PENSION AND OTHER POSTRETIREMENT BENEFITS

Defined Contribution Plan

We sponsor a defined contribution savings plan, which allows our eligible employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. The plan includes several match contribution formulas which requires us to match a percentage of the employee contributions up to certain limits and make base contributions, generally totaling between 2.0% to 6.0% of employee eligible pay. Matching contributions and base contributions charged to expense were $80 million, $82 million and $58 million for fiscal 2017, 2016 and 2015, respectively, including both continuing and discontinued operations.

Deferred Compensation Plan

We also sponsor a supplemental executive retirement plan, which is a nonqualified deferred compensation arrangement for highly compensated employees (within the meaning of section 201(2) of ERISA). The plan obligations are funded by investments held in a Rabbi Trust.

The following table provides the fair value of our deferred compensation plan investments and liabilities by category and by fair value hierarchy level as of June 30, 2017:



	Total		Level 1

	(In millions)
Assets
Deferred compensation plan investments: ⁽¹⁾
Equity security	$	37	$	37
Investments Measured at NAV:
Corporate-owned life insurance	25
Equity fund	50
Total	75
Total fair value of deferred compensation plan assets	$	112

Liabilities
Deferred compensation plan liabilities: ⁽²⁾
Equity securities and mutual funds	$	46	$	46
Investments Measured at NAV:
Common/collective trusts and guaranteed investment contracts	80
Total fair value of deferred compensation plan liabilities	$	126


(1)	Represents investments held in a Rabbi Trust associated with our non-qualified deferred compensation plans, which we include in the “Other current assets” and “Other non-current assets” line items in our Consolidated Balance Sheet.

(2)

Primarily represents obligations to pay benefits under certain non-qualified deferred compensation plans, which we include in the “Compensation and benefits” and “Other long-term liabilities” line items in our Consolidated Balance Sheet. Under these plans, participants designate investment options (including money market, stock and fixed-income funds), which serve as the basis for measurement of the notional value of their accounts.

Defined Benefit Plans

Some of our employees participate in numerous defined benefit pension plans, and benefits for most participants under the terms of these plans are based on the employee’s years of service and compensation. We fund these plans as required by statutory regulations and through voluntary contributions. Some of our employees also participate in other postretirement defined benefit plans such as health care and life insurance plans.

The U.S. Salaried Retirement Plan (“U.S. SRP”) is our largest defined benefit pension plan, with assets valued at $4.4 billion and a projected benefit obligation of $5.6 billion as of June 30, 2017. Effective December 31, 2016, accruals under the U.S. SRP benefit formula were frozen for all employees and replaced with a 1% cash balance benefit formula for certain non-highly compensated employees.

Balance Sheet Information

Amounts recognized in our Consolidated Balance Sheet for defined benefit pension plans and other postretirement defined benefit plans (collectively, “defined benefit plans”) reflect the funded status of our plans. The following table provides a summary of the funded status of our defined benefit plans and the presentation of such balances within our Consolidated Balance Sheet:



	June 30, 2017									July 1, 2016
	Pension			Other Benefits			Total			Pension			Other Benefits			Total

	(In millions)									(In millions)
Fair value of plan assets	$	4,921		$	212		$	5,133		$	4,273		$	216		$	4,489
Projected benefit obligation	(6,140		)	(265		)	(6,405		)	(6,471		)	(311		)	(6,782		)
Funded status	(1,219		)	(53		)	(1,272		)	(2,198		)	(95		)	(2,293		)
Amounts reported within:
Other non-current assets	9			—			9			5			—			5
Compensation and benefits	(2		)	(1		)	(3		)	(2		)	—			(2		)
Defined benefit plans	$	(1,226	)	$	(52	)	$	(1,278	)	$	(2,201	)	$	(95	)	$	(2,296	)

A portion of our projected benefit obligation includes amounts that have not yet been recognized as expense (or reductions of expense) in our results of operations. Such amounts are recorded within accumulated other comprehensive loss until they are amortized as a component of net periodic benefit cost. The following table provides a summary of pre-tax amounts recorded within accumulated other comprehensive loss:



	June 30, 2017							July 1, 2016
	Pension		Other Benefits			Total		Pension		Other Benefits			Total

