2017
ANNUAL REPORT
SELECTED FINANCIAL HIGHLIGHTS
3
0
8
5
2
$
,
8
0
5
4
2
$
,
6
2
5
3
2
$
,
9
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2
,
3
$
3
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1
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6
7
0
,
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$
.
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1
$
.
9
1
2
1
$
.
9
3
0
1
$
15
16
17
15
16
17
15
16
17
SALES
( $ in millions )
OPERATING INCOME
( $ in millions )
DILUTED EPS EXCLUDING 2017
TAX REFORM AND RELATED
DISCRETIONARY PENSION
CONTRIBUTION IMPACTS*
0
9
3
$
.
0
5
3
$
.
0
1
3
$
.
8
3
9
,
2
$
3
1
8
,
2
$
7
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2
$
,
6
1
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2
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,
3
9
8
1
$
,
0
1
0
,
2
$
15
16
17
15
16
17
15
16
17
CASH DIVIDENDS DECLARED
(per common share)
CASH PROVIDED BY OPERATING
ACTIVITIES BEFORE AFTER-TAX
DISCRETIONARY PENSION
CONTRIBUTION*
( $ in millions )
FREE CASH FLOW BEFORE
AFTER-TAX DISCRETIONARY
PENSION CONTRIBUTION*
( $ in millions )
*Non-GAAP financial metric. For more information, including a definition, reconciliation to the most directly comparable GAAP
measure, and why we believe this measure may be useful to investors, please refer to “Use of Non-GAAP Financial Measures” on
the page preceding the back cover of this Annual Report.
DEAR FELLOW SHAREHOLDERS
We are pleased to report another year of strong financial
At Northrop Grumman, corporate responsibility and
results reflecting our continued focus on sustainable
sustainability are important components of our business
top performance for our shareholders, customers and
and operating strategies. We take pride in conducting our
employees. We are investing in our business globally while
business for the benefit of all our stakeholders, including
delivering innovative and affordable solutions for our
the communities where we operate. In 2017, Northrop
customers.
Grumman, the Northrop Grumman Foundation and
Excellent results from all three of our businesses combined
to generate higher operating income and, before the
impacts of the Tax Cuts and Jobs Act and our related
discretionary pension contribution, higher earnings and
cash generation than in 2016.
Our capital deployment strategy continues to serve us
and our shareholders well. Our robust capital expenditures
reflect the quality of our opportunities and support our
foundation for long-term profitable growth. In addition
to these investments, we also took an important step
to broaden our portfolio by reaching an agreement to
ECHO—our Employees Charity Organization—contributed
more than $30 million in support of assistance to veterans,
service members and their families; science, technology,
engineering and math (STEM) programs for young people;
and help for those with critical needs.
Last year, Northrop Grumman was included in the Dow
Jones Sustainability Index for North America for the second
year in a row, maintained a leadership score on the CDP
climate change program for the sixth consecutive year, and
was named in DiversityInc’s annual Top 50 Companies for
Diversity list for an eighth consecutive year.
acquire Orbital ATK.
As we continue to grow as a company, we remain
For our shareholders, we raised our quarterly dividend
11 percent and reduced our weighted average diluted
shares outstanding by 3 percent. In 2017, we returned
committed to maintaining the highest ethical standards
and producing the highest quality products and services for
our customers. We appreciate your continued investment
in Northrop Grumman as we drive profitable growth for the
more than $1 billion to our shareholders through dividends
long term.
and share repurchases. Total shareholder return was 33.9
percent in 2017, another strong performance relative to our
peers and the S&P 500.
WES BUSH
Chairman and Chief Executive Officer
March 22, 2018
NORTHROP GRUMMAN 2017 ANNUAL REPORT
PAGE 1
OUR
GLOBAL
CAPABILITIES
Northrop Grumman is a leading global
security company offering a broad port-
AUTONOMOUS SYSTEMS
Northrop Grumman is a leader in the design,
CYBER
Northrop Grumman is a leading provider of
folio of capabilities and technologies
that enable us to deliver innovative
products, systems and solutions for
development and production of autonomous
cyber resilience solutions and full-spectrum
systems, primarily intelligence, surveillance,
cyber capabilities. With more than thirty years
and reconnaissance (ISR) systems for tactical
of cyber mission partnership, the company
and strategic missions. Key programs include
delivers trusted cyber solutions for our nation
applications that range from undersea
high-altitude long-endurance systems, such
and allies.
to outer space and into cyberspace.
as the Global Hawk system, which provides
We provide products, systems and
solutions in autonomous systems; cyber;
command, control, communications
and computers, intelligence, surveil-
near real-time high resolution imagery of
The company is differentiating and creating
land masses for theater awareness; the Triton
mission success through cyber mission man-
system, which provides real-time ISR over
agement; large, scalable cyber solutions;
vast ocean and coastal regions for mari-
agile software expertise; situational aware-
time domain awareness; the NATO Alliance
ness; C2; advanced security services; and
Ground Surveillance system for multinational
full-spectrum cyber operations. The company
lance, and reconnaissance (C4ISR);
theater operations; the ship-based vertical
provides information sharing and analy-
strike; and logistics and modernization
in support of customers worldwide.
take off and landing Fire Scout system, which
sis solutions, and engineers sophisticated
provides situational awareness for maritime
enterprise-wide solutions to design, build and
forces and precision targeting support; and
manage resilient and secure IT infrastructures.
the Navy Unmanned Combat Air System
demonstrating an unmanned combat air
The company has created an ecosystem
vehicle for carrier-based operations.
of STEM training and curricula to develop a
robust, diverse pipeline of passionate
professionals who will secure our nation’s
cyber future.
PAGE 2
C4ISR
Northrop Grumman is a leader in advanced
STRIKE
Northrop Grumman designs, develops,
LOGISTICS & MODERNIZATION
Northrop Grumman is a leading provider
end-to-end mission solutions and multifunc-
manufactures, and integrates long-range
of logistics solutions supporting the full life
tion systems primarily for U.S. Department
strike aircraft systems, tactical aircraft sys-
cycle of platforms and systems for global
of Defense, intelligence community, and
tems, directed energy systems and strategic
defense and federal-civil customers. The
foreign governments, as well as commer-
deterrent systems. Key long-range strike
company delivers innovative, technology-
cial customers. Major C4ISR products and
aircraft programs include the B-21 Raider
driven solutions and services to enable cost-
services include the Integrated Air and Missile
long-range strike bomber and modernization
effective improvements for customer mission
Defense Battle Command System and the
and sustainment services for the B-2 Spirit
effectiveness.
Battlefield Airborne Communications Node.
bomber. The company also designs, devel-
In addition, the company designs, develops,
ops, manufactures and integrates the F-35
Competencies include aircraft, electronics
manufactures, and integrates airborne C4ISR
Lightning II center fuselage and F/A-18 Super
and software sustainment and engineering;
including the E-2D Advanced Hawkeye and
Hornet center/aft fuselage sections. Addition-
electronic warfare/attack and avionics/
Joint Surveillance Target Attack Radar System
ally, Northrop Grumman leads the operations
electronics subsystems modernization;
(JSTARS), Global Hawk and Triton programs.
and sustainment for the ground subsystem
supply chain management; deployed
The company also designs, develops, manu-
of the Minuteman III Intercontinental Ballistic
logistics support for manned and unmanned
factures, and integrates spacecraft systems,
Missile system (ICBM). In 2017, the U.S. Air
weapon systems; field services, on-going
subsystems, sensors and communications
Force also selected Northrop Grumman
maintenance and technical assistance;
payloads in support of space C4ISR.
to execute a technology maturation and
and delivering rapid response in support of
risk reduction phase of the Ground Based
global customers.
Strategic Deterrent program, the nation’s next
ICBM system.
PAGE 3
ELECTED OFFICERS (As of January 1, 2018)
WESLEY G. BUSH
Chairman and Chief Executive Officer
KATHY J. WARDEN
President and Chief Operating Officer
PATRICK M. ANTKOWIAK
Corporate Vice President
and Chief Technology Officer
KENNETH L. BEDINGFIELD
Corporate Vice President
and Chief Financial Officer
MARK A. CAYLOR
Corporate Vice President
and President,
Mission Systems
SHEILA C. CHESTON
Corporate Vice President
and General Counsel
LISA R. DAVIS
Corporate Vice President,
Communications
MICHAEL A. HARDESTY
Corporate Vice President,
Controller and
Chief Accounting Officer
CHRISTOPHER T. JONES
Corporate Vice President
and President,
Technology Services
LESLEY A. KALAN
Corporate Vice President,
Government Relations
JENNIFER C. MCGAREY
Corporate Vice President
and Secretary
STEPHEN C. MOVIUS
Corporate Vice President and Treasurer,
Vice President Investor Relations
JANIS G. PAMILJANS
Corporate Vice President
and President,
Aerospace Systems
DENISE M. PEPPARD
Corporate Vice President
and Chief Human Resources Officer
DAVID T. PERRY
Corporate Vice President
and Chief Global Business
Development Officer
SHAWN N. PURVIS
Corporate Vice President
and President of Enterprise Services
BOARD OF DIRECTORS (As of January 1, 2018)
WESLEY G. BUSH
Chairman and Chief Executive Officer,
Northrop Grumman Corporation
MARIANNE C. BROWN 1 3
Co-Chief Operating Officer, Global Financial
Solutions, 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)
ANN M. FUDGE 1 3
Former Chairman and
Chief Executive Officer,
Young & Rubicam Brands
(marketing communications company)
BRUCE S. GORDON 1† 4
Former President, Retail Markets Group,
Verizon Communications Inc.
(telecommunications company);
Former President and Chief Executive Officer,
NAACP
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)
GARY ROUGHEAD 2 4
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 2 3
Former Chairman and
Chief Executive Officer,
Ernst & Young
(a professional services
organization)
MARK A. WELSH 1 3
Dean, Bush School of
Government and Public Service,
Texas A&M University;
General, United States Air Force (Ret.)
and Former Chief of Staff,
United States Air Force
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 2017 ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
_____________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to Commission file number 1-16411
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
2980 Fairview Park Drive
Falls Church, Virginia
(Address of principal executive offices)
80-0640649
(I.R.S. Employer
Identification Number)
22042
(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 class
Common Stock, $1 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Smaller reporting company
Non-accelerated filer
(Do not check if a smaller reporting company)
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
As of June 30, 2017, 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 $44.5 billion.
As of January 25, 2018, 174,087,585 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Northrop Grumman Corporation’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation
14A for the 2018 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
NORTHROP GRUMMAN CORPORATION
TABLE OF CONTENTS
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Data
Overview
Consolidated Operating Results
Segment Operating Results
Product and Service Analysis
Backlog
Liquidity and Capital Resources
Critical Accounting Policies, Estimates and Judgments
Other Matters
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings and Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders’ Equity
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
2. Pending Acquisition of Orbital ATK
3. Earnings Per Share, Share Repurchases and Dividends on Common Stock
4. Segment Information
5. Accounts Receivable, Net
6. Inventoried Costs, Net
7. Income Taxes
8. Goodwill and Other Purchased Intangible Assets
9. Fair Value of Financial Instruments
i
Page
1
6
18
19
20
20
21
23
24
24
26
27
31
32
32
35
39
40
41
41
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Page
61
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91
10. Long-term Debt
11. Investigations, Claims and Litigation
12. Commitments and Contingencies
13. Retirement Benefits
14. Stock Compensation Plans and Other Compensation Arrangements
15. Unaudited Selected Quarterly Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 15. Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
PART IV
ii
NORTHROP GRUMMAN CORPORATION
Item 1. Business
HISTORY AND ORGANIZATION
PART I
History
Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”)
is a leading global security company. We offer a broad portfolio of capabilities and technologies that enable us to
deliver innovative products, systems and solutions for applications that range from undersea to outer space and into
cyberspace. We provide products, systems and solutions in autonomous systems; cyber; command, control,
communications and computers, intelligence, surveillance and reconnaissance (C4ISR); strike; and logistics and
modernization. We participate in many high-priority defense and government programs in the United States (U.S.)
and abroad. We conduct most of our business with the U.S. Government, principally the Department of Defense
(DoD) and intelligence community. We also conduct business with foreign, state and local governments, as well as
commercial customers. For a discussion of risks associated with our operations, see “Risk Factors.”
The company originally was formed in Hawthorne, California in 1939, as Northrop Aircraft Incorporated and was
reincorporated in Delaware in 1985, as Northrop Corporation. Northrop Aircraft Incorporated was a principal
developer of flying wing technology, including the B-2 Spirit bomber. The company developed into one of the
largest defense contractors in the world through a series of acquisitions, as well as organic growth. In 1994, we
acquired Grumman Corporation (Grumman), after which time the company was renamed Northrop Grumman
Corporation. Grumman was a premier military aircraft systems integrator and builder of the Lunar Module that first
delivered humans to the surface of the moon. In 1996, we acquired the defense and electronics businesses of
Westinghouse Electric Corporation, a world leader in the development and production of sophisticated radar and
other electronic systems for the nation’s defense, civil aviation, and other U.S. and international applications. In
2001, we acquired Litton Industries, a global electronics and information technology company, and one of the
nation’s leading full service shipbuilders. Also in 2001, we acquired Newport News Shipbuilding, a leading designer
and builder of nuclear-powered aircraft carriers and submarines. In 2002, we acquired TRW Inc., a leading
developer of military and civil space systems and payloads, as well as a leading global integrator of complex,
mission-enabling systems and services. In 2011, we completed the spin-off to our shareholders of Huntington Ingalls
Industries, Inc. (HII). HII operates our former Shipbuilding business, comprised largely of a part of Litton Industries
and Newport News Shipbuilding.
On September 17, 2017, the company entered into a definitive merger agreement to acquire Orbital ATK, Inc.
(Orbital ATK). We currently expect the transaction to close in the first half of 2018, after receiving regulatory
approvals. Upon completion of the Orbital ATK Acquisition, we plan to establish Orbital ATK as a new, fourth
business sector named Northrop Grumman Innovation Systems. See Notes 2 and 10 to the consolidated financial
statements for further information.
Organization
From time to time, we acquire or dispose of businesses and realign contracts, programs or businesses among and
within our operating segments. Internal realignments are typically designed to leverage existing capabilities more
fully and to enhance development and delivery of products and services. The operating results for all periods
presented have been revised to reflect any such changes made through December 31, 2017. The company is aligned
in three operating sectors, which also comprise our reportable segments: Aerospace Systems, Mission Systems and
Technology Services. See Note 4 to our consolidated financial statements for further information.
AEROSPACE SYSTEMS
Aerospace Systems, headquartered in Redondo Beach, California, is a leader in the design, development, integration
and production of manned aircraft, autonomous systems, spacecraft, high-energy laser systems, microelectronics and
other systems and subsystems. Aerospace Systems’ customers, primarily the DoD and other U.S. Government
agencies, use these systems in mission areas including intelligence, surveillance and reconnaissance (ISR), strike
operations, communications, earth observation, and space science and exploration. The sector is reported in three
business areas, which reflect our core capabilities: Autonomous Systems, Manned Aircraft and Space.
Autonomous Systems – designs, develops, manufactures, integrates and sustains autonomous aircraft systems for
tactical and strategic ISR missions. Key programs include high-altitude long-endurance (HALE) systems, such as
the Global Hawk system, which provides near real-time high resolution imagery of land masses for theater
awareness; the Triton system, which provides real-time ISR over vast ocean and coastal regions for maritime domain
awareness; and the North Atlantic Treaty Organization (NATO) Alliance Ground Surveillance (AGS) system for
-1-
NORTHROP GRUMMAN CORPORATION
multinational theater operations; the ship-based vertical take off and landing (VTOL) Fire Scout system, which
provides situational awareness for maritime forces and precision targeting support; and the Navy Unmanned Combat
Air System demonstrating an unmanned combat air vehicle for carrier-based operations.
Manned Aircraft – designs, develops, manufactures, and integrates airborne C4ISR systems, long-range strike
aircraft systems, tactical aircraft systems and directed energy systems. Key airborne C4ISR programs include the
E-2D Advanced Hawkeye and Joint Surveillance Target Attack Radar System (JSTARS). Key long-range strike
aircraft programs include the B-21 Raider long-range strike bomber and modernization and sustainment services for
the B-2 Spirit bomber. Tactical aircraft includes the design, development, manufacture and integration of F-35
Lightning II center fuselage and F/A-18 Super Hornet center/aft fuselage sections. Directed energy involves the
design, development, and integration of laser weapon systems for air, ground, and sea platforms, and production of
the Airborne Laser Mine Detection System for the U.S. Navy and international customers.
Space – designs, develops, manufactures, and integrates spacecraft systems, subsystems, sensors and
communications payloads in support of space C4ISR and science missions. Key programs include the James Webb
Space Telescope (JWST), a large infrared telescope being built for the National Aeronautics and Space
Administration (NASA) that will be deployed in space to study the origins of the universe; Advanced Extremely
High Frequency (AEHF) payloads providing survivable, protected communications to U.S. forces; Space-Based
Infrared System (SBIRS) payloads providing data for missile surveillance, missile defense, technical intelligence
and battlespace characterization; and restricted programs.
MISSION SYSTEMS
Mission Systems, headquartered in Linthicum, Maryland, is a leader in advanced end-to-end mission solutions and
multifunction systems for DoD, intelligence community, international, federal-civil and commercial customers.
Major products and services include C4ISR systems; radar, electro-optical/infrared (EO/IR) and acoustic sensors;
electronic warfare systems; cyber solutions; space systems; intelligence processing systems; air and missile defense
(AMD) integration; navigation; and shipboard missile and encapsulated payload launch systems. The sector is
reported in three business areas, which reflect our core capabilities: Sensors and Processing, Cyber and ISR, and
Advanced Capabilities.
Sensors and Processing – delivers products, systems and services that support ground-based and fixed wing and
rotary wing aircraft platforms with radar, electronic warfare, communications, command and control (C2), Signals
Intelligence (SIGINT), and situational awareness mission systems. Competencies include targeting, surveillance, air
defense, and early warning & control radar systems; EO/IR and radio frequency (RF) self-protection, targeting and
surveillance systems; electronic attack and electronic support systems; communications and intelligence systems;
digitized cockpits; and multi-sensor processing. Key programs include Airborne Early Warning & Control
(AEW&C) and air-to-ground sensors; Battlefield Airborne Communications Node (BACN); F-35 fire control radar,
Distributed Aperture System (DAS), and Communications, Navigation and Identification (CNI) integrated avionics
system; Ground/Air Task Oriented Radar (G/ATOR); Joint Counter Radio-Controlled Improvised Explosive Device
Electronic Warfare (JCREW); RF and Infrared Countermeasures (IRCM) programs for both fixed wing and rotary
wing platforms; EO/IR targeting and surveillance programs; Scalable Agile Beam Radar (SABR); UH-60V Black
Hawk integrated mission equipment package; and restricted programs.
Cyber and ISR – delivers products, systems and services that support full-spectrum cyber solutions, space-based
payload and exploitation systems, space-based C2 and processing systems, and enterprise integration of multi-
intelligence mission data across all domains. Competencies include cyber mission management; large-scale cyber
solutions for national security applications; missile warning and defense systems; weather and satellite
communications; ground software systems; and geospatial intelligence and data fusion, specializing in the
collection, processing and exploitation of data. Key programs include exploitation and cyber programs; operational
services to the United States Computer Emergency Readiness Team (US-CERT); worldwide IT coverage and
support services through Solutions for the Information Technology Enterprise (SITE); the Enterprise Application
Managed Services (EAMS) program; and restricted programs.
Advanced Capabilities – provides integration and interoperability of net-enabled battle management, sensors,
targeting and surveillance systems; air and missile defense C2; and global battlespace awareness. It also delivers
products, systems and services that support maritime platforms and embedded navigation and positioning sensors for
a range of platforms including ships, aircraft, spacecraft and weapons. Competencies include advanced AMD
integration with land, air and space assets; shipboard missile and encapsulated payload launch systems; unmanned
maritime vehicles and high-resolution undersea sensors; and inertial navigation systems. Key programs include the
Integrated Air and Missile Defense Battle Command System (IBCS); Ground-based Midcourse Defense (GMD)
-2-
NORTHROP GRUMMAN CORPORATION
system; Surface Electronic Warfare Improvement Program (SEWIP) Block III; the Embedded Global Positioning
System (GPS)/Inertial Navigation Systems-Modernization; AQS-24B Minehunting System; and Trident and
Virginia-Class payload launch systems.
TECHNOLOGY SERVICES
Technology Services, headquartered in Herndon, Virginia, is a leader in logistic solutions supporting the full life
cycle of platforms and systems and delivering innovative, technology-driven solutions and services for DoD, global
defense and federal-civil customers. Major products and services include software and system sustainment;
modernization of platforms and associated subsystems; advanced training solutions; and integrated logistics support.
The sector is reported in three business areas, which reflect our core capabilities: Global Logistics and
Modernization; Advanced Defense Services; and System Modernization and Services.
Global Logistics and Modernization – provides global logistics support, sustainment, operations and modernization
for air, sea and ground systems and weapon system components. Competencies include aircraft, electronics and
software sustainment and engineering; electronic warfare/attack and avionics/electronics subsystems modernization;
supply chain management; manned and unmanned weapon systems deployed logistics support; field services, on-
going maintenance and technical assistance; and rapid response in support of global customers. Capabilities include:
integration, delivery and global support of unmanned special mission aircraft solutions for platforms such as the
MQ-5B Hunter, Global Hawk and Triton; subsystem and component-level depot repair and modernization for
products such as AAQ-24, APN-241, ALQ-135 and ALQ-131A sensors; missile sustainment and modernization
solutions for products, including the Intercontinental Ballistic Missile Minuteman III; and weapon systems
sustainment, refurbishment, overhaul, modernization and contractor logistics support for several unique low-density/
high-demand platforms, including the B-2 Spirit bomber, JSTARS, KC-30A and UK Airborne Warning and Control
System.
Advanced Defense Services – provides advanced defense and security services including cyber; network operations
and security; system and software sustainment and modernization; and training to strengthen the national security of
the U.S. and its allies. Key programs include the Marine Corps Cyber Operations Group, which provides network
defense services for the U.S. Marine Corps; Ministry of the National Guard (MNG) Training Support, through our
interest in a joint venture for which we consolidate the financial results, which provides equipment fielding, training
and maintenance, logistics and operations support to the Saudi Arabia MNG; and the Mission Command Training
Program, the Army's premier leadership and staff training exercise program at the tactical and operational level.
System Modernization and Services – provides full life cycle information systems modernization and sustainment
primarily in support of civilian government agencies. Competencies include analytics; mission information
processing; cyber and secure networking; and software development. Capabilities include fraud detection and
compliance services, data analysis and decision support tools, and software system sustainment; services to U.S.
Government healthcare agencies, including benefits systems administration, fraud prevention, payment
modernization, bioinformatics, and precision health; and information sharing and analysis solutions as well as
sophisticated enterprise-wide solutions to design, build and manage resilient and secure IT infrastructures. Our
capabilities provide proactive network monitoring, patch management and desktop optimization to control and
reduce overall operating costs.
SELECTED FINANCIAL DATA AND SEGMENT OPERATING RESULTS
For a summary of selected consolidated financial information, see “Selected Financial Data.” For a more complete
understanding of our segment financial information, see “Segment Operating Results” in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” (MD&A) and Note 4 to the consolidated financial
statements.
CUSTOMER CONCENTRATION
Our largest customer is the U.S. Government. Sales to the U.S. Government accounted for 85 percent, 84 percent
and 83 percent of sales during the years ended December 31, 2017, 2016 and 2015, respectively. For further
information on sales by customer category, see Note 1 to the consolidated financial statements. No single program
accounted for more than ten percent of total sales during any period presented. See “Risk Factors” for further
discussion regarding risks related to customer concentration.
COMPETITIVE CONDITIONS
We compete with many companies in the defense, intelligence and federal markets. BAE Systems, Boeing, Booz
Allen Hamilton, General Dynamics, Harris, L3 Technologies, Leidos, Leonardo, Lockheed Martin, Raytheon and
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NORTHROP GRUMMAN CORPORATION
Thales are some of our primary competitors. Key characteristics of our industry include long operating cycles and
intense competition, which is evident through the number of competitors bidding on program opportunities and the
number of bid protests (competitor protests of U.S. Government procurement awards).
It is common in the defense industry for work on major programs to be shared among a number of companies. A
company competing to be a prime contractor may, upon ultimate award of the contract to another competitor,
become a subcontractor to the ultimate prime contracting company. It is not unusual to compete for a contract award
with a peer company and, simultaneously, perform as a supplier to or a customer of that same competitor on other
contracts, or vice versa.
SEASONALITY
No material portion of our business is considered to be seasonal.
BACKLOG
At December 31, 2017, total backlog was $42.9 billion, as compared with $45.3 billion at December 31, 2016. For
further information, see “Backlog” in MD&A.
RESEARCH AND DEVELOPMENT
Our strategy includes significant investment in research and development (R&D) to support future technologies and
mission solutions. In 2017, 2016 and 2015, we invested 2.5 percent, 2.9 percent and 3.0 percent of total sales in
company-sponsored R&D. For additional information on company-sponsored and customer-funded R&D, see Note
1 to the consolidated financial statements.
INTELLECTUAL PROPERTY
We routinely apply for and own a number of U.S. and foreign patents related to the technologies we develop. We
also develop and protect intellectual property as trade secrets. In addition to owning a large portfolio of proprietary
intellectual property, we license some intellectual property rights to third parties and we license or otherwise obtain
access to intellectual property from third parties. The U.S. Government typically holds licenses to patents developed
in the performance of U.S. Government contracts and may use or authorize others to use the inventions covered by
these patents for certain purposes. See “Risk Factors” for further discussion regarding risks related to intellectual
property.
RAW MATERIALS
We have not experienced significant delays in the supply or availability of raw materials, nor have we experienced a
significant price increase for raw materials. See “Risk Factors” for further discussion regarding risks related to raw
materials.
EMPLOYEE RELATIONS
We believe that we maintain good relations with our approximately 70,000 employees. Approximately 2,300 are
covered by 10 collective agreements in the U.S., of which we negotiated one renewal in 2017 and expect to
negotiate two renewals in 2018. See “Risk Factors” for further discussion regarding risks related to employee
relations.
REGULATORY MATTERS
Government Contract Security Restrictions
Certain classified programs with the U.S. Government are prohibited by the customer from being publicly discussed
and are therefore generally referred to as “restricted” in this Annual Report on Form 10-K. The consolidated
financial statements and financial information in this Annual Report on Form 10-K reflect the operating results of
our entire company, including restricted programs.
Contracts
We generate the majority of our business from long-term contracts with the U.S. Government for development,
production and support activities. Unless otherwise specified in a contract, allowable and allocable costs are billed to
contracts with the U.S. Government pursuant to the Federal Acquisition 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, certain legal costs, charitable donations,
advertising costs, interest expense and unallowable employee compensation and benefits costs.
We monitor our contracts on a regular basis for compliance with our policies and procedures and applicable
government regulations and laws to enhance compliance and consistent application for contracts with similar terms
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NORTHROP GRUMMAN CORPORATION
and conditions. In addition, costs incurred and allocated to contracts with the U.S. Government are routinely audited
by the Defense Contract Audit Agency (DCAA).
Our long-term contracts typically fall into one of two broad categories:
Cost-type contracts – Cost-type contracts include cost plus fixed fee, cost plus award fee and cost plus incentive fee
contracts. Cost-type contracts provide generally for reimbursement of a contractor’s allowable costs incurred plus
fee. As a result, cost-type contracts have less financial risk associated with unanticipated cost growth but generally
provide lower profit margins than fixed-price contracts. Cost-type contracts typically require that the contractor use
its best efforts to accomplish the scope of the work within some specified time and 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
determined and earned based on customer evaluation of the company’s performance against contractual criteria.
Incentive fees are generally based on cost and provide for an initially negotiated fee to be adjusted later, based on
the relationship of total allowable costs to total target costs. Award and incentive fees that can reasonably be
estimated and are deemed reasonably assured are recorded over the performance period of the contract.
Fixed-price contracts – Firm fixed-price contracts include a specified scope of work 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. As a result, fixed-price contracts have more financial risk
associated with unanticipated cost growth, but generally provide the opportunity for higher profit margins than cost-
type contracts. Certain fixed-price incentive fee contracts provide for reimbursement of the contractor’s allowable
costs plus a fee up to a cost ceiling amount, typically through a cost-sharing ratio that affects profitability. These
types of fixed-price incentive fee contracts effectively become firm fixed-price contracts once the cost-share ceiling
is reached. Time-and-materials contracts are considered fixed-price contracts as they specify a fixed hourly rate for
each labor hour charged.
Profit margins on our contracts may vary materially depending on, among other things, the contract type, contract
phase (e.g., development, low-rate production or mature production), negotiated fee arrangements, achievement of
performance objectives, and cost, schedule and technical performance.
See Note 1 to the consolidated financial statements and “Risk Factors.”
The following table summarizes sales for the year ended December 31, 2017, recognized by contract type and
customer category:
($ in millions)
Cost-type contracts
Fixed-price contracts
Total sales
U.S.
Government(1)
13,441
$
8,396
21,837
$
International(2)
641
$
2,661
3,302
$
$
$
Other
Customers
86
578
664
$
$
Percentage
of Total
Sales
55%
45%
100%
Total
14,168
11,635
25,803
(1) Sales to the U.S. Government include sales from contracts for which we are the prime contractor, as well as those for which we
are a subcontractor and the ultimate customer is the U.S. Government. Each of the company’s segments derives substantial
revenue from the U.S. Government.
(2) International sales include sales from contracts for which we are the prime contractor, as well as those for which we are a
subcontractor and the ultimate customer is an international customer. These sales include foreign military sales contracted
through the U.S. Government, direct sales with governments outside the U.S. and commercial sales outside the U.S.
Environmental
Our operations are subject to and affected by federal, state, local and foreign laws, regulations and enforcement
actions relating to protection of the environment. In 2010, we established goals for the reduction of greenhouse gas
emissions and implementation of best management practices for water use and solid waste; those goals were
achieved as of December 31, 2014. In 2015, we announced our 2020 environmental sustainability goals: to reduce
absolute greenhouse gas emissions by 30 percent from 2010 levels; to reduce potable water use by 20 percent from
2014 levels; and to achieve a 70 percent solid waste diversion rate (away from landfills).
We have incurred and expect to continue to incur capital and operating costs to comply with applicable
environmental laws and regulations and to achieve our environmental sustainability commitments. See “Risk
Factors” and Notes 1 and 12 to the consolidated financial statements.
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EXECUTIVE OFFICERS
See “Directors, Executive Officers and Corporate Governance” for information about our executive officers.
AVAILABLE INFORMATION
Our principal executive offices are located at 2980 Fairview Park Drive, Falls Church, Virginia 22042. Our
telephone number is (703) 280-2900 and our home page is www.northropgrumman.com.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statement
for the annual shareholders’ meeting, as well as any amendments to those reports, are available free of charge
through our website as soon as reasonably practicable after we file them with the U.S. Securities 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 Northrop Grumman Corporation.
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 this report, unless otherwise expressly incorporated by
reference in this report.
Item 1A. Risk Factors
Our consolidated financial position, results of operations and cash flows are subject to various risks, many of which
are not exclusively within our control, that may cause actual performance to differ materially from historical or
projected future performance. We encourage you to consider carefully the risk factors described below in evaluating
the information contained in this report as the outcome of one or more of these risks could have a material adverse
effect on our financial position, results of operations and/or cash flows.
We depend heavily on a single customer, the U.S. Government, for a substantial portion of our business. Changes
in this customer’s priorities and spending could have a material adverse effect on our financial position, results
of operations and/or cash flows.
Our primary customer is the U.S. Government, from which we derived 85 percent, 84 percent and 83 percent of our
sales during the years ended December 31, 2017, 2016 and 2015, respectively; we have a number of large programs
with the U.S. Air Force, in particular. The U.S. Government has been implementing significant reductions in
government spending and other significant program changes. We cannot predict the impact on existing, follow-on,
replacement or future programs from potential changes in priorities due to changes in defense spending levels, the
threat environment, military strategy and planning and/or changes in social, economic or political priorities.
