Northrop Grumman
Annual Report 2015

Plain-text annual report

A N N U A L R E P O R T selected financial highlights selected financial highlights 6 6 2 2 5 5 3 3 2 2 $ $ , , 9 9 7 7 9 9 3 3 2 2 $ $ , , 1 1 6 6 6 6 , , 4 4 2 2 $ $ 6 6 7 7 0 0 , , 3 3 $ $ 6 6 9 9 1 1 , , 3 3 $ $ 3 3 2 2 1 1 3 3 $ $ , , . . 9 9 3 3 0 0 1 1 $ $ 5 5 7 7 9 9 $ $ . . 5 5 3 3 8 8 $ $ . . 15 15 14 14 13 13 15 15 14 14 13 13 15 15 14 14 13 13 sales sales ( $ in millions ) ( $ in millions ) oPerating income oPerating income ( $ in millions ) ( $ in millions ) DiluteD ePs DiluteD ePs 0 0 1 1 3 3 $ $ . . 1 1 7 7 2 2 $ $ . . 8 8 3 3 2 2 $ $ . . 6 6 0 0 8 8 2 2 $ $ , , 3 3 9 9 5 5 , , 2 2 $ $ 7 7 8 8 4 4 , , 2 2 $ $ 2 2 4 4 4 4 , , 2 2 $ $ 6 6 1 1 0 0 , , 2 2 $ $ 2 2 3 3 0 0 , , 2 2 $ $ 15 15 14 14 13 13 15 15 14 14 13 13 15 15 14 14 13 13 cash DiviDenDs DeclareD cash DiviDenDs DeclareD (per common share) (per common share) aDjusteD cash ProviDeD aDjusteD cash ProviDeD by oPerations by oPerations ( $ in millions ) ( $ in millions ) aDjusteD free cash flow aDjusteD free cash flow from oPerations from oPerations ( $ in millions ) ( $ in millions ) These selected financial highlights include references to adjusted cash provided by operations and adjusted free cash flow These selected financial highlights include references to adjusted cash provided by operations and adjusted free cash flow from operations, which are non-GAAP financial measures. For reconciliations between our non-GAAP measures and the from operations, which are non-GAAP financial measures. For reconciliations between our non-GAAP measures and the nearest GAAP measures, please refer to the page preceding the back cover of this Annual Report. nearest GAAP measures, please refer to the page preceding the back cover of this Annual Report. noc_2015_AnnualReport_FINAL.indd 2 3/18/2016 2:18:24 PM deaR fellOW shaRehOldeRs DEAR FELLOW SHAREHOLDERS the northrop grumman team continued its focus in 2015 on The Northrop Grumman team continued its focus in 2015 on as we continue to grow as a global security company, we As we continue to grow as a global security company, we sustained performance, portfolio alignment and effective sustained performance, portfolio alignment and effective remain committed to maintaining the highest of ethical remain committed to maintaining the highest of ethical capital deployment. financial highlights for 2015 include capital deployment. Financial highlights for 2015 include standards, embracing diversity and inclusion, sustaining standards, embracing diversity and inclusion, sustaining net earnings of $2.0 billion, or $10.39 per diluted share, net earnings of $2.0 billion, or $10.39 per diluted share, the environment, and operating as a responsible corporate the environment, and operating as a responsible corporate compared to $2.1 billion, or $9.75 per diluted share in 2014. compared to $2.1 billion, or $9.75 per diluted share in 2014. citizen. in 2015, northrop grumman, the northrop grumman citizen. In 2015, Northrop Grumman, the Northrop Grumman Diluted earnings per share for 2015 increased 7 percent Diluted earnings per share for 2015 increased 7 percent foundation and echo – our employees charity organization Foundation and ECHO – our Employees Charity Organization and are based on 191.6 million weighted average shares and are based on 191.6 million weighted average shares – contributed a total of $27.7 million in support of science, – contributed a total of $27.7 million in support of science, outstanding, compared with 212.1 million shares in 2014. outstanding, compared with 212.1 million shares in 2014. technology, engineering and math (stem) programs; technology, engineering and math (STEM) programs; During 2015, the company repurchased 19.3 million shares During 2015, the company repurchased 19.3 million shares assistance to veterans, service members and their families; assistance to veterans, service members and their families; of its common stock for $3.2 billion. as of Dec. 31, 2015, of its common stock for $3.2 billion. As of Dec. 31, 2015, and help for those with critical needs in our communities. and help for those with critical needs in our communities. $4.3 billion remained on the company’s share repurchase $4.3 billion remained on the company’s share repurchase Please take a few minutes to read our 2015 corporate Please take a few minutes to read our 2015 Corporate authorization. authorization. responsibility report to learn more about our efforts Responsibility report to learn more about our efforts continued strong cash generation also supported our Continued strong cash generation also supported our and accomplishments. and accomplishments. twelfth consecutive annual dividend increase. we raised twelfth consecutive annual dividend increase. We raised we continue to build on our solid track record, and we look We continue to build on our solid track record, and we look the quarterly dividend by 14 percent and paid shareholders the quarterly dividend by 14 percent and paid shareholders forward to continued, long-term, sustainable value creation forward to continued, long-term, sustainable value creation $603 million in dividends in 2015. total shareholder return $603 million in dividends in 2015. Total shareholder return for our shareholders, customers and employees. thank you for our shareholders, customers and employees. Thank you for the year was slightly more than 30 percent. the first for the year was slightly more than 30 percent. The first for your continued investment in northrop grumman. for your continued investment in Northrop Grumman. priority of our capital deployment strategy is to invest in our priority of our capital deployment strategy is to invest in our businesses. capital spending in 2015 totaled $471 million, businesses. Capital spending in 2015 totaled $471 million, and we increased our iraD investment by 25 percent, to and we increased our IRAD investment by 25 percent, to $712 million, or 3 percent of sales, as we foresee significant $712 million, or 3 percent of sales, as we foresee significant opportunities ahead. opportunities ahead. in addition to strong financial results, northrop grumman In addition to strong financial results, Northrop Grumman captured several important new business awards, both captured several important new business awards, both within the united states and internationally, as we continued within the United States and internationally, as we continued to focus on our core capabilities—autonomous systems, to focus on our core capabilities—unmanned, cyber, cyber, c4isr, logistics and strike. the estimated value of C4ISR, logistics and strike. The estimated value of contract contract awards recorded during 2015 was $21.3 billion. awards recorded during 2015 was $21.3 billion. WES buSH Wes bush chairman, ceo and President Chairman, CEO and President march 21, 2016 March 15, 2016 northroP grumman 2015 annual rePort NORTHROP GRUMMAN 2015 ANNUAl REPORT Page 1 PAGE 1 Our Global Presence northrop grumman continues to expand its global presence and broaden its focus on the delivery of capabilities, products and services into global markets by leveraging the company’s core positions in autonomous systems, cyber, c4isr, logistics, and strike. country chief executives were appointed in japan and south Korea aimed at enhancing northrop grumman’s in-country presence in autOnOMOus sYsteMs northrop grumman is a premier provider of cYbeR northrop grumman is a global provider these markets. this builds on the appointment autonomous systems on land, at sea, in the of advanced cyber and continuous trust in 2013 of country chief executives for europe, air, and in space. these unmanned aircraft, solutions for defense, intelligence, and australia, united arab emirates, and the satellites and space systems, and advanced civil agency customers. as an end-to-end Kingdom of saudi arabia. our increased technologies are critical to our national security. mission solutions provider, we offer capa- global presence will enable us to work more autonomous systems operate in areas and bilities in cyber resiliency, cyber Defense, closely with our customers, understand and environments where manned vehicles cannot, cyber/non-Kinetic operations, and cyber address their needs, and offer a broad range allow for prolonged missions, and help reduce intelligence aimed at bolstering national of integrated solutions. risk to human lives. Key products include the security and economic protection. in addi- global hawk enterprise (global hawk, triton, tion to the customers that we serve around northrop grumman offers an extraordinary and nato ags), fire scout, and X-47b ucas-D the world, northrop grumman is focused portfolio of capabilities and technologies that autonomous unmanned aircraft systems; on embedding cybersecurity to ensure enable us to deliver innovative systems and james webb space telescope; an/aQs-24b resiliency across all of our platforms, solutions for applications that range from minehunting system; and remotec robotic systems and networks so that they start undersea to outer space and cyberspace. Platforms. secure, stay secure and return secure. our core competencies are aligned with the current and future needs of our customers and address emerging global security challenges. Page 2 northroP grumman 2015 annual rePort noc_2015_AnnualReport_FINAL.indd 4 3/18/2016 2:18:28 PM Our Global Presence Northrop Grumman continues to expand its Our Global Presence Our Global Presence global presence and broaden its focus on the delivery of capabilities, products and Northrop Grumman offers an extraordinary Northrop Grumman continues to expand its services into global markets by leveraging the portfolio of capabilities and technologies that global presence and broaden its focus on company’s core positions in Autonomy, Cyber, enable us to deliver innovative systems and the delivery of capabilities, products and C4ISR, Logistics, and Strike. Country chief solutions for applications that range from services into global markets by leveraging the executives were appointed in Japan and undersea to outer space to cyberspace. company’s core positions in Autonomy, Cyber, South Korea aimed at enhancing Northrop Our core competencies are aligned with the C4ISR, Logistics, and Strike. Country chief Grumman’s in-country presence in these AUTONOMOUS SYSTEMS Northrop Grumman is a premier provider of current and future needs of our customers and executives were appointed in Japan and markets. This builds on the appointment in autonomous systems on land, at sea, in the CYBER Northrop Grumman is a global provider of advanced information solutions for defense, address emerging global security challenges. South Korea aimed at enhancing Northrop 2013 of country chief executives for Europe, Australia, United Arab Emirates, and the Grumman’s in-country presence in these Northrop Grumman continues to expand its markets. This builds on the appointment in Kingdom of Saudi Arabia. Our increased global presence and broaden its focus on 2013 of country chief executives for Europe, global presence will enable us to work more AUTONOMOUS SYSTEMS air, and in space. These unmanned aircraft, Northrop Grumman is a premier provider AUTONOMOUS SYSTEMS Northrop Grumman is a premier provider of satellites and space systems, and advanced intelligence, civil agencies, and commercial CYBER CYBER Northrop Grumman is a global provider Northrop Grumman is a global provider of customers. Our solutions include Cyber of autonomous systems, including aircraft, autonomous systems on land, at sea, in the technologies are critical to our national security. space systems, and related advanced air, and in space. These unmanned aircraft, Autonomous systems operate in areas and Intelligence, Cyber Resiliency, Active Cyber of advanced cyber and continuous trust advanced information solutions for defense, Defense, and full-spectrum Operations to solutions for defense, intelligence, and intelligence, civil agencies, and commercial the delivery of capabilities, products and Australia, United Arab Emirates, and the closely with our customers, understand and services into global markets by leveraging Kingdom of Saudi Arabia. Our increased address their needs, and offer a broad range environments where manned vehicles cannot, technologies that are critical to our national satellites and space systems, and advanced ensure economic protection and national civil customers. As an end-to-end mission customers. Our solutions include Cyber allow for prolonged missions, and help reduce security. Autonomous systems operate in technologies are critical to our national security. security. Key products and capabilities solutions provider, we offer capabilities Intelligence, Cyber Resiliency, Active Cyber the company’s core positions in Autonomous global presence will enable us to work more of integrated solutions. risk to human lives. Key products include the areas and environments where manned Autonomous systems operate in areas and in Cyber Resiliency, Cyber Defense, Defense, and full-spectrum Operations to include: Consolidated Afloat Networks and Systems, Cyber, C4ISR, Logistics, and Strike. closely with our customers, understand and Global Hawk enterprise (Global Hawk, Triton, vehicles cannot, allow for prolonged missions, environments where manned vehicles cannot, Enterprise Services; MOSA-C and open Cyber/Non-Kinetic Operations, and Cyber ensure economic protection and national Our increased global presence will enable address their needs, and offer a broad range Northrop Grumman offers an extraordinary and NATO AGS), Fire Scout, and X-47B UCAS-D and help reduce risk to human lives. Key allow for prolonged missions, and help reduce architecture solutions; software-defines RF Intelligence aimed at bolstering national security. Key products and capabilities us to work more closely with our customers, of integrated solutions. portfolio of capabilities and technologies that understand and address their needs, and enable us to deliver innovative systems and autonomous unmanned aircraft systems; products include the Global Hawk enterprise risk to human lives. Key products include the technology; Integrated Battle Command security and economic protection. In include: Consolidated Afloat Networks and James Webb Space Telescope; AN/AQS-24B Global Hawk enterprise (Global Hawk, Triton, (Global Hawk, Triton, and NATO AGS), Fire Scout, System; Activity-based Intelligence solutions; addition to the customers that we serve Enterprise Services; MOSA-C and open offer a broad range of integrated solutions. Northrop Grumman offers an extraordinary solutions for applications that range from undersea to outer space and cyberspace. portfolio of capabilities and technologies that Platforms. and X-47B UCAS-D autonomous unmanned and NATO AGS), Fire Scout, and X-47B UCAS-D Minehunting System; and Remotec Robotic aircraft systems; James Webb Space autonomous unmanned aircraft systems; Airborne Signals Intelligence Payload products; around the world, Northrop Grumman is architecture solutions; software-defines RF Enterprise Networked Support Services; health focused on embedding cybersecurity to technology; Integrated Battle Command Our core competencies are aligned with the enable us to deliver innovative systems and current and future needs of our customers and solutions for applications that range from Telescope; AN/AQS-24B Minehunting System; James Webb Space Telescope; AN/AQS-24B IT solutions; fraud prevention systems; and ensure resiliency across all of our platforms, System; Activity-based Intelligence solutions; and Remotec Robotic Platforms. Minehunting System; and Remotec Robotic public safety systems. Our systems help to systems and networks so that they start Airborne Signals Intelligence Payload products; address emerging global security challenges. undersea to outer space and cyberspace. Platforms. Our core competencies are aligned with the PAGE 2 current and future needs of our customers and address emerging global security challenges. project force and protect critical data. secure, stay secure and return secure. Enterprise Networked Support Services; health IT solutions; fraud prevention systems; and public safety systems. Our systems help to NORTHROP GRUMMAN 2015 ANNUAL REPORT project force and protect critical data. PAGE 2 PAGE 2 NORTHROP GRUMMAN 2015 ANNUAL REPORT NORTHROP GRUMMAN 2015 ANNUAL REPORT noc_2015_AnnualReport_3.24.indd 4 3/24/2016 1:01:15 PM NORTHROP GRUMMAN 2015 ANNUAL REPORT PAGE 3 C4ISR C4ISR Northrop Grumman is a leading provider Northrop Grumman is a leading provider LOGISTICS LOGISTICS Northrop Grumman is a leading provider of A leading provider of logistics solutions support- STRIKE As a leader in integrated strike systems, STRIKE As a leader in integrated strike systems, of C4ISR systems that are the backbone of of C4ISR systems that are the backbone of ing the full lifecycle of platforms and systems logistics solutions supporting the full lifecycle Northrop Grumman brings world-class Northrop Grumman brings world-class capa- operations and decision making. Our systems operations, and the backbone of decision of platforms and systems for government for global defense and federal-civil customers. capabilities in system design, systems bilities in system design, systems engineering, provide situational awareness from planning making. Our systems provide situational We deliver innovative, technology-driven customers around the globe. We deliver manufacturing, and sustainment. The ability to engineering, manufacturing, and sustainment. to execution. We deliver sensing, commu- awareness from planning to execution. We innovative, technology-driven solutions and solutions and services to enable cost-effective The ability to project power, strategically, project power, strategically, anywhere in the nications, command and control and fully deliver analysis systems through to advanced services to enable cost-effective improve- improvements for customer mission effective- world is an essential tenet of the U.S. military. anywhere in the world is an essential tenet integrated solutions that support the U.S. and communications payloads and integrated ness. We provide a full spectrum of offerings ments for customer mission effectiveness. Our platforms like B-2 Stealth Bomber and of the U.S. military. Our platforms, including allied forces across the globe. With unmatched solutions that support the U.S. and allied forces We provide a full spectrum of offerings including software and system sustainment, the B-2 Stealth Bomber and America’s America’s new long-range strike bomber; our end-to-end C4ISR capabilities, our key products across the globe. With unmatched end-to-end modernization of platforms and associated including software and system sustainment, mission systems on F/A-18 and F-35; and our new long-range strike bomber; our mission include the E-2D Advanced Hawkeye, E-8C C4ISR capabilities, our key products include the subsystems, advanced training solutions, modernization of platforms and associated systems on F/A-18 and F-35; and our LITENING advanced targeting systems, Ground Joint STARS, the Global Hawk enterprise, Space E-2D Advanced Hawkeye, E-8C Joint STARS, subsystems, advanced training solutions, and integrated logistics support. The sector LITENING advanced targeting systems, Laser Target Designators, and Space radar Systems, Cyber Warfare Integration Network, Global Hawk, Cyber Warfare Integration Net- comprises three business areas: Global and integrated logistics support. and Ground Laser Target Designators, provide a powerful projection of force. And Integrated Air and Missile Defense Battle Com- work, Integrated Air and Missile Defense Battle Logistics and Modernization; Advanced provide a powerful projection of force. our cyber systems provide protection of our mand System, Battlefield Airborne Communi- Command System, Battlefield Airborne Com- Defense Services; and System Modernization mission planning data and secured network cations Node, Secure Messaging, and Space munications Node, Secure Messaging, and and Services. communications to deliver another level Weather Analysis and Forecast System. Space Weather Analysis and Forecast System. Space Weather Analysis and Forecast System. of virtual projection of force. of virtual projection of force. munications Node, Secure Messaging, and and Services. communications to deliver another level Command System, Battlefield Airborne Com- Defense Services; and System Modernization mission planning data and secured network work, Integrated Air and Missile Defense Battle Logistics and Modernization; Advanced our cyber systems provide protection of our Global Hawk, Cyber Warfare Integration Net- comprises three business areas: Global provide a powerful projection of force. And E-2D Advanced Hawkeye, E-8C Joint STARS, and integrated logistics support. The sector Laser Target Designators, and Space radar C4ISR capabilities, our key products include the subsystems, advanced training solutions, LITENING advanced targeting systems, Ground across the globe. With unmatched end-to-end modernization of platforms and associated mission systems on F/A-18 and F-35; and our solutions that support the U.S. and allied forces including software and system sustainment, America’s new long-range strike bomber; our communications payloads and integrated ness. We provide a full spectrum of offerings Our platforms like B-2 Stealth Bomber and deliver analysis systems through to advanced improvements for customer mission effective- world is an essential tenet of the U.S. military. awareness from planning to execution. We solutions and services to enable cost-effective project power, strategically, anywhere in the making. Our systems provide situational We deliver innovative, technology-driven manufacturing, and sustainment. The ability to operations, and the backbone of decision for global defense and federal-civil customers. bilities in system design, systems engineering, of C4ISR systems that are the backbone of ing the full lifecycle of platforms and systems Northrop Grumman brings world-class capa- Northrop Grumman is a leading provider C4ISR A leading provider of logistics solutions support- LOGISTICS As a leader in integrated strike systems, STRIKE NORTHROP GRUMMAN 2015 ANNUAL REPORT NORTHROP GRUMMAN 2015 ANNUAL REPORT NORTHROP GRUMMAN 2015 ANNUAL REPORT PAGE 3 PAGE 3 noc_2015_AnnualReport_3.24.indd 5 3/24/2016 1:01:19 PM ELECTED OFFICERS (As of December 31, 2015) wesley g. bush Chairman, Chief Executive Officer and President PatricK M. aNtKowiaK Corporate Vice President and Chief Technology Officer sid ashworth Corporate Vice President, Government Relations KeNNeth l. bediNgField Corporate Vice President and Chief Financial Officer MarK a. caylor Corporate Vice President, President of Enterprise Services and Chief Strategy Officer 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 JeNNi Fer c. Mcgarey Corporate Vice President and Secretary BOARD OF DIRECTORS (As of December 31, 2015) williaM h. herNaNdeZ 2 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 wesley g. bush Chairman, Chief Executive Officer and President, Northrop Grumman Corporation MariaNNe c. browN 1 3 Chief Operating Officer Institutional and Wholesale Business, Fidelity National Information Services, Inc. (financial services technology solutions provider) 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) bruce s. gordoN 1† 4 Former President and Chief Executive Officer, NAACP and Former President, Retail Markets Group, Verizon Communications Inc. (telecommunications company) stePheN c. Movius Corporate Vice President and Treasurer 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 2 3 Admiral, United States Navy (Ret.) and Former Chief of Naval Operations thoMas M. schoewe 1 4 Former Executive Vice President and Chief Financial Officer, Wal-Mart Stores, Inc. (operator of retail stores) JaMes s. turley 1 3 Former Chairman and Chief Executive Officer, Ernst & Young (a professional services organization) 1 Member of Policy Committee 2 Member of Governance Committee 3 Member of Audit Committee 4 Member of Compensation Committee † Committee Chairperson PAGE 4 northroP GrummAn 2015 AnnuAl rEPort UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_____________________ FORM 10-K_____________________ xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015oroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number 1-16411NORTHROP GRUMMAN CORPORATION(Exact name of registrant as specified in its charter)DELAWARE80-0640649(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification Number)2980 Fairview Park DriveFalls Church, Virginia22042(Address of principal executive offices)(Zip code)(703) 280-2900(Registrant's telephone number, including area code)Securities registered pursuant to section 12(b) of the Act:Title of each className of each exchange on which registeredCommon Stock, $1 par valueNew York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes xNo *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 xIndicate 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 12months (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 x No *Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted 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 x 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’sknowledge, 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. oIndicate 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 “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer xAccelerated filer *Non-accelerated filer *Smaller reporting company *(Do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes *No xAs of June 30, 2015, 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 $29.8 billion.As of January 28, 2016, 180,943,220 shares of common stock were outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of Northrop Grumman Corporation’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for the 2016 Annual Meetingof Stockholders are incorporated by reference in Part III of this Form 10-K.NORTHROP GRUMMAN CORPORATION TABLE OF CONTENTSPagePART IItem 1.Business1Item 1A.Risk Factors7Item 1B.Unresolved Staff Comments17Item 2.Properties17Item 3.Legal Proceedings18Item 4.Mine Safety Disclosures18PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities19Item 6.Selected Financial Data21Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations23Overview23Consolidated Operating Results24Segment Operating Results25Product and Service Analysis29Backlog30Liquidity and Capital Resources31Critical Accounting Policies, Estimates and Judgments33Other Matters37Item 7A.Quantitative and Qualitative Disclosures about Market Risk38Item 8.Financial Statements and Supplementary Data39Report of Independent Registered Public Accounting Firm39Consolidated Statements of Earnings and Comprehensive Income (Loss)40Consolidated Statements of Financial Position41Consolidated Statements of Cash Flows42Consolidated Statements of Changes in Shareholders' Equity43Notes to Consolidated Financial Statements441. Summary of Significant Accounting Policies442. Earnings Per Share, Share Repurchases and Dividends on Common Stock503. Segment Information524. Accounts Receivable, Net535. Inventoried Costs, Net546. Income Taxes547. Goodwill and Other Purchased Intangible Assets568. Fair Value of Financial Instruments57iPage Page 58 58 59 59 61 61 62 62 69 69 72 72 73 73 73 73 73 73 74 74 75 75 76 76 79 79 79 79 79 79 79 79 80 80 89 89 Item 9. Item 9. Item 9A. Item 9A. Item 9B. Item 9B. Item 10. Item 10. Item 11. Item 11. Item 12. Item 12. Item 13. Item 13. Item 14. Item 14. Item 15. Item 15. 9. Long-term Debt 9. Long-term Debt 10. Investigations, Claims and Litigation 10. Investigations, Claims and Litigation 11. Commitments and Contingencies 11. Commitments and Contingencies 12. Retirement Benefits 12. Retirement Benefits 13. Stock Compensation Plans and Other Compensation Arrangements 13. Stock Compensation Plans and Other Compensation Arrangements 14. Unaudited Selected Quarterly Data 14. Unaudited Selected Quarterly Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Controls and Procedures Other Information Other Information Management's Report on Internal Control over Financial Reporting Management's Report on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting PART III PART III Directors, Executive Officers and Corporate Governance Directors, Executive Officers and Corporate Governance Executive Compensation Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Principal Accountant Fees and Services Exhibits and Financial Statement Schedules Exhibits and Financial Statement Schedules Signatures Signatures PART IV PART IV ii ii NORTHROP GRUMMAN CORPORATIONPART IItem 1. BusinessHISTORY AND ORGANIZATIONHistoryNorthrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global security company. Weoffer a broad portfolio of capabilities and technologies that enable us to deliver innovative products, systems and solutions for applications that range fromundersea to outer space and into cyberspace. We provide products, systems and solutions in unmanned systems; cyber; command, control, communicationsand computers (C4), intelligence, surveillance, and reconnaissance (C4ISR); strike aircraft; and logistics and modernization to government and commercialcustomers worldwide. We participate in many high-priority defense and government programs in the United States (U.S.) and abroad. We conduct most of ourbusiness with the U.S. Government, principally the Department of Defense (DoD) and intelligence community. We also conduct business with foreign, stateand local governments and 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, asNorthrop Corporation. Northrop Aircraft Incorporated was a principal developer of flying wing technology, including the B-2 Stealth Bomber. The companydeveloped into one of the largest defense contractors in the world through a series of acquisitions, as well as organic growth. In 1994, we acquired GrummanCorporation (Grumman), after which time the company was renamed Northrop Grumman Corporation. Grumman was a premier military aircraft systemsintegrator and builder of the Lunar Module that first delivered humans to the surface of the moon. In 1996, we acquired the defense and electronicsbusinesses of Westinghouse Electric Corporation, a world leader in the development and production of sophisticated radar and other electronic systems forthe nation’s defense, civil aviation, and other U.S. and international applications. In 2001, we acquired Litton Industries, a global electronics and informationtechnology company, and one of the nation's leading full service shipbuilders. In 2002, we acquired TRW Inc., a leading developer of military and civilspace systems and satellite payloads, as well as a leading global integrator of complex, mission-enabling systems and services. In 2011, the companycompleted the spin-off to its shareholders of Huntington Ingalls Industries, Inc. (HII). HII operates our former Shipbuilding business, which was acquired in2001, through the acquisitions of Newport News Shipbuilding and Litton Industries.OrganizationAt December 31, 2015, the company was aligned into four sectors: Aerospace Systems, Electronic Systems, Information Systems, and Technical Services.Subsequent Realignment - Effective January 1, 2016, the company streamlined our sectors from four to three to better align our business with the evolvingneeds of our customers and enhance innovation across the company. Two new sectors were created by merging elements of our former Electronic Systems,Information Systems and Technical Services sectors. The new Mission Systems sector is composed of the majority of our former Electronic Systems sector andthe businesses from our former Information Systems sector focused on the development of new capabilities for our military and intelligence customers. Theservices portfolio in the former Information Systems sector was combined with the former Technical Services sector to form the new Technology Servicessector. Among other operations that were realigned, the military and civil space hardware business in Azusa, California, previously reporting to the ElectronicSystems sector, moved to the Aerospace Systems sector, and the electronic attack business previously in the Aerospace Systems sector moved to the MissionSystems sector. This realignment is not reflected in the business descriptions below or in any of the financial information contained in this report.AEROSPACE SYSTEMSAerospace 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 businessareas: 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 missions. Key ISR programs include theRQ-4 Global Hawk reconnaissance system, a proven high-altitude-1-NORTHROP GRUMMAN CORPORATIONlong-endurance system providing near real-time high resolution imagery of large geographical areas; the Triton aircraft system providing real-time ISR overvast ocean and coastal regions; the trans-Atlantic North Atlantic Treaty Organization (NATO) Alliance Ground Surveillance (AGS) system for multinationaltheater operations, peacekeeping missions, and disaster relief efforts; the Fire Scout aircraft system providing unprecedented situational awareness andprecision targeting support; the Navy Unmanned Combat Air System demonstrating an unmanned combat air vehicle for carrier-based operations; and theCommon Mission Management System, providing high performance service based on ground control solutions enabling unmanned mission capabilities.Military Aircraft Systems - designs, develops, manufactures, and integrates airborne C4ISR, electronic warfare mission systems, and long range strike andtactical 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, andintegration of laser weapon systems for air, sea, and ground platforms. This business area also designed, developed and manufactured the B-2 Spirit bomberand now provides sustainment and modernization services for the B-2, the nation's most advanced long range strike aircraft system. Tactical aircraft includesthe 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 spacescience and C4ISR. Key programs include the James Webb Space Telescope, a large infrared telescope being built for the National Aeronautics and SpaceAdministration that will be deployed in space to study the origins of the universe; Advanced Extremely High Frequency 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 currentand future customer needs. This business area maintains a broad portfolio of contracts ranging from basic research to the development of technologies,components, prototypes, and initial operational systems across the air, land and space domains.ELECTRONIC SYSTEMSElectronic 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 providesa variety of defense electronics and systems, airborne fire control radars, situational awareness systems, early warning systems, electronic warfare systems, airdefense radars and management systems, navigation systems, communications systems, marine power and propulsion systems, space systems and logisticsservices. The segment consists of four business areas: Airborne Intelligence, Surveillance, Reconnaissance & Targeting Systems, Space Intelligence,Surveillance, & Reconnaissance Systems, Land & Self Protection Systems, and Navigation & Maritime Systems.Airborne Intelligence, Surveillance, Reconnaissance & Targeting Systems - delivers products and services for airborne and ground-based surveillance, multi-sensor processing, analysis and dissemination for combat units and national agencies, both U.S. and international. These systems provide battle spaceawareness, command and control, combat avionics (fire control radars, multi-function apertures and pods), and airborne electro-optical/infrared (EO/IR)targeting systems. Key programs include airborne fire control radars such as the Scalable Agile Beam Radar (SABR), which provides Active ElectronicallyScanned Array (AESA) capabilities for U.S. and international fighters; the F-35 fire control radar, a multi-function AESA radar for the U.S. Armed Forces and alarge number of international partners; electro-optical infrared (EO/IR) systems such as the LITENING targeting pod and the Distributed Aperture System(DAS), a 360 degree spherical situational awareness system; and airborne surveillance radars such as the Multirole and Electronically Scanned Array (MESA)for Airborne Early Warning & Control (AEW&C), which provides air-to-air and air-to-surface coverage.Space Intelligence, Surveillance, & Reconnaissance Systems - delivers products and services for radar and EO/IR space satellite applications for the DoD andnational intelligence agencies. These systems provide missile warning, missile defense, situational awareness, and ground software systems for intelligencecommunity decision makers. Key programs include space systems such as the Space-Based Infrared System (SBIRS), which provides data for missilesurveillance, missile defense, technical intelligence and battlespace characterization; Advanced Technology Microwave Sounder (ATMS) for environmentalsensing on JPSS satellites; Joint Tactical Army Ground Station (JTAGS), Joint OPIR Ground (JOG) solutions; and a large number of restricted programs forthe intelligence community.