NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1
. BASIS OF PRESENTATION
Principles of Consolidation and Reporting
These unaudited condensed consolidated financial statements (the “financial statements”) include the accounts of Northrop Grumman Corporation and its subsidiaries and joint ventures or other investments for which we consolidate the financial results (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.
On June 6, 2018 (the “Merger date”),
the company completed its previously announced acquisition of Orbital ATK, Inc. (“Orbital ATK”) (the “Merger”)
. On the Merger date,
Orbital ATK became a wholly-owned subsidiary of the company and its name was changed to Northrop Grumman Innovation Systems, Inc., which we established as
a new, fourth business sector
(“Innovation Systems”)
. The operating results of Innovation Systems subsequent to the Merger date have been included in the company's unaudited condensed consolidated results of operations.
See N
ote
2
for further information regarding the Merger.
These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”) and in accordance with the rules of the Securities and Exchange Commission (SEC) for interim reporting. The 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 financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the information contained in the company’s
2018
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 legacy Northrop Grumman’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. Similarly, Innovation Systems uses a “fiscal” calendar by closing its books on a Sunday near these quarter-end dates and will continue this practice until its business processes are aligned with legacy Northrop Grumman’s. This practice is only used at interim periods within a reporting year.
As previously announced, effective January 1, 2019, we adopted Accounting Standards Codification (ASC) Topic 842,
Leases
, using the optional transition method to apply the standard through a cumulative effect adjustment in the period of adoption. The adoption of this standard is reflected in the amounts and disclosures set forth in this Form 10-Q.
Accounting Estimates
Preparation of the financial statements 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. The company classifies sales as product or service based on the predominant attributes of each contract.
The company recognizes revenue for each separately identifiable performance obligation in a contract representing a promise to transfer a distinct good or service to a customer. In most cases, goods and services provided under the company’s contracts are accounted for as single performance obligations due to the complex and integrated nature of our products and services. These contracts generally require significant integration of a group of goods and/or services to deliver a combined output. In some contracts, the company provides multiple distinct goods or services to a customer, most commonly when a contract covers multiple phases of the product lifecycle (e.g., development, production, sustainment, etc.). In those cases, the company accounts for the distinct contract deliverables as separate performance obligations and allocates the transaction price to each performance obligation based on its relative standalone selling price, which is generally estimated using a cost plus a reasonable margin approach. Warranties are
NORTHROP GRUMMAN CORPORATION
provided on certain contracts, but do not typically provide for services beyond standard assurances and are therefore not considered to be separate performance obligations. Our accounting for costs to obtain or fulfill a contract are not material.
Contracts are often modified for changes in contract specifications or requirements, which may result in scope and/or price changes. Most of the company’s contract modifications are for goods or services that are not distinct in the context of the contract and are therefore accounted for as part of the original performance obligation through a cumulative estimate-at-completion (EAC) adjustment.
The company recognizes revenue as control is transferred to the customer, either over time or at a point in time. In general, our U.S. government contracts contain termination for convenience and/or other clauses that generally provide the customer rights to goods produced and/or in-process. Similarly, our non-U.S. government contracts generally contain contractual termination clauses or entitle the company to payment for work performed to date for goods and services that do not have an alternative use. As control is effectively transferred while we perform on our contracts, we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion) as the company believes this represents the most appropriate measurement towards satisfaction of its performance obligations. Revenue for contracts in which the control of goods produced does not transfer until delivery to the customer is recognized at a point in time (i.e., typically upon delivery).
Contract Estimates
Use of the cost-to-cost method requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. The company estimates profit on these contracts as the difference between total estimated sales and total estimated cost at completion and recognizes that profit as costs are incurred. Significant judgment is used to estimate total revenue and cost at completion.
Contract sales may include estimates of variable consideration, including cost or performance incentives (such as award and incentive fees), contract claims and requests for equitable adjustment (REAs). Variable consideration is included in total estimated sales to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate variable consideration as the most likely amount to which we expect to be entitled.
We recognize changes in estimated contract sales or costs and the resulting changes in contract profit on a cumulative basis. Cumulative EAC adjustments represent the cumulative effect of the changes on current and prior periods; sales and operating margins in future periods are recognized as if the revised estimates had been used since contract inception. If it is determined that a loss is expected to result on an individual performance obligation, the entire amount of the estimable future loss, including an allocation of general and administrative (G&A) costs, is charged against income in the period the loss is identified. Each loss provision is first offset against costs included in Unbilled receivables or Inventoried costs; remaining amounts are reflected in Other current liabilities.
Significant EAC adjustments on a single contract could have a material effect on the company’s financial statements. 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 were material to the financial statements during the
three
months ended
March 31, 2019
and
2018
.
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
|
2019
|
|
2018
|
|
Operating income
|
$
|
138
|
|
|
$
|
116
|
|
|
Net earnings
(1)
|
109
|
|
|
92
|
|
|
Diluted earnings per share
(1)
|
0.64
|
|
|
0.52
|
|
|
|
|
|
(1)
|
Based on a 21 percent statutory tax rate.
|
Revenue recognized from performance obligations satisfied in previous reporting periods was
$166 million
and
$133 million
for the
three
months ended
March 31, 2019
and
2018
, respectively.
Backlog
Backlog represents the future sales we expect to recognize on firm orders received by the company and is equivalent to the company’s remaining performance obligations at the end of each period. It comprises both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contract options
NORTHROP GRUMMAN CORPORATION
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.
Company backlog as of
March 31, 2019
was
$57.3 billion
.
We expect to recognize approximately 50 percent and 75 percent of our March 31, 2019 backlog as revenue over the next 12 and 24 months, respectively, with the remainder to be recognized thereafter.
Contract Assets and Liabilities
For each of the company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Fixed-price contracts are typically billed to the customer either using progress payments, whereby amounts are billed monthly as costs are incurred or work is completed, or performance based payments, which are based upon the achievement of specific, measurable events or accomplishments defined and valued at contract inception. Cost-type contracts are typically billed to the customer on a monthly or semi-monthly basis.
Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Unbilled receivables are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected beyond one year due to the long-cycle nature of many of our contracts. Accumulated contract costs in unbilled receivables include costs such as direct production costs, factory and engineering overhead, production tooling costs, and allowable G&A. Unbilled receivables also include certain estimates of variable consideration described above. These contract assets are not considered a significant financing component of the company’s contracts as the payment terms are intended to protect the customer in the event the company does not perform on its obligations under the contract.
Contract liabilities are equivalent to and reflected as
Advance payments and billings in excess of costs incurred
in the unaudited condensed consolidated statements of financial position. Certain customers make advance payments prior to the company’s satisfaction of its obligations on the contract. These amounts are recorded as contract liabilities until such obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made. Contract liabilities are not a significant financing component as they are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements.
The amount of revenue recognized for the
three
months ended
March 31, 2019
and
2018
that was included in the contract liability balances at the beginning of each year was
$674 million
and
$706 million
, respectively.
Disaggregation of Revenue
See Note
11
for information regarding the company’s sales by customer type, contract type and geographic region for each of our segments. We believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
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$ in millions
|
|
March 31,
2019
|
|
December 31,
2018
|
|
Unamortized prior service credit, net of tax expense of $28 for 2019 and $32 for 2018
|
|
$
|
87
|
|
|
$
|
98
|
|
|
Cumulative translation adjustment
|
|
(143
|
)
|
|
(144
|
)
|
|
Other, net
|
|
(3
|
)
|
|
(6
|
)
|
|
Total accumulated other comprehensive loss
|
|
$
|
(59
|
)
|
|
$
|
(52
|
)
|
Reclassifications from accumulated other comprehensive loss to net earnings related to the amortization of prior service credit were
$11 million
and
$15 million
, net of taxes, for the
three
months ended
March 31, 2019
and
2018
, respectively. The reclassifications are included in the computation of net periodic pension cost (benefit). See Note
8
for further information.
Reclassifications from accumulated other comprehensive loss to net earnings relating to cumulative translation adjustments and effective cash flow hedges were not material for the
three
months ended
March 31, 2019
and
2018
.
Leases
The company leases certain buildings, land and equipment. Under ASC 842, at contract inception we determine whether the contract is or contains a lease and whether the lease should be classified as an operating or a financing
NORTHROP GRUMMAN CORPORATION
lease. Operating leases are included in Operating lease right-of-use (ROU) assets, Other current liabilities, and Operating lease liabilities in our unaudited condensed consolidated statements of financial position.
The company recognizes operating lease ROU assets and operating lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. We use our incremental borrowing rate based on the information available at commencement date to determine the present value of future payments and the appropriate lease classification. Many of our leases include renewal options aligned with our contract terms. We define the initial lease term to include renewal options determined to be reasonably certain. In our adoption of ASC 842, we elected not to recognize a right-of-use asset and a lease liability for leases with an initial term of 12 months or less; we recognize lease expense for these leases on a straight-line basis over the lease term. We elected the practical expedient to not separate lease components from nonlease components and applied that practical expedient to all material classes of leased assets.
Many of the company’s real property lease agreements contain incentives for tenant improvements, rent holidays, or rent escalation clauses. For tenant improvement incentives, if the incentive is determined to be a leasehold improvement owned by the lessee, the company generally records a deferred rent liability and amortizes the deferred rent over the term of the lease as a reduction to rent expense. For rent holidays and rent escalation clauses during the lease term, the company records rental expense on a straight-line basis over the term of the lease. For these lease incentives, the company uses the date of initial possession as the commencement date, which is generally when the company is given the right of access to the space and begins to make improvements in preparation for intended use.
Finance leases are not material to our unaudited condensed consolidated financial statements and the company is not a lessor in any material arrangements. We do not have any material restrictions or covenants in our lease agreements, sale-leaseback transactions, land easements or residual value guarantees.
Restricted Cash
On occasion, we are required to maintain cash deposits with banks in connection with certain contingent obligations. This restricted cash is included in
Prepaid expenses and other current assets
in the unaudited condensed consolidated statements of financial position. As of
March 31, 2019
our restricted cash totaled approximately
$93 million
. We had
no
restricted cash as of
December 31, 2018
.
Related Party Transactions
The company had no material related party transactions in any period presented.
Accounting Standards Updates
On February 25, 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. ASC Topic 842 supersedes existing lease guidance, including ASC 840 -
Leases
. Among other things, ASU 2016-02 requires recognition of a right-of-use asset and liability for future lease payments for contracts that meet the definition of a lease and requires disclosure of certain information about leasing arrangements. On July 30, 2018, the FASB issued ASU No. 2018-11,
Leases (Topic 842): Targeted Improvements
, which, among other things, allows companies to elect an optional transition method to apply the new lease standard through a cumulative-effect adjustment in the period of adoption.
We adopted the standard on January 1, 2019 using the optional transition method and, as a result, did not recast prior period unaudited condensed comparative financial statements. All prior period amounts and disclosures are presented under ASC 840. We elected the package of practical expedients, which, among other things, allows us to carry forward our prior lease classifications under ASC 840. We did not elect to adopt the hindsight practical expedient and are therefore maintaining the lease terms we previously determined under ASC 840. Adoption of the new standard resulted in the recording of additional lease assets and lease liabilities on the unaudited condensed consolidated statements of financial position with no cumulative impact to retained earnings and did not have a material impact on our results of operations or cash flows.
Other accounting standards updates adopted and/or issued, but not effective until after
March 31, 2019
, 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
. ACQUISITION OF ORBITAL ATK
On June 6, 2018
, the company completed its previously announced acquisition of Orbital ATK, by acquiring all of the outstanding shares of Orbital ATK for a purchase price of
$7.7 billion
in cash. On the Merger date, Orbital ATK became a wholly-owned subsidiary of the company and its name was changed to Northrop Grumman Innovation Systems, Inc. We established Innovation Systems as a new, fourth business sector.
Its main products include precision munitions and armaments; tactical missiles and subsystems; ammunition; launch vehicles; space and strategic propulsion systems; aerospace structures; space exploration products; and national security and commercial satellite systems and related components/services.