The U.S. Government generally has the ability to terminate contracts, in whole or in part, for its convenience or for
default based on performance. In the event of termination for the U.S. Government’s convenience, contractors are
generally protected by provisions covering reimbursement for costs incurred on the contracts and profit on those
costs up to the amount authorized under the contract, but not the anticipated profit that would have been earned had
the contract been completed. Termination by the U.S. Government of a contract due to default could require us to
pay for re-procurement costs in excess of the original contract price, net of the value of work accepted from the
original contract, as well as other damages. Termination of a contract due to our default could have a material
adverse effect on our reputation, our ability to compete for other contracts and our financial position, results of
operations and/or cash flows.
The U.S. Government also has the ability to stop work under a contract for a limited period of time for its
convenience. It is possible that the U.S. Government could invoke this ability across a limited or broad number of
contracts. In the event of a stop work order, contractors are typically protected by provisions covering
reimbursement for costs incurred on the contract to date and for costs associated with the temporary stoppage of
work on the contract plus a reasonable fee. 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 full recovery from
the U.S. Government. They could also ultimately result in termination of a contract (or contracts) 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 in which we do participate, unless offset by other programs and opportunities,
could have a material adverse effect on our financial position, results of operations and/or cash flows.
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Significant delays or reductions in appropriations for our programs and U.S. Government funding more broadly
may negatively impact our business and programs and could have a material adverse effect on our financial
position, results of operations and/or cash flows.
U.S. Government programs are subject to annual congressional budget authorization and appropriation processes.
For many programs, Congress appropriates funds on a fiscal year basis even though the program performance period
may extend over several years. Consequently, programs are often partially funded initially and additional funds are
committed only as Congress makes further appropriations. If we incur costs in excess of funds obligated on a
contract, we may be at risk for reimbursement of those costs unless and until additional funds are obligated to the
contract. We cannot predict the extent to which total funding and/or funding for individual programs will be
included, increased or reduced as part of the annual budget process ultimately approved by Congress and the
President or in separate supplemental appropriations or continuing resolutions, as applicable. Laws and plans
adopted by the U.S. Government relating to, along with pressures on and uncertainty surrounding the federal budget,
potential changes in priorities and defense spending levels, 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 decisions by our customers. In the event
government funding for our significant programs becomes unavailable, or is reduced or delayed, or planned orders
are reduced, our contract or subcontract under 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
raised the statutory limit on the amount of permissible federal debt (the debt ceiling) until March 2017 and raised the
sequester caps imposed by the Budget Control Act of 2011 (the BCA) by $80 billion, split equally between defense
and non-defense discretionary spending in FY 2016 and FY 2017 ($50 billion in FY 2016 and $30 billion in FY
2017).
In March 2017, the debt ceiling was reached and the Treasury Department began taking “extraordinary measures” to
finance the government and avoid a breach of the debt ceiling. On September 8, 2017, the debt ceiling was
suspended for three months and on December 9, 2017, the Treasury Department again began taking extraordinary
measures to finance the government. It is currently estimated that the Treasury Department will run out of the ability
to take extraordinary measures to finance the government in the first half of 2018. If the debt ceiling is not raised
and is breached, we may be required to continue to perform for some period of time on certain of our U.S.
Government contracts even if the U.S. Government is not making timely payments. Unforeseen circumstances could
cause an extended debt ceiling breach and have significant near and long-term consequences for our company, our
employees, our suppliers and the defense industry.
In May 2017, the President signed into law the FY 2017 Consolidated Appropriations Act. In total for FY 2017,
Congress appropriated $524 billion in base discretionary funding for the DoD, consistent with the Budget Act.
Congress also appropriated approximately $68 billion in Overseas Contingency Operation (OCO) funding and
approximately $15 billion in additional DoD appropriations.
In May 2017, the President released his FY 2018 budget request, which seeks $575 billion for the DoD’s base
budget, approximately $52 billion above the statutory caps provided for in the BCA. The President’s budget request
also seeks an additional $65 billion in OCO funding for expeditionary needs, not capped by the BCA. On September
8, 2017, the President signed a continuing resolution which generally funded the government at FY 2017 levels
through December 8, 2017. The continuing resolution was extended to December 22, 2017 and further extended to
January 19, 2018. As Congress did not enact appropriations legislation or a new continuing resolution by January
19, 2018, on January 20, 2018, the U.S. Government temporarily shut down. On January 22, 2018, a fourth
continuing resolution was enacted, which funds the government through February 8, 2018.
The budget environment, including sequestration as currently mandated, and uncertainty surrounding the
appropriations processes, remain significant short and long-term risks. Considerable uncertainty exists regarding
how future budget and program decisions will unfold, including the defense spending priorities of the
Administration and Congress, what challenges budget reductions (required by the BCA and otherwise) will present
for the defense industry and whether an annual appropriations bill will be enacted for FY 2018. If an annual
appropriations bill is not timely enacted for FY 2018 or beyond, the U.S. Government may continue to operate under
a continuing resolution, restricting new contract or program starts, presenting resource allocation challenges and
placing limitations on some planned program budgets, and we may face a government shutdown of unknown
duration. If a prolonged government shutdown were to occur, it could result in program cancellations, disruptions
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and/or stop work orders and could limit our ability to perform on our U.S. Government contracts and the U.S.
Government’s ability to effectively progress programs and to make timely payments.
We believe continued budget pressures would have serious negative consequences for the security of our country,
the defense industrial base, including Northrop Grumman, and the customers, employees, suppliers, investors, and
communities that rely on companies in the defense industrial base. It is likely budget and program decisions made in
this environment would have long-term implications for our company and the entire defense industry.
Funding for certain programs in which we participate may be reduced, delayed or cancelled. In addition, budget cuts
globally could adversely affect the viability of our subcontractors and suppliers, and our employee base. While we
believe that our business is well-positioned in areas that the DoD and other customers have indicated are areas of
focus for future defense spending, the long-term impact of the BCA, other defense spending cuts, challenges in the
appropriations process, the debt ceiling and the ongoing fiscal debates remain uncertain.
Significant delays or reductions in appropriations; long-term funding under a continuing resolution; an extended
debt ceiling breach or government shutdown; and/or future budget and program decisions, among other items, may
negatively impact our business and programs and could have a material adverse effect on our financial position,
results of operations and/or cash flows.
We are subject to various investigations, claims, disputes, enforcement actions, litigation and other legal
proceedings that could ultimately be resolved against us.
The size, nature and complexity of our business make us susceptible to investigations, claims, disputes, enforcement
actions, litigation and other legal proceedings, particularly those involving governments. We are and may become
subject to investigations, claims, disputes, enforcement actions and administrative, civil or criminal litigation or
other legal proceedings globally and across a broad array of matters, including, but not limited to, government
contracts, false claims, false statements, mischarging, contract performance, products liability, fraud, procurement
integrity, environmental, shareholder derivative actions, intellectual property, tax, employees, export/import, anti-
corruption, labor, health and safety, accidents, employee benefits and plans, including plan administration, and
improper payments. These matters could divert financial and management resources; result in administrative, civil
or criminal fines, penalties or other sanctions (which terms include judgments or convictions and consent or other
voluntary decrees or agreements); compensatory, treble or other damages; non-monetary relief or actions; or other
liabilities; and otherwise harm our business. Government regulations provide that certain allegations against a
contractor may lead to suspension or debarment from government contracts or suspension of export privileges for
the company or one or more of its components. Suspension or debarment or criminal resolutions in particular could
have a material adverse effect on the company because of our reliance on government contracts and export
authorizations. An investigation, claim, dispute, enforcement action or litigation, even if not substantiated or fully
indemnified or insured, could also negatively impact our reputation among our customers and the public, and make
it substantially more difficult for us to compete effectively for business or obtain adequate insurance in the future.
Investigations, claims, disputes, enforcement actions or litigation could have a material adverse effect on our
financial 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 our profitability and our overall financial position.
Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and
making assumptions regarding performance. Due to the size and nature of many of our contracts, the estimation of
total revenues and costs at completion is complex and subject to many variables. Incentives, awards and/or penalties
related to performance on contracts are considered in estimating revenue and profit rates when there is sufficient
information to assess anticipated performance. Suppliers’ expected performance is 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
increased estimated contract costs may include: design issues; changes in estimates of the nature and complexity of
the work to be performed, including technical or quality issues or requests to perform additional work at the
direction of the customer; production challenges, including those resulting from the availability and timeliness of
customer funding, unavailability or reduced productivity of qualified and timely cleared labor or the effect of any
delays in performance; the availability, performance, quality or financial strength of significant subcontractors;
supplier issues, including the costs, timeliness and availability of materials and components; the effect of any
changes in laws or regulations; actions deemed necessary for long-term customer satisfaction; and natural disasters
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NORTHROP GRUMMAN CORPORATION
or environmental matters. We may file requests for equitable 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
financial risk than cost-type contracts. In 2017, approximately half of our sales were derived from fixed-price
contracts. We typically enter into fixed-price contracts where costs can be more reasonably estimated based on
actual experience, such as for mature production programs. In addition, our contracts contain provisions relating to
cost controls and audit rights. If the terms specified in our contracts are not met, our profitability may be reduced
and we may incur a loss.
Our fixed-price contracts may include fixed-price development work. This type of work is inherently more uncertain
as to future events than production contracts, and, as a result, there is typically more variability in estimates of the
costs to complete the development stage. As work progresses through the development stage into production, the
risks associated with estimating the total costs of the contract are typically reduced. While management uses its best
judgment to estimate costs associated with fixed-price development contracts, future events could result in either
upward or downward adjustments to those estimates.
Under cost-type contracts, allowable costs incurred by the contractor are generally subject to reimbursement plus a
fee. We often enter into cost-type contracts for development programs with complex design and technical
challenges. These cost-type programs typically have award or incentive fees that are subject to uncertainty and may
be earned over extended periods or towards the end of the contract. In these cases, the associated financial risks are
primarily in recognizing profit, which ultimately may not be earned, or program cancellation if cost, schedule, or
technical performance issues arise. We also may face additional financial risk due to an increasing number of
contract solicitations requiring the contractor to bid on cost-type development work and related fixed-price
production lots and/or options in one submission, or cost-type development work requiring the contractor to provide
certain items to the customer at the contractor’s expense or at little or no fee.
Because of the significance of management’s judgments and the estimation processes described above, it is possible
that materially different amounts could be obtained if different assumptions were used or if the underlying
circumstances were to change. Changes in underlying assumptions, circumstances or estimates, and the failure to
prevail on claims for equitable adjustments could have a material adverse effect on the profitability of one or more
of the affected contracts and on our overall financial position, results of operations and/or cash flows. See “Critical
Accounting Policies, Estimates and Judgments” in MD&A.
Our international business exposes us to additional risks, including risks related to geopolitical and economic
factors, laws and regulations.
Sales to customers outside the U.S. are an increasingly important component of our strategy. Our international
business (including our participation in joint ventures) is subject to numerous political and economic factors, legal
requirements, cross-cultural considerations and other risks associated with doing business globally. These risks
differ in some respects from those associated with our U.S. business and our exposure to such risks may increase if
our international business continues to grow as we anticipate.
Our international business is subject to both U.S. and foreign laws and regulations, including, without limitation,
laws and regulations relating to import-export controls, technology transfer restrictions, data privacy and protection,
investment, exchange rates and controls, the Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws,
the anti-boycott provisions of the U.S. Export Administration Act, labor and employment, works councils and other
labor groups, taxes, environment, security restrictions and intellectual property. Failure by us, our employees,
affiliates, partners or others with whom we work to comply with these laws and regulations could result in
administrative, civil or criminal liabilities, including suspension or debarment from government contracts or
suspension of our export privileges. Our customers outside of the U.S. generally have the ability to terminate
contracts for default based on performance. Termination of a contract due to default could have a material adverse
effect on our reputation, our ability to compete for other contracts and our financial position, results of operations
and/or cash flows. We also are subject to various non-U.S. procurement and other laws applicable to our industry.
New regulations and requirements, or changes to existing ones in the various countries in which we operate can
significantly increase our costs and risks of doing business internationally.
Changes in laws, regulations, political leadership and environment, or security risks may dramatically affect our
ability to conduct or continue to conduct business in international markets. Our international business may also be
impacted by changes in foreign national policies and priorities, which may be influenced by changes in the threat
environment, political leadership, geopolitical uncertainties, government budgets, and economic and political factors
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NORTHROP GRUMMAN CORPORATION
more generally, any of which could impact funding for programs or delay purchasing decisions or customer
payments. We also could be affected by the legal, regulatory and economic impacts of Britain’s exit from the
European Union, the impact of which is not known at this time. Global economic conditions and fluctuations in
foreign currency exchange rates could further impact our business. For example, the tightening of credit in financial
markets outside of the U.S. could adversely affect the ability of our customers and suppliers to obtain financing and
could result in a decrease in or cancellation of orders for our products and services or impact the ability of our
customers to make payments.
Our contracts with non-U.S. customers may also include terms and reflect legal requirements that create additional
risks. They may include industrial cooperation agreements requiring specific in-country purchases, investments,
manufacturing agreements or other financial obligations, known as offset obligations, and provide for significant
penalties if we fail to meet such requirements. They may also require us to enter into letters of credit, performance or
surety bonds, bank guarantees and/or other financial arrangements to secure our performance obligations. We also
increasingly are dependent on in-country suppliers and we face risks related to their failure to perform in accordance
with the contracts, particularly where we rely on a sole source supplier. Our ability to sell products outside the U.S.
could be adversely affected if we are unable to design our products for export on a cost effective basis or to obtain
and retain all necessary export licenses and authorizations on a timely basis. We face risks related to our products
that are approved for export, but may be subject to the U.S. Government changing or canceling the export license
after the product is ordered. 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/or security clearances in the markets in which we do
business.
More broadly, our ability effectively to pursue and execute contracts outside the U.S. also may be impacted by our
ability to partner successfully with non-U.S. companies, including through joint ventures, teaming agreements or
other arrangements, in support of such pursuits. This risk includes the ability to identify and negotiate appropriate
arrangements with local partners as well as potential exposure for their actions.
The products and services we provide internationally, including those provided by subcontractors and joint ventures
in which we have an interest, are sometimes in countries with unstable governments, economic or fiscal challenges,
military or political conflicts and/or developing legal systems. This may increase the risk to our employees,
subcontractors or other third parties, and/or increase the risk of a wide range of liabilities, as well as loss of property
or damage to our products.
The 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, our ability to do business and our financial position, results of operations and/or cash flows may
be impacted by the improper conduct of employees, agents, subcontractors, suppliers, business partners or joint
ventures in which we participate.
We have implemented policies, procedures, training and other compliance controls, and have negotiated terms
designed to prevent misconduct by employees, agents or others working on our behalf or with us that would violate
the applicable laws of the jurisdictions in which we operate, including laws governing improper payments to
government officials, the protection of export controlled or classified information, false claims, procurement
integrity, cost accounting and billing, competition and data privacy, or the terms of our contracts. However, we
cannot ensure that we will prevent all such misconduct committed by our employees, agents, subcontractors,
suppliers, business partners or others working on our behalf or with us. We have in the past experienced and may in
the future experience such misconduct, despite a vigorous compliance program. This 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 may be unable to prevent misconduct or other violations of applicable laws by these joint ventures (including
their officers, directors and employees) or our partners. Improper actions by those with whom or through whom we
do business (including our employees, agents, subcontractors, suppliers, business partners and joint ventures) could
subject us to administrative, civil or criminal investigations and enforcement actions; monetary and non-monetary
penalties; liabilities; and other sanctions, including suspension and debarment, which could negatively impact our
reputation and ability to conduct business and could have a material adverse effect on our financial position, results
of operations and/or cash flows.
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 and networks; insider threats; threats to the safety of our directors, officers and
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employees; threats to the security of our facilities, infrastructure and supply chain; and threats from terrorist acts or
other acts of aggression. Our customers and partners (including our supply chain and joint ventures) face similar
threats. Although we utilize various procedures and controls to monitor and mitigate the risk of these threats, there
can be no assurance that these procedures and controls will be sufficient. These threats could lead to losses of
sensitive information or capabilities; harm to personnel, infrastructure or products; financial liabilities and damage
to our reputation.
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 release of confidential, personal or otherwise
protected information (ours or that of our employees, customers or partners), and corruption of data, networks or
systems. 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 remedial actions 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 services may 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 could adversely 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 or property, damage to our reputation, loss of business, contractual or regulatory
actions and potential liabilities, any one of which could have a material adverse effect on our financial position,
results of operations and/or cash flows.
Our earnings and profitability depend, in part, on subcontractor and supplier performance and financial viability
as well as raw material and component availability 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 software and intellectual property, and perform some of the
services we provide to our customers, and to do so in compliance with all applicable laws, regulations and contract
terms. Disruptions or performance problems caused by our subcontractors and suppliers, or a misalignment between
our contractual obligations to our customers and our agreement with our subcontractors and suppliers, could have
various impacts on the company, including 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 the contract. Changes in
economic conditions, including changes in defense budgets or credit availability, or other changes impacting a
subcontractor or supplier (including changes in ownership or operations) could adversely affect the financial
stability of our subcontractors and suppliers and/or their ability to perform. The inability of our suppliers to perform,
or their inability to perform adequately, could also result in the need for us to transition to alternate suppliers, which
could result in significant incremental cost and delay or the need for us to provide other resources to support our
existing suppliers.
In connection with our U.S. Government contracts, we are required to procure certain materials, components and
parts from supply sources approved by the customer. We also are facing increased and changing regulatory
requirements, both domestically and internationally, many of which apply to our subcontractors and suppliers. 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 or materials. We rely on our subcontractors and suppliers to comply with applicable
laws, regulations and contract terms, including 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.
We also rely on our subcontractors and suppliers effectively to mitigate the risk of cyber and security threats or other
disruptions with respect to the products, components and services they deliver to us and the information entrusted to
them by us or our customers and to comply with applicable laws and regulations, including our customer’s
cybersecurity requirements.
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NORTHROP GRUMMAN CORPORATION
If we are unable to procure or experience significant delays in subcontractor or supplier deliveries of needed
materials, components, services, intellectual property or parts; if our subcontractors or suppliers fail to perform, if
they do not comply with all applicable laws, regulations and contract terms, or if the certifications we receive from
them are inaccurate; or if what we receive is counterfeit or otherwise improper, it could 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 industry and 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 with them. 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 procurement regulations and other specific legal requirements. These regulations and other
requirements, although often customary in government contracts, increase our performance 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 cybersecurity, recovery of employee compensation costs, counterfeit
parts, anti-human trafficking, specialty metals and conflict minerals) can significantly increase our costs and risks
and reduce our profitability.
We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. Government and
its agencies, such as the Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA)
and the DoD Inspector General. These agencies review performance under our contracts, our cost structure and our
compliance with applicable laws, regulations and standards, as well as the adequacy of our systems and processes in
meeting government requirements. Costs ultimately found to be unallowable or improperly allocated to a specific
contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal
activities, we may be subject to civil and criminal penalties, sanctions, forfeiture of profits or suspension or
debarment. Whether or not illegal activities are alleged, the U.S. Government has the ability to decrease or withhold
certain payments when it deems systems subject to its review to be inadequate, with significant financial impact. In
addition, we could suffer serious reputational harm if allegations of impropriety were made against us or business
partners.
Our industry has experienced, and we expect it will continue to experience, significant changes to business practices
globally as a result of an increased focus on affordability, efficiencies, business systems, recovery of costs and a
reprioritization of available defense funds to key areas for future defense spending. As a result of certain of these
initiatives, we have experienced and may continue to experience an increased number of audits and/or a lengthened
period of time required to close open audits. For example, the thresholds for certain allowable costs in the U.S.,
including compensation costs, have been significantly reduced; the allowability of other types of costs are being
challenged, debated and, in certain cases, modified, all with potentially significant financial costs to the company. In
connection with these cost reduction initiatives, the U.S. Government is also pursuing alternatives to shift additional
responsibility and performance risks to the contractor. The U.S. Government has been pursuing and may continue to
pursue policies that could negatively impact our profitability. Changes in procurement practices favoring incentive-
based fee arrangements, different award criteria, non-traditional contract provisions and government contract
negotiation offers that indicate what our costs should be also may affect our profitability and predictability.
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 of federal laws and regulations related to our industry, including but not
limited to the Truth in Negotiations Act, the False Claims Act, the Procurement Integrity Act, CAS, FAR, the
International Traffic in Arms Regulations promulgated under the Arms Export Control Act, the Close the Contractor
Fraud Loophole Act and the FCPA. If we are found to have violated such requirements, or are found not to have
acted responsibly, we may be subject to reductions of the value of contracts; contract modifications or termination;
the withholding of payments from our customer; the loss of export privileges; administrative or civil judgments and
liabilities; criminal judgments or convictions, liabilities and consent or other voluntary decrees or agreements; other
sanctions; the assessment of penalties, fines, or compensatory, treble or other damages or non-monetary relief or
actions; or suspension or debarment.
If we or those with whom we do business do not comply with the laws, regulations and processes to which we are
subject or if customer business practices change significantly, including with respect to the thresholds for allowable
costs, it could affect our ability to compete and have a material adverse effect on our financial position, results of
operations and/or cash flows.
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Competition within our markets and bid protests may affect our ability to win new contracts and result in reduced
revenues and market share.
We operate in highly competitive markets and our competitors may have more financial capacity, more extensive or
specialized engineering, manufacturing, or marketing capabilities in some areas, or be willing to accept more risk or
lower profitability in competing for contracts. We have seen, and anticipate we will continue to see, increased
competition in some of our core markets, especially as a result of budget pressures for many customers, a continued
focus on affordability and competition, and our own success in winning business. We are facing increasing
competition in the U.S. and outside the U.S. from U.S., foreign and multinational firms. In some instances outside
the U.S., foreign companies may receive loans, marketing subsidies and other assistance from their governments that
may not be available to U.S. companies and foreign companies may be subject to fewer restrictions on technology
transfer. Additionally, some customers, including the DoD, may turn to commercial contractors, rather than
traditional defense contractors, for some products and services, or may utilize small business contractors or
determine to source work internally rather than hiring a contractor.
We are also seeing a significant number of bid protests from unsuccessful bidders on new program awards. Bid
protests could result in contract modifications or 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 extend the 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 future revenues and market share, which could, over time, have a material adverse
effect on our financial position, results of operations and/or cash flows.
Our ability to win new competitions and meet the needs of our customers depends, in part, on our ability to
maintain a qualified workforce.
Our operating results are heavily dependent upon our ability to attract and retain sufficient personnel with security
clearances and requisite skills in multiple areas, including science, technology, engineering and math. Additionally,
as we grow our international business, it is increasingly important that we are able to attract and retain personnel
with relevant experience in local laws, regulations, customs and business practices. If qualified personnel are scarce
or difficult to attract or retain or if we experience a high level of attrition, generally or in particular areas, or if such
personnel are unable to obtain security clearances on a timely basis, we could experience higher labor, recruiting or
training costs in order to attract and retain necessary employees.
Certain of our employees are covered by collective agreements. We generally have been able to renegotiate renewals
to expiring agreements without significant disruption of operating activities. If we experience difficulties with
renewals and renegotiations of existing collective agreements or if our employees pursue new collective
representation, we could incur additional expenses and may be subject to work stoppages. Any such expenses or
delays could adversely affect our programs served by employees who are covered by such agreements or
representation.
If we are unable to attract and retain a qualified workforce, we may be unable to maintain our competitive position
and our future success could be materially 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 our contractual obligations could adversely affect our profitability,
reputation and future prospects.
We design, develop and manufacture technologically advanced and innovative products and services, which are
applied by our customers in a variety of environments. Problems and delays in development or delivery, or system
failures, as a result of issues with respect to design, technology, intellectual property rights, labor, inability to
achieve learning curve assumptions, inability to manage effectively a broad array of programs, manufacturing
materials or components, or subcontractor performance could prevent us from meeting requirements and create
significant risk and liabilities. Similarly, failures to perform on schedule or otherwise to fulfill our contractual
obligations could negatively impact our financial position, reputation and ability to win future business.
In addition, our products cannot be tested and proven in all situations and are otherwise subject to unforeseen
problems. Examples of unforeseen problems that could negatively affect revenue, schedule and profitability include
loss on launch or flight of spacecraft, loss of aviation platforms, premature failure of products that cannot be
accessed for repair or replacement, problems with design, quality and workmanship, country of origin of procured
materials, delivery of subcontractor components or services and degradation of product performance. These failures
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could result, either directly or indirectly, in loss of life or property. Among the factors that may affect revenue and
profitability could be inaccurate cost estimates, design issues, human factors, unforeseen costs and expenses not
covered by insurance or indemnification from the customer, diversion of management focus in responding to
unforeseen problems, loss of follow-on work, and, in the case of certain contracts, repayment to the government
customer of contract cost and fee payments we previously received, or replacement obligations.
Certain contracts, primarily involving space satellite systems, contain provisions that also entitle the customer to
recover fees in the event of failure of the system upon launch or subsequent deployment for less than a specified
period of time. Under such terms, we could be required to forfeit fees previously recognized and/or collected.
If we are unable to meet our obligations, including due to issues regarding the design, development or manufacture
of our products or services, or we experience launch, platform or satellite system failures, it could have a material
adverse effect on our reputation, our ability to compete for other contracts and our financial position, results of
operations and/or cash flows.
Environmental matters, including unforeseen costs associated with compliance and remediation efforts, and
government and third party claims, could have a material adverse effect on our reputation and 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, including as they may be changed over time. Compliance with these environmental laws and regulations
requires, and is expected to continue to require, significant operating and capital costs. We may be subject to
substantial administrative, civil or criminal fines, penalties or other sanctions (including suspension and debarment)
for violations. If we are found to be in violation of the Federal Clean Air Act or the Clean Water Act, the facility or
facilities involved in the violation could be placed by the Environmental Protection Agency on a list maintained by
the General Services Administration of facilities that generally cannot be used in performing on U.S. Government
contracts until the violation is corrected.
We incur, and expect to continue to incur, substantial remediation costs related to the cleanup of pollutants
previously released into the environment. Stricter or different enforcement of existing laws and regulations; new
laws, regulations or cleanup requirements; discovery of previously unknown or more extensive contamination;
imposition of fines, penalties, compensatory or other damages (including natural resource damages); a determination
that certain environmental costs are unallowable; rulings on allocation or insurance coverage; and/or the insolvency
or other inability or unwillingness of other parties to pay their share of such costs could require us to incur material
additional costs in excess of those anticipated.
We also are and may become a party to various legal proceedings and disputes involving government and private
parties (including class actions) relating to alleged impacts from pollutants released into the environment. These
matters could result in compensatory or other damages, determinations on allowability or insurance coverage, fines,
penalties, and non-monetary relief.
We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic
operations at the former United States Navy and Grumman facilities in Bethpage, New York. We have incurred, and
expect to continue to incur, substantial remediation and other costs related to environmental conditions in Bethpage.
The remediation standards or requirements to which we are subject may change and costs may increase materially.
The State of New York has notified us that it intends to seek to impose additional remedial requirements and, among
other things, is evaluating natural resource damages. We are and may become a party to various legal proceedings
and disputes related to remediation and/or alleged environmental impacts in Bethpage, including with federal and
state entities, local municipalities and water districts, insurance carriers and class action plaintiffs. These matters
could result in fines, penalties, sanctions, compensatory or other damages (including natural resource damages),
determinations on allocation, allowability and coverage, and non-monetary relief and actions.
In addition, government and private parties could seek to hold us responsible for liabilities or obligations related to
former operations that have been divested or spun-off (including our former shipbuilding business) and/or for which
other parties have agreed to be responsible and/or to indemnify us, directly or indirectly. The indemnity related
rights we have may not be sufficient to protect us against such liabilities.
The impact of these factors is difficult to predict, but one or more of them could harm our reputation and business
and have a material adverse effect on our financial position, results of operations and/or cash flows.
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NORTHROP GRUMMAN CORPORATION
Our business is subject to disruption caused by natural and/or environmental disasters that could adversely affect
our profitability and our overall financial position.
We have significant operations located in regions that may be exposed to hurricanes, earthquakes and other
damaging storms and natural disasters. Our business also may be subject to environmental disasters. Our
subcontractors and suppliers are also subject to natural and environmental disasters that could affect their ability to
deliver or perform under a contract. Although preventative measures may help to mitigate damage, the damage and
disruption resulting from natural and environmental disasters may be significant.
Natural and environmental disasters could also disrupt our and our subcontractors’ and suppliers’ workforce and the
critical industrial infrastructure needed for 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 business due 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 unavailable or
inadequate to cover all of our significant risks or our insurers may deny coverage of or be unable to pay for
material losses we incur, which could adversely affect our profitability and overall financial position.
We endeavor to obtain insurance agreements from financially solid, highly rated counterparties in established
markets to cover significant risks and liabilities (including, for example, natural disasters and products liability). Not
every risk or liability can be insured, and for risks that are insurable, the policy limits and terms of coverage
reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. Even if
insurance coverage is available, we may not be able to obtain it at a price or on terms acceptable to us. Disputes with
insurance carriers, including over policy terms, reservation of rights, the applicability of coverage (including
exclusions), compliance with provisions (including notice) and/or the insolvency of one or more of our insurers may
significantly affect the amount or timing of recovery.
In some circumstances we may be entitled to certain legal protections or indemnifications from our customers
through contractual provisions, laws, regulations or otherwise. However, these protections are not always available,
are typically subject to certain terms or limitations, including the availability of funds, and may not be sufficient to
cover all losses or liabilities incurred.
If insurance coverage, customer indemnifications and/or other legal protections are not available or are not sufficient
to cover our risks or losses, it could have a material 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 used in
support of nuclear-related operations of third parties. In addition, certain of our products are provided with space
launch services. These activities subject us to various extraordinary risks, including potential liabilities relating to
nuclear-related incidents; to the harmful effects on the environment and human health that may result from nuclear-
related activities, operations or incidents, as well as the storage, handling and disposal of radioactive materials; and
to failed launches of spacecraft. We may be subject to reputational harm and potential liabilities arising out of a
nuclear or launch incident, among others, whether or not the cause was within our control. Under some
circumstances, the U.S. Government and prime contractors provide for certain indemnification and other protection
under certain of our government related contracts, including pursuant to, or in connection with, Public Law 85-804,
the Price-Anderson Nuclear Industries Indemnity Act and the Terrorism Risk Insurance Reauthorization Act, for
certain risks.
In addition, our customers may otherwise use our products and services in connection with hazardous activities, or
in ways that can be unusually hazardous or 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 our customers 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
potential liabilities.
If there was a nuclear incident or other nuclear-related damages, an incident related to launch activities or an
incident or other damages related to or caused by the use of our products and services in connection with hazardous
activities or risks, and if indemnification or other protection was not available to cover our losses and liabilities, it
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could adversely affect our reputation and have a material adverse effect on our financial position, results of
operations and/or cash flows.
Pension and medical liabilities and related expenses recorded in our financial statements may fluctuate
significantly depending upon future investment performance of plan assets, changes in actuarial assumptions,
and legislative or other regulatory actions.
A substantial portion of our current and retired employee population is covered by pension and other post-retirement
benefit plans. Defined benefit pension and medical liabilities and related expenses as recorded in our financial
statements are primarily dependent upon future investment 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
benefit obligations of our pension and other post-retirement benefit plans, including Pension Benefit Guaranty
Corporation premiums for certain of our defined benefit plans, and our health and welfare 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 may
occur in different periods from when those pension costs are recognized for financial statement purposes or when
pension funding is made. These timing differences could have a material adverse effect on our cash flows. The cost
accounting rules have been revised in order to partially harmonize the measurement and period of assignment of
defined benefit pension plan costs allocable to U.S. Government contracts and minimum required contributions
under the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act
(PPA) of 2006. These rules better align, but do not eliminate, mismatches between ERISA funding requirements and
CAS pension costs for U.S. Government CAS covered contracts.
Future investment performance of plan assets and changes in assumptions associated with our pension and other
post-retirement benefit plans could have a material adverse effect on our financial position, results of operations and/
or cash flows.
Anticipated benefits of the Orbital ATK Acquisition may not be realized.