-2-NORTHROP GRUMMAN CORPORATIONLand & Self Protection Systems - delivers products, systems and services that support ground-based, helicopter and fixed wing platforms (manned andunmanned) with sensor and protection systems. A major product line of this business area consists of systems that perform threat detection andcountermeasures that defeat infrared and radio frequency (RF) guided missile and tracking systems. This business area also provides integrated electronicwarfare 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, laser/electro-optical systems and digitized and open architecture cockpits andapplications. Key programs include the Ground/Air Task Oriented Radar (G/ATOR), which is a ground-based multi-mission radar designed to detect and tracka wide variety of threats; the TPS-78 ground-based radar, which provides air defense and air surveillance for the global market; the Large Aircraft InfraredCountermeasures (LAIRCM), which is an infrared countermeasure system designed to protect aircraft against man-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 U.S. and international defense, civil and commercial customers supporting smartnavigation, shipboard radar surveillance, ship control, machinery control and integrated combat management systems for naval surface ships; high-resolutionundersea sensors for mine hunting, situational awareness and other applications; unmanned marine vehicles; shipboard missile and encapsulated payloadlaunch systems, propulsion and power generation systems, nuclear reactor instrumentation and control and acoustic sensors for submarines and aircraftcarriers; inertial navigation systems for all domains (air, land, sea, and space); embedded Global Positioning Systems; and postal automation systems. Keyprograms include the AN/SPQ-9B Anti-Ship Missile Defense radar, which provides the US Navy’s cruisers and destroyers with situational awareness andcontact information from aircraft, cruise missiles, surface vessels and periscope detection; and inertial navigation and positioning products for a range ofplatforms including ships, aircraft, spacecraft and weapons systems.In addition to the product and service lines discussed above, our Electronic Systems segment also includes Advanced Concepts & Technologies (AC&T),which develops next-generation systems to position the segment in key developing markets. AC&T focuses on understanding customer mission needs;conceiving affordable, innovative and open solutions; and demonstrating the readiness and effectiveness of Electronic Systems' products. AC&T focuses onthe following enterprise-wide and cross cutting technology development thrust areas: RF systems; EO/IR systems; multi-function systems; modular opensystems architectural approaches and designs; precision navigation and timing capabilities; and secure and trusted solutions.INFORMATION SYSTEMSInformation Systems, headquartered in McLean, Virginia, is a leading provider of advanced solutions for the DoD, national intelligence, federal civilian,state, international and commercial customers. Products and services focus on the fields of command and control (C2), communications, cyber, air and missiledefense, intelligence processing, civil security, health technology and government support systems. The segment consists of seven business areas: Cyber, C2,Communications, ISR, Integrated Air and Missile Defense (IAMD), Civil and Health.Cyber - provides full spectrum solutions that address cyber security threats, cyber mission management and special cyber systems. Cyber offerings spanintelligence, defense, federal, state, international and commercial customers, providing dynamic cyber defense and specialized cyber systems and services insupport of critical government missions. This business specializes in active defense, malware detection, analytics platforms and large scale cyber solutions fornational security applications.C2 - provides net-enabled C2, battle management, command center integration, combat support systems, mission-enabling solutions and criticalinfrastructure protection systems. C2 systems support operations, managing assets and forces employed to accomplish national and military missions, andoptimizing legacy platforms, sensors and weapons systems. These systems are installed in operational and command centers world-wide and across DoDservices, joint commands and the international security community.Communications - provides the underlying networks, network management, gateway systems and radio frequency devices that support national militaryC4ISR missions and help make C4ISR more integrated and interoperable. Communications capabilities include gateways and products for aircraftinteroperability, multi-function avionics, software defined radios and protected communications.ISR - delivers systems and services in Signals Intelligence (SIGINT), airborne reconnaissance, geospatial intelligence and data fusion, specializing in thecollection, processing, and exploitation of data to achieve a deep-3-NORTHROP GRUMMAN CORPORATIONunderstanding of the environment. Offerings include intelligence integration, large scale information processing, multi-source intelligence, big dataapplications and geo-location techniques.IAMD - provides integration and interoperability of net-enabled battle management, sensors, targeting and surveillance systems, air and missile defense C2,missile warning systems and critical situational awareness for weapons and fire control systems. This business provides solutions for both U.S. andinternational customers, advanced IAMD integration with land and air assets, and cost effective flexible architectures.Civil - provides civilian information technology (IT) solutions, civil financial operations, public safety systems, law enforcement and state programs. Thisbusiness is a provider in global homeland security and public safety, federal law enforcement information sharing and analysis, and IT systems and servicesthat enable civil missions and satisfy infrastructure and back office requirements.Health - provides healthcare expertise combined with IT capabilities to support effective healthcare services and efficient health and human services systems.Capabilities include benefits management, population health, clinical data integration and health analytics. This business provides system engineering andintegration, affordable national healthcare IT, and solutions to meet health and human services challenges.Key programs for the Information Systems segment include the Joint National Integration Center Research and Development (JRDC) contract, which supportsthe technical infrastructure, modeling and simulation, test and evaluation, and management of the Missile Defense Agency network at multiple sites; theBattlefield Airborne Communications Node (BACN), a high-altitude, airborne communications and information gateway system that provides situationalawareness and C2 coordination between warfighters and commanders; the Communications, Navigation and Identification (CNI) integrated avionics systemfor the F-35 Joint Strike Fighter based on software-defined technology with advanced capabilities for interoperability; and the Integrated Air and MissileDefense Battle Command System (IBCS), a C2 system that delivers a single, unambiguous view of the battlespace with enhanced aircraft and missile trackingimproving the ability of combatant commanders and air defenders to make critical decisions within seconds.TECHNICAL SERVICESTechnical Services, headquartered in Herndon, Virginia, is a leader in innovative logistics, modernization and sustainment and also provides an array of otheradvanced technology and engineering services, including space, missile defense, nuclear security, training and simulation. The segment consists of twobusiness areas: Integrated Logistics and Modernization and Mission Solutions and Readiness.Integrated Logistics and Modernization - provides complete life cycle support and weapon system sustainment and modernization products and services, andprovides direct support to warfighters while delivering aircraft and subsystem maintenance, repair and overhaul (MRO). Competencies include aircraft andelectronics sustaining engineering, supply chain management services, manned and unmanned weapons systems deployed logistics support, field servicesand on-going maintenance and technical assistance, and delivering rapid response in support of global customers. Key programs include KC-10 ContractorLogistics Support (CLS), which provides total weapons systems CLS to the Air Force for the entire fleet of 59 KC-10 aircraft; Intercontinental BallisticMissile (ICBM) Systems, which provides systems engineering and integration for the land-based leg of the U.S. nuclear deterrent force; UK Airborne Warningand Control System (AWACS), which provides through life management of the UK Royal Air Force fleet of E-3D AWACS aircraft; KC-30A Multi-RoleTanker Transport (MRTT), which provides through life support for the Royal Australian Air Force (RAAF) KC-30A air to air refueling aircraft; MQ5B HunterContractor Logistics Support (CLS), which provides maintenance and continuous modernization of the Army’s fielded Hunter Unmanned Aerial Vehicles(UAV); and AAQ24 LAIRCM, which provides repair, testing, component spare procurement, logistics, and data collection related to directional infraredcounter measures systems used on multiple fixed and rotary wing aircraft.Mission Solutions and Readiness - provides realistic and comprehensive training through live, virtual and constructive domains, innovative and diversetraining applications ranging from battle command to professional military education, sustainment and modernization of tactical vehicles, high technologyand engineering services in the areas of nuclear security, space and launch services, civil engineering and military range-sensor-instrumentation operations.Key programs include Ministry of the National Guard Training Support (MNG TSC), through our interest in a joint venture for which we consolidate thefinancial results, which provides equipment fielding, training and maintenance, simulator training and operations, tactical exercise development, logisticsand operations support and English language training to the Saudi Arabian National Guard; the Mission Command Training Program (MCTP), the Army'spremier leadership and staff training exercise program at the tactical and operational level; and-4-NORTHROP GRUMMAN CORPORATIONFort Irwin Logistics Services Support, which provides a full range of logistics support services and operates a large-scale maintenance and repair program ofboth tracked and tactical wheeled vehicles.SELECTED FINANCIAL DATA AND SEGMENT OPERATING RESULTSFor a more complete understanding of our business, see Selected Financial Data in Part II, Item 6. For a more complete understanding of our segment financialinformation, see Segment Operating Results in Part II, Item 7 and Note 3 to the consolidated financial statements in Part II, Item 8.CUSTOMER CONCENTRATIONOur largest customer is the U.S. Government. Sales to the U.S. Government accounted for 83 percent, 84 percent and 86 percent of sales during the yearsended December 31, 2015, 2014 and 2013, respectively. For further information on sales by customer category, see Note 1 to the consolidated financialstatements in Part II, Item 8. No single program accounted for more than ten percent of total sales during any period presented. See Risk Factors in Part I,Item 1A.COMPETITIVE CONDITIONSWe compete with many companies in the defense, intelligence and federal markets. BAE Systems, Boeing, Booz Allen Hamilton, Finmeccanica, GeneralDynamics, Harris, L-3 Communications, Leidos, Lockheed Martin, Raytheon and Thales are some of our primary competitors. Key characteristics of ourindustry include long operating cycles and intense competition, which is evident through the number of bid protests (competitor protests of U.S. Governmentprocurement 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 contractormay, upon ultimate award of the contract to another competitor, become a subcontractor for the ultimate prime contracting company. It is not unusual tocompete 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, orvice versa.SEASONALITYNo material portion of our business is considered to be seasonal.BACKLOGAt December 31, 2015, total backlog was $35.9 billion, compared with $38.2 billion at the end of 2014. For further information, see Backlog in Part II,Item 7.RESEARCH AND DEVELOPMENTSee Note 1 to the consolidated financial statements in Part II, Item 8.INTELLECTUAL PROPERTYWe routinely apply for and own a number of U.S. and foreign patents related to the products and services we provide. We also develop and protectintellectual property as trade secrets. In addition to owning a large portfolio of proprietary intellectual property, we license some intellectual property rightsto and from third parties. The U.S. Government typically holds licenses to patents developed in the performance of U.S. Government contracts and may use orauthorize others to use the inventions covered by these patents for certain purposes. See Risk Factors in Part I, Item 1A.RAW MATERIALSWe have not experienced significant delays in the supply or availability of raw materials, nor have we experienced a significant price increase for rawmaterials. See Risk Factors in Part I, Item 1A.EMPLOYEE RELATIONSWe believe that we maintain good relations with our approximately 65,000 employees. Approximately 2,600 are covered by 12 collective agreements in theU.S., of which we negotiated renewals of four in 2015 and expect to negotiate renewals of five in 2016. See Risk Factors in Part I, Item 1A.REGULATORY MATTERSGovernment Contract Security RestrictionsCertain programs with the U.S. Government that are prohibited by the customer from being publicly discussed are generally referred to as “restricted” in thisAnnual Report on Form 10-K. The consolidated financial statements and-5-NORTHROP GRUMMAN CORPORATIONfinancial information in this Annual Report on Form 10-K reflect the operating results of our entire company, including restricted programs, underaccounting principles generally accepted in the United States of America (GAAP).ContractsWe generate the majority of our business from long-term contracts with the U.S. Government for development, production and support activities. Unlessotherwise specified in a contract, allowable and allocable costs are billed to contracts with the U.S. Government under the requirements of the FederalAcquisition Regulation (FAR) and U.S. Government Cost Accounting Standards (CAS). Examples of costs incurred by us and not billed to the U.S.Government in accordance with the FAR and CAS include, but are not limited to, lobbying costs, certain legal costs, charitable donations, advertising costs,interest expense and unallowable employee compensation and benefits costs.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/or incentive fee contracts. Cost-type contracts provide for reimbursementof the contractor’s allowable costs incurred plus fee. Cost-type contracts generally require that the contractor use its best efforts to accomplish the scope ofthe 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 generally based on performance criteria such as cost, schedule, quality and/or technical performance. Award fees are determinedand earned based on customer evaluation of the company's performance against contractual criteria, and are intended to provide motivation for excellence incontract performance. Incentive fees that are based on cost provide for an initially negotiated fee to be adjusted later, typically using a formula to measureperformance against the associated criteria, based on the relationship of total allowable costs to total target costs. Award and incentive fees that canreasonably 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. Certainfixed-price incentive fee contracts provide for reimbursement of the contractor’s allowable costs plus a fee up to a cost ceiling amount, typically through acost-sharing ratio that affects profitability. These types of fixed-price incentive fee contracts effectively become firm fixed-price contracts once the cost-shareceiling is reached. Time-and-materials contracts are considered fixed-price contracts as they specify a fixed hourly rate for each labor hour charged.See Note 1 to the consolidated financial statements in Part II, Item 8 and Risk Factors in Part I, Item 1A.The following table summarizes sales for the year ended December 31, 2015, recognized by contract type and customer:($ in millions)U.S.Government(1)International andOther Customers(2)TotalPercentageof Total SalesCost-type contracts$11,558$641$12,19952%Fixed-price contracts7,9003,42711,32748%Total sales$19,458$4,068$23,526100%(1) 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 andthe ultimate customer is the U.S. Government. Each of the company's segments derives substantial revenue from the U.S. Government. (2) Sales to International and Other Customers include foreign military sales contracted through the U.S. Government, direct commercial sales with governments outside the U.S.,sales to state and local governments, and sales to commercial customers.Profit margins may vary materially depending on, among other things, negotiated contract fee arrangements, achievement of performance objectives and thestage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is 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 applicable government regulations and laws. In addition, costs incurred and allocated to contracts with the U.S. Government areroutinely audited by the Defense Contract Audit Agency.-6-NORTHROP GRUMMAN CORPORATIONEnvironmentalOur operations are subject to and affected by federal, state, local and foreign laws and regulations relating to the protection of the environment. In 2010, weestablished goals for the reduction of greenhouse gas emissions and implementation of best management practices for water use and solid waste; those goalswere achieved as of December 31, 2014. In 2015, we announced our 2020 environmental sustainability goals: to reduce absolute greenhouse gas emissionsby 30 percent from 2010 levels; to reduce potable water use by 20 percent from 2014 levels; and achieve a 70 percent solid waste diversion rate (fromlandfills).We have recorded liabilities and have incurred and expect to continue to incur capital and operating costs to comply with applicable environmental laws andregulations and to achieve our environmental sustainability commitments. See Risk Factors in Part I, Item 1A and Notes 1 and 11 to the consolidatedfinancial statements in Part II, Item 8.EXECUTIVE OFFICERSSee Part III, Item 10, for information about our executive officers.AVAILABLE INFORMATIONOur principal executive offices are located at 2980 Fairview Park Drive, Falls Church, Virginia 22042. Our telephone number is (703) 280-2900 and ourhome 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, aswell as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with theSecurities and Exchange Commission (SEC). You can learn more about us by reviewing our SEC filings on the investor relations page of our website.The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information about SEC registrants, including NorthropGrumman 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 canobtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.References to our website and the SEC’s website 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 through, such websites. Such information should not be considered a part of thisreport, unless otherwise expressly incorporated by reference in this report.Item 1A. Risk FactorsOur 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 factorsdescribed 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 onour 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 andspending 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 83 percent, 84 percent and 86 percent of our sales during the years ended December 31,2015, 2014 and 2013, respectively. The U.S. Government has been implementing significant reductions in government spending and other significantprogram changes. We cannot predict the impact on existing, follow-on, replacement or future programs from potential changes in priorities due to changes indefense spending levels, military strategy and planning and/or changes in social-political priorities.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 onperformance. In the event of termination for the U.S. Government’s convenience, contractors are generally protected by provisions covering reimbursementfor 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 havebeen 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-procurementcosts 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 contractdue to our default could have a material adverse effect on our reputation and our ability to compete for other contracts.-7-NORTHROP GRUMMAN CORPORATIONThe 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. Governmentcould invoke this ability across a limited or broad number of contracts. In the event of a stop work order, contractors are typically protected by provisionscovering 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 and result in financial and other damages for which we may not be able to negotiate fullrecovery from the U.S. Government. They could also ultimately result in termination for convenience or reduced future orders.A significant shift in government priorities to programs in which we do not participate and/or reductions in funding for or the termination of programs inwhich we do participate, unless offset by other programs and opportunities, could have a material adverse effect on our financial position, results ofoperations and/or cash flows.▪Significant delays or reductions in appropriations for our programs and U.S. Government funding more broadly may negatively impact our businessand 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 appropriatesfunds on a fiscal year basis even though the program performance period may extend over several years. Consequently, programs are often partially fundedinitially and additional funds are committed only as Congress makes further appropriations. If we incur costs in excess of funds obligated on a contract, wemay 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 totalfunding and/or funding for individual programs will be included, increased or reduced as part of the annual budget process ultimately approved by Congressor in separate supplemental appropriations or continuing resolutions, as applicable. Laws and plans adopted by the U.S. Government relating to, along withpressures on and uncertainty surrounding the federal budget, sequestration, the appropriations process, use of continuing resolutions (with restrictions, e.g.,on new starts) and the permissible federal debt limit, could adversely affect the funding for individual programs and delay purchasing or payment decisionsby our customers. In the event government funding for our significant programs becomes unavailable, or is reduced or delayed, our contract or subcontractunder such programs may be terminated or adjusted by the U.S. Government or the prime contractor.On November 2, 2015, the President signed the Bipartisan Budget Act of 2015 (the Budget Act). The Budget Act raises the statutory limit on the amount ofpermissible federal debt (the debt ceiling) until March 2017 and raises the sequester caps imposed by the Budget Control Act of 2011 (the Budget ControlAct) by $80 billion, split equally between defense and domestic spending, over the next two years ($50 billion in FY 2016 and $30 billion in FY 2017).However, unforeseen circumstances could cause an extended debt ceiling breach, which could negatively affect the U.S. Government's timely payment of ourbillings, resulting in delayed cash collection, and have significant consequences for our company, our employees, our suppliers and the defense industry. OnDecember 18, 2015, Congress passed and the President signed the Consolidated Appropriations Act of 2016, which provides funding for the U.S. governmentfor FY 2016, providing $1.1 trillion in discretionary funding for federal agencies through September 2016.The budget environment, including sequestration as currently mandated, and uncertainty surrounding the appropriations processes, remain significant long-term risks. Considerable uncertainty exists regarding how future budget and program decisions will unfold, what challenges budget reductions (required bythe Budget Control Act and otherwise) will present for the defense industry and whether an annual appropriations bill will be enacted for FY 2017. If anannual appropriations bill is not enacted for FY 2017 or beyond, the U.S. Government may operate under a continuing resolution, restricting new contract orprogram starts and we may face a government shutdown of unknown duration. Adverse consequences from operating under a continuing resolution may begreater if the company has a higher percentage of development programs. We believe continued budget pressures will have serious negative consequences forthe security of our country, the defense industrial base, including Northrop Grumman, and the customers, employees, suppliers, investors, and communitiesthat rely on companies in the defense industrial base. It is likely budget and program decisions made in this environment will have long-term implications forour 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 globally could adverselyaffect the viability of our subcontractors and suppliers, and our employee base. While we believe that our business is well-positioned in areas that theDepartment of Defense (DoD) and other customers have indicated are areas of focus for future defense spending, the long-term impact of the Budget ControlAct, other defense spending cuts, and the ongoing fiscal debates remain uncertain.-8-NORTHROP GRUMMAN CORPORATIONSignificant delays or reductions in appropriations; long term funding under a continuing resolution; an extended debt ceiling breach or governmentshutdown; and/or future budget and program decisions, among other items, may negatively impact our business and programs and could have a materialadverse effect on our financial position, results of operations and/or cash flows.▪We are subject to various investigations, claims and litigation that could ultimately be resolved against us.The size, nature and complexity of our business make us susceptible to investigations, claims, and litigation, particularly those involving governments. Weare and may become subject to investigations, claims and administrative, civil or criminal litigation globally and across a broad array of matters, including,but not limited to, government contracts, false claims, products liability, fraud, environmental, intellectual property, tax, export/import, anti-corruption,labor, health and safety, employee benefits and plans, including plan administration, and improper payments. These matters could divert financial andmanagement resources; result in fines, penalties, compensatory, treble or other damages or non-monetary relief; and otherwise disrupt our business.Government regulations also provide that certain allegations against a contractor may lead to suspension or debarment from government contracts orsuspension of export privileges for the company or one or more of its components. Suspension or debarment could have a material adverse effect on thecompany because of our reliance on government contracts and export authorizations. An investigation, claim or litigation, even if fully indemnified orinsured, could also negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtainadequate insurance in the future. Investigations, claims or litigation could have a material adverse effect on our financial position, results of operationsand/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 (including joint ventures) is subjectto numerous political and economic factors, legal requirements, cross-cultural considerations and other risks associated with doing business in foreigncountries. These risks differ in some respects from those associated with our U.S. business and our exposure to such risks may increase if our internationalbusiness 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-exportcontrols, technology transfer restrictions, repatriation of earnings, data privacy and protection, investment, exchange controls, the Foreign Corrupt PracticesAct (FCPA) and other anti-corruption laws, the anti-boycott provisions of the U.S. Export Administration Act, labor and employment, works councils andother labor groups, taxes, security restrictions and intellectual property. Failure by us, our employees, or others working on our behalf to comply with theselaws and regulations could result in administrative, civil, or criminal liabilities, including suspension or debarment from government contracts or suspensionof our export privileges.Changes in regulations, political leadership and environment, or security risks may dramatically affect our ability to conduct or continue to conduct businessin international markets. Our international business may also be impacted by changes in foreign national policies and priorities, government budgets, andeconomic factors more generally, any of which could impact funding for programs or delay purchasing or payment decisions by customers. Global economicconditions and fluctuations in foreign currency exchange rates could further impact our international business. Our international contracts may also includeindustrial cooperation agreements requiring specific in-country purchases, investments, manufacturing agreements or other financial obligations, known asoffset obligations, and provide for significant penalties if we fail to meet such requirements. Our ability to sell products outside the U.S. could be adverselyaffected if we are unable to design our products for export on a cost effective basis or to obtain all necessary export licenses and authorizations on a timelybasis. Our ability to conduct business outside of the U.S. also depends on our ability to attract and retain sufficient qualified personnel with the skills and/orsecurity clearances in the markets in which we do business.The products and services we provide internationally, including those provided by subcontractors and joint ventures in which we have an interest, aresometimes in countries with unstable governments and/or developing legal systems, in areas of military conflict or at military installations. This increases therisk of political dynamics or an incident resulting in harm or loss of life to our employees, subcontractors or other third parties, or in loss of property ordamage to our products. It also exposes the company to additional financial, contractual and legal risks. Accidents or incidents that occur in connection withour international operations could also result in negative publicity, which could adversely affect our reputation and make it more difficult for us to competefor future contracts or attract and retain employees or result in the loss of existing and future contracts.-9-NORTHROP GRUMMAN CORPORATIONThe occurrence and 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.▪Our reputation and our ability to do business may be impacted by the improper conduct of employees, agents, business partners or joint ventures inwhich we participate.We have implemented extensive policies, procedures, training and other compliance controls to prevent misconduct by employees, agents or others workingon our behalf or with us that would violate the applicable laws of the jurisdictions in which we operate, including laws governing improper payments togovernment officials, the protection of export controlled or classified information, cost accounting and billing, competition and data privacy. However, wecannot ensure that we will prevent all such misconduct committed by our employees, agents, subcontractors or others working on our behalf or with us, andthis risk of improper conduct may increase as we expand globally. In the ordinary course of our business we form and are members of joint ventures. We maybe unable to prevent misconduct or other violations of applicable laws by these joint ventures. Improper actions by our employees, agents, subcontractors,business partners or joint ventures could subject us to administrative, civil or criminal investigations and monetary and non-monetary penalties, includingsuspension and debarment, which could negatively impact our reputation and ability to conduct business and could have a material adverse effect on ourfinancial position, results of operations and/or cash flows.▪We use estimates when accounting for contracts. Contract cost growth or changes in estimated contract revenues and costs could affect ourprofitability and our overall financial position.Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technicalissues. 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 manyvariables. Incentives, awards or penalties related to performance on contracts are considered in estimating revenue and profit rates when there is sufficientinformation to assess anticipated performance. Suppliers’ assertions are also assessed and considered in estimating costs and profitability.Our operating income can be adversely affected when we experience increased estimated contract costs. Reasons for estimated contract cost growth mayinclude: design issues; changes in estimates of the nature and complexity of the work to be performed, including technical or quality issues or requests toperform additional work at the direction of the customer; production challenges, including those resulting from the availability and timeliness of customerfunding, unavailability or reduced productivity of labor or the effect of any delays in performance; the availability, performance, quality or financial strengthof significant subcontractors; supplier issues, including the costs, timeliness and availability of materials and components; the effect of any changes in lawsor regulations; actions deemed necessary for long-term customer satisfaction; and natural disasters or environmental matters. We may file requests forequitable adjustment or claims to seek recovery in whole or in part for our increased costs.Our risk varies with the type of contract. Due to their nature, fixed-price contracts inherently tend to have more risk than cost type contracts. In 2015,approximately half of our sales were derived from fixed-price contracts. We typically enter into fixed-price contracts where costs can be more reasonablyestimated based on actual experience, such as for mature production programs. In addition, our contracts contain provisions relating to cost controls andaudit rights. If the terms specified in our contracts are not met, our profitability may be reduced and we may incur a loss. Our fixed-priced contracts mayinclude fixed-price development work. This type of work is inherently more uncertain as to future events than production contracts, and, as a result, there istypically 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 costsassociated with fixed price development contracts, future events could result in either upward or downward adjustments to those estimates. Under cost typecontracts, allowable costs incurred by the contractor are generally subject to reimbursement plus a fee. We often enter into cost type contracts fordevelopment programs with complex design and technical challenges. These cost type programs typically have award or incentive fees that are subject touncertainty and may be earned over extended periods or towards the end of the contract. In these cases, the associated financial risks are primarily inrecognizing profit, which ultimately may not be earned, or program cancellation if cost, schedule, or technical performance issues arise.Because of the significance of the judgment and estimation processes described above, it is possible that materially different amounts could be obtained ifdifferent assumptions were used or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates, and thefailure to prevail on claims for equitable adjustments could have a material adverse effect upon the profitability of one or more of the affected-10-NORTHROP GRUMMAN CORPORATIONcontracts 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 cyber and other security threats or disruptions.As a defense contractor, we face various cyber and other security threats, including attempts to gain unauthorized access to sensitive information andnetworks; insider threats; threats to the safety of our directors, officers and employees; threats to the security of our facilities and infrastructure; and threatsfrom terrorist acts or other acts of aggression. Our customers and partners (including subcontractors and joint ventures) face similar threats. Although weutilize various procedures and controls to monitor and mitigate the risk of these threats, there can be no assurance that these procedures and controls will besufficient. These threats could lead to losses of sensitive information or capabilities, harm to personnel, infrastructure or products, and/or damage to ourreputation as well as our partners' ability to perform on our contracts.Cyber threats are evolving and include, but are not limited to, malicious software, destructive malware, 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 releaseof confidential, personal or otherwise protected information (ours or that of our employees, customers or partners), and corruption of data, networks orsystems. In addition, we could be impacted by cyber threats or other disruptions or vulnerabilities found in products we use or in our partners’ or customers’systems that are used in connection with our business. These events, if not prevented or effectively mitigated, could damage our reputation, require remedialactions and lead to loss of business, regulatory actions, potential liability and other financial losses.We provide systems, products and services to various customers (government and commercial) who also face cyber threats. Our systems, products and servicesmay themselves be subject to cyber threats and/or they may not be able to detect or deter threats, or effectively to mitigate resulting losses. These losses couldadversely affect our customers and our company.The impact of these factors is difficult to predict, but one or more of them could result in the loss of information or capabilities, harm to individuals orproperty, damage to our reputation, loss of business, regulatory actions and potential liability, any one of which could have a material adverse effect on ourfinancial position, results of operations and/or cash flows.