UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ 
FORM 10-Q
______________________________________ 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2015
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-16411
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
 
80-0640649
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2980 Fairview Park Drive, Falls Church, Virginia 22042
(Address of principal executive offices)
(703) 280-2900
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x
  
No *
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x
  
No *
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer x
  
Accelerated filer *
 
 
 
Non-accelerated filer * (Do not check if a smaller reporting company)
 
 Smaller reporting company  *
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes *
  
No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 24, 2015, 187,392,516 shares of common stock were outstanding.


NORTHROP GRUMMAN CORPORATION                        

TABLE OF CONTENTS
 
 
 
Page
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
6. Investigations, Claims and Litigation
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

i

NORTHROP GRUMMAN CORPORATION                        

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions, except per share amounts
2015
 
2014
 
2015
 
2014
Sales
 
 
 
 
 
 
 
Product
$
3,509

 
$
3,564

 
$
6,938

 
$
6,972

Service
2,387

 
2,475

 
4,915

 
4,915

Total sales
5,896

 
6,039

 
11,853

 
11,887

Operating costs and expenses
 
 
 
 
 
 
 
Product
2,568

 
2,668

 
5,110

 
5,201

Service
1,874

 
1,961

 
3,874

 
3,889

General and administrative expenses
641

 
590

 
1,276

 
1,132

Operating income
813

 
820

 
1,593

 
1,665

Other (expense) income
 
 
 
 
 
 
 
Interest expense
(75
)
 
(70
)
 
(151
)
 
(139
)
Other, net
(2
)
 
6

 
(2
)
 
16

Earnings before income taxes
736

 
756

 
1,440

 
1,542

Federal and foreign income tax expense
205

 
245

 
425

 
452

Net earnings
$
531

 
$
511

 
$
1,015

 
$
1,090

 
 
 
 
 
 
 
 
Basic earnings per share
$
2.77

 
$
2.41

 
$
5.21

 
$
5.09

Weighted-average common shares outstanding, in millions
191.8

 
212.4

 
194.8

 
214.3

Diluted earnings per share
$
2.74

 
$
2.37

 
$
5.15

 
$
5.01

Weighted-average diluted shares outstanding, in millions
193.7

 
215.2

 
197.1

 
217.7

 
 
 
 
 
 
 
 
Net earnings (from above)
$
531

 
$
511

 
$
1,015

 
$
1,090

Other comprehensive income
 
 
 
 
 
 
 
Change in unamortized benefit plan costs, net of tax
96

 
35

 
192

 
96

Change in cumulative translation adjustment
13

 
—

 
(16
)
 
2

Other, net
—

 
—

 
(1
)
 
—

Other comprehensive income, net of tax
109

 
35

 
175

 
98

Comprehensive income
$
640

 
$
546

 
$
1,190

 
$
1,188

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

-1-

NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
$ in millions
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Cash and cash equivalents
$
1,907

 
$
3,863

Accounts receivable, net
3,151

 
2,806

Inventoried costs, net
856

 
742

Deferred tax assets
386

 
404

Prepaid expenses and other current assets
160

 
369

Total current assets
6,460

 
8,184

Property, plant and equipment, net of accumulated depreciation of $4,728 in 2015 and $4,611 in 2014
3,005

 
2,991

Goodwill
12,464

 
12,466

Non-current deferred tax assets
1,383

 
1,622

Other non-current assets
1,240

 
1,309

Total assets
$
24,552

 
$
26,572

 
 
 
 
Liabilities
 
 
 
Trade accounts payable
$
1,246

 
$
1,305

Accrued employee compensation
1,097

 
1,441

Advance payments and amounts in excess of costs incurred
1,370

 
1,713

Other current liabilities
1,441

 
1,433

Total current liabilities
5,154

 
5,892

Long-term debt, net of current portion
6,417

 
5,925

Pension and other post-retirement benefit plan liabilities
5,871

 
6,555

Other non-current liabilities
939

 
965

Total liabilities
18,381

 
19,337

 
 
 
 
Commitments and contingencies (Note 7)

 

 
 
 
 
Shareholders’ equity
 
 
 
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding
—

 
—

Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2015—188,381,212 and 2014—198,930,240
188

 
199

Paid-in capital
—

 
—

Retained earnings
11,164

 
12,392

Accumulated other comprehensive loss
(5,181
)
 
(5,356
)
Total shareholders’ equity
6,171

 
7,235

Total liabilities and shareholders’ equity
$
24,552

 
$
26,572

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

-2-

NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended June 30
$ in millions
2015
 
2014
Operating activities
 
 
 
Net earnings
$
1,015

 
$
1,090

Adjustments to reconcile to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
216

 
217

Stock-based compensation
47

 
51

Excess tax benefits from stock-based compensation
(106
)
 
(74
)
Deferred income taxes
139

 
21

Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(344
)
 
(577
)
Inventoried costs, net
(117
)
 
(33
)
Prepaid expenses and other assets
48

 
(23
)
Accounts payable and other liabilities
(870
)
 
(588
)
Income taxes payable
314

 
103

Retiree benefits
(378
)
 
8

Other, net
8

 
(25
)
Net cash (used in) provided by operating activities
$
(28
)
 
$
170

 
 
 
 
Investing activities
 
 
 
Capital expenditures
(232
)
 
(176
)
Other investing activities, net
(2
)
 
(72
)
Net cash used in investing activities
(234
)
 
(248
)
 
 
 
 
Financing activities
 
 
 
Common stock repurchases
(1,916
)
 
(1,301
)
Net proceeds from issuance of long-term debt
600

 
—

Cash dividends paid
(309
)
 
(280
)
Other financing activities, net
(69
)
 
(15
)
Net cash used in financing activities
(1,694
)
 
(1,596
)
Decrease in cash and cash equivalents
(1,956
)
 
(1,674
)
Cash and cash equivalents, beginning of year
3,863

 
5,150

Cash and cash equivalents, end of period
$
1,907

 
$
3,476

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

-3-

NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
Six Months Ended June 30
$ in millions, except per share amounts
2015
 
2014
Common stock
 
 
 
Beginning of year
$
199

 
$
218

Common stock repurchased
(12
)
 
(11
)
Shares issued for employee stock awards and options
1

 
2

End of period
188

 
209

Paid-in capital
 
 
 
Beginning of year
—

 
848

Common stock repurchased
—

 
(896
)
Stock compensation
—

 
37

Other
—

 
11

End of period
—

 
—

Retained earnings
 
 
 
Beginning of year
12,392

 
12,538

Common stock repurchased
(1,933
)
 
(398
)
Net earnings
1,015

 
1,090

Dividends declared
(297
)
 
(285
)
Stock compensation
(13
)
 
—

End of period
11,164

 
12,945

Accumulated other comprehensive loss
 
 
 
Beginning of year
(5,356
)
 
(2,984
)
Other comprehensive income, net of tax
175

 
98

End of period
(5,181
)
 
(2,886
)
Total shareholders’ equity
$
6,171

 
$
10,268

Cash dividends declared per share
$
1.50

 
$
1.31

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

-4-

NORTHROP GRUMMAN CORPORATION                        

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.    BASIS OF PRESENTATION
Principles of Consolidation and Reporting
These unaudited condensed consolidated financial statements include the accounts of Northrop Grumman Corporation and subsidiaries (herein referred to as "Northrop Grumman," the "company," "we," "us," or "our"). 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.
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with the rules of the Securities and Exchange Commission (SEC) for interim reporting purposes. These financial statements include adjustments of a normal recurring nature considered necessary by management for a fair presentation of the company's unaudited condensed consolidated financial position, results of operations and cash flows.
The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the information contained in the company’s 2014 Annual Report on Form 10-K.
The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30 and third quarter as ending on September 30. It is the company's long-standing practice to establish actual interim closing dates using a “fiscal” calendar, in which we close our books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. This practice is only used at interim periods within a reporting year.
Accounting Estimates
The accompanying unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation thereof requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of 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 United States (U.S.) Government for the production of goods, the provision of services, or in some cases, a combination of both. In accounting for these contracts, we utilize either the cost-to-cost or the units-of-delivery method of percentage-of-completion accounting, with cost-to-cost being the predominant method. 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.
We recognize changes in estimated contract sales, costs or profits using the cumulative catch-up method of accounting. This method recognizes, in the current period, the cumulative effect of the changes on current and prior periods; sales and profit in future periods of contract performance are recognized as if the revised estimates had been used since contract inception. If it is determined that a loss will result from the performance of a contract, the entire amount of the estimable future loss is charged against income in the period the loss is identified. Loss provisions are first offset against any costs that are included in unbilled accounts receivable or inventoried costs, and any remaining amount is reflected in liabilities.
Significant changes in estimates on a single contract could have a material effect on the company's unaudited condensed consolidated financial position or results of operations. Where such changes occur, we generally disclose the nature, underlying conditions and financial impact of the change. No discrete event or adjustments to an individual contract were material to the accompanying unaudited condensed consolidated financial statements.

-5-

NORTHROP GRUMMAN CORPORATION                        

The effect of aggregate net changes in contract estimates recognized using the cumulative catch-up method of accounting is as follows:
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions, except per share data
2015
 
2014
 
2015
 
2014
Operating Income
$
162

 
$
165

 
$
349

 
$
362

Net Earnings (1)
105

 
107

 
227

 
235

Diluted earnings per share (1)
0.54

 
0.50

 
1.15

 
1.08

(1) Based on statutory tax rates
As of June 30, 2015, the recognized amounts related to contract claims and requests for equitable adjustment are not material individually or in aggregate. In addition, as of June 30, 2015, the company does not have any contract terminations in process that we anticipate would have a material effect on our unaudited condensed consolidated financial position, or our annual results of operations and/or cash flows.
Related Party Transactions
For all periods presented, the company had no material related party transactions.
Accounting Standards Updates
On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition guidance, including Accounting Standards Codification (ASC) No. 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts. ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time. These concepts, as well as other aspects of ASU 2014-09, may change the method and/or timing of revenue recognition for certain of our contracts. On July 9, 2015, the FASB approved a one year deferral of the effective date of ASU 2014-09 to January 1, 2018. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. We are currently evaluating both methods of adoption as well as the effect ASU 2014-09 will have on the company’s consolidated financial position, annual results of operations and cash flows.
Other accounting standards updates effective after June 30, 2015, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.
Shareholders' Equity
The company records the difference between the cost of shares repurchased and their par value as well as tax withholding in excess of related stock compensation expense as a reduction of paid-in capital to the extent available and then as a reduction of retained earnings.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
$ in millions
June 30,
2015
 
December 31,
2014
Unamortized benefit plan costs, net of tax benefit of $3,276 as of June 30, 2015 and $3,395 as of December 31, 2014
$
(5,124
)
 
$
(5,316
)
Cumulative translation adjustment
(57
)
 
(41
)
Net unrealized gain on marketable securities and cash flow hedges, net of tax
—

 
1

Total accumulated other comprehensive loss
$
(5,181
)
 
$
(5,356
)
Unamortized benefit plan costs consist primarily of net after-tax actuarial losses totaling $5.4 billion and $5.6 billion as of June 30, 2015 and December 31, 2014, 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 income to net earnings related to the amortization of benefit plan costs were $96 million and $192 million, net of taxes, for the three and six months ended June 30, 2015, respectively, and were $35 million and $73 million, net of taxes, for the three and six months ended June 30, 2014,

-6-

NORTHROP GRUMMAN CORPORATION                        

respectively. The reclassifications represent the amortization of net actuarial losses and prior service credits for the company's retirement benefit plans, and are included in the computation of net periodic pension cost (See Note 8 for further information).
Reclassifications from accumulated other comprehensive income to net earnings, relating to cumulative translation adjustments, marketable securities and effective cash flow hedges for the three and six months ended June 30, 2015 and 2014, respectively, were not material. Reclassifications for cumulative translation adjustments and marketable securities are recorded in other income, and reclassifications for effective cash flow hedges are recorded in operating income.
2.    EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK
Basic Earnings Per Share
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 includes the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled 1.9 million shares and 2.3 million shares for the three and six months ended June 30, 2015, respectively. The dilutive effect of these securities totaled 2.8 million and 3.4 million for the three and six months ended June 30, 2014, respectively. The weighted-average diluted shares outstanding would exclude stock options with exercise prices in excess of the average market price of the company's common stock during the period; however, we had no such stock options outstanding for the three and six months ended June 30, 2015 and 2014.
Share Repurchases
The table below summarizes the company’s share repurchases:
 
 
 
 
 
 
 
 
 
 
Shares Repurchased
(in millions)
Repurchase Program Authorization Date
 
Amount
Authorized
(in millions)
 
Total Shares Retired (in millions)
 
Average 
Price
Per Share(3)
 
Date Completed
 
Six Months Ended June 30
 
2015
 
2014
May 15, 2013 (1)
 
$
4,000

 
32.8

 
$
121.97

 
March 2015
 
2.7

 
10.9

December 4, 2014(2)
 
$
3,000

 
9.4

 
$
160.34

 

 
9.4

 
—

(1)
On May 15, 2013, the company's board of directors authorized a share repurchase program of up to $4.0 billion of the company's common stock (2013 Repurchase Program). Repurchases under the 2013 Repurchase Program commenced in September 2013.
(2)
On December 4, 2014, the company's board of directors authorized a new share repurchase program of up to an additional $3.0 billion of the company's common stock (2014 Repurchase Program). Repurchases under the 2014 Repurchase Program commenced in March 2015 upon the completion of the company's 2013 Repurchase Program. As of June 30, 2015, repurchases under the 2014 Repurchase Program totaled $1.5 billion and there was $1.5 billion remaining under this share repurchase authorization. By its terms, the 2014 Repurchase Program will expire when we have used all authorized funds for repurchases.
(3)
Includes commissions paid.
Share repurchases take place from time to time, subject to market conditions and management's discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.
Dividends on Common Stock
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.
In May 2014, the company increased the quarterly common stock dividend 15 percent to $0.70 per share from the previous amount of $0.61 per share.

-7-

NORTHROP GRUMMAN CORPORATION                        

3.    SEGMENT INFORMATION
The company is aligned into four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. The company, from time to time, acquires or disposes of businesses and realigns contracts, programs or business areas among and within our segments. Portfolio shaping and internal realignments are designed to more fully leverage existing capabilities and enhance development and delivery of products and services.
The following table presents sales and operating income by segment:
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Sales
 
 
 
 
 
 
 
Aerospace Systems
$
2,512

 
$
2,502

 
$
5,010

 
$
4,922

Electronic Systems
1,683

 
1,744

 
3,364

 
3,388

Information Systems
1,485

 
1,562

 
3,059

 
3,139

Technical Services
720

 
732

 
1,490

 
1,429

Intersegment eliminations
(504
)
 
(501
)
 
(1,070
)
 
(991
)
Total sales
5,896

 
6,039

 
11,853

 
11,887

Operating income
 
 
 
 
 
 
 
Aerospace Systems
322

 
290

 
637

 
614

Electronic Systems
265

 
291

 
512

 
559

Information Systems
150

 
153

 
316

 
315

Technical Services
67

 
68

 
135

 
136

Intersegment eliminations
(62
)
 
(60
)
 
(123
)
 
(125
)
Total segment operating income
742


742

 
1,477

 
1,499

Reconciliation to total operating income:
 
 
 
 
 
 
 
Net FAS/CAS pension adjustment
81

 
110

 
164

 
220

Unallocated corporate expenses
(9
)
 
(31
)
 
(47
)
 
(53
)
Other
(1
)
 
(1
)
 
(1
)
 
(1
)
Total operating income
$
813

 
$
820

 
$
1,593

 
$
1,665

Net FAS/CAS Pension Adjustment
The net FAS (GAAP Financial Accounting Standards)/CAS (U.S. Government Cost Accounting Standards) pension adjustment reflects the difference between pension expense charged to contracts and included as cost in segment operating income and pension expense determined in accordance with GAAP. The decrease in net FAS/CAS pension adjustment for the three and six months ended June 30, 2015, as compared to the same periods in 2014, is principally due to an increase in FAS expense, as a result of changes in our FAS discount rate and mortality assumptions as of December 31, 2014. The increase in FAS expense was partially offset by higher CAS expense resulting from updated mortality assumptions.
Unallocated Corporate Expenses
Unallocated corporate expenses include the portion of corporate expenses not considered allowable or allocable under applicable CAS or the Federal Acquisition Regulation, and are therefore not allocated to the segments. Such costs consist of a portion of management and administration, legal, environmental, compensation costs, retiree benefits and certain unallowable costs such as lobbying activities, among others. The decrease in unallocated corporate expenses for the three months ended June 30, 2015, as compared to the same period in 2014, is principally due to a reduction in reserves for overhead costs. Unallocated corporate expenses for the six months ended June 30, 2015, were comparable to the same period in 2014.

