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
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Page
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ARTICLE 1
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Definitions
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SECTION 1.01
. Defined Terms
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1
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SECTION 1.02
. Classification of Loans and Borrowings
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32
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SECTION 1.03
. Terms Generally
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32
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SECTION 1.04
. Accounting Terms; GAAP
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32
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SECTION 1.05
. Currency Translation
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33
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SECTION 1.06.
Pro Forma Calculations
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33
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ARTICLE 2
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The Credits
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SECTION 2.01
. Commitments
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33
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SECTION 2.02
. Loans and Borrowings
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33
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SECTION 2.03
. Requests for Borrowings
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34
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SECTION 2.04
. Swingline Loans
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35
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SECTION 2.05
. Letters of Credit
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36
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SECTION 2.06
. Funding of Borrowings
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42
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SECTION 2.07
. Interest Elections
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42
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SECTION 2.08
. Termination and Reduction of Commitments
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44
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SECTION 2.09
. Repayment of Loans; Evidence of Debt
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44
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SECTION 2.10
. Amortization of Term Loans
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45
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SECTION 2.11
. Voluntary Prepayments
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46
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SECTION 2.12
. Mandatory Prepayments
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46
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SECTION 2.13
. Fees
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48
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SECTION 2.14
. Interest
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49
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SECTION 2.15
. Alternate Rate of Interest
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50
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SECTION 2.16
. Increased Costs
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50
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SECTION 2.17
. Break Funding Payments
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52
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SECTION 2.18
. Taxes
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52
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SECTION 2.19
. Payments Generally; Pro Rata Treatment; Sharing of Set Offs
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56
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SECTION 2.20
. Mitigation Obligations; Replacement of Lenders
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57
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SECTION 2.21
. Defaulting Lenders
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58
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ARTICLE 3
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Representations and Warranties
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SECTION 3.01
. Organization; Powers
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60
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SECTION 3.02
. Authorization; Enforceability
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60
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SECTION 3.03
. Governmental Approvals; No Conflicts
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60
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i
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Page
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SECTION 3.04
. Financial Condition; No Material Adverse Change
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61
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SECTION 3.05
. Properties
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61
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SECTION 3.06
. Litigation and Environmental Matters
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62
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SECTION 3.07
. Compliance with Laws and Agreements
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63
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SECTION 3.08
. Investment Company Status
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63
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SECTION 3.09
. Taxes
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63
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SECTION 3.10
. ERISA
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64
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SECTION 3.11
. Disclosure
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64
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SECTION 3.12
. Use of Proceeds
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64
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SECTION 3.13
. Margin Regulations
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64
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SECTION 3.14
. Subsidiaries
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64
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SECTION 3.15
. Collateral Documents
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64
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SECTION 3.16
. Labor Matters
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65
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SECTION 3.17
. Solvency
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65
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SECTION 3.18
. Transaction Documents
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65
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SECTION 3.19
. Insurance
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65
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SECTION 3.20.
OFAC
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66
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SECTION 3.21.
Patriot Act
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66
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ARTICLE 4
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Conditions
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SECTION 4.01
. Effective Date
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66
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SECTION 4.02
. Funding Date
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68
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SECTION 4.03
. Each Credit Event
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70
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ARTICLE 5
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Affirmative Covenants
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SECTION 5.01
. Financial Statements; Ratings Change and Other Information
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71
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SECTION 5.02
. Notices of Material Events
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73
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SECTION 5.03
. Existence; Conduct of Business
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73
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SECTION 5.04
. Payment of Obligations
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73
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SECTION 5.05
. Maintenance of Properties; Insurance
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74
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SECTION 5.06
. Books and Records; Inspection Rights; Maintenance of Ratings
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75
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SECTION 5.07
. Compliance with Laws
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75
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SECTION 5.08
. Use of Proceeds and Letters of Credit
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75
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SECTION 5.09
. Employee Benefits
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75
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SECTION 5.10
. Compliance with Environmental Laws
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75
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SECTION 5.11.
Further Assurances
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76
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SECTION 5.12
. Designation of Subsidiaries
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76
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SECTION 5.13
. Maintenance of Separate Existence
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77
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SECTION 5.14.
Post-Funding Date Collateral Matters
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77
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ii
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Page
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ARTICLE 6
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Negative Covenants
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SECTION 6.01
. Indebtedness
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78
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SECTION 6.02
. Liens
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80
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SECTION 6.03
. Sale and Lease-Back Transactions
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83
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SECTION 6.04
. Investments, Loans and Advances
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83
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SECTION 6.05
. Mergers, Consolidations, Sales of Assets and Acquisitions
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85
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SECTION 6.06
. Restricted Payments; Restrictive Agreements
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86
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SECTION 6.07
. Transactions with Affiliates
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88
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SECTION 6.08
. Business of Borrower and Restricted Subsidiaries and Titan II
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89
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SECTION 6.09
. Certain Other Indebtedness
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89
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SECTION 6.10
. Capital Expenditures
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90
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SECTION 6.11
. Interest Coverage Ratio
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91
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SECTION 6.12
. Maximum Leverage Ratio
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92
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SECTION 6.13
. Fiscal Year
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92
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SECTION 6.14.
Transactions
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92
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ARTICLE 7
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Events of Default
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ARTICLE 8
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The Administrative Agent and the Collateral Agent
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ARTICLE 9
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Miscellaneous
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SECTION 9.01
. Notices
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98
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SECTION 9.02
. Waivers; Amendments
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98
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SECTION 9.03
. Expenses; Indemnity; Damage Waiver
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100
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SECTION 9.04
. Successors and Assigns
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102
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SECTION 9.05
. Survival
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105
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SECTION 9.06
. Counterparts; Integration; Effectiveness
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106
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SECTION 9.07
. Severability
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106
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SECTION 9.08
. Right of Setoff
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106
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SECTION 9.09
. Governing Law; Jurisdiction; Consent to Service of Process
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107
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SECTION 9.10
. WAIVER OF JURY TRIAL
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107
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SECTION 9.11
. Headings
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108
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SECTION 9.12
. Confidentiality
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108
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SECTION 9.13
. Interest Rate Limitation
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109
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SECTION 9.14
. Conversion of Currencies
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109
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SECTION 9.15
. USA PATRIOT Act
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110
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SECTION 9.16
. Collateral Release and Recapture
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110
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SECTION 9.17
. Collateral and Guaranty Release
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110
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SECTION 9.18
. Security Clearance
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111
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iii
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Page
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SECTION 9.19
. No Fiduciary Relationship
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112
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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:
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Exhibit A
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Form of Assignment and Assumption
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Exhibit B
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Form of Borrowing Request
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Exhibit C
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Form of LC Continuing Agreement
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Exhibit D
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Form of Guarantee and Security Agreement
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Exhibit E
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Form of Global Intercompany Note
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Exhibit F
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Form of Mortgages
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Exhibit G
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Form of Compliance Certificate
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Exhibit H
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Form of Confidentiality Agreement
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Exhibit I
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Form of U.S. Tax Certificate
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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
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Eurodollar
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Commitment
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Leverage Ratio:
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ABR Spread
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Spread
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Fee Rate
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Category 1
>
4.0 to 1.0
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2.00%
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3.00%
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0.50%
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Category 2
< 4.0 to 1.0 but
>
3.5 to 1.0
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1.75%
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2.75%
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0.50%
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Category 3
< 3.5 to 1.0 but
>
2.5 to 1.0
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1.50%
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2.50%
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0.50%
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Category 4
< 2.5 to 1.0 but
>
2.0 to 1.0
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1.25%
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2.25%
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0.40%
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Category 5
< 2.0 to 1.0
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1.00%
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2.00%
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0.35%
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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)
|
|
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;
|
|
|
(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.
32
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
56
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
57
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
58
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
59
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.
61
(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
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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
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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.
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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
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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
75
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,
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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;
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(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;
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(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;
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(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
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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
95
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
96
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.
97
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
98
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.
99
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.
|
|
|
|
|
|
HUNTINGTON INGALLS INDUSTRIES, INC.
|
|
|
By:
|
/s/ Mark Rabinowitz
|
|
|
|
Name:
|
Mark Rabinowitz
|
|
|
|
Title:
|
Treasurer
|
|
|
|
JPMORGAN CHASE BANK,
individually and as
Administrative Agent
|
|
|
By:
|
/s/ Matthew H. Massie
|
|
|
|
Name:
|
Matthew H. Massie
|
|
|
|
Title:
|
Managing Director
|
|
|
|
|
|
|
By:
|
/s/ Matthew H. Massie
|
|
|
|
Name:
|
Matthew H. Massie
|
|
|
|
Title:
|
Managing Director
|
|
|
|
CREDIT SUISSE A.G., CAYMAN ISLANDS BRANCH
|
|
|
By:
|
/s/ John D. Toronto
|
|
|
|
Name:
|
John D. Toronto
|
|
|
|
Title:
|
Managing Director
|
|
|
|
|
|
|
By:
|
/s/ Vipul Dhadda
|
|
|
|
Name:
|
Vipul Dhadda
|
|
|
|
Title:
|
Associate
|
|
|
|
THE ROYAL BANK OF SCOTLAND PLC
|
|
|
By:
|
/s/ L. Peter Yetman
|
|
|
|
Name:
|
L. Peter Yetman
|
|
|
|
Title:
|
Director
|
|
|
|
|
|
|
|
WELLS FARGO BANK, N.A.
|
|
|
By:
|
/s/ Scott Santa Cruz
|
|
|
|
Name:
|
Scott Santa Cruz
|
|
|
|
Title:
|
Director
|
|
|
|
BNP PARIBAS
|
|
|
By:
|
/s/ Rick Pace
|
|
|
|
Name:
|
Rick Pace
|
|
|
|
Title:
|
Managing Director
|
|
|
|
|
|
|
By:
|
/s/ Berangere Allen
|
|
|
|
Name:
|
Berangere Allen
|
|
|
|
Title:
|
Director
|
|
|
|
SUMITOMO MITSUI BANKING CORPORATION
|
|
|
By:
|
/s/ William Ginn
|
|
|
|
Name:
|
William Ginn
|
|
|
|
Title:
|
Executive Officer
|
|
|
|
SUNTRUST BANK
|
|
|
By:
|
/s/ Keith Cox
|
|
|
|
Name:
|
Keith Cox
|
|
|
|
Title:
|
Managing Director
|
|
|
|
BANK OF AMERICA, N.A.
|
|
|
By:
|
/s/ Kenneth Beck
|
|
|
|
Name:
|
Kenneth Beck
|
|
|
|
Title:
|
Managing Director
|
|
|
113
|
|
|
|
|
|
THE BANK OF NOVA SCOTIA
|
|
|
By:
|
/s/ John Matthews
|
|
|
|
Name:
|
John Matthews
|
|
|
|
Title:
|
Director
|
|
|
|
|
|
|
|
TD BANK, N.A.
|
|
|
By:
|
/s/ Marla Willner
|
|
|
|
Name:
|
Marla Willner
|
|
|
|
Title:
|
Senior Vice President
|
|
|
|
U.S. BANK NATIONAL ASSOCIATION
|
|
|
By:
|
/s/ Blake Malia
|
|
|
|
Name:
|
Blake Malia
|
|
|
|
Title:
|
Vice President
|
|
|
|
THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.
|
|
|
By:
|
/s/ Victor Pierzchalski
|
|
|
|
Name:
|
Victor Pierzchalski
|
|
|
|
Title:
|
Authorized Signatory
|
|
|
|
MORGAN STANLEY BANK, N.A.
|
|
|
By:
|
/s/ Sheresse Clarke
|
|
|
|
Name:
|
Sheresse Clarke
|
|
|
|
Title:
|
Authorized Signatory
|
|
|
|
BRANCH BANKING AND TRUST COMPANY
|
|
|
By:
|
/s/ Daniel T. Laurenzi
|
|
|
|
Name:
|
Daniel T. Laurenzi
|
|
|
|
Title:
|
Vice President
|
|
|
|
CAPITAL ONE LEVERAGE FINANCE CORP.
|
|
|
By:
|
/s/ Paul Dellova
|
|
|
|
Name:
|
Paul Dellova
|
|
|
|
Title:
|
Senior Vice President
|
|
|
|
|
|
|
|
COMERICA BANK
|
|
|
By:
|
/s/ Blake Arnett
|
|
|
|
Name:
|
Blake Arnett
|
|
|
|
Title:
|
Vice President
|
|
|
|
THE NORTHERN TRUST COMPANY
|
|
|
By:
|
/s/ Michael J. Kingsley
|
|
|
|
Name:
|
Michael J. Kingsley
|
|
|
|
Title:
|
Senior Vice President
|
|
|
|
STATE STREET BANK AND TRUST COMPANY
|
|
|
By:
|
/s/ Juan G. Sierra
|
|
|
|
Name:
|
Juan G. Sierra
|
|
|
|
Title:
|
Vice President
|
|
|
|
TAIWAN BUSINESS BRANCH, L.A. BRANCH
|
|
|
By:
|
/s/ Alex Wang
|
|
|
|
Name:
|
Alex Wang
|
|
|
|
Title:
|
S.V.P. & General Manager
|
|
|
|
TAIWAN COOPERATIVE BANK SEATTLE BRANCH
|
|
|
By:
|
/s/ Ming-Chih Chen
|
|
|
|
Name:
|
Ming-Chih Chen
|
|
|
|
Title:
|
VP & General Manager
|
|
|
114
Schedule 1.01A
Spin-off Transactions
Capitalized terms used but not defined in this Schedule 1.01A have the respective meanings
ascribed to such terms in the Credit Agreement to which this Schedule 1.01A is attached.
The transactions described in Steps 1 through 13 are referred to as the
Internal
Reorganization
. Steps 1 through 9 below are referred to as the
Pre-Contribution Internal
Reorganization
. For the avoidance of doubt, Steps 11 through 13 shall occur on the Funding Date
substantially concurrently with Step 10. The transactions described below have occurred or will
occur prior to the Spin-off in the following order:
|
|
|
Step 1:
|
|
Current NGC Parent has formed (a) New NGC, (b) the Borrower, (c)
Titan Holdings I, LLC, a Delaware limited liability company
(
Holdings LLC
), (d) Titan Holdings II, L.P., a Delaware limited
partnership (
Holdings LP
), and (e) Titan Merger Sub Inc., a
Delaware corporation (
Merger Sub
). New NGC initially will own
all the stock of the Borrower, the sole membership interest in
Holdings LLC and the sole general partner interest in Holdings
LP. Holdings LLC will initially own the sole limited partner
interest in Holdings LP. Holdings LP will initially own all of
the stock of Merger Sub.
|
|
|
|
Step 2:
|
|
The Current NGC Parent will contribute to New NGC and the
Borrower (or one or more of their respective subsidiaries), as
allocated in accordance with the Distribution Agreement, all of
its assets other than the capital stock in the Main Shipbuilding
Subsidiary and Northrop Grumman Systems Corporation, a Delaware
corporation (
NGSC
), and New NGC and the Borrower will assume
all of the liabilities of the Current NGC Parent, as allocated in
accordance with the Distribution Agreement, except for the
Current NGC Parents obligations under the Amended and Restated
Credit Agreement, dated as of August 10, 2007, between the
Current NGC Parent, the lenders party thereto from time to time,
JPMorgan Chase Bank, N.A. and the other parties named therein
(the
NGC Credit Agreement
) and the Current NGC Parents
obligations under the Titan II Guarantees and the guarantee of
the GO-Zone Bonds (the
GO-Zone Bonds Guarantee
).
|
|
|
|
Step 3:
|
|
Each of the Main Shipbuilding Subsidiarys subsidiaries will
distribute to the Main Shipbuilding Subsidiary all of the open
account debt owed to it by NGSC, if any. The Main Shipbuilding
Subsidiary will distribute to the Current NGC Parent all of the
open account debt owed to it by NGSC, including such debt
distributed to it by its Subsidiaries (all such debt, the
Intercompany Debt Receivable
).
|
|
|
|
Step 4:
|
|
The Holding Company Merger will be consummated.
|
|
|
|
Step 5:
|
|
New NGC will contribute its membership interest in Holdings LLC
and its partnership interest in Holdings LP to the Borrower.
|
|
|
|
Step 6:
|
|
The Current NGC Parent will distribute (the
NGC Distribution
)
to Holdings LP all of the Current NGC Parents assets (including
the stock of NGSC, the Main Shipbuilding Subsidiary and the
Intercompany Debt Receivable), and Holdings LP will assume all of
the Current NGC Parents liabilities and other obligations
(including the Current NGC Parents obligations under the NGC
Credit Agreement) except the Current NGC Parents obligations
under the Titan II Guarantees and the GO-Zone Bonds Guarantee.
|
|
|
|
Step 7:
|
|
Concurrent with the NGC Distribution, the Borrower will enter
into certain performance and indemnity agreements, forms of which
have been filed as Exhibits 10.13 and 10.14 to the Form 10
pursuant to which the Borrower will agree to perform all of the
Current NGC Parents obligations under the Titan II Guarantees
and the GO-Zone Bonds Guarantee and indemnify the Current NGC
Parent for any costs arising from such obligations.
|
|
|
|
Step 8:
|
|
Holdings LP will distribute to Holdings LLC, its limited partner,
and the Borrower, its general partner, all of the stock of the
Main Shipbuilding Subsidiary and the Current NGC Parent (the
Holdings LP Distribution
).
|
|
|
|
Step 9:
|
|
Holdings LLC will distribute to the Borrower the shares of the
Current NGC Parent and the Main Shipbuilding Subsidiary that it
received in the Holdings LP Distribution.
|
|
|
|
Step 10:
|
|
The Borrower will receive the net cash proceeds from the Senior
Notes out of an escrow account to be maintained pursuant to the
Escrow and Security Agreement, dated as of March 11, 2011, among
HII, as grantor, Wells Fargo Bank National Association, as escrow
agent and financial institution, and The Bank of New York Mellon,
as trustee (the
Senior Notes Escrow
). In addition, the
Borrower will receive the net cash proceeds from the Term Loans.
$300 million of such net cash proceeds will be retained by the
Borrower (the
Retained Cash
). Such cash proceeds less the
Retained Cash are referred to as the
Transferred Debt Proceeds
.
|
|
|
|
Step 11:
|
|
The Borrower will contribute (a) to Holdings LLC a portion of the
Transferred Debt Proceeds equal to Holdings LLCs proportionate
interest in Holdings LP (approximately $715 million) and (b) to
Holdings LP the remaining amount of the Transferred Debt Proceeds
(approximately $715 million).
|
|
|
|
Step 12:
|
|
Holdings LLC will contribute to Holdings LP the amount of the
Transferred Debt Proceeds contributed to it by the Borrower, and
Holdings LP will contribute to NGSC the entire amount of the
Transferred Debt Proceeds (such contributions, together with the
contributions in Step 11, the
Contribution
). Holdings LP will
also contribute to NGSC the entire amount of the Intercompany
Debt Receivable.
|
|
|
|
Step 13:
|
|
The Borrower will distribute all of its membership interest in
Holdings LLC and all of its partnership interest in Holdings LP
to New NGC.
|
2
After completion of the Internal Reorganization, New NGC will distribute to the holders of record
of the common stock, par value $1.00 per share, of New NGC as of the record date (which record date
will be the close of business on the date the Internal Reorganization is completed), on a pro rata
basis, all the outstanding shares of common stock, par value $.01 per share, of the Borrower owned
by New NGC on the date of such distribution.
3
Schedule 1.01B
Initial Mortgaged Real Properties
Gulf Coast
Mortgaged Property
PASCAGOULA
all of the land owned by Borrower or any Restricted Subsidiary (including
Northrop Grumman Shipbuilding, Inc.) and improvements located thereon in
Jackson County, MS
Exclusions
That certain land included in tax parcel 40408003.025 (the Point Property)
shall either be (a) excluded as part of the above referenced mortgaged
property, or (b) included, but subject to the right to release said Point
Property from the lien of the applicable deed of trust
GULFPORT
all of the land owned by Borrower or any Restricted Subsidiary (including
Northrop Grumman Shipbuilding, Inc.) and improvements located thereon in
Harrison County, MS
Newport News
Mortgaged Property
all of the land owned by Borrower or any Restricted Subsidiary (including
Northrop Grumman Shipbuilding, Inc.) and improvements located thereon in
Hampton, VA
all of the land owned by Northrop Grumman Shipbuilding, Inc. and improvements
located thereon in Newport News, VA
Exclusions
That certain land commonly known as 6801 Shipyard Drive, Newport News, VA
23607, which is leased to AREVA Newport News LLC (Tenant) shall be, subject
to the Collateral Agent being reasonably satisfied that the Lien on the
remaining property would not be adversely affected, excluded as part of the
above referenced mortgaged property
4
Schedule 2.01
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RevolvingCredit
|
|
|
Term Loan
|
|
|
|
|
Lender
|
|
Commitment
|
|
|
Commitment
|
|
|
Total
|
|
JPMorgan Chase Bank, N.A.
|
|
$
|
87,551,020
|
|
|
$
|
77,448,980
|
|
|
$
|
165,000,000
|
|
Credit Suisse AG, Cayman Islands
Branch
|
|
|
87,551,020
|
|
|
|
77,448,980
|
|
|
|
165,000,000
|
|
The Royal Bank of Scotland plc
|
|
|
66,326,531
|
|
|
|
58,673,469
|
|
|
|
125,000,000
|
|
Wells Fargo Bank, N.A.
|
|
|
66,326,531
|
|
|
|
58,673,469
|
|
|
|
125,000,000
|
|
BNP Paribas
|
|
|
39,795,918
|
|
|
|
35,204,082
|
|
|
|
75,000,000
|
|
Sumitomo Mitsui Banking
Corporation
|
|
|
39,795,918
|
|
|
|
35,204,082
|
|
|
|
75,000,000
|
|
SunTrust Bank
|
|
|
39,795,918
|
|
|
|
35,204,082
|
|
|
|
75,000,000
|
|
Bank of America, N.A.
|
|
|
26,530,612
|
|
|
|
23,469,388
|
|
|
|
50,000,000
|
|
The Bank of Nova Scotia
|
|
|
26,530,612
|
|
|
|
23,469,388
|
|
|
|
50,000,000
|
|
TD Bank, N.A.
|
|
|
26,530,612
|
|
|
|
23,469,388
|
|
|
|
50,000,000
|
|
U.S. Bank National Association
|
|
|
26,530,612
|
|
|
|
23,469,388
|
|
|
|
50,000,000
|
|
The Bank of Tokyo Mitsubishi
UFJ, Ltd.
|
|
|
19,897,959
|
|
|
|
17,602,041
|
|
|
|
37,500,000
|
|
Morgan Stanley Bank, N.A.
|
|
|
19,897,959
|
|
|
|
17,602,041
|
|
|
|
37,500,000
|
|
Branch Banking and Trust
Company
|
|
|
13,265,306
|
|
|
|
11,734,694
|
|
|
|
25,000,000
|
|
Capital One Leverage Finance
Corp.
|
|
|
13,265,306
|
|
|
|
11,734,694
|
|
|
|
25,000,000
|
|
Comerica Bank
|
|
|
13,265,306
|
|
|
|
11,734,694
|
|
|
|
25,000,000
|
|
The Northern Trust Company
|
|
|
13,265,306
|
|
|
|
11,734,694
|
|
|
|
25,000,000
|
|
State Street Bank and Trust
Company
|
|
|
13,265,306
|
|
|
|
11,734,694
|
|
|
|
25,000,000
|
|
Taiwan Business Bank, L.A.
Branch
|
|
|
5,306,122
|
|
|
|
4,693,878
|
|
|
|
10,000,000
|
|
Taiwan Cooperative Bank Seattle
Branch
|
|
|
5,306,122
|
|
|
|
4,693,878
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
650,000,000
|
|
|
$
|
575,000,000
|
|
|
$
|
1,225,000,000
|
|
|
|
|
|
|
|
|
|
|
|
Schedule 2.05A
LC Commitments
|
|
|
Issuing Bank
|
|
LC Commitment
|
JPMorgan Chase Bank, N.A.
|
|
$350,000,000
|
Schedule 2.05B
Existing Letters of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiry Date
|
|
Issue Date
|
|
Issuing Bank
|
|
|
L/C Number
|
|
|
Beneficiary
|
|
Contract Amount
|
12/31/2011
|
|
7/15/2003
|
|
Bank Of Nova Scotia
|
|
|
95526/80085
|
|
|
U.S. Department of Labor
|
|
|
17,000,000
|
|
12/31/2011
|
|
7/15/2003
|
|
Bank Of Nova Scotia
|
|
|
95527/80085
|
|
|
U.S. Department of Labor
|
|
|
40,000,000
|
|
10/31/2011
|
|
11/1/2001
|
|
Bayerische Landesbank
|
|
|
0067/01
|
|
|
American Home Insurance
|
|
|
15,000,000
|
|
12/31/2011
|
|
12/5/2002
|
|
Bayerische Landesbank
|
|
|
0123/02
|
|
|
Pacific Employers Insurance Co.
|
|
|
50,000
|
|
6/30/2011
|
|
7/3/2002
|
|
Bayerische Landesbank
|
|
|
0081/02
|
|
|
National Fire Ins. Co. of Hartford
|
|
|
3,200,000
|
|
8/3/2011
|
|
7/31/2002
|
|
Bayerische Landesbank
|
|
|
0085/02
|
|
|
American Home Assurance Company
|
|
|
13,050,000
|
|
4/1/2011
|
|
2/6/2003
|
|
JPMorgan Chase Bank
|
|
|
LPLS-633197
|
|
|
Majestic Insurance Co
|
|
|
180,941
|
|
6/30/2011
|
|
12/12/2002
|
|
Sumitomo Mitsui Banking
Corp
|
|
|
432424
|
|
|
National Union Fire Insurance Company of Pittburgh
|
|
|
12,000,000
|
|
|
4/5/2012
|
|
4/5/2000
|
|
Wells Fargo/Wachovia Bank
|
|
|
412298
|
|
|
US Bank
|
|
|
17,115,777.40
|
|
Schedule 3.05(f)
Owned Real Property
1
Gulf Coast
Property
PASCAGOULA OWNED
all of the land owned by Borrower or any Restricted Subsidiary (including
Northrop Grumman Shipbuilding, Inc.) and improvements located thereon in
Jackson County, MS
GULFPORT OWNED
all of the land owned by Borrower or any Restricted Subsidiary (including
Northrop Grumman Shipbuilding, Inc.) and improvements located thereon in
Harrison County, MS
AVONDALE OWNED
all of the land owned by Borrower or any Restricted Subsidiary (including
Northrop Grumman Shipbuilding, Inc.) and improvements located thereon in
Jefferson Parrish, LA
CMSD OWNED
all of the land owned by Borrower or any Restricted Subsidiary (including
Northrop Grumman Shipbuilding, Inc.) and improvements located thereon in San
Diego County, CA
Newport News
Property Name
HAMPTON OWNED
all of the land owned by Borrower or any Restricted Subsidiary (including
Northrop Grumman Shipbuilding, Inc.) and improvements located thereon in
Hampton, VA
NEWPORT NEWS OWNED
all of the land owned by Northrop Grumman Shipbuilding, Inc. and improvements
located thereon in Newport News, VA
|
|
|
1
|
|
Each of the above listed Owned Real Properties is
more fully described in those certain schedules previously disclosed to
Collateral Agent by Borrower, and which are currently on file with the
Collateral Agent.
|
2
Schedule 3.05(g)
Leased Real Property
Gulf Coast
|
|
|
|
|
|
|
Property Name
|
|
Address
|
|
Lessor
|
|
Lessee
|
LEASED TRAILERS
|
|
|
|
|
|
|
Leased Trailers Pascagoula
|
|
1000 Access Road
Pascagoula, MS 39568
|
|
|
|
|
|
|
|
|
|
|
|
Leased Trailers Gulfport
|
|
Gulfport, MS 39503
|
|
|
|
|
|
|
|
|
|
|
|
Leased Trailers Avondale
|
|
5100 River Rd
Avondale, LA 70094
|
|
|
|
|
|
|
|
|
|
|
|
PASCAGOULA LEASED SPACE
|
|
|
|
|
|
|
Singing River Island
|
|
Singing River Island
Pascagoula, MS 39568
|
|
Jackson County Board of
Supervisors, Jackson County
Port Authority
|
|
Northrop Grumman Ship
Systems, Inc.
|
|
|
|
|
|
|
|
Singing River Mall
|
|
2800 US Highway 90,
Suite 5000
Gautier, MS 39553
|
|
Stirling Properties, Inc.
|
|
Northrop Grumman Ship
Systems, Inc.
|
|
|
|
|
|
|
|
500-510 Krebs Ave
|
|
500-510 Krebs Ave
Pascagoula, MS 39568
|
|
American Bonded Storage
|
|
Northrop Grumman Ship
Systems, Inc.
|
|
|
|
|
|
|
|
Singing River Mall Variety
|
|
2800 Highway 90,
Suite 1080 and 1234
Gautier, MS 39553
|
|
Stirling Properties, Inc.
|
|
Northrop Grumman Ship
Systems, Inc.
|
|
|
|
|
|
|
|
1126 Jackson Avenue
|
|
1126 Jackson Street Avenue
Pascagoula, MS 39568
|
|
First Corporate Center, LLC, as
successor-in-interest to Arcata
2 Properties, LLC and Millette
and Associates
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
|
|
|
|
|
|
4908 Chicot Rd
|
|
4908 Chicot Rd
Pascagoula, MS 39568
|
|
Dantzler Family, LLC
|
|
Northrop Grumman Ship
Systems, Inc.
|
|
|
|
|
|
|
|
2614 Telephone Rd
|
|
2614 Telephone Rd
Bldg F Unit A
Pascagoula, MS 39568
|
|
Dantzler Family, LLC
|
|
Northrop Grumman Ship
Systems, Inc.
|
|
|
|
|
|
|
|
2810 Louise Street
|
|
2810 Louise Street
Pascagoula, MS 39568
|
|
Misty Meadows Farm Corporation
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
|
|
|
|
|
|
2614 Telephone Ave
|
|
2614 Telephone Ave
Bldg F Units B, C & E
Pascagoula, MS 39568
|
|
Dantzler Family, LLC
|
|
Northrop Grumman Ship
Systems, Inc.
|
|
|
|
|
|
|
|
Kmart Building, 3943 Denny Ave.
|
|
3943 Denny Ave
Pascagoula, MS 39568
|
|
LSAC Pascagoula L.P. (assigned
by 2003 Pascagoula Associates,
LLC)
|
|
Northrop Grumman
Systems Corporation
|
3
|
|
|
|
|
|
|
Property Name
|
|
Address
|
|
Lessor
|
|
Lessee
|
PASCAGOULA LEASED LAND
|
|
|
|
|
|
|
West Bank
|
|
Pascagoula, MS 39568
|
|
Jackson County Port Authority,
and the Mississippi Development
Authority, as
successor-in-interest to
Mississippi Agricultural and
Industrial Board
|
|
Northrop Grumman Ship
Systems, Inc, as
successor-in-interest
to Ingalls
Shipbuilding
Corporation
|
|
|
|
|
|
|
|
Parking Lot to Kmart Building,
3943 Denny Ave
|
|
3943 Denny Ave
Pascagoula, MS 39568
|
|
Phillips Distributors Inc.
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
|
|
|
|
|
|
WASHINGTON LEASED
|
|
|
|
|
|
|
300 M Street
|
|
300 M Street
Washington, DC 20003
|
|
Federal Center Limited
Partnership
|
|
NG Mission Systems
(shared with Northrop
Grumman Shipbuilding,
Inc.)
|
|
|
|
|
|
|
|
AVONDALE LEASED SPACE
|
|
|
|
|
|
|
5100 River Road UNO
|
|
5100 River Road
Avondale, LA 70094
|
|
University of New Orleans
Research and Technology
Foundation, Inc.
|
|
Avondale Industries,
Inc.
|
|
|
|
|
|
|
|
1420 Sams Avenue
|
|
1420 Sams Avenue
Harahan, LA 70003
|
|
Four Star Harahan, LLC
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
|
|
|
|
|
|
AVONDALE LEASED LAND
|
|
|
|
|
|
|
5100 River Rd Marrero
|
|
5100 River Rd
Avondale, LA 70094
|
|
The Marrero Land and
Improvement Association,
Limited
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
|
|
|
|
|
|
5100 River Rd Union Pacific
|
|
5100 River Rd
Avondale, LA 70094
|
|
Texas and New Orleans Railroad
Company, predecessor in title
to Southern Pacific Company
|
|
Avondale Marine Ways,
Inc., predecessor in
title to Avondale
Shipyards, Inc.
|
|
|
|
|
|
|
|
LA 18 Marrero
|
|
5201 Westbank Expressway
Marrero, LA 70094
|
|
The Marrero Land and
Improvement Association,
Limited
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
|
|
|
|
|
|
5100 River Rd Entergy
|
|
5100 River Rd
Avondale, LA 70094
|
|
Louisiana Power & Light Company
|
|
Avondale Industries,
Inc.
|
4
|
|
|
|
|
|
|
Property Name
|
|
Address
|
|
Lessor
|
|
Lessee
|
Bridge City Parking Lot
|
|
Avondale
Marrero, LA 70072
|
|
The Marrero Land and
Improvement Association,
Limited
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
|
|
|
|
|
|
5100 River Rd Robinson Track
|
|
5100 River Road
Avondale, LA 70094
|
|
Robert A. Robinson
|
|
Avondale Shipyards,
Inc.
|
|
|
|
|
|
|
|
CMD LEASED LAND
|
|
|
|
|
|
|
Continental Maritime
|
|
1995 Bayfront Street
San Diego, CA 71282
|
|
San Diego Unified Port District
|
|
Continental Maritime
of San Diego, Inc.
|
|
|
|
|
|
|
|
AMSEC LEASED SPACE
|
|
|
|
|
|
|
Werner Road Facility
|
|
5780 West Werner Road
Bremerton, WA 98312
|
|
Schourup LLC
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
Hawaii Warehouse
|
|
3060 Ualena St.
(includes, Warehouse Unit
3050C, Bay A, Bay A-1,
and Unit 3060B) Honolulu,
HI
|
|
Taihook Associates
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
Hawaii Office
|
|
3375 Koapaka Street,
Suite B200
Honolulu, HI 96819
|
|
AIPA Properties, L.L.C.