	(In millions)							(In millions)
Net actuarial loss (gain)	$	262	$	(28	)	$	234	$	546	$	11		$	557
Net prior service cost (credit)	2		(1		)	1		3		(1		)	2
	$	264	$	(29	)	$	235	$	549	$	10		$	559

The following table provides a roll-forward of the projected benefit obligations for our defined benefit plans:



	2017									2016
	Pension			Other Benefits			Total			Pension			Other Benefits			Total

	(In millions)									(In millions)
Change in benefit obligation
Benefit obligation at beginning of fiscal year	$	6,471		$	311		$	6,782		$	6,493		$	445		$	6,938
Service cost	58			1			59			75			1			76
Interest cost	184			8			192			245			13			258
Actuarial loss (gain)	(160		)	(32		)	(192		)	303			(2		)	301
Prior service cost (credit)⁽¹⁾	—			—			—			3			(121		)	(118		)
Benefits paid	(376		)	(22		)	(398		)	(358		)	(24		)	(382		)
Settlements⁽²⁾	—			—			—			(244		)	—			(244		)
Special termination benefits	—			—			—			1			—			1
Expenses paid	(34		)	—			(34		)	(30		)	—			(30		)
Curtailments⁽³⁾⁽⁴⁾	—			(1		)	(1		)	(2		)	(1		)	(3		)
Foreign exchange	(3		)	—			(3		)	(15		)	—			(15		)
Benefit obligation at end of fiscal year	$	6,140		$	265		$	6,405		$	6,471		$	311		$	6,782

(1) We discontinued certain significantly underfunded post-employment benefit plans effective December 31, 2015. Under GAAP, this resulted in a negative plan amendment, curtailment and settlement during the year.

(2) We made lump sum distributions to participants covered under one of the Exelis Inc. excess pension plans that became payable within 90 days from the close of the acquisition on May 29, 2015. These distributions resulted in a settlement during the quarter ended October 2, 2015 and a net liability reduction of $244 million.

(3) We discontinued operations at one of our facilities during fiscal 2016, with the facility consolidation completed during the quarter ended July 1, 2016. Under GAAP, this resulted in a curtailment during the quarter ended January 1, 2016, and a net pension liability reduction of $2 million.


(4)	We divested IT Services during fiscal 2017, which resulted in a curtailment under the Salaried Retiree Medical Plan.

The following table provides a roll-forward of the assets and the ending funded status of our defined benefit plans:



	2017									2016
	Pension			Other Benefits			Total			Pension			Other Benefits			Total

	(In millions)									(In millions)
Change in plan assets
Plan assets at beginning of fiscal year	$	4,273		$	216		$	4,489		$	4,500		$	257		$	4,757
Actual return on plan assets	470			22			492			1			(1		)	—
Employer contributions	591			(4		)	587			420			1			421
Benefits paid	(376		)	(22		)	(398		)	(358		)	(25		)	(383		)
Settlements	—			—			—			(244		)	—			(244		)
Expenses paid	(34		)	—			(34		)	(30		)	—			(30		)
Foreign exchange loss	(3		)	—			(3		)	(16		)	—			(16		)
Other⁽¹⁾	—			—			—			—			(16		)	(16		)
Plan assets at end of fiscal year	$	4,921		$	212		$	5,133		$	4,273		$	216		$	4,489

Funded status at end of fiscal year	$	(1,219	)	$	(53	)	$	(1,272	)	$	(2,198	)	$	(95	)	$	(2,293	)

(1) We discontinued certain significantly underfunded post-employment benefit plans effective December 31, 2015. As a result, the remaining assets of the Employee Benefit Trust were designated for other employee benefit costs.