-8-

NORTHROP GRUMMAN CORPORATION                        

4.    INCOME TAXES
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Federal and foreign income tax expense
$
205

 
$
245

 
$
425

 
$
452

Effective income tax rate
27.9
%
 
32.4
%
 
29.5
%
 
29.3
%
Current Quarter
The company's effective tax rate for the three months ended June 30, 2015 was lower than the comparable 2014 period primarily due to a $38 million net benefit recognized in 2015 for additional research credits claimed on prior year tax returns.
Year to Date
The company's effective tax rate for the six months ended June 30, 2015 was comparable with the same period in 2014 and reflects the $38 million net benefit recognized in 2015 for additional research credits and a $51 million benefit recorded in 2014 for the partial resolution of the Internal Revenue Service (IRS) examination of our 2007-2009 tax returns.
The company files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. Certain matters related to our 2007-2011 tax returns are currently before the IRS Office of Appeals. The company believes it is reasonably possible that within the next twelve months we may settle certain matters on these open tax years. The combined resolution of these items, excluding interest, could result in a reduction of our unrecognized tax benefits up to $75 million and a reduction of our income tax expense up to $40 million.
Open tax years related to state and foreign jurisdictions remain subject to examination, but are not considered material.
5.    FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents comparative carrying value and fair value information for our financial assets and liabilities:
 
June 30, 2015
 
December 31, 2014
$ in millions
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Financial Assets (Liabilities)
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Trading
$
321

 
$
321

 
$
331

 
$
331

Available-for-sale
5

 
5

 
5

 
5

Derivatives
4

 
4

 
1

 
1

Long-term debt, including current portion
$
(6,527
)
 
$
(6,997
)
 
$
(5,928
)
 
$
(6,726
)
There were no transfers of financial instruments between the three levels of fair value hierarchy during the six months ended June 30, 2015.
The carrying value of cash and cash equivalents approximates fair value.
Investments in Marketable Securities
The company holds a portfolio of marketable securities to partially fund non-qualified employee benefit plans consisting of securities that are classified as either trading or available-for-sale. These assets are recorded at fair value on a recurring basis and substantially all of these instruments are valued using Level 1 inputs, with an immaterial amount valued using Level 2 inputs. As of June 30, 2015 and December 31, 2014, marketable securities of $326 million and $336 million, respectively, were included in other non-current assets in the unaudited condensed consolidated statements of financial position.
Derivative Financial Instruments and Hedging Activities
The company's derivative portfolio consists primarily of foreign currency forward contracts. The notional value of the company's derivative portfolio at June 30, 2015 and December 31, 2014, was $139 million and $146 million,

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NORTHROP GRUMMAN CORPORATION                        

respectively. The portion of notional value designated as cash flow hedges at June 30, 2015 and December 31, 2014, was $18 million and $34 million, respectively.
Derivative financial instruments are recognized as assets or liabilities in the unaudited condensed consolidated financial statements and measured at fair value on a recurring basis. Substantially all of these instruments are valued using Level 2 inputs. Where model-derived valuations are appropriate, the company utilizes the income approach to determine the fair value and uses the applicable London Interbank Offered Rate (LIBOR) swap rates.
Unrealized gains or losses on the effective portion of cash flow hedges are reclassified from other comprehensive income to operating income upon the recognition of the underlying hedged transaction. Hedge contracts not designated for hedge accounting and the ineffective portion of cash flow hedges are recorded in other income. The derivative fair values and related unrealized gains/losses at June 30, 2015 and December 31, 2014, were not material.
Long-term Debt
The fair value of long-term debt is calculated using Level 2 inputs based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements.
Debt Issuance
In February 2015, the company issued $600 million of unsecured senior notes due April 15, 2045 with a fixed interest rate of 3.85 percent (the Notes). Interest on the Notes is payable semi-annually in arrears. The Notes are subject to redemption at the company's discretion at any time, or from time to time, prior to maturity in whole or in part at the greater of the principal amount of the Notes or an applicable "make-whole" amount, plus accrued and unpaid interest. We are using the net proceeds from this offering for general corporate purposes, including the funding of a $500 million voluntary contribution to our pension plans in the first quarter of 2015 and debt repayment.
6.    INVESTIGATIONS, CLAIMS AND LITIGATION
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 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,

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NORTHROP GRUMMAN CORPORATION                        

ECT alleges the consortium breached its contract with ECT and seeks damages of approximately R$111 million (the equivalent of approximately $35 million as of June 30, 2015), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law, which amounts could be significant over time. The original suit sought R$89 million (the equivalent of approximately $28 million as of June 30, 2015) in damages. In October 2013, ECT asserted an additional damage claim of R$22 million (the equivalent of approximately $7 million as of June 30, 2015). 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 $34 million as of June 30, 2015), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law. The Brazilian court retained an expert to consider certain issues pending before it. On August 8, 2013 and September 10, 2014, the company received 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 is one of several defendants in litigation brought by the Orange County Water District in Orange County Superior Court in California on December 17, 2004, for alleged contribution to volatile organic chemical contamination of the County's shallow groundwater. The lawsuit includes counts against the defendants for violation of the Orange County Water District Act, the California Super Fund Act, negligence, nuisance, trespass and declaratory relief. Among other things, the lawsuit seeks unspecified damages for the cost of remediation, payment of attorney fees and costs, and punitive damages. Trial on the statutory claims (those based on the Orange County Water District Act, the California Super Fund Act and declaratory relief) concluded on September 25, 2012. On October 29, 2013, the court issued its decision in favor of the defendants on the statutory claims. On May 9, 2014, the court granted defendants' dispositive motions on the remaining tort causes of action. Notice of entry of judgment was filed on July 1, 2014. The Orange County Water District filed a notice of appeal on August 28, 2014. We expect the Court of Appeals will soon establish a revised deadline for the Orange County Water District opening brief, likely in August.
The company is a party to various investigations, lawsuits, claims and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, and other than with respect to the FSS matters discussed separately above, the company does not believe that the outcome of any matter pending against the company is likely to have a material adverse effect on the company's unaudited condensed consolidated financial position as of June 30, 2015, or its annual results of operations or cash flows.
7.    COMMITMENTS AND CONTINGENCIES
Guarantees of Subsidiary Performance Obligations
From time to time in the ordinary course of business, the company guarantees obligations of its subsidiaries under certain contracts. Generally, the company is liable under such an arrangement only if its subsidiary is unable to perform under its contract. Historically, the company has not incurred any substantial liabilities resulting from these guarantees.
In addition, the company’s subsidiaries may enter into joint ventures, teaming and other business arrangements (collectively, Business Arrangements) to support our products and services in domestic and international markets. The company generally strives to limit its exposure under these arrangements to its subsidiary’s investment in the Business Arrangements or to the extent of such subsidiary’s obligations under the applicable contract. In some cases, however, we may be required to guarantee performance by the Business Arrangements and, in such cases, the company generally strives to obtain cross-indemnification from the other members of the Business Arrangements.
At June 30, 2015, the company is not aware of any existing event of default that would require it to satisfy any of these guarantees.
U.S. Government Cost Claims
From time to time, the company is advised of claims by the U.S. Government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and the U.S. Government representatives engage in discussions to enable the company to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for matters raised by the U.S. Government. Such provisions are reviewed periodically using the

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NORTHROP GRUMMAN CORPORATION                        

most recent information available. The company believes it has adequately reserved for disputed amounts that are probable and estimable, and the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of June 30, 2015, or its annual results of operations and/or cash flows.
Environmental Matters
The estimated cost to complete remediation at certain current or formerly owned or leased sites has been accrued where the company believes, based on the facts and circumstances known to the company, it is probable we will incur costs to address environmental impacts and the costs are reasonably estimable. As of June 30, 2015, management estimates the range of reasonably possible future costs for environmental remediation is between $359 million and $802 million, before considering the amount recoverable through overhead charges on U.S. Government contracts. At June 30, 2015, the amount within that range accrued for probable environmental remediation costs was $374 million, of which $131 million is recorded in other current liabilities and $243 million is recorded in other non-current liabilities. A portion of the environmental remediation costs is expected to be recoverable through overhead charges on U.S. Government contracts and, accordingly, such amounts are deferred in inventoried costs and other non-current assets. As of June 30, 2015, $65 million is deferred in inventoried costs and $123 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, we do not anticipate future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company's unaudited condensed consolidated financial position as of June 30, 2015, or its annual results of operations and/or cash flows.
Financial Arrangements
In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At June 30, 2015, there were $241 million of stand-by letters of credit and guarantees and $158 million of surety bonds outstanding.
Indemnifications
The company has retained certain environmental, income tax and other potential liabilities in connection with certain of its divestitures. The settlement of these liabilities is not expected to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of June 30, 2015, or its annual results of operations and/or cash flows.
Operating Leases
Rental expense for operating leases for the three and six months ended June 30, 2015, was $76 million and $157 million, respectively, and was $73 million and $145 million for the three and six months ended June 30, 2014, respectively. These amounts are net of immaterial amounts of sublease rental income.
Credit Facility
In July 2015, the company amended its $1.775 billion five-year credit facility dated August 29, 2013 by reducing the aggregate principal amount available under the facility to $1.6 billion and extending the maturity to July 2020 (the 2015 Credit Agreement).
The 2015 Credit Agreement contains generally customary terms and conditions, including covenants restricting the company's ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other fundamental changes and incur liens. The company also generally cannot permit the ratio of its debt to capitalization (as set forth in the 2015 Credit Agreement) to exceed 65 percent.

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NORTHROP GRUMMAN CORPORATION                        

8.    RETIREMENT BENEFITS
The cost to the company of its retirement plans is shown in the following table:
 
Three Months Ended June 30
Six Months Ended June 30
 
Pension
Benefits
 
Medical and
Life Benefits
Pension
Benefits
 
Medical and
Life Benefits
$ in millions
2015
 
2014
 
2015
 
2014
2015
 
2014
 
2015
 
2014
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
121

 
$
115

 
$
9

 
$
9

$
242

 
$
229

 
$
18

 
$
17

Interest cost
306

 
315

 
23

 
24

612

 
630

 
47

 
50

Expected return on plan assets
(493
)
 
(468
)
 
(23
)
 
(21
)
(987
)
 
(935
)
 
(45
)
 
(42
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service credit
(15
)
 
(15
)
 
(7
)
 
(13
)
(30
)
 
(30
)
 
(14
)
 
(20
)
Net loss from previous years
170

 
82

 
8

 
4

341

 
164

 
14

 
6

Net periodic benefit cost
$
89

 
$
29

 
$
10

 
$
3

$
178

 
$
58

 
$
20

 
$
11

Employer Contributions
The company sponsors defined benefit pension and post-retirement plans, as well as defined contribution plans. We fund our defined benefit pension plans annually in a manner consistent with the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006. Additionally, in the first quarter of 2015, we made a voluntary pension contribution of $500 million.
Contributions made by the company to its retirement plans are as follows:
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Defined benefit pension plans
$
19

 
$
18

 
$
544

 
$
39

Post-retirement benefit plans
19

 
19

 
25

 
26

Defined contribution plans
65

 
74

 
150

 
147

9.    STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Awards
In February 2015, the company granted certain employees 0.2 million restricted stock rights (RSRs) and 0.4 million restricted performance stocks rights (RPSRs) under the company's long-term incentive stock plan, with a grant date aggregate fair value of $87 million. The RSRs will typically vest on the third anniversary of the grant date, while the RPSRs will vest and pay out based on the achievement of financial metrics for the three-year period ending December 31, 2017.
Cash Awards
In February 2015, the company granted certain employees cash units (CUs) and cash performance units (CPUs) with a minimum aggregate payout amount of $34 million and a maximum aggregate payout amount of $190 million. The CUs will vest and settle in cash on the third anniversary of the grant date, while the CPUs will vest and settle in cash based on the achievement of financial metrics for the three-year period ending December 31, 2017.

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NORTHROP GRUMMAN CORPORATION                        

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Falls Church, Virginia
We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation (the "Corporation") and subsidiaries as of June 30, 2015, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and six-month periods ended June 30, 2015 and 2014, and of cash flows and changes in shareholders' equity for the six-month periods ended June 30, 2015 and 2014. These interim financial statements are the responsibility of the Corporation's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of December 31, 2014, and the related consolidated statements of earnings and comprehensive (loss) income, cash flows, and changes in shareholders' equity for the year then ended (not presented herein); and in our report dated February 2, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2014, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

/s/  Deloitte & Touche LLP
McLean, Virginia
July 28, 2015


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NORTHROP GRUMMAN CORPORATION                        

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
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 unmanned systems; cyber; command, control, communications and computers (C4), intelligence, surveillance and reconnaissance (C4ISR); strike aircraft; and logistics and modernization to government and commercial customers worldwide through our four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. We participate in many high-priority defense and government 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 and commercial customers.
The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Form 10-Q, as well as our 2014 Annual Report on Form 10-K, which provides a more thorough discussion of our systems, products and solutions; political and economic environment; industry outlook; and business trends. See further discussions in the Consolidated Operating Results and Segment Operating Results sections that follow.
Political and Economic Environment
The following is an update of events relating to the company’s political and economic environment since the filing of our 2014 Annual Report on Form 10-K.
On February 2, 2015, the President delivered his FY 2016 budget to Congress. The FY 2016 budget seeks an increase in defense and non-defense spending, including $534 billion for the DoD’s annual budget and an additional $51 billion for Overseas Contingency Operations. While the President's FY 2016 budget is in line with projections included in his FY 2015 budget, it is approximately $38 billion more than the current DoD appropriations and $34 billion more than the spending caps provided for in the Budget Control Act (BCA). The Administration and Congress continue to debate the defense budget and strategies to address the BCA’s spending caps.
The Temporary Debt Limit Extension Act suspended the statutory limit on the amount of permissible federal debt (the debt ceiling) until March 15, 2015. On March 16, 2015, the Treasury Department began taking “extraordinary measures” to finance the government. If the debt ceiling is not raised, it is anticipated that the debt ceiling will be reached later this year.
Operating Performance Assessment and Reporting
We manage and assess our business based on our performance on contracts and programs (typically two or more closely-related contracts). Sales from our portfolio of long-term contracts are primarily recognized 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 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, and we do not focus on individual cost groupings (such as manufacturing, engineering and design labor costs, subcontractor costs, material costs, overhead costs and general and administrative costs), as much as we do on total contract cost, which is the key driver of our sales and operating income.
In evaluating our operating performance, we look primarily at changes in sales and operating income, including the effects of meaningful changes in operating income as a result of changes in contract estimates. Where applicable, significant fluctuations in operating performance attributable to individual contracts or programs, or changes in a specific cost element across multiple contracts, are described in our analysis. Based on this approach and the nature of our operations, the discussion below of results of operations first focuses on our four segments before distinguishing between products and services. Changes in sales are generally described in terms of volume, deliveries or other indicators of sales activity, and contract mix. For purposes of this discussion, volume generally refers to increases or decreases in sales or cost from production/service activity levels or delivery rates. Performance generally refers to changes in contract operating margin rates for the period, as well as the continuing effect of prior cumulative catch-up adjustments.

