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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2020
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-16411
NORTHROP GRUMMAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
80-0640649
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
2980 Fairview Park Drive
 
 
Falls Church,
Virginia
 
22042
(Address of principal executive offices)
 
(Zip Code)
(703) 280-2900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
NOC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer ☒     Accelerated Filer ☐
Non-accelerated Filer ☐    Smaller Reporting Company                 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes     No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of April 24, 2020, 166,702,730 shares of common stock were outstanding.


Table of Contents

NORTHROP GRUMMAN CORPORATION                        

TABLE OF CONTENTS
 
 
Page
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 

i

Table of Contents

NORTHROP GRUMMAN CORPORATION                        

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended March 31
$ in millions, except per share amounts
2020

2019
Sales





Product
$
6,176


$
5,728

Service
2,444


2,461

Total sales
8,620


8,189

Operating costs and expenses





Product
4,952


4,517

Service
1,946


1,976

General and administrative expenses
788


760

Operating income
934


936

Other (expense) income





Interest expense
(125
)

(138
)
FAS (non-service) pension benefit
302


200

Other, net
(58
)

36

Earnings before income taxes
1,053


1,034

Federal and foreign income tax expense
185


171

Net earnings
$
868


$
863







Basic earnings per share
$
5.18


$
5.08

Weighted-average common shares outstanding, in millions
167.7


170.0

Diluted earnings per share
$
5.15


$
5.06

Weighted-average diluted shares outstanding, in millions
168.4


170.7







Net earnings (from above)
$
868


$
863

Other comprehensive loss
 
 
 
Change in unamortized prior service credit, net of tax
(10
)
 
(11
)
Change in cumulative translation adjustment and other, net
(9
)
 
4

Other comprehensive loss, net of tax
(19
)
 
(7
)
Comprehensive income
$
849

 
$
856

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

-1-

Table of Contents

NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
$ in millions, except par value
March 31,
2020
 
December 31,
2019
Assets
 
 
 
Cash and cash equivalents
$
3,278

 
$
2,245

Accounts receivable, net
2,136

 
1,326

Unbilled receivables, net
5,918

 
5,334

Inventoried costs, net
785

 
783

Prepaid expenses and other current assets
1,011

 
997

Total current assets
13,128

 
10,685

Property, plant and equipment, net of accumulated depreciation of $5,952 for 2020 and $5,850 for 2019
6,956

 
6,912

Operating lease right-of-use assets
1,469

 
1,511

Goodwill
18,698

 
18,708

Intangible assets, net
974

 
1,040

Deferred tax assets
355

 
508

Other non-current assets
1,623

 
1,725

Total assets
$
43,203

 
$
41,089

 
 
 
 
Liabilities
 
 
 
Trade accounts payable
$
2,071

 
$
2,226

Accrued employee compensation
1,472

 
1,865

Advance payments and billings in excess of costs incurred
2,027

 
2,237

Other current liabilities
4,607

 
3,106

Total current liabilities
10,177

 
9,434

Long-term debt, net of current portion of $1,790 for 2020 and $1,109 for 2019
14,299

 
12,770

Pension and other postretirement benefit plan liabilities
6,779

 
6,979

Operating lease liabilities
1,280

 
1,308

Other non-current liabilities
1,606

 
1,779

Total liabilities
34,141

 
32,270

 
 
 
 
Commitments and contingencies (Note 6)

 

 
 
 
 
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: 2020—167,099,297 and 2019—167,848,424
167

 
168

Paid-in capital

 

Retained earnings
9,011

 
8,748

Accumulated other comprehensive loss
(116
)
 
(97
)
Total shareholders’ equity
9,062

 
8,819

Total liabilities and shareholders’ equity
$
43,203

 
$
41,089

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

-2-

Table of Contents

NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31
$ in millions
2020
 
2019
Operating activities
 
 
 
Net earnings
$
868

 
$
863

Adjustments to reconcile to net cash used in operating activities:
 
 
 
Depreciation and amortization
297

 
302

Stock-based compensation
18

 
26

Deferred income taxes
156

 
33

Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(810
)
 
(718
)
Unbilled receivables, net
(584
)
 
(759
)
Inventoried costs, net
(2
)
 
(124
)
Prepaid expenses and other assets
56

 
(23
)
Accounts payable and other liabilities
(833
)
 
(480
)
Income taxes payable, net
10

 
140

Retiree benefits
(237
)
 
(142
)
Other, net
68

 
(31
)
Net cash used in operating activities
(993
)
 
(913
)
 
 
 
 
Investing activities
 
 
 
Capital expenditures
(272
)
 
(284
)
Other, net
2

 
4

Net cash used in investing activities
(270
)
 
(280
)
 
 
 
 
Financing activities
 
 
 
Net proceeds from issuance of long-term debt
2,239

 

Payments to credit facilities
(7
)
 
(20
)
Net borrowings on commercial paper
744

 
814

Common stock repurchases
(344
)
 
