NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global security company. We offer a broad portfolio of capabilities and technologies that enable us to deliver innovative platforms, systems and solutions for applications that range from undersea to outer space and into cyberspace. We provide capabilities in autonomous systems; cyber; command, control, communications and computers, intelligence, surveillance and reconnaissance (C4ISR); space; strike; and logistics and modernization. We participate in many high-priority defense and government programs in the United States (U.S.) and abroad. We conduct most of our business with the U.S. government, principally the Department of Defense (DoD) and intelligence community. We also conduct business with foreign, state and local governments, as well as commercial customers.
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 consolidated results of operations. See Note
2
for further information regarding the Merger.
Principles of Consolidation
The consolidated financial statements include the accounts of Northrop Grumman and its subsidiaries and joint ventures or other investments for which we consolidate the financial results. Material intercompany accounts, transactions and profits are eliminated in consolidation. Investments in equity securities and joint ventures where the company has significant influence, but not control, are accounted for using the equity method.
Basis of Presentation
The prior period financial information in the company’s consolidated financial statements reflects the retrospective effects from the company’s January 1, 2018 adoption of Accounting Standards Codification (ASC) Topic 606,
Revenue from Contracts with Customers,
and Accounting Standards Update (ASU) No. 2017-07,
Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, and our fourth quarter 2018 change in accounting method related to the recognition of actuarial gains and losses for pension and other postretirement benefit (OPB) plans as discussed below.
Accounting Estimates
The company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”). The preparation thereof requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Estimates have been prepared using the most current and best available information; however, actual results could differ materially from those estimates.
Revenue Recognition
The majority of our sales are derived from long-term contracts with the U.S. government for the production of goods, the provision of services, or a combination of both. The company classifies sales as product or service based on the predominant attributes of each contract.
Under Accounting Standards Codification (ASC) Topic 606,
Revenue from Contracts with Customers
, 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 (development, production, maintenance and/or support). 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 the cost plus a reasonable margin approach of ASC Topic 606. Warranties are provided on certain contracts, but do not typically provide for services beyond standard assurances and are therefore not within the scope of ASC Topic 606. Likewise, our accounting for costs to
NORTHROP GRUMMAN CORPORATION
obtain or fulfill a contract was not significantly impacted by the adoption of ASC Topic 606 as these costs are not material.
A contract modification exists when the parties to a contract approve a change in the scope or price of a contract. Contracts are often modified for changes in contract specifications or requirements. 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 entitle the customer 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 and we are typically entitled to cost plus a reasonable margin for work in process if the contract is terminated for convenience, 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 accounts receivable 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 consolidated financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. During the second quarter of
2018
, the company recognized
$69 million
of favorable EAC adjustments on multiple restricted programs at Aerospace Systems. During the third quarter of 2017, the company recorded a
$56 million
favorable EAC adjustment on a restricted program at Aerospace Systems.
The following table presents the effect of aggregate net EAC adjustments:
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Year Ended December 31
|
$ in millions, except per share data
|
2018
|
|
2017
|
|
2016
|
Operating income
|
$
|
577
|
|
|
$
|
360
|
|
|
$
|
443
|
|
Net earnings
(1)
|
456
|
|
|
234
|
|
|
288
|
|
Diluted earnings per share
(1)
|
2.61
|
|
|
1.33
|
|
|
1.60
|
|
|
|
(1)
|
Based on statutory tax rates in effect for each year presented.
|
Revenue recognized from performance obligations satisfied in previous reporting periods was
$631 million
,
$374 million
and
$463 million
for the years ended
December 31, 2018
,
2017
and
2016
, 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 an option or IDIQ task order is exercised or awarded.
Company backlog as of
December 31, 2018
was
$53.5 billion
.
We expect to recognize approximately 50 percent and 75 percent of our December 31, 2018 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 consist of unbilled receivables, 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 include advance payments and billings in excess of revenue recognized. 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.
Net contract assets (liabilities) are as follows:
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$ in millions
|
December 31,
2018
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|
December 31,
2017
|
$ Change
|
% Change
|
Unbilled receivables, net
|
$
|
5,026
|
|
|
$
|
3,465
|
|
$
|
1,561
|
|
45
|
%
|
Advance payments and amounts in excess of costs incurred
|
(1,917
|
)
|
|
(1,761
|
)
|
(156
|
)
|
9
|
%
|
Net contract assets (liabilities)
|
$
|
3,109
|
|
|
$
|
1,704
|
|
$
|
1,405
|
|
82
|
%
|
The change in the balances of the company’s contract assets and liabilities primarily results from timing differences between revenue recognition and customer billings and/or payments. The increase in net contract assets during the year ended
December 31, 2018
is principally due to the addition of
$1.0 billion
of net contract assets from Innovation Systems and a reduction of amounts in excess of costs incurred at Mission Systems.
The amount of revenue recognized for the years ended
December 31, 2018
,
2017
and
2016
that was included in the contract liability balance at the beginning of each year was
$1.3 billion
,
$1.2 billion
and
$1.3 billion
, respectively.
Disaggregation of Revenue
See Note
15
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.
General and Administrative Expenses
In accordance with the regulations that govern cost accounting requirements for government contracts, most general management and corporate expenses incurred at the segment and corporate locations are considered allowable and allocable costs. Allowable and allocable G&A costs, including independent research and development (IR&D) and bid and proposal (B&P) costs, are allocated on a systematic basis to contracts in progress and are included as a component of total estimated contract costs.
Research and Development
Company-sponsored research and development activities primarily include efforts related to government programs. Company-sponsored IR&D expenses totaled
$764 million
,
$639 million
and
$705 million
in
2018
,
2017
and
2016
,
NORTHROP GRUMMAN CORPORATION
respectively, which represented
2.5 percent
,
2.5 percent
and
2.9 percent
of total sales, respectively. Customer-funded research and development activities are charged directly to the related contracts.
Income Taxes
Provisions for federal and foreign income taxes are calculated on reported earnings before income taxes based on current tax law and include the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently payable because certain items of income and expense are recognized in different periods for financial reporting purposes than for income tax purposes. The company recognizes federal and foreign interest accrued related to unrecognized tax benefits in income tax expense. Federal tax penalties are recognized as a component of income tax expense.
In accordance with the regulations that govern cost accounting requirements for government contracts, current state and local income and franchise taxes are generally considered allowable and allocable costs and, consistent with industry practice, are recorded in operating costs and expenses. The company recognizes changes in deferred state taxes and unrecognized state tax benefits in unallocated corporate expenses.
Uncertain tax positions reflect the company’s expected treatment of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim, which have not been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxing authorities or the statute of limitations concerning such issues lapses, the company does not generally recognize the tax benefits resulting from such positions and reports the tax effects as a liability for uncertain tax positions in its consolidated statements of financial position.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of three months or less, primarily consisting of bank time deposits and investments in institutional money market funds. Cash in bank accounts often exceeds federally insured limits.
Fair Value of Financial Instruments
The company measures the fair value of its financial instruments using observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions.
These two types of inputs create the following fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 - Significant inputs to the valuation model are unobservable.
Marketable securities accounted for as trading are recorded at fair value on a recurring basis. Changes in unrealized gains and losses on trading securities are included in Other, net in the consolidated statements of earnings and
comprehensive income
. Investments in held-to-maturity instruments with original maturities greater than three months are recorded at amortized cost.
Derivative financial instruments are recognized as assets or liabilities in the financial statements and measured at fair value on a recurring basis. Changes in the fair value of derivative financial instruments that are designated as fair value hedges are recorded in net earnings, while the changes in the fair value of derivative financial instruments that are designated as cash flow hedges are recorded as a component of other comprehensive income until settlement. For derivative financial instruments not designated as hedging instruments, gains or losses resulting from changes in the fair value are reported in Other, net in the consolidated statements of earnings and
comprehensive income
.
The company may use derivative financial instruments to manage its exposure to interest rate risk for its long-term fixed-rate debt portfolio, foreign currency exchange risk related to receipts from customers and payments to suppliers denominated in foreign currencies and commodity price risk on purchases of inventory such as copper and zinc. The company does not use derivative financial instruments for trading or speculative purposes, nor does it use leveraged financial instruments. Credit risk related to derivative financial instruments is considered minimal and is managed through the use of multiple counterparties with high credit standards and periodic settlements of positions, as well as by entering into master netting agreements with most of our counterparties.
NORTHROP GRUMMAN CORPORATION
Inventoried Costs
Inventoried costs generally comprise costs associated with unsatisfied performance obligations on contracts accounted for using point in time revenue recognition, costs incurred in excess of existing contract requirements or funding that are probable of recovery and other accrued contract costs that are expected to be recoverable when allocated to specific contracts. Product inventory primarily consists of raw materials and is stated at the lower of cost or net realizable value, generally using the average method.
Accumulated contract costs in inventoried costs include costs such as direct production costs, factory and engineering overhead, production tooling costs, and allowable G&A. Inventoried costs are classified as current assets and, in accordance with industry practice, include amounts related to contracts having production cycles longer than one year.
Cash Surrender Value of Life Insurance Policies
The company maintains whole life insurance policies on a group of executives, which are recorded at their cash surrender value as determined by the insurance carrier. The company also has split-dollar life insurance policies on former officers and executives from acquired businesses, which are recorded at the lesser of their cash surrender value or premiums paid. These policies are utilized as a partial funding source for deferred compensation and other non-qualified employee retirement plans. As of
December 31, 2018
and
2017
, the carrying values associated with these policies were
$316 million
and
$340 million
, respectively, and are recorded in Other non-current assets in the consolidated statements of financial position.
Property, Plant and Equipment
Property, plant and equipment are depreciated over the estimated useful lives of individual assets. Most assets are depreciated using declining-balance methods, with the remainder using the straight-line method. Depreciation expense is generally recorded in the same segment where the related assets are held. However, the additional depreciation expense related to the step-up in fair value of property, plant and equipment acquired through business combinations is recorded in unallocated corporate expense within operating income as such depreciation is not considered part of management’s evaluation of segment operating performance. Major classes of property, plant and equipment and their useful lives are as follows:
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December 31
|
Useful life in years, $ in millions
|
|
Useful Life
|
|
2018
|
|
2017
|
Land and land improvements
|
|
Up to 40
(1)
|
|
$
|
636
|
|
|
$
|
420
|
|
Buildings and improvements
|
|
Up to 40
|
|
2,139
|
|
|
1,834
|
|
Machinery and other equipment
|
|
Up to 20
|
|
6,618
|
|
|
5,105
|
|
Capitalized software costs
|
|
3-5
|
|
603
|
|
|
537
|
|
Leasehold improvements
|
|
Length of Lease
(2)
|
|
1,745
|
|
|
1,395
|
|
Property, plant and equipment, at cost
|
|
|
|
11,741
|
|
|
9,291
|
|
Accumulated depreciation
|
|
|
|
(5,369
|
)
|
|
(5,066
|
)
|
Property, plant and equipment, net
|
|
|
|
$
|
6,372
|
|
|
$
|
4,225
|
|
|
|
(1)
|
Land is not a depreciable asset.
|
|
|
(2)
|
Leasehold improvements are depreciated over the shorter of the useful life of the asset or the length of the lease.
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Goodwill and Other Purchased Intangible Assets
The company tests goodwill for impairment at least annually as of December 31, or when an indicator of potential impairment exists. When performing the goodwill impairment test, the company uses a discounted cash flow approach corroborated by comparative market multiples, where appropriate, to determine the fair value of its reporting units.
Goodwill and other purchased intangible asset balances are included in the identifiable assets of their assigned business segment. Beginning in 2018, the company includes the amortization of other purchased intangible assets in unallocated corporate expense within operating income as such amortization is no longer considered part of management’s evaluation of segment operating performance. The company’s customer-related intangible assets are generally amortized over their respective useful lives based on the pattern in which the future economic benefits of the intangible assets are expected to be consumed. Other intangible assets are generally amortized on a straight-line basis over their estimated useful lives.
NORTHROP GRUMMAN CORPORATION
Leases
The company uses its incremental borrowing rate in the assessment of lease classification as capital or operating and defines the initial lease term to include renewal options determined to be reasonably assured. The majority of our leases are operating leases.
Many of the company’s real property lease agreements contain incentives for tenant improvements, rent holidays, or rent escalation clauses. For tenant improvement incentives, the company records a deferred rent liability and amortizes the deferred rent over the term of the lease as a reduction to rent expense. For rent holidays and rent escalation clauses during the lease term, the company records rental expense on a straight-line basis over the term of the lease. For purposes of recognizing lease incentives, the company uses the date of initial possession as the commencement date, which is generally when the company is given the right of access to the space and begins to make improvements in preparation for intended use.
Litigation, Commitments and Contingencies
We accrue for litigation, commitments and contingencies when management, after considering the facts and circumstances of each matter as then known to management, has determined it is probable a liability will be found to have been incurred and the amount of the loss can be reasonably estimated. When only a range of amounts is reasonably estimable and no amount within the range is more likely than another, the low end of the range is recorded. Legal fees are expensed as incurred. Due to the inherent uncertainties surrounding gain contingencies, we generally do not recognize potential gains until realized.
Environmental Costs
We accrue for environmental liabilities when management determines that, based on the facts and circumstances known to the company, it is probable the company will incur costs to address environmental impacts and the costs are reasonably estimable. When only a range of amounts is reasonably estimable and no amount within the range is more probable than another, we record the low end of the range. The company typically projects environmental costs for up to 30 years, records environmental liabilities on an undiscounted basis, and excludes asset retirement obligations and certain legal costs. At sites involving multiple parties, we accrue environmental liabilities based upon our expected share of liability, taking into account the financial viability of other liable parties. As a portion of environmental remediation liabilities are expected to be recoverable through overhead charges on government contracts, such amounts are deferred in prepaid expenses and other current assets (current portion) and other non-current assets until charged to contracts. The portion of environmental costs not expected to be recoverable is expensed.
Retirement Benefits
The company sponsors various defined benefit pension plans and defined contribution retirement plans covering substantially all of its employees. In most cases, our defined contribution plans provide for a company match of employee contributions. The company also provides postretirement benefits other than pensions to eligible retirees and qualifying dependents, consisting principally of health care and life insurance benefits.
The liabilities, unamortized prior service credits and annual income or expense of the company’s defined benefit pension and OPB plans are determined using methodologies that involve several actuarial assumptions.
Because U.S. government regulations require that the costs of pension and OPB plans be charged to our contracts in accordance with the Federal Acquisition Regulation (FAR) and the related U.S. Government Cost Accounting Standards (CAS) that govern such plans, we calculate retiree benefit plan costs under both CAS and FAS methods. While both FAS and CAS recognize a normal service cost component in measuring periodic pension cost, there are differences in the way the components of annual pension costs are calculated under each method. Measuring plan obligations under FAS and CAS includes different assumptions and models, such as in estimating returns on plan assets, calculating interest expense and the periods over which gains/losses related to pension assets and actuarial changes are recognized. As a result, annual retiree benefit plan expense amounts for FAS are different from the amounts for CAS in any given reporting period even though the ultimate cost of providing benefits over the life of the plans is the same under either method. CAS retiree benefit plan costs are charged to contracts and are included in segment operating income, and the difference between the service cost component of FAS expense and total CAS expense is recorded in operating income at the consolidated company level. Not all net periodic pension expense is recognized in net earnings in the year incurred because it is allocated as production costs and a portion remains in inventory at the end of a reporting period.
Change in Accounting Method
During
the fourth quarter of 2018, we changed our GAAP accounting method related to the recognition of actuarial gains and losses for the company’s pension and
OPB
plans (the “Accounting change”). Prior to the Accounting
NORTHROP GRUMMAN CORPORATION
change, actuarial gains and losses were recognized as a component of
Accumulated other comprehensive (loss) income
upon annual remeasurement and were amortized into earnings in future periods on a plan-by-plan basis when they exceeded the accounting corridor, a defined range within which amortization of net gains and losses is not required.
Under the new method, actuarial gains and losses are immediately recognized in net periodic benefit cost through Mark-to-market pension and OPB (“MTM”) (expense) benefit upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.
