FORM |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
(Address of principal executive offices) | (Zip Code) |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Page | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 6. | ||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
$ in millions, except per share amounts | 2020 | 2019 | 2020 | 2019 | |||||||||||
Sales | |||||||||||||||
Product | $ | $ | $ | $ | |||||||||||
Service | |||||||||||||||
Total sales | |||||||||||||||
Operating costs and expenses | |||||||||||||||
Product | |||||||||||||||
Service | |||||||||||||||
General and administrative expenses | |||||||||||||||
Operating income | |||||||||||||||
Other (expense) income | |||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
FAS (non-service) pension benefit | |||||||||||||||
Other, net | |||||||||||||||
Earnings before income taxes | |||||||||||||||
Federal and foreign income tax expense | |||||||||||||||
Net earnings | $ | $ | $ | $ | |||||||||||
Basic earnings per share | $ | $ | $ | $ | |||||||||||
Weighted-average common shares outstanding, in millions | |||||||||||||||
Diluted earnings per share | $ | $ | $ | $ | |||||||||||
Weighted-average diluted shares outstanding, in millions | |||||||||||||||
Net earnings (from above) | $ | $ | $ | $ | |||||||||||
Other comprehensive loss | |||||||||||||||
Change in unamortized prior service credit, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Change in cumulative translation adjustment and other, net | |||||||||||||||
Other comprehensive loss, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Comprehensive income | $ | $ | $ | $ |
$ in millions, except par value | September 30, 2020 | December 31, 2019 | |||||
Assets | |||||||
Cash and cash equivalents | $ | $ | |||||
Accounts receivable, net | |||||||
Unbilled receivables, net | |||||||
Inventoried costs, net | |||||||
Prepaid expenses and other current assets | |||||||
Total current assets | |||||||
Property, plant and equipment, net of accumulated depreciation of $6,259 for 2020 and $5,850 for 2019 | |||||||
Operating lease right-of-use assets | |||||||
Goodwill | |||||||
Intangible assets, net | |||||||
Deferred tax assets | |||||||
Other non-current assets | |||||||
Total assets | $ | $ | |||||
Liabilities | |||||||
Trade accounts payable | $ | $ | |||||
Accrued employee compensation | |||||||
Advance payments and billings in excess of costs incurred | |||||||
Other current liabilities | |||||||
Total current liabilities | |||||||
Long-term debt, net of current portion of $1,806 for 2020 and $1,109 for 2019 | |||||||
Pension and other postretirement benefit plan liabilities | |||||||
Operating lease liabilities | |||||||
Deferred tax liabilities | |||||||
Other non-current liabilities | |||||||
Total liabilities | |||||||
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—166,715,510 and 2019—167,848,424 | |||||||
Paid-in capital | |||||||
Retained earnings | |||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Total shareholders’ equity | |||||||
Total liabilities and shareholders’ equity | $ | $ |
Nine Months Ended September 30 | |||||||
$ in millions | 2020 | 2019 | |||||
Operating activities | |||||||
Net earnings | $ | $ | |||||
Adjustments to reconcile to net cash provided by operating activities: | |||||||
Depreciation and amortization | |||||||
Stock-based compensation | |||||||
Deferred income taxes | |||||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | ( | ) | ( | ) | |||
Unbilled receivables, net | ( | ) | ( | ) | |||
Inventoried costs, net | ( | ) | ( | ) | |||
Prepaid expenses and other assets | ( | ) | ( | ) | |||
Accounts payable and other liabilities | |||||||
Income taxes payable, net | ( | ) | |||||
Retiree benefits | ( | ) | ( | ) | |||
Other, net | ( | ) | |||||
Net cash provided by operating activities | |||||||
Investing activities | |||||||
Capital expenditures | ( | ) | ( | ) | |||
Other, net | |||||||
Net cash used in investing activities | ( | ) | ( | ) | |||
Financing activities | |||||||
Net proceeds from issuance of long-term debt | |||||||
Payments of long-term debt | ( | ) | ( | ) | |||
Payments to credit facilities | ( | ) | ( | ) | |||
Net borrowings on commercial paper | |||||||
Common stock repurchases | ( | ) | ( | ) | |||
Cash dividends paid | ( | ) | ( | ) | |||
Payments of employee taxes withheld from share-based awards | ( | ) | ( | ) | |||
Other, net | ( | ) | ( | ) | |||
Net cash provided by (used in) financing activities | ( | ) | |||||
Increase (decrease) in cash and cash equivalents | ( | ) | |||||
Cash and cash equivalents, beginning of year | |||||||
Cash and cash equivalents, end of period | $ | $ |
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
$ in millions, except per share amounts | 2020 | 2019 | 2020 | 2019 | |||||||||||
Common stock | |||||||||||||||
Beginning of period | $ | $ | $ | $ | |||||||||||
Common stock repurchased | ( | ) | ( | ) | |||||||||||
End of period | |||||||||||||||
Paid-in capital | |||||||||||||||
Beginning of period | |||||||||||||||
Stock compensation | |||||||||||||||
Other | ( | ) | ( | ) | |||||||||||
End of period | |||||||||||||||
Retained earnings | |||||||||||||||
Beginning of period | |||||||||||||||
Common stock repurchased | ( | ) | ( | ) | ( | ) | |||||||||
Net earnings | |||||||||||||||
Dividends declared | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Stock compensation | ( | ) | |||||||||||||
Other | |||||||||||||||
End of period | |||||||||||||||
Accumulated other comprehensive loss | |||||||||||||||
Beginning of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other comprehensive loss, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
End of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total shareholders’ equity | $ | $ | $ | $ | |||||||||||
Cash dividends declared per share | $ | $ | $ | $ |
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
$ in millions, except per share data | 2020 | 2019 | 2020 | 2019 | |||||||||||
Revenue | $ | $ | $ | $ | |||||||||||
Operating income | |||||||||||||||
Net earnings(1) | |||||||||||||||
Diluted earnings per share(1) |
(1) |
$ in millions | September 30, 2020 | December 31, 2019 | ||||
Unamortized prior service credit, net of tax expense of $6 for 2020 and $17 for 2019 | $ | $ | ||||
Cumulative translation adjustment and other, net | ( | ) | ( | ) | ||
Total accumulated other comprehensive loss | $ | ( | ) | $ | ( | ) |
Shares Repurchased (in millions) | |||||||||||||||||||
Repurchase Program Authorization Date | Amount Authorized (in millions) | Total Shares Retired (in millions) | Average Price Per Share(1) | Date Completed | Nine Months Ended September 30 | ||||||||||||||
2020 | 2019 | ||||||||||||||||||
