NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31,
2018
AND
2017
, AND FOR THE YEAR ENDED DECEMBER 31,
2018
1. DESCRIPTION OF THE PLAN
The following description of the Northrop Grumman Savings Plan (the “Plan”) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan’s provisions.
General
The Plan is a qualified profit-sharing and stock bonus plan that includes an employee stock ownership plan sponsored by Northrop Grumman Corporation (the “Company” or “Plan sponsor”). The Plan was established February 1, 1962. The Plan's Benefit Plans Administrative and Investment Committees control and manage the operation of the Plan. State Street Bank and Trust Company (“State Street” or the “Trustee”) serves as Trustee of the Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
All of the Plan’s investments are participant directed. The Plan holds assets in the Northrop Grumman Defined Contribution Plans Master Trust (the “DC Master Trust”), as well as a short-term investment fund at the Trustee, and participant-directed brokerage accounts held in the Fidelity Brokerage Services LLC BrokerageLink Account (“BrokerageLink Account”).
Eligibility
The Plan covers substantially all hourly and salaried employees of the Company who are at least 18 years old, are citizens or residents of the United States of America (“U.S.”), are not covered under another plan, and whose pay is determined in accordance with the U.S Internal Revenue Code of 1986, as amended (the “Code”) and processed on a U.S. payroll system of the Company.
Contributions
Participant contributions are subject to certain limitations imposed by the Code. Contributions can be made on a tax-deferred (before-tax) basis, after-tax basis or to a Roth 401(k) on an after-tax basis, or a combination thereof through payroll withholdings. Participants may also contribute amounts representing benefit payments from certain pension plans sponsored by the Company and other qualified plans. An active participant may change the percentage of his or her contributions. First time eligible employees (newly hired, rehired, and certain transfers) are enrolled automatically into the Plan approximately 45 days after the date of hire, rehire, or transfer unless an alternative election is made. Contributions for those automatically enrolled in the plan increase by one percent each year up to a maximum percentage specified by the Plan sponsor. Effective April 1, 2016, the automatic increase program was limited to pre-tax and Roth 401(k) contributions.
For employees hired before April 1, 2016, the Company’s matching contributions are generally as follows:
|
|
|
|
|
|
|
Employee Contribution
|
Company
Match
|
|
First 2% of eligible compensation
|
100
|
%
|
|
Next 2% of eligible compensation
|
50
|
%
|
|
Next 4% of eligible compensation
|
25
|
%
|
|
Contributions over 8%
|
—
|
|
Certain employees (generally hired or rehired on or after July 1, 2008 and before April 1, 2016), who meet the applicable Plan requirements, are also eligible to receive an additional employer contribution known as a Retirement Account Contribution (“RAC”). The Company credits participants who meet eligibility requirements with a RAC each pay period in an amount determined as a percentage of eligible compensation for each pay period in accordance with the following table:
|
|
|
|
|
|
|
Participant’s Age as of December 31, 2016
|
Percentage of
Compensation
|
|
Under 35
|
3
|
%
|
|
35 – 49
|
4
|
%
|
|
50 or older
|
5
|
%
|
For most employees hired after April 1, 2016 and certain employees that did not previously participate in a Company sponsored pension plan or receive a RAC, the Company’s matching contributions are generally as follows:
|
|
|
|
|
|
|
Employee Contribution
|
Company
Match
|
|
First 4% of eligible compensation
|
100
|
%
|
|
For employees with less than 5 years of service:
|
|
|
Next 4% of eligible compensation
|
50
|
%
|
|
Contributions over 8%
|
—
|
|
|
For employees with 5 or more years of service:
|
|
|
Next 6% of eligible compensation
|
50
|
%
|
|
Contributions over 10%
|
—
|
|
Effective January 1, 2018, the Company may make discretionary profit sharing contributions that will be contributed to eligible employees' Plan accounts based on the Company's achievement of specified performance metrics. For the year ended
December 31, 2018
, the Company made a $62.5 million discretionary profit sharing contribution to the Plan, which was remitted to the Plan in March 2019.
Contributions receivable as of December 31,
2018
and
2017
represent amounts due to the Plan from participants and the Company. These contributions were remitted to the Plan subsequent to year end.