Prior service credits will continue to be recognized as a component of
Accumulated other comprehensive (loss) income
and amortized into earnings in future periods. While the historical accounting principle was acceptable, we believe the Accounting change is preferable as it better aligns with fair value principles by recognizing the effects of economic and interest rate changes in our pension and OPB assets and liabilities in the year in which the gains and losses are incurred rather than amortizing them over time. The Accounting change has been applied retrospectively to all prior years presented. As of January 1, 2016, the cumulative effect of this change resulted in a
$5.5 billion
decrease to retained earnings and a corresponding
$5.5 billion
increase to
accumulated other comprehensive (loss) income
, both net of tax of
$3.5 billion
.
See Notes
13
,
16
,
17
and
18
for further information regarding the impact of the Accounting change on our current and prior period consolidated financial statements.
Stock Compensation
The company’s stock compensation plans are classified as equity plans and compensation expense is generally recognized over the vesting period of stock awards (typically
three
years), net of estimated forfeitures. The company issues stock awards in the form of restricted performance stock rights and restricted stock rights. The fair value of stock awards is determined based on the closing market price of the company’s common stock on the grant date. At each reporting date, the number of shares used to calculate compensation expense and diluted earnings per share is adjusted to reflect the number ultimately expected to vest.
Accumulated Other Comprehensive (Loss) Income
The components of
accumulated other comprehensive (loss) income
are as follows:
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December 31
|
$ in millions
|
|
2018
|
|
2017
|
Unamortized prior service credit, net of tax expense of $32 for 2018 and $76 for 2017
|
|
$
|
98
|
|
|
$
|
133
|
|
Cumulative translation adjustment
|
|
(144
|
)
|
|
(136
|
)
|
Other, net
|
|
(6
|
)
|
|
4
|
|
Total accumulated other comprehensive (loss) income
|
|
$
|
(52
|
)
|
|
$
|
1
|
|
Unamortized prior service credit as of
December 31, 2018
reflects a reclassification from
accumulated other comprehensive (loss) income
to retained earnings of
$25 million
of stranded tax effects resulting from the 2017 Tax Act. This reclassification, which was calculated after consideration of the Accounting change, resulted from the company’s early adoption of ASU 2018-02 on January 1, 2018. See “Accounting Standards Updates” below for more information.
Reclassifications from
accumulated other comprehensive (loss) income
to net earnings related to the amortization of prior service credit were
$60 million
,
$44 million
and
$62 million
, net of taxes, for the years ended
December 31, 2018
,
2017
and
2016
, respectively. The reclassifications are included in the computation of net periodic benefit cost. See Note
13
for further information.
Reclassifications from
accumulated other comprehensive (loss) income
to net earnings, relating to cumulative translation adjustments, marketable securities (prior to the January 1, 2018 adoption of ASU 2016-01) and cash flow hedges were not material for the years ended
December 31, 2018
,
2017
and
2016
.
Related Party Transactions
For all periods presented, the company had no material related party transactions.
Accounting Standards Updates
On February 14, 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. ASU 2018-02 allows companies to reclassify stranded tax effects resulting from the 2017 Tax Act from accumulated other comprehensive (loss) income to retained earnings. As described above, the company elected to early adopt ASU 2018-02 on January 1, 2018, which resulted in a reclassification of
$25 million
NORTHROP GRUMMAN CORPORATION
of stranded tax effects, related to our unamortized prior service credits, from accumulated other comprehensive (loss) income to retained earnings.
Adoption of ASU 2018-02 did not have a material impact on the company’s results of operations and/or cash flows.
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 OPB 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 is eligible for asset capitalization. We adopted ASU 2017-07 on January 1, 2018 using the retrospective method. Adoption of ASU 2017-07 did not have a material impact on our consolidated statements of financial position and/or cash flows.
See Note
18
for further information regarding the impact of adopting ASU 2017-17 on our consolidated statements of earnings and comprehensive income.
On February 25, 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. ASU 2016-02 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. ASU 2016-02 will be effective January 1, 2019, although early adoption is permitted. 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. The company has made substantial progress in executing our implementation plan. We have revised our controls and processes to address the lease standard and have completed the implementation and data input for our lease accounting software tool. We are electing the package of practical expedients, which, among other things, allows us to carry forward our prior lease classifications under ASC 840. However, we are not electing to adopt the hindsight practical expedient and are therefore maintaining the lease terms we previously determined under ASC 840. Adoption of the standard is expected to have an impact of approximately
$1.4 billion
on our consolidated statement of financial position for the addition of lease assets and liabilities related to operating leases. ASU 2016-02 also requires expanded disclosure regarding the amounts, timing and uncertainties of cash flows related to a company’s lease portfolio. We are evaluating these disclosure requirements and are incorporating the collection of relevant data into our processes in preparation for disclosure in 2019. We do not expect ASU 2016-02 to have a material impact on our annual results of operations and/or cash flows.
On January 5, 2016, the FASB issued ASU No. 2016-01,
Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU 2016-01 requires equity investments that are not accounted for under the equity method of accounting or that do not result in consolidation of the investee to be measured at fair value with changes recognized in net earnings. ASU 2016-01 also eliminates the available-for-sale classification for equity investments that recognized changes in fair value as a component of other comprehensive income. We adopted ASU 2016-01 on January 1, 2018 using the modified retrospective method, which resulted in a
$4 million
(net of tax) cumulative-effect adjustment from accumulated other comprehensive
(loss) income
to retained earnings. Adoption of ASU 2016-01 did not have a material impact on our results of operations and/or cash flows.
On May 28, 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. Topic 606 supersedes previous 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. The primary impact of the adoption of ASC Topic 606 was that, in most cases, the accounting for those contracts where we previously recognized revenue as units were delivered changed under ASC Topic 606 such that we now recognize revenue as over time as costs are incurred. In addition, for certain of our contracts, there is a change in the number of performance obligations under ASC Topic 606, which has altered the timing of revenue and margin recognition.
We adopted ASC Topic 606 on January 1, 2018 using the full retrospective method. We applied the transition practical expedient related to remaining performance obligations for reporting periods presented before the date of initial application. No other practical expedients were applied. The cumulative effect of adopting ASC Topic 606
NORTHROP GRUMMAN CORPORATION
was a
$148 million
increase to retained earnings at January 1, 2016.
See Note
18
for further information regarding the impact of adopting ASC Topic 606 on our consolidated financial statements.
Other accounting standards updates adopted and/or issued, but not effective until after December 31, 2018, are not expected to have a material effect on the company’s consolidated financial position, annual results of operations and/or cash flows.
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
, whose main products include launch vehicles and related propulsion systems; missile products and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and advanced aerospace structures.
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.
The operating results of Innovation Systems subsequent to the Merger date are included in the company's consolidated results of operations. Innovation Systems recognized sales of
$3.3 billion
, operating income of
$343 million
and net earnings of
$273 million
for the period from the Merger date to
December 31, 2018
.
The company recognized
$29 million
of acquisition-related costs that were expensed as incurred during the year ended
December 31, 2018
. These costs are included in Product and Service cost in the consolidated statements of earnings and comprehensive income.
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 OPB plan liabilities increased
$56 million
and Goodwill decreased
$73 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: income tax and certain 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:
|
|
|
|
|
|
$ 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:
|
|
|
|
|
|
$ 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
|
|
214
|
|
Property, plant and equipment
|
|
1,509
|
|
Goodwill
|
|
6,222
|
|
Intangible assets
|
|
1,525
|
|
Other non-current assets
|
|
151
|
|
Total assets acquired
|
|
11,786
|
|
Trade accounts payable
|
|
(397
|
)
|
Accrued employee compensation
|
|
(158
|
)
|
Advance payments and amounts 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
|
|
(248
|
)
|
Other non-current liabilities
|
|
(156
|
)
|
Total liabilities assumed
|
|
(4,044
|
)
|
Total purchase price
|
|
$
|
7,742
|
|
|
|
(1)
|
Included in Other current liabilities in the consolidated statements of financial position.
|
Below market contracts represent liabilities on certain acquired programs where the expected costs at completion exceed the expected sales under contract. We measured these liabilities based on the estimated price to transfer the obligations to a market participant at the Merger date plus a reasonable profit margin. These liabilities will be reduced as the company incurs costs to complete its performance obligations on the underlying programs. This reduction will be included in sales and is estimated as follows:
$64 million
in 2019,
$45 million
in 2020, and
$2 million
in 2021.
The following table presents a summary of purchased intangible assets and their related estimated useful lives:
|
|
|
|
|
|
|
|
|
|
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 (refer to Note
8
). 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:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
$ in millions, except per share amounts
|
2018
|
|
2017
|
Sales
|
$
|
32,319
|
|
|
$
|
30,634
|
|
Net earnings
|
3,417
|
|
|
2,938
|
|
Diluted earnings per share
|
19.57
|
|
|
16.73
|
|
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:
|
|
1.
|
The impact of the adoption of ASC Topic 606 on Orbital ATK’s historical sales of
$21 million
and cost of sales of
$21 million
, for the year ended
December 31, 2017
.
|
|
|
2.
|
The elimination of intercompany sales and costs of sales between the company and Orbital ATK of
$80 million
and
$155 million
for the years ended
December 31, 2018
and
2017
, respectively.
|
|
|
3.
|
The elimination of nonrecurring transaction costs incurred by the company and Orbital ATK in connection with the Merger of
$71 million
and
$57 million
for the years ended
December 31, 2018
and
2017
, respectively.
|
|
|
4.
|
The recognition of additional depreciation expense, net of removal of historical depreciation expense, of
$8 million
and
$40 million
for the years ended
December 31, 2018
and
2017
, respectively, related to the step-up in fair value of acquired property, plant and equipment.
|
|
|
5.
|
Additional interest expense related to the debt issued to finance the Merger, including amortization of the debt issuance costs associated with the newly issued debt, of
$208 million
for the year ended
December 31, 2017
. Interest expense and amortization of debt issuance costs have been included in the company's historical financial statements since the date of issuance (October 12, 2017).
|
|
|
6.
|
The recognition of additional amortization expense, net of removal of historical amortization expense, of
$90 million
and
$290 million
for the years ended
December 31, 2018
and
2017
, respectively, related to the fair value of acquired intangible assets.
|
|
|
7.
|
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
$51 million
and
$110 million
for the years ended
December 31, 2018
and
2017
, respectively.
|
|
|
8.
|
The income tax effect on the pro forma adjustments, which was calculated using the federal statutory tax rate in effect in each respective period, of
$(5) million
and
$130 million
for the years ended
December 31, 2018
and
2017
, respectively.
|
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
0.9 million
,
1.2 million
and
1.6 million
shares for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
NORTHROP GRUMMAN CORPORATION
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 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 as part of the 2015 Repurchase Program. Under the agreement, we made a payment of
$1.0 billion
to Goldman Sachs and received an initial delivery of
3.0 million
shares valued at
$800 million
that were immediately canceled by the company. The remaining balance of
$200 million
, included as a reduction to Retained earnings on the consolidated statement of financial position, 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
December 31, 2018
, repurchases under the 2015 Repurchase Program totaled
$2.7 billion
;
$1.3 billion
remained under this share repurchase authorization.
$200 million
of this share repurchase authorization was used to settle the ASR on
January 4, 2019
. By its terms, the 2015 Repurchase Program is set to expire when we have used all authorized funds for repurchases.
Share repurchases take place from time to time, subject to market conditions and management’s discretion, in the open market or in privately negotiated transactions. The company retires its common stock upon repurchase and, in the periods presented, has not made any purchases of common stock other than in connection with these publicly announced repurchase programs.
The table below summarizes the company’s share repurchases to date under the authorizations described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Program
Authorization Date
|
|
Amount
Authorized
(in millions)
|
|
Total
Shares Retired
(in millions)
|
|
Average
Price
Per Share
(1)
|
|
Date Completed
|
|
Shares Repurchased
(in millions)
|
|
Year Ended December 31
|
2018
|
|
2017
|
|
2016
|
December 4, 2014
|
|
$
|
3,000
|
|
|
18.0
|
|
|
$
|
166.70
|
|
|
March 2016
|
|
—
|
|
|
—
|
|
|
1.4
|
|
September 16, 2015
|
|
$
|
4,000
|
|
|
11.3
|
|
|
$
|
241.66
|
|
|
|
|
3.8
|
|
|
1.6
|
|
|
5.9
|
|
December 4, 2018
|
|
$
|
3,000
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
|
1.6
|
|
|
7.3
|
|
|
|
(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.
In May
2017
, the company increased the quarterly common stock dividend
11
percent to
$1.00
per share from the previous amount of
$0.90
per share.
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.
4
. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net represent amounts billed and due from customers. Substantially all accounts receivable at
December 31, 2018
are expected to be collected in
2019
. The company does not believe it has significant exposure
NORTHROP GRUMMAN CORPORATION
to credit risk as accounts receivable are primarily due from the U.S. government either as the ultimate customer or in connection with foreign military sales.
Accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2018
|
|
2017
|
Due from U.S. government
(1)
|
|
$
|
1,164
|
|
|
$
|
825
|
|
Due from international and other customers
|
|
318
|
|
|
268
|
|
Accounts receivable, gross
|
|
1,482
|
|
|
1,093
|
|
Allowance for doubtful accounts
|
|
(34
|
)
|
|
(39
|
)
|
Accounts receivable, net
|
|
$
|
1,448
|
|
|
$
|
1,054
|
|
|
|
(1)
|
Includes receivables due from the U.S. government associated with foreign military sales (FMS). For FMS, we contract with and are paid by the U.S. government.
|
5
. UNBILLED RECEIVABLES, NET
Unbilled receivables, net represent revenue recognized under the cost-to-cost method that exceeds amounts billed to customers. Substantially all unbilled receivables at
December 31, 2018
are expected to be billed and collected in
2019
. Progress and performance-based payments are reflected as an offset to the related unbilled receivable balances.
Unbilled receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2018
|
|
2017
|
Due from U.S. government
(1)
|
|
|
|
|
Unbilled receivables
|
|
$
|
16,823
|
|
|
$
|
12,513
|
|
Progress and performance-based payments received
|
|
(12,539
|
)
|
|
(9,447
|
)
|
Total due from U.S. government
|
|
4,284
|
|
|
3,066
|
|
Due from international and other customers
|
|
|
|
|
Unbilled receivables
|
|
3,811
|
|
|
3,424
|
|
Progress and performance-based payments received
|
|
(3,030
|
)
|
|
(2,986
|
)
|
Total due from international and other customers
|
|
781
|
|
|
438
|
|
Unbilled receivables, net of progress and performance-based payments received
|
|
5,065
|
|
|
3,504
|
|
Allowance for doubtful accounts
|
|
(39
|
)
|
|
(39
|
)
|
Unbilled receivables, net
|
|
$
|
5,026
|
|
|
$
|
3,465
|
|
|
|
(1)
|
Includes unbilled receivables due from the U.S. government associated with FMS sales. For FMS, we contract with and are paid by the U.S. government.
|
NORTHROP GRUMMAN CORPORATION
6
. INVENTORIED COSTS, NET
Inventoried costs are primarily from contracts where the U.S. government is the primary customer, therefore the company does not believe it has significant exposure to recoverability risk related to these amounts.
Inventoried costs, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2018
|
|
2017
|
Production costs of contracts in process
|
|
$
|
402
|
|
|
$
|
312
|
|
G&A expenses
|
|
16
|
|
|
30
|
|
|
|
418
|
|
|
342
|
|
Progress and performance-based payments received
|
|
(41
|
)
|
|
(41
|
)
|
|
|
377
|
|
|
301
|
|
Product inventory and raw material
|
|
277
|
|
|
97
|
|
Inventoried costs, net
|
|
$
|
654
|
|
|
$
|
398
|
|
7
. INCOME TAXES
In December 2017, the 2017 Tax Act was enacted. The 2017 Tax Act includes a number of changes to previous U.S. tax laws that impact the company, most notably a reduction of the U.S. corporate income tax rate from
35 percent
to
21 percent
for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for a one-time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017 as well as prospective changes which began in 2018, including repeal of the domestic manufacturing deduction, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.