(60
)
Cash dividends paid
(227
)
 
(211
)
Payments of employee taxes withheld from share-based awards
(63
)
 
(61
)
Other, net
(46
)
 

Net cash provided by financing activities
2,296

 
462

Increase (decrease) in cash and cash equivalents
1,033

 
(731
)
Cash and cash equivalents, beginning of year
2,245

 
1,579

Cash and cash equivalents, end of period
$
3,278

 
$
848

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

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NORTHROP GRUMMAN CORPORATION                        

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
Three Months Ended March 31
$ in millions, except per share amounts
2020
 
2019
Common stock
 
 
 
Beginning of period
$
168

 
$
171

Common stock repurchased
(1
)
 
(1
)
End of period
167

 
170

Paid-in capital
 
 
 
Beginning of period

 

End of period

 

Retained earnings
 
 
 
Beginning of period
8,748

 
8,068

Common stock repurchased
(348
)
 
(62
)
Net earnings
868

 
863

Dividends declared
(223
)
 
(206
)
Stock compensation
(45
)
 
(35
)
Other
11

 

End of period
9,011

 
8,628

Accumulated other comprehensive (loss) income
 
 
 
Beginning of period
(97
)
 
(52
)
Other comprehensive loss, net of tax
(19
)
 
(7
)
End of period
(116
)
 
(59
)
Total shareholders’ equity
$
9,062

 
$
8,739

Cash dividends declared per share
$
1.32

 
$
1.20

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

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NORTHROP GRUMMAN CORPORATION                        

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.    BASIS OF PRESENTATION
Principles of Consolidation and Reporting
These unaudited condensed consolidated financial statements (the “financial statements”) include the accounts of Northrop Grumman Corporation and its subsidiaries and joint ventures or other investments for which we consolidate the financial results (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”). 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.
These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP” or “FAS”) and in accordance with the rules of the Securities and Exchange Commission (SEC) for interim reporting. The financial statements include adjustments of a normal recurring nature considered necessary by management for a fair presentation of the company’s unaudited condensed consolidated financial position, results of operations and cash flows.
Effective January 1, 2020, the company reorganized its operating sectors to better align the company’s broad portfolio to serve its customers’ needs. The four new sectors, which also comprise our reportable segments, are Aeronautics Systems, Defense Systems, Mission Systems and Space Systems.
The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the information contained in the company’s 2019 Annual Report on Form 10-K and the Form 8-K that we expect to file with the SEC immediately after filing this Form 10-Q, which recasts the disclosures in certain portions of the 2019 Annual Report on Form 10-K to reflect changes in the company’s reportable segments.
The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30 and third quarter as ending on September 30. It is the company’s long-standing practice to establish actual interim closing dates using a “fiscal” calendar, in which we close our books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. This practice is only used at interim periods within a reporting year.
Accounting Estimates
Preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Estimates have been prepared using the most current and best available information; however, actual results could differ materially from those estimates.
Revenue Recognition
The majority of our sales are derived from long-term contracts with the U.S. government for the production of goods, the provision of services, or a combination of both. We recognize revenue as control is transferred to the customer, either over time or at a point in time. As control is effectively transferred while we perform on our contracts, we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion) as the company believes this represents the most appropriate measurement towards satisfaction of our 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 sales 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.

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NORTHROP GRUMMAN CORPORATION                        

We recognize changes in estimated contract sales or costs and the resulting changes in contract profit on a cumulative basis. Cumulative Estimate-at-Completion (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.
The following table presents the effect of aggregate net EAC adjustments:
 
Three Months Ended March 31
$ in millions, except per share data
2020
 
2019
Revenue
$
136

 
$
166

Operating income
124

 
138

Net earnings(1)
98

 
109

Diluted earnings per share(1)
0.58

 
0.64

(1) 
Based on a 21 percent statutory tax rate.
EAC adjustments on a single performance obligation can have a material effect on the company’s financial statements. When such adjustments occur, we generally disclose the nature, underlying conditions and financial impact of the adjustments. No such adjustments were material to the financial statements during the three months ended March 31, 2020 and 2019.
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 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 March 31, 2020 was $64.2 billion. We expect to recognize approximately 45 percent and 70 percent of our March 31, 2020 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. Contract assets are equivalent to and reflected as Unbilled receivables in the unaudited condensed consolidated statements of financial position and are primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Contract liabilities are equivalent to and reflected as Advance payments and billings in excess of costs incurred in the unaudited condensed consolidated statements of financial position. The amount of revenue recognized for the three months ended March 31, 2020 and 2019 that was included in the contract liability balances at the beginning of each year was $781 million and $674 million, respectively.
Disaggregation of Revenue
See Note 9 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.