On September 17, 2017, the company entered into a definitive merger agreement to acquire Orbital ATK (the Orbital
ATK Acquisition). We believe this acquisition will enable us to broaden our capabilities and offerings, create value
for shareholders, provide expanded opportunities for our combined employees and enhance our ability to provide
innovative solutions to meet our customers’ emerging requirements. However, in the course of integrating our
business with Orbital ATK’s business, we may discover additional information about Orbital ATK’s business
(including its financial controls and potential risks, opportunities and liabilities) that alters our assessment of the
anticipated benefits, costs and risks of the Orbital ATK Acquisition. Additionally, our customers may not value our
combined businesses and capabilities as much as we anticipate, in which case we may not realize the benefits of our
combined business to the extent we currently anticipate or at all.
The Orbital ATK Acquisition is subject to the satisfaction of certain customary conditions, some of which are
beyond our control and may prevent or otherwise negatively affect the consummation of the Orbital ATK
Acquisition or the anticipated benefits therefrom. These conditions include the expiration or termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and satisfaction of the requirements
of the European Commission. We cannot predict whether or when these conditions will be satisfied or what
requirements will be imposed in order to satisfy these conditions. In addition, the merger agreement may be
terminated if the Orbital ATK Acquisition is not completed by September 17, 2018 (subject to extension to
December 17, 2018 in certain circumstances) and in certain other specified circumstances described in the merger
agreement. If the Orbital ATK Acquisition is not consummated, we will have incurred significant transaction-related
costs, expenses and risks without realizing the anticipated benefits of the acquisition.
Our ability to realize the anticipated benefits of the Orbital ATK Acquisition will depend, to a large extent, on our
ability to integrate the Orbital ATK business with ours. The integration of an independent business with our business
is a complex, costly and time-consuming process. Costs may include, among other things, those associated with
facilities and systems consolidation, operational impacts, severance and other potential employment-related costs, as
well as fees paid to financial, legal and other advisors. We are devoting and will be required to devote significant
management attention and resources prior to the consummation of the Orbital ATK Acquisition to prepare for
integration. We also will be required to devote significant management attention and resources following the
consummation of the Orbital ATK Acquisition effectively to integrate Orbital ATK’s business and operations with
our business and to realize the anticipated benefits. One area of integration will be internal controls processes and
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procedures. In the past, Orbital ATK restated its financial statements and identified material weaknesses in internal
control over financial reporting, which we will need to address post-closing in the integration process. The
integration process may disrupt our business and, if implemented ineffectively, may not result in the realization of
the expected benefits of the Orbital ATK Acquisition. The consummation of the Orbital ATK Acquisition may trigger
change in control and other similar provisions in certain agreements to which Orbital ATK is a party, or otherwise
affect contractual relationships, which could have an adverse impact on the combined business if we are unable to
address such issues successfully. The failure to meet the challenges involved in integrating Orbital ATK’s business
and to realize the anticipated benefits of the Orbital ATK Acquisition could cause an interruption of, or a loss of
momentum in, our activities.
Assuming the Orbital ATK Acquisition closes, the above risks could have a material adverse effect on our future
financial position, results of operations and/or cash flows.
We may be unable fully to exploit or adequately to protect intellectual property rights, which could materially
affect our ability to compete, our reputation and our financial position, results of operations and/or cash flows.
To perform on our contracts and to win new business, we depend on our ability to develop, protect and exploit our
intellectual property and also to access the intellectual property of others under reasonable terms. We may not be
able adequately to exploit, protect or access intellectual property and the conduct of our customers, competitors and
suppliers may make it more difficult for us to do so.
We own many forms of intellectual property, including U.S. and foreign patents, trademarks, copyrights and trade
secrets and we license or otherwise obtain access to various intellectual property rights of third parties. The U.S.
Government and certain foreign governments hold licenses or other rights to certain intellectual property that we
develop in performance of government contracts, and may seek to use or authorize others to use such intellectual
property, including in competition with us. Governments have increased certain efforts to assert or obtain more
extensive rights in intellectual property, which could reduce our ability to exploit certain of our intellectual property
rights and to compete. Governments have also declined at times to make intellectual property of others available to
us under acceptable terms.
We also rely significantly upon proprietary technology, information, processes and know-how. We typically seek to
protect this information, including by entering into confidentiality agreements with our employees and other parties
such as consultants and subcontractors. These agreements and other measures may not provide adequate protection
for our trade secrets and other proprietary information. In the event of an infringement of such intellectual property
rights, a breach of a confidentiality agreement or divulgence of proprietary information, we may not have adequate
legal remedies. In addition, our trade secrets or other proprietary information may otherwise become known or be
independently developed by competitors.
In some instances, our ability to seek, win or perform contracts may require us to access and use third party
intellectual property. This may require that the government or our customer is willing and able to provide rights to
such third party intellectual property, or that we are able to negotiate directly to obtain necessary rights on
reasonable terms.
Our intellectual property is subject to challenge, invalidation, misappropriation or circumvention by third parties.
Our use of intellectual property licensed or otherwise obtained from third parties is also subject to challenge.
Litigation to determine the scope of intellectual property rights, even if ultimately successful, could be costly and
could divert management’s attention away from other aspects of our business. Moreover, the laws concerning
intellectual property rights vary among countries and the protection provided to our intellectual property by foreign
laws and courts may not be the same as the remedies available under U.S. law.
If we are unable adequately to exploit our intellectual property rights, to protect our intellectual property rights
against infringement or third party claims, or to obtain rights to intellectual property of others, it could have a
material adverse effect on our reputation, ability to compete for and perform on contracts, financial position, results
of operations and/or cash flows.
Our future success depends, in part, on our ability to develop new products and new technologies and maintain
technologies, facilities and equipment 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 customers change and evolve regularly. Our success in the competitive defense industry
depends upon our ability to develop technologically advanced, innovative and cost-effective products and services
and market these products and services to our customers in the U.S. and internationally. In addition, our ability to
develop innovative and technology advanced products depends, in part, on continued funding for research and
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development projects. Our success also depends on our continued access to assured suppliers of important
technologies and components and our ability to provide the people, technologies, facilities, equipment and financial
capacity needed to deliver those products and services with maximum efficiency. If we are unable to develop new
products and technologies, or if we fail to achieve market acceptance more rapidly than our competitors, we may be
unable to maintain our competitive position and our future success could be materially adversely affected. If we fail
to maintain our competitive position, we could lose a significant amount of future business to our competitors,
which would negatively impact our ability to generate favorable financial results and maintain market share.
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.
Although we currently have significant excess fair value of our reporting units over their respective carrying values,
goodwill accounts for approximately 36 percent of our total assets. Market-based inputs to the calculations in our
goodwill impairment test, such as weighted average cost of capital and terminal value (based on market
comparisons) could change significantly from our current assumptions. We continue to monitor the recoverability of
the carrying value of our goodwill and other long-lived assets. Significant write-offs of goodwill or other long-lived
assets could have a material adverse effect on our financial condition and/or results of operations.
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 their interpretation and application, including the possibility of retroactive effect, could
affect our tax expense and profitability as they did in 2017 upon passage of the Tax Cuts and Jobs Act. In addition,
the final determination of any tax audits or related litigation could be materially different from our historical income
tax provisions and accruals. Changes in our tax provision or an increase in our tax liabilities, whether due to changes
in applicable laws and regulations, the interpretation or application thereof, or a final determination of tax audits or
litigation, could have a material adverse effect on our financial position, results of operations and/or cash flows.
Item 1B. Unresolved Staff Comments
None.
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Annual Report on Form 10-K and the information we are incorporating by reference contain statements, other
than statements of historical fact, that constitute “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as “will,” “expect,” “intend,” “may,” “could,” “plan,”
“project,” “forecast,” “believe,” “estimate,” “outlook,” “anticipate,” “trends,” “goals” and similar expressions
generally identify these forward-looking statements. Forward-looking statements include, among other things,
statements relating to our future financial condition, results of operations and/or cash flows. Forward-looking
statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when
made, but which may change over time. These statements are not guarantees of future performance and inherently
involve a wide range of risks and uncertainties that are difficult to predict. Specific risks that could cause actual
results to differ materially from those expressed or implied in these forward-looking statements include, but are not
limited to, those identified under “Risk Factors” and other important factors disclosed in this report and from time to
time in our other filings with the SEC. They include:
•
•
•
•
•
•
our dependence on the U.S. Government for a substantial portion of our business
significant delays or reductions in appropriations for our programs and U.S. Government funding more
broadly
investigations, claims, disputes, enforcement actions and/or litigation
the use of estimates when accounting for our contracts and the effect of contract cost growth and/or
changes in estimated contract revenues and costs
our exposure to additional risks as a result of our international business, including risks related to
geopolitical and economic factors, laws and regulations
the improper conduct of employees, agents, subcontractors, suppliers, business partners or joint ventures in
which we participate and the impact on our reputation, our ability to do business, and our financial position,
results of operations and/or cash flows
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NORTHROP GRUMMAN CORPORATION
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
cyber and other security threats or disruptions faced by us, our customers or our suppliers and other
partners
the performance and financial viability of our subcontractors and suppliers and the availability and pricing
of raw materials and components
changes in procurement and other laws, regulations and practices applicable to our industry, findings by the
U.S. Government as to our compliance with such laws and regulations, and changes in our customers’
business practices globally
increased competition within our markets and bid protests
the ability to maintain a qualified workforce
our ability to meet performance obligations under our contracts, including obligations that are
technologically complex, require certain manufacturing expertise or are dependent on factors not wholly
within our control
environmental matters, including unforeseen environmental costs and government and third party claims
natural and/or environmental disasters
the adequacy and availability of our insurance coverage, customer indemnifications or other liability
protections
products and services we provide related to hazardous and high risk operations, which subject us to various
environmental, regulatory, financial, reputational and other risks
the future investment performance of plan assets, changes in actuarial assumptions associated with our
pension and other post-retirement benefit plans and legislative or other regulatory actions impacting our
pension, post-retirement and health and welfare plans
the satisfaction of conditions (including regulatory approvals) to and successful consummation of the
Orbital ATK Acquisition; our ability successfully to integrate the Orbital ATK business and realize fully the
anticipated benefits of the acquisition, without adverse consequences
our ability to exploit or protect intellectual property rights
our ability to develop new products and technologies and maintain technologies, facilities, and equipment
to win new competitions and meet the needs of our customers
changes in business conditions that could impact business investments and/or recorded goodwill or the
value of other long-lived assets
unanticipated changes in our tax provisions or exposure to additional tax liabilities
You are urged to consider the limitations on, and risks associated with, forward-looking statements and not unduly
rely on the accuracy of forward-looking statements. These forward-looking statements speak only as of the date this
report is first filed or, in the case of any document incorporated by reference, the date of that document. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by applicable law.
Item 2. Properties
At December 31, 2017, we had approximately 35 million square feet of floor space at 424 separate locations,
primarily in the U.S., for manufacturing, warehousing, research and testing, administration and various other uses.
At December 31, 2017, we leased to third parties approximately 220,000 square feet of our owned and leased
facilities.
At December 31, 2017, we had major operations at the following locations:
Aerospace Systems
Azusa, Carson, El Segundo, Manhattan Beach, Mojave, Oxnard, Palmdale, Redondo Beach and San Diego, CA;
Melbourne and St. Augustine, FL; Devens, MA; Moss Point, MS; and Oklahoma City, OK.
Mission Systems
Huntsville, AL; McClellan, Redondo Beach, San Diego, Sunnyvale and Woodland Hills, CA; Aurora and Colorado
Springs, CO; Apopka, FL; Rolling Meadows, IL; Annapolis, Annapolis Junction, Elkridge, Halethorpe, Linthicum
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NORTHROP GRUMMAN CORPORATION
and Sykesville, MD; Bethpage and Williamsville, NY; Beavercreek and Cincinnati, OH; Salt Lake City, UT; and
Chantilly, Charlottesville, Fairfax, McLean and Richmond, VA. Locations outside the U.S. include Germany, Italy
and the United Kingdom.
Technology Services
Sierra Vista, AZ; Warner Robins, GA; Lake Charles, LA; Baltimore, MD; and Chester and Herndon, VA. Locations
outside the U.S. include Australia and France.
Corporate
Falls Church and Lebanon, VA and Irving, TX.
The following is a summary of our floor space at December 31, 2017:
Square feet (in thousands)
Aerospace Systems
Mission Systems
Technology Services
Corporate
Total
Owned
Leased
U.S. Government
Owned/Leased
Total
6,775
8,783
434
657
16,649
7,164
5,588
2,772
444
15,968
2,761
—
1
—
2,762
16,700
14,371
3,207
1,101
35,379
We maintain our properties in good operating condition and believe that the productive capacity of our properties is
adequate to meet current contractual requirements and those for the foreseeable future.
Item 3. Legal Proceedings
We have provided information about certain legal proceedings in which we are involved in Notes 11 and 12 to the
consolidated financial statements.
We are a party to various investigations, lawsuits, claims, enforcement actions and other legal proceedings,
including government investigations and claims, that arise in the ordinary course of our business. These types of
matters could result in administrative, civil or criminal fines, penalties or other sanctions (which terms include
judgments or convictions and consent or other voluntary decrees or agreements); compensatory, treble or other
damages; non-monetary relief or actions; or other liabilities. Government regulations provide that certain allegations
against a contractor may lead to suspension or debarment from future government contracts or suspension of export
privileges for the company or one or more of its components. The nature of legal proceedings is such that we cannot
assure the outcome of any particular matter. For additional information on pending matters, please see Note 11 to the
consolidated financial statements, and for further information on the risks we face from existing and future
investigations, lawsuits, claims, enforcement actions and other legal proceedings, please see “Risk Factors.”
Item 4. Mine Safety Disclosures
No information is required in response to this item.
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NORTHROP GRUMMAN CORPORATION
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
PART II
COMMON STOCK
We have 800,000,000 shares authorized at a $1 par value per share, of which 174,085,619 shares and 175,068,263
shares were issued and outstanding as of December 31, 2017 and 2016, respectively.
PREFERRED STOCK
We have 10,000,000 shares authorized at a $1 par value per share, of which no shares were issued and outstanding
as of December 31, 2017 and 2016.
DIVIDENDS AND MARKET INFORMATION
Our common stock is listed on the New York Stock Exchange and trades under the symbol NOC.
The following table sets forth, for the periods indicated, quarterly dividends declared per common share and the
intraday low and high prices of our common stock as reported in the consolidated reporting system for the New York
Stock Exchange Composite Transactions.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
HOLDERS
Dividends per common share
2017
2016
$
$
0.90
1.00
1.00
1.00
3.90
$
$
0.80
0.90
0.90
0.90
3.50
Stock prices (Low - High)
2017
2016
$223.88 - $249.43
$175.00 - $200.78
235.16 - 262.59
198.75 - 223.42
256.65 - 287.81
206.69 - 224.12
287.22 - 311.15
212.02 - 253.80
$223.88 - $311.15
$175.00 - $253.80
The approximate number of common stockholders was 23,420 as of January 25, 2018.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
We had no repurchases of common stock during the three months ended December 31, 2017. The approximate
dollar value of shares that may yet be purchased as part of the company’s publicly announced plans or programs is
$2.3 billion as of December 31, 2017.
Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the
open market or in privately negotiated transactions. The company retires its common stock upon repurchase.
See Note 3 to the consolidated financial statements for further information on our share repurchase programs.
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NORTHROP GRUMMAN CORPORATION
STOCK PERFORMANCE GRAPH
Comparison of Cumulative Five Year Total Return
Among Northrop Grumman, the S&P 500 Index and the S&P Aerospace & Defense (A&D) Index
• Assumes $100 invested at the close of business on December 31, 2012, in Northrop Grumman Corporation
common stock, Standard & Poor’s (S&P) 500 Index and the S&P Aerospace & Defense Index.
• The cumulative total return assumes reinvestment of dividends.
• The S&P Aerospace & Defense Index is comprised of Arconic, Inc., The Boeing Company, General
Dynamics Corporation, Harris Corporation, L3 Technologies, Inc., Lockheed Martin Corporation, Northrop
Grumman Corporation, Raytheon Company, Rockwell Collins, Inc., Textron, Inc., TransDigm Group and
United Technologies Corporation.
• The total return is weighted according to market capitalization of each company at the beginning of each year.
• 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 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.
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NORTHROP GRUMMAN CORPORATION
Item 6. Selected Financial Data
The data presented in the following table is derived from the audited consolidated financial statements and other
information.
SELECTED FINANCIAL DATA
$ in millions, except per share amounts
2017
2016
2015
2014
2013
Year Ended December 31
Sales
U.S. Government(1)
International(2)
Other Customers
Total sales
Operating income
Net earnings
Basic earnings per share
Diluted earnings per share
Cash dividends declared per common share
Year-End Financial Position
Total assets
Notes payable to banks and long-term debt
Other long-term obligations(3)
Financial Metrics
Net cash provided by operating activities
Free cash flow(4)
Other Information
$ 21,837
$ 20,573
$ 19,458
$ 20,085
$ 21,278
3,302
664
3,205
730
3,339
729
3,045
849
2,493
890
25,803
24,508
23,526
23,979
24,661
3,299
2,015
3,193
2,200
3,076
1,990
$ 11.55
$ 12.30
$ 10.51
$
11.47
3.90
12.19
3.50
10.39
3.10
3,196
2,069
9.91
9.75
2.71
$
3,123
1,952
8.50
8.35
2.38
$ 34,917
$ 25,614
$ 24,424
$ 26,545
$ 26,351
15,266
6,505
7,070
7,667
6,496
7,059
5,901
7,520
5,900
4,018
$ 2,613
$ 2,813
$ 2,162
$ 2,593
$ 2,483
1,685
1,893
1,691
2,032
2,119
Company-sponsored research and development expenses
$
639
$
705
$
712
$
569
$
507
Total backlog
Square footage at year-end (in thousands)
Number of employees at year-end
42,878
35,379
70,000
45,339
34,112
67,000
35,923
34,392
65,000
38,199
34,264
64,300
37,033
34,500
65,300
(1) Sales to the United States (U.S.) Government include sales from contracts for which we are the prime contractor, as well as
those for which we are a subcontractor and the ultimate customer is the U.S. Government. Each of the company’s segments
derives substantial revenue from the U.S. Government.
(2) International sales include sales from contracts for which we are the prime contractor, as well as those for which we are a
subcontractor and the ultimate customer is an international customer. These sales include foreign military sales contracted
through the U.S. Government, direct sales with governments outside the U.S. and commercial sales outside the U.S.
(3) Other long-term obligations include pension and other post-retirement benefit plan liabilities, deferred compensation,
unrecognized tax benefits, environmental liabilities and other long-term obligations.
(4) Free cash flow is a non-GAAP measure defined as net cash provided by operating activities less capital expenditures, and may
not be defined and calculated by other companies in the same manner. We use free cash flow as a key factor in our planning
for, and consideration of, acquisitions, stock repurchases, and the payment of dividends. This measure may be useful to
investors and other users of our financial statements as a supplemental measure of our cash performance, but should not be
considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating
cash flows presented in accordance with accounting principles generally accepted in the United States of America (“GAAP” or
“FAS”). See “Liquidity and Capital Resources” – “Free Cash Flow” in Management’s Discussion and Analysis of Financial
Conditions and Results of Operations (MD&A) for more information on this measure, including a reconciliation of free cash
flow to net cash provided by operating activities.
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NORTHROP GRUMMAN CORPORATION
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Pending Acquisition of Orbital ATK
On September 17, 2017, the company entered into a definitive merger agreement to acquire all of the outstanding
shares of Orbital ATK, Inc. (Orbital ATK) for approximately $7.8 billion in cash, plus the assumption of
approximately $1.4 billion in net debt (the “Orbital ATK Acquisition”). See Item 1.01 in our Current Report on Form
8-K filed with the SEC on September 18, 2017 for a summary and copy of the merger agreement. We believe this
acquisition will enable us to broaden our capabilities and offerings, create value for shareholders, provide expanded
opportunities for our combined employees and enhance our ability to provide innovative solutions to meet our
customers’ emerging requirements. Under the terms of the merger agreement, Orbital ATK shareholders are to
receive all-cash consideration of $134.50 per share. We expect to fund the Orbital ATK Acquisition with the
proceeds from our debt financing completed in October 2017 and cash on hand. See Note 10 to the consolidated
financial statements for further information on our Orbital ATK Acquisition financing. On November 29, 2017,
Orbital ATK shareholders approved the proposed Orbital ATK Acquisition. We currently expect the transaction to
close in the first half of 2018, after receiving regulatory approvals. Upon completion of the Orbital ATK Acquisition,
we plan to establish Orbital ATK as a new, fourth business sector named Northrop Grumman Innovation Systems.
U.S. Tax Reform
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act represents major
tax reform legislation that, among other provisions, reduces the U.S. corporate tax rate. Certain income tax effects of
the 2017 Tax Act, including $300 million of tax expense recorded principally due to the write-down of our net
deferred tax assets, are reflected in our financial results in accordance with Staff Accounting Bulletin No. 118 (SAB
118), which provides SEC staff guidance regarding the application of Accounting Standards Codification (ASC)
Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act became law. See Note 7 to the
consolidated financial statements for further information on the financial statement impact of the 2017 Tax Act.
Global Security and Economic Environment
The U.S. and its allies continue to face a global security environment of heightened tensions and instability, threats
from state and non-state actors as well as terrorist organizations, emerging nuclear tensions and diverse regional
security concerns. Global threats persist across all domains, from undersea to space to cyber. The market for defense
products, services and solutions globally is driven by these complex and evolving security challenges, considered in
the broader context of political and socioeconomic priorities.
The global economic environment also continues to be marked by uncertainty, instability and geopolitical tensions.
Global economic growth is expected to remain in the low single digits in 2018, reflecting the impact of and
uncertainty surrounding geopolitical tensions globally and financial market volatility. The global economy may also
be affected by Britain’s exit from the European Union, the impact of which is not known at this time. Global
economic conditions could impact customer purchasing decisions.
U.S. Political and Economic Environment
The U.S. continues to face an uncertain political environment and substantial fiscal and economic challenges, which
affect funding for discretionary and non-discretionary budgets. Part I of the Budget Control Act of 2011 (the BCA)
provided for a reduction in planned defense budgets by at least $487 billion over a ten year period. Part II mandated
substantial additional reductions, through a process known as “sequestration,” which took effect in March 2013.
On November 2, 2015, the President signed the Bipartisan Budget Act of 2015 (the Budget Act). The Budget Act
raised the debt ceiling until March 2017 and raised the sequester caps imposed by the BCA by $80 billion, split
equally between defense and non-defense discretionary spending in the Government’s FY 2016 and FY 2017 ($50
billion in FY 2016 and $30 billion in FY 2017). Sequestration spending caps under the BCA could reduce defense
spending again in FY 2018.
On February 9, 2016, the President delivered his FY 2017 budget to Congress. The FY 2017 budget reflected the FY
2017 spending caps established in the Budget Act and requested $583 billion for the DoD’s annual budget, including
$59 billion for OCO. The President signed a continuing resolution in September 2016, which was extended in
December 2016 and provided funding for the U.S. Government at FY 2016 levels through April 28, 2017.
In March 2017, the debt ceiling was reached and the Treasury Department began taking “extraordinary measures” to
finance the government and avoid a breach of the debt ceiling. On September 8, 2017, the debt ceiling was
suspended for three months and on December 9, 2017, the Treasury Department again began taking extraordinary
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NORTHROP GRUMMAN CORPORATION
measures to finance the government. It is expected that the Treasury Department will run out of the ability to take
extraordinary measures to finance the government in the first half of 2018.
In May 2017, the President signed into law the FY 2017 Consolidated Appropriations Act. In total for FY 2017,
Congress appropriated $524 billion in base discretionary funding for the DoD, consistent with the Budget Act.
Congress also appropriated approximately $68 billion in OCO funding and approximately $15 billion in additional
DoD appropriations.
In May 2017, the President released his FY 2018 budget request, which seeks $575 billion for the DoD’s base
budget, approximately $52 billion above the statutory caps provided for in the BCA. The President’s budget request
also seeks an additional $65 billion in OCO funding for expeditionary needs, not capped by the BCA. On September
8, 2017, the President signed a continuing resolution which generally funded the government at FY 2017 levels
through December 8, 2017. The continuing resolution was extended to December 22, 2017 and further extended to
January 19, 2018. As Congress did not enact appropriations legislation or a new continuing resolution by January
19, 2018, on January 20, 2018, the U.S. Government temporarily shut down. On January 22, 2018, a fourth
continuing resolution was enacted, which funds the government through February 8, 2018.
The federal budget and debt ceiling are expected to continue to be the subject of considerable debate, which could
have a significant impact on defense spending broadly and the company's programs in particular.
For further information on the risks we face from the current political and economic environment, see “Risk
Factors.”
Operating Performance Assessment and Reporting
We manage and assess our business based on our performance on contracts and programs (typically larger contracts
or two or more closely-related contracts). We recognize sales from our portfolio of long-term contracts primarily
using the cost-to-cost method of percentage of completion accounting, but in some cases we utilize the units-of-
delivery method of percentage of completion accounting. As a result, sales tend to fluctuate in concert with costs
incurred and units delivered across our large portfolio of 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, engineering and design labor, subcontractor, material, overhead and general and administrative
(G&A) 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. Where
applicable, significant fluctuations in operating performance attributable to individual contracts or programs, or
changes in a specific cost element across multiple contracts, are described in our analysis. Based on this approach
and the nature of our operations, the discussion of results of operations below first focuses on our three segments
before distinguishing between products and services. Changes in sales are generally described in terms of volume,
deliveries or other indicators of sales activity. Changes in margin rates are generally described in terms of
performance and contract mix. For purposes of this discussion, volume generally refers to increases or decreases in
sales or cost from production/service activity levels or delivery rates. Performance generally refers to non-volume
related changes in profitability. Contract mix generally refers to changes in the ratio of contract type and/or lifecycle
(e.g., cost-type, fixed-price, development, production, and/or sustainment).
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NORTHROP GRUMMAN CORPORATION
CONSOLIDATED OPERATING RESULTS
Selected financial highlights are presented in the table below:
$ in millions, except per share amounts
Sales
Operating costs and expenses
Operating costs and expenses as a % of sales
Operating income
Operating margin rate
Federal and foreign income tax expense
Effective income tax rate
Net earnings
Diluted earnings per share
Year Ended December 31
2016
$ 24,508
21,315
2015
$ 23,526
20,450
2017
$ 25,803
22,504
87.2%
3,299
12.8 %
1,034
33.9 %
2,015
11.47
87.0%
3,193
13.0%
723
24.7%
2,200
12.19
86.9%
3,076
13.1%
800
28.7%
1,990
10.39
% Change in
2017
2016
5 %
6 %
3 %
4 %
4 %
4 %
43 %
(10)%
(8)%
(6)%
11 %
17 %
Sales
2017 – Sales increased $1.3 billion, or 5 percent, as compared with 2016, primarily due to higher sales at Aerospace
Systems and Mission Systems.
2016 – Sales increased $982 million, or 4 percent, as compared with 2015, primarily due to higher sales at
Aerospace Systems and Mission Systems.
See “Revenue Recognition” in Note 1 to the consolidated financial statements for further information on sales by
customer category. See “Segment Operating Results” below for further information by segment and “Product and
Service Analysis” for product and service detail.
Operating Income
2017 – Operating income increased $106 million, or 3 percent, as compared with 2016, primarily due to a $278
million increase in our net FAS/CAS pension adjustment and a $24 million increase in segment operating income,
partially offset by a $197 million increase in unallocated corporate expenses, as described in “Segment Operating
Results.” Higher operating costs and expenses as a percentage of sales reduced our operating margin rate to 12.8
percent from 13.0 percent in the prior year period and was driven by the increase in unallocated corporate expenses
and a lower segment operating margin rate, as described in “Segment Operating Results,” partially offset by the
increase in our net FAS/CAS pension adjustment.
G&A as a percentage of sales decreased to 10.3 percent in 2017 from 10.5 percent in 2016, principally due to higher
sales volume.
2016 – Operating income increased $117 million, or 4 percent, as compared with 2015, primarily due to a $137
million reduction in unallocated corporate expenses and higher sales volume, partially offset by a $32 million
decrease in our net FAS/CAS pension adjustment and lower segment margin rates. Operating costs and expenses as
a percentage of sales increased slightly in 2016 as compared with 2015, which reduced our operating margin rate to
13.0 percent from 13.1 percent in the prior year period. The decrease in operating margin rate was driven by a lower
segment operating margin rate and a $32 million decrease in our net FAS/CAS pension adjustment, partially offset
by a $137 million reduction in unallocated corporate expenses, as described in “Segment Operating Results.”
G&A as a percentage of sales decreased to 10.5 percent in 2016 from 10.9 percent in 2015, principally due to higher
sales volume.
For further information regarding product and service operating costs and expenses, see “Product and Service
Analysis” below.
Federal and Foreign Income Taxes
2017 – Our effective tax rate for 2017 was 33.9 percent, as compared with 24.7 percent in 2016. The higher rate is
principally due to $300 million of tax expense recorded in connection with the 2017 Tax Act, largely due to the
write-down of net deferred tax assets, partially offset by a $69 million increase in research credits and a $39 million
benefit recognized for additional manufacturing deductions principally related to prior years. The effective tax rates
for the years ended December 31, 2017 and 2016 each include separate approximately $40 million benefits
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NORTHROP GRUMMAN CORPORATION
recognized in connection with the resolution of Internal Revenue Service (IRS) examinations of the company’s prior
year tax returns.
2016 – Our effective tax rate for 2016 was 24.7 percent, as compared with 28.7 percent in 2015. The lower rate is
principally due to $85 million of excess tax benefits related to employee share-based payment transactions
recognized in 2016, a $40 million benefit recognized in connection with resolution of the IRS examination of the
company’s 2007-2011 tax returns and a $33 million benefit recognized in connection with the repatriation of
earnings from certain of our foreign subsidiaries. These benefits were partially offset by a $58 million decrease in
research credits, which were principally a result of credits recorded in 2015 that were claimed on our prior year tax
returns.
Net Earnings
2017 – Net earnings for 2017 decreased $185 million, or 8 percent, as compared with 2016, primarily due to the
higher effective tax rate discussed above and higher interest expense resulting from our debt issuance in October
2017, as described in Note 10 to the consolidated financial statements. These decreases were partially offset by
higher operating income and an increase in Other, net as a result of gains on the sale of two investments and higher
interest income on short-term investments.
2016 – Net earnings for 2016 increased $210 million, or 11 percent, as compared with 2015, primarily due to the
higher operating income and lower effective tax rate discussed above.
Diluted Earnings Per Share
2017 – Diluted earnings per share for 2017 decreased $0.72, or 6 percent, as compared with 2016. The decrease is
primarily due to the 8 percent decline in net earnings discussed above, partially offset by a 3 percent reduction in
weighted-average shares outstanding resulting principally from shares repurchased during 2016.
2016 – Diluted earnings per share for 2016 increased $1.80, or 17 percent, as compared with 2015. The increase is
primarily due to the 11 percent increase in net earnings discussed above and a 6 percent reduction in weighted-
average shares outstanding resulting from shares repurchased during 2015 and 2016.
SEGMENT OPERATING RESULTS
Basis of Presentation
The company is aligned in three operating sectors, which also comprise our reportable segments: Aerospace
Systems, Mission Systems and Technology Services. For a more complete description of each segment’s products
and services, see “Business.”
We present our sectors in the following business areas, which are reported in a manner reflecting core capabilities:
Aerospace Systems
Autonomous Systems
Manned Aircraft
Space
Mission Systems
Technology Services
Sensors and Processing
Global Logistics and Modernization
Cyber and ISR
Advanced Defense Services
Advanced Capabilities
System Modernization and Services
This section discusses segment sales, operating income and operating margin rates. A reconciliation of segment
operating income to total operating income is provided below.
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NORTHROP GRUMMAN CORPORATION
Segment Operating Income and Margin Rate
Segment operating income, as reconciled in the Reconciliation of Segment Operating Income to Total Operating
Income section below, is a non-GAAP measure that reflects total earnings from our three segments, including
allocated pension expense recognized under CAS, and excluding unallocated corporate items and FAS pension
expense. This measure may be useful to investors and other users of our financial statements as a supplemental
measure in evaluating the financial performance and operational trends of our sectors. This measure may not be
defined and calculated by other companies in the same manner and should not be considered in isolation or as an
alternative to operating results presented in accordance with GAAP.