The company recognized the income tax effects of the 2017 Tax Act in its financial statements in accordance with Staff Accounting Bulletin (SAB) No. 118, which provides SEC staff guidance for the application of ASC Topic 740,
Income Taxes
. The company finalized its accounting for the income tax effects of the 2017 Tax Act in the third quarter of 2018.
The following tables present the impact of the 2017 Tax Act relating to SAB 118 amounts as an increase (decrease) reflected in the noted line items in the Consolidated Statements of Earnings and Comprehensive Income and Consolidated Statements of Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
$ in millions
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Income Tax Expense
|
|
Income Tax Rate
|
Reduction of U.S. Corporate Income Tax Rate
|
$
|
—
|
|
|
$
|
265
|
|
|
—
|
%
|
|
6.3
|
%
|
Transition Tax on Foreign Earnings
|
5
|
|
|
13
|
|
|
0.1
|
|
|
0.3
|
|
Acceleration of Depreciation
|
—
|
|
|
5
|
|
|
—
|
|
|
0.1
|
|
Other
|
—
|
|
|
2
|
|
|
—
|
|
|
0.1
|
|
Total
|
$
|
5
|
|
|
$
|
285
|
|
|
0.1
|
%
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
$ in millions
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Deferred Tax Assets
|
|
Other Current Liabilities
|
Reduction of U.S. Corporate Income Tax Rate
|
$
|
—
|
|
|
$
|
(265
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Transition Tax on Foreign Earnings
|
(5
|
)
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
Acceleration of Depreciation
|
17
|
|
|
(80
|
)
|
|
17
|
|
|
(75
|
)
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total
|
$
|
12
|
|
|
$
|
(358
|
)
|
|
$
|
17
|
|
|
$
|
(73
|
)
|
NORTHROP GRUMMAN CORPORATION
Income Tax Expense
Federal and foreign income tax expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
$ in millions
|
|
2018
|
|
2017
|
|
2016
|
Federal income tax expense:
|
|
|
|
|
|
|
Current
|
|
$
|
292
|
|
|
$
|
449
|
|
|
$
|
661
|
|
Deferred
|
|
213
|
|
|
907
|
|
|
(36
|
)
|
Total federal income tax expense
|
|
505
|
|
|
1,356
|
|
|
625
|
|
Foreign income tax expense:
|
|
|
|
|
|
|
Current
|
|
7
|
|
|
8
|
|
|
14
|
|
Deferred
|
|
1
|
|
|
(4
|
)
|
|
(1
|
)
|
Total foreign income tax expense
|
|
8
|
|
|
4
|
|
|
13
|
|
Total federal and foreign income tax expense
|
|
$
|
513
|
|
|
$
|
1,360
|
|
|
$
|
638
|
|
Earnings from foreign operations before income taxes are not material for all periods presented.
Income tax expense differs from the amount computed by multiplying earnings before income taxes by the statutory federal income tax rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
$ in millions
|
|
2018
|
|
2017
|
|
2016
|
Income tax expense at statutory rate
|
|
$
|
786
|
|
|
21.0
|
%
|
|
$
|
1,480
|
|
|
35.0
|
%
|
|
$
|
938
|
|
|
35.0
|
%
|
Stock compensation - excess tax benefits
|
|
(27
|
)
|
|
(0.7
|
)
|
|
(48
|
)
|
|
(1.1
|
)
|
|
(85
|
)
|
|
(3.2
|
)
|
Research credit
|
|
(186
|
)
|
|
(5.0
|
)
|
|
(130
|
)
|
|
(3.1
|
)
|
|
(61
|
)
|
|
(2.2
|
)
|
Manufacturing deduction
|
|
—
|
|
|
—
|
|
|
(97
|
)
|
|
(2.3
|
)
|
|
(58
|
)
|
|
(2.2
|
)
|
Settlements with taxing authorities
|
|
—
|
|
|
—
|
|
|
(42
|
)
|
|
(1.0
|
)
|
|
(40
|
)
|
|
(1.5
|
)
|
Repatriation of non-U.S. earnings
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(33
|
)
|
|
(1.2
|
)
|
Impacts related to the 2017 Tax Act
|
|
(84
|
)
|
|
(2.2
|
)
|
|
285
|
|
|
6.8
|
|
|
—
|
|
|
—
|
|
MTM benefit tax rate differential
(1)
|
|
—
|
|
|
—
|
|
|
(72
|
)
|
|
(1.7
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
|
24
|
|
|
0.6
|
|
|
(16
|
)
|
|
(0.4
|
)
|
|
(23
|
)
|
|
(0.9
|
)
|
Total federal and foreign income taxes
|
|
$
|
513
|
|
|
13.7
|
%
|
|
$
|
1,360
|
|
|
32.2
|
%
|
|
$
|
638
|
|
|
23.8
|
%
|
|
|
(1)
|
Impact of applying the 2017 Tax Act enacted statutory tax rate of
21 percent
versus
35 percent
.
|
2018
– The effective tax rate for
2018
was
13.7 percent
, as compared with
32.2 percent
in
2017
, principally due to the reduction of the U.S. corporate income tax rate from
35 percent
to
21 percent
as a result of the 2017 Tax Act and a
$56 million
increase in research credits. In addition, the company’s effective tax rate for
2017
includes
$285 million
of tax expense recorded in connection with the 2017 Tax Act, largely due to the write-down of net deferred tax assets, offset by
$97 million
of tax benefits associated with manufacturing deductions and a
$72 million
tax benefit from the impact of applying the 2017 Tax Act enacted statutory tax rate of
21 percent
versus
35 percent
to the 2017 MTM benefit.
2017
– The effective tax rate for
2017
was
32.2 percent
, as compared with
23.8 percent
in
2016
.
The higher rate is principally due to
$285 million
of tax expense recorded in connection with the 2017 Tax Act, largely due to the write-down of net deferred tax assets, partially offset by a
$69 million
increase in research credits and a
$39 million
benefit recognized for additional manufacturing deductions principally related to prior years. The effective tax rates for the years ended December 31, 2017 and 2016 each include separate approximately
$40 million
benefits recognized in connection with the resolution of Internal Revenue Service (IRS) examinations of the company’s prior year tax returns.
Income tax payments, net of refunds received, were
$270 million
,
$517 million
and
$691 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
NORTHROP GRUMMAN CORPORATION
Uncertain Tax Positions
In connection with the Merger, the company has initially recognized an increase in unrecognized tax benefits of approximately
$160 million
for matters associated with legacy Orbital ATK, principally related to federal and state research credits. In addition, during 2018, we increased our unrecognized tax benefits related to our methods of accounting associated with the 2017 Tax Act by approximately
$100 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 2014-2015 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 and nine-month transition period ended December 31, 2015 are currently under IRS examination.
Tax returns for open tax years related to state and foreign jurisdictions remain subject to examination, but the amounts currently subject to examination are not material.
The change in unrecognized tax benefits during
2018
,
2017
and
2016
, excluding interest, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2018
|
|
2017
|
|
2016
|
Unrecognized tax benefits at beginning of the year
|
|
$
|
283
|
|
|
$
|
135
|
|
|
$
|
223
|
|
Additions based on tax positions related to the current year
|
|
293
|
|
|
102
|
|
|
35
|
|
Additions for tax positions of prior years
|
|
207
|
|
|
110
|
|
|
2
|
|
Reductions for tax positions of prior years
|
|
(23
|
)
|
|
(44
|
)
|
|
(40
|
)
|
Settlements with taxing authorities
|
|
(7
|
)
|
|
(20
|
)
|
|
(84
|
)
|
Other, net
|
|
(5
|
)
|
|
—
|
|
|
(1
|
)
|
Net change in unrecognized tax benefits
|
|
465
|
|
|
148
|
|
|
(88
|
)
|
Unrecognized tax benefits at end of the year
|
|
$
|
748
|
|
|
$
|
283
|
|
|
$
|
135
|
|
These liabilities, along with
$24 million
of accrued interest and penalties, are included in other current and non-current liabilities in the consolidated statements of financial position. If the income tax benefits from these tax positions are ultimately realized,
$430 million
of federal and foreign tax benefits would reduce the company’s effective tax rate.
Net interest expense within the company’s federal, foreign and state income tax provisions was not material for all years presented.
NORTHROP GRUMMAN CORPORATION
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax purposes. Net deferred tax assets and liabilities are classified as non-current in the consolidated statements of financial position.
The tax effects of significant temporary differences and carryforwards that gave rise to year-end deferred federal, state and foreign tax balances, as presented in the consolidated statements of financial position, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2018
|
|
2017
|
Deferred Tax Assets
|
|
|
|
|
Retiree benefits
|
|
$
|
1,541
|
|
|
$
|
1,477
|
|
Accrued employee compensation
|
|
308
|
|
|
263
|
|
Provisions for accrued liabilities
|
|
139
|
|
|
193
|
|
Inventory
|
|
650
|
|
|
447
|
|
Stock-based compensation
|
|
42
|
|
|
46
|
|
Tax credits
|
|
174
|
|
|
9
|
|
Other
|
|
59
|
|
|
30
|
|
Gross deferred tax assets
|
|
2,913
|
|
|
2,465
|
|
Less valuation allowance
|
|
(142
|
)
|
|
(26
|
)
|
Net deferred tax assets
|
|
2,771
|
|
|
2,439
|
|
Deferred Tax Liabilities
|
|
|
|
|
Goodwill
|
|
511
|
|
|
508
|
|
Purchased intangibles
|
|
346
|
|
|
9
|
|
Property, plant and equipment, net
|
|
518
|
|
|
256
|
|
Contract accounting differences
|
|
1,381
|
|
|
1,182
|
|
Other
|
|
29
|
|
|
37
|
|
Deferred tax liabilities
|
|
2,785
|
|
|
1,992
|
|
Total net deferred tax (liabilities) assets
|
|
$
|
(14
|
)
|
|
$
|
447
|
|
Realization of deferred tax assets is primarily dependent on generating sufficient taxable income in future periods. The company believes it is more-likely-than-not our net deferred tax assets will be realized.
At
December 31, 2018
, the company has available tax credits and unused net operating losses of
$255 million
and
$330 million
, respectively, that may be applied against future taxable income. The majority of tax credits and net operating losses expire in 2019 through 2039, however, some may be carried forward indefinitely. Due to the uncertainty of the realization of the tax credits and net operating losses, the company has recorded valuation allowances of
$110 million
and
$27 million
as of
December 31, 2018
, respectively.
Undistributed Foreign Earnings
As of
December 31, 2018
, the company has accumulated undistributed earnings generated by our foreign subsidiaries and most
have been taxed in the U.S. as a result of the 2017 Tax Act. The 2017 Tax Act allows for a dividend received deduction for repatriation of earnings.
We intend to indefinitely reinvest these earnings, as well as future earnings from our foreign subsidiaries, to fund our international operations and foreign credit facility. In addition, we expect future U.S. cash generation will be sufficient to meet future U.S. cash needs.
8
. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Goodwill
As discussed in Note
2
, Innovation Systems was established as a new, fourth business sector of the company. The Merger resulted in the recognition of
$6.2 billion
of goodwill, a majority of which was allocated to the Innovation Systems sector. A portion of this goodwill was allocated to the company’s other sectors based on expected revenue synergies generated by the integration of their products and technologies with those of Innovation Systems. The amount of goodwill recognized is subject to change, pending the final determination of the fair value of assets acquired and liabilities assumed in connection with the Merger (see Note
2
).
NORTHROP GRUMMAN CORPORATION
Changes in the carrying amounts of goodwill for the years ended
December 31, 2017
and
2018
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
Aerospace Systems
|
|
Innovation Systems
|
|
Mission Systems
|
|
Technology Services
|
|
Total
|
Balance as of December 31, 2016
|
|
$
|
3,742
|
|
|
$
|
—
|
|
|
$
|
6,694
|
|
|
$
|
2,014
|
|
|
$
|
12,450
|
|
Other
(1)
|
|
—
|
|
|
—
|
|
|
2
|
|
|
3
|
|
|
5
|
|
Balance as of December 31, 2017
|
|
$
|
3,742
|
|
|
$
|
—
|
|
|
$
|
6,696
|
|
|
$
|
2,017
|
|
|
$
|
12,455
|
|
Acquisition of Orbital ATK
|
|
418
|
|
|
5,256
|
|
|
469
|
|
|
79
|
|
|
6,222
|
|
Other
(1)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(3
|
)
|
|
(5
|
)
|
Balance as of December 31, 2018
|
|
$
|
4,160
|
|
|
$
|
5,256
|
|
|
$
|
7,163
|
|
|
$
|
2,093
|
|
|
$
|
18,672
|
|
|
|
(1)
|
Other consists primarily of adjustments for foreign currency translation.
|
Accumulated goodwill impairment losses at
December 31, 2018
and
2017
, totaled
$570 million
at Aerospace Systems.
Other Purchased Intangible Assets
Net customer-related and other intangible assets, including the fair value of purchased intangible assets acquired in the Merger, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2018
|
|
2017
|
Gross customer-related and other intangible assets
|
|
$
|
3,356
|
|
|
$
|
1,833
|
|
Less accumulated amortization
|
|
(1,984
|
)
|
|
(1,781
|
)
|
Net customer-related and other intangible assets
|
|
$
|
1,372
|
|
|
$
|
52
|
|
Amortization expense for
2018
,
2017
and
2016
, was
$203 million
,
$14 million
and
$16 million
, respectively. The company’s other purchased intangible assets are being amortized over an aggregate weighted-average period of
12
years. As of
December 31, 2018
, the expected future amortization of purchased intangibles for each of the next five years is as follows:
|
|
|
|
|
|
$ in millions
|
|
|
2019
|
|
$
|
331
|
|
2020
|
|
262
|
|
2021
|
|
204
|
|
2022
|
|
197
|
|
2023
|
|
78
|
|
9
. 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 consolidated statements of financial position.
The company's derivative portfolio consists primarily of commodity forward contracts and foreign currency forward contracts. As a result of the Merger, the company assumed commodity forward contracts, which Innovation Systems periodically uses 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.
NORTHROP GRUMMAN CORPORATION
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. See Note
1
for the definitions of these levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
$ in millions
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
Financial Assets (Liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
319
|
|
|
$
|
1
|
|
|
$
|
320
|
|
|
$
|
352
|
|
|
$
|
1
|
|
|
$
|
353
|
|
Marketable securities valued using NAV
|
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total marketable securities
|
|
319
|
|
|
1
|
|
|
335
|
|
|
352
|
|
|
1
|
|
|
353
|
|
Derivatives
|
|
—
|
|
|
(10
|
)
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
At
December 31, 2018
, the company had commodity forward contracts outstanding that hedge forecasted commodity purchases of
10 million
pounds of copper and
4 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
December 31, 2018
and
2017
was
$114 million
and
$89 million
, respectively. At
December 31, 2018
,
no
portion of the notional value was designated as a cash flow hedge. The portion of the notional value designated as a cash flow hedge at
December 31, 2017
was
$8 million
.
The derivative fair values and related unrealized gains/losses at
December 31, 2018
and
2017
were not material.
There were no transfers of financial instruments between the three levels of the fair value hierarchy during the years ended
December 31, 2018
and
2017
.
The carrying value of cash and cash equivalents and commercial paper approximates fair value.
10
. DEBT
Unsecured Senior Notes
In October 2017, the company issued
$8.25 billion
of unsecured senior notes to finance the Orbital ATK Acquisition and to pay related fees and expenses as follows:
|
|
•
|
$1.0 billion
of
2.08 percent
Senior Notes due 2020 (the “2020 Notes”),
|
|
|
•
|
$1.5 billion
of
2.55 percent
Senior Notes due 2022 (the “2022 Notes”),
|
|
|
•
|
$1.5 billion
of
2.93 percent
Senior Notes due 2025 (the “2025 Notes”),
|
|
|
•
|
$2.0 billion
of
3.25 percent
Senior Notes due 2028 (the “2028 Notes”) and
|
|
|
•
|
$2.25 billion
of
4.03 percent
Senior Notes due 2047 (the “2047 Notes”).
|
In December 2016, the company issued
$750 million
of unsecured senior notes due
February 1, 2027
, with a fixed interest rate of
3.20 percent
. We used the net proceeds from this offering for a debt repayment of
$200 million
in the fourth quarter of 2016 and for general corporate purposes.
