Exhibit 4.1
Huntington Ingalls Industries, Inc.
as Issuer
and
The Bank of New York Mellon
as Trustee
Indenture
Dated as of March 11, 2011
6.875% Senior Notes due 2018
7.125% Senior Notes due 2021
CROSS-REFERENCE TABLE
1
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TIA Sections
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Indenture Sections
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§ 310 (a)
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7.10
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(b)
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7.08
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§ 311
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7.03
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§ 312
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12.02
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§ 313
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7.06
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§ 314 (a)
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4, 4.02
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(c)
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12.04
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(e)
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12.05
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§ 315 (a)
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7.01, 7.02
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(b)
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7.02, 7.05
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(c)
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7.01
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(d)
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7.02
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(e)
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6.12, 7.02
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§ 316 (a)
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2.05, 6.02, 6.03, 6.05
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(b)
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6.06, 6.07
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(c)
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12.02
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§ 317
(a) (1)
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6.08
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(a) (2)
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6.09
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(b)
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2.03
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§ 318
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12.01
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2
RECITALS
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ARTICLE 1
Definitions And Incorporation By Reference
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Section 1.01
. Definitions
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2
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Section 1.02.
Rules of Construction
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29
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ARTICLE 2
The Notes
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Section 2.01
. Form, Dating and Denominations; Legends
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30
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Section 2.02
. Execution and Authentication; Exchange Notes; Additional Notes
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31
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Section 2.03
. Registrar, Paying Agent and Authenticating Agent; Paying Agent to Hold Money in Trust
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33
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Section 2.04
. Replacement Notes
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33
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Section 2.05
. Outstanding Notes
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34
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Section 2.06
. Temporary Notes
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34
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Section 2.07
. Cancellation
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35
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Section 2.08
. CUSIP and CINS Numbers
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35
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Section 2.09
. Registration, Transfer and Exchange
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35
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Section 2.10
. Restrictions on Transfer and Exchange
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39
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Section 2.11
. Temporary Offshore Global Notes
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41
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ARTICLE 3
Redemption; Offer to Purchase
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Section 3.01
. Optional Redemption
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42
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Section 3.02
. Redemption with Proceeds of Public Equity Offering
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43
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Section 3.03
. Special Redemption
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43
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Section 3.04
. Mandatory Redemption
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44
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Section 3.05
. Method and Effect of Redemption
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44
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Section 3.06
. Offer to Purchase
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46
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ARTICLE 4
Covenants
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Section 4.01
. Payment Of Notes
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48
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Section 4.02
. Maintenance Of Office Or Agency
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49
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Section 4.03
. Existence
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49
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Section 4.04
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[Reserved].
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49
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Section 4.05
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[Reserved].
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49
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Section 4.06.
Limitation on Debt
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49
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Section 4.07
. Limitation on Restricted Payments
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53
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3
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Section 4.08
. Limitation on Liens
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58
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Section 4.09
. Limitation on Dividend and other Payment Restrictions Affecting Restricted Subsidiaries
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58
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Section 4.10
. Guaranties by Restricted Subsidiaries
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60
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Section 4.11
. Repurchase of Notes Upon a Change of Control
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60
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Section 4.12
. Limitation on Asset Sales
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60
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Section 4.13
. Limitation on Transactions with Affiliates
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62
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Section 4.14
. Line of Business
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64
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Section 4.15
. Designation of Restricted and Unrestricted Subsidiaries
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64
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Section 4.16.
Limitation on Actions of Current NGC
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65
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Section 4.17.
Restrictive Covenants
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66
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Section 4.18
. Financial Reports
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66
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Section 4.19
. Reports to Trustee
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67
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Section 4.20
. Suspension Of Certain Covenants
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68
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ARTICLE 5
Consolidation, Merger or Sale of Assets
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Section 5.01.
Consolidation, Merger or Sale of Assets by the Company
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69
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Section 5.02.
Consolidation, Merger or Sale of Assets by a Guarantor
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70
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ARTICLE 6
Default and Remedies
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Section 6.01
. Events of Default
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71
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Section 6.02
. Acceleration
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73
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Section 6.03
. Waiver of Past Defaults
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73
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Section 6.04
. Other Remedies
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74
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Section 6.05
. Control by Majority
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74
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Section 6.06
. Limitation on Suits
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74
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Section 6.07
. Rights of Holders to Receive Payment
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75
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Section 6.08
. Collection Suit by Trustee
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75
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Section 6.09
. Trustee May File Proofs of Claim
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75
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Section 6.10
. Priorities
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76
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Section 6.11
. Restoration of Rights and Remedies
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76
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Section 6.12
. Undertaking for Costs
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76
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Section 6.13
. Rights and Remedies Cumulative
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76
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Section 6.14
. Delay or Omission Not Waiver
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77
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Section 6.15
. Waiver of Stay, Extension or Usury Laws
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77
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ARTICLE 7
The Trustee
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Section 7.01
. General
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77
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Section 7.02
. Certain Rights of Trustee
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78
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Section 7.03
. Individual Rights of Trustee
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80
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4
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Section 7.04
. Trustees Disclaimer
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80
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Section 7.05
. Notice of Default
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81
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Section 7.06
. Reports by Trustee to Holders
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81
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Section 7.07
. Compensation and Indemnity
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81
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Section 7.08
. Replacement of Trustee
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82
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Section 7.09
. Successor Trustee by Merger
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83
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Section 7.10
. Eligibility
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83
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Section 7.11
. Money Held in Trust
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83
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ARTICLE 8
Defeasance and Discharge
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Section 8.01
. Discharge of Companys Obligations
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83
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Section 8.02
. Legal Defeasance
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84
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Section 8.03
. Covenant Defeasance
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86
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Section 8.04
. Application of Trust Money
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86
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Section 8.05
. Repayment to Company
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87
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Section 8.06
. Reinstatement
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87
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ARTICLE 9
Amendments, Supplements and Waivers
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Section 9.01
. Amendments without Consent of Holders
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87
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Section 9.02
. Amendments with Consent of Holders
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88
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Section 9.03
. Effect of Consent
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90
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Section 9.04
. Trustees Rights and Obligations
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90
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Section 9.05
. Conformity with Trust Indenture Act
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90
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Section 9.06
. Payments for Consents
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90
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ARTICLE 10
Guaranties
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Section 10.01
. The Guaranties
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90
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Section 10.02
. Guaranty Unconditional
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91
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Section 10.03
. Discharge; Reinstatement
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92
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Section 10.04
. Waiver by the Guarantors
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92
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Section 10.05
. Subrogation and Contribution
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92
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Section 10.06
. Stay of Acceleration
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92
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Section 10.07
. Limitation on Amount of Guaranty
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92
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Section 10.08
. Execution and Delivery of Guaranty
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92
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Section 10.09
. Release of Guaranty
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93
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ARTICLE 11
Escrow Arrangements
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Section 11.01
. Escrow Account
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93
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5
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Section 11.02
. Special Redemption
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94
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Section 11.03
. Release of Escrow Property
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94
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Section 11.04
. Trustee Direction to Execute Escrow Agreement
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94
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ARTICLE 12
Miscellaneous
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Section 12.01
. Trust Indenture Act of 1939
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94
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Section 12.02
. Noteholder Communications; Noteholder Actions
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94
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Section 12.03
. Notices
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95
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Section 12.04
. Certificate and Opinion as to Conditions Precedent
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96
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Section 12.05
. Statements Required in Certificate or Opinion
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97
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Section 12.06
. Payment Date Other Than a Business Day
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97
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Section 12.07
. Governing Law; Waiver of Trial by Jury
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97
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Section 12.08
. No Adverse Interpretation of Other Agreements
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97
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Section 12.09
. Successors
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97
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Section 12.10
. Duplicate Originals
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98
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Section 12.11
. Separability
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98
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Section 12.12
. Table of Contents and Headings
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98
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Section 12.13
. No Liability of Directors, Officers, Employees, Incorporators, Members and Stockholders
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98
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6
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EXHIBITS
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EXHIBIT A
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Form of 2018 Note
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EXHIBIT B
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Form of 2021 Note
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EXHIBIT C
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Form of Supplemental Indenture
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EXHIBIT D
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Restricted Legend
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EXHIBIT E
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DTC Legend
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EXHIBIT F
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Regulation S Certificate
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EXHIBIT G
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Rule 144A Certificate
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EXHIBIT H
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Institutional Accredited Investor Certificate
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EXHIBIT I
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Certificate of Beneficial Ownership
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EXHIBIT J
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Temporary Offshore Global Note Legend
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7
INDENTURE, dated as of March 11, 2011, between Huntington Ingalls Industries, Inc., a Delaware
corporation, as the Company, the Guarantors party hereto and The Bank of New York Mellon, as
Trustee.
RECITALS
The Company has duly authorized the execution and delivery of the Indenture to provide for the
issuance of up to $600,000,000 aggregate principal amount of the Companys 6.875% Senior Notes Due
2018 (together with, if and when issued, any Additional Notes of such series together with any
Exchange Notes issued in exchange therefor as provided herein, the
2018 Notes
) and up to
$600,000,000 aggregate principal amount of the Companys 7.125% Senior Notes Due 2021 (together
with, if and when issued, any Additional Notes of such series together with any Exchange Notes
issued in exchange therefor as provided herein, the
2021 Notes
, and collectively with the 2018
Notes, the
Notes
). Each of the 2018 Notes and the 2021 Notes constitute a separate series
hereunder. All things necessary to make the Indenture a valid agreement of the Company, in
accordance with its terms, have been done, and the Company has done all things necessary to make
the Notes (in the case of the Additional Notes, when duly authorized), when executed by the Company
and authenticated and delivered by the Trustee and duly issued by the Company, the valid
obligations of the Company as hereinafter provided.
This Indenture is subject to, and will be governed by, the provisions of the Trust Indenture
Act that are required to be a part of and govern indentures qualified under the Trust Indenture
Act.
THIS INDENTURE WITNESSETH
For and in consideration of the premises and the purchase of the Notes by the Holders thereof,
the parties hereto covenant and agree, for the equal and proportionate benefit of all Holders, as
follows:
ARTICLE 1
Definitions And Incorporation By Reference
Section 1.01
. Definitions.
Accrued Yield
means, an amount in respect of each $1,000 principal amount of a Note that,
together with the accrued interest to be paid in a Special Redemption or a Mandatory Redemption,
will provide the Holder thereof with the yield to maturity on such Note, calculated on the basis of
a 360 day year and payable for the actual number of days elapsed from the Issue Date. Yield to
maturity means the annual yield to maturity of the Notes, calculated based on market convention
and as reflected in the pricing term sheet for the offering of the Initial Notes.
Acquired Debt
means Debt of a Person existing at the time the Person merges with or into, or
becomes a, Restricted Subsidiary or is assumed in connection with the acquisition of assets from
such Person and not Incurred in connection with, or in contemplation of, the Person merging with or
into or becoming a Restricted Subsidiary or such acquisition.
Additional Interest
means additional interest owed to the Holders pursuant to a Registration
Rights Agreement.
Additional Notes
means any Notes issued under the Indenture in addition to the Original
Notes of a series, including any Exchange Notes issued in exchange for such Additional Notes,
having the same terms in all respects as the Original Notes of a series, or in all respects except
with respect to the initial Interest Payment Date and interest paid or payable on or prior to the
first Interest Payment Date after the issuance of such Additional Notes and such Additional Notes
may have different issuance prices, initial interest accrual dates or initial interests payment
dates and may not have the benefit of any registration rights.
Affiliate
means, with respect to any Person, any other Person directly or indirectly
controlling, controlled by, or under direct or indirect common control with, such Person. For
purposes of this definition, control (including, with correlative meanings, the terms
controlling, controlled by and under common control with) with respect to any Person, means
the possession, directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting securities, by
contract or otherwise.
Agent
means any Registrar, Paying Agent or Authenticating Agent.
Agent Member
means a member of, or a participant in, the Depositary.
2
Applicable Premium
means, with respect to any Note on any redemption date, the greater of
(1) 1.0% of the principal amount of such Note; and (2) the excess, if any, of (a) the present value
at such redemption date of (i) the redemption price of such Note on March 15, 2015 in the case of
the 2018 Notes and March 15, 2016 in the case of the 2021 Notes each as set forth under Section
3.01 plus (ii) all required interest payments due on such Note through March 15, 2015 in the case
of the 2018 Notes and March 15, 2016 in the case of the 2021 Notes (in each case, excluding accrued
but unpaid interest, if any, to the redemption date), computed using a discount rate equal to the
applicable Treasury Rate as of such redemption date plus 50 basis points; over (b) the principal
amount of such Note.
Asset Sale
means any sale, lease, transfer or other disposition of any assets by the Company
or any Restricted Subsidiary, including by means of a merger, consolidation or similar transaction
and including any sale or issuance of the Equity Interests (other than directors qualifying shares
or shares or interests held by foreign nationals as required by law) of any Restricted Subsidiary
(each of the above referred to as a disposition),
provided
that the following are not included in
the definition of Asset Sale:
(1) a disposition to the Company or a Restricted Subsidiary, including the sale or
issuance by the Company or any Restricted Subsidiary of any Equity Interests of any
Restricted Subsidiary to the Company or any Restricted Subsidiary;
(2) the disposition by the Company or any Restricted Subsidiary of assets in the
ordinary course of business, including inventory and other assets acquired and held for
resale or rights granted to others pursuant to leases or licenses;
(3) the disposition of cash, Cash Equivalents and cash management investments;
(4) the disposition of scrap, damaged, worn out, obsolete, surplus, permanently
retired assets, or property or equipment that is no longer useful in the conduct of the
business of the Company and its Restricted Subsidiaries;
(5) the sale or discount of accounts receivable arising in the ordinary course of
business not in connection with a securitization or factoring transaction;
(6) a transaction covered by Article 5;
(7) a Restricted Payment permitted under Section 4.07 or a Permitted Investment;
3
(8) the issuance of Disqualified Stock or Preferred Stock of a non-Guarantor
Restricted Subsidiary pursuant to Section 4.06
(9) the disposition of the Companys interest, including Equity Interests and assets
related to, the shipyard located in Avondale, Louisiana or the facilities in Waggaman,
Louisiana, or Tallulah, Louisiana;
(10) any sale of Equity Interests in, or Debt or other securities of, an Unrestricted
Subsidiary;
(11) dispositions of Investments in joint ventures to the extent required by, or made
pursuant to, customary buy/sell or put/call arrangements between the joint venture parties
set forth in joint venture arrangements and similar binding arrangements;
(12) any disposition in a transaction or series of related transactions of assets
with a fair market value of less than $10.0 million; and
(13) any disposition of assets pursuant to the Transactions or the Interim Ordinary
Course Transactions.
Authenticating Agent
refers to a Person engaged to authenticate the Notes in the stead of
the Trustee.
Average Life
means, with respect to any Debt, the quotient obtained by dividing (i) the sum
of the products of (x) the number of years from the date of determination to the dates of each
successive scheduled principal payment of such Debt and (y) the amount of such principal payment by
(ii) the sum of all such principal payments.
bankruptcy default
has the meaning assigned to such term in Section 6.01.
Board of Directors
means the board of directors or comparable governing body of the Company,
or any committee thereof duly authorized to act on its behalf.
Board Resolution
means a copy of a resolution certified by the Secretary or an Assistant
Secretary of the Company to have been duly adopted by the Board of Directors and to be in full
force and effect as of the date of such certification.
Business Day
means any day except a Saturday, Sunday or other day on which commercial banks
in New York City or in the city where the Corporate
4
Trust Office of the Trustee is located are authorized by law or executive order to close.
Capital Lease
means, with respect to any Person, any lease of any property which, in
conformity with GAAP, is required to be capitalized on the balance sheet of such Person.
Capital Stock
means, with respect to any Person, any and all shares of stock of a
corporation, partnership interests or other equivalent interests (however designated, whether
voting or non-voting) in such Persons equity, entitling the holder to receive a share of the
profits and losses, and a distribution of assets, after liabilities, of such Person.
Cash Equivalents
means
(1) United States dollars, or money in other currencies received in the ordinary
course of business,
(2) U.S. Government Obligations or certificates representing an ownership interest in
U.S. Government Obligations with maturities not exceeding two years from the date of
acquisition ,
(3) (i) demand deposits, (ii) time deposits and certificates of deposit with
maturities of one year or less from the date of acquisition, (iii) bankers acceptances
with maturities not exceeding one year from the date of acquisition, and (iv) overnight
bank deposits, in each case with any bank or trust company organized or licensed under the
laws of the United States or any state thereof having capital, surplus and undivided
profits in excess of $500 million whose short-term debt is rated A-2 or higher by S&P or
P-2 or higher by Moodys,
(4) repurchase obligations with a term of not more than 180 days for underlying
securities of the type described in clauses (2) and (3) above entered into with any
financial institution meeting the qualifications specified in clause (3) above,
(5) commercial paper rated at least P-1 by Moodys or A-1 by S&P and maturing within
six months after the date of acquisition,
(6) direct obligations issued by any state of the United States or any political
subdivision or public instrumentality thereof rated at least Investment Grade, provided
that such Investments mature within 365 days after the date of acquisition, and
(7) money market funds at least 95% of the assets of which consist of investments of
the type described in clauses (1) through (6) above.
5
Certificate of Beneficial Ownership
means a certificate substantially in the form of Exhibit
I.
Certificated Note
means a Note in registered form without interest coupons and that is not a
Global Note.
Change of Control
means:
(1) the merger or consolidation of the Company with or into another Person or the
merger of another Person with or into the Company or the merger of any Person with or into
a Subsidiary of the Company if Capital Stock of the Company is issued in connection
therewith, or the sale of all or substantially all the assets of the Company to another
Person, unless holders of a majority of the aggregate voting power of the Voting Stock of
the Company, immediately prior to such transaction, hold securities of the surviving or
transferee Person that represent, immediately after such transaction, at least a majority
of the aggregate voting power of the Voting Stock of the surviving Person;
(2) any person or group (as such terms are used for purposes of Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the beneficial owner (as such term is used
in Rules 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the
total voting power of the Voting Stock of the Company;
(3) individuals who on the Issue Date constituted the board of directors of the
Company, together with any new directors whose election by the board of directors or whose
nomination for election by the stockholders of the Company was approved by a majority of
the directors then still in office who were either directors or whose election or
nomination for election was previously so approved, cease for any reason to constitute a
majority of the board of directors of the Company then in office; or
(4) the adoption of a plan relating to the liquidation or dissolution of the Company.
Notwithstanding anything to the contrary set forth above, the consummation of the Transactions
will be disregarded in determining the occurrence of a Change of Control.
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Code
means the Internal Revenue Code of 1986.
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Commission
means the United States Securities and Exchange Commission.
6
Company
means the party named as such in the first paragraph of the Indenture or any
successor obligor under the Indenture and the Notes pursuant to Article 5.
Completion Date
means the date on which all Escrow Conditions are satisfied and the proceeds
of the escrow account referred to in the Escrow Agreement are released.
Consolidated Net Income
means, for any period, the aggregate net income (or loss) of the
Company and its Restricted Subsidiaries for such period determined on a consolidated basis in
conformity with GAAP,
provided
that the following (without duplication) will be excluded in
computing Consolidated Net Income:
(1) the net income (but not loss) of any Person that is not a Restricted Subsidiary
(including minority interests in unconsolidated Persons or Investments in Unrestricted
Subsidiaries), except to the extent of the dividends or other distributions actually paid
in cash (which, for the avoidance of doubt, will increase Consolidated Net Income) to the
Company or any of its Restricted Subsidiaries by such Person during such period (including
dividends and distributions from joint ventures);
(2) solely for purposes of determining the amount available for Restricted Payments
under Section 4.07(a)(3), the net income of any Restricted Subsidiary (other than a
Guarantor) to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income would not have been
permitted for the relevant period by charter or by any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such Restricted
Subsidiary;
(3) any net after-tax gains or losses attributable to Asset Sales or the
extinguishment or conversion of Debt, in each case net of fees and expenses relating to
the transaction giving rise thereto;
(4) all extraordinary gains or losses (net of fees and expenses relating to the
transaction giving rise thereto), income, expenses or charges;
(5) the cumulative effect of a change in accounting principles;
(6) non-recurring expenses and charges related to the Spin-Off and related
financings;
(7) non-recurring non-cash charges attributable to the closing of manufacturing
facilities or the lay-off of employees, in either case which
7
are recorded as restructuring and other specific charges in accordance with GAAP;
(8) non-cash compensation expense incurred with any issuance of Equity Interests of
the Company to an employee of the Company or any Restricted Subsidiary;
(9) any one-time expenses or charges (including financing, financial and other
advisory fees, accounting and consulting fees and legal fees) related to any acquisition,
Investment, Asset Sale, disposition, issuance of Equity Interests, Debt or amendment or
modification of any Debt, and including, in each case, any such transaction undertaken but
not completed, in each case whether or not successful;
(10) any expenses, charges or losses that are covered by indemnification or other
reimbursement provisions in connection with any Investment or any sale, conveyance,
transfer or other disposition of assets permitted under the Indenture, to the extent
actually reimbursed, or, so long as the Company has made a determination that a reasonable
basis exists for indemnification or reimbursement and only to the extent that such amount
is in fact indemnified or reimbursed within 365 days of such determination (with a
deduction in the applicable future period for any amount so added back to the extent not
so indemnified or reimbursed within such 365 days);
(11) any expenses, charges or losses with respect to liability or casualty events or
business interruption to the extent covered by insurance and actually reimbursed, or, so
long as the Company has made a determination that there exists reasonable evidence that
such amount will in fact be reimbursed by the insurer and only to the extent that such
amount is in fact reimbursed within 365 days of the date of such determination (with a
deduction in the applicable future period for any amount so added back to the extent not
so reimbursed within such 365 days);
(12) any non-cash impairment charges or asset write-off or write-down, or from fair
value accounting required by Statement of Financial Accounting; and
(13) cash or non-cash restructuring costs, charges or losses relating to the closing
of the shipyard in Avondale, Louisiana, the construction of the LPD-23 Anchorage or the
construction of the LPD-25 Somerset, up to an aggregate amount for all such cash costs,
charges and losses of (i) for the 2011 fiscal year, $50.0 million, (ii) for the 2012
fiscal year, $35.0 million and (iii) for any fiscal year thereafter, $25.0 million.
8
Consolidated Net Tangible Assets
of any Person means the aggregate amount of assets of such
Person and its Restricted Subsidiaries after deducting therefrom (to the extent otherwise included
therein) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and
other like intangibles, all as set forth on the most recent quarterly or annual (as the case may
be) consolidated balance sheet (prior to the relevant date of determination for which internal
financial statements are available) of such Person and its Restricted Subsidiaries in accordance
with GAAP.
Consolidated Secured Leverage Ratio
means, on any date (the transaction date), the ratio
of
(x) the aggregate amount of Debt of the Company and its Restricted Subsidiaries as of the date
of determination that is secured by a Lien on any asset of the Company or any of its Restricted
Subsidiaries (Secured Debt) to
(y) the aggregate amount of EBITDA for the four fiscal quarters immediately prior to the
transaction date for which internal financial statements are available.
Such ratio shall be calculated on a pro forma basis (in accordance with Regulation S-X) as
appropriate and consistent with the pro forma adjustments set forth in the definition of Fixed
Charge Coverage Ratio.
Corporate Trust Office
means the office of the Trustee at which the corporate trust business
of the Trustee is principally administered, which at the date of the Indenture is located at 101
Barclay Street, Floor 8 West, New York, New York, 10286.
Credit Agreement
means the credit agreement to be dated on or about the Completion Date
among the Company, the guarantors named therein, the lenders party thereto and JPMorgan Chase Bank,
N.A., as agent, together with any related documents (including any security documents and guarantee
agreements), as such agreement may be amended, modified, supplemented, restated, extended, renewed,
refinanced or replaced or substituted from time to time in one or more agreements or instruments
(in each case with the same or new lender, group of lenders, purchasers or debtholders), including
pursuant to any agreement extending the maturity thereof or otherwise restructuring all or any
portion of the Debt thereunder or increasing the amount loaned or issued thereunder.
Credit Facilities
means one or more (i) credit facilities (including the Credit Agreement)
with banks or other lenders providing for revolving credit loans or term loans or the issuance of
letters of credit or bankers acceptances or the like, (ii) note purchase agreements and indentures
providing for the sale of
9
debt securities, and (iii) agreements that refinance any Debt Incurred under any agreement
described in clause (i) or (ii) or this clause (iii), including in each case any successor or
replacement agreement or agreements or indentures.
Current NGC
means Northrop Grumman Corporation as such company is referred to as of the
Issue Date.
Date of Determination
has the meaning assigned to such term in Section 3.03.
Debt
means, with respect to any Person, without duplication,
(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments;
(3) all obligations of such Person in respect of letters of credit, bankers
acceptances or other similar instruments , excluding obligations in respect of trade
letters of credit or bankers acceptances issued in respect of trade payables;
provided
that such obligations shall not constitute Debt except to the extent drawn upon or
presented and not paid within 10 Business Days;
(4) all obligations of such Person to pay the deferred and unpaid purchase price of
property or services which are recorded as liabilities under GAAP, excluding trade
payables arising in the ordinary course of business;
(5) all obligations of such Person as lessee under Capital Leases;
(6) all Debt of other Persons Guaranteed by such Person to the extent so Guaranteed;
(7) all Debt of other Persons secured by a Lien on any asset of such Person, whether
or not such Debt is assumed by such Person;
(8) all Disqualified Stock; and
(9) all obligations of such Person under Hedging Agreements at the time of
determination.
The amount of Debt of any Person will be deemed to be:
(A) with respect to contingent obligations, the maximum liability upon the occurrence
of the contingency giving rise to the obligation;
10
(B) with respect to Debt secured by a Lien on an asset of such Person but not
otherwise the obligation, contingent or otherwise, of such Person, the lesser of (x) the
fair market value of such asset on the date the Lien attached and (y) the amount of such
Debt;
(C) with respect to any Debt issued with original issue discount, the face amount of
such Debt less the remaining unamortized portion of the original issue discount of such
Debt;
(D) with respect to any Hedging Agreement, the net amount payable if such Hedging
Agreement terminated at that time due to default by such Person;
(E) with respect to any Disqualified Equity Interests, the maximum amount that the
Company and its Restricted Subsidiaries may become obligated to pay upon the maturity of,
or pursuant to any mandatory redemption provisions of, such Disqualified Equity Interests
or portion thereof, exclusive of accrued dividends; and
(F) otherwise, the outstanding principal amount thereof.
Default
means any event that is, or after notice or passage of time or both would be, an
Event of Default.
Depositary
means the depositary of each Global Note, which will initially be DTC.
Designated Non-cash Consideration
means any non-cash consideration received by the Company
or a Restricted Subsidiary in connection with an Asset Sale that is designated as Designated
Non-cash Consideration pursuant to an Officers Certificate executed by an officer of the Company
or such Restricted Subsidiary at the time of such Asset Sale, less the amount of cash or Cash
Equivalents received in connection with a subsequent sale of or collection on such Designated
Non-cash Consideration
provided
that any such amount is deemed to be Net Cash Proceeds of an Asset
Sale for purposes of Section 4.12.
Disqualified Equity Interests
means Equity Interests that by their terms or upon the
happening of any event prior to the Stated Maturity of the Notes are
(1) required to be redeemed or redeemable at the option of the holder for
consideration other than Qualified Equity Interests, or
(2) convertible at the option of the holder into Disqualified Equity Interests or
exchangeable for Debt;
11
provided
that only the portion of such Equity Interests that is required to be redeemed, is so
redeemable or is so convertible at the option of the holder thereof before such date will be deemed
to be Disqualified Equity Interests and Equity Interests will not constitute Disqualified Equity
Interests solely because of provisions giving holders thereof the right to require repurchase or
redemption upon an asset sale or change of control occurring prior to the Stated Maturity of
the Notes if those provisions
(A) are no more favorable to the holders than Section 4.11 and Section 4.12, and
(B) specifically state that repurchase or redemption pursuant thereto will not be
required prior to the Companys repurchase of the Notes as required by the Indenture.
Disqualified Stock
means Capital Stock constituting Disqualified Equity Interests.
DTC
means The Depository Trust Company, a New York corporation, and its successors.
DTC Legend
means the legend set forth in Exhibit E.
Domestic Restricted Subsidiary
means any Restricted Subsidiary formed under the laws of the
United States of America or any jurisdiction thereof.
EBITDA
means, for any period, the sum of
(1) Consolidated Net Income, plus
(2) Fixed Charges, to the extent deducted in calculating Consolidated Net Income,
plus
(3) to the extent deducted in calculating Consolidated Net Income and as determined
on a consolidated basis for the Company and its Restricted Subsidiaries in conformity with
GAAP:
(A) income taxes, including any penalties and interest related to such taxes
or arising from any tax examinations;
(B) depreciation, amortization (including amortization of goodwill, other
intangibles, deferred financing fees, debt issuance costs, commissions, fees and
expenses) and all other non-cash items reducing Consolidated Net Income (not
including non-cash charges in a period which reflect cash expenses paid or to be
paid in another period), less all non-cash items increasing Consolidated Net
Income;
12
(C) any costs and expenses incurred by the Company or any Restricted
Subsidiary pursuant to any management equity plan or stock option plan or any
other management or employee benefit plan or agreement, any stock subscription or
shareholder agreement, to the extent that such costs or expenses are funded with
the cash proceeds contributed to the capital of the Company or net cash proceeds
from an issuance of Equity Interests of the Company (other than Disqualified
Equity Interests); and
(D) all non-recurring losses (and minus all non-recurring gains).
Equity Interests
means all Capital Stock and all warrants or options with respect to, or
other rights to purchase, Capital Stock, but excluding Debt convertible into equity.
Escrow Agent
means Wells Fargo Bank, National Association.
Escrow Agreement
means the escrow and security agreement, dated as of March 11, 2011, among
the Company, the Trustee, the Financial Institution (as defined therein) and the Escrow Agent.
Escrow Conditions
means the conditions set forth in Section 1.05(b) of the Escrow Agreement
required to be satisfied to cause the release of the proceeds of the escrow account referred to
therein.
Event of Default
has the meaning assigned to such term in Section 6.01.
Excess Proceeds
has the meaning assigned to such term in Section 4.12.
Exchange Act
means the Securities Exchange Act of 1934.
Exchange Notes
means the Notes of a series of the Company issued pursuant to the Indenture
in exchange for, and up to an aggregate principal amount equal to, the Initial Notes or Initial
Additional Notes of such series in compliance with the terms of a Registration Rights Agreement and
containing terms substantially identical to the Initial Notes or Initial Additional Notes of such
series (except that (i) such Exchange Notes will be registered under the Securities Act and will
not be subject to transfer restrictions or bear the Restricted Legend, and (ii) the provisions
relating to Additional Interest will be eliminated).
Exchange Offer
means an offer by the Company to the Holders of the Initial Notes or Initial
Additional Notes to exchange outstanding Notes of a series for Exchange Notes of such series, as
provided for in a Registration Rights Agreement.
13
Exchange Offer Registration Statement
means the Exchange Offer Registration Statement as
defined in a Registration Rights Agreement.
Fixed Charge Coverage Ratio
means, on any date (the
transaction date
), the ratio of
(x) the aggregate amount of EBITDA for the four fiscal quarters immediately prior to
the transaction date for which internal financial statements are available (the
reference
period
) to
(y) the aggregate Fixed Charges during such reference period.
In making the foregoing calculation,
(1) pro forma effect will be given to any Incurrence or repayment, defeasance or
redemption of Debt (other than pursuant to revolving credit facilities) or Preferred Stock
and the application of the proceeds thereof during the reference period or subsequent
thereto and on or prior to the date of determination as if such Incurrence, repayment or
redemption occurred on the first day of the reference period;
(2) pro forma calculations of interest on Debt bearing a floating interest rate will
be made as if the rate in effect on the transaction date (taking into account any Hedging
Agreement applicable to the Debt) had been the applicable rate for the entire reference
period; and
(3) Fixed Charges related to any Debt or Preferred Stock no longer outstanding or to
be repaid, defeased or redeemed on the transaction date, except for Consolidated Interest
Expense accrued during the reference period under a revolving credit to the extent of the
commitment thereunder (or under any successor revolving credit) in effect on the
transaction date, will be excluded;
(4) pro forma effect (calculated in accordance with Regulation S-X) will be given to
(A) the creation, designation or redesignation of Restricted and
Unrestricted Subsidiaries,
(B) the acquisition or disposition of companies, divisions or lines of
businesses by the Company and its Restricted Subsidiaries, including any
acquisition or disposition of a company, division or line of business since the
beginning of the reference period by a Person that became a Restricted
Subsidiary after the beginning of the reference period, and
14
(C) discontinued operations and the discontinuation of any discontinued
operations but, in the case of Fixed Charges, only to the extent that the
obligations giving rise to the Fixed Charges will not be obligations of the
Company or any Restricted Subsidiary following the transaction date
that have occurred since the beginning of the reference period as if such events had
occurred, and, in the case of any disposition, the proceeds thereof applied, on the first
day of the reference period. To the extent that pro forma effect is to be given to an
acquisition or disposition of a company, division or line of business, the pro forma
calculation will be based upon the most recent four full fiscal quarters for which the
relevant financial information is available.
Fixed Charges
means, for any period, the sum of
(1) Interest Expense for such period; and
(2) the product of
(x) cash and non-cash dividends paid, declared, accrued or accumulated
during such period on any Disqualified Stock, and dividends paid during such
period on any Preferred Stock, of the Company or a Restricted Subsidiary, except
for dividends payable in the Companys Qualified Stock or paid to the Company or
to a Restricted Subsidiary and excluding items eliminated in consolidation, and
(y) a fraction, the numerator of which is one and the denominator of which
is one minus the sum of the currently effective combined Federal, state, local
and foreign tax rate applicable to the Company and its Restricted Subsidiaries.
Foreign Restricted Subsidiary
means any Restricted Subsidiary that is not a Domestic
Restricted Subsidiary.
GAAP
means generally accepted accounting principles in the United States of America as in
effect as of the Issue Date.
Global Note
means a Note in registered global form without interest coupons.
Guarantee
means any obligation, contingent or otherwise, of any Person directly or
indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the
generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt
or other
15
obligation of such other Person (whether arising by virtue of partnership arrangements, or by
agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Debt or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof, in whole or in part;
provided
that the term
Guarantee does not include endorsements for collection or deposit in the ordinary course of
business. The term Guarantee used as a verb has a corresponding meaning.
Guarantor
means (i) each Domestic Restricted Subsidiary of the Company in existence on the
Completion Date that Guarantees any Debt under the Credit Agreement at such time and (ii) each
Domestic Restricted Subsidiary that executes a supplemental indenture in the form of Exhibit C to
the Indenture providing for the guaranty of the payment of the Notes, or any successor obligor
under its Note Guaranty pursuant to Article 5, in each case unless and until such Guarantor is
released from its Note Guaranty pursuant to the Indenture.
Hedging Agreement
means (i) any interest rate swap agreement, interest rate cap agreement or
other agreement designed to protect against fluctuations in interest rates or (ii) any foreign
exchange forward contract, currency swap agreement or other agreement designed to protect against
fluctuations in foreign exchange rates or (iii) any commodity or raw material futures contract or
any other agreement designed to protect against fluctuations in raw material prices.
Holder
or
Noteholder
means the registered holder of any Note.
IAI Global Note
means a Global Note representing Notes resold to Institutional Accredited
Investors bearing the Restricted Legend.
Incur
means, with respect to any Debt, to incur, create, issue, assume or Guarantee such
Debt. If any Person becomes a Restricted Subsidiary on any date after the Issue Date (including by
redesignation of an Unrestricted Subsidiary or failure of an Unrestricted Subsidiary to meet the
qualifications necessary to remain an Unrestricted Subsidiary), the Debt of such Person outstanding
on such date will be deemed to have been Incurred by such Person on such date for purposes of
Section 4.06, but with respect to Disqualified Stock will not be considered the sale or issuance of
Equity Interests for purposes of Section 4.12. The accretion of original issue discount or payment
of interest in kind will not be considered an Incurrence of Debt.
Indenture
means this indenture, as amended or supplemented from time to time.
16
Initial Additional Notes
means Additional Notes issued in an offering not registered under
the Securities Act and any Notes issued in replacement thereof, but not including any Exchange
Notes issued in exchange therefor.
Initial Notes
means the Notes issued on the Issue Date and any Notes issued in replacement
thereof, but not including any Exchange Notes issued in exchange therefor.
Initial Purchasers
means the initial purchasers party to a purchase agreement with the
Company relating to the sale of the Initial Notes or Initial Additional Notes by the Company.
Institutional Accredited Investor
means an institutional accredited investor (as defined)
in Rule 501(a), (2), (3) or (7) under the Securities Act.
Institutional Accredited Investor Certificate
means a certificate substantially in the form
of Exhibit H hereto.
interest
, in respect of the Notes, unless the context otherwise requires, refers to interest
and Additional Interest, if any.
Interest Expense
means, for any period, the consolidated interest expense of the Company and
its Restricted Subsidiaries, plus, to the extent not included in such consolidated interest
expense, and to the extent incurred, accrued or payable by the Company or its Restricted
Subsidiaries, without duplication, (i) amortization of debt discount but excluding the amortization
or write-off of debt issuance costs, deferred financing fees, commissions, fees and expenses and
expensing of interim loan commitment and other financing fees, (ii) capitalized interest, (iii)
non-cash interest expense, (iv) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers acceptance financing, and (v) net costs associated with Hedging
Agreements (including the amortization of fees) in respect of interest rate protection, as
determined on a consolidated basis and in accordance with GAAP.
Interest Payment Date
means each March 15 and September 15 of each year, commencing
September 15, 2011.
Interim Ordinary Course Transactions
has the meaning assigned to such term in Section 4.17.
Internal Reorganization
means the internal reorganization that is conducted on the terms
described in the Offering Circular.
Investment
means
(1) any direct or indirect advance, loan or other extension of credit to another
Person,
17
(2) any capital contribution to another Person, by means of any transfer of cash or
other property or assets,
(3) any purchase or acquisition of Equity Interests, bonds, notes or other Debt, or
other instruments or securities issued by another Person, including the receipt of any of
the above as consideration for the disposition of assets or rendering of services, or
(4) any Guarantee of the Debt of another Person
but shall exclude: (a) accounts receivable and other extensions of trade credit arising in the
ordinary course of business; (b) the acquisition or use of property and assets from suppliers and
other vendors in the ordinary course of business; (c) prepaid expenses and workers compensation,
utility, lease and similar deposits, in the ordinary course of business; and (d) negotiable
instruments held for collection and endorsements for deposit or collection in the ordinary course
of business.
If the Company or any Restricted Subsidiary (x) sells or otherwise disposes of any Equity
Interests of any direct or indirect Restricted Subsidiary so that, after giving effect to that sale
or disposition, such Person is no longer a Subsidiary of the Company, or (y) designates any
Restricted Subsidiary as an Unrestricted Subsidiary in accordance with Section 4.15 of the
Indenture, all remaining Investments of the Company and the Restricted Subsidiaries in such Person
shall be deemed to have been made at such time.
Investment Grade
means BBB- or higher by S&P and Baa3 or higher by Moodys, or the
equivalent of such ratings by another Rating Agency.
Issue Date
means March 11, 2011, the date on which the Original Notes are originally issued
under the Indenture.
Lien
means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind
(including any conditional sale or other title retention agreement or Capital Lease having
substantially the same economic effect as any of the foregoing).
Mandatory Redemption Price
has the meaning assigned to such term in Section 3.04.
Mandatory Redemption
has the meaning assigned to such term in Section 3.04.
Mandatory Redemption Date
has the meaning assigned to such term in Section 3.04.
Moodys
means Moodys Investors Service, Inc. and its successors.
18
Net Cash Proceeds
means, with respect to any Asset Sale, the proceeds of such Asset Sale in
the form of cash (including (i) payments in respect of deferred payment obligations to the extent
corresponding to principal, but not interest, when received in the form of cash, and (ii) proceeds
from the conversion of other consideration received when converted to cash), net of
(1) brokerage commissions and other fees and expenses related to such Asset Sale,
including all legal, accounting, title and recording tax expenses, commissions and other
fees and expenses incurred;
(2) provisions for federal, state, foreign and local taxes as a result of such Asset
Sale taking into account the consolidated results of operations of the Company and its
Restricted Subsidiaries;
(3) payments required to be made to holders of minority interests in Restricted
Subsidiaries as a result of such Asset Sale or to repay Debt outstanding at the time of
such Asset Sale that is secured by a Lien on the property or assets sold; and
(4) amounts by contract to be held in escrow pending determination of whether a
purchase price adjustment will be made and appropriate amounts to be provided as a reserve
against liabilities associated with such Asset Sale, including pension and other
post-employment benefit liabilities, liabilities related to environmental matters and
indemnification obligations associated with such Asset Sale, with any subsequent reduction
of the reserve other than by payments made and charged against the reserved amount or
release from escrow to be deemed a receipt of cash.
Non-Recourse Debt
means Debt as to which neither the Company nor any Restricted Subsidiary
provides any Guarantee and no default as to which would, as such, constitute a default under any
Debt of the Company or any Restricted Subsidiary.
Non-U.S. Person
means a Person that is not a U.S. person, as defined in Regulation S.
NGC
means the company that will be renamed Northrop Grumman Corporation after the Spin-off,
together with its consolidated Subsidiaries after the Spin-off.
Notes
has the meaning assigned to such term in the Recitals.
Note Guaranty
means the guaranty of the Notes by a Guarantor pursuant to the Indenture.
19
Obligations
means, with respect to any Debt, all obligations (whether in existence on the
Issue Date or arising afterwards, absolute or contingent, direct or indirect) for or in respect of
principal (when due, upon acceleration, upon redemption, upon mandatory repayment or repurchase
pursuant to a mandatory offer to purchase, or otherwise), premium, interest, penalties, fees,
indemnification, reimbursement and other amounts payable and liabilities with respect to such Debt,
including all interest accrued or accruing after the commencement of any bankruptcy, insolvency or
reorganization or similar case or proceeding at the contract rate (including, any contract rate
applicable upon default) specified in the relevant documentation, whether or not the claim for such
interest is allowed as a claim in such case or proceeding.
Offer to Purchase
has the meaning assigned to such term in Section 3.06.
Offering Circular
means the offering circular relating to the issuance of the Notes dated
March 4, 2011.
Officer
means any vice president, the chief executive officer, the chief financial officer,
the treasurer or any assistant treasurer, or the secretary or any assistant secretary, of the
Company.
Officers Certificate
means a certificate signed in the name of the Company by an Officer.
Offshore Global Note
means a Global Note representing Notes issued and sold pursuant to
Regulation S.
Opinion of Counsel
means a written opinion signed by legal counsel, who may be an employee
of or counsel to the Company, satisfactory to the Trustee.
Original Notes
means the Initial Notes and any Exchange Notes issued in exchange therefor.
Paying Agent
means any Person authorized by the Company to pay the principal of or interest
on any Notes on behalf of the Company.
Permanent Offshore Global Note
means an Offshore Global Note that does not bear the
Temporary Offshore Global Note Legend.
Permitted Bank Debt
has the meaning assigned to such term in Section 4.06.
Permitted Debt
has the meaning assigned to such term in Section 4.06.
20
Permitted Business
means any of the businesses in which the Company and its Restricted
Subsidiaries are engaged on the Issue Date and Completion Date after giving effect to the
Transactions, and any business reasonably related, incidental, complementary or ancillary thereto.
Permitted Investments
means:
(1) Investments in existence on the Issue Date not otherwise permitted by clause (2)
below or required pursuant to any agreement in effect on the Issue Date;
(2) any Investment in the Company or in a Restricted Subsidiary of the Company;
(3) any Investment in Cash Equivalents;
(4) any Investment by the Company or any Subsidiary of the Company in a Person, if as
a result of such Investment,
(A) such Person becomes a Restricted Subsidiary of the Company, or
(B) such Person is merged or consolidated with or into, or transfers or
conveys substantially all its assets to, or is liquidated into, the Company or a
Restricted Subsidiary;
(5) Investments received as non-cash consideration in an Asset Sale made pursuant to
and in compliance with Section 4.12 or any disposition of property not constituting an
Asset Sale;
(6) Hedging Agreements otherwise permitted under the Indenture;
(7) (i) receivables owing to the Company or any Restricted Subsidiary and advances to
suppliers if created or acquired in the ordinary course of business, (ii) Cash
Equivalents, (iii) endorsements for collection or deposit in the ordinary course of
business, and (iv) securities, instruments or other obligations received in compromise or
settlement of debts created in the ordinary course of business, or by reason of a
composition or readjustment of debts or reorganization of another Person, or in
satisfaction of claims or judgments;
(8) Investments in an aggregate amount, taken together with all other Investments
made in reliance on this clause, not to exceed the greater of (A) $150.0 million and (B)
4.0% of Consolidated Net Tangible Assets (net of, with respect to the Investment in any
particular Person, the cash return thereon received after the Issue Date as a result of
any sale for
21
cash, repayment, redemption, liquidating distribution or other cash realization (not
included in Consolidated Net Income), not to exceed the amount of Investments in such
Person made after the Issue Date in reliance on this clause);
(9) payroll, travel and other loans or advances to, or Guarantees issued to support
the obligations of, officers and employees, in each case in the ordinary course of
business, not in excess of $10.0 million outstanding at any time;
(10) Investments in joint ventures and Unrestricted Subsidiaries (measured on the
date each such investment is made and without giving effect to subsequent changes in
value) in an aggregate amount not to exceed the greater of (A) $150.0 million and (B) 4.0%
of Consolidated Net Tangible Assets (net of, with respect to the Investment in any
particular Person, the cash return thereon received after the Issue Date as a result of
any sale for cash, repayment, redemption, liquidating distribution or other cash
realization (not included in Consolidated Net Income), not to exceed the amount of
Investments in such Person made after the Issue Date in reliance on this clause);
(11) extensions of credit to customers and suppliers in the ordinary course of
business; and
(12) Investments resulting from the disposition of interests in the shipyard in
Avondale, Louisiana or the facilities in Waggaman, Louisiana, or Tallulah, Louisiana.
Permitted Liens
means
(1) Liens existing on the Issue Date or arising on or prior to the Completion Date
pursuant to the Transactions and the Interim Ordinary Course Transactions, in each case
not otherwise constituting Permitted Liens;
(2) Liens securing the Notes or any Note Guaranties;
(3) Liens securing (A) Permitted Bank Debt
plus
(B) Debt Incurred under Section
4.06(a) in an aggregate principal amount not to exceed (X) an amount that does not cause
the Consolidated Secured Leverage Ratio to exceed 2.65:1
minus
(Y) an amount equal to
$1,500 million
less
any amount of Permitted Bank Debt permanently repaid as provided under
Section 4.12,
plus
(C) Obligations in respect thereof and any cash management obligations
or agreements with respect to similar banking services;
22
(4) pledges or deposits under workers compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in connection with bids, tenders, contracts
or leases, or to secure public or statutory obligations, surety bonds, customs duties and
the like, or for the payment of rent, in each case incurred in the ordinary course of
business and not securing Debt;
(5) Liens imposed by law, such as carriers, vendors, warehousemens and mechanics
liens, in each case for sums not yet due or being contested in good faith and by
appropriate proceedings;
(6) Liens in respect of taxes and other governmental assessments and charges which
are not yet due or which are being contested in good faith and by appropriate proceedings;
(7) Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the proceeds
thereof;
(8) minor survey exceptions, minor encumbrances, easements or reservations of, or
rights of others for, licenses, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions as to the use
of real property, not interfering in any material respect with the conduct of the business
of the Company and its Restricted Subsidiaries;
(9) licenses or leases or subleases as licensor, lessor or sublessor of any of its
property, including intellectual property, in the ordinary course of business;
(10) customary Liens in favor of trustees and escrow agents, and netting and setoff
rights, bankers liens and the like in favor of financial institutions and counterparties
to financial obligations and instruments, including Hedging Agreements;
(11) Liens on assets pursuant to merger agreements, stock or asset purchase
agreements and similar agreements in respect of the disposition of such assets;
(12) judgment liens, and Liens securing appeal bonds or letters of credit issued in
support of or in lieu of appeal bonds, so long as no Event of Default then exists as a
result thereof;
(13) Liens (including the interest of a lessor under a Capital Lease) on property
that secure Debt Incurred under clause 11 of Permitted Debt for the purpose of financing
all or any part of the purchase price or
23
cost of construction or improvement of such property and which attach within 180 days
after the date of such purchase or the completion of construction or improvement;
(14) Liens on property of a Person at the time such Person becomes a Restricted
Subsidiary of the Company,
provided
such Liens were not created in contemplation thereof
and do not extend to any other property of the Company or any Restricted Subsidiary;
(15) Liens on property at the time the Company or any of the Restricted Subsidiaries
acquires such property, including any acquisition by means of a merger or consolidation
with or into the Company or a Restricted Subsidiary of such Person,
provided
such Liens
were not created in contemplation thereof and do not extend to any other property of the
Company or any Restricted Subsidiary;
(16) Liens securing Debt or other obligations of the Company or a Restricted
Subsidiary to the Company or a Restricted Subsidiary;
(17) Liens securing Hedging Agreements so long as such Hedging Agreements relate to
Debt for borrowed money that is, and is permitted to be under the Indenture, secured by a
Lien on the same property securing such Hedging Agreements;
(18) Liens in favor of customs or revenue authorities arising as a matter of law to
secure payments of customs duties in connection with the importation of goods incurred in
the ordinary course of business;
(19) deposits in the ordinary course of business to secure liability to insurance
carriers;
(20) any interest of title of an owner of equipment or inventory on a loan or
consignment to the Company or any of its Restricted Subsidiaries and Liens arising from
Uniform Commercial Code financing statement filings regarding operating leases entered
into by the Company or any Restricted Subsidiary in the ordinary course of business;
(21) Liens securing obligations for third party customer financing in the ordinary
course of business;
(22) options, put and call arrangements, rights of first refusal and similar rights
relating to Investments in joint ventures, limited liability companies, partnerships and
the like permitted to be made under the Indenture;
(23) Liens deemed to exist in connection with Investments in repurchase agreements
that constitute Permitted Investments; provided
24
that such Liens do not extend to any assets other than those assets that are the
subject of such repurchase agreements;
(24) Liens on property necessary to defease Debt that was not incurred in violation
of the Indenture;
(25) extensions, renewals or replacements of any Liens referred to in clauses (1),
(2), (13), (14) or (15) in connection with the refinancing of the obligations secured
thereby,
provided
that such Lien does not extend to any other property and, except as
contemplated by the definition of Permitted Refinancing Debt, the amount secured by such
Lien is not increased; and
(26) other Liens securing obligations in an aggregate amount not exceeding $210.0
million.
Permitted Refinancing Debt
has the meaning assigned to such term in Section 4.06.
Person
means an individual, a corporation, a partnership, a limited liability company, an
association, a trust or any other entity, including a government or political subdivision or an
agency or instrumentality thereof.
Preferred Stock
means, with respect to any Person, any and all Capital Stock which is
preferred as to the payment of dividends or distributions, upon liquidation or otherwise, over
another class of Capital Stock of such Person.
principal
of any Debt means the principal amount of such Debt, (or if such Debt was issued
with original issue discount, the face amount of such Debt less the remaining unamortized portion
of the original issue discount of such Debt), together with, if the context so requires, any
premium then payable on such Debt.
Qualified Equity Interests
means all Equity Interests of a Person other than Disqualified
Equity Interests.
Qualified Equity Offering
means any public or private offering, after the Issue Date, of
Qualified Stock of the Company other than pursuant to employee benefit plans or otherwise in
compensation to officers, directors or employees.
Qualified Stock
means all Capital Stock of a Person other than Disqualified Stock.
Rating Agencies
means S&P and Moodys;
provided
, that if either S&P or Moodys (or both)
shall cease issuing a rating on the Notes for reasons outside
25
the control of the Company, the Company may select a nationally recognized statistical rating
agency to substitute for S&P or Moodys (or both).
refinance
has the meaning assigned to such term in Section 4.06.
Register
has the meaning assigned to such term in Section 2.09.
Registrar
means a Person engaged to maintain the Register.
Registration Rights Agreement
means (i) the Registration Rights Agreement dated on or about
the Issue Date between the Company and the Initial Purchasers party thereto with respect to the
Initial Notes , and (ii) with respect to any Additional Notes, any registration rights agreements
between the Company and the Initial Purchasers party thereto relating to rights given by the
Company to the purchasers of Additional Notes to register such Additional Notes or exchange them
for Notes registered under the Securities Act.
Regular Record Date
for the interest payable on any Interest Payment Date means the March 1
or September 1 (whether or not a Business Day) next preceding such Interest Payment Date.
Regulation S
means Regulation S under the Securities Act.
Regulation S Certificate
means a certificate substantially in the form of Exhibit F hereto.
Replacement Assets
means all or substantially all of the assets of a Permitted Business, or
a majority of the Voting Stock of another Person that thereupon becomes a Restricted Subsidiary
engaged in a Permitted Business or assets (other than inventory, securities or Cash Equivalents)
that are used or useful in a Permitted Business.
Restricted Legend
means the legend set forth in Exhibit D.
Restricted Payment
has the meaning assigned to such term in Section 4.07.
Restricted Period
means the relevant 40-day distribution compliance period as defined in
Regulation S, commencing on the Issue Date in the case of the Initial Notes.
Restricted Subsidiary
means any Subsidiary of the Company other than an Unrestricted
Subsidiary.
Reversion Date
has the meaning assigned to such term in Section 4.20.
Rule 144A
means Rule 144A under the Securities Act.
26
Rule 144A Certificate
means (i) a certificate substantially in the form of Exhibit G hereto
or (ii) a written certification addressed to the Company and the Trustee to the effect that the
Person making such certification (x) is acquiring such Note (or beneficial interest) for its own
account or one or more accounts with respect to which it exercises sole investment discretion and
that it and each such account is a qualified institutional buyer within the meaning of Rule 144A,
(y) is aware that the transfer to it or exchange, as applicable, is being made in reliance upon the
exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A, and (z)
acknowledges that it has received such information regarding the Company as it has requested
pursuant to Rule 144A(d)(4) or has determined not to request such information.
S&P
means Standard & Poors Ratings Group, a division of McGraw Hill, Inc. and its
successors.
Securities Act
means the Securities Act of 1933.
Significant Subsidiary
means any Restricted Subsidiary , or group of Restricted
Subsidiaries, that would , taken together, be a significant subsidiary as defined in Article 1,
Rule 1-02 (w)(1) or (2) of Regulation S-X promulgated under the Securities Act, as such regulation
is in effect on the Issue Date.
Special Redemption
has the meaning assigned to such term in Section 3.03.
Special Redemption Date
has the meaning assigned to such term in Section 3.03.
Special Redemption Price
means a cash redemption price equal to 100% of the issue price of
the applicable Note (as set forth on the cover of the Offering Circular), plus the Accrued Yield on
such Note and accrued and unpaid interest on such Note from the Issue Date to the Special
Redemption Date.
Spin-off
means the Spin-off transaction pursuant to which the shares of the Company will be
distributed to the stockholders of Northrop Grumman Corporation as described in the Offering
Circular.
Spin-off Date
means the date on which the Spin-off is consummated.
Spin-off Determination Date
has the meaning assigned to such term in Section 3.04.
Stated Maturity
means (i) with respect to any Debt, the date specified as the fixed date on
which the final installment of principal of such Debt is due and payable or (ii) with respect to
any scheduled installment of principal of or interest on any Debt, the date specified as the fixed
date on which such installment is due and payable as, in each case, set forth in the documentation
27
governing such Debt, not including any contingent obligation to repay, redeem or repurchase
prior to the regularly scheduled date for payment.
Subordinated Debt
means any Debt of the Company or any Guarantor which is subordinated in
right of payment to the Notes or the Note Guaranty, as applicable, pursuant to a written agreement
to that effect.
Subsidiary
means with respect to any Person, any corporation, association or other business
entity of which more than 50% of the outstanding Voting Stock is owned, directly or indirectly, by,
or, in the case of a partnership, the sole general partner or the managing partner or the only
general partners of which are, such Person and one or more Subsidiaries of such Person (or a
combination thereof). Unless otherwise specified, Subsidiary means a Subsidiary of the Company.
Suspended Covenants
has the meaning assigned to such term in Section 4.20.
Suspension Period
has the meaning assigned to such term in Section 4.20.
Temporary Offshore Global Note
means an Offshore Global Note that bears the Temporary
Offshore Global Note Legend.
Temporary Offshore Global Note Legend
means the legend set forth in Exhibit J.
Transactions
means, collectively, the Internal Reorganization and the Spin-off, including
the transactions set forth in the instruments and documents relating thereto to occur in connection
therewith (including any actions necessary to effect such transactions), the offering of the Notes
and borrowings under the Credit Agreement and the application of the proceeds thereof (including
the contribution of a portion of the proceeds of the offering of the Notes and Credit Agreement
borrowings to NGC), and the payment of the fees and expenses and reimbursement of advances related
thereto (including financing, financial and other advisory fees, accounting and consulting fees and
legal fees), in each case substantially on the terms described in the Offering Circular.
Treasury Rate
means, as of any redemption date, the yield to maturity as of such redemption
date of United States Treasury securities with a constant maturity (as compiled and published in
the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available
at least two Business Days prior to the redemption date (or, if such Statistical Release is no
longer published, any publicly available source of similar market data)) most nearly equal to the
period from the redemption date to March 15, 2015 in the case of the 2018 Notes and March 15, 2016
in the case of the 2021 Notes;
provided
that if the period
28
from the redemption date to such date is less than one year, the weekly average yield on
actually traded United States Treasury securities adjusted to a constant maturity of one year will
be used.
Trustee
means the party named as such in the first paragraph of the Indenture or any
successor trustee under the Indenture pursuant to Article 7.
Trust Indenture Act
means the Trust Indenture Act of 1939.
U.S. Global Note
means a Global Note that bears the Restricted Legend representing Notes
issued and sold pursuant to Rule 144A.
U.S. Government Obligations
means (i) obligations issued or directly and fully guaranteed or
insured by the United States of America or by any agent or instrumentality thereof, provided that
the full faith and credit of the United States of America is pledged in support thereof; (ii)
repurchase agreements with respect to debt obligations referred to in clause (i); (iii) money
market accounts that invest solely in the debt obligations referred to in clause (i) and/or
repurchase obligations referred to in clause (ii) above; and (iv) U.S. dollars.
Unrestricted Subsidiary
means (i) all Subsidiaries of NGC that are not intended to be the
Company or a Subsidiary of the Company following the Spin-off, (ii) Current NGC and (iii) any
Subsidiary of the Company that at the time of determination has previously been designated, and
continues to be, an Unrestricted Subsidiary in accordance with Section 4.15.
Voting Stock
means, with respect to any Person, Capital Stock of any class or kind
ordinarily having the power to vote for the election of directors, managers or other voting
members, as applicable, of the governing body of such Person.
Wholly Owned
means, with respect to any Restricted Subsidiary, a Restricted Subsidiary all
of the outstanding Capital Stock of which (other than any directors qualifying shares) is owned by
the Company and one or more Wholly Owned Restricted Subsidiaries (or a combination thereof).
Section 1.02
.
Rules of Construction.
Unless the context otherwise requires or
except as otherwise expressly provided,
(1) an accounting term not otherwise defined has the meaning assigned to it in
accordance with GAAP;
(2) herein, hereof and other words of similar import refer to the Indenture as a
whole and not to any particular Section, Article or other subdivision; and the word
including means including without limitation;
29
(3) all references to Sections or Articles or Exhibits refer to Sections or Articles
or Exhibits of or to the Indenture unless otherwise indicated;
(4) references to agreements or instruments, or to statutes or regulations, are to
such agreements or instruments, or statutes or regulations, as amended from time to time
(or to successor statutes and regulations); and
(5) in the event that a transaction meets the criteria of more than one category of
permitted transactions or listed exceptions the Company may classify such transaction as
it, in its sole discretion, determines.
ARTICLE 2
The Notes
Section 2.01
. Form, Dating and Denominations; Legends.
(a) The 2018 Notes and the Trustees
certificate of authentication thereon will be substantially in the form attached as Exhibit A. The
2021 Notes and the Trustees certificate of authentication thereon will be substantially in the
form attached as Exhibit B. The terms and provisions contained in the respective forms of the 2018
Notes annexed as Exhibit A and the 2021 Notes annexed as Exhibit B constitute, and are hereby
expressly made, a part of the Indenture. The Notes of each series may have notations, legends or
endorsements required by law, rules of or agreements with national securities exchanges to which
the Company is subject, or usage. Each Note will be dated the date of its authentication. The
Notes of each series will be issuable in denominations of $2,000 and higher integral multiples of
$1,000.
(b) (1) Except as otherwise provided in paragraph (c), Section 2.09(b)(4) or Section
2.10(b)(3), (b)(5), or (c), each Initial Note or Initial Additional Note (other than a
Permanent Offshore Note) will bear the Restricted Legend.
(2) Each Global Note, whether or not an Initial Note or Additional Note, will bear
the DTC Legend.
(3) Each Temporary Offshore Global Note will bear the Temporary Offshore Global Note
Legend.
(4) Initial Notes and Initial Additional Notes offered and sold in reliance on
Regulation S will be issued as provided in Section 2.11(a).
(5) Initial Notes and Initial Additional Notes offered and sold in reliance on Rule
144A will be in the form of one or more U.S. Global Notes.
30
(6) Initial Notes and Initial Additional Notes offered and sold in reliance on any
exemption under the Securities Act other than Regulation S and Rule 144A will be issued in
the form of Certificated Notes.
(7) Initial Notes resold to Institutional Accredited Investors will be in the form of
one or more IAI Global Notes.
(8) Exchange Notes will be issued, subject to Section 2.09(b), in the form of one or
more Global Notes.
(c) (1) If the Company determines (upon the advice of counsel and based on such other
certifications and evidence as the Company may reasonably require) that a Note is eligible
for resale pursuant to Rule 144 under the Securities Act (or a successor provision)
without the need for current public information and that the Restricted Legend is no
longer necessary or appropriate in order to ensure that subsequent transfers of the Note
(or a beneficial interest therein) are effected in compliance with the Securities Act, or
(2) after an Initial Note or any Initial Additional Note is
(x) sold pursuant to an effective registration statement under the
Securities Act, pursuant to the Registration Rights Agreement or otherwise, or
(y) is validly tendered for exchange into an Exchange Note pursuant to an
Exchange Offer
the Company may instruct the Trustee to cancel the Note and issue to the Holder thereof (or to its
transferee) a new Note of the same series, of like tenor and amount, registered in the name of the
Holder thereof (or its transferee), that does not bear the Restricted Legend, and the Trustee will
comply with such instruction.
(d) By its acceptance of any Note bearing the Restricted Legend (or any beneficial interest in
such a Note), each Holder thereof and each owner of a beneficial interest therein acknowledges the
restrictions on transfer of such Note (and any such beneficial interest) set forth in this
Indenture and in the Restricted Legend and agrees that it will transfer such Note (and any such
beneficial interest) only in accordance with the Indenture and such legend.
Section 2.02
. Execution and Authentication; Exchange Notes; Additional Notes.
(a) An Officer
shall execute the Notes for the Company by facsimile or manual signature in the name and on behalf
of the Company. If an Officer whose signature is on a Note no longer holds that office at the time
the Note is authenticated, the Note will still be valid.
(b) A Note will not be valid until the Trustee manually signs the certificate of
authentication on the Note by an authorized signatory, with the
31
signature conclusive evidence that the Note has been authenticated under the Indenture.
(c) At any time and from time to time after the execution and delivery of the Indenture, the
Company may deliver Notes of a series executed by the Company to the Trustee for authentication.
The Trustee will authenticate and deliver
(i) Initial Notes for original issue in the aggregate principal amount not to exceed
$600,000,000 aggregate principal amount of the 2018 Notes and $600,000,000 aggregate
principal amount of the 2021 Notes,
(ii) Initial Additional Notes from time to time for original issue in aggregate
principal amounts specified by the Company, and
(iii) Exchange Notes from time to time for issue in exchange for a like principal
amount of Initial Notes or Initial Additional Notes of the same series
after the following conditions have been met:
(1) Receipt by the Trustee of an Officers Certificate specifying
(A) the amount of Notes to be authenticated and the date on which the Notes
are to be authenticated,
(B) whether the Notes are to be Initial Notes, Additional Notes or Exchange
Notes,
(C) in the case of Initial Additional Notes, that the issuance of such Notes
does not contravene any provision of Article 4,
(D) whether the Notes are to be issued as one or more Global Notes or
Certificated Notes, and
(E) other information the Company may determine to include or the Trustee
may reasonably request.
(2) In the case of Initial Additional Notes, receipt by the Trustee of an Opinion of
Counsel confirming that the Holders of the outstanding Notes will be subject to federal
income tax in the same amounts, in the same manner and at the same times as would have
been the case if such Additional Notes were not issued.
32
(3) In the case of Exchange Notes, effectiveness of an Exchange Offer Registration
Statement and consummation of the exchange offer thereunder (and receipt by the Trustee of
an Officers Certificate to that effect). Initial Notes or Initial Additional Notes
exchanged for Exchange Notes will be cancelled by the Trustee.
Section 2.03
. Registrar, Paying Agent and Authenticating Agent; Paying Agent to Hold Money in
Trust.
(a) The Company may appoint one or more Registrars and one or more Paying Agents, and the
Trustee may appoint an Authenticating Agent, in which case each reference, if any, in the Indenture
to the Trustee in respect of the obligations of the Trustee to be performed by that Agent will be
deemed to be references to the Agent. The Company may act as Registrar or (except for purposes of
Article 8) Paying Agent. In each case the Company and the Trustee will enter into an appropriate
agreement with the Agent (if other than the Trustee) implementing the provisions of the Indenture
relating to the obligations to be performed by the Agent and the related rights. The Company
initially appoints the Trustee as Registrar and Paying Agent.
(b) The Company will require each Paying Agent other than the Trustee to agree in writing that
the Paying Agent will hold in trust for the benefit of the Holders or the Trustee all money held by
the Paying Agent for the payment of principal of and interest on the Notes and will promptly notify
the Trustee of any default by the Company in making any such payment. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee and account for any funds
disbursed, and the Trustee may at any time during the continuance of any payment default, upon
written request to a Paying Agent, require the Paying Agent to pay all money held by it to the
Trustee and to account for any funds disbursed. Upon doing so, the Paying Agent will have no
further liability for the money so paid over to the Trustee.
Section 2.04
. Replacement Notes.
If a mutilated Note is surrendered to the Trustee or if the
Trustee receives evidence to its satisfaction that a Note has been lost, destroyed or wrongfully
taken, the Company will issue and the Trustee will authenticate a replacement Note of like series,
tenor and principal amount and bearing a number not contemporaneously outstanding. Every
replacement Note is an additional obligation of the Company and entitled to the benefits of the
Indenture. If required by the Trustee or the Company, an indemnity must be furnished that is
sufficient in the judgment of both the Trustee and the Company to protect the Company and the
Trustee from any loss they may suffer if a Note is replaced. The Company may charge the Holder for
the expenses of the Company and the Trustee in replacing a Note. In case the mutilated, lost,
destroyed or wrongfully taken Note has become or is about to become due and payable, the Company in
its discretion may pay the Note instead of issuing a replacement Note. The provisions of this
Section 2.04 shall be exclusive and shall preclude (to the extent lawful) all other rights and
remedies with respect to the replacement or payment of mutilated, destroyed, lost or wrongfully
taken Notes.
33
Section 2.05
. Outstanding Notes.
(a) Notes outstanding at any time are all Notes that have
been authenticated by the Trustee except for
(1) Notes cancelled by the Trustee or delivered to it for cancellation;
(2) any Note which has been replaced or paid pursuant to Section 2.04 unless and
until the Trustee and the Company receive proof satisfactory to them that the replaced or
paid Note is held by a
bona fide
purchaser; and
(3) on or after the maturity date or any redemption date or date for purchase of the
Notes pursuant to an Offer to Purchase, those Notes payable or to be redeemed or purchased
on that date for which the Trustee (or Paying Agent, other than the Company or an
Affiliate of the Company) holds money sufficient to pay all amounts then due.
(b) A Note does not cease to be outstanding because the Company or one of its Affiliates holds
the Note,
provided
that in determining whether the Holders of the requisite principal amount of the
outstanding Notes have given or taken any request, demand, authorization, direction, notice,
consent, waiver or other action hereunder, Notes owned by the Company or any Affiliate of the
Company will be disregarded and deemed not to be outstanding, (it being understood that in
determining whether the Trustee is protected in relying upon any such request, demand,
authorization, direction, notice, consent, waiver or other action, only Notes which the Trustee
knows to be so owned will be so disregarded). Notes so owned which have been pledged in good faith
may be regarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgees right so to act with respect to such Notes and that the pledgee is not the Company or any
Affiliate of the Company.
Section 2.06
. Temporary Notes.
Until definitive Notes are ready for delivery, the Company
may prepare and the Trustee will authenticate temporary Notes. Temporary Notes will be
substantially in the form of definitive Notes of the applicable series but may have insertions,
substitutions, omissions and other variations determined to be appropriate by the Officer executing
the temporary Notes, as evidenced by the execution of the temporary Notes. If temporary Notes are
issued, the Company will cause definitive Notes to be prepared without unreasonable delay. After
the preparation of definitive Notes, the temporary Notes will be exchangeable for definitive Notes
of the same series upon surrender of the temporary Notes at the office or agency of the Company
designated for the purpose pursuant to Section 4.02, without charge to the Holder. Upon surrender
for cancellation of any temporary Notes the Company will execute and the Trustee will authenticate
and deliver in exchange therefor a like principal amount of definitive Notes of the same series of
authorized denominations. Until so
34
exchanged, the temporary Notes will be entitled to the same benefits under the Indenture as
definitive Notes of the applicable series.
Section 2.07
. Cancellation.
The Company at any time may deliver to the Trustee for
cancellation any Notes previously authenticated and delivered hereunder which the Company may
have acquired in any manner whatsoever, and may deliver to the Trustee for cancellation any Notes
previously authenticated hereunder which the Company has not issued and sold. Any Registrar or the
Paying Agent will forward to the Trustee any Notes surrendered to it for transfer, exchange or
payment. The Trustee will cancel all Notes surrendered for transfer, exchange, payment or
cancellation and dispose of them in accordance with its normal procedures or the written
instructions of the Company. The Company may not issue new Notes to replace Notes it has paid in
full or delivered to the Trustee for cancellation.
Section 2.08
. CUSIP and CINS Numbers.
The Company in issuing the Notes may use CUSIP and
CINS numbers, and the Trustee will use CUSIP numbers or CINS numbers in notices of redemption or
exchange or in Offers to Purchase as a convenience to Holders, the notice to state that no
representation is made as to the correctness of such numbers either as printed on the Notes or as
contained in any notice of redemption or exchange or Offer to Purchase. The Company will promptly
notify the Trustee of any change in the CUSIP or CINS numbers.
Section 2.09
. Registration, Transfer and Exchange.
(a) The Notes will be issued in
registered form only, without coupons, and the Company shall cause the Trustee to maintain a
register (the
Register
) of the Notes, for registering the record ownership of the Notes by the
Holders and transfers and exchanges of the Notes.
(b) (1) Each Global Note will be registered in the name of the Depositary or its
nominee and, so long as DTC is serving as the Depositary thereof, will bear the DTC
Legend.
(2) Each Global Note will be delivered to the Trustee as custodian for the
Depositary. Transfers of a Global Note (but not a beneficial interest therein) will be
limited to transfers thereof in whole, but not in part, to the Depositary, its successors
or their respective nominees, except (1) as set forth in Section 2.09(b)(4) and (2)
transfers of portions thereof in the form of Certificated Notes of the same series may be
made upon request of an Agent Member (for itself or on behalf of a beneficial owner) by
written notice given to the Trustee by or on behalf of the Depositary in accordance with
customary procedures of the Depositary and in compliance with this Section and Section
2.10.
35
(3) Agent Members will have no rights under the Indenture with respect to any Global
Note held on their behalf by the Depositary, and the Depositary may be treated by the
Company, the Trustee and any agent of the Company or the Trustee as the absolute owner and
Holder of such Global Note for all purposes whatsoever. Notwithstanding the foregoing,
the Depositary or its nominee may grant proxies and otherwise authorize any Person
(including any Agent Member and any Person that holds a beneficial interest in a Global
Note through an Agent Member) to take any action which a Holder is entitled to take under
the Indenture or the Notes, and nothing herein will impair, as between the Depositary and
its Agent Members, the operation of customary practices governing the exercise of the
rights of a holder of any security.
(4) If (x) the Depositary notifies the Company that it is unwilling or unable to
continue as Depositary for a Global Note and a successor depositary is not appointed by
the Company within 90 days of the notice or (y) an Event of Default has occurred and is
continuing and the Trustee has received a request from the Depositary, the Trustee will
promptly exchange each beneficial interest in the Global Note for one or more Certificated
Notes in authorized denominations having an equal aggregate principal amount registered in
the name of the owner of such beneficial interest, as identified to the Trustee by the
Depositary, and thereupon the Global Note will be deemed canceled. If such Note does not
bear the Restricted Legend, then the Certificated Notes issued in exchange therefor will
not bear the Restricted Legend. If such Note bears the Restricted Legend, then the
Certificated Notes issued in exchange therefor will bear the Restricted Legend,
provided
that any Holder of any such Certificated Note issued in exchange for a beneficial interest
in a Temporary Offshore Global Note will have the right upon presentation to the Trustee
of a duly completed Certificate of Beneficial Ownership after the Restricted Period to
exchange such Certificated Note for a Certificated Note of like tenor and amount that does
not bear the Restricted Legend, registered in the name of such Holder.
(5) None of the Company, the Trustee nor any agent of the Company or the Trustee will
have any responsibility or liability for any aspect of the records relating to or payments
made on account of beneficial ownership interests of a Global Note or maintaining,
supervising or reviewing any records relating to such beneficial ownership interests.
(c) Each Certificated Note will be registered in the name of the holder thereof or its
nominee.
(d) A Holder may transfer a Note (or a beneficial interest therein) to another Person or
exchange a Note (or a beneficial interest therein) for another
36
Note or Notes of the same series of any authorized denomination by presenting to the Trustee a
written request therefor stating the name of the proposed transferee or requesting such an
exchange, accompanied by any certification, opinion or other document required by Section 2.10.
For avoidance of doubt, neither the Trustee nor the Registrar shall have any responsibilities with
respect to the transfer of beneficial interests within the same Global Note. The Trustee will
promptly register any transfer or exchange that meets the requirements of this Section by noting
the same in the register maintained by the Trustee for the purpose;
provided
that
(x) no transfer or exchange will be effective until it is registered in such
register,
(y) the Trustee will not be required (i) to issue, register the transfer of or
exchange any Note for a period of 15 days before a selection of Notes to be redeemed or
purchased pursuant to an Offer to Purchase, (ii) to register the transfer of or exchange
any Note so selected for redemption or purchase in whole or in part, except, in the case
of a partial redemption or purchase, that portion of any Note not being redeemed or
purchased, or (iii) if a redemption or a purchase pursuant to an Offer to Purchase is to
occur after a Regular Record Date but on or before the corresponding Interest Payment
Date, to register the transfer of or exchange any Note on or after the Regular Record Date
and before the date of redemption or purchase. Prior to the registration of any transfer,
the Company, the Trustee and their agents will treat the Person in whose name the Note is
registered as the owner and Holder thereof for all purposes (whether or not the Note is
overdue), and will not be affected by notice to the contrary, and
(z) every Note presented or surrendered for registration of transfer or for exchange
shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied
by a written instrument of transfer in form satisfactory to the Company and the Registrar
duly executed, by the Holder thereof or his attorney duly authorized in writing.
From time to time the Company will execute and the Trustee will authenticate additional Notes
as necessary in order to permit the registration of a transfer or exchange in accordance with this
Section. In order to facilitate the execution, authentication and delivery of Certificated Notes,
the Company shall deliver a supply of Certificated Notes to the Trustee in sufficient time to
permit the execution, authentication and delivery thereof on a timely basis.
No service charge will be imposed in connection with any transfer or exchange of any Note, but
the Company may require payment of a sum sufficient to cover any transfer tax or similar
governmental charge payable in connection
37
therewith (other than a transfer tax or other similar governmental charge payable upon
exchange pursuant to subsection (b)(4)).
(e) (1)
Global Note to Global Note
. If a beneficial interest in a Global Note is
transferred or exchanged for a beneficial interest in another Global Note, the Trustee
will (x) record a decrease in the principal amount of the Global Note being transferred or
exchanged equal to the principal amount of such transfer or exchange and (y) record a like
increase in the principal amount of the other Global Note of the same series. Any
beneficial interest in one Global Note that is transferred to a Person who takes delivery
in the form of an interest in another Global Note, or exchanged for an interest in another
Global Note, will, upon transfer or exchange, cease to be an interest in such Global Note
and become an interest in the other Global Note and, accordingly, will thereafter be
subject to all transfer and exchange restrictions, if any, and other procedures applicable
to beneficial interests in such other Global Note for as long as it remains such an
interest.
(2)
Global Note to Certificated Note
. If a beneficial interest in a Global Note is
transferred or exchanged for a Certificated Note, the Trustee will (x) record a decrease
in the principal amount of such Global Note equal to the principal amount of such transfer
or exchange and (y) deliver one or more new Certificated Notes of the same series in
authorized denominations having an equal aggregate principal amount to the transferee (in
the case of a transfer) or the owner of such beneficial interest (in the case of an
exchange), registered in the name of such transferee or owner, as applicable.
(3)
Certificated Note to Global Note
. If a Certificated Note is transferred or
exchanged for a beneficial interest in a Global Note, the Trustee will (x) cancel such
Certificated Note, (y) record an increase in the principal amount of such Global Note of
the same series equal to the principal amount of such transfer or exchange and (z) in the
event that such transfer or exchange involves less than the entire principal amount of the
canceled Certificated Note, deliver to the Holder thereof one or more new Certificated
Notes of the same series in authorized denominations having an aggregate principal amount
equal to the untransferred or unexchanged portion of the canceled Certificated Note,
registered in the name of the Holder thereof.
(4)
Certificated Note to Certificated Note
. If a Certificated Note is transferred or
exchanged for another Certificated Note, the Trustee will (x) cancel the Certificated Note
being transferred or exchanged, (y) deliver one or more new Certificated Notes of the same
series in authorized denominations having an aggregate principal amount equal to the
principal amount of such transfer or exchange to the transferee (in the case of a
38
transfer) or the Holder of the canceled Certificated Note (in the case of an
exchange), registered in the name of such transferee or Holder, as applicable, and (z) if
such transfer or exchange involves less than the entire principal amount of the canceled
Certificated Note, deliver to the Holder thereof one or more Certificated Notes of the
same series in authorized denominations having an aggregate principal amount equal to the
untransferred or unexchanged portion of the canceled Certificated Note, registered in the
name of the Holder thereof.
Section 2.10
. Restrictions on Transfer and Exchange.
(a) The transfer or exchange of any
Note (or a beneficial interest therein) may only be made in accordance with this Section and
Section 2.09 and, in the case of a Global Note (or a beneficial interest therein), the applicable
rules and procedures of the Depositary. The Trustee shall refuse to register any requested
transfer or exchange that does not comply with the preceding sentence.
(b) Subject to paragraph (c), the transfer or exchange of any Note (or a beneficial interest
therein) of the type set forth in column A below for a Note (or a beneficial interest therein) of
the type set forth opposite in column B below may only be made in compliance with the certification
requirements (if any) described in the clause of this paragraph set forth opposite in column C
below.
|
|
|
|
|
|
|
A
|
|
B
|
|
C
|
U.S. Global Note
|
|
U.S. Global Note
|
|
|
(1
|
)
|
U.S. Global Note
|
|
Offshore Global Note
|
|
|
(2
|
)
|
U.S .Global Note
|
|
IAI Global Note
|
|
|
(6
|
)
|
U.S. Global Note
|
|
Certificated Note
|
|
|
(3
|
)
|
Offshore Global Note
|
|
U.S. Global Note
|
|
|
(4
|
)
|
Offshore Global Note
|
|
Offshore Global Note
|
|
|
(1
|
)
|
Offshore Global Note
|
|
IAI Global Note
|
|
|
(6
|
)
|
Offshore Global Note
|
|
Certificated Note
|
|
|
(5
|
)
|
IAI Global Note
|
|
U.S. Global Note
|
|
|
(4
|
)
|
IAI Global Note
|
|
Offshore Global Note
|
|
|
(2
|
)
|
IAI Global Note
|
|
IAI Global Note
|
|
|
(1
|
)
|
IAI Global Note
|
|
Certificated Note
|
|
|
(3
|
)
|
Certificated Note
|
|
U.S. Global Note
|
|
|
(4
|
)
|
Certificated Note
|
|
Offshore Global Note
|
|
|
(2
|
)
|
Certificated Note
|
|
IAI Global Note
|
|
|
(6
|
)
|
Certificated Note
|
|
Certificated Note
|
|
|
(3
|
)
|
(1) No certification is required.
(2) The Person requesting the transfer or exchange must deliver or cause to be
delivered to the Trustee a duly completed Regulation S Certificate;
provided
that if the
requested transfer or exchange is made by
39
the Holder of a Certificated Note that does not bear the Restricted Legend, then no
certification is required.
(3) The Person requesting the transfer or exchange must deliver or cause to be
delivered to the Trustee (x) a duly completed Rule 144A Certificate, (y) a duly completed
Regulation S Certificate or (z) a duly completed Institutional Accredited Investor
Certificate, and/or, in the case of clauses (x), (y) and (z), an Opinion of Counsel and
such other certifications and evidence as the Company may reasonably require in order to
determine that the proposed transfer or exchange is being made in compliance with the
Securities Act and any applicable securities laws of any state of the United States;
provided
that if the requested transfer or exchange is made by the Holder of a
Certificated Note that does not bear the Restricted Legend, then no certification is
required. In the event that (i) the requested transfer or exchange takes place after the
Restricted Period and a duly completed Regulation S Certificate is delivered to the
Trustee or (ii) a Certificated Note that does not bear the Restricted Legend is
surrendered for transfer or exchange, upon transfer or exchange the Trustee will deliver a
Certificated Note that does not bear the Restricted Legend.
(4) The Person requesting the transfer or exchange must deliver or cause to be
delivered to the Trustee a duly completed Rule 144A Certificate.
(5) Notwithstanding anything to the contrary contained herein, no such exchange is
permitted if the requested exchange involves a beneficial interest in a Temporary Offshore
Global Note. If the requested transfer involves a beneficial interest in a Temporary
Offshore Global Note, the Person requesting the transfer must deliver or cause to be
delivered to the Trustee (x) a duly completed Rule 144A Certificate or (y) a duly
completed Institutional Accredited Investor Certificate and/or an Opinion of Counsel and
such other certifications and evidence as the Company may reasonably require in order to
determine that the proposed transfer is being made in compliance with the Securities Act
and any applicable securities laws of any state of the United States. If the requested
transfer or exchange involves a beneficial interest in a Permanent Offshore Global Note,
no certification is required and the Trustee will deliver a Certificated Note that does
not bear the Restricted Legend.
(6) The Person requesting the transfer or exchange must deliver or cause to be
delivered to the Trustee a duly completed Institutional Accredited Investor Certificate.
40
(c) No certification is required in connection with any transfer or exchange of any Note (or a
beneficial interest therein)
(1) after such Note is eligible for resale pursuant to Rule 144 under the Securities
Act (or a successor provision) without the need for current public information;
provided
that the Company has provided the Trustee with an Officers Certificate to that effect,
and the Company may require from any Person requesting a transfer or exchange in reliance
upon this clause (1) an opinion of counsel and any other reasonable certifications and
evidence in order to support such certificate; or
(2)(x) sold pursuant to an effective registration statement, pursuant to the
Registration Rights Agreement or otherwise or (y) which is validly tendered for exchange
into an Exchange Note pursuant to an Exchange Offer.
Any Certificated Note delivered in reliance upon clause (c) will not bear the Restricted
Legend.
(d) The Trustee will retain copies of all certificates, opinions and other documents received
in connection with the transfer or exchange of a Note (or a beneficial interest therein), and the
Company will have the right to inspect and make copies thereof at any reasonable time upon written
notice to the Trustee.
Section 2.11
. Temporary Offshore Global Notes.
(a) Each Note originally sold by the Initial
Purchasers in reliance upon Regulation S will be evidenced by one or more Offshore Global Notes
that bear the Temporary Offshore Global Note Legend.
(b) An owner of a beneficial interest in a Temporary Offshore Global Note (or a Person acting
on behalf of such an owner) may provide to the Trustee (and the Trustee will accept) a duly
completed Certificate of Beneficial Ownership at any time after the Restricted Period (it being
understood that the Trustee will not accept any such certificate during the Restricted Period).
Promptly after acceptance of a Certificate of Beneficial Ownership with respect to such a
beneficial interest, the Trustee will cause such beneficial interest to be exchanged for an
equivalent beneficial interest in a Permanent Offshore Global Note, and will (x) permanently reduce
the principal amount of such Temporary Offshore Global Note by the amount of such beneficial
interest and (y) increase the principal amount of such Permanent Offshore Global Note by the amount
of such beneficial interest.
(c) Notwithstanding paragraph (b), if after the Restricted Period any Initial Purchaser owns a
beneficial interest in a Temporary Offshore Global Note, such Initial Purchaser may, upon written
request to the Trustee accompanied by a certification as to its status as an Initial Purchaser,
exchange such beneficial
41
interest for an equivalent beneficial interest in a Permanent Offshore Global Note, and the
Trustee will comply with such request and will (x) permanently reduce the principal amount of such
Temporary Offshore Global Note by the amount of such beneficial interest and (y) increase the
principal amount of such Permanent Offshore Global Note by the amount of such beneficial interest.
(d) Notwithstanding anything to the contrary contained herein, any owner of a beneficial
interest in a Temporary Offshore Global Note shall not be entitled to receive payment of principal
or interest on such beneficial interest or other amounts in respect of such beneficial interest
until such beneficial interest is exchanged for an interest in a Permanent Offshore Global Note or
transferred for an interest in another Global Note or a Certificated Note.
ARTICLE 3
Redemption; Offer to Purchase
Section 3.01
. Optional Redemption.
(a) At any time and from time to time prior to March 15,
2015, the Company may redeem, in whole or in part, the 2018 Notes at a price of 100% of the
principal amount of the Notes redeemed plus the Applicable Premium, plus accrued and unpaid
interest, if any, to, but excluding, the redemption date.
(b) At any time and from time to time on or after March 15, 2015, the Company may redeem the
2018 Notes, in whole or in part, at a redemption price equal to the percentage of principal amount
set forth below plus accrued and unpaid interest to the redemption date.
|
|
|
|
|
12-month period
|
|
|
commencing
|
|
|
March 15
|
|
|
in Year
|
|
Percentage
|
2015
|
|
|
103.438%
|
|
2016
|
|
|
101.719%
|
|
2017 and thereafter
|
|
|
100%
|
|
(c) At any time and from time to time prior to March 15, 2016, the Company may redeem, in
whole or in part, the 2021 Notes at a price of 100% of the principal amount of the Notes redeemed
plus the Applicable Premium, plus accrued and unpaid interest, if any, to, but excluding, the
redemption date.
(d) At any time and from time to time on or after March 15, 2016, the Company may redeem the
2021 Notes, in whole or in part, at a redemption price equal to the percentage of principal amount
set forth below plus accrued and unpaid interest to the redemption date.
42
|
|
|
|
|
12-month period
|
|
|
commencing
|
|
|
March 15
|
|
|
in Year
|
|
Percentage
|
2016
|
|
|
103.563%
|
|
2017
|
|
|
102.375%
|
|
2018
|
|
|
101.188%
|
|
2019 and thereafter
|
|
|
100%
|
|
The Company, and not the Trustee, shall be responsible for calculating the Applicable Premium.
Promptly after the calculation thereof, the Company shall give the Trustee notice of the amount of
the Applicable Premium.
Section 3.02
. Redemption with Proceeds of Public Equity Offering.
(a) At any time and from
time to time prior to March 15, 2014, the Company may redeem the 2018 Notes with the net cash
proceeds received by the Company from any Qualified Equity Offering at a redemption price equal to
106.875% of the principal amount plus accrued and unpaid interest to the redemption date, in an
aggregate principal amount for all such redemptions not to exceed 35% of the aggregate principal
amount of the 2018 Notes, including Additional Notes,
provided
that
(1) in each case the redemption takes place not later than 90 days after the closing of the
related Qualified Equity Offering, and
(2) not less than 65% in principal amount of the 2018 Notes, including Additional Notes,
remains outstanding immediately thereafter.
(b) At any time and from time to time prior to March 15, 2014, the Company may redeem the 2021
Notes with the net cash proceeds received by the Company from any Qualified Equity Offering at a
redemption price equal to 107.125% of the principal amount plus accrued and unpaid interest to the
redemption date, in an aggregate principal amount for all such redemptions not to exceed 35% of the
aggregate principal amount of the 2021 Notes, including Additional Notes,
provided
that
(1) in each case the redemption takes place not later than 90 days after the closing of the
related Qualified Equity Offering, and
(2) not less than 65% in principal amount of the 2021 Notes, including Additional Notes,
remains outstanding immediately thereafter.
Section 3.03
. Special Redemption.
In the event that the Completion Date has not occurred on
or prior to the earlier to occur of (i) the determination by the Board of Directors in its good
faith judgment that the Completion Date will not occur by June 30, 2011, or (ii) June 30, 2011
(such earlier date, the
Date of
43
Determination
), the Company shall redeem each Note (the
Special Redemption
), on the date
that is five Business Days after the Date of Determination (the
Special Redemption Date
), at the
Special Redemption Price. If the Completion Date has not occurred on or prior to the Date of
Determination, upon the receipt of written instruction from the Company, which instruction shall
include a statement that the Date of Determination has occurred and a notice as to the amount of
the Special Redemption Price, and an Officers Certificate and Opinion of Counsel, each to the
effect that all conditions precedent provided for in the Indenture to the Special Redemption have
been complied with, which the Company is required to provide by the close of business on the Date
of Determination, the Trustee will send a notice of such Special Redemption on behalf of the
Company to the Holders of the Notes (in the form provided to it by the Company) on the next
Business Day after the Date of Determination.
Section 3.04
. Mandatory Redemption.
In the event that the Spin-off is not consummated within
five Business Days after the Completion Date (the
Spin-off Determination Date
), the Company shall
redeem each Note (the
Mandatory Redemption
), on the date that is five Business Days after the
Spin-off Determination Date (the
Mandatory Redemption Date
), at a cash redemption price equal to
the issue price of such Note (as set forth on the cover page of the Offering Circular), plus the
Accrued Yield and accrued interest on such Note to the date of redemption (the
Mandatory
Redemption Price
). If the Spin-off has not occurred on or prior to the Spin-off Determination
Date, upon the receipt of written instruction from the Company, which instructions shall include a
statement that the Spin-off Determination Date has occurred and a notice as to the amount of the
Mandatory Redemption Price, and an Officers Certificate and Opinion of Counsel each to the effect
that all conditions precedent provided for in the Indenture to the Mandatory Redemption have been
complied with, which the Company is required to provide by the close of business on the Spin-off
Determination Date, the Trustee will send a notice of such Mandatory Redemption on behalf of the
Company to the Holders of the Notes (in the form provided to it by the Company) on the next
Business Day after the Spin-off Determination Date.
Section 3.05
. Method and Effect of Redemption.
(a) If the Company elects to redeem Notes of
a series, it must notify the Trustee of the redemption date and the principal amount of Notes to be
redeemed by delivering an Officers Certificate at least 60 days before the redemption date (unless
a shorter period is satisfactory to the Trustee) except as set forth in Section 3.03 and Section
3.04, such Officers Certificate to state that all conditions precedent provided for in the
Indenture to such redemption have been complied with. If fewer than all of the Notes of a series
are being redeemed, the Trustee will select the Notes of such series to be redeemed, no later than
30 days prior to the redemption date, pro rata, by lot or by any other method the Trustee in its
sole discretion deems fair and appropriate, in denominations of $2,000 principal amount and higher
integral multiples of $1,000; provided, that the unredeemed portion of a Note must be in a
44
minimum principal amount of $2,000. The Trustee will notify the Company promptly of the Notes
or portions of Notes to be called for redemption. Except as provided in Section 3.03 and Section
3.04, notice of redemption must be sent by the Company to Holders whose Notes are to be redeemed at
least 30 days but not more than 60 days before the redemption date. At the Companys request in
connection with an optional redemption, the Trustee shall give the notice of redemption in the
Companys name and at its expense;
provided, however
, that the Company shall have delivered to the
Trustee, at least 45 days prior to the redemption date (or such shorter period as may be acceptable
to the Trustee), an Officers Certificate requesting that the Trustee give such notice and setting
forth the information to be stated in such notice as provided in Section 3.05(b).
(b) The notice of redemption will identify the Notes to be redeemed and will include or state
the following:
(1) the redemption date;
(2) the redemption price, or if not then ascertainable, the manner of calculation
thereof, including the portion thereof representing any accrued interest;
(3) the place or places where Notes are to be surrendered for redemption;
(4) Notes called for redemption must be so surrendered in order to collect the
redemption price;
(5) on the redemption date the redemption price will become due and payable on Notes
called for redemption, and interest on Notes called for redemption will cease to accrue on
and after the redemption date;
(6) if any Note is redeemed in part, on and after the redemption date, upon surrender
of such Note, new Notes equal in principal amount to the unredeemed portion will be
issued; and
(7) if any Note contains a CUSIP or CINS number, no representation is being made as
to the correctness of the CUSIP or CINS number either as printed on the Notes or as
contained in the notice of redemption and that the Holder should rely only on the other
identification numbers printed on the Notes.
(c) Once notice of redemption is sent to the Holders, Notes called for redemption become due
and payable at the redemption price on the redemption date, and upon surrender of the Notes called
for redemption, the Company shall redeem such Notes at the redemption price. Commencing on the
redemption date, Notes redeemed will cease to accrue interest;
provided
, that the Company has not
45
defaulted in depositing the redemption price in accordance with the provisions hereof. Upon
surrender of any Note redeemed in part, the Holder will receive a new Note equal in principal
amount to the unredeemed portion of the surrendered Note.
Section 3.06
. Offer to Purchase.
(a) An
Offer to Purchase
means an offer by the Company to
purchase Notes as required by the Indenture. An Offer to Purchase must be made by written offer
(the
offer
) sent to the Holders. The Company will notify the Trustee at least 15 days (or such
shorter period as is acceptable to the Trustee) prior to sending the offer to Holders of its
obligation to make an Offer to Purchase, and the offer will be sent by the Company or, at the
Companys request, by the Trustee in the name and at the expense of the Company. Such request
shall be evidenced by an Officers Certificate requesting that the Trustee give such notice and
setting forth the information to be stated in such notice as provided in Section 3.06(b).
(b) The offer must include or state the following as to the terms of the Offer to Purchase:
(1) the provision of the Indenture pursuant to which the Offer to Purchase is being
made;
(2) the aggregate principal amount of the outstanding Notes offered to be purchased
by the Company pursuant to the Offer to Purchase (including, if less than 100%, the manner
by which such amount has been determined pursuant to the Indenture) (the
purchase
amount
);
(3) the purchase price, including the portion thereof representing accrued interest;
(4) an expiration date (the
expiration date
) not less than 30 days or more than 60
days after the date of the offer, and a settlement date for purchase (the
purchase date
)
not more than five Business Days after the expiration date;
(5) describe the transaction or transactions that constituted the requirement to make
the Offer to Purchase;
(6) a Holder may tender all or any portion of its Notes, subject to the requirement
that any portion of a Note tendered must be equal to $2,000 principal amount or a higher
multiple of $1,000 principal amount (provided that any unpurchased portion of the Note
must be in a minimum principal amount of $2,000);
(7) the place or places where Notes are to be surrendered for tender pursuant to the
Offer to Purchase;
46
(8) each Holder electing to tender a Note pursuant to the offer will be required to
surrender such Note at the place or places specified in the offer prior to the close of
business on the expiration date (such Note being, if the Company or the Trustee so
requires, duly endorsed or accompanied by a duly executed written instrument of transfer);
(9) interest on any Note not tendered, or tendered but not purchased by the Company
pursuant to the Offer to Purchase, will continue to accrue;
(10) on the purchase date the purchase price will become due and payable on each Note
accepted for purchase, and interest on Notes purchased will cease to accrue on and after
the purchase date;
(11) Holders are entitled to withdraw Notes tendered by giving notice, which must be
received by the Company or the Trustee not later than the close of business on the
expiration date, setting forth the name of the Holder, the principal amount of the
tendered Notes, the certificate number of the tendered Notes and a statement that the
Holder is withdrawing all or a portion of the tender;
(12) (i) if Notes in an aggregate principal amount less than or equal to the purchase
amount are duly tendered and not withdrawn pursuant to the Offer to Purchase, the Company
will purchase all such Notes, and (ii) if the Offer to Purchase is for less than all of
the outstanding Notes and Notes in an aggregate principal amount in excess of the purchase
amount are tendered and not withdrawn pursuant to the offer, the Company will purchase
Notes of both series having an aggregate principal amount equal to the purchase amount on
a pro rata basis (based on the principal amount of all Notes of both series tendered),
with adjustments so that only Notes in multiples of $1,000 principal amount will be
purchased;
(13) if any Note is purchased in part, new Notes equal in principal amount to the
unpurchased portion of the Note will be issued; and
(14) if any Note contains a CUSIP or CINS number, no representation is being made as
to the correctness of the CUSIP or CINS number either as printed on the Notes or as
contained in the offer and that the Holder should rely only on the other identification
numbers printed on the Notes.
(c) Prior to the purchase date, the Company will accept tendered Notes for purchase as
required by the Offer to Purchase and deliver to the Trustee all Notes so accepted together with an
Officers Certificate specifying which Notes have been accepted for purchase. On the purchase date
the purchase price will
47
become due and payable on each Note accepted for purchase, and interest on Notes purchased
will cease to accrue on and after the purchase date;
provided
, that the Company has not defaulted
in depositing the purchase price in accordance with the provisions hereof. The Trustee will
promptly return to Holders any Notes not accepted for purchase and send to Holders new Notes equal
in principal amount to any unpurchased portion of any Notes accepted for purchase in part.
(d) The Company will comply with Rule 14e-1 under the Exchange Act and all other applicable
laws in making any Offer to Purchase, and the above procedures will be deemed modified as necessary
to permit such compliance, and the Company shall not be deemed to have breached its obligations
hereinder as a result of such compliance.
ARTICLE 4
Covenants
Section 4.01
. Payment Of Notes.
(a) The Company agrees to pay the principal of and interest
on the Notes on the dates and in the manner provided in the Notes and the Indenture. Not later
than 9:00 A.M. (New York City time) on the due date of any principal of or interest on any Notes,
or any redemption or purchase price of the Notes, the Company will deposit with the Trustee (or
Paying Agent) money in immediately available funds sufficient to pay such amounts,
provided
that if
the Company or any Affiliate of the Company is acting as Paying Agent, it will, on or before each
due date, segregate and hold in a separate trust fund for the benefit of the Holders a sum of money
sufficient to pay such amounts until paid to such Holders or otherwise disposed of as provided in
the Indenture. In each case the Company will promptly notify the Trustee of its compliance with
this paragraph.
(b) An installment of principal or interest will be considered paid on the date due if the
Trustee (or Paying Agent, other than the Company or any Affiliate of the Company) holds on that
date money designated for and sufficient to pay the installment. If the Company or any Affiliate
of the Company acts as Paying Agent, an installment of principal or interest will be considered
paid on the due date only if paid to the Holders.
(c) The Company agrees to pay interest on overdue principal, and, to the extent lawful,
overdue installments of interest at the rate per annum specified in the Notes.
(d) Payments in respect of the Notes represented by the Global Notes are to be made by wire
transfer of immediately available funds to DTC for transfer to the accounts of its participants.
With respect to Certificated Notes, the Company will make all payments by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or, if no such account
is specified
48
to the Trustee or the Paying Agent at least 15 calendar days prior to the applicable payment
date, by mailing a check to each Holders registered address.
Section 4.02
. Maintenance Of Office Or Agency.
The Company will maintain in the United
States of America, an office or agency where Notes may be surrendered for registration of transfer
or exchange or for presentation for payment and where notices and demands to or upon the Company in
respect of the Notes and the Indenture may be served. The Company hereby initially designates the
Corporate Trust Office of the Trustee as such agency of the Company. The Company will give prompt
written notice to the Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company fails to maintain any such required office or agency or fails
to furnish the Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served upon the Trustee.
The Company may also from time to time designate one or more other offices or agencies where
the Notes may be surrendered or presented for any of such purposes and may from time to time
rescind such designations. The Company will give prompt written notice to the Trustee of any such
designation or rescission and of any change in the location of any such other office or agency.
Section 4.03
. Existence.
The Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its existence and the existence of each of its
Restricted Subsidiaries in accordance with their respective organizational documents, and the
material rights, licenses and franchises of the Company and each Restricted Subsidiary,
provided
that the Company is not required to preserve any such right, license or franchise, or the existence
of any Restricted Subsidiary, if the maintenance or preservation thereof is no longer desirable in
the conduct of the business of the Company and its Restricted Subsidiaries taken as a whole; and
provided further
that this Section does not prohibit any transaction otherwise permitted by Section
4.12 or Article 5.
Section 4.04
.
[Reserved].
Section 4.05
.
[Reserved].
Section 4.06.
Limitation on Debt.
(a) The Company
(1) will not, and will not permit any of its Restricted Subsidiaries to, Incur any
Debt; and
(2) will not permit any of its Restricted Subsidiaries that is not a Guarantor to
Incur any Preferred Stock (other than Preferred Stock of Restricted Subsidiaries held by
the Company or a Restricted Subsidiary, so long as it is so held);
49
provided
that the Company or any Restricted Subsidiary may Incur Debt and any Restricted Subsidiary
that is not a Guarantor may Incur Preferred Stock if, on the date of the Incurrence, after giving
effect to the Incurrence and the receipt and application of the proceeds therefrom, the Fixed
Charge Coverage Ratio is not less than 2.0:1.0.
(b) Notwithstanding the foregoing, the Company and, to the extent provided below, any
Restricted Subsidiary may Incur the following (
Permitted Debt
):
(1) Debt (
Permitted Bank Debt
) of the Company or any Guarantor pursuant to Credit
Facilities; provided that the aggregate principal amount at any time outstanding does not
exceed $1,500.0 million,
less
any amount of such Debt permanently repaid as provided under
Section 4.12;
(2) Debt of the Company or any Restricted Subsidiary to the Company or any Restricted
Subsidiary so long as such Debt continues to be owed to the Company or a Restricted
Subsidiary;
(3) Debt of the Company pursuant to the Notes (other than Additional Notes, but
including Exchange Notes in respect of Notes and Additional Notes) and Debt of any
Guarantor pursuant to a Note Guaranty of the Notes (including Additional Notes and
Exchange Notes);
(4) Debt (
Permitted Refinancing Debt
) constituting an extension or renewal of,
replacement of, or substitution for, or issued in exchange for, or the net proceeds of
which are used to repay, redeem, repurchase, refinance or refund, including by way of
defeasance (all of the above, for purposes of this clause,
refinance
) then outstanding
Debt in an amount not to exceed the principal amount of the Debt so refinanced, plus
premiums, fees and expenses;
provided
that
(A) in case the Debt to be refinanced is Subordinated Debt, the new Debt, by
its terms or by the terms of any agreement or instrument pursuant to which it is
outstanding is expressly made subordinate in right of payment to the Notes at
least to the extent that the Debt to be refinanced is subordinated to the Notes,
(B) the new Debt either does not have a Stated Maturity prior to the Stated
Maturity of the Debt to be refinanced or has a Stated Maturity at least 91 days
after the maturity of the Notes, and the Average Life of the new Debt is at least
equal to the remaining Average Life of the Debt to be refinanced,
50
(C) in no event may Debt of the Company or any Guarantor be refinanced
pursuant to this clause by means of any Debt of any Restricted Subsidiary that is
not a Guarantor, and
(D) Debt Incurred pursuant to clauses (1), (2), (5), (6), (9), (10), (12),
(13), (14) and (15) may not be refinanced pursuant to this clause;
(5) Hedging Agreements of the Company or any Restricted Subsidiary entered into in
the ordinary course of business for the purpose of limiting risks associated with the
business of the Company and its Restricted Subsidiaries and not for speculation;
(6) Debt of the Company or any Restricted Subsidiary incurred in respect of workers
compensation claims and self-insurance obligations and with respect to letters of credit
and bankers acceptances issued in the ordinary course of business and not supporting
Debt, including letters of credit for operating purposes or completion guarantees or
supporting indemnity, bid, warranty, performance, surety, appeal or similar bonds, or
indemnification, adjustment of purchase price or similar obligations incurred in
connection with the acquisition or disposition of any business or assets;
(7) Debt of the Company or any Restricted Subsidiary (a) that is outstanding on the
Issue Date or will be Incurred on or prior to the Completion Date as a result of the
Transactions or (b) Incurred under the Interim Ordinary Course Transactions (and, for
purposes of clause (4)(D), not otherwise constituting Permitted Debt);
provided
that no
Debt for borrowed money Incurred under clause (b) shall remain outstanding following the
Spin-Off Date;
(8) Acquired Debt;
provided
that, after giving effect to the incurrence thereof,
(A) the Company could incur at least $1.00 of Debt pursuant to paragraph (a)
above or
(B) the Fixed Charge Coverage Ratio of the Company would be greater than
such ratio immediately prior to such incurrence;
(9) Obligations of the Company or any Restricted Subsidiary in respect of customer
advances received and held in the ordinary course of business;
51
(10) Debt of the Company and any of its Restricted Subsidiaries consisting of (i) the
financing of insurance premiums or (ii) take-or-pay obligations contained in supply
arrangements, in each case, incurred in the ordinary course of business;
(11) Debt of the Company or any Restricted Subsidiary, which may include Capital
Leases, mortgage financings or purchase money obligations, Incurred on or after the Issue
Date no later than 180 days after the date of purchase or completion of construction or
improvement of property, plant or equipment for the purpose of financing all or any part
of the purchase price or cost of construction or improvement;
provided
that the aggregate
principal amount of any Debt (including the aggregate outstanding amount of Permitted
Refinancing Debt Incurred to refinance Debt Incurred pursuant to this clause) at any time
outstanding pursuant to this clause may not exceed the greater of (A) $75.0 million and
(B) 2.0% of Consolidated Net Tangible Assets of the Company;
(12) Debt of the Company or any Restricted Subsidiary consisting of Guarantees of
Debt of the Company or any Restricted Subsidiary Incurred under any other clause of this
covenant;
(13) Debt incurred on behalf of, or representing Guarantees of Debt of, joint
ventures not to exceed the greater of (A) $100.0 million and (B) 2.6% of Consolidated Net
Tangible Assets at any time outstanding;
(14) Debt supported by a letter of credit Incurred under clause (1) above in the same
principal amount; and
(15) Debt of the Company or any Restricted Subsidiary Incurred on or after the Issue
Date not otherwise permitted in an aggregate principal amount at any time outstanding not
to exceed the greater of (A) $200.0 million and (B) 5.3% of Consolidated Net Tangible
Assets.
(c) Notwithstanding any other provision of this covenant, for purposes of determining
compliance with this covenant, increases in Debt solely due to fluctuations in the
exchange rates of currencies will not be deemed to exceed the maximum amount that the
Company or a Restricted Subsidiary may Incur under this covenant. For purposes of
determining compliance with any U.S. dollar-denominated restriction on the Incurrence of
Debt, the U.S. dollar-equivalent principal amount of Debt denominated in a foreign
currency shall be calculated based on the relevant currency exchange rate in effect on the
date such Debt was Incurred; provided that if such Debt is Incurred to refinance other
Debt denominated in a foreign currency, and such refinancing would cause the applicable
U.S. dollar-denominated restriction to be exceeded if calculated at the relevant currency
exchange rate in effect on the date of such refinancing, such U.S.
52
dollar-denominated restriction shall be deemed not to have been exceeded so long as
the principal amount of such refinancing Debt does not exceed the principal amount of such
Debt being refinanced. The principal amount of any Debt Incurred to refinance other Debt,
if Incurred in a different currency from the Debt being refinanced, shall be calculated
based on the currency exchange rate applicable to the currencies in which such respective
Debt is denominated that is in effect on the date of such refinancing. Guarantees or
Liens in respect of, or obligations in respect of letters of credit relating to, Debt
which is otherwise included in the determination of a particular amount of Debt shall not
be included in the determination of such amount of Debt;
provided
that the Incurrence of
the Debt represented by such guarantee, Lien or letter of credit, as the case may be, was
in compliance with this covenant.
(d) In the event that an item, or a portion of such item, taken by itself, of Debt or
Preferred Stock meets the criteria of more than one of the categories of Permitted Debt
described in clauses (1) through (14) above or such item is (or a portion, taken by itself
(without taking into account any other Permitted Debt (other than Permitted Debt under
clause (8) above) being incurred on the same date, would be) entitled to be Incurred
pursuant to paragraph (a) of this covenant, the Company shall, in its sole discretion,
classify or reclassify, or later divide, classify or reclassify, such item of Debt in any
manner that complies with this covenant, and may change the classification of an item of
Debt (or any portion thereof) to any other type of Debt described in this covenant at any
time
; provided
that Debt under the Credit Agreement outstanding on the Completion Date
shall be deemed at all times to be incurred under clause (1) of Permitted Debt.
(e) Neither the Company nor any Guarantor may Incur any Debt that is subordinated in
right of payment to other Debt of the Company or the Guarantor unless such Debt is also
subordinated in right of payment to the Notes or the relevant Note Guaranty to the same
extent. This does not apply to distinctions between categories of Debt that exist by
reason of any structural subordination, Liens or Guarantees securing or in favor of some
but not all of such Debt.
Section 4.07
. Limitation on Restricted Payments.
(a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly (the payments and other actions
described in the following clauses being collectively
Restricted Payments
):
(i) declare or pay any dividend or make any distribution on its Equity Interests
(other than dividends or distributions paid in the Companys Qualified Equity Interests)
held by Persons other than the Company or any of its Restricted Subsidiaries;
53
(ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests
of the Company or any direct or indirect parent of the Company held by Persons other than
the Company or any of its Restricted Subsidiaries;
(iii) repay, redeem, repurchase, defease or otherwise acquire or retire for value, or
make any payment on or with respect to, any Subordinated Debt (except (1) a payment of
interest or principal at Stated Maturity or (2) the purchase, repurchase or other
acquisition of Subordinated Debt or payments of principal and interest in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity, in each
case, within one year of the due date thereof); or
(iv) make any Investment other than a Permitted Investment;
unless, at the time of, and after giving effect to, the proposed Restricted Payment:
(1) no Default has occurred and is continuing,
(2) the Company could Incur at least $1.00 of Debt under Section 4.06(a), and
(3) the aggregate amount expended for all Restricted Payments made on or after the
Issue Date would not, subject to paragraph (c), exceed the sum of
(A) 50% of the aggregate amount of the Consolidated Net Income (or, if the
Consolidated Net Income is a loss, minus 100% of the amount of the loss) accrued
on a cumulative basis during the period, taken as one accounting period, from
January 1, 2011, and ending on the last day of the Companys most recently
completed fiscal quarter for which internal financial statements are available
immediately preceding the date of such proposed Restricted Payment, plus
(B) subject to paragraph (c), the aggregate net cash proceeds and the fair
market value (determined in the good faith of the Company) of any property other
than cash received by the Company (other than from a Subsidiary) after the Issue
Date from
(i) the issuance and sale of its Qualified Equity Interests,
including by way of issuance of its Disqualified Equity Interests or
Debt to the extent since converted into Qualified Equity Interests of
the Company, or
(ii) as a contribution to its common equity, plus
54
(C) an amount equal to the sum, for all Unrestricted Subsidiaries, of the
following:
(x) the cash and the fair market value as determined in good faith
by the Company of property, after the Issue Date, received on
Investments (other than Permitted Investments) in an Unrestricted
Subsidiary made after the Issue Date as a result of any sale, repayment,
redemption, liquidating distribution or other realization other than
pursuant to clause (D) below (to the extent not included in Consolidated
Net Income), plus
(y) the portion (proportionate to the Companys equity interest in
such Subsidiary) of the fair market value (as determined in good faith
by the Company) of the assets less liabilities of an Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a
Restricted Subsidiary,
not to exceed, in the case of any Unrestricted Subsidiary, the amount of
Investments made after the Issue Date by the Company and its Restricted
Subsidiaries in such Unrestricted Subsidiary pursuant to this paragraph (a); plus
(D) the cash and the fair market value (as determined in good faith by the
Company) of property, after the Issue Date, received on any other Investment
(other than Permitted Investments) made after the Issue Date as a result of any
payments of interest on Debt, dividends, repayments of loans or advances, or
sale, repayment, redemption, liquidating distribution or other realization (to
the extent not included in Consolidated Net Income) not to exceed the amount of
such Investment as made.
The amount expended in any Restricted Payment, if other than in cash, will be deemed to be the
fair market value of the relevant non-cash assets, as determined in good faith by the Board of
Directors, whose determination will be conclusive and evidenced by a Board Resolution.
(b) The foregoing will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration thereof
if, at the date of declaration, such payment would comply with paragraph (a);
55
(2) dividends or distributions by a Restricted Subsidiary payable, on a pro rata
basis or on a basis more favorable to the Company, to all holders of its Equity Interests;
(3) the repayment, redemption, repurchase, defeasance or other acquisition or
retirement of Subordinated Debt with the net cash proceeds of, or in exchange for, a
substantially concurrent issuance of new Subordinated Debt Incurred in accordance with the
Indenture;
(4) the purchase, redemption or other acquisition or retirement of Equity Interests
of the Company or any direct or indirect parent in exchange for, or out of the net cash
proceeds of a substantially concurrent offering of, Qualified Equity Interests of the
Company or of a cash contribution to the common equity of the Company;
(5) the repayment, redemption, repurchase, defeasance or other acquisition or
retirement of Subordinated Debt of the Company in exchange for, or out of the net cash
proceeds of, a substantially concurrent offering of, Qualified Equity Interests of the
Company or of a cash contribution to the common equity of the Company;
(6) any Investment made in exchange for, or out of the net cash proceeds of a
substantially concurrent offering of Qualified Equity Interests of the Company or of a
cash contribution to the common equity of the Company;
(7) the purchase, redemption or other acquisition or retirement for value of Equity
Interests of the Company in connection with issuances of Equity Interests pursuant to
employee benefit plans or otherwise in compensation to officers, directors or employees,
which purchase, redemption or other acquisition or retirement for value is in order to
minimize dilution;
provided
that the aggregate cash consideration paid therefor in any
twelve-month period after the Issue Date does not exceed an aggregate amount of $10.0
million; provided further, that any unused amounts in any calendar year may be carried
forward to one or more future periods subject to a maximum aggregate amount of repurchases
made pursuant to this clause (7) not to exceed $20.0 million in any calendar year;
(8) the defeasance, redemption, repurchase or other acquisition of any Subordinated
Debt at a purchase price not greater than (x) 101% of the principal amount thereof in the
event of a change of control pursuant to a provision no more favorable to the holders
thereof than Section 4.11 or (y) 100% of the principal amount thereof in the event of an
Asset Sale pursuant to a provision no more favorable to the holders thereof than Section
4.12, in each case plus accrued interest, provided that, in each
56
case, prior to or contemporaneously with the defeasance, redemption, repurchase or
other acquisition the Company has made an Offer to Purchase and repurchased all Notes
issued under the Indenture that were validly tendered for payment and not withdrawn in
connection with the Offer to Purchase;
(9) the declaration and payment of dividends on Disqualified Stock of the Company or
any Restricted Subsidiary issued or Incurred in compliance with Section 4.06 to the extent
such dividends are included in Fixed Charges;
(10) repurchases of Equity Interests deemed to occur upon the exercise of stock
options, warrants or other convertible or exchangeable securities, or cash payments, in
lieu of issuance of fractional shares, in connection with the exercise of stock options,
warrants or other securities convertible into or exchangeable for the Equity Interests of
the Company or any Restricted Subsidiary;
(11) the declaration and payment of dividends on the Companys Equity Interests, or
the purchase, repurchase, redemption, defeasance or other acquisition or retirement of any
Qualified Equity Interests of the Company, not to exceed an aggregate amount pursuant to
this clause (11) of $30.0 million in any calendar year provided, that any unused amounts
in any calendar year may be carried forward to one or more future periods; and
(12) Restricted Payments not otherwise permitted hereby in an aggregate amount not to
exceed $100.0 million.
provided
that, in the case of clause (11), no Event of Default has occurred and is continuing or
would occur as a result thereof.
(c) Proceeds of the issuance of Qualified Equity Interests will be included under clause (3)
of paragraph (a) only to the extent they are not applied as described in clause (4), (5), or (6) of
paragraph (b). Restricted Payments permitted pursuant to clause (2) through (7), (9), (10) or (12)
will not be included in making the calculations under clause (3) of paragraph (a).
(d) Notwithstanding anything to the contrary set forth above, (i) none of (x) the consummation
of the Transactions, including the Internal Reorganization, the distribution of the Equity
Interests of any Unrestricted Subsidiary by the Company or any Restricted Subsidiary to NGC or any
of its Subsidiaries (other than the Company or any of its Subsidiaries) and the contribution of a
portion of the proceeds of the offering and Credit Agreement borrowings to NGC, in each case as
described in the Offering Circular, or (y) the Interim Ordinary Course Transactions will constitute
a Restricted Payment,
57
and(ii) any contribution to the Companys equity or issuance of Equity Interests of the
Company in connection with the Transactions will be disregarded for purposes of clause (a)(3)
above.
Section 4.08
. Limitation on Liens.
The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, incur or permit to exist any Liens of any nature whatsoever
that secure Debt on any of its properties or assets, whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the Notes are secured
equally and ratably with (or, if the obligation to be secured by the Lien is subordinated in right
of payment to the Notes or any Note Guaranty, prior to) the obligations so secured for so long as
such obligations are so secured.
Section 4.09
. Limitation on Dividend and other Payment Restrictions Affecting Restricted
Subsidiaries.
(a) Except as provided in paragraph (b), the Company will not, and will not permit
any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any
consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to
(1) pay dividends or make any other distributions on any Equity Interests of the
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(2) pay any Debt or other obligation owed to the Company or any other Restricted
Subsidiary,
(3) make loans or advances to the Company or any other Restricted Subsidiary, or
(4) transfer any of its property or assets to the Company or any other Restricted
Subsidiary.
(b) The provisions of paragraph (a) do not apply to any encumbrances or restrictions
(1) existing (a) on the Issue Date in the Indenture or any other agreements in effect
on the Issue Date, or (b) existing on the Completion Date in the Credit Agreement or any
other agreement relating to the Transactions (in each case on the terms described in the
Offering Circular), and any extensions, renewals, replacements or refinancings of any of
the foregoing;
provided
that the encumbrances and restrictions in the extension, renewal,
replacement or refinancing are, taken as a whole, no less favorable in any material
respect to the Noteholders than the encumbrances or restrictions being extended, renewed,
replaced or refinanced;
58
(2) existing under or by reason of applicable law, rule, regulation or order;
(3) existing
(A) with respect to any Person, or to the property or assets of any Person,
at the time the Person is acquired by the Company or any Restricted Subsidiary,
or
(B) with respect to any Unrestricted Subsidiary at the time it is designated
or is deemed to become a Restricted Subsidiary,
which encumbrances or restrictions (i) are not applicable to any other Person or the
property or assets of any other Person and (ii) were not put in place in anticipation of
such event, and any extensions, renewals, replacements or refinancings of any of the
foregoing,
provided
the encumbrances and restrictions in the extension, renewal,
replacement or refinancing are, taken as a whole, no less favorable in any material
respect to the Noteholders than the encumbrances or restrictions being extended, renewed,
replaced or refinanced;
(4) of the type described in clause (a)(4) arising or agreed to in the ordinary
course of business (i) that restrict in a customary manner the subletting, assignment or
transfer of any property or asset that is subject to a lease or license, (ii) are
contained in agreements related to the license of copyrighted or patented materials or
other intellectual property or (iii) by virtue of any Lien on, or agreement to transfer,
option or similar right with respect to any property or assets of, the Company or any
Restricted Subsidiary;
(5) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that
has been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, the Restricted Subsidiary that is permitted
by Section 4.12;
(6) encumbrances or restrictions that are customary provisions in joint venture
agreements, asset sale agreements, stock sale agreements, sale leaseback agreements or
other similar arrangements with respect to the disposition or distribution of assets or
property subject to such agreements;
(7) any other agreements governing Debt entered into after the Issue Date that
contains encumbrances and restrictions that are not materially more restrictive with
respect to any Restricted Subsidiary than
59
those in effect on the Issue Date with respect to that Restricted Subsidiary pursuant
to agreements in effect on the Issue Date;
(8) any restriction with respect to the Company or a Restricted Subsidiary (or any of
its property or assets) imposed by customary provisions in Hedging Agreements not entered
into for speculative purposes;
(9) existing under, by reason of or with respect to Debt Incurred by any Guarantor
permitted to be Incurred under Section 4.06; or
(10) required pursuant to the Indenture.
Section 4.10
. Guaranties by Restricted Subsidiaries.
On the Completion Date, each Domestic
Restricted Subsidiary that Guarantees any Debt under the Credit Agreement shall guarantee the Notes
pursuant to Article 10. If any Restricted Subsidiary Guarantees Debt under the Credit Agreement
after the Completion Date, such Restricted Subsidiary shall guarantee the Notes pursuant to Article
10. A Restricted Subsidiary required to provide a Note Guaranty shall execute a supplemental
indenture in the form of Exhibit C, and deliver an Opinion of Counsel to the Trustee to the effect
that the supplemental indenture has been duly authorized, executed and delivered by the Restricted
Subsidiary and constitutes a valid and binding obligation of the Restricted Subsidiary, enforceable
against the Restricted Subsidiary in accordance with its terms (subject to customary exceptions).
Section 4.11
. Repurchase of Notes Upon a Change of Control.
Not later than 30 days following
a Change of Control, the Company will make an Offer to Purchase all outstanding Notes at a purchase
price equal to 101% of the principal amount plus accrued interest to the date of purchase.
The Company will not be required to make an Offer to Purchase upon a Change of Control if (i)
a third party makes such Offer to Purchase contemporaneously with or upon a Change of Control in
the manner, at the times and otherwise in compliance with the requirements of the Indenture and
purchases all Notes validly tendered and not withdrawn under such Offer to Purchase or (ii) a
notice of redemption to the holders of the Notes has been given pursuant to the Indenture as
described under Section 3.05.
Section 4.12
. Limitation on Asset Sales.
(a) The Company will not, and will not permit any
Restricted Subsidiary to, make any Asset Sale unless the following conditions are met:
(1) The Asset Sale is for consideration at least equal to fair market value, as
determined in good faith by the Board of Directors.
60
(2) At least 75% of the consideration consists of cash, Cash Equivalents or
Replacement Assets or a combination thereof received at closing. For purposes of this
clause (2):
(A) the assumption by the purchaser of Debt or other obligations (other than
Subordinated Debt) of the Company or a Restricted Subsidiary pursuant to a customary
novation agreement,
(B) instruments or securities received from the purchaser that are promptly, but in
any event within 180 days of the closing, converted by the Company to cash, to the extent
of the cash actually so received, and
(C) any Designated Non-cash Consideration received by the Company in such Asset Sale
having an aggregate fair market value (as determined in good faith by the Company), taken
together with all other Designated Non-cash Consideration received pursuant to this clause
(C) that is at that time outstanding, not to exceed the greater of $50.0 million and 1.3%
of Consolidated Net Tangible Assets at the time of the receipt of such Designated Non-cash
Consideration (with the fair market value of each item of Designated Non-cash
Consideration being measured at the time received and without giving effect to subsequent
changes in value)
shall be considered cash received at closing.
(3) Within 365 days after the receipt of any Net Cash Proceeds from an Asset Sale,
the Net Cash Proceeds may be used
(A) to permanently repay secured Debt of the Company or a Guarantor or any
Debt of a Restricted Subsidiary that is not a Guarantor (and in the case of a
revolving credit facility, permanently reduce the commitment thereunder by such
amount), in each case owing to a Person other than the Company or any Subsidiary,
or
(B) to acquire Replacement Assets or to make capital expenditures or
expenditures for maintenance, repair or improvement of existing capital assets;
provided
that if during such 365-day period the Company or a Restricted Subsidiary enters
into a definitive written agreement committing it to apply such Net Cash Proceeds in
accordance with the requirements of clause (B) above, such 365-day period shall be
extended with respect to the amount of Net Cash Proceeds so committed until the earlier of
the date required to be paid in accordance with such agreement and 180 days.
61
(4) The Net Cash Proceeds of an Asset Sale not applied pursuant to clause (3) within
365 days of the Asset Sale (as may be extended as set forth above) constitute
Excess
Proceeds
. Excess Proceeds of less than $50.0 million will be carried forward and
accumulated. When accumulated Excess Proceeds equals or exceeds such amount, the Company
must, within 30 days, make an Offer to Purchase Notes of both series having a principal
amount equal to
(A) accumulated Excess Proceeds, multiplied by
(B) a fraction (x) the numerator of which is equal to the outstanding
principal amount of the Notes of both series and (y) the denominator of which is
equal to the outstanding principal amount of the Notes of both series and all
pari passu
Debt similarly required to be repaid, redeemed or tendered for in
connection with the Asset Sale,
rounded down to the nearest $1,000. The purchase price for the Notes will be 100% of the
principal amount plus accrued interest to the date of purchase. Upon completion of the Offer to
Purchase, Excess Proceeds will be reset at zero, and any Excess Proceeds remaining after
consummation of the Offer to Purchase may be used for any purpose not otherwise prohibited by the
Indenture.
Section 4.13
. Limitation on Transactions with Affiliates.
(a) The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any
transaction or arrangement (including the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any Affiliate of the Company or any Restricted Subsidiary,
for consideration in excess of $10.0 million (a
Related Party Transaction
), except upon fair and
reasonable terms not materially less favorable to the Company or the Restricted Subsidiary than
could be obtained in a comparable arms-length transaction with a Person that is not an Affiliate
of the Company.
(b) Any Related Party Transaction or series of Related Party Transactions with an aggregate
value in excess of $20.0 million must first be approved by a majority of the Board of Directors who
are disinterested in the subject matter of the transaction pursuant to a Board Resolution delivered
to the Trustee. Prior to entering into any Related Party Transaction or series of Related Party
Transactions with an aggregate value in excess of $50.0 million, the Company must in addition
obtain and deliver to the Trustee a favorable written opinion from a nationally recognized
investment banking firm as to the fairness of the transaction to the Company and its Restricted
Subsidiaries from a financial point of view.
(c) The foregoing paragraphs do not apply to
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(1) any transaction between the Company and any of its Restricted Subsidiaries or
between Restricted Subsidiaries of the Company;
(2) the payment of reasonable and customary compensation paid to, or loans made to,
and indemnities and other benefits provided to officers, directors, employees or
consultants of the Company or any Subsidiary, as determined by the Company in good faith;
(3) any Restricted Payments and Permitted Investments (other than Permitted
Investments referred to in clause (4) thereof) if permitted by the Indenture;
(4) any transaction with a joint venture, partnership, limited liability company or
other entity that constitutes an Affiliate solely because the Company or a Restricted
Subsidiary owns an equity interest in such joint venture, partnership, limited liability
company or other entity;
(5) sales or leases of goods, or providing or receiving services, to or from joint
ventures and Affiliates (but excluding any officers or directors) in the ordinary course
of business for less than fair market value but not for less than cost;
(6) transactions with customers, clients, suppliers or purchasers or sellers of goods
or services, or transactions with joint ventures, in each case on terms that are not
materially less favorable to the Company or any of its Restricted Subsidiaries, as the
case may be, as determined in good faith by the Company, than those that could be obtained
in a comparable arms length transaction with a Person that is not an Affiliate of the
Company;
(7) contributions to the equity capital of the Company or a Restricted Subsidiary or
sales of Qualified Equity Interests of the Company or a Guarantor;
(8) transactions or arrangements pursuant to (a) any agreements in effect on the
Issue Date, (b) Interim Ordinary Course Transactions at any time prior to the Spin-Off
Date, or (c) any agreements to be entered into in connection with the Transactions, and,
in the case of agreements referred to in clauses (a) and (c), as such agreements may be
amended, modified or replaced from time to time so long as the amended, modified or new
agreements, taken as a whole, are not materially less favorable to the holders of the
Notes than those in effect on the Issue Date in the case of clause (a) or those described
in the Offering Circular in the case of clause (c).
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Section 4.14
. Line of Business.
The Company will not, and will not permit any of its
Restricted Subsidiaries, to engage in any business other than a Permitted Business, except to an
extent that so doing would not be material to the Company and its Restricted Subsidiaries, taken as
a whole.
Section 4.15
. Designation of Restricted and Unrestricted Subsidiaries.
(a) The Board of
Directors may designate any Subsidiary, including a newly acquired or created Subsidiary, to be an
Unrestricted Subsidiary if it meets the following qualifications and the designation would not
cause a Default.
(1) At the time of the designation, the designation would be permitted under Section
4.07.
(2) To the extent the Debt of the Subsidiary is not Non-Recourse Debt, any Guarantee
or other credit support thereof by the Company or any Restricted Subsidiary is permitted
under Section 4.06 and Section 4.07.
(3) The Subsidiary is not party to any transaction or arrangement with the Company or
any Restricted Subsidiary that would not be permitted under Section 4.13.
(4) Neither the Company nor any Restricted Subsidiary has any obligation to subscribe
for additional Equity Interests of the Subsidiary or to maintain or preserve its financial
condition or cause it to achieve specified levels of operating results except to the
extent permitted by Section 4.06 and Section 4.07.
Once so designated the Subsidiary will remain an Unrestricted Subsidiary, subject to paragraph (b).
(b) (1) A Subsidiary previously designated an Unrestricted Subsidiary pursuant to clause (iii)
of the definition thereof which fails to meet the qualifications set forth in paragraph (a) will be
deemed to become at that time a Restricted Subsidiary, subject to the consequences set forth in
paragraph (d).
(2) The Board of Directors may designate an Unrestricted Subsidiary to be a
Restricted Subsidiary if the designation would not cause a Default.
(c) Upon a Restricted Subsidiary becoming an Unrestricted Subsidiary,
(1) all existing Investments of the Company and the Restricted Subsidiaries therein
(valued at the Companys proportional share of the fair market value of its assets less
liabilities (as determined in good faith by the Company)) will be deemed made at that
time;
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(2) all existing Capital Stock or Debt of the Company or a Restricted Subsidiary held
by it will be deemed Incurred at that time, and all Liens on property of the Company or a
Restricted Subsidiary held by it will be deemed incurred at that time;
(3) all existing transactions between it and the Company or any Restricted Subsidiary
will be deemed entered into at that time;
(4) it is released at that time from its Note Guaranty, if any; and
(5) it will cease to be subject to the provisions of the Indenture as a Restricted
Subsidiary.
(d) Upon an Unrestricted Subsidiary becoming, or being deemed to become, a Restricted
Subsidiary,
(1) all of its Debt and Preferred Stock will be deemed Incurred at that time for
purposes of Section 4.06, but will not be considered the sale or issuance of Equity
Interests for purposes of Section 4.12;
(2) Investments therein previously charged under Section 4.07 will be credited as
provided thereunder;
(3) it may be required to issue a Note Guaranty pursuant to Section 4.10; and
(4) it will thenceforward be subject to the provisions of the Indenture as a
Restricted Subsidiary.
(e) Any designation by the Board of Directors of a Subsidiary as a Restricted Subsidiary or
Unrestricted Subsidiary will be evidenced to the Trustee by promptly filing with the Trustee a copy
of the Board Resolution giving effect to the designation and an Officers Certificate certifying
that the designation complied with the foregoing provisions.
(f) Notwithstanding the foregoing, each of NGC and its Subsidiaries (after giving effect to
the Transactions) and Current NGC shall be deemed an Unrestricted Subsidiary of the Company at all
times on and after and for so long as it becomes a Subsidiary of the Company (which designation
shall occur automatically and without the need to comply with clause (a) above).
Section 4.16.
Limitation on Actions of Current NGC
. Following the Completion Date, the
Company shall not permit or cause Current NGC to engage at any time in any business or have any
material assets or liabilities, other than (a) its liabilities as a guarantor under debt and
certain contracts of the Company and its Restricted Subsidiaries outstanding on the Issue Date, (b)
indemnities from the Company in support of the liabilities listed in (a), (c) liabilities
reasonably
65
incurred in connection with the maintenance of its corporate existence, and (d) liabilities
that may arise from its contractual obligations under the agreements to which NGC is a party
relating to the Transactions.
Section 4.17.
Restrictive Covenants
. (a) Beginning on the Issue Date, all restrictive
covenants set forth in the Indenture will be applicable to each of the Persons that are intended to
be one of the Companys Restricted Subsidiaries on the Completion Date, each of which shall be
deemed a Restricted Subsidiary of the Company beginning on the Issue Date. Each Person that is not
engaged in the shipbuilding business of Northrop Grumman Corporation and is not intended to be a
Subsidiary of the Company following the Spin-Off Date, and Current NGC, will be automatically
designated an Unrestricted Subsidiary when it becomes a Subsidiary of the Company, and such
designation will not be treated as a Restricted Payment. Such Unrestricted Subsidiaries will
accordingly not be party hereto, will not guaranty the Notes and will not be subject to the
restrictive covenants hereunder applicable to the Company and the Restricted Subsidiaries.
(b) Notwithstanding the restrictive covenants in the Indenture, the Company and its Restricted
Subsidiaries will be permitted, prior to the Completion Date, to engage in the ordinary course of
their collective business consistent with past practice, including with Current NGC, NGC and their
respective Subsidiaries, and to consummate transactions in connection therewith (the
Interim
Ordinary Course Transactions
), and prior to the Completion Date, the Interim Ordinary Course
Transactions will be exempt from the limitations set forth under Section 4.06 to Section 4.16,
Section 4.18 and Section 4.19.
(c) For purposes of applying the covenants under the Indenture and compliance thereunder, the
Transactions will be deemed to have occurred immediately prior to the Issue Date.
Section 4.18
. Financial Reports.
(a) Whether or not the Company is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company must provide the Trustee and
Noteholders within the time periods specified in those sections with
(1) all quarterly and annual reports that would be required to be filed with the
Commission on Forms 10-Q and 10-K if the Company were required to file such reports, and
(2) all current reports that would be required to be filed with the Commission on
Form 8-K if the Company were required to file such reports.
In addition, whether or not required by the Commission, the Company will, if the Commission
will accept the filing, file a copy of all of the information
66
and reports referred to in clauses (1) and (2) with the Commission for public availability
within the time periods specified in the Commissions rules and regulations. For purposes of this
covenant, the Company will be deemed to have provided all required reports referred to in this
covenant to the Trustee and the Noteholders as required by this covenant if it has timely filed
such reports with the Commission via the EDGAR filing system (or its successor system). If the
Company had any Unrestricted Subsidiaries during the relevant period, then the quarterly and annual
reports required by this covenant shall include a reasonably detailed presentation of the financial
condition and results of operations of the Company and its Restricted Subsidiaries, excluding in
all respects the Unrestricted Subsidiaries, separate from the financial condition and results of
operations of the Unrestricted Subsidiaries.
Notwithstanding anything herein to the contrary, the Company will not be deemed to have failed
to comply with any of its obligations under this Section for purposes of Section 6.01(4) until 90
days after the date any report hereunder is due.
(b) For so long as any of the Notes remain outstanding and constitute restricted securities
under Rule 144, the Company will furnish to the Holders of the Notes and prospective investors,
upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
(c) All obligors on the Notes will comply with Section 314(a) of the Trust Indenture Act.
(d) Delivery of these reports and information to the Trustee is for informational purposes
only and the Trustees receipt of them will not constitute constructive notice of any information
contained therein or determinable from information contained therein, including the Companys
compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely
exclusively on Officers Certificates).
Section 4.19
. Reports to Trustee.
(a) The Company and each Guarantor will deliver to the
Trustee within 120 days after the end of each fiscal year a certificate from the principal
executive, financial or accounting officer of the Company and such Guarantor stating that the
officer has conducted or supervised a review of the activities of the Company and its Restricted
Subsidiaries and their performance under the Indenture and that, based upon such review, the
Company and each Guarantor has fulfilled its obligations hereunder or, if there has been a Default,
specifying the Default and its nature and status.
(b) The Company will deliver to the Trustee, as soon as possible and in any event within 30
days after the Company becomes aware of the occurrence of a Default, an Officers Certificate
setting forth the details of the Default, and the action which the Company proposes to take with
respect thereto.
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Section 4.20
. Suspension Of Certain Covenants.
If at any time after the Issue Date (i) the
Notes are rated Investment Grade by each of S&P and Moodys (or, if either (or both) of S&P and
Moodys have been substituted in accordance with the definition of Rating Agencies, by each of
the then applicable Rating Agencies) and (ii) no Default has occurred and is continuing hereunder,
the Company and its Restricted Subsidiaries will not be subject to the covenants in Sections 4.06,
4.07, 4.09, 4.12, 4.13, 4.14 and 5.01(a)(iii)(3) (the
Suspended Covenants
).
At such time as the above referenced covenants are suspended (a
Suspension Period
), the
Company will no longer be permitted to designate any Restricted Subsidiary as an Unrestricted
Subsidiary unless the Company would have been permitted to designate such Subsidiary as an
Unrestricted Subsidiary if a Suspension Period had not been in effect for any period and such
designation shall be deemed to have created a Restricted Payment as set forth under Section 4.07
following the Reversion Date (as defined below).
In the event that the Company and its Restricted Subsidiaries are not subject to the Suspended
Covenants for any period of time as a result of the foregoing, and on any subsequent date (the
Reversion Date
) the condition set forth in clause (i) of the first paragraph of this section is
no longer satisfied, then the Company and its Restricted Subsidiaries will thereafter again be
subject to the Suspended Covenant with respect to future events.
On each Reversion Date, all Debt incurred during the Suspension Period prior to such Reversion
Date will be deemed to be Debt incurred pursuant to clause (b)(7) under Section 4.06. For purposes
of calculating the amount available to be made as Restricted Payments under Section 4.07(a)(3),
calculations under such covenant shall be made as though such covenant had been in effect during
the entire period of time after the Issue Date (including the Suspension Period). Restricted
Payments made during the Suspension Period not otherwise permitted under Section 4.07(b) will
reduce the amount available to be made as Restricted Payments under Section 4.07 (a)(3) of such
covenant. For purposes of Section 4.12, on the Reversion Date, the amount of Excess Proceeds will
be reset to zero.
Notwithstanding that the Suspended Covenants may be reinstated, no Default or Event of Default
shall be deemed to have occurred as a result of a failure to comply with the Suspended Covenants
during a Suspension Period (or on the Reversion Date after a Suspension Period based solely on
events that occurred during the Suspension Period).
Promptly after the commencement of a Suspension Period or the occurrence of a Reversion Date,
the Company shall furnish to the Trustee an Officers Certificate to the effect that such
Suspension Period has begun or that such Reversion Date has occurred, as the case may be, and
stating that all
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conditions precedent provided for in the Indenture to the commencement of the Suspension
Period or to the occurrence of such Reversion Date, as the case may be, have been complied with.
ARTICLE 5
Consolidation, Merger or Sale of Assets
Section 5.01.
Consolidation, Merger or Sale of Assets by the Company.
(a) The Company will
not
(i) consolidate with or merge with or into any Person, or
(ii) sell, convey, transfer, lease or otherwise dispose of all or substantially all
of its assets and the assets of its Restricted Subsidiaries, taken as a whole, as an
entirety or substantially an entirety, in one transaction or a series of related
transactions, to any Person or
(iii) permit any Person to merge with or into the Company
unless
(1) either (x) the Company is the continuing Person or (y) the resulting,
surviving or transferee Person is a corporation, limited liability company or
partnership (
provided
that if the resulting, surviving or transferee Person is a
limited liability company or partnership, a corporate Wholly Owned Restricted
Subsidiary becomes a co-obligor at such time) organized and validly existing
under the laws of the United States of America or any jurisdiction thereof and
expressly assumes by supplemental indenture in form satisfactory to the Trustee
all of the obligations of the Company under the Indenture, the Escrow Agreement
and the Notes and the Registration Rights Agreement;
(2) immediately after giving effect to the transaction, no Default has
occurred and is continuing;
(3) immediately after giving effect to the transaction on a pro forma basis,
the Company or the resulting surviving or transferee Person could Incur at least
$1.00 of Debt under Section 4.06(a); and
(4) the Company delivers to the Trustee an Officers Certificate and an
Opinion of Counsel, each stating that the consolidation, merger, sale,
conveyance, transfer, lease or other
69
disposition and the supplemental indenture (if any) comply with the
Indenture;
provided
, that (a) clauses (2) and (3) do not apply (i) to the consolidation or merger of the
Company with or into a Wholly Owned Restricted Subsidiary or the consolidation or merger of a
Wholly Owned Restricted Subsidiary with or into the Company, or to the sale, lease, conveyance,
transfer, or other disposition of all or substantially all of its assets and the assets of its
Restricted Subsidiaries, taken as a whole, as an entirety or substantially an entirety, to a
Wholly-Owned Restricted Subsidiary that is a Guarantor, or (ii) if the sole purpose of the
transaction is to change the jurisdiction of incorporation of the Company and (b) the foregoing
does not apply to the consummation of the Transactions.
(b) Upon the consummation of any transaction effected in accordance with these provisions, if
the Company is not the continuing Person, the resulting, surviving or transferee Person will
succeed to, and be substituted for, and may exercise every right and power of, the Company under
the Indenture and the Notes with the same effect as if such successor Person had been named as the
Company in the Indenture. Upon such substitution, except in the case of a lease, the Company will
be released from its obligations under the Indenture, the Notes, the Escrow Agreement and the
Registration Rights Agreement.
Section 5.02.
Consolidation, Merger or Sale of Assets by a Guarantor.
(a) No Guarantor may
(i) consolidate with or merge with or into any Person, or
(ii) sell, convey, transfer or dispose of, all or substantially all its assets as an
entirety or substantially as an entirety, in one transaction or a series of related
transactions, to any Person, or
(iii) permit any Person to merge with or into the Guarantor
unless
(A) the other Person is the Company or any Restricted Subsidiary that is a
Guarantor or becomes a Guarantor concurrently with the transaction; or
(B) (1) either (x) the Guarantor is the continuing Person or (y)
the resulting, surviving or transferee Person expressly assumes by
supplemental indenture in form satisfactory to the Trustee all of the
obligations of the Guarantor under its Note Guaranty; and
(2) immediately after giving effect to the transaction, no Default
has occurred and is continuing; or
70
(C) the transaction constitutes a sale or other disposition (including by
way of consolidation or merger) of the Guarantor or the sale or disposition of
all or substantially all the assets of the Guarantor (in each case other than to
the Company or a Restricted Subsidiary) otherwise permitted by the Indenture, and
(D) the Company delivers to the Trustee an Officers Certificate and an
Opinion of Counsel, each stating that the consolidation, merger, sale,
conveyance, transfer or other disposition and the supplemental indenture (if any)
comply with the Indenture.
ARTICLE 6
Default and Remedies
Section 6.01
. Events of Default.
An
Event of Default
occurs with respect to Notes of a
series if
(1) the Company defaults in the payment of the principal of any Note of such series when the
same becomes due and payable at maturity, upon acceleration or redemption, or otherwise (other than
pursuant to an Offer to Purchase);
(2) the Company defaults in the payment of interest (including any Additional Interest) on any
Note of such series when the same becomes due and payable, and the default continues for a period
of 30 days;
(3) the Company fails (A) after 45 days after written notice to the Company by the Trustee or
to the Company and the Trustee by the Holders of 25% or more in aggregate principal amount of the
Notes of such series to make an Offer to Purchase (which notice requires that the failure be
remedied and states that it is a notice of default under the Indenture) or (B) to thereafter accept
and pay for Notes validly tendered when and as required pursuant to Section 4.11 or Section 4.12;
(4) the Company defaults in the performance of or breaches any other covenant or agreement of
the Company in the Indenture or under the Notes of such series and the default or breach continues
for a period of 60 consecutive days after written notice to the Company by the Trustee or to the
Company and the Trustee by the Holders of 25% or more in aggregate principal amount of the Notes of
such series (which notice requires that the default be remedied and states that it is a notice of
default under the Indenture);
(5) there occurs with respect to any Debt of the Company or any of its Restricted Subsidiaries
having an outstanding principal amount of $50.0 million
71
or more in the aggregate for all such Debt of all such Persons (i) an event of default that
results in such Debt being due and payable prior to its scheduled maturity or (ii) a failure to
make a principal payment when due and such defaulted payment is not made, waived or extended within
the applicable grace period;
(6) one or more final judgments or orders for the payment of money are rendered against the
Company or any of its Restricted Subsidiaries and are not paid or discharged, and there is a period
of 60 consecutive days following entry of the final judgment or order that causes the aggregate
amount for all such final judgments or orders outstanding and not paid or discharged against all
such Persons to exceed $50.0 million (in excess of amounts which the Companys insurance carriers
have not challenged under applicable policies or which indemnifying parties have not challenged
under applicable third party indemnities) during which a stay of enforcement, by reason of a
pending appeal or otherwise, is not in effect;
(7) a decree or order for relief is entered against the Company or any Significant Subsidiary
in an involuntary case or other proceeding commenced against the Company or any Significant
Subsidiary with respect to it or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, and such decree or order
remains in effect and unstayed for a period of 60 days;
(8) the Company or any of its Significant Subsidiaries (i) commences a voluntary case under
any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents
to the entry of an order for relief in an involuntary case under any such law, (ii) consents to the
appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any of its Significant Subsidiaries or for all
or substantially all of the property and assets of the Company or any of its Significant
Subsidiaries or (iii) effects any general assignment for the benefit of creditors (an event of
default specified in clause (7) or (8) a
bankruptcy default
);
(9) any Note Guaranty of a Significant Subsidiary ceases to be in full force and effect, other
than in accordance the terms of the Indenture, or a Guarantor that is a Significant Subsidiary
denies or disaffirms its obligations under its Note Guaranty; or
(10) at any time prior to the Completion Date, the Company defaults in the performance of, or
breaches, any covenant or agreement of the Company in the Escrow Agreement, or the lien of the
Escrow Agreement on the Account and the U.S. Government Obligations ceases to be perfected or have
the priority intended to be provided, or the Escrow Agreement ceases to be in full force and effect
or the Company asserts the invalidity thereof.
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Section 6.02
. Acceleration.
(a) If an Event of Default, other than a bankruptcy default
with respect to the Company, occurs and is continuing under the Indenture with respect to Notes of
a series, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes of
such series then outstanding, by written notice to the Company (and to the Trustee if the notice is
given by the Holders), may, and the Trustee at the request of such Holders shall, declare the
principal of and accrued interest on the Notes of such series to be immediately due and payable.
Upon a declaration of acceleration, such principal and interest will become immediately due and
payable. If a bankruptcy default occurs with respect to the Company, the principal of and accrued
interest on the Notes of each series then outstanding will become immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
In the event of a declaration of acceleration of the Notes solely because an Event of Default
described in clause (5) above has occurred and is continuing, the declaration of acceleration of
the Notes shall be automatically rescinded and annulled if the event of default or payment default
triggering such Event of Default pursuant to clause (5) shall be remedied or cured by the Company
or a Restricted Subsidiary of the Company or waived (and the related declaration of acceleration
rescinded or annulled) by the holders of the relevant Debt within 20 Business Days after the
declaration of acceleration with respect to the Notes and if the rescission and annulment of the
acceleration of the Notes would not conflict with any judgment or decree of a court of competent
jurisdiction obtained by the Trustee for the payment of amounts due on the Notes.
(b) The Holders of a majority in principal amount of the outstanding Notes of a series by
written notice to the Company and to the Trustee may waive all past defaults and rescind and annul
a declaration of acceleration and its consequences with respect to such Notes if
(1) all existing Events of Default with respect to such Notes, other than the
nonpayment of the principal of, premium, if any, and interest on the Notes of such series
that have become due solely by the declaration of acceleration, have been cured or waived,
(2) the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction, and
(3) all sums paid or advanced by the Trustee under the Indenture and the reasonable
fees, expenses and disbursements of the Trustee, its agents and counsel have been paid.
Section 6.03
. Waiver of Past Defaults.
Except as otherwise provided in Sections 6.02, 6.07
and 9.02, the Holders of a majority in principal amount of the outstanding Notes of a series may,
by notice to the Trustee, waive an existing Default and its consequences with respect to such
series. Upon such waiver, the
73
Default will cease to exist, and any Event of Default arising therefrom will be deemed to have
been cured, but no such waiver will extend to any subsequent or other Default or impair any right
consequent thereon.
Section 6.04
. Other Remedies.
If an Event of Default with respect to the Notes of a series
occurs and is continuing, the Trustee may pursue, in its own name or as trustee of an express
trust, any available remedy by proceeding at law or in equity to collect the payment of principal
of and interest on the Notes of such series or to enforce the performance of any provision of the
Notes of such series or the Indenture with respect to the Notes of a series. The Trustee may
maintain a proceeding even if it does not possess any of the Notes or does not produce any of them
in the proceeding.
Section 6.05
. Control by Majority.
The Holders of a majority in aggregate principal amount
of the outstanding Notes of a series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such series. However, the Trustee may refuse to follow any
direction that conflicts with law, the Indenture or the Escrow Agreement, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith may be unduly
prejudicial to the rights of Holders of Notes of such series not joining in the giving of such
direction, and may take any other action it deems proper that is not inconsistent with any such
direction received from Holders of Notes of such series.
Section 6.06
. Limitation on Suits.
A Holder of Notes of a series may not institute any
proceeding, judicial or otherwise, with respect to the Indenture or the Notes of such series, or
for the appointment of a receiver or trustee, or for any other remedy under the Indenture or the
Notes of such series, unless:
(1) the Holder has previously given to the Trustee written notice of a continuing
Event of Default with respect to the Notes of such series;
(2) Holders of at least 25% in aggregate principal amount of outstanding Notes of
such series have made written request to the Trustee to institute proceedings in respect
of the Event of Default in its own name as Trustee under the Indenture;
(3) Holders have offered to the Trustee indemnity reasonably satisfactory to the
Trustee against any costs, liabilities or expenses to be incurred in compliance with such
request;
(4) the Trustee for 60 days after its receipt of such notice, request and offer of
indemnity has failed to institute any such proceeding; and
74
(5) during such 60-day period, the Holders of a majority in aggregate principal
amount of the outstanding Notes of such series have not given the Trustee a direction that
is inconsistent with such written request.
Section 6.07
. Rights of Holders to Receive Payment.
Notwithstanding anything herein to the
contrary, the right of a Holder of a Note to receive payment of principal of or interest on its
Note on or after the Stated Maturities thereof or on or after a redemption or repurchase date
therefor, or to bring suit for the enforcement of any such payment on or after such respective
dates, may not be impaired or affected without the consent of that Holder.
Section 6.08
. Collection Suit by Trustee.
If an Event of Default in payment of principal or
interest specified in clause (1) or (2) of Section 6.01 occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust for the whole amount of
principal and accrued interest remaining unpaid, together with interest on overdue principal and,
to the extent lawful, overdue installments of interest, in each case at the rate specified in the
Notes, and such further amount as is sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel and any other amounts due the Trustee hereunder.
Section 6.09
. Trustee May File Proofs of Claim.
The Trustee may file proofs of claim and
other papers or documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee hereunder) and the Holders
allowed in any judicial proceedings relating to the Company or any Guarantor or their respective
creditors or property, and is entitled and empowered to collect, receive and distribute any money,
securities or other property payable or deliverable upon conversion or exchange of the Notes or
upon any such claims. Any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by each Holder to make
such payments to the Trustee and, if the Trustee consents to the making of such payments directly
to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agent and counsel, and any other amounts
due the Trustee hereunder. Nothing in the Indenture will be deemed to empower the Trustee to
authorize or consent to, or accept or adopt on behalf of any Holder, any plan of reorganization,
arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or
to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.
