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 its 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. 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 Annual Report on Form 10-K for the year ended December 31, 2016 (2016 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 (“U.S. GAAP” or “FAS”). The preparation thereof requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Estimates have been prepared using the most current and best available information; however, actual results could differ materially from those estimates.
Revenue Recognition
The majority of our sales are derived from long-term contracts with the U.S. Government for the production of goods, the provision of services, or a combination of both. In accounting for these contracts, we utilize either the cost-to-cost method or the units-of-delivery method of percentage-of-completion accounting, with cost-to-cost being the predominant method. The company estimates profit on contracts as the difference between total estimated sales and total estimated cost at completion and recognizes that profit either as costs are incurred (cost-to-cost) or as units are delivered (units-of-delivery). The company classifies sales as product or service depending upon the predominant attributes of the contract.
Contract sales may include estimated amounts not contractually agreed to or yet funded by the customer, including cost or performance incentives (such as award and incentive fees), un-priced change orders, contract claims and requests for equitable adjustment (REAs). Further, as contracts are performed, change orders can be a regular occurrence and may be un-priced until negotiated with the customer. Un-priced change orders, contract claims (including change orders unapproved as to both scope and price) and REAs are included in estimated contract sales when management believes it is probable the un-priced change order, claim and/or REA will result in additional contract revenue and the amount can be reliably estimated based on the facts and circumstances known to us at the time. Amounts recognized related to claims and REAs as of
March 31, 2017
were not material individually or in aggregate.
Net Estimate-At-Completion (EAC) Adjustments
- We recognize changes in estimated contract sales or costs and the resulting operating margins using the cumulative catch-up method of accounting. This method recognizes, in current period operating margin, the cumulative effect of the changes on current and prior periods as net EAC adjustments; sales and operating margins in future periods of contract performance are recognized as if the revised estimates had been used since contract inception. If it is determined that a loss will result from the performance of a contract, the entire amount of the estimable future loss, including an allocation of general and administrative costs, is charged against income in the period the loss is identified. Loss provisions are first offset against costs included in unbilled accounts receivable or inventoried costs; remaining amounts are reflected in current liabilities.
NORTHROP GRUMMAN CORPORATION
Significant EAC adjustments on a single contract could have a material effect on the company’s unaudited condensed consolidated financial position or results of operations. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. No discrete event or adjustments to an individual contract was material to the accompanying unaudited condensed consolidated financial statements.
The following table presents the effect of aggregate net EAC adjustments:
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Three Months Ended March 31
|
$ in millions, except per share data
|
2017
|
|
2016
|
Operating Income
|
$
|
115
|
|
|
$
|
129
|
|
Net Earnings
(1)
|
75
|
|
|
84
|
|
Diluted earnings per share
(1)
|
0.43
|
|
|
0.46
|
|
|
|
(1)
|
Based on statutory tax rates
|
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
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$ in millions
|
March 31,
2017
|
|
December 31,
2016
|
Unamortized benefit plan costs, net of tax benefit of $3,378 as of March 31, 2017 and $3,439 as of December 31, 2016
|
$
|
(5,317
|
)
|
|
$
|
(5,416
|
)
|
Cumulative translation adjustment
|
(128
|
)
|
|
(132
|
)
|
Net unrealized gain on marketable securities and cash flow hedges, net of tax
|
4
|
|
|
2
|
|
Total accumulated other comprehensive loss
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$
|
(5,441
|
)
|
|
$
|
(5,546
|
)
|
Unamortized benefit plan costs consist primarily of net after-tax actuarial losses totaling
$5.4 billion
and
$5.6 billion
as of
March 31, 2017
and
December 31, 2016
, respectively. Net actuarial gains or losses are re-determined annually or upon remeasurement events and principally arise from changes in the interest rate used to discount our benefit obligations and differences between expected and actual returns on plan assets.
Reclassifications from accumulated other comprehensive loss to net earnings related to the amortization of benefit plan costs were
$99 million
and
$101 million
, net of taxes, for the
three
months ended
March 31, 2017
and
2016
, respectively. The reclassifications represent the amortization of net actuarial losses and prior service credits, and are included in the computation of net periodic pension cost. See Note
8
for further information.