Commercial Paper
In May 2018, the company commenced a commercial paper program that serves as a source of short-term financing. In September 2018, the company amended its commercial paper program to increase its capacity to issue unsecured commercial paper notes from
$750 million
up to
$2.0 billion
. The commercial paper notes outstanding have original maturities of
three
months or less from the date of issuance. At
December 31, 2018
, there were
$198 million
of outstanding short-term commercial paper borrowings at a weighted-average interest rate of
2.77 percent
. The outstanding balance of commercial paper borrowings is recorded in Other current liabilities in the consolidated statements of financial position.
Credit Facilities
In August 2018, the company entered into a new five-year senior unsecured credit facility in an aggregate principal amount of
$2.0 billion
(the “2018 Credit Agreement”). The 2018 Credit Agreement replaced the company’s prior five-year revolving credit facility in an aggregate amount of
$1.6 billion
entered into on July 8, 2015. The revolving credit facility established under the 2018 Credit Agreement is intended to support the company’s commercial paper program and other general corporate purposes. At
December 31, 2018
, 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.
NORTHROP GRUMMAN CORPORATION
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
$152 million
as of
December 31, 2018
) (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
December 31, 2018
, there was
£85 million
(the equivalent of approximately
$108 million
as of
December 31, 2018
) 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.
Our credit agreements contain generally customary terms and conditions, including covenants restricting the company’s ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other fundamental changes and incur liens.
The company also cannot permit the ratio of its debt to capitalization (as set forth in the credit agreements) to exceed 65 percent.
At
December 31, 2018
,
the company was in compliance with all covenants under its credit agreements.
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
|
|
December 31
|
2018
|
|
2017
|
Fixed-rate notes and debentures, maturing in
|
|
Interest rate
|
|
|
|
|
2018
|
|
1.75%
|
|
$
|
—
|
|
|
$
|
850
|
|
2019
|
|
5.05%
|
|
500
|
|
|
500
|
|
2020
|
|
2.08%
|
|
1,000
|
|
|
1,000
|
|
2021
|
|
3.50%
|
|
700
|
|
|
700
|
|
2022
|
|
2.55%
|
|
1,500
|
|
|
1,500
|
|
2023
|
|
3.25%
|
|
1,050
|
|
|
1,050
|
|
2025
|
|
2.93%
|
|
1,500
|
|
|
1,500
|
|
2026
|
|
7.75% - 7.88%
|
|
527
|
|
|
527
|
|
2027
|
|
3.20%
|
|
750
|
|
|
750
|
|
2028
|
|
3.25%
|
|
2,000
|
|
|
2,000
|
|
2031
|
|
7.75%
|
|
466
|
|
|
466
|
|
2040
|
|
5.05%
|
|
300
|
|
|
300
|
|
2043
|
|
4.75%
|
|
950
|
|
|
950
|
|
2045
|
|
3.85%
|
|
600
|
|
|
600
|
|
2047
|
|
4.03%
|
|
2,250
|
|
|
2,250
|
|
Credit facilities
|
|
1.89%
|
|
108
|
|
|
134
|
|
Other
|
|
Various
|
|
272
|
|
|
271
|
|
Debt issuance costs
|
|
|
|
(73
|
)
|
|
(82
|
)
|
Total long-term debt
|
|
|
|
14,400
|
|
|
15,266
|
|
Less: current portion
(1)
|
|
|
|
517
|
|
|
867
|
|
Long-term debt, net of current portion
|
|
|
|
$
|
13,883
|
|
|
$
|
14,399
|
|
(1)
The current portion of long-term debt is recorded in Other current liabilities in the consolidated statements of financial position.
In connection with the Merger, the company assumed
$1.7 billion
of long-term debt, all of which was repaid as of
December 31, 2018
.
The estimated fair value of long-term debt was
$14.3 billion
and
$16.0 billion
as of
December 31, 2018
and
2017
, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements.
Indentures underlying long-term debt issued by the company or its subsidiaries contain various restrictions with respect to the issuer, including one or more restrictions relating to limitations on liens, sale-leaseback arrangements and funded debt of subsidiaries. The majority of these fixed rate notes and debentures are subject to redemption at the company’s discretion at any time prior to maturity in whole or in part at the principal amount plus any make-whole premium and accrued and unpaid interest. Interest on these fixed rate notes and debentures are payable semi-annually in arrears.
Total interest payments, net of interest received, were
$456 million
,
$273 million
, and
$299 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
NORTHROP GRUMMAN CORPORATION
Maturities of long-term debt as of
December 31, 2018
, are as follows:
|
|
|
|
|
$ in millions
|
|
|
Year Ending December 31
|
|
2019
|
$
|
517
|
|
2020
|
1,127
|
|
2021
|
741
|
|
2022
|
1,505
|
|
2023
|
1,053
|
|
Thereafter
|
9,532
|
|
Total principal payments
|
14,475
|
|
Unamortized premium on long-term debt, net of discount
|
(2
|
)
|
Debt issuance costs
|
(73
|
)
|
Total long-term debt
|
$
|
14,400
|
|
11
. INVESTIGATIONS, CLAIMS AND LITIGATION
Litigation
On May 4, 2012, the company commenced an action,
Northrop Grumman Systems Corp. v. United States
, in the U.S. Court of Federal Claims. This lawsuit relates to an approximately
$875 million
firm fixed-price contract awarded to the company in 2007 by the U.S. Postal Service (USPS) for the construction and delivery of flats sequencing systems (FSS) as part of the postal automation program. The FSS have been delivered. The company’s lawsuit is based on various theories of liability. The complaint seeks approximately
$63 million
for unpaid portions of the contract price, and approximately
$115 million
based on the company’s assertions that, through various acts and omissions over the life of the contract, the USPS adversely affected the cost and schedule of performance and materially altered the company’s obligations under the contract. The United States responded to the company’s complaint with an answer, denying most of the company’s claims, and counterclaims seeking approximately
$410 million
, less certain amounts outstanding under the contract. The principal counterclaim alleges that the company delayed its performance and caused damages to the USPS because USPS did not realize certain costs savings as early as it had expected. On April 2, 2013, the U.S. Department of Justice informed the company of a False Claims Act complaint relating to the FSS contract that was filed under seal by a relator in June 2011 in the U.S. District Court for the Eastern District of Virginia. On June 3, 2013, the United States filed a Notice informing the Court that the United States had decided not to intervene in this case. The relator alleged that the company violated the False Claims Act in a number of ways with respect to the FSS contract, alleged damage to the USPS in an amount of at least approximately
$179 million
annually, alleged that he was improperly discharged in retaliation, and sought an unspecified partial refund of the contract purchase price, penalties, attorney’s fees and other costs of suit. The relator later voluntarily dismissed his retaliation claim and reasserted it in a separate arbitration, which he also ultimately voluntarily dismissed. On September 5, 2014, the court granted the company’s motion for summary judgment and ordered the relator’s False Claims Act case be dismissed with prejudice. On December 19, 2014, the company filed a motion for partial summary judgment asking the court to dismiss the principal counterclaim referenced above. On June 29, 2015, the Court heard argument and denied that motion without prejudice to filing a later motion to dismiss. 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, and for pretrial activities then 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
$29 million
as of
December 31, 2018
), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law, which amounts could be significant over time. The original suit
NORTHROP GRUMMAN CORPORATION
sought
R$89 million
(the equivalent of approximately
$23 million
as of
December 31, 2018
) in damages. In October 2013, ECT asserted an additional damage claim of
R$22 million
(the equivalent of approximately
$6 million
as of
December 31, 2018
). 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
December 31, 2018
), 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 and awarded damages of
R$41 million
(the equivalent of approximately
$11 million
as of December 31, 2018) 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. Once the court officially publishes the decision, the parties will have 10 days to file a motion for clarification with the trial court or 30 days to file an appeal with the intermediate court of appeals.
The company previously identified and disclosed to the U.S. government various issues relating primarily to time-charging practices of some employees working on a particular program with remote deployments. In the fourth quarter of 2018, the Department of Justice concluded its investigations as to the company and settled the matter with the company. As part of the settlement, the company paid a total of
$30 million
, largely in restitution and repayment, and agreed to continue to cooperate with the government’s ongoing investigation.
We are engaged in remediation activities relating to environmental conditions allegedly resulting from historic operations at the former United States Navy and Grumman facilities in Bethpage, New York. For over 20 years, we have worked closely with the United States Navy, the United States Environmental Protection Agency, the New York State Department of Environmental Conservation, the New York State Department of Health and other federal, state and local governmental authorities, to address legacy environmental conditions in Bethpage. We have incurred, and expect to continue to incur, as included in Note 12
, substantial remediation costs related to these environmental conditions. The remediation standards or requirements to which we are subject may change and costs may increase materially. The State of New York has notified us that it intends to seek to impose additional remedial requirements and, among other things, is evaluating natural resource damages. In addition, we are and may become a party to various legal proceedings and disputes related to remediation and/or alleged environmental impacts in Bethpage, including with federal and state entities, local municipalities and water districts, insurance carriers and class action and individual plaintiffs alleging personal injury and property damage. 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 January 15, 2019, the court issued an order setting a schedule for final settlement approval proceedings. Consistent with that order, on January 30, 2019, the parties submitted a joint motion for preliminary settlement approval, with supporting documents. The schedule suggests a final approval settlement hearing in the second quarter of 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.
NORTHROP GRUMMAN CORPORATION
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 consolidated financial position as of
December 31, 2018
, or its annual results of operations and/or cash flows.
12
. COMMITMENTS AND CONTINGENCIES
U.S. Government Cost Claims
From time to time, the company is advised of claims by the U.S. government concerning certain potential disallowed costs, plus, at times, penalties and interest. When such findings are presented, the company and 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 effect on its consolidated financial position as of
December 31, 2018
, 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
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
Range of Reasonably Possible Future Costs
(1)
|
|
Accrued Costs
(2)
|
|
Deferred Costs
(3)
|
December 31, 2018
|
|
$447 - $835
|
|
$
|
461
|
|
|
$
|
343
|
|
December 31, 2017
|
|
405 - 792
|
|
410
|
|
|
207
|
|
|
|
(1)
|
Estimated remediation costs are not discounted to present value. The range of reasonably possible future costs does not take into consideration amounts expected to be recoverable through overhead charges on U.S. government contracts.
|
|
|
(2)
|
As of
December 31, 2018
,
$159 million
is recorded in Other current liabilities and
$302 million
is recorded in Other non-current liabilities.
|
|
|
(3)
|
As of
December 31, 2018
,
$127 million
is deferred in Prepaid expenses and other current assets and
$216 million
is deferred in Other non-current assets. These amounts reflect a
$103 million
increase during 2018 in our estimated recovery of certain environmental remediation costs and are evaluated for recoverability on a routine basis.
|
As a result of the Merger, we assumed certain environmental remediation liabilities that are included in the accrued costs above, along with the related deferred costs expected to be recoverable on U.S. government contracts.
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 consolidated financial position as of
December 31, 2018
, or its annual results of operations and/or cash flows. With respect to Bethpage, as described in Note
11
, we cannot at this time estimate the range of reasonably possible additional future costs that could result from potential changes to remediation standards or requirements to which we are subject.
NORTHROP GRUMMAN CORPORATION
Financial Arrangements
In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At
December 31, 2018
, there were
$542 million
of stand-by letters of credit and guarantees and
$201 million
of surety bonds outstanding.
Indemnifications
The company has provided indemnification for certain environmental, income tax and other potential liabilities in connection with certain of its divestitures. The settlement of these liabilities is not expected to have a material adverse effect on the company’s consolidated financial position as of
December 31, 2018
, or its annual results of operations and/or cash flows.
Operating Leases
Rental expense for operating leases was
$375 million
,
$300 million
and
$298 million
in
2018
,
2017
and
2016
, respectively. These amounts are net of immaterial amounts of sublease rental income. Minimum rental commitments under long-term non-cancelable operating leases as of
December 31, 2018
are payable 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
|
|
13
. RETIREMENT BENEFITS
Plan Descriptions
U.S. Defined Benefit Pension Plans
– The company sponsors several defined benefit pension plans in the U.S. Pension benefits for most participants are based on their years of service, age and compensation. It is our policy to fund at least the minimum amount required for all qualified plans, using actuarial cost methods and assumptions acceptable under U.S. government regulations, by making payments into benefit trusts separate from the company.
U.S. Defined Contribution Plans
– The company also sponsors defined contribution plans covering the majority of its employees, including certain employees covered under collective bargaining agreements. Company contributions vary depending on date of hire, with a majority of employees being eligible for employer matching of employee contributions. Based on date of hire, certain employees are eligible to receive a company non-elective contribution or an enhanced matching contribution in lieu of a defined benefit pension plan benefit. The company’s contributions to these defined contribution plans for the years ended
December 31, 2018
,
2017
and
2016
, were
$403 million
,
$344 million
and
$311 million
, respectively.
Non-U.S. Benefit Plans –
The company sponsors several benefit plans for non-U.S. employees. These plans are designed to provide benefits appropriate to local practice and in accordance with local regulations. Some of these plans are funded using benefit trusts separate from the company.
Medical and Life Benefits
– The company provides a portion of the costs for certain health care and life insurance benefits for a substantial number of its active and retired employees. In addition to a company and employee cost-sharing feature, the health plans also have provisions for deductibles, co-payments, coinsurance percentages, out-of-pocket limits, conformance to a schedule of reasonable fees, the use of managed care providers and coordination of benefits with other plans. The plans also provide for a Medicare carve-out. The company reserves the right to amend or terminate the plans at any time.
Certain covered employees and dependents are eligible to participate in plans upon retirement if they meet specified age and years of service requirements. The company provides subsidies to reimburse certain retirees for a portion of the cost of individual Medicare-supplemental coverage purchased directly by the retiree through a private insurance exchange. The company has capped the amount of its contributions to substantially all of its remaining
NORTHROP GRUMMAN CORPORATION
postretirement medical and life benefit plans. In addition, after January 1, 2005 (or earlier at some businesses), newly hired employees are not eligible for subsidized postretirement medical and life benefits.
Summary Plan Results
As discussed in Note
1
, during the fourth quarter of 2018, we changed our accounting method related to the recognition of actuarial gains and losses for our pension and OPB plans. Under the new method, actuarial gains and losses are immediately recognized in net periodic benefit cost upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement. These changes have been applied retrospectively to all prior years presented below. See Notes
1
,
16
,
17
and
18
for further information regarding the impact of the change in accounting principle on our consolidated financial statements.