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NORTHROP GRUMMAN CORPORATION                        

CONSOLIDATED OPERATING RESULTS
Selected financial highlights are presented in the table below:
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions, except per share amounts
2015
 
2014
 
2015
 
2014
Sales
$
5,896

 
$
6,039

 
$
11,853

 
$
11,887

Operating costs and expenses
5,083

 
5,219

 
10,260

 
10,222

Operating income
813

 
820

 
1,593

 
1,665

Operating margin rate
13.8
%
 
13.6
%
 
13.4
%
 
14.0
%
Federal and foreign income tax expense
205

 
245

 
425

 
452

Effective income tax rate
27.9
%
 
32.4
%
 
29.5
%
 
29.3
%
Net earnings
531

 
511

 
1,015

 
1,090

Diluted earnings per share
2.74

 
2.37

 
5.15

 
5.01

Net cash provided by (used in) operating activities
$
626

 
$
572

 
$
(28
)
 
$
170

Sales
Sales for the three months ended June 30, 2015, decreased $143 million, or 2 percent, and for the six months ended June 30, 2015, were comparable with the same period in 2014.
The table below shows the variances in segment sales from the prior year period:
$ in millions
Three Month Variance
 
Six Month Variance
Aerospace Systems
$
10

 
—

 
$
88

 
2
%
Electronic Systems
(61
)
 
(3
%)
 
(24
)
 
(1
%)
Information Systems
(77
)
 
(5
%)
 
(80
)
 
(3
%)
Technical Services
(12
)
 
(2
%)
 
61

 
4
%
Intersegment sales elimination
(3
)
 
1
%
 
(79
)
 
8
%
Total sales variance
$
(143
)
 
(2
%)
 
$
(34
)
 
—

For further information by segment refer to Segment Operating Results below, and for product and service detail, refer to the Product and Service Analysis section that follows Segment Operating Results.
Operating Costs and Expenses
Operating costs and expenses primarily comprise labor, material, subcontractor and overhead costs, and are generally allocated to contracts as incurred. In accordance with industry practice and the regulations that govern cost accounting requirements for government contracts, most general management and corporate expenses incurred at the segment and corporate locations are considered allowable and allocable costs. Allowable and allocable general and administrative costs are allocated on a systematic basis to contracts in progress.
Operating costs and expenses comprise the following:
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Product costs
$
2,568

 
$
2,668

 
$
5,110

 
$
5,201

Service costs
1,874

 
1,961

 
3,874

 
3,889

General and administrative expenses
641

 
590

 
1,276

 
1,132

Operating costs and expenses
$
5,083

 
$
5,219

 
$
10,260

 
$
10,222

Current Quarter
Product costs as a percentage of product sales for the three months ended June 30, 2015 were 73.2 percent as compared to 74.9 percent during the same period in 2014; the decrease was mainly due to improved performance

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NORTHROP GRUMMAN CORPORATION                        

partially offset by business mix changes, which resulted in lower volume for mature fixed price production programs and higher volume for cost-type development programs. Service costs as a percentage of service sales for the three months ended June 30, 2015 were 78.5 percent as compared to 79.2 percent during the same period in 2014; the decrease was mainly due to improved performance on service programs at Electronic Systems.
General and administrative expenses as a percentage of total sales for the three months ended June 30, 2015 were 10.9 percent as compared with 9.8 percent for the same period in 2014, principally due to an increase in independent research and development (IR&D) as we continue to invest in future business opportunities.
Year to Date
Product costs as a percentage of product sales for the six months ended June 30, 2015 were 73.7 percent as compared to 74.6 percent during the same period in 2014; the decrease was mainly due to improved performance partially offset by business mix changes. Service costs as a percentage of service sales for the six months ended June 30, 2015 were 78.8 percent, which is comparable with the 79.1 percent during the same period in 2014.
General and administrative expenses as a percentage of total sales for the six months ended June 30, 2015 were 10.8 percent, as compared with 9.5 percent for the same period in 2014, principally due to an increase in IR&D as we continue to invest in future business opportunities.
For further information regarding product and service sales and costs, see the Product and Service Analysis section that follows Segment Operating Results.
Operating Income
We define operating income as sales less operating costs and expenses, which includes general and administrative expenses. Changes in estimated contract operating margin at completion, resulting from changes in estimated sales, operating costs and expenses, are recorded using the cumulative catch-up method of accounting, which in aggregate can have a significant effect on our reported sales and operating income in each of our reporting periods. Cumulative catch-up adjustments are presented in the table below:
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Favorable adjustments
$
228

 
$
226

 
$
518

 
$
482

Unfavorable adjustments
(66
)
 
(61
)
 
(169
)
 
(120
)
Net favorable adjustments
$
162

 
$
165

 
$
349

 
$
362

Net cumulative catch-up adjustments by segment are presented in the table below:
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Aerospace Systems
$
111

 
$
70

 
$
222

 
$
195

Electronic Systems
37

 
77

 
79

 
134

Information Systems
15

 
16

 
38

 
34

Technical Services
9

 
8

 
23

 
21

Eliminations
(10
)
 
(6
)
 
(13
)
 
(22
)
Net favorable adjustments
$
162

 
$
165

 
$
349

 
$
362

Federal and Foreign Income Tax Expense
The effective tax rates for the three and six months ended June 30, 2015, were 27.9 percent and 29.5 percent, respectively, compared with 32.4 percent and 29.3 percent, respectively, for the three and six months ended June 30, 2014.
Current Quarter
The company's effective tax rate for the three months ended June 30, 2015 was lower than the comparable 2014 period primarily due to a $38 million net benefit recognized in 2015 for additional research credits claimed on prior year tax returns.

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NORTHROP GRUMMAN CORPORATION                        

Year to Date
The company's effective tax rate for the six months ended June 30, 2015 was comparable with the same period in 2014 and reflects the $38 million net benefit recognized in 2015 for additional research credits and a $51 million benefit recorded in 2014 for the partial resolution of the Internal Revenue Service (IRS) examination of our 2007-2009 tax returns.
Net Earnings
Current Quarter
Net earnings for the three months ended June 30, 2015 were $531 million, as compared with $511 million in 2014. Net earnings increased $20 million, or 4 percent, principally due to the lower effective tax rate discussed above.
Year to Date
Net earnings for the six months ended June 30, 2015 were $1.0 billion, as compared with $1.1 billion in 2014. Net earnings decreased $75 million, or 7 percent, principally due to lower net FAS (GAAP Financial Accounting Standards)/CAS pension adjustment and segment operating income, both of which are discussed in Segment Operating Results.
Diluted Earnings Per Share
Current Quarter
Diluted earnings per share for the three months ended June 30, 2015, increased $0.37, or 16 percent, as compared with the same period in 2014, reflecting lower weighted-average shares outstanding resulting from shares repurchased during 2014 and 2015 and higher net earnings.
Year to Date
Diluted earnings per share for the six months ended June 30, 2015, increased $0.14, or 3 percent, as compared with the same period in 2014, reflecting lower weighted-average shares outstanding resulting from shares repurchased during 2014 and 2015, partially offset by lower earnings.
Net Cash from Operating Activities
Current Quarter
For the three months ended June 30, 2015, net cash provided by operating activities increased $54 million, as compared with the same period in 2014, principally due to higher net earnings.
Year to Date
For the six months ended June 30, 2015, net cash from operating activities decreased $198 million, as compared with the same period in 2014, principally driven by a $500 million voluntary pre-tax pension contribution which was partially offset by changes in trade working capital.
SEGMENT OPERATING RESULTS
Basis of Presentation
We are aligned in four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. This section discusses segment sales, operating income and operating margin rates. The reconciliation of segment sales to total sales is provided in Note 3 to the unaudited condensed consolidated financial statements in Part I, Item 1. The reconciliation of segment operating income to total operating income, as well as a discussion of the reconciling items, is provided in Note 3 to the unaudited condensed consolidated financial statements in Part I, Item 1. For purposes of the discussion in this Segment Operating Results section, references to operating income and operating margin rate reflect segment operating income and segment operating margin rate.

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NORTHROP GRUMMAN CORPORATION                        

Segment Operating Income
Segment operating income, as reconciled below, is a non-GAAP measure and is used by management as an internal measure for financial performance of our operating segments. Segment operating income reflects total earnings from our four segments including allocated pension expense recognized under CAS and excludes unallocated corporate items, including FAS pension expense.
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Segment operating income
$
742

 
$
742

 
$
1,477

 
$
1,499

Segment operating margin rate
12.6
%
 
12.3
%
 
12.5
%
 
12.6
%
Current Quarter
Segment operating income for the three months ended June 30, 2015, was consistent with the same period in 2014, and segment operating margin rate increased to 12.6 percent from 12.3 percent due to improved performance at Aerospace Systems, partially offset by less favorable performance at Electronic Systems.
Year to Date
Segment operating income and segment operating margin rate for the six months ended June 30, 2015, slightly decreased compared to the same period in 2014, due to less favorable performance at Electronic Systems, partially offset by improved performance at Aerospace Systems.
The table below reconciles segment operating income to total operating income by including the impact of net FAS/CAS pension adjustments, as well as certain corporate-level expenses, which are not considered allowable or allocable under applicable CAS or FAR.
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Segment operating income
$
742

 
$
742

 
$
1,477

 
$
1,499

CAS pension expense
170

 
139

 
342

 
278

Less: FAS pension expense
(89
)
 
(29
)
 
(178
)
 
(58
)
Net FAS/CAS pension adjustment
81

 
110

 
164

 
220

Unallocated corporate expenses
(9
)
 
(31
)
 
(47
)
 
(53
)
Other
(1
)
 
(1
)
 
(1
)
 
(1
)
Total operating income
$
813

 
$
820

 
$
1,593

 
$
1,665

Net FAS/CAS Pension Adjustment
For financial statement purposes, we account for our employee pension plans in accordance with GAAP under FAS. However, the cost of these plans is charged to our contracts in accordance with the FAR and the related CAS that govern such plans. The net FAS/CAS pension adjustment reflects the difference between pension expense charged to contracts and included as cost in segment operating income and pension expense determined in accordance with GAAP. The decrease in net FAS/CAS pension adjustment for the three and six months ended June 30, 2015, as compared to the same periods in 2014, is principally due to an increase in FAS expense, as a result of changes in our FAS discount rate and mortality assumptions as of December 31, 2014. The increase in FAS expense was partially offset by higher CAS expense resulting from updated mortality assumptions.
Unallocated Corporate Expenses
Unallocated corporate expenses include the portion of corporate expenses not considered allowable or allocable under applicable CAS or FAR, and are therefore not allocated to the segments. Such costs consist of a portion of management and administration, legal, environmental, compensation costs, retiree benefits and certain unallowable costs such as lobbying activities, among others. The decrease in unallocated corporate expenses for the three months ended June 30, 2015, as compared to the same period in 2014, is principally due to a reduction in reserves for overhead costs. Unallocated corporate expenses for the six months ended June 30, 2015, were comparable to the same period in 2014.

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NORTHROP GRUMMAN CORPORATION                        

AEROSPACE SYSTEMS
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Sales
$
2,512

 
$
2,502

 
$
5,010

 
$
4,922

Operating income
322

 
290

 
637

 
614

Operating margin rate
12.8
%
 
11.6
%
 
12.7
%
 
12.5
%
Current Quarter
Aerospace Systems sales for the three months ended June 30, 2015, increased $10 million, as compared with the same period in 2014, primarily due to higher volume on unmanned and space programs, partially offset by lower volume on manned military aircraft and other programs. Volume was higher across a number of programs in the unmanned portfolio, including the Global Hawk program. The increase in space programs reflects higher volume for restricted activities. The decrease in manned military aircraft programs is mainly due to fewer F/A-18 deliveries and lower volume on F-35 development activities, partially offset by a ramp-up of production activities on the E-2D Advanced Hawkeye program.
Operating income for the three months ended June 30, 2015, increased $32 million, or 11 percent, and operating margin rate increased to 12.8 percent from 11.6 percent. Operating income and margin rate increased primarily due to risk retirements associated with a restricted program.
Year to Date
Aerospace Systems sales for the six months ended June 30, 2015, increased $88 million, or 2 percent, as compared with the same period in 2014, primarily due to higher volume on unmanned and space programs, partially offset by lower volume on manned military aircraft programs. Volume was higher across a number of programs in the unmanned portfolio, including the Global Hawk program. The increase in space programs was mainly due to higher volume for restricted activities, partially offset by lower volume on the Advanced Extremely High Frequency program. The decrease in manned military aircraft programs is mainly due to fewer F/A-18 deliveries and lower volume on F-35 development activities, partially offset by a ramp-up of production activities on the E-2D Advanced Hawkeye program.
Operating income for the six months ended June 30, 2015, increased $23 million, or 4 percent and operating margin rate increased to 12.7 percent from 12.5 percent. Operating income and margin rate increased primarily due to risk retirements associated with a restricted program.
ELECTRONIC SYSTEMS
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Sales
$
1,683

 
$
1,744

 
$
3,364

 
$
3,388

Operating income
265

 
291

 
512

 
559

Operating margin rate
15.7
%
 
16.7
%
 
15.2
%
 
16.5
%
Current Quarter
Electronic Systems sales for the three months ended June 30, 2015, decreased $61 million, or 3 percent, as compared with the same period in 2014. The decrease was primarily driven by lower volume on land and self protection systems and airborne tactical sensor programs, partially offset by higher volume on navigation and maritime systems and combat avionics programs.
Operating income for the three months ended June 30, 2015, decreased $26 million, or 9 percent, and operating margin rate decreased to 15.7 percent from 16.7 percent. Operating income and margin rate for 2015 decreased primarily due to business mix changes, which resulted in lower volume for mature fixed price production programs and higher volume for cost-type development programs, as well as less favorable performance in land and self protection systems.
Year to Date
Electronic Systems sales for the six months ended June 30, 2015, decreased $24 million, or 1 percent, as compared with the same period in 2014. The decrease was primarily due to lower volume on land and self protection systems

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NORTHROP GRUMMAN CORPORATION                        

and airborne tactical sensor and combat avionics programs, partially offset by higher volume on space systems and marine systems programs.
Operating income for the six months ended June 30, 2015, decreased $47 million, or 8 percent, and operating margin rate decreased to 15.2 percent from 16.5 percent. Operating income and margin rate for 2015 decreased primarily due to business mix changes, which resulted in lower volume for mature fixed price production programs and higher volume for cost-type development programs, as well as less favorable performance in land and self protection systems.
INFORMATION SYSTEMS
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Sales
$
1,485

 
$
1,562

 
$
3,059

 
$
3,139

Operating income
150

 
153

 
316

 
315

Operating margin rate
10.1
%
 
9.8
%
 
10.3
%
 
10.0
%
Current Quarter
Information Systems sales for the three months ended June 30, 2015, decreased $77 million, or 5 percent, as compared with the same period in 2014. The decrease was driven by lower volume on command and control programs including the Consolidated Afloat Network and Enterprise Services program, the impact of in-theater force reductions and completion of the Ground Combat Vehicle program.
Operating income for the three months ended June 30, 2015, decreased $3 million, or 2 percent, as compared with the same period in 2014. Operating margin rate increased to 10.1 percent from 9.8 percent primarily due to program completions and improved performance across the portfolio.
Year to Date
Information Systems sales for the six months ended June 30, 2015, decreased $80 million, or 3 percent, as compared with the same period in 2014. The sales decrease was due to lower volume on the command and control programs described above and declines in civil programs including the Emergency Communications Transformation Program. These decreases were partially offset by higher volume on intelligence, surveillance and reconnaissance programs and integrated air and missile defense programs.
Operating income for the six months ended June 30, 2015, was consistent with the same period in 2014. Operating margin rate increased to 10.3 percent from 10.0 percent primarily due to program completions and improved performance across the portfolio.
TECHNICAL SERVICES
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Sales
$
720

 
$
732

 
$
1,490

 
$
1,429

Operating income
67

 
68

 
135

 
136

Operating margin rate
9.3
%
 
9.3
%
 
9.1
%
 
9.5
%
Current Quarter
Technical Services sales for the three months ended June 30, 2015, decreased $12 million, or 2 percent, as compared with the same period in 2014. The decrease is primarily a result of lower volume on the InterContinental Ballistic Missile (ICBM) program and completion of the Combined Tactical Training Range program, partially offset by higher volume on international programs.
Operating income and operating margin rate for the three months ended June 30, 2015, were consistent with the same period in 2014.