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
Mayport Florida Office
|
|
2920 Mayport Road
Jacksonville, FL 32233
|
|
Inlere, Inc.
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
NY Office
|
|
112 34
th
Street
New York, NY 10020
|
|
112 West 34
th
St, LLC
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
Scoop Warehouse
|
|
6701 College Avenue
(Suites 155, 155A, 180A &
190)
Suffolk, VA 23435
|
|
Ashley Bridgeway, LLC
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
Virginia Beach Corporate
Headquarters
|
|
2829 Guardian Lane
Virginia Beach, VA 23452
|
|
Campus Point Realty Corporation
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
Net Center Office
|
|
5200 Mercury Blvd
Hampton, VA 23605
|
|
NetCenter Partners, LLC, as
successor to Sans Holding
Corporation
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
CVN 77 78
|
|
6701 College Avenue,
Suite 170
Suffolk, VA 23435
|
|
Ashley Bridgeway, LLC
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
Woodlake Warehouse
|
|
550 Woodlake Drive
Chesapeake, VA 23320
|
|
Woodlake LLC
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
Suffolk 045 Facility NGSB
|
|
6701 College Avenue
(Suite 160)
Suffolk, VA 23435
|
|
Ashley Bridgeway, LLC
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
045FES Suffolk Warehouse
|
|
1 College Drive (Suite
185)
Suffolk, VA 23435
|
|
Ashley Bridgeway
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
Norfolk sublease
|
|
7437 Central Business
Park Drive
Norfolk, CT 23513
|
|
Delphinus Engineering, Inc.
|
|
AMSEC LLC
|
5
|
|
|
|
|
|
|
Property Name
|
|
Address
|
|
Lessor
|
|
Lessee
|
Philadelphia Office 1st lease
|
|
4900 S. Broad Street,
Philadelphia, PA 19112
|
|
4900 S. Broad St.
Associates-Tenant, L.P.
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
Philadelphia Office lease
number 2
|
|
4900 S. Broad Street,
Philadelphia, PA 19112
|
|
4900 S. Broad St.
Associates-Tenant, L.P.
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
New Hampshire Office
|
|
One New Hampshire Avenue
Portsmouth, NH 23709
|
|
IOS Business Centers
|
|
AMSEC LLC
|
|
|
|
|
|
|
|
National City Warehouse
|
|
131 W. 33rd Street
National City, CA 91950
|
|
RIF IV West 33
rd
Street, LLC
|
|
AMSEC LLC
|
NEWPORT NEWS
|
|
|
|
|
|
|
LEASED OFFICES
|
|
|
|
|
|
|
Building 901 (VSS Building)
|
|
2800 Washington Avenue
Newport News, VA 23607
|
|
Economic
Development
Authority of the
City of Newport
News, Virginia
|
|
Newport News
Shipbuilding and Dry
Dock Company
|
|
|
|
|
|
|
|
Building 902 (Sears Building)
|
|
2700 Huntington Avenue
Newport News, VA 23607
|
|
Economic
Development
Authority of the
City of Newport
News, Virginia
|
|
Newport News
Shipbuilding and Dry
Dock Company
|
|
|
|
|
|
|
|
Building 903 (Eng Bldg)
|
|
300 29
th
Street
Newport News, VA 23607
|
|
Economic
Development
Authority of the
City of Newport
News, Virginia
|
|
Newport News
Shipbuilding and Dry
Dock Company
|
|
|
|
|
|
|
|
Building 903 1
st
Floor
|
|
300 29
th
Street (Units 4 and 5)
Newport News, VA 23607
|
|
Economic
Development
Authority of the
City of Newport
News, Virginia
|
|
Newport News
Shipbuilding and Dry
Dock Company
|
|
|
|
|
|
|
|
Building 802-NetCenter-RPPY & IIS
|
|
5200 W. Mercury Boulevard
Hampton, VA 23605
|
|
NetCenter HH, LLC
|
|
Newport News
Shipbuilding and Dry
Dock Company
|
|
|
|
|
|
|
|
Building 802-NetCenter-8
th
Quadrant
|
|
5200 W. Mercury Boulevard
Hampton, VA 23605
|
|
NetCenter HH, LLC
|
|
Newport News
Shipbuilding and Dry
Dock Company
|
|
|
|
|
|
|
|
Building 802-NetCenter-CATIA Training
|
|
5200 W. Mercury (Suite 195) Boulevard
Hampton, VA 23605
|
|
NetCenter HH, LLC
|
|
Newport News
Shipbuilding and Dry
Dock Company
|
6
|
|
|
|
|
|
|
1715 Pratt Dr, Ste#1300, Blacksburg, VA
|
|
1715 Pratt Drive
Blacksburg, VA 24060
|
|
Virginia Tech
Corporate Research
Center, Inc.
|
|
Newport News
Shipbuilding and Dry
Dock Company
|
|
|
|
|
|
|
|
Rouse Tower, 10
th
& 11
th
Flrs
|
|
6060 Jefferson Avenue
Newport News, VA 23605
|
|
Economic
Development
Authority of the
City of Newport
News, Virginia
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
|
|
|
|
|
|
WAREHOUSES
|
|
|
|
|
|
|
ALRE, 814 Maxwell Ave
|
|
814 Maxwell Drive
Hampton, VA 23661
|
|
Tidewater Warehouse
Associates, L.L.C.
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
|
|
|
|
|
|
MDC, 2175 Aluminum Ave, Bldg B
|
|
2175 Aluminum Avenue
Hampton, VA 23661
|
|
BEH BLD LC (f/k/a
BEH LC)
|
|
Newport News
Shipbuilding and Dry
Dock Company
|
|
|
|
|
|
|
|
PRODUCTION FACILITIES
|
|
|
|
|
|
|
Building 861, 505 Howmet Dr
|
|
505 Howmet Drive
Hampton, VA 23661
|
|
Lamar Investments
|
|
Northrop Grumman
Shipbuilding, Inc.,
as
successor-in-interest
to Newport News
Shipbuilding and Dry
Dock Company
|
|
|
|
|
|
|
|
NNS AS ADMINISTRATOR
|
|
|
|
|
|
|
NNI Main Office, Bldg #906
|
|
182 Enterprise Drive
Newport News, VA 23603
|
|
Newport News
Shipbuilding and
Dry Dock Company
|
|
Newport News
Industrial
Corporation
|
|
|
|
|
|
|
|
NNI 220 Pickets Line
|
|
220 Picketts Line
Newport News, VA 23603
|
|
Susquehanna
Stewart, LLP
|
|
Newport News
Industrial
Corporation
|
|
|
|
|
|
|
|
NNI Swisslog Building
|
|
161 Enterprise Drive
Newport News, VA 23603
|
|
Swisslog Logistics,
Inc.
|
|
Newport News
Industrial
Corporation
|
|
|
|
|
|
|
|
LEASED TRAILERS
|
|
|
|
|
|
|
Leased Trailers Newport News
|
|
4101 Washington Avenue
Newport News, VA 23607
|
|
|
|
|
|
|
|
|
|
|
|
LAND LEASES
|
|
|
|
|
|
|
AREVA Newport News, LLC
|
|
6801 Shipyard Drive
Newport News, VA 23607
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
AREVA Newport News,
LLC
|
|
|
|
|
|
|
|
SUB-LEASES
|
|
|
|
|
|
|
Rouse Tower, 10
th
Flr
|
|
6060 Jefferson Avenue
Newport News, VA 23605
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
AREVA Newport News,
LLC
|
7
Schedule 3.06
Disclosed Matters
None.
8
Schedule 3.14
Subsidiaries
None
Restricted
Subsidiaries (as of the Funding
Date)
2
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Ownership
|
|
Company
|
|
Holder
|
|
Interests
|
|
Northrop Grumman
Shipbuilding, Inc.
|
|
Huntington Ingalls Industries, Inc.
|
|
|
100
|
%
|
Newport News Energy
Company
|
|
Northrop Grumman Shipbuilding, Inc.
|
|
|
100
|
%
|
Newport News Reactor Services, Inc.
|
|
Northrop Grumman Shipbuilding, Inc.
|
|
|
100
|
%
|
Newport News Industrial Corporation
|
|
Northrop Grumman Shipbuilding, Inc.
|
|
|
100
|
%
|
Newport News Nuclear Inc.
|
|
Northrop Grumman Shipbuilding, Inc.
|
|
|
100
|
%
|
Newport News Shipbuilding and Dry Dock Company
|
|
Northrop Grumman Shipbuilding, Inc.
|
|
|
100
|
%
|
Ingalls Shipbuilding, Inc.
|
|
Northrop Grumman Shipbuilding, Inc.
|
|
|
100
|
%
|
Northrop Grumman Ship Systems International, Inc.
|
|
Northrop Grumman Shipbuilding, Inc.
|
|
|
100
|
%
|
Continental Maritime of San Diego, Inc.
|
|
Northrop Grumman Shipbuilding, Inc.
|
|
|
100
|
%
|
Fleet Services Holding Corp.
|
|
Northrop Grumman Shipbuilding, Inc.
|
|
|
100
|
%
|
AMSEC LLC
|
|
Fleet Services Holding Corp.
|
|
|
100
|
%
|
|
|
|
2
|
|
These entities are not Subsidiaries of Huntington Ingalls
Industries, Inc. as of the Effective Date.
|
9
Unrestricted Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
Ownership
|
Company
|
|
Holder
|
|
Interests
|
Ascension
Holding Company, LLC
|
|
Northrop Grumman Shipbuilding, Inc.
|
|
|
50.7
|
%
|
Northrop
Grumman Corporation
|
|
Huntington Ingalls Industries Inc.
4
|
|
|
100
|
%
|
|
|
|
3
|
|
These entities are not Subsidiaries of Huntington Ingalls
Industries, Inc. as of the Effective Date.
|
|
4
|
|
Holder as of the consummation of the transactions described in Schedule 1.01A.
|
10
Schedule 6.01
Existing Indebtedness
|
|
|
|
|
|
|
|
|
|
|
|
|
Debtor
|
|
Creditor
|
|
Principal Amount
|
|
Date of Note
|
|
Maturity Date
|
Newport News Shipbuilding Inc.
5
|
|
Northrop Grumman Systems Corporation
|
|
$
|
407,995,838.04
|
|
|
|
02/22/2002
|
|
|
On Demand
|
Newport News Shipbuilding Inc.
6
|
|
Northrop Grumman Corporation
|
|
$
|
128,676,275.30
|
|
|
|
11/30/2001
|
|
|
On Demand
|
Northrop Grumman Shipbuilding Inc.
7
|
|
Northrop Grumman Systems Corporation
|
|
$
|
178,395,000.00
|
|
|
|
12/02/2010
|
|
|
On Demand
|
Northrop Grumman Ship Systems, Inc.
|
|
Mississippi Business Finance Corporation
|
|
$
|
21,605,000.00
|
|
|
|
12/01/2006
|
|
|
12/01/2028
|
Ingalls Shipbuilding, Inc
|
|
Mississippi Business Finance Corporation
|
|
$
|
83,700,000.00
|
|
|
|
05/01/1999
|
|
|
05/01/2024
|
Huntington Ingalls Industries, Inc.
8
|
|
Northrop Grumman Systems Corporation
|
|
Up to $60,000,000
|
|
|
|
N/A
|
|
|
(To be paid upon release of funds from Senior Notes Escrow.)
|
Indebtedness in Respect of Existing Letters of Credit (see Schedule 2.05B)
|
|
|
5
|
|
Note will be settled prior to Step 3 of the Internal Reorganization described in Section 1.01A.
|
|
6
|
|
Note will be settled prior to Step 3 of the Internal Reorganization described in Section 1.01A.
|
|
7
|
|
Note will be settled prior to Step 3 of the Internal Reorganization described in Section 1.01A.
|
|
8
|
|
Note will be settled in connection with Step 10 of the Internal Reorganization described in Section 1.01A.
|
11
Schedule 6.02
Existing Liens
None.
12
Schedule 6.06
Existing Agreements
None.
Schedule 6.07
Permitted Transactions with Affiliates
On or prior to the Spin-Off Date, agreements and transactions among the Restricted Companies,
Northrop Grumman and the Northrop Grumman Retained Subsidiaries.
14
EXHIBIT
A
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
This Huntington Ingalls Industries, Inc. Assignment and Assumption Agreement (the
Assignment and Assumption
) is dated as of the Effective Date set forth below and is
entered into by and among each of the Persons identified on the signature pages hereto as an
Assignor (each, an Assignor and collectively, the Assignors) and JPMorgan Chase Bank, N.A. (the
Assignee). Capitalized terms used but not defined herein shall have the meanings given to them
in the Credit Agreement identified below (as amended, the
Credit Agreement
), receipt of a
copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth
in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a
part of this Assignment and Assumption as if set forth herein in full.
For an agreed consideration, each Assignor hereby irrevocably sells and assigns to the
Assignee as described below, and the Assignee hereby irrevocably purchases and assumes from the
applicable Assignor, subject to and in accordance with the Standard Terms and Conditions and the
Credit Agreement, as of the Effective Date, (i) all of the applicable Assignors rights and
obligations in its capacity as a Lender under the Credit Agreement and any other documents or
instruments delivered pursuant thereto to the extent related to the amount and/or percentage
interest identified below of the applicable Assignors outstanding rights and obligations under the
respective facilities identified below (including any letters of credit, guarantees and swingline
loans included in such facilities) and (ii) to the extent permitted to be assigned under applicable
law, all claims (including contract claims, tort claims, malpractice claims, statutory claims and
all other claims at law or in equity), suits, causes of action and any other right of the
applicable Assignor (in its capacity as a Lender) against any Person, whether known or unknown,
arising under or in connection with the Credit Agreement, any other documents or instruments
delivered pursuant thereto or the loan transactions governed thereby or in any way based on or
related to any of the foregoing (the rights and obligations sold and assigned pursuant to clauses
(i) and (ii) above are in each case hereinafter referred to as an
Assigned Interest
).
Such sale and assignment is without recourse to any of the Assignors and, except as expressly
provided in this Assignment and Assumption, without representation or warranty by any of the
Assignors.
A-1
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1.
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Borrower:
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Huntington Ingalls Industries, Inc.
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2.
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Administrative Agent:
|
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JPMorgan Chase Bank, N.A., as the
Administrative Agent under the Credit
Agreement
|
|
|
|
|
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3.
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Credit Agreement:
|
|
Credit Agreement dated as of February
[
], 2011 among Huntington Ingalls
Industries, Inc., the Lenders party
thereto, and JPMorgan Chase Bank, N.A., as
Administrative Agent, an Issuing Bank and a
Swingline Lender, and Credit Suisse AG, as
Swingline Lender
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|
|
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4.
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Assigned Interests:
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Aggregate Amount
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Percentage
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of
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Amount of
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Assigned of
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Facility
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Commitment/Loans
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Commitment/Loans
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Commitment/
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Assignors
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Assignees
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Assigned
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for all Lenders
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Assigned
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Loans
1
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1.
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[LENDER]
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[
]
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[
]
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$
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$
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%
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2.
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[LENDER]
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[
]
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[
]
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$
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$
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%
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3.
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[LENDER]
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[
]
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[
]
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$
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$
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%
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4.
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[LENDER]
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[
]
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[
]
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$
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|
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$
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|
|
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%
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5.
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[LENDER]
|
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[
]
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[
]
|
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$
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|
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$
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|
|
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%
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6. Effective Date: [__________] [___], 20[__]
2
The Assignee agrees to deliver to the Administrative Agent a completed 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.
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1
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Set forth, to at least 9 decimals, as a
percentage of the Commitments/Loans of all Lenders thereunder.
|
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2
|
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To be inserted by Administrative Agent and
which shall be the Effective Date of recordation of transfer in the Register
therefor.
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A-2
The terms set forth in this Assignment and Assumption are hereby agreed to:
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,
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as
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Assignor,
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By
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Name:
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Title:
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By
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Name:
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Title:
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,
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as
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Assignee,
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By
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Name:
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Title:
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By
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Name:
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Title:
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A-3
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[Consented to and]
3
Accepted:
|
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|
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|
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[ADMINISTRATIVE AGENT], as
Administrative Agent
|
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By
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Name:
|
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Title:
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[Consented to:
|
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[BORROWER]
|
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By
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Name:
|
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Title: ]
4
|
|
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[Consented to:
|
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[ISSUING BANK]
|
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By
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Name:
|
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Title: ]
5
|
|
|
|
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3
|
|
To be added only if the consent of the
Administrative Agent is required by the terms of the Credit Agreement.
|
|
4
|
|
To be added only if the consent of the
Borrower is required by the terms of the Credit Agreement.
|
|
5
|
|
To be added only if the consent of the
Issuing Bank is required by the terms of the Credit Agreement.
|
A-4
ANNEX 1
STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION AGREEMENT
1.
|
|
Representations and Warranties
.
|
|
1.1.
|
|
Assignors
. Each Assignor represents and warrants that (i) it is the legal and
beneficial owner of the Assigned Interests transferred by it hereunder, (ii) each Assigned
Interest transferred by it hereunder is free and clear of any lien, encumbrance or other
adverse claim and (iii) it has full power and authority, and has taken all action
necessary, to execute and deliver this Assignment and Assumption and to consummate the
transactions by it contemplated hereby. Neither any Assignor nor any of its officers,
directors, employees, agents or attorneys shall be responsible for (i) any statements,
warranties or representations made in or in connection with the Credit Agreement or any
other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness,
sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the
financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other
Person obligated in respect of any Loan Document or (iv) the performance or observance by
the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their
respective obligations under any Loan Document.
|
|
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1.2.
|
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Assignee
. The Assignee (a) represents and warrants that (i) it has full power
and authority, and has taken all action necessary, to execute and deliver this Assignment
and Assumption and to consummate the transactions contemplated hereby and to become a
Lender under the Credit Agreement, (ii) it satisfies the requirements, if any, specified in
the Credit Agreement that are required to be satisfied by it in order to acquire the
Assigned Interests and become a Lender, (iii) from and after the Effective Date, it shall
be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the
extent of the Assigned Interests acquired by it hereunder, shall have the obligations of a
Lender thereunder, and (iv) it has received a copy of the Credit Agreement, together with
copies of the most recent financial statements delivered pursuant to Section 6.01 thereof,
as applicable, and such other documents and information as it has deemed appropriate to
make its own credit analysis and decision to enter into this Assignment and Assumption and
to purchase the Assigned Interests acquired by it hereunder on the basis of which it has
made such analysis and decision independently and without reliance on the Administrative
Agent or any other Lender and (v) if it is a Foreign Lender, attached to the Assignment and
Assumption is any documentation required to be delivered by it pursuant to [Section
2.18(f)], duly completed and executed by the Assignee; and (b) agrees that (i) it will,
independently and without reliance on the Administrative Agent, the Assignors or any other
Lender, and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action under the
Loan Documents, and (ii) it will perform in accordance with their terms all of the
obligations which by the terms of the Loan Documents are required to be performed by it as
a Lender.
|
2.
|
|
Payments
. From and after the Effective Date, the Administrative Agent shall make all
payments in respect of the Assigned Interests (including payments of principal, interest, fees
and other amounts) to the applicable Assignors for amounts which have accrued to but excluding
the
|
A-5
|
|
Effective Date and to the Assignee for amounts which have accrued from and after the Effective
Date.
|
3.
|
|
General Provisions
. This Assignment and Assumption shall be binding upon, and inure
to the benefit of, the parties hereto and their respective successors and assigns. This
Assignment and Assumption may be executed in any number of counterparts, which together shall
constitute one instrument. Delivery of an executed counterpart of a signature page of this
Assignment and Assumption by facsimile or other electronic transmission shall be effective as
delivery of a manually executed counterpart of this Assignment and Assumption. This
Assignment and Assumption shall be governed by, and construed in accordance with, the law of
the State of New York.
|
A-6
EXHIBIT B
FORM OF BORROWING REQUEST
JPMorgan Chase Bank, N.A., as Administrative Agent
for the Lenders referred to below,
270 Park Avenue
New York, New York 10017
Attention of [ ]
[Date]
1
Ladies and Gentlemen:
This Borrowing Request is delivered pursuant to the Credit Agreement dated as of March [ ],
2011 (as amended, restated, supplemented or otherwise modified from time to time, the
Credit
Agreement
) among Huntington Ingalls Industries, Inc., the Lenders from time to time party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, an Issuing Bank and a Swingline Lender, and
Credit Suisse AG, as Swingline Lender. Terms used herein and not defined have the meanings
assigned to them in the Credit Agreement.
The Borrower hereby gives you notice pursuant to Section 2.03 of the Credit Agreement that it
requests a Borrowing under the Credit Agreement as follows:
|
|
|
|
|
1.
|
|
Aggregate Amount of Borrowing
2
|
|
$__________________.
|
|
|
|
|
|
2.
|
|
Date of Borrowing
|
|
_____________, 20___.
|
|
|
(which is a Business Day)
|
|
|
|
|
|
|
|
3.
|
|
Type of Borrowing
3
|
|
___________________.
|
|
|
|
|
|
4.
|
|
Interest Period
4
|
|
___________________.
|
The Borrower certifies that on and as of the date of the proposed Borrowing:
|
|
|
1
|
|
Must be notified by telephone no later than
12:00 noon, New York City time, in the case of Eurodollar Borrowings, three
Business Days before, and in the case of the ABR Borrowings, one Business Day
before the date of the proposed Borrowing and confirmed promptly by written
Borrowing Request; 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) of the Credit Agreement may be given not later than 10 a.m., New York
City time, on the date of the proposed Borrowing.
|
|
2
|
|
Eurodollar Revolving Borrowings must be in an
aggregate amount not less than $2,000,000 and in an integral multiple of
$500,000. ABR Revolving Borrowings must be in an aggregate amount not less than
$2,000,000 and in an integral multiple of $500,000; 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) of the
Credit Agreement.
|
|
3
|
|
Specify Term Borrowing or Revolving Borrowing
and ABR Borrowing or Eurodollar Borrowing.
|
|
4
|
|
Applicable only to Eurodollar Borrowings, and
subject to the definition of Interest Period and Section 2.02 of the Credit
Agreement.
|
B-1
(i) the representations and warranties of the Borrower set forth in the Credit Agreement shall
be true and correct in all material respects (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); and
(ii) at the time of and immediately after giving effect to such proposed Borrowing, no Default
or Event of Default shall have occurred and be continuing.
|
|
|
|
|
|
HUNTINGTON INGALLS INDUSTRIES, INC.
|
|
|
By:
|
|
|
|
|
Name:
|
|
|
|
|
Title:
|
|
|
|
B-2
EXHIBIT C
For Bank use only, insert Applicants name:
_________________________
CONTINUING AGREEMENT FOR
COMMERCIAL & STANDBY LETTERS OF CREDIT
To induce [Issuing Bank] and/or any of its subsidiaries or affiliates (individually and
collectively,
Bank
), in its sole discretion, to issue one or more standby or commercial letters
of credit or other independent undertakings from time to time at the request of the undersigned
(
Applicant
), Applicant agrees as follows, including as to each such letter of credit or other
independent undertaking (together with any extensions or modifications, each a
Credit
):
1. Definitions.
Capitalized terms used but not defined herein shall have the meanings assigned to
such terms in the Credit Agreement (as defined below). The following terms shall have the meanings
set forth below, unless the context requires otherwise:
Agreement
means this Continuing Agreement for Commercial & Standby Letters of Credit, as amended,
supplemented or otherwise modified from time to time.
Application
means a request to issue a Credit in the form of Exhibit A Application for
Irrevocable Standby Letter of Credit or Exhibit B Application for Irrevocable Commercial Letter
of Credit or a request to amend a Credit in the form of Exhibit C Application for Amendment
hereto.
Credit Agreement
means the Credit Agreement (as amended, extended, restated or otherwise modified
from time to time) dated as of March __, 2011 among Huntington Ingalls Industries, Inc., the
Lenders party thereto, JPMorgan Chase Bank, N.A. as Administrative Agent, Issuing Bank and
Swingline Lender, and Credit Suisse AG, as Swingline Lender.
Drawing Document
means any document presented for purposes of drawing under a Credit (including
any draft or other demand or request for honor of a Credit).
Instructions
means any inquiries, communications or instructions (whether oral, telephonic,
written, facsimile, electronic or other) regarding a Credit, an Application or this Agreement (and
the term Application is subsumed within the term Instructions).
LOI
means a steamship guarantee, release or letter of indemnity in favor of a carrier issued by
Bank upon Instruction of Applicant.
2. Applications/Instructions.
Each Application shall be irrevocable and in such form as Bank shall
from time to time require (including any type of electronic form or means of communication);
provided
that the form of application set forth as Exhibit A and Exhibit B, as applicable,
shall be acceptable to Bank. Banks records of the content of any Instruction shall be conclusive
absent manifest error. Applicants ultimate responsibility for the final text of each Credit shall
not be affected by any assistance Bank may provide, such as by drafting or recommending text.
3. Payment Terms; Obligations Absolute.
(a) For each Credit, Applicant shall pay to the
Administrative Agent for the account of Bank: (i) the amount of each drawing paid by Bank under
such Credit, in accordance with Section 2.05(e) of the Credit Agreement; (ii) commissions, fees and
charges in respect of such Credit, in accordance with in Section 2.13(b) of the Credit Agreement;
(iii) interest in accordance with Section 2.05(h) of the Credit Agreement; and (iv) Banks charges,
costs and expenses, in accordance with Section 9.03(a) of the Credit Agreement.
(b) If the amount drawn under any Credit is in a Designated Foreign Currency, Applicant shall pay
under Section 3(a)(i) the US Dollar Equivalent of such amount, in accordance with Section 2.05(e)
of the Credit Agreement.
(c) Applicants payment obligations under this Section 3 are absolute, unconditional and
irrevocable under any and all circumstances whatsoever, as provided in Section 2.05(f) of the
Credit Agreement.
4. Additional Provisions Applicable to Commercial Credits.
(a)
Transport Documents and LOIs.
If Bank issues a LOI or endorses a bill of lading at the
Instruction of Applicant, then: (i) except as may be otherwise set forth herein, such LOI shall be
deemed issued by Bank subject to the same terms and conditions set forth herein for Credits
(including payment obligations,
indemnification provisions and limitations of liability); (ii) Applicant shall be liable for any
payment made under such LOI on demand; (iii) Bank shall have the right in its sole discretion and
without notice to or approval of Applicant, to pay, settle or adjust any claim or demand made
against or upon Bank in connection therewith without inquiry or determination, on Banks part, of
the
C-1
circumstances, merits or validity of such claim or demand; (iv) Applicant shall take whatever
steps are reasonably necessary to obtain the shipping documents relating to such LOI; (v) promptly
following Applicants receipt of such shipping documents, Applicant shall deliver them to the
carrier, duly endorsed by all parties whose endorsement is required by the carrier, and obtain from
the carrier and deliver to Bank, the LOI and a release of Banks liability to the carrier; (vi)
Bank is hereby authorized to honor any drawing under the Credit related to such LOI, whether or not
the drawing complies with the terms and conditions of such Credit; and (vii) Applicant acknowledges
that it may be required to reimburse Bank for payments made by Bank under both such LOI and the
Credit related to such LOI.).
(b)
Absence of Written Instructions.
In the absence of written instructions to the contrary,
Applicant agrees that (a) if any commercial Credit authorizes drawings and/or shipments in
installments and any installment is not drawn and/or shipped within the period allowed for that
installment but Applicant waives such discrepancy, Bank is authorized to honor any subsequent
installments so long as documents for such installments are presented within the period allowed for
such installments; and (b) each negotiation Credit shall expire at the counters of the nominated
person even if notice of the presentation or any documents contained in the presentation is not
received by Bank until after the expiry date of such Credit or any installment thereof.
(c)
Pledge and Assignment of Security
.
As security for the payment and performance of all
obligations and liabilities of Applicant to Bank in respect of any commercial Credit or any related
LOI issued hereunder (if any) and under this Agreement, Applicant hereby grants to Bank a
continuing lien and security interest in all of Applicants right, title and interest in, to and
under all Property, including any goods and documents which have been or at any time shall be
delivered to, received by or otherwise come into the possession or control of Bank, its
correspondents or Applicant in connection with such Credit. As used herein, Property means, in
respect of any commercial Credit, any and all right, title and interest of Applicant in any goods
and documents relating to or presented under such Credit, and any identifiable proceeds thereof.
5. Covenants.
Applicant shall comply with all foreign and domestic laws, rules and regulations
(including the USA Patriot Act, foreign exchange control regulations, foreign asset control
regulations and other trade-related regulations) now or hereafter applicable to each Credit, the
transactions underlying such Credit or Applicants execution, delivery and performance of this
Agreement, except where the failure to do so, individually or in the aggregate, would not
reasonably be expected to result in a Material Adverse Effect.
6. Remedies
. If any Event of Default as defined in the Credit Agreement shall have occurred and be
continuing, in addition to the remedies specified therein, Bank may require Applicant to (and
Applicant agrees that it shall) use its reasonable efforts to cause Bank to be promptly released
from its obligations under each Credit.
7. Electronic Transmissions.
Bank is authorized to accept and process any Application and any
amendments, transfers, assignments of proceeds, Instructions, consents, waivers or other documents
relating to any Credit or Application which are sent to Bank by any form of electronic transmission
and such communications shall be binding upon Applicant. If it is a condition of any Credit that
payment may be made upon receipt by Bank of an electronic transmission advising negotiation or
honor, Applicant agrees to reimburse Bank on demand for the amount indicated in such electronic
transmission advice, and further agrees to hold Bank harmless if documents fail to arrive, or if,
upon arrival of documents, Bank determines that such documents do not comply with the terms and
conditions of such Credit.
8. Auto Extend Notice.
If any Credit provides for automatic extension without amendment, Applicant
agrees that it will notify Bank in writing at least thirty (30) days prior to the last day
specified in such Credit by which Bank must give notice of nonextension as to whether or not it
wishes such Credit to be extended. Except as may be provided in any Credit or as Bank may
otherwise agree in writing in its sole discretion, Bank has no duty to (i) send or refrain from
sending notice of its election not to extend such Credit or (ii) otherwise amend or modify any
Credit.
9. Continuing Agreement; Survival.
This Agreement shall be effective immediately upon execution
and delivery by Applicant (with acceptance by Bank being waived) and shall remain in effect until
Applicant or Bank gives the other at least 30 days prior written notice of termination (which
notice may be given whether or not any Event of Default exists). Termination shall not release
Applicant from any liability for any payment obligations (whether or not contingent) existing at
the time of termination or resulting from or incidental to any Credit issued on or before such date
(regardless of when such Credit expires or is cancelled). The provisions hereof relating to
payments, indemnities, exculpations, limitations of liability, suretyship defenses, jurisdiction
and waiver
of jury trial shall survive and remain in full force and effect regardless of the consummation of
any transactions contemplated hereby, the reimbursement or repayment of any drawings, the
expiration or termination of the Credits or LOIs, the termination of the Credit Agreement, or the
termination of this Agreement or any provision hereof.
10. Amendment; Severability.
This Agreement may not be amended without the written consent of
Applicant and Bank. Any provision of this Agreement which may be determined by competent authority
to be prohibited or unenforceable in any jurisdiction
C-2
shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other jurisdiction.
11.
Bank hereby notifies Applicant that pursuant to the requirements of the USA Patriot Act (Title
III of Pub. L. 107-56 (signed into law October 26, 2001)), it is required to obtain, verify and
record information that identifies Applicant, which information includes the name and address of
Applicant and other information that will allow Bank to identify Applicant in accordance with such
Act.
12. Credit Agreement Controls.
It is understood and agreed that each Credit shall be subject to
the terms and conditions set forth in the Credit Agreement, including, without limitation, Sections
2.05 and 2.16 thereof. In the event of any inconsistency between the terms and conditions of this
Agreement and the terms and conditions of the Credit Agreement, the terms and conditions of the
Credit Agreement shall control. For the avoidance of doubt, the provisions of the Credit Agreement
shall govern with respect to all matters not expressly provided for herein.
13. Applicable Law; Jurisdiction; Jury Trial. (a)
This Agreement shall be construed in accordance
with and governed by the law of the State of New York.
(b) Applicant 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 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
Bank may otherwise have to bring any action or proceeding relating to this Agreement against the
Applicant or its properties in the courts of any jurisdiction. Applicant 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 in any court referred to in this paragraph (b). 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. Each party
to this Agreement irrevocably consents to service of process in the manner provided for notices in
Section 9.01 of the Credit Agreement. Nothing in this Agreement will affect the right of any party
to this Agreement to serve process in any other manner permitted by law.
(c)
APPLICANT WAIVES THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY ACTION OR PROCEEDING IN WHICH
BANK AND APPLICANT ARE PARTIES (WHETHER OR NOT THE ONLY PARTIES) ARISING OUT OF OR IN CONNECTION
WITH THIS AGREEMENT, ANY INSTRUCTION OR ANY CREDIT.
[Remainder of page intentionally left blank]
C-3
The undersigned hereby agrees to all the terms and conditions set forth herein as of the date set
forth below.
Address for Notices, etc. to Applicant:
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Fax:
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Telephone:
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Attention:
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Agent for service per Section 15(b), if applicable:
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Name:
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Address:
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(which must be in the State of New York)
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(Place and Type of Organization)
C-4
EXHIBIT A
Form of Application for Irrevocable Standby Letter of Credit
This application and the Letter of Credit issued hereunder are subject to and governed by the
CONTINUING AGREEMENT FOR COMMERCIAL & STANDBY LETTERS OF CREDIT
executed by the undersigned in
favor of [Issuing Bank] on (the Agreement).
When Transmitting this application by facsimile all pages must be transmitted.
To: [Issuing Bank] and/or its subsidiaries and/or affiliates.
Date:
I.
