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Northrop Grumman Corp. (NOC)


Analysis of Operating Leases

Advanced level


Accounting Policy on Operating Leases

Northrop Grumman uses its incremental borrowing rate in the assessment of lease classification as capital or operating and defines the initial lease term to include renewal options determined to be reasonably assured. The majority of Northrop Grumman’s leases are operating leases.

Many of Northrop Grumman’s real property lease agreements contain incentives for tenant improvements, rent holidays, or rent escalation clauses. For tenant improvement incentives, Northrop Grumman records a deferred rent liability and amortizes the deferred rent over the term of the lease as a reduction to rent expense. For rent holidays and rent escalation clauses during the lease term, Northrop Grumman records rental expense on a straight-line basis over the term of the lease. For purposes of recognizing lease incentives, Northrop Grumman uses the date of initial possession as the commencement date, which is generally when Northrop Grumman is given the right of access to the space and begins to make improvements in preparation for intended use.

Source: 10-K (filing date: 2019-01-31).


Present Value of Future Operating Lease Payments (before Adoption of FASB Topic 842)

Northrop Grumman Corp., future operating lease payments (before adoption of FASB Topic 842)

US$ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Total undiscounted future operating lease payments 2,080  1,338  892  839  840 
Discount rate1 3.73% 3.61% 4.19% 4.34% 5.33%
 
Total present value of future operating lease payments 1,724  1,124  787  747  735 

Based on: 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-30), 10-K (filing date: 2016-02-01), 10-K (filing date: 2015-02-02).

1 Weighted-average interest rate for Northrop Grumman Corp.’s debt

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 3.73%
2019 312  2019 312  301 
2020 270  2020 270  251 
2021 221  2021 221  198 
2022 186  2022 186  161 
2023 152  2023 152  127 
2024 and thereafter 939  2024 152  122 
2025 152  118 
2026 152  113 
2027 152  109 
2028 152  105 
2029 152  102 
2030 27  17 
Total: 2,080  2,080  1,724 

Based on: 10-K (filing date: 2019-01-31).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 3.61%
2018 232  2018 232  224 
2019 195  2019 195  182 
2020 145  2020 145  130 
2021 120  2021 120  104 
2022 87  2022 87  73 
2023 and thereafter 559  2023 87  70 
2024 87  68 
2025 87  66 
2026 87  63 
2027 87  61 
2028 87  59 
2029 37  24 
Total: 1,338  1,338  1,124 

Based on: 10-K (filing date: 2018-01-29).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 4.19%
2017 257  2017 257  247 
2018 186  2018 186  171 
2019 131  2019 131  116 
2020 92  2020 92  78 
2021 66  2021 66  54 
2022 and thereafter 160  2022 66  52 
2023 66  50 
2024 28  20 
Total: 892  892  787 

Based on: 10-K (filing date: 2017-01-30).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 4.34%
2016 251  2016 251  241 
2017 201  2017 201  185 
2018 135  2018 135  119 
2019 99  2019 99  84 
2020 61  2020 61  49 
2021 and thereafter 92  2021 61  47 
2022 31  23 
Total: 839  839  747 

Based on: 10-K (filing date: 2016-02-01).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 5.33%
2015 267  2015 267  253 
2016 214  2016 214  193 
2017 140  2017 140  120 
2018 84  2018 84  68 
2019 57  2019 57  44 
2020 and thereafter 78  2020 57  42 
2021 21  15 
Total: 840  840  735 

Based on: 10-K (filing date: 2015-02-02).


Adjustments to Financial Statements for Operating Leases

Northrop Grumman Corp., adjustments to financial statements

US$ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Adjustment to Total Assets
Total assets (as reported) 37,653  34,917  25,614  24,454  26,572 
Add: Operating lease right-of-use asset (before adoption of FASB Topic 842)1 1,724  1,124  787  747  735 
Total assets (adjusted) 39,377  36,041  26,401  25,201  27,307 
Adjustment to Total Debt
Total debt (as reported) 14,400  15,266  7,070  6,526  5,928 
Add: Operating lease liability (before adoption of FASB Topic 842)2 1,724  1,124  787  747  735 
Total debt (adjusted) 16,124  16,390  7,857  7,273  6,663 

Based on: 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-30), 10-K (filing date: 2016-02-01), 10-K (filing date: 2015-02-02).

1, 2 Equal to total present value of future operating lease payments.