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NORTHROP GRUMMAN CORPORATION                        

Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
$ in millions
March 31,
2020
December 31,
2019
Unamortized prior service credit, net of tax expense of $13 for 2020 and $17 for 2019
$
41

$
51

Cumulative translation adjustment and other, net
(157
)
(148
)
Total accumulated other comprehensive loss
$
(116
)
$
(97
)

Related Party Transactions
For all periods presented, the company had no material related party transactions.
Accounting Standards Updates
Accounting standards updates adopted and/or issued, but not effective until after March 31, 2020, are not expected to have a material effect on the company’s unaudited condensed consolidated financial position, annual results of operations and/or cash flows.
2.    EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK
Basic Earnings Per Share
We calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of common stock outstanding during each period.
Diluted Earnings Per Share
Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. The dilutive effect of these securities totaled 0.7 million shares and 0.7 million shares for the three months ended March 31, 2020 and 2019, respectively.
Share Repurchases
On September 16, 2015, the company’s board of directors authorized a share repurchase program of up to $4.0 billion of the company’s common stock (the “2015 Repurchase Program”). Repurchases under the 2015 Repurchase Program commenced in March 2016 and were completed in March 2020.
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”). Repurchases under the 2018 Repurchase Program commenced in March 2020 upon the completion of the company’s 2015 Repurchase Program. As of March 31, 2020, repurchases under the 2018 Repurchase Program totaled $20 million; $2.98 billion remained under this share repurchase authorization. By its terms, the 2018 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:
 
 
 
 
 
 
 
 
 
 
Shares Repurchased
(in millions)
Repurchase Program
Authorization Date
 
Amount
Authorized
(in millions)
 
Total
Shares Retired
(in millions)
 
Average 
Price
Per Share
(1)
 
Date Completed
 
Three Months Ended March 31
 
2020
 
2019
September 16, 2015
 
$
4,000

 
15.4

 
$
260.33

 
March 2020
 
0.9

 
1.1

December 4, 2018
 
$
3,000

 
0.1

 
306.22

 

 
0.1

 


(1) 
Includes commissions paid.
Dividends on Common Stock
In May 2019, the company increased the quarterly common stock dividend 10 percent to $1.32 per share from the previous amount of $1.20 per share.

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NORTHROP GRUMMAN CORPORATION                        

3.    INCOME TAXES
 
Three Months Ended March 31
$ in millions
2020

2019
Federal and foreign income tax expense
$
185

 
$
171

Effective income tax rate
17.6
%
 
16.5
%

The first quarter 2020 effective tax rate increased to 17.6 percent from 16.5 percent in the first quarter of 2019 primarily due to nondeductible losses on marketable securities and an increase in reserves for uncertain tax positions. These were partially offset by an increase in research credits, which totaled $41 million in the first quarter of 2020 and $31 million in the prior year period. Both periods benefited from $13 million of excess tax benefits for employee share-based compensation.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act includes certain changes to U.S. tax law that impact the company, including a technical correction to the 2017 Tax Cuts and Jobs Act, which makes certain qualified improvement property eligible for bonus depreciation. The CARES Act did not have a significant impact on the company’s first quarter 2020 effective tax rate.
The company has recorded unrecognized tax benefits related to our methods of accounting associated with the timing of revenue recognition and related costs, and the 2017 Tax Act. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may decrease by up to $60 million. Since enactment of the 2017 Tax Act, the IRS and U.S. Treasury Department have issued and are expected to further issue interpretive guidance that impacts taxpayers. We will continue to evaluate such guidance as it is issued.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2017 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under IRS examination. In addition, legacy Orbital ATK federal tax returns for the year ended March 31, 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under IRS examination.
4.    FAIR VALUE OF FINANCIAL INSTRUMENTS
The company holds a portfolio of marketable securities consisting of securities to partially fund non-qualified employee benefit plans. A portion of these securities are held in common/collective trust funds and are measured at fair value using net asset value (NAV) per share as a practical expedient; and therefore are not required to be categorized in the fair value hierarchy table below. Marketable securities are included in Other non-current assets in the unaudited condensed consolidated statements of financial position.
The company’s derivative portfolio consists primarily of foreign currency forward contracts. Where model-derived valuations are appropriate, the company utilizes the income approach to determine the fair value and uses the applicable London Interbank Offered Rate (LIBOR) swap rates.
The following table presents the financial assets and liabilities the company records at fair value on a recurring basis identified by the level of inputs used to determine fair value:
 
 
March 31, 2020
 
December 31, 2019
$ in millions
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Financial Assets (Liabilities)
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities
 
$
288

 
$
4

 
$
292

 
$
364

 
$
1

 
$
365

Marketable securities valued using NAV
 
 
 
 
 
16

 
 
 
 
 
17

Total marketable securities
 
288

 
4

 
308

 
364

 
1

 
382

Derivatives
 

 
(3
)
 
(3
)
 

 
(3
)
 
(3
)

The notional value of the company’s foreign currency forward contracts at March 31, 2020 and December 31, 2019 was $85 million and $98 million, respectively. The portion of notional value designated as a cash flow hedge was $3 million and $7 million as of March 31, 2020 and December 31, 2019, respectively.