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Section 6.10
. Priorities.
If the Trustee collects any money pursuant to this Article or
Section 1.05(f) of the Escrow Agreement, it shall pay out the money in the following order:
First: to the Trustee for all amounts due to it hereunder;
Second: to Holders of Notes of the series in respect of which such money is
collected for amounts then due and unpaid for principal of and interest on the Notes,
ratably, without preference or priority of any kind, according to the amounts due and
payable on the Notes for principal and interest; and
Third: to the Company or as a court of competent jurisdiction may direct.
The Trustee, upon written notice to the Company, may fix a record date and payment date for
any payment to Holders pursuant to this Section.
Section 6.11
. Restoration of Rights and Remedies.
If the Trustee or any Holder has
instituted a proceeding to enforce any right or remedy under the Indenture and the proceeding has
been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or
to the Holder, then, subject to any determination in the proceeding, the Company, any Guarantors,
the Trustee and the Holders will be restored severally and respectively to their former positions
hereunder and thereafter all rights and remedies of the Company, any Guarantors, the Trustee and
the Holders will continue as though no such proceeding had been instituted.
Section 6.12
. Undertaking for Costs.
In any suit for the enforcement of any right or remedy
under the Indenture or in any suit against the Trustee for any action taken or omitted by it as
Trustee, a court may require any party litigant in such suit (other than the Trustee) to file an
undertaking to pay the costs of the suit, and the court may assess reasonable costs, including
reasonable attorneys fees, against any party litigant (other than the Trustee) in the suit having
due regard to the merits and good faith of the claims or defenses made by the party litigant. This
Section does not apply to a suit by a Holder to enforce payment of principal of or interest on any
Note on the respective due dates, or a suit by Holders of more than 10% in principal amount of the
outstanding Notes of a series.
Section 6.13
. Rights and Remedies Cumulative.
No right or remedy conferred or reserved to
the Trustee or to the Holders under this Indenture is intended to be exclusive of any other right
or remedy, and all such rights and remedies are, to the extent permitted by law, cumulative and in
addition to every other right and remedy hereunder or now or hereafter existing at law or in equity
or otherwise. The assertion or exercise of any right or remedy hereunder, or
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otherwise, will not prevent the concurrent assertion or exercise of any other right or remedy.
Section 6.14
. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any
Holder to exercise any right or remedy accruing upon any Event of Default will impair any such
right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article or by law to the Trustee or to the Holders may be
exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the
Holders, as the case may be.
Section 6.15
. Waiver of Stay, Extension or Usury Laws.
The Company and each Guarantor
covenants, to the extent that it may lawfully do so, that it will not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension
law or any usury law or other law that would prohibit or forgive the Company or the Guarantor from
paying all or any portion of the principal of, or interest on the Notes as contemplated herein,
wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the
performance of the Indenture. The Company and each Guarantor hereby expressly waives, to the
extent that it may lawfully do so, all benefit or advantage of any such law and covenants that it
will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will
suffer and permit the execution of every such power as though no such law had been enacted.
ARTICLE 7
The Trustee
Section 7.01
. General.
(a) The duties and responsibilities of the Trustee are as provided by
the Trust Indenture Act and as set forth herein. Whether or not expressly so provided, every
provision of the Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee is subject to this Article.
(b) Except during the continuance of an Event of Default, the Trustee need perform only those
duties that are specifically set forth in the Indenture and no others, and no implied covenants or
obligations will be read into the Indenture against the Trustee. In case an Event of Default has
occurred and is continuing, the Trustee shall exercise those rights and powers vested in it by the
Indenture, and use the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(c) Except as provided in Section 315(d) of the Trust Indenture Act, no provision of the
Indenture shall be construed to relieve the Trustee from
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liability for its own negligent action, its own negligent failure to act or its own willful
misconduct.
Section 7.02
. Certain Rights of Trustee.
Subject to Trust Indenture Act Sections 315(a)
through (d):
(1) In the absence of bad faith on its part, the Trustee may rely, and will be
protected in acting or refraining from acting, upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document believed by it
to be genuine and to have been signed or presented by the proper Person. The Trustee need
not investigate any fact or matter stated in any document, but, in the case of any
document which is specifically required to be furnished to the Trustee pursuant to any
provision hereof, the Trustee shall examine the document to determine whether it conforms
to the requirements of the Indenture (but need not confirm or investigate the accuracy of
mathematical calculations or other facts stated therein). The Trustee, in its discretion,
may make further inquiry or investigation into such facts or matters as it sees fit.
(2) Before the Trustee acts or refrains from acting, it may require an Officers
Certificate or an Opinion of Counsel conforming to Section 12.05 and the Trustee will not
be liable for any action it takes or omits to take in good faith in reliance on the
certificate or opinion.
(3) The Trustee may act through its attorneys and agents and will not be responsible
for the misconduct or negligence of any attorney or agent appointed with due care.
(4) The Trustee will be under no obligation to exercise any of the rights or powers
vested in it by the Indenture or in the Escrow Agreement at the request or direction of
any of the Holders, unless such Holders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities that might be incurred by it in
compliance with such request or direction.
(5) The Trustee will not be liable for any action it takes or omits to take in good
faith that it believes to be authorized or within its rights or powers or for any action
it takes or omits to take in accordance with the direction of the Holders in accordance
with Section 6.05 relating to the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred upon the
Trustee, under the Indenture.
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(6) The Trustee may consult with counsel, and the written advice of such counsel or
any Opinion of Counsel will be full and complete authorization and protection in respect
of any action taken, suffered or omitted by it hereunder in good faith and in reliance
thereon.
(7) No provision of the Indenture or the Escrow Agreement will require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the performance
of its duties hereunder, or in the exercise of its rights or powers, unless it receives
indemnity satisfactory to it against any loss, liability or expense.
(8) Unless otherwise specifically provided in the Indenture or the Escrow Agreement,
any demand, instruction, request, direction or notice from the Company shall be sufficient
if signed by an Officer of the Company.
(9) The Trustee may request that the Company deliver an Officers Certificate setting
forth the names of individuals and/or titles of officers authorized at such time to take
specified actions pursuant to the Indenture or the Escrow Agreement, which Officers
Certificate may be signed by any person authorized to sign an Officers Certificate,
including any person specified as so authorized in any such certificate previously
delivered and not superseded.
(10) In no event shall the Trustee be responsible or liable for special, indirect, or
consequential loss or damage of any kind whatsoever (including, but not limited to, loss
of profit) irrespective of whether the Trustee has been advised of the likelihood of such
loss or damage and regardless of the form of action.
(11) The Trustee shall not be charged with knowledge of any Default or any Event of
Default unless either (i) an officer of the Trustee responsible for the administration of
the Indenture shall have actual knowledge of such Default or Event of Default or (ii)
written notice of such Default or Event of Default shall have been given to the Trustee by
the Company or any other obligor on the Notes, or by any Holder of the Notes.
(12) The rights, privileges, protections, immunities and benefits given to the
Trustee, including, without limitation, its right to be indemnified, are extended to, and
shall be enforceable by, the Trustee in each of its capacities hereunder.
(13) In no event shall the Trustee be responsible or liable for any failure or delay
in the performance of its obligations hereunder or under the Escrow Agreement arising out
of or caused by, directly or indirectly,
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forces beyond its control, including, without limitation, strikes, work stoppages,
accidents, acts of war or terrorism, civil or military disturbances, nuclear or natural
catastrophes or acts of God, and interruptions, loss or malfunctions of utilities,
communications or computer (software and hardware) services; it being understood that the
Trustee shall use reasonable efforts which are consistent with accepted practices in the
banking industry to resume performance as soon as practicable under the circumstances.
(14) The Trustee shall have no responsibility for perfecting or maintaining the
perfection of the security interest granted to it under the Escrow Agreement or for filing
any financing statement or continuation statement or other notice in any public office at
any time or times and shall not be liable for the acts or omissions of the Escrow Agent.
Section 7.03
. Individual Rights of Trustee.
The Trustee, in its individual or any other
capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not the Trustee. Any Agent may do the
same with like rights. However, the Trustee is subject to Trust Indenture Act Sections 310(b) and
311. For purposes of Trust Indenture Act Section 311(b)(4) and (6):
(a)
cash transaction
means any transaction in which full payment for goods or
securities sold is made within seven days after delivery of the goods or securities in
currency or in checks or other orders drawn upon banks or bankers and payable upon demand;
and
(b)
self-liquidating paper
means any draft, bill of exchange, acceptance or
obligation which is made, drawn, negotiated or incurred for the purpose of financing the
purchase, processing, manufacturing, shipment, storage or sale of goods, wares or
merchandise and which is secured by documents evidencing title to, possession of, or a
lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the
sale of the goods, wares or merchandise previously constituting the security, provided the
security is received by the Trustee simultaneously with the creation of the creditor
relationship arising from the making, drawing, negotiating or incurring of the draft, bill
of exchange, acceptance or obligation.
Section 7.04
. Trustees Disclaimer.
The Trustee (i) makes no representation as to the
validity or adequacy of the Indenture, the Notes, the Escrow Agreement, the Escrow Property (as
defined in the Escrow Agreement) or the security interest granted to it under the Escrow Agreement
(ii) is not accountable for the Companys use or application of the proceeds from the Notes or for
determining the value of the Escrow Property and (iii) is not responsible for any statement in the
Notes other than its certificate of authentication.
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Section 7.05
. Notice of Default.
If any Default occurs and is continuing and is known to the
Trustee, the Trustee will send notice of the Default to each Holder within 90 days after it occurs,
unless the Default has been cured;
provided
that, except in the case of a default in the payment of
the principal of or interest on any Note, the Trustee may withhold the notice if and so long as the
board of directors, the executive committee or a trust committee of directors of the Trustee or of
officers of the Trustee responsible for the administration of the Indenture in good faith
determines that withholding the notice is in the interest of the Holders. Notice to Holders under
this Section will be given in the manner and to the extent provided in Trust Indenture Act Section
313(c).
Section 7.06
. Reports by Trustee to Holders.
Within 60 days after each March 15, beginning
with March 15, 2012, the Trustee will mail to each Holder, as provided in Trust Indenture Act
Section 313(c), a brief report dated as of such March 15, if required by Trust Indenture Act
Section 313(a), and file such reports with each stock exchange upon which the Notes are listed and
with the Commission as required by Trust Indenture Act Section 313(d). The Company will promptly
notify the Trustee when any Notes are listed on any stock exchange.
Section 7.07
. Compensation and Indemnity.
(a) The Company will pay the Trustee compensation
as agreed upon in writing for its services. The compensation of the Trustee is not limited by any
law on compensation of a Trustee of an express trust. The Company will reimburse the Trustee upon
request for all reasonable out-of-pocket expenses, disbursements and advances incurred or made by
the Trustee, including the reasonable compensation and expenses of the Trustees agents and
counsel.
(b) The Company will indemnify the Trustee for, and hold it harmless against, any loss or
liability or expense (including the reasonable compensation and expenses of the Trustees agents
and counsel) incurred by it without negligence or bad faith on its part arising out of or in
connection with the acceptance or administration of the Indenture and the Escrow Agreement and its
duties under the Indenture, the Escrow Agreement and the Notes, including the costs and expenses of
defending itself against any claim or liability and of complying with any process served upon it or
any of its officers in connection with the exercise or performance of any of its powers or duties
under the Indenture, the Escrow Agreement and the Notes.
(c) To secure the Companys payment obligations in this Section, the Trustee will have a lien
prior to the Notes on all money or property held or collected by the Trustee, in its capacity as
Trustee, except money or property held in trust to pay principal of, and interest on particular
Notes.
(d) The obligations of the Company and the Guarantors under this Section shall survive the
payment of the Notes, the satisfaction and discharge of the Indenture and the resignation or
removal of the Trustee.
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Section 7.08
. Replacement of Trustee.
(a) (1) The Trustee may resign at any time by written
notice to the Company.
(2) The Holders of a majority in principal amount of the outstanding Notes may remove
the Trustee by written notice to the Trustee.
(3) If the Trustee is no longer eligible under Section 7.10 or in the circumstances
described in Trust Indenture Act Section 310(b), any Holder that satisfies the
requirements of Trust Indenture Act Section 310(b) may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.
(4) The Company may remove the Trustee if: (i) the Trustee is no longer eligible
under Section 7.10; (ii) the Trustee is adjudged a bankrupt or an insolvent; (iii) a
receiver or other public officer takes charge of the Trustee or its property; or (iv) the
Trustee becomes incapable of acting.
A resignation or removal of the Trustee and appointment of a successor Trustee will become
effective only upon the successor Trustees acceptance of appointment as provided in this Section.
(b) If the Trustee has been removed by the Holders, Holders of a majority in principal amount
of the Notes may appoint a successor Trustee with the consent of the Company. Otherwise, if the
Trustee resigns or is removed, or if a vacancy exists in the office of Trustee for any reason, the
Company will promptly appoint a successor Trustee. If the successor Trustee does not deliver its
written acceptance within 30 days after the retiring Trustee resigns or is removed, the retiring
Trustee, the Company or the Holders of a majority in principal amount of the outstanding Notes may
petition any court of competent jurisdiction for the appointment of a successor Trustee.
(c) Upon delivery by the successor Trustee of a written acceptance of its appointment to the
retiring Trustee and to the Company, (i) the retiring Trustee will transfer all property held by it
as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07, (ii) the
resignation or removal of the retiring Trustee will become effective, and (iii) the successor
Trustee will have all the rights, powers and duties of the Trustee under the Indenture. Upon
request of any successor Trustee, the Company will execute any and all instruments for fully and
vesting in and confirming to the successor Trustee all such rights, powers and trusts. The Company
will give notice of any resignation and any removal of the Trustee and each appointment of a
successor Trustee to all Holders, and include in the notice the name of the successor Trustee and
the address of its Corporate Trust Office.
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(d) Notwithstanding replacement of the Trustee pursuant to this Section, the Companys and the
Guarantors obligations under Section 7.07 will continue for the benefit of the retiring Trustee.
(e) The Trustee agrees to give the notices provided for in, and otherwise comply with, Trust
Indenture Act Section 310(b), subject to its right to seek a stay of its duty to resign in
accordance with the penultimate paragraph thereof.
Section 7.09
. Successor Trustee by Merger.
If the Trustee consolidates with, merges or
converts into, or transfers all or substantially all of its corporate trust business to, another
corporation or national banking association, the resulting, surviving or transferee corporation or
national banking association without any further act will be the successor Trustee with the same
effect as if the successor Trustee had been named as the Trustee in the Indenture.
Section 7.10
. Eligibility.
The Indenture must always have a Trustee that satisfies the
requirements of Trust Indenture Act Section 310(a) and has a combined capital and surplus of at
least $25,000,000 as set forth in its most recent published annual report of condition.
Section 7.11
. Money Held in Trust.
The Trustee will not be liable for interest on any money
received by it except as it may agree with the Company. Money held in trust by the Trustee need
not be segregated from other funds except to the extent required by law and except for money held
in trust under Article 8.
ARTICLE 8
Defeasance and Discharge
Section 8.01
. Discharge of Companys Obligations.
(a) Subject to paragraph (b), the
Companys obligations under the Notes of a series and the Indenture with respect to such Notes, and
each Guarantors obligations under its Note Guaranty with respect to such Notes, will terminate if:
(1) all Notes of such series previously authenticated and delivered (other than (i)
destroyed, lost or stolen Notes that have been replaced or paid under Section 2.04 or (ii)
Notes that are paid pursuant to Section 4.01 or (iii) Notes for whose payment money or
U.S. Government Obligations have been held in trust and then repaid to the Company
pursuant to Section 8.05) have been cancelled or delivered to the Trustee for cancellation
and the Company has paid all sums payable by it hereunder; or
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(2) (A) the Notes of such series mature within one year, or all of the Notes
of such series are to be called for redemption within one year under arrangements
satisfactory to the Trustee for giving the notice of redemption,
(B) the Company irrevocably deposits in trust with the Trustee, as trust
funds solely for the benefit of the Holders, money sufficient or U.S. Government
Obligations, the principal of and interest on which will be sufficient, or a
combination sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certificate delivered to
the Trustee, which opinion need be given only if U.S. Government Obligations have
been deposited, without consideration of any reinvestment, to pay principal of
and interest on the Notes of such series to maturity or redemption, as the case
may be, and to pay all other sums payable by it hereunder,
(C) the Company has paid or caused to be paid all other sums payable under
the Indenture by the Company,
(D) the deposit will not result in a breach or violation of, or constitute a
default under, any material agreement or instrument (other than the Indenture) to
which the Company is a party or by which it is bound, and
(E) the Company delivers to the Trustee an Officers Certificate and an
Opinion of Counsel, in each case stating that all conditions precedent provided
for herein relating to the satisfaction and discharge of the Indenture have been
complied with.
(b) After satisfying the conditions in clause (a)(1) of this Section 8.01, only the Companys
obligations under Section 7.07 and Section 8.04 will survive in respect of such series. After
satisfying the conditions in clause (a)(2) of this Section 8.01, only the Companys obligations in
Article 2 and Sections 4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 will survive in respect of such
series. In either case, the Trustee upon request will acknowledge in writing the discharge of the
Companys obligations under the Notes of such series and the Indenture with respect to such Notes
other than the surviving obligations.
Section 8.02
. Legal Defeasance.
Following the deposit referred to in clause (1) of this
Section 8.02, the Company will be deemed to have paid and will be discharged from its obligations
in respect of the Notes of a series and the Indenture with respect to such Notes, other than its
obligations in Article 2 and Sections 4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 in respect of such
series, and each Guarantors obligations under its Note Guaranty in respect of such series will
terminate,
provided
the following conditions have been satisfied:
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(1) The Company has irrevocably deposited in trust with the Trustee, as trust funds
solely for the benefit of the Holders, money sufficient or U.S. Government Obligations,
the principal of and interest on which will be sufficient, or a combination sufficient, in
the opinion of a nationally recognized firm of independent public accountants expressed in
a written certificate thereof delivered to the Trustee, without consideration of any
reinvestment, to pay principal of and interest on the Notes of such series to maturity or
redemption, as the case may be,
provided
that any redemption before maturity has been
irrevocably provided for under arrangements satisfactory to the Trustee.
(2) No Default has occurred and is continuing on the date of the deposit (other than
a Default resulting from the borrowing of funds to be applied to such deposit and the
grant of any Lien securing such borrowings).
(3) The deposit will not result in a breach or violation of, or constitute a default
under, the Indenture (other than a Default resulting from the borrowing of funds to be
applied to such deposit and the grant of any Lien securing such borrowings) or any other
material agreement or instrument to which the Company is a party or by which it is bound.
(4) The Company has delivered to the Trustee
(A) either (x) a ruling received from the Internal Revenue Service to the
effect that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of the defeasance and will be subject to federal
income tax on the same amount and in the same manner and at the same times as
would otherwise have been the case or (y) an Opinion of Counsel, based on a
change in law after the date of the Indenture, to the same effect as the ruling
described in clause (x), and
(B) an Opinion of Counsel to the effect that, and assuming no intervening
bankruptcy of the Company between the date of the deposit and the 91
st
day following the date of deposit and that no Holder is an insider of the
Company, after the passage of 91 days following the deposit, the trust funds will
not be subject to the effect of Section 547 of the United States Bankruptcy Code.
(5) If the Notes are listed on a national securities exchange, the Company has
delivered to the Trustee an Opinion of Counsel to the effect that the deposit and
defeasance will not cause the Notes to be delisted.
(6) The Company has delivered to the Trustee an Officers Certificate and an Opinion
of Counsel, in each case stating that all
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conditions precedent provided for herein relating to the defeasance have been
complied with.
Thereafter, the Trustee upon request will acknowledge in writing the discharge of the
Companys obligations under the Notes of such series and the Indenture with respect to such series
except for the surviving obligations specified above.
Section 8.03
. Covenant Defeasance.
Following the deposit referred to in clause (1) of this
Section 8.03, the Companys obligations set forth in Sections 4.06 through 4.15 inclusive and
Section 5.01(a)(iii)(3) with respect to Notes of a series, and each Guarantors obligations under
its Note Guaranty with respect to such series, will terminate, and clauses (3), (4) (solely with
respect to the covenants being defeased), (5), (6), (9) and (10) of Section 6.01 will no longer
constitute Events of Default with respect to the Notes of such series,
provided
the following
conditions have been satisfied:
(1) The Company has complied with clauses (1), (2), (3), 4(B), (5) and (6) of Section
8.02; and
(2) the Company has delivered to the Trustee an Opinion of Counsel to the effect that
the Holders will not recognize income, gain or loss for federal income tax purposes as a
result of the defeasance and will be subject to federal income tax on the same amount and
in the same manner and at the same times as would otherwise have been the case.
Except as specifically stated above, none of the Companys obligations under the Indenture
will be discharged.
Section 8.04
. Application of Trust Money.
Subject to Section 8.05, the Trustee will hold in
trust the money or U.S. Government Obligations (including the proceeds thereof) deposited with it
pursuant to Section 8.01, 8.02 or 8.03, and apply the deposited money and the proceeds from
deposited U.S. Government Obligations to the payment of principal of and interest on the Notes of
the applicable series in accordance with the Notes of such series and the Indenture. Such money
and U.S. Government Obligations need not be segregated from other funds except to the extent
required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed
on or assessed against the money or U.S. Government Obligations deposited pursuant to Section 8.01,
8.02 or 8.03 hereof or the principal and interest received in respect thereof other than any such
tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes.
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Section 8.05
. Repayment to Company.
Subject to Sections 7.07, 8.01, 8.02 and 8.03, the
Trustee will promptly pay to the Company upon request any money held by the Trustee at any time
under Section 8.01, 8.02 or 8.03, which in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof delivered to the
Trustee (in case U.S. Government Obligations have been deposited) are in excess of the amount
thereof that would then be required to be deposited to effect an equivalent discharge or defeasance
under such Sections and thereupon be relieved from all liability with respect to such money. The
Trustee will pay to the Company upon request any money held for payment with respect to the Notes
of a series that remains unclaimed for two years,
provided
that before making such payment the
Trustee may at the expense of the Company publish once in a newspaper of general circulation in New
York City, or send to each Holder entitled to such money, notice that the money remains unclaimed
and that after a date specified in the notice (at least 30 days after the date of the publication
or notice) any remaining unclaimed balance of money will be repaid to the Company. After payment
to the Company, Holders entitled to such money must look solely to the Company for payment, unless
applicable law designates another Person, and all liability of the Trustee with respect to such
money will cease.
Section 8.06
. Reinstatement.
If and for so long as the Trustee is unable to apply any money
or U.S. Government Obligations held in trust pursuant to Section 8.01, 8.02 or 8.03 by reason of
any legal proceeding or by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, the Companys obligations under
the Notes of the applicable series and the Indenture with respect to such Notes will be reinstated
as though no such deposit in trust had been made. If the Company makes any payment of principal of
or interest on any Notes of such series because of the reinstatement of its obligations, it will be
subrogated to the rights of the Holders of such Notes to receive such payment from the money or
U.S. Government Obligations held in trust.
Section 8.07.
U.S. Government Obligations.
Any U.S. Government Obligations deposited pursuant
to this Article shall be non-callable by the issuer thereof.
ARTICLE 9
Amendments, Supplements and Waivers
Section 9.01
. Amendments without Consent of Holders.
The Company and the Trustee may amend
or supplement the Indenture, the Escrow Agreement or the Notes without notice to or the consent of
any Noteholder
(1) to cure any ambiguity, defect or inconsistency in the Indenture or the Notes;
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(2) to comply with Article 5;
(3) to comply with any requirements of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act;
(4) to evidence and provide for the acceptance of an appointment hereunder by a
successor Trustee;
(5) to provide for uncertificated Notes in addition to or in place of certificated
Notes,
provided
that the uncertificated Notes are issued in registered form for purposes
of Section 163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code;
(6) to provide for any Guarantee of the Notes, to secure the Notes or to confirm and
evidence the release, termination or discharge of any Guarantee of or Lien securing the
Notes when such release, termination or discharge is permitted by the Indenture;
(7) to provide for or confirm the issuance of Additional Notes;
(8) to make any other change that does not materially and adversely affect the rights
of any Holder;
(9) to provide for the issuance of Exchange Notes;
(10) to add to the covenants of the Company for the benefit of the Noteholders;
(11) to add additional Events of Default; or
(12) to conform any provision hereof to the Description of Notes section in the
Offering Circular.
Section 9.02
. Amendments with Consent of Holders.
(a) Except as otherwise provided in
Sections 6.02, 6.03 and 6.07 or paragraph (b), the Company and the Trustee may amend the Indenture,
the Escrow Agreement and the Notes with respect to a series of Notes with the written consent of
the Holders of a majority in principal amount of the outstanding Notes of such series, and the
Holders of a majority in principal amount of the outstanding Notes of such series by written notice
to the Trustee may waive future compliance by the Company with any provision of the Indenture or
the Notes with respect to such series.
(b) Notwithstanding the provisions of paragraph (a), without the consent of each Holder
affected, an amendment or waiver may not
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(1) reduce the principal amount of or change the Stated Maturity of any installment
of principal of any Note,
(2) reduce the rate of or change the Stated Maturity of any interest payment on any
Note,
(3) reduce the amount payable upon the redemption of any Note or change the time of
any mandatory redemption or, in respect of an optional redemption, the times at which any
Note may be redeemed or, once notice of redemption has been given, the time at which it
must thereupon be redeemed,
(4) after the time an Offer to Purchase is required to have been made, reduce the
purchase amount or purchase price, or extend the latest expiration date or purchase date
thereunder,
(5) make any Note payable in money other than that stated in the Note,
(6) impair the right of any Holder of Notes to receive any principal payment or
interest payment on such Holders Notes, on or after the Stated Maturity thereof or any
redemption or repurchase date therefor, or to institute suit for the enforcement of any
such payment,
(7) make any change in the percentage of the principal amount of the Notes required
for amendments or waivers,
(8) modify or change any provision of the Indenture affecting the ranking of the
Notes or any Note Guaranty in a manner adverse to the Holders of the Notes, or
(9) make any change in any Note Guaranty that would adversely affect the Noteholders
in any material respect.
(c) It is not necessary for Noteholders to approve the particular form of any proposed
amendment, supplement or waiver, but is sufficient if their consent approves the substance thereof.
(d) An amendment, supplement or waiver under this Section will become effective on receipt by
the Company and the Trustee of written consents from the Holders of the requisite percentage in
principal amount of the outstanding Notes. After an amendment, supplement or waiver under this
Section becomes effective, the Company will send to the Holders affected thereby a notice briefly
describing the amendment, supplement or waiver. The Company will send supplemental indentures to
Holders upon request. Any failure of the Company to send such notice, or any defect therein, will
not, however, in any way impair or affect the validity of any such supplemental indenture or
waiver.
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Section 9.03
. Effect of Consent.
(a) After an amendment, supplement or waiver becomes
effective, it will bind every Holder unless it is of the type requiring the consent of each Holder
affected. If the amendment, supplement or waiver is of the type requiring the consent of each
Holder affected, the amendment, supplement or waiver will bind each Holder that has consented to it
and every subsequent Holder of a Note that evidences the same debt as the Note of the consenting
Holder.
(b) If an amendment, supplement or waiver changes the terms of a Note, the Trustee may require
the Holder to deliver it to the Trustee so that the Trustee may place an appropriate notation of
the changed terms on the Note and return it to the Holder, or exchange it for a new Note that
reflects the changed terms. The Trustee may also place an appropriate notation on any Note
thereafter authenticated. However, the effectiveness of the amendment, supplement or waiver is not
affected by any failure to annotate or exchange Notes in this fashion.
Section 9.04
. Trustees Rights and Obligations.
The Trustee is entitled to receive, and will
be fully protected in relying upon, an Opinion of Counsel stating that the execution of any
amendment, supplement or waiver authorized pursuant to this Article is authorized or permitted by
the Indenture. If the Trustee has received such an Opinion of Counsel, it shall sign the
amendment, supplement or waiver so long as the same does not adversely affect the rights, duties or
immunities of the Trustee under the Indenture or otherwise. The Trustee may, but is not obligated
to, execute any amendment, supplement or waiver that affects the Trustees own rights, duties or
immunities under the Indenture or otherwise.
Section 9.05
. Conformity with Trust Indenture Act.
Every supplemental indenture executed
pursuant to this Article shall comply with the Trust Indenture Act.
Section 9.06
. Payments for Consents.
Neither the Company nor any of its Subsidiaries may,
directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee
or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture, the Escrow Agreement or the Notes unless such
consideration is offered to be paid or agreed to be paid to all Holders of the Notes that consent,
waive or agree to amend such term or provision within the time period set forth in the solicitation
documents relating to the consent, waiver or amendment.
ARTICLE 10
Guaranties
Section 10.01
. The Guaranties.
Subject to the provisions of this Article, each Guarantor
that executes a supplemental indenture in the form of Exhibit C
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hereto hereby irrevocably and unconditionally guarantees, jointly and severally, on an
unsecured basis, the full and punctual payment (whether at Stated Maturity, upon redemption,
purchase pursuant to an Offer to Purchase or acceleration, or otherwise) of the principal of,
premium, if any, and interest on, and all other amounts payable under, each Note, and the full and
punctual payment of all other amounts payable by the Company under the Indenture. Upon failure by
the Company to pay punctually any such amount, each Guarantor shall forthwith on demand pay the
amount not so paid at the place and in the manner specified in the Indenture. The Note Guaranty of
each Guarantor shall be a guarantee of payment and not of collection.
Section 10.02
. Guaranty Unconditional.
The obligations of each Guarantor hereunder are
unconditional and absolute and, without limiting the generality of the foregoing, will not be
released, discharged or otherwise affected by
(1) any extension, renewal, settlement, compromise, waiver or release in respect of
any obligation of the Company under the Indenture or any Note, by operation of law or
otherwise;
(2) any modification or amendment of or supplement to the Indenture or any Note;
(3) any change in the corporate existence, structure or ownership of the Company, or
any insolvency, bankruptcy, reorganization or other similar proceeding affecting the
Company or its assets or any resulting release or discharge of any obligation of the
Company contained in the Indenture or any Note;
(4) the existence of any claim, set-off or other rights which the Guarantor may have
at any time against the Company, the Trustee or any other Person, whether in connection
with the Indenture or any unrelated transactions,
provided
that nothing herein prevents
the assertion of any such claim by separate suit or compulsory counterclaim;
(5) any invalidity or unenforceability relating to or against the Company for any
reason of the Indenture or any Note, or any provision of applicable law or regulation
purporting to prohibit the payment by the Company of the principal of or interest on any
Note or any other amount payable by the Company under the Indenture; or
(6) any other act or omission to act or delay of any kind by the Company, the Trustee
or any other Person or any other circumstance whatsoever which might, but for the
provisions of this paragraph, constitute a legal or equitable discharge of or defense to
such Guarantors obligations hereunder.
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Section 10.03
. Discharge; Reinstatement.
Subject to Section 10.09, each Guarantors
obligations hereunder will remain in full force and effect until the principal of, premium, if any,
and interest on the Notes and all other amounts payable by the Company under the Indenture have
been paid in full. If at any time any payment of the principal of, premium, if any, or interest on
any Note or any other amount payable by the Company under the Indenture is rescinded or must be
otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Company or
otherwise, each Guarantors obligations hereunder with respect to such payment will be reinstated
as though such payment had been due but not made at such time.
Section 10.04
. Waiver by the Guarantors.
Each Guarantor irrevocably waives acceptance
hereof, presentment, demand, protest and any notice not provided for herein, as well as any
requirement that at any time any action be taken by any Person against the Company or any other
Person.
Section 10.05
. Subrogation and Contribution.
Upon making any payment with respect to any
obligation of the Company under this Article, the Guarantor making such payment will be subrogated
to the rights of the payee against the Company with respect to such obligation,
provided
that the
Guarantor may not enforce either any right of subrogation, or any right to receive payment in the
nature of contribution, or otherwise, from any other Guarantor, with respect to such payment so
long as any amount payable by the Company hereunder or under the Notes remains unpaid.
Section 10.06
. Stay of Acceleration.
If acceleration of the time for payment of any amount
payable by the Company under the Indenture or the Notes is stayed upon the insolvency, bankruptcy
or reorganization of the Company, all such amounts otherwise subject to acceleration under the
terms of the Indenture are nonetheless payable by the Guarantors hereunder forthwith on demand by
the Trustee or the Holders.
Section 10.07
. Limitation on Amount of Guaranty.
Notwithstanding anything to the contrary in
this Article, each Guarantor, and by its acceptance of Notes, each Holder, hereby confirms that it
is the intention of all such parties that the Note Guaranty of such Guarantor not constitute a
fraudulent conveyance under applicable fraudulent conveyance provisions of the United States
Bankruptcy Code or any comparable provision of state law. To effectuate that intention, the
Trustee, the Holders and the Guarantors hereby irrevocably agree that the obligations of each
Guarantor under its Note Guaranty are limited to the maximum amount that would not render the
Guarantors obligations subject to avoidance under applicable fraudulent conveyance provisions of
the United States Bankruptcy Code or any comparable provision of state law.
Section 10.08
. Execution and Delivery of Guaranty.
The execution by each Guarantor of a
supplemental indenture in the form of Exhibit C evidences
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the Note Guaranty of such Guarantor, whether or not the person signing as an officer of the
Guarantor still holds that office at the time of authentication of any Note. The delivery of any
Note by the Trustee after authentication constitutes due delivery of the Note Guaranty set forth in
the Indenture on behalf of each Guarantor.
Section 10.09
. Release of Guaranty.
The Note Guaranty of a Guarantor will terminate upon
(1) a sale or other disposition (including by way of consolidation or merger) of
Capital Stock of the Guarantor if, as a result of such disposition, such Guarantor ceases
to be a Subsidiary or the sale or disposition of all or substantially all the assets of
the Guarantor (other than to the Company or a Restricted Subsidiary) otherwise permitted
by the Indenture,
(2) the release of the Guarantee by such Guarantor of Debt under the Credit
Agreement, other than a discharge through payment thereon,
(3) the designation in accordance with the Indenture of the Guarantor as an
Unrestricted Subsidiary, or
(4) defeasance or discharge of the Notes, as provided in Article 8.
Upon delivery by the Company to the Trustee of an Officers Certificate and an Opinion of
Counsel to the foregoing effect, the Trustee will execute any documents reasonably required in
order to evidence the release of the Guarantor from its obligations under its Note Guaranty.
ARTICLE 11
Escrow Arrangements
Section 11.01
. Escrow Account.
Notwithstanding anything in the Indenture, on the Issue Date
simultaneously with the issuance of the Notes, the Company will, pursuant to the terms of the
Escrow Agreement, deposit into an account pledged to the Trustee (the
Escrow Account
) the
proceeds of the offering of the Notes, together with an additional amount in cash (collectively
with any other property from time to time held by the Escrow Agent, the
Escrow Property
),
sufficient to redeem the Notes at the Special Redemption Price on July 8, 2011. Funds held in the
Escrow Account shall, pending release to fund the Special Redemption as set forth in Section 3.03
or as a result of the satisfaction of the Escrow Conditions as set forth in Section 11.03, be
invested at the direction of
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the Company in U.S. Government Obligations as more fully set forth in the Escrow Agreement.
Section 11.02
. Special Redemption.
If the Escrow Conditions have not been satisfied on or
prior to the Date of Determination, the Company shall cause the Escrow Agent, on or before the
Business Day immediately prior to the Special Redemption Date, to cause the liquidation of all
investments of Escrow Property then held by the Escrow Agent and to cause the release of all of the
Escrow Property for application as payment to the Holders of the Special Redemption Price pursuant
to Section 3.03.
Section 11.03
. Release of Escrow Property.
Upon the satisfaction of the Escrow Conditions,
including the execution and delivery by each Domestic Restricted Subsidiary of the Company of a
supplemental indenture in the form of Exhibit C hereto, the Escrow Property will be released to the
Company, in accordance with the terms of the Escrow Agreement.
Section 11.04
. Trustee Direction to Execute Escrow Agreement.
The Trustee is hereby
authorized and directed to execute and deliver the Escrow Agreement.
ARTICLE 12
Miscellaneous
Section 12.01
. Trust Indenture Act of 1939.
The Indenture shall incorporate and be governed
by the provisions of the Trust Indenture Act that are required to be part of and to govern
indentures qualified under the Trust Indenture Act.
Section 12.02
. Noteholder Communications; Noteholder Actions.
(a) The rights of Holders to
communicate with other Holders with respect to the Indenture or the Notes are as provided by the
Trust Indenture Act, and the Company and the Trustee shall comply with the requirements of Trust
Indenture Act Sections 312(a) and 312(b). Neither the Company nor the Trustee will be held
accountable by reason of any disclosure of information as to names and addresses of Holders made
pursuant to the Trust Indenture Act.
(b) (1) Any request, demand, authorization, direction, notice, consent to amendment,
supplement or waiver or other action provided by this Indenture to be given or taken by a
Holder (an
act
) may be evidenced by an instrument signed by the Holder delivered to the
Trustee. The fact and date of the execution of the instrument, or the authority of the
person executing it, may be proved in any manner that the Trustee deems sufficient.
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(2) The Trustee may make reasonable rules for action by or at a meeting of Holders,
which will be binding on all the Holders.
(c) Any act by the Holder of any Note binds that Holder and every subsequent Holder of a Note
that evidences the same debt as the Note of the acting Holder, even if no notation thereof appears
on the Note. Subject to paragraph (d), a Holder may revoke an act as to its Notes, but only if the
Trustee receives the notice of revocation before the date the amendment or waiver or other
consequence of the act becomes effective.
(d) The Company may, but is not obligated to, fix a record date (which need not be within the
time limits otherwise prescribed by Trust Indenture Act Section 316(c)) for the purpose of
determining the Holders entitled to act with respect to any amendment or waiver or in any other
regard, except that during the continuance of an Event of Default, only the Trustee may set a
record date as to notices of default, any declaration or acceleration or any other remedies or
other consequences of the Event of Default or related directions or waivers. If a record date is
fixed, those Persons that were Holders of the applicable Notes at such record date and only those
Persons will be entitled to act, or to revoke any previous act, whether or not those Persons
continue to be Holders after the record date. No act will be valid or effective for more than 90
days after the record date.
Section 12.03
. Notices.
(a) Any notice or communication to the Company will be deemed given
if in writing (i) when delivered in person or (ii) five days after mailing when mailed by first
class mail, or (iii) when sent by facsimile transmission, with transmission confirmed. Notices or
communications to a Guarantor will be deemed given if given to the Company. Any notice to the
Trustee shall be in writing and will be effective only upon receipt. In each case the notice or
communication should be addressed as follows:
if to the Company:
Huntington Ingalls Industries, Inc.,
4101 Washington Avenue
Newport News, Virginia 23607
(757) 380-2000
if to the Trustee
:
The Bank of New York Mellon
101 Barclay Street, Floor 8 West
New York, New York 10286
(212) 815-5707
The Company or the Trustee by notice to the other may designate additional or different addresses
for subsequent notices or communications.
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The Trustee agrees to accept and act upon instructions or directions pursuant to the Indenture
sent by unsecured e-mail, facsimile transmission or other similar unsecured electronic methods;
provided, however, that (a) the party providing such electronic instructions or directions,
subsequent to the transmission thereof, shall provide the originally executed instructions or
directions to the Trustee in a timely manner and (b) such originally executed instructions or
directions shall be signed by an authorized representative of the party providing such instructions
or directions. The Trustee shall not be liable for any losses, costs or expenses arising directly
or indirectly from the Trustees reliance upon and compliance with such instructions or directions
notwithstanding such instructions or directions conflict or are inconsistent with a subsequent
written instruction or direction or if the subsequent written instruction or direction is never
received. The party providing instructions or directions by unsecured e-mail, facsimile
transmission or other similar unsecured electronic methods, as aforesaid, agrees to assume all
risks arising out of the use of such electronic methods to submit instructions and directions to
the Trustee, including without limitation the risk of the Trustee acting on unauthorized
instructions, and the risk of interception and misuse by third parties.
(b) Except as otherwise expressly provided with respect to published notices, any notice or
communication to a Holder will be deemed given when mailed to the Holder at its address as it
appears on the Register by first class mail or, as to any Global Note registered in the name of DTC
or its nominee, as agreed by the Company, the Trustee and DTC. Copies of any notice or
communication to a Holder, if given by the Company, will be mailed to the Trustee at the same time.
Defect in mailing a notice or communication to any particular Holder will not affect its
sufficiency with respect to other Holders.
(c) Where the Indenture provides for notice, the notice may be waived in writing by the Person
entitled to receive such notice, either before or after the event, and the waiver will be the
equivalent of the notice. Waivers of notice by Holders must be filed with the Trustee, but such
filing is not a condition precedent to the validity of any action taken in reliance upon such
waivers.
Section 12.04
. Certificate and Opinion as to Conditions Precedent.
Upon any request or
application by the Company to the Trustee to take any action under the Indenture, the Company will
furnish to the Trustee:
(1) an Officers Certificate stating that, in the opinion of the signers, all
conditions precedent, if any, provided for in the Indenture relating to the proposed
action have been complied with; and
(2) an Opinion of Counsel stating that all such conditions precedent have been
complied with.
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Section 12.05
. Statements Required in Certificate or Opinion.
Each certificate or opinion
with respect to compliance with a condition or covenant provided for in the Indenture must include:
(1) a statement that each person signing the certificate or opinion has read the
covenant or condition and the related definitions;
(2) a brief statement as to the nature and scope of the examination or investigation
upon which the statement or opinion contained in the certificate or opinion is based;
(3) a statement that, in the opinion of each such person, that person has made such
examination or investigation as is necessary to enable the person to express an informed
opinion as to whether or not such covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of each such person, such
condition or covenant has been complied with,
provided
that an Opinion of Counsel may rely
on an Officers Certificate or certificates of public officials with respect to matters of
fact.
Section 12.06
. Payment Date Other Than a Business Day.
If any payment of principal of,
premium, if any, or interest on any Note (including any payment to be made on any date fixed for
redemption or purchase of any Note) is due on a day which is not a Business Day, then the payment
need not be made on such date, but may be made on the next Business Day with the same force and
effect as if made on such date, and no interest will accrue on the payment so deferred for the
intervening period.
Section 12.07
. Governing Law; Waiver of Trial by Jury.
The Indenture, including any Note
Guaranties, and the Notes shall be governed by, and construed in accordance with, the laws of the
State of New York, without regard to principles of conflicts of laws. Each of the Company, the
Guarantors, the Trustee and the Holders hereby irrevocably waive, to the fullest extent permitted
by applicable law, any and all right to trial by jury in any legal proceeding arising out of or
relating to this Indenture, the Note Guaranties or the Notes.
Section 12.08
. No Adverse Interpretation of Other Agreements.
The Indenture may not be used
to interpret another indenture or loan or debt agreement of the Company or any Subsidiary of the
Company, and no such indenture or loan or debt agreement may be used to interpret the Indenture.
Section 12.09
. Successors.
All agreements of the Company or any Guarantor in the Indenture
and the Notes will bind its successors. All agreements of the Trustee in the Indenture will bind
its successor.
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Section 12.10
. Duplicate Originals.
The parties may sign any number of copies of the
Indenture. Each signed copy shall be an original, but all of them together represent the same
agreement.
Section 12.11
. Separability.
In case any provision in the Indenture or in the Notes is
invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining
provisions will not in any way be affected or impaired thereby.
Section 12.12
. Table of Contents and Headings.
The Table of Contents, Cross-Reference Table
and headings of the Articles and Sections of the Indenture have been inserted for convenience of
reference only, are not to be considered a part of the Indenture and in no way modify or restrict
any of the terms and provisions of the Indenture.
Section 12.13
. No Liability of Directors, Officers, Employees, Incorporators, Members and
Stockholders.
No director, officer, employee, incorporator, member, general or limited partner or
stockholder past, present and future, of the Company or any of its Subsidiaries or NGC or any of
its subsidiaries, as such, will have any liability for any obligations of the Company or any
Guarantor under the Notes, any Note Guaranty or the Indenture or for any claim based on, in respect
of, or by reason of, such obligations. Each Holder of Notes by accepting a Note waives and
releases all such liability. The waiver and release are part of the consideration for issuance of
the Notes.
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SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused the Indenture to be duly executed as of the
date first written above.
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Huntington Ingalls Industries, Inc.
as Issuer
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By:
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/s/
Mark Rabinowitz
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Name:
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Mark Rabinowitz
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Title:
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Treasurer
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The Bank of New York Mellon
as Trustee
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By:
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/s/
Laurence J. OBrien
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Name:
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Laurence J. OBrien
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Title:
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Vice President
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EXHIBIT A
[FACE OF NOTE]
Huntington Ingalls Industries, Inc.
6.875% Senior Note Due 2018
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[CUSIP] [CINS] _______________
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No.
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$_______________
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Huntington Ingalls Industries, Inc., a Delaware corporation (the
Company
, which term
includes any successor under the Indenture hereinafter referred to), for value received, promises
to pay to [Cede & Co.], or its registered assigns, the principal sum of ____________ DOLLARS
($______) [or such other amount as indicated on the Schedule of Exchange of Notes attached
hereto]
1
on March 15, 2018.
Initial Interest Rate: 6.875% per annum.
Interest Payment Dates: March 15 and September 15, commencing September 15, 2011.
Regular Record Dates: March 1 and September 1 (whether or not a Business Day).
Reference is hereby made to the further provisions of this Note set forth on the reverse
hereof, which will for all purposes have the same effect as if set forth at this place.
A-1
IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by
one of its duly authorized officers.
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Date:
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Huntington Ingalls Industries, Inc.
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By:
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Name:
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Title:
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A-2
(Form of Trustees Certificate of Authentication)
This is one of the 6.875% Senior Notes Due 2018 described in the Indenture referred to in this
Note.
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The Bank of New York Mellon, as
Trustee
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By:
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Authorized Signatory
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A-3
[REVERSE SIDE OF NOTE]
Huntington Ingalls Industries, Inc.
6.875% Senior Note Due 2018
1.
Principal and Interest.
The Company promises to pay the principal of this Note on March 15, 2018.
The Company promises to pay interest on the principal amount of this Note on each Interest
Payment Date, as set forth on the face of this Note, at the rate of 6.875% per annum [(subject to
adjustment as provided below)].
2
Interest will be payable semiannually (to the Holder of record of this Note at the close of
business on the March 1 or September 1 (whether or not a Business Day) immediately preceding the
Interest Payment Date) on each Interest Payment Date, commencing September 15, 2011.
[The Holder of this Note is entitled to the benefits of the Registration Rights Agreement,
dated March 11, 2011, between the Company and the Initial Purchasers named therein (the
Registration Rights Agreement
), including the right to receive Additional Interest (as defined in
the Registration Rights Agreement) as and when set forth thereon. Such Additional Interest shall
be payable at the same times, in the same manner and to the same Persons as ordinary interest on
this Note.]
3
Interest on this Note will accrue from the most recent date to which interest has been paid or
duly provided for on this Note [or the Note surrendered in exchange for this Note]
4
(or,
if there is no existing default in the payment of interest and if this Note is authenticated
between a Regular Record Date and the next Interest Payment Date, from such Interest Payment Date)
or, if no interest has been paid, from [the Issue Date].
5
Interest will be computed in
the basis of a 360-day year of twelve 30-day months.
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2
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Include only for Initial Note or Initial
Additional Note.
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3
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Include only for Initial Note or Initial
Additional Note.
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4
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Include only for Exchange Note.
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5
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For Additional Notes, should be the date of
their original issue, unless otherwise provided with respect to such Notes.
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A-4
The Company will pay interest on overdue principal, premium, if any, and interest at the rate
per annum otherwise applicable to this Note. Interest not paid when due and any interest on
principal, premium or interest not paid when due will be paid to the Persons that are Holders on a
special record date, which will be the 15th day preceding the date fixed by the Company for the
payment of such interest, whether or not such day is a Business Day. At least 15 days before a
special record date, the Company will send to each Holder and to the Trustee a notice that sets
forth the special record date, the payment date and the amount of interest to be paid.
2.
Indentures; Note Guaranty.
This is one of the 2018 Notes (the
Notes
) issued as a series of notes under an Indenture
dated as of March 11, 2011 (as amended from time to time, the
Indenture
), between the Company and
The Bank of New York Mellon, as Trustee. Capitalized terms used herein are used as defined in the
Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are
subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act
for a statement of all such terms. To the extent permitted by applicable law, in the event of any
inconsistency between the terms of this Note and the terms of the Indenture, the terms of the
Indenture will control.
The Notes are general unsecured obligations of the Company. The Indenture limits the original
aggregate principal amount of the Notes to $600,000,000, but Additional Notes of the same tenor and
series may be issued pursuant to the Indenture, and the originally issued Notes and all such
Additional Notes vote together for all purposes as a single class. This Note is guarantied as set
forth in the Indenture.
3.
Redemption and Repurchase; Discharge Prior to Redemption or Maturity.
The Notes are subject to optional redemption, and may be the subject of an Offer to Purchase,
Special Redemption or Mandatory Redemption, as further described in the Indenture. Except for such
Special Redemption or Mandatory Redemption, there is no sinking fund or mandatory redemption
applicable to this Note.
If the Company deposits with the Trustee money or U.S. Government Obligations or a combination
thereof sufficient to pay the then outstanding principal of, premium, if any, and accrued interest
on the Notes to redemption or maturity, the Company may in certain circumstances be discharged from
the Indenture and the Notes or may be discharged from certain of its obligations under certain
provisions of the Indenture.
4.
Registered Form; Denominations; Transfer; Exchange.
A-5
The Notes are in registered form without coupons in denominations of $2,000 principal amount
and higher integral multiples of $1,000. A Holder may register the transfer or exchange of Notes
in accordance with the Indenture. The Trustee may require a Holder to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by law or permitted by
the Indenture. Pursuant to the Indenture, there are certain periods during which the Trustee will
not be required to issue, register the transfer of or exchange any Note or certain portions of a
Note.
5.
Defaults and Remedies.
If an Event of Default, as defined in the Indenture, with respect to the Notes occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes may declare
all the Notes to be due and payable. If a bankruptcy or insolvency default with respect to the
Company occurs and is continuing, the Notes automatically become due and payable. Holders may not
enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain
limitations, Holders of a majority in principal amount of the Notes then outstanding may direct the
Trustee in its exercise of remedies.
6.
Amendment and Waiver.
Subject to certain exceptions, the Indenture and the Notes may be amended, or default may be
waived, with respect to the Notes with the consent of the Holders of a majority in principal amount
of the outstanding Notes. Without notice to or the consent of any Holder, the Company and the
Trustee may amend or supplement the Indenture or the Notes to, among other things, cure any
ambiguity, defect or inconsistency or if such amendment or supplement does not materially and
adversely affect the rights of any Holders.
7.
Authentication.
This Note is not valid until the Trustee (or Authenticating Agent) signs the certificate of
authentication on the other side of this Note.
8.
Governing Law.
This Note shall be governed by, and construed in accordance with, the laws of the State of New
York, without regard to principles of conflicts of laws.
9.
Abbreviations.
Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM
(= tenants in common), TEN ENT (= tenants by the
A-6
entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common),
CUST (= Custodian) and U/G/M/A/ (= Uniform Gifts to Minors Act).
The Company will furnish a copy of the Indenture to any Holder upon written request and
without charge.
A-7
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s)
unto
Insert Taxpayer Identification No.
Please print or typewrite name and address including zip code of assignee
the within Note and all rights thereunder, hereby irrevocably constituting and appointing
attorney to transfer said Note on the books of the Company with full power of substitution in
the premises.
A-8
[THE FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATED NOTES BEARING A RESTRICTED LEGEND]
In connection with any transfer of this Note occurring prior to ______________
6
,
the undersigned confirms that such transfer is made without utilizing any general solicitation or
general advertising and further as follows:
Check One
o
(1) This Note is being transferred to a qualified institutional buyer in compliance with
Rule 144A under the Securities Act of 1933, as amended and certification in the form of Exhibit G
to the Indenture is being furnished herewith.
o
(2) This Note is being transferred to a Non-U.S. Person in compliance with the exemption from
registration under the Securities Act of 1933, as amended, provided by Regulation S thereunder, and
certification in the form of Exhibit F to the Indenture is being furnished herewith.
or
o
(3) This Note is being transferred other than in accordance with (1) or (2) above and
documents are being furnished which comply with the conditions of transfer set forth in this Note
and the Indenture.
If none of the foregoing boxes is checked, the Trustee is not obligated to register this Note
in the name of any Person other than the Holder hereof unless and until the conditions to any such
transfer of registration set forth herein and in the Indenture have been satisfied.
NOTICE: The signature to this assignment must correspond
with the name as written upon the face of the
within-mentioned instrument in every particular, without
alteration or any change whatsoever.
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6
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One year after the date of initial issuance
or a later date when purchased from an affiliate.
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A-9
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Signature Guarantee:
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By
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To be executed by an executive officer
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7
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Signatures must be guaranteed by an
eligible
guarantor institution
meeting the requirements of the Registrar, which
requirements include membership or participation in the Securities Transfer
Association Medallion Program (
STAMP
) or such other
signature guarantee
program
as may be determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the Securities Exchange Act of
1934, as amended.
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A-10
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have all of this Note purchased by the Company pursuant to Section 4.11 or
Section 4.12 of the Indenture, check the appropriate box below:
o
Section 4.11
o
Section 4.12
If you wish to have a portion of this Note purchased by the Company pursuant to Section 4.11
or Section 4.12 of the Indenture, state the amount (in original principal amount) below:
$_____________________ ($2,000 or integral multiples of $1,000 in excess thereof,
provided that any unpurchased portion of this Note must be in a minimum
denomination of $2,000).
Date:____________
Your Signature:__________________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee:
1
_____________________________
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1
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Signatures must be guaranteed by an
eligible
guarantor institution
meeting the requirements of the Trustee, which
requirements include membership or participation in the Securities Transfer
Association Medallion Program (
STAMP
) or such other
signature guarantee
program
as may be determined by the Trustee in addition to, or in substitution
for, STAMP, all in accordance with the Securities Exchange Act of 1934, as
amended.
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A-11
SCHEDULE OF EXCHANGES OF NOTES
1
The following exchanges of a part of this Global Note for Certificated Notes or a part of another
Global Note have been made:
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Principal amount of
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this Global Note
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Signature of
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Amount of decrease
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Amount of increase
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following such
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authorized signatory
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in principal amount
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in principal amount
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decrease (or
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of
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Date of Exchange
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of this Global Note
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of this Global Note
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increase)
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Trustee
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A-12
EXHIBIT B
[FACE OF NOTE]
Huntington Ingalls Industries, Inc.
7.125% Senior Note Due 2021
[CUSIP] [CINS] _______________
Huntington Ingalls Industries, Inc., a Delaware corporation (the
Company
, which term
includes any successor under the Indenture hereinafter referred to), for value received, promises
to pay to [Cede & Co.], or its registered assigns, the principal sum of ____________ DOLLARS
($______) [or such other amount as indicated on the Schedule of Exchange of Notes attached hereto]
on [
], 2021.
Initial Interest Rate: 7.125% per annum.
Interest Payment Dates: March 15 and September 15, commencing September 15, 2011.
Regular Record Dates: March 1 and September 1 (whether or not a Business Day).
Reference is hereby made to the further provisions of this Note set forth on the reverse
hereof, which will for all purposes have the same effect as if set forth at this place.
B-1
IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by
one of its duly authorized officers.
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Date:
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Huntington Ingalls Industries, Inc.
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By:
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Name:
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Title:
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B-2
(Form of Trustees Certificate of Authentication)
This is one of the 7.125% Senior Notes Due 2021 described in the Indenture referred to in this
Note.
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The Bank of New York Mellon, as Trustee
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By:
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Authorized Signatory
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B-3
[REVERSE SIDE OF NOTE]
Huntington Ingalls Industries, Inc.
7.125% Senior Note Due 2021
1.
Principal and Interest.
The Company promises to pay the principal of this Note on March 15, 2021.
The Company promises to pay interest on the principal amount of this Note on each Interest
Payment Date, as set forth on the face of this Note, at the rate of 7.125% per annum [(subject to
adjustment as provided below)].
8
Interest will be payable semiannually (to the Holder of Record of this Note at the close of
business on the March 1 or September 1 (whether or not a Business Day) immediately preceding the
Interest Payment Date) on each Interest Payment Date, commencing September 15, 2011.
[The Holder of this Note is entitled to the benefits of the Registration Rights Agreement,
dated March 11, 2011, between the Company and the Initial Purchasers named therein (the
Registration Rights Agreement
), including the right to receive Additional Interest (as defined in
the Registration Rights Agreement) as and when set forth thereon. Such Additional Interest shall
be payable at the same times, in the same manner and to the same Persons as ordinary interest on
this Note.]
9
Interest on this Note will accrue from the most recent date to which interest has been paid or
duly provided for on this Note [or the Note surrendered in exchange for this Note]
10
(or,
if there is no existing default in the payment of interest and if this Note is authenticated
between a Regular Record Date and the next Interest Payment Date, from such Interest Payment Date)
or, if no interest has been paid, from [the Issue Date].
11
Interest will be computed in
the basis of a 360-day year of twelve 30-day months.
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8
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Include only for Initial Note or Initial
Additional Note.
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9
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Include only for Initial Note or Initial
Additional Note.
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10
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Include only for Exchange Note.
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11
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For Additional Notes, should be the date of
their original issue, unless otherwise provided with respect to such Notes.
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B-4
The Company will pay interest on overdue principal, premium, if any, and interest at the rate
per annum otherwise applicable to this Note. Interest not paid when due and any interest on
principal, premium or interest not paid when due will be paid to the Persons that are Holders on a
special record date, which will be the 15th day preceding the date fixed by the Company for the
payment of such interest, whether or not such day is a Business Day. At least 15 days before a
special record date, the Company will send to each Holder and to the Trustee a notice that sets
forth the special record date, the payment date and the amount of interest to be paid.
2.
Indentures; Note Guaranty.
This is one of the 2021 Notes (the
Notes
) issued as a series of notes under an Indenture
dated as of March 11, 2011 (as amended from time to time, the
Indenture
), between the Company and
The Bank of New York Mellon, as Trustee. Capitalized terms used herein are used as defined in the
Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are
subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act
for a statement of all such terms. To the extent permitted by applicable law, in the event of any
inconsistency between the terms of this Note and the terms of the Indenture, the terms of the
Indenture will control.
The Notes are general unsecured obligations of the Company. The Indenture limits the original
aggregate principal amount of the Notes to $600,000,000, but Additional Notes of the same tenor and
series may be issued pursuant to the Indenture, and the originally issued Notes and all such
Additional Notes vote together for all purposes as a single class. This Note is guarantied as set
forth in the Indenture.
3.
Redemption and Repurchase; Discharge Prior to Redemption or Maturity.
The Notes are subject to optional redemption, and may be the subject of an Offer to Purchase,
Special Redemption or Mandatory Redemption, as further described in the Indenture. Except for such
Special Redemption or Mandatory Redemption, there is no sinking fund or mandatory redemption
applicable to this Note.
If the Company deposits with the Trustee money or U.S. Government Obligations or a combination
thereof sufficient to pay the then outstanding principal of, premium, if any, and accrued interest
on the Notes to redemption or maturity, the Company may in certain circumstances be discharged from
the Indenture and the Notes or may be discharged from certain of its obligations under certain
provisions of the Indenture.
4.
Registered Form; Denominations; Transfer; Exchange.
B-5
The Notes are in registered form without coupons in denominations of $2,000 principal amount
and higher integral multiples of $1,000. A Holder may register the transfer or exchange of Notes
in accordance with the Indenture. The Trustee may require a Holder to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by law or permitted by
the Indenture. Pursuant to the Indenture, there are certain periods during which the Trustee will
not be required to issue, register the transfer of or exchange any Note or certain portions of a
Note.
5.
Defaults and Remedies.
If an Event of Default, as defined in the Indenture, with respect to the Notes occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes may declare
all the Notes to be due and payable. If a bankruptcy or insolvency default with respect to the
Company occurs and is continuing, the Notes automatically become due and payable. Holders may not
enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain
limitations, Holders of a majority in principal amount of the Notes then outstanding may direct the
Trustee in its exercise of remedies.
6.
Amendment and Waiver.
Subject to certain exceptions, the Indenture and the Notes may be amended, or default may be
waived, with respect to the Notes with the consent of the Holders of a majority in principal amount
of the outstanding Notes. Without notice to or the consent of any Holder, the Company and the
Trustee may amend or supplement the Indenture or the Notes to, among other things, cure any
ambiguity, defect or inconsistency or if such amendment or supplement does not materially and
adversely affect the rights of any Holders.
7.
Authentication.
This Note is not valid until the Trustee (or Authenticating Agent) signs the certificate of
authentication on the other side of this Note.
8.
Governing Law.
This Note shall be governed by, and construed in accordance with, the laws of the State of New
York, without regard to principles of conflicts of laws.
9.
Abbreviations.
Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM
(= tenants in common), TEN ENT (= tenants by the
B-6
entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common),
CUST (= Custodian) and U/G/M/A/ (= Uniform Gifts to Minors Act).
The Company will furnish a copy of the Indenture to any Holder upon written request and
without charge.
B-7
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s)
unto
Insert Taxpayer Identification No.
Please print or typewrite name and address including zip code of assignee
the within Note and all rights thereunder, hereby irrevocably constituting and appointing
attorney to transfer said Note on the books of the Company with full power of substitution in
the premises.
B-8
[THE
FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATED NOTES BEARING A RESTRICTED LEGEND]
In connection with any transfer of this Note occurring prior to
______________
12
,
the undersigned confirms that such transfer is made without utilizing any general solicitation or
general advertising and further as follows:
Check One
o
(1) This Note is being transferred to a qualified institutional buyer in compliance with
Rule 144A under the Securities Act of 1933, as amended and certification in the form of Exhibit G
to the Indenture is being furnished herewith.
o
(2) This Note is being transferred to a Non-U.S. Person in compliance with the exemption from
registration under the Securities Act of 1933, as amended, provided by Regulation S thereunder, and
certification in the form of Exhibit F to the Indenture is being furnished herewith.
or
o
(3) This Note is being transferred other than in accordance with (1) or (2) above and
documents are being furnished which comply with the conditions of transfer set forth in this Note
and the Indenture.
If none of the foregoing boxes is checked, the Trustee is not obligated to register this Note
in the name of any Person other than the Holder hereof unless and until the conditions to any such
transfer of registration set forth herein and in the Indenture have been satisfied.
NOTICE: The signature to this assignment must correspond
with the name as written upon the face of the
within-mentioned instrument in every particular, without
alteration or any change whatsoever.
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12
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One year after date of initial issuance or a
later date when purchased from an affiliate.
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B-9
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Signature
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Guarantee:
13
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By
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To be executed by an executive officer
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13
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Signatures must be guaranteed by an
eligible
guarantor institution
meeting the requirements of the Registrar, which
requirements include membership or participation in the Securities Transfer
Association Medallion Program (
STAMP
) or such other
signature guarantee
program
as may be determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the Securities Exchange Act of
1934, as amended.
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B-10
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have all of this Note purchased by the Company pursuant to Section 4.11 or
Section 4.12 of the Indenture, check the appropriate box below: 9
o
Section 4.11
o
Section 4.12
If you wish to have a portion of this Note purchased by the Company pursuant to Section 4.11
or Section 4.12 of the Indenture, state the amount (in original principal amount) below:
$_____________________ ($2,000 or integral multiples of $1,000 in excess thereof,
provided that any unpurchased portion of this Note must be in a minimum
denomination of $2,000).
Date:____________
Your Signature:__________________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee:
1
_____________________________
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1
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Signatures must be guaranteed by an
eligible
guarantor institution
meeting the requirements of the Trustee, which
requirements include membership or participation in the Securities Transfer
Association Medallion Program (
STAMP
) or such other
signature guarantee
program
as may be determined by the Trustee in addition to, or in substitution
for, STAMP, all in accordance with the Securities Exchange Act of 1934, as
amended.
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B-11
SCHEDULE OF EXCHANGES OF NOTES
1
The following exchanges of a part of this Global Note for Certificated Notes or a part of another
Global Note have been made:
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Principal amount of
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this Global Note
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Signature of
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Amount of decrease
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Amount of increase
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following such
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authorized signatory
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in principal amount
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in principal amount
|
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decrease (or
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of
|
Date of Exchange
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of this Global Note
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of this Global Note
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increase)
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Trustee
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B-12
EXHIBIT C
SUPPLEMENTAL INDENTURE
dated as of [
], 2011
among
Huntington Ingalls Industries, Inc.,
The Guarantor(s) Party Hereto
and
The Bank of New York Mellon,
as Trustee
6.875% Senior Notes due 2018
7.125% Senior Notes due 2021
C-1
THIS SUPPLEMENTAL INDENTURE (this
Supplemental Indenture
), entered into as of [
], 2011,
among Huntington Ingalls Industries, Inc., a Delaware corporation (the
Company
), [insert each
Guarantor executing this Supplemental Indenture and its jurisdiction of incorporation] (each an
Undersigned
) and The Bank of New York Mellon, as trustee (the
Trustee
).
RECITALS
WHEREAS, the Company and the Trustee entered into the Indenture, dated as of March 11, 2011
(the
Indenture
), relating to the Companys 6.875% Senior Notes due 2018 (the
2018 Notes
) and
7.125% Senior Notes due 2021 (the
2021 Notes
and together with the 2018 Notes, the
Notes
);
WHEREAS, as a condition to the Trustee entering into the Indenture and the purchase of the
Notes by the Holders, the Company agreed pursuant to the Indenture to cause Domestic Restricted
Subsidiaries that Guarantee any Debt under the Credit Agreement to enter into this Supplemental
Indenture to provide Guaranties.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and
intending to be legally bound, the parties to this Supplemental Indenture hereby agree as follows:
Section 1. Capitalized terms used herein and not otherwise defined herein are used as defined
in the Indenture.
Section 2. Each Undersigned, by its execution of this Supplemental Indenture, agrees to be a
Guarantor under the Indenture and to be bound by the terms of the Indenture applicable to
Guarantors, including, but not limited to, Article 10 thereof.
Section 3. This Supplemental Indenture shall be governed by and construed in accordance with
the laws of the State of New York.
Section 4. This Supplemental Indenture may be signed in various counterparts which together
will constitute one and the same instrument.
Section 5. This Supplemental Indenture is an amendment supplemental to the Indenture and the
Indenture and this Supplemental Indenture will henceforth be read together.
Section 6. The Trustee shall not be responsible in any manner whatsoever for or in respect of
the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals
contained herein, all of which recitals are made solely by the other parties hereto.
C-2
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly
executed as of the date first above written.
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Huntington Ingalls Industries, Inc., as Issuer
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By:
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Name:
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Title:
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[GUARANTOR]
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By:
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Name:
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Title:
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The Bank of New York Mellon, as Trustee
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By:
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Name:
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Title:
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C-3
EXHIBIT D
RESTRICTED LEGEND
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
ACCORDANCE WITH THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST
HEREIN, THE ACQUIRER
(1) REPRESENTS THAT
(A) IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS A QUALIFIED INSTITUTIONAL BUYER
(WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) AND THAT IT EXERCISES SOLE
INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT,
(B) IT IS AN INSTITUTIONAL ACCREDITED INVESTOR (WITHIN THE MEANING OF RULE 501(a)
(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN INSTITUTIONAL ACCREDITED INVESTOR) OR
(C) IT IS NOT A U.S. PERSON (WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES
ACT) AND
(2) AGREES FOR THE BENEFIT OF THE COMPANY THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE
TRANSFER THIS NOTE OR ANY BENEFICIAL INTEREST HEREIN, EXCEPT IN ACCORDANCE WITH THE SECURITIES ACT
AND ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND ONLY
(A) TO THE COMPANY,
(B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BECOME EFFECTIVE UNDER THE
SECURITIES ACT,
(C) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE
SECURITIES ACT,
(D) IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE
SECURITIES ACT,
D-1
(E) IN A PRINCIPAL AMOUNT OF NOT LESS THAN $250,000 TO AN INSTITUTIONAL ACCREDITED
INVESTOR THAT, PRIOR TO SUCH TRANSFER, DELIVERS TO THE TRUSTEE A DULY COMPLETED AND SIGNED
CERTIFICATE (THE FORM OF WHICH MAY BE OBTAINED FROM THE TRUSTEE) RELATING TO THE
RESTRICTIONS ON TRANSFER OF THIS NOTE, OR
(F) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT.
PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH (2)(C) ABOVE OR (2)(D) ABOVE, A DULY
COMPLETED AND SIGNED CERTIFICATE (THE FORM OF WHICH MAY BE OBTAINED FROM THE TRUSTEE) MUST BE
DELIVERED TO THE TRUSTEE. PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH (2)(E) OR
(F) ABOVE, THE COMPANY RESERVES THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS,
CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE
PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS. NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY RULE 144 EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
D-2
EXHIBIT E
DTC LEGEND
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION (
DTC
), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE
& CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS A BENEFICIAL INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE ARE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO DTC, TO
NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSORS NOMINEE AND TRANSFERS OF PORTIONS OF
THIS GLOBAL NOTE ARE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE TRANSFER PROVISIONS OF THE
INDENTURE.
E-1
EXHIBIT F
Regulation S Certificate
_________, ____
The Bank of New York Mellon
101 Barclay Street, Floor 8W
New York, NY 10286
Attention: Corporate Trust Administration
|
|
|
Re:
|
|
Huntington Ingalls Industries, Inc. (the
Company
)
[6.875% Senior Notes due 2018]
[7.125% Senior Notes due 2021] (the
Notes
)
Issued under the Indenture (the
Indenture
) dated
as of March 11, 2011 relating to the Notes
|
Ladies and Gentlemen:
Terms are used in this Certificate as used in Regulation S (Regulation S) under the
Securities Act of 1933, as amended (the Securities Act), except as otherwise stated herein.
[CHECK A OR B AS APPLICABLE.]
|
o
A.
|
|
This Certificate relates to our proposed transfer of $____ principal amount of
Notes issued under the Indenture. We hereby certify as follows:
|
|
1.
|
|
The offer and sale of the Notes was not and will not
be made to a person in the United States (unless such person is excluded
from the definition of U.S. person pursuant to Rule 902(k)(2)(vi) or the
account held by it for which it is acting is excluded from the definition
of U.S. person pursuant to Rule 902(k)(2)(i) under the circumstances
described in Rule 902(h)(3)) and such offer and sale was not and will not
be specifically targeted at an identifiable group of U.S. citizens abroad.
|
|
|
2.
|
|
Unless the circumstances described in the
parenthetical in paragraph 1 above are applicable, either (a) at the time
the buy order was originated, the buyer was outside the United States or
we and any person acting on our behalf reasonably believed that the buyer
was outside the United States or (b) the transaction was executed in, on
or through the facilities
|
F-1
|
|
|
of a designated offshore securities market, and neither we nor any person
acting on our behalf knows that the transaction was pre-arranged with a
buyer in the United States.
|
|
|
3.
|
|
Neither we, any of our affiliates, nor any person
acting on our or their behalf has made any directed selling efforts in the
United States with respect to the Notes.
|
|
|
4.
|
|
The proposed transfer of Notes is not part of a plan
or scheme to evade the registration requirements of the Securities Act.
|
|
|
5.
|
|
If we are a dealer or a person receiving a selling
concession, fee or other remuneration in respect of the Notes, and the
proposed transfer takes place during the Restricted Period (as defined in
the Indenture), or we are an officer or director of the Company or an
Initial Purchaser (as defined in the Indenture), we certify that the
proposed transfer is being made in accordance with the provisions of Rule
904(b) of Regulation S.
|
|
o
B.
|
|
This Certificate relates to our proposed exchange of $____ principal amount of
Notes issued under the Indenture for an equal principal amount of Notes to be held by
us. We hereby certify as follows:
|
|
1.
|
|
At the time the offer and sale of the Notes was made
to us, either (i) we were not in the United States or (ii) we were
excluded from the definition of U.S. person pursuant to Rule
902(k)(2)(vi) or the account held by us for which we were acting was
excluded from the definition of U.S. person pursuant to Rule
902(k)(2)(i) under the circumstances described in Rule 902(h)(3); and we
were not a member of an identifiable group of U.S. citizens abroad.
|
|
|
2.
|
|
Unless the circumstances described in paragraph 1(ii)
above are applicable, either (a) at the time our buy order was originated,
we were outside the United States or (b) the transaction was executed in,
on or through the facilities of a designated offshore securities market
and we did not pre-arrange the transaction in the United States.
|
|
|
3.
|
|
The proposed exchange of Notes is not part of a plan
or scheme to evade the registration requirements of the Securities Act.
|
F-2
You and the Company are entitled to rely upon this Certificate and are irrevocably authorized
to produce this Certificate or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
|
|
|
|
|
|
Very truly yours,
[NAME OF SELLER (FOR TRANSFERS)
OR OWNER (FOR EXCHANGES)]
|
|
|
By:
|
|
|
|
|
Name:
|
|
|
|
|
Title:
Address:
|
|
|
|
Date: _________________
F-3
EXHIBIT G
Rule 144A Certificate
_________, ____
The Bank of New York Mellon
101 Barclay Street, Floor 8W
New York, NY 10286
Attention: Corporate Trust Administration
|
|
|
Re:
|
|
Huntington Ingalls Industries, Inc. (the
Company
)
|
|
|
[6.875% Senior Notes due 2018]
|
|
|
[7.125% Senior Notes due 2021] (the
Notes
)
|
|
|
Issued under the Indenture (the
Indenture
) dated
|
|
|
as of March 11, 2011 relating to the Notes
|
Ladies and Gentlemen:
This Certificate relates to:
[CHECK A OR B AS APPLICABLE.]
|
o
A.
|
|
Our proposed purchase of $____ principal amount of Notes issued under the
Indenture.
|
|
|
o
B.
|
|
Our proposed exchange of $____ principal amount of Notes issued under the
Indenture for an equal principal amount of Notes to be held by us.
|
We and, if applicable, each account for which we are acting in the aggregate owned and
invested more than $100,000,000 in securities of issuers that are not affiliated with us (or such
accounts, if applicable), as of _________, 20__, which is a date on or since close of our most
recent fiscal year. We and, if applicable, each account for which we are acting, are a qualified
institutional buyer within the meaning of Rule 144A (Rule 144A) under the Securities Act of 1933,
as amended (the Securities Act). If we are acting on behalf of an account, we exercise sole
investment discretion with respect to such account. We are aware that the transfer of Notes to us,
or such exchange, as applicable, is being made in reliance upon the exemption from the provisions
of Section 5 of the Securities Act provided by Rule 144A. Prior to the date of this Certificate we
have received such information regarding the Company as we have requested pursuant to Rule
144A(d)(4) or have determined not to request such information.
G-1
You and the Company are entitled to rely upon this Certificate and are irrevocably authorized
to produce this Certificate or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
|
|
|
|
|
|
Very truly yours,
[NAME OF PURCHASER (FOR
TRANSFERS) OR OWNER (FOR
EXCHANGES)]
|
|
|
By:
|
|
|
|
|
Name:
|
|
|
|
|
Title:
Address:
|
|
|
|
Date: _________________
G-2
EXHIBIT H
Institutional Accredited Investor Certificate
The Bank of New York Mellon
101 Barclay Street, Floor 8W
New York, NY 10286
Attention: Corporate Trust Administration
|
|
|
Re:
|
|
Huntington Ingalls Industries, Inc. (the
Company
)
|
|
|
[6.875% Senior Notes due 2018]
|
|
|
[7.125% Senior Notes due 2021] (the
Notes
)
|
|
|
Issued under the Indenture (the
Indenture
) dated
|
|
|
as of March 11, 2011 relating to the Notes
|
Ladies and Gentlemen:
This Certificate relates to:
[CHECK A OR B AS APPLICABLE.]
|
o
A.
|
|
Our proposed purchase of $____ principal amount of Notes issued under the
Indenture.
|
|
|
o
B.
|
|
Our proposed exchange of $____ principal amount of Notes issued under the
Indenture for an equal principal amount of Notes to be held by us.
|
We hereby confirm that:
|
1.
|
|
We are an institutional accredited investor within the meaning of
Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended (the
Securities Act) (an Institutional Accredited Investor).
|
|
|
2.
|
|
Any acquisition of Notes by us will be for our own account or for the
account of one or more other Institutional Accredited Investors as to which we
exercise sole investment discretion.
|
|
|
3.
|
|
We have such knowledge and experience in financial and business matters
that we are capable of evaluating the merits and risks of an investment in the
Notes and we and any accounts for which we are acting are able to bear the economic
risks of and an entire loss of our or their investment in the Notes.
|
H-1
|
4.
|
|
We are not acquiring the Notes with a view to any distribution thereof
in a transaction that would violate the Securities Act or the securities laws of
any State of the United States or any other applicable jurisdiction;
provided
that
the disposition of our property and the property of any accounts for which we are
acting as fiduciary will remain at all times within our and their control.
|
|
|
5.
|
|
We acknowledge that the Notes have not been registered under the
Securities Act and that the Notes may not be offered or sold within the United
States or to or for the benefit of U.S. persons except as set forth below.
|
|
|
6.
|
|
The principal amount of Notes to which this Certificate relates is at
least equal to $250,000.
|
We agree for the benefit of the Company, on our own behalf and on behalf of each account for
which we are acting, that such Notes may be offered, sold, pledged or otherwise transferred only in
accordance with the Securities Act and any applicable securities laws of any State of the United
States and only (a) to the Company, (b) pursuant to a registration statement which has become
effective under the Securities Act, (c) to a qualified institutional buyer in compliance with Rule
144A under the Securities Act, (d) in an offshore transaction in compliance with Rule 904 of
Regulation S under the Securities Act, (e) in a principal amount of not less than $250,000, to an
Institutional Accredited Investor that, prior to such transfer, delivers to the Trustee a duly
completed and signed certificate (the form of which may be obtained from the Trustee) relating to
the restrictions on transfer of the Notes or (f) pursuant to an exemption from registration
provided by Rule 144 under the Securities Act or any other available exemption from the
registration requirements of the Securities Act.
Prior to the registration of any transfer in accordance with (c) or (d) above, we acknowledge
that a duly completed and signed certificate (the form of which may be obtained from the Trustee)
must be delivered to the Trustee. Prior to the registration of any transfer in accordance with (e)
or (f) above, we acknowledge that the Company reserves the right to require the delivery of such
legal opinions, certifications or other evidence as may reasonably be required in order to
determine that the proposed transfer is being made in compliance with the Securities Act and
applicable state securities laws. We acknowledge that no representation is made as to the
availability of any Rule 144 exemption from the registration requirements of the Securities Act.
We understand that the Trustee will not be required to accept for registration of transfer any
Notes acquired by us, except upon presentation of evidence satisfactory to the Company and the
Trustee that the foregoing restrictions on transfer have been complied with. We further agree to
provide to any person acquiring any of the Notes from us a notice advising such person that
H-2
resales of the Notes are restricted as stated herein and that certificates representing the
Notes will bear a legend to that effect.
We agree to notify you promptly in writing if any of our acknowledgments, representations or
agreements herein ceases to be accurate and complete.
We represent to you that we have full power to make the foregoing acknowledgments,
representations and agreements on our own behalf and on behalf of any account for which we are
acting.
You and the Company are entitled to rely upon this Certificate and are irrevocably authorized
to produce this Certificate or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
|
|
|
|
|
|
Very truly yours,
[NAME OF PURCHASER (FOR
TRANSFERS) OR OWNER (FOR
EXCHANGES)]
|
|
|
By:
|
|
|
|
|
Name:
|
|
|
|
|
Title:
Address:
|
|
|
|
Date: _________________
H-3
Upon transfer, the Notes would be registered in the name of the new beneficial owner as
follows:
H-4
EXHIBIT I
[COMPLETE FORM I OR FORM II AS APPLICABLE.]
[FORM I]
Certificate of Beneficial Ownership
|
|
|
To:
|
|
The Bank of New York Mellon
|
|
|
101 Barclay Street, Floor 8W
|
|
|
New York, NY 10286
|
|
|
Attention: Corporate Trust Administration
OR
|
|
|
|
|
|
[Name of DTC Participant]]
|
|
|
|
Re:
|
|
Huntington Ingalls Industries, Inc. (the
Company
)
|
|
|
[6.875% Senior Notes due 2018]
|
|
|
[7.125% Senior Notes due 2021] (the
Notes
)
|
|
|
Issued under the Indenture (the
Indenture
) dated
|
|
|
as of March 11, 2011 relating to the Notes
|
Ladies and Gentlemen:
We are the beneficial owner of $____ principal amount of Notes issued under the Indenture and
represented by a Temporary Offshore Global Note (as defined in the Indenture).
We hereby certify as follows:
[CHECK A OR B AS APPLICABLE.]
|
o
A.
|
|
We are a non-U.S. person (within the meaning of Regulation S under the
Securities Act of 1933, as amended).
|
|
|
o
B.
|
|
We are a U.S. person (within the meaning of Regulation S under the Securities
Act of 1933, as amended) that purchased the Notes in a transaction that did not require
registration under the Securities Act of 1933, as amended.
|
You and the Company are entitled to rely upon this Certificate and are irrevocably authorized
to produce this Certificate or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
I-1
|
|
|
|
|
|
Very truly yours,
[NAME OF BENEFICIAL OWNER]
|
|
|
By:
|
|
|
|
|
Name:
|
|
|
|
|
Title:
Address:
|
|
|
|
Date: _________________
[FORM II]
Certificate of Beneficial Ownership
|
|
|
To:
|
|
The Bank of New York Mellon
|
|
|
101 Barclay Street, Floor 8W
|
|
|
New York, NY 10286
|
|
|
Attention: Corporate Trust Administration
|
|
|
|
Re:
|
|
Huntington Ingalls Industries, Inc. (the
Company
)
|
|
|
[6.875% Senior Notes due 2018]
|
|
|
[7.125% Senior Notes due 2021] (the
Notes
)
|
|
|
Issued under the Indenture (the
Indenture
) dated
|
|
|
as of March 11, 2011 relating to the Notes
|
Ladies and Gentlemen:
This is to certify that based solely on certifications we have received in writing, by tested
telex or by electronic transmission from Institutions appearing in our records as persons being
entitled to a portion of the principal amount of Notes represented by a Temporary Offshore Global
Note issued under the above-referenced Indenture, that as of the date hereof, $____ principal
amount of Notes represented by the Temporary Offshore Global Note being submitted herewith for
exchange is beneficially owned by persons that are either (i) non-U.S. persons (within the meaning
of Regulation S under the Securities Act of 1933, as amended) or (ii) U.S. persons that purchased
the Notes in a transaction that did not require registration under the Securities Act of 1933, as
amended.
We further certify that (i) we are not submitting herewith for exchange any portion of such
Temporary Offshore Global Note excepted in such certifications and (ii) as of the date hereof we
have not received any notification from any Institution to the effect that the statements made by
such Institution with respect
I-2
to any portion of such Temporary Offshore Global Note submitted herewith for exchange are no
longer true and cannot be relied upon as of the date hereof.
You and the Company are entitled to rely upon this Certificate and are irrevocably authorized
to produce this Certificate or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
|
|
|
|
|
|
Yours faithfully,
[Name of DTC Participant]
|
|
|
By:
|
|
|
|
|
Name:
|
|
|
|
|
Title:
Address:
|
|
|
|
Date: _________________
I-3
EXHIBIT J
THIS NOTE IS A TEMPORARY GLOBAL NOTE. PRIOR TO THE EXPIRATION OF THE RESTRICTED PERIOD APPLICABLE
HERETO, BENEFICIAL INTERESTS HEREIN MAY NOT BE HELD BY ANY PERSON OTHER THAN (1) A NON-U.S. PERSON
OR (2) A U.S. PERSON THAT PURCHASED SUCH INTEREST IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT
). BENEFICIAL INTERESTS HEREIN
ARE NOT EXCHANGEABLE FOR PHYSICAL NOTES OTHER THAN A PERMANENT GLOBAL NOTE IN ACCORDANCE WITH THE
TERMS OF THE INDENTURE. TERMS IN THIS LEGEND ARE USED AS USED IN REGULATION S UNDER THE SECURITIES
ACT.
NO BENEFICIAL OWNERS OF THIS TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF
PRINCIPAL OR INTEREST HEREON UNTIL SUCH BENEFICIAL INTEREST IS EXCHANGED OR TRANSFERRED FOR AN
INTEREST IN ANOTHER NOTE.
J-1
Exhibit 10.27
EXECUTION VERSION
CREDIT AGREEMENT
dated as of
March 11, 2011
among
HUNTINGTON INGALLS INDUSTRIES, INC.,
The Lenders Party Hereto,
JPMORGAN CHASE BANK, N.A.,
as Administrative Agent, Issuing Bank and Swingline Lender,
and
CREDIT SUISSE AG,
as Swingline Lender
J.P. MORGAN SECURITIES LLC and
CREDIT SUISSE SECURITIES (USA) LLC,
as Lead Arrangers
J.P. MORGAN SECURITIES LLC,
CREDIT SUISSE SECURITIES (USA) LLC,
WELLS FARGO SECURITIES, LLC and
RBS SECURITIES INC.,
as Joint Bookrunners
CREDIT SUISSE SECURITIES (USA) LLC,
as Syndication Agent
THE ROYAL BANK OF SCOTLAND PLC,
WELLS FARGO BANK, N.A.,
SUNTRUST BANK,
BNP PARIBAS and
SUMITOMO MITSUI BANKING CORPORATION,
as Documentation Agents
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page
|
ARTICLE 1
|
Definitions
|
|
|
|
|
|
SECTION 1.01
. Defined Terms
|
|
|
1
|
|
SECTION 1.02
. Classification of Loans and Borrowings
|
|
|
32
|
|
SECTION 1.03
. Terms Generally
|
|
|
32
|
|
SECTION 1.04
. Accounting Terms; GAAP
|
|
|
32
|
|
SECTION 1.05
. Currency Translation
|
|
|
33
|
|
SECTION 1.06.
Pro Forma Calculations
|
|
|
33
|
|
|
|
|
|
|
ARTICLE 2
|
The Credits
|
|
|
|
|
|
SECTION 2.01
. Commitments
|
|
|
33
|
|
SECTION 2.02
. Loans and Borrowings
|
|
|
33
|
|
SECTION 2.03
. Requests for Borrowings
|
|
|
34
|
|
SECTION 2.04
. Swingline Loans
|
|
|
35
|
|
SECTION 2.05
. Letters of Credit
|
|
|
36
|
|
SECTION 2.06
. Funding of Borrowings
|
|
|
42
|
|
SECTION 2.07
. Interest Elections
|
|
|
42
|
|
SECTION 2.08
. Termination and Reduction of Commitments
|
|
|
44
|
|
SECTION 2.09
. Repayment of Loans; Evidence of Debt
|
|
|
44
|
|
SECTION 2.10
. Amortization of Term Loans
|
|
|
45
|
|
SECTION 2.11
. Voluntary Prepayments
|
|
|
46
|
|
SECTION 2.12
. Mandatory Prepayments
|
|
|
46
|
|
SECTION 2.13
. Fees
|
|
|
48
|
|
SECTION 2.14
. Interest
|
|
|
49
|
|
SECTION 2.15
. Alternate Rate of Interest
|
|
|
50
|
|
SECTION 2.16
. Increased Costs
|
|
|
50
|
|
SECTION 2.17
. Break Funding Payments
|
|
|
52
|
|
SECTION 2.18
. Taxes
|
|
|
52
|
|
SECTION 2.19
. Payments Generally; Pro Rata Treatment; Sharing of Set Offs
|
|
|
56
|
|
SECTION 2.20
. Mitigation Obligations; Replacement of Lenders
|
|
|
57
|
|
SECTION 2.21
. Defaulting Lenders
|
|
|
58
|
|
|
|
|
|
|
ARTICLE 3
|
Representations and Warranties
|
|
|
|
|
|
SECTION 3.01
. Organization; Powers
|
|
|
60
|
|
SECTION 3.02
. Authorization; Enforceability
|
|
|
60
|
|
SECTION 3.03
. Governmental Approvals; No Conflicts
|
|
|
60
|
|
i
|
|
|
|
|
|
|
Page
|
SECTION 3.04
. Financial Condition; No Material Adverse Change
|
|
|
61
|
|
SECTION 3.05
. Properties
|
|
|
61
|
|
SECTION 3.06
. Litigation and Environmental Matters
|
|
|
62
|
|
SECTION 3.07
. Compliance with Laws and Agreements
|
|
|
63
|
|
SECTION 3.08
. Investment Company Status
|
|
|
63
|
|
SECTION 3.09
. Taxes
|
|
|
63
|
|
SECTION 3.10
. ERISA
|
|
|
64
|
|
SECTION 3.11
. Disclosure
|
|
|
64
|
|
SECTION 3.12
. Use of Proceeds
|
|
|
64
|
|
SECTION 3.13
. Margin Regulations
|
|
|
64
|
|
SECTION 3.14
. Subsidiaries
|
|
|
64
|
|
SECTION 3.15
. Collateral Documents
|
|
|
64
|
|
SECTION 3.16
. Labor Matters
|
|
|
65
|
|
SECTION 3.17
. Solvency
|
|
|
65
|
|
SECTION 3.18
. Transaction Documents
|
|
|
65
|
|
SECTION 3.19
. Insurance
|
|
|
65
|
|
SECTION 3.20.
OFAC
|
|
|
66
|
|
SECTION 3.21.
Patriot Act
|
|
|
66
|
|
|
|
|
|
|
ARTICLE 4
|
Conditions
|
|
|
|
|
|
SECTION 4.01
. Effective Date
|
|
|
66
|
|
SECTION 4.02
. Funding Date
|
|
|
68
|
|
SECTION 4.03
. Each Credit Event
|
|
|
70
|
|
|
|
|
|
|
ARTICLE 5
|
Affirmative Covenants
|
|
|
|
|
|
SECTION 5.01
. Financial Statements; Ratings Change and Other Information
|
|
|
71
|
|
SECTION 5.02
. Notices of Material Events
|
|
|
73
|
|
SECTION 5.03
. Existence; Conduct of Business
|
|
|
73
|
|
SECTION 5.04
. Payment of Obligations
|
|
|
73
|
|
SECTION 5.05
. Maintenance of Properties; Insurance
|
|
|
74
|
|
SECTION 5.06
. Books and Records; Inspection Rights; Maintenance of Ratings
|
|
|
75
|
|
SECTION 5.07
. Compliance with Laws
|
|
|
75
|
|
SECTION 5.08
. Use of Proceeds and Letters of Credit
|
|
|
75
|
|
SECTION 5.09
. Employee Benefits
|
|
|
75
|
|
SECTION 5.10
. Compliance with Environmental Laws
|
|
|
75
|
|
SECTION 5.11.
Further Assurances
|
|
|
76
|
|
SECTION 5.12
. Designation of Subsidiaries
|
|
|
76
|
|
SECTION 5.13
. Maintenance of Separate Existence
|
|
|
77
|
|
SECTION 5.14.
Post-Funding Date Collateral Matters
|
|
|
77
|
|
ii
|
|
|
|
|
|
|
Page
|
ARTICLE 6
|
Negative Covenants
|
|
|
|
|
|
SECTION 6.01
. Indebtedness
|
|
|
78
|
|
SECTION 6.02
. Liens
|
|
|
80
|
|
SECTION 6.03
. Sale and Lease-Back Transactions
|
|
|
83
|
|
SECTION 6.04
. Investments, Loans and Advances
|
|
|
83
|
|
SECTION 6.05
. Mergers, Consolidations, Sales of Assets and Acquisitions
|
|
|
85
|
|
SECTION 6.06
. Restricted Payments; Restrictive Agreements
|
|
|
86
|
|
SECTION 6.07
. Transactions with Affiliates
|
|
|
88
|
|
SECTION 6.08
. Business of Borrower and Restricted Subsidiaries and Titan II
|
|
|
89
|
|
SECTION 6.09
. Certain Other Indebtedness
|
|
|
89
|
|
SECTION 6.10
. Capital Expenditures
|
|
|
90
|
|
SECTION 6.11
. Interest Coverage Ratio
|
|
|
91
|
|
SECTION 6.12
. Maximum Leverage Ratio
|
|
|
92
|
|
SECTION 6.13
. Fiscal Year
|
|
|
92
|
|
SECTION 6.14.
Transactions
|
|
|
92
|
|
|
|
|
|
|
ARTICLE 7
|
Events of Default
|
|
|
|
|
|
ARTICLE 8
|
The Administrative Agent and the Collateral Agent
|
|
|
|
|
|
ARTICLE 9
|
Miscellaneous
|
|
|
|
|
|
SECTION 9.01
. Notices
|
|
|
98
|
|
SECTION 9.02
. Waivers; Amendments
|
|
|
98
|
|
SECTION 9.03
. Expenses; Indemnity; Damage Waiver
|
|
|
100
|
|
SECTION 9.04
. Successors and Assigns
|
|
|
102
|
|
SECTION 9.05
. Survival
|
|
|
105
|
|
SECTION 9.06
. Counterparts; Integration; Effectiveness
|
|
|
106
|
|
SECTION 9.07
. Severability
|
|
|
106
|
|
SECTION 9.08
. Right of Setoff
|
|
|
106
|
|
SECTION 9.09
. Governing Law; Jurisdiction; Consent to Service of Process
|
|
|
107
|
|
SECTION 9.10
. WAIVER OF JURY TRIAL
|
|
|
107
|
|
SECTION 9.11
. Headings
|
|
|
108
|
|
SECTION 9.12
. Confidentiality
|
|
|
108
|
|
SECTION 9.13
. Interest Rate Limitation
|
|
|
109
|
|
SECTION 9.14
. Conversion of Currencies
|
|
|
109
|
|
SECTION 9.15
. USA PATRIOT Act
|
|
|
110
|
|
SECTION 9.16
. Collateral Release and Recapture
|
|
|
110
|
|
SECTION 9.17
. Collateral and Guaranty Release
|
|
|
110
|
|
SECTION 9.18
. Security Clearance
|
|
|
111
|
|
iii
|
|
|
|
|
|
|
Page
|
SECTION 9.19
. No Fiduciary Relationship
|
|
|
112
|
|
iv
SCHEDULES:
Schedule 1.01A Spin-off Transactions
Schedule 1.01B Mortgaged Real Properties
Schedule 2.01 Commitments
Schedule 2.05A LC Commitments
Schedule 2.05B Existing Letters of Credit
Schedule 3.05(f) Owned Real Property
Schedule 3.05(g) Leased Real Property
Schedule 3.06 Disclosed Matters
Schedule 3.14 Subsidiaries
Schedule 6.01 Existing Indebtedness
Schedule 6.02 Existing Liens
Schedule 6.06 Existing Agreements
Schedule 6.07 Permitted Transactions with Affiliates
EXHIBITS:
|
|
|
Exhibit A
|
|
Form of Assignment and Assumption
|
Exhibit B
|
|
Form of Borrowing Request
|
Exhibit C
|
|
Form of LC Continuing Agreement
|
Exhibit D
|
|
Form of Guarantee and Security Agreement
|
Exhibit E
|
|
Form of Global Intercompany Note
|
Exhibit F
|
|
Form of Mortgages
|
Exhibit G
|
|
Form of Compliance Certificate
|
Exhibit H
|
|
Form of Confidentiality Agreement
|
Exhibit I
|
|
Form of U.S. Tax Certificate
|
v
CREDIT AGREEMENT dated as of March 11, 2011 among HUNTINGTON INGALLS INDUSTRIES, INC., the
LENDERS party hereto, and JPMORGAN CHASE BANK, N.A., as Administrative Agent, an Issuing Bank and a
Swingline Lender, and CREDIT SUISSE AG, as Swingline Lender.
The Borrower has requested the Lenders to extend credit in the form of (a) a term loan
facility comprising Term Loans extended on the Funding Date, in an aggregate principal amount not
in excess of $575,000,000, and (b) a revolving credit facility comprising Revolving Loans extended
at any time and from time to time after the Spin-off, in an aggregate principal amount at any time
outstanding not in excess of $650,000,000; and, as sub-facilities of such revolving credit
facility, the Borrower has requested (x) the Swingline Lenders to extend credit, at any time after
the Spin-off, in the form of Swingline Loans, in an aggregate principal amount at any time
outstanding not in excess of $100,000,000, and (y) the Issuing Banks to issue Letters of Credit, at
any time and from time to time on or after the Funding Date, in an aggregate face amount at any
time outstanding not in excess of $350,000,000.
The Lenders are willing to extend such credit to the Borrower, and the Issuing Banks are
willing to issue Letters of Credit for the account of the Borrower and its Restricted Subsidiaries,
in each case on the terms and subject to the conditions set forth herein. In consideration of the
mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows:
ARTICLE 1
Definitions
SECTION 1.01
. Defined Terms.
As used in this Agreement, the following terms have the
meanings specified below:
ABR
when used in reference to any Loan or Borrowing, refers to whether such Loan, or the
Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the
Alternate Base Rate.
Acquired Business
means the shipbuilding business of Northrop Grumman (including without
limitation, the shipbuilding business conducted by the Main Shipbuilding Subsidiary and its
subsidiaries) that is being transferred to the Borrower pursuant to the Distribution Agreement.
Acquired Entity
has the meaning assigned to such term in Section 6.04(g).
Adjusted LIBO Rate
means, with respect to any Eurodollar Borrowing for any Interest Period,
an interest rate per annum (rounded upwards, if necessary to the next 1/16 of 1%) equal to (a) the
LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.
Administrative Agent
means JPMCB, in its capacity as administrative agent for the Lenders
hereunder.
Administrative Questionnaire
means an Administrative Questionnaire in a form supplied by the
Administrative Agent.
Affiliate
means, with respect to a specified Person as of any date of determination, another
Person that as of such date directly, or indirectly through one or more intermediaries, Controls or
is Controlled by or is under common Control with the Person specified.
Agents
has the meaning assigned to such term in Article 8.
Agreement Value
means, in respect of any one or more Swap Contracts, after taking into
account the effect of any legally enforceable netting agreement relating to such Swap Contracts,
(a) for any date on or after the date such Swap Contracts have been closed out and termination
value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior
to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for
such Swap Contracts, as determined based upon one or more mid-market or other readily available
quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or
any Affiliate of a Lender).
Alternate Base Rate
means, for any day, a rate per annum equal to the greatest of (a) the
Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus
1
/
2
of 1% and (c) the Adjusted LIBO Rate for a one month Interest Period on such day (or if such day is
not a Business Day, the immediately preceding Business Day) plus 1%,
provided
that, for the
avoidance of doubt, the Adjusted LIBO Rate for any day shall be based on the rate appearing on the
Reuters BBA Libor Rates Page 3750 (or on any successor or substitute page of such page) at
approximately 11:00 a.m. London time on such day. Any change in the Alternate Base Rate due to a
change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate shall be
effective from and including the effective date of such change in the Prime Rate, the Federal Funds
Effective Rate or the Adjusted LIBO Rate, respectively.
Applicable ECF Percentage
means, with respect to any fiscal year, (i) 50%, if the Leverage
Ratio at the end of such fiscal year is greater than 2.75 to 1.00, (ii) 25%, if the Leverage Ratio
at the end of such fiscal year is greater than 2.00 to 1.00 but less than or equal to 2.75 to 1.00,
and (iii) 0%, if the Leverage Ratio at the end of such fiscal year is equal to or less than 2.00 to
1.00.
Applicable Margin
means, for any day, with respect to any ABR Loan or Eurodollar Loan, or
with respect to the commitment fees payable hereunder, as the case may be, the applicable margin
per annum set forth below under the caption ABR Spread, Eurodollar Spread or Commitment Fee
Rate, as the case may be, based upon the Leverage Ratio (determined as of the last day of the
previous fiscal quarter),
provided
that until the delivery to the Administrative Agent pursuant to
Section 5.01 of the Borrowers consolidated financial information for the Borrowers second full
fiscal quarter ending after the Funding Date, the Applicable Margin shall be the applicable rate
per annum set forth below in Category 3:
2
|
|
|
|
|
|
|
|
|
|
|
Eurodollar
|
|
Commitment
|
Leverage Ratio:
|
|
ABR Spread
|
|
Spread
|
|
Fee Rate
|
Category 1
>
4.0 to 1.0
|
|
2.00%
|
|
3.00%
|
|
0.50%
|
|
|
|
|
|
|
|
Category 2
< 4.0 to 1.0 but
>
3.5 to 1.0
|
|
1.75%
|
|
2.75%
|
|
0.50%
|
|
|
|
|
|
|
|
Category 3
< 3.5 to 1.0 but
>
2.5 to 1.0
|
|
1.50%
|
|
2.50%
|
|
0.50%
|
|
|
|
|
|
|
|
Category 4
< 2.5 to 1.0 but
>
2.0 to 1.0
|
|
1.25%
|
|
2.25%
|
|
0.40%
|
|
|
|
|
|
|
|
Category 5
< 2.0 to 1.0
|
|
1.00%
|
|
2.00%
|
|
0.35%
|
For purposes of the foregoing, (a) the Applicable Margin shall be determined as of the end of
each fiscal quarter of the Borrower based upon the Borrowers annual or quarterly consolidated
financial statements and certificates delivered pursuant to Section 5.01 (a) (c) and (b) each
change in the Applicable Margin resulting from a change in the Leverage Ratio shall be effective
during the period commencing on and including the date of delivery to the Administrative Agent of
such consolidated financial statements and certificates indicating such change and ending on the
date immediately preceding the effective date of the next such change,
provided
that the Leverage
Ratio shall be deemed to be in Category 1 (A) at any time that an Event of Default has occurred and
is continuing or (B) if the Borrower fails to deliver the annual or quarterly consolidated
financial statements and certificates required to be delivered by it pursuant to Section 5.01 (a)
(c), during the period from the expiration of the time for delivery thereof until such
consolidated financial statements are delivered.
In the event that any financial statement or compliance certificate delivered pursuant to
Section 5.01 (a) (c) is inaccurate (regardless of whether this Agreement or the Commitments are
in effect when such inaccuracy is discovered), (a) if such inaccuracy, if corrected, would have led
to the application of a higher Applicable Margin for any period (an
Applicable Period
) than the
Applicable Margin applied for such Applicable Period, then (i) promptly after the discovery of any
such inaccuracy by a Financial Officer, the Borrower shall deliver to the Administrative Agent a
corrected financial statement and a corrected compliance certificate for such Applicable Period,
(ii) the Applicable Margin shall be determined based on the corrected compliance certificate for
such Applicable Period, and (iii) the Borrower shall immediately pay to the Administrative Agent
(for the account of the Lenders during the Applicable Period or their successors and assigns) the
accrued additional interest owing as a result of such increased Applicable Margin for such
Applicable Period; and (b) if such inaccuracy, if corrected, would have led to the application of a
lower Applicable Margin for any Applicable Period than the Applicable Margin applied for such
Applicable Period, the applicable Lenders shall have no obligation to repay any interest or fees to
the Borrower, provided that if, as a result of any
3
restatement or other event a proper calculation of the Leverage Ratio would have resulted in
higher pricing for one or more periods and lower pricing for one or more other periods (due to the
shifting of income or expenses from one period to another period or any similar reason), then the
amount payable by the Borrower pursuant to clause (a) above shall be based upon the excess, if any,
of the amount of interest and fees that should have been paid for all applicable periods over the
amount of interest and fees paid for all such periods. This paragraph shall not limit the rights
of the Administrative Agent or the Lenders with respect to Section 2.14(c) and Article 7 hereof,
and shall survive the termination of this Agreement.
Applicable Revolving Percentage
means, with respect to any Revolving Credit Lender, the
percentage of the total Revolving Credit Commitments represented by such Lenders Revolving Credit
Commitment;
provided
that in the case of Section 2.21 when a Defaulting Lender shall exist,
Applicable Revolving Percentage shall mean the percentage of the total Revolving Credit
Commitments (disregarding any Defaulting Lenders Revolving Credit Commitment) represented by such
Lenders Revolving Credit Commitment. If the Revolving Credit Commitments have terminated or
expired, the Applicable Revolving Percentages shall be determined based upon the Revolving Credit
Commitments most recently in effect, giving effect to any assignments and to any Revolving Credit
Lenders status as a Defaulting Lender at the time of determination.
Approved Fund
means any Person (other than a natural person) that is engaged in making,
purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary
course of its business and that is administered or managed by a Lender, an Affiliate of a Lender or
an entity or an Affiliate of an entity that administers or manages a Lender.
Ascension
means Ascension Holding Company, LLC, a Delaware limited liability company and
majority-owned joint venture of the Main Shipbuilding Subsidiary.
Asset Sale
means the sale, transfer or other disposition (by way of merger, casualty,
condemnation or otherwise, but not including by way of lease or license (except a lease to own or
a sale leaseback transaction)) by the Borrower or any of the Restricted Subsidiaries to any Person
other than (x) the Borrower or any Subsidiary Guarantor, or (y) any other Restricted Subsidiary if
the transferor is not the Borrower or a Subsidiary Guarantor, of (a) any Equity Interests of any of
the Subsidiaries (other than directors qualifying shares) or (b) any other assets of the Borrower
or any of the Restricted Subsidiaries (other than (i) dispositions of inventory, damaged, obsolete,
surplus or worn out assets, scrap and Permitted Investments, in each case disposed of in the
ordinary course of business (provided that dispositions of surplus assets and scrap in connection
with the closing of the shipyard in Avondale, Louisiana or the facilities in Waggaman, Louisiana,
or Tallulah, Louisiana shall not be so required to be in the ordinary course of business), (ii)
dispositions between or among Foreign Restricted Subsidiaries, (iii) any sale, transfer or other
disposition or series of related sales, transfers or other dispositions having a value not in
excess of $5,000,000 and (iv) dispositions made pursuant to the Transaction Documents (other than
the Loan Documents and the Senior Note Documents)).
Assignment and Assumption
means an assignment and assumption entered into by a Lender and an
assignee (with the consent of any party whose consent is required by Section
4
9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form
approved by the Administrative Agent.
Available Retained Basket Amount
means, at any time, the sum of:
(a) the cumulative amount of Excess Cash Flow ((x)
plus
any Unused Withheld Amount from the
prior fiscal years, which amount shall be added only after the Applicable ECF Percentage of such
amount has been paid to the Term Lenders in accordance with Section 2.12(e) and (y)
plus
any amount
by which the Excess Cash Withheld Amount is reduced in accordance with Section 2.12(d), which
amount shall be added only after the Applicable ECF Percentage of such amount has been paid to the
Term Lenders in accordance with Section 2.12(d) of the Borrower and its Restricted Subsidiaries for
each fiscal year commencing with the fiscal year ending December 31, 2011
minus
the portion of such
Excess Cash Flow that has been (or is required to be) applied to the prepayment of Term Loans in
accordance with Sections 2.12(c), 2.12(d) and 2.12(e);
plus
(b) the cumulative amount of Net Cash Proceeds from the issue from time to time of Qualified
Capital Stock of the Borrower after the date of the Spin-off, other than issuances to any
Restricted Subsidiary,
minus
(c) the cumulative aggregate, for each reduction in the Gross ECF Overpayment Amount pursuant
to Section 2.12(c) at or prior to such time, of the product of (x) the associated Underestimated
Amount giving rise to the portion of the Excess Cash Adjustment Amount so reduced, and (y) 1.00
less
the applicable Applicable ECF Percentage,
minus
(d) the Available Retained Basket Usage Amount at such time.
Available Retained Basket Usage Amount
means, at any time, the aggregate amount of any
investments outstanding at such time pursuant to Section 6.04(n), any Restricted Payments made
prior to such time pursuant to Section 6.06(a)(iii) or (vii), any payment made prior to such time
pursuant to Section 6.09(b)(iii) or (iv), or any amount of Capital Expenditures made prior to such
time pursuant to Section 6.10(i).
Availability Period
means (i) with respect to Revolving Loans and Swingline Loans, the
period after the Spin-off to but excluding the earlier of the Revolving Credit Maturity Date and
the date of termination of the Revolving Credit Commitments and (ii) with respect to Letters of
Credit, the period from and including the Funding Date to but excluding the earlier of the
Revolving Credit Maturity Date and the date of termination of the Revolving Credit Commitments.
Bankruptcy Event
means, with respect to any Person, such Person becomes the subject of a
bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator,
custodian, assignee for the benefit of creditors or similar Person charged with the reorganization
or liquidation of its business appointed for it, or, in the good faith determination of the
Administrative Agent, has taken any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any such proceeding or appointment,
provided
that a Bankruptcy
Event shall not result solely by virtue of any ownership interest, or the acquisition of any
5
ownership interest, in such Person by a Governmental Authority or instrumentality thereof,
provided
,
further
, that such ownership interest does not result in or provide such Person with
immunity from the jurisdiction of courts within the United States or from the enforcement of
judgments or writs of attachment on its assets or permit such Person (or such Governmental
Authority or instrumentality) to reject, repudiate, disavow or disaffirm any contracts or
agreements made by such Person.
Board
means the Board of Governors of the Federal Reserve System of the United States of
America.
Borrower
means Huntington Ingalls Industries, Inc., a Delaware corporation.
Borrower Notice
has the meaning assigned to such term in Section 5.14.
Borrowing
means (a) Loans of the same Class and Type made, (or converted or continued) on
the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in
effect or (b) a Swingline Loan.
Borrowing Request
means a request by the Borrower in accordance with Section 2.03 and
substantially in the form of Exhibit B or such other form as shall be approved by the
Administrative Agent.
Business Day
means any day that is not a Saturday, Sunday or other day on which commercial
banks in New York City are authorized or required by law to remain closed;
provided
that, when used
in connection with a Eurodollar Loan, the term Business Day shall also exclude any day on which
banks are not open for dealings in US Dollar deposits in the London interbank market.
CapEx Pull Forward Amount
has the meaning assigned to such term in Section 6.10.
CapEx Rollover Amount
has the meaning assigned to such term in Section 6.10.
Capital Expenditures
means, for any period, (a) the additions to property, plant and
equipment and other capital expenditures that are (or should be) set forth in a consolidated
statement of cash flows of the Borrower and the Restricted Subsidiaries for such period prepared in
accordance with GAAP and (b) Capital Lease Obligations incurred by the Borrower and its
consolidated Restricted Subsidiaries during such period, but excluding in each case any such
expenditure made to restore, replace or rebuild property to the condition of such property (or its
reasonable equivalent) immediately prior to any damage, loss, destruction or condemnation of such
property, to the extent such expenditure is made with insurance proceeds, condemnation awards or
damage recovery proceeds relating to any such damage, loss, destruction or condemnation.
Capital Lease Obligations
of any Person means the obligations of such Person to pay rent or
other amounts under any lease of (or other arrangement conveying the right to use) real or personal
property, or a combination thereof, which obligations are required to be classified and
6
accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount
of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.
Change in Control
means (a) the acquisition of ownership, directly or indirectly,
beneficially or of record, by any Person or group (within the meaning of the Securities Exchange
Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the
date hereof) of Equity Interests representing more than 35% of the aggregate ordinary voting power
represented by the issued and outstanding Equity Interests of the Borrower (
provided
that the
foregoing shall not apply to the ownership of such voting Equity Interests by Northrop Grumman on
or prior to the completion of the Spin-off); (b) occupation of a majority of the seats (other than
vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated
by, or whose nomination was approved by, the board of directors of the Borrower nor (ii) appointed
by directors so nominated; or (c) any change of control (or any comparable term) shall occur
under the Senior Notes or any other Material Indebtedness to the extent resulting in a put right
for the holders thereof.
Change in Law
means (a) the adoption or taking effect of any law, rule or regulation after
the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation
or application thereof by any Governmental Authority after the date of this Agreement or (c)
compliance by any Lender or any Issuing Bank (or, for purposes of Section 2.16(b), by any lending
office of such Lender or by such Lenders or such Issuing Banks holding company, if any) with any
request, guideline or directive (whether or not having the force of law) of any Governmental
Authority made or issued after the date of this Agreement;
provided
,
however
, that notwithstanding
anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act
and all requests, rules, guidelines or directives thereunder or issued in connection therewith and
(y) all requests, rules, guidelines or directives promulgated by the Bank for International
Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or
the United States regulatory authorities, in each case pursuant to Basel III, shall in each case be
deemed to be a Change in Law, regardless of the date enacted, adopted or issued.
Class
, when used in reference to (a) any Loan or Borrowing, refers to whether such Loan, or
the Loans comprising such Borrowing, are Revolving Loans, Term Loans or Swingline Loans and (b) any
Commitment, refers to whether such Commitment is a Revolving Credit Commitment or a Term Loan
Commitment.
Code
means the Internal Revenue Code of 1986, as amended from time to time.
Collateral
means all the Collateral as defined in any Collateral Document and shall also
include the Mortgaged Properties.
Collateral Agent
means JPMCB, in its capacity as collateral agent under the Loan Documents.
Collateral Documents
means the Mortgages, the Guarantee and Security Agreement and each of
the security agreements, mortgages and other instruments and documents executed and delivered
pursuant to any of the foregoing or pursuant to Section 5.11.
7
Collateral Reversion Date
has the meaning assigned to such term in Section 9.16(b).
Collateral Suspension Date
has the meaning assigned to such term in Section 9.16(a).
Collateral Suspension Period
has the meaning assigned to such term in Section 9.16(b).
Collateral Suspension Ratings Level
means the condition deemed to occur at any time after
the consummation of the Spin-off at which (i) the Borrowers senior unsecured non-credit enhanced
long-term indebtedness is rated at least Baa3 (with a stable or better outlook) by Moodys and at
least BBB- (with a stable or better outlook) by S&P and (ii) the Borrower obtains and maintains a
corporate credit rating of at least Baa3 (with a stable or better outlook) by Moodys and a
corporate family rating of at least BBB- (with a stable or better outlook) by S&P.
Commitment
means, with respect to any Lender, such Lenders Revolving Credit Commitment and
Term Loan Commitment. The initial amount of each Lenders Revolving Credit Commitment or Term Loan
Commitment is set forth on Schedule 2.01, or in the Assignment and Assumption pursuant to which
such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the
Lenders Commitments is $1,225,000,000.
Compliance Certificate
means a certificate of a Financial Officer of the Borrower,
substantially in the form of Exhibit G.
Confidential Information Memorandum
means the Confidential Information Memorandum dated
January 2011 relating to the Borrower and the Transactions.
Confidentiality Agreement
means a binding confidentiality agreement substantially in the
form of Exhibit H, which may be an electronic click-through agreement.
Consolidated EBITDA
means, for any period, Consolidated Net Income for such period
plus
(a)
without duplication and to the extent deducted in determining such Consolidated Net Income, the sum
of (i) Consolidated Interest Expense for such period, (ii) letters of credit fees (to the extent
not included in Consolidated Interest Expense) for such period, (iii) consolidated income tax
expense for such period, (iv) all amounts attributable to depreciation and amortization for such
period, (v) any non-cash charges (other than the write-down of current assets) for such period,
(vi) any extraordinary charges for such period, (vii) any Incremental Spin-off Related Expenses for
such period, not to exceed $40,000,000 in the aggregate over the term of this Agreement or
$20,000,000 in any fiscal year, (viii) any financing fees, financial and other advisory fees,
accounting and consulting fees and legal fees and related costs and expenses incurred during such
period in connection with acquisitions, investments and asset sales permitted by this Agreement,
(ix) any cash or non-cash charges or losses relating to the closing of the shipyard in Avondale,
Louisiana or the facilities in Waggaman, Louisiana, or Tallulah, Louisiana, the construction of the
LPD-23
Anchorage
, the construction of the LPD-25
Somerset
or any restructuring or reorganization of
the Borrower or any of its Subsidiaries (including severance costs), up to an aggregate amount for
all such charges and losses of (A) for the 2011 fiscal year, $50,000,000, (B) for the 2012 fiscal
year, $35,000,000 and (C) for any fiscal year
8
thereafter, $25,000,000 and (x) Transaction Expenses,
minus
(b) without duplication (i) all
cash payments made during such period on account of reserves, restructuring charges and other
non-cash charges added to Consolidated Net Income pursuant to clause (a)(v) above in a previous
period and (ii) to the extent included in determining such Consolidated Net Income, any
extraordinary gains and all non-cash items of income for such period, and
plus/minus
(c) unrealized
losses/gains in respect of Swap Contracts, all determined on a consolidated basis in accordance
with GAAP;
provided
that for purposes of calculating (x) the Leverage Ratio in connection with
determining compliance with Section 6.12 and the Applicable Margin for any period and (y) the
Interest Coverage Ratio for any period (A) the Consolidated EBITDA of any Acquired Entity acquired
by the Borrower or any Restricted Subsidiary pursuant to a Permitted Acquisition during such period
shall be included on a pro forma basis for such period (assuming the consummation of such
acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred
as of the first day of such period) and (B) the Consolidated EBITDA of any Person or line of
business sold or otherwise disposed of by the Borrower or any Restricted Subsidiary during such
period for shall be excluded for such period (assuming the consummation of such sale or other
disposition and the repayment of any Indebtedness in connection therewith occurred as of the first
day of such period). For purposes of determining Consolidated EBITDA under this Agreement for any
period that includes any of the fiscal quarters ended on March 31, 2010, June 30, 2010, September
30, 2010 and December 31, 2010, Consolidated EBITDA will be deemed to be equal to (i) for the
fiscal quarter ended March 31, 2010, $136,000,000, (ii) for the fiscal quarter ended June 30, 2010,
$140,000,000, (iii) for the fiscal quarter ended September 30, 2010, $157,000,000 and (iv) for the
fiscal quarter ended December 31, 2010, $119,700,000.
Consolidated Interest Expense
means, for any period, (a) the interest expense (including
without limitation imputed interest expense in respect of Capital Lease Obligations) of the
Borrower and the Restricted Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP,
plus
(b) any interest accrued during such period in respect of Indebtedness
of the Borrower or any Restricted Subsidiary that is required to be capitalized rather than
included in consolidated interest expense for such period in accordance with GAAP,
minus
(c) the
interest income with respect to unrestricted cash and Permitted Investments of the Borrower and the
Restricted Subsidiaries earned during such period in accordance with GAAP. For purposes of the
foregoing, interest expense shall be determined after giving effect to any net payments made or
received by the Borrower or any Restricted Subsidiary with respect to interest rate Swap Contracts.
For purposes of determining the Interest Coverage Ratio for any period ending prior to the first
anniversary of the Funding Date, Consolidated Interest Expense shall be deemed to be equal to the
actual Consolidated Interest Expense from the Funding Date through the date of determination
multiplied by a fraction the numerator of which is 365 and the denominator of which is the number
of days from the Funding Date through the date of determination.
Consolidated Net Income
means, for any period, the net income or loss of the Borrower and
the Restricted Subsidiaries for such period determined on a consolidated basis in accordance with
GAAP;
provided
that there shall be excluded (a) the income of any Restricted Subsidiary to the
extent that the declaration or payment of dividends or similar distributions by the Restricted
Subsidiary of that income is not at the time permitted by operation of the terms of
9
its charter or any agreement, instrument, judgment, decree, statute, rule or governmental
regulation applicable to such Restricted Subsidiary, (b) the income or loss of any Person accrued
prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the
Borrower or any Restricted Subsidiary or the date that such Persons assets are acquired by the
Borrower or any Restricted Subsidiary, (c) the income of any Person in which any other Person
(other than the Borrower or a Wholly Owned Restricted Subsidiary or any director holding qualifying
shares in accordance with applicable law) has a joint interest, except to the extent of the amount
of dividends or other distributions actually paid to the Borrower or a Wholly Owned Restricted
Subsidiary by such Person during such period, and (d) any gains attributable to sales of assets out
of the ordinary course of business.
Consolidated Net Tangible Assets
means, at any time, (a) the total assets appearing on the
most recently prepared consolidated balance sheet of the Borrower and the Restricted Subsidiaries
as of the end of the most recent fiscal quarter of the Borrower and the Restricted Subsidiaries for
which such balance sheet is available, prepared in accordance with GAAP,
minus
(b) all intangible
assets, including without limitation, goodwill, patents, trademarks, copyrights, franchises and
research and development costs.
Control
means the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the ability to exercise voting
power, by contract or otherwise.
Controlling
and
Controlled
have meanings correlative thereto.
Contribution
has the meaning assigned to such term in Schedule 1.01A.
Credit Suisse
means Credit Suisse, AG and its successors.
Current Assets
means, at any time, the consolidated current assets (other than cash and
Permitted Investments) of the Borrower and the Restricted Subsidiaries.
Current Liabilities
means, at any time, the consolidated current liabilities of the Borrower
and the Restricted Subsidiaries at such time, but excluding, without duplication, (a) the current
portion of any long-term Indebtedness and (b) outstanding Revolving Loans and Swingline Loans.
Current NGC Parent
means Northrop Grumman Corporation, a Delaware corporation, to be renamed
as Titan II Inc. after the consummation of the Holding Company Merger.
Default
means any event or condition which constitutes an Event of Default or which upon
notice, lapse of time or both would, unless cured or waived, become an Event of Default.
Defaulting Lender
means any Revolving Credit Lender that (a) has failed, within two Business
Days of the date required to be funded or paid, to (i) fund any portion of its Revolving Loans,
(ii) fund any portion of its participations in Letters of Credit or Swingline Loans or (iii) pay
over to any Revolving Credit Party any other amount required to be paid by it hereunder, unless, in
the case of clause (i) above, such Lender notifies the Administrative Agent in writing that such
failure is the result of such Lenders good faith determination that a condition
10
precedent to funding (specifically identified and including the particular default, if any)
has not been satisfied, (b) has notified the Borrower or any Revolving Credit Party in writing, or
has made a public statement to the effect, that it does not intend or expect to comply with any of
its funding obligations under this Agreement (unless such writing or public statement indicates
that such position is based on such Lenders good faith determination that a condition precedent
(specifically identified and including the particular default, if any) to funding a loan under this
Agreement cannot be satisfied) or generally under other agreements in which it commits to extend
credit, (c) has failed, within three Business Days after written request by a Revolving Credit
Party, acting in good faith, to provide a certification in writing from an authorized officer of
such Lender that it will comply with its obligations to fund prospective Loans and participations
in then outstanding Letters of Credit and Swingline Loans under this Agreement,
provided
that such
Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon such Revolving Credit
Partys receipt of such certification in form and substance satisfactory to it and the
Administrative Agent, or (d) has become the subject of a Bankruptcy Event, or is the subsidiary of
a Lender Parent that has become the subject of a Bankruptcy Event.
Designated Foreign Currency
means, with respect to any applicable Letter of Credit, any
foreign currency that is (a) freely traded and exchangeable into US Dollars and (b) approved by the
applicable Issuing Bank.
Designated Payment Account
means an account with the Administrative Agent designated from
time to time by the Borrower in a writing executed by a Financial Officer.
Disclosed Matters
means the actions, suits and proceedings and the environmental matters
disclosed in Schedule 3.06.
Disqualified Stock
means any Equity Interest that, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable), or upon the happening of
any event, (a) matures (excluding any maturity as the result of an optional redemption by the
issuer thereof) or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise,
or is redeemable at the option of the holder thereof, in whole or in part, or requires the payment
of any cash dividend or any other scheduled payment constituting a return of capital, in each case
at any time on or prior to the first anniversary of the Term Loan Maturity Date, or (b) is
convertible into or exchangeable (unless at the sole option of the issuer thereof) for (i) debt
securities or (ii) any Equity Interest referred to in clause (a) above, in each case at any time
prior to the first anniversary of the Term Loan Maturity Date.
Distribution Agreement
means the Separation and Distribution Agreement to be entered into
prior to the Internal Reorganization among the Borrower, the Current NGC Parent, New NGC, the Main
Shipbuilding Subsidiary and Northrop Grumman Systems Corporation, a Delaware corporation,
substantially in the form of the draft provided to the Administrative Agent prior to the date
hereof.
Documentation Agents
means The Royal Bank of Scotland plc, Wells Fargo Bank, N.A., SunTrust
Bank, BNP Paribas and Sumitomo Mitsui Banking Corporation in their capacity as documentation
agents.
11
Domestic Restricted Subsidiary
means any Domestic Subsidiary that is a Restricted
Subsidiary.
Domestic Subsidiary
means any Subsidiary that is not a Foreign Subsidiary.
Effective Date
means the date on which the conditions specified in Section 4.01 are
satisfied (or waived in accordance with Section 9.02).
Environmental Laws
means all laws (statutory, common or otherwise), rules, regulations,
codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued,
promulgated or entered into by any Governmental Authority, relating in any way to the environment,
preservation or reclamation of natural resources, the management, release or threatened release of
any Hazardous Material or to health and safety matters.
Environmental Liability
means any liability, contingent or otherwise (including any
liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the
Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any
Environmental Law, (b) generation, use, handling, transportation, storage, treatment or disposal of
any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) release or threatened release
of any Hazardous Materials into the environment or (e) contract, agreement or other consensual
arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
Equity Interests
means shares of capital stock, partnership interests, membership interests
in a limited liability company, beneficial interests in a trust or other equity interests in any
Person, and any option, warrant or other right entitling the holder thereof to purchase or
otherwise acquire any such equity interest (including through convertible securities); provided
that any Indebtedness convertible or exchangeable for Equity Interests shall not be deemed to be
Equity Interests, unless and until any such Indebtedness is so converted or exchanged.
ERISA
means the Employee Retirement Income Security Act of 1974, as amended from time to
time.
ERISA Affiliate
means any trade or business (whether or not incorporated) that, together
with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or,
solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single
employer under Section 414 of the Code.
ERISA Event
means (a) any reportable event, as defined in Section 4043 of ERISA or the
regulations issued thereunder with respect to a Plan (other than an event for which the 30 day
notice period is waived); (b) a determination that a Plan is, or is expected to be, in at risk
status (as defined in Section 303(i)(4) of ERISA); (c) the failure to timely make a contribution
required to be made with respect to any Plan or any Multiemployer Plan; (d) a determination that a
Multiemployer Plan is, or is expected to be, in endangered status or critical status (each as
defined in Section 305(b) of ERISA); (e) the incurrence by the Borrower or any of its ERISA
Affiliates of any liability under Title IV of ERISA with respect to the termination of, or
withdrawal or partial withdrawal from, any Plan or Multiemployer Plan; (f) the receipt by the
12
Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating
to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (g)
the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any
Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the
imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected
to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; or (h) the
occurrence of a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the
Code which would reasonably be expected to result in liability to the Borrower or any of its ERISA
Affiliates.
Eurodollar
, when used in reference to any Loan or Borrowing, refers to whether such Loan, or
the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the
Adjusted LIBO Rate.
Event of Default
has the meaning assigned to such term in Article 7.
Excess Cash Adjustment Amount
shall mean, as of any date,
(a) the sum, for all fiscal years of the Borrower (starting with the fiscal year ended
December 31, 2012) for which annual financial statements have been delivered pursuant to Section
5.01(a) on or prior to such date, of the Excess Cash Flow Overpayment Amount for each such year
(the
Gross ECF Overpayment Amount
),
minus
(b) the sum of all amounts by which the Gross ECF Overpayment Amount is reduced pursuant to
Section 2.12(c).
Excess Cash Flow
means, for any fiscal year of the Borrower (starting with the fiscal year
ended December 31, 2011), the excess of (a) the sum, without duplication, of (i) Consolidated Net
Income for such fiscal year, (ii) reductions to noncash working capital of the Borrower and the
Restricted Subsidiaries for such fiscal year (
i.e.
, the decrease, if any, in Current Assets minus
Current Liabilities from the beginning to the end of such fiscal year), (iii) the amount of all
non-cash charges (including depreciation and amortization) deducted in arriving at such
Consolidated Net Income, (iv) an amount equal to the aggregate net non-cash loss on the disposition
of property by the Borrower and the Restricted Subsidiaries during such fiscal year, to the extent
deducted in arriving at such Consolidated Net Income, (v) the amount of income tax expense deducted
in determining Consolidated Net Income for such period, and (vi) Consolidated Interest Expense for
such period,
over
(b) the sum, without duplication, of (i) the amount of any incomes taxes payable
in cash by the Borrower and the Restricted Subsidiaries with respect to such fiscal year, (ii)
Consolidated Interest Expense for such fiscal year paid in cash plus, to the extent deducted from
the calculation thereof, cash interest income during such fiscal year, (iii) Capital Expenditures
and Permitted Acquisitions made in cash in accordance with Section 6.10 and Section 6.04(g),
respectively, during such fiscal year, in each case to the extent financed with internally
generated funds and not by utilizing the Available Retained Basket Amount, (iv) cash or in-kind
investments made during such fiscal year pursuant to Section 6.04(p) or Section 6.04(q), and cash
fees and expenses paid during such fiscal year in connection with any Investment permitted under
Section 6.04, in each case to the extent financed with internally generated funds (other than in
the case of any in-kind investment) and not by
13
utilizing the Available Retained Basket Amount, (v) permanent repayments of Indebtedness
(other than mandatory prepayments of Term Loans under Section 2.12 and voluntary prepayments of
Term Loans under Section 2.11) made in cash by the Borrower and the Restricted Subsidiaries during
such fiscal year, but only to the extent that the Indebtedness so prepaid by its terms cannot be
reborrowed or redrawn, such prepayments do not occur in connection with a refinancing of all or any
portion of such Indebtedness and such prepayments are not financed with the Available Retained
Basket Amount, (vi) additions to noncash working capital for such fiscal year
(i.e.
, the increase,
if any, in Current Assets
minus
Current Liabilities from the beginning to the end of such fiscal
year), (vii) an amount equal to the aggregate net non-cash gain on the disposition of property by
the Borrower and the Restricted Subsidiaries during such fiscal year, to the extent included in
arriving at such Consolidated Net Income, (viii) cash payments during such fiscal year in respect
of long-term liabilities other than Indebtedness and that were made with internally generated funds
and were not deducted or excluded in calculating Consolidated Net Income and (ix) the Excess Cash
Withheld Amount for such fiscal year.
Excess Cash Flow Overpayment Amount
means, with respect to any fiscal year (starting with
the fiscal year ended December 31, 2012) for which annual financial statements have been delivered
pursuant to Section 5.01(a), the lesser of (x) the amount of outstanding Term Loans, if any, that
have been prepaid in accordance with Section 2.12(c) based on the Excess Cash Flow calculated for
the year preceding such fiscal year, and (y) the product of (A) the positive excess, if any, of the
amount of Capital Expenditures and other expenditures for working capital requirements made by the
Borrower and its Restricted Subsidiaries during such fiscal year over the Excess Cash Withheld
Amount planned (as of the end of the preceding fiscal year) to be used during such fiscal year to
make Capital Expenditures or for other working capital requirements (the
Underestimated Amount
),
and (B) the Applicable ECF Percentage (calculated as of the end of the preceding fiscal year).
Excess Cash Withheld Amount
means, as of the end of any fiscal year, an amount equal to the
sum of (x) the amount of Capital Expenditures committed to be made in the following fiscal year by
the Borrower and the Restricted Subsidiaries and (y) the amount of other working capital
requirements of the Borrower and the Restricted Subsidiaries for the following fiscal year, in each
case as certified in reasonable detail in a certificate signed by a Financial Officer and delivered
to the Administrative Agent contemporaneously with the delivery of the Compliance Certificate for
such fiscal year;
provided
that to the extent such Excess Cash Withheld Amount (as reduced in
accordance with Section 2.12(d)) is not used for the purposes described in such officers
certificate by the end of the following fiscal year (the
Unused Withheld Amount
), the Applicable
ECF Percentage (applicable to the original fiscal year) of such Unused Withheld Amount shall be
applied to mandatorily prepay Term Loans to the extent set forth in Section 2.12(e).
Excluded Taxes
means, with respect to the Administrative Agent, any Lender, any Issuing Bank
or any other recipient of any payment to be made by or on account of any obligation of the Borrower
or any Guarantor hereunder, (a) income or franchise Taxes imposed on (or measured by) its net
income by the United States of America, or by the jurisdiction under the laws of which such
recipient is organized or in which its principal office is located or, in the case of any Lender,
in which its applicable lending office is located, (b) any branch profits Taxes
14
imposed by the United States of America or any similar Tax imposed by any other jurisdiction
described in clause (a) above, (c) in the case of a Foreign Lender (other than an assignee pursuant
to a request by the Borrower under Section 2.20), any withholding Tax that is imposed on amounts
payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement
(or designates a new lending office) or is attributable to such Foreign Lenders failure to comply
with Section 2.18(f), except to the extent that such Foreign Lender (or its assignor, if any) was
entitled, at the time of designation of a new lending office (or assignment), to receive additional
amounts from the Borrower with respect to such withholding Tax pursuant to Section 2.18(a) and (d)
any U.S. federal withholding Tax imposed under FATCA.
Existing JPM Letters of Credit
means the Existing Letters of Credit with respect to which
JPMCB or an Affiliate thereof is the issuing bank.
Existing Letters of Credit
means the letters of credit set forth on Schedule 2.05B.
FATCA
means Sections 1471 through 1474 of the Code, as of the date of this Agreement and any
regulations or official interpretations thereof.
Federal Funds Effective Rate
means, for any day, the weighted average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day that is a Business Day, the average (rounded upwards, if necessary, to the
next 1/100 of 1%) of the quotations for such day for such transactions received by the
Administrative Agent from three Federal funds brokers of recognized standing selected by it.
Fee Letter
means the letter agreement, dated as of January 22, 2011, among the Borrower, the
Current NGC Parent, the Lead Arrangers and the Administrative Agent.
Financial Officer
means the chief financial officer, principal accounting officer, treasurer
or controller of the Borrower.
Fitch
means Fitch Ratings, a wholly owned subsidiary of Fimilac, S.A.
Flood Laws
means the National Flood Insurance Reform Act of 1994 and related legislation
(including the regulations of the Board of Governors of the Federal Reserve Systems).
Foreign Lender
means any Lender that is organized under the laws of a jurisdiction other
than that in which the Borrower is located. For purposes of this definition, the United States of
America, each State thereof and the District of Columbia shall be deemed to constitute a single
jurisdiction.
Foreign Restricted Subsidiary
means any Foreign Subsidiary that is a Restricted Subsidiary.
Foreign Subsidiary
means any (i) Subsidiary that is treated as a corporation for U.S.
federal income tax purposes that is organized under the laws of a jurisdiction other than the
15
United States of America or any State thereof or the District of Columbia, (ii) Subsidiary
substantially all of the assets of which consist, directly or indirectly, of Subsidiaries described
in clause (i) of this definition, (iii) entity treated as disregarded for U.S. federal income tax
purposes that owns more than 65% of the voting stock of a Subsidiary described in clauses (i) or
(ii) of this definition, and (iv) Subsidiary of an entity described in clauses (i), (ii), or (iii)
of this definition.
Funding Date
means the date on which the conditions specified in Section 4.02 are satisfied
(or waived in accordance with Section 9.02).
GAAP
means generally accepted accounting principles in the United States of America.
Global Intercompany Note
means a global intercompany note in the form of Exhibit E pursuant
to which intercompany obligations and advances owed by any Loan Party are subordinated to the
Secured Obligations (as defined in the Guarantee and Security Agreement).
Governmental Authority
means the government of the United States of America, any other
nation or any political subdivision thereof, whether state or local, and any agency, authority,
instrumentality, regulatory body, court, central bank or other entity exercising executive,
legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to
government.
GO Zone Bonds
has the meaning assigned to such term in Section 4.02(i).
Gross ECF Overpayment Amount
has the meaning assigned to such term in the definition of
Excess Cash Adjustment Amount.
Guarantee
of or by any Person means any obligation, contingent or otherwise, of such Person
guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of
any other Person (the
primary obligor
) in any manner, whether directly or indirectly, and
including any obligation of such Person, direct or indirect, (a) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase
(or to advance or supply funds for the purchase of) any security for the payment of such
Indebtedness or other obligation, (b) to purchase or lease property, securities or services for the
purpose of assuring the owner of such Indebtedness or other obligation of the payment of such
Indebtedness or other obligation or (c) to maintain working capital, equity capital or any other
financial statement condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness or other obligation;
provided
,
however
, that the term
Guarantee
shall not include (x) endorsements for collection or deposit in the ordinary course of business or
(y) any customary and reasonable indemnity obligations in effect on the Effective Date or entered
into in connection with any acquisition or disposition of assets permitted under this Agreement
(other than such obligations related to Indebtedness).
Guarantee and Security Agreement
means the Guarantee and Security Agreement, substantially
in the form of Exhibit D, among the Borrower, the Guarantors party thereto and the Collateral Agent
for the benefit of the Secured Parties.
16
Guarantors
means each of the Borrowers direct and indirect Wholly Owned Domestic Restricted
Subsidiaries.
Hazardous Materials
means all explosive or radioactive substances or wastes and all
hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum
distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas,
infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to
any environmental law.
Holding Company Merger
means the merger of Titan Merger Sub Inc., a Delaware corporation and
a wholly owned indirect subsidiary of New NGC with and into the Current NGC Parent in a merger
pursuant to Section 251(g) of the Delaware General Corporation Law, with the Current NGC Parent as
the surviving entity and renamed Titan II Inc. and with New NGC renamed Northrop Grumman
Corporation.
Incremental Spin-off Related Expenses
means incremental costs for procurement of material
and/or services resulting from renegotiation of pre-existing Intercompany Work Orders (IWOs) on an
arms length basis with Northrop Grumman and its subsidiaries.
Indebtedness
of any Person means, without duplication, (a) all obligations of such Person
for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or
similar instruments, (c) all obligations of such Person under conditional sale or other title
retention agreements relating to property or assets purchased by such Person, (d) all obligations
of such Person issued or assumed as the deferred purchase price of property or services (excluding
trade and other current accounts payable and accrued obligations incurred in the ordinary course of
business), (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or
acquired by such Person, whether or not the obligations secured thereby have been assumed (but to
the extent such Lien does not extend to any other property of such Person and is otherwise
non-recourse against such Person, limited to the fair market value of such property), (f) all
Guarantees by such Person of Indebtedness of others, (g) all Capital Lease Obligations of such
Person, (h) net obligations of such Person under any Swap Contracts, valued at the Agreement Value
thereof, (i) all obligations of such Person in respect of Disqualified Stock, (j) all obligations
of such Person as an account party in respect of letters of credit and (k) all obligations of such
Person in respect of bankers acceptances. The Indebtedness of any Person shall include the
Indebtedness of any partnership in which such Person is a general partner, unless such Indebtedness
is expressly made non-recourse to such Person.
Indemnified Taxes
means Taxes other than Excluded Taxes.
Interest Coverage Ratio
means, for any period, the ratio of (a) Consolidated EBITDA for such
period to (b) Consolidated Interest Expense for such period.
Interest Election Request
means a request by the Borrower to convert or continue a Borrowing
in accordance with Section 2.07.
17
Interest Payment Date
means (a) with respect to any ABR Loan (other than a Swingline Loan),
the last day of each March, June, September and December, (b) with respect to any Eurodollar Loan,
the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and,
in the case of a Eurodollar Borrowing with an Interest Period of more than three months duration,
each day prior to the last day of such Interest Period that occurs at intervals of three months
duration after the first day of such Interest Period and (c) with respect to any Swingline Loan,
the day that such Loan is required to be repaid.
Interest Period
means with respect to any Eurodollar Borrowing, the period commencing on the
date of such Borrowing and ending on the numerically corresponding day in the calendar month that
is one, two, three or six months thereafter, or, if agreed by all Revolving Credit Lenders, nine or
twelve months thereafter, as the Borrower may elect;
provided
that (i) if any Interest Period would
end on a day other than a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding
Business Day would fall in the next calendar month, in which case such Interest Period shall end on
the next preceding Business Day and (ii) any Interest Period pertaining to a Eurodollar Borrowing
that commences on the last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the last calendar month of such Interest Period) shall end on the
last Business Day of the last calendar month of such Interest Period. For purposes hereof, the
date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter
shall be the effective date of the most recent conversion or continuation of such Borrowing.
Internal Reorganization
has the meaning assigned to such term in Schedule 1.01A.
Investment
means, as to any Person, any direct or indirect acquisition or investment by such
Person, whether by means of (a) the purchase or other acquisition of capital stock or other
securities of another Person, (b) a loan, advance or capital contribution to, Guarantee or
assumption of debt of, or purchase or other acquisition of any other debt or equity participation
or interest in, another Person, including any partnership or joint venture interest in such other
Person and any arrangement pursuant to which the investor Guarantees Indebtedness of such other
Person, or (c) the purchase or other acquisition (in one transaction or a series of transactions)
of assets of another Person that constitute a business unit, line of business or division of such
Person. For purposes of covenant compliance, the amount of any Investment shall be the amount
actually invested, without adjustment for subsequent increases or decreases in the value of such
Investment.
ISP
means, with respect to any Letter of Credit, the International Standby Practices 1998
published by the Institute of International Banking Law & Practice (or such later version thereof
as may be in effect at the time of issuance).
Issuing Bank
means JPMCB and each other Person that shall have become an Issuing Bank
hereunder as provided in Section 2.05(i), in each case in its capacity as an issuer of Letters of
Credit hereunder, and its successors in such capacity as provided in Section 2.05(j). Each Issuing
Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by its
Affiliates (
provided
that the identity and creditworthiness of the Affiliate is reasonably
18
acceptable to the Borrower), in which case the term Issuing Bank shall include any such
Affiliate with respect to Letters of Credit issued by such Affiliate.
Issuing Bank Agreement
has the meaning assigned to such term in Section 2.05(i).
JPMCB
means JPMorgan Chase Bank, N.A. and its successors.
Joint Bookrunners
means J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC,
Wells Fargo Securities, LLC and RBS Securities Inc., in their capacity as joint bookrunners.
Judgment Currency
has the meaning assigned to such term in Section 9.14.
LC Commitment
means, with respect to each Issuing Bank, the commitment of such Issuing Bank
to issue Letters of Credit pursuant to Section 2.05. The initial amount of each Issuing Banks LC
Commitment is set forth on Schedule 2.05A, or in such Issuing Banks Issuing Bank Agreement.
LC Continuing Agreement Form
has the meaning assigned to such term in Section 2.05(a).
LC Disbursement
means a payment made by an Issuing Bank pursuant to a Letter of Credit.
LC Exchange Rate
means, on any day, with respect to US Dollars in relation to any Designated
Foreign Currency, the rate at which US Dollars may be exchanged into such currency, as set forth at
approximately 12:00 noon, New York City time, on such day on the applicable Reuters World Currency
Page. In the event that any such rate does not appear on the applicable Reuters World Currency
Page, the LC Exchange Rate shall be determined by reference to such other publicly available
service for displaying exchange rates as may be agreed upon by the Administrative Agent and the
Borrower or, in the absence of such agreement, such LC Exchange Rate shall instead be the spot rate
of exchange of the Administrative Agent, at or about 11:00 a.m., London time, on such date for the
purchase of such Designated Foreign Currency with US Dollars for delivery two Business Days later;
provided
that if at the time of any such determination, for any reason, no such spot rate is being
quoted, the Administrative Agent, after consultation with the Borrower, may use any reasonable
method it deems appropriate to determine such rate, and such determination shall be conclusive
absent manifest error.
LC Exposure
means, at any time, the sum of (a) the aggregate of the US Dollar Equivalents of
the undrawn amounts of all outstanding Letters of Credit at such time plus (b) the aggregate of the
US Dollar Equivalents of all LC Disbursements that have not yet been reimbursed by or on behalf of
the applicable Borrower at such time (determined as provided in Section 2.05 as of the applicable
LC Participation Calculation Dates in the case of LC Disbursements in respect of which the
Borrowers reimbursement obligations have been converted to US Dollar amounts in accordance with
such Section). The LC Exposure of any
19
Revolving Credit Lender at any time shall be its Applicable Revolving Percentage of the total
LC Exposure at such time.
LC Participation Calculation Date
means, with respect to any LC Disbursement made in a
currency other than US Dollars, (a) the date on which the applicable Issuing Bank shall advise the
Administrative Agent that it purchased with US Dollars the currency used to make such LC
Disbursement, or (b) if such Issuing Bank shall not advise the Administrative Agent that it made
such a purchase, the date on which such LC Disbursement is made.
Lead Arrangers
means J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC, in
their capacity as lead arrangers.
Lender Parent
means, with respect to any Lender, any Person as to which such Lender is,
directly or indirectly, a subsidiary.
Lenders
means the Persons listed on Schedule 2.01 and any other Person that shall have
become a party hereto pursuant to an Assignment and Assumption, other than any such Person that
ceases to be a party hereto pursuant to an Assignment and Assumption. Unless the context otherwise
requires, the term Lenders includes the Swingline Lender.
Letter of Credit
means any letter of credit issued pursuant to this Agreement (including the
Existing Letters of Credit).
Leverage Ratio
means, on any date, the ratio of Total Debt on such date to Consolidated
EBITDA for the period of four consecutive fiscal quarters most recently ended on or prior to such
date.
LIBO Rate
means, with respect to any Eurodollar Borrowing for any Interest Period, the rate
per annum equal to the British Bankers Association LIBOR Rate (
BBA LIBOR
) from Telerate Successor
Page 3750, as published by Reuters (or other commercially available source providing quotations of
BBA LIBOR as designated by the Administrative Agent from time to time) at approximately 11:00 a.m.,
London time, two Business Days prior to the commencement of such Interest Period, as the rate for
US Dollar deposits with a maturity comparable to such Interest Period. In the event that such rate
is not available at such time for any reason, then the
LIBO Rate
with respect to such Eurodollar
Borrowing for such Interest Period shall be the rate at which US Dollar deposits of $5,000,000 and
for a maturity comparable to such Interest Period are offered by the principal London office of the
Administrative Agent in immediately available funds in the London interbank market at approximately
11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period.
Lien
means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge,
hypothecation, encumbrance, charge or security interest in or on or of such asset, (b) the interest
of a vendor or a lessor under any conditional sale agreement, capital lease or title retention
agreement (or any financing lease having substantially the same economic effect as any of the
foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or
similar right of a third party with respect to such securities.
20
Loan Documents
means this Agreement, the Letters of Credit, the Collateral Documents, any
promissory note issued under Section 2.09(e) and any other document executed in connection with the
foregoing.
Loan Parties
means the Borrower and the Guarantors (but, in the case of any Guarantor, only
for so long as that Guarantor has not been released from its Guarantee under the Guarantee and
Security Agreement in accordance with its terms).
Loans
means the loans made by the Lenders to the Borrower pursuant to this Agreement.
Main Shipbuilding Subsidiary
means Northrop Grumman Shipbuilding, Inc., a Virginia
corporation.
Margin Stock
has the meaning assigned to such term in Regulation U issued by the Board.
Material Adverse Effect
means a material adverse effect on (a) the business, assets,
liabilities, results of operations or financial position of (i) the Borrower and its Subsidiaries,
taken as a whole or (ii) the Acquired Business, in each case other than as a result of the Internal
Reorganization (including the Contribution), (b) the ability of the Loan Parties to perform their
obligations under this Agreement and the other Loan Documents or (c) the rights and remedies of the
Lenders, the Administrative Agent or the Collateral Agent under this Agreement and the other Loan
Documents.
Material Indebtedness
means Indebtedness (other than the Loans and Letters of Credit), or
obligations in respect of one or more Swap Contracts, of any one or more of the Borrower and its
Restricted Subsidiaries in an aggregate principal amount exceeding $40,000,000. For purposes of
determining Material Indebtedness, the principal amount of the obligations of the Borrower or any
Restricted Subsidiary in respect of any Swap Contract at any time shall be the Agreement Value
thereof.
Material Real Property
means a fee interest in (i) any real property owned by the Borrower
or any Wholly Owned Domestic Restricted Subsidiary on the Effective Date or the Funding Date that
is listed on Schedule 1.01B and (ii) any after-acquired real property owned by a Loan Party having
gross purchase price exceeding $10,000,000 at the time of acquisition;
provided
that for purposes
of this definition, individual parcels of land in the same general geographic area acquired as part
of a single acquisition will be considered as a single property.
MBFC
has the meaning assigned to such term in Section 4.02(i).
Moodys
means Moodys Investors Service, Inc.
Mortgaged Properties
means, (i) initially, the properties specified on Schedule 1.01B, and
(ii) any other Material Real Properties owned by any Loan Party with respect to which a Mortgage is
granted pursuant to Section 5.11.
21
Mortgages
shall mean the mortgages, deeds of trust, deeds to secure debt, assignments of
leases and rents, modifications and other Collateral Documents delivered pursuant to Section 5.14
or Section 5.11 (each substantially in the form being attached hereto as Exhibit F).
Multiemployer Plan
means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
Net Cash Proceeds
means (a) with respect to any Asset Sale, the cash proceeds (including (i)
cash proceeds subsequently received (as and when received) in respect of noncash consideration
initially received and (ii) casualty insurance settlements and condemnation awards, but only as and
when received), net of (i) selling expenses (including reasonable brokers fees or commissions,
legal fees, transfer and similar taxes, title and survey expenses if customarily paid by a seller
in the jurisdiction where the asset is located and the Borrowers good faith estimate of income
taxes paid or payable in connection with such sale), (ii) amounts provided as a reserve, in
accordance with GAAP, or amounts placed in escrow, against any liabilities under any
indemnification obligations or purchase price adjustment associated with such Asset Sale (
provided
that, to the extent and at the time any such amounts are released from such reserve or such escrow,
such amounts shall constitute Net Cash Proceeds), (iii) the principal amount, premium or penalty,
if any, interest and other amounts on any Indebtedness for borrowed money which is secured by the
asset sold in such Asset Sale and which is required to be repaid with such proceeds (other than any
such Indebtedness assumed by the purchaser of such asset and the Obligations) and (iv) refunds
contractually or legally due to customers that are Governmental Authorities, or contractors or
sub-contractors of Governmental Authorities, in respect of such cash proceeds;
provided
,
however
,
that, if (A) the Borrower shall deliver a certificate of a Financial Officer to the Administrative
Agent at the time of receipt thereof setting forth the Borrowers intent to reinvest such proceeds
in productive assets of a kind then used or usable in the business of the Borrower and the
Restricted Subsidiaries (or, in the case of proceeds from the disposition of any Investment in a
joint venture or Unrestricted Subsidiary, to reinvest such proceeds in any Investment permitted by
Section 6.04), and (B) no Default or Event of Default shall have occurred and shall be continuing
at the time of such certificate or at the proposed time of the application of such proceeds, such
proceeds shall not constitute Net Cash Proceeds except to the extent not so used (1) within 365
days following the receipt of such proceeds, at which time such remaining proceeds shall be deemed
to be Net Cash Proceeds or (2) if the Borrower or the relevant Subsidiary enters into a legally
binding commitment to reinvest such Net Cash Proceeds within 365 days following the receipt
thereof, within 180 days following the date of such legally binding commitment; and (b) with
respect to any issuance or incurrence of Indebtedness or any Equity Issuance, the cash proceeds
thereof, net of all taxes and customary fees, commissions, costs and other expenses incurred in
connection therewith.
New NGC
means New P, Inc., a Delaware corporation, to be renamed as Northrop Grumman
Corporation after the consummation of the Holding Company Merger.
NFIP
has the meaning assigned to such term in Section 5.14.
Non-Consenting Lender
has the meaning assigned to such term in Section 9.02(c).
22
Northrop Grumman
means, collectively, the Current NGC Parent, New NGC and their respective
subsidiaries.
Northrop Grumman Retained Subsidiaries
means LLC Holdco, LP Holdco, any direct or indirect
subsidiary of LLC Holdco or LP Holdco from time to time (so long as it is a subsidiary of LLC
Holdco and/or LP Holdco), and each other Northrop Grumman entity that is not engaged in the
shipbuilding business of Northrop Grumman, is not part of the Acquired Business and is not intended
to be a Subsidiary of the Borrower following the Spin-off. For the avoidance of doubt, Northrop
Grumman Systems Corporation, a Delaware corporation, and its subsidiaries after giving effect to
the Internal Reorganization shall be Northrop Grumman Retained Subsidiaries.