$ in millions
Segment operating income
Segment operating margin rate
Year Ended December 31
% Change in
2017
2016
2015
2017
2016
$
2,959
$
11.5%
$
2,935
12.0%
2,920
12.4%
1%
1%
2017 - Segment operating income for 2017 increased $24 million, or 1 percent, as compared with 2016 and includes
higher operating income at all three sectors. The higher operating income includes a $56 million favorable EAC
adjustment at Aerospace Systems on a restricted program largely related to performance incentives and $54 million
recognized to date in connection with a claim related to certain costs incurred in prior years (the “Cost Claim”).
Segment operating margin rate decreased to 11.5 percent from 12.0 percent in 2016 principally due to lower segment
margin rates at Aerospace Systems and Mission Systems, partially offset by a higher segment margin rate at
Technology Services.
2016 - Segment operating income for 2016 increased $15 million, or 1 percent, as compared with 2015 as a result of
higher sales volume, which more than offset the lower segment operating margin rate. Segment operating margin
rate decreased to 12.0 percent from 12.4 percent in 2015 principally due to a lower segment margin rate at
Aerospace Systems.
Reconciliation of Segment Operating Income to Total Operating Income - The table below reconciles segment
operating income to total operating income by including the impact of the net FAS/CAS pension adjustment, as well
as unallocated corporate expenses (certain corporate-level expenses, which are not considered allowable or allocable
under applicable CAS or the FAR). See Note 4 to the consolidated financial statements for further information on
the net FAS/CAS pension adjustment and unallocated corporate expenses.
$ in millions
Segment operating income
CAS pension expense
Less: FAS pension expense
Net FAS/CAS pension adjustment
Unallocated corporate expenses
Other
Total operating income
Year Ended December 31
% Change in
2017
2016
2015
2017
2016
$
2,959
$
2,935
$
1,026
(432)
594
(250)
(4)
3,299
$
847
(531)
316
(53)
(5)
3,193
$
$
2,920
703
(355)
348
(190)
(2)
3,076
1 %
21 %
(19)%
88 %
1 %
20 %
50 %
(9)%
372 %
(72)%
(20)% 150 %
4 %
3 %
2017 - The increase in net FAS/CAS pension adjustment is primarily due to higher CAS expense and lower FAS
expense than in the prior year period. The increase in CAS expense relates to the continued phase-in of CAS
harmonization and the impact of actual demographic experience, partially offset by a change in our mortality
assumption as of December 31, 2016. The reduction in FAS expense was principally driven by our year-end 2016
FAS pension assumptions, including the noted change in our mortality assumption offset by a lower discount rate.
2016 - The decrease in net FAS/CAS pension adjustment is primarily due to lower than expected asset returns during
2015, partially offset by the increase in our FAS discount rate assumption as of December 31, 2015 and the
continued phase-in of CAS harmonization.
2017 - Unallocated corporate expenses increased in 2017, as compared to 2016, primarily due to $47 million of
costs associated with the Orbital ATK Acquisition and $41 million of deferred state tax expense resulting from state
tax adjustments associated with the filing of our prior year federal tax return and the company's $500 million
discretionary pension contribution in December 2017. In addition, the prior year period included a $35 million
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NORTHROP GRUMMAN CORPORATION
benefit recognized for state tax refunds claimed on our prior year tax returns and a $25 million benefit recognized
for estimated prior year overhead claim recoveries.
2016 - Unallocated corporate expenses declined in 2016, as compared to 2015. In 2016, unallocated corporate
expenses included a $35 million benefit recognized for state tax refunds claimed on our prior year tax returns and a
$25 million benefit recognized for estimated prior year overhead claim recoveries. In 2015, unallocated corporate
expenses included a $45 million expense recognized for deferred state income taxes due to a change in accounting
methods approved by the IRS that lowered our deductions for domestic production activities and a $25 million
expense recognized for deferred state income taxes resulting from a discretionary pension contribution.
Net Estimate-At-Completion (EAC) Adjustments - We record changes in estimated contract earnings at completion
(net EAC adjustments) using the cumulative catch-up method of accounting. Net EAC adjustments can have a
significant effect on reported sales and operating income and the aggregate amounts are presented in the table
below:
$ in millions
Favorable EAC adjustments
Unfavorable EAC adjustments
Net EAC adjustments
Net EAC adjustments by segment are presented in the table below:
$ in millions
Aerospace Systems
Mission Systems
Technology Services
Eliminations
Net EAC adjustments
Year Ended December 31
2017
2016
2015
668
(305)
363
$
$
765
(271)
494
$
$
924
(344)
580
Year Ended December 31
2017
2016
2015
246
$
79
51
(13)
363
$
263
191
69
(29)
494
$
$
352
169
68
(9)
580
$
$
$
$
For purposes of the discussion in the remainder of this Segment Operating Results section, references to operating
income and operating margin rate reflect segment operating income and segment operating margin rate, respectively.
AEROSPACE SYSTEMS
$ in millions
Sales
Operating income
Operating margin rate
Year Ended December 31
% Change in
2017
$ 11,955
1,259
10.5%
2016
$ 10,828
1,236
11.4%
$
2015
2017
2016
9,940
1,205
12.1%
10%
2%
9%
3%
2017 - Aerospace Systems sales for 2017 increased $1.1 billion, or 10 percent, as compared with 2016, primarily
due to higher volume on Manned Aircraft programs. Manned Aircraft sales were driven by higher restricted sales.
Autonomous Systems sales increased principally due to higher volume for several programs, including Triton,
partially offset by lower NATO Alliance Ground Surveillance (AGS) volume. Space sales increased primarily due to
higher restricted sales, partially offset by lower volume on the James Webb Space Telescope (JWST) and Advanced
Extremely High Frequency (AEHF) programs.
Operating income for 2017 increased $23 million, or 2 percent, primarily due to higher sales, partially offset by a
lower operating margin rate. Operating margin rate decreased to 10.5 percent from 11.4 percent principally due to
changes in contract mix on Manned Aircraft programs and a gain of $45 million recognized in the prior year
associated with the sale of a property, partially offset by the previously discussed $56 million favorable EAC
adjustment largely related to performance incentives.
2016 - Aerospace Systems sales for 2016 increased $888 million, or 9 percent, as compared with 2015. The increase
was due to higher volume on Manned Aircraft and Autonomous Systems programs. Manned Aircraft sales increased
primarily due to higher restricted volume, increased F-35 deliveries and production ramp-up on the E-2D program.
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NORTHROP GRUMMAN CORPORATION
These increases were partially offset by lower B-2 volume and fewer F/A-18 deliveries. Autonomous Systems sales
increased primarily due to higher volume on the Triton and Global Hawk programs, partially offset by ramp-down
of the NATO AGS program. Space sales include higher volume on restricted programs, partially offset by lower
volume on the AEHF program.
Operating income for 2016 increased $31 million, or 3 percent, and includes a gain of $45 million associated with
the sale of a property. Higher sales volume and improved performance on Space and Autonomous Systems programs
were more than offset by lower margins on Manned Aircraft programs, principally due to changes in contract mix
and the timing of risk reductions. Operating margin rate decreased to 11.4 percent from 12.1 percent primarily due to
the lower margins on Manned Aircraft programs, partially offset by improved performance on Space and
Autonomous Systems programs.
MISSION SYSTEMS
$ in millions
Sales
Operating income
Operating margin rate
Year Ended December 31
2016
$ 10,928
1,445
13.2%
2017
$ 11,382
1,453
12.8%
2015
$ 10,674
1,410
13.2%
% Change in
2017
2016
4%
1%
2%
2%
2017 - Mission Systems sales for 2017 increased $454 million, or 4 percent, as compared with 2016, primarily due
to higher Sensors and Processing volume, partially offset by lower Cyber and ISR volume. Sensors and Processing
sales increased principally due to higher volume on F-35 sensors, electro-optical/infrared self-protection and
targeting programs, communications programs and the Scalable Agile Beam Radar program. These increases were
partially offset by lower volume on international ground-based radar programs. Cyber and ISR sales decreased
primarily due to lower volume on ISR and restricted programs.
Operating income for 2017 increased $8 million, or 1 percent, primarily due to higher sales and $32 million
recognized in connection with the Cost Claim described above, partially offset by a lower operating margin rate.
Operating margin rate decreased to 12.8 percent from 13.2 percent primarily due to lower margin rates on Sensors
and Processing and Cyber and ISR programs principally resulting from lower performance and changes in contract
mix. This decrease was partially offset by improved margin rates at Advanced Capabilities primarily due to the prior
year including a $49 million forward loss provision on an Advanced Capabilities program as described below.
2016 - Mission Systems sales for 2016 increased $254 million, or 2 percent, as compared with 2015 due to higher
volume on Sensors and Processing and Advanced Capabilities programs, partially offset by lower volume on Cyber
and ISR programs. Sensors and Processing sales increased primarily due to higher volume on communications
programs, including the Joint Counter Radio-Controlled Improvised Explosive Device Electronic Warfare program;
increased restricted volume and ramp-up on the G/ATOR program. These increases were partially offset by lower
volume on international programs. Advanced Capabilities sales increased primarily due to higher volume on
restricted, maritime systems and marine systems programs. Cyber and ISR sales reflect lower volume on space
programs.
Operating income for 2016 increased $35 million, or 2 percent, due to the higher sales volume described above and
a $21 million gain associated with the sale of a commercial cyber security product business, partially offset by a $49
million forward loss provision recorded on an Advanced Capabilities program principally due to cost growth for
changes impacting fixed-price options, which may not be fully recovered through additional contract value.
Operating margin rate for 2016 was consistent with the same period in 2015 and reflects improved performance on
Sensors and Processing programs, partially offset by lower margins on Advanced Capabilities programs.
TECHNOLOGY SERVICES
$ in millions
Sales
Operating income
Operating margin rate
Year Ended December 31
2016
2015
2017
$
$
4,750
524
11.0%
$
4,825
512
10.6%
4,819
514
10.7%
% Change in
2017
2016
(2)%
2 %
— %
— %
2017 - Technology Services sales for 2017 decreased $75 million, or 2 percent, as compared with 2016, primarily
due to lower volume on System Modernization and Services programs, partially offset by higher volume on Global
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NORTHROP GRUMMAN CORPORATION
Logistics and Modernization programs. System Modernization and Services sales decreased principally due to the
completion of several programs in 2016 and 2017. Global Logistics and Modernization sales increased primarily due
to higher intercompany volume and increased sales on the UKAWACS and Hunter programs, partially offset by
lower volume on the KC-10 program as our contract nears completion.
Operating income for 2017 increased $12 million, or 2 percent, and operating margin rate increased to 11.0 percent
from 10.6 percent primarily due to improved performance across the sector.
2016 - Technology Services sales for 2016 were slightly higher than the prior year and reflect higher volume on
System Modernization and Services programs, partially offset by lower volume on Advanced Defense Services and
Global Logistics and Modernization programs. System Modernization and Services sales increased primarily due to
higher volume on U.S. Government health programs. Advanced Defense Services sales declined primarily due to the
completion of several programs in 2015, partially offset by higher volume on the Saudi Arabian Ministry of National
Guard Training Support program (through our interest in a joint venture for which we consolidate the financial
results). Global Logistics and Modernization sales decreased principally due to lower volume on the Intercontinental
Ballistic Missile program, partially offset by higher volume on the KC-10 program.
Operating income and margin rate for 2016 were comparable to the prior year.
PRODUCT AND SERVICE ANALYSIS
The following table presents product and service sales and operating costs and expenses by segment:
$ in millions
2017
Year Ended December 31
2016
Operating
Costs and
Expenses
Sales
Operating
Costs and
Expenses
Sales
2015
Operating
Costs and
Expenses
Sales
Segment Information:
Aerospace Systems
Product
Service
Mission Systems
Product
Service
Technology Services
Product
Service
Segment Totals
Total Product
Total Service
Intersegment eliminations
Total Segment(1)
$
$
9,841
2,114
$
8,796
1,900
$
8,868
1,960
$
7,837
1,755
$
7,976
1,964
6,907
4,475
392
4,358
5,981
3,948
360
3,866
6,471
4,457
320
4,505
5,588
3,895
292
4,021
6,448
4,226
358
4,461
7,025
1,710
5,532
3,732
339
3,966
$
17,140
10,947
(2,284)
$ 15,137
9,714
(2,007)
$
$
15,659
10,922
(2,073)
$
13,717
9,671
(1,815)
$
14,782
10,651
(1,907)
12,896
9,408
(1,698)
$
25,803
$
22,844
$
24,508
$
21,573
$
23,526
$
20,606
(1) A reconciliation of segment operating income to total operating income is included in “Segment Operating Results.”
Product Sales and Costs
2017 - Product sales for 2017 increased $1.5 billion, or 9 percent, as compared with 2016. The increase was
primarily due to higher product sales at Aerospace Systems and Mission Systems. Higher Aerospace Systems
product sales were primarily driven by increased restricted volume, partially offset by lower volume on the JWST
and NATO AGS programs. The increase at Mission Systems was principally due to higher product volume on F-35
sensors, EO/IR self-protection and targeting programs and the SABR program.
Product costs for 2017 increased $1.4 billion, or 10 percent, as compared to 2016. The increase principally reflects a
lower product margin rate at Aerospace Systems due to changes in contract mix.
2016 - Product sales for 2016 increased $877 million, or 6 percent, as compared with 2015. The increase was
primarily driven by higher product sales at Aerospace Systems due to higher restricted volume, increased F-35
deliveries and production ramp-up on the E-2D program.
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NORTHROP GRUMMAN CORPORATION
Product costs for 2016 increased $821 million, or 6 percent, as compared to 2015, consistent with the change in
product sales described above.
Service Sales and Costs
2017 - Service sales for 2017 were comparable with 2016. Higher service sales at Aerospace Systems on several
Autonomous Systems and Manned Aircraft programs were offset by lower service volume principally on the KC-10
program at Technology Services.
Service costs for 2017 were comparable with 2016, consistent with the change in service sales described above and
reflect lower service margins at Mission Systems, partially offset by higher service margins at Technology Services
principally due to improved performance across the sector.
2016 - Service sales for 2016 increased $271 million, or 3 percent, as compared with 2015. The increase was
primarily driven by higher volume on several Cyber and ISR and Sensors and Processing service programs at
Mission Systems.
Service costs for 2016 increased $263 million, or 3 percent, as compared with 2015, consistent with the change in
service sales described above and reflects higher service margins at Mission Systems, partially offset by lower
service margins at Aerospace Systems.
BACKLOG
Total backlog includes both funded backlog (firm orders for which funding is authorized and appropriated) and
unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not
included in backlog until the time the option or IDIQ task order is exercised or awarded. For multi-year service
contracts with non-U.S. Government customers having no stated contract values, backlog includes only the amounts
committed by the customer. Backlog is converted into sales as costs are incurred or deliveries are made.
Backlog consisted of the following at December 31, 2017 and 2016:
$ in millions
Aerospace Systems
Mission Systems
Technology Services
Total backlog
2017
Funded
9,335
10,241
2,797
22,373
$
$
Unfunded
15,687
$
3,790
1,028
20,505
$
Total
Backlog
25,022
$
14,031
3,825
42,878
$
2016
Total
Backlog
27,310
$
13,715
4,314
45,339
$
% Change
in 2017
(8)%
2 %
(11)%
(5)%
Approximately $20.3 billion of the $42.9 billion total backlog at December 31, 2017 is expected to be converted into
sales in 2018.
OTHER
On July 18, 2017, the Armed Services Board of Contract Appeals made public its decision that the government
improperly required Northrop Grumman to treat $253 million of its post-retirement benefit costs as unallowable for
government contract cost accounting purposes. The decision, if upheld on any potential appeal, would only apply to
certain contracts spanning a 20-year period.
LIQUIDITY AND CAPITAL RESOURCES
We endeavor to ensure the most efficient conversion of operating income into cash for deployment in our business
and to maximize shareholder value through cash deployment activities. In addition to our cash position, we use
various financial measures to assist in capital deployment decision-making, including cash provided by operating
activities and free cash flow, a non-GAAP measure described in more detail below.
As of December 31, 2017, we had cash and cash equivalents of $11.2 billion; approximately $200 million was held
outside of the U.S. by foreign subsidiaries. Cash and cash equivalents and cash generated from operating activities,
supplemented by borrowings under credit facilities and/or in the capital markets, if needed, are expected to be
sufficient to fund our operations for at least the next 12 months. Capital expenditure commitments were $492
million at December 31, 2017, and are expected to be paid with cash on hand.
On September 17, 2017, we entered into a definitive merger agreement to acquire Orbital ATK for approximately
$7.8 billion in cash, plus the assumption of approximately $1.4 billion in net debt. In October 2017, the company
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NORTHROP GRUMMAN CORPORATION
issued $8.25 billion of unsecured senior notes and intends to use the net proceeds, as well as cash on hand, to
finance the Orbital ATK Acquisition and to pay related fees and expenses. See Notes 2 and 10 to the consolidated
financial statements for further information.
Operating Cash Flow
The table below summarizes key components of cash flow provided by operating activities:
$ in millions
Net earnings
Non-cash items(1)
Changes in assets and liabilities:
Trade working capital
Retiree benefits
Other, net
Net cash provided by operating activities
Year Ended December 31
2016
2015
2017
$
$
$
2,015
1,172
$
2,200
585
1,990
1,035
(340)
(191)
(43)
2,613
$
(240)
393
(125)
2,813
$
(564)
(263)
(36)
2,162
(1) Includes deferred income taxes, depreciation and amortization and stock based compensation expense (including related excess
tax benefits in 2015).
2017 – Net cash provided by operating activities for 2017 decreased by $200 million, or 7 percent, as compared with
2016, principally due to a $500 million voluntary pre-tax pension contribution ($325 million after-tax) made in
December 2017.
2016 – Net cash provided by operating activities for 2016 increased by $651 million, or 30 percent, as compared
with 2015, principally due to a $500 million voluntary pre-tax pension contribution ($325 million after-tax) made in
the first quarter of 2015, changes in trade working capital and an increase in net earnings during 2016, partially
offset by an increase in net income tax payments.
Free Cash Flow
Free cash flow, as reconciled in the table below, is a non-GAAP measure defined as net cash provided by operating
activities less capital expenditures, and may not be defined and calculated by other companies in the same manner.
We use free cash flow as a key factor in our planning for, and consideration of, acquisitions, stock repurchases, and
the payment of dividends. This measure may be useful to investors and other users of our financial statements as a
supplemental measure of our cash performance, but should not be considered in isolation, as a measure of residual
cash flow available for discretionary purposes, or as an alternative to operating cash flows presented in accordance
with GAAP.
The table below reconciles net cash provided by operating activities to free cash flow:
$ in millions
Net cash provided by operating activities
Less: capital expenditures
Free cash flow
Year Ended December 31
2017
2015
2016
$ 2,613
$ 2,162
$ 2,813
(928)
(471)
(920)
$ 1,685
$ 1,691
$ 1,893
% Change in
2017
2016
(7)%
1 %
(11)%
30%
95%
12%
2017 – Free cash flow for 2017 decreased $208 million, or 11 percent, as compared with 2016. The decrease was
principally driven by the $500 million voluntary pre-tax pension contribution discussed above.
2016 – Free cash flow for 2016 increased $202 million, or 12 percent, as compared with 2015. The increase was
principally driven by the higher net cash provided by operating activities described above, partially offset by higher
capital expenditures in 2016 reflecting $239 million for the purchase of facilities previously leased by Mission
Systems and increased capital investment at Aerospace Systems.
Investing Cash Flow
2017 - Net cash used in investing activities for 2017 increased $84 million, or 10 percent, as compared with 2016.
The increase was primarily due to proceeds from the 2016 sales of a property at Aerospace Systems and a
commercial cyber security business at Mission Systems, partially offset by proceeds from the sale of two
investments in 2017.
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NORTHROP GRUMMAN CORPORATION
2016 - Net cash used in investing activities for 2016 increased $374 million, or 87 percent, as compared with 2015.
The increase was principally due to the higher capital expenditures described above, partially offset by proceeds
from the sale of a property at Aerospace Systems and the sale of a commercial cyber security business at Mission
Systems.
Financing Cash Flow
2017 - Net cash provided by financing activities during 2017 was $7.0 billion compared to net cash used in
financing activities of $1.8 billion in 2016. The change is principally due to $7.5 billion higher net proceeds from
the issuance of long-term debt and $1.2 billion lower share repurchases in 2017.
2016 - Net cash used in financing activities during 2016 decreased $1.5 billion, or 45 percent, as compared with
2015, principally due to $1.6 billion lower share repurchases, $149 million higher net proceeds from the issuance of
long-term debt and $135 million of borrowings under our credit facilities, partially offset by $321 million in debt
repayments.
Share Repurchases - See Note 3 to the consolidated financial statements for further information on our share
repurchase programs.
Credit Facilities and Unsecured Senior Notes - See Note 10 to the consolidated financial statements for further
information on our credit facilities and unsecured senior notes.
Financial Arrangements - See Note 12 to the consolidated financial statements for further information on our use of
standby letters of credit and guarantees.
Other Sources of Capital - We believe we can obtain additional capital, if necessary for long-term liquidity, from
such sources as the public or private capital markets, the sale of assets, sale and leaseback of operating assets, and
leasing rather than purchasing new assets. We have an effective shelf registration statement on file with the SEC,
which allows us to access capital in a timely manner.
Contractual Obligations
At December 31, 2017, we had contractual commitments to repay debt with interest, make payments under
operating leases, settle obligations related to agreements to purchase goods and services and make payments on
various other liabilities. Payments due under these obligations and commitments, and the estimated timing of those
payments, are as follows:
2018
2019-
2020
2021-
2022
2023 and
beyond
$
$
$
$ in millions
Long-term debt
Interest payments on long-term debt
Operating leases
Purchase obligations(1)
Other long-term liabilities(2)
Total contractual obligations
10,581
5,151
559
731
377
17,399
(1) A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and legally binding on us
and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable
price provisions; and the approximate timing of the transaction. These amounts are primarily comprised of open purchase order
commitments to suppliers and subcontractors pertaining to funded contracts.
Total
15,350
7,705
1,338
9,772
1,187
35,352
867
530
232
5,396
302
7,327
1,563
1,069
340
3,187
376
6,535
2,339
955
207
458
132
4,091
$
$
$
$
$
$
$
(2) Other long-term liabilities, including their current portions, primarily consist of total accrued environmental reserves, deferred
compensation and other miscellaneous liabilities, of which $148 million is related to environmental reserves recorded in other
current liabilities. It excludes obligations for uncertain tax positions of $294 million, as the timing of such 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 Employee Retirement Income Security Act, as amended. For further information about
future minimum contributions for these plans, see Note 13 to the consolidated financial statements. Further details
regarding long-term debt and operating leases can be found in Notes 10 and 12, respectively, to the consolidated
financial statements.
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NORTHROP GRUMMAN CORPORATION
CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS
Our consolidated financial statements are based on GAAP, which requires us to make estimates and assumptions
about future events that affect the amounts reported in our consolidated financial statements. We employ judgment
in making our estimates in consideration of historical experience, currently available information and various other
assumptions that we believe to be reasonable under the circumstances. Actual results could differ from our estimates
and assumptions, and any such differences could be material to our consolidated financial statements. We believe the
following accounting policies are critical to the understanding of our consolidated financial statements and require
the use of significant management judgment in their application. For a summary of our significant accounting
policies, see Note 1 to the consolidated financial statements.
Revenue Recognition
Due to the long-term nature of our contracts, we generally recognize revenue using the percentage-of-completion
method of accounting as work on our contracts progresses, which requires us to make reasonably dependable
estimates regarding the design, manufacture and delivery of our products and services. In accounting for these
contracts, we utilize either the cost-to-cost or the units-of-delivery method of percentage-of-completion accounting,
with cost-to-cost being the predominant method.
Contract sales may include estimated amounts not contractually agreed to or yet funded by the customer, including
cost or performance incentives (such as award and incentive fees), un-priced change orders, contract claims and
requests for equitable adjustment (REAs). Further, as contracts are performed, change orders can be a regular
occurrence and may be un-priced until negotiated with the customer. Un-priced change orders, contract claims
(including change orders unapproved as to both scope and price) and REAs are included in estimated contract sales
when management believes it is probable the un-priced change order, claim and/or REA will result in additional
contract revenue and the amount can be reliably estimated considering the facts and circumstances known to us at
the time.
Our cost estimation process is based on the professional knowledge of our engineering, program management and
financial professionals, and draws on their significant experience and judgment. We prepare EACs for our contracts
and calculate an estimated contract operating margin based on estimated contract sales and cost. Since contract costs
are typically incurred over a period of several years, estimation of these costs requires the use of judgment. Factors
considered in estimating the cost of the work to be completed include our historical performance, the availability,
productivity and cost of labor, the nature and complexity of work to be performed, the effect of change orders, the
availability and cost of materials, components and subcontracts, the effect of any delays in performance and the
level 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 the occurrence of events, changes in circumstances and evaluations of contract
performance to reflect the latest reliable information available. Changes in estimates of contract sales and cost are
frequent. The company performs on a broad portfolio of long-term contracts, including the development of complex
and customized military platforms and systems, as well as advanced electronic equipment and software, that often
include technology at the forefront of science. Changes in estimates occur for a variety of reasons, including changes
in contract scope, the resolution of risk at lower or higher cost than anticipated, unanticipated risks affecting contract
costs, performance issues with our subcontractors or suppliers, changes in indirect cost allocations, such as overhead
and G&A costs, and changes in estimated award and incentive fees. Identified risks typically include technical,
schedule and/or performance risk based on our evaluation of the contract effort. Similarly, the changes in estimates
may include changes in, or resolution of, identified opportunities for operating margin improvement.
For the impacts of changes in estimates on our consolidated statement of earnings and comprehensive income, see
“Segment Operating Results” and Note 1 to the consolidated financial statements.
New Revenue Standard
Effective January 1, 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from
Contracts with Customers, using the full retrospective method. Topic 606 supersedes existing revenue recognition
guidance, including ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts, and
outlines a single set of comprehensive principles for recognizing revenue under GAAP. Under Topic 606, revenue is
recognized as control transfers to the customer. As such, under the new standard, revenue for our contracts is
generally recognized over time using the cost-to-cost method, which is consistent with the revenue recognition
model used for the majority of our contracts prior to the adoption of Topic 606. In most cases the accounting for
those contracts where we previously recognized revenue as units were delivered has changed under Topic 606 such
that we now recognize revenue as costs are incurred. This change generally results in an acceleration of revenue as
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NORTHROP GRUMMAN CORPORATION
compared with our previous revenue recognition method for those contracts. In addition, for certain of our contracts,
there is a change in the number of performance obligations under Topic 606, which has altered the timing of revenue
and margin recognition. See “Accounting Standards Updates” in Note 1 to the consolidated financial statements for
additional information regarding our adoption of Topic 606.
Retirement Benefits
Overview – The determination of projected benefit obligations and the fair value of plan assets for our pension and
other post-retirement plans requires the use of estimates and actuarial assumptions. We perform an annual review of
our actuarial assumptions in consultation with our actuaries. As we determine changes in the assumptions are
warranted, or as a result of plan amendments, future pension and other post-retirement benefit expense and our
projected benefit obligation could increase or decrease. The principal estimates and assumptions that have a
significant effect on our consolidated financial position and annual results of operations are the discount rate, cash
balance crediting rate, expected long-term rate of return on plan assets, estimated fair market value of plan assets,
and the mortality 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 required to settle our pension and other post-retirement benefit obligations. The
discount rate is generally based on the yield of high-quality corporate fixed-income investments. At the end of each
year, we determine the discount rate using a theoretical bond portfolio model of bonds rated AA or better to match
the notional cash outflows related to projected benefit payments for each of our significant benefit plans. Taking into
consideration the factors noted above, our weighted-average composite pension discount rate was 3.68 percent at
December 31, 2017, and 4.19 percent at December 31, 2016.
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 accounting corridor 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 of the greater of plan assets or
benefit obligations. Holding all other assumptions constant, an increase or decrease of 25 basis points in the
December 31, 2017 discount rate assumption would have the following estimated effects on 2017 pension and other
post-retirement benefit obligations and 2018 expected pension and other post-retirement expense:
$ increase/(decrease) in millions
Pension expense
Other post-retirement benefit expense
Pension obligation
Other post-retirement benefit obligation
25 Basis Point
Decrease in
Rate
25 Basis Point
Increase in
Rate
$
$
96
1
1,096
57
(92)
(1)
(1,039)
(54)
Cash Balance Crediting Rate - A portion of the company’s pension obligation and resulting pension expense is
based on a cash balance formula, where participants’ hypothetical account balances are accumulated over time with
pay-based credits and interest. Interest is credited monthly using the 30-Year Treasury bond rate. The interest
crediting rate is part of the cash balance formula and independent of actual pension investment earnings. The cash
balance crediting rate tends to move in concert with the discount rate but has an offsetting effect on pension benefit
obligations and pension expense in comparison to 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 cash balance crediting rate
assumption has therefore been set to its current level of 2.75 percent as of December 31, 2017, growing to 3.0
percent by 2023. Holding all other assumptions constant, an increase or decrease of 25 basis points in the
December 31, 2017 cash balance crediting rate assumption would have the following estimated effects on 2017
pension benefit obligations and 2018 expected pension expense:
$ increase/(decrease) in millions
Pension expense
Pension obligation
25 Basis Point
Decrease in
Rate
25 Basis Point
Increase in
Rate
$
(26) $
(135)
27
141
Expected Long-Term Rate of Return on Plan Assets – The expected long-term rate of return on plan assets (EROA)
assumption reflects the average rate of net earnings we expect on current and future benefit plan investments. EROA
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NORTHROP GRUMMAN CORPORATION
is a long-term assumption, which we review annually and adjust to reflect changes in our long-term view of
expected market returns and/or significant changes in our plan asset investment policy. Due to the inherent
uncertainty of this assumption, we consider multiple data points at the measurement date including historical asset
returns, the plan’s target asset allocation, and third party projection models of expected long-term returns for each of
the plans’ strategic asset classes. In addition to the data points themselves, we consider trends in the data points,
including changes from the prior measurement date. The EROA assumptions we use for pension benefits are
consistent with those used for other post-retirement benefits; however, we reduce the EROA for other post-
retirement benefit plans to allow for the impact of tax on investment earnings, as certain Voluntary Employee
Beneficiary Association trusts are taxable.
While historical market returns are not necessarily predictive of future market returns, given our long history of plan
performance supported by the stability in our investment mix, investment managers, and active asset management,
we believe our actual historical performance is a reasonable metric to consider when developing our EROA. Our
average annual rate of return from 1976 to 2017 was approximately 11.3 percent and our 20-year rolling average
rate of return was approximately 8.1 percent, each determined on an arithmetic basis. Our 2017 asset returns, net of
expenses, were approximately 16.4 percent.
With regard to the company’s investment policy, during 2017, the Benefit Plans Investment Committee reviewed
and re-affirmed the major asset class allocations. Our asset allocation is approximately 45% equities, 35% fixed-
income and 20% alternatives and we are not currently contemplating significant changes to that investment mix. For
further information on plan asset investments, see Note 13 to the consolidated financial statements.
Consistent with our past practice, we obtained long-term capital market forecasting models from several third parties
and, using our target asset allocation, developed an expected rate of return on plan assets from each model. We
considered not only the specific returns projected by those third party models, but also changes in the models year-
to-year when developing our EROA.
For determining FAS expense in 2017 and 2016, we assumed an expected long-term rate of return on pension plan
assets of 8.0 percent for both 2017 and 2016 and an expected long-term rate of return on other post-retirement
benefit plan assets of 7.7 percent for both 2017 and 2016. For 2018 FAS expense, we have assumed an expected
long-term rate of return on pension plan assets of 8.0 percent and 7.7 percent on other post-retirement benefit plans.