Participant Accounts
Individual accounts are maintained for each Plan participant. Each participant account is credited with participant and Company contributions and an allocation of any Plan earnings from the DC Master Trust. Each participant account is charged with withdrawals and an allocation of any Plan losses and administrative expenses. Allocations are based on participant units. Participants are generally entitled to the net of these contributions, withdrawals and allocations to the extent of their vesting in the account.
Vesting
Plan participants are fully vested in the balance of their accounts from employee contributions and earnings thereon. Plan participants, other than participants covered under certain collective bargaining agreements, become fully vested in Company matching contributions, and earnings thereon, upon completion of three years of service. RAC participants fully vest in Company contributions, and earnings thereon, upon completion of three years of service.
Investment Options
Upon enrollment in the Plan, each participant directs his or her employee and Company contributions to be invested in the investment funds described below. The investment funds are managed by professional investment managers appointed by Plan management.
Participants may generally change their investment elections daily. Existing account balances can generally be transferred daily between investment funds, subject to certain restrictions.
Contributions deposited into each investment fund are used to purchase units of that fund based on unit values that are updated daily prior to any Plan transactions. Plan transactions include contributions, withdrawals, distributions and transfers. The value of each participant’s account within each fund depends on two factors: the number of units purchased to date and the current value of each unit.
U.S. Equity Fund
—
The U.S. Equity Fund consists predominantly of holdings in large and medium-sized U.S. company stocks. The fund’s objective is to achieve a high total return through long-term growth of capital and the reinvestment of current income.
U.S. Fixed-Income Fund
—
The U.S. Fixed-Income Fund primarily consists of holdings in marketable, fixed-income securities rated within the three highest investment grades assigned by Moody’s Investor Services or Standard & Poor’s Corporation, U.S. Treasury or federal agency obligations, or cash equivalent instruments. The fund invests in a range of fixed-income securities that mature, on average, in eight to ten years. The U.S. Fixed-Income Fund provides direct ownership of fixed income securities.
Stable Value Account (
“
Stable Value Account
”
)
—
Investments in the Stable Value Account primarily include guaranteed investment contracts (“GICs”), cash and cash equivalents. See Note 5 for further information on GICs.
Northrop Grumman Fund (
“
NG Stock Fund
”
)
—
The NG Stock Fund invests primarily in Northrop Grumman Corporation common stock.
Balanced Fund
—
The Balanced Fund is designed to provide investors with a diversified portfolio consisting of targeted proportions of fixed-income securities (35 percent), U.S. equities (45 percent), and international equities (20 percent). The fund seeks to exceed the return of the bond market and approach the return of the stock market, but with less risk than an investment only in stocks.
International Equity Fund
—
The International Equity Fund consists of stocks of a diversified group of companies in developed countries outside of the U.S. The fund’s objectives are capital appreciation over the long term, along with current income (dividends).
Small Cap Fund
—
The Small Cap Fund consists of a diversified group of U.S. companies with lower market capitalization and higher expected revenue growth than the large, well-established companies that make up the S&P 500 Index. The fund seeks to provide capital appreciation over the long term, rather than current income.
Emerging Markets Fund
—
The Emerging Markets Fund consists of a diversified portfolio of stocks issued by companies based in developing countries. The fund’s objective is capital appreciation over the long term.
Retirement Path Portfolios
—
Each retirement path is a broadly diversified portfolio of funds consisting of equities, fixed-income securities and other investments tailored to the investment time horizon of the investor. The name of each strategy reflects the year when the investor will most likely begin to draw interest and/or principal out of their portfolio. The portfolios are the Retirement Path, the 2020 Retirement Path, the 2025 Retirement Path, the 2030 Retirement Path, the 2035 Retirement Path, the 2040 Retirement Path, the 2045 Retirement Path, the 2050 Retirement Path, the 2055 Retirement Path and the 2060 Retirement Path.
The Plan also offers a participant-directed brokerage account. The brokerage account enables participants to invest in a range of investment options beyond the core investment options and retirement path funds offered by the Plan.
All funds may include common/collective trust (“CCT”) funds. These funds manage pooled trust accounts, which group assets together to develop generally larger and more diversified portfolios. These funds may also include short-term investment funds.
