uses a December 31 measurement date
for all of its plans.
$ in millions
Change in projected benefit obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Participant contributions
Plan amendments
Actuarial (gain) loss
Benefits paid
Other
Projected benefit obligation at end of year
$ in millions
Change in plan assets
Fair value of plan assets at beginning of year
Gain on plan assets
Employer contributions
Participant contributions
Benefits paid
Other
Fair value of plan assets at end of year
Funded status
Amounts recognized in the Consolidated Statements of
Financial Position
Non-current assets
Current liability
Non-current liability
Pension Benefits
2013
2012
Medical and
Life Benefits
2013
2012
$27,746
516
1,117
12
—
(2,063)
(1,365)
9
$25,972
$24,129
522
1,184
12
(1)
3,114
(1,220)
6
$27,746
$2,448
36
96
77
—
(219)
(227)
13
$2,224
$2,235
34
109
81
—
202
(227)
14
$2,448
Pension Benefits
2013
2012
Medical and
Life Benefits
2013
2012
$22,962
1,907
579
12
(1,365)
3
24,098
($ 1,874)
$21,340
2,463
366
12
(1,220)
1
22,962
($4,784)
$1,062
137
114
77
(227)
12
1,175
($1,049)
$ 946
119
129
81
(227)
14
1,062
($1,386)
$ 117
(122)
(1,869)
$ 7
(111)
(4,680)
$ 72
(36)
(1,085)
$ 49
(30)
(1,405)
The following table shows those amounts expected to be recognized in net periodic benefit cost in 2014:
$ in millions
Amounts expected to be recognized in 2014 net periodic benefit
cost
Net actuarial loss
Prior service credit
Pension Benefits
Medical and
Life Benefits
$327
(59)
$ 9
(30)
The accumulated benefit obligation for all defined benefit pension plans was $25.7 billion and $27.2 billion at
December 31, 2013 and 2012, respectively.
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NORTHROP GRUMMAN CORPORATION
Amounts for pension plans with accumulated benefit obligations in excess of fair value of plan assets are as follows:
$ in millions
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
December 31
2013
$24,129
23,830
22,138
2012
$27,645
27,146
22,853
Plan Assumptions
On a weighted-average basis, the following assumptions were used to determine the benefit obligations and the net
periodic benefit cost:
Assumptions used to determine benefit obligation at December 31
Discount rate
Initial cash balance crediting rate assumed for the next year
Rate to which the cash balance crediting rate is assumed to increase
(the ultimate rate)
Year that the cash balance crediting rate reaches the ultimate rate
Rate of compensation increase
Initial health care cost trend rate assumed for the next year
Rate to which the health care cost trend rate is assumed to decline
(the ultimate trend rate)
Year that the health care cost trend rate reaches the ultimate trend
rate
Assumptions used to determine benefit cost for the year ended
December 31
Discount rate
Initial cash balance crediting rate assumed for the next year
Rate to which the cash balance crediting rate is assumed to increase
(the ultimate rate)
Year that the cash balance crediting rate reaches the ultimate rate
Expected long-term return on plan assets
Rate of compensation increase
Initial health care cost trend rate assumed for the next year
Rate to which the health care cost trend rate is assumed to decline
(the ultimate trend rate)
Year that the health care cost trend rate reaches the ultimate trend
rate
Pension Benefits
2013
2012
Medical and
Life Benefits
2013
2012
4.99% 4.12% 4.90% 4.02%
3.90% 3.00%
4.70% 4.25%
2019
2018
3.00% 2.75%
6.50% 7.00%
5.00% 5.00%
2017
2017
4.12% 5.03% 4.02% 5.02%
3.00% 3.25%
4.25% 4.50%
2018
2017
8.00% 8.25% 7.33% 7.44%
2.75% 2.75%
7.00% 7.50%
5.00% 5.00%
2017
2017
The discount rate is generally based on the yield of high-quality corporate fixed-income investments. At the end of
each year, the discount rate is primarily determined using a portfolio of high-quality bonds matching the notional
cash inflows with the expected benefit payments for each significant benefit plan.
Through consultation with investment advisors, expected long-term returns for each of the plans’ strategic asset
classes were developed. Several factors were considered, including current market data such as yields/price-earnings
ratios, historical market returns over long periods and periodic surveys of investment managers’ expectations. Using
policy target allocation percentages and the asset class expected returns, a weighted-average expected return was
calculated.
The assumptions used for pension benefits are consistent with those used for retiree medical and life insurance
benefits. The long-term rate of return on plan assets used for medical and life benefits is reduced to allow for the
impact of tax on expected returns as the earnings of certain Voluntary Employee Beneficiary Association (VEBA)
trusts are taxable, unlike the pension trust.
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NORTHROP GRUMMAN CORPORATION
A one-percentage-point change in the initial through the ultimate health care cost trend rates would have had the
following estimated effect on 2013 other post-retirement benefit results:
$ in millions
Increase (decrease) from change in health care cost trend rates to
Total service and interest cost
Other post-retirement benefit liability
1-Percentage-
Point Decrease
1-Percentage-
Point Increase
$ (5)
(81)
$ 4
67
Plan Assets and Investment Policy
Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and
investment return over the long term. The investment goal is to exceed the assumed rate of return over the long term
within reasonable and prudent levels of risk. Liability studies are conducted on a regular basis to provide guidance in
setting investment goals with an objective to balance risk. Risk targets are established and monitored against
acceptable ranges.
Our investment policies and procedures are designed to ensure the plans’ investments are in compliance with ERISA
(Employee Retirement Income Security Act). Guidelines are established defining permitted investments within each
asset class. Derivatives are used for transitioning assets, asset class rebalancing, managing currency risk and for
management of fixed income and alternative investments.
For the majority of the plans’ assets, the investment policies require that the asset allocation be maintained within
the following ranges as of December 31, 2013:
Domestic equities
International equities
Fixed income securities
Alternative investments
Asset Allocation Ranges
10% - 30%
5% - 25%
30% - 50%
15% - 30%
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NORTHROP GRUMMAN CORPORATION
The table below provides the fair values of the company’s pension and VEBA trust plan assets at December 31,
2013, and 2012, by asset category. The table also identifies the level of inputs used to determine the fair value of
assets in each category (see Note 1 for definition of levels). The significant amount of Level 2 investments in the
table results from including in this category investments in pooled funds that contain investments with values based
on quoted market prices, but for which the funds are not valued on a quoted market basis, and fixed income
securities valued using model-based pricing services.
$ in millions
Asset category
Cash and cash equivalents(1)
Domestic equities
International equities
Fixed income securities
U.S. Treasuries
U.S. Government Agency
Non-U.S. Government
Corporate debt
Asset backed
High yield debt
Bank loans
Alternative Investments
Hedge funds
Private equities
Real estate
Other
Fair value of plan assets at
the end of the year
Level 1
Level 2
Level 3
Total
2013
2012
2013
2012
2013
2012
2013
2012
$ 32
4,163
2,473
$ 92
3,657
1,700
$ 1,467
287
1,741
$ 1,748
318
2,319
2
$ 2
$ 1,499
4,452
4,214
$ 1,840
3,977
4,019
1,602
974
422
4,744
545
922
185
1,780
968
401
4,123
528
1,139
223
26
(5)
20
5
1,602
974
422
4,744
549
923
185
821
2,075
2,767
46
1,780
968
401
4,123
532
1,167
223
758
1,980
2,256
—
4
1
4
28
821
2,075
2,767
758
1,980
2,256
$6,694
$5,444
$12,909
$13,552
$5,670
$5,028
$25,273
$24,024
(1) Cash and cash equivalents are predominantly held in money market funds.