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NORTHROP GRUMMAN CORPORATION                        

The derivative fair values and related unrealized gains/losses at March 31, 2020 and December 31, 2019 were not material. There were no transfers of financial instruments between the three levels of the fair value hierarchy during the three months ended March 31, 2020.
The carrying value of cash and cash equivalents and commercial paper approximates fair value.
Long-term Debt
The estimated fair value of long-term debt was $17.5 billion and $15.1 billion as of March 31, 2020 and December 31, 2019, respectively. We calculated the fair value of long-term debt using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the company’s existing debt arrangements. The carrying value of long-term debt was $16.1 billion and $13.9 billion as of March 31, 2020 and December 31, 2019, respectively. The current portion of long-term debt is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.
Unsecured Senior Notes
In March 2020, the company issued $2.25 billion of unsecured senior notes for general corporate purposes, including debt repayment and working capital, as follows:
$750 million of 4.40% senior notes due 2030 (the “2030 Notes”),
$500 million of 5.15% senior notes due 2040 (the “2040 Notes”) and
$1.0 billion of 5.25% senior notes due 2050 (the “2050 Notes”).
We refer to the 2030 Notes, the 2040 Notes and the 2050 Notes, together, as the “notes.” Interest on the notes is payable semi-annually in arrears. The notes are generally subject to redemption, in whole or in part, at the company’s discretion at any time, or from time to time, prior to maturity at a redemption price equal to the greater of 100% of the principal amount of the notes to be redeemed or an applicable “make-whole” amount, plus accrued and unpaid interest.
5.    INVESTIGATIONS, CLAIMS AND 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 February 16, 2018, both the company and the United States filed motions to dismiss many of the claims and counterclaims referenced above, 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 February 3, 2020, the parties commenced what was expected to be a seven-week trial. The first four weeks of trial have concluded, but the court postponed the remaining three weeks until May 2020 as a result of COVID-19-related concerns. 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.

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NORTHROP GRUMMAN CORPORATION                        

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, ECT alleges the consortium breached its contract with ECT and seeks damages of approximately R$111 million (the equivalent of approximately $22 million as of March 31, 2020), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law, which amounts could be significant over time. The original suit sought R$89 million (the equivalent of approximately $17 million as of March 31, 2020) in damages. In October 2013, ECT asserted an additional damage claim of R$22 million (the equivalent of approximately $4 million as of March 31, 2020). In its counterclaim, Solystic alleges ECT breached the contract by wrongfully refusing to accept the equipment Solystic had designed and built and seeks damages of approximately 31 million (the equivalent of approximately $34 million as of March 31, 2020), plus interest, inflation adjustments and attorneys’ fees, as authorized by Brazilian law. The Brazilian court retained an expert to consider certain issues pending before it. On August 8, 2013 and September 10, 2014, the company received reports from the expert, which contain some recommended findings relating to liability and the damages calculations put forth by ECT. Some of the expert’s recommended findings were favorable to the company and others were favorable to ECT. In November 2014, the parties submitted comments on the expert’s most recent report. On June 16, 2015, the court published a decision denying the parties’ request to present oral testimony. In a decision dated November 13, 2018, the trial court ruled in ECT’s favor on one of its claims against Solystic, and awarded damages of R$41 million (the equivalent of approximately $8 million as of March 31, 2020) against Solystic and its consortium partners, with that amount to be adjusted for inflation and interest from November 2004 through any appeal, in accordance with the Manual of Calculations of the Federal Justice, as well as attorneys’ fees. On March 22, 2019, ECT appealed the trial court’s decision to the intermediate court of appeals. Solystic filed its appeal on April 11, 2019. The parties are assessing whether there is a possible path for a negotiated resolution of the dispute.
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 6, substantial remediation costs related to these environmental conditions. The remediation standards or requirements to which we are subject are being reconsidered and may change and costs may increase materially. As discussed in Note 6, the State of New York issued a Feasibility Study and an Amended Record of Decision, seeking to impose additional remedial requirements. The company is engaged in discussions with the State of New York and certain other potentially responsible parties. The State of New York has said that, among other things, it is also evaluating potential natural resource damages. In addition, we are a party to various, and expect to become a party to additional, legal proceedings and disputes related to remediation, costs, allowability and/or alleged environmental impacts in Bethpage, including with federal and state entities, the Navy, local municipalities and water districts, and insurance carriers, as well as class action and individual plaintiffs alleging personal injury and property damage and seeking both monetary and non-monetary relief. These Bethpage matters could result in additional costs, fines, penalties, sanctions, compensatory or other damages (including natural resource damages), determinations on allocation, allowability and coverage, and non-monetary relief. We cannot at this time predict or reasonably estimate the potential cumulative outcomes or ranges of possible liability of these aggregate Bethpage matters.
The company is a party to various other investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, that arise in the ordinary course of our business. The nature of legal proceedings is such that we cannot assure the outcome of any particular matter. However, based on information available to the company to date, the company does not believe that the outcome of any of these other matters pending against the company is likely to have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, 2020, or its annual results of operations and/or cash flows.
6.    COMMITMENTS AND CONTINGENCIES
U.S. Government Cost Claims and Contingencies
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