Holding all other assumptions constant, an increase or decrease of 25 basis points in our December 31, 2017 EROA
assumption would have the following estimated effects on 2018 pension and other post-retirement benefit expense:
$ increase/(decrease) in millions
Pension expense
Other post-retirement benefit expense
25 Basis Point
Decrease
25 Basis Point
Increase
$
$
66
3
(66)
(3)
Estimated Fair Market Value of Plan Assets – For certain plan assets where the fair market value is not readily
determinable, such as real estate, private equity, hedge funds and opportunistic investments, estimates of fair value
are determined using the best information available. Estimated fair values on these plan assets are based on
redemption values and net asset values, as well as valuation methodologies that include third party appraisals,
comparable transactions, discounted cash flow valuation models and public market data.
Mortality Rate – Mortality assumptions are used to estimate life expectancies of plan participants. In October 2014,
the Society of Actuaries (SOA) issued updated mortality tables and a mortality improvement scale, which reflected
longer life expectancies than previously projected. The SOA has issued annual updates to their mortality
improvement scale each year since then as additional data has become available. These updates generally contained
lower mortality improvement projections than the original projections from 2014. After considering the additional
information released by the SOA in October 2017, and after reviewing our own historical mortality experience, we
continued our practice of adopting the latest SOA projection scale, but with a long-term improvement rate of 0.75%
versus 1.0% assumed by the SOA. Accordingly, we updated the mortality assumptions used in calculating our
pension and post-retirement benefit obligations recognized at December 31, 2017, and the amounts estimated for our
2018 pension and post-retirement benefit expense.
For further information regarding our pension and post-retirement benefits, see “Risk Factors” and Note 13 to the
consolidated financial statements.
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NORTHROP GRUMMAN CORPORATION
Litigation, Commitments and Contingencies
We are subject to a range of claims, disputes, enforcement actions, investigations, lawsuits, overhead cost claims,
environmental matters, income tax matters and administrative proceedings that arise in the ordinary course of
business. Estimating liabilities and costs associated with these matters requires judgment based upon the
professional knowledge and experience of management. We determine whether to record a reserve and, if so, what
amount based on consideration of the facts and circumstances of each matter as then known to us. Determinations
regarding whether to record a reserve and, if so, of what amount, reflect management’s assessment regarding what is
likely to occur; they do not necessarily reflect what management believes should occur. The ultimate resolution of
any such exposure to us may vary materially from earlier estimates as further facts and circumstances develop or
become known to us.
Environmental Matters - We are subject to environmental laws and regulations in the jurisdictions in which we do or
have done business. Factors that could result in changes to the assessment of probability, range of reasonably
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 and effects of contamination; results of efforts to involve
other responsible parties; financial capabilities of other responsible parties; changes in laws and regulations, their
interpretation or application; contractual obligations affecting remediation or responsibilities; and improvements in
remediation technology.
For further information on litigation, commitments and contingencies, see “Risk Factors” and Note 1, Note 11 and
Note 12 to the consolidated financial statements.
Goodwill
Overview – We allocate the purchase price of acquired businesses to the underlying tangible and intangible assets
acquired and liabilities assumed based upon their respective fair values, with the excess recorded as goodwill. Such
fair value assessments require judgments and estimates that can be affected by contract performance and other
factors over time, which may cause final amounts to differ materially from original estimates. Adjustments to the
fair value of purchased assets and liabilities after the initial measurement period are recognized in net earnings.
Impairment Testing – We test for impairment of goodwill annually at each of our reporting units, which comprise
our operating segments. The results of our annual goodwill impairment tests as of December 31, 2017 and 2016,
respectively, indicated that the estimated fair value of each reporting unit substantially exceeded its respective
carrying value. There were no impairment charges recorded in the years ended December 31, 2017, 2016 and 2015.
In addition to performing an annual goodwill impairment test, we may perform an interim impairment test if events
occur or circumstances change that suggest goodwill in any of our reporting units may be impaired. Such indicators
may include, but are not limited to, the loss of significant 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 fair value of our reporting units, we primarily use the income approach based on
the cash flows that the reporting unit expects to generate in the future, consistent with our operating plans. This
income valuation method requires management to project sales, operating expenses, working capital, capital
spending and cash flows for the reporting units over a multi-year period, as well as to determine the weighted-
average cost of capital (WACC) used as a discount rate and terminal value assumptions. The WACC takes into
account the relative weights of each component of our consolidated capital structure (equity and debt) and represents
the expected cost of new capital adjusted as appropriate to consider lower risk profiles associated with longer-term
contracts and barriers to market entry. The terminal value assumptions are applied to the final year of the discounted
cash flow model. We use industry multiples (including relevant control premiums) of operating earnings to
corroborate the fair values of our reporting units determined under the market valuation method of the income
approach.
Impairment assessment inherently involves management judgments as to assumptions about expected future cash
flows and the impact of market conditions on those assumptions. Due to the many variables inherent in the
estimation of a business’ fair value and the relative size of our recorded goodwill, differences in assumptions may
have a material effect on the results of our impairment analysis.
-38-
NORTHROP GRUMMAN CORPORATION
OTHER MATTERS
Off-Balance Sheet Arrangements
As of December 31, 2017, we had no significant off-balance sheet arrangements other than operating leases. For a
description of our operating leases, see Note 12 to the consolidated financial statements.
-39-
NORTHROP GRUMMAN CORPORATION
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
EQUITY RISK
We are exposed to market risk with respect to our portfolio of trading and available-for-sale marketable securities
with a fair value of $353 million at December 31, 2017. These securities are exposed to market volatilities, changes
in price and interest rates.
INTEREST RATE RISK
We are exposed to interest rate risk on variable-rate, short-term borrowings under our credit facilities, for which
there was £100 million (the equivalent of approximately $134 million as of December 31, 2017) outstanding at
December 31, 2017. At December 31, 2017, we have $15.3 billion of long-term debt, primarily consisting of fixed-
rate debt, with a fair value of approximately $16.0 billion. The terms of our fixed-rate debt obligations do not
generally allow investors to demand payment of these obligations prior to maturity. Therefore, we do not have
significant 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 debt prior to maturity.
FOREIGN CURRENCY RISK
In certain circumstances, we are exposed to foreign currency risk. We enter into foreign currency forward contracts
to manage a portion of the exchange rate risk related to receipts from customers and payments to suppliers
denominated in foreign currencies. We do not hold or issue derivative financial instruments for trading purposes. At
December 31, 2017, foreign currency forward contracts with a notional amount of $89 million were outstanding. At
December 31, 2017, a 10 percent unfavorable foreign exchange rate movement would not have a material impact on
our consolidated financial position, annual results of operations and/or cash flows.
INFLATION RISK
We have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer-term firm
fixed-price contracts typically include assumptions for labor and other cost escalations in amounts that historically
have been sufficient to cover cost increases over the period of performance.
-40-
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Falls Church, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Northrop Grumman Corporation
and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of
earnings and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2017, 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) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on the
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated January 29, 2018 expressed an unqualified opinion
on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
Deloitte & Touche LLP
McLean, Virginia
January 29, 2018
We have served as the Company’s auditor since 1975.
-41-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
$ in millions, except per share amounts
Sales
Product
Service
Total sales
Operating costs and expenses
Product
Service
General and administrative expenses
Operating income
Other (expense) income
Interest expense
Other, net
Earnings before income taxes
Federal and foreign income tax expense
Net earnings
Basic earnings per share
Weighted-average common shares outstanding, in millions
Diluted earnings per share
Weighted-average diluted shares outstanding, in millions
Net earnings (from above)
Other comprehensive income (loss)
Year Ended December 31
2016
2015
2017
$ 16,038
9,765
25,803
$ 14,738
9,770
24,508
$ 13,966
9,560
23,526
12,271
7,578
2,655
3,299
11,002
7,729
2,584
3,193
10,333
7,551
2,566
3,076
(360)
110
3,049
1,034
2,015
11.55
174.4
11.47
175.6
$
$
$
(301)
31
2,923
723
2,200
12.30
178.9
12.19
180.5
$
$
$
(301)
15
2,790
800
1,990
10.51
189.4
10.39
191.6
$
$
$
$
2,015
$
2,200
$
1,990
Change in unamortized benefit plan costs, net of tax (expense) benefit
of ($383) in 2017, $89 in 2016 and ($45) in 2015
Change in cumulative translation adjustment
Other, net
Other comprehensive income (loss), net of tax
Comprehensive income
830
(4)
2
828
2,843
$
(175)
(50)
(1)
(226)
1,974
$
75
(41)
2
36
2,026
$
The accompanying notes are an integral part of these consolidated financial statements.
-42-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
$ in millions
Assets
Cash and cash equivalents
Accounts receivable, net
Inventoried costs, net
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net of accumulated depreciation of $5,066 for 2017 and
$4,831 for 2016
Goodwill
Deferred tax assets
Other non-current assets
Total assets
Liabilities
Trade accounts payable
Accrued employee compensation
Advance payments and amounts in excess of costs incurred
Other current liabilities
Total current liabilities
Long-term debt, net of current portion of $867 for 2017 and $12 for 2016
Pension and other post-retirement benefit plan liabilities
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note 12)
Shareholders’ equity
December 31
2017
2016
$ 11,225
3,976
780
368
16,349
4,225
12,455
475
1,413
$ 34,917
$
1,661
1,382
1,617
2,305
6,965
14,399
5,511
994
27,869
$
2,541
3,299
816
200
6,856
3,588
12,450
1,462
1,258
$ 25,614
$
1,554
1,342
1,471
1,263
5,630
7,058
6,818
849
20,355
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and
outstanding
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding:
2017—174,085,619 and 2016—175,068,263
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
—
—
174
44
11,548
(4,718)
7,048
$ 34,917
175
—
10,630
(5,546)
5,259
$ 25,614
The accompanying notes are an integral part of these consolidated financial statements.
-43-
Year Ended December 31
2016
2015
2017
$
2,015
$
2,200
$
1,990
475
94
—
603
(677)
36
(81)
539
(157)
(191)
(43)
2,613
(928)
39
(889)
456
93
—
36
(461)
(15)
(110)
198
148
393
(125)
2,813
(920)
115
(805)
(1,547)
749
(321)
135
(640)
(153)
(9)
(1,786)
222
2,319
2,541
467
99
(103)
572
(30)
(80)
43
(632)
135
(263)
(36)
2,162
(471)
40
(431)
(3,182)
600
—
—
(603)
(186)
96
(3,275)
(1,544)
3,863
2,319
$
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
$ in millions
Operating activities
Net earnings
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
Excess tax benefits from stock-based compensation
Deferred income taxes
Changes in assets and liabilities:
Accounts receivable, net
Inventoried costs, net
Prepaid expenses and other assets
Accounts payable and other liabilities
Income taxes payable, net
Retiree benefits
Other, net
Net cash provided by operating activities
Investing activities
Capital expenditures
Other, net
Net cash used in investing activities
Financing activities
Common stock repurchases
Net proceeds from issuance of long-term debt
Payments of long-term debt
Net (payments to) proceeds from credit facilities
Cash dividends paid
Payments of employee taxes withheld from share-based awards
Other, net
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
(393)
8,245
—
(13)
(689)
(92)
(98)
6,960
8,684
2,541
$ 11,225
$
The accompanying notes are an integral part of these consolidated financial statements.
-44-
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
$ in millions, except per share amounts
Common stock
Beginning of year
Common stock repurchased
Shares issued for employee stock awards and options
End of year
Paid-in capital
Beginning of year
Stock compensation
End of year
Retained earnings
Beginning of year
Common stock repurchased
Net earnings
Dividends declared
Stock compensation
End of year
Accumulated other comprehensive loss
Beginning of year
Other comprehensive income (loss), net of tax
End of year
Total shareholders’ equity
Cash dividends declared per share
Year Ended December 31
2016
2015
2017
$
$
$
175
(2)
1
174
—
44
44
10,630
(371)
2,015
(687)
(39)
11,548
(5,546)
828
(4,718)
7,048
3.90
$
$
$
181
(7)
1
175
—
—
—
10,661
(1,548)
2,200
(633)
(50)
10,630
(5,320)
(226)
(5,546)
5,259
3.50
$
$
$
199
(19)
1
181
—
—
—
12,392
(3,154)
1,990
(596)
29
10,661
(5,356)
36
(5,320)
5,522
3.10
The accompanying notes are an integral part of these consolidated financial statements.
-45-
NORTHROP GRUMMAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”)
is a leading global security company. We offer a broad portfolio of capabilities and technologies that enable us to
deliver innovative products, systems and solutions for applications that range from undersea to outer space and into
cyberspace. We provide products, systems and solutions in autonomous systems; cyber; command, control,
communications and computers, intelligence, surveillance and reconnaissance (C4ISR); strike; and logistics and
modernization. We participate in many high-priority defense and government programs in the United States (U.S.)
and abroad. We conduct most of our business with the U.S. Government, principally the Department of Defense
(DoD) and intelligence community. We also conduct business with foreign, state and local governments, as well as
commercial customers.
Principles of Consolidation
The consolidated financial statements include the accounts of Northrop Grumman and its subsidiaries and joint
ventures or other investments for which we consolidate the financial results. Material intercompany accounts,
transactions and profits are eliminated in consolidation. Investments in equity securities and joint ventures where the
company has significant influence, but not control, are accounted for using the equity method.
Accounting Estimates
The company’s consolidated financial statements are prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP” or “FAS”). The preparation thereof requires management to
make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of
contingencies at the date of the financial statements, as well as the reported amounts of sales and expenses during
the reporting period. Estimates have been prepared using the most current and best available information; however,
actual results could differ materially from those estimates.
Revenue Recognition
The majority of our sales are derived from long-term contracts with the U.S. Government for the production of
goods, the provision of services, or 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-type contracts that
provide for deliveries at lower volume rates are accounted for using the cost-to-cost method. Under this method,
sales, including estimated profits, are recorded as costs are incurred. Generally, sales under contracts that provide for
deliveries at higher volume rates are accounted for using the units-of-delivery method. Under this method, cost and
sales are recognized as units are delivered to the customer. The company estimates profit on contracts as the
difference between total estimated sales and total estimated cost at completion and recognizes that profit either as
costs are incurred (cost-to-cost) or as units are delivered (units-of-delivery). The company classifies sales as product
or service depending upon the predominant attributes of the contract.
Contract sales may include estimated amounts not contractually agreed to or yet funded by the customer, including
cost or performance incentives (such as award and incentive fees), un-priced change orders, contract claims and
requests for equitable adjustment (REAs). Further, as contracts are performed, change orders can be a regular
occurrence and may be un-priced until negotiated with the customer. Un-priced change orders, contract claims
(including change orders unapproved as to both scope and price) and REAs are included in estimated contract sales
when management believes it is probable the un-priced change order, claim and/or REA will result in additional
contract revenue and the amount can be reliably estimated considering the facts and circumstances known to us at
the time.
Net Estimate-At-Completion (EAC) Adjustments - We recognize changes in estimated contract sales or costs and the
resulting changes in contract operating margins using the cumulative catch-up method of accounting. This method
recognizes, in current period operating margin, the cumulative effect of the changes on total costs incurred to date as
net EAC adjustments; sales and operating margins in future periods of contract performance are recognized as if the
revised estimates had been used since contract inception. If it is determined that a loss will result from the
performance of a contract, the entire amount of the estimable future loss, including an allocation of general and
administrative costs, is charged against income in the period the loss is identified. Each loss provision is first offset
against costs included in unbilled accounts receivable or inventoried costs; remaining amounts are reflected in
current liabilities.
-46-
NORTHROP GRUMMAN CORPORATION
Significant EAC adjustments on a single contract could have a material effect on the company’s consolidated
financial position or results of operations. When such adjustments occur, we generally disclose the nature,
underlying conditions and financial impact of the adjustments. During the third quarter of 2017, we recorded a $56
million favorable EAC adjustment on a restricted program at Aerospace Systems largely related to performance
incentives.
The following table presents the effect of aggregate net EAC adjustments:
$ in millions, except per share data
Operating income
Net earnings(1)
Diluted earnings per share(1)
Year Ended December 31
2017
2016
2015
$
$
363
236
1.34
$
494
321
1.78
580
377
1.97
(1) Based on statutory tax rates in effect for each year presented.
Sales by Customer Category - The following table presents sales by customer category:
$ in millions
U.S. Government(1)
International(2)
Other Customers
Total Sales
Year Ended December 31
2017
$
%
$
21,837
3,302
664
85% $
13%
2%
2016
$
20,573
3,205
730
2015
%
$
%
84% $
19,458
13%
3%
3,339
729
83%
14%
3%
$
25,803
$
24,508
$
23,526
(1) Sales to the U.S. Government include sales from contracts for which we are the prime contractor, as well as those for which we
are a subcontractor and the ultimate customer is the U.S. Government. Each of the company’s segments derives substantial
revenue from the U.S. Government.
(2) International sales include sales from contracts for which we are the prime contractor, as well as those for which we are a
subcontractor and the ultimate customer is an international customer. These sales include foreign military sales contracted
through the U.S. Government, direct sales with governments outside the U.S. and commercial sales outside the U.S.
General and Administrative Expenses
In accordance with the regulations that govern cost accounting requirements for government contracts, most general
management and corporate expenses incurred at the segment and corporate locations are considered allowable and
allocable costs. Allowable and allocable G&A costs, including independent research and development (IR&D) and
bid and proposal (B&P) costs, are allocated on a systematic basis to contracts in progress and are included as a
component of total estimated contract costs.
Research and Development
Company-sponsored research and development activities primarily include efforts related to government programs.
Company-sponsored IR&D expenses totaled $639 million, $705 million and $712 million in 2017, 2016 and 2015,
respectively. Customer-funded research and development activities are charged directly to the related contracts.
Income Taxes
Provisions for federal and foreign income taxes are calculated on reported earnings before income taxes based on
current tax law and include the cumulative effect of any changes in tax rates from those used previously in
determining deferred tax assets and liabilities. Such provisions differ from the amounts currently payable because
certain items of income and expense are recognized in different periods for financial reporting purposes than for
income tax purposes. The company recognizes federal and foreign interest accrued related to unrecognized tax
benefits in income tax expense. Federal tax penalties are recognized as a component of income tax expense.
In accordance with the regulations that govern cost accounting requirements for government contracts, current state
and local income and franchise taxes are generally considered allowable and allocable costs and, consistent with
industry practice, are recorded in operating costs and expenses. The company recognizes 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 or claim, which have not been reflected in measuring income tax expense
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NORTHROP GRUMMAN CORPORATION
for financial reporting purposes. Until these positions are sustained by the taxing authorities or the statute of
limitations concerning such issues lapses, the company does not generally recognize the tax benefits resulting from
such positions and reports the tax effects as a liability for uncertain tax positions in its consolidated statements of
financial position.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of
three months or less, primarily consisting of bank time deposits and investments in institutional money market
funds. Cash in bank accounts often exceeds federally insured limits.
Fair Value of Financial Instruments
The company measures the fair value of its financial instruments using observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal
market assumptions.
These two types of inputs create the following fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments
in markets that are not active; and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
Level 3 - Significant inputs to the valuation model are unobservable.
Marketable securities accounted for as trading and available-for-sale are recorded at fair value on a recurring basis.
For available-for-sale securities, changes in unrealized gains and losses are reported as a component of other
comprehensive income. Changes in unrealized gains and losses on trading securities are included in other, net in the
consolidated statements of earnings and comprehensive income. Investments in held-to-maturity instruments with
original maturities greater than three months are recorded at amortized cost.
Derivative financial instruments are recognized as assets or liabilities in the financial statements and measured at
fair value on a recurring basis. Changes in the fair value of derivative financial instruments that are designated as
fair value hedges are recorded in net earnings, while the effective portion of the changes in the fair value of
derivative financial instruments that are designated as cash flow hedges are recorded as a component of other
comprehensive income until settlement. For derivative financial instruments not designated as hedging instruments,
gains or losses resulting from changes in the fair value are reported in other, net in the consolidated statements of
earnings and comprehensive income.
The company may use derivative financial instruments to manage its exposure to interest rate risk for its long-term
fixed-rate debt portfolio and foreign currency exchange risk related to receipts from customers and payments to
suppliers denominated in foreign currencies. The company does not use derivative financial instruments for trading
or speculative purposes, nor does it use leveraged financial instruments. Credit risk related to derivative financial
instruments is considered minimal and is managed 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.
Accounts Receivable and Inventoried Costs
Accounts receivable include amounts billed and currently due from customers, as well as amounts currently due but
unbilled (primarily related to costs incurred on contracts accounted for under the cost-to-cost method). Accounts
receivable also include certain estimated amounts for un-priced change orders, contract claims and/or REAs in
negotiation that are probable of recovery and amounts retained by the customer pending contract completion.
Inventoried costs primarily relate to work in process on contracts accounted for under the units-of-delivery method.
These costs represent accumulated contract costs less the portion of such costs allocated to delivered items. Product
inventory primarily consists of raw materials and is stated at the lower of cost or net realizable value, generally
using the average cost method.
Accumulated contract costs in unbilled accounts receivable and inventoried costs include manufacturing,
engineering and design labor, subcontractor, material, overhead and, for government contracts, allowable G&A
costs. According to the provisions of U.S. Government contracts, the customer asserts title to, or a security interest
in, inventories related to such contracts as a result of contract advances, performance-based payments, and/or
progress payments. In accordance with industry practice, unbilled accounts receivable and inventoried costs are
classified as current assets and include amounts related to contracts having production cycles longer than one year.
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NORTHROP GRUMMAN CORPORATION
Payments received in excess of unbilled accounts receivable and inventoried costs on a contract by contract basis are
recorded as advance payments and amounts in excess of costs incurred in the consolidated statements of financial
position.
Cash Surrender Value of Life Insurance Policies
The company maintains whole life insurance policies on a group of executives, which are recorded at their cash
surrender value as determined by the insurance carrier. The company also has split-dollar life insurance policies on
former officers and executives from acquired businesses, which are recorded at the lesser of their cash surrender
value or premiums paid. These policies are utilized as a partial funding source for deferred compensation and other
non-qualified employee retirement plans. As of December 31, 2017 and 2016, the carrying values associated with
these policies were $340 million and $304 million, respectively, and are recorded in other non-current assets in the
consolidated statements of financial position.
Property, Plant and Equipment
Property, plant and equipment are depreciated over the estimated useful lives of individual assets. Most of these
assets are depreciated using declining-balance methods, with the remainder using the straight-line method. Major
classes of property, plant and equipment and their useful lives are as follows:
Useful life in years, $ in millions
Land and land improvements
Buildings and improvements
Machinery and other equipment
Capitalized software costs
Leasehold improvements
Property, plant and equipment, at cost
Accumulated depreciation
Property, plant and equipment, net
Useful Life
Up to 40(1)
Up to 40
Up to 20
3-5
Length of Lease(2)
December 31
2017
2016
$
$
420
1,834
5,105
537
1,395
9,291
(5,066)
4,225
$
$
415
1,798
4,711
439
1,056
8,419
(4,831)
3,588
(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.
Goodwill and Other Purchased Intangible Assets
The company tests goodwill for impairment at least annually as of December 31, or when an indicator of potential
impairment exists. When performing the goodwill impairment test, the company uses a discounted cash flow
approach corroborated by comparative market multiples, where appropriate, to determine the fair value of its
reporting units.
Goodwill and other purchased intangible asset balances are included in the identifiable assets of their assigned
business segment. The company charges goodwill impairment, as well as the amortization of other purchased
intangible assets, against the respective segment’s operating income. Purchased intangible assets are amortized on a
straight-line basis over their estimated useful lives and are included in other non-current assets in the consolidated
statements of financial position.
Leases
The company uses its incremental borrowing rate in the assessment of lease classification as capital or operating and
defines the initial lease term to include renewal options determined to be reasonably assured. The majority of our
leases are operating leases.
Many of the company’s real property lease agreements contain incentives for tenant improvements, rent holidays, or
rent escalation clauses. For tenant improvement incentives, the company records a deferred rent liability and
amortizes the deferred rent over the term of the lease as a reduction to rent expense. For rent holidays and rent
escalation clauses during the lease term, the company records rental expense on a straight-line basis over the term of
the lease. For purposes of recognizing lease incentives, the company uses the date of initial possession as the
commencement date, which is generally when the company is given the right of access to the space and begins to
make improvements in preparation for intended use.
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NORTHROP GRUMMAN CORPORATION
Litigation, Commitments and Contingencies
We accrue for litigation, commitments and contingencies when management, after considering the facts and
circumstances of 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 be reasonably estimated. When only a range of amounts is
reasonably estimable and no amount within the range is more likely than another, the low end of the range is
recorded. Legal fees are expensed as incurred. Due to the inherent uncertainties surrounding gain contingencies, we
generally do not recognize potential gains until realized.
Environmental Costs
We accrue for environmental liabilities when management determines that, based on the facts and circumstances
known to the company, it is probable the company will incur costs to address environmental impacts and the costs
are reasonably estimable. When only a range of amounts is reasonably estimable and no amount 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 30 years, records environmental liabilities on an undiscounted basis, and excludes asset retirement
obligations and certain legal costs. At sites involving multiple parties, we accrue environmental liabilities based
upon our expected share of liability, taking into account the financial viability of other liable parties. As a portion of
environmental remediation liabilities are expected to be recoverable through overhead charges on government
contracts, such amounts are deferred in inventoried costs (current portion) and other non-current assets until charged
to contracts. The portion of environmental costs not expected to be recoverable is expensed.
Retirement Benefits
The company sponsors various defined benefit pension plans and defined contribution retirement plans covering
substantially all of its employees. In most cases, our defined contribution plans provide for a company match of
employee contributions. The company also provides post-retirement benefits other than pensions to eligible retirees
and qualifying dependents, consisting principally of health care and life insurance benefits.
The liabilities, unamortized benefit plan costs and annual income or expense of the company’s defined benefit
pension and other post-retirement benefit plans are determined using methodologies that involve several actuarial
assumptions. Unamortized benefit plan costs consist primarily of accumulated net after-tax actuarial losses.
Because U.S. Government regulations require that the costs of pension and other post-retirement plans be charged to
our contracts in accordance with the Federal Acquisition Regulation (FAR) and the related U.S. Government Cost
Accounting Standards (CAS) that govern such plans, we calculate retiree benefit plan costs under both CAS and
FAS methods. While both FAS and CAS recognize a normal service cost component in measuring periodic pension
cost, there are differences in the way the components of annual pension costs are calculated under each method.
Measuring plan obligations under FAS and CAS includes different assumptions and models, such as in estimating
returns on plan assets, calculating interest expense, and the periods over which gains/losses related to pension assets
and actuarial changes are amortized. As a result, annual retiree benefit plan expense amounts for FAS are different
from the amounts for CAS in any given reporting period even though the ultimate cost of providing benefits over the
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 FAS and CAS expense is recorded in operating
income at the consolidated company level.
For GAAP reporting, net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they
exceed the accounting corridor. The accounting corridor is a defined range within which amortization of net gains
and losses is not required and is equal to 10 percent of the greater of plan assets or benefit obligations. For most of
the company’s plans, gains or losses outside of the corridor are subject to amortization over the average future
service period of active plan participants (approximately eight years). For plans where all or almost all plan
participants are inactive, gains or losses outside of the corridor are generally subject to amortization over the average
remaining life expectancy of plan participants (approximately 20 years). Not all net periodic pension 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 of a reporting period. The company’s funding policy for the qualified pension plans is to
contribute, at a minimum, the statutorily required amount to an irrevocable trust.
Stock Compensation
The company’s stock compensation plans are classified as equity plans and compensation expense is generally
recognized over the vesting period (typically three years), net of estimated forfeitures. The company issues stock
awards in the form of restricted performance stock rights and restricted stock rights. The fair value of stock awards
is determined based on the closing market price of the company’s common stock on the grant date. At each reporting
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NORTHROP GRUMMAN CORPORATION
date, the number of shares used to calculate compensation expense and diluted earnings per share is adjusted to
reflect the number ultimately expected to vest.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
$ in millions
December 31
2017
2016
Unamortized benefit plan costs, net of tax benefit of $3,056 for 2017 and $3,439 for 2016
Cumulative translation adjustment
Net unrealized gain on marketable securities and cash flow hedges, net of tax
$ (4,586) $ (5,416)
(132)
2
(136)
4
Total accumulated other comprehensive loss
$ (4,718) $ (5,546)
Unamortized benefit plan costs consist primarily of net after-tax actuarial losses totaling $4.7 billion and $5.6 billion
as of December 31, 2017 and 2016, respectively. Net actuarial gains or losses are re-determined annually or upon
remeasurement events and principally arise from changes in the interest rate used to discount our benefit obligations
and differences between expected and actual returns on plan assets.
Reclassifications from accumulated other comprehensive loss to net earnings related to the amortization of benefit
plan costs were $398 million, $402 million and $388 million, net of taxes, for the years ended December 31, 2017,
2016 and 2015, respectively. The reclassifications represent the amortization of net actuarial losses and prior service
credits, and are included in the computation of net periodic pension cost. See Note 13 for further information.
Reclassifications from accumulated other comprehensive loss to net earnings, relating to cumulative translation
adjustments, marketable securities and effective cash flow hedges were not material for the years ended
December 31, 2017, 2016 and 2015.
Related Party Transactions
For all periods presented, the company had no material related party transactions.
Accounting Standards Updates
On March 10, 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2017-07 Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires employers that sponsor defined benefit
pension and/or other post-retirement benefit plans to report the service cost component of net benefit cost in the
same line item as other compensation costs arising from services rendered by the pertinent employees during the
period. Employers are required to present the other components of net benefit costs in the income statement
separately from the service cost component and outside a subtotal of income from operations. Additionally, only the
service cost component of net periodic pension cost will be eligible for asset capitalization.
We expect adoption of ASU 2017-07 to result in a change in our net FAS/CAS pension adjustment within operating
income, which will be offset by a corresponding change in Other, net to reflect the impact of presenting the interest
cost, expected return on plan assets, and amortization of prior service credit and net actuarial loss components of net
periodic benefit costs outside of operating income. In addition, interest on service cost and plan administrative
expenses, which, in some cases, are currently included within service cost, will be presented in the interest cost and
amortization of net actuarial loss components, respectively, in Other, net. We adopted ASU 2017-07 on January 1,
2018 using the retrospective method and do not anticipate a material change to our 2017 net FAS/CAS pension
adjustment in operating income or Other, net when they are recast to reflect the standard. We also do not expect ASU
2017-07 to have a material impact on our consolidated statements of financial position and/or cash flows.
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 supersedes existing
lease guidance, including Accounting Standards Codification (ASC) 840 - Leases. Among other things, ASU
2016-02 requires recognition of a right-of-use asset and liability for future lease payments for contracts that meet the
definition of a lease and requires disclosure of certain information about leasing arrangements. ASU 2016-02 will be
effective January 1, 2019, although early adoption is permitted, and it is currently required to be applied using a
modified retrospective transition method. We expect to adopt the standard on January 1, 2019. We are reviewing our
leases to determine the effect ASU 2016-02 will have on the company’s consolidated financial position, annual
results of operations and/or cash flows. We currently expect the right-of-use assets and lease liabilities recognized
upon adoption will each approximate our future minimum lease payments, as disclosed in our Annual Reports on
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NORTHROP GRUMMAN CORPORATION
Form 10-K. We do not expect ASU 2016-02 to have a material impact on our annual results of operations and/or
cash flows.
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic
606 supersedes existing revenue recognition guidance, including ASC 605-35, Revenue Recognition - Construction-
Type and Production-Type Contracts, and outlines a single set of comprehensive principles for recognizing revenue
under GAAP. Among other things, it requires companies to identify contractual performance obligations and
determine whether revenue should be recognized at a point in time or over time. On July 9, 2015, the FASB
approved a one year deferral of the effective date of Topic 606 to annual reporting periods beginning after December
15, 2017. Topic 606 may be applied either retrospectively or through the use of a modified-retrospective method. We
adopted the standard effective January 1, 2018, using the full retrospective method.
During 2017, we completed our evaluation of Topic 606, including the impact on our business processes, systems
and controls, and differences in the timing and/or method of revenue recognition for our contracts. As a result of our
evaluation, we identified changes to and modified certain of our accounting policies and practices. We also designed
and implemented specific controls over our evaluation of the impact of Topic 606, including our calculation of the
cumulative effect of adopting Topic 606. Although there were no significant changes to our accounting systems or
controls upon adoption of Topic 606, we modified certain of our existing controls to incorporate the revisions we
made to our accounting policies and practices.