September 16, 2015 | $ | $ | March 2020 | ||||||||||||||||
December 4, 2018 | $ | — |
(1) | Includes commissions paid. |
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
$ in millions | 2020 | 2019 | 2020 | 2019 | |||||||||||
Federal and foreign income tax expense | $ | $ | $ | $ | |||||||||||
Effective income tax rate | % | % | % | % |
September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||
$ in millions | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||
Financial Assets (Liabilities) | ||||||||||||||||||||||||
Marketable securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Marketable securities valued using NAV | ||||||||||||||||||||||||
Total marketable securities | ||||||||||||||||||||||||
Derivatives | ( | ) | ( | ) | ( | ) | ( | ) |
• | $ |
• | $ |
• | $ |
$ in millions | Accrued Costs(1)(2) | Reasonably Possible Future Costs in Excess of Accrued Costs(2) | Deferred Costs(3) | |||||||||
September 30, 2020 | $ | $ | $ | |||||||||
December 31, 2019 |
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||
Pension Benefits | OPB | Pension Benefits | OPB | ||||||||||||||||||||||||||||
$ in millions | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Components of net periodic benefit cost (benefit) | |||||||||||||||||||||||||||||||
Service cost | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Interest cost | |||||||||||||||||||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||
Amortization of prior service credit | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
Net periodic benefit cost (benefit) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ |
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
$ in millions | 2020 | 2019 | 2020 | 2019 | |||||||||||
Defined benefit pension plans | $ | $ | $ | $ | |||||||||||
OPB plans | |||||||||||||||
Defined contribution plans |
Nine Months Ended September 30 | ||||||||
in millions | 2020 | 2019 | ||||||
RSRs granted | ||||||||
RPSRs granted | ||||||||
Grant date aggregate fair value | $ | $ |
Nine Months Ended September 30 | ||||||||
$ in millions | 2020 | 2019 | ||||||
Minimum aggregate payout amount | $ | $ | ||||||
Maximum aggregate payout amount |
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
$ in millions | 2020 | 2019 | 2020 | 2019 | |||||||||||
Sales | |||||||||||||||
Aeronautics Systems | $ | $ | $ | $ | |||||||||||
Defense Systems | |||||||||||||||
Mission Systems | |||||||||||||||
Space Systems | |||||||||||||||
Intersegment eliminations | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total sales | |||||||||||||||
Operating income | |||||||||||||||
Aeronautics Systems | |||||||||||||||
Defense Systems | |||||||||||||||
Mission Systems | |||||||||||||||
Space Systems | |||||||||||||||
Intersegment eliminations | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total segment operating income | |||||||||||||||
Net FAS (service)/CAS pension adjustment | |||||||||||||||
Unallocated corporate expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total operating income | $ | $ | $ | $ |
Sales by Customer Type | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
$ in millions | $ | %(3) | $ | %(3) | $ | %(3) | $ | %(3) | |||||||||||||||
Aeronautics Systems | |||||||||||||||||||||||
U.S. government(1) | $ | % | $ | % | $ | % | $ | % | |||||||||||||||
International(2) | % | % | % | % | |||||||||||||||||||
Other customers | % | % | % | % | |||||||||||||||||||
Intersegment sales | % | % | % | % | |||||||||||||||||||
Aeronautics Systems sales | % | % | % | % | |||||||||||||||||||
Defense Systems | |||||||||||||||||||||||
U.S. government(1) | % | % | % | % | |||||||||||||||||||
International(2) | % | % | % | % | |||||||||||||||||||
Other customers | % | % | % | % | |||||||||||||||||||
Intersegment sales | % | % | % | % | |||||||||||||||||||
Defense Systems sales | % | % | % | % | |||||||||||||||||||
Mission Systems | |||||||||||||||||||||||
U.S. government(1) | % | % | % | % | |||||||||||||||||||
International(2) | % | % | % | % | |||||||||||||||||||
Other customers | % | % | % | % | |||||||||||||||||||
Intersegment sales | % | % | % | % | |||||||||||||||||||
Mission Systems sales | % | % | % | % | |||||||||||||||||||
Space Systems | |||||||||||||||||||||||
U.S. government(1) | % | % | % | % | |||||||||||||||||||
International(2) | % | % | % | % | |||||||||||||||||||
Other customers | % | % | % | % | |||||||||||||||||||
Intersegment sales | % | % | % | % | |||||||||||||||||||
Space Systems sales | % | % | % | % | |||||||||||||||||||
Total | |||||||||||||||||||||||
U.S. government(1) | % | % | % | % | |||||||||||||||||||
International(2) | % | % | % | % | |||||||||||||||||||
Other customers | % | % | % | % | |||||||||||||||||||
Total Sales | $ | % | $ | % | $ | % | $ | % |
(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. |
Sales by Contract Type | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
$ in millions | $ | %(1) | $ | %(1) | $ | %(1) | $ | %(1) | |||||||||||||||
Aeronautics Systems | |||||||||||||||||||||||
Cost-type | $ | % | $ | % | $ | % | $ | % | |||||||||||||||
Fixed-price | % | % | % | % | |||||||||||||||||||
Intersegment sales | |||||||||||||||||||||||
Aeronautics Systems sales | |||||||||||||||||||||||
Defense Systems | |||||||||||||||||||||||
Cost-type | % | % | % | % | |||||||||||||||||||
Fixed-price | % | % | % | % | |||||||||||||||||||
Intersegment sales | |||||||||||||||||||||||
Defense Systems sales | |||||||||||||||||||||||
Mission Systems | |||||||||||||||||||||||
Cost-type | % | % | % | % | |||||||||||||||||||
Fixed-price | % | % | % | % | |||||||||||||||||||
Intersegment sales | |||||||||||||||||||||||
Mission Systems sales | |||||||||||||||||||||||
Space Systems | |||||||||||||||||||||||
Cost-type | % | % | % | % | |||||||||||||||||||
Fixed-price | % | % | % | % | |||||||||||||||||||
Intersegment sales | |||||||||||||||||||||||
Space Systems sales | |||||||||||||||||||||||
Total | |||||||||||||||||||||||
Cost-type | % | % | % | % | |||||||||||||||||||
Fixed-price | % | % | % | % | |||||||||||||||||||
Total Sales | $ | $ | $ | $ |
(1) |
Sales by Geographic Region | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
$ in millions | $ | %(2) | $ | %(2) | $ | %(2) | $ | %(2) | |||||||||||||||
Aeronautics Systems | |||||||||||||||||||||||
United States | $ | % | $ | % | $ | % | $ | % | |||||||||||||||
Asia/Pacific | % | % | % | % | |||||||||||||||||||
All other(1) | % | % | % | % | |||||||||||||||||||
Intersegment sales | |||||||||||||||||||||||
Aeronautics Systems sales | |||||||||||||||||||||||
Defense Systems | |||||||||||||||||||||||
United States | % | % | % | % | |||||||||||||||||||
Asia/Pacific | % | % | % | % | |||||||||||||||||||
All other(1) | % | % | % | % | |||||||||||||||||||