Pursuant to the Terms and Conditions contained herein, please issue an IRREVOCABLE STANDBY
Letter of Credit (together with any replacements, extensions or modifications, the Credit) and
transmit it by:
o
Teletransmission
o
Courier
If completing in Microsoft Word, please enter data by clicking on the gray boxes.
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Applicant/Obligor
(Full name and address-
jointly and
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Beneficiary
(Full name and address):
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severally if more than one, individually and collectively,
Applicant/Obligor
):
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[Signature lines are on last page].
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Account Party
(Full name and address of entity to be named in
Letter of Credit if different than the above
Applicant/Obligor):
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Advising Bank-Optional
(If blank, Issuer will select its
branch or affiliate or correspondent in the domicile of the
beneficiary):
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Amount:
Up to an aggregate amount of
If not USD, indicate currency
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Expiry Date:
Demands/claims must be presented to the counters of
the Nominated bank not later than
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Complete only if Automatic Extension of the expiry date is required.
Credit to contain Automatic Extension clause with extension period of
o
one year/
o
other (please specify).
No less than calendar days non-extension notice to the beneficiary.
Automatic Extension final expiration date: (the date after which the Credit will no longer be subject to Automatic Extension).
AVAILABLE BY
(indicate A, B or C)
o
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A. Beneficiarys dated statement referencing [Issuing Bank] Letter of Credit Number indicating amount of demand/claim and
purportedly signed by an authorized person reading as follows (Please state within the quotation marks the wording to appear
on the statement to be presented):
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(
insert appropriate reason for drawing
)
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o
Demands received by authenticated teletransmission are acceptable in lieu of the beneficiarys signed and dated statement provided that
such authenticated teletransmission contains the beneficiarys statement as provided for in the Credit.
C-5
o
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B. See attached sheet(s) for continuation of other documents and/or special instructions, which form an integral part of this
Application and such specimen should be approved and signed by the applicant/obligor.
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o
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C. Other:
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Complete only when the Beneficiarys bank or Correspondent is to issue its guarantee or undertaking based on the issued Standby Letter of
Credit.
We understand and agree that by making this request, we shall remain liable under this Credit until Issuer is fully released in writing
by such entity.
o
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Request Beneficiarys bank to issue and deliver its:
(Specify type of bid or performance bond, guarantee, undertaking or other)
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In favor of:
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Name(s)
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Attention Party Name
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Address
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City/State/Zip/Country
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Telephone
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Fax
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For an amount not exceeding that specified above, effective immediately and expiring at their office on (at least 30 days prior to Expiry
Date above) covering (brief description): .
o
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Multiple drawings prohibited (if blank, multiple drawings will be permitted).
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o
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Partial drawings prohibited (if blank, partial drawings will be permitted).
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o
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Credit is transferable only in its entirety (Issuer is authorized to include its standard transfer conditions and is
authorized to nominate a transferring bank, if applicable).
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The Credit, or any Credit issued shall be subject to the International Standby Practices 1998, International Chamber of Commerce
Publication 590 (ISP) or,
o
if box is checked, it shall be subject to the Uniform Customs and Practice for Documentary Credits 2007
Revision, International Chamber of Commerce Publication No. 600 (UCP).
Please include a brief description of the purpose of the Standby Letter of Credit including goods description, pricing, country of origin
of the goods, shipment from and shipment to countries, as applicable:
Unless otherwise stated herein, the nominated bank (if any) is authorized to send all documents to
you in one airmail or courier service, if available.
C-6
THE UNDERSIGNED HEREBY AGREES TO ALL THE TERMS AND CONDITIONS SET FORTH IN THE AGREEMENT, ALL OF
WHICH HAVE BEEN READ AND UNDERSTOOD BY THE UNDERSIGNED.
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(Applicant/Obligor)
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(Authorized Signature)
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(Title)
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(Phone)
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(Fax)
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(Date)
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C-7
EXHIBIT B
Form of Application for Irrevocable Commercial Letter of Credit
This application and the Letter of Credit issued hereunder are subject to and governed by the
CONTINUING AGREEMENT FOR COMMERCIAL & STANDBY LETTERS OF CREDIT
executed by the undersigned in
favor of [Issuing Bank]
on (the Agreement).
When transmitting this application by facsimile all pages must be transmitted.
To: [Issuing Bank] and/or its subsidiaries and/or affiliates. Date:
I.
Pursuant to the Terms and Conditions contained herein, please issue an IRREVOCABLE DOCUMENTARY
COMMERCIAL Letter of Credit (together with any replacements, extensions or modifications, the
Credit) and transmit it by:
o
Teletransmission
o
Courier
If completing in Microsoft Word, please enter data by clicking on the gray boxes.
Applicant/Obligor
(Full name and address):
[Signature lines are on last page].
Account Party
(Full name and address of entity to be named in Letter of Credit if different
than the above Applicant/Obligor):
Advising Bank-Optional
(If blank, Issuer will select its branch or affiliate or correspondent
in the domicile of the beneficiary):
Beneficiary
(Full name and address):
Amount
(In Figures):
Amount
(In words):
Indicate plus or minus percentage if applicable
o
Plus
o
Minus
%
o
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Credit is transferable.
(Issuer is authorized to include its standard transfer conditions and
is authorized to nominate a Transferring Bank.)
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Partial Shipment
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Transhipment
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o
Not Allowed (if blank, allowed)
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o
Not Allowed (if blank, allowed)
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Shipment:
Shipment from:
For Transportation to:
Latest Shipment Date:
Credit available:
o
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At sight.
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o
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By deferred payment at:
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o
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By acceptance of drafts at:
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o
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Discount
Charges, if any, for the account of the
(specify only if credit is available by acceptance)
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o
Beneficiary
o
Applicant
Against the documents detailed herein and Beneficiarys draft(s) drawn on Issuer or Issuers branch
or affiliate or correspondent (at Issuers option) for 100% or
% of the invoice value.
Insurance:
o
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Insurance effected by us. We agree to keep insurance in force until this transaction is
complete (no document required if checked).
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If above is not checked, the following documents are required:
o
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Negotiable Insurance Policy or Certificate covering the following
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All Risks
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War SR&CC
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Other Risks (specify)
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Indicate if a full set is required.
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o
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Insurance coverage for
% (Unless otherwise specified the minimum amount of
insurance must be for
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C-8
Expiry Date:
Place of Expiry
Unless the undersigned or Issuer nominates a bank which is authorized to pay, to
accept. to incur a deferred payment undertaking, or to negotiate, the Credit will be freely
negotiable. Issuer may nominate such a bank in its sole discretion or stipulate that the Credit is
available with Issuer only.
If the Credit is freely negotiable, it will be considered to be freely negotiable by any bank
anywhere. (Issuer in its sole discretion may specify that the Credit will expire in the country of
the beneficiary).
o
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Commercial Invoice
originals
copies.
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o
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Custom Invoice
originals
copies.
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o
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Visaed Customs Invoice
originals
copies.
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Transport Documents:
o
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Full Set of Marine/Ocean Bill of Lading covering a port to port shipment consigned to the order
of [Issuing Bank] marked notify Applicant indicating the name of the carrier, and indicating
the goods have been loaded on board or shipped on a named vessel.
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o
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Full Set of Multimodal Transport document consigned to the order of [Issuing Bank] marked
notify Applicant indicating the name of the carrier or Multimodal transport operator, and
indicating that the goods have been dispatched, taken in charge or loaded on board.
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o
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Air Waybill consigned to [Issuing Bank] marked notify Applicant indicating the name of the
carrier.
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o
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If Consignee other than [Issuing Bank] (please specify):
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o
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If notify party other than Applicant (please specify):
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Truck Bill of Lading consigned to
marked notify Applicant indicating the name of the carrier.
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o
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Rail Bill of Lading consigned to
marked notify Applicant indicating the name of the carrier.
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The Transport Document must be marked
o
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Freight Collect
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o
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Freight Prepaid
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100% of the CIF or CIP value plus 10%. If the CIF or CIP value cannot be determined from the documents on
their face, insurance must be for a minimum amount of 110% of the drawing amount or
110%
of the gross invoice amount, whichever is greater
.)
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o
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Packing List
originals
copies.
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o
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Certificate of Origin
originals
copies.
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o
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Forwarders Cargo Receipt (FCR) issued by
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indicating that the merchandise has been received (indicate in the space below any further
requirements-Note: a FCR is not a transport document):
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Inspection Certificate issued by
and purportedly signed by
originals
copies
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Specify Inspection Certificate content (if blank, document will be accepted as
tendered.)
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o
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Other Documents
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o
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See attached sheet for continuation or other documents or further special instructions which
form and are an integral part of this Application.
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Covering: Merchandise described in the invoice as (Mention commodity only in generic terms omitting
details as to grade, quality, etc. Do not attach copy of Purchase Order. Reference may be made to
it for information only.)
Trade Terms:
o
Check if Incoterms 2000 applies
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FAS
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FOB (named port of shipment);
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FCA (named place of shipment);
o
CIP (named place of destination);
o
CFR
o
CIF (named port of destination);
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Other
Documents must be presented for payment, acceptance, negotiation within
days (unless
otherwise specified 21 days will be
stipulated) after the date of shipment of the transport documents (or in the case of a FCR or Air
Waybill 21 days after its date) but within the validity of the Credit.
o
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All bank charges other than those of Issuer are for the beneficiarys account.
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C-9
Unless otherwise stated herein, the negotiating/nominated bank (if any) is authorized to send all
documents to you in one airmail or courier service, if available.
The Credit, or any Credit issued shall be subject to the Uniform Customs and Practice for
Documentary Credits 2007 Revision, International Chamber of Commerce Publication No. 600 (UCP)
and any subsequent revision thereof adhered to by Bank on the date such Credit is issued.
C-10
THE UNDERSIGNED HEREBY AGREES TO ALL THE TERMS AND CONDITIONS SET FORTH IN THE CONTINUING
AGREEMENT, ALL OF WHICH HAVE BEEN READ AND UNDERSTOOD BY THE UNDERSIGNED.
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(Applicant/Obligor)
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(Authorized Signature)
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(Title)
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(Phone)
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(Fax)
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(Date)
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C-11
EXHIBIT C
Form of Application for Amendment
On Beneficiary Letterhead
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Date:
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[
]
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To:
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[Issuing Bank]
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[Address]
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ATTN: [
]
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Phone: [
]
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FAX: [
]
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From:
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[Name and Address of Beneficiary]
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RE: [Issuing Bank] Letter of Credit Number [
SPECIFY NUMBER]
issued on behalf of [
SPECIFY APPLICANT
NAME]
in the amount of [
SPECIFY CURRENCY AND AMOUNT]
.
Gentlemen:
We hereby agree to amend the above referenced letter of credit as follows:
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Ø
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[Decrease the available amount of the letter of credit by USD__________ to a new
balance of USD______________.]
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Ø
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[Change the expiration date to ____________________.]
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Ø
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[OTHER:_________________________]
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Please contact
[SPECIFY BENEFICIARY CONTACT NAME / PHONE/ EMAIL]
with any questions.
Regards,
_________________________________________
COMPANY NAME: __________________________
NAME OF SIGNER:__________________________
TITLE OF SIGNER:__________________________
C-12
On Obligor Letterhead
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Date:
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[
]
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To:
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[Issuing Bank]
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[Address]
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ATTN: [
]
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Phone: [
]
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FAX: [
]
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From:
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[Name and Address of Obligor]
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RE: [Issuing Bank ] Letter of Credit Number [SPECIFY NUMBER] issued on behalf of [SPECIFY APPLICANT
NAME
1
*] in the amount of [SPECIFY CURRENCY AND AMOUNT] in favor of [SPECIFY NAME OF
BENEFICIARY].
Gentlemen:
We request the above referenced letter of credit be amended as follows:
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Ø
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[Increase / Decrease the available amount of the letter of credit by USD__________ to
a new balance of USD
2
______________.]
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Ø
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[Extend the expiration date to ____________________.]
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Ø
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[OTHER:_________________________]
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Regards,
_________________________________________
COMPANY NAME: __________________________
NAME OF SIGNER:__________________________
TITLE OF SIGNER:__________________________
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1
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Obligor must submit the request to amend
but, if the applicant is a party other than the obligor, the applicant name is
included for reference.
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2
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Amendment must be made in the currency
the letter of credit was issued.
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C-13
EXHIBIT D
GUARANTEE AND SECURITY AGREEMENT
dated as of
March [
], 2011
among
HUNTINGTON INGALLS INDUSTRIES, INC.,
THE GUARANTORS PARTY HERETO
and
JPMORGAN CHASE BANK, N.A.,
as Collateral Agent
TABLE OF CONTENTS
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Page
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SECTION 1
. Definitions
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1
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SECTION 2
. Guarantees by Guarantors
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10
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SECTION 3
. Grant of Transaction Liens
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13
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SECTION 4
. General Representations and Warranties
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15
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SECTION 5.
Further Assurances; General Covenants
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16
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SECTION 6
. Recordable Intellectual Property
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18
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SECTION 7
. Investment Property
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19
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SECTION 8
. Material Government Contracts
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22
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SECTION 9
. Cash Collateral Accounts
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24
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SECTION 10
. Commercial Tort Claims
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24
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SECTION 11
. Transfer of Record Ownership
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25
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SECTION 12
. Right to Vote Securities
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25
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SECTION 13
. Certain Cash Distributions
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26
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SECTION 14
. Remedies upon Event of Default
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26
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SECTION 15
. Application of Proceeds
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28
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SECTION 16
. Fees and Expenses; Indemnification
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30
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SECTION 17
. Authority to Administer Collateral
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31
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SECTION 18
. Limitation on Duty in Respect of Collateral
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32
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SECTION 19
. General Provisions Concerning the Collateral Agent
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32
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SECTION 20
. Termination of Transaction Liens; Release of Collateral
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33
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SECTION 21
. Additional Guarantors and Grantors
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34
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SECTION 22
. Notices
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34
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SECTION 23
. No Implied Waivers; Remedies Not Exclusive
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34
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SECTION 24
. Successors and Assigns
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34
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SECTION 25
. Amendments and Waivers
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35
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SECTION 26
. Choice of Law
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35
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SECTION 27
. Waiver of Jury Trial
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35
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SECTION 28
. Severability
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35
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SCHEDULES
:
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Schedule 1
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Material Government Contracts
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Schedule 2
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Material Commercial Tort Claims
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EXHIBITS
:
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Exhibit A
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Security Agreement Supplement
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Exhibit B
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Copyright Security Agreement
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Exhibit C
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Patent Security Agreement
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Exhibit D
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Trademark Security Agreement
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Exhibit E
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Perfection Certificate
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Exhibit F
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Issuer Control Agreement
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Exhibit G-1
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Assignment of Government Contract
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Exhibit G-2
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Notice of Assignment of Government Contract
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ii
GUARANTEE AND SECURITY AGREEMENT
AGREEMENT dated as of March [
], 2011 among HUNTINGTON INGALLS INDUSTRIES, INC., as
Borrower, the GUARANTORS party hereto and JPMORGAN CHASE BANK, N.A., as Collateral Agent.
WHEREAS, the Borrower has entered into the Credit Agreement described in Section 1 hereof,
pursuant to which the Borrower intends to borrow funds and obtain letters of credit for the
purposes set forth therein;
WHEREAS, the Borrower is willing to secure (i) its obligations under the Credit Agreement and
(ii) certain other obligations, by granting Liens on its assets to the Collateral Agent as provided
in the Security Documents;
WHEREAS, the Borrower is willing to cause each of its Wholly Owned Domestic Restricted
Subsidiaries to guarantee the foregoing obligations of the Borrower and to secure its guarantee
thereof by granting Liens on its assets to the Collateral Agent as provided in the Security
Documents; and
WHEREAS, the Lenders and each Issuing Bank are not willing to make loans or issue or
participate in letters of credit under the Credit Agreement unless (i) the foregoing obligations of
the Borrower are secured and guaranteed as described above and (ii) each guarantee thereof is
secured by Liens on assets of the relevant Guarantor as provided in the Security Documents;
NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1
. Definitions.
(a)
Terms Defined in Credit Agreement
. Terms defined in the Credit Agreement and not
otherwise defined in subsection (b) or (c) of this Section have, as used herein, the respective
meanings provided for therein. The rules of construction specified in Sections 1.03 and 1.04 of
the Credit Agreement also apply to this Agreement.
(b)
Terms Defined in UCC
. As used herein, each of the following terms has the meaning
specified in the UCC:
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Term
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UCC
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Account
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9-102
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Authenticate
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9-102
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Certificated Security
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8-102
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Term
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UCC
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Chattel Paper
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9-102
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Commercial Tort Claim
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9-102
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Commodity Account
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9-102
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Commodity Customer
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9-102
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Deposit Account
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9-102
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Document
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9-102
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Entitlement Holder
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8-102
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Entitlement Order
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8-102
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Equipment
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9-102
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Financial Asset
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8-102 & 103
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General Intangibles
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9-102
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Instrument
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9-102
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Inventory
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9-102
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Investment Property
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9-102
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Letter-of-Credit Right
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9-102
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Nominated Person
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5-102
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Record
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9-102
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Securities Account
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8-501
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Securities Intermediary
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8-102
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Security
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8-102 & 103
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Security Entitlement
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8-102
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Supporting Obligations
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9-102
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Uncertificated Security
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8-102
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(c)
Additional Definitions
. The following additional terms, as used herein, have the
following meanings:
Bank Product Obligations
means obligations in respect of (i) Cash Management Services and
(ii) Secured Swap Agreements.
Cash Distributions
means dividends, interest and other distributions and payments (including
proceeds of liquidation, sale or other disposition) made or received in cash upon or with respect
to any Collateral.
Cash Management Services
means any services provided from time to time by any Lender or any
of its Affiliates to any Loan Party in connection with (i) operating, collections, payroll, trust
or other depository or disbursement accounts, including automated clearinghouse, e-payable,
electronic funds transfer, wire transfer, controlled disbursement, overdraft, depository,
information reporting, lockbox and stop payment services and (ii) commercial credit card,
purchasing card and merchant card services.
2
Collateral
means all property, whether now owned or hereafter acquired, on which a Lien is
granted or purports to be granted to the Collateral Agent pursuant to the Security Documents. When
used with respect to a specific Grantor, the term Collateral means all its property on which such
a Lien is granted or purports to be granted.
Collateral Accounts
means, collectively, the Cash Collateral Accounts, Deposit Accounts and
Securities Accounts.
Contingent Secured Obligation
means, at any time, any Secured Obligation (or portion
thereof) that is contingent in nature at such time, including any Secured Obligation that is:
(i) an obligation to reimburse a bank for drawings not yet made under a letter of
credit issued by it;
(ii) an obligation under a Secured Swap Agreement to make payments that cannot be
quantified at such time;
(iii) any other obligation (including any guarantee) that is contingent in nature at
such time; or
(iv) an obligation to provide collateral to secure any of the foregoing types of
obligations.
Control
has the following meanings:
(a) when used with respect to any Security or Security Entitlement, the meaning
specified in UCC Section 8-106;
(b) when used with respect to any Deposit Account, the meaning specified in UCC
Section 9-104;
(c) when used with respect to any Electronic Chattel Paper, the meaning specified in
UCC Section 9-105;
(d) when used with respect to any Commodity Account or Commodity Contract, the
meaning specified in UCC Section 9-106(b); and
(e) when used with respect to any right to payment or performance by the issuer or a
Nominated Person in respect of a letter of credit, the meaning specified in UCC Section
9-107.
3
Copyright License
means any agreement now or hereafter in existence granting to any Grantor,
or pursuant to which any Grantor grants to any other Person, any right to use, copy, reproduce,
distribute, prepare derivative works, display or publish any records or other materials on which a
Copyright is in existence or may come into existence, including any agreement identified in
Schedule 1 to any Copyright Security Agreement.
Copyrights
means all the following: (i) all copyrights under the laws of the United States
or any other country (whether or not the underlying works of authorship have been published), all
registrations and recordings thereof, all copyrightable works of authorship (whether or not
published), and all applications for copyrights under the laws of the United States or any other
country, including registrations, recordings and applications in the United States Copyright Office
or in any similar office or agency of the United States, any State thereof or any other country or
any political subdivision thereof, including those described in Schedule 1 to any Copyright
Security Agreement, (ii) all renewals of any of the foregoing, (iii) all claims for, and rights to
sue for, past or future infringements of any of the foregoing, and (iv) all income, royalties,
damages and payments now or hereafter due or payable with respect to any of the foregoing,
including damages and payments for past or future infringements thereof.
Copyright Security Agreement
means a Copyright Security Agreement, substantially in the form
of Exhibit B (with any changes that the Collateral Agent shall have approved), executed and
delivered by a Grantor in favor of the Collateral Agent for the benefit of the Secured Parties.
Credit
Agreement
means the Credit Agreement dated as of March
[ ], 2011 among
Huntington Ingalls Industries, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as
Administrative Agent, Issuing Bank and Swingline Lender and Credit Suisse, as Swingline Lender.
Equity Interest
means (i) in the case of a corporation, any shares of its capital stock,
(ii) in the case of a limited liability company, any membership interest therein, (iii) in the case
of a partnership, any partnership interest (whether general or limited) therein, (iv) in the case
of any other business entity, any participation or other interest in the equity or profits thereof,
(v) any warrant, option or other right to acquire any Equity Interest described in this definition
or (vi) any Security Entitlement in respect of any Equity Interest described in this definition.
FACA
means the Federal Assignment of Claims Act, as amended, 31 U.S.C. §3727 and 41 U.S.C.
§15.
4
Federal Government
means the federal government of the United States or any agency or
instrumentality thereof.
Funding Date Perfection Certificate
shall mean the Perfection Certificate with respect to
the Original Grantors delivered on the Funding Date.
Grantors
means the Borrower and the Guarantors.
Guarantors
means each Subsidiary listed on the signature pages hereof under the caption
Guarantors and each Subsidiary that shall, at any time after the date hereof, become a
Guarantor pursuant to Section 21.
Intellectual Property
means all intellectual and similar property of any Grantor of every
kind and nature now owned or hereafter acquired by any Grantor, including trade secrets,
confidential or proprietary technical and business information, know-how or other data or
information, in each case to the extent subject to protection under applicable law, Patents,
Copyrights, Licenses and Trademarks, including any of the foregoing that protect, are embodied by,
or are incorporated in software and databases.
Intellectual Property Filing
means (i) with respect to any Patent, Patent License, Trademark
or Trademark License, the filing of the applicable Patent Security Agreement or Trademark Security
Agreement with the United States Patent and Trademark Office, together with an appropriately
completed recordation form, and (ii) with respect to any Copyright or Copyright License, the filing
of the applicable Copyright Security Agreement with the United States Copyright Office, together
with an appropriately completed recordation form, in each case sufficient to record the Transaction
Lien granted to the Collateral Agent in such Recordable Intellectual Property.
Intellectual Property Security Agreement
means a Copyright Security Agreement, a Patent
Security Agreement or a Trademark Security Agreement.
Issuer Control Agreement
means an Issuer Control Agreement substantially in the form of
Exhibit F (with any changes that the Collateral Agent shall have approved, such approval to be
evidenced by the Collateral Agents execution and delivery of such Issuer Control Agreement).
License
means any Patent License, Trademark License, Copyright License or other license or
sublicense agreement relating to Intellectual Property to which any Grantor is a party.
Material Commercial Tort Claim
means a Commercial Tort Claim involving a claim for more than
$5,000,000.
5
Material Government Contract
means a contract, between a Grantor and either (i) the Federal
Government or (ii) a state or local government or any agency or instrumentality thereof, that
provides (or can reasonably be expected to provide) for payments to such Grantor in an aggregate
amount exceeding $350,000,000.
Non-Contingent Secured Obligation
means at any time any Secured Obligation (or portion
thereof) that is not a Contingent Secured Obligation at such time.
Original Grantor
means any Grantor that grants a Lien on any of its assets hereunder on the
Funding Date.
own
refers to the possession of sufficient rights in property to grant a security interest
therein as contemplated by UCC Section 9-203, and
acquire
refers to the acquisition of any such
rights.
Patent License
means any agreement now or hereafter in existence granting to any Grantor, or
pursuant to which any Grantor grants to any other Person, any right with respect to any Patent,
including any agreement identified in Schedule 1 to any Patent Security Agreement.
Patents
means (i) all letters patent and design letters patent of the United States or any
other country and all applications for letters patent or design letters patent of the United States
or any other country, including applications in the United States Patent and Trademark Office or in
any similar office or agency of the United States, any State thereof or any other country or any
political subdivision thereof, including those described in Schedule 1 to any Patent Security
Agreement, (ii) all reissues, divisions, continuations, continuations in part, revisions and
extensions of any of the foregoing, (iii) all claims for, and rights to sue for, past or future
infringements of any of the foregoing and (iv) all income, royalties, damages and payments now or
hereafter due or payable with respect to any of the foregoing, including damages and payments for
past or future infringements thereof.
Patent Security Agreement
means a Patent Security Agreement, substantially in the form of
Exhibit C (with any changes that the Collateral Agent shall have approved), executed and delivered
by a Grantor in favor of the Collateral Agent for the benefit of the Secured Parties.
Perfection Certificate
means, with respect to any Grantor, a certificate substantially in
the form of Exhibit E (with any changes that the Collateral Agent shall have approved), completed
and supplemented with the schedules contemplated thereby to the satisfaction of the Collateral
Agent, and signed by an
6
officer of such Grantor, it being understood and agreed that an abbreviated version of such
certificate as agreed to by the Collateral Agent and the Borrower shall have been delivered on the
Effective Date.
Permitted Liens
means (i) the Transaction Liens and (ii) any other Liens on the Collateral
permitted to be created or assumed or to exist pursuant to Section 6.02 of the Credit Agreement.
Personal Property Collateral
means all property included in the Collateral except Real
Property Collateral.
Pledged
, when used in conjunction with any type of asset, means at any time an asset of such
type that is included (or that creates rights that are included) in the Collateral at such time.
For example, Pledged Equity Interest means an Equity Interest that is included in the Collateral
at such time.
Post-Petition Interest
means any interest that accrues after the commencement of any case,
proceeding or other action relating to the bankruptcy, insolvency or reorganization of any one or
more of the Grantors (or would accrue but for the operation of applicable bankruptcy or insolvency
laws), whether or not such interest is allowed or allowable as a claim in any such proceeding.
Proceeds
means all proceeds of, and all other profits, products, rents or receipts, in
whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other
disposition of, or other realization upon, any Collateral, including all claims of the relevant
Grantor against third parties for loss of, damage to or destruction of, or for proceeds payable
under, or unearned premiums with respect to, policies of insurance in respect of, any Collateral,
and any condemnation or requisition payments with respect to any Collateral.
Real Property Collateral
means all real property (including leasehold interests in real
property) included in the Collateral.
Recordable Intellectual Property
means (i) any Patent registered with the United States
Patent and Trademark Office, and any Patent License with respect to a Patent so registered under
which exclusive rights are granted to any Grantor, (ii) any Trademark registered with the United
States Patent and Trademark Office, and any Trademark License with respect to a Trademark so
registered under which exclusive rights are granted to any Grantor, (iii) any Copyright registered
with the United States Copyright Office and any Copyright License with respect to a Copyright so
registered under which exclusive rights are granted to any Grantor, and all rights in or under any
of the foregoing.
7
Release Conditions
means the following conditions for releasing all the Secured Guarantees
and terminating all the Transaction Liens:
(i) all Commitments under the Credit Agreement shall have expired or been terminated;
(ii) all Non-Contingent Secured Obligations shall have been paid in full; and
(iii) no Contingent Secured Obligation (other than contingent indemnification and
expense reimbursement obligations as to which no claim shall have been asserted) shall
remain outstanding.
Secured Agreement
, when used with respect to any Secured Obligation, refers collectively to
each instrument, agreement or other document that sets forth obligations of the Borrower,
obligations of a guarantor and/or rights of the holder with respect to such Secured Obligation.
Secured Guarantee
means, with respect to each Guarantor, its guarantee of the Secured
Obligations under Section 2 hereof or Section 1 of a Security Agreement Supplement.
Secured Obligations
means (i) all principal of all Loans and LC Disbursements outstanding
from time to time under the Credit Agreement, all interest (including Post-Petition Interest) on
such Loans and LC Disbursements and all other amounts now or hereafter payable by the Borrower
pursuant to the Loan Documents and (ii) all Bank Product Obligations.
Secured Parties
means the holders from time to time of the Secured Obligations, including
the Administrative Agent and the Collateral Agent.
Secured Swap Agreement
means any Swap Agreement (i) existing on the Funding Date and entered
into by any Loan Party with a counterparty that is a Lender or an Affiliate thereof on the Funding
Date and (ii) entered into by any Loan Party after the Funding Date with a counterparty that is a
Lender or an Affiliate thereof at the time of entry into such agreement.
Security Agreement Supplement
means a Security Agreement Supplement, substantially in the
form of Exhibit A, signed and delivered to the Collateral Agent for the purpose of adding a
Subsidiary as a party hereto pursuant to Section 21 and/or adding additional property to the
Collateral.
Security Documents
means this Agreement, the Security Agreement Supplements, the Issuer
Control Agreements, the Mortgages, the Intellectual Property Security Agreements and all other
supplemental or additional security
8
agreements, control agreements, mortgages or similar instruments delivered pursuant to the
Loan Documents.
Specified Instrument
means (i) any Instrument with a value greater than or equal to
$5,000,000 (other than checks or similar Instruments received, and to be deposited, in the ordinary
course of business) and (ii) and any Instrument representing Indebtedness for borrowed money owed
by one Restricted Company to another Restricted Company.
Trademark License
means any agreement now or hereafter in existence granting to any Grantor,
or pursuant to which any Grantor grants to any other Person, any right to use any Trademark,
including any agreement identified in Schedule 1 to any Trademark Security Agreement.
Trademarks
means: (i) all trademarks, trade names, corporate names, company names, business
names, fictitious business names, trade styles, service marks, logos, brand names, trade dress,
prints and labels on which any of the foregoing have appeared or appear, package and other designs,
and all other source or business identifiers, and all general intangibles of like nature, and the
rights in any of the foregoing which arise under applicable law, (ii) the goodwill of the business
symbolized thereby or associated with each of them, (iii) all registrations and applications in
connection therewith, including registrations and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any State thereof or any
other country or any political subdivision thereof, including those described in Schedule 1 to any
Trademark Security Agreement, (iv) all renewals of any of the foregoing, (v) all claims for, and
rights to sue for, past or future infringements of any of the foregoing and (vi) all income,
royalties, damages and payments now or hereafter due or payable with respect to any of the
foregoing, including damages and payments for past or future infringements thereof.
Trademark Security Agreement
means a Trademark Security Agreement, substantially in the form
of Exhibit D (with any changes that the Collateral Agent shall have approved), executed and
delivered by a Grantor in favor of the Collateral Agent for the benefit of the Secured Parties.
Transaction Liens
means the Liens granted by the Grantors under the Security Documents.
UCC
means the Uniform Commercial Code as in effect from time to time in the State of New
York;
provided
that, if perfection or the effect of perfection or non-perfection or the priority of
any Transaction Lien on any Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than New York, UCC means the Uniform Commercial Code
9
as in effect from time to time in such other jurisdiction for purposes of the provisions
hereof relating to such perfection, effect of perfection or non-perfection or priority.
SECTION 2
. Guarantees by Guarantors.
(a)
Secured Guarantees.
Each Guarantor unconditionally guarantees the full and punctual
payment of each Secured Obligation when due (whether at stated maturity, upon acceleration or
otherwise). If the Borrower fails to pay any Secured Obligation punctually when due, each
Guarantor agrees that it will forthwith on demand pay the amount not so paid at the place and in
the manner specified in the relevant Secured Agreement.
(b)
Secured Guarantees Unconditional
. The obligations of each Guarantor under its Secured
Guarantee shall be unconditional and absolute and, without limiting the generality of the
foregoing, shall not be released, discharged or otherwise affected by:
(i) any extension, renewal, settlement, compromise, waiver or release in respect of
any obligation of the Borrower, any other Guarantor or any other Person under any Secured
Agreement, by operation of law or otherwise;
(ii) any modification or amendment of or supplement to any Secured Agreement;
(iii) any release, impairment, non-perfection or invalidity of any direct or indirect
security for any obligation of the Borrower, any other Guarantor or any other Person under
any Secured Agreement;
(iv) any change in the legal existence (including the form thereof), structure or
ownership of the Borrower, any other Guarantor or any other Person or any of their
respective subsidiaries, or any insolvency, bankruptcy, reorganization or other similar
proceeding affecting the Borrower, any other Guarantor or any other Person or any of their
assets or any resulting release or discharge of any obligation of the Borrower, any other
Guarantor or any other Person under any Secured Agreement;
(v) the existence of any claim, set-off or other right that such Guarantor may have
at any time against the Borrower, any other Guarantor, any Secured Party or any other
Person, whether in connection with the Loan Documents or any unrelated transactions,
provided
that nothing herein shall prevent the assertion of any such claim by separate
suit or compulsory counterclaim;
10
(vi) any invalidity or unenforceability relating to or against the Borrower, any
other Guarantor or any other Person for any reason of any Secured Agreement, or any
provision of applicable law or regulation purporting to prohibit the payment of any
Secured Obligation by the Borrower, any other Guarantor or any other Person; or
(vii) any other act or omission to act or delay of any kind by the Borrower, any
other Guarantor, any other party to any Secured Agreement, any Secured Party or any other
Person, or any other circumstance whatsoever that might, but for the provisions of this
clause (vii), constitute a legal or equitable discharge of or defense to any obligation of
any Guarantor hereunder, other than satisfaction in full of the Release Conditions or
indefeasible payment in cash of the Secured Obligations.
(c)
Release of Secured Guarantees
. (i) All the Secured Guarantees will be released when all
the Release Conditions are satisfied. If at any time any payment of a Secured Obligation is
rescinded or must be otherwise restored or returned upon the insolvency or receivership of the
Borrower or otherwise, the Secured Guarantees shall be reinstated with respect thereto as though
such payment had been due but not made at such time.