Obligations
means (i) the principal of and premium, if any, and interest (including interest
accruing during the pendency of any bankruptcy, insolvency, receivership or other similar
proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, (ii) each
payment required to be made by the Borrower under this Agreement in respect of any Letter of
Credit, including payments in respect of reimbursement of disbursements, interest thereon and
obligations to provide cash collateral and (iii) all other monetary obligations, including fees,
costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise
(including monetary obligations incurred during the pendency of any bankruptcy, insolvency,
receivership or other similar proceeding, regardless of whether allowed or allowable in such
proceeding), of the Loan Parties under this Agreement and the other Loan Documents.
Other Taxes
means any and all present or future recording, filing, stamp or documentary
taxes or any other excise or property taxes, charges or similar levies arising from any payment
made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to,
this Agreement.
Participant
has the meaning assigned to such term in Section 9.04(c).
Participant Register
has the meaning assigned to such term in Section 9.04(c).
PBGC
means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any
successor entity performing similar functions.
Perfection Certificate
has the meaning assigned to such term in the Guarantee and Security
Agreement.
Permitted Acquisition
has the meaning assigned to such term in Section 6.04(g).
Permitted Business
means (a) any business conducted by the Borrower and the Restricted
Subsidiaries on the Effective Date, (b) any defense-related business with the Navy, the Coast Guard
or other governmental agency that is substantially related, ancillary or complementary to the
businesses described in clause (a) above and (c) any other business substantially related,
ancillary or complementary to the businesses described in clause (a) above
23
to the extent such other business is within the core competency of the Borrower and the
Restricted Subsidiaries.
Permitted Investments
means:
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(a)
|
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direct obligations of, or obligations the principal of and interest on which
are unconditionally guaranteed by, the United States of America (or by any agency
thereof to the extent such obligations are backed by the full faith and credit of the
United States of America), in each case maturing within one year from the date of
issuance thereof;
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(b)
|
|
investments in commercial paper maturing within 270 days from the date of
issuance thereof and having, at such date of acquisition, the highest credit rating
obtainable from S&P or from Moodys;
|
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(c)
|
|
investments in certificates of deposit, bankers acceptances and time deposits
maturing within 180 days from the date of acquisition thereof issued or guaranteed by
or placed with, and money market deposit accounts issued or offered by, the
Administrative Agent or any domestic office of any commercial bank organized under the
laws of the United States of America or any State thereof that has a combined capital
and surplus and undivided profits of not less than $500,000,000;
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(d)
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fully collateralized repurchase agreements with a term of not more than 30 days
for securities described in clause (a) above and entered into with a financial
institution satisfying the criteria of clause (c) above; and
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(e)
|
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money market funds that (i) comply with the criteria set forth in Rule 2a-7 of
the Investment Company Act of 1940, as amended, (ii) are rated AAA by S&P and Aaa by
Moodys and (iii) have portfolio assets of at least $5,000,000,000.
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Permitted Refinancing
means, with respect to any Person, any modification, refinancing,
refunding, renewal or extension (collectively,
Refinancing
) of any Indebtedness of such Person;
provided
that (a) the principal amount (or accreted value, if applicable) thereof does not exceed
the principal amount (or accreted value, if applicable) of the Indebtedness so modified,
refinanced, refunded, renewed or extended (collectively,
Refinanced
) except by an amount equal to
unpaid accrued interest and premium thereon, (b) such Refinancing has a final maturity date equal
to or later than the final maturity date of, and has a weighted average life to maturity equal to
or greater than the weighted average life to maturity of, the Indebtedness being Refinanced, (c) if
the Indebtedness being Refinanced is subordinated in right of payment to the Obligations, such
Refinancing is subordinated in right of payment to the Obligations on terms at least as favorable
to the Lenders as those contained in the documentation governing the Indebtedness being Refinanced,
taken as a whole, (d) the terms and conditions (including, if applicable, as to collateral) of any
such Refinanced Indebtedness are not materially less favorable to the Loan Parties or the Lenders
than the terms and conditions of the Indebtedness being Refinanced, taken as a whole, (e) such
Refinancing is incurred by the Person who is the obligor on the Indebtedness being Refinanced, (f)
at the time thereof, no Default or Event of Default shall have occurred and be continuing and (g)
the Borrower and its Restricted Subsidiaries shall
24
be in compliance, on a pro forma basis after giving effect to such Refinancing, with the
financial covenants set forth in Sections 6.11 and 6.12.
Permitted Senior Indebtedness
means unsecured senior Indebtedness issued or incurred by the
Borrower, (a) the terms of which (i) do not provide for any scheduled repayment, mandatory
redemption (except in exchange for common stock of the Borrower) or sinking fund obligation prior
to the date that is six months after the Term Loan Maturity Date, (ii) have mandatory prepayment,
repurchase or redemption provisions no more onerous or expansive in scope, taken as a whole, than
those contained in this Agreement and (iii) provide for covenants and events of default customary
for Indebtedness of a similar nature as such Permitted Senior Indebtedness and (b) in respect of
which no Restricted Subsidiary that is not an obligor under the Loan Documents is an obligor;
provided
that immediately prior to and after giving effect on a pro forma basis to any incurrence
of Permitted Senior Indebtedness, no Default or Event of Default shall have occurred and be
continuing or would result therefrom.
Permitted Subordinated Indebtedness
means unsecured subordinated Indebtedness issued or
incurred by the Borrower, (a) the terms of which (i) do not provide for any scheduled repayment,
mandatory redemption (except in exchange for common stock of the Borrower) or sinking fund
obligation prior to the date that is six months after the Term Loan Maturity Date, (ii) have
mandatory prepayment, repurchase or redemption provisions no more onerous or expansive in scope,
taken as a whole, than those contained in this Agreement, (iii) provide for covenants and events of
default customary for Indebtedness of a similar nature as such Permitted Subordinated Indebtedness
and (iv) provide for subordination of payments in respect of such Indebtedness to the Obligations
and guarantees thereof under the Loan Documents customary for high yield securities and (b) in
respect of which no Restricted Subsidiary that is not an obligor under the Loan Documents is an
obligor;
provided
that immediately prior to and after giving effect on a pro forma basis to any
incurrence of Permitted Subordinated Indebtedness, no Default or Event of Default shall have
occurred and be continuing or would result therefrom.
Person
means any natural person, corporation, limited liability company, trust, joint
venture, association, company, partnership, Governmental Authority or other entity.
Plan
means any employee pension benefit plan (other than a Multiemployer Plan) subject to
the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in
respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would
under Section 4069 of ERISA be deemed to be) an employer as defined in Section 3(5) of ERISA.
Pre-Contribution Internal Reorganization
has the meaning assigned to such term in Schedule
1.01A.
Prime Rate
means the rate of interest per annum publicly announced from time to time by
JPMCB as its prime rate in effect at its office located at 270 Park Avenue, New York, New York;
each change in the Prime Rate shall be effective from and including the date such change is
publicly announced as being effective.
Proposed Change
has the meaning assigned to such term in Section 9.02(c).
25
Qualified Capital Stock
of any Person means any Equity Interest of such Person that is not
Disqualified Stock.
Register
has the meaning assigned to such term in Section 9.04(b).
Related Parties
means, with respect to any specified Person, such Persons Affiliates and
the respective directors, officers, employees, agents and advisors of such Person and such Persons
Affiliates.
Required Lenders
means, at any time, Lenders having Term Loans (or prior to the Funding
Date, Term Loan Commitments), Revolving Credit Exposures and unused Revolving Credit Commitments
representing more than 50% of the sum of total Term Loans (or prior to the Funding Date, Term Loan
Commitments), Revolving Credit Exposures and unused Revolving Credit Commitments at such time;
provided
that the Revolving Credit Exposure and unused Revolving Credit Commitments of any
Defaulting Lender shall be disregarded in the determination of the Required Lenders at any time.
Required Revolving Credit Lenders
means, at any time, Revolving Credit Lenders having
Revolving Credit Exposures and unused Revolving Credit Commitments representing more than 50% of
the sum of total Revolving Credit Exposures and unused Revolving Credit Commitments at such time;
provided
that the Revolving Credit Exposure and unused Revolving Credit Commitments of any
Defaulting Lender shall be disregarded in the determination of the Required Revolving Credit
Lenders at any time.
Responsible Officer
means any Financial Officer, chief executive officer, general counsel,
chief compliance officer or chief administrative officer of the Borrower.
Restricted Companies
means the Borrower and the Restricted Subsidiaries.
Restricted Payment
means any dividend or other distribution (whether in cash, securities or
other property) with respect to any Equity Interests in the Borrower or any Restricted Subsidiary,
or any payment (whether in cash, securities or other property), including any sinking fund or
similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or
termination of any Equity Interests in the Borrower or any Restricted Subsidiary.
Restricted Prepayment
has the meaning assigned to such term in Section 6.09(b).
Restricted Subsidiary
means any Subsidiary of the Borrower other than any Unrestricted
Subsidiary;
provided
that prior to the Spin-off, the Northrop Grumman Retained Subsidiaries shall
be deemed not to be Restricted Subsidiaries of the Borrower. Between the period starting with the
Effective Date and ending on the Funding Date, each entity that is scheduled to be a Restricted
Subsidiary as of the Funding Date pursuant to the Internal Reorganization shall be deemed to be a
Restricted Subsidiary for purposes of this Agreement during such period,
provided
that,
notwithstanding the foregoing, for purposes of Article 5 (except for Sections 5.01 and 5.02) no
entity will be deemed a Restricted Subsidiary for purposes of this Agreement unless it is at such
time a subsidiary of the Borrower.
26
Revaluation Date
means, with respect to any Letter of Credit denominated in a Designated
Foreign Currency, each of the following: (a) each date of issuance of a Letter of Credit
denominated in a Designated Foreign Currency, (b) each date of an amendment of any such Letter of
Credit having the effect of increasing the amount thereof (solely with respect to the increased
amount), (c) each date of any payment by an Issuing Bank under any Letter of Credit denominated in
a Designated Foreign Currency and (d) such additional dates as the Administrative Agent or the
applicable Issuing Bank shall determine or the Required Lenders shall require.
Revolving Borrowing
means a Borrowing comprised of Revolving Loans.
Revolving Credit Commitment
means, with respect to each Revolving Credit Lender, the
commitment of such Revolving Credit Lender to make Revolving Loans pursuant to Section 2.01,
expressed as a US Dollar amount representing the maximum aggregate permitted amount of such
Revolving Credit Lenders Revolving Credit Exposure hereunder, as such commitment may be (a)
reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time
pursuant to assignments by or to such Lender under Section 9.04. The initial amount of each
Revolving Credit Lenders Revolving Credit Commitment is set forth on Schedule 2.01, or in the
Assignment and Assumption pursuant to which such Revolving Credit Lender shall have assumed its
Revolving Credit Commitment, as applicable. The aggregate amount of the Revolving Credit
Commitments on the date hereof is $650,000,000.
Revolving Credit Exposure
means, with respect to any Lender at any time, the sum of the
outstanding principal amount of such Lenders Revolving Loans and its LC Exposure and Swingline
Exposure at such time.
Revolving Credit Facility
means the Revolving Credit Commitments and the extensions of
credit made hereunder by the Revolving Credit Lenders.
Revolving Credit Lender
means a Lender with a Revolving Credit Commitment or an outstanding
Revolving Credit Exposure.
Revolving Credit Maturity Date
means the date (or if such date is not a Business Day, the
next succeeding Business Day, unless such Business Day is in the next calendar month, in which case
the next preceding Business Day) that is the fifth anniversary of the Funding Date.
Revolving Credit Party
means the Administrative Agent, any Issuing Bank, any Swingline
Lender or any other Revolving Credit Lender.
Revolving Loan
means a Loan made pursuant to Section 2.01.
S&P
means Standard & Poors Ratings System.
Secured Obligations
has the meaning assigned to such term in the Guarantee and Security
Agreement.
Secured Parties
has the meaning assigned to such term in the Guarantee and Security
Agreement.
27
Senior Credit Facilities
means the revolving credit, swingline, letters of credit and the
term loan facility provided for by this Agreement.
Senior Note Documents
means the indenture under which the Senior Notes are issued and all
other instruments, agreements and other documents evidencing or governing the Senior Notes or
providing for any Guarantee or other right in respect thereof.
Senior Notes
means, collectively, (i) the Borrowers 6.875% Senior Notes due 2018 in an
initial aggregate principal amount of $600,000,000 and (ii) the Borrowers 7.125% Senior Notes due
2021 in an initial aggregate principal amount of $600,000,000.
Senior Notes Escrow
has the meaning assigned to such term in Schedule 1.01A.
Significant Subsidiary
means (i) each Restricted Subsidiary other than Restricted
Subsidiaries that, in the aggregate, as of the last day of the most recent fiscal quarter of the
Borrower for which financial statements have been delivered pursuant to Section 5.01, constitute
minor subsidiaries as defined in Rule 3-10 of Regulation S-X and (ii) for purposes of Section
5.01(k) only, Significant Subsidiary shall include each Unrestricted Subsidiary other than
Unrestricted Subsidiaries that, in the aggregate, as of the last day of the most recent fiscal
quarter of the Borrower for which financial statements have been delivered pursuant to Section
5.01, constitute minor subsidiaries as defined in Rule 3-10 of Regulation S-X.
Specified Permitted CapEx Amount
has the meaning assigned to such term in Section 6.10.
Spin-off
means the distribution by New NGC of all of the issued and outstanding shares of
the Borrowers common stock on a pro rata basis to holders of New NGC common stock (after giving
effect to the Internal Reorganization) in accordance with the Distribution Agreement, as more fully
described in Schedule 1.01A.
Statutory Reserve Rate
means a fraction (expressed as a decimal), the numerator of which is
the number one and the denominator of which is the number one minus the aggregate of the maximum
reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed
as a decimal established by the Board to which the Administrative Agent is subject with respect to
the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as Eurocurrency
Liabilities in Regulation D of the Board). Such reserve percentages shall include those imposed
pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding
and to be subject to such reserve requirements without benefit of or credit for proration,
exemptions or offsets that may be available from time to time to any Lender under such Regulation D
or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as
of the effective date of any change in any reserve percentage.
subsidiary
means, with respect to any Person (the
parent
) at any date, any corporation,
limited liability company, partnership, association or other entity the accounts of which would be
consolidated with those of the parent in the parents consolidated financial statements if such
financial statements were prepared in accordance with GAAP as of such date, as well as any other
corporation, limited liability company, partnership, association or other
28
entity of which securities or other ownership interests representing more than 50% of the
equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than
50% of the general partnership interests are, as of such date, directly or indirectly, owned,
controlled or held by the parent or one or more of the other subsidiaries of the parent or by the
parent and one or more of the other subsidiaries of the parent.
Subsidiary
means any subsidiary of the Borrower;
provided
that prior to the Spin-off, the
Northrop Grumman Retained Subsidiaries shall be deemed not to be Subsidiaries of the Borrower.
Swap Contract
means (a) any and all rate swap transactions, basis swaps, credit derivative
transactions, forward rate transactions, commodity swaps, commodity options, equity or equity index
swaps or options, bond or bond index swaps or options, interest rate options, foreign exchange
transactions, cap transactions, floor transactions, collar transactions, currency swap
transactions, cross-currency rate swap transactions, currency options or any other similar
transactions or any combination of any of the foregoing (including any options to enter into any of
the foregoing), whether or not any such transaction is governed by or subject to any master
agreement, and (b) any and all transactions of any kind, and the related confirmations, which are
subject to the terms and conditions of, or governed by, any form of master agreement published by
the International Swaps and Derivatives Association, Inc. or any other master agreement or related
schedules, including any such obligations or liabilities arising therefrom.
Swingline Exposure
means, at any time, the aggregate principal amount of all Swingline Loans
outstanding at such time. The Swingline Exposure of any Revolving Credit Lender at any time shall
be its Applicable Revolving Percentage of the total Swingline Exposure at such time.
Swingline Lender
means each of JPMorgan Chase Bank, N.A. and Credit Suisse AG, in each such
Lenders capacity as a lender of Swingline Loans hereunder
Swingline Loan
means a Loan made pursuant to Section 2.04.
Syndication Agent
means Credit Suisse Securities (USA) LLC in its capacity as syndication
agent.
Taxes
means any and all present or future taxes, levies, imposts, duties, deductions,
charges or withholdings imposed by any Governmental Authority, including any interest, additions to
tax or penalties applicable thereto.
Term Borrowing
means a Borrowing comprised of Term Loans.
Term Lender
means a Lender with a Term Loan Commitment or an outstanding Term Loan.
Term Loan Commitment
means with respect to each Term Lender, the amount set forth on
Schedule 2.01 under the heading Term Loan Commitment. The aggregate amount of the Term Loan
Commitments on the Effective Date is $575,000,000.
29
Term Loans
means the term loans made by the Lenders to the Borrower on the Funding Date
pursuant to Section 2.01(a).
Term Maturity Date
means the date (or if such date is not a Business Day, the next
succeeding Business Day, unless such Business Day is in the next calendar month, in which case the
next preceding Business Day) that is the fifth anniversary of the Funding Date.
Titan II
means (i) prior to the consummation of the Spin-off, the Current NGC Parent after
(A) it becomes a Wholly Owned Subsidiary of the Borrower and (B) the Main Shipbuilding Subsidiary
becomes a Wholly Owned Subsidiary of the Borrower and (ii) after the consummation of the Spin-off,
Titan II Inc., a Delaware corporation and a Wholly Owned Subsidiary of the Borrower.
Titan II Guarantees
means (i) (A) the performance guaranty dated as of April 11, 2002, by
Current NGC Parent, as guarantor, to the United States of America, Naval Sea Systems Command (the
Navy
), as beneficiary, (B) the performance guaranty dated as of May 30, 2006, by Current NGC
Parent, as guarantor, to the Navy, as beneficiary, (C) the performance guaranty dated as of April
24, 2007, by Current NGC Parent, as guarantor, to the Navy, as beneficiary, and (D) any other
similar guarantee pursuant to which Current NGC Parent has guaranteed the performance of the Main
Shipbuilding Subsidiary, or any affiliate of the Main Shipbuilding Subsidiary, under shipbuilding
construction contracts with the Navy or a command or other division thereof and (ii) the guaranty
agreement dated as of December 1, 2006, between Current NGC Parent, as guarantor, and The Bank of
New York Mellon Trust Company, N.A. (formerly known as The Bank of New York Trust Company, N.A.),
as trustee, pursuant to which Current NGC Parent has guaranteed the payment of the GO Zone Bonds.
Total Debt
means, at any time, the total Indebtedness of the Borrower and the Restricted
Subsidiaries on a consolidated basis at such time (excluding Indebtedness of the type described in
clause (i), clause (j) and clause (k) of the definition of such term, except, in the case of such
clauses (j) and (k), to the extent of any unreimbursed drawings thereunder).
Transaction Documents
means, collectively, (i) the Distribution Agreement, the Ancillary
Agreements (as defined in the Distribution Agreement) and any other contribution and separation
agreements and other documents relating to the Internal Reorganization (including the Contribution)
and the Spin-off (including as to the allocation of liabilities), (ii) the documentation relating
to the establishment of the Borrower, (iii) the Senior Note Documents and (iv) all other documents,
instruments and documents relating to the Transactions (other than the Loan Documents).
Transaction Expenses
means all legal fees, auditors fees and other fees or expenses incurred
by the Borrower and the Restricted Subsidiaries in connection with the Transactions (including
without limitation, financing fees, financial and other advisory fees, accounting and consulting
fees and legal fees and related costs and expenses).
Transactions
means, collectively, (a) the Internal Reorganization (including the
Contribution), the establishment of the Borrower, and other transactions expressly contemplated by
the Transaction Documents specified in clause (i) of the definition thereof, (b) the Spin-off,
30
(c) the execution, delivery and performance by each Loan Party of the Loan Documents to which
it is to be a party, the borrowing or issuance of Loans, the use of any proceeds thereof and the
issuance of Letters of Credit hereunder, (e) the execution, delivery and performance of each Loan
Party of the Senior Note Documents to which it is to be a party and the issuance of the Senior
Notes and (e) the payment of the Transaction Expenses.
Type
, when used in reference to any Loan or Borrowing, refers to whether the rate of
interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the
Adjusted LIBO Rate or the Alternate Base Rate.
UCP
means, with respect to any Letter of Credit, the Uniform Customs and Practice for
Documentary Credits, as published by the International Chamber of Commerce in 2007 (the UCP600).
Unrestricted Subsidiary
means any Subsidiary of the Borrower designated by the board of
directors of the Borrower (or, in the case of Titan II and Ascension designated by operation of the
last sentence of Section 5.12) as an Unrestricted Subsidiary pursuant to Section 5.12 (and
continuing until such time that such designation may be thereafter revoked by the Borrower).
Unused Withheld Amount
has the meaning assigned to such term in the definition of Excess
Cash Withheld Amount.
US Dollar Equivalent
means, on any date of determination, (a) with respect to any amount in
US Dollars, such amount, and (b) with respect to any amount in any currency other than US Dollars,
the equivalent in US Dollars of such amount, determined by the Administrative Agent using the LC
Exchange Rate with respect to such currency in effect for such amount on such date. The US Dollar
Equivalent at any time of the amount of any Letter of Credit or LC Disbursement denominated in any
currency other than US Dollars shall be the amount most recently determined as provided in Section
1.05.
US Dollars
or
$
means the lawful money of the United States of America.
U.S. Person
means a United States person within the meaning of Section 7701(a)(30) of the
Code.
U.S. Tax Certificate
has the meaning assigned to such term in Section 2.18(f)(ii)(D).
Wholly Owned Domestic Restricted Subsidiary
means a Wholly Owned Restricted Subsidiary that
is a Domestic Subsidiary.
Wholly Owned Restricted Subsidiary
means a Wholly Owned Subsidiary that is a Restricted
Subsidiary.
Wholly Owned Subsidiary
of any Person means a subsidiary of such Person of which securities
(except for directors qualifying shares) or other ownership interests representing 100% of the
Equity Interests are, at the time any determination is being made, owned, Controlled
31
or held by such Person or one or more wholly owned Subsidiaries of such Person or by such
Person and one or more wholly owned Subsidiaries of such Person.
Withdrawal Liability
means liability to a Multiemployer Plan as a result of a complete or
partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E
of Title IV of ERISA.
SECTION 1.02
. Classification of Loans and Borrowings.
For purposes of this Agreement, Loans
may be classified and referred to by Class (e.g., a Revolving Loan) or by Type (e.g., a
Eurodollar Loan) or by Class and Type (e.g., a Eurodollar Revolving Loan). Borrowings also may
be classified and referred to by Class (e.g., a Revolving Borrowing) or by Type (e.g., a
Eurodollar Borrowing) or by Class and Type (e.g., a Eurodollar Revolving Borrowing).
SECTION 1.03
. Terms Generally.
The definitions of terms herein shall apply equally to both
the singular and plural forms of the terms defined. Whenever the context may require, any pronoun
shall include the corresponding masculine, feminine and neuter forms. The words include,
includes and including shall be deemed to be followed by the phrase without limitation. The
word will shall be construed to have the same meaning and effect as the word shall. Unless the
context requires otherwise (a) any definition of or reference to any agreement, instrument or other
document herein shall be construed as referring to such agreement, instrument or other document as
from time to time amended, supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference herein to any Person
shall be construed to include such Persons successors and assigns, (c) the words herein,
hereof and hereunder, and words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision hereof, (d) all references herein to
Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of,
and Exhibits and Schedules to, this Agreement and (e) the words asset and property shall be
construed to have the same meaning and effect and to refer to any and all tangible and intangible
assets and properties, including cash, securities, accounts and contract rights.
SECTION 1.04
. Accounting Terms; GAAP.
Except as otherwise expressly provided herein, all
terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect
from time to time;
provided
that, if the Borrower notifies the Administrative Agent that the
Borrower requests an amendment to any provision hereof to eliminate the effect of any change
occurring after the date hereof in GAAP or the rules promulgated with respect thereto or in the
application thereof on the operation of such provision or on the method of calculation of financial
covenants, standards or terms of this Agreement (or if the Administrative Agent notifies the
Borrower that the Required Lenders request an amendment to any provision hereof for such purpose),
regardless of whether any such notice is given before or after such change in GAAP or in the
application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and
applied immediately before such change shall have become effective until such notice shall have
been withdrawn or such provision amended in accordance herewith.
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SECTION 1.05
. Currency Translation.
The Administrative Agent shall determine the US Dollar
Equivalent of any Letter of Credit denominated in a Designated Foreign Currency as of any
Revaluation Date, in each case using the LC Exchange Rate for the applicable currency in effect on
the date of determination, and each such amount shall be the US Dollar Equivalent of such Letter of
Credit until the next Revaluation Date. The Administrative Agent shall in addition determine the
US Dollar Equivalent of any Letter of Credit denominated in any Designated Foreign Currency as
provided in Section 2.05. The Administrative Agent shall notify the Borrower and the applicable
Issuing Bank of each calculation of the US Dollar Equivalent of each Letter of Credit and LC
Disbursement.
SECTION 1.06.
Pro Forma Calculations.
All pro forma calculations permitted or required to be
made by the Borrower or any Restricted Subsidiary pursuant to this Agreement shall include only
those adjustments that would be (a) permitted or required by Regulation S-X under the Securities
Act of 1933, as amended, together with those adjustments that (i) have been certified by a
Financial Officer of the Borrower as having been prepared in good faith based upon reasonable
assumptions and (ii) are based on reasonably detailed written assumptions and (b) required by the
definition of Consolidated EBITDA.
ARTICLE 2
The Credits
SECTION 2.01
. Commitments.
(a) Subject to the terms and conditions set forth herein, each
Term Lender severally agrees to make Term Loans to the Borrower on the Funding Date in US Dollars
in an aggregate principal amount that will not result in the aggregate amount of such Lenders Term
Loans exceeding such Lenders Term Loan Commitment. Amounts repaid or prepaid in respect of Term
Loans may not be reborrowed.
(b) Subject to the terms and conditions set forth herein, each Revolving Credit Lender
severally agrees to make Revolving Loans to the Borrower from time to time during the Availability
Period in US Dollars in an aggregate principal amount that will not result in such Lenders
Revolving Credit Exposure exceeding such Lenders Revolving Credit Commitment; it being understood
and agreed for the avoidance of doubt that no Revolving Loans shall be made on the Funding Date.
Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower
may borrow, repay and reborrow Revolving Loans.
SECTION 2.02
. Loans and Borrowings.
(a) Each Loan of any Class (other than Swingline Loans)
shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance
with their applicable Commitments of such Class. The failure of any Lender to make any Loan
required to be made by it shall not relieve any other Lender of its obligations hereunder;
provided
that the Commitments of the Lenders are several and no Lender shall be responsible for any other
Lenders failure to make Loans as required.
(b) Subject to Section 2.15, each Borrowing shall be comprised entirely of ABR Loans or
Eurodollar Loans as the Borrower may request in accordance herewith. Each Swingline Loan shall be
an ABR Loan. Each Lender at its option may make any Eurodollar Loan by causing any domestic or
foreign branch or Affiliate of such Lender to make such Loan;
provided
that any
33
exercise of such option shall not affect the obligation of the Borrower to repay such Loan in
accordance with the terms of this Agreement.
(c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing, such
Borrowing shall be in an aggregate amount that is an integral multiple of $500,000 and not less
than $2,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in
an aggregate amount that is an integral multiple of $500,000 and not less than $2,000,000;
provided
that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused
balance of the total Commitments or that is required to finance the reimbursement of an LC
Disbursement as contemplated by Section 2.05(e). Each Swingline Loan shall be in an amount that is
an integral multiple of $100,000 and not less than $500,000. Borrowings of more than one Type and
Class may be outstanding at the same time;
provided
that there shall not at any time be more than a
total of 10 Eurodollar Borrowings outstanding.
(d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled
to request, or to elect to convert or continue, any Eurodollar Borrowing if the Interest Period
requested with respect thereto would end after the Revolving Credit Maturity Date or the Term
Maturity Date, as applicable.
SECTION 2.03
. Requests for Borrowings.
To request a Borrowing, the Borrower shall notify the
Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not
later than 12:00 noon, New York City time, three Business Days before the date of the proposed
Borrowing or (b) in the case of an ABR Borrowing, not later than 12:00 noon, New York City time,
one Business Day before the proposed Borrowing;
provided
that any such notice of an ABR Revolving
Borrowing to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e) may
be given not later than 10:00 a.m., New York City time, on the date of the proposed Borrowing.
Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand
delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved
by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing
Request shall specify the following information in compliance with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business Day;
(iii) whether such Borrowing is to be a Term Borrowing or a Revolving Borrowing, and
whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and
(iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be
applicable thereto, which shall be a period contemplated by the definition of the term
Interest Period.
If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an
ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar
34
Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one months
duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the
Administrative Agent shall advise each Lender of the applicable Class of the details thereof and of
the amount of such Lenders Loan to be made as part of the requested Borrowing.
SECTION 2.04
. Swingline Loans.
(a) Subject to the terms and conditions set forth herein, the
Swingline Lenders agree to make Swingline Loans to the Borrower from time to time during the
Availability Period in US Dollars in amounts that will not result in (i) the aggregate principal
amount of outstanding Swingline Loans exceeding $100,000,000 or (ii) the total Revolving Credit
Exposures exceeding the total Revolving Credit Commitments;
provided
that no Swingline Lender shall
be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the
foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow,
repay and reborrow Swingline Loans. Unless otherwise agreed between the Swingline Lenders, each
Swingline Lender shall make 50% of each Swingline Loan.
(b) To request a Swingline Loan, the Borrower shall notify the Administrative Agent of such
request by telephone (confirmed by telecopy), not later than 1:00 p.m., New York City time, on the
day of a proposed Swingline Loan. Each such notice shall be irrevocable and shall specify the
requested date (which shall be a Business Day) and amount of the requested Swingline Loan. The
Administrative Agent will promptly advise the Swingline Lenders of any such notice received from
the Borrower. The Swingline Lenders shall make each Swingline Loan available to the Borrower by
means of a credit (or remittance) to the general deposit account of the Borrower with the
Administrative Agent (or, in the case of a Swingline Loan made to finance the reimbursement of an
LC Disbursement as provided in Section 2.05(e), by remittance to the applicable Issuing Bank) by
4:00 p.m., New York City time, on the requested date of such Swingline Loan.
(c) The Swingline Lenders (acting together) may by written notice given to the Administrative
Agent not later than 10:00 a.m., New York City time, on any Business Day require the Revolving
Credit Lenders to acquire participations on such Business Day in all or a portion of the
outstanding Swingline Loans. Such notice shall specify the aggregate amount of Swingline Loans in
which the Revolving Credit Lenders will participate. Promptly upon receipt of such notice, the
Administrative Agent will give notice thereof to each Revolving Credit Lender, specifying in such
notice such Lenders Applicable Revolving Percentage of such Swingline Loan or Loans. Each
Revolving Credit Lender hereby absolutely and unconditionally agrees, upon receipt of notice as
provided above, to pay to the Administrative Agent, for the account of the Swingline Lenders, such
Lenders Applicable Revolving Percentage of such Swingline Loan or Loans. Each Revolving Credit
Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans
pursuant to this paragraph is absolute and unconditional and shall not be affected by any
circumstance whatsoever, including the occurrence and continuance of a Default or reduction or
termination of the Commitments, and that each such payment shall be made without any offset,
abatement, withholding or reduction whatsoever. Each Revolving Credit Lender shall comply with its
obligation under this paragraph by wire transfer of immediately available funds, in the same manner
as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall
apply,
mutatis mutandis
, to the payment obligations of the Lenders), and the Administrative Agent
shall promptly pay to the
35
Swingline Lenders their pro rata share of the amounts so received by it from the Revolving
Credit Lenders. The Administrative Agent shall notify the Borrower of any participations in any
Swingline Loan acquired pursuant to this paragraph, and thereafter payments in respect of such
Swingline Loan shall be made to the Administrative Agent and not to the Swingline Lenders. Any
amounts received by the Swingline Lenders from the Borrower (or other party on behalf of the
Borrower) in respect of a Swingline Loan after receipt by the Swingline Lenders of the proceeds of
a sale of participations therein shall be promptly remitted to the Administrative Agent; any such
amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent
to the Revolving Credit Lenders that shall have made their payments pursuant to this paragraph and
to the Swingline Lenders, as their interests may appear;
provided
that any such payment so remitted
shall be repaid to the Swingline Lenders or to the Administrative Agent, as applicable, if and to
the extent such payment is required to be refunded to the Borrower for any reason. The purchase of
participations in a Swingline Loan pursuant to this paragraph shall not relieve the Borrower of any
default in the payment thereof.
SECTION 2.05
. Letters of Credit.
(a)
General
. (i) Subject to the terms and conditions set
forth herein, the Borrower may request the issuance of commercial and standby Letters of Credit
denominated in US Dollars or any Designated Foreign Currency approved by the applicable Issuing
Bank (and in the case of any such Designated Foreign Currency, (A) subject to any cap imposed by
such applicable Issuing Bank in respect of such Designated Foreign Currency and (B) provided that
the LC Exposure of Letters of Credit denominated in Designated Foreign Currencies shall not exceed
$70,000,000 at any time), (x) for its own account or (y) for its own account and, jointly, for the
account of any of its Restricted Subsidiaries (and in each case under this clause (y), the Borrower
shall be considered the sole obligor under such Letter of Credit for purposes of this Agreement
notwithstanding any listing of any Restricted Subsidiary as an account party or applicant with
respect to such Letter of Credit), pursuant to an agreement (x) if JPMCB is the Issuing Bank,
substantially in the form of Exhibit C (the
LC Continuing Agreement Form
) and (y) in the case of
any other Issuing Bank, substantially in the form of the LC Continuing Agreement Form with such
changes as shall be agreed to by the Borrower, the applicable Issuing Bank and the Administrative
Agent, at any time and from time to time during the Availability Period (including, for the
avoidance of doubt, on the Funding Date). Except as to matters covered by agreements contained
herein or otherwise expressly agreed by the relevant Issuing Bank and the Borrower when a Letter of
Credit is issued, the rules of the ISP shall apply to each standby Letter of Credit, and the rules
of the UCP shall apply to each commercial Letter of Credit. JPMCB and each other Lender which has
been designated as an Issuing Bank hereunder, agrees, subject to the terms and conditions set forth
herein (including, without limitation, Section 4.03), that it shall issue Letters of Credit
complying with the terms of this Agreement upon the request of the Borrower in the manner
contemplated by this Section. It is understood and agreed that the Borrower shall be deemed to be
a primary account party under, and obligated in respect of, each Letter of Credit issued at the
request of the Borrower hereunder, notwithstanding the fact that a Restricted Subsidiary may be
listed as the account party in the Letter of Credit. In the event of any inconsistency between the
terms and conditions of this Agreement and the terms and conditions of any form of letter of credit
application or other agreement submitted by the Borrower to, or entered into by the Borrower with,
an Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall
control. The Borrower unconditionally and irrevocably agrees that, in connection with any Letter
of Credit
36
referred to in clause (ii) of the first sentence of this paragraph, it will be fully
responsible for the reimbursement of LC Disbursements, the payment of interest thereon and the
payment of participation fees and other fees due hereunder to the same extent as if it were the
sole account party in respect of such Letter of Credit (the Borrower hereby irrevocably waiving any
defenses that might otherwise be available to it as a guarantor of the obligations of any
Restricted Subsidiary that shall be a joint account party in respect of any such Letter of Credit).
(ii) The parties hereto acknowledge and agree that, as of the Funding Date, the Existing
JPM Letters of Credit shall constitute Letters of Credit hereunder for all purposes as fully
as if such Existing JPM Letters of Credit had been issued as Letters of Credit hereunder.
(b)
Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions
. To request the
issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of
Credit), the Borrower shall hand deliver or telecopy to the applicable Issuing Bank and the
Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal
or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of
Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal
or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire
(which shall comply with paragraph (c) of this Section), the currency and amount of such Letter of
Credit, the name and address of the beneficiary thereof and such other information as shall be
necessary to prepare, amend, renew or extend such Letter of Credit. In connection with any request
for a Letter of Credit and if requested by the applicable Issuing Bank, the Borrower also shall
submit (i) in the case of such request from JPMCB, a letter of credit application substantially in
the form attached as an annex to the LC Continuing Agreement Form or (ii) in the case of such
request from any other Issuing Bank, a letter of credit application substantially in the form
attached as an annex to the LC Continuing Agreement with such changes as shall be agreed between
the Borrower and such Issuing Bank. A Letter of Credit shall be issued, amended, renewed or
extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the
Borrower shall be deemed to represent and warrant that), after giving effect to such issuance,
amendment, renewal or extension, (i) the total Revolving Credit Exposures shall not exceed the
total Revolving Credit Commitments, (ii) the total LC Exposure shall not exceed $350,000,000, (iii)
the portion of the LC Exposure attributable to Letters of Credit issued by the applicable Issuing
Bank will not exceed the LC Commitment of such Issuing Bank and (iv) if such Letter of Credit is
denominated in a Designated Foreign Currency, the US Dollar Equivalent of the portion of the LC
Exposure attributable to Letters of Credit denominated in such Designated Foreign Currency and
issued by the applicable Issuing Bank shall not exceed the cap (if any) imposed by such Applicable
Bank with respect to such Designated Foreign Currency.
(c)
Expiration Date
. Each Letter of Credit shall expire at or prior to the close of business
on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit
(or, in the case of any renewal or extension thereof, one year after such renewal or extension) and
(ii) the date that is five Business Days prior to the Revolving Credit Maturity Date;
provided
that
any Letter of Credit with a one-year tenor may provide for renewal thereof under procedures
reasonably satisfactory to the applicable Issuing Bank for additional one-year periods (which shall
in no event extend beyond the date referred to in clause (ii) above).
37
(d)
Participations
. By the issuance of a Letter of Credit (or an amendment to a Letter of
Credit increasing the amount thereof) and without any further action on the part of the applicable
Issuing Bank or the Revolving Credit Lenders, such Issuing Bank hereby grants to each Revolving
Credit Lender, and each such Revolving Credit Lender hereby acquires from such Issuing Bank, a
participation in such Letter of Credit equal to such Lenders Applicable Revolving Percentage of
the aggregate amount available to be drawn under such Letter of Credit. In consideration and in
furtherance of the foregoing, each Revolving Credit Lender hereby absolutely and unconditionally
agrees to pay to the Administrative Agent, for the account of the applicable Issuing Bank, such
Lenders Applicable Revolving Percentage (determined as of the time or times at which the Revolving
Credit Lenders are required to make payments in respect of unreimbursed LC Disbursements under such
Letter of Credit pursuant to paragraph (e) below) of each LC Disbursement made by such Issuing Bank
and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or
of any reimbursement payment required to be refunded to the Borrower for any reason (or, if the
currency of the applicable LC Disbursement or reimbursement payment shall be a Designated Foreign
Currency, an amount equal to the US Dollar Equivalent thereof using the LC Exchange Rate in effect
on the applicable LC Participation Calculation Date). Each Revolving Credit Lender acknowledges
and agrees that its obligation to acquire participations pursuant to this paragraph in respect of
Letters of Credit is absolute and unconditional and shall not be affected by any circumstance
whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence
and continuance of a Default or reduction or termination of the Commitments or any fluctuation in
currency values, and that each such payment shall be made without any offset, abatement,
withholding or reduction whatsoever.
(e)
Reimbursement
. If the applicable Issuing Bank shall make any LC Disbursement in respect
of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the
Administrative Agent an amount equal to such LC Disbursement not later than 12:00 noon, New York
City time, on the date that such LC Disbursement is made, if the Borrower shall have received
notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such
notice has not been received by the Borrower prior to such time on such date, then not later than
12:00 noon, New York City time, on the Business Day immediately following the day that the Borrower
receives such notice;
provided
that the Borrower may, subject to the conditions to borrowing set
forth herein, request in accordance with Sections 2.03 or 2.04 that such payment be financed with
an ABR Revolving Borrowing or Swingline Loan in an equivalent amount and, to the extent so
financed, the Borrowers obligation to make such payment shall be discharged and replaced by the
resulting ABR Revolving Borrowing or Swingline Loan. If the Borrower fails to reimburse any LC
Disbursement when due, (i) if such payment relates to a Letter of Credit denominated in a
Designated Foreign Currency, automatically and with no further action required, the obligation of
the Borrower to reimburse the applicable LC Disbursement shall be permanently converted into an
obligation to reimburse the US Dollar Equivalent, calculated using the LC Exchange Rate on the
applicable LC Participation Calculation Date, of such LC Disbursement and (ii) in the case of each
LC Disbursement, the Administrative Agent shall notify each Revolving Credit Lender of the
applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such
Lenders Applicable Revolving Percentage thereof. Promptly following receipt of such notice, each
Revolving Credit Lender shall pay to the Administrative Agent its Applicable Revolving Percentage
of the payment then due from the
38
Borrower, in the same manner as provided in Section 2.06 with respect to Revolving Loans made
by such Lender (and Section 2.06 shall apply,
mutatis mutandis
, to the payment obligations of the
Revolving Credit Lenders), and the Administrative Agent shall promptly pay to the applicable
Issuing Bank the amounts so received by it from the Revolving Credit Lenders. Promptly following
receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph,
the Administrative Agent shall distribute such payment to such Issuing Bank or, to the extent that
Revolving Credit Lenders or a Swingline Lender have made payments pursuant to this paragraph to
reimburse such Issuing Bank, then to such Lenders and such Issuing Bank as their interests may
appear. Any payment made by a Lender pursuant to this paragraph to reimburse an Issuing Bank for
any LC Disbursement (other than the funding of ABR Revolving Loans or a Swingline Loan as
contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its
obligation to reimburse such LC Disbursement. If the Borrowers reimbursement of, or obligation to
reimburse, any amounts in respect of any Letter of Credit denominated in a currency other than US
Dollars would subject the Administrative Agent, the applicable Issuing Bank or any Lender to any
stamp duty, ad valorem charge or other tax, expense or loss (including any loss resulting from
changes in currency exchange rates between the date of any LC Disbursement and the date of any
reimbursement payment in respect thereof), the Borrower shall pay the amount of any such tax,
expense or loss requested by the Administrative Agent or the relevant Issuing Bank or Lender, as
applicable.
(f)
Obligations Absolute
. The Borrowers obligation to reimburse LC Disbursements as provided
in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be
performed strictly in accordance with the terms of this Agreement under any and all circumstances
whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit
or this Agreement, or any term or provision therein, (ii) any draft or other document presented
under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any
statement therein being untrue or inaccurate in any respect, (iii) payment by the applicable
Issuing Bank under a Letter of Credit against presentation of a draft or other document that does
not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance
whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of
this Section, constitute a legal or equitable discharge of, or provide a right of setoff against,
the Borrowers obligations hereunder. Neither the Administrative Agent, the Revolving Credit
Lenders nor any Issuing Bank, nor any of their Related Parties, shall have any liability or
responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit
or any payment or failure to make any payment thereunder (irrespective of any of the circumstances
referred to in the preceding sentence), or any error, omission, interruption, loss or delay in
transmission or delivery of any draft, notice or other communication under or relating to any
Letter of Credit (including any document required to make a drawing thereunder), any error in
interpretation of technical terms or any consequence arising from causes beyond the control of the
applicable Issuing Bank;
provided
that the foregoing shall not be construed to excuse an Issuing
Bank from liability to the Borrower to the extent of any direct damages (as opposed to
consequential damages, claims in respect of which are hereby waived by the Borrower to the extent
permitted by applicable law) suffered by the Borrower that are caused by such Issuing Banks
failure to exercise care when determining whether drafts and other documents presented under a
Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the
absence of gross negligence or willful misconduct on the part of an Issuing Bank (as
39
finally determined by a court of competent jurisdiction), such Issuing Bank shall be deemed to
have exercised care in each such determination. In furtherance of the foregoing and without
limiting the generality thereof, the parties agree that, with respect to documents presented which
appear on their face to be in substantial compliance with the terms of a Letter of Credit, an
Issuing Bank may, in its sole discretion, either accept and make payment upon such documents
without responsibility for further investigation, regardless of any notice or information to the
contrary, or refuse to accept and make payment upon such documents if such documents are not in
strict compliance with the terms of such Letter of Credit.
(g)
Disbursement Procedures
. The applicable Issuing Bank shall, promptly following its
receipt thereof, examine all documents purporting to represent a demand for payment under a Letter
of Credit. Such Issuing Bank shall promptly notify the Administrative Agent and the Borrower by
telephone (confirmed by telecopy) of such demand for payment and whether such Issuing Bank has made
or will make an LC Disbursement thereunder;
provided
that any failure to give or delay in giving
such notice shall not relieve the Borrower of its obligation to reimburse such Issuing Bank and the
Revolving Credit Lenders with respect to any such LC Disbursement.
(h)
Interim Interest
. If an Issuing Bank shall make any LC Disbursement, then, unless the
Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the
unpaid amount thereof shall bear interest, for each day from and including the date such LC
Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement,
(i) in the case of any LC Disbursement denominated in US Dollars and at all times following the
conversion to US Dollars of an LC Disbursement made in a Designated Foreign Currency pursuant to
paragraph (e) of this Section, at the rate per annum then applicable to ABR Revolving Loans, and
(ii) if such LC Disbursement is made in a Designated Foreign Currency, at all times prior to its
conversion to US Dollars pursuant to paragraph (e) of this Section, at a rate per annum reasonably
determined by the applicable Issuing Bank to represent the cost to such Issuing Bank of funding
such LC Disbursement plus the Applicable Margin applicable to Eurodollar Revolving Loans at such
time;
provided
that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to
paragraph (e) of this Section, then Section 2.14(c) shall apply. Interest accrued pursuant to this
paragraph shall be for the account of the applicable Issuing Bank, except that interest accrued on
and after the date of payment by any Lender pursuant to paragraph (e) of this Section to reimburse
such Issuing Bank shall be for the account of such Lender to the extent of such payment.
(i)
Designation of Additional Issuing Banks
. From time to time, the Borrower may by notice to
the Administrative Agent and the Revolving Credit Lenders designate as additional Issuing Banks one
or more Revolving Credit Lenders that agree to serve in such capacity as provided below. The
acceptance by a Revolving Credit Lender of any appointment as an Issuing Bank hereunder shall be
evidenced by an agreement (an
Issuing Bank Agreement
), which shall be in a form reasonably
satisfactory to the Borrower and the Administrative Agent, shall set forth the LC Commitment of
such Revolving Credit Lender and shall be executed by such Revolving Credit Lender, the Borrower
and the Administrative Agent and, from and after the effective date of such agreement, (i) such
Revolving Credit Lender shall have all the rights and obligations of an Issuing Bank under this
Agreement and (ii) references herein to the term Issuing Bank shall be deemed to include such
Revolving Credit Lender in its capacity as an Issuing Bank.
40
(j)
Replacement of an Issuing Bank
. An Issuing Bank may be replaced at any time by written
agreement among the Borrower, the Administrative Agent (whose consent will not be unreasonably
withheld or delayed) and the successor Issuing Bank. Any Issuing Bank so replaced shall continue
to have the benefit of this Agreement in respect of any Letters of Credit of that Issuing Bank
which remain outstanding. The Administrative Agent shall notify the Lenders of any such
replacement of an Issuing Bank. At the time any such replacement shall become effective, the
Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to
Section 2.13(b).
(k)
Cash Collateralization
. If any Event of Default shall occur and be continuing, on the
Business Day that the Borrower receives notice from the Administrative Agent or the Required
Lenders (or, if the maturity of the Revolving Credit Loans has been accelerated, the Required
Revolving Credit Lenders or any Issuing Bank with any outstanding Letter of Credit) demanding the
deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account
with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the
Revolving Credit Lenders, an amount in cash equal to 102% of the LC Exposure with respect to the
applicable Letters of Credit as of such date plus any accrued and unpaid interest thereon;
provided
that (i) amounts payable in respect of any Letter of Credit or LC Disbursement shall be payable in
the currency of such Letter of Credit or LC Disbursement and (ii) the obligation to deposit such
cash collateral shall become effective immediately, and such deposit shall become immediately due
and payable, without demand or other notice of any kind, upon the occurrence of any Event of
Default with respect to the Borrower described in clause (h) or (i) of Article 7. Such deposit
shall be held by the Administrative Agent as collateral for the payment and performance of the
obligations of the Borrower under this Agreement. The Administrative Agent shall have exclusive
dominion and control, including the exclusive right of withdrawal, over such account. Other than
any interest earned on the investment of such deposits, which investments shall be made in
Permitted Investments at the option and sole discretion of the Administrative Agent and at the
Borrowers risk and expense, such deposits shall not bear interest. Interest or profits, if any,
on such investments shall accumulate in such account. Moneys in such account shall be applied by
the Administrative Agent to reimburse each Issuing Bank for LC Disbursements for which such Issuing
Bank has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction
of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the
maturity of the Revolving Credit Loans has been accelerated (but subject to the consent of the
Required Revolving Credit Lenders and each Issuing Bank with any outstanding Letter of Credit), be
applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is
required to provide an amount of cash collateral hereunder as a result of the occurrence of an
Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the
Borrower within three Business Days after all Events of Default have been cured or waived.
(l)
Issuing Bank Reports
. Unless otherwise agreed by the Administrative Agent, each Issuing
Bank shall report in writing to the Administrative Agent (who shall promptly provide notice to the
Revolving Credit Lenders of the contents thereof) (i) on or prior to each Business Day on which
such Issuing Bank issues, amends, renews or extends any Letter of Credit, the date of such
issuance, amendment, renewal or extension, and the currency and aggregate face amount of the
Letters of Credit issued, amended, renewed or extended by it and outstanding after giving
41
effect to such issuance, amendment, renewal or extension (and whether the amount thereof shall
have changed), it being understood that such Issuing Bank shall not effect any issuance, renewal,
extension or amendment resulting in an increase in the aggregate amount of the Letters of Credit
issued by it without first obtaining written confirmation from the Administrative Agent that such
increase is then permitted under this Agreement, (ii) on each Business Day on which such Issuing
Bank makes any LC Disbursement, the date, currency and amount of such LC Disbursement, (iii) on any
Business Day on which the Borrower fails to reimburse an LC Disbursement required to be reimbursed
to such Issuing Bank on such day, the date of such failure and the currency and amount of such LC
Disbursement and (iv) on any other Business Day, such other information as the Administrative Agent
shall reasonably request as to the Letters of Credit issued by such Issuing Bank.
SECTION 2.06
. Funding of Borrowings.
(a) Each Lender shall make each Loan to be made by it
hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00
noon, New York City time, to the account of the Administrative Agent most recently designated by it
for such purpose by notice to the Lenders;
provided
that Swingline Loans shall be made as provided
in Section 2.04. The Administrative Agent will make such Loans available to the Borrower by
promptly crediting the amounts so received, in like funds, to the Designated Payment Account;
provided
that ABR Revolving Loans made to finance the reimbursement of an LC Disbursement as
provided in Section 2.05(e) shall be remitted by the Administrative Agent to the applicable Issuing
Bank.
(b) Unless the Administrative Agent shall have received notice from a Lender prior to the
proposed date of any Borrowing that such Lender will not make available to the Administrative Agent
such Lenders share of such Borrowing, the Administrative Agent may assume that such Lender has
made such share available on such date in accordance with paragraph (a) of this Section and may, in
reliance upon such assumption, make available to the Borrower a corresponding amount. In such
event, if a Lender has not in fact made its share of the applicable Borrowing available to the
Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the
Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each
day from and including the date such amount is made available to the Borrower to but excluding the
date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the
Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with
banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest
rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then
such amount shall constitute such Lenders Loan included in such Borrowing.
SECTION 2.07
. Interest Elections.
(a) Each Borrowing initially shall be of the Type
specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall
have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower
may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the
case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this
Section. The Borrower may elect different options with respect to different portions of the
affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders
holding the Loans comprising such Borrowing, and the Loans comprising each such
42
portion shall be considered a separate Borrowing. This Section shall not apply to Swingline
Loans, which may not be converted or continued.
(b) To make an election pursuant to this Section, the Borrower shall notify the Administrative
Agent of such election by telephone by the time that a Borrowing Request would be required under
Section 2.03 if the Borrower were requesting a Borrowing of the Type resulting from such election
to be made on the effective date of such election. Each such telephonic Interest Election Request
shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the
Administrative Agent of a written Interest Election Request in a form approved by the
Administrative Agent and signed by the Borrower.
(c) Each telephonic and written Interest Election Request shall specify the following
information in compliance with Section 2.02:
(i) the Borrowing to which such Interest Election Request applies and, if different
options are being elected with respect to different portions thereof, the portions thereof
to be allocated to each resulting Borrowing (in which case the information to be specified
pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);
(ii) the effective date of the election made pursuant to such Interest Election
Request, which shall be a Business Day;
(iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar
Borrowing; and
(iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be
applicable thereto after giving effect to such election, which shall be a period
contemplated by the definition of the term Interest Period.
If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an
Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one
months duration.
(d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall
advise each Lender of the details thereof and of such Lenders portion of each resulting Borrowing.
(e) If the Borrower fails to deliver a timely Interest Election Request with respect to a
Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such
Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be
converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of
Default has occurred and is continuing and the Administrative Agent, at the request of the Required
Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no
outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless
repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest
Period applicable thereto.
43
SECTION 2.08
. Termination and Reduction of Commitments.
(a) If the Funding Date does not
occur on or prior to June 30, 2011, the Commitment of each Lender shall terminate at the close of
business on June 30, 2011. Unless previously terminated, the Revolving Credit Commitment of each
Revolving Credit Lender shall terminate on the Revolving Credit Maturity Date. Unless previously
terminated, the Term Loan Commitment of each Term Lender shall automatically terminate upon the
funding of Term Loans to be made by it on the Funding Date.
(b) The Borrower may at any time terminate, or from time to time reduce, the Commitments;
provided
that (i) each reduction of the Commitments shall be in an amount that is an integral
multiple of $1,000,000 and not less than $1,000,000 and (ii) the Borrower shall not terminate or
reduce the Revolving Credit Commitments if, after giving effect to any concurrent prepayment of the
Loans in accordance with Sections 2.11 and 2.12, the total Revolving Credit Exposures would exceed
the total Revolving Credit Commitments.
(c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce
the Commitments of any Class under paragraph (b) of this Section at least three Business Days prior
to the effective date of such termination or reduction, specifying such election and the effective
date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the
Lenders of the applicable Class of the contents thereof. Each notice delivered by the Borrower
pursuant to this Section shall be irrevocable;
provided
that a notice of termination of the
Revolving Credit Commitments delivered by the Borrower may state that such notice is conditioned
upon the effectiveness of other credit facilities or other debt or equity issuances, in which case
such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to
the specified effective date) if such condition is not satisfied. Any termination or reduction of
the Commitments shall be permanent. Each reduction of the Commitments of any Class shall be made
ratably among the Lenders of such Class in accordance with their respective Commitments of such
Class. The Borrower shall pay to the Administrative Agent for the account of the Lenders of the
applicable Class, on the date of each termination or reduction under paragraph (b) of this Section,
any applicable commitment fees on the amount of the Commitments of such Class so terminated or
reduced accrued to but excluding the date of such termination or reduction.
SECTION 2.09
. Repayment of Loans; Evidence of Debt.
(a) The Borrower hereby unconditionally
promises to pay (i) to the Administrative Agent for the account of each Revolving Credit Lender the
then unpaid principal amount of each Revolving Loan on the Revolving Credit Maturity Date, (ii) to
the Administrative Agent for the account of each Term Lender the then unpaid principal amount of
each Term Loan on the Term Loan Maturity Date and (iii) to the Swingline Lenders the then unpaid
principal amount of each Swingline Loan on the earlier of (A) the Revolving Credit Maturity Date
and (B) the first date after such Swingline Loan is made that is five Business Days after such
Swingline Loan is made;
provided
that on each date that a Revolving Borrowing is made, the Borrower
shall repay all Swingline Loans then outstanding.
(b) Each Lender shall maintain in accordance with its usual practice an account or accounts
evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such
Lender, including the amounts of principal and interest payable and paid to such Lender from time
to time hereunder.
44
(c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount
of each Loan made hereunder, the Class and Type thereof and the Interest Period (if any) applicable
thereto, (ii) the amount of any principal or interest due and payable or to become due and payable
from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the
Administrative Agent hereunder for the account of the Lenders and each Lenders share thereof.
(d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this
Section shall be
prima facie
evidence of the existence and amounts of the obligations recorded
therein;
provided
that the failure of any Lender or the Administrative Agent to maintain such
accounts or any error therein shall not in any manner affect the obligation of the Borrower to
repay the Loans in accordance with the terms of this Agreement.
(e) Any Lender may request that Loans made by it be evidenced by a promissory note. In such
event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to
the order of such Lender (or, if requested by such Lender, to such Lender and its registered
assigns) and in a form reasonably approved by the Administrative Agent. Thereafter, the Loans
evidenced by such promissory note and interest thereon shall at all times (including after
assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form
payable to the order of the payee named therein (or, if such promissory note is a registered note,
to such payee and its registered assigns).
SECTION 2.10
. Amortization of Term Loans.
(a) Subject to adjustment pursuant to Sections
2.11(b) and 2.12(g), the Borrower shall repay to the Administrative Agent for the account of the
Term Lenders, on the dates set forth below, or if any such date is not a Business Day, on the
immediately succeeding Business Day a principal amount of the Term Loans in an amount equal to the
amount set forth below for such date, together in each case with accrued and unpaid interest on the
principal amount to be paid to but excluding the date of such payment:
|
|
|
|
|
Repayment Date
1
|
|
Amount
|
June __, 2011
|
|
$
|
7,500,000
|
|
September __, 2011
|
|
$
|
7,500,000
|
|
December __, 2011
|
|
$
|
7,500,000
|
|
March __, 2012
|
|
$
|
7,500,000
|
|
June __, 2012
|
|
$
|
7,500,000
|
|
September __, 2012
|
|
$
|
7,500,000
|
|
December __, 2012
|
|
$
|
7,500,000
|
|
March __, 2013
|
|
$
|
7,500,000
|
|
June __, 2013
|
|
$
|
15,000,000
|
|
September __, 2013
|
|
$
|
15,000,000
|
|
December __, 2013
|
|
$
|
15,000,000
|
|
March __, 2014
|
|
$
|
15,000,000
|
|
June __, 2014
|
|
$
|
22,500,000
|
|
|
|
|
1
|
|
Repayment Dates (which shall be in 3-month
intervals from the Funding Date) to be filled in by Administrative Agent and
Borrower on Funding Date.
|
45
|
|
|
|
|
Repayment Date
1
|
|
Amount
|
September __, 2014
|
|
$
|
22,500,000
|
|
December __, 2014
|
|
$
|
22,500,000
|
|
March __, 2015
|
|
$
|
22,500,000
|
|
June __, 2015
|
|
$
|
30,000,000
|
|
September __, 2015
|
|
$
|
30,000,000
|
|
December __, 2015
|
|
$
|
30,000,000
|
|
Term Maturity Date
|
|
Remaining outstanding principal amount
|
(b) To the extent not previously paid, all Term Loans shall be due and payable on the Term
Maturity Date.
SECTION 2.11
. Voluntary Prepayments.
(a) The Borrower shall have the right at any time and
from time to time to prepay any Borrowing of any Class in whole or in part, subject to prior notice
in accordance with paragraph (b) of this Section;
provided
,
however
, that each partial prepayment
shall be in an aggregate principal amount that is an integral multiple of $500,000 and not less
than $1,000,000 or, if less, the amount outstanding.
(b) The Borrower shall notify the Administrative Agent (and, in the case of prepayment of a
Swingline Loan, the Swingline Lenders) by telephone (confirmed by telecopy) of any prepayment
hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 12:00 noon, New
York City time, three Business Days before the date of prepayment, (ii) in the case of prepayment
of an ABR Borrowing, not later than 12:00 noon, New York City time, one Business Day before the
date of prepayment or (iii) in the case of prepayment of a Swingline Loan, not later than 12:00
noon, New York City time, on the date of prepayment. Each such notice shall be irrevocable and
shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to
be prepaid;
provided
that a notice of prepayment delivered by the Borrower may state that such
notice is conditioned upon the effectiveness of other credit facilities or other debt or equity
issuances, in which case such notice may be revoked by the Borrower (by notice to the
Administrative Agent on or prior to the specified effective date) if such condition is not
satisfied;
provided further
that, if a notice of prepayment is given in connection with a
conditional notice of termination of the Commitments as contemplated by Section 2.08(c), then such
notice of prepayment may be revoked if such notice of termination is revoked in accordance with
Section 2.08(c). Promptly following receipt of any such notice relating to a Borrowing of any
Class, the Administrative Agent shall advise the Lenders of such Class of the contents thereof.
Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid
Borrowing. Voluntary prepayments of outstanding Term Loans under this Section 2.11 shall be
applied to future scheduled amortization payments pursuant to Section 2.10(a) as directed by the
Borrower. Prepayments under this Section 2.11 shall be accompanied by accrued interest to the
extent required by Section 2.14 and shall be subject to Section 2.17, but otherwise without premium
or penalty.
SECTION 2.12
. Mandatory Prepayments.
(a) In the event of any termination of all the
Revolving Credit Commitments, the Borrower shall, on the date of such termination, repay or prepay
all its outstanding Revolving Loans and all outstanding Swingline Loans and replace or cause to be
canceled (or make other arrangements satisfactory to the Administrative Agent and
46
each applicable Issuing Bank with respect to) all outstanding Letters of Credit. If, after
giving effect to any partial reduction of the Revolving Credit Commitments or at any other time,
the total Revolving Credit Exposures would exceed the total Revolving Credit Commitments, then the
Borrower shall, on the date of such reduction or at such other time, repay or prepay Revolving
Loans or Swingline Loans (or a combination thereof) and, after the Revolving Loans and Swingline
Loans shall have been repaid or prepaid in full, replace or cause to be canceled (or make other
arrangements satisfactory to the Administrative Agent and each applicable Issuing Bank with respect
to) Letters of Credit in an amount sufficient to eliminate such excess.
(b) Not later than the fifth Business Day following the receipt of Net Cash Proceeds in
respect of any Asset Sale, the Borrower shall apply 100% of the Net Cash Proceeds received with
respect thereto to prepay outstanding Term Loans in accordance with Section 2.12(g).
(c) No later than 90 days after the end of each fiscal year of the Borrower, commencing with
the fiscal year ending on December 31, 2011, the Borrower shall prepay outstanding Term Loans in
accordance with Section 2.12(g) in an aggregate principal amount equal to (x) the Applicable ECF
Percentage of Excess Cash Flow minus (y) voluntary prepayments of Term Loans under Section 2.11
during such fiscal year but only to the extent that such prepayments do not occur in connection
with a refinancing of all or any portion of Term Loans;
provided
, that the amount of Term Loans
required to be repaid on any date pursuant to this Section 2.12(c) shall be reduced, to the extent
thereof, by an amount equal to the Excess Cash Adjustment Amount as of such date (before giving
effect to the reduction in the succeeding clause of this sentence), and the Gross ECF Overpayment
Amount shall in such case also be reduced on a dollar-for-dollar basis on such date.
(d) If any Excess Cash Withheld Amount has been determined (as of the end of the preceding
fiscal year) in respect of a fiscal year, and certified in accordance with the definition of
Excess Cash Withheld Amount, then at any time and from time to time during such fiscal year the
Borrower may by written notice to the Administrative Agent reduce such Excess Cash Withheld Amount
(to the extent thereof), and if such notice is given then (x) the Borrower shall promptly prepay
outstanding Term Loans in accordance with Section 2.12(g) in an aggregate amount equal to the
Applicable ECF Percentage (calculated as of the end of the prior fiscal year) of the amount by
which such Excess Cash Withheld Amount is to be reduced, as specified in such notice, and (y) the
Excess Cash Withheld Amount in respect of such fiscal year shall be deemed reduced by the amount of
such reduction as so specified, and any calculation of Unused Withheld Amount and Excess Cash Flow
Overpayment Amount with respect to such fiscal year shall refer to the amount of Excess Cash
Withheld Amount as so reduced.
(e) Not later than 45 days after the end of each fiscal year, commencing with the fiscal year
ending on December 31, 2012, the Borrower shall prepay outstanding Term Loans in accordance with
Section 2.12(g) in an aggregate amount equal to the Applicable ECF Percentage (calculated as of the
end of the prior fiscal year) of the Unused Withheld Amount, if any (after giving effect to Section
2.12(d)), from the prior fiscal year.
(f) In the event that the Borrower or any Restricted Subsidiary shall receive Net Cash
Proceeds from the issuance or incurrence of Indebtedness (other than the issuance or incurrence of
Indebtedness permitted pursuant to Section 6.01), the Borrower shall, substantially
47
simultaneously with (and in any event not later than the third Business Day next following)
the receipt of such Net Cash Proceeds by the Borrower or such Restricted Subsidiary, apply an
amount equal to 100% of such Net Cash Proceeds to prepay outstanding Term Loans in accordance with
Section 2.12(g).
(g) Mandatory prepayments of outstanding Term Loans under this Section 2.12 shall be applied
to reduce scheduled amortization payments pursuant to Section 2.10(a) (i) in forward order of
maturity to payments coming due within 12 months of the date of such prepayment and (ii) to the
extent of any excess, ratably by amount to the remaining scheduled payments.
(h) The Borrower shall deliver to the Administrative Agent, at the time of each prepayment
required under this Section 2.12, (i) a certificate signed by a Financial Officer of the Borrower
setting forth in reasonable detail the calculation of the amount of such prepayment and (ii) at
least three Business Days prior written notice of such prepayment. Each notice of prepayment shall
specify the prepayment date, the Class and Type of each Loan being prepaid and the principal amount
of each Loan (or portion thereof) to be prepaid. All prepayments of Borrowings under this Section
2.12 shall be subject to Section 2.17, but shall otherwise be without premium or penalty, and shall
be accompanied by accrued and unpaid interest on the principal amount to be prepaid to but
excluding the date of payment.
SECTION 2.13
. Fees.
(a) The Borrower agrees to pay to the Administrative Agent for the
account of each Revolving Credit Lender a commitment fee equal to the Applicable Margin of the
average daily unutilized amount of the Revolving Credit Commitments during the period from and
including the Funding Date to but excluding the date on which the Revolving Credit Commitments
terminate. For purposes of calculation of the commitment fee, Swingline Loans shall not, but LC
Exposure shall, be deemed to be a utilization of the Revolving Credit Commitments. Accrued
commitment fees shall be payable in arrears on the last day of March, June, September and December
of each year and on the date on which the Revolving Credit Commitments terminate, commencing on the
first such date to occur after the Funding Date. All commitment fees shall be computed on the
basis of a year of 360 days and shall be payable for the actual number of days elapsed (including
the first day but excluding the last day).
(b) The Borrower agrees to pay (i) to the Administrative Agent for the account of each
Revolving Credit Lender a participation fee with respect to such Lenders participations in Letters
of Credit, which shall accrue on each day at a rate per annum equal to the Applicable Margin for
Eurodollar Revolving Loans on the average daily amount of such Lenders LC Exposure (excluding any
portion thereof attributable to unreimbursed LC Disbursements) during the period from and including
the Funding Date to but excluding the later of the date on which such Lenders Revolving Credit
Commitment terminates and the date on which such Lender ceases to have any LC Exposure, (ii) to
each Issuing Bank, for its own account, a fronting fee, which shall accrue at a rate of 25 basis
points per annum on the average daily amount of the LC Exposure attributable to Letters of Credit
issued by such Issuing Bank (excluding any portion thereof attributable to unreimbursed LC
Disbursements) during the period from and including the Funding Date to but excluding the later of
the date of termination of the Revolving Credit Commitments and the date on which there ceases to
be any LC Exposure, and (iii) to each Issuing Bank, for its own account, such Issuing Banks
standard fees (or such other fees as may be agreed to by such Issuing Bank and the Borrower from
time to time) with respect to the
48
amendment, renewal or extension of any Letter of Credit issued by it or processing of drawings
thereunder. Participation fees and fronting fees accrued through and including the last day of
March, June, September and December of each year shall be payable on the third Business Day
following such last day, commencing on the first such date to occur after the Funding Date;
provided
that all such fees shall be payable on the date on which the Revolving Credit Commitments
terminate and any such fees accruing after the date on which the Revolving Credit Commitments
terminate shall be payable on demand. Any other fees payable to an Issuing Bank pursuant to this
paragraph shall be payable within 10 days after demand. All participation fees and fronting fees
shall be computed on the basis of a year of 360 days and shall be payable for the actual number of
days elapsed (including the first day but excluding the last day).
(c) If the Effective Date occurs but the Funding Date does not occur on or prior to March 31,
2011, a ticking fee shall accrue on the Commitments starting from April 1, 2011 until the Funding
Date as follows: (i) in the case of the Revolving Credit Commitments, at the rate of 0.50% per
annum of the Revolving Credit Commitments during the period from and including April 1, 2011 to but
excluding the Funding Date and (ii) in the case of the Term Loan Commitments, at the rate of 2.50%
per annum of the Lenders Term Loan Commitments during the period from and including April 1, 2011
to but excluding the Funding Date. Such ticking fee shall be payable by the Borrower to the
Administrative Agent for the account of each Lender on the Funding Date (if, but only if, the
Funding Date occurs).
(d) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable
in the amounts and at the times separately agreed upon between the Borrower and the Administrative
Agent.
(e) All fees payable hereunder shall be paid on the dates due, in immediately available funds,
to the Administrative Agent (or to the applicable Issuing Bank, in the case of fees payable to it)
for distribution, in the case of commitment fees, participation fees and ticking fees, to the
applicable Lenders. Fees paid shall not be refundable under any circumstances.
SECTION 2.14
. Interest.
(a) The Loans comprising each ABR Borrowing (including each
Swingline Loan) shall bear interest at the Alternate Base Rate plus the Applicable Margin.
(b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO
Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin.
(c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or
other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity,
upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before
judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% per
annum plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of
this Section or (ii) in the case of any other amount, 2% per annum plus the rate applicable to ABR
Loans as provided in paragraph (a) of this Section.
(d) Accrued interest on each Loan shall be payable in arrears (i) on each Interest Payment
Date for such Loan, (ii) in the case of Revolving Loans, upon termination of the
49
Revolving Credit Commitments and (iii) in the case of Term Loans on the Term Maturity Date;
provided
that (A) interest accrued pursuant to paragraph (c) of this Section shall be payable on
demand, (B) in the event of any repayment or prepayment of any Loan (other than a prepayment of an
ABR Revolving Loan prior to the end of the Availability Period), accrued interest on the principal
amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (C) in
the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period
therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.
(e) All interest hereunder shall be computed on the basis of a year of 360 days, except that
interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is
based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap
year), and in each case shall be payable for the actual number of days elapsed (including the first
day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO
Rate shall be determined by the Administrative Agent, and such determination shall be conclusive
absent manifest error.
SECTION 2.15
. Alternate Rate of Interest.
If prior to the commencement of any Interest
Period for a Eurodollar Borrowing:
(a) the Administrative Agent determines (which determination shall be conclusive absent
manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO
Rate or the LIBO Rate, as applicable, for such Interest Period; or
(b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate or
the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the
cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in
such Borrowing for such Interest Period;
then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by
telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent
notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer
exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or
continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any
Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR
Borrowing;
provided
that if the circumstances giving rise to such notice affect only one Type of
Borrowings, then the other Type of Borrowings shall be permitted.
SECTION 2.16
. Increased Costs.
(a) If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit or similar
requirement against assets of, deposits with or for the account of, or credit extended by,
any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or any
Issuing Bank;
50
(ii) impose on any Lender or any Issuing Bank or the London interbank market any other
condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of
Credit or participation therein; or
(iii) subject any Lender, the Issuing Bank or the Administrative Agent to any Taxes
(other than Indemnified Taxes) on its loans, loan principal, letters of credit, commitments
or other obligations, or its deposits, reserves, other liabilities or capital attributable
thereto;
and the result of any of the foregoing shall be to increase the cost to such Lender of making or
maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to
increase the cost to such Lender or such Issuing Bank of participating in, issuing or maintaining
any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or
such Issuing Bank hereunder (whether of principal, interest or otherwise), in each case by an
amount deemed by that Lender or Issuing Bank in good faith to be material, then the Borrower will
pay to such Lender or such Issuing Bank, as the case may be, such additional amount or amounts as
will compensate such Lender or such Issuing Bank, as the case may be, for such additional costs
incurred or reduction suffered.
(b) If any Lender or any Issuing Bank determines that any Change in Law regarding tax, capital
requirements or other requirements of law has or would have the effect of reducing the rate of
return on such Lenders or such Issuing Banks capital or on the capital of such Lenders or such
Issuing Banks holding company, if any, as a consequence of this Agreement or the Loans made by, or
participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by such
Issuing Bank, to a level below that which such Lender or such Issuing Bank or such Lenders or such
Issuing Banks holding company could have achieved but for such Change in Law (taking into
consideration such Lenders or such Issuing Banks policies and the policies of such Lenders or
such Issuing Banks holding company including those with respect to capital adequacy), in each case
by an amount deemed by that Lender in good faith to be material, then from time to time the
Borrower will, without duplication of payments required to be made by the Borrower pursuant to
Section 2.18 hereof, pay to such Lender or such Issuing Bank, as the case may be, such additional
amount or amounts as will compensate such Lender or such Issuing Bank or such Lenders or such
Issuing Banks holding company for any such reduction suffered.
(c) A certificate of a Lender or an Issuing Bank setting forth the amount or amounts necessary
to compensate such Lender or such Issuing Bank or its holding company, as the case may be, as
specified in paragraph (a) or (b) of this Section and setting forth the basis for the determination
thereof, together with supporting calculations, shall be delivered to the Borrower and shall be
conclusive absent manifest error. In determining such amount or amounts, such Lender or such
Issuing Bank shall act reasonably and in good faith, and may use any reasonable averaging and
attribution methods. The Borrower shall pay such Lender or such Issuing Bank, as the case may be,
the amount shown as due on any such certificate within 10 Business Days after receipt thereof.
(d) Failure or delay on the part of any Lender or any Issuing Bank to demand compensation
pursuant to this Section shall not constitute a waiver of such Lenders or such
51
Issuing Banks right to demand such compensation;
provided
that the Borrower shall not be
required to compensate a Lender or an Issuing Bank pursuant to this Section for any increased costs
or reductions incurred more than 180 days prior to the date that such Lender or such Issuing Bank,
as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs
or reductions and of such Lenders or such Issuing Banks intention to claim compensation therefor;
provided further that, if the Change in Law giving rise to such increased costs or reductions is
retroactive, then the 180-day period referred to above shall be extended to include the period of
retroactive effect thereof.
SECTION 2.17
. Break Funding Payments.
In the event of (a) the payment of any principal of
any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including
as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the
last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or
prepay any Eurodollar Loan on the date specified in any notice delivered pursuant hereto
(regardless of whether such notice may be revoked under Section 2.11(b) and is revoked in
accordance therewith) or (d) the assignment of any Eurodollar Loan other than on the last day of
the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section
2.20 then, in any such event, the Borrower shall compensate each Lender for the loss, cost and
expense attributable to such event (which loss, cost or expense shall not include lost profits).
In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to
include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest
which would have accrued on the principal amount of such Loan had such event not occurred, at the
Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of
such event to the last day of the then current Interest Period therefor (or, in the case of a
failure to borrow, convert or continue, for the period that would have been the Interest Period for
such Loan), over (ii) the amount of interest which would accrue on such principal amount for such
period at the interest rate which such Lender would bid were it to bid, at the commencement of such
period, for dollar deposits of a comparable amount and period from other banks in the eurodollar
market. A certificate of any Lender setting forth any amount or amounts that such Lender is
entitled to receive pursuant to this Section and setting forth the basis for the determination
thereof, together with supporting calculations, shall be delivered to the Borrower and shall be
conclusive absent manifest error. In determining such amount or amounts, such Lender shall act
reasonably and in good faith. The Borrower shall pay such Lender the amount shown as due on any
such certificate within 10 days after receipt thereof.
SECTION 2.18
. Taxes.
(a) Any and all payments by or on account of any obligation of any Loan
Party under any Loan Document shall to the extent permitted by applicable law be made free and
clear of and without deduction for any Indemnified Taxes or Other Taxes;
provided
that if a Loan
Party shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i)
the sum payable shall be increased as necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section) the Administrative
Agent, a Lender or an Issuing Bank (as the case may be) receives an amount equal to the sum it
would have received had no such deductions been made, (ii) such Loan Party shall make such
deductions and (iii) such Loan Party shall pay the full amount deducted to the relevant
Governmental Authority in accordance with applicable law.
52
(b) In addition, each Loan Party shall pay any Other Taxes to the relevant Governmental
Authority in accordance with applicable law.
(c) Each Loan Party shall indemnify the Administrative Agent, each Lender and each Issuing
Bank, within 10 Business Days after written demand therefor (together with a reasonable basis for
the determination thereof), for the full amount of any Indemnified Taxes or Other Taxes paid by the
Administrative Agent, such Lender or such Issuing Bank, as the case may be, on or with respect to
any payment by or on account of any obligation of such Loan Party under any Loan Document
(including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts
payable under this Section) and any reasonable expenses arising therefrom or with respect thereto,
whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted
by the relevant Governmental Authority. A certificate as to the amount of such payment or
liability delivered to the Borrower and setting forth the basis for the determination thereof,
delivered to a Loan Party by a Lender or an Issuing Bank, or by the Administrative Agent on its own
behalf or on behalf of a Lender or an Issuing Bank, shall be conclusive absent manifest error.
(d) Each Lender shall severally indemnify the Administrative Agent for any Taxes (but, in the
case of any Indemnified Taxes, only to the extent that a Loan Party has not already indemnified the
Administrative Agent for such Indemnified Taxes and without limiting the obligation of the Loan
Parties to do so) attributable to each Lender that are paid or payable by the Administrative Agent
in connection with any Loan Document and any reasonable expenses arising therefrom or with respect
thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant
Governmental Authority. The indemnity under this Section 2.18(d) shall be paid within ten (10) days
after the Administrative Agent delivers to the applicable Lender a certificate stating the amount
of Taxes so paid or payable by the Administrative Agent. The certificate shall be conclusive as
between each Lender and the Administrative Agent of the amount so paid or payable absent manifest
error.
(e) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by a Loan
Party to a Governmental Authority, such Loan Party shall deliver to the Administrative Agent the
original or a certified copy of a receipt issued by such Governmental Authority evidencing such
payment, a copy of that portion of the tax return reporting such payment or other evidence of such
payment reasonably satisfactory to the Administrative Agent.
(f) (i) Any Lender that is entitled to an exemption from or reduction of any applicable
withholding tax with respect to payments under any Loan Document shall deliver to the Borrower
(with a copy to the Administrative Agent), at the time or times as prescribed by applicable law or
reasonably requested by the Borrower or the Administrative Agent, such properly completed and
executed documentation prescribed by applicable law or reasonably requested by the Borrower or the
Administrative Agent as will permit such payments to be made without withholding or at a reduced
rate of withholding. In addition, any Lender, if requested by the Borrower or the Administrative
Agent, shall deliver such other documentation prescribed by law or reasonably requested by the
Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent to
determine whether or not the Lender is subject to any withholding (including backup withholding) or
information reporting requirements. Notwithstanding anything to the contrary in the preceding two
sentences, the completion,
53
execution and submission of such documentation (other than such documentation set forth in
Section 2.18(f)(ii)(A) through (F) below) shall not be required if in the Lenders judgment such
completion, execution or submission would subject the Lender to any material unreimbursed cost or
expense (or, in the case of a Change in Law, any incremental material unreimbursed cost or expense)
or would, unless indemnified by the Borrower to the reasonable satisfaction of the Lender,
materially prejudice the legal position or commercial operations of the Lender. Upon the reasonable
request of the Borrower or the Administrative Agent, any Lender shall update any form or
certification previously delivered pursuant to this Section 2.18(f). If any form or certification
previously delivered pursuant to this Section expires or becomes obsolete or inaccurate in any
respect with respect to a Lender, the Lender shall promptly (and in any event within ten (10) days
after such expiration, obsolescence or inaccuracy) notify the Borrower and the Administrative Agent
in writing of such expiration, obsolescence or inaccuracy and update the form or certification if
it is legally eligible to do so.
(ii) Without limiting the generality of the foregoing, any Lender with respect to the
Borrower shall, if it is legally eligible to do so, deliver to the Borrower and the
Administrative Agent (in such number of copies reasonably requested by the Borrower and the
Administrative Agent) on or prior to the date on which the Lender becomes a party hereto,
duly completed and executed copies of whichever of the following is applicable:
(A) in the case of a Lender that is a U.S. Person, IRS Form W-9 certifying
that the Lender is exempt from U.S. federal backup withholding;
(B) in the case of a Foreign Lender claiming the benefits of an income tax
treaty to which the United States is a party (1) with respect to payments of
interest under any Loan Document, IRS Form W-8BEN establishing an exemption from,
or reduction of, U.S. federal withholding Tax pursuant to the interest article of
such tax treaty and (2) with respect to any other applicable payments under this
Agreement, IRS Form W-8BEN establishing an exemption from, or reduction of, U.S.
federal withholding Tax pursuant to another article of such tax treaty including,
without limitation, the business profits or other income article of such tax
treaty;
(C) in the case of a Foreign Lender for whom payments under this Agreement
constitute income that is effectively connected with the Lenders conduct of a
trade or business in the United States, IRS Form W-8ECI;
(D) in the case of a Foreign Lender claiming the benefits of the exemption for
portfolio interest under Section 881(c) of the Code, both (1) IRS Form W-8BEN and
(2) a certificate substantially in the form of Exhibit I (a
U.S. Tax Certificate
)
to the effect that the Lender is not (w) a bank within the meaning of Section
881(c)(3)(A) of the Code, (x) a 10 percent shareholder of the Borrower within the
meaning of Section 881(c)(3)(B) of the Code, (y) a controlled foreign corporation
described in Section 881(c)(3)(C) of the Code or (z) conducting a trade or business
in the United States with which the relevant interest payments are effectively
connected;
54
(E) in the case of a Foreign Lender that is not the beneficial owner of
payments made under this Agreement (including a partnership or a participating
Lender) (1) an IRS Form W-8IMY on behalf of itself and (2) the relevant forms
prescribed in clauses (A), (B), (C), (D) and (F) of this paragraph (f)(ii) that
would be required of each beneficial owner (or partner or Participant) if the
beneficial owner (or partner or Participant) were a Lender; provided, however, that
if the Lender is a partnership and one or more of its partners are claiming the
exemption for portfolio interest under Section 881(c) of the Code, the Lender may
provide a U.S. Tax Certificate on behalf of the partners; or
(F) any other form prescribed by law as a basis for claiming exemption from,
or a reduction of, U.S. federal withholding Tax together with the supplementary
documentation necessary to enable the Borrower or the Administrative Agent to
determine the amount of Tax (if any) required by law to be withheld.
(iii) If a payment made to a Lender under any Loan Document would be subject to U.S.
federal withholding Tax imposed by FATCA if the Lender were to fail to comply with the
applicable reporting requirements of FATCA (including those contained in Section 1471(b) or
1472(b) of the Code, as applicable), the Lender shall deliver to the Administrative Agent
and the Borrower, at the time or times prescribed by law and at such other time or times
reasonably requested by the Administrative Agent or the Borrower, the documentation
prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the
Code) and the additional documentation reasonably requested by the Administrative Agent or
the Borrower as may be necessary for the Administrative Agent or the relevant Borrower to
comply with its obligations under FATCA, to determine that the Lender has or has not
complied with the Lenders obligations under FATCA, or to determine the amount to deduct and
withhold from the payment. Solely for purposes of this Section 2.18(f)(iii), FATCA shall
include any amendments made to FATCA after the date of this Agreement.
(g) If the Administrative Agent, a Lender or an Issuing Bank determines, in its sole
discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been
indemnified by a Loan Party or with respect to which a Loan Party has paid additional amounts
pursuant to this Section 2.18, it shall pay over such refund to such Loan Party (but only to the
extent of indemnity payments made, or additional amounts paid, by such Loan Party under this
Section 2.18 with respect to the Taxes or Other Taxes giving rise to such refund), net of all
reasonable out-of-pocket expenses of the Administrative Agent, such Lender or such Issuing Bank and
without interest (other than any interest paid by the relevant Governmental Authority with respect
to such refund) within thirty days after receipt of such refund;
provided
, that such Loan Party,
upon the request of the Administrative Agent, such Lender or such Issuing Bank, agrees to repay the
amount paid over to such Loan Party (plus any penalties, interest or other charges imposed by the
relevant Governmental Authority and the reasonable fees and expenses of the Administrative Agent,
such Lender or such Issuing Bank) to the Administrative Agent, such Lender or such Issuing Bank in
the event the Administrative Agent, such Lender or such Issuing Bank is required to repay such
refund to such Governmental Authority. This Section shall not be construed to require the
Administrative Agent, any Lender or any Issuing Bank to
55
make available its tax returns (or any other information relating to its taxes which it deems
confidential) to the Loan Parties or any other Person.
SECTION 2.19
. Payments Generally; Pro Rata Treatment; Sharing of Set Offs.
(a) The Borrower
shall make each payment required to be made by it hereunder (whether of principal, interest, fees
or reimbursement of LC Disbursements, or of amounts payable under Section 2.16, 2.17 or 2.18, or
otherwise) prior to 1:00 p.m., New York City time, on the date when due, in immediately available
funds, without set off or counterclaim. Any amounts received after such time on any date may, in
the discretion of the Administrative Agent, be deemed to have been received on the next succeeding
Business Day for purposes of calculating interest thereon. All such payments shall be made to the
Administrative Agent at its offices at 270 Park Avenue, New York, New York, except payments to be
made directly to an Issuing Bank or the Swingline Lenders as expressly provided herein and except
that payments pursuant to Section 2.16, 2.17 or 2.18 and 9.03 shall be made directly to the Persons
entitled thereto; in the case of each payment, Borrower may make such payment in accordance with
the wire transfer instructions from time to time provided by the Administrative Agent to the
Borrower in writing, executed in original counterpart on the Administrative Agents letterhead.
The Administrative Agent shall distribute any such payments received by it for the account of any
other Person to the appropriate recipient promptly following receipt thereof. If any payment
hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended
to the next succeeding Business Day, and, in the case of any payment accruing interest, interest
thereon shall be payable for the period of such extension. All payments hereunder shall be made in
US Dollars except as expressly provided herein.
(b) If at any time insufficient funds are received by and available to the Administrative
Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then
due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due
hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest
and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed
LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with
the amounts of principal and unreimbursed LC Disbursements then due to such parties.
(c) If any Lender shall, by exercising any right of set off or counterclaim or otherwise,
obtain payment in respect of any principal of or interest on any of its Loans or participations in
LC Disbursements or Swingline Loans resulting in such Lender receiving payment of a greater
proportion of the aggregate amount of its Loans and participations in LC Disbursements and
Swingline Loans and accrued interest thereon than the proportion received by any other Lender, then
the Lender receiving such greater proportion shall purchase (for cash at face value) participations
in the Loans and participations in LC Disbursements and Swingline Loans of other Lenders to the
extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in
accordance with the aggregate amount of principal of and accrued interest on their respective Loans
and participations in LC Disbursements and Swingline Loans;
provided
that (i) if any such
participations are purchased and all or any portion of the payment giving rise thereto is
recovered, such participations shall be rescinded and the purchase price restored to the extent of
such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed
to apply to any payment made by the Borrower pursuant to and in accordance with the
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express terms of this Agreement or any payment obtained by a Lender as consideration for the
assignment of or sale of a participation in any of its Loans or participations in LC Disbursements
to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof
(as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing
and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring
a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of
set-off and counterclaim with respect to such participation as fully as if such Lender were a
direct creditor of the Borrower in the amount of such participation.
(d) Unless the Administrative Agent shall have received notice from the Borrower prior to the
date on which any payment is due to the Administrative Agent for the account of the Lenders or the
applicable Issuing Bank hereunder that the Borrower will not make such payment, the Administrative
Agent may assume that the Borrower has made such payment on such date in accordance herewith and
may, in reliance upon such assumption, distribute to the Lenders or such Issuing Bank, as the case
may be, the amount due. In such event, if the Borrower has not in fact made such payment, then
each of the Lenders or the applicable Issuing Bank, as the case may be, severally agrees to repay
to the Administrative Agent forthwith on demand the amount so distributed to such Lender or such
Issuing Bank with interest thereon, for each day from and including the date such amount is
distributed to it to but excluding the date of payment to the Administrative Agent, at the greater
of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance
with banking industry rules on interbank compensation.
(e) If any Lender shall fail to make any payment required to be made by it pursuant to
Sections 2.04(c), 2.05(d), 2.05(e), 2.06(b), 2.19(d) or 9.03(c), then the Administrative Agent may,
in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter
received by the Administrative Agent for the account of such Lender to satisfy such Lenders
obligations under such Sections until all such unsatisfied obligations are fully paid.
SECTION 2.20
. Mitigation Obligations; Replacement of Lenders.
(a) If any Lender requests
compensation under Section 2.16, or if any Loan Party is required to pay any additional amount to
any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.18,
then such Lender shall use reasonable efforts to designate a different lending office for funding
or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its
offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment
(i) would eliminate or reduce amounts payable pursuant to Section 2.16 or Section 2.18, as the case
may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense
and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all
reasonable costs and expenses incurred by any Lender in connection with any such designation or
assignment.
(b) If any Lender requests compensation under Section 2.16, or if any Loan Party is required
to pay any additional amount to any Lender or any Governmental Authority for the account of any
Lender pursuant to Section 2.18, or if any Lender of any Class becomes a Defaulting Lender, then
the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative
Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject
to the restrictions contained in Section 9.04), all its
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interests, rights and obligations under this Agreement to an assignee that shall assume such
obligations (which assignee may be another Lender of such Class, if a Lender accepts such
assignment);
provided
that (i) the Borrower shall have received the prior written consent of the
Administrative Agent (and if a Revolving Credit Commitment is being assigned, the Issuing Bank),
which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of
an amount equal to the outstanding principal of its Loans and participations in LC Disbursements
and Swingline Loans, accrued interest thereon, accrued fees and all other amounts payable to it
hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and
fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such
assignment resulting from a claim for compensation under Section 2.16 or payments required to be
made pursuant to Section 2.18, such assignment will result in a reduction in such compensation or
payments. A Lender shall not be required to make any such assignment and delegation if, prior
thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the
Borrower to require such assignment and delegation cease to apply.
SECTION 2.21
. Defaulting Lenders.
Notwithstanding any provision of this Agreement to the
contrary, if any Revolving Credit Lender becomes a Defaulting Lender, then the following provisions
shall apply for so long as such Lender is a Defaulting Lender:
(a) fees shall cease to accrue on the unfunded portion of the Revolving Credit Commitment of
such Defaulting Lender pursuant to Section 2.13(a);
(b) the Revolving Credit Commitment and Revolving Credit Exposure of such Defaulting Lender
shall not be included in determining whether the Required Lenders have taken or may take any action
hereunder (including any consent to any amendment, waiver or other modification pursuant to Section
9.02);
provided
, that this clause (b) shall not apply to the vote of a Defaulting Lender in the
case of an amendment, waiver or other modification requiring the consent of all Lenders or each
Lender affected thereby;
(c) if any Swingline Exposure or LC Exposure exists at the time such Lender becomes a
Defaulting Lender then:
(i) so long as no Event of Default shall have occurred and be continuing, all or any
part of the Swingline Exposure and LC Exposure of such Defaulting Lender shall be
reallocated among the non-Defaulting Lenders that are Revolving Credit Lenders in accordance
with their respective Applicable Revolving Percentages but only to the extent (x) the sum of
all non-Defaulting Lenders Revolving Credit Exposures plus such Defaulting Lenders
Swingline Exposure and LC Exposure does not exceed the total of all non-Defaulting Lenders
Revolving Credit Commitments and (y) the sum of any non-Defaulting Lenders Revolving Credit
Exposure plus its Applicable Revolving Percentage of such Defaulting Lenders Swingline
Exposure and LC Exposure does not exceed such non-Defaulting Lenders Revolving Credit
Commitment;
(ii) if the reallocation described in clause (i) above cannot, or can only partially,
be effected, the Borrower shall within one Business Day following notice by the
Administrative Agent (x)
first
, prepay such Swingline Exposure and (y)
second
, cash
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collateralize for the benefit of the Issuing Banks only the Borrowers obligations
corresponding to such Defaulting Lenders LC Exposure (after giving effect to any partial
reallocation pursuant to clause (i) above) in accordance with the procedures set forth in
Section 2.05(k) for so long as such LC Exposure is outstanding;
(iii) if the Borrower cash collateralizes any portion of such Defaulting Lenders LC
Exposure pursuant to clause (ii) above, the Borrower shall not be required to pay any fees
to such Defaulting Lender pursuant to Section 2.13(b) with respect to such Defaulting
Lenders LC Exposure during the period such Defaulting Lenders LC Exposure is cash
collateralized;
(iv) if the LC Exposure of the non-Defaulting Lenders is reallocated pursuant to clause
(i) above, then the fees payable to the Lenders pursuant to Section 2.13(a) and (b) shall be
adjusted in accordance with such non-Defaulting Lenders Applicable Revolving Percentages;
and
(v) if all or any portion of such Defaulting Lenders LC Exposure is neither
reallocated nor cash collateralized pursuant to clause (i) or (ii) above, then, without
prejudice to any rights or remedies of the Issuing Banks or any other Revolving Credit
Lender hereunder, all fees payable under Section 2.13(b) with respect to such Defaulting
Lenders LC Exposure shall be payable to the applicable Issuing Bank until and to the extent
that such LC Exposure is reallocated and/or cash collateralized; and
(d) so long as such Lender is a Defaulting Lender, the Swingline Lender shall not be required
to fund any Swingline Loan and the Issuing Bank shall not be required to issue, amend or increase
any Letter of Credit, unless it is satisfied that the related exposure and the Defaulting Lenders
then outstanding LC Exposure will be 100% covered by the Revolving Credit Commitments of the
non-Defaulting Lenders and/or cash collateral will be provided by the Borrower in accordance with
Section 2.21(c), and participating interests in any newly made Swingline Loan or any newly issued
or increased Letter of Credit shall be allocated among non-Defaulting Lenders that are Revolving
Credit Lenders in a manner consistent with Section 2.21(c)(i) (and such Defaulting Lender shall not
participate therein).
If (i) a Bankruptcy Event with respect to a Lender Parent of any Revolving Credit Lender shall
occur following the date hereof and for so long as such event shall continue or (ii) the Swingline
Lenders or the applicable Issuing Bank has a good faith belief that any Revolving Credit Lender has
defaulted in fulfilling its obligations under one or more other agreements in which such Lender
commits to extend credit, the Swingline Lenders shall not be required to fund any Swingline Loan
and such Issuing Bank shall not be required to issue, amend or increase any Letter of Credit,
unless the Swingline Lenders or such Issuing Bank, as the case may be, shall have entered into
arrangements with the Borrower or such Lender, satisfactory to the Swingline Lenders or such
Issuing Bank, as the case may be, to defease any risk to it in respect of such Lender hereunder.
In the event that the Administrative Agent, the Borrower, the Swingline Lenders and the
Issuing Banks each agrees that a Defaulting Lender has adequately remedied all matters that caused
such Revolving Credit Lender to be a Defaulting Lender, then the Swingline Exposure
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and LC Exposure of the Revolving Credit Lenders shall be readjusted to reflect the inclusion
of such Lenders Revolving Credit Commitment and on such date such Lender shall purchase at par
such of the Revolving Loans of the other Revolving Credit Lenders as the Administrative Agent shall
determine may be necessary in order for such Lender to hold such Revolving Loans in accordance with
its Applicable Revolving Percentage.
ARTICLE 3
Representations and Warranties
The Borrower represents and warrants to the Lenders that:
SECTION 3.01
. Organization; Powers.
Each of the Borrower and its Restricted Subsidiaries is
duly organized, validly existing and in good standing under the laws of the jurisdiction of its
organization, and, except in each case where the failure to do so, individually or in the
aggregate, would not reasonably be expected to result in a Material Adverse Effect, (i) has all
requisite power and authority to carry on its business as now conducted and (ii) is qualified to do
business in, and is in good standing in, every jurisdiction where such qualification is required.
SECTION 3.02
. Authorization; Enforceability.
The Transactions to be entered into by each
Loan Party are within such Loan Partys corporate powers. The Loan Documents have been duly
authorized by the Borrower, and will have been duly authorized by each other Loan Party on or prior
to the Funding Date. The other Transactions will have been duly authorized by each Loan Party on
or prior to the Funding Date. This Agreement has been duly executed and delivered by each Loan
Party party hereto and constitutes, and each other Loan Document when executed and delivered by
each Loan Party party thereto will constitute, a legal, valid and binding obligation of each such
Loan Party, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors rights generally and subject to
general principles of equity, regardless of whether considered in a proceeding in equity or at law.
SECTION 3.03
. Governmental Approvals; No Conflicts.
The execution and delivery of this
Agreement by each Loan Party party hereto, and performance by each such Loan Party of its
obligations hereunder, in each case from and after the date such Loan Party becomes a party hereto,
(a) do not require any consent or approval of, registration or filing with or any other action by
any Governmental Authority, except for (i) the filing of Uniform Commercial Code financing
statements and filings with the United States Patent and Trademark Office and the United States
Copyright Office, (ii) recordation of the Mortgages and (iii) such as have been obtained or made
and are in full force and effect, (b) will not violate any applicable law, statute, rule or
regulation or the certificate or articles of incorporation, by-laws or other organizational
documents of the Borrower or any of the Restricted Subsidiaries or any order of any Governmental
Authority, (c) will not be in conflict with, violate or result in a default or give rise to any
right to accelerate or to require the prepayment, repurchase or redemption of any obligation under
any indenture, agreement or other instrument binding upon the Borrower or any of the Restricted
Subsidiaries or its property or assets, or give rise to a right thereunder to require any payment
to be made by the Borrower or any of its Restricted Subsidiaries (except pursuant to
60
the Fee Letter or the Loan Documents) and (d) will not result in the creation or imposition of
any Lien, other than Liens permitted under Section 6.02, on any property or any asset now owned or
hereafter acquired by the Borrower or any of its Restricted Subsidiaries (other than any Lien
created hereunder or under the Collateral Documents), where any such conflict, violation, breach or
default referred to in clause (b) or (c) of this Section 3.03, would reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect.
SECTION 3.04
. Financial Condition; No Material Adverse Change.
(a) The Borrower has
heretofore furnished to the Lenders the Main Shipbuilding Subsidiarys consolidated balance sheet
and statements of income, stockholders equity and cash flows as of and for the fiscal years ended
December 31, 2008, December 31, 2009 and December 31, 2010, audited by and accompanied by the
opinion of Deloitte & Touche LLP, independent public accountants. Such financial statements
present fairly, in all material respects, the financial position and results of operations and cash
flows of the Main Shipbuilding Subsidiary and its consolidated Subsidiaries as of such dates and
for such periods in accordance with GAAP. Such balance sheets and the notes thereto disclose all
material liabilities, direct or contingent, of the Main Shipbuilding Subsidiary and its
consolidated Subsidiaries as of the dates thereof.
(b) The Borrower has heretofore delivered to the Lenders its unaudited pro forma consolidated
balance sheet and related pro forma statements of income, stockholders equity and cash flows as of
December 31, 2010, prepared giving effect to the Transactions as if they had occurred, with respect
to such balance sheet, on such date and, with respect to such other financial statements, on the
first day of the 12-month period ending on such date. Such pro forma financial statements have been
prepared in good faith by the Borrower, based on the assumptions used to prepare the pro forma
financial information contained in the Confidential Information Memorandum (which assumptions are
believed by the Borrower on the date hereof to be reasonable), accurately reflect all material
adjustments required to be made to give effect to the Transactions and present fairly on a pro
forma basis the estimated consolidated financial position of the Borrower and its consolidated
Subsidiaries as of such date and for such period, assuming that the Transactions had actually
occurred at such date or at the beginning of such period, as the case may be.
(c) There has not occurred since December 31, 2010, any event, occurrence, change, state of
circumstances or condition which, individually or in the aggregate has had or would reasonably be
expected to have a Material Adverse Effect.
SECTION 3.05
. Properties.
(a) From and after the Funding Date, each of the Borrower and the
Restricted Subsidiaries has good title to, or valid leasehold interests in, or easements or other
limited property interests in, or is licensed to use, all its real and personal property material
to its business (including all Mortgaged Properties), except for defects in the foregoing that do
not materially interfere with its ability to conduct its business as currently conducted or to
utilize such properties for their intended purposes and except where the failure to have such title
or other ownership rights would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect. From and after the Funding Date, all such material
properties and assets are free and clear of Liens, other than Liens expressly permitted by Section
6.02.
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(b) Each of the Borrower and the Restricted Subsidiaries has complied with all obligations
under all leases to which it is a party, except where the failure to comply would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect, and all such leases
are in full force and effect, except leases in respect of which the failure to be in full force and
effect would not reasonably be expected to have a Material Adverse Effect. Each of the Borrower
and the Restricted Subsidiaries enjoys peaceful and undisturbed possession under all such leases,
other than leases in respect of which the failure to enjoy peaceful and undisturbed possession
would not reasonably be expected to have, individually or in the aggregate, a Material Adverse
Effect.
(c) As of the Effective Date, neither the Borrower nor any of the Restricted Subsidiaries has
received any written notice of, nor has any knowledge of, any pending or contemplated condemnation
proceeding for any material portion of the Mortgaged Properties or any sale or disposition thereof
in lieu of condemnation.
(d) As of the Effective Date, neither the Borrower nor any of the Restricted Subsidiaries is
obligated under any right of first refusal, option or other contractual right to sell, assign or
otherwise dispose of any Mortgaged Property or any interest therein.
(e) Each of the Borrower and the Restricted Subsidiaries owns, or is licensed or otherwise has
the right to use, or could obtain ownership or possession of, all trademarks, tradenames,
copyrights, patents and other intellectual property material to its business, except for those the
failure to own, possess, license or have the right to use which would not reasonably be expected to
result in a Material Adverse Effect, and the use thereof by the Borrower and the Restricted
Subsidiaries does not, to the knowledge of any Responsible Officer of the Borrower, infringe upon
the rights of any other Person, except for any such infringements that, individually or in the
aggregate, would not reasonably be expected to result in a Material Adverse Effect.
(f) Schedule 3.05(f) lists completely and correctly as of the Effective Date all real property
owned in fee by the Borrower or the Restricted Subsidiaries (and the addresses thereof) that are
material to their business.
(g) Schedule 3.05(g) lists completely and correctly as of the Effective Date all real property
leased by the Borrower or the Restricted Subsidiaries (and the addresses thereof) that are material
to their business.
SECTION 3.06
. Litigation and Environmental Matters.
(a) Except for the Disclosed Matters,
there are no actions, suits or proceedings at law or in equity by or before any arbitrator or
Governmental Authority pending against or, to the knowledge of a Responsible Officer of the
Borrower, threatened against or affecting the Borrower or any of the Restricted Subsidiaries or any
business, property or rights of any such Person (i) as to which there is a reasonable likelihood of
an adverse determination and that, if adversely determined, would reasonably be expected,
individually or in the aggregate, to result in a Material Adverse Effect or (ii) that challenge the
enforceability of any Loan Document.
(b) Except for the Disclosed Matters and except with respect to any other matters that,
individually or in the aggregate, would not reasonably be expected to result in a Material
62
Adverse Effect, neither the Borrower nor any of the Restricted Subsidiaries (i) has failed, or
is failing, to comply with any Environmental Law or to obtain, maintain or comply with any permit,
license or other approval required under any Environmental Law, (ii) has become subject to any
Environmental Liability, (iii) has received notice of any claim with respect to any Environmental
Liability or (iv) knows of any basis for any Environmental Liability.
(c) Since the date of this Agreement, there has been no change in the status of the Disclosed
Matters that, individually or in the aggregate, has resulted in, or materially increased the
likelihood of, a Material Adverse Effect.
SECTION 3.07
. Compliance with Laws and Agreements.
(a) Each of the Borrower and the
Restricted Subsidiaries is in compliance with all laws, regulations and orders of any Governmental
Authority applicable to it or its property and all indentures or other agreements or instruments
evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by
which it or any of its properties or assets are or may be bound, except where the failure to do so,
individually or in the aggregate, would not reasonably be expected to result in a Material Adverse
Effect. No Default has occurred and is continuing.
(b) None of the Borrower or any of the Restricted Subsidiaries is in default under any
agreement or instrument or in violation of any corporate restriction that, in each case, has
resulted or would reasonably be expected to result in a Material Adverse Effect.
(c) Neither the Borrower or any of the Restricted Subsidiaries or any of their respective
material properties or assets is in violation of, nor will the continued operation of their
material properties and assets as currently conducted violate, any law, rule or regulation
(including any zoning, building, ordinance, code or approval or any building permits) or any
restrictions of record or agreements affecting the Mortgaged Property, or is in default with
respect to any judgment, writ, injunction, decree or order of any Governmental Authority, where
such violation or default would reasonably be expected to result in a Material Adverse Effect.
(d) Certificates of occupancy and permits are in effect for each Mortgaged Property as
currently constructed, and true and complete copies of such certificates of occupancy have been
delivered to the Collateral Agent as mortgagee with respect to each Mortgaged Property.
SECTION 3.08
. Investment Company Status.
Neither the Borrower nor any of the Restricted
Subsidiaries is required to be registered as an investment company under the Investment Company
Act of 1940.
SECTION 3.09
. Taxes.
Each of the Borrower and the Restricted Subsidiaries has timely filed
or caused to be filed all Tax returns and reports required to have been filed, subject to any
applicable extensions without penalty, and has paid or caused to be paid all Taxes required to have
been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings
and for which the Borrower or such Restricted Subsidiary, as applicable, has set aside on its books
adequate reserves or (b) to the extent that the failure to do so would not reasonably be expected
to result in a Material Adverse Effect.
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SECTION 3.10
. ERISA.
Except as would not reasonably be expected, individually or in the
aggregate, to result in a Material Adverse Effect, each of the Borrower and its ERISA Affiliates is
in compliance with the applicable provisions of ERISA and the Code and the regulations and
published interpretations thereunder. No ERISA Event has occurred or is reasonably expected to
occur that, when taken together with all other such ERISA Events for which liability is reasonably
expected to occur, would reasonably be expected to result in a Material Adverse Effect.
SECTION 3.11
. Disclosure.
Neither the Confidential Information Memorandum nor any of the
other reports, financial statements, certificates or other written information furnished by or on
behalf of the Borrower to the Administrative Agent or any Lender in connection with the negotiation
of any Loan Document or delivered pursuant thereto (as modified or supplemented by other
information so furnished, and taken as a whole) contains any material misstatement of fact or omits
to state any material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
provided
that, with respect to any
projected financial information, the Borrower represents only that such information was prepared in
good faith based upon assumptions believed to be reasonable at the time.
SECTION 3.12
. Use of Proceeds.
The Borrower will use (i) the proceeds of Term Loans solely
to finance a portion of the Contribution and related Transactions and for other general corporate
purposes, and (ii) the proceeds of the Revolving Loans and Swingline Loans and the Letters of
Credit solely for working capital needs and other general corporate purposes.
SECTION 3.13
. Margin Regulations.
None of the Borrower nor any of the Restricted
Subsidiaries is engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of buying or carrying Margin Stock. Neither the proceeds of any
Loan nor any Letter of Credit will be used, whether directly or indirectly, and whether
immediately, incidentally or ultimately, for any purpose that entails a violation of, or that is
inconsistent with the provisions of the regulations of the Board, including Regulation U or
Regulation X.
SECTION 3.14
. Subsidiaries.
Schedule 3.14 sets forth as of the Effective Date a list of all
Restricted Subsidiaries of the Borrower and the two entities that are to be designated as
Unrestricted Subsidiaries on or prior to the Funding Date, and the percentage ownership interest of
the Borrower therein (it being understood and agreed that prior to the Spin-off, the Northrop
Grumman Retained Subsidiaries shall be deemed not to be Subsidiaries or Restricted Subsidiaries of
the Borrower). As of the Funding Date, the shares of capital stock or other ownership interests in
Restricted Subsidiaries so indicated on Schedule 3.14 are, or will be, fully paid and
non-assessable and are, or will be, owned by the Borrower, directly or indirectly, free and clear
of all Liens (other than Liens created under the Collateral Documents, and statutory or other
non-consensual Liens permitted under Section 6.02).
SECTION 3.15
. Collateral Documents.
From and after the Funding Date (and subject, if
applicable, to Section 5.14), all filings and other actions necessary to perfect and protect the
Liens in the Collateral created under, and in the manner and to the extent contemplated by, the
Collateral Documents will have been duly made or taken or otherwise provided for in the manner
reasonably requested by the Administrative Agent and will be in full force and effect, and the
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Collateral Documents will, upon execution and delivery thereof, create in favor of the
Collateral Agent for the benefit of the Secured Parties a valid and, together with such filings and
other actions, perfected first priority Lien in the Collateral (to the extent contemplated by the
Collateral Documents), securing the payment of the Secured Obligations, subject to Liens permitted
by Section 6.02.
SECTION 3.16
. Labor Matters.
As of the Effective Date, there are no strikes, lockouts or
slowdowns against the Borrower or any Restricted Subsidiary pending or, to the knowledge of a
Responsible Officer of the Borrower, threatened that, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect. The hours worked by and payments made to
employees of the Borrower and the Restricted Subsidiaries have not been in violation of the Fair
Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such
matters that, individually or in the aggregate, would reasonably be expected to have a Material
Adverse Effect. All material payments due from the Borrower or any Restricted Subsidiary, or for
which any claim may be made against the Borrower or any Restricted Subsidiary, on account of wages
and employee health and welfare insurance and other benefits, have been paid or accrued as a
liability on the books of the Borrower or such Restricted Subsidiary. The consummation of the
Transactions will not give rise to any right of termination or right of renegotiation on the part
of any union under any collective bargaining agreement to which the Borrower or any Restricted
Subsidiary is bound.
SECTION 3.17
. Solvency.
Immediately after giving effect to the consummation of the
Transactions (including the Spin-off), (a) the fair value of the assets of the Borrower and the
Restricted Subsidiaries on a consolidated basis, at a fair valuation, will exceed the debts and
liabilities, subordinated, contingent or otherwise of the Borrower and the Restricted Subsidiaries
on a consolidated basis; (b) the present fair saleable value of the property of the Borrower and
the Restricted Subsidiaries on a consolidated basis will be greater than the amount that will be
required to pay the probable liability of the debts and other liabilities, subordinated, contingent
or otherwise of the Borrower and the Restricted Subsidiaries on a consolidated basis, as such debts
and other liabilities become absolute and matured; (c) the Borrower and the Restricted Subsidiaries
on a consolidated basis will be able to pay the debts and liabilities, subordinated, contingent or
otherwise of the Borrower and the Restricted Subsidiaries on a consolidated basis, as such debts
and liabilities become absolute and matured; and (d) the Borrower and the Restricted Subsidiaries
on a consolidated basis will not have unreasonably small capital with which to conduct the
businesses in which they are engaged as such businesses are now conducted and are proposed to be
conducted following the Funding Date.
SECTION 3.18
. Transaction Documents.
As of the Effective Date, the Borrower has delivered to
the Administrative Agent a complete and correct copy of the Transaction Documents that are in
effect as of such date (including all schedules, exhibits, amendments, supplements and
modifications thereto). Neither the Borrower nor any Loan Party or, to the knowledge of the
Borrower or each Loan Party, any other Person party thereto is in default in the performance or
compliance with any material provisions thereof.
SECTION 3.19
. Insurance.
The Borrower and the Restricted Subsidiaries have insurance in such
amounts and covering such risks and liabilities as are in accordance with normal industry practice.
65
SECTION 3.20.
OFAC.
Neither the Borrower nor any Restricted Subsidiary (i) is a person whose
property or interest in property is blocked or subject to blocking pursuant to Section 1 of
Executive Order 13224 of September 23, 2001 Blocking Property and Prohibiting Transactions With
Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)), (ii)
engages in any dealings or transactions prohibited by section 2 of such executive order, or is
otherwise associated with any such person in any manner violative of such section 2, or (iii) is a
person on the list of Specially Designated Nationals and Blocked Persons or subject to the
limitations or prohibitions under any other U.S. Department of Treasurys Office of Foreign Assets
Control regulation or executive order.
SECTION 3.21.
Patriot Act
. The Borrower and each Restricted Subsidiary is in compliance, in
all material respects, with (i) the Trading with the Enemy Act, as amended, and each of the foreign
assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V,
as amended) and any other enabling legislation or executive order relating thereto, and (ii) the
Uniting And Strengthening America By Providing Appropriate Tools Required To Intercept And Obstruct
Terrorism (USA Patriot Act of 2001). No part of the proceeds of the Loans will be used, directly
or indirectly, for any payments to any governmental official or employee, political party, official
of a political party, candidate for political office, or anyone else acting in an official
capacity, in order to obtain, retain or direct business or obtain any improper advantage, in
violation of the United States Foreign Corrupt Practices Act of 1977, as amended.
ARTICLE 4
Conditions
SECTION 4.01
. Effective Date.
This Agreement shall become effective as of the date hereof
upon the satisfaction of the conditions precedent set forth in this Section 4.01 (the date upon
which all such conditions precedent under this Section 4.01 shall be satisfied referred to as the
Effective Date):
(a) The Administrative Agent (or its counsel) shall have received from each party hereto
either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence
satisfactory to the Administrative Agent (which may include telecopy transmission of a signed
signature page of this Agreement) that such party has signed a counterpart of this Agreement.
(b) The Administrative Agent shall have received a favorable written opinion (addressed to the
Administrative Agent, the Issuing Banks and the Lenders and dated the Effective Date) of Gibson
Dunn & Crutcher LLP, counsel for the Borrower, and covering such other matters relating to the
Borrower or the Loan Documents as the Administrative Agent shall reasonably request. The Borrower
hereby requests such counsel to deliver such opinion.
(c) The Administrative Agent shall have received (i) a copy of the certificate or articles of
incorporation, including all amendments thereto, of the Borrower, certified as of a recent date by
the Secretary of State of the state of its organization, and a certificate as to the good standing
of the Borrower as of a recent date, from such Secretary of State; (ii) a certificate of the
66
Secretary or Assistant Secretary of the Borrower dated the Effective Date and certifying (A)
that attached thereto is a true and complete copy of the by-laws of the Borrower as in effect on
the Effective Date and at all times since a date prior to the date of the resolutions described in
clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted
by the Board of Directors of the Borrower authorizing the execution, delivery and performance of
the Loan Documents to which the Borrower is a party and the borrowings hereunder, and that such
resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that
the certificate or articles of incorporation of the Borrower have not been amended since the date
of the last amendment thereto shown on the certificate of good standing furnished pursuant to
clause (i) above, and (D) as to the incumbency and specimen signature of each officer executing any
Loan Document or any other document delivered in connection herewith on behalf of the Borrower;
(iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary
or Assistant Secretary executing the certificate pursuant to clause (ii) above; and (iv) such other
documents as the Lenders, the Issuing Banks or the Administrative Agent may reasonably request.
(d) The Administrative Agent shall have received a certificate, dated the Effective Date and
signed by the President, a Vice President or a Financial Officer of the Borrower, confirming
compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.03.
(e) The Lenders shall have received (i) the financial statements referred to in Sections
3.04(a) and 3.04(b) and (ii) forecasts of consolidated balance sheets, income statements and cash
flow statements of the Borrower and its Subsidiaries on an annual basis for 2010 through 2015.
(f) The Administrative Agent shall have received, at least 5 days prior to the Effective Date,
all documentation and other information required by regulatory authorities under applicable know
your customer and anti-money laundering rules and regulations, including the PATRIOT Act, that
have been requested by the Administrative Agent and the Lenders no later than 10 days prior to the
Effective Date.
(g) The Borrower shall have received (i) a corporate credit rating from Moodys, a corporate
family rating from S&P and an issuer default rating from Fitch, and (ii) a rating of the Senior
Credit Facilities by Moodys, S&P and Fitch.
(h) The Collateral Agent shall have received a Perfection Certificate with respect to the
Borrower and each Wholly Owned Domestic Restricted Subsidiary dated the Effective Date and duly
executed by a Responsible Officer of the Borrower, and shall have received the results of a search
of the Uniform Commercial Code filings (or equivalent filings) made with respect to the Borrower
and each Wholly Owned Domestic Restricted Subsidiary in the states (or other jurisdictions) of
formation of such Persons, in which the chief executive office of each such Person is located and
in the other jurisdictions in which such Persons maintain property, in each case as indicated on
such Perfection Certificate, together with copies of the financing statements (or similar
documents) disclosed by such search, and accompanied by evidence satisfactory to the Collateral
Agent that the Liens indicated in any such financing statement (or similar document) would be
permitted under Section 6.02 or have been or will be contemporaneously released or terminated.
67
(i) All material governmental and third party approvals necessary in connection with the
Senior Credit Facilities and the Loan Documents shall have been obtained and be in full force and
effect.
The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date.
SECTION 4.02
. Funding Date.
The obligations of the Lenders to make Loans and of the Issuing
Bank to issue Letters of Credit hereunder shall not become effective unless each of the following
conditions is satisfied (or waived pursuant to Section 9.02) on or prior to June 30, 2011 (the date
upon which all such conditions precedent under this Section 4.02 shall be satisfied or waived
referred to as the Funding Date, and, in the event such conditions are not so satisfied or waived
by June 30, 2011, the Commitments shall terminate on such date):
(a) The Effective Date shall have occurred.
(b) The Administrative Agent shall have received a favorable written opinion (addressed to the
Administrative Agent, the Issuing Banks and the Lenders and dated the Funding Date) of Gibson Dunn
& Crutcher LLP, counsel for the Borrower, Brownstein Hyatt Farber Schreck, LLP, Nevada counsel for
the Borrower and George M. Simmerman, Vice President and Sector Counsel of Northrop Grumman
Shipbuilding, Inc., and covering such other matters relating to the Loan Parties, the Collateral
Documents or the Transactions as the Administrative Agent shall reasonably request. The Borrower
hereby requests such counsel to deliver such opinion.
(c) The Administrative Agent shall have received (i) a copy of the certificate or articles of
incorporation, including all amendments thereto, of each Guarantor, certified as of a recent date
by the Secretary of State of the state of its organization, and a certificate as to the good
standing of such Guarantor as of a recent date, from such Secretary of State; (ii) a certificate of
the Secretary or Assistant Secretary of each Guarantor dated the Funding Date and certifying (A)
that attached thereto is a true and complete copy of the by-laws of such Guarantor as in effect on
the Funding Date and at all times since a date prior to the date of the resolutions described in
clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted
by the Board of Directors of such Guarantor authorizing the execution, delivery and performance of
the Loan Documents to which such Person is a party, and that such resolutions have not been
modified, rescinded or amended and are in full force and effect, (C) that the certificate or
articles of incorporation of such Guarantor have not been amended since the date of the last
amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above,
and (D) as to the incumbency and specimen signature of each officer executing any Loan Document or
any other document delivered in connection herewith on behalf of such Guarantor; (iii) a
certificate of another officer as to the incumbency and specimen signature of the Secretary or
Assistant Secretary executing the certificate pursuant to clause (ii) above; and (iv) such other
documents as the Lenders, the Issuing Banks or the Administrative Agent may reasonably request
(d) The Collateral Documents shall have been duly executed by each Loan Party that is to be a
party thereto and shall be in full force and effect on the Funding Date. The Collateral Agent shall
be reasonably satisfied that all actions necessary to establish that the Collateral
68
Agent will have a security interest on behalf of the Secured Parties in the Collateral of the
type and priority described in each Collateral Document shall have been taken. Nothing contained
in the foregoing sentence shall be construed to require the satisfaction of the post-Funding Date
obligations set forth in Section 5.14 prior to the Funding Date.
(e) The Administrative Agent shall have received a copy of, or a certificate as to coverage
under, the insurance policies required by Section 5.05 and the applicable provisions of the
Collateral Documents, each of which shall be endorsed or otherwise amended to include a customary
lenders loss payable endorsement and to name the Collateral Agent as additional insured, in form
and substance satisfactory to the Administrative Agent. In addition, the Administrative Agent
shall have received a schedule setting forth a true, complete and correct description of all
material insurance maintained by or on behalf of the Borrower or the Restricted Subsidiaries as of
the Funding Date. As of such date, such insurance shall be in full force and effect and all
premiums shall have been duly paid.
(f) The Collateral Agent shall have received a Perfection Certificate with respect to the Loan
Parties dated the Funding Date and duly executed by a Responsible Officer of the Borrower.
(g) The Administrative Agent shall have received a certificate from the chief financial
officer of the Borrower certifying that the Borrower and the Restricted Subsidiaries, on a
consolidated basis after giving effect to the Transactions and the other transactions contemplated
hereby, are solvent within the meaning of the term solvency as set forth in Section 3.17.
(h) The final terms and conditions of each aspect of the Transactions, including without
limitation, all tax aspects thereof, shall be consistent in all material respects with the terms
set forth in the Distribution Agreement and the information set forth in the Form 10. The Lead
Arrangers shall be reasonably satisfied with the terms and conditions of the Distribution Agreement
and the other Transaction Documents, it being understood and agreed that the Lead Arrangers are
reasonably satisfied with the terms and conditions set forth in the forms of the Transaction
Documents delivered to the Lead Arrangers prior to the Effective Date. Since the Effective Date,
the Transaction Documents shall not have been altered, amended or otherwise changed or supplemented
or any condition therein waived, in each case in a manner that is materially adverse to the
interests of the Lenders, without the prior written consent of the Lead Arrangers. The
Pre-Contribution Internal Reorganization shall have been consummated. The Lead Arrangers shall be
reasonably satisfied that (x) the Contribution will be consummated substantially contemporaneously
with the initial funding of the Senior Credit Facilities pursuant to this Section 4.02 and (y) all
regulatory approvals necessary to consummate the Spin-off (after the Funding Date) shall have been
(or substantially contemporaneously with the initial funding of the Senior Credit Facilities
hereunder shall be) obtained and all other conditions necessary to consummate the Spin-off after
the Funding Date (other than those which, pursuant to the Transaction Documents, are to be
satisfied after the initial funding of the Senior Credit Facilities hereunder) shall have been (or
substantially contemporaneously with the initial funding of the Senior Credit Facilities hereunder
shall be) satisfied, in each case in accordance with the applicable Transaction Documents and
applicable law. The proceeds of the issuance of the Senior Notes shall have been (or substantially
contemporaneously with the initial funding of the Senior Credit Facilities hereunder shall be)
released to the Borrower from the Senior Notes
69
Escrow in an aggregate principal amount that together with the aggregate principal amount of
the Term Loans funded pursuant to this Section 4.02 shall be up to $1,775,000,000.
(i) On the Funding Date, after giving effect to the Transactions, neither the Borrower nor any
of its Restricted Subsidiaries shall have any material Indebtedness for borrowed money, other than
(i) the Senior Credit Facilities, (ii) the Senior Notes, (iii) up to $83,700,000 of indebtedness
under a loan agreement with the Mississippi Business Finance Corporation (
MBFC
) in connection
with MBFCs issuance of 7.81% Economic Development Revenue Bonds (Ingalls Shipbuilding, Inc.
Project) Taxable Series 1999A due 2024 and (iv) up to $22,000,000 of indebtedness under a loan
agreement with the MBFC in connection with the MBFCs issuance of 4.55% Gulf Opportunity Zone
Industrial Revenue Bonds (Northrop Grumman Ship Systems, Inc. Project) Series 2006 due 2028 (the
GO Zone Bonds
).
(j) There shall not have occurred since December 31, 2010 any event, occurrence, change, state
of circumstances or condition which, individually or in the aggregate has had or would reasonably
be expected to have a Material Adverse Effect.
(k) The Lenders, the Administrative Agent and the Lead Arrangers shall have received all fees
and other amounts due and payable on or prior to the Funding Date, including, to the extent
invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid
by the Borrower hereunder.
(l) The Administrative Agent shall have received a certificate, dated the Funding Date and
signed by the President, a Vice President or a Financial Officer of the Borrower, confirming
compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.03.
SECTION 4.03
. Each Credit Event.
The obligation of each Lender to make a Loan on the
occasion of any Borrowing, and of each Issuing Bank to issue, amend, renew or extend any Letter of
Credit, is subject to the satisfaction of the following conditions:
(a) The representations and warranties made by or on behalf of the Borrower and the Restricted
Subsidiaries set forth in this Agreement and in the Collateral Documents shall be true and correct
in all material respects on and as of the date of such Borrowing or the date of issuance,
amendment, renewal or extension of such Letter of Credit, as applicable (except to the extent that
such representations and warranties specifically refer to an earlier date, in which case they shall
be true and correct in all material respects as of such earlier date).
(b) At the time of and immediately after giving effect to such Borrowing or the issuance,
amendment, renewal or extension of such Letter of Credit, as applicable, no Default or Event of
Default shall have occurred and be continuing.
Each Borrowing and each issuance, amendment, renewal or extension of a Letter of Credit shall be
deemed to constitute a representation and warranty by the Borrower on the date thereof as to the
matters specified in paragraphs (a) and (b) of this Section.
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ARTICLE 5
Affirmative Covenants
Until the Commitments have expired or been terminated and the principal of and interest on
each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit
shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower
covenants and agrees with the Lenders that the Borrower will, and will (from and after the Funding
Date in the case of Sections 5.05(a) and (c), 5.08, 5.11 and 5.14) cause each of the Restricted
Subsidiaries to:
SECTION 5.01
. Financial Statements; Ratings Change and Other Information.
In the case of the
Borrower, furnish to the Administrative Agent for distribution to each Lender:
(a) within 90 days after the end of each fiscal year of the Borrower, its audited consolidated
balance sheet and related statements of operations, stockholders equity and cash flows as of the
end of and for such year, setting forth in each case in comparative form the figures for the
previous fiscal year, all reported on by Deloitte & Touche LLP or other independent public
accountants of recognized national standing (without a going concern or like qualification or
exception and without any qualification or exception as to the scope of such audit) to the effect
that such consolidated financial statements present fairly in all material respects the financial
condition and results of operations of the Borrower and its consolidated Subsidiaries on a
consolidated basis in accordance with GAAP consistently applied, together with a customary
management discussion and analysis provision;
(b) within 45 days after the end of each of the first three fiscal quarters of each fiscal
year of the Borrower, its consolidated balance sheet and related statements of operations,
stockholders equity and cash flows as of the end of and for such fiscal quarter and the then
elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for
the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the
previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all
material respects the financial condition and results of operations of the Borrower and its
consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied,
subject to normal year-end audit adjustments and the absence of footnotes, together with a
customary management discussion and analysis provision;
(c) concurrently with any delivery of financial statements under clause (a) or (b) above, a
duly completed Compliance Certificate signed by a Financial Officer of the Borrower (i) certifying
that no Default or Event of Default has occurred or, if such a Default or Event of Default has
occurred, specifying the nature and extent thereof and any action taken or proposed to be taken
with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance
with Sections 6.10, 6.11 and 6.12 and (iii) stating whether any change in GAAP or in the
application thereof has occurred since the date of the audited financial statements referred to in
Section 3.04 and, if any such change has occurred, specifying the effect of such change on the
financial statements accompanying such certificate;
(d) concurrently with any delivery of financial statements under clause (a) above, a
certificate of the accounting firm that reported on such financial statements stating whether they
71
obtained knowledge during the course of their examination of such financial statements of any
Default or Event of Default under Section 6.11 or 6.12 (which certificate may be limited to the
extent required by accounting rules or guidelines);
(e) within 90 days after the beginning of each fiscal year of the Borrower, a detailed
consolidated budget for such fiscal year (including a projected consolidated balance sheet and
related statements of projected operations and cash flows as of the end of and for such fiscal year
and setting forth the assumptions used for purposes of preparing such budget) and, promptly when
available, any significant revisions of such budget.
(f) promptly after the same become publicly available, copies of all periodic and other
reports, proxy statements and other materials filed by the Borrower or any Restricted Subsidiary
with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all
of the functions of said Commission, or with any national securities exchange, or distributed by
the Borrower to its shareholders generally, as the case may be;
(g) promptly after Moodys, S&P or Fitch shall have announced a change in the rating
established or deemed to have been established for the Borrower or the Senior Credit Facilities,
written notice of such rating change;
(h) promptly after the receipt thereof by the Borrower or any Restricted Subsidiary, a copy of
any management letter received by any such Person from its certified public accountants and the
managements response thereto;
(i) promptly after the request by any Lender, all documentation and other information that
such Lender reasonably requests in order to comply with its ongoing obligations under applicable
know your customer and anti-money laundering rules and regulations, including the USA PATRIOT
Act;
(j) promptly following any request therefor, subject to compliance with applicable law and any
restrictions imposed by a Governmental Authority, such other information regarding the operations,
business affairs and financial condition of the Borrower or any Restricted Subsidiary, or
compliance with the terms of this Agreement, as the Administrative Agent or any Lender may
reasonably request (for itself or on behalf of any Lender); and.
(k) if there are any Unrestricted Subsidiaries as of the last day of any fiscal quarter,
simultaneously with the delivery of each set of consolidated financial statements referred to in
Sections 5.01(a) or 5.01(b) above, the related consolidating financial statements reflecting the
adjustments necessary to eliminate the accounts of any Unrestricted Subsidiaries that constitute
Significant Subsidiaries from such consolidated financial statements.
Information required to be delivered pursuant to paragraphs (a), (b) or (f) of this Section
shall be deemed to have been delivered if such information, or one or more annual or quarterly
reports containing such information, shall have been delivered to the Administrative Agent in a
format which is suitable for posting by the Administrative Agent on an IntraLinks or similar site
to which the Lenders have been granted access or shall be available on the website of the
Securities and Exchange Commission at http://www.sec.gov (and the Borrower shall endeavor to
72
deliver or cause to be delivered to the Administrative Agent a confirming electronic
correspondence providing notice of such availability,
provided
that the failure to deliver such
confirming electronic correspondence shall not constitute a default hereunder);
provided
that the
Borrower shall deliver paper copies of such information to any Lender that requests such delivery.
Information required to be delivered pursuant to this Section may also be delivered by electronic
communications pursuant to procedures approved by the Administrative Agent.
SECTION 5.02
. Notices of Material Events.
Furnish to the Administrative Agent (for
distribution to each Lender) promptly, upon a Responsible Officer of the Borrower obtaining actual
knowledge thereof, written notice of the following:
(a) the occurrence of any Default;
(b) the filing or commencement of, or any written threat or written notice of intention of any
Person to file or commence, any action, suit or proceeding whether at law or in equity by or before
any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof
that would reasonably be expected to result in a Material Adverse Effect;
(c) the occurrence or reasonably expected occurrence of any ERISA Event that, alone or
together with any other ERISA Events that have occurred, would reasonably be expected to result in
liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $25,000,000; and
(d) any other development that has resulted in, or would reasonably be expected to result in,
a Material Adverse Effect.
Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer
or other executive officer of the Borrower setting forth the details of the event or development
requiring such notice and any action taken or proposed to be taken with respect thereto.
SECTION 5.03
. Existence; Conduct of Business.
Do or cause to be done all things necessary to
preserve, renew and keep in full force and effect its legal existence and the rights, licenses,
permits, privileges and franchises material to the conduct of its business, except as would not,
individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect;
provided
that the foregoing shall not prohibit the Transactions or any merger, consolidation,
liquidation or dissolution permitted under Section 6.05.
SECTION 5.04
. Payment of Obligations.
Pay and discharge all material Taxes, assessments and
governmental charges or levies imposed upon it or upon its income or profits, or upon any property
belonging to it, prior to the date on which penalties attach thereto, and all lawful material
claims which, if unpaid, might become a Lien upon the property of the Borrower or such Restricted
Subsidiary;
provided
that neither the Borrower nor any such Restricted Subsidiary shall be required
to pay any such Tax, assessment, charge, levy or claims (i) the payment of which is being contested
in good faith and by proper proceedings, (ii) not yet delinquent or (iii) the non-payment of which,
if taken in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.
73
SECTION 5.05
. Maintenance of Properties; Insurance.
(a) Keep and maintain all property material to the conduct of its business in good working
order and condition, ordinary wear and tear excepted and except where failure to do so would not
reasonably be expected to result in a Material Adverse Effect.
(b) Maintain, with financially sound and reputable insurance companies, insurance in such
amounts and against such risks as are customarily maintained by companies engaged in the same or
similar businesses operating in the same or similar locations.
(c) Cause all such policies covering any Collateral to be endorsed or otherwise amended to
include a customary lenders loss payable endorsement, in form and substance satisfactory to the
Administrative Agent and the Collateral Agent, which endorsement shall provide that, from and after
the Funding Date, if the insurance carrier shall have received written notice from the
Administrative Agent or the Collateral Agent of the occurrence of an Event of Default, the
insurance carrier shall pay all proceeds otherwise payable to the Borrower or the Loan Parties
under such policies directly to the Collateral Agent; cause all such policies to provide that
neither the Borrower, the Administrative Agent, the Collateral Agent nor any other party shall be a
coinsurer thereunder and to contain a Replacement Cost Endorsement, without any deduction for
depreciation, and such other provisions as the Administrative Agent or the Collateral Agent may
reasonably require from time to time to protect their interests; deliver original or certified
copies of all such policies to the Collateral Agent; cause each such policy to provide that it
shall not be canceled, modified or not renewed (i) by reason of nonpayment of premium upon not less
than 10 days prior written notice thereof by the insurer to the Administrative Agent and the
Collateral Agent (giving the Administrative Agent and the Collateral Agent the right to cure
defaults in the payment of premiums) or (ii) for any other reason upon not less than 30 days prior
written notice thereof by the insurer to the Administrative Agent and the Collateral Agent; deliver
to the Administrative Agent and the Collateral Agent, prior to the cancellation, modification or
nonrenewal of any such policy of insurance, a copy of a renewal or replacement policy (or other
evidence of renewal of a policy previously delivered to the Administrative Agent and the Collateral
Agent) together with evidence satisfactory to the Administrative Agent and the Collateral Agent of
payment of the premium therefor.
(d) If at any time the area in which the Property (as specifically defined in a Mortgage) is
located is designated (i) a flood hazard area in any Flood Insurance Rate Map published by the
Federal Emergency Management Agency (or any successor agency), and if available in the community in
which the Property is located, obtain flood insurance in such total amount as the Administrative
Agent, the Collateral Agent or the Required Lenders may from time to time require, and otherwise
comply with the National Flood Insurance Program as set forth in the Flood Disaster Protection Act
of 1973, as it may be amended from time to time, or (ii) a Zone 1 area, obtain earthquake
insurance in such total amount as the Administrative Agent, the Collateral Agent or the Required
Lenders may from time to time require.
(e) With respect to any Mortgaged Property, carry and maintain comprehensive general liability
insurance including the broad form CGL endorsement and coverage on an occurrence basis against
claims made for personal injury (including bodily injury, death and
74
property damage) and umbrella liability insurance against any and all claims, in no event for
a combined single limit of less than that which is customary for companies in the same or similar
businesses operating in the same or similar locations, naming the Collateral Agent as an additional
insured, on forms satisfactory to the Collateral Agent.
(f) Notify the Administrative Agent and the Collateral Agent promptly whenever any separate
insurance concurrent in form or contributing in the event of loss with that required to be
maintained under this Section 5.05 is taken out by any Loan Party; and promptly deliver to the
Administrative Agent and the Collateral Agent a duplicate original copy of such policy or policies.
SECTION 5.06
. Books and Records; Inspection Rights; Maintenance of Ratings.
(a) Keep proper
books of record and account in accordance with GAAP.
(b) Permit any representatives designated by the Administrative Agent (or, if any Event of
Default has occurred and is continuing, any Lender), upon reasonable prior notice and subject to
reasonable requirements of confidentiality, including the requirements imposed by any Governmental
Authority or by contract, to visit and inspect its properties, to examine and make extracts from
its books and records, and to discuss its affairs, finances and condition with its officers and
independent accountants, all at such reasonable times during normal business hours and as often as
reasonably requested,
provided
that the exercise of rights under this Section shall not
unreasonably interfere with the business of the Borrower and its Subsidiaries and the
Administrative Agent and the Lenders shall give the Borrower a reasonable opportunity to
participate in any discussions with the Borrowers accountants.
(c) Use commercially reasonable efforts to (i) cause the Senior Credit Facilities to be
continuously rated by S&P and Moodys and, at the Borrowers election, Fitch, and (ii) maintain a
corporate rating from S&P, a corporate family rating from Moodys, and, at the Borrowers election,
an issuer default rating from Fitch, in each case in respect of the Borrower.
SECTION 5.07
. Compliance with Laws.
Comply with all laws, rules, regulations and orders of
any Governmental Authority applicable to it or its property, except where the failure to do so,
individually or in the aggregate, would not reasonably be expected to result in a Material Adverse
Effect.
SECTION 5.08
. Use of Proceeds and Letters of Credit.
Use the proceeds of the Loans and the
issuance of Letters of Credit solely for the purposes described in Section 3.12.
SECTION 5.09
. Employee Benefits.
Comply with the applicable provisions of ERISA and the
Code, except where the failure to do so, individually or in the aggregate, would not reasonably be
expected to result in a Material Adverse Effect.
SECTION 5.10
. Compliance with Environmental Laws.
Comply, and cause all lessees and other
Persons occupying its properties to comply, in all material respects with all Environmental Laws
applicable to its operations and properties; obtain and renew all material environmental permits
necessary for its operations and properties; and conduct any remedial action required by
Environmental Laws or by a Governmental Authority;
provided
,
however
, that
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none of the Borrower or any Restricted Subsidiary shall be required to undertake any remedial
action or incur any compliance cost required by Environmental Laws or by a Governmental Authority
to the extent that its obligation to do so is being contested in good faith and by proper
proceedings and, if applicable, appropriate reserves are being maintained with respect to such
circumstances in accordance with GAAP.
SECTION 5.11.
Further Assurances.
Execute any and all further documents, financing
statements, agreements and instruments, and take all further action (including filing Uniform
Commercial Code and other financing statements, mortgages and deeds of trust) that may be required
under applicable law, or that the Required Lenders, the Administrative Agent or the Collateral
Agent may reasonably request, in order to effectuate the transactions contemplated by the Loan
Documents and in order to grant, preserve, protect and perfect the validity and priority of the
security interests created or intended to be created by the Collateral Documents. The Borrower
will cause any subsequently acquired or organized Wholly Owned Subsidiary that is a Domestic
Restricted Subsidiary to become a Loan Party by executing the Guarantee and Security Agreement and
each applicable Collateral Document in favor of the Collateral Agent. In addition, from time to
time (other than during a Collateral Suspension Period), the Borrower will, at its cost and
expense, promptly secure the Secured Obligations by pledging or creating, or causing to be pledged
or created, perfected security interests with respect to such of its assets and properties as the
Administrative Agent or the Required Lenders shall designate (it being understood that it is the
intent of the parties that the Secured Obligations shall be secured (other than during a Collateral
Suspension Period) by substantially all the assets of the Borrower and its Restricted Subsidiaries
(but, as to real property, shall be secured only by Material Real Property owned as of, or acquired
subsequent to, the Effective Date)). Such security interests and Liens will be created under the
Collateral Documents and other security agreements, mortgages, deeds of trust and other instruments
and documents in form and substance satisfactory to the Collateral Agent, and the Borrower shall
deliver or cause to be delivered to the Lenders all such instruments and documents (consistent with
the items required under Section 5.14) as the Collateral Agent shall reasonably request to evidence
compliance with this Section. The Borrower agrees to provide such evidence as the Collateral Agent
shall reasonably request as to the perfection and priority status of each such security interest
and Lien. In furtherance of the foregoing, the Borrower will give prompt notice to the
Administrative Agent of the acquisition by it or any of the Subsidiaries of any Material Real
Property.
SECTION 5.12
. Designation of Subsidiaries.
In the case of the Borrower, at any time and from
time to time in its sole discretion, designate any Restricted Subsidiary as an Unrestricted
Subsidiary or any Unrestricted Subsidiary as a Restricted Subsidiary;
provided
that (a) immediately
before and after such designation, no Default or Event of Default shall have occurred and be
continuing, (b) immediately after giving effect to such designation, the Borrower shall be in
compliance, on a pro forma basis, with the covenants set forth in Sections 6.11 and 6.12 (and, as a
condition precedent to the effectiveness of any such designation, the Borrower shall deliver to the
Administrative Agent a certificate setting forth in reasonable detail the calculations
demonstrating such compliance), (c) no Subsidiary that owns any Equity Interests of any Restricted
Subsidiary, shall be an Unrestricted Subsidiary, (d) (i) the designation of any Subsidiary as an
Unrestricted Subsidiary shall constitute an Investment by the Borrower or the applicable Restricted
Subsidiary therein at the date of designation in an amount equal to
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the net book value (or, in the case of any guarantee or similar Investment, the fair market
value thereof) of such Investments of the Borrower or such Restricted Subsidiary and (ii) no such
designation shall be effective if, immediately after such designation, the sum of (x) the amount of
all such Investments and (y) the amount of all Investments in majority-owned joint ventures, in
each case net of cash returned to the Borrower or a Restricted Subsidiary in respect of such
Investments, exceeds $150,000,000 in the aggregate, (e) no Subsidiary may be designated as an
Unrestricted Subsidiary if it is a Restricted Subsidiary for the purpose of the Senior Notes, any
other Permitted Senior Indebtedness or any Permitted Subordinated Indebtedness (unless it is
concurrently designated as an Unrestricted Subsidiary for the purpose of such other Indebtedness)
and (f) there shall be no Unrestricted Subsidiary (other than Titan II and Ascension) on the
Effective Date or the Funding Date. If any Person becomes a Restricted Subsidiary on any date
after the Funding Date (including by redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary), the Indebtedness of such Person outstanding on such date will be deemed to have been
incurred by such Person on such date for purposes of Section 6.01, but will not be considered the
sale or issuance of Equity Interests for purposes of Section 6.05. Titan II and Ascension will be
deemed designated an Unrestricted Subsidiary immediately upon its becoming a Subsidiary of the
Borrower,
provided
that the conditions in clauses (a) through (e) above are satisfied at such time.
SECTION 5.13
. Maintenance of Separate Existence.
So long as Titan II shall exist, do all
things necessary to cause Titan II to maintain a separate existence from the Borrower and each
other Restricted Subsidiary, including, without limitation, causing Titan II to (i) maintain proper
corporate records and books of account separate from those of the Borrower and each other
Restricted Subsidiary; (ii) hold appropriate meetings of its board of directors, keep minutes of
such meetings and of meetings of its members and observe all other necessary organizational
formalities (and any successor shall observe similar procedures in accordance with its governing
documents and applicable law); (iii) at all times hold itself out to the public under its own name
as a legal entity separate and distinct from the Borrower and each other Restricted Subsidiary; and
(iv) refrain from (A) having any assets other than as contemplated by the Transaction Documents,
(B) guaranteeing, becoming obligated for or holding itself or its credit out to be responsible for
or available to satisfy, the debts or obligations of any other Person, or otherwise having any
liabilities except for the guarantees and related liabilities pursuant to the Titan II Guarantees
or liabilities for which Titan II is indemnified under the Transaction Documents, (C) acting with
the intent to hinder, delay or defraud any of its creditors in violation of applicable law, (D)
acquiring any securities or debt instruments of its Affiliates or any other Person, and (E) making
loans or advances, or transferring its assets, to any Person, except (in the case of clauses (A),
(B) and (E) above) for liabilities permitted under Section 6.08(b) and de minimis assets,
liabilities, advances, loans and transfers related to the maintenance of Titan IIs existence or to
the conduct of the activities of Titan II permitted under Section 6.08(b).
SECTION 5.14.
Post-Funding Date Collateral Matters
. Within 90 days after the Funding Date
(or such later date as agreed to by the Administrative Agent), (i) execute and deliver to the
Collateral Agent or cause to be executed and delivered to the Collateral Agent each of the
Collateral Documents, in form and substance satisfactory to the Collateral Agent, relating to each
of the Mortgaged Properties, (ii) cause each of such Collateral Documents to be filed and recorded
in the recording office as specified on Schedule 7(A) to the Perfection Certificate and,
77
in connection therewith, provide to the Collateral Agent evidence satisfactory to it of each
such filing and recordation (or a lenders title insurance policy, in form and substance consistent
with clause (iv) below and covering the
gap
of time between the delivery of the applicable
Collateral Document and the recordation of such Collateral Document), (iii) cause the Collateral
Agent to receive, in order to comply with the Flood Laws, the following documents relating to
Mortgaged Properties: (A) a completed standard flood hazard determination form; (B) if any
improvement(s) comprising part of the Mortgaged Properties are located in a special flood hazard
area, a notification to the Borrower (
Borrower Notice
) and (if applicable) notification to the
Borrower that flood insurance coverage under the National Flood Insurance Program (
NFIP
) is not
available because the community does not participate in the NFIP; and (C) documentation evidencing
the Borrowers receipt of the Borrower Notice; and (D) if the Borrower Notice is required to be
given and flood insurance is available in the community in which the applicable property is
located, a copy of one of the following: the flood insurance policy, the Borrowers application for
a flood insurance policy plus proof of premium payment, a declaration page confirming that flood
insurance has been issued, or such other evidence of flood insurance satisfactory to the Collateral
Agent; and (iv) cause to be delivered to the Collateral Agent such other documents, including a
policy or policies of title insurance issued by a nationally recognized title insurance company
selected by the Borrower and reasonably acceptable to the Collateral Agent, insuring such
Collateral Document as a first lien on such Mortgaged Property, subject to no Liens other than the
Liens permitted by Section 6.02, together with such endorsements, coinsurance and reinsurance as
may be available in the applicable jurisdiction and reasonably requested by the Collateral Agent
and the Lenders, with insurance amounts of not more than 105% of the actual value (as reasonably
estimated by the Borrower based on real estate tax assessment information) of the applicable
Mortgaged Property at the time such Collateral Document is recorded, together with such surveys,
abstracts, appraisals and reasonable and customary legal opinions reasonably requested by the
Collateral Agent.
ARTICLE 6
Negative Covenants
Until the Commitments have expired or terminated and the principal of and interest on each
Loan and all fees payable hereunder have been paid in full and all Letters of Credit have expired
or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and
agrees with the Lenders that the Borrower will not, nor will it (from and after the Funding Date)
cause or permit any of the Restricted Subsidiaries to:
SECTION 6.01
. Indebtedness.
Incur, create, assume or permit to exist any Indebtedness,
except:
(a) Indebtedness existing on the date hereof or expected to be existing on the Funding Date
and, in each case, set forth in Schedule 6.01, and any Permitted Refinancing thereof;
(b) (i) Indebtedness created hereunder and under the other Loan Documents and (ii)
Indebtedness in respect of the Senior Notes and any Permitted Refinancing thereof;
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(c) intercompany Indebtedness of the Borrower and the Restricted Subsidiaries to the extent
permitted by Section 6.04;
provided
that Indebtedness of any Loan Party owing to any Restricted
Subsidiary that is not a Loan Party shall be subordinated to the Secured Obligations (as defined in
the Guarantee and Security Agreement) pursuant to a Global Intercompany Note;
(d) Indebtedness of the Borrower or any Restricted Subsidiary incurred to finance the
acquisition, construction or improvement of any fixed or capital assets (including by way of a
Permitted Acquisition), and any Permitted Refinancing thereof;
provided
that (i) such Indebtedness
is incurred prior to or within 120 days after such acquisition or the completion of such
construction or improvement and (ii) the aggregate principal amount of Indebtedness permitted by
this Section 6.01(d), when combined with the aggregate principal amount of all Capital Lease
Obligations incurred pursuant to Section 6.01(e) at any time outstanding shall not exceed the
greater of (A) $50,000,000 and (B) 1.5% of Consolidated Net Tangible Assets;
(e) Capital Lease Obligations and any Permitted Refinancing thereof, in an aggregate principal
amount that, when combined with the aggregate principal amount of all Indebtedness incurred
pursuant to Section 6.01(d), shall not exceed the greater of (i) $50,000,000 and (ii) 1.5% of
Consolidated Net Tangible Assets;
(f) Indebtedness under or with respect to self-insurance obligations, performance bonds, bid
bonds, completion guarantees, appeal bonds, customs bonds, surety bonds, return of money bonds,
bankers acceptances and similar obligations and trade-related letters of credit, in each case
provided in the ordinary course of business and not in connection with Indebtedness for borrowed
money, including those incurred to secure health, safety and environmental obligations (including
with respect to workers compensation claims or other types of social security benefits,
environmental financial responsibility requirements and environmental remediation programs or to
secure the performance of statutory obligations and other obligations of a like nature arising from
legal or regulatory requirements), in each case in the ordinary course of business;
(g) Indebtedness owed to any Person providing workers compensation, health, disability or
other employee benefits or property, casualty or liability insurance to the Borrower or any
Restricted Subsidiary, pursuant to reimbursement or indemnification obligations to such Person;
provided
that upon the occurrence of Indebtedness with respect to reimbursement obligations
regarding workers compensation claims, such obligations are reimbursed in the ordinary course of
business consistent with past practice;
(h) Indebtedness in respect of the honoring by a bank or other financial institution of a
check, draft or similar instrument drawn against insufficient funds in the ordinary course of
business;
provided
that such Indebtedness is extinguished within five Business Days of its
incurrence;
(i) Indebtedness incurred in the ordinary course of business to finance insurance policy
premiums;
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(j) Indebtedness in respect of agreements providing for indemnification, adjustment of
purchase price, earn-outs or similar obligations, in each case, incurred or assumed in connection
with the disposition of any business, assets or a Subsidiary of the Borrower;
(k) Indebtedness of any Person that becomes a Restricted Subsidiary after the date hereof and
any Permitted Refinancing thereof;
provided
that (i) such Indebtedness exists at the time such
Persons becomes a Restricted Subsidiary and is not created in contemplation of or in connection
with such Person becoming a Restricted Subsidiary, (ii) immediately before and after such Person
becomes a Restricted Subsidiary, no Default or Event of Default shall have occurred and be
continuing and (iii) the aggregate principal amount of Indebtedness permitted by this Section
6.01(k) shall not exceed $50,000,000 at any time outstanding;
(l) Indebtedness in respect of those Swap Contracts incurred in the ordinary course of
business and not for speculative purposes and consistent with prudent business practice;
(m) any Permitted Senior Indebtedness and any Permitted Subordinated Indebtedness;
provided
that in each case the Borrower and the Restricted Subsidiaries shall be in pro forma compliance
with the financial covenants set forth in Sections 6.11 and 6.12 after giving effect to such
Indebtedness;
(n) endorsements for collection or deposit in the ordinary course of business;
(o) Indebtedness in respect of (i) customer advances received and held in the ordinary course
of business or (ii) take-or-pay obligations contained in supply arrangements incurred in the
ordinary course of business;
(p) Indebtedness incurred on behalf of or representing Guarantees of Indebtedness of
Unrestricted Subsidiaries or joint ventures in an amount not to exceed the amount of investments
permitted under Section 6.04(p);
(q) Guarantees of Indebtedness of the Borrower and its Restricted Subsidiaries that is
permitted under clause (d), (e) or (n) of this Section 6.01; and
(r) other Indebtedness of the Borrower or the Restricted Subsidiaries in an aggregate
principal amount at any time outstanding not exceeding $200,000,000.
SECTION 6.02
. Liens.