Based on our evaluation of Topic 606, we do not expect it to have a material impact on our results of operations or
cash flows in the periods after adoption. Under Topic 606, revenue is recognized as control transfers to the customer.
As such, under the new standard, revenue for our contracts is generally recognized over time using the cost-to-cost
method, which is consistent with the revenue recognition model used for the majority of our contracts prior to the
adoption of Topic 606. In most cases the accounting for those contracts where we previously recognized revenue as
units were delivered has changed under Topic 606 such that we now recognize revenue as costs are incurred. This
change generally results in an acceleration of revenue as compared with our previous revenue recognition method
for those contracts. In addition, for certain of our contracts, there is a change in the number of performance
obligations under Topic 606, which has altered the timing of revenue and margin recognition.
Topic 606 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue, cash flow and
customer contract balances, including how and when we satisfy our performance obligations and the relationship
between revenue recognized and changes in contract balances during a reporting period. We have evaluated these
disclosure requirements and incorporated the collection of relevant data into our reporting process.
During 2017, we completed our assessment of the cumulative effect of adopting Topic 606. Under the full
retrospective method, we principally recognized the cumulative effect of adoption as an increase in unbilled
accounts receivable, a reduction in inventoried costs, an increase in advance payments and amounts in excess of
costs incurred and a net increase in retained earnings as of January 1, 2016. We also completed our assessment of the
impact of adoption on our 2016 and 2017 results. The following table includes selected financial information that
has been recast to reflect the adoption of Topic 606:
$ in millions, except per share amounts
Sales
Operating income
Net earnings
Basic earnings per share
Diluted earnings per share
Year Ended December 31
2017
2016
$
26,004
$
24,706
3,246
1,995
$
11.44
$
11.36
3,125
2,156
12.05
11.94
These amounts principally reflect the impact under Topic 606 of converting contracts to the cost-to-cost method of
accounting as well as changes in the number of performance obligations for certain of our contracts. The impact of
adopting Topic 606 on our 2016 and 2017 results of operations may not be indicative of the impact in future years.
Other accounting standards updates issued, but not effective until after December 31, 2017, are not expected to have
a material effect on the company’s consolidated financial position, annual results of operations and/or cash flows.
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NORTHROP GRUMMAN CORPORATION
2. PENDING ACQUISITION OF ORBITAL ATK
On September 17, 2017, the company entered into a definitive merger agreement to acquire all of the outstanding
shares of Orbital ATK, Inc. (Orbital ATK) for approximately $7.8 billion in cash, plus the assumption of
approximately $1.4 billion in net debt (the “Orbital ATK Acquisition”). Under the terms of the merger agreement,
Orbital ATK shareholders are to receive all-cash consideration of $134.50 per share. We expect to fund the Orbital
ATK Acquisition with the proceeds from our debt financing completed in October 2017 and cash on hand. See Note
10 for further information on our Orbital ATK Acquisition financing. On November 29, 2017, Orbital ATK
shareholders approved the proposed Orbital ATK Acquisition. We currently expect the transaction to close in the
first half of 2018, after receiving regulatory approvals. Upon completion of the Orbital ATK Acquisition, we plan to
establish Orbital ATK as a new, fourth business sector named Northrop Grumman Innovation Systems.
3. EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK
Basic Earnings Per Share
We calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of
common stock outstanding during each period.
Diluted Earnings Per Share
Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based
compensation plans. The dilutive effect of these securities totaled 1.2 million, 1.6 million and 2.2 million shares for
the years ended December 31, 2017, 2016 and 2015, respectively.
Share Repurchases
On May 15, 2013, the company’s board of directors authorized a share repurchase program of up to $4.0 billion of
the company’s common stock (the “2013 Repurchase 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 (the
“2014 Repurchase Program”). Repurchases under the 2014 Repurchase Program commenced in March 2015 and
were completed in March 2016.
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 (the “2015 Repurchase Program”). Repurchases under the 2015 Repurchase
Program commenced in March 2016 upon the completion of the company’s 2014 Repurchase Program. As of
December 31, 2017, repurchases under the 2015 Repurchase Program totaled $1.7 billion; $2.3 billion remained
under this share repurchase authorization. By its terms, the 2015 Repurchase Program is set 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 negotiated transactions. The company retires its common stock upon repurchase and, in
the periods presented, has not made any purchases of common stock other than in connection with these publicly
announced repurchase programs.
The table below summarizes the company’s share repurchases to date under the authorizations described above:
Repurchase Program
Authorization Date
May 15, 2013
December 4, 2014
September 16, 2015
Amount
Authorized
(in millions)
$
$
$
4,000
3,000
4,000
Total
Shares
Retired
(in millions)
32.8
18.0
7.4
(1) Includes commissions paid.
Average
Price
Per Share(1) Date Completed
$
March 2015
121.97
Shares Repurchased
(in millions)
Year Ended
December 31
2016
—
—
2015
2.7
2017
$
$
166.70
222.93
March 2016
—
1.6
1.6
1.4
5.9
7.3
16.6
—
19.3
Dividends on Common Stock
In May 2017, the company increased the quarterly common stock dividend 11 percent to $1.00 per share from the
previous amount of $0.90 per share.
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NORTHROP GRUMMAN CORPORATION
In May 2016, the company increased the quarterly common stock dividend 13 percent to $0.90 per share from the
previous amount of $0.80 per share.
In 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.
4. SEGMENT INFORMATION
The company is aligned in three operating sectors, which also comprise our reportable segments: Aerospace
Systems, Mission Systems and Technology Services.
The following table presents sales and operating income by segment:
$ in millions
Sales
Aerospace Systems
Mission Systems
Technology Services
Intersegment eliminations
Total sales
Operating income
Aerospace Systems
Mission Systems
Technology Services
Intersegment eliminations
Total segment operating income
Net FAS/CAS pension adjustment
Unallocated corporate expenses
Other
Total operating income
Year Ended December 31
2016
2015
2017
$ 11,955
11,382
4,750
(2,284)
25,803
$ 10,828
10,928
4,825
(2,073)
24,508
$
9,940
10,674
4,819
(1,907)
23,526
1,259
1,453
524
(277)
2,959
594
(250)
(4)
3,299
$
1,236
1,445
512
(258)
2,935
316
(53)
(5)
3,193
$
1,205
1,410
514
(209)
2,920
348
(190)
(2)
3,076
$
Net FAS/CAS Pension Adjustment
For financial statement purposes, we account for our employee pension plans in accordance with FAS. However, the
cost of these plans is charged to our contracts in accordance with the FAR and the related CAS. The net FAS/CAS
pension adjustment reflects the difference between CAS pension expense included as cost in segment operating
income and FAS expense included in total operating income.
Unallocated Corporate Expenses
Unallocated corporate expenses include the portion of corporate expenses not considered allowable or allocable
under applicable CAS or the FAR, and therefore not allocated to the segments. Such costs consist of a portion of
management and administration, legal, environmental, compensation, retiree benefits and other corporate
unallowable costs.
Intersegment Sales and Operating Income
Sales between segments are recorded at values that include intercompany operating income for the performing
segment based on that segment’s estimated average operating margin rate for external sales. Such intercompany
operating income is eliminated in consolidation, so that the company’s total sales and total operating income reflect
only those transactions with external customers. See Note 1 for additional information.
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NORTHROP GRUMMAN CORPORATION
The following table presents intersegment sales and operating income before eliminations:
$ in millions
Intersegment sales and operating income
Aerospace Systems
Mission Systems
Technology Services
Total
2017
Year Ended December 31
2016
2015
Sales
Operating
Income
Sales
Operating
Income
Sales
Operating
Income
$
295
954
1,035
$ 2,284
$ 33
141
103
$ 277
$
239
875
959
$ 2,073
$ 28
136
94
$ 258
$
221
781
905
$ 1,907
$ 27
97
85
$ 209
Assets
Substantially all of the company’s operating assets are located in the U.S. The following table presents assets by
segment:
$ in millions
Assets
Aerospace Systems
Mission Systems
Technology Services
Segment assets
Corporate assets(1)
Total assets
December 31
2017
2016
$
$
8,449
10,204
3,010
21,663
13,254
34,917
$
$
7,523
9,991
3,082
20,596
5,018
25,614
(1) Corporate assets principally consist of cash and cash equivalents and deferred tax assets.
Capital Expenditures and Depreciation and Amortization
The following table presents capital expenditures and depreciation and amortization by segment:
$ in millions
Aerospace Systems
Mission Systems
Technology Services
Corporate
Total
Capital Expenditures
2016
2017
2015
Depreciation and Amortization(1)
2016
2015
2017
$
$
665
164
15
84
928
$
$
451
372
6
91
920
$
$
237
141
3
90
471
$
$
234
131
40
70
475
$
$
216
140
37
63
456
$
$
215
153
36
63
467
(1) Depreciation and amortization expense includes amortization of purchased intangible assets, as well as amortization of
deferred and other outsourcing costs.
5. ACCOUNTS RECEIVABLE, NET
Unbilled amounts represent sales for which billings have not been presented to customers by period-end. These
amounts are generally billed and collected within one year. Substantially all accounts receivable at December 31,
2017 are expected to be collected in 2018. The company does not believe it has significant exposure to credit risk, as
accounts receivable and the related unbilled amounts are primarily due from the U.S. Government either as the
ultimate customer or in connection with foreign military sales. Progress and performance-based payments are
reflected as an offset to the related unbilled accounts receivable balance for contracts accounted for under the cost-
to-cost method of percentage-of-completion accounting.
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NORTHROP GRUMMAN CORPORATION
Accounts receivable consisted of the following:
$ in millions
Due from U.S. Government (1)
Billed
Unbilled
Progress and performance-based payments received
Total due from U.S. Government
Due from International and Other Customers
Billed
Unbilled
Progress and performance-based payments received
Total due from International and Other Customers
Total accounts receivable
Allowance for doubtful accounts
Total accounts receivable, net
December 31
2017
2016
$
$
656
10,818
(8,068)
3,406
218
3,397
(2,966)
649
4,055
(79)
3,976
$
$
482
9,730
(7,484)
2,728
200
3,895
(3,461)
634
3,362
(63)
3,299
(1) Includes receivables due from the U.S. Government associated with foreign military sales (FMS). For FMS, we contract with
and are paid by the U.S. Government.
6. INVENTORIED COSTS, NET
Inventoried costs are primarily from contracts where the U.S. Government is the primary customer, therefore the
company does not believe it has significant exposure to recoverability risk related to these amounts.
Inventoried costs consisted of the following:
$ in millions
Production costs of contracts in process
G&A expenses
Contracts in process, gross
Progress and performance-based payments received
Contracts in process, net
Product inventory and raw material
Total inventoried costs, net
7. INCOME TAXES
December 31
2017
2016
$
$
1,813
266
2,079
(1,396)
683
97
780
$
$
1,574
249
1,823
(1,107)
716
100
816
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a
number of changes to existing U.S. tax laws that impact the company, most notably a reduction of the U.S. corporate
income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act
also provides for a one-time transition tax on certain foreign earnings and the acceleration of depreciation for certain
assets placed into service after September 27, 2017 as well as prospective changes beginning in 2018, including
repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research
and development expenditures, additional limitations on executive compensation and limitations on the deductibility
of interest.
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NORTHROP GRUMMAN CORPORATION
The company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance
with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740,
Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. As such, the company’s
financial results reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is
complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for which the
accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The company did not
identify items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable
estimate could not be determined as of December 31, 2017.
The following table presents the impact of the 2017 Tax Act as an increase (decrease) reflected in the noted line
items in the Consolidated Statements of Earnings and Comprehensive Income and Consolidated Statements of
Financial Position:
($ in millions)
Income tax expense
Effective tax rate
($ in millions)
Deferred tax assets
Other current liabilities
Year Ended December 31, 2017
Reduction of
U.S. Corporate
Income Tax Rate
$
280
9.1%
Transition Tax
on Foreign
Earnings
$
13
0.4%
Acceleration of
Depreciation
5
0.2%
$
$
Other
Total
$
2
0.1%
300
9.8%
Reduction of
U.S. Corporate
Income Tax Rate
$
(280) $
—
As of December 31, 2017
Transition Tax
on Foreign
Earnings
Acceleration of
Depreciation
Other
Total
(13) $
—
(80) $
(75)
— $
2
(373)
(73)
The changes to existing U.S. tax laws as a result of the 2017 Tax Act, which we believe have the most significant
impact on the company’s federal income taxes are as follows:
Reduction of the U.S. Corporate Income Tax Rate
The company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in
which the temporary differences are expected to be recovered or paid. Accordingly, the company’s deferred tax
assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 35
percent to 21 percent, resulting in a $280 million increase in income tax expense for the year ended December 31,
2017 and a corresponding $280 million decrease in net deferred tax assets as of December 31, 2017.
Transition Tax on Foreign Earnings
The company recognized a provisional income tax expense of $13 million for the year ended December 31, 2017
related to the one-time transition tax on certain foreign earnings. This resulted in a corresponding decrease in
deferred tax assets due to the utilization of foreign tax credit carryforwards. The determination of the transition tax
requires further analysis regarding the amount and composition of the company’s historical foreign earnings,
which is expected to be completed in the second half of 2018.
Acceleration of Depreciation
The company recognized a provisional reduction to net deferred tax assets of $80 million attributable to the
accelerated depreciation for certain assets placed into service after September 27, 2017 and a provisional income
tax expense of $5 million for the corresponding impact on its 2017 domestic manufacturing deduction. These
provisional adjustments resulted in a decrease in income tax payable of $75 million. The income tax effects for
these positions require further analysis due to the volume of data required to complete the calculations; the
company expects to complete those analyses in the second half of 2018.
Effective January 1, 2018, the 2017 Tax Act requires the acceleration of revenue for tax purposes for certain types of
revenue. This change impacts several accounting methods previously used by the company and is expected to result
in an acceleration of taxability of such revenue beginning in 2018 as compared with prior U.S. tax laws.
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NORTHROP GRUMMAN CORPORATION
Income Tax Expense
Federal and foreign income tax expense consisted of the following:
$ in millions
Federal income tax expense:
Current
Deferred
Total federal income tax expense
Foreign income tax expense:
Current
Deferred
Total foreign income tax expense
Total federal and foreign income tax expense
Year Ended December 31
2017
2015
2016
$
449
581
1,030
8
(4)
4
$ 1,034
$
$
661
49
710
14
(1)
13
723
$
$
310
472
782
21
(3)
18
800
Earnings from foreign operations before income taxes are not material for all periods presented.
Income tax expense differs from the amount computed by multiplying earnings before income taxes by the statutory
federal income tax rate due to the following:
$ in millions
Income tax expense at statutory rate
Stock compensation - excess tax benefits
Research credit
Manufacturing deduction
Settlements with taxing authorities
Repatriation of non-U.S. earnings
Impacts related to the 2017 Tax Act
Other, net
Total federal and foreign income taxes
2017
Year Ended December 31
2016
2015
$ 1,067
(48)
(130)
(97)
(42)
—
300
(16)
$ 1,034
35.0% $ 1,023
(1.6)
(85)
(4.2)
(61)
(3.2)
(58)
(1.4)
(40)
—
(33)
9.8
—
(0.5)
(23)
33.9% $
723
35.0% $
(2.9)
(2.1)
(2.0)
(1.4)
(1.1)
—
(0.8)
24.7% $
976
—
(119)
(31)
—
—
—
(26)
800
35.0%
—
(4.3)
(1.1)
—
—
—
(0.9)
28.7%
2017 – The effective tax rate for 2017 was 33.9 percent, as compared with 24.7 percent in 2016. The higher rate is
principally due to $300 million of tax expense recorded in connection with the 2017 Tax Act, largely due to the
write-down of net deferred tax assets, partially offset by a $69 million increase in research credits and a $39 million
benefit recognized for additional manufacturing deductions principally related to prior years. The effective tax rates
for the years ended December 31, 2017 and 2016 each include separate approximately $40 million benefits
recognized in connection with the resolution of Internal Revenue Service (IRS) examinations of the company’s prior
year tax returns.
2016 – The effective tax rate for 2016 was 24.7 percent, as compared with 28.7 percent in 2015. The lower rate is
principally due to $85 million of excess tax benefits related to employee share-based payment transactions
recognized in 2016, a $40 million benefit recognized in connection with resolution of the IRS examination of the
company’s 2007-2011 tax returns and a $33 million benefit recognized in connection with the repatriation of
earnings from certain of our foreign subsidiaries. These benefits were partially offset by a $58 million decrease in
research credits, which were principally a result of credits recorded in 2015 that were claimed on our prior year tax
returns.
Income tax payments, net of refunds received, were $517 million, $691 million and $118 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Uncertain Tax Positions
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. Our
2014-2015 federal tax returns are currently under IRS examination and our 2007-2011 federal tax returns are subject
to examination due to the filing of refund claims for these years. The company believes it is reasonably possible that
within the next twelve months we may resolve certain matters related to the years under examination, which may
result in reductions of our unrecognized tax benefits up to $115 million and income tax expense up to $30 million.
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NORTHROP GRUMMAN CORPORATION
Tax returns for open tax years related to state and foreign jurisdictions remain subject to examination, but the
amounts currently subject to examination are not considered material.
The change in unrecognized tax benefits during 2017, 2016 and 2015, excluding interest, is as follows:
$ in millions
Unrecognized tax benefits at beginning of the year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements with taxing authorities
Other, net
Net change in unrecognized tax benefits
Unrecognized tax benefits at end of the year
December 31
2016
2017
2015
$
$
135
102
110
(44)
(20)
—
148
283
$
$
223
35
2
(40)
(84)
(1)
(88)
135
$
$
210
52
17
(10)
—
(46)
13
223
These liabilities, along with $11 million of accrued interest and penalties, are included in other current and non-
current liabilities in the consolidated statements of financial position. If the income tax benefits from these tax
positions are ultimately realized, $149 million of federal and foreign tax benefits would 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.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and tax purposes. Net deferred tax assets and liabilities are classified
as non-current in the consolidated statements of financial position. As described above, deferred tax assets and
liabilities are measured based on the enacted tax rates that will apply in the years in which the temporary differences
are expected to be recovered or paid. As such, during December 2017, the company remeasured its deferred tax
assets and liabilities as a result of passage of the 2017 Tax Act. The primary impact of this remeasurement was a
reduction in deferred tax assets and liabilities in connection with the reduction of the U.S. corporate income tax rate
from 35 percent to 21 percent.
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NORTHROP GRUMMAN CORPORATION
The tax effects of significant temporary differences and carryforwards that gave rise to year-end deferred federal,
state and foreign tax balances, as presented in the consolidated statements of financial position, are as follows:
$ in millions
Deferred Tax Assets
Retiree benefits
Accrued employee compensation
Provisions for accrued liabilities
Inventory
Stock-based compensation
Other
Gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred Tax Liabilities
Goodwill
Property, plant and equipment, net
Contract accounting differences
Other
Deferred tax liabilities
Total net deferred tax assets
December 31
2017
2016
$
$
1,477
263
193
191
46
39
2,209
(26)
2,183
511
256
898
43
1,708
475
$
$
2,814
349
295
287
72
72
3,889
(31)
3,858
798
321
1,200
77
2,396
1,462
Realization of deferred tax assets is primarily dependent on generating sufficient taxable income in future periods.
The company believes it is more-likely-than-not our deferred tax assets will be realized, net of valuation allowances
currently established.
At December 31, 2017, the company has available foreign tax credits and unused net operating losses of $5 million
and $142 million, respectively, that may be applied against future taxable income. The net operating losses are
primarily attributable to the United Kingdom and may be carried forward indefinitely. A valuation allowance of $26
million, predominantly related to net operating losses, has been recorded due to the uncertainty regarding the
realization of the asset.
Undistributed Foreign Earnings
As of December 31, 2017, the company has accumulated undistributed earnings generated by our foreign
subsidiaries of approximately $168 million, of which $153 million was subject to the one-time transition tax on
foreign earnings required by the 2017 Tax Act or has otherwise been previously taxed. We intend to indefinitely
reinvest these earnings, as well as future earnings from our foreign subsidiaries, to fund our international operations
and foreign credit facility. In addition, we expect future U.S. cash generation will be sufficient to meet future U.S.
cash needs.
8. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Goodwill
Changes in the carrying amounts of goodwill for the years ended December 31, 2016 and 2017, were as follows:
$ in millions
Balance as of December 31, 2015
Businesses sold and other(1)
Balance as of December 31, 2016
Other(1)
Balance as of December 31, 2017
Aerospace
Systems
Mission
Systems
Technology
Services
Total
$
$
$
3,742
—
3,742
—
3,742
$
$
$
6,704
(10)
6,694
2
6,696
$
$
$
2,014
—
2,014
3
2,017
$
$
$
12,460
(10)
12,450
5
12,455
(1) Other consists primarily of adjustments for foreign currency translation.
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NORTHROP GRUMMAN CORPORATION
Accumulated goodwill impairment losses at December 31, 2017 and 2016, totaled $570 million at Aerospace
Systems.
Purchased Intangible Assets
Purchased intangible assets at December 31, 2017 and 2016 totaled $52 million and $61 million, respectively, net of
accumulated amortization of $1.8 billion at each respective year end.
Amortization expense for 2017, 2016 and 2015, was $14 million, $16 million and $22 million, respectively. The
company’s purchased intangible assets are being amortized over an aggregate weighted-average period of 22 years.
As of December 31, 2017, the expected future amortization of purchased intangibles for each of the next five years
is approximately $10 million per year.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The 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 securities are included in other non-
current assets in the consolidated statements of financial position.
The company’s derivative portfolio consists primarily of foreign currency forward contracts. Where model-derived
valuations are appropriate, the company utilizes the income approach to determine the fair value and uses the
applicable London Interbank Offered Rate (LIBOR) swap rates.
The following table presents the financial assets and liabilities we record at fair value on a recurring basis identified
by the level of inputs used to determine fair value. See Note 1 for the definitions of these levels.
$ in millions
Financial Assets (Liabilities)
Marketable securities
Trading
Available-for-sale
Derivatives
December 31, 2017
December 31, 2016
Level 1
Level 2
Total
Level 1
Level 2
Total
$
342
$
10
—
1
—
—
$
343
$
321
$
10
—
7
—
2
—
8
$
323
7
8
The notional value of the company’s derivative portfolio at December 31, 2017 and 2016 was $89 million and $147
million, respectively. The portion of notional value designated as a cash flow hedge at December 31, 2017 was $8
million. At December 31, 2016, no portion of the notional value was designated as a cash flow hedge. The derivative
fair values and related unrealized gains/losses at December 31, 2017 and 2016, were not material.
There were no transfers of financial instruments between the three levels of the fair value hierarchy during the years
ended December 31, 2017 and 2016.
The carrying value of cash and cash equivalents approximates fair value.
10. LONG-TERM DEBT
Unsecured Senior Notes
In October 2017, the company issued $8.25 billion of unsecured senior notes to finance the Orbital ATK Acquisition and
to pay related fees and expenses as follows:
• $1.0 billion of 2.08 percent Senior Notes due 2020 (the “2020 Notes”),
• $1.5 billion of 2.55 percent Senior Notes due 2022 (the “2022 Notes”),
• $1.5 billion of 2.93 percent Senior Notes due 2025 (the “2025 Notes”),
• $2.0 billion of 3.25 percent Senior Notes due 2028 (the “2028 Notes”) and
• $2.25 billion of 4.03 percent Senior Notes due 2047 (the “2047 Notes”).
We refer to the 2020 Notes, 2022 Notes, 2025 Notes, 2028 Notes and 2047 Notes, together, as the “notes.” Interest on
the notes is payable semi-annually in arrears. The notes are generally subject to an optional redemption, in whole or in
part, at the company's discretion at any time, or from time to time, prior to maturity at a redemption price equal to the
greater of 100% of the principal amount of the notes to be redeemed or an applicable “make-whole” amount, plus
accrued and unpaid interest.
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NORTHROP GRUMMAN CORPORATION
In addition, the 2020 Notes, 2022 Notes, 2025 Notes and 2047 Notes are subject to a mandatory redemption. If the
Orbital ATK Acquisition is not consummated on or prior to December 17, 2018, or if the merger agreement relating to
the Orbital ATK Acquisition is terminated prior to such date, then, in either case, the company will be required to
redeem all of the outstanding 2020 Notes, 2022 Notes, 2025 Notes and 2047 Notes at a redemption price equal to 101%
of the aggregate principal amount of such notes, plus accrued and unpaid interest.
The 2028 Notes are not subject to a special mandatory redemption. If the Orbital ATK Acquisition is not consummated,
the company expects to use the net proceeds from the offering of the 2028 Notes for general corporate purposes, which
may include debt repayment, share repurchases, pension plan funding, acquisitions and working capital.
In December 2016, the company issued $750 million of unsecured senior notes due February 1, 2027, with a fixed interest
rate of 3.20 percent. We used the net proceeds from this offering for a debt repayment of $200 million in the fourth
quarter of 2016 and for general corporate purposes.
Credit Facilities
In December 2016, a subsidiary of the company entered into a two-year credit facility, with two additional one-year
option periods, in an aggregate principal amount of £120 million (the equivalent of approximately $161 million as of
December 31, 2017) (the “2016 Credit Agreement”). The company exercised the first option to extend the maturity to
December 2019. The 2016 Credit Agreement is guaranteed by the company. At December 31, 2017, there was £100
million (the equivalent of approximately $134 million as of December 31, 2017) outstanding under this facility, which
bears interest at a rate of LIBOR plus 1.10 percent. All of the borrowings outstanding under this facility mature less than
one year from the date of issuance, but may be renewed under the terms of the facility. Based on our intent and ability to
refinance the obligations on a long-term basis, substantially all of the borrowings are classified as non-current.
The company also maintains a five-year unsecured credit facility in an aggregate principal amount of $1.6 billion that
matures in July 2020. At December 31, 2017, there was no balance outstanding under this facility.
Our credit agreements contain generally customary terms and conditions, including covenants restricting the company’s
ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other fundamental
changes and incur liens. The company also cannot permit the ratio of its debt to capitalization (as set forth in the credit
agreements) to exceed 65 percent. At December 31, 2017, the company was in compliance with all covenants under its
credit agreements.
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NORTHROP GRUMMAN CORPORATION
Long-term debt consists of the following:
$ in millions
Fixed-rate notes and debentures, maturing in
2018
2019
2020
2021
2022
2023
2025
2026
2027
2028
2031
2040
2043
2045
2047
Credit facilities
Other
Debt issuance costs
Total long-term debt
Less: current portion(1)
Long-term debt, net of current portion
Interest rate
1.75%
5.05%
2.08%
3.50%
2.55%
3.25%
2.93%
7.75% - 7.88%
3.20%
3.25%
7.75%
5.05%
4.75%
3.85%
4.03%
1.62%
Various
December 31
2017
2016
850
500
1,000
700
1,500
1,050
1,500
527
750
2,000
466
300
950
600
2,250
134
271
(82)
15,266
867
$ 14,399
$
850
500
—
700
—
1,050
—
527
750
—
466
300
950
600
—
135
273
(31)
7,070
12
7,058
(1) The current portion of long-term debt is recorded in Other current liabilities in the consolidated statements of financial position.
The estimated fair value of long-term debt was $16.0 billion and $7.6 billion as of December 31, 2017 and 2016,
respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt
with terms and maturities similar to the company’s existing debt arrangements.
Indentures underlying long-term debt issued by the company or its subsidiaries contain various restrictions with respect to
the issuer, including one or more restrictions relating to limitations on liens, sale-leaseback arrangements and funded debt
of subsidiaries. The majority of these fixed rate notes and debentures are subject to redemption at the company’s
discretion at any time prior to maturity in whole or in part at the principal amount plus any make-whole premium and
accrued and unpaid interest. Interest on these fixed rate notes and debentures are payable semi-annually in arrears.
Total interest payments, net of interest received, were $273 million, $299 million, and $291 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
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NORTHROP GRUMMAN CORPORATION
Maturities of long-term debt as of December 31, 2017, are as follows:
$ in millions
Year Ending December 31
2018
2019
2020
2021
2022
Thereafter
Total principal payments
Unamortized premium on long-term debt, net of discount
Debt issuance costs
Total long-term debt
11. INVESTIGATIONS, CLAIMS AND LITIGATION
$
867
518
1,045
834
1,505
10,581
15,350
(2)
(82)
$ 15,266
Litigation
On May 4, 2012, the company commenced an action, Northrop Grumman Systems Corp. v. United States, in the
U.S. Court of Federal Claims. This lawsuit relates to an approximately $875 million firm fixed-price contract
awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats
sequencing systems (FSS) as part of the postal automation program. The FSS have been delivered. The company’s
lawsuit is based on various theories of liability. The complaint seeks approximately $63 million for unpaid portions
of the contract price, and approximately $115 million based on the company’s assertions that, through various acts
and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and
materially altered the company’s obligations under the contract. The United States responded to the company’s
complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately $410
million, less certain amounts outstanding under the contract. The principal counterclaim alleges that the company
delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as
early as it had expected. On April 2, 2013, the U.S. Department of Justice informed the company of a False Claims
Act complaint relating to the FSS contract that was filed under seal by a relator in June 2011 in the U.S. District
Court for the Eastern District of Virginia. On June 3, 2013, the United States filed a Notice informing the Court that
the United States had decided not to intervene in this case. The relator alleged that the company violated the False
Claims Act in a number of ways with respect to the FSS contract, alleged damage to the USPS in an amount of at
least approximately $179 million annually, alleged that he was improperly discharged in retaliation, and sought an
unspecified partial refund of the contract purchase price, penalties, attorney’s fees and other costs of suit. The relator
later voluntarily 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 (“the FSS matters,” collectively), including any possible
loss, cannot be predicted or reasonably estimated at this time, the company intends vigorously to pursue and defend
the 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 Brazil brought by the Brazilian Post and Telegraph Corporation (ECT), a
Brazilian state-owned entity, against Solystic SAS (Solystic), a French subsidiary of the company, and two of its
consortium partners. In this suit, commenced on December 17, 2004, and relatively inactive for some period of time,
ECT alleges the consortium breached its contract with ECT and seeks damages of approximately R$111 million (the
equivalent of approximately $33 million as of December 31, 2017), 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 $27 million as of December 31, 2017) in damages. In October
2013, ECT asserted an additional damage claim of R$22 million (the equivalent of approximately $7 million as of
December 31, 2017). In its counterclaim, Solystic alleges ECT breached the contract by wrongfully refusing to
accept the equipment Solystic had designed and built and seeks damages of approximately €31 million (the
equivalent of approximately $37 million as of December 31, 2017), plus interest, inflation adjustments and
attorneys’ fees, as authorized by Brazilian law. The Brazilian court retained an expert to consider certain issues
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NORTHROP GRUMMAN CORPORATION
pending before it. On August 8, 2013 and September 10, 2014, the company received reports from the expert, which
contain some recommended findings relating to liability and the damages calculations put forth by ECT. Some of the
expert’s recommended findings were favorable to the company and others were favorable to ECT. In November
2014, the parties submitted comments on the expert’s most 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 is expected 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 previously identified and disclosed to the U.S. Government various issues relating primarily to time-
charging practices of some employees working on a particular program with remote deployments. The Department
of Justice is continuing to investigate this matter, and the company is cooperating in that investigation. Depending
upon the ultimate outcome of this matter, the company could be subject to damages, civil or criminal fines, penalties
or other sanctions, and suspension or debarment actions; however, we cannot at this point predict the outcome.
We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic
operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, we
have worked closely with the United States Navy, the United States Environmental Protection Agency, the New
York State Department of Environmental Conservation, the New York State Department of Health and other federal,
state and local governmental authorities, to address legacy environmental conditions in Bethpage. We have incurred,
and expect to continue to incur, as included in Note 12, substantial remediation costs related to these environmental
conditions. The remediation standards or requirements to which we are subject may change and costs may increase
materially. The State of New York has notified us that it intends to seek to impose additional remedial requirements
and, among other things, is evaluating natural resource damages. In addition, we are and may become a party to
various legal proceedings and disputes related to remediation and/or alleged environmental impacts in Bethpage,
including with federal and state entities, local municipalities and water districts, insurance carriers and class action
plaintiffs. These Bethpage matters could result in additional costs, fines, penalties, sanctions, compensatory or other
damages (including natural resource damages), determinations on allocation, allowability and coverage, and non-
monetary relief. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges
of possible liability of these aggregate Bethpage matters.