▪Pension and medical liabilities and related expenses in our financial statements that have been recorded in connection with our retirement benefitplans may fluctuate significantly depending upon future investment performance of plan assets, changes in actuarial assumptions, and legislative orother regulatory actions.A substantial portion of our current and retired employee population is covered by pension and other post-retirement benefit plans. Pension and medicalliabilities and related expenses in our financial statements that have been recorded in connection with these plans are primarily dependent upon futureinvestment performance of plan assets and various assumptions, including discount rates applied to future payment obligations, mortality assumptions,estimated long term rates of return on plan assets, rates of future cost growth and trends for future costs. In addition, funding requirements for benefitobligations of our pension and other post-retirement benefit plans are subject to legislative and other government regulatory actions.In accordance with government regulations, pension plan cost recoveries under our U.S. Government contracts occur in different periods from when thosepension costs are recognized for financial statement purposes or when pension funding is made. These timing differences could have a material adverse effecton our cash flows. The cost accounting rules have been revised in order to partially harmonize the measurement and period of assignment of defined benefitpension plan costs allocable to U.S. Government contracts and the minimum required contribution under the Employee Retirement Income Security Act of1974 (ERISA), as amended by the Pension Protection Act (PPA) of 2006. These rules better align, but do not eliminate, mismatches between ERISA fundingrequirements and CAS pension costs for U.S. Government CAS covered contracts.Future investment performance of plan assets and changes in assumptions associated with our pension and other post-retirement benefit plans could have amaterial adverse effect on our financial position, results of operations and/or cash flows.▪Our earnings and profitability depend, in part, on subcontractor performance and financial viability as well as raw material and componentavailability and pricing.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-11-NORTHROP GRUMMAN CORPORATIONprovide to our customers, and to do so in compliance with all applicable laws and regulations. Disruptions or performance problems caused by oursubcontractors and suppliers, or a misalignment between our contractual obligations to our customers and our agreement with our subcontractors andsuppliers, could have an adverse effect on our ability to meet our commitments to customers.Our ability to perform our obligations on time 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, compliant and cost-effective manner or otherwise to meet the requirements of thecontract. Changes in economic conditions, including changes in defense budgets or credit availability, could adversely affect the financial stability of oursubcontractors 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 toalternate suppliers, which could result in significant incremental cost and delay or the need for us to provide other supplemental means to support ourexisting suppliers.In connection with our U.S. Government contracts, we are required to procure certain materials, components and parts from supply sources approved by thecustomer. In some cases, there may be only one supplier for certain components. If a sole source supplier cannot meet our needs or is otherwise unavailable,we may be unable to find a suitable alternative.Our procurement practices are intended to reduce the likelihood of our procurement of counterfeit, unauthorized or otherwise non-compliant parts ormaterials. We rely on our subcontractors and suppliers to comply with applicable laws and regulations regarding the parts or materials we procure from them;in some circumstances, we rely on certifications provided by our subcontractors and suppliers regarding their compliance.If we are unable to procure or experience significant delays in supplier deliveries of needed materials, components, intellectual property or parts; if oursubcontractors or suppliers do not comply with all applicable laws and regulations; if the certifications we receive from them are inaccurate; or if what wereceive is counterfeit or otherwise improper, it 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 affect our ability to win new contracts and result in reduced revenues and marketshare.We operate in highly competitive markets and our competitors may have more extensive or specialized engineering, manufacturing, or marketing capabilitiesin some areas or financial capacity, or be willing to accept more risk or lower profitability in competing for contracts. We have seen, and anticipate we willcontinue to see, increased competition in some of our core markets, especially as a result of budget reductions for many customers, a continued focus onaffordability and competition, and our own success in winning business. We are facing increasing competition in our U.S. and international markets fromU.S., foreign and multinational firms. Additionally, some customers, including the DoD, may turn to commercial contractors, rather than traditional defensecontractors, for some products and services, or may utilize small business contractors or determine to source work internally rather than hiring a contractor.We also are seeing an increasing number of bid protests from unsuccessful bidders on new program awards. Bid protests could result in contract modificationsor the award decision being reversed and loss of the contract award. Even where a bid protest does not result in the loss of an award, the resolution can extendthe time until the contract activity can begin, and delay earnings.If we are unable to continue to compete successfully against our current or future competitors, or prevail in protests, we may experience declines in futurerevenues and market share, which could, over time, have a material adverse effect on our financial position, results of operations and/or cash flows.▪As a U.S. Government contractor, we and our partners are subject to various procurement and other laws and regulations applicable to our industryand we could be adversely affected by changes in such laws and regulations or any negative findings by the U.S. Government as to our compliance withthem. We also may be adversely affected by changes in our customers' business practices globally.U.S. Government contractors (including their subcontractors and others with whom they do business) must comply with many significant procurementregulations and other specific legal requirements. These regulations and other requirements, although customary in government contracts, increase ourperformance and compliance costs and risks and are regularly evolving. New laws, regulations or procurement requirements or changes to current ones(including, for example, regulations related to limits on recovery of employee compensation costs, counterfeit parts, specialty metals and conflict minerals)can significantly increase our costs and risks and reduce our profitability.-12-NORTHROP GRUMMAN CORPORATIONWe operate in a highly regulated environment and are routinely audited and reviewed by the U.S. Government and its agencies, such as the Defense ContractAudit Agency (DCAA), Defense Contract Management Agency (DCMA) and the DoD Inspector General. These agencies review performance under ourcontracts, our cost structure and our compliance with applicable laws, regulations and standards, as well as the adequacy of our systems and processes inmeeting government requirements. Costs ultimately found to be unallowable or improperly allocated to a specific contract will not be reimbursed or must berefunded if already reimbursed. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties, sanctions, forfeiture ofprofits or suspension or debarment. Whether or not illegal activities are alleged, the U.S. Government has the ability to decrease or withhold certain paymentswhen it deems systems subject to its review to be inadequate, with significant financial impact. In addition, we could suffer serious reputational harm ifallegations of impropriety were made against us.Our industry has experienced, and we expect it will continue to experience, significant changes to business practices globally as a result of an increased focuson affordability, efficiencies, recovery of costs and a reprioritization of available defense funds to key areas for future defense spending. As a result of certainof these initiatives, we have experienced and may continue to experience an increased number of audits and/or a lengthened period of time required to closeopen audits. More recently, the thresholds for certain allowable costs in the U.S., including compensation costs, have been significantly reduced; theallowability of other types of costs are being challenged, debated and, in certain cases, modified, all with potentially significant financial costs to thecompany. In connection with these cost reduction initiatives, the U.S. Government is also pursuing alternatives to shift additional responsibility andperformance risks to the contractor.We (again, including our subcontractors and others with whom we do business) also are subject to and expected to perform in compliance with a vast array offederal laws, including but not limited to the Truth in Negotiations Act, the False Claims Act, the Procurement Integrity Act, CAS, FAR, the InternationalTraffic in Arms Regulations promulgated under the Arms Export Control Act, the Close the Contractor Fraud Loophole Act and the FCPA. If we are found tohave 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; contractmodifications or termination; the withholding of payments from our customer; the loss of export privileges; the assessment of penalties, fines, orcompensatory, treble or other damages; or suspension or debarment.If we do not comply with the laws, regulations and processes to which we are subject or if customer business practices change significantly, including withrespect to the thresholds for allowable costs, it could have a material adverse effect on our financial position, results of operations and/or cash flows.▪Our business is subject to disruption caused by natural and/or environmental disasters that could adversely affect our profitability and our overallfinancial position.We have significant operations located in regions that may be exposed to earthquakes, damaging storms and other natural disasters. Our business also may besubject to environmental disasters. Our subcontractors and suppliers are also subject to natural and environmental disasters that could affect their ability todeliver or perform under a contract. Although preventative measures may help to mitigate damage, the damage and disruption resulting from natural andenvironmental disasters may be significant.Natural and environmental disasters could also disrupt our and our subcontractors’ and suppliers’ workforce and the critical industrial infrastructure neededfor normal business operations.If insurance or other risk transfer mechanisms are unavailable or insufficient to recover all costs or if we experience a significant disruption to our businessdue to a natural or environmental disaster, it could have a material adverse effect on our financial position, results of operations and/or cash flows.▪Our insurance coverage, customer indemnifications or other liability protections may be inadequate to cover all of our significant risks or our insurersmay 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 andliabilities (including, for example, natural disasters and product liability). Not every risk or liability can be insured, and, for risks that are insurable, the policylimits and terms of coverage reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. Even if insurancecoverage 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 theinsolvency 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 insurerbecomes necessary, an outcome unfavorable to us may adversely affect us.-13-NORTHROP GRUMMAN CORPORATIONIn 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 tocover all losses or liabilities incurred.If available insurance coverage, customer indemnifications and/or other legal protections are not sufficient to cover our risks or losses, it could have amaterial adverse effect on our financial position, results of operations and/or cash flows.▪We provide products and services related to hazardous and high risk operations, which subjects us to various environmental, regulatory, financial,reputational and other risks.We provide products and services related to hazardous and high risk operations. Among other such operations, our products and services are used in nuclear-related activities (including nuclear-powered platforms) and in support of nuclear-related operations of third parties. This subjects us to various extraordinaryrisks, including potential liabilities relating to nuclear-related incidents and the harmful effects on the environment and human health that may result fromsuch nuclear-related activities, operations or incidents, as well as the storage, handling and disposal of radioactive materials. We may be subject toreputational harm and potential liabilities arising out of a nuclear incident, whether or not the cause was within our control. Under some circumstances, theU.S. Government and prime contractors provide for certain indemnification and other protection under certain of our government related contracts, includingpursuant to, or in connection with, Public Law 85-804, the Price-Anderson Nuclear Industries Indemnity Act and the Terrorism Risk InsuranceReauthorization Act, for certain nuclear-related risks.In addition, our customers may otherwise use our products and services in connection with hazardous activities, or in ways that can be unusually hazardousor risky, creating potential liabilities to our customers and/or our company as the provider of such products and services. In the event of an incident, if ourcustomers fail to use our products properly or if our products or services do not operate as intended, we could be subject to reputational harm and potentialliabilities.If there was a nuclear incident or other nuclear-related damages, or incident or other damages related to or caused by the hazardous use of our products andservices, and if indemnification or other protection was not available to cover our losses and liabilities, it could adversely affect our reputation and have amaterial adverse effect on our financial position, results of operations and/or cash flows.▪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. Market-based inputs to the calculations in our goodwill impairment test, such as weightedaverage cost of capital and terminal value (based on market comparisons) could change significantly from our current assumptions. Additionally, the carryingvalues of our reporting units are significantly influenced by a number of factors, particularly the discount rate used to determine our net pension liability. Wecontinue to monitor the recoverability of the carrying value of our goodwill and other long-lived assets. Significant write-offs of goodwill or other long-livedassets could have a material adverse effect on our financial condition and/or results of operations.▪Our future success depends, in part, on our ability to develop new products and new technologies and maintain technologies, facilities, equipment anda qualified workforce to win new competitions and 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 customerschange and evolve regularly. Our success in the competitive defense industry depends upon our ability to develop technologically advanced, innovative andcost-effective products and services and market these products and services to our customers in the U.S. and internationally. Our success depends on ourcontinued access to assured suppliers of important technologies and components. Our success also depends on our ability to provide the people,technologies, facilities, equipment and financial capacity needed to deliver those products and services with maximum efficiency. If we fail to maintain ourcompetitive position, we could lose a significant amount of future business to our competitors, which would negatively impact our ability to generatefavorable 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,globally. If qualified personnel become scarce or difficult to attract or retain or if we experience a high level of attrition for geographic, compensation-relatedor other reasons, or if such personnel-14-NORTHROP GRUMMAN CORPORATIONare unable to obtain security clearances on a timely basis, we could experience higher labor, recruiting or training costs in order to attract and retain necessaryemployees. Failure to maintain a qualified workforce would result in significant difficulty in performing under our contracts.Certain of our employees are covered by collective agreements. We generally have been able to renegotiate renewals to expiring agreements withoutsignificant disruption of operating activities. If we experience difficulties with renewals and renegotiations of existing collective agreements or if ouremployees pursue new collective representation, we could incur additional expenses and may be subject to work stoppages. Any such expenses or delayscould adversely affect our programs served by employees who are covered by such agreements or representation.If we are unable to develop new products and technologies or attract and retain a qualified workforce, we may be unable to maintain our competitive positionand our future success could be adversely affected.▪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 ourprofitability and future prospects.We design, develop and manufacture technologically advanced and innovative products and services, which are applied by our customers in a variety ofenvironments. Problems and delays in development or delivery, or system failures, as a result of issues with respect to design, technology, intellectualproperty rights, labor, inability to achieve learning curve assumptions, inability to manage effectively a broad array of programs, manufacturing materials orcomponents could prevent us from meeting requirements and create significant risk.In addition, our products cannot be tested and proven in all situations and are otherwise subject to unforeseen problems. Examples of unforeseen problemsthat could negatively affect revenue and profitability include loss on launch of spacecraft, loss of aviation platforms, premature failure of products thatcannot be accessed for repair or replacement, problems with design, quality and workmanship, country of origin of procured materials, delivery ofsubcontractor components or services and degradation of product performance. These failures could result, either directly or indirectly, in loss of life orproperty. Among the factors that may affect revenue and profitability could be inaccurate cost estimates, design issues, human factors, unforeseen costs andexpenses not covered by insurance or indemnification from the customer, diversion of management focus in responding to unforeseen problems, loss offollow-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 failure of the systemupon launch or subsequent deployment for less than a specified period of time. Under such terms, we could be required to forfeit fees previously recognizedand/or collected.If we are unable to meet our performance obligations due to issues regarding the design, development or manufacture of our products or services, or weexperience launch, platform or satellite system failures, it could have an adverse impact on our current and future business.▪Unforeseen environmental costs could have an 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 beaffected by future laws or regulations, including those imposed in response to climate change concerns and other actions. Compliance with current and futureenvironmental laws and regulations currently requires, and is expected to continue to require, significant operating and capital costs. We may be required toincur additional costs in excess of those anticipated as a result of, among other things, new laws and regulations, stricter enforcement of existing laws andregulations, imposition of new cleanup requirements, discovery of previously unknown or more extensive contamination, litigation involving environmentalimpacts or sanctions or penalties or a determination that certain environmental costs are unallowable. In addition, if other identified responsible parties areinsolvent or otherwise unable to pay their share of such costs, we may be required to incur additional costs in excess of those anticipated.Environmental laws and regulations provide for substantial fines and criminal sanctions for violations. These laws and regulations may limit our operationsor require the installation of costly pollution control equipment or operational changes to limit pollution emissions or discharges and/or decrease thelikelihood of accidental hazardous substance releases. We also incur, and expect to continue to incur, costs to comply with current environmental laws andregulations related to the cleanup of pollutants previously released into the environment. In addition, if we were-15-NORTHROP GRUMMAN CORPORATIONfound 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 theEnvironmental Protection Agency on a list maintained by the General Services Administration of facilities that generally cannot be used in performing onU.S. Government contracts until the violation is corrected.The impact of these factors is difficult to predict, but one or more of them could have an adverse effect on our financial position, results of operations and/orcash 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 toand 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 ourability to control the use of certain of our intellectual property rights in a government contracting environment. Our intellectual property is also subject tochallenge, 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 thisinformation through trade secret or confidentiality agreements with our employees, consultants, subcontractors and other parties, as well as through othermeasures. These agreements and other measures may not provide adequate protection for our unpatented proprietary information. In the event of aninfringement of our intellectual property rights, a breach of a confidentiality agreement or divulgence of proprietary information, we may not have adequatelegal remedies to maintain our intellectual property. Litigation to determine the scope of intellectual property rights, even if ultimately successful, could becostly and could divert management’s attention away from other aspects of our business. In addition, our trade secrets may otherwise become known or beindependently developed by competitors. In some instances, we have licensed the proprietary intellectual property of others, but we may be unable in thefuture to secure the necessary licenses to use such intellectual property on commercially reasonable terms. Moreover, the laws concerning intellectualproperty rights vary among countries and the protection provided to our intellectual property by these laws and foreign courts may not be the same as theremedies available under U.S. law.If we are unable adequately to control or protect our intellectual property rights against claims by our customers or others, or otherwise procure necessaryintellectual property, it could have an adverse effect on our financial position, results of operations and/or cash flows.▪Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our profitability and cash flow.We are subject to income and other taxes in the U.S. and foreign jurisdictions. Changes in applicable U.S. or foreign tax laws and regulations, or theirinterpretation and application, including the possibility of retroactive effect, could affect our tax expense and profitability. For example, 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 because our deferred tax assets aremeasured at the current statutory tax rate. In addition, the final determination of any tax audits or related litigation could be materially different from ourhistorical income tax provisions and accruals. Changes in our tax provision or an increase in our tax liabilities, whether due to changes in applicable law andregulations, the interpretation or application thereof, changes in the tax rate or a final determination of tax audits or litigation, could have an adverse effecton our financial position, results of operations and/or cash flows.▪The spin-off of our former Shipbuilding business may expose us to claims, liabilities and reputational harm.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 theseparation. For example, under the Separation and Distribution Agreement, from and after the spin-off transaction, each of HII and Northrop Grumman isgenerally responsible for the debts, liabilities and other obligations related to the business or businesses that it owns and operates following theconsummation of the spin-off. It is possible that a court would disregard the allocation agreed to between us and HII, and require that we assumeresponsibility for certain obligations allocated to HII (for example, tax and/or environmental liabilities), particularly if HII were to refuse or were unable topay 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 toindemnify us, directly or indirectly. The indemnity related rights we have under our agreements with HII may not be sufficient to protect us against suchliabilities. Even if we ultimately succeed in-16-NORTHROP GRUMMAN CORPORATIONrecovering 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 asthe 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, andcould negatively impact our business.In connection with the spin-off transaction, we received a letter ruling from the IRS and an opinion of counsel confirming that we and our shareholders wouldnot 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 received cash in lieu of fractional shares would recognize gain or loss with respect to such cash. Nevertheless, if the merger,the internal reorganization or the distribution were ultimately determined to be taxable for U.S. federal income tax purposes, we and our shareholders couldbe subject to additional income tax liabilities.The impact of these factors is difficult to predict, but one or more of them could cause reputational harm and could have an adverse effect on our financialposition, results of operations and/or cash flows.Item 1B. Unresolved Staff CommentsNone.FORWARD-LOOKING STATEMENTS AND PROJECTIONSThis Annual Report on Form 10-K and the information we are incorporating by reference contain statements, other than statements of historical fact, thatconstitute “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 identifythese forward-looking statements. Forward-looking statements include, among other things, statements relating to our future financial condition, results ofoperations and cash flows. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonablewhen made, but which may change over time. These statements are not guarantees of future performance and inherently involve a wide range of risks anduncertainties 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 reportand 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-lookingstatements. These forward-looking statements speak only as of the date this report is first filed or, in the case of any document incorporated by reference, thedate 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. PropertiesAt December 31, 2015, we had approximately 34 million square feet of floor space at 467 separate locations, primarily in the U.S., for manufacturing,warehousing, research and testing, administration and various other uses. At December 31, 2015, we leased to third parties approximately 250,000 square feetof our owned and leased facilities, and had vacant floor space of approximately 1 million square feet.At December 31, 2015, we had major operations at the following locations:Aerospace SystemsCarson, 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 SystemsAzusa, 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 SystemsHuntsville, AL; 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.-17-NORTHROP GRUMMAN CORPORATIONTechnical ServicesSierra Vista, AZ; Warner Robins, GA; Lake Charles, LA; and Herndon, VA.CorporateFalls Church and Lebanon, VA and Irving, TX.The following is a summary of our floor space at December 31, 2015:Square feet (in thousands)OwnedLeasedU.S. GovernmentOwned/LeasedTotalAerospace Systems6,5915,9611,93014,482Electronic Systems8,1722,316—10,488Information Systems6585,646—6,304Technical Services1421,82311,966Corporate657495—1,152Total16,22016,2411,93134,392We maintain our properties in good operating condition and believe that the productive capacity of our properties is adequate to meet current contractualrequirements and those for the foreseeable future.Item 3. Legal ProceedingsWe have provided information about certain legal proceedings in which we are involved in Note 10 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 theordinary course of our business. These types of matters could 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 future government contracts orsuspension of export privileges for the company or one or more of its components. Suspension or debarment could have a material adverse effect on thecompany because of our reliance on government contracts and authorizations. The nature of legal proceedings is such that we cannot assure the outcome ofany particular matter. However, based on information available to us to date and other than as noted in Note 10 to the consolidated financial statements, wedo not believe that the outcome of any matter currently pending against the company is likely to have a material adverse effect on the company'sconsolidated financial position as of December 31, 2015, its annual results of operations and/or cash flows. For further information on the risks we face fromexisting and future investigations, lawsuits, claims and other legal proceedings, please see Risk Factors in Part I, Item 1A.Item 4. Mine Safety DisclosuresNo information is required in response to this item.-18-NORTHROP GRUMMAN CORPORATIONPART IIItem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesCOMMON STOCKWe have 800,000,000 shares authorized at a $1 par value per share, of which 181,303,083 shares and 198,930,240 shares were outstanding as ofDecember 31, 2015 and 2014, respectively.PREFERRED STOCKWe 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, 2015 and 2014.MARKET INFORMATIONOur 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 intraday high and low prices of our common stock as reported in the consolidated reportingsystem for the New York Stock Exchange Composite Transactions.20152014January to March$141.58 to $172.30$109.17 to $125.37April to June152.44 to 166.55116.11 to 126.00July to September152.31 to 176.83118.23 to 134.24October to December168.26 to 193.99118.24 to 153.19HOLDERSThe approximate number of common stockholders was 25,444 as of January 28, 2016.DIVIDENDSQuarterly dividends per common share for the most recent two years are as follows:20152014January to March$0.70$0.61April to June0.800.70July to September0.800.70October to December0.800.70Total$3.10$2.71-19-NORTHROP GRUMMAN CORPORATIONPURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSThe table below summarizes our repurchases of common stock during the three months ended December 31, 2015:PeriodTotal Numberof SharesPurchasedAverage PricePaid perShare(1)Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor ProgramsApproximate DollarValue of Shares thatMay Yet BePurchased under thePlans or Programs($ in millions)October 3, 2015 - October 30, 2015647,990$175.95647,990$4,444October 31, 2015 - November 27, 2015420,316185.48420,3164,366November 28, 2015 - December 31, 2015486,407187.96486,4074,274Total1,554,713 $182.281,554,713 $4,274(1) 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 negotiatedtransactions. The company retires its common stock upon repurchase and has not made any purchases of common stock other than in connection with thesepublicly announced repurchase programs in the periods presented.See Note 2 to the consolidated financial statements in Part II, Item 8 for further information on our share repurchase programs.-20-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 $400 $350 $300 $250 $200 $150 $100 $50 $0 2010 2011 2012 2013 2014 2015 Period Ending Northrop Grumman Corporation S&P 500 Index S&P Aerospace & Defense Index (1) Assumes $100 invested at the close of business on December 31, 2010, in Northrop Grumman Corporation common stock, Standard & Poor’s (S&P) 500 Index and the S&P Aerospace & Defense Index. (2) The cumulative total return assumes reinvestment of dividends. In March 2011, we completed the spin-off of Huntington Ingalls Industries, Inc. (HII). Our shareholders received one share of HII common stock for every six shares of our common stock held on the record date. The effect of the spin-off is reflected in the cumulative total return as a reinvested dividend. wp_33975_Northrup Graph f21.indd 1 3/15/16 4:34 PM (3) The S&P Aerospace & Defense Index is comprised of The Boeing Company, General Dynamics Corporation, Honeywell International Inc., L-3 Communications, Lockheed Martin Corporation, Northrop Grumman Corporation, Precision Castparts Corporation, Raytheon Company, Rockwell Collins, Inc., Textron, Inc. and United Technologies Corporation. (4) The total return is weighted according to market capitalization of each company at the beginning of each year. (5) This graph is not deemed to be filed with the U.S. Securities and Exchange Commission (SEC) or subject to the liabilities of Section 18 of the Securities and Exchange Act of 1934 (the Exchange Act), and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Exchange Act. Item 6. Selected Financial Data The data presented in the following table is derived from the audited consolidated financial statements and other information. 2011 data is adjusted to reflect the effects of discontinued operations. -21- NORTHROP GRUMMAN CORPORATIONSELECTED FINANCIAL DATAYear Ended December 31$ in millions, except per share amounts20152014201320122011SalesU.S. Government(1)$19,458$20,085$21,278$22,268$23,432International(2)3,3393,0452,4932,0852,076Other Customers(3)729849890865904Total sales23,52623,97924,66125,21826,412Operating income3,0763,1963,1233,1303,276Earnings from continuing operations1,9902,0691,9521,9782,086Basic earnings per share, from continuing operations$10.51 $9.91 $8.50 $7.96 $7.54Diluted earnings per share, from continuing operations10.399.758.357.817.41Cash dividends declared per common share3.102.712.382.151.97Year-End Financial PositionTotal assets$24,454$26,572$26,381$26,543$25,411Notes payable to banks and long-term debt6,5265,9285,9303,9353,948Other long-term obligations(4)7,0597,5204,0187,0435,005Financial MetricsNet cash provided by continuing operations$2,162 $2,593 $2,483 $2,640 $2,347Free cash flow from continuing operations(5)1,6912,0322,1192,3091,855Other InformationCompany-sponsored research and development expenses$712$569$507$520$543Total backlog35,92338,19937,03340,80939,515Square footage at year-end (in thousands)34,39234,26434,50035,05337,397Number of employees at year-end65,00064,30065,30068,10072,500(1) 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 andthe ultimate customer is the U.S. Government. Each of the company's segments derives substantial revenue from the U.S. Government.