The changes in the fair value of the pension and VEBA plan trust assets measured using Level 3 significant
unobservable inputs during 2013 and 2012, are as follows:
$ in millions
Balance as of December 31, 2011
Actual return on plan assets:
Unrealized gains (losses), net
Realized gains (losses), net
Purchases
Sales
Balance as of December 31, 2012
Actual return on plan assets:
Unrealized gains (losses), net
Realized gains (losses), net
Purchases
Sales
Balance as of December 31, 2013
Hedge funds and
High-yield debt
$1,446
Private
equities
Real
Estate
Other
Total
$2,098
$1,788
$6
$5,338
23
47
—
(730)
$ 786
(16)
43
200
(191)
$ 822
(122)
—
259
(255)
$1,980
112
—
666
(683)
$2,075
68
—
846
(446)
$2,256
262
—
763
(514)
$2,767
5
(5)
—
—
$6
—
—
—
—
$6
(26)
42
1,105
(1,431)
$5,028
358
43
1,629
(1,388)
$5,670
Generally, investments are valued based on information in financial publications of general circulation, statistical
and valuation services, records of security exchanges, appraisal by qualified persons, transactions and bona fide
offers. Domestic and international equities consist primarily of common stocks and institutional common trust
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NORTHROP GRUMMAN CORPORATION
funds. Investments in common and preferred shares are valued at the last reported sales price of the stock on the last
business day of the reporting period. Units in common trust funds and hedge funds are valued based on the
redemption price of units owned by the trusts at year-end. Fair value for real estate and private equity partnerships is
primarily based on valuation methodologies that include third party appraisals, comparable transactions, discounted
cash flow valuation models and public market data.
Non-government fixed income securities are invested across various industry sectors and credit quality ratings.
Generally, investment guidelines are written to limit securities, for example, to no more than 5 percent of each trust
account, and to exclude the purchase of securities issued by the company. The number of real estate and private
equity partnerships is 163 and the unfunded commitments are $899 million and $810 million as of December 31,
2013 and 2012, respectively. For alternative investments that cannot be redeemed, such as limited partnerships, the
typical investment term is ten years. For alternative investments that permit redemptions, such redemptions are
generally made quarterly and require a 90-day notice. The company is generally unable to determine the final
redemption date and amount until the request is processed by the investment fund and therefore categorizes such
alternative investments as Level 3 assets.
For the years ended December 31, 2013 and 2012, the defined benefit pension and VEBA trusts did not hold any
Northrop Grumman common stock.
Benefit Payments
The following table reflects estimated future benefit payments for the next ten years, based upon the same
assumptions used to measure the benefit obligation, and includes expected future employee service, as of
December 31, 2013:
$ in millions
Year Ending December 31
2014
2015
2016
2017
2018
2019 through 2023
Pension Plans
Medical and
Life Plans
$1,341
1,394
1,446
1,500
1,557
8,556
$148
154
160
165
169
860
In 2014, the company expects to contribute the required minimum funding level of approximately $74 million to its
pension plans and approximately $90 million to its other post-retirement benefit plans, with no expected additional
voluntary pension contributions. During the years ended December 31, 2013 and 2012, the company made voluntary
pension contributions of $500 million and $300 million, respectively.
14. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Compensation Plans
At December 31, 2013, Northrop Grumman had stock-based compensation awards outstanding under the following
plans: the 2001 Long-Term Incentive Stock Plan (2001 Plan) and the 2011 Long-Term Incentive Stock Plan (2011
Plan), both applicable to employees, and the 1993 Stock Plan for Non-Employee Directors (1993 SPND) and the
1995 Stock Plan for Non-Employee Directors (1995 SPND) as amended. All of these plans were approved by the
company’s shareholders. The company has historically issued new shares to satisfy award grants.
Employee Plans – In May 2011, the shareholders of the company approved the company’s new 2011 Plan, which
replaced the expired 2001 Plan. The 2011 Plan permit grants to key employees of three general types of stock
incentive awards: stock options, stock appreciation rights (SARs), and stock awards. Each stock option grant is
made with an exercise price either at the closing price of the stock on the date of grant (market options) or at a
premium over the closing price of the stock on the date of grant (premium options). Outstanding stock options
granted prior to 2008 generally vest in 25 percent increments over four years from the grant date, and grants
outstanding expire ten years after the grant date. Stock options granted after January 1, 2008, vest in 33 percent
increments over three years from the grant date, and grants outstanding expire seven years after the grant date. No
SARs have been granted under either plan. Stock awards in the form of restricted performance stock rights and
restricted stock rights are granted to key employees without payment to the company. The 2011 Plan also provides
equity-based award grants to non-employee directors.
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NORTHROP GRUMMAN CORPORATION
Under the 2011 Plan, the company is authorized to issue or transfer shares of common stock pursuant to the types of
awards mentioned above. The 2011 Plan authorized 39.1 million new shares plus 6.9 million shares from the 2001
LTISP that were previously authorized and available to be issued at the date the 2001 Plan expired. Under the terms
of the 2011 Plan, in the event that outstanding awards under the 2001 Plan expire or terminate without being
exercised or paid, as the case may be, such shares (the Forfeited Shares) will become available for award under the
2011 Plan.
Recipients of restricted performance stock rights earn shares of stock, based on financial metrics determined by the
board of directors in accordance with the plan. Depending on whether performance objectives are met, recipients
could forfeit up to 100 percent of the original grant or could earn up to 200 percent of the original grant. Restricted
performance stock rights and restricted stock rights issued under either plan generally vest after three or four years.
Termination of employment can result in forfeiture of some or all of the benefits extended. Shares issued under the
2011 Plan, other than for stock options, stock appreciation rights and the Forfeited Shares, will be counted against
the 2011 Plan’s aggregate share limit as 4.5 shares for every one share actually issued in connection with the award;
any shares issued for stock options, stock appreciation rights and the Forfeited Shares will be counted against the
remaining shares on a one-for-one basis.
As of December 31, 2013, 28 million shares are available for grant under the 2011 Plan.
Non-Employee Director Plans – Under the 2011 Plan, each non-employee director must defer a portion of their
compensation into a stock unit account (Automatic Stock Units). The Automatic Stock Units accrued under the 2011
Plan and the 1993 SPND are paid out in the form of common stock at the conclusion of the director's board service,
or earlier, as specified by the director, if he or she has five or more years of service. In addition, each director may
elect to defer payment of all or a portion of his or her remaining cash retainer or committee retainer fees into a stock
unit account (Elective Stock Units). The Elective Stock Units are paid at the conclusion of board service or earlier as
specified by the director, regardless of years of service. Directors are credited with dividend equivalents in
connection with the accumulated stock units until shares of common stock related to such stock units are issued.
Since all directors are eligible to receive awards under the 2011 LTISP, shares from this plan are available for future
director awards following the same share counting limits as described for the employee plans. Awards under the
2011 Plan are made pursuant to the Northrop Grumman Corporation Equity Grant Program for Non-Employee
Directors under the 2011 Plan, which sets forth the terms and conditions for the awards of stock units as described
above.
The 1995 SPND provided for an annual grant of nonqualified stock options to each non-employee director. Since
June 2005, no new grants have been issued under that 1995 SPND. Each grant of stock options under the 1995
SPND was made at the closing market price on the date of the grant and expires ten years from the date of grant. As
of December 31, 2013, three non-employee directors held unexercised stock options.
Compensation Expense
Stock-based compensation expense and the related tax benefits for the years ended December 31, 2013, 2012 and
2011, were as follows:
$ in millions
Stock-based compensation expense:
Stock options
Stock awards
Total stock-based compensation expense
Tax benefits from the exercise of stock options
Tax benefits from the issuance of stock awards
Year Ended December 31
2013
2012
2011
$ 4
$ 10
$ 14
140
144
25
16
173
183
26
19
125
139
18
37
Total tax benefits recognized for stock-based compensation
$ 41
$ 45
$ 55
At December 31, 2013, there was $102 million of unrecognized compensation expense related to unvested awards
granted under the company’s stock-based compensation plans, predominantly related to stock awards. These
amounts are expected to be charged to expense over a weighted-average period of 1.3 years.
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NORTHROP GRUMMAN CORPORATION
Stock Options
There were no stock options issued in 2013 or 2012. Stock option activity for the year ended December 31, 2013,
was as follows:
Outstanding at January 1, 2013
Exercised
Cancelled and forfeited
Outstanding at December 31, 2013
Vested and expected to vest in the future at
December 31, 2013
Exercisable at December 31, 2013
Shares
under Option
(in thousands)
6,271
(4,522)
(29)
1,720
1,716
1,343
Weighted-
Average
Exercise
Price
$58
59
60
56
56
$55
Weighted-
Average
Remaining
Contractual
Term
2.9 years
Aggregate
Intrinsic
Value
($ in millions)
$66
2.6 years
2.6 years
2.2 years
101
101
$80
The total intrinsic value of exercised stock options during the years ended December 31, 2013, 2012 and 2011, was
$118 million, $97 million and $46 million, respectively. Intrinsic value is measured using the fair market value at the
date of exercise (for options exercised) or at December 31, 2013 (for outstanding options), less the applicable
exercise price.