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NORTHROP GRUMMAN CORPORATION                        

Year to Date
Technical Services sales for the six months ended June 30, 2015, increased $61 million, or 4 percent, as compared with the same period in 2014. The increase is primarily due to growth on international programs and higher intercompany sales, partially offset by lower volume on the ICBM program.
Operating income for the six months ended June 30, 2015, was comparable with the same period in 2014. Operating margin rate decreased to 9.1 percent from 9.5 percent primarily due to lower income from an unconsolidated joint venture than in the prior year period.
PRODUCT AND SERVICE ANALYSIS
The following table presents product and service sales and operating costs and expenses by segment:
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
2014
 
2015
2014
Segment Information:
Sales
Operating Costs and Expenses
Sales
Operating Costs and Expenses
 
Sales
Operating Costs and Expenses
Sales
Operating Costs and Expenses
Aerospace Systems
 
 
 
 
 
 
 
 
 
Product
$
2,034

$
1,766

$
2,008

$
1,768

 
$
3,979

$
3,477

$
3,981

$
3,476

Service
478

424

494

444

 
1,031

896

941

832

Electronic Systems
 
 
 
 
 
 
 
 
 
Product
1,356

1,163

1,429

1,192

 
2,729

2,340

2,750

2,297

Service
327

255

315

261

 
635

512

638

532

Information Systems
 
 
 
 
 
 
 
 
 
Product
324

292

341

324

 
662

589

660

621

Service
1,161

1,043

1,221

1,085

 
2,397

2,154

2,479

2,203

Technical Services
 
 
 
 
 
 
 
 
 
Product
51

54

42

41

 
120

117

98

91

Service
669

599

690

623

 
1,370

1,238

1,331

1,202

Segment Totals
 
 
 
 
 
 
 
 
 
Total Product
$
3,765

$
3,275

$
3,820

$
3,325

 
$
7,490

$
6,523

$
7,489

$
6,485

Total Service
2,635

2,321

2,720

2,413

 
5,433

4,800

5,389

4,769

Intersegment eliminations
(504
)
(442
)
(501
)
(441
)
 
(1,070
)
(947
)
(991
)
(866
)
Total segment(1)
$
5,896

$
5,154

$
6,039

$
5,297

 
$
11,853

$
10,376

$
11,887

$
10,388

(1) The reconciliation of segment operating income to total operating income, as well as a discussion of the reconciling items, is included in Note 3 to the unaudited condensed consolidated financial statements in Part I, Item 1.
Product Sales and Costs
Current Quarter
Product sales for the three months ended June 30, 2015, decreased $55 million, or 1 percent, as compared with the same period in 2014. The decrease was primarily driven by lower volume at Electronic Systems on land and self protection systems and tactical sensor programs, partially offset by higher volume on space sensor and combat avionics programs, as described in the Segment Operating Results section above.
Product costs for the three months ended June 30, 2015, decreased $50 million, or 2 percent, as compared with the same period in 2014. The decrease was primarily driven by the lower product sales described above and improved performance at Information Systems, partially offset by lower product operating margin rates at Electronic Systems, due to business mix changes, as described in the Segment Operating Results section above.
Year to Date
Product sales for the six months ended June 30, 2015 were comparable with the same period in 2014.

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NORTHROP GRUMMAN CORPORATION                        

Product costs for the six months ended June 30, 2015, increased $38 million, or 1 percent, as compared with the same period in 2014. The increase was primarily driven by lower product operating margin rates at Electronic Systems, due to business mix changes, and less favorable performance at Technical Services, partially offset by improved performance at Information Systems, as described in the Segment Operating Results section above.
Service Sales and Costs
Current Quarter
Service sales for the three months ended June 30, 2015, decreased $85 million, or 3 percent, as compared with the same period in 2014. The decrease was primarily driven by lower service sales at Information Systems due to lower volume on certain command and control programs and the impact of in-theater force reductions, as described in the Segment Operating Results section above.
Service costs for the three months ended June 30, 2015, decreased $92 million, or 4 percent, as compared with the same period in 2014. The decrease was primarily driven by the lower service sales described above, offset, in part, by higher operating margin rates on service programs at Electronic Systems.
Year to Date
Service sales for the six months ended June 30, 2015, increased $44 million, or 1 percent, as compared with the same period in 2014. The increase was primarily due to higher service sales at Aerospace Systems and Technical Services, partially offset by lower service sales at Information Systems. The increase at Aerospace Systems was primarily driven by higher volume on operations, maintenance, and sustainment activities on manned military aircraft and unmanned programs. The increase at Technical Services was primarily driven by higher service sales on international programs, partially offset by lower service sales on the ICBM program. The decrease at Information Systems was primarily driven by lower volume on certain command and control programs and the impact of in-theater force reductions as described in the Segment Operating Results section above.
Service costs for the six months ended June 30, 2015, increased $31 million, or 1 percent, as compared with the same period in 2014. The increase is consistent with the increase in service sales described above.
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 as of June 30, 2015, and December 31, 2014:
 
June 30,
2015
 
December 31,
2014
$ in millions
Funded
 
Unfunded
 
Total
Backlog
 
Total
Backlog
Aerospace Systems
$
9,975

 
$
9,005

 
$
18,980

 
$
20,063

Electronic Systems
7,349

 
2,207

 
9,556

 
9,715

Information Systems
2,787

 
3,026

 
5,813

 
6,115

Technical Services
2,492

 
179

 
2,671

 
2,306

Total backlog
$
22,603

 
$
14,417

 
$
37,020

 
$
38,199

New Awards
The estimated value of contract awards recorded during the six months ended June 30, 2015 was $10.7 billion. New awards during this period include $879 million for the F-35 program, $791 million for the Saudi Arabian Ministry of National Guard Training Support program (through our interest in a joint venture for which we consolidate the financial results), $543 million for the E-2D Advanced Hawkeye program, $195 million for the B-2 program and $194 million for the F/A-18 program.
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. In addition to our cash position, we use various financial measures to assist in

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NORTHROP GRUMMAN CORPORATION                        

capital deployment decision-making, including cash provided by operating activities, free cash flow, net debt-to-equity and net debt-to-capital. We believe these measures are useful to investors in assessing our financial performance and condition.
In February 2015, the company issued $600 million of unsecured senior notes due April 15, 2045 with a fixed interest rate of 3.85 percent (the Notes). Interest on the Notes is payable semi-annually in arrears. The Notes are subject to redemption at the company's discretion at any time, or from time to time, prior to maturity in whole or in part at the greater of the principal amount of the Notes or an applicable "make-whole" amount, plus accrued and unpaid interest. We are using the net proceeds from this offering for general corporate purposes, including the funding of a $500 million voluntary contribution to our pension plans in the first quarter of 2015 and debt repayment.
At June 30, 2015, the company maintained an unsecured credit facility in an aggregate principal amount of $1.775 billion dated August 29, 2013 (the 2013 Credit Agreement); the company was in compliance with all covenants under the 2013 Credit Agreement and there was no balance outstanding.
In July 2015, the company amended the 2013 Credit Agreement by reducing the aggregate principal amount available under the facility to $1.6 billion and extending the maturity to July 2020 (the 2015 Credit Agreement). The 2015 Credit Agreement contains generally customary terms and conditions.
Cash balances 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.
The table below summarizes key components of cash from operating activities:
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Net earnings
$
531

 
$
511

 
$
1,015

 
$
1,090

Non-cash items(1)
74

 
112

 
296

 
215

Changes in assets and liabilities:
 
 
 
 
 
 
 
Trade working capital
(61
)
 
(39
)
 
(969
)
 
(1,118
)
Retiree benefits
62

 
(6
)
 
(378
)
 
8

Other, net
20

 
(6
)
 
8

 
(25
)
Net cash provided by (used in) operating activities
$
626

 
$
572

 
$
(28
)
 
$
170

(1)
Includes depreciation and amortization, stock-based compensation (including related excess tax benefits) and deferred income taxes
Free Cash Flow
Free cash flow is defined as cash from operating activities less capital expenditures. We believe free cash flow is a useful measure for investors to consider as it represents the cash flow the company has available after capital spending to invest for future growth, strengthen the balance sheet and/or return to shareholders through dividends and share repurchases. Free cash flow is a key factor in our planning for and consideration of strategic acquisitions, the payment of dividends and stock repurchases.
Free cash flow is not a measure of financial performance under GAAP, and may not be defined and calculated by other companies in the same manner. This measure should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating results presented in accordance with GAAP as indicators of performance.

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NORTHROP GRUMMAN CORPORATION                        

The table below reconciles cash from operating activities to free cash flow from operations:
 
Three Months Ended June 30
 
Six Months Ended June 30
$ in millions
2015
 
2014
 
2015
 
2014
Net cash provided by (used in) operating activities
$
626

 
$
572

 
$
(28
)
 
$
170

Less: capital expenditures
(115
)
 
(116
)
 
(232
)
 
(176
)
Free cash flow
$
511

 
$
456

 
$
(260
)
 
$
(6
)
Current Quarter
Free cash flow for the three months ended June 30, 2015, increased $55 million, as compared to the same period in 2014, principally due to higher net earnings.
Year to Date
Free cash flow for the six months ended June 30, 2015, decreased $254 million, as compared to the same period in 2014, principally driven by a $500 million voluntary pre-tax pension contribution and higher capital expenditures in 2015, partially offset by changes in trade working capital.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
There have been no material changes to our critical accounting policies, estimates or judgments from those discussed in our 2014 Annual Report on Form 10-K.
ACCOUNTING STANDARDS UPDATES
See Note 1 to our unaudited condensed consolidated financial statements in Part I, Item 1.
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Form 10-Q and the information we are incorporating by reference contains statements, other than statements of historical fact, that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expect,” “intend,” “may,” “could,” “plan,” “project,” “forecast,” “believe,” “estimate,” “outlook,” “anticipate,” “trends,” "goals," and similar expressions generally identify these forward-looking statements.
Forward-looking statements include, among other things, statements relating to our future financial condition, results of operations and cash flows. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made, but which may change over time. These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict. Specific risks that could cause actual results to differ materially from those expressed or implied in these forward-looking statements include, but are not limited to, those identified and discussed more fully in the section entitled "Risk Factors" in our Form 10-K for the year ended December 31, 2014. They include:
•
our dependence on a single customer, the U.S. Government
•
delays or reductions in appropriations for our programs and U.S. Government funding
•
investigations, claims and/or litigation
•
our international business
•
the improper conduct of employees, agents, business partners or joint ventures in which we participate
•
the use of accounting estimates for our contracts
•
cyber and other security threats or disruptions
•
changes in actuarial assumptions associated with our pension and other post-retirement benefit plans
•
the performance and financial viability of our suppliers and the availability and pricing of raw materials and components
•
competition within our markets
•
changes in procurement and other laws and regulations applicable to our industry
•
natural and/or environmental disasters

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NORTHROP GRUMMAN CORPORATION                        

•
the adequacy of our insurance coverage, customer indemnifications or other liability protections
•
the products and services we provide related to nuclear operations
•
changes in business conditions that could impact recorded goodwill or the value of other long-lived assets
•
our ability to develop new products and technologies and maintain technologies, facilities, equipment and a qualified workforce
•
our ability to meet performance obligations under our contracts
•
unforeseen environmental costs
•
our ability to protect our intellectual property rights
•
changes in our tax provisions or exposure to additional tax liabilities
•
the spin-off of our former Shipbuilding business
Additional information regarding these risks and other important factors can be found in the section entitled "Risk Factors" in our Form 10-K for the year ended December 31, 2014 and as disclosed in this report and from time to time in our other filings with the SEC.
You are urged to consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of forward-looking statements. These forward-looking statements speak only as of the date this 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.
CONTRACTUAL OBLIGATIONS
Other than the debt issuance, including associated interest, described in Note 5 of Part I, Item 1, and the credit facility amendment described in Note 7 of Part I, Item 1, there have been no material changes to our contractual obligations from those discussed in our 2014 Annual Report on Form 10-K.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risks from those discussed in our 2014 Annual Report on Form 10-K.
Item 4.    Controls and Procedures
DISCLOSURES CONTROLS AND PROCEDURES
Our principal executive officer (Chairman, Chief Executive Officer and President) and principal financial officer (Corporate Vice President and Chief Financial Officer) have evaluated the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) as of June 30, 2015, 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 June 30, 2015, 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.

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NORTHROP GRUMMAN CORPORATION                        

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We have provided information about certain legal proceedings in which we are involved in our 2014 Annual Report on Form 10-K, and updated that information in Note 6 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this report.
We are a party to various investigations, lawsuits, claims and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. These types of matters could result in fines; penalties; compensatory, treble or other damages; or non-monetary relief. U.S. Government regulations also provide that certain allegations against a contractor may lead to suspension or debarment from future U.S. Government contracts or suspension of export privileges for the company or one or more of its components. Suspension or debarment could have a material adverse effect on the company because of our reliance on government contracts and authorizations. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to us to date and other than as noted in our 2014 Annual Report on Form 10-K, as updated by Note 6 to the unaudited condensed consolidated financial statements in this report, we do not believe that the outcome of any matter currently pending against the company is likely to have a material adverse effect on the company's unaudited condensed consolidated financial position as of June 30, 2015, its annual results of operations and/or cash flows. For further information on the risks we face from existing and future investigations, lawsuits, claims and other legal proceedings, please see Risk Factors in Part I, Item 1A of our 2014 Annual Report on Form 10-K.
Item 1A. Risk Factors
For a discussion of our risk factors please see the section entitled "Risk Factors" in our Form 10-K for the year ended December 31, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities – The table below summarizes our repurchases of common stock during the three months ended June 30, 2015:
Period
Number
of Shares
Purchased(1)
 
Average 
Price
Paid per
Share(2)
 
Numbers
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the
Plans or Programs
($ in millions)
April
2,276,845

 
$
161.87

 
2,276,845

 
 
$
2,219

May
2,094,100

 
157.19

 
2,094,100

 
 
1,890

June
2,414,200

 
160.73

 
2,414,200

 
 
1,502

Total
6,785,145

 
$
160.02

 
6,785,145

 
 
$
1,502

(1)
On May 15, 2013, the company's board of directors authorized a share repurchase program of up to $4.0 billion of the company's common stock (2013 Repurchase Program). Repurchases under the 2013 Repurchase Program commenced in September 2013. On December 4, 2014, the company's board of directors authorized a new share repurchase program of up to an additional $3.0 billion of the company's common stock (2014 Repurchase Program). Repurchases under the 2014 Repurchase Program commenced in March 2015 upon the completion of the company's 2013 Repurchase Program. As of June 30, 2015, repurchases under the 2014 Repurchase Program totaled $1.5 billion and there was $1.5 billion remaining under this share repurchase authorization. By its terms, the 2014 Repurchase Program will expire when we have used all authorized funds for repurchases.
(2)
Includes commissions paid.
Share repurchases take place from time to time, subject to market conditions and management's discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.