(2) International sales include foreign military sales contracted through the U.S. Government, direct commercial sales with governments outside the U.S. and commercial salesoutside the U.S. (3) Sales to Other Customers include sales to U.S. state and local governments and U.S. commercial customers. (4) Other long-term obligations include pension and other post-retirement benefit plan liabilities, deferred compensation, unrecognized tax benefits, environmental liabilities and otherlong-term obligations.(5) 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 Liquidityand Capital Resources – Free Cash Flow in Part II, Item 7 for more information on this measure.-22-NORTHROP GRUMMAN CORPORATIONItem 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsOVERVIEWU.S. Political and Economic EnvironmentThe 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 yearperiod. Part II mandated substantial additional reductions, through a process known as “sequestration,” which took effect in March 2013.In December 2013, Congress passed the National Defense Authorization Act (NDAA). Congress also passed, and the President signed into law, the BipartisanBudget Act of 2013, which set discretionary spending levels for fiscal year (FY) 2014 and FY 2015. The legislation provided for additional budget fundingof approximately $63 billion over FY 2014 and FY 2015. The additional funding alleviated some budget cuts that would otherwise have been institutedthrough sequestration in FY 2014 and FY 2015.In December 2014, Congress passed and the President signed into law the Consolidated and Further Appropriations Act of 2015, providing for federalspending levels for FY 2015 consistent with the Bipartisan Budget Act of 2013.On November 2, 2015, the President signed into law the Bipartisan Budget Act of 2015 (the Budget Act). The Budget Act raises the debt ceiling until March2017 and raises the sequester caps imposed by the Budget Control Act by $80 billion, split equally between defense and non-defense spending, over the nexttwo years ($50 billion in FY 2016 and $30 billion in FY 2017).On December 18, 2015, Congress passed and the President signed the Consolidated Appropriations Act of 2016, which provides funding for the U.S.Government for FY 2016, providing $1.1 trillion in discretionary funding for federal agencies through September 2016. The FY 2016 DoD budget approvedby Congress is approximately $581 billion (including $58 billion for Overseas Contingency Operations (OCO)), which represents an approximately fourpercent increase relative to the DoD funding for FY 2015.The federal budget continues to be the subject of considerable debate, which could have a significant impact on defense spending broadly and the company'sprograms in particular.For further information on the risks we face from the current political and economic environment, see Risk Factors in Part I, Item 1A.Operating Performance Assessment and ReportingWe manage and assess our business based on our performance on contracts and programs (typically two or more closely-related contracts). We recognize salesfrom our portfolio of long-term contracts primarily using the cost-to-cost method of percentage of completion accounting, but in some cases we utilize theunits-of-delivery method of percentage of completion accounting. As a result, sales tend to fluctuate in concert with costs incurred across our large portfolioof contracts. Due to Federal Acquisition Regulation (FAR) rules that govern our U.S Government business and related Cost Accounting Standards (CAS),most types of costs are allocable to U.S. Government contracts. As such, we do not focus on individual cost groupings (such as manufacturing, engineeringand 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.In evaluating our operating performance, we look primarily at changes in sales and operating income, including the effects of meaningful changes inoperating income as a result of changes in contract estimates. Where applicable, significant fluctuations in operating performance attributable to individualcontracts or programs, or changes in a specific cost element across multiple contracts, are described in our analysis. Based on this approach and the nature ofour operations, the discussion below of results of operations first focuses on our four segments before distinguishing between products and services. Changesin sales are generally described in terms of volume, deliveries or other indicators of sales activity, and contract mix. For purposes of this discussion, volumegenerally refers to increases or decreases in sales or cost from production/service activity levels or delivery rates. Performance generally refers to changes inestimates-at-completion (EACs) for contract operating margin rates during the period (net EAC adjustments), as well as the continuing effect of prior net EACadjustments.-23-NORTHROP GRUMMAN CORPORATIONCONSOLIDATED OPERATING RESULTSSelected financial highlights are presented in the table below:Year Ended December 31% Change in$ in millions, except per share amounts20152014201320152014Sales$23,526$23,979$24,661(2)%(3)%Operating costs and expenses20,45020,78321,538(2)%(4)%Operating income3,0763,1963,123(4)%2 %Operating margin rate13.1%13.3%12.7%Federal and foreign income tax expense800868911(8)%(5)%Effective income tax rate28.7%29.6%31.8%Net earnings1,9902,0691,952(4)%6 %Diluted earnings per share10.399.758.357 %17 %Net cash provided by operating activities$2,162$2,593$2,483(17)%4 %Sales2015 – Sales decreased $453 million, or 2 percent, as compared with 2014, primarily due to lower sales on U.S. Government contracts at Aerospace Systemsand Information Systems, partially offset by an increase in international sales at Aerospace Systems.2014 – Sales decreased $682 million, or 3 percent, as compared with 2013, primarily due to lower sales on U.S. Government contracts, partially offset by anincrease in international sales across the company.See “Revenue Recognition” in Note 1 to the consolidated financial statements in Part II, Item 8 for further information on sales by customer category.See Segment Operating Results below for further information by segment and the Product and Service Analysis section that follows Segment OperatingResults for product and service detail.Operating Costs and ExpensesOperating costs and expenses primarily comprise labor, material, subcontractor and overhead costs, and are generally allocated to contracts as incurred. Inaccordance with industry practice and the regulations that govern cost accounting requirements for government contracts, most general management andcorporate expenses incurred at the segment and corporate locations are considered allowable and allocable costs. Allowable and allocable general andadministrative costs, including independent research and development (IR&D) and certain bid and proposal costs, are allocated on a systematic basis tocontracts in progress.Operating costs and expenses comprise the following:Year Ended December 31% Change in$ in millions20152014201320152014Product costs$10,333$10,431$10,623(1)%(2)%Service costs7,5517,9478,659(5)%(8)%General and administrative expenses2,5662,4052,2567 %7 %Operating costs and expenses$20,450 $20,783 $21,538(2)%(4)%Operating costs and expenses as a % of sales86.9%86.7%87.3%2015 – Operating costs and expenses as a percentage of sales increased in 2015 as compared with 2014, which reduced our operating margin rate to 13.1percent from 13.3 percent in the prior year period. The increase in operating costs and expenses as a percentage of sales was driven by $179 million of lowersegment operating income, as described in the Segment Operating Results section below, and $21 million in higher unallocated corporate expenses, partiallyoffset by a $79 million increase in our net FAS (GAAP Financial Accounting Standards)/CAS pension adjustment. For further information regarding netFAS/CAS pension adjustment and unallocated corporate expenses, see Note 3 to the consolidated financial statements in Part II, Item 8.2014 – Operating costs and expenses as a percentage of sales declined in 2014 as compared with 2013, which increased our operating margin rate to 13.3percent from 12.7 percent in the prior year period. The reduction in-24-NORTHROP GRUMMAN CORPORATIONoperating costs and expenses as a percentage of sales was driven by a $101 million increase in our net FAS/CAS pension adjustment and $19 million ofhigher segment operating income, partially offset by $50 million in higher unallocated corporate expenses.2015 – General and administrative expenses as a percentage of sales increased to 10.9 percent in 2015 from 10.0 percent in 2014, principally due to anincrease in IR&D as we continue to invest in future business opportunities.2014 – General and administrative expenses as a percentage of sales increased to 10.0 percent in 2014 from 9.1 percent in 2013, principally due to anincrease in IR&D as we continue to invest in future business opportunities.For further information regarding product and service sales and costs, see the Product and Service Analysis section that follows Segment Operating Results.Operating Income and Margin RateWe define operating income as sales less operating costs and expenses, which includes general and administrative expenses. Operating margin rate is definedas operating income as a percentage of sales.2015 – Operating income decreased $120 million, or 4 percent, as compared with 2014, and operating margin rate decreased to 13.1 percent from 13.3percent in 2014, primarily due to the lower sales volume described above and the absence in 2015 of a $75 million benefit realized in 2014 in connectionwith agreements reached with the U.S. Government to settle certain claims relating to use of the company's intellectual property and a terminated program.2014 – Operating income increased $73 million, or 2 percent, as compared with 2013, and operating margin rate increased to 13.3 percent from 12.7 percentin 2013, primarily due to a $101 million increase in our net FAS/CAS pension adjustment and higher operating income at Aerospace Systems due to thesettlements described above, partially offset by higher unallocated corporate expenses and lower operating margin rates at Electronic Systems.Federal and Foreign Income Taxes2015 – Our effective tax rate for 2015 was 28.7 percent, as compared with 29.6 percent in 2014. This reduction was driven by a $76 million increase inresearch credits primarily resulting from additional credits claimed on our prior year tax returns, partially offset by a $51 million benefit recorded in 2014 forthe partial resolution of the Internal Revenue Service (IRS) examination of our 2007-2009 tax returns.2014 – Our effective tax rate for 2014 was 29.6 percent, as compared with 31.8 percent in 2013. The decline in the company's lower effective tax rate for 2014reflects a $51 million benefit for the partial resolution of our 2007-2009 IRS examination.Net Earnings2015 – Net earnings for 2015 decreased $79 million, or 4 percent, as compared with 2014, primarily due to lower operating income and higher interestexpense, partially offset by the lower effective tax rate described above.2014 – Net earnings for 2014 increased $117 million, or 6 percent, as compared with 2013, primarily due to higher operating income and a lower effectivetax rate, partially offset by higher interest expense.Diluted Earnings Per Share2015 – Diluted earnings per share for 2015 increased $0.64, or 7 percent, as compared with 2014. The increase is primarily due to a 10 percent reduction inweighted-average diluted shares outstanding resulting from shares repurchased in 2014 and 2015, partially offset by the 4 percent decline in net earningsdiscussed above.2014 – Diluted earnings per share for 2014 increased $1.40, or 17 percent, as compared with 2013. The increase is primarily due to a 9 percent reduction inweighted-average diluted shares outstanding resulting from shares repurchased in 2013 and 2014 and the 6 percent increase in net earnings discussed above.Net Cash Provided by Operating ActivitiesSee “Operating Cash Flow” in the Liquidity and Capital Resources section below for further information on net cash provided by operating activities.SEGMENT OPERATING RESULTSBasis of PresentationAt December 31, 2015, the company was aligned in four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. Fora more complete description of each segment’s products and services and for further information, see Business in Part I, Item 1.This section discusses segment sales, operating income and operating margin rates. A reconciliation of segment sales to total sales is provided in Note 3 tothe consolidated financial statements in Part II, Item 8. A reconciliation of-25-NORTHROP GRUMMAN CORPORATIONsegment operating income to total operating income, as well as a discussion of the reconciling items, is provided in Note 3 to the consolidated financialstatements in Part II, Item 8. For purposes of the discussion in this Segment Operating Results section, references to operating income and operating marginrate reflect segment operating income and segment operating margin rate.Segment Operating Income and Margin RateSegment operating income, as reconciled in the Reconciliation of Segment Operating Income to Total Operating Income table below, is a non-GAAP measureand is used by management as an internal measure for financial performance of our operating segments. Segment operating income reflects total earningsfrom our four segments, including allocated pension expense recognized under CAS, and excludes unallocated corporate items, including FAS pensionexpense.Year Ended December 31% Change in$ in millions20152014201320152014Segment operating income$2,920$3,099$3,080(6)%1%Segment operating margin rate12.4%12.9%12.5%2015 - Segment operating income for 2015 decreased $179 million, or 6 percent, as compared with 2014 and segment operating margin rate decreased to 12.4percent from 12.9 percent in 2014. The decrease in segment operating income was principally due to lower sales volume and the absence in 2015 of the $75million in settlements described above and a benefit of approximately $45 million from lower 2014 CAS costs due to passage of the Highway andTransportation Funding Act of 2014 (HATFA). The absence in 2015 of the noted settlements and HATFA benefits was the primary driver of the lower 2015operating margin rate.2014 - Segment operating income for 2014 increased $19 million, or 1 percent, as compared with 2013 and segment operating margin rate increased to 12.9percent from 12.5 percent in 2013. The increase in segment operating income and margin rate was principally due to the benefits recognized as a result of thesettlements and the HATFA legislation described above. These increases more than offset the impact of lower sales volume.Net EAC Adjustments - We record changes in estimated contract operating margin at completion (net EAC adjustments) using the cumulative catch-upmethod of accounting. In aggregate, net EAC adjustments can have a significant effect on reported sales and operating income and are presented in the tablebelow:Year Ended December 31$ in millions201520142013Favorable EAC adjustments$924$922$1,044Unfavorable EAC adjustments(344)(258)(291)Net EAC adjustments$580$664$753Net EAC adjustments by segment are presented in the table below:Year Ended December 31$ in millions201520142013Aerospace Systems$358$372$394Electronic Systems140207312Information Systems577349Technical Services394443Eliminations(14)(32)(45)Net EAC adjustments$580 $664 $753-26-NORTHROP GRUMMAN CORPORATIONReconciliation of Segment Operating Income to Total Operating Income - The table below reconciles segment operating income to total operating income byincluding the impact of net FAS/CAS pension adjustments, as well as certain corporate-level expenses, which are not considered allowable or allocable underapplicable CAS or FAR (unallocated corporate expenses). See Note 3 to the consolidated financial statements in Part II, Item 8 for further information on thenet FAS/CAS pension adjustment and unallocated corporate expenses.Year Ended December 31% Change in$ in millions20152014201320152014Segment operating income$2,920$3,099$3,080(6)%1 % CAS pension expense70338454283 %(29)% Less: FAS pension expense(355)(115)(374)209 %(69)%Net FAS/CAS pension adjustment34826916829 %60 %Unallocated corporate expenses(190)(169)(119)12 %42 %Other(2)(3)(6)(33)%(50)%Total operating income$3,076$3,196$3,123(4)%2 %Aerospace SystemsYear Ended December 31% Change in$ in millions20152014201320152014Sales$10,004$9,997$10,014— %— %Operating income1,2201,3151,215(7)%8 %Operating margin rate12.2%13.2%12.1%2015 - Aerospace Systems sales for 2015 were comparable to the prior year. Sales in 2014 included the $75 million in settlements described above.Excluding the settlements, sales for 2015 increased $82 million, or 1 percent, as compared to 2014. The increase in unmanned systems (UMS) sales reflectshigher volume on a number of programs, including Global Hawk. These increases were partially offset by lower volume on the Fire Scout and NATO AllianceGround Surveillance (AGS) programs. Military aircraft systems (MAS) sales increased principally due to the transition to full rate production on the E-2DAdvanced Hawkeye program, increased deliveries on the F-35 program and higher volume on the Joint Surveillance Target Attack Radar System (JSTARS)program. These increases were partially offset by lower volume on the F/A-18 program due to fewer deliveries as the program ramps down. Space salesinclude higher volume on restricted programs, partially offset by lower volume on the Advanced Extremely High Frequency (AEHF) program.Operating income for 2015 decreased $95 million, or 7 percent, and operating margin rate decreased to 12.2 percent from 13.2 percent. Lower operatingincome and margin rate in 2015 were primarily due to the benefits recognized in 2014 associated with the settlements described above.2014 - Aerospace Systems sales for 2014 were comparable to 2013, and include the impact of the settlements described in the Segment Operating Income andMargin Rate section above. Excluding the settlements, Aerospace Systems had lower sales on UMS, space and MAS programs. The decrease in UMSprograms reflects declines of $136 million on Global Hawk due to lower production activity and $111 million on Fire Scout as a result of lower developmentactivity. These declines were partially offset by $135 million of higher volume on the NATO AGS program. The decrease in space programs was mainly dueto lower volume on the James Webb Space Telescope and AEHF programs. The decrease in MAS programs was primarily the result of lower volume on theJSTARS, F-35 and B-2 programs, partially offset by higher volume of $87 million on the E-2D Advanced Hawkeye program.Operating income for 2014 increased $100 million, or 8 percent, and operating margin rate increased to 13.2 percent, from 12.1 percent. Higher operatingincome and margin rate in 2014 were primarily due to the settlements described above and improved performance.-27-NORTHROP GRUMMAN CORPORATIONElectronic SystemsYear Ended December 31% Change in$ in millions20152014201320152014Sales$6,842$6,951$7,149(2)%(3)%Operating income1,0681,1481,226(7)%(6)%Operating margin rate15.6%16.5%17.1%2015 - Electronic Systems sales for 2015 decreased $109 million, or 2 percent, as compared with 2014. The decrease was primarily due to lower volume onAirborne Intelligence, Surveillance, and Reconnaissance & Targeting (AISR&T) Systems and Land & Self Protection Systems (L&SPS), partially offset byhigher volume on Navigation & Maritime Systems (N&MS) programs. AISR&T sales decreased primarily due to lower volume on the LITENING program.The decline in L&SPS is due to in-theater force reductions and ramp-down on an international program, partially offset by increased deliveries on infraredcountermeasures (IRCM) programs and ramp-up on the G/ATOR program. The increase in N&MS sales reflects higher volume from ramp-up activities on anumber of marine and undersea systems programs.Operating income for 2015 decreased $80 million, or 7 percent, and operating margin rate decreased to 15.6 percent from 16.5 percent. Operating income andmargin rate for 2015 decreased primarily due to business mix changes, which resulted in lower volume for mature fixed price production programs and highervolume for cost-type development programs, and less favorable performance on AISR&T and L&SPS programs.2014 - Electronic Systems sales for 2014 decreased $198 million, or 3 percent, as compared with 2013. Lower sales are principally due to lower volume forL&SPS programs, including lower deliveries of $174 million on IRCM and laser systems; lower volume for U.S. intelligence, surveillance, reconnaissanceand targeting programs, including $93 million of lower deliveries on combat avionics; and $109 million of lower volume for N&MS programs. The declineswere partially offset by higher sales of $178 million on international programs.Operating income for 2014 decreased $78 million, or 6 percent, and operating margin rate decreased to 16.5 percent from 17.1 percent. Operating income andmargin rate for 2014 declined primarily due to a reduction in net EAC adjustments, lower volume and the absence in 2014 of the benefit from the reversal of a$26 million non-programmatic risk reserve in 2013.Information SystemsYear Ended December 31% Change in$ in millions20152014201320152014Sales$5,894$6,222$6,596(5)%(6)%Operating income6166116331 %(3)%Operating margin rate10.5%9.8%9.6%2015 - Information Systems sales for 2015 decreased $328 million, or 5 percent, as compared with 2014. The decrease is primarily driven by lower volume onCommand and Control (C2) and civil programs. The decrease in C2 is mainly driven by lower volume on the Consolidated Afloat Network and EnterpriseServices program, the impact of in-theater force reductions, and completion of the Ground Combat Vehicle contract. The decrease in civil is primarily due tothe restructuring of the Emergency Communications Transformation Program Stage II contract.Operating income for 2015 increased $5 million, or 1 percent, and operating margin rate increased to 10.5 percent from 9.8 percent. The increase in operatingincome and margin rate reflects improved performance, partially offset by the decline in sales volume described above.2014 - Information Systems sales for 2014 decreased $374 million, or 6 percent, as compared with 2013. Sales principally declined as a result of lowervolume of $294 million on C2 programs and $62 million on communications programs due to in-theater force reductions, reduced funding levels and thewind-down of various programs.Operating income for 2014 decreased $22 million, or 3 percent, and operating margin rate increased to 9.8 percent from 9.6 percent. The lower operatingincome is primarily a result of the lower sales described above. The higher operating margin rate reflects additional operating income resulting fromimproved performance.-28-NORTHROP GRUMMAN CORPORATIONTechnical ServicesYear Ended December 31% Change in$ in millions20152014201320152014Sales$2,838$2,799$2,8431 %(2)%Operating income254261262(3)%— %Operating margin rate8.9%9.3%9.2%2015 - Technical Services sales for 2015 increased $39 million, or 1 percent, as compared with 2014. The increase was principally due to higher volume onmission solutions and readiness (MS&R) programs, partially offset by lower volume on integrated logistics and modernization (IL&M) programs. Theincrease in MS&R was primarily due to higher volume on the Saudi Arabian Ministry of National Guard Training Support program (through our interest in ajoint venture for which we consolidate the financial results). The decrease in IL&M was mainly due to ramp-down activities on the InterContinental BallisticMissile (ICBM) program, partially offset by increased volume on the JSTARS and Hunter programs.Operating income for 2015 decreased $7 million, or 3 percent, and operating margin rate decreased to 8.9 percent from 9.3 percent. The declines in bothoperating income and operating margin rate were principally due to lower income from an unconsolidated joint venture than in the prior year period.2014 - Technical Services sales for 2014 decreased $44 million, or 2 percent, as compared with 2013. The decrease was primarily due to lower volume on theICBM, Hunter and Combined Tactical Training Range programs, which were partially offset by growth in international sales, principally as a result of theacquisition of Qantas Defence Services Pty Limited (QDS) in the first quarter of 2014.Operating income and margin rate for 2014 were comparable to 2013.PRODUCT AND SERVICE ANALYSISThe following table presents product and service sales and operating costs and expenses by segment:Year Ended December 31$ in millions201520142013Segment Information:SalesOperating Costsand ExpensesSalesOperating Costsand ExpensesSalesOperating Costsand ExpensesAerospace SystemsProduct$8,001$7,037$7,986$6,897$8,210$7,197Service2,0031,7472,0111,7851,8041,602Electronic SystemsProduct5,5304,7065,5324,6225,5744,612Service1,3121,0681,4191,1811,5751,311Information SystemsProduct1,2821,1571,3351,244990895Service4,6124,1214,8874,3675,6065,068Technical ServicesProduct222210184173210191Service2,6162,3742,6152,3652,6332,390Segment TotalsTotal Product$15,035 $13,110$15,037$12,936$14,984$12,895Total Service10,5439,31010,9329,69811,61810,371Intersegment eliminations(2,052)(1,814)(1,990)(1,754)(1,941)(1,685)Total Segment(1)$23,526$20,606$23,979$20,880$24,661$21,581(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 sectionabove.-29-NORTHROP GRUMMAN CORPORATIONProduct Sales and Product Costs2015 - Product sales for 2015 were comparable with 2014. Sales in 2014 included the $75 million in settlements at Aerospace Systems as described aboveand sales in 2015 reflect lower product sales at Information Systems and higher product sales at Technical Services. The decrease at Information Systems wasprimarily due to lower product sales on certain cyber programs, partially offset by higher F-35 volume. The increase at Technical Services was primarily dueto higher volume on intercompany restricted work.Product costs for 2015 increased $174 million, or 1 percent, as compared to 2014. The increase was primarily due to higher product costs at AerospaceSystems and Electronic Systems due to lower performance and changes in business mix. These increases were partially offset by a reduction in product costsat Information Systems due to lower sales and improved performance.2014 - Product sales for 2014 were slightly higher than 2013, primarily due to higher product sales at Information Systems, offset by lower product sales atAerospace Systems. The increase at Information Systems was primarily due to higher product sales on certain restricted and C2 programs. The decrease atAerospace Systems was primarily driven by lower product volume in unmanned and space programs, partially offset by the settlements described in theSegment Operating Results section above.Product costs for 2014 were slightly higher than 2013, primarily due to higher product costs at Information Systems, offset by lower product costs atAerospace Systems, consistent with the changes in product sales described above.Service Sales and Service Costs2015 - Service sales for 2015 decreased $389 million, or 4 percent, as compared with 2014. The decrease was primarily due to lower service sales atInformation Systems and Electronic Systems. The decrease at Information Systems was primarily due to lower volume on C2 and civil programs, includingthe impact of in-theater force reductions. The decrease at Electronic Systems was primarily due to lower service sales on certain tactical sensor and otherprograms.Service costs for 2015 decreased $388 million, or 4 percent, as compared with 2014, consistent with the change in service sales described above.2014 - Service sales for 2014 decreased $686 million, or 6 percent, as compared with 2013. The decrease was primarily driven by lower service sales atInformation Systems, principally from reduced volume on restricted work and the impacts of in-theater force reductions as described in the SegmentOperating Results section above.Service costs for 2014 decreased $673 million, or 6 percent, as compared with 2013, consistent with the change in service sales described above.BACKLOGTotal backlog includes both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contractoptions and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time the option or IDIQ task order is exercised orawarded. For multi-year service contracts with non-U.S. Government customers having no stated contract values, backlog includes only the amountscommitted by the customer. Backlog is converted into sales as costs are incurred or deliveries are made.Backlog consisted of the following at December 31, 2015 and 2014:20152014$ in millionsFundedUnfundedTotalBacklogTotalBacklog% Change in2015Aerospace Systems$8,218$9,381$17,599$20,063(12)%Electronic Systems7,3232,3429,6659,715(1)%Information Systems2,8573,1155,9726,115(2)%Technical Services2,3553322,6872,30617 %Total backlog$20,753$15,170$35,923$38,199(6)%The percentage of total backlog from the U.S. Government, International, and Other Customers at December 31, 2015 totaled 81 percent, 16 percent, and 3percent, respectively.-30-NORTHROP GRUMMAN CORPORATIONNew Awards2015 - The estimated value of contract awards recorded during 2015 was $21.3 billion. Significant new awards during 2015 include $1.8 billion for the F-35program, $1.1 billion for the E-2D Advanced Hawkeye program, $947 million for the Saudi Arabian Ministry of National Guard Training Support program(through our interest in a joint venture for which we consolidate the financial results), $597 million for the B-2 program and $504 million for the F/A-18program.On October 27, 2015, the U.S. Air Force announced it was awarding us a contract for Engineering andManufacturing Development and early production for the Long Range Strike Bomber (LRS-B). In November 2015, the unsuccessful offeror filed a protestasking the U.S. Government Accountability Office (GAO) to review the decision to award the company the LRS-B contract, triggering an automatic stay ofperformance of the contract. As a result, the LRS-B award is not included in 2015 new awards or backlog.2014 - The estimated value of contract awards recorded during 2014 was $25.0 billion. Significant new awards during 2014 include $4.1 billion for the E-2DAdvanced Hawkeye program, $1.4 billion for the Global Hawk program, $1.3 billion for the F-35 program, $727 million for the B-2 program, and $560million for the Virginia Class Submarine program.LIQUIDITY AND CAPITAL RESOURCESWe endeavor to ensure the most efficient conversion of operating income into cash for deployment in our business and to maximize shareholder value. Inaddition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash provided by operatingactivities, free cash flow, and net debt-to-equity and net debt-to-capital ratios. We believe these measures are useful to investors in assessing our financialperformance and condition.Cash balances and cash generated from operating activities, supplemented by borrowings under credit facilities and/or in the capital markets, if needed, areexpected to be sufficient to fund our operations for at least the next 12 months.Operating Cash FlowThe table below summarizes the key components of cash flow provided by operating activities:Year Ended December 31$ in millions201520142013Net earnings$1,990$2,069$1,952Non-cash items(1)1,035731724Changes in assets and liabilities:Trade working capital(564)(121)54Retiree benefits(263)(17)(281)Other, net(36)(69)34Net cash provided by operating activities$2,162$2,593$2,483(1) Includes depreciation and amortization, stock based compensation expense (including related excess tax benefits) and deferred income taxes2015 – Net cash provided by operating activities for 2015 decreased by $431 million, or 17 percent, as compared with 2014, principally due to changes intrade working capital and a $500 million voluntary pre-tax pension contribution made in March 2015, partially offset by lower net tax payments.2014 – Net cash provided by operating activities for 2014 increased by $110 million, or 4 percent, as compared with 2013, principally due to a $500 millionvoluntary pre-tax pension contribution made in April 2013, partially offset by changes in trade working capital during 2014.As of December 31, 2015, the amount of cash, cash equivalents and marketable securities held outside of the U.S. by foreign subsidiaries was $551 million.We intend to permanently reinvest these balances and expect future U.S. cash generation will be sufficient to meet future U.S. cash needs. Capital expenditurecommitments were $393 million at December 31, 2015, and are expected to be paid with cash on hand.-31-NORTHROP GRUMMAN CORPORATIONFree Cash FlowWe define free cash flow as cash provided by operating activities less capital expenditures. We believe free cash flow is a useful measure for investors toconsider as it represents cash flow the company has available after capital spending to invest for future growth, strengthen the balance sheet and/or return toshareholders through dividends and share repurchases. Free cash flow is a key factor in our planning for and consideration of strategic acquisitions, paymentof dividends and stock repurchases.Free cash flow is not a measure of financial performance under GAAP, and may not be defined and calculated by other companies in the same manner. Thismeasure should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating resultspresented in accordance with GAAP as indicators of performance.The table below reconciles cash provided by operating activities to free cash flow:Year Ended December 31% Change in$ in millions20152014201320152014Net cash provided by operating activities$2,162$2,593$2,483(17)%4 %Less: Capital expenditures(471)(561)(364)(16)%54 %Free cash flow$1,691$2,032$2,119(17)%(4)%2015 – Free cash flow for 2015 decreased $341 million, or 17 percent, as compared with 2014. The decrease was principally driven by the lower net cashprovided by operating activities described above, partially offset by a reduction in capital expenditures.2014 – Free cash flow for 2014 decreased $87 million, or 4 percent, as compared with 2013. The decrease was principally driven by higher capitalexpenditures associated with our Aerospace Systems' Centers of Excellence, partially offset by an increase in net cash provided by operating activities, asdescribed above.Investing Cash Flow2015 - Cash used in investing activities for 2015 decreased $214 million, or 33 percent, as compared with 2014. The decrease was principally due to lowercapital expenditures and the 2014 acquisition of QDS.2014 - Cash used in investing activities for 2014 increased $299 million, or 86 percent, as compared with 2013. The increase was principally due to highercapital expenditures associated with our Aerospace Systems’ Centers of Excellence, as well as the acquisition of QDS.Financing Cash Flow2015 - Net cash used in financing activities during 2015 was comparable with the prior year period and reflects an increase in share repurchases anddividends offset by $600 million of net proceeds from our issuance of unsecured senior notes in 2015.2014 - Cash used in financing activities for 2014 increased $2.4 billion, or 281 percent, as compared with 2013. The increase was primarily due to theabsence in 2014 of $2.8 billion of net proceeds from our issuance of unsecured senior notes, of which $850 million was used for the redemption of existingdebt in 2013, as well as increased share repurchases in 2014.Credit Facility and Unsecured Senior Notes - See Note 9 to the consolidated financial statements in Part II, Item 8 for further information on our creditfacility and unsecured senior notes.Financial Arrangements - See Note 11 to the consolidated financial statements in Part II, Item 8 for further information on our use of standby letters of creditand guarantees.-32-NORTHROP GRUMMAN CORPORATIONOther Sources of Capital - We believe we can obtain additional capital, if necessary for long-term liquidity, from such sources as the public or private capitalmarkets, the sale of assets, sale and leaseback of operating assets, and leasing rather than purchasing new assets. We have an effective shelf registrationstatement on file with the SEC, which allows us to access capital in a timely manner.Share Repurchases - In October 2015, the company completed its previously announced goal of repurchasing 60 million shares of common stock by the endof 2015. See Note 2 of the consolidated financial statements in Part II, Item 8 for further information on our share repurchase programs.Contractual ObligationsThe following table presents our contractual obligations as of December 31, 2015, and the estimated timing of future cash payments:$ in millionsTotal20162017- 20182019- 20202021 andbeyondLong-term debt$6,523$110$1,056$535$4,822Interest payments on long-term debt4,1142985735032,740Operating leases83925133616092Purchase obligations(1)8,3184,4952,2311,50785Other long-term liabilities(2)1,044269327143305Total contractual obligations$20,838$5,423$4,523$2,848$8,044(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 comprisedof open purchase order commitments to suppliers and subcontractors pertaining to funded contracts.