Notes Receivable from Participants
Participants may borrow from their fund accounts in accordance with the Plan document, with loans of a minimum of $1,000 up to a maximum equal to the lesser of $50,000 reduced by the highest outstanding loan balance over the past 12 months, or 50 percent of their vested account balance. Loans are secured by the balance in the participant's account and are issued at an interest rate set at the prime rate plus one percent. Repayments are made from payroll deductions (for active employees) or other forms of payment (for former employees or employees on a leave of absence). As of
December 31, 2018
and
2017
, participant loans were outstanding with maturities through
2034
and interest rates ranging from
4
percent to
11.5
percent.
Payment of Benefits
Upon termination of employment with the Company (including termination due to death, disability, or retirement), a participant may receive a lump-sum payment of his or her entire account balance (net of any outstanding loan balances). Otherwise, distributions generally begin on a participant's mandatory commencement date. Participants may roll over account balances to individual retirement accounts or another employer’s qualified retirement plan.
Distributions from the NG Stock Fund may be paid in cash, stock, or a combination of the two, depending on the participant’s election.
Withdrawals
A participant may withdraw all or a portion of his or her vested account in accordance with the Plan document, which provides for different rules for withdrawals based on whether or not the participant has reached age 59
1
/
2
.
Forfeited Accounts
For the years ended
December 31, 2018
and
2017
, Plan forfeitures totaled $11.3 million and $7.3 million, respectively. Forfeited amounts may be used to reduce Company matching contributions or to offset Plan expenses. During the year ended
December 31, 2018
, employer matching contributions were reduced by $11.0 million due to forfeitures. No forfeitures were used to offset Plan expenses during
2018
.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ materially from those estimates.
Risks and Uncertainties
The Plan invests in various securities, including U.S. and foreign government securities, corporate debt instruments, domestic equities, asset-backed securities, mortgage-backed securities, mutual funds, common/collective trust funds and a stable value account. Investment securities are exposed to various risks, including interest rate and credit risk, overall market volatility, and risks related to U.S. and foreign government stability. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities may occur in the near term, and those changes could materially affect the amounts reported in the financial statements.
Fair Value of Financial Instruments
The Plan measures the fair value of its financial instruments using observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
These two types of inputs create the following fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets. Level 1 investments of the DC Master Trust and the Plan primarily include cash equivalents, short-term investment funds and U.S. and international equities.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 2 investments of the DC Master Trust and the Plan primarily include fixed-income securities based on broker quotes or model-derived valuations.
Level 3 - Significant inputs to the valuation model are unobservable. There were no Level 3 investments in the Plan during the years ended
December 31, 2018
and
2017
.
Investment Valuation and Income Recognition
The Plan’s investments are stated at fair value with the exception of GICs held by the Plan through the Stable Value Account of the DC Master Trust, which are stated at contract value. Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (see Note 4). The GICs are stated at contract value because contract value is the amount that would be received by participants if they were to initiate permitted transactions under the terms of the Plan. Contract value is equal to the value of initial deposited principal, plus accumulated interest and additional deposits, minus withdrawals and expenses (see Note 5). Plan management provides direction and oversight of the valuation process. The fair value of Plan investments, including the underlying investments in the DC Master Trust
and BrokerageLink Account, is determined as follows:
Investments in U.S. and international equity securities, which include common and preferred stock, are valued at the last reported sales price of the stock on the active market on which the securities are traded on the last business day of the Plan year. Investments in CCT funds are valued based on the net asset value (“NAV”) derived by investment managers, as a practical expedient. Short-term investment funds are valued at amortized cost, which approximates fair value. Fair values for other securities, including U.S. and foreign government, corporate debt, asset-backed and other fixed-income securities, which are not exchange-traded, are valued using third-party pricing services. These pricing services use, for example, recent broker-dealer quotations or model-based pricing methods that use significant observable inputs such as relevant yield curves, credit information of the underlying security, prepayment projections, cash flows and other security characteristics to determine fair value as of the last trading day of the year. If market values are not available from the above sources, the fair value is provided to the Trustee by the party with authority to trade in such securities (investment managers or Plan management, as applicable).
All securities and cash or cash equivalents are quoted in the local currency and then converted into U.S. dollars. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Broker commissions, transfer taxes, and other charges and expenses incurred in connection with the purchase, sale, or other disposition of securities or other investments are added to the cost of such securities or other investments, or are deducted from the proceeds of the sale or other disposition thereof, as appropriate. Taxes, if any, on fund assets, or on any gain resulting from the sale or other disposition of such assets, or on the earnings of the funds, are apportioned among the participants whose interests in the Plan are affected, and the share of such taxes apportioned to each such person is charged against his or her account in the Plan.