The acquisition was financed with proceeds from the company’s debt financing completed in October 2017 and cash on hand.
We believe this acquisition will enable us to broaden our capabilities and offerings, provide additional innovative solutions to meet our customers’ emerging requirements, create value for shareholders and provide expanded opportunities for our combined employees.
Preliminary Purchase Price Allocation
The acquisition was accounted for as a purchase business combination. As such, the company recorded the assets acquired and liabilities assumed at fair value, with the excess of the purchase price over the fair value of assets acquired and liabilities assumed recorded as goodwill.
Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. In some cases, the company used discounted cash flow analyses, which were based on our best estimate of future sales, earnings and cash flows after considering such factors as general market conditions, customer budgets, existing firm and future orders, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.
During the second quarter of 2018, the company completed a preliminary analysis to determine the fair values of the assets acquired and liabilities assumed and the amounts recorded reflected management’s initial assessment of fair value as of the Merger date. Based on additional information obtained to date, the company refined its initial assessment of fair value and recognized the following significant adjustments to our preliminary purchase price allocation: Intangible assets increased
$220 million
, Other current liabilities increased
$114 million
, Pension and other postretirement benefit (OPB) plan liabilities increased
$56 million
, Other non-current liabilities increased
$53 million
and Goodwill decreased
$47 million
. These adjustments did not result in a material impact on the financial results of prior periods.
The company expects to finalize its purchase price allocation within one year of the Merger date. We are continuing to analyze and assess relevant information in the following areas to determine the fair value of assets acquired and liabilities assumed as of the Merger date: certain income tax, legal and contract-related matters. The final fair value determination could result in material adjustments to the values presented in the preliminary purchase price allocation table below.
The Merger date fair value of the consideration transferred totaled
$7.7 billion
in cash, which was comprised of the following:
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|
|
|
|
|
|
$ in millions, except per share amounts
|
|
Purchase price
|
|
Shares of Orbital ATK common stock outstanding as of the Merger date
|
|
57,562,152
|
|
|
Cash consideration per share of Orbital ATK common stock
|
|
$
|
134.50
|
|
|
Total purchase price
|
|
$
|
7,742
|
|
NORTHROP GRUMMAN CORPORATION
The following preliminary purchase price allocation table presents the company’s refined estimate of the fair values of assets acquired and liabilities assumed at the Merger date:
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|
|
|
|
|
|
|
$ in millions
|
|
As of
June 6, 2018
|
|
Cash and cash equivalents
|
|
$
|
85
|
|
|
Accounts receivable
|
|
596
|
|
|
Unbilled receivables
|
|
1,264
|
|
|
Inventoried costs
|
|
220
|
|
|
Other current assets
|
|
226
|
|
|
Property, plant and equipment
|
|
1,509
|
|
|
Goodwill
|
|
6,248
|
|
|
Intangible assets
|
|
1,525
|
|
|
Other non-current assets
|
|
151
|
|
|
Total assets acquired
|
|
11,824
|
|
|
Trade accounts payable
|
|
(397
|
)
|
|
Accrued employee compensation
|
|
(158
|
)
|
|
Advance payments and billings in excess of costs incurred
|
|
(222
|
)
|
|
Below market contracts
(1)
|
|
(151
|
)
|
|
Other current liabilities
|
|
(412
|
)
|
|
Long-term debt
|
|
(1,687
|
)
|
|
Pension and OPB plan liabilities
|
|
(613
|
)
|
|
Deferred tax liabilities
|
|
(253
|
)
|
|
Other non-current liabilities
|
|
(189
|
)
|
|
Total liabilities assumed
|
|
(4,082
|
)
|
|
Total purchase price
|
|
$
|
7,742
|
|
|
|
|
|
(1)
|
Included in Other current liabilities in the unaudited condensed consolidated statements of financial position.
|
The following table presents a summary of purchased intangible assets and their related estimated useful lives:
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Fair Value
(in millions)
|
|
Estimated Useful Life in Years
|
|
Customer contracts
|
|
$
|
1,245
|
|
|
9
|
|
Commercial customer relationships
|
|
280
|
|
|
13
|
|
Total customer-related intangible assets
|
|
$
|
1,525
|
|
|
|
The preliminary purchase price allocation resulted in the recognition of
$6.2 billion
of goodwill, a majority of which was allocated to the Innovation Systems sector. The goodwill recognized is attributable to expected revenue synergies generated by the integration of Aerospace Systems, Mission Systems and Technology Services products and technologies with those of legacy Orbital ATK, synergies resulting from the consolidation or elimination of certain costs, and intangible assets that do not qualify for separate recognition, such as the assembled workforce of Orbital ATK. None of the goodwill is expected to be deductible for tax purposes.
NORTHROP GRUMMAN CORPORATION
Unaudited Supplemental Pro Forma Information
The following table presents unaudited pro forma financial information
prepared in accordance with
Article 11 of Regulation S-X and computed
as if Orbital ATK had been included in our results as of January 1, 2017
:
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|
|
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$ in millions, except per share amounts
|
Three Months Ended March 31, 2018
|
|
Sales
|
$
|
8,000
|
|
|
Net earnings
|
914
|
|
|
Diluted earnings per share
|
5.21
|
|
The unaudited supplemental pro forma financial data has been calculated after applying our accounting policies and adjusting the historical results of Orbital ATK with pro forma adjustments, net of tax, that assume the acquisition occurred on January 1, 2017. Significant pro forma adjustments include the following:
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1.
|
The elimination of intercompany sales and costs of sales between the company and Orbital ATK of
$47 million
for the
three
months ended
March 31, 2018
.
|
|
|
|
|
2.
|
The elimination of nonrecurring transaction costs incurred by the company and Orbital ATK in connection with the Merger of
$7 million
for the
three
months ended
March 31, 2018
.
|
|
|
|
|
3.
|
The recognition of additional depreciation expense, net of removal of historical depreciation expense, of
$6 million
for the
three
months ended
March 31, 2018
related to the step-up in fair value of acquired property, plant and equipment.