(2) Other long-term liabilities, including their current portions, primarily consist of total accrued environmental reserves, deferred compensation and other miscellaneous liabilities, ofwhich $113 million is related to environmental reserves recorded in other current liabilities. It excludes obligations for uncertain tax positions of $246 million, as the timing ofsuch payments, if any, cannot be reasonably estimated.The table above excludes estimated minimum funding requirements for retirement and other post-retirement benefit plans, as set forth by the EmployeeRetirement Income Security Act, as amended (ERISA). For further information about future minimum contributions for these plans, see Note 12 to theconsolidated financial statements in Part II, Item 8. Further details regarding long-term debt and operating leases can be found in Notes 9 and 11,respectively, to the consolidated financial statements in Part II, Item 8.CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTSOur consolidated financial statements are based on the application of U.S. GAAP, which require us to make estimates and assumptions about future eventsthat affect the amounts reported in our consolidated financial statements and the accompanying notes. We employ judgment in making our estimates inconsideration of historical experience, currently available information and various other assumptions that we believe to be reasonable under thecircumstances. Actual results could differ from our estimates and assumptions, and any such differences could be material to our consolidated financialstatements. We believe the following accounting policies are critical to the understanding of our consolidated financial statements and require the use ofsignificant management judgment in their application. For a summary of our significant accounting policies, see Note 1 to the consolidated financialstatements in Part II, Item 8.Revenue RecognitionDue to the long-term nature of our contracts, we generally recognize revenue using the percentage-of-completion method of accounting as work on ourcontracts progresses, which requires us to make reasonably dependable estimates for the design, manufacture and delivery of our products and services. Inaccounting for these contracts, we utilize either the cost-to-cost or the units-of-delivery method of percentage-of-completion accounting, with cost-to-costbeing the predominant method.Sales may include estimated amounts not contractually agreed to by the customer, including cost or performance incentives (such as award and incentivefees), un-priced change orders, claims and requests for equitable adjustment. Amounts pertaining to cost and/or performance incentives are included inestimated contract sales when they are reasonably estimable.-33-NORTHROP GRUMMAN CORPORATIONOur cost estimation process is based on the professional knowledge of our engineering, program management and financial professionals, and draws on theirsignificant experience and judgment. We prepare EACs for our contracts and calculate an estimated contract operating margin based on estimated contractsales and cost. Since contract costs are typically incurred over a period of several years, estimation of these costs requires the use of judgment. Factorsconsidered in estimating the cost of the work to be completed include the availability, productivity and cost of labor, the nature and complexity of work tobe performed, the effect of change orders, availability and cost of materials, components and subcontracts, the effect of any delays in performance and thelevel of indirect cost allocations.We generally review and reassess our sales, cost and profit estimates for each significant contract at least annually or more frequently as determined by theoccurrence of events, changes in circumstances and evaluations of contract performance to reflect the latest reliable information available. Changes inestimates of contract sales and cost are frequent. The company performs on a broad portfolio of long-term contracts, including the development of complexand customized military platforms and systems, as well as advanced electronic equipment and software, that often include technology at the forefront ofscience. Changes in estimates occur for a variety of reasons, including changes in contract scope, the resolution of risk at lower or higher cost thananticipated, unanticipated risks affecting contract costs, performance issues with our subcontractors or suppliers, changes in indirect cost allocations, such asoverhead and general and administrative expenses, and changes in estimated award and incentive fees. EACs are also adjusted to reflect estimated risksrelated to contract performance. These risks typically include technical, schedule and performance risk based on our evaluation of the contract effort.Similarly, the changes in estimates may include identified opportunities for operating margin improvement.For the impacts of changes in estimates on our consolidated statement of earnings and comprehensive income (loss), see the Consolidating Operating Resultssection above and Note 1 to the consolidated financial statements in Part II, Item 8.Retirement BenefitsOverview – The determination of projected benefit obligations and the fair value of plan assets for our pension and other post-retirement plans requires theuse of several actuarial assumptions. We perform an annual review of these assumptions in consultation with our outside actuaries. As we determine changesin the assumptions are warranted, or as a result of plan amendments, future pension and other post-retirement benefit expense and our projected benefitobligation could increase or decrease. The principal assumptions that have a significant effect on our consolidated financial position and annual results ofoperations are the discount rate, cash balance crediting rate, expected long-term rate of return on plan assets, estimated fair market value of plan assets, andmortality rate of those covered by our pension and other post-retirement benefit plans.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 requiredto settle our pension and other post-retirement benefit obligations. The discount rate is generally based on the yield of high-quality corporate fixed-incomeinvestments. At the end of each year, we determine the discount rate using a portfolio of bonds matching the notional cash outflows related to projectedbenefit payments for each significant benefit plan. Taking into consideration the factors noted above, our weighted-average composite pension discount ratewas 4.53 percent at December 31, 2015, and 4.12 percent at December 31, 2014.The effects of a hypothetical change in the discount rate may be nonlinear and asymmetrical for future years as the discount rate changes and the accountingcorridor is applied. The accounting corridor is a defined range within which amortization of net gains and losses is not required and is equal to 10 percent ofthe greater of plan assets or benefit obligations. Holding all other assumptions constant, an increase or decrease of 25 basis points in the December 31, 2015discount rate assumption would have the following estimated effects on 2015 pension and other post-retirement benefit obligations and 2016 expectedpension and other post-retirement expense:$ increase/(decrease) in millions25 Basis PointDecrease in Rate25 Basis PointIncrease in RatePension expense$97$(93)Other post-retirement benefit expense1(1)Pension obligation982(931)Other post-retirement benefit obligation58(56)-34-NORTHROP GRUMMAN CORPORATIONCash Balance Crediting Rate - A portion of the company’s pension obligation and resulting pension expense is based on a cash balance formula, whereparticipants’ hypothetical account balances are accumulated over time with pay-based credits and interest. Interest is credited monthly using the 30-YearTreasury bond rate. The interest crediting rate is part of the cash balance formula and independent of actual pension investment earnings. The cash balancecrediting rate tends to move in concert with the discount rate but has an offsetting effect on pension benefit obligations and pension expense in comparisonto the discount rate. Although current 30-Year Treasury bond rates are near historically low levels, we expect such bond rates to rise in the future. The cashbalance crediting rate assumption has been set to its current level of 3.0 percent as of December 31, 2015, growing to 3.75 percent by 2021. Holding all otherassumptions constant, an increase or decrease of 25 basis points in the December 31, 2015 cash balance crediting rate assumption would have the followingestimated effects on 2015 pension benefit obligations and 2016 expected pension expense:$ increase/(decrease) in millions25 Basis PointDecrease in Rate25 Basis PointIncrease in RatePension expense$(25)$27Pension obligation(122)128Expected Long-Term Rate of Return on Plan Assets – The expected long-term rate of return on plan assets represents the average rate of earnings expected onfunds invested. Through consultation with our investment management team and outside investment advisers, management develops expected long-termreturns for each of the plans’ strategic asset classes. In addition to our historical investment performance, we consider several factors, including current marketdata such as yields/price-earnings ratios, historical market returns over long periods and periodic surveys of investment managers’ expectations. Using policytarget allocation percentages and the asset class expected returns, we calculate a weighted-average expected return.The assumptions used for pension benefits are consistent with those used for other post-retirement benefits. The long-term rate of return on plan assets usedfor medical and life benefits is reduced to allow for the impact of tax on expected returns as the earnings of certain Voluntary Employee BeneficiaryAssociation (VEBA) trusts are taxable, unlike the pension trust.For 2015 and 2014, we assumed an expected long-term rate of return on pension plan assets of 8.0 percent and assumed an expected long-term rate of returnon other post-retirement benefit plan assets of 7.58 percent and 7.45 percent, respectively. For 2016, we have assumed an expected long-term rate of return onplan assets of 8.0 percent on pension plans and 7.70 percent on other post-retirement benefit plans. Holding all other assumptions constant, an increase ordecrease of 25 basis points in the December 31, 2015 expected long-term rate of return on plan asset assumption would have the following estimated effectson 2016 pension and other post-retirement benefit expense:$ increase/(decrease) in millions25 Basis PointDecrease25 Basis PointIncreasePension expense$58$(58)Other post-retirement benefit expense3(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 equityand hedge funds, estimates of fair value are determined using the best information available. Estimated fair values on these plan assets are based onredemption values and net asset values, as well as valuation methodologies that include third party appraisals, comparable transactions, discounted cash flowvaluation models and public market data.Mortality Rate – Mortality assumptions are used to estimate life expectancies of plan participants. In October 2014, the Society of Actuaries issued updatedmortality tables and a mortality improvement scale, which reflect longer life expectancies than previously projected. In October 2015, the SOA issued anupdated mortality improvement scale which further refined the previous scale based on additional data and which generally contained lower mortalityimprovement projections. In consideration of this information, we studied our historical mortality experience and developed an expectation for continuedfuture mortality improvements. Based on this data, we updated the mortality assumptions used in calculating our pension and post-retirement benefitobligations recognized at December 31, 2015, and the amounts estimated for our 2016 pension and post-retirement benefit expense.-35-NORTHROP GRUMMAN CORPORATIONFor further information regarding our pension and post-retirement benefits, see Risk Factors in Part I, Item 1A and Note 12 to the consolidated financialstatements in Part II, Item 8.Litigation, Commitments and ContingenciesWe are subject to a range of claims, investigations, lawsuits, overhead cost claims, environmental matters, income tax matters and administrative proceedingsthat arise in the ordinary course of business. Estimating liabilities and costs associated with these matters requires judgment based upon the professionalknowledge and experience of management and counsel. We determine whether to record a reserve and, if so, what amount based on consideration of the factsand circumstances of each matter as then known to us. Determinations regarding whether to record a reserve and, if so, of what amount, reflect management'sassessment regarding what is likely to occur; they do not necessarily reflect what management believes should occur. The ultimate resolution of any suchexposure to us may vary materially from earlier estimates as further facts and circumstances develop or become known to us.Environmental Matters - We are subject to environmental laws and regulations in the jurisdictions in which we do or have done business. Factors that couldresult in changes to the assessment of probability, range of estimated costs and environmental accruals include: modification of planned remedial actions,changes in the estimated time required to conduct remedial actions, discovery of more or less extensive (or different) contamination than anticipated,information regarding the potential causes of contamination, results of efforts to involve other responsible parties, financial capabilities of other responsibleparties, changes in laws and regulations or contractual obligations affecting remediation requirements or other obligations, and improvements in remediationtechnology.For further information on litigation, commitments and contingencies, see Risk Factors in Part I, Item 1A, and Note 1, Note 10 and Note 11 to theconsolidated financial statements in Part II, Item 8.GoodwillOverview – We allocate the purchase price of acquired businesses to the underlying tangible and intangible assets acquired and liabilities assumed basedupon their respective fair values, with the excess recorded as goodwill. Such fair value assessments require judgments and estimates that can be affected bycontract performance and other factors over time, which may cause final amounts to differ materially from original estimates. Adjustments to the fair value ofpurchased assets and liabilities after the initial measurement period are recognized in net earnings.Impairment Testing – We test for impairment of goodwill annually at each of our reporting units, which comprise our operating segments. The results of ourannual goodwill impairment tests as of December 31, 2015 and 2014, respectively, indicated that the estimated fair value of each reporting unit substantiallyexceeded its respective carrying value. There were no impairment charges recorded in the years ended December 31, 2015, 2014 and 2013.In addition to performing an annual goodwill impairment test, we may perform an interim impairment test if events occur or circumstances change thatsuggest goodwill in any of our reporting units may be impaired during an interim period. Such indicators may include, but are not limited to, the loss ofsignificant business, significant reductions 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 reporting units to their respective carrying values. To determine the fairvalue 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, consistentwith our operating plans. This income valuation method requires management to project sales, operating expenses, working capital, capital spending andcash flows for the reporting units over a multi-year period, as well as to determine the weighted-average cost of capital (WACC) used as a discount rate andterminal 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 tomarket entry. The terminal value assumptions are applied to the final year of the discounted cash flow model. We use industry multiples (including relevantcontrol premiums) of operating earnings to corroborate the fair values of our reporting units determined under the market valuation method of the incomeapproach.Impairment assessment inherently involves management judgments as to assumptions about expected future cash flows and the impact of market conditionson those assumptions. Due to the many variables inherent in the estimation of a business’ fair value and the relative size of our recorded goodwill, differencesin assumptions may have a material effect on the results of our impairment analysis.-36-NORTHROP GRUMMAN CORPORATIONOTHER MATTERSOff-Balance Sheet ArrangementsAs of December 31, 2015, we had no significant off-balance sheet arrangements other than operating leases. For a description of our operating leases, see Note11 to the consolidated financial statements in Part II, Item 8.-37-NORTHROP GRUMMAN CORPORATIONItem 7A. Quantitative and Qualitative Disclosures about Market RiskEQUITY RISKWe 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 atDecember 31, 2015. These securities are exposed to market volatilities, changes in price and interest rates.INTEREST RATE RISKWe are exposed to interest rate risk on variable-rate short-term credit facilities for which there were no borrowings outstanding at December 31, 2015. AtDecember 31, 2015, we have $6.5 billion of long-term debt, primarily consisting of fixed-rate debt, with a fair value of approximately $6.9 billion. The termsof our fixed-rate debt obligations do not generally allow investors to demand payment of these obligations prior to maturity. Therefore, we do not havesignificant exposure to interest rate risk for our fixed-rate debt; however, we do have exposure to fair value risk if we repurchase or exchange long-term debtprior to maturity.FOREIGN CURRENCY RISKWe are exposed to foreign currency risk with respect to our international operations. We enter into foreign currency forward contracts to manage a portion ofthe exchange rate risk related to receipts from customers and payments to suppliers denominated in foreign currencies. We do not hold or issue derivativefinancial instruments for trading purposes. At December 31, 2015, foreign currency forward contracts with a notional amount of $141 million wereoutstanding. At December 31, 2015, a 10 percent unfavorable foreign exchange rate movement would not have a material impact on our consolidatedfinancial position, annual results of operations and/or cash flows.INFLATION RISKWe have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer-term firm fixed-price contracts typically includeassumptions for labor and other cost escalations in amounts that historically have been sufficient to cover cost increases over the period of performance.-38-Item 8. Financial Statements and Supplementary DataREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders ofNorthrop Grumman CorporationFalls Church, VirginiaWe have audited the accompanying consolidated statements of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as ofDecember 31, 2015 and 2014, and the related consolidated statements of earnings and comprehensive income (loss), changes in shareholders’ equity, andcash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’smanagement. 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 thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide 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 andsubsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2015, 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 controlover financial reporting as of December 31, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our report dated February 1, 2016 expressed an unqualified opinion on theCompany’s internal control over financial reporting./s/Deloitte & Touche LLPMcLean, VirginiaFebruary 1, 2016-39-NORTHROP GRUMMAN CORPORATIONCONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS)Year Ended December 31$ in millions, except per share amounts201520142013SalesProduct$13,966$14,015$14,033Service9,5609,96410,628Total sales23,52623,97924,661Operating costs and expensesProduct10,33310,43110,623Service7,5517,9478,659General and administrative expenses2,5662,4052,256Operating income3,0763,1963,123Other (expense) incomeInterest expense(301)(282)(257)Other, net1523(3)Earnings before income taxes2,7902,9372,863Federal and foreign income tax expense800868911Net earnings$1,990$2,069$1,952Basic earnings per share$10.51$9.91$8.50Weighted-average common shares outstanding, in millions189.4208.8229.6Diluted earnings per share$10.39$9.75$8.35Weighted-average diluted shares outstanding, in millions191.6212.1233.9Net earnings (from above)$1,990$2,069$1,952Other comprehensive income (loss)Change in unamortized benefit plan costs, net of tax (expense) benefit of ($45) in 2015, $1,423in 2014 and ($1,177) in 201375(2,316)1,790Change in cumulative translation adjustment(41)(59)14Other, net23(1)Other comprehensive income (loss), net of tax36(2,372)1,803Comprehensive income (loss)$2,026$(303) $3,755The accompanying notes are an integral part of these consolidated financial statements.-40-NORTHROP GRUMMAN CORPORATIONCONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31$ in millions20152014AssetsCash and cash equivalents$2,319$3,863Accounts receivable, net2,8412,806Inventoried costs, net807742Prepaid expenses and other current assets367369Total current assets6,3347,780Property, plant and equipment, net of accumulated depreciation of $4,849 in 2015 and $4,611 in 20143,0642,991Goodwill12,46012,466Deferred tax assets1,4092,026Other non-current assets1,1871,309Total assets$24,454$26,572LiabilitiesTrade accounts payable$1,282$1,305Accrued employee compensation1,1951,441Advance payments and amounts in excess of costs incurred1,5371,713Other current liabilities1,4431,433Total current liabilities5,4575,892Long-term debt, net of current portion of $110 in 2015 and $3 in 20146,4165,925Pension and other post-retirement benefit plan liabilities6,1726,555Other non-current liabilities887965Total liabilities18,93219,337Commitments and contingencies (Note 11)Shareholders’ equityPreferred 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: 2015—181,303,083 and 2014—198,930,240181199Paid-in capital——Retained earnings10,66112,392Accumulated other comprehensive loss(5,320)(5,356)Total shareholders’ equity5,5227,235Total liabilities and shareholders’ equity$24,454$26,572The accompanying notes are an integral part of these consolidated financial statements.-41-NORTHROP GRUMMAN CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31$ in millions201520142013Operating activitiesNet earnings$1,990$2,069$1,952Adjustments to reconcile to net cash provided by operating activities:Depreciation and amortization467462495Stock-based compensation99134144Excess tax benefits from stock-based compensation(103)(81)(43)Deferred income taxes572216128Changes in assets and liabilities:Accounts receivable, net(30)(105)171Inventoried costs, net(80)(24)101Prepaid expenses and other assets4313(51)Accounts payable and other liabilities(632)(89)(169)Income taxes payable135842Retiree benefits(263)(17)(281)Other, net(36)(69)34Net cash provided by operating activities2,1622,5932,483Investing activitiesCapital expenditures(471)(561)(364)Other investing activities, net40(84)18Net cash used in investing activities(431)(645)(346)Financing activitiesCommon stock repurchases(3,182)(2,668)(2,371)Net proceeds from issuance of long-term debt600—2,841Cash dividends paid(603)(563)(545)Payments of long-term debt——(877)Other financing activities, net(90)(4)103Net cash used in financing activities(3,275)(3,235)(849)(Decrease) increase in cash and cash equivalents(1,544)(1,287)1,288Cash and cash equivalents, beginning of year3,8635,1503,862Cash and cash equivalents, end of year$2,319$3,863$5,150The accompanying notes are an integral part of these consolidated financial statements.-42-NORTHROP GRUMMAN CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYYear Ended December 31$ in millions, except per share amounts201520142013Common stockBeginning of year$199$218$239Common stock repurchased(19)(21)(27)Shares issued for employee stock awards and options126End of year181199218Paid-in capitalBeginning of year—8482,924Common stock repurchased—(999)(2,345)Stock compensation—139274Other—12(5)End of year——848Retained earningsBeginning of year12,39212,53811,138Common stock repurchased(3,154)(1,637)—Net earnings1,9902,0691,952Dividends declared(596)(578)(552)Stock compensation29——End of year10,66112,39212,538Accumulated other comprehensive lossBeginning of year(5,356)(2,984)(4,787)Other comprehensive income (loss), net of tax36(2,372)1,803End of year(5,320)(5,356)(2,984)Total shareholders’ equity$5,522$7,235$10,620Cash dividends declared per share$3.10$2.71$2.38The accompanying notes are an integral part of these consolidated financial statements.-43-NORTHROP GRUMMAN CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNature of OperationsNorthrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global security company. Weoffer a broad portfolio of capabilities and technologies that enable us to deliver innovative products, systems and solutions for applications that range fromundersea to outer space and into cyberspace.We provide products, systems and solutions in unmanned systems; cyber; command, control, communicationsand computers (C4), intelligence, surveillance, and reconnaissance (C4ISR); strike aircraft; and logistics and modernization to government and commercialcustomers worldwide. We participate in many high-priority defense and government programs in the United States (U.S.) and abroad. We conduct most of ourbusiness with the U.S. Government, principally the Department of Defense (DoD) and intelligence community. We also conduct business with foreign, stateand local governments and commercial customers.Principles of ConsolidationThe consolidated financial statements include the accounts of Northrop Grumman and its subsidiaries. Material intercompany accounts, transactions andprofits are eliminated in consolidation. Investments in equity securities and joint ventures where the company has significant influence, but not control, areaccounted for using the equity method.Accounting EstimatesThe company’s financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Thepreparation thereof requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure ofcontingencies at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Estimates have beenprepared using the most current and best available information; however, actual results could differ materially from those estimates.Related Party TransactionsFor all periods presented, the company had no material related party transactions.Revenue RecognitionThe majority of our sales are derived from long-term contracts with the U.S. Government for the production of goods, the provision of services, or in somecases, a combination of both. In accounting for these contracts, we utilize either the cost-to-cost method or the units-of-delivery method of percentage-of-completion accounting, with cost-to-cost being the predominant method. Generally, sales under cost-reimbursement contracts and construction-typecontracts 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 thismethod, sales, including estimated profits, are recorded as costs are incurred. Generally, sales under contracts that provide for deliveries at higher volumerates per year or a large number of units are accounted for using the units-of-delivery method. Under this method, cost and sales are recognized as units aredelivered to the customer. The company estimates profit on contracts as the difference between total estimated sales and total estimated cost at completionand recognizes that profit either as costs are incurred (cost-to-cost) or as units are delivered (units-of-delivery). The company classifies sales as product orservice depending upon the predominant attributes of the contract.Contract sales may include estimated amounts not contractually agreed to by the customer, including cost or performance incentives (such as award andincentive fees), un-priced change orders, claims and requests for equitable adjustment (REAs). Further, as contracts are performed, change orders can be aregular occurrence and may be un-priced until negotiated with the customer. Un-priced change orders are included in estimated contract sales whenmanagement believes it is probable they will be recovered through a change in contract price. Amounts representing claims (including change ordersunapproved as to both scope and price) and REAs are included in estimated contract sales when management believes it is probable the claim and/or REAwill result in additional contract revenue and the amount can be reliably estimated based on the facts and circumstances known to us at the time. As ofDecember 31, 2015, the company has initiated REAs with the U.S. government and an international customer seeking recovery of approximately $300million under contracts related to two Aerospace Systems programs. A substantial portion of the REAs was initiated during the fourth quarter of 2015. TheREAs relate to what we believe is work performed by the company at the direction of our customers that is beyond the scope of the related contracts as well ascosts incurred by the company as a result of customer-caused delays and disruption. The total amount of additional contract sales we have assumed as ofDecember 31, 2015 is approximately $225 million.-44-NORTHROP GRUMMAN CORPORATIONWe are currently negotiating the REAs and the terms of the contracts with our customers. Recognized amounts related to claims and REAs as of December 31,2014 were not material individually or in 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 ofthe government. If a contract is terminated for default, we may not be entitled to recover any of our costs on partially completed work and may be liable to thegovernment for re-procurement costs of acquiring similar products or services from another contractor, and for certain other damages. Termination of acontract for the convenience of the government may occur when the government concludes it is in the best interests of the government that the contract beterminated. Under a termination for convenience, the contractor is typically entitled to be paid in accordance with the contract’s terms for costs incurred priorto the effective date of termination, plus a reasonable profit and settlement expenses. At December 31, 2015, the company did not have any contractterminations in process that we anticipate would have a material effect on our consolidated financial position, annual results of operations and/or cash flows.Net Estimate-At-Completion (EAC) Adjustments - We recognize changes in estimated contract sales, costs or profits using the cumulative catch-up method ofaccounting. This method recognizes, in the current period, the cumulative effect of the changes on current and prior periods as net EAC adjustments; salesand profit in future periods of contract performance are recognized as if the revised estimates had been used since contract inception. If it is determined that aloss 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 provisions are first offset against any costs that are included in unbilled accounts receivable or inventoried costs, and any remaining amount is reflectedin liabilities.Significant EAC adjustments on a single contract could have a material effect on the company's consolidated financial position or annual results ofoperations. Where such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. No discrete eventor adjustments to an individual contract were material to the accompanying consolidated statements of earnings and comprehensive income (loss) for each ofthe three years ended December 31, 2015, 2014, and 2013.The following table presents the effect of aggregate net EAC adjustments:Year Ended December 31$ in millions, except per share data201520142013Operating Income$580$664$753Net Earnings(1)377432489Diluted earnings per share(1)1.972.042.09(1) Based on statutory tax ratesSales by Customer Category - The following table presents sales by customer category:Year Ended December 31201520142013$ in millions$%(1)$%(1)$%(1)U.S. Government(2)$19,45883% $20,08584% $21,27886%International(3)3,33914%3,04513%2,49310%Other Customers(4)7293%8493%8904%Total Sales$23,526$23,979$24,661(1) Percentage of total sales.(2) 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 andthe ultimate customer is the U.S. Government. Each of the company's segments derives substantial revenue from the U.S. Government. (3) International sales include foreign military sales contracted through the U.S. Government, direct commercial sales with governments outside the U.S. and commercial salesoutside the U.S.(4) Sales to Other Customers include sales to U.S. state and local governments and U.S. commercial customers.-45-NORTHROP GRUMMAN CORPORATIONGeneral and Administrative ExpensesIn accordance with industry practice and the regulations that govern cost accounting requirements for government contracts, most general management andcorporate expenses incurred at the segment and corporate locations are considered allowable and allocable costs. Allowable and allocable general andadministrative costs, including independent research and development (IR&D) and certain bid and proposal (B&P) costs, are allocated on a systematic basisto contracts in progress and are included as a component of total estimated contract costs, including any provision for loss contracts.Research and DevelopmentCompany-sponsored research and development activities primarily include IR&D efforts related to government programs. Company-sponsored IR&Dexpenses totaled $712 million, $569 million and $507 million in 2015, 2014 and 2013, respectively. Customer-funded research and development activitiesare charged directly to the related contracts.Environmental CostsWe accrue for environmental liabilities when management determines that, based on the facts and circumstances known to the company, it is probable thecompany will incur costs to address environmental impacts and the costs are reasonably estimable. When only a range of amounts is established and noamount within the range is more probable than another, we record the low end of the range. The company typically projects environmental costs for up to 30years, records environmental liabilities on an undiscounted basis, and excludes asset retirement obligations and certain legal costs. At sites involvingmultiple parties, we accrue environmental liabilities based upon our expected share of liability, taking into account the financial viability of other liableparties. As a portion of environmental remediation costs is expected to be recoverable through overhead charges on government contracts, such amounts aredeferred in inventoried costs (current portion) and other non-current assets. The portion of environmental costs not expected to be recoverable is expensed.Fair Value of Financial InstrumentsThe company measures the fair value of its financial instruments using observable and unobservable inputs. Observable inputs reflect market data obtainedfrom 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 on a recurring basis. For available-for-sale securities, changesin unrealized gains and losses are reported as a component of other comprehensive income. Changes in unrealized gains and losses on trading securities areincluded in other, net in the consolidated statements of earnings and comprehensive income (loss). Investments in held-to-maturity instruments with originalmaturities 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 on a recurring basis. Changes inthe fair value of derivative financial instruments that are designated as fair value hedges are recorded in net earnings, while the effective portion of thechanges in the fair value of derivative financial instruments that are designated as cash flow hedges are recorded as a component of other comprehensiveincome until settlement. For derivative financial instruments not designated as hedging instruments, gains or losses resulting from changes in the fair valueare reported in other, net in the consolidated statements of earnings and comprehensive income (loss).The company may use derivative financial instruments to manage its exposure to interest rate risk for its long-term fixed-rate debt portfolio and foreigncurrency exchange risk related to receipts from customers and payments to suppliers denominated in foreign currencies. The company does not use derivativefinancial instruments for trading or speculative purposes, nor does it use leveraged financial instruments. Credit risk related to derivative financialinstruments is considered minimal and is managed through the use of multiple counterparties with high credit standards and periodic settlements of positions,as well as by entering into master netting agreements with most of our counterparties.