In performing any valuations or calculations required of the Trustee, the Trustee relies on the prices provided by pricing sources, the investment managers, Plan management or the participant’s broker as a certification as to the value.
The DC Master Trust allocates investment income, realized gains and losses, and unrealized appreciation and depreciation on the underlying securities to the participating plans daily based upon the market value of each plan’s investment. The realized gain or loss on investments is the difference between the proceeds received and the average cost of investments sold. The unrealized appreciation or depreciation is the aggregate difference between the current fair market value and the cost of investments.
Notes Receivable from Participants
Participant loans are measured at their outstanding balances, plus accrued interest.
Expenses
Plan expenses are paid by the Plan or the Plan sponsor as provided in the Plan document. Fees incurred by the Plan for investment management services of
$
5.3
million
are presented as an offset to total investment income in the Statement of Changes in Net Assets Available for Benefits for the year ended December 31, 2018.
Payment of Benefits
Benefit payments to participants are recorded upon distribution. Amounts allocated to accounts of participants who have elected to withdraw funds from the Plan but have not yet been paid were
$4.9
million and $4.4 million at
December 31, 2018
and
2017
,
respectively. These amounts continue to accrue investment earnings (losses) until paid
.
Accounting Standards Updates
In February 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-06,
Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting
(a consensus of the Emerging Issues Task Force). The amendments in ASU 2017-06 clarify presentation requirements for a plan’s interest in a master trust and require more detailed disclosures of the plan’s interest in the master trust. ASU 2017-06 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. Plan management does not expect the adoption to have a material impact on the financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820) - Disclosure Framework -
Changes to the Disclosure Requirements for Fair Value Measurement
,
which amends certain disclosure requirements of ASC 820. ASU 2018-13 removed the requirement to disclose the amount of and reasons for transfers between level 1 and level 2 of the fair value hierarchy as well as the policy for timing of transfers between levels. The ASU also modified the disclosure for investments in certain entities that calculate NAV to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the Plan or announced the timing publicly. It also clarified the measurement uncertainty disclosure to communicate information about the uncertainty in measurement as of the reporting date. The guidance is effective for fiscal years beginning after December 15, 2019. Plan management is currently evaluating the impact of this ASU on the financial statements but does not expect the adoption to have a material impact.
3. INVESTMENTS
The Plan’s investments consist of a proportionate interest in certain investments held by the DC Master Trust. Those investments are stated at fair value determined and reported by the Trustee in accordance with the DC Master Trust Agreement established by the Company.
Plan assets represent
98
percent of total net assets reported by the Trustee of the DC Master Trust as of
December 31, 2018
and
2017
. The remaining assets in the DC Master Trust relate to the Northrop Grumman Financial Security and Savings Program.
The net assets of the DC Master Trust as of
December 31, 2018
and
2017
,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in thousands
|
|
2018
|
|
2017
|
|
Assets
|
|
|
|
|
|
At fair value:
|
|
|
|
|
|
Cash equivalents and short-term investment fund
|
|
$
|
265,773
|
|
|
$
|
62,930
|
|
|
U.S. and international equities
|
|
2,721,409
|
|
|
3,706,850
|
|
|
Common/collective trust funds
|
|
13,316,552
|
|
|
14,558,924
|
|
|
Fixed-income securities
|
|
|
|
|
|
U.S. and foreign government
|
|
389,996
|
|
|
441,105
|
|
|
Corporate debt
|
|
303,915
|
|
|
319,595
|
|
|
Asset-backed
|
|
345,724
|
|
|
348,814
|
|
|
Collateral held under securities lending agreements
|
|
520,250
|
|
|
780,851
|
|
|
Assets on loan to third-party borrowers
|
|
104,837
|
|
|
40,126
|
|
|
Total investments at fair value
|
|
17,968,456
|
|
|
20,259,195
|
|
|
At contract value:
|
|
|
|
|
|
|
|
Guaranteed investment contracts
|
|
3,318,654
|
|
|
3,315,474
|
|
|
Total investments at contract value
|
|
3,318,654
|
|
|
3,315,474
|
|
|
Receivable from broker for investments sold
|
|
155
|
|
|
181
|
|
|