-27-

NORTHROP GRUMMAN CORPORATION                        

Item 3. Defaults Upon Senior Securities
No information is required in response to this item.
Item 4. Mine Safety Disclosures
No information is required in response to this item.
Item 5. Other Information
No information is required in response to this item.

-28-

NORTHROP GRUMMAN CORPORATION                        

Item 6. Exhibits
2.1
Agreement and Plan of Merger among Titan II, Inc. (formerly Northrop Grumman Corporation), Northrop Grumman Corporation (formerly New P, Inc.) and Titan Merger Sub Inc., dated March 29, 2011 (incorporated by reference to Exhibit 10.1 to Form 8-K filed April 4, 2011)
 
 
2.2
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)
 
 
*+10.1
Non-Employee Director Compensation Term Sheet, effective May 20, 2015
 
 
+10.2
Amended and Restated 2011 Long-Term Incentive Stock Plan (as amended and restated effective as of May 20, 2015 (incorporated by reference to Appendix B to the Northrop Grumman Corporation Proxy Statement on Schedule 14A for the 2015 Annual Meeting of Shareholders filed April 6, 2015, File No. 001-16411)
 
 
*+10.3
Northrop Grumman Savings Excess Plan (Amended and Restated Effective as of January 1, 2016)
 
 
10.4
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, File No. 001-16411)
 
 
*12(a)
Computation of Ratio of Earnings to Fixed Charges
 
 
*15
Letter from Independent Registered Public Accounting Firm
 
 
*31.1
Rule 13a-14(a)/15d-14(a) Certification of Wesley G. Bush (Section 302 of the Sarbanes-Oxley Act of 2002)
 
 
*31.2
Rule 13a-14(a)/15d-14(a) Certification of Kenneth L. Bedingfield (Section 302 of the Sarbanes-Oxley Act of 2002)
 
 
**32.1
Certification of Wesley G. Bush pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
**32.2
Certification of Kenneth L. Bedingfield pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
*101
Northrop Grumman Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings and Comprehensive Income, (ii) Condensed Consolidated Statements of Financial Position, (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity, and (v) Notes to Condensed Consolidated Financial Statements
+
Management contract or compensatory plan or arrangement
 
 
*
Filed with this report
 
 
**
Furnished with this report

-29-

NORTHROP GRUMMAN CORPORATION                        

SIGNATURES
Pursuant to the requirements 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.

NORTHROP GRUMMAN CORPORATION
(Registrant)
 
 
By:
 
 
/s/ Michael A. Hardesty
 
 
Michael A. Hardesty
Corporate Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
Date: July 28, 2015

-30-


Exhibit 10.1

Board of Director Compensation
(effective as of May 20, 2015)


Retainers:
 
Retainer fees are paid quarterly, at the end of each quarter. Fees are as follows:
 
 
 
 
 
 
Annual cash retainer:
 

$122,500

Additional retainer for Lead Independent Director:
 

$27,500

Additional retainer for Audit Committee:
 

$10,000

Additional retainer for Audit Committee chair:
 

$20,000

Additional retainer for Comp Committee chair:
 

$20,000

Additional retainer for Gov Committee chair:
 

$15,000

Additional retainer for Policy Committee chair:
 

$7,500


Equity Grant:
 
Directors are awarded an annual equity grant of $140,000 in deferred stock units, awarded quarterly. The deferred stock units will be paid at the conclusion of board service, or earlier, as specified by the director, if he has five or more years of service.
 
 
 
 
 
Directors may elect to defer payment of all or a portion of their cash retainer fees and any other annual committee retainer fees into the deferred stock unit account.

Elective Deferral Program:
 
Directors may elect to defer to a later year all or a portion of their remaining annual cash retainer and any other fees payable for their Board service into alternative investment options similar to the options generally available under Northrop Grumman's Savings Excess Plan.
 
 
 





Exhibit 10.3




NORTHROP GRUMMAN
SAVINGS EXCESS PLAN


(Amended and Restated Effective as of January 1, 2016)

























TABLE OF CONTENTS

INTRODUCTION.......................................................................................................................
2

ARTICLE I DEFINITIONS........................................................................................................
2

1.1 Definitions....................................................................................................................
2

ARTICLE II PARTICIPATION ..................................................................................................
6

2.1 In General ....................................................................................................................
6

2.2 Disputes as to Employment Status ...............................................................................
6

ARTICLE III DEFERRAL ELECTIONS ..................................................................................
7

3.1 Elections to Defer Eligible Compensation ...................................................................
7

3.2 Contribution Amounts ..................................................................................................
7

3.3 Crediting of Deferrals ...................................................................................................
8

3.4 Investment Elections ....................................................................................................
8

3.5 Investment Return Not Guaranteed ..............................................................................
9

ARTICLE IV ACCOUNTS ........................................................................................................
9

4.1 Accounts .......................................................................................................................
9

4.2 Valuation of Accounts ..................................................................................................
9

4.3 Use of a Trust ...............................................................................................................
10

ARTICLE V VESTING AND FORFEITURES..........................................................................
10

5.1 In General .....................................................................................................................
10

5.2 Exceptions ....................................................................................................................
10

ARTICLE VI DISTRIBUTIONS ...............................................................................................
11

6.1 Distribution Rules for Non-RAC Amounts ..................................................................
11

6.2 Distribution Rules for RAC Subaccounts ....................................................................
12

6.3 Effect of Taxation .........................................................................................................
12

6.4 Permitted Delays ..........................................................................................................
12

6.5 Payments Not Received At Death ................................................................................
13

6.6 Inability to Locate Participant ......................................................................................
13

6.7 Committee Rules ..........................................................................................................
13

ARTICLE VII ADMINISTRATION .........................................................................................
13

7.1 Committees ...................................................................................................................
13

7.2 Committee Action ........................................................................................................
14

7.3 Powers and Duties of the Administrative Committee ..................................................
14

7.4 Powers and Duties of the Investment Committee ........................................................
15

7.5 Construction and Interpretation ....................................................................................
15

7.6 Information ..................................................................................................................
15

7.7 Committee Compensation, Expenses and Indemnity ...................................................
16

7.8 Disputes ........................................................................................................................
16

ARTICLE VIII MISCELLANEOUS .........................................................................................
16

8.1 Unsecured General Creditor .........................................................................................
16

8.2 Restriction Against Assignment....................................................................................
16

8.3 Restriction Against Double Payment ...........................................................................
17


i



8.4 Withholding ..................................................................................................................
17

8.5 Amendment, Modification, Suspension or Termination ..............................................
18

8.6 Governing Law .............................................................................................................
18

8.7 Receipt and Release .....................................................................................................
18

8.8 Payments on Behalf of Persons Under Incapacity .......................................................
18

8.9 Limitation of Rights and Employment Relationship ...................................................
18

8.10 Headings .....................................................................................................................
19

8.11 Liabilities Transferred to HII ......................................................................................
19

APPENDIX A - 2005 TRANSITION RELIEF ..........................................................................
1

A.1 Cash-Out ......................................................................................................................
1

A.2 Elections ......................................................................................................................
1

A.3 Key Employees ............................................................................................................
1

APPENDIX B - DISTRIBUTION RULES FOR PRE-2005 AMOUNTS .................................
1

B.1 Distribution of Contributions .......................................................................................
1

APPENDIX C - MERGED PLANS............................................................................................
1

C.1 Plan Mergers ................................................................................................................
1

C.2 Merged Plans - General Rule .......................................................................................
1

APPENDIX D - COMMITTEES AND APPOINTMENTS ......................................................
1





ii



INTRODUCTION
The Northrop Grumman Savings Excess Plan (the "Plan") was last amended and restated effective as of January 1, 2015. This restatement amends that version of the Plan, and is effective January 1, 2016, and does not affect amounts earned and vested under the Plan prior to 2005.
Northrop Grumman Corporation (the "Company") established this Plan for participants in the Northrop Grumman Savings Plan who exceed the limits under sections 401(a)(17) or 415(c) of the Internal Revenue Code. This Plan is intended (1) to comply with section 409A of the Internal Revenue Code, as amended (the "Code") and official guidance issued thereunder (except with respect to amounts covered by Appendix B), and (2) to be "a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974. Notwithstanding any other provision of this Plan, this Plan shall be interpreted, operated and administered in a manner consistent with these intentions.
    
ARTICLE I

DEFINITIONS
1.1
Definitions
Whenever the following words and phrases are used in this Plan, with the first letter capitalized, they shall have the meanings specified below.
(a)    "Account" shall mean the recordkeeping account set up for each Participant to keep track of amounts to his or her credit.
(b)    "Administrative Committee" means the committee in charge of Plan administration, as described in Article VII.
(c)    "Affiliated Companies" shall mean the Company and any entity affiliated with the Company under Code sections 414(b) or (c).
(d)    "Base Salary" shall mean a Participant's annual base salary, excluding bonuses, commissions, incentive and all other remuneration for services rendered to the Affiliated Companies and prior to reduction for any salary contributions to a plan established pursuant to section 125 of the Code or qualified pursuant to section 401(k) of the Code.
(e)    "Basic Contributions" shall have the same meaning as that term is defined in the NGSP.
(f)    "Beneficiary" or "Beneficiaries" shall mean the person or persons, including a trustee, personal representative or other fiduciary, last designated in writing by a

2



Participant in accordance with procedures established by the Administrative Committee to receive the benefits specified hereunder in the event of the Participant's death.
(1)    No Beneficiary designation shall become effective until it is filed with the Administrative Committee.
(2)    Any designation shall be revocable at any time through a written instrument filed by the Participant with the Administrative Committee with or without the consent of the previous Beneficiary.
No designation of a Beneficiary other than the Participant's spouse shall be valid unless consented to in writing by such spouse. If there is no such designation or if there is no surviving designated Beneficiary, then the Participant's surviving spouse shall be the Beneficiary. If there is no surviving spouse to receive any benefits payable in accordance with the preceding sentence, the duly appointed and currently acting personal representative of the Participant's estate (which shall include either the Participant's probate estate or living trust) shall be the Beneficiary. In any case where there is no such personal representative of the Participant's estate duly appointed and acting in that capacity within 90 days after the Participant's death (or such extended period as the Administrative Committee determines is reasonably necessary to allow such personal representative to be appointed, but not to exceed 180 days after the Participant's death), then Beneficiary shall mean the person or persons who can verify by affidavit or court order to the satisfaction of the Administrative Committee that they are legally entitled to receive the benefits specified hereunder. Any payment made pursuant to such determination shall constitute a full release and discharge of the Plan, the Administrative Committee and the Company. Effective January 1, 2007, a Participant will automatically revoke a designation of a spouse as primary beneficiary upon the dissolution of their marriage.
(3)    In the event any amount is payable under the Plan to a minor, payment shall not be made to the minor, but instead be paid (a) to that person's living parent(s) to act as custodian, (b) if that person's parents are then divorced, and one parent is the sole custodial parent, to such custodial parent, or (c) if no parent of that person is then living, to a custodian selected by the Administrative Committee to hold the funds for the minor under the Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which the minor resides. If no parent is living and the Administrative Committee decides not to select another custodian to hold the funds for the minor, then payment shall be made to the duly appointed and currently acting guardian of the estate for the minor or, if no guardian of the estate for the minor is duly appointed and currently acting within 60 days after the date the amount becomes payable, payment shall be deposited with the court having jurisdiction over the estate of the minor. Any payment made pursuant to such determination shall constitute a full release and discharge of the Plan, the Administrative Committee and the Company.
(4)    Payment by the Affiliated Companies pursuant to any unrevoked Beneficiary designation, or to the Participant's estate if no such designation exists, of all benefits owed hereunder shall terminate any and all liability of the Affiliated Companies.
(g)    "Board" shall mean the Board of Directors of the Company.

3



(h)    "Bonuses" shall mean the bonuses earned under the Company's formal incentive plans as defined by the Administrative Committee.
(i)    "Code" shall mean the Internal Revenue Code of 1986, as amended.
(j)    "Committees" shall mean the Committees appointed as provided in Article VII.
(k)    "Company" shall mean Northrop Grumman Corporation and any successor.
(l)    "Company Contributions" shall mean contributions by the Company to a Participant's Account.
(m)    "Compensation" shall be Compensation as defined by Section 5.01 of the NGSP.
(n)    "Disability" or "Disabled" shall mean the Participant's inability to perform each and every duty of his or her occupation or position of employment due to illness or injury as determined in the sole and absolute discretion of the Administrative Committee.
(o)    "Eligible Compensation" shall mean (1) Compensation prior to January 1, 2009, and (2) after 2008, Base Salary and Bonuses, reduced by the amount of any deferrals made from such amounts under the Northrop Grumman Deferred Compensation Plan.
(p)    "Eligible Employee" shall mean any Employee who meets the following conditions:
(1)    he or she is eligible to participate in the NGSP;
(2)    he or she is classified by the Affiliated Companies as an Employee and not as an independent contractor; and
(3)    he or she meets any additional eligibility criteria set by the Administrative Committee.
Additional eligibility criteria established by the Administrative Committee may include specifying classifications of Employees who are eligible to participate and the date as of which various groups of Employees will be eligible to participate. This includes, for example, Administrative Committee authority to delay eligibility for employees of newly acquired companies who become Employees.
(q)    "Employee" shall mean any common law employee of the Affiliated Companies who is classified as an employee by the Affiliated Companies.
(r)    "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.

4



(s)    "Investment Committee" means the committee in charge of investment aspects of the Plan, as described in Article VII.
(t)    "Key Employee" means an employee who on the date of his Separation from Service is treated as a "specified employee" under Code section 409A in accordance with a uniform Company policy.
(u)    "NGSP" means the Northrop Grumman Savings Plan.
(v)    "Open Enrollment Period" means the period designated by the Administrative Committee for electing deferrals for the following Plan Year.
(w)    "Participant" shall mean any Eligible Employee who participates in this Plan in accordance with Article II or any Employee who is a RAC Participant.
(x)    "Payment Date" shall mean:
(1)    for distributions upon early termination under Section B.1(a), a date after the end of the month in which termination of employment occurs; and
(2)    for distributions after Retirement, Disability or death under Section B.1(b), a date after the end of the month in which occurs Retirement, the determination of Disability by the Administrative Committee, or the notification of the Administrative Committee of the Participant's death (or later qualification of the Beneficiary or Beneficiaries), as applicable.