Stock Awards
Compensation expense for stock awards is measured at the grant date based on the fair value of the award and is
recognized over the vesting period (generally three years). The fair value of stock awards and performance stock
awards is determined based on the closing market price of the company’s common stock on the grant date. The fair
value of market-based stock awards is determined at the grant date using a Monte Carlo simulation model. For
purposes of measuring compensation expense for performance awards, the number of shares ultimately expected to
vest is estimated at each reporting date based on management’s expectations regarding the relevant performance
criteria.
Stock award activity for the years ended December 31, 2013, 2012 and 2011, is presented in the table below. Vested
awards do not include any adjustments to reflect the final performance measure for issued shares.
Outstanding at January 1, 2011
Granted
Vested
Forfeited
Shipbuilding spin-off adjustment
Outstanding at December 31, 2011
Granted
Vested
Forfeited
Outstanding at December 31, 2012
Granted
Vested
Forfeited
Outstanding at December 31, 2013
Stock
Awards
(in thousands)
Weighted-
Average
Grant Date
Fair Value
4,300
1,748
(1,824)
(350)
(252)
3,622
1,860
(1,800)
(204)
3,478
1,577
(1,323)
(312)
3,420
$53
63
42
50
47
$58
60
55
59
$61
64
60
62
$61
Weighted-
Average
Remaining
Contractual
Term (in years)
1.5
1.6
1.6
1.5
The company issued 3.4 million, 2.8 million and 1.4 million shares to employees in settlement of fully vested stock
awards, which had total fair values at issuance of $226 million, $172 million and $87 million and grant date fair
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NORTHROP GRUMMAN CORPORATION
values of $105 million, $75 million and $101 million during the years ended December 31, 2013, 2012 and 2011,
respectively. The differences between the fair values at issuance and the grant date fair values reflect the effects of
the performance adjustments and changes in the fair market value of the company’s common stock.
In 2013, the company granted certain employees 0.5 million restricted stock rights (RSRs) and 1.1 million restricted
performance stocks rights (RPSRs) under the company's long-term incentive stock plan, with a grant date aggregate
fair value of $101 million. The majority of stock awards were granted on February 20, 2013. The RSRs will
typically vest on the third anniversary of the grant date, while the RPSRs will vest and pay out based on the
achievement of financial metrics for the three-year period ending December 31, 2015.
In 2014, the company expects to issue to employees approximately 2.5 million shares of common stock with a grant
date fair value of $80 million, principally related to the 2011 RPSR awards that vested as of December 31, 2013.
The ultimate amount of shares to be paid out is subject to approval by the Compensation Committee of the Board of
Directors and may vary from this estimate.
Cash Awards
In 2013, the company granted certain employees cash units (CUs) and cash performance units (CPUs) with a
minimum aggregate payout amount of $32 million and a maximum aggregate payout amount of $173 million. The
majority of cash awards were granted on February 20, 2013. The CUs will vest and settle in cash on the third
anniversary of the grant date, while the CPUs will vest and settle in cash based on the achievement of financial
metrics for the three-year period ending December 31, 2015. At December 31, 2013, there was $108 million of
unrecognized compensation expense related to cash awards.
15. UNAUDITED SELECTED QUARTERLY DATA
Unaudited quarterly financial results are set forth in the following tables. It is the company’s long-standing practice
to establish actual interim closing dates using a “fiscal” calendar, which requires the businesses to close their books
on a Friday, in order to normalize the potentially disruptive effects of quarterly close on business processes. The
effects of this practice only exist within a reporting year.
2013
In millions, except per share amounts
Sales
Operating income
Net earnings
Basic earnings per share
Diluted earnings per share
Weighted-average common shares outstanding
Weighted-average diluted shares outstanding
1st Qtr
$6,104
759
489
2nd Qtr
$6,294
806
488
3rd Qtr
$6,106
790
497
4th Qtr
$6,157
768
478
2.07
2.03
236.4
241.0
2.09
2.05
234.0
237.5
2.18
2.14
228.2
232.6
2.17
2.12
220.5
225.2
Significant 2013 Fourth Quarter Events – In the fourth quarter of 2013, the company repurchased 6.6 million shares
of common stock for $699 million.
2012
In millions, except per share amounts
Sales
Operating income
Net earnings
Basic earnings per share
Diluted earnings per share
Weighted-average common shares outstanding
Weighted-average diluted shares outstanding
1st Qtr
$6,198
796
506
2nd Qtr
$6,274
774
480
3rd Qtr
$6,270
736
459
4th Qtr
$6,476
824
533
2.00
1.96
253.1
258.0
1.91
1.88
250.8
254.7
1.86
1.82
247.2
252.1
2.19
2.14
243.4
248.9
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NORTHROP GRUMMAN CORPORATION
Significant 2012 Fourth Quarter Events – In the fourth quarter of 2012, the company repurchased 7.3 million shares
of common stock for $487 million.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive officer (Chairman, Chief Executive Officer and President) and principal financial officer
(Corporate Vice President and Chief Financial Officer) have evaluated the company’s disclosure controls and
procedures as of December 31, 2013, and have concluded that these controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange
Act of 1934 (15 USC § 78a et seq) is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed in
the reports that we file or submit is accumulated and communicated to management, including the principal
executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fourth quarter of 2013, no change occurred in the company’s internal control over financial reporting that
materially affected, or is likely to materially affect, the company’s internal control over financial reporting.
Item 9B. Other Information
None.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Northrop Grumman Corporation (the company) prepared and is responsible for the consolidated
financial statements and all related financial information contained in this Annual Report. This responsibility
includes establishing and maintaining effective internal control over financial reporting. The company’s internal
control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States of America.
To comply with the requirements of Section 404 of the Sarbanes–Oxley Act of 2002, the company designed and
implemented a structured and comprehensive assessment process to evaluate its internal control over financial
reporting across the enterprise. The assessment of the effectiveness of the company’s internal control over financial
reporting was based on criteria established in Internal Control—Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, a system
of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Management regularly monitors its internal control over financial reporting, and actions are taken to
correct any deficiencies as they are identified. Based on its assessment, management has concluded that the
company’s internal control over financial reporting is effective as of December 31, 2013.
Deloitte & Touche LLP issued an attestation report dated February 3, 2014, concerning the company’s internal
control over financial reporting, which is contained in this Annual Report. The company’s consolidated financial
statements as of and for the year ended December 31, 2013, have been audited by the independent registered public
accounting firm of Deloitte & Touche LLP in accordance with the standards of the Public Company Accounting
Oversight Board (United States).
/s/ Wesley G. Bush
Chairman, Chief Executive Officer and President
/s/ James F. Palmer
Corporate Vice President and Chief Financial Officer
February 3, 2014
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Falls Church, Virginia
We have audited the internal control over financial reporting of Northrop Grumman Corporation and subsidiaries
(the “Company”) as of December 31, 2013, based on criteria established in Internal Control — Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion
or improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2013, based on the criteria established in Internal Control – Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended December 31, 2013 of the Company and
our report dated February 3, 2014 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
McLean, Virginia
February 3, 2014
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NORTHROP GRUMMAN CORPORATION
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
DIRECTORS
Information about our Directors will be incorporated herein by reference to the Proxy Statement for the 2014 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of
our fiscal year.
EXECUTIVE OFFICERS
Our executive officers as of February 3, 2014, are listed below, along with their ages on that date, positions and
offices with the company, and principal occupations and employment during the past five years.