Reclassifications from accumulated other comprehensive loss to net earnings, relating to cumulative translation adjustments, marketable securities and effective cash flow hedges for the
three
months ended
March 31, 2017
and
2016
, respectively, were not material.
Related Party Transactions
For all periods presented, the company had no material related party transactions.
Accounting Standards Updates
On March 10, 2017, the FASB issued ASU No. 2017-07
Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. ASU 2017-07 requires employers that sponsor defined benefit pension and/or other post-retirement benefit plans to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Employers are required to present the other components of net benefit costs in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component of net periodic pension cost will be eligible for asset capitalization.
We expect adoption of ASU 2017-07 to result in a change in our net FAS/CAS pension adjustment within operating income, which will be offset by a corresponding change in other, net to reflect the impact of presenting the interest cost, expected return on plan assets, and amortization of prior service credit and net actuarial loss components of net periodic benefit costs outside of operating income. We expect to adopt ASU 2017-07 on January 1, 2018 using the retrospective method and do not anticipate a material change to our 2017 net FAS/CAS pension adjustment or other,
NORTHROP GRUMMAN CORPORATION
net when they are recast to reflect the standard. We also do not expect ASU 2017-07 to have a material impact on our consolidated statements of financial position or cash flows.
On February 25, 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. ASU 2016-02 supersedes existing lease guidance, including Accounting Standards Codification (ASC) 840 -
Leases
. Among other things, ASU 2016-02 requires recognition of a right-of-use asset and liability for future lease payments for contracts that meet the definition of a lease. ASU 2016-02 will be effective January 1, 2019, although early adoption is permitted, and it is to be applied using a modified retrospective approach. We expect to adopt the standard on January 1, 2019. We are currently reviewing our leases to determine the effect ASU 2016-02 will have on the company’s consolidated financial position, annual results of operations and/or cash flows.
On May 28, 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. ASU 2014-09 supersedes existing revenue recognition guidance, including ASC 605-35,
Revenue Recognition - Construction-Type and Production-Type Contracts,
and outlines a single set of comprehensive principles for recognizing revenue under 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. On July 9, 2015, the FASB approved a one year deferral of the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. We currently expect to adopt the standard on January 1, 2018 and apply it retrospectively to all periods presented.
During 2016, we substantially completed our evaluation of ASU 2014-09, including the expected impact on our business processes, systems and controls, and potential differences in the timing and/or method of revenue recognition for our contracts. As a result of our evaluation, we identified changes to and are modifying certain of our accounting policies and practices. We also designed and implemented specific controls over our evaluation of the impact of ASU 2014-09, including our calculation of the cumulative effect of adopting ASU 2014-09. Although we do not expect significant changes to our accounting systems or controls upon adoption of ASU 2014-09, we have modified certain of our current controls to incorporate the revisions we have made to our accounting policies and practices.
Based on our evaluation of ASU 2014-09, we currently do not expect it to have a material impact on our results of operations or cash flows in the periods after adoption. Under ASU 2014-09, revenue is recognized as control transfers to the customer. As such, revenue for our contracts will generally be recognized over time using the cost-to-cost method, which is consistent with the revenue recognition model we currently use for the majority of our contracts. For those contracts where we currently recognize revenue as units are delivered, in most cases the accounting for those contracts will change under ASU 2014-09 such that we will recognize revenue as costs are incurred. This change will generally result in an acceleration of revenue as compared with our current revenue recognition method for those contracts. In addition, for certain of our contracts, we expect the number of performance obligations to change under ASU 2014-09, which may alter the timing of revenue and margin recognition.
Upon adoption of the standard, we also expect a reduction in inventoried costs, an increase in unbilled accounts receivable and a net increase in retained earnings primarily to reflect the impact of converting units-of-delivery contracts to the cost-to-cost method of accounting. ASU 2014-09 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue, cash flow and customer contract balances, including how and when we satisfy our performance obligations and the relationship between revenue recognized and changes in contract balances during a reporting period. We have evaluated these disclosure requirements and are incorporating the collection of relevant data into our quarterly processes.