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NORTHROP GRUMMAN CORPORATION                        

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 unaudited condensed consolidated financial position as of March 31, 2020, or its annual results of operations and/or cash flows.
Recently, the U.S. government has raised questions about an interest rate assumption used by the company to determine our CAS pension cost in previous years. We are currently engaging with the government to address their questions. Although we believe our pension-related assumptions are appropriate, the sensitivity to changes in interest rate assumptions makes it reasonably possible the outcome of this matter could have a material adverse effect on our financial position, results of operations and/or cash flows, although we are not currently able to estimate a range of any potential loss.
Environmental Matters
The table below summarizes the amount accrued for environmental remediation costs, management’s estimate of the amount of reasonably possible future costs in excess of accrued costs and the deferred costs expected to be recoverable through overhead charges on U.S. government contracts as of March 31, 2020 and December 31, 2019:
$ in millions
 
Accrued Costs(1)(2)
 
Reasonably Possible Future Costs in Excess of Accrued Costs(2)
 
Deferred Costs(3)
March 31, 2020
 
$
533

 
$
448

 
$
439

December 31, 2019
 
531

 
448

 
436

(1) As of March 31, 2020, $163 million is recorded in Other current liabilities and $370 million is recorded in Other non-current liabilities.
(2) Estimated remediation costs are not discounted to present value. The reasonably possible future costs in excess of accrued costs do not take into consideration amounts expected to be recoverable through overhead charges on U.S. government contracts.
(3) As of March 31, 2020, $131 million is deferred in Prepaid expenses and other current assets and $308 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.
Although management cannot predict whether new information gained as our environmental remediation projects progress, or as changes in facts and circumstances occur, will materially affect the estimated liability accrued, except with respect to Bethpage, we do not anticipate that future remediation expenditures associated with our currently identified projects will have a material adverse effect on the company’s unaudited condensed consolidated financial position as of March 31, 2020, or its annual results of operations and/or cash flows. With respect to Bethpage, the State of New York issued a Feasibility Study and an Amended Record of Decision, proposing to impose additional remedial requirements. The company is engaged in discussions with the State of New York and other potentially responsible parties. As discussed in Note 5, the remediation standards or requirements to which we are subject are being reconsidered and may change and costs may increase materially.
Financial Arrangements
In the ordinary course of business, the company uses standby letters of credit and guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee the performance on certain obligations. At March 31, 2020, there were $469 million of stand-by letters of credit and guarantees and $182 million of surety bonds outstanding.
Commercial Paper
The company maintains a commercial paper program that serves as a source of short-term financing with capacity to issue unsecured commercial paper notes up to $2.0 billion. At March 31, 2020, there were $744 million of outstanding short-term commercial paper borrowings at a weighted-average interest rate of 1.88 percent that have original maturities of three months or less from the date of issuance. The outstanding balance of commercial paper borrowings is recorded in Other current liabilities in the unaudited condensed consolidated statements of financial position.
Credit Facilities
The company maintains a five-year senior unsecured credit facility in an aggregate principal amount of $2.0 billion (the “2018 Credit Agreement”) that matures in August 2024 and is intended to support the company’s commercial paper program and other general corporate purposes. Commercial paper borrowings reduce the amount available for

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NORTHROP GRUMMAN CORPORATION                        

borrowing under the 2018 Credit Agreement. At March 31, 2020, there was no balance outstanding under this facility.
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 $149 million as of March 31, 2020) (the “2016 Credit Agreement”). The company exercised the second option to extend the maturity to December 2020. The 2016 Credit Agreement is guaranteed by the company. At March 31, 2020, there was £55 million (the equivalent of approximately $68 million) outstanding under this facility, which bears interest at a rate of LIBOR plus 1.10 percent. All of the borrowings outstanding under this facility are recorded in Other current liabilities in the unaudited condensed consolidated statement of financial position.
At March 31, 2020, the company was in compliance with all covenants under its credit agreements.
7.    RETIREMENT BENEFITS
The cost to the company of its pension and other postretirement benefit (OPB) plans is shown in the following table:
 
Three Months Ended March 31
 
Pension
Benefits
 
OPB
$ in millions
2020
 
2019
 
2020
 
2019
Components of net periodic benefit cost (benefit)
 
 
 
 
 
 
 
Service cost
$
102

 
$
92

 
$
4

 
$
4

Interest cost
307

 
340

 
17

 
20

Expected return on plan assets
(594
)
 
(525
)
 
(26
)
 
(23
)
Amortization of prior service credit
(15
)
 
(15
)
 
1

 
(1
)
Net periodic benefit cost (benefit)
$
(200
)
 