The accumulated benefit obligation for all defined benefit pension plans was $6.1 billion at June 30, 2017. The following table provides information for defined benefit pension plans with an accumulated benefit obligation in excess of plan assets:



	June 30, 2017		July 1, 2016
	(In millions)		(In millions)
Projected benefit obligation	$	6,061	$	6,390
Accumulated benefit obligation	6,061		6,379
Fair value of plan assets	4,833		4,187

Income Statement Information

The following table provides the components of net periodic benefit income and other amounts recognized in other comprehensive income for fiscal 2017, 2016, and 2015 as they pertain to our defined benefit plans:



	Pension									Other Benefits
	2017			2016			2015			2017			2016			2015

	(In millions)
Net periodic benefit income⁽¹⁾
Service cost	$	58		$	75		$	7		$	1		$	1		$	1
Interest cost	184			245			23			8			13			2
Expected return on plan assets	(340		)	(347		)	(32		)	(17		)	(18		)	(2		)
Amortization of prior service credit	—			—			—			—			(5		)	(13		)
Amortization of net actuarial loss	1			1			1			—			1			6
Net periodic benefit income	(97		)	(26		)	(1		)	(8		)	(8		)	(6		)
Effect of curtailments, settlements or special termination benefits⁽²⁾	—			1			—			—			(121		)	—
Total net periodic benefit income	$	(97	)	$	(25	)	$	(1	)	$	(8	)	$	(129	)	$	(6	)
Other changes in plan assets and benefit obligations recognized in other comprehensive loss (income)
Net actuarial loss (gain)	$	(284	)	$	645		$	(117	)	$	(38	)	$	15		$	(5	)
Prior service cost (credit)⁽²⁾	—			3			—			—			(121		)	(19		)
Amortization of prior service credit	—			—			—			—			126			13
Amortization of net actuarial loss	(1		)	(1		)	(1		)	—			(2		)	(6		)
Total change recognized in other comprehensive loss (income)	(285		)	647			(118		)	(38		)	18			(17		)
Total impact from net periodic benefit cost and changes in other comprehensive loss (income)	$	(382	)	$	622		$	(119	)	$	(46	)	$	(111	)	$	(23	)

(1) Net periodic benefit income presented in this table includes both continuing and discontinued operations. $2 million and $4 million of the service cost component of net periodic benefit income is included as a component of the “Discontinued operations, net of income taxes” line item in our Consolidated Statement of Income for fiscal 2017 and fiscal 2016, respectively.

(2) We discontinued certain significantly underfunded post-employment benefit plans effective December 31, 2015. Under GAAP, this resulted in a negative plan amendment, curtailment and settlement during fiscal 2016.

Defined Benefit Plan Assumptions

The determination of the assumptions related to defined benefit plans are based on the provisions of the applicable accounting pronouncements, review of various market data and discussions with our actuaries. We develop each assumption using relevant Company experience in conjunction with market-related data. Assumptions are reviewed annually and adjusted as appropriate.

The following tables provide the weighted-average assumptions used to determine projected benefit obligations and net periodic benefit cost, as they pertain to our defined benefit pension plans:



Obligation assumptions as of:	June 30, 2017		July 1, 2016
Discount rate	3.76	%	3.62	%
Rate of future compensation increase	2.76	%	2.75	%

Cost assumptions for fiscal years:	2017		2016		2015
Discount rate to determine service cost	3.80	%	4.06	%	3.77	%
Discount rate to determine interest cost	2.94	%	4.06	%	3.77	%
Expected return on plan assets	7.65	%	7.91	%	7.93	%
Rate of future compensation increase	2.75	%	2.76	%	2.76	%

Key assumptions for the U.S. SRP (our largest defined benefit pension plan with approximately 90% of the total projected benefit obligation) included a discount rate for obligation assumptions of 3.78% and expected return on plan assets of 7.75% for fiscal 2017, which is being maintained at 7.75% for fiscal 2018.

The following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic benefit cost, as they pertain to our other postretirement defined benefit plans:



Obligation assumptions as of:	June 30, 2017		July 1, 2016
Discount rate	3.63	%	3.41	%
Rate of future compensation increase	N/A		N/A

Cost assumptions for fiscal year:	2017		2016		2015
Discount rate to determine service cost	3.52	%	3.86	%	3.57	%
Discount rate to determine interest cost	2.60	%	3.86	%	3.57	%
Rate of future compensation increase	N/A		2.75	%	2.75	%