Intersegment sales | |||||||||||||||||||||||
Defense Systems sales | |||||||||||||||||||||||
Mission Systems | |||||||||||||||||||||||
United States | % | % | % | % | |||||||||||||||||||
Asia/Pacific | % | % | % | % | |||||||||||||||||||
All other(1) | % | % | % | % | |||||||||||||||||||
Intersegment sales | |||||||||||||||||||||||
Mission Systems sales | |||||||||||||||||||||||
Space Systems | |||||||||||||||||||||||
United States | % | % | % | % | |||||||||||||||||||
Asia/Pacific | % | % | % | % | |||||||||||||||||||
All other(1) | % | % | % | % | |||||||||||||||||||
Intersegment sales | |||||||||||||||||||||||
Space Systems sales | |||||||||||||||||||||||
Total | |||||||||||||||||||||||
United States | % | % | % | % | |||||||||||||||||||
Asia/Pacific | % | % | % | % | |||||||||||||||||||
All other(1) | % | % | % | % | |||||||||||||||||||
Total Sales | $ | $ | $ | $ |
(1) | All other is principally comprised of Europe and the Middle East. |
(2) |
Three Months Ended September 30 | % | Nine Months Ended September 30 | % | ||||||||||||||||||
$ in millions, except per share amounts | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||
Sales | $ | 9,083 | $ | 8,475 | 7 | % | $ | 26,587 | $ | 25,120 | 6 | % | |||||||||
Operating costs and expenses | 8,098 | 7,524 | 8 | % | 23,674 | 22,287 | 6 | % | |||||||||||||
Operating costs and expenses as a % of sales | 89.2 | % | 88.8 | % | 89.0 | % | 88.7 | % | |||||||||||||
Operating income | 985 | 951 | 4 | % | 2,913 | 2,833 | 3 | % | |||||||||||||
Operating margin rate | 10.8 | % | 11.2 | % | 11.0 | % | 11.3 | % | |||||||||||||
Federal and foreign income tax expense | 181 | 122 | 48 | % | 564 | 460 | 23 | % | |||||||||||||
Effective income tax rate | 15.5 | % | 11.6 | % | 16.5 | % | 14.8 | % | |||||||||||||
Net earnings | 986 | 933 | 6 | % | 2,859 | 2,657 | 8 | % | |||||||||||||
Diluted earnings per share | $ | 5.89 | $ | 5.49 | 7 | % | $ | 17.05 | $ | 15.60 | 9 | % |
Aeronautics Systems | Defense Systems | Mission Systems | Space Systems | |||
Autonomous Systems | Battle Management & Missile Systems | Airborne Sensors & Networks | Launch & Strategic Missiles | |||
Manned Aircraft | Mission Readiness | Cyber & Intelligence Mission Solutions | Space | |||
Maritime/Land Systems & Sensors | ||||||
Navigation, Targeting & Survivability |
Three Months Ended September 30 | % | Nine Months Ended September 30 | % | ||||||||||||||||||
$ in millions | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||
Segment operating income | $ | 1,049 | $ | 955 | 10 | % | $ | 3,047 | $ | 2,926 | 4 | % | |||||||||
Segment operating margin rate | 11.5 | % | 11.3 | % | 11.5 | % | 11.6 | % | |||||||||||||
CAS pension expense | 210 | 223 | (6 | )% | 622 | 622 | — | ||||||||||||||
Less: FAS (service) pension expense | (102 | ) | (92 | ) | 11 | % | (306 | ) | (276 | ) | 11 | % | |||||||||
Net FAS (service)/CAS pension adjustment | 108 | 131 | (18 | )% | 316 | 346 | (9 | )% | |||||||||||||
Intangible asset amortization and PP&E step-up depreciation | (81 | ) | (98 | ) | (17 | )% | (240 | ) | (292 | ) | (18 | )% | |||||||||
Other unallocated corporate expense | (91 | ) | (37 | ) | 146 | % | (210 | ) | (147 | ) | 43 | % | |||||||||
Unallocated corporate expense | (172 | ) | (135 | ) | 27 | % | (450 | ) | (439 | ) | 3 | % | |||||||||
Operating income | $ | 985 | $ | 951 | 4 | % | $ | 2,913 | $ | 2,833 | 3 | % |
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
$ in millions | 2020 | 2019 | 2020 | 2019 | |||||||||||
Favorable EAC adjustments | $ | 271 | $ | 285 | $ | 788 | $ | 803 | |||||||
Unfavorable EAC adjustments | (148 | ) | (160 | ) | (429 | ) | (382 | ) | |||||||
Net EAC adjustments | $ | 123 | $ | 125 | $ | 359 | $ | 421 |
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
$ in millions | 2020 | 2019 | 2020 | 2019 | |||||||||||
Aeronautics Systems | $ | — | $ | 19 | $ | 34 | $ | 129 | |||||||
Defense Systems | 58 | 36 | 119 | 106 | |||||||||||
Mission Systems | 58 | 70 | 196 | 157 | |||||||||||
Space Systems | 10 | 4 | 15 | 41 | |||||||||||
Eliminations | (3 | ) | (4 | ) | (5 | ) | (12 | ) | |||||||
Net EAC adjustments | $ | 123 | $ | 125 | $ | 359 | $ | 421 |
AERONAUTICS SYSTEMS | Three Months Ended September 30 | % | Nine Months Ended September 30 | % | |||||||||||||||||
$ in millions | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||
Sales | $ | 2,914 | $ | 2,770 | 5 | % | $ | 8,682 | $ | 8,309 | 4 | % | |||||||||
Operating income | 294 | 269 | 9 | % | 867 | 879 | (1 | )% | |||||||||||||
Operating margin rate | 10.1 | % | 9.7 | % | 10.0 | % | 10.6 | % |
DEFENSE SYSTEMS | Three Months Ended September 30 | % | Nine Months Ended September 30 | % | |||||||||||||||||
$ in millions | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||
Sales | $ | 1,859 | $ | 1,931 | (4 | )% | $ | 5,626 | $ | 5,615 | — | ||||||||||
Operating income | 217 | 201 | 8 | % | 632 | 617 | 2 | % | |||||||||||||
Operating margin rate | 11.7 | % | 10.4 | % | 11.2 | % | 11.0 | % |
MISSION SYSTEMS | Three Months Ended September 30 | % | Nine Months Ended September 30 | % | |||||||||||||||||
$ in millions | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||
Sales | $ | 2,551 | $ | 2,310 | 10 | % | $ | 7,344 | $ | 6,924 | 6 | % | |||||||||
Operating income | 370 | 351 | 5 | % | 1,070 | 1,012 | 6 | % | |||||||||||||
Operating margin rate | 14.5 | % | 15.2 | % | 14.6 | % | 14.6 | % |
SPACE SYSTEMS | Three Months Ended September 30 | % | Nine Months Ended September 30 | % | |||||||||||||||||
$ in millions | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||
Sales | $ | 2,198 | $ | 1,885 | 17 | % | $ | 6,194 | $ | 5,474 | 13 | % | |||||||||
Operating income | 224 | 191 | 17 | % | 635 | 574 | 11 | % | |||||||||||||
Operating margin rate | 10.2 | % | 10.1 | % | 10.3 | % | 10.5 | % |
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||
$ in millions | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
Segment Information: | Sales | Operating Costs and Expenses | Sales | Operating Costs and Expenses | Sales | Operating Costs and Expenses | Sales | Operating Costs and Expenses | |||||||||||||||||
Aeronautics Systems | |||||||||||||||||||||||||
Product | $ | 2,469 | $ | 2,231 | $ | 2,311 | $ | 2,100 | $ | 7,390 | $ | 6,677 | $ | 7,017 | $ | 6,310 | |||||||||
Service | 415 | 362 | 432 | 376 | 1,207 | 1,062 | 1,217 | 1,052 | |||||||||||||||||
Intersegment eliminations | 30 | 27 | 27 | 25 | 85 | 76 | 75 | 68 | |||||||||||||||||
Total Aeronautics Systems | 2,914 | 2,620 | 2,770 | 2,501 | 8,682 | 7,815 | 8,309 | 7,430 | |||||||||||||||||
Defense Systems | |||||||||||||||||||||||||
Product | 735 | 661 | 732 | 687 | 2,258 | 2,041 | 2,050 | 1,870 | |||||||||||||||||