The company is a party to various other investigations, lawsuits, claims, enforcement actions and other legal
proceedings, including government investigations and claims, that arise in the ordinary course of our business. The
nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on
information available to the company to date, the company does not believe that the outcome of any of these other
matters pending against the company is likely to have a material adverse effect on the company’s consolidated
financial position as of December 31, 2017, or its annual results of operations and/or cash flows.
12. COMMITMENTS AND CONTINGENCIES
U.S. Government Cost Claims
From time to time, the company is advised of claims by the U.S. Government concerning certain potential
disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and the U.S.
Government representatives engage in discussions to enable the company to evaluate the merits of these claims, as
well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s
estimated exposure for such potential disallowed costs. Such provisions are reviewed periodically using the most
recent information available. The company believes it has adequately reserved for disputed amounts that are
probable and reasonably estimable, and the outcome of any such matters would not have a material adverse effect on
its consolidated financial position as of December 31, 2017, or its annual results of operations and/or cash flows.
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NORTHROP GRUMMAN CORPORATION
Environmental Matters
The table below summarizes management’s estimate of the range of reasonably possible future costs for
environmental remediation, the amount accrued within that range, and the deferred costs expected to be recoverable
through overhead charges on U.S. Government contracts as of December 31, 2017 and 2016:
$ in millions
December 31, 2017
December 31, 2016
Range of Reasonably
Possible Future Costs(1)
$405 - $792
$
379- 774
Accrued
Costs(2)
Deferred
Costs(3)
$
410
385
207
195
(1) Estimated remediation costs are not discounted to present value. 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, 2017, $148 million is recorded in other current liabilities and $262 million is recorded in other non-current
liabilities.
(3) As of December 31, 2017, $76 million is deferred in inventoried costs and $131 million is deferred in other non-current assets.
These amounts are evaluated for recoverability on a routine basis.
Although management cannot predict whether new information gained as our environmental remediation projects
progress, or as changes in facts and circumstances occur, will materially affect the estimated liability accrued, except
as we note below with respect to Bethpage, we do not anticipate that future remediation expenditures associated
with our currently identified projects will have a material adverse effect on the company’s consolidated financial
position as of December 31, 2017, or its annual results of operations and/or cash flows. With respect to Bethpage, as
described in Note 11, we cannot at this time estimate the range of reasonably possible additional future costs that
could result from potential changes to remediation standards or requirements to which we are subject.
Financial Arrangements
In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial
banks and surety bonds issued principally by insurance companies to guarantee the performance on certain
obligations. At December 31, 2017, there were $186 million of stand-by letters of credit and guarantees and $197
million of surety bonds outstanding.
Indemnifications
The company has provided indemnification for certain environmental, income tax and other potential liabilities in
connection with certain of its divestitures. The settlement of these liabilities is not expected to have a material
adverse effect on the company’s consolidated financial position as of December 31, 2017, or its annual results of
operations and/or cash flows.
Operating Leases
Rental expense for operating leases was $300 million in 2017, $298 million in 2016, and $302 million in 2015.
These amounts are net of immaterial amounts of sublease rental income. Minimum rental commitments under long-
term non-cancelable operating leases as of December 31, 2017 are payable as follows:
$ in millions
Year Ending December 31
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
13. RETIREMENT BENEFITS
$
232
195
145
120
87
559
$ 1,338
Plan Descriptions
U.S. Defined Benefit Pension Plans – The company sponsors several defined benefit pension plans in the U.S.
covering the majority of its employees. Pension benefits for most employees are based on the employee’s years of
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NORTHROP GRUMMAN CORPORATION
service, age and compensation. It is our policy to fund at least the minimum amount required for all qualified plans,
using actuarial cost methods and assumptions acceptable under U.S. Government regulations, by making payments
into benefit trusts separate from the company.
Defined Contribution Plans – The company also sponsors 401(k) defined contribution plans in which most
employees are eligible to participate, including certain employees covered under collective agreements. Company
contributions for most plans are based on employer matching of employee contributions up to four percent of
compensation for employees hired on or before April 1, 2016. In addition to the 401(k) defined contribution benefit,
certain employees hired from July 1, 2008 through April 1, 2016, are eligible to participate in Retirement Account
Contributions (RAC) in lieu of a defined benefit pension plan. Most employees hired after April 1, 2016 and certain
employees that did not previously participate in the pension plan or receive RAC are eligible for an increased
company match of up to seven percent of compensation. The company’s contributions to these defined contribution
plans for the years ended December 31, 2017, 2016 and 2015, were $344 million, $311 million and $291 million,
respectively.
Non-U.S. Benefit Plans – The company sponsors several benefit plans for non-U.S. employees. These plans are
designed to provide benefits appropriate to local practice and in accordance with local regulations. Some of these
plans are funded using benefit trusts separate from the company.
Medical and Life Benefits – The company provides a portion of the costs for certain health care and life insurance
benefits for a substantial number of its active and retired employees. Certain covered employees achieve eligibility
to participate in these plans upon retirement from active service if they meet specified age and years of service
requirements. Qualifying dependents are also eligible for plan benefits in certain circumstances. The company
reserves the right to amend or terminate the plans at any time. The company has capped the amount of its
contributions to substantially all of its remaining post-retirement medical and life benefit plans.
In addition to a company and employee cost-sharing feature, the 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. The plans also provide for a Medicare
carve-out. Subsequent to January 1, 2005 (or earlier at some segments), newly hired employees are not eligible for
subsidized post-retirement medical and life benefits.
The company provides subsidies to reimburse certain retirees for a portion of the cost of individual Medicare-
supplemental coverage purchased directly by the retiree through a private insurance exchange.
Summary Plan Results
The cost to the company of its retirement benefit plans is shown in the following table:
$ in millions
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service credit
Net loss from previous years
Other
Net periodic benefit cost
Year Ended December 31
Pension Benefits
2016
2017
2015
Medical and Life Benefits
2017
2015
2016
$
424
1,234
(1,885)
$
446
1,284
(1,853)
$
484
1,224
(1,975)
(57)
712
4
432
$
(60)
714
—
531
$
(60)
682
—
355
$
$
$
23
84
(89)
(22)
9
1
6
$
$
30
94
(86)
(22)
16
—
32
$
$
35
94
(89)
(28)
27
—
39
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NORTHROP GRUMMAN CORPORATION
The table below summarizes the components of changes in unamortized benefit plan costs for the years ended
December 31, 2015, 2016 and 2017:
$ in millions
Changes in unamortized benefit plan costs
Change in net actuarial loss
Amortization of:
Prior service credit
Net loss from previous years
Tax (benefit) expense related to above items
Change in unamortized benefit plan costs – 2015
Change in net actuarial loss
Amortization of:
Prior service credit
Net loss from previous years
Tax (benefit) expense related to above items
Change in unamortized benefit plan costs – 2016
Change in net actuarial loss
Amortization of:
Prior service credit
Net loss from previous years
Tax (benefit) expense related to above items
Change in unamortized benefit plan costs – 2017
Pension
Benefits
Medical and
Life Benefits
Total
$
626
$
(125) $
501
60
(682)
(1)
3
1,003
60
(714)
(121)
228
(476)
28
(27)
46
(78)
(91)
22
(16)
32
(53)
(95)
57
(712)
365
(766) $
$
22
(9)
18
(64) $
88
(709)
45
(75)
912
82
(730)
(89)
175
(571)
79
(721)
383
(830)
The table below presents the components of accumulated other comprehensive loss related to the company’s
retirement benefit plans:
$ in millions
Amounts recorded in accumulated other comprehensive loss
Net actuarial loss
Prior service credit
Income tax benefits related to above items
Unamortized benefit plan costs
Pension Benefits
2017
2016
Medical and
Life Benefits
2017
2016
$ (7,842) $ (9,030) $
187
3,042
244
3,407
$ (4,613) $ (5,379) $
(9) $
22
14
27
$
(113)
44
32
(37)
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NORTHROP GRUMMAN CORPORATION
The following table sets forth the funded status and amounts recognized in the consolidated statements of financial
position for the company’s retirement benefit 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.
$ in millions
Plan Assets
Fair value of plan assets at beginning of year
Net gain on plan assets
Employer contributions
Participant contributions
Benefits paid
Other
Fair value of plan assets at end of year
Projected Benefit Obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Participant contributions
Actuarial loss (gain)
Benefits paid
Other
Projected benefit obligation at end of year
Funded status
Pension Benefits
2017
2016
Medical and
Life Benefits
2017
2016
$
$ 24,384
3,885
596
11
(1,617)
(33)
27,226
$ 23,950
1,867
81
11
(1,480)
(45)
24,384
30,409
424
1,234
11
1,526
(1,617)
(20)
31,967
29,182
446
1,284
11
1,026
(1,480)
(60)
30,409
$ (4,741) $ (6,025) $
$
1,208
208
45
24
(144)
(3)
1,338
2,100
23
84
24
26
(144)
(3)
2,110
(772) $
1,153
97
83
20
(146)
1
1,208
2,181
30
94
20
(80)
(146)
1
2,100
(892)
Classification of amounts recognized in the consolidated
statements of financial position
Non-current assets
Current liability
Non-current liability
$
$
82
(154)
(4,669)
2
(146)
(5,881)
$
$
112
(42)
(842)
87
(42)
(937)
The following table shows those amounts expected to be recognized in net periodic benefit cost in 2018:
$ in millions
Amounts expected to be recognized in 2018 net periodic
benefit cost
Pension
Benefits
Medical and
Life Benefits
Total
Net actuarial loss
Prior service credit
$
$
535
(58)
— $
(21)
535
(79)
The accumulated benefit obligation for all defined benefit pension plans was $31.6 billion and $30.1 billion at
December 31, 2017 and 2016, respectively.
Amounts for pension plans with accumulated benefit obligations in excess of fair value of plan assets are as follows:
$ in millions
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
December 31
$
2017
29,804
29,454
24,981
$
2016
30,350
30,065
24,322
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NORTHROP GRUMMAN CORPORATION
Plan Assumptions
On a weighted-average basis, the following assumptions were used to determine benefit obligations and net periodic
benefit cost:
Assumptions used to determine benefit obligation at December 31
Discount rate
Initial cash balance crediting rate assumed for the next year
Rate to which the cash balance crediting rate is assumed to increase
(the ultimate rate)
Year that the cash balance crediting rate reaches the ultimate rate
Rate of compensation increase
Initial health care cost trend rate assumed for the next year
Rate to which the health care cost trend rate is assumed to decline
(the ultimate trend rate)
Year that the health care cost trend rate reaches the ultimate trend
rate
Assumptions used to determine benefit cost for the year ended
December 31
Discount rate
Initial cash balance crediting rate assumed for the next year
Rate to which the cash balance crediting rate is assumed to increase
(the ultimate rate)
Year that the cash balance crediting rate reaches the ultimate rate
Expected long-term return on plan assets
Rate of compensation increase
Initial health care cost trend rate assumed for the next year
Rate to which the health care cost trend rate is assumed to decline
(the ultimate trend rate)
Year that the health care cost trend rate reaches the ultimate trend
rate
Pension Benefits
2017
2016
Medical and
Life Benefits
2017
2016
3.68% 4.19% 3.66% 4.13%
2.75% 3.10%
3.00% 3.60%
2023
2022
3.00% 3.00%
6.50% 6.50%
5.00% 5.00%
2023
2020
4.19% 4.53% 4.13% 4.47%
3.10% 3.00%
3.60% 3.75%
2022
2021
8.00% 8.00% 7.70% 7.70%
3.00% 3.00%
6.50% 7.00%
5.00% 5.00%
2020
2020
Plan Assets and Investment Policy
Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and
investment return over the long term. The investment goal is to exceed the assumed rate of return over the long term
within reasonable and prudent levels of risk. Through consultation with our investment 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, historical market returns over long periods and periodic surveys of
investment managers’ expectations. Using policy target allocation percentages and the asset class expected returns,
we calculate a weighted-average expected long-term rate of return. Liability studies are conducted on a regular basis
to provide guidance in setting investment goals with an objective to balance risk. Risk targets are established and
monitored against acceptable ranges.
Our investment policies and procedures are designed to ensure the plans’ investments are in compliance with the
Employee Retirement Income Security Act (ERISA). 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.
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NORTHROP GRUMMAN CORPORATION
For the majority of the plans’ assets, the investment policies require that the asset allocation be maintained within
the following ranges as of December 31, 2017:
Cash and cash equivalents
U.S. equities
International equities
Fixed-income securities
Alternative investments
Asset Allocation Ranges
0% - 12%
15% - 35%
10% - 30%
20% - 55%
8% - 28%
The table below provides the fair values of the company’s pension and Voluntary Employee Beneficiary Association
(VEBA) trust plan assets at December 31, 2017 and 2016, by asset category. The table also identifies the level of
inputs used to determine the fair value of assets in each category. See Note 1 for the definitions of these levels.
Certain investments that are measured at fair value using net asset value (NAV) per share (or its equivalent) as a
practical expedient are not required to be categorized in the fair value hierarchy table. The total fair value of these
investments is included in the table below to permit reconciliation of the fair value hierarchy to amounts presented
in the funded status table above. As of December 31, 2017 and 2016, there were no investments expected to be sold
at a value materially different than NAV.
$ in millions
Asset category
Cash and cash equivalents
U.S. equities
International equities
Fixed-income securities
U.S. Treasuries
U.S. Government Agency
Corporate bond
Non-U.S. Government
Corporate debt
Asset backed
High yield debt
Bank loans
Other Assets
Investments valued using
NAV as a practical expedient
U.S. equities
International equities
Fixed-income funds
Hedge funds
Opportunistic investments
Private equities
Real estate funds
Fair value of plan assets at
the end of the year
Level 1
Level 2
Level 3
Total
2017
2016
2017
2016
2017
2016
2017
2016
$
55
$
72
$ 4,086
$ 2,477
$ 4,141
$ 2,549
3,365
2,453
3,686
2,392
—
48
$
$
1
1
3
1
3,366
2,454
3,689
2,441
1,282
1,109
1,282
1,109
345
2
135
4,404
255
866
248
3
424
—
108
3,723
296
1,844
297
12
—
1
2
—
15
(10)
345
2
135
4,404
255
866
248
20
1,053
4,315
129
166
873
2,091
2,419
424
—
108
3,723
297
1,844
297
2
700
3,329
99
220
581
1,801
2,379
$ 5,888
$ 6,140
$ 11,626
$ 10,338
$
4
$
5
$ 28,564
$ 25,592
There were no transfers of plan assets between the three levels of the fair value hierarchy during the years ended
December 31, 2017 and 2016.
Generally, investments are valued based on information in financial publications of general circulation, statistical
and valuation services, records of security exchanges, appraisal by qualified persons, transactions and bona fide
offers. Cash and cash equivalents are predominantly held in money market or short-term investment funds. U.S. and
international equities consist primarily of common stocks and institutional common trust funds. Investments in
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NORTHROP GRUMMAN CORPORATION
certain equity securities, which include domestic and international securities and registered investment companies,
are valued at the last reported sales or quoted price on the last business day of the reporting period. Fair values for
certain fixed-income securities, which are not exchange-traded, are valued using third-party pricing services.
Other assets include derivative assets with a fair value of $34 million and $19 million, derivative liabilities with a
fair value of $19 million and $28 million, and net notional amounts of $3.3 billion and $2.0 billion, as of
December 31, 2017 and 2016, 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 pension and 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.
Investments in certain equity and fixed-income funds, which include common/collective trust funds, and alternative
investments, including hedge funds, opportunistic investments, private equity funds and real estate funds, are valued
based on the NAV derived by the investment managers, as a practical expedient, and are described further below.
U.S. and International equities: Generally, redemption periods are monthly with a notice requirement less than 30
days. As of December 31, 2017 and 2016, unfunded commitments were not material.
Fixed-income funds: Redemption periods are daily, monthly or quarterly with various notice requirements but
generally are less than 30 days. As of December 31, 2017 and 2016, there were no unfunded commitments.
Hedge funds: The redemption period of hedge funds is generally quarterly and requires a 90-day notice. As of
December 31, 2017 and 2016, there were no unfunded commitments.
Opportunistic investments: Opportunistic investments are primarily held in partnerships with a 5-10 year life. As of
December 31, 2017 and 2016, unfunded commitments were $768 million and $638 million, respectively.
Private equities: The term of each fund is typically 10 or more years and the fund’s investors do not have an option
to redeem their interest in the fund. As of December 31, 2017 and 2016, unfunded commitments were $1.4 billion
and $1.3 billion, respectively.
Real estate funds: Consists of closed-end real estate funds and infrastructure funds with terms that are typically 10 or
more years. This class also contains open-end funds that generally allow investors to redeem their interests in the
fund. As of December 31, 2017 and 2016, unfunded commitments were $71 million and $72 million, respectively.
For the years ended December 31, 2017 and 2016, the defined benefit pension and VEBA trusts did not hold any
Northrop Grumman common stock.
Benefit Payments
The following table reflects estimated future benefit payments for the next ten years, based upon the same
assumptions used to measure the benefit obligation, and includes expected future employee service, as of
December 31, 2017:
$ in millions
Year Ending December 31
2018
2019
2020
2021
2022
2023 through 2027
Pension Plans
Medical and
Life Plans
Total
$
$
1,573
1,618
1,665
1,713
1,757
9,410
$
149
153
144
144
143
676
1,722
1,771
1,809
1,857
1,900
10,086
In 2018, the company expects to contribute the required minimum funding of approximately $87 million to its
pension plans and approximately $43 million to its medical and life benefit plans. During the year ended
December 31, 2017, the company made a voluntary pension contribution of $500 million.
14. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Compensation Plans
At December 31, 2017, the company had stock-based compensation awards outstanding under the following
shareholder-approved plans: the 2011 Long-Term Incentive Stock Plan (2011 Plan), applicable to employees, and
the 1993 Stock Plan for Non-Employee Directors (1993 SPND).
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NORTHROP GRUMMAN CORPORATION
Employee Plans – In May 2015, the company’s shareholders approved amendments to the 2011 Plan. These
amendments provided that shares issued under the plan would be counted against the aggregate share limit on a one-
for-one basis. As amended, 5.1 million shares plus 2.4 million of newly authorized shares were available for
issuance under the 2011 Plan; as of December 31, 2017, 6.3 million shares remain available for issuance.
The 2011 Plan provides for the following equity awards: stock options, stock appreciation rights (SARs) and stock
awards. Under the 2011 Plan, no SARs have been granted and there are no outstanding stock options. Stock awards
include restricted performance stock rights (RPSR) and restricted stock rights (RSR). RPSRs generally vest and are
paid following the completion of a three-year performance period, based on achievement of financial objectives
determined by the Board. RSRs generally vest 100% after three years. Each includes dividend equivalents, which
are paid upon payment of the RPSR or RSR. The terms of equity awards granted under the 2011 Plan provide for
accelerated vesting, and in some instances forfeiture, of all or a portion of an award upon termination of
employment.
Non-Employee Director Plans – Awards to non-employee directors are made pursuant to the Northrop Grumman
Corporation Equity Grant Program for Non-Employee Directors under the 2011 Plan (the Director Program), which
was amended and restated effective January 1, 2016. Prior to January 1, 2016, the Director Program and the 1993
SPND provided for quarterly award and vesting of an annual equity retainer in the form of deferred stock units
(Automatic Stock Units) to be paid upon the conclusion of a director’s board service, or earlier, as specified by the
director, if the director had five or more years of service.
Under the amended Director Program, each non-employee director is awarded an annual equity grant in the form of
Automatic Stock Units, which vest on the one-year anniversary of the grant date. Directors may elect to have all or
any portion of their Automatic Stock Units paid on (A) the earlier of (i) the beginning 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.
Directors also may 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 or in alternative investment options. Elective Stock Units are
awarded on a quarterly basis. Directors may elect to have all or a portion of their Elective Stock 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 units awarded under the Director Program are paid out in an equivalent number of shares of Northrop
Grumman common stock. Directors are credited with dividend equivalents in connection with the accumulated stock
units until the shares of common stock relating to such stock units are issued.
Compensation Expense
Stock-based compensation expense for the years ended December 31, 2017, 2016 and 2015 was $94 million, $93
million and $99 million, respectively. The related tax benefits for stock-based compensation for the years ended
December 31, 2017, 2016 and 2015 were $48 million, $85 million and $103 million, respectively.
At December 31, 2017, there was $91 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 Awards
Compensation expense for stock awards is measured at the grant date based on the fair value of the award and is
recognized over the vesting period (generally three years). The fair value of stock awards and performance stock
awards is determined based on the closing market price of the company’s common stock on the grant date. The fair
value of market-based stock awards is determined at the grant date using a Monte Carlo simulation model. For
purposes of measuring compensation expense for performance awards, the number of shares ultimately expected to
vest is estimated at each reporting date based on management’s expectations regarding the relevant performance
criteria.
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NORTHROP GRUMMAN CORPORATION
Stock award activity for the years ended December 31, 2015, 2016 and 2017, is presented in the table below. Vested
awards do not include any adjustments to reflect the final performance measure for issued shares.
Outstanding at January 1, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Granted
Vested
Forfeited
Outstanding at December 31, 2017
Stock
Awards
(in thousands)
2,808
539
(1,691)
(70)
1,586
483
(872)
(49)
1,148
397
(521)
(86)
938
Weighted-
Average
Grant Date
Fair Value
Per Share
77
$
Weighted-
Average
Remaining
Contractual
Term (in years)
1.1
166
62
108
122
186
97
143
167
233
152
198
192
$
$
$
1.2
1.3
1.0
The majority of our stock awards are granted annually during the first quarter. RSRs typically vest on the third
anniversary of the grant date, while RPSRs generally vest and pay out based on the achievement of financial metrics
over a three-year period.
The grant date fair value of shares issued in settlement of fully vested stock awards was $96 million, $97 million and
$143 million during the years ended December 31, 2017, 2016 and 2015, respectively.
Cash Awards
The 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 amounts related to those cash awards
granted for the periods presented:
$ in millions
Minimum aggregate payout amount
Maximum aggregate payout amount
Year Ended December 31
2017
2016
2015
$
38 $
201
39 $
199
37
194
The 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 over a three-year period. At December 31, 2017, there was $133 million of unrecognized
compensation expense related to cash awards.
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NORTHROP GRUMMAN CORPORATION
15. UNAUDITED SELECTED QUARTERLY DATA
Unaudited quarterly financial results are set forth in the following tables. It is the company’s long-standing practice
to establish actual interim closing dates using a “fiscal” calendar in which we close our books on a Friday near each
quarter-end date, in order to normalize the potentially disruptive effects of quarterly closings on business processes.
This practice is only used at interim periods within a reporting year.
2017
In millions, except per share amounts
Sales
Operating income
Net earnings
Basic earnings per share
Diluted earnings per share
Weighted-average common shares outstanding
Weighted-average diluted shares outstanding
2016
In millions, except per share amounts
Sales
Operating income
Net earnings
Basic earnings per share
Diluted earnings per share
Weighted-average common shares outstanding
Weighted-average diluted shares outstanding
$
$
1st Qtr
6,267
832
640
3.66
3.63
174.8
176.1
1st Qtr
5,956
739
556
3.07
3.03
181.3
183.4
2nd Qtr
6,375
$
855
552
3rd Qtr
6,527
$
845
645
$
4th Qtr
6,634
767
178
3.16
3.15
174.5
175.5
3.70
3.68
174.2
175.3
1.02
1.01
174.2
175.5
2nd Qtr
6,000
$
797
517
3rd Qtr
6,155
$
826
602
$
4th Qtr
6,397
831
525
2.87
2.85
180.1
181.5
3.38
3.35
178.1
179.6
2.98
2.96
176.0
177.6
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NORTHROP GRUMMAN CORPORATION
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive officer (Chairman and Chief Executive Officer) and principal financial officer (Corporate
Vice President and Chief Financial Officer) have evaluated the company’s disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) as of
December 31, 2017, and have concluded that these controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and
forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the reports that we file or submit is accumulated and
communicated to management, including the principal executive officer and the principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended December 31, 2017, no change occurred in our internal controls over financial
reporting that materially affected, or is reasonably likely to materially affect, our internal controls over financial
reporting.
Item 9B. Other Information
None.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Northrop Grumman Corporation (the company) prepared and is responsible for the consolidated
financial statements and all related financial information contained in this Annual Report. This responsibility
includes establishing and maintaining effective internal control over financial reporting. The company’s internal
control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States of America.
To comply with the requirements of Section 404 of the Sarbanes–Oxley Act of 2002, the company designed and
implemented a structured and comprehensive assessment process to evaluate its internal control over financial
reporting across the enterprise. The assessment of the effectiveness of the company’s internal control over financial
reporting is based on criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, a system
of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Management regularly monitors its internal control over financial reporting, and actions are taken to
correct deficiencies as they are identified. Based on its assessment, management has concluded that the company’s
internal control over financial reporting was effective as of December 31, 2017.
Deloitte & Touche LLP issued an attestation report dated January 29, 2018, concerning the company’s internal
control over financial reporting, which is contained in this Annual Report. The company’s consolidated financial
statements as of and for the year ended December 31, 2017, have been audited by the independent registered public
accounting firm of Deloitte & Touche LLP in accordance with the standards of the Public Company Accounting
Oversight Board (United States).
/s/ Wesley G. Bush
Chairman and Chief Executive Officer
/s/ Kenneth L. Bedingfield
Corporate Vice President and Chief Financial Officer
January 29, 2018
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Falls Church, Virginia
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Northrop Grumman Corporation and subsidiaries
(the “Company”) as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by
COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017 of the
Company and our report dated January 29, 2018 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Deloitte & Touche LLP
McLean, Virginia
January 29, 2018
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NORTHROP GRUMMAN CORPORATION
Item 10. Directors, Executive Officers and Corporate Governance
PART III
DIRECTORS
Information about our Directors will be incorporated herein by reference to the Proxy Statement for the 2018 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission (SEC) within 120 days after the
end of the company’s fiscal year.
EXECUTIVE OFFICERS
Our executive officers as of January 29, 2018, are listed below, along with their ages on that date, positions and
offices held with the company, and principal occupations and employment, focused primarily on the past five years.
Name
Wesley G. Bush
Age
Office Held
56 Chairman and
Since
2011
Recent Business Experience
Chairman, Chief Executive Officer and President
(2011-2017)
Patrick M. Antkowiak
Kenneth L. Bedingfield
Chief Executive
Officer
57 Corporate Vice
President and
Chief Technology
Officer
45 Corporate Vice
President and
Chief Financial
Officer
Mark A. Caylor
53 Corporate Vice
President and
President,
Mission Systems
Sector
2014 Vice President and General Manager, Advanced
Concepts and Technologies Division, Former
Electronic Systems Sector (2010-2014)
2015 Vice President, Finance (2014-2015); Vice
President, Business Management and Chief
Financial Officer, Aerospace Systems Sector
(2013-2014); Corporate Vice President,
Controller and Chief Accounting Officer
(2011-2013)
Corporate Vice President and President,
Enterprise Services and Chief Strategy Officer
(2014-2017); Corporate Vice President and
President, Enterprise Shared Services
(2013-2014)
2018
Sheila C. Cheston
59 Corporate Vice
2010
Lisa R. Davis
Michael A. Hardesty
Christopher T. Jones
President and
General Counsel
56 Corporate Vice
President,
Communications
46 Corporate Vice
President,
Controller, and
Chief Accounting
Officer
53 Corporate Vice
President and
President,
Technology
Services Sector
2016 Vice President, Communications, Former
Electronic Systems Sector (2014-2016); Vice
President, Communications, AstraZeneca (a
biopharmaceutical company) (2006-2013)
2013 Vice President and Chief Financial Officer,
Former Information Systems Sector (2011-2013)
2016
Corporate Vice President and President, Former
Technical Services Sector (2013-2015)
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NORTHROP GRUMMAN CORPORATION
Name
Lesley A. Kalan
Age
Office Held
44 Corporate Vice
President,
Government
Relations
Since
2018 Vice President, Legislative Affairs (2010-2017)
Recent Business Experience
Janis G. Pamiljans
57 Corporate Vice
2017 Vice President and General Manager, Strategic
President and
President,
Aerospace
Systems Sector
Systems Division, Aerospace Systems Sector
(2015-2017); Vice President and General
Manager, Unmanned Systems (now Autonomous
Systems), Aerospace Systems Sector
(2012-2014)
Denise M. Peppard
61 Corporate Vice
2011
President and
Chief Human
Resources Officer
David T. Perry
53 Corporate Vice
2012
President and
Chief Global
Business
Development
Officer
Shawn N. Purvis
44 Corporate Vice
2018 Vice President and Chief Information Officer
President and
President of
Enterprise
Services
(2016-2017); Vice President and General
Manager, Cyber Division, Former Information
Systems Sector (2014-2016); Vice President and
Business Manager, Integrated Intelligence
Systems Business Unit, Former Information
Systems Sector (2012-2014)
Kathy J. Warden
46
President and
Chief Operating
Officer
2018
Corporate Vice President and President, Mission
Systems Sector (2016-2017); Corporate Vice
President and President, Former Information
Systems Sector (2013-2015)
AUDIT COMMITTEE FINANCIAL EXPERT
The information as to the Audit Committee and the Audit Committee Financial Expert will be incorporated herein by
reference to the Proxy Statement for the 2018 Annual Meeting of Shareholders.
CODE OF ETHICS
We have adopted Standards of Business Conduct for all of our employees, including the principal executive officer,
principal financial officer and principal accounting officer. The Standards of Business Conduct can be found on our
internet 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: Northrop
Grumman Corporation, c/o Office of the Secretary, 2980 Fairview Park Drive, Falls Church, VA 22042. We disclose
amendments to provisions of our Standards of Business Conduct by posting amendments on our website. Waivers of
the provisions of our Standards of Business Conduct that apply to our directors 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 the SEC.
OTHER DISCLOSURES
Other disclosures required by this Item will be incorporated herein by reference to the Proxy Statement for the 2018
Annual Meeting of Shareholders.
Item 11. Executive Compensation
Information concerning Executive Compensation, including information concerning Compensation Committee
Interlocks and Insider Participation and the Compensation Committee Report, will be incorporated herein by
reference to the Proxy Statement for the 2018 Annual Meeting of Shareholders.
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NORTHROP GRUMMAN CORPORATION
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information as to Securities Authorized for Issuance Under Equity Compensation Plans and Security Ownership
of Certain Beneficial Owners and Management will be incorporated herein by reference to the Proxy Statement for
the 2018 Annual Meeting of Shareholders.
For a description of securities authorized under our equity compensation plans, see Note 14 to the consolidated
financial statements.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information as to Certain Relationships and Related Transactions and Director Independence will be
incorporated herein by reference to the Proxy Statement for the 2018 Annual Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services
The information as to Principal Accountant Fees and Services will be incorporated herein by reference to the Proxy
Statement for the 2018 Annual Meeting of Shareholders.
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NORTHROP GRUMMAN CORPORATION
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Report of Independent Registered Public Accounting Firm
PART IV
Financial Statements
Consolidated Statements of Earnings and Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders’ Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules have been omitted because they are not applicable, not required, or the information has been
otherwise supplied in the financial statements or notes to the financial statements.
3. Exhibits
2(a)
2(b)
2(c)
3(a)
3(b)
4(a)
4(b)
4(c)
Agreement and Plan of Merger among Titan II, Inc. (formerly Northrop Grumman Corporation),
Northrop Grumman Corporation (formerly New P, Inc.) and Titan Merger Sub Inc., dated
March 30, 2011 (incorporated by reference to Exhibit 10.1 to Form 8-K filed April 4, 2011, File
No. 001-16411)
Separation and Distribution Agreement dated as of March 29, 2011, among Titan II, Inc.
