Northrop Grumman Corporation Module 10 – Detailed Analysis of Financial Reports Alex Aponte - Section 2 – Acct 70311
Brief Overview of Northrop • Northrop Grumman Corporation is a leading global security company providing innovative systems, products and solutions in a number of key segments.
Four Segments of Northrop • Aerospace Systems – 36.5% of sales – design, development, integration and production of manned aircraft, unmanned systems, spacecraft, etc. • Electronic Systems – 25.5% of sales – designs, develops and manufactures solutions a variety of defense electronics and systems for controlling a military environment.
Segments (continued) 3. Information Systems – 26.9% of sales – focuses on cyber-security; C4ISR; intelligence processing; ad air ad missile defense. 4. Technical Services– 11.1% of sales - provides training solutions, logistics services, and advanced technology in missile defense, nuclear security, and simulations.
Inventoried Costs, Net • $698M matches the Balance Sheet
Inventoried Costs, Net • Primarily relates to WIP on contracts accounted for under either units-of-delivery or percentage-of-completion accounting • Inventoried Costs Bal. Sheet Account = Accumulated Contract Costs less portion of cost allocated to delivered items • Physical inventory within “Inventoried Costs” consists mostly of raw materials
Deferred Tax Asset • Plug of $209M on liability side yields match
Property, Plant and Equipment • From Balance Sheet
Property, Plant and Equipment • $2,806M matches Balance Sheet number
Property, Plant and Equipment • Most assets within PP&E are depreciated using double-declining balance method, and the remainder use the straight-line method
Goodwill • Goodwill amount matches Balance Sheet
Goodwill • Historically, Northrop has performed annual goodwill test for impairment November 30. • In 2013, Northrop changed the date to December 31. • Deloitte concluded change was preferable under the circumstances • Used discounted cash flow approach corroborated with comparative market multiples when appropriate • Acc. goodwill impairment loss in 2012 and 2013 totaled $570M for Aerospace Systems segment (buried in goodwill numbers, not shown in 10-K)
Other Non-Current Assets – Life Insurance • Life insurance policies are for a number of executives at Northrop, which are recorded at their cash surrender value. Utilized partially as deferred compensation and partially as non-qualified employee retirement plans.
Other Non-Current Assets – Purchased Intangible Assets • Amortized on straight-line basis over an aggregate weighted-average period of 21 years
Other Non-Current Assets – L-T Marketable Securities • Partially used to fund long-term deferred compensation programs • Securities classified as either “trading” or “available-for-sale” and can be readily liquidated without restriction • Recorded at fair value
Other Non-Current Assets – Environmental Costs • Remediation costs brought on by Environmental Protection Agency • Loss is probable and estimable • $128M represents deferred amount that Northrop believes is recoverable through contract agreed upon with U.S. Government
Other Non-Current Liabilities • $100M current portion of environmental reserve related to remediation with EPA mentioned earlier • Remaining $964 of non-current liability implied to get $1,064 total
Long-Term Debt • Mostly fixed rate maturity, >75% of which matures >5 years out.
Sales – by Customer • U.S. Gov’t biggest customer. Roughly 50/50 split on contract types (minimal knowledge on this currently)
Income Tax Rate • U.S. Federal Statutory Income Tax Rate – 35% • Minimal information given by 10-K
What I Would Still Want to Know • Patents, intangible assets, technology. This is the hallmark of Northrop’s industry but is nowhere to be found in 10-K • Greater detail on sales of Northrop – specific products, greater overall detail on the operations of the company. This is extremely vital to understanding the Aerospace/Defense Industry