|
|
|
|
|
4.
|
The recognition of additional amortization expense, net of removal of historical amortization expense, of
$66 million
for the
three
months ended
March 31, 2018
related to the fair value of acquired intangible assets.
|
|
|
|
|
5.
|
The elimination of Orbital ATK's historical amortization of net actuarial losses and prior service credits and impact of the revised pension and OPB net periodic benefit cost as determined under the company’s plan assumptions of
$31 million
for the
three
months ended
March 31, 2018
.
|
|
|
|
|
6.
|
The income tax effect on the pro forma adjustments, which was calculated using the federal statutory tax rate, of
$7 million
for the
three
months ended
March 31, 2018
.
|
The unaudited pro forma financial information does not reflect the potential realization of revenue synergies or cost savings, nor does it reflect other costs relating to the integration of the two companies. This unaudited pro forma financial information should not be considered indicative of the results that would have actually occurred if the acquisition had been consummated on January 1, 2017, nor are they indicative of future results.
3
. EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK
Basic Earnings Per Share
We calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of common stock outstanding during each period.
Diluted Earnings Per Share
Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled
0.7 million
shares and
1.1 million
shares for the
three
months ended
March 31, 2019
and
2018
, respectively.
Share Repurchases
On September 16, 2015, the company’s board of directors authorized a 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.
On December 4, 2018, the company’s board of directors authorized a new share repurchase program of up to an additional
$3.0 billion
in share repurchases of the company’s common stock (the “2018 Repurchase Program”). By its terms, repurchases under the 2018 Repurchase Program will commence upon completion of the 2015 Repurchase Program and will expire when we have used all authorized funds for repurchases.
During the fourth quarter of 2018, the company entered into an accelerated share repurchase (ASR) agreement with Goldman Sachs & Co. LLC (Goldman Sachs) to repurchase
$1.0 billion
of the company’s common stock under the 2015 Repurchase Program. Under the agreement, we made a payment of
$1.0 billion
to Goldman Sachs and
NORTHROP GRUMMAN CORPORATION
received an initial delivery of
3.0 million
shares valued at
$800 million
that were immediately canceled by the company. The remaining balance was settled on
January 4, 2019
with a final delivery of
0.9 million
shares from Goldman Sachs. The final average purchase price was
$260.32
per share.
As of
March 31, 2019
, repurchases under the 2015 Repurchase Program totaled
$3.0 billion
;
$1.0 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 and 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
|
|
Amount
Authorized
(in millions)
|
|
Total
Shares Retired
(in millions)
|
|
Average
Price
Per Share
(1)
|
|
Date Completed
|
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
September 16, 2015
|
|
$
|
4,000
|
|
|
12.4
|
|
|
$
|
241.36
|
|
|
|
|
1.1
|
|
|
—
|
|
|
December 4, 2018
|
|
$
|
3,000
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
(1)
|
Includes commissions paid.
|
Dividends on Common Stock
In May 2018, the company increased the quarterly common stock dividend
9
percent to
$1.20
per share from the previous amount of
$1.10
per share.
In January 2018, the company increased the quarterly common stock dividend
10
percent to
$1.10
per share from the previous amount of
$1.00
per share.
4
. INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
$ in millions
|
2019
|
|
2018
|
|
Federal and foreign income tax expense
|
$
|
171
|
|
|
$
|
159
|
|
|
Effective income tax rate
|
16.5
|
%
|
|
15.9
|
%
|
The effective tax rate for the
first quarter of 2019
increased to
16.5 percent
from
15.9 percent
in the first quarter of 2018 primarily due to lower tax benefits related to employee share-based compensation and claims for prior year manufacturing deductions, partially offset by higher research credits.
The company’s effective rate for the
first quarter of 2019
includes
$31 million
of research credits and
$13 million
of excess tax benefits for employee share-based compensation. The company’s effective tax rate for the first quarter of 2018 included
$26 million
of excess tax benefits for employee share-based compensation,
$20 million
of research credits and
$8 million
of claims for prior year manufacturing deductions.
During the
three
months ended
March 31, 2019
, we increased our unrecognized tax benefits related to our methods of accounting associated with the
Tax Cuts and Jobs Act
by approximately
$15 million
and it is reasonably possible that within the next twelve months those unrecognized tax benefits may increase by up to an additional
$70 million
.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2017 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under
IRS
examination.
In addition, legacy Orbital ATK federal tax returns for the year ended March 31, 2015, the nine-month transition period ended December 31, 2015 and calendar year 2016 are currently under IRS examination.
NORTHROP GRUMMAN CORPORATION
5
. FAIR VALUE OF FINANCIAL INSTRUMENTS
The company holds a portfolio of marketable securities consisting of securities to partially fund non-qualified employee benefit plans. A portion of these securities are held in common/collective trust funds and are measured at fair value using net asset value (NAV) per share as a practical expedient; and therefore are not required to be categorized in the fair value hierarchy table below. Marketable 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 commodity forward contracts and foreign currency forward contracts. The company periodically uses commodity forward contracts to hedge forecasted purchases of certain commodities. The contracts generally establish a fixed price for the underlying commodity and are designated and qualify as effective cash flow hedges of such commodity purchases. Commodity derivatives are valued based on prices of future exchanges and recently reported transactions in the marketplace. For 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 the company records at fair value on a recurring basis identified by the level of inputs used to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
$ in millions
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Financial Assets (Liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
347
|
|
|
$
|
—
|
|
|
$
|
347
|
|
|
$
|
319
|
|
|
$
|
1
|
|
|
$
|
320
|
|
|
Marketable securities valued using NAV
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
Total marketable securities
|
|
347
|
|
|
—
|
|
|
363
|
|
|
319
|
|
|
1
|
|
|
335
|
|
|
Derivatives
|
|
—
|
|
|
(5
|
)
|
|
(5
|
)
|
|
—
|
|
|
(10
|
)
|
|
(10
|
)
|
At
March 31, 2019
, the company had commodity forward contracts outstanding that hedge forecasted commodity purchases of
19 million
pounds of copper and
7 million
pounds of zinc. Gains or losses on the commodity forward contracts are recognized in product and service cost as the performance obligations on related contracts are satisfied.