Dividends, interest, taxes and other receivables
|
|
7,786
|
|
|
7,157
|
|
|
Total assets
|
|
21,295,051
|
|
|
23,582,007
|
|
|
Liabilities
|
|
|
|
|
|
Collateral held under securities lending agreements
|
|
520,250
|
|
|
780,851
|
|
|
Due to broker for securities purchased
|
|
6,323
|
|
|
39,598
|
|
|
Total liabilities
|
|
526,573
|
|
|
820,449
|
|
|
Net assets of the DC Master Trust
|
|
$
|
20,768,478
|
|
|
$
|
22,761,558
|
|
Investment loss for the DC Master Trust for the Plan year ended
December 31, 2018
,
is as follows:
|
|
|
|
|
|
|
|
$ in thousands
|
2018
|
|
Investment (loss) income
|
|
|
Net depreciation of investments
|
$
|
(1,716,585
|
)
|
|
Interest
|
121,511
|
|
|
Dividends
|
54,880
|
|
|
Other income
|
21,064
|
|
|
Stock loan income
|
200
|
|
|
Investment manager fees
|
(5,336
|
)
|
|
Total investment loss
|
$
|
(1,524,266
|
)
|
4. FAIR VALUE MEASUREMENTS
Certain investments that are measured at fair value using NAV per share (or its equivalent) as a practical expedient are not required to be categorized in the fair value hierarchy tables. The total fair value of these investments is included in the tables below to permit reconciliation of the fair value hierarchy to amounts presented in the investments footnote (Note 3). These investments have no unfunded commitments, redemption notice periods greater than seven days or other redemption restrictions. As of December 31, 2018 and 2017, there were no investments expected to be sold at a value materially different than NAV.
The table below sets forth the fair value of the investments by level, measured on a recurring basis and held by the DC Master Trust as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$ in thousands
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
DC Master Trust at fair value
|
|
|
|
|
|
|
|
Cash equivalents and short-term investment fund
|
|
$
|
1,319
|
|
|
$
|
264,454
|
|
|
$
|
265,773
|
|
|
U.S. and international equities
|
|
2,721,409
|
|
|
—
|
|
|
2,721,409
|
|
|
Fixed-income securities
|
|
|
|
|
|
|
|
U.S. and foreign government
|
|
—
|
|
|
484,883
|
|
|
484,883
|
|
|
Corporate debt
|
|
—
|
|
|
313,865
|
|
|
313,865
|
|
|
Asset-backed
|
|
—
|
|
|
345,724
|
|
|
345,724
|
|
|
Collateral held under securities lending agreements
|
|
—
|
|
|
520,250
|
|
|
520,250
|
|
|
Common/collective trust funds valued using NAV as a practical expedient
|
|
|
|
|
|
13,316,552
|
|
|
Total DC Master Trust at fair value
|
|
$
|
2,722,728
|
|
|
$
|
1,929,176
|
|
|
$
|
17,968,456
|
|
The table below sets forth the fair value of the BrokerageLink Account and short-term investment fund, by level, measured on a recurring basis, and held by the Plan as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$ in thousands
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Other Plan investments
|
|
|
|
|
|
|
|
BrokerageLink Account
|
|
$
|
1,625,900
|
|
|
$
|
—
|
|
|
$
|
1,625,900
|
|
|
State Street Bank and Trust Company short-term investment fund
|
|
—
|
|
|
681
|
|
|
681
|
|
|
Total other Plan investments
|
|
$
|
1,625,900
|
|
|
$
|
681
|
|
|
$
|
1,626,581
|
|
The table below sets forth the fair value of the investments by level, measured on a recurring basis and held by the DC Master Trust as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$ in thousands
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
DC Master Trust at fair value
|
|
|
|
|
|
|
|
Cash equivalents and short-term investment fund
|
|
$
|
11,366
|
|
|
$
|
51,564
|
|
|
$
|
62,930
|
|
|
U.S. and international equities
|
|
3,706,850
|
|
|
—
|
|
|
3,706,850
|
|
|
Fixed-income securities
|
|
|
|
|
|
|
|
U.S. and foreign government
|
|
—
|
|
|
468,311
|
|
|
468,311
|
|
|
Corporate debt
|
|
—
|
|
|
332,515
|
|
|
332,515
|
|
|
Asset-backed
|
|
—
|
|
|
348,814
|
|
|
348,814
|
|
|
Collateral held under securities lending agreements
|
|
—
|
|
|
780,851
|
|
|
780,851
|
|
|
Common/collective trust funds valued using NAV as a practical expedient
|
|
|
|
|
|
14,558,924
|
|
|
Total DC Master Trust at fair value
|
|
$
|
3,718,216
|
|
|
$
|
1,982,055
|
|
|
$
|
20,259,195
|
|
The table below sets forth the fair value of the BrokerageLink Account and short-term investment fund, by level, measured on a recurring basis, and held by the Plan as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$ in thousands
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Other Plan investments
|
|
|
|
|
|
|
|
BrokerageLink Account
|
|
$
|
1,742,226
|
|
|
$
|
—
|
|
|
$
|
1,742,226
|
|
|
State Street Bank and Trust Company short-term investment fund
|
|
—
|
|
|
665
|
|
|
665
|
|
|
Total other Plan investments
|
|
$
|
1,742,226
|
|
|
$
|
665
|
|
|
$
|
1,742,891
|
|
There were no transfers of investments between levels during
2018
and
2017
.