Service | 933 | 812 | 1,020 | 883 | 2,826 | 2,469 | 3,055 | 2,672 | |||||||||||||||||
Intersegment eliminations | 191 | 169 | 179 | 160 | 542 | 484 | 510 | 456 | |||||||||||||||||
Total Defense Systems | 1,859 | 1,642 | 1,931 | 1,730 | 5,626 | 4,994 | 5,615 | 4,998 | |||||||||||||||||
Mission Systems | |||||||||||||||||||||||||
Product | 1,735 | 1,506 | 1,450 | 1,218 | 4,889 | 4,168 | 4,406 | 3,710 | |||||||||||||||||
Service | 623 | 511 | 669 | 583 | 1,902 | 1,635 | 1,966 | 1,739 | |||||||||||||||||
Intersegment eliminations | 193 | 164 | 191 | 158 | 553 | 471 | 552 | 463 | |||||||||||||||||
Total Mission Systems | 2,551 | 2,181 | 2,310 | 1,959 | 7,344 | 6,274 | 6,924 | 5,912 | |||||||||||||||||
Space Systems | |||||||||||||||||||||||||
Product | 1,728 | 1,550 | 1,504 | 1,344 | 4,788 | 4,277 | 4,132 | 3,674 | |||||||||||||||||
Service | 445 | 401 | 357 | 329 | 1,327 | 1,211 | 1,277 | 1,167 | |||||||||||||||||
Intersegment eliminations | 25 | 23 | 24 | 21 | 79 | 71 | 65 | 59 | |||||||||||||||||
Total Space Systems | 2,198 | 1,974 | 1,885 | 1,694 | 6,194 | 5,559 | 5,474 | 4,900 | |||||||||||||||||
Segment Totals | |||||||||||||||||||||||||
Total Product | $ | 6,667 | $ | 5,948 | $ | 5,997 | $ | 5,349 | $ | 19,325 | $ | 17,163 | $ | 17,605 | $ | 15,564 | |||||||||
Total Service | 2,416 | 2,086 | 2,478 | 2,171 | 7,262 | 6,377 | 7,515 | 6,630 | |||||||||||||||||
Total Segment(1) | $ | 9,083 | $ | 8,034 | $ | 8,475 | $ | 7,520 | $ | 26,587 | $ | 23,540 | $ | 25,120 | $ | 22,194 |
(1) | A reconciliation of segment operating income to total operating income is included in “Segment Operating Results.” |
September 30, 2020 | December 31, 2019 | ||||||||||||||||||
$ in millions | Funded | Unfunded | Total Backlog | Total Backlog | % Change in 2020 | ||||||||||||||
Aeronautics Systems | $ | 11,802 | $ | 11,760 | $ | 23,562 | $ | 26,021 | (9 | )% | |||||||||
Defense Systems | 6,793 | 1,350 | 8,143 | 8,481 | (4 | )% | |||||||||||||
Mission Systems | 9,679 | 4,185 | 13,864 | 14,226 | (3 | )% | |||||||||||||
Space Systems | 5,066 | 30,620 | 35,686 | 16,112 | 121 | % | |||||||||||||
Total backlog | $ | 33,340 | $ | 47,915 | $ | 81,255 | $ | 64,840 | 25 | % |
Nine Months Ended September 30 | % | |||||||||
$ in millions | 2020 | 2019 | Change | |||||||
Net earnings | $ | 2,859 | $ | 2,657 | 8 | % | ||||
Non-cash items(1) | 1,352 | 1,041 | 30 | % | ||||||
Changes in assets and liabilities: | ||||||||||
Trade working capital | (816 | ) | (1,392 | ) | (41 | )% | ||||
Retiree benefits | (704 | ) | (422 | ) | 67 | % | ||||
Other, net | 12 | (51 | ) | (124 | )% | |||||
Net cash provided by operating activities | $ | 2,703 | $ | 1,833 | 47 | % |
(1) | Includes depreciation and amortization, non-cash lease expense, stock based compensation expense and deferred income taxes. |
Nine Months Ended September 30 | % | |||||||||
$ in millions | 2020 | 2019 | Change | |||||||
Net cash provided by operating activities | $ | 2,703 | $ | 1,833 | 47 | % | ||||
Less: capital expenditures | (828 | ) | (793 | ) | 4 | % | ||||
Free cash flow | $ | 1,875 | $ | 1,040 | 80 | % |
• | the impact of the COVID-19 outbreak or future epidemics on our business, including the potential for worker absenteeism, facility closures, work slowdowns or stoppages, supply chain disruptions, program delays, our ability to recover costs under contracts, changing government funding and acquisition priorities and processes, changing government payment rules and practices, and potential impacts on access to capital, the markets and the fair value of our assets |
• | our dependence on the U.S. government for a substantial portion of our business |
• | significant delays or reductions in appropriations for our programs, and U.S. government funding and program support more broadly |
• | investigations, claims, disputes, enforcement actions, litigation and/or other legal proceedings |
• | the use of estimates when accounting for our contracts and the effect of contract cost growth and/or changes in estimated contract revenues and costs |
• | our exposure to additional risks as a result of our international business, including risks related to geopolitical and economic factors, suppliers, laws and regulations |
• | the improper conduct of employees, agents, subcontractors, suppliers, business partners or joint ventures in which we participate and the impact on our reputation and our ability to do business |
• | cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners |
• | the performance and financial viability of our subcontractors and suppliers and the availability and pricing of raw materials and components |
• | changes in procurement and other laws, regulations, contract terms and practices applicable to our industry, findings by the U.S. government as to our compliance with such requirements, and changes in our customers’ business practices globally |
• | increased competition within our markets and bid protests |
• | the ability to maintain a qualified workforce with the required security clearances and requisite skills |
• | our ability to meet performance obligations under our contracts, including obligations that require innovative design capabilities, are technologically complex, require certain manufacturing expertise or are dependent on factors not wholly within our control |
• | environmental matters, including unforeseen environmental costs and government and third party claims |
• | natural disasters |
• | health epidemics, pandemics and similar outbreaks, including the global COVID-19 pandemic |
• | the adequacy and availability of our insurance coverage, customer indemnifications or other liability protections |
• | products and services we provide related to hazardous and high risk operations, including the production and use of such products, which subject us to various environmental, regulatory, financial, reputational and other risks |
• | the future investment performance of plan assets, changes in actuarial assumptions associated with our pension and other postretirement benefit plans and legislative or other regulatory actions impacting our pension and postretirement benefit obligations |
• | our ability appropriately to exploit and/or protect intellectual property rights |
• | our ability to develop new products and technologies and maintain technologies, facilities, and equipment to win new competitions and meet the needs of our customers |
• | unanticipated changes in our tax provisions or exposure to additional tax liabilities |
• | changes in business conditions that could impact business investments and/or recorded goodwill or the value of other long-lived assets |
2.1 | |
2.2 | |
2.3 | |
2.4 | |
*15 | |
*31.1 | |
*31.2 | |