(ii) If all the capital stock of a Guarantor or all the assets of a Guarantor are sold
to a Person other than the Borrower or one of its Subsidiaries in a transaction permitted
by the Credit Agreement (any such sale, a
Sale of Guarantor
), the Secured Guarantee of
such Guarantor shall automatically be discharged and released without further action by
the Collateral Agent or any other Secured Party effective as of the time of such Sale of
Guarantor;
provided
that, if such sale constitutes an Asset Sale for purposes of Section
2.12(b) of the Credit Agreement, arrangements reasonably satisfactory to the Collateral
Agent have been made to apply the Net Proceeds thereof as (and to the extent) required by
the Credit Agreement. Such release shall not require the consent of any Secured Party,
and the Collateral Agent shall be fully protected in relying on a certificate of the
Borrower as to whether any particular sale constitutes a Sale of Guarantor.
(iii) In addition to any release permitted by subsection (ii), the Collateral Agent
may release any Secured Guarantee with the prior written consent of the Required Lenders;
provided
that any release of all or substantially all the Secured Guarantees shall require
the consent of all the Lenders.
11
(iv) Upon any release of a Secured Guarantee, the Collateral Agent will, at the
expense of the relevant Guarantor, promptly execute and deliver to such Guarantor such
documents as such Guarantor shall reasonably request to evidence the release of such
Secured Guarantee.
(d)
Waiver by 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 Borrower, any other Guarantor or any other Person.
(e)
Subrogation
. A Guarantor that makes a payment with respect to a Secured Obligation
hereunder shall be subrogated to the rights of the payee against the Borrower with respect to such
payment;
provided
that no Guarantor shall enforce any payment by way of subrogation against the
Borrower, or by reason of contribution against any other guarantor of such Secured Obligation,
until all the Release Conditions have been satisfied.
(f)
Stay of Acceleration
. If acceleration of the time for payment of any Secured Obligation
by the Borrower is stayed by reason of the insolvency or receivership of the Borrower or otherwise,
all Secured Obligations otherwise subject to acceleration under the terms of any Secured Agreement
shall nonetheless be payable by the Guarantors hereunder forthwith on demand by the Collateral
Agent.
(g)
Right of Set-Off
. If any Secured Obligation is not paid promptly when due (after the
passage of any applicable grace period as set forth in the Loan Documents), each of the Secured
Parties and their respective Affiliates is authorized, 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 Secured Party or Affiliate to or
for the credit or the account of any Guarantor against the obligations of such Guarantor under its
Secured Guarantee, irrespective of whether or not such Secured Party shall have made any demand
thereunder and although such obligations may be unmatured. The rights of each Secured Party under
this subsection are in addition to all other rights and remedies (including other rights of
set-off) that such Secured Party may have.
(h)
Continuing Guarantee
. Each Secured Guarantee is a continuing guarantee, shall be binding
on the relevant Guarantor and its successors and assigns, and shall be enforceable by the
Collateral Agent and the other Secured Parties. If all or part of any Secured Partys interest in
any Secured Obligation is assigned or otherwise transferred, the transferors rights under each
Secured Guarantee, to the extent applicable to the obligation so transferred, shall automatically
be transferred with such obligation.
12
(i)
Limitation on Obligations of Subsidiary Guarantor.
The obligations of each Subsidiary
Guarantor under its Secured Guarantee shall be limited to an aggregate amount equal to the largest
amount that would not render such Secured Guarantee subject to avoidance under Section 548 of the
United States Bankruptcy Code or any comparable provisions of applicable law.
SECTION 3
. Grant of Transaction Liens.
(a) The Borrower, in order to secure the Secured Obligations, and each Guarantor listed on the
signature pages hereof or subsequently becoming a Guarantor, in order to secure its Secured
Guarantee, grants to the Collateral Agent for the benefit of the Secured Parties a continuing
security interest in all of the Borrowers or such Guarantors, as the case may be, right, title
and interest in and to the following property, whether now owned or existing or hereafter acquired
or arising and regardless of where located:
(i) all Accounts;
(ii)
all Chattel Paper;
(iii) all cash and Deposit Accounts;
(iv) all Documents;
(v) all Equipment;
(vi) all General Intangibles (including (x) any Equity Interests in other Persons
that do not constitute Investment Property and (y) any Intellectual Property);
(vii) all Instruments;
(viii) all Inventory;
(ix) all Investment Property;
(x) the Commercial Tort Claims described in Schedule 2;
(xi) all Letter-of-Credit Rights;
(xii) all books and records (including customer lists, credit files, computer
programs, printouts and other computer materials and records) of such Grantor pertaining
to any of its Collateral;
13
(xiii) such Grantors ownership interest in (1) its Collateral Accounts, (2) all
Financial Assets credited to its Collateral Accounts from time to time and all Security
Entitlements in respect thereof, (3) all cash held in its Collateral Accounts from time to
time and (4) all other money in the possession of the Collateral Agent; and
(xiv) all Proceeds of the Collateral described in the foregoing clauses (i) through
(xiii);
provided
that the following property is excluded from the foregoing security interests: (A) motor
vehicles the perfection of a security interest in which is excluded from the Uniform Commercial
Code in the relevant jurisdiction, (B) voting Equity Interests in any Foreign Subsidiary, to the
extent (but only to the extent) required to prevent the Collateral from including more than 65% of
all voting Equity Interests in such Foreign Subsidiary, (C) any Trademark that is a United States
intent-to-use trademark application for which, and solely during the period in which, an amendment
to allege use or statement of use has not been filed under 15 U.S.C. Section 1051(c) or 15 U.S.C.
Section 1051(d), respectively, or if filed, has not been deemed in conformance with 15 U.S.C.
Section 1051(a) or examined and accepted, respectively, by the United States Patent and Trademark
Office;
provided
, that upon such filing and acceptance, such intent-to-use trademark application
shall no longer be excluded from the foregoing security interests, (D) any leasehold interest in
real property, (E) any funds subject to Liens permitted under Section 6.02(f), 6.02(g) or 6.02(n)
of the Credit Agreement, but only to the extent such funds are held in a segregated deposit account
of the Grantors or a deposit account under the control of the Person in whose favor such Lien has
been granted, (F) property subject to Liens permitted under Section 6.02(i) or 6.02(p) of the
Credit Agreement, but only to the extent the terms of the Indebtedness secured thereby prohibit the
grant of a security interest therein, (G) any property or assets if the Administrative Agent shall
determine in its sole discretion and shall have confirmed in writing to the Borrower that the cost
to the Borrower or the Guarantors of creating or perfecting such security interests in such
property or assets in favor of the Collateral Agent for the benefit of the Secured Parties is
excessive in relation to the benefits to be obtained therefrom by the Secured Parties and (H) any
property to the extent that the grant of a security interest therein is prohibited by any
applicable law or regulation, requires a consent not obtained of any Governmental Authority
pursuant to any applicable law or regulation, or is prohibited by, or constitutes a breach or
default under or results in the termination of or requires any consent not obtained under, any
contract, license, agreement, instrument or other document evidencing or giving rise to such
property or, in the case of any Investment Property, any applicable organizational document or
shareholder or similar agreement, except to the extent that such law or regulation or the term in
such contract, license, agreement, instrument or other document or shareholder or similar agreement
providing for
14
such prohibition, breach, default or termination or requiring such consent is ineffective under
applicable law. Each Grantor shall upon request of the Collateral Agent use commercially
reasonable efforts to obtain any such required consent that is reasonably obtainable.
(b) With respect to each right to payment or performance included in the Collateral from time
to time, the Transaction Lien granted therein includes a continuing security interest in (i) any
Supporting Obligation that supports such payment or performance and (ii) any Lien that (x) secures
such right to payment or performance or (y) secures any such Supporting Obligation.
(c) The Transaction Liens are granted as security only and shall not subject the Collateral
Agent or any other Secured Party to, or transfer any obligation or liability of any Grantor with
respect to any of the Collateral or any transaction in connection therewith.
SECTION 4
. General Representations and Warranties.
Each Grantor represents and warrants
that:
(a) With respect to each Original Grantor, such Grantor is, as of the Funding Date, duly
organized, validly existing and in good standing under the laws of the jurisdiction identified as
its jurisdiction of organization in its Perfection Certificate.
(b) All Pledged Equity Interests of any Subsidiary that are owned by such Grantor are owned by
it free and clear of any Lien other than (i) the Transaction Liens, (ii) Liens permitted under
Section 6.02(c) or 6.02(j) of the Credit Agreement and (iii) any inchoate tax liens. All shares of
capital stock included in such Pledged Equity Interests (including shares of capital stock in
respect of which such Grantor owns a Security Entitlement) have been duly authorized and validly
issued and are fully paid and non-assessable.
(c) No authorized financing statement, security agreement, mortgage or similar or equivalent
document or instrument covering all or part of the Collateral owned by such Grantor is on file or
of record in any jurisdiction in which such filing or recording would be effective to perfect or
record a Lien on such Collateral, except financing statements, mortgages or other similar or
equivalent documents with respect to Permitted Liens. After the Funding Date, no Collateral owned
by such Grantor will be in the possession or under the Control of any other Person having a
security interest therein, other than a Permitted Lien.
(d) When the relevant Mortgages have been duly executed and delivered, the Transaction Liens
on all Material Real Property included in the Collateral owned by such Grantor as of the Funding
Date will have been validly
15
created and will secure all the Secured Obligations or such Grantors Secured Guarantee, as
the case may be. When each such Mortgage has been duly recorded, such Transaction Liens will rank
prior to all other Liens (except Permitted Liens) on such Material Real Property covered by such
Mortgage.
(e) Such Grantor has delivered a Perfection Certificate to the Collateral Agent. With respect
to each Original Grantor, information set forth in such Grantors Funding Date Perfection
Certificate is correct and complete as of the Funding Date.
(f) When UCC financing statements describing the Personal Property Collateral as all personal
property have been filed in the offices specified in the Perfection Certificate referred to in
Section 4(e), the Transaction Liens will constitute perfected security interests in the Personal
Property Collateral owned by such Grantor to the extent that a security interest therein may be
perfected by filing pursuant to the UCC, prior to all Liens and rights of others therein except
Permitted Liens. When, in addition to the filing of such UCC financing statements, the applicable
Intellectual Property Filings have been made with respect to such Grantors Recordable Intellectual
Property (including any future filings required pursuant to Sections 5(a) and 6(a)), the
Transaction Liens will constitute perfected security interests in all right, title and interest of
such Grantor in its Recordable Intellectual Property to the extent that security interests therein
may be perfected by such filings, prior to all Liens and rights of others therein except Permitted
Liens. Except for (i) the filing of such UCC financing statements, (ii) such Intellectual Property
Filings and (iii) the due recordation of the Mortgages, no registration, recordation or filing with
any governmental body, agency or official is required in connection with the execution or delivery
of the Security Documents or is necessary for the validity or enforceability thereof or for the
initial perfection or due recordation of the Transaction Liens or for the enforcement of the
Transaction Liens.
SECTION 5
.
Further Assurances; General Covenants.
Each Grantor covenants as follows:
(a) Such Grantor will, from time to time, at the Borrowers expense, and subject to Sections
5(g) and 8(e) execute, deliver, file and record any statement, assignment, instrument, document,
agreement or other paper and take any other action (including any Intellectual Property Filing)
that from time to time may be necessary, or that the Collateral Agent may reasonably request, in
order to:
(i) create, preserve, perfect, confirm or ensure the validity of the Transaction
Liens on such Grantors Collateral;
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(ii) in the case of Pledged Investment Property, Pledged Instruments and Pledged
Letter-of-Credit Rights, cause the Collateral Agent to have Control thereof; or
(iii) enable the Collateral Agent to exercise and enforce any of its rights, powers
and remedies with respect to any of such Grantors Collateral.
Such Grantor authorizes the Collateral Agent to execute and file such financing statements or
continuation statements in such jurisdictions with such descriptions of collateral (including all
assets or all personal property or other words to that effect) and other information set forth
therein as the Collateral Agent may deem necessary or desirable for the purposes set forth in the
preceding sentence. Each Grantor also ratifies its authorization for the Collateral Agent to file
in any such jurisdiction any initial financing statements or amendments thereto if filed prior to
the date hereof. The Collateral Agent is further authorized to file with the United States Patent
and Trademark Office or United States Copyright Office (or any successor office or any similar
office in any other country) such documents as may be necessary or advisable for the purpose of
perfecting, confirming, continuing, enforcing or protecting the security interests granted by each
Grantor, without the signature of any Grantor, and naming any Grantor or the Grantors as debtors
and the Collateral Agent as secured party. The Borrower will pay the costs of, or incidental to,
any Intellectual Property Filings and any recording or filing of any financing or continuation
statements or other documents recorded or filed pursuant hereto.
(b) Such Grantor will not (i) change its name or organizational form or structure or (ii)
change its location (determined as provided in UCC Section 9-307) unless it shall have given the
Collateral Agent 10 days prior written notice thereof. Such Grantor will not effect or permit any
change referred to in the preceding sentence or become bound, as provided in UCC Section 9 203(d)
or otherwise, by a security agreement entered into by another Person, unless all filings have been
made (or will be made in a timely fashion) under the UCC or any other applicable law that are
required to perfect (to the extent such perfection is otherwise required hereunder or under any
other Loan Document) the Transaction Liens (except any continuation statements that are to be filed
more than six months after the date of such change).
(c) If any of its Collateral is in the possession or control of a warehouseman, bailee or
agent at any time, and an Event of Default shall have occurred and be continuing, such Grantor
will, upon the request of the Collateral Agent, (i) notify such warehouseman, bailee or agent of
the relevant Transaction Liens, (ii) instruct such warehouseman, bailee or agent to hold all such
Collateral for the Collateral Agents account subject to the Collateral Agents instructions,
17
(iii) use commercially reasonable efforts to cause such warehouseman, bailee or agent to
Authenticate a Record acknowledging that it holds possession of such Collateral for the Collateral
Agents benefit and (iv) make such Authenticated Record available to the Collateral Agent.
(d) Such Grantor will not sell, lease, exchange, assign or otherwise dispose of, or grant any
option with respect to, any of its Collateral if (i) doing so would violate a covenant in the
Credit Agreement or (ii) except in the case of any such sales, leases, exchanges, assignments, or
other dispositions of, or grants of options with respect to, inventory in the ordinary course of
business, the maturity of any or all of the Secured Obligations shall have been accelerated.
Concurrently with any sale, lease or other disposition (except a sale or disposition to another
Grantor or a lease) not prohibited by the preceding sentence, the Transaction Liens on the assets
sold or disposed of (but not in any Proceeds arising from such sale or disposition) will be
released and cease immediately without any notice to or action by the Collateral Agent or any other
Secured Party. The Collateral Agent will, at the Borrowers expense, execute and deliver to the
relevant Grantor such documents as such Grantor shall reasonably request to evidence the fact that
any asset so sold or disposed of is no longer subject to a Transaction Lien.
(e) Such Grantor will, promptly upon request, provide to the Collateral Agent all information
and evidence concerning such Grantors Collateral that the Collateral Agent may reasonably request
from time to time to enable it to enforce the provisions of the Security Documents.
(f) Notwithstanding any to the contrary in this Agreement or any other Loan Document, no
control agreement shall be required in respect of any Deposit Account or Securities Account.
SECTION 6
. Recordable Intellectual Property.
Each Grantor covenants as follows:
(a) On the Funding Date (in the case of an Original Grantor) or the date on which it signs and
delivers its first Security Agreement Supplement (in the case of any other Grantor), such Grantor
will sign and deliver to the Collateral Agent Intellectual Property Security Agreements with
respect to all Recordable Intellectual Property then owned by it. Within 30 days after each March
31 and September 30 thereafter (starting with September 30, 2011), it will sign and deliver to the
Collateral Agent an appropriate Intellectual Property Security Agreement covering any Recordable
Intellectual Property owned by it on such March 31 or September 30 that is not covered by any
previous Intellectual Property Security Agreement so signed and delivered by it. The Collateral
Agent is hereby authorized by each Grantor to make all Intellectual Property Filings
18
necessary to record the Transaction Liens on such Recordable Intellectual Property.
(b) Such Grantor will notify the Collateral Agent promptly if it knows that any application or
registration relating to any Recordable Intellectual Property owned or licensed by it may become
abandoned or dedicated to the public, or of any adverse determination or development (including the
institution of, or any adverse determination or development in, any proceeding in the United States
Copyright Office, the United States Patent and Trademark Office or any court) regarding such
Grantors ownership of such Recordable Intellectual Property, its right to register or patent the
same, or its right to keep and maintain the same;
provided
that the foregoing shall not apply to
the extent that any such event, individually or together with all such events, would not reasonably
be expected to have a Material Adverse Effect. If any of such Grantors rights to any Recordable
Intellectual Property are infringed, misappropriated or diluted by a third party in a manner that
materially and adversely affects such Grantors business, such Grantor will notify the Collateral
Agent within 30 days after it learns thereof and will, to the extent it reasonably determines that
doing so is necessary or economically desirable for the operation of the business under the
circumstances, promptly sue for infringement, misappropriation or dilution and to recover any and
all damages for such infringement, misappropriation or dilution, and take such other actions as
such Grantor shall reasonably deem appropriate under the circumstances to protect such Recordable
Intellectual Property.
(c) Upon the occurrence and during the continuance of an Event of Default, if requested by the
Collateral Agent, each Grantor shall use its commercially reasonable efforts to obtain all
requisite consents or approvals by the licensor of each Copyright License, Patent License or
Trademark License under which such Grantor is a licensee to effect the assignment of all such
Grantors right, title and interest thereunder to the Collateral Agent, for the ratable benefit of
the Secured Parties, or its designee.
SECTION 7
. Investment Property.
Each Grantor represents, warrants and covenants as follows:
(a)
Certificated Securities.
On the Funding Date (in the case of an Original Grantor) or the
date on which it signs and delivers its first Security Agreement Supplement (in the case of any
other Grantor), such Grantor will deliver to the Collateral Agent as Collateral hereunder all
certificates representing Pledged Certificated Securities then owned by such Grantor. Thereafter,
whenever such Grantor acquires any other certificate representing a Pledged Certificated Security,
such Grantor will promptly, and in any event within 5 Business Days, deliver such certificate to
the Collateral Agent as Collateral hereunder. The Grantors shall have the right to not comply with
the preceding
19
two sentences with respect to Pledged Certificated Securities (other than Pledged Certificated
Securities issued by any Subsidiary) having an aggregate value, for both such sentences for all
Grantors, not in excess of $1,000,000). The provisions of this subsection are subject to the
limitation in Section 7(g) in the case of voting Equity Interests in a Foreign Subsidiary.
(b)
Uncertificated Securities
. On the Funding Date (in the case of an Original Grantor) or
within 5 Business Days following the date on which it signs and delivers its first Security
Agreement Supplement (in the case of any other Grantor), such Grantor will enter into (and, if the
relevant issuer is a Subsidiary, cause, or if the relevant issuer is not a Subsidiary, use
commercially reasonable efforts to cause, the relevant issuer to enter into) an Issuer Control
Agreement in respect of each Pledged Uncertificated Security then owned by such Grantor and deliver
such Issuer Control Agreement to the Collateral Agent (which shall enter into the same).
Thereafter, whenever such Grantor acquires any other Pledged Uncertificated Security, such Grantor
will promptly, and in any event within 5 Business Days, enter into (and, if the relevant issuer is
a Subsidiary, cause, or if the relevant issuer is not a Subsidiary, use commercially reasonable
efforts to cause, the relevant issuer to enter into) an Issuer Control Agreement in respect of such
Pledged Uncertificated Security and deliver such Issuer Control Agreement to the Collateral Agent
(which shall enter into the same). The Grantors shall have the right to not comply with the
preceding two sentences with respect to Pledged Uncertificated Securities (other than Pledged
Uncertificated Securities issued by any Subsidiary) having an aggregate value, for both such
sentences for all Grantors, not in excess of $1,000,000). The provisions of this subsection are
subject to the limitation in Section 7(g) in the case of voting Equity Interests in a Foreign
Subsidiary.
(c)
Perfection as to Certificated Securities.
When such Grantor delivers the certificate
representing any Pledged Certificated Security owned by it to the Collateral Agent and complies
with Section 7(e) in connection with such delivery, (i) the Transaction Lien on such Pledged
Certificated Security will be perfected, subject to no prior Liens or rights of others (other than,
in the case of any Pledged Certificated Security issued by a Person not organized under the laws of
the United States or any State thereof or the District of Columbia, rights arising under foreign
law), (ii) the Collateral Agent will have Control of such Pledged Certificated Security and (iii)
the Collateral Agent (unless it has notice of any adverse claim with respect thereto) will be a
protected purchaser (within the meaning of UCC Section 8-303) thereof.
(d)
Perfection as to Uncertificated Securities
. When such Grantor, the Collateral Agent and
the issuer of any Pledged Uncertificated Security owned by such Grantor enter into an Issuer
Control Agreement with respect thereto, (i) the Transaction Lien on such Pledged Uncertificated
Security will be perfected,
20
subject to no prior Liens of others (other than, in the case of any Pledged Uncertificated
Security issued by a Person not organized under the laws of the United States or any State thereof
or the District of Columbia, Liens arising under foreign law), (ii) the Collateral Agent will have
Control of such Pledged Uncertificated Security and (iii) the Collateral Agent (unless it has
notice of any adverse claim with respect thereto) will be a protected purchaser (within the meaning
of UCC Section 8-303) thereof.
(e)
Delivery of Pledged Certificates
. All certificates representing Pledged Certificated
Securities, when delivered to the Collateral Agent, will be in suitable form for transfer by
delivery, or accompanied by duly executed instruments of transfer or assignment in blank in form
reasonably satisfactory to the Collateral Agent.
(f)
Communications
. Each Grantor will promptly give to the Collateral Agent copies of any
notices and other communications received by it with respect to (i) Pledged Securities registered
in the name of such Grantor or its nominee and (ii) Pledged Security Entitlements as to which such
Grantor is the Entitlement Holder, in each case (x) upon the Collateral Agents request, while an
Event of Default has occurred and is continuing or (y) in the case of Securities of any Subsidiary,
relating to any matter that would reasonably be expected to have a Material Adverse Effect.
(g)
Foreign Subsidiaries.
A Grantor will not be obligated to comply with the provisions of
this Section at any time with respect to any voting Equity Interest in a Foreign Subsidiary if and
to the extent (but only to the extent) that such voting Equity Interest is excluded from the
Transaction Liens at such time pursuant to clause (B) of the proviso at the end of Section 3(a)
and/or the comparable provisions of one or more Security Agreement Supplements.
(h)
Compliance with Applicable Foreign Laws.
If at any time and so long as (i) the Collateral
includes any Equity Interest in a Foreign Subsidiary and (ii) an Event of Default has occurred and
is continuing, the relevant Grantor will upon reasonable request of the Collateral Agent take all
such action as may be required and available under the laws of such foreign jurisdiction to ensure
that the Transaction Lien on such Collateral ranks prior to all Liens and rights of others therein
other than Permitted Liens that have priority over the Transaction Liens by operation of law.
(i)
Certification of Limited Liability Company and Partnership Interests
. Any limited
liability company and any partnership that is a direct subsidiary of any Grantor and whose Equity
Interests are pledged hereunder shall either (i) not include in its operative documents any
provision that any Equity Interests in such limited liability company or such partnership be a
security as
21
defined under Article 8 of the Uniform Commercial Code, or (ii) certificate any Equity
Interests in any such limited liability company or such partnership. To the extent an interest in
any limited liability company or partnership that is a direct subsidiary of any Grantor and pledged
hereunder is certificated or becomes certificated, each such certificate shall be delivered to the
Collateral Agent pursuant to Section 7(a) (subject to Section 7(g))and such Grantor shall fulfill
all other requirements under Section 7 applicable in respect thereof.
(j)
Instruments
. (i) On the Funding Date (in the case of an Original Grantor) or within 5
Business Days of the date on which it signs and delivers its first Security Agreement Supplement
(in the case of any other Grantor), such Grantor will deliver to the Collateral Agent as Collateral
hereunder all Pledged Specified Instruments then owned by such Grantor. Thereafter, whenever such
Grantor acquires any other Pledged Specified Instrument, such Grantor will promptly, and in any
event within 5 Business Days, deliver such Pledged Specified Instrument to the Collateral Agent as
Collateral hereunder. All such Pledged Specified Instruments owned by such Grantor, when delivered
to the Collateral Agent, will be indorsed to the order of the Collateral Agent, or accompanied by
duly executed instruments of assignment all in form reasonably satisfactory to the Collateral
Agent. Upon the delivery of any Pledged Specified Instrument owned by such Grantor to the
Collateral Agent, the Transaction Lien on such Collateral will be perfected, subject to no prior
Liens or rights of others other than inchoate tax liens or Permitted Liens that have priority over
the Transaction Liens by operation of law.
(ii) So long as no Event of Default shall have occurred and be continuing, the
Collateral Agent will, promptly upon request by the relevant Grantor, make appropriate
arrangements for making any Pledged Instrument available to it for purposes of
presentation, collection or renewal (any such arrangement to be effected, to the extent
deemed appropriate by the Collateral Agent, against trust receipt or like document).
(k)
Letter-of-Credit Rights
. Each Grantor will, upon the request of the Collateral Agent
after the occurrence and during the continuance of an Event of Default, use commercially reasonable
efforts to obtain from other Persons agreements evidencing Control of the Collateral Agent over any
Collateral that are Letter-of-Credit Rights in excess of $5,000,000 individually where confirmation
of the Control of the Collateral Agent over the particular Letter-of-Credit Rights is required in
order to perfect a security interest therein.
SECTION 8
. Material Government Contracts.
Each Grantor represents, warrants and covenants
as follows:
22
(a) In the case of an Original Grantor, Schedule 1 lists all Material Government Contracts to
which such Grantor is a party as of the Funding Date. In the case of any other Grantor, Schedule 1
to its first Security Agreement Supplement will list all Material Government Contracts to which
such Grantor is a party as of the date on which it signs and delivers such Security Agreement
Supplement. Within 60 days after the Funding Date (in the case of an Original Grantor) or after
the date on which it signs and delivers its first Security Agreement Supplement (in the case of any
other Grantor) such Grantor will use commercially reasonable efforts to comply with FACA and other
similar applicable state or local law in respect of such Material Government Contracts and in
connection therewith, (x) if any such Material Government Contract is with the Federal Government,
execute and deliver to the Collateral Agent assignments and notices of assignment, substantially in
the forms of Exhibits G-1 and G-2, with respect to each of its Material Government Contracts with
the Federal Government and (y) if any such Material Government Contract is with a state or local
government or agency, execute and deliver to the Collateral Agent all assignments, notices of
assignment and other documents required to be filed with any state or local government or agency to
insure that such Grantors Material Government Contracts with such government or agency are validly
assigned to the Collateral Agent to the extent that such validity is governed by applicable
provisions of state or local law.
(b) Each Grantor will, from time to time, amend and supplement the relevant Schedule 1 to
include each Material Government Contract entered into by it after the Funding Date (in the case of
an Original Grantor) or the date on which it signs and delivers its first Security Agreement
Supplement (in the case of any other Grantor), by delivering to the Collateral Agent a supplemental
schedule of Material Government Contracts. Within 60 days after the delivery of such amended
Schedule 1, such Grantor will use commercially reasonable efforts to comply with FACA and other
similar applicable state laws and in connection therewith, (x) if any such Material Government
Contract is with the Federal Government, execute and deliver to the Collateral Agent assignments
and notices of assignment, substantially in the forms of Exhibits G-1 and G-2, with respect to each
Material Government Contract with the Federal Government listed on such supplemental schedule and
(y) if any such Material Government Contract is with a state or local government or agency, execute
and deliver to the Collateral Agent all assignments, notices of assignment and other documents
required to be filed with any state or local government or agency to insure that such Grantors
Material Government Contracts with such government or agency are validly assigned to the Collateral
Agent to the extent that such validity is governed by applicable provisions of state or local law.
(c) If an Event of Default shall have occurred, shall not have been cured, remedied or waived
within 5 days of such occurrence and shall be
23
continuing (or if the maturity of the Loans shall have been accelerated pursuant to Article 7
of the Credit Agreement), the Collateral Agent may, at the Borrowers expense:
(i) file, deliver and record with the Federal Government in accordance with FACA any
or all assignments and/or notices of assignment executed and delivered to the Collateral
Agent pursuant to subsection (a) or (b) above; and
(ii) file, deliver and/or record with the relevant state or local government or
agency any or all assignments, notices of assignment and/or other documents executed and
delivered to the Collateral Agent pursuant to subsection (a) or (b) above.
(d) When the Collateral Agent files any notice of assignment referred to in subsection (a) or
(b) above with the governmental authority or agency or other office described therein, the filing
of such notice will constitute a valid assignment of the Material Government Contract identified
therein, to the extent that such validity is governed by FACA.
(e) It is understood and agreed that except with respect to Material Government Contracts (as
set forth in this Section 8), the Grantors shall not be required to comply with FACA or other
similar applicable state or local law with respect to contracts with Governmental Authorities, or
accounts receivable on which a Governmental Authority is the obligor.
SECTION 9
. Cash Collateral Accounts.
If and when the Grantors shall be required by any Loan
Document to provide cash collateral, the Collateral Agent will establish with respect to each
Grantor an account (its
Cash Collateral Account
), in the name and under the exclusive control of
the Collateral Agent, into which all amounts owned by such Grantor that are to be deposited therein
pursuant to the Loan Documents shall be deposited from time to time. Funds held in any Cash
Collateral Account may, until withdrawn, be invested and reinvested in such Permitted Investments
as the relevant Grantor shall request from time to time;
provided
that if an Event of Default shall
have occurred and be continuing, the Collateral Agent may select such Permitted Investments.
Subject to Section 15, withdrawal of funds on deposit in any Cash Collateral Account shall be
permitted if, as and when expressly so provided in or in respect of the applicable provision of the
Loan Documents pursuant to which such Cash Collateral Account was required to be established.
SECTION 10
. Commercial Tort Claims.
Each Grantor represents, warrants and covenants as
follows:
24
(a) In the case of an Original Grantor, Schedule 2 accurately describes, with the specificity
required to satisfy Official Comment 5 to UCC Section 9-108, each Material Commercial Tort Claim
with respect to which such Original Grantor is the claimant as of the Funding Date. In the case of
any other Grantor, Schedule 2 to its first Security Agreement Supplement will accurately describe,
with the specificity required to satisfy said Official Comment 5, each Material Commercial Tort
Claim with respect to which such Grantor is the claimant as of the date on which it signs and
delivers such Security Agreement Supplement.
(b) If any Grantor acquires a Material Commercial Tort Claim after the Funding Date (in the
case of an Original Grantor) or the date on which it signs and delivers its first Security
Agreement Supplement (in the case of any other Grantor), such Grantor will promptly sign and
deliver to the Collateral Agent a Security Agreement Supplement granting a security interest in
such Commercial Tort Claim (which shall be described therein with the specificity required to
satisfy said Official Comment 5) to the Collateral Agent for the benefit of the Secured Parties.
SECTION 11
. Transfer of Record Ownership.
At any time when an Event of Default shall have
occurred and be continuing, the Collateral Agent may (and to the extent that action by it is
required, the relevant Grantor, if directed to do so by the Collateral Agent, will as promptly as
practicable) cause each of the Pledged Securities (or any portion thereof specified in such
direction) to be transferred of record into the name of the Collateral Agent or its nominee;
provided
that if no Event of Default is continuing, to the extent any of the Pledged Securities (or
a portion thereof) have been transferred of record into the name of the Collateral Agent or its
nominee, the Collateral Agent will cooperate reasonably with the relevant Grantor to cause such
Pledged Security (or portion thereof) to be re-registered (as promptly as practicable) in the name
of such Grantor. Each Grantor will take any and all actions reasonably requested by the Collateral
Agent to facilitate compliance with this Section. If the provisions of this Section are
implemented, Section 7(b) shall not thereafter apply to any Pledged Security that is registered in
the name of the Collateral Agent or its nominee. The Collateral Agent will promptly give to the
relevant Grantor copies of any notices and other communications received by the Collateral Agent
with respect to Pledged Securities registered in the name of the Collateral Agent or its nominee.
SECTION 12
. Right to Vote Securities.
(a) Unless an Event of Default shall have occurred
and be continuing, each Grantor will have the right, from time to time, to vote and to give
consents, ratifications and waivers with respect to any Pledged Security owned by it and the
Financial Asset underlying any Pledged Security Entitlement owned by it, and the Collateral Agent
will, upon receiving a written request from such Grantor, promptly deliver to such Grantor or as
25
specified in such request such proxies, powers of attorney, consents, ratifications and
waivers in respect of any such Pledged Security that is registered in the name of, or held by, the
Collateral Agent or its nominee or any such Pledged Security Entitlement as to which the Collateral
Agent or its nominee is the Entitlement Holder, in each case as shall be specified in such request
and be in form and substance reasonably satisfactory to the Collateral Agent.
(b) If an Event of Default shall have occurred and be continuing, and after written notice
from the Collateral Agent to such Grantor, the Collateral Agent will have the exclusive right to
the extent permitted by law (and in the case of a pledged interest in a partnership or LLC, by the
relevant partnership agreement, limited liability company agreement, operating agreement or other
governing document) to vote, to give consents, ratifications and waivers and to take any other
action with respect to the Pledged Investment Property, the other Pledged Equity Interests and the
Financial Assets underlying the Pledged Security Entitlements, with the same force and effect as if
the Collateral Agent were the absolute and sole owner thereof, and each Grantor will take all such
action as the Collateral Agent may reasonably request from time to time to give effect to such
right.
SECTION 13
. Certain Cash Distributions.
(a) Unless an Event of Default shall have occurred
and be continuing, each Grantor will have the right to receive and retain all Cash Distributions in
respect of any Pledged Equity Interest or Pledged Indebtedness owned by it and the Financial Asset
underlying any Pledged Security Entitlement owned by it, and the Collateral Agent will, upon
receiving a written request from such Grantor, promptly deliver to such Grantor or as specified in
such request such proxies, powers of attorney, consents, ratifications and waivers in respect of
any such Pledged Security that is registered in the name of, or held by, the Collateral Agent or
its nominee) or any such Pledged Security Entitlement as to which the Collateral Agent or its
nominee is the Entitlement Holder, in each case as shall be specified in such request and be in
form and substance reasonably satisfactory to the Collateral Agent.