The notional value of the company’s foreign currency forward contracts at
March 31, 2019
and
December 31, 2018
was
$111 million
and
$114 million
, respectively. The portion of notional value designated as a cash flow hedge at
March 31, 2019
was
$12 million
. At
December 31, 2018
,
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, 2019
and
December 31, 2018
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, 2019
.
The carrying value of cash and cash equivalents and commercial paper approximates fair value.
Long-term Debt
The estimated fair value of long-term debt was
$14.8 billion
and
$14.3 billion
as of
March 31, 2019
and
December 31, 2018
, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The carrying value of long-term debt was
$14.4 billion
as of
March 31, 2019
and
December 31, 2018
. The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.
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
NORTHROP GRUMMAN CORPORATION
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. On February 16, 2018, both the company and the United States filed motions to dismiss many of the claims and counterclaims in whole or in part. The United States also filed a motion seeking to amend its answer and counterclaim, including to reduce its counterclaim to approximately
$193 million
, which the court granted on June 11, 2018. On October 17, 2018, the court granted in part and denied in part the parties’ motions to dismiss. On December 17, 2018, the court issued a Scheduling Order, proposed by the parties, providing for the parties to engage in mediation through March 1, 2019. After the government shutdown, the mediation was rescheduled for May 2019. The Scheduling Order provides for pretrial activities to resume, if and as necessary, with trial to commence on or about September 23, 2019. 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
$28 million
as of
March 31, 2019
), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law, which amounts could be significant over time. The original suit sought
R$89 million
(the equivalent of approximately
$23 million
as of
March 31, 2019
) in damages. In October 2013, ECT asserted an additional damage claim of
R$22 million
(the equivalent of approximately
$6 million
as of
March 31, 2019
). 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
$35 million
as of
March 31, 2019
), 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. In a decision dated November 13, 2018, the trial court ruled in ECT’s favor on one of its claims against Solystic, and awarded damages of
R$41 million
(the equivalent of approximately
$10 million
as of
March 31, 2019
) against Solystic and its consortium partners, with that amount to be adjusted for inflation and interest from November 2004 through any appeal, in accordance with the Manual of Calculations of the Federal Justice, as well as attorneys’ fees. On March 22, 2019, ECT appealed the trial court’s decision to the intermediate court of appeals. Solystic filed its appeal on April 11, 2019. The parties are exploring possible resolution under a newly-established short term ECT dispute resolution program.
We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, we have worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation, the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. We have incurred, and expect to continue to incur, as included in Note 7
, substantial remediation costs related to these environmental conditions. The remediation standards or requirements to which we are subject are being reconsidered and may
NORTHROP GRUMMAN CORPORATION
change and costs may increase materially. The State of New York has notified us that it intends to seek to impose additional remedial requirements and, among other things, is also evaluating natural resource damages. In addition, we are a party to various, and expect to become a party to additional, legal proceedings and disputes related to remediation and/or alleged environmental impacts in Bethpage, including with federal and state entities, local municipalities and water districts, insurance carriers and class action and individual plaintiffs alleging personal injury and property damage and seeking both monetary and non-monetary relief. These Bethpage matters could result in additional costs, fines, penalties, sanctions, compensatory or other damages (including natural resource damages), determinations on allocation, allowability and coverage, and non-monetary relief. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these aggregate Bethpage matters.
On August 12, 2016, a putative class action complaint, naming Orbital ATK and two of its then-officers as defendants, Steven Knurr, et al. v. Orbital ATK, Inc., No. 16-cv-01031 (TSE-MSN), was filed in the United States District Court for the Eastern District of Virginia. The complaint asserts claims on behalf of purchasers of Orbital ATK securities for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5, allegedly arising out of false and misleading statements and the failure to disclose that: (i) Orbital ATK lacked effective control over financial reporting; and (ii) as a result, it failed to record an anticipated loss on a long-term contract with the U.S. Army to manufacture and supply small caliber ammunition at the U.S. Army's Lake City Army Ammunition Plant. On April 24, 2017 and October 10, 2017, the plaintiffs filed amended complaints naming additional defendants and asserting claims for alleged violations of additional sections of the Exchange Act and alleged false and misleading statements in Orbital ATK’s Form S-4 filed in connection with the Orbital-ATK Merger. The complaint seeks damages, reasonable costs and expenses at trial, including counsel and expert fees, and such other relief as deemed appropriate by the Court. On August 8, 2018, plaintiffs sought leave to file an additional amended complaint; defendants filed an opposition. The parties engaged in mediation on November 6, 2018. On December 27, 2018, the parties reached a preliminary agreement to resolve the litigation for
$108 million
subject to agreement on additional terms and to court approval. On February 22, 2019, the court preliminarily approved the parties’ proposed settlement and set a schedule for final settlement proceedings, including a final approval settlement hearing on June 7, 2019. The company is also negotiating with and pursuing coverage litigation against various of its insurance carriers. The company intends vigorously to defend itself in connection with these matters. We currently expect related contingencies will continue to be included in the company’s measurement period adjustments of the fair value of assets acquired and liabilities assumed in the Merger
(see Note 2)
.
The SEC is investigating Orbital ATK’s historical accounting practices relating to the restatement of Orbital’s unaudited condensed consolidated financial statements for the quarterly periods ended July 5, 2015 and October 4, 2015 described in the Transition Report on Form 10-K for the nine-month period ending December 31, 2015 previously filed on March 15, 2016. The SEC is also investigating matters relating to a voluntary disclosure Orbital ATK made concerning the restatement described in Orbital ATK’s Form 10-K/A for the nine-month period ending December 31, 2015 filed on February 24, 2017. The ultimate outcome of these matters, including any possible loss, cannot be predicted or reasonably estimated at this time and the company intends to continue to cooperate with the SEC.