-46-NORTHROP GRUMMAN CORPORATIONIncome TaxesProvisions for federal and foreign income taxes are calculated on reported earnings before income taxes based on current tax law and include the cumulativeeffect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provisions differ from the amountscurrently payable because certain items of income and expense are recognized in different periods for financial reporting purposes than for income taxpurposes. The company recognizes federal and foreign interest accrued related to unrecognized tax benefits in income tax expense. Federal tax penalties arerecognized as a component of income tax expense.In accordance with industry practice and regulations that govern the cost accounting requirements for government contracts, current state and local incomeand franchise taxes are generally considered allowable and allocable costs and are therefore recorded in operating costs and expenses. The companyrecognizes changes in deferred state taxes and unrecognized state tax benefits in unallocated corporate expenses.Uncertain tax positions reflect the company’s expected treatment of tax positions taken in a filed tax return, or planned to be taken in a future tax return orclaim, which have not been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxingauthorities or the statute of limitations concerning such issues lapses, the company does not recognize the tax benefits resulting from such positions andreports the tax effects as a liability for uncertain tax positions in its consolidated statements of financial position.Cash and Cash EquivalentsCash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of three months or less, primarily consistingof bank time deposits and investments in institutional money market funds. The company does not invest in high yield or high risk securities. Cash in bankaccounts at times may exceed federally insured limits.Accounts Receivable and Inventoried CostsAccounts receivable include amounts billed and currently due from customers, as well as amounts currently due but unbilled (primarily related to costsincurred on contracts accounted for under the cost-to-cost method of percentage-of-completion accounting). Accounts receivable also include certainestimated contract change amounts, claims or REAs in negotiation that are probable of recovery and amounts retained by the customer pending contractcompletion.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 rawmaterials and is stated at the lower of cost or market, generally using the average cost method.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. Governmentcontracts, the customer asserts title to, or a security interest in, inventories related to such contracts as a result of contract advances, performance-basedpayments, and progress payments. In accordance with industry practice, unbilled accounts receivable and inventoried costs are classified as current assets andinclude amounts related to contracts having production cycles longer than one year. Payments received in excess of inventoried costs and unbilled accountsreceivable amounts on a contract by contract basis are recorded as advance payments and amounts in excess of costs incurred in the consolidated statementsof financial position.-47-NORTHROP GRUMMAN CORPORATIONProperty, Plant and EquipmentProperty, 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:December 31Useful life in years, $ in millionsUseful Life20152014Land and land improvements Up to 40(1)$381$373Buildings and improvementsUp to 451,6181,589Machinery and other equipmentUp to 204,6104,401Capitalized software costs3-5406428Leasehold improvementsLength of Lease(2)898811Property, plant and equipment, at cost7,9137,602Accumulated depreciation(4,849)(4,611)Property, plant and equipment, net$3,064$2,991(1) Land is not a depreciable asset.(2) Leasehold improvements are depreciated over the shorter of the useful life of the asset or the length of the lease.LeasesThe company uses its incremental borrowing rate in the assessment of lease classification as capital or operating and defines the initial lease term to includerenewal 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 tenantimprovement 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. Forpurposes of recognizing lease incentives, the company uses the date of initial possession as the commencement date, which is generally when the company isgiven the right of access to the space and begins to make improvements in preparation of intended use.Goodwill and Other Purchased Intangible AssetsThe company tests for impairment of goodwill annually as of December 31, or when we believe a potential impairment exists. When performing the goodwillimpairment test, the company uses a discounted cash flow approach corroborated by comparative market multiples, where appropriate, to determine the fairvalue of its reporting units.Goodwill and other purchased intangible asset balances are included in the identifiable assets of their assigned business segment. The company chargesgoodwill impairment, as well as the amortization of other purchased intangible assets, against the respective segment’s operating income. Purchasedintangible assets are amortized on a straight-line basis over their estimated useful lives.Cash Surrender Value of Life Insurance PoliciesThe company maintains whole life insurance policies on a group of executives, which are recorded at their cash surrender value as determined by theinsurance carrier. The company also has split-dollar life insurance policies on former officers and executives from acquired businesses, which are recorded atthe 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, 2015 and 2014, the carrying values associated with these policies were $284 million and $290million, respectively, and are recorded in other non-current assets in the consolidated statements of financial position.Litigation, Commitments and ContingenciesAmounts associated with litigation, commitments and contingencies are recorded as reserves when management, after considering the facts and circumstancesof each matter as then known to management, has determined it is probable a liability will be found to have been incurred and the amount of the loss can bereasonably estimated. When only a range of amounts is established and no amount within the range is more likely than another, the low-48-NORTHROP GRUMMAN CORPORATIONend of the range is recorded. Legal fees are expensed as incurred. Due to the inherent uncertainties surrounding gain contingencies, we generally do notrecognize potential gains until realized.Retirement BenefitsThe company sponsors various defined benefit pension plans and defined contribution retirement plans covering substantially all of its employees. In mostcases, our defined contribution plans provide for up to a 50 percent match of employee contributions up to eight percent of compensation. The company alsoprovides post-retirement benefits other than pensions, consisting principally of health care and life insurance benefits, to eligible retirees and qualifyingdependents.The liabilities, unamortized benefit plan costs and annual income or expense of the company’s defined benefit pension and other post-retirement benefitplans are determined using methodologies that involve several actuarial assumptions. Unamortized benefit plan costs consist primarily of accumulated netafter-tax actuarial losses.Because U.S. Government regulations require that the costs of pension and other post-retirement plans be charged to our contracts in accordance with theFederal Acquisition Regulation (FAR) and the related U.S. Government Cost Accounting Standards (CAS) that govern such plans, we calculate retiree benefitplan costs under both CAS and FAS (GAAP Financial Accounting Standards) methods. While both FAS and CAS recognize a normal service cost componentin measuring periodic pension cost, there are differences in the way the components of annual pension costs are calculated under each method. Measuringplan obligations under FAS and CAS includes different assumptions and models, such as in estimating earnings on plan assets and calculating interestexpense. In addition, the periods over which gains/losses related to pension assets and actuarial changes are amortized are different under FAS and CAS. As aresult, annual retiree benefit plan expense amounts for FAS are different from the amounts for CAS even though the ultimate cost of providing benefits overthe life of the plans 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 definedrange within which amortization of net gains and losses is not required and is equal to 10 percent of the greater of plan assets or benefit obligations. Gains orlosses outside of the corridor are subject to amortization over our average employee future service period of approximately nine years. Not all net periodicpension expense is recognized in net earnings in the year incurred because it is allocated as production costs and a portion remains in inventory at the end ofa reporting period. The company’s funding policy for the qualified pension plans is to contribute, at a minimum, the statutorily required amount to anirrevocable trust.Stock CompensationThe company’s stock compensation plans are classified as equity plans and compensation expense is generally recognized over the vesting period (typicallythree years), net of estimated forfeitures. The company issues stock awards in the form of restricted performance stock rights and restricted stock rights underits 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 eachreporting date, the number of shares is adjusted to equal the number ultimately expected to vest.Accounting Standards UpdatesOn May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)No. 2014-09, Revenue from Contracts withCustomers. ASU 2014-09 supersedes existing revenue recognition guidance, including Accounting Standards Codification No. 605-35, Revenue Recognition- Construction-Type and Production-Type Contracts. ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue under U.S.GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at apoint in time or over time. These concepts, as well as other aspects of ASU 2014-09, may change the method and/or timing of revenue recognition for certainof our contracts. On July 9, 2015, the FASB approved a one year deferral of the effective date of ASU 2014-09 to annual reporting periods beginning afterDecember 15, 2017. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. We are currently evaluatingboth methods of adoption as well as the effect ASU 2014-09 will have on the company’s consolidated financial position, annual results of operations andcash flows.On November 20, 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferredincome taxes and requires that deferred tax assets and liabilities, as well as any related valuation allowance, be classified as noncurrent in a classifiedstatement of financial position. The company adopted ASU 2015-17 during the fourth quarter of 2015 and applied it retrospectively to all periods presented.-49-NORTHROP GRUMMAN CORPORATIONOther accounting standards updates effective after December 31, 2015, are not expected to have a material effect on the company’s consolidated financialposition, annual results of operations and/or cash flows.ReclassificationsAs a result of the company's adoption of ASU 2015-17, we now present deferred tax assets and liabilities as non-current. This change resulted in areclassification of $404 million of net current deferred tax assets reported in our 2014 consolidated statement of financial position to non-current deferred taxassets. This reclassification reduced our current assets as of December 31, 2014, but had no impact on total assets.Shareholders' EquityThe company records the difference between the cost of shares repurchased and their par value as well as tax withholding in excess of related stockcompensation expense as a reduction of paid-in capital to the extent available and then as a reduction of retained earnings.Accumulated Other Comprehensive LossThe components of accumulated other comprehensive loss are as follows:December 31$ in millions20152014Unamortized benefit plan costs, net of tax benefit of $3,350 in 2015 and $3,395 in 2014$(5,241)$(5,316)Cumulative translation adjustment(82)(41)Net unrealized gain on marketable securities and cash flow hedges, net of tax31Total accumulated other comprehensive loss$(5,320)$(5,356)Unamortized benefit plan costs consist primarily of net after-tax actuarial losses totaling $5.5 billion and $5.6 billion as of December 31, 2015 and 2014,respectively. Net actuarial gains or losses are re-determined annually or upon remeasurement events and principally arise from changes in the interest rateused to discount our benefit obligations and differences between expected and actual returns on plan assets.Reclassifications from accumulated other comprehensive income to net earnings related to the amortization of benefit plan costs were $388 million, $145million and $319 million, net of taxes, for the years ended December 31, 2015, 2014 and 2013, respectively. The reclassifications represent the amortizationof 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 12 for further information).Reclassifications from accumulated other comprehensive income to net earnings, relating to cumulative translation adjustments, marketable securities andeffective cash flow hedges for the years ended December 31, 2015, 2014 and 2013, respectively, were not material. Reclassifications for cumulativetranslation adjustments and marketable securities are recorded in other income, and reclassifications for effective cash flow hedges are recorded in operatingincome.2. EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCKBasic Earnings Per ShareWe calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of common stock outstanding during each period.Diluted Earnings Per ShareDiluted earnings per share includes the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of thesesecurities totaled 2.2 million, 3.3 million and 4.3 million shares for the years ended December 31, 2015, 2014 and 2013, respectively. We had no anti-dilutive stock options outstanding for the years ended December 31, 2015, 2014 and 2013, respectively.Share RepurchasesOn 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 (2013Repurchase Program). Repurchases under the 2013 Repurchase Program commenced in September 2013 and were completed in March 2015.On December 4, 2014, the company's board of directors authorized a new share repurchase program of up to $3.0 billion of the company's common stock(2014 Repurchase Program). Repurchases under the 2014 Repurchase Program commenced in March 2015 upon the completion of the company's 2013Repurchase Program. As of-50-NORTHROP GRUMMAN CORPORATIONDecember 31, 2015, repurchases under the 2014 Repurchase Program totaled $2.7 billion; $0.3 billion remained under this share repurchase authorization.By its terms, the 2014 Repurchase Program is set to expire when we have used all authorized funds for repurchases.On September 16, 2015, the company's board of directors authorized a new share repurchase program of up to $4.0 billion of the company's common stock(2015 Repurchase Program). By its terms, repurchases under the 2015 Repurchase Program are set to commence upon completion of the 2014 RepurchaseProgram and to expire when we have used all authorized funds for repurchases.Share repurchases take place from time to time, subject to market conditions and management's discretion, in the open market or in privately negotiatedtransactions. The company retires its common stock upon repurchase and has not made any purchases of common stock other than in connection with thesepublicly announced repurchase programs in the periods presented.The table below summarizes the company’s share repurchases:Repurchase ProgramAuthorization DateAmountAuthorized(in millions)TotalShares Retired(in millions)Average PricePer Share(1)Date CompletedShares Repurchased(in millions)Year Ended December 31201520142013June 16, 2010$5,35083.7$63.86September 2013——18.6May 15, 2013$4,00032.8$121.97March 20152.721.48.7December 4, 2014$3,00016.6$164.7216.6——September 16, 2015$4,000—$————19.321.427.3(1) Includes commissions paid.Dividends on Common StockIn May 2015, the company increased the quarterly common stock dividend 14 percent to $0.80 per share from the previous amount of $0.70 per share.In May 2014, the company increased the quarterly common stock dividend 15 percent to $0.70 per share from the previous amount of $0.61 per share.In May 2013, the company increased the quarterly common stock dividend 11 percent to $0.61 per share from the previous amount of $0.55 per share.-51-NORTHROP GRUMMAN CORPORATION3. SEGMENT INFORMATIONAt December 31, 2015, the company was aligned into four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services.The following table presents sales and operating income by segment:Year Ended December 31$ in millions201520142013SalesAerospace Systems$10,004$9,997$10,014Electronic Systems6,8426,9517,149Information Systems5,8946,2226,596Technical Services2,8382,7992,843Intersegment eliminations(2,052)(1,990)(1,941)Total sales23,52623,97924,661Operating incomeAerospace Systems1,2201,3151,215Electronic Systems1,0681,1481,226Information Systems616611633Technical Services254261262Intersegment eliminations(238)(236)(256)Total segment operating income2,9203,0993,080Reconciliation to operating income:Net FAS/CAS pension adjustment348269168Unallocated corporate expenses(190)(169)(119)Other(2)(3)(6)Total operating income$3,076$3,196$3,123Net FAS/CAS Pension AdjustmentFor financial statement purposes, we account for our employee pension plans in accordance with GAAP under FAS. However, the cost of these plans ischarged to our contracts in accordance with the FAR and the related CAS that govern such plans. The net FAS/CAS pension adjustment reflects the differencebetween CAS pension expense included as cost in segment operating income and FAS pension expense determined in accordance with GAAP.2015 - The increase in net FAS/CAS pension adjustment is principally due to higher 2015 CAS expense resulting from changes in mortality assumptions anddemographic experience, partially offset by an increase in 2015 FAS expense as a result of changes in our FAS discount rate and mortality assumptions as ofDecember 31, 2014.2014 - The increase in net FAS/CAS pension adjustment is principally due to a reduction in FAS expense, largely due to the increase in our FAS discount rateassumptions as of December 31, 2013. The reduction in FAS expense was partially offset by lower CAS expense due to the passage of the Highway andTransportation Funding Act of 2014 (HATFA), which included provisions that reduce the amount of CAS expense charged to our contracts.Unallocated Corporate ExpensesUnallocated corporate expenses include the portion of corporate expenses not considered allowable or allocable under applicable CAS or the FAR, and aretherefore not allocated to the segments. Such costs consist of a portion of management and administration, legal, environmental, compensation costs, retireebenefits and certain unallowable costs such as lobbying activities, among others.2015 - The increase in unallocated corporate expenses for 2015, as compared to 2014, is principally due to a $21 million increase in unallocated state incometaxes due in part to a change in accounting methods approved by the Internal Revenue Service (IRS) during the fourth quarter of 2015.2014 - The increase in unallocated corporate expenses for 2014, as compared to 2013, is primarily due to increases in year-over-year provisions forenvironmental matters.-52-NORTHROP GRUMMAN CORPORATIONIntersegment Sales and Operating IncomeSales between segments are recorded at values that include intercompany operating income for the performing segment based on that segment’s estimatedoperating margin rate for external sales. Such intercompany operating income is eliminated in consolidation.The following table presents intersegment sales and operating income before eliminations:Year Ended December 31$ in millions201520142013SalesOperatingIncomeSalesOperatingIncomeSalesOperatingIncomeIntersegment sales and operating incomeAerospace Systems$232$28$176$22$149$18Electronic Systems54488637109629125Information Systems592605375750463Technical Services684626404865950Total$2,052$238$1,990$236$1,941$256AssetsSubstantially all of the company’s operating assets are located in the U.S. The following table presents assets by segment:December 31$ in millions20152014AssetsAerospace Systems$7,061$6,844Electronic Systems4,3944,366Information Systems6,5886,725Technical Services1,5281,539Segment assets19,57119,474Corporate assets(1)4,8837,098Total assets$24,454$26,572(1) Corporate assets principally consist of cash and cash equivalents and deferred tax assets.Capital Expenditures and Depreciation and AmortizationThe following table presents capital expenditures and depreciation and amortization by segment:Capital ExpendituresDepreciation and Amortization(1)$ in millions201520142013201520142013Aerospace Systems$240$387$198$213$206$210Electronic Systems1118276120119134Information Systems284027657081Technical Services213674Corporate905160636066Total$471$561$364$467$462$495(1) Depreciation and amortization expense includes amortization of purchased intangible assets, as well as amortization of deferred and other outsourcing costs.4. ACCOUNTS RECEIVABLE, NETUnbilled amounts represent sales for which billings have not been presented to customers by period-end. These amounts are usually billed and collectedwithin one year. Substantially all accounts receivable at December 31, 2015 are expected to be collected in 2016. The company does not believe it hassignificant exposure to credit risk, as accounts receivable and the related unbilled amounts are primarily from contracts where the U.S. Government is theprimary customer.-53-NORTHROP GRUMMAN CORPORATIONAccounts receivable consisted of the following:December 31$ in millions20152014Due from U.S. GovernmentBilled$506$536Unbilled7,6996,806Progress and performance-based payments received(6,140)(5,150)2,0652,192Due from International and Other Customers(1)Billed223283Unbilled3,7133,461Progress and performance-based payments received(3,101)(3,062)835682Total accounts receivable2,9002,874Allowance for doubtful accounts(59)(68)Total accounts receivable, net$2,841$2,806(1) Includes receivables due from the U.S. Government associated with foreign military sales.5. INVENTORIED COSTS, NETInventoried costs consisted of the following:December 31$ in millions20152014Production costs of contracts in process$1,218$1,257General and administrative expenses2932521,5111,509Progress and performance-based payments received(807)(873)704636Product inventory103106Total inventoried costs, net$807$7426. INCOME TAXESFederal and foreign income tax expense consisted of the following:Year Ended December 31$ in millions201520142013Federal income tax expense:Current$310$701$803Deferred47215584Total federal income tax expense782856887Foreign income tax expense:Current211028Deferred(3)2(4)Total foreign income tax expense181224Total federal and foreign income tax expense$800$868$911Earnings from foreign operations before income taxes are not material for all periods presented.-54-NORTHROP GRUMMAN CORPORATIONIncome tax expense differs from the amount computed by multiplying the statutory federal income tax rate times earnings before income taxes due to thefollowing:Year Ended December 31$ in millions201520142013Income tax expense at statutory rate$976$1,028$1,002Research tax credit(119)(43)(37)Manufacturing deduction(31)(48)(63)Settlements with taxing authorities—(51)—Other, net(26)(18)9Total federal and foreign income taxes$800$868 $9112015 – The effective tax rate for 2015 was 28.7 percent, as compared with 29.6 percent in 2014. This reduction was driven by a $76 million increase inresearch credits primarily resulting from additional credits claimed on our prior year tax returns, partially offset by a $51 million benefit recorded in 2014 forthe partial resolution of the IRS examination of our 2007-2009 tax returns.2014 – The effective tax rate for 2014 was 29.6 percent, as compared with 31.8 percent in 2013. The decline in the company's lower effective tax rate for2014 reflects a $51 million benefit for the partial resolution of our 2007-2009 IRS examination.Income tax payments, net of refunds received, were $118 million, $727 million and $880 million for the years ended December 31, 2015, 2014 and 2013,respectively.Uncertain Tax PositionsThe company files income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The company's 2007-2013 tax returns arecurrently either under IRS examination or appeals. In the first quarter of 2014, the U.S. Congressional Joint Committee on Taxation approved a partialresolution of the IRS examination of the company's 2007-2009 tax returns. As a result, the company recorded a reduction of income tax expense of $51million. The company also reduced its unrecognized tax benefits by $59 million and related accrued interest by $12 million. During 2014, the company filedappeals with the IRS for the unresolved 2007-2009 tax return matters and for unresolved 2010-2011 examination matters.The company believes it is reasonably possible that within the next twelve months, we may resolve certain matters on the years under examination orappeals, resulting in a reduction of our unrecognized tax benefits up to $175 million and a reduction of our income tax expense up to $45 million.Open tax years related to state and foreign jurisdictions remain subject to examination, but are not considered material.The change in unrecognized tax benefits during 2015, 2014 and 2013, excluding interest, is as follows:December 31$ in millions201520142013Unrecognized tax benefits at beginning of the year$210$241$156Additions based on tax positions related to the current year526256Additions for tax positions of prior years17944Settlements with taxing authorities(10)(61)(1)Other, net(46)(41)(14)Net change in unrecognized tax benefits13(31)85Unrecognized tax benefits at end of the year$223$210$241These liabilities, along with $23 million of accrued interest and penalties, are included in other current and non-current liabilities in the consolidatedstatements of financial position. If the income tax benefits from these tax positions are ultimately realized, $173 million of federal and foreign tax benefitswould reduce the company’s effective tax rate.Net interest expense within the company's federal, foreign and state income tax provisions was not material for all years presented.-55-NORTHROP GRUMMAN CORPORATIONDeferred Income TaxesDeferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and tax purposes. Net deferred tax assets and liabilities are classified as non-current in the consolidated statements of financial position.The tax effects of significant temporary differences and carryforwards that gave rise to year-end deferred federal, state and foreign tax balances, as presentedin the consolidated statements of financial position, are as follows:December 31$ in millions20152014Deferred Tax AssetsRetiree benefits$2,549$2,745Accrued employee compensation316311Provisions for accrued liabilities347392Inventory227—Stock-based compensation7691Other68104Gross deferred tax assets3,5833,643Less valuation allowance(34)(53)Net deferred tax assets3,5493,590Deferred Tax LiabilitiesGoodwill788787Property, plant and equipment, net297315Contract accounting differences976332Other79130Deferred tax liabilities2,1401,564Total net deferred tax assets$1,409$2,026Realization 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 valuation allowances currently established.At December 31, 2015, the company has available unused net operating losses of $198 million that may be applied against future taxable income, primarilyin the United Kingdom, that may be used indefinitely. A valuation allowance of $34 million has been recorded against certain deferred tax assets due to theuncertainty of the realization of these net operating losses and other deferred tax assets, principally in foreign jurisdictions.Undistributed Foreign EarningsAs of December 31, 2015, the company has accumulated undistributed earnings generated by its foreign subsidiaries of approximately $560 million. Nodeferred tax liability has been recorded on these earnings since the company intends to permanently reinvest these earnings and expects future U.S. cashgeneration will be sufficient to meet future U.S. cash needs. Should these earnings be distributed in the form of dividends or otherwise, the distributionswould result in tax of approximately $45 million, representing U.S. federal income tax, less foreign tax credits available to offset such distributions.7. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETSGoodwillGoodwill and other purchased intangible assets are included in the identifiable assets of the segment to which the operations of the acquired entity have beenassigned. Accumulated goodwill impairment losses at December 31, 2015 and 2014, totaled $570 million at the Aerospace Systems segment.-56-NORTHROP GRUMMAN CORPORATIONChanges in the carrying amounts of goodwill for the years ended December 31, 2015 and 2014, were as follows:$ in millionsAerospaceSystemsElectronicSystemsInformationSystemsTechnicalServicesTotalBalance as of December 31, 2013$3,758$2,410$5,294$976$12,438Businesses acquired and other(1)——(8)3628Balance as of December 31, 2014$3,758$2,410$5,286$1,012$12,466Businesses acquired and other(1)——(2)(4)(6)Balance as of December 31, 2015$3,758$2,410$5,284$1,008$12,460(1) Other consists primarily of adjustments for foreign currency translation.Purchased Intangible AssetsNet contract, program, and other intangible assets comprise the following:December 31$ in millions20152014Gross contract, program and other intangible assets$1,828$1,831Less accumulated amortization(1,751)(1,730)Net contract, program and other intangible assets$77$101Amortization expense for 2015, 2014 and 2013, was $22 million, $22 million and $26 million, respectively. The company’s purchased intangible assets arebeing amortized on a straight-line basis over an aggregate weighted-average period of 21 years and are included in other non-current assets in theconsolidated statements of financial position. As of December 31, 2015, the expected future amortization of purchased intangibles for each of the next fiveyears is as follows:$ in millionsYear Ending December 312016$16201714201812201910202068. FAIR VALUE OF FINANCIAL INSTRUMENTSThe following table presents comparative carrying value and fair value information for our financial assets and liabilities:December 31, 2015December 31, 2014$ in millionsCarryingValueFairValueCarryingValueFairValueFinancial Assets (Liabilities)Marketable securitiesTrading$303$303$331$331Available-for-sale7755Derivatives5511Long-term debt, including current portion(6,526)(6,907)(5,928)(6,726)There were no transfers of financial instruments between the three levels of the fair value hierarchy during the years ended December 31, 2015 and 2014.The carrying value of cash and cash equivalents approximates fair value.-57-NORTHROP GRUMMAN CORPORATIONInvestments in Marketable SecuritiesThe company holds a portfolio of marketable securities consisting of securities that are classified as either trading or available-for-sale to partially fund non-qualified employee benefit plans. These assets are recorded at fair value on a recurring basis and substantially all of these instruments are valued using Level1 inputs, with an immaterial amount valued using Level 2 inputs. As of December 31, 2015 and 2014, marketable securities of $310 million and $336million, respectively, were included in other non-current assets in the consolidated statements of financial position.Derivative Financial Instruments and Hedging ActivitiesThe company's derivative portfolio consists primarily of foreign currency forward contracts. The notional value of the company's derivative portfolio atDecember 31, 2015 and 2014 was $141 million and $146 million, respectively. The portion of the notional value designated as cash flow hedges atDecember 31, 2015 and 2014, was $10 million and $34 million, respectively. Substantially all of these instruments are valued using Level 2 inputs. Wheremodel-derived valuations are appropriate, the company utilizes the income approach to determine the fair value and uses the applicable London InterbankOffered Rate (LIBOR) swap rates. The derivative fair values and related unrealized gains/losses at December 31, 2015 and 2014, were not material.Long-Term DebtThe 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 thecompany’s existing debt arrangements.9. LONG-TERM DEBTCredit FacilityIn the third quarter of 2015, the Company amended its $1.8 billion five-year credit facility dated August 29, 2013 by reducing the aggregate principalamount available under the facility to $1.6 billion and extending the maturity to July 2020 (the “2015 Credit Agreement”).The 2015 Credit Agreement contains generally customary terms and conditions, including covenants restricting the company's ability to sell all orsubstantially all of its assets, merge or consolidate with another entity or undertake other fundamental changes and incur liens. The company also cannotpermit the ratio of its debt to capitalization (as set forth in the Credit Agreement) to exceed 65 percent. At December 31, 2015, the company was incompliance with all covenants under the Credit Agreement and there was no balance outstanding under this facility.Unsecured Senior NotesIn February 2015, the company issued $600 million of unsecured senior notes due April 15, 2045 with a fixed interest rate of 3.85 percent (the Notes). Intereston the Notes is payable semi-annually in arrears. The Notes are subject to redemption, in whole or in part, at the company's discretion at any time, or fromtime to time, prior to maturity at a redemption price equal to the greater of the principal amount of the Notes or an applicable “make-whole” amount, plusaccrued and unpaid interest. We are using the net proceeds from this offering for general corporate purposes, including the funding of a $500 millionvoluntary contribution to our pension plans in the first quarter of 2015 and a debt repayment due in 2016.