**32.1 | |
**32.2 | |
*101 | Northrop Grumman Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Cover Page, (ii) Condensed Consolidated Statements of Earnings and Comprehensive Income, (iii) Condensed Consolidated Statements of Financial Position, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Shareholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
*104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
+ | Management contract or compensatory plan or arrangement |
* | Filed with this report |
** | Furnished with this report |
NORTHROP GRUMMAN CORPORATION (Registrant) | ||
By: | /s/ Michael A. Hardesty | |
Michael A. Hardesty Corporate Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) |
1. | I have reviewed this report on Form 10-Q of Northrop Grumman Corporation (“company”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. |
/s/ Kathy J. Warden |
Kathy J. Warden |
Chairman, Chief Executive Officer and President |
1. | I have reviewed this report on Form 10-Q of Northrop Grumman Corporation (“company”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. |
/s/ David F. Keffer |
David F. Keffer |
Corporate Vice President and Chief Financial Officer |
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company. |
/s/ Kathy J. Warden |
Kathy J. Warden |
Chairman, Chief Executive Officer and President |
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company. |
/s/ David F. Keffer |
David F. Keffer |
Corporate Vice President and Chief Financial Officer |
Condensed Consolidated Statements of Earnings and Comprehensive Income (Unaudited) - USD ($) shares in Millions, $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
Sales | $ 9,083 | $ 8,475 | $ 26,587 | $ 25,120 |
Operating costs and expenses | ||||
General and administrative expenses | 855 | 776 | 2,475 | 2,320 |
Operating income | 985 | 951 | 2,913 | 2,833 |
Other (expense) income | ||||
Interest expense | (154) | (123) | (433) | (398) |
FAS (non-service) pension benefit | 302 | 200 | 907 | 600 |
Other, net | 34 | 27 | 36 | 82 |
Earnings before income taxes | 1,167 | 1,055 | 3,423 | 3,117 |
Federal and foreign income tax expense | 181 | 122 | 564 | 460 |
Net earnings | $ 986 | $ 933 | $ 2,859 | $ 2,657 |
Basic earnings per share | ||||
Basic earnings per share | $ 5.91 | $ 5.52 | $ 17.11 | $ 15.67 |
Weighted-average common shares outstanding, in millions | 166.8 | 169.1 | 167.1 | 169.6 |
Diluted earnings per share | ||||
Diluted earnings per share | $ 5.89 | $ 5.49 | $ 17.05 | $ 15.60 |
Weighted-average diluted shares outstanding, in millions | 167.3 | 169.9 | 167.7 | 170.3 |
Net earnings (from above) | $ 986 | $ 933 | $ 2,859 | $ 2,657 |
Change in unamortized prior service credit, net of tax | (10) | (12) | (31) | (35) |
Change in cumulative translation adjustment and other, net | 6 | 0 | 7 | 0 |
Other comprehensive loss, net of tax | (4) | (12) | (24) | (35) |
Comprehensive income | 982 | 921 | 2,835 | 2,622 |
Product [Member] | ||||
Sales | 6,667 | 5,997 | 19,325 | 17,605 |
Cost of Sales | 5,346 | 4,777 | 15,425 | 13,955 |
Service [Member] | ||||
Sales | 2,416 | 2,478 | 7,262 | 7,515 |
Cost of Sales | $ 1,897 | $ 1,971 | $ 5,774 | $ 6,012 |
Condensed Consolidated Statements of Financial Position (Unaudited) (Parentheticals) - USD ($) $ in Millions |
Sep. 30, 2020 |
Dec. 31, 2019 |
---|---|---|
Statement of Financial Position [Abstract] | ||
Accumulated depreciation | $ (6,259) | $ (5,850) |
Long-term debt, current portion | $ 1,806 | $ 1,109 |
Preferred Stock, par value | $ 1 | $ 1 |
Preferred Stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred Stock, shares issued | 0 | 0 |
Preferred Stock, shares outstanding | 0 | 0 |
Common Stock, par value | $ 1 | $ 1 |
Common Stock, shares authorized | 800,000,000 | 800,000,000 |
Common Stock, shares issued | 166,715,510 | 167,848,424 |
Common Stock, shares outstanding | 166,715,510 | 167,848,424 |
Basis of Presentation (Unaudited) |
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Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BASIS OF PRESENTATION | 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. Beginning in the second quarter of 2020, the company no longer considers certain unallowable costs and environmental matters that are principally managed at the corporate office as part of management’s evaluation of segment operating performance. As a result, certain unallowable compensation and other costs, which were previously included in segment operating results, are now reported in Unallocated corporate expense within operating income. In addition, certain accrued and deferred costs, as well as unallowable costs, if any, associated with certain environmental matters that were previously reflected in segment assets and operating results are now reflected in corporate assets and Unallocated corporate expense within operating income. The impact of these changes are reflected in the amounts in this Form 10-Q. See Part II, Item 5 in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and Note 9 for further information regarding the impact of these changes on the company’s prior period segment operating income. 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, the Form 8-K that we filed with the SEC on April 29, 2020, 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, and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. 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 development or 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. For most of our contracts, control is effectively transferred during the period of performance, so we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion). 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. 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) expense, is charged against income in the period the loss is identified. The following table presents the effect of aggregate net EAC adjustments:
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 September 30, 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 September 30, 2020 was $81.3 billion. We expect to recognize approximately 35 percent and 55 percent of our September 30, 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 and nine months ended September 30, 2020 that was included in the December 31, 2019 contract liability balance was $232 million and $1.5 billion, respectively. The amount of revenue recognized for the three and nine months ended September 30, 2019 that was included in the December 31, 2018 contract liability balance was $209 million and $1.2 billion, 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. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows:
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 September 30, 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.
