STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS
Stock Compensation Plans
At December 31, 2013, Northrop Grumman had stock-based compensation awards outstanding under the following plans: the 2001 Long-Term Incentive Stock Plan (2001 Plan) and the 2011 Long-Term Incentive Stock Plan (2011 Plan), both applicable to employees, and the 1993 Stock Plan for Non-Employee Directors (1993 SPND) and the 1995 Stock Plan for Non-Employee Directors (1995 SPND) as amended. All of these plans were approved by the company’s shareholders. The company has historically issued new shares to satisfy award grants.
Employee Plans – In May 2011, the shareholders of the company approved the company’s new 2011 Plan, which replaced the expired 2001 Plan. The 2011 Plan permit grants to key employees of three general types of stock incentive awards: stock options, stock appreciation rights (SARs), and stock awards. Each stock option grant is made with an exercise price either at the closing price of the stock on the date of grant (market options) or at a premium over the closing price of the stock on the date of grant (premium options). Outstanding stock options granted prior to 2008 generally vest in 25 percent increments over four years from the grant date, and grants outstanding expire ten years after the grant date. Stock options granted after January 1, 2008, vest in 33 percent increments over three years from the grant date, and grants outstanding expire seven years after the grant date. No SARs have been granted under either plan. Stock awards in the form of restricted performance stock rights and restricted stock rights are granted to key employees without payment to the company. The 2011 Plan also provides equity-based award grants to non-employee directors.
Under the 2011 Plan, the company is authorized to issue or transfer shares of common stock pursuant to the types of awards mentioned above. The 2011 Plan authorized 39.1 million new shares plus 6.9 million shares from the 2001 LTISP that were previously authorized and available to be issued at the date the 2001 Plan expired. Under the terms of the 2011 Plan, in the event that outstanding awards under the 2001 Plan expire or terminate without being exercised or paid, as the case may be, such shares (the Forfeited Shares) will become available for award under the 2011 Plan.
Recipients of restricted performance stock rights earn shares of stock, based on financial metrics determined by the board of directors in accordance with the plan. Depending on whether performance objectives are met, recipients could forfeit up to 100 percent of the original grant or could earn up to 200 percent of the original grant. Restricted performance stock rights and restricted stock rights issued under either plan generally vest after three or four years. Termination of employment can result in forfeiture of some or all of the benefits extended. Shares issued under the 2011 Plan, other than for stock options, stock appreciation rights and the Forfeited Shares, will be counted against the 2011 Plan’s aggregate share limit as 4.5 shares for every one share actually issued in connection with the award; any shares issued for stock options, stock appreciation rights and the Forfeited Shares will be counted against the remaining shares on a one-for-one basis.
As of December 31, 2013, 28 million shares are available for grant under the 2011 Plan.
Non-Employee Director Plans – Under the 2011 Plan, each non-employee director must defer a portion of their compensation into a stock unit account (Automatic Stock Units). The Automatic Stock Units accrued under the 2011 Plan and the 1993 SPND are paid out in the form of common stock at the conclusion of the director's board service, or earlier, as specified by the director, if he or she has five or more years of service. In addition, each director may elect to defer payment of all or a portion of his or her remaining cash retainer or committee retainer fees into a stock unit account (Elective Stock Units). The Elective Stock Units are paid at the conclusion of board service or earlier as specified by the director, regardless of years of service. Directors are credited with dividend equivalents in connection with the accumulated stock units until shares of common stock related to such stock units are issued. Since all directors are eligible to receive awards under the 2011 LTISP, shares from this plan are available for future director awards following the same share counting limits as described for the employee plans. Awards under the 2011 Plan are made pursuant to the Northrop Grumman Corporation Equity Grant Program for Non-Employee Directors under the 2011 Plan, which sets forth the terms and conditions for the awards of stock units as described above.
The 1995 SPND provided for an annual grant of nonqualified stock options to each non-employee director. Since June 2005, no new grants have been issued under that 1995 SPND. Each grant of stock options under the 1995 SPND was made at the closing market price on the date of the grant and expires ten years from the date of grant. As of December 31, 2013, three non-employee directors held unexercised stock options.
Compensation Expense
Stock-based compensation expense and the related tax benefits for the years ended December 31, 2013, 2012 and 2011, were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31 |
$ in millions | 2013 | | 2012 | | 2011 |
Stock-based compensation expense: | | | | | |
Stock options |
| $ 4 |
| |
| $ 10 |
| |
| $ 14 |
|
Stock awards | 140 |
| | 173 |
| | 125 |
|
Total stock-based compensation expense | 144 |
| | 183 |
| | 139 |
|
Tax benefits from the exercise of stock options | 25 |
| | 26 |
| | 18 |
|
Tax benefits from the issuance of stock awards | 16 |
| | 19 |
| | 37 |
|
Total tax benefits recognized for stock-based compensation |
| $ 41 |
| |
| $ 45 |
| |
| $ 55 |
|
At December 31, 2013, there was $102 million of unrecognized compensation expense related to unvested awards granted under the company’s stock-based compensation plans, predominantly related to stock awards. These amounts are expected to be charged to expense over a weighted-average period of 1.3 years.