-58-NORTHROP GRUMMAN CORPORATIONLong-term debt consists of the following:$ in millionsDecember 3120152014Fixed-rate notes and debentures, maturing inInterest rate20167.75%$107$10720181.75% - 6.75%1,0501,05020195.05%50050020213.50%70070020233.25%1,0501,05020267.75% - 7.88%52752720317.75%46646620405.05%30030020434.75%95095020453.85%600—Capital leasesVarious3133OtherVarious245245Total long-term debt6,5265,928Less: current portion1103Long-term debt, net of current portion$6,416$5,925Indentures underlying long-term debt issued by the company or its subsidiaries contain various restrictions with respect to the issuer, including one or morerestrictions relating to limitations on liens, sale-leaseback arrangements and funded debt of subsidiaries. The majority of these fixed rate notes and debenturesare 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 premiumand accrued and unpaid interest. Interest on these fixed rate notes and debentures are payable semi-annually in arrears.Total interest payments, net of interest received, were $291 million, $281 million, and $234 million for the years ended December 31, 2015, 2014 and 2013,respectively.Maturities of long-term debt as of December 31, 2015, are as follows:$ in millionsYear Ending December 312016$1102017320181,0532019504202031Thereafter4,822Total principal payments6,523Unamortized premium on long-term debt, net of discount3Total long-term debt$6,52610. INVESTIGATIONS, CLAIMS AND LITIGATIONLitigationOn May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the U.S. Court of Federal Claims. This lawsuitrelates 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 anddelivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS have been delivered. The company's lawsuit is based on varioustheories of liability. The complaint seeks approximately $63 million for unpaid portions of the contract price, and approximately $115 million based on thecompany's assertions that, through various acts-59-NORTHROP GRUMMAN CORPORATIONand omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company'sobligations under the contract. The United States responded to the company's complaint with an answer, denying most of the company's claims, andcounterclaims seeking approximately $410 million, less certain amounts outstanding under the contract. The principal counterclaim alleges that thecompany 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 relatorin 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 theUnited States had decided not to intervene in this case. The relator alleged that the company violated the False Claims Act in a number of ways with respectto the FSS contract, alleged damage to the USPS in an amount of at least approximately $179 million annually, alleged that he was improperly discharged inretaliation, and sought an unspecified partial refund of the contract purchase price, penalties, attorney's fees and other costs of suit. The relator latervoluntarily dismissed his retaliation claim and reasserted it in a separate arbitration, which he also ultimately voluntarily dismissed. On September 5, 2014,the court granted the company's motion for summary judgment and ordered the relator's False Claims Act case be dismissed with prejudice. On December 19,2014, the company filed a motion for partial summary judgment asking the court to dismiss the principal counterclaim referenced above. On June 29, 2015,the Court heard argument and denied that motion without prejudice to filing a later motion to dismiss. Although the ultimate outcome of these matters (“theFSS matters,” collectively), including any possible loss, cannot be predicted or estimated at this time, the company intends vigorously to pursue and defendthe FSS matters.On August 8, 2013, the company received a court-appointed expert's report in litigation pending in the Second Federal Court of the Federal District in Brazilbrought by the Brazilian Post and Telegraph Corporation (ECT), a Brazilian state-owned entity, against Solystic SAS (Solystic), a French subsidiary of thecompany, and two of its consortium partners. In this suit, commenced on December 17, 2004, and relatively inactive for some period of time, ECT alleges theconsortium breached its contract with ECT and seeks damages of approximately R$111 million (the equivalent of approximately $28 million as ofDecember 31, 2015), 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 $23 million as of December 31, 2015) in damages. In October 2013, ECT asserted anadditional damage claim of R$22 million (the equivalent of approximately $6 million as of December 31, 2015). In its counterclaim, Solystic alleges ECTbreached the contract by wrongfully refusing to accept the equipment Solystic had designed and built and seeks damages of approximately €31 million (theequivalent of approximately $34 million as of December 31, 2015), 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 and September 10, 2014, the company received reportsfrom the expert, which contain some recommended findings relating to liability and the damages calculations put forth by ECT. Some of the expert'srecommended findings were favorable to the company and others were favorable to ECT. In November 2014, the parties submitted comments on the expert'smost recent report. On June 16, 2015, the court published a decision denying the parties' request to present oral testimony. At some future point, the court isexpected to issue a decision on the parties' claims and counterclaims that could accept or reject, in whole or in part, the expert’s recommended findings.The company is one of several defendants in litigation brought by the Orange County Water District in Orange County Superior Court in California onDecember 17, 2004, for alleged contribution to volatile organic chemical contamination of the County's shallow groundwater. The lawsuit includes countsagainst the defendants for violation of the Orange County Water District Act, the California Super Fund Act, negligence, nuisance, trespass and declaratoryrelief. Among other things, the lawsuit seeks unspecified damages for the cost of remediation, payment of attorney fees and costs, and punitive damages. Trialon the statutory claims (those based on the Orange County Water District Act, the California Super Fund Act and declaratory relief) concluded on September25, 2012. On October 29, 2013, the court issued its decision in favor of the defendants on the statutory claims. On May 9, 2014, the court granted defendants'dispositive motions on the remaining tort causes of action. Notice of entry of judgment was filed on July 1, 2014. The Orange County Water District filed anotice of appeal on August 28, 2014. The Orange County Water District filed its opening brief on October 14, 2015. The company is preparing its response.The company is a party to various investigations, lawsuits, claims and other legal proceedings, including government investigations and claims, that arise inthe ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based oninformation available to the company to date, and other than with respect to the FSS matters discussed separately above, the company does not believe thatthe outcome of any matter pending against the company is likely to have a material-60-NORTHROP GRUMMAN CORPORATIONadverse effect on the company's consolidated financial position as of December 31, 2015, or its annual results of operations or cash flows.11. COMMITMENTS AND CONTINGENCIESGuarantees of Subsidiary Performance ObligationsFrom time to time in the ordinary course of business, the company guarantees obligations of its subsidiaries under certain contracts. Generally, the companyis liable under such an arrangement only if its subsidiary is unable to perform under its contract. Historically, the company has not incurred any substantialliabilities resulting from these guarantees.In addition, the company’s subsidiaries may enter into joint ventures, teaming and other business arrangements (collectively, Business Arrangements) tosupport our products and services in U.S. and international markets. The company generally strives to limit its exposure under these arrangements to itssubsidiary’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 strives to obtain cross-indemnification from the other members of the Business Arrangements.At December 31, 2015, 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 ClaimsFrom time to time, the company is advised of claims by the U.S. Government concerning certain potential disallowed costs, plus, at times, penalties andinterest. When such findings are presented, the company and the U.S. Government representatives engage in discussions to enable the company to evaluatethe merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimatedexposure for matters raised by the U.S. Government. Such provisions are reviewed periodically using the most recent information available. The companybelieves it has adequately reserved for disputed amounts that are probable and estimable, and the outcome of any such matters would not have a materialadverse effect on its consolidated financial position as of December 31, 2015, or its annual results of operations and/or cash flows.Environmental MattersThe table below summarizes management's estimate of the range of reasonably possible future costs for environmental remediation, the amount accruedwithin that range, and the deferred costs expected to be recoverable through overhead charges on U.S. Government contracts as of December 31, 2015 and2014:$ in millionsRange of Reasonably PossibleFuture Costs(1)Accrued Costs(2)Deferred Costs(3)December 31, 2015$353 - $812$370$186December 31, 2014363 - 809381193(1) The range of reasonably possible future costs does not take into consideration amounts expected to be recoverable through overhead charges on U.S. Government contracts.(2) As of December 31, 2015, $113 million is recorded in other current liabilities and $257 million is recorded in other non-current liabilities.(3) As of December 31, 2015, $57 million is deferred in inventoried costs and $129 million is deferred in other non-current assets. These amounts are evaluated for recoverability ona routine basis.Although management cannot predict whether new information gained as our environmental remediation projects progress, or as changes in facts andcircumstances occur, will materially affect the estimated liability accrued, we do not anticipate future remediation expenditures associated with our currentlyidentified projects will have a material adverse effect on the company's consolidated financial position as of December 31, 2015, or its annual results ofoperations and/or cash flows.Financial ArrangementsIn the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks, and surety bonds issued principallyby insurance companies to guarantee the performance on certain obligations. At December 31, 2015, there were $235 million of stand-by letters of credit andguarantees, and $151 million of surety bonds outstanding.-61-NORTHROP GRUMMAN CORPORATIONIndemnificationsThe company has retained certain environmental, income tax and other potential liabilities in connection with certain of its divestitures. The settlement ofthese liabilities is not expected to have a material adverse effect on the company’s consolidated financial position as of December 31, 2015, or its annualresults of operations and/or cash flows.Operating LeasesRental expense for operating leases was $302 million in 2015, $304 million in 2014, and $298 million in 2013. These amounts are net of immaterial amountsof sublease rental income. Minimum rental commitments under long-term non-cancelable operating leases as of December 31, 2015 are payable as follows:$ in millionsYear Ending December 312016$25120172012018135201999202061Thereafter92Total minimum lease payments$839Subsequent Event - Included in the amounts listed in the table above are annual rental expenses of approximately $17 million for a facility currently underlease through December 31, 2021. On January 4, 2016, we exercised an option to purchase the facility for approximately $150 million. The purchase isexpected to close in the first quarter of 2016.12. RETIREMENT BENEFITSPlan DescriptionsDefined Benefit Pension Plans – The company sponsors several defined benefit pension plans in the U.S. covering the majority of its employees. Pensionbenefits for most employees are based on the employee’s years of service, age and compensation. It is our policy to fund at least the minimum amountrequired for all qualified plans, using actuarial cost methods and assumptions acceptable under U.S. Government regulations, by making payments intobenefit 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, includingcertain employees covered under collective bargaining agreements. Company contributions for most plans are based on employer matching of up to 50percent of employee contributions up to eight percent of compensation. In addition to the 401(k) defined contribution benefit, certain employees hired afterJune 30, 2008, are eligible to participate in a defined contribution program in lieu of a defined benefit pension plan. The company’s contributions to thesedefined contribution plans for the years ended December 31, 2015, 2014 and 2013, were $291 million, $282 million and $285 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 tolocal 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 itsactive and retired employees. Certain covered employees achieve eligibility to participate in these plans upon retirement from active service if they meetspecified age and years of service requirements. Qualifying dependents are also eligible for plan benefits in certain circumstances. The company reserves theright to amend or terminate the plans at any time. The company has capped the amount of its contributions to substantially all of its remaining postretirement medical and life benefit plans.In addition to a company and employee cost-sharing feature, the health plans also have provisions for deductibles, co-payments, coinsurance percentages,out-of-pocket limits, conformance to a schedule of reasonable fees, the use of managed care providers and coordination of benefits with other plans. Theplans also provide for a Medicare-62-NORTHROP GRUMMAN CORPORATIONcarve-out. Subsequent to January 1, 2005 (or earlier at some segments), newly hired employees are not eligible for subsidized post retirement medical and lifebenefits.In the first quarter of 2014, we communicated an amendment to most of our Medicare-eligible retirees, that beginning in the third quarter of 2014, in lieu ofthe benefits previously provided under the plans, the company will provide subsidies to reimburse retirees for a portion of the cost of individual Medicare-supplemental coverage purchased directly by the retiree through a private insurance exchange. The amendment did not affect Pre-Medicare retirees. Weexpect that the cost of retiree medical coverage in 2016 will be comparable to 2015.Summary Plan ResultsThe cost to the company of its retirement benefit plans is shown in the following table:Year Ended December 31Pension BenefitsMedical andLife Benefits$ in millions201520142013201520142013Components of net periodic benefit costService cost$484$457$516$35$34$36Interest cost1,2241,2601,117949996Expected return on plan assets(1,975)(1,871)(1,809)(89)(83)(75)Amortization of:Prior service credit(60)(59)(58)(28)(45)(51)Net loss from previous years682327608271330Other—1————Net periodic benefit cost$355$115$374$39$18$36The table below summarizes the components of changes in unamortized benefit plan costs for the years ended December 31, 2015, 2014 and 2013:$ in millionsPension BenefitsMedical andLife BenefitsTotalChanges in unamortized benefit plan costsChange in net actuarial loss$(2,158)$(280)$(2,438)Amortization of:Prior service credit5851109Net loss from previous years(608)(30)(638)Tax expense related to above items1,0751021,177Change in unamortized benefit plan costs – 2013(1,633)(157)(1,790)Change in net actuarial loss3,8332344,067Change in prior service cost—(92)(92)Amortization of:Prior service credit5945104Net loss from previous years(327)(13)(340)Tax benefit related to above items(1,357)(66)(1,423)Change in unamortized benefit plan costs – 20142,2081082,316Change in net actuarial loss626(125)501Change in prior service cost———Amortization of:Prior service credit602888Net loss from previous years(682)(27)(709)Tax (benefit) expense related to above items(1)4645Change in unamortized benefit plan costs – 2015$3$(78)$(75)-63-NORTHROP GRUMMAN CORPORATIONThe table below presents the components of accumulated other comprehensive loss related to the company's retirement benefit plans:Pension BenefitsMedical andLife Benefits$ in millions2015201420152014Amounts recorded in accumulated other comprehensive lossNet actuarial loss$(8,741)$(8,797)$(220)$(372)Prior service credit3043646694Income tax benefits related to above items3,2863,28564110Unamortized benefit plan costs$(5,151)$(5,148)$(90)$(168)The following table sets forth the funded status and amounts recognized in the consolidated statements of financial position for the company’s retirementbenefit plans. Pension benefits data includes the qualified plans, foreign plans and U.S. unfunded non-qualified plans for benefits provided to directors,officers and certain employees. The company uses a December 31 measurement date for its plans.Pension BenefitsMedical andLife Benefits$ in millions2015201420152014Change in plan assetsFair value of plan assets at beginning of year$25,063$24,098$1,216$1,175Net gain on plan assets(258)2,298(5)108Employer contributions578786857Participant contributions10192250Benefits paid(1,428)(1,409)(151)(186)Other(15)(21)312Fair value of plan assets at end of year23,95025,0631,1531,216Change in projected benefit obligationProjected benefit obligation at beginning of year30,52525,9722,3982,224Service cost4844573534Interest cost1,2241,2609499Participant contributions10192250Plan amendments———(92)Actuarial (gain) loss(1,602)4,273(219)258Benefits paid(1,428)(1,409)(151)(186)Other(31)(47)211Projected benefit obligation at end of year29,18230,5252,1812,398Funded status$(5,232)$(5,462)$(1,028)$(1,182)Classification of amounts recognized in the consolidated statements of financialpositionNon-current assets$18$3$79$80Current liability(142)(133)(43)(39)Non-current liability(5,108)(5,332)(1,064)(1,223)-64-NORTHROP GRUMMAN CORPORATIONThe following table shows those amounts expected to be recognized in net periodic benefit cost in 2016:$ in millionsPension BenefitsMedical andLife BenefitsTotalAmounts expected to be recognized in 2016 net periodic benefit costNet actuarial loss$714$16$730Prior service credit(60)(22)(82)The accumulated benefit obligation for all defined benefit pension plans was $29.0 billion and $30.3 billion at December 31, 2015 and 2014, respectively.Amounts for pension plans with accumulated benefit obligations in excess of fair value of plan assets are as follows:December 31$ in millions20152014Projected benefit obligation$29,131$30,405Accumulated benefit obligation28,92330,172Fair value of plan assets23,88224,940-65-NORTHROP GRUMMAN CORPORATIONPlan AssumptionsOn a weighted-average basis, the following assumptions were used to determine benefit obligations and net periodic benefit cost:Pension Benefits Medical andLife Benefits2015201420152014Assumptions used to determine benefit obligation at December 31Discount rate4.53%4.12%4.47%4.04%Initial cash balance crediting rate assumed for the next year3.00%2.75%Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate)3.75%3.50%Year that the cash balance crediting rate reaches the ultimate rate20212020Rate of compensation increase3.00%3.00%Initial health care cost trend rate assumed for the next year7.00%6.50%Rate to which the health care cost trend rate is assumed to decline (the ultimate trendrate)5.00%5.00%Year that the health care cost trend rate reaches the ultimate trend rate20202019Assumptions used to determine benefit cost for the year ended December 31Discount rate4.12%4.99%4.04%4.90%Initial cash balance crediting rate assumed for the next year2.75%3.90%Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate)3.50%4.70%Year that the cash balance crediting rate reaches the ultimate rate20202019Expected long-term return on plan assets8.00%8.00%7.58%7.45%Rate of compensation increase3.00%3.00%Initial health care cost trend rate assumed for the next year6.50%6.50%Rate to which the health care cost trend rate is assumed to decline (the ultimate trendrate)5.00%5.00%Year that the health care cost trend rate reaches the ultimate trend rate20192017Plan Assets and Investment PolicyPlan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term. Theinvestment goal is to exceed the assumed rate of return over the long term within reasonable and prudent levels of risk. Through consultation with ourinvestment management team and outside investment advisers, management develops expected long-term returns for each of the plans’ strategic asset classes.In addition to our historical investment performance, we consider several factors, including current market data such as yields/price-earnings ratios, historicalmarket returns over long periods and periodic surveys of investment managers’ expectations. Using policy target allocation percentages and the asset classexpected returns, we calculate a weighted-average expected return. Liability studies are conducted on a regular basis to provide guidance in settinginvestment 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 SecurityAct). 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.-66-NORTHROP GRUMMAN CORPORATIONFor the majority of the plans’ assets, the investment policies require that the asset allocation be maintained within the following ranges as of December 31,2015:Asset Allocation RangesU.S. equities15% - 35%International equities10% - 30%Fixed income securities20% - 55%Alternative investments10% - 30%The table below provides the fair values of the company’s pension and VEBA trust plan assets at December 31, 2015 and 2014, by asset category. The tablealso 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 ofLevel 2 investments in the table results from including in this category investments in pooled funds that contain investments with values based on quotedmarket prices, but for which the funds are not valued on a quoted market basis, and fixed income securities valued using model-based pricing services.Level 1Level 2 Level 3Total$ in millions20152014201520142015201420152014Asset categoryCash and cash equivalents(1)$ 37$ 38$ 1,471$ 1,737$ 1,508$ 1,775U.S. equities(2)4,0434,729593147$2$ 24,6384,878International equities(2)2,3002,6752,5512,0624,8514,737Fixed income securitiesU.S. Treasuries530957530957U.S. Government Agency717909717909Non-U.S. Government309440309440Corporate debt4,9195,7104,9195,710Asset backed39260414393608High yield debt1,7195861,719586Bank loans261228261228Alternative InvestmentsHedge funds497632497632Private equities1,8502,0301,8502,030Real estate2,8862,7592,8862,759Other(3)20325(2)2530Fair value of plan assets at the end ofthe year$6,400$7,474$13,467$13,378$5,236$5,427$25,103$26,279(1) Cash and cash equivalents are predominantly held in money market or short-term investment funds.(2) U.S. and international equities represent private investment funds that primarily hold diversified investments in underlying equity securities. These funds are structured as limitedpartnerships, one of which has an unfunded commitment of $25 million. Redemption periods are monthly with a notice requirement less than 30 days.(3) Other assets include derivative assets with a fair value of $40 million and $84 million, derivative liabilities with a fair value of $25 million and $59 million, and net notionalamounts of $3.2 billion and $3.0 billion, as of December 31, 2015 and 2014, respectively. Derivative instruments may include exchange traded futures contracts, interest rate swaps,options on futures and swaps, currency contracts, total return swaps and credit default swaps. Notional amounts do not quantify risk or represent assets or liabilities of the pensionand VEBA trusts, but are used in the calculation of cash settlement under the contracts. The volume of derivative activity is commensurate with the amounts disclosed at year-end.Certain derivative financial instruments within the pension trust are subject to master netting agreements with certain counterparties.-67-NORTHROP GRUMMAN CORPORATIONThe changes in the fair value of the pension and VEBA plan trust assets measured using Level 3 significant unobservable inputs during 2015 and 2014, are asfollows:$ in millionsHedge funds and High-yield debtPrivate equitiesReal EstateOtherTotalBalance as of December 31, 2013$822$2,075$2,767$6$5,670Actual return on plan assets:Unrealized (losses) gains, net(46)(60)173—67Realized gains, net891071—170Purchases2143161—513Sales(254)(426)(313)—(993)Balance as of December 31, 20146322,0302,75965,427Actual return on plan assets:Unrealized gains (losses), net(55)(193)235—(13)Realized gains (losses), net50(2)(7)—41Purchases8722552—364Sales(217)(210)(153)(3)(583)Balance as of December 31, 2015$497$1,850$2,886$3$5,236The amount of total gains and (losses) for the periodattributable to the change in unrealized gains or(losses) related to assets held at year-end$(55)$(172)$310$—$83There were no transfers of plan assets between the three levels of the fair value hierarchy during the years ended December 31, 2015 and 2014.Generally, investments are valued based on information in financial publications of general circulation, statistical and valuation services, records of securityexchanges, appraisal by qualified persons, transactions and bona fide offers. U.S. and international equities consist primarily of common stocks andinstitutional common trust funds. Investments in common and preferred shares are valued at the last reported sales price of the stock on the last business dayof 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. Fairvalue for real estate and private equity partnerships is primarily based on valuation methodologies that include third party appraisals, comparabletransactions, 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 writtento limit securities, for example, to no more than five percent of each trust account, and to exclude the purchase of securities issued by the company. Thenumber of real estate, hedge fund and private equity partnerships is 167 and the unfunded commitments are $1.5 billion and $833 million as of December 31,2015 and 2014, respectively. For alternative investments that cannot be redeemed, the typical investment term is ten years. For alternative investments thatpermit redemptions, such redemptions are generally made quarterly and require a 90-day notice. The company is generally unable to determine the finalredemption date and amount until the request is processed by the investment fund and therefore categorizes such alternative investments as Level 3 assets.For the years ended December 31, 2015 and 2014, the defined benefit pension and VEBA trusts did not hold any Northrop Grumman common stock.-68-NORTHROP GRUMMAN CORPORATIONBenefit PaymentsThe following table reflects estimated future benefit payments for the next ten years, based upon the same assumptions used to measure the benefitobligation, and includes expected future employee service, as of December 31, 2015:$ in millionsPension PlansMedical andLife PlansTotalYear Ending December 312016$1,469$151$1,62020171,5131551,66820181,5631581,72120191,6141601,77420201,6641611,8252021 through 20259,0657889,853In 2016, the company expects to contribute the required minimum funding of approximately $79 million to its pension plans and approximately $75 millionto its other post-retirement benefit plans. During the year ended December 31, 2015, the company made a voluntary pension contribution of $500 million.13. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTSStock Compensation PlansAt December 31, 2015, Northrop Grumman had stock-based compensation awards outstanding under the following plans: the 2001 Long-Term IncentiveStock Plan (2001 Plan) and the 2011 Long-Term Incentive Stock Plan (2011 Plan), both applicable to employees, and the 1993 Stock Plan for Non-EmployeeDirectors (1993 SPND). All of these plans were approved by the company’s shareholders. The company has historically issued new shares to satisfy awardgrants.Employee Plans – In 2011, the shareholders of the company approved the company’s 2011 Plan, which replaced the expired 2001 Plan. The 2011 Planpermits grants to key employees of three general types of stock incentive awards: stock options, stock appreciation rights (SARs) and stock awards.Outstanding stock options granted after January 1, 2008, vest in equal increments over three years from the grant date, and grants outstanding expire sevenyears after the grant date. No SARs have been granted under either plan. Stock awards in the form of restricted performance stock rights (RPSR) and restrictedstock rights (RSR) are granted to key employees without payment to the company. The 2011 Plan also provides equity-based award grants to non-employeedirectors.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 Planauthorized 39.1 million new shares plus 6.9 million shares from the 2001 Plan that were previously authorized and available to be issued at the date the 2001Plan expired. In May 2015, the shareholders of the company approved amendments to the 2011 Plan (Amended 2011 Plan). The Amended 2011 Plan, amongother things, removed the prior requirement to count 4.5 shares for every one stock award share issued against the aggregate share limit. Shares issued underthe Amended 2011 Plan are counted against the aggregate share limit on a one-for-one basis. Based on a one-for-one share count, the amended sharesavailable for grant are 5.1 million shares, plus 2.4 million of newly authorized shares. Under the terms of the Amended 2011 Plan, in the event awards issuedunder the 2001 Plan and 2011 Plan and outstanding on March 10, 2015 expire or terminate without being exercised or paid, such shares will becomeavailable for award under the Amended 2011 Plan.Recipients of RPSRs earn shares of stock, based on achievement of financial objectives determined by the board of directors in accordance with the plan.Depending on actual performance against these objectives, recipients earn between 0 and 200 percent of the original grant (between 0 and 150 percent for thecompany's Corporate Policy Council), as well as dividend equivalents on the ultimate number of shares issued. Termination of employment can result inforfeiture of some or all of the benefits extended.As of December 31, 2015, 7.5 million shares are available for grant under the Amended 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 theconclusion 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-69-NORTHROP GRUMMAN CORPORATIONelect 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) or inalternative investment options. The Elective Stock Units are paid at the conclusion of board service or earlier as specified by the director, regardless of yearsof service. Directors are credited with dividend equivalents in connection with the Automatic and Elective Stock Units until shares of common stock relatedto such stock units are issued. Since all directors are eligible to receive awards under the 2011 Plan, shares from this plan are available for future directorawards following the same share counting limits as described for the employee plans. Awards under the 2011 Plan are made pursuant to the NorthropGrumman Corporation Equity Grant Program for Non-Employee Directors under the 2011 Plan (the Director Program), which sets forth the terms andconditions for the awards of stock units as described above.The Director Program was amended and restated effective January 1, 2016 (the Amended Director Program). In 2016, directors will receive two stock unitgrants - a one-time transitional grant on January 1, 2016 (the Transition Stock Units) and an annual grant of Automatic Stock Units on May 18, 2016. TheTransition Stock Units will vest on May 18, 2016, and the Automatic Stock Units will vest on the one year anniversary of the grant date. Under the AmendedDirector Program, directors may elect to have all or any portion of their Transition Stock Units and Automatic Stock Units paid on (A) the earlier of (i) thebeginning of a specified calendar year after the vesting date or (ii) their separation from service as a member of the Board, or (B) on the vesting date. Directorsmay elect to defer to a later year all or a portion of their remaining cash retainer or committee retainer fees into a stock unit account as Elective Stock Units orin alternative investment options. Elective Stock Units are awarded on a calendar quarterly basis. Directors may elect to have all or a portion of their ElectiveStock Units paid on the earlier of (i) the beginning of a specified calendar year or (ii) their separation from service as a member of the Board. Stock unitsawarded under the Amended Director Program will be paid out in an equivalent number of shares of Northrop Grumman common stock.Compensation ExpenseStock-based compensation expense and the related tax benefits for the years ended December 31, 2015, 2014 and 2013, are as follows:Year Ended December 31$ in millions201520142013Stock-based compensation expense:Stock options$—$—$4Stock awards99134140Total stock-based compensation expense99134144Tax benefits from the exercise of stock options62925Tax benefits from the issuance of stock awards975216Total tax benefits recognized for stock-based compensation$103$81$41At December 31, 2015, there was $88 million of unrecognized compensation expense related to unvested stock awards granted under the company’s stock-based compensation plans. These amounts are expected to be charged to expense over a weighted-average period of 1.3 years.Stock OptionsThere were no stock options issued in 2015 or 2014. As of December 31, 2015 and 2014, there were 0.1 million and 0.3 million stock options outstanding,respectively. There were 0.2 million stock options exercised during the year ended December 31, 2015. All stock options outstanding were fully vested andexercisable at December 31, 2015.The total intrinsic value of exercised stock options for the years ended December 31, 2015, 2014 and 2013, was $18 million, $94 million and $118 million,respectively. The total intrinsic value for options outstanding for the years ended December 31, 2015, 2014 and 2013, was $20 million, $28 million and $101million, respectively. Intrinsic value is measured using the fair market value at the date of exercise (for options exercised), or at December 31, 2015 (foroptions outstanding), less the applicable exercise price.Stock AwardsCompensation 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 (generallythree 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 onthe grant date. The fair value of market-based stock awards is determined at the grant date using a Monte Carlo simulation model. For-70-NORTHROP GRUMMAN CORPORATIONpurposes of measuring compensation expense for performance awards, the number of shares ultimately expected to vest is estimated at each reporting datebased on management’s expectations regarding the relevant performance criteria.Stock award activity for the years ended December 31, 2015, 2014 and 2013, is presented in the table below. Vested awards do not include any adjustmentsto reflect the final performance measure for issued shares.StockAwards(in thousands)Weighted-AverageGrant DateFair ValueWeighted-AverageRemainingContractualTerm (in years)Outstanding at January 1, 20133,478$611.6Granted1,57764Vested(1,323)60Forfeited(312)62Outstanding at December 31, 20133,420$611.5Granted763118Vested(1,217)58Forfeited(158)70Outstanding at December 31, 20142,808$771.1Granted539166Vested(1,691)62Forfeited(70)108Outstanding at December 31, 20151,586 $1221.2The following table presents the number of RSRs and RPSRs granted to employees under the company's long-term incentive stock plan and the grant dateaggregate fair value of those stock awards for the periods presented:Year Ended December 31in millions201520142013RSRs granted0.20.20.5RPSRs granted0.40.61.1Grant date aggregate fair value$89$90$101The majority of our stock awards are granted annually during the first quarter. RSRs typically vest on the third anniversary of the grant date, while RPSRsgenerally vest and pay out based on the achievement of financial metrics for the three-year period ending on December 31 of the third year subsequent togrant.The following table presents the gross number of shares issued to employees in settlement of fully vested stock awards and the total fair value at issuance andon the grant date for the periods presented:Year Ended December 31in millions201520142013Gross number of shares issued(1)2.62.63.4Fair value at issuance(2)$434$305$226Grant date fair value(2)14380105(1) The gross number of shares issued includes the effect of performance adjustments. Actual shares issued to employees are net of shares withheld for taxes.(2) The difference between the fair value at issuance and the grant date fair value reflects changes in the fair market value of the company's common stock.In 2016, the company expects to issue to employees approximately 1.7 million shares of common stock with a grant date fair value of $96 million,principally related to the 2013 RPSR awards that vested as of December 31, 2015.-71-NORTHROP GRUMMAN CORPORATIONThe ultimate amount of shares to be paid out is subject to approval by the Compensation Committee of the Board of Directors and may vary from thisestimate.Cash AwardsThe company grants certain employees cash units (CUs) and cash performance units (CPUs). Depending on actual performance against financial objectives,recipients of CPUs earn between 0 and 200 percent of the original grant. The following table presents the minimum and maximum aggregate payout amountsrelated to those cash awards granted for the periods presented:Year Ended December 31$ in millions201520142013Minimum aggregate payout amount$37$32$32Maximum aggregate payout amount194179173The following table presents unrecognized compensation expense associated with the company's cash awards:December 31$ in millions201520142013Unrecognized compensation expense$128$122$108The majority of our cash awards are granted annually during the first quarter. CUs typically vest and settle in cash on the third anniversary of the grant date,while CPUs generally vest and pay out in cash based on the achievement of financial metrics for a three-year period ending on December 31 of the third yearsubsequent to grant.14. UNAUDITED SELECTED QUARTERLY DATAUnaudited quarterly financial results are set forth in the following tables. It is the company’s long-standing practice to establish actual interim closing datesusing a “fiscal” calendar in which we close our books on a Friday near each quarter-end date, in order to normalize the potentially disruptive effects ofquarterly closings on business processes. This practice is only used at interim periods within a reporting year.2015In millions, except per share amounts1st Qtr2nd Qtr3rd Qtr4th QtrSales$5,957$5,896$5,979$5,694Operating income780813794689Net earnings484531516459Basic earnings per share2.452.772.782.52Diluted earnings per share2.412.742.752.49Weighted-average common shares outstanding197.7191.8185.8182.1Weighted-average diluted shares outstanding200.5193.7187.9184.22014In millions, except per share amounts1st Qtr2nd Qtr3rd Qtr4th QtrSales$5,848$6,039$5,984$6,108Operating income845820769762Net earnings579511473506Basic earnings per share2.682.412.292.52Diluted earnings per share2.632.372.262.48Weighted-average common shares outstanding216.3212.4206.2200.8Weighted-average diluted shares outstanding220.4215.2209.2204.2-72-NORTHROP GRUMMAN CORPORATIONItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresDISCLOSURE CONTROLS AND PROCEDURESOur principal executive officer (Chairman, Chief Executive Officer and President) and principal financial officer (Corporate Vice President and ChiefFinancial Officer) have evaluated the company’s disclosure controls and procedures as of December 31, 2015, and have concluded that these controls andprocedures 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 of1934 (15 USC § 78a et seq) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’srules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information requiredto be disclosed in the reports that we file or submit is accumulated and communicated to management, including the principal executive officer and theprincipal financial officer, as appropriate to allow timely decisions regarding required disclosure.CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTINGDuring the three months ended December 31, 2015, no change occurred in our internal controls over financial reporting that materially affected, or isreasonably likely to materially affect, our internal controls over financial reporting.Item 9B. Other InformationNone.