Create, incur, assume or permit to exist any Lien on any property or
assets (including Equity Interests or other securities of any Person, including any Subsidiary) now
owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof,
except:
(a) Liens on property or assets of the Borrower and its Restricted Subsidiaries existing on
the date hereof or expected to be existing on the Funding Date and, in each case, set forth in
Schedule 6.02;
provided
that such Liens shall secure only those obligations which they secure on
the date hereof and refinancings, extensions, renewals and replacements thereof permitted
hereunder;
(b) any Lien created under the Loan Documents;
80
(c) any Lien existing on any property or asset prior to the acquisition thereof by the
Borrower or any Restricted Subsidiary or existing on any property or assets of any Person that
becomes a Restricted Subsidiary after the date hereof prior to the time such Person becomes a
Restricted Subsidiary, as the case may be;
provided
that (i) such Lien is not created in
contemplation of or in connection with such acquisition or such Person becoming a Restricted
Subsidiary, (ii) such Lien secures only those obligations which it secures on the date of such
acquisition or the date such Person becomes a Restricted Subsidiary, as the case may be, and any
Permitted Refinancing thereof, and (iii) such Lien does not apply to any other property or assets
of the Borrower or any Restricted Subsidiary;
(d) Liens for Taxes not yet due or which are being contested in compliance with Section 5.04;
(e) carriers, warehousemens, mechanics, materialmens, repairmens landlords or other like
Liens arising in the ordinary course of business and securing obligations that are not overdue by
more than 60 days and payable or which are being contested in compliance with Section 5.04;
(f) pledges and deposits made in the ordinary course of business in compliance with workmens
compensation, unemployment insurance and other social security laws or regulations;
(g) pledges (in the ordinary course of business and consistent with past practice) and
deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases
(other than Capital Lease Obligations), statutory obligations, other obligations of a like nature
incurred in the ordinary course of business, and other obligations permitted by Section 6.01(f),
(g) or (h);
(h) (i) encumbrances on real property that would be shown on a current and accurate survey and
zoning restrictions, easements, rights-of-way, covenants, restrictions, agreements, reservations,
riparian rights, mineral and air rights and similar encumbrances on real property imposed by law,
recorded in the applicable land records, or arising in the ordinary course of business that do not
materially detract from the value of the affected property or materially interfere with the
ordinary conduct of the business of the Borrower or any of its Restricted Subsidiaries and (ii) all
matters shown on or referred to in loan title policies issued to the Collateral Agent and the
Lenders;
(i) purchase money security interests in real property, improvements thereto or assets
hereafter acquired (or, in the case of improvements, constructed) by the Borrower or any Restricted
Subsidiary;
provided
that (i) such security interests secure Indebtedness permitted by Section
6.01, (ii) such security interests are incurred, and the Indebtedness secured thereby is created,
within 120 days after such acquisition (or construction), (iii) the Indebtedness secured thereby
does not exceed the lesser of the cost or the fair market value of such real property, improvements
or equipment at the time of such acquisition (or construction) and (iv) such security interests do
not apply to any other property or assets of the Borrower or any Restricted Subsidiary;
81
(j) judgment Liens securing judgments not constituting an Event of Default under Article 7 or
securing appeal or other surety bonds related to such judgments;
(k) Liens created in favor of the United States of America or any department or agency thereof
or any other contracting party or customer in connection with advance or progress payments or
similar forms of vendor financing or incentive arrangements;
(l) Liens arising solely by virtue of any statutory or common law provision relating to
bankers liens, rights of set-off or similar rights, or existing solely with respect to cash and
Permitted Investments on deposit in one or more accounts maintained by any Loan Party or any
Restricted Subsidiary of the Borrower, in each case granted in the ordinary course of business in
favor of the bank or banks which such accounts are maintained;
(m) Liens arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into in the ordinary course of business, and Liens on
assets on loan, consignment or lease to the Borrower or a Restricted Subsidiary in the ordinary
course of business, including UCC financing statements related to such assets;
(n) Liens solely on any cash earnest money deposits made by the Borrower or any of its
Restricted Subsidiaries in connection with any letter of intent of a Permitted Acquisition or other
Investment otherwise permitted hereunder;
(o) Liens in favor of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of goods in the ordinary course of
business;
(p) Liens securing Capital Lease Obligations permitted under Section 6.01(e);
(q) Liens on (i) insurance policies and the proceeds thereof (whether accrued or not) and
rights or claims against an insurer, in each case securing insurance premium financings permitted
under Section 6.01(i) and (ii) deposits made in the ordinary course of business to secure
liabilities for premiums to insurance carriers;
(r) (i) Liens in the form of licenses, leases or subleases granted or created by the Borrower
or any of its Restricted Subsidiaries in the ordinary course of business, which licenses, leases or
subleases do not interfere, individually or in the aggregate, in any material respect with the
business of the Borrower and its Restricted Subsidiaries, taken as a whole and (ii) rights of
Persons in possession under recorded or unrecorded leases, licenses, occupancy or concession
agreements and easements entered into with the Borrower or any Restricted Subsidiary in the
ordinary course of business;
(s) Liens attaching to decommissioning trust funds as may be required pursuant to any
requirement of law; and
(t) other Liens in an aggregate amount not to exceed $50,000,000 at any time outstanding.
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SECTION 6.03
. Sale and Lease-Back Transactions.
Enter into any arrangement, directly or
indirectly, with any Person whereby it shall sell or transfer any property, real or personal, used
or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease
such property or other property which it intends to use for substantially the same purpose or
purposes as the property being sold or transferred unless (a) the sale or transfer of such property
is permitted by Section 6.05 and (b) any Capital Lease Obligations or Liens arising in connection
therewith are permitted by Sections 6.01 and 6.02, as the case may be.
SECTION 6.04
. Investments, Loans and Advances.
Purchase, hold or acquire any Equity
Interests, evidences of indebtedness or other securities of, make or permit to exist any loans or
advances to, or make or permit to exist any investment or any other interest in, any other Person,
except:
(a) (i) investments by the Borrower and the Restricted Subsidiaries existing on the Funding
Date in the Equity Interests of their respective Restricted Subsidiaries and joint ventures and
(ii) additional investments by the Borrower and the Restricted Subsidiaries in the Equity Interests
of the Restricted Subsidiaries;
provided
that (A) any such Equity Interests held by a Loan Party
shall be pledged pursuant to the Guarantee and Security Agreement (subject to the limitations
applicable to voting stock of a Foreign Subsidiary referred to therein) and (B) the aggregate
amount of investments made pursuant to this clause (a) after the Funding Date by Loan Parties in,
and loans and advances made pursuant to clause (c) below after the Funding Date by Loan Parties to,
Restricted Subsidiaries that are not Loan Parties (determined without regard to any write-downs or
write-offs of such investments, loans and advances) shall not exceed $10,000,000 at any time
outstanding;
(b) Permitted Investments;
(c) loans or advances made by the Borrower to any Restricted Subsidiary and made by any
Restricted Subsidiary to the Borrower or any other Restricted Subsidiary;
provided
that (i) any
such loans and advances made by a Loan Party shall be evidenced by a global intercompany note
pledged to the Collateral Agent for the ratable benefit of the Secured Parties pursuant to the
Guarantee and Security Agreement, (ii) such loans and advances shall be unsecured, (iii) if owed by
a Loan Party to a Restricted Subsidiary that is not a Loan Party, such loans and advances shall be
subordinated to the Secured Obligations (as defined in the Guarantee and Security Agreement)
pursuant to a Global Intercompany Note and (iv) the amount of such loans and advances made by Loan
Parties to Subsidiaries that are not Loan Parties pursuant to this clause (c) shall be subject to
the limitation set forth in clause (a) above;
(d) investments received in connection with the bankruptcy or reorganization of, or settlement
of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary
course of business;
(e) the Borrower and the Restricted Subsidiaries may make loans and advances in the ordinary
course of business to their respective employees so long as the aggregate principal amount thereof
during any fiscal year (determined without regard to any write-downs or write-offs of such loans
and advances) shall not exceed $10,000,000;
83
(f) investments in prepaid expenses, negotiable instruments held for collection and lease,
utility and workers compensation, performance and similar deposits entered into as a result of the
operations of the business in the ordinary course of business;
(g) the Borrower or any Restricted Subsidiary may acquire all or substantially all the assets
of a Person or division or line of business of such Person, or not less than 100% of the Equity
Interests (other than directors qualifying shares) of a Person (referred to herein as the
Acquired Entity
);
provided
that (i) such acquisition was not preceded by an unsolicited tender
offer for such Equity Interests by, or proxy contest initiated by, the Borrower or any Restricted
Subsidiary; (ii) the Acquired Entity shall be in a Permitted Business; and (iii) at the time of
such transaction (A) both before and after giving effect thereto, no Default or Event of Default
shall have occurred and be continuing; (B) the Borrower would be in compliance with the covenants
set forth in Sections 6.11 and 6.12 as of the most recently completed period of four consecutive
fiscal quarters ending prior to such transaction for which the financial statements and
certificates required by Section 5.01(a) or Section 5.01(b), as the case may be, and Section
5.01(c) have been delivered or for which comparable financial statements have been filed with the
Securities and Exchange Commission, after giving pro forma effect to such transaction and to any
other event occurring after such period as to which pro forma recalculation is appropriate
(including any other transaction described in this Section 6.04(g) occurring after such period) as
if such transaction had occurred as of the first day of such period; (C) if the total consideration
of such acquisition exceeds $25,000,000, the Borrower shall have delivered a certificate of a
Financial Officer, certifying as to the foregoing and containing reasonably detailed calculations
in support thereof, in form and substance satisfactory to the Administrative Agent and (D) the
Borrower shall comply, and shall cause the Acquired Entity to comply, with the applicable
provisions of Section 5.11 and the Security Documents (any acquisition of an Acquired Entity
meeting all the criteria of this Section 6.04(g) being referred to herein as a
Permitted
Acquisition
);
(h) Investments received as the non-cash portion of consideration received in connection with
transactions permitted pursuant to Section 6.05(b);
(i) Investments by the Borrower or any Restricted Subsidiary constituting receivables owing to
it, if created or acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms;
(j) Investments in connection with the Transactions;
(k) Investments resulting from the disposition of interests in the shipyard in Avondale,
Louisiana or the facilities in Waggaman, Louisiana, or Tallulah, Louisiana;
(l) Guarantees constituting Indebtedness permitted by Section 6.01(b);
(m) Investments by the Borrower in Swap Contracts permitted under Section 6.01(l);
(n) so long as no Default or Event of Default shall have occurred and be continuing or would
result therefrom, investments in an aggregate amount, in each case net of cash returned to the
Borrower or a Restricted Subsidiary in respect of such Investments, not to exceed the portion, if
any, of the Available Retained Basket Amount on the date of such election that the Borrower
84
elects to apply to this Section 6.04(n), such election to be specified in a written notice of
a Financial Officer of the Borrower calculating in reasonable detail the amount of the Available
Retained Basket Amount immediately prior to such election and the amount thereof elected to be so
applied (which amount shall, upon such application, increase the Available Retained Basket Usage
Amount);
(o) Investments constituting the guarantee of performance under a contract (other than
Indebtedness) in the ordinary course of business;
(p) investments, loans and advances by the Borrower and the Restricted Subsidiaries in
Unrestricted Subsidiaries or majority-owned joint ventures so long as the aggregate amount
invested, loaned or advanced pursuant to this Section 6.04(p) (determined without regard to any
write-downs or write-offs of such investments, loans and advances), in each case net of cash
returned to the Borrower or a Restricted Subsidiary in respect of such Investments, does not exceed
$150,000,000 in the aggregate; and
(q) in addition to investments permitted by paragraphs (a) through (o) above, additional
investments, loans and advances by the Borrower and the Restricted Subsidiaries so long as the
aggregate amount invested, loaned or advanced pursuant to this Section 6.04(q) (determined without
regard to any write-downs or write-offs of such investments, loans and advances), in each case net
of cash returned to the Borrower or a Restricted Subsidiary in respect of such Investments, does
not exceed $150,000,000 in the aggregate.
SECTION 6.05
. Mergers, Consolidations, Sales of Assets and Acquisitions.
(a) Merge into or
consolidate with any other Person, or permit any other Person to merge into or consolidate with it,
or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of
transactions) all or substantially all the assets (whether now owned or hereafter acquired) of the
Borrower or less than all the Equity Interests of any Restricted Subsidiary, or purchase or
otherwise acquire (in one transaction or a series of transactions) all or substantially all of the
assets of any other Person or division or line of business of such Person, except that (i) the
Borrower and any Restricted Subsidiary may purchase and sell inventory in the ordinary course of
business and (ii) if at the time thereof and immediately after giving effect thereto no Event of
Default or Default shall have occurred and be continuing (1) any Wholly Owned Restricted Subsidiary
may merge into the Borrower in a transaction in which the Borrower is the surviving corporation,
(2) any Wholly Owned Restricted Subsidiary may merge into or consolidate with any other Wholly
Owned Restricted Subsidiary in a transaction in which the surviving entity is a Wholly Owned
Restricted Subsidiary (
provided
that if any party to any such transaction is a Loan Party, the
surviving entity of such transaction shall be a Loan Party), (3) any Restricted Subsidiary may
dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower or
any other Restricted Subsidiary (which such recipient Restricted Subsidiary shall be a Loan Party
if the disposing Restricted Subsidiary is a Loan Party), (4) any Restricted Subsidiary may
liquidate (other than in connection with a merger or a consolidation which shall be governed by the
other clauses of this Section 6.05(a)) and distribute its assets ratably to its shareholders if the
Borrower determines in good faith that such liquidation or dissolution is in the best interests of
the Borrower and is not materially disadvantageous to the Lenders, and (5) the Borrower and the
Restricted Subsidiaries may make Permitted Acquisitions, including by means of mergers or
consolidations.
85
(b) Make any Asset Sale otherwise permitted under paragraph (a) above unless (i) such
Asset Sale is for consideration at least 75% of which consists of cash, (ii) such consideration is
at least equal to the fair market value of the assets being sold, transferred, leased or disposed
of and (iii) the fair market value of all assets sold, transferred, leased or disposed of pursuant
to this paragraph (b) shall not exceed the greater of (i) $100,000,000 and (ii) 3.0% of the
Consolidated Net Tangible Assets in any fiscal year.
SECTION 6.06
. Restricted Payments; Restrictive Agreements.
(a) Declare or make, or agree to
declare or make, directly or indirectly, any Restricted Payment, or incur any obligation
(contingent or otherwise) to do so;
provided
,
however
, that:
(i) any Restricted Subsidiary may declare and pay dividends or make other distributions
ratably to its equity holders;
(ii) the purchase, redemption or other acquisition or retirement for value of Equity
Interests of the Borrower in connection with issuances of Equity Interests pursuant to
employee benefit plans or otherwise in compensation to officers, directors or employees,
which purchase, redemption or other acquisition or retirement for value is in order to
minimize dilution; provided, however, that the aggregate cash consideration paid for such
purchase, redemption, acquisition or retirement for value does not exceed $10,000,000 in any
fiscal year; provided, further, that any unused amounts in any fiscal year may be carried
forward to one or more future periods subject to a maximum aggregate amount of repurchases
made pursuant to this clause (ii) not to exceed $20,000,000 in any fiscal year;
(iii) the Borrower may make Restricted Payments so long as (A) no Default or Event of
Default shall have occurred and be continuing or would result therefrom and (B) the Borrower
shall have a minimum of $300,000,000 of cash, Permitted Investments and/or availability
under the Revolving Credit Facility and (C) each such Restricted Payment pursuant to this
clause (iii) does not exceed the portion of the Available Retained Basket Amount on the date
of such Restricted Payment that the Borrower elects to apply to such Restricted Payment
pursuant to this Section 6.06(a)(iii), such election to be specified in a written notice of
a Financial Officer of the Borrower calculating in reasonable detail the amount of the
Available Retained Basket Amount immediately prior to such election and the amount thereof
elected to be so applied (which amount shall, upon such application, increase the Available
Retained Basket Usage Amount);
(iv) the Borrower and each Subsidiary of the Borrower may declare and make dividend
payments or other distributions payable solely in the common stock or other common Equity
Interests of such Person;
(v) the Borrower and each Subsidiary of the Borrower may make Restricted Payments for
the cashless exercise of options and warrants in respect of Equity Interests that represent
a portion of the exercise price of such options;
(vi) so long as no Default or Event of Default shall have occurred or be continuing or
result therefrom, the Borrower and each Subsidiary of the Borrower may
86
declare and make regular dividend payments or other distributions, or other Restricted
Payments, in an amount not to exceed $30,000,000 in any fiscal year;
provided
that the
amount of payments pursuant to this clause (vi) in respect of any fiscal year commencing
with the fiscal year ending on December 31, 2012 shall be increased by an amount equal to
unused amount of payments permitted pursuant to this clause (vi) in any preceding fiscal
year (the
Restricted Payment Rollover Amount
);
provided
that any portion of the Restricted
Payment Rollover Amount allocated to increase the amount of payments permitted pursuant to
this clause (vi) for one fiscal year shall not be allocated to increase the amount of such
permitted payments for any other fiscal year;
(vii) the Borrower may make Restricted Payments so long as (A) no Default or Event of
Default shall have occurred and be continuing or would result therefrom, (B) the Borrower
shall have a minimum of $300,000,000 of cash, Permitted Investments and/or availability
under the Revolving Credit Facility, (C) after giving effect thereto, the Leverage Ratio is
below 2.75:1 and (D) the sum of (1) the aggregate amount of such Restricted Payments
pursuant to this clause (vii)
plus
(2) the aggregate amount of Restricted Prepayments made
pursuant to Section 6.09(b)(iii), does not exceed $100,000,000 in the aggregate;
provided
that (x) any Restricted Payments made pursuant to this clause (vii) shall be applied to
increase dollar-for-dollar the Available Retained Basket Usage Amount and (y) such
application shall be specified in a written notice of a Financial Officer of the Borrower
calculating in reasonable detail the amount of the Available Retained Basket Amount
immediately prior to such application and the amount thereof to be so applied; and
(viii) the Borrower may consummate the Spin-off in accordance with the Distribution
Agreement, and the Borrower and its Restricted Subsidiaries may make other Restricted
Payments pursuant to the Transaction Documents.
(b) Enter into, incur or permit to exist any agreement or other arrangement that prohibits,
restricts or imposes any condition upon (i) the ability of Borrower or any Restricted Subsidiary to
create, incur or permit to exist any Lien upon any of its property or assets, or (ii) the ability
of any Restricted Subsidiary to pay dividends or other distributions with respect to any of its
Equity Interests or to make or repay loans or advances to the Borrower or any other Restricted
Subsidiary or to Guarantee Indebtedness of the Borrower or any other Restricted Subsidiary;
provided
that (A) the foregoing shall not apply to restrictions and conditions imposed by law or by
any Loan Document or Transaction Document, (B) the foregoing shall not apply to customary
restrictions and conditions contained in agreements relating to the sale of a Restricted Subsidiary
pending such sale,
provided
such restrictions and conditions apply only to the Restricted
Subsidiary that is to be sold and such sale is permitted hereunder, (C) the foregoing shall not
apply to (x) any agreement in effect on the date hereof or on the Funding Date and set forth on
Schedule 6.06 (including (1) in the case of any such agreement evidencing Indebtedness, any
Permitted Refinancing and (2) in the case of any other such agreement, any amendment or renewal
thereof that is not prohibited by any Loan Documents so long as such agreement, as so amended or
renewed is no more restrictive with respect to such limitation than such agreement prior to giving
effect to such amendment or renewal thereof) or (y) at the time any Person first becomes a
Subsidiary of the Borrower, so long as such agreement was not entered into solely in contemplation
of such Person becoming a Subsidiary of the Borrower, (D) clause (i) of the
87
foregoing shall not apply to restrictions or conditions imposed by any agreement relating to
secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to
the property or assets securing such Indebtedness, (E) clause (i) of the foregoing shall not apply
to (x) customary provisions in leases and other contracts restricting the assignment thereof and
(y) encumbrances or restrictions that are customary provisions in asset sale agreements, stock sale
agreements, sale leaseback agreements or other similar arrangements with respect to the disposition
or distribution of assets or property subject to such agreements, and (F) the foregoing shall not
apply to customary provisions in joint venture agreements, in each case applicable solely to such
joint venture entered into in the ordinary course of business.
SECTION 6.07
. Transactions with Affiliates.
Except for transactions between or among the
Restricted Companies, sell or transfer any property or assets to, or purchase or acquire any
property or assets from, or otherwise engage in any other transactions with, any of its Affiliates,
other than:
(i) transactions at prices and on terms and conditions not materially less favorable to
the Borrower or such Restricted Subsidiary than could be obtained on an arms-length basis
from unrelated third parties,
(ii) any indemnification agreement or any similar arrangement entered into with
directors, officers, consultants and employees of the Borrower and the Restricted
Subsidiaries in the ordinary course of business and the payment of fees and indemnities to
directors, officers, consultants and employees of the Borrower and the Restricted
Subsidiaries in the ordinary course of business,
(iii) transactions pursuant to permitted agreements in existence on the Effective Date
or expected to be existing on the Funding Date and, in each case, set forth on Schedule 6.07
or any amendment thereto to the extent such amendment is not adverse to the Lenders in any
material respect,
(iv) any employment agreement or employee benefit plan entered into by the Borrower or
any of the Restricted Subsidiaries in the ordinary course of business or consistent with
past practice and payments pursuant thereto,
(v) transactions otherwise permitted under Section 6.04 and Section 6.06,
(vi) the existence of, or the performance by the Borrower or any of the Restricted
Subsidiaries of its obligations under the terms of, the Distribution Agreement, or any
agreement contemplated thereunder to which it is a party as of the Effective Date,
provided
,
however
, that the existence of, or the performance by the Borrower or any Subsidiary of
obligations under any future amendment to any such existing agreement or under any similar
agreement entered into after the Effective Date shall only be permitted by this clause (vi)
to the extent that the terms of any such amendment or new agreement are not otherwise
disadvantageous to the Lenders in any material respect,
(vii) any transaction or series of related transactions with an aggregate value or
payment (and, if applicable, annual value or payment) of less than $1,000,000;
88
(viii) transactions with any Affiliate for the purchase or sale of goods, products,
parts and services entered into in the ordinary course of business, and
(ix) the Transactions.
SECTION 6.08
. Business of Borrower and Restricted Subsidiaries and Titan II.
(a) Engage at
any time in any business other than the Permitted Business.
(b) Permit or cause Titan II, after (but not including) the Funding Date, to engage at any
time in any business or have any assets or liabilities, other than (i) its liabilities as a
guarantor under the Titan II Guarantees or liabilities for which Titan II is indemnified under the
Transaction Documents, (ii) liabilities reasonably incurred in connection with the maintenance of
Titan IIs corporate existence or arising from the Transaction Documents, and (iii) indemnities
from the Borrower in support of the foregoing. For the avoidance of doubt, it is understood and
agreed that in no event shall Titan II be merged into or consolidated with the Borrower or any
other Subsidiary, other than an Unrestricted Subsidiary formed solely for the purpose of such
merger that does not have any assets or operations (other than assets or operations incidental to
its formation); provided that after such merger such surviving Unrestricted Subsidiary shall be
deemed to be Titan II thereafter for purposes of this Agreement (including without limitation,
Section 5.13).
SECTION 6.09
. Certain Other Indebtedness.
(a) Permit any waiver, supplement, modification,
amendment, termination or release of any indenture, instrument or agreement pursuant to which any
Senior Notes, any other Permitted Senior Indebtedness or any Permitted Subordinated Indebtedness is
outstanding if the effect of such waiver, supplement, modification, amendment, termination or
release would materially impair the value of the interest or rights of any Loan Party thereunder or
would materially impair the rights or interests of the Agent or any Lender, other than any
termination thereof in connection with the payment in full of all obligations thereunder in
accordance with the terms of this Agreement (including, without limitation, Section 6.09(b)
hereof).
(b) Prepay, redeem, purchase, defease or otherwise satisfy prior to the scheduled maturity
thereof in any manner (it being understood that payments of regularly scheduled interest shall be
permitted) any Senior Notes, any other Permitted Senior Indebtedness or any Permitted Subordinated
Indebtedness or make any payment in violation of any subordination terms of any Permitted
Subordinated Indebtedness (collectively,
Restricted Prepayments
), except:
(i) the refinancing thereof with net cash proceeds of (A) in the case of Permitted
Subordinated Indebtedness, any issuance of Qualified Capital Stock or other Permitted
Subordinated Indebtedness, and (B) in the case of the Senior Notes or any other Permitted
Senior Indebtedness, any issuance of Qualified Capital Stock, Permitted Subordinated
Indebtedness or other Permitted Senior Indebtedness;
(ii) the conversion of any Permitted Subordinated Indebtedness, any Senior Notes or any
other Permitted Senior Indebtedness to Qualified Capital Stock;
89
(iii) so long as (A) no Default or Event of Default shall have occurred and be
continuing or would result therefrom and (B) no Revolving Loans are outstanding at such
time, Restricted Prepayments in an amount, in the case of each such Restricted Prepayment,
up to the portion, if any, of the Available Retained Basket Amount on the date of such
Restricted Prepayment that the Borrower elects to apply to this Section 6.09(b)(iii), such
election to be specified in a written notice of a Financial Officer of the Borrower
calculating in reasonable detail the amount of the Available Retained Basket Amount
immediately prior to such election and the amount thereof elected to be so applied (which
amount shall, upon such application, increase the Available Retained Basket Usage Amount);
(iv) so long as (A) no Default or Event of Default shall have occurred and be
continuing or would result therefrom, (B) the Borrower has at such time a minimum of
$300,000,000 of cash, Permitted Investments and/or availability under the Revolving Credit
Facility, (C) after giving effect thereto, the Leverage Ratio is below 2.75:1 and (D) the
sum of (1) the aggregate amount of such Restricted Prepayments pursuant to this clause (iv)
plus
(2) the aggregate amount of Restricted Payments made pursuant to Section 6.06(a)(vii)
does not exceed $100,000,000 in the aggregate; provided that (x) any Restricted Prepayments
made pursuant to this clause (iv) shall be applied to increase dollar-for dollar the
Available Retained Basket Usage Amount and (y) such application shall be specified in a
written notice of a Financial Officer of the Borrower calculating in reasonable detail the
amount of the Available Retained Basket Amount immediately prior to such application and the
amount thereof to be so applied; and
(v) in addition to Restricted Prepayments permitted by paragraphs (i) through (iii)
above, additional Restricted Prepayments in an aggregate amount not to exceed $100,000,000
during the term of this Agreement;
provided
that at the time of any such prepayment, (A) no
Default or Event of Default shall have occurred and be continuing or would result therefrom
and (B) the Borrower has at such time a minimum of $300,000,000 of cash, Permitted
Investments and/or availability under the Revolving Credit Facility.
SECTION 6.10
. Capital Expenditures.
Permit the aggregate amount of Capital Expenditures made
by the Borrower and the Restricted Subsidiaries in any period set forth below to exceed (i) the
amount of such Capital Expenditures made with the portion, if any, of the Available Retained Basket
Amount on the date of any election that the Borrower elects to apply to this Section 6.10(i), such
election to be specified in a written notice of a Financial Officer of the Borrower calculating in
reasonable detail the amount of the Available Retained Basket Amount immediately prior to such
election and the amount thereof elected to be so applied (which amount shall, upon such Capital
Expenditure, increase the Available Retained Basket Usage Amount), plus (ii) the amount set forth
below for such period:
|
|
|
|
|
Fiscal Year
|
|
Amount
|
2011
|
|
$
|
350,000,000
|
|
2012
|
|
$
|
200,000,000
|
|
2013
|
|
$
|
200,000,000
|
|
2014
|
|
$
|
200,000,000
|
|
2015 and thereafter
|
|
$
|
200,000,000
|
|
90
The amount of permitted Capital Expenditures set forth in the table above in respect of any
fiscal year commencing with the fiscal year ending on December 31, 2012 (the
Specified Permitted
CapEx Amount
) shall be increased (but not decreased) by the amount of the unused Specified
Permitted CapEx Amount for the immediately preceding fiscal year (the
CapEx Rollover Amount
);
provided
that any CapEx Rollover Amount shall be available to be used in such fiscal year only
after the Specified Permitted CapEx Amount for such fiscal year has been fully used in such fiscal
year. In addition, the amount of permitted Capital Expenditures that would otherwise be permitted
in any fiscal year pursuant to this Section 6.10 (including as a result of the preceding sentence)
may be increased by an amount not to exceed 50% of the Specified Permitted CapEx Amount for the
immediately succeeding fiscal year (the
CapEx Pull Forward Amount
);
provided
that before any
Capital Expenditures are made in a fiscal year pursuant to the CapEx Pull Forward Amount, Capital
Expenditures shall have been made in such fiscal year in an amount equal to the Capital
Expenditures otherwise permitted in such fiscal year (including as a result of the application of
the preceding sentence). The actual CapEx Pull Forward Amount that is used in respect of any such
fiscal year shall reduce, on a dollar-for-dollar basis, the Specified Permitted CapEx Amount for
the immediately succeeding fiscal year. Notwithstanding anything to the contrary in this
paragraph, the amount of Capital Expenditures permitted to be made pursuant to clause (ii) of this
Section 6.10 (including as a result of the application of the preceding sentences) in any fiscal
year shall not exceed 200% of the Specified Permitted CapEx Amount for such fiscal year.
SECTION 6.11
. Interest Coverage Ratio.
Permit the Interest Coverage Ratio for any period of
four consecutive fiscal quarters, in each case taken as one accounting period, ending on a date or
during any period set forth below to be less than the ratio set forth opposite such date or period
below:
|
|
|
|
|
Date or Period
|
|
Ratio
|
Quarter ending March 31, 2011
|
|
|
3.50:1
|
|
Quarter ending June 30, 2011
|
|
|
3.50:1
|
|
Quarter ending September 30, 2011
|
|
|
3.50:1
|
|
Quarter ending December 31, 2011
|
|
|
3.50:1
|
|
Quarter ending March 31, 2012
|
|
|
3.50:1
|
|
Quarter ending June 30, 2012
|
|
|
3.50:1
|
|
Quarter ending September 30, 2012
|
|
|
3.75:1
|
|
Quarter ending December 31, 2012
|
|
|
3.75:1
|
|
Quarter ending March 31, 2013
|
|
|
3.75:1
|
|
Quarter ending June 30, 2013
|
|
|
3.75:1
|
|
Quarter ending September 30, 2013
|
|
|
4.00:1
|
|
Quarter ending December 31, 2013
|
|
|
4.00:1
|
|
Quarter ending March 31, 2014
|
|
|
4.25:1
|
|
Quarter ending June 30, 2014
|
|
|
4.25:1
|
|
Quarter ending September 30, 2014
|
|
|
4.25:1
|
|
Quarter ending December 31, 2014
|
|
|
4.25:1
|
|
Quarter ending March 31, 2015
and thereafter
|
|
|
4.50:1
|
|
91
SECTION 6.12
. Maximum Leverage Ratio.
Permit the Leverage Ratio as of the last day of any
period set forth below to be greater than the ratio set forth opposite such period below:
|
|
|
|
|
Period
|
|
Ratio
|
Quarter ending March 31, 2011
|
|
|
4.50:1
|
|
Quarter ending June 30, 2011
|
|
|
4.50:1
|
|
Quarter ending September 30, 2011
|
|
|
4.50:1
|
|
Quarter ending December 31, 2011
|
|
|
4.25:1
|
|
Quarter ending March 31, 2012
|
|
|
4.25:1
|
|
Quarter ending June 30, 2012
|
|
|
4.25:1
|
|
Quarter ending September 30, 2012
|
|
|
4.00:1
|
|
Quarter ending December 31, 2012
|
|
|
4.00:1
|
|
Quarter ending March 31, 2013
|
|
|
3.75:1
|
|
Quarter ending June 30, 2013
|
|
|
3.75:1
|
|
Quarter ending September 30, 2013
|
|
|
3.50:1
|
|
Quarter ending December 31, 2013
|
|
|
3.25:1
|
|
Quarter ending March 31, 2014
|
|
|
3.00:1
|
|
Quarter ending June 30, 2014
|
|
|
3.00:1
|
|
Quarter ending September 30, 2014
|
|
|
3.00:1
|
|
Quarter ending December 31, 2014
|
|
|
3.00:1
|
|
Quarter ending March 31, 2015 and thereafter
|
|
|
2.75:1
|
|
SECTION 6.13
. Fiscal Year.
With respect to the Borrower, change its fiscal year-end to a
date other than December 31.
SECTION 6.14.
Transactions.
For the avoidance of doubt, notwithstanding anything else to the
contrary in this Agreement, the Borrower and the Restricted Subsidiaries shall be permitted to
consummate the Transactions.
ARTICLE 7
Events of Default
If any of the following events (
Events of Default
) shall occur:
(a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation
in respect of any LC Disbursement when and as the same shall become due and payable, whether at the
due date thereof or at a date fixed for prepayment thereof or otherwise;
(b) the Borrower shall fail to pay any interest on any Loan or LC Disbursement or any fee or
any other amount (other than an amount referred to in clause (a) of this Article) payable under
this Agreement or any other Loan Document when and as the same shall become due and payable, and
such failure shall continue unremedied for a period of five days;
92
(c) any representation or warranty made or deemed made by or on behalf of the Borrower or any
Restricted Subsidiary in or in connection with this Agreement, any other Loan Document, the
borrowings or issuances of Letters of Credit hereunder or any amendment or modification hereof or
thereof or waiver hereunder or thereunder, or in any report, certificate, financial statement or
other document furnished pursuant to or in connection with this Agreement or any amendment or
modification hereof or waiver hereunder, shall prove to have been incorrect in any material respect
when made, deemed made or furnished;
(d) the Borrower or any Restricted Subsidiary shall fail to observe or perform any covenant,
condition or agreement contained in Sections 2.05(k)(ii), 5.02(a), 5.03 (with respect to the
Borrowers existence), 5.08, 5.12 or in Article 6;
(e) the Borrower or any Restricted Subsidiary shall fail to observe or perform any covenant,
condition or agreement contained in this Agreement or in any Loan Document (other than those
specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied
for a period of 30 days after notice thereof from the Administrative Agent to the Borrower (which
notice will be given at the request of any Lender);
(f) the Borrower or any Restricted Subsidiary shall fail to pay any principal or interest,
regardless of amount, in respect of any Material Indebtedness, when and as the same shall become
due and payable;
(g) any other event or condition occurs that results in any Material Indebtedness becoming due
prior to its scheduled maturity or that enables or permits (with or without the giving of notice,
the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or
agent on its or their behalf to cause any Material Indebtedness to become due, or to require the
prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity (and the
lapse of any applicable grace periods in respect thereof);
provided
that this clause (g) shall not
apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the
property or assets securing such Indebtedness;
(h) an involuntary case or other proceeding shall be commenced or an involuntary petition
shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower
or any Significant Subsidiary or its debts, or of a substantial part of its property or assets,
under any Federal, state or foreign bankruptcy, insolvency, receivership or other similar law now
or hereafter in effect or seeking (ii) the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for the Borrower or any Significant Subsidiary or for
a substantial part of its assets, and, in any such case, such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be
entered;
(i) the Borrower or any Significant Subsidiary shall (i) voluntarily commence any proceeding
or file any petition seeking liquidation, reorganization or other relief under any Federal, state
or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii)
consent to the institution of, or fail to contest in a timely and appropriate manner, any
proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the
appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for
the
93
Borrower or any Significant Subsidiary or for a substantial part of its assets, (iv) become
unable, admit in writing its inability or fail generally to pay its debts as they become due, (v)
file an answer admitting the material allegations of a petition filed against it in any such
proceeding, (vi) make a general assignment for the benefit of creditors or (vii) take any action
for the purpose of effecting any of the foregoing;
(j) one or more judgments for (x) the payment of money in an aggregate amount in excess of
$40,000,000 (to the extent not covered by independent third-party insurance as to which the insurer
is rated at least A by A.M. Best Company and does not dispute coverage) or (y) injunctive relief
which would reasonably be expected to result in a Material Adverse Effect shall be rendered against
the Borrower, any Restricted Subsidiary or any combination thereof and the same shall, in each
case, remain undischarged for a period of 30 consecutive days during which execution shall not be
effectively stayed, by reason of a pending appeal or otherwise, or any action shall be legally
taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Restricted
Subsidiary to enforce any such judgment;
(k) an ERISA Event shall have occurred that, in the reasonable opinion of the Required
Lenders, when taken together with all other ERISA Events that have occurred, would be expected to
result in liability of the Borrower and its Restricted Subsidiaries in an aggregate amount
exceeding $40,000,000;
(l) any Guarantee under the Guarantee and Security Agreement for any reason shall cease to be
in full force and effect (other than in accordance with its terms), or any Guarantor shall deny in
writing that it has any further liability under the Guarantee and Security Agreement (other than as
a result of the discharge of such Guarantor in accordance with the terms of the Loan Documents);
(m) any security interest purported to be created by any Collateral Document in any material
portion of the Collateral shall cease to be, or shall be asserted by the Borrower or any other Loan
Party not to be, a valid, perfected, first priority (except as otherwise expressly provided in this
Agreement or such Collateral Document) security interest in the securities, assets or properties
covered thereby;
(n) any Permitted Subordinated Indebtedness of the Borrower and its Restricted Subsidiaries
constituting Material Indebtedness shall cease (or any Loan Party or an Affiliate of any Loan Party
shall so assert), for any reason, to be validly subordinated to the Obligations as provided in the
agreements evidencing such Indebtedness;
(o) a Change in Control shall occur; or
(p) the Spin-off shall not have occurred as soon as practicable and within 5 Business Days of
the Funding Date;
then, and in every such event (other than an event with respect to the Borrower described in clause
(h) or (i) of this Article), and at any time thereafter during the continuance of such event, the
Administrative Agent may, and at the request of the Required Lenders (or in the case of terminating
the Revolving Credit Commitments pursuant to clause (i) below, the Required
94
Revolving Credit Lenders), shall, by notice to the Borrower, take any or all of the following
actions, as applicable, at the same or different times: (i) terminate the Commitments, and
thereupon the Commitments shall terminate immediately, (ii) declare the Loans then outstanding to
be due and payable in whole (or in part, in which case any principal not so declared to be due and
payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans
so declared to be due and payable, together with accrued interest thereon and all fees and other
obligations of the Borrower accrued hereunder, shall become due and payable immediately, without
presentment, demand, protest or other notice of any kind, all of which are hereby waived by the
Borrower, and (iii) exercise on behalf of itself and the Lenders all rights and remedies available
to it and the Lenders under the Loan Documents or applicable law;
provided
that in case of any
event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments
shall automatically terminate and the principal of the Loans then outstanding, together with
accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder,
shall automatically become due and payable, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Borrower. Nothing in this Agreement shall
constitute a waiver of any rights or remedies the Lenders may otherwise have, including setoff
rights.
ARTICLE 8
The Administrative Agent and the Collateral Agent
Each of the Lenders and the Issuing Bank hereby irrevocably appoints the Administrative Agent
and the Collateral Agent (for purposes of this Article 8, the Administrative Agent and the
Collateral Agent are referred to collectively as the
Agents
) as its agent and authorizes the
Agents to take such actions on its behalf and to exercise such powers as are delegated to such
Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably
incidental thereto. Without limiting the generality of the foregoing, the Agents are hereby
expressly authorized to (i) execute any and all documents (including releases) with respect to the
Collateral and the rights of the Secured Parties with respect thereto, as contemplated by and in
accordance with the provisions of this Agreement and the Collateral Documents and (ii) negotiate,
enforce or the settle any claim, action or proceeding affecting the Lenders in their capacity as
such, at the direction of the Required Lenders, which negotiation, enforcement or settlement will
be binding upon each Lender.
Neither Agent shall have any duties or obligations except those expressly set forth in the
Loan Documents. Without limiting the generality of the foregoing, (a) neither Agent shall be
subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and
is continuing, (b) neither Agent shall have any duty to take any discretionary action or exercise
any discretionary powers, except discretionary rights and powers expressly contemplated hereby that
such Agent is required to exercise in writing as directed by the Required Lenders (or such other
number or percentage of the Lenders as shall be necessary under the circumstances as provided in
Section 9.02), and (c) except as expressly set forth in the Loan Documents, neither Agent shall not
have any duty to disclose, and nor shall it be liable for the failure to disclose, any information
relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank
serving as the Administrative Agent and/or Collateral Agent or any of its
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Affiliates in any capacity. Neither Agent shall be liable for any action taken or not taken
by it with the consent or at the request of the Required Lenders (or such other number or
percentage of the Lenders as shall be necessary under the circumstances as provided in Section
9.02) or in the absence of its own gross negligence or willful misconduct. Neither Agent shall be
deemed to have knowledge of any Default unless and until written notice thereof is given to such
Agent by the Borrower or a Lender, and neither Agent shall be responsible for or have any duty to
ascertain or inquire into (i) any statement, warranty or representation made in or in connection
with any Loan Document, (ii) the contents of any certificate, report or other document delivered
thereunder or in connection therewith, (iii) the performance or observance of any of the covenants,
agreements or other terms or conditions set forth in any Loan Document, (iv) the validity,
enforceability, effectiveness or genuineness of this Loan Document or any other agreement,
instrument or document, or (v) the satisfaction of any condition set forth in Article 4 or
elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be
delivered to such Agent and to confirm the occurrence of the Effective Date in accordance with
Section 4.02.
The bank serving as the Administrative Agent and/or the Collateral Agent hereunder shall have
the same rights and powers in its capacity as a Lender as any other Lender and may exercise the
same as though it were not an Agent, and such bank and its Affiliates may accept deposits from,
lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or
other Affiliate thereof as if it were not an Agent hereunder.
Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon,
any notice, request, certificate, consent, statement, instrument, document or other writing
believed by it to be genuine and to have been signed or sent by the proper Person. Each Agent also
may rely upon any statement made to it orally or by telephone and believed by it to have been made
by the proper Person, and shall not incur any liability for relying thereon. Each Agent may
consult with legal counsel (who may be counsel for the Borrower), independent accountants and other
experts selected by it, and shall not be liable for any action taken or not taken by it in
accordance with the advice of any such counsel, accountants or experts.
Each Agent may perform any and all its duties and exercise its rights and powers by or through
any one or more sub-agents appointed by it. Each Agent and any such sub-agent may perform any and
all of its duties and exercise its rights and powers by or through their respective Related
Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent
and to the Related Parties of each Administrative Agent and any such sub-agent, and shall apply to
their respective activities in connection with the syndication of the Senior Credit Facilities as
well as activities as Agent.
Subject to the appointment and acceptance of a successor Agent as provided below, each Agent
may resign at any time by notifying the Lenders, the Issuing Banks and the Borrower. Upon any such
resignation, the Required Lenders shall have the right to appoint a successor (such successor to be
approved by the Borrower, such approval not to be unreasonably withheld or delayed; provided,
however, if an Event of Default shall exist at such time, no approval of the Borrower shall be
required). If no successor shall have been so appointed by the Required Lenders and shall have
accepted such appointment within 30 days after the retiring Agent gives notice of its resignation,
then the retiring Agent may, on behalf of the Lenders and the Issuing
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Bank, appoint a successor Agent which shall be a bank with an office in New York, New York, or
an Affiliate of any such bank. If no successor Agent has been appointed pursuant to the
immediately preceding sentence by the 30th day after the date such notice of resignation was given
by such Agent, such Agents resignation shall become effective and the Required Lenders shall
thereafter perform all the duties of such Agent hereunder and/or under any other Loan Document
until such time, if any, as the Required Lenders appoint a successor Administrative Agent and/or
Collateral Agent, as the case may be. Any such resignation by such Agent hereunder shall also
constitute, to the extent applicable, its resignation as an Issuing Bank and the Swingline Lender,
in which case such resigning Agent (x) shall not be required to issue any further Letters of Credit
or make any additional Swingline Loans hereunder and (y) shall maintain all of its rights, duties
and obligations as Issuing Bank or Swingline Lender, as the case may be, with respect to any
Letters of Credit issued by it, or Swingline Loans made by it, prior to the date of such
resignation. Upon the acceptance of its appointment as Agent hereunder by a successor, such
successor shall succeed to and become vested with all the rights, powers, privileges and duties of
the retiring Agent and, if applicable, as an Issuing Bank (and shall issue letters of credit in
substitution for the Letters of Credit, if any, outstanding at the time of such succession or make
other arrangements satisfactory to the retiring Issuing Bank to effectively assume the obligations
of the retiring Issuing Bank with respect to such Letters of Credit) and a Swingline Lender, and
the retiring Agent shall be discharged from its duties and obligations hereunder. The fees payable
by the Borrower to a successor Agent shall be the same as those payable to its predecessor unless
otherwise agreed between the Borrower and such successor. After the Agents resignation hereunder,
the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such
retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken
or omitted to be taken by any of them while acting as Agent.
Each Lender acknowledges that it has, independently and without reliance upon the Agents or
any other Lender and based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that
it will, independently and without reliance upon the Agents or any other Lender and based on such
documents and information as it shall from time to time deem appropriate, continue to make its own
decisions in taking or not taking action under or based upon this Agreement or any other Loan
Document, any related agreement or any document furnished hereunder or thereunder.
It is agreed that the Syndication Agent, Documentation Agents, Lead Arrangers and Joint
Bookrunners shall, in their capacities as such, have no duties or responsibilities under this
Agreement or liability in connection with this Agreement. None of the Syndication Agent,
Documentation Agents, Lead Arrangers and Joint Bookrunners, in their capacities as such, has or is
deemed to have any fiduciary relationship with any Lender.
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ARTICLE 9
Miscellaneous
SECTION 9.01
. Notices.
(a) Except in the case of notices and other communications expressly
permitted to be given by telephone (and subject to paragraph (b) below), all notices and other
communications provided for herein shall be in writing and shall be delivered by hand or overnight
courier service, mailed by certified or registered mail or sent by telecopy, as follows:
(i) if to the Borrower, to it at Huntington Ingalls Industries, Inc., 4101 Washington
Avenue, Newport News, Virginia 23607, Attention of D.R. Wyatt (Telecopy No. (757) 688-6449);
(ii) if to the Administrative Agent to JPMorgan Chase Bank, N.A., Loan and Agency
Services Group, 1111 Fannin, 8th Floor, Houston, Texas 77002, Attention of Omar Jones
(Telecopy No. (713) 750-2938), with a copy to JPMorgan Chase Bank, N.A., 383 Madison Avenue,
New York, New York 10179, Attention of Matthew Massie (Telecopy No. (212) 270-5100, E-mail:
Matthew.Massie@jpmorgan.com);
(iii) if to the Swingline Lenders, to them at (A) JPMorgan Chase Bank, N.A., Loan and
Agency Services Group, 1111 Fannin, 8th Floor, Houston, Texas 77002, Attention of Omar Jones
(Telecopy No. (713) 750-2938), with a copy to JPMorgan Chase Bank, N.A., 383 Madison Avenue,
New York, New York 10179, Attention of Matthew Massie (Telecopy No. (212) 270-5100, E-mail:
Matthew.Massie@jpmorgan.com); and
(iv) if to any other Lender or Issuing Bank, to it at its address (or telecopy number)
set forth in its Administrative Questionnaire.
(b) Notices and other communications to the Lenders hereunder may be delivered or furnished by
electronic communications pursuant to procedures approved by the Administrative Agent;
provided
that the foregoing shall not apply to notices pursuant to Article 2 unless otherwise agreed by the
Administrative Agent and the applicable Lender. The Administrative Agent or the Borrower may, in
its discretion, agree to accept notices and other communications to it hereunder by electronic
communications pursuant to procedures approved by it;
provided
that approval of such procedures may
be limited to particular notices or communications.
(c) Any party hereto may change its address or telecopy number for notices and other
communications hereunder by notice to the other parties hereto. All notices and other
communications given to any party hereto in accordance with the provisions of this Agreement shall
be deemed to have been given on the date of receipt.
(d) Each Lender is responsible for providing prompt notice to the Administrative Agent of any
changes to the information set forth in its Administrative Questionnaire.
SECTION 9.02
. Waivers; Amendments.
(a) No failure or delay by the Administrative Agent, any
Issuing Bank or any Lender in exercising any right or power hereunder or under any Loan Document
shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or
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power, preclude any other or further exercise thereof or the exercise of any other right or
power. The rights and remedies of the Administrative Agent, each Issuing Bank and the Lenders
hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or
remedies that they would otherwise have. No waiver of any provision of this Agreement or any other
Loan Document or consent to any departure by the Borrower or any other Loan Party therefrom shall
in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and
then such waiver or consent shall be effective only in the specific instance and for the purpose
for which given. Without limiting the generality of the foregoing, the making of a Loan or
issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of
whether the Administrative Agent, any Lender or the Issuing Bank may have had notice or knowledge
of such Default at the time.
(b) Neither this Agreement nor any other Loan Document (other than any LC Continuing
Agreement) nor any provision hereof or thereof may be waived, amended or modified except (i) in the
case of this Agreement, pursuant to an agreement or agreements in writing entered into by the
Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent
of the Required Lenders and (ii) in the case of any other Loan Document, pursuant to an agreement
or agreements in writing entered into by each party thereto and the Administrative Agent with the
consent of the Required Lenders;
provided
that no such agreement shall (i) increase the Commitment
of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any
Loan or any LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable
hereunder, without the written consent of each Lender affected thereby, (iii) postpone the
scheduled date of payment of the principal amount of any Loan or any LC Disbursement, or any
interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such
payment, or postpone the scheduled date of expiration of any Commitment, without the written
consent of each Lender affected thereby, (iv) change Section 2.19(b), 2.19(c) or any other
provision of the Loan Documents in a manner that would alter the pro rata sharing of payments
required thereby, without the written consent of each affected Lender, (v) change any of the
provisions of this Section or the definition of Required Lenders, Required Revolving Credit
Lenders, or any other provision hereof specifying the number or percentage of Lenders required to
waive, amend or modify any rights hereunder or make any determination or grant any consent
hereunder, without the written consent of each Lender, (vi) release any Guarantor (other than in
connection with the sale of such Guarantor in a transaction permitted by Section 6.05) without the
written consent of each Lender, (vii) release all or substantially all of the Collateral without
the written consent of each Lender, (viii) change any of the provisions in Section 9.04(b) in such
a way that imposes greater restrictions on a Lenders ability to assign all or a portion of its
rights and obligations under this Agreement without the written consent of each Lender adversely
affected thereby, (ix) change any of the provisions of Section 15
(Application of Proceeds
) of the
Guarantee and Security Agreement without the consent of each Lender and (x) amend, modify,
supplement or waive any condition precedent to any Revolving Loan set forth in Section 4.03 without
the written consent of the Required Revolving Credit Lenders;
provided further
that no such
agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent,
any Issuing Bank or any Swingline Lender hereunder without the prior written consent of the
Administrative Agent, such Issuing Bank or such Swingline Lender, as the case may be.
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Notwithstanding anything to the contrary contained in this Section 9.02(b), on the Funding
Date the Administrative Agent and the Borrower shall be permitted, without the consent of any other
Lender, to complete the column under Repayment Dates in the table set forth in Section 2.10(a) to
reflect repayment dates that are in successive 3-month intervals from the Funding Date.
(c) In connection with any proposed amendment, modification, waiver or termination (a
Proposed Change
) requiring the consent of all the Lenders, if the consent of Lenders representing
the Required Lenders to such Proposed Change is obtained, but the consent of any other Lender is
not obtained (any such Lender whose consent is not obtained as described in this Section 9.02(c)
being referred to as a
Non-Consenting Lender
), then, at the Borrowers request, any assignee
identified by the Borrower (with the consent of such assignee) that is a Lender, an Affiliate of a
Lender, an Approved Fund or otherwise reasonably acceptable to the Administrative Agent (and that
is not a Non-Consenting Lender) shall have the right, after consultation of the Borrower with the
Administrative Agent (and with the consent of the Administrative Agent to the extent such
assignment would require its consent under Section 9.04(b)(i)), to purchase from such
Non-Consenting Lender, and such Non-Consenting Lender agrees that it shall, upon the Borrowers
request, sell and assign to such assignee, at no expense to such Non-Consenting Lender (including
with respect to any processing and recordation fees that may be applicable pursuant to Section
9.04(b)(ii)), all of its interests, rights and obligations with respect to the Class of Loans or
Commitments that is the subject of such Proposed Change, for an amount equal to the principal
balance of all Loans (and funded participations in Swingline Loans and unreimbursed LC
Disbursements) held by such Non-Consenting Lender and all accrued interest, accrued fees and other
amounts with respect thereto through the date of sale (including amounts under Sections 2.16, 2.17
and 2.18), such purchase and sale to be consummated pursuant to an executed Assignment and
Assumption in accordance with Section 9.04(b) (which Assignment and Assumption need not be signed
by such Non-Consenting Lender).
SECTION 9.03
. Expenses; Indemnity; Damage Waiver.
(a) The Borrower shall pay (i) all
reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates and the
Lead Arrangers, the Collateral Agent, each Issuing Bank and Swingline Lender, including the
reasonable fees, charges and disbursements of Davis Polk & Wardwell LLP and any other special or
local counsel for the Administrative Agent as may have been retained by the Administrative Agent
after consultation with the Borrower, in connection with the arrangement and syndication of the
credit facilities provided for herein, the preparation, execution, delivery and administration of
this Agreement (including expenses incurred in connection with due diligence and initial and
ongoing Collateral examination and the reasonable fees, disbursements and the charges for no more
than one counsel in each jurisdiction where Collateral is located) or any amendments, modifications
or waivers of the provisions hereof (in each case whether or not the Transactions are consummated),
(ii) all reasonable out-of-pocket expenses incurred by any Issuing Bank in connection with the
issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment
thereunder and (iii) all reasonable out-of-pocket expenses incurred by the Administrative Agent,
the Collateral Agent, any Issuing Bank or any Lender, including the fees, charges and disbursements
of any counsel for the Administrative Agent, the Collateral Agent, any Issuing Bank or any Lender,
in connection with the enforcement or
100
protection of its rights under or in connection with this Agreement and the other Loan
Documents, including its rights under this Section, or in connection with the Loans made or Letters
of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout,
restructuring or negotiations in respect of such Loans or Letters of Credit.
(b) The Borrower shall indemnify the Administrative Agent, the Collateral Agent, the Lead
Arrangers each Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons
(each such Person being called an
Indemnitee
) against, and hold each Indemnitee harmless from,
any and all losses, claims, damages, liabilities and related expenses, including the fees, charges
and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee
arising out of, in connection with, or as a result of (i) the arrangement and the syndication of
the credit facilities provided for herein, the execution or delivery of this Agreement or any other
Loan Document or any agreement or instrument contemplated hereby, the performance by the parties
hereto of their respective obligations hereunder or the consummation of the Transactions or any
other transactions contemplated hereby, (ii) any Loan or Letter of Credit or the use of the
proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a
Letter of Credit if the documents presented in connection with such demand do not strictly comply
with the terms of such Letter of Credit), (iii) any actual or alleged presence or release or
threatened release of Hazardous Materials at, under, on or from any property owned or operated by
the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the
Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation,
investigation or proceeding relating to any of the foregoing, whether based on contract, tort or
any other theory and regardless of whether any Indemnitee is a party thereto and regardless of
whether such matter is initiated by a third party or by the Borrower or any Affiliate thereof;
provided
that such indemnity shall not, as to any Indemnitee, be available to the extent that such
losses, claims, damages, liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or
willful misconduct of such Indemnitee or its Affiliates, officers, directors, employees, advisors
or agents. This Section 9.03(b) shall not apply with respect to Taxes other than any Taxes that
represent losses or damages from any non-Tax claim.
(c) To the extent that the Borrower fails to pay any amount required to be paid by it to the
Administrative Agent, the Issuing Bank or the Swingline Lender under paragraph (a) or (b) of this
Section, each Lender severally agrees to pay to the Administrative Agent, the Issuing Bank or the
Swingline Lender, as the case may be, such Lenders pro rata share (determined as of the time that
the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount;
provided
that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as
the case may be, was incurred by or asserted against the Administrative Agent, the Issuing Bank or
the Swingline Lender in its capacity as such. For purposes hereof, a Lenders
pro rata share
shall be determined based upon its share of the sum of the aggregate Revolving Credit Exposure,
outstanding Term Loans and unused Commitments at the time (in each case, determined as if no Lender
were a Defaulting Lender).
(d) To the extent permitted by applicable law, neither the Borrower nor any Indemnitee shall
have liability for any special, indirect, consequential or punitive damages (as opposed to direct
or actual damages) arising out of, in connection with or as a result of this Agreement or
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any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of
Credit or the use of the proceeds thereof (other than in respect of such damages incurred or paid
by an Indemnitee to a third party).
(e) All amounts due under this Section shall be payable promptly/not later than 10 days after
written demand therefor, together with reasonable detail and supporting documentation.
(f) The provisions of this Section 9.03 shall remain operative and in full force and effect
regardless of the expiration of the term of this Agreement, the consummation of the transactions
contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the
expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of
this Agreement or any other Loan Document, or any investigation made by or on behalf of the
Administrative Agent, the Collateral Agent, any Lender or any Issuing Bank.
SECTION 9.04
. Successors and Assigns.
(a) This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns permitted hereby
(including any Affiliate of any Issuing Bank that issues any Letter of Credit), except that (i) the
Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without
the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower
without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer
its rights or obligations hereunder except in accordance with this Section. Nothing in this
Agreement, expressed or implied, shall be construed to confer upon any Person (other than the
parties hereto, their respective successors and assigns permitted hereby (including any Affiliate
of any Issuing Bank that issues any Letter of Credit), Participants (but only to the extent
expressly provided for in paragraph (c) of this Section) and, to the extent expressly contemplated
hereby, the Related Parties of each of the Administrative Agent, the Issuing Banks and the Lenders)
any legal or equitable right, remedy or claim under or by reason of this Agreement.
(b) (i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign
to one or more assignees all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans at the time owing to it) with the prior
written consent (such consent not to be unreasonably withheld) of:
(A) the Borrower,
provided
that no consent of the Borrower shall be required
for an assignment to a Lender, an Affiliate of a Lender, an Approved Fund or, if an
Event of Default has occurred and is continuing, any other assignee;
(B) the Administrative Agent, and in the case of a Revolving Credit
Commitment, each of the Swingline Lenders;
provided
that no consent of the
Administrative Agent or the Swingline Lenders shall be required for an assignment
of all or any portion of a Term Loan to a Lender, an Affiliate of a Lender or an
Approved Fund; and
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(C) any Issuing Bank with LC Exposure;
provided
that no consent of the Issuing
Bank shall be required for an assignment of all or any portion of a Term Loan.
(ii) Assignments shall be subject to the following additional conditions:
(A) except in the case of an assignment to a Lender or an Affiliate of a
Lender or an assignment of the entire remaining amount of the assigning Lenders
Commitment or Loans of any Class, the amount of the Commitment or Loans of the
assigning Lender subject to each such assignment (determined as of the date the
Assignment and Assumption with respect to such assignment is delivered to the
Administrative Agent) shall not be less than $5,000,000 or, in the case of a Term
Loan, $1,000,000 unless each of the Borrower and the Administrative Agent otherwise
consent,
provided
that no such consent of the Borrower shall be required if an
Event of Default has occurred and is continuing;
(B) each partial assignment shall be made as an assignment of a proportionate
part of all the assigning Lenders rights and obligations under this Agreement;
provided
that this clause shall not be construed to prohibit the assignment of a
proportionate part of all the assigning Lenders rights and obligations in respect
of one Class of Commitments or Loans;
(C) the parties to each assignment shall execute and deliver to the
Administrative Agent an Assignment and Assumption, together with a processing and
recordation fee of $3,500;
(D) the assignee, if it shall not already be a Lender, shall deliver to the
Administrative Agent an Administrative Questionnaire in which the assignee
designates one or more credit contacts to whom all syndicate-level information
(which may contain material non-public information about the Borrower, the Loan
Parties and their related parties or their respective securities) will be made
available and who may receive such information in accordance with the assignees
compliance procedures and applicable laws, including Federal and state securities
laws; and
(E) no assignment shall be permitted to (x) the Borrower or any of its
Subsidiaries or Affiliates without the approval of the Required Lenders or (y) a
natural person.
(iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) of this
Section, from and after the effective date specified in each Assignment and Assumption the
assignee thereunder shall be a party hereto and, to the extent of the interest assigned by
such Assignment and Assumption, have the rights and obligations of a Lender under this
Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned
by such Assignment and Assumption, be released from its obligations under this Agreement
(and, in the case of an Assignment and Assumption covering all of the assigning Lenders
rights and obligations under this Agreement, such
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Lender shall cease to be a party hereto but shall continue to be entitled to the
benefits of Sections 2.16, 2.17, 2.18 and 9.03). Any assignment or transfer by a Lender of
rights or obligations under this Agreement that does not comply with this Section 9.04 shall
be treated for purposes of this Agreement as a sale by such Lender of a participation in
such rights and obligations in accordance with paragraph (c) of this Section.
(iv) The Administrative Agent, acting for this purpose as an agent of the Borrower,
shall maintain at one of its offices a copy of each Assignment and Assumption delivered to
it and a register for the recordation of the names and addresses of the Lenders, and the
Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender
pursuant to the terms hereof from time to time (the
Register
). The entries in the
Register shall be conclusive, and the Borrower, the Administrative Agent, each Issuing Bank
and the Lenders may treat each Person whose name is recorded in the Register pursuant to the
terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding
notice to the contrary. The Register shall be available for inspection by the Borrower, any
Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable
prior notice.
(v) Upon its receipt of, and consent to, a duly completed Assignment and Assumption
executed by an assigning Lender and an assignee, the assignees completed Administrative
Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and
recordation fee referred to in paragraph (b) of this Section and any written consent to such
assignment required by paragraph (b) of this Section, the Administrative Agent and, if
required, the Borrower shall accept such Assignment and Assumption and record the
information contained therein in the Register;
provided
that if either the assigning Lender
or the assignee shall have failed to make any payment required to be made by it pursuant to
Section 2.04(c), 2.05(d), 2.05(e), 2.06(b), 2.19(d) or 9.03(c), the Administrative Agent
shall have no obligation to accept such Assignment and Assumption and record the information
therein in the Register unless and until such payment shall have been made in full, together
with all accrued interest thereon. No assignment shall be effective for purposes of this
Agreement unless it has been recorded in the Register as provided in this paragraph.
(c) (i) Any Lender may, without the consent of the Borrower, the Administrative Agent, any
Issuing Bank or any Swingline Lender, sell participations to one or more banks or other entities (a
Participant
) in all or a portion of such Lenders rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans and the LC Disbursements owing to it);
provided
that (A) such Lenders obligations under this Agreement shall remain unchanged, (B) such
Lender shall remain solely responsible to the other parties hereto for the performance of such
obligations, (C) the participating banks or other Persons shall be entitled to the benefit of the
cost protection provisions contained in Sections 2.16, 2.17 and 2.18 to the same extent as if they
were Lenders (but, with respect to any particular participant, to no greater extent than the Lender
that sold the participation to such participant) and (D) the Borrower, the Administrative Agent,
the Issuing Banks and the other Lenders shall continue to deal solely and directly with such Lender
in connection with such Lenders rights and obligations under this Agreement. Any agreement or
instrument pursuant to which a Lender sells such a participation shall provide that such Lender
shall retain the sole right to enforce this Agreement
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and the other Loan Documents and to approve any amendment, modification or waiver of any
provision of this Agreement and the other Loan Documents;
provided
that such agreement or
instrument may provide that such Lender will not, without the consent of the Participant, agree to
any amendment, modification or waiver described in the first proviso to Section 9.02(b) that
affects such Participant. Subject to paragraph (c)(ii) of this Section, the Borrower agrees that
each Participant shall be entitled to the benefits of Sections 2.16, 2.17 and 2.18 to the same
extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b)
of this Section. To the extent permitted by law, each Participant also shall be entitled to the
benefits of Section 9.08 as though it were a Lender,
provided
such Participant agrees to be subject
to Section 2.19(c) as though it were a Lender.
(ii) A Participant shall not be entitled to receive any greater payment under Section
2.16 or 2.18 than the applicable Lender would have been entitled to receive with respect to
the participation sold to such Participant, unless the sale of the participation to such
Participant is made with the Borrowers prior written consent. A Participant shall not be
entitled to the benefits of Section 2.18 unless the Borrower is notified of the
participation sold to such Participant and such Participant agrees, for the benefit of the
Borrower, to comply with Section 2.18(f) as though it were a Lender.
(iii) Each Lender that sells a participation shall, acting solely for this purpose as
an agent of the Borrower, maintain a register in the United States on which it enters the
name and address of each Participant and the principal amounts (and stated interest) of each
Participants interest in the Loans or other obligations under the Loan Documents (the
Participant Register
);
provided
that no Lender shall have any obligation to disclose all
or any portion of the Participant register to any Person (including the identity of any
Participant or any information relating to a Participants interest in any commitments,
loans, letters of credit or its other obligations under any Loan Document) except to the
extent that such disclosure is necessary to establish that such commitment, loan, letter of
credit or other obligation is in registered form under Section 5f.103-1(c) of the United
States Treasury Regulations. The entries in the Participant Register shall be conclusive,
absent manifest error, and such Lender shall treat each person whose name is recorded in the
Participant Register as the owner of such participation for all purposes of this Agreement
notwithstanding any notice to the contrary.
(d) Any Lender may at any time pledge or assign a security interest in all or any portion of
its rights under this Agreement to secure obligations of such Lender, including without limitation
any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall
not apply to any such pledge or assignment of a security interest;
provided
that no such pledge or
assignment of a security interest shall release a Lender from any of its obligations hereunder or
substitute any such pledgee or assignee for such Lender as a party hereto.
SECTION 9.05
. Survival.
Nothing herein shall prejudice the right of the Administrative Agent
or any Lender to give any notice or other communication pursuant to any Loan Document in any other
manner specified in such Loan Document. All covenants, agreements, representations and warranties
made by the Borrower and the Loan Parties herein, in the other Loan Documents and in the
certificates or other instruments delivered in connection with or pursuant to this Agreement or any
other Loan Document shall be considered to have been relied
105
upon by the other parties hereto and shall survive the execution and delivery of this
Agreement and the Loan Documents and the making of any Loans and issuance of any Letters of Credit,
regardless of any investigation made by any such other party or on its behalf and notwithstanding
that the Administrative Agent, any Issuing Bank or any Lender may have had notice or knowledge of
any Default or incorrect representation or warranty at the time any credit is extended hereunder,
and shall continue in full force and effect as long as the principal of or any accrued interest on
any Loan or LC Disbursement or any fee or any other amount payable under this Agreement or any Loan
Document is outstanding and unpaid or any Letter of Credit is outstanding and so long as the
Commitments have not expired or terminated. The provisions of Sections 2.16, 2.17, 2.18 and 9.03
and Article 8 shall survive and remain in full force and effect regardless of the consummation of
the transactions contemplated hereby, the repayment of any of the Loans, the invalidity or
unenforceability of any term or provision of this Agreement or any other Loan Document, or any
investigation made by or on behalf of the Administrative Agent, the Collateral Agent, any Lender or
any Issuing Bank, the expiration or termination of the Letters of Credit and the Commitments or the
termination of this Agreement or any provision hereof.
SECTION 9.06
. Counterparts; Integration; Effectiveness.
This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each of which shall
constitute an original, but all of which when taken together shall constitute a single contract.
This Agreement and any separate letter agreements with respect to fees payable to the
Administrative Agent constitute the entire contract among the parties relating to the subject
matter hereof and supersede any and all previous agreements and understandings, oral or written,
relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall
become effective when it shall have been executed by the Administrative Agent and the Borrower and
when the Administrative Agent shall have received counterparts hereof which, when taken together,
bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and assigns. Delivery
of an executed counterpart of a signature page of this Agreement by telecopy, PDF or other
electronic format shall be effective as delivery of a manually executed counterpart of this
Agreement.
SECTION 9.07
. Severability.
Any provision of this Agreement held to be invalid, illegal or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity, illegality or unenforceability without affecting the validity, legality and
enforceability of the remaining provisions hereof; and the invalidity of a particular provision in
a particular jurisdiction shall not invalidate such provision in any other jurisdiction.
SECTION 9.08
. Right of Setoff.
If an Event of Default shall have occurred and be continuing,
each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to
the fullest extent permitted by law, to set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other obligations at any time owing by
such Lender or Affiliate to or for the credit or the account of the Borrower, any other Loan Party
or any other Domestic Subsidiary that is a Restricted Subsidiary against any of and all the
obligations of the Loan Parties now or hereafter existing under this Agreement held by such Lender,
irrespective of whether or not such Lender shall have made any demand under this Agreement or such
other Loan Document and although such obligations may be unmatured.
106
The rights of each Lender under this Section are in addition to other rights and remedies
(including other rights of setoff) which such Lender may have.
SECTION 9.09
. Governing Law; Jurisdiction; Consent to Service of Process.
(a) This Agreement
and the Loan Documents (except, as to any other Loan Document, as expressly set forth therein)
shall be construed in accordance with and governed by the law of the State of New York.
(b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property,
to the non-exclusive jurisdiction of the Supreme Court of the State of New York sitting in New York
County and of the United States District Court of the Southern District of New York, and any
appellate court from any thereof, in any action or proceeding arising out of or relating to this
Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each
of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of
any such action or proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall
affect any right that the Administrative Agent, any Issuing Bank or any Lender may otherwise have
to bring any action or proceeding relating to this Agreement against the Borrower or its properties
in the courts of any jurisdiction.
(c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may
legally and effectively do so, any objection which it may now or hereafter have to the laying of
venue of any suit, action or proceeding arising out of or relating to this Agreement or the other
Loan Documents in any court referred to in paragraph (b) of this Section. Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Each party to this Agreement irrevocably consents to service of process in the manner
provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party
to this Agreement to serve process in any other manner permitted by law.
SECTION 9.10
. WAIVER OF JURY TRIAL.
EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENTS OR
THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH
PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION,
SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE
BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
107
SECTION 9.11
. Headings.
Article and Section headings and the Table of Contents used herein
are for convenience of reference only, are not part of this Agreement and shall not affect the
construction of, or be taken into consideration in interpreting, this Agreement.
SECTION 9.12
. Confidentiality.
(a) Each of the Administrative Agent, each Issuing Bank and
the Lenders (each, a
Recipient
) acknowledges that the Borrower considers the Information (as
defined below) to include confidential, sensitive or proprietary information and agrees to maintain
the confidentiality of the Information, except that Information may be disclosed (i) to such
Recipients and its Affiliates directors, officers, employees and agents, including accountants,
legal counsel and other advisors (collectively, such Recipients
Representatives
) (provided that
such Representatives shall be informed by such Recipient of the confidential nature of such
information prior to the disclosure and shall be directed to treat such information in accordance
with the terms hereof, and each Recipient hereby agrees to be, and shall be, responsible for any
breach of the confidentiality provisions of this Section 9.12 by its Representatives), (ii) to the
extent requested in any legal, judicial, administrative proceeding or other compulsory process
(including for purposes of establishing a due diligence defense in connection with such
proceeding or process) or as required by applicable law or regulations, or upon the request or
demand of any regulatory authority having jurisdiction over such Recipient or its affiliates
(provided that, to the extent not prohibited by law or legal process, the disclosing Recipient will
notify the Borrower as soon as practical in the event of any such disclosure pursuant to this
clause (ii) (other than any disclosure made in the course of any examination conducted by a bank
regulatory authority)), (iii) to any other party to this Agreement, (iv) in connection with the
exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or
any other Loan Document or the enforcement of rights hereunder, (v) subject to a Confidentiality
Agreement executed (including in the form of a binding electronic click-through agreement) in
favor of the Borrower, to (A) any assignee of or Participant in, or any prospective assignee of or
Participant in, any of its rights or obligations under this Agreement or (B) any actual or
prospective counterparty (or its advisors) designated by the Loan Parties to any swap or derivative
transaction relating to the Borrower and its obligations, (vi) with the written consent of the
Borrower acting through a Financial Officer or (vii) to the extent such Information (A) becomes
publicly available other than as a result of a breach of this Section or (B) becomes available to
the Administrative Agent, any Issuing Bank or any Lender on a nonconfidential basis from a source
other than the Borrower. For the purposes of this Section,
Information
means all information
received from the Borrower relating to the Borrower, its Subsidiaries or its business, other than
any such information that is available to the Administrative Agent, the Issuing Bank or any Lender
on a nonconfidential basis prior to disclosure by the Borrower.
(b) EACH LENDER ACKNOWLEDGES THAT INFORMATION (AS DEFINED IN SECTION 9.12(a)) FURNISHED TO IT
PURSUANT TO THIS AGREEMENT MAY INCLUDE MATERIAL NON-PUBLIC INFORMATION CONCERNING THE BORROWER AND
ITS RELATED PARTIES OR THEIR RESPECTIVE SECURITIES, AND CONFIRMS THAT IT HAS DEVELOPED COMPLIANCE
PROCEDURES REGARDING THE USE OF MATERIAL NON-PUBLIC INFORMATION AND THAT IT WILL HANDLE SUCH
MATERIAL NON-PUBLIC INFORMATION IN ACCORDANCE WITH THOSE PROCEDURES AND APPLICABLE LAW, INCLUDING
FEDERAL AND STATE
108
SECURITIES LAWS (AND IN ACCORDANCE WITH THE PROVISIONS OF CLAUSE (A) ABOVE).
(c) ALL INFORMATION, INCLUDING REQUESTS FOR WAIVERS AND AMENDMENTS, FURNISHED BY THE BORROWER
OR THE ADMINISTRATIVE AGENT PURSUANT TO, OR IN THE COURSE OF ADMINISTERING, THIS AGREEMENT WILL BE
SYNDICATE-LEVEL INFORMATION, WHICH MAY CONTAIN MATERIAL NON-PUBLIC INFORMATION ABOUT THE BORROWER,
THE LOAN PARTIES AND THEIR RELATED PARTIES OR THEIR RESPECTIVE SECURITIES. ACCORDINGLY, EACH
LENDER REPRESENTS TO THE BORROWER AND THE ADMINISTRATIVE AGENT THAT IT HAS IDENTIFIED IN ITS
ADMINISTRATIVE QUESTIONNAIRE A CREDIT CONTACT WHO MAY RECEIVE INFORMATION THAT MAY CONTAIN MATERIAL
NON-PUBLIC INFORMATION IN ACCORDANCE WITH ITS COMPLIANCE PROCEDURES AND APPLICABLE LAW(AND IN
ACCORDANCE WITH THE PROVISIONS OF CLAUSE (A) ABOVE).
(d) The Administrative Agent shall, upon the written request of the Borrower (and in any case
no more frequently than once every thirty days) provide to the Borrower a list of financial
institutions or other entities that have accessed private-side Information on the IntraLinks site
established in connection with the Senior Credit Facilities (it being understood and agreed that
each such Person shall have executed (including by click-through) a Confidentiality Agreement).
SECTION 9.13
. Interest Rate Limitation.
Notwithstanding anything herein to the contrary, if
at any time the interest rate applicable to any Loan, together with all fees, charges and other
amounts which are treated as interest on such Loan under applicable law (collectively the
Charges
), shall exceed the maximum lawful rate (the
Maximum Rate
) which may be contracted for,
charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable
law, the rate of interest payable in respect of such Loan hereunder, together with all Charges
payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the
interest and Charges that would have been payable in respect of such Loan but were not payable as a
result of the operation of this Section shall be cumulated and the interest and Charges payable to
such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate
therefor) until such cumulated amount, together with interest thereon at the Federal Funds
Effective Rate to the date of repayment, shall have been received by such Lender.
SECTION 9.14
. Conversion of Currencies.
(a) If, for the purpose of obtaining judgment in any
court, it is necessary to convert a sum owing hereunder in one currency into another currency, each
party hereto agrees, to the fullest extent that it may effectively do so, that the rate of exchange
used shall be that at which in accordance with normal banking procedures in the relevant
jurisdiction the first currency could be purchased with such other currency on the Business Day
immediately preceding the day on which final judgment is given.
(b) The obligations of the Borrower in respect of any sum due to any party hereto or any
holder of the obligations owing hereunder (the
Applicable Creditor
) shall, notwithstanding any
judgment in a currency (the
Judgment Currency
) other than the
109
currency in which such sum is stated to be due hereunder (the
Agreement Currency
), be
discharged only to the extent that, on the Business Day following receipt by the Applicable
Creditor of any sum adjudged to be so due in the Judgment Currency, the Applicable Creditor may in
accordance with normal banking procedures in the relevant jurisdiction purchase the Agreement
Currency with the Judgment Currency; if the amount of the Agreement Currency so purchased is less
than the sum originally due to the Applicable Creditor in the Agreement Currency, the Borrower
agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Applicable
Creditor against such loss. The obligations of the Borrower contained in this Section 9.14 shall
survive the termination of this Agreement and the payment of all other amounts owing hereunder.
SECTION 9.15
. USA PATRIOT Act.
Each Lender that is subject to the requirements of the USA
Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the
Act
) hereby
notifies the Borrower that pursuant to the requirements of the Act, it is required to obtain,
verify and record information that identifies the Borrower, which information includes the name and
address of the Borrower and other information that will allow such Lender to identify the Borrower
in accordance with the Act.
SECTION 9.16
. Collateral Release and Recapture.
(a) At such time as the Borrower has
achieved the Collateral Suspension Ratings Level and so long as no Event of Default shall have
occurred and be continuing, the Borrower shall have the right by written notice to the
Administrative Agent to require that the Collateral be released from any security interest created
by the Loan Documents. On any such date (the
Collateral Suspension Date
), all rights to the
Collateral shall transfer and revert to the relevant Loan Parties and all Liens and security
interests created by the Loan Documents shall automatically terminate. On any such Collateral
Suspension Date, the Borrower and each other Loan Party shall be authorized and the Collateral
Agent hereby authorizes the Borrower and each other Loan Party, to prepare and record UCC
termination statements, PTO termination of assignment filings, or other analogous documents and
filings with respect to any financing statements or collateral assignments recorded by the
Collateral Agent under the Collateral Documents. At the request and sole expense of the Borrower
following the Collateral Suspension Date, the Collateral Agent shall deliver to the Borrower any
Collateral (including certificates representing the Pledged Stock (as defined in the Guarantee and
Security Agreement)) held by the Collateral Agent pursuant to the Collateral Documents, and execute
and deliver to the Borrower such documents as the Borrower shall reasonably request to evidence
such termination, including without limitation, original executed releases of the Mortgages in
recordable form.
(b) If on any subsequent date the Borrower fails to satisfy the Collateral Suspension Ratings
Level (such subsequent date, the
Collateral Reversion Date
), any Collateral that was released
from Liens securing the Secured Obligations, as well as any Collateral acquired since the
Collateral Suspension Date, will be restored and pledged to secure the Secured Obligations in
accordance with the Collateral Documents and Section 5.11. The period of time between the
Collateral Suspension Date and the Collateral Reversion Date is referred to herein as the
Collateral Suspension Period
.
SECTION 9.17
. Collateral and Guaranty Release.
Each Lender irrevocably authorizes the
Agents:
110
(a) to release any Lien on any property granted to or held by the Administrative Agent or the
Collateral Agent under any Loan Document (i) upon termination of the Commitments and payment in
full of all Obligations (other than contingent indemnification obligations not yet due and payable)
and the expiration or termination of all Letters of Credit, (ii) that is disposed of or to be
disposed of to a Person other than a Loan Party as part of or in connection with any sale or other
transfer permitted hereunder or under any other Loan Document, or (iii) subject to Section 9.02, if
approved, authorized or ratified in writing by the Required Lenders;
(b) to release any Guarantor from its obligations under the Guarantee and Security Agreement
if such Person ceases to be a Wholly Own Domestic Restricted Subsidiary as a result of a
transaction permitted hereunder; and
(c) to subordinate any Lien on any property granted to or held by the Administrative Agent or
the Collateral Agent under any Loan Document to the holder of any Lien on such property that is
permitted by Section 6.02(i) and (p).
In each case as specified in this Section 9.17, the Administrative Agent and Collateral Agent
will, at the Borrowers expense, execute and deliver to the applicable Loan Party such documents as
such Loan Party may reasonably request to evidence the release of such item of Collateral from the
assignment and security interest granted under the Collateral Documents or to subordinate its
interest in such item, or to release such Guarantor from its obligations under the Guarantee and
Security Agreement, in each case in accordance with the terms of the Loan Documents and this
Section 9.17. In each case as specified in this Section 9.17, the Administrative Agent and
Collateral Agent will, at the Borrowers expense, execute and deliver to the applicable Loan Party
such documents as such Loan Party may reasonably request to evidence the release of such item of
Collateral from the assignment, security interest and Lien granted under the Collateral Documents,
and, if applicable, return any possessory collateral or to release such Guarantor from its
obligations under the Guaranty, in each case in accordance with the terms of the Loan Documents and
this Section 9.17. In each case as specified in this Section 9.17, the Administrative Agent and
Collateral Agent hereby authorize the applicable Loan Parties to prepare and record UCC termination
statements, PTO termination of assignment filings, or other analogous documents and filings with
respect to any financing statements or collateral assignments recorded by the Collateral Agent
under the Collateral Documents.
SECTION 9.18
. Security Clearance.
The Lenders, the Agents and the Issuing Banks acknowledge
that the Loan Parties and their Subsidiaries perform classified contracts funded by or for the
benefit of the United States Federal government and, accordingly, neither the Loan Parties nor
their Subsidiaries will release, disclose or otherwise make available to any Lender, any Agent or
any Issuing Bank any classified information or nuclear material in violation of any requirement of
law, including laws restricting release of such information or material to any parties not in
possession of a valid security clearance and authorized by the appropriate agency of the United
States Federal government to receive such information or material. The Lenders, the Agents and the
Issuing Banks acknowledge that in connection with any exercise of a right or remedy the United
States Federal government may remove classified information or government-issued property prior to
any remedial action which would give the Lenders, the Agents or the Issuing Banks access to or
control over such classified information or government-issued property. The Lenders, the Agents
and the Issuing Banks acknowledge that any exercise
111
of rights or remedies under the Loan Documents or applicable laws may be subject to the
federal National Industrial Security Program Operating Manual (
NISPOM
), including, without
limitation, the rules governing Foreign Ownership Control or Influence (as defined therein).
Notwithstanding any notice requirements or other obligations of the Loan Parties under this
Agreement, none of the Loan Parties or their Subsidiaries shall be required to furnish any
classified or other confidential information to the extent that furnishing such information would
not be permitted under applicable requirements of law (including, without limitation, the National
Industrial Security Program established by Executive Order 12829 for the protection of information
classified under, inter alia, the Atomic Energy Act of 1954 and the procedures set forth in NISPOM
and the Department of Energy security regulations, including, without limitation, the foreign
ownership, control or influence regulations under 48 CFR 904.70003, et seq.). Nothing in this
Section 9.18 shall relieve the Loan Parties and their Subsidiaries of the obligation pursuant to
Section 5.02 to furnish to the Administrative Agent written notice of any actual knowledge of the
Borrower of any development in connection with any classified contract that may have a material
adverse effect on the value of such contract to a Loan Party or Subsidiary, including but not
limited to notice of cancellation received by the Loan Parties or their Subsidiaries or allegation
of default with respect to such contract to the extent compliance with such specific notice
obligations is not prohibited by applicable law or regulation.
SECTION 9.19
. No Fiduciary Relationship.
Each of the Loan Parties hereby acknowledges that
none of the Administrative Agent, the Lenders, the Issuing Banks or their Affiliates has any
fiduciary relationship with or duty to any Loan Party arising out of or in connection with this
Agreement, and the relationship between the Administrative Agent, the Lead Arrangers, the Lenders,
and the Issuing Banks or any of their Affiliates, on the one hand, and the Loan Parties, on the
other hand, in connection herewith is solely that of debtor and creditor.
[The remainder of this page has been left blank intentionally]
112
IN WITNESS
WHEREOF, the parties hereto have caused this Agreement to be duly executed by
their respective authorized officers as of the day and year first above written.
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HUNTINGTON INGALLS INDUSTRIES, INC.
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By:
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/s/ Mark Rabinowitz
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Name:
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Mark Rabinowitz
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Title:
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Treasurer
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JPMORGAN CHASE BANK,
individually and as
Administrative Agent
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By:
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/s/ Matthew H. Massie
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Name:
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Matthew H. Massie
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Title:
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Managing Director
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By:
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/s/ Matthew H. Massie
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Name:
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Matthew H. Massie
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Title:
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Managing Director
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CREDIT SUISSE A.G., CAYMAN ISLANDS BRANCH
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By:
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/s/ John D. Toronto
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Name:
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John D. Toronto
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Title:
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Managing Director
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By:
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/s/ Vipul Dhadda
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Name:
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Vipul Dhadda
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Title:
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Associate
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THE ROYAL BANK OF SCOTLAND PLC
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By:
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/s/ L. Peter Yetman
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Name:
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L. Peter Yetman
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Title:
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Director
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WELLS FARGO BANK, N.A.
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By:
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/s/ Scott Santa Cruz
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Name:
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Scott Santa Cruz
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Title:
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Director
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BNP PARIBAS
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By:
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/s/ Rick Pace
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Name:
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Rick Pace
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Title:
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Managing Director
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By:
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/s/ Berangere Allen
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Name:
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Berangere Allen
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Title:
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Director
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SUMITOMO MITSUI BANKING CORPORATION
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By:
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/s/ William Ginn
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Name:
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William Ginn
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Title:
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Executive Officer
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SUNTRUST BANK
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By:
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/s/ Keith Cox
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Name:
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Keith Cox
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Title:
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Managing Director
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BANK OF AMERICA, N.A.
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By:
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/s/ Kenneth Beck
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Name:
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Kenneth Beck
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Title:
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Managing Director
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113
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THE BANK OF NOVA SCOTIA
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By:
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/s/ John Matthews
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Name:
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John Matthews
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Title:
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Director
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TD BANK, N.A.
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By:
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/s/ Marla Willner
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Name:
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Marla Willner
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Title:
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Senior Vice President
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U.S. BANK NATIONAL ASSOCIATION
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By:
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/s/ Blake Malia
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Name:
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Blake Malia
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Title:
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Vice President
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THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.
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By:
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/s/ Victor Pierzchalski
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Name:
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Victor Pierzchalski
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Title:
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Authorized Signatory
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MORGAN STANLEY BANK, N.A.
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By:
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/s/ Sheresse Clarke
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Name:
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Sheresse Clarke
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Title:
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Authorized Signatory
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BRANCH BANKING AND TRUST COMPANY
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By:
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/s/ Daniel T. Laurenzi
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Name:
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Daniel T. Laurenzi
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Title:
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Vice President
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CAPITAL ONE LEVERAGE FINANCE CORP.
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By:
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/s/ Paul Dellova
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Name:
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Paul Dellova
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Title:
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Senior Vice President
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COMERICA BANK
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By:
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/s/ Blake Arnett
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Name:
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Blake Arnett
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Title:
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Vice President
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THE NORTHERN TRUST COMPANY
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By:
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/s/ Michael J. Kingsley
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Name:
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Michael J. Kingsley
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Title:
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Senior Vice President
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STATE STREET BANK AND TRUST COMPANY
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By:
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/s/ Juan G. Sierra
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Name:
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Juan G. Sierra
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Title:
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Vice President
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TAIWAN BUSINESS BRANCH, L.A. BRANCH
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By:
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/s/ Alex Wang
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Name:
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Alex Wang
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Title:
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S.V.P. & General Manager
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TAIWAN COOPERATIVE BANK SEATTLE BRANCH
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By:
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/s/ Ming-Chih Chen
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Name:
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Ming-Chih Chen
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Title:
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VP & General Manager
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114
Exhibit 99.1
, 2011
Dear Northrop Grumman Stockholder:
I am pleased to inform you that on March 14, 2011, the board of directors of Northrop Grumman
Corporation approved the spin-off of Huntington Ingalls Industries, Inc., a wholly owned subsidiary
of Northrop Grumman. Upon completion of the spin-off, Northrop Grumman stockholders will own 100%
of the outstanding shares of common stock of HII. At the time of the spin-off, HII will own and
operate our shipbuilding business, which has been designing, building, overhauling and repairing a
wide variety of ships primarily for the U.S. Navy and the U.S. Coast Guard for over a century. We
believe that this separation of HII to form a new, independent, publicly owned company is in the
best interests of both Northrop Grumman and HII.
The spin-off will be completed by way of a pro rata distribution of HII common stock to our
stockholders of record as of 5:00 p.m., Eastern time, on March 30, 2011, the spin-off record date.
Each Northrop Grumman stockholder will receive one share of HII common stock for every six shares
of Northrop Grumman common stock held by such stockholder on the record date. The distribution of
these shares will be made in book-entry form, which means that no physical share certificates will
be issued. Following the spin-off, stockholders may request that their shares of HII common stock
be transferred to a brokerage or other account at any time. No fractional shares of HII common
stock will be issued. If you would otherwise have been entitled to a fractional common share in the
distribution, you will receive the net cash proceeds of such fractional share instead.
The spin-off is subject to certain customary conditions. Stockholder approval of the
distribution is not required, nor are you required to take any action to receive your shares of HII
common stock.
Immediately following the spin-off, you will own common stock in Northrop Grumman and HII.
Northrop Grummans common stock will continue to trade on the New York Stock Exchange under the
symbol NOC. HII intends to have its common stock listed on the New York Stock Exchange under the
symbol HII.
We expect the spin-off to be tax-free to the stockholders of Northrop Grumman, except with
respect to any cash received in lieu of fractional shares. The spin-off is conditioned on the
receipt of a letter ruling from the Internal Revenue Service and an opinion of counsel confirming
that the spin-off will not result in the recognition, for U.S. Federal income tax purposes, of
income, gain or loss to Northrop Grumman or its stockholders, except to the extent of cash received
in lieu of fractional shares.
The enclosed information statement, which is being mailed to all Northrop Grumman
stockholders, describes the spin-off in detail and contains important information about HII,
including its historical consolidated financial statements. We urge you to read this information
statement carefully.
I want to thank you for your continued support of Northrop Grumman. We look forward to your
support of HII in the future.
Yours sincerely,
Wesley G. Bush
Chief Executive Officer and President
Northrop Grumman
Huntington Ingalls Industries, Inc.
, 2011
Dear Huntington Ingalls Industries, Inc. Stockholder:
It is our pleasure to welcome you as a stockholder of our company, Huntington Ingalls
Industries, Inc. We have been a leader in designing, building, overhauling and repairing a wide
variety of ships primarily for the U.S. Navy and the U.S. Coast Guard for over a century.
As an independent, publicly owned company, we believe we can more effectively focus on our
objectives and satisfy the capital needs of our company, and thus bring more value to you as a
stockholder than we could as an operating segment of Northrop Grumman Corporation.
We expect to have HII common stock listed on the New York Stock Exchange under the symbol
HII in connection with the distribution of HII common stock by Northrop Grumman.
We invite you to learn more about HII and our subsidiaries by reviewing the enclosed
information statement. We look forward to our future as an independent, publicly owned company and
to your support as a holder of HII common stock.
Very truly yours,
C. Michael Petters
President and Chief Executive Officer
Huntington Ingalls Industries, Inc.
Information contained herein is subject to completion or amendment. A Registration Statement on
Form 10 relating to these securities has been filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
SUBJECT TO COMPLETION, DATED MARCH 15, 2011
INFORMATION STATEMENT
HUNTINGTON INGALLS INDUSTRIES, INC.
4101 Washington Avenue
Newport News, Virginia 23607
Common Stock
(par value $1.00 per share)
This information statement is being sent to you in connection with the separation of
Huntington Ingalls Industries, Inc. (HII) from Northrop Grumman Corporation (Northrop Grumman),
following which HII will be an independent, publicly owned company. As part of the separation,
Northrop Grumman will undergo an internal reorganization, after which it will complete the
separation by distributing all of the shares of HII common stock on a pro rata basis to the holders
of Northrop Grumman common stock. We refer to this pro rata distribution as the distribution and
we refer to the separation, including the internal reorganization and distribution, as the
spin-off. We expect that the spin-off will be tax-free to Northrop Grumman stockholders for U.S.
Federal income tax purposes, except to the extent of cash received in lieu of fractional shares.
Every six shares of Northrop Grumman common stock outstanding as of 5:00 pm, Eastern time, on March
30, 2011, the record date for the distribution, will entitle the holder thereof to receive one
share of HII common stock. The distribution of shares will be made in book-entry form. Northrop
Grumman will not distribute any fractional shares of HII common stock. Instead, the distribution
agent will aggregate fractional shares into whole shares, sell the whole shares in the open market
at prevailing market prices and distribute the aggregate net cash proceeds from the sales pro rata
to each holder who would otherwise have been entitled to receive a fractional share in the
spin-off. The distribution will be effective as of 12:01 a.m., Eastern time, on March 31, 2011.
Immediately after the distribution becomes effective, we will be an independent, publicly owned
company.
No vote or further action of Northrop Grumman stockholders is required in connection with the
spin-off. We are not asking you for a proxy.
Northrop Grumman stockholders will not be required to
pay any consideration for the shares of HII common stock they receive in the spin-off, and they
will not be required to surrender or exchange shares of their Northrop Grumman common stock or take
any other action in connection with the spin-off.
All of the outstanding shares of HII common stock are currently owned by Northrop Grumman.
Accordingly, there is no current trading market for HII common stock. We expect, however, that a
limited trading market for HII common stock, commonly known as a when-issued trading market, will
develop at least two trading days prior to the record date for the distribution, and we expect
regular-way trading of HII common stock will begin the first trading day after the distribution
date. We intend to list HII common stock on the New York Stock Exchange under the ticker symbol
HII.
In reviewing this information statement, you should carefully consider the matters described
in Risk Factors beginning on page 19 of this information statement.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved these securities or determined if this information statement is truthful or
complete. Any representation to the contrary is a criminal offense.
This information statement is not an offer to sell, or a solicitation of an offer to buy, any
securities.
The date of this information statement is , 2011.
This Information Statement was first mailed to Northrop Grumman stockholders on or about , 2011.
TABLE OF CONTENTS
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Page
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Summary
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1
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Glossary of Programs
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15
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Risk Factors
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19
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Special Note About Forward-Looking Statements
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41
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The Spin-Off
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42
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Trading Market
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51
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Dividend Policy
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53
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Capitalization
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54
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Selected Historical Consolidated Financial and Other Data
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56
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Unaudited Pro Forma Condensed Consolidated Financial Statements
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57
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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62
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Business
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79
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Management
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100
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Executive Compensation
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106
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Certain Relationships and Related Party Transactions
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135
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Description of Material Indebtedness
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140
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Security Ownership of Certain Beneficial Owners and Management
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144
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Description of Capital Stock
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147
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Where You Can Find More Information
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152
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Index to Financial Statements
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F-1
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i
SUMMARY
This summary highlights information contained in this information statement and provides an
overview of our company, our separation from Northrop Grumman and the distribution of HII common
stock by Northrop Grumman to its stockholders. For a more complete understanding of our business
and the spin-off, you should read the entire information statement carefully, particularly the
discussion set forth under Risk Factors beginning on page 19 of this information statement, and
our audited and unaudited historical consolidated financial statements, our unaudited pro forma
condensed consolidated financial statements and the respective notes to those statements appearing
elsewhere in this information statement.
Except as otherwise indicated or unless the context otherwise requires, HII, we, us and
our refer to Huntington Ingalls Industries, Inc. and the entities that will be its consolidated
subsidiaries following the internal reorganization. HII was formed in anticipation of the spin-off
as a holding company for our business, which has been conducted by Northrop Grumman Shipbuilding,
Inc. (NGSB). NGSB will be a wholly owned subsidiary of HII following the internal reorganization.
In connection with the spin-off, NGSB intends to change its name to Huntington Ingalls Industries
Company. Except as otherwise indicated or unless the context otherwise requires, the information
included in this information statement assumes the completion of the internal reorganization
preceding the distribution, as described herein.
For convenience, brief descriptions of certain programs discussed in this information
statement are included in the Glossary of Programs beginning on page 15.
Unless otherwise indicated, references in this information statement to fiscal years are to
HIIs fiscal years ended December 31.
Our Company
For more than a century, we have been designing, building, overhauling and repairing ships
primarily for the U.S. Navy and the U.S. Coast Guard. We are the nations sole industrial designer,
builder and refueler of nuclear-powered aircraft carriers, the sole supplier and builder of
amphibious assault and expeditionary warfare ships to the U.S. Navy, the sole builder of National
Security Cutters for the U.S. Coast Guard, one of only two companies currently designing and
building nuclear-powered submarines for the U.S. Navy and one of only two companies that builds the
U.S. Navys current fleet of DDG-51
Arleigh Burke-
class destroyers. We build more ships, in more
ship types and classes, than any other U.S. naval shipbuilder. We are the exclusive provider of
RCOH (Refueling and Complex Overhaul) services for nuclear-powered aircraft carriers, a
full-service systems provider for the design, engineering, construction and life cycle support of
major programs for surface ships and a provider of fleet support and maintenance services for the
U.S. Navy. With our product capabilities, heavy industrial facilities and a workforce of
approximately 39,000 shipbuilders, we believe we are poised to continue to support the long-term
objectives of the U.S. Navy to adapt and respond to a complex, uncertain and rapidly changing
national security environment.
Our primary areas of business include the design, construction, repair and maintenance of
nuclear-powered ships, such as aircraft carriers and submarines, and non-nuclear ships, such as
surface combatants, expeditionary warfare/amphibious assault and coastal defense surface ships, as
well as the overhaul and refueling of nuclear-powered ships. We manage our business in two
segments: Newport News, which includes all of our nuclear ship design, construction, overhaul and
refueling businesses; and Gulf Coast, which includes our non-nuclear ship design, construction,
repair and maintenance businesses.
Our three major shipyards are currently located in Newport News, Virginia, Pascagoula,
Mississippi and Avondale, Louisiana. We currently intend to wind down our construction activities
at our Avondale shipyard in 2013 and consolidate Gulf Coast construction into our Mississippi
facilities. We believe that consolidation in Pascagoula would allow us to realize the benefits of
serial production, reduce program costs on existing contracts and make future vessels more
affordable, thereby reducing overhead rates and realizing cost savings for the U.S. Navy and the
U.S. Coast Guard. We are also exploring the potential for alternative uses of the Avondale facility
by new owners, including alternative opportunities for the workforce there. We expect that process
to take some time. We anticipate that we will incur substantial restructuring-related costs and
asset write-downs currently estimated at $310 million related to the wind down of our construction
activities at Avondale, substantially all of which we believe is recoverable. For a more detailed
discussion of these expected costs, see Risk Factors beginning on page 19.
Competitive Strengths
We believe that we have the following key competitive strengths:
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We are one of the two largest publicly owned shipbuilders in the United States.
We
and our primary competitor are the builders of 232 of the U.S. Navys current 286
ships, and the exclusive builders of 16 of the U.S. Navys 29 classes of ships (seven
classes for which we are the exclusive builder, and four classes for which we are
co-builders with our primary competitor). We build more ships, in more types and
classes, than
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1
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any other U.S. naval shipbuilder and we are the exclusive builder of 33 of the U.S.
Navys 286 ships, representing seven of the U.S. Navys 29 classes of ships. We are the
sole builder and refueler of nuclear-powered aircraft carriers, the sole supplier of
amphibious assault and expeditionary warfare ships for the U.S. Navy, and the sole
provider of the National Security Cutter to the U.S. Coast Guard. We are also teamed with
Electric Boat as the sole builders of nuclear-powered submarines for the U.S. Navy.
Additionally, we are a full-service systems provider for the design, engineering,
construction and life cycle support of major programs for surface ships and a provider of
fleet support and maintenance services for the U.S. Navy.
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We have long-term contracts with visible revenue streams and highly probable backlog
based on the U.S. Navys 30-Year Plan
. Most of our contracts are long-term in nature
with visible revenue streams. Total backlog at December 31, 2010 was approximately $17
billion. At the end of 2010, total orders from the U.S. Government comprised
substantially all of the total backlog. In connection with ships that we have
constructed, we expect to continue our regular service and support, including RCOH of
aircraft carriers and inactivation of aging nuclear aircraft carriers.
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We generate a significant amount of our revenue from contracts for classes of ships
for which we are the exclusive provider.
We are the exclusive provider of seven of the
U.S. Navys 29 classes of ships, and a significant amount of our revenue is from
contracts for these classes of ships. Collectively, contracts for ship classes for
which we are the exclusive provider accounted for 64% and 68% of our revenues in 2009
and 2010, respectively.
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We are capable of manufacturing multiple classes of ships at our heavy industrial
facilities.
Our Newport News and Pascagoula shipyards possess heavy industrial assets
and are capable of manufacturing multiple ship types and classes. The Newport News
shipyard, which is able to simultaneously construct in staggered phases two nuclear
aircraft carriers and five nuclear submarines, provide refueling and overhaul services
for up to two additional aircraft carriers, and provide maintenance and repair services
for additional ships, has an 18-acre all weather onsite steel fabrication workshop, a
modular outfitting facility for assembly of a ships basic structural modules indoors
and on land, machine shops totaling approximately 300,000 square feet, a 1,050-ton
gantry crane capable of servicing two aircraft carriers at one time, and a 2,170 foot
long drydock. Our Pascagoula shipyard, which is able to simultaneously build several
classes of ships for both the U.S. Navy and the U.S. Coast Guard, includes a 30,000-ton
floating dry dock, 660-ton gantry crane, a steel fabrication shop with capacity to
process 150 tons of steel per day, covered outfitting and stacking halls capable of
handling three-deck height grand blocks, and a propulsion assembly building that can
hold up to fifteen 30,000 horsepower engines simultaneously.
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We have an experienced management team.
Our senior management team has experience in
the management of defense and shipbuilding companies and is competent in the areas of
project management, supply chain management and technology management.
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We have a workforce of approximately 39,000 shipbuilders.
Our workforce includes
individuals specializing in 19 crafts and trades, including more than 7,500 engineers
and designers and more than 1,000 employees with advanced degrees. Additionally, our
workforce is composed of many third-, fourth- and fifth- generation shipbuilding
employees. At December 31, 2010, we had 771 Master Shipbuilders, employees who have
been with us or our predecessors for over 40 years. We provide ongoing training for all
of our employees, providing over 60,000 individual training seats in 2009 and 64,000 in
2010 across our Newport News and Gulf Coast operations.
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Our Strategy
Our objectives are to maintain our leadership position in the U.S. naval shipbuilding industry
and to deliver long-term value to our stockholders. To achieve these objectives, we utilize the
following strategies:
Strengthen and protect market position.
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Align our business to support the U.S. Navys 30-Year Plan.
We intend to continue to
support the U.S. Navy in the design and construction of new ships, including the
construction of an aircraft carrier and an amphibious assault ship approximately every
five years, the restart of construction of DDG-51s and the increase in production rates
of VCS to two submarines per year. Through investments in our workforce, processes and
facilities, and through the streamlining of our operations, we intend to support
continued construction of these core U.S. Navy programs, ensure quality construction
and make ships more affordable.
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Ensure capabilities that support new U.S. Navy requirements.
Through alignment with
the U.S. Navys requirements in the 30-Year Plan, we intend to position ourselves as
the provider of choice for new platforms and services related to our current core
markets. We intend to complete construction of a new facility at our Newport News
shipyard designed specifically for aircraft carrier inactivations, to better position
ourselves to be the U.S. Navys choice for future aircraft carrier inactivations. We
have also deployed our design and
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2
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engineering talents and capabilities to support work as a subcontractor on the design of
the SSBN (X) replacement for the aging
Ohio
-class ballistic missile submarines, and we
also intend to position ourselves as the builder of choice for the LSD(X), the next class
of amphibious assault ship expected to be built as a follow-on to the LPD-17 and LHA-6
classes of ships, for which we are currently the exclusive supplier.
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Streamline our operations and footprint to deliver more affordable ships.
We intend
to monitor our operations to determine where strategic investments or consolidation may
be necessary to allow us to provide the U.S. Navy with the highest quality, most
technologically advanced ships possible, on a cost-effective basis. For example, we
expect to wind down our construction activities at the Avondale shipyard in 2013 and
intend to consolidate our Gulf Coast operations and footprint to shift all future Gulf
Coast ship construction work to our Pascagoula and Gulfport facilities in Mississippi.
With this consolidation, we believe that we are ensuring the long-term viability of our
Gulf Coast operations by making them more cost competitive through increased
throughput, continuity of production, single learning curves and workload efficiency
gains. We also expect that this consolidation may reduce program costs on some existing
contracts and make future vessels more affordable for the U.S. Navy and the U.S. Coast
Guard.
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Execute well on all contracts.
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Improve performance in our Gulf Coast operations.
Our Gulf Coast operations have
recently implemented a new management approach that is geared toward planning and
managing our work in discrete phases to drive performance, accountability and
predictability (the Gulf Coast Operating System). Through the Gulf Coast Operating
System, we believe program managers will be better able to confirm that a ship is
adhering to our newly developed standardized performance metrics, and to assure that we
are providing a quality product in a safe, timely and cost-effective manner. We intend
to continue to utilize the Gulf Coast Operating System across the spectrum of our ships
to improve both quality and efficiency of our building processes in all aspects of our
design and construction activities, bringing together our shipbuilders. See
BusinessOur BusinessGulf Coast.
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Capture the benefits of serial production.
We intend to seek opportunities to
maximize the quality and affordability of our ships through serial production, while
ensuring that we undertake first-in-class (first ships to be built in their class)
construction where such construction is expected to lead to additional serial
production.
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Deliver quality products on contract targets.
We are focused on delivering quality
products on contract schedule and cost targets for all current contracts, which we
believe will protect our position in our industry and enhance our efforts to secure
future contracts. We believe we must adhere to schedule and cost commitments and
quality expectations on our current U.S. Navy contracts. Specifically, we must execute
on our human capital strategy, create and sustain a first-time quality culture and
capitalize on our supply chain management initiatives.
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Other Information
Huntington Ingalls Industries, Inc. was incorporated in Delaware on August 4, 2010. Our
principal executive offices are located at 4101 Washington Avenue, Newport News, Virginia 23607.
Our telephone number is (757) 380-2000. Our website address is www. .com. Information
contained on, or connected to, our website or Northrop Grummans website does not and will not
constitute part of this information statement or the registration statement on Form 10 of which
this information statement is part.
The Spin-Off
Overview
On March 14, 2011, Northrop Grumman approved the spin-off of HII from Northrop Grumman,
following which HII will be an independent, publicly owned company.
Before our spin-off from Northrop Grumman, we will enter into a Separation and Distribution
Agreement and several other agreements with Northrop Grumman related to the spin-off. These
agreements will govern the relationship between us and Northrop Grumman after completion of the
spin-off and provide for the allocation between us and Northrop Grumman of various assets,
liabilities and obligations (including employee benefits, intellectual property, information
technology, insurance and tax-related assets and liabilities). See Certain Relationships and
Related Party TransactionsAgreements with Northrop Grumman Related to the Spin-Off.
Additionally, we have (i) incurred debt in an amount of $1,200 million from third parties (the HII
Debt) and (ii) entered into a credit facility with third-party lenders in an amount of $1,225
million, (the HII Credit Facility), which includes a $575 million secured term loan expected to
be funded in connection with the internal reorganization, and a $650 million secured revolving
credit facility, of which approximately $137 million of letters of credit are expected to be
outstanding at the time of the spin-off, and the remainder will be undrawn. See Description of
Material Indebtedness. The proceeds of the HII Debt and the HII Credit Facility are to be
3
used to fund a cash transfer in an amount of $1,429 million (the Contribution) to Northrop
Grumman Systems Corporation (NGSC), the primary operating subsidiary of Northrop Grumman after
completion of the spin-off, and for general corporate purposes in an amount of $300 million.
The distribution of HII common stock as described in this information statement is subject to
the satisfaction or waiver of certain conditions. In addition, Northrop Grumman has the right not
to complete the spin-off if, at any time prior to the distribution, the board of directors of
Northrop Grumman determines, in its sole discretion, that the spin-off is not in the best interests
of Northrop Grumman or its stockholders, that a sale or other alternative is in the best interests
of Northrop Grumman or its stockholders or that it is not advisable for HII to separate from
Northrop Grumman. See The Spin-OffConditions to the Spin-Off.
Questions and Answers About the Spin-Off
The following provides only a summary of the terms of the spin-off. For a more detailed
description of the matters described below, see The Spin-Off.
Q:
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What is the spin-off?
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A:
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The spin-off is the series of transactions by which HII will separate from Northrop Grumman. To complete the spin-off,
Northrop Grumman will distribute to its stockholders all of the shares of HII common stock. We refer to this as the
distribution. Following the spin-off, HII will be a separate company from Northrop Grumman, and Northrop Grumman will not
retain any ownership interest in HII. The number of shares of Northrop Grumman common stock you own will not change as a
result of the spin-off.
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Q:
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What will I receive in the spin-off?
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A:
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As a holder of Northrop Grumman stock, you will retain your Northrop Grumman shares and will receive one share of HII
common stock for every six shares of Northrop Grumman common stock you own as of the record date. Your proportionate
interest in Northrop Grumman will not change as a result of the spin-off. For a more detailed description, see The
Spin-Off.
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Q:
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What is HII?
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A:
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HII is currently an indirect, wholly owned subsidiary of Northrop Grumman whose shares will be distributed to Northrop
Grumman stockholders if the spin-off is completed. After the spin-off is completed, HII will be a public company and will
own all of the shipbuilding business of Northrop Grumman. That business is referred to as the shipbuilding business
throughout this information statement.
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Q:
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What are the reasons for and benefits of separating HII from Northrop Grumman?
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A:
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Northrop Grumman believes that a spin-off will provide various benefits including: (i) greater strategic focus of
investment resources and management efforts, (ii) tailored customer focus, (iii) direct and differentiated access to
capital markets and (iv) enhanced investor choices. Northrop Grumman believes that separating HII from Northrop Grumman
will benefit both Northrop Grumman and the shipbuilding business by better aligning managements attention and investment
resources to pursue opportunities in their respective markets and more actively manage their cost structures.
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Northrop Grumman believes its portfolio of C4ISR systems and electronics, manned and unmanned
air and space platforms, cyber-security and related system-level applications and logistics is
strategically aligned with its customers emerging security priorities. Operational and
investment synergies exist within and between these areas of its portfolio, which comprise its
aerospace, electronics, information systems and technical services sectors. Northrop Grumman
management sees little future synergy between these businesses and its shipbuilding business.
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Additionally, the shipbuilding business is a mature business that is more capital-intensive
than most of Northrop Grummans other businesses, with longer periods of performance. Northrop
Grummans management believes that its shipbuilding business, on one hand, and its other
businesses, on the other hand, require inherently different strategies in order to maximize
their long-term value. Northrop Grumman believes that a separation will allow each entity to
pursue appropriate strategies that will increase investor choice between the businesses, allow
for differentiated access to capital and allow for the creation of long-term value for
shareholders. For a more detailed discussion of the reasons for the spin-off see The
Spin-OffReasons for the Spin-Off.
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Q:
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Why is the separation of HII structured as a spin-off as opposed to a sale?
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A:
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Northrop Grumman believes a spin-off is the most efficient way to accomplish a separation of shipbuilding for reasons
including: (i) a spin-off would be a tax-free distribution of HII common stock to shareholders; (ii) a spin-off offers a
higher degree of certainty of completion in a timely manner, lessening disruption to current shipbuilding operations; and
(iii) a spin-off provides greater assurance that decisions regarding HIIs capital structure support future financial
stability. After consideration of strategic alternatives, including a sale, Northrop Grumman believes that a tax-free
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4
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spin-off will enhance the long-term value of both Northrop Grumman and HII. For a more detailed discussion of the reasons for the
spin-off see The Spin-OffReasons for the Spin-Off.
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Q:
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What is being distributed in the spin-off?
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A:
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Approximately 48.8 million shares of HII common stock will be distributed in the spin-off, based on the
number of shares of Northrop Grumman common stock expected to be outstanding as of the record date. The
actual number of shares of HII common stock to be distributed will be calculated on March 30, 2011, the
record date. The shares of HII common stock to be distributed by Northrop Grumman will constitute all of
the issued and outstanding shares of HII common stock immediately prior to the distribution. For more
information on the shares being distributed in the spin-off, see Description of Our Capital StockCommon
Stock.
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Q:
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How will options and stock held by HII employees be affected as a result of the spin-off?
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A:
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At the time of the distribution, the exercise price of and number of shares subject to any outstanding
option to purchase Northrop Grumman stock, as well as the number of shares subject to any restricted stock
right or other Northrop Grumman equity award, held by HIIs current and former employees on the
distribution date will be adjusted to reflect the value of the distribution such that the intrinsic value
of such awards at the time of separation is held constant. In addition, existing performance criteria
applicable to HII awards will be modified appropriately to reflect the spin-off.
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Additionally, HIIs current and former employees who hold shares of Northrop Grumman common
stock in their applicable 401(k) Plan account as of the record date for the distribution will,
like all stockholders, receive shares of HII common stock in the distribution. On the
distribution date, one share of HII common stock, based on the distribution ratio for every six
shares of Northrop Grumman common stock held in such employees Northrop Grumman stock fund
account, will be included in a HII stock fund account under the HII 401(k) Plan. However, in
conformity with the fiduciary responsibility requirements of the Employee Retirement Income
Security Act of 1974 (ERISA), remaining shares of the Northrop Grumman common stock held in
HIIs employees Northrop Grumman stock fund accounts following the distribution will be
disposed of and allocated to another investment alternative available under the HII 401(k) Plan
as directed by participants until such date as shall be determined by the Investment Committee,
after which date the Investment Committee shall dispose of all remaining shares and invest the
proceeds in another investment alternative to be determined by the Investment Committee (but
this will not prohibit diversified, collectively managed investment alternatives available
under the HII 401(k) Plan from holding Northrop Grumman common stock or prohibit employees who
use self-directed accounts in the HII 401(k) Plan from investing their accounts in Northrop
Grumman common stock). In addition, current and former Northrop Grumman employees who hold
Northrop Grumman stock under the Northrop Grumman stock fund in their Northrop Grumman 401(k)
Plan account as of the record date for the distribution will, like all stockholders, receive
one share of HII common stock in the distribution, based on the distribution ratio, for every
six shares of Northrop Grumman common stock held in the employees Northrop Grumman stock fund
account. HII shares will be included in a new, temporary HII stock fund under the Northrop
Grumman 401(k) Plan. In conformity with the fiduciary responsibility requirements of ERISA,
remaining shares of HII common stock held in the temporary HII stock fund following the
distribution will be disposed of and allocated to another investment alternative available
under the Northrop Grumman 401(k) Plan as directed by participants until such date as shall be
determined by the Investment Committee, after which date the Investment Committee shall dispose
of all remaining shares and invest the proceeds in another investment alternative to be
determined by the Investment Committee (but this will not prohibit diversified, collectively
managed investment alternatives available under the Northrop Grumman 401(k) Plan from holding
HII common stock or prohibit employees who use self-directed accounts in the Northrop Grumman
401(k) Plan from investing their accounts in HII common stock).
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Q:
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When is the record date for the distribution?
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A:
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The record date will be the close of business of the New York Stock Exchange (the NYSE) on March 30, 2011.
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Q:
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When will the distribution occur?
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A:
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The distribution date of the spin-off is March 31, 2011. HII expects that it will take the distribution agent, acting on
behalf of Northrop Grumman, up to two weeks after the distribution date to fully distribute the shares of HII common stock
to Northrop Grumman stockholders. The ability to trade HII shares will not be affected during that time.
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Q:
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What do I have to do to participate in the spin-off?
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A:
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You are not required to take any action, although you are urged to read this entire document carefully. No stockholder
approval of the distribution is required or sought. You are not being asked for a proxy. No action is required on your part
to receive your shares of HII common stock. You will neither be required to pay anything for the new shares nor to
surrender any shares of Northrop Grumman common stock to participate in the spin-off.
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Q:
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How will fractional shares be treated in the spin-off?
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5
A:
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Fractional shares of HII common stock will not be distributed. Fractional shares of HII common stock to which Northrop
Grumman stockholders of record would otherwise be entitled will be aggregated and sold in the public market by the
distribution agent at prevailing market prices. The aggregate net cash proceeds of the sales will be distributed ratably to
those stockholders who would otherwise have received fractional shares of HII common stock. See The Spin-OffTreatment of
Fractional Shares for a more detailed explanation. Proceeds from these sales will generally result in a taxable gain or
loss to those stockholders. Each stockholder entitled to receive cash proceeds from these shares should consult his, her or
its own tax advisor as to such stockholders particular circumstances. The tax consequences of the distribution are
described in more detail under The Spin-OffU.S. Federal Income Tax Consequences of the Spin-Off.
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Q:
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What are the U.S. Federal income tax consequences of the spin-off?
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A:
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The spin-off is conditioned on the receipt by Northrop Grumman of an initial and any supplemental ruling (collectively, the
IRS Ruling) from the Internal Revenue Service (IRS), which Northrop Grumman has received, and an opinion from its tax
counsel that, for U.S. Federal income tax purposes, the distribution will be tax-free to Northrop Grumman, Northrop
Grummans stockholders and HII under Section 355 and related provisions of the Internal Revenue Code of 1986 (the Code),
except for cash payments made to stockholders in lieu of fractional shares such stockholders would otherwise receive in the
distribution. The tax consequences of the distribution are described in more detail under The Spin-OffU.S. Federal
Income Tax Consequences of the Spin-Off.
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Q:
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Will the HII common stock be listed on a stock exchange?
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A:
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Yes. Although there is not currently a public market for HII common stock, before completion of the spin-off, HII intends
to apply to list its common stock on the NYSE under the symbol HII. It is anticipated that trading of HII common stock
will commence on a when-issued basis at least two trading days prior to the record date. When-issued trading refers to a
sale or purchase made conditionally because the security has been authorized but not yet issued. When-issued trades
generally settle within four trading days after the distribution date. On the first trading day following the distribution
date, any when-issued trading with respect to HII common stock will end and regular-way trading will begin. Regular-way
trading refers to trading after a security has been issued and typically involves a transaction that settles on the third
full trading day following the date of the transaction. See Trading Market.
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Q:
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Will my shares of Northrop Grumman common stock continue to trade?
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A:
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Yes. Northrop Grumman common stock will continue to be listed and trade on the NYSE under the symbol NOC.
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Q:
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If I sell, on or before the distribution date, shares of Northrop Grumman common stock that I held on the record date, am I
still entitled to receive shares of HII common stock distributable with respect to the shares of Northrop Grumman common
stock I sold?
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A:
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Beginning on or shortly before the record date and continuing through the distribution date for the spin-off, Northrop
Grummans common stock will begin to trade in two markets on the NYSE: a regular-way market and an ex-distribution
market. If you are a holder of record of shares of Northrop Grumman common stock as of the record date for the distribution
and choose to sell those shares in the regular-way market after the record date for the distribution and before the
distribution date, you also will be selling the right to receive the shares of HII common stock in connection with the
spin-off. However, if you are a holder of record of shares of Northrop Grumman common stock as of the record date for the
distribution and choose to sell those shares in the ex-distribution market after the record date for the distribution and
before the distribution date, you will still receive the shares of HII common stock in the spin-off.
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Q:
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Will the spin-off affect the trading price of my Northrop Grumman stock?
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A:
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Yes, the trading price of shares of Northrop Grumman common stock immediately following the distribution is expected to be
lower than immediately prior to the distribution because its trading price will no longer reflect the value of the
shipbuilding business. However, we cannot provide you with any assurance as to the price at which the Northrop Grumman
shares will trade following the spin-off.
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Q:
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What is the Contribution?
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A:
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As part of the internal reorganization, we will transfer $1,429 million of the proceeds of the HII Debt and the HII Credit
Facility to NGSC in order to eliminate intercompany notes between Northrop Grumman entities and NGSB (including one such
note that was recently established in connection with the funds that we borrowed from NGSC to finance the tender offer for
the 4.55% Gulf Opportunity Zone Industrial Revenue Bonds (Northrop Grumman Ship Systems, Inc. Project) Series 2006 due 2028
(the GO Zone IRBs)) and to provide Northrop Grumman with additional funds to partially offset the loss of future cash
flows that it would likely have realized if not for the spin-off transaction.
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6
Q:
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What indebtedness will HII have following the spin-off?
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A:
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HII has (i) incurred the HII Debt in an amount of $1,200 million and (ii) entered into the HII Credit Facility in an amount
of $1,225 million ($575 million of which is a secured term loan expected be funded in connection with the internal
reorganization, and $650 million of which is a secured revolving credit facility, of which approximately $137 million of
letters of credit are expected to be outstanding at the time of the spin-off, and the remainder will be undrawn). The
proceeds of the HII Debt and the HII Credit Facility are to be used to fund the $1,429 million Contribution and for general
corporate purposes in the amount of $300 million. Following the spin-off, we will also continue to have $83.7 million of
indebtedness under a loan agreement with the Mississippi Business Finance Corporation (the MBFC) in connection with the
MBFCs issuance of $83.7 million of 7.81% Economic Development Revenue Bonds (Ingalls Shipbuilding, Inc. Project) Taxable
Series 1999A due 2024 (the Revenue Bonds). While NGSC will continue to guarantee the Revenue Bonds, we intend to
indemnify NGSC for any losses related to the guaranty. Additionally, following the spin-off we will continue to have $21.6
million of indebtedness under a loan agreement with the MBFC in connection with the MBFCs issuance of $200 million of the
GO Zone IRBs, which will continue to be guaranteed by Current NGC, the holding company currently named Northrop Grumman
Corporation that, after the spin-off, will be our wholly owned subsidiary (Current NGC). In connection with the potential
spin-off, NGSB on November 1, 2010, launched a tender offer to purchase any and all GO Zone IRBs at par. As a result, NGSB
purchased $178.4 million in principal amount of the GO Zone IRBs and $21.6 million remain outstanding. Outstanding Northrop
Grumman debt will remain with New P, Inc., which (a) is currently a subsidiary of Northrop Grumman, and (b) after the
internal reorganization, will be renamed Northrop Grumman Corporation and will be the holding company that distributes
the shares of HII to complete the spin-off (New NGC).
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Q:
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What will the relationship be between Northrop Grumman and HII after the spin-off?
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A:
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Following the spin-off, HII will be an independent, publicly owned company and Northrop Grumman will have no continuing
stock ownership interest in HII. HII will have entered into a Separation and Distribution Agreement and several other
agreements with Northrop Grumman for the purpose of allocating between HII and Northrop Grumman various assets, liabilities
and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities).
These agreements will also govern HIIs relationship with Northrop Grumman following the spin-off and will provide
arrangements for employee matters, tax matters, intellectual property matters, insurance matters and some other liabilities
and obligations attributable to periods before and, in some cases, after the spin-off. These agreements will also include
arrangements with respect to transitional services. The Separation and Distribution Agreement will provide that HII will
indemnify Northrop Grumman against any and all liabilities arising out of HIIs business, and that Northrop Grumman will
indemnify HII against any and all liabilities arising out of Northrop Grummans non-shipbuilding business.
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Q:
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What will HIIs dividend policy be after the spin-off?
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A:
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HII does not currently intend to pay a dividend. Going forward, HIIs dividend policy will be established by the HII board
of directors based on HIIs financial condition, results of operations and capital requirements, as well as applicable law,
regulatory constraints, industry practice and other business considerations that HIIs board of directors considers
relevant. In addition, the terms of the agreements governing HIIs new debt or debt that we may incur in the future may
limit or prohibit the payments of dividends. For more information, see Dividend Policy.
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Q:
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What are the anti-takeover effects of the spin-off?
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A:
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Some provisions of the Restated Certificate of Incorporation of HII (the Restated Certificate of Incorporation) and the
Restated Bylaws of HII (the Restated Bylaws), Delaware law and possibly the agreements governing HIIs new debt, as each
will be in effect immediately following the spin-off, may have the effect of making more difficult an acquisition of
control of HII in a transaction not approved by HIIs board of directors. In addition, under tax sharing arrangements, HII
will agree not to enter into any transaction involving an acquisition (including issuance) of HII common stock or any other
transaction (or, to the extent HII has the right to prohibit it, to permit any such transaction) that could reasonably be
expected to cause the distribution or any of the internal reorganization transactions to be taxable to Northrop Grumman.
HII will also agree to indemnify Northrop Grumman for any tax liabilities resulting from any such transactions. The amount
of any such indemnification could be substantial. Generally, Northrop Grumman will recognize taxable gain on the
distribution if there are one or more acquisitions (including issuances) of HII capital stock representing 50% or more of
HIIs then-outstanding stock, measured by vote or value, and the acquisitions are deemed to be part of a plan or series of
related transactions that include the distribution. Any such acquisition of HII common stock within two years before or
after the distribution (with exceptions, including public trading by less-than-5% stockholders and certain compensatory
stock issuances) generally will be presumed to be part of such a plan unless we can rebut that presumption.
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Under the Separation and Distribution Agreement, in the event that, prior to the fifth
anniversary of the distribution, we experience a change of control and our corporate rating is
downgraded to B or B2 or below, as applicable, during
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7
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the period beginning upon the announcement of such change of control and ending 60 days after
the announcement of the consummation of such change of control, we will be required to provide
credit support for our indemnity obligations under the Separation and Distribution Agreement in
the form of one or more standby letters of credit in an amount equal to $250 million. See
Certain Relationships and Related Party TransactionsAgreements with Northrop Grumman Related
to the Spin-OffSeparation and Distribution Agreement.
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Additionally, we intend to enter into a Guaranty Performance, Indemnity and Termination
Agreement with NGSC (the Guaranty Performance Agreement), pursuant to which, among other
things, we will agree to cause NGSCs guarantee obligations under the $83.7 million Revenue
Bonds, which were issued for our benefit, to terminate or cause credit support to be provided
in the event we experience a change of control. For any period of time between a change of
control and the termination of NGSCs guarantee obligations, we will be required to cause
credit support to be provided for NGSCs guarantee obligations in the form of one or more
letters of credit in an amount reasonably satisfactory to NGSC to support the payment of all
principal, interest and any premiums under the Revenue Bonds. For a description of the Guaranty
Performance Agreement, see Certain Relationships and Related Party TransactionsOther
Agreements.
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As a result, HIIs obligations may discourage, delay or prevent a change of control of HII.
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Q:
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What are the risks associated with the spin-off?
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A:
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There are a number of risks associated with the spin-off and ownership of HII common stock. These risks are discussed under
Risk Factors beginning on page 19.
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Q:
|
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How will the spin-off affect HIIs relationship with its customers?
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A:
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We believe we have well-established relationships with our principal customers. We believe the spin-off will enable us
better to focus on those customers and to align our resources with their priorities. As we seek to enter into new contracts
with our customers, we expect to continue to provide information to enable them to have ongoing confidence in our
management, our workforce and our ability to perform, including our financial stability.
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Under federal acquisition regulations, the government commonly makes affirmative responsibility
determinations before entering into new contracts with a contractor. In so doing, the
government considers various factors, including financial resources, performance record,
technical skills and facilities. Our customers and prospective customers will consider whether
our responsibility on a stand-alone basis satisfies their requirements for entering into new
contracts with us. At present there are several contracts in the negotiation phase that may not
be finalized and awarded until after the spin-off is concluded and the U.S. Navy makes a
responsibility determination. This could cause the contracts to be delayed or not awarded. We
believe we continue to be a responsible contractor. Nonetheless, if our customers or
prospective customers are not satisfied with our responsibility, including our financial
resources, it could likely affect our ability to bid for and obtain or retain projects, which,
if unresolved, could have a material adverse effect on our financial position, results of
operations or cash flows. See Risk FactorsRisks Relating to the Spin-Off
Our customers and
prospective customers will consider whether our responsibility on a stand-alone basis satisfies
their requirements for entering into new contracts with us
.
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Q:
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Where can I get more information?
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A.
|
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If you have any questions relating to the mechanics of the distribution, you should contact
the distribution agent at:
|
Computershare Trust Company, N.A.
Phone:
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|
Before the spin-off, if you have any questions relating to the spin-off, you should contact
Northrop Grumman at:
|
Northrop Grumman Corporation
Investor Relations
1840 Century Park East
Los Angeles, California 90067
Phone: (310) 201-1634
Email: investors@ngc.com
www.northropgrumman.com
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|
After the spin-off, if you have any questions relating to HII, you should contact HII at:
|
Huntington Ingalls Industries, Inc.
Investor Relations
4101 Washington Avenue
Newport News, Virginia 23607
Phone:
Email:
www. .com
8
Transaction Structure
(simplified for illustrative purposes)
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The diagram below shows the current
structure of Northrop Grumman:
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The diagram below shows the
structure of Northrop Grumman after
completion of the internal
reorganization:
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The diagram below shows the structure of Northrop Grumman and HII immediately after completion
of the spin-off:
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Except as otherwise indicated or unless the context otherwise requires, HII,
we, us and our refers to Huntington Ingalls Industries, Inc. and its
consolidated subsidiaries, after giving effect to the internal reorganization.
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NGSB refers to Northrop Grumman Shipbuilding, Inc., which currently operates
Northrop Grummans shipbuilding business. In connection with the spin-off, NGSB
intends to change its name to Huntington Ingalls Industries Company
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NGSC refers to Northrop Grumman Systems Corporation, which operates Northrop
Grummans non-shipbuilding businesses.
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Current NGC refers to (a) the current holding company, named Northrop Grumman
Corporation, and its consolidated subsidiaries prior to the spin-off and (b) to Titan
II Inc. after the spin-off.
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New NGC refers to New P, Inc., which (a) is currently a subsidiary of Northrop
Grumman, and (b) after the internal reorganization, will be renamed Northrop Grumman
Corporation and will be the holding company that distributes the shares of HII to
complete the spin-off.
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Northrop Grumman refers to Current NGC and its consolidated subsidiaries prior
to the spin-off or New NGC and its consolidated subsidiaries after the internal
reorganization or the spin-off, as applicable.
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9
Summary of the Spin-Off
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Distributing Company
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Northrop Grumman Corporation, a Delaware corporation. After the distribution,
Northrop Grumman will not own any shares of HII common stock.
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Distributed Company
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Huntington Ingalls Industries, Inc., a Delaware corporation and a wholly owned
subsidiary of Northrop Grumman. After the spin-off, HII will be an independent,
publicly owned company.
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Distributed Securities
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All of the shares of HII common stock owned by Northrop Grumman which will be
100% of HII common stock issued and outstanding immediately prior to the
distribution.
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Record Date
|
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The record date for the distribution is the close of business on March 30, 2011.
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Distribution Date
|
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The distribution date is March 31, 2011.
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Internal Reorganization
|
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As part of the spin-off, Northrop Grumman will undergo an internal
reorganization, which we refer to as the internal reorganization, that will,
among other things, result in:
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New NGC replacing Current NGC as the publicly owned holding company
that directly and indirectly owns all of the capital stock of Current NGC and
its subsidiaries, including HII.
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New NGC changing its name to Northrop Grumman Corporation.
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HII becoming the parent company of the Northrop Grumman subsidiaries
that currently operate the shipbuilding business.
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Current NGC becoming a direct, wholly owned subsidiary of HII and being
renamed Titan II Inc.
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After completion of the spin-off:
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New NGC will own and operate the aerospace systems, electronic systems,
information systems and technical services businesses.
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HII will be an independent, publicly owned company, will own and
operate the shipbuilding business and will own all of the stock of Current NGC.
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For more information, see the description of this internal reorganization in
The Spin-OffManner of Effecting the Spin-OffInternal Reorganization.
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Incurrence of Debt
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To fund the Contribution and for general corporate purposes, HII has (i)
incurred the HII Debt and (ii) entered into the HII Credit Facility.
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Distribution Ratio
|
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Each holder of Northrop Grumman common stock will receive one share of HII
common stock for every six shares of Northrop Grumman common stock held on
March 30, 2011.
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The Distribution
|
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On the distribution date, Northrop Grumman will release the shares of HII
common stock to the distribution agent to distribute to Northrop Grumman
stockholders. The distribution of shares will be made in book-entry form, which
means that no physical share certificates will be issued. It is expected that
it will take the distribution agent up to two weeks to electronically issue
shares of HII common stock to you or to your bank or brokerage firm on your
behalf by way of direct registration in book-entry form. Trading of our shares
will not be affected during that time. Following the spin-off, stockholders
whose shares are held in book-entry form may request that their shares of HII
common stock be transferred to a brokerage or other account at any time. You
will not be required to make any payment, surrender or exchange your shares of
Northrop Grumman common stock or take any other action to receive your shares
of HII common stock.
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10
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Fractional Shares
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The distribution agent will not distribute any fractional shares of HII common
stock to Northrop Grumman stockholders. Fractional shares of HII common stock
to which Northrop Grumman stockholders of record would otherwise be entitled
will be aggregated and sold in the public market by the distribution agent. The
aggregate net cash proceeds of the sales will be distributed ratably to those
stockholders who would otherwise have received fractional shares of HII common
stock. Proceeds from these sales will generally result in a taxable gain or
loss to those stockholders. Each stockholder entitled to receive cash proceeds
from these shares should consult his, her or its own tax advisor as to such
stockholders particular circumstances. The tax consequences of the
distribution are described in more detail under The Spin-OffU.S. Federal
Income Tax Consequences of the Spin-Off.
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Conditions to the Spin-Off
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Completion of the spin-off is subject to the satisfaction or waiver by Northrop
Grumman of the following conditions:
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the board of directors of Northrop Grumman, in its sole and absolute
discretion, shall have authorized and approved the spin-off and not withdrawn
such authorization and approval, and the New NGC board shall have declared the
dividend of the common stock of HII to Northrop Grumman stockholders;
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the Separation and Distribution Agreement and each ancillary agreement
contemplated by the Separation and Distribution Agreement shall have been
executed by each party thereto;
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the Securities and Exchange Commission (the SEC) shall have declared
effective HIIs registration statement on Form 10, of which this information
statement is a part, under the Securities Exchange Act of 1934, as amended (the
Exchange Act), no stop order suspending the effectiveness of the registration
statement shall be in effect, and no proceedings for such purpose shall be
pending before or threatened by the SEC;
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HII common stock shall have been accepted for listing on the NYSE or
another national securities exchange approved by Northrop Grumman, subject to
official notice of issuance;
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the internal reorganization (as described in The
Spin-OffBackground) shall have been completed;
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Northrop Grumman shall have received the IRS Ruling and an opinion of
its tax counsel, each of which shall remain in full force and effect, that the
spin-off (including the internal reorganization) will not result in
recognition, for U.S. Federal income tax purposes, of income, gain or loss to
Northrop Grumman, or of income, gain or loss to its stockholders, except to the
extent of cash received in lieu of fractional shares;
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HII shall have (i) entered into the HII Credit Facility, (ii) received
the net proceeds from the HII Debt and (iii) made the Contribution;
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no order, injunction or decree that would prevent the consummation of
the distribution shall be threatened, pending or issued (and still in effect)
by any governmental authority of competent jurisdiction, other legal restraint
or prohibition preventing consummation of the distribution shall be pending,
threatened, issued or in effect and no other event outside the control of
Northrop Grumman shall have occurred or failed to occur that prevents the
consummation of the distribution;
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no other events or developments shall have occurred prior to the
distribution that, in the judgment of the board of directors of Northrop
Grumman, would result in the spin-off having a significant adverse effect on
Northrop Grumman or its stockholders;
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prior to the distribution, this information statement shall have been
mailed to the holders of Northrop Grumman common stock as of the record date;
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HIIs current directors shall have duly elected the individuals listed
as
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11
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members of its post-distribution board of directors in this information
statement, and such individuals shall become the members of HIIs board of
directors immediately prior to the distribution;
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prior to the distribution, Northrop Grumman shall have delivered to HII
resignations from those HII positions, effective as of immediately prior to the
distribution, of each individual who will be an employee of Northrop Grumman
after the distribution and who is an officer or director of HII immediately
prior to the distribution; and
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immediately prior to the distribution, the Restated Certificate of
Incorporation and the Restated Bylaws, each in substantially the form filed as
an exhibit to the registration statement on Form 10 of which this information
statement is part, shall be in effect.
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The fulfillment of the foregoing conditions will not create any obligation on
Northrop Grummans part to effect the spin-off. We are not aware of any
material federal or state regulatory requirements that must be complied with or
any material approvals that must be obtained, other than compliance with SEC
rules and regulations and the declaration of effectiveness of the Registration
Statement by the SEC, in connection with the distribution. Northrop Grumman has
the right not to complete the spin-off if, at any time prior to the
distribution, the board of directors of Northrop Grumman determines, in its
sole discretion, that the spin-off is not in the best interests of Northrop
Grumman or its stockholders, that a sale or other alternative is in the best
interests of Northrop Grumman or its stockholders or that it is not advisable
for HII to separate from Northrop Grumman. For more information, see The
Spin-OffConditions to the Spin-Off.
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Trading Market and Symbol
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We have filed an application to list HII common stock on the NYSE under the
ticker symbol HII. We anticipate that, at least two trading days prior to the
record date, trading of shares of HII common stock will begin on a
when-issued basis and will continue up to and including the distribution
date, and we expect regular-way trading of HII common stock will begin the
first trading day after the distribution date. We also anticipate that, at
least two trading days prior to the record date, there will be two markets in
Northrop Grumman common stock: a regular-way market on which shares of Northrop
Grumman common stock will trade with an entitlement to shares of HII common
stock to be distributed pursuant to the distribution, and an ex-distribution
market on which shares of Northrop Grumman common stock will trade without an
entitlement to shares of HII common stock. For more information, see Trading
Market.
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Tax Consequences
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Northrop Grumman has received the IRS Ruling and will receive an opinion of
counsel stating that Northrop Grumman, Northrop Grummans stockholders and HII
will not recognize any taxable income, gain or loss for U.S. Federal income tax
purposes as a result of the spin-off, including the internal reorganization,
except with respect to any cash received by Northrop Grummans stockholders in
lieu of fractional shares. For a more detailed description of the U.S. Federal
income tax consequences of the spin-off, see The Spin-OffU.S. Federal Income
Tax Consequences of the Spin-Off.
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Each stockholder is urged to consult his, her or its tax advisor as to the
specific tax consequences of the spin-off to such stockholder, including the
effect of any state, local or non-U.S. tax laws and of changes in applicable
tax laws.
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12
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Relationship with
Northrop Grumman after
the Spin-Off
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We will enter into a Separation and Distribution Agreement and other agreements
with Northrop Grumman related to the spin-off. These agreements will govern the
relationship between us and Northrop Grumman after completion of the spin-off
and provide for the allocation between us and Northrop Grumman of various
assets, liabilities and obligations (including employee benefits, intellectual
property, insurance and tax-related assets and liabilities). The Separation and
Distribution Agreement, in particular, will provide for the settlement or
extinguishment of certain obligations between us and Northrop Grumman. We
intend to enter into a Transition Services Agreement with Northrop Grumman
pursuant to which certain services will be provided on an interim basis
following the distribution. We also intend to enter into an Employee Matters
Agreement that will set forth the agreements between Northrop Grumman and us
concerning certain employee compensation and benefit matters. Further, we
intend to enter into a Tax Matters Agreement with Northrop Grumman regarding
the sharing of taxes incurred before and after completion of the spin-off,
certain indemnification rights with respect to tax matters and certain
restrictions to preserve the tax-free status of the spin-off. In addition, to
facilitate the ongoing use of various intellectual property by each of us and
Northrop Grumman, we intend to enter into an Intellectual Property License
Agreement with Northrop Grumman that will provide for certain reciprocal
licensing arrangements. We also intend to enter into an Insurance Matters
Agreement with Northrop Grumman. We describe these arrangements in greater
detail under Certain Relationships and Related Party TransactionsAgreements
with Northrop Grumman Related to the Spin-Off, and describe some of the risks
of these arrangements under Risk FactorsRisks Relating to the Spin-Off.
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Dividend Policy
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HII does not currently intend to pay a dividend. Going forward, HIIs dividend
policy will be established by the HII board of directors based on our financial
condition, results of operations and capital requirements, as well as
applicable law, regulatory constraints, industry practice and other business
considerations that HIIs board of directors considers relevant. In addition,
the terms of the agreements governing our new debt or debt that we may incur in
the future may limit or prohibit the payments of dividends. For more
information, see Dividend Policy.
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Transfer Agent
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Computershare Trust Company, N.A.
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Risk Factors
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We face both general and specific risks and uncertainties relating to our
business, our relationship with Northrop Grumman and our being an independent,
publicly owned company. We also are subject to risks relating to the spin-off.
You should carefully read Risk Factors beginning on page 19 of this
information statement.
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13
Summary Historical and Unaudited Pro Forma Condensed Consolidated Financial Data
The following table presents the summary historical condensed consolidated financial data for
NGSB and HIIs unaudited pro forma condensed consolidated financial data. The consolidated
financial data set forth below for the years ended December 31, 2010, 2009 and 2008 are derived
from NGSBs audited consolidated financial statements included elsewhere in this information
statement.
The summary unaudited pro forma condensed consolidated financial data for the year ended
December 31, 2010 have been prepared to reflect the spin-off, including: (i) the distribution of
48,492,792 shares of HII common stock by Northrop Grumman to its stockholders; (ii) the incurrence
of $1,775 million of the HII Debt and the HII Credit Facility by HII and the making of the $1,429
million Contribution; (iii) adjustments for certain federal contract matters in accordance with the
Separation and Distribution Agreement; (iv) adjustments for uncertain federal and state tax
positions in accordance with the Tax Matters Agreement; (v) the cost of special long-term incentive
stock grants, which are contingent upon completion of the spin-off, in the form of restricted stock
rights for our Named Executive Officers, including our President, and other key employees; and (vi)
the cost of modifying certain terms of existing long-term incentive stock plans to allow continued
vesting for our participants. The unaudited pro forma condensed consolidated statement of
operations data presented for the year ended December 31, 2010 assumes the spin-off occurred on
January 1, 2010, the first day of fiscal year 2010. The unaudited pro forma condensed consolidated
statement of financial position data assumes the spin-off occurred on December 31, 2010. The
assumptions used and pro forma adjustments derived from such assumptions are based on currently
available information and we believe such assumptions are reasonable under the circumstances.
The unaudited pro forma condensed consolidated financial statements are not necessarily
indicative of our results of operations or financial condition had the distribution and our
anticipated post-spin-off capital structure been completed on the dates assumed. Also, they may not
reflect the results of operations or financial condition which would have resulted had we been
operating as an independent, publicly owned company during such periods. In addition, they are not
necessarily indicative of our future results of operations or financial condition.
You should read this summary financial data together with Unaudited Pro Forma Condensed
Consolidated Financial Statements, Capitalization, Selected Historical Consolidated Financial
and Other Data, Managements Discussion and Analysis of Financial Condition and Results of
Operations and NGSBs consolidated financial statements and accompanying notes included in this
information statement.
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(Year ended) December 31
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HII
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Pro Forma
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NGSB
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2010
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2010
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2009
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2008
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(in millions)
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Sales and service revenues
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$
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6,723
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$
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6,723
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$
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6,292
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$
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6,189
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Goodwill impairment
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2,490
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Operating income (loss)
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255
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248
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211
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(2,354
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)
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Net earnings (loss)
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79
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135
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124
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(2,420
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Total assets
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5,560
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5,203
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5,036
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4,760
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Long-term debt
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1,851
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105
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283
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283
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Total long-term obligations
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3,294
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1,559
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1,645
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1,761
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Free cash flow
(1)
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98
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168
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(269
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)
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121
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(1)
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Free cash flow is a non-generally accepted accounting principles (non-GAAP) financial
measure and represents cash from operating activities less capital expenditure. See
Managements Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital ResourcesFree Cash Flow for more information on this
measure.
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14
GLOSSARY OF PROGRAMS
Listed below are brief descriptions of the programs mentioned in this information statement.
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Program Name
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Program Description
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AREVA Newport News
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Participate, as minority owners
of a limited liability company
formed with AREVA NP, in a
joint venture to supply heavy
components to the civilian
nuclear electrical power
sector. The joint venture,
AREVA Newport News, LLC, plans
to construct a production
facility adjacent to the
Newport News shipyard for the
manufacture of heavy commercial
nuclear power plant components.
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CVN-65 USS
Enterprise
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Maintain and support the
worlds first nuclear-powered
aircraft carrier, the
inactivation of which is
expected to start in 2013.
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CVN-68
Nimitz
-class
aircraft carriers
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Refuel, maintain and repair the
CVN-68
Nimitz
-class aircraft
carriers, which are the largest
warships in the world. Each
Nimitz
-class carrier is
designed for an approximately
50-year service life, with one
mid-life refueling. Aircraft
carriers are the centerpiece of
Americas Naval forces. On any
given day, aircraft carriers
exercise the U.S. Navy core
capabilities of power
projection, forward presence,
humanitarian assistance,
deterrence, sea control and
maritime security. The 10th and
final
Nimitz
-class carrier
constructed, CVN-77 USS
George
H.W. Bush
, was commissioned in
2009.
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CVN-78
Gerald R. Ford
-class aircraft
carriers
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Design and construction for the
CVN-21 program, which is the
future aircraft carrier
replacement program for CVN-65
USS
Enterprise
and CVN-68
Nimitz
-class aircraft carriers.
CVN-78
Gerald R. Ford
(the
first ship of the CVN-21
program) is currently under
construction and is scheduled
to be delivered in 2015. CVN-79
(unnamed) is under contract for
engineering, advance
construction and purchase of
long-lead time components and
material. CVN-78
Gerald R.
Ford
-class carriers are
expected to be awarded every
five years across the U.S.
Navys 30-Year Plan. They will
be the premier forward asset
for crisis response and early
decisive striking power in a
major combat operation. The
class brings improved
warfighting capability, quality
of life improvements for
sailors and reduced acquisition
and life cycle costs.
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DDG-51
Arleigh Burke
-class destroyers
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Build guided missile destroyers
designed for conducting
anti-air, anti-submarine,
anti-surface and strike
operations. The Aegis-equipped
DDG-51
Arleigh Burke
-class
destroyers are the U.S. Navys
primary surface combatant, and
have been constructed in
variants, allowing
technological advances during
construction. The U.S. Navy has
committed to restarting the
DDG-51 program, and truncating
construction of the DDG-1000
class of ships. The plan is for
a total of 62 ships.
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DDG-1000
Zumwalt
-class destroyers
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Design and build
next-generation multi-mission
surface combatants in
conjunction with General
Dynamics Bath Iron Works and
construct the ships integrated
composite deckhouses, as well
as portions of the ships aft
peripheral vertical launch
systems. Developed under the
DD(X) destroyer program, the
DDG-1000
Zumwalt
-class
destroyer is the lead ship of a
class tailored for land attack
and littoral dominance with
capabilities that defeat
current and projected threats
and improve battle force
defense. In July 2008, the U.S.
Navy announced its decision to
truncate the DDG-1000 program
at three ships and restart the
construction of BMD-capable
DDG-51s. We are constructing
the composite superstructure of
DDG-1000
Zumwalt
and DDG-1001
Michael Monsoor
and have
submitted a proposal to
construct the DDG-
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Program Name
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Program Description
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1002 (unnamed) composite
superstructure.
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DoE
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Participate, as a minority
member in two joint ventures,
in the management and operation
of the U.S. Department of
Energys (DoE) nuclear sites,
the Savannah River Site near
Aiken, South Carolina, and
potentially at the Idaho
National Laboratory, near Idaho
Falls, Idaho. Our joint venture
partners include Fluor
Corporation and Honeywell
International Inc. at the
Savannah River Site, and CH2M
Hill in Idaho.
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Inactivation
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Defuel and inactivate
nuclear-powered aircraft
carriers for the U.S. Navy.
Inactivation of nuclear-powered
aircraft carriers, of which 11
have been constructed to date,
is expected to start in 2013
with CVN-65 USS
Enterprise
.
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LHA-6
America-
class
amphibious assault ships
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Design and build amphibious
assault ships that provide
forward presence and power
projection as an integral part
of joint, interagency and
multinational maritime
expeditionary forces. The LHA-6
America
-class ships, together
with the LHD-1
Wasp
-class
ships, are the successors to
the aging LHA-1
Tarawa-
class
ships. Three of the original
five
Tarawa
-class ships have
been recently decommissioned,
and the remainder of the class
is scheduled to be
decommissioned by 2015. The
first LHA replacement (LHA(R))
ship, LHA-6
America
, was placed
under contract with us in June
2007, and is scheduled for
delivery in 2013. The LHA-6
America
-class ships optimize
aviation operations and support
capabilities. The key
differences between LHA-6 and
the LHD-1
Wasp-
class ships
include an enlarged hangar
deck, enhanced aviation
maintenance facilities,
increased aviation fuel
capacity, additional aviation
storerooms, removal of the well
deck and an electronically
reconfigurable command,
control, computers,
communications, intelligence,
surveillance and reconnaissance
(C4ISR) suite.
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LHD-1
Wasp
-class
amphibious assault ships
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Build the worlds largest class
of amphibious assault ships,
the LHD-1
Wasp
-class ships,
which perform essentially the
same mission as the LHA/LHA(R)
ships. These ships project
power and maintain presence by
serving as the cornerstone of
the Amphibious Readiness Group
(ARG)/Expeditionary Strike
Group (ESG). A key element of
the Seapower 21 pillars of Sea
Strike and Sea Basing, these
ships transport and land
elements of the Marine
Expeditionary Brigade (MEB)
with a combination of aircraft
and landing craft. The plan is
for a total of eight ships, of
which LHD-8 USS
Makin Island
,
commissioned in October 2009
and equipped with improved
capabilities, is the last.
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LPD-17
San Antonio-
class
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Design and build amphibious
transport dock ships, which are
warships that embark, transport
and land elements of a landing
force for a variety of
expeditionary warfare missions,
and also serve as the secondary
aviation platform for
Amphibious Readiness Groups.
The LPD-17
San Antonio
-class is
the newest addition to the U.S.
Navys 21
st
century
amphibious assault force, and
these ships are a key element
of the U.S. Navys seabase
transformation. Collectively,
these ships functionally
replace over 41 ships (LPD-4,
LSD-36, LKA-113 and LST-1179
classes of amphibious ships),
providing the U.S. Navy and
U.S. Marine Corps with modern,
seabased platforms that are
networked, survivable and built
to operate with 21
st
century transformational
platforms. The first ship in
the class, LPD-17 USS
San
Antonio
, was delivered in July
2005. We have delivered LPD-18
through LPD-21 to the U.S.
Navy. We are currently
constructing LPD-22 through
LPD-25 and the U.S. Navy has
awarded us the long lead time
material contract for LPD-26
and LPD-27. A long lead time
material contract is a contract
that provides the contractor
with the ability to begin
ordering materials for a
subsequent construction
contract. These types of
contracts are often used with
major ship acquisitions due to
the length of time between
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Program Name
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Program Description
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order and delivery of some of
the equipment.
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NSC-1
Legend-
class
National Security Cutter
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Design and build the U.S. Coast
Guards National Security
Cutters, the largest and most
technically advanced class of
cutter in the Coast Guard. The
first three NSCs were procured
through a limited liability
company owned by us and
Lockheed Martin. NSC-4 and
future NSCs are expected to be
ordered directly from us. The
NSC is equipped to carry out
maritime homeland security,
maritime safety, protection of
natural resources, maritime
mobility and national defense
missions. The plan is for a
total of eight ships of which
the first two ships, NSC-1
USCGC
Bertholf
and NSC-2 USCGC
Waesche
, have been delivered
and NSC-3
Stratton
is under
construction. The construction
contract for NSC-4
Hamilton
was
awarded in November 2010, and
long-lead procurement is
underway for NSC-5 (unnamed).
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Refueling and Complex Overhaul (RCOH)
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|
Perform refueling and complex
overhaul (RCOH) of
nuclear-powered aircraft
carriers, which is required at
the mid-point of their 50-year
life cycle. CVN-71 USS
Theodore
Roosevelt
is currently
undergoing RCOH, marking the
fifth CVN RCOH in history. We
have already successfully
completed the RCOH process for
CVN-65 USS
Enterprise
, CVN-68
USS
Nimitz
, CVN-69 USS
Dwight
D. Eisenhower
and CVN-70 USS
Carl Vinson
, and have been
awarded a planning contract for
the RCOH of CVN-72 USS
Abraham
Lincoln
.
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SSBN(X)
Ohio
-class
Submarine Replacement Program
|
|
Act, through an agreement with
Electric Boat, as design
subcontractor for the
Ohio
-class replacement boats.