Name
Wesley G. Bush
M. Sidney Ashworth
Michael A. Hardesty
Age
Office Held
52 Chairman, Chief
Executive Officer
and President
Since
2010
Prior Business Experience (Last Five Years)
President and Chief Operating Officer (2007-2009);
Prior to March 2007, President and Chief Financial
Officer (2006-2007); Corporate Vice President and
Chief Financial Officer (2005-2006)
62 Corporate Vice
President,
Government
Relations
2010 Vice President of Washington Operations, GE
Aviation (2010); Prior to March 2010, Principal, the
Ashworth Group (2009-2010); Professional Staff
Member , U.S. Senate Committee on Appropriations
(1995-2009)
42 Corporate Vice
President,
Controller, and
Chief Accounting
Officer
2013 Vice President and Chief Financial Officer,
Information Systems sector (2011-2013); Vice
President, Internal Audit (2010-2011); Vice
President and Chief Financial Officer, Enterprise
Shared Services (2008-2010)
Mark A. Caylor
49 Corporate Vice
2013 Corporate Vice President and Treasurer (2011-2012);
President and
President,
Enterprise Shared
Services
Assistant Treasurer (2008-2011); Director, Mergers
& Acquisitions (2006-2008)
Sheila C. Cheston
55 Corporate Vice
2010 Executive Vice President and Director, BAE
President and
General Counsel
Systems, Inc. (2009 -2010); Prior to September
2009, Senior Vice President, General Counsel,
Secretary and Director, BAE Systems, Inc.
(2002-2009)
Gloria A. Flach
55 Corporate Vice
President and
President,
Electronic
Systems Sector
2013 Corporate Vice President and President, Enterprise
Shared Services (2010-2012); Sector Vice President
and General Manager, Targeting Systems Division,
Electronic Systems (ES) Sector (2010); Prior to
2010, Sector Vice President and General Manager of
Engineering, Manufacturing and Logistics, ES
Sector (2009).
Darryl M. Fraser
55 Corporate Vice
President,
Communications
2008
Sector Vice President of Business Development and
Strategic Initiatives, Mission Systems Sector (2007-
March 2008)
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NORTHROP GRUMMAN CORPORATION
Name
Christopher T. Jones
Age
Office Held
49 Corporate Vice
Linda A. Mills
President and
President,
Technical
Services
64 Corporate Vice
President,
Operations
Prior Business Experience (Last Five Years)
Since
2013 Vice President and General Manager, Integrated
Logistics and Modernization Division, Technical
Services Sector (2010-2012); Director of Product
Support (2004-2010)
2013 Corporate Vice President and President, Information
Systems Sector (2009-2012)
James F. Palmer
64 Corporate Vice
2007 Executive Vice President and Chief Financial
President and
Chief Financial
Officer
Officer, Visteon Corporation (2004-2007)
Denise M. Peppard
57 Corporate Vice
2011 Vice President and Chief Human Resources,
President and
Chief Human
Resources Officer
Computer Sciences Corporation (2010-2011); Senior
Vice President of Human Resources, Wyeth
Pharmaceuticals, Inc. (2001-2010)
David T. Perry
49 Corporate Vice
2012 Vice President and General Manager of Naval and
President and
Chief Global
Business
Development
Officer
Marine Systems Division, Electronic Systems Sector
(2009-2012); Vice President of Marine Systems,
Electronic Systems Sector (2005-2009)
Thomas E. Vice
51 Corporate Vice
2013 Corporate Vice President and President, Technical
President and
President,
Aerospace
Systems Sector
Services (2010-2012); Sector Vice President and
General Manager, Battle Management and
Engagement Systems Division, Aerospace Systems
Sector (2008-2010)
Kathy J. Warden
42 Corporate Vice
2013 Vice President and General Manager, Cyber
President and
President,
Information
Systems Sector
Intelligence Division (2011-2012); Vice President,
Cyber and SIGINT business unit (2008-2011); Vice
President, Intelligence Systems, General Dynamics
Corporation (2007-2008)
AUDIT COMMITTEE FINANCIAL EXPERT
The information as to the Audit Committee and the Audit Committee Financial Expert will be incorporated herein by
reference to the Proxy Statement for the 2014 Annual Meeting of Stockholders to be filed within 120 days after the
end of the company’s fiscal year.
CODE OF ETHICS
We have adopted Standards of Business Conduct for all of our employees, including the principal executive officer,
principal financial officer and principal accounting officer. The Standards of Business Conduct can be found on our
internet Web site at www.northropgrumman.com under “Investor Relations – Corporate Governance – Overview.” A
copy of the Standards of Business Conduct is available to any stockholder who requests it by writing to: Northrop
Grumman Corporation, c/o Office of the Secretary, 2980 Fairview Park Drive, Falls Church, VA 22042.
The Web site and information contained on it or incorporated in it are not intended to be incorporated in this report
on Form 10-K or other filings with the Securities and Exchange Commission.
OTHER DISCLOSURES
Other disclosures required by this Item will be incorporated herein by reference to the Proxy Statement for the 2014
Annual Meeting of Stockholders to be filed within 120 days after the end of the company’s fiscal year.
Item 11. Executive Compensation
Information concerning Executive Compensation, including information concerning Compensation Committee
Interlocks and Insider Participation and Compensation Committee Report, will be incorporated herein by reference
to the Proxy Statement for the 2014 Annual Meeting of Stockholders to be filed within 120 days after the end of the
company’s fiscal year.
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NORTHROP GRUMMAN CORPORATION
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information as to Securities Authorized for Issuance Under Equity Compensation Plans and Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters will be incorporated herein by
reference to the Proxy Statement for the 2014 Annual Meeting of Stockholders to be filed within 120 days after the
end of the company’s fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information as to Certain Relationships and Related Transactions and Director Independence will be
incorporated herein by reference to the Proxy Statement for the 2014 Annual Meeting of Stockholders to be filed
within 120 days after the end of the company’s fiscal year.
Item 14. Principal Accountant Fees and Services
The information as to Principal Accountant Fees and Services will be incorporated herein by reference to the Proxy
Statement for the 2014 Annual Meeting of Shareholders to be filed within 120 days after the end of the company’s
fiscal year.
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NORTHROP GRUMMAN CORPORATION
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Report of Independent Registered Public Accounting Firm
PART IV
Financial Statements
Consolidated Statements of Earnings and Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders’ Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules have been omitted because they are not applicable, not required, or the information has been otherwise
supplied in the financial statements or notes to the financial statements.
3. Exhibits
2(a)
2(b)
3(a)
3(b)
4(a)
4(b)
4(c)
4(d)
Agreement and Plan of Merger among Titan II, Inc. (formerly Northrop Grumman Corporation),
Northrop Grumman Corporation (formerly New P, Inc.) and Titan Merger Sub Inc., dated
March 29, 2011 (incorporated by reference to Exhibit 10.1 to Form 8-K filed April 4, 2011)
Separation and Distribution Agreement dated as of March 29, 2011, among Titan II, Inc.