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Earnings Per Share, Share Repurchases and Dividends on Common Stock (Unaudited) |
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Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EARNINGS PER SHARE, SHARE REPURCHASES AND DIVIDENDS ON COMMON STOCK | 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 0.5 million shares and 0.6 million shares for the three and nine months ended September 30, 2020, respectively. The dilutive effect of these securities totaled 0.8 million shares and 0.7 million shares for the three and nine months ended September 30, 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. We had no repurchases of common stock during the three months ended September 30, 2020. As of September 30, 2020, repurchases under the 2018 Repurchase Program totaled $0.2 billion; $2.8 billion remained under this share repurchase authorization. By its terms, the 2018 Repurchase Program is set to expire when all authorized funds for repurchases have been used. 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:
Dividends on Common Stock In May 2020, the company increased the quarterly common stock dividend 10 percent to $1.45 per share from the previous amount of $1.32 per share. 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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Income Taxes (Unaudited) |
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Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INCOME TAXES | INCOME TAXES
Current Quarter The third quarter 2020 effective tax rate (ETR) increased to 15.5 percent from 11.6 percent in the prior year period primarily due to lower research credits, partially offset by benefits relating to foreign-derived intangible income (FDII) after final regulations issued in July clarified Foreign Military Sales qualify for the deduction. The company’s third quarter 2020 ETR includes benefits of $45 million for research credits and $30 million for FDII. The company’s third quarter 2019 ETR includes benefits of $89 million for research credits and $17 million for FDII. Year to Date The year to date 2020 ETR increased to 16.5 percent from 14.8 percent in the prior year period due to the same current quarter items discussed above. The company’s year to date 2020 ETR includes benefits of $135 million for research credits and $46 million for FDII. The company’s year to date 2019 ETR includes benefits of $171 million for research credits and $26 million for FDII. In March 2020, 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 third quarter and year to date 2020 effective tax rate. During the three and nine months ended September 30, 2020, we increased our unrecognized tax benefits by approximately $219 million and $294 million, respectively, primarily related to state apportionment, 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 $50 million. Since enactment of the 2017 Tax Act, the Internal Revenue Service (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 appeal with the IRS.
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Fair Value of Financial Instruments (Unaudited) |
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Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FAIR VALUE OF FINANCIAL INSTRUMENTS | FAIR VALUE OF FINANCIAL INSTRUMENTS The company holds a portfolio of marketable 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:
The notional value of the company’s foreign currency forward contracts at September 30, 2020 and December 31, 2019 was $66 million and $98 million, respectively. At September 30, 2020, 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, 2019 was $7 million. The derivative fair values and related unrealized gains/losses at September 30, 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 nine months ended September 30, 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 $19.1 billion and $15.1 billion as of September 30, 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 September 30, 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. On October 15, 2020, the company repaid $1.0 billion of unsecured senior notes upon maturity. 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:
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.
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Investigations, Claims and Litigation (Unaudited) |
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Sep. 30, 2020 | |
Disclosure Text Block Supplement [Abstract] | |
INVESTIGATIONS, CLAIMS AND LITIGATION | 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 concluded, but the court postponed the remaining estimated three weeks as a result of COVID-19-related concerns. Trial is currently scheduled to resume in November 2020. 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, ECT alleges the consortium breached its contract with ECT and seeks damages of approximately R$111 million (the equivalent of approximately $20 million as of September 30, 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 $16 million as of September 30, 2020) in damages. In October 2013, ECT asserted an additional damage claim of R$22 million (the equivalent of approximately $4 million as of September 30, 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 $36 million as of September 30, 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 $7 million as of September 30, 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. On August 10, 2020, the court approved a settlement between the parties and dismissed the lawsuit. 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 are changing 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 (including the Navy, Defense Contract Management Agency, the state, 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 September 30, 2020, or its annual results of operations and/or cash flows.
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Commitments and Contingencies (Unaudited) |
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Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
COMMITMENTS AND CONTINGENCIES | 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 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 September 30, 2020, or its annual results of operations and/or cash flows. The U.S. government has raised questions about an interest rate assumption used by the company to determine our CAS pension expense in previous years and in our current forward pricing rate proposal. On June 1, 2020, the government provided written notice that the assumptions the company used during the period 2013-2019 were potentially noncompliant with CAS. We are engaging with the government to address their questions. We submitted a formal response on July 31, 2020, which we believe demonstrates the appropriateness of the assumptions used. However, 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 September 30, 2020 and December 31, 2019:
(1) As of September 30, 2020, $165 million is recorded in Other current liabilities and $398 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 September 30, 2020, $135 million is deferred in Prepaid expenses and other current assets and $339 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 September 30, 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 are changing 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 September 30, 2020, there were $465 million of stand-by letters of credit and guarantees and $77 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 September 30, 2020, there were no commercial paper borrowings outstanding. 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 borrowing under the 2018 Credit Agreement. At September 30, 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 $154 million as of September 30, 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 September 30, 2020, there was £50 million (the equivalent of approximately $64 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 September 30, 2020, the company was in compliance with all covenants under its credit agreements.