The U.S. Navy has committed to
designing a replacement class
for the aging
Ohio
-class
nuclear ballistic submarines,
which were first introduced
into service in 1981. The
SSBN(X)
Ohio
-class Submarine
Replacement Program represents
a new program opportunity for
us. Electric Boat is expected
to lead the program. Although
the contract is not yet
negotiated, we expect to share
in the design effort and our
experience and well-qualified
workforce position us for a
potential role in the
construction effort. The
Ohio
-class includes 14
ballistic missile submarines
(SSBN) and four cruise missile
submarines (SSGN). The
Ohio
-class Submarine
Replacement Program currently
calls for 12 new ballistic
missile submarines over a
15-year period for
approximately $4 to $7 billion
each. The first
Ohio
-class
ballistic submarine is expected
to be retired in 2029, meaning
that the first replacement
platform should be in
commission by that time. The
U.S. Navy has initiated the
design process for this class
of submarine, and we have begun
design work as a subcontractor
to Electric Boat. We cannot
guarantee that we will continue
to work on the SSBN(X) design
with Electric Boat, and we can
give no assurance regarding the
final design concept chosen by
the U.S. Navy or the amount of
funding made available by
Congress for the SSBN(X)
Ohio-class Submarine
Replacement Program.
Construction is expected to
begin in 2019 with the
procurement of long-lead time
materials in 2015.
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SSN-774
Virginia
-class fast attack
submarines
|
|
Construct the newest attack
submarine as the principal
subcontractor to Electric Boat.
The SSN-774
Virginia
-class is a
post-Cold War design tailored
to excel in a wide range of
warfighting missions, including
anti-submarine and surface ship
warfare; special operation
forces; strike; intelligence,
surveillance, and
reconnaissance; carrier and
expeditionary strike group
support; and mine warfare. The
SSN-774
Virginia
-class has
several innovations which
significantly enhance its
warfighting capabilities with
an emphasis on littoral
operations. Through the
extensive use of modular
construction, open
architecture, and commercial
off-the-shelf components, the
SSN-774
Virginia
-class is
designed to remain
state-of-the-art for the entire
operational life of its
submarines through the rapid
introduction of new systems and
payloads. Through a teaming
agreement with Electric Boat
that
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Program Name
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Program Description
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provides for approximate
equality of work allocated
between the parties, we provide
SSN-774
Virginia
-class nuclear
fast attack submarines. Under
the teaming agreement, Electric
Boat is the prime contractor to
whom construction contracts
have been awarded in blocks,
and we are principal
subcontractor. Block I was
awarded in 1998 and consisted
of four submarines, Block II
was awarded in 2003 and
consisted of six submarines,
and Block III was awarded in
2008 and consisted of eight
submarines. We and Electric
Boat have delivered the first
seven submarines of the class
(all four submarines from Block
I and three submarines from
Block II), have another five
submarines under construction
(the remaining three submarines
of Block II and the first two
submarines of Block III) and
have been contracted to deliver
an additional six submarines
(the remaining six submarines
of Block III). Based on
expected build rates, the last
Block III SSN-774
Virginia
-class submarine is
scheduled for delivery in 2018.
We are also investing in our
facilities to support the
increase in production rate
from one to two SSN-774
Virginia
-class submarines per
year beginning in 2011.
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18
RISK FACTORS
You should carefully consider each of the following risks, which we believe are the principal
risks that we face and of which we are currently aware, and all of the other information in this
information statement. Some of the risks described below relate to our business, while others
relate to the spin-off. Other risks relate principally to the securities markets and ownership of
our common stock.
Should any of the following risks and uncertainties develop into actual events, our business,
financial condition or results of operations could be materially and adversely affected, the
trading price of our common stock could decline and you could lose all or part of your investment.
Risks Relating to Our Business
We face the following risks in connection with the general conditions and trends of the
industry in which we operate:
We depend heavily on a single customer, the U.S. Government, for substantially all of our business,
and changes affecting this customers ability to do business with us could have a material adverse
effect on our financial position, results of operations or cash flows.
Our business is primarily dependent upon the design, construction, repair, maintenance, fleet
support and life cycle services of nuclear-powered ships, such as aircraft carriers and submarines,
and non-nuclear ships, such as surface combatants and expeditionary warfare/amphibious assault
ships for the U.S. Navy and coastal defense surface ships for the U.S. Coast Guard, as well as the
overhaul and refueling of nuclear-powered ships for the U.S. Navy. Substantially all of our revenue
during 2010 was derived from products and services ultimately sold to the U.S. Government. In
addition, substantially all of our backlog was U.S. Government-related as of December 31, 2010. We
are a supplier, either directly or as a subcontractor or team member, to the U.S. Government and
its agencies. These contracts are subject to our customers political and budgetary constraints and
processes, changes in customers short-range and long-range strategic plans, the timing of contract
awards, significant changes in contract scheduling, intense contract and funding competition,
difficulty in forecasting costs and schedules when bidding on developmental and highly
sophisticated technical work, and delays in the timing of contract approval, as well as other risks
such as contractor suspension or debarment in the event of certain violations of legal or
regulatory requirements.
Contracts with the U.S. Government are subject to uncertain levels of funding, modification due to
changes in customer priorities and potential termination.
We are directly dependent upon allocation of defense monies to the U.S. Navy and the U.S.
Coast Guard. The funding of U.S. Government programs is subject to congressional budget
authorization and appropriation processes. For certain programs, Congress appropriates funds on a
fiscal year basis even though a program may be performed over several fiscal years. Consequently,
programs may be partially funded initially and additional funds are committed only as Congress
makes further appropriations. We cannot predict the extent to which total funding and/or funding
for individual programs will be included, increased or reduced as part of the 2011 and subsequent
budgets ultimately approved by Congress or will be included in the scope of separate supplemental
appropriations. For example, the proposed 2011 defense budget includes funding to increase
construction from one to two
Virginia
-class submarines. Currently the U.S. Government is operating
under a continuing resolution that maintains defense funding at 2010 appropriation levels. If the
proposed 2011 defense budget is not approved and funding continues at last years level, funding of
the second
Virginia
-class submarine construction contract in 2011 could be delayed or eliminated.
The impact, severity and duration of the current U.S. economic situation, the sweeping economic
plans adopted by the U.S. Government, and pressures on the federal budget could also adversely
affect the total funding and/or funding for individual programs. In the event that appropriations
for any of our programs becomes unavailable, or is reduced or delayed, our contract or subcontract
under such program may be terminated or adjusted by the U.S. Government, which could have a
material adverse effect on our future sales under such program, and on our financial position,
results of operations or cash flows.
We also cannot predict the impact of potential changes in priorities due to military
transformation and planning and/or the nature of war-related activity on existing, follow-on or
replacement programs. A shift of government priorities to programs in which we do not participate
and/or reductions in funding for or the termination of programs in which we do participate, could
have a material adverse effect on our financial position, results of operations or cash flows.
In addition, the U.S. Government generally has the ability to terminate contracts, in whole or
in part, with little to no prior notice, for convenience or for default based on performance. In
the event of termination for the U.S. Governments convenience, contractors are normally protected
by provisions covering reimbursement for costs incurred on the contracts and profit related to
those costs but not the anticipated profit that would have been earned had the contract been
completed. However, such a termination could result in the cancelation of future work on that
program. Termination resulting from our
19
default can expose us to liability and have a material adverse effect on our financial
condition and our ability to compete for contracts.
Contract cost growth on fixed price and other contracts that cannot be justified as an increase in
contract value due from customers exposes us to reduced profitability and the potential loss of
future business.
Our operating income is adversely affected when we incur certain contract costs or certain
increases in contract costs that cannot be billed to customers. This cost growth can occur if
estimates to complete increase due to technical challenges, manufacturing difficulties or delays,
or workforce-related issues, or if initial estimates used for calculating the contract cost were
inaccurate. The cost estimation process requires significant judgment and expertise. Reasons for
cost growth may include unavailability or reduced productivity of labor, the nature and complexity
of the work to be performed, the timelines and availability of materials, major subcontractor
performance and quality of their products, the effect of any delays in performance, availability
and timing of funding from the customer, natural disasters and the inability to recover any claims
included in the estimates to complete. For example, lack of progress in LHD-8 on-board testing
preparatory to sea trials prompted us to undertake a comprehensive review of the program, including
a detailed physical audit of the ship, resulting in a pre-tax charge of $272 million in the first
quarter of 2008 for anticipated cost growth related to the identified need for substantial re-work
on the ship. In addition to the LHD-8 charge, an additional $54 million of charges was recognized
in the first quarter of 2008, primarily for schedule impacts on other ships and impairment of
purchased intangibles at the Gulf Coast shipyards. Subsequent to recognizing the LHD-8 charge, we
completed our performance under the contract at costs that were lower than the amounts previously
anticipated primarily due to efficiencies from improved operating practices, risk retirement and
increased escalation recovery. As a result, $63 million of the loss provision was reversed in 2008,
and an additional $54 million was reversed in 2009 upon delivery of the ship. In addition, shortly
after Hurricane Katrina, we entered into a fixed price incentive contract for LPD-22 through
LPD-25, which, in hindsight, reflected aggressive cost targets resulting in estimated costs today
that are greater than were included in our bid. Therefore, construction under the LPD-22 through
LPD-25 contract has been adversely impacted by operating performance factors, resulting in
unfavorable cost growth that led to pre-tax charges totaling $171 million in 2009. A significant
change in cost estimates on one or more programs could have a material adverse effect on our
financial position, results of operations or cash flows.
Our principal U.S. Government business is currently being performed under firm fixed price
(FFP), fixed price incentive (FPI), cost plus incentive fee (CPIF), cost plus fixed fee
(CPFF) and cost plus award fee (CPAF) contracts. The risk to us of not being reimbursed for
some of our costs varies with the type of contract. Under FFP contracts, we retain all costs
savings on completed contracts but are liable for the full amount of all expenditures in excess of
the contract price. FPI contracts, on the other hand, are flexibly priced arrangements under which
overruns and underruns to an agreed-upon target cost are shared between the U.S. Government and us.
Our profit is increased or decreased according to a formula set forth in the contract, which
generally compares the amount of costs incurred to the contract target cost. The U.S. Government is
liable for its share of all allowable costs up to a ceiling price. However, we are responsible for
all costs incurred in excess of such ceiling price, which is typically 125135% of target cost. In
addition, our FPI contracts, if long-term, generally provide for the U.S. Government to pay
escalation based on published indices relating to the shipbuilding industry. Under CPIF, CPFF and
CPAF contracts, we are generally only required to perform the contract to the extent the U.S.
Government makes funds available, and we recover all allowable costs incurred in the performance of
the contract. Under CPIF contracts, our profit is determined by a contractually specified formula
that essentially compares allowable incurred costs to the contract target cost. In some instances,
the contract fee may be affected by a maximum or minimum fee percentage set for the contract. Under
CPFF contracts, the fee is the same without regard to the amount of cost incurred. Under CPAF
contracts, the fee is determined in accordance with the award fee provisions in the contract. In
2010, approximately 42% of Newport News revenues were CPIF, which primarily included aircraft
carrier construction and RCOH. Twenty-six percent of Newport News 2010 revenues were FPI
contracts, mainly consisting of submarine construction, 29% of revenues were CPFF contracts, 2%
were CPAF and 1% were FFP. Approximately 74% of Gulf Coasts revenues were FPI, 13% were CPAF, 6%
were CPFF, 5% were CPIF and 2% were FFP.
Our earnings and margins depend, in part, on our ability to perform under contracts and on
subcontractor performance as well as raw material and component availability and pricing.
When agreeing to contractual terms, we make assumptions and projections about future
conditions and events, many of which extend over long periods. These projections assess the
productivity and availability of labor, the complexity of the work to be performed, the cost and
availability of materials, the impact of delayed performance and the timing of product deliveries.
We cannot guarantee that there will not be significant variances from our assumptions, delays in
our performance and the timing of our product deliveries. If there is a significant change in one
or more of these circumstances or estimates, or if we face unanticipated contract costs, the
profitability of one or more of these contracts may be adversely affected.
20
We also rely on other companies to provide raw materials and major components for our products
and rely on subcontractors to produce hardware elements and sub-assemblies and perform some of the
services that we provide to our customers. Disruptions or performance problems caused by our
subcontractors and vendors could have an adverse effect on our ability to meet our commitments to
customers. Our ability to perform our obligations as a prime contractor could be adversely affected
if one or more of the vendors or subcontractors are unable to provide the agreed-upon products or
materials or perform the agreed-upon services in a timely and cost-effective manner.
All major materials, parts and components for our products are currently available in adequate
supply from domestic and/or foreign sources. Through the cost escalation provisions contained in
some of our U.S. Government contracts, we may be protected from increases in material costs to the
extent that the increases in our costs are in line with industry indices. However, the difference
in basis between our actual material costs and these indices may expose us to cost uncertainty even
with these provisions. The most significant raw material we require is steel. A significant delay
in supply deliveries of our key raw materials required in our production processes could have a
material adverse effect on our financial position, results of operations or cash flows.
In connection with our government contracts, we are required to procure certain materials and
component parts from supply sources approved by the U.S. Government. Due largely to the
consolidation of the defense industry, there are currently several components for which there is
only one supplier. The inability of a sole source supplier to meet our needs could have a material
adverse effect on our financial position, results of operations or cash flows.
Our results of operations depend on the award of new contracts.
The prospects of U.S. shipyards, including ours, can be materially affected by their success
in securing significant U.S. Navy contract awards. In February 2010, the Department of Defense (the
DoD) issued its Report of the Quadrennial Defense Review (the QDR), a legislatively mandated
review of military strategy and priorities that shapes defense funding over the ensuing four years.
The QDR emphasized the related challenge of rebuilding readiness at a time when the DoD is also
pursuing growth, modernization and transformation of its forces and capabilities, reiterated the
need for preparedness across the range of military operations, and prioritized continued investment
in warfighting capabilities. The U.S. Navy relies on the force requirements set forth in the QDR to
design its 30-Year Plan. The QDR report describes some of the tradeoffs that the DoDs leaders have
identified to enable the rebalancing of U.S. military capabilities. The Presidents 2011 budget
request proposes reductions to certain lower-priority programs, including some in which we
participate or for which we expect to compete, so that more pressing needs can be addressed, both
within that budget and those of subsequent years. The U.S. Navy has decided to delay procurement of
CVN-79 (unnamed) from fiscal year 2012 to 2013, cancel the new-design CG(X) procurement program and
truncate the DDG-1000
Zumwalt
-class destroyers program to three ships. We believe that our
shipbuilding programs are a high priority for national defense, but under budgetary pressures, one
or more of our programs may be reduced, extended or terminated by our U.S. Government customers.
Specific actions already taken that could negatively affect us include the deferral of production
of new maritime prepositioning ships, the reduction in the number of planned large surface
combatants and the increase of the procurement interval for aircraft carriers to five years.
In February 2010, the U.S. Navy released its 30-Year Plan, in which the U.S. Navy used the
goals and strategies set forth in the QDR to identify the naval capabilities projected to meet the
defense challenges faced by the nation in the next three decades. The 30-Year Plan uses, as a
baseline, a 313-ship force that was first proposed by the U.S. Navy to Congress in 2006 to design a
battle inventory to provide global reach; persistent presence; and strategic, operational and
tactical effects expected of naval forces within reasonable levels of funding. Any significant
reduction from the 30-Year Plan could have a material adverse effect on our financial position,
results of operations or cash flows.
Although we believe that, as the only company currently capable of building the U.S. Navys
nuclear-powered aircraft carriers, we are in a strong competitive position to be awarded any
contracts for building new nuclear-powered aircraft carriers, we cannot give any assurances that we
will receive any award, that aircraft carrier construction projects will not be delayed or that
aircraft carrier construction projects will be funded by Congress. Furthermore, in response to the
need for cheaper alternatives and the proliferation of smart weapons, it is possible that future
strategy reassessments by the DoD may result in a decreased need for aircraft carriers. We are
currently performing design engineering and advanced construction and procuring long lead time
materials for the next generation of aircraft carriers. For the year ended December 31, 2010,
aircraft carrier construction and design engineering accounted for approximately 21% of our
consolidated revenue. Aircraft carrier programs and other government projects can be delayed, and
such delays typically cause loss of income during the period of delay and retraining costs when
work resumes. Any significant reduction in the level of government appropriations for aircraft
carrier or other shipbuilding programs, or a significant delay of such appropriations, would have a
material adverse effect on our financial position, results of operations or cash flows.
Through a teaming agreement with Electric Boat that provides for approximate equality of work
allocated between the parties, we provide SSN-774
Virginia
-class nuclear fast attack submarines.
Under the teaming agreement, Electric Boat
21
is the prime contractor to whom construction contracts have been awarded in blocks, and we are
principal subcontractor. Block I was awarded in 1998 and consisted of four submarines, Block II was
awarded in 2003 and consisted of six submarines, and Block III was awarded in 2008 and consisted of
eight submarines. We and Electric Boat have delivered the first seven submarines of the class (all
four submarines from Block I and three submarines from Block II), have another five submarines
under construction (the remaining three submarines of Block II and the first two submarines of
Block III) and have been contracted to deliver an additional six submarines (the remaining six
submarines of Block III). Based on expected build rates, the last Block III SSN-774
Virginia
-class
submarine is scheduled for delivery in 2018. We are also investing in our facilities to support the
increase in production rate from one to two SSN-774
Virginia
-class submarines per year beginning in
2011. The team has a current backlog of 11 SSN-774
Virginia
-class submarines, but there can be no
assurance that the SSN-774
Virginia
-class submarine program will continue to be funded or proceed
on schedule. Additionally, the U.S. Navy has initiated the design process for the aging
Ohio
-class nuclear
ballistic submarines, which were first introduced into service in 1981. The SSBN(X)
Ohio
-class
Submarine Replacement Program represents a new program opportunity for us. Electric Boat is
expected to lead the program. Although the contract is not yet negotiated, we expect to share in
the design effort and our experience and well-qualified workforce position us for a potential role
in the construction effort. The
Ohio
-class includes 14 ballistic missile submarines (SSBN) and four
cruise missile submarines (SSGN). The
Ohio
-class Submarine Replacement Program currently calls for
12 new ballistic missile submarines over a 15-year period for approximately $4 to $7 billion each.
The first
Ohio
-class ballistic submarine is expected to be retired in 2029, meaning that the first
replacement platform should be in commission by that time. We have begun design work as a
subcontractor to Electric Boat. We cannot guarantee that we will continue to work on the SSBN(X)
design with Electric Boat, and we can give no assurance regarding the final design concept chosen
by the U.S. Navy or the amount of funding made available by Congress for the SSBN(X) Ohio-class
Submarine Replacement Program. Construction is expected to begin in 2019 with the procurement of
long-lead time materials in 2015.
With respect to the federal nuclear market, we are a minority member of a joint venture that
manages and operates the Savannah River Site for the DoE in South Carolina. We are also a minority
member of a joint venture that was recently awarded the contract to manage and operate DoEs
Advanced Mixed Waste Project in Idaho, which was subsequently protested and is under re-evaluation
by the DoE. We are also preparing to bid (also with others in an alliance) on several other DoE
site management contracts. Competition for these types of contracts and projects is intense and
there can be no assurance that we will continue to receive contracts or be successful with our
initiatives in these areas.
Additionally, the U.S. Navy has stated that it currently expects that LPD-17
San Antonio
-class
amphibious assault transport dock ships will be a mainstay of the U.S. Navy over the next decade,
replacing a number of vessels nearing the end of their useful lives. Our U.S. Gulf Coast shipyards
are the sole builders of amphibious assault ships (LHA, LHD and LPD). Despite Congresss recent
authorization for the funding of the 10th ship in the class, we cannot guarantee that the DoD and
Congress will fund the 10 or 11 planned LPD-17
San Antonio
-class vessels. In the second quarter of
2009, we became aware of quality issues relating to certain pipe welds on our LPD-17 class of ships
under production in the Gulf Coast as well as those that had previously been delivered. In light of
these recent quality issues, we may incur additional costs to maintain our position as the
exclusive provider for these ships. See
Many of our contracts contain performance obligations
that require innovative design capabilities, are technologically complex, require manufacturing
expertise or are dependent upon factors not wholly within our control and failure to meet these
obligations could adversely affect our profitability and future prospects
. Any failure to fund
such vessels, or, even if funded, to award the construction of such vessels to us, could have a
material adverse effect on our financial position, results of operations or cash flows.
The Department of Defense has announced plans for significant changes to its business practices
that could have a material effect on its overall procurement process and adversely impact our
current programs and potential new awards.
Last year, the DoD announced certain initiatives designed to gain efficiencies, refocus
priorities and enhance business practices used by the DoD, including those used to procure goods
and services from defense contractors. These initiatives are organized in five major areas:
Affordability and Cost Growth; Productivity and Innovation; Competition; Services Acquisition; and
Processes and Bureaucracy. Our understanding is that these initiatives are intended to drive down
costs and enhance efficiencies and productivity. As described by a senior DoD official, they are
intended to enable the DoD to do more without more.
These initiatives are expected to impact the contracting environment in which we do business
with our DoD customers as we and others in the industry adjust our practices to address the new
initiatives and the reduced level of spending by the DoD. We are taking steps internally to assess
how we can respond to and support these changes, including how we can further reduce costs and
increase productivity, modify how we respond to proposals and revise our areas of focus. Depending
on how these initiatives are implemented, they could have an impact on current programs as well as
new business opportunities. Changes to the DoD acquisition system and contracting models could
affect whether and, if so, how we pursue certain opportunities and the terms under which we are
able to do so. These initiatives are still fairly new; we expect to understand better the specific
impacts to our business as the DoD implements them further.
22
Our future success depends, in part, on our ability to deliver our products and services at an
affordable life cycle cost, requiring us to have and maintain technologies, facilities, equipment
and a qualified workforce to meet the needs of current and future customers.
Shipbuilding is a long cycle business and our success depends on quality, cost and schedule
performance on our contracts. We must have and sustain the people, technologies, facilities,
equipment and financial capacity needed to deliver our products and services at an affordable life
cycle cost. If we fail to maintain our competitive position, we could lose a significant amount of
future business to our competitors, which would have a material adverse effect on our financial
position, results of operations or cash flows, or our ability to maintain market share.
Operating results are heavily dependent upon our ability to attract and retain a sufficient
number of engineers and skilled workers, at competitive costs, with requisite skills and/or
security clearances. Additionally, it is important that we have stable future revenues and costs in
order to maintain a qualified workforce. The necessary nuclear expertise required and the
challenges of hiring and training a qualified workforce can be a limitation on our business. If
qualified personnel become scarce, we could experience higher labor, recruiting or training costs
in order to attract and retain such employees or could experience difficulty in performing under
our contracts or pursuing new business if the needs for such employees are unmet.
Competition within our markets and an increase in bid protests may reduce our revenues and market
share.
We believe the programs and number of ship constructions, refuelings and overhauls and
inactivations currently planned by the U.S. Navy over the next several years will remain relatively
steady; however, projected U.S. defense spending levels for periods beyond the near term are
uncertain and difficult to predict. While the U.S. Navys current 30-Year Plan is based on an
optimized 313-ship fleet, the plan itself anticipates procurement for only 276 ships during the
30-year period. Changes in U.S. defense spending may limit certain future market opportunities. If
we are unable to continue to compete successfully against our current or future competitors, we may
experience declines in revenues and market share which could negatively impact our results of
operations and financial condition.
For example, in the event the U.S. Navy determines it is in its best interest to compete the
DDG-51 class of ships and we are unable to win at least one out of three awarded ships, we would
experience not only a loss of revenues but such an event could have a material impact on ships in
production as well as on our ability to compete and construct affordable ships in the future. Such
an event could also have a material adverse effect on our financial position, results of operations
or cash flows.
The reduced level of shipbuilding activity by the U.S. Navy, as demonstrated by the reduction
in fleet size from 566 ships in 1989 to 286 ships as of January 25, 2011, has resulted in workforce
reductions in the industry, but little infrastructure consolidation. The general result has been
fewer contracts awarded to the same fixed number of shipyards. There are principally six major
private U.S. shipyards, three of which are our shipyards, plus numerous other smaller private
shipyards that compete for contracts to construct, overhaul, repair or convert naval vessels.
Northrop Grumman recently announced its intention to initiate a wind down and eventual
discontinuance of our construction activities at Avondale, our Louisiana shipyard, in 2013 and two
Louisiana components facilities by 2013 and consolidate all Gulf Coast construction into our
Mississippi facilities. We are also exploring the potential for alternative uses of the Avondale
facility by new owners, including alternative opportunities for the workforce there. We expect that
process to take some time. After this wind down, we will have two primary shipyards. Competition
for future programs is expected to be intense. Additionally, our products, such as aircraft
carriers, submarines and other ships, compete with each other, as well as with other defense
products and services, for defense monies. We cannot guarantee that there will not be some
rationalization of shipyard capacity in the United States and that we will not be subject to
shipyard consolidation or closures as a result of the reduced level of U.S. Navy spending on the
construction of its naval fleet. Any further reduction could have a significant effect on our
business, financial condition or results of operations.
Although we are the only company currently capable of refueling nuclear-powered carriers, we
also believe that two existing government-owned shipyards, one in the U.S. Pacific Northwest and
the other in the U.S. Mid-Atlantic, could refuel nuclear-powered carriers if substantial
investments in facilities, personnel and training were made. U.S. Government-owned shipyards are
presently involved in refueling, overhaul and inactivation of SSN-688
Los Angeles
-class submarines
and are capable of repairing and overhauling non-nuclear ships.
We also compete in the engineering, planning and design market with other companies that
provide engineering support services. There can be no assurance that we will be the successful
bidder on future U.S. Navy engineering work, including aircraft carrier research and development,
submarine design and future surface combatant and amphibious assault programs.
The competitive environment is also affected by bid protests from unsuccessful bidders on new
program awards. Bid protests could result in the award decision being overturned, requiring a
re-bid of the contract. Even where a bid protest
23
does not result in a re-bid, the resolution typically extends the time until the contract
activity can begin, which may reduce our earnings in the period in which the contract would
otherwise have commenced.
As a U.S. Government contractor, we are subject to a number of regulations and could be adversely
affected by changes in regulations or any negative findings from a U.S. Government audit or
investigation.
U.S. Government contractors must comply with many significant regulations, including
procurement, nuclear and other requirements. These regulations and requirements, although customary
in government contracts, increase our performance and compliance costs. Our nuclear operations are
subject to an enhanced regulatory environment, which mandates increased performance and compliance
efforts and costs. If any such regulations or requirements change, our costs of complying with them
could increase and reduce our margins.
We operate in a highly regulated environment and are routinely audited and reviewed by the
U.S. Government and its various agencies such as the U.S. Navys Supervisor of Shipbuilding, the
Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency. These agencies
review our performance under our contracts, our cost structure and our compliance with applicable
laws, regulations, and standards, as well as the adequacy of, and our compliance with, our internal
control systems and policies. Systems that are subject to review include, but are not limited to,
our accounting systems, purchasing systems, billing systems, property management and control
systems, cost estimating systems, compensation systems and management information systems. Any
costs found to be unallowable or improperly allocated to a specific contract will not be reimbursed
or must be refunded if previously reimbursed. If an audit uncovers improper or illegal activities,
we may be subject to civil and criminal penalties and administrative sanctions, which may include
termination of contracts, forfeiture of profits, suspension of payments, fines and suspension, or
prohibition from doing business with the U.S. Government. Whether or not illegal activities are
alleged, the U.S. Government also has the ability to decrease or withhold certain payments when it
deems systems subject to its review to be inadequate. In addition, we could suffer serious
reputational harm if allegations of impropriety were made against us.
As with other government contractors, the U.S. Government has, from time to time, recommended
that certain of our contract prices be reduced, or that costs allocated to our contracts be
disallowed. Some of these recommendations involve substantial amounts. In the past, as a result of
such audits and other investigations and inquiries, we have on occasion made minor adjustments to
our contract prices and the costs allocated to our government contracts. We cannot guarantee that
such audits, investigations and inquiries will not result in reductions of our contract prices in
the future.
We are also, from time to time, subject to U.S. Government investigations relating to our
operations, and we are subject to or are expected to perform in compliance with a vast array of
federal laws, including but not limited to the Truth in Negotiations Act, the False Claims Act,
Procurement Integrity Act, Cost Accounting Standards, the International Traffic in Arms Regulations
promulgated under the Arms Export Control Act, the Close the Contractor Fraud Loophole Act and the
Foreign Corrupt Practices Act. If we are convicted or otherwise found to have violated the law, or
are found not to have acted responsibly as defined by the law, we may be subject to reductions of
the value of contracts, contract modifications or termination and the assessment of penalties and
fines, compensatory or treble damages, which could have a material adverse effect on our financial
position, results of operations or cash flows. Such findings or convictions could also result in
suspension or debarment from government contracting. Given our dependence on government
contracting, suspension or debarment could have a material adverse effect on our financial
position, results of operations or cash flows.
Many of our contracts contain performance obligations that require innovative design capabilities,
are technologically complex, require manufacturing expertise or are dependent upon factors not
wholly within our control and failure to meet these obligations could adversely affect our
profitability and future prospects.
We design, develop and manufacture products and services applied by our customers in a variety
of environments. Problems and delays in development or delivery of subcontractor components or
services as a result of issues with respect to design, technology, licensing and patent rights,
labor, learning curve assumptions or materials and components could prevent us from achieving
contractual requirements.
First-in-class ships, also known as lead ships, usually have new technology that is either
supplied by the U.S. Navy, us or other contractors. Problems in developing these new technologies
or design changes later in the construction process could lead to delays in maintaining the design
schedule needed for construction. The risk associated with new technology or mid-construction
design changes could both increase the cost of a ship and delay delivery. For example, the new
CVN-78
Gerald R. Ford
-class has many new technologies with several of them still in development.
Those technologies include but are not limited to EMALS (the electromagnetic aircraft launch
system), AAG (the advanced arresting gear) and DBR (the dual band radar). All three of these are
being developed concurrently with the ship under construction. Late delivery of information could
drive inefficiencies in the construction process, increase cost and put the delivery schedule at
risk, and could adversely affect our profitability and future prospects.
24
In addition, our products cannot be tested and proven in all situations and are otherwise
subject to unforeseen problems. Examples of unforeseen problems that could negatively affect
revenue and profitability include premature failure of products that cannot be accessed for repair
or replacement, problems with quality or workmanship and unplanned degradation of product
performance. These failures could result, either directly or indirectly, in loss of life or
property. Among the factors that may affect revenue and profits could be unforeseen costs and
expenses not covered by insurance or indemnification from the customer, diversion of management
focus in responding to unforeseen problems, loss of follow-on work and, in the case of certain
contracts, repayment to the government customer of contract cost and fee payments we previously
received.
In 2009, we received notice of an investigation regarding work performed by our Gulf Coast
shipyards on the LPD-17
San Antonio
-class ships. While the investigation did not result in any
fraud or willful misconduct being alleged, in response to the concerns regarding the quality of our
products, in 2009, our Gulf Coast shipyards began implementation of a new management approach
focused on better organizing and managing the construction of the ships we build. There can be no
assurance that this approach will deliver high quality products in a safe, timely and
cost-effective manner as intended, and there may be difficulties related to its implementation. We
have also encountered various quality issues on our aircraft carrier construction and overhaul
programs and our SSN-774
Virginia
-class submarine construction program at our Newport News
location. These include matters related to filler metal used in pipe welds identified in 2007, and
in 2009, issues associated with non-nuclear weld inspection and the installation of weapons
handling equipment on certain submarines. We may discover additional quality issues related to our
products requiring analysis and corrective action in the future.
In addition, we have experienced several quality issues in the Gulf Coast related to our
LPD-17 class of ships. In the second quarter of 2009, as a result of a review of the design,
engineering and production processes undertaken as a result of leaks discovered in the LPD-17 USS
San Antonio
s lube oil system, we became aware of quality issues relating to certain pipe welds on
ships under production in the Gulf Coast as well as those that had previously been delivered. Since
that discovery, we have been working with the customer to determine the nature and extent of the
pipe weld issue and its possible impact on related shipboard systems. This effort has resulted in
the preparation of a technical analysis of the problem, additional inspections on the ships, a
rework plan for ships previously delivered and in various stages of production, and modifications
to the work plans for ships in production. Although not fully resolved with the U.S. Navy, we
believe that the incremental costs associated with the anticipated resolution of these matters have
been appropriately reflected in our financial statements. In the fourth quarter of 2009, certain
bearing wear and debris were found in the lubrication system of the main propulsion diesel engines
(MPDE) installed on LPD-21. We are participating with the U.S. Navy and other industry
participants involved with the MPDEs in a review panel to examine the MPDE lubrication systems
design, construction, operation and maintenance for the LPD-17 class of ships. To date, the review
has identified several potential system improvements for increasing the system reliability and
certain changes are being implemented on ships under construction at this time. We continue to work
in partnership to investigate and identify any additional corrective actions to address quality
issues and will implement appropriate corrective actions consistent with our contractual and legal
obligations. The U.S. Navy has requested that a special MPDE flush procedure be used on LPDs 22
through 25 under construction at our Gulf Coast facilities. We have informed the U.S. Navy of our
position that should they direct us to use this new flush procedure, we believe such direction
would be a change to the contracts for all LPDs under construction, and that such a change would
entitle us to an equitable adjustment to cover the cost and schedule impacts. However, we can give
no assurance that the U.S. Navy will agree that any such direction would constitute a contract
change.
We cannot make assurances that potential undiscovered issues would not have a material adverse
effect on our financial position, results of operations or cash flows in the future. See
Our
results of operations depend on the award of new contracts
.
We may not realize the anticipated benefits related to the wind down of our construction activities
at Avondale, our Louisiana shipyard, and two Louisiana components facilities and the consolidation
of all Gulf Coast construction into our Mississippi facilities.
In July 2010, Northrop Grumman announced its intention to wind down our construction
activities at Avondale, our Louisiana shipyard, in 2013 and two Louisiana components facilities by
2013, after completing LPD-17
San Antonio
-class ships currently under construction, and consolidate
all Gulf Coast construction into our Mississippi facilities. Future LPD-class ships will be built
in a single production line at our Pascagoula, Mississippi facility. The consolidation is intended
to reduce costs, increase efficiency and address shipbuilding overcapacity. We are also exploring
the potential for alternative uses of the Avondale facility by new owners, including alternative
opportunities for the workforce there. We expect that process to take some time. We cannot provide
any assurances that consolidation of shipbuilding activities in our Pascagoula and Gulfport
facilities will result in our realization of benefits from serial production at those facilities.
In connection with the increased utilization of our employees and facilities in our Pascagoula
shipyard, we may encounter difficulties in
25
adhering to back-to-back production schedules. An inability to adhere to production schedules
could have an adverse effect on our ability to timely perform under our contracts and to obtain new
contracts in the future. Furthermore, because our workforce will be located primarily in two
locations, we may not be able to attract and retain a sufficient number of skilled and trained
employees to perform the increased workload in Pascagoula and Gulfport. Any failure to attract and
retain the necessary workforce, or to effectively manage and control third-party contractors, could
adversely affect our ability to perform under our contracts and could have a material adverse
effect on our financial position, results of operations or cash flows. Additionally, due to the
consolidation, we expect higher costs to complete ships currently under construction in Avondale
due to anticipated reductions in productivity, and have increased the estimates to complete for
LPDs 23 and 25 by approximately $210 million, which caused us to recognize a $113 million pre-tax
charge to second quarter 2010 operating income.
In addition, we anticipate that we will incur substantial restructuring-related costs and
asset write-downs currently estimated at $310 million related to the wind down of our operations at
Avondale. We have assumed that substantially all of the restructuring expenses associated with the
wind down of those operations will be recoverable and amortized as future allowable costs over five
years based upon applicable government regulations governing internal restructuring activities
and/or based upon other Federal Acquisition Regulation (FAR) allowable contract cost provisions.
In a preliminary assessment of our proposed treatment of the wind down costs, the U.S. Navy noted
that it has initial concerns regarding the allowability of selected elements of our restructuring
proposal. The DCAA, a DoD agency, prepared an initial audit report on our cost proposal for the
restructuring and shutdown related costs, in which it stated that, in general, the proposal was not
adequately supported in order for it to reach a conclusion. The DCAA also questioned about $25
million (approximately 8%) of the costs submitted. The DCAA stated that it could not reach a final
conclusion on the cost submission due to the potential spin-off transaction. Accordingly, the DCAA
did not accept the cost proposal as submitted, and we intend to resubmit our proposal to address
the concerns express by DCAA. Should these costs be further challenged by the U.S. Navy, it could
create uncertainty as to the timing, allocation and eventual allowability of the restructuring
costs related to the wind down of the Avondale facility. We do not have an agreement with our
customer in place regarding the government contract accounting and pricing treatment of these
costs. The actual restructuring expenses related to the wind down may be greater than our current
estimate and any inability to recover such costs could result in a material adverse effect on our
financial position, results of operations or cash flows.
We use estimates when accounting for contracts. Changes in estimates could affect our profitability
and our overall financial position.
Contract accounting requires judgment relative to assessing risks, estimating contract
revenues and costs, and making assumptions for schedule and technical issues. Due to the size and
nature of many of our contracts, the estimation of total revenues and costs at completion is
complicated and subject to many variables. For new programs, we estimate, negotiate and contract
for construction on ships that are not completely designed. Therefore, assessing risks, estimating
contract revenues and costs, and making assumptions for schedule and technical issues for these
ships is subject to the variability of the final ship design and evolving scope of work. For all
ships, assumptions have to be made regarding the length of time to complete the contract because
costs also include expected increases in wages and prices for materials. Similarly, assumptions
have to be made regarding the future impact of our efficiency initiatives and cost reduction
efforts. Incentives, awards or penalties related to performance on contracts are considered in
estimating revenue and profit rates, and are recorded when there is sufficient information to
assess anticipated performance.
Because of the significance of the judgment and estimation processes described above, it is
possible that materially different amounts could be obtained if different assumptions were used or
if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or
estimates may have a material adverse effect upon future period financial reporting and
performance. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsCritical Accounting Policies.
Our business is subject to disruption caused by natural disasters, environmental disasters and
other factors that could have a material adverse effect on our financial position, results of
operations or cash flows.
We have significant operations located in regions of the United States that have been and may
be exposed to damaging storms, such as hurricanes, and environmental disasters, such as oil spills.
Although preventative measures may help to mitigate damage, the damage and disruption resulting
from natural and environmental disasters may be significant. Should insurance or other risk
transfer mechanisms be unavailable or insufficient to recover all costs, we could experience a
material adverse effect on our financial position, results of operations or cash flows. See
Our
insurance coverage may be inadequate to cover all of our significant risks or our insurers may deny
coverage of material losses we incur, which could adversely affect our profitability and overall
financial position
.
Our suppliers and subcontractors are also subject to natural and environmental disasters that
could affect their ability to deliver or perform under a contract. Performance failures by our
subcontractors due to natural or environmental disasters
26
may adversely affect our ability to perform our obligations on the prime contract, which could
reduce our profitability due to damages or other costs that may not be fully recoverable from the
subcontractor or from the customer or our insurers and could result in a termination of the prime
contract and have an adverse effect on our ability to compete for future contracts.
Natural disasters can also disrupt our workforce, electrical and other power distribution
networks, including computer and internet operation and accessibility, and the critical industrial
infrastructure needed for normal business operations. These disruptions could cause adverse effects
on our profitability and performance. Environmental disasters, particularly oil spills in waterways
and bodies of water used for the transport and testing of our ships, can disrupt the timing of our
performance under our contracts with the U.S. Navy and the U.S. Coast Guard.
Our insurance coverage may be inadequate to cover all of our significant risks or our insurers may
deny coverage of material losses we incur, which could adversely affect our profitability and
overall financial position.
We endeavor to identify and obtain, in established markets, insurance agreements to cover
significant risks and liabilities (including, among others, natural disasters, product liability
and business interruption). Not every risk or liability can be protected by insurance, and, for
insurable risks, the limits of coverage reasonably obtainable in the market may not be sufficient
to cover all actual losses or liabilities incurred, including, for example, a catastrophic
hurricane claim. In some, but not all, circumstances, we may receive indemnification from the U.S.
Government. Because of the limitations in overall available coverage referred to above, we may have
to bear substantial costs for uninsured losses that could have a material adverse effect on our
financial position, results of operations or cash flows. Additionally, disputes with insurance
carriers over coverage may affect the timing of cash flows and, if litigation with the carrier
becomes necessary, an outcome unfavorable to us may have a material adverse effect on our financial
position, results of operations or cash flows.
We are pursuing legal action against an insurance provider, Factory Mutual Insurance Company
(FM Global), arising out of a disagreement concerning the coverage of certain losses related to
Hurricane Katrina (see Notes to Consolidated Financial StatementsNote 15). Legal action was
commenced against FM Global on November 4, 2005, which is now pending in the U.S. District Court
for the Central District of California, Western Division. In August 2007, the District Court issued
an order finding that the excess insurance policy provided coverage for Katrina-related losses. FM
Global appealed the District Courts order and on August 14, 2008, the U.S. Court of Appeals for
the Ninth Circuit reversed the earlier summary judgment order in favor of Northrop Grummans
interest, holding that the FM Global excess policy unambiguously excludes damage from the storm
surge caused by Hurricane Katrina under its Flood exclusion. The Ninth Circuit remanded the case
to the District Court to determine whether the California efficient proximate cause doctrine
affords coverage sought by the company under the policy even if the Flood exclusion of the policy
is unambiguous. On April 2, 2009, the Ninth Circuit denied Northrop Grummans Petition for
Rehearing and remanded the case to the District Court. On June 10, 2009, Northrop Grumman filed a
motion seeking leave of court to file a complaint adding Aon Risk Services, Inc. of Southern
California (Aon) as a defendant. On July 1, 2009, FM Global filed a motion for partial summary
judgment seeking a determination that the California efficient proximate cause doctrine is not
applicable or that it affords no coverage under the policy. On August 26, 2010, the District Court
denied Northrop Grummans motion to add Aon as a defendant to the case pending in federal court,
finding that Northrop Grumman has a viable option to bring suit against Aon in state court. Also on
August 26, the District Court granted FM Globals motion for summary judgment based upon
Californias doctrine of efficient proximate cause, and denied FM Globals motion for summary
judgment based upon breach of contract, finding that triable issues of fact remained as to whether
and to what extent we sustained wind damage apart from the storm surge that inundated our
Pascagoula facility. The District Court has scheduled trial on the merits for April 3, 2012. On
January 27, 2011, Northrop Grumman filed an action against Aon Insurance Services West, Inc.,
formerly known as Aon Risk Services, Inc. of Southern California, in Superior Court in California
alleging breach of contract, professional negligence, and negligent misrepresentation. Based on the
current status of the litigation, no assurances can be made as to the ultimate outcome of these
matters.
During 2008, notification from Munich-American Risk Partners (Munich Re), the only remaining
insurer within the primary layer of insurance coverage with which a resolution has not been
reached, was received noting that it will pursue arbitration proceedings against Northrop Grumman
related to approximately $19 million owed by Munich Re to Northrop Grumman Risk Management Inc.
(NGRMI), a wholly owned subsidiary of Northrop Grumman, for certain losses related to Hurricane
Katrina. An arbitration was later invoked by Munich Re in the United Kingdom under the reinsurance
contract. Northrop Grumman was also notified that Munich Re is seeking reimbursement of
approximately $44 million of funds previously advanced to NGRMI for payment of claim losses of
which Munich Re provided reinsurance protection to NGRMI pursuant to an executed reinsurance
contract, and $6 million of adjustment expenses. The arbitral panel has set a hearing for November
14, 2011. We believe that NGRMI is entitled to full reimbursement of its covered losses under the
reinsurance contract and has substantive defenses to the claim of Munich Re for return of the funds
paid to date, but can make no assurances as to the outcome of this matter. Payments to be made to
NGRMI in connection with this matter would be for the benefit of our accounts, and reimbursements
to be made to Munich Re would be made by us, if any.
27
Our business could suffer if we are unsuccessful in negotiating new collective bargaining
agreements.
Approximately 50% of our approximately 39,000 employees are covered by a total of 10
collective bargaining agreements. We expect to re-negotiate renewals of each of our collective
bargaining agreements between 2012 and 2014 as they approach expiration. Collective bargaining
agreements generally expire after three to five years and are subject to renegotiation at that
time. While we believe we maintain good relationships with our represented workers, and it is not
expected that the results of these negotiations will have a material adverse effect on our
financial position, results of operations or cash flows, it is possible that we may experience
difficulties with renewals and renegotiations of existing collective bargaining agreements. If we
experience such difficulties, we could incur additional expenses and work stoppages. Any such
expenses or delays could adversely affect programs served by employees who are covered by
collective bargaining agreements. In the recent past, we have experienced some work stoppages,
strikes and other labor disruptions associated with the collective bargaining of new labor
agreements.
Pension and medical expenses associated with our retirement benefit plans may fluctuate
significantly depending upon changes in actuarial assumptions, future market performance of plan
assets, future trends in health care costs and legislative or other regulatory actions.
A substantial portion of our current and retired employee population is covered by pension
plans, the costs of which are dependent upon various assumptions, including estimates of rates of
return on benefit-related assets, discount rates for future payment obligations, rates of future
cost growth and trends for future costs. Variances from these estimates could have a material
adverse effect on our financial position, results of operations or cash flows. See Notes to
Consolidated Financial StatementsNote 16. In addition, funding requirements for benefit
obligations of our pension plans are subject to legislative and other government regulatory
actions. For example, due to government regulations, pension plan cost recoveries under our
government contracts may occur in different periods from when those pension costs are accrued for
financial statement purposes or when pension funding is made. Timing differences between pension
costs accrued for financial statement purposes or when pension funding occurs compared to when such
costs are recoverable as allowable costs under our government contracts could have a material
adverse effect on our cash flow from operations.
In addition, on May 10, 2010, the U.S. Cost Accounting Standards (CAS) Board published a
Notice of Proposed Rulemaking (NPRM) that, if adopted, would provide a framework to partially
harmonize the CAS rules with the Pension Protection Act of 2006 (PPA) funding requirements. As
with the Advance Notice of Proposed Rulemaking (ANPRM) that was issued on September 2, 2008, the
NPRM would harmonize by partially mitigating the mismatch between CAS costs and PPA-amended ERISA
minimum funding requirements. Compared to the ANPRM, the NPRM simplifies the rules and the
transition process, and results in an acceleration of allowable CAS pension costs over the next
five years as compared with our current CAS pension costs. Until the final rule is published, and
to the extent that the final rule does not completely eliminate mismatches between ERISA funding
requirements and CAS pension costs, government contractors maintaining defined benefit pension
plans will continue to experience a timing mismatch between required contributions and pension
expenses recoverable under CAS. Although the CAS Board may issue its final rule in 2010, we do not
expect the rule to be issued until 2011. The final rule is expected to apply to contracts starting
the year following the award of the first CAS covered contract after the effective date of the new
rule. This would mean the rule would most likely apply to our contracts in 2011 or 2012. We
anticipate that contractors will be entitled to an equitable adjustment for any additional CAS
contract costs resulting from the final rule.
Unforeseen environmental costs could have a material adverse effect on our financial position,
results of operations or cash flows.
Our operations are subject to and affected by a variety of federal, state and local
environmental protection laws and regulations. In addition, we could be affected by future laws or
regulations, including those imposed in response to climate change concerns or other actions
commonly referred to as green initiatives. To comply with current and future environmental laws
and regulations and to meet this goal, we expect to incur capital and operating costs.
The nature of shipbuilding operations requires the use of hazardous materials. Our shipyards
also generate significant quantities of wastewater, which we treat before discharging pursuant to
various permits. In order to handle these materials, our shipyards have an extensive network of
above-ground and underground storage tanks, some of which have leaked and required remediation in
the past. In addition, the extensive handling of these materials sometimes results in spills in the
shipyards and occasionally in the adjacent rivers and waterways where we operate. The shipyards
also have extensive waste handling programs that we maintain and periodically modify consistent
with changes in applicable regulations. See BusinessEnvironmental, Health and Safety.
Various federal, state and local environmental laws and regulations impose limitations on the
discharge of pollutants into the environment and establish standards for the transportation,
storage and disposal of toxic and hazardous wastes. Stringent fines and penalties may be imposed
for noncompliance and certain environmental laws impose joint and several
28
strict liability for remediation of spills and releases of oil and hazardous substances
rendering a person liable for environmental clean-up and remediation costs and damage, without
regard to negligence or fault on the part of such person. Such laws and regulations may expose us
to liability for the conduct of or conditions caused by Northrop Grumman and others.
Environmental laws and regulations can also impose substantial fines and criminal sanctions
for violations, and may require the installation of costly pollution control equipment or
operational changes to limit pollution emissions or discharges and/or decrease the likelihood of
accidental hazardous substance releases. We also incur, and expect to continue to incur, costs to
comply with current federal and state environmental laws and regulations related to the cleanup of
pollutants previously released into the environment. In addition, if we are found to be in
violation of the Federal Clean Air Act or the Clean Water Act, the facility or facilities involved
in the violation could be placed by the U.S. Environmental Protection Agency (the EPA) on the
Excluded Parties List maintained by the General Services Administration. The listing would
continue until the EPA concludes that the cause of the violation had been cured. Listed facilities
cannot be used in performing any U.S. Government contract while they are listed by the EPA.
The adoption of new laws and regulations, stricter enforcement of existing laws and
regulations, imposition of new cleanup requirements, discovery of previously unknown or more
extensive contamination, litigation involving environmental impacts, our ability to recover such
costs under previously priced contracts or financial insolvency of other responsible parties could
cause us to incur costs in the future that could have a material adverse effect on our financial
position, results of operations or cash flows.
On June 4, 2010, the EPA proposed new regulations at 40 CFR Part 63 Subpart DDDDD entitled
National Emission Standards for Hazardous Air Pollutants for Major Sources: Industrial,
Commercial, and Institutional Boilers and Process Heaters. NGSB owns and operates five residual
oil-fired industrial boilers for supplying process and building steam along with supplying high
pressure steam to ships under construction. We believe that these boilers will be significantly
adversely affected by these regulations, if adopted as proposed. The capital cost to replace these
could be significant. However, on December 2, 2010, the EPA official responsible for these
regulations stated publicly that the proposed emissions limits in the regulation were unachievable.
On December 7, 2010, the EPA filed papers in court to secure an extension of up to 15 months on the
current judicial deadline governing these regulations in order to repropose a revised set of
regulations. As of this time, the court has not ruled on the EPAs extension request.
Northrop Grumman recently announced its intention to wind down our construction activities at
Avondale, our Louisiana shipyard, in 2013 and two Louisiana components facilities by 2013 and
consolidate all Gulf Coast construction into our Mississippi facilities. The transition plan,
covering a period of more than two years, provides the opportunity to work with federal, state and
local officials and others to explore other uses for the Avondale facility, allowing time for an
orderly adjustment of the Avondale workforce. It is possible that the winding down of operations at
Avondale may result in environmental costs. However, these costs are not known and cannot be
reasonably estimated at this time.
Market volatility and adverse capital or credit market conditions may affect our ability to access
cost-effective sources of funding and expose us to risks associated with the financial viability of
suppliers and the ability of counterparties to perform on financial instruments.
The financial and credit markets recently experienced high levels of volatility and
disruption, reducing the availability of credit for certain issuers. We expect to access these
markets to support certain business activities, including acquisitions, capital expansion projects,
obtaining credit support for our self-insurance for workers compensation, refinancing existing
debt and issuing letters of credit. In the future, we may not be able to obtain capital market
financing or bank financing on favorable terms, or at all, which could have a material adverse
effect on our financial position, results of operations or cash flows.
A tightening of credit could also adversely affect our suppliers ability to obtain financing.
Delays in suppliers ability to obtain financing, or the unavailability of financing, could cause
us to be unable to meet our contract obligations and could adversely affect our results of
operations. The inability of our suppliers to obtain financing could also result in the need for us
to transition to alternate suppliers, which could result in significant incremental cost and delay.
We may execute transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks and other institutional parties. These
transactions expose us to potential credit risk in the event of default of a counterparty. In
addition, our credit risk may be increased when collateral held by us cannot be realized upon a
sale or is liquidated at prices not sufficient to recover the full amount of the loan or derivative
exposure due to it.
29
Our reputation and our ability to do business may be impacted by the improper conduct of employees,
agents or business partners.
We have implemented extensive compliance controls, policies and procedures to prevent and
detect reckless or criminal acts committed by employees, agents or business partners that would
violate the laws of the jurisdictions in which we operate, including laws governing payments to
government officials, security clearance breaches, cost accounting and billing, competition and
data privacy. However, we cannot ensure that we will prevent all such reckless or criminal acts
committed by our employees, agents or business partners. Any improper actions could subject us to
civil or criminal investigations and monetary and non-monetary penalties, and could have a material
adverse effect on our reputation, financial position, results of operations or cash flows.
Our business could be negatively impacted by security threats and other disruptions.
As a defense contractor, we face certain security threats, including threats to our
information technology infrastructure and unlawful attempts to gain access to our proprietary or
classified information. Our information technology networks and related systems are critical to the
smooth operation of our business and essential to our ability to perform day-to-day operations.
Loss of security within this critical operational infrastructure could disrupt our operations,
require significant management attention and resources and could have a material adverse effect on
our financial position, results of operations or cash flows.
Our nuclear operations subject us to various environmental, regulatory, financial and other risks.
The development and operation of nuclear-powered aircraft carriers, nuclear-powered
submarines, nuclear facilities and other nuclear operations subject us to various risks, including:
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potential liabilities relating to harmful effects on the environment and human
health resulting from nuclear operations and the storage, handling and disposal of
radioactive materials;
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unplanned expenditures relating to maintenance, operation, security and repair,
including repairs required by the Nuclear Regulatory Commission;
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reputational harm;
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potential liabilities arising out of a nuclear incident whether or not it is within
our control; and
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regulatory non-compliance and loss of authorizations or indemnification necessary
for operations.
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The U.S. Government provides indemnity protection against specified risks under our contracts
pursuant to Public Law 85-804 and the Price-Anderson Nuclear Industries Indemnity Act for certain
of our nuclear operations risks. Our nuclear operations are subject to various safety-related
requirements imposed by the U.S. Navy, DoE and Nuclear Regulatory Commission. In the event of
noncompliance, these agencies may increase regulatory oversight, impose fines or shut down our
operations, depending upon the assessment of the severity of the situation. Our activities,
especially our nuclear shipbuilding operations, are considered vitally important to the U.S. Navy.
As such, in the event of a potential change in control, we believe the U.S. Navy would want to be
comfortable with the buyer and ensure that the buyer would continue to conduct our operations in a
satisfactory manner. More specifically, in the event of a change in control, we believe the U.S.
Navy and other regulatory agencies would want to assure themselves that our nuclear operations
would continue to be conducted in a manner consistent with regulatory and contract requirements and
that they should continue to provide the authorizations and indemnification necessary to conduct
our nuclear operations. Depending on the circumstances, they could withdraw authorizations or
decline to extend indemnification to new contracts, which could have a material adverse effect on
our financial position, results of operations or cash flows. We have recently begun discussions
with the U.S. Navy regarding whether to incorporate into our contracts more explicit terms
regarding the requirements for U.S. Navy approval before transferring authorizations in the event
of changes in control; we understand these discussions are part of a U.S. Navy initiative across
our shipbuilding industry. In addition, revised security and safety requirements promulgated by the
U.S. Navy, DoE and Nuclear Regulatory Commission could necessitate substantial capital and other
expenditures. Additionally, while we maintain insurance for certain risks related to transportation
of low level nuclear materials and waste, such as contaminated clothing, and for regulatory changes
in the health, safety and fire protection areas, there can be no assurances that such insurance
will be sufficient to cover our costs in the event of an accident or business interruption relating
to our nuclear operations, which could have a material adverse effect on our financial position,
results of operations or cash flows.
30
Changes in future business conditions could cause business investments and/or recorded goodwill to
become impaired, resulting in substantial losses and write-downs that would reduce our operating
income.
As part of our overall strategy, we may, from time to time, acquire a minority or majority
interest in a business. These investments are made upon careful analysis and due diligence
procedures designed to achieve a desired return or strategic objective. These procedures often
involve certain assumptions and judgment in determining acquisition price. Even after careful
integration efforts, actual operating results may vary significantly from initial estimates.
Goodwill accounts for approximately a quarter of our recorded total assets. In the past, we have
evaluated goodwill amounts for impairment annually on November 30, or when evidence of potential
impairment exists. The impairment test is based on several factors requiring judgment. Principally,
a significant decrease in expected cash flows or changes in market conditions may indicate
potential impairment of recorded goodwill. Adverse equity market conditions that result in a
decline in market multiples and our stock price could result in an impairment of goodwill and/or
other intangible assets.
For example, we recorded a non-cash charge totaling $2,490 million in the fourth quarter of
2008 for the impairment of goodwill. The impairment was primarily driven by adverse equity market
conditions that caused a decrease in market multiples and the parents stock price as of November
30, 2008. The charge reduced goodwill recorded in connection with Northrop Grummans 2001
acquisition of Newport News Shipbuilding, Inc. and Litton Industries, Inc. (Litton).
If we are required in the future to recognize any additional impairments to goodwill, it could
have a material adverse effect on our financial position, results of operations or cash flows.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could
affect our profitability and cash flow.
We are subject to income taxes in the United States. Significant judgment is required in
determining our provision for income taxes. In the ordinary course of business, there are many
transactions and calculations where the ultimate tax determination is uncertain. In addition,
timing differences in the recognition of income from contracts for financial statement purposes and
for income tax regulations can cause uncertainty with respect to the timing of income tax payments
which can have a significant impact on cash flow in a particular period. Furthermore, changes in
applicable income tax laws and regulations, or their interpretation, could result in higher or
lower income tax rates assessed or changes in the taxability of certain sales or the deductibility
of certain expenses, thereby affecting our income tax expense and profitability. The final
determination of any tax audits or related litigation could be materially different from our
historical income tax provisions and accruals. Additionally, changes in our tax rate as a result of
changes in our overall profitability, changes in tax legislation, changes in the valuation of
deferred tax assets and liabilities, changes in differences between financial reporting income and
taxable income, the results of audits and the examination of previously filed tax returns by taxing
authorities and continuing assessments of our tax exposures could impact our tax liabilities and
affect our income tax expense, profitability and cash flow.
As of December 31, 2010, the estimated value of our uncertain tax positions was a potential
liability of $17 million, which includes accrued interest of $3 million. If our positions are
sustained by the taxing authority in our favor, the reversal of the entire balance would reduce our
income tax provision. However, we cannot guarantee that such positions will be sustained in our
favor.
We conduct a portion of our operations through joint ventures and strategic alliances. We may have
limited control over decisions and controls of joint venture projects and have returns that are not
proportional to the risks and resources we contribute.
We conduct a portion of our operations through joint ventures, where control may be shared
with unaffiliated third parties. For more information, see BusinessOur Business.
In any joint venture arrangement, differences in views among the joint venture participants
may result in delayed decisions or in failures to agree on major issues, and we cannot guarantee
that we and our joint venture partners will always reach agreement on a timely basis, or at all. We
also cannot control the actions of our joint venture partners, including any nonperformance,
default or bankruptcy of our joint venture partners, and we typically share liability or have joint
and/or several liability along with our joint venture partners under these joint venture
arrangements. These factors could potentially have a material adverse effect on our joint ventures.
Operating through joint ventures in which we are the minority holder results in limited
control over many decisions made with respect to projects and internal controls relating to
projects. These joint ventures may not be subject to the same requirements regarding internal
controls and internal control reporting that we follow. As a result, internal control issues may
arise which could have a material adverse effect on the joint venture. When entering into joint
ventures, in order to establish or preserve relationships with our joint venture partners, we may
agree to risks and contributions of resources that are proportionately greater than the returns we
could receive, which could reduce our income and returns on these
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investments compared to what we would have received if the risks and resources we contributed
were always proportionate to our returns.
Accordingly, our financial results could be adversely affected from unanticipated performance
issues, transaction-related charges and partner performance.
We are subject to various claims and litigation that could ultimately be resolved against us,
requiring material future cash payments and/or future material charges against our operating
income, materially impairing our financial position.
The size, type and complexity of our business make it highly susceptible to claims and
litigation. We are and may become subject to various environmental claims and other litigation
which, if not resolved within established reserves, could have a material adverse effect on our
financial position, results of operations or cash flows. Any claims and litigation, even if fully
indemnified or insured, could negatively impact our reputation among our customers and the public,
and make it more difficult for us to compete effectively or obtain adequate insurance in the
future. These claims and litigation relating to our shipbuilding business are intended to be
allocated to us under the terms of the Separation and Distribution Agreement. See Certain
Relationships and Related Party TransactionsAgreements with Northrop Grumman Related to the
Spin-OffSeparation and Distribution Agreement.
In the second quarter of 2007, the U.S. Coast Guard issued a revocation of acceptance under
the Deepwater Modernization Program for eight converted 123-foot patrol boats (the vessels) based
on alleged hull buckling and shaft alignment problems and alleged nonconforming topside
equipment on the vessels. We submitted a written response that argued that the revocation of
acceptance was improper. The U.S. Coast Guard advised Integrated Coast Guard Systems (ICGS),
which was formed by us and Lockheed Martin to perform the Deepwater Modernization Program, that it
was seeking $96.1 million from ICGS as a result of the revocation of acceptance. The majority of
the costs associated with the 123-foot conversion effort are associated with the alleged structural
deficiencies of the vessels, which were converted under contracts with us and one of our
subcontractors. In 2008, the U.S. Coast Guard advised ICGS that the U.S. Coast Guard would support
an investigation by the U.S. Department of Justice of ICGS and its subcontractors instead of
pursuing its $96.1 million claim independently. The Department of Justice conducted an
investigation of ICGS under a sealed False Claims Act complaint filed in the U.S. District Court
for the Northern District of Texas and decided in early 2009 not to intervene at that time. On
February 12, 2009, the District Court unsealed the complaint filed by Michael J. DeKort, a former
Lockheed Martin employee, against us, ICGS, Lockheed Martin Corporation relating to the 123-foot
conversion effort. Damages under the False Claims Act are subject to trebling. On October 15, 2009,
the three defendants moved to dismiss the Fifth Amended complaint. On April 5, 2010, the District
Court ruled on the defendants motions to dismiss, granting them in part and denying them in part.
As to us, the District Court dismissed conspiracy claims and those pertaining to the C4ISR systems.
On October 27, 2010, the District Court entered summary judgment for us on DeKorts hull,
mechanical and electrical (HM&E) claims brought against us. On November 10, 2010, DeKort
acknowledged that with the dismissal of the HM&E claims, no issues remained against us for trial
and the District Court subsequently vacated the December 1, 2010 trial. On November 12, 2010,
DeKort filed a motion for reconsideration regarding the District Courts denial of his motion to
amend the Fifth Amended complaint. On November 19, 2010, DeKort filed a second motion for
reconsideration regarding the District Courts order granting summary judgment on the HM&E claims.
Based upon the information available to us to date, we believe that we have substantive defenses to
any potential claims but can give no assurance that we will prevail in this litigation.
We and our predecessors in interest are defendants in several hundred cases filed in numerous
jurisdictions around the country wherein former and current employees and various third parties
allege exposure to asbestos-containing materials on or associated with our premises or while
working on vessels constructed or repaired by us. Some cases allege exposure to asbestos-containing
materials through contact with our employees and third persons who were on the premises. The cases
allege various injuries including those associated with pleural plaque disease, asbestosis, cancer,
mesothelioma and other alleged asbestos-related conditions. In some cases, in addition to us,
several of our former executive officers are also named defendants. In some instances, partial or
full insurance coverage is available to us for our potential liability and that of our former
executive officers. We can give no assurance that we will prevail on all claims in each of these
cases. Based on information available, we believe that the resolution of any existing claims or
legal proceedings would not have a material adverse effect on our financial position, results of
operations or cash flows.
On January 31, 2011, the U.S. Department of Justice first informed Northrop Grumman and us of
a False Claims Act complaint that we believe was filed under seal by a relator (the plaintiff) in
mid-2010 in the U.S. District Court for the District of Columbia. The redacted copy of the
complaint that we received (the Complaint) alleges that through largely unspecified fraudulent
means, Northrop Grumman and we obtained federal funds that were restricted by law for the
consequences of Hurricane Katrina, and used those funds to cover costs under certain shipbuilding
contracts that were unrelated to Hurricane Katrina and for which Northrop Grumman and we were not
entitled to recovery under the contracts.
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The Complaint seeks monetary damages of at least $835 million, plus penalties, attorneys fees
and other costs of suit. Damages under the False Claims Act may be trebled upon a finding of
liability.
For several years, Northrop Grumman has pursued recovery under its insurance policies for
Hurricane Katrina-related property damage and business interruption losses. One of the insurers
involved in those actions has made allegations that overlap significantly with certain of the
issues raised in the Complaint, including allegations that Northrop Grumman and we used certain
Hurricane Katrina-related funds for losses under the contracts unrelated to the hurricane. Northrop
Grumman and we believe that the insurers defenses, including those related to the use of Hurricane
Katrina funding, are without merit.
We have agreed to cooperate with the government investigation relating to the False Claims Act
Complaint. We have been advised that the Department of Justice has not made a decision whether to
intervene. Based upon our review to date of the information available to us, we believe we have
substantive defenses to the allegations in the Complaint. We believe that the claims as set forth
in the Complaint evidence a fundamental lack of understanding of the terms and conditions in our
shipbuilding contracts, including the post-Katrina modifications to those contracts, and the manner
in which the parties performed in connection with the contracts. Based upon our review to date of
the information available to us, we believe that the claims as set forth in the Complaint lack
merit and are not likely to result in a material adverse effect on our consolidated financial
position. We intend vigorously to defend the matter, but we cannot predict what new or revised
claims might be asserted or what information might come to light so can give no assurances
regarding the ultimate outcome.
We may be unable to adequately protect our intellectual property rights, which could affect our
ability to compete.
We own or have the right to use certain patents, trademarks, copyrights and other forms of
intellectual property. The U.S. Government has rights to use certain intellectual property we
develop in performance of government contracts, and it may use or authorize others to use such
intellectual property. Our intellectual property is subject to challenge, invalidation,
misappropriation or circumvention by third parties.
We also rely upon proprietary technology, information, processes and know-how that are not
protected by patents. We seek to protect this information through trade secret or confidentiality
agreements with our employees, consultants, subcontractors and other parties, as well as through
other security measures. These agreements may not provide meaningful protection for our unpatented
proprietary information. In the event our intellectual property rights are infringed, we may not
have adequate legal remedies to maintain our intellectual property. Litigation to determine the
scope of our rights, even if successful, could be costly and a diversion of managements attention
away from other aspects of our business. In addition, trade secrets may otherwise become known or
be independently developed by competitors.
In some instances, we have licensed the proprietary intellectual property of others, but we
may be unable in the future to secure the necessary licenses to use such intellectual property on
commercially reasonable terms.
Risks Relating to the Spin-Off
We face the following risks in connection with the spin-off:
We may incur greater costs as an independent company than we did when we were part of Northrop
Grumman.
As a current subsidiary of Northrop Grumman, we take advantage of Northrop Grummans size and
purchasing power in procuring certain goods and services such as insurance and health care
benefits, and technology such as computer software licenses. We also rely on Northrop Grumman to
provide various corporate functions. After the spin-off, as a separate, independent entity, we may
be unable to obtain these goods, services and technologies at prices or on terms as favorable to us
as those we obtained prior to the distribution. We may also incur costs for functions previously
performed by Northrop Grumman that are higher than the amounts reflected in our historical
financial statements, which could cause our profitability to decrease.
We have incurred new indebtedness in connection with the spin-off and the degree to which we will
be leveraged following completion of the spin-off may have a material adverse effect on our
financial position, results of operations or cash flows.
We have historically relied upon Northrop Grumman for working capital requirements on a
short-term basis and for other financial support functions. After the spin-off, we will not be able
to rely on the earnings, assets or cash flow of Northrop Grumman, and we will be responsible for
servicing our own debt, obtaining and maintaining sufficient working capital and paying dividends.
In connection with the spin-off, we will receive $1,200 million of HII Debt and $575 million from
the HII Credit Facility. $1,429 million of the proceeds of the HII Debt and the HII Credit Facility
will be transferred to NGSC, a wholly owned subsidiary of Northrop Grumman, in the Contribution
prior to the spin-off. Given the smaller relative size of the company as compared to Northrop
Grumman after the spin-off, we expect to incur higher debt servicing
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costs on the new indebtedness than we would have otherwise incurred previously as a subsidiary
of Northrop Grumman. Our debt upon completion of the spin-off will include (i) a Loan Agreement
between Ingalls Shipbuilding, Inc. (Ingalls), which is now part of NGSB, and the MBFC, under
which we borrowed the proceeds of the MBFCs 1999 issuance of $83.7 million of Economic Development
Revenue Bonds, (ii) a Loan Agreement between Northrop Grumman Ship Systems, Inc. (NGSS), which is
now part of NGSB, and the MBFC, under which we borrowed the proceeds of the MBFCs issuance of $200
million of Gulf Opportunity Zone Industrial Revenue Bonds, and under which we owe $21.6 million,
(iii) $1,200 million of the HII Debt and (iv) the $1,225 million HII Credit Facility (comprising a
$575 million term loan and a $650 million revolving credit facility, of which approximately $137
million of letters of credit are expected to be outstanding at the time of the spin-off, and the
remainder will be undrawn). The net proceeds of the HII Debt and the term loan under the HII Credit
Facility are expected to be used to fund the Contribution and for general corporate purposes.
Our ability to make payments on and to refinance our indebtedness, including the debt retained
or incurred pursuant to the spin-off as well as any future debt that we may incur, will depend on
our ability to generate cash in the future from operations, financings or asset sales. Our ability
to generate cash is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. If we are not able to repay or refinance our debt as
it becomes due, we may be forced to sell assets or take other disadvantageous actions, including
(i) reducing financing in the future for working capital, capital expenditures and general
corporate purposes or (ii) dedicating an unsustainable level of our cash flow from operations to
the payment of principal and interest on our indebtedness. In addition, our ability to withstand
competitive pressures and to react to changes in the shipbuilding and defense industries could be
impaired. The lenders who hold such debt could also accelerate amounts due, which could potentially
trigger a default or acceleration of our other debt.
The shipbuilding business is more capital-intensive than most other Northrop Grumman businesses,
and our ability to meet our capital needs may be altered by the loss of financial support from
Northrop Grumman.
The shipbuilding business is a mature business that is more capital-intensive than most of
Northrop Grummans other businesses, with longer periods of performance. Northrop Grumman is
currently available to provide certain capital that may be needed in excess of the amounts
generated by our operating activities. After completion of the spin-off, we will be an independent,
publicly owned company and we expect to obtain any such funds needed from third parties through the
capital markets or bank financing, and not from Northrop Grumman. However, there is no guarantee
that we will be able to obtain capital market financing or credit availability on favorable terms,
or at all, in the future. See
Market volatility and adverse capital or credit market conditions
may affect our ability to access cost-effective sources of funding and expose us to risks
associated with the financial viability of suppliers and the ability of counterparties to perform
on financial instruments
. While our business plan fully supports the capital expenditures we
anticipate, we can give no assurance that our ability to meet our capital needs will not be altered
by the loss of financial support from Northrop Grumman.
We may be unable to achieve some or all of the benefits that we expect to achieve from the
spin-off.
As an independent, publicly owned company, we believe that our business will benefit from,
among other things, (i) greater strategic focus of financial resources and managements efforts,
(ii) tailored customer focus, (iii) direct and differentiated access to capital markets and (iv)
enhanced investor choices by offering investment opportunities in a separate entity from Northrop
Grumman. However, by separating from Northrop Grumman, we may be more susceptible to market
fluctuations and other adverse events than we would have been were we still a part of Northrop
Grumman. In addition, we may not be able to achieve some or all of the benefits that we expect to
achieve as an independent company in the time we expect, if at all.
We may increase our debt or raise additional capital in the future, which could affect our
financial health, and may decrease our profitability.
We may increase our debt or raise additional capital in the future, subject to restrictions in
our debt agreements. If our cash flow from operations is less than we anticipate, or if our cash
requirements are more than we expect, we may require more financing. However, debt or equity
financing may not be available to us on terms acceptable to us, if at all. If we incur additional
debt or raise equity through the issuance of our preferred stock, the terms of the debt or our
preferred stock issued may give the holders rights, preferences and privileges senior to those of
holders of our common stock, particularly in the event of liquidation. The terms of the debt may
also impose additional and more stringent restrictions on our operations than we currently have. If
we raise funds through the issuance of additional equity, your ownership in us would be diluted. If
we are unable to raise additional capital when needed, it could affect our financial health, which
could negatively affect your investment in us. Also, regardless of the terms of our debt or equity
financing, the amount of our stock that we can issue may be limited because the issuance of our
stock may cause the distribution to be a taxable event for Northrop Grumman under Section 355(e) of
the Code and under the Tax Matters Agreement we could be required to indemnify Northrop Grumman for
that tax. See
We may be responsible for U.S. Federal income tax liabilities that relate to the
distribution
.
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We may be responsible for U.S. Federal income tax liabilities that relate to the distribution.
We have received the IRS Ruling and expect to receive an opinion of counsel stating that
Northrop Grumman, Northrop Grummans stockholders and HII will not recognize any taxable income,
gain or loss for U.S. Federal income tax purposes as a result of the spin-off, including the
internal reorganization, except with respect to cash received by Northrop Grummans stockholders in
lieu of fractional shares. Receipt of the IRS Ruling and opinion of counsel will satisfy a
condition to completion of the spin-off. See The Spin-OffU.S. Federal Income Tax Consequences of
the Spin-Off. The IRS Ruling, while generally binding upon the IRS, is based on certain factual
statements and representations. If any such factual statements or representations were incomplete
or untrue in any material respect, or if the facts on which the IRS Ruling is based are materially
different from the facts at the time of the spin-off, the IRS could modify or revoke the IRS Ruling
retroactively.
An opinion of counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions
with respect to the spin-off that are different from the conclusions reached in the opinion. Like
the IRS Ruling, the opinion will be based on certain factual statements and representations, which,
if incomplete or untrue in any material respect, could alter counsels conclusions.
Neither we nor Northrop Grumman are aware of any facts or circumstances that would cause any
such factual statements or representations in the IRS Ruling or the legal opinion to be incomplete
or untrue or cause the facts on which the IRS Ruling is based, or the legal opinion will be based,
to be materially different from the facts at the time of the spin-off.
If all or a portion of the spin-off does not qualify as a tax-free transaction because any of
the factual statements or representations in the IRS Ruling or the opinion are incomplete or
untrue, or because the facts upon which the IRS Ruling is based are materially different from the
facts at the time of the spin-off, Northrop Grumman would recognize a substantial gain for U.S.
Federal income tax purposes. In such case, under IRS regulations each member of Northrop Grumman
consolidated group at the time of the spin-off (including us and our subsidiaries), would be
severally liable for the resulting U.S. Federal income tax liability.
Even if the spin-off otherwise qualifies as a tax-free transaction for U.S. Federal income tax
purposes, the distribution will be taxable to Northrop Grumman (but not to Northrop Grumman
stockholders) pursuant to Section 355(e) of the Internal Revenue Code if there are one or more
acquisitions (including issuances) of the stock of either us or Northrop Grumman, representing 50%
or more, measured by vote or value, of the then-outstanding stock of either corporation and the
acquisition or acquisitions are deemed to be part of a plan or series of related transactions that
include the distribution. Any acquisition of our common stock within two years before or after the
distribution (with exceptions, including public trading by less-than-5% stockholders and certain
compensatory stock issuances) generally will be presumed to be part of such a plan unless we can
rebut that presumption. The tax liability resulting from the application of Section 355(e) would be
substantial. In addition, under IRS regulations, each member of the Northrop Grumman consolidated
group at the time of the spin-off (including us and our subsidiaries) would be severally liable for
the resulting U.S. Federal income tax liability.
We will agree not to enter into any transaction that could reasonably be expected to cause any
portion of the spin-off (including the internal reorganization) to be taxable to Northrop Grumman,
including under Section 355(e). We will also agree to indemnify Northrop Grumman for any tax
liabilities resulting from any such transactions. The amount of any such indemnification could be
substantial. These obligations may discourage, delay or prevent a change of control of our company.
For additional detail, see
Anti-takeover provisions in our organizational documents and Delaware
law, as well as regulatory requirements, could delay or prevent a change in control
and Certain
Relationships and Related Party TransactionsAgreements with Northrop Grumman Related to the
Spin-OffTax Matters Agreement.
We may be unable to make, on a timely basis, the changes necessary to operate as an independent,
publicly owned company.
We have historically relied on Northrop Grumman for various financial, legal, administrative
and other corporate services to support our operations. After the distribution, Northrop Grumman
will continue to supply us certain of these services on a short-term transitional basis. However,
we will be required to establish the necessary infrastructure and systems to supply these services
on an ongoing basis. We may not be able to replace these services provided by Northrop Grumman in a
timely manner or on terms and conditions as favorable as those we receive from Northrop Grumman.
In addition, as a public entity, we will be subject to the reporting requirements of the
Exchange Act and requirements of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act). These
requirements may place a strain on our systems and resources. The Exchange Act requires that we
file annual, quarterly and current reports with respect to our business and financial condition.
Under the Sarbanes-Oxley Act, we will be required to maintain effective disclosure controls and
procedures and internal control over financial reporting. In order to maintain and improve the
effectiveness of our
35
disclosure controls and procedures, significant resources and management oversight will be
required. We will be implementing additional procedures and processes for the purpose of addressing
the standards and requirements applicable to public companies. These activities may divert
managements attention from other business concerns, which could have a material adverse effect on
our financial position, results of operations or cash flows.
We do not have a recent operating history as an independent company and our historical financial
information may not be a reliable indicator of our future results.
The historical financial information we have included in this information statement has been
derived from Northrop Grummans consolidated financial statements and does not necessarily reflect
what our financial position, results of operations and cash flows would have been had we been a
separate, stand-alone entity during the periods presented. Northrop Grumman did not account for us,
and we were not operated, as a single stand-alone entity for the periods presented. In addition,
the historical information is not necessarily indicative of what our results of operations,
financial position and cash flows will be in the future. For example, following the spin-off,
changes will occur in our cost structure, funding and operations, including changes in our tax
structure, increased costs associated with reduced economies of scale and increased costs
associated with becoming a public, stand-alone company. While we have been profitable as part of
Northrop Grumman, we cannot assure you that as a stand-alone company our profits will continue at a
similar level.
Our customers and prospective customers will consider whether our responsibility on a stand-alone
basis satisfies their requirements for engaging in business with us.
Under federal acquisition regulations, the government commonly makes affirmative
responsibility determinations before entering into new contracts with a contractor. In so doing,
the government considers various factors, including financial resources, performance record,
technical skills and facilities. Our customers and prospective customers will consider whether our
responsibility on a stand-alone basis satisfies their requirements for entering into new contracts
with us. We believe the U.S. Navy is in the final stages of completing a responsibility
determination. There are several contracts in the negotiation phase that may not be finalized and
awarded before the spin-off is concluded, even if the U.S. Navy successfully concludes its
responsibility determination prior to the spin-off. We believe we continue to be a responsible
contractor. Nonetheless, if our customers or prospective customers are not satisfied with our
responsibility, including our financial resources, it could likely affect our ability to bid for,
obtain or retain contracts, which, if unresolved, could have a material adverse effect on our
financial position, results of operations or cash flows.
More generally, our customers will need to develop and retain confidence in us as a partner on
a stand-alone basis. We believe that will occur. In the process, however, our customers may
continue to request additional information, as well as undertake further audits or take other steps
that could lead to certain delays and costs.
The spin-off may expose us to potential liabilities arising out of state and federal fraudulent
conveyance laws and legal dividend requirements.
The spin-off is subject to review under various state and federal fraudulent conveyance laws.
Under these laws, if a court in a lawsuit by an unpaid creditor or an entity vested with the power
of such creditor (including without limitation a trustee or debtor-in-possession in a bankruptcy by
us or Northrop Grumman or any of our respective subsidiaries) were to determine that Northrop
Grumman or any of its subsidiaries did not receive fair consideration or reasonably equivalent
value for distributing our common stock or taking other action as part of the spin-off, or that we
or any of our subsidiaries did not receive fair consideration or reasonably equivalent value for
incurring indebtedness, including the new debt incurred by us in connection with the spin-off,
transferring assets or taking other action as part of the spin-off and, at the time of such action,
we, Northrop Grumman or any of our respective subsidiaries (i) was insolvent or would be rendered
insolvent, (ii) had reasonably small capital with which to carry on its business and all business
in which it intended to engage or (iii) intended to incur, or believed it would incur, debts beyond
its ability to repay such debts as they would mature, then such court could void the spin-off as a
constructive fraudulent transfer. If such court made this determination, the court could impose a
number of different remedies, including without limitation, voiding our liens and claims against
Northrop Grumman, or providing Northrop Grumman with a claim for money damages against us in an
amount equal to the difference between the consideration received by Northrop Grumman and the fair
market value of our company at the time of the spin-off.
The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending
on which jurisdictions law is applied. Generally, however, an entity would be considered insolvent
if the present fair saleable value of its assets is less than (i) the amount of its liabilities
(including contingent liabilities) or (ii) the amount that will be required to pay its probable
liabilities on its existing debts as they become absolute and mature. No assurance can be given as
to what standard a court would apply to determine insolvency or that a court would determine that
we, Northrop Grumman or any of our respective subsidiaries were solvent at the time of or after
giving effect to the spin-off, including the distribution of our common stock.
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The distribution by us to Northrop Grumman of our interests in NGSC in connection with the
internal reorganization and the payment of future dividends, if any, to the holders of our common
stock are also subject to review under state corporate distribution statutes. Under the General
Corporation Law of the State of Delaware (the DGCL), a corporation may only pay dividends to its
stockholders either (i) out of its surplus (net assets minus capital) or (ii) if there is no such
surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Although we intend to make the distribution to Northrop Grumman and pay
future dividends, if any, to the holders of our common stock entirely from surplus, no assurance
can be given that a court will not later determine that some or all of the distribution to Northrop
Grumman or any such future dividends to the holders of our common stock were unlawful.
In connection with the internal reorganization transactions, the Northrop Grumman board of
directors expects to obtain opinions regarding the solvency of New NGC, Current NGC and us, as
applicable. In addition, prior to the spin-off, the Northrop Grumman board of directors expects to
obtain an opinion regarding our solvency and the solvency of Northrop Grumman and the
permissibility of the spin-off and the distribution by us to Northrop Grumman under Section 170 of
the DGCL. The Northrop Grumman board of directors and management believe that, in accordance with
this opinion that is expected to be rendered in connection with the spin-off and the distribution
by us of our interests in NGSC to Northrop Grumman, (i) Northrop Grumman and we each will be
solvent at the time of the spin-off (including after the payment of such dividend and the
spin-off), will be able to repay its debts as they mature following the spin-off and will have
sufficient capital to carry on its businesses and (ii) the spin-off and such distribution will be
made entirely out of surplus in accordance with Section 170 of the DGCL. There is no certainty,
however, that a court would find this solvency opinion to be binding on the creditors of either us
or Northrop Grumman, or that a court would reach the same conclusions set forth in such opinion in
determining whether Northrop Grumman or we were insolvent at the time of, or after giving effect
to, the spin-off, or whether lawful funds were available for the separation and the distribution to
Northrop Grumman.
Under the Separation and Distribution Agreement, from and after the spin-off, each of Northrop
Grumman and we will be responsible for the debts, liabilities and other obligations related to the
business or businesses which it owns and operates following the consummation of the spin-off.
Although we do not expect to be liable for any such obligations not expressly assumed by us
pursuant to the Separation and Distribution Agreement, it is possible that a court would disregard
the allocation agreed to between the parties, and require that we assume responsibility for
obligations allocated to Northrop Grumman (for example, tax and/or environmental liabilities),
particularly if Northrop Grumman were to refuse or were unable to pay or perform the subject
allocated obligations. See Certain Relationships and Related Party TransactionsAgreements with
Northrop Grumman Related to the Spin-OffSeparation and Distribution Agreement.
We may have been able to receive better terms from unaffiliated third parties than the terms we
receive in our agreements with Northrop Grumman.
We expect that the agreements related to the spin-off, including the Separation and
Distribution Agreement, Employee Matters Agreement, Insurance Matters Agreement, Intellectual
Property License Agreement, Tax Matters Agreement, Transition Services Agreement and any other
agreements, will be negotiated in the context of our separation from Northrop Grumman while we are
still part of Northrop Grumman. Accordingly, these agreements may not reflect terms that would have
resulted from arms-length negotiations among unaffiliated third parties. The terms of the
agreements being negotiated in the context of our separation are related to, among other things,
allocations of assets, liabilities, rights, indemnifications and other obligations among Northrop
Grumman and us. We may have received better terms from third parties because third parties may have
competed with each other to win our business. See Certain Relationships and Related Party
TransactionsAgreements with Northrop Grumman Related to the Spin-Off for more detail.
Risks Relating to Our Common Stock
You face the following risks in connection with ownership of our common stock:
There is no existing market for our common stock and we cannot be certain that an active trading
market will develop or be sustained after the spin-off, and following the spin-off, our stock price
may fluctuate significantly.
There currently is no public market for our common stock. We intend to apply to list our
common stock on the NYSE. See Trading Market. It is anticipated that before the distribution date
for the spin-off, trading of shares of our common stock will begin on a when-issued basis and
such trading will continue up to and including the distribution date. However, there can be no
assurance that an active trading market for our common stock will develop as a result of the
spin-off or be sustained in the future. The lack of an active market may make it more difficult for
you to sell our common stock and could lead to the price of our common stock being depressed or
more volatile. We cannot predict the prices at which our common stock may trade after the spin-off.
The market price of our common stock may fluctuate widely, depending on many factors, some of which
may be beyond our control, including:
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our business profile and market capitalization may not fit the investment objectives
of some Northrop Grumman stockholders and, as a result, these Northrop Grumman
stockholders may sell our shares after the distribution;
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actual or anticipated fluctuations in our operating results due to factors related
to our business;
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success or failure of our business strategy;
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our quarterly or annual earnings, or those of other companies in our industry;
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our ability to obtain financing as needed;
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announcement by us or our competitors of significant new business awards;
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announcements by us or our competitors of significant acquisitions or dispositions;
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changes in accounting standards, policies, guidance, interpretations or principles;
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the failure of securities analysts to cover our common stock after the spin-off;
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changes in earnings estimates by securities analysts or our ability to meet those
estimates;
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the operating and stock price performance of other comparable companies;
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investor perception of our company and the shipbuilding industry;
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natural or environmental disasters that investors believe may affect us;
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overall market fluctuations;
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fluctuations in the budget of the DoD;
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results from any material litigation or Government investigation;
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further reduction or rationalization by us or our competitors of the shipbuilding
industrial base as a result of adverse changes to the DoD budget;
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changes in laws and regulations affecting our business; and
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general economic conditions and other external factors.
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Stock markets in general have experienced volatility that has often been unrelated to the
operating performance of a particular company. These broad market fluctuations could adversely
affect the trading price of our common stock.
Substantial sales of our common stock may occur in connection with the spin-off, which could cause
the price of our common stock to decline.
The shares of our common stock that Northrop Grumman distributes to its stockholders generally
may be sold immediately in the public market. It is possible that some Northrop Grumman
stockholders, which could include some of our larger stockholders, will sell our common stock
received in the distribution if, for reasons such as our business profile or market capitalization
as an independent company, we do not fit their investment objectives, or in the case of index
funds we are not a participant in the index in which they are investing. The sales of
significant amounts of our common stock or the perception in the market that this will occur may
reduce the market price of our common stock.
We cannot assure you that we will pay dividends on our common stock, and our indebtedness could
limit our ability to pay dividends on our common stock.
We do not currently intend to pay a dividend. Going forward, our dividend policy will be
established by our board of directors based on our financial condition, results of operations and
capital requirements, as well as applicable law, regulatory constraints, industry practice and
other business considerations that our board of directors considers relevant. In addition, the
terms of the agreements governing our new debt or debt that we may incur in the future may limit or
prohibit the payments of dividends. For more information, see Dividend Policy. There can be no
assurance that we will pay a dividend in the future or continue to pay any dividend if we do
commence the payment of dividends. There can also be no assurance that the combined annual
dividends on Northrop Grumman common stock and our common stock after the spin-off, if any, will be
equal to the annual dividends on Northrop Grumman common stock prior to the spin-off.
Additionally, indebtedness that we expect to incur in connection with the internal
reorganization could have important consequences for holders of our common stock. If we cannot
generate sufficient cash flow from operations to meet our debt-payment obligations, then our
ability to pay dividends, if so determined by the board of directors, will be
38
impaired and we may be required to attempt to restructure or refinance our debt, raise
additional capital or take other actions such as selling assets, reducing or delaying capital
expenditures or reducing our dividend. There can be no assurance, however, that any such actions
could be effected on satisfactory terms, if at all, or would be permitted by the terms of our new
debt or our other credit and contractual arrangements. In addition, the terms of the agreements
governing new debt that we expect to incur prior to the spin-off or that we may incur in the future
may limit or prohibit the payment of dividends.
Anti-takeover provisions in our organizational documents and Delaware law, as well as regulatory
requirements, could delay or prevent a change in control.
Prior to completion of the spin-off, we will adopt the Restated Certificate of Incorporation
and the Restated Bylaws. Certain provisions of the Restated Certificate of Incorporation and the
Restated Bylaws may delay or prevent a merger or acquisition that a stockholder may consider
favorable. For example, the Restated Certificate of Incorporation and the Restated Bylaws provide
for a classified board, require advance notice for stockholder proposals and nominations, place
limitations on convening stockholder meetings and authorize our board of directors to issue one or
more series of preferred stock. These provisions may also discourage acquisition proposals or delay
or prevent a change in control, which could harm our stock price. Delaware law also imposes some
restrictions on mergers and other business combinations between any holder of 15% or more of our
outstanding common stock and us. See Description of Capital Stock.
Under tax sharing arrangements, we will agree not to enter into any transaction involving an
acquisition (including issuance) of HII common stock or any other transaction (or, to the extent we
have the right to prohibit it, to permit any such transaction) that could reasonably be expected to
cause the distribution or any of the internal reorganization transactions to be taxable to Northrop
Grumman. We will also agree to indemnify Northrop Grumman for any tax liabilities resulting from
any such transactions. The amount of any such indemnification could be substantial. Generally,
Northrop Grumman will recognize taxable gain on the distribution if there are one or more
acquisitions (including issuances) of our capital stock, directly or indirectly, representing 50%
or more, measured by vote or value, of our then-outstanding capital stock, and the acquisitions or
issuances are deemed to be part of a plan or series of related transactions that include the
distribution. We will agree that, for two years after the spin-off, we will not enter into any
transactions that reasonably could be expected to result in a 40%-or-more change in ownership of
our stock, in the aggregate. See Certain Relationships and Related Party TransactionsAgreements
with Northrop Grumman Related to the Spin-OffTax Matters Agreement. Any such shares of our
common stock acquired, directly or indirectly, within two years before or after the distribution
(with exceptions, including public trading by less-than-5% stockholders and certain compensatory
stock issuances) will generally be presumed to be part of such a plan unless we can rebut that
presumption.
Under the Separation and Distribution Agreement, in the event that, prior to the fifth
anniversary of the distribution, if we experience a change of control and our corporate rating is
downgraded to B or B2 or below, as applicable, during the period beginning upon the announcement of
such change of control and ending 60 days after the announcement of the consummation of such change
of control, we will be required to provide credit support for our indemnity obligations under the
Separation and Distribution Agreement in the form of one or more standby letters of credit in an
amount equal to $250 million. See Certain Relationships and Related Party TransactionsAgreements
with Northrop Grumman Related to the Spin-OffSeparation and Distribution Agreement.
Our activities, especially our nuclear shipbuilding operations, are considered vitally
important to the U.S. Navy. As such, in the event of a potential change in control, we believe the
U.S. Navy would want to be comfortable with the buyer and ensure that the buyer would continue to
conduct our operations in a satisfactory manner. More specifically, in the event of a change in
control, we believe the U.S. Navy and other regulatory agencies would want to assure themselves
that our nuclear operations would continue to be conducted in a manner consistent with regulatory
and contract requirements and that they should continue to provide the authorizations and
indemnification necessary to conduct our nuclear operations. Depending on the circumstances, they
could withdraw authorizations or decline to extend indemnification to new contracts, which could
have a material adverse effect on our financial position, results of operations or cash flows. We
have recently begun discussions with the U.S. Navy regarding whether to incorporate into our
contracts more explicit terms regarding the requirements for U.S. Navy approval before transferring
authorizations in the event of changes in control; we understand these discussions are part of a
U.S. Navy initiative across our shipbuilding industry. See
Our nuclear operations subject us to
various environmental, regulatory, financial and other risks.
Additionally, we intend to enter into the Guaranty Performance Agreement, pursuant to which,
among other things, we will agree to cause NGSCs guarantee obligations under the $83.7 million
Revenue Bonds, which were issued for our benefit, to terminate or to cause credit support to be
provided in the event we experience a change of control. For any period of time between a change of
control and the termination of NGSCs guarantee obligations, we will be required to cause credit
support to be provided for NGSCs guarantee obligations in the form of one or more letters of
credit in an amount reasonably satisfactory to NGSC to support the payment of all principal,
interest and any premiums under the
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Revenue Bonds. For a description of the Guaranty Performance Agreement, see Certain
Relationships and Related Party TransactionsOther Agreements.
As a result, our obligations may discourage, delay or prevent a change of control of our
company.
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this information statement, including in the
sections entitled Summary, Risk Factors, Questions and Answers About the Spin-Off, The
Spin-Off, Managements Discussion and Analysis of Financial Condition and Results of Operations
and Business, that are based on our managements beliefs and assumptions and on information
currently available to our management. Forward-looking statements include the information
concerning our possible or assumed future results of operations, business strategies, financing
plans, competitive position, potential growth opportunities, potential operating performance
improvements, benefits resulting from our separation from Northrop Grumman, the effects of
competition and the effects of future legislation or regulations. Forward-looking statements
include all statements that are not historical facts and can be identified by the use of
forward-looking terminology such as the words believe, expect, plan, intend, anticipate,
estimate, predict, potential, continue, may, might, should, could or the negative
of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual results may
differ materially from those expressed in these forward-looking statements. You should not put
undue reliance on any forward-looking statements in this information statement. We do not have any
intention or obligation to update forward-looking statements after we distribute this information
statement.
The risk factors discussed in Risk Factors could cause our results to differ materially from
those expressed in forward-looking statements. There may be other risks and uncertainties that we
are unable to predict at this time or that we currently do not expect to have a material adverse
effect on our financial position, results of operations or cash flows. Any such risks could cause
our results to differ materially from those expressed in forward-looking statements.
41
THE SPIN-OFF
Background
On March 14, 2011, Northrop Grumman approved the spin-off of HII from Northrop Grumman,
following which we will be an independent, publicly owned company. As part of the spin-off, Current
NGC will complete an internal reorganization, which we refer to as the internal reorganization,
which will result in:
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New NGC, a subsidiary of Current NGC, replacing Current NGC as the publicly owned
holding company that directly and indirectly owns all of the capital stock of Current
NGC and its subsidiaries, including our common stock;
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New NGC changing its name to Northrop Grumman Corporation;
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Our becoming the parent company of those Northrop Grumman subsidiaries that
currently operate the shipbuilding business; and
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Current NGC becoming a direct, wholly owned non-operating subsidiary of HII and
being renamed Titan II Inc.
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To complete the spin-off, Northrop Grumman will, following the internal reorganization,
distribute to its stockholders all of the shares of our common stock. The distribution will occur
on the distribution date, which is March 31, 2011. Each holder of Northrop Grumman common stock
will receive one share of our common stock for every six shares of Northrop Grumman common stock
held on March 30, 2011, the record date. After completion of the spin-off:
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we will be an independent, publicly owned company, will own and operate the
shipbuilding business and will own all of the stock of Current NGC; and
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New NGC, primarily through its subsidiary NGSC, will own and operate the aerospace
systems, electronic systems, information systems and technical services businesses
previously owned by and operated by Current NGC.
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Each holder of Northrop Grumman common stock will continue to hold his, her or its shares in
Northrop Grumman. No vote of Northrop Grummans stockholders is required or is being sought in
connection with the spin-off, and Northrop Grummans stockholders will not have any appraisal
rights in connection with the spin-off, including the internal reorganization.
The distribution of our common stock as described in this information statement is subject to
the satisfaction or waiver of certain conditions. In addition, Northrop Grumman has the right not
to complete the spin-off if, at any time prior to the distribution, the board of directors of
Northrop Grumman determines, in its sole discretion, that the spin-off is not in the best interests
of Northrop Grumman or its stockholders, that a sale or other alternative is in the best interests
of Northrop Grumman or its stockholders or that it is not advisable for us to separate from
Northrop Grumman. For a more detailed description, see Conditions to the Spin-Off.
Reasons for the Spin-Off
Northrop Grummans board of directors has determined that the spin-off is in the best
interests of Northrop Grumman and its stockholders because the spin-off will provide various
benefits including: (i) greater strategic focus of investment resources and each managements
efforts, (ii) tailored customer focus, (iii) direct and differentiated access to capital markets
and (iv) enhanced investor choices by offering investment opportunities in separate entities.
Greater Strategic Focus of Financial Resources and Each Managements Efforts
. Northrop
Grummans shipbuilding business represents a discrete portion of Northrop Grummans overall
businesses. It has historically exhibited different financial and operating characteristics than
Northrop Grummans other businesses. Northrop Grumman has a portfolio of C4ISR systems and
electronics, manned and unmanned air and space platforms, cyber-security and related system-level
applications and logistics that it has strategically positioned to align with what Northrop Grumman
believes are its customers emerging security priorities. Northrop Grumman management believes it
has capabilities and synergies in these areas of its portfolio across its aerospace, electronics,
information systems and technical services sectors. Going forward, however, Northrop Grumman
management sees little synergy between its shipbuilding business and its other businesses.
Additionally, the shipbuilding business is a mature business that is more capital-intensive than
most of Northrop Grummans other businesses, with longer periods of performance. Northrop Grummans
management believes that its shipbuilding business, on one hand, and its other businesses, on the
other hand, require inherently different strategies in order to maximize their long-term value.
Because the shipbuilding business requires capital intensiveness to support its key customers,
Northrop Grumman has been required, in recent years, to make continuing capital expenditures in the
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shipbuilding business. Northrop Grummans and our management believe that Northrop Grummans
management resources would be more efficiently utilized if Northrop Grummans management
concentrated solely on Northrop Grummans other businesses, and that our management resources would
be more efficiently utilized if our management concentrated solely on the shipbuilding business.
Consequently, Northrop Grumman has determined that its current structure may not be the most
effective to design and implement the distinct strategies necessary to operate in a manner that
maximizes the long-term value of each company.
Both Northrop Grumman and we expect to have better use of management and financial resources
as a result of having board and management teams solely focused on their respective businesses. The
spin-off will allow us to better align managements attention and resources to pursue opportunities
in the shipbuilding market and to more actively manage our cost structure. Northrop Grumman will
similarly benefit from its managements ability to focus on the management and operation of its
other businesses.
Tailored Customer Focus
. Both Northrop Grumman and we believe that, as a unified, commonly
managed, stand-alone shipbuilding business, our management will be able to focus solely on the
needs of our own customers (primarily the U.S. Navy), without dilution arising from a connection to
a larger parent with tangential goals and incentives.
Direct and Differentiated Access to Capital Markets
. After the spin-off, we will no longer
need to compete with Northrop Grummans other businesses for capital resources. As a long-cycle,
mature industrial business with heavy capital needs but with long-duration and highly transparent
cash flows, the shipbuilding business has different financial and operating characteristics from
Northrop Grummans other businesses. Both Northrop Grumman and we believe that direct and
differentiated access to the capital markets will allow each of us to better optimize the amounts
and terms of the capital needed for each of the respective businesses, aligning financial and
operational characteristics with investor and market expectations. Northrop Grummans management
also believes that, as a separate entity, we will have ready access to capital, because we will
attract investors who are interested in the characteristics of the shipbuilding business. Although
we will no longer have financial support from Northrop Grumman, our financial resources have been
established in a manner that considers the capital-intensiveness of our business and specifically
factors in the projected requirement for future capital expenditures.
Enhanced Investor Choices by Offering Investment Opportunities in Separate Entities
. After the
spin-off, investors should be better able to evaluate the financial performances of Northrop
Grumman and us, as well as our respective strategies within the context of our respective markets,
thereby enhancing the likelihood that both entities will achieve appropriate market valuations.
Northrop Grummans management and financial advisors believe that the investment characteristics of
the shipbuilding business and Northrop Grummans other businesses may appeal to different types of
investors. As a result of the spin-off, management of both companies should be able to implement
goals and evaluate strategic opportunities in light of investor expectations within their
respective specialties without undue attention to investor expectations in other specialties. In
addition, each company should be able to focus its public relations efforts on cultivating its own
separate identity.
Manner of Effecting the Spin-Off
The general terms and conditions relating to the spin-off will be set forth in a Separation
and Distribution Agreement among us, Northrop Grumman, NGSC and NGSB.
Internal Reorganization
Prior to the distribution, as described under Distribution of Shares of Our Common Stock,
and as part of the internal reorganization, Current NGC will complete a corporate reorganization,
which we refer to as the holding company reorganization, to create a holding company structure.
The holding company reorganization will be effected by action of the board of directors of Current
NGC without a vote of Northrop Grummans stockholders pursuant to Section 251(g) of the DGCL. In
accordance with Section 251(g) of the DGCL, Titan Merger Sub Inc., a Delaware corporation and
indirect, wholly owned subsidiary of New NGC, will merge with and into Current NGC, with Current
NGC as the surviving corporation and an indirect, wholly owned subsidiary of New NGC, the new
holding company. At the effective time of that merger and in connection with the holding company
reorganization, Current NGC will change its name from Northrop Grumman Corporation to Titan II
Inc., and New NGC will change its name to Northrop Grumman Corporation. In the holding company
reorganization, all of the outstanding shares of capital stock of Current NGC will become the same
number of shares of the same class of capital stock of New NGC. Outstanding options to acquire
common stock of Current NGC will become options to acquire common stock of New NGC. The board of
directors of New NGC immediately after completion of the holding company reorganization will be
composed of the same persons who are on the board of directors of Current NGC immediately prior to
the holding company reorganization.
As part of the internal reorganization, through a series of internal transfers including the
Contribution and the transfer to New NGC of all of the non-shipbuilding-related assets and
liabilities of Current NGC, we will be the parent company of the
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Northrop Grumman subsidiaries that currently operate the shipbuilding business and Current NGC
will be our direct, wholly owned subsidiary. After completion of the internal reorganization,
Current NGC will have no material assets or liabilities other than Current NGCs guarantees of our
performance under certain of our contracts and certain of our indebtedness and insurance agreements
related to NGSB (the Current NGC Obligations). See Description of Material Indebtedness. These
guarantees, which will remain with Current NGC and will not be transferred in the internal
reorganization or the Spin-Off, require Current NGC to guarantee the performance of our subsidiary,
NGSB, under certain of its shipbuilding contracts and to guarantee the payment of amounts owed by
us in connection with the GO Zone IRBs and the related loan agreement with the MBFC. We will enter
into performance and indemnity agreements with Current NGC, pursuant to which we will agree to
perform all of the Current NGC Obligations and indemnify Current NGC for any costs arising from
such obligations. These indemnities do not relate to our relationship with Northrop Grumman. The
diagrams below show the transaction structure, simplified for illustrative purposes only:
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The diagram below shows the current
structure of Northrop Grumman:
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The diagram below shows the
structure of Northrop Grumman after
completion of the internal
reorganization:
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Distribution of Shares of Our Common Stock
Under the Separation and Distribution Agreement, the distribution will be effective as of
12:01 a.m., Eastern time, on March 31, 2011, the distribution date. As a result of the spin-off, on
the distribution date, each holder of Northrop Grumman common stock will receive one share of our
common stock for every six shares of Northrop Grumman common stock that he, she or it owns. In
order to receive shares of our common stock in the spin-off, a Northrop Grumman stockholder must be
stockholder at the close of business of the NYSE on March 30, 2011, the record date.
The diagram below shows the structure, simplified for illustrative purposes only, of Northrop
Grumman and HII after completion of the spin-off:
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On the distribution date, Northrop Grumman will release the shares of our common stock to our
distribution agent to distribute to Northrop Grumman stockholders. For most of these Northrop
Grumman stockholders, our distribution agent will credit their shares of our common stock to
book-entry accounts established to hold their shares of our common stock. Our distribution agent
will send these stockholders, including any Northrop Grumman stockholder that holds physical share
certificates of Northrop Grumman common stock and is the registered holder of such shares of
Northrop Grumman common stock represented by those certificates on the record date, a statement
reflecting their ownership of our common stock. Book-entry refers to a method of recording stock
ownership in our records in which no physical certificates are used. For stockholders who own
Northrop Grumman common stock through a broker or other nominee, their shares of our common stock
will be credited to these stockholders accounts by the broker or other nominee. It is expected
that it will take the distribution agent up to two weeks to electronically issue shares of our
common stock to Northrop Grumman stockholders or their bank or brokerage firm by way of direct
registration in book-entry form. Trading of our stock will not be affected by this delay in
issuance by the distribution agent. As further discussed below, we will not issue fractional shares
of our common stock in the distribution. Following the spin-off, stockholders whose shares are held
in book-entry form may request that their shares of our common stock be transferred to a brokerage
or other account at any time.
Northrop Grumman stockholders will not be required to make any payment or surrender or
exchange their shares of Northrop Grumman common stock or take any other action to receive their
shares of our common stock. No vote of Northrop Grumman stockholders is required or sought in
connection with the spin-off, including the internal reorganization, and Northrop Grumman
stockholders have no appraisal rights in connection with the spin-off.
Treatment of Fractional Shares
The distribution agent will not distribute any fractional shares of our common stock to
Northrop Grumman stockholders. Instead, as soon as practicable on or after the distribution date,
the distribution agent will aggregate fractional shares of our common stock held by holders of
record into whole shares, sell them in the open market at the prevailing market prices and then
distribute the aggregate sale proceeds ratably to Northrop Grumman stockholders who would otherwise
have been entitled to receive fractional shares of our common stock. The amount of this payment
will depend on the prices at which the distribution agent sells the aggregated fractional shares of
our common stock in the open market shortly after the distribution date. We will be responsible for
any payment of brokerage fees. The amount of these brokerage fees is not expected to be material to
us. The receipt of cash in lieu of fractional shares of our common stock will generally result in a
taxable gain or loss to the recipient stockholder. Each stockholder entitled to receive cash
proceeds from these shares should consult his, her or its own tax advisor as to the stockholders
particular circumstances. The tax consequences of the distribution are described in more detail
under U.S. Federal Income Tax Consequences of the Spin-Off.
In addition, at the time of the distribution, the exercise price of each outstanding option to
purchase Northrop Grumman stock held by our employees on the distribution date will be reduced to
reflect the value of the distribution, which will be calculated using the equitable adjustment
approach contained in the existing awards.
U.S. Federal Income Tax Consequences of the Spin-Off
Northrop Grumman has received the IRS Ruling and will receive an opinion from the law firm of
Ivins, Phillips & Barker substantially to the effect that, among other things, (i) the holding
company reorganization, together with certain other internal reorganization transactions, will
qualify for tax-free treatment, and (ii) the distribution will qualify under Section 355 of the
Code as a tax-free spin-off to the holders of Northrop Grumman common stock (except with respect to
cash received in lieu of fractional shares of our common stock) and will be tax-free to Northrop
Grumman and HII. Assuming the holding company reorganization, together with certain other internal
reorganization transactions, qualifies for tax-free treatment, and the distribution qualifies under
Section 355 of the Code as tax-free:
In the holding company reorganization:
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no gain or loss will be recognized by the holders of Northrop Grumman common stock
upon their receipt of New NGC common stock in exchange for their Current NGC common
stock in the holding company reorganization;
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the basis of New NGC common stock received in exchange for Current NGC common stock
in the holding company reorganization will be equal to the basis of the Current NGC
common stock surrendered in exchange therefor; and
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the holding period of New NGC common stock received in exchange for Current NGC
stock in the holding company reorganization will include the period during which the
stockholder held the Current NGC common
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stock, provided the Current NGC common stock is held as a capital asset on the date of
the merger in the holding company reorganization.
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In the internal reorganization, neither we nor Northrop Grumman will recognize any taxable
income, gain or loss.
In the distribution:
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no gain or loss will be recognized by, and no amount will be included in the income
of, holders of Northrop Grumman common stock upon their receipt of shares of our common
stock in the distribution;
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the basis of Northrop Grumman common stock immediately before the distribution will
be allocated between the Northrop Grumman common stock and our common stock received in
the distribution, in proportion with relative fair market values at the time of the
distribution;
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the holding period of our common stock received by each Northrop Grumman stockholder
will include the period during which the stockholder held the Northrop Grumman common
stock on which the distribution is made, provided that the Northrop Grumman common
stock is held as a capital asset on the distribution date;
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any cash received in lieu of fractional share interest in our common stock will give
rise to taxable gain or loss equal to the difference between the amount of cash
received and the tax basis allocable to the fractional share interests, determined as
described above, and such gain will be capital gain or loss if the Northrop Grumman
common stock on which the distribution is made is held as a capital asset on the
distribution date; and
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no gain or loss will be recognized by Northrop Grumman upon the distribution of our
common stock.
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U.S. Treasury regulations require certain stockholders that receive stock in a spin-off to
attach to their respective U.S. Federal income tax returns, for the year in which the spin-off
occurs, a detailed statement setting forth certain information relating to the spin-off. Shortly
after the distribution, Northrop Grumman will provide stockholders who receive our common stock in
the distribution with the information necessary to comply with that requirement, as well as
information to help stockholders allocate their stock basis between their Northrop Grumman common
stock and our common stock.
The IRS Ruling is, and the opinion of counsel will be, conditioned on the truthfulness and
completeness of certain factual statements and representations provided by Northrop Grumman and us.
If those factual statements and representations are incomplete or untrue in any material respect,
the IRS Ruling and opinion of counsel could become inoperative. Northrop Grumman and we have
reviewed the statements of fact and representations on which the IRS Ruling is, and the opinion of
counsel will be, based, and neither Northrop Grumman nor we are aware of any facts or circumstances
that would cause any of the statements of fact or representations to be incomplete or untrue. Both
Northrop Grumman and we have agreed to some restrictions on our future actions to provide further
assurance that the distribution will qualify as a tax-free distribution under Section 355 of the
Code.
If the holding company reorganization does not qualify as a tax-free reorganization, taxable
gain or loss would be recognized by each holder of Northrop Grumman stock. The amount of such gain
or loss would be equal to the difference between the fair market value of such holders New NGC
stock (including our stock received in the distribution) and such holders adjusted basis in his,
her or its Current NGC stock. In addition, if the holding company reorganization does not qualify
as a tax-free organization, taxable gain would be recognized by Northrop Grumman. The amount of
such gain would result in a significant U.S. Federal income tax liability to Northrop Grumman.
If the distribution does not qualify under Section 355 of the Code, each holder of Northrop
Grumman common stock receiving our common stock in the distribution would be treated as receiving a
taxable distribution in an amount equal to the fair market value of our common stock received,
which would result in:
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a taxable dividend to the extent of the stockholders pro rata share of Northrop
Grummans current and accumulated earnings and profits;
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a reduction in the stockholders basis in Northrop Grumman common stock to the
extent the amount received exceeds such stockholders share of earnings and profits;
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taxable gain from the exchange of Northrop Grumman common stock to the extent the
amount received exceeds both the stockholders share of earnings and profits and the
stockholders basis in Northrop Grumman common stock; and
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basis in our stock equal to its fair market value on the date of the distribution.
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46
Under certain circumstances Northrop Grumman would recognize taxable gain on the distribution.
These circumstances would include the following:
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the distribution does not qualify as tax-free under Section 355 of the Code; and
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there are one or more acquisitions (including issuances) of either our stock or the
stock of Northrop Grumman, representing 50% or more, measured by vote or value, of the
then-outstanding stock of either corporation, and the acquisition or acquisitions are
deemed to be part of a plan or series of related transactions that include the
distribution. Any such acquisition of our stock within two years before or after the
distribution (with exceptions, including public trading by less-than-5% stockholders
and certain compensatory stock issuances) generally will be presumed to be part of such
a plan unless we can rebut that presumption.
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The amount of such gain would result in a significant U.S. Federal income tax liability to
Northrop Grumman.
Furthermore, under certain circumstances, we would recognize taxable gain on portions of the
internal reorganization. These circumstances would include the following:
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certain portions of the holding company reorganization or the internal
reorganization do not qualify as a tax-free reorganization; and
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there are one or more acquisitions (including issuances and repurchases) of either
our stock or the stock of NGSC, a subsidiary of Northrop Grumman, representing 50% or
more, measured by vote or value, of the then-outstanding stock of either corporation,
and the acquisition or acquisitions are deemed to be part of a plan or series of
related transactions that include the internal reorganization. Any such acquisition of
our stock within two years before or after the distribution (with exceptions, including
public trading by less-than-5% stockholders and certain compensatory stock issuances)
generally will be presumed to be part of such a plan unless we can rebut that
presumption.
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The amount of such gain would result in a significant U.S. Federal income tax liability to us,
which may have a material adverse effect on our financial position, results of operations or cash
flows.
We will agree to indemnify Northrop Grumman for any tax liabilities of Northrop Grumman
resulting from the holding company reorganization, the internal reorganization, and the
distribution under certain circumstances. Our obligation to indemnify Northrop Grumman may
discourage, delay or prevent a change of control of our company. In addition, under IRS
regulations, each member of the Northrop Grumman consolidated tax return group at the time of the
spin-off (including us and our subsidiaries) would be severally liable to the IRS for such tax
liability. The resulting tax liability may have a material adverse effect on both our and Northrop
Grummans financial position, results of operations or cash flows.
The preceding summary of the anticipated U.S. Federal income tax consequences of the spin-off
is for general information only. Northrop Grumman stockholders should consult their own tax
advisors as to the specific tax consequences of the spin-off to them, including the application and
effect of state, local or non-U.S. tax laws and of changes in applicable tax laws.
Results of the Spin-Off
After the spin-off, we will be an independent, publicly owned company. Immediately following
the spin-off, we expect to have approximately 32,000 holders of shares of our common stock and
approximately 48.8 million shares of our common stock outstanding, based on the number of
stockholders and outstanding shares of Northrop Grumman common stock expected as of the record
date. The figures assume no exercise of outstanding options and exclude shares of Northrop Grumman
common stock held directly or indirectly by Northrop Grumman, if any. The actual number of shares
to be distributed will be determined on the record date and will reflect any exercise of Northrop
Grumman options between the date the Northrop Grumman board of directors declares the dividend for
the distribution and the record date for the distribution.
For information regarding options to purchase shares of our common stock that will be
outstanding after the distribution, see Capitalization, Certain Relationships and Related Party
TransactionsAgreements with Northrop Grumman Related to the Spin-OffEmployee Matters Agreement
and Management.
Before the spin-off, we will enter into several agreements with Northrop Grumman to effect the
spin-off and provide a framework for our relationship with Northrop Grumman after the spin-off.
These agreements will govern the relationship between us and Northrop Grumman after completion of
the spin-off and provide for the allocation between us and Northrop Grumman of Northrop Grummans
assets, liabilities and obligations. For a more detailed description of these agreements,
47
see Certain Relationships and Related Party TransactionsAgreements with Northrop Grumman
Related to the Spin-Off.
Trading Prior to the Distribution Date
It is anticipated that, at least two trading days prior to the record date and continuing up
to and including the distribution date, there will be a when-issued market in our common stock.
When-issued trading refers to a sale or purchase made conditionally because the security has been
authorized but not yet issued. The when-issued trading market will be a market for shares of our
common stock that will be distributed to Northrop Grumman stockholders on the distribution date.
Any Northrop Grumman stockholder that owns shares of Northrop Grumman common stock at the close of
business on the record date will be entitled to shares of our common stock distributed in the
spin-off. Northrop Grumman stockholders may trade this entitlement to shares of our common stock,
without the shares of Northrop Grumman common stock they own, on the when-issued market. On the
first trading day following the distribution date, we expect when-issued trading with respect to
our common stock will end and regular-way trading will begin. See Trading Market.
Following the distribution date, we expect shares of our common stock to be listed on the NYSE
under the ticker symbol HII. We will announce the when-issued ticker symbol when and if it
becomes available.
It is also anticipated that, at least two trading days prior to the record date and continuing
up to and including the distribution date, there will be two markets in Northrop Grumman common
stock: a regular-way market and an ex-distribution market. Shares of Northrop Grumman common
stock that trade on the regular-way market will trade with an entitlement to shares of our common
stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market
will trade without an entitlement to shares of our common stock distributed pursuant to the
distribution. Therefore, if shares of Northrop Grumman common stock are sold in the regular-way
market up to and including the distribution date, the selling stockholders right to receive shares
of our common stock in the distribution will be sold as well. However, if Northrop Grumman
stockholders own shares of Northrop Grumman common stock at the close of business on the record
date and sell those shares on the ex-distribution market up to and including the distribution date,
the selling stockholders will still receive the shares of our common stock that they would
otherwise receive pursuant to the distribution. See Trading Market.
Treatment of 401(k) Shares for Current and Former Employees
Our Employees Invested in the Northrop Grumman Stock Fund of the Northrop Grumman
401(k)
Plan
.
Our current and former employees who hold accounts in the Northrop Grumman 401(k) Plan on
March 30, 2011 will have their accounts transferred to the HII 401(k) Plan, as of March 31, 2011,
including any shares of Northrop Grumman common stock held in the Northrop Grumman Stock Fund under
the Northrop Grumman 401(k) Plan. On the distribution date, one share of our common stock, based on
the distribution ratio for every six shares of Northrop Grumman common stock held in such
employees Northrop Grumman stock fund account, will be included in a new HII stock fund account
under the HII 401(k) Plan. However, in conformity with the fiduciary responsibility requirements of
ERISA, remaining shares of Northrop Grumman common stock held in our employees Northrop Grumman
stock fund accounts following the distribution will be disposed of and allocated to another
investment alternative available under the HII 401(k) Plan as directed by participants until such
date as shall be determined by the Investment Committee, after which date the Investment Committee
shall dispose of all remaining shares and invest the proceeds in another investment alternative to
be determined by the Investment Committee (but this will not prohibit diversified, collectively
managed investment alternatives available under the HII 401(k) Plan from holding Northrop Grumman
common stock or prohibit employees who use self-directed accounts in the HII 401(k) Plan from
investing their accounts in Northrop Grumman common stock).
Northrop Grumman Employees Invested in the Northrop Grumman Stock Fund of the Northrop Grumman
4
01(k)
Plan.
Current and former Northrop Grumman employees who hold shares of Northrop Grumman common stock
in their Northrop Grumman 401(k) Plan account as of the record date will receive shares of our
common stock in the distribution. Our shares will be included in a new, temporary HII stock fund
under the Northrop Grumman 401(k) Plan. In conformity with the fiduciary responsibility
requirements of ERISA, remaining shares of our common stock held in the temporary HII stock fund
following the distribution will be disposed of and allocated to another investment alternative
available under the Northrop Grumman 401(k) Plan as directed by participants until such date as
shall be determined by the Investment Committee, after which date the Investment Committee shall
dispose of all remaining shares and invest the proceeds in another investment alternative to be
determined by the Investment Committee (but this will not prohibit diversified, collectively
managed investment alternatives available under the Northrop Grumman 401(k) Plan from holding our
common stock or prohibit employees who use self-directed accounts in the Northrop Grumman 401(k)
Plan from investing their accounts in our common stock).
48
Incurrence of Debt
It is anticipated that, prior to the spin-off, we will (i) receive the net proceeds from the
HII Debt, (ii) enter into the HII Credit Facility and (iii) make the Contribution, all on terms
acceptable to Northrop Grumman.
Conditions to the Spin-Off
We expect that the spin-off will be effective as of 12:01 a.m., Eastern time, on March 31,
2011, the distribution date, provided that the following conditions shall have been satisfied or
waived by Northrop Grumman:
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the board of directors of Northrop Grumman, in its sole and absolute discretion,
shall have authorized and approved the spin-off and not withdrawn such authorization
and approval, and the New NGC board shall have declared the dividend of our common
stock to Northrop Grumman stockholders;
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the Separation and Distribution Agreement and each ancillary agreement contemplated
by the Separation and Distribution Agreement shall have been executed by each party
thereto;
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the SEC shall have declared effective our registration statement on Form 10, of
which this information statement is a part, under the Exchange Act, and no stop order
suspending the effectiveness of the registration statement shall be in effect, and no
proceedings for such shall be pending before or threatened by the SEC;
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our common stock shall have been accepted for listing on the NYSE or another
national securities exchange approved by Northrop Grumman, subject to official notice
of issuance;
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the internal reorganization (as described in Background) shall have been
completed;
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Northrop Grumman shall have received the IRS Ruling and an opinion of its tax
counsel, each of which shall remain in full force and effect, that the spin-off
(including the internal reorganization) will not result in the recognition, for U.S.
Federal income tax purposes, of gain or loss to Northrop Grumman or its stockholders,
except to the extent of cash received in lieu of fractional shares;
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HII shall have (i) entered into the HII Credit Facility, (ii) received the net
proceeds from the HII Debt and (iii) made the Contribution;
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no order, injunction or decree that would prevent the consummation of the
distribution shall be threatened, pending or issued (and still in effect) by any
governmental authority of competent jurisdiction, other legal restraint or prohibition
preventing consummation of the distribution shall be in effect and no other event
outside the control of Northrop Grumman shall have occurred or failed to occur that
prevents the consummation of the distribution;
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no other events or developments shall have occurred prior to the distribution that,
in the judgment of the board of directors of Northrop Grumman, would result in the
spin-off having a significant adverse effect on Northrop Grumman or its stockholders;
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prior to the distribution, this information statement shall have been mailed to the
holders of Northrop Grumman common stock as of the record date;
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our current directors shall have duly elected the individuals listed as members of
our post-distribution board of directors in this information statement, and such
individuals shall become the members of our board of directors immediately prior to the
distribution;
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prior to the distribution, Northrop Grumman shall have delivered to us resignations
from those HII positions, effective as of immediately prior to the distribution, of
each individual who will be an employee of Northrop Grumman after the distribution and
who is our officer or director immediately prior to the distribution; and
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immediately prior to the distribution, the Restated Certificate of Incorporation and
the Restated Bylaws, each in substantially the form filed as an exhibit to the
registration statement on Form 10 of which this information statement is a part, shall
be in effect.
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49
The fulfillment of the foregoing conditions will not create any obligation on Northrop
Grummans part to effect the spin-off. We are not aware of any material federal or state regulatory
requirements that must be complied with or any material approvals that must be obtained, other than
compliance with SEC rules and regulations and the declaration of effectiveness of the registration
statement on Form 10 by the SEC, in connection with the distribution. Northrop Grumman has the
right not to complete the spin-off if, at any time prior to the distribution, the board of
directors of Northrop Grumman determines, in its sole discretion, that the spin-off is not in the
best interests of Northrop Grumman or its stockholders, that a sale or other alternative is in the
best interests of Northrop Grumman or its stockholders or that it is not advisable for us to
separate from Northrop Grumman.
Reason for Furnishing this Information Statement
This information statement is being furnished solely to provide information to Northrop
Grummans stockholders that are entitled to receive shares of our common stock in the spin-off.
This information statement is not, and is not to be construed as, an inducement or encouragement to
buy, hold or sell any of our securities. We believe that the information in this information
statement is accurate as of the date set forth on the cover. Changes may occur after that date and
neither Northrop Grumman nor we undertake any obligation to update the information except in the
normal course of our respective public disclosure obligations.
50
TRADING MARKET
Market for Our Common Stock
There has been no public market for our common stock. An active trading market may not develop
or may not be sustained. We anticipate that trading of our common stock will commence on a
when-issued basis at least two trading days prior to the record date and continue through the
distribution date. When-issued trading refers to a sale or purchase made conditionally because the
security has been authorized but not yet issued. When-issued trades generally settle within four
trading days after the distribution date. If you own shares of Northrop Grumman common stock at the
close of business on the record date, you will be entitled to shares of our common stock
distributed pursuant to the spin-off. You may trade this entitlement to shares of our common stock,
without the shares of Northrop Grumman common stock you own, on the when-issued market. On the
first trading day following the distribution date, any when-issued trading with respect to our
common stock will end and regular-way trading will begin. We intend to list our common stock on
the NYSE under the ticker symbol HII. We will announce our when-issued trading symbol when and if
it becomes available.
It is also anticipated that, at least two trading days prior to the record date and continuing
up to and including the distribution date, there will be two markets in Northrop Grumman common
stock: a regular-way market and an ex-distribution market. Shares of Northrop Grumman common
stock that trade on the regular-way market will trade with an entitlement to shares of our common
stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market
will trade without an entitlement to shares of our common stock distributed pursuant to the
distribution. Therefore, if you sell shares of Northrop Grumman common stock in the regular-way
market up to and including the distribution date, you will be selling your right to receive shares
of our common stock in the distribution. However, if you own shares of Northrop Grumman common
stock at the close of business on the record date and sell those shares on the ex-distribution
market up to and including the distribution date, you will still receive the shares of our common
stock that you would otherwise receive pursuant to the distribution.
We cannot predict the prices at which our common stock may trade before the spin-off on a
when-issued basis or after the spin-off. Those prices will be determined by the marketplace.
Prices at which trading in our common stock occurs may fluctuate significantly. Those prices may be
influenced by many factors, including anticipated or actual fluctuations in our operating results
or those of other companies in our industry, investor perception of our company and the
shipbuilding industry, market fluctuations and general economic conditions. In addition, the stock
market in general has experienced extreme price and volume fluctuations that have affected the
performance of many stocks and that have often been unrelated or disproportionate to the operating
performance of these companies. These are just some factors that may adversely affect the market
price of our common stock. See Risk FactorsRisks Relating to Our Common Stock.
Transferability of Shares of Our Common Stock
We expect that upon completion of the spin-off, we will have approximately 48.8 million shares
of common stock issued and outstanding, based on the number of shares of Northrop Grumman common
stock expected to be outstanding as of the record date. The shares of our common stock that you
will receive in the distribution will be freely transferable, unless you are considered an
affiliate of ours under Rule 144 under the Securities Act of 1933, as amended (the Securities
Act). Persons who can be considered our affiliates after the spin-off generally include
individuals or entities that directly, or indirectly through one or more intermediaries, control,
are controlled by, or are under common control with, us, and may include certain of our officers
and directors. As of the record date, we estimate that our directors and officers will beneficially
own 98,510 shares of our common stock. In addition, individuals who are affiliates of Northrop
Grumman on the distribution date may be deemed to be affiliates of ours. Our affiliates may sell
shares of our common stock received in the distribution only:
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under a registration statement that the SEC has declared effective under the
Securities Act; or
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under an exemption from registration under the Securities Act, such as the exemption
afforded by Rule 144.
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In general, under Rule 144 as currently in effect, an affiliate will be entitled to sell,
within any three-month period commencing 90 days after the date the registration statement, of
which this information statement is a part, is declared effective, a number of shares of our common
stock that does not exceed the greater of:
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1.0% of our common stock then outstanding; or
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the average weekly trading volume of our common stock on the NYSE during the four
calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.
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Sales under Rule 144 are also subject to restrictions relating to manner of sale and the
availability of current public information about us.
51
In the future, we may adopt new stock option and other equity-based award plans and issue
options to purchase shares of our common stock and other stock-based awards. We currently expect to
file a registration statement under the Securities Act to register shares to be issued under these
stock plans. Shares issued pursuant to awards after the effective date of the registration
statement, other than shares issued to affiliates, generally will be freely tradable without
further registration under the Securities Act.
Except for our common stock distributed in the distribution, none of our equity securities
will be outstanding on or immediately after the spin-off and there are no registration rights
agreements existing with respect to our common stock.
52
DIVIDEND POLICY
We do not currently intend to pay a dividend. Going forward, our dividend policy will be
established by our board of directors based on our financial condition, results of operations and
capital requirements, as well as applicable law, regulatory constraints, industry practice and
other business considerations that our board of directors considers relevant. In addition, the
terms of the agreements governing our new debt or debt that we may incur in the future may limit or
prohibit the payments of dividends. There can be no assurance that we will pay a dividend in the
future or continue to pay any dividend if we do commence the payment of dividends. There can also
be no assurance that the combined annual dividends on Northrop Grumman common stock and our common
stock after the spin-off, if any, will be equal to the annual dividends on Northrop Grumman common
stock prior to the spin-off.
53
CAPITALIZATION
The following table presents NGSBs historical capitalization at December 31, 2010 and our pro
forma capitalization at that date reflecting the spin-off and the related transactions and events
described in the notes to our unaudited pro forma condensed consolidated balance sheet as if the
spin-off and the related transactions and events, including our financing transaction, had occurred
on December 31, 2010. The capitalization table below should be read together with Managements
Discussion and Analysis of Financial Condition and Results of Operations, and NGSBs historical
consolidated financial statements, our unaudited pro forma condensed consolidated financial
statements and the notes to those financial statements included elsewhere in this information
statement.
We are providing the capitalization table below for informational purposes only. It should not
be construed to be indicative of our capitalization or financial condition had the spin-off and the
related transactions and events been completed on the date assumed. The capitalization table below
may not reflect the capitalization or financial condition that would have resulted had we been
operated as a separate, independent entity at that date and is not necessarily indicative of our
future capitalization or financial condition.
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December 31, 2010
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Pro Forma
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$ in millions
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Historical
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Adjustments
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Pro Forma
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Cash and cash equivalents
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$
|
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|
$
|
300
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[A]
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$
|
300
|
|
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|
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Debt, including current and long-term:
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Long-term debt
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$
|
105
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|
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$
|
105
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Revolving credit facility
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[A]
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Term loan
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$
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575
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[A]
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575
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Senior notes
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1,200
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[A]
|
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1,200
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Notes payable to parent
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715
|
|
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(715
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)[B]
|
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Accrued interest on notes payable to parent
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239
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|
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(239
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)[B]
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Total debt
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1,059
|
|
|
|
821
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|
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1,880
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Equity:
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|
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Common stock
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[B]
|
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Additional paid-in capital
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|
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1,508
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[B]
|
|
|
1,508
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Parents equity in unit
|
|
|
1,933
|
|
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|
(1,933
|
)[B]
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Accumulated other comprehensive loss
|
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(515
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)
|
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|
|
|
|
|
(515
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)
|
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|
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|
|
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Total equity
|
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|
1,418
|
|
|
|
(425
|
)
|
|
|
993
|
|
|
|
|
|
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Total capitalization
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$
|
2,477
|
|
|
$
|
396
|
|
|
$
|
2,873
|
|
|
|
|
|
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[A]
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Historically, cash received by us has been transferred to Northrop Grumman, and
Northrop Grumman has funded our disbursement accounts on an as-needed basis. The pro forma
cash and cash equivalents balance reflects proceeds, net of fees, of $1,729 million from
the incurrence of the HII Debt (consisting of $1,200 million in notes) and the HII Credit
Facility (which includes a $575 million term loan and a revolving facility of $650 million,
of which approximately $137 million of letters of credit are expected to be outstanding at
the time of the spin-off, and the remainder will be undrawn), less a Contribution of $1,429
million to Northrop Grumman. This remaining balance will be available for our general
corporate purposes. The $1,200 million in notes consist of a $600 million 6.875% senior
note due in 2018 and a $600 million 7.125% senior note due in 2021. The $575 million term
loan is due in 2016 and has a variable interest rate based on LIBOR plus a spread based on
leverage ratio, which at the current leverage ratio is 2.5% and may vary between 2.0% and
3.0%.
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After giving effect to the capitalization transactions, $513 million of borrowing capacity
would have been available under our new $650 million revolving credit facility. See
Description of Material Indebtedness for further information on the HII Credit Facility.
We expect that we will obtain approximately $137 million of letters of credit under this
facility upon closing to support various performance obligations.
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[B]
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In connection with our recapitalization, we intend to retire the notes payable to
parent of $715 million and accrued interest thereon of $239 million, eliminate the parents
equity in unit of $1,933 million, eliminate the $50 million of pro forma adjustments
described below, establish the capital structure ($0 million of common stock and $1,508
|
|
54
|
|
|
|
|
|
million of additional paid-in capital) of HII and make the Contribution of $1,429 million.
The $50 million of pro forma adjustments consist of $5 million of capitalized debt issuance
costs funded by Northrop Grumman, the removal of $28 million in accumulated Settlement
Liabilities associated with Federal Contract Matters (as described in Note [B] of the
Unaudited Pro Forma Condensed Consolidated Financial Statements) and the removal of $11
million in liabilities and establishment of $6 million in receivable from Northrop Grumman
for uncertain federal and state tax positions (as described in Note [H] of the Unaudited Pro
Forma Condensed Consolidated Financial Statements). For purposes of this capitalization
table, we have used $.01 per share par value and the one-for-six exchange ratio for shares
of HII common stock based on the 290,956,752 shares of Northrop Grumman common stock
outstanding as of December 31, 2010 as filed in Northrop Grummans Form 10-K. Adjustments to
establish the HII common stock and the associated additional paid-in capital were determined
based on the stated value of the common stock and the number of shares outstanding.
|
|
55
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents the selected historical condensed consolidated financial data for
NGSB. The condensed consolidated financial data set forth below for the years ended December 31,
2010, 2009, 2008 and 2007 is derived from NGSBs audited consolidated financial statements. NGSBs
audited consolidated financial statements for the years ended December 31, 2010, 2009 and 2008 are
included elsewhere in this information statement. The condensed consolidated financial data as of
and for the year ended December 31, 2006 is derived from NGSBs unaudited consolidated financial
statements that are not included in this information statement. The unaudited consolidated
financial statements have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of our management include all adjustments necessary for a fair
presentation of the information set forth herein.
The selected historical condensed consolidated financial and other data presented below should
be read in conjunction with NGSBs consolidated financial statements and accompanying notes and
Capitalization and Managements Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this information statement. NGSBs condensed consolidated
financial data may not be indicative of our future performance and does not necessarily reflect
what our financial position and results of operations would have been had we been operating as an
independent, publicly owned company during the periods presented, including changes that will occur
in our operations and capitalization as a result of the spin-off from Northrop Grumman. See
Unaudited Pro Forma Condensed Consolidated Financial Statements for a further description of the
anticipated changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Year ended)
|
|
|
|
December 31
|
|
(in millions)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Sales and service revenues
|
|
$
|
6,723
|
|
|
$
|
6,292
|
|
|
$
|
6,189
|
|
|
$
|
5,692
|
|
|
$
|
5,319
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
2,490
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
248
|
|
|
|
211
|
|
|
|
(2,354
|
)
|
|
|
447
|
|
|
|
331
|
|
Net earnings (loss)
|
|
|
135
|
|
|
|
124
|
|
|
|
(2,420
|
)
|
|
|
276
|
|
|
|
194
|
|
Total assets
|
|
|
5,203
|
|
|
|
5,036
|
|
|
|
4,760
|
|
|
|
7,658
|
|
|
|
7,644
|
|
Long-term debt
|
|
|
105
|
|
|
|
283
|
|
|
|
283
|
|
|
|
283
|
|
|
|
283
|
|
Total long-term obligations
|
|
|
1,559
|
|
|
|
1,645
|
|
|
|
1,761
|
|
|
|
1,790
|
|
|
|
1,784
|
|
Free cash flow
(1)
|
|
|
168
|
|
|
|
(269
|
)
|
|
|
121
|
|
|
|
364
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Free cash flow is a non-GAAP financial measure and represents cash from operating
activities less capital expenditure. See Managements Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital ResourcesFree Cash Flow for more
information on this measure.
|
56
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents our unaudited pro forma condensed consolidated financial data,
reflecting adjustments to NGSBs condensed consolidated financial data for the year ended December
31, 2010. NGSBs condensed consolidated financial data for the year ended December 31, 2010 is
derived from NGSBs audited consolidated financial statements included elsewhere in this
information statement.
The unaudited pro forma condensed consolidated financial data for the year ended December 31,
2010 have been prepared to reflect the spin-off, including: (i) the distribution of 48,492,792
shares of HII common stock by Northrop Grumman to its stockholders; (ii) the incurrence of $1,775
million of the HII Debt and the HII Credit Facility by HII and the making of the $1,429 million
Contribution; (iii) adjustments for certain federal contract matters in accordance with the
Separation and Distribution Agreement; (iv) adjustments for uncertain federal and state tax
positions in accordance with the Tax Matters Agreement; (v) the cost of special long-term incentive
stock grants, which are contingent upon completion of the spin-off, in the form of restricted stock
rights for our Named Executive Officers, including our President, and other key employees; and (vi)
the cost of modifying certain terms of existing long-term incentive stock plans to allow continued
vesting for our participants. No pro forma adjustments have been included for the Transition
Services Agreement, as we expect that the costs for the Transition Services Agreement will be
comparable to those included in our historical consolidated financial statements. The unaudited pro
forma condensed consolidated statement of operations data presented for the year ended December 31,
2010 assumes the spin-off occurred on January 1, 2010, the first day of fiscal year 2010. The
unaudited pro forma condensed consolidated statement of financial position data assumes the
spin-off occurred on December 31, 2010. The assumptions used and pro forma adjustments derived from
such assumptions are based on currently available information and we believe such assumptions are
reasonable under the circumstances.
The unaudited pro forma condensed consolidated financial statements are not necessarily
indicative of our results of operations or financial condition had the distribution and our
anticipated post-spin-off capital structure been completed on the dates assumed. Also, they may not
reflect the results of operations or financial condition which would have resulted had we been
operating as an independent, publicly owned company during such periods. In addition, they are not
necessarily indicative of our future results of operations or financial condition.
57
HII
Unaudited Pro Forma Condensed Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
In millions except per share data
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
Sales and service revenues
|
|
$
|
6,723
|
|
|
|
|
|
|
$
|
6,723
|
|
Cost of sales and service revenues
|
|
|
6,475
|
|
|
$
|
(7
|
)[A][B]
|
|
|
6,468
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
248
|
|
|
|
7
|
|
|
|
255
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(40
|
)
|
|
|
(80
|
)[C]
|
|
|
(120
|
)
|
Other, net
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
206
|
|
|
|
(73
|
)
|
|
|
133
|
|
Federal income taxes
|
|
|
71
|
|
|
|
(17
|
)[D]
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
135
|
|
|
$
|
(56
|
)
|
|
$
|
79
|
|
Other comprehensive income, net of tax
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
151
|
|
|
$
|
(56
|
)
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
$
|
1.60
|
|
Basic weighted average common shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
49.4
|
[I]
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
$
|
1.60
|
|
Diluted weighted average common
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
49.4
|
[I]
|
|
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
58
HII
Unaudited Pro Forma Condensed Consolidated Statement of Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
$ in millions
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
$
|
300
|
[E]
|
|
$
|
300
|
|
Accounts receivable, net
|
|
$
|
728
|
|
|
|
|
|
|
|
728
|
|
Inventoried costs, net
|
|
|
293
|
|
|
|
|
|
|
|
293
|
|
Deferred income taxes
|
|
|
284
|
|
|
|
|
|
|
|
284
|
|
Prepaid expenses and other current assets
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,313
|
|
|
|
300
|
|
|
|
1,613
|
|
Property, plant and equipment, net
|
|
|
1,997
|
|
|
|
|
|
|
|
1,997
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,134
|
|
|
|
|
|
|
|
1,134
|
|
Other purchased intangibles, net
|
|
|
587
|
|
|
|
|
|
|
|
587
|
|
Pension plan asset
|
|
|
131
|
|
|
|
|
|
|
|
131
|
|
Miscellaneous other assets
|
|
|
41
|
|
|
|
57
|
[E][H]
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,893
|
|
|
|
57
|
|
|
|
1,950
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,203
|
|
|
$
|
357
|
|
|
$
|
5,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to parent
|
|
$
|
715
|
|
|
$
|
(715
|
)[G]
|
|
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
29
|
[E]
|
|
$
|
29
|
|
Trade accounts payable
|
|
|
274
|
|
|
|
|
|
|
|
274
|
|
Current portion of workers compensation
liabilities
|
|
|
197
|
|
|
|
|
|
|
|
197
|
|
Accrued interest on notes payable to parent
|
|
|
239
|
|
|
|
(239
|
)[G]
|
|
|
|
|
Current portion of post-retirement plan
liabilities
|
|
|
146
|
|
|
|
|
|
|
|
146
|
|
Accrued employees compensation
|
|
|
203
|
|
|
|
|
|
|
|
203
|
|
Provision for contract losses
|
|
|
107
|
|
|
|
|
|
|
|
107
|
|
Advance payments and billings in excess of
costs incurred
|
|
|
80
|
|
|
|
|
|
|
|
80
|
|
Other current liabilities
|
|
|
265
|
|
|
|
(28
|
)[B]
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,226
|
|
|
|
(953
|
)
|
|
|
1,273
|
|
Long-term debt
|
|
|
105
|
|
|
|
|
|
|
|
105
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
[F]
|
|
|
|
|
Term loan
|
|
|
|
|
|
|
546
|
[E]
|
|
|
546
|
|
Senior notes
|
|
|
|
|
|
|
1,200
|
[E]
|
|
|
1,200
|
|
Other post-retirement plan liabilities
|
|
|
567
|
|
|
|
|
|
|
|
567
|
|
Pension plan liabilities
|
|
|
381
|
|
|
|
|
|
|
|
381
|
|
Workers compensation liabilities
|
|
|
351
|
|
|
|
|
|
|
|
351
|
|
Deferred tax liabilities
|
|
|
99
|
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
56
|
|
|
|
(11
|
)[H]
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,785
|
|
|
|
782
|
|
|
|
4,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (par value $.01)
|
|
|
|
|
|
|
|
[G]
|
|
|
|
|
Additional paid-in-capital
|
|
|
|
|
|
|
1,508
|
[G][E]
|
|
|
1,508
|
|
Parents equity in unit
|
|
|
1,933
|
|
|
|
(1,933
|
)[G]
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(515
|
)
|
|
|
|
|
|
|
(515
|
)
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
1,418
|
|
|
$
|
(425
|
)
|
|
$
|
993
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
5,203
|
|
|
$
|
357
|
|
|
$
|
5,560
|
|
|
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
59
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
|
|
[A]
|
|
We believe that costs required to operate the shipbuilding business as a standalone
company approximate those costs allocated to NGSB by Northrop Grumman in the historical
NGSB financial statements. Accordingly, no pro forma adjustment has been made for
incremental operating costs. However, we have included two adjustments totaling an $13
million increase to cost of sales and service revenues for the year ended December 31,
2010, related to additional stock-based compensation associated with the anticipated
spin-off transaction.
|
|
|
|
|
|
|
In connection with the anticipated spin off, retention stock awards are expected to be
granted to key employees to ensure a successful transition and business continuity.
Retention grants will be delivered in the form of restricted stock rights with cliff vesting
on the third anniversary of the grant. The annual expense for the retention grants included
in the pro forma adjustment is $10 million (based on a total grant value of $6 million for
the Named Executive Officers (the NEOs) and $24 million for other key employees). The
total value of these grants was determined based on the criticality of the employees
position and on a percentage of the employees base salary. We cannot determine the number
of shares expected to be granted at this time as each share will be valued based on HIIs
stock price, which is not yet known.
|
|
|
|
|
|
|
An additional adjustment of $3 million in compensation expense was included in cost of sales
and service revenues to reflect the full year impact of a modification to the terms of
Northrop Grummans long-term incentive stock plan. The December 2010 modification clarified
that certain Northrop Grumman participants transferring to HII would not be deemed
terminated under the plan. The plan amendment was made in contemplation of the spin-off to
allow continued vesting for our participants. The amount of the adjustment represents the
vested portion of the difference between the aggregate value of the incentive awards at the
date of the amendment and the value of the awards at their original date of grant.
|
|
|
|
|
|
|
There is approximately $100 million of products and services provided by Northrop Grumman,
at its cost without margin, to HII to support HIIs contracts included in the historical
cost of sales and service revenues. Northrop Grummans profit margin rate for the type of
work provided to NGSB for the year ended December 31, 2010 was approximately 13.4%.
Subsequent to the completion of the anticipated spin-off transaction, we will negotiate with
Northrop Grumman the terms of future subcontract work to be performed by Northrop Grumman.
Because the final terms of such work have not been negotiated and the ultimate margin rates
to be paid by HII are unknown, we have not included any pro forma adjustments for
incremental subcontract costs.
|
|
|
|
|
[B]
|
|
A reduction of $20 million to cost of sales and service revenues and $28 million to
other current liabilities represents the removal of the 2010 costs and Settlement
Liabilities, respectively, associated with specific Federal Contract Matters (as defined in
the Separation and Distribution Agreement) relating to costs incurred by Northrop Grumman.
These amounts were allocated in the historical financial statements to represent HIIs
proportionate share of Northrop Grummans accruals for claims and audits identifying
potentially disallowed costs and penalties. However, the Separation and Distribution
Agreement provides that post separation, HII and Northrop Grumman will each be solely
responsible for the resolution of their respective pre-separation allowable cost audits
relating to costs incurred at either the HII or Northrop Grumman level. The pro forma
adjustment removes all costs incurred by Northrop Grumman that were previously allocated to
HII, but which will become the sole responsibility of Northrop Grumman post separation
pursuant to the Separation and Distribution Agreement. Costs and obligations incurred by
HII for its potential disallowed costs and penalties have been included in the consolidated
financial statements and are insignificant.
|
|
|
|
|
[C]
|
|
The adjustment to interest expense includes $115 million for the year ended December
31, 2010, related to HIIs issuance of $1,775 million of debt as described in Note [E] and
the removal of $35 million of interest associated with the elimination of $27 million in
interest on the notes payable to parent as described in Note [G] and $8 million in interest
related to the $178 million in Go Zone IRBs that was replaced by an equal amount of note
payable to parent in November 2010 and effectively refinanced as part of the HII Debt. The
pro forma interest expense of $115 million represents interest expense of $103 million
using the interest rates and maturities for the $1,775 debt issuance described in Note [E],
plus $4 million in interest associated with outstanding letters of credit under the HII
Credit Facility and $8 million in amortization of debt issuance costs, determined as
described below.
|
|
|
|
|
|
|
The $27 million interest adjustment was determined by applying the 5% annual interest rate
to $537 million of principal for two of the notes payable to parent outstanding for the
entire year and by applying the 4.55% annual interest rate to $178 million of principal for
the note payable to parent that replaced the Go Zone IRBs in November 2010.
|
|
60
|
|
|
|
The amortization of debt issuance costs of $8 million was determined by calculating the
annual cost associated with the $51 million of capitalized costs described in Note [E]. The
components of the capitalized costs were $25 million for the HII Credit Facility term loan
to be amortized over five years, $13 million for the HII Debt note due in 2018 to be
amortized over seven years and $13 million for the other HII Debt note due in 2021 to be
amortized over 10 years.
|
|
|
|
|
[D]
|
|
The adjustment to Federal income taxes represents the tax effect of the pro forma
adjustments impacting earnings before income taxes calculated using the U.S. statutory tax
rate of 35% and an increase of $9 million in tax expense associated with the removal of the
liability for uncertain federal tax positions as discussed in Note [H].
|
|
|
|
|
[E]
|
|
These adjustments reflect the incurrence of the HII Debt and entry into the term loan
under the HII Credit Facility in an aggregate amount of $1,775 million and the Contribution
in the amount of $1,429 million. The $1,200 million in HII Debt consist of a $600 million
6.875% senior note due in 2018 and a $600 million 7.125% senior note due in 2021. The $575
million term loan is due in 2016 and has a variable interest rate based on LIBOR. The rate
used in the pro forma adjustment, which averaged 2.84% for 2010, represents the LIBOR rates
measured quarterly during the year, plus 2.5%. Costs and expenses related to obtaining the
HII Debt including $5 million in costs funded by Northrop Grumman (as discussed in Note
[G]), for an estimated total of $51 million, will be capitalized in accordance with GAAP.
|
|
|
|
|
[F]
|
|
After giving effect to the capitalization transactions, $513 million of borrowing
capacity would have been available under our new revolving credit facility of $650 million.
See Description of Material Indebtedness for further information on the HII Credit
Facility. We expect that we will obtain approximately $137 million of letters of credit
under this facility upon closing to support various performance obligations, and we expect
that there will be no outstanding borrowings under this facility at the date of separation.
|
|
|
|
|
[G]
|
|
In connection with our recapitalization, we intend to retire the notes payable to
parent of $715 million and accrued interest thereon of $239 million, eliminate the parents
equity in unit of $1,933 million, eliminate the $50 million of pro forma adjustments
described below, establish the capital structure ($0 million of common stock and $1,508
million of additional paid-in capital) of HII and make the Contribution of $1,429 million.
The $50 million of pro forma adjustments consist of $5 million of capitalized debt issuance
costs funded by Northrop Grumman, the removal of $28 million in accumulated Settlement
Liabilities associated with Federal Contract Matters as described in Note [B] and the
removal of $11 million in liabilities and establishment of $6 million in receivable from
Northrop Grumman for uncertain federal and state tax positions as described in Note [H].
For purposes of these pro forma financial statements, we have used $.01 per share par value
and the one-for-six exchange ratio for shares of HII common stock based on the 290,956,752
shares of Northrop Grumman common stock outstanding as of December 31, 2010 as filed in
Northrop Grummans Form 10-K. Adjustments to establish the HII common stock and the
associated additional paid-in capital were determined based on the stated value of the
common stock and the number of shares outstanding.
|
|
|
|
|
[H]
|
|
The adjustment of $9 million to federal income taxes and $11 million to other long-term
liabilities represents the removal of the 2010 federal tax benefit and liabilities for all
uncertain federal tax positions and a portion of the uncertain state tax positions,
respectively. These amounts were allocated in the historical financial statements to
represent HIIs proportionate share of Northrop Grummans liabilities for uncertain federal
and state tax positions. However, the Tax Matters Agreement provides that post separation,
Northrop Grumman will be solely responsible for the resolution of these pre-separation
uncertain tax positions. In certain state tax jurisdictions where NGSBs pre-separation
results were filed in state tax returns separate from Northrop Grumman, the Tax Matters
Agreement requires Northrop Grumman to reimburse HII for pre-separation uncertain state tax
positions. The adjustment of $6 million to miscellaneous other assets represents a
receivable from Northrop Grumman for these items.
|
|
|
|
|
[I]
|
|
The basic and diluted weighted average shares outstanding were determined by applying
the one-for-six exchange ratio described in Note [G] to Northrop Grummans basic weighted
average shares outstanding as of December 31, 2010 as filed in Northrop Grummans Form
10-K. We have assumed the same basic and diluted weighted average shares outstanding
because the potentially dilutive effect of the outstanding stock awards and stock options
was not material.
|
|
61
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion of our results of operations and financial condition
together with the audited and unaudited historical consolidated financial statements and the notes
thereto included elsewhere in this information statement as well as the discussion in the section
of this information statement entitled Business. This discussion contains forward-looking
statements that involve risks and uncertainties. The forward-looking statements are not historical
facts, but rather are based on current expectations, estimates, assumptions and projections about
our industry, business and future financial results. Our actual results could differ materially
from the results contemplated by these forward-looking statements due to a number of factors,
including those discussed in the sections of this information statement entitled Risk Factors and
Special Note About Forward-Looking Statements.
The consolidated financial statements, which are discussed below, reflect the historical
financial condition, results of operations and cash flows of Northrop Grumman Shipbuilding, Inc.,
which will be our wholly owned subsidiary at the time of the distribution. The financial
information discussed below and included in this information statement, however, may not
necessarily reflect what our financial condition, results of operations or cash flows would have
been had we been a stand alone company during the periods presented or what our financial
condition, results of operations and cash flows may be in the future.
Overview
The Spin-Off
On March 14, 2011, Northrop Grumman approved the spin-off of HII from Northrop Grumman,
following which we will be an independent, publicly owned company. As part of the spin-off,
Northrop Grumman will complete an internal reorganization, as described in The
Spin-OffBackground. To complete the spin-off, Northrop Grumman will, following the internal
reorganization, distribute to its stockholders all of the shares of our common stock. After
completion of the spin-off we will be an independent, publicly owned company and will own and
operate the Northrop Grumman shipbuilding business. The spin-off is subject to certain customary
conditions. We also expect to enter into a series of agreements with Northrop Grumman, including
the Separation and Distribution Agreement and other agreements, which will govern the relationship
between us and Northrop Grumman after completion of the spin-off and provide for the allocation
between us and Northrop Grumman of various assets, liabilities and obligations (including employee
benefits, intellectual property, insurance and tax-related assets and liabilities). These
agreements are described in Certain Relationships and Related Party TransactionsAgreements with
Northrop Grumman Related to the Spin-Off. Consummation of the spin-off is subject to the
satisfaction or waiver of certain conditions, as described in The Spin-OffConditions to the
Spin-Off.