The exact date in each case will be determined by the Administrative Committee to allow time for administrative processing.
(y)    "Plan" shall be the Northrop Grumman Savings Excess Plan.
(z)    "Plan Year" shall be the calendar year.
(aa)    "RAC Contributions" shall mean the Company contributions under Section 3.2(b)(2) and Section 3.2(b)(4).
(bb)    "RAC Participant" shall mean an Employee who is eligible to participate in the NGSP, receives Retirement Account Contributions under the NGSP, and is classified by the Affiliated Companies as an Employee and not as an independent contractor. Notwithstanding the foregoing, an Employee who becomes eligible to participate in the Officers Supplemental Executive Retirement Program II ("OSERP II") under the Northrop Grumman Supplemental Plan 2 shall immediately cease to be eligible for RAC Contributions.
(cc)    "RAC Subaccount" shall mean the portion of a Participant's Account made up of RAC Contributions and earnings thereon.
(dd)    "Retirement" shall mean termination of employment with the Affiliated Companies after reaching age 55.

5



(ee)    "Separation from Service" or "Separates from Service" or "Separating from Service" means a "separation from service" within the meaning of Code section 409A.

ARTICLE II

PARTICIPATION
2.1
In General
(a)    An Eligible Employee may become a Participant by complying with the procedures established by the Administrative Committee for enrolling in the Plan. Anyone who becomes an Eligible Employee will be entitled to become a Participant during an Open Enrollment Period.
(b)    A RAC Participant will become a Participant when RAC Contributions are first made to his or her RAC Subaccount.
(c)    An individual will cease to be a Participant when he or she no longer has a positive balance to his or her Account under the Plan.
2.2
Disputes as to Employment Status
(a)    Because there may be disputes about an individual's proper status as an Employee or non-Employee, this Section describes how such disputes are to be handled with respect to Plan participation.
(b)    The Affiliated Companies will make the initial determination of an individual's employment status.
(1)    If an individual is not treated by the Affiliated Companies as a common law employee, then the Plan will not consider the individual to be an "Eligible Employee" and he or she will not be entitled to participate in the Plan.
(2)    This will be so even if the individual is told he or she is entitled to participate in the Plan and given a summary of the plan and enrollment forms or other actions are taken indicating that he or she may participate.
(c)    Disputes may arise as to an individual's employment status. As part of the resolution of the dispute, an individual's status may be changed by the Affiliated Companies from non-Employee to Employee. Such Employees are not Eligible Employees and will not be entitled to participate in the Plan.

6




ARTICLE III

DEFERRAL ELECTIONS
3.1
Elections to Defer Eligible Compensation
(a)    Timing. An Eligible Employee who meets the requirements of Section 2.1(a) may elect to defer Eligible Compensation earned in a Plan Year by filing an election in the Open Enrollment Period for the Plan Year. An election to participate for a Plan Year is irrevocable.
(b)    Election Rules. An Eligible Employee's election may be made in writing, electronically, or as otherwise specified by the Administrative Committee. Such election shall specify the Eligible Employee's rate of deferral for contributions to the Plan, which shall be between 1% and 50%, and shall address distribution of the deferred amounts as described in Section 6.1. All elections must be made in accordance with the rules, procedures and forms provided by the Administrative Committee. The Administrative Committee may change the rules, procedures and forms from time to time and without prior notice to Participants.
(c)    Cancellation of Election. If a Participant becomes disabled (as defined under Code section 409A) during a Plan Year, his deferral election for such Plan Year shall be cancelled.
3.2
Contribution Amounts
(a)    Participant Contributions. An Eligible Employee's contributions under the Plan for a Plan Year will begin once his or her Compensation for the Plan Year exceeds the Code section 401(a)(17) limit for the Plan Year. The Participant's elected deferral percentage will be applied to his or her Eligible Compensation for the balance of the Plan Year.
(b)    Company Contributions. The Company will make Company Contributions to a Participant's Account as provided in (1), (2) and (3) below.
(1)    Matching Contributions. The Company will make a Company Contribution equal to the matching contribution rate for which the Participant is eligible under the NGSP for the Plan Year multiplied by the amount of the Participant's contributions under subsection (a).
(2)    RAC Contributions. Effective July 1, 2008, the Company will make RAC Contributions equal to a percentage of a RAC Participant's Compensation for a Plan Year in excess of the Code section 401(a)(17) limit. The percentage used to calculate a RAC Participant's contribution for a Plan Year shall be based on the RAC Participant's age on the last day of the Plan Year as follows:
(i)    Three percent if not yet age 35.

7



(ii)    Four percent if 35 or older, but not yet 50.
(iii)    Five percent if age 50 or older.
(3)    Make-Up Matching Contributions for Contribution Limitation. If an Eligible Employee's Basic Contributions under the NGSP for a Plan Year are limited by the Code section 415(c) contribution limit before the Eligible Employee's Basic Contributions under the NGSP are limited by the Code section 401(a)(17) compensation limit, the Company will make a Company Contribution equal to the amount of matching contributions for which the Eligible Employee would have been eligible under the NGSP were Code section 415(c) not applied, reduced by the actual amount of matching contributions made for the Plan Year under the NGSP.
(4)    Make-Up RAC Contributions for Contribution Limitation. If an Eligible Employee is a RAC Participant and his Retirement Account Contributions under the NGSP for a Plan Year are limited by the Code section 415(c) contribution limit before the RAC Participant’s Retirement Account Contributions under the NGSP are limited by the Code section 401(a)(17) compensation limit, the Company will make a Company Contribution equal to the amount of Retirement Account Contributions for which the RAC Participant would have been eligible under the NGSP were Code section 415(c) not applied, reduced by the actual amount of Retirement Account Contributions made for the Plan Year under the NGSP.
3.3    Crediting of Deferrals
Amounts deferred by a Participant under the Plan shall be credited to the Participant's Account as soon as practicable after the amounts would have otherwise been paid to the Participant. Company contributions other than those under Section 3.2(b)(3) and Section 3.2(b)(4) will be credited to Accounts as soon as practicable after each payroll cycle in which they accrue. Company contributions under Section 3.2(b)(3) and Section 3.2(b)(4) will be credited to Accounts as soon as practicable after each Plan Year.
3.4
Investment Elections
(a)    The Investment Committee will establish a number of different investment funds or other investment options for the Plan. The Investment Committee may change the funds or other investment options from time to time, without prior notice to Participants.
(b)    Participants may elect how their future contributions and existing Account balances will be deemed invested in the various investment funds and may change their elections from time to time. If a Participant does not elect how future contributions will be deemed invested, contributions will be deemed invested in the qualified default investment alternative ("QDIA") that applies to the Participant under the NGSP.
(c)    The deemed investments for a RAC Participant's RAC Subaccount must be the same as the deemed investments for the RAC Participant's Company contributions under Section 3.2(b)(1).

8



(d)    Selections of investments, changes and transfers must be made according to the rules and procedures of the Administrative Committee.
(1)    The Administrative Committee may prescribe rules that may include, among other matters, limitations on the amounts that may be transferred and procedures for electing transfers.
(2)    The Administrative Committee may prescribe valuation rules for purposes of investment elections and transfers. Such rules may, in the Administrative Committee's discretion, use averaging methods to determine values and accrue estimated expenses. The Administrative Committee may change the methods it uses for valuation from time to time.
(3)    The Administrative Committee may prescribe the periods and frequency with which Participants may change deemed investment elections and make transfers.
(4)    The Administrative Committee may change its rules and procedures from time to time and without prior notice to Participants.
(e)    Effective January 13, 2011, Participant investment elections involving a Company stock investment fund (e.g., transfers into or out of the fund) may be restricted, including in accordance with Company policies generally applicable to employee transactions in Company stock.
3.5
Investment Return Not Guaranteed
Investment performance under the Plan is not guaranteed at any level. Participants may lose all or a portion of their contributions due to poor investment performance.

ARTICLE IV

ACCOUNTS
4.1
Accounts
The Administrative Committee shall establish and maintain a recordkeeping Account for each Participant under the Plan.
4.2
Valuation of Accounts
The valuation of Participants' recordkeeping Accounts will reflect earnings, losses, expenses and distributions, and will be made in accordance with the rules and procedures of the Administrative Committee.
(a)    The Administrative Committee may set regular valuation dates and times and also use special valuation dates and times and procedures from time to time under unusual circumstances and to protect the financial integrity of the Plan.

9



(b)    The Administrative Committee may use averaging methods to determine values and accrue estimated expenses.
(c)    The Administrative Committee may change its valuation rules and procedures from time to time and without prior notice to Participants.
4.3
Use of a Trust
The Company may set up a trust to hold any assets or insurance policies that it may use in meeting its obligations under the Plan. Any trust set up will be a rabbi trust and any assets placed in the trust shall continue for all purposes to be part of the general assets of the Company and shall be available to its general creditors in the event of the Company's bankruptcy or insolvency.


ARTICLE V

VESTING AND FORFEITURES
5.1
In General
A Participant's interest in his or her Account will be nonforfeitable, subject to the exceptions in Section 5.2.
5.2
Exceptions
The following exceptions apply to the vesting rule in Section 5.1 above:
(a)    A RAC Participant shall become fully vested in his or her RAC Subaccount and earnings thereon upon the earliest of the following dates, provided he or she is an Employee at such time: (i) the date he or she completes three years of service, (ii) the date of his or her 65th birthday, (iii) the date of his or her death, (iv) the date he or she becomes Disabled, or (v) the date Company Contributions are completely discontinued or the Plan is terminated. Notwithstanding anything to the contrary, if a Participant terminates employment with the Affiliated Companies prior to vesting as set forth in this Section 5.2(a), his or her unvested RAC Subaccount and earnings thereon shall be immediately forfeited upon such termination. For this purpose, years of service shall be calculated in the same manner as for purposes of determining vesting in Retirement Account Contributions under the NGSP (including the treatment of a break in service).
(b)    A Participant whose original date of hire with the Affiliated Companies is after April 30, 2012 shall become fully vested in his or her Company matching contributions under Sections 3.2(b)(1) and (3) and earnings thereon upon the earliest of the following dates, provided he or she is an Employee at such time: (i) the date he or she completes three years of service, (ii) the date of his or her 65th birthday, (iii) the date of his or her death, or (iv) the date he or she becomes Disabled, or (v) the date Company Contributions are completely discontinued or the Plan is terminated. Notwithstanding anything to the contrary, if a Participant terminates

10



employment with the Affiliated Companies prior to vesting as set for in this Section 5.2(b), his or her unvested Company matching contributions under Sections 3.2(b)(1) and (3) and earnings thereon shall be immediately forfeited upon such termination. For this purpose, years of service shall be calculated in the same manner as for purposes of determining vesting in Retirement Account Contributions under the NGSP (including the treatment of a break in service).
(c)    Forfeitures on account of a lost payee. See Section 6.6.
(d)    Forfeitures under an escheat law.
(e)    Recapture of amounts improperly credited to a Participant's Account or improperly paid to or with respect to a Participant.
(f)    Expenses charged to a Participant's Account.
(g)    Investment losses.

ARTICLE VI

DISTRIBUTIONS
6.1
Distribution Rules for Non-RAC Amounts
The rules in this Section 6.1 apply to distribution of a Participant's Account other than the RAC Subaccount.
Notwithstanding the foregoing, Appendix B governs the distribution of amounts that were earned and vested (within the meaning of Code section 409A and regulations thereunder) under the Plan prior to 2005 (and earnings thereon) and are exempt from the requirements of Code section 409A. Thus, this Section 6.1 does not apply to these pre-2005 deferrals, but does apply to all other amounts deferred under the Plan.
(a)    Separate Distribution Election. A Participant must make a separate distribution election for each year's contributions. A Participant generally makes a distribution election at the same time the Participant makes the deferral election, i.e., during the Open Enrollment Period.
(b)    Distribution Upon Separation. A Participant may elect on a deferral form to have the vested portion of his Account related to amounts deferred under the deferral form and Company contributions for the same year (and earnings thereon) distributed in a lump sum or in quarterly or annual installments over a period of 1 to 15 years. Lump sum payments under the Plan will be made in the month following the Participant's Separation from Service. Installment payments shall commence in the March, June, September or December next following the month of Separation from Service. If a Participant does not make a distribution election and his vested Account balance (including amounts subject to Appendix B) exceeds $50,000 and the Participant is age 55 or older at the time the Participant Separates from Service, the Participant will receive quarterly installments over a 10-year period. Otherwise, a Participant not making an election

11



will receive a lump sum payment. Notwithstanding the foregoing, if the Participant's vested Account balance (including amounts subject to Appendix B) is $50,000 or less or the Participant is under age 55 at the time the Participant Separates from Service, the vested Account balance shall be distributed in a lump sum payment in the month following the Participant's Separation from Service.
Notwithstanding the timing rules in the foregoing paragraph, distributions may not be made to a Key Employee upon a Separation from Service before the date which is six months after the date of the Key Employee's Separation from Service (or, if earlier, the date of death of the Key Employee). Any payments that would otherwise be made during this period of delay shall be accumulated and paid six months after the date payments would have commenced absent the six month delay.
(c)    Changes in Form of Distribution. A Participant may make up to two subsequent elections to change the form of a distribution for any year's deferrals and Company contributions. Such an election, however, shall be effective only if the following conditions are satisfied:
(1)    The election may not take effect until at least twelve (12) months after the date on which the election is made; and
(2)    The distribution will be made exactly five (5) years from the date the distribution would have otherwise been made.
6.2
Distribution Rules for RAC Subaccount
The full vested balance in a RAC Subaccount shall be distributed in a lump sum upon a RAC Participant's Separation from Service. Notwithstanding the foregoing, distribution will not be made to a Key Employee upon a Separation from Service until the date which is six months after the date of the Key Employee's Separation from Service (or, if earlier, the date of death of the Key Employee).
6.3
Effect of Taxation
If a Participant's benefits under the Plan are includible in income pursuant to Code section 409A, the Company shall have the discretion to accelerate the distribution of all or a portion of such includible benefits to the Participant, provided that the Participant shall not be given a direct or indirect election as to whether such discretion is exercised.
6.4
Permitted Delays
Notwithstanding the foregoing, any payment to a Participant under the Plan shall be delayed upon the Committee's reasonable anticipation of one or more of the following events:
(a)    The Company's deduction with respect to such payment would be eliminated by application of Code section 162(m); or

12



(b)    The making of the payment would violate Federal securities laws or other applicable law;
(c)    provided, that any payment delayed pursuant to this Section 6.4 shall be paid in accordance with Code section 409A.
6.5
Payments Not Received At Death
In the event of the death of a Participant before receiving a payment, payment will be made to his or her estate if death occurs on or after the date of a check that has been issued by the Plan. Otherwise, payment of the amount will be made to the Participant's Beneficiary.
6.6
Inability to Locate Participant
In the event that the Administrative Committee is unable to locate a Participant or Beneficiary within two years following the required payment date, the amount allocated to the Participant's Account shall be forfeited. If, after such forfeiture and prior to termination of the Plan, the Participant or Beneficiary later claims such benefit, such benefit shall be reinstated without interest or earnings for the forfeiture period.
6.7
Committee Rules
All distributions are subject to the rules and procedures of the Administrative Committee. The Administrative Committee may also require the use of particular forms. The Administrative Committee may change its rules, procedures and forms from time to time and without prior notice to Participants.

ARTICLE VII

ADMINISTRATION
7.1
Committees
(a)    Effective April 27, 2006, the Administrative Committee shall be comprised of the individuals (in their corporate capacity) who are members of the Administrative Committee for Northrop Grumman Deferred Compensation Plan. If no such Administrative Committee exists, the members of the Administrative Committee for the Plan shall be individuals holding the following positions within the Company (as such titles may be modified from time to time), or their successors in office: the Corporate Vice President and Chief Human Resources and Administration Officer; the Corporate Vice President, Controller and Chief Accounting Officer; the Vice President, Taxation; the Vice President, Compensation, Benefits and HRIS; and the Corporate Director, Benefits Administration and Services. A member of the Administrative Committee may resign by delivering a written notice of resignation to the Corporate Vice President and Chief Human Resources and Administration Officer.