$
(108
)
 
$
(4
)
 
$


Employer Contributions
The company sponsors defined benefit pension and OPB plans, as well as defined contribution plans. We fund our defined benefit pension plans annually in a manner consistent with the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006.
Contributions made by the company to its retirement plans are as follows:
 
Three Months Ended March 31
$ in millions
2020
 
2019
Defined benefit pension plans
$
20

 
$
23

OPB plans
12

 
12

Defined contribution plans
256

 
191


8.    STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Awards
The following table presents the number of restricted stock rights (RSRs) and restricted performance stock rights (RPSRs) granted to employees under the company’s long-term incentive stock plan and the grant date aggregate fair value of those stock awards for the periods presented:
 
 
Three Months Ended March 31
in millions
 
2020
 
2019
RSRs granted
 
0.1

 
0.1

RPSRs granted
 
0.2

 
0.2

Grant date aggregate fair value
 
$
87

 
$
91


RSRs typically vest on the third anniversary of the grant date, while RPSRs generally vest and pay out based on the achievement of financial metrics over a three-year period.

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NORTHROP GRUMMAN CORPORATION                        

Cash Awards
The following table presents the minimum and maximum aggregate payout amounts related to cash units (CUs) and cash performance units (CPUs) granted to employees in the periods presented:
 
 
Three Months Ended March 31
$ in millions
 
2020
 
2019
Minimum aggregate payout amount
 
$
31

 
$
36

Maximum aggregate payout amount
 
175

 
203


CUs typically vest and settle in cash on the third anniversary of the grant date, while CPUs generally vest and pay out in cash based on the achievement of financial metrics over a three-year period.
9.    SEGMENT INFORMATION
Effective January 1, 2020, the company reorganized its operating sectors to better align the company’s broad portfolio to serve its customers’ needs. The four new sectors, which also comprise our reportable segments, are Aeronautics Systems, Defense Systems, Mission Systems and Space Systems.
The following table presents sales and operating income by segment:
 
Three Months Ended March 31
$ in millions
2020
 
2019
Sales
 
 
 
Aeronautics Systems
$
2,843

 
$
2,818

Defense Systems
1,881

 
1,768

Mission Systems
2,347

 
2,210

Space Systems
1,948

 
1,801

Intersegment eliminations
(399
)
 
(408
)
Total sales
8,620

 
8,189

Operating income
 
 
 
Aeronautics Systems
259

 
308

Defense Systems
196

 
202

Mission Systems
348

 
319

Space Systems
199

 
188

Intersegment eliminations
(49
)
 
(50
)
Total segment operating income
953

 
967

Net FAS (service)/CAS pension adjustment
105

 
108

Unallocated corporate expense
(124
)
 
(139
)
Total operating income
$
934

 
$
936


Net FAS (Service)/CAS Pension Adjustment
For financial statement purposes, we account for our employee pension plans in accordance with FAS. However, the cost of these plans is charged to our contracts in accordance with the Federal Acquisition Regulation (FAR) and the related U.S. Government Cost Accounting Standards (CAS). The net FAS (service)/CAS pension adjustment reflects the difference between CAS pension expense included as cost in segment operating income and the service cost component of FAS expense included in total operating income.
Unallocated Corporate Expense
Unallocated corporate expense includes the portion of corporate costs not considered allowable or allocable under applicable CAS or FAR, and therefore not allocated to the segments, such as a portion of management and administration, legal, environmental, compensation, retiree benefits and other corporate unallowable costs. Unallocated corporate expense also includes costs not considered part of management’s evaluation of segment

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NORTHROP GRUMMAN CORPORATION                        

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.
Disaggregation of Revenue
Sales by Customer Type
Three Months Ended March 31
 
2020
 
2019
$ in millions
$
%(3)
 
$
%(3)
Aeronautics Systems
 
 
 
 
 
U.S. government(1)
$
2,361

83
%
 
$
2,334

83
%
International(2)
444

16
%
 
435

15
%
Other customers
12

%
 
25

1
%
Intersegment sales
26

1
%
 
24

1
%
Aeronautics Systems sales
2,843

100
%
 
2,818

100
%
Defense Systems
 
 
 
 
 
U.S. government(1)
1,259

67
%
 
1,141

65
%
International(2)
340

18
%
 
363

21
%
Other customers
111

6
%
 
97

5
%
Intersegment sales
171

9
%
 
167

9
%
Defense Systems sales
1,881

100
%
 
1,768

100
%
Mission Systems
 
 
 
 
 
U.S. government(1)
1,671

71
%
 
1,613

73
%
International(2)
483

21
%
 
376

17
%
Other customers
17

1
%
 
24

1
%
Intersegment sales
176

7
%
 
197

9
%
Mission Systems sales
2,347

100
%
 
2,210

100
%
Space Systems
 
 
 
 
 
U.S. government(1)
1,803

93
%
 
1,669

93
%
International(2)
68

3
%
 
43

2
%
Other customers
51

3
%
 
69

4
%
Intersegment sales
26

1
%
 
20

1
%
Space Systems sales
1,948

100
%
 
1,801

100
%
Total
 
 
 
 
 
U.S. government(1)
7,094

83
%
 
6,757

83
%
International(2)
1,335

15
%
 
1,217

15
%
Other customers
191

2
%
 
215

2
%
Total Sales
$
8,620

100
%
 
$
8,189

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.