Our Business
Our business is organized into two operating segments, Gulf Coast and Newport News, which also
represent our reportable segments. Through our Gulf Coast shipyards, we are the sole supplier and
builder of amphibious assault and expeditionary warfare ships to the U.S. Navy, the sole builder of
National Security Cutters for the U.S. Coast Guard, and one of only two companies that builds the
U.S. Navys current fleet of DDG-51
Arleigh Burke
-class destroyers. Through our Newport News
shipyard, we are the nations sole industrial designer, builder, and refueler of nuclear-powered
aircraft carriers, and one of only two companies currently designing and building nuclear-powered
submarines for the U.S. Navy. We build more ships, in more ship types and classes, than any other
U.S. naval shipbuilder. We are the exclusive provider of RCOH services for nuclear-powered aircraft
carriers, a full-service systems provider for the design, engineering, construction and life cycle
support of major programs for surface ships and a provider of fleet support and maintenance
services for the U.S. Navy. As prime contractor, principal subcontractor, team member or partner,
we participate in many high-priority defense technology programs in the United States. We conduct
most of our business with the U.S. Government, principally the Department of Defense.
Factors Affecting Our Results of Operations
Our operating results are primarily affected by the following factors:
Contracts
We generate the majority of our business from long-term government contracts for design,
production and support activities. Government contracts typically include the following cost
elements: direct material, labor and subcontracting costs, and certain indirect costs including
allowable general and administrative costs. Unless otherwise specified in a contract, costs billed
to contracts with the U.S. Government are determined under the requirements of the FAR and Cost
Accounting Standards (CAS) regulations as allowable and allocable costs. Examples of costs
incurred by us and not
62
billed to the U.S. Government in accordance with the requirements of the FAR and CAS
regulations include, but are not limited to, certain legal costs, lobbying costs, charitable
donations, interest expense and advertising costs.
We monitor our policies and procedures with respect to our contracts on a regular basis to
ensure consistent application under similar terms and conditions as well as compliance with all
applicable government regulations. In addition, costs incurred and allocated to contracts with the
U.S. Government are routinely audited by the Defense Contract Audit Agency.
Our long-term contracts typically fall into one of two broad categories:
Flexibly Priced Contracts
Includes both cost-type and fixed-price incentive contracts.
Cost-type contracts provide for reimbursement of the contractors allowable costs incurred plus a
fee that represents profit. Cost-type contracts generally require that the contractor use its
reasonable efforts to accomplish the scope of the work within some specified time and some stated
dollar limitation. Fixed-price incentive contracts also provide for reimbursement of the
contractors allowable costs, but are subject to a cost-share limit which affects profitability.
Fixed-price incentive contracts effectively become firm fixed-price contracts once the cost-share
limit is reached.
Firm Fixed-Price Contracts
A firm fixed-price contract is a contract in which the specified
scope of work is agreed to for a price that is pre-determined by bid or negotiation, and not
generally subject to adjustment regardless of costs incurred by the contractor. Time-and-materials
contracts are considered firm fixed-price contracts as they specify a fixed hourly rate for each
labor hour charged.
Approximately 99% of our 2010 revenue was generated by flexibly priced contracts (including
certain fixed-price incentive contracts which have exceeded their cost-share limit), with the
remaining 1% from firm fixed-price arrangements. Substantially all of our revenue for 2010 was
derived from the U.S. Government.
Contract Fees
Negotiated contract fee structures for both flexibly priced and fixed-price
contracts include, but are not limited to: fixed-fee amounts, cost sharing arrangements to reward
or penalize for either under or over cost target performance, positive award fees and negative
penalty arrangements. Profit margins may vary materially depending on the negotiated contract fee
arrangements, percentage-of-completion of the contract, the achievement of performance objectives,
and the stage of performance at which the right to receive fees, particularly under incentive and
award fee contracts, is finally determined.
Award Fees
Certain contracts contain provisions consisting of award fees based on
performance criteria such as cost, schedule, quality and technical performance. Award fees are
determined and earned based on an evaluation by the customer of our performance against such
negotiated criteria. Fees that can be reasonably assured and reasonably estimated are recorded over
the performance period of the contract.
Impacts from Hurricanes
In August 2005, our shipyards in Louisiana and Mississippi sustained significant windstorm
damage as a result of Hurricane Katrina, causing work and production delays. We incurred costs to
replace or repair and improve destroyed and damaged assets, suffered losses under our contracts and
incurred substantial costs to clean up and recover our operations. We invested significant capital
to harden, protect and modernize our Pascagoula facilities, and to ensure the shipyards
robustness. In 2008, as a result of Hurricane Gustav, our Gulf Coast shipyards experienced a
shut-down for several days and a resulting minor delay in ship construction throughout the yards;
however, the storm caused no significant physical damage to the yards, we believe in part due to
our successful hardening and improvement after Hurricane Katrina. Also in 2008, Hurricane Ike
severely impacted a subcontractors operations in Texas. The subcontractor produced compartments
for two of the LPD amphibious transport dock ships under construction at the Gulf Coast shipyards.
As a result of the delays and cost growth caused by the subcontractors production delays, our
operating income was reduced during the second half of 2008.
Recent Developments in U.S. Cost Accounting Standards (CAS) Pension Recovery Rules
A substantial portion of our current and retired employee population is covered by pension
plans, the costs of which are dependent upon various assumptions, including estimates of rates of
return on benefit-related assets, discount rates for future payment obligations, rates of future
cost growth and trends for future costs. In addition, funding requirements for benefit obligations
of our pension plans are subject to legislative and other government regulatory actions. For
example, due to government regulations, pension plan cost recoveries under our government contracts
may occur in different periods from when those pension costs are accrued for financial statement
purposes or when pension funding is made. Timing differences between pension costs accrued for
financial statement purposes or when pension funding occurs compared to when such costs are
recoverable as allowable costs under our government contracts could have a material adverse effect
on our cash flow from operations. See Notes to Consolidated Financial StatementsNote 17.
63
In addition, on May 10, 2010, the CAS Board published a Notice of Proposed Rulemaking (NPRM)
that, if adopted, would provide a framework to partially harmonize the CAS rules with the Pension
Protection Act of 2006 (PPA) funding requirements. The NPRM would harmonize by partially
mitigating the mismatch between CAS costs and PPA-amended ERISA minimum funding requirements. Until
the final rule is published, and to the extent that the final rule does not completely eliminate
mismatches between ERISA funding requirements and CAS pension costs, government contractors
maintaining defined benefit pension plans will continue to experience a timing mismatch between
required contributions and pension expenses recoverable under CAS. We expect the rule to be issued
in 2011. The final rule is expected to apply to contracts starting the year following the award of
the first CAS covered contract after the effective date of the new rule. This would mean the rule
would most likely apply to our contracts in 2012. We anticipate that contractors will be entitled
to an equitable adjustment on existing contracts for any additional CAS contract costs resulting
from the final rule.
Consolidated Operating Results
Selected financial highlights are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Sales and service revenues
|
|
$
|
6,723
|
|
|
$
|
6,292
|
|
|
$
|
6,189
|
|
Cost of sales and service revenues
|
|
|
5,812
|
|
|
|
5,442
|
|
|
|
5,489
|
|
Corporate home office and general and administrative costs
|
|
|
663
|
|
|
|
639
|
|
|
|
564
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
2,490
|
|
Operating income (loss)
|
|
|
248
|
|
|
|
211
|
|
|
|
(2,354
|
)
|
Interest expense
|
|
|
40
|
|
|
|
36
|
|
|
|
40
|
|
Other, net
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
Federal income taxes
|
|
|
71
|
|
|
|
52
|
|
|
|
26
|
|
Net earnings (loss)
|
|
|
135
|
|
|
|
124
|
|
|
|
(2,420
|
)
|
|
Operating Performance Assessment and Reporting
We manage and assess the performance of our businesses based on our performance on individual
contracts and programs obtained generally from government organizations using the financial
measures referred to below, with consideration given to the Critical Accounting Policies,
Estimates, and Judgments described in our Notes to Consolidated Financial Statements. Our portfolio
of long-term contracts is largely flexibly-priced, which means that sales tend to fluctuate in
concert with costs across our large portfolio of active contracts, with operating income being a
critical measure of operational performance. Due to FAR rules that govern our business, most types
of costs are allowable, and we do not focus on individual cost groupings (such as cost of sales or
general and administrative costs) as much as we do on total contract costs, which are a key factor
in determining contract operating income. As a result, in evaluating our operating performance, we
look primarily at changes in sales and service revenues, and operating income, including the
effects of significant changes in operating income as a result of changes in contract estimates and
the use of the cumulative catch-up method of accounting in accordance with GAAP. Unusual
fluctuations in operating performance driven by changes in a specific cost element across multiple
contracts, however, are described in our analysis.
Sales and Service Revenues
Sales and service revenues consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Product sales
|
|
$
|
5,798
|
|
|
$
|
5,046
|
|
|
$
|
5,207
|
|
Service revenues
|
|
|
925
|
|
|
|
1,246
|
|
|
|
982
|
|
|
Total sales and service revenues
|
|
$
|
6,723
|
|
|
$
|
6,292
|
|
|
$
|
6,189
|
|
|
2010
Product sales increased $752 million, or 15%, from 2009. The increase is primarily due
to higher sales volume in the LPD and LHA expeditionary warfare programs, the CVN-78
Gerald R. Ford
aircraft carrier construction program, the CVN-71 USS
Theodore Roosevelt
RCOH and the SSN-774
Virginia
-class submarine construction program. These increases were partially offset by reduced
sales in 2010 due to the 2009 deliveries of LHD-8 USS
Makin Island
and CVN-77 USS
George H.W. Bush
.
Additionally, during the second quarter of 2010 we announced the wind down of shipbuilding
operations at the Avondale facility in 2013 (see Notes to Consolidated Financial StatementsNote
4) and reduced product revenues by $115 million to reflect revised estimates to complete LPD-23
and LPD-25. In 2009, we reduced product revenues by $160 million to reflect revised estimates to
complete the LPD-class ships and LHA-6
America
.
64
Service revenues decreased $321 million, or 26%, from 2009. The decrease is primarily due to
the completion of the CVN-65 USS
Enterprise
Extended Dry-docking Selected Restricted Availability
(EDSRA) in the second quarter of 2010.
2009
Product sales decreased $161 million, or 3%, from 2008. The decrease was primarily due
to the delivery of several ships in the second and third quarters of 2009, including the aircraft
carrier CVN-77 USS
George H.W. Bush
, the expeditionary ship LHD-8 USS
Makin Island
, and the surface
combatant DDG-105 USS
Dewey
. The lower volume associated with these ship deliveries during the year
was partially offset by higher sales on the construction of SSN-774
Virginia
-class submarines and
production ramp-ups in the LPD program.
Service revenues increased $264 million, or 27%, from 2008. The increase was primarily due to
higher volume on the CVN-65 USS
Enterprise
EDSRA and Post-Shakedown Availabilities on the CVN-77
USS
George H.W. Bush
and CVN-70 USS
Carl Vinson
.
Cost of Sales and Service Revenues
Cost of sales and service revenues and corporate home office and other general and
administrative costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cost of product sales
|
|
$
|
5,042
|
|
|
$
|
4,415
|
|
|
$
|
4,672
|
|
% of product sales
|
|
|
87.0
|
%
|
|
|
87.5
|
%
|
|
|
89.7
|
%
|
Cost of service revenues
|
|
|
770
|
|
|
|
1,027
|
|
|
|
817
|
|
% of service revenues
|
|
|
83.2
|
%
|
|
|
82.4
|
%
|
|
|
83.2
|
%
|
Corporate home office and general and administrative costs
|
|
|
663
|
|
|
|
639
|
|
|
|
564
|
|
% of total sales and service revenues
|
|
|
9.9
|
%
|
|
|
10.2
|
%
|
|
|
9.1
|
%
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
2,490
|
|
|
Cost of sales and service revenues
|
|
$
|
6,475
|
|
|
$
|
6,081
|
|
|
$
|
8,543
|
|
|
Cost of Product Sales and Service Revenues
2010
Cost of product sales increased $627 million, or 14%, from 2009 primarily as a result
of the higher sales volume described above. Cost of product sales as a percentage of product sales
declined slightly year over year principally as a result of lower unfavorable margin adjustments in
our Gulf Coast segment in 2010 relative to 2009 (see Segment Operating Income (Loss) below).
Cost of service revenues decreased $257 million, or 25%, from 2009 primarily as a result of
the lower sales volume described above. The modest increase in cost of service revenues as a
percentage of service revenues is the result of normal year-to-year variances in contract mix.
2009
Cost of product sales in 2009 decreased $257 million, or 6%, from 2008 primarily as a
result of the lower sales volume described above. Cost of product sales as a percentage of product
sales declined year over year principally as a result of lower unfavorable margin adjustments in
our Gulf Coast segment in 2009 relative to 2008 (see Segment Operating Income (Loss) below).
Cost of service revenues in 2009 increased $210 million, or 26%, from 2008 primarily as a
result of the higher sales volume described above. The modest decrease in cost of service revenues
as a percentage of service revenues is the result of normal year-to-year variances in contract mix.
Corporate Home Office and Other General and Administrative Costs
In accordance with industry practice and the regulations that govern the cost accounting
requirements for government contracts, most corporate home office and other general and
administrative costs are considered allowable and allocable costs on government contracts. These
costs are allocated to contracts in progress on a systematic basis and contract performance factors
include this cost component as an element of cost.
2010
Corporate home office and other general and administrative expenses in 2010 increased
to $663 million from $639 million in 2009 primarily as a result of higher cost allocations for
Northrop Grumman management and support services. The Northrop Grumman management and support
services expense in 2010 increased to $115 million from $82 million in 2009. The increase in
management and support services allocations reflects higher employee compensation expenses in 2010
and the impact of the final allocation of prior year overheads. As a percentage of total sales and
service revenues, these costs decreased year over year due principally to the higher sales volume
in 2010.
65
2009
Corporate home office and other general and administrative expenses in 2009 increased
to $639 million from $564 million in 2008 primarily as a result of higher net pension and
post-retirement benefits expense and increased state tax
expense. These 2009 increases were partially offset by lower cost allocations for Northrop
Grumman management and support services, which included a larger favorable impact of final
allocation of prior year overheads. As a percentage of total sales and service revenues, these
costs increased year over year due principally to the cost increases described above, partially
offset by the higher sales volume in 2009.
Goodwill Impairment
In 2008, we recorded a non-cash charge totaling $2.5 billion for the impairment of goodwill,
driven primarily by adverse equity market conditions that caused a decrease in current market
multiples and Northrop Grummans stock price as of November 30, 2008. See Notes to Consolidated
Financial StatementsNote 9.
Operating Income (Loss)
We consider operating income to be an important measure for evaluating our operating
performance and, as is typical in the industry, we define operating income as revenues less the
related cost of producing the revenues and corporate home office and other general and
administrative costs.
We internally manage our operations by reference to segment operating income. Segment
operating income is defined as operating income before net pension and post-retirement benefits
adjustment and deferred state income taxes, neither of which affects segment performance. Segment
operating income is one of the key metrics we use to evaluate operating performance. Segment
operating income is not, however, a measure of financial performance under the generally accepted
accounting principles in the United States of America (GAAP), and may not be defined and
calculated by other companies in the same manner.
The table below reconciles segment operating income to total operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Segment operating income (loss)
|
|
$
|
294
|
|
|
$
|
284
|
|
|
$
|
(2,328
|
)
|
Net pension and post-retirement benefits adjustment
|
|
|
(49
|
)
|
|
|
(88
|
)
|
|
|
(25
|
)
|
Deferred state income taxes
|
|
|
3
|
|
|
|
15
|
|
|
|
(1
|
)
|
|
Total operating income (loss)
|
|
$
|
248
|
|
|
$
|
211
|
|
|
$
|
(2,354
|
)
|
|
Segment Operating Income (Loss)
2010
Segment operating income was $294 million, an increase of $10 million from 2009.
Segment operating income was 4.3% and 4.5% of sales and service revenues for 2010 and 2009,
respectively. In 2010, we recorded net performance adjustments of $132 million on the LPD-22
through LPD-25 contract, including the effect of a $113 million charge for the cumulative effect of
the $210 million of incremental costs expected in connection with our decision to wind down
shipbuilding operations at the Avondale facility in 2013 (see Notes to Consolidated Financial
StatementsNote 4). Results for 2010 also include an unfavorable adjustment of $30 million to
reflect additional costs to complete post-delivery work on LHD-8 USS
Makin Island
(see Notes to
Consolidated Financial StatementsNote 6). Results for 2009 included unfavorable performance
adjustments totaling $171 million on the LPD-22 through LPD-25 contract, partially offset by a
favorable adjustment of $54 million on the LHD-8 contract (see Notes to Consolidated Financial
StatementsNote 6). Activity within each segment is discussed in Segment Operating Results
below.
2009
Segment operating income was $284 million as compared with a segment operating loss of
$2.3 billion in 2008. The increase was primarily due to the 2008 goodwill impairment charge of $2.5
billion (see Notes to Consolidated Financial StatementsNote 9), and improved performance on the
LHD expeditionary warfare program as compared to 2008. In 2008, the Gulf Coast segment had net
negative performance adjustments of $263 million due principally to adjustments on the LHD-8
contract, as well as cost growth and schedule delays on the LPD program and the effects of
Hurricane Ike on a subcontractors performance (see Notes to Consolidated Financial
StatementsNotes 6 and 15).
Net Pension and Post-Retirement Benefits Adjustment
Net pension and post-retirement benefits adjustment reflects the difference between expenses
for pension and other post-retirement benefits determined in accordance with GAAP and the expenses
for these items included in segment operating income in accordance with CAS.
2010
The net pension and post-retirement benefits adjustment was an expense of $49 million
and $88 million in 2010 and 2009, respectively. The decrease in net expense in 2010 is primarily
due to lower GAAP pension expense principally as a result of favorable returns on pension plan
assets in 2009.
66
2009
The net pension and post-retirement benefits adjustment was an expense of $88 million
and $25 million in 2009 and 2008, respectively. The increase in net expense in 2009 was primarily
due to negative returns on plan assets in 2008.
Deferred State Income Taxes
Deferred state income taxes reflect the change in deferred state tax assets and liabilities in
the period. These amounts are recorded within operating income while the current period state
income tax expense is charged to contract costs and included in cost of sales and service revenues
in segment operating income.
2010
The benefit provided by deferred state income taxes in 2010 was $3 million, compared
to a benefit of $15 million in 2009. The change was primarily due to the timing of contract-related
deductions.
2009
The benefit provided by deferred state income taxes in 2009 was $15 million, compared
to an expense of $1 million in 2008. The change was primarily due to the timing of contract-related
deductions.
Interest Expense
2010
Interest expense in 2010 increased $4 million as compared with 2009. The increase is
primarily due to lower capitalized interest in 2010, which resulted from a lower level of long-term
capital projects in 2010 as compared to 2009.
2009
Interest expense in 2009 decreased $4 million, or 10%, as compared with 2008. The
decrease is primarily due to higher capitalized interest in 2009, which resulted from a higher
level of long-term capital projects in 2009 as compared to 2008.
Other, net
2010
Other, net for 2010 decreased $3 million as compared with 2009. The decrease is
primarily due to the write off of $2 million of capitalized debt issuance costs associated with the
partial retirement of GO Zone IRBs in the fourth quarter of 2010 pursuant to a tender offer. See
Financing Activities below and also Notes to Consolidated Financial StatementsNote 11.
U.S. Federal Income Taxes
2010
Our effective tax rate on earnings from continuing operations for 2010 was 34.5%
compared with 29.5% in 2009. The increase in effective tax rate is due to the elimination of
certain tax benefits with the passage of the Patient Protection and Affordable Care Act and the
Health Care and Education Reconciliation Act of 2010 and a decrease in the manufacturers deduction
and the expiration of wage credit benefits, partially offset by the effects of the settlement with
the Internal Revenue Service and the U.S. Congressional Joint Committee on Taxation of our parents
tax returns for the years 2004 through 2006. See Notes to Consolidated Financial StatementsNote
10.
2009
Our effective tax rate on earnings from continuing operations for 2009 was 29.5%
compared with 27.1% in 2008 (excluding the non-cash, non-deductible goodwill impairment charge of
$2.5 billion). The effective tax rate for 2008 was lower than 2009 due to the benefit of a higher
wage credit in 2008 offset by a higher manufacturing deduction in 2009.
67
Segment Operating Results
Basis of Presentation
We are aligned into two reportable segments: Gulf Coast and Newport News.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast
|
|
$
|
3,027
|
|
|
$
|
2,865
|
|
|
$
|
2,848
|
|
Newport News
|
|
|
3,775
|
|
|
|
3,534
|
|
|
|
3,427
|
|
Intersegment eliminations
|
|
|
(79
|
)
|
|
|
(107
|
)
|
|
|
(86
|
)
|
|
Total sales and service revenues
|
|
$
|
6,723
|
|
|
$
|
6,292
|
|
|
$
|
6,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast
|
|
$
|
(61
|
)
|
|
$
|
(29
|
)
|
|
$
|
(1,433
|
)
|
Newport News
|
|
|
355
|
|
|
|
313
|
|
|
|
(895
|
)
|
|
Total Segment Operating Income (Loss)
|
|
|
294
|
|
|
|
284
|
|
|
|
(2,328
|
)
|
Non-segment factors affecting operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension and post-retirement benefits adjustment
|
|
|
(49
|
)
|
|
|
(88
|
)
|
|
|
(25
|
)
|
Deferred state income taxes
|
|
|
3
|
|
|
|
15
|
|
|
|
(1
|
)
|
|
Total operating income (loss)
|
|
$
|
248
|
|
|
$
|
211
|
|
|
$
|
(2,354
|
)
|
|
Key Segment Financial Measures
Sales and Service Revenues
Period-to-period sales reflect performance under new and ongoing contracts. Changes in sales
and service revenues are typically expressed in terms of volume. Unless otherwise described, volume
generally refers to increases (or decreases) in reported revenues due to varying production
activity levels, delivery rates, or service levels on individual contracts. Volume changes will
typically carry a corresponding income change based on the margin rate for a particular contract.
Segment Operating Income
Segment operating income reflects the aggregate performance results of contracts within a
business area or segment. Excluded from this measure are certain costs not directly associated with
contract performance, including net pension and post-retirement benefits expenses and deferred
state income taxes. Changes in segment operating income are typically expressed in terms of volume,
as discussed in Sales and Service Revenues above, or performance. Performance refers to changes in
contract margin rates. These changes typically relate to profit recognition associated with
revisions to total estimated costs at completion of the contract (EAC) that reflect improved (or
deteriorated) operating performance on a particular contract. Operating income changes are
accounted for on a cumulative to date basis at the time an EAC change is recorded. Segment
operating income may also be affected by, among other things, contract performance, the effects of
workforce stoppages, the effects of natural disasters (such as hurricanes), resolution of disputed
items with the customer, recovery of insurance proceeds, and other discrete events. At the
completion of a long-term contract, any originally estimated costs not incurred or reserves not
fully utilized (such as warranty reserves) could also impact contract earnings. Where such items
have occurred, and the effects are material, a separate description is provided.
Program Descriptions
For convenience, a brief description of certain programs discussed in this registration
statement on Form 10 is included in the Glossary of Programs beginning on page 15.
68
Gulf Coast
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Sales and service revenues
|
|
$
|
3,027
|
|
|
$
|
2,865
|
|
|
$
|
2,848
|
|
Segment operating loss
|
|
|
(61
|
)
|
|
|
(29
|
)
|
|
|
(1,433
|
)
|
As a percentage of segment sales
|
|
|
(2.0
|
%)
|
|
|
(1.0
|
%)
|
|
|
(50.3
|
%)
|
|
Sales and Service Revenues
2010
Gulf Coast revenues increased $162 million, or 6%, from 2009, primarily driven by $339
million higher sales in Expeditionary Warfare, partially offset by $122 million lower sales in
Surface Combatants and $62 million lower sales in Coast Guard & Coastal Defense. The increase in
Expeditionary Warfare was due to higher sales volume in the LPD program and on LHA-6
America
,
partially offset by lower sales in 2010 due to the delivery of LHD-8 USS
Makin Island
in 2009. The
decrease in Surface Combatants was primarily due to lower sales volume on the DDG-51 program
following delivery of DDG-105 USS
Dewey
in the third quarter of 2009. The decrease in Coast Guard &
Coastal Defense was primarily due to lower sales volume following delivery of NSC-2 USCGC
Waesche
in the fourth quarter of 2009.
2009
Gulf Coast revenues increased $17 million from 2008, primarily driven by $81 million
higher sales in Expeditionary Warfare, partially offset by $64 million lower sales in Surface
Combatants. The increase in Expeditionary Warfare was due to higher sales volume in the LPD program
due to production ramp-ups, partially offset by the delivery of LHD-8 USS
Makin Island
in the
second quarter of 2009. The decrease in Surface Combatants was primarily due to lower sales volume
on the DDG-51 program following delivery of DDG-105 USS
Dewey
in the third quarter.
Segment Operating Income
2010
Gulf Coast operating loss was $61 million as compared with a loss of $29 million in
2009. The increase in operating loss was caused primarily by unfavorable performance on
Expeditionary Warfare programs and a lower level of operating income on other programs resulting
from the sales volume reductions described above. In Expeditionary Warfare, we recorded net
performance adjustments of $132 million on the LPD-22 through LPD-25 contract, including the effect
of a $113 million charge for the cumulative effect of the $210 million of incremental costs
expected in connection with our decision to wind down shipbuilding operations at the Avondale
facility in 2013 (see Notes to Consolidated Financial StatementsNote 4). Additionally, we
recognized an unfavorable adjustment of $30 million to reflect additional costs to complete
post-delivery work on LHD-8 USS
Makin Island
(see Notes to Consolidated Financial StatementsNote
6). In 2009, operating income included a favorable adjustment of $54 million on the LHD-8
contract, which was more than offset by unfavorable adjustments of $38 million and $171 million on
the DDG-51 and LPD programs, respectively.
2009
Gulf Coast operating loss was $29 million as compared with a loss of $1.4 billion in
2008. The change was primarily due to the 2008 goodwill impairment charge of $2.5 billion, of which
the Gulf Coast segment realized $1.3 billion (see Notes to Consolidated Financial StatementsNote
9), and improved performance on LHD-8 USS
Makin Island
as compared to 2008. In 2008, Gulf Coast
had net negative performance adjustments of $263 million due principally to adjustments on the
LHD-8 contract, as well as cost growth and schedule delays on the LPD program and the effects of
Hurricane Ike on an LPD subcontractors performance. The absence of these unfavorable events in
2009 was partially offset by $171 million in net unfavorable performance adjustments in 2009 on the
LPD-22 through LPD-25 contract (see Notes to Consolidated Financial StatementsNote 6).
Newport News
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Sales and service revenues
|
|
$
|
3,775
|
|
|
$
|
3,534
|
|
|
$
|
3,427
|
|
Segment operating income (loss)
|
|
|
355
|
|
|
|
313
|
|
|
|
(895
|
)
|
As a percentage of segment sales
|
|
|
9.4
|
%
|
|
|
8.9
|
%
|
|
|
(26.1
|
%)
|
|
Sales and Service Revenues
2010
Newport News revenues increased $241 million, or 7%, from 2009, primarily driven by
$148 million higher sales in Aircraft Carriers and $108 million higher sales in Submarines. The
increase in Aircraft Carriers was primarily due to higher sales volume on CVN-78
Gerald R. Ford
and
CVN-71 USS
Theodore Roosevelt
RCOH, partially offset by lower volume in 2010 on CVN-77 USS
George
H.W. Bush
and CVN-70 USS
Carl Vinson
RCOH, both of which were completed in the second quarter of
2009. The increase in Submarines was primarily due to higher sales volume on the construction of
SSN-774
Virginia
-class submarines.
69
2009
Newport News revenues increased $107 million, or 3%, from 2008, primarily driven by
$176 million higher sales in Submarines and $26 million higher sales in Aircraft Carriers,
partially offset by $111 million lower sales in Fleet Support. The increase in Submarines was
primarily due to higher sales volume on the construction of SSN-774
Virginia
-class submarines. The
increase in Aircraft Carriers was primarily due to higher sales volume on CVN-78
Gerald R. Ford
,
CVN-65 USS
Enterprise
EDSRA, and CVN-71 USS
Theodore Roosevelt
RCOH, partially offset by lower
volume on CVN-77 USS
George H.W. Bush
and CVN-70 USS
Carl Vinson
RCOH, both of which were completed
in the second quarter of 2009. The decrease in Fleet Support was primarily due to the redelivery of
the USS
Toledo
submarine in the first quarter of 2009 and decreased carrier fleet support services.
Segment Operating Income
2010
Newport News operating income was $355 million compared with $313 million in 2009. The
increase was primarily due to the impact of the sales volume changes described above, improved
operating performance on Aircraft Carriers and higher earnings from the companys equity method
investments, which totaled $19 million and $10 million in 2010 and 2009, respectively (see Notes
to Consolidated Financial StatementsNote 12).
2009
Newport News operating income was $313 million as compared with a loss of $895 million
in 2008. The increase was primarily due to the 2008 goodwill impairment charge of $2.5 billion, of
which the Newport News segment realized $1.2 billion (see Notes to Consolidated Financial
StatementsNote 9). Additionally, the change in segment operating income in 2009 includes the
impact of the higher sales volume described above for Aircraft Carriers and Submarines, partially
offset by the impact of lower sales volume in Fleet Support.
Backlog
Total backlog at December 31, 2010 was approximately $17 billion. Total backlog includes both
funded backlog (firm orders for which funding is contractually obligated by the customer) and
unfunded backlog (firm orders for which funding is not currently contractually obligated by the
customer). Backlog excludes unexercised contract options and unfunded Indefinite
Delivery/Indefinite Quantity (IDIQ) orders. For contracts having no stated contract values, backlog
includes only the amounts committed by the customer.
The following table presents funded and unfunded backlog by segment at December 31, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
$ in millions
|
|
Funded
|
|
Unfunded
|
|
Total
|
|
Funded
|
|
Unfunded
|
|
Total
|
|
Gulf Coast
|
|
$
|
4,317
|
|
|
$
|
581
|
|
|
$
|
4,898
|
|
|
$
|
6,070
|
|
|
$
|
38
|
|
|
$
|
6,108
|
|
Newport News
|
|
|
5,248
|
|
|
|
7,191
|
|
|
|
12,439
|
|
|
|
5,141
|
|
|
|
9,116
|
|
|
|
14,257
|
|
|
Total backlog
|
|
$
|
9,565
|
|
|
$
|
7,772
|
|
|
$
|
17,337
|
|
|
$
|
11,211
|
|
|
$
|
9,154
|
|
|
$
|
20,365
|
|
|
Backlog is converted into the following years sales as costs are incurred or deliveries are
made. Approximately 31% of the $17 billion total backlog at December 31, 2010 is expected to be
converted into sales in 2011. Total U.S. Government orders comprised substantially all of the total
backlog at the end of 2010.
Awards
2010
The value of new contract awards during the year ended December 31, 2010, was
approximately $3.6 billion. Significant new awards during this period include $480 million for the
construction of the U.S. Coast Guards fourth National Security Cutter (unnamed), $480 million for
design and long-lead material procurement activities for the CVN-79 aircraft carrier (unnamed),
$377 million for CVN-78
Gerald R. Ford
, $224 million for LHA-7 (unnamed), $184 million for LPD-26
John P. Murtha
, $114 million for DDG-114
Callaghan
and $62 million for long-lead material
procurement activities for LPD-27 (unnamed).
2009
The value of new contract awards during the year ended December 31, 2009, was
approximately $4.3 billion. Significant new awards during this period include a contract valued at
up to $2.4 billion for the CVN-71 USS
Theodore Roosevelt
RCOH, a contract valued at up to $635
million for engineering, design and modernization support of submarines, and $374 million for
design and long-lead material procurement activities for the CVN-79 (unnamed) aircraft carrier.
Backlog Adjustments
In 2009, Gulf Coast segment backlog includes a decrease of $670 million for the customers
restructuring of the DDG-1000 program.
Liquidity and Capital Resources
We endeavor to ensure the most efficient conversion of operating results into cash for
deployment in operating our businesses and maximizing stockholder value. We effectively utilize our
capital resources through working capital
70
management, capital expenditures, strategic business acquisitions, debt service, required and
voluntary pension contributions, and returning cash to stockholders through Northrop Grumman.
We use various financial measures to assist in capital deployment decision making, including
net cash provided by operating activities and free cash flow. We believe these measures are useful
to investors in assessing our financial performance.
The table below summarizes key components of cash flow provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Net earnings (loss)
|
|
$
|
135
|
|
|
$
|
124
|
|
|
$
|
(2,420
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
2,490
|
|
Deferred income taxes
|
|
|
(19
|
)
|
|
|
(98
|
)
|
|
|
10
|
|
Other non-cash items (1)
|
|
|
183
|
|
|
|
186
|
|
|
|
193
|
|
Retiree benefit funding less than (in excess of) expense
|
|
|
33
|
|
|
|
(28
|
)
|
|
|
(28
|
)
|
Trade working capital decrease (increase)
|
|
|
27
|
|
|
|
(272
|
)
|
|
|
94
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
359
|
|
|
$
|
(88
|
)
|
|
$
|
339
|
|
|
|
|
|
(1)
|
|
Includes depreciation and amortization.
|
Cash Flows
The following is a discussion of our major operating, investing and financing activities for
each of the three years in the period ended December 31, 2010, as classified on the consolidated
statements of cash flows.
Operating Activities
2010
Net cash provided by operating activities was $359 million in 2010 compared with cash
used of $88 million in 2009. The change of $447 million was due principally to a decrease in
discretionary pension contributions of $97 million, a decrease in trade working capital of $299
million, and a decrease in deferred income taxes of $79 million. In 2009, trade working capital
balances included the unfavorable impact of delayed customer billings associated with the negative
performance adjustments on the LPD-22 through LPD-25 contract due to projected cost increases at
completion (see Notes to Consolidated Financial StatementsNote 6). The change in deferred taxes
was due principally to the timing of contract-related deductions. U.S. Federal income tax payments
made by Northrop Grumman on our behalf were $89 million in 2010.
We expect cash generated from operations for 2011 to be sufficient to service debt, meet
contract obligations, and finance capital expenditures. Although 2011 cash from operations is
expected to be sufficient to service these obligations, we may borrow funds from Northrop Grumman
to accommodate timing differences in cash flows. After completion of the spin-off, we will be an
independent, publicly owned company and we expect to obtain any funds needed from third parties
through the capital markets or bank financing.
2009 Net cash provided by operating activities in 2009 decreased $427 million as compared
with 2008, due primarily to an increase in trade working capital of $366 million and an increase in
deferred income taxes of $108 million. The trade working capital change resulted primarily from the
unfavorable impact of delayed customer billings associated with the negative performance
adjustments on the LPD-22 through LPD-25 contract due to projected cost increases at completion
(see Notes to Consolidated Financial StatementsNote 6). The change in deferred taxes was due to
the timing of contract-related deductions. U.S. Federal income tax payments made by Northrop
Grumman on our behalf were $132 million in 2009.
2008
Net cash provided by operating activities in 2008 decreased $271 million as compared
with 2007, due primarily to lower net earnings (adjusted for non-cash goodwill impairment), an
increase in discretionary pension contributions of $60 million, and a smaller year-over-year
decrease in trade working capital of $50 million. The lower net earnings were the result of
unfavorable performance on LHD-8 USS
Makin Island
(see Notes to Consolidated Financial
StatementsNote 6). The change in trade working capital reflected the receipt in 2007 of $123
million of insurance proceeds related to Hurricane Katrina, partially offset by the impact of
Hurricanes Ike and Gustav (see Notes to Consolidated Financial StatementsNote 15). U.S. Federal
income tax payments made by Northrop Grumman on our behalf were $21 million in 2008.
Investing Activities
2010
Cash used by investing activities was $189 million in 2010, principally for capital
expenditures.
71
2009
Cash used by investing activities was $178 million in 2009, due principally to $181
million in capital expenditures.
2008
Cash used by investing activities was $152 million in 2008, due primarily to $218
million in capital expenditures. During 2008, we received $61 million from the release of
restricted cash related to the GO Zone IRBs (see Notes to Consolidated Financial StatementsNote
11).
Financing Activities
Transactions between Northrop Grumman and us are reflected as effectively settled for cash at
the time of the transaction and are included in financing activities in the consolidated statements
of cash flows. The net effect of these transactions is reflected in the parents equity in unit in
the consolidated statements of financial position.
2010
In connection with the potential spin-off, on November 30, 2010, NGSB purchased $178
million of the outstanding principal amount of GO Zone IRBs pursuant to a tender offer. NGSB used
the proceeds of an intercompany loan for $178 million with Northrop Grumman to purchase the GO Zone
IRBs and submitted the purchased bonds to the trustee for cancellation. See Notes to Consolidated
Financial StatementsNote 11.
Free Cash Flow
Free cash flow represents cash from operating activities less capital expenditures. We believe
free cash flow is a useful measure for investors to consider. This measure is a key factor in our
planning.
Free cash flow is not a measure of financial performance under GAAP, and may not be defined
and calculated by other companies in the same manner. This measure should not be considered in
isolation, as a measure of residual cash flow available for discretionary purposes, or as an
alternative to operating results presented in accordance with GAAP as indicators of performance.
The table below reconciles net cash provided by operating activities to free cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Net cash provided by (used in) operating activities
|
|
$
|
359
|
|
|
$
|
(88
|
)
|
|
$
|
339
|
|
Less capital expenditures
|
|
|
(191
|
)
|
|
|
(181
|
)
|
|
|
(218
|
)
|
|
Free cash flow from operations
|
|
$
|
168
|
|
|
$
|
(269
|
)
|
|
$
|
121
|
|
|
Other Sources and Uses of Capital
Additional Capital
Northrop Grumman currently provides certain capital needed in excess of
the amounts generated by our operating activities. After completion of the spin-off, we will be an
independent, publicly owned company and we expect to obtain any funds needed from third parties
through the capital markets or bank financing, and not from Northrop Grumman. We expect cash
generated from operations for 2011 to be sufficient to service debt, meet contractual obligations
and finance capital expenditures.
We have (i) incurred $1,200 million of HII Debt (consisting of a $600 million 6.875% senior
note due in 2018 and a $600 million 7.125% senior note due in 2021) and (ii) entered into the HII
Credit Facility with third-party lenders (in an amount of $1,225 million, comprising a $575 million
term loan (due in 2016 with a variable interest rate based on LIBOR plus a spread based on leverage
ratio, which at the current leverage ratio is 2.5% and which may vary between 2.0% and 3.0%) that
is expected to be funded in connection with the internal reorganization, and a $650 million
revolving credit facility (maturing in 2016 with a variable interest rate based on LIBOR plus a
spread based upon leverage ratio, which spread at the current leverage ratio is 2.5% and which may
vary between 2.0% and 3.0%), of which approximately $137 million of letters of credit are expected
to be outstanding at the time of the spin-off, and the remainder will be undrawn. See Description
of Material Indebtedness. The proceeds of the HII Debt and the HII Credit Facility are to be used
to fund the $1,429 million Contribution and for general corporate purposes in the amount of $300
million.
Financial Arrangements
In the ordinary course of business, Northrop Grumman uses standby
letters of credit issued by commercial banks and surety bonds issued by insurance companies
principally to support our self-insured workers compensation plans. At December 31, 2010, there
were $125 million of unused stand-by letters of credit and $296 million of surety bonds outstanding
related to our operations. After completion of the spin-off, we will be an independent, publicly
owned company. We are working to obtain similar arrangements from the capital markets as needed
although we may not be able to obtain letters of credit and surety bonds in the same amount and on
as favorable terms and conditions as prior to the spin-off.
72
Contractual Obligations
In connection with the spin-off, we intend to enter into a Transition Services Agreement with
Northrop Grumman, under which Northrop Grumman or certain of its subsidiaries will provide us with
certain services for a limited time to help ensure an orderly transition following the
distribution.
We anticipate that under the Transition Services Agreement, Northrop Grumman will provide
certain enterprise shared services (including information technology, resource planning, financial,
procurement and human resource services), benefits support services and other specified services to
HII. We expect these services will be provided at cost and are planned to extend generally for a
period of six to twelve months. See Certain Relationships and Related Party
TransactionsAgreements with Northrop Grumman Related to the Spin-OffTransition Services
Agreement.
In connection with the spin-off, we also intend to enter into a Tax Matters Agreement with
Northrop Grumman that will govern the respective rights, responsibilities and obligations of
Northrop Grumman and us after the spin-off with respect to tax liabilities and benefits, tax
attributes, tax contests and other tax sharing regarding U.S. Federal, state, local and foreign
income taxes, other taxes and related tax returns. As a subsidiary of Northrop Grumman, we have
(and will continue to have following the spin-off) several liability with Northrop Grumman to the
IRS for the consolidated U.S. Federal income taxes of the Northrop Grumman consolidated group
relating to the taxable periods in which we were part of that group. However, we expect that the
Tax Matters Agreement will specify the portion, if any, of this tax liability for which we will
bear responsibility, and Northrop Grumman will agree to indemnify us against any amounts for which
we are not responsible. We expect that the Tax Matters Agreement will also provide special rules
for allocating tax liabilities in the event that the spin-off, together with certain related
transactions, is not tax-free. See Certain Relationships and Related Party
TransactionsAgreements with Northrop Grumman Related to the Spin-OffTax Matters Agreement.
We do not expect either the Transition Services Agreement or the Tax Matters Agreement to have
a significant impact on our financial condition and results of operations.
The following table presents our contractual obligations and pro forma adjustments reflecting
separation from Northrop Grumman as of December 31, 2010, and the estimated timing of future cash
payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012-
|
|
2014-
|
|
2016 and
|
$ in millions
|
|
Total
|
|
2011
|
|
2013
|
|
2015
|
|
beyond
|
|
Notes payable to parent
(1)
|
|
$
|
715
|
|
|
$
|
715
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Accrued interest on notes payable to parent
(1)
|
|
|
239
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
Interest payments on long-term debt
|
|
|
105
|
|
|
|
8
|
|
|
|
15
|
|
|
|
15
|
|
|
|
67
|
|
Operating leases
|
|
|
137
|
|
|
|
21
|
|
|
|
36
|
|
|
|
25
|
|
|
|
55
|
|
Purchase obligations
(2)
|
|
|
1,972
|
|
|
|
1,045
|
|
|
|
733
|
|
|
|
190
|
|
|
|
4
|
|
Other long-term liabilities
(3)
|
|
|
587
|
|
|
|
76
|
|
|
|
127
|
|
|
|
82
|
|
|
|
302
|
|
|
Total contractual obligations
|
|
$
|
3,860
|
|
|
$
|
2,104
|
|
|
$
|
911
|
|
|
$
|
312
|
|
|
$
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustments reflecting separation from parent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to parent and accrued interest
(4)
|
|
|
(954
|
)
|
|
|
(954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
HII debt incurred in connection with spin-off
|
|
|
1,775
|
|
|
|
29
|
|
|
|
86
|
|
|
|
460
|
|
|
|
1,200
|
|
Interest payments on HII debt
(5)
|
|
|
797
|
|
|
|
103
|
|
|
|
203
|
|
|
|
195
|
|
|
|
296
|
|
|
Total contractual obligations with pro forma adjustments
|
|
$
|
5,478
|
|
|
$
|
1,282
|
|
|
$
|
1,200
|
|
|
$
|
967
|
|
|
$
|
2,029
|
|
|
|
|
|
(1)
|
|
The notes payable to parent and accrued interest are presented as due in 2011 because such
notes are due on demand by our parent.
|
|
(2)
|
|
A purchase obligation is defined as an agreement to purchase goods or services that is
enforceable and legally binding on us and that specifies all significant terms, including:
fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and
the approximate timing of the transaction. These amounts are primarily comprised of open
purchase order commitments to vendors and subcontractors pertaining to funded contracts.
|
|
(3)
|
|
Other long-term liabilities primarily consist of total accrued workers compensation
reserves, deferred compensation, and other miscellaneous liabilities, of which $197 million is
the current portion of workers compensation liabilities. It excludes obligations for
uncertain tax positions of $17 million, as the timing of the payments, if any, cannot be
reasonably estimated.
|
73
|
|
|
(4)
|
|
In connection with the recapitalization resulting from the spin-off transaction, the amount
of Northrop Grummans investment in HII, including intercompany debt and accrued interest
thereon, net of the Contribution, will be contributed to additional paid-in capital.
|
|
(5)
|
|
Interest expense includes interest on $575 million of variable interest rate debt calculated
based on interest rates at December 31, 2010.
|
Further details regarding long-term debt and operating leases can be found in Notes to
Consolidated Financial StatementsNotes 11 and 14.
Off-Balance Sheet Arrangements
As of December 31, 2010, we had no significant off-balance sheet arrangements other than the
surety bonds and letters of credit discussed in Other Sources and Uses of Capital above and
operating leases. For a description of our operating leases, see Notes to Consolidated Financial
StatementsNotes 2 and 14.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rates
At December 31, 2010, we do not consider the market risk exposure relating
to interest rates to be material to the consolidated financial statements. Substantially all
outstanding borrowings were fixed-rate long-term debt obligations. See Notes to Consolidated
Financial StatementsNote 11.
Foreign Currency
We may enter into foreign currency forward contracts to manage foreign
currency exchange rate risk related to payments to suppliers denominated in foreign currencies. At
December 31, 2010, the amount of foreign currency forward contracts outstanding was not material.
Critical Accounting Policies, Estimates and Judgments
Our consolidated financial statements are prepared in accordance with GAAP, which require
management to make estimates, judgments and assumptions that affect the amounts reported in the
consolidated financial statements and the accompanying notes. Management considers an accounting
policy to be critical if it is important to our financial condition and results of operations, and
if it requires significant judgment and estimates on the part of management in its application. The
development and selection of these critical accounting policies have been determined by our
management. Due to the significant judgment involved in selecting certain of the assumptions used
in these areas, it is possible that different parties could choose different assumptions and reach
different conclusions. We consider the policies relating to the following matters to be critical
accounting policies:
|
|
|
Revenue recognition
|
|
|
|
|
Purchase accounting and goodwill
|
|
|
|
|
Litigation, commitments and contingencies
|
|
|
|
|
Retirement benefits
|
|
|
|
|
Workers compensation
|
Revenue Recognition
Overview
We derive the majority of our business from long-term contracts for the production
of goods and services provided to the federal government, which are accounted for in conformity
with GAAP, for construction-type and production-type contracts and federal government contractors.
We classify contract revenues as product sales or service revenues depending on the predominant
attributes of the relevant underlying contracts. We consider the nature of these contracts and the
types of products and services provided when determining the proper accounting method for a
particular contract.
Percentage-of-Completion Accounting
We generally recognize revenues from our long-term
contracts under the cost-to-cost measure of the percentage-of-completion method of accounting. The
percentage-of-completion method recognizes income as work on a contract progresses. For most
contracts, sales are calculated based on the percentage of total costs incurred in relation to
total estimated costs at completion of the contract. For certain contracts with large up-front
purchases of material, sales are generally calculated based on the percentage that direct labor
costs incurred bear to total estimated direct labor costs.
The use of the percentage-of-completion method depends on our ability to make reasonably
dependable cost estimates for the design, manufacture, and delivery of our products and services.
Such costs are typically incurred over a
74
period of several years, and estimation of these costs
requires the use of judgment. We record sales under cost-type contracts as costs are incurred.
Many contracts contain positive and negative profit incentives based upon performance relative
to predetermined targets that may occur during or subsequent to delivery of the product. These
incentives take the form of potential
additional fees to be earned or penalties to be incurred. Incentives and award fees that can
be reasonably assured and reasonably estimated are recorded over the performance period of the
contract. Incentives and award fees that are not reasonably assured or cannot be reasonably
estimated are recorded when awarded or at such time as a reasonable estimate can be made.
Changes in estimates of contract sales, costs and profits are recognized using the cumulative
catch-up method of accounting. This method recognizes in the current period the cumulative effect
of the changes on current and prior periods. Hence, the effect of the changes on future periods of
contract performance is recognized as if the revised estimate had been the original estimate. A
significant change in an estimate on one or more contracts could have a material effect on our
consolidated financial position or results of operations for that period.
Cost Estimation
The cost estimation process requires significant judgment and is based upon
the professional knowledge and experience of our engineers, program managers, and financial
professionals. Factors that are considered in estimating the work to be completed and ultimate
contract recovery include the availability, productivity and cost of labor, the nature and
complexity of the work to be performed, the effect of change orders, the availability of materials,
the effect of any delays in performance, the availability and timing of funding from the customer,
and the recoverability of any claims included in the estimates to complete. A significant change in
an estimate on one or more contracts could have a material effect on our consolidated financial
position or results of operations, and where such changes occur, separate disclosure is made of the
nature, underlying conditions and financial impact from the change. We update our contract cost
estimates at least annually and more frequently as determined by events or circumstances. We review
and assess our cost and revenue estimates for each significant contract on a quarterly basis.
We record a provision for the entire loss on a contract in the period the loss is determined
when estimates of total costs to be incurred on the contract exceed estimates of total revenue to
be earned. We offset loss provisions first against costs that are included in unbilled accounts
receivable or inventoried assets, with any remaining amount reflected in other current liabilities.
Purchase Accounting and Goodwill
Overview
We allocate the purchase price of an acquired business to the underlying tangible
and intangible assets acquired and liabilities assumed based upon their respective fair market
values, with the excess recorded as goodwill. Such fair market value assessments require judgments
and estimates that can be affected by contract performance and other factors over time, which may
cause final amounts to differ materially from original estimates. For acquisitions completed
through December 31, 2008, we recorded adjustments to fair value assessments to goodwill over the
purchase price allocation period (typically not exceeding twelve months), and adjusted goodwill for
the resolution of income tax uncertainties which extended beyond the purchase price allocation
period.
In 2009, we implemented new GAAP accounting guidance related to business combinations that
impacts how we record adjustments to fair values included in the purchase price allocation and the
resolution of income tax uncertainties. For acquisitions completed after January 1, 2009, any
adjustments to the fair value of purchased assets and subsequent resolution of uncertain tax
positions are recognized in net earnings, rather than as adjustments to goodwill. We have had no
acquisitions since the new business combination GAAP requirements became effective.
Tests for Impairment
We perform impairment tests for goodwill as of November 30 each year,
or when evidence of potential impairment exists. We record a charge to operations when we determine
that an impairment has occurred. In order to test for potential impairment, we use a discounted
cash flow analysis, corroborated by comparative market multiples where appropriate.
The principal factors used in the discounted cash flow analysis requiring judgment are the
projected results of operations, discount rate and terminal value assumptions. The discount rate
represents the expected cost of new capital. The terminal value assumptions are applied to the
final year of the discounted cash flow model.
As a result of the announcement to wind down operations at the Avondale, Louisiana facility
and the Gulf Coast segments recent operating losses, we performed an impairment test for each
reportable segments goodwill. The results of our goodwill impairment tests as of June 30, 2010 and
November 30, 2010 indicated that the estimated fair value of each of our reporting units was
substantially in excess of its carrying value. See Notes to Consolidated Financial
StatementsNote 4.
75
Litigation, Commitments and Contingencies
Overview
We are subject to a range of claims, lawsuits, environmental and income tax
matters, and administrative proceedings that arise in the ordinary course of business. Estimating
liabilities and costs associated with these matters requires judgment and assessment based upon
professional knowledge and experience of management and our internal and external legal counsel. In
accordance with our practices relating to accounting for contingencies, we record amounts as
charges to earnings after taking into consideration the facts and circumstances of each
matter, including any settlement offers, and determine that it is probable that a liability has
been incurred and the amount of the loss can be reasonably estimated. The ultimate resolution of
any such exposure to us may vary from earlier estimates as further facts and circumstances become
known.
Environmental Accruals
We are subject to the environmental laws and regulations of the
jurisdictions in which we conduct operations. We record a liability for the costs of expected
environmental remediation obligations when we determine that it is probable we will incur such
costs, and the amount of the liability can be reasonably estimated. When a range of costs is
possible and no amount within that range is a better estimate than another, we record the minimum
amount of the range.
Factors which could result in changes to the assessment of probability, range of estimated
costs and environmental accruals include: modification of planned remedial actions, increase or
decrease in the estimated time required to remediate, discovery of more extensive contamination
than anticipated, results of efforts to involve other legally responsible parties, financial
insolvency of other responsible parties, changes in laws and regulations or contractual obligations
affecting remediation requirements and improvements in remediation technology. Although we cannot
predict whether new information gained as projects progress will materially affect the estimated
liability accrued, we do not anticipate that future remediation expenditures will have a material
adverse effect on our financial position, results of operations or cash flows.
Asset Retirement Obligations
We record all known asset retirement obligations for which the
liabilitys fair value can be reasonably estimated, including certain asbestos removal, asset
decommissioning and contractual lease restoration obligations. Recorded amounts as of December 31,
2010 are $20 million and consist primarily of obligations associated with the wind down of
operations at our Avondale facility (see Notes to Consolidated Financial StatementsNote 4.).
Amounts as of December 31, 2009 were not material.
We also have known conditional asset retirement obligations related to assets currently in
use, such as certain asbestos remediation and asset decommissioning activities to be performed in
the future, that are not reasonably estimable as of December 31, 2010, due to insufficient
information about the timing and method of settlement of the obligation. Accordingly, the fair
value of these obligations has not been recorded in the consolidated financial statements.
Environmental remediation and/or asset decommissioning of these facilities may be required when we
cease to utilize these facilities. In addition, there may be conditional environmental asset
retirement obligations that we have not yet discovered (e.g., asbestos may exist in certain
buildings which we have not become aware of through its normal business operations), and therefore,
these obligations also have not been included in the consolidated financial statements.
Litigation Accruals
Litigation accruals are recorded as charges to earnings when
management, after taking into consideration the facts and circumstances of each matter, including
any settlement offers, has determined that it is probable that a liability has been incurred and
the amount of the loss can be reasonably estimated. The ultimate resolution of any exposure to us
may vary from earlier estimates as further facts and circumstances become known. Based upon the
information available, we believe that the resolution of any of these various claims and legal
proceedings would not have a material adverse effect on our consolidated financial position,
results of operations or cash flows.
Uncertain Tax Positions
Uncertain tax positions meeting the more-likely-than-not
recognition threshold are recognized in the financial statements. If a tax position does not meet
the minimum statutory threshold to avoid payment of penalties, we recognize an expense for the
amount of the penalty in the period the tax position is claimed in our tax return. We recognize
interest accrued related to unrecognized tax benefits in income tax expense. Penalties, if probable
and reasonably estimable, are recognized as a component of income tax expense. The timing and
amount of accrued interest is determined by the applicable tax law associated with an underpayment
of income taxes. See Notes to Consolidated Financial StatementsNote 10. Under existing GAAP,
prior to January 1, 2009, changes in accruals associated with uncertainties arising from the
resolution of pre-acquisition contingencies of acquired businesses were charged or credited to
goodwill; effective January 1, 2009, such changes are now recorded to income tax expense.
Adjustments to other tax accruals are generally recorded in earnings in the period they are
determined.
Retirement Benefits
Overview
We annually evaluate assumptions used in determining projected benefit obligations
and the fair values of plan assets for our pension plans and other post-retirement benefits plans
in consultation with our outside actuaries. In
76
the event that we determine that plan amendments or
changes in the assumptions are warranted, future pension and post-retirement benefit expenses could
increase or decrease.
Assumptions
The principal assumptions that have a significant effect on our consolidated
financial position and results of operations are the discount rate, the expected long-term rate of
return on plan assets, the health care cost trend rate and the estimated fair market value of plan
assets. For certain plan assets where the fair market value is not readily
determinable, such as real estate, private equity, and hedge funds, estimates of fair value
are determined using the best information available.
Discount Rate
The discount rate represents the interest rate that is used to determine the
present value of future cash flows currently expected to be required to settle the pension and
post-retirement benefit obligations. The discount rate is generally based on the yield of
high-quality corporate fixed-income investments. At the end of each year, the discount rate is
primarily determined using the results of bond yield curve models based on a portfolio of high
quality bonds matching the notional cash inflows with the expected benefit payments for each
significant benefit plan. Taking into consideration the factors noted above, our weighted-average
pension composite discount rate was 5.84% at December 31, 2010 and 6.04% at December 31, 2009.
Holding all other assumptions constant, and since net actuarial gains and losses were in excess of
the 10% accounting corridor in 2010, an increase or decrease of 25 basis points in the discount
rate assumption for 2010 would have decreased or increased pension and post-retirement benefit
expense for 2010 by approximately $13 million, of which $2 million relates to post-retirement
benefits, and decreased or increased the amount of the benefit obligation recorded at December 31,
2010, by approximately $140 million, of which $20 million relates to post-retirement benefits. The
effects of hypothetical changes in the discount rate for a single year may not be representative
and may be asymmetrical or nonlinear for future years because of the application of the accounting
corridor. The accounting corridor is a defined range within which amortization of net gains and
losses is not required. Due to adverse capital market conditions in 2008 our pension plan assets
experienced a negative return of approximately 16% in 2008. As a result, substantially all of our
plans experienced net actuarial losses outside the 10% accounting corridor at the end of 2008, thus
requiring accumulated gains and losses to be amortized to expense. As a result of this condition,
sensitivity of net periodic pension costs to changes in the discount rate was much higher in 2009
and 2010 than was the case in 2008 and prior. This condition is expected to continue into the near
future.
Expected Long-Term Rate of Return
The expected long-term rate of return on plan assets
represents the average rate of earnings expected on the funds invested in a specified target asset
allocation to provide for anticipated future benefit payment obligations. For 2010 and 2009, we
assumed an expected long-term rate of return on plan assets of 8.5%. An increase or decrease of 25
basis points in the expected long-term rate of return assumption for 2010, holding all other
assumptions constant, would increase or decrease our pension and post-retirement benefit expense
for 2010 by approximately $8 million.
Health Care Cost Trend Rates
The health care cost trend rates represent the annual rates of
change in the cost of health care benefits based on external estimates of health care inflation,
changes in health care utilization or delivery patterns, technological advances, and changes in the
health status of the plan participants. Using a combination of market expectations and economic
projections including the effect of health care reform, we selected an expected initial health care
cost trend rate of 8.0% and an ultimate health care cost trend rate of 5.0% reached in 2017. In
2009, we assumed an expected initial health care cost trend rate of 7.0% for 2010 and an ultimate
health care cost trend rate of 5.0% reached in 2014. Although our actual cost experience is much
lower at this time, market conditions and the potential effects of health care reform are expected
to increase medical cost trends in the next one to three years thus our past experience may not
reflect future conditions.
Differences in the initial through the ultimate health care cost trend rates within the range
indicated below would have had the following impact on 2010 post-retirement benefit results:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage
|
|
1-Percentage
|
$ in millions
|
|
Point Increase
|
|
Point Decrease
|
|
Increase (Decrease) From Change in Health Care Cost Trend Rates To:
|
|
|
|
|
|
|
|
|
Post-retirement benefit expense
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
Post-retirement benefit liability
|
|
|
18
|
|
|
|
(18
|
)
|
|
Workers Compensation
Our operations are subject to federal and state workers compensation laws. We maintain
self-insured workers compensation plans, in addition to participating in federal administered
second injury workers compensation funds. We estimate the required liability for such claims and
state funding requirements on a discounted basis utilizing actuarial methods based on various
assumptions, which include, but are not limited to, our historical loss experience and projected
loss development factors as compiled in an annual actuarial study. Related self-insurance accruals
include amounts related
77
to the liability for reported claims and an estimated accrual for claims
incurred but not reported. Our workers compensation liability is discounted at 3.31% and 3.47% at
December 31, 2010 and 2009, respectively, based on future payment streams and a risk-free rate.
Workers compensation benefit obligation on an undiscounted basis is $726 million and $686 million
as of December 31, 2010 and 2009, respectively.
Accounting Standard Updates
Accounting Standards Updates not effective until after December 31, 2010 are not expected to
have a significant effect on our consolidated financial position, results of operations or cash
flows.
78
BUSINESS
Our Company
For more than a century, we have been designing, building, overhauling and repairing ships
primarily for the U.S. Navy and the U.S. Coast Guard. We are the nations sole industrial designer,
builder and refueler of nuclear-powered aircraft carriers, the sole supplier and builder of
amphibious assault and expeditionary warfare ships to the U.S. Navy, the sole builder of National
Security Cutters for the U.S. Coast Guard, one of only two companies currently designing and
building nuclear-powered submarines for the U.S. Navy and one of only two companies that builds the
U.S. Navys current fleet of DDG-51
Arleigh Burke-
class destroyers. We build more ships, in more
ship types and classes, than any other U.S. naval shipbuilder. We are also a full-service systems
provider for the design, engineering, construction and life cycle support of major programs for
surface ships and a provider of fleet support and maintenance services for the U.S. Navy. With our
product capabilities, heavy industrial facilities and a workforce of approximately 39,000
shipbuilders, we believe we are poised to continue to support the long-term objectives of the U.S.
Navy to adapt and respond to a complex, uncertain and rapidly changing national security
environment.
Our primary areas of business include the design, construction, repair and maintenance of
nuclear-powered ships, such as aircraft carriers and submarines, and non-nuclear ships, such as
surface combatants, expeditionary warfare/amphibious assault and coastal defense surface ships, as
well as the overhaul and refueling of nuclear-powered ships.
The credit quality of our primary customer (the U.S. Government), the long life cycle of our
products, our significant contracted backlog, our manufacturing capabilities at our heavy
industrial facilities and the alignment of our products to the 30-Year Plan assist us in
forecasting our near- and long-term business plans that we believe provide us with a measure of
financial stability and predictability.
Our three major shipyards are currently located in Newport News, Virginia, Pascagoula,
Mississippi and Avondale, Louisiana.
We manage our business in two segments: Newport News, which includes all of our nuclear ship
design, construction, overhaul and refueling businesses, and Gulf Coast, which includes our
non-nuclear ship design, construction, repair and maintenance businesses.
Newport News
Through our Newport News shipyard, we are the sole supplier of nuclear-powered aircraft
carriers to the U.S. Navy. We delivered the last of the ten-ship CVN-68
Nimitz-
class, CVN-77 USS
George H.W. Bush
, on May 11, 2009. In 2008, we were awarded a $5.1 billion contract for the detail
design and construction of the first ship of the CVN-78
Gerald R. Ford
-class, the next generation
of nuclear-powered aircraft carriers, which is scheduled for delivery in 2015. In 2009, we were
also awarded construction preparation contracts totaling $451 million for the second CVN-78
Gerald
R. Ford
-class aircraft carrier, CVN-79 (unnamed). The duration of this initial CVN-79 award is two
years plus a one-year option. The 30-Year Plan includes the award of a new aircraft carrier
construction contract every five years.
Through a teaming agreement with Electric Boat that provides for approximate equality of work
allocated between the parties, we provide SSN-774
Virginia
-class nuclear fast attack submarines.
Under the teaming agreement, Electric Boat is the prime contractor to whom construction contracts
have been awarded in blocks, and we are principal subcontractor. Block I was awarded in 1998 and
consisted of four submarines, Block II was awarded in 2003 and consisted of six submarines, and
Block III was awarded in 2008 and consisted of eight submarines. We and Electric Boat have
delivered the first seven submarines of the class (all four submarines from Block I and three
submarines from Block II), have another five submarines under construction (the remaining three
submarines of Block II and the first two submarines of Block III) and have been contracted to
deliver an additional six submarines (the remaining six submarines of Block III). Based on expected
build rates, the last Block III SSN-774
Virginia
-class submarine is scheduled for delivery in 2018.
We are also investing in our facilities to support the increase in production rate from one to two
SSN-774
Virginia
-class submarines per year beginning in 2011. Additionally, we have begun working
with Electric Boat on the initial design phase for the SSBN(X)
Ohio
-class Submarine Replacement
Program. We also have a submarine engineering department that provides planning yard services to
the U.S. Navy for its other two classes of nuclear-powered submarines, the
Los Angeles
-class and
the
Seawolf
-class.
We are the exclusive provider of RCOH services for nuclear-powered aircraft carriers and a
provider of fleet maintenance services to the U.S. Navy. In 2009, we were awarded a contract for up
to $2.4 billion for the RCOH of CVN-71 USS
Theodore Roosevelt
, which is scheduled for redelivery to
the U.S. Navy in 2013. In 2010, we were also awarded a three-year $678 million planning contract
(an initial award of $79 million with two one-year options) for the RCOH of CVN-72 USS
Abraham
Lincoln
. In 2011, the first option was exercised for $207 million. RCOH execution contracts are
79
awarded approximately every four years. Additionally, we are currently building a facility at
our Newport News shipyard for the inactivation of nuclear-powered aircraft carriers, the contract
for the first of which, CVN-65 USS
Enterprise
, is expected to be awarded in 2013.
We leverage our nuclear capabilities in non-shipbuilding programs as well. For example, we are
working with our joint venture partner, AREVA NP, to prepare for the manufacture of heavy
components to support civilian nuclear power plant construction work. We are also working with
several other joint venture partners for the DoE on environmental management and operations
projects at the Savannah River Site near Aiken, South Carolina, and potentially at the Idaho
National Laboratory, near Idaho Falls, Idaho. We believe these programs allow us to utilize our
nuclear expertise to take advantage of opportunities to provide niche services in our areas of core
competencies.
The table below sets forth the primary product lines in our Newport News segment:
Newport News Programs
|
|
|
|
|
|
|
|
|
|
|
Program
|
|
Program
|
|
Contract
|
|
Funding
|
|
|
Name
|
|
Description
|
|
Overview
|
|
Overview
|
|
|
Carrier New
Construction
CVN-78
Gerald R.
Ford
-class
|
|
New
aircraft carrier
for the
21
st
century
Increased
warfighting
capabilities
New
propulsion plant
Reduced
ship manning
Focused on
operating cost
reduction
Designed
for modular
construction
|
|
Cost plus
incentive fee
Exclusive
provider
Incentivized
capital investment
under the planning
contract
8-year
design, 7.5-year
construction
|
|
New
construction
contract expected
to be awarded
approximately every
5 years
|
|
|
|
|
|
|
|
|
|
|
|
Carrier RCOH
|
|
Complex
overhaul of the
ships machinery
and equipment
Refueling
of both of the
ships reactors
Significant
renovation and
modernization work
|
|
Cost plus
incentive fee
Exclusive
provider
3-year
advanced planning
Approximately
3.5-year overhaul
execution
|
|
RCOH
Execution contracts
expected to be
awarded
approximately every
4 years
|
|
|
|
|
|
|
|
|
|
|
|
Submarine New
Construction
SSN-774
Virginia
-class and
Fleet Support
|
|
Post-Cold
War design focused
on maneuverability,
stealth,
warfighting
capability and
affordability
|
|
Fixed price
incentive
Exclusive
provider through
joint production
arrangement
Incentivized
capital investment
|
|
Rate
increasing from 1
to 2 annually in
2011
7
delivered, 11
additional in
program backlog
|
80
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|
Program
|
|
Program
|
|
Contract
|
|
Funding
|
|
|
Name
|
|
Description
|
|
Overview
|
|
Overview
|
|
|
|
|
Designed
for modular
construction
Constructed
under a teaming
agreement with
Electric Boat
Planning
yard services for
Los Angeles
-class
and
Seawolf
-class
|
|
Multi-ship
buys
5-year
construction
|
|
Block IV
expected to include
9 submarines with
anticipated award
at the end of 2013
|
The table below sets forth the potential future programs in our Newport News segment:
Newport News Potential Future Programs
|
|
|
|
|
|
|
Program
|
|
|
|
|
Name
|
|
Program Description
|
|
|
Aircraft Carrier Inactivation
|
|
CVN-65 inactivation expected to
begin in 2013
End-of-life nuclear reactor
defueling
Inactivation of ship systems,
equipment and machinery
4-year execution
Contracts for
Nimitz
-class carriers
expected to be awarded approximately every
4 years beginning in 2023
|
|
|
|
|
|
|
|
Ohio
-class Replacement Program
|
|
Anticipated to begin in 2019
30-Year Plan includes 12 SSBN(X)
submarines
NGSB currently acting as
subcontractor in design of SSBN(X)
|
|
|
|
|
|
|
|
Energy
|
|
AREVA Newport News: Manufacturing
heavy reactor components
DoE: Site management and operations
Newport News Industrial
|
Gulf Coast
Our Gulf Coast shipyards design and construct surface combatant and amphibious
assault/expeditionary warfare ships for the U.S. Navy and coastal defense surface ships for the
U.S. Coast Guard. We are the sole supplier and builder of amphibious assault/expeditionary warfare
ships (LHA, LHD and LPD) to the U.S. Navy. We are currently constructing four LPD-17
San
Antonio
-class amphibious transport dock ships: LPD-22
San Diego
(scheduled for delivery in 2011)
and LPD-24
Arlington
(scheduled for delivery in 2012) in our Pascagoula, Mississippi shipyard, and
LPD-23
Anchorage
(scheduled for delivery in 2012) and LPD-25
Somerset
(scheduled for delivery in
2013) in our Avondale shipyard. Long-lead procurement is currently underway for LPD-26 and LPD-27.
As we complete work on LPD-23
Anchorage
and LPD-25
Somerset
, we intend to wind down our
construction activities at Avondale, our Louisiana shipyard, and two Louisiana components
facilities and consolidate all Gulf Coast construction into our Mississippi facilities. We believe
that consolidation in Pascagoula would allow us to realize the benefits of serial production,
reduce program costs on existing contracts and make future vessels more affordable, thereby
reducing overhead rates and realizing cost savings for the U.S. Navy and the U.S. Coast Guard. We
are also exploring the potential for alternative uses of the Avondale facility by new owners,
including alternative opportunities for the workforce there. We expect that process to take some
time.
81
In 2009, construction of the LHD-1
Wasp
-class amphibious assault ships was concluded with the
delivery of LHD-8 USS
Makin Island
, and the first ship of the follow-on class of large-deck
amphibious assault ships, LHA-6
America
, is currently under construction and we expect to deliver
it in 2013. Long-lead procurement is currently underway for LHA-7.
We are one of only two companies that build the U.S. Navys current fleet of DDG-51
Arleigh
Burke-
class destroyers, a program for which the U.S. Navy recently decided to restart production.
We delivered DDG-107 USS
Gravely
to the U.S. Navy in July 2010 and DDG-110
William P. Lawrence
in
February 2011. Long-lead procurement is currently underway for DDG-113 and DDG-114.
We are also constructing the composite superstructure of DDG-1000
Zumwalt
and DDG-1001
Michael
Monsoor
.
For the U.S. Coast Guard, we are currently constructing NSC-3
Stratton
(scheduled for delivery
in 2011) for the National Security Cutter program, providing advanced and operationally efficient
deepwater capabilities for the U.S. Coast Guard. The construction contract for NSC-4
Hamilton
was
awarded in November 2010. Long-lead procurement is currently underway for NSC-5.
Additionally, we provide fleet maintenance and modernization services to the U.S. Navy and
U.S. Coast Guard fleets. On any given day, over 600 employees of our wholly owned subsidiary AMSEC
are on board U.S. Navy ships, assessing equipment conditions, modernizing systems and training
sailors. Through our wholly owned subsidiary, CMSD, a Master Ship Repair Contractor, we provide
ship repair, regular overhaul and selected restricted availability services (pierside or in
customers drydocks) for the U.S. Navy. We also perform emergent repair for the U.S. Navy on all
classes of ships.
In 2009, our Gulf Coast shipyards began implementation of a new management approach, the Gulf
Coast Operating System, focused on better organizing and managing the construction of the ships we
build. Through the Gulf Coast Operating System, we believe program managers will be better able to
confirm that a ship is adhering to our newly developed standardized performance metrics, and to
assure that we are providing high quality products in a safe, timely and cost-effective manner.
The table below sets forth the primary product lines in our Gulf Coast segment:
Gulf Coast Programs
|
|
|
|
|
|
|
|
|
|
|
Program
|
|
Program
|
|
Contract
|
|
Funding
|
|
|
Name
|
|
Description
|
|
Overview
|
|
Overview
|
|
|
DDG-51
Arleigh
Burke
-class
Destroyer
|
|
Most
advanced surface
combatant in the
fleet
62-Ship
Program/ 28 awarded
to us
|
|
Fixed price
incentive
4-year
construction
|
|
32
additional
DDG-51s/Large
Surface Combatants
expected for
procurement by 2031
Long lead
time and material
contract awarded
for DDG-113 and
DDG-114
|
|
|
|
|
|
|
|
|
|
|
|
LPD-17
San
Antonio
-class
Amphibious
Transport Dock Ship
|
|
Transport
and land 700 to 800
Marines, their
equipment and
supplies
Supports
amphibious assault,
special operations
|
|
Fixed price
incentive
4.5-year
construction
|
|
5 delivered
(LPD 1721), 4
under construction
(LPD 2225)
Long lead
time and material
contract awarded
for LPD-26 and
LPD-27
|
82
|
|
|
|
|
|
|
|
|
|
|
Program
|
|
Program
|
|
Contract
|
|
Funding
|
|
|
Name
|
|
Description
|
|
Overview
|
|
Overview
|
|
|
LHA-6
America
-class
Next Generation
Amphibious Ship for
Joint Operations
|
|
Navys
largest warfare
ship for joint
operations
Gas turbines
All
electric
auxiliaries
|
|
Fixed price
incentive
5-year
construction
|
|
LHA-6 under
construction
Long lead
time and material
contract awarded
for LHA-7
|
|
|
|
|
|
|
|
|
|
|
|
National Security
Cutter (Legend
Class)
|
|
Largest/most
capable of the U.S.
Coast Guards new
multi-mission
cutters
Twin-screw
propulsion
Two
hangars/large
flight deck
|
|
Cost plus
incentive fee (NSC
13); fixed price
incentive (NSC-4)
3-year
construction
|
|
Plan for a
total of 8 ships
2 delivered
(NSC-1, 2), 1 under
construction
(NSC-3)
Construction
contract awarded
for NSC-4
Long lead
time and material
contract awarded
for NSC-5
|
The table below sets forth a potential future program in our Gulf Coast segment:
Gulf Coast Potential Future Program
|
|
|
|
|
|
|
Program
|
|
|
|
|
Name
|
|
Program Description
|
|
|
LSD(X) Amphibious
Dock Landing Ship
|
|
Expected to begin in 2017
30-Year Plan calls for 12
LSD(X) ships (one every other
year)
4-year construction
|
History
Prior to its purchase by Northrop Grumman in 2001, the Newport News shipyard was the largest
independent shipyard in the United States. Newport News was built in 1886 to repair ships servicing
coal and train facilities in Hampton Roads, Virginia. By 1897, Newport News had built its first
three boats for the U.S. Navy. In 1968 Newport News merged with the Tenneco Corporation, and in
1996 was spun-off to form its own corporation, Newport News Shipbuilding.
83
Our Gulf Coast operations are centered around our Pascagoula, Mississippi and Avondale,
Louisiana shipyards. The Pascagoula shipyard was founded in 1938 as the Ingalls Shipbuilding
Corporation (Ingalls Shipbuilding). Ingalls Shipbuilding originally began building commercial
ships, but in the 1950s shifted its focus to building ships for the U.S. Navy. In 1961, Ingalls
Shipbuilding was purchased by Litton, an electronics company building navigation, communications
and electronic warfare equipment. In 1999, Litton also acquired Avondale Industries. Organized in
1938, Avondale Industries first began building ocean-faring ships in the 1950s. From 1959 to 1985,
Avondale Industries operated as a subsidiary of Ogden Corporation. In 2001, Northrop Grumman
acquired Litton. Ingalls Shipbuilding and Avondale Industries became part of Northrop Grumman Ship
Systems.
In January 2008, Northrop Grumman Ship Systems was realigned with Newport News into a single
operating segment called Northrop Grumman Shipbuilding.
Huntington Ingalls Industries, Inc. was incorporated in Delaware on August 4, 2010. Our
corporate headquarters are located in Newport News, Virginia.
Defense Industry Overview
The United States faces a complex, uncertain and rapidly changing national security
environment. The defense of the United States and its allies requires the ability to respond to
constantly evolving threats, terrorist acts, regional conflicts and cyber attacks, responses to
which are increasingly dependent on early threat identification. National responses to such threats
can require unilateral or cooperative initiatives ranging from dissuasion, deterrence, active
defense, security and stability operations, or peacekeeping. We believe that the U.S. Government
will continue to place a high priority on the protection of its engaged forces and citizenry and on
minimizing collateral damage when force must be applied in pursuit of national objectives.
The United States engagement in combating terrorism around the world, coupled with the need
to modernize U.S. military forces, has driven DoD funding levels since 2001. In February 2010, the
DoD released its QDR, a legislatively mandated review of military strategy and priorities that
shapes defense funding over the ensuing four years. The QDR emphasized four key strategic
priorities: prevailing in todays wars, preventing and deterring conflict, preparing to defeat
adversaries in a wide range of contingencies, and preserving and enhancing the All-Volunteer Force.
These priorities combined with supporting key joint mission requirements helped shape the U.S.
Navys 30-Year Plan.
We expect that the nations engagement in a multi-front, multi-decade struggle will require an
affordable balance between investments in current missions and investments in new capabilities to
meet future challenges. The DoD faces the additional challenge of recapitalizing equipment and
rebuilding readiness at a time when the DoD is pursuing modernization of its capabilities as well
as reducing overhead and inefficiencies. The DoD has made a commitment to use resources more
effectively and efficiently to support and sustain the warfighter, and the DoD expects the annual
defense budget to grow by a nominal one percent, after inflation, in the coming years. The fiscal
year 2011 budget submitted by the President and currently under deliberation in Congress requests
$548.9 billion in discretionary authority for the DoD base budget, representing a modest increase
over the 2010 budget.
The Pentagons five-year spending plan, also submitted to Congress in February 2010, reflects
the slow, steady growth requirements set forth in the QDR. Through 2015, the base defense budget is
expected to grow at low single-digit rates. Investment spending is also projected to display
low-single-digit inflation-adjusted growth, with procurement funding for maturing programs growing
and research and development funding for new programs declining over the period.
In February 2010, the U.S. Navy released its 30-Year Plan, in which the U.S. Navy used the
goals and strategies set forth in the QDR to identify the naval capabilities projected to meet the
defense challenges faced by the nation in the next three decades. The 30-Year Plan uses, as a
baseline, a 313-ship force that was first proposed by the U.S. Navy to Congress in 2006 to design a
battle inventory to provide global reach; persistent presence; and strategic, operational and
tactical effects expected of naval forces within reasonable levels of funding. The Chief of Naval
Operations has stated that the 313-ship fleet is a floor. Major elements of the 30-Year Plan
include:
|
|
|
Shifting the procurement of nuclear-powered aircraft carriers to five-year
procurement centers, which will result in a steady-state aircraft carrier force of 11
CVNs throughout the 30 years;
|
|
|
|
|
Truncating the DDG-1000
Zumwalt
-class destroyer program, restarting production of
DDG-51
Arleigh Burke
-class destroyers and continuing the Advanced Missile Defense Radar
(AMDR) development efforts;
|
|
|
|
|
Shifting to a single sea frame for the Littoral Combat Ship (LCS) and splitting
its production between two shipyards in an effort to reduce the ships overall cost;
|
|
|
|
|
Maintaining an adaptable amphibious landing force of approximately 33 ships;
|
84
|
|
|
Transitioning to a Combat Logistics force composed of just two types of ships and
expanding the size of the Joint High Speed Vessel Fleet;
|
|
|
|
|
Defining U.S. Navy requirements for 48 fast attack submarines and four guided
missile submarines to sustain strike capacity and a robust capability to covertly
deploy special operations force personnel. Procurement of
Virginia
-class submarines
will increase to two boats per year starting in 2011 and slow to one boat per year once
full rate production of the SSBN(X)
Ohio
-class Submarine Replacement Program begins;
and
|
|
|
|
|
Projecting procurement of 276 ships over the next 30 years (198 combat ships and 78
logistics and support ships).
|
The QDR has directed certain specific enhancements to U.S. forces and capabilities and a
number of these enhancements present NGSB with substantial new competitive opportunities including:
|
|
|
Exploitation of advantages in subsurface operations;
|
|
|
|
|
U.S. Air Force and U.S. Navy joint development of air-sea battle concepts to
integrate air and naval force capabilities across all operational domains;
|
|
|
|
|
Increased ballistic missile defense capabilities;
|
|
|
|
|
Expanded future long-range strike capabilities;
|
|
|
|
|
Expanded capacity of
Virginia
-class fast attack nuclear submarines for long-range
strike; and
|
|
|
|
|
U.S. Navy and U.S. Air Force new joint cruise missile alternatives.
|
The shipbuilding defense industry, as characterized by its competitors, customers, suppliers,
potential entrants and substitutes, is unique in many ways. It is highly capital- and skilled
labor-intensive. There are two major participants: us and General Dynamics, which together
represent over 90% of the market and employ over 60,000 shipbuilders. The U.S. Navy, a large single
customer with many needs and requirements, dominates the industrys customer base and is served by
a supplier base where competition is giving way to exclusive providers. However, there are smaller
shipyards entering the market to build the U.S. Navys new LCS. The U.S. Navy must compete with
other national priorities, including other defense activities and entitlement programs, for a share
of federal budget dollars.
The DoD recently announced various initiatives designed to gain efficiencies, refocus
priorities and enhance business practices used by the DoD, including those used to procure goods
and services from defense contractors. The most recent initiatives are organized in five major
areas: Affordability and Cost Growth; Productivity and Innovation; Competition; Services
Acquisition; and Processes and Bureaucracy. These initiatives are still fairly new and the specific
impacts on our industry will be understood better as the DoD implements them further. See Risk
Factors
The Department of Defense has announced plans for significant changes to its business
practices that could have a material effect on its overall procurement process and adversely impact
our current programs and potential new awards
.
Competitive Strengths
We believe that we have the following key competitive strengths:
We are one of the two largest publicly owned shipbuilders in the United States.
We and our
primary competitor are the builders of 232 of the U.S. Navys current 286 ships, and the exclusive
builders of 16 of the U.S. Navys 29 classes of ship (seven classes for which we are the exclusive
builder, and four classes for which we are co-builders with our primary competitor). We build more
ships, in more types and classes, than any other U.S. naval shipbuilder and we are the exclusive
builder of 33 of the U.S. Navys 286 ships, representing seven of the U.S. Navys 29 classes of
ships. We are the sole builder and refueler of nuclear-powered aircraft carriers, the sole supplier
of amphibious assault and expeditionary warfare ships for the U.S. Navy, and the sole provider of
the National Security Cutter to the U.S. Coast Guard. We are also teamed with Electric Boat as the
sole builders of nuclear-powered submarines for the U.S. Navy. We are also a full-service systems
provider for the design, engineering, construction and life cycle support of major programs for
surface ships and a provider of fleet support and maintenance services for the U.S. Navy. We are
one of only two nuclear shipbuilders and the only company capable of constructing and refueling
aircraft carriers.
We have long-term contracts with visible revenue streams and highly probable backlog based on
the U.S. Navys 30-Year Plan
. Most of our contracts are long-term in nature with visible revenue
streams. Total backlog at December 31, 2010 was approximately $17 billion. At the end of 2010,
total orders from the U.S. Government comprised substantially all of the total backlog. In
connection with ships that we have constructed, we expect to continue our regular service and
support, including RCOH of aircraft carriers and inactivation of aging nuclear aircraft carriers.
For ships that may be built in the future, we intend to continue to pursue and obtain planning and
design contracts with the U.S. Government. Thus, we
85
believe we have a highly probable backlog associated with every stage of the life cycle for the
ships we build. We believe these factors allow us to assess our financial performance for many
years into the future, which contributes to our long-term stability.
We generate a significant amount of our revenue from contracts for classes of ships for which
we are the exclusive provider.
We are the exclusive provider of seven of the U.S. Navys 29 classes
of ships, and a significant amount of our revenue is from contracts for these classes of ships.
Collectively, our contracts for ship classes for which we are the exclusive provider accounted for
64% and 68% of our revenues in 2009 and 2010, respectively.
We are capable of manufacturing multiple classes of ships at our heavy industrial facilities.
Our Newport News and Pascagoula shipyards possess heavy industrial assets and are capable of
manufacturing multiple ship types and classes. The Newport News shipyard, which is able to
simultaneously construct in staggered phases two nuclear aircraft carriers and five nuclear
submarines, provide refueling and overhaul services for up to two additional aircraft carriers, and
provide maintenance and repair services for additional ships, has an 18-acre all weather onsite
steel fabrication workshop, a modular outfitting facility for assembly of a ships basic structural
modules indoors and on land, machine shops totaling approximately 300,000 square feet, a 1,050-ton
gantry crane capable of servicing two aircraft carriers at one time, and a 2,170 foot long drydock.
Our Pascagoula shipyard, which is able to simultaneously build several classes of ships for both
the U.S. Navy and the U.S. Coast Guard, includes a 30,000-ton floating dry dock, 660-ton gantry
crane, a steel fabrication shop with capacity to process 150 tons of steel per day, covered
outfitting and stacking halls capable of handling three-deck height grand blocks, and a propulsion
assembly building that can hold up to fifteen 30,000 horsepower engines simultaneously. Our
Gulfport, Mississippi facility is focused on composite research and engineering and is a
322,000-square foot manufacturing facility capable of building large scale carbon fiber and e-glass
composite structures such as mast, deckhouse and hangar structures. Additionally, we have the
Virginia Advanced Shipbuilding Carrier Integration Center (VASCIC) in Newport News, two Land
Based Test Facilities, one in Newport News and one in Pascagoula, and the Center of Excellence for
Modeling and Simulation (including the Aviation Simulation Integration Center and the Flexible
Infrastructure Laboratory), which is housed at VASCIC.
We have an experienced management team
. Our senior management team has experience in the
management of defense and shipbuilding companies and in the areas of project management, supply
chain management and technology management. Emphasis is placed on developing and aligning a dynamic
leadership team to engage the workforce and drive high performance. Additionally, through our
Enhancing Personal Leadership program, we leverage the experience and talent of our current
management team to train our new and upcoming leaders to add to the overall depth and skill level
of our management.
We have a workforce of approximately 39,000 shipbuilders.
Our workforce includes individuals
specializing in 19 crafts and trades, including more than 7,500 engineers and designers and more
than 1,000 employees with advanced degrees. Additionally, our workforce is composed of many third-,
fourth- and fifth- generation shipbuilding employees. At December 31, 2010, we had 771 Master
Shipbuilders, employees who have been with us or our predecessors for over 40 years. We operate two
Apprentice Schools: one in Newport News, which trains over 750 apprentices each year in 19 trades
and several advanced programs, and one in the Gulf Coast, which currently has nearly 1,000
registered apprentices in its programs. We also provide ongoing training for all of our employees,
providing over 60,000 individual training seats in 2009 and 64,000 in 2010 across our Newport News
and Gulf Coast operations.
Our Strategy
Our objectives are to maintain our leadership position in the U.S. naval shipbuilding industry
and to deliver long-term value to our stockholders. To achieve these objectives, we utilize the
following strategies:
Strengthen and protect market position.
Align our business to support the U.S. Navys 30-Year Plan.
To ensure that we remain the U.S.
Navys builder of choice on ships we currently build, we intend to continue to align ourselves with
the U.S. Navy to support its 30-Year Plan. We intend to continue to support the U.S. Navy in the
design and construction of new ships, including the construction of an aircraft carrier and an
amphibious assault ship approximately every five years, the restart of construction of DDG-51s and
the increase in production rates of VCS to two submarines per year. Through investments in our
workforce, processes and facilities, and through the streamlining of our operations, we intend to
support continued construction of these core U.S. Navy programs, ensure quality construction and
make ships more affordable. We plan to continue to work to keep our U.S. Navy programs fully funded
in order to avoid their delay or cancellation.
Ensure capabilities that support new U.S. Navy requirements.
Through alignment with the U.S.
Navys requirements in the 30-Year Plan, we intend to position ourselves as the provider of choice
for new platforms and services related to our
current core markets. In 2013, the U.S. Navy is expected to award the first aircraft carrier
inactivation contract for CVN-65 USS
Enterprise
. We intend to complete construction of a new
facility at our Newport News shipyard designed specifically
86
for aircraft carrier inactivations, to ensure that we are the U.S. Navys choice for this and
future aircraft carrier inactivations. We have also deployed our design and engineering talents and
capabilities to support work as a subcontractor on the design of the SSBN (X) replacement for the
aging
Ohio
-class ballistic missile submarines, in anticipation of our participation as a
subcontractor in the construction of the expected 12 new submarines under that program.
Additionally, we intend to position ourselves as the builder of choice for the LSD(X), the next
class of amphibious ship expected to be built as a follow-on to the LPD-17 and LHA-6 classes of
ships, for which we are currently the exclusive supplier.
Streamline our operations and footprint to deliver more affordable ships.
To maintain our
market position, we intend to monitor our operations to determine where strategic investments or
consolidation may be necessary to allow us to provide the U.S. Navy with the highest quality, most
technologically advanced ships possible, on a cost-effective basis. For example, in light of the
U.S. Navys 30-Year Plan requirements and the need to continue to make ships more affordable for
our customers, we intend to consolidate our Gulf Coast operations and footprint to shift all future
Gulf Coast ship construction work to our Pascagoula and Gulfport facilities in Mississippi. Our
construction activities at the Avondale shipyard in Louisiana are expected to wind down in 2013
when work on LPD-25 is completed. Future ship construction work would be performed at our larger
and more modern Pascagoula shipyard. With this consolidation, we believe that we are ensuring the
long-term viability of our Gulf Coast operations by making them more cost competitive through
increased throughput, continuity of production, single learning curves and workload efficiency
gains. We also expect that this consolidation may reduce program costs on some existing contracts
and make future vessels more affordable for the U.S. Navy and the U.S. Coast Guard.
Execute well on all contracts.
Improve performance in our Gulf Coast operations.
We intend to continue to improve quality,
cost and schedule performance in our Gulf Coast operations to address past operational issues, such
as quality and high rework costs caused by hurricane -related disruptions, and to maintain our
market position on non-nuclear surface ship construction. To accomplish this, our Gulf Coast
operations have recently implemented a new management approach that is geared toward planning and
managing our work in discrete phases to drive performance, accountability and predictability.
Through the Gulf Coast Operating System, we believe program managers will be better able to confirm
that a ship is adhering to our newly developed standardized performance metrics, and to assure that
we are providing a quality product in a safe, timely and cost-effective manner. By organizing the
work on each ship class to provide for the construction in a carefully managed sequence, our Gulf
Coast Operating System ensures that each ship within a class is constructed in the same way each
time to maximize learning from ship to ship. We intend to continue to utilize the Gulf Coast
Operating System across the spectrum of our ships to improve both quality and efficiency of our
building processes in all aspects of our design and construction activities, bringing together our
engineers, craftspeople and technical workers. See Our BusinessGulf Coast.
Capture the benefits of serial production.
We intend to seek opportunities to maximize the
quality and affordability of our ships through serial production, while ensuring that we undertake
first-in-class construction where such construction is expected to lead to additional serial
production. For example, in 2009, we entered into an agreement with the U.S. Navy to shift work on
DDG-1001
Michael Monsoor
to General Dynamics Bath Iron Works (BIW), in exchange for new
construction work on two ships in the new flight of the DDG-51
Arleigh Burke
-class, DDG-113
William
S. Sims
and DDG-114
Callaghan
(the Swap Agreement). In 2008, the U.S. Navy announced that the
more expensive DDG-1000
Zumwalt
-class is being truncated to three ships. With the Swap Agreement,
all three DDG-1000 ships will now be built at BIW, but we will remain the co-lead for the DDG-1000
design and will provide the integrated composite deckhouse and aft peripheral vertical launch
system for all three ships. The U.S. Navy anticipates it will procure eight ships in the new flight
of DDG-51s over the next five years. We believe the Swap Agreement allows us to benefit from serial
production on DDG-51s and to reduce the programmatic complexity and risk of building the DDG-51 and
DDG-1000 classes of destroyers simultaneously in one shipyard. We also believe the Swap Agreement
eliminates the required investment for a single ship production run that would have occurred if we
had built DDG-1001
Michael Monsoor
.
Deliver quality products on contract targets.
We are focused on delivering quality products on
contract schedule and cost targets for all current contracts, which we believe will protect our
market position and enhance our efforts to secure future contracts. We believe we must adhere to
schedule and cost commitments and quality expectations on our current U.S. Navy contracts.
Specifically, we must execute on our human capital strategy, create and sustain a first-time
quality culture and capitalize on our supply chain management initiatives.
Our Business
We design and construct nuclear and non-nuclear ships for the U.S. Navy and U.S. Coast Guard,
including nuclear-powered aircraft carriers and submarines, and non-nuclear surface combatants,
amphibious assault ships and National Security Cutters. Additionally, through our shipyards and
through our AMSEC and CMSD operations, we provide fleet
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maintenance and support services for the U.S. Navys ships. Our Newport News shipyard is also the
exclusive supplier for the overhaul and refueling of nuclear-powered ships for the U.S. Navy.
Newport News
The capabilities of our Newport News operations extend from our core nuclear business of
designing and constructing nuclear-powered ships, such as aircraft carriers and submarines and the
refueling and overhaul of such ships, to our secondary businesses, which are focused on the
construction of heavy manufacturing equipment for commercial nuclear power facilities and the
operations, management and cleanup of environmental hazard sites through the DoEs cleanup
programs. Our Newport News shipyard is one of the largest shipyards in the United States. Our
facilities are located on approximately 550 acres on the mouth of the James River, which adjoins
the Chesapeake Bay. The shipyard has two miles of waterfront property and heavy industrial
facilities that include seven graving docks, a floating dry dock, two outfitting berths, five
outfitting piers, a module outfitting facility and various other workshops. Our Newport News
shipyard also has a 2,170 foot drydock and a 1,050-ton gantry crane capable of servicing two
aircraft carriers at one time.
Design, Construction and Refueling and Complex Overhaul of Aircraft Carriers
Engineering, design and construction of U.S. Navy nuclear aircraft carriers are core to our
operations. Aircraft carriers are the largest ships in the U.S. Navys fleet, with a weight
(displacement) of about 90,000 tons. Since 1933, Newport News has delivered 30 aircraft carriers to
the U.S. Navy, including all 11 ships currently deployed.
The U.S. Navys newest carrier and the last of the CVN-68
Nimitz
-class, CVN-77 USS
George H.W.
Bush
, was delivered on May 11, 2009. Design work on the next generation carrier, the CVN-78
Gerald
R. Ford-
class, has been underway for over eight years. The CVN-78
Gerald R. Ford-
class incorporates
transformational technologies including an enhanced flight deck with increased sortie rates,
improved weapons movement, a redesigned island, a new nuclear propulsion plant design, flexibility
to incorporate future technologies and reduced manning. In 2008, we were awarded a $5.1 billion
contract for detail design and construction of the first ship of the class, CVN-78
Gerald R. Ford
,
which is scheduled for delivery in 2015. In 2009 we were also awarded construction preparation
contracts totaling $451 million for the second CVN-78
Gerald R. Ford
-class aircraft carrier, CVN-79
(unnamed). The duration of this initial CVN-79 award is two years plus a one-year option.
We continue to be the exclusive prime contractor for nuclear carrier RCOHs. Each RCOH takes
over three years and accounts for approximately 35% of all maintenance and modernization in the
service life of an aircraft carrier. RCOH services include propulsion (refueling of reactors,
propulsion plant modernization, propulsion plant repairs), restoration of service life (dry
docking, tank and void maintenance; hull shafting, propellers, rudders; piping repairs, replacement
and upgrades; electrical systems upgrades; aviation capabilities) and modernization (warfare,
interoperability and environmental compliance). We provide ongoing maintenance for the U.S. Navy
aircraft carrier fleet through both RCOH and repair work. In 2009, the completion of the RCOH of
CVN-70 USS
Carl Vinson
was followed by the arrival of CVN-71 USS
Theodore Roosevelt
, which is
expected to be redelivered to the U.S. Navy following its RCOH in early 2013.
In 2010, we were awarded a $678 million planning contract (an initial award of $79 million
with two one-year options) for the RCOH of CVN-72 USS
Abraham Lincoln
. In 2011, the first option
was exercised for $207 million. We believe that our position as the exclusive designer and builder
of nuclear-powered aircraft carriers, as well as the fact that this work requires a highly trained
workforce, is capital-intensive and has high barriers to entry due to its nuclear requirements,
strongly positions us as the frontrunner for the award of future RCOH contracts on the current and
future fleet of U.S. Navy carriers.
Aircraft Carrier Inactivation
We anticipate that in 2013 the U.S. Navy will contract with us, through our Newport News
shipyard, to inactivate CVN-65 USS
Enterprise
, the worlds first nuclear-powered aircraft carrier,
which was built by us and commissioned in 1961. We are currently building the facility to perform
this work at our Newport News shipyard. Additionally, as other aircraft carriers in the naval fleet
age, we believe that the U.S. Navy will require inactivation of those ships, and we plan to be
positioned as the best choice for the U.S. Navy to grant that work. Aircraft carriers generally
have a lifespan of approximately 50 years, and we believe the 11 carriers we have delivered and
those we deliver going forward present a significant opportunity for us in the future with respect
to both RCOH and inactivation. We expect funding for an aircraft carrier inactivation to be
approximately $650 million.
Design and Construction of Nuclear-Powered Submarines
We are one of only two U.S. companies capable of designing and building nuclear-powered
submarines for the U.S. Navy. Since 1960, Newport News has delivered 56 submarines, including 42
fast attack and 14 ballistic submarines, to the U.S. Navy. Of the 53 nuclear-powered fast attack
submarines currently in active service, 25 have been delivered by Newport News. Our nuclear
submarine program, located at our Newport News shipyard, includes construction,
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engineering, design, research and integrated planning. In February 1997, Northrop Grumman and
Electric Boat executed a teaming agreement to cooperatively build SSN-774
Virginia-
class fast
attack nuclear submarines. Under the present arrangement, we build the stern, habitability and
machinery spaces, torpedo room, sail and bow, while Electric Boat builds the engine room and
control room. Work on the reactor plant and the final assembly, test, outfit and delivery is
alternated between us and Electric Boat with Electric Boat performing this work on the odd numbered
deliveries and Newport News on the even numbered deliveries. The initial four submarines in the
class were delivered in 2004, 2006 and 2008. With Electric Boat as the prime contractor and us as a
principal subcontractor, the team was awarded a construction contract in August 2003 for the second
block of six SSN-774
Virginia-
class submarines, the first two of which were delivered in 2008 and
2009, respectively. Construction on the remaining four submarines of the second block is underway,
with the last scheduled to be delivered in 2014. In December 2008, the team was awarded a
construction contract for the third block of eight SSN-774
Virginia
-class submarines. The
multi-year contract allows us and our teammate to proceed with the construction of one submarine
per year in 2010, increasing to two submarines per year from 2011 to 2013. The eighth submarine to
be procured under this contract is scheduled for delivery in 2019.
SSBN(X)
Ohio
-Class Replacement Program
The 30-Year Plan discusses the U.S. Navys intention to focus on the design and construction
of replacement boats for the current aging
Ohio
-class ballistic and cruise missile submarines. The
U.S. Navy has committed to designing a replacement class for the aging
Ohio
-class nuclear ballistic
submarines, which were first introduced into service in 1981. The SSBN(X)
Ohio
-class Submarine
Replacement Program represents a new program opportunity for us. Electric Boat is expected to lead
the program. Although the contract is not yet negotiated, we expect to share in the design effort
and our experience and well-qualified workforce position us for a potential role in the
construction effort. The
Ohio
-class includes 14 ballistic missile submarines (SSBN) and four cruise
missile submarines (SSGN). The
Ohio
-class Submarine Replacement Program currently calls for 12 new
ballistic missile submarines over a 15-year period for approximately $4 to $7 billion each. The
first
Ohio
-class ballistic submarine is expected to be retired in 2029, meaning that the first
replacement platform should be in commission by that time. The U.S. Navy has initiated the design
process for this class of submarine, and we have begun design work as a subcontractor to Electric
Boat. We cannot guarantee that we will continue to work on the SSBN(X) design with Electric Boat,
and we can give no assurance regarding the final design concept chosen by the U.S. Navy or the
amount of funding made available by Congress for the SSBN(X) Ohio-class Submarine Replacement
Program. Construction is expected to begin in 2019 with the procurement of long-lead time materials
in 2015. We believe that this program may represent a significant opportunity for us in the future.
Energy
Our DoE and Commercial Nuclear Programs leverage our core competencies in nuclear operations,
program management and heavy manufacturing. We selectively partner with experienced industry
leaders and we are significant participants in three joint ventures. Additionally, through our
subsidiary Newport News Industrial Corporation (NNI), we are able to provide a range of services
to the energy and petrochemical industries as well as government customers.
AREVA Newport News, LLC
In October 2008, we announced the formation of a joint venture, AREVA Newport News, LLC, with
AREVA NP to build a new manufacturing facility in Newport News, Virginia to help supply heavy
components to the civilian nuclear electrical power sector. AREVA Newport News plans to construct a
production facility for the manufacture of heavy commercial nuclear power plant components. We are
minority owners of the limited liability company that we formed pursuant to this joint venture.
DoE Programs
Savannah River
In January 2008, Savannah River Nuclear Solutions, LLC, our joint venture with Fluor
Corporation and Honeywell International Inc., was awarded a five-year $4 billion contract for site
management and operations of the DoEs Savannah River Site located 12 miles south of Aiken, South
Carolina. Work at the site includes management of a national laboratory and the cleanup of nuclear
waste, both newly generated and backlogged and legacy wastes that exist at various facilities
throughout the Savannah River Site. As part of the American Recovery and Reinvestment Act of 2009,
Savannah River Nuclear Solutions was awarded a stimulus contract for $1.4 billion to deactivate and
remediate several reactors and sites at the Savannah River Site. We have a 34% ownership stake in
Savannah River Nuclear Solutions, LLC.
Idaho National Laboratory
We, together with our joint venture partner CH2M Hill, bid on environmental management and
cleanup projects for the DoE at the Idaho National Laboratory, near Idaho Falls, Idaho. In March
2010, the team was awarded a six-year $590
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million contract, which award was protested and is under re-evaluation by the DoE. We have a
25% ownership stake in CH2M Hill Newport News Nuclear, LLC.
Newport News Industrial
NNI was incorporated in 1965 and provides a range of support services to operating commercial
nuclear power plants. In the 45 years since it was founded, NNI has expanded its capabilities,
continuing to provide support for nuclear energy work, as well as for fossil power plants and other
industrial facilities. NNI focuses on fabrication services, construction services, equipment
services, technical services and product sales to its customers, which include both private
industry as well as government entities such as NASA, the DoE and the DoD.
VASCIC
Established in 1998 with state funding, VASCIC, located in Newport News, Virginia, is the only
facility in the world devoted to furthering research for nuclear-powered aircraft carriers and
submarines. VASCIC is a facility where we conduct on-site warfare systems testing, training and
laboratory research for the next generation of aircraft carriers, submarines and other ships. The
center houses a team of systems experts who work together to develop and test advanced technology
systems for aircraft carriers and other U.S. Navy ships, with a goal of reducing cost and
increasing capability. VASCIC benefits the U.S. Navy and we believe represents a competitive
advantage for us by developing future naval capabilities, reducing total ownership cost and
facilitating technology transfer.
Gulf Coast
Through our Gulf Coast operations, we design and construct non-nuclear ships for the U.S. Navy
and U.S. Coast Guard, including amphibious assault ships, surface combatants and National Security
Cutters. We are the sole supplier of amphibious assault ships to the U.S. Navy and have built 26 of
the 62-ship DDG-51
Arleigh Burke
-class of Aegis guided missile destroyers in active service. We are
also the sole supplier of the large multi-mission National Security Cutters for the U.S. Coast
Guard. Our Gulf Coast shipbuilding sites are located in Mississippi (Pascagoula and Gulfport) and
Louisiana (Tallulah, Waggaman and Avondale). We intend to wind down our construction activities at
Avondale, our Louisiana shipyard, in 2013 and two Louisiana components facilities by 2013 and
consolidate all Gulf Coast construction into our Mississippi facilities. We are also exploring the
potential for alternative uses of the Avondale facility by new owners, including alternative
opportunities for the workforce there. We expect that process to take some time. Our various Gulf
Coast facilities offer a collection of manufacturing capabilities with advantages, such as a
660-ton gantry crane, a shipbuilding facility focused on composite research and engineering and a
Land Based Test Facility.
When our current management team assumed responsibility for NGSB in 2008, they identified key
operational issues impacting the Gulf Coast. By applying best practices and lessons learned from
lead ship construction experience, they implemented the Gulf Coast Operating System to improve
performance across the Gulf Coast. We believe this new system will result in significant
improvement in Gulf Coast operational performance.
The Gulf Coast Operating System organizes the construction of ships into 12-week phases with a
discrete statement of work and cost and schedule goals. Through the Gulf Coast Operating System,
program managers are able to ensure that a ship is adhering to our newly developed standardized
performance metrics and that we are providing the highest possible quality products on a timely and
cost-effective basis. The key features of the operating system are:
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Ship class plans.
These plans apply to an entire class of ships and enforce
conformity within the class. Construction is scheduled at the lowest level of work and
in the most efficient work sequence by craft, thereby ensuring consistent ship
construction and maximum learning (i.e., cost reduction) from ship to ship.
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Phase commitment and hot wash.
This is a process whereby cost, schedule and work
completion goals for each 12-week phase are established prior to commencing work. These
commitments are the baseline for performance measurement, providing improved visibility
for each phase and monitoring actual versus committed performance on a weekly basis.
This additional rigor around completing work in the scheduled phase allows for timely
corrective actions within the phase if actual performance deviates from commitments and
precludes additional cost associated with out-of-phase work. At the completion of the
phase, a formal hot wash process occurs that documents actual performance versus
commitments and enables adjustments to EACs and future phase plans. These EAC updates
ensure timely adjustments are made and effectively reduce or eliminate surprises that
traditionally accompany annual reviews of EAC.
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Performance measurement
. Using standardized metrics, performance measurements have
been institutionalized across the Gulf Coast to support the Operating Systems rhythm.
The metrics include both lagging and leading indicators of performance. Each ships
performance metrics are reviewed by management
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and staff weekly to allow for timely corrective actions and are also consolidated in an
Executive Dashboard web-based visibility system for access by our entire management
team.
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Risk/opportunity management
. This process links a ships total risk and opportunity
to phases of construction. Risk mitigation and opportunity plans are developed by phase
and monitored to assess progress. The ships Program Manager owns the risk/opportunity
process, which is administered by a centralized organization that ensures consistency
throughout the portfolio.
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Labor resource plan (LRP).
The LRP establishes employment requirements by craft or
organization over the ships construction phase. The LRP integrates class plans and
ship schedules with actual versus committed phase performance to establish hiring plans
and the allocation of manning across ships. This integrated yard-wide labor resource
plan enables an orderly proactive approach to hiring, overtime plans and movement of
manning from ship to ship.
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Quarterly estimate at completion
. The EAC process is performed on each ship and
integrates performance across the Gulf Coast Operating System. It incorporates a
bottom-up EAC process as well as top-down performance metrics to validate the programs
EAC. Each ship must address favorable or unfavorable results within the quarter and
adjust (if necessary) program plan, EACs, and the programs financials.
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We believe that the increased integration and efficient utilization of workers, schedule and
cost transparency and management oversight of the shipbuilding process through our Gulf Coast
Operating System will enable us to execute on our current contracts, strengthen our position with
the U.S. Navy and allow us to continue to improve our operations in the future.
Amphibious Assault Ships
We are the sole provider of amphibious assault and expeditionary warfare ships for the U.S.
Navy. Design, construction and modernization of the U.S. Navy Large Deck Amphibious ships (LHA and
LHD) are core to our Gulf Coast operations. In 2009, construction of LHD-1
Wasp-
class multipurpose
amphibious assault ships was concluded with the delivery of LHD-8 USS
Makin Island
. In 2007, we
were awarded the construction contract for LHA-6
America
, the first in a new class of enhanced
amphibious assault ships designed from the keel up to be an aviation optimized Marine assault
platform. The first ship of the LHA-6
America
-class is currently under construction and we expect
to deliver it in 2013. The LHA is a key component of the U.S. Navy-Marine Corps requirement for 11
Expeditionary Strike Groups/Amphibious Readiness Groups.
The LPD program is one of our Gulf Coast operations two long-run production programs where we
have an opportunity to take advantage of cost reductions due to learning ship-over-ship. We are
currently constructing four LPD-17
San Antonio
-class amphibious transport dock ships: LPD-22
San
Diego
(scheduled for delivery in 2011) and LPD-24
Arlington
(scheduled for delivery in 2012) in our
Pascagoula, Mississippi shipyard, and LPD-23
Anchorage
(scheduled for delivery in 2012) and LPD-25
Somerset
(scheduled for delivery in 2013) in our Avondale shipyard. Additionally, long lead time
material contracts for LPD-26
John P. Murtha
and LPD-27 (unnamed) were awarded in June 2009 and
October 2010, respectively.
As we complete work on LPD-23
Anchorage
and LPD-25
Somerset
, we intend to wind down our
construction activities at Avondale, our Louisiana shipyard, in 2013 and two Louisiana components
facilities (Waggaman and Tallulah) by 2013 and consolidate all Gulf Coast construction into our
Mississippi facilities. We believe that this consolidation will allow our Gulf Coast shipbuilding
decreased fixed overhead expenses, provide improved facility utilization and a more cost-efficient
construction process and allow us to centralize our shipbuilding learning and realize the benefits
of serial production. We expect that consolidation of operations in Pascagoula and Gulfport would
reduce program costs on existing contracts and make future vessels more affordable, thereby
reducing rates and realizing cost savings for the U.S. Navy and the U.S. Coast Guard. We are also
exploring the potential for alternative uses of the Avondale facility by new owners, including
alternative opportunities for the workforce there. We expect that process to take some time.
Surface Combatants
We are a design agent for and one of only two companies that constructs the DDG-51
Arleigh
Burke-
class guided missile destroyers, as well as major components for the DDG-1000
Zumwalt
-class
of land attack destroyers. We previously delivered 27 DDG-51
Arleigh Burke
-class destroyers to the
U.S. Navy and were awarded a long lead time material contract for a restart of the DDG-51
Arleigh
Burke
-class in December 2009. We delivered DDG-107 USS
Gravely
to the U.S. Navy in July 2010 and
DDG-110
William P. Lawrence
in February 2011. Our participation in the DDG-1000
Zumwalt-
class
guided missile destroyers program includes detailed design and construction of the ships
integrated composite deckhouses, as well as portions of the ships aft peripheral vertical launch
systems. The U.S. Navy expects to build three DDG-1000
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Zumwalt-
class destroyers. At our Gulfport, Mississippi shipyard, which is focused on composite
research and engineering, we are currently constructing the composite superstructure of DDG-1000
Zumwalt
and DDG-1001
Michael Monsoor
.
As set forth in the 30-Year Plan, the U.S. Navy has decided to truncate the DDG-1000
Zumwalt
-class program and restart the DDG-51
Arleigh Burke-
class destroyer production line. As a
result of that determination, in December 2009, we were awarded a $171 million long lead contract
for the next ship in the DDG-51
Arleigh Burke
-class. We anticipate that the DoD will award the
construction contract for DDG-113
William S. Sims
in 2011 and the construction contract for DDG-114
Callaghan
in 2012. We intend to be the U.S. Navys contractor of choice for the construction of the
DDG-51
Arleigh Burke
-class ships.
National Security Cutter
We are a participant, along with Lockheed Martin, in the U.S. Coast Guards Deepwater
Modernization Program. This program is designed to replace aging and operationally expensive ships
and aircraft used to conduct missions in excess of 50 miles from the shoreline. The flagship of
this program is the NSC, a multi-mission platform designed and built by us. This type of cutter
meets or exceeds traditional U.S. Coast Guard mission requirements as well as counter-terrorism
requirements. In 2006, ICGS, a joint venture between us and Lockheed Martin was awarded a 43-month
extension of the original design and construction contract awarded to the joint venture for the
Deepwater Modernization Program. The first National Security Cutter, NSC-1 USCGC
Bertholf
, was
delivered to the U.S. Coast Guard in 2008 followed by NSC-2 USCGC
Waesche
in 2009. Currently, NSC-3
Stratton
is in construction, and the construction contract for NSC-4
Hamilton
was awarded in
November 2010. Long-lead procurement is currently underway for NSC-5. We believe that future NSC
procurements will be contracted directly to us and not to the joint venture.
Fleet Support
AMSEC and Continental Maritime
Fleet support provides comprehensive life-cycle services, including depot maintenance,
modernization, repairs, logistics and technical support and planning yard services for naval and
commercial vessels through our AMSEC and CMSD subsidiaries. We have ship repair facilities in
Newport News, Virginia, and San Diego, California, which are near the U.S. Navys largest homeports
of Norfolk, Virginia and San Diego. AMSEC provides naval architecture and marine engineering, ship
system assessments, maintenance engineering and logistics services to the U.S. Navy and commercial
maritime industry from 28 locations nationwide and overseas. On any given day, over 600 of our
AMSEC employees are on board U.S. Navy ships, assessing equipment conditions, modernizing systems
and training sailors. Through CMSD, a Master Ship Repair Contractor, we provide ship repair,
regular overhaul and selected restricted availability services (pierside or in customers drydocks)
for the U.S. Navy. We also perform emergent repair for the U.S. Navy on all classes of ships.
Customers
U.S. Government revenue accounted for substantially all of total revenue in 2010, 2009 and
2008. Of those revenues in 2010, 97% were from the U.S. Navy and 3% from the U.S. Coast Guard.
While we are reliant upon the U.S. Government for substantially all of our business, we are also
the design agent and sole supplier for the nuclear aircraft carrier CVN-68
Nimitz
-class and CVN-78
Gerald R. Ford
-class, and together with our teammate Electric Boat, we are responsible for the
construction of the entire SSN-774
Virginia
-class of nuclear submarines. We are the builder of 28
of the original 62-ship program for DDG-51
Arleigh Burke
-class U.S. Navy destroyers and the builder
of amphibious assault ships (LHA, LHD and LPD). In addition, we have built the largest
multi-mission National Security Cutters for the U.S. Coast Guard.
Intellectual Property
We incorporate new technologies and designs into our vessels. With more than 2,500 engineers,
designers and technicians, we develop and implement new ship technologies.
Research and Development
Our research and development activities primarily include independent research and development
(IR&D) efforts related to government programs. IR&D expenses are included in general and
administrative expenses and are generally allocated to U.S. Government contracts. IR&D expenses
totaled approximately $23 million, $21 million and $21 million for each of the years ended December
2010, 2009 and 2008, respectively. Expenses for research and development required by contracts are
charged directly to the related contracts.
At VASCIC, we conduct on-site warfare systems testing, training and laboratory research for
the next generation aircraft carriers, submarines and other ships. VASCIC serves as the focal point
for the integration of ship systems and the application of new technologies. It has a classified
facility and an integration area that allows for research and development related to setup and
testing of electronic as well as hull, mechanical and electrical systems prior to introducing new
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equipment on board a ship. It also has modeling and simulation capability allowing for
visualization using 3-D displays. See Our BusinessVASCIC.
Governmental Regulation and Supervision
Our business is affected by numerous laws and regulations relating to the award,
administration and performance of U.S. Government contracts. See Risk FactorsRisks Relating to
Our Business.
We operate in a highly regulated environment and are routinely audited and reviewed by the
U.S. Government and its agencies such as the U.S. Navys Supervisor of Shipbuilding, the Defense
Contract Audit Agency and the Defense Contract Management Agency. These agencies review our
performance under our contracts, our cost structure and our compliance with applicable laws,
regulations and standards, as well as the adequacy of, and our compliance with, our internal
control systems and policies. Systems that are subject to review include but are not limited to our
accounting systems, purchasing systems, billing systems, property management and control systems,
cost estimating systems, earned value management systems, compensation systems and management
information systems. Any costs found to be unallowable or improperly allocated to a specific
contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers
improper or illegal activities, we may be subject to civil and criminal penalties and
administrative sanctions, which may include termination of contracts, forfeiture of profits,
suspension of payments, fines and suspension, or prohibition from doing business with the U.S.
Government. The U.S. Government also has the ability to decrement payments when it deems systems
subject to its review to be inadequate.
In addition, the U.S. Government generally has the ability to terminate contracts, in whole or
in part, with little to no prior notice, for convenience or for default based on performance. In
the event of termination for the governments convenience, contractors are normally protected by
provisions covering reimbursement for costs incurred on the contracts and profit on those costs,
but not for anticipatory profit on the work that was terminated. Termination resulting from our
default could expose us to various liabilities, including but not limited to excess reprocurement
costs, and could have a material adverse effect on our ability to compete for contracts. See Risk
FactorsRisks Relating to Our Business.
In 2009, Congress passed legislation to improve the organization and procedures of the DoD for
the acquisition of major weapons systems, including shipbuilding and maritime systems. This
legislation, the Weapon System Acquisition Reform Act of 2009, requires the DoD to develop
mechanisms to address cost, schedule and performance in establishing program requirements. As
acquisition reform progresses, we will continue to anticipate and respond to the actions of the
Pentagon and Congress to determine their impact on our operations.
U.S. Government contractors must comply with a myriad of significant procurement regulations
and other requirements. Contracting with the U.S. Government may result in our filing of Requests
for Equitable Adjustments (REAs) in connection with government contracts. REAs represent requests
for the U.S. Government to make appropriate adjustments to aspects of a contract including pricing,
delivery schedule, technical requirements or other affected terms, due to changes in the original
contract requirements and resulting delays and disruption in contract performance for which the
U.S. Government is responsible. REAs are prepared, submitted and negotiated in the ordinary course
of business, and large REAs are not uncommon at the conclusion of both new construction and
overhaul activities. Such REAs are not considered claims under the Contract Disputes Act of 1978,
although they may be converted to such claims if good faith negotiations are unproductive.
In cases where there are multiple suppliers, contracts for the construction and conversion of
U.S. Navy ships and submarines are generally subject to competitive bidding. In evaluating proposed
prices, the U.S. Navy sometimes requires that each bidder submit information on pricing, estimated
costs of completion and anticipated profit margins in order to assess cost realism. The U.S. Navy
uses this and other data to determine an estimated cost for each bidder. Under U.S. Government
regulations, certain costs, including certain financing costs and marketing expenses, are not
allowable contract costs. The U.S. Government also regulates the methods by which all costs,
including overhead, are allocated to government contracts.
Additional procurement regulations to which our contracts with various agencies of the U.S.
Government and subcontracts with other prime contractors are subject include but are not limited to
the Truth in Negotiations Act, the Procurement Integrity Act, the False Claims Act, Procurement
Integrity Act, Cost Accounting Standards, the International Traffic in Arms Regulations promulgated
under the Arms Export Control Act, the Close the Contractor Fraud Loophole Act and the Foreign
Corrupt Practices Act. Noncompliance found by any one agency may result in fines, penalties,
debarment or suspension from receiving additional contracts with all U.S. Government agencies.
Raw Materials
The most significant raw material we use is steel. Other materials used in large quantities
include paint, aluminum, pipe, electrical cable and fittings. All of these materials are currently
available in adequate supply from domestic and
93
foreign sources. In connection with our government contracts, we are required to procure
certain materials and component parts from supply sources approved by the U.S. Government.
Generally, for all of our long-term contracts, we obtain price quotations for many of our materials
requirements from multiple suppliers to ensure competitive pricing. We have not generally been
dependent upon any one supply source; however, due largely to the consolidation of the defense
industry, there are currently several components for which there is only one supplier. We believe
that these sole source suppliers as well as our overall supplier base are adequate to meet our
future needs. We have mitigated some supply risk by negotiating long-term agreements with a number
of steel suppliers; such agreements are anticipated to be renegotiated in 2011. In addition, we
have mitigated price risk related to steel purchases through certain contractual arrangements with
the U.S. Government. We must continue our efforts to maintain sources for raw materials, fabricated
parts, electronic components and major subassemblies. In this manufacturing and systems integration
environment, effective oversight of subcontractors and suppliers is as vital to success as managing
internal operations. While we have generally been able to obtain key raw materials required in our
production processes in a timely manner, a significant delay in supply deliveries could have a
material adverse effect on our financial position, results of operations or cash flows. See Risk
FactorsRisks Relating to Our Business.
Competition
We primarily compete with General Dynamics and to a lesser extent with smaller shipyards, one
or more of whom may be teamed with a large defense contractor. Intense competition related to
programs, resources and funding, and long operating cycles are both key characteristics of our
business and the defense industry. It is common in this industry for work on major programs to be
shared among a number of companies. A company competing to be a prime contractor may, upon ultimate
award of the contract to another party, turn out to be a subcontractor for the ultimate prime
contracting party. It is not uncommon to compete for a contract award with a peer company and,
simultaneously, perform as a supplier to or a customer of such competitor on other contracts. The
nature of major defense programs, conducted under binding contracts, allows companies that perform
well to benefit from a level of program continuity not common in many industries.
We believe we are well-positioned in the market. Because we are the only company currently
capable of building and refueling the U.S. Navys nuclear-powered aircraft carriers, we believe we
are in a strong competitive position to be awarded any contracts to build or refuel nuclear-powered
aircraft carriers. We are the only builder of large deck amphibious assault and expeditionary
warfare ships for the U.S. Navy, including LHD, LHA and LPD, and would be positioned to be awarded
any future contracts for these types of vessels. Our success in the competitive shipbuilding
defense industry depends upon our ability to develop, market and produce our products and services
at a cost consistent with the U.S. Navys budget, as well as our ability to provide the people,
technologies, facilities, equipment and financial capacity needed to deliver those products and
services with maximum efficiency.
Environmental, Health and Safety
Our manufacturing operations are subject to and affected by federal, state and local laws and
regulations relating to the protection of the environment. We provide for the estimated cost to
complete environmental remediation where we determine it is probable that we will incur such costs
in the future in amounts we can reasonably estimate to address environmental impacts at currently
or formerly owned or leased operating facilities, or at sites where we are named a Potentially
Responsible Party (PRP) by the U.S. Environmental Protection Agency or similarly designated by
other environmental agencies. These estimates may change given the inherent difficulty in
estimating environmental cleanup costs to be incurred in the future due to the uncertainties
regarding the extent of the required cleanup, determination of legally responsible parties, and the
status of laws, regulations and their interpretations.
We assess the potential impact on our financial statements by estimating the range of
reasonably possible remediation costs that we could incur on a site-by-site basis, taking into
account currently available facts on each site as well as the current state of technology and prior
experience in remediating contaminated sites. We review our estimates periodically and adjust them
to reflect changes in facts and technical and legal circumstances. We record accruals for
environmental cleanup costs in the accounting period in which it becomes probable we have incurred
a liability and the costs can be reasonably estimated. We record insurance recoveries only when we
determine that collection is probable and we do not include any litigation costs related to
environmental matters in our environmental remediation accrual.
We estimate that as of December 31, 2010, the probable future costs for environmental
remediation sites is $3 million, which is accrued in other current liabilities in the consolidated
statements of financial position. We record environmental accruals on an undiscounted basis. At
sites involving multiple parties, we provide environmental accruals based upon our expected share
of liability, taking into account the financial viability of other jointly liable parties. We
expense or capitalize environmental expenditures as appropriate. Capitalized expenditures relate to
long-lived improvements in currently operating facilities. We may have to incur costs in addition
to those already estimated and accrued if other PRPs do not pay their allocable share of
remediation costs, which could have a material effect on our business, financial position, results
of operations or cash flows. We have made the investments we believe necessary to
94
comply with environmental laws. Although we cannot predict whether information gained as
projects progress will materially affect the estimated accrued liability, we do not anticipate that
future remediation expenditures will have a material adverse effect on our financial position,
results of operations or cash flows.
We may incur future environmental costs at some point that may be related to the wind down of
our construction activities at Avondale. Due to insufficient information about the nature, timing
and extent of any potential environmental remediation and costs that we may experience at some
point, these costs are not reasonably estimable at this time. Accordingly, potential environmental
costs associated with the wind down of our construction activities at Avondale are not included in
the estimated $3 million of probable future costs for environmental remediation sites discussed
above, in the $310 million estimate of asset write downs and restructuring-related Avondale costs
noted above or in the consolidated financial statements. Based on the FAR, we expect that a
significant portion of any potential future environmental costs would be recoverable consistent
with government accounting practices.
We believe that we are in material compliance with all applicable environmental regulations,
and historical environmental compliance costs have not been material to our business. However, on
June 4, 2010, the EPA proposed new regulations at 40 CFR Part 63 Subpart DDDDD entitled National
Emission Standards for Hazardous Air Pollutants for Major Sources: Industrial, Commercial, and
Institutional Boilers and Process Heaters. NGSB owns and operates five residual oil-fired
industrial boilers for supplying process and building steam along with supplying high pressure
steam to ships under construction. We believe that these boilers will be significantly adversely
affected by these regulations, if adopted as proposed and would likely need to be replaced. The
capital cost to replace these could be significant. However, on December 2, 2010, the EPA official
responsible for these regulations stated publicly that the proposed emissions limits in the
regulation were unachievable. On December 7, 2010, the EPA filed papers in court to secure an
extension of up to 15 months on the current judicial deadline governing these regulations in order
to repropose a revised set of regulations. Pursuant to a court order, the EPA is expected to
promulgate final regulations in February 2011. The EPA has stated that these final rules will be
significantly different than the June 2010 proposed rules and will be immediately subject to
administrative reconsideration. Given the regulatory uncertainty, it is impossible to predict the
impact of these regulations at this time.
We could be affected by future laws or regulations, including those enacted in response to
climate change concerns and other actions known as green initiatives. We recently established an
internal goal of reducing our greenhouse gas emissions during the next five years. To comply with
current and future environmental laws and regulations and to meet this goal, we expect to incur
capital and operating costs, but at this time we do not expect that such costs will have a material
adverse effect on our financial position, results of operations or cash flows.
With regard to occupational health and safety, the Shipbuilding and Ship Repair industry
involves work with many hazardous materials and processes, and remains one of the most highly
hazardous industry segments. According to the Bureau of Labor statistics, the Shipbuilding and Ship
Repair industry (SIC Code 3731) ranks among the highest in virtually every injury metric.
Nevertheless, in terms of serious injuries at our operations, there have been six industrial
related fatalities in the past six years, and none in the past two years. There are no outstanding
Occupational Safety & Health Administration (OSHA) investigations or violations, and our internal
audit program seeks to assure that our OSHA compliance programs remain strong. In 1995, our Newport
News, Virginia shipyard became the only shipyard to be awarded the Star Award from the Occupational
Safety and Health Administrations Voluntary Protection Program (OSHA VPP). To earn this award,
we joined efforts with our unions and supported the participation in the Voluntary Protection
Program in which all parties help each other to make our shipyard a safer place to work. Since
then, our Gulfport, Mississippi and Tallulah and Waggaman, Louisiana, facilities have all also been
certified as OSHA VPP Star Sites. Additionally, our Avondale facility in New Orleans, Louisiana and
our Continental Maritime facility in San Diego, California facilities have been certified as OSHA
VPP Merit Sites.
The Nuclear Regulatory Commission, the Department of Energy and the DoD regulate and control
various matters relating to nuclear materials that we handle. Subject to certain requirements and
limitations, our government contracts generally provide for indemnity by the U.S. Government for
costs arising out of or resulting from certain nuclear risks.
Employees
We have approximately 39,000 employees. We are the largest industrial employer in Virginia and
the largest private employer in Mississippi. Our workforce contains many third-, fourth- and
fifth-generation shipbuilding employees. We employ individuals specializing in 19 crafts and
trades, including more than 7,500 engineers and designers and more than 1,000 employees with
advanced degrees. Employees who have been with us or our predecessors for over 40 years achieve the
title of Master Shipbuilder. At December 31, 2010, we had 771 Master Shipbuilders (506 in Newport
News, 265 in the Gulf Coast). Additionally, we employ nearly 6,200 veterans.
95
At our Newport News shipyard, we operate the Apprentice School, which trains over 750
apprentices each year in 19 trades and several advanced programs. Our Gulf Coast Apprentice School
currently has nearly 1,000 registered apprentices in its programs. Apprentices are paid as
full-time employees for the duration of their studies, and usually continue to work with us upon
graduation. From nuclear pipe welders to senior executives, over 2,650 alumni of the Apprentice
School at Newport News and over 1,775 alumni of our Gulf Coast Apprentice School continue to work
with us.
Approximately 50% of our employees are covered by a total of 10 collective bargaining
agreements. We expect to re-negotiate each of our collective bargaining agreements between 2012 and
2014 as they approach expiration. It is not expected that the results of these negotiations will
have a material adverse effect on our financial position, results of operations or cash flows. We
believe that our relationship with our employees is satisfactory.
Properties
At December 31, 2010, we had operations in San Diego, California; Avondale (New Orleans),
Louisiana; Gulfport and Pascagoula, Mississippi; and Hampton, Newport News and Suffolk, Virginia.
We also lease and/or own office buildings related to our operations in both Virginia Beach,
Virginia and Washington, D.C.
Newport News
. Our facilities located in Newport News, Virginia are on approximately 550 acres
that we own at the mouth of the James River, which adjoins the Chesapeake Bay, the premier deep
water harbor on the east coast of the United States. Our Newport News shipyard is one of the
largest in the United States. It is the nations sole designer, builder and refueler of
nuclear-powered aircraft carriers and one of only two companies capable of designing and building
nuclear-powered submarines for the U.S. Navy. The shipyard also provides services for naval and
commercial vessels. Its facilities include seven graving docks, a floating dry dock, two outfitting
berths, five outfitting piers, a module outfitting facility and various other shops. Dry Dock 12
has been extended to 662 meters. Dry Dock 12 is serviced by a 1,050 metric ton capacity gantry
crane that spans the dry dock and work platen.
Our Newport News shipyard also has a variety of other facilities including an 18-acre
all-weather on-site steel fabrication shop, accessible by both rail and transporter, a module
outfitting facility which enables us to assemble a ships basic structural modules indoors and on
land, machine shops totaling 300,000 square feet, and its own school which provides a four-year
accredited apprenticeship program that trains shipbuilders.
We believe that substantially all of our plants and equipment are, in general, well maintained
and in good operating condition. They are considered adequate for present needs and, as
supplemented by planned construction, are expected to remain adequate for the near future.
Gulf Coast
. Our five properties across the Gulf Coast are located in Pascagoula and Gulfport,
Mississippi and Avondale, Tallulah and Waggaman, Louisiana. In addition, our facilities in San
Diego, California and Virginia Beach, Virginia are considered part of our Gulf Coast operations.
Our Pascagoula shipyard is a main provider of major surface warships to the U.S. Navy and has
modernized dozens of other naval ships. It is the only U.S. shipyard in recent years to be
developing and building six different classes of ships for the U.S. Navy and U.S. Coast Guard. Our
facilities in Pascagoula sit on approximately 800 acres on the banks of the Pascagoula River where
it flows into the Mississippi Sound. We lease the west bank of our Pascagoula facility from the
State of Mississippi pursuant to a 99-year lease (consisting of a 40-year base term plus six
additional option terms). We anticipate continued use of this facility for the remaining currently
anticipated 56 years on the lease and beyond.
Our components facility in Gulfport, Mississippi, is on approximately 120 acres and is focused
on composite research and engineering. The facility is currently building the DDG-1000 composite
deckhouses. We believe that this composites capability, coupled with strong alliances with several
universities and suppliers, positions us to take advantage of any shift toward lighter-weight
topside composite structures in U.S. Naval and U.S. Coast Guard applications.
Our Avondale shipyard is on approximately 268 acres located on the banks of the Mississippi
River approximately 12 miles upriver from downtown New Orleans. This site has the capacity to
manufacture large amphibious assault and military and commercial transport vessels, and includes
three outfitting docks totaling more than 6,000 linear feet. In addition to the shipyard,
operations include the Maritime Technology Center of Excellence.
Our Tallulah facility consists of a 115,000-square foot production shop.
Our Waggaman facility is located three miles upriver from the Avondale shipyard and features
an 81,625-square foot production facility that consists of a machine shop, a fabrication and
assembly area, a piping production area, a warehouse and a paint booth.
Our San Diego and Virginia Beach facilities provide fleet support services.
96
Our Gulf Coast operations continue to recover from the infrastructure and workforce impacts
from Hurricane Katrina in 2005. In August 2005, our shipyards in Louisiana and Mississippi
sustained significant windstorm damage as a result of Hurricane Katrina, causing work and
production delays. We incurred costs to replace or repair and improve destroyed and damaged assets,
suffered losses under our contracts, and incurred substantial costs to clean up and recover our
operations. We invested significant capital to harden, protect and modernize our Pascagoula
facilities, and to ensure the shipyards robustness. In 2008, our Gulf Coast shipyards were
affected by Hurricane Gustav and Hurricane Ike. As a result of Hurricane Gustav, our shipyards
experienced a shut-down for several days and a resulting minor delay in ship construction
throughout the yards; however, the storm caused no significant physical damage to the yards, we
believe in part due to our successful hardening and improvement after Hurricane Katrina. Hurricane
Ike severely impacted a subcontractors operations in Texas. The subcontractor produced
compartments for two of the LPD amphibious transport dock ships under construction at the Gulf
Coast shipyards. As a result of the delays and cost growth caused by the subcontractors production
delays, our operating income was reduced during the second half of 2008.
We intend to wind down our construction activities at Avondale, our Louisiana shipyard, in
2013 and two Louisiana components facilities by 2013 and consolidate all Gulf Coast construction
into our Mississippi facilities. We expect that consolidation of operations in Mississippi would
reduce program costs on existing contracts and make future vessels more affordable, thereby
reducing rates and realizing cost savings for the U.S. Navy and the U.S. Coast Guard. We are also
exploring the potential for alternative uses of the Avondale facility by new owners, including
alternative opportunities for the workforce there. We expect that process to take some time.
Legal Proceedings
U.S. Government Investigations and Claims
. Departments and agencies of the U.S. Government
have the authority to investigate various transactions and operations of our company, and the
results of such investigations may lead to administrative, civil or criminal proceedings, the
ultimate outcome of which could be fines, penalties, repayments or compensatory or treble damages.
U.S. Government regulations provide that certain findings against a contractor may lead to
suspension or debarment from future U.S. Government contracts or the loss of export privileges for
a company or a division or subdivision. Suspension or debarment could have a material adverse
effect on us because of our reliance on government contracts.
In the second quarter of 2007, the U.S. Coast Guard issued a revocation of acceptance under
the Deepwater Modernization Program for eight converted 123-foot patrol boats based on alleged
hull buckling and shaft alignment problems and alleged nonconforming topside equipment on the
vessels. We submitted a written response that argued that the revocation of acceptance was
improper. The U.S. Coast Guard advised ICGS, which was formed by us and Lockheed Martin to perform
the Deepwater Modernization Program, that it was seeking $96 million from ICGS as a result of the
revocation of acceptance. The majority of the costs associated with the 123-foot conversion effort
are associated with the alleged structural deficiencies of the vessels, which were converted under
contracts with us and one of our subcontractors. In 2008, the U.S. Coast Guard advised ICGS that
the U.S. Coast Guard would support an investigation by the U.S. Department of Justice of ICGS and
its subcontractors instead of pursuing its $96 million claim independently. The Department of
Justice conducted an investigation of ICGS under a sealed False Claims Act complaint filed in the
U.S. District Court for the Northern District of Texas and decided in early 2009 not to intervene
at that time. On February 12, 2009, the District Court unsealed the complaint filed by Michael J.
DeKort, a former Lockheed Martin employee, against us, ICGS, Lockheed Martin Corporation relating
to the 123-foot conversion effort. Damages under the False Claims Act are subject to trebling. On
October 15, 2009, the three defendants moved to dismiss the Fifth Amended complaint. On April 5,
2010, the District Court ruled on the defendants motions to dismiss, granting them in part and
denying them in part. As to us, the District Court dismissed conspiracy claims and those pertaining
to the C4ISR systems. On October 27, 2010, the District Court entered summary judgment for us on
DeKorts HM&E claims brought against us. On November 10, 2010, DeKort acknowledged that with the
dismissal of the HM&E claims, no issues remained against us for trial and the District Court
subsequently vacated the December 1, 2010 trial. On November 12, 2010, DeKort filed a motion for
reconsideration regarding the District Courts denial of his motion to amend the Fifth Amended
complaint. On November 19, 2010, DeKort filed a second motion for reconsideration regarding the
District Courts order granting summary judgment on the HM&E claims. Based upon the information
available to us to date, we believe that we have substantive defenses to any potential claims but
can give no assurance that we will prevail in this litigation.
Litigation
. We are party to various investigations, lawsuits, claims and other legal
proceedings that arise in the ordinary course of our business. Based on information available, we
believe that the resolution of any of these various claims and legal proceedings would not have a
material adverse effect on our financial position, results of operations or cash flows.
We are pursuing legal action against an insurance provider, FM Global, arising out of a
disagreement concerning the coverage of certain losses related to Hurricane Katrina (see Notes to
Consolidated Financial StatementsNote 15). Legal
97
action was commenced against FM Global on November 4, 2005, which is now pending in the U.S.
District Court for the Central District of California, Western Division. In August 2007, the
District Court issued an order finding that the excess insurance policy provided coverage for
Katrina-related losses. FM Global appealed the District Courts order and on August 14, 2008, the
U.S. Court of Appeals for the Ninth Circuit reversed the earlier summary judgment order in favor of
Northrop Grummans interest, holding that the FM Global excess policy unambiguously excludes damage
from the storm surge caused by Hurricane Katrina under its Flood exclusion. The Ninth Circuit
remanded the case to the District Court to determine whether the California efficient proximate
cause doctrine affords coverage sought by Northrop Grumman under the policy even if the Flood
exclusion of the policy is unambiguous. On April 2, 2009, the Ninth Circuit denied Northrop
Grummans Petition for Rehearing and remanded the case to the District Court. On June 10, 2009,
Northrop Grumman filed a motion seeking leave of court to file a complaint adding Aon as a
defendant. On July 1, 2009, FM Global filed a motion for partial summary judgment seeking a
determination that the California efficient proximate cause doctrine is not applicable or that it
affords no coverage under the policy. On August 26, 2010, the District Court denied Northrop
Grummans motion to add Aon as a defendant to the case pending in federal court, finding that
Northrop Grumman has a viable option to bring suit against Aon in state court. Also on August 26,
the District Court granted FM Globals motion for summary judgment based upon Californias doctrine
of efficient proximate cause, and denied FM Globals motion for summary judgment based upon breach
of contract, finding that triable issues of fact remained as to whether and to what extent we
sustained wind damage apart from the storm surge that inundated our Pascagoula facility. We believe
that we are entitled to full reimbursement of our covered losses under the excess policy. The
District Court has scheduled trial on the merits for April 3, 2012. On January 27, 2011, Northrop
Grumman filed an action against Aon Insurance Services West, Inc., formerly known as Aon Risk
Services, Inc. of Southern California, in Superior Court in California alleging breach of contract,
professional negligence, and negligent misrepresentation. Based on the current status of the
litigation, no assurances can be made as to the ultimate outcome of these matters.
However, if either of these claims are successful, the potential impact to our consolidated
financial position, results of operations or cash flows would be favorable.
During 2008, notification from Munich Re, the only remaining insurer within the primary layer
of insurance coverage with which a resolution has not been reached, was received noting that it
will pursue arbitration proceedings against Northrop Grumman related to approximately $19 million
owed by Munich Re to NGRMI, a wholly owned subsidiary of Northrop Grumman, for certain losses
related to Hurricane Katrina. An arbitration was later invoked by Munich Re in the United Kingdom
under the reinsurance contract. Northrop Grumman was also notified that Munich Re is seeking
reimbursement of approximately $44 million of funds previously advanced to NGRMI for payment of
claim losses of which Munich Re provided reinsurance protection to NGRMI pursuant to an executed
reinsurance contract, and $6 million of adjustment expenses. The arbitral panel has set a hearing
for November 14, 2011. We believe that NGRMI is entitled to full reimbursement of its covered
losses under the reinsurance contract and has substantive defenses to the claim of Munich Re for
return of the funds paid to date. If the matters are resolved in NGRMIs favor, then NGRMI would be
entitled to the remaining $19 million owed for covered losses and it would have no further
obligations to Munich Re. Payments to be made to NGRMI in connection with this matter would be for
the benefit of our accounts, and reimbursements to be made to Munich Re would be made by us, if
any.
On January 31, 2011, the U.S. Department of Justice first informed Northrop Grumman and us of
a False Claims Act complaint that we believe was filed under seal by a relator (the plaintiff) in
mid-2010 in the U.S. District Court for the District of Columbia. The redacted copy of the
complaint that we received (the Complaint) alleges that through largely unspecified fraudulent
means, Northrop Grumman and we obtained federal funds that were restricted by law for the
consequences of Hurricane Katrina, and used those funds to cover costs under certain shipbuilding
contracts that were unrelated to Hurricane Katrina and for which Northrop Grumman and we were not
entitled to recovery under the contracts. The Complaint seeks monetary damages of at least $835
million, plus penalties, attorneys fees and other costs of suit. Damages under the False Claims
Act may be trebled upon a finding of liability.
For several years, Northrop Grumman has pursued recovery under its insurance policies for
Hurricane Katrina-related property damage and business interruption losses. One of the insurers
involved in those actions has made allegations that overlap significantly with certain of the
issues raised in the Complaint, including allegations that Northrop Grumman and we used certain
Hurricane Katrina-related funds for losses under the contracts unrelated to the hurricane. Northrop
Grumman and we believe that the insurers defenses, including those related to the use of Hurricane
Katrina funding, are without merit.
We have agreed to cooperate with the government investigation relating to the False Claims Act
Complaint. We have been advised that the Department of Justice has not made a decision whether to
intervene. Based upon our review to date of the information available to us, we believe we have
substantive defenses to the allegations in the Complaint. We believe that the claims as set forth
in the Complaint evidence a fundamental lack of understanding of the terms and conditions in our
shipbuilding contracts, including the post-Katrina modifications to those contracts, and the manner
in
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which the parties performed in connection with the contracts. Based upon our review to date of
the information available to us, we believe that the claims as set forth in the Complaint lack
merit and are not likely to result in a material adverse effect on our consolidated financial
position. We intend vigorously to defend the matter, but we cannot predict what new or revised
claims might be asserted or what information might come to light so can give no assurances
regarding the ultimate outcome.
Additionally, we and our predecessors in interest are defendants in several hundred cases
filed in numerous jurisdictions around the country wherein former and current employees and various
third parties allege exposure to asbestos-containing materials on or associated with our premises
or while working on vessels constructed or repaired by us. Some cases allege exposure to
asbestos-containing materials through contact with our employees and third persons who were on the
premises. The cases allege various injuries including those associated with pleural plaque disease,
asbestosis, cancer, mesothelioma and other alleged asbestos-related conditions. In some cases, in
addition to us, several of our former executive officers are also named defendants. In some
instances, partial or full insurance coverage is available to us for our liability and that of our
former executive officers. Because of the varying nature of these actions, and based upon the
information available to us to date, we believe we have substantive defenses in many of these cases
but can give no assurance that we will prevail on all claims in each of these cases. We believe
that the ultimate resolution of these cases will not have a material adverse effect on our
financial position, results of operations or cash flows. See Notes to Consolidated Financial
StatementsNote 14.
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MANAGEMENT
Our Executive Officers
The following table sets forth certain information as of March 14, 2011, concerning certain of
our executive officers, including a five-year employment history and any directorships held in
public companies following the spin-off.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
C. Michael Petters
|
|
|
51
|
|
|
President and Chief Executive Officer
|
Barbara A. Niland
|
|
|
52
|
|
|
Vice President and Chief Financial Officer
|
Irwin F. Edenzon
|
|
|
56
|
|
|
Vice President and General Manager Gulf Coast Operations
|
Matthew J. Mulherin
|
|
|
51
|
|
|
Vice President and General Manager Newport News Operations
|
William R. Ermatinger
|
|
|
46
|
|
|
Vice President and Chief Human Resources Officer
|
C. Michael Petters, President and Chief Executive Officer
Mr. Petters has been President of
Northrop Grumman Shipbuilding since 2008, when NGSB was formed, and was previously President of the
Newport News sector. Since joining the Company in 1987, his responsibilities have included
oversight of the
Virginia
-class submarine program, the nuclear-powered aircraft carrier programs,
aircraft carrier overhaul and refueling, submarine fleet maintenance, commercial and naval ship
repair, human resources and business and technology development. Mr. Petters holds a Bachelor of
Science degree in Physics from the United States Naval Academy and a Master of Business
Administration degree from the College of William and Mary.
Barbara A. Niland, Vice President and Chief Financial Officer
Ms. Niland has been Sector Vice
President, Business Management and Chief Financial Officer for NGSB since 2008, when NGSB was
formed. In that position, she has been responsible for strategy and processes supporting growth and
profitability goals, as well as the business management functions of NGSB. Since joining Northrop
Grumman in 1979, Ms. Niland has held a variety of positions, including Vice President of Business
Management and Chief Financial Officer of the Newport News sector. Ms. Niland holds a Bachelor of
Science degree in finance from Towson State University and a Master of Business Administration
degree from the University of Maryland University College.
Irwin F. Edenzon, Vice President and General Manager Gulf Coast Operations
Mr. Edenzon has
been Sector Vice President and General Manager, Gulf Coast since 2008, when NGSB was formed. Since
Mr. Edenzon joined the Company in 1997, his responsibilities have included overseeing Newport News
Technical Engineering Division, Advanced Programs and Internal Research, as well as serving as Vice
President for Business and Technology Development, and Vice President for Technology Development
and Fleet Support of the Newport News sector. Mr. Edenzon holds a Bachelor of Arts degree in
Criminal Justice, magna cum laude, from Rutgers University and a Master of Business Administration
degree from Florida Atlantic University.
Matthew J. Mulherin, Vice President and General Manager Newport News Operations
Mr.
Mulherin has been Sector Vice President and General Manager, Newport News since 2008. Since joining
the Company in 1981, Mr. Mulherin has had many responsibilities, including serving as Vice
President of the CVNX program, Vice President of the CVN-21 program, and Vice President of Programs
for the Newport News operations, where he successfully led the aircraft carrier design and
construction programs, carrier refueling and overhaul programs and the submarine program. Mr.
Mulherin holds a Bachelor of Science degree in Civil Engineering from Virginia Tech.
William R. Ermatinger, Vice President and Chief Human Resources Officer
Mr. Ermatinger has
been Sector Vice President of Human Resources and Administration since 2008, when NGSB was formed.
In that position, he has been responsible for all NGSB human resources and administration
activities. Since joining the Company in 1987, Mr. Ermatinger has held several human resources
management positions with increasing responsibility, including Vice President of Human Resources
and Administration of the Newport News sector. Mr. Ermatinger holds a Bachelor of Arts degree in
Political Science from the University of Maryland Baltimore County (UMBC).
100
Our Board of Directors
The following table sets forth information with respect to those persons who are expected to serve
on our board of directors following the spin-off. See ManagementOur Executive Officers for Mr.
Petterss biographical information.
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|
|
|
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Name
|
|
Age
|
|
Position(s)
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Thomas B. Fargo
|
|
|
62
|
|
|
Chairman
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C. Michael Petters
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|
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51
|
|
|
Director
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Robert Bruner
|
|
|
61
|
|
|
Director
|
Artur Davis
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|
|
43
|
|
|
Director
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Anastasia Kelly
|
|
|
61
|
|
|
Director
|
Paul D. Miller
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|
|
69
|
|
|
Director
|
Tom Schievelbein
|
|
|
57
|
|
|
Director
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Karl von der Heyden
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|
|
74
|
|
|
Director
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Thomas B. Fargo, Chairman
Admiral Fargo joined the private sector in March of 2005 following
a 35-year career in the Department of Defense and the U.S. Navy. He was President of Trex
Enterprises until April of 2008 when he became a Managing Director and member of the Operating
Executive Board of J.F. Lehman and Company. He currently holds the John M. Shalikashvili Chair in
National Security Studies at the National Bureau of Asian Research. Admiral Fargo serves on the
boards of directors of Northrop Grumman Corporation, Hawaiian Electric Industries and USAA. Prior
public company experience included Chairman of the Compensation Committee of Hawaiian Airlines. His
last assignment on active duty was as Commander, U.S. Pacific Command, leading the largest unified
command while directing the joint operations of the Army, Navy, Air Force and Marine Corps. His
service included six tours in Washington, D.C. and five Commands in the Pacific, Indian Ocean and
Middle East.
Robert Bruner, Director
Dr. Bruner currently serves as the dean of the Darden Graduate School
of Business Administration at the University of Virginia, where he has been a faculty member since
1982. Dr. Bruner is a financial economist whose research focuses in the areas of capital structure
management, commercial and investment banking and corporate finance and he frequently works as a
consultant for leading banks and professional services firms to train employees on these subjects.
He has published numerous books and articles on a variety of investment bank and finance topics and
has created a variety of instructional software programs on corporate value creation. Dr. Bruner
was the founding co-editor, and since 2004 has served on the Advisory Board, of the Emerging
Markets Review. From 1996 to 2010, Dr. Bruner served as Co-Editor of Educator: Courses, Cases, and
Teaching, which is a successor to Finance Teaching and Case Abstracts, which Dr. Bruner founded in
1996. Presently, Dr. Bruner chairs a Task Force on the Globalization of Management for AACSB
International, and is also chairman of the Board of the Consortium for Graduate Study in
Management. Prior to his time in academia, he worked as a banker at First Chicago Corporation for
three years, and also served in the U.S. Army Reserve from 1971 to 1977. Dr. Bruner received a B.A.
from Yale University and an M.B.A. and a D.B.A. from Harvard University.
Artur Davis, Director
Mr. Davis joined the law firm SNR Denton in 2011 as a partner in the
white collar crime and government investigations section. Prior to joining SNR Denton, Mr. Davis
served four terms as a member of the United States House of Representatives, representing Alabamas
Seventh Congressional District. He served for four years as a member of the Ways and Means
Committee, which has exclusive jurisdiction over tax-writing policy, and during his tenure, also
served on the Committee on House Administration, the Judiciary Committee, the Budget Committee and
the House Financial Services Committee, previously called the Banking Committee. Mr. Davis served
as co-chair of the House New Democrat Caucus for four years. Mr. Davis received a B.A., magna cum
laude, and a J.D., cum laude, both from Harvard University.
Anastasia Kelly, Director
Ms. Kelly joined the law firm of DLA Piper in 2010 as a partner.
Prior to joining DLA Piper, she was an Executive Officer of American International Group, Inc.
(AIG) from 2006 to 2010, serving as Executive Vice President and General Counsel from 2006 to
January 2009 and as Vice Chairman until December 2009, specifically dealing with legal, regulatory,
corporate governance and risk management issues. Prior to joining AIG, Ms. Kelly was an executive
and general counsel of several large, publicly traded companies, including MCI/WorldCom, Sears,
Roebuck and Co., and Fannie Mae. She serves as a director and member of the Compensation and Risk
Committees of Owens-Illinois, Inc., the worlds largest manufacturer of glass containers, and sits
on the board of numerous philanthropic organizations. Ms. Kelly serves as a trustee of the Carey
School of Business at John Hopkins University and is also a member of the Rock Center for Corporate
Governance at Stanford University Law School. She is also past Chair of Equal Justice Works and a
Director of Lawyers for Children America and the International Institute for Conflict Prevention &
Resolution. She was a director of Saxon Capital from 2005 to 2007. Ms. Kelly received a B.A., cum
laude, from Trinity
101
University and a J.D., magna cum laude, from George Washington Law School. Ms. Kelly is a
member of the Texas Bar, the District of Columbia Bar and the American Bar Foundation.