(formerly Northrop Grumman Corporation), Northrop Grumman Corporation (formerly New P,
Inc.), Huntington Ingalls Industries, Inc., Northrop Grumman Shipbuilding, Inc. and Northrop
Grumman Systems Corporation (incorporated by reference to Exhibit 10.2 to Form 8-K filed
April 4, 2011)
Amended and Restated Certificate of Incorporation of Northrop Grumman Corporation dated
May 29, 2012 (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended June
30, 2012, filed July 24, 2012)
Amended and Restated Bylaws of Northrop Grumman Corporation dated December 17, 2013
(incorporated by reference to Exhibit 3.1 to Form 8-K filed December 23, 2013)
Registration Rights Agreement dated as of January 23, 2001, by and among Northrop Grumman
Corporation (now Northrop Grumman Systems Corporation), NNG, Inc. (now Northrop
Grumman Corporation) and Unitrin, Inc. (incorporated by reference to Exhibit(d)(6) to
Amendment No. 4 to Schedule TO filed January 31, 2001)
Indenture dated as of October 15, 1994, between Northrop Grumman Corporation (now Northrop
Grumman Systems Corporation) and The Chase Manhattan Bank (National Association), Trustee
(incorporated by reference to Exhibit 4.1 to Form 8-K filed October 25, 1994)
First Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman
Systems Corporation, The Bank of New York Mellon (successor trustee to JPMorgan Chase
Bank and The Chase Manhattan Bank, N.A.), Titan II, Inc. (formerly known as Northrop
Grumman Corporation), and Titan Holdings II, L.P., to Indenture dated as of October 15, 1994,
between Northrop Grumman Corporation (now Northrop Grumman Systems Corporation) and
The Chase Manhattan Bank, N.A., Trustee (incorporated by reference to Exhibit 4.1 to Form 10-
Q for the quarter ended March 31, 2011, filed April 27, 2011)
Second Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman
Systems Corporation, The Bank of New York Mellon (successor trustee to JPMorgan Chase
Bank and The Chase Manhattan Bank, N.A.), Titan Holdings II, L.P., and Northrop Grumman
Corporation (formerly known as New P, Inc.), to Indenture dated as of October 15, 1994,
between Northrop Grumman Corporation (now Northrop Grumman Systems Corporation) and
The Chase Manhattan Bank, N.A., Trustee (incorporated by reference to Exhibit 4.2 to Form 10-
Q for the quarter ended March 31, 2011, filed April 27, 2011)
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NORTHROP GRUMMAN CORPORATION
4(e)
4(f)
4(g)
4(h)
4(i)
4(j)
4(k)
4(l)
4(m)
4(n)
4(o)
Form of Officers’ Certificate (without exhibits) establishing the terms of Northrop Grumman
Corporation’s (now Northrop Grumman Systems Corporation’s) 7.75 percent Debentures due
2016 and 7.875 percent Debentures due 2026 (incorporated by reference to Exhibit 4-3 to
Form S-4 Registration Statement No. 333-02653 filed April 19, 1996)
Form of Northrop Grumman Corporation’s (now Northrop Grumman Systems Corporation’s)
7.75 percent Debentures due 2016 (incorporated by reference to Exhibit 4-5 to Form S-4
Registration Statement No. 333-02653 filed April 19, 1996)
Form of Northrop Grumman Corporation’s (now Northrop Grumman Systems Corporation’s)
7.875 percent Debentures due 2026 (incorporated by reference to Exhibit 4-6 to Form S-4
Registration Statement No. 333-02653 filed April 19, 1996)
Form of Officers’ Certificate establishing the terms of Northrop Grumman Corporation’s (now
Northrop Grumman Systems Corporation’s) 7.75 percent Debentures due 2031 (incorporated by
reference to Exhibit 10.9 to Form 8-K filed April 17, 2001)
Indenture dated as of April 13, 1998, between Litton Industries, Inc. (predecessor-in-interest to
Northrop Grumman Systems Corporation) and The Bank of New York, as trustee, under which
its 6.75 percent Senior Debentures due 2018 were issued (incorporated by reference to
Exhibit 4.1 to the Form 10-Q of Litton Industries, Inc. for the quarter ended April 30, 1998, filed
June 15, 1998)
Supplemental Indenture with respect to Indenture dated April 13, 1998, dated as of April 3, 2001,
among Litton Industries, Inc. (predecessor-in-interest to Northrop Grumman Systems
Corporation), Northrop Grumman Corporation, Northrop Grumman Systems Corporation and
The Bank of New York, as trustee (incorporated by reference to Exhibit 4.5 to Form 10-Q for the
quarter ended March 31, 2001, filed May 10, 2001)
Supplemental Indenture with respect to Indenture dated April 13, 1998, dated as of December 20,
2002, among Litton Industries, Inc. (predecessor-in-interest to Northrop Grumman Systems
Corporation), Northrop Grumman Corporation, Northrop Grumman Systems Corporation and
The Bank of New York, as trustee (incorporated by reference to Exhibit 4(q) to Form 10-K for
the year ended December 31, 2002, filed March 24, 2003)
Third Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman
Systems Corporation (successor-in-interest to Litton Industries, Inc.), The Bank of New York
Mellon (formerly known as The Bank of New York) as trustee, Titan II, Inc. (formerly known as
Northrop Grumman Corporation), and Titan Holdings II, L.P., to Indenture dated April 13, 1998,
between Litton Industries, Inc. and The Bank of New York, as trustee (incorporated by reference
to Exhibit 4.3 to Form 10-Q for the quarter ended March 31, 2011, filed April 27, 2011)
Fourth Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman
Systems Corporation (successor-in-interest to Litton Industries, Inc.), The Bank of New York
Mellon (formerly known as The Bank of New York) as trustee, Titan Holdings II, L.P., and
Northrop Grumman Corporation (formerly known as New P., Inc.), to Indenture dated April 13,
1998, between Litton Industries, Inc. and The Bank of New York, as trustee (incorporated by
reference to Exhibit 4.4 to Form 10-Q for the quarter ended March 31, 2011, filed April 27,
2011)
Senior Indenture dated as of December 15, 1991, between Litton Industries, Inc. (predecessor-in-
interest to Northrop Grumman Systems Corporation) and The Bank of New York, as trustee,
under which its 7.75 percent and 6.98 percent debentures due 2026 and 2036 were issued, and
specimens of such debentures (incorporated by reference to Exhibit 4.1 to the Form 10-Q of
Litton Industries, Inc. for the quarter ended April 30, 1996, filed June 11, 1996)
Supplemental Indenture with respect to Indenture dated December 15, 1991, dated as of April 3,
2001, among Litton Industries, Inc. (predecessor-in-interest to Northrop Grumman Systems
Corporation), Northrop Grumman Corporation, Northrop Grumman Systems Corporation and
The Bank of New York, as trustee (incorporated by reference to Exhibit 4.7 to Form 10-Q for the
quarter ended March 31, 2001, filed May 10, 2001)
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NORTHROP GRUMMAN CORPORATION
4(p)
4(q)
4(r)
4(s)
4(t)
4(u)
4(v)
4(w)
4(x)
Supplemental Indenture with respect to Indenture dated December 15, 1991, dated as of
December 20, 2002, among Litton Industries, Inc. (predecessor-in-interest to Northrop Grumman
Systems Corporation), Northrop Grumman Corporation, Northrop Grumman Systems
Corporation and The Bank of New York, as trustee (incorporated by reference to Exhibit 4(t) to
Form 10-K for the year ended December 31, 2002, filed March 24, 2003)
Third Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman
Systems Corporation (successor-in-interest to Litton Industries, Inc.), The Bank of New York
Mellon (formerly known as The Bank of New York), as trustee, Titan II, Inc. (formerly known as
Northrop Grumman Corporation), and Titan Holdings II, L.P., to Senior Indenture dated
December 15, 1991, among Litton Industries, Inc., Northrop Grumman Corporation, Northrop
Grumman Systems Corporation and The Bank of New York, as trustee (incorporated by
reference to Exhibit 4.5 to Form 10-Q for the quarter ended March 31, 2011, filed April 27,
2011)
Fourth Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman
Systems Corporation (successor-in-interest to Litton Industries, Inc.), The Bank of New York
Mellon (formerly known as The Bank of New York) as trustee, Titan Holdings II, L.P., and
Northrop Grumman Corporation (formerly known as New P, Inc.), to Senior Indenture dated
December 15, 1991, among Litton Industries, Inc., Northrop Grumman Corporation, Northrop
Grumman Systems Corporation and The Bank of New York, as trustee (incorporated by
reference to Exhibit 4.6 to Form 10-Q for the quarter ended March 31, 2011, filed April 27,
2011)
Indenture between TRW Inc. (predecessor-in-interest to Northrop Grumman Systems
Corporation) and Mellon Bank, N.A., as trustee, dated as of May 1, 1986 (incorporated by
reference to Exhibit 2 to the Form 8-A Registration Statement of TRW Inc. dated July 3, 1986)
First Supplemental Indenture between TRW Inc. (predecessor-in-interest to Northrop Grumman
Systems Corporation) and Mellon Bank, N.A., as trustee, dated as of August 24, 1989
(incorporated by reference to Exhibit 4(b) to Form S-3 Registration Statement No. 33-30350 of
TRW Inc.)