The company is a party to various other investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of
March 31, 2019
, 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 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 that the outcome of any such matters would not have a material adverse
NORTHROP GRUMMAN CORPORATION
effect on its unaudited condensed consolidated financial position as of
March 31, 2019
, or its annual results of operations and/or cash flows.
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, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
Range of Reasonably Possible Future Costs
(1)
|
|
Accrued Costs
(2)
|
|
Deferred Costs
(3)
|
|
March 31, 2019
|
|
$460 - $836
|
|
$
|
473
|
|
|
$
|
353
|
|
|
December 31, 2018
|
|
447 - 835
|
|
461
|
|
|
343
|
|
|
|
|
|
(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, 2019
,
$172 million
is recorded in Other current liabilities and
$301 million
is recorded in Other non-current liabilities.
(3)
As of
March 31, 2019
,
$139 million
is deferred in Prepaid expenses and other current assets and
$214 million
is deferred in Other non-current assets.
Although management cannot predict whether new information gained as our environmental remediation projects progress, or as changes in facts and circumstances occur, will materially affect the estimated liability accrued, except with respect to Bethpage, we
do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the
company’s unaudited condensed consolidated financial position as of
March 31, 2019
, or its annual results of operations and/or cash flows. With respect to Bethpage, as described in Note
6
, we cannot at this time estimate the range of reasonably possible additional future costs that could result from potential changes to remediation standards or requirements to which we are subject.
Financial Arrangements
In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At
March 31, 2019
, there were
$493 million
of stand-by letters of credit and guarantees and
$200 million
of surety bonds outstanding.
Commercial Paper
The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to
$2.0 billion
. At
March 31, 2019
, there were
$1.0 billion
of outstanding short-term commercial paper borrowings at a weighted-average interest rate of
3.04 percent
that have original maturities of
three
months or less from the date of issuance. The outstanding balance of commercial paper borrowings is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.
Credit Facilities
The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of
$2.0 billion
(the “2018 Credit Agreement”) that matures in August 2023. At
March 31, 2019
, there was
no
balance outstanding under this facility; however, the outstanding balance of commercial paper borrowings reduces the amount available for borrowing under the 2018 Credit Agreement.
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
$156 million
as of
March 31, 2019
) (the “2016 Credit Agreement”). The company exercised the second option to extend the maturity to December 2020. The 2016 Credit Agreement is guaranteed by the company. At
March 31, 2019
, there was
£70 million
(the equivalent of approximately
$91 million
) 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, a large majority of the borrowings are classified as non-current.
At
March 31, 2019
,
the company was in compliance with all covenants under its 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
|
|
OPB
|
|
$ in millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
92
|
|
|
$
|
99
|
|
|
$
|
4
|
|
|
$
|
5
|
|
|
Interest cost
|
340
|
|
|
290
|
|
|
20
|
|
|
19
|
|
|
Expected return on plan assets
|
(525
|
)
|
|
(529
|
)
|
|
(23
|
)
|
|
(25
|
)
|
|
Amortization of prior service credit
|
(15
|
)
|
|
(15
|
)
|
|
(1
|
)
|
|
(5
|
)
|
|
Net periodic benefit cost (benefit)
|
$
|
(108
|
)
|
|
$
|
(155
|
)
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
Employer Contributions
The company sponsors defined benefit pension and OPB 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
|
2019
|
|
2018
|
|
Defined benefit pension plans
|
$
|
23
|
|
|
$
|
22
|
|
|
OPB plans
|
12
|
|
|
11
|
|
|
Defined contribution plans
|
191
|
|
|
104
|
|
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
|
2019
|
|
2018
|
|
RSRs granted
|
0.1
|
|
|
0.1
|
|
|
RPSRs granted
|
0.2
|
|
|
0.2
|
|
|
Grant date aggregate fair value
|
$
|
91
|
|
|
$
|
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
|
|
2019
|
2018
|
|
Minimum aggregate payout amount
|
|
$
|
36
|
|
$
|
35
|
|
|
Maximum aggregate payout amount
|
|
203
|
|
196
|
|
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.
10
. LEASES
As described in Note
1
, effective January 1, 2019, we adopted ASC 842 using the optional transition method. In accordance with the optional transition method, we did not recast the prior period unaudited condensed consolidated financial statements and all prior period amounts and disclosures are presented under ASC 840. Finance leases are not material to our unaudited condensed consolidated financial statements and are therefore not included in the following disclosures.
Total Lease Cost
Total lease cost is included in Product and Service costs and General and administrative expenses in the unaudited condensed consolidated statement of earnings and comprehensive income and is recorded net of immaterial sublease income. Total lease cost is comprised of the following:
|
|
|
|
|
|
|
|
|
$ in millions
|
|
Three Months Ended March 31, 2019
|
|
Operating lease cost
|
|
$
|
82
|
|
|
Variable lease cost
|
|
2
|
|
|
Short-term lease cost
|
|
17
|
|
|
Total lease cost
|
|
$
|
101
|
|
Supplemental Balance Sheet Information
Supplemental operating lease balance sheet information consists of the following:
|
|
|
|
|
|
|
|
|
$ in millions
|
|
March 31, 2019
|
|
Operating lease right-of-use assets
|
|
$
|
1,283
|
|
|
|
|
|
|
Other current liabilities
|
|
229
|
|
|
Operating lease liabilities
|
|
1,098
|
|
|
Total operating lease liabilities
|
|
$
|
1,327
|
|
Other Supplemental Information
Other supplemental operating lease information consists of the following:
|
|
|
|
|
|
|
|
|
$ in millions
|
|
Three Months Ended March 31, 2019
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
$
|
84
|
|
|
Right-of-use assets obtained in exchange for new lease liabilities
|
|
54
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
11.0 years
|
|
|
Weighted average discount rate
|
|
4.0
|
%
|
NORTHROP GRUMMAN CORPORATION
Maturities of Lease Liabilities
Maturities of operating lease liabilities as of
March 31, 2019
were as follows:
|
|
|
|
|
|
|
|
|
$ in millions
|
|
|
|
Year Ending December 31
|
|
|
|
2019
(1)
|
|
$
|
208
|
|
|
2020
|
|
260
|
|
|
2021
|
|
207
|
|
|
2022
|
|
170
|
|
|
2023
|
|
134
|
|
|
Thereafter
|
|
737
|
|
|
Total lease payments
|
|
1,716
|
|
|
Less: imputed interest
|
|
(389
|
)
|
|
Present value of operating lease liabilities
|
|
$
|
1,327
|
|
|
|
|
|
(1)
|
Excludes the
three
months ended
March 31, 2019
.
|
As of
March 31, 2019
, we have a rental commitment of
$226 million
for a real estate lease that has not yet commenced. This operating lease is expected to commence in the fourth quarter of 2019 with a lease term of approximately
17 years
.