The expected long-term rate of return on plan assets reflects the expected returns for each major asset class in which the plans invest, the weight of each asset class in the strategic allocation, the correlations among asset classes and their expected volatilities. Our expected rate of return on plan assets is estimated by evaluating both historical returns and estimates of future returns. Specifically, the determination of the expected long-term rate of return takes into consideration: (1) the plan’s actual historical annual return on assets over the past 15-, 20- and 25-year time periods, (2) historical broad market returns over long-term timeframes weighted by the plan’s strategic allocation, and (3) independent estimates of future long-term asset class returns, weighted by the plan’s strategic allocation. Based on this approach, the long-term annual rate of return on assets is estimated at 7.75% for fiscal 2018 for the U.S. defined benefit plans. The weighted average long-term annual rate of return on assets for all defined benefit pension plans is estimated at 7.66% for fiscal 2018. In fiscal 2017, we adopted updated mortality tables, which resulted in a decrease in the defined benefit plans’ projected benefit obligation as of June 30, 2017 and estimated net periodic benefit cost beginning fiscal 2018.

The assumed rate of future increases in the per capita cost of healthcare (the healthcare trend rate) was 7.25% for fiscal 2017 and is 6.88% for fiscal 2018, with both assumptions decreasing ratably to 4.75% in fiscal 2027. Increasing or decreasing the healthcare cost trend rates by one percent per year would not have a material effect on the benefit obligation or the aggregate annual service and interest cost components. To the extent that actual experience differs from these assumptions, the effect will be accumulated and generally amortized for each plan to the extent required over the estimated future life expectancy or, if applicable, the future working lifetime of the plan’s active participants.

Investment Policy

The investment strategy for managing defined benefit plan assets is to seek an optimal rate of return relative to an appropriate level of risk. We manage substantially all defined benefit plan assets on a commingled basis in a master investment trust. In making these asset allocation decisions, we take into account recent and expected returns and volatility of returns for each asset class, the expected correlation of returns among the different investments, as well as anticipated funding and cash flows. To enhance returns and mitigate risk, we diversify our investments by strategy, asset class, geography and sector and engage a large number of managers to gain broad exposure to the markets.

The following table provides the current strategic target asset allocation ranges by asset category:



	Target Asset Allocation
Equity investments	45	%	—	75	%
Fixed income investments	20	%	—	42	%
Hedge funds	5	%	—	15	%
Cash and cash equivalents	0	%	—	10	%

Fair Value of Plan Assets

The following is a description of the valuation techniques and inputs used to measure fair value for major categories of investments as reflected in the table that follows such description:

•

Domestic and international equities, which include common and preferred shares, domestic listed and foreign listed equity securities, open-ended and closed-ended mutual funds and exchange traded funds, are generally valued at the closing price reported on the major market exchanges on which the individual securities are traded at the measurement date. Because these assets are traded predominantly on liquid, widely traded public exchanges, equity securities are categorized as Level 1 assets.

•

Private equity funds, which include buy-out, mezzanine, venture capital, distressed asset and secondary funds, are typically limited partnership investment structures. Private equity valuations are based on the valuation of the underlying investments, which include inputs such as cost, operating results, discounted future cash flows and market-based comparable data. Private equity funds generally have liquidity restrictions that extend for ten or more years. Valuations are largely based on unobservable inputs and short-term liquidity is restricted; consequently, private equity is categorized as Level 3 assets. At June 30, 2017 and July 1, 2016, our defined benefit plans had future unfunded commitments totaling $157 million and $178 million, respectively, related to private equity fund investments.

•

Hedge funds, which include equity long/short, event-driven and fixed-income arbitrage and global macro funds, are typically limited partnership investment structures. Limited partnership interests in hedge funds are primarily valued using a market approach based on NAV calculated by the funds and are not publicly available. Hedge funds that permit redemption on a quarterly or more frequent basis with 90 or fewer days notice are generally categorized as Level 2 assets. All other hedge funds are categorized as Level 3 assets.

•

Fixed income investments, which include U.S. Government securities and investment and non-investment grade corporate bonds, are generally valued using pricing models that use verifiable, observable market data such as interest rates, benchmark yield curves and credit spreads, bids provided by brokers or dealers, or quoted prices of securities with similar characteristics. Fixed income investments are categorized as Level 2 assets.


•	Other is primarily comprised of guaranteed insurance contracts valued at book value, which approximates fair value, calculated using the prior-year balance adjusted for investment returns and changes in cash flows.