5. INTEREST IN GUARANTEED INVESTMENT CONTRACTS
Guaranteed investment contracts consist of fully benefit-responsive wrapper contracts that provide specified interest rates. Realized and unrealized gains and losses on the underlying assets are not reflected immediately in the net assets of the plan, but are amortized as adjustments to the future interest-crediting rate over a period equal to or less than the duration of the underlying assets. Primary variables affecting the future crediting rate of the wrapper contracts include the current yield of underlying assets, the duration of underlying assets, and the difference between the market value and contract value of underlying assets.
Investments held in guaranteed investment contracts (at contract value) totaled
$3.3 billion
as of December 31, 2018 and 2017.
Certain events, such as Plan termination or a plan merger initiated by the Plan sponsor, may limit the ability of the Plan to transact at contract value or may allow for the termination of the wrapper contract at less than contract value. Plan management believes that the occurrence of events that may limit the ability of the Plan to transact at less than contract value is not probable.
6. THIRD PARTY BORROWINGS
The DC Master Trust participates in a securities lending program with State Street through the Fixed Income Fund and the separately managed Stable Value Account. The program allows State Street to loan securities, which are assets of the DC Master Trust, to approved borrowers. Such assets could be subject to sale restrictions in the event security lending agreements are terminated and the securities have not been returned to the DC Master Trust. DC Master Trust assets on loan to third-party borrowers under security lending agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
$ in thousands
|
|
2018
|
|
2017
|
|
Underlying securities of guaranteed investment contracts
|
|
$
|
405,701
|
|
|
$
|
724,538
|
|
|
Fixed-income securities
|
|
|
|
|
|
|
|
U.S. and foreign government
|
|
94,887
|
|
|
27,206
|
|
|
Corporate debt
|
|
9,950
|
|
|
12,920
|
|
|
Total fixed-income securities
|
|
104,837
|
|
|
40,126
|
|
|
DC Master Trust Assets on loan to third-party borrowers
|
|
$
|
510,538
|
|
|
$
|
764,664
|
|
State Street requires borrowers, pursuant to a security loan agreement, to deliver collateral to secure each loan. The initial collateral required is 102 percent of the fair value of U.S. securities borrowed and 105 percent for foreign equity securities borrowed. The DC Master Trust bears the risk of loss with respect to any unfavorable change in fair value of the invested cash collateral. However, the borrower bears the risk of loss related to the decrease in the fair value of the securities collateral and, therefore, may have to deliver additional cash or securities to maintain the required collateral. In U.S. markets, State Street generally enters into a netting arrangement with a borrower which permits the netting of mark-to-market exposure for transactions within the lending program with that borrower. Such arrangements would cover lending transactions with the borrower and reverse repurchase agreements of cash collateral involving investment of the collateral. State Street may also negotiate a right of offset in the event of borrower default. In the event of borrower default, State Street indemnifies the DC Master Trust against any loss of the amount loaned. As of December 31, 2018, cash and non-cash collateral associated with securities on loan totaled $23 million and $497 million, respectively. As of December 31, 2017, cash and non-cash collateral associated with securities on loan totaled $113 million and $668 million, respectively. All of the securities on loan are collateralized at more than 100%.