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Retirement Benefits (Unaudited) |
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Retirement Benefits [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
RETIREMENT BENEFITS | RETIREMENT BENEFITS The cost to the company of its pension and other postretirement benefit (OPB) plans is shown in the following table:
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:
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Stock Compensation Plans and Other Compensation Arrangements (Unaudited) |
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Share-based Payment Arrangement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS | 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:
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. 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:
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.
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Segment Information (Unaudited) |
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Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SEGMENT INFORMATION | 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. As discussed in Note 1, beginning in the second quarter of 2020, the company no longer considers certain unallowable costs as part of management’s evaluation of segment operating performance. As a result, certain unallowable costs, which were previously included in segment operating results, are now reported in Unallocated corporate expense within operating income. This change has been applied retrospectively in the amounts below. See Part II, Item 5 in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 for further information regarding the impact of this change on the company’s prior period segment information. The following table presents sales and operating income by segment:
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, advertising 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, as well as certain compensation and other costs. Disaggregation of Revenue
(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.
(2) Percentages calculated based on external customer sales.
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Summary of Significant Accounting Policies (Policies) |
9 Months Ended |
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Sep. 30, 2020 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Principles of Consolidation | 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.
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Basis of Presentation | 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. Beginning in the second quarter of 2020, the company no longer considers certain unallowable costs and environmental matters that are principally managed at the corporate office as part of management’s evaluation of segment operating performance. As a result, certain unallowable compensation and other costs, which were previously included in segment operating results, are now reported in Unallocated corporate expense within operating income. In addition, certain accrued and deferred costs, as well as unallowable costs, if any, associated with certain environmental matters that were previously reflected in segment assets and operating results are now reflected in corporate assets and Unallocated corporate expense within operating income. The impact of these changes are reflected in the amounts in this Form 10-Q. See Part II, Item 5 in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and Note 9 for further information regarding the impact of these changes on the company’s prior period segment operating income. 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, the Form 8-K that we filed with the SEC on April 29, 2020, 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, and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.
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Fiscal Period Policy | 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.
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Revenue from Contract with Customer | Revenue Recognition The majority of our sales are derived from long-term contracts with the U.S. government for the development or 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. For most of our contracts, control is effectively transferred during the period of performance, so we generally recognize revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion). 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. 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) expense, is charged against income in the period the loss is identified. 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.
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Earnings Per Share | Diluted earnings per share include the dilutive effect of awards granted to employees under stock-based compensation plans. We calculate basic earnings per share by dividing net earnings by the weighted-average number of shares of common stock outstanding during each period.
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Investments in Marketable Securities | The company holds a portfolio of marketable 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 |
Derivative Financial Instruments and Hedging Activities | 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. |
Fair Value of Long-term Debt | 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. |
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. |
Pension and Other Postretirement 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 |
Basis of Presentation (Unaudited) (Tables) |
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Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Change in Accounting Estimate [Table Text Block] | The following table presents the effect of aggregate net EAC adjustments:
(1) Based on a 21 percent statutory tax rate
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Accumulated Other Comprehensive Loss | The components of accumulated other comprehensive loss are as follows:
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Earnings Per Share, Share Repurchases and Dividends on Common Stock (Unaudited) (Tables) |
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Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share Repurchases | The table below summarizes the company’s share repurchases to date under the authorizations described above:
(1) Includes commissions paid.
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Income Taxes (Unaudited) (Tables) |
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Sep. 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Income Tax Expense and Effective Income Tax Rates |
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Fair Value of Financial Instruments (Unaudited) (Tables) |
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Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value information of assets and liabilities measured at fair value on a recurring basis | 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:
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Commitments and Contingencies (Unaudited) (Tables) |
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Environmental Remediation Range of Future Costs [Line Items] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Environmental Remediation [Table Text Block] | 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 September 30, 2020 and December 31, 2019:
(1) As of September 30, 2020, $165 million is recorded in Other current liabilities and $398 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 September 30, 2020, $135 million is deferred in Prepaid expenses and other current assets and $339 million is deferred in Other non-current assets. These amounts are evaluated for recoverability on a routine basis.
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Retirement Benefits (Unaudited) (Tables) |
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Retirement Benefits [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components of net periodic benefit cost | The cost to the company of its pension and other postretirement benefit (OPB) plans is shown in the following table:
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Employer contributions to retirement plans | Contributions made by the company to its retirement plans are as follows:
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Stock Compensation Plans and Other Compensation Arrangements (Unaudited) (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based Payment Arrangement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nonvested Restricted Stock Shares Activity [Table Text Block] | 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:
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Cash Units and Cash Performance Units Aggregate Payout Amount [Table Text Block] | 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:
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Segment Information (Unaudited) (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales and operating income by segment | The following table presents sales and operating income by segment:
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Revenue by Major Customers by Reporting Segments |
(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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Revenue from External Customers by Contract Type |
(1) Percentages calculated based on external customer sales.
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Revenue from External Customers by Geographic Areas |
(2) Percentages calculated based on external customer sales.
