Northrop Grumman Announces Change in Pension Accounting
December 10 2018 - 4:33PM
Northrop Grumman Corporation (NYSE: NOC) is changing its method of
accounting for pension and other post-retirement benefits (OPEB) to
a more preferable method under U.S. GAAP. Beginning with Dec. 31,
2018 results, the company will adopt the mark-to-market (MTM)
method of accounting.
Under MTM accounting, the company now plans to recognize pension
and OPEB actuarial gains and losses, largely related to changes in
discount rates and differences between expected and actual plan
asset returns, in the fourth quarter of the year they are incurred
rather than amortizing them over time. The elimination of
amortization of gains and losses is expected to increase 2018
pre-tax earnings by $535 million before the fourth quarter 2018 MTM
adjustment. Assuming a 4.25 percent discount rate and zero percent
plan asset returns in 2018, the increase in 2018 pre-tax earnings
resulting from the elimination of amortization would be partially
offset by a fourth quarter 2018 MTM adjustment of approximately
$500 million. The actual fourth quarter 2018 MTM adjustment will
largely be determined based on actual 2018 plan asset returns and
the year-end discount rate.
For 2019, the adoption of the MTM method is expected to increase
the company's net FAS/CAS adjustment to $1.350 billion from $750
million, and increase pre-tax earnings by approximately $600
million, before any fourth quarter 2019 MTM adjustment. The
increase reflects the elimination of future amortization of
actuarial gains and losses.
Schedule 1 of this release updates the company's Oct. 24, 2018
pension information for the new accounting method. Schedule 2
provides the 2018 MTM adjustment's sensitivities to differences in
the discount rate and plan asset return assumptions described
above, and also provides FAS pension expense sensitivities for 2019
and beyond.
Northrop Grumman will provide recast prior period financial
statements, reflecting the effects of the adoption of the MTM
method as described above, when it reports its fourth quarter and
full year 2018 earnings results on January 31, 2019.
SCHEDULE 1
2018-2020 Pension Accounting Update (Excluding MTM
Adjustments)
|
As of October 24, 20181 |
Pension Accounting Update2,3 |
($ in millions) |
2018E |
|
2019E |
|
2020E |
2018E |
|
2019E |
|
2020E |
|
|
|
|
|
|
|
|
|
|
|
Total Net FAS/ CAS adjustment |
~1,110 |
|
~750 |
|
~825 |
~1,645 |
|
~1,350 |
|
~1,350 |
|
|
|
|
|
|
|
|
|
|
|
CAS |
~1,000 |
|
~850 |
|
~800 |
~1,000 |
|
~850 |
|
~800 |
|
|
|
|
|
|
|
|
|
|
|
FAS service expense |
~(405) |
|
~(400) |
|
~(350) |
~(405) |
|
~(400) |
|
~(350) |
|
|
|
|
|
|
|
|
|
|
|
FAS non-service benefit |
~515 |
|
~300 |
|
~375 |
~1,050 |
|
~900 |
|
~900 |
|
|
|
|
|
|
|
|
|
|
|
Required funding |
~90 |
|
~180 |
|
~270 |
~90 |
|
~180 |
|
~270 |
|
|
|
|
|
|
|
|
|
|
|
1 Assumes
a 4.18% discount rate for 2019 and 2020, 2018 plan asset return of
0%, and an 8% expected long-term rate of return for all years
presented, subject to change depending upon actual results. |
2 Assumes
a 4.25% discount rate for 2019 and 2020, 2018 plan asset return of
0%, and an 8% expected long-term rate of return for all years
presented, subject to change depending upon actual results. |
3 Updated
accounting treatment will include a MTM adjustment to be recorded
in Q4 of each year. |
|
SCHEDULE 2
2018 MTM Adjustment Sensitivities
($ in
millions) |
Change |
|
Inc/(Dec)
to Expense |
Discount rate |
|
|
|
|
+25 basis points |
|
~(1,000) |
|
-25 basis points |
|
~1,000 |
Plan asset returns |
|
|
|
|
+100 basis points |
|
~(300) |
|
-100 basis points |
|
~300 |
2019 and Beyond FAS Pension Expense
Sensitivities
($ in
millions) |
Change |
|
Inc/(Dec)
to Expense |
Discount rate |
|
|
|
|
+25 basis points |
|
~35 |
|
-25 basis points |
|
~(35) |
Plan asset returns |
|
|
|
|
+100 basis points |
|
~(25) |
|
-100 basis points |
|
~25 |
Northrop Grumman is a leading global security company providing
innovative systems, products and solutions in autonomous systems,
cyber, C4ISR, space, strike, and logistics and modernization to
customers worldwide. Please visit news.northropgrumman.com and
follow us on Twitter, @NGCNews, for more information.
Forward-Looking Statements
This press release contains statements, other than statements of
historical fact, that constitute “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act
of 1995. Words such as “will,” “expect,” “intend,” “may,” “could,”
“plan,” “project,” “forecast,” “believe,” “estimate,” “guidance,”
“outlook,” “anticipate,” “trends,” “goals” and similar expressions
generally identify these forward-looking statements.
Forward-looking statements include, among other things, statements
relating to our future financial condition, results of operations
and/or cash flows. Forward-looking statements are based upon
assumptions, expectations, plans and projections that we believe to
be reasonable when made, but which may change over time. These
statements are not guarantees of future performance and inherently
involve a wide range of risks and uncertainties that are difficult
to predict. Specific risks that could cause actual results to
differ materially from those expressed or implied in these
forward-looking statements include, but are not limited to, those
identified and discussed more fully in the section entitled “Risk
Factors” in our 2017 Annual Report on Form 10-K, the section
entitled “Risk Factors” in the Form 10-Q for the quarter ended June
30, 2018 and in other filings with the Securities and Exchange
Commission (SEC). You are urged to consider the limitations on, and
risks associated with, forward-looking statements and not unduly
rely on the accuracy of forward-looking statements. These
forward-looking statements speak only as of the date this release
is first issued or, in the case of any document incorporated by
reference, the date of that document. We undertake no obligation to
publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise, except
as required by applicable law.
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Contact: |
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Steve Movius (Investors) |
|
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703-280-4575 |
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steve.movius@ngc.com |
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