Paul D. Miller, Director
Admiral Miller served as Chairman and CEO of Alliant Techsystems
Inc., an aerospace and defense company, from 1999 until his retirement in 2005. He was also the
President and CEO of Sperry Marine from 1994 to 1998, a company that was acquired by Litton
Industries in 1997. During his 30-year career with the U.S. Navy, Admiral Miller served as
Commander-in-Chief, U.S. Atlantic Command, one of five U.S. theater commands, and served
concurrently as NATO Supreme Allied Commander-Atlantic. Since 2001, Admiral Miller has served on
the board of directors as a member of the audit committee of both Donaldson Company, Inc. and
Teledyne Technologies, Incorporated. Additionally, he was a director at Atlantic Marine Inc., a
private company, from 2009 until the company was sold in 2010. Admiral Miller has a B.A. from
Florida State University, completed the U.S. Navy War College, has an M.B.A. from the University of
Georgia, and completed the Executive Management Program (PDM) at Harvard Business School.
Tom Schievelbein, Director
Mr. Schievelbein is the Lead Director of New York Life Insurance
Co., where he has served as a member of the board of directors since 2006, and has been a member of
the board of directors of Brinks Co., where he serves as a member of the Audit Committee, since
March 2009, and McDermott International Inc., where he serves as the chair of the Compensation
Committee, since February 2004. Mr. Schievelbein served as the President of Northrop Grumman
Newport News and was a member of the Northrop Grumman Corporate Policy Council from November 2001
until his retirement in November 2004. Mr. Schievelbein served as Chief Operating Officer of
Newport News Shipbuilding Inc. from 1995 until 2001 and was responsible for the design,
construction and maintenance of nuclear-powered aircraft carriers and submarines. His experience
includes the
Virginia
-class submarine program, CVN-76, CVN-77 and CVN-21 aircraft carrier programs,
aircraft carrier overhaul and refueling, submarine fleet maintenance, commercial and naval ship
repair and business development. Mr. Schievelbein is also a past member of the Secretary of the
Navys Advisory Panel. Mr. Schievelbein holds a B.S. in Marine Engineering from the United States
Naval Academy and a Masters Degree in Nuclear Engineering from the University of Virginia.
Karl von der Heyden
,
Director
Mr. von der Heyden currently serves as co-chairman of The
American Academy in Berlin and as a trustee of New York City Global Partners. He has served on the
board of directors of several public companies, including DreamWorks Animation SKG Inc. (October
2005 to June 2009), Macys, Inc. (February 1992 to May 2010), Aramark Corporation (September 2001
to December 2006), PanAmSat (March 2005 to May 2006) and NYSE Euronext, Inc. (December 2005 to May
2008). From 1996 to 2001, Mr. von der Heyden was vice chairman of the board of directors of
PepsiCo, Inc., where he also served in various senior management capacities, including as chief
financial officer. Mr. von der Heyden was previously co-chairman and chief executive officer of RJR
Nabisco, president and chief executive officer of Metallgesellschaft Corp. and senior vice
president, chief financial officer and a director of and H.J. Heinz Company. He is a former trustee
of Duke University, the YMCA of Greater New York and other non-profit organizations. He has served
as Chairman of the Financial Accounting Standard Boards Advisory Council and was a senior adviser
to the Clipper Group, a private equity firm. Mr. von der Heyden attended the Free University of
Berlin and has received a B.A. from Duke University and an M.B.A. from the Wharton School of
Business at the University of Pennsylvania. He has also received a CPA certificate.
Qualifications of Directors
We believe the board of directors should be comprised of individuals with appropriate skills
and experiences to meet board governance responsibilities and contribute effectively to the
company. Pursuant to its charter, the Governance Committee will review the skills and experiences
of directors and nominee candidates before nominating directors for election to the board. All of
our non-employee directors are expected to serve on board committees, further supporting the board
by providing expertise to those committees. The needs of the committees will also be reviewed when
considering nominees to the board.
The board of directors is expected to be comprised of active and former senior executives of
major corporations and former senior executives of the U.S. military and individuals with business
and academic experience in the defense industry and other fields. As such, they are expected to
have a deep working knowledge of matters common to large companies, generally including experience
with financial statement preparation, compensation determinations, regulatory compliance, corporate
governance, public affairs and legal matters. Many of our directors are likely to serve on the
boards of one or more other publicly owned companies. We believe the company benefits from the
experience and expertise our directors gain from serving on those boards. We also believe for
effective board governance and collaboration it is important to have Mr. Petters, our President and
Chief Executive Officer, serve on the board.
Our non-employee directors are qualified to serve as directors and members of the committees
on which they will serve based on the following experience:
102
Admiral Fargos experience with the Department of Defense and the U.S. Navy, and as an
executive in the private sector, together with his experience as a member of the Northrop Grumman
board of directors.
Dr. Bruners experience as the dean of a graduate school of business, as a financial economist
and varied business and academic experience.
Mr. Daviss experience in the U.S. House of Representatives, including on the Ways and Means
Committee, the Budget Committee and the House Financial Services Committee, and varied public
service and legal experience.
Ms. Kellys experience as a senior executive and general counsel of several large, publicly
traded companies and varied business and legal experience.
Admiral Millers experience with the U.S. Navy, and as the chairman of an aerospace and
defense company.
Mr. Schievelbeins experience as the President and Chief Operating Officer of Northrop Grumman
Newport News, together with his experience on the Northrop Grumman Corporate Policy Council.
Mr. von der Heydens experience on several boards of directors and boards of trustees and as a
senior executive of large public companies, together with his varied business and finance
experience.
Structure of the Board of Directors
Our board of directors will be divided into three classes that will be, as nearly as possible,
of equal size. Each class of directors will be elected for a three-year term of office, and the
terms are staggered so that the term of only one class of directors expires at each annual meeting.
The terms of the Class I, Class II and Class III directors will expire in 2012, 2013 and 2014,
respectively. The proposed Class I directors will include Mr. von der Heyden, Admiral Miller and
Mr. Petters, the proposed Class II directors will include Admiral Fargo, Dr. Bruner and Mr. Davis
and the proposed Class III directors will include Mr. Schievelbein and Ms. Kelly.
Committees of the Board of Directors
Following the spin-off, the standing committees of our board of directors will include an
Audit Committee, a Compensation Committee and a Governance Committee, each as further described
below. Following our listing on the NYSE and in accordance with the transition provisions of the
rules of the NYSE applicable to companies listing in conjunction with a spin-off transaction, each
of these committees will, by the date required by the rules of the NYSE, be composed exclusively of
directors who are independent. Other committees may also be established by the board of directors
from time to time.
Audit Committee
. The members of the Audit Committee are expected to be Mr. von der Heyden
(chair), Mr. Schievelbein and Dr. Bruner. The Audit Committee will have the responsibility, among
other things, to meet periodically with management and with both our independent auditor and
internal auditor to review audit results and the adequacy of and compliance with our system of
internal controls. In addition, the Audit Committee will appoint or discharge our independent
auditor, and review and approve auditing services and permissible non-audit services to be provided
by the independent auditor in order to evaluate the impact of undertaking such added services on
the independence of the auditor. The responsibilities of the Audit Committee, which are anticipated
to be substantially identical to the responsibilities of Northrop Grummans Audit Committee, will
be more fully described in our Audit Committee charter. The Audit Committee charter will be posted
on our website at www. .com and will be available in print to any stockholder that requests it.
By the date required by the transition provisions of the rules of the NYSE, all members of the
Audit Committee will be independent and financially literate. Further, the board of directors has
determined that Mr. von der Heyden possesses accounting or related financial management expertise
within the meaning of the NYSE listing standards and that he qualifies as an audit committee
financial expert as defined under the applicable SEC rules.
Compensation Committee
. The members of the Compensation Committee are expected to be Admiral
Miller (chair) and Admiral Fargo. The Compensation Committee will oversee all compensation and
benefit programs and actions that affect our senior executive officers. The Compensation Committee
will also provide strategic direction for our overall compensation structure, policies and programs
and will review senior officer succession plans. The Compensation Committee will review and
recommend to the board of directors the compensation of directors. The responsibilities of the
Compensation Committee, which are anticipated to be substantially identical to the responsibilities
of Northrop Grummans Compensation Committee, will be more fully described in the Compensation
Committee charter. The Compensation Committee charter will be posted on our website at www. .com
and will be available in print to any stockholder that requests it. Each member of the Compensation
Committee will be a non-employee director, and there are no Compensation Committee interlocks
involving any of the projected members of the Compensation Committee.
Governance Committee
. The members of the Governance Committee are expected to be Ms. Kelly
(chair), Mr. Davis and Admiral Fargo. The Governance Committee will be responsible for developing
and recommending to the board of directors criteria for identifying and evaluating director
candidates; identifying, reviewing the qualifications of and
103
recruiting candidates for election to the board of directors; and assessing the contributions
and independence of incumbent directors in determining whether to recommend them for reelection to
the board of directors. The Governance Committee will also review and recommend action to the board
of directors on matters concerning transactions with related persons and matters involving
corporate governance and, in general, oversee the evaluation of the board of directors. The
responsibilities of the Governance Committee, which are anticipated to be substantially identical
to the responsibilities of Northrop Grummans Governance Committee, will be more fully described in
the Governance Committee charter. The Governance Committee charter will be posted on our website at
www. .com and will be available in print to any stockholder that requests it.
Director Independence
. Our board of directors is expected to formally determine the
independence of its directors following the spin-off. We expect that our board of directors will
determine that the following directors, who are anticipated to be elected to our board of
directors, are independent: Admiral Fargo, Dr. Bruner, Mr. Davis, Ms. Kelly, Admiral Miller, Mr.
Schievelbein and Mr. von der Heyden. Our board of directors is expected to annually determine the
independence of directors based on a review by the directors and the Governance Committee. No
director will be considered independent unless the board of directors determines that he or she has
no material relationship with us, either directly or as a partner, stockholder, or officer of an
organization that has a material relationship with us. Material relationships can include
commercial, industrial, banking, consulting, legal, accounting, charitable, and familial
relationships, among others. In affirmatively determining whether a director is independent, the
board of directors will determine whether each director meets the objective standards for
independence set forth in the NYSE rules, which generally provide that:
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A director who is an employee, or whose immediate family member (defined as a spouse,
parent, child, sibling, father- and mother-in-law, son- and daughter-in-law, brother- and
sister-in-law and anyone, other than a domestic employee, sharing the directors home) is
an executive officer of the company, would not be independent until three years after the
end of such relationship.
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|
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A director who receives, or whose immediate family member receives, more than $120,000
per year in direct compensation from the company, other than director and committee fees
and pension or other forms of deferred compensation for prior services (provided such
compensation is not contingent in any way on continued service) would not be independent
until three years after ceasing to receive such amount.
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|
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A director who is a partner of or employed by, or whose immediate family member is a
partner of or employed by and personally works on the companys audit, a present or
former internal or external auditor of the company would not be independent until three
years after the end of the affiliation or the employment or auditing relationship.
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A director who is employed, or whose immediate family member is employed, as an
executive officer of another company where any of the companys present executives serve
on the other companys compensation committee would not be independent until three years
after the end of such service or employment relationship.
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A director who is an employee, or whose immediate family member is an executive
officer, of a company that makes payments to, or receives payments from, the company for
property or services in an amount which, in any single fiscal year, exceeds the greater
of $1 million, or 2% of such other companys consolidated gross revenues, would not be
independent until three years after falling below such threshold.
|
Compensation of Non-Employee Directors
Following the spin-off, director compensation will be determined by our board of directors
with the assistance of its Compensation Committee. It is anticipated that such compensation will
consist of an annual retainer, an annual equity award, annual fees for serving as a committee chair
and other types of compensation as determined by the board from time to time.
Director Compensation Table
The following table sets forth information concerning the 2010 compensation awarded by
Northrop Grumman to non-employee directors of Northrop Grumman who are expected to be non-employee
directors of HII:
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|
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|
|
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|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
Stock
|
|
All Other
|
|
|
|
|
Paid in Cash
(1)
|
|
Awards
(2)
|
|
Compensation
|
|
Total
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Thomas B. Fargo
(3) (4)
|
|
|
122,500
|
|
|
|
120,000
|
|
|
|
|
|
|
|
242,500
|
|
Tom Schievelbein
(5)
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
60,000
|
|
104
Footnotes:
(1)
|
|
Effective October 1, 2008, non-employee directors of Northrop Grumman earned an annual
retainer of $220,000, $100,000 of which was paid in cash and the remainder of which was
required to be deferred into a stock unit account pursuant to the 1993 Stock Plan for
Non-Employee Directors, as amended (the 1993 Directors Plan). The other annual retainers
were paid in cash as follows:
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|
|
|
|
|
|
|
Amount
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Type of Retainer
|
|
($)
|
|
Audit Committee Retainer
|
|
|
10,000
|
|
Audit Committee Chair Retainer
|
|
|
25,000
|
|
Compensation Committee Chair Retainer
|
|
|
10,000
|
|
Governance Committee Chair Retainer
|
|
|
10,000
|
|
Policy Committee Chair Retainer
|
|
|
7,500
|
|
Non-executive Chairman of the Board
|
|
|
250,000
|
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Matching Gifts for Education Program
|
|
Match of $1 per $1 of director contributions, up to
$10,000 per director, to eligible educational programs
in accordance with the rules of the program
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(2)
|
|
Represents the target value of stock units awarded to each non-employee director of
Northrop Grumman in 2010 under the 1993 Directors Plan. Of the $220,000 annual retainer
earned by non-employee directors of Northrop Grumman, $120,000 was required to be deferred
into a stock unit account (Automatic Stock Units) pursuant to the 1993 Directors Plan.
Effective January 1, 2010, the amended 1993 Directors Plan provides that the Automatic
Stock Units be paid at the conclusion of board service or earlier, as specified by the
director, if he or she has more than five years of service. In addition, each director may
defer payment of all or a portion of his or her remaining board retainer fee and other
annual committee fees, which are placed 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. All deferral elections must be
made prior to the beginning of the year for which the retainer and fees will be paid.
Directors are credited with dividend equivalents in connection with the shares of Common
Stock until the shares are paid. The amount reported in this column for each director
reflects the aggregate fair value on the date of grant, as determined under Financial
Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation,
of the stock units for each director, excluding any assumed forfeitures.
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(3)
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|
In 2010, a matching contribution was made by the companys Matching Gifts for Education
Program on behalf of Admiral Fargo in the amount of $2,500.
|
|
(4)
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|
Admiral Fargo received an additional $10,000 for service on an Ad Hoc Committee of the
Northrop Grumman board during 2010.
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(5)
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|
Pursuant to an agreement with NGSB, renewable on an annual basis, in 2010 Mr.
Schievelbein received payment for service as a consultant on issues related to the
management of NGSB and its programs, specializing in shipbuilding, ship repair, ship
overhaul and other defense matters. The agreement expired on December 31, 2010 and has not
been renewed.
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Deferred Stock Units
As of December 31, 2010, the non-employee directors of Northrop Grumman who are expected to be
non-employee directors of HII had the following aggregate number of deferred stock units
accumulated in their deferral accounts for all years of service as a director of Northrop Grumman,
including additional stock units credited as a result of dividend equivalents earned on the stock
units:
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Additional
|
|
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|
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Mandatory
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Voluntary
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|
Name
|
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Deferral
|
|
Deferral
|
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Total
|
|
Thomas B. Fargo
|
|
|
5,870
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0
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|
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5,870
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105
EXECUTIVE COMPENSATION
Prior to the spin-off, we were a subsidiary of Northrop Grumman; therefore, our historical
compensation strategy has been primarily determined by Northrop Grummans senior management
(Northrop Grumman Management) and the Compensation Committee of Northrop Grummans board of
directors (the Northrop Grumman Compensation Committee) along with our senior management. Since
the information presented in this document relates to our 2010 fiscal year, which ended on December
31, 2010, this Compensation Discussion and Analysis focuses primarily on our compensation programs
and decisions with respect to 2010 and the processes used to determine 2010 compensation. The
information in this section, including in the tables herein, is presented as of December 31, 2010
when Northrop Grumman was the relevant employer. In connection with the spin-off, we will be the
relevant employer and will form our own Compensation Committee that will be responsible for our
executive compensation programs prospectively, which may be different from the compensation
programs in place for 2010.
This Compensation Discussion and Analysis is presented in the following sections:
Compensation Philosophy:
describes the principles that formed the foundation of the
compensation and benefits programs covering our executives in 2010.
Section I Roles and Responsibilities:
provides an overview of the roles and
responsibilities of the Northrop Grumman Compensation Committee, Northrop Grumman Management, our
senior management and other parties involved in determining compensation for our Named Executive
Officers (HII NEOs) for 2010.
Section II Elements of Compensation:
provides more details on our main compensation
elements for HII NEOs for 2010salary, annual incentives (or bonus), long-term incentive
compensation and other benefits.
Section III Policies and Procedures:
gives additional information on policies and
procedures related to HII NEO compensation for 2010.
Compensation Philosophy
The following compensation principles were based on principles approved by the Northrop
Grumman Compensation Committee and formed the basis of our Compensation Philosophy prior to the
spin-off.
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Compensation programs were to be directly aligned with and reinforce stockholder
interests, and accordingly had to be performance-based, transparent, defensible and
designed to provide pay commensurate with company results. Compensation was designed to
motivate and reward our management for delivering operational and strategic performance
to maximize stockholder value and demonstrating our and Northrop Grummans values,
behaviors, and leadership competencies.
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Compensation and benefits had to be competitive within the market to attract and
retain key talent that drives the desired business results. Market data was utilized to
appropriately determine competitive pay levels.
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A significant part of compensation was to be at risk based on financial and
individual performance. The appropriate level of equity-related compensation linked to
stockholder value was delivered through long-term incentives.
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Compensation was to be disclosed and explained in a transparent, understandable
manner. Clear and concise goals were established to enable the assessment of
performance by the Northrop Grumman Compensation Committee and by stockholders through
the Compensation Discussion and Analysis.
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Compensation programs were to be consistent with financial objectives relative to
our business conditions. Alignment to peer companies was considered when developing
programs and goals; however, measures oriented to strongly improving business results
will be the predominant factor.
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Successful accomplishment of business goals in both annual operating performance and
the achievement of increased stockholder value were designed to produce significant
individual rewards, and failure to attain business goals was designed to negatively
affect the pay of our executives.
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To promote alignment of management and stockholder interests, all officers were
expected to meet stock ownership guidelines in the following denominations of base
salary: our President was required to hold three times his base salary and the other
HII NEOs were required to hold one and one-half times their salary.
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The mix of long-term awards, selection of performance criteria and oversight of
compensation programs, together with other programs such as stock ownership guidelines,
were designed to mitigate excessive risk by emphasizing a long-term focus on
compensation and financial performance.
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106
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The HII NEO compensation strategy was to be consistent in philosophy for all
incentive plan participants to ensure proper alignment, accountability, and line of
sight regarding commitments and priorities. For 2010, over 85% of our Presidents pay,
and over 70% of the other HII NEOs pay, was based on compensation at risk.
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SECTION I
Roles and Responsibilities for 2010
Role of Northrop Grumman Management
Northrop Grumman has an annual compensation review process that has historically taken place
during the first quarter each year where it determines regular base salary merit increases, annual
bonuses and grants of long-term incentives through an annual review of all employees, including the
HII NEOs. The purpose of this review process has been to measure individual performance over the
course of the performance year against pre-set financial, operational and individual goals. The
system has assisted in ensuring that each HII NEOs compensation is tied to the financial and
operating performance of the company, the HII NEOs individual achievement and the HII NEOs
demonstration of Northrop Grummans strategic initiatives and values.
Throughout the year, our President provided recommendations regarding the compensation of the
HII NEOs (other than our President) to Northrop Grumman Management for their review and approval.
These recommendations were reviewed by Northrop Grummans Chief Human Resources Officer (Northrop
Grumman CHRO) and included all compensation actions for our officers, including the HII NEOs
(other than our President), as well as participation in the companys various executive benefit and
perquisite programs. The Northrop Grumman CHRO reviewed all compensation actions for our officers
and then made a recommendation to the Northrop Grumman CEO for his review and approval. This was
one of many inputs the Northrop Grumman CEO considered when reviewing compensation recommendations
provided by our President. The Northrop Grumman CEO also took into account the leadership,
performance, skills and industry knowledge of our officers when making his decision. The Northrop
Grumman CEO could also seek additional input from an independent consultant or request additional
market data from the Northrop Grumman CHRO to assist with the decision. The Northrop Grumman CEO
approved all compensation actions taken with respect to our officers other than our President,
whose compensation and benefits were approved by the Northrop Grumman Compensation Committee.
Northrop Grumman Management also provided recommendations to the Northrop Grumman Compensation
Committee regarding compensation actions for our President along with all executive plan designs
and strategies. These recommendations included financial goals and criteria for the annual and
long-term incentive plans. Northrop Grumman Management provided its recommendations based on
information gathered from consultants and the market as well as from internal resources, allowing
designs and strategies to be tied directly to the needs of Northrop Grummans and the companys
businesses.
Compensation Decisions for HII NEOs
In February 2010, the Northrop Grumman Compensation Committee, acting pursuant to authority
under its charter, reviewed and approved compensation recommendations for our President. These
compensation actions included a salary increase from $575,000 to $750,000, an annual bonus payment
of $350,000 for 2009, and a grant of long-term incentives that included a grant of 122,700 stock
options and a grant of 29,000 Restricted Performance Stock Rights (RPSRs) for the 2010 through
2012 performance period. These recommendations were provided to the Northrop Grumman Compensation
Committee by the Northrop Grumman CEO.
In conjunction with the annual compensation cycle in the first quarter described above, the
Northrop Grumman CEO approved the compensation actions for the HII NEOs below our President level.
These compensation actions included salary increases, bonus payouts, and grants of RPSRs.
All grants of long-term incentive awards made to our employees by Northrop Grumman were within
the annual grant guidelines established by the Northrop Grumman Compensation Committee. The
Northrop Grumman Compensation Committee also established performance criteria for all Northrop
Grumman employees, including our executives, regarding performance targets for both the Annual
Incentive Plan (AIP) and Northrop Grummans long-term incentive stock plan (LTI).
Independent Consultant
The Northrop Grumman Compensation Committee relied on Mr. George Paulin, Chairman and CEO of
Frederic W. Cook & Co., Inc. (F.W. Cook), for guidance in determining the levels and structure of
executive compensation including our President. The Northrop Grumman Compensation Committee also
utilized competitive salary data provided to the
107
Northrop Grumman Compensation Committee by F.W. Cook and by Aon Hewitt (formerly Hewitt
Associates and referred to herein as Hewitt).
Mr. Paulins role included: advising the Northrop Grumman Compensation Committee on management
proposals as requested; serving as a resource to the Northrop Grumman Compensation Committee Chair
on setting agenda items for Committee meetings and undertaking special projects; reviewing Northrop
Grummans total compensation philosophy, peer groups and target competitive positioning for
reasonableness and appropriateness; identifying market trends or practices; and providing proactive
counsel to the Northrop Grumman Compensation Committee on best practices for board governance of
executive compensation as well as areas of concern or risk in Northrop Grummans executive
compensation programs. Our executives historically participated in those programs in which Mr.
Paulin advised the Northrop Grumman Compensation Committee. Mr. Paulin and F.W. Cook received no
other compensation from Northrop Grumman or from us except in connection with Mr. Paulins role as
an independent consultant to the Northrop Grumman Compensation Committee.
In addition to Mr. Paulin, Northrop Grumman Management also utilized consulting services from
Hewitt to provide competitive market data on our officer positions. Hewitt also provided data to
Mr. Paulin on behalf of the Northrop Grumman Compensation Committee on an annual basis.
Neither Mr. Paulin nor Hewitt determined compensation amounts or made decisions regarding
compensation recommendations for HII NEOs and other executives.
Benchmarking
Although compensation paid to the HII NEOs was not rigorously tied to that paid by peer
groups, the Northrop Grumman Compensation Committee and the Northrop Grumman CEO determined that in
order to support the objective of attracting and retaining leading executive talent, its total
compensation program (base salary, target annual incentive awards, target long-term incentive award
values and benefits) should, in the aggregate, approximate the 50th percentile in the market.
To assess market levels of compensation for Northrop Grumman elected officers, Northrop
Grumman Management collected compensation data from a Target Industry Peer Group and a General
Industry Peer Group to perform annual analyses. These peer groups for 2010 are detailed below. The
Northrop Grumman Compensation Committee has determined that these groups provide a reasonable and
relevant comparison of market data.
Consistent with the Compensation Philosophy discussed above, in 2010 the Northrop Grumman
Compensation Committee initiated a review of these peer groups previously established for
benchmarking compensation of Northrop Grummans elected officers, including our President. This
study, prepared for the Northrop Grumman Compensation Committee by Mr. Paulin of F.W. Cook,
resulted in modifications to the Target Industry Peer Group. The group was expanded from 11 to 15
companies, and some companies in the existing peer group were replaced. The objective of these
changes was to better approximate the competitive marketplace within which Northrop Grumman
operates and competes for talent while enhancing Northrop Grummans ability to obtain market data
upon which to evaluate executive compensation. The new group included six of the nine largest
worldwide defense contractors where comparable U.S. data was available and captured companies
participating in Hewitts executive compensation survey.
For 2010, the Target Industry Peer Group consisted of the following 15 companies:
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|
|
2010 Target Industry Peer Group (current)
|
|
|
3M Co.*
|
|
Johnson Controls, Inc.*
|
The Boeing Co.
|
|
L-3 Communications Holdings, Inc.*
|
Caterpillar, Inc.*
|
|
Lockheed Martin Corp.
|
Emerson Electric Co.*
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|
Raytheon Co.
|
General Dynamics Corp.
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SAIC, Inc.*
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Goodrich Corp.*
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|
Textron, Inc.*
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Honeywell International, Inc.
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|
United Technologies Corp.
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ITT Corp.*
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|
Historically, the composition of the General Industry Peer Group fluctuated from year to
year based on participation in Hewitts executive compensation survey however the basic design
remained consistent; Fortune 100 companies participating in the survey, excluding financial
services organizations due to their unique pay models. For 2010, data was compiled from 47
organizations. The analysis included a review of data as reported in the survey (including the
25
th
, 50
th
, and 75
th
percentile
information) and employed statistical analysis to assess market pay on an adjusted basis, as
determined by revenue size.
108
For 2010, the General Industry Peer Group consisted of the following 47 companies:
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|
|
2010 General Industry Peer Group
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|
|
Abbott Laboratories
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|
Merck & Co., Inc.
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Aetna, Inc.
|
|
PepsiCo, Inc.
|
AT&T, Inc.
|
|
Pfizer, Inc
|
Caterpillar, Inc.
|
|
Philip Morris International
|
Chevron Corporation
|
|
Procter & Gamble
|
CHS, Inc.
|
|
Raytheon Company
|
Comcast Corporation
|
|
Sunoco, Inc.
|
CVS Corporation
|
|
SUPERVALU INC.
|
Delta Air Lines Inc.
|
|
Target Corporation
|
E. I. du Pont de Nemours and Company
|
|
The Boeing Company
|
FedEx Corporation
|
|
The Coca-Cola Company
|
Ford Motor Company
|
|
The Dow Chemical Company
|
General Dynamics Corporation
|
|
The Home Depot, Inc.
|
General Electric Company
|
|
The Kroger Co.
|
Honeywell International, Inc.
|
|
The Walt Disney Company
|
Humana, Inc.
|
|
Tyson Foods Incorporated
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IBM Corporation
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|
United Parcel Service
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Ingram Micro, Inc.
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|
United Technologies Corporation
|
Johnson & Johnson
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|
UnitedHealth Group
|
Johnson Controls, Inc.
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|
Valero Energy Corporation
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Kraft Foods, Inc.
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Verizon Communications, Inc.
|
Lockheed Martin Corporation
|
|
Walgreen Co.
|
Lowes Companies, Inc.
|
|
Wellpoint, Inc.
|
Medco Health Solutions, Inc.
|
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|
Compensation for Our President
Hewitt provided an analysis of elected officers in the two peer groups compared to Northrop
Grumman executives. This information was analyzed by F.W. Cook and presented to the Northrop
Grumman Compensation Committee in December 2010. This study was used as a reference to make base
salary, bonus and long-term incentive plan recommendations for the Northrop Grumman Compensation
Committee to review and approve in February 2011. The Northrop Grumman CEO utilized this
information to determine compensation for his direct reports, including our President. With respect
to our President however, the Northrop Grumman CEO recommendation to the Northrop Grumman
Compensation Committee was limited to an annual bonus (pertaining to the 2010 performance year).
The recommendation for our Presidents annual incentive award was approved by the Northrop Grumman
Compensation Committee at their meeting on February 15, 2011.
In 2010, target total compensation was measured for Northrop Grumman elected officers,
including our President. Target total compensation is comprised of base salary, target annual
incentive awards, target long-term incentive award values and benefits. As an elected officer of
Northrop Grumman, Mr. Petters target total compensation was measured each year as part of an
annual review conducted by Hewitt and F. W. Cook.
Compared to the Target Industry Peer Group, Mr. Petters target total compensation was 34%
above the size-adjusted median, and for the General Industry Peer Group his target total
compensation was 28% above the size-adjusted median. Mr. Petters compensation levels reflect the
value Northrop Grumman has placed on the knowledge, skills and experience that he has brought to
his role overseeing the Shipbuilding sector. In addition, Northrop Grumman has placed value on
internal peer comparisons and equity in terms of Mr. Petters job scope and responsibilities.
Compensation for HII NEOs
Northrop Grumman Management had available extensive information on competitive market
practices. The primary source of survey information that Northrop Grumman Management relied upon
was provided by Hewitt and typically focused on companies in the heavy manufacturing industry with
annual revenues similar, in Northrop Grumman Managements judgment, to our annual revenue. Northrop
Grumman Management, including the Northrop Grumman CEO, utilized this information when reviewing
compensation information for all officers, including the HII NEOs.
To evaluate competitive pay levels in the marketplace, both the Northrop Grumman Compensation
Committee and the Northrop Grumman CEO reviewed data reported from F.W. Cook and Hewitt for our
President. The Northrop Grumman CEO reviewed data from Hewitt and SIRS Executive surveys from ORC
Worldwide/Mercer for the remaining HII NEOs, including the 25
th
,
50
th
, and 75
th
percentile information. Where
appropriate, the data presented to the Northrop Grumman Compensation Committee and the Northrop
Grumman CEO also used statistical analysis of the applicable peer group to predict market pay
levels based on revenue size.
109
Each of our executive positions that could be compared to relevant peer data was benchmarked
to the relevant data. Executive positions that were unique to us and could not be benchmarked to
the market were compared internally based on their relative duties and responsibilities. HII NEOs
were matched to the Hewitt or SIRS benchmark positions, considering revenue size of the business
unit for base salary, annual bonus and long-term incentives. Once the survey results were released,
the matches were confirmed and the market data was extracted for use in determining annual salary,
bonus and long-term incentive recommendations. In 2010, total direct compensation (base salary,
annual bonus, long-term incentives) was measured for the remaining HII NEOs and their compensation
levels ranged from 11% to 20% above the 50
th
percentile of the applicable
survey results; Ms. Niland, 11%; Mr. Edenzon, 11%; Mr. Mulherin, 11%; Mr. Ermatinger, 20%.
Risk Assessment
During the fourth quarter of 2009 the Northrop Grumman board of directors oversaw an internal
assessment of Northrop Grummans risk profile, including the potential risk posed by the
compensation programs in which our employees participated. This was followed by a risk assessment
of Northrop Grummans executive compensation programs in the first quarter of 2010, performed by
the Northrop Grumman Compensation Committees compensation consultant, Mr. Paulin of F.W. Cook. As
a part of these risk assessments, the following were determined:
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the board and the Northrop Grumman Compensation Committee exercise close oversight
over the performance measures utilized by the annual and long-term incentive plans,
both of which serve to drive long-term performance and enhance stockholder value;
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|
the performance objectives of the plans are linked such that achievement of annual
incentive plan measures serves to enhance long-term performance of Northrop Grumman and
the company while also supporting the goals established for the long-term incentive
plan; and
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|
|
the connection of performance metrics between the annual and long-term plans
incentivizes long-term performance over short-term gain. Moreover, in addition to other
risk-mitigating features incorporated into Northrop Grummans compensation programs
such as holding-period requirements, stock ownership guidelines and a compensation
recoupment policy, Northrop Grumman relies upon a rigorous system of internal controls
to prevent any individual employee from creating adverse material risk in pursuit of an
annual or long-term award.
|
SECTION II
Elements of Compensation
The compensation elements for the HII NEOs for fiscal 2010 are summarized in the table below
and then described in more detail following the table.
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|
|
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|
Element of
|
|
|
|
If Variable,
|
|
Cash or
|
Compensation
|
|
Objectives
|
|
Performance Measured
|
|
Equity
|
Salaries
|
|
targeted at
a competitive
market median on a
job-by-job basis
adjusted
above or below
median based on
executives
experience, skills
and sustained
performance
served to
recruit and retain
the talent
necessary to run
our businesses
|
|
Not variable
|
|
Cash
|
|
|
|
|
|
|
|
Annual Incentive
|
|
designed to
motivate executives
to attain vital
short-term goals
intended to
provide a
competitive level
of compensation
when the individual
and the company
achieve the
approved
performance
objectives
tying the
annual incentive
directly to
financial
performance
provided the most
effective alignment
with stockholder
interests
|
|
Variable, based on our and Northrop Grummans
performance for all executives other than our
President, which is based solely on Northrop
Grumman performance, and adjusted for
individual performance
2010 performance criteria were the
following:
new business awards
pension-adjusted operating margin
free cash flow conversion before
discretionary pension funding
non-financial performance goals
|
|
Cash
|
|
|
|
|
|
|
|
Long-Term Incentives
|
|
for 2010,
long-term
incentives granted
to our President in
the form of
Northrop Grumman
stock options (50%)
and Northrop
Grumman Restricted
Performance Stock
Rights (50%); to
the other HII NEOs
in the form of
Northrop Grumman
Restricted
Performance Stock
Rights (100%)
|
|
See below
|
|
Equity
|
110
|
|
|
|
|
|
|
Element of
|
|
|
|
If Variable,
|
|
Cash or
|
Compensation
|
|
Objectives
|
|
Performance Measured
|
|
Equity
|
Stock Options
|
|
provided
direct alignment
with stockholder
interest while
serving as a
retention tool
|
|
Variable, based on Northrop Grumman stock price
|
|
Equity
|
|
|
|
|
|
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|
Restricted
Performance Stock
Rights
|
|
designed to
establish a
long-term
performance
perspective for the
executives
stock-based
arrangement to
create
stockholder-managers
interested in
Northrop Grummans
sustained growth
and prosperity
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|
Variable, based on:
pension-adjusted operating margin
pension-adjusted return on net assets
for our President, performance is
measured in terms of Northrop Grumman stock
price only (3 year total shareholder return)
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|
Equity
|
|
|
|
|
|
|
|
Other Benefits
|
|
supplemental
retirement,
savings, medical
and severance plans
consistent with
industry practice
|
|
Not variable
|
|
Cash
|
Salaries
Base salaries of the HII NEOs were targeted at a competitive market median on a job-by-job
basis with individual variations explained by differences in each incumbents experience, skills,
and sustained performance. Internal pay relationships and equitability were also considered. The
Northrop Grumman Compensation Committee reviewed and approved our Presidents salary and the
Northrop Grumman CEO reviewed and approved the other HII NEOs salaries, based on recommendations
from our President, on an annual basis, or at the time of promotion or a substantial change in
responsibilities, and made adjustments as needed based on the Compensation Philosophy described
above.
In February 2010, the Northrop Grumman Compensation Committee approved base salary increases
for certain sector presidents, including Mr. Petters, whose base salary was raised from $575,000 to
$750,000. This action was taken to more closely align the sector presidents in terms of internal
equity since the scope of job responsibilities is very similar.
Annual Incentives
Under the Northrop Grumman Annual Incentive Plan, the Northrop Grumman Compensation Committee
approved annual incentive compensation targets for our President and the Northrop Grumman CEO
approved the annual incentive compensation targets for the other HII NEOs. The incentive
compensation targets were determined for each position based on market prevalence, individual job
level, scope and overall influence on the business results. The Northrop Grumman Compensation
Committee and the Northrop Grumman CEO considered both the recommendations of consultants and those
of Northrop Grumman Management and our senior management in determining appropriate annual
incentive target levels. The target incentive award (Target Bonus) represented a percentage of
each executives base salary and, after the year ended, provided a basis upon which a final award
amount was determined by the Northrop Grumman Compensation Committee and the Northrop Grumman CEO
based on an assessment of the financial performance against pre-determined performance criteria and
individual performance.
The annual incentive targets below were established for the HII NEOs:
2010 Annual Incentive Targets
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|
|
Target
|
|
Payout Range
|
Name
|
|
Title
|
|
Payout%
|
|
% of Salary
|
C. Michael Petters
|
|
President and Chief Executive Officer
|
|
|
75
|
%
|
|
0% 150%
|
Barbara A. Niland
|
|
Vice President and Chief Financial Officer
|
|
|
40
|
%
|
|
0% 80%
|
Irwin F. Edenzon
|
|
Vice President and General Manager Gulf Coast Operations
|
|
|
45
|
%
|
|
0% 90%
|
Matthew J. Mulherin
|
|
Vice President and General Manager Newport News Operations
|
|
|
45
|
%
|
|
0% 90%
|
William R. Ermatinger
|
|
Vice President and Chief Human Resources Officer
|
|
|
40
|
%
|
|
0% 80%
|
For 2010, our Presidents bonus was evaluated based on the Northrop Grumman Company
Performance Factor (CPF) and an Individual Performance Factor (IPF). For the remaining HII
NEOs, bonuses were evaluated based on the Northrop Grumman Company Performance Factor, our Sector
Performance Factor (SPF), and an IPF. Within the annual incentive formula described below, the
CPF and SPF were weighted equally (50% each) and could range from 0% to 200%. The IPF could range
0-125%. Final bonus award payments were capped at 200% of an individuals target bonus.
111
Annual incentive formula for 2010:
Base Salary x Target % = Target Bonus
Target Bonus x CPF x IPF = Final Bonus Award *
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*
|
|
For elected officers including our President, as a member of Northrop Grummans
Corporate Policy Council, the CPF within the formula is weighted 100% on Northrop
Grumman company performance. For the other NEOs, the CPF equals Final Company Financial
Metric (50%) plus Final Sector Score (50%). The Final Sector Score is comprised of
sector level performance of the same financial and non-financial metrics explained
below.
|
At the conclusion of the calendar year, an annual performance evaluation for each HII
NEO, other than our President, was conducted by the Northrop Grumman CEO who reviewed and approved
the IPFs for those HII NEOs. The IPF was determined based upon consideration of the following
factors:
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Financial performance
|
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|
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|
Performance on non-financial goals, including company-level goals and specific
operating factors
|
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|
Strategic leadership and vision
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|
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|
Program execution and performance
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|
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|
Customer relationships
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|
Peer and employee relationships
|
The Northrop Grumman CEO and Northrop Grumman Compensation Committee reviewed all performance
information, as well as the comparison to market data, and approved bonus amounts. As previously
noted, the Northrop Grumman CEO approved bonus amounts for all HII NEOs (other than our President)
and the Northrop Grumman Compensation Committee approved our Presidents final bonus amount. The
Northrop Grumman Compensation Committee approved the final financial performance factors (CPF and
SPF) that were used to determine the annual incentive payout. The Northrop Grumman Compensation
Committee also has full discretion to make adjustments to the CPF and/or SPF if it determines such
adjustment is warranted. For example, in instances where our performance has been impacted by
material, unusual or non-recurring gains and losses, changes in law, regulations or in generally
accepted accounting principles, accounting charges or other extraordinary events not foreseen at
the time the targets were set. The Northrop Grumman Compensation Committee has also adjusted
payouts downward in the past despite performance targets having been met when it determined
circumstances existed that had a negative impact on us and they were not reflected in the
performance calculation. Actual adjustments for 2010 are described below.
2010 Annual Incentive Goals and Results
For the 2010 performance year, the Northrop Grumman Compensation Committee determined that the
evaluation of Northrop Grumman performance would be based on achievement of both financial and
non-financial metric goals. The final Northrop Grumman CPF equaled the financial metric score
multiplied by the assessment for the non-financial metrics which were scored in the range of 80% to
120%. The Northrop Grumman Compensation Committee assessed non-financial performance with a
recommendation from the Northrop Grumman CEO.
The three Northrop Grumman financial metrics focused on capturing new business awards,
expanding the current pension-adjusted operating margin rate and on free cash flow conversion
(calculated as free cash flow before discretionary pension funding divided by net income). The six
Northrop Grumman non-financial metrics were customer satisfaction, diversity, engagement
(attrition), environmental, quality and safety, measured as follows:
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|
|
Customer Satisfaction
measured in terms of feedback received from customers
including customer generated performance scores, award fees, as well as verbal and
written feedback. For example, Department of Defense contracts that meet certain
thresholds are required to provide feedback through the Contractor Performance
Assessment Reporting System.
|
|
|
|
|
Diversity
measured in terms of improving representation of females and people of
color in mid-level and senior-level management positions with respect to peer
benchmarks.
|
|
|
|
|
Engagement (attrition)
measured in terms of voluntary attrition, which is an
indicator of engagement levels within an organization as companies with high employee
engagement retain a more motivated and productive workforce.
|
|
|
|
|
Environmental
measured in terms of the reduction, in metric tons, of greenhouse
gases emissions.
|
112
|
|
|
Quality
measured using program-specific objectives available within each of
Northrop Grummans sectors. This metric integrates available measures of quality
including defect rates, process quality, supplier quality, planning quality and other
appropriate criteria for program type and phase.
|
|
|
|
|
Safety
measured by Total Case Rate, and defined as the number of OSHA recordable
injuries (any medical treatment requiring more than first aid) per 100 full-time
employees.
|
The score for operating margin is adjusted based upon the amount of earnings charges recorded
for the year. The adjustment can increase the score by a maximum of five percentage points if the
actual operating margin rate is equal to or above target and minimal charges are recorded or
decrease the score by up to five percentage points if significant charges are recorded and the
target operating margin rate is not achieved. Each financial metric/goal is described below and
shown with its relative weighting.
Northrop Grumman Financial Goals that were Applicable to our President
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2010 Actual
|
|
|
|
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|
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Threshold
|
|
Target
|
|
Maximum
|
|
Performance
|
Metric/Goal
|
|
Weighting
|
|
Performance
|
|
Performance
|
|
Performance
|
|
(as adjusted)
|
New Business Awards (Amounts in
Billions)
|
|
|
20
|
%
|
|
$
|
27.0
|
|
|
$
|
30.0
|
|
|
$
|
37.0
|
|
|
$
|
31.8
|
|
Pension-Adjusted Operating Margin Rate *
|
|
|
40
|
%
|
|
|
8.0
|
%
|
|
|
9.0
|
%
|
|
|
10.0
|
%
|
|
$
|
9.3
|
%
|
Free Cash Flow Conversion
|
|
|
40
|
%
|
|
|
80
|
%
|
|
|
100
|
%
|
|
|
135
|
%
|
|
|
119
|
%
|
|
|
|
*
|
|
This goal is adjusted for net FAS/CAS pension expense.
|
For 2010, the Northrop Grumman Compensation Committee used its discretion to adjust the
financial metric scores for four unusual, non-recurring items: financial impacts resulting from the
shipbuilding strategic actions; IRS tax settlement for years 2004 through 2006; cash tender offer
for Northrop Grumman debt securities; and the purchase of the new headquarters facility in
Virginia. Three of the adjustments increased the score and one of the adjustments decreased the
score.
After adjusting for the four unusual items described above, the Northrop Grumman adjusted
financial performance score was 142%. For non-financial metrics, the calculated score was 107%.
After incorporating performance on the three financial metrics and six non-financial metrics, the
final CPF for Northrop Grumman was 152%. Based on an overall assessment of performance at Northrop
Grumman, the Northrop Grumman CEO recommended to the Northrop Grumman Compensation Committee a
company performance score of 150%. After reviewing Northrop Grummans overall performance, the
Northrop Grumman Compensation Committee approved a final CPF of 150%.
Northrop Grumman non-financial goals applicable to our President were based on Company-level
performance, including customer satisfaction, diversity, engagement (attrition), environmental,
quality and safety, as described above. Based on an assessment of the adjusted company-level
financial performance, the company-level non-financial performance metrics, and his individual
performance factor, the Northrop Grumman Compensation Committee determined a score of 161% for our
President for 2010. The calculation resulted in an annual incentive payout of $900,000 for the 2010
performance year.
Financial Goals that were Applicable to the Remaining HII NEOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Actual
|
|
|
|
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Performance
|
Metric/Goal
|
|
Weighting
|
|
Performance
|
|
Performance
|
|
Performance
|
|
(as adjusted)
|
New Business Awards
(Amounts in Billions)
|
|
|
20
|
%
|
|
$
|
3.4
|
|
|
$
|
3.8
|
|
|
$
|
4.6
|
|
|
$
|
5.4
|
|
Operating Margin Rate
|
|
|
40
|
%
|
|
|
5.9
|
%
|
|
|
6.9
|
%
|
|
|
7.9
|
%
|
|
|
6.7
|
%
|
Free Cash Flow Conversion *
|
|
|
40
|
%
|
|
|
50
|
%
|
|
|
65
|
%
|
|
|
85
|
%
|
|
|
92
|
%
|
|
|
|
*
|
|
Defined as free cash flow divided by operating margin where free cash flow is adjusted for
net external interest expense and foreign tax and operating margin is adjusted for purchased
intangible amortization and intersegment margin.
|
AIP scores for our NEOs other than our President are based on the HII Final AIP score
times an individual performance factor, with the HII Final AIP score based on the following
calculation:
HII Final AIP Score = 50% x (Northrop Grumman financial metric score) + 50% x (HII score)
HII Score = (HII financial metric score) x (HII non-financial metric score + HII
operating factor (range of 80 120%))
Within the annual incentive formula for the HII score, the operating factor is based on our
performance as measured against a set of pre-approved HII specific objectives that consist of the
following priorities: HII improvement projects,
113
human capital, achieving first time quality, supply chain management, facilities and
technology, and financial predictability. Consistent with the calculation of the Northrop Grumman
financial metric score, our operating margin score is adjusted based upon the amount of HII
earnings charges taken during the year. The HII non-financial metrics are the same as those for the
company described above.
After adjusting for the Shipbuilding strategic actions (wind down of Shipbuilding activities
in Avondale, Louisiana), the adjusted HII financial metric score was 150%. The combined assessment
for the non-financial metrics and HII specific objectives was 118% resulting in a HII score of
177%. A final HII AIP score of 160% was calculated by taking 50% of the company financial metric
score (142%) and 50% of the HII score (177%). For 2010, the Compensation Committee accepted the
CEOs recommendation that the HII Final AIP score be set at 160%, including an adjustment to the
HII financial metrics for non-recurring strategic actions in Shipbuilding, and recognizing the
success of the HII team in addressing the non-financial goals in Shipbuilding.
Details on the range of bonuses that could have been payable based on 2010 performance are
provided in the Grants of Plan-Based Awards table. Actual bonus payouts for 2010 performance are
provided in the Summary Compensation Table.
Long-Term Incentive Compensation
2010 Stock Option and Restricted Performance Stock Right Award
During 2010, each of the HII NEOs was granted long-term incentive awards in the form of
Northrop Grumman equity grants. With respect to the amount of long-term incentive awards granted to
the HII NEOs in 2010, the Northrop Grumman Compensation Committee determined the target award value
for our President, and the Northrop Grumman CEO determined the target award values for the other
HII NEOs based on the market analysis discussed in this Compensation Discussion and Analysis,
applying value-based guidelines which focus on the value delivered versus the number of shares
delivered (share-based guidelines). The Northrop Grumman Compensation Committee and Northrop
Grumman CEO believes that value-based guidelines more effectively allow for the delivery of target
opportunities that are consistent with median awards given to individuals holding comparable
positions at peer companies.
2010 Long-Term Incentive Target Value
|
|
|
|
|
|
|
|
|
|
|
Target Value
|
Name
|
|
Title
|
|
(% of Base Salary)
|
C. Michael Petters
|
|
President and Chief Executive Officer
|
|
|
248
|
%
|
Barbara A. Niland
|
|
Vice President and Chief Financial Officer
|
|
|
114
|
%
|
Irwin F. Edenzon
|
|
Vice President and General Manager Gulf Coast Operations
|
|
|
122
|
%
|
Matthew J. Mulherin
|
|
Vice President and General Manager Newport News Operations
|
|
|
122
|
%
|
William R. Ermatinger
|
|
Vice President and Chief Human Resources Officer
|
|
|
83
|
%
|
In 2010, the Northrop Grumman Compensation Committee granted 50% of the target value in
the form of stock options and 50% in the form of RPSRs to our President. The Northrop Grumman
Compensation Committee believes it is important to utilize performance-based units such as RPSRs in
combination with stock options, as this long-term incentive combination focuses on creating
stockholder value. Stock options granted to our President in 2010 vest in three annual installments
of 33% each, becoming fully vested after three years, and expiring after seven years. For the other
NEOs, the Northrop Grumman CEO approved awards 100% in the form of RPSRs.
The Northrop Grumman Compensation Committee evaluates RPSR performance requirements each year
to ensure they are aligned with Northrop Grummans objectives. For the 2010 grant, the Northrop
Grumman Compensation Committee reviewed the performance metrics with management and determined that
for elected officers of Northrop Grumman, including our President, performance would be measured in
terms of relative Total Shareholder Return (TSR). TSR is measured by comparing Northrop Grumman
share performance over a three-year period to the performance of top aerospace and defense
companies in the United States and Europe, and to the S&P Industrials Index which comprises
companies within the S&P 500 classified as Industrials.
For the other HII NEOs, financial performance would be measured based on the Return On Net
Assets (RONA) adjusted for pension benefits and the pension-adjusted operating margin rate
achieved at the end of the three-year period. Final performance determination is an equally
weighted sum of RONA and pension-adjusted operating margin rate results. Target performance is
based upon achieving a RONA of 14% and achieving a pension-adjusted operating margin rate of 10% at
the end of 2012.
Shares that ultimately are vested and paid out under an RPSR award to the executive can vary
from 0% to 200% of the original number of shares granted. RPSR awards may be paid in shares, cash
or a combination of shares and cash. Dividends are not paid or earned on RPSR awards. More details
on the 2010 stock option and RPSR grants to the President and HII NEOs are provided in the Grants
of Plan-Based Awards Table.
114
Recently Completed RPSR Performance Period (2008 2010)
During the first quarter of each year, the Northrop Grumman Compensation Committee reviews
Northrop Grummans financial performance achievement against established goals to determine payout
multiples for RPSRs with a performance period that ended in the prior year. The Northrop Grumman
Compensation Committee has authority to make adjustments to the payout multiple if it determines
such adjustment is warranted. For example, in instances where our performance has been impacted by
material, unusual or non-recurring gains and losses, changes in law, regulations or in generally
accepted accounting principles, accounting charges or other extraordinary events not foreseen at
the time the targets were set, the Northrop Grumman Compensation Committee has used discretion in
the past to modify the final awards. Individual performance is not relevant to the amount of the
final payout of RPSRs.
At the February 15, 2011 meeting, the Northrop Grumman Compensation Committee reviewed
performance for the January 1, 2008 to December 31, 2010 RPSR performance period. The final award
for this grant of RPSRs was based on an equally weighted sum of RONA and cumulative,
pension-adjusted, operating margin.
The amount of cumulative pension adjusted operating margin over the three year period was less
than the threshold amount, resulting in a score of 0%, primarily because of the $3.1 billion
goodwill impairment charge taken in 2008. RONA exceeded the maximum amount, resulting in a score of
200%. Based on equal weighting for each metric, the final performance for the 2008 grant was
determined to be 100%.
Retention Grants for Key Employees
In January 2011, the Northrop Grumman Compensation Committee approved, for recommendation to
the HII board of directors, special long-term incentive stock grants in the form of restricted
stock rights (RSRs) for the HII NEOs, including our President. These grants are contingent upon
the completion of the spin-off. The purpose of these grants is to ensure overall business
continuity and a successful transition from Northrop Grumman to Huntington Ingalls Industries. The
HII NEOs will be granted RSRs with the following approximate values on the date of grant: Mr.
Petters, $2,500,000; Ms. Niland, $1,000,000; Mr. Edenzon, $1,000,000; Mr. Mulherin, $1,000,000; Mr.
Ermatinger, $750,000. These grants will be made in HII shares upon the date of the distribution,
with the number of shares based on the closing price on that date, and will vest 100% after three
years.
Treatment of Long-Term Incentive Awards Following the Spin-Off
In connection with the spin-off, HII will establish an equity incentive plan to provide for
awards with respect to shares of HIIs common stock. At the time of the distribution, the exercise
price of and number of shares subject to any outstanding option to purchase Northrop Grumman stock,
as well as the number of shares subject to any RPSRs, RSRs or other Northrop Grumman equity award,
held by HIIs current and former employees on the distribution date will be adjusted to reflect the
value of the distribution such that the intrinsic value of such awards at the time of separation is
held constant. The performance of each award will be determined as of December 31, 2010 and fixed
with a payout during the normal cycle in shares of HII stock at the end of the performance period.
The awards will continue under HII for the remaining portion of each respective performance period.
In addition, existing performance criteria applicable to such awards will be modified appropriately
to reflect the spin-off such that the remaining portion of each grant will be based on HII
performance metrics. The equity awards held by the HII NEOs will be adjusted in the same manner as
the awards held by our other current and former employees.
Other Benefits
This section describes the other benefits HII NEOs received in 2010. These benefits were
non-performance related and were designed to provide a market competitive package for purposes of
attracting and retaining the executive talent needed to achieve our business objectives. These
included benefits under broad-based retirement plans, as well as supplemental executive benefits
provided in addition to those provided to all other employees. These supplemental benefits included
supplemental pension plans, enhanced health and welfare benefits and the Special Officers Retiree
Medical Plan (SORMP) for our President offered at retirement.
Defined Benefit Retirement Plans
Northrop Grumman maintains tax-qualified defined benefit plans that covered the HII NEOs and
the majority of our workforce. Compensation, age and service factor into the amount of the benefits
provided under the plans. Thus, the plans were structured to reward and retain employees of long
service and to recognize higher performance levels as evidenced by increases in annual pay.
Northrop Grumman maintains supplemental defined benefit plans that covered the HII NEOs. These
plans (1) provided benefits that would have been provided under the tax-qualified plans but for
limitations imposed by the
115
Internal
Revenue Code and (2) provided larger accruals for elected and appointed officers in
recognition of the higher levels of responsibility for such executives. Such benefits are common in
the aerospace and defense industry.
Although benefits were paid from different plans due to plan and legal requirements, Northrop
Grumman imposed an overall cap on all the pension benefits which included the HII NEOs. Each
officers total pension benefit under all pension plans combined was limited to no more than 60% of
his or her final average pay. Additional information on these defined benefit retirement plans and
the cap on officer pension benefits is provided in the Pension Benefits Table.
Defined Contribution Savings Plans
Northrop Grumman maintains tax-qualified retirement savings plans that covered the HII NEOs
and the majority of our workforce. Participating employees contributed amounts from their pay to
the plans, and Northrop Grumman generally provides a matching contribution.
Northrop Grumman maintains two supplemental savings plans that covered all eligible employees,
including the HII NEOs. The Savings Excess Plan allowed the HII NEOs and all other eligible
employees to defer compensation beyond the limits of the tax-qualified plans and receive a matching
contribution. The HII NEOs and all other eligible employees could also defer compensation under the
Deferred Compensation Plan. No match was provided under the Deferred Compensation Plan, which was
closed to new contributions as of December 31, 2010.
Additional information about the Savings Excess and Deferred Compensation Plans is provided in
the Nonqualified Deferred Compensation Table.
Special Officer Retiree Medical Plan
(SORMP)
The SORMP was closed to new participants in 2007. Only our President was a participant in the
SORMP and was entitled to retiree medical benefits pursuant to the terms of the SORMP. The coverage
was essentially a continuation of the executive medical benefits plus retiree life insurance.
Additional information about the SORMP is provided in the Retiree Medical Arrangement section in
the attached tables.
Perquisites
HII NEOs were eligible for certain executive perquisites which included financial planning,
income tax preparation, physical exams and personal liability insurance. While almost all other
executive perquisites have been eliminated, the perquisites that remained were the most common
within the marketplace and were viewed as an important component of our total compensation package.
On an annual basis, Northrop Grumman Management and the Northrop Grumman Compensation Committee
reviewed both perquisites and benefits for companies participating in the Aon Hewitt market-based
database.
Use of Northrop Grumman Aircraft
Our President was able to utilize Northrop Grumman aircraft for business and personal travel.
Throughout the year, if any HII NEO used Northrop Grumman aircraft for personal travel, the costs
for such travel were imputed as income and subject to the appropriate tax reporting according to
IRS regulations and this benefit was not grossed up.
Severance and Change-in-Control Benefits
Northrop Grumman has an established severance plan for elected and appointed officers. Prior
to December 31, 2010, Northrop Grumman also maintained a change-in-control Special Agreement for
certain elected officers, including our President. During its March 2010 meeting, the Northrop
Grumman Compensation Committee approved the termination of all change-in-control agreements and
plans at Northrop Grumman as of December 31, 2010, including the Special Agreement previously in
effect for our President.
The severance plan provided compensation and benefits for a reasonable period if participants
are terminated.
Northrop Grummans Severance Plan for Elected and Appointed Officers was implemented in August
2003, and offers severance to officers who qualify and are approved to receive such treatment.
Generally, executives are unemployed for a time period following a termination, and the purpose of
the severance plan was to help bridge an executives income and health coverage during this period.
Effective October 1, 2009, the Northrop Grumman Compensation Committee approved a modification to
severance benefits for our President and reduced the severance benefits from two years of salary
and bonus to eighteen months. All other HII NEOs were eligible for severance benefits equal to one
year of base salary + target bonus. In general, these benefits were consistent with severance
multiples and benefit continuation periods in the market. The severance benefits that are provided
to the HII NEOs under the Northrop Grumman Severance Plan for Elected and Appointed Officers are
the following:
116
For our President
|
|
|
Lump sum cash payment = 1
1
/
2
x (Base Salary + Target
Bonus)
|
|
|
|
|
Continue to pay portion of medical & dental benefits for 18 months concurrent with
COBRA coverage. The employee is responsible for his/her portion
|
|
|
|
|
Outplacement assistance up to 1 year after termination
|
|
|
|
|
Continued reimbursement of eligible financial planning expenses for the year of
termination and the following year, up to a maximum of $15,000 per year
|
For the HII NEOs
|
|
|
Lump sum cash payment = 1 x (Base Salary + Target Bonus)
|
|
|
|
|
Continue to pay portion of medical & dental benefits for 12 months concurrent with
COBRA coverage. The employee is responsible for his/her portion
|
|
|
|
|
Outplacement assistance up to 1 year after termination
|
|
|
|
|
Continued reimbursement of eligible financial planning expenses for the year of
termination and the following year, up to a maximum of $5,000 per year
|
Additional information on the benefits provided under the severance plan is provided in the
Severance/Change-in-Control section of the tables. None of the HII NEOs will be entitled to any
severance benefits under the Northrop Grumman Severance Plan for Elected and Appointed Officers as
a result of the spin-off.
SECTION III
Policies and Procedures
Tax Deductibility of Pay
Section 162(m) of the Internal Revenue Code generally limits the annual tax deduction to $1
million per person for compensation paid to a public companys CEO and its next three highest-paid
executive officers (other than the CFO). Qualifying performance-based compensation is not subject
to the deduction limit. For 2010, none of the HII NEOs was within the group of Northrop Grumman
executive officers that was subject to the Code Section 162(m) limitations. Following the spin-off,
we intend to consider the application of the Code Section 162(m) limits. However, our compensation
decisions will be made, among other things, to ensure market competitive rates are maintained and
retention of critical executives is achieved. Sometimes these decisions may result in compensation
amounts being non-deductible under Code Section 162(m).
Grant Date for Equity Awards
Historically, the annual grant cycle for stock options and other equity awards occurred at the
same time as salary increases and annual incentive grants. This typically occurred in February each
calendar year. This timing allowed management and the Northrop Grumman Compensation Committee and
the Northrop Grumman CEO to make decisions on three compensation components at the same time,
utilizing a total compensation perspective. The Northrop Grumman Compensation Committee and the
Northrop Grumman CEO reviewed and approved long-term incentive grants in February and established
the grant price for stock options on the date of the Northrop Grumman Compensation Committee
meeting. The grant price was equal to the closing price of Northrop Grummans stock on the date of
grant.
At its February 2010 meeting, the Northrop Grumman Compensation Committee reviewed and
approved the long-term incentives for our President, and long-term incentives for the remaining HII
NEOs were approved by the Northrop Grumman CEO under his delegation from the Northrop Grumman
Compensation Committee. The 2010 grant was approved after the filing of Northrop Grummans Form
10-K for 2009 on February 9, 2010, as the Northrop Grumman Compensation Committee and Northrop
Grumman CEO believe it is important to have the grant occur following the release of detailed
financial information about the company. This approach allows for the stock price to be fully
reflective of the markets consideration of material information disclosed in Northrop Grummans
Form 10-K.
Stock Ownership Guidelines
Northrop Grumman maintains stock ownership guidelines which apply to the HII NEOs. These
guidelines are intended to further promote alignment of management and stockholder interests. These
guidelines required that the HII NEOs and other officers own stock denominated as a multiple of
their annual salaries which could be accumulated over a five-year period from the date of hire or
promotion into an officer position.
117
The Stock Ownership guidelines were as follows:
|
|
|
HII President: 3 x base salary
|
|
|
|
|
Other HII NEOs: 1
1
/
2
x base salary
|
Shares that satisfy the stock ownership guidelines included:
|
|
|
Stock owned outright by an officer
|
|
|
|
|
Restricted Stock Rights, whether or not vested
|
|
|
|
|
Value of equivalent shares held in the Northrop Grumman Savings Plan, the Northrop
Grumman Financial Security and Savings Program and the Northrop Grumman Savings Excess
Plan.
|
Stock options and unvested RPSRs were not included in calculating ownership until they were
converted to actual shares owned.
During its September 2010 meeting, the Northrop Grumman Compensation Committee performed its
annual review of the ownership of all elected officers including our President. The Northrop
Grumman CEO performed a review of the stock ownership holdings of Northrop Grummans Appointed
Officers; these included the remaining HII NEOs. Officers whose current stock ownership fell below
certain thresholds were asked to provide a plan for achieving compliance. The Northrop Grumman
Compensation Committee and the Northrop Grumman CEO were satisfied with the efforts of all officers
to achieve compliance.
In September 2008, the Northrop Grumman Compensation Committee approved a stock trading
program under SEC Rule 10b5-1 for purposes of more effectively managing insider sales of stock. The
plan covered all the HII NEOs and other officers. An insider could establish a plan during any
quarterly window period for the next window period. The duration of the plan was one year.
Executive Compensation Recoupment
Ethical behavior and integrity remain an important priority for the company leadership. In
support of this, the Northrop Grumman Compensation Committee approved an executive compensation
recoupment policy (also known as a clawback policy) at its December 2008 meeting that became
effective in the first quarter of 2009, and was subsequently amended in March 2010. The policy
applied to our NEOs and all other employees at the level of Vice President or higher. When first
adopted, Northrop Grumman could recover annual and long-term incentive compensation when incentive
payments had been based on financial results that were later restated due to misconduct.
In the first quarter of 2010, the Northrop Grumman Compensation Committee approved
strengthening the policy to allow for the recovery of incentive compensation payments based on
restated financial results regardless of whether misconduct was determined to have been the cause
of the restatement. The Northrop Grumman Compensation Committee believed this broader definition
governing the basis for incentive compensation recoupment would better serve shareholder interests
and those of Northrop Grumman.
The Northrop Grumman Compensation Committee was responsible for investigating potential
payments based on inaccurate financial results that were later restated, and determining whether
any incentive payments are to be recovered.
Stock Holding Requirement
Effective with February 2010 awards, Northrop Grumman implemented a new stock holding policy
for elected and appointed officers further emphasizing the importance of sustainable performance
and appropriate risk management behaviors. This new policy worked in conjunction with the stock
ownership requirements and required all officers (Corporate Policy Council members and vice
presidents) to hold, for a period of three years, 50% of the net shares (after taxes) received from
RPSR payouts and stock option exercises. This change was effective with the 2010 grants and for
grants made in subsequent years. Grants to employees prior to 2010 are not subject to these holding
requirements. These holding requirements will generally continue upon termination and retirement
for a one-year period after separation from the company, affecting any stock vesting or option
exercises in that one-year period. Stock vesting or options exercised after the one-year
anniversary of retirement or termination will not be subject to the holding requirement.
118
2010 Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Non-Equity Incentive
|
|
Compensation
|
|
All Other
|
|
|
|
|
|
|
|
|
Salary
(1)
|
|
|
|
|
|
Awards
(2)
|
|
Awards
(2)
|
|
Plan Compensation
(3)
|
|
Earnings
(4)
|
|
Compensation
(5)
|
|
Total
|
Name & Principal Position
|
|
Year
|
|
($)
|
|
Bonus ($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
C. Michael Petters
|
|
|
2010
|
|
|
|
716,346
|
|
|
|
0
|
|
|
|
2,208,350
|
|
|
|
1,400,034
|
|
|
|
900,000
|
|
|
|
434,140
|
|
|
|
62,009
|
|
|
|
5,720,879
|
|
President and Chief
|
|
|
2009
|
|
|
|
572,788
|
|
|
|
0
|
|
|
|
1,490,069
|
|
|
|
861,877
|
|
|
|
350,000
|
|
|
|
593,065
|
|
|
|
76,789
|
|
|
|
3,944,588
|
|
Executive Officer
|
|
|
2008
|
|
|
|
566,827
|
|
|
|
0
|
|
|
|
2,379,608
|
|
|
|
946,494
|
|
|
|
603,750
|
|
|
|
490,672
|
|
|
|
73,803
|
|
|
|
5,061,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barbara A. Niland
|
|
|
2010
|
|
|
|
332,875
|
|
|
|
0
|
|
|
|
1,043,265
|
|
|
|
0
|
|
|
|
267,800
|
|
|
|
450,950
|
|
|
|
50,779
|
|
|
|
2,145,669
|
|
Vice President and
|
|
|
2009
|
|
|
|
312,115
|
|
|
|
0
|
|
|
|
920,387
|
|
|
|
0
|
|
|
|
110,000
|
|
|
|
545,626
|
|
|
|
69,391
|
|
|
|
1,957,519
|
|
Chief Financial Officer
|
|
|
2008
|
|
|
|
297,019
|
|
|
|
0
|
|
|
|
652,775
|
|
|
|
0
|
|
|
|
174,300
|
|
|
|
376,775
|
|
|
|
76,442
|
|
|
|
1,577,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irwin F. Edenzon
|
|
|
2010
|
|
|
|
368,723
|
|
|
|
0
|
|
|
|
1,264,864
|
|
|
|
0
|
|
|
|
306,798
|
|
|
|
215,018
|
|
|
|
53,168
|
|
|
|
2,208,571
|
|
Vice President and
|
|
|
2009
|
|
|
|
347,115
|
|
|
|
0
|
|
|
|
1,051,902
|
|
|
|
51,959
|
|
|
|
140,000
|
|
|
|
340,778
|
|
|
|
60,144
|
|
|
|
1,991,898
|
|
General Manager Gulf Coast Operations
|
|
|
2008
|
|
|
|
322,231
|
|
|
|
0
|
|
|
|
606,210
|
|
|
|
0
|
|
|
|
199,200
|
|
|
|
266,050
|
|
|
|
101,649
|
|
|
|
1,495,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew J. Mulherin
|
|
|
2010
|
|
|
|
368,723
|
|
|
|
0
|
|
|
|
1,264,864
|
|
|
|
0
|
|
|
|
306,798
|
|
|
|
243,700
|
|
|
|
62,712
|
|
|
|
2,246,797
|
|
Vice President and
|
|
|
2009
|
|
|
|
347,115
|
|
|
|
0
|
|
|
|
1,051,902
|
|
|
|
51,959
|
|
|
|
140,000
|
|
|
|
273,116
|
|
|
|
73,885
|
|
|
|
1,937,977
|
|
General Manager Newport News Operations
|
|
|
2008
|
|
|
|
328,040
|
|
|
|
0
|
|
|
|
652,775
|
|
|
|
0
|
|
|
|
199,200
|
|
|
|
216,647
|
|
|
|
75,601
|
|
|
|
1,472,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Ermatinger
|
|
|
2010
|
|
|
|
286,017
|
|
|
|
0
|
|
|
|
664,874
|
|
|
|
0
|
|
|
|
207,088
|
|
|
|
256,136
|
|
|
|
57,304
|
|
|
|
1,471,419
|
|
Vice President and
|
|
|
2009
|
|
|
|
267,471
|
|
|
|
0
|
|
|
|
670,603
|
|
|
|
0
|
|
|
|
90,000
|
|
|
|
309,709
|
|
|
|
75,247
|
|
|
|
1,413,030
|
|
Chief Human
Resources Officer
|
|
|
2008
|
|
|
|
257,500
|
|
|
|
0
|
|
|
|
388,171
|
|
|
|
0
|
|
|
|
124,500
|
|
|
|
256,791
|
|
|
|
75,263
|
|
|
|
1,102,225
|
|
Footnotes
:
(1)
|
|
The amounts in this column include amounts deferred under the savings and nonqualified
deferred compensation plans.
|
|
(2)
|
|
The dollar value shown in these columns is equal to the grant-date fair value of equity
awards made during the year. For assumptions used in calculating these numbers, see Footnote 4
on the Grants of Plan-Based Awards table. Amounts for 2008 have been adjusted to reflect
expected performance on date of grant. The maximum grant date value (200%) of 2010 stock
awards for each NEO is listed below:
|
|
|
|
C. Michael Petters $3,454,480
|
|
|
|
|
Barbara A. Niland $1,605,023
|
|
|
|
|
Irwin F. Edenzon $1,945,944
|
|
|
|
|
Matthew J. Mulherin $1,945,944
|
|
|
|
|
William R. Ermatinger $1,022,883
|
(3)
|
|
For 2009 and 2008, these amounts were paid under Northrop Grummans annual bonus plan based
on performance achieved during the prior year, as described in the Compensation Discussion and
Analysis. 2010 bonus information was approved by the Northrop Grumman Compensation Committee
on February 15, 2011. The amounts in this column include amounts deferred under the savings
and nonqualified deferred compensation plans.
|
|
(4)
|
|
There were no above-market earnings in the nonqualified deferred compensation plans (see the
description of these plans under the Nonqualified Deferred Compensation table). The amounts in
this column relate solely to the increased present value of the executives pension plan
benefits (see the description of these plans under the Pension Benefits table).
|
|
(5)
|
|
The 2010 amount listed in this column for Mr. Petters includes medical, dental, life and
disability premiums ($47,192), company contributions to Northrop Grumman defined contribution
plans ($9,800), personal liability insurance ($541) and personal and dependent travel
including company aircraft ($4,476).
|
|
|
|
The 2010 amount listed in this column for Ms. Niland includes medical, dental, life and
disability premiums ($33,699), company contributions to Northrop Grumman defined contribution
plans ($16,533), personal liability insurance ($500) and personal and dependent travel
including company aircraft ($47).
|
119
|
|
The 2010 amount listed in this column for Mr. Edenzon includes medical, dental, life and
disability premiums ($33,652), company contributions to Northrop Grumman defined contribution
plans ($18,066), financial planning/income tax preparation ($950) and personal liability
insurance ($500).
|
|
|
|
The 2010 amount listed in this column for Mr. Mulherin includes medical, dental, life and
disability premiums ($43,896), company contributions to Northrop Grumman defined contribution
plans ($14,316), financial planning/income tax preparation ($4,000) and personal liability
insurance ($500).
|
|
|
|
The 2010 amount listed in this column for Mr. Ermatinger includes medical, dental, life and
disability premiums ($42,592), company contributions to Northrop Grumman defined contribution
plans ($13,752), financial planning/income tax preparation ($460) and personal liability
insurance ($500).
|
Method for Calculating Perquisite Value
The following method was used to calculate the value of personal use of Northrop Grumman
aircraft described in the paragraphs above. Northrop Grumman calculates the incremental cost of
each element, which includes trip-related crew hotels and meals, in-flight food and beverages,
landing and ground handling fees, hourly maintenance contract costs, hangar or aircraft parking
costs, fuel costs based on the average annual cost of fuel per mile flown, and other smaller
variable costs. Fixed costs that would be incurred in any event to operate Northrop Grumman
aircraft (e.g., aircraft purchase costs, maintenance not related to personal trips, and flight crew
salaries) are not included. The amount related to the loss of tax deduction to Northrop Grumman on
account of personal use of corporate aircraft under the Internal Revenue Code is not included.
120
2010 Grants of Plan-Based Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
Option Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under
|
|
Estimated Future Payouts Under Equity
|
|
Shares of
|
|
Securities
|
|
Exercise or
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
Non-Equity Incentive Plan Awards
(1)
|
|
Incentive Plan Awards
(2)
|
|
Stock or
|
|
Underlying
|
|
Base Price of
|
|
Stock and
|
|
|
|
|
|
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Units
|
|
Options
(3)
|
|
Option Awards
|
|
Option
|
Name & Principal Position
|
|
Grant Type
|
|
Grant Date
|
|
($)
|
|
($)
|
|
($)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
($/Sh)
|
|
Awards
(4)
|
C. Michael Petters
|
|
Incentive Plan
|
|
|
|
|
|
|
0
|
|
|
|
562,500
|
|
|
|
1,125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President and Chief
|
|
RPSR
|
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
29,000
|
|
|
|
58,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,208,350
|
|
Executive Officer
|
|
Options
|
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,700
|
|
|
|
59.56
|
|
|
|
1,400,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barbara A. Niland
|
|
Incentive Plan
|
|
|
|
|
|
|
0
|
|
|
|
133,900
|
|
|
|
267,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President and Chief Financial Officer
|
|
RPSR
|
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
13,474
|
|
|
|
26,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,043,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irwin F. Edenzon
|
|
Incentive Plan
|
|
|
|
|
|
|
0
|
|
|
|
166,860
|
|
|
|
333,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President and General
|
|
RPSR
|
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
16,336
|
|
|
|
32,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,264,864
|
|
Manager Gulf Coast Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew J. Mulherin
|
|
Incentive Plan
|
|
|
|
|
|
|
0
|
|
|
|
166,860
|
|
|
|
333,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President and General
|
|
RPSR
|
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
16,336
|
|
|
|
32,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,264,864
|
|
Manager Newport News Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Ermatinger
|
|
Incentive Plan
|
|
|
|
|
|
|
0
|
|
|
|
115,051
|
|
|
|
230,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President and Chief
|
|
RPSR
|
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
8,587
|
|
|
|
17,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
664,874
|
|
Human Resources Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footnotes:
|
|
|
(1)
|
|
Amounts in these columns show the range of payouts that was possible under Northrop Grummans
annual bonus plan based on performance during 2010, as described in the Compensation
Discussion and Analysis.
|
|
(2)
|
|
These amounts relate to RPSRs granted in 2010 under the 2001 Long-Term Incentive Stock Plan.
Each RPSR represents the right to receive a share of Northrop Grummans common stock upon
vesting of the RPSR. For the President, the RPSRs may be earned based on relative Total
Shareholder Return over a three-year period commencing on January 1, 2010 and ending December
31, 2012. For other NEOs, the RPSRs may be earned based on Northrop Grummans Operating Margin
(OM) and RONA performance over a three-year performance period commencing January 1, 2010
and ending December 31, 2012. The payout will occur in early 2013 and may range from 0% to
200% of the rights awarded. Earned RPSRs may be paid in shares, cash or a combination of
shares and cash. An executive must remain employed through the performance period to earn an
award, although pro-rata vesting results if employment terminates earlier due to retirement,
death or disability. See the Severance/Change-in-Control section for treatment of RPSRs in
these situations and upon a change in control.
|
|
(3)
|
|
These amounts relate to non-qualified stock options granted in 2010 under the 2001 Long-Term
Incentive Stock Plan. The exercise price for the options equals the closing price of Northrop
Grummans common stock on the date of grant. The options vest in one-third installments on the
first three anniversaries of the grant date and become fully vested after three years. The
options may also vest upon a change in control under certain circumstances, and a portion of
the options may vest upon termination due to retirement, death or disability (see more on
these issues in the Severance/Change-in-Control section). The options expire seven years from
the date of the grant. No dividends or dividend equivalents are payable with respect to the
options.
|
|
(4)
|
|
For assumptions used in calculating these numbers in accordance with U.S. GAAP, see the
discussion in Footnote 18 of Northrop Grumman Shipbuildings financial statements for the
fiscal year ended December 31, 2010, included elsewhere herein, adjusted to exclude
forfeitures.
|
121
Outstanding Equity Awards at 2010 Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
Equity Incentive Plan
|
|
Equity Incentive Plan
|
|
|
Securities
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Shares or
|
|
Awards: Number of
|
|
Awards: Market or
|
|
|
Underlying
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
|
Shares or
|
|
Units of
|
|
Unearned Shares,
|
|
Payout Value of
|
|
|
Unexercised
|
|
Unexercised
|
|
Unexercised
|
|
|
|
|
|
Option
|
|
|
|
|
|
Units of Stock
|
|
Stock that
|
|
Units, or Other
|
|
Unearned Shares,
|
|
|
Options
|
|
Options
|
|
Unearned
|
|
|
|
|
|
Exercise
|
|
Option
|
|
that Have Not
|
|
Have Not
|
|
Rights that Have Not
|
|
Units, or Other
|
|
|
(#)
|
|
(#)
|
|
Options
|
|
|
|
|
|
Price
|
|
Expiration
|
|
Vested
(2)
|
|
Vested
|
|
Vested
(3)
|
|
Rights that Have Not
|
Name & Principal Position
|
|
Exercisable
(1)
|
|
Unexercisable
(1)
|
|
(#)
|
|
Grant Date
|
|
($)
|
|
Date
|
|
(#)
|
|
($)
|
|
(#)
|
|
Vested
(4)
($)
|
C. Michael Petters
|
|
|
0
|
|
|
|
122,700
|
|
|
|
0
|
|
|
|
2/16/10
|
|
|
|
59.56
|
|
|
|
2/16/17
|
|
|
|
0
|
|
|
|
0
|
|
|
|
29,000
|
|
|
|
1,878,620
|
|
President and Chief Executive Officer
|
|
|
39,683
|
|
|
|
79,367
|
|
|
|
0
|
|
|
|
2/17/09
|
|
|
|
44.99
|
|
|
|
2/17/16
|
|
|
|
0
|
|
|
|
0
|
|
|
|
20,700
|
|
|
|
1,340,946
|
|
|
|
|
39,700
|
|
|
|
19,850
|
|
|
|
0
|
|
|
|
2/27/08
|
|
|
|
80.82
|
|
|
|
2/27/15
|
|
|
|
0
|
|
|
|
0
|
|
|
|
13,000
|
|
|
|
842,140
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1/15/08
|
|
|
|
|
|
|
|
|
|
|
|
12,500
|
|
|
|
809,750
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
27,000
|
|
|
|
9,000
|
|
|
|
0
|
|
|
|
2/28/07
|
|
|
|
71.85
|
|
|
|
2/28/17
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
40,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/15/06
|
|
|
|
65.10
|
|
|
|
2/15/16
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
20,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
11/1/04
|
|
|
|
52.43
|
|
|
|
11/1/14
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
10,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6/14/04
|
|
|
|
52.49
|
|
|
|
6/14/14
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
8,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8/20/03
|
|
|
|
47.11
|
|
|
|
8/20/13
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
8,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8/20/02
|
|
|
|
57.40
|
|
|
|
8/20/12
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
4,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1/18/02
|
|
|
|
49.21
|
|
|
|
1/18/12
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Barbara A. Niland
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
13,474
|
|
|
|
872,846
|
|
Vice President and Chief Financial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/17/09
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
12,786
|
|
|
|
828,277
|
|
Officer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/27/08
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,213
|
|
|
|
402,478
|
|
Irwin F. Edenzon
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16,336
|
|
|
|
1,058,246
|
|
Vice President and General
|
|
|
2,489
|
|
|
|
4,980
|
|
|
|
0
|
|
|
|
2/17/09
|
|
|
|
44.99
|
|
|
|
2/17/16
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14,613
|
|
|
|
946,630
|
|
Manager Gulf Coast Operations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/27/08
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5,107
|
|
|
|
330,831
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3/20/08
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
683
|
|
|
|
44,245
|
|
Matthew J. Mulherin
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16,336
|
|
|
|
1,058,246
|
|
Vice President and General
|
|
|
2,489
|
|
|
|
4,980
|
|
|
|
0
|
|
|
|
2/17/09
|
|
|
|
44.99
|
|
|
|
2/17/16
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14,613
|
|
|
|
946,630
|
|
Manager Newport News Operations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/27/08
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,213
|
|
|
|
402,478
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/28/07
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
8,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6/14/04
|
|
|
|
52.49
|
|
|
|
6/14/14
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
5,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8/20/03
|
|
|
|
47.11
|
|
|
|
8/20/13
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
4,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8/20/02
|
|
|
|
57.40
|
|
|
|
8/20/12
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
William R. Ermatinger
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8,587
|
|
|
|
556,266
|
|
Vice President and Chief Human
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/17/09
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
9,316
|
|
|
|
603,490
|
|
Resources Officer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3/20/08
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
455
|
|
|
|
29,475
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/27/08
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,253
|
|
|
|
210,729
|
|
Footnotes:
|
|
|
(1)
|
|
Options awarded vest at a rate of 33 1/3% per year on the grants anniversary date over the
first three years of the seven-year option term. Options granted prior to 2008 vest at a rate
of 25% per year on the grants anniversary date over the first four years of the ten-year
option term.
|
|
(2)
|
|
Outstanding Restricted Stock Rights (RSRs) for Mr. Petters of 12,500 fully vested on January
15, 2011.
|
|
(3)
|
|
These are target numbers for RPSRs. The first RPSR award for each NEO will vest based on
performance for the three-year period ending on December 31, 2012; the second, based on
performance for the three-year period ending on December 31, 2011; and the third (and fourth
for Mr. Edenzon and Mr. Ermatinger), based on performance for the three-year period ending on
December 31, 2010.
|
|
(4)
|
|
Based on closing price of Northrop Grummans stock on December 31, 2010 of $64.78 for target
RPSRs.
|
122
2010 Option Exercises and Stock Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of
|
|
|
|
Number of Shares
|
|
|
|
|
Shares Acquired
|
|
Value Realized on
|
|
Acquired on
|
|
Value Realized
|
|
|
on Exercise
|
|
Exercise
|
|
Vesting(*)
|
|
on Vesting
|
Name & Principal Position
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)
|
C. Michael Petters
|
|
|
0
|
|
|
|
0
|
|
|
|
15,660
|
|
|
|
932,710
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barbara A. Niland
|
|
|
0
|
|
|
|
0
|
|
|
|
4,567
|
|
|
|
272,011
|
|
Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irwin F. Edenzon
|
|
|
0
|
|
|
|
0
|
|
|
|
4,350
|
|
|
|
259,086
|
|
Vice President and General Manager
Gulf Coast Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew J. Mulherin
|
|
|
0
|
|
|
|
0
|
|
|
|
6,090
|
|
|
|
362,720
|
|
Vice President and General Manager
Newport News Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Ermatinger
|
|
|
0
|
|
|
|
0
|
|
|
|
3,480
|
|
|
|
207,269
|
|
Vice President and Chief Human Resources Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footnote:
|
|
|
(*)
|
|
All shares in this column are RPSRs.
|
2010 Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Years
|
|
Present Value of
|
|
Payments
|
|
|
|
|
Credited
|
|
Accumulated
|
|
During Last
|
|
|
|
|
Service
|
|
Benefit
(*)
|
|
Fiscal Year
|
Name & Principal Position
|
|
Plan Name
|
|
(#)
|
|
($)
|
|
($)
|
C. Michael Petters
|
|
CPC SERP
|
|
|
6.17
|
|
|
|
1,236,757
|
|
|
|
0
|
|
President and Chief Executive Officer
|
|
NNS Restoration
|
|
|
22.50
|
|
|
|
2,326,126
|
|
|
|
0
|
|
|
|
NNS Salaried Pension Plan
|
|
|
22.50
|
|
|
|
496,901
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barbara A. Niland
|
|
OSERP
|
|
|
32.00
|
|
|
|
1,765,890
|
|
|
|
0
|
|
Vice President and Chief Financial Officer
|
|
ERISA 2
|
|
|
7.50
|
|
|
|
281,647
|
|
|
|
0
|
|
|
|
ES Executive Pension Plan
|
|
|
32.00
|
|
|
|
946,364
|
|
|
|
0
|
|
|
|
Northrop Grumman Pension Plan
|
|
|
32.00
|
|
|
|
588,673
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irwin F. Edenzon
|
|
OSERP
|
|
|
21.00
|
|
|
|
1,055,557
|
|
|
|
0
|
|
Vice President and General Manager
|
|
NNS Restoration
|
|
|
13.17
|
|
|
|
471,922
|
|
|
|
0
|
|
Gulf Coast Operations
|
|
NNS Salaried Pension Plan
|
|
|
13.17
|
|
|
|
437,970
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew J. Mulherin
|
|
OSERP
|
|
|
30.00
|
|
|
|
684,500
|
|
|
|
0
|
|
Vice President and General Manager
|
|
NNS Restoration
|
|
|
28.50
|
|
|
|
941,115
|
|
|
|
0
|
|
Newport News Operations
|
|
NNS Salaried Pension Plan
|
|
|
28.50
|
|
|
|
556,063
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Ermatinger
|
|
OSERP
|
|
|
23.58
|
|
|
|
868,995
|
|
|
|
0
|
|
Vice President and Chief Human Resources Officer
|
|
ERISA 2
|
|
|
7.50
|
|
|
|
106,145
|
|
|
|
0
|
|
|
|
ES Executive Pension Plan
|
|
|
23.55
|
|
|
|
345,854
|
|
|
|
0
|
|
|
|
Northrop Grumman Pension Plan
|
|
|
23.55
|
|
|
|
339,573
|
|
|
|
0
|
|
Footnote:
|
|
|
(*)
|
|
While benefits may be spread over different plans, it is Northrop Grummans policy that an
executives total benefit under these plans is essentially limited to 60% of such executives
final average pay. Service listed above in the CPC SERP represents employment while in a CPC
position. The pension benefits for Mr. Petters under the CPC SERP are based on an alternate
formula (as described in more detail in the CPC SERP section below) which includes total
Northrop Grumman service.
|
The pension values included in this table are the present value of the benefits expected to be
paid in the future. They do not represent actual lump sum values that may be paid from a plan. The
amount of future payments is based on the
123
current accrued pension benefit as of December 31, 2010.
Pursuant to the SEC disclosure rules: (i) the actuarial assumptions used to calculate amounts for
this table are the same as those used for Northrop Grummans financial statements and (ii) all
pension values are determined assuming the NEO works until the specified retirement age, which is
the earliest unreduced retirement age (as defined in each plan).
The value of accumulated benefits for Ms. Niland and Mr. Ermatinger has been computed in
accordance with SEC guidance. This guidance results in an overlap of benefits in the OSERP and the
ES Executive Pension Plan (EPP) which has the effect of overvaluing their benefits. Based on SEC
guidance, the assumed OSERP retirement age for Ms. Niland and Mr. Ermatinger is the date on which
they attain 85 points (age 55 in each case). At this age, their EPP benefit is zero, thereby
increasing the OSERP benefit (see description of each of these plans below for further details).
The assumed retirement age for the remaining plans is age 60. Under this assumption, the EPP and
the OSERP are both payable. In reality, Ms. Niland and Mr. Ermatinger will retire under only one
retirement age. If they were to retire on their earliest retirement age of 55, their annual
annuity, based on current service and earnings, would be approximately $218,300 and $147,500
respectively. The present values are $2,570,985 and $1,298,413 which represent a more accurate
value of their total benefit rather than the total amounts of $3,582,574 and $1,660,567 shown
above.
General Explanation of the Table
Through acquisitions, Northrop Grumman has acquired numerous pension plans applying to
different groups of employees. Through changes in employment, individual employees may be covered
by several different pension plans. However, an executives total benefit under these plans is
essentially limited to 60% of his final average pay. Legally, the accrued pension benefit cannot be
reduced or taken away so all of these historical pension plans have been maintained.
Pension plans provide income during retirement as well as benefits in special circumstances
including death and disability. In general, the plans are structured to reward and retain employees
of long service and recognize higher achievement levels as evidenced by increases in annual pay.
The term qualified plan generally means a plan that qualifies for favorable tax treatment under
Internal Revenue Code Section 401. Savings plans (also known as 401(k) plans) and traditional
pension plans are examples of qualified plans. Qualified plans apply to a broad base of employees.
The term nonqualified plan generally means a plan that is limited to a specified group of
management personnel. The nonqualified plans supplement the qualified plans and (1) provide
benefits that would be provided under Northrop Grummans qualified plans but for limitations
imposed by the Internal Revenue Code and (2) provide a minimum level of pension benefits to elected
and appointed officers of Northrop Grumman in recognition of the higher levels of responsibility.
The amounts in the table are based on the specific provisions of each plan, which are
described in more detail below. There are two basic types of pension benefits reflected in the
Pension Benefits Table: non-cash balance type benefits and cash balance type benefits. For purposes
of the amounts in the table: non-cash balance type benefits are determined based
on the annual pension earned as of December 31, 2010, and include any supplemental payments.
Cash balance type benefits are based on the account balance as of December 31, 2010, plus a future
interest credit, converted to an annuity using the applicable conversion factors.
Ms. Niland and Mr. Ermatinger participate in the Northrop Grumman Pension Plan (NGPP), the
Northrop Grumman Electronic Systems Executive Pension Plan (ES EPP), and the Northrop Grumman
Supplemental Plan 2 (ERISA 2). Mr. Petters, Mr. Edenzon and Mr. Mulherin participate in the
Newport News Shipbuilding, Inc. Retirement Plan (NNS Plan) and the Newport News Shipbuilding,
Inc. Retirement Benefit Restoration Plan (NNS Restoration Plan). Each NEO except Mr. Petters also
participates in the Officers Supplemental Executive Retirement Program (OSERP). Mr. Petters
participates in the CPC Supplemental Executive Retirement Program (CPC SERP).
The change in pension values shown in the Summary Compensation Table includes the effect of:
|
|
|
an additional year of service from December 31, 2009 to December 31, 2010;
|
|
|
|
|
changes in eligible pension pay;
|
|
|
|
|
changes in applicable pay cap limits; and
|
|
|
|
|
changes in actuarial assumptions.
|
124
Description of Qualified Plans
Northrop Grumman Pension Plan (NGPP) and Newport News Shipbuilding, Inc. Retirement
Plan (NNS Plan)
These plans are part of the Northrop Grumman Pension Program (the Program). The general
benefit structure of plans within the Program is similar except for the historical benefit
formulas, the transition benefit formulas and the timing of the transition period, all of which are
described below.
The Program is a group of defined benefit pension plans qualified under Internal Revenue Code
Section 401. The Program provides up to three component pieces of benefits depending on when a
participant is hired and terminates. The following chart illustrates the component pieces of the
Program benefit (described in more detail after the chart):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Part B
(5-Year Transition Benefit)
Benefit based on a formula similar
to the one under
the historical plan formula during
the transition period
|
|
|
|
|
|
|
|
|
Part A
Benefit under the historical plan
formula before the transition
period
|
|
+
|
|
or
(if greater)
|
|
+
|
|
Part D
Benefit under the cash
balance formula after
the transition period
|
|
=
|
|
Pension Benefit
|
|
|
|
|
Part C
(5-Year Transition Benefit)
Benefit under the cash balance
formula during the transition period
|
|
|
|
|
|
|
|
|
The components are the historical benefit (the Part A benefit), the transition benefit (the
greater of the Part B benefit or the Part C benefit) and the cash balance benefit (the Part D
benefit). Eligible employees who joined the Program after the transition date associated with their
pension plan accrue only the cash balance benefit (Part D) from their date of participation.
The qualified benefit for each NEO is the sum of these three benefits (Part A + Part B or C +
Part D).The transition period for the NGPP is July 1, 2003 through June 30, 2008 while the
transition period for the NNS Plan is January 1, 2004 through December 31, 2008. During the
transition period, each eligible participant earned the greater of (i) the benefit calculated under
a formula similar to his or her historical plan (Part B) or (ii) the cash balance formula benefit
(Part C).
The Programs cash balance formula (Parts C and D benefits) uses a participants points (age
plus years of service) to determine a pay-based credit amount (a percentage of eligible pay) on a
monthly basis. Interest is credited monthly on
the amount in the participants hypothetical individual account. At normal retirement age, a
participants balance in the hypothetical account is converted into an annuity payable for life,
using factors specified in the Program. There are various forms of annuities from which the
participant can choose, including a single life annuity or a joint-and-survivor annuity.
Specific Elements of the Program
The following paragraphs describe specific elements of the Program in more detail.
|
|
|
Formulas Under Historical Plans:
|
|
|
|
Northrop Grumman Electronic Systems Pension Plan (NG ESPP).
The NG ESPP is
a sub-plan of the NGPP and provides a benefit equal to 2% multiplied by the sum
of all years of pensionable compensation (as limited by Code section 401(a)(17))
from January 1, 1995 plus a frozen benefit accrued under the prior Westinghouse
Pension Plan, if any. Participants hired prior to January 1, 1995 who elect an
annuity form of payment for their Westinghouse frozen benefit are eligible for
an annual pre-age 62 supplemental benefit equal to $144 per year of service.
This supplemental benefit is paid to those who retire prior to age 62 with
payments ceasing at age 62. The NG ESPP was a contributory plan until April 1,
2000. Ms. Niland and Mr. Ermatinger have historical (Part A) benefits under
this formula.
|
|
|
|
|
Newport News Shipbuilding, Inc. Retirement Plan
. The NNS Plan provides a
benefit equal to 55% of final average pay (as limited by Code section
401(a)(17)) multiplied by benefit service up to a
|
125
|
|
|
maximum of 35 years divided by
35. Participants with pre-1997 service also have a frozen accrued benefit with
the prior NNS parent company, Tenneco. Total benefit service is used for the NNS
Plan benefit but the frozen accrued benefit with Tenneco is offset from the
total benefit. Final average pay is the average of the final 60 months of base
pay multiplied by 12 to determine an annual final average pay. Mr. Petters, Mr.
Edenzon and Mr. Mulherin have historical (Part A) benefits under this formula.
|
|
|
|
Cash Balance Formula
.
Table 1 shows the percentage of pay credit specified at each
point level for the Part C benefit for each NEO. Interest is credited monthly based on
the 30-year Treasury bond rate.
|
|
|
|
|
For the Part D benefit, the cash balance formula for all NEOs is based on Table 2.
|
Table 1 (Heritage)
|
|
|
|
|
|
|
Credit Amount
|
Points
|
|
|
|
Eligible Pay in Excess of Social Security
|
(attained age and total service)
|
|
All Eligible Pay
|
|
Wage Base
|
Under 25
|
|
6.0%
|
|
6.0%
|
25 to 34
|
|
6.5%
|
|
6.0%
|
35 to 44
|
|
7.0%
|
|
6.0%
|
45 to 54
|
|
7.5%
|
|
6.0%
|
55 to 64
|
|
8.0%
|
|
6.0%
|
65 to 74
|
|
8.5%
|
|
6.0%
|
75 to 84
|
|
9.0%
|
|
6.0%
|
Over 84
|
|
9.5%
|
|
6.0%
|
Table 2 (Part D Formula)
|
|
|
|
|
|
|
Credit Amount
|
Points
|
|
|
|
Eligible Pay in Excess of Social Security
|
(attained age and total service)
|
|
All Eligible Pay
|
|
Wage Base
|
Under 25
|
|
3.5%
|
|
4.0%
|
25 to 34
|
|
4.0%
|
|
4.0%
|
35 to 44
|
|
4.5%
|
|
4.0%
|
45 to 54
|
|
5.0%
|
|
4.0%
|
55 to 64
|
|
5.5%
|
|
4.0%
|
65 to 74
|
|
6.5%
|
|
4.0%
|
75 to 84
|
|
7.5%
|
|
4.0%
|
Over 84
|
|
9.0%
|
|
4.0%
|
|
|
|
Vesting
.
Participants vest in their Program benefits upon completion of three
years of service. As of December 31, 2010, each NEO has a nonforfeitable right to
receive retirement benefits, which are payable upon early (if eligible) or normal
retirement, as elected by the NEO.
|
|
|
|
|
Form of Benefit
.
The standard form of benefit is an annuity payable for the life of
the participant. At normal retirement the annuity for the cash balance formula is equal
to the accumulated account balance divided by 9. Other annuity options may be elected;
however, each of them is actuarially equivalent in value to the standard
form. The NG ESPP also allows a lump-sum form of distribution to be elected on a portion
of the historical (Part A) benefit.
|
|
|
|
|
Pay
.
Pay for purposes of the cash balance, and the NG ESPP formulas is basically
salary plus the annual cash bonus. Final average pay for the NNS Plan is determined
using base salary only.
|
|
|
|
|
Normal Retirement
.
Normal retirement means the benefit is not reduced for early
commencement. It is generally specified in each formula: age 65 for the historical NG
ESPP and NNS Plan formula and the later of age 65 and three years of vesting service
for the cash balance formula.
|
|
|
|
|
Early Retirement
.
Early retirement eligibility for the historical NNS Plan and for
the cash balance formulas occurs when the participant attains both age 55 and completes
10 years of service. Early retirement for the NG ESPP can occur when the participant
attains either age 58 and completes 30 years of service or attains age 60 and completes
10 years of service. Alternatively, an NG ESPP participant may elect to commence an
actuarially reduced vested benefit at any time following termination. Early retirement
benefits under both the historical and cash balance formulas may be reduced for
commencement prior to normal retirement. This is to reflect the longer period of time
over which the benefit will be paid.
|
|
|
|
|
All NEOs have completed 10 or more years of service; hence, they are eligible for
early retirement under the NGPP or the NNS Plan, as applicable, upon attainment of the
early retirement age requirement. Early retirement benefits for each NEO cannot
commence prior to termination of employment.
|
126
Description of Nonqualified Plans
ERISA 2 is a nonqualified plan which provides benefits that would have been paid under the
NGPP but for the Code section 401(a)(17) limit on the amount of compensation that may be taken into
account under a qualified plan. ERISA 2 also provides benefits based on compensation deferred under
a Company deferred compensation plan, because such deferrals are not included as compensation under
the qualified plans. Benefits under ERISA 2 are subject to a general limitation of 60% of final
average pay (reduced for early retirement, if applicable, according to the rules of the OSERP) for
all Company pension benefits. Optional forms of payment are generally the same as those from the
qualified plan, plus a 13-month delayed lump sum option on a portion of the ERISA 2 benefit.
Reductions for early retirement apply in the same manner as under the associated qualified plan.
Ms. Niland and Mr. Ermatinger began participation under the ERISA 2 plan on July 1, 2003; the
date ERISA 2 was amended to cover NG ESPP participants.
NNS Restoration Plan is a nonqualified plan which provides benefits that would have been paid
under the NNS Plan but for the Code section 401(a)(17) limit on the amount of compensation that may
be taken into account under a qualified plan and the Code Section 415 limit on benefits that may be
paid under a qualified plan. The NNS Restoration Plan also provides benefits based on total
compensation (generally base pay plus bonus earned in a calendar year) including compensation
deferred under a Northrop Grumman deferred compensation plan. Benefits under the NNS Restoration
Plan are subject to a general limitation of 60% of final average pay (reduced for early retirement,
if applicable, according to the rules of the OSERP) for all Northrop Grumman pension benefits.
Optional forms of payment are the same as those under the NNS Plan. Reductions for early retirement
apply in the same manner as under the NNS Plan.
Mr. Petters, Mr. Edenzon and Mr. Mulherin began participation under the NNS Restoration Plan
when they reached applicable pay grades for inclusion in the Plan.
|
|
|
ES Executive Pension Plan
|
The ES EPP is a nonqualified plan, frozen to new entrants on July 1, 2003. It provides a gross
supplemental pension equal to 1.47% of final average pay for each year or portion thereof that the
participant was making maximum contributions to the NG ESPP or predecessor plan. Final average pay
is the average of the highest five annualized base salaries at December of each year on or after
1995 plus the average of the highest five annual incentive payments since January 1, 1995. The
final ES EPP benefit is reduced by benefits from the NG ESPP and ERISA 2. Participants vest in
their ES EPP benefits upon attaining age 58 and completion of 30 years of service, attaining age 60
and completion of 10 years of service or attaining age 65 and completion of 5 years of service.
These milestones must be attained prior to termination from the Company. Currently, Ms. Niland and
Mr. Ermatinger are not vested in their respective ES EPP benefits. Optional forms of payment are
the same as those from the NG ESPP.
The OSERP is a nonqualified plan frozen to new entrants on July 1, 2008; therefore, officers
hired on or after this date and any promoted officers who do not participate in a qualified defined
benefit pension plan are not allowed to participate in the OSERP. They instead participate in the
Officers Retirement Account Contribution Plan, which is a defined contribution plan arrangement.
Ms. Niland, Mr. Edenzon, Mr. Mulherin and Mr. Ermatinger participate in the OSERP which provides a
total pension benefit equal to a percentage of final average pay (the average pay without the
401(a)(17) limit and including deferred compensation in the three highest-paid plan years during
the greater of (i) the last ten consecutive years of participation, or (ii) all consecutive years
of participation since January 1, 1997) where the percentage is determined by the following
formula: 2% for each year of service up to 10 years, 1.5% for each subsequent year up to 20 years,
and 1% for each additional year over 20 and less than 45, less any other Northrop Grumman pension
benefits. In the OSERP provisions, all years of service with Northrop Grumman are used to determine
the final percentage.
The OSERP benefit when combined with all Northrop Grumman pension benefits cannot exceed the
general limit of 60% of final average pay (reduced for early retirement, if applicable, according
to the rules of the OSERP). Optional forms of payment are generally the same as those from the
qualified plan, plus a 13-month delayed lump sum option on a portion of the OSERP benefit.
Normal Retirement: Age 65.
Early Retirement: Age 55 and completion of 10 years of service. Benefits are reduced by the
smaller of 2.5% for each year between retirement age and age 65, or 2.5% for each point less than
85 at retirement. Points are equal to the sum of age and years of service.
127
Vesting: Participants vest in their OSERP benefits upon attaining age 55 and completion of 10
years of service or attaining age 65 and completion of 5 years of service. These milestones must be
attained prior to termination from Northrop Grumman.
The CPC SERP is a nonqualified plan, frozen to new entrants on July 1, 2009. Mr. Petters is
eligible to participate in the CPC SERP which provides a pension equal to the greater of the amount
accrued under the CPC SERP formula or the benefit calculated using the OSERP provisions. Effective
July 1, 2009, the CPC SERP formula is a percentage of final average pay (as defined under the
OSERP) where the percentage is determined by the following formula: 3.3334% for each year or
portion thereof that the participant has served on the Corporate Policy Council up to 10 years,
1.5% for each subsequent year up to 20 years and 1% for each additional year over 20. The final CPC
SERP benefit is determined by deducting any other Northrop Grumman pension benefits accrued for the
same period of council service.
CPC SERP participants will also have their benefits calculated under the OSERP provisions and
if it results in a greater amount, the benefit under the OSERP provisions will be provided.
The CPC SERP benefit when combined with all Northrop Grumman pension benefits cannot exceed
the general limit of 60% of final average pay (reduced for early retirement, if applicable,
according to the rules of the CPC SERP). Optional forms of payment are generally the same as those
from the qualified plan, plus a 13-month delayed lump sum option on a portion of the CPC SERP
benefit.
Normal Retirement: Age 65.
Early Retirement: The later of the first day of the month following termination or the
commencement of the participants qualified plan benefit. Benefits are reduced by the smaller of
2.5% for each year between retirement age and age 65, or 2.5% for each point less than 85 at
retirement. Points are equal to the sum of age and years of service.
Vesting: Participants vest in their CPC SERP benefits when they have vested in their qualified
plan benefits.
|
|
|
409A Restrictions on Timing and Optional Forms of Payment
|
Under IRC section 409A, employees who participate in company-sponsored nonqualified plans such
as the ES EPP, ERISA 2, NNS Restoration Plan, the OSERP and the CPC SERP are subject to special
rules regarding the timing and forms of payment for benefits earned or vested after December 31,
2004 (post-2004 benefits). Payment of post-2004 benefits must begin on the first day of the month
coincident with or following the later of attainment of age 55 and termination from the Northrop
Grumman. The optional forms of payment for post-2004 benefits are limited to single life annuity or
a selection of joint and survivor options.
Specific Assumptions Used to Estimate Present Values
Assumed Retirement Age:
For all plans, pension benefits are assumed to begin at the earliest
retirement age that the participant can receive an unreduced benefit payable from the plan. OSERP
and CPC SERP, benefits are first unreduced once the NEO reaches age 55 and accumulates 85 points or
reaches age 65. For the NG ESPP (Part A and B benefits), the associated ERISA 2 (Part B benefits)
and the ES EPP, vested benefits are first unreduced for the NEO at the earlier of age 60 and
completion of 30 years of service or age 65. NNS Plan and associated NNS Restoration Plan benefits
(Part A and B benefits), are first unreduced at the earlier of age 62 and completion of 10 years of
service or age 65. Given each NEOs period of service, cash balance benefits (Part C and D
benefits) will be converted to an annuity on an unreduced basis at age 55.
When portions of an NEOs benefit under the Part A + Part B or Part C + Part D structure
have different unreduced retirement ages, the later unreduced age is used for the entire benefit.
Discount Rate:
The applicable discount rates are 6.00% as of December 31, 2009 (6.25% for the
NNS Plan and 5.75% for Plan B) and 5.75% as of December 31, 2010 (6.00% for the NNS Plan).
Mortality Table:
As was used for financial reporting purposes, RP-2000 projected ten years
without collar adjustment as of December 31, 2009 and RP-2000 projected eleven years without collar
adjustment as of December 31, 2010.
Present Values:
Present values are calculated using the Assumed Retirement Age, Discount Rate,
and Mortality Table described above; they assume the NEO remains employed until his earliest
unreduced retirement age.
Future Investment Crediting Rate Assumption:
Cash balance amounts are projected to the Assumed
Retirement Age based on the future investment crediting rate assumptions of 4.37% as of December
31, 2009 and 3.80% as of
128
December 31, 2010. These rates are used in conjunction with the discount
rate to estimate the present value amounts for cash balance benefits.
Information on Executives Eligible to Retire and Additional Notes
Mr. Edenzon is eligible to retire early and begin pension benefits immediately under all plans
in which he participates. His total annual immediate benefit assuming he had terminated on December
31, 2010 was $165,943.
2010 Nonqualified Deferred Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
Registrant
|
|
Aggregate
|
|
|
|
|
|
|
|
|
Contributions in
|
|
Contributions in
|
|
Earnings in Last
|
|
Aggregate Withdrawals/
|
|
Aggregate Balance
|
|
|
|
|
Last FY
(1)
|
|
Last FY
(2)
|
|
FY
(3)
|
|
Distributions
|
|
at Last FYE
(4)
|
Name & Principal Position
|
|
Plan Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
C. Michael Petters
|
|
Deferred Compensation
|
|
|
0
|
|
|
|
0
|
|
|
|
255,026
|
|
|
|
0
|
|
|
|
2,544,647
|
|
President and Chief Executive Officer
|
|
Savings Excess
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Barbara A. Niland
|
|
Deferred Compensation
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Vice President and Chief Financial Officer
|
|
Savings Excess
|
|
|
49,469
|
|
|
|
9,016
|
|
|
|
10,283
|
|
|
|
0
|
|
|
|
312,896
|
|
|
Irwin F. Edenzon
|
|
Deferred Compensation
|
|
|
0
|
|
|
|
0
|
|
|
|
26,742
|
|
|
|
52,221
|
|
|
|
138,690
|
|
Vice President and General Manager
|
|
Savings Excess
|
|
|
26,372
|
|
|
|
10,549
|
|
|
|
14,974
|
|
|
|
0
|
|
|
|
152,868
|
|
Gulf Coast Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew J. Mulherin
|
|
Deferred Compensation
|
|
|
84,418
|
|
|
|
0
|
|
|
|
215,114
|
|
|
|
0
|
|
|
|
1,619,631
|
|
Vice President and General Manager
|
|
Savings Excess
|
|
|
5,420
|
|
|
|
4,516
|
|
|
|
1,601
|
|
|
|
0
|
|
|
|
15,561
|
|
Newport News Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Ermatinger
|
|
Deferred Compensation
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Vice President and Chief Human Resources Officer
|
|
Savings Excess
|
|
|
20,963
|
|
|
|
5,241
|
|
|
|
13,717
|
|
|
|
0
|
|
|
|
136,028
|
|
Footnotes:
|
|
|
(1)
|
|
Executive contributions in this column also are included in the salary and non-equity
incentive plan columns of the 2010 Summary Compensation Table.
|
|
(2)
|
|
Northrop Grumman contributions in this column are included under the All Other Compensation
column in the 2010 Summary Compensation Table.
|
|
(3)
|
|
Aggregate earnings in the last fiscal year are not included in the 2010 Summary Compensation
Table since they are not above market or preferential.
|
|
(4)
|
|
The only amounts reflected in this column that previously were reported as compensation to
the NEO in the Summary Compensation Table were executive and Northrop Grumman contributions
for the respective fiscal year-end and only if the NEO was reported as an NEO for each respective year. Aggregate earnings in
this column were not reported previously in the Summary Compensation Table.
|
All Deferred Compensation Plan balances consist of employee contributions and earnings only;
there are no company contributions to this plan.
Ms. Nilands Savings Excess Plan (SEP) account balance consists of $255,411 in employee
contributions, as adjusted for investment returns.
Mr. Edenzons SEP account balance consists of $123,526 in employee contributions, as adjusted
for investment returns.
Mr. Mulherins SEP account balance consists of $8,279 in employee contributions, as adjusted
for investment returns.
Mr. Ermatingers SEP account balance consists of $102,047 in employee contributions, as
adjusted for investment returns.
Outlined below are the material terms of the two nonqualified deferred compensation plans in
which the executives could participate. No above market earnings are provided under these plans.
|
|
|
|
|
Feature
|
|
Savings Excess Plan
|
|
Deferred Compensation Plan
|
Compensation Eligible for Deferral
|
|
1% to 75% of salary and ICP bonus
above IRS limits
|
|
Up to 90% of salary and/or ICP bonus
|
Company Allocation
|
|
Up to 4%, based on a contribution
rate of 8%
First 2% is matched at
100%
Next 2% is matched at
50%
Next 4% is matched
at 25%
|
|
None
|
129
|
|
|
|
|
Feature
|
|
Savings Excess Plan
|
|
Deferred Compensation Plan
|
Method of Crediting Earnings
|
|
Participants may make elections
on a daily basis as to how their
account balances will be deemed
invested for purposes of
crediting earnings to the
account. Deemed investments are
chosen from a limited list of
investment options selected by
the Committee administering the
Plan.
|
|
Participants may make elections on
a daily basis as to how their
account balances will be deemed
invested for purposes of crediting
earnings to the account. Deemed
investments are chosen from a
limited list of investment options
selected by the Committee
administering the Plan.
|
Vesting
|
|
100% at all times
|
|
100% at all times
|
|
Distributions
|
|
|
|
|
At Termination of Employment
|
|
Based on advance election,
payment made in lump sum or
installments over period of up to
15 years.
|
|
Based on advance election, payment
made in lump sum or installments
over a 5, 10, or 15-year period.
|
Scheduled In-Service Distribution
|
|
Not available
|
|
Available with advance election.
Payment made in lump sum or
installments over 2-5 years.
|
Non-Scheduled In-Service Distribution
|
|
Not available
|
|
Up to 90% of the pre-2005 account
balance may be distributed. A 10%
forfeiture penalty will apply.
|
Hardship Withdrawals
|
|
Not available
|
|
Available
|
All deferred compensation that was not earned and vested before January 1, 2005 is
subject to the requirements under Internal Revenue Code section 409A. Those requirements largely
restrict an executives ability to control the form and timing of distributions from nonqualified
plans such as those listed in this chart.
2010 Change-in-Control and Severance
The tables below provide estimated payments and benefits that Northrop Grumman would have
provided each NEO if his employment had terminated on December 31, 2010 for specified reasons.
These payments and benefits are payable based on the following Northrop Grumman arrangements:
|
|
|
The Severance Plan for Elected and Appointed Officers of Northrop Grumman
Corporation
|
|
|
|
|
The 2001 Long-Term Incentive Stock Plan and terms and conditions of equity awards
|
|
|
|
|
The Special Officer Retiree Medical Plan
|
|
|
|
|
The Special Agreements (change-in-control agreements)
|
We summarized these arrangements before providing the estimated payment and benefit amounts in
the tables. Due to the many factors that affect the nature and amount of any benefits provided upon
the termination events discussed below, any actual amounts paid or distributed to NEOs may be
different. Factors that may affect these amounts include timing during the year of the occurrence
of the event, our stock price and the NEOs age. The amounts described below are in addition to a
NEOs benefits described in the Pension Benefits and Nonqualified Deferred Compensation Tables, as
well as benefits generally available to our employees such as distributions under our 401(k) plan,
disability or life insurance benefits and accrued vacation.
Severance Plan Benefits
Upon a qualifying termination (defined below) Northrop Grumman had discretion to provide
severance benefits to the NEOs under the Severance Plan for Elected and Appointed Officers of
Northrop Grumman Corporation (Severance Plan). Provided the NEO signed a release, such executive
would have received: (i) a lump sum severance benefit equal to one times base salary, and target
bonus, except our President who would have received one and one-half times base salary and target
bonus, (ii) continued medical and dental coverage for the severance period, (iii) income tax
preparation/financial planning fees for one year and (iv) outplacement expenses up to 15% of
salary. The cost of providing continued medical and dental coverage was based upon current premium
costs. The cost of providing income tax preparation and financial planning for one year was capped
at $15,000 for the Corp VP & President and $5,000 for each of the other NEOs.
A qualifying termination means one of the following:
|
|
|
involuntary termination, other than for cause or mandatory retirement,
|
|
|
|
|
election to terminate in lieu of accepting a downgrade to a non-officer position,
|
|
|
|
|
following a divestiture of the NEOs business unit, election to terminate in lieu of
accepting a relocation, or
|
130
|
|
|
if the NEOs position is affected by a divestiture, the NEO is not offered salary or
bonus at a certain level.
|
Terms of Equity Awards
The terms of equity awards to the NEOs under the 2001 Long-Term Incentive Plan provided for
accelerated vesting if an NEO terminated for certain reasons. For stock options and RPSRs,
accelerated vesting of a portion of each award results from a termination due to death, disability,
or retirement (after age 55 with 10 years of service or mandatory retirement at age 65). An
extended exercise period is also provided for options under these circumstances. For restricted
stock rights (RSRs), accelerated vesting occurs for a termination due to death or disability.
For purposes of estimating the payments due under RPSRs below, Northrop Grumman performance is
assumed to be at target levels through the close of each three-year performance period.
The terms of equity awards to the NEOs under the 2001 Long-Term Incentive Plan also provided
for accelerated vesting of stock options and RSRs (and for prorated payment in the case of RPSRs)
in the event that the NEO was terminated in a qualifying termination related to a change in control
(see Change-in-Control Benefits below). Prorated payment for RPSRs made upon a qualifying
termination will be based on the portion of the three-year performance period prior to the
qualifying termination. For example, if the qualifying termination occurred on June 30 in the
second year of a three-year performance period, the target number of RPSRs subject to an award
would be multiplied by one-half and then multiplied by the earnout percentage that is based on
Northrop Grummans performance for the performance period.
Payout of RPSRs for retirements and terminations is made during the normal process for payouts
which occur during the first quarter following the end of the performance period.
Retiree Medical Arrangement
The Special Officer Retiree Medical Plan (SORMP) was closed to new participants in 2007.
NEOs who are vested participants in the SORMP are entitled to retiree medical benefits pursuant to
the terms of the SORMP. The coverage is essentially a continuation of the NEOs executive medical
benefits plus retiree life insurance. A participant becomes vested if he or she has either five
years of vesting service as an elected officer or 30 years of total service with Northrop Grumman
and its affiliates. A vested participant can commence SORMP benefits at retirement before age 65 if
he has attained age 55 and 10 years of service. The estimated cost of the SORMP benefit reflected
in the tables below is the present value of the estimated cost to provide future benefits using
actuarial calculations and assumptions. Mr. Petters is the only NEO eligible for SORMP benefits.
Change-in-Control Benefits
During its March 2010 meeting, the Northrop Grumman Compensation Committee approved the
termination of all change-in-control programs and agreements effective January 1, 2011. Through
December 31, 2010, Mr. Petters was
entitled to severance benefits under his change-in-control agreement only upon a qualifying
termination that occurred during a protected period (of up to six months) prior to a change in
control or in the 24-month period following a change in control. For this purpose, a qualifying
termination generally occurred if the NEOs employment was terminated by Northrop Grumman for
reasons other than Cause or the NEO terminated employment for specified Good Reason during the
two-year period following the change in control.
As reflected in the following table, through December 31, 2010 and upon a qualifying
termination, the Company would have provided the NEO with the following:
|
|
|
a lump sum payment equal to three times the Presidents highest annualized base
salary earned
|
|
|
|
|
a lump sum payment equal to three times the Presidents target bonus for the year
during which the change in control occurs
|
|
|
|
|
a lump sum payment equal to the pro rata portion of the Presidents target bonus for
the year during which termination occurs
|
|
|
|
|
a lump sum payment equal to the increase in the present value of all the Presidents
qualified and nonqualified pension benefits based on an addition in age and service of
three years
|
|
|
|
|
three years of continued welfare benefits
|
|
|
|
|
reimbursement for the costs of outplacement services for 12 months following the
effective date of termination, up to an amount equal to 15% of the Presidents base
salary
|
131
Termination Payments
C. Michael Petters
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
Post-CIC
|
|
|
|
|
|
|
|
|
Termination
|
|
Involuntary or
|
|
|
|
|
Voluntary
|
|
Not For Cause
|
|
Good Reason
|
|
Death or Disability
|
Executive Benefits
|
|
Termination
|
|
(2)
|
|
Termination
|
|
(3)
|
Salary
|
|
$
|
0
|
|
|
$
|
1,125,000
|
|
|
$
|
2,250,000
|
|
|
$
|
0
|
|
Short-term Incentives
|
|
$
|
0
|
|
|
$
|
843,750
|
|
|
$
|
1,687,500
|
|
|
$
|
0
|
|
Long-term Incentives (1)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,541,088
|
|
|
$
|
3,328,745
|
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental Pension
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
904,874
|
|
|
$
|
0
|
|
Retiree Medical and Life Insurance
|
|
$
|
369,669
|
|
|
$
|
369,669
|
|
|
$
|
369,669
|
|
|
$
|
369,669
|
|
Medical/Dental Continuation
|
|
$
|
0
|
|
|
$
|
54,081
|
|
|
$
|
128,856
|
|
|
$
|
0
|
|
Life Insurance Coverage
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Financial Planning/Income Tax
|
|
$
|
0
|
|
|
$
|
15,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Outplacement Services
|
|
$
|
0
|
|
|
$
|
112,500
|
|
|
$
|
112,500
|
|
|
$
|
0
|
|
Footnotes:
|
|
|
(1)
|
|
Long-term Incentives include grants of Restricted Stock Rights, Restricted Performance Stock
Rights and Stock Options. Results in a benefit under Voluntary Termination only if eligible
for retirement treatment under the terms and conditions of the grants (age 55 with 10 years of
service).
|
|
(2)
|
|
Similar treatment provided for certain good reason terminations as described above.
However, there would be no termination payment in the event of an involuntary termination for
cause.
|
|
(3)
|
|
Retiree medical and life insurance value reflects cost associated with Disability. If
termination results from death, the retiree medical and life insurance expense would be less
than the disability amount indicated.
|
Termination Payments
Barbara A. Niland
Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
Post-CIC
|
|
|
|
|
|
|
|
|
Termination
|
|
Involuntary or
|
|
|
|
|
Voluntary
|
|
Not For Cause
|
|
Good Reason
|
|
|
Executive Benefits
|
|
Termination
|
|
(2)
|
|
Termination
|
|
Death or Disability
|
Salary
|
|
$
|
0
|
|
|
$
|
334,750
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Short-term Incentives
|
|
$
|
0
|
|
|
$
|
133,900
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Long-term Incentives (1)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
843,112
|
|
|
$
|
843,112
|
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical/Dental Continuation
|
|
$
|
0
|
|
|
$
|
26,236
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Financial Planning/Income Tax
|
|
$
|
0
|
|
|
$
|
5,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Outplacement Services
|
|
$
|
0
|
|
|
$
|
50,213
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Footnotes:
|
|
|
(1)
|
|
Long-term Incentives include grants of Restricted Performance Stock Rights and Stock Options.
Results in a benefit under Voluntary Termination only if eligible for retirement treatment
under the terms and conditions of the grants (age 55 with 10 years of service).
|
|
(2)
|
|
Similar treatment provided for certain good reason terminations, as described above.
However, there would be no termination payment in the event of an involuntary termination for
cause.
|
132
Termination Payments
Irwin F. Edenzon
Vice President and General Manager Gulf Coast Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
Post-CIC
|
|
|
|
|
|
|
|
|
Termination
|
|
Involuntary or
|
|
|
|
|
Voluntary
|
|
Not For Cause
|
|
Good Reason
|
|
|
Executive Benefits
|
|
Termination
|
|
(2)
|
|
Termination
|
|
Death or Disability
|
Salary
|
|
$
|
0
|
|
|
$
|
370,800
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Short-term Incentives
|
|
$
|
0
|
|
|
$
|
166,860
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Long-term Incentives (1)
|
|
$
|
1,033,091
|
|
|
$
|
1,033,091
|
|
|
$
|
1,082,368
|
|
|
$
|
1,033,091
|
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical/Dental Continuation
|
|
$
|
0
|
|
|
$
|
26,236
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Financial Planning/Income Tax
|
|
$
|
0
|
|
|
$
|
5,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Outplacement Services
|
|
$
|
0
|
|
|
$
|
55,620
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Footnotes:
|
|
|
(1)
|
|
Long-term Incentives include grants of Restricted Performance Stock Rights and Stock Options.
Results in a benefit under Voluntary Termination only if eligible for retirement treatment
under the terms and conditions of the grants (age 55 with 10 years of service).
|
|
(2)
|
|
Similar treatment provided for certain good reason terminations, as described above.
However, there would be no termination payment in the event of an involuntary termination for
cause.
|
Termination Payments
Matthew J. Mulherin
Vice President and General Manager Newport News Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
Post-CIC
|
|
|
|
|
|
|
|
|
Termination
|
|
Involuntary or
|
|
|
|
|
Voluntary
|
|
Not For Cause
|
|
Good Reason
|
|
|
Executive Benefits
|
|
Termination
|
|
(2)
|
|
Termination
|
|
Death or Disability
|
Salary
|
|
$
|
0
|
|
|
$
|
370,800
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Short-term Incentives
|
|
$
|
0
|
|
|
$
|
166,860
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Long-term Incentives (1)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,082,368
|
|
|
$
|
1,033,091
|
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical/Dental Continuation
|
|
$
|
0
|
|
|
$
|
36,054
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Financial Planning/Income Tax
|
|
$
|
0
|
|
|
$
|
5,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Outplacement Services
|
|
$
|
0
|
|
|
$
|
55,620
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Footnotes:
|
|
|
(1)
|
|
Long-term Incentives include grants of Restricted Performance Stock Rights and Stock Options.
Results in a benefit under Voluntary Termination only if eligible for retirement treatment
under the terms and conditions of the grants (age 55 with 10 years of service).
|
|
(2)
|
|
Similar treatment provided for certain good reason terminations, as described above.
However, there would be no termination payment in the event of an involuntary termination for
cause.
|
Termination Payments
William R. Ermatinger
Vice President and Chief Human Resources Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
Post-CIC
|
|
|
|
|
|
|
|
|
Termination
|
|
Involuntary or
|
|
|
|
|
Voluntary
|
|
Not For Cause
|
|
Good Reason
|
|
|
Executive Benefits
|
|
Termination
|
|
(2)
|
|
Termination
|
|
Death or Disability
|
Salary
|
|
$
|
0
|
|
|
$
|
287,628
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Short-term Incentives
|
|
$
|
0
|
|
|
$
|
115,051
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Long-term Incentives (1)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
587,684
|
|
|
$
|
587,684
|
|
Benefits and Perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical/Dental Continuation
|
|
$
|
0
|
|
|
$
|
36,054
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Financial Planning/Income Tax
|
|
$
|
0
|
|
|
$
|
5,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Outplacement Services
|
|
$
|
0
|
|
|
$
|
43,144
|
|
|
$
|
0
|
|
|
$
|
0
|
|
133
Footnotes:
|
|
|
(1)
|
|
Long-term Incentives include grants of Restricted Performance Stock Rights and Stock Options.
Results in a benefit under Voluntary Termination only if eligible for retirement treatment
under the terms and conditions of the grants (age 55 with 10 years of service).
|
|
(2)
|
|
Similar treatment provided for certain good reason terminations, as described above.
However, there would be no termination payment in the event of an involuntary termination for
cause.
|
Accelerated Equity Vesting Due to Change in Control
The terms of equity awards to the NEOs under the 2001 Long-Term Incentive Plan provide for
accelerated vesting of stock options and RSRs (and for prorated payments in the case of RPSRs) when
Northrop Grumman is involved in certain types of change in control events that are more fully
described in the Plan (e.g., certain business combinations after which Northrop Grumman is not the
surviving entity and the surviving entity does not assume the awards). Vested stock options that
are not exercised prior to one of these changes in control may be settled in cash and terminated.
Prorated payments for RPSRs made upon one of these changes in control will be based on the portion
of the three-year performance period prior to the change in control. For example, if a change in
control occurred on June 30 in the second year of a three-year performance period, the target
number of RPSRs subject to an award would be multiplied by one-half and then multiplied by the
earnout percentage that is based on Northrop Grummans performance for the first half of the
performance period.
The table below provides the estimated value of accelerated equity vesting and/or payments if
such a change in control had occurred on December 31, 2010. The value of the accelerated vesting
was computed using the closing market price of Northrop Grummans common stock on December 31, 2010
($64.78). The value for unvested RPSRs was computed by multiplying $64.78 by the number of unvested
shares that would vest. The value of unvested stock options equals the difference between the
exercise price of each option and $64.78. No value was attributed to accelerated vesting of a stock
option if its exercise price was greater than $64.78.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
RSRs
|
|
RPSRs
|
|
|
|
|
Acceleration of Vesting
|
|
Acceleration of Vesting
|
|
Prorated Payment
|
|
Total
|
Name and Principal Position
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
C. Michael Petters
President and Chief Executive Officer
|
|
$
|
2,211,167
|
|
|
$
|
809,750
|
|
|
$
|
1,520,171
|
|
|
$
|
4,541,088
|
|
Barbara A. Niland
Vice President and Chief Financial Officer
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
843,112
|
|
|
$
|
843,112
|
|
Irwin F. Edenzon
Vice President and General Manager Gulf
Coast Operations
|
|
$
|
98,554
|
|
|
$
|
0
|
|
|
$
|
983,814
|
|
|
$
|
1,082,368
|
|
Matthew J. Mulherin
Vice President and General Manager Newport
News Operations
|
|
$
|
98,554
|
|
|
$
|
0
|
|
|
$
|
983,814
|
|
|
$
|
1,082,368
|
|
William R. Ermatinger
Vice President and Chief Human Resources Officer
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
587,684
|
|
|
$
|
587,684
|
|
134
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Agreements with Northrop Grumman Related to the Spin-Off
This section of the information statement summarizes material agreements between us and
Northrop Grumman that will govern the ongoing relationships between the two companies after the
spin-off and are intended to provide for an orderly transition to our status as an independent,
publicly owned company. Additional or modified agreements, arrangements and transactions, which
will be negotiated at arms length, may be entered into between Northrop Grumman and us after the
spin-off.
Following the spin-off, we and Northrop Grumman will operate independently, and neither will
have any ownership interest in the other. In order to govern certain ongoing relationships between
us and Northrop Grumman after the spin-off and to provide mechanisms for an orderly transition, we
and Northrop Grumman intend to enter into agreements pursuant to which certain services and rights
will be provided for following the spin-off, and we and Northrop Grumman will indemnify each other
against certain liabilities arising from our respective businesses. The following is a summary of
the terms of the material agreements we expect to enter into with Northrop Grumman.
Separation and Distribution Agreement
We and NGSB intend to enter into a Separation and Distribution Agreement with Northrop Grumman
and NGSC before the distribution of our shares of common stock to Northrop Grumman stockholders.
The Separation and Distribution Agreement will set forth our agreements with Northrop Grumman
regarding the principal actions needed to be taken in connection with our separation from Northrop
Grumman, including the internal reorganization. It will also set forth other agreements that govern
certain aspects of our relationship with Northrop Grumman following the spin-off.
Transfer of Assets and Assumption of Liabilities
. The Separation and Distribution Agreement
will identify certain transfers of assets and assumptions of liabilities that are necessary in
advance of our separation from Northrop Grumman so that each of HII and Northrop Grumman retains
both the assets of, and the liabilities associated with, our respective businesses. Matters
identified above in the Legal Proceedings section that relate to our shipbuilding business will
thus be allocated to us under the Separation and Distribution Agreement. The Separation and
Distribution Agreement will also provide for the settlement or extinguishment of certain
liabilities and other obligations between HII and Northrop Grumman. See Unaudited Pro Forma
Condensed Consolidated Financial StatementsNote D.
Effective on the distribution date, all agreements, arrangements, commitments and
understandings, including all intercompany accounts payable or accounts receivable, including
intercompany indebtedness and intercompany work orders, between us and our subsidiaries and other
affiliates, on the one hand, and Northrop Grumman and its other subsidiaries and other affiliates,
on the other hand, will terminate as of the distribution date, except certain agreements and
arrangements, which are intended to survive the distribution. After the distribution, we expect to
issue letter subcontracts for the performance of follow-on work for terminated intercompany work
orders. We expect then to negotiate definitive subcontracts with Northrop Grumman and its other
subsidiaries and affiliates.
Shared Gains and Shared Liabilities
. Subject to certain exceptions, including those set forth
in the Tax Matters Agreement, the Separation and Distribution Agreement will provide for the
sharing of certain gains and liabilities. We and Northrop Grumman will each be entitled to or
responsible for the appropriate proportion of the shared gains or liabilities. The appropriate
proportion applicable to any shared gain or liability will generally be determined by the extent to
which the shared gain or liability relates to our or Northrop Grummans respective businesses. The
Separation and Distribution Agreement further provides that where the Separation and Distribution
Agreement has not already specified the appropriate proportions applicable to any such shared gain
or liability, the applicable appropriate proportions with respect to a shared gain or liability
will generally be determined by an allocation committee comprising one representative designated by
each of Northrop Grumman and us.
Representations and Warranties
. In general, neither we nor Northrop Grumman will make any
representations or warranties regarding any assets or liabilities transferred or assumed, any
consents or approvals that may be required in connection with such transfers or assumptions, the
value or freedom from any lien or other security interest of any assets transferred, the absence of
any defenses relating to any claim of either party or the legal sufficiency of any conveyance
documents. Except as expressly set forth in the Separation and Distribution Agreement or in any
ancillary agreement, all assets will be transferred on an as is, where is basis.
The Distribution
. The Separation and Distribution Agreement will govern the rights and
obligations of the parties regarding the proposed distribution. Prior to the distribution, the
number of our shares held by Northrop Grumman will be increased to the number of shares of our
common stock distributable in the distribution. Northrop Grumman will cause its agent to distribute
all of the issued and outstanding shares of our common stock to Northrop Grumman stockholders who
hold Northrop Grumman shares as of the record date.
135
Conditions
. The Separation and Distribution Agreement will provide that the distribution is
subject to several conditions that must be satisfied or waived by Northrop Grumman in its sole
discretion. For further information regarding these conditions, see The Spin-OffConditions to
the Spin-Off. Northrop Grumman may, in its sole discretion, determine the distribution date and
the terms of the distribution and may at any time prior to the completion of the distribution
decide to abandon or modify the distribution. The board of New NGC may determine the record date.
Termination
. The Separation and Distribution Agreement will provide that it may be terminated
by the board of directors of Northrop Grumman at any time prior to the distribution date.
Release of Claims
. We and Northrop Grumman will agree to broad releases pursuant to which we
will each release the other and its affiliates, successors and assigns and their respective
stockholders, directors, officers, agents and employees from any claims against any of them that
arise out of or relate to events, circumstances or actions occurring or failing to occur or any
conditions existing at or prior to the time of the distribution. These releases will be subject to
certain exceptions set forth in the Separation and Distribution Agreement.
Indemnification
. We and NGSB on one hand, and Northrop Grumman and NGSC on the other, will
agree to indemnify each other and each of our respective affiliates, former, current and future
directors, officers and employees, and each of the heirs, executors, successors and assigns of any
of the foregoing against certain liabilities in connection with the spin-off and our respective
businesses.
The amount of any partys indemnification obligations will be subject to reduction by any
insurance proceeds received by the party being indemnified. The Separation and Distribution
Agreement will also specify procedures with respect to claims subject to indemnification and
related matters.
In the event that, prior to the fifth anniversary of the distribution, if we experience a
change of control and our corporate rating is downgraded to B or B2 or below, as applicable, during
the period beginning upon the announcement of such change of control and ending 60 days after the
announcement of the consummation of such change of control, we will be required to provide credit
support for our indemnity obligations under the Separation and Distribution Agreement in the form
of one or more standby letters of credit in an amount equal to $250 million.
Employee Matters Agreement
We intend to enter into an Employee Matters Agreement with Northrop Grumman that will set
forth our agreements with Northrop Grumman as to certain employment, compensation and benefits
matters.
The Employee Matters Agreement will provide for the allocation and treatment of assets and
liabilities arising out of employee compensation and benefit programs in which our employees
participated prior to the distribution. In connection with the distribution, we will provide
benefit plans and arrangements in which our employees will participate going forward. Generally, we
will assume or retain sponsorship of, and liabilities relating to, employee compensation and
benefit programs relating to our current and former employees and all employees who will be
transferred to us from Northrop Grumman in connection with the distribution.
We expect that all outstanding Northrop Grumman equity awards held by current and former
employees of NGSB and its subsidiaries as of the distribution will be converted to HII equity
awards, issued pursuant to a plan that we will establish. We expect the conversion will result in
the converted award having substantially the same intrinsic value as the applicable Northrop
Grumman equity award as of the conversion. The performance criteria applicable to any converted
restricted performance stock rights shall also be adjusted so that the applicable criteria are
measured based on Northrop Grumman performance through December 31, 2010 and our performance
following such date through the end of the applicable performance period.
The Employee Matters Agreement will also provide for post-distribution transfers of employees
between Northrop Grumman and us. Such transfers may be effected within 45 days of the distribution
by mutual agreement between Northrop Grumman and us. In such event, the recipient employer will
generally be responsible for all employment-related liabilities relating to the transferred
employees, and, under the Employee Matters Agreement, the transferred employees will be treated in
the same manner as other employees of the recipient.
Insurance Matters Agreement
We intend to enter into an Insurance Matters Agreement with Northrop Grumman pursuant to which
we will allocate rights regarding various policies of insurance.
Under the Insurance Matters Agreement, Northrop Grumman will assign to us its rights and
obligations in certain insurance policies that are exclusive to our business. In the event that
Northrop Grumman experiences a loss that relates to our business and may be recoverable under the
insurance policies transferred to us pursuant to the Insurance Matters Agreement, Northrop Grumman
may make the claim directly to the insurer. We will be responsible for paying all amounts
136
necessary to exhaust or otherwise satisfy all applicable self-insured retentions, deductibles,
and retrospective premium adjustments and similar amounts.
Northrop Grumman will retain the rights and obligations to all other insurance policies.
Northrop Grumman will provide us the benefit of such retained insurance policies, until such
policies are exhausted by us or Northrop Grumman, for occurrences prior to the distribution. We
will have no rights under such policies for occurrences after the distribution.
Intellectual Property License Agreement
We, through NGSB, intend to enter into an Intellectual Property License Agreement with NGSC
pursuant to which we will license certain of our intellectual property to NGSC and its affiliates
and NGSC and its affiliates will license certain of its intellectual property to us.
The licenses granted by us and NGSC under the Intellectual Property License Agreement will
permit the licensed party and its affiliates to use certain licensed intellectual property for uses
such party has made of the licensed intellectual property in the ordinary course of such partys
business generally in the twelve-month period prior to the distribution, including the general
manner and scope of such use in the licensed partys line of business for which the licensed
intellectual property has been used during such period.
We and NGSB each may assign the Intellectual Property License Agreement and the rights granted
thereunder, whether in whole or in part, without the other partys consent if such assignment takes
place in an acquisition context, including in connection with the sale of a business unit or a
product line. An assignment by either of us to an unaffiliated third party outside of an
acquisition context will require the other partys consent. Any assignee of an assigning partys
license rights is subject to the limitations and restrictions imposed under the Intellectual
Property License Agreement, including the restrictions regarding the general manner, scope and line
of business for which and by whom the licensed intellectual property will be used.
Tax Matters Agreement
We intend to enter into a Tax Matters Agreement with Northrop Grumman that will govern rights
and obligations after the spin-off with respect to matters regarding U.S. Federal, state, local and
foreign income taxes and other taxes, including tax liabilities and benefits, attributes, returns
and contests.
Under the Tax Matters Agreement, taxes for periods before the spin-off will be allocated as
follows:
We are severally liable with Northrop Grumman for its U.S. Federal income taxes for periods
before the spin-off, and this several liability will continue after the spin-off. Current NGC will
continue to act as tax agent for New NGC for U.S. Federal tax matters for periods before the
spin-off and New NGC will pay all costs and expenses associated with Current NGC retaining a tax
officer for this purpose. Under the Tax Matters Agreement, Northrop Grumman will indemnify us for
any portion of such taxes that we pay, subject to our obligation relating to audit adjustments,
described below.
We will be obligated to indemnify Northrop Grumman for audit adjustments that increase our
U.S. Federal taxable income for periods before the spin-off and are of a nature that could result
in correlative reductions to our taxable income for periods after the spin-off. This indemnity will
apply only to the extent such adjustments increase our U.S. Federal income tax liability for
periods before the spin-off by a total of more $2,000,000.
Northrop Grumman generally will be responsible for our state, local and foreign income taxes
for periods before the spin-off. We will, however, be obligated to indemnify Northrop Grumman for
audit adjustments that increase such taxes, in accordance with the provisions of the Separation and
Distribution Agreement relating to government contract matters.
Northrop Grumman generally will be responsible for our taxes other than income taxes for
periods before the spin-off. We will not indemnify Northrop Grumman for audit adjustments relating
to non-income taxes.
The Tax Matters Agreement will contain special provisions to allocate tax liabilities
resulting from the spin-off or related transactions not being tax-free (notwithstanding the IRS
ruling and tax opinion stating that such transactions are tax-free). Under the Tax Matters
Agreement, if our actions could be reasonably likely to cause the spin-off, the internal
reorganization or any such related transactions not to be tax-free, we will be obligated to
indemnify Northrop Grumman for the resulting taxes, professional fees and other expenses. The
amount of any such indemnification could be substantial.
The Tax Matters Agreement will contain covenants intended to protect the tax-free status of
the spin-off, the internal reorganization and related transactions. These covenants may restrict
our ability to pursue strategic or other transactions that otherwise could maximize the value of
our business and may discourage or delay a change of control that you may consider favorable. In
general, we will covenant that, during the two-year period immediately after the spin-off:
137
We will not take any action inconsistent with continuation of the shipbuilding business. The
winding down of our operations at Avondale will not be considered inconsistent with continuation of
the shipbuilding business.
We will not sell, transfer or otherwise dispose of more than 30% of our gross assets in one
or more transactions. Specified transactions, however, including the winding down of our operations
at Avondale, will not count against the 30% limitation. These will include sales in the ordinary
course of business, payments of interest and principal on indebtedness and stock repurchases to the
extent described below.
We will not repurchase more than 20% of our stock.
We will not take any action (or permit actions by other persons if we can prevent them) that
would result in one or more persons, in one or more transactions, selling more than 20% of our
stock (including but not limited to stock repurchases).
We will not take any action (or permit actions by other persons if we can prevent them) that
would result in one or more persons, in one or more transactions, acquiring 40% or more of our
stock (by vote or value) or of the stock of a successor in a merger or consolidation (or, in either
case, rights to acquire such stock). Such transactions include mergers and acquisitions, sales of
stock between shareholders, issuances of new stock, repurchases of stock, recapitalizations and
amendments to our certificate of incorporation affecting shareholder voting rights. Specified
transactions, however, will not count against the 40% limitation. These include public trading by
persons owning less than 5% of our stock and compensatory grants of stock or stock options to
directors or employees or exercises of such stock options.
We will covenant not to take any of the above actions unless either (i) Northrop Grumman
requests and obtains from IRS a supplemental ruling, satisfactory in form and substance to Northrop
Grumman, that the contemplated action will not adversely affect the tax-free status of the
transactions, or (ii) we obtain, from a nationally recognized law firm, an unqualified opinion to
such effect. Both the law firm and the form and substance of the opinion must be satisfactory to
Northrop Grumman.
Although valid as between the parties, the Tax Matters Agreement will not be binding on the
IRS.
Transition Services Agreement
We intend to enter into a Transition Services Agreement with Northrop Grumman, under which
Northrop Grumman or certain of its subsidiaries will provide us with certain services for a limited
time to help ensure an orderly transition following the distribution.
Services.
We anticipate that under the Transition Services Agreement, Northrop Grumman will
provide certain enterprise shared services (including information technology, resource planning,
financial, procurement and human resource services), benefits support services and other specified
services to us. We expect that these services will be provided at cost, as determined by Northrop
Grumman in a manner consistent with its cost accounting practices.
Indemnification.
Under the Transition Services Agreement, we will release and indemnify
Northrop Grumman and its affiliates for losses arising from or relating to the provision or use of
any service or product provided under the Transition Services Agreement.
Term.
We expect that the Transition Services Agreement will become effective on the
distribution date, and will remain in effect until the expiration of the last time period for the
performance of services thereunder, which we expect generally to be no longer than 12 months from
the distribution date.
Termination.
Each party will be permitted to terminate the Transition Services Agreement if
the other party breaches any of its significant obligations under the agreement and does not cure
such breach within 30 days of receiving written notice from the other party.
Other Agreements
NGSC Guaranty Performance, Indemnity and Termination Agreement
. We intend to enter into the
Guaranty Performance Agreement with NGSC, pursuant to which we will agree to comply on behalf of
NGSC with all of its guarantee obligations in relation to the $83.7 million of Revenue Bonds, which
were issued for our benefit, to indemnify NGSC for all costs arising out of or related to its
guarantee obligations of the Revenue Bonds and to cause NGSCs guarantee obligations to terminate
or to cause credit support to be provided in the event of a change of control of HII. For any
period of time between a change of control and the termination of NGSCs guarantee obligations, we
will be required to cause credit support to be provided for NGSCs guarantee obligations in the
form of one or more letters of credit in an amount reasonably satisfactory to NGSC to support the
payment of all principal, interest and any premiums under the Revenue Bonds. In addition, so long
as NGSC has any liability under the guaranty, we will be required to pay a fee equal to 1% per
annum of the aggregate principal amount of the Revenue Bonds outstanding unless we are providing
credit support
138
for NGSCs obligations under the guaranty. For a description of the Revenue Bonds, see
Description of Material IndebtednessEconomic Development Revenue BondsGuaranty.
Related Party Transactions
Policy and Procedures Governing Related Person Transactions
Our board of directors will adopt a written policy and procedures for the review, approval and
ratification of transactions to which we are a party and the aggregate amount involved in the
transaction will or may be expected to exceed $100,000 in any year if any director, director
nominee, executive officer, greater-than-5% beneficial owner or their respective immediate family
members have or will have a direct or indirect interest.
The policy will provide that the Governance Committee reviews transactions subject to the
policy and determines whether or not to approve or ratify those transactions. In doing so, the
Governance Committee takes into account, among other factors it deems appropriate, whether the
transaction is on terms that are no less favorable to the company than terms generally available to
an unaffiliated third party under the same or similar circumstances, the extent of the related
persons interest in the transaction, the materiality of the proposed related person transaction,
the actual or perceived conflict of interest between us and the related person, the relationship of
the proposed related person transaction to applicable state corporation and fiduciary obligation
laws and rules, disclosure standards, our Corporate Governance Guidelines and Standards of Business
Conduct, and the best interests of us and our stockholders.
The Governance Committee will adopt standing pre-approvals under the policy for transactions
with related persons. Pre-approved transactions include, but are not limited to: (a) employment of
executive officers where (i) the officers compensation is required to be reported in the Proxy
Statement or (ii) the executive officer is not an immediate family member of another executive
officer or director, the related compensation would have been reported in the Proxy Statement if
the officer was a named executive officer and the Compensation Committee approved such
compensation; (b) director compensation where such compensation is required to be reported in the
Proxy Statement and the arrangements have been approved by the board of directors; (c) certain
transactions with other companies where the related persons only relationship with the other
company is as a director, employee or beneficial owner of less than 10% of that companys shares
and the aggregate amount involved does not exceed the greater of $1 million or 2% of that companys
total annual revenues; (d) certain of our charitable contributions where the related persons only
relationship is as an employee or director of the charitable entity and where the aggregate amount
does not exceed the lesser of $1 million or 2% of the charitable entitys total annual receipts;
(e) transactions where the related persons interest derives solely from his or her ownership of
common stock of the company and all stockholders receive proportional benefits; (f) transactions
involving competitive bids; (g) regulated transactions; and (h) certain banking-related services.
The policy requires each director and executive officer to complete an annual questionnaire to
identify his or her related interests and persons, and to notify the Office of the General Counsel
of changes in that information. Based on that information, the Office of the General Counsel will
maintain a master list of related persons for purposes of tracking and reporting related person
transactions.
139
DESCRIPTION OF MATERIAL INDEBTEDNESS
From and after the spin-off, we and Northrop Grumman will, in general, each be responsible for
the debts, liabilities and obligations related to the business or businesses that it owns and
operates following consummation of the spin-off, except as set forth below. See Certain
Relationships and Related Party TransactionsAgreements with Northrop Grumman Related to the
Spin-Off.
In connection with the internal reorganization and prior to the spin-off, the outstanding
intercompany notes, plus accrued and unpaid interest, will be contributed to our capital. These
notes are payable on demand and include $537 million of principal with an annual interest rate of
5% and $178 million of principal with an annual interest rate of 4.55%.
In addition to new debt incurred prior to the spin-off, our obligations to the MBFC under two
loan agreements in connection with certain economic development revenue bonds and industrial
revenue bonds issued by the MBFC for our benefit will continue following the spin-off, as described
below. We have summarized selected provisions of the loan agreements, indentures and guaranties
below. The summary is not complete and does not describe every aspect of the loan agreements,
indentures or guaranties. Copies of the loan agreements, indentures and guaranties, as defined
below, have been filed as exhibits to the registration statement of which this information
statement is a part. You should read the more detailed provisions of the loan agreements,
indentures and the guaranties, including the defined terms, for provisions that may be important to
you.
HII Debt
In connection with the anticipated spin-off, we issued $600 million aggregate principal amount
of 6.875% Senior Notes due March 15, 2018 (the 2018 notes), and $600 million aggregate principal
amount of 7.125% Senior Notes due March 15, 2021 (the 2021 notes, and, collectively, the notes)
under an indenture, dated March 11, 2011, between us and The Bank of New York Mellon, as trustee.
Proceeds from this offering will be placed in an escrow account pending completion of certain steps
of the internal reorganization.
Optional Redemption
. We may redeem some or all of the 2018 notes at any time prior to March
15, 2015 and some or all of the 2021 notes at any time prior to March 15, 2016 at a price equal to
100% of the principal amount of such notes plus accrued and unpaid interest plus a make-whole
premium. We may redeem any of the 2018 notes beginning on March 15, 2015 and any of the 2021 notes
beginning on March 15,2016 at specified redemption prices. If, before March 15, 2014, 65% of the
aggregate principal amount of the 2018 notes originally issued remains outstanding, we may redeem
up to 35% of such series with the proceedings of certain offerings of our common stock at 106.875%
of the principal amount plus accrued interest. If, before March 15, 2014, 65% of the aggregate
principal amount of the 2021 notes originally issued remains outstanding, we may redeem up to 35%
of such series with the proceedings of certain offerings of our common stock at 107.125% of the
principal amount plus accrued interest.
Mandatory Redemption
. In the event that by June 30, 2011, any of the conditions for the
release of the escrowed proceeds of the notes offering has not occurred, or in the event the board
earlier determines that such conditions will not be satisfied by such date, we will be required to
redeem the notes five business days thereafter at a price equal to the issue price of the notes,
together with accrued yield and accrued interest on the notes from the issue date to but excluding
the date of redemption.
In addition, in the event that the spin-off is not consummated within five business days after
the date that the proceeds from the notes offering are released from escrow, we will be required to
redeem the notes on the date that is five business days thereafter, at a cash redemption price
equal to the issue price of the notes, plus the accrued yield and accrued interest to the date of
redemption.
Covenants
. The terms of the notes restrict our ability and the ability of certain of our
subsidiaries to: incur additional indebtedness, create liens, pay dividends or make distributions
in respect of capital stock, purchase or redeem capital stock, make investments or certain other
restricted payments, sell assets, enter into transactions with stockholders or affiliates and
effect a consolidation or merger. However, these limitations will be subject to a number of
important qualifications and exceptions.
Guarantees
. The performance of our obligations pursuant to the notes, including any repurchase
obligations resulting from a change of control, are unconditionally guaranteed, jointly and
severally, on an unsecured basis, by each of our existing and future domestic restricted
subsidiaries that guarantees debt under the HII Credit Agreement. The guarantees will rank equally
with all other unsecured and unsubordinated indebtedness of the guarantors.
Events of Default
. The indenture provides that an Event of Default occurs with respect to
notes of a series if: (a) failure by us to pay when due the principal required to be paid; (b)
failure by us to pay within 30 days of the date due the interest required to be paid; (c) failure
by us, after 45 days of written notice to us by the trustee or to us and the trustee by
140
holders of 25% or more in aggregate principal amount of notes of such series, to make an Offer
to Purchase (as defined by the indenture), or to thereafter pay for notes tendered; (d) failure by
us to perform or breach by us of any other of the covenants or agreements under the indenture for a
period of 60 days after written notice to us by the trustee or to us and the trustee by holders of
25% or more in aggregate principal amount of notes of such series specifying such failure and
requesting that it be remedied; (e) there occurs, with respect to our debt or that of any of our
restricted subsidiaries with an aggregate of at least $50 million of debt, an event of default with
respect to such debt, or failure to make a principal payment that is not made, waived or extended
within the applicable grace period; (f) one or more final judgments rendered against us or any of
our restricted subsidiaries are not paid or discharged, and there is a period of 60 consecutive
days in which final judgments or orders outstanding and not paid or discharged exceed $50 million;
(g) certain bankruptcy defaults with respect to us or any significant subsidiary; (h) any note
guaranty of a significant subsidiary ceases to be in full force and effect; and (i) at any time
prior to the Completion Date, we default under the escrow agreement.
HII Credit Facility
In connection with the spin-off, we entered into the HII Credit Facility with third-party
lenders. The HII Credit Facility comprises (i) a five-year term loan facility of $575 million, to
be funded substantially contemporaneously with the completion of the internal reorganization, and
(ii) a revolving credit facility of $650 million, which, subject to the satisfaction of certain
funding conditions, may be drawn upon during a period of five years from the date of the funding
pursuant to clause (i) above, and which includes a commitment fee equal to 0.5% on the average
daily unused portion of the facility. The revolving credit facility includes a letter of credit
subfacility of $350 million, and a swingline loan subfacility of $100 million. The revolving credit
facility will have a variable interest rate based on LIBOR plus a spread based upon leverage ratio,
which spread at the current leverage ratio is 2.5% and which may vary between 2.0% and 3.0%. At the
time of the spin-off, approximately $137 million of letters of credit are expected to be
outstanding, and the remainder will be undrawn.