Rental expense for operating leases classified under ASC 840 for the
three
months ended
March 31, 2018
was
$92 million
, net of immaterial amounts of sublease income. As of
December 31, 2018
, future minimum lease payments under long-term non-cancelable operating leases as classified under ASC 840 were as follows:
|
|
|
|
|
|
|
|
$ in millions
|
|
|
Year Ending December 31
|
|
|
2019
|
$
|
312
|
|
|
2020
|
270
|
|
|
2021
|
221
|
|
|
2022
|
186
|
|
|
2023
|
152
|
|
|
Thereafter
|
939
|
|
|
Total minimum lease payments
|
$
|
2,080
|
|
NORTHROP GRUMMAN CORPORATION
11
. SEGMENT INFORMATION
The company is aligned in
four
operating sectors, which also comprise our reportable segments: Aerospace Systems, Innovation Systems, Mission Systems and Technology Services.
The following table presents sales and operating income by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
$ in millions
|
2019
|
|
2018
|
|
Sales
|
|
|
|
|
Aerospace Systems
|
$
|
3,496
|
|
|
$
|
3,280
|
|
|
Innovation Systems
|
1,438
|
|
|
—
|
|
|
Mission Systems
|
2,886
|
|
|
2,883
|
|
|
Technology Services
|
977
|
|
|
1,144
|
|
|
Intersegment eliminations
|
(608
|
)
|
|
(572
|
)
|
|
Total sales
|
8,189
|
|
|
6,735
|
|
|
Operating income
|
|
|
|
|
Aerospace Systems
|
382
|
|
|
341
|
|
|
Innovation Systems
|
167
|
|
|
—
|
|
|
Mission Systems
|
383
|
|
|
371
|
|
|
Technology Services
|
102
|
|
|
122
|
|
|
Intersegment eliminations
|
(67
|
)
|
|
(72
|
)
|
|
Total segment operating income
|
967
|
|
|
762
|
|
|
Net FAS (service)/CAS pension adjustment
|
108
|
|
|
127
|
|
|
Unallocated corporate expense
|
(139
|
)
|
|
(41
|
)
|
|
Total operating income
|
$
|
936
|
|
|
$
|
848
|
|
Net FAS (Service)/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 (service)/CAS pension adjustment
reflects the difference between CAS pension expense included as cost in segment operating income and the service cost component of FAS expense included in total operating income.
Unallocated Corporate Expense
Unallocated corporate expense includes the portion of corporate costs not considered allowable or allocable under applicable CAS or
FAR, and therefore not allocated to the segments, such as a portion of management and administration, legal, environmental, compensation, retiree benefits and other corporate unallowable costs. Unallocated corporate expense also includes costs not considered part of management’s evaluation of segment operating performance, such as amortization of purchased intangible assets and the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business combinations.
NORTHROP GRUMMAN CORPORATION
Disaggregation of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by Customer Type
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
$ in millions
|
$
|
%
(3)
|
|
$
|
%
(3)
|
|
Aerospace Systems
|
|
|
|
|
|
|
U.S. government
(1)
|
$
|
3,022
|
|
86
|
%
|
|
$
|
2,908
|
|
89
|
%
|
|
International
(2)
|
394
|
|
11
|
%
|
|
271
|
|
8
|
%
|
|
Other customers
|
34
|
|
1
|
%
|
|
42
|
|
1
|
%
|
|
Intersegment sales
|
46
|
|
2
|
%
|
|
59
|
|
2
|
%
|
|
Aerospace Systems sales
|
3,496
|
|
100
|
%
|
|
3,280
|
|
100
|
%
|
|
Innovation Systems
|
|
|
|
|
|
|
U.S. government
(1)
|
1,015
|
|
71
|
%
|
|
—
|
|
—
|
|
|
International
(2)
|
247
|
|
17
|
%
|
|
—
|
|
—
|
|
|
Other customers
|
114
|
|
8
|
%
|
|
—
|
|
—
|
|
|
Intersegment sales
|
62
|
|
4
|
%
|
|
—
|
|
—
|
|
|
Innovation Systems sales
|
1,438
|
|
100
|
%
|
|
—
|
|
—
|
|
|
Mission Systems
|
|
|
|
|
|
|
U.S. government
(1)
|
2,167
|
|
75
|
%
|
|
2,190
|
|
76
|
%
|
|
International
(2)
|
367
|
|
13
|
%
|
|
379
|
|
13
|
%
|
|
Other customers
|
34
|
|
1
|
%
|
|
30
|
|
1
|
%
|
|
Intersegment sales
|
318
|
|
11
|
%
|
|
284
|
|
10
|
%
|
|
Mission Systems sales
|
2,886
|
|
100
|
%
|
|
2,883
|
|
100
|
%
|
|
Technology Services
|
|
|
|
|
|
|
U.S. government
(1)
|
553
|
|
57
|
%
|
|
602
|
|
53
|
%
|
|
International
(2)
|
209
|
|
21
|
%
|
|
220
|
|
19
|
%
|
|
Other customers
|
33
|
|
3
|
%
|
|
93
|
|
8
|
%
|
|
Intersegment sales
|
182
|
|
19
|
%
|
|
229
|
|
20
|
%
|
|
Technology Services sales
|
977
|
|
100
|
%
|
|
1,144
|
|
100
|
%
|
|
Total
|
|
|
|
|
|
|
U.S. government
(1)
|
6,757
|
|
83
|
%
|
|
5,700
|
|
85
|
%
|
|
International
(2)
|
1,217
|
|
15
|
%
|
|
870
|
|
13
|
%
|
|
Other customers
|
215
|
|
2
|
%
|
|
165
|
|
2
|
%
|
|
Total Sales
|
$
|
8,189
|
|
100
|
%
|
|
$
|
6,735
|
|
100
|
%
|
|
|
|
|
(1)
|
Sales to the U.S. government include sales from contracts for which we are the prime contractor, as well as those for which we are a subcontractor and the ultimate customer is the U.S. government. Each of the company's segments derives substantial revenue from the U.S. government.
|
(2)
International sales include sales from contracts for which we are the prime contractor, as well as those for which we are a subcontractor and the ultimate customer is an international customer. These sales include foreign military sales contracted through the U.S. government.