Fifth Supplemental Indenture between TRW Inc. (predecessor-in-interest to Northrop Grumman
Systems Corporation) and The Chase Manhattan Bank, as successor trustee, dated as of June 2,
1999 (incorporated by reference to Exhibit 4(f) to Form S-4 Registration Statement
No. 333-83227 of TRW Inc. filed July 20, 1999)
Ninth Supplemental Indenture dated as of December 31, 2009 among Northrop Grumman Space
& Mission Systems Corp. (predecessor–in-interest to Northrop Grumman Systems Corporation);
The Bank of New York Mellon, as successor trustee; Northrop Grumman Corporation; and
Northrop Grumman Systems Corporation (incorporated by reference to Exhibit 4(p) to Form 10-
K for the year ended December 31, 2009, filed February 9, 2010)
Tenth Supplemental Indenture dated as of March 30, 2011, by and among Northrop Grumman
Systems Corporation (successor-in-interest to Northrop Grumman Space & Mission Systems
Corp. and TRW, Inc.), The Bank of New York Mellon, as successor trustee to JPMorgan Chase
Bank and to Mellon Bank, N.A., Titan II Inc. (formerly known as Northrop Grumman
Corporation), and Titan Holdings II, L.P., to Indenture between TRW Inc. and Mellon Bank,
N.A., as trustee, dated as of May 1, 1986 (incorporated by reference to Exhibit 4.7 to Form 10-Q
for the quarter ended March 31, 2011, filed April 27, 2011)
Eleventh Supplemental Indenture dated as of March 30, 2011, by and among Northrop Grumman
Systems Corporation (successor-in-interest to Northrop Grumman Space & Mission Systems
Corp. and TRW Inc.), The Bank of New York Mellon, as successor trustee to JPMorgan Chase
Bank and to Mellon Bank, N.A., Titan Holdings II, L.P., and Northrop Grumman Corporation
(formerly known as New P, Inc.) to Indenture between TRW Inc. and Mellon Bank, N.A., as
trustee, dated as of May 1, 1986 (incorporated by reference to Exhibit 4.8 to Form 10-Q for the
quarter ended March 31, 2011, filed April 27, 2011)
4(y)
Indenture dated as of November 21, 2001, between Northrop Grumman Corporation and
JPMorgan Chase Bank, as trustee (incorporated by reference to Exhibit 4.1 to Form 8-K filed
November 21, 2001)
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NORTHROP GRUMMAN CORPORATION
4(z)
4(aa)
4(bb)
4(cc)
4(dd)
4(ee)
4(ff)
4(gg)
First Supplemental Indenture dated as of July 30, 2009, between Northrop Grumman
Corporation and The Bank of New York Mellon, as successor trustee, to Indenture dated as of
November 21, 2001 (incorporated by reference to Exhibit 4(a) to Form 8-K filed July 30, 2009)
Form of Northrop Grumman Corporation’s 5.05 percent Senior Note due 2019 (incorporated by
reference to Exhibit 4(c) to Form 8-K filed July 30, 2009)
Second Supplemental Indenture dated as of November 8, 2010, between Northrop Grumman
Corporation and The Bank of New York Mellon, as successor trustee, to Indenture dated as of
November 21, 2001 (incorporated by reference to Exhibit 4(a) to Form 8-K filed November 8,
2010)
Form of Northrop Grumman Corporation’s 3.500% Senior Note due 2021 (incorporated by
reference to Exhibit 4(a) to Form 8-K filed November 8, 2010)
Form of Northrop Grumman Corporation’s 5.050% Senior Note due 2040 (incorporated by
reference to Exhibit 4(a) to Form 8-K filed November 8, 2010)
Third Supplemental Indenture dated as of March 30, 2011, by and among Titan II, Inc. (formerly
known as Northrop Grumman Corporation), The Bank of New York Mellon, as successor trustee
to JPMorgan Chase Bank, and Titan Holdings II, L.P., to Indenture dated as of November 21,
2001 between Northrop Grumman Corporation and JPMorgan Chase Bank, as trustee
(incorporated by reference to Exhibit 4.9 to Form 10-Q for the quarter ended March 31, 2011,
filed April 27, 2011)
Fourth Supplemental Indenture dated as of March 30, 2011, by and among Titan Holdings II,
L.P., The Bank of New York Mellon, as successor trustee to JPMorgan Chase Bank, and
Northrop Grumman Corporation (formerly known as New P., Inc.), to Indenture dated as of
November 21, 2001 between Northrop Grumman Corporation and JPMorgan Chase Bank, as
trustee (incorporated by reference to Exhibit 4.10 to Form 10-Q for the quarter ended March 31,
2011, filed April 27, 2011)
Fifth Supplemental Indenture, dated as of May 31, 2013, between Northrop Grumman
Corporation and The Bank of New York Mellon, as successor to JPMorgan Chase Bank, Trustee,
to Indenture dated as of November 21, 2001 (incorporated by reference to Exhibit 4(a) to Form
8-K filed May 31, 2013)
4(hh)
Form of 1.750% Senior Note due 2018 (incorporated by reference to Exhibit 4(a) to Form 8-K
filed May 31, 2013)
4(ii)
4(jj)
10(a)
10(b)
Form of 3.250% Senior Note due 2023 (incorporated by reference to Exhibit 4(a) to Form 8-K
filed May 31, 2013)
Form of 4.750% Senior Note due 2043 (incorporated by reference to Exhibit 4(a) to Form 8-K
filed May 31, 2013)
Credit Agreement dated as of August 29, 2013, among Northrop Grumman Corporation, as
Borrower; Northrop Grumman Systems Corporation, as Guarantor; the Lenders party thereto;
JPMorgan Chase Bank, N.A., as Administrative Agent; an Issuing Bank and a Swingline Lender,
and The Royal Bank of Scotland plc, Citibank, N.A., and Wells Fargo Bank, National
Association, as Issuing Banks and Syndication Agents (incorporated by reference to Exhibit 10.1
to Form 8-K filed August 30, 2013)
Second Amended and Restated Credit Agreement dated as of September 8, 2011, among
Northrop Grumman Corporation, as Borrower; Northrop Grumman Systems Corporation, as
Guarantor; the Lenders party thereto; JPMorgan Chase Bank, N.A., as Administrative Agent, an
Issuing Bank and a Swingline Lender; and Citibank, N.A., The Royal Bank of Scotland plc and
Wells Fargo Bank, National Association, as Syndication Agents (incorporated by reference to
Exhibit 10.1 to Form 8-K filed September 13, 2011)
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NORTHROP GRUMMAN CORPORATION
10(c)
10(d)
10(e)
10(f)
+10(g)
+10(h)
+10(i)
+10(j)
364-Day Credit Agreement dated as of September 4, 2012, among Northrop Grumman
Corporation, as Borrower; Northrop Grumman Systems Corporation, as Guarantor; the Lenders
party thereto; JPMorgan Chase Bank, N.A., as Administrative Agent; and Citibank, N.A., The
Royal Bank of Scotland plc and Wells Fargo Bank, National Association, as Syndication Agents
(incorporated by reference to Exhibit 10.1 to Form 8-K filed September 7, 2012)
Form of Guarantee dated as of April 3, 2001, by Northrop Grumman Corporation of the
indenture indebtedness issued by Litton Industries, Inc. (predecessor-in-interest to Northrop
Grumman Systems Corporation) (incorporated by reference to Exhibit 10.10 to Form 8-K filed
April 17, 2001)
Form of Guarantee dated as of April 3, 2001, by Northrop Grumman Corporation of Northrop
Grumman Systems Corporation indenture indebtedness (incorporated by reference to
Exhibit 10.11 to Form 8-K and filed April 17, 2001)
Form of Guarantee dated as of March 27, 2003, by Northrop Grumman Corporation, as
Guarantor, in favor of JP Morgan Chase Bank, as trustee, of certain debt securities issued by the
former Northrop Grumman Space & Mission Systems Corp. (predecessor-in-interest to Northrop
Grumman Systems Corporation) (incorporated by reference to Exhibit 4.2 to Form 10-Q for the
quarter ended March 31, 2003, filed May 14, 2003)
Consultant Contract dated June 28, 2010 between Ronald D. Sugar and Northrop Grumman
Corporation (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June
30, 2010, filed July 29, 2010)
Northrop Grumman Corporation 1993 Stock Plan for Non-Employee Directors (as Amended and
Restated January 1, 2010) (incorporated by reference to Exhibit 10.1 to Form 10-Q for the
quarter ended June 30, 2009, filed July 23, 2009)
Northrop Grumman Corporation Non-Employee Directors Equity Participation Plan (Amended
and Restated January 1, 2008) (incorporated by reference to Exhibit 10(q) to Form 10-K for the
year ended December 31, 2007, filed February 20, 2008)
Northrop Grumman 2001 Long-Term Incentive Stock Plan (As amended through December 19,
2007) (incorporated by reference to Exhibit A to the Company’s Proxy Statement on Schedule