We expect to complete our assessment of the cumulative effect of adopting ASU 2014-09 as well as the expected impact of adoption on our 2016 results during the first half of 2017. We will continue our evaluation of ASU 2014-09 (including how it may impact new contracts we receive as well as new or emerging interpretations of the standard) through the date of adoption.
Other accounting standards updates effective after
March 31, 2017
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.
NORTHROP GRUMMAN CORPORATION
2. EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK
Basic Earnings Per Share
We calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of common stock outstanding during each period.
Diluted Earnings Per Share
Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled
1.3 million
shares and
2.1 million
shares for the
three
months ended
March 31, 2017
and
2016
, respectively.
Share Repurchases
On December 4, 2014, the company’s board of directors authorized a share repurchase program of up to
$3.0 billion
of the company’s common stock (the “2014 Repurchase Program”). Repurchases under the 2014 Repurchase Program commenced in March 2015 and were completed in March 2016. On September 16, 2015, the company’s board of directors authorized a new share repurchase program of up to
$4.0 billion
of the company’s common stock (the “2015 Repurchase Program”). Repurchases under the 2015 Repurchase Program commenced in March 2016 upon completion of the company’s 2014 Repurchase Program. As of
March 31, 2017
, repurchases under the 2015 Repurchase Program totaled
$1.5 billion
;
$2.5 billion
remained under this share repurchase authorization. By its terms, the 2015 Repurchase Program is set to expire when we have used all authorized funds for repurchases.
Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and, in the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.
The table below summarizes the company’s share repurchases to date under the authorizations described above:
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Shares Repurchased
(in millions)
|
Repurchase Program
Authorization Date
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|
Amount
Authorized
(in millions)
|
|
Total
Shares Retired
(in millions)
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|
Average
Price
Per Share
(1)
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|
Date Completed
|
|
Three Months Ended March 31
|
|
2017
|
|
2016
|
December 4, 2014
|
|
$
|
3,000
|
|
|
18.0
|
|
|
$
|
166.70
|
|
|
March 2016
|
|
—
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|
|
1.4
|
|
September 16, 2015
|
|
$
|
4,000
|
|
|
6.8
|
|
|
$
|
220.37
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|
|
|
|
0.9
|
|
|
0.1
|
|
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|
(1)
|
Includes commissions paid.
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Dividends on Common Stock
In May 2016, the company increased the quarterly common stock dividend
13
percent to
$0.90
per share from the previous amount of
$0.80
per share.
NORTHROP GRUMMAN CORPORATION
3
. SEGMENT INFORMATION
At
March 31, 2017
, the company was aligned in
three
operating sectors, which also comprise our reportable segments: Aerospace Systems, Mission Systems and Technology Services.
The following table presents sales and operating income by segment:
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Three Months Ended March 31
|
$ in millions
|
2017
|
|
2016
|
Sales
|
|
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|
Aerospace Systems
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$
|
2,898
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|
$
|
2,574
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|
Mission Systems
|
2,739
|
|
|
2,693
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|
Technology Services
|
1,194
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|
|
1,214
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|
Intersegment eliminations
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(564
|
)
|
|
(525
|
)
|
Total sales
|
6,267
|
|
|
5,956
|
|
Operating income
|
|
|
|
Aerospace Systems
|
312
|
|
|
286
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|
Mission Systems
|
353
|
|
|
353
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|
Technology Services
|
131
|
|
|
126
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|
Intersegment eliminations
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(70
|
)
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|
(64
|
)
|
Total segment operating income
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726
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|
|
701
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|
Net FAS/CAS pension adjustment
|
136
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|
|
74
|
|
Unallocated corporate expenses
|
(29
|
)
|
|
(33
|
)
|
Other
|
(1
|
)
|
|
(3
|
)
|
Total operating income
|
$
|
832
|
|
|
$
|
739
|
|
Net FAS/CAS Pension Adjustment
For financial statement purposes, we account for our employee pension plans in accordance with FAS. However, the cost of these plans is charged to our contracts in accordance with the Federal Acquisition Regulation (FAR) and the related U.S. Government Cost Accounting Standards (CAS). The net FAS/CAS pension adjustment
reflects the difference between CAS pension expense included as cost in segment operating income and FAS expense included in total operating income.