The term loan facility is subject to amortization in 3-month intervals from the funding date,
expected to be in an aggregate amount equal to (i) 5% during the first year and the second year,
(ii) 10% during the third year, (iii) 15% during the fourth year and (iv) 65% payable during the
fifth year (of which 5% shall be payable on each of the first 3 quarterly payment dates during such
year, and the balance shall be payable on the term maturity date). Loans will bear interest at a
rate equal to LIBOR plus a spread of 2.50% (or the base rate plus 1.50%), which spread is expected
to vary between 2.0% and 3.0% based upon changes to our leverage ratio.
Security
. The HII Credit Facility is secured by a perfected first priority security interest
in substantially all of our assets, and substantially all assets of the guarantors, subject to
certain exceptions.
Covenants
. The loan agreement contains customary affirmative covenants, including, but not
limited to, those related to our maintaining our corporate existence, complying with applicable
laws, payment of taxes, and ownership of property; and customary negative covenants, including but
not limited to limitations on (a) sales of assets, (b) mergers, consolidations, liquidations and
dissolutions, (c) indebtedness, (d) liens, (e) dividends, (f) acquisitions, (g) investments, (h)
prepayments and modifications of subordinated debt and unsecured bonds, (i) transactions with
affiliates, (j) sale-leasebacks, (k) negative pledges and (l) changes of lines of business.
Financial Covenants
. The loan agreement contains certain financial covenants, which include
(a) a maximum total leverage ratio, defined as the ratio of total indebtedness to EBITDA of 4.50:1
as of the first quarterly period following the spinoff, incrementally decreasing to 2.75:1 as of
March 31, 2015 and thereafter, (b) a minimum interest coverage ratio, defined as the ratio of
EBITDA to total interest expense, net of interest income of 3.50:1 as of the first quarterly period
following the spinoff, incrementally increasing to 4.50:1 as of March 31, 2015 and thereafter and
(c) a limitation on capital expenditures of $350 million for the year 2011, incrementally
decreasing to $200 million as of 2015 and thereafter.
Guarantees
. Each of our direct and indirect, existing and future, domestic wholly-owned
subsidiaries, except for those which are specifically designated as unrestricted subsidiaries, will
be guarantors under the HII Credit Facility. Current NGC is designated as unrestricted and is not a
guarantor under the HII Credit Facility.
Mandatory Prepayment
. Mandatory prepayments of the term loan will be required from the net
cash proceeds from any sale or other disposition of our assets or those of our subsidiaries
(subject to certain exceptions and reinvestment rights), the net cash proceeds from issuances or
incurrences of debt by us or our subsidiaries (other than permitted indebtedness), and a portion of
any excess cash flow, as such term is defined in the loan agreement, of us or our subsidiaries
(subject to certain agreed upon reductions).
Events of Default
. The loan agreement provides that the happening of one or more of the
following events will constitute an Event of Default (subject to certain thresholds and
exceptions): (a) nonpayment of principal when due; (b) nonpayment of interest, fees or other
amounts when due; (c) material inaccuracy of representations and warranties at the time made or
reaffirmed; (d) violation of a covenant; (e) cross-default on material indebtedness; (f) bankruptcy
events; (g)
141
certain ERISA events; (h) material judgments which, absent a stay due to appeal or otherwise,
remain unpaid more than thirty days following execution of the judgment; (i) actual or asserted
invalidity of any HII Credit Facility guarantee, security document or subordination provisions or
non-perfection of any security interest; (j) a change of control; and (k) failure of the spin-off
to occur within five business days of the funding date.
Gulf Opportunity Zone Industrial Revenue Bonds
Under a loan agreement, dated December 1, 2006, between NGSS and the MBFC, we borrowed the
proceeds of the MBFCs issuance of $200 million of GO Zone IRBs at an interest rate of 4.55% due
2028.
Optional Redemption
. The GO Zone IRBs may be redeemed by the issuer on or after December 1,
2016, in whole at any time, or in part from time to time as requested by us, but, if in part, by
lot or in such other random manner as the trustee shall determine, at a price equal to 100% of the
principal amount thereof plus accrued interest to the date of redemption.
Optional Mandatory Tender for Purchase.
The GO Zone IRBs are subject to a mandatory tender for
purchase on or after December 1, 2016, as requested by us, at 100% of the principal outstanding. If
any GO Zone IRBs are purchased by us, such GO Zone IRBs will remain outstanding and may be offered
for sale in a different interest rate mode.
In connection with the potential spin-off, on November 30, 2010, NGSB purchased $178.4 million
of the outstanding principal amount of GO Zone IRBs pursuant to a tender offer. NGSB used cash on
hand provided by Northrop Grumman to purchase the GO Zone IRBs and submitted the purchased bonds to
the trustee for cancellation. The remaining $21.6 million of GO Zone Bonds mature in 2028 and
accrue interest at a fixed rate of 4.55% (payable semi-annually).
Covenants
. The loan agreement contains customary affirmative and negative covenants, including
those related to NGSS (a) maintaining its corporate existence, (b) maintaining and properly
insuring certain buildings and immovable equipment at our shipbuilding complex located in
Pascagoula and Gulfport, Mississippi (collectively, the GO Zone Project), (c) promptly paying, as
the same become due, all taxes and assessments related to the GO Zone Project, and (d) operating
the GO Zone Project for its designated purposes until the date on which no GO Zone IRBs are
outstanding.
Guaranty
. The performance of our payment obligations in connection with the GO Zone IRBs,
including payment of any and all amounts which may come due under the indenture, the GO Zone IRBs,
or the loan agreement, is guaranteed by Current NGC.
After the spin-off, the payment obligations, under the guaranty, will remain with Current NGC,
which will be a wholly owned subsidiary of HII. We intend to enter into a Performance and Indemnity
Agreement with Current NGC, pursuant to which we will agree to comply with all of Current NGCs
obligations under this guaranty and to indemnify Current NGC for any costs, losses or damages
arising out of, or related to, this guaranty.
Events of Default
. The loan agreement provides that the happening of one or more of the
following events will constitute an Event of Default: (a) failure by us to pay when due the
amounts required to be paid; (b) failure by us to pay within 30 days of the date due any other
amounts required to be paid pursuant to the loan agreement; (c) failure by us to observe and
perform any other of the covenants, conditions or agreements under the loan agreement for a period
of 90 days after written notice specifying such failure and requesting that it be remedied from the
issuer or the trustee, unless extended; and (d) certain events of bankruptcy, insolvency,
dissolution, liquidation, winding-up, reorganization or other similar events of Northrop Grumman
Ship Systems, Inc.
Economic Development Revenue Bonds
Under a loan agreement, dated May 1, 1999, between Ingalls and the MBFC, we borrowed the
proceeds of the MBFCs issuance of $83.7 million of Revenue Bonds at an interest rate of 7.81% due
2024.
Optional Redemption
. The Revenue Bonds are redeemable, in whole or in part, at the option of
the issuer, at our direction, at any time at a redemption price equal to the greater of (a) 100% of
the principal amount of the Revenue Bonds or (b) as determined by an independent banker, the sum of
the present values of the remaining scheduled payments of principal and interest thereon discounted
to the date of redemption on a semiannual basis, plus, in each case, accrued interest thereon to
the date of redemption. The discount rate is based upon a comparable Treasury yield plus 0.25%.
Covenants
. The loan agreement contains customary affirmative and negative covenants, including
those related to Ingalls (a) maintaining its corporate existence, (b) maintaining and properly
insuring certain port facilities at our shipbuilding complex located in Jackson County, Mississippi
(collectively, the Ingalls Project), (c) promptly paying, as the same become due, all taxes and
assessments related to the Ingalls Project, and (d) operating the Ingalls Project for its
designated purposes until the date on which no Revenue Bonds are outstanding.
Guaranty
. The performance of the payment obligations in connection with the Revenue Bonds,
including our payment for the principal and interest under the Revenue Bonds, which were issued for
our benefit, and all other amounts
142
due under the loan agreement, is guaranteed by NGSC, a subsidiary of Northrop Grumman. We
intend to enter into the Guaranty Performance Agreement with NGSC, pursuant to which we will agree,
among other things, to comply with all of NGSCs obligations under this guaranty, to indemnify NGSC
for any costs, losses or damages arising out of or related to this guaranty and to terminate NGSCs
guaranty obligations or cause credit support to be provided in the event we experience a change of
control. For a description of the Guaranty Performance Agreement, see Certain Relationships and
Related Party TransactionsOther Agreements.
Events of Default
. The loan agreement provides that the happening of one or more of the
following events will constitute an Event of Default under the loan agreement: (a) failure by us
to pay any loan repayment installment required to be paid with respect to the principal of or
premium, if any, on any bond on the date and at the time specified in the loan agreement; (b)
failure by us to pay any amount required to be paid with respect to interest on any bond on the
date and at the time specified in the loan agreement; (c) failure by us to observe and perform any
other of its covenants, conditions or agreements under the loan agreement for a period of 30 days
after written notice specifying such failure and requesting that it be remedied from the issuer or
the trustee, unless extended; (d) certain events of bankruptcy, insolvency, dissolution,
liquidation, winding-up, reorganization or other similar events of Ingalls; or (e) the occurrence
of an Event of Default under the indenture. Additionally, failure by NGSC to comply with its
covenants under the guaranty will be a default under the guaranty and under the indenture, which,
if not cured within the applicable period, could potentially result in the trustee taking action
against us. We will not be indemnified by NGSC for any actions it takes that lead to a breach of
the guaranty and will not obtain any contractual undertaking by NGSC to comply with such covenants.
143
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the date of this information statement, all of the outstanding shares of our common
stock are beneficially owned by Northrop Grumman. After the spin-off, Northrop Grumman will not own
any shares of our common stock.
The following table provides information with respect to the anticipated beneficial ownership
of our common stock by:
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each of our stockholders who we believe (based on the assumptions described below) will
beneficially own more than 5% of HIIs outstanding common stock;
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each of our current directors and its directors following the spin-off;
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each officer named in the summary compensation table; and
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all of our directors and executive officers following the spin-off as a group.
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Except as otherwise noted below, we based the share amounts on each persons beneficial
ownership of Northrop Grumman common stock on March 11, 2011, giving effect to a distribution ratio
of one share of our common stock for every six shares of Northrop Grumman common stock held by such
person.
To the extent our directors and executive officers own Northrop Grumman common stock at the
record date of the spin-off, they will participate in the distribution on the same terms as other
holders of Northrop Grumman common stock.
Except as otherwise noted in the footnotes below, each person or entity identified in the
tables below has sole voting and investment power with respect to the securities owned by such
person or entity.
Immediately following the spin-off, we estimate that approximately 48.8 million shares of our
common stock will be issued and outstanding, based on the number of shares of Northrop Grumman
common stock expected to be outstanding as of the record date. The actual number of shares of our
common stock outstanding following the spin-off will be determined on March 30, 2011, the record
date.
Stock Ownership of Certain Beneficial Owners
We anticipate, based on information to our knowledge as of December 31, 2010, that the
following entities will beneficially own more than 5% of our common stock after the spin-off.
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Amount and Nature
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of Beneficial
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Percent
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Name and Address of Beneficial Owner
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Ownership
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of Class
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State Street Bank and Trust Company
One Lincoln Street, Boston, MA 02111
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5,489,233 shares
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11.30
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%
(a)
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Capital World Investors
333 South Hope Street, Los Angeles, CA 90071
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3,906,291 shares
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8.00
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%
(b)
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BlackRock Inc.
40 East 52
nd
Street, New York, NY 10022
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3,324,427 shares
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7.94
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%
(c)
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AllianceBernstein LP
1245 Avenue of the Americas, New York, NY 10105
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3,864,638 shares
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6.80
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%
(d)
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(a)
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This information is derived from information regarding Northrop Grumman
stock in a Schedule 13G filed with the SEC by State Street Bank and Trust
Company (State Street) on February 14, 2011. According to State Street, as
of December 31, 2010, State Street had shared voting power over 32,935,400
shares of Northrop Grumman Stock and shared dispositive power over
32,837,370 shares of Northrop Grumman Stock. This total includes 21,711,393
shares of Northrop Grumman stock held in the Defined Contributions Master
Trust for the Northrop Grumman Savings Plan for which State Street acts as a
trustee.
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(b)
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This information is derived from information regarding Northrop
Grumman stock in a Schedule 13G/A filed with the SEC by Capital World
Investors, a division of Capital Research and Management Company, on
February 14, 2011. According to Capital World Investors, as of
December 31, 2010, Capital World Investors had sole voting power over
9,787,743 shares of Northrop Grumman stock and sole dispositive power
over 23,437,743 shares of Northrop Grumman stock.
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(c)
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This information is derived from information regarding Northrop
Grumman stock in a Schedule 13G/A filed with the
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144
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SEC by BlackRock,Inc. (which acquired Barclays Global Investors effective December 1,
2009) on February 7, 2011. According to BlackRock, Inc., as of
December 31, 2010, BlackRock, Inc. had sole voting power over
23,187,826 shares of Northrop Grumman stock and sole dispositive power
over 23,187,826 shares of Northrop Grumman stock.
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(d)
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This information is derived from information regarding Northrop
Grumman stock in a Schedule 13G/A filed with the SEC by
AllianceBernstein LP on February 9, 2011. According to
AllianceBernstein LP, as of December 31, 2010, AllianceBernstein LP
had sole voting power over 15,989,780 shares of Northrop Grumman
stock, sole dispositive power over 19,931,887 shares of Northrop
Grumman stock and shared dispositive power over 14,675 shares of
Northrop Grumman stock.
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145
Stock Ownership of Officers and Directors
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Shares of Common
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Stock
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Shares Subject to
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Share
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Beneficially Owned
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Option
(1)
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Equivalents
(2)
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Total
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Non-Employee Directors
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Thomas B. Fargo
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978
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978
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Robert Bruner
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Artur Davis
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Anastasia Kelly
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Paul D. Miller
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Tom Schievelbein
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481
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481
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Karl von der Heyden
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Named Executive Officers
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C. Michael Petters
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12,069
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71,217
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121
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83,407
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Barbara A. Niland
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2,221
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2,221
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Irwin F. Edenzon
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1,171
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1,245
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213
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2,630
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Matthew J. Mulherin
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3,419
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4,078
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85
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7,582
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William R. Ermatinger
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772
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439
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1,211
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Directors and Executive
Officers as a Group (12
persons)
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20,134
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76,540
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1,836
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98,510
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(1)
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These shares subject to option are either currently exercisable
or exercisable within 60 days as of March 11, 2011.
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(2)
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Share equivalents for directors represent non-voting deferred
stock units acquired under the 1993 Directors Plan some of which
are paid out in shares of common stock at the conclusion of a
director-specified deferral period, and others are paid out upon
termination of the directors service on the Board of Directors.
The HII NEOs hold share equivalents with pass-through voting
rights in the Northrop Grumman Savings Plan.
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146
DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
Prior to the distribution date, our board of directors and Northrop Grumman, as our sole
stockholder, will approve and adopt the Restated Certificate of Incorporation, and our board of
directors will approve and adopt the Restated Bylaws. Under the Restated Certificate of
Incorporation, authorized capital stock will consist of 150 million shares of our common stock, par
value $.01 per share, and 10 million shares of our preferred stock, par value $.01 per share.
Common Stock
Immediately following the spin-off, we estimate that approximately 48.8 million shares of our
common stock will be issued and outstanding, based on the number of shares of Northrop Grumman
common stock expected to be outstanding as of the record date. The actual number of shares of our
common stock outstanding following the spin-off will be determined on March 30, 2011, the record
date.
Dividend Rights
. Dividends may be paid on our common stock and on any class or series of stock
entitled to participate with our common stock as to dividends, but only when and as declared by our
board of directors and only if full dividends on all then-outstanding series of our preferred stock
for the then current and prior dividend periods have been paid or provided for.
Voting Rights
. Each holder of our common stock is generally entitled to one vote per share on
all matters submitted to a vote of stockholders and does not have cumulative voting rights for the
election of directors.
Liquidation
. If we liquidate, holders of our common stock are entitled to receive all
remaining assets available for distribution to stockholders after satisfaction of our liabilities
and the preferential rights of any our preferred stock that may be outstanding at that time.
Other Rights
. The outstanding shares of our common stock are fully paid and nonassessable. The
holders of our common stock do not have any preemptive, conversion or redemption rights.
Preferred Stock
Under the Restated Certificate of Incorporation, our board of directors is authorized to issue
our preferred stock from time to time, in one or more series, and to fix the number of shares
constituting such series and the designation of such series, the voting powers (if any) of the
shares of such series, and the preference and relative, participating, optional or other special
rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such
series. See Anti-Takeover Effects of Provisions of Our Certificate of Incorporation and Bylaws.
Our preferred stock will, when issued, be fully paid and nonassessable and have no preemptive
rights. Our preferred stock will have the dividend, liquidation, and voting rights described below,
unless we indicate otherwise in the applicable certificate of designation relating to a particular
series of our preferred stock.
Dividend Rights
. Holders of our preferred stock will receive, when, as and if declared by our
board of directors, dividends at rates and on the dates described in the applicable certificate of
designations. Each dividend will be payable to the holders of record as they appear on our stock
record books. Dividends on any series of our preferred stock may be cumulative or noncumulative.
Voting Rights
. Unless indicated otherwise in the applicable certificate of designation
relating to a particular series of our preferred stock or expressly required by law, the holders of
our preferred stock will not have any voting rights.
Liquidation
. If we liquidate, dissolve or wind up our affairs, either voluntarily or
involuntarily, the holders of each series of our preferred stock will be entitled to receive
liquidation distributions. These will be in the amounts set forth in the applicable certificate of
designation, plus accrued and unpaid dividends and, if the series of our preferred stock is
cumulative, accrued and unpaid dividends for all prior dividend periods. If we do not pay in full
all amounts payable on any series of our preferred stock, the holders of our preferred stock will
share proportionately with any equally ranked securities in any distribution of our assets. After
the holders of any series of our preferred stock are paid in full, they will not have any further
claim to any of our remaining assets.
Redemption
. A series of our preferred stock may be redeemable, in whole or in part, at our
option or at the option of the holder of the stock, and may be subject to mandatory redemption
pursuant to a sinking fund, under the terms described in any applicable certificate of designation.
147
In the event of partial redemptions of our preferred stock, our board of directors or its
committee will determine the method for selecting the shares to be redeemed, which may be by lot or
pro rata or by any other method our board of directors or its committee determines to be equitable.
On and after a redemption date, unless we default in the payment of the redemption price,
dividends will cease to accrue on shares of our preferred stock which were called for redemption.
In addition, all rights of holders of the shares of our preferred stock will terminate except for
the right to receive the redemption price.
Conversion and Exchange
. The applicable certificate of designation for any series of our
preferred stock will state the terms and conditions, if any, on which shares of that series are
convertible into or exchangeable for our common stock or other securities.
Anti-Takeover Effects of Provisions of Our Certificate of Incorporation and Bylaws
The Restated Certificate of Incorporation, the Restated Bylaws and Delaware statutory law
contain certain provisions that could make the acquisition of our company by means of a tender
offer, a proxy contest or otherwise more difficult. The description set forth below is intended as
a summary only and is qualified in its entirety by reference to the Restated Certificate of
Incorporation and the Restated Bylaws which are attached as exhibits to our Registration Statement
on Form 10 under the Exchange Act relating to our common stock.
Classified Board of Directors
. The Restated Certificate of Incorporation provides for a
classified board of directors consisting of three classes of directors. Directors of each class are
chosen for three-year terms upon the expiration of their current terms and each year one class of
our directors will be elected by our stockholders. The terms of the first, second and third classes
will expire in 2012, 2013 and 2014, respectively.
Number of Directors; Filling Vacancies; Removal
. The Restated Certificate of Incorporation and
the Restated Bylaws provide that that our business and affairs will be managed by and under our
board of directors. The Restated Certificate of Incorporation and the Restated Bylaws provide that
the board of directors shall consist of not less than five or more than fifteen members, the exact
number of which will be fixed from time to time exclusively by a resolution duly adopted by the
board of directors. In addition, the Restated Certificate of Incorporation and the Restated Bylaws
provide that any vacancy on our board of directors that results from any increase in the number of
directors, or any other vacancies, may be filled solely by the affirmative vote of a majority of
the remaining directors then in office and entitled to vote thereon, even though less than a quorum
of the board of directors. The Restated Certificate of Incorporation also provides that any
director, or the entire board of directors, may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at least 66
2
/
3
% of the total voting power of
the outstanding shares of capital stock of the company entitled to vote thereon, voting as a single
class.
Notwithstanding the foregoing, the Restated Certificate of Incorporation and the Restated
Bylaws provide that whenever the holders of any class or series of our preferred stock have the
right to elect additional directors under specified circumstances, the election, removal, term of
office, filling of vacancies and other features of such directorships will be governed by the terms
of the certificate of designation applicable thereto.
Special Meetings
. The Restated Certificate of Incorporation and the Restated Bylaws provide
that, subject to the terms of any class or series of our preferred stock, special meetings of the
stockholders may be called at any time only by the board of directors (or an authorized committee
thereof) or by the chairperson of the board of directors.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
. The Restated
Bylaws establish an advance notice procedure for stockholders to make nominations of candidates for
election to the board of directors, or to bring other business before an annual meeting of
stockholders (the Stockholder Notice Procedure).
The Stockholder Notice Procedure provides that nominations of persons for election to the
board of directors and the proposal of business to be transacted by the stockholders may be made at
an annual meeting of stockholders (i) pursuant to the companys proxy materials with respect to
such meeting, (ii) by or at the direction of our board of directors or (iii) by any stockholder of
record of our company (a Record Stockholder) at the time of the giving of the notice required,
who is entitled to vote at the meeting and who has complied with the proper notice procedures.
Under the Stockholder Notice Procedure, for a stockholder notice in respect of the annual meeting
of stockholders to be timely, such notice must be received by our Secretary at our principal
executive offices not less than 90 or more than 120 days prior to the one-year anniversary of the
date on which the company first mailed its proxy materials; provided, however, that if the annual
meeting is convened more than 30 days prior to or delayed by more than 30 days after the one-year
anniversary of the preceding years annual meeting, or if no annual meeting was held in the
preceding year, notice by the Record Stockholder to be timely must be so received not later than
the close of the business on the later of (x) the 135th day prior to such annual meeting or (y) the
10th day following the day on which the public announcement of the date of such meeting is first
made by the company. Notwithstanding anything in the preceding sentence to the contrary, in the
event that the number of
148
directors to be elected to the board of directors is increased and we do not make a public
announcement naming all of the nominees for director or specifying the size of the increased board
of directors at least 10 days before the last day a Record Stockholder may deliver a notice of
nomination in accordance with the preceding sentence, a Record Stockholders notice will also be
considered timely, but only with respect to nominees for any new positions created by such
increase, if it is received by our Secretary at our principal executive offices not later than the
close of business on the 10th day following the day on which we first make such public
announcement.
Under the Stockholder Notice Procedure, a Record Stockholders notice proposing to nominate a
person for election as a director or bring other business before an annual meeting of stockholders
must contain certain information, as set forth in the Restated Bylaws. Only persons who are
nominated in accordance with the Stockholder Notice Procedures will be eligible to serve as
directors and only such business which has been brought before the meeting in accordance with these
Stockholder Notice Procedures will be conducted at an annual meeting of stockholders.
By requiring advance notice of nominations by stockholders, the Stockholder Notice Procedure
will afford our board of directors an opportunity to consider the qualifications of the proposed
nominees and, to the extent deemed necessary or desirable by our board of directors, to inform
stockholders about such qualifications. By requiring advance notice of other proposed business, the
Stockholder Notice Procedure will also provide a more orderly procedure for conducting annual
meetings of stockholders and, to the extent deemed necessary or desirable by our board of
directors, will provide our board of directors with an opportunity to inform stockholders, prior to
such meetings, of any business proposed to be conducted at such meetings, together with any
recommendations as to our board of directors position regarding action to be taken with respect to
such business, so that stockholders can better decide whether to attend such a meeting or to grant
a proxy regarding the disposition of any such business.
Contests for the election of directors or the consideration of stockholder proposals will be
precluded if the proper procedures are not followed. Third parties may therefore be discouraged
from conducting a solicitation of proxies to elect its own slate of directors or to approve its own
proposal.
Stockholder Action by Written Consent with Board Authorization
. The Restated Certificate of
Incorporation and the Restated Bylaws require authorization of our board of directors (or an
authorized committee thereof) for action by written consent of the holders of the outstanding
shares of stock having not less than the minimum voting power that would be necessary to authorize
or take such action at a meeting of stockholders at which all shares entitled to vote thereon were
present and voted, provided all other requirements of applicable law and the Restated Certificate
of Incorporation have been satisfied.
Amendments to Certificate of Incorporation and Bylaws.
The Restated Certificate of
Incorporation provides that, in addition to any requirements of law and notwithstanding any other
provision of the Restated Certificate of Incorporation or the Restated Bylaws of our company, the
affirmative vote of at least
66
2
/
3
% in voting power of the issued and outstanding stock entitled to
vote thereon, voting as a single class, will be required for our stockholders to amend or repeal,
or adopt any provision inconsistent with, the provisions in the Restated Certificate of
Incorporation or the Bylaws relating to the number, term and election of directors, vacancies on
our board of directors, removal of directors, stockholder action by written consent, calling of
special meetings, advance notice of stockholder proposals, liability of directors, indemnification,
amendments to the Restated Certificate of Incorporation and amendments to the Restated Bylaws.
Stockholder Meetings
. The Restated Bylaws provide that all meetings of stockholders will be
conducted in accordance with such rules and procedures as our board of directors may determine
subject to the requirements of applicable law and, as to matters not governed by such rules and
procedures, as the chairperson of such meeting will determine. Such rules and procedures may
include the establishment of an agenda, rules and procedures for maintaining order, limitations on
attendance and participation relating to presence at the meeting of persons other than
stockholders, restrictions on entry at the meeting after commencement thereof and the imposition of
time limitations for questions by participants at the meeting.
Our Preferred Stock
. The Restated Certificate of Incorporation authorizes our board of
directors to provide for series of our preferred stock and, with respect to each such series, to
fix the number of shares constituting such series and the designation of such series, the voting
powers (if any) of the shares of such series, and the preferences and relative, participating,
optional or other special rights, if any, and any qualifications, limitations or restrictions
thereof, of the shares of such series.
We believe that the ability of our board of directors to issue one or more series of our
preferred stock will provide us with flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs which might arise. The authorized shares of our
preferred stock, as well as shares of common stock, will be available for issuance without further
action by our stockholders, unless such action is required by applicable law or the rules of any
stock exchange or automated quotation system on which our securities may be listed or traded. The
NYSE currently requires
149
stockholder approval as a prerequisite to listing shares in several instances, including where
the present or potential issuance of shares could result in a 20% increase in the number of shares
of common stock outstanding or in the amount of voting securities outstanding. If the approval of
our stockholders is not required for the issuance of shares of our preferred stock or our common
stock, our board of directors may determine not to seek stockholder approval.
Although our board of directors has no intention at the present time of doing so, it could
issue a series of our preferred stock that could, depending on the terms of such series, impede the
completion of a merger, tender offer or other takeover attempt. Our board of directors will make
any determination to issue such shares based on its judgment as to the best interests of the
company and our stockholders. Our board of directors, in so acting, could issue our preferred stock
having terms that could discourage an acquisition attempt through which an acquiror may be able to
change the composition of our board of directors, including a tender offer or other transaction
that some, or a majority, of our stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then current market price of
such stock.
Section 203 of the Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law (the DGCL) provides that, subject to
certain exceptions specified therein, a corporation shall not engage in any business combination
with any interested stockholder for a three-year period following the time that such stockholder
becomes an interested stockholder unless (i) prior to such time, the board of directors of the
corporation approved either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the transaction commenced
(excluding certain shares) or (iii) on or subsequent to such time, the business combination is
approved by the board of directors of the corporation and by the
affirmative vote of at least 66
2
/
3
%
of the outstanding voting stock which is not owned by the interested stockholder. Section 203 of
the DGCL generally defines an interested stockholder to include (x) any person that is the owner
of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within three years immediately prior to the relevant date and (y) the
affiliates and associates of any such person. Section 203 of the DGCL generally defines a business
combination to include (1) mergers and sales or other dispositions of 10% or more of the assets of
the corporation with or to an interested stockholder, (2) certain transactions resulting in the
issuance or transfer to the interested stockholder of any stock of the corporation or its
subsidiaries, (3) certain transactions which would result in increasing the proportionate share of
the stock of the corporation or its subsidiaries owned by the interested stockholder and (4)
receipt by the interested stockholder of the benefit (except proportionately as a stockholder) of
any loans, advances, guarantees, pledges or other financial benefits.
Under certain circumstances, Section 203 of the DGCL makes it more difficult for a person who
would be an interested stockholder to effect various business combinations with a corporation for
a three-year period, although the certificate of incorporation or stockholder-adopted bylaws may
exclude a corporation from the restrictions imposed thereunder. Neither the Restated Certificate of
Incorporation nor the Restated Bylaws exclude HII from the restrictions imposed under Section 203
of the DGCL. It is anticipated that the provisions of Section 203 of the DGCL may encourage
companies interested in acquiring us to negotiate in advance with our board of directors since the
stockholder approval requirement would be avoided if our board of directors approves, prior to the
time the stockholder becomes an interested stockholder, either the business combination or the
transaction which results in the stockholder becoming an interested stockholder.
Transfer Agent and Registrar
The registrar and transfer agent for our common stock is Computershare Trust Company, N.A.
Listing
Following the spin-off, we expect to have our common stock listed on the NYSE under the ticker
symbol HII.
150
Liability and Indemnification of Directors and Officers
Elimination of Liability of Directors
. The Restated Certificate of Incorporation provides that
a director of our company will not be liable to the company or our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the
directors duty of loyalty to the company or our stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL (which concerns unlawful payments of dividends, stock purchases or
redemptions), or (iv) for any transaction from which the director derives an improper personal
benefit. If the DGCL is amended to authorize the further elimination or limitation of the liability
of directors, then the liability of a director of the company shall be eliminated or limited to the
fullest extent permitted by the DGCL, as so amended.
While the Restated Certificate of Incorporation provides directors with protection from awards
for monetary damages for breaches of their duty of care, it does not eliminate such duty.
Accordingly, the Restated Certificate of Incorporation will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a directors breach of his or her
duty of care. The provisions of the Restated Certificate of Incorporation described above apply to
an officer of HII only if he or she is a director of HII and is acting in his or her capacity as
director, and do not apply to officers of HII who are not directors.
Indemnification of Directors, Officers, Employees and Agents
. The Restated Bylaws provide that
we will indemnify and hold harmless, to the fullest extent authorized by the DGCL as it presently
exists or may thereafter be amended, any person (an Indemnitee) who was or is made a party to
any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or
investigative (a proceeding), by reason of the fact that he or she is or was a director, officer,
employee or agent of our company or while he or she is or was serving at the request of the board
of directors or an executive officer of our company as a director, officer, employee, agent or
trustee of another corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan, against all expense, liability and loss
(including attorneys fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) actually and reasonably incurred or suffered by such Indemnitee in connection
therewith. The Restated Bylaws also provide that, notwithstanding the foregoing, but except as
described in the second following paragraph, we will be required to indemnify an Indemnitee in
connection with a proceeding, or part thereof, initiated by such Indemnitee only if such
proceeding, or part thereof, was authorized by our board of directors.
The Restated Bylaws further provide that we will pay the expenses incurred by an Indemnitee in
defending or preparing for any proceeding in advance of its final disposition, provided however,
that if the DGCL requires, such payment of expenses in advance of the final disposition of the
proceeding will be made only upon delivery to our company of an undertaking containing such terms
and conditions, including the requirement of security, as our board of directors deems appropriate,
by or on behalf of such Indemnitee, to repay all amounts so advanced if it is ultimately determined
by final judicial decision from which there is no further right to appeal that the Indemnitee is
not entitled to be indemnified under the relevant section of the Restated Bylaws or otherwise.
The Restated Bylaws also expressly state that we may grant additional rights to
indemnification and to the advancement of expenses to any of our employees or agents to the fullest
extent permitted by law.
151
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a Form 10 with respect to the shares of common stock that Northrop
Grumman stockholders will receive in the distribution. This information statement does not contain
all of the information contained in the Form 10 and the exhibits and schedules to the Form 10. Some
items are omitted in accordance with the rules and regulations of the SEC. For additional
information relating to us and the spin-off, reference is made to the Form 10 and the exhibits to
the Form 10, which are on file at the offices of the SEC. Statements contained in this information
statement as to the contents of any contract or other document referred to are not necessarily
complete and in each instance, if the contract or document is filed as an exhibit, reference is
made to the copy of the contract or other documents filed as an exhibit to the Form 10. Each
statement is qualified in all respects by the relevant reference.
You may inspect and copy the Form 10 and the exhibits to the Form 10 that we have filed with
the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please
call the SEC at (800) SEC-0330 for further information on the Public Reference Room. In addition,
the SEC maintains an Internet site at www.sec.gov, from which you can electronically access the
Form 10, including the exhibits and schedules to the Form 10.
We maintain an Internet site at www. .com. Our Internet site and the information contained
on that site, or connected to that site, are not incorporated into the information statement or the
registration statement on Form 10.
As a result of the distribution, we will be required to comply with the full informational
requirements of the Exchange Act. We will fulfill our obligations with respect to these
requirements by filing periodic reports and other information with the SEC.
We plan to make available, free of charge, on our Internet site our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to
Section 16 of the Exchange Act and amendments to those reports as soon as reasonably practicable
after we electronically file or furnish such materials to the SEC.
You should rely only on the information contained in this information statement or to which we
have referred you. We have not authorized any person to provide you with different information or
to make any representation not contained in this information statement.
152
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
Page
|
NORTHROP GRUMMAN SHIPBUILDING
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-2
|
Consolidated Statements of Operations
|
|
F-3
|
Consolidated Statements of Financial Position
|
|
F-4
|
Consolidated Statements of Cash Flows
|
|
F-5
|
Consolidated Statements of Changes in Equity
|
|
F-6
|
Notes to Consolidated Financial Statements
|
|
F-7
|
|
|
|
HUNTINGTON INGALLS INDUSTRIES, INC.
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-35
|
Statement of Financial Position
|
|
F-36
|
Note to Statement of Financial Position
|
|
F-37
|
F-1
NORTHROP GRUMMAN SHIPBUILDING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Northrop Grumman Corporation
Los Angeles, California
We have audited the accompanying consolidated statements of financial position of Northrop Grumman
Shipbuilding and subsidiaries (the Company), a wholly owned subsidiary of Northrop Grumman
Corporation (the Corporation), as of December 31, 2010 and 2009, and the related consolidated
statements of operations, changes in equity and cash flows for each of the three years in the
period ended December 31, 2010. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Northrop Grumman Shipbuilding and subsidiaries as of December 31, 2010
and 2009, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2010, in conformity with accounting principles generally accepted in
the United States of America.
As described in Note 2, the accompanying consolidated financial statements have been derived from
the consolidated financial statements and accounting records of the Corporation. The consolidated
financial statements also include expense allocations for certain corporate functions historically
provided by the Corporation. These allocations may not be reflective of the actual expense which
would have been incurred had the Company operated as a separate entity apart from the Corporation.
DELOITTE & TOUCHE LLP
Virginia Beach, Virginia
February 8, 2011
(February 21, 2011 as to Note 13)
F-2
NORTHROP GRUMMAN SHIPBUILDING
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
5,798
|
|
|
$
|
5,046
|
|
|
$
|
5,207
|
|
Service revenues
|
|
|
925
|
|
|
|
1,246
|
|
|
|
982
|
|
|
Total sales and service revenues
|
|
|
6,723
|
|
|
|
6,292
|
|
|
|
6,189
|
|
|
Cost of Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
5,042
|
|
|
|
4,415
|
|
|
|
4,672
|
|
Cost of service revenues
|
|
|
770
|
|
|
|
1,027
|
|
|
|
817
|
|
Corporate home office and other general and
administrative costs
|
|
|
663
|
|
|
|
639
|
|
|
|
564
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
2,490
|
|
|
Operating income (loss)
|
|
|
248
|
|
|
|
211
|
|
|
|
(2,354
|
)
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(40
|
)
|
|
|
(36
|
)
|
|
|
(40
|
)
|
Other, net
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
206
|
|
|
|
176
|
|
|
|
(2,394
|
)
|
Federal income taxes
|
|
|
71
|
|
|
|
52
|
|
|
|
26
|
|
|
Net earnings (loss)
|
|
$
|
135
|
|
|
$
|
124
|
|
|
$
|
(2,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from above
|
|
$
|
135
|
|
|
$
|
124
|
|
|
$
|
(2,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unamortized benefit plan costs
|
|
|
11
|
|
|
|
142
|
|
|
|
(677
|
)
|
Tax (expense) benefit on change in
unamortized benefit plan costs
|
|
|
5
|
|
|
|
(56
|
)
|
|
|
264
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
16
|
|
|
|
86
|
|
|
|
(413
|
)
|
|
Comprehensive income (loss)
|
|
$
|
151
|
|
|
$
|
210
|
|
|
$
|
(2,833
|
)
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
NORTHROP GRUMMAN SHIPBUILDING
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
December 31
|
|
December 31
|
|
December 31
|
$ in millions
|
|
2010
|
|
2010
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
728
|
|
|
$
|
728
|
|
|
$
|
537
|
|
Inventoried costs, net
|
|
|
293
|
|
|
|
293
|
|
|
|
298
|
|
Deferred income taxes
|
|
|
284
|
|
|
|
284
|
|
|
|
326
|
|
Prepaid expenses and other current assets
|
|
|
8
|
|
|
|
8
|
|
|
|
10
|
|
|
Total current assets
|
|
|
1,313
|
|
|
|
1,313
|
|
|
|
1,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant, and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
303
|
|
|
|
303
|
|
|
|
287
|
|
Buildings and leasehold improvements
|
|
|
1,357
|
|
|
|
1,357
|
|
|
|
1,296
|
|
Machinery and other equipment
|
|
|
1,162
|
|
|
|
1,162
|
|
|
|
1,104
|
|
Capitalized software costs
|
|
|
185
|
|
|
|
185
|
|
|
|
160
|
|
|
|
|
|
3,007
|
|
|
|
3,007
|
|
|
|
2,847
|
|
Accumulated depreciation and amortization
|
|
|
(1,010
|
)
|
|
|
(1,010
|
)
|
|
|
(870
|
)
|
|
Property, plant, and equipment, net
|
|
|
1,997
|
|
|
|
1,997
|
|
|
|
1,977
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,134
|
|
|
|
1,134
|
|
|
|
1,134
|
|
Other purchased intangibles, net of accumulated amortization of $352
in 2010 and $329 in 2009
|
|
|
587
|
|
|
|
587
|
|
|
|
610
|
|
Pension plan asset
|
|
|
131
|
|
|
|
131
|
|
|
|
116
|
|
Miscellaneous other assets
|
|
|
41
|
|
|
|
41
|
|
|
|
28
|
|
|
Total other assets
|
|
|
1,893
|
|
|
|
1,893
|
|
|
|
1,888
|
|
|
Total assets
|
|
$
|
5,203
|
|
|
$
|
5,203
|
|
|
$
|
5,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to parent
|
|
|
|
|
|
$
|
715
|
|
|
$
|
537
|
|
Trade accounts payable
|
|
$
|
274
|
|
|
|
274
|
|
|
|
314
|
|
Current portion of workers compensation liabilities
|
|
|
197
|
|
|
|
197
|
|
|
|
255
|
|
Accrued interest on notes payable to parent
|
|
|
|
|
|
|
239
|
|
|
|
212
|
|
Current portion of post-retirement plan liabilities
|
|
|
146
|
|
|
|
146
|
|
|
|
175
|
|
Accrued employees compensation
|
|
|
203
|
|
|
|
203
|
|
|
|
173
|
|
Advance payments and billings in excess of costs incurred
|
|
|
107
|
|
|
|
107
|
|
|
|
81
|
|
Provision for contract losses
|
|
|
80
|
|
|
|
80
|
|
|
|
53
|
|
Other current liabilities
|
|
|
265
|
|
|
|
265
|
|
|
|
154
|
|
|
Total current liabilities
|
|
|
1,272
|
|
|
|
2,226
|
|
|
|
1,954
|
|
|
Long-term debt
|
|
|
105
|
|
|
|
105
|
|
|
|
283
|
|
Contribution payable to parent
|
|
|
|
|
|
|
|
|
|
|
1,429
|
|
Other post-retirement plan liabilities
|
|
|
567
|
|
|
|
567
|
|
|
|
502
|
|
Pension plan liabilities
|
|
|
381
|
|
|
|
381
|
|
|
|
379
|
|
Workers compensation liabilities
|
|
|
351
|
|
|
|
351
|
|
|
|
265
|
|
Deferred tax liabilities
|
|
|
99
|
|
|
|
99
|
|
|
|
156
|
|
Other long-term liabilities
|
|
|
56
|
|
|
|
56
|
|
|
|
60
|
|
|
Total liabilities
|
|
|
4,260
|
|
|
|
3,785
|
|
|
|
3,599
|
|
|
Commitments and Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $.01 par value
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
1,458
|
|
|
|
|
|
|
|
|
|
Parents equity in unit
|
|
|
|
|
|
|
1,933
|
|
|
|
1,968
|
|
Accumulated other comprehensive loss
|
|
|
(515
|
)
|
|
|
(515
|
)
|
|
|
(531
|
)
|
|
Total equity
|
|
|
943
|
|
|
|
1,418
|
|
|
|
1,437
|
|
|
Total liabilities and equity
|
|
$
|
5,203
|
|
|
$
|
5,203
|
|
|
$
|
5,036
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
NORTHROP GRUMMAN SHIPBUILDING
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss)
|
|
$
|
135
|
|
|
$
|
124
|
|
|
$
|
(2,420
|
)
|
Adjustments to reconcile to net cash provided by
(used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
160
|
|
|
|
156
|
|
|
|
137
|
|
Amortization of purchased intangibles
|
|
|
23
|
|
|
|
30
|
|
|
|
56
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
2,490
|
|
Deferred income taxes
|
|
|
(19
|
)
|
|
|
(98
|
)
|
|
|
10
|
|
Decrease (increase) in
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(190
|
)
|
|
|
(56
|
)
|
|
|
(103
|
)
|
Inventoried costs
|
|
|
5
|
|
|
|
(101
|
)
|
|
|
52
|
|
Prepaid expenses and other current assets
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
2
|
|
Increase (decrease) in
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accruals
|
|
|
205
|
|
|
|
(111
|
)
|
|
|
145
|
|
Retiree benefits
|
|
|
33
|
|
|
|
(28
|
)
|
|
|
(28
|
)
|
Other non-cash transactions, net
|
|
|
5
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
Net cash provided by (used in) operations
|
|
|
359
|
|
|
|
(88
|
)
|
|
|
339
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant, and equipment
|
|
|
(191
|
)
|
|
|
(181
|
)
|
|
|
(218
|
)
|
Decrease in restricted cash
|
|
|
|
|
|
|
|
|
|
|
61
|
|
Other investing activities, net
|
|
|
2
|
|
|
|
3
|
|
|
|
5
|
|
|
Net cash used in investing activities
|
|
|
(189
|
)
|
|
|
(178
|
)
|
|
|
(152
|
)
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of note payable to parent
|
|
|
178
|
|
|
|
|
|
|
|
|
|
Net transfers from (to) parent
|
|
|
(170
|
)
|
|
|
266
|
|
|
|
(187
|
)
|
|
Net cash (used in) provided by financing activities
|
|
|
(170
|
)
|
|
|
266
|
|
|
|
(187
|
)
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures accrued in accounts payable
|
|
$
|
44
|
|
|
$
|
47
|
|
|
$
|
42
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
NORTHROP GRUMMAN SHIPBUILDING
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Parents Equity in Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
$
|
1,968
|
|
|
$
|
1,578
|
|
|
$
|
4,185
|
|
Net earnings (loss)
|
|
|
135
|
|
|
|
124
|
|
|
|
(2,420
|
)
|
Net transfers from (to) parent
|
|
|
(170
|
)
|
|
|
266
|
|
|
|
(187
|
)
|
|
At end of year
|
|
|
1,933
|
|
|
|
1,968
|
|
|
|
1,578
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
|
(531
|
)
|
|
|
(617
|
)
|
|
|
(204
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
16
|
|
|
|
86
|
|
|
|
(413
|
)
|
|
At end of year
|
|
|
(515
|
)
|
|
|
(531
|
)
|
|
|
(617
|
)
|
|
Total equity
|
|
$
|
1,418
|
|
|
$
|
1,437
|
|
|
$
|
961
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NORTHROP GRUMMAN SHIPBUILDING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Northrop Grumman Shipbuilding and its subsidiaries (NGSB or the company) is a wholly owned
subsidiary of Northrop Grumman Corporation (Northrop Grumman). The company currently operates
three major shipyards located in Newport News, Virginia, Pascagoula, Mississippi and Avondale,
Louisiana but plans to wind down its shipbuilding operations at the Avondale, Louisiana facility in
2013 (see Note 4).
The companys business is organized into two operating segments, Gulf Coast and Newport News.
Through its Gulf Coast shipyards, the company currently is the sole supplier and builder of
amphibious assault and expeditionary ships to the U.S. Navy, currently the sole builder of National
Security Cutters for the U.S. Coast Guard, one of only two companies that currently builds the U.S.
Navys current fleet of DDG-51 Arleigh Burke-class destroyers, and one of the nations leading
service providers of life cycle support of major surface ship programs for the U.S. Navy and U.S.
Coast Guard. Through its Newport News shipyard, the company is the nations sole industrial
designer, builder, and refueler of nuclear-powered aircraft carriers, and one of only two companies
currently capable of designing and building nuclear-powered submarines for the U.S. Navy. As prime
contractor, principal subcontractor, or partner, NGSB participates in many high-priority defense
technology programs in the U.S. The company conducts most of its business with the U.S. Government,
principally the Department of Defense (DoD).
Strategic Actions
Northrop Grumman announced in July 2010 that it will evaluate whether a
separation of NGSB would be in the best interests of Northrop Grumman shareholders, customers, and
employees. Strategic alternatives for NGSB include, but are not limited to, a spin-off to Northrop
Grumman shareholders. Northrop Grumman believes that separating NGSB from Northrop Grumman will
benefit both Northrop Grumman and the shipbuilding business by better aligning managements
attention and investment resources to pursue opportunities in their respective markets and more
actively manage their cost structures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of NGSB have been derived from the
consolidated financial statements and accounting records of Northrop Grumman and were prepared in
conformity with accounting principles generally accepted in the United States (GAAP).
The consolidated statements of operations include expense allocations for certain corporate
functions historically provided to NGSB by Northrop Grumman, including, but not limited to, human
resources, employee benefits administration, treasury, risk management, audit, finance, tax, legal,
information technology support, procurement, and other shared services. These allocations are
reflected in the consolidated statements of operations within the expense categories to which they
relate. The allocations were made on a direct usage basis when identifiable, with the remainder
allocated on various bases that are further discussed in Note 19. Management of NGSB and Northrop
Grumman consider these allocations to be a reasonable reflection of the utilization of services by,
or benefits provided to, NGSB. Management believes that the allocations are substantially
consistent with NGSBs estimates of the costs it would incur as a stand-alone company. However,
these estimates are based on managements judgment regarding its future stand-alone company costs
and not the actual costs incurred.
Transactions between NGSB and Northrop Grumman are reflected as effectively settled for cash at the
time of the transaction and are included in financing activities in the consolidated statements of
cash flows. The net effect of these transactions is reflected in the parents equity in unit in
the consolidated statements of financial position.
The consolidated financial statements also include certain Northrop Grumman assets and liabilities
that are specifically identifiable or otherwise allocable to the company. The NGSB consolidated
financial statements may not be indicative of NGSBs future performance and do not necessarily
reflect what the results of operations, financial position and cash flows would have been had NGSB
operated as a stand-alone company during the periods presented.
Unaudited Pro Forma Statement of Financial Position
The unaudited pro forma statement of
financial position presents NGSBs pro forma capitalization at December 31, 2010. The statement
reflects the impacts of the transactions to be completed in conjunction with the spin-off of
Huntington Ingalls Industries, Inc. (HII), which will become the parent of NGSB, including: (i)
the distribution of HII common stock by Northrop Grumman to its shareholders; and (ii) the accrual
of the contribution of $1,429 million by HII to Northrop Grumman Systems Corporation, a subsidiary
of Northrop Grumman (the Contribution). The Contribution is presented as a long-term obligation
because it will be paid using the proceeds from the incurrence of $1,775 million of debt prior to
the completion of the spin-off by HII (the HII Debt). HII will record the net proceeds of the HII Debt after
funding the Contribution as cash and cash equivalents on its Consolidated Statement of Financial
Position.
F-7
NORTHROP GRUMMAN SHIPBUILDING
The distribution of HII common stock to Northrop Grummans stockholders includes adjustments for
the recapitalization transactions. In connection with this recapitalization, the amount of
Northrop Grummans net investment in HII, including intercompany debt and accrued interest thereon
which was recorded as notes payable to parent in the consolidated statement of financial position,
net of the contribution, will be contributed to additional paid-in capital. Northrop Grumman
stockholders will receive one share of HII common stock for every six shares of Northrop Grumman
stock owned. The unaudited pro forma statement of financial position reflects a distribution of
48,492,792 shares of HII common stock based on the 290,956,752 shares of Northrop Grumman stock
outstanding as of December 31, 2010.
The unaudited pro forma statement of financial position was prepared as if the transactions and
events described above had occurred on December 31, 2010.
Parents Equity in Unit
Parents Equity in Unit in the consolidated statements of financial
position represents Northrop Grummans historical investment in NGSB, the net effect of cost
allocations from and transactions with Northrop Grumman, net cash activity, and NGSBs accumulated
earnings. See Basis of Presentation in Note 2 and Note 19.
Financial Statement Reclassification
Certain amounts in the prior year financial statements and
related notes have been reclassified to conform to the current presentation as described in Note
10. In addition, the company reclassified $22 million of accrued liabilities from non-current to
current liabilities in the 2009 consolidated statements of financial position to conform to the
current presentation.
Principles of Consolidation
The consolidated financial statements presented herein represent the
stand-alone results of operations, financial position and cash flows of NGSB and its subsidiaries.
All intercompany transactions and accounts of NGSB have been eliminated.
Accounting Estimates
The preparation of the financial statements requires management to make
estimates and judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingencies at the date of the financial statements as well as the reported amounts
of revenues and expenses during the reporting period. Estimates have been prepared on the basis of
the most current and best available information; actual results could differ materially from those
estimates.
Revenue Recognition
As a defense contractor engaging in long-term contracts (both as prime
contractor and subcontractor), the majority of the companys business is derived from long-term
contracts for the construction of naval vessels, production of goods, and services provided to the
federal government, principally the U.S. Navy. In accounting for these contracts, the company
extensively utilizes the cost-to-cost measures of the percentage-of-completion method of
accounting, principally based upon direct labor dollars or total costs incurred. Under this
method, sales, including estimated earned fees or profits, are recorded as costs are incurred.
Contract sales are calculated either based on the percentage that direct labor costs incurred bear
to total estimated direct labor costs or based on the percentage that total costs incurred bear to
total estimated costs at completion. Certain contracts contain provisions for price redetermination
or for cost and/or performance incentives. Such redetermined amounts or incentives are included in
sales when the amounts can reasonably be determined and estimated. Amounts representing contract
change orders, claims, requests for equitable adjustment, or limitations in funding are included in
sales only when they can be reliably estimated and realization is probable. The company estimates
profit as the difference between total estimated revenue and total estimated cost of a contract and
recognizes that profit over the life of the contract based on progress towards completion. The
company classifies contract revenues as product sales or service revenues depending upon the
predominant attributes of the relevant underlying contracts. In the period in which it is
determined that a loss will result from the performance of a contract, the entire amount of the
estimated ultimate loss is charged against income. Loss provisions are first offset against costs
that are included in unbilled accounts receivable or inventoried costs, with any remaining amount
reflected in other current liabilities. Changes in estimates of contract sales, costs, and profits
are recognized using the cumulative catch-up method of accounting. This method recognizes in the
current period the cumulative effect of the changes on current and prior periods. Hence, the effect
of the changes on future periods of contract performance is recognized as if the revised estimate
had been the original estimate. A significant change in an estimate on one or more contracts could
have a material effect on the companys consolidated financial position or results of operations,
and where such changes occur, separate disclosure is made of the nature, underlying conditions, and
the amount of the financial impact from the change in estimate (see Notes 4 and 6).
Corporate Home Office and Other General and Administrative Costs
In accordance with industry
practice and the regulations that govern the cost accounting requirements for government contracts,
most general and administrative expenses are considered allowable and allocable costs on government
contracts. These costs are allocated to contracts in progress on a systematic basis and contract
performance factors include this cost component as an element of cost.
General and administrative expenses also include certain Northrop Grumman corporate and other
costs, primarily consisting of the net
pension and post-retirement benefits adjustment, the provision for deferred state income taxes and
certain other expenses that are generally not currently allowable under the Federal Acquisition
Regulations (FAR). The net pension and post-retirement benefits adjustment reflects the difference
between pension and post-retirement benefits expenses determined in accordance with GAAP and
F-8
NORTHROP GRUMMAN SHIPBUILDING
pension and post-retirement benefit expenses allocated to individual contracts determined in
accordance with Cost Accounting Standards (CAS). For purposes of these stand-alone financial
statements, these Northrop Grumman amounts together with allowable general and administrative
expenses have been allocated to NGSB. Allowable general and administrative expense is comprised of
NGSB home office costs, independent research and development costs, bid and proposal costs, the
allowable portion of corporate home office costs, and the current state income tax provision.
Research and Development
Company-sponsored research and development activities primarily include
independent research and development (IR&D) efforts related to government programs. IR&D expenses
are included in general and administrative expenses and are generally allocated to government
contracts. Company-sponsored IR&D expenses totaled $23 million, $21 million and $21 million for the
years ended December 31, 2010, 2009 and 2008, respectively. Expenses for research and development
sponsored by the customer are charged directly to the related contracts.
Product Warranty Costs
The company provides certain product warranties that require repair or
replacement of non-conforming items for a specified period of time often subject to a specified
monetary coverage limit. The companys product warranties are provided under government contracts,
the costs of which are immaterial and are accounted for using the percentage-of-completion method
of accounting.
Environmental Costs
Environmental liabilities are accrued when the company determines it is
responsible for remediation costs and such amounts are reasonably estimable. When only a range of
amounts is established and no amount within the range is more probable than another, the minimum
amount in the range is recorded. Environmental liabilities are recorded on an undiscounted basis.
Environmental expenditures are expensed or capitalized as appropriate. Capitalized expenditures, if
any, relate to long-lived improvements in currently operating facilities. The company does not
record insurance recoveries before collection is probable. At December 31, 2010, and 2009, the
company did not have any accrued receivables related to insurance reimbursements or recoveries for
environmental matters.
Fair Value of Financial Instruments
The valuation techniques utilized to determine the fair
value of financial instruments are based upon observable and unobservable inputs. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect internal
market assumptions. These two types of inputs create the following fair value hierarchy:
|
|
|
Level 1
|
|
Quoted prices for identical instruments in active markets.
|
|
|
|
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 3
|
|
Significant inputs to the valuation model are unobservable.
|
Except for long-term debt, the carrying amounts of the companys other financial instruments are
measured at fair value or approximate fair value due to the short-term nature of these other items.
Asset Retirement Obligations
The company records all known asset retirement obligations for
which the liabilitys fair value can be reasonably estimated, including certain asbestos removal,
asset decommissioning and contractual lease restoration obligations. Recorded amounts as of
December 31, 2010 are $20 million and consist primarily of obligations associated with the wind
down of the companys shipbuilding operations at the Avondale facility (see Note 4). Amounts as of
December 31, 2009 were not material.
The company also has known conditional asset retirement obligations related to assets currently in
use, such as certain asbestos remediation and asset decommissioning activities to be performed in
the future, that are not reasonably estimable as of December 31, 2010 and 2009 due to insufficient
information about the timing and method of settlement of the obligation. Accordingly, the fair
value of these obligations has not been recorded in the consolidated financial statements.
Environmental remediation and/or asset decommissioning of these facilities may be required when the
company ceases to utilize these facilities but no such plans are currently contemplated as of
December 31, 2010. In addition, there may be conditional environmental asset retirement
obligations that the company has not yet discovered (e.g. asbestos may exist in certain buildings
which the company has not become aware of through its normal business operations), and therefore,
these obligations also have not been included in the consolidated financial statements.
Income Taxes
The results of the companys operations are included in the federal income and
state income and franchise tax returns of Northrop Grumman. Income tax expense and other income
tax-related information contained in these financial statements are presented as if the company
filed its own tax returns on a stand-alone basis and are based on the prevailing statutory rates
for U.S. federal income taxes and the composite state income tax rate for the company for each
period presented. State and local income and
franchise tax provisions are allocable to contracts in process and, accordingly, are included in
cost of product sales, cost of service revenues and corporate home office and other general and
administrative expenses.
The company makes a comprehensive review of its portfolio of uncertain tax
positions regularly. In this regard, an uncertain tax
F-9
NORTHROP GRUMMAN SHIPBUILDING
position represents the companys expected treatment of a tax
position taken in Northrop Grummans consolidated tax return, or planned to be taken in a future
tax return or claim that has not been reflected in measuring income tax expense for financial
reporting purposes. Until these positions are sustained or otherwise resolved by the taxing
authorities, the company does not recognize the tax benefits resulting from such positions, if any,
and reports the tax effects as a liability for uncertain tax positions in its consolidated
statements of financial position.
Determinations of the expected realizability of deferred tax assets and the need for any valuation
allowances against these deferred tax assets were evaluated based upon the stand-alone tax
attributes of the company, and no valuation allowances were deemed necessary as of December 31,
2010, and 2009.
Current federal income tax liabilities are assumed to be immediately settled by Northrop Grumman
and are relieved through the parents equity in unit account. Federal income taxes have been
recorded within income tax expense. The company recognizes interest accrued related to unrecognized
tax benefits in income tax expense. Penalties, if probable and reasonably estimable, are also
recognized as a component of income tax expense.
Cash and Cash Equivalents
Northrop Grumman utilizes a centralized cash management system. Cash
and cash equivalents balances are held at the Northrop Grumman level and have not been allocated to
NGSB. Historically, cash received by the company has been transferred to Northrop Grumman, and
Northrop Grumman has funded the companys disbursement accounts on an as-needed basis. The net
effect of transfers of cash to and from the Northrop Grumman cash management accounts is reflected
in the parents equity in unit account in the consolidated statements of financial position.
Accounts Receivable
Accounts receivable include amounts billed and currently due from customers,
amounts currently due but unbilled, certain estimated contract change amounts, claims or requests
for equitable adjustment in negotiation that are probable of recovery, and amounts retained by the
customer pending contract completion.
Inventoried Costs
Inventoried costs primarily relate to work in process under contracts that
recognize revenue using labor dollars as the basis of the percentage-of-completion calculation.
These costs represent accumulated contract costs less cost of sales, as calculated using the
percentage-of-completion method. Accumulated contract costs include direct production costs,
factory and engineering overhead, production tooling costs, and, for government contracts,
allowable general and administrative expenses. According to the provisions of U.S. Government
contracts, the customer asserts title to, or a security interest in, inventories related to such
contracts as a result of contract advances, performance-based payments, and progress payments. In
accordance with industry practice, inventoried costs are classified as a current asset and include
amounts related to contracts having production cycles longer than one year. Inventoried costs also
include company owned raw materials, which are stated at the lower of cost or market, generally
using the average cost method.
Depreciable Properties
Property, plant, and equipment owned by the company are recorded at cost
and depreciated over the estimated useful lives of individual assets. Costs incurred for computer
software developed or obtained for internal use are capitalized and amortized over the expected
useful life of the software, not to exceed nine years. Leasehold improvements are amortized over
the shorter of their useful lives or the term of the lease.
The remaining assets are depreciated using the straight-line method, with the following lives:
|
|
|
|
|
|
|
Years
|
|
Land improvements
|
|
|
12 - 45
|
|
Buildings and improvements
|
|
|
15 - 50
|
|
Capitalized software costs
|
|
|
3 - 9
|
|
Machinery and other equipment
|
|
|
3 - 45
|
|
|
The company evaluates the recoverability of its property, plant and equipment when there are
changes in economic circumstances or business objectives that indicate the carrying value may
not be recoverable. The companys evaluations include estimated future cash flows,
profitability and other factors in determining fair value. As these assumptions and
estimates may change over time, it may or may not be necessary to record impairment charges.
Leases
The company has historically used Northrop Grummans 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 company conducts operations
primarily under operating leases.
Many of the companys real property lease agreements contain incentives for tenant improvements,
rent holidays, or rent escalation
clauses. For incentives for tenant improvements, the company 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, the company records minimum rental
expenses on a straight-line basis over the term of the lease. For purposes of recognizing lease
incentives, the
F-10
NORTHROP GRUMMAN SHIPBUILDING
company uses the date of initial possession as the commencement date, which is
generally, when the company is given the right of access to the space and begins to make
improvements in preparation for intended use.
Goodwill and Other Purchased Intangible Assets
The company performs impairment tests for
goodwill as of November 30th of each year, or when evidence of potential impairment exists. When it
is determined that impairment has occurred, a charge to operations is recorded. Purchased
intangible assets are amortized on a straight-line basis over their estimated useful lives and the
carrying value of these assets is reviewed for impairment when events indicate that a potential
impairment may have occurred (see Notes 4 and 9).
Self-Insured Group Medical Insurance
The company participates in a Northrop Grumman-sponsored
self-insured group medical insurance plan and these financial statements include an allocation of
the expenses and accruals attributable to NGSB employees participating in the plan. The plan is
designed to provide a specified level of coverage for employees and their dependents. Northrop
Grumman estimates expenses and the required liability of such claims utilizing actuarial methods
based on various assumptions, which include, but are not limited to, Northrop Grummans historical
loss experience and projected loss development factors. Related self-insurance accruals include
amounts related to the liability for reported claims and an estimated accrual for claims incurred
but not reported.
Self-Insured Workers Compensation Plan
The operations of the company are subject to the federal
and state workers compensation laws. The company maintains self-insured workers compensation
plans, in addition to participating in state administered second injury workers compensation
funds. The company estimates the required liability of such claims and state funding requirements
on a discounted basis utilizing actuarial methods based on various assumptions, which include, but
are not limited to, the companys historical loss experience and projected loss development factors
as compiled in an annual actuarial study. Related self-insurance accruals include amounts related
to the liability for reported claims and an estimated accrual for claims incurred but not reported.
The companys workers compensation liability is discounted at 3.31% and 3.47% at December 31,
2010, and 2009, respectively, which discount rates were determined using a risk-free rate based on
future payment streams. Workers compensation benefit obligations on an undiscounted basis were
$726 million and $686 million as of December 31, 2010 and 2009, respectively.
Litigation, Commitments, and Contingencies
Amounts associated with litigation, commitments, and
contingencies are recorded as charges to earnings when management, after taking into consideration
the facts and circumstances of each matter, including any settlement offers, has determined that it
is probable that a liability has been incurred and the amount of the loss can be reasonably
estimated.
Retirement Benefits
A substantial portion of the companys employees are covered by Northrop
Grumman-sponsored defined benefit pension plans under which they are eligible for benefits
generally at age 65 or on a reduced basis for qualifying early retirement. Certain employees are
also covered by Northrop Grumman-sponsored post-retirement health care plans. For the Northrop
Grumman sponsored pension and post-retirement plans that only cover company employees, the
consolidated financial statements reflect the respective plans total funded status and related
changes in funded status. For the Northrop Grumman sponsored pension and post-retirement plans
where company employees participate along with other Northrop Grumman employees, the consolidated
financial statements reflect an allocated portion of the respective plans funded status and
related changes in funded status based upon the company employee participation level. The assets
recognized as of December 31, 2010 and 2009 for such plans where allocations were required were
calculated based on the present values of the accrued benefit determined under Employee Retirement
Income Security Act (ERISA) and Internal Revenue Service (IRS) regulations. The CAS costs have
been separately calculated for NGSB in accordance with the relevant standards. For funded plans,
Northrop Grummans funding policy is to contribute, at a minimum, the statutorily required amount
to an irrevocable trust. For unfunded plans, Northrop Grumman makes contributions equal to the
amount of benefit payments made to plan participants. Northrop Grumman also sponsors 401(k) defined
contribution plans in which most of the companys employees are eligible to participate. Northrop
Grumman contributions for most plans are based on a cash matching of company employee contributions
up to 4 percent of compensation. In addition to the Northrop Grumman-sponsored 401(k) defined
contribution plan, company employees hired after June 30, 2008 are eligible to participate in a
Northrop Grumman-sponsored defined contribution pension plan in lieu of a defined benefit pension
plan.
Stock Compensation
Certain key employees of the company participate in stock-based compensation
plans of Northrop Grumman. All of Northrop Grummans stock-based compensation plans are considered
equity plans and compensation expense recognized is net of estimated forfeitures over the vesting
period. Northrop Grumman issues stock options and stock awards, in the form of restricted
performance stock rights and restricted stock rights, under its existing plans. The fair value of
stock option grants is estimated on the date of grant using a Black-Scholes option-pricing model
and expensed on a straight-line basis over the vesting period of the options, which is generally
three to four years. The fair value of stock awards is determined based on the closing market
price of Northrop Grummans common stock on the grant date and at each reporting date, the amount
of shares is adjusted to equal the amount
ultimately expected to vest. Compensation expense for stock awards is allocated to NGSB by
Northrop Grumman and expensed over the vesting period, usually three to five years.
F-11
NORTHROP GRUMMAN SHIPBUILDING
Accumulated Other Comprehensive Loss
The accumulated other comprehensive loss as of December 31,
2010 and 2009, was comprised of unamortized benefit plan costs of $515 million (net of tax benefit
of $343 million) and $531 million (net of tax benefit of $338 million), respectively.
3. ACCOUNTING STANDARDS UPDATES
Accounting Standards Updates not effective until after December 31, 2010 are not expected to have a
significant effect on the companys consolidated financial position, results of operations or cash
flows.
4. CONSOLIDATION OF GULF COAST OPERATIONS
In July 2010, Northrop Grumman announced plans to consolidate NGSBs Gulf Coast operations by
winding down its shipbuilding operations at the Avondale, Louisiana facility in 2013 after
completing LPD-class ships currently under construction there. Future LPD-class ships will be built
in a single production line at the companys Pascagoula, Mississippi facility. The consolidation is
intended to reduce costs, increase efficiency, and address shipbuilding overcapacity. Due to the
consolidation, NGSB expects higher costs to complete ships currently under construction in Avondale
due to anticipated reductions in productivity and increased the estimates to complete LPDs 23 and
25 by approximately $210 million. The company recognized a $113 million charge to operating income
for the cumulative effect of these incremental costs on the LPD 23 and 25 contracts in the second
quarter of 2010.
In connection with and as a result of the decision to wind down its shipbuilding operations at the
Avondale, Louisiana facility, the company determined it would not meet certain requirements under
its co-operative agreement with the State of Louisiana. Accordingly, the company recorded
liabilities of $51 million in June 2010 to recognize this obligation as well as certain asset
retirement obligations, which were necessitated as a result of the Avondale facility decision. In
addition to the cost of the assets to be acquired from the State of Louisiana upon payment of the
obligation to the state, the company anticipates that it will incur substantial other restructuring
and facilities shut-down related costs, including but not limited to, severance, relocation
expense, and asset write-downs related to the Avondale facilities. These costs are expected to be
allowable expenses under government accounting standards and thus will be recoverable in future
years overhead costs. These future costs could approximate $310 million and such costs should be
allocable to existing flexibly priced contracts or future negotiated contracts at the Gulf Coast
operations in accordance with FAR provisions relating to the treatment of restructuring and
shutdown related costs.
In its initial audit report on the companys cost proposal for the restructuring and shutdown
related costs, the Defense Contract Audit Agency (DCAA) stated that, in general, the proposal was
not adequately supported in order for it to reach a conclusion. The DCAA also questioned about $25
million (approximately 8%) of the costs submitted. The DCAA stated that it could not reach a final
conclusion on the cost submission due to the potential spin transaction relating to the
Shipbuilding business. Accordingly, the DCAA did not accept the cost proposal as submitted, and the
company intends to resubmit its proposal to address the concerns expressed by the DCAA. Ultimately,
the company anticipates that this process will result in an agreement with the U.S. Navy that is
substantially in accord with managements cost allowability expectations. Accordingly, the company
has treated these costs as allowable costs in determining the cost and earnings performance on its
contracts in process. If there is a formal challenge to the companys treatment of its
restructuring costs, there are prescribed dispute resolution alternatives to resolve such a
challenge and the company would likely pursue a dispute resolution process.
As a result of the announcement to wind down its shipbuilding operations at the Avondale, Louisiana
facility and the Gulf Coast segments 2010 operating losses, the company performed an impairment
test for the Gulf Coast segments other long-lived assets and each reportable segments goodwill as
of June 30, 2010. The companys testing approach for goodwill impairment utilizes a discounted
cash flow analysis corroborated by comparative market multiples to determine the fair value of its
businesses for comparison to their corresponding book values. NGSB determined that no impairment
existed as of June 30, 2010. See Note 9 for the results of the annual impairment test.
Northrop Grummans decision to wind down its shipbuilding operations at the Avondale, Louisiana
facility also led to a curtailment adjustment reducing the pension benefit obligation on the
benefit plans in which NGSB employees participate by $14 million. The effect of this curtailment
on the companys consolidated results of operations or cash flows was not material.
NGSB is currently exploring alternative uses of the Avondale facility by potential new owners,
including alternative opportunities for the workforce.
5. SEGMENT INFORMATION
At December 31, 2010, the company was aligned into two reportable segments: Gulf Coast and Newport
News.
U.S. Government Sales
Revenue from the U.S. Government includes revenue from contracts for which
NGSB is the prime contractor as well as those for which the company is a subcontractor and the
ultimate customer is the U.S. Government. The company
F-12
NORTHROP GRUMMAN SHIPBUILDING
derives substantially all of its revenue
from the U.S. Government.
Assets
Substantially all of the companys assets are located or maintained in the U.S.
Results of Operations By Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast
|
|
$
|
3,027
|
|
|
$
|
2,865
|
|
|
$
|
2,848
|
|
Newport News
|
|
|
3,775
|
|
|
|
3,534
|
|
|
|
3,427
|
|
Intersegment eliminations
|
|
|
(79
|
)
|
|
|
(107
|
)
|
|
|
(86
|
)
|
|
Total sales and service revenues
|
|
|
6,723
|
|
|
|
6,292
|
|
|
|
6,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast
|
|
|
(61
|
)
|
|
|
(29
|
)
|
|
|
(1,433
|
)
|
Newport News
|
|
|
355
|
|
|
|
313
|
|
|
|
(895
|
)
|
|
Total Segment Operating Income (Loss)
|
|
|
294
|
|
|
|
284
|
|
|
|
(2,328
|
)
|
Non-segment factors affecting operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension and post-retirement benefits adjustment
|
|
|
(49
|
)
|
|
|
(88
|
)
|
|
|
(25
|
)
|
Deferred State Income Taxes
|
|
|
3
|
|
|
|
15
|
|
|
|
(1
|
)
|
|
Total operating income (loss)
|
|
$
|
248
|
|
|
$
|
211
|
|
|
$
|
(2,354
|
)
|
|
Sales transactions between segments are generally recorded at cost.
Goodwill Impairment Charge
The operating losses for the year ended December 31, 2008, reflect
goodwill impairment charges for Gulf Coast and Newport News of $1.3 billion and $1.2 billion,
respectively.
Net Pension and Post-Retirement Benefits Adjustment
The net pension and post-retirement benefits
adjustment reflects the difference between expenses for pension and other post-retirement benefits
determined in accordance with GAAP and the expenses for these items included in segment operating
income in accordance with CAS.
Other Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast
|
|
$
|
2,044
|
|
|
$
|
1,922
|
|
|
$
|
1,817
|
|
Newport News
|
|
|
2,744
|
|
|
|
2,672
|
|
|
|
2,616
|
|
Corporate
|
|
|
415
|
|
|
|
442
|
|
|
|
327
|
|
|
Total assets
|
|
$
|
5,203
|
|
|
$
|
5,036
|
|
|
$
|
4,760
|
|
|
The Corporate assets included in the table above consist only of pension and other-post retirement
plan assets and deferred tax assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast
|
|
$
|
52
|
|
|
$
|
102
|
|
|
$
|
153
|
|
Newport News
|
|
|
139
|
|
|
|
79
|
|
|
|
65
|
|
|
Total capital expenditures
|
|
$
|
191
|
|
|
$
|
181
|
|
|
$
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast
|
|
$
|
96
|
|
|
$
|
101
|
|
|
$
|
110
|
|
Newport News
|
|
|
87
|
|
|
|
85
|
|
|
|
83
|
|
|
Total depreciation and amortization
|
|
$
|
183
|
|
|
$
|
186
|
|
|
$
|
193
|
|
|
6. CONTRACT CHARGES
F-13
NORTHROP GRUMMAN SHIPBUILDING
Earnings Charge Relating to LHD 8 Contract Performance
LHD 8 is an amphibious assault ship that
was delivered in the second quarter of 2009. LHD 8 features significant enhancements compared with
earlier ships of the class, including a gas turbine engine propulsion system, a new electrical
generation and distribution system, and a centralized machinery control system administered over a
fiber optic network. LHD 8 was constructed under a fixed-price incentive contract. Lack of
progress in LHD 8 on-board testing preparatory to sea trials prompted the company to undertake a
comprehensive review of the program, including a detailed physical audit of the ship, resulting in
a pre-tax charge of $272 million in the first quarter of 2008 for anticipated cost growth related
to the identified need for substantial re-work on the ship. In addition to the LHD 8 charge, an
additional $54 million of charges were recognized in the first quarter of 2008, primarily for
schedule impacts on other ships and impairment of purchased intangibles at the Gulf Coast
shipyards. Subsequent to recognizing the LHD 8 charge, the company delivered the ship at costs
that were lower than the amounts previously anticipated primarily due to efficiencies from improved
operating practices, mitigation of performance risk and increased recovery of cost escalation
adjustments. As a result, $63 million of the loss provision was reversed in 2008, and an
additional $54 million was reversed in 2009 upon delivery of the ship. In 2010, NGSB determined
that costs to complete post-delivery work on LHD 8 exceeded original estimates resulting in a
charge of $30 million.
Earnings Charge Relating to LPD 22-25 Contract Performance
The LPD 22-25 contract is a four-ship
fixed-price incentive contract for the construction of amphibious landing platform ships that are a
follow-on of the LPD 17 Class program with five ships previously built and delivered. The
programs construction has been adversely impacted by operating performance factors, resulting in
unfavorable cost growth that led to pre-tax charges totaling $171 million in 2009. In 2010, the
company recorded net performance adjustments of $132 million primarily for additional cost growth
on the LPD 22-25 contract, including the effect of a $113 million charge for the cumulative effect
of the $210 million of incremental costs expected due to the companys decision to wind down its
shipbuilding operations at the Avondale facility in 2013. Note 4 provides additional information
related to the consolidation of Gulf Coast operations.
7. ACCOUNTS RECEIVABLE, NET
Unbilled amounts represent sales for which billings have not been presented to customers at
year-end. These amounts are usually billed and collected within one year. Accounts receivable at
December 31, 2010, are expected to be collected in 2011, except for approximately $72 million due
in 2012 and $6 million due in 2013 and later.
Because the companys accounts receivable are primarily with the U.S. Government, the company does
not have material exposure to credit risk.
Accounts receivable were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
Due From U.S. Government
|
|
|
|
|
|
|
|
|
Amounts billed
|
|
$
|
194
|
|
|
$
|
240
|
|
Recoverable costs and accrued profit on progress completed unbilled
|
|
|
524
|
|
|
|
288
|
|
|
|
|
|
718
|
|
|
|
528
|
|
|
Due From Other Customers
|
|
|
|
|
|
|
|
|
Amounts billed
|
|
|
9
|
|
|
|
11
|
|
Recoverable costs and accrued profit on progress completed unbilled
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
13
|
|
|
|
12
|
|
|
Total accounts receivable
|
|
|
731
|
|
|
|
540
|
|
Allowances for doubtful accounts
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
Total accounts receivable, net
|
|
$
|
728
|
|
|
$
|
537
|
|
|
8. INVENTORIED COSTS, NET
Inventoried costs were composed of the following:
F-14
NORTHROP GRUMMAN SHIPBUILDING
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
Production costs of contracts in process
|
|
$
|
681
|
|
|
$
|
1,009
|
|
General and administrative expenses
|
|
|
7
|
|
|
|
14
|
|
|
|
|
|
688
|
|
|
|
1,023
|
|
Progress payments received
|
|
|
(481
|
)
|
|
|
(811
|
)
|
|
|
|
|
207
|
|
|
|
212
|
|
Raw material inventory
|
|
|
86
|
|
|
|
86
|
|
|
Total inventoried costs, net
|
|
$
|
293
|
|
|
$
|
298
|
|
|
9. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Goodwill
NGSB performs its annual impairment test for goodwill as of November 30th each year, or more often
as circumstances require. The companys testing approach utilizes a discounted cash flow analysis
corroborated by comparative market multiples to determine the fair value of its businesses for
comparison to their corresponding book values. If the book value exceeds the estimated fair value
of the business, a potential impairment is indicated and GAAP prescribes the approach for
determining the impairment amount, if any. The company performed its annual impairment test as of
November 30, 2010, with no indication of impairment.
In the fourth quarter of 2008, the company recorded a non-cash charge totaling $2,490 million for
the impairment of goodwill. The impairment was primarily driven by adverse equity market
conditions that caused a decrease in current market multiples and Northrop Grummans stock price as
of November 30, 2008. The charge reduced goodwill recorded in connection with Northrop Grummans
2001 acquisition of Newport News Shipbuilding and the shipbuilding operations of Litton Industries.
The companys accumulated goodwill impairment losses at December 31, 2010, and 2009, amounted to
$2,490 million. The accumulated goodwill impairment losses at December 31, 2010 and 2009 for Gulf
Coast and Newport News were $1,278 million and $1,212 million, respectively. The goodwill has no
tax basis, and accordingly, there was no tax benefit to be derived from recording the impairment
charge.
The carrying amount of goodwill as of December 31, 2010, was $1,134 million there were no changes
to goodwill during 2009 and 2010. The carrying amounts of goodwill as of December 31, 2010 and 2009
for Gulf Coast and Newport News were $488 million and $646 million, respectively.
Prior to recording the goodwill impairment charge, NGSB tested its purchased intangible assets and
other long-lived assets for impairment, and the carrying values of these assets were determined not
to be impaired.
Purchased Intangible Assets
The table below summarizes the companys aggregate purchased intangible assets, all of which are
contract or program related intangible assets:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
Gross carrying amount
|
|
$
|
939
|
|
|
$
|
939
|
|
Accumulated amortization
|
|
|
(352
|
)
|
|
|
(329
|
)
|
|
Net carrying amount
|
|
$
|
587
|
|
|
$
|
610
|
|
|
The companys purchased intangible assets are subject to amortization and are being amortized on a
straight-line basis over an aggregate weighted-average period of 40 years. Remaining unamortized
intangible assets consist principally of amounts pertaining to nuclear-powered aircraft carrier and
submarine intangibles whose useful lives have been estimated based on the long life cycle of the
related programs. Aggregate amortization expense for 2010, 2009, and 2008, was $23 million, $30
million, and $56 million, respectively. The 2008 amount includes $19 million of additional
amortization recorded in the first quarter of 2008 associated with the events impacting LHD 8 and
other Gulf Coast shipbuilding programs as described in Note 6.
Expected amortization for purchased intangibles as of December 31, 2010, is $20 million for each of
the next five years.
10. INCOME TAXES
The companys earnings are entirely domestic and its effective tax rate for the year ended December
31, 2010, was 34.5 percent as
F-15
NORTHROP GRUMMAN SHIPBUILDING
compared with 29.5 percent and 27.1 percent (excluding the non-cash,
non-deductible goodwill impairment charge of $2.5 billion) in 2009 and 2008, respectively. In 2010,
the companys effective tax rate reflects the unfavorable impact of the elimination of certain
Medicare Part D tax benefits with the passage of the Patient Protection and Affordable Care Act and
the Health Care and Education Reconciliation Act of 2010, a decrease in the manufacturers
deduction and the expiration of wage credit benefits, partially offset by the favorable impact of
the settlement of the IRS examination of Northrop Grummans tax returns for the years 2004-2006.
The companys effective tax rates also reflect tax credits and manufacturing deductions for all
periods presented. As described in Note 2, current federal income tax liabilities are assumed to
be immediately settled by Northrop Grumman and are relieved through the parents equity in unit
account. For current state income tax purposes, the standalone tax amounts have been computed as
if they were allowable costs under the terms of the companys existing contracts in the applicable period, and,
accordingly, are included in cost of product sales, cost of service revenues and corporate home
office and other general and administrative expenses.
Federal income tax expense for the years ended December 31, 2010, 2009, and 2008, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Income Taxes on Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes currently payable
|
|
$
|
89
|
|
|
$
|
135
|
|
|
$
|
22
|
|
Change in deferred federal income taxes
|
|
|
(18
|
)
|
|
|
(83
|
)
|
|
|
4
|
|
|
Total federal income taxes
|
|
$
|
71
|
|
|
$
|
52
|
|
|
$
|
26
|
|
|
Income tax expense differs from the amount computed by multiplying the statutory federal income tax
rate times the earnings (loss) before income taxes due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Income tax expense (benefit) on operations at statutory rate
|
|
$
|
72
|
|
|
$
|
61
|
|
|
$
|
(838
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
872
|
|
Manufacturing deduction
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
Research tax credit
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Medicare Part D law change
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Wage credit
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
IRS settlement
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
Other, net
|
|
|
4
|
|
|
|
|
|
|
|
(3
|
)
|
|
Total federal income taxes
|
|
$
|
71
|
|
|
$
|
52
|
|
|
$
|
26
|
|
|
Uncertain Tax Positions
During 2010, Northrop Grumman reached final approval from the IRS
and the U. S. Congressional Joint Committee on Taxation of the IRS examination of Northrop
Grummans tax returns for the years 2004-2006. As a result of this settlement, the company
recognized tax benefits of $8 million as a reduction to the provision for income taxes. In
connection with the settlement, the company also recorded a reduction of $10 million to its
liability for uncertain tax positions, including previously accrued interest, of $2 million.
As of December 31, 2010, the estimated value of the companys uncertain tax positions, which are
more-likely-than-not to be sustained on examination, was a liability of $17 million, including
accrued interest of $3 million. This liability is included in other long-term liabilities in the
consolidated statements of financial position. Assuming sustainment of these positions, the
reversal of the amounts accrued would reduce the companys effective tax rate.
Unrecognized Tax Benefits
Unrecognized tax benefits represent the gross value of the
companys tax positions that have not been reflected in the consolidated statements of operations,
and include the value of the companys recorded uncertain tax positions. If the income tax benefits
from federal tax positions are ultimately realized, such realization would affect the companys
effective tax rate whereas the realization of state tax benefits would be recorded in cost of
product sales, cost of service revenues and corporate home office and other general and
administrative expenses. The changes in unrecognized tax benefits (exclusive of interest) during
2010, 2009 and 2008 are summarized in the table below:
F-16
NORTHROP GRUMMAN SHIPBUILDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
Unrecognized tax benefits at beginning of the year
|
|
$
|
21
|
|
|
$
|
19
|
|
|
$
|
26
|
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Additions for tax positions of prior years
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Statute expiration
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
Settlement
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Net change in unrecognized tax benefits
|
|
|
(7
|
)
|
|
|
2
|
|
|
|
(7
|
)
|
|
Unrecognized tax benefits at end of the year
|
|
$
|
14
|
|
|
$
|
21
|
|
|
$
|
19
|
|
|
Although the company believes it has adequately provided for all tax positions, amounts
asserted by taxing authorities could be greater than the companys accrued position. Accordingly,
additional provisions on federal and state tax related matters could be recorded in the future as
revised estimates are made or the underlying matters are effectively settled or otherwise resolved.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of
assets and liabilities for financial reporting purposes and income tax purposes. Such amounts are
classified in the consolidated statements of financial position as current or noncurrent assets or
liabilities based upon the classification of the related assets and liabilities.
The tax effects of significant temporary differences and carryforwards that gave rise to year-end
deferred federal and state tax balances, as presented in the consolidated statements of financial
position, are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Retirement benefits
|
|
$
|
404
|
|
|
$
|
390
|
|
Workers compensation
|
|
|
226
|
|
|
|
214
|
|
Contract accounting differences
|
|
|
72
|
|
|
|
79
|
|
Provisions for accrued liabilities
|
|
|
66
|
|
|
|
67
|
|
Stock-based compensation
|
|
|
24
|
|
|
|
22
|
|
Other
|
|
|
4
|
|
|
|
6
|
|
|
Gross deferred tax assets
|
|
|
796
|
|
|
|
778
|
|
Less valuation allowance
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
796
|
|
|
|
778
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
372
|
|
|
|
360
|
|
Purchased intangibles
|
|
|
239
|
|
|
|
248
|
|
|
Gross deferred tax liabilities
|
|
|
611
|
|
|
|
608
|
|
|
Total net deferred tax assets
|
|
$
|
185
|
|
|
$
|
170
|
|
|
During 2010, the company performed a comprehensive review of the classification treatment of its
deferred tax assets and liabilities and identified certain reclassifications that changed the 2009
presentation of deferred tax assets, primarily for retirement benefits and workers compensation
liabilities. Such reclassifications also increased the net current deferred tax assets and net
noncurrent deferred tax liabilities previously presented as of December 31, 2009 by $35 million.
Net deferred tax assets (liabilities) as presented in the consolidated statements of financial
position are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
$ in millions
|
|
2010
|
|
2009
|
|
Net current deferred tax assets
|
|
$
|
284
|
|
|
$
|
326
|
|
Net non-current deferred tax liabilities
|
|
|
(99
|
)
|
|
|
(156
|
)
|
|
Total net deferred tax assets
|
|
$
|
185
|
|
|
$
|
170
|
|
|
F-17
NORTHROP GRUMMAN SHIPBUILDING
11. LONG-TERM DEBT
Mississippi Economic Development Revenue Bonds
As of December 31, 2010, and 2009, the company
had $83.7 million outstanding from the issuance of Industrial Revenue Bonds issued by the
Mississippi Business Finance Corporation. These bonds accrue interest at a fixed rate of 7.81
percent per annum (payable semi-annually), and mature in 2024. Repayment of principal and interest
is guaranteed by Northrop Grumman Systems Corporation (a wholly owned subsidiary of Northrop
Grumman). In accordance with the terms of the bonds, the proceeds have been used to finance the
construction, reconstruction, and renovation of the companys interest in certain ship
manufacturing and repair facilities, or portions thereof, located in the state of Mississippi.
Gulf Opportunity Zone Industrial Development Revenue Bonds
As of December 31, 2010, the company
had $22 million outstanding from the issuance of Gulf Opportunity Zone Industrial Development
Revenue Bonds (GO Zone IRBs) issued by the Mississippi Business Finance Corporation. The initial
issuance of the GO Zone IRBs was for $200 million of principal value, and in November 2010, in
connection with the anticipated spin-off, NGSB, purchased $178 million of the bonds using the
proceeds from a $178 million intercompany loan with Northrop Grumman (see Note 19). The remaining
bonds accrue interest at a fixed rate of 4.55 percent per annum (payable semi-annually), and mature
in 2028. Repayment of principal and interest is guaranteed by Northrop Grumman. In
accordance with the terms of the bonds, the proceeds have been used to finance the construction,
reconstruction, and renovation of the companys interest in certain ship manufacturing and repair
facilities, or portions thereof, located in the state of Mississippi.
Repayment of principal for the bonds listed in the table below is contractually obligated when the
bonds mature in 2024 and 2028.
The carrying amounts and the related estimated fair values of the companys long-term debt at
December 31, 2010, and 2009, are shown below. The fair value of the long-term debt was calculated
based on recent trades, if available, or interest rates prevailing on debt with terms and
maturities similar to the companys existing debt arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
$ in millions
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Long-term debt
|
|
$
|
105
|
|
|
$
|
128
|
|
|
$
|
283
|
|
|
$
|
285
|
|
|
12. BUSINESS ARRANGEMENTS
NGSB periodically enters into business arrangements with non-affiliated entities. These
arrangements generally consist of joint ventures designed to deliver collective capabilities that
would not have been available to the ventures participants individually, and also provide a single
point of contact during contract performance to the entitys principal customer. In some
arrangements, each equity participant receives a subcontract from the joint venture for a
pre-determined scope of work. In other cases, the arrangements rely primarily on the assignment of
key personnel to the venture from each equity participant rather than subcontracts for a specific
work scope. Based on the terms of these arrangements and the relevant GAAP related to
consolidation accounting for such entities, the company does not consolidate the financial
position, results of operations and cash flows of these entities into its consolidated financial
statements, but accounts for them under the equity method. NGSB has recorded operating income
related to earnings from equity method investments of $19 million, $10 million and $1 million in
its results of operations within the cost of service revenues for the years ended December 31,
2010, 2009, and 2008, respectively. To the extent subcontracts are used in these arrangements,
NGSBs subcontract activities are recorded in the same manner as sales to non-affiliated entities.
The assets, liabilities, results of operations and cash flows of these collaborative entities were
not material to the companys consolidated financial position, results of operations and cash flows
for any period presented.
13. LITIGATION
U.S. Government Investigations and Claims
Departments and agencies of the U.S. Government have
the authority to investigate various transactions and operations of the company, and the results of
such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome
of which could be fines, penalties, repayments or compensatory or treble damages. U.S. Government
regulations provide that certain findings against a contractor may lead to suspension or debarment
from future U.S. Government contracts or the loss of export privileges for a company or an
operating division or subdivision. Suspension or debarment could have a material adverse effect on
the company because of its reliance on government contracts.
In the second quarter of 2007, the U.S. Coast Guard issued a revocation of acceptance under the
Deepwater Modernization Program for eight converted 123-foot patrol boats (the vessels) based on
alleged hull buckling and shaft alignment problems and alleged nonconforming topside equipment
on the vessels. The company submitted a written response that argued that the revocation of
acceptance was improper. The Coast Guard advised Integrated Coast Guard Systems, LLC (ICGS), which
was formed by Northrop Grumman and Lockheed Martin to perform the Deepwater Modernization Program,
that it was seeking approximately $96 million
F-18
NORTHROP GRUMMAN SHIPBUILDING
from ICGS as a result of the revocation of
acceptance. The majority of the costs associated with the 123-foot conversion effort are associated
with the alleged structural deficiencies of the vessels, which were converted under contracts with
the company and a subcontractor to the company. In 2008, the Coast Guard advised ICGS that the
Coast Guard would support an investigation by the U.S. Department of Justice of ICGS and its
subcontractors instead of pursuing its $96 million claim independently. The Department of Justice
conducted an investigation of ICGS under a sealed False Claims Act complaint filed in the U.S.
District Court for the Northern District of Texas and decided in early 2009 not to intervene at
that time. On February 12, 2009, the District Court unsealed the complaint filed by Michael J.
DeKort, a former Lockheed Martin employee, against ICGS, Lockheed Martin Corporation and the
company relating to the 123-foot conversion effort. Damages under the False Claims Act are subject
to trebling. On October 15, 2009, the three defendants moved to dismiss the Fifth Amended
complaint. On April 5, 2010, the District Court ruled on the defendants motions to dismiss,
granting them in part and denying them in part. As to the company, the District Court dismissed
conspiracy claims and those pertaining to the C4ISR systems. On October 27, 2010, the District
Court entered summary judgment for the company on DeKorts hull, mechanical and electrical (HM&E)
claims brought against the company. On November 10, 2010, the DeKort acknowledged that with the
dismissal of the HM&E claims, no issues remained against the company for trial and the District
Court subsequently vacated the December 1, 2010 trial. On November 12, 2010, DeKort filed a motion
for reconsideration regarding the District Courts denial of his motion to amend the Fifth Amended
Complaint. On November 19, 2010, DeKort filed a second
motion for reconsideration regarding the District Courts order granting summary judgment on the
HM&E claims. Based upon the information available to the company to date, the company believes
that it has substantive defenses to any potential claims but can give no assurance that the company
will prevail in this litigation.
Based upon the available information regarding matters that are subject to U.S. Government
investigations, the company believes that the outcome of any such matters would not have a material
adverse effect on its consolidated financial position, results of operations or cash flows.
Asbestos-Related Claims
NGSB and its predecessors in interest are defendants in a long-standing
series of cases filed in numerous jurisdictions around the country wherein former and current
employees and various third party persons allege exposure to asbestos-containing materials on NGSB
premises or while working on vessels constructed or repaired by NGSB. Some cases allege exposure to
asbestos-containing materials through contact with company employees and third persons who were on
the premises. The cases allege various injuries including those associated with pleural plaque
disease, asbestosis, cancer, mesothelioma and other alleged asbestos related conditions. In some
cases, in addition to the company, several of its former executive officers are also named
defendants. In some instances, partial or full insurance coverage is available to the company for
its liability and that of its former executive officers. Because of the varying nature of these
actions, and based upon the information available to the company to date, the company believes it
has substantive defenses in many of these cases but can give no assurance that it will prevail on
all claims in each of these cases. The company believes that the ultimate resolution of these
cases will not have a material adverse effect on its consolidated financial position, results of
operations or cash flows.
Litigation
Various claims and legal proceedings arise in the ordinary course of business and are
pending against the company and its properties. Based upon the information available, the company
believes that the resolution of any of these various claims and legal proceedings would not have a
material adverse effect on its consolidated financial position, results of operations, or cash
flows.
Subsequent Event
On January 31, 2011, the U. S. Department of Justice first informed Northrop
Grumman and the company of a False Claims Act complaint that the company believes was filed under
seal by a relator (the plaintiff) in mid-2010 in the United States District Court for the District
of Columbia. The redacted copy of the complaint that the company received (Complaint) alleges
that through largely unspecified fraudulent means Northrop Grumman and the company obtained federal
funds that were restricted by law for the consequences of Hurricane Katrina (Katrina), and used
those funds to cover costs under certain shipbuilding contracts that were unrelated to Katrina and
for which Northrop Grumman and the company were not entitled to recovery under the contracts. The
Complaint seeks monetary damages of at least $835 million, plus penalties, attorneys fees and
other costs of suit. Damages under the False Claims Act may be trebled upon a finding of
liability.
For several years, Northrop Grumman has pursued recovery under its insurance policies for Katrina
related property damage and business interruption losses. One of the insurers involved in those
actions has made allegations that overlap significantly with certain of the issues raised in the
Complaint, including allegations that Northrop and the company used certain Katrina related funds
for losses under the contracts unrelated to the hurricane. Northrop Grumman and the company
believe that the insurers defenses, including those related to the use of Katrina funding, are
without merit.
The company has agreed to cooperate with the government investigation relating to the False Claims
Act Complaint. The company has been advised that the Department of Justice has not made a decision
whether to intervene. Based upon a review to date of the information available to the company, the
company believes that it has substantive defenses to the allegations in the Complaint. The company
believes that the claims as set forth in the Complaint evidence a fundamental lack of understanding
of the terms and conditions in the companys shipbuilding contracts, including the post-Katrina
modifications to those contracts, and the manner in
F-19
NORTHROP GRUMMAN SHIPBUILDING
which the parties performed in connection with
the contracts. Based upon a review to date of the information available to the company, the company
believes that the claims as set forth in the Complaint lack merit and are not likely to result in a
material adverse effect on its consolidated financial position. The company intends vigorously to
defend the matter, but the company cannot predict what new or revised claims might be asserted or
what information might come to light so can give no assurances regarding the ultimate outcome.
14. COMMITMENTS AND CONTINGENCIES
Contract Performance Contingencies
Contract profit margins may include estimates of revenues not
contractually agreed to between the customer and the company for matters such as settlements in the
process of negotiation, contract changes, claims and requests for equitable adjustment for
previously unanticipated contract costs. These estimates are based upon managements best
assessment of the underlying causal events and circumstances, and are included in determining
contract profit margins to the extent of expected recovery based on contractual entitlements and
the probability of successful negotiation with the customer. As of December 31, 2010, the
recognized amounts related to claims and requests for equitable adjustment are not material
individually or in the aggregate.
Guarantees of Performance Obligations
From time to time in the ordinary course of business,
Northrop Grumman guaranteed performance obligations of NGSB under certain contracts. NGSB may
enter into joint ventures, teaming and other business arrangements (Business Arrangements) to
support the companys products and services. NGSB generally strives to limit its exposure under
these arrangements to its investment in the Business Arrangement, or to the extent of obligations
under the applicable contract. In some cases, however, Northrop Grumman may be required to
guarantee performance of the Business Arrangement and, in such cases, generally obtains
cross-indemnification from the other members of the Business Arrangement. At December 31, 2010, the
company is not aware of any existing event of default that would require Northrop Grumman to
satisfy any of these guarantees.
NGSB Quality Issues
In conjunction with a second quarter 2009 review of design, engineering and
production processes at the Gulf Coast undertaken as a result of leaks discovered in the USS
San
Antonios
(LPD 17) lube oil system, the company became aware of quality issues relating to certain
pipe welds on ships under production as well as those that had previously been delivered. Since
that discovery, the company has been working with the U.S. Navy to determine the nature and extent
of the pipe weld issue and its possible impact on related shipboard systems. This effort has
resulted in the preparation of a technical analysis of the problem, additional inspections on the
ships, a rework plan for ships previously delivered and in various stages of production, and
modifications to the work plans for ships being placed into production, all of which has been done
with the knowledge and support of the U.S. Navy. NGSB responsible incremental costs associated
with the anticipated resolution of these matters have been reflected in the financial performance
analysis and contract booking rates beginning with the second quarter of 2009.
In the fourth quarter of 2009, certain bearing wear and debris were found in the lubrication system
of the main propulsion diesel engines (MPDE) installed on LPD 21. NGSB is participating with the
U.S. Navy and other industry participants involved with the MPDEs in a review panel established by
the U.S. Navy to examine the MPDE lubrication systems design, construction, operation and
maintenance for the LPD 17 class of ships. The team is focusing on identification and
understanding of the root causes of the MPDE diesel bearing wear and the debris in the lubrication
system and potential future impacts on maintenance costs. To date the review has identified
several potential system improvements for increasing the system reliability. Certain changes are
being implemented on ships under construction at this time and the U.S. Navy is implementing some
changes on in-service ships in the class at the earliest opportunity. The U.S. Navy has requested
a special MPDE flush procedure be used on LPDs 22 through 25 under construction at the Gulf Coast
shipyards. The company has informed the U.S. Navy of its position that should the U.S. Navy direct
use of this new flush procedure, the company believes such direction would be a change to the
contracts for all LPDs under construction, and that such a change would entitle the company to an
equitable adjustment to cover the cost and schedule impacts. However, the company can give no
assurance that the U.S. Navy will agree that any such direction would constitute a contract change.
In July 2010, the Navy released its report documenting the results of a Judge Advocate Generals
manual (JAGMAN) investigation of the failure of MPDE bearings on LPD 17 subsequent to the Navys
Planned Maintenance Availability (PMA), which was completed in October 2009. During sea trials
following the completion of the Navy conducted PMA, one of the ships MPDEs suffered a casualty as
the result of a bearing failure. The JAGMAN investigation determined that the bearing failure could
be attributed to a number of possible factors, including deficiencies in the acquisition process,
maintenance, training, and execution of shipboard programs, as well as debris from the construction
process. NGSBs technical personnel reviewed the JAGMAN report and provided feedback to the Navy on
the report recommending that the company and the Navy perform a comprehensive review of the LPD 17
Class propulsion system design and its associated operation and maintenance procedure in order to
enhance reliability. Discussions between the company and the Navy on this recommendation are
ongoing.
The company and the U.S. Navy continue to work in partnership to investigate and identify any
additional corrective actions to address quality issues associated with ships manufactured in the
companys Gulf Coast shipyards and the company will implement appropriate corrective actions. The
company does not believe that the ultimate resolution of the matters described above will have a
F-20
NORTHROP GRUMMAN SHIPBUILDING
material adverse effect upon its consolidated financial position, results of operations or cash
flows.
The company has also encountered various quality issues on its Aircraft Carrier construction and
overhaul programs and its Virginia Class Submarine construction program at its Newport News
location. These primarily involve matters related to filler metal used in pipe welds identified in
2007, and in 2009, issues associated with non-nuclear weld inspection and the installation of
weapons handling equipment on certain submarines, and certain purchased material quality issues.
The company does not believe that resolution of these issues will have a material adverse effect
upon its consolidated financial position, results of operations or cash flows.
Environmental Matters
The estimated cost to complete remediation has been accrued where it is
probable that the company will incur such costs in the future to address environmental impacts at
currently or formerly owned or leased operating facilities, or at sites where it has been named a
Potentially Responsible Party (PRP) by the Environmental Protection Agency, or similarly designated
by other environmental agencies. These accruals do not include any litigation costs related to
environmental matters, nor do they include amounts recorded as asset retirement obligations. To
assess the potential impact on the companys consolidated financial statements, management
estimates the reasonably possible remediation costs that could be incurred by the company, taking
into account currently
available facts on each site as well as the current state of technology and prior experience in
remediating contaminated sites. These estimates are reviewed periodically and adjusted to reflect
changes in facts and technical and legal circumstances. Management estimates that as of December
31, 2010, the probable future costs for environmental remediation sites is $3 million, which is
accrued in other current liabilities. Factors that could result in changes to the companys
estimates include: modification of planned remedial actions, increases or decreases in the
estimated time required to remediate, changes to the determination of legally responsible parties,
discovery of more extensive contamination than anticipated, changes in laws and regulations
affecting remediation requirements, and improvements in remediation technology. Should other PRPs
not pay their allocable share of remediation costs, the company may have to incur costs in addition
to those already estimated and accrued. In addition, there are some potential remediation sites
where the costs of remediation cannot be reasonably estimated. Although management cannot predict
whether new information gained as projects progress will materially affect the estimated liability
accrued, management does not anticipate that future remediation expenditures will have a material
adverse effect on the companys consolidated financial position, results of operations, or cash
flows.
Collective Bargaining Agreements
The company believes that it maintains good relations with its
39,000 employees, of which approximately 50 percent are covered by 10 collective bargaining
agreements. The company successfully negotiated a two-year extension to the collective bargaining
agreements at its Gulf Coast locations that were to expire in 2010. It is not expected that the
results of these negotiations will, either individually or in the aggregate, have a material
adverse effect on the companys consolidated results of operations.
Financial Arrangements
In the ordinary course of business, Northrop Grumman uses standby letters
of credit issued by commercial banks and surety bonds issued by insurance companies principally to
guarantee the performance on certain contracts and to support the companys self-insured workers
compensation plans. At December 31, 2010, there were $125 million of unused stand-by letters of
credit and $296 million of surety bonds outstanding related to NGSB.
U.S. Government Claims
From time to time, customers advise the company of claims and penalties
concerning certain potential disallowed costs. When such findings are presented, Northrop Grumman,
the company and the U.S. Government representatives engage in discussions to enable Northrop
Grumman and NGSB to evaluate the merits of these claims as well as to assess the amounts being
claimed. Where appropriate, provisions are made to reflect the expected exposure to the matters
raised by the U.S. Government representatives and such provisions are reviewed on a quarterly basis
for sufficiency based on the most recent information available. Northrop Grumman and the company
do not believe that the outcome of any such matters would have a material adverse effect on its
consolidated financial position, results of operations, or cash flows.
Operating Leases
Rental expense for operating leases was $44 million in 2010, $48 million in
2009, and $41 million in 2008. These amounts are net of immaterial amounts of sublease rental
income. Minimum rental commitments under long-term noncancellable operating leases as of December
31, 2010, total approximately $137 million, which are payable as follows: 2011 $21 million; 2012
$20 million; 2013 $16 million; 2014 $14 million; 2015 $11 million; and thereafter
$55 million.
15. IMPACTS FROM HURRICANES
In 2008, a subcontractors operations in Texas were severely impacted by Hurricane Ike. The
subcontractor produces compartments for two of the LPD amphibious transport dock ships under
construction at the Gulf Coast shipyards. As a result of the delays and cost growth caused by the
subcontractors production delays, NGSBs operating income was reduced by approximately $16 million
during 2008. In the first quarter of 2010, the company received $17 million in final settlement of
its claim, which was recorded as a reduction to cost of product sales.
F-21
NORTHROP GRUMMAN SHIPBUILDING
In August 2005, the companys Gulf Coast operations were significantly impacted by Katrina and the
companys shipyards in Louisiana and Mississippi sustained significant windstorm damage from the
hurricane. As a result of the storm, the company incurred costs to replace or repair destroyed or
damaged assets, suffered losses under its contracts, and incurred substantial costs to clean up and
recover its operations. As of the date of the storm, the company had a comprehensive insurance
program that provided coverage for, among other things, property damage, business interruption
impact on net profitability, and costs associated with clean-up and recovery. The company expects
that its remaining claim will be resolved separately with the two remaining insurers, Factory
Mutual Insurance Company (FM Global) and Munich-American Risk Partners (Munich Re) (see Note 16).
The company has full entitlement to any insurance recoveries related to business interruption
impacts on net profitability resulting from these hurricanes. However, because of uncertainties
concerning the ultimate determination of recoveries related to business interruption claims, no
such amounts are recognized until they are resolved with the insurers. Furthermore, due to the
uncertainties with respect to the companys disagreement with FM Global in relation to the Katrina
claim, no receivables have been recognized by the company in the accompanying consolidated
financial statements for insurance recoveries from FM Global.
In accordance with U.S. Government cost accounting regulations affecting the majority of the
companys contracts, the cost of insurance premiums for property damage and business interruption
coverage, other than coverage of profit, is an allowable expense
that may be charged to contracts. Because a substantial portion of long-term contracts at the
shipyards is flexibly-priced, the U.S. Navy would benefit from a portion of insurance recoveries in
excess of the net book value of damaged assets. When such insurance recoveries occur, the company
is obligated to provide the benefit of a portion of these amounts to the government. In recent
discussions, the U.S. Navy has expressed its intention to challenge the allowability of certain
post-Katrina depreciation costs charged or expected to be charged on contracts under construction
in the Gulf Coast shipyards. It is premature to estimate the amount, if any, that the U. S. Navy
will ultimately challenge. The company believes all of the replacement costs should be recoverable
under its insurance coverage and the amounts that may be challenged are included in the insurance
claim. However, if NGSB is unsuccessful in its insurance recovery, the company believes there are
specific rules in the CAS and FAR that should still render the depreciation on those assets
allowable and recoverable through its contracts with the U.S. Navy as these replacement costs
provide benefit to the government. The company believes that its depreciation practices are in
conformity with the FAR, and that, if the U.S. Navy were to challenge the allowability of such
costs, the company should be able to successfully resolve this matter with no material adverse
effect to the companys consolidated financial position, results of operations or cash flows.
16. HURRICANE KATRINA INSURANCE RECOVERIES
The company is pursuing legal action against an insurance provider, FM Global, arising out of a
disagreement concerning the coverage of certain losses related to Katrina (see Note 15). Legal
action commenced against FM Global on November 4, 2005, which is now pending in the U.S. District
Court for the Central District of California, Western Division. In August 2007, the District Court
issued an order finding that the excess insurance policy provided coverage for the companys
Katrina-related loss. FM Global appealed the District Courts order and on August 14, 2008, the
U.S. Court of Appeals for the Ninth Circuit reversed the earlier summary judgment order in favor of
the Northrop Grummans interest, holding that the FM Global excess policy unambiguously excludes
damage from the storm surge caused by Katrina under its Flood exclusion. The Ninth Circuit
remanded the case to the District Court to determine whether the California efficient proximate
cause doctrine affords Northrop Grumman coverage under the policy even if the Flood exclusion of
the policy is unambiguous. On April 2, 2009, the Ninth Circuit denied Northrop Grummans Petition
for Rehearing and remanded the case to the District Court. On June 10, 2009, Northrop Grumman filed
a motion seeking leave of court to file a complaint adding Aon Risk Services, Inc. of Southern
California (Aon) as a defendant. On July 1, 2009, FM Global filed a motion for partial summary
judgment seeking a determination that the California efficient proximate cause doctrine is not
applicable or that it affords no coverage under the policy. On August 26, 2010, the District Court
denied Northrop Grummans motion to add Aon as a defendant to the case pending in the District
Court, finding that Northrop Grumman has a viable option to bring suit against Aon in state court.
Also on August 26, the District Court granted FM Globals motion for summary judgment based upon
Californias doctrine of efficient proximate cause, and denied FM Globals motion for summary
judgment based upon breach of contract, finding that triable issues of fact remained as to whether
and to what extent the company sustained wind damage apart from the storm surge. Northrop Grumman
believes that it is entitled to full reimbursement of its covered losses under the excess policy.
The District Court has scheduled trial on the merits for April 3, 2012. On January 27, 2011,
Northrop Grumman filed an action against Aon Insurance Services West, Inc., formerly known as Aon
Risk Services, Inc. of Southern California, in Superior Court in California alleging breach of
contract, professional negligence, and negligent misrepresentation. Based on the current status of
the litigation, no assurances can be made as to the ultimate outcome of these matters. However, if
either of the claims are successful, the potential effect to the companys consolidated financial
position, results of operations, or cash flows would be favorable.
During 2008, notification from Munich Re, the only remaining insurer within the primary layer of
insurance coverage with which a resolution has not been reached, was received noting that it will
pursue arbitration proceedings against Northrop Grumman related to approximately $19 million owed
by Munich Re to Northrop Grumman Risk Management Inc. (NGRMI), a wholly owned subsidiary of
Northrop Grumman, for certain losses related to Katrina. An arbitration was later invoked by Munich
Re in the United Kingdom under the reinsurance contract. Northrop Grumman was subsequently
notified that Munich Re is seeking reimbursement of
F-22
NORTHROP GRUMMAN SHIPBUILDING
approximately $44 million of funds previously
advanced to NGRMI for payment of claim losses of which Munich Re provided reinsurance protection to
NGRMI pursuant to an executed reinsurance contract, and $6 million of adjustment expenses. The
arbitral panel has set a hearing for November 14, 2011. Northrop Grumman and the company believe
that NGRMI is entitled to full reimbursement of its covered losses under the reinsurance contract
and has substantive defenses to the claim of Munich Re for return of the funds paid to date. If
the matters are resolved in NGRMIs favor, then it would be entitled to the remaining $19 million
owed for covered losses and it would have no further obligations to Munich Re. Payments to be made
to NGRMI in connection with this matter would be for the benefit of the company and reimbursements
to be made to Munich Re would be made by the company, if any.
17. RETIREMENT BENEFITS
Plan Descriptions
Defined Benefit Pension Plans
The company participates in several defined benefit pension plans
of Northrop Grumman covering the majority of its employees. Pension benefits for most employees are
based on the employees years of service and compensation. It is the policy of Northrop Grumman to
fund at least the minimum amount required for all the sponsored plans, using actuarial cost methods
and assumptions acceptable under U.S. Government regulations, by making payments into benefit
trusts separate from
Northrop Grumman. The pension benefit for most employees is based upon criteria whereby employees
earn age and service points over their employment period.
Defined Contribution Plans
The company also participates in Northrop Grumman-sponsored 401(k)
defined contribution plans in which most employees are eligible to participate, as well as certain
union employees. Northrop Grumman contributions for most plans are based on a cash matching of
company employee contributions up to 4 percent of compensation. Certain hourly employees are
covered under a target benefit plan. In addition to the 401(k) defined contribution benefit,
non-union represented company employees hired after June 30, 2008, are eligible to participate in a
Northrop Grumman-sponsored defined contribution program in lieu of a defined benefit pension plan.
Northrop Grummans contributions to these defined contribution plans for company employees for the
years ended December 31, 2010, 2009, and 2008, were $51 million, $50 million, and $49 million,
respectively.
Medical and Life Benefits
The company participates in several health care plans of Northrop
Grumman by which the company provides a portion of the costs for certain health and welfare
benefits for a significant number of its active and retired employees. Covered employees achieve
eligibility to participate in these contributory plans upon retirement from active service if they
meet specified age and years of service requirements. Qualifying dependents are also eligible for
medical coverage. Northrop Grumman reserves the right to amend or terminate the plans at any time.
In November 2006, the company adopted plan amendments and communicated to plan participants that it
would cap the amount of its contributions to substantially all of its remaining post retirement
medical and life benefit plans that were previously not subject to limits on the companys
contributions.
In addition to a medical inflation cost-sharing feature, the plans also have provisions for
deductibles, co-payments, coinsurance percentages, out-of-pocket limits, conformance to a schedule
of reasonable fees, the use of managed care providers, and maintenance of benefits with other
plans. The plans also provide for a Medicare carve-out, and a maximum lifetime benefit of $2
million per covered individual. Effective January 1, 2011, the company elected to remove the
maximum lifetime benefit cap for all company sponsored medical plans due to passage of the new
health care legislation described below. Subsequent to July 1, 2003, and January 1, 2004, for Gulf
Coast and Virginia operations, respectively, newly hired employees are not eligible for post
employment medical and life benefits.
The effect of the Medicare prescription drug subsidy from the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 to reduce the companys net periodic postretirement
benefit cost was not material for the periods presented and accumulated postretirement benefit
obligation was $26 million and $28 million as of December 31, 2010 and 2009, respectively.
New Health Care Legislation
The Patient Protection and Affordable Care Act and the Health Care
and Education Reconciliation Act
became law during the first quarter of 2010. These new laws will impact the companys costs of
providing health care benefits to its employees beginning in 2011. The initial passage of the laws
will eliminate the companys tax benefits under the Medicare prescription drug subsidies associated
with the Medicare Prescription Drug, Improvement and Modernization Act of 2003
beginning in 2013. The impact from the elimination of these tax benefits was recorded in the
consolidated financial statements (see Note 10). The company has also begun participation in the
Early Retiree Reinsurance Program (ERRP) that became effective on June 1, 2010. The company
continues to assess the extent to which the provisions of the new laws will affect its future
health care and related employee benefit plan costs.
Summary Plan Results
The cost to the company of its retirement benefit plans in each of the three years ended December
31 is shown in the following table:
F-23
NORTHROP GRUMMAN SHIPBUILDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical and
|
|
|
Pension Benefits
|
|
Life Benefits
|
$ in millions
|
|
2010
|
|
2009
|
|
2008
|
|
2010
|
|
2009
|
|
2008
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
127
|
|
|
$
|
114
|
|
|
$
|
130
|
|
|
$
|
15
|
|
|
$
|
15
|
|
|
$
|
14
|
|
Interest cost
|
|
|
182
|
|
|
|
169
|
|
|
|
156
|
|
|
|
38
|
|
|
|
40
|
|
|
|
39
|
|
Expected return on plan assets
|
|
|
(232
|
)
|
|
|
(193
|
)
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
|
|
13
|
|
|
|
13
|
|
|
|
7
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
(14
|
)
|
Net loss from previous years
|
|
|
38
|
|
|
|
48
|
|
|
|
2
|
|
|
|
8
|
|
|
|
9
|
|
|
|
15
|
|
|
Net periodic benefit cost
|
|
$
|
128
|
|
|
$
|
151
|
|
|
$
|
64
|
|
|
$
|
52
|
|
|
$
|
55
|
|
|
$
|
54
|
|
|
The table below summarizes the changes in the components of unrecognized benefit plan costs
for the years ended December 31, 2010, 2009, and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Medical and
|
|
|
$ in millions
|
|
Benefits
|
|
Life Benefits
|
|
Total
|
|
Changes in Unamortized Benefit Plan Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net actuarial loss
|
|
$
|
640
|
|
|
$
|
(41
|
)
|
|
$
|
599
|
|
Change in prior service cost
|
|
|
57
|
|
|
|
31
|
|
|
|
88
|
|
Amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (cost) credit
|
|
|
(7
|
)
|
|
|
14
|
|
|
|
7
|
|
Net loss from previous years
|
|
|
(2
|
)
|
|
|
(15
|
)
|
|
|
(17
|
)
|
Tax (expense) benefits related to above items
|
|
|
(268
|
)
|
|
|
4
|
|
|
|
(264
|
)
|
|
Changes in unamortized benefit plan costs 2008
|
|
|
420
|
|
|
|
(7
|
)
|
|
|
413
|
|
|
Change in net actuarial loss
|
|
|
(76
|
)
|
|
|
(5
|
)
|
|
|
(81
|
)
|
Change in prior service cost (credit)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
Amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (cost) credit
|
|
|
(13
|
)
|
|
|
9
|
|
|
|
(4
|
)
|
Net loss from previous years
|
|
|
(48
|
)
|
|
|
(9
|
)
|
|
|
(57
|
)
|
Tax benefits related to above items
|
|
|
54
|
|
|
|
2
|
|
|
|
56
|
|
|
Changes in unamortized benefit plan costs 2009
|
|
|
(82
|
)
|
|
|
(4
|
)
|
|
|
(86
|
)
|
|
Change in net actuarial loss
|
|
|
17
|
|
|
|
15
|
|
|
|
32
|
|
Transfers
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (cost) credit
|
|
|
(13
|
)
|
|
|
9
|
|
|
|
(4
|
)
|
Net loss from previous years
|
|
|
(38
|
)
|
|
|
(8
|
)
|
|
|
(46
|
)
|
Tax benefits (expense) related to above items
|
|
|
11
|
|
|
|
(15
|
)
|
|
|
(4
|
)
|
|
Changes in unamortized benefit plan costs 2010
|
|
$
|
(17
|
)
|
|
$
|
1
|
|
|
$
|
(16
|
)
|
|
The changes in the unamortized benefit plan costs, net of tax, are included in other
comprehensive income in the consolidated statements of operations. Unamortized benefit plan costs
consist primarily of net after-tax actuarial loss amounts totaling $487 million, $489 million, and
$573 million as of December 31, 2010, 2009, and 2008, respectively. Net actuarial gains or losses
are determined annually and principally arise from gains or losses on plan assets due to variations
in the fair market value of the underlying assets, and changes in the benefit obligation due to
changes in actuarial assumptions. Net actuarial gains or losses are amortized to expense in future
periods when they exceed ten percent of the greater of the plan assets or projected benefit
obligations by plan. The excess of gains or losses over the ten percent threshold is subject to
amortization over the average future service period of employees of approximately ten years.
The following tables set forth the funded status and amounts recognized in the consolidated
statements of financial position for the Northrop Grumman-sponsored defined benefit pension and
retiree health care and life insurance benefit plans. Pension benefits data include the qualified
plans as well as several unfunded non-qualified plans for benefits provided to directors, officers,
and certain employees. The company uses a December 31 measurement date for all of its plans.
F-24
NORTHROP GRUMMAN SHIPBUILDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical and
|
|
|
Pension Benefits
|
|
Life Benefits
|
$ in millions
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
3,062
|
|
|
$
|
2,756
|
|
|
$
|
677
|
|
|
$
|
660
|
|
Service cost
|
|
|
127
|
|
|
|
114
|
|
|
|
15
|
|
|
|
15
|
|
Interest cost
|
|
|
182
|
|
|
|
169
|
|
|
|
38
|
|
|
|
40
|
|
Plan participants contributions
|
|
|
9
|
|
|
|
5
|
|
|
|
16
|
|
|
|
15
|
|
Plan amendments
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
|
|
145
|
|
|
|
114
|
|
|
|
15
|
|
|
|
(5
|
)
|
Benefits paid
|
|
|
(106
|
)
|
|
|
(98
|
)
|
|
|
(52
|
)
|
|
|
(51
|
)
|
Transfers
|
|
|
37
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Curtailment
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
Benefit obligation at end of year
|
|
|
3,442
|
|
|
|
3,062
|
|
|
|
714
|
|
|
|
677
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
2,789
|
|
|
|
2,297
|
|
|
|
|
|
|
|
|
|
Gain on plan assets
|
|
|
347
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
105
|
|
|
|
201
|
|
|
|
33
|
|
|
|
33
|
|
Plan participants contributions
|
|
|
9
|
|
|
|
5
|
|
|
|
16
|
|
|
|
15
|
|
Benefits paid
|
|
|
(106
|
)
|
|
|
(98
|
)
|
|
|
(52
|
)
|
|
|
(51
|
)
|
Transfers
|
|
|
39
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
Fair value of plan assets at end of year
|
|
|
3,183
|
|
|
|
2,789
|
|
|
|
1
|
|
|
|
|
|
|
Funded status
|
|
$
|
(259
|
)
|
|
$
|
(273
|
)
|
|
$
|
(713
|
)
|
|
$
|
(677
|
)
|
|
Amounts Recognized in the Consolidated Statements of
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
$
|
131
|
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
Current liability
|
|
|
(9
|
)
|
|
|
(10
|
)
|
|
$
|
(146
|
)
|
|
$
|
(175
|
)
|
Non-current liability
|
|
|
(381
|
)
|
|
|
(379
|
)
|
|
|
(567
|
)
|
|
|
(502
|
)
|
|
The following table shows those amounts expected to be recognized in net periodic benefit cost
in 2011:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Medical and
|
$ in millions
|
|
Benefits
|
|
Life Benefits
|
|
Amounts Expected to be Recognized in
2011 Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
34
|
|
|
$
|
9
|
|
Prior service cost (credit)
|
|
|
12
|
|
|
|
(9
|
)
|
|
The accumulated benefit obligation allocated from all of the Northrop Grumman-sponsored
defined benefit pension plans in which company employees participate was $3.2 billion and $2.8
billion at December 31, 2010, and 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Medical and Life Benefits
|
$ in millions
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Amounts Recorded in Accumulated Other
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
640
|
|
|
$
|
654
|
|
|
$
|
157
|
|
|
$
|
150
|
|
Prior service cost
|
|
|
99
|
|
|
|
111
|
|
|
|
(38
|
)
|
|
|
(46
|
)
|
Income tax benefits related to above items
|
|
|
(287
|
)
|
|
|
(298
|
)
|
|
|
(56
|
)
|
|
|
(40
|
)
|
|
Unamortized benefit plan costs
|
|
$
|
452
|
|
|
$
|
467
|
|
|
$
|
63
|
|
|
$
|
64
|
|
|
F-25
NORTHROP GRUMMAN SHIPBUILDING
Amounts for pension plans with accumulated benefit obligations in excess of fair value of plan
assets associated with company employees are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
$ in millions
|
|
2010
|
|
|
2009
|
|
|
Projected benefit obligation
|
|
$
|
2,771
|
|
|
$
|
2,050
|
|
Accumulated benefit obligation
|
|
|
2,531
|
|
|
|
1,823
|
|
Fair value of plan assets
|
|
|
2,381
|
|
|
|
1,696
|
|
|
Plan Assumptions
On a weighted-average basis, the following assumptions were used to determine the benefit
obligations and the net periodic benefit cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical and
|
|
|
Pension Benefits
|
|
Life Benefits
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Assumptions Used to Determine Benefit Obligation at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.84
|
%
|
|
|
6.04
|
%
|
|
|
5.58
|
%
|
|
|
5.84
|
%
|
Rate of compensation increase
|
|
|
3.43
|
%
|
|
|
3.51
|
%
|
|
|
|
|
|
|
|
|
Initial health care cost trend rate assumed for the next year
|
|
|
|
|
|
|
|
|
|
|
8.00
|
%
|
|
|
7.00
|
%
|
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
|
|
|
|
|
|
|
|
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
2014
|
|
Assumptions Used to Determine Benefit Cost for the Year Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.04
|
%
|
|
|
6.25
|
%
|
|
|
5.84
|
%
|
|
|
6.25
|
%
|
Expected long-term return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
3.51
|
%
|
|
|
3.77
|
%
|
|
|
|
|
|
|
|
|
Initial health care cost trend rate assumed for the next year
|
|
|
|
|
|
|
|
|
|
|
7.00
|
%
|
|
|
7.50
|
%
|
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
|
|
|
|
|
|
|
|
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
2014
|
|
|
The discount rate is generally based on the yield on high-quality corporate fixed-income
investments. At the end of each year, the discount rate is primarily determined using the results
of bond yield curve models based on a portfolio of high quality bonds matching the notional cash
inflows with the expected benefit payments for each significant benefit plan.
The assumptions used for pension benefits are consistent with those used for retiree medical and
life insurance benefits.
Through consultation with investment advisors, expected long-term returns for each of the plans
strategic asset classes were
developed by Northrop Grumman. Several factors were considered, including survey of investment
managers expectations, current market data such as yields/price-earnings ratios, and historical
market returns over long periods. Using policy target allocation percentages and the asset class
expected returns, a weighted-average expected return was calculated.
A one-percentage-point change in the initial through the ultimate health care cost trend rates
would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
|
|
1-Percentage-
|
$ in millions
|
|
Point Increase
|
|
Point Decrease
|
|
Increase (Decrease) From Change In Health Care Cost Trend Rates To
|
|
|
|
|
|
|
|
|
Postretirement benefit expense
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
Postretirement benefit liability
|
|
|
18
|
|
|
|
(18
|
)
|
|
Plan Assets and Investment Policy
The retirement benefit plans assets in the NGSB Master Trust are invested in various asset classes
that are expected to produce a sufficient level of diversification and investment return over the
long term. The investment goals are to exceed the assumed actuarial rate of return over the long
term within reasonable and prudent levels of risk. Liability studies are conducted on a regular
basis to
F-26
NORTHROP GRUMMAN SHIPBUILDING
provide guidance in setting investment goals with an objective to balance risk. Risk
targets are established and monitored against acceptable ranges.
All investment policies and procedures are designed to ensure that the plans investments are
in compliance with ERISA. Guidelines are established defining permitted investments within each
asset class. Derivatives are used for transitioning assets, asset class rebalancing, managing
currency risk, and for management of fixed income and alternative investments. The investment
policies for most of the retirement benefit plans were changed effective January 1, 2010 and
require that the asset allocation be maintained within the following ranges as of December 31,
2010:
|
|
|
|
|
Asset Allocation Ranges
|
|
U.S. equity
|
|
15 35%
|
International equity
|
|
10 30%
|
Long bonds
|
|
25 45%
|
2010: Real estate and other
|
|
10 30%
|
|
As of December 31, 2010, the assets of NGSBs retirement benefit plans were transferred into a
separate NGSB Master Trust. The domestic equities, international equities and fixed income
securities were transferred in-kind. For the real estate and other category, the NGSB Master Trust
holds an interest in private equity, real estate, and hedge funds partnerships held in the Northrop
Grumman Master Trust (NGSB Master Trust Partnership Interests). After the asset transfers, the
NGSB Master Trust continues to be invested in accordance with the same investment policies and
procedures described above. If the anticipated spin-off transaction discussed in Note 1 is
completed, the NGSB Master Trust will be transferred to HII. In that event, the NGSB Master Trust
Partnership Interests may be transferred in the form of cash. Subsequent to the anticipated
spin-off transaction, the fiduciary of the NGSB retirement benefit plans may elect to change the
investment policies of the NGSB Master Trust.
The table below represents the fair values of the NGSB Master Trust and the proportionate share of
the fair values of NGSBs retirement benefit plans assets held in the Northrop Grumman Master Trust
at December 31, 2010, by asset category. The table that follows represents the proportionate share
of the fair values of NGSBs retirement benefit plan assets held in the Northrop Grumman Master
Trust at December 31, 2009, by asset category. The tables also identify the level of inputs used to
determine the fair value of assets in each category (see Note 1 for definition of levels). The
significant amount of Level 2 investments in the tables results from including in this category
investments in pooled funds that contain investments with values based on quoted market prices, but
for which the funds are not valued on a quoted market basis, and fixed income securities that are
valued using model based pricing services.
F-27
NORTHROP GRUMMAN SHIPBUILDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NGS B Master Trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic equities
|
|
$
|
789
|
|
|
|
|
|
|
|
|
|
|
$
|
789
|
|
International equities
|
|
|
6
|
|
|
$
|
590
|
|
|
|
|
|
|
|
596
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents
(1)
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
34
|
|
U.S. Treasuries
|
|
|
|
|
|
|
268
|
|
|
|
|
|
|
|
268
|
|
Other U.S. Governement Agency Securities
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
142
|
|
Non-U.S. Government Securities
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
Corporate debt
|
|
|
|
|
|
|
564
|
|
|
|
|
|
|
|
564
|
|
Asset backed
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
86
|
|
High yield debt
|
|
|
|
|
|
|
11
|
|
|
|
9
|
|
|
|
20
|
|
Bank loans
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Interest in Northrop Grumman Master Trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
181
|
|
Private equities
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
232
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
|
165
|
|
Other
(2)
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
74
|
|
|
Fair value of plan assets as of December 31, 2010
|
|
$
|
795
|
|
|
$
|
1,802
|
|
|
$
|
587
|
|
|
$
|
3,184
|
|
|
|
|
|
(1)
|
|
Cash & cash equivalents are predominantly held in money market funds and include a
net payable for unsettled trades at year end.
|
|
(2)
|
|
Other includes futures, swaps, options, swaptions, insurance contracts.
|
F-28
NORTHROP GRUMMAN SHIPBUILDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest in Northrop Grumman Master Trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic equities
|
|
$
|
507
|
|
|
|
|
|
|
|
|
|
|
$
|
507
|
|
International equities
|
|
|
212
|
|
|
$
|
218
|
|
|
|
|
|
|
|
430
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents
(1)
|
|
|
17
|
|
|
|
272
|
|
|
|
|
|
|
|
289
|
|
U.S. Treasuries
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
156
|
|
Other U.S. Governement Agency Securities
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
88
|
|
Non-U.S. Government Securities
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
Corporate debt
|
|
|
|
|
|
|
546
|
|
|
|
|
|
|
|
546
|
|
Asset backed
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
96
|
|
High yield debt
|
|
|
|
|
|
|
67
|
|
|
|
8
|
|
|
|
75
|
|
Bank loans
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
Real estate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
|
|
188
|
|
|
|
188
|
|
Private equities
|
|
|
|
|
|
|
|
|
|
|
242
|
|
|
|
242
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
127
|
|
|
|
127
|
|
Other
(2)
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
Fair value of plan assets as of December 31, 2009
|
|
$
|
736
|
|
|
$
|
1,488
|
|
|
$
|
565
|
|
|
$
|
2,789
|
|
|
|
|
|
|
(1)
|
|
Cash & cash equivalents are predominantly held in money market funds
|
|
|
|
(2)
|
|
Other includes futures, swaps, options, swaptions, insurance contracts and net payable for unsettled trades at year end.
|
|
At December 31, 2010 and 2009, the fair value of the plan assets of $3,184 million and $2,789
million, respectively in the tables above consisted entirely of assets for pension benefits.
The table below summarizes the changes in the fair value of the companys retirement benefit plans
assets measured using significant unobservable inputs for the years ended December 31, 2010 and
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High yield
|
|
Hedge
|
|
Private
|
|
|
|
|
$ in millions
|
|
debt
|
|
funds
|
|
equities
|
|
Real estate
|
|
Total
|
|
Balance as of December 31, 2008
|
|
$
|
6
|
|
|
$
|
169
|
|
|
$
|
240
|
|
|
$
|
168
|
|
|
$
|
583
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets still held at reporting date
|
|
|
2
|
|
|
|
23
|
|
|
|
(16
|
)
|
|
|
(57
|
)
|
|
|
(48
|
)
|
Assets sold during the period
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Purchases, sales, and settlements
|
|
|
|
|
|
|
(3
|
)
|
|
|
18
|
|
|
|
17
|
|
|
|
32
|
|
|
Balance as of December 31, 2009
|
|
|
8
|
|
|
|
188
|
|
|
|
242
|
|
|
|
127
|
|
|
|
565
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets still held at reporting date
|
|
|
2
|
|
|
|
14
|
|
|
|
24
|
|
|
|
12
|
|
|
|
52
|
|
Assets sold during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Purchases, sales, and settlements
|
|
|
|
|
|
|
10
|
|
|
|
8
|
|
|
|
48
|
|
|
|
66
|
|
Change in asset allocation mix
|
|
|
(1
|
)
|
|
|
(31
|
)
|
|
|
(42
|
)
|
|
|
(21
|
)
|
|
|
(95
|
)
|
|
Balance as of December 31, 2010
|
|
$
|
9
|
|
|
$
|
181
|
|
|
$
|
232
|
|
|
$
|
165
|
|
|
$
|
587
|
|
|
Generally, investments are valued based on information in financial publications of general
circulation, statistical and valuation services, records of security exchanges, appraisal by
qualified persons, transactions and bona fide offers. Domestic and international
F-29
NORTHROP GRUMMAN SHIPBUILDING
equities consist
primarily of common stocks and institutional common trust funds. Investments in common and
preferred shares are valued at the last reported sales price of the stock on the last business day
of the reporting period. Units in common trust funds and hedge funds are valued based on the
redemption price of units owned by the trusts at year-end. Fair value for real estate and private
equity partnerships is primarily based on valuation methodologies that include third party
appraisals, comparable transactions, discounted cash flow valuation models, and public market data.
Non-government fixed income securities are invested across various industry sectors and credit
quality ratings. Generally, investment guidelines are written to limit securities, for example, to
no more than five percent of each trust account, and to exclude the purchase of securities issued
by Northrop Grumman. The number of real estate and private equity partnerships held by the Northrop
Grumman Master Trust from which NGSBs plan assets are allocated is 167 and the unfunded
commitments for the trust are $1.2 billion and $1.1 billion as of December 31, 2010, and 2009,
respectively. NGSB retirement benefit plans proportionate share of these unfunded commitments is
approximately 11% and 13% for December 31, 2010, and 2009, respectively. For alternative
investments that cannot be redeemed, such as limited partnerships, the typical investment term is
ten years. For alternative investments that permit redemptions, such redemptions are generally made
quarterly and require a 90-day notice. The company is generally unable to determine the final
redemption amount until the request is processed by the investment fund and therefore categorizes
such alternative investments as Level 3 assets.
At December 31, 2010, and 2009, the defined benefit pension trust did not hold any Northrop Grumman
common stock.
In 2011, the required minimum funding level is expected to be approximately $2 million to the
companys retirement benefit plans and approximately $37 million to the companys other
post-retirement benefit plans.
It is not expected that any assets will be returned to the company from the benefit plans during
2011.
Benefit Payments
The following table reflects estimated future benefit payments, based upon the same assumptions
used to measure the benefit obligation, and includes expected future employee service, as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Medical and
|
$ in millions
|
|
Plans
|
|
Life Plans
|
|
Year Ending December 31
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
116
|
|
|
$
|
37
|
|
2012
|
|
|
129
|
|
|
|
38
|
|
2013
|
|
|
146
|
|
|
|
42
|
|
2014
|
|
|
162
|
|
|
|
46
|
|
2015
|
|
|
177
|
|
|
|
50
|
|
2016 through 2020
|
|
|
1,138
|
|
|
|
294
|
|
|
18. STOCK COMPENSATION PLANS
Plan Descriptions
The company participates in certain of Northrop Grummans stock-based award plans. At December 31,
2010, company employees had stock-based compensation awards outstanding under the Northrop
Grumman-sponsored 2001 Long-Term Incentive Stock Plan (2001 LTISP). This plan was approved by
Northrop Grummans shareholders. Northrop Grumman has historically issued new shares to satisfy
award grants.
The 2001 LTISP plan permit grants to key employees of three general types of stock incentive awards
of Northrop Grummans common stock: stock options, stock appreciation rights (SARs), and stock
awards. Each stock option grant is made with an exercise price at the closing price of Northrop
Grummans stock on the date of grant (market options). Outstanding stock options granted prior to
2008 generally vest in 25 percent increments over four years from the grant date under the 2001
LTISP, and grants outstanding expire ten years after the grant date. Stock options granted in 2008
and later 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 the 2001
LTISP. Stock awards, in the form of restricted performance stock rights and restricted stock
rights, are granted to key employees without payment to the company.
Under the 2001 LTISP, recipients of restricted performance stock rights earn shares of Northrop
Grummans stock, based on financial metrics determined by Northrop Grummans Board of Directors in
accordance with the plan. For grants prior to 2007, if the objectives have not been met at the end
of the applicable performance period, a substantial portion of the original grant will be
forfeited. If the
F-30
NORTHROP GRUMMAN SHIPBUILDING
financial metrics are met or exceeded during the performance period, all
recipients can earn up to 150 percent of the original grant. Beginning in 2007, all recipients
could earn up to 200 percent of the original 2007 grant if financial metrics are exceeded.
Restricted stock rights issued under either plan generally vest after three years. Termination of
employment can result in forfeiture of some or all of the benefits extended.
Compensation Expense
Total stock-based compensation allocated to NGSB by Northrop Grumman for the value of such awards
granted to company employees for the years ended December 31, 2010, 2009, and 2008, was $16
million, $11 million, and $13 million, respectively, of which $1 million, $1 million, and $1
million related to stock options and $15 million, $10 million, and $11 million, related to stock
awards, respectively. Tax benefits recognized in the consolidated statements of operations for
stock-based compensation during the years ended December 31, 2010, 2009, and 2008, were $6 million,
$5 million, and $5 million, respectively. The amount of Northrop Grumman shares issued to satisfy
stock-based compensation awards are recorded by Northrop Grumman and, accordingly, are not
reflected in NGSBs consolidated financial statements.
Unrecognized Compensation Expense
At December 31, 2010, there was $26 million of unrecognized compensation expense related to
unvested awards granted under Northrop Grummans stock-based compensation plans for company
employees, of which $2 million related to stock options and $24 million related to stock awards.
These amounts are expected to be charged to expense over a weighted-average period of 1.3 years.
Stock Options
The fair value of each of Northrop Grummans stock option awards is estimated on the date of grant
using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The
fair value of Northrop Grummans stock option awards is expensed on a straight-line basis over the
vesting period of the options, which is generally three to four years. Expected volatility is based
on an average of (1) historical volatility of Northrop Grummans stock and (2) implied volatility
from traded options on Northrop Grummans stock. The risk-free rate for periods within the
contractual life of the stock option award is based on the yield curve of a zero-coupon U.S.
Treasury bond on the date the award is granted with a maturity equal to the expected term of the
award. Northrop Grumman uses historical data to estimate future forfeitures. The expected term of
awards granted is derived from historical experience under Northrop Grummans stock-based
compensation plans and represents the period of time that awards granted are expected to be
outstanding.
The significant weighted-average assumptions used by Northrop Grumman relating to the valuation of
Northrop Grummans stock options for the years ended December 31, 2010, 2009, and 2008, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Dividend yield
|
|
|
2.9
|
%
|
|
|
3.6
|
%
|
|
|
1.8
|
%
|
Volatility rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
20
|
%
|
Risk-free interest rate
|
|
|
2.3
|
%
|
|
|
1.7
|
%
|
|
|
2.8
|
%
|
Expected option life (years)
|
|
|
6
|
|
|
|
5 & 6
|
|
|
|
6
|
|
Northrop Grumman generally grants stock options exclusively to executives, and the expected
term of six years is based on these employees historical exercise behavior. In 2009, Northrop
Grumman granted options to non-executives and assigned an expected term of five years for valuing
these options. Northrop Grumman and the company believe that this stratification of expected terms
best represents future expected exercise behavior between the two employee groups
The weighted-average grant date fair value of Northrop Grummans stock options granted during the
years ended December 31, 2010, 2009, and 2008, was $11, $7, and $15, per share, respectively.
Stock option activity for the year ended December 31, 2010, was as follows:
F-31
NORTHROP GRUMMAN SHIPBUILDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
|
|
Weighted-Average
|
|
Aggregate
|
|
|
Under Option
|
|
Average
|
|
Remaining
|
|
Intrinsic Value
|
|
|
(in thousands)
|
|
Exercise Price
|
|
Contractual Term
|
|
($ in millions)
|
|
Outstanding at January 1, 2010
|
|
|
1,139
|
|
|
$
|
53
|
|
|
4 years
|
|
$
|
6
|
|
Granted
|
|
|
123
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(91
|
)
|
|
|
46
|
|
|
|
|
|
|
|
|
|
Cancelled and forfeited
|
|
|
(10
|
)
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
1,161
|
|
|
$
|
54
|
|
|
3.5 years
|
|
$
|
14
|
|
|
Vested and expected to vest in the future at December 31, 2010
|
|
|
1,148
|
|
|
$
|
54
|
|
|
3.5 years
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
891
|
|
|
$
|
54
|
|
|
2.9 years
|
|
$
|
11
|
|
|
The intrinsic value of options exercised during the years ended December 31, 2010, 2009, and
2008, was $2 million, zero, and $2 million, respectively. Intrinsic value is measured using the
fair market value at the date of exercise (for options exercised) or at December 31 for the
applicable year (for outstanding options), less the applicable exercise price.
Stock Awards
The fair value of stock awards is determined based on the closing market price of Northrop
Grummans common stock on the grant date. Compensation expense for stock awards is measured at the
grant date based on fair value and recognized over the vesting period. For purposes of measuring
compensation expense, the amount of shares ultimately expected to vest is estimated at each
reporting date based on managements expectations regarding the relevant performance criteria.
Stock award activity for the year ended December 31, 2010, is presented in the table below. Vested
awards include stock awards fully vested during the year and net adjustments to reflect the final
performance measure for issued shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Weighted-Average
|
|
Weighted-Average
|
|
|
Awards
|
|
Grant Date
|
|
Remaining
|
|
|
(in thousands)
|
|
Fair Value
|
|
Contractual Term
|
|
Outstanding at December 31, 2009
|
|
|
436
|
|
|
$
|
58
|
|
|
1.6 years
|
Granted
|
|
|
272
|
|
|
|
60
|
|
|
|
|
|
Vested
|
|
|
(142
|
)
|
|
|
82
|
|
|
|
|
|
Forfeited
|
|
|
(11
|
)
|
|
|
52
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
555
|
|
|
$
|
53
|
|
|
1.5 years
|
|
During the year ended December 31, 2010, 136,000 shares of Northrop Grummans common stock
were issued to company employees in settlement of prior year stock awards that were fully vested,
with a total value upon issuance of $8 million and a grant date fair value of $10 million. During
the year ended December 31, 2009, 284,000 shares of Northrop Grummans common stock were issued to
company employees in settlement of prior year stock awards that were fully vested, with a total
value upon issuance of $13 million and a grant date fair value of $19 million. During the year
ended December 31, 2008 348,000 shares were issued to company employees in settlement of prior year
stock awards that were fully vested, with a total value upon issuance of $19 million and a grant
date fair value of $28 million. 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 companys common stock.
In 2011, Northrop Grumman expects, upon approval of the Compensation Committee of the Board of
Directors, to issue to company employees an additional 142,000 shares of common stock that vested
as of December 31 2010, with a grant date fair value of $11 million.
19. RELATED PARTY TRANSACTIONS AND PARENT COMPANY EQUITY
Allocation of General Corporate Expenses
The consolidated financial statements reflect an allocation of general corporate expenses from
Northrop Grumman, including allowable and unallowable costs as defined by the FAR. The allowable
portion of these costs have historically been allocated to NGSBs contracts, unless prohibited by
the FAR. These costs generally fall into one of the following categories:
Northrop Grumman management and support services
This category includes costs for functions such
as human resources, treasury, insurance risk management, internal audit, finance, tax, legal,
executive office and other administrative support. Human resources, employee benefits
administration, treasury and insurance risk management are generally allocated to the company based
on relative
F-32
NORTHROP GRUMMAN SHIPBUILDING
gross payroll dollars; internal audit is generally allocated based on audit hours
incurred related to the company; and the remaining costs are generally allocated using a
three-factor-formula that considers the companys relative amounts of revenues, payroll and average
asset balances as compared to the total value of these factors for all Northrop Grumman entities
utilizing these support services (the Three Factor Formula). The consolidated financial statements
include Northrop Grumman management and support services allocations totaling $115 million, $82
million, and $95 million for the years ended December 31, 2010, 2009, and 2008, respectively.
Shared services and infrastructure costs
This category includes costs for functions such as
information technology support, systems maintenance, telecommunications, procurement and other
shared services. These costs are generally allocated to the company using the Three Factor Formula
or based on usage. The consolidated statement of operations reflects shared services and
infrastructure costs allocations totaling $325 million, $325 million and $323 million for the years
ended December 31, 2010, 2009 and 2008, respectively.
Northrop Grumman-provided benefits
This category includes costs for group medical, dental and
vision insurance, 401(k) savings plan, pension and postretirement benefits, incentive compensation
and other benefits. These costs are generally allocated to the company based on specific
identification of the benefits provided to company employees participating in these benefit plans.
The consolidated financial statements include Northrop Grumman-provided benefits allocations
totaling $725 million, $680 million and $637 million for the years ended December 31, 2010, 2009,
and 2008, respectively.
Management believes that the methods of allocating these costs are reasonable, consistent with past
practices, and in conformity with cost allocation requirements of CAS or the FAR.
Related Party Sales and Cost of Sales
NGSB purchases and sells products and services from other Northrop Grumman businesses. Purchases
of products and services from these affiliated entities, which were recorded at cost, were $97
million, $100 million, and $73 million in 2010, 2009, and 2008, respectively. Sales of products
and services to these entities were $8 million, $9 million, and $8 million in 2010, 2009, and 2008,
respectively. No intercompany trade receivables or payables were outstanding as of the years ended
December 31, 2010, and 2009.
Notes Payable to Parent
The company had $715 million and $537 million of promissory notes outstanding with Northrop Grumman
as of December 31, 2010 and 2009, respectively. These notes were issued in conjunction with
Northrop Grummans purchase of Newport News Shipbuilding in 2001 and the tender and purchase of
$178 million of the GO Zone IRBs in November 2010 discussed in Note 11. These notes are payable on
demand and include $537 million of principal with an annual interest rate of 5% and $178 million of
principal with an annual interest rate of 4.55%. None of the notes require periodic payments.
Accrued and unpaid interest totaled $239 million and $212 million for the years ended December 31,
2010, and 2009, respectively. Intercompany interest expense of $27 million for each of the years
ended December 31, 2010, 2009, and 2008 is included in interest expense in the consolidated
statements of operations.
Parents Equity in Unit
Intercompany transactions between NGSB and Northrop Grumman have been included in these
consolidated financial statements and are considered to be effectively settled for cash at the time
the transaction is recorded. The net effect of the settlement of these transactions is reflected as
parents equity in unit in the consolidated statements of financial position.
20. UNAUDITED SELECTED QUARTERLY DATA
Unaudited quarterly financial results are set forth in the following tables.
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
1st Qtr
|
|
2nd Qtr
|
|
3rd Qtr
|
|
4th Qtr
|
|
Sales and service revenues
|
|
$
|
1,712
|
|
|
$
|
1,610
|
|
|
$
|
1,665
|
|
|
$
|
1,736
|
|
Operating income (loss)
|
|
|
87
|
|
|
|
(20
|
)
|
|
|
77
|
|
|
|
104
|
|
Earnings (loss) before income taxes
|
|
|
77
|
|
|
|
(30
|
)
|
|
|
67
|
|
|
|
92
|
|
Net earnings (loss)
|
|
|
41
|
|
|
|
(11
|
)
|
|
|
42
|
|
|
|
63
|
|
In the second quarter of 2010, Northrop Grumman announced plans to consolidate NGSBs Gulf Coast
operations by winding down its operations at the Avondale, Louisiana facility in 2013 after
completing LPD-class ships currently under construction. As a result of this decision, the company
recognized a $113 million pre-tax charge to operating income for the contracts under construction
at Avondale.
F-33
NORTHROP GRUMMAN SHIPBUILDING
In the third quarter of 2010, NGSB determined that costs to complete post-delivery work on LHD 8
exceeded original estimates resulting in a charge of $30 million. Also in the third quarter, the
company realized $24 million in unfavorable performance adjustments on LPD-24
Arlington
, which was
more than offset by $31 million in milestone incentives on the total LPD-22 through LPD-25
contract.
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
1st Qtr
|
|
2nd Qtr
|
|
3rd Qtr
|
|
4th Qtr
|
|
Sales and service revenues
|
|
$
|
1,410
|
|
|
$
|
1,544
|
|
|
$
|
1,656
|
|
|
$
|
1,682
|
|
Operating income (loss)
|
|
|
68
|
|
|
|
(4
|
)
|
|
|
82
|
|
|
|
65
|
|
Earnings (loss) before income taxes
|
|
|
57
|
|
|
|
(15
|
)
|
|
|
71
|
|
|
|
63
|
|
Net earnings (loss)
|
|
|
39
|
|
|
|
(10
|
)
|
|
|
52
|
|
|
|
43
|
|
In the first quarter of 2009, the company recognized a $48 million favorable adjustment on the LHD
8 contract due to risk retirement for earlier than expected completion of U.S. Navy acceptance sea
trials and increased escalation recovery. This increase was more than offset by lower performance
of $38 million each on the DDG 51 program and LPD 22 due to cost growth.
In the second quarter of 2009, the company recognized a $105 million pre-tax charge for cost growth
on LPD-class ships and LHA 6. These adjustments reflected additional expense to improve design,
engineering, production, and quality processes as well as increased production cost estimates for
these ships.
F-34
HUNTINGTON INGALLS INDUSTRIES, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Northrop Grumman Corporation
Los Angeles, California
We have audited the accompanying statement of financial position of Huntington Ingalls
Industries, Inc. (the Company), a wholly owned subsidiary of Northrop Grumman Corporation, as of
December 31, 2010. This financial statement is the responsibility of the Companys management. Our
responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of financial position is free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of financial position, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement of financial position
presentation. We believe that our audit of the statement of financial position provides a
reasonable basis for our opinion.
In our opinion, such statement of financial position presents fairly, in all material
respects, the financial position of Huntington Ingalls Industries, Inc. as of December 31, 2010, in
conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Virginia Beach, Virginia
February 21, 2011
F-35
HUNTINGTON INGALLS INDUSTRIES, INC.
STATEMENT OF FINANCIAL POSITION
|
|
|
|
|
|
|
December 31,
|
in whole dollars
|
|
2010
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
100
|
|
|
Total assets
|
|
$
|
100
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
Common stock, $1 par value; 100 shares
authorized, issued and outstanding at
December 31, 2010
|
|
$
|
100
|
|
|
Total shareholders equity
|
|
$
|
100
|
|
|
F-36
HUNTINGTON INGALLS INDUSTRIES, INC.
Note to Statement of Financial Position
On July 13, 2010, Northrop Grumman Corporation (Northrop Grumman) announced its decision to explore
strategic alternatives for its shipbuilding business, including but not limited to, a spin-off to
its shareholders to create a separate public company. On August 4, 2010, Northrop Grumman formed a
new, wholly-owned subsidiary, New S HoldCo, Inc., to serve as the holding company for its
shipbuilding business. The company was initially capitalized for $100 and issued 100 shares of its
common stock, at $1 par value per share, to New P, Inc, a subsidiary of Northrop Grumman and sole
shareholder of the company. Effective September 29, 2010, New S HoldCo, Inc. changed its name to
New Ships, Inc. Effective November 23, 2010 New Ships, Inc. changed its name to Huntington Ingalls
Industries, Inc. (the company).
In anticipation of a spin-off, Northrop Grumman and the company are planning to enter into a
separation and distribution agreement under which Northrop Grumman will transfer various assets,
liabilities and obligations (including employee benefits, intellectual property, information
technology, insurance and tax-rated assets and liabilities) associated with the shipbuilding
business. The assets and liabilities transferred to the company will be recorded at historical
cost as a reorganization of entities under common control. Northrop Grumman is not planning to
have any ownership interest in the company subsequent to the spin-off.
Management expects that the shares of the company will be distributed to Northrop Grumman
shareholders in the form of a tax-free distribution to Northrop Grumman shareholders for U.S.
Federal income tax purposes. The distribution will result in the company operating as a separate
entity with publicly traded common stock.
Statements of operations and cash flows have not been presented as there has been no activity since
formation.
F-37