14A for the 2008 Annual Meeting of Shareholders filed April 21, 2008)
(i) Form of Notice of Non-Qualified Grant of Stock Options and Option Agreement (incorporated by
reference to Exhibit 10.5 to Form S-4 Registration Statement No. 333-83672 filed March 4, 2002)
(ii) Form of Agreement for 2005 Stock Options (officer) (incorporated by reference to Exhibit 10(d)
(v) to Form 10-K for the year ended December 31, 2004, filed March 4, 2005)
(iii) Form of letter from Northrop Grumman Corporation regarding Stock Option Retirement
Enhancement (incorporated by reference to Exhibit 10.2 to Form 8-K dated March 14, 2005 and
filed March 15, 2005)
(iv) Form of Agreement for 2006 Stock Options (officer) (incorporated by reference to Exhibit 10(d)
(viii) to Form 10-K for the year ended December 31, 2005, filed February 17, 2006)
(v) Form of Agreement for 2007 Stock Options (officers) (incorporated by reference to Exhibit 10(2)
(ii) to Form 10-Q for the quarter ended March 31, 2007, filed April 24, 2007)
(vi) Form of Agreement for 2008 Stock Options (officer) (incorporated by reference to Exhibit 10(4)
(i) to Form 10-Q for the quarter ended March 31, 2008, filed April 24, 2008)
(vii) Form of Agreement for 2009 Stock Options (incorporated by reference to Exhibit 10.2(i) to Form
10-Q for the quarter ended March 31, 2009, filed April 22, 2009)
(viii) Form of Agreement for 2010 Restricted Performance Stock Rights (incorporated by reference to
Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2010, filed April 28, 2010)
(ix) Form of Agreement for 2010 Stock Options (incorporated by reference to Exhibit 10.3 to Form
10-Q for the quarter ended March 31, 2010, filed April 28, 2010)
(x) Form of Agreement for 2010 Restricted Stock Rights (incorporated by reference to Exhibit 10.4
to Form 10-Q for the quarter ended March 31, 2010, filed April 28, 2010)
(xi) Form of Agreement for 2011 Stock Options granted under the Northrop Grumman 2001 Long-
Term Incentive Stock Plan (As amended through December 19, 2007) (incorporated by reference
to Exhibit 10.1 of Form 8-K filed February 22, 2011)
-88-
NORTHROP GRUMMAN CORPORATION
(xii) Form of Agreement for 2011 Restricted Performance Stock Rights granted under the Northrop
Grumman 2001 Long-Term Incentive Stock Plan (As amended through December 19, 2007)
(incorporated by reference to Exhibit 10.2 of Form 8-K filed February 22, 2011)
(xvi) Form of Agreement for 2011 Restricted Stock Rights granted under the Northrop Grumman 2001
Long-Term Incentive Stock Plan (As amended through December 19, 2007) (incorporated by
reference to Exhibit 10.3 of Form 8-K filed February 22, 2011)
(xvii) Terms and Conditions Applicable to Special 2011 Restricted Stock Rights granted to Gary W.
Ervin under the Northrop Grumman 2001 Long-Term Incentive Stock Plan (as amended through
December 19, 2007) (incorporated by reference to Exhibit 10.4 of Form 8-K filed February 22,
2011)
+10(k)
Northrop Grumman 2011 Long-Term Incentive Stock Plan (incorporated by reference to
Exhibit A to the Company’s Proxy Statement on Schedule 14A for the 2011 Annual Meeting of
Shareholders filed April 8, 2011)
(i) Summary of Non-Employee Director Award Terms Under the 2011 Long-Term Incentive Stock
Plan effective December 21, 2011 (incorporated by reference to Exhibit 10(j)(ii) to Form 10-K for
the year ended December 31, 2011, filed February 7, 2012)
(ii) Northrop Grumman Corporation Equity Grant Program for Non-Employee Directors under the
Northrop Grumman 2011 Long-Term Incentive Stock Plan, effective January 1, 2012
(incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2012,
filed July 24, 2012)
(iii) Grant Certificate Specifying the Terms and Conditions Applicable to 2012 Restricted Stock
Rights Granted Under the 2011 Long-Term Incentive Stock Plan (incorporated by reference to
Exhibit 10.1 to Form 8-K filed February 17, 2012)
(iv) Grant Certificate Specifying the Terms and Conditions Applicable to 2012 Restricted
Performance Stock Rights Granted Under the 2011 Long-Term Incentive Stock Plan
(incorporated by reference to Exhibit 10.2 to Form 8-K filed February 17, 2012)
(v) Grant Certificate Specifying the Terms and Conditions Applicable to 2013 Restricted Stock
Rights Granted Under the 2011 Long-Term Incentive Stock Plan (incorporated by reference to
Exhibit 10.1 to Form 8-K filed February 21, 2013)
(vi) Grant Certificate Specifying the Terms and Conditions Applicable to 2013 Restricted
Performance Stock Rights Granted Under the 2011 Long-Term Incentive Stock Plan
(incorporated by reference to Exhibit 10.2 to Form 8-K filed February 21, 2013)
(vii) Grant Certificate Specifying the Terms and Conditions Applicable to Special 2013 Restricted
Stock Rights Granted to James F. Palmer Under the 2011 Long-Term Incentive Stock Plan
(incorporated by reference to Exhibit 10.1 to Form 8-K filed September 23, 2013)
+*10(l) Northrop Grumman Supplemental Plan 2 (Amended and Restated Effective as of January 1,
2014)
*(i) Appendix B to the Northrop Grumman Supplemental Plan 2: ERISA Supplemental Program 2
(Amended and Restated Effective as of January 1, 2014)
(ii) Appendix F to the Northrop Grumman Supplemental Plan 2: CPC Supplemental Executive
Retirement Program (Amended and Restated Effective as of January 1, 2012)
(iii) Appendix G to the Northrop Grumman Supplemental Plan 2: Officers Supplemental Executive
Retirement Program (Amended and Restated Effective as of January 1, 2012)
+*10(m) Northrop Grumman Supplementary Retirement Income Plan (formerly TRW Supplementary
Retirement Income Plan) (Amended and Restated Effective January 1, 2014)
+*10(n) Northrop Grumman Electronic Systems Executive Pension Plan (Amended and Restated
Effective as of January 1, 2014)
+10(o)
Severance Plan for Elected and Appointed Officers of Northrop Grumman Corporation
(Amended and Restated Effective July 20, 2012) (incorporated by reference to Exhibit 10.4 to
Form 10-Q for the quarter ended September 30, 2012, filed October 23, 2012)
+10(p)
Letter dated May 15, 2013, between the Board of Directors and Wesley G. Bush (incorporated by
reference to Exhibit 99.1 to Form 8-K filed May 15, 2013)
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NORTHROP GRUMMAN CORPORATION
+10(q)
Non-Employee Director Compensation Term Sheet, effective May 15, 2012 (incorporated by
reference to Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2012, filed July 24, 2012)
+10(r)
+10(s)
+10(t)
+10(u)
Form of Indemnification Agreement between Northrop Grumman Corporation and its directors
and executive officers (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter
ended March 31, 2012, filed April 24, 2012)
Northrop Grumman Deferred Compensation Plan (Amended and Restated Effective as of
January 1, 2013) (incorporated by reference to Exhibit 10(t) to Form 10-K for the year ended
December 31, 2012, filed February 4, 2013)
The 2002 Incentive Compensation Plan of Northrop Grumman Corporation, As Amended and
Restated effective January 1, 2009 (incorporated by reference to Exhibit 10.6 to Form 10-Q for
the quarter ended March 31, 2009, filed April 22, 2009)
Northrop Grumman 2006 Annual Incentive Plan and Incentive Compensation Plan (for Non-
Section 162(m) Officers), as amended and restated effective January 1, 2009 (incorporated by
reference to Exhibit 10.7 to Form 10-Q for the quarter ended March 31, 2009, filed April 22,
2009)
+10(v)
Northrop Grumman Savings Excess Plan (Amended and Restated Effective as of October 1,
2013) (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended September
30, 2013, filed October 23, 2013)
+10(w) Northrop Grumman Officers Retirement Account Contribution Plan (Amended and Restated
Effective as of October 1, 2013) (incorporated by reference to Exhibit 10.5 to Form 10-Q for the
quarter ended September 30, 2013, filed October 23, 2013)
+10(x)
Compensatory Arrangements of Certain Officers (incorporated by reference to Item 5.02(e) of
Form 8-K filed February 21, 2013)
+10(y)
Offering letter dated February 1, 2007 from Northrop Grumman Corporation to James F. Palmer