Unallocated Corporate Expenses
Unallocated corporate expenses include the portion of corporate expenses not considered allowable or allocable under applicable CAS or
the FAR, and therefore not allocated to the segments. Such costs consist of a portion of management and administration, legal, environmental, compensation, retiree benefits and corporate unallowable costs.
4. INCOME TAXES
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Three Months Ended March 31
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$ in millions
|
2017
|
|
2016
|
Federal and foreign income tax expense
|
$
|
133
|
|
|
$
|
120
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|
Effective income tax rate
|
17.2
|
%
|
|
17.8
|
%
|
The company’s effective tax rate of
17.2 percent
for the
three
months ended
March 31, 2017
was comparable with the same period in
2016
. Both periods reflect comparable tax benefits associated with the manufacturing deduction and research credits. In addition, the company’s effective tax rate for the
three
months ended
March 31, 2017
includes
$47 million
of excess tax benefits related to employee share-based compensation, a
$42 million
benefit recognized in connection with the Congressional Joint Committee on Taxation’s approval of the Internal Revenue Service (IRS) examination of the company’s 2012-2013 tax returns and a
$22 million
benefit recognized for additional research credits claimed on our prior year tax returns. The company’s effective tax rate of
17.8 percent
for
NORTHROP GRUMMAN CORPORATION
the
three
months ended March 31, 2016 included
$80 million
of excess tax benefits related to employee share-based compensation.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. Our 2014-2015 federal tax returns are currently under IRS examination.
In the first quarter of 2017, the company recorded a net increase in unrecognized tax benefits of approximately
$55 million
. This increase included
$65 million
related to tax benefits from temporary items claimed on a prior year tax return and
$40 million
related to positions taken on amended federal and state tax returns filed during the quarter. These increases were partially offset by a
$60 million
reduction in connection with the resolution of the IRS examination of the company’s 2012-2013 tax returns described above.
5
. FAIR VALUE OF FINANCIAL INSTRUMENTS
The company holds a portfolio of marketable securities consisting of securities that are classified as either trading or available-for-sale to partially fund non-qualified employee benefit plans. These securities are included in other non-current assets in the unaudited condensed consolidated statements of financial position.
The company's derivative portfolio consists primarily of foreign currency forward contracts. Where model-derived valuations are appropriate, the company utilizes the income approach to determine the fair value and uses the applicable London Interbank Offered Rate (LIBOR) swap rates.
The following table presents the financial assets and liabilities we record at fair value on a recurring basis identified by the level of inputs used to determine fair value:
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March 31, 2017
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|
December 31, 2016
|
$ in millions
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
Financial Assets (Liabilities)
|
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Marketable securities
|
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Trading
|
|
$
|
333
|
|
|
$
|
1
|
|
|
$
|
334
|
|
|
$
|
321
|
|
|
$
|
2
|
|
|
$
|
323
|
|
Available-for-sale
|
|
11
|
|
|
—
|
|
|
11
|
|
|
7
|
|
|
—
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|
|
7
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|
Derivatives
|
|
—
|
|
|
6
|
|
|
6
|
|
|
—
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|
|
8
|
|
|
8
|
|
The notional value of the company’s derivative portfolio at
March 31, 2017
and
December 31, 2016
, was
$159 million
and
$147 million
, respectively. At
March 31, 2017
and
December 31, 2016
,
no
portion of the notional value was designated as a cash flow hedge. The derivative fair values and related unrealized gains/losses at
March 31, 2017
and
December 31, 2016
, were not material.
There were no transfers of financial instruments between the three levels of the fair value hierarchy during the
three
months ended
March 31, 2017
.
The carrying value of cash and cash equivalents approximates fair value.
Long-term Debt
The estimated fair value of long-term debt was
$7.6 billion
as of
March 31, 2017
and
December 31, 2016
. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The carrying value of long-term debt was
$7.1 billion
as of
March 31, 2017
and
December 31, 2016
.