(b) If an Event of Default shall have occurred and be continuing, all Cash Distributions
received by any Grantor in respect of any Pledged Equity Interest or Pledged Indebtedness owned by
it or the Financial Asset underlying any Pledged Security Entitlement owned by it shall be received
in trust for the benefit of the Collateral Agent, shall be segregated from other funds of such
Grantor and shall be forthwith paid over to the Collateral Agent in the same form as so received
(with any necessary indorsement).
SECTION 14
. Remedies upon Event of Default.
(a) If an Event of Default shall have occurred
and be continuing, the Collateral Agent may exercise
26
(or cause its sub-agents to exercise) any or all of the remedies available to it (or to such
sub-agents) under the Security Documents.
(b) Without limiting the generality of the foregoing, if an Event of Default shall have
occurred and be continuing, the Collateral Agent may exercise on behalf of the Secured Parties all
the rights of a secured party under the UCC (whether or not in effect in the jurisdiction where
such rights are exercised) with respect to any Personal Property Collateral and, in addition, the
Collateral Agent may, without being required to give any notice, except as herein provided or as
may be required by mandatory provisions of law, sell or otherwise dispose of the Collateral or any
part thereof in one or more parcels at public or private sale, at any exchange, brokers board or
at any of the Collateral Agents offices or elsewhere, for cash, on credit or for future delivery,
at such time or times and at such price or prices and upon such other terms as the Collateral Agent
may deem commercially reasonable, irrespective of the impact of any such sales on the market price
of the Collateral. To the maximum extent permitted by applicable law, any Secured Party may be the
purchaser of any or all of the Collateral at any such sale and (with the consent of the Collateral
Agent, which may be withheld in its discretion) shall be entitled, for the purpose of bidding and
making settlement or payment of the purchase price for all or any portion of the Collateral sold at
any such public sale, to use and apply all of any part of the Secured Obligations as a credit on
account of the purchase price of any Collateral payable at such sale. Upon any sale of Collateral
by the Collateral Agent (including pursuant to a power of sale granted by statute or under a
judicial proceeding), the receipt of the Collateral Agent or of the officer making the sale shall
be a sufficient discharge to the purchaser or purchasers of the Collateral so sold and such
purchaser or purchasers shall not be obligated to see to the application of any part of the
purchase money paid to the Collateral Agent or such officer or be answerable in any way for the
misapplication thereof. Each purchaser at any such sale shall hold the property sold absolutely
free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the
extent permitted by law) all rights of redemption, stay or appraisal that it now has or may at any
time in the future have under any rule of law or statute now existing or hereafter enacted. The
Collateral Agent shall not be obliged to make any sale of Collateral regardless of notice of sale
having been given. The Collateral Agent may adjourn any public or private sale from time to time
by announcement at the time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned. To the maximum extent permitted by law,
each Grantor hereby waives any claim against any Secured Party arising because the price at which
any Collateral may have been sold at such a private sale was less than the price that might have
been obtained at a public sale, even if the Collateral Agent accepts the first offer received and
does not offer such Collateral to more than one offeree. The Collateral Agent may disclaim any
warranty, as to title or as to any other matter, in connection with such sale or other
27
disposition, and its doing so shall not be considered adversely to affect the commercial
reasonableness of such sale or other disposition.
(c) If the Collateral Agent sells any of the Collateral upon credit, the Grantors will be
credited only with payment actually made by the purchaser and received by the Collateral Agent. In
the event the purchaser fails to pay for the Collateral, the Collateral Agent may resell the same,
subject to the same rights and duties set forth herein.
(d) Notice of any such sale or other disposition shall be given to the relevant Grantor(s) as
(and if) required by Section 17.
(e) For the purpose of enabling the Collateral Agent to exercise rights and remedies under
this Agreement at such time as the Collateral Agent shall be lawfully entitled to exercise such
rights and remedies, each Grantor hereby grants to the Collateral Agent an irrevocable license
(exercisable without payment of royalty or other compensation to the Grantors), to use, license or
sublicense any of the Collateral consisting of Intellectual Property now owned or hereafter
acquired by such Grantor, and including in such license access to all media in which any of the
licensed items may be recorded or stored and to all computer software and programs used for the
compilation or printout thereof;
provided
that, without limiting any other rights and remedies of
the Collateral Agent under this Agreement, any other Loan Document or applicable law, nothing in
the foregoing license grant shall be construed as granting the Collateral Agent rights in and to
such Collateral in contravention of any License existing and made available to the Collateral Agent
as of the date hereof. The foregoing license grant may be exercised by the Collateral Agent only
upon the occurrence and during the continuation of an Event of Default;
provided
,
however
, that any
license or sublicense granted by the Collateral Agent in accordance herewith shall be binding upon
each Grantor notwithstanding any subsequent cure of an Event of Default.
(f) The foregoing provisions of this Section shall not apply to Real Property Collateral other
than Fixtures as to which such provisions shall apply to the extent such Fixtures are governed by
Article 9 of the UCC.
SECTION 15
. Application of Proceeds.
(a) If an Event of Default shall have occurred and be
continuing, the Collateral Agent may apply (i) any cash held in the Collateral Accounts and (ii)
the proceeds of any sale or other disposition of all or any part of the Collateral, in the
following order of priorities:
first
, to pay the expenses of such sale or other disposition, including reasonable
compensation to agents of and counsel for the Collateral Agent, and all expenses,
liabilities and advances incurred or
28
made by the Collateral Agent in connection with the Security Documents, and any other
amounts then due and payable to the Collateral Agent pursuant to Section 16 or pursuant to
Section 9.03 of the Credit Agreement;
second
, to pay ratably all accrued and unpaid interest (including Post-Petition
Interest) on the Secured Obligations payable under the Credit Agreement, until payment in
full of all such interest shall have been made;
third
, to pay the unpaid principal of the Secured Obligations (including all payments
in respect of Bank Product Obligations) ratably (or provide for the payment thereof
pursuant to Section 15(b)), until payment in full of all such Secured Obligations shall
have been made (or so provided for);
fourth
, to pay all other unpaid Secured Obligations ratably (or provide for the
payment thereof pursuant to Section 15(b)), until payment in full of all such other
Secured Obligations shall have been made (or so provided for); and
finally
, to pay to the relevant Grantor, or as a court of competent jurisdiction may
direct, any surplus then remaining from the proceeds of the Collateral owned by it;
provided
that Collateral owned by a Subsidiary Guarantor and any proceeds thereof shall be applied
pursuant to the foregoing clauses
first
,
second
,
third
and
fourth
only to the extent permitted by
the limitation in Section 2(i). The Collateral Agent may make such distributions hereunder in cash
or in kind or, on a ratable basis, in any combination thereof.
(b) If at any time any portion of any monies collected or received by the Collateral Agent
would, but for the provisions of this Section 15(b), be payable pursuant to Section 15(a) in
respect of a Contingent Secured Obligation, the Collateral Agent shall not apply any monies to pay
such Contingent Secured Obligation but instead shall request the holder thereof, at least 10 days
before each proposed distribution hereunder, to notify the Collateral Agent as to the maximum
amount of such Contingent Secured Obligation if then ascertainable (
e.g.
, in the case of a letter
of credit, the maximum amount available for subsequent drawings thereunder). If the holder of such
Contingent Secured Obligation does not notify the Collateral Agent of the maximum ascertainable
amount thereof at least two Business Days before such distribution, such holder will not be
entitled to share in such distribution. If such holder does so notify the Collateral Agent as to
the maximum ascertainable amount thereof, the Collateral Agent will allocate to such holder a
portion of the monies to be distributed in such
29
distribution, calculated as if such Contingent Secured Obligation were outstanding in such
maximum ascertainable amount. However, the Collateral Agent will not apply such portion of such
monies to pay such Contingent Secured Obligation, but instead will hold such monies or invest such
monies in Permitted Investments. All such monies and Permitted Investments and all proceeds
thereof will constitute Collateral hereunder, but will be subject to distribution in accordance
with this Section 15(b) rather than Section 15(a). The Collateral Agent will hold all such monies
and Permitted Investments and the net proceeds thereof in trust until all or part of such
Contingent Secured Obligation becomes a Non-Contingent Secured Obligation, whereupon the Collateral
Agent at the request of the relevant Secured Party will apply the amount so held in trust to pay
such Non-Contingent Secured Obligation;
provided
that, if the other Secured Obligations theretofore
paid pursuant to the same clause of Section 15(a) (
i.e.
, clause
second
or
fourth
) were not paid in
full, the Collateral Agent will apply the amount so held in trust to pay the same percentage of
such Non-Contingent Secured Obligation as the percentage of such other Secured Obligations
theretofore paid pursuant to the same clause of Section 15(a). If (i) the holder of such
Contingent Secured Obligation shall advise the Collateral Agent that no portion thereof remains in
the category of a Contingent Secured Obligation and (ii) the Collateral Agent still holds any
amount held in trust pursuant to this Section 15(b) in respect of such Contingent Secured
Obligation (after paying all amounts payable pursuant to the preceding sentence with respect to any
portions thereof that became Non-Contingent Secured Obligations), such remaining amount will be
applied by the Collateral Agent in the order of priorities set forth in Section 15(a).
(c) In making the payments and allocations required by this Section, the Collateral Agent may
rely upon information supplied to it pursuant to Section 19(c). All distributions made by the
Collateral Agent pursuant to this Section shall be final (except in the event of manifest error)
and the Collateral Agent shall have no duty to inquire as to the application by any Secured Party
of any amount distributed to it.
SECTION 16
. Fees and Expenses; Indemnification.
(a) Without duplication of (and without
limiting) the Borrowers obligations under Section 9.03 of the Credit Agreement, the Borrower will:
(i) reimburse the Collateral Agent for the amount of any taxes that the Collateral
Agent may have been required to pay by reason of the Transaction Liens or to free any
Collateral from any other Lien thereon; and
(ii) indemnify the Collateral Agent for, or hold it harmless and defend it against,
any loss, liability or expense (including the reasonable
30
fees and expenses of its counsel and any experts or sub-agents appointed by it
hereunder) incurred or suffered by the Collateral Agent in connection with the Security
Documents, except to the extent that such loss, liability or expense arises from the gross
negligence or willful misconduct of the Collateral Agent or its Affiliates, officers,
directors, employees, advisors or agents, or a breach of any duty that the Collateral
Agent has under this Agreement (after giving effect to Sections 18 and 21).
(b) If any transfer tax, documentary stamp tax or other tax is payable in connection with any
transfer or other transaction provided for in the Security Documents, the Borrower will pay (or
will reimburse the Collateral Agent to the extent the Collateral Agent has paid) such tax and
provide any required tax stamps to the Collateral Agent or as otherwise required by law.
(c) Amounts payable by the Borrower under this Section 16 shall be paid promptly and in any
event not later than 10 days after written demand therefor, together with reasonable detail and
supporting documentation.
SECTION 17
. Authority to Administer Collateral.
(a) Each Grantor irrevocably appoints the Collateral Agent its true and lawful attorney, with
full power of substitution, in the name of such Grantor, any Secured Party or otherwise, for the
sole use and benefit of the Secured Parties, but at the Borrowers expense, to the extent permitted
by law to exercise, at any time and from time to time while an Event of Default shall have occurred
and be continuing, all or any of the following powers with respect to all or any of such Grantors
Collateral:
(i) to demand, sue for, collect, receive and give acquittance for any and all monies
due or to become due upon or by virtue thereof,
(ii) to settle, compromise, compound, prosecute or defend any action or proceeding
with respect thereto,
(iii) to sell, lease, license or otherwise dispose of the same or the proceeds or
avails thereof, as fully and effectually as if the Collateral Agent were the absolute
owner thereof, and
(iv) to extend the time of payment of any or all thereof and to make any allowance or
other adjustment with reference thereto;
provided
that, except in the case of Personal Property Collateral that is perishable or threatens
to decline speedily in value or is of a type customarily sold on a recognized market, the
Collateral Agent will give the relevant Grantor at least ten days prior written notice of the time
and place of any public sale thereof or the
31
time after which any private sale or other intended disposition thereof will be made. Any such
notice shall (A) contain the information specified in UCC Section 9-613, (B) be Authenticated and
(C) be sent to the parties required to be notified pursuant to UCC Section 9-611(c);
provided
that,
if the Collateral Agent fails to comply with this sentence in any respect, its liability for such
failure shall be limited to the liability (if any) imposed on it as a matter of law under the UCC.
(b) The foregoing provisions of this Section shall not apply to Real Property Collateral other
than Fixtures as to which such provisions shall apply to the extent such Fixtures are governed by
Article 9 of the UCC.
SECTION 18
. Limitation on Duty in Respect of Collateral.
Beyond the exercise of reasonable
care in the custody and preservation thereof and accounting for monies received by it in connection
with any exercise of remedies provided for hereunder, the Collateral Agent will have no duty as to
any Collateral in its possession or control or in the possession or control of any sub-agent or
bailee or any income therefrom or as to the preservation of rights against prior parties or any
other rights pertaining thereto. The Collateral Agent will be deemed to have exercised reasonable
care in the custody and preservation of the Collateral in its possession or control if such
Collateral is accorded treatment substantially equal to that which it accords its own property, and
will not be liable or responsible for any loss or damage to any Collateral, or for any diminution
in the value thereof, by reason of any act or omission of any sub-agent or bailee selected by the
Collateral Agent in good faith, except to the extent that such liability arises from the Collateral
Agents gross negligence or willful misconduct.
SECTION 19
. General Provisions Concerning the Collateral Agent.
(a) The provisions of Article 8 of the Credit Agreement shall inure to the benefit of the
Collateral Agent, and shall be binding upon all Grantors and all Secured Parties, in connection
with this Agreement and the other Security Documents. Without limiting the generality of the
foregoing, (i) the Collateral Agent shall not be subject to any fiduciary or other implied duties,
regardless of whether an Event of Default has occurred and is continuing, (ii) the Collateral Agent
shall not have any duty to take any discretionary action or exercise any discretionary powers,
except discretionary rights and powers expressly contemplated by the Security Documents that the
Collateral Agent is required in writing to exercise 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 of the Credit Agreement), and (iii) except as expressly set forth in the Loan Documents, the
Collateral Agent shall not have any duty to disclose, and shall not be liable for any failure to
disclose, any information relating to any Grantor that is communicated to or obtained by the bank
serving as Collateral Agent or any of its Affiliates in any capacity. The Collateral Agent shall
not be
32
responsible for the existence, genuineness or value of any Collateral or for the validity,
perfection, priority or enforceability of any Transaction Lien, whether impaired by operation of
law or by reason of any action or omission to act on its part under the Security Documents. The
Collateral Agent shall be deemed not to have knowledge of any Event of Default unless and until
written notice thereof is given to the Collateral Agent by the Borrower or a Secured Party.
(b)
Sub-Agents and Related Parties
. The Collateral Agent may perform any of its duties and
exercise any of its rights and powers through one or more sub-agents appointed by it. The
Collateral Agent and any such sub-agent may perform any of its duties and exercise any of its
rights and powers through its Related Parties. The exculpatory provisions of Section 18 and this
Section shall apply to any such sub-agent and to the Related Parties of the Collateral Agent and
any such sub-agent.
(c)
Information as to Secured Obligations and Actions by Secured Parties.
For all purposes of
the Security Documents, including determining the amounts of the Secured Obligations and whether a
Secured Obligation is a Contingent Secured Obligation or not, or whether any action has been taken
under any Secured Agreement, the Collateral Agent will be entitled to rely on information from (i)
its own records for information as to the Lenders, their Secured Obligations and actions taken by
them, (ii) any other Secured Party for information as to its Secured Obligations and actions taken
by it, to the extent that the Collateral Agent has not obtained such information from its own
records, and (iii) the Borrower, to the extent that the Collateral Agent has not obtained
information from the foregoing sources.
(d)
Refusal to Act
. The Collateral Agent may refuse to act on any notice, consent, direction
or instruction from any Secured Parties or any agent, trustee or similar representative thereof
that, in the Collateral Agents opinion, (i) is contrary to law or the provisions of any Security
Document, (ii) may expose the Collateral Agent to liability (unless the Collateral Agent shall have
been indemnified, to its reasonable satisfaction, for such liability by the Secured Parties that
gave such notice, consent, direction or instruction) or (iii) is unduly prejudicial to Secured
Parties not joining in such notice, consent, direction or instruction.
SECTION 20
. Termination of Transaction Liens; Release of Collateral.
(a) The Transaction
Liens granted by each Guarantor shall terminate when its Secured Guarantee is released pursuant to
Section 2(c).
(b) The Transaction Liens granted by the Borrower shall terminate when all the Release
Conditions are satisfied.
33
(c) The Transaction Liens granted by the Grantors shall be automatically released and
terminated during the Collateral Suspension Period pursuant to Section 9.16 of the Credit
Agreement, without notice to or action by the Collateral Agent or any other Secured Party. If
after the termination of the Transaction Liens in accordance with this clause (c) the Collateral
Reversion Date shall occur, the Transaction Liens shall be reinstated automatically and without any
further action on the part of any Person (and the Grantors shall take all action requested by the
Collateral Agent to evidence such reinstatement).
(d) At any time before the Transaction Liens granted by the Grantors terminate, the Collateral
Agent may, at the written request of the Borrower, (i) release any Collateral (but not all or
substantially all the Collateral) with the prior written consent of the Required Lenders or (ii)
release all or substantially all the Collateral with the prior written consent of all Lenders.
(e) Upon any termination of a Transaction Lien or release of Collateral, the Collateral Agent
will, at the expense of the relevant Grantor, promptly execute and deliver to such Grantor such
documents as such Grantor shall reasonably request to evidence the termination of such Transaction
Lien or the release of such Collateral, as the case may be.
SECTION 21
. Additional Guarantors and Grantors.
Any Restricted Subsidiary may become a
party hereto by signing and delivering to the Collateral Agent a Security Agreement Supplement,
whereupon such Subsidiary shall become a Guarantor and a Grantor as defined herein.
SECTION 22
. Notices.
Each notice, request or other communication given to any party
hereunder shall be given in accordance with Section 9.01 of the Credit Agreement, and in the case
of any such notice, request or other communication to a Grantor other than the Borrower, shall be
given to it in care of the Borrower.
SECTION 23
. No Implied Waivers; Remedies Not Exclusive.
No failure by the Collateral Agent
or any Secured Party to exercise, and no delay in exercising and no course of dealing with respect
to, any right or remedy under any Security Document shall operate as a waiver thereof; nor shall
any single or partial exercise by the Collateral Agent or any Secured Party of any right or remedy
under any Loan Document preclude any other or further exercise thereof or the exercise of any other
right or remedy. The rights and remedies specified in the Loan Documents are cumulative and are
not exclusive of any other rights or remedies provided by law.
SECTION 24
. Successors and Assigns.
This Agreement is for the benefit of the Collateral
Agent and the Secured Parties. If all or any part of any Secured
34
Partys interest in any Secured Obligation is assigned or otherwise transferred, the
transferors rights hereunder, to the extent applicable to the obligation so transferred, shall be
automatically transferred with such obligation. This Agreement shall be binding on the Grantors
and their respective successors and assigns.
SECTION 25
. Amendments and Waivers.
Neither this Agreement nor any provision hereof may be
waived, amended, modified or terminated except pursuant to an agreement or agreements in writing
entered into by the Collateral Agent, with the consent of such Lenders as are required to consent
thereto under Section 9.02 of the Credit Agreement. No such waiver, amendment or modification
shall (i) be binding upon any Grantor, except with its written consent, or (ii) affect the rights
of a Secured Party (other than a Lender) hereunder more adversely than it affects the comparable
rights of the Lenders hereunder, without the consent of such Secured Party.
SECTION 26
. Choice of Law.
This Agreement shall be construed in accordance with and
governed by the laws of the State of New York, except as otherwise required by mandatory provisions
of law and except to the extent that remedies provided by the laws of any jurisdiction other than
the State of New York are governed by the laws of such jurisdiction.
SECTION 27
. Waiver of Jury Trial.
EACH PARTY HERETO 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 ANY SECURITY DOCUMENT OR ANY TRANSACTION CONTEMPLATED
THEREBY (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 BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION.
SECTION 28
. Severability.
If any provision of any Security Document is invalid or
unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other
provisions of the Security Documents shall remain in full force and effect in such jurisdiction and
shall be liberally construed in favor of the Collateral Agent and the other Secured Parties in
order to carry out the intentions of the parties thereto as nearly as may be possible and (ii) the
invalidity or
35
unenforceability of such provision in such jurisdiction shall not affect the validity or
enforceability thereof in any other jurisdiction.
36
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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Name:
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Title:
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JPMORGAN CHASE BANK, N.A., as
Collateral Agent
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By:
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Name:
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Title:
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Guarantors:
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[NAMES OF SUBSIDIARY GUARANTORS]
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By:
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Name:
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Title:
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37
EXHIBIT E
FORM OF GLOBAL INTERCOMPANY NOTE
New York, New York
March [_], 2011
FOR VALUE RECEIVED, each of the undersigned, to the extent a borrower from time to time (each,
in such capacity, a
Payor
) from any other entity party hereto (each, in such capacity, a
Payee
), hereby promises to pay on demand to the order of such Payee or its registered assigns, in
lawful money of the United States of America or such other currency as shall be agreed upon by such
Payor and such Payee in immediately available funds, at such location in the United States of
America as a Payee shall from time to time designate or at such other location as shall be agreed
upon by such Payor and such Payee, the unpaid principal amount of all loans, advances and other
credit extensions made by such Payee to such Payor that would, even if not evidenced by this Global
Intercompany Note, constitute Indebtedness (such loans, advances and other credit extensions,
Intercompany Indebtedness
). Each Payor promises also to pay interest on the unpaid principal
amount of all such Intercompany Indebtedness in like money at said location from the date of the
incurrence of such Intercompany Indebtedness until paid at such rate per annum, if any, as shall be
agreed upon from time to time by such Payor and such Payee.
Reference is made to the Credit Agreement dated as of March [_], 2011 (as amended, amended and
restated, supplemented or otherwise modified from time to time, the
Credit Agreement
) among
Huntington Ingalls Industries, Inc. (the
Company
), the Lenders party thereto, JPMorgan Chase
Bank, N.A. as Administrative Agent, Issuing Bank and Swingline Lender, and Credit Suisse AG, as
Swingline Lender. Capitalized terms used in this note (
Global Intercompany Note
) and not
otherwise defined herein have the meanings specified in the Credit Agreement.
Anything in this Global Intercompany Note to the contrary notwithstanding, the Intercompany
Indebtedness evidenced by this Global Intercompany Note owed by any Payor that is a Loan Party to
any Payee that is not a Loan Party (any such Payor and Payee with respect to any such Intercompany
Indebtedness, an
Affected Payor
or
Affected Payee
, as relevant) shall be subordinate and junior
in right of payment, to the extent and in the manner hereinafter set forth, to the prior payment of
all Secured Obligations of such Affected Payor, including, without limitation, where applicable,
under such Affected Payors guarantee of the Secured Obligations (the Secured Obligations, and
other indebtedness and obligations in connection with any renewal, refunding, restructuring or
refinancing thereof, including interest thereon accruing after the commencement of any proceedings
referred to in clause (i) below at the contract rate (including, without limitation, any contract
rate
E-1
applicable upon default) specified in the Credit Agreement, whether or not such interest is an
allowed or allowable claim in such proceeding, being hereinafter collectively referred to as
Senior Indebtedness
):
(i) In the event of any Bankruptcy Event relative to any Affected Payor or a like
event with respect to all or substantially all of its property, and in the event of any
proceedings for voluntary liquidation, dissolution or other winding up of such Affected
Payor constituting a Default or Event of Default under the Credit Agreement, whether or
not involving insolvency or bankruptcy, then (x) the holders of Senior Indebtedness shall
be paid in full in cash in respect of all amounts constituting Senior Indebtedness before
any Affected Payee is entitled to receive (whether directly or indirectly), or make any
demands for, any payment on account of this Global Intercompany Note from or on behalf of
the Affected Payor and (y) until the holders of Senior Indebtedness are paid in full in
cash in respect of all amounts constituting Senior Indebtedness, any payment or
distribution of any kind or character to which such Affected Payee would otherwise be
entitled in respect of this Global Intercompany Note from or on behalf of the Affected
Payor shall be made to the holders of Senior Indebtedness;
(ii) if any Event of Default under Article VII of the Credit Agreement occurs and is
continuing with respect to any Senior Indebtedness, then no payment or distribution of any
kind or character shall be made by or on behalf of the Affected Payor or any other Person
on its behalf to the Affected Payee or any other Person on its behalf, directly or
indirectly in cash or other property or by set-off or in any other manner, with respect to
this Global Intercompany Note; and
(iii) if any payment or distribution of any character, whether in cash, securities or
other property, in respect of this Global Intercompany Note shall (despite these
subordination provisions) be received by any Payee in violation of clause (i) or (ii)
before all Senior Indebtedness shall have been paid in full in cash, such payment or
distribution shall be held in trust for the benefit of, and shall be paid over or
delivered to, the holders of Senior Indebtedness (or their representatives), ratably
according to the respective aggregate amounts remaining unpaid thereon, to the extent
necessary to pay all Senior Indebtedness in full in cash.
To the fullest extent permitted by law, no present or future holder of Senior Indebtedness
(such holders, the
Senior Creditors
) shall be prejudiced in its right to enforce the
subordination of this Global Intercompany Note by any act or failure to act on the part of any
Affected Payor or by any act or failure to act on the part of such holder or any trustee or agent
for such holder. Each Affected Payee and each Affected Payor hereby agree that the subordination
of this Global Intercompany Note is for the benefit of the Senior Creditors, and the Senior
E-2
Creditors are obligees under this Global Intercompany Note to the same extent as if their
names were written herein as such and the Administrative Agent, on behalf of itself or the other
Senior Creditors, may proceed to enforce the subordination provisions herein to the extent
applicable.
Nothing contained in the subordination provisions set forth above is intended to or will
impair, as between each Payor and each Payee, the obligations of such Payor, which are absolute and
unconditional, to pay to such Payee the principal of and interest on this Global Intercompany Note
as and when due and payable in accordance with its terms, or is intended to or will affect the
relative rights of such Payee and other creditors of such Payor other than the Senior Creditors.
Each Payee is hereby authorized to record all Intercompany Indebtedness owing to it by Payor
(all of which shall be evidenced by this Global Intercompany Note), and all repayments or
prepayments thereof, in its books and records, such books and records constituting prima facie
evidence of the accuracy of the information contained therein.
Upon execution and delivery after the date hereof by any Subsidiary of the Company of a
counterpart signature page hereto, such Subsidiary shall become a Payor or Payee, as applicable,
hereunder with the same force and effect thereafter as if originally named a Payor or Payee, as
applicable, hereunder. The rights and obligations of each Payor or Payee hereunder shall remain in
full force and effect notwithstanding the addition of any new Payor or Payee as a party to this
Global Intercompany Note.
To the extent permitted by applicable law, each Payor hereby waives presentment, demand,
protest or notice of any kind in connection with this Global Intercompany Note. All payments under
this Global Intercompany Note shall be made without offset, counterclaim or deduction of any kind.
THIS GLOBAL INTERCOMPANY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
E-3
EXHIBIT F
This instrument was prepared in consultation
with counsel in the State in which the
Property is located and, when recorded,
the recorded counterparts should be returned to:
Real Estate Department
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT
AND FIXTURE FILING
dated as of ____ __, 2011
by
[
NORTHROP GRUMMAN SHIPBUILDING, INC. (Formerly Known as Newport News
Shipbuilding and Dry Dock Company)],
a [Virginia] corporation,
the Grantor,
to
[TRUSTEE] [NOTE TO DRAFT: FOR VA PROPERTY MUST BE A VIRGINIA RESIDENT]
,
as Trustee,
for the benefit of
JPMORGAN CHASE BANK, N.A.
as Collateral Agent,
the Beneficiary
Property:
[ ]
[VA: This instrument affects certain real and personal property located in the City of ___________,
Commonwealth of Virginia. THIS IS A CREDIT LINE DEED OF TRUST]
[VA: THE CURRENT VALUE OF ALL VIRGINIA PROPERTY SECURING THE SECURED OBLIGATIONS IS $_________.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, THE MAXIMUM PRINCIPAL INDEBTEDNESS TO BE
SECURED UNDER ANY CONTINGENCY AT ANY ONE TIME BY THIS INSTRUMENT SHALL IN NO EVENT EXCEED
$________.]
This Instrument Contains After-acquired Property Provisions and Secures Obligations Containing
Provisions for Changes in Interest Rates . This Instrument Also Secures Future Advances.
THIS INSTRUMENT CONSTITUTES A FIXTURE FILING [VA: UNDER VA. CODE ANN. § 8.9A-502(c).]
EXHIBIT F
TABLE OF CONTENTS
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Page
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ARTICLE 1
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Definitions and Interpretation
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Section 1.01
.
Definitions
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6
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Section 1.02
.
Interpretation
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10
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ARTICLE 2
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Certain Warranties And Covenants Of The Grantor
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Section 2.01
. Title; Further Assurances; Existence and Authority
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11
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Section 2.02
.
Secured Obligations
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12
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Section 2.03
.
Impositions
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12
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Section 2.04
.
Legal and Insurance Requirements
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12
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Section 2.05
.
Status and Care of the Property
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13
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Section 2.06
.
Permitted Contests
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13
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Section 2.07
.
Liens
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14
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Section 2.08
.
Transfer
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14
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ARTICLE 3
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Insurance, Casualty and Condemnation
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Section 3.01
.
Insurance
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14
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Section 3.02
.
Casualty and Condemnation
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14
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ARTICLE 4
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Certain Secured Obligations
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Section 4.01
. Revolving Loans
;
Future Advances
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15
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Section 4.02
. Interest After Default
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15
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Section 4.03
. Changes in the Laws Regarding Taxation
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16
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Section 4.04
.
Indemnification
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16
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Section 4.05
. Expenses
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16
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ARTICLE 5
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Defaults, Remedies and Rights
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Section 5.01
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Events of Default
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17
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Section 5.02
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Remedies
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17
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Section 5.03
.
Waivers by the Grantor
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20
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Section 5.04
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Jurisdiction and Process
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21
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Page
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Section 5.05
.
Sales
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21
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Section 5.06
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Proceeds
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23
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Section 5.07
.
Assignment of Leases
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25
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Section 5.08
.
Dealing with the Trust Property
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26
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Section 5.09
.
Sales
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26
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Section 5.10
.
Right to Perform Obligations
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27
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Section 5.11
.
Concerning the Beneficiary
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27
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ARTICLE 6
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Security Agreement And Fixture Filing
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Section 6.01
. Security Agreement
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28
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Section 6.02
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Fixture Filing
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28
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ARTICLE 7
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Miscellaneous
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Section 7.01
.
Release of Trust Property
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29
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Section 7.02
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Notices
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30
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Section 7.03
.
Amendments In Writing
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30
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Section 7.04
.
Severability
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30
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Section 7.05
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Binding Effect
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30
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Section 7.06
.
Governing Law
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31
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Section 7.07
.
Trustee
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31
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Section 7.08
.
Local Law Provisions
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32
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Section 7.09
.
Multisite Real Estate Transaction
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33
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Section 7.10
. Subrogation to Rights of Prior Lienholder
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33
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Section 7.11
.
Waiver of Jury Trial
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33
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Exhibit A Description of the Land
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Exhibit B Permitted Encumbrances
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Appendix Local Law Provisions
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3
EXHIBIT F
THIS DEED OF TRUST
1
, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE
FILING
(
Deed of Trust
) dated as of _________ __, 2011 by [
NORTHROP GRUMMAN SHIPBUILDING,
INC. (F/K/A NEWPORT NEWS SHIPBUILDING AND DRY DOCK COMPANY)
], a [Virginia]
[corporation]
2
(the
Grantor
), with a mailing address of [4101 Washington Avenue,
Newport News, VA 23607] to [ ], with a mailing address of [ ]
3
(the
Trustee
) for
the benefit of JPMORGAN CHASE BANK, N.A., as Collateral Agent, with a mailing address of 1111
Fannin, 8
th
Floor, Houston, Texas 77002 (the
Beneficiary
).
WITNESSETH:
4
This is a Credit Line Deed of Trust
Recitals
A.
Credit Agreement
. Pursuant and subject to the terms, conditions and provisions of that
certain Credit Agreement dated as of [ ], 2011 (as amended from time to time, the
Credit
Agreement
), among Huntington Ingalls Industries, Inc. (the
Borrower
), the Lenders party thereto
(the
Lenders
), and the Beneficiary, as Collateral Agent, Issuing Bank and a Swingline Lender and
Credit Suisse, as a Swingline Lender, the Lenders agreed to extend certain loans to the Borrower
[up to a maximum principal amount of $1,225,000,000 which indebtedness is finally due and payable
on the Maturity Date (as defined below), and the Issuing Banks have agreed to make letters of
credit available for the account of the Borrower.
B.
Security Agreement
. Pursuant to the Credit Agreement, the Borrower, certain subsidiaries party
thereto and the Beneficiary have executed and delivered the Guarantee and Security Agreement dated
as of [ ], 2011 (the
Security Agreement
).
C.
Inducement for Subsidiary Guarantors
. Grantor is a wholly-owned, direct or indirect subsidiary
of the Borrower and will continue to derive substantial direct and indirect benefits from the
credit extensions to the Borrower pursuant to the Credit Agreement and the other Security
Documents.
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1
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Leasehold provisions to be added if leasehold
mortgage of any lease is delivered.
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2
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Grantors to be confirmed Gulfport: Avondale
Enterprises Inc.; Pascagoula: Ingalls Shipbuilding, Inc., a Delaware
corporation]
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3
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Local counsel to confirm.
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4
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Capitalized terms are defined in, or by
reference in, Section 1.01.
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D.