-73-MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGThe management of Northrop Grumman Corporation (the company) prepared and is responsible for the consolidated financial statements and all relatedfinancial information contained in this Annual Report. This responsibility includes establishing and maintaining effective internal control over financialreporting. The company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States ofAmerica.To comply with the requirements of Section 404 of the Sarbanes–Oxley Act of 2002, the company designed and implemented a structured andcomprehensive assessment process to evaluate its internal control over financial reporting across the enterprise. The assessment of the effectiveness of thecompany’s internal control over financial reporting is based on criteria established in Internal Control—Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, a system of internal control over financialreporting can provide only reasonable assurance and may not prevent or detect misstatements. Management regularly monitors its internal control overfinancial reporting, and actions are taken to correct deficiencies as they are identified. Based on its assessment, management has concluded that thecompany’s internal control over financial reporting was effective as of December 31, 2015.Deloitte & Touche LLP issued an attestation report dated February 1, 2016, concerning the company’s internal control over financial reporting, which iscontained in this Annual Report. The company’s consolidated financial statements as of and for the year ended December 31, 2015, have been audited by theindependent registered public accounting firm of Deloitte & Touche LLP in accordance with the standards of the Public Company Accounting OversightBoard (United States)./s/ Wesley G. BushChairman, Chief Executive Officer and President/s/ Kenneth L. BedingfieldCorporate Vice President and Chief Financial OfficerFebruary 1, 2016-74-REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders ofNorthrop Grumman CorporationFalls Church, VirginiaWe have audited the internal control over financial reporting of Northrop Grumman Corporation and subsidiaries (the “Company”) as of December 31, 2015,based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness 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 thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary 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 principalfinancial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition ofthe 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 ofcontrols, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because ofchanges 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, 2015, based on thecriteria established in Internal Control – Integrated Framework (2013) 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 financialstatements as of and for the year ended December 31, 2015 of the Company and our report dated February 1, 2016 expressed an unqualified opinion on thosefinancial statements./s/ Deloitte & Touche LLPMcLean, VirginiaFebruary 1, 2016-75-NORTHROP GRUMMAN CORPORATIONPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceDIRECTORSInformation about our Directors will be incorporated herein by reference to the Proxy Statement for the 2016 Annual Meeting of Stockholders, to be filedwith the Securities and Exchange Commission within 120 days after the end of our fiscal year.-76-NORTHROP GRUMMAN CORPORATIONEXECUTIVE OFFICERSOur executive officers as of February 1, 2016, are listed below, along with their ages on that date, positions and offices held with the company, and principaloccupations and employment, focused primarily on the past five years.NameAgeOffice HeldSinceRecent Business ExperienceWesley G. Bush54Chairman, ChiefExecutive Officer andPresident2010President and Chief Operating Officer (2007-2009); Prior to March2007, President and Chief Financial Officer (2006-2007);Corporate Vice President and Chief Financial Officer (2005-2006)Patrick M. Antkowiak55Corporate Vice Presidentand Chief TechnologyOfficer2014Vice President and General Manager, Advanced Concepts andTechnologies Division, Electronic Systems Sector (2010-2014);Vice President of Engineering, Manufacturing and Logistics,Electronic Systems Sector (2010)M. Sidney Ashworth64Corporate Vice President,Government Relations2010Vice President of Washington Operations, GE Aviation (a providerof aircraft engines, components and systems) (2010); Prior toMarch 2010, Principal, the Ashworth Group (a consulting firm)(2009-2010); Professional Staff Member, U.S. Senate Committeeon Appropriations (1995-2009)Kenneth L. Bedingfield43Corporate Vice Presidentand Chief FinancialOfficer2015Vice President, Finance (2014-2015); Vice President, BusinessManagement and Chief Financial Officer, Aerospace SystemsSector (2013-2014); Corporate Vice President, Controller andChief Accounting Officer (2011-2013); Audit Partner, KPMG LLP(a professional services firm) (2005-2011)Mark A. Caylor51Corporate Vice Presidentand President, EnterpriseServices and ChiefStrategy Officer2013Corporate Vice President and Treasurer (2011-2012); AssistantTreasurer (2008-2011); Director, Mergers & Acquisitions (2006-2008)Sheila C. Cheston57Corporate Vice Presidentand General Counsel2010Executive Vice President and Director, BAE Systems, Inc. (anaerospace and defense company) (2009 -2010); Prior to September2009, Senior Vice President, General Counsel, Secretary andDirector, BAE Systems, Inc. (2002-2009)Gloria A. Flach57Corporate Vice Presidentand Chief OperatingOfficer2016Corporate Vice President and President, Electronic Systems (2013-2015); Corporate Vice President and President, Enterprise SharedServices (2010-2012); Sector Vice President and General Manager,Targeting Systems Division, Electronic Systems Sector (2010);Prior to 2010, Sector Vice President and General Manager ofEngineering, Manufacturing and Logistics, Electronic SystemsSector (2009)Darryl M. Fraser*57Corporate Vice President,Communications2008Sector Vice President of Business Development and StrategicInitiatives, Mission Systems Sector (2007-2008)-77-NORTHROP GRUMMAN CORPORATIONNameAgeOffice HeldSinceRecent Business ExperienceMichael A. Hardesty44Corporate Vice President,Controller, and ChiefAccounting Officer2013Vice President and Chief Financial Officer, Information Systems(2011-2013); Vice President, Internal Audit (2010-2011); VicePresident and Chief Financial Officer, Enterprise Shared Services(2008-2010)Christopher T. Jones51Corporate Vice Presidentand President,Technology ServicesSector2016Corporate Vice President and President, Technical Services (2013-2015); Vice President and General Manager, Integrated Logisticsand Modernization Division, Technical Services Sector (2010-2012); Director of Product Support (2004-2010)Denise M. Peppard59Corporate Vice Presidentand Chief HumanResources Officer2011Vice President and Chief Human Resources, Computer SciencesCorporation (an information technology services company) (2010-2011); Senior Vice President of Human Resources, WyethPharmaceuticals, Inc. (a pharmaceuticals company) (2001-2010)David T. Perry51Corporate Vice Presidentand Chief GlobalBusiness DevelopmentOfficer2012Vice President and General Manager of Naval and Marine SystemsDivision, Electronic Systems Sector (2009-2012); Vice Presidentof Marine Systems, Electronic Systems Sector (2005-2009)Thomas E. Vice53Corporate Vice Presidentand President, AerospaceSystems Sector2013Corporate Vice President and President, Technical Services (2010-2012); Sector Vice President and General Manager, BattleManagement and Engagement Systems Division, AerospaceSystems Sector (2008-2010)Kathy J. Warden44Corporate Vice Presidentand President, MissionSystems Sector2016Corporate Vice President and President, Information Systems(2013-2015); Vice President and General Manager, CyberIntelligence Division (2011-2012); Vice President, Cyber andSIGINT business unit (2008-2011)*Mr. Fraser is scheduled to retire from his position on February 29, 2016.AUDIT COMMITTEE FINANCIAL EXPERTThe information as to the Audit Committee and the Audit Committee Financial Expert will be incorporated herein by reference to the Proxy Statement for the2016 Annual Meeting of Stockholders to be filed within 120 days after the end of the company’s fiscal year.CODE OF ETHICSWe have adopted Standards of Business Conduct for all of our employees, including the principal executive officer, principal financial officer and principalaccounting officer. The Standards of Business Conduct can be found on our internet website 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: NorthropGrumman Corporation, c/o Office of the Secretary, 2980 Fairview Park Drive, Falls Church, VA 22042. We disclose amendments to provisions of ourStandards of Business Conduct by posting amendments on our website. Waivers of the provisions of our Standards of Business Conduct that apply to ourdirectors and executive officers are disclosed in a Current Report on Form 8-K.The website 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 theSecurities and Exchange Commission.OTHER DISCLOSURESOther disclosures required by this Item will be incorporated herein by reference to the Proxy Statement for the 2016 Annual Meeting of Stockholders to befiled within 120 days after the end of the company’s fiscal year.-78-NORTHROP GRUMMAN CORPORATIONItem 11. Executive CompensationInformation concerning Executive Compensation, including information concerning Compensation Committee Interlocks and Insider Participation andCompensation Committee Report, will be incorporated herein by reference to the Proxy Statement for the 2016 Annual Meeting of Stockholders to be filedwithin 120 days after the end of the company’s fiscal year.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information as to Securities Authorized for Issuance Under Equity Compensation Plans and Security Ownership of Certain Beneficial Owners andManagement will be incorporated herein by reference to the Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed within 120 days afterthe end of the company’s fiscal year.For a description of securities authorized under our equity compensation plans, see Note 13 to the consolidated financial statements in Part II, Item 8.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information as to Certain Relationships and Related Transactions and Director Independence will be incorporated herein by reference to the ProxyStatement for the 2016 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 ServicesThe information as to Principal Accountant Fees and Services will be incorporated herein by reference to the Proxy Statement for the 2016 Annual Meetingof Shareholders to be filed within 120 days after the end of the company’s fiscal year.-79-NORTHROP GRUMMAN CORPORATIONPART IVItem 15. Exhibits and Financial Statement Schedules(a)1. Report of Independent Registered Public Accounting FirmFinancial StatementsConsolidated Statements of Earnings and Comprehensive Income (Loss)Consolidated Statements of Financial PositionConsolidated Statements of Cash FlowsConsolidated Statements of Changes in Shareholders’ EquityNotes to Consolidated Financial Statements2. Financial Statement SchedulesAll schedules have been omitted because they are not applicable, not required, or the information has been otherwise supplied in the financialstatements or notes to the financial statements.3. Exhibits2(a)Separation and Distribution Agreement dated as of March 29, 2011, among Titan II, Inc. (formerly Northrop GrummanCorporation), Northrop Grumman Corporation (formerly New P, Inc.), Huntington Ingalls Industries, Inc., Northrop GrummanShipbuilding, Inc. and Northrop Grumman Systems Corporation (incorporated by reference to Exhibit 10.2 to Form 8-K filedApril 4, 2011)3(a)Amended and Restated Certificate of Incorporation of Northrop Grumman Corporation dated May 29, 2012 (incorporated byreference to Exhibit 3.1 to Form 10-Q for the quarter ended June 30, 2012, filed July 24, 2012)3(b)Amended and Restated Bylaws of Northrop Grumman Corporation dated December 4, 2015 (incorporated by reference toExhibit 3.2 to Form 8-K filed December 10, 2015)4(a)Registration Rights Agreement dated as of January 23, 2001, by and among Northrop Grumman Corporation (now NorthropGrumman Systems Corporation), NNG, Inc. (now Northrop Grumman Corporation) and Unitrin, Inc. (incorporated by referenceto Exhibit(d)(6) to Amendment No. 4 to Schedule TO filed January 31, 2001)4(b)Indenture dated as of October 15, 1994, between Northrop Grumman Corporation (now Northrop Grumman SystemsCorporation) and The Chase Manhattan Bank (National Association), Trustee (incorporated by reference to Exhibit 4.1 toForm 8-K filed October 25, 1994)4(c)First Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman Systems Corporation, The Bank ofNew York Mellon (successor trustee to JPMorgan Chase Bank and The Chase Manhattan Bank, N.A.), Titan II, Inc. (formerlyknown as Northrop Grumman Corporation), and Titan Holdings II, L.P., to Indenture dated as of October 15, 1994, betweenNorthrop 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)4(d)Second Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman Systems Corporation, TheBank of New York Mellon (successor trustee to JPMorgan Chase Bank and The Chase Manhattan Bank, N.A.), Titan HoldingsII, 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)4(e)Form of Officers’ Certificate (without exhibits) establishing the terms of Northrop Grumman Corporation’s (now NorthropGrumman Systems Corporation’s) 7.75 percent Debentures due 2016 and 7.875 percent Debentures due 2026 (incorporated byreference to Exhibit 4-3 to Form S-4 Registration Statement No. 333-02653 filed April 19, 1996)-80-NORTHROP GRUMMAN CORPORATION4(f)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)4(g)Form of Northrop Grumman Corporation’s (now Northrop Grumman Systems Corporation’s) 7.875 percent Debentures due2026 (incorporated by reference to Exhibit 4-6 to Form S-4 Registration Statement No. 333-02653 filed April 19, 1996)4(h)Form of Officers’ Certificate establishing the terms of Northrop Grumman Corporation’s (now Northrop Grumman SystemsCorporation’s) 7.75 percent Debentures due 2031 (incorporated by reference to Exhibit 10.9 to Form 8-K filed April 17, 2001)4(i)Indenture dated as of April 13, 1998, between Litton Industries, Inc. (predecessor-in-interest to Northrop Grumman SystemsCorporation) 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, filedJune 15, 1998)4(j)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 GrummanSystems Corporation and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.5 to Form 10-Q for thequarter ended March 31, 2001, filed May 10, 2001)4(k)Supplemental Indenture with respect to Indenture dated April 13, 1998, dated as of December 20, 2002, among LittonIndustries, Inc. (predecessor-in-interest to Northrop Grumman Systems Corporation), Northrop Grumman Corporation, NorthropGrumman Systems Corporation and The Bank of New York, as trustee (incorporated by reference to Exhibit 4(q) to Form 10-Kfor the year ended December 31, 2002, filed March 24, 2003)4(l)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 toForm 10-Q for the quarter ended March 31, 2011, filed April 27, 2011)4(m)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 toForm 10-Q for the quarter ended March 31, 2011, filed April 27, 2011)4(n)Senior Indenture dated as of December 15, 1991, between Litton Industries, Inc. (predecessor-in-interest to Northrop GrummanSystems Corporation) and The Bank of New York, as trustee, under which its 7.75 percent and 6.98 percent debentures due2026 and 2036 were issued, and specimens of such debentures (incorporated by reference to Exhibit 4.1 to the Form 10-Q ofLitton Industries, Inc. for the quarter ended April 30, 1996, filed June 11, 1996)4(o)Supplemental Indenture with respect to Indenture dated December 15, 1991, dated as of April 3, 2001, among LittonIndustries, Inc. (predecessor-in-interest to Northrop Grumman Systems Corporation), Northrop Grumman Corporation, NorthropGrumman Systems Corporation and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.7 to Form 10-Qfor the quarter ended March 31, 2001, filed May 10, 2001)4(p)Supplemental Indenture with respect to Indenture dated December 15, 1991, dated as of December 20, 2002, among LittonIndustries, Inc. (predecessor-in-interest to Northrop Grumman Systems Corporation), Northrop Grumman Corporation, NorthropGrumman Systems Corporation and The Bank of New York, as trustee (incorporated by reference to Exhibit 4(t) to Form 10-Kfor the year ended December 31, 2002, filed March 24, 2003)-81-NORTHROP GRUMMAN CORPORATION4(q)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 datedDecember 15, 1991, among Litton Industries, Inc., Northrop Grumman Corporation, Northrop Grumman Systems Corporationand 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)4(r)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 datedDecember 15, 1991, among Litton Industries, Inc., Northrop Grumman Corporation, Northrop Grumman Systems Corporationand 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)4(s)Indenture between TRW Inc. (predecessor-in-interest to Northrop Grumman Systems Corporation) and Mellon Bank, N.A., astrustee, 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)4(t)First Supplemental Indenture between TRW Inc. (predecessor-in-interest to Northrop Grumman Systems Corporation) andMellon Bank, N.A., as trustee, dated as of August 24, 1989 (incorporated by reference to Exhibit 4(b) to Form S-3 RegistrationStatement No. 33-30350 of TRW Inc.)4(u)Fifth Supplemental Indenture between TRW Inc. (predecessor-in-interest to Northrop Grumman Systems Corporation) and TheChase Manhattan Bank, as successor trustee, dated as of June 2, 1999 (incorporated by reference to Exhibit 4(f) to Form S-4Registration Statement No. 333-83227 of TRW Inc. filed July 20, 1999)4(v)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) toForm 10-K for the year ended December 31, 2009, filed February 9, 2010)4(w)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 successortrustee 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)4(x)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, assuccessor trustee to JPMorgan Chase Bank and to Mellon Bank, N.A., Titan Holdings II, L.P., and Northrop GrummanCorporation (formerly known as New P, Inc.) to Indenture between TRW Inc. and Mellon Bank, N.A., as trustee, dated as ofMay 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)4(z)First Supplemental Indenture dated as of July 30, 2009, between Northrop Grumman Corporation and The Bank of New YorkMellon, 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)4(aa)Form of Northrop Grumman Corporation’s 5.05 percent Senior Note due 2019 (incorporated by reference to Exhibit 4(c) toForm 8-K filed July 30, 2009)-82-NORTHROP GRUMMAN CORPORATION4(bb)Second Supplemental Indenture dated as of November 8, 2010, between Northrop Grumman Corporation and The Bank of NewYork Mellon, as successor trustee, to Indenture dated as of November 21, 2001 (incorporated by reference to Exhibit 4(a) toForm 8-K filed November 8, 2010)4(cc)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)4(dd)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)4(ee)Third Supplemental Indenture dated as of March 30, 2011, by and among Titan II, Inc. (formerly known as Northrop GrummanCorporation), The Bank of New York Mellon, as successor trustee to JPMorgan Chase Bank, and Titan Holdings II, L.P., toIndenture 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)4(ff)Fourth Supplemental Indenture dated as of March 30, 2011, by and among Titan Holdings II, L.P., The Bank of New YorkMellon, 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)4(gg)Fifth Supplemental Indenture, dated as of May 31, 2013, between Northrop Grumman Corporation and The Bank of New YorkMellon, as successor to JPMorgan Chase Bank, Trustee, to Indenture dated as of November 21, 2001 (incorporated by referenceto 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)Form of 3.250% Senior Note due 2023 (incorporated by reference to Exhibit 4(a) to Form 8-K filed May 31, 2013)4(jj)Form of 4.750% Senior Note due 2043 (incorporated by reference to Exhibit 4(a) to Form 8-K filed May 31, 2013)4(kk)Sixth Supplemental Indenture, dated as of February 6, 2015, between Northrop Grumman Corporation and The Bank of NewYork Mellon, as successor to JPMorgan Chase Bank, Trustee, to Indenture dated as of November 21, 2001 (incorporated byreference to Exhibit 4.1 to Form 8-K filed February 6, 2015)4(ii)Form of 3.850% Senior Note due 2045 (incorporated by reference to Exhibit 4.1 to Form 8-K filed February 6, 2015)10(a)Amended and Restated Credit Agreement, dated as of July 8, 2015, among Northrop Grumman Corporation, as Borrower;Northrop Grumman Systems Corporation, as Guarantor; the lenders party thereto and JPMorgan Chase Bank, N.A., asAdministrative Agent (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 9, 2015)10(b)Credit Agreement dated as of August 29, 2013, among Northrop Grumman Corporation, as Borrower; Northrop GrummanSystems Corporation, as Guarantor; the Lenders party thereto; JPMorgan Chase Bank, N.A., as Administrative Agent; anIssuing Bank and a Swingline Lender, and The Royal Bank of Scotland plc, Citibank, N.A., and Wells Fargo Bank, NationalAssociation, as Issuing Banks and Syndication Agents (incorporated by reference to Exhibit 10.1 to Form 8-K filed August 30,2013)10(c)Form of Guarantee dated as of April 3, 2001, by Northrop Grumman Corporation of the indenture indebtedness issued byLitton Industries, Inc. (predecessor-in-interest to Northrop Grumman Systems Corporation) (incorporated by reference toExhibit 10.10 to Form 8-K filed April 17, 2001)-83-NORTHROP GRUMMAN CORPORATION10(d)Form of Guarantee dated as of April 3, 2001, by Northrop Grumman Corporation of Northrop Grumman Systems Corporationindenture indebtedness (incorporated by reference to Exhibit 10.11 to Form 8-K and filed April 17, 2001)10(e)Form of Guarantee dated as of March 27, 2003, by Northrop Grumman Corporation, as Guarantor, in favor of JP Morgan ChaseBank, 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 forthe quarter ended March 31, 2003, filed May 14, 2003)+10(f)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)+10(g)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)+10(h)Northrop Grumman 2001 Long-Term Incentive Stock Plan (As amended through December 19, 2007) (incorporated byreference to Exhibit A to the Company’s Proxy Statement on Schedule 14A for the 2008 Annual Meeting of Shareholders filedApril 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 endedDecember 31, 2004, filed March 4, 2005)(iii)Form of letter from Northrop Grumman Corporation regarding Stock Option Retirement Enhancement (incorporated by reference toExhibit 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 endedDecember 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 quarterended 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 endedMarch 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 March31, 2009, filed April 22, 2009)(viii)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)(ix)Form of Agreement for 2011 Stock Options granted under the Northrop Grumman 2001 Long-Term Incentive Stock Plan (Asamended through December 19, 2007) (incorporated by reference to Exhibit 10.1 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 (Asamended through December 19, 2007) (incorporated by reference to Exhibit 10.3 of Form 8-K filed February 22, 2011)+10(i)Amended and Restated 2011 Long-Term Incentive Stock Plan (as amended and restated effective as of May 20, 2015)(incorporated by reference to Appendix B to the Northrop Grumman Corporation Proxy Statement on Schedule 14A for the2015 Annual Meeting of Shareholders filed April 6, 2015, File No. 001-16411)(i)Northrop Grumman Corporation Equity Grant Program for Non-Employee Directors under the Northrop Grumman 2011 Long-TermIncentive Stock Plan, Amended and Restated Effective January 1, 2016 (incorporated by reference to Exhibit 10.1 to Form 10-Q forthe quarter ended September 30, 2015, filed October 28, 2015)+10(j)Northrop Grumman 2011 Long-Term Incentive Stock Plan (as Amended Through December 4, 2014) (incorporated byreference to Exhibit 10(h) to Form 10-K for the year ended December 31, 2014, filed February 2, 2015)-84-NORTHROP GRUMMAN CORPORATION(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-TermIncentive Stock Plan, Amended and Restated Effective January 1, 2015 (incorporated by reference to Exhibit 10(h)(ii) to Form 10-Kfor the year ended December 31, 2014, filed February 2, 2015)(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 the2011 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 the2011 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)(viii)Grant Certificate Specifying the Terms and Conditions Applicable to 2014 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 24, 2014)(ix)Grant Certificate Specifying the Terms and Conditions Applicable to 2014 Restricted Performance Stock Rights Granted Under the2011 Long-Term Incentive Stock Plan (incorporated by reference to Exhibit 10.2 to Form 8-K filed February 24, 2014)(x)Amended and Restated Grant Certificate Specifying the Terms and Conditions Applicable to 2014 Restricted Stock Rights GrantedUnder the 2011 Long-Term Incentive Stock Plan (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended June30, 2014, filed July 23, 2014)(xi)Amended and Restated Grant Certificate Specifying the Terms and Conditions Applicable to 2014 Restricted Performance StockRights Granted Under the 2011 Long-Term Incentive Stock Plan (incorporated by reference to Exhibit 10.3 to Form 10-Q for thequarter ended June 30, 2014, filed July 23, 2014)(xii)Grant Certificate Specifying the Terms and Conditions Applicable to 2015 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 20, 2015)(xiii)Grant Certificate Specifying the Terms and Conditions Applicable to 2015 Restricted Performance Stock Rights Granted Under the2011 Long-Term Incentive Stock Plan (incorporated by reference to Exhibit 10.2 to Form 8-K filed February 20, 2015)+10(k)Northrop Grumman Supplemental Plan 2 (Amended and Restated Effective as of January 1, 2014) (incorporated by reference toExhibit 10(l) to Form 10-K for the year ended December 31, 2013, Filed February 3, 2014)(i)Appendix B to the Northrop Grumman Supplemental Plan 2: ERISA Supplemental Program 2 (Amended and Restated Effective as ofJanuary 1, 2014) (incorporated by reference to Exhibit 10(l)(i) to Form 10-K for the year ended December 31, 2013, filed February 3,2014)(ii)Appendix F to the Northrop Grumman Supplemental Plan 2: CPC Supplemental Executive Retirement Program (Amended andRestated Effective as of January 1, 2012) (incorporated by reference to Exhibit 10(k)(iii) to Form 10-K for the year ended December31, 2011, filed February 8, 2012)(iii)Appendix G to the Northrop Grumman Supplemental Plan 2: Officers Supplemental Executive Retirement Program (Amended andRestated Effective as of January 1, 2012) (incorporated by-85-NORTHROP GRUMMAN CORPORATIONreference to Exhibit 10(k)(iv) to Form 10-K for the year ended December 31, 2011, filed February 8, 2012)*(iv) Appendix I to the Northrop Grumman Supplemental Plan 2: Officers Supplemental Executive Retirement Program II+10(l)Northrop Grumman Supplementary Retirement Income Plan (formerly TRW Supplementary Retirement Income Plan)(Amended and Restated Effective January 1, 2014) (incorporated by reference to Exhibit 10(m) to Form 10-K for the yearended December 31, 2013, filed February 3, 2014)*+10(m)Northrop Grumman Electronic Systems Executive Pension Plan (Amended and Restated Effective as of January 1, 2016)+10(n)Severance Plan for Elected and Appointed Officers of Northrop Grumman Corporation (Amended and Restated Effective July20, 2012) (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 2012, filed October 23,2012)+10(o)Letter dated May 15, 2013, between the Board of Directors and Wesley G. Bush (incorporated by reference to Exhibit 99.1 toForm 8-K filed May 15, 2013)+10(p)Non-Employee Director Compensation Term Sheet, effective January 1, 2015 (incorporated by reference to Exhibit 10(p) toForm 10-K for the year ended December 31, 2014, filed February 2, 2015)+10(q)Non-Employee Director Compensation Term Sheet, effective May 20, 2015 (incorporated by reference to Exhibit 10.1 to Form10-Q for the quarter ended June 30, 2015, filed July 29, 2015)+10(r)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)+10(s)Northrop Grumman Deferred Compensation Plan (Amended and Restated Effective as of January 1, 2013) (incorporated byreference to Exhibit 10(t) to Form 10-K for the year ended December 31, 2012, filed February 4, 2013)+10(t)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)+10(u)Northrop Grumman 2006 Annual Incentive Plan and Incentive Compensation Plan (for Non-Section 162(m) Officers), asamended and restated effective January 1, 2009 (incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter endedMarch 31, 2009, filed April 22, 2009)+*10(v)Northrop Grumman Savings Excess Plan (Amended and Restated Effective as of January 1, 2016)+*10(w)Northrop Grumman Officers Retirement Account Contribution Plan (Amended and Restated Effective as of January 1, 2015)+10(x)Compensatory Arrangements of Certain Officers (incorporated by reference to Item 5.02(e) of Form 8-K filed February 20,2015)+10(y)Offering letter dated February 1, 2007 from Northrop Grumman Corporation to James F. Palmer relating to position ofCorporate Vice President and Chief Financial Officer (incorporated by reference to Exhibit 10(3) to Form 10-Q for the quarterended March 31, 2007, filed April 24, 2007), as amended by Amendment to Letter Agreement between Northrop GrummanCorporation and James F. Palmer dated December 17, 2008 (incorporated by reference to Exhibit 10.3 to Form 8-K filedDecember 19, 2008)-86-NORTHROP GRUMMAN CORPORATION+10(z)Northrop Grumman Supplemental Retirement Replacement Plan, as Restated, dated January 1, 2008 between NorthropGrumman 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 datedJanuary 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 ofOctober 4, 2007 (incorporated by reference to Exhibit 10(2) to Form 10-Q for the quarter ended June 30, 2008, filed July 29,2008)+10(ee)Executive Dental Insurance Policy Group Numbers 5134 and 5135 (incorporated by reference to Exhibit 10(m) to Form 10-Kfor the year ended December 31, 1995, filed February 22, 1996), as amended by action of the Compensation Committee of theBoard of Directors of Northrop Grumman Corporation effective July 1, 2009 (incorporated by reference to Item 5.02(e) of Form8-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 June30, 2011, filed July 27, 2011)+10(gg)Letter dated December 16, 2009 from Northrop Grumman Corporation to Wesley G. Bush regarding compensation effectiveJanuary 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 (incorporatedby reference to Exhibit A to the Company’s Proxy Statement on Schedule 14A for the 2007 Meeting of Shareholders filedApril 12, 2007)*+10(ii)Relocation Agreement between Northrop Grumman Corporation and Gloria A. Flach dated December 1, 2015*+10(jj)Relocation Agreement between Northrop Grumman Corporation and Kathy J. Warden dated December 1, 2015*12(a)Computation of Ratio of Earnings to Fixed Charges*21Subsidiaries*23Consent of Independent Registered Public Accounting Firm*24Power of Attorney*31.1Rule 13a-15(e)/15d-15(e) Certification of Wesley G. Bush (Section 302 of the Sarbanes-Oxley Act of 2002)*31.2Rule 13a-15(e)/15d-15(e) Certification of Kenneth L. Bedingfield (Section 302 of the Sarbanes-Oxley Act of 2002)**32.1Certification of Wesley G. Bush pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002-87-NORTHROP GRUMMAN CORPORATION**32.2Certification of Kenneth L. Bedingfield pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002*101Northrop Grumman Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2015, formatted in XBRL(Extensible Business Reporting Language); (i) the Consolidated Statements of Earnings and Comprehensive Income (Loss),(ii) Consolidated Statements of Financial Position, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statementsof 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-88-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 1st day of February 2016. 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 1st day of February 2016, by the following persons and in the capacities indicated. Signature Wesley G. Bush* Title Chairman, Chief Executive Officer and President (Principal Executive Officer), and Director Kenneth L. Bedingfield* Corporate Vice President and Chief Financial Officer (Principal Financial Officer) Michael A. Hardesty Marianne C. Brown* Victor H. Fazio* Donald E. Felsinger* Bruce S. Gordon* William H. Hernandez* Madeleine A. Kleiner* Karl J. Krapek* Richard B. Myers* Gary Roughead* Thomas M. Schoewe* James S. Turley* *By: /s/ Jennifer C. McGarey Jennifer C. McGarey Corporate Vice President and Secretary Attorney-in-Fact pursuant to a power of attorney Corporate Vice President, Controller and Chief Accounting Officer Director Director Director Director Director Director Director Director Director Director Director -89- -89- USE OF NON-GAAP FINANCIAL MEASURES This Annual Report contains non-GAAP financial measures, as defined by SEC Regulation G. While we believe that these non-GAAP financial measures may be useful in evaluating our financial information, they should be considered as supplemental in nature and not as a substitute for financial information prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Definitions for the non-GAAP financial measures contained in this Annual Report and reconciliations are provided below. Other companies may define these measures differently or may utilize different non-GAAP financial measures. ADJUSTED CASH PROVIDED BY OPERATIONS (ALSO REFERRED TO AS: “CASH PROVIDED BY OPERATING ACTIVITIES BEFORE AFTER-TAX DISCRETIONARY PENSION CONTRIBUTIONS”): Cash provided by operating activities before the after-tax impact of discretionary pension contributions. Cash provided by operating activities before discretionary pension contributions has been provided for consistency and comparability of financial performance and is reconciled below. FREE CASH FLOW: Net cash provided by operating activities less capital expenditures. We use free cash flow as a key factor in our planning for, and consideration of, strategic acquisitions, stock repurchases and the payment of dividends. 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. Free cash flow is reconciled below. ADJUSTED FREE CASH FLOW FROM OPERATIONS (ALSO REFERRED TO AS: “FREE CASH FLOW BEFORE AFTER-TAX DISCRETIONARY PENSION CONTRIBUTIONS”): Free cash flow before the after-tax impact of discretionary pension contributions. We use free cash flow before discretionary pension contributions as a key factor in our planning for, and consideration of, strategic acquisitions, stock repurchases and the payment of dividends. 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. Free cash flow before after-tax discretionary pension contributions is reconciled below. ($M) Cash provided by operating activities before after-tax discretionary pension contributions After-tax discretionary pension pre-funding impact Net Cash provided by operating activities Less: Capital expenditures Free cash flow After-tax discretionary pension pre-funding impact 2015 2014 2013 $ 2,487 $ 2,593 $ 2,806 (325) 2,162 (471) 1,691 325 — 2,593 (561) 2,032 — (323) 2,483 (364) 2,119 323 Free cash flow before after-tax discretionary pension contributions $ 2,016 $ 2,032 $ 2,442 northrop grumman 2015 annual report GENERAL INFORMATION NORTHROP GRUMMAN ON THE INTERNET Information on Northrop Grumman and its sectors, including press releases and this annual report, can be found at: www.northropgrumman.com ANNUAL MEETING Of SHAREHOLDERS Wednesday, May 18, 2016 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 30170 College Station, TX 77842-3170 (877) 498-8861 www.computershare.com/investor 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 2015 annual report 2980 Fairview Park Drive Falls Church, VA 22042-4511 www.northropgrumman.com 

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