The cost to the company of its retirement benefit plans is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
Pension Benefits
|
|
Medical and Life Benefits
|
$ in millions
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
404
|
|
|
$
|
388
|
|
|
$
|
390
|
|
|
$
|
21
|
|
|
$
|
20
|
|
|
$
|
29
|
|
Interest cost
|
|
1,226
|
|
|
1,250
|
|
|
1,302
|
|
|
76
|
|
|
85
|
|
|
95
|
|
Expected return on plan assets
|
|
(2,217
|
)
|
|
(1,885
|
)
|
|
(1,853
|
)
|
|
(101
|
)
|
|
(89
|
)
|
|
(86
|
)
|
Amortization of prior service credit
|
|
(58
|
)
|
|
(57
|
)
|
|
(60
|
)
|
|
(21
|
)
|
|
(22
|
)
|
|
(22
|
)
|
Mark-to-market expense (benefit)
|
|
699
|
|
|
(445
|
)
|
|
1,041
|
|
|
(44
|
)
|
|
(91
|
)
|
|
(91
|
)
|
Other
|
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
54
|
|
|
$
|
(756
|
)
|
|
$
|
820
|
|
|
$
|
(69
|
)
|
|
$
|
(97
|
)
|
|
$
|
(75
|
)
|
Changes in Presentation
As discussed in Note
1
, we adopted ASU 2017-07 on January 1, 2018 using the retrospective method, which changed the financial statement presentation of service costs and the other components of net periodic benefit cost. The service cost component continues to be included in operating income; however, the other components are now presented in
Net FAS (non-service) pension benefit
and MTM (expense) benefit in the consolidated statements of earnings and comprehensive income. In addition, interest on service cost, which has historically been included in service cost, is now presented in interest cost. Further, to conform our presentation of service costs for all plans, administrative expenses previously included in service cost for certain plans are now consistently presented in the MTM (expense) benefit component. As a result, the company reclassified interest on service cost of
$16 million
and
$18 million
and plan administrative expenses of
$20 million
and
$38 million
from service cost to the interest cost and MTM (expense) benefit components, respectively, for its pension plans for the years ended
December 31, 2017
and
2016
, respectively, to conform to the current year presentation. For the company’s medical and life benefit plans, plan administrative expenses of
$2 million
were reclassified from service cost to the MTM (expense) benefit component for the year ended
December 31, 2017
and interest on service costs of
$1 million
were reclassified from service cost to the interest cost component for the year ended
December 31, 2016
to conform to the current year presentation. This change in presentation had no impact on net periodic benefit cost.
The table below summarizes the components of changes in unamortized prior service credit for the years ended
December 31, 2016
,
2017
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
Pension Benefits
|
|
Medical and Life Benefits
|
|
Total
|
Changes in unamortized prior service credit
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
$
|
60
|
|
|
$
|
22
|
|
|
$
|
82
|
|
Tax expense
|
|
(11
|
)
|
|
(9
|
)
|
|
(20
|
)
|
Change in unamortized prior service credit – 2016
|
|
49
|
|
|
13
|
|
|
62
|
|
Amortization of prior service credit
|
|
57
|
|
|
22
|
|
|
79
|
|
Tax expense
|
|
(26
|
)
|
|
(9
|
)
|
|
(35
|
)
|
Change in unamortized prior service credit – 2017
|
|
31
|
|
|
13
|
|
|
44
|
|
Amortization of prior service credit
|
|
58
|
|
|
21
|
|
|
79
|
|
Tax expense
|
|
(14
|
)
|
|
(5
|
)
|
|
(19
|
)
|
Change in unamortized prior service credit – 2018
|
|
$
|
44
|
|
|
$
|
16
|
|
|
$
|
60
|
|
NORTHROP GRUMMAN CORPORATION
We expect to recognize
$59 million
and
$3 million
of prior year service credit related to our pension benefit and medical and life benefit plans, respectively, in net periodic benefit cost in 2019.
The following table sets forth the funded status and amounts recognized in the consolidated statements of financial position for the company’s defined benefit retirement plans. Pension benefits data includes the qualified plans, foreign plans and U.S. unfunded non-qualified plans for benefits provided to directors, officers and certain employees. The company uses a December 31 measurement date for its plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Medical and Life Benefits
|
$ in millions
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Plan Assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
27,226
|
|
|
$
|
24,384
|
|
|
$
|
1,338
|
|
|
$
|
1,208
|
|
Net (loss) gain on plan assets
|
|
(1,043
|
)
|
|
3,885
|
|
|
(65
|
)
|
|
208
|
|
Employer contributions
|
|
370
|
|
|
596
|
|
|
38
|
|
|
45
|
|
Participant contributions
|
|
9
|
|
|
11
|
|
|
25
|
|
|
24
|
|
Benefits paid
|
|
(1,685
|
)
|
|
(1,617
|
)
|
|
(148
|
)
|
|
(144
|
)
|
Acquired plan assets
|
|
2,293
|
|
|
—
|
|
|
58
|
|
|
—
|
|
Other
|
|
(20
|
)
|
|
(33
|
)
|
|
1
|
|
|
(3
|
)
|
Fair value of plan assets at end of year
|
|
27,150
|
|
|
27,226
|
|
|
1,247
|
|
|
1,338
|
|
Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
31,967
|
|
|
30,409
|
|
|
2,110
|
|
|
2,100
|
|
Service cost
|
|
404
|
|
|
388
|
|
|
21
|
|
|
20
|
|
Interest cost
|
|
1,226
|
|
|
1,250
|
|
|
76
|
|
|
85
|
|
Participant contributions
|
|
9
|
|
|
11
|
|
|
25
|
|
|
24
|
|
Actuarial loss (gain)
|
|
(2,561
|
)
|
|
1,544
|
|
|
(211
|
)
|
|
26
|
|
Benefits paid
|
|
(1,685
|
)
|
|
(1,617
|
)
|
|
(148
|
)
|
|
(144
|
)
|
Acquired benefit obligation
|
|
2,895
|
|
|
—
|
|
|
50
|
|
|
—
|
|
Other
|
|
(24
|
)
|
|
(18
|
)
|
|
7
|
|
|
(1
|
)
|
Projected benefit obligation at end of year
|
|
32,231
|
|
|
31,967
|
|
|
1,930
|
|
|
2,110
|
|
Funded status
|
|
$
|
(5,081
|
)
|
|
$
|
(4,741
|
)
|
|
$
|
(683
|
)
|
|
$
|
(772
|
)
|
|
|
|
|
|
|
|
|
|
Classification of amounts recognized in the consolidated statements of financial position
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
$
|
77
|
|
|
$
|
82
|
|
|
$
|
124
|
|
|
$
|
112
|
|
Current liability
|
|
(164
|
)
|
|
(154
|
)
|
|
(46
|
)
|
|
(42
|
)
|
Non-current liability
|
|
(4,994
|
)
|
|
(4,669
|
)
|
|
(761
|
)
|
|
(842
|
)
|
The accumulated benefit obligation for all defined benefit pension plans was
$31.9 billion
and
$31.6 billion
at
December 31, 2018
and
2017
, respectively.
Amounts for pension plans with accumulated benefit obligations in excess of fair value of plan assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2018
|
|
2017
|
Projected benefit obligation
|
|
$
|
30,259
|
|
|
$
|
29,804
|
|
Accumulated benefit obligation
|
|
29,961
|
|
|
29,454
|
|
Fair value of plan assets
|
|
25,101
|
|
|
24,981
|
|
NORTHROP GRUMMAN CORPORATION
Plan Assumptions
On a weighted-average basis, the following assumptions were used to determine benefit obligations and net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Medical and Life Benefits
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Assumptions used to determine benefit obligation at December 31
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.31
|
%
|
|
3.68
|
%
|
|
4.30
|
%
|
|
3.66
|
%
|
Initial cash balance crediting rate assumed for the next year
|
|
3.00
|
%
|
|
2.75
|
%
|
|
|
|
|
Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate)
|
|
3.25
|
%
|
|
3.00
|
%
|
|
|
|
|
Year that the cash balance crediting rate reaches the ultimate rate
|
|
2024
|
|
|
2023
|
|
|
|
|
|
Rate of compensation increase
|
|
3.00
|
%
|
|
3.00
|
%
|
|
|
|
|
Initial health care cost trend rate assumed for the next year
|
|
|
|
|
|
6.20
|
%
|
|
6.50
|
%
|
Rate to which the health care cost trend rate is assumed to decline (the ultimate trend rate)
|
|
|
|
|
|
5.00
|
%
|
|
5.00
|
%
|
Year that the health care cost trend rate reaches the ultimate trend rate
|
|
|
|
|
|
2023
|
|
|
2023
|
|
Assumptions used to determine benefit cost for the year ended December 31
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.68
|
%
|
|
4.19
|
%
|
|
3.66
|
%
|
|
4.13
|
%
|
Initial cash balance crediting rate assumed for the next year
|
|
2.75
|
%
|
|
3.10
|
%
|
|
|
|
|
Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate)
|
|
3.00
|
%
|
|
3.60
|
%
|
|
|
|
|
Year that the cash balance crediting rate reaches the ultimate rate
|
|
2023
|
|
|
2022
|
|
|
|
|
|
Expected long-term return on plan assets
|
|
8.00
|
%
|
|
8.00
|
%
|
|
7.65
|
%
|
|
7.70
|
%
|
Rate of compensation increase
|
|
3.00
|
%
|
|
3.00
|
%
|
|
|
|
|
Initial health care cost trend rate assumed for the next year
|
|
|
|
|
|
6.50
|
%
|
|
6.50
|
%
|
Rate to which the health care cost trend rate is assumed to decline (the ultimate trend rate)
|
|
|
|
|
|
5.00
|
%
|
|
5.00
|
%
|
Year that the health care cost trend rate reaches the ultimate trend rate
|
|
|
|
|
|
2023
|
|
|
2020
|
|
Plan Assets and Investment Policy
Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term.
Through consultation with our investment management team and outside investment advisers, management develops expected long-term returns for each of the plans’ strategic asset classes. In addition to our historical investment performance, we consider several factors, including current market data such as yields/price-earnings ratios, historical market returns over long periods and periodic surveys of investment managers’ expectations. Using policy target allocation percentages and the asset class expected returns, we calculate a weighted-average expected long-term rate of return.
Liability studies are conducted on a regular basis to provide guidance in setting investment goals with an objective to balance risk. Risk targets are established and monitored against acceptable ranges.
Our investment policies and procedures are designed to ensure the plans’ investments are in compliance with the Employee Retirement Income Security Act (ERISA). Guidelines are established defining permitted investments within each asset class. Derivatives are used for transitioning assets, asset class rebalancing, managing currency risk and for management of fixed-income and alternative investments.
NORTHROP GRUMMAN CORPORATION
For the majority of the plans’ assets, the investment policies require that the asset allocation be maintained within the following ranges as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
Asset Allocation Ranges
|
Cash and cash equivalents
|
|
0% - 12%
|
Global Public Equities
|
|
35% - 55%
|
Fixed-income securities
|
|
20% - 40%
|
Alternative investments
|
|
13% - 33%
|
The table below provides the fair values of the company’s pension and Voluntary Employee Beneficiary Association (VEBA) trust plan assets at
December 31, 2018
and
2017
, by asset category. The table also identifies the level of inputs used to determine the fair value of assets in each category. See Note
1
for the definitions of these levels. Certain investments that are measured at fair value using NAV per share (or its equivalent) as a practical expedient are not required to be categorized in the fair value hierarchy table. The total fair value of these investments is included in the table below to permit reconciliation of the fair value hierarchy to amounts presented in the funded status table above. As of
December 31, 2018
and
2017
, there were no investments expected to be sold at a value materially different than NAV.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
$ in millions
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Asset category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
209
|
|
|
$
|
55
|
|
|
$
|
2,655
|
|
|
$
|
4,086
|
|
|
|
|
|
|
$
|
2,864
|
|
|
$
|
4,141
|
|
U.S. equities
|
|
2,859
|
|
|
3,365
|
|
|
|
|
|
|
|
|
$
|
1
|
|
|
2,859
|
|
|
3,366
|
|
International equities
|
|
2,711
|
|
|
2,453
|
|
|
|
|
|
|
$
|
1
|
|
|
1
|
|
|
2,712
|
|
|
2,454
|
|
Fixed-income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries
|
|
26
|
|
|
—
|
|
|
1,501
|
|
|
1,282
|
|
|
|
|
|
|
1,527
|
|
|
1,282
|
|
U.S. Government Agency
|
|
|
|
|
|
322
|
|
|
345
|
|
|
|
|
|
|
322
|
|
|
345
|
|
Non-U.S. Government
|
|
|
|
|
|
206
|
|
|
135
|
|
|
|
|
|
|
206
|
|
|
135
|
|
Corporate debt
|
|
34
|
|
|
—
|
|
|
4,141
|
|
|
4,406
|
|
|
|
|
|
|
4,175
|
|
|
4,406
|
|
Asset backed
|
|
|
|
|
|
297
|
|
|
255
|
|
|
|
|
|
|
297
|
|
|
255
|
|
High yield debt
|
|
11
|
|
|
—
|
|
|
153
|
|
|
866
|
|
|
|
|
|
|
164
|
|
|
866
|
|
Bank loans
|
|
|
|
|
|
20
|
|
|
248
|
|
|
|
|
|
|
20
|
|
|
248
|
|
Other Assets
|
|
15
|
|
|
15
|
|
|
51
|
|
|
3
|
|
|
2
|
|
|
2
|
|
|
68
|
|
|
20
|
|
Investments valued using NAV as a practical expedient
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,170
|
|
|
1,053
|
|
International equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,017
|
|
|
4,315
|
|
Fixed-income funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,386
|
|
|
129
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351
|
|
|
166
|
|
Opportunistic investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,367
|
|
|
873
|
|
Private equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,510
|
|
|
2,091
|
|
Real estate funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,382
|
|
|
2,419
|
|
Fair value of plan assets at the end of the year
|
|
$
|
5,865
|
|
|
$
|
5,888
|
|
|
$
|
9,346
|
|
|
$
|
11,626
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
28,397
|
|
|
$
|
28,564
|
|
There were no transfers of plan assets between the three levels of the fair value hierarchy during the years ended
December 31, 2018
and
2017
.
Generally, investments are valued based on information in financial publications of general circulation, statistical and valuation services, records of security exchanges, appraisal by qualified persons, transactions and bona fide offers. Cash and cash equivalents are predominantly held in money market or short-term investment funds. U.S. and international equities consist primarily of common stocks and institutional common trust funds. Investments in certain equity securities, which include domestic and international securities and registered investment companies, and exchange-traded funds with fixed income strategies are valued at the last reported sales or quoted price on the
NORTHROP GRUMMAN CORPORATION
last business day of the reporting period. Fair values for certain fixed-income securities, which are not exchange-traded, are valued using third-party pricing services.
Other assets include derivative assets with a fair value of
$76 million
and
$34 million
, derivative liabilities with a fair value of
$52 million
and
$19 million
, and net notional amounts of
$3.2 billion
and
$3.3 billion
, as of
December 31, 2018
and
2017
, respectively. Derivative instruments may include exchange traded futures contracts, interest rate swaps, options on futures and swaps, currency contracts, total return swaps and credit default swaps. Notional amounts do not quantify risk or represent assets or liabilities of the pension and VEBA trusts, but are used in the calculation of cash settlement under the contracts. The volume of derivative activity is commensurate with the amounts disclosed at year-end. Certain derivative financial instruments within the pension trust are subject to master netting agreements with certain counterparties.
Investments in certain equity and fixed-income funds, which include common/collective trust funds, and alternative investments, including hedge funds, opportunistic investments, private equity funds and real estate funds, are valued based on the NAV derived by the investment managers, as a practical expedient, and are described further below.
U.S. and International equities: Generally, redemption periods are daily or monthly with a notice requirement less than 30 days. As of
December 31, 2018
and
2017
, there were no unfunded commitments.
Fixed-income funds: Redemption periods are
daily, monthly or quarterly
with various notice requirements but generally are less than
30
days. As of
December 31, 2018
and
2017
, there were no unfunded commitments.
Hedge funds: The redemption period of hedge funds is generally
monthly or quarterly
with various notice requirements from
30
to
95
days. As of
December 31, 2018
and
2017
, there were no unfunded commitments.
Opportunistic investments: Opportunistic investments are primarily held in partnerships with a 5-10 year life. As of
December 31, 2018
and
2017
, unfunded commitments were
$1.1 billion
and
$768 million
, respectively.
Private equities: The term of each fund is typically
10
or more years and the fund’s investors do not have an option to redeem their interest in the fund. As of
December 31, 2018
and
2017
, unfunded commitments were
$1.8 billion
and
$1.4 billion
, respectively.
Real estate funds: Consists of closed-end real estate funds and infrastructure funds with terms that are typically
10
or more years. This class also contains open-end funds that generally allow investors to redeem their interests in the fund. As of
December 31, 2018
and
2017
, unfunded commitments were
$73 million
and
$71 million
, respectively.