Secured Obligations
. The Lien of this Deed of Trust is being granted to secure payment,
performance and observance of the Secured Obligations, whether now or hereafter owed or owing.
E.
Principal Amount Secured
. This Deed of Trust secures a maximum principal amount of
$1,225,000,000 at any one time outstanding, plus accrued unpaid interest and costs.
5
Granting Clauses
For and in consideration of the premises, and of the mutual covenants contained herein, in order to
secure the full, timely and proper payment, performance of and compliance with each and every one
of the Secured Obligations, the Grantor hereby irrevocably grants, bargains, sells, conveys,
assigns, transfers and warrants to the Trustee and its successors and/or assigns, for the benefit
of the Beneficiary, and its successors and/or assigns, forever, IN TRUST, with POWER OF SALE TO
SECURE THE SECURED OBLIGATIONS, if applicable, and right of entry as hereinafter provided (and to
the extent covered by the UCC, does hereby grant and warrant a continuing security interest in),
all of the property and rights described in the following Granting Clauses (the
Trust Property
),
to wit:
Granting Clause I
Land.
All estate, right, title and interest of the Grantor in, to, under or derived from the
parcel or parcels of land located in the County of [ ], State of [ ], which are more
particularly listed or described in Exhibit A (the
Land
).
Granting Clause II
Improvements
. All estate, right, title and interest of the Grantor in, to, under or derived from
all buildings, structures, facilities and other improvements of every kind and description now or
hereafter located on the Land, including all parking areas, roads, driveways, walks, fences, walls
and berms; all estate, right, title and interest of the Grantor in, to, under or derived from all
items of fixtures, equipment and personal property of every kind and description, in each case now
or hereafter located on the Land or affixed (actually or constructively) to the Improvements which
by the nature of their location thereon or affixation thereto, or otherwise, are real property
under applicable law or an interest in them arises under real estate law including: all drainage
and lighting facilities and other site improvements; all water, sanitary and storm sewer, drainage,
electricity, steam, gas, telephone, telecommunications and other utility equipment and facilities;
all plumbing, lighting, heating, ventilating, air-conditioning, refrigerating, incinerating,
compacting, fire protection and sprinkler, surveillance and security, vacuum cleaning, public
address and communications equipment and systems; all pipes, elevators, escalators, motors,
electrical, computer and other wiring,
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5
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Local counsel to advise if it is required
that a maximum principal amount be stated.
|
F-2
machinery, fittings and racking and shelving; all walls, screens and partitions; and including all
materials intended for the construction, reconstruction, repair, replacement, alteration, addition
or improvement of or to such buildings, equipment, fixtures, structures and improvements, all of
which materials shall be deemed to be part of the Trust Property immediately upon delivery thereof
on the Land and to be part of the improvements immediately upon their incorporation therein (the
foregoing being collectively called the
Improvements
).
Personal Property and Equipment
. All estate, right, title and interest of the Grantor in, to,
under or derived from all component parts of the Improvements, fixtures, chattels, equipment (as
defined in the UCC), and articles of personal property owned by the Grantor or in which the Grantor
has or shall acquire an interest, wherever situated, and now or hereafter located on, attached to
or contained in the Land or the Improvements, whether or not attached thereto and which are not
real property under applicable law, including all partitions, furniture and furnishings, heating,
lighting, plumbing, ventilating, air conditioning, refrigerating, gas, steam, electrical,
incinerating and compacting plants, systems, fixtures and equipment, elevators, call systems,
switchboards, sprinkler systems and other fire prevention, alarm and extinguishing apparatus and
materials, motors, machinery, pipes, conduits, dynamos, engines, compressors, generators, boilers,
stokers, furnaces, pumps, trunks, ducts, appliances, equipment, utensils, tools, implements,
fittings and fixtures (all of the foregoing being hereinafter collectively called the
Equipment
;
the Land with the Improvements thereon and the Equipment therein being collectively called the
Property
). If the Lien of this Deed of Trust is subject to a security interest covering any
property described in this GRANTING CLAUSE II, then all of the right, title and interest of the
Grantor in and to any and all such property is hereby assigned to the Beneficiary, together with
the benefits of all deposits and payments now or hereafter made thereon by or on behalf of the
Grantor, and subject to all of the liens of, and terms and conditions applicable to, such security
interest.
Granting Clause III
Appurtenant Rights
. All estate, right, title and interest of the Grantor in, to, under or derived
from all tenements, hereditaments and appurtenances now or hereafter relating to the Property; the
streets, roads, sidewalks and alleys abutting the Land; all strips and gores within or adjoining
the Land; all land in the bed of any body of water adjacent to the Land; all land adjoining the
Land created by artificial means or by accretion; all air space and rights to use air space above
the Land; all development or similar rights now or hereafter appurtenant to the Land; all rights of
ingress and egress now or hereafter appertaining to the Property; all easements, servitudes,
privileges and rights of way now or hereafter appertaining to the Property; and all royalties and
other rights now or hereafter appertaining to the use and enjoyment of the Property, including
alley, party walls, support, drainage, crop, timber, agricultural, horticultural, oil, gas and
other mineral, water stock, riparian and other water rights.
Granting Clause IV
F-3
Agreements
. All estate, right, title and interest of the Grantor in, to, under or derived from all
Insurance Policies (including all unearned premiums and dividends thereunder), all guarantees and
warranties relating to the Property, all supply and service contracts for water, sanitary and storm
sewer, drainage, electricity, steam, gas, telephone and other utilities now or hereafter relating
to the Property and all other contract rights, now or hereafter relating to the use or operation of
the Property.
Granting Clause V
Leases
. All estate, right, title and interest of the Grantor in, to, under or derived from all
Leases now or hereafter in effect, whether or not of record, for the use or occupancy of all or any
part of the Property.
Granting Clause VI
Rents, Issues and Profits
. All estate, right, title and interest of the Grantor in, to, under or
derived from all rents, royalties, issues and profits, including during any period of redemption,
now or hereafter accruing with respect to the Property, including all rents and other sums now or
hereafter, including during any period of redemption, payable pursuant to the Leases; all other
sums now or hereafter, including during any period of redemption, payable with respect to the use,
occupancy, management, operation or control of the Property; and all other claims, rights and
remedies now or hereafter, including during any period of redemption, belonging or accruing with
respect to the Property, including deficiency rents and liquidated damages following default or
cancellation (the foregoing rents and other sums described in this Granting Clause VI being
collectively called the
Rents
).
Granting Clause VII
Proceeds
. All estate, right, title and interest of the Grantor in, to, under or derived from all
proceeds of any Transfer, financing, refinancing or conversion into cash or liquidated claims,
whether voluntary or involuntary, of any of the Trust Property, including all insurance proceeds or
awards resulting from a Casualty Event or a Condemnation Event and title insurance proceeds under
any title insurance policy now or hereafter held by the Grantor, and all rights, dividends and
other claims of any kind whatsoever (including damage, secured, unsecured, priority and bankruptcy
claims) now or hereafter relating to any of the Trust Property.
Granting Clause VIII
Permits
. All estate, right, title and interest of the Grantor in, to, under or derived from all
licenses, authorizations, certificates, variances, concessions, grants, franchises, consents,
approvals and other permits now or hereafter appertaining to the Property (the foregoing being
collectively the
Permits
).
F-4
Granting Clause IX
Additional Property
. All greater, additional or other estate, right, title and interest of the
Grantor in, to, under or derived from the Trust Property hereafter acquired by the Grantor,
including all right, title and interest of the Grantor in, to, under or derived from all
extensions, improvements, betterments, renewals, substitutions and replacements of, and additions
and appurtenances to, any of the Trust Property hereafter acquired by or released to the Grantor or
constructed or located on, or attached to, the Property, in each case, immediately upon such
acquisition, release, construction, location or attachment; all estate, right, title and interest
of the Grantor in, to, under or derived from any other property and rights which are, by the
provisions of any Secured Agreement, the Security Agreement or this Deed of Trust, required to be
subjected to the Lien hereof; all estate, right, title and interest of the Grantor in, to, under or
derived from any other property and rights which are necessary to maintain the Property and the
Grantors business or operations conducted therein as a going concern, in each case, to the fullest
extent permitted by law, without any further conveyance, mortgage, assignment or other act by the
Grantor; and all estate, right, title and interest of the Grantor in, to, under or derived from all
other property and rights which are by any instrument or otherwise subjected to the Lien hereof by
the Grantor or anyone acting on its behalf.
TO HAVE AND TO HOLD the Trust Property, together with all estate, right, title and interest of the
Grantor and anyone claiming by, through or under the Grantor in, to, under or derived from the
Trust Property and all rights and appurtenances relating thereto, to the Trustee for the benefit of
Beneficiary, forever.
Notwithstanding the foregoing, the following property is excluded from the foregoing security
interests: any property to the extent that the grant of a security interest therein is prohibited
by any applicable law or regulation, requires a consent not obtained of any Governmental Authority
pursuant to any applicable law or regulation, or is prohibited by, or constitutes a breach or
default under or results in the termination of or requires any consent not obtained under, any
contract, license, agreement, instrument or other document evidencing or giving rise to such
property, except to the extent that such law or regulation or the term in such contract, license,
agreement, instrument or other document providing for such prohibition, breach, default or
termination or requiring such consent is ineffective under applicable law. Grantor shall upon
request of the Beneficiary use all reasonable efforts to obtain any such required consent that is
reasonably obtainable.
THE GRANTOR ADDITIONALLY COVENANTS AND AGREES WITH THE TRUSTEE AND THE BENEFICIARY AS FOLLOWS:
F-5
ARTICLE 1
Definitions and Interpretation
Section 1.01
.
Definitions.
(a) Capitalized terms used in this Deed of Trust, but not
otherwise defined herein, are defined in, or are defined by reference to, the Credit Agreement and
have the same meanings herein as therein.
(b) In addition, as used herein, the following terms have the following meanings:
Article 9 Collateral
is defined in Section 6.01.
Bank Product Obligations
means obligations in respect of (i) Cash Management Services and
(ii) Secured Swap Agreements.
Bankruptcy Code
means the Bankruptcy Code of 1978, as amended.
Beneficiary
is defined in the Preamble.
Borrower
is defined in the Recitals.
Cash Collateral Account
is defined in Section 9 of the Security Agreement.
Cash Management Services
means any services provided from time to time by any Lender or any
of its Affiliates to any Loan Party in connection with (i) operating, collections, payroll, trust
or other depository or disbursement accounts, including automated clearinghouse, e-payable,
electronic funds transfer, wire transfer, controlled disbursement, overdraft, depository,
information reporting, lockbox and stop payment services and (ii) commercial credit card,
purchasing card and merchant card services.
Casualty Event
means any damage to, or destruction of, any real or personal property or
improvements.
Collateral
is defined in the Security Agreement.
Collateral Agent
means JPMorgan Chase Bank, N.A., in its capacity as Collateral Agent.
Condemnation Event
means any condemnation or other taking or temporary or permanent
requisition of any property, any interest therein or right appurtenant thereto, or any change of
grade affecting any property, as the result of the exercise of any right of condemnation or eminent
domain. A transfer to a governmental authority in lieu or anticipation of condemnation shall be
deemed to be a Condemnation Event.
F-6
Contingent Secured Obligation
means, at any time, any Secured Obligation (or portion
thereof) that is contingent in nature at such time, including any Secured Obligation that is:
(i) an obligation to reimburse a bank for drawings not yet made under a
letter of credit issued by it;
(ii) an obligation under a Secured Swap Agreement to make payments that
cannot be quantified at such time;
(iii) any other obligation (including any guarantee) that is contingent in
nature at such time; or
(iv) an obligation to provide collateral to secure any of the foregoing
types of obligations.
Credit Agreement
is defined in the Recitals.
Deed of Trust
is defined in the Preamble.
Grantor
is defined in the Preamble.
Indemnitee
is defined in Section 4.04.
Impositions
means all real estate taxes, transfer taxes and sales and use taxes, assessments
(including all assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof), and water, sewer or other rents, rates and charges, excises,
levies, license fees, permit fees, inspection fees and other authorization fees and other charges,
in each case whether general or special, ordinary or extraordinary, foreseen or unforeseen, of
every character (including all interest and penalties thereon), which at any time may be assessed,
levied, confirmed or imposed on or in respect of, or be a Lien upon, (i) the Property, any other
Trust Property or any interest therein, (ii) any occupancy, use or possession of, or activity
conducted on, the Property or (iii) the Rents, but excluding income, excess profits, franchise,
capital stock, estate, inheritance, succession, gift or similar taxes of the Grantor or the
Beneficiary or any Secured Party, except to the extent that such taxes of the Grantor or the
Beneficiary or any Secured Party are imposed in whole or in part in lieu of, or as a substitute
for, any taxes which are or would otherwise be Impositions.
Improvements
is defined in Granting Clause II.
Insurance Policies
means the insurance policies required to be maintained by the Grantor
with respect to the Property pursuant to the Credit Agreement.
Insurance Premiums
means all premiums payable under the Insurance Policies.
F-7
Land
is defined in Granting Clause I.
LC Reimbursement Obligations
means each payment required to be made by the Borrower under
the Credit Agreement in respect of any LC Disbursement, including payments in respect of
reimbursement of LC Disbursements, interest thereon and obligations to provide cash collateral.
Lease
means each lease, sublease, tenancy, subtenancy, license, franchise, concession or
other occupancy agreement relating to the Property, together with any guarantee of the obligations
of the tenant or occupant thereunder or any right to possession under any federal or state
bankruptcy code in the event of the rejection of any sublease by the sublandlord thereof or its
trustee pursuant to said code.
Legal Requirements
means all provisions of all applicable laws, statutes, codes, acts,
ordinances, orders, judgments, decrees, injunctions, rules, regulations, directions and
requirements of, permits from and agreements with, all governmental authorities, now or hereafter
applicable to the Property, any adjoining vaults, sidewalks, streets or ways, or any use or
condition thereof.
Maturity Date
means ______________, 20__, on which date the latest to mature of all Secured
Obligations will be finally due and payable.
Non-Contingent Secured Obligation
means at any time any Secured Obligation (or portion
thereof) that is not a Contingent Secured Obligation at such time.
Other Deeds of Trust
is defined in Section 7.09.
Permitted Disposition
means any (i) Transfer permitted by the Credit Agreement, (ii)
Transfer in connection with a Condemnation Event, and (iii) any Transfer in the nature of an
easement or similar encumbrance with respect to the Property granted by the Grantor to any
adjoining landowner or any railroad, telephone, cable television, water, sewer, utility or similar
company, municipality or other governmental subdivision in the ordinary course of business.
Permitted Liens
means (i) the Transaction Liens and (ii) any Liens permitted under Section
6.02 of the Credit Agreement.
Post-Default Rate
means, with respect to any amount payable by the Grantor hereunder which
is not paid when due, a rate per annum equal to (i) in the case of overdue principal of any Loan
(as defined in the Credit Agreement), 2.0% per annum plus the rate otherwise applicable to such
Loan as provided in Section 2.14 of the Credit Agreement or (ii) in the case of any other amount,
2% per annum plus the rate applicable to ABR Loans as provided in Section 2.14(a).
Post-Petition Interest
means any interest that accrues after the commencement of any case,
proceeding or other action relating to the bankruptcy, insolvency or reorganization of any one or
more of the Grantors (or would accrue
F-8
but for the operation of applicable bankruptcy or insolvency laws), whether or not such
interest is allowed or allowable as a claim in any such proceeding.
Property
is defined in Granting Clause II.
Receiver
is defined in Section 5.02(a)(iv).
Release Conditions
means the following conditions for releasing the Lien of this Deed of
Trust:
(i) all Commitments under the Credit Agreement shall have expired or been terminated;
(ii) all Non-Contingent Secured Obligations shall have been paid in full; and
(iii) no Contingent Secured Obligation (other than contingent indemnification and
expense reimbursement obligations as to which no claim shall have been asserted) shall
remain outstanding.
Rents
is defined in Granting Clause VI.
Restoration
means the restoration, repair, replacement or rebuilding of the Property after a
Casualty Event or Condemnation Event, and Restore means to restore, repair, replace or rebuild
the Property after a Casualty Event or Condemnation Event, in each case to a value and condition
substantially the same as the value and condition immediately prior to the Casualty Event or
Condemnation Event.
Secured Agreement
, when used with respect to any Secured Obligation, refers collectively to
each instrument, agreement or other document that sets forth obligations of the Borrower,
obligations of a guarantor and/or rights of the holder with respect to such Secured Obligation.
Secured Obligations
means (i) all principal of all Loans and LC Disbursements outstanding
from time to time under the Credit Agreement, all interest (including Post-Petition Interest) on
such Loans and LC Disbursements and all other amounts now or hereafter payable by the Borrower
pursuant to the Loan Documents and (ii) all Bank Product Obligations.
Secured Parties
means the holders from time to time of the Secured Obligations, including
the Administrative Agent and the Collateral Agent.
Secured Swap Agreement
means any Swap Agreement (i) existing on the Funding Date and entered
into by any Loan Party with a counterparty that is a Lender or an Affiliate thereof on the Funding
Date and (ii) entered into by any Loan Party after the Funding Date with a counterparty that is a
Lender or an Affiliate thereof at the time of entry into such agreement
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Security Agreement
is defined in the Recitals.
Transfer
means, when used as a noun, any sale, conveyance, assignment, lease, sublease of
all or any substantial portion of the Property, or other transfer and, when used as a verb, to
sell, convey, assign, lease, so sublease, or otherwise transfer, in each case (i) whether voluntary
or involuntary, (ii) whether direct or indirect and (iii) including any agreement providing for a
Transfer or granting any right or option providing for a Transfer.
Trust Property
is defined in the Granting Clauses.
Trustee
is defined in the Preamble.
UCC
means the Uniform Commercial Code as in effect from time to time in the State of [
];
provided
that, if perfection or the effect of perfection or non-perfection or the priority of
any Transaction Lien on any Trust Property is governed by the Uniform Commercial Code as in effect
in a jurisdiction other than [ ], UCC means the Uniform Commercial Code as in effect from
time to time in such other jurisdiction for purposes of the provisions hereof relating to such
perfection, effect of perfection or non-perfection or priority.
(c) In this Deed of Trust, unless otherwise specified, references to this Deed of Trust or to
Leases, the Credit Agreement, Notes, Swingline Note, Letters of Credit, the Security Agreement,
Secured Agreements and Security Documents include all amendments, supplements, consolidations,
replacements, restatements, extensions, renewals and other modifications and any refinancings and
refundings thereof, in whole or in part.
Section 1.02
.
Interpretation
. In this Deed of Trust, unless otherwise specified, (i)
singular words include the plural and plural words include the singular; (ii) words which include a
number of constituent parts, things or elements, including the terms Leases, Improvements, Land,
Secured Obligations, Property and Trust Property, shall be construed as referring separately to
each constituent part, thing or element thereof, as well as to all of such constituent parts,
things or elements as a whole; (iii) words importing any gender include the other gender; (iv)
references to any Person include such Persons successors and assigns and in the case of an
individual, the word successors includes such Persons heirs, devisees, legatees, executors,
administrators and personal representatives; (v) references to any statute or other law include all
applicable rules, regulations and orders adopted or made thereunder and all statutes or other laws
amending, consolidating or replacing the statute or law referred to; (vi) the words consent,
approve, agree and request, and derivations thereof or words of similar import, mean the
prior written consent, approval, agreement or request of the Person in question; (vii) the words
include and including, and words of similar import, shall be deemed to be followed by the words
without limitation; (viii) the words hereto, herein, hereof and hereunder, and words of
similar import, refer to this Deed of Trust in its entirety; (ix) references to Articles, Sections,
Schedules, Exhibits, subsections, paragraphs and clauses are
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to the Articles, Sections, Schedules, Exhibits, subsections, paragraphs and clauses of this
Deed of Trust; (x) the Schedules and Exhibits to this Deed of Trust are incorporated herein by
reference; (xi) the titles and headings of Articles, Sections, Schedules, Exhibits, subsections,
paragraphs and clauses are inserted as a matter of convenience and shall not affect the
construction of this Deed of Trust; (xii) all obligations of the Grantor hereunder shall be
satisfied by the Grantor at the Grantors sole cost and expense; and (xiii) all rights and powers
granted to the Trustee and/or the Beneficiary hereunder shall be deemed to be coupled with an
interest and be irrevocable.
ARTICLE 2
Certain Warranties And Covenants Of The Grantor
Section 2.01
. Title; Further Assurances; Existence and Authority.
(a) The Grantor warrants
that, as of the date hereof, (i) (x) the Grantor has good title to the Land and the Improvements
thereon, free and clear of all Liens other than the Permitted Liens, (y) the Grantor is the owner
of, or has a valid leasehold interest in, the Equipment and all other items constituting the Trust
Property, except where the failure to have such ownership rights would not reasonably be expected
to have, individually or in the aggregate, a material adverse effect on the use or value of the
Property or the Lien of this Deed of Trust, and (z) this Deed of Trust constitutes a valid, binding
and enforceable agreement of Grantor.
(b) The Grantor shall forever preserve, protect, warrant and defend (A) the estate, right,
title and interest of the Grantor in and to the Trust Property; (B) the validity, enforceability
and priority of the Lien of this Deed of Trust on the Trust Property; and (C) the right, title and
interest of the Beneficiary and any purchaser at any sale of the Trust Property hereunder or
relating hereto, in each case against all other Liens and claims whatsoever, subject only to
Permitted Liens.
(c) Upon the recording of this Deed of Trust in the appropriate county recording offices, the
Lien of this Deed of Trust in the Trust Property constituting real property and fixtures granted
hereby shall be a perfected first Lien on such Trust Property (including fixtures) prior to all
Liens on and security interests in such Property other than the Permitted Liens.
(d) The Grantor, at its sole cost and expense, shall (i) promptly correct any defect or error
which may be discovered in this Deed of Trust or any financing statement or other document relating
hereto; and (ii) promptly execute, acknowledge, deliver, record and re-record, register and
re-register, and file and re-file this Deed of Trust and any financing statements or other
documents which the Beneficiary may reasonably require from time to time (all in form and substance
reasonably satisfactory to the Beneficiary) in order (A) to effectuate, complete, perfect, continue
or preserve the Lien of this Deed of Trust as a first Lien on the Trust Property, whether now owned
or hereafter acquired, subject only to the Permitted Liens, or (B) to effectuate, complete,
perfect, continue or
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preserve any right, power or privilege granted or intended to be granted to the Trustee and/or
the Beneficiary hereunder or otherwise accomplish the purposes of this Deed of Trust. To the
extent permitted by law, Grantor hereby authorizes Trustee and/or Beneficiary to file any and all
financing statements and amendments thereto in such form and in such locations as Beneficiary or
Trustee deems necessary or appropriate in connection herewith. The Grantor shall pay on demand the
costs of, or incidental to, any recording or filing of this Deed of Trust and any financing or
continuation statement, or amendment thereto, concerning the Trust Property.
(e) Nothing herein shall be construed to subordinate the Lien of this Deed of Trust to any
Permitted Lien to which the Lien of this Deed of Trust is not otherwise subordinate.
(e) The Grantor is duly organized, validly existing and in good standing under the laws of the
State of [ ], and is qualified to do business in and is in good standing in the State of [ ].
(f) The execution and delivery by the Grantor of this Deed of Trust and its performance of its
obligations hereunder are within its corporate or other powers, have been duly authorized by all
necessary corporate or other action, require no action by or in respect of, or filing with, any
governmental body, agency or official (other than filings necessary to perfect the Liens created
hereby) and do not contravene, or constitute a default under, any Legal Requirements or any
provision of its organizational or constituent documents, or of any agreement or other instrument
binding upon it or result in or require the imposition of any Lien (other than the Liens created by
the Security Documents) on any of its assets.
Section 2.02
.
Secured Obligations
. The Grantor shall duly and punctually pay, perform and
observe the Secured Obligations.
Section 2.03
.
Impositions
. The Grantor shall (i) pay all Impositions as required by the
Credit Agreement; (ii) file all material returns and other material statements required to be filed
with respect to any Imposition; and (iii) not make deduction from or claim any credit on any
Secured Obligation by reason of any Imposition and, to the extent permitted under applicable law,
hereby irrevocably waives any right to do so.
Section 2.04
.
Legal and Insurance Requirements
. (a) The Grantor represents and warrants that
(i) as of the date hereof, the Property and the use and operation thereof comply in all material
respects with all Legal Requirements and Insurance Policies; (ii) there is no material default
under any Legal Requirement or Insurance Policy; and (iii) the execution, delivery and performance
of this Deed of Trust will not contravene in any material respect any provision of or constitute a
default under any Legal Requirement or Insurance Policy.
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(b) The Grantor shall (i) duly and punctually comply in all material respects with all Legal
Requirements and Insurance Policies other than any Legal Requirement or Insurance Policy that is
the subject of a Permitted Contest and except where the failure to so comply would not reasonably
be expected to have, individually or in the aggregate, a material adverse effect on the use or
value of the Property or the Lien of this Deed of Trust; and (ii) upon written request, promptly
furnish to the Beneficiary a copy of any Permit obtained by the Grantor with respect to the
Property after the date hereof.
Section 2.05
.
Status and Care of the Property
. (a) The Grantor represents and warrants that
(i) the Property is served by all necessary water, sanitary and storm sewer, drainage, electric,
steam, gas, telephone and other utility facilities to serve the current use and operation of the
Property; and (ii) the Property has legal access to all streets or roads necessary to serve the
current use and operation of the Property.
(b) Except in connection with any Permitted Disposition, the Grantor (i) shall not, without
the consent of the Beneficiary, which consent shall not be unreasonably withheld or conditioned,
(A) initiate, consent to or affirmatively support any change in the applicable zoning, (B) seek any
variance (or any change in any variance) under the zoning, or (C) execute or file any subdivision
or other plat or map, in each case which would reasonably be expected to have a material adverse
effect on the value, use or operation of the Property or the lien of this Deed of Trust; and (ii)
shall, promptly after receiving notice or obtaining knowledge of any proposed change in the zoning
materially and adversely affecting the value of the Lien created by this Deed of Trust or which
would result in the current use of the Property being a non-conforming use for which a variance has
not been obtained, notify the Beneficiary thereof and diligently contest the same by any action or
proceeding deemed appropriate by the Grantor in its reasonable judgment or reasonably requested by
the Beneficiary
provided
, however, that the Grantor shall not hereby be obligated to commence or
prosecute any legal action.
Section 2.06
.
Permitted Contests
. The Grantor may contest, by appropriate proceedings
conducted in good faith, any Legal Requirement, any insurance requirement, any Imposition, Permit
or Lien on or with respect to the Trust Property or any interest therein,
provided
that the
Beneficiary shall determine that as a result of such contest or proceeding (a) no Trust Property or
interest therein is in danger of being sold, forfeited or lost, or the priority of the Lien of the
Beneficiary is not at risk; (b) in the case of any Legal Requirement or Permit, the Beneficiary and
the other Secured Parties are not in danger of any criminal or material civil penalty or any other
liability for failure to comply therewith; (c) in the case of any Insurance Policy, no Insurance
Policy or coverage is in danger of being invalidated, forfeited or lost for failure to comply
therewith; and (d) in the case of (i) any Lien of a laborer, mechanic, materialman, supplier or
vendor, (ii) any Imposition or Lien therefore or (iii) any other Lien, the Grantor establishes any
reserve or other appropriate provision required with respect to such contest pursuant to the Credit
Agreement. It is agreed that the failure to
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comply with any such Legal Requirement, Insurance Policy or Permit, to pay any such Imposition
or to discharge any such Lien being contested pursuant to this Section during such contest shall
not constitute an Event of Default, provided that the Grantor is in compliance with this Section.
Section 2.07
.
Liens
. The Grantor shall not create or permit to be created or to remain, and
shall immediately discharge or cause to be discharged, any Lien on the Trust Property or any
interest therein, in each case (i) whether voluntarily or involuntarily created, (ii) whether
directly or indirectly a Lien thereon and (iii) whether subordinated hereto, except Permitted
Liens. The provisions of this Section shall apply to each and every Lien (other than Permitted
Liens) on the Trust Property or any interest therein, regardless of whether a consent to, or waiver
of a right to consent to, any other Lien thereon has been previously obtained in accordance with
the terms of the Secured Agreements.
Section 2.08
.
Transfer
. The Grantor shall not Transfer, or suffer any Transfer of, the Trust
Property or any part thereof or interest therein, except, in connection with Permitted
Dispositions,
provided
any proceeds resulting from such Transfer are applied as required or
permitted by the Credit Agreement or any other Secured Agreement (as applicable).
ARTICLE 3
Insurance, Casualty and Condemnation
Section 3.01
.
Insurance
. (a) The Grantor shall maintain in full force and effect Insurance
Policies with respect to the Property as required by, and otherwise comply with, Section 5.05 of
the Credit Agreement.
(b) If at any time the area in which any Trust Property is located is designated a flood
hazard area in any Flood Insurance Rate Map published by the Federal Emergency Management Agency
(or any successor agency), the Grantor shall obtain flood insurance as required by the Flood Laws
and Section 5.05(d) of the Credit Agreement.
(c) If the Grantor fails to maintain the Insurance Policies or, upon written request, fails to
promptly deliver evidence thereof to the Beneficiary, the Beneficiary shall have the right, but not
the obligation, to obtain such insurance policies and pay the premiums therefore. If the
Beneficiary obtains such insurance policies or pays the premiums therefore, upon demand, the
Grantor shall reimburse the Beneficiary for its expenses in connection therewith, together with
interest thereon, pursuant to Section 5.10.
Section 3.02
.
Casualty and Condemnation
. (a) The Grantor represents and warrants that, as of
the date hereof, there is no Casualty Event or Condemnation Event affecting the Property, the
proceeds of which are expected to exceed $1,000,000.
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(b) If any Casualty Event or Condemnation Event occurs and such event is likely to result in
Restoration costs or proceeds in excess of $[5,000,000], the Grantor shall provide notice of such
event to the Beneficiary. If any Casualty Event or Condemnation Event occurs, the Grantor shall
Restore the Property or take such action as is required or permitted by the Credit Agreement (such
as reinvestment of proceeds or prepayment of obligations) and the other Secured Agreements and
cause any insurance proceeds, condemnation awards or other similar payments to which the Grantor
may be or become entitled to be held, applied and/or disbursed as required by the Credit Agreement
or any other Secured Agreement (as applicable).
ARTICLE 4
Certain Secured Obligations
Section 4.01
. Revolving Loans
;
Future Advances
. The Secured Obligations secured by this
Deed of Trust include (x) obligations of Secured Parties to make future advances and (y) Revolving
Loans made, and reimbursement obligations relating to Letters of Credit issued, under the Credit
Agreement [in the maximum principal or face amount of $________] which are advanced, paid and
readvanced from time to time. Notwithstanding the amount outstanding at any particular time, this
Deed of Trust secures the total amount of Secured Obligations [VA: up to the Secured Loan Amount].
The unpaid balance of the Revolving Loans and the unpaid balance of the reimbursement obligations
may at certain times be, or be reduced to, zero. A zero balance, by itself, does not affect any
Issuing Banks obligations to issue Letters of Credit or any Lenders obligation to advance
Revolving Loans, or to make payments upon draws under Letters of Credit, all of which are
obligatory subject to the conditions stated in the Credit Agreement. Each of the interest of the
Beneficiary hereunder and the priority of the Lien of this Deed of Trust will remain in full force
and effect with respect to all of the Secured Obligations notwithstanding such a zero balance of
the LC Reimbursement Obligations or the reimbursement obligations, and the Lien of this Deed of
Trust will not be extinguished until this Deed of Trust has been terminated pursuant to Section
7.01.
Section 4.02
. Interest After Default.
If, pursuant to the terms of this Deed of Trust, the
Beneficiary shall make any payment on behalf of the Grantor, or shall incur hereunder any expense
for which the Beneficiary is entitled to reimbursement pursuant to the terms of the Secured
Agreements, such Secured Obligation shall be payable on demand and any amounts not paid on demand
shall bear interest from the date incurred at the Post-Default Rate. Such interest, and any other
interest on the Secured Obligations payable at the Post-Default Rate pursuant to the terms of the
Secured Agreements, shall accrue through the date paid notwithstanding any intervening judgment of
foreclosure or sale. All such interest shall be part of the Secured Obligations and shall be
secured by this Deed of Trust.
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Section 4.03
. Changes in the Laws Regarding Taxation
. If, after the date hereof, there shall
be enacted any applicable law changing in any way the taxation of mortgages, deeds of trust or
other Liens or obligations secured thereby, or the manner of collection of such taxes, so as to
adversely affect this Deed of Trust, the Secured Obligations, the Beneficiary or any Secured Party,
promptly after demand by the Beneficiary or any affected Secured Party, the Grantor shall pay all
taxes, assessments or other charges resulting therefrom or shall reimburse such affected Person for
all such taxes, assessments or other charges which such Person is obligated to pay as a result
thereof.
Section 4.04
.
Indemnification
. The Grantor shall protect, indemnify and defend each of the
Trustee, the Beneficiary and each other Secured Party, their respective affiliates and the
respective directors, officers, agents and employees of the foregoing (each an
Indemnitee
)
against, and hold each Indemnitee harmless from, any and all liabilities, losses, damages, costs
and expenses of any kind (including reasonable fees and disbursements of counsel) arising out of,
or in connection with (a) this Deed of Trust; (b) the Beneficiarys exercise of any of its rights
and remedies hereunder; (c) any accident, injury to or death of persons or loss of or damage to
property occurring in, on or about the Property or any part thereof or on the adjoining sidewalks,
curbs, adjacent property or adjacent parking areas, street or ways; (d) the performance of any
labor or services or the furnishing of any materials or other property in respect of the Trust
Property or any part thereof; and (e) any Environmental Liability related in any way to the Grantor
or the Property;
provided
, that such indemnity shall not be available to any Indemnitee to the
extent that such losses, claims, damages, liabilities or related expense resulted from such
Indemnitees gross negligence or willful misconduct. Any amount payable under this Section will be
deemed a demand obligation and will bear interest pursuant to Section 4.02. The obligations of the
Grantor under this Section shall survive the termination of this Deed of Trust. Consistent with
Section 9.03(d) of the Credit Agreement, to the extent permitted by applicable law, neither the
Grantor 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 Deed of Trust or any agreement or instrument contemplated hereby (other than in
respect of such damages incurred or paid by an Indemnitee to a third party).