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NORTHROP GRUMMAN CORPORATION                        

Sales by Contract Type
Three Months Ended March 31
 
2020
 
2019
$ in millions
$
%(1)
 
$
%(1)
Aeronautics Systems
 

 

 
 

 

Cost-type
$
1,343

48
%
 
$
1,312

47
%
Fixed-price
1,474

52
%
 
1,482

53
%
Intersegment sales
26

 
 
24

 
Aeronautics Systems sales
2,843

 
 
2,818

 
Defense Systems
 
 
 
 
 
Cost-type
628

37
%
 
623

39
%
Fixed-price
1,082

63
%
 
978

61
%
Intersegment sales
171

 
 
167

 
Defense Systems sales
1,881

 
 
1,768

 
Mission Systems
 
 
 
 
 
Cost-type
846

39
%
 
835

41
%
Fixed-price
1,325

61
%
 
1,178

59
%
Intersegment sales
176

 
 
197

 
Mission Systems sales
2,347

 
 
2,210

 
Space Systems
 
 
 
 
 
Cost-type
1,398

73
%
 
1,306

73
%
Fixed-price
524

27
%
 
475

27
%
Intersegment sales
26

 
 
20

 
Space Systems sales
1,948

 
 
1,801

 
Total
 
 
 
 
 
Cost-type
4,215

49
%
 
4,076

50
%
Fixed-price
4,405

51
%
 
4,113

50
%
Total Sales
$
8,620

 
 
$
8,189

 
(1) 
Percentages calculated based on external customer sales.  

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NORTHROP GRUMMAN CORPORATION                        

Sales by Geographic Region
Three Months Ended March 31
 
2020
 
2019
$ in millions
$
%(2)
 
$
%(2)
Aeronautics Systems
 
 
 
 
 
United States
$
2,373

84
%
 
$
2,359

85
%
Asia/Pacific
207

8
%
 
233

8
%
All other(1)
237

8
%
 
202

7
%
Intersegment sales
26

 
 
24

 
Aeronautics Systems sales
2,843

 
 
2,818

 
Defense Systems
 
 
 
 
 
United States
1,370

80
%
 
1,238

77
%
Asia/Pacific
82

5
%
 
88

6
%
All other(1)
258

15
%
 
275

17
%
Intersegment sales
171

 
 
167

 
Defense Systems sales
1,881

 
 
1,768

 
Mission Systems
 
 
 
 
 
United States
1,688

78
%
 
1,637

81
%
Asia/Pacific
176

8
%
 
135

7
%
All other(1)
307

14
%
 
241

12
%
Intersegment sales
176

 
 
197

 
Mission Systems sales
2,347

 
 
2,210

 
Space Systems
 
 
 
 
 
United States
1,854

97
%
 
1,738

98
%
Asia/Pacific
5

%
 
12

%
All other(1)
63

3
%
 
31

2
%
Intersegment sales
26

 
 
20

 
Space Systems sales
1,948

 
 
1,801

 
Total
 
 
 
 
 
United States
7,285

85
%
 
6,972

85
%
Asia/Pacific
470

5
%
 
468

6
%
All other(1)
865

10
%
 
749

9
%
Total Sales
$
8,620

 
 
$
8,189

 
(1) 
All other is principally comprised of Europe and the Middle East.  
(2) 
Percentages calculated based on external customer sales.  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Falls Church, Virginia
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries (the “Company”) as of March 31, 2020, and the related condensed consolidated statements of earnings and comprehensive income, cash flows and changes in shareholders’ equity for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the “interim financial information”). Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial position of Northrop Grumman Corporation and subsidiaries as of December 31, 2019, and the related consolidated statements of earnings and comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January 29, 2020, we expressed an unqualified opinion on those consolidated financial statements, which included an explanatory paragraph regarding the Company’s change in its method of accounting for leases in 2019 due to the adoption of ASC 842, Leases. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2019, is fairly stated, in all material respects, in relation to the audited consolidated statement of financial position from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/  Deloitte & Touche LLP
McLean, Virginia
April 28, 2020


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NORTHROP GRUMMAN CORPORATION                        