7. EXEMPT PARTY-IN-INTEREST TRANSACTIONS
Party-in-interest transactions through the DC Master Trust include the purchase and sale of investments managed by affiliates of the Plan's Trustee and transactions involving Northrop Grumman Corporation common stock. The NG Stock Fund within the DC Master Trust held
11.1 million
and
12.1 million
shares of common stock of the Company with a fair value of
$2.7 billion
and
$3.7 billion
at
December 31, 2018
and
2017
, respectively. The Plan’s interest in the net assets of the NG Stock Fund was approximately 99.4 percent at
December 31, 2018
and
2017
. During
2018
, the NG Stock Fund earned dividends of
$54.9 million
from its investment in Northrop Grumman Corporation common stock.
State Street affiliates managed $0.7 million of Plan assets held in a short-term investment fund as of
December 31, 2018
and
2017
. The Plan paid $1.1 million to the Trustee in fees during the year ended
December 31, 2018
.
The DC Master Trust utilized various investment managers to manage its net assets. These net assets may be invested into funds also managed by the investment managers. Therefore, these transactions qualify as party-in-interest transactions.
The Plan had transactions with the Trustee’s short-term investment fund, a liquidity pooled fund in which participation commences and terminates on a daily basis. In Plan management’s opinion, fees paid during the year for services rendered by parties-in-interest were based upon customary and reasonable rates for such services.
8. PLAN TERMINATION
Although it has not expressed any intention to do so, the Company has the right under the Plan provisions to discontinue its contributions at any time and to terminate the Plan subject to ERISA provisions. In the event of a Plan termination, the interests of all participants in their accounts would become 100 percent vested.
9. FEDERAL INCOME TAX STATUS
The Plan obtained its latest determination letter dated December 7, 2015, in which the Internal Revenue Service (the “IRS”) determined that the Plan’s terms at the time of the determination letter application were in compliance with applicable sections of the Code and, therefore, the related trust is exempt from taxation.
In December 2016, the IRS began publishing a Required Amendments List for individually designed plans which specifies changes in qualification requirements. The list is published annually and requires plans to be amended for each item on the list, as applicable, to retain its tax exempt status.
Management believes the Plan and related trust are currently designed and operated in compliance with the applicable requirements of the Code. Therefore, no provision for income taxes has been included in the Plan’s financial statements.
10. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
A reconciliation of net assets available for benefits per the financial statements to Form 5500 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
$ in thousands
|
|
2018
|
|
2017
|
|
Net assets available for benefits per the financial statements
|
|
$
|
22,179,580
|
|
|
$
|
24,194,430
|
|
|
Less amounts allocated to withdrawing participants
|
|
(4,934
|
)
|
|
(4,421
|
)
|
|
Net assets available for benefits per Form 5500
|
|
$
|
22,174,646
|
|
|
$
|
24,190,009
|
|
A reconciliation of benefits paid to participants per the financial statements to Form 5500 for the year ended
December 31, 2018
, is as follows:
|
|
|
|
|
|
|
|
$ in thousands
|
|
|
Benefits paid to participants per the financial statements
|
$
|
1,783,236
|
|
|
Add amounts allocated to withdrawing participants at December 31, 2018
|
4,934
|
|
|
Less amounts allocated to withdrawing participants at December 31, 2017
|
(4,421
|
)
|
|
Benefits paid to participants per Form 5500
|
$
|
1,783,749
|
|
Amounts allocated to withdrawing participants are recorded on Form 5500 for benefit claims that have been processed and approved for payment prior to
December 31, 2018
and
2017
, but not yet paid as of that date.
11. SUBSEQUENT EVENTS
On June 6, 2018 (the “Merger date”), the Company completed its previously announced acquisition of Orbital ATK, Inc. (“Orbital ATK”). On the Merger date, Orbital ATK became a wholly-owned subsidiary of the Company and its name was changed to Northrop Grumman Innovation Systems, Inc. Effective January 1, 2019, the Orbital ATK, Inc. 401(k) Plan (“Orbital ATK Plan”) merged into the Plan. In January 2019, participant account balances in the Orbital ATK Plan of approximately $3.0 billion were transferred to the Plan.
* * * * * *