Section 4.05
. Expenses
. The Grantor agrees that it will forthwith on demand pay to the
Beneficiary (i) the amount of any taxes which the Beneficiary may have been required to pay in
order to free any of the Trust Property from any Lien thereon (other than Permitted Liens), and
(ii) the amount of any and all out-of-pocket expenses, including the fees and disbursements of
counsel and of any other experts (to the extent supported by back-up invoices and documentation),
which the Beneficiary may reasonably incur in connection with its exercise of any rights or powers
under this Deed of Trust or the collection, sale or other disposition of any of the Trust Property.
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ARTICLE 5
Defaults, Remedies and Rights
Section 5.01
.
Events of Default
. Any Event of Default (as defined in the Credit Agreement)
under the Credit Agreement shall constitute an Event of Default hereunder.
Section 5.02
.
Remedies
. (a) When an Event of Default has occurred and is continuing, each of
the Trustee and the Beneficiary shall have the right and power, [(x)] subject to the terms of
Article 7 of the Credit Agreement, to accelerate the Secured Obligations and [(y) subject to and in
compliance with applicable U.S. Government regulations and any Legal Requirements in effect at the
time in the nature of security regulations pertaining to the Grantors secure or classified
activities at the Property,]
6
shall have the right and power to exercise any of the
following remedies and rights, subject to mandatory provisions of applicable law, to wit:
(i) to institute a proceeding or proceedings, by advertisement, judicial process or
otherwise as provided under applicable law, for the complete or partial foreclosure of
this Deed of Trust or the complete and partial sale of the Trust Property under the power
of sale hereunder or under any applicable provision of law; or
(ii) to sell the Trust Property, and all estate, right, title, interest, claim and
demand of the Grantor therein and thereto, and all rights of redemption thereof, at one or
more sales, as an entirety or in parcels, with such elements of real or personal property,
at such time and place and upon such terms as the Beneficiary may deem expedient or as may
be required under applicable law, and in the event of a sale hereunder or under any
applicable provision of law of less than all of the Trust Property, this Deed of Trust
shall continue as a Lien on the remaining Trust Property; or
(iii) to institute a suit, action or proceeding for the specific performance of any
of the provisions of this Deed of Trust; or
(iv) to be entitled to the appointment of a receiver, supervisor, trustee,
liquidator, conservator or other custodian (a
Receiver
) of the Trust Property, without
notice to the Grantor, to the fullest extent permitted by law, as a matter of right and
without regard to, or the necessity to disprove, the adequacy of the security for the
Secured Obligations or the solvency of the Grantor or any other obligor, and the Grantor
hereby, to the fullest extent permitted by applicable law, irrevocably waives such
necessity and consents to such appointment, without notice, said appointee to be vested
with the fullest powers
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Insert bracketed language for Newport News
Deed of Trust.
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permitted under applicable law, including to the extent permitted under applicable
law those under Section 5.02; or
(v) to the fullest extent permitted by applicable law : to enter upon the Property,
by the Beneficiary (or its agent), Trustee or a Receiver (whichever is the Person
exercising the rights under this clause), and, exclude the Grantor and its managers,
employees, contractors, agents and other representatives therefrom in accordance with
applicable law, without liability for trespass, damages or otherwise, and take possession
of all other Trust Property and all books, records and accounts relating thereto, and upon
demand the Grantor shall surrender possession of the Property, the other Trust Property
and such books, records and accounts to the Person exercising the rights under this
clause; and having and holding the same, the Person exercising the rights under this
clause may use, operate, manage, preserve, control and otherwise deal therewith and
conduct the business thereof, either personally or by its managers, employees,
contractors, agents or other representatives, without interference from the Grantor or its
managers, employees, contractors, agents and other representatives; and, upon each such
entry and from time to time thereafter, at the expense of the Grantor and the Trust
Property, without interference by the Grantor or its managers, employees, contractors,
agents and other representatives, the Person exercising the rights under this clause may,
as such Person deems expedient, (A) insure or reinsure the Property, (B) make all
necessary or proper repairs, renewals, replacements, alterations, additions, Restorations,
betterments and improvements to the Property and (C) in such Persons own name or, at the
option of such Person, in the Grantors name, exercise all rights, powers and privileges
of the Grantor with respect to the Trust Property, including the right to enter into
Leases with respect to the Property, including Leases extending beyond the time of
possession by the Person exercising the rights under this clause; and the Person
exercising the rights under this clause shall not be liable to account for any action
taken hereunder, other than for Rents actually received by such Person, and shall not be
liable for any loss sustained by the Grantor resulting from any failure to let the
Property or from any other act or omission of such Person, except to the extent such loss
is caused by such Persons own willful misconduct or gross negligence; or
(vi) with or, to the fullest extent permitted by applicable law, without entry upon
the Property, in the name of the Beneficiary, Trustee or a Receiver as required by law
(whichever is the Person exercising the rights under this clause) or, at such Persons
option, in the name of the Grantor, to collect, receive, sue for and recover all Rents and
proceeds of or derived from the Trust Property, and after deducting therefrom all costs,
expenses and liabilities of every character incurred by the Person exercising the rights
under this clause in collecting the same and in using, operating, managing, preserving and
controlling the Trust Property and otherwise in exercising the rights under Section 5.02
or any other rights
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hereunder, including all amounts necessary to pay Impositions, Rents, Insurance
Premiums and other costs, expenses and liabilities relating to the Property, as well as
reasonable compensation for the services of such Person and its managers, employees,
contractors, agents or other representatives, to apply the remainder as provided in
Section 5.06; or
(vii) to take any action with respect to any Trust Property permitted under the UCC;
or
(viii) to take any other action, or pursue any other remedy or right, as the
Beneficiary or the Trustee may have under applicable law, including the right to
foreclosure through court action, and the Grantor does hereby grant the same to the
Beneficiary or the Trustee (as the case may be).
(b) To the fullest extent permitted by applicable law,
(i) each remedy or right hereunder shall be in addition to, and not exclusive or in
limitation of, any other remedy or right hereunder, under any other Loan Document or under
applicable law;
(ii) every remedy or right hereunder, under any other Loan Document or under
applicable law may be exercised concurrently or independently and whenever and as often as
deemed appropriate by the Beneficiary;
(iii) no failure to exercise or delay in exercising any remedy or right hereunder,
under any other Loan Document or under applicable law shall be construed as a waiver of
any Default, Event of Default or other occurrence hereunder or under any other Loan
Document;
(iv) no waiver of, failure to exercise or delay in exercising any remedy or right
hereunder, under any other Loan Document or under applicable law upon any Default, Event
of Default or other occurrence hereunder or under any other Loan Document shall be
construed as a waiver of, or otherwise limit the exercise of, such remedy or right upon
any other or subsequent Default, Event of Default or other or subsequent occurrence
hereunder or under any other Loan Document;
(v) no single or partial exercise of any remedy or right hereunder, under any other
Loan Document or under applicable law upon any Default, Event of Default or other
occurrence hereunder or under any other Loan Document shall preclude or otherwise limit
the exercise of any other remedy or right hereunder, under any other Loan Document or
under applicable law upon such Default, Event of Default or occurrence or upon any other
or subsequent Default, Event of Default or other or subsequent occurrence hereunder or
under any other Loan Document;
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(vi) the acceptance by the Beneficiary, any other agent or any Secured Party of any
payment less than the amount of the Secured Obligation in question shall be deemed to be
an acceptance on account only and shall not be construed as a waiver of any Default or
Event of Default hereunder or under any other Loan Document with respect thereto; and
(vii) the acceptance by the Beneficiary, any other agent or any Secured Party of any
payment of, or on account of, any Secured Obligation shall not be deemed to be a waiver of
any Default or Event of Default or other occurrence hereunder or under any other Loan
Document with respect to any other Secured Obligation.
(c) If the Beneficiary or the Trustee has proceeded to enforce any remedy or right hereunder
or with respect hereto by foreclosure, sale, entry or otherwise, it may compromise, discontinue or
abandon such proceeding for any reason without notice to the Grantor or any other Person (other
than to any Secured Party to the extent required by the other Secured Agreements); and, if any such
proceeding shall be discontinued, abandoned or determined adversely for any reason, the Grantor,
the Trustee and the Beneficiary shall retain and be restored to their former positions and rights
hereunder with respect to the Trust Property, subject to the Lien hereof except to the extent any
such adverse determination specifically provides to the contrary.
(d) For the purpose of carrying out any provisions of Section 5.02(a)(v), 5.02(a)(iv), 5.05,
5.07, 5.10 or 6.01 or any other provision hereunder authorizing the Beneficiary or any other Person
to perform any action on behalf of the Grantor, the Grantor hereby irrevocably appoints the
Beneficiary, the Trustee or a Receiver appointed pursuant to Section 5.02(a)(iv) to act in the name
of the Grantor or, at the option of the Person appointed to act under this subsection, in such
Persons own name, to take the action authorized under Section 5.02(a)(v), 5.02(a)(iv), 5.05, 5.07,
5.10 or 6.01 or such other provision, and to execute, acknowledge and deliver any document in
connection therewith or to take any other action incidental thereto as the Person appointed to act
under this subsection shall deem appropriate in its discretion; and the Grantor hereby irrevocably
authorizes and directs any other Person to rely and act on behalf of the foregoing appointment and
a certificate of the Person appointed to act under this subsection that such Person is authorized
to act under this subsection.
Section 5.03
.
Waivers by the Grantor
. To the fullest extent permitted under applicable law,
the Grantor shall not assert, and hereby irrevocably waives, any right or defense the Grantor may
have under any statute or rule of law or equity now or hereafter in effect relating to (a)
appraisement, valuation, homestead exemption, extension, moratorium, stay, statute of limitations,
redemption, marshaling of the Trust Property or the other assets of the Grantor, sale of the Trust
Property in any order or notice of deficiency or intention to accelerate any Secured Obligation;
(b) impairment of any right of subrogation or reimbursement; (c) any requirement that at any time
any action must be taken
F-20
against any other Person, any portion of the Trust Property or any other asset of the Grantor
or any other Person; (d) any provision barring or limiting the right of the Beneficiary or the
Trustee to sell any Trust Property after any other sale of any other Trust Property or any other
action against the Grantor or any other Person; (e) any provision barring or limiting the recovery
by the Beneficiary of a deficiency after any sale of the Trust Property; (f) any other provision of
applicable law which shall defeat, limit or adversely affect any right or remedy of the
Beneficiary, the Trustee or any Secured Party under or with respect to this Deed of Trust or any
other Security Document as it relates to any Trust Property; or (g) the right of the Beneficiary or
the Trustee to foreclose this Deed of Trust in its own name on behalf of all of the Secured Parties
by judicial action as the real party in interest without the necessity of joining any Secured
Party.
Section 5.04
.
Jurisdiction and Process
. (a) To the extent permitted under applicable law, in
any suit, action or proceeding arising out of or relating to this Deed of Trust or any other
Security Document as it relates to any Trust Property, the Grantor (i) irrevocably consents to the
non-exclusive jurisdiction of any state or federal court sitting in the State in which the Property
is located and irrevocably waives any defense or objection which it may now or hereafter have to
the jurisdiction of such court or the venue of such court or the convenience of such court as the
forum for any such suit, action or proceeding; and (ii) irrevocably consents to the service of (A)
any process in accordance with applicable law in any such suit, action or proceeding, or (B) any
notice relating to any sale, or the exercise of any other remedy by the Beneficiary or the Trustee
hereunder by delivering a copy of such process or notice by overnight courier or United States
registered or certified mail, postage prepaid, return receipt requested to the Grantor at its
address specified in or pursuant to Section 7.02, such service to be effective in accordance with
applicable law.
(b) Nothing in this Section shall affect the right of the Beneficiary or the Trustee to bring
any suit, action or proceeding arising out of or relating to this Deed of Trust or any other
Security Document in any court having jurisdiction under the provisions of any other Security
Document or applicable law or to serve any process, notice of sale or other notice in any manner
permitted by any other Security Document or applicable law.
Section 5.05
.
Sales
. Except as otherwise provided herein, to the fullest extent permitted
under applicable law, at the election of the Trustee or the Beneficiary, the following provisions
shall apply to any sale of the Trust Property hereunder, whether made pursuant to the power of sale
under Section 5.02 or under any applicable provision of law, any judicial proceeding or any
judgment or decree of foreclosure or sale or otherwise:
(a) The Beneficiary, the Trustee or the court officer (whichever is the Person conducting any
sale) may conduct any number of sales from time to time. The power of sale hereunder shall not be
exhausted by any sale as to any part or parcel of the Trust Property which is not sold, unless and
until the Secured Obligations shall have been paid in full, and shall not be exhausted or impaired
by
F-21
any sale which is not completed or is defective. Any sale may be as a whole or in part or
parcels and, as provided in Section 5.03, the Grantor has waived its right to direct the order in
which the Trust Property or any part or parcel thereof is sold.
(b) Any sale may be postponed or adjourned by public announcement at the time and place
appointed for such sale or for such postponed or adjourned sale without further notice.
(c) After each sale, the Person conducting such sale shall execute and deliver to the
purchaser or purchasers at such sale a good and sufficient instrument or instruments granting,
conveying, assigning, transferring and delivering all right, title and interest of the Grantor in
and to the Trust Property sold and shall receive the proceeds of such sale [VA: up to the Secured
Loan Amount] and apply the same as provided in Section 5.06. The Grantor hereby irrevocably
appoints the Person conducting such sale as the attorney-in-fact of the Grantor (with full power to
substitute any other Person in its place as such attorney-in-fact) to act in the name of the
Grantor or, at the option of the Person conducting such sale, in such Persons own name, to make
without warranty by such Person any conveyance, assignment, transfer or delivery of the Trust
Property sold, and to execute, acknowledge and deliver any instrument of conveyance, assignment,
transfer or delivery or other document in connection therewith or to take any other action
incidental thereto, as the Person conducting such sale shall deem appropriate in its discretion;
and the Grantor hereby irrevocably authorizes and directs any other Person to rely and act upon the
foregoing appointment and a certificate of the Person conducting such sale that such Person is
authorized to act hereunder. Nevertheless, upon the request of such attorney-in-fact the Grantor
shall promptly execute, acknowledge and deliver any documentation which such attorney-in-fact may
require for the purpose of ratifying, confirming or effectuating the powers granted hereby or any
such conveyance, assignment, transfer or delivery by such attorney-in-fact.
(d) Any statement of fact or other recital made in any instrument referred to in Section
5.05(c) given by the Person conducting any sale as to the nonpayment of any Secured Obligation, the
occurrence of any Event of Default, the amount of the Secured Obligations due and payable, the
request to the Beneficiary or the Trustee to sell, the notice of the time, place and terms of sale
and of the Trust Property to be sold having been duly given, the refusal, failure or inability of
the Beneficiary or the Trustee to act, the appointment of any substitute or successor agent, any
other act or thing having been duly done by the Grantor, the Beneficiary, the Trustee or any other
such Person, shall be taken as conclusive and binding against all other Persons as evidence of the
truth of the facts so stated or recited. The Trustee or the substitute trustee conducting any sale
may appoint or delegate any other Person as agent to perform any act necessary or incident to such
sale, including the posting of notices and the conduct of such sale, but in the name and on behalf
of the Person conducting such sale.
(e) The receipt by the Person conducting any sale of the purchase money paid at such sale
shall be sufficient discharge therefor to any purchaser of
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any Trust Property sold, and no such purchaser, or its representatives, grantees or assigns,
after paying such purchase price and receiving such receipt, shall be bound to see to the
application of such purchase price or any part thereof upon or for any trust or purpose of this
Deed of Trust or any Secured Agreement, or, in any manner whatsoever, be answerable for any loss,
misapplication or nonapplication of any such purchase money or be bound to inquire as to the
authorization, necessity, expediency or regularity of such sale.
(f) Subject to mandatory provisions of applicable law, any sale shall operate to divest all of
the estate, right, title, interest, claim and demand whatsoever, whether at law or in equity, of
the Grantor in and to the Trust Property sold, and shall be a perpetual bar both at law and in
equity against the Grantor and any and all Persons claiming such Trust Property or any interest
therein by, through or under the Grantor.
(g) At any sale, the Beneficiary may bid for and acquire the Trust Property sold and, in lieu
of paying cash therefor, may make settlement for the purchase price by crediting or causing the
Secured Parties to credit against the Secured Obligations, including the expenses of the sale and
the cost of any enforcement proceeding hereunder, the amount of the bid made therefor to the extent
necessary to satisfy such bid.
(h) If the Grantor or any Person claiming by, through or under the Grantor shall transfer or
fail to surrender possession of the Trust Property, after the exercise by the Beneficiary or the
Trustee of the remedies under Section 5.02(a)(v) or after any sale of the Trust Property pursuant
hereto, then the Grantor or such Person shall be deemed a tenant at sufferance of the purchaser at
such sale, subject to eviction by means of summary process for possession of land, or subject to
any other right or remedy available hereunder or under applicable law.
(i) Upon any sale, it shall not be necessary for the Person conducting such sale to have any
Trust Property being sold present or constructively in its possession.
(j) If a sale hereunder shall be commenced by the Beneficiary or the Trustee, the Beneficiary
or the Trustee may at any time before the sale abandon the sale, and may institute suit for the
collection of the Secured Obligations or for the foreclosure of this Deed of Trust; or if the
Beneficiary or the Trustee shall institute a suit for collection of the Secured Obligations or the
foreclosure of this Deed of Trust, the Beneficiary or the Trustee may at any time before the entry
of final judgment in said suit dismiss the same and sell the Trust Property in accordance with the
provisions of this Deed of Trust.
Section 5.06
.
Proceeds
.
(a) Subject to the mandatory provisions of applicable law, the Beneficiary shall apply the
proceeds of any sale of, or other disposition of, all or any part of the Trust Property [VA: up to
the Secured Loan Amount] whether
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made pursuant to the power of sale hereunder or under any applicable provision of law, any
judicial proceeding or any judgment or decree of foreclosure or sale or otherwise, in the order of
priorities provided in Section 15 of the Security Agreement.
(b) If at any time any portion of any monies collected or received by the Beneficiary would,
but for the provisions of this Section 5.06(b), be payable pursuant to Section 5.06(a) in respect
of a Contingent Secured Obligation, the Beneficiary shall not apply any monies to pay such
Contingent Secured Obligation but instead shall request the holder thereof, at least 10 days before
each proposed distribution hereunder, to notify the Beneficiary as to the maximum amount of such
Contingent Secured Obligation if then ascertainable (e.g., in the case of a letter of credit, the
maximum amount available for subsequent drawings thereunder). If the holder of such Contingent
Secured Obligation does not notify the Beneficiary of the maximum ascertainable amount thereof at
least two Business Days before such distribution, such holder will not be entitled to share in such
distribution. If such holder does so notify the Beneficiary as to the maximum ascertainable amount
thereof, the Beneficiary will allocate to such holder a portion of the monies to be distributed in
such distribution, calculated as if such Contingent Secured Obligation were outstanding in such
maximum ascertainable amount. However, the Beneficiary shall not apply such portion of such monies
to pay such Contingent Secured Obligation, but instead will hold such monies or invest such monies
in Liquid Investments (as defined in the Security Agreement). All such monies and Liquid
Investments and all proceeds thereof will constitute Trust Property hereunder, but will be subject
to distribution in accordance with this Section 5.06(b) rather than Section 5.06(a). The
Beneficiary will hold all such monies and Liquid Investments and the net proceeds thereof in trust
until all or part of such Contingent Secured Obligation becomes a Non-Contingent Secured
Obligation, whereupon the Beneficiary at the request of the relevant Secured Party will apply the
amount so held in trust to pay such Non-Contingent Secured Obligation; provided that, if the other
Secured Obligations theretofore paid pursuant to the same clause of Section 5.06(a) (i.e., clause
second or fourth) were not paid in full, the Beneficiary will apply the amount so held in trust to
pay the same percentage of such Non-Contingent Secured Obligation as the percentage of such other
Secured Obligations theretofore paid pursuant to the same clause of Section 5.06(a). If (i) the
holder of such Contingent Secured Obligation shall advise the Beneficiary that no portion thereof
remains in the category of a Contingent Secured Obligation and (ii) the Beneficiary still holds any
amount held in trust pursuant to this Section 5.06(b) in respect of such Contingent Secured
Obligation (after paying all amounts payable pursuant to the preceding sentence with respect to any
portions thereof that became Non-Contingent Secured Obligations), such remaining amount will be
applied by the Beneficiary in the order of priorities set forth in Section 5.06(a).
(c) In making the payments and allocations required by this Section, the Beneficiary may rely
upon information supplied to it pursuant to Section 20 of the Security Agreement. All
distributions made by the Beneficiary pursuant to this
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Section shall be final (except in the event of manifest error) and the Beneficiary shall have
no duty to inquire as to the application by any Secured Party of any amount distributed to it.
Section 5.07
.
Assignment of Leases
.
(a) Subject to paragraph (d) below, the assignment of the Leases and the Rents pursuant to
Granting Clauses V and VI are and shall be present, absolute and irrevocable assignments by the
Grantor to the Beneficiary and, subject to the license to the Grantor under Section 5.07(b), the
Beneficiary or a Receiver appointed pursuant to Section 5.02(a)(iv) (whichever is the Person
exercising the rights under this Section) shall have the absolute, immediate and continuing right
to collect and receive all such Rents now or hereafter, including during any period of redemption,
accruing with respect to the Property. At the request of the Beneficiary or such Receiver, the
Grantor shall promptly execute, acknowledge, deliver, record, register and file any additional
general assignment of the Leases or specific assignment of any Lease which the Beneficiary or such
Receiver may require from time to time (all in form and substance satisfactory to the Beneficiary
or such Receiver) to effectuate, complete, perfect, continue or preserve the assignments of the
Leases and the Rents thereunder pursuant to Granting Clauses V and VI. Neither the acceptance
hereof nor the exercise of the rights and remedies hereunder nor any other action on the part of
the Beneficiary or any Person exercising the rights of the Beneficiary hereunder shall be construed
to obligate the Beneficiary or any such Person to take any action under or with respect to the
Leases or with respect to the Property, to incur any expense or perform or discharge any duty or
obligation under or with respect to the Leases or with respect to the Property, to appear in or
defend any action or proceeding relating to the Leases or the Property, to constitute the
Beneficiary as a Beneficiary in possession (unless the assignee hereunder actually enters and takes
possession of the Property), or to be liable in any way for any injury or damage to person or
property sustained by any Person in or about the Property other than to the extent caused by the
willful misconduct or gross negligence of the Beneficiary or any Person exercising the rights of
the Beneficiary hereunder.
(b) The Grantor shall have a license granted hereby to collect and receive all Rents under the
Leases and apply the same subject to the provisions of the Secured Agreements, such license to be
terminable by the Beneficiary as provided in Section 5.07(c).
(c) When an Event of Default has occurred and is continuing, the Beneficiary or a Receiver
appointed pursuant to Section 5.02(a)(iv) (whichever is the Person exercising the rights under this
Section) shall have the right to terminate the license granted under Section 5.07(b) by notice to
the Grantor and to exercise the rights and remedies provided under Section 5.07(a), under Section
5.02(a)(v) and (vi) or under applicable law. Upon demand by the Person exercising the rights under
this Section, the Grantor shall promptly pay to such Person all security deposits under the Leases
and all Rents thereunder allocable to any period after such demand. Subject to Section 5.02(a)(v)
and (vi) and any
F-25
applicable requirement of law, any Rents received hereunder by such Person shall be promptly
paid to the Beneficiary, and any Rents received hereunder by the Beneficiary shall be deposited in
the Collateral Proceeds Account, to be held, applied and disbursed as provided in the Security
Agreement, provided that, subject to Section 5.02(a)(v) and (vi) and any applicable requirement of
law, any security deposits actually received by such Person shall be promptly paid to the
Beneficiary, and any security deposits actually received by the Beneficiary shall be held, applied
and disbursed as provided in the applicable Leases and applicable law.
(d) Nothing herein shall be construed to be an assumption by the Person exercising the rights
under this Section, or otherwise to make such Person liable for the performance, of any of the
obligations of the Grantor under the Leases,
provided
that such Person shall be accountable as
provided in Section 5.07(c) for any Rents or security deposits actually received by such Person.
Section 5.08
.
Dealing with the Trust Property
. The Beneficiary shall have the right, subject
to Section 7.01 and upon the delivery by the Grantor or the Borrower of an Opinion of Counsel or
officers certificate in form and substance reasonably satisfactory to the Beneficiary, to, in its
sole and reasonable discretion (a) release any portion of the Trust Property; (ii) consent to the
granting of any Permitted Lien affecting any portion of the Property, (iii) subordinate the Lien of
this Deed of Trust to any Permitted Lien, (iv) grant non-disturbance protection to a tenant under a
lease constituting a Permitted Lien, and (v) to otherwise deal with the Trust Property.
Section 5.09
.
Sales
.
Right of Entry
. The Beneficiary and the representatives of the
Beneficiary shall have the right[, subject to any applicable U.S. Government regulations and any
Legal Requirements in effect at the time in the nature of security regulations pertaining to the
Grantors secure or classified activities at the Property]
7
, (a) without notice, when an
Event of Default has occurred and is continuing, (b) with simultaneous notice, if any payment or
performance is necessary in the reasonable opinion of the Beneficiary to preserve the Beneficiarys
rights under this Deed of Trust or with respect to the Trust Property, or (c) after reasonable
notice, in all other cases, to enter upon the Property at reasonable times, and with reasonable
frequency, to inspect the Trust Property or, subject to the provisions hereof, to exercise any
right, power or remedy of the Beneficiary hereunder,
provided
that any Person so entering the
Property shall not unreasonably interfere with the ordinary conduct of the Grantors business, and
provided further
that no such entry on the Property, for the purpose of performing obligations
under Section 5.10 or for any other purpose, shall be construed to be (i) possession of the
Property by such Person or to constitute such Person as a beneficiary in possession, unless such
Person exercises its right to take possession of the Property under Section 5.02(a)(v), or
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Insert bracketed language for Newport News
Deed of Trust.
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(ii) a cure of any Default or waiver of any Default or Secured Obligation. The expense of any
inspection pursuant to clause (c) above shall be borne by the Beneficiary unless an Event of
Default shall have occurred and be continuing at the time of such inspection, in which case the
Grantor shall pay, or reimburse the Beneficiary for, such expense.
Section 5.10
.
Right to Perform Obligations
. If the Grantor fails to pay any Imposition or
premium under and Insurance Policy or perform any obligation to remove any Lien other than
Permitted Liens, after the expiration of any applicable grace period, the Beneficiary and the
representatives of the Beneficiary shall have the right, to pay or perform such obligation,
provided
that the Grantor is not contesting payment or performance in accordance with the terms
hereof and
further provided
that no such payment or performance shall be construed to be a cure of
any Default or waiver of any Default or Secured Obligation. The Grantor shall reimburse the
Beneficiary on demand for the reasonable costs of performing any such obligations and any amounts
not paid on demand shall bear interest, payable on demand, for each day until paid at the
Post-Default Rate for such day.
Section 5.11
.
Concerning the Beneficiary
.
(a) The provisions of Section 8 of the Credit Agreement and Section 19 of the Security
Agreement shall inure to the benefit of the Beneficiary in respect of this Deed of Trust and shall
be binding upon the parties to the Credit Agreement and the other Secured Agreements in such
respect. In furtherance and not in derogation of the rights, privileges and immunities of the
Beneficiary therein set forth:
(i) The Beneficiary is authorized to take all such action as is provided to be taken
by it as Beneficiary hereunder and all other action incidental thereto.
(ii) The Beneficiary shall not be responsible for the existence, genuineness or value
of any of the Trust Property or for the validity, perfection, priority or enforceability
of the Lien of this Deed of Trust on any of the Trust Property, whether impaired by
operation of law or by reason of any action or omission to act on its part hereunder. The
Beneficiary shall have no duty to ascertain or inquire as to the performance or observance
of any of the terms of this Deed of Trust by the Grantor.
(b) At any time or times, in order to comply with any Legal Requirement in any jurisdiction,
the Beneficiary may appoint another bank or trust company or one or more other Persons, either to
act as co-agent or co-agents, jointly with the Beneficiary, or to act as separate agent or agents
on behalf of the Secured Parties with such power and authority as may be necessary for the
effectual operation of the provisions hereof and may be specified in the instrument of appointment
(which may, in the discretion of the Beneficiary, include provisions for the protection of such
co-agent or separate agent similar to
F-27
the provisions of this Section 5.11). References to the Beneficiary in Section 5.12 shall be
deemed to include any co-agent or separate agent appointed pursuant to this Section 5.11.
ARTICLE 6
Security Agreement And Fixture Filing
Section 6.01
. Security Agreement.
To the extent that the Trust Property constitutes or
includes tangible or intangible Collateral (as defined in the Security Agreement), including
equipment (as defined in the UCC), goods (as defined in the UCC) and other items of personal
property which are or are to become fixtures under applicable law (
Article 9 Collateral
), the
Grantor hereby grants to the Beneficiary a security interest therein and this Deed of Trust shall
also be construed as a pledge and a security agreement under the UCC. Following the occurrence and
during the continuance of an Event of Default, the Beneficiary shall be entitled to exercise with
respect to Article 9 Collateral all remedies available under the Security Agreement, the UCC and
all other remedies available under applicable law. Without limiting the foregoing, upon an Event
of Default, any Article 9 Collateral may, at the Beneficiarys option and, except as otherwise
required by applicable law, without the giving of notice, (i) be sold hereunder, (ii) be sold
pursuant to the UCC or (iii) be dealt with by the Beneficiary in any other manner permitted under
applicable law. The Beneficiary may require the Grantor, after an Event of Default has occurred
and is continuing to assemble any Article 9 Collateral and make it available to the Beneficiary at
a place to be designated by the Beneficiary. Following the occurrence and during the continuance
of an Event of Default, the Beneficiary shall be the attorney-in-fact of the Grantor with respect
to any and all matters pertaining to Article 9 Collateral with full power and authority to give
instructions with respect to the collection and remittance of payments, to endorse checks, to
enforce the rights and remedies of the Grantor and to execute on behalf of the Grantor and in
Grantors name any instruction, agreement or other writing required therefor. The Grantor
acknowledges and agrees that a disposition of Article 9 Collateral in accordance with the
Beneficiarys rights and remedies in respect of the Property under the Security Agreement and as
heretofore provided is a commercially reasonable disposition thereof. Notwithstanding the
foregoing, to the extent that the Trust Property includes Article 9 Collateral covered by the
Security Agreement the provisions of the Security Agreement shall govern with respect to such
Article 9 Collateral.
Section 6.02
.
Fixture Filing
. To the extent that the Trust Property includes equipment,
goods or other items of personal property which are or are to become Fixtures (as defined in the
UCC) under applicable law, and to the extent permitted under applicable law, the recording of this
Deed of Trust in the real estate records in the county in which the Trust Property is located shall
also operate from the time of filing as a fixture filing with respect to such Trust
F-28
Property pursuant to the terms of Sections 9-313 and 9-502
8
of the UCC [as enacted
by Virginia Code Sections 8.9A-313 and 8.9A-502]. This filing remains in effect as a fixture
filing until this Deed of Trust is released or satisfied or its effectiveness otherwise terminates
as to the Trust Property. In that regard, the following information is applicable for the purpose
of such fixture filing, to wit:
(a) Name and address of the debtor:
[Northrop Grumman Shipbuilding, Inc.]
c/o Huntington Ingalls Industries, Inc.
[4101 Washington Avenue
Newport News, Virginia 23607]
(b) Name and address of the secured party:
JPMorgan Chase Bank, N.A., as Collateral Agent
1111 Fannin, 8
th
Floor
Houston, Texas 77002
(c) This instrument covers goods or items of personal property which are or are to become
fixtures upon the Property.
(d) The name of the record owner of the real estate on which such fixtures are or are to be
located is Grantor.
(e) The organizational identification number of the Grantor is 54-0318880.
ARTICLE 7
Miscellaneous
Section 7.01
.
Release of Trust Property
.
(a) This Deed of Trust shall cease, terminate and thereafter be of no further force or effect
(except as provided in Section 4.03) when any or all of the following may occur (i) when all of the
Release Conditions have been satisfied, (ii) if the Grantors Secured Guarantee is released
pursuant to Section 2(c) of the Security Agreement, or (iii) during a Collateral Suspension Period
pursuant to Section 9.16(a) of the Credit Agreement. Notwithstanding the foregoing, if, after the
termination of the Lien of this Deed of Trust in accordance with clause (iii), the Collateral
Reversion Date shall occur, the Grantor shall cause a Deed of Trust in the form of this Deed of
Trust to be recorded in order to reinstate the Lien.
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(b) At any time and from time to time before the Transaction Liens granted by the Grantor
terminate, the Beneficiary shall, in connection with a Transfer or other disposition on permitted
by the Credit Agreement or any other Secured Agreement, and may, at the written request of the
Borrower, release any Collateral (subject to the Beneficiarys receipt of any consent by the
Secured Parties).
(c) Upon any termination of a Transaction Lien, release of Trust Property or any termination
pursuant to Section 7.01(a), the Beneficiary will, at the expense of the Grantor, execute and
deliver to the Grantor such documents as the Grantor shall reasonably request to evidence the
termination of the Transaction Lien or the release of the Trust Property, as the case may be.
(d) Upon any termination of a Transaction Lien or release of Collateral, the Collateral Agent
will, at the expense of the relevant Grantor, execute and deliver to such Grantor such documents as
such Grantor shall reasonably request to evidence the termination of such Transaction Lien or the
release of such Collateral, as the case may be.
Section 7.02
.
Notices.
All notices, approvals, requests, demands and other communications
hereunder shall be given in accordance with Section 9.01 of the Credit Agreement.
Section 7.03
.