Northrop Grumman Corp., Financial Data: Reported vs. Adjusted


Adjusted Financial Ratios for Operating Leases (Summary)

Northrop Grumman Corp., adjusted financial ratios

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Total Asset Turnover1
Reported total asset turnover 0.80 0.74 0.96 0.96 0.90
Adjusted total asset turnover 0.76 0.72 0.93 0.93 0.88
Debt to Equity2
Reported debt to equity 1.76 2.17 1.34 1.18 0.82
Adjusted debt to equity 1.97 2.33 1.49 1.32 0.92
Return on Assets3 (ROA)
Reported ROA 8.58% 5.77% 8.59% 8.14% 7.79%
Adjusted ROA 8.20% 5.59% 8.33% 7.90% 7.58%

Based on: 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-30), 10-K (filing date: 2016-02-01), 10-K (filing date: 2015-02-02).

Financial ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Northrop Grumman Corp.’s adjusted total asset turnover ratio deteriorated from 2016 to 2017 but then slightly improved from 2017 to 2018.
Adjusted debt to equity A solvency ratio calculated as adjusted total debt divided by total shareholders’ equity. Northrop Grumman Corp.’s adjusted debt to equity ratio deteriorated from 2016 to 2017 but then slightly improved from 2017 to 2018.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Northrop Grumman Corp.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.

Northrop Grumman Corp., Financial Ratios: Reported vs. Adjusted


Adjusted Total Asset Turnover

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Sales 30,095  25,803  24,508  23,526  23,979 
Total assets 37,653  34,917  25,614  24,454  26,572 
Activity Ratio
Total asset turnover1 0.80 0.74 0.96 0.96 0.90
Adjusted for Operating Leases
Selected Financial Data (US$ in millions)
Sales 30,095  25,803  24,508  23,526  23,979 
Adjusted total assets 39,377  36,041  26,401  25,201  27,307 
Activity Ratio
Adjusted total asset turnover2 0.76 0.72 0.93 0.93 0.88

Based on: 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-30), 10-K (filing date: 2016-02-01), 10-K (filing date: 2015-02-02).

2018 Calculations

1 Total asset turnover = Sales ÷ Total assets
= 30,095 ÷ 37,653 = 0.80

2 Adjusted total asset turnover = Sales ÷ Adjusted total assets
= 30,095 ÷ 39,377 = 0.76

Activity ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Northrop Grumman Corp.’s adjusted total asset turnover ratio deteriorated from 2016 to 2017 but then slightly improved from 2017 to 2018.

Adjusted Debt to Equity

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Total debt 14,400  15,266  7,070  6,526  5,928 
Shareholders’ equity 8,187  7,048  5,259  5,522  7,235 
Solvency Ratio
Debt to equity1 1.76 2.17 1.34 1.18 0.82
Adjusted for Operating Leases
Selected Financial Data (US$ in millions)
Adjusted total debt 16,124  16,390  7,857  7,273  6,663 
Shareholders’ equity 8,187  7,048  5,259  5,522  7,235 
Solvency Ratio
Adjusted debt to equity2 1.97 2.33 1.49 1.32 0.92

Based on: 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-30), 10-K (filing date: 2016-02-01), 10-K (filing date: 2015-02-02).

2018 Calculations

1 Debt to equity = Total debt ÷ Shareholders’ equity
= 14,400 ÷ 8,187 = 1.76

2 Adjusted debt to equity = Adjusted total debt ÷ Shareholders’ equity
= 16,124 ÷ 8,187 = 1.97

Solvency ratio Description The company
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders’ equity. Northrop Grumman Corp.’s adjusted debt-to-equity ratio deteriorated from 2016 to 2017 but then slightly improved from 2017 to 2018.

Adjusted Return on Assets (ROA)

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net earnings 3,229  2,015  2,200  1,990  2,069 
Total assets 37,653  34,917  25,614  24,454  26,572 
Profitability Ratio
ROA1 8.58% 5.77% 8.59% 8.14% 7.79%
Adjusted for Operating Leases
Selected Financial Data (US$ in millions)
Net earnings 3,229  2,015  2,200  1,990  2,069 
Adjusted total assets 39,377  36,041  26,401  25,201  27,307 
Profitability Ratio
Adjusted ROA2 8.20% 5.59% 8.33% 7.90% 7.58%

Based on: 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-30), 10-K (filing date: 2016-02-01), 10-K (filing date: 2015-02-02).

2018 Calculations

1 ROA = 100 × Net earnings ÷ Total assets
= 100 × 3,229 ÷ 37,653 = 8.58%

2 Adjusted ROA = 100 × Net earnings ÷ Adjusted total assets
= 100 × 3,229 ÷ 39,377 = 8.20%

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Northrop Grumman Corp.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.