(formerly Northrop Grumman Corporation), Northrop Grumman Corporation (formerly New P,
Inc.), Huntington Ingalls Industries, Inc., Northrop Grumman Shipbuilding, Inc. and Northrop
Grumman Systems Corporation (incorporated by reference to Exhibit 10.2 to Form 8-K filed
April 4, 2011, File No. 001-16411)
Agreement and Plan of Merger dated as of September 17, 2017, among Northrop Grumman
Corporation, Neptune Merger, Inc. and Orbital ATK, Inc. (incorporated by reference to Exhibit
2.1 to Form 8-K filed September 18, 2017)
Amended and Restated Certificate of Incorporation of Northrop Grumman Corporation dated
May 29, 2012 (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended June
30, 2012, filed July 25, 2012, File No. 001-16411)
Amended and Restated Bylaws of Northrop Grumman Corporation dated February 17, 2016
(incorporated by reference to Exhibit 3.2 to Form 8-K filed February 22, 2016)
Registration Rights Agreement dated as of January 23, 2001, by and among Northrop Grumman
Corporation (now Northrop Grumman Systems Corporation), NNG, Inc. (now Northrop
Grumman Corporation) and Unitrin, Inc. (incorporated by reference to Exhibit(d)(6) to
Amendment No. 4 to Schedule TO filed January 31, 2001, File No. 001-3229)
Indenture dated as of October 15, 1994, between Northrop Grumman Corporation (now
Northrop Grumman Systems Corporation) and The Chase Manhattan Bank (National
Association), Trustee (incorporated by reference to Exhibit 4.1 to Form 8-K filed October 25,
1994, File No. 001-3229)
First Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman
Systems Corporation, The Bank of New York Mellon (successor trustee to JPMorgan Chase
Bank and The Chase Manhattan Bank, N.A.), Titan II, Inc. (formerly known as Northrop
Grumman Corporation), and Titan Holdings II, L.P., to Indenture dated as of October 15, 1994,
between Northrop Grumman Corporation (now Northrop Grumman Systems Corporation) and
The Chase Manhattan Bank, N.A., Trustee (incorporated by reference to Exhibit 4.1 to Form 10-
Q for the quarter ended March 31, 2011, filed April 27, 2011, File No. 001-16411)
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NORTHROP GRUMMAN CORPORATION
4(d)
4(e)
4(f)
4(g)
4(h)
4(i)
4(j)
4(k)
4(l)
4(m)
4(n)
Second Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman
Systems Corporation, The Bank of New York Mellon (successor trustee to JPMorgan Chase
Bank and The Chase Manhattan Bank, N.A.), Titan Holdings II, L.P., and Northrop Grumman
Corporation (formerly known as New P, Inc.), to Indenture dated as of October 15, 1994,
between Northrop Grumman Corporation (now Northrop Grumman Systems Corporation) and
The Chase Manhattan Bank, N.A., Trustee (incorporated by reference to Exhibit 4.2 to Form 10-
Q for the quarter ended March 31, 2011, filed April 27, 2011, File No. 001-16411)
Form of Officers’ Certificate (without exhibits) establishing the terms of Northrop Grumman
Corporation’s (now Northrop Grumman Systems Corporation’s) 7.875% Debentures due 2026
(incorporated by reference to Exhibit 4.3 to Form S-4 Registration Statement No. 333-02653
filed April 19, 1996)
Form of Northrop Grumman Corporation’s (now Northrop Grumman Systems Corporation’s)
7.875% Debentures due 2026 (incorporated by reference to Exhibit 4.6 to Form S-4 Registration
Statement No. 333-02653 filed April 19, 1996)
Form of Officers’ Certificate establishing the terms of Northrop Grumman Corporation’s (now
Northrop Grumman Systems Corporation’s) 7.75% Debentures due 2031 (incorporated by
reference to Exhibit 10.9 to Form 8-K filed April 17, 2001, File No. 001-16411)
Senior Indenture dated as of December 15, 1991, between Litton Industries, Inc. (predecessor-in-
interest to Northrop Grumman Systems Corporation) and The Bank of New York, as trustee,
under which its 7.75% and 6.98% debentures due 2026 and 2036 were issued, and specimens of
such debentures (incorporated by reference to Exhibit 4.1 to the Form 10-Q of Litton Industries,
Inc. for the quarter ended April 30, 1996, filed June 11, 1996, File No. 001-3998)
Supplemental Indenture with respect to Senior Indenture dated December 15, 1991, dated as of
April 3, 2001, among Litton Industries, Inc. (predecessor-in-interest to Northrop Grumman
Systems Corporation), Northrop Grumman Corporation, Northrop Grumman Systems
Corporation and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.7 to
Form 10-Q for the quarter ended March 31, 2001, filed May 10, 2001, File No. 001-16411)
Supplemental Indenture with respect to Senior Indenture dated December 15, 1991, dated as of
December 20, 2002, among Litton Industries, Inc. (predecessor-in-interest to Northrop
Grumman Systems Corporation), Northrop Grumman Corporation, Northrop Grumman Systems
Corporation and The Bank of New York, as trustee (incorporated by reference to Exhibit 4(t) to
Form 10-K for the year ended December 31, 2002, filed March 24, 2003, File No. 001-16411)
Third Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman
Systems Corporation (successor-in-interest to Litton Industries, Inc.), The Bank of New York
Mellon (formerly known as The Bank of New York), as trustee, Titan II, Inc. (formerly known as
Northrop Grumman Corporation), and Titan Holdings II, L.P., to Senior Indenture dated
December 15, 1991, between Litton Industries, Inc. and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.5 to Form 10-Q for the quarter ended March 31, 2011,
filed April 27, 2011, File No. 001-16411)
Fourth Supplemental Indenture dated as of March 30, 2011 by and among Northrop Grumman
Systems Corporation (successor-in-interest to Litton Industries, Inc.), The Bank of New York
Mellon (formerly known as The Bank of New York) as trustee, Titan Holdings II, L.P., and
Northrop Grumman Corporation (formerly known as New P, Inc.), to Senior Indenture dated
December 15, 1991, between Litton Industries, Inc. and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.6 to Form 10-Q for the quarter ended March 31, 2011,
filed April 27, 2011, File No. 001-16411)
Indenture between TRW Inc. (predecessor-in-interest to Northrop Grumman Systems
Corporation) and Mellon Bank, N.A., as trustee, dated as of May 1, 1986 (incorporated by
reference to Exhibit 2 to the Form 8-A Registration Statement of TRW Inc. dated July 3, 1986,
File No. 001-02384)
First Supplemental Indenture between TRW Inc. (predecessor-in-interest to Northrop Grumman
Systems Corporation) and Mellon Bank, N.A., as trustee, dated as of August 24, 1989
(incorporated by reference to Exhibit 4(b) to Form S-3 Registration Statement No. 33-30350 of
TRW Inc.)
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NORTHROP GRUMMAN CORPORATION
4(o)
4(p)
4(q)
4(r)
4(s)
4(t)
4(u)
4(v)
4(w)
4(x)
4(y)
4(z)
Fifth Supplemental Indenture between TRW Inc. (predecessor-in-interest to Northrop Grumman
Systems Corporation) and The Chase Manhattan Bank, as successor trustee, dated as of June 2,
1999 (incorporated by reference to Exhibit 4(f) to Form S-4 Registration Statement
No. 333-83227 of TRW Inc. filed July 20, 1999)
Ninth Supplemental Indenture dated as of December 31, 2009 among Northrop Grumman Space
& Mission Systems Corp. (predecessor–in-interest to Northrop Grumman Systems Corporation);
The Bank of New York Mellon, as successor trustee; Northrop Grumman Corporation; and
Northrop Grumman Systems Corporation (incorporated by reference to Exhibit 4(p) to Form 10-
K for the year ended December 31, 2009, filed February 9, 2010, File No. 001-16411)
Tenth Supplemental Indenture dated as of March 30, 2011, by and among Northrop Grumman
Systems Corporation (successor-in-interest to Northrop Grumman Space & Mission Systems
Corp. and TRW, Inc.), The Bank of New York Mellon, as successor trustee to JPMorgan Chase
Bank and to Mellon Bank, N.A., Titan II Inc. (formerly known as Northrop Grumman
Corporation), and Titan Holdings II, L.P., to Indenture between TRW Inc. and Mellon Bank,
N.A., as trustee, dated as of May 1, 1986 (incorporated by reference to Exhibit 4.7 to Form 10-Q
for the quarter ended March 31, 2011, filed April 27, 2011, File No. 001-16411)
Eleventh Supplemental Indenture dated as of March 30, 2011, by and among Northrop
Grumman Systems Corporation (successor-in-interest to Northrop Grumman Space & Mission
Systems Corp. and TRW Inc.), The Bank of New York Mellon, as successor trustee to JPMorgan
Chase Bank and to Mellon Bank, N.A., Titan Holdings II, L.P., and Northrop Grumman
Corporation (formerly known as New P, Inc.) to Indenture between TRW Inc. and Mellon Bank,
N.A., as trustee, dated as of May 1, 1986 (incorporated by reference to Exhibit 4.8 to Form 10-Q
for the quarter ended March 31, 2011, filed April 27, 2011, File No. 001-16411)
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, File No. 001-16411)
First Supplemental Indenture dated as of July 30, 2009, between Northrop Grumman
Corporation and The Bank of New York Mellon, as successor trustee, to Indenture dated as of
November 21, 2001 (incorporated by reference to Exhibit 4(a) to Form 8-K filed July 30, 2009,
File No. 001-16411)
Form of Northrop Grumman Corporation’s 5.05% Senior Note due 2019 (incorporated by
reference to Exhibit B to Exhibit 4(a) to Form 8-K filed July 30, 2009, File No. 001-16411)
Second Supplemental Indenture dated as of November 8, 2010, between Northrop Grumman
Corporation and The Bank of New York Mellon, as successor trustee, to Indenture dated as of
November 21, 2001 (incorporated by reference to Exhibit 4(a) to Form 8-K filed November 8,
2010, File No. 001-16411)
Form of Northrop Grumman Corporation’s 3.500% Senior Note due 2021 (incorporated by
reference to Exhibit B to Exhibit 4(a) to Form 8-K filed November 8, 2010, File No. 001-16411)
Form of Northrop Grumman Corporation’s 5.050% Senior Note due 2040 (incorporated by
reference to Exhibit C to Exhibit 4(a) to Form 8-K filed November 8, 2010, File No. 001-16411)
Third Supplemental Indenture dated as of March 30, 2011, by and among Titan II, Inc. (formerly
known as Northrop Grumman Corporation), The Bank of New York Mellon, as successor trustee
to JPMorgan Chase Bank, and Titan Holdings II, L.P., to Indenture dated as of November 21,
2001 between Northrop Grumman Corporation and JPMorgan Chase Bank, as trustee
(incorporated by reference to Exhibit 4.9 to Form 10-Q for the quarter ended March 31, 2011,
filed April 27, 2011, File No. 001-16411)
Fourth Supplemental Indenture dated as of March 30, 2011, by and among Titan Holdings II,
L.P., The Bank of New York Mellon, as successor trustee to JPMorgan Chase Bank, and
Northrop Grumman Corporation (formerly known as New P, Inc.), to Indenture dated as of
November 21, 2001 between Northrop Grumman Corporation and JPMorgan Chase Bank, as
trustee (incorporated by reference to Exhibit 4.10 to Form 10-Q for the quarter ended March 31,
2011, filed April 27, 2011, File No. 001-16411)
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NORTHROP GRUMMAN CORPORATION
4(aa)
4(bb)
4(cc)
4(dd)
4(ee)
4(ff)
4(gg)
4(hh)
4(ii)
4(jj)
4(kk)
4(ll)
Fifth Supplemental Indenture, dated as of May 31, 2013, between Northrop Grumman
Corporation and The Bank of New York Mellon, as successor to JPMorgan Chase Bank, Trustee,
to Indenture dated as of November 21, 2001 (incorporated by reference to Exhibit 4(a) to Form
8-K filed May 31, 2013)
Form of 1.750% Senior Note due 2018 (incorporated by reference to Exhibit A to Exhibit 4(a) to
Form 8-K filed May 31, 2013)
Form of 3.250% Senior Note due 2023 (incorporated by reference to Exhibit B to Exhibit 4(a) to
Form 8-K filed May 31, 2013)
Form of 4.750% Senior Note due 2043 (incorporated by reference to Exhibit C to Exhibit 4(a) to
Form 8-K filed May 31, 2013)
Sixth Supplemental Indenture, dated as of February 6, 2015, between Northrop Grumman
Corporation and The Bank of New York Mellon, as successor to JPMorgan Chase Bank, Trustee,
to Indenture dated as of November 21, 2001 (incorporated by reference to Exhibit 4.1 to Form 8-
K filed February 6, 2015)
Form of 3.850% Senior Note due 2045 (incorporated by reference to Exhibit A to Exhibit 4.1 to
Form 8-K filed February 6, 2015)
Seventh Supplemental Indenture, dated as of December 1, 2016, between Northrop Grumman
Corporation and The Bank of New York Mellon, as successor to JPMorgan Chase Bank, Trustee,
to Indenture dated as of November 21, 2001 (incorporated by reference to Exhibit 4.1 to Form 8-
K filed December 1, 2016)
Form of 3.200% Senior Note due 2027 (incorporated by reference to Exhibit A to Exhibit 4.1 to
Form 8-K filed December 1, 2016)
Eighth Supplemental Indenture, dated as of October 13, 2017, between Northrop Grumman
Corporation and The Bank of New York Mellon, as successor to JPMorgan Chase Bank, Trustee,
to Indenture dated as of November 21, 2001 (incorporated by reference to Exhibit 4.1 to Form 8-
K filed October 13, 2017)
Form of 2.080% Senior Note due 2020 (incorporated by reference to Exhibit A to Exhibit 4.1 to
Form 8-K filed October 13, 2017)
Form of 2.550% Senior Note due 2022 (incorporated by reference to Exhibit B to Exhibit 4.1 to
Form 8-K filed October 13, 2017)
Form of 2.930% Senior Note due 2025 (incorporated by reference to Exhibit C to Exhibit 4.1 to
Form 8-K filed October 13, 2017)
4(mm)
Form of 3.250% Senior Note due 2028 (incorporated by reference to Exhibit D to Exhibit 4.1 to
Form 8-K filed October 13, 2017)
4(nn)
10(a)
10(b)
Form of 4.030% Senior Note due 2047 (incorporated by reference to Exhibit E to Exhibit 4.1 to
Form 8-K filed October 13, 2017)
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., as Administrative Agent (incorporated by
reference to Exhibit 10.1 to Form 8-K filed July 9, 2015)
Form of Guarantee dated as of April 3, 2001, by Northrop Grumman Corporation of the
indenture indebtedness issued by Litton Industries, Inc. (predecessor-in-interest to Northrop
Grumman Systems Corporation) (incorporated by reference to Exhibit 10.10 to Form 8-K filed
April 17, 2001, File No. 001-16411)
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NORTHROP GRUMMAN CORPORATION
10(c)
10(d)
+10(e)
+10(f)
+10(g)
Form of Guarantee dated as of April 3, 2001, by Northrop Grumman Corporation of Northrop
Grumman Systems Corporation indenture indebtedness (incorporated by reference to
Exhibit 10.11 to Form 8-K and filed April 17, 2001, File No. 001-16411)
Form of Guarantee dated as of March 27, 2003, by Northrop Grumman Corporation, as
Guarantor, in favor of JP Morgan Chase Bank, as trustee, of certain debt securities issued by the
former Northrop Grumman Space & Mission Systems Corp. (predecessor-in-interest to Northrop
Grumman Systems Corporation) (incorporated by reference to Exhibit 4.2 to Form 10-Q for the
quarter ended March 31, 2003, filed May 14, 2003, File No. 001-16411)
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, File No. 001-16411)
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, File No. 001-16411)
Northrop Grumman 2001 Long-Term Incentive Stock Plan (As Amended Through December 19,
2007) (incorporated by reference to Exhibit A to the Company’s Proxy Statement on Schedule
14A for the 2008 Annual Meeting of Shareholders filed April 21, 2008)
(i)
(ii)
Form of Agreement for 2010 Stock Options granted under the Northrop Grumman 2001
Long-Term Incentive Stock Plan (as amended through December 19, 2007) (incorporated
by reference to Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2010, filed
April 28, 2010, File No. 001-16411)
Form of Agreement for 2011 Stock Options granted under the Northrop Grumman 2001
Long-Term Incentive Stock Plan (as amended through December 19, 2007) (incorporated
by reference to Exhibit 10.1 of Form 8-K filed February 22, 2011, File No. 001-16411)
+10(h)
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 Company’s Proxy
Statement on Schedule 14A for the 2015 Annual Meeting of Shareholders filed April 6, 2015)
(i)
Northrop Grumman Corporation Equity Grant Program for Non-Employee Directors
under the Northrop Grumman 2011 Long-Term Incentive Stock Plan, Amended and
Restated Effective as of January 1, 2016 (incorporated by reference to Exhibit 10.1 to
Form 10-Q for the quarter ended September 30, 2015, filed October 28, 2015)
(ii) Grant Certificate Specifying the Terms and Conditions Applicable to 2016 Restricted
Stock Rights Granted Under the 2011 Long-Term Incentive Stock Plan (incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2016 filed April
27, 2016)
(iii) Grant Certificate Specifying the Terms and Conditions Applicable to 2016 Restricted
Performance Stock Rights Granted Under the 2011 Long-Term Incentive Stock Plan
(incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended March 31,
2016 filed April 27, 2016)
*(iv) Grant Certificate Specifying the Terms and Conditions Applicable to 2016 Restricted
Performance Stock Rights Granted to Janis G. Pamiljans Under the 2011 Long-Term
Incentive Stock Plan
*(v) Grant Certificate Specifying the Terms and Conditions Applicable to 2016 Restricted
Stock Rights Granted to Janis G. Pamiljans Under the 2011 Long-Term Incentive Stock
Plan
*(vi) Grant Certificate Specifying the Terms and Conditions Applicable to Special 2016
Restricted Stock Rights Granted to Janis G. Pamiljans Under the 2011 Long-Term
Incentive Stock Plan
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NORTHROP GRUMMAN CORPORATION
(vii) Grant Certificate Specifying the Terms and Conditions Applicable to 2017 Restricted
Stock Rights Granted Under the 2011 Long-Term Incentive Stock Plan (incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2017, filed April
26, 2017)
(viii) Grant Certificate Specifying the Terms and Conditions Applicable to 2017 Restricted
Performance Stock Rights Granted Under the 2011 Long-Term Incentive Stock Plan
(incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended March 31,
2017, filed April 26, 2017)
(ix) Grant Certificate Specifying the Terms and Conditions Applicable to 2017 Restricted
Stock Rights Granted to Janis G. Pamiljans Under the 2011 Long-Term Incentive Stock
Plan (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended June
30, 2017, filed July 26, 2017)
+10(i)
Northrop Grumman 2011 Long-Term Incentive Stock Plan (As Amended Through December 4,
2014) (incorporated by reference to Exhibit 10(h) to Form 10-K for the year ended December
31, 2014, filed February 2, 2015)
(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 8, 2012, File No.
001-16411)
(ii) Northrop Grumman Corporation Equity Grant Program for Non-Employee Directors
under the Northrop Grumman 2011 Long-Term Incentive Stock Plan, Amended and
Restated Effective January 1, 2015 (incorporated by reference to Exhibit 10(h)(ii) to Form
10-K for the year ended December 31, 2014, filed February 2, 2015)
(iii) 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)
(iv) Grant Certificate Specifying the Terms and Conditions Applicable to 2014 Restricted
Performance Stock Rights Granted Under the 2011 Long-Term Incentive Stock Plan
(incorporated by reference to Exhibit 10.2 to Form 8-K filed February 24, 2014)
(v) Amended and Restated 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 10.2 to Form 10-Q for the quarter ended June 30,
2014, filed July 23, 2014)
(vi) Amended and Restated Grant Certificate Specifying the Terms and Conditions Applicable
to 2014 Restricted Performance Stock Rights Granted Under the 2011 Long-Term
Incentive Stock Plan (incorporated by reference to Exhibit 10.3 to Form 10-Q for the
quarter ended June 30, 2014, filed July 23, 2014)
(vii) 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)
(viii) Grant Certificate Specifying the Terms and Conditions Applicable to 2015 Restricted
Performance Stock Rights Granted Under the 2011 Long-Term Incentive Stock Plan
(incorporated by reference to Exhibit 10.2 to Form 8-K filed February 20, 2015)
+10(j)
Northrop Grumman Supplemental Plan 2 (Amended and Restated Effective as of January 1,
2014) (incorporated by reference to Exhibit 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 of January 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)
-87-
NORTHROP GRUMMAN CORPORATION
(ii) Appendix F to the Northrop Grumman Supplemental Plan 2: CPC Supplemental
Executive Retirement Program (Amended and Restated Effective as of January 1, 2012)
(incorporated by reference to Exhibit 10(k)(iii) to Form 10-K for the year ended
December 31, 2011, filed February 8, 2012, File No. 001-16411)
(iii) Appendix G to the Northrop Grumman Supplemental Plan 2: Officers Supplemental
Executive Retirement Program (Amended and Restated Effective as of January 1, 2012)
(incorporated by reference to Exhibit 10(k)(iv) to Form 10-K for the year ended December
31, 2011, filed February 8, 2012, File No. 001-16411)
(iv) Appendix I to the Northrop Grumman Supplemental Plan 2: Officers Supplemental
Executive Retirement Program II (Amended and Restated January 1, 2014) (incorporated
by reference to Exhibit 10(k)(iv) to Form 10-K for the year ended December 31, 2015,
filed February 1, 2016)
*(v) First Amendment to the Northrop Grumman Supplemental Plan 2, dated December 20,
2017 (Effective as of December 31, 2017)
+10(k)
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 year ended December 31, 2013, filed February
3, 2014)
+10(l)
Northrop Grumman Electronic Systems Executive Pension Plan (Amended and Restated
Effective as of January 1, 2016) (incorporated by reference to Exhibit 10(m) to Form 10-K for
the year ended December 31, 2015, filed February 1, 2016)
+*10(m) Severance Plan for Elected and Appointed Officers of Northrop Grumman Corporation
(Amended and Restated Effective January 1, 2018)
+10(n)
Non-Employee Director Compensation Term Sheet, effective May 18, 2016 (incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2016, filed July 27, 2016)
+10(o)
Non-Employee Director Compensation Term Sheet, effective May 17, 2017 (incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2017, filed July 26, 2017)
+10(p)
+10(q)
+10(r)
+10(s)
+10(t)
+10(u)
Form of Indemnification Agreement between Northrop Grumman Corporation and its directors
and executive officers (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter
ended March 31, 2012, filed April 25, 2012, File No. 001-16411)
Northrop Grumman Deferred Compensation Plan (Amended and Restated Effective as of April
1, 2016) (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended March
31, 2016, filed April 27, 2016)
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, File No. 001-16411)
Northrop Grumman 2006 Annual Incentive Plan and Incentive Compensation Plan (for Non-
Section 162(m) Officers), as amended and restated effective January 1, 2009 (incorporated by
reference to Exhibit 10.7 to Form 10-Q for the quarter ended March 31, 2009, filed April 22,
2009, File No. 001-16411)
Northrop Grumman Savings Excess Plan (Amended and Restated Effective as of April 1, 2016)
(incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2016,
filed April 27, 2016)
Northrop Grumman Officers Retirement Account Contribution Plan (Amended and Restated
Effective as of April 1, 2016) (incorporated by reference to Exhibit 10.4 to Form 10-Q for the
quarter ended March 31, 2016, filed April 27, 2016)
-88-
NORTHROP GRUMMAN CORPORATION
+10(v)
Northrop Grumman Corporation Special Officer Retiree Medical Plan (Amended and Restated
Effective January 1, 2015) (incorporated by reference to Exhibit 10(y) to Form 10-K for the year
ended December 31, 2016, filed January 30, 2017)
+*10(w) Executive Basic Life Insurance Policy (Certificate No. 46) dated July 1, 2013
*(i) Amendment to Executive Life Insurance Policy effective July 1, 2016
+10(x)
Executive Accidental Death, Dismemberment and Plegia Insurance Policy Terms applicable to
Executive Officers dated January 1, 2009 (incorporated by reference to Exhibit 10.3 to Form 10-
Q for the quarter ended March 31, 2009, filed April 22, 2009, File No. 001-16411)
*(i) Amendment to Executive Accidental Death, Dismemberment and Plegia Insurance Policy
Terms dated April 9, 2009
+*10(y) Executive Long-Term Disability Insurance Policy as amended by Amendment No. 7 dated
December 29, 2016 and effective as of January 1, 2017
+*10(z)
Executive Supplemental Individual Disability Insurance Plan dated June 30, 2014
+10(aa) Group Personal Excess Liability Policy dated October 20, 2016 and effective as of January 1,
2017 (incorporated by reference to Exhibit 10(dd) to Form 10-K for the year ended December
31, 2016, filed January 30, 2017)
+10(bb) Letter dated December 16, 2009 from Northrop Grumman Corporation to Wesley G. Bush
regarding compensation effective January 1, 2010 (incorporated by reference to Exhibit 10.2 to
Form 8-K filed December 21, 2009, File No. 001-16411)
+10(cc) Relocation Agreement between Northrop Grumman Systems Corporation and Gloria A. Flach
dated December 1, 2015 (incorporated by reference to Exhibit 10(ii) to Form 10-K for the year
ended December 31, 2015, filed February 1, 2016)
+10(dd) Relocation Agreement between Northrop Grumman Systems Corporation and Kathy J. Warden
dated December 1, 2015 (incorporated by reference to Exhibit 10(jj) to Form 10-K for the year
ended December 31, 2015, filed February 1, 2016)
+*10(ee) Retention Incentive between Northrop Grumman Systems Corporation and Janis G. Pamiljans
dated March 1, 2016
+10(ff)
Transition and Retirement Agreement between Northrop Grumman Systems Corporation and
Thomas E. Vice, dated February 27, 2017 (incorporated by reference to Exhibit 10.1 to Form 8-
K filed February 28, 2017)
+*10(gg) Relocation Agreement between Northrop Grumman Systems Corporation and Janis G. Pamiljans
dated March 8, 2017
*12(a)
Computation of Ratio of Earnings to Fixed Charges
*21
*23
*24
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Power of Attorney
*31.1
Certification of Wesley G. Bush pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2
Certification of Kenneth L. Bedingfield pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
-89-
NORTHROP GRUMMAN CORPORATION
**32.1
Certification of Wesley G. Bush pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**32.2
Certification of Kenneth L. Bedingfield pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
*101
+
*
**
Northrop Grumman Corporation Annual Report on Form 10-K for the fiscal year ended
December 31, 2017, formatted in XBRL (Extensible Business Reporting Language); (i) the
Consolidated Statements of Earnings and Comprehensive Income, (ii) Consolidated Statements
of Financial Position, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements
of Changes in Shareholders’ Equity, and (v) Notes to Consolidated Financial Statements
Management contract or compensatory plan or arrangement
Filed with this Report
Furnished with this Report
Item 16. Form 10-K Summary
None.
-90-
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 29th day of
January 2018.
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 29th day of January 2018, by the following persons and in the capacities indicated.
Signature
Wesley G. Bush*
Kenneth L. Bedingfield*
Michael A. Hardesty
Marianne C. Brown*
Victor H. Fazio*
Donald E. Felsinger*
Ann M. Fudge*
Bruce S. Gordon*
William H. Hernandez*
Madeleine A. Kleiner*
Karl J. Krapek*
Gary Roughead*
Thomas M. Schoewe*
James S. Turley*
Mark A. Welsh III*
*By:
/s/ Jennifer C. McGarey
Jennifer C. McGarey
Corporate Vice President and Secretary
Attorney-in-Fact
pursuant to a power of attorney
Title
Chairman and Chief Executive Officer (Principal Executive
Officer), and Director
Corporate Vice President and Chief Financial Officer (Principal
Financial Officer)
Corporate Vice President, Controller and Chief Accounting
Officer
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
-91-
USE OF NON-GAAP FINANCIAL MEASURES
This Annual Report contains non-GAAP (accounting principles generally accepted in the United States of America) financial measures, as defined
by SEC (Securities and Exchange Commission) Regulation G. While we believe investors and other users of our financial statements may find these
non-GAAP financial measures useful in evaluating our financial performance and operational trends, they should be considered as supplemental
in nature, and therefore, should not be considered in isolation or as a substitute for financial information prepared in accordance with GAAP.
Definitions and reconciliations for the non-GAAP financial measures contained in this Annual Report are provided below. Other companies may
define these measures differently or may utilize different non-GAAP financial measures.
CASH PROVIDED BY OPERATING ACTIVITIES BEFORE AFTER-TAX DISCRETIONARY PENSION CONTRIBUTION:
Cash provided by operating activities before the after-tax impact of discretionary pension contribution. Cash provided by operating activities
before after-tax discretionary pension contribution 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,
acquisitions, stock repurchases and the payment of dividends. This measure may be useful to investors and other users of our financial statements
as a supplemental measure of our cash performance, but should not be considered in isolation, as a measure of residual cash flow available for
discretionary purposes, or as an alternative to operating cash flows presented in accordance with GAAP. Free cash flow is reconciled below.
FREE CASH FLOW BEFORE AFTER-TAX DISCRETIONARY PENSION CONTRIBUTION:
Free cash flow before the after-tax impact of discretionary pension contribution. We use free cash flow before after-tax discretionary pension
contribution as a key factor in our planning for, and consideration of, acquisitions, stock repurchases and the payment of dividends. This measure
may be useful to investors and other users of our financial statements as a supplemental measure of our cash performance, but should not
be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating cash flows
presented in accordance with GAAP. Free cash flow before after-tax discretionary pension contribution is reconciled below.
DILUTED EPS EXCLUDING 2017 TAX REFORM AND RELATED DISCRETIONARY PENSION CONTRIBUTION IMPACTS:
Net earnings excluding the impacts of 2017 tax reform and our related discretionary pension contribution divided by weighted average diluted
shares outstanding. This measure may be useful to investors and other users of our financial statements in understanding the impact of these
items to our financial results, but should not be considered in isolation or as an alternative to earnings per share presented in accordance with
GAAP. Diluted EPS excluding 2017 tax reform and related discretionary pension contribution impacts is reconciled below.
($M)
2015
2016
Cash provided by operating activities before after-tax discretionary pension contribution
$ 2,487
$ 2,813
After-tax discretionary pension contribution impact
Net cash provided by operating activities
Less: Capital expenditures
Free cash flow
After-tax discretionary pension contribution impact
(325)
—
2,162
(471)
1,691
2,813
(920)
1,893
325
—
2017
$ 2,938
(325)
2,613
(928)
1,685
325
Free cash flow before after-tax discretionary pension contribution
$ 2,016
$ 1,893
$ 2,010
Diluted EPS
Tax expense related to the Tax Cuts and Jobs Act
Tax expense related to discretionary pension contribution1
Operating income reduction related to discretionary pension contribution, net of tax2
Impact on diluted EPS of 2017 tax reform and related discretionary pension contribution
Diluted EPS excluding the impact of 2017 tax reform and related discretionary pension
contribution impacts
2017
$ 11.47
1.71
0.05
0.05
1.81
$ 13.28
1 Reflects $8 million of additional income tax recorded due to lower manufacturing deductions available as a result of the $500 million voluntary pre-tax pension contribution.
2 Reflects $9 million of lower operating income (net of tax) as follows: $18 million reduction in corporate operating income due to lower state deferred tax assets, partially offset by
approximately $4.5 million of higher sector operating income as a result of lower state tax cost, each tax effected at 35 percent.
NORTHROP GRUMMAN 2017 ANNUAL REPORT
GENERAL INFORMATION
NORTHROP GRUMMAN CORPORATION
ON THE INTERNET
Information on Northrop Grumman
and its sectors, including press
releases and this annual report and the
corporate responsibility report,
can be found at: www.northropgrumman.com
ANNUAL MEETING OF SHAREHOLDERS
Wednesday, May 16, 2018
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
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.
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.
NORTHROP GRUMMAN 2017 ANNUAL REPORT 2980 Fairview Park Drive
Falls Church, VA 22042-4511
www.northropgrumman.com