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”) is a leading global aerospace and defense company. We use our broad portfolio of capabilities and technologies to create and deliver innovative platforms, systems and solutions in space; manned and autonomous airborne systems, including strike; hypersonics; cyber; command, control, communications and computers, intelligence, surveillance and reconnaissance (C4ISR); 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.
The following discussion should be read along with the financial statements included in this Form 10-Q, as well as our 2019 Annual Report on Form 10-K and the Form 8-K that we expect to file with the SEC immediately after filing this Form 10-Q, which recasts the disclosures in certain portions of the 2019 Annual Report on Form 10-K to reflect changes in the company’s reportable segments. These documents provide additional information on our business and the environment in which we operate and our operating results.
COVID-19
Coronavirus disease 2019 (“COVID-19”) was first reported in late 2019 and has since dramatically impacted the global health and economic environment, including millions of confirmed cases, business slowdowns or shutdowns, government challenges and market volatility. In March 2020, the World Health Organization characterized COVID-19 as a global pandemic, and the President declared a national emergency concerning the COVID-19 outbreak. The company’s leadership and Crisis Management Teams have closely monitored the developments, including the impact on our company, our employees, our customers, our suppliers and our communities. They have considered guidance from the Centers for Disease Control (CDC), other health organizations, governments and our customers. We have taken, and continue to take, actions to help protect the health, safety and well-being of our employees, to support our suppliers and local communities, and to continue to serve our customers. Our goals have been to lessen the immediate potential adverse impacts, both health and economic, and to continue to position the company for long-term success. Among other actions, we have required employees to work from home or remotely where practicable, and expanded IT and communication support to enhance their productivity; adjusted work spaces and shift schedules to facilitate social distancing for those who continue to work in our facilities; implemented visitor protocols and enhanced cleaning and disinfecting procedures at our facilities; worked to procure and distribute personal protective equipment (“PPE”); restricted travel; provided additional paid time off for those most at risk; and contributed financial and manufacturing resources to supporting critical national requirements, such as for PPE. Along with the Northrop Grumman Foundation, we have provided grants for global, national and local organizations that support frontline healthcare workers, address food insecurity, advance efforts for vaccines, increase student access to technology and provide support to vulnerable populations; donated PPE items to emergency response teams and healthcare professionals, including N95 masks and Tyvek suits; and established a COVID-19 relief matching gift program for employees.
As a result of COVID-19, many state and local jurisdictions have implemented mandatory stay-at-home or shelter-in-place orders. To date, most of those orders have exempted some or all of the defense industrial base, including Northrop Grumman and many of our suppliers, as part of the essential or critical infrastructure. Our facilities have largely remained open and many of our employees who cannot work remotely are continuing to come to work and support our customers’ national security and mission-essential operations. Even though we have been able to continue many of our operations, we have experienced and expect to continue to experience certain increasing costs to maintain our operations and reductions in productivity, including as a result of actions to protect health; because of illness, quarantines, and absenteeism; as a result of government actions; and because of disruption and stress among our suppliers and customers. We continue to monitor this situation closely and cannot predict how it will change. Our customers have generally continued to make timely payments, and we are working with them to consider the possibility of additional cost recoveries. Again, however, our customers are facing tremendous demands and we cannot predict how this may change and how they will continue to allocate resources.
Financial impacts related to COVID-19, including our actions and costs in response to the pandemic, were not material to the company’s first quarter 2020 financial position, results of operations or cash flows. Going forward, we currently expect the COVID–19 crisis to result in a reduction to 2020 revenue and operating margins in portions of our business driven primarily by supplier disruption, changes in employee productivity, and related program delays or challenges. Our employees, suppliers and customers, the company and our global community are facing

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NORTHROP GRUMMAN CORPORATION                        

tremendous challenges and we cannot predict how this dynamic situation will evolve or the impact it will have. For further information on the potential impact to the company of COVID-19, see “Risk Factors”.
U.S. Political and Economic Environment
Since the filing of our 2019 Annual Report on Form 10-K, the President released his budget request for fiscal year 2021 (FY21) on February 10, 2020. The FY21 budget request includes $746 billion for national security, which will be the subject of debate in Congress. The FY21 budget request addresses various capabilities highlighted in the U.S. National Security Strategy, the National Defense Strategy and the Missile Defense Review. We believe our capabilities, particularly in space, missiles, missile defense, hypersonics, counter-hypersonics, survivable aircraft and cyber will continue to allow for long-term profitable growth in our business in support of our customers’ needs. Congress has enacted emergency COVID-19 relief bills addressing certain impacts of the pandemic.
CONSOLIDATED OPERATING RESULTS
Selected financial highlights are presented in the table below:
 
Three Months Ended March 31
 
%
$ in millions, except per share amounts
2020
 
2019
 
Change
Sales
$
8,620

 
$
8,189

 
5
 %
Operating costs and expenses
7,686

 
7,253

 
6
 %
Operating costs and expenses as a % of sales
89.2
%
 
88.6
%
 
 
Operating income
934

 
936

 
 %
Operating margin rate
10.8
%
 
11.4
%
 
 
Federal and foreign income tax expense
185

 
171

 
8
 %
Effective income tax rate
17.6
%
 
16.5
%
 
 
Net earnings