relating to position of Corporate Vice President and Chief Financial Officer (incorporated by
reference to Exhibit 10(3) to Form 10-Q for the quarter ended March 31, 2007, filed April 24,
2007), as amended by Amendment to Letter Agreement between Northrop Grumman
Corporation and James F. Palmer dated December 17, 2008 (incorporated by reference to Exhibit
10.3 to Form 8-K filed December 19, 2008)
+10(z)
Northrop Grumman Supplemental Retirement Replacement Plan, as Restated, dated January 1,
2008 between Northrop Grumman Corporation and James F. Palmer (incorporated by reference
to Exhibit 10.4 to Form 8-K filed December 19, 2008)
(i) First Amendment to the Northrop Grumman Supplemental Retirement Replacement
Plan, dated October 25, 2011 (incorporated by reference to Exhibit 10(bb)(i) to
Form 10-K for the year ended December 31, 2011, filed February 7, 2012)
+10(aa) Northrop Grumman Corporation Special Officer Retiree Medical Plan (Amended and Restated
Effective January 1, 2008) (incorporated by reference to Exhibit 10(2) to Form 10-Q for the
quarter ended March 31, 2008, filed April 24, 2008)
+10(bb) Executive Life Insurance Policy (incorporated by reference to Exhibit 10(gg) to Form 10-K for
the year ended December 31, 2004, filed March 4, 2005)
+10(cc) Executive Accidental Death, Dismemberment and Plegia Insurance Policy Terms applicable to
Executive Officers dated January 1, 2009 (incorporated by reference to Exhibit 10.3 to Form 10-
Q for the quarter ended March 31, 2009, filed April 22, 2009)
+10(dd) Executive Long-Term Disability Insurance Policy as amended by Amendment No. 2 dated
June 19, 2008 and effective as of October 4, 2007 (incorporated by reference to Exhibit 10(2) to
Form 10-Q for the quarter ended June 30, 2008, filed July 29, 2008)
-90-
NORTHROP GRUMMAN CORPORATION
+10(ee) Executive Dental Insurance Policy Group Numbers 5134 and 5135 (incorporated by reference to
Exhibit 10(m) to Form 10-K for the year ended December 31, 1995, filed February 22, 1996), as
amended by action of the Compensation Committee of the Board of Directors of Northrop
Grumman Corporation effective July 1, 2009 (incorporated by reference to Item 5.02(e) of Form
8-K filed May 26, 2009)
+10(ff) Group Personal Excess Liability Policy (incorporated by reference to Exhibit 10.15 to Form 10-
Q for the quarter ended June 30, 2011, filed July 27, 2011)
+10(gg) Letter dated December 16, 2009 from Northrop Grumman Corporation to Wesley G. Bush
regarding compensation effective January 1, 2010 (incorporated by reference to Exhibit 10.2 to
Form 8-K filed December 21, 2009)
+10(hh) Northrop Grumman Corporation 1995 Stock Plan for Non-Employee Directors, as Amended as
of May 16, 2007 (incorporated by reference to Exhibit A to the Company’s Proxy Statement on
Schedule 14A for the 2007 Meeting of Shareholders filed April 12, 2007)
+10(ii)
Retirement and Separation Agreement dated July 23, 2012 between Northrop Grumman Systems
Corporation and Gary W. Ervin (incorporated by reference to Exhibit 10.4 to Form 10-Q for the
quarter ended June 30, 2012, filed July 24, 2012)
*12(a)
Computation of Ratio of Earnings to Fixed Charges
*18
*21
*23
*24
*31.1
*31.2
Preferability Letter of Independent Registered Public Accounting Firm dated February 3, 2014
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Rule 13a-15(e)/15d-15(e) Certification of Wesley G. Bush (Section 302 of the Sarbanes-Oxley
Act of 2002)
Rule 13a-15(e)/15d-15(e) Certification of James F. Palmer (Section 302 of the Sarbanes-Oxley
Act of 2002)
**32.1
Certification of Wesley G. Bush pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
**32.2
Certification of James F. Palmer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
*101
+
*
**
Northrop Grumman Corporation Annual Report on Form 10-K for the fiscal year ended
December 31, 2013, formatted in XBRL (Extensible Business Reporting Language); (i) the
Consolidated Statements of Earnings and Comprehensive Income, (ii) Consolidated Statements
of Financial Position, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements
of Changes in Shareholders’ Equity, and (v) Notes to Consolidated Financial Statements
Management contract or compensatory plan or arrangement
Filed with this Report
Furnished with this Report
-91-
NORTHROP GRUMMAN CORPORATION
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 3rd day of
February 2014.
SIGNATURES
NORTHROP GRUMMAN CORPORATION
By:
/s/ Michael A. Hardesty
Michael A. Hardesty
Corporate Vice President, Controller, and Chief
Accounting Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the
registrant this the 3rd day of February 2014, by the following persons and in the capacities indicated.
Signature
Wesley G. Bush*
James F. Palmer*
Michael A. Hardesty
Victor H. Fazio*
Donald E. Felsinger*
Stephen E. Frank *
Bruce S. Gordon*
William H. Hernandez*
Madeleine A. Kleiner*
Karl J. Krapek*
Richard B. Myers*
Aulana L. Peters*
Gary Roughead*
Thomas M. Schoewe*
Kevin W. Sharer*
*By:
/s/ Jennifer C. McGarey
Jennifer C. McGarey
Corporate Vice President and Secretary
Attorney-in-Fact
pursuant to a power of attorney
Title
Chairman, Chief Executive Officer and President (Principal
Executive Officer), and Director
Corporate Vice President and Chief Financial Officer (Principal
Financial Officer)
Corporate Vice President, Controller and Chief Accounting
Officer
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
-92-
GENERAL INFORMATION
NORTHROP GRUMMAN
ON THE INTERNET
Information on Northrop Grumman
and its sectors, including press
releases and this annual report,
can be found on our home page at
www.northropgrumman.com
ANNUAL MEETING OF
SHAREHOLDERS
Wednesday, May 21, 2014
8 a.m. EDT
Northrop Grumman Corporation
Corporate Office
2980 Fairview Park Drive
Falls Church, Virginia 22042
INDEPENDENT AUDITORS
Deloitte & Touche LLP
STOCK LISTING
Northrop Grumman Corporation
common stock is listed on the
New York Stock Exchange
(trading symbol NOC).
TRANSFER AGENT,
REGISTRAR AND DIVIDEND
PAYING AGENT
Computershare
P.O. Box 43078
Providence, RI 02940
(877) 498-8861
www.computershare.com
INVESTOR RELATIONS
Securities analysts, institutional investors
and portfolio managers should contact
Northrop Grumman Investor Relations
at (703) 280-2268 or send an e-mail to
investors@ngc.com
MEDIA RELATIONS
Inquiries from the media should
be directed to Northrop Grumman
Corporate Communications at
(703) 280-2720 or send an e-mail to
newsbureau@ngc.com
ELECTRONIC DELIVERY
OF FUTURE SHAREHOLDER
COMMUNICATIONS
If you would like to help conserve
natural resources and reduce the
costs incurred by Northrop Grumman
Corporation in mailing proxy materials,
you can consent to receiving all
future proxy statements, proxy cards
and annual reports electronically
via e-mail or the Internet. To sign
up for electronic delivery, registered
shareholders may log on to
www.computershare.com/investor
DIVIDEND REINVESTMENT PROGRAM
Registered owners of Northrop
Grumman Corporation common
stock are eligible to participate in
the company’s Automatic Dividend
Reinvestment Plan. Under this plan,
shares are purchased with reinvested
cash dividends and voluntary cash
payments of up to a specified amount
per calendar year.
For information on the company’s
Dividend Reinvestment Service,
contact our Transfer Agent and
Registrar, Computershare.
COMPANY SHAREHOLDER SERVICES
Shareholders with questions regarding
stock ownership should contact
our Transfer Agent and Registrar,
Computershare. Stock ownership
inquiries may also be directed to
Northrop Grumman’s Shareholder
Services via e-mail at sharesrv@ngc.com
DUPLICATE MAILINGS
Stockholders with more than one account
or who share the same address with
another stockholder may receive more
than one annual report. To eliminate
duplicate mailings or to consolidate
accounts, contact Computershare.
Separate dividend checks and proxy
materials will continue to be sent for each
account on our records.
NORTHROP GRUMMAN 2013 ANNUAL REPORT 2980 Fairview Park Drive
Falls Church, VA 22042-4511
www.northropgrumman.com