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
NORTHROP GRUMMAN CORPORATION
million
, less certain amounts outstanding under the contract. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On April 2, 2013, the U.S. Department of Justice informed the company of a False Claims Act complaint relating to the FSS contract that was filed under seal by a relator in June 2011 in the U.S. District Court for the Eastern District of Virginia. On June 3, 2013, the United States filed a Notice informing the Court that the United States had decided not to intervene in this case. The relator alleged that the company violated the False Claims Act in a number of ways with respect to the FSS contract, alleged damage to the USPS in an amount of at least approximately
$179 million
annually, alleged that he was improperly discharged in retaliation, and sought an unspecified partial refund of the contract purchase price, penalties, attorney’s fees and other costs of suit. The relator later voluntarily dismissed his retaliation claim and reasserted it in a separate arbitration, which he also ultimately voluntarily dismissed. On September 5, 2014, the court granted the company’s motion for summary judgment and ordered the relator’s False Claims Act case be dismissed with prejudice. On December 19, 2014, the company filed a motion for partial summary judgment asking the court to dismiss the principal counterclaim referenced above. On June 29, 2015, the Court heard argument and denied that motion without prejudice to filing a later motion to dismiss. Although the ultimate outcome of these matters (“the FSS matters,” collectively), including any possible loss, cannot be predicted or reasonably estimated at this time, the company intends vigorously to pursue and defend the FSS matters.
On August 8, 2013, the company received a court-appointed expert’s report in litigation pending in the Second Federal Court of the Federal District in Brazil brought by the Brazilian Post and Telegraph Corporation (ECT), a Brazilian state-owned entity, against Solystic SAS (Solystic), a French subsidiary of the company, and
two
of its consortium partners. In this suit, commenced on December 17, 2004, and relatively inactive for some period of time, ECT alleges the consortium breached its contract with ECT and seeks damages of approximately
R$111 million
(the equivalent of approximately
$35 million
as of
March 31, 2017
), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law, which amounts could be significant over time. The original suit sought
R$89 million
(the equivalent of approximately
$28 million
as of
March 31, 2017
) in damages. In October 2013, ECT asserted an additional damage claim of
R$22 million
(the equivalent of approximately
$7 million
as of
March 31, 2017
). In its counterclaim, Solystic alleges ECT breached the contract by wrongfully refusing to accept the equipment Solystic had designed and built and seeks damages of approximately
€31 million
(the equivalent of approximately
$33 million
as of
March 31, 2017
), 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 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
March 31, 2017
, or its annual results of operations and/or cash flows.
7
. COMMITMENTS AND CONTINGENCIES
U.S. Government Cost Claims
From time to time, the company is advised of claims by the U.S. Government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and the U.S. Government representatives engage in discussions to enable the company to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the company’s estimated exposure for such potential disallowed costs. Such provisions are reviewed periodically using the most recent information available. The company believes it has adequately reserved for disputed amounts that are probable and reasonably estimable, and the outcome of any such matters would not have a material adverse effect on its unaudited condensed consolidated financial position as of
March 31, 2017
, or its annual results of operations and/or cash flows.
NORTHROP GRUMMAN CORPORATION
Environmental Matters
The table below summarizes management’s estimate of the range of reasonably possible future costs for environmental remediation, the amount accrued within that range, and the deferred costs expected to be recoverable through overhead charges on U.S. Government contracts as of
March 31, 2017
and
December 31, 2016
:
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$ in millions
|
|
Range of Reasonably Possible Future Costs
(1)
|
|
Accrued Costs
(2)
|
|
Deferred Costs
(3)
|
March 31, 2017
|
|
$399 - $790
|
|
$
|
402
|
|
|
$
|
207
|
|
December 31, 2016
|
|
379 - 774
|
|
385
|
|
|
195
|
|
|
|
(1)
|
Estimated remediation costs are not discounted to present value. The range of reasonably possible future costs does not take into consideration amounts expected to be recoverable through overhead charges on U.S. Government contracts.
|
(2)
As of
March 31, 2017
,
$127 million
is recorded in other current liabilities and
$275 million
is recorded in other non-current liabilities.