•	Cash and cash equivalents are primarily comprised of short-term money market funds valued at cost, which approximates fair value, or valued at quoted market prices of identical instruments. Cash and currency are categorized as Level 1 assets; cash equivalents, such as money market funds or short-term commingled funds, are categorized as Level 2 assets.


•	Certain investments that are valued using the NAV per share (or its equivalent) as a practical expedient are not categorized in the fair value hierarchy and are included in the table to permit reconciliation of the fair value hierarchy to the aggregate postretirement benefit plan assets.

The following table provides the fair value of plan assets held by our defined benefit plans by asset category and by fair value hierarchy level:



	June 30, 2017
	Total			Level 1		Level 2		Level 3

	(In millions)
Asset Category
Equities:
Domestic equities	$	1,062		$	1,032	$	30	$	—
International equities	838			834		4		—
Alternative investments:
Private equity funds	489			—		—		489
Hedge funds	242			—		—		242
Commodities and real estate	33			—		—		33
Fixed income:
Corporate bonds	611			—		611		—
Government securities	241			—		241		—
Other	2			—		—		2
Cash and cash equivalents	597			1		596		—
Total	4,115			$	1,867	$	1,482	$	766
Investments Measured at NAV
Equity funds	632
Fixed income funds	288
Total Investments Measured at NAV	920
Receivables, net	98
Total fair value of plan assets	$	5,133

	July 1, 2016
	Total			Level 1		Level 2		Level 3

	(In millions)
Asset Category
Equities:
Domestic equities	$	1,097		$	1,070	$	27	$	—
International equities	455			452		3		—
Alternative investments:
Private equity funds	664			—		—		664
Hedge funds	329			—		47		282
Commodities and real estate	36			—		—		36
Fixed income:
Corporate bonds	557			—		557		—
Government securities	166			—		166		—
Other	2			—		—		2
Cash and cash equivalents	197			31		166		—
Total	$	3,503		$	1,553	$	966	$	984
Investments Measured at NAV
Equity funds	582
Fixed income funds	405
Total Investments Measured at NAV	987
Payables, net	(1		)
Total fair value of plan assets	$	4,489

The following table presents a reconciliation of the beginning and ending defined benefit plan asset balances that use significant unobservable inputs (Level 3) to measure fair value:



	Private Equity Funds, Commodities and Real Estate			Hedge Funds			International Equities			Other			Total

							(In millions)
Level 3 balance — July 3, 2015	$	931		$	338		$	145		$	13		$	1,427
Realized gains (losses), net	109			(8		)	127			1			229
Unrealized losses, net	(121		)	(20		)	(137		)	(3		)	(281		)
Sales, net	(219		)	(28		)	(135		)	(9		)	(391		)
Level 3 balance — July 1, 2016	700			282			—			2			984
Realized gains (losses), net	78			(23		)	—			—			55
Unrealized gains (losses), net	(71		)	49			—			—			(22		)
Sales, net	(185		)	(66		)	—			—			(251		)
Level 3 balance — June 30, 2017	$	522		$	242		$	—		$	2		$	766

Contributions

Funding requirements under Internal Revenue Service (“IRS”) rules are a major consideration in making contributions to our postretirement benefit plans. With respect to U.S. qualified pension plans, we intend to contribute annually not less than the required minimum funding thresholds.

The Highway and Transportation Funding Act of 2014 (“HATFA”) and the Bipartisan Budget Act of 2015 (“BBA 2015”) further extended the interest rate stabilization provision of MAP-21 until 2020. We made a $400 million voluntary contribution to our U.S. qualified pension plans during fiscal 2017. As a result, we currently do not anticipate making any contributions to our U.S. qualified pension plans during fiscal 2018.

Estimated Future Benefit Payments

The following table provides the projected timing of payments for benefits earned to date and benefits expected to be earned for future service by current active employees under our defined benefit plans:



	Pension		Other Benefits ⁽¹⁾		Total

	(In millions)
Fiscal Years:
2018	$	391	$	26	$	417
2019	384		26		410
2020	386		25		411
2021	386		25		411
2022	386		24		410
2023 — 2027	1,891		102		1,993


(1)	Projected payments for Other Benefits reflect gross payments from the Company, excluding subsidies, which are expected to approximate 10 percent of gross payments.