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(b)    Prior to April 27, 2006, the Administrative Committee shall be comprised of the individuals appointed by the Compensation Committee of the Board (the "Compensation Committee").
(c)    An Investment Committee (referred to together with the Administrative Committee as, the "Committees"), comprised of one or more persons, shall be appointed by and serve at the pleasure of the Board (or its delegate). The number of members comprising the Investment Committee shall be determined by the Board, which may from time to time vary the number of members. A member of the Investment Committee may resign by delivering a written notice of resignation to the Board. The Board may remove any member by delivering a certified copy of its resolution of removal to such member. Vacancies in the membership of the Investment Committee shall be filled promptly by the Board.
7.2
Committee Action
Each Committee shall act at meetings by affirmative vote of a majority of the members of that Committee. Any determination of action of a Committee may be made or taken by a majority of a quorum present at any meeting thereof, or without a meeting, by resolution or written memorandum signed by a majority of the members of the Committee then in office. A member of a Committee shall not vote or act upon any matter which relates solely to himself or herself as a Participant. The Chairman or any other member or members of each Committee designated by the Chairman may execute any certificate or other written direction on behalf of the Committee of which he or she is a member.
The Compensation Committee shall appoint a Chairman from among the members of the Administrative Committee and a Secretary who may or may not be a member of the Administrative Committee. The Administrative Committee shall conduct its business according to the provisions of this Article and the rules contained in the current edition of Robert's Rules of Order or such other rules of order the Administrative Committee may deem appropriate. The Administrative Committee shall hold meetings from time to time in any convenient location.
7.3
Powers and Duties of the Administrative Committee
The Administrative Committee shall enforce the Plan in accordance with its terms, shall be charged with the general administration of the Plan, and shall have all powers necessary to accomplish its purposes, including, but not by way of limitation, the following:
(a)    To construe and interpret the terms and provisions of this Plan and make all factual determinations;
(b)    To compute and certify to the amount and kind of benefits payable to Participants and their Beneficiaries;
(c)    To maintain all records that may be necessary for the administration of the Plan;

14



(d)    To provide for the disclosure of all information and the filing or provision of all reports and statements to Participants, Beneficiaries or governmental agencies as shall be required by law;
(e)    To make and publish such rules for the regulation of the Plan and procedures for the administration of the Plan as are not inconsistent with the terms hereof;
(f)    To appoint a Plan administrator or any other agent, and to delegate to them such powers and duties in connection with the administration of the Plan as the Administrative Committee may from time to time prescribe (including the power to subdelegate);
(g)    To exercise powers granted the Administrative Committee under other Sections of the Plan; and
(h)    To take all actions necessary for the administration of the Plan, including determining whether to hold or discontinue insurance policies purchased in connection with the Plan.
7.4
Powers and Duties of the Investment Committee
The Investment Committee shall have all powers necessary to accomplish its purposes, including, but not by way of limitation, the following:
(a)    To select types of investment and the actual investments against which earnings and losses will be measured;
(b)    To oversee any rabbi trust; and
(c)    To appoint agents, and to delegate to them such powers and duties in connection with its duties as the Investment Committee may from time to time prescribe (including the power to subdelegate).
7.5
Construction and Interpretation
The Administrative Committee shall have full discretion to construe and interpret the terms and provisions of this Plan, to make factual determinations and to remedy possible inconsistencies and omissions. The Administrative Committee's interpretations, constructions and remedies shall be final and binding on all parties, including but not limited to the Affiliated Companies and any Participant or Beneficiary. The Administrative Committee shall administer such terms and provisions in a uniform and nondiscriminatory manner and in full accordance with any and all laws applicable to the Plan.
7.6
Information
To enable the Committees to perform their functions, the Affiliated Companies adopting the Plan shall supply full and timely information to the Committees on all matters relating to the compensation of all Participants, their death or other events that cause termination of their participation in this Plan, and such other pertinent facts as the Committees may require.

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7.7
Committee Compensation, Expenses and Indemnity
(a)    The members of the Committees shall serve without compensation for their services hereunder.
(b)    The Committees are authorized to employ such accounting, consultants or legal counsel as they may deem advisable to assist in the performance of their duties hereunder.
(c)    To the extent permitted by ERISA and applicable state law, the Company shall indemnify and hold harmless the Committees and each member thereof, the Board and any delegate of the Committees who is an employee of the Affiliated Companies against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise, as such indemnities are permitted under ERISA and state law.
7.8
Disputes
The Company's standardized "Northrop Grumman Nonqualified Retirement Plans Claims and Appeals Procedures" shall apply in handling claims and appeals under this Plan.

ARTICLE VIII

MISCELLANEOUS
8.1
Unsecured General Creditor
Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interest in any specific property or assets of the Affiliated Companies. No assets of the Affiliated Companies shall be held in any way as collateral security for the fulfilling of the obligations of the Affiliated Companies under this Plan. Any and all of the Affiliated Companies' assets shall be, and remain, the general unpledged, unrestricted assets of the Affiliated Companies. The obligation under the Plan of the Affiliated Companies adopting the Plan shall be merely that of an unfunded and unsecured promise of those Affiliated Companies to pay money in the future, and the rights of the Participants and Beneficiaries shall be no greater than those of unsecured general creditors. It is the intention of the Affiliated Companies that this Plan be unfunded for purposes of the Code and for purposes of Title I of ERISA.
8.2
Restriction Against Assignment
(a)    The Company shall pay all amounts payable hereunder only to the person or persons designated by the Plan and not to any other person or corporation. No part of a Participant's Accounts shall be liable for the debts, contracts, or engagements of any Participant, his or her Beneficiary, or successors in interest, nor shall a Participant's Accounts be subject to execution by levy, attachment, or garnishment or by any other legal or equitable proceeding, nor

16



shall any such person have any right to alienate, anticipate, sell, transfer, commute, pledge, encumber, or assign any benefits or payments hereunder in any manner whatsoever. If any Participant, Beneficiary or successor in interest is adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, commute, assign, pledge, encumber or charge any distribution or payment from the Plan, voluntarily or involuntarily, the Administrative Committee, in its discretion, may cancel such distribution or payment (or any part thereof) to or for the benefit of such Participant, Beneficiary or successor in interest in such manner as the Administrative Committee shall direct.
(b)    The actions considered exceptions to the vesting rule under Section 5.2 will not be treated as violations of this Section.
(c)    Notwithstanding the foregoing, all or a portion of a Participant's vested Account balance may be paid to another person as specified in a domestic relations order that the Administrative Committee determines is qualified (a "Qualified Domestic Relations Order"). For this purpose, a Qualified Domestic Relations Order means a judgment, decree, or order (including the approval of a settlement agreement) which is:
(1)    issued pursuant to a State's domestic relations law;
(2)    relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of the Participant;
(3)    creates or recognizes the right of a spouse, former spouse, child or other dependent of the Participant to receive all or a portion of the Participant's benefits under the Plan; and
(4)    meets such other requirements established by the Administrative Committee.
The Administrative Committee shall determine whether any document received by it is a Qualified Domestic Relations Order. In making this determination, the Administrative Committee may consider the rules applicable to "domestic relations orders" under Code section 414(p) and ERISA section 206(d), and such other rules and procedures as it deems relevant.
8.3
Restriction Against Double Payment
If a court orders an assignment of benefits despite Section 8.2, the affected Participant's benefits will be reduced accordingly. The Administrative Committee may use any reasonable actuarial assumptions to accomplish the offset under this Section.
8.4
Withholding
There shall be deducted from each payment made under the Plan or any other compensation payable to the Participant (or Beneficiary) all taxes, which are required to be withheld by the Affiliated Companies in respect to such payment or this Plan. The Affiliated

17



Companies shall have the right to reduce any payment (or compensation) by the amount of cash sufficient to provide the amount of said taxes.
8.5
Amendment, Modification, Suspension or Termination
The Company may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part for any reason. Notwithstanding the foregoing, no amendment or termination of the Plan shall reduce the amount of a Participant's Account balance as of the date of such amendment or termination. Upon termination of the Plan, distribution of balances in Accounts shall be made to Participants and Beneficiaries in the manner and at the time described in Article VI, unless the Company determines in its sole discretion that all such amounts shall be distributed upon termination in accordance with the requirements under Code section 409A.
Notwithstanding the foregoing, no amendment of the Plan shall apply to amounts that were earned and vested (within the meaning of Code section 409A and regulations thereunder) under the Plan prior to 2005, unless the amendment specifically provides that it applies to such amounts. The purpose of this restriction is to prevent a Plan amendment from resulting in an inadvertent "material modification" to amounts that are "grandfathered" and exempt from the requirements of Code section 409A.
8.6
Governing Law
To the extent not preempted by ERISA, this Plan shall be construed, governed and administered in accordance with the laws of Delaware.
8.7
Receipt and Release
Any payment to a payee in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Plan, the Committees and the Affiliated Companies. The Administrative Committee may require such payee, as a condition precedent to such payment, to execute a receipt and release to such effect.
8.8
Payments on Behalf of Persons Under Incapacity
In the event that any amount becomes payable under the Plan to a person who, in the sole judgment of the Administrative Committee, is considered by reason of physical or mental condition to be unable to give a valid receipt therefore, the Administrative Committee may direct that such payment be made to any person found by the Committee, in its sole judgment, to have assumed the care of such person. Any payment made pursuant to such determination shall constitute a full release and discharge of the Administrative Committee and the Company.
8.9
Limitation of Rights and Employment Relationship
Neither the establishment of the Plan, any trust nor any modification thereof, nor the creating of any fund or account, nor the payment of any benefits shall be construed as giving

18



to any Participant, or Beneficiary or other person any legal or equitable right against the Affiliated Companies or any trustee except as provided in the Plan and any trust agreement; and in no event shall the terms of employment of any Employee or Participant be modified or in any way be affected by the provisions of the Plan and any trust agreement.
8.10
Headings
Headings and subheadings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof.
8.11
Liabilities Transferred to HII
Northrop Grumman Corporation distributed its interest in Huntington Ingalls Industries, Inc. ("HII) to its shareholders on March 31, 2011 (the "HII Distribution Date"). Pursuant to an agreement between Northrop Grumman Corporation and HII, on the HII Distribution Date certain employees and former employees of HII ceased to participate in the Plan and the liabilities for these participants' benefits under the Plan were transferred to HII. On and after the HII Distribution Date, the Company and the Plan, and any successors thereto, shall have no further obligation or liability to any such participant with respect to any benefit, amount, or right due under the Plan.

* * *


IN WITNESS WHEREOF, this Amendment and Restatement is hereby executed by a duly authorized officer on this 29th day of June, 2015.

NORTHROP GRUMMAN CORPORATION

By: /s/ Denise M. Peppard
Denise Peppard
Corporate Vice President and
Chief Human Resources Officer



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APPENDIX A – 2005 TRANSITION RELIEF
The following provisions apply only during 2005, pursuant to transition relief granted in IRS Notice 2005-1:
A.1    Cash-Out
Participants Separating from Service during 2005 for any reason before age 55 will receive an immediate lump sum distribution of their Account balances. Other Participants Separating from Service in 2005 will receive payments in accordance with their prior elections.
A.2    Elections
During the Plan's open enrollment period in June 2005 Participants may fully or partially cancel 2005 deferral elections and receive in 2005 a refund of amounts previously deferred in 2005.
In addition, individuals working in Company facilities impacted by Hurricane Katrina may stop or reduce 2005 elective contributions to the Plan at any time during 2005. All payments under this Section A.2 will be made before the end of calendar year 2005.
A.3    Key Employees
Key Employees Separating from Service on or after July 1, 2005, with distributions subject to Code section 409A and scheduled for payment in 2006 within six months of Separation from Service, may choose I or II below, subject to III:
I.
Delay the distributions described above for six months from the date of Separation from Service. The delayed payments will be paid as a single sum with interest at the end of the six month period, with the remaining payments resuming as scheduled.
II.
Accelerate the distributions described above into a payment in 2005 without interest adjustments.
III.
Key Employees must elect I or II during 2005.



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APPENDIX B – DISTRIBUTION RULES FOR PRE-2005 AMOUNTS

Distribution of amounts earned and vested (within the meaning of Code section 409A and regulations thereunder) under the Plan or a Merged Plan prior to 2005 (and earnings thereon) are exempt from the requirements of Code section 409A and shall be made in accordance with the Plan or the applicable Merged Plan terms as in effect on December 31, 2004 and as summarized in the following provisions, except as otherwise provided in Appendix C.
B.1    Distribution of Contributions
(a)    Distributions Upon Early Termination.
(1)    Voluntary Termination. If a Participant voluntarily terminates employment with the Affiliated Companies before age 55 or Disability, distribution of his or her Account will be made in a lump sum on the Participant's Payment Date.
(2)    Involuntary Termination. If a Participant involuntarily terminates employment with the Affiliated Companies before age 55, distribution of his or her Account will generally be made in quarterly or annual installments over a fixed number of whole years not to exceed 15 years, commencing on the Participant's Payment Date, in accordance with the Participant's original election on his or her deferral election form. Payment will be made in a lump sum if the Participant had originally elected a lump sum, if the Account balance is $50,000 or less, or if the Administrative Committee so specifies.
(b)    Distribution After Retirement, Disability or Death. In the case of a Participant who separates from service with the Affiliated Companies on account of Retirement, Disability or death and has an Account balance of more than $50,000, the Account shall be paid to the Participant (and after his or her death to his or her Beneficiary) in substantially equal quarterly installments over 10 years commencing on the Participant's Payment Date unless an optional form of benefit has been specified pursuant to Section B.1(b)(1).
(1)    An optional form of benefit may be elected by the Participant, on the form provided by Administrative Committee, during his or her initial election period from among those listed below:
(i)    A lump sum distribution on the Participant's Payment Date.
(ii)    Quarterly installments over a period of at least 1 and no more than 15 years beginning on the Participant's Payment Date.
(iii)    Annual installments over a period of at least 2 and no more than 15 years beginning on the Participant's Payment Date.
(2)    A Participant from time to time may modify the form of benefit that he or she has previously elected. Upon his or her separation from service, the most recently

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elected form of distribution submitted at least 12 months prior to separation will govern. If no such election exists, distributions will be paid under the 10-year installment method.
(3)    In the case of a Participant who terminates employment with the Affiliated Companies on account of Retirement, Disability or death with an Account balance of $50,000 or less, the Account shall be paid to the Participant in a lump sum distribution on the Participant's Payment Date.
(4)    In general, upon the Participant's death, payment of any remaining Account balance will be made to the Beneficiary in a lump sum on the Payment Date. But the Beneficiary will receive any remaining installments (starting on the Payment Date) if the Participant was receiving installments, or if the Participant died on or after age 55 with an Account balance over $50,000 and with an effective installment payout election in place. In such cases, the Beneficiary may still elect a lump sum payment of the remaining Account balance, but only with the Administrative Committee's consent.
(5)    In the event that this Plan is terminated, the amounts allocated to a Participant's Account shall be distributed to the Participant or, in the event of his or her death, to his or her Beneficiary in a lump sum.