(3)
As of
March 31, 2017
,
$71 million
is deferred in inventoried costs and
$136 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
March 31, 2017
, 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
March 31, 2017
, there were
$205 million
of stand-by letters of credit and guarantees and
$202 million
of surety bonds outstanding.
Indemnifications
The company has provided indemnification for certain environmental, income tax and other potential liabilities in connection with certain of its divestitures. The settlement of these liabilities is not expected to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of
March 31, 2017
, or its annual results of operations and/or cash flows.
Operating Leases
Rental expense for operating leases was
$89 million
and
$91 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. These amounts are net of immaterial amounts of sublease rental income.
Credit Facilities
In December 2016, a subsidiary of the company entered into a two-year credit facility, with two additional one-year option periods, in an aggregate principal amount of
£120 million
(the equivalent of approximately
$150 million
as of
March 31, 2017
) (the “2016 Credit Agreement”). The 2016 Credit Agreement is guaranteed by the company. At
March 31, 2017
, there was
£110 million
(the equivalent of approximately
$137 million
as of
March 31, 2017
) outstanding under this facility, which bears interest at a rate of
LIBOR plus 1.10 percent
. All of the borrowings outstanding under this facility mature less than one year from the date of issuance, but may be renewed under the terms of the facility. Based on our intent and ability to refinance the obligations on a long-term basis, substantially all of the borrowings are classified as non-current.
The company also maintains an unsecured credit facility in an aggregate principal amount of
$1.6 billion
(the “2015 Credit Agreement”) that matures in July 2020. At
March 31, 2017
, there was
no
balance outstanding under this facility.
At
March 31, 2017
,
the company was in compliance with all covenants under the Credit Agreements.
NORTHROP GRUMMAN CORPORATION
8
. RETIREMENT BENEFITS
The cost to the company of its retirement plans is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
Pension
Benefits
|
|
Medical and
Life Benefits
|
$ in millions
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
Service cost
|
$
|
114
|
|
|
$
|
112
|
|
|
$
|
6
|
|
|
$
|
8
|
|
Interest cost
|
309
|
|
|
321
|
|
|
21
|
|
|
24
|
|
Expected return on plan assets
|
(471
|
)
|
|
(463
|
)
|
|
(22
|
)
|
|
(21
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service credit
|
(15
|
)
|
|
(15
|
)
|
|
(5
|
)
|
|
(6
|
)
|
Net loss from previous years
|
178
|
|
|
178
|
|
|
2
|
|
|
3
|
|
Net periodic benefit cost
|
$
|
115
|
|
|
$
|
133
|
|
|
$
|
2
|
|
|
$
|
8
|
|
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.
Contributions made by the company to its retirement plans are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
$ in millions
|
2017
|
|
2016
|
Defined benefit pension plans
|
$
|
23
|
|
|
$
|
27
|
|
Medical and life benefit plans
|
11
|
|
|
11
|
|
Defined contribution plans
|
99
|
|
|
87
|
|
9. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Awards
The following table presents the number of restricted stock rights (RSRs) and restricted performance stock rights (RPSRs) granted to employees under the company's long-term incentive stock plan and the grant date aggregate fair value of those stock awards for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
in millions
|
|
2017
|
2016
|
RSRs granted
|
|
0.1
|
|
0.2
|
|
RPSRs granted
|
|
0.3
|
|
0.3
|
|
Grant date aggregate fair value
|
|
$
|
86
|
|
$
|
87
|
|
RSRs typically vest on the
third
anniversary of the grant date, while RPSRs generally vest and pay out based on the achievement of financial metrics over a
three
-year period.
NORTHROP GRUMMAN CORPORATION
Cash Awards
The following table presents the minimum and maximum aggregate payout amounts related to cash units (CUs) and cash performance units (CPUs) granted to employees in the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
$ in millions
|
|
2017
|
2016
|
Minimum aggregate payout amount
|
|
$
|
35
|
|
$
|
34
|
|
Maximum aggregate payout amount
|
|
198
|
|
193
|
|
CUs typically vest and settle in cash on the
third
anniversary of the grant date, while CPUs generally vest and pay out in cash based on the achievement of financial metrics over a
three
-year period.