For the years ended
December 31, 2018
and
2017
, the defined benefit pension and VEBA trusts did not hold any Northrop Grumman common stock.
Benefit Payments
The following table reflects estimated future benefit payments for the next ten years, based upon the same assumptions used to measure the benefit obligation, and includes expected future employee service, as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
Pension Plans
|
|
Medical and Life Plans
|
|
Total
|
Year Ending December 31
|
|
|
|
|
|
|
2019
|
|
$
|
1,781
|
|
|
$
|
153
|
|
|
$
|
1,934
|
|
2020
|
|
1,834
|
|
|
155
|
|
|
1,989
|
|
2021
|
|
1,880
|
|
|
142
|
|
|
2,022
|
|
2022
|
|
1,928
|
|
|
141
|
|
|
2,069
|
|
2023
|
|
1,970
|
|
|
139
|
|
|
2,109
|
|
2024 through 2028
|
|
10,384
|
|
|
651
|
|
|
11,035
|
|
In
2019
, the company expects to contribute the required minimum funding of approximately
$91 million
to its pension plans and approximately
$50 million
to its medical and life benefit plans.
During the year ended
December 31, 2018
, the company made voluntary pension contributions of
$280 million
.
14
. STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Compensation Plans
At
December 31, 2018
, the company had stock-based compensation awards outstanding under the following shareholder-approved plans: the 2011 Long-Term Incentive Stock Plan (2011 Plan), applicable to employees, and the 1993 Stock Plan for Non-Employee Directors (1993 SPND).
NORTHROP GRUMMAN CORPORATION
Employee Plans
– In May 2015, the company’s shareholders approved amendments to the 2011 Plan. These amendments provided that shares issued under the plan would be counted against the aggregate share limit on a one-for-one basis. As amended,
5.1 million
shares plus
2.4 million
of newly authorized shares were available for issuance under the 2011 Plan; as of
December 31, 2018
,
5.9 million
shares remain available for issuance.
The 2011 Plan provides for the following equity awards: stock options, stock appreciation rights (SARs) and stock awards. Under the 2011 Plan, no SARs have been granted and there are no outstanding stock options. Stock awards include restricted performance stock rights (RPSR) and restricted stock rights (RSR). RPSRs generally vest and are paid following the completion of a three-year performance period, based primarily on achievement of financial objectives determined by the Board. RSRs generally vest 100% after three years. Each includes dividend equivalents, which are paid upon payment of the RPSR or RSR. The terms of equity awards granted under the 2011 Plan provide for accelerated vesting, and in some instances forfeiture, of all or a portion of an award upon termination of employment.
Non-Employee Director Plans
– Awards to non-employee directors are made pursuant to the Northrop Grumman Corporation Equity Grant Program for Non-Employee Directors under the 2011 Plan (the Director Program), which was amended and restated effective January 1, 2016. Prior to January 1, 2016, the Director Program and the 1993 SPND provided for quarterly award and vesting of an annual equity retainer in the form of deferred stock units (Automatic Stock Units) to be paid upon the conclusion of a director’s board service, or earlier, as specified by the director, if the director had
five
or more years of service.
Under the amended Director Program, each non-employee director is awarded an annual equity grant in the form of Automatic Stock Units, which vest on the one-year anniversary of the grant date. Directors may elect to have all or any portion of their Automatic Stock Units paid on (A) the earlier of (i) the beginning of a specified calendar year after the vesting date or (ii) their separation from service as a member of the Board, or (B) on the vesting date.
Directors also may elect to defer to a later year all or a portion of their remaining cash retainer or committee retainer fees into a stock unit account as Elective Stock Units or in alternative investment options. Elective Stock Units are awarded on a quarterly basis. Directors may elect to have all or a portion of their Elective Stock Units paid on the earlier of (i) the beginning of a specified calendar year or (ii) their separation from service as a member of the Board. Stock units awarded under the Director Program are paid out in an equivalent number of shares of Northrop Grumman common stock. Directors are credited with dividend equivalents in connection with the accumulated stock units until the shares of common stock relating to such stock units are issued.
Compensation Expense
Stock-based compensation expense for the years ended
December 31, 2018
,
2017
and
2016
was
$86 million
,
$94 million
and
$93 million
, respectively. The related tax benefits for stock-based compensation for the years ended
December 31, 2018
,
2017
and
2016
were
$27 million
,
$48 million
and
$85 million
, respectively.
At
December 31, 2018
, there was
$108 million
of unrecognized compensation expense related to unvested stock awards granted under the company’s stock-based compensation plans. These amounts are expected to be charged to expense over a weighted-average period of
1.3
years.
Stock Awards
Compensation expense for stock awards is measured at the grant date based on the fair value of the award and is recognized over the vesting period (generally
three
years). The fair value of stock awards and performance stock awards is determined based on the closing market price of the company’s common stock on the grant date. The fair value of market-based stock awards is determined at the grant date using a Monte Carlo simulation model. For purposes of measuring compensation expense for performance awards, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria.
NORTHROP GRUMMAN CORPORATION
Stock award activity for the years ended
December 31, 2016
,
2017
and
2018
, is presented in the table below. Vested awards do not include any adjustments to reflect the final performance measure for issued shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Awards
(in thousands)
|
|
Weighted-
Average
Grant Date
Fair Value
Per Share
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
Outstanding at January 1, 2016
|
|
1,586
|
|
|
$
|
122
|
|
|
1.2
|
Granted
|
|
483
|
|
|
186
|
|
|
|
Vested
|
|
(872
|
)
|
|
97
|
|
|
|
Forfeited
|
|
(49
|
)
|
|
143
|
|
|
|
Outstanding at December 31, 2016
|
|
1,148
|
|
|
$
|
167
|
|
|
1.3
|
Granted
|
|
397
|
|
|
233
|
|
|
|
Vested
|
|
(521
|
)
|
|
152
|
|
|
|
Forfeited
|
|
(86
|
)
|
|
198
|
|
|
|
Outstanding at December 31, 2017
|
|
938
|
|
|
$
|
192
|
|
|
1.0
|
Granted
|
|
376
|
|
|
321
|
|
|
|
Vested
|
|
(455
|
)
|
|
181
|
|
|
|
Forfeited
|
|
(63
|
)
|
|
250
|
|
|
|
Outstanding at December 31, 2018
|
|
796
|
|
|
$
|
244
|
|
|
0.8
|
The majority of our stock awards are granted annually during the first quarter.
The grant date fair value of shares issued in settlement of fully vested stock awards was
$93 million
,
$96 million
and
$97 million
during the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Cash Awards
The company grants certain employees cash units (CUs) and cash performance units (CPUs). Depending on actual performance against financial objectives, recipients of CPUs earn between
0
and
200 percent
of the original grant. The following table presents the minimum and maximum aggregate payout amounts related to those cash awards granted for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
$ in millions
|
|
2018
|
2017
|
2016
|
Minimum aggregate payout amount
|
|
$
|
36
|
|
$
|
38
|
|
$
|
39
|
|
Maximum aggregate payout amount
|
|
205
|
|
201
|
|
199
|
|
The majority of our cash awards are granted annually during the first quarter. CUs typically vest and settle in cash on the third anniversary of the grant date, while CPUs generally vest and pay out in cash based primarily on the achievement of financial metrics over a three-year period. At
December 31, 2018
, there was
$137 million
of unrecognized compensation expense related to cash awards.
NORTHROP GRUMMAN CORPORATION
15
. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
$ in millions
|
|
2018
|
|
2017
|
|
2016
|
Sales
|
|
|
|
|
|
|
Aerospace Systems
|
|
$
|
13,096
|
|
|
$
|
12,131
|
|
|
$
|
10,853
|
|
Innovation Systems
|
|
3,276
|
|
|
—
|
|
|
—
|
|
Mission Systems
|
|
11,709
|
|
|
11,470
|
|
|
11,161
|
|
Technology Services
|
|
4,297
|
|
|
4,687
|
|
|
4,765
|
|
Intersegment eliminations
|
|
(2,283
|
)
|
|
(2,284
|
)
|
|
(2,073
|
)
|
Total sales
|
|
30,095
|
|
|
26,004
|
|
|
24,706
|
|
Operating income
|
|
|
|
|
|
|
Aerospace Systems
|
|
1,411
|
|
|
1,289
|
|
|
1,198
|
|
Innovation Systems
|
|
343
|
|
|
—
|
|
|
—
|
|
Mission Systems
|
|
1,520
|
|
|
1,442
|
|
|
1,468
|
|
Technology Services
|
|
443
|
|
|
449
|
|
|
456
|
|
Intersegment eliminations
|
|
(270
|
)
|
|
(277
|
)
|
|
(258
|
)
|
Total segment operating income
|
|
3,447
|
|
|
2,903
|
|
|
2,864
|
|
Net FAS (service)/CAS pension adjustment
|
|
613
|
|
|
638
|
|
|
457
|
|
Unallocated corporate expense
|
|
(277
|
)
|
|
(319
|
)
|
|
(39
|
)
|
Other
|
|
(3
|
)
|
|
(4
|
)
|
|
(5
|
)
|
Total operating income
|
|
$
|
3,780
|
|
|
$
|
3,218
|
|
|
$
|
3,277
|
|
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 FAR and the related 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
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
$ in millions
|
$
|
%
(3)
|
|
$
|
%
(3)
|
|
$
|
%
(3)
|
Aerospace Systems
|
|
|
|
|
|
|
|
|
U.S. Government
(1)
|
$
|
11,380
|
|
87
|
%
|
|
$
|
10,521
|
|
87
|
%
|
|
$
|
9,277
|
|
86
|
%
|
International
(2)
|
1,371
|
|
10
|
%
|
|
1,160
|
|
10
|
%
|
|
1,192
|
|
11
|
%
|
Other Customers
|
148
|
|
1
|
%
|
|
155
|
|
1
|
%
|
|
144
|
|
1
|
%
|
Intersegment sales
|
197
|
|
2
|
%
|
|
295
|
|
2
|
%
|
|
240
|
|
2
|
%
|
Aerospace Systems sales
|
13,096
|
|
100
|
%
|
|
12,131
|
|
100
|
%
|
|
10,853
|
|
100
|
%
|
Innovation Systems
|
|
|
|
|
|
|
|
|
U.S. Government
(1)
|
2,241
|
|
68
|
%
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
International
(2)
|
615
|
|
19
|
%
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Other Customers
|
293
|
|
9
|
%
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Intersegment sales
|
127
|
|
4
|
%
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Innovation Systems sales
|
3,276
|
|
100
|
%
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Mission Systems
|
|
|
|
|
|
|
|
|
U.S. Government
(1)
|
8,803
|
|
75
|
%
|
|
8,876
|
|
77
|
%
|
|
8,737
|
|
78
|
%
|
International
(2)
|
1,647
|
|
14
|
%
|
|
1,540
|
|
14
|
%
|
|
1,416
|
|
13
|
%
|
Other Customers
|
114
|
|
1
|
%
|
|
100
|
|
1
|
%
|
|
133
|
|
1
|
%
|
Intersegment sales
|
1,145
|
|
10
|
%
|
|
954
|
|
8
|
%
|
|
875
|
|
8
|
%
|
Mission Systems sales
|
11,709
|
|
100
|
%
|
|
11,470
|
|
100
|
%
|
|
11,161
|
|
100
|
%
|
Technology Services
|
|
|
|
|
|
|
|
|
U.S. Government
(1)
|
2,372
|
|
55
|
%
|
|
2,572
|
|
55
|
%
|
|
2,722
|
|
57
|
%
|
International
(2)
|
801
|
|
19
|
%
|
|
752
|
|
16
|
%
|
|
687
|
|
15
|
%
|
Other Customers
|
310
|
|
7
|
%
|
|
328
|
|
7
|
%
|
|
398
|
|
8
|
%
|
Intersegment sales
|
814
|
|
19
|
%
|
|
1,035
|
|
22
|
%
|
|
958
|
|
20
|
%
|
Technology Services sales
|
4,297
|
|
100
|
%
|
|
4,687
|
|
100
|
%
|
|
4,765
|
|
100
|
%
|
Total
|
|
|
|
|
|
|
|
|
U.S. Government
(1)
|
24,796
|
|
82
|
%
|
|
21,969
|
|
85
|
%
|
|
20,736
|
|
84
|
%
|
International
(2)
|
4,434
|
|
15
|
%
|
|
3,452
|
|
13
|
%
|
|
3,295
|
|
13
|
%
|
Other Customers
|
865
|
|
3
|
%
|
|
583
|
|
2
|
%
|
|
675
|
|
3
|
%
|
Total Sales
|
$
|
30,095
|
|
100
|
%
|
|
$
|
26,004
|
|
100
|
%
|
|
$
|
24,706
|
|
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
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
$ in millions
|
$
|
%
(1)
|
|
$
|
%
(1)
|
|
$
|
%
(1)
|
Aerospace Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost-type
|
$
|
7,634
|
|
59
|
%
|
|
$
|
7,193
|
|
61
|
%
|
|
$
|
6,484
|
|
61
|
%
|
Fixed-price
|
5,265
|
|
41
|
%
|
|
4,643
|
|
39
|
%
|
|
4,129
|
|
39
|
%
|
Intersegment sales
|
197
|
|
|
|
295
|
|
|
|
240
|
|
|
Aerospace System sales
|
13,096
|
|
|
|
12,131
|
|
|
|
10,853
|
|
|
Innovation Systems
|
|
|
|
|
|
|
|
|
Cost-type
|
843
|
|
27
|
%
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Fixed-price
|
2,306
|
|
73
|
%
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Intersegment sales
|
127
|
|
|
|
—
|
|
|
|
—
|
|
|
Innovation System sales
|
3,276
|
|
|
|
—
|
|
|
|
—
|
|
|
Mission Systems
|
|
|
|
|
|
|
|
|
Cost-type
|
4,939
|
|
47
|
%
|
|
5,311
|
|
51
|
%
|
|
5,200
|
|
51
|
%
|
Fixed-price
|
5,625
|
|
53
|
%
|
|
5,205
|
|
49
|
%
|
|
5,086
|
|
49
|
%
|
Intersegment sales
|
1,145
|
|
|
|
954
|
|
|
|
875
|
|
|
Mission System sales
|
11,709
|
|
|
|
11,470
|
|
|
|
11,161
|
|
|
Technology Services
|
|
|
|
|
|
|
|
|
Cost-type
|
1,588
|
|
46
|
%
|
|
1,693
|
|
46
|
%
|
|
1,770
|
|
46
|
%
|
Fixed-price
|
1,895
|
|
54
|
%
|
|
1,959
|
|
54
|
%
|
|
2,037
|
|
54
|
%
|
Intersegment sales
|
814
|
|
|
|
1,035
|
|
|
|
958
|
|
|
Technology Services sales
|
4,297
|
|
|
|
4,687
|
|
|
|
4,765
|
|
|
Total
|
|
|
|
|
|
|
|
|
Cost-type
|
15,004
|
|
50
|
%
|
|
14,197
|
|
55
|
%
|
|
13,454
|
|
54
|
%
|
Fixed-price
|
15,091
|
|
50
|
%
|
|
11,807
|
|
45
|
%
|
|
11,252
|
|
46
|
%
|
Total Sales
|
$
|
30,095
|
|
|
|
$
|
26,004
|
|
|
|
$
|
24,706
|
|
|
|
|
(1)
|
Percentages calculated based on external customer sales.