Amendments In Writing.
No provision of this Deed of Trust shall be modified,
waived or terminated, and no consent to any departure by the Grantor from any provision of this
Deed of Trust shall be effective, unless the same shall be by an instrument in writing, signed by
the Grantor and the Beneficiary in accordance with Section 9.02 of the Credit Agreement with any
consent of Secured Parties required under any Secured Agreement. Any such waiver or consent shall
be effective only in the specific instance and for the specific purpose for which given.
Section 7.04
.
Severability.
All rights, powers and remedies provided in this Deed of Trust
may be exercised only to the extent that the exercise thereof does not violate applicable law, and
all the provisions of this Deed of Trust are intended to be subject to all mandatory provisions of
applicable law and to be limited to the extent necessary so that they will not render this Deed of
Trust illegal, invalid, unenforceable or not entitled to be recorded, registered or filed under
applicable law. If any provision of this Deed of Trust or the application thereof to any Person or
circumstance shall, to any extent, be illegal, invalid or unenforceable, or cause this Deed of
Trust not to be entitled to be recorded, registered or filed, the remaining provisions of this Deed
of Trust or the application of such provision to other Persons or circumstances shall not be
affected thereby, and each provision of this Deed of Trust shall be valid and be enforced to the
fullest extent permitted under applicable law.
Section 7.05
.
Binding Effect.
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(a) The provisions of this Deed of Trust shall be binding upon the Grantor and its successors
and assigns and inure to the benefit of the Trustee and Beneficiary and their respective successors
and/or assigns.
(b) To the fullest extent permitted under applicable law, the provisions of this Deed of Trust
binding upon the Grantor shall be deemed to be covenants which run with the land.
Section 7.06
.
Governing Law.
THIS DEED OF TRUST SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED WITHOUT REGARD TO SUCH
STATES CONFLICT OF LAW PRINCIPLES.
Section 7.07
.
Trustee.
(a) The Grantor hereby irrevocably appoints the Trustee to act in that capacity hereunder and
the Trustee hereby accepts such appointment. The Grantor hereby irrevocably ratifies and confirms
all acts which the Trustee shall lawfully take in accordance with the provisions hereof.
(b) The Trustee may, at its option, resign as trustee hereunder by notice given to the
Beneficiary, and such resignation shall be effective on the earlier to occur of (i) the date which
is 30 days after the date on which the Trustee gives such notice to the Beneficiary or (ii) the
date on which a successor trustee is appointed by the Beneficiary and accepts such appointment.
(c) The Beneficiary may, at its option, with or without cause or notice, remove the Trustee,
appoint a successor trustee or appoint an additional trustee or trustees (including a separate
trustee for each jurisdiction in which the Trust Property is located) hereunder by an instrument in
writing executed and acknowledged by the Beneficiary and accepted by such successor or additional
trustee and recorded, registered or filed in the real estate records of the jurisdiction in which
the Trust Property affected by such instrument is located; and, thereupon, without further act,
deed or conveyance, such substitute or additional trustee shall be fully vested with all estate,
right, title and interest of its predecessor or co-trustee in, to, under or derived from the Trust
Property and all rights, powers, privileges and obligations of such predecessor or co-trustee, with
the same effect as if such successor or additional trustee had originally been named as trustee or
co-trustee hereunder. The execution, acknowledgment and recording, registration or filing of such
an instrument shall be conclusive evidence against the Grantor and all other Persons of the proper
removal of the Trustee and substitution or addition of the successor or additional trustee; and, if
the Beneficiary or such successor or additional trustee is a corporation, the execution and
acknowledgment by an officer of such corporation shall be conclusive evidence against all other
Persons of the due authorization, execution and delivery thereof by such corporation.
F-31
(d) Notwithstanding anything herein to the contrary, the Trustee shall not exercise or waive
the exercise of any of its rights, powers or remedies hereunder or otherwise act or refrain from
acting hereunder unless directed to do so by the Beneficiary, and the Trustee shall exercise or
waive the exercise of any of its rights, powers or remedies hereunder and otherwise act or refrain
from acting when and in the manner directed by the Beneficiary,
provided
that the Trustee
(i) shall not be required to follow any direction of the Beneficiary if the Trustee has been
advised by counsel that such action would violate applicable law, (ii) shall not be required to
expend or risk its own funds or otherwise incur any financial liability in connection with such
action if it has grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not assured to it, and (iii) shall be entitled to exercise its rights
under subsection (e) of this Section without such direction by the Beneficiary.
(e) The Trustee shall be entitled to receive, and the Grantor shall pay, reasonable and
customary compensation to the Trustee for its services rendered hereunder after any Default and
reimbursement to the Trustee for its expenses (including reasonable attorneys fees and expenses)
(to the extent supported by back-up invoices and documentation) in connection herewith or the
exercise of any right, power or remedy hereunder.
(f) The Trustee shall not be liable with respect to any act taken or omitted by it in good
faith in accordance with any direction of the Beneficiary. Except for willful misconduct or gross
negligence, the Trustee shall not be liable (i) in acting upon any direction, demand, request,
notice, statement or other document believed by it in good faith to be genuine and delivered by the
Person empowered to do so, (ii) for any error in judgment or mistake of fact or law made in good
faith, or (iii) for any action taken or omitted by it in accordance with the provisions of this
Deed of Trust. The Trustee shall not be responsible to see to the recording, registration or
filing of this Deed of Trust or any financing statement relating hereto in any jurisdiction or for
the payment of any fees, charges or taxes in connection therewith. No co-trustee hereunder shall
be liable for any act or omission of any other co-trustee.
(g) All moneys received by the Trustee hereunder (other than amounts payable to the Trustee
pursuant to subsection (d) of this Section) shall be held by the Trustee in trust for the purposes
for which such moneys were received; and, except as provided herein or under mandatory provisions
of applicable law, the Trustee need not segregate such moneys from any other moneys and shall have
no liability to pay interest thereon, except such interest as it may actually earn thereon.
Section 7.08
.
Local Law Provisions
. THE PROVISIONS SET FORTH IN APPENDIX A HERETO ARE
INCORPORATED HEREIN BY REFERENCE AS IF FULLY SET FORTH HEREIN AND NOT IN AN APPENDIX.
F-32
Section 7.09
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Multisite Real Estate Transaction.
The Grantor acknowledges that this Deed of
Trust is one of a number of mortgages, deeds of trust and other security documents (
Other Deeds of
Trust
) that secure the Secured Obligations. Grantor agrees that the lien of this Deed of Trust
shall be absolute and unconditional and shall not in any manner be affected or impaired by any acts
or omissions whatsoever of Beneficiary, and without limiting the generality of the foregoing, the
lien hereof shall not be impaired by any acceptance by the Beneficiary of any security for or
guarantees of the Secured Obligations, or by any failure, neglect or omission on the part of
Beneficiary to realize upon or protect any Secured Obligation or any collateral security therefor
including the Other Deeds of Trust. The lien hereof shall not in any manner be impaired or
affected by any release (except as to the property released), sale, pledge, surrender, compromise,
settlement, renewal, extension, indulgence, alteration, changing, modification or disposition of
any of the Secured Obligations or of any of the collateral security therefor, including the Other
Deeds of Trust or of any guarantee thereof, and, to the fullest extent permitted by applicable law,
Beneficiary may at its discretion foreclose, exercise any power of sale, or exercise any other
remedy available to it under any or all of the Other Deeds of Trust without first exercising or
enforcing any of its rights and remedies hereunder. Such exercise of Beneficiarys rights and
remedies under any or all of the Other Deeds of Trust shall not in any manner impair the
indebtedness hereby secured or the lien of this Deed of Trust and any exercise of the rights or
remedies of Beneficiary hereunder shall not impair the lien of any of the Other Deeds of Trust or
any of Deed of Trusts rights and remedies thereunder. To the fullest extent permitted by
applicable law, Grantor specifically consents and agrees the Beneficiary may exercise its rights
and remedies hereunder and under the Other Deeds of Trust separately or concurrently and in any
order that it may deem appropriate and waives any rights of subrogation.
Section 7.10
. Subrogation to Rights of Prior Lienholder.
If, and to the extent that, the
proceeds of the Loan are used to pay, satisfy or discharge any obligation of the Borrower for the
payment of money that is secured by a pre-existing mortgage, deed of trust or other lien
encumbering the Trust Property (a prior lien), such loan proceeds shall be deemed to have been
advanced by the Lenders at the Borrowers request, and the Beneficiary, on behalf of the Lenders,
shall automatically, and without further action on its part, be subrogated to the rights, including
lien priority, of the owner or holder of the obligation secured by the prior lien, whether or not
the prior lien is released.
Section 7.11
.
Waiver of Jury Trial
. GRANTOR AND BENEFICIARY EXPRESSLY AND VOLUNTARILY WAIVE
ANY AND ALL RIGHTS, WHETHER ARISING UNDER THE UNITED STATES OR ANY STATE CONSTITUTION, ANY RULES OF
CIVIL PROCEDURE, COMMON LAW OR OTHERWISE, TO DEMAND A TRIAL BY JURY IN ANY ACTION, LAWSUIT,
PROCEEDING, COUNTERCLAIM OR ANY OTHER LITIGATION PROCEDURE BASED UPON, OR ARISING OUT OF, THIS DEED
OF TRUST OR THE SECURITY DOCUMENTS, ANY AGREEMENTS ARISING UNDER OR RELATING TO THIS DEED OF TRUST,
ANY
F-33
COLLATERAL SECURING THE OBLIGATIONS, OR THE DEALINGS OR RELATIONSHIPS BETWEEN OR AMONG GRANTOR
AND BENEFICIARY, OR ANY OF THEM. NEITHER GRANTOR NOR BENEFICIARY, INCLUDING ANY ASSIGNEE OR
SUCCESSOR OF GRANTOR OR BENEFICIARY SHALL SEEK A JURY TRIAL IN ANY SUCH ACTION. NEITHER GRANTOR
NOR BENEFICIARY SHALL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION WHEN A JURY TRIAL
CANNOT BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER
GRANTOR NOR BENEFICIARY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO THE OTHER THAT THE PROVISIONS
OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
F-34
IN WITNESS WHEREOF
, this Deed of Trust has been executed by the Grantor hereto as of the day
first set forth above.
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Grantor:
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[NORTHROP GRUMMAN SHIPBUILDING, INC. (f/k/a NEWPORT NEWS SHIPBUILDING AND
DRY DOCK COMPANY)]., a [Virginia] [corporation]
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By:
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Name:
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Title:
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9
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STATE OF
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) ss
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COUNTY OF
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Before me, the undersigned, a Notary Public, on this day personally appeared
__________________, known by me to be the person and officer whose name is subscribed to the
foregoing instrument, and acknowledged to me that the same was the act of the said Northrop Grumman
Shipbuilding Inc., a Virginia corporation, and that (s)he has executed the same as the act of such
corporation for the purposes and consideration therein expressed, and in the capacity therein
stated.
Given under my hand and seal of office this ___ day of ____________, 2011.
_______________________
Notary Public, State of _______________
_________________________
Printed Name of Notary
(Seal or Stamp)
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9
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Local counsel: please provide notary form for
your jurisidiction.
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Exhibit A
LEGAL DESCRIPTION
Appendix A
to Deed of Trust
Local Law Provisions
10
[MS:
1. Section [5.05] (Sales) of the Deed of Trust is supplemented as follows:
Except as otherwise provided herein, to the fullest extent permitted under applicable law, at
the election of the Beneficiary, the following provisions shall apply to any sale of the Trust
Property hereunder, whether made pursuant to the power of sale hereunder, any judicial proceeding
or any judgment or decree of foreclosure or sale or otherwise: In the event the Beneficiary directs
the Trustee to sell the Trust Property, or any part thereof, the Trustee shall first give notice of
the time, place and terms of sale by publication of a notice of sale for three consecutive weeks
preceding the sale and by posting one notice at the courthouse of the county in which any land
included in the Trust Property is located, as required by Section 89-1-55 of the Mississippi Code
of 1972, as amended. If the Trust Property is situated in two or more counties or in two judicial
districts of the same county or different counties, the Trustee shall have full power to select in
which county or judicial district the advertisement and sale of all or any part of the Trust
Property shall be made. The Trustee shall have authority to fix the day, hour, terms and place of
sale. Grantor waives any provision of law which restricts or limits the right of the Trustee to
offer more than 160 acres at one time. In the event any portion of the Trust Property is subject
to the provisions of the UCC, the Trustee shall have the same authority, rights and obligation with
respect to such property as to all other Trust Property or, the Beneficiary at its option may
proceed directly with respect to the Trust Property subject to the provisions of the UCC. In the
event the Beneficiary directs the Trustee to sell that portion of the Trust Property which is
subject to the UCC, the Trustee may elect to sell such property separately subject to the
provisions of the UCC, or the Trustee may sell all Trust Property pursuant to the provisions of
this Deed of Trust relating to sales of real property. Ten (10) days prior written notice will be
deemed commercially reasonable notice for sales held by Trustee pursuant to the UCC. The Trustee
may sell real and personal property separately and in any order or lots or coordinate the sales in
any manner deemed advisable by the Beneficiary. If the Beneficiary is proceeding to sell property
subject to the UCC, any sale held by
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10
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Local counsel to comment and provide
different or additional riders, as necessary or recommended.
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Beneficiary may be held in conjunction with or separate from sales held by Trustee.
2. The following sentence shall be added to Section [7.01(c)] (Trustee): The right to appoint
a successor or additional trustee shall be a continuing one and shall not be exhausted by one or
more appointments.]
[VA:
1.
Notices
. All notices and communications delivered shall be effective in accordance
with the provisions of this Deed of Trust, provided, that service of a notice required by § 1-206
of the Virginia Code, as amended, shall be considered complete when the requirements of that
statute are met.
2.
Acceleration Upon Transfer
. If any sale, conveyance, alienation, mortgage,
encumbrance, pledge or transfer of the Trust Property prohibited under the Secured Agreements
occurs without Beneficiarys consent, then at Beneficiarys sole option, Beneficiary may, by
written notice to Grantor, declare the Secured Obligations immediately due and payable. Without
limiting the generality of the foregoing, the following provision is set forth herein in order to
comply with the requirements of § 6.2-417 of the Code of Virginia, if such requirements are
applicable to the Trust Property: NOTICE THE DEBT SECURED HEREBY IS SUBJECT TO CALL IN FULL OR
THE TERMS THEREOF BEING MODIFIED IN THE EVENT OF SALE OR CONVEYANCE OF THE PROPERTY CONVEYED.
3.
Rights and Remedies of Trustee
. Trustee may take possession of and sell the Trust
Property, or any part thereof requested by Beneficiary to be sold, and in connection therewith
Grantor hereby authorizes and empowers Trustee to take possession of and sell (or in case of the
default of any purchaser to resell) the Trust Property, or any part thereof, all in accordance with
the laws or rules of court of the Commonwealth of Virginia relating to deeds of trust, including
any amendments thereof, or additions thereto, which do not materially change or impair the remedy.
In connection with any foreclosure, Beneficiary and/or Trustee may (y) procure such title reports,
surveys, tax histories and appraisals as they deem necessary, and (z) make such repairs and
additions to the Trust Property as they deem advisable, all of which shall constitute Expenses
(hereinafter defined). In the case of any sale under this Deed of Trust, by virtue of judicial
proceedings or otherwise, the Trust Property may be sold as an entirety or in parcels, by one sale
or by several sales, and any fixtures or other Trust Property encumbered by this Deed of Trust may
be sold at the same sale as the Trust Property or in one or more sales, as may be deemed by
Trustees to be appropriate and without regard to any right of Grantor or any other person to the
marshalling of assets, for cash, on credit or for other property, for immediate or future delivery,
and for such price or prices and on such terms having first given such notice prior to the sale of
such time, place and terms by publication in at least one newspaper published or having general
circulation in the city or county
in which the Trust Property is located or at such time or times as may be required by the laws
of the Commonwealth of Virginia or rule of court of the Commonwealth of Virginia, and such other
times and by such other methods, if any, as Trustee, in its sole discretion, shall deem
advantageous and proper. Expenses means all costs and expenses of any nature whatsoever incurred
at any time and from time to time (whether before or after an Event of Default) by Beneficiary or
Trustee in exercising or enforcing any rights, powers and remedies provided in this Deed of Trust
or the Secured Agreements, including, without limitation, attorneys fees, court costs, receivers
fees, management fees and costs incurred in the repair, maintenance and operation of, or taking
possession of, or selling, the Property.
(a) Any sale hereunder may be made at public auction, at such time or times, at such
place or places, and upon such terms and conditions and after such previous public notice
as trustee shall deem appropriate and advantageous and as required by the laws of the
Commonwealth of Virginia. The parties hereto agree that the advertisement required is as
follows: (1) if the advertisement is inserted on a weekly basis, publication once a week
for two (2) weeks shall be sufficient; and (2) if the advertisement is inserted on a daily
basis, publication once a day for three (3) days, which may be consecutive days, shall be
sufficient.
(b) Upon the terms of such sale being complied with, Trustee shall convey to, and at
the cost of, the purchaser or purchasers the interest of Grantor in the Property so sold,
free and discharged of and from all estate, title or interest of Grantor, at law or in
equity, such purchaser or purchasers being hereby discharged from all liability to see to
the application of the purchase money.
(c) Beneficiary and any affiliate thereof may be a purchaser of the Trust Property or
of any part thereof or of any interest therein at any public sale thereof, whether
pursuant to foreclosure or power of sale or otherwise hereunder, without forfeiting its
right to collect any deficiency from Grantor; and Beneficiary may apply upon the purchase
price the Obligations secured hereby owing to Beneficiary. Beneficiary, upon any such
purchase shall acquire good title to the properties so purchased, free of the lien of this
Deed of Trust and all rights of redemption in Grantor and free of all liens and
encumbrances subordinate to this Deed of Trust.
4.
Statutory Conditions
. This Deed of Trust is made under and pursuant to the
provisions of the Code of Virginia, Sections 55-58.1, 55-58.2, 55-59, 55-59.1 through 55-59.4 and
55-60, as amended, and shall be construed to impose and confer upon the parties hereto and
Beneficiary all the rights, duties and obligations prescribed by said Sections 55-58.1, 55-58.2
55-59, 55-59.1 through 55-59.4 and 55-60, as amended, except as herein otherwise restricted,
expanded or changed, including without limitation the following rights, duties and obligations
described in short form:
(a) All exemptions are hereby waived.
(b) Subject to all upon default.
(c) Renewal, extension, or reinstatement permitted.
(d) Substitution of trustees collectively or of any of them individually by
the beneficiary is permitted for any reason whatsoever, and any number of times
without exhaustion of the right to do so.
(e) Advertisement required, as set forth in paragraph 4(a) of this Appendix
A in any newspaper of general circulation in the county or city in which the
Property is situated.
(f) Any Trustee may act.
(g) The Trustee may require a deposit in the amount of two percent (2%) of
the unpaid principal obligations then secured hereby or Fifty Thousand Dollars
($50,000.00), whichever is greater, to accompany each bid at foreclosure sale or
sale in lieu thereof.
5.
Application of Foreclosure Sale Proceeds
. The proceeds of such sale or sales of
the Trust Property under this Deed of Trust, whether under the assent to a decree, the power of
sale, or by equitable foreclosure, shall be held by Trustee and applied in accordance with Virginia
law. In the event that the proceeds of any such sale or sales, together with all other monies at
the time held by Trustees under this Deed of Trust, are insufficient to pay the foregoing costs and
expenses, Beneficiary may, at its sole option, advance such sums as Beneficiary in its sole and
absolute discretion shall determine for the purpose of paying all or any part of such costs and
expenses, and all such sums so advanced shall be (A) lien against the Trust Property, (B) added to
the amount due under the Secured Obligations and secured by this Deed of Trust, and (C) payable on
demand with interest at the rate of interest applicable to the principal balance of the Secured
Obligation, from and including the date each such advance is made. In any event, Grantor shall be
liable to Beneficiary for any deficiency to the full extent permissible under applicable law.
Grantor shall pay to Trustee a reasonable commission if the Trust Property is advertised for sale
under the provisions of this Deed of Trust and is not sold, and the Grantor shall also pay or
reimburse Trustees for all of Trustees expenses and disbursements hereunder (to the extent
supported by back-up invoices and documentation) regardless of whether the Trust Property is sold
(the Trustees Commission).
[6.
Execution Under Seal
. Trustee agrees that this Deed of Trust is executed under
seal. The designation (SEAL) on this Deed of Trust shall be as effective as the affixing of a
seal physically to this Deed of Trust.]
7.
Credit Line Deed of Trust
. THIS IS A CREDIT LINE DEED OF TRUST WITHIN THE MEANING
OF Section 55-58.2 of the Code of Virginia (1950), as amended. For purposes of and to the extent
required by such Section, (i) the name of the agent for the noteholders secured by this Deed of
Trust is [____________________] as Collateral Agent, (ii) the address at which communications may
be mailed or delivered to such noteholder is [______________________], and (iii) the maximum
aggregate amount of principal to be secured at any one time is $_______________.
8. Pursuant to Va. Code § 55-59(7), Beneficiary may inform the Trustee of an event of default
as necessary to empower the Trustee to sell the Trust Property.]
EXHIBIT
G
FORM OF COMPLIANCE CERTIFICATE
Reference is made to that certain Credit Agreement dated as of March [ ], 2011 (as amended,
restated, extended, supplemented or otherwise modified in writing from time to time, the
Credit Agreement
) among Huntington Ingalls Industries, Inc. (the
Borrower
), the
Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Issuing Bank and
Swingline Lender and Credit Suisse AG, as Swingline Lender. Under otherwise defined herein,
capitalized terms used herein have the meanings attributed thereto in the Credit Agreement.
The undersigned Financial Officer of the Borrower hereby certifies to the Administrative Agent
on behalf of the Borrower as of the date hereof as follows:
1.
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[Attached hereto as
Annex
A is the audited consolidated balance sheet and related
statements of operations, stockholders equity and cash flows of the Borrower and its
Subsidiaries as of the end of and for [FISCAL 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. Also attached are 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.]
1
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2.
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[Attached hereto as
Annex A
is the consolidated balance sheet and related statements
of operations, stockholders equity and cash flows of the Borrower and its Subsidiaries as of
the end of and for [FISCAL QUARTER] and the portion of the fiscal year through the end of such
quarter, 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. These 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, subject to normal year-end audit
adjustments and the absence of footnotes, together with a customary management discussion and
analysis provision. Also attached are 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.]
2
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1
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To be included if accompanying annual
financial statements only.
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2
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To be included if accompanying quarterly
financial statements only.
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G-1
3.
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[Attached hereto as
Annex B
is a detailed consolidated budget for [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).]
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4.
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[Attached hereto as
Annex C
is a certificate of the accounting firm that reported on
the financial statements in Annex A stating whether they 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 of the Credit Agreement (which certificate may be limited to the extent
required by accounting rules or guidelines).]
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5.
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No Default or Event of Default has occurred. [If unable to provide the foregoing
certification, provide here a list of each such Default or Event of Default, specifying the
nature and extent thereof and any action taken or proposed to be taken with respect thereto.]
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6.
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Attached hereto as
Schedule 1
are the reasonably detailed calculations demonstrating
compliance with Section 6.10 of the Credit Agreement.
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7.
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Attached hereto as
Schedule 2
are the reasonably detailed calculations demonstrating
compliance with Section 6.11 of the Credit Agreement.
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8.
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Attached hereto as
Schedule 3
are the reasonably detailed calculations demonstrating
compliance with Section 6.12 of the Credit Agreement.
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9.
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[Attached hereto as
Schedule 4
are the reasonably detailed calculations demonstrating
Excess Cash Flow.]
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10.
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[Attached hereto as Schedule 5 are the reasonably detailed calculations demonstrating Excess
Cash Withheld Amount.]
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11.
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No change in GAAP or in the application thereof has occurred since December 31, 2010. [If
unable to provide the foregoing certification, provide here a list of each such change in GAAP
or in the application thereof, specifying the effect of such change on the financial
statements in Annex A.]
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[Remainder of page intentionally blank]
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3
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To be included if accompanying annual
financial statements only.
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4
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To be included if accompanying annual
financial statements only.
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5
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To be included if accompanying annual
financial statements only.
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6
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To be included if accompanying annual
financial statements only.
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G-2
IN WITNESS WHEREOF, the undersigned has executed this Compliance Certificate for and on behalf
of Huntington Ingalls Industries, Inc. and has caused this certificate to be delivered this [ ]
day of [ ], 201[ ].
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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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G-3
ANNEX A
to the Compliance Certificate
FINANCIAL STATEMENTS
[See attached]
G-4
ANNEX B
to the Compliance Certificate
DETAILED CONSOLIDATED BUDGET
[See attached]
G-5
ANNEX C
to the Compliance Certificate
CERTIFICATE OF ACCOUNTING FIRM
[See attached]
G-6
SCHEDULE 1
to Compliance Certificate
Capital Expenditures
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(a)
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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:
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$__________
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(b)
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Capital Lease Obligations incurred by the Borrower and its
consolidated Restricted Subsidiaries during such period:
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$__________
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(c)
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any such expenditure made to restore, replace or rebuild property
to the condition of such property (or its reasonable equivalent)
immediately prior to any damage, loss, destruction or condemnation of
such property, to the extent such expenditure is made with insurance
proceeds, condemnation awards or damage recovery proceeds relating to
any such damage, loss, destruction or condemnation:
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$__________
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II.
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Amount of Total attributed to Capital Expenditures made with the
portion, if any, of the Available Retained Basket Amount pursuant to
Section 6.10(i) of the Credit Agreement:
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$__________
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III.
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Amount of Total attributed to the amount permitted pursuant to the
table listed in Section 6.10(ii) of the Credit Agreement:
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$__________
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IV.
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Amount of Total attributed to CapEx Rollover Amount, if any
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$__________
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Such amount equals the unused Specified
Permitted CapEx Amount for the immediately preceding fiscal year. CapEx
Rollover Amount may be used in any fiscal year beginning with the fiscal year
ended December 31, 2012 and only after the Specified Permitted CapEx Amount for
such fiscal year has been fully used in such fiscal year.
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G-7
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V.
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Amount of Total attributed to CapEx Pull Forward Amount
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$__________
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8
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This amount not to exceed 50% of the amount
of the Specified Permitted CapEx Amount for the immediately succeeding year.
This amount shall reduce on a dollar-for-dollar basis the Specified Permitted
CapEx Amount for the immediately succeeding year.
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G-8
SCHEDULE 2
to Compliance Certificate
Interest Coverage Ratio (Consolidated EBITDA
÷
Consolidated Interest Expense)
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I.
|
|
Consolidated EBITDA
9
|
|
|
|
|
Consolidated Net Income:
|
|
(i)
|
|
net income or loss of the Borrower and the
Restricted Subsidiaries determined on a
consolidated basis in accordance with GAAP:
|
|
$__________
|
|
(ii)
|
|
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
its charter or any agreement, instrument,
judgment, decree, statute, rule or governmental
regulation applicable to such Restricted
Subsidiary:
|
|
$__________
|
|
(iii)
|
|
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:
|
|
$__________
|
|
|
|
9
|
|
The Consolidated EBITDA of any Acquired
Entity acquired by the Borrower or any Restricted Subsidiary pursuant to a
Permitted Acquisition during any 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). The Consolidated EBITDA of any Person or
line of business sold or otherwise disposed of by the Borrower or any
Restricted Subsidiary during any period 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).
|
G-9
|
(iv)
|
|
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:
|
$
|
|
|
(v)
|
|
any gains attributable to sales of assets
out of the ordinary course of business:
|
$
|
|
|
|
|
|
Consolidated Net Income Total
|
$
|
|
|
(a)
|
|
the sum, without duplication and to the extent deducted in
determining Consolidated Net Income for such period, of
|
|
(i)
|
|
Consolidated Interest Expense
10
:
|
|
(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:
|
$
|
|
|
|
|
10
|
|
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 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.
|
G-10
|
(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:
|
|
$__________
|
|
(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:
|
|
$__________
|
|
|
|
|
Consolidated Interest Expense Total
|
|
$__________
|
|
(ii)
|
|
letters of credit fees (to the extent not
included in Consolidated Interest Expense):
|
|
$__________
|
|
|
(iii)
|
|
consolidated income tax expense:
|
|
$__________
|
|
|
(iv)
|
|
all amounts attributable to depreciation
and amortization:
|
|
$__________
|
|
|
(v)
|
|
any non-cash charges (other than the
write-down of current assets):
|
|
$__________
|
|
|
(vi)
|
|
any extraordinary charges:
|
|
$__________
|
|
|
(vii)
|
|
any Incremental Spin-off Related
Expenses
11
for such
period
12
:
|
|
$__________
|
|
|
(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 the Credit Agreement:
|
|
$__________
|
|
|
|
11
|
|
Incremental costs for procurement of
material and/or services resulting from renegotiation of pre-existing
Intercompany Work Orders on an arms length basis with Northrop Grumman and its
subsidiaries.
|
|
12
|
|
Not to exceed $40,000,000 in the aggregate
over the term of the Credit Agreement or $20,000,000 in any fiscal year.
|
G-11
|
(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)
13
:
|
$
|
|
|
|
(x)
|
|
Transaction Expenses
14
:
|
$
|
|
|
|
|
|
Sub-Total
|
$
|
|
|
(b)
|
|
the sum, without duplication, of:
|
|
(i)
|
|
all cash payments made 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:
|
$
|
|
|
|
(ii)
|
|
to the extent included in determining such
Consolidated Net Income, any extraordinary
gains and all non-cash items of income:
|
$
|
|
|
|
|
|
Sub-Total
|
$
|
|
|
(c)
|
|
unrealized losses/gains in respect of Swap Contracts, all
determined on a consolidated basis in accordance with GAAP:
|
$
|
|
|
|
|
|
Sub-Total
|
$
|
|
|
|
|
13
|
|
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 thereafter,
$25,000,000.
|
|
14
|
|
All legal fees, auditors fees and other fees
or expenses incurred by the Borrower and the Restricted Subsidiaries in
connection with the Transactions (as defined in the Credit Agreement)
(including without limitation, financing fees, financial and other advisory
fees, accounting and consulting fees and legal fees and related costs and
expenses).
|
G-12
|
|
|
Consolidated EBITDA (Consolidated Net Income Total + Sub-Total
for (a) Sub-Total for (b) +/- Sub-Total for (c))
|
$
|
|
|
II.
|
|
Consolidated Interest Expense
|
$
|
|
|
|
Interest Coverage Ratio
(Consolidated EBITDA ÷ Consolidated Interest
Expense)
|
|
__ to 1:00
|
G-13
SCHEDULE 3
to Compliance Certificate
Leverage Ratio (Total Debt ÷ Consolidated EBITDA
15
)
|
(a)
|
|
all obligations of the Borrower and the
Restricted Subsidiaries for borrowed money:
|
|
$__________
|
|
|
(b)
|
|
all obligations of the Borrower and the
Restricted Subsidiaries evidenced by bonds,
debentures, notes or similar instruments:
|
|
$__________
|
|
|
(c)
|
|
all obligations of the Borrower and the
Restricted Subsidiaries under conditional sale or
other title retention agreements relating to property
or assets purchased by such Person:
|
|
$__________
|
|
|
(d)
|
|
all obligations of the Borrower and the
Restricted Subsidiaries 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 the Borrower
and the Restricted Subsidiaries, whether or not the
obligations secured thereby have been assumed (but to
the extent such Lien does not extend to any other
property of the Borrower and the Restricted
Subsidiaries and is otherwise non-recourse against
the Borrower and the Restricted Subsidiaries, limited
to the fair market value of such property):
|
|
$__________
|
|
|
(f)
|
|
all Guarantees by the Borrower and the Restricted
Subsidiaries of Indebtedness of others:
|
|
$__________
|
|
|
(g)
|
|
all Capital Lease Obligations of the Borrower and
the Restricted Subsidiaries:
|
|
$__________
|
|
|
|
15
|
|
For the period of four consecutive fiscal
quarters most recently ended on or prior to such date.
|
G-14
|
(h)
|
|
net obligations of the Borrower and the
Restricted Subsidiaries under any Swap Contracts,
valued at the Agreement Value thereof:
|
|
$__________
|
|
|
(i)
|
|
all obligations of the Borrower and the
Restricted Subsidiaries as an account party in
respect of letters of credit (only to the extent of
any unreimbursed drawings thereunder):
|
|
$__________
|
|
|
(j)
|
|
all obligations of the Borrower and the
Restricted Subsidiaries in respect of bankers
acceptances (only to the extent of any unreimbursed
drawings thereunder):
|
|
$
|
|
|
|
|
Total
|
|
$
|
|
II.
|
|
Consolidated EBITDA
|
|
$
|
|
|
II.
|
|
Leverage Ratio
(Total Debt ÷ Consolidated EBITDA)
|
|
__ to 1:00
|
G-15
SCHEDULE 4
to Compliance Certificate
Excess Cash Flow
|
(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:
|
|
$__________
|
|
|
(vi)
|
|
Consolidated Interest Expense for such period:
|
|
$__________
|
|
|
|
|
Total
|
|
$
|
|
(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, of the Credit Agreement during such fiscal year, in
each case to the extent financed with internally generated funds
and not by utilizing the Available Retained Basket Amount:
|
|
$__________
|
G-16
|
(iv)
|
|
cash or in-kind investments made during such fiscal year
pursuant to Section 6.04(p) or Section 6.04(q) of the Credit
Agreement, and cash fees and expenses paid during such fiscal
year in connection with any Investment permitted under Section
6.04 of the Credit Agreement, in each case to the extent financed
with internally generated funds (other than in the case of any
in-kind investment) and not by 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 of the Credit
Agreement) 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
16
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:
|
|
$__________
|
|
|
(ix)
|
|
Excess Cash Withheld Amount
17
for such fiscal
year:
|
|
$__________
|
|
|
|
|
Total
|
|
$
|
|
|
|
16
|
|
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.
|
|
17
|
|
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.
|
G-17
|
|
|
Excess Cash Flow
(Total for (a) Total for (b))
|