Stock Options
There were no stock options issued in 2013 or 2012. Stock option activity for the year ended December 31, 2013, was as follows: |
| | | | | | | | | | | | | |
| | Shares
under Option
(in thousands) | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value
($ in millions) |
Outstanding at January 1, 2013 | | 6,271 |
| |
| $58 |
| | 2.9 years | |
| $66 |
|
Exercised | | (4,522 | ) | | 59 |
| | | | |
Cancelled and forfeited | | (29 | ) | | 60 |
| | | | |
Outstanding at December 31, 2013 | | 1,720 |
| | 56 |
| | 2.6 years | | 101 |
|
Vested and expected to vest in the future at December 31, 2013 | | 1,716 |
| | 56 |
| | 2.6 years | | 101 |
|
Exercisable at December 31, 2013 | | 1,343 |
| |
| $55 |
| | 2.2 years | |
| $80 |
|
The total intrinsic value of exercised stock options during the years ended December 31, 2013, 2012 and 2011, was $118 million, $97 million and $46 million, respectively. Intrinsic value is measured using the fair market value at the date of exercise (for options exercised) or at December 31, 2013 (for outstanding options), less the applicable exercise price.
Stock Awards
Compensation expense for stock awards is measured at the grant date based on the fair value of the award and is recognized over the vesting period (generally three years). The fair value of stock awards and performance stock awards is determined based on the closing market price of the company’s common stock on the grant date. The fair value of market-based stock awards is determined at the grant date using a Monte Carlo simulation model. For purposes of measuring compensation expense for performance awards, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria.
Stock award activity for the years ended December 31, 2013, 2012 and 2011, is presented in the table below. Vested awards do not include any adjustments to reflect the final performance measure for issued shares.
|
| | | | | | | | | |
| | Stock
Awards
(in thousands) | | Weighted-
Average
Grant Date
Fair Value | | Weighted-
Average
Remaining
Contractual
Term (in years) |
Outstanding at January 1, 2011 | | 4,300 |
| |
| $53 |
| | 1.5 |
Granted | | 1,748 |
| | 63 |
| | |
Vested | | (1,824 | ) | | 42 |
| | |
Forfeited | | (350 | ) | | 50 |
| | |
Shipbuilding spin-off adjustment | | (252 | ) | | 47 |
| | |
Outstanding at December 31, 2011 | | 3,622 |
| |
| $58 |
| | 1.6 |
Granted | | 1,860 |
| | 60 |
| | |
Vested | | (1,800 | ) | | 55 |
| | |
Forfeited | | (204 | ) | | 59 |
| | |
Outstanding at December 31, 2012 | | 3,478 |
| |
| $61 |
| | 1.6 |
Granted | | 1,577 |
| | 64 |
| | |
Vested | | (1,323 | ) | | 60 |
| | |
Forfeited | | (312 | ) | | 62 |
| | |
Outstanding at December 31, 2013 | | 3,420 |
| |
| $61 |
| | 1.5 |
The company issued 3.4 million, 2.8 million and 1.4 million shares to employees in settlement of fully vested stock awards, which had total fair values at issuance of $226 million, $172 million and $87 million and grant date fair values of $105 million, $75 million and $101 million during the years ended December 31, 2013, 2012 and 2011, respectively. The differences between the fair values at issuance and the grant date fair values reflect the effects of the performance adjustments and changes in the fair market value of the company’s common stock.
In 2013, the company granted certain employees 0.5 million restricted stock rights (RSRs) and 1.1 million restricted performance stocks rights (RPSRs) under the company's long-term incentive stock plan, with a grant date aggregate fair value of $101 million. The majority of stock awards were granted on February 20, 2013. The RSRs will typically vest on the third anniversary of the grant date, while the RPSRs will vest and pay out based on the achievement of financial metrics for the three-year period ending December 31, 2015.
In 2014, the company expects to issue to employees approximately 2.5 million shares of common stock with a grant date fair value of $80 million, principally related to the 2011 RPSR awards that vested as of December 31, 2013. The ultimate amount of shares to be paid out is subject to approval by the Compensation Committee of the Board of Directors and may vary from this estimate.
Cash Awards
In 2013, the company granted certain employees cash units (CUs) and cash performance units (CPUs) with a minimum aggregate payout amount of $32 million and a maximum aggregate payout amount of $173 million. The majority of cash awards were granted on February 20, 2013. The CUs will vest and settle in cash on the third anniversary of the grant date, while the CPUs will vest and settle in cash based on the achievement of financial metrics for the three-year period ending December 31, 2015. At December 31, 2013, there was $108 million of unrecognized compensation expense related to cash awards.