|
NORTHROP GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by Geographic Region
|
Year Ended December 31
|
|
2018
|
2017
|
|
2016
|
$ in millions
|
$
|
%
(2)
|
|
$
|
%
(2)
|
|
$
|
%
(2)
|
Aerospace Systems
|
|
|
|
|
|
|
|
|
United States
|
$
|
11,528
|
|
89
|
%
|
|
$
|
10,676
|
|
90
|
%
|
|
$
|
9,421
|
|
89
|
%
|
Asia/Pacific
|
705
|
|
6
|
%
|
|
649
|
|
6
|
%
|
|
579
|
|
5
|
%
|
All other
(1)
|
666
|
|
5
|
%
|
|
511
|
|
4
|
%
|
|
613
|
|
6
|
%
|
Intersegment sales
|
197
|
|
|
|
295
|
|
|
|
240
|
|
|
Aerospace Systems sales
|
13,096
|
|
|
|
12,131
|
|
|
|
10,853
|
|
|
Innovation Systems
|
|
|
|
|
|
|
|
|
United States
|
2,534
|
|
80
|
%
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Asia/Pacific
|
151
|
|
5
|
%
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
All other
(1)
|
464
|
|
15
|
%
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Intersegment sales
|
127
|
|
|
|
—
|
|
|
|
—
|
|
|
Innovation Systems sales
|
3,276
|
|
|
|
—
|
|
|
|
—
|
|
|
Mission Systems
|
|
|
|
|
|
|
|
|
United States
|
8,917
|
|
85
|
%
|
|
8,976
|
|
86
|
%
|
|
8,870
|
|
86
|
%
|
Asia/Pacific
|
659
|
|
6
|
%
|
|
671
|
|
6
|
%
|
|
514
|
|
5
|
%
|
All other
(1)
|
988
|
|
9
|
%
|
|
869
|
|
8
|
%
|
|
902
|
|
9
|
%
|
Intersegment sales
|
1,145
|
|
|
|
954
|
|
|
|
875
|
|
|
Mission Systems sales
|
11,709
|
|
|
|
11,470
|
|
|
|
11,161
|
|
|
Technology Services
|
|
|
|
|
|
|
|
|
United States
|
2,682
|
|
77
|
%
|
|
2,900
|
|
79
|
%
|
|
3,120
|
|
82
|
%
|
Asia/Pacific
|
151
|
|
4
|
%
|
|
141
|
|
4
|
%
|
|
119
|
|
3
|
%
|
All other
(1)
|
650
|
|
19
|
%
|
|
611
|
|
17
|
%
|
|
568
|
|
15
|
%
|
Intersegment sales
|
814
|
|
|
|
1,035
|
|
|
|
958
|
|
|
Technology Services sales
|
4,297
|
|
|
|
4,687
|
|
|
|
4,765
|
|
|
Total
|
|
|
|
|
|
|
|
|
United States
|
25,661
|
|
85
|
%
|
|
22,552
|
|
87
|
%
|
|
21,411
|
|
87
|
%
|
Asia/Pacific
|
1,666
|
|
6
|
%
|
|
1,461
|
|
5
|
%
|
|
1,212
|
|
5
|
%
|
All other
(1)
|
2,768
|
|
9
|
%
|
|
1,991
|
|
8
|
%
|
|
2,083
|
|
8
|
%
|
Total Sales
|
$
|
30,095
|
|
|
|
$
|
26,004
|
|
|
|
$
|
24,706
|
|
|
|
|
(1)
|
All other is principally comprised of Europe and the Middle East.
|
|
|
(2)
|
Percentages calculated based on external customer sales.
|
NORTHROP GRUMMAN CORPORATION
Intersegment Sales and Operating Income
Sales between segments are recorded at values that include intercompany operating income for the performing segment based on that segment’s estimated average operating margin rate for external sales. Such intercompany operating income is eliminated in consolidation, so that the company’s total sales and total operating income reflect only those transactions with external customers. See Note
1
for additional information.
The following table presents intersegment sales and operating income before eliminations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
$ in millions
|
|
2018
|
|
2017
|
|
2016
|
|
|
Sales
|
Operating
Income
|
|
Sales
|
Operating
Income
|
|
Sales
|
Operating
Income
|
Intersegment sales and operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace Systems
|
|
$
|
197
|
|
|
$
|
23
|
|
|
$
|
295
|
|
|
$
|
33
|
|
|
$
|
240
|
|
|
$
|
28
|
|
Innovation Systems
|
|
127
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mission Systems
|
|
1,145
|
|
|
165
|
|
|
954
|
|
|
141
|
|
|
875
|
|
|
136
|
|
Technology Services
|
|
814
|
|
|
81
|
|
|
1,035
|
|
|
103
|
|
|
958
|
|
|
94
|
|
Total
|
|
$
|
2,283
|
|
|
$
|
270
|
|
|
$
|
2,284
|
|
|
$
|
277
|
|
|
$
|
2,073
|
|
|
$
|
258
|
|
Assets
Substantially all of the company’s operating assets are located in the U.S. The following table presents assets by segment:
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2018
|
|
2017
|
Assets
|
|
|
|
|
Aerospace Systems
|
|
$
|
9,750
|
|
|
$
|
8,497
|
|
Innovation Systems
|
|
10,368
|
|
|
—
|
|
Mission Systems
|
|
11,047
|
|
|
10,389
|
|
Technology Services
|
|
2,957
|
|
|
3,014
|
|
Segment assets
|
|
34,122
|
|
|
21,900
|
|
Corporate assets
(1)
|
|
3,531
|
|
|
13,228
|
|
Total assets
|
|
$
|
37,653
|
|
|
$
|
35,128
|
|
|
|
(1)
|
Corporate assets principally consist of cash and cash equivalents, property, plant and equipment and marketable securities.
|
Capital Expenditures and Depreciation and Amortization
The following table presents capital expenditures and depreciation and amortization by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
$ in millions
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
|
Capital Expenditures
|
|
Depreciation and Amortization
(1)
|
Aerospace Systems
|
|
$
|
781
|
|
|
$
|
665
|
|
|
$
|
451
|
|
|
$
|
243
|
|
|
$
|
234
|
|
|
$
|
216
|
|
Innovation Systems
|
|
141
|
|
|
—
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
—
|
|
Mission Systems
|
|
206
|
|
|
164
|
|
|
372
|
|
|
134
|
|
|
131
|
|
|
140
|
|
Technology Services
|
|
18
|
|
|
15
|
|
|
6
|
|
|
45
|
|
|
40
|
|
|
37
|
|
Corporate
|
|
103
|
|
|
84
|
|
|
91
|
|
|
294
|
|
|
70
|
|
|
63
|
|
Total
|
|
$
|
1,249
|
|
|
$
|
928
|
|
|
$
|
920
|
|
|
$
|
800
|
|
|
$
|
475
|
|
|
$
|
456
|
|
|
|
(1)
|
Beginning in 2018, corporate amounts include the amortization of other 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 as they are not considered part of management's evaluation of segment operating performance.
|
NORTHROP GRUMMAN CORPORATION
16
. UNAUDITED SELECTED QUARTERLY DATA
Unaudited quarterly financial results are set forth in the following tables. 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 each quarter-end date, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
In millions, except per share amounts
|
|
1st Qtr
|
|
2nd Qtr
(1)
|
|
3rd Qtr
(1)
|
|
4th Qtr
(1)
|
Sales
|
|
$
|
6,735
|
|
|
$
|
7,119
|
|
|
$
|
8,085
|
|
|
$
|
8,156
|
|
Operating income
|
|
848
|
|
|
817
|
|
|
1,172
|
|
|
943
|
|
Net earnings
|
|
840
|
|
|
789
|
|
|
1,244
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
4.82
|
|
|
4.52
|
|
|
7.15
|
|
|
2.07
|
|
Diluted earnings per share
|
|
4.79
|
|
|
4.50
|
|
|
7.11
|
|
|
2.06
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
174.3
|
|
|
174.5
|
|
|
174.1
|
|
|
171.8
|
|
Weighted-average diluted shares outstanding
|
|
175.4
|
|
|
175.4
|
|
|
174.9
|
|
|
172.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 - Impact of Accounting Change
(2)
|
|
|
In millions, except per share amounts
|
|
1st Qtr
|
|
2nd Qtr
|
|
3rd Qtr
|
|
4th Qtr
|
Sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating income
|
|
(6
|
)
|
|
(6
|
)
|
|
(6
|
)
|
|
23
|
|
Net earnings
|
|
101
|
|
|
100
|
|
|
100
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
0.58
|
|
|
0.57
|
|
|
0.58
|
|
|
(2.29
|
)
|
Diluted earnings per share
|
|
0.58
|
|
|
0.57
|
|
|
0.57
|
|
|
(2.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
In millions, except per share amounts
|
|
1st Qtr
|
|
2nd Qtr
|
|
3rd Qtr
|
|
4th Qtr
|
Sales
|
|
$
|
6,410
|
|
|
$
|
6,473
|
|
|
$
|
6,569
|
|
|
$
|
6,552
|
|
Operating income
|
|
853
|
|
|
864
|
|
|
829
|
|
|
672
|
|
Net earnings
|
|
770
|
|
|
677
|
|
|
750
|
|
|
672
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
4.41
|
|
|
3.88
|
|
|
4.31
|
|
|
3.86
|
|
Diluted earnings per share
|
|
4.37
|
|
|
3.86
|
|
|
4.28
|
|
|
3.83
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
174.8
|
|
|
174.5
|
|
|
174.2
|
|
|
174.2
|
|
Weighted-average diluted shares outstanding
|
|
176.1
|
|
|
175.5
|
|
|
175.3
|
|
|
175.5
|
|
NORTHROP GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 - Impact of Accounting Change
(2)
|
|
|
In millions, except per share amounts
|
|
1st Qtr
|
|
2nd Qtr
|
|
3rd Qtr
|
|
4th Qtr
|
Sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating income
|
|
(9
|
)
|
|
(9
|
)
|
|
(8
|
)
|
|
(32
|
)
|
Net earnings
|
|
120
|
|
|
122
|
|
|
107
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
0.69
|
|
|
0.70
|
|
|
0.62
|
|
|
3.01
|
|
Diluted earnings per share
|
|
0.68
|
|
|
0.70
|
|
|
0.61
|
|
|
2.99
|
|
(1)
Selected financial data includes the operating results of Innovation Systems subsequent to the Merger date.
(2)
Table reflects the effects of the Accounting change described in Note 1 on our unaudited selected quarterly financial data.
NORTHROP GRUMMAN CORPORATION
17
. 2018 IMPACT OF ACCOUNTING METHOD CHANGE
The following tables summarize the effects of the Accounting change described in Note
1
on our consolidated statement of earnings and comprehensive income, statement of cash flows and statement of changes in shareholders’ equity for the year ended December 31, 2018 and consolidated statement of financial position as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
|
|
|
Year Ended December 31, 2018
|
$ in millions, except per share amounts
|
|
As Computed Under Previous Method
|
|
Effect of Accounting Change
|
|
As Reported Under New Method
|
Operating income
|
|
$
|
3,775
|
|
|
$
|
5
|
|
|
$
|
3,780
|
|
Other (expense) income
|
|
|
|
|
|
|
Interest expense
|
|
(562
|
)
|
|
—
|
|
|
(562
|
)
|
Net FAS (non-service) pension benefit
|
|
514
|
|
|
535
|
|
|
1,049
|
|
Mark-to-market pension and OPB expense
|
|
—
|
|
|
(655
|
)
|
|
(655
|
)
|
Other, net
|
|
132
|
|
|
(2
|
)
|
|
130
|
|
Earnings before income taxes
|
|
3,859
|
|
|
(117
|
)
|
|
3,742
|
|
Federal and foreign income tax expense
|
|
537
|
|
|
(24
|
)
|
|
513
|
|
Net earnings
|
|
$
|
3,322
|
|
|
$
|
(93
|
)
|
|
$
|
3,229
|
|
Basic earnings per share
|
|
$
|
19.12
|
|
|
$
|
(0.53
|
)
|
|
$
|
18.59
|
|
Diluted earnings per share
|
|
$
|
19.03
|
|
|
$
|
(0.54
|
)
|
|
$
|
18.49
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
|
|
|
December 31, 2018
|
$ in millions
|
|
As Computed Under Previous Method
|
|
Effect of Accounting Change
|
|
As Reported Under New Method
|
Retained earnings
|
|
$
|
13,965
|
|
|
$
|
(5,897
|
)
|
|
$
|
8,068
|
|
Accumulated other comprehensive (loss) income
|
|
(5,949
|
)
|
|
5,897
|
|
|
(52
|
)
|
NORTHROP GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
December 31, 2018
|
$ in millions
|
|
As Computed Under Previous Method
|
|
Effect of Accounting Change
|
|
As Reported Under New Method
|
Operating activities
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,322
|
|
|
$
|
(93
|
)
|
|
$
|
3,229
|
|
Adjustments to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
800
|
|
|
—
|
|
|
800
|
|
Mark-to-market pension and OPB expense
|
|
—
|
|
|
655
|
|
|
655
|
|
Stock-based compensation
|
|
86
|
|
|
—
|
|
|
86
|
|
Deferred income taxes
|
|
263
|
|
|
(29
|
)
|
|
234
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
202
|
|
|
—
|
|
|
202
|
|
Unbilled receivables, net
|
|
(297
|
)
|
|
—
|
|
|
(297
|
)
|
Inventoried costs, net
|
|
(37
|
)
|
|
—
|
|
|
(37
|
)
|
Prepaid expenses and other assets
|
|
(56
|
)
|
|
—
|
|
|
(56
|
)
|
Accounts payable and other liabilities
|
|
381
|
|
|
—
|
|
|
381
|
|
Income taxes payable, net
|
|
(258
|
)
|
|
—
|
|
|
(258
|
)
|
Retiree benefits
(1)
|
|
(550
|
)
|
|
(533
|
)
|
|
(1,083
|
)
|
Other, net
|
|
(29
|
)
|
|
—
|
|
|
(29
|
)
|
Net cash provided by operating activities
|
|
$
|
3,827
|
|
|
$
|
—
|
|
|
$
|
3,827
|
|
|
|
(1)
|
Includes company contributions to our pension and OPB plans as well as net periodic benefit costs, excluding MTM pension and OPB expense, which is presented as a separate non-cash item above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
|
|
|
Year ended December 31, 2018
|
$ in millions
|
|
As Computed Under Previous Method
|
|
Effect of Accounting Change
|
|
As Reported Under New Method
|
Retained earnings
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
11,632
|
|
|
$
|
(4,719
|
)
|
|
$
|
6,913
|
|
Impact from adoption of ASU 2018-02 and ASU 2016-01
|
|
1,064
|
|
|
(1,085
|
)
|
|
(21
|
)
|
Common stock repurchased
|
|
(1,225
|
)
|
|
—
|
|
|
(1,225
|
)
|
Net earnings
|
|
3,322
|
|
|
(93
|
)
|
|
3,229
|
|
Dividends declared
|
|
(822
|
)
|
|
—
|
|
|
(822
|
)
|
Stock compensation
|
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
End of year
|
|
13,965
|
|
|
(5,897
|
)
|
|
8,068
|
|
Accumulated other comprehensive (loss) income
|
|
|
|
|
|
|
Beginning of year
|
|
(4,718
|
)
|
|
4,719
|
|
|
1
|
|
Impact from adoption of ASU 2018-02 and ASU 2016-01
|
|
(1,064
|
)
|
|
1,085
|
|
|
21
|
|
Other comprehensive loss, net of tax
|
|
(167
|
)
|
|
93
|
|
|
(74
|
)
|
End of year
|
|
$
|
(5,949
|
)
|
|
$
|
5,897
|
|
|
$
|
(52
|
)
|
NORTHROP GRUMMAN CORPORATION
18
. RECAST 2017 AND 2016 FINANCIAL INFORMATION
Our prior period consolidated financial statements were recast for the retrospective adoption of ASC Topic 606 and ASU 2017-07 and the Accounting change described in Note
1
. The following tables summarize the effects of these changes on our consolidated statements of earnings and comprehensive income, statements of cash flows and statements of changes in shareholders’ equity for the years ended
December 31, 2017
and
2016
and consolidated statement of financial position as of
December 31, 2017
.
CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
As Previously Reported
|
Impact of:
|
As Adjusted
|
$ in millions, except per share amounts
|
|
ASC Topic 606
|
|
ASU 2017-07
|
|
Accounting Change
|
|
Sales
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
16,038
|
|
|
$
|
326
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,364
|
|
Service
|
9,765
|
|
|
(125
|
)
|
|
—
|
|
|
—
|
|
|
9,640
|
|
Total sales
|
25,803
|
|
|
201
|
|
|
—
|
|
|
—
|
|
|
26,004
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
Product
|
12,271
|
|
|
239
|
|
|
(18
|
)
|
|
35
|
|
|
12,527
|
|
Service
|
7,578
|
|
|
(42
|
)
|
|
(12
|
)
|
|
23
|
|
|
7,547
|
|
General and administrative expenses
|
2,655
|
|
|
57
|
|
|
—
|
|
|
—
|
|
|
2,712
|
|
Operating income
|
3,299
|
|
|
(53
|
)
|
|
30
|
|
|
(58
|
)
|
|
3,218
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(360
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(360
|
)
|
Net FAS (non-service) pension (expense) income
|
—
|
|
|
—
|
|
|
(44
|
)
|
|
743
|
|
|
699
|
|
Mark-to-market pension and OPB benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
536
|
|
|
536
|
|
Other, net
|
110
|
|
|
—
|
|
|
14
|
|
|
12
|
|
|
136
|
|
Earnings before income taxes
|
3,049
|
|
|
(53
|
)
|
|
—
|
|
|
1,233
|
|
|
4,229
|
|
Federal and foreign income tax expense (benefit)
|
1,034
|
|
|
(33
|
)
|
|
—
|
|
|
359
|
|
|
1,360
|
|
Net earnings
|
$
|
2,015
|
|
|
$
|
(20
|
)
|
|
$
|
—
|
|
|
$
|
874
|
|
|
$
|
2,869
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
11.55
|
|
|
$
|
(0.11
|
)
|
|
$
|
—
|
|
|
$
|
5.01
|
|
|
$
|
16.45
|
|
Weighted-average common shares outstanding, in millions
|
174.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
174.4
|
|
Diluted earnings per share
|
$
|
11.47
|
|
|
$
|
(0.11
|
)
|
|
$
|
—
|
|
|
$
|
4.98
|
|
|
$
|
16.34
|
|
Weighted-average diluted shares outstanding, in millions
|
175.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
175.6
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (from above)
|
$
|
2,015
|
|
|
$
|
(20
|
)
|
|
$
|
—
|
|
|
$
|
874
|
|
|
$
|
2,869
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
Change in unamortized benefit plan costs, net of tax expense of $35
|
830
|
|
|
—
|
|
|
—
|
|
|
(874
|
)
|
|
(44
|
)
|
Change in cumulative translation adjustment
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Other, net
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Other comprehensive income (loss), net of tax
|
828
|
|
|
—
|
|
|
—
|
|
|
(874
|
)
|
|
(46
|
)
|
Comprehensive income
|
$
|
2,843
|
|
|
$
|
(20
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,823
|
|
NORTHROP GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
As Previously Reported
|
Impact of:
|
As Adjusted
|
$ in millions, except per share amounts
|
|
ASC Topic 606
|
|
ASU 2017-07
|
|
Accounting Change
|
|
Sales
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
14,738
|
|
|
$
|
342
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,080
|
|
Service
|
9,770
|
|
|
(144
|
)
|
|
—
|
|
|
—
|
|
|
9,626
|
|
Total sales
|
24,508
|
|
|
198
|
|
|
—
|
|
|
—
|
|
|
24,706
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
Product
|
11,002
|
|
|
286
|
|
|
(86
|
)
|
|
(5
|
)
|
|
11,197
|
|
Service
|
7,729
|
|
|
(68
|
)
|
|
(58
|
)
|
|
(3
|
)
|
|
7,600
|
|
General and administrative expenses
|
2,584
|
|
|
48
|
|
|
—
|
|
|
—
|
|
|
2,632
|
|
Operating income
|
3,193
|
|
|
(68
|
)
|
|
144
|
|
|
8
|
|
|
3,277
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(301
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(301
|
)
|
Net FAS (non-service) pension (expense) income
|
—
|
|
|
—
|
|
|
(141
|
)
|
|
752
|
|
|
611
|
|
Mark-to-market pension and OPB expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(950
|
)
|
|
(950
|
)
|
Other, net
|
31
|
|
|
—
|
|
|
(3
|
)
|
|
16
|
|
|
44
|
|
Earnings before income taxes
|
2,923
|
|
|
(68
|
)
|
|
—
|
|
|
(174
|
)
|
|
2,681
|
|
Federal and foreign income tax expense (benefit)
|
723
|
|
|
(24
|
)
|
|
—
|
|
|
(61
|
)
|
|
638
|
|
Net earnings
|
$
|
2,200
|
|
|
$
|
(44
|
)
|
|
$
|
—
|
|
|
$
|
(113
|
)
|
|
$
|
2,043
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
12.30
|
|
|
$
|
(0.25
|
)
|
|
$
|
—
|
|
|
$
|
(0.63
|
)
|
|
$
|
11.42
|
|
Weighted-average common shares outstanding, in millions
|
178.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
178.9
|
|
Diluted earnings per share
|
$
|
12.19
|
|
|
$
|
(0.24
|
)
|
|
$
|
—
|
|
|
$
|
(0.63
|
)
|
|
$
|
11.32
|
|
Weighted-average diluted shares outstanding, in millions
|
180.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
180.5
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (from above)
|
$
|
2,200
|
|
|
$
|
(44
|
)
|
|
$
|
—
|
|
|
$
|
(113
|
)
|
|
$
|
2,043
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
Change in unamortized benefit plan costs, net of tax expense of $20
|
(175
|
)
|
|
—
|
|
|
—
|
|
|
113
|
|
|
(62
|
)
|
Change in cumulative translation adjustment
|
(50
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(50
|
)
|
Other, net
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Other comprehensive loss, net of tax
|
(226
|
)
|
|
—
|
|
|
—
|
|
|
113
|
|
|
(113
|
)
|
Comprehensive income
|
$
|
1,974
|
|
|
$
|
(44
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,930
|
|
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
As Previously Reported
|
Impact of:
|
As Adjusted
|
$ in millions
|
|
ASC Topic 606
|
|
Accounting Change
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
11,225
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,225
|
|
Accounts receivable, net
|
829
|
|
|
225
|
|
|
—
|
|
|
1,054
|
|
Unbilled receivables, net
|
3,147
|
|
|
318
|
|
|
—
|
|
|
3,465
|
|
Inventoried costs, net
|
780
|
|
|
(382
|
)
|
|
—
|
|
|
398
|
|
Prepaid expenses and other current assets
|
368
|
|
|
77
|
|
|
—
|
|
|
445
|
|
Total current assets
|
16,349
|
|
|
238
|
|
|
—
|
|
|
16,587
|
|
Property, plant and equipment, net of accumulated depreciation of $5,066 for 2017
|
4,225
|
|
|
—
|
|
|
—
|
|
|
4,225
|
|
Goodwill
|
12,455
|
|
|
—
|
|
|
—
|
|
|
12,455
|
|
Intangible assets, net
|
52
|
|
|
—
|
|
|
—
|
|
|
52
|
|
Deferred tax assets
|
475
|
|
|
(28
|
)
|
|
—
|
|
|
447
|
|
Other non-current assets
|
1,361
|
|
|
1
|
|
|
—
|
|
|
1,362
|
|
Total assets
|
$
|
34,917
|
|
|
$
|
211
|
|
|
$
|
—
|
|
|
$
|
35,128
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Trade accounts payable
|
$
|
1,661
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
1,661
|
|
Accrued employee compensation
|
1,382
|
|
|
—
|
|
|
—
|
|
|
1,382
|
|
Advance payments and amounts in excess of costs incurred
|
1,617
|
|
|
144
|
|
|
—
|
|
|
1,761
|
|
Other current liabilities
|
2,305
|
|
|
(17
|
)
|
|
—
|
|
|
2,288
|
|
Total current liabilities
|
6,965
|
|
|
127
|
|
|
—
|
|
|
7,092
|
|
Long-term debt, net of current portion of $867 for 2017
|
14,399
|
|
|
—
|
|
|
—
|
|
|
14,399
|
|
Pension and OPB plan liabilities
|
5,511
|
|
|
—
|
|
|
—
|
|
|
5,511
|
|
Other non-current liabilities
|
994
|
|
|
—
|
|
|
—
|
|
|
994
|
|
Total liabilities
|
27,869
|
|
|
127
|
|
|
—
|
|
|
27,996
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2017—174,085,619
|
174
|
|
|
—
|
|
|
—
|
|
|
174
|
|
Paid-in capital
|
44
|
|
|
—
|
|
|
—
|
|
|
44
|
|
Retained earnings
|
11,548
|
|
|
84
|
|
|
(4,719
|
)
|
|
6,913
|
|
Accumulated other comprehensive (loss) income
|
(4,718
|
)
|
|
—
|
|
|
4,719
|
|
|
1
|
|
Total shareholders’ equity
|
7,048
|
|
|
84
|
|
|
—
|
|
|
7,132
|
|
Total liabilities and shareholders’ equity
|
$
|
34,917
|
|
|
$
|
211
|
|
|
$
|
—
|
|
|
$
|
35,128
|
|
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
The adoption of ASC Topic 606 and ASU 2017-07 and our Accounting change did not have an impact on our investing or financing cash flows for the years ended
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
As Previously Reported
|
|
Impact of:
|
|
As Adjusted
|
$ in millions
|
|
ASC Topic 606
|
|
Accounting Change
|
|
Operating activities
|
|
|
|
|
|
|
|
Net earnings
|
$
|
2,015
|
|
|
$
|
(20
|
)
|
|
$
|
874
|
|
|
$
|
2,869
|
|
Adjustments to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
475
|
|
|
—
|
|
|
—
|
|
|
475
|
|
Mark-to-market pension and OPB benefit
|
—
|
|
|
—
|
|
|
(536
|
)
|
|
(536
|
)
|
Stock-based compensation
|
94
|
|
|
—
|
|
|
—
|
|
|
94
|
|
Deferred income taxes
|
603
|
|
|
(35
|
)
|
|
417
|
|
|
985
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable, net
|
(187
|
)
|
|
(22
|
)
|
|
—
|
|
|
(209
|
)
|
Unbilled receivables, net
|
(490
|
)
|
|
68
|
|
|
—
|
|
|
(422
|
)
|
Inventoried costs, net
|
36
|
|
|
(11
|
)
|
|
—
|
|
|
25
|
|
Prepaid expenses and other assets
|
(81
|
)
|
|
(11
|
)
|
|
—
|
|
|
(92
|
)
|
Accounts payable and other liabilities
|
539
|
|
|
31
|
|
|
—
|
|
|
570
|
|
Income taxes payable, net
|
(157
|
)
|
|
—
|
|
|
—
|
|
|
(157
|
)
|
Retiree benefits
(1)
|
(191
|
)
|
|
—
|
|
|
(755
|
)
|
|
(946
|
)
|
Other, net
|
(43
|
)
|
|
—
|
|
|
—
|
|
|
(43
|
)
|
Net cash provided by operating activities
|
$
|
2,613
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
As Previously Reported
|
|
Impact of:
|
|
As Adjusted
|
$ in millions
|
|
ASC Topic 606
|
|
Accounting Change
|
|
Operating activities
|
|
|
|
|
|
|
|
Net earnings
|
$
|
2,200
|
|
|
$
|
(44
|
)
|
|
$
|
(113
|
)
|
|
$
|
2,043
|
|
Adjustments to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
456
|
|
|
—
|
|
|
—
|
|
|
456
|
|
Mark-to-market pension and OPB expense
|
—
|
|
|
—
|
|
|
950
|
|
|
950
|
|
Stock-based compensation
|
93
|
|
|
—
|
|
|
—
|
|
|
93
|
|
Deferred income taxes
|
36
|
|
|
(27
|
)
|
|
(69
|
)
|
|
(60
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable, net
|
55
|
|
|
(9
|
)
|
|
—
|
|
|
46
|
|
Unbilled receivables, net
|
(516
|
)
|
|
305
|
|
|
—
|
|
|
(211
|
)
|
Inventoried costs, net
|
(15
|
)
|
|
(38
|
)
|
|
—
|
|
|
(53
|
)
|
Prepaid expenses and other assets
|
(110
|
)
|
|
(7
|
)
|
|
—
|
|
|
(117
|
)
|
Accounts payable and other liabilities
|
198
|
|
|
(180
|
)
|
|
—
|
|
|
18
|
|
Income taxes payable, net
|
148
|
|
|
—
|
|
|
—
|
|
|
148
|
|
Retiree benefits
(1)
|
393
|
|
|
—
|
|
|
(768
|
)
|
|
(375
|
)
|
Other, net
|
(125
|
)
|
|
—
|
|
|
—
|
|
|
(125
|
)
|
Net cash provided by operating activities
|
$
|
2,813
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,813
|
|
|
|
(1)
|
Includes company contributions to our pension and OPB plans as well as net periodic benefit costs, excluding MTM pension and OPB expense, which is presented as a separate non-cash item above.
|
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
The adoption of ASC Topic 606 and ASU 2017-07 and our Accounting change did not have an impact on the changes in common stock and paid-in capital for the years ended
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
As Previously Reported
|
Impact of:
|
As Adjusted
|
$ in millions, except per share amounts
|
|
ASC Topic 606
|
|
Accounting Change
|
|
Retained earnings
|
|
|
|
|
|
|
|
Beginning of year
|
$
|
10,630
|
|
|
$
|
104
|
|
|
$
|
(5,593
|
)
|
|
$
|
5,141
|
|
Common stock repurchased
|
(371
|
)
|
|
—
|
|
|
—
|
|
|
(371
|
)
|
Net earnings
|
2,015
|
|
|
(20
|
)
|
|
874
|
|
|
2,869
|
|
Dividends declared
|
(687
|
)
|
|
—
|
|
|
—
|
|
|
(687
|
)
|
Stock compensation
|
(39
|
)
|
|
—
|
|
|
—
|
|
|
(39
|
)
|
End of year
|
11,548
|
|
|
84
|
|
|
(4,719
|
)
|
|
6,913
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income
|
|
|
|
|
|
|
|
Beginning of year
|
(5,546
|
)
|
|
—
|
|
|
5,593
|
|
|
47
|
|
Other comprehensive income (loss), net of tax
|
828
|
|
|
—
|
|
|
(874
|
)
|
|
(46
|
)
|
End of year
|
(4,718
|
)
|
|
—
|
|
|
4,719
|
|
|
1
|
|
Total shareholders’ equity
|
$
|
7,048
|
|
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
7,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
As Previously Reported
|
Impact of:
|
As Adjusted
|
$ in millions, except per share amounts
|
|
ASC Topic 606
|
|
Accounting Change
|
|
Retained earnings
|
|
|
|
|
|
|
|
Beginning of year
|
$
|
10,661
|
|
|
$
|
148
|
|
|
$
|
(5,480
|
)
|
|
$
|
5,329
|
|
Common stock repurchased
|
(1,548
|
)
|
|
—
|
|
|
—
|
|
|
(1,548
|
)
|
Net earnings
|
2,200
|
|
|
(44
|
)
|
|
(113
|
)
|
|
2,043
|
|
Dividends declared
|
(633
|
)
|
|
—
|
|
|
—
|
|
|
(633
|
)
|
Stock compensation
|
(50
|
)
|
|
—
|
|
|
—
|
|
|
(50
|
)
|
End of year
|
10,630
|
|
|
104
|
|
|
(5,593
|
)
|
|
5,141
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income
|
|
|
|
|
|
|
|
Beginning of year
|
(5,320
|
)
|
|
—
|
|
|
5,480
|
|
|
160
|
|
Other comprehensive income (loss), net of tax
|
(226
|
)
|
|
—
|
|
|
113
|
|
|
(113
|
)
|
End of year
|
(5,546
|
)
|
|
—
|
|
|
5,593
|
|
|
47
|
|
Total shareholders’ equity
|
$
|
5,259
|
|
|
$
|
104
|
|
|
$
|
—
|
|
|
$
|
5,363
|
|
NORTHROP GRUMMAN CORPORATION