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APPENDIX C – MERGED PLANS

C.1    Plan Mergers
(a)    Merged Plans. As of their respective effective dates, the plans listed in (c) (the "Merged Plans") are merged into this Plan. All amounts from those plans that were merged into this Plan are held in their corresponding Accounts.
(b)    Accounts. Effective as of the dates below, Accounts are established for individuals who, before the merger, had account balances under the merged plans. These individuals will not accrue benefits under this Plan unless they become Participants by virtue of being hired into a covered position with an Affiliated Company, but they will be considered Participants for purposes of the merged accounts. The balance credited to the Participant's merged plan account will, effective as of the date provided in the table below, be invested in accordance with the terms of this Plan. Except as provided in section C.2 below, amounts merged into this Plan from the merged plans are governed by the terms of this Plan.
(c)    Table.

Name of Merged Plans
Merger Effective Dates
Merged Account Names

Northrop Grumman Benefits Equalization Plan

December 10, 2004
NG BEP Account
Northrop Grumman Space & Mission Systems Corp. Deferred Compensation Plan
December 10, 2004
S & MS Deferred Compensation Account
BDM International, Inc. 1997
Executive Deferred Compensation Plan ("BDM Plan")
April 29, 2005
BDM Account
PRC Inc. Executive Deferred Compensation Plan ("PRC Plan")
November 9, 2012
PRC EDCP Account (or Sub-Account, as applicable)

C.2    Merged Plans – General Rule
(a)    NG BEP Account and S & MS Deferred Compensation Account. Distributions from Participants' NG BEP and S & MS Deferred Compensation Accounts are made under the provisions of Appendix B, except as provided in this Section.

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(1)    Amounts in the Participant's NG BEP Account and the S & MS Deferred Compensation Account shall be paid out in accordance with elections made under the Merged Plans.
(2)    The Participant's "Payment Date" for amounts in the NG BEP Account and the S & MS Deferred Compensation Account shall be deemed to be the end of January following the Participant's termination of employment.
(3)    The reference to $50,000 in the provisions of Appendix B shall be deemed to be $5,000 with respect to amounts in the NG BEP Account and the S & MS Deferred Compensation Account.
(4)    The Administrative Committee shall assume the rights and responsibilities of the Directors/Committee with respect to determining whether a Participant's NG BEP Account may be paid out in a form other than the automatic form of payment.
(5)    The Administrative Committee shall assume the rights and responsibilities of the Committee or Special Committee with respect to determining whether a Participant's S & MS Deferred Compensation Account may be paid out in a form other than the automatic form of payment.
(6)    For purposes of determining the time of payment of a Participant's NG BEP Account, a Participant's employment will not be deemed to have terminated following the Participant's layoff until the earlier of the end of the twelve-month period following layoff (without a return to employment with the Affiliated Companies) or the date on which the Participant retires under any pension plan maintained by the Affiliated Companies.
(7)    A Participant's S & MS Deferred Compensation Account shall be paid to the Participant no later than the January 5 next preceding the Participant's 80th birthday.
(8)    In no event will payments of amounts in the Participant's NG BEP Account and the S & MS Deferred Compensation Account be accelerated or deferred beyond the payment schedule provided under the Merged Plans. However, any election to change the time or form of payment for such an amount may be made based on the terms of the relevant Merged Plan as in effect on October 3, 2004.
(b)    BDM Account. Distributions of a Participant's vested BDM Account balance shall be made in accordance with this Section C.2(b), and Article VI shall not apply to such distributions. A Participant shall be vested in his BDM Account balance in accordance with the vesting provisions of the BDM Plan.
(1)    Timing of Payment: A Participant's vested BDM Account balance shall be distributed in accordance with elections made under the BDM Plan. For those Participants who have not commenced distributions as of April 29, 2005, payments from the BDM Account will commence at the time designated on his or her BDM enrollment and election form, unless extended prior to such date. However, if such a Participant did not elect a fixed date (or elect the earlier of a fixed date or termination of employment), his or her vested BDM

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Account balance will be paid as soon as administratively practicable following termination of employment in the form designated under Section C.2(b)(2) below.
(2)    Form of Payment: A Participant's vested BDM Account balance shall be paid in cash. The vested BDM Account balance will be paid in (i) a lump sum, (ii) five (5) or ten (10) substantially equal annual installments (adjusted for gains and losses), or (iii) a combination thereof, as selected by the Participant (or Beneficiary) prior to the date on which amounts are first payable to the Participant (or Beneficiary) under Section C.2(b)(1) above. If the Participant fails to designate properly the manner of payment, such payment will be made in a lump sum.
(3)    Death Benefits: If a Participant dies before commencement of payment of his BDM Account balance, the entire Account balance will be paid at the times provided in Section C.2(b)(2) above to his or her Beneficiary. If a Participant dies after commencement but before he or she has received all payments from his vested BDM Account balance, the remaining installments shall be paid annually to the Beneficiary. For purposes of this Section C.2(b), a Participant's Beneficiary, unless subsequently changed, will be the designated beneficiary(ies) under the BDM Plan or if none, the Participant's spouse, if then living, but otherwise the Participant's then living descendants, if any, per stirpes, but, if none, the Participant's estate.
(4)    Lost Participant: In the event that the Administrative Committee is unable to locate a Participant or Beneficiary within three years following the payment date under Section C.2(b)(1) above, the amount allocated to the Participant's BDM Account shall be forfeited. If, after such forfeiture and prior to termination of the Plan, the Participant or Beneficiary later claims such benefit, such benefit shall be reinstated without interest or earnings for the forfeiture period. In lieu of such a forfeiture, the Administrative Committee has the discretion to direct distribution of the vested BDM Account balance to any one or more or all of the Participant's next of kin, and in the proportions as the Administrative Committee determines.
(5)    Committee Rules: All distributions are subject to the rules and procedures of the Administrative Committee. The Administrative Committee may also require the use of particular forms. The Administrative Committee may change its rules, procedures and forms from time to time and without prior notice to Participants.
(6)    Payment Schedule: In no event will payments of amounts in the Participant's BDM Account be accelerated or deferred beyond the payment schedule provided under the BDM Plan.
(7)    Application to Trustee: BDM International, Inc. set aside amounts in a grantor trust to assist it in meeting its obligations under the BDM Plan. Notwithstanding Section C.2(b)(5) above and the claims procedures provided in Section 7.8, a Participant may make application for payment of benefits under this Section C.2(b) directly to the trustee of such trust.
(c)    PRC EDCP Account. Notwithstanding anything to the contrary, the following provisions in this Section C.2(c) summarize the distribution rules in effect under the

C3
 
 

 



PRC Plan with respect to the PRC EDCP Account balances, and those PRC Plan distribution terms shall continue to govern the distributions of the PRC EDCP Account balances. Article VI and Appendix B shall not apply to the PRC EDCP Account balances. Nothing in this Section C.2(c) shall change or alter the distribution terms of the PRC Plan in effect as of any date. All capitalized terms in this Section C.2(c) not otherwise defined in the Plan shall be defined in accordance with the terms of the PRC Plan as in effect immediately prior to the PRC Plan's merger with the Plan on November 9, 2012.
(1)    Vesting. All Participants are vested in their PRC EDCP Account balances in accordance with the vesting provisions of the PRC Plan.
(2)    Fixed Payment Dates; Termination of Employment. A Participant's vested PRC EDCP Account balance shall be distributed in accordance with his elections made under the PRC Plan. However, if such a Participant did not elect a fixed date or termination of employment with all Employers (or elect the earlier of a fixed date or termination of employment) for any particular portion of his or her vested PRC EDCP Account, such portion of his or her PRC EDCP Account balance will be valued and payable at or commence at such Participant's termination of employment according to the provisions of Sections C.2(c)(4) and (5).
(3)    Hardship Distributions. In the event of financial hardship of the Participant, as hereinafter defined, the Participant may apply to the Administrative Committee for the distribution of all or any part or his or her vested PRC EDCP Account. The Administrative Committee shall consider the circumstances of each such case, and the best interests of the Participant and his or her family, and shall have the right, in its sole and absolute discretion, if applicable, to allow such distribution, or, if applicable, to direct a distribution of part of the amount requested, or to refuse to allow any distribution. Upon a finding of financial hardship, the Administrative Committee shall make or cause the appropriate distribution to be made to the Participant from amounts held by the Company or the Trustee in respect of the Participant's vested PRC EDCP Account. In no event shall the aggregate amount of the distribution exceed either the full value of the Participant's vested PRC EDCP Account or the amount determined by the Administrative Committee, in its sole and absolute discretion, to be necessary to alleviate the Participant's financial hardship (which financial hardship may be considered to include any taxes due because of the distribution occurring because of this Section), and which is not reasonably available from other resources of the Participant. For purposes of this Section, the value of the Participant's vested PRC EDCP Account shall be determined as of the date of the distribution. "Financial hardship" means (i) a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Code section 152(a)) of the Participant, (ii) loss of the Participant's property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, each as determined to exist by the Administrative Committee. A distribution may be made under this Section only with the consent of the Administrative Committee.
(4)    Amount and Time of Payment. Subject to Section C.2(c)(3), a Participant (or his or her Beneficiary) shall become entitled to receive a vested PRC EDCP Sub-

C4
 
 

 



Account balance commencing on the Payment Date for such sub-account. For this purpose, the "Payment Date" will be the relevant date or event triggering payment as provided under Section C.2(c)(2). Notwithstanding the foregoing, a Participant may elect to postpone a Payment Date to a later date, provided the election is made at least 12 months prior to the scheduled Payment Date. For example, a Participant could elect (i) to postpone a fixed payment date to a later fixed payment date, or (ii) elect to postpone the payment date for an amount payable upon termination of employment to a date that necessarily occurs after termination of employment (e.g., two years after termination of employment). There is no limit on the number of such elections a Participant may make. Any payment due hereunder from the Trust which is not paid by the Trust for any reason will be paid by the Employer from its general assets.
(5)    Method of Payment.
(i)    Form of Payment. Unless otherwise elected by the Participant and permitted by the Trustee in its sole and absolute discretion, a Participant's vested PRC EDCP Account balance shall be paid in cash. In the case of distributions to a Participant or his or her Beneficiary by virtue of an entitlement pursuant to Section C.2(c)(2), an aggregate amount equal to the Participant's vested PRC EDCP Sub-Account will be paid by the Trust or the Employer, as provided by Section C.2(c)(4), in a lump sum or in five (5) or ten (10) substantially equal annual installments (adjusted for gains and losses, and reduced by any required withholding or other deductions from such payments), as selected by the Participant on his or her Participant Enrollment and Election Form for such sub-account. If the Participant fails to designate properly the manner of payment, such payment will be made in a lump sum.

If a Participant receiving installment distributions pursuant to Section C.2(c)(7) is re-employed by the Employer, the remaining distributions due to the Participant shall be suspended until such time as the Participant (or his or her Beneficiary) once again becomes eligible for benefit payments, at which time such distribution shall commence, subject to the limitations and conditions contained in the PRC Plan.
(ii)    Subsequent Deferral Elections. Such form of payment may be changed by the Participant provided (A) the election is made at least 12 months prior to the payment date for the PRC EDCP Sub-Account provided under Section C.2(c)(4) and (B) the form of payment is not accelerated (i.e., an election of installments may not be changed to a lump sum and an election of 10 annual installments may not be changed to 5 annual installments). There is no limit on the number of such elections a Participant may make.
(6)    Death Benefits. If a Participant dies before terminating his or her employment with the Employer and before the commencement of payments to the Participant hereunder, the entire value of the Participant's PRC EDCP Account (which may include credits for insurance contract death benefits deemed to be received by the PRC EDCP Account) shall be paid, as provided in Section C.2(c)(5), to the Beneficiary designated under the Plan, unless the Employer elects a more rapid form or schedule of distribution.

Upon the death of a Participant after payments hereunder have begun but before he or she has received all payments to which he or she is entitled under the Plan, the remaining benefit

C5
 
 

 



payments shall be paid to the Beneficiary designated under the Plan, in the manner in which such benefits were payable to the Participant, unless the Employer elects a more rapid form or schedule of distribution.
(7)    Application to Trustee. Notwithstanding Section 6.7 above and the claims procedures provided in Section 7.8, on the date or dates on which a Participant or Beneficiary is entitled to payment under Section C.2(c)(2), the Participant or Beneficiary need not make application for payment to the Administrative Committee, but instead may make application for payment directly to the Trustee who shall, subject to any restrictions or limitations contained in the Trust, pay the Participant or Beneficiary the appropriate amount directly from the Trust without the consent of PRC or the Employer. The Trustee shall report the amount of each such payment, and any withholding thereon, to the Company.


    

C6
 
 

 



APPENDIX D – COMMITTEES AND APPOINTMENTS

Notwithstanding anything to the contrary in this Plan, effective October 25, 2011, the Chief Executive Officer of Northrop Grumman Corporation shall appoint, and shall have the power to remove, the members of (1) an Administrative Committee that shall have responsibility for administering the Plan (including as such responsibilities are described in Article VII of the Plan) and (2) an Investment Committee that shall have responsibility for overseeing any rabbi trusts or other informal funding for the Plan.

D1
 
 
 





NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 12(a)
NORTHROP GRUMMAN CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES

$ in millions
Six Months Ended June 30
 
Year Ended December 31
Earnings:
2015
2014
 
2014
2013
2012
2011
2010
Earnings from continuing operations before income taxes
$
1,440

$
1,542

 
$
2,937

$
2,863

$
2,965

$
3,083

$
2,366

Fixed Charges:
 
 
 
 
 
 
 
 
Interest expense, including amortization of debt premium
151

139

 
282

257

212

221

269

Portion of rental expenses on operating leases deemed to be representative of the interest factor
52

48

 
101

99

116

140

149

Earnings from continuing operations before income taxes and fixed charges
$
1,643

$
1,729

 
$
3,320

$
3,219

$
3,293

$
3,444

$
2,784

Fixed Charges:
$
203

$
187

 
$
383

$
356

$
328

$
361

$
418

Ratio of earnings to fixed charges
8.1

9.2

 
8.7

9.0

10.0

9.5

6.7


  







NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 15

LETTER FROM INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

July 28, 2015

Northrop Grumman Corporation
2980 Fairview Park Drive
Falls Church, Virginia 22042
We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of Northrop Grumman Corporation and subsidiaries for the periods ended June 30, 2015, and 2014, as indicated in our report dated July 28, 2015; because we did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, is incorporated by reference in Registration Statement Nos. 033-59815, 033-59853, 333-67266, 333-100179, 333-107734, 333-121104, 333-125120, 333-127317, and 333-175798 on Form S-8; and Registration Statement No 333-196238 on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

/s/ Deloitte & Touche LLP
McLean, Virginia








NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Wesley G. Bush, certify that:
1.
I have reviewed this report on Form 10-Q of Northrop Grumman Corporation (“company”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4.
The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5.
The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

Date: July 28, 2015

/s/ Wesley G. Bush
Wesley G. Bush
Chairman, Chief Executive Officer and President







NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth L. Bedingfield, certify that:
1.
I have reviewed this report on Form 10-Q of Northrop Grumman Corporation (“company”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4.
The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5.
The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

Date: July 28, 2015
 
/s/ Kenneth L. Bedingfield
Kenneth L. Bedingfield
Corporate Vice President and Chief Financial Officer






NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Northrop Grumman Corporation (the “company”) on Form 10-Q for the period ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Wesley G. Bush, Chairman, Chief Executive Officer and President of the company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
 
Date: July 28, 2015

/s/ Wesley G. Bush
Wesley G. Bush
Chairman, Chief Executive Officer and President








NORTHROP GRUMMAN CORPORATION
 
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Northrop Grumman Corporation (the “company”) on Form 10-Q for the period ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kenneth L. Bedingfield, Corporate Vice President and Chief Financial Officer of the company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.

Date: July 28, 2015

/s/ Kenneth L. Bedingfield
Kenneth L. Bedingfield
Corporate Vice President and Chief Financial Officer




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