|
Basis of Presentation (Unaudited) Contract Estimates (Details 1) - USD ($) $ / shares in Units, $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
Change in Accounting Estimate [Line Items] | ||||
Revenue | $ 124 | $ 142 | $ 385 | $ 462 |
Operating income | 985 | 951 | 2,913 | 2,833 |
Net earnings | $ 986 | $ 933 | $ 2,859 | $ 2,657 |
Diluted earnings per share | $ 5.89 | $ 5.49 | $ 17.05 | $ 15.60 |
Contracts Accounted for under Percentage of Completion [Member] | ||||
Change in Accounting Estimate [Line Items] | ||||
Operating income | $ 123 | $ 125 | $ 359 | $ 421 |
Net earnings | $ 97 | $ 99 | $ 284 | $ 333 |
Diluted earnings per share | $ 0.58 | $ 0.58 | $ 1.69 | $ 1.96 |
Basis of Presentation (Unaudited) Backlog and Contract Assets and Liabilities (Details 2) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
Change in Contract with Customer, Liability [Abstract] | ||||
Contract with Customer, Liability, Revenue Recognized | $ 232 | $ 209 | $ 1,500 | $ 1,200 |
Revenue from Contract with Customer [Abstract] | ||||
Revenue, Remaining Performance Obligation, Amount | $ 81,300 | $ 81,300 | ||
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Explanation | We expect to recognize approximately 35 percent and 55 percent of our September 30, 2020 backlog as revenue over the next 12 and 24 months, respectively, with the remainder to be recognized thereafter. |
Basis of Presentation (Unaudited) Accumulated Other Comprehensive Income (Loss) (Details 3) - USD ($) $ in Millions |
Sep. 30, 2020 |
Dec. 31, 2019 |
---|---|---|
Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract] | ||
Unamortized prior service credit, net of tax expense of $6 for 2020 and $17 for 2019 | $ (20) | $ (51) |
Cumulative translation adjustment and other, net | (141) | (148) |
Total accumulated other comprehensive loss | (121) | (97) |
Unamortized prior service credit, tax expense | $ 6 | $ 17 |
Earnings Per Share, Share Repurchases and Dividends on Common Stock (Unaudited) Earnings Per Share and Dividends (Details 1) - $ / shares shares in Millions |
1 Months Ended | 3 Months Ended | 9 Months Ended | ||||
---|---|---|---|---|---|---|---|
May 31, 2020 |
May 31, 2019 |
May 31, 2018 |
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
Earnings Per Share, Basic and Diluted [Abstract] | |||||||
Incremental Common Shares Attributable to Dilutive Effect of Share-based Payment Arrangements | 0.5 | 0.8 | 0.6 | 0.7 | |||
Common stock dividends per share, declared (in dollars per share) | $ 1.45 | $ 1.32 | $ 1.20 | $ 1.45 | $ 1.32 | $ 4.22 | $ 3.84 |
Increase in quarterly common stock dividend (percent) | 10.00% | 10.00% |
Earnings Per Share, Share Repurchases and Dividends on Common Stock (Unaudited) Share Repurchases (Details 2) - USD ($) $ / shares in Units, shares in Millions, $ in Millions |
7 Months Ended | 9 Months Ended | 47 Months Ended | |||
---|---|---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2020 |
Sep. 30, 2019 |
Feb. 29, 2020 |
Dec. 04, 2018 |
Sep. 16, 2015 |
|
September 2015 Share Repurchase Program Original Authorization | ||||||
Share Repurchase [Line Items] | ||||||
Amount Authorized | $ 4,000 | |||||
Shares Retired | 15.4 | |||||
Average Cost Per Share | $ 260.33 | |||||
Shares Repurchased | 0.9 | 2.3 | ||||
December 2018 Share Repurchase Original Authorization [Member] | ||||||
Share Repurchase [Line Items] | ||||||
Amount Authorized | $ 3,000 | |||||
Shares Retired | 0.5 | |||||
Average Cost Per Share | $ 326.20 | |||||
Shares Repurchased | 0.5 | |||||
Share Repurchases - Notes to Table | ||||||
Shares repurchased amount | $ 200 | |||||
Amount remaining under authorization for share repurchases | $ 2,800 | $ 2,800 |
Income Taxes (Unaudited) Effective Income Tax Rate Reconciliation (Details 1) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
Income Tax Disclosure [Abstract] | ||||
Federal and foreign income tax expense | $ 181 | $ 122 | $ 564 | $ 460 |
Effective income tax rate | 15.50% | 11.60% | 16.50% | 14.80% |
Effective Income Tax Rate Reconciliation, Tax Credit, Research, Amount | $ 45 | $ 89 | $ 135 | $ 171 |
IncomeTaxReconciliationDeductionsFDII | $ 30 | $ 17 | $ 46 | $ 26 |
Income Taxes (Unaudited) Unrecognized Tax Benefit (Details 2) $ in Millions |
3 Months Ended | 9 Months Ended |
---|---|---|
Sep. 30, 2020
USD ($)
|
Sep. 30, 2020
USD ($)
|
|
Income Tax Disclosure [Abstract] | ||
Unrecognized Tax Benefits, Increase Resulting from Prior Period Tax Positions | $ 219 | $ 294 |
Decrease in Unrecognized Tax Benefits is Reasonably Possible | $ 50 | $ 50 |
Amounts in Paragraphs - Fair Value of Financial Instruments (Unaudited) (Details 2) - USD ($) $ in Millions |
Sep. 30, 2020 |
Dec. 31, 2019 |
---|---|---|
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||
Foreign Currency Derivative Instruments Not Designated as Hedging Instruments, Asset at Fair Value | $ 66 | $ 98 |
Foreign Currency Cash Flow Hedge Derivative at Fair Value, Net | $ 0 | $ 7 |
Fair Value of Financial Instruments (Unaudited) Long-term Debt (Details 3) - USD ($) $ in Millions |
Oct. 15, 2020 |
Sep. 30, 2020 |
Mar. 23, 2020 |
Dec. 31, 2019 |
---|---|---|---|---|
Debt Instrument [Line Items] | ||||
Debt Instrument, Face Amount | $ 2,250 | |||
Debt and Lease Obligation | $ 16,100 | $ 13,900 | ||
Long-term Debt, Fair Value | $ 19,100 | $ 15,100 | ||
Two Thousand Thirty [Member] | ||||
Debt Instrument [Line Items] | ||||
Debt Instrument, Face Amount | $ 750 | |||
Debt Instrument, Interest Rate, Stated Percentage | 4.40% | |||
Two Thousand Forty 2 [Member] | ||||
Debt Instrument [Line Items] | ||||
Debt Instrument, Face Amount | $ 500 | |||
Debt Instrument, Interest Rate, Stated Percentage | 5.15% | |||
Two Thousand Fifty [Member] | ||||
Debt Instrument [Line Items] | ||||
Debt Instrument, Face Amount | $ 1,000 | |||
Debt Instrument, Interest Rate, Stated Percentage | 5.25% | |||
Subsequent Event [Member] | ||||
Debt Instrument [Line Items] | ||||
Repayments of Notes Payable | $ 1,000 |
Retirement Benefits (Unaudited) (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
Components of Net Periodic Benefit Cost | ||||
Defined contribution plan, employer contributions | $ 116 | $ 98 | $ 472 | $ 377 |
Pension Benefits | ||||
Components of Net Periodic Benefit Cost | ||||
Service cost | 102 | 92 | 306 | 276 |
Interest cost | 307 | 340 | 920 | 1,020 |
Expected return on plan assets | (594) | (525) | (1,782) | (1,576) |
Amortization of prior service credit | (15) | (15) | (45) | (44) |
Net periodic benefit cost (benefit) | (200) | (108) | (601) | (324) |
Defined benefit plan, contributions by Employer | 24 | 18 | 70 | 64 |
OPB | ||||
Components of Net Periodic Benefit Cost | ||||
Service cost | 4 | 4 | 13 | 12 |
Interest cost | 17 | 20 | 50 | 60 |
Expected return on plan assets | (26) | (23) | (77) | (69) |
Amortization of prior service credit | 1 | (1) | 3 | (2) |
Net periodic benefit cost (benefit) | (4) | 0 | (11) | 1 |
Defined benefit plan, contributions by Employer | $ 7 | $ 10 | $ 30 | $ 34 |
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