(3)
Percentages calculated based on total segment sales.
NORTHROP GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by Contract Type
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
$ in millions
|
$
|
%
(1)
|
|
$
|
%
(1)
|
|
Aerospace Systems
|
|
|
|
|
|
|
|
|
|
|
Cost-type
|
$
|
2,002
|
|
58
|
%
|
|
$
|
1,902
|
|
59
|
%
|
|
Fixed-price
|
1,448
|
|
42
|
%
|
|
1,319
|
|
41
|
%
|
|
Intersegment sales
|
46
|
|
|
|
59
|
|
|
|
Aerospace Systems sales
|
3,496
|
|
|
|
3,280
|
|
|
|
Innovation Systems
|
|
|
|
|
|
|
Cost-type
|
408
|
|
30
|
%
|
|
—
|
|
—
|
|
|
Fixed-price
|
968
|
|
70
|
%
|
|
—
|
|
—
|
|
|
Intersegment sales
|
62
|
|
|
|
—
|
|
|
|
Innovation Systems sales
|
1,438
|
|
|
|
—
|
|
|
|
Mission Systems
|
|
|
|
|
|
|
Cost-type
|
1,274
|
|
50
|
%
|
|
1,279
|
|
49
|
%
|
|
Fixed-price
|
1,294
|
|
50
|
%
|
|
1,320
|
|
51
|
%
|
|
Intersegment sales
|
318
|
|
|
|
284
|
|
|
|
Mission Systems sales
|
2,886
|
|
|
|
2,883
|
|
|
|
Technology Services
|
|
|
|
|
|
|
Cost-type
|
392
|
|
49
|
%
|
|
437
|
|
48
|
%
|
|
Fixed-price
|
403
|
|
51
|
%
|
|
478
|
|
52
|
%
|
|
Intersegment sales
|
182
|
|
|
|
229
|
|
|
|
Technology Services sales
|
977
|
|
|
|
1,144
|
|
|
|
Total
|
|
|
|
|
|
|
Cost-type
|
4,076
|
|
50
|
%
|
|
3,618
|
|
54
|
%
|
|
Fixed-price
|
4,113
|
|
50
|
%
|
|
3,117
|
|
46
|
%
|
|
Total Sales
|
$
|
8,189
|
|
|
|
$
|
6,735
|
|
|
|
|
|
|
(1)
|
Percentages calculated based on external customer sales.
|
NORTHROP GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by Geographic Region
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
$ in millions
|
$
|
%
(2)
|
|
$
|
%
(2)
|
|
Aerospace Systems
|
|
|
|
|
|
|
United States
|
$
|
3,056
|
|
89
|
%
|
|
$
|
2,950
|
|
92
|
%
|
|
Asia/Pacific
|
239
|
|
7
|
%
|
|
129
|
|
4
|
%
|
|
All other
(1)
|
155
|
|
4
|
%
|
|
142
|
|
4
|
%
|
|
Intersegment sales
|
46
|
|
|
|
59
|
|
|
|
Aerospace Systems sales
|
3,496
|
|
|
|
3,280
|
|
|
|
Innovation Systems
|
|
|
|
|
|
|
United States
|
1,129
|
|
82
|
%
|
|
—
|
|
—
|
|
|
Asia/Pacific
|
45
|
|
3
|
%
|
|
—
|
|
—
|
|
|
All other
(1)
|
202
|
|
15
|
%
|
|
—
|
|
—
|
|
|
Intersegment sales
|
62
|
|
|
|
—
|
|
|
|
Innovation Systems sales
|
1,438
|
|
|
|
—
|
|
|
|
Mission Systems
|
|
|
|
|
|
|
United States
|
2,201
|
|
86
|
%
|
|
2,220
|
|
85
|
%
|
|
Asia/Pacific
|
146
|
|
5
|
%
|
|
153
|
|
6
|
%
|
|
All other
(1)
|
221
|
|
9
|
%
|
|
226
|
|
9
|
%
|
|
Intersegment sales
|
318
|
|
|
|
284
|
|
|
|
Mission Systems sales
|
2,886
|
|
|
|
2,883
|
|
|
|
Technology Services
|
|
|
|
|
|
|
United States
|
586
|
|
74
|
%
|
|
695
|
|
76
|
%
|
|
Asia/Pacific
|
38
|
|
4
|
%
|
|
32
|
|
3
|
%
|
|
All other
(1)
|
171
|
|
22
|
%
|
|
188
|
|
21
|
%
|
|
Intersegment sales
|
182
|
|
|
|
229
|
|
|
|
Technology Services sales
|
977
|
|
|
|
1,144
|
|
|
|
Total
|
|
|
|
|
|
|
United States
|
6,972
|
|
85
|
%
|
|
5,865
|
|
87
|
%
|
|
Asia/Pacific
|
468
|
|
6
|
%
|
|
314
|
|
5
|
%
|
|
All other
(1)
|
749
|
|
9
|
%
|
|
556
|
|
8
|
%
|
|
Total Sales
|
$
|
8,189
|
|
|
|
$
|
6,735
|
|
|
|
|
|
|
(1)
|
All other is principally comprised of Europe and the Middle East.
|
|
|
|
|
(2)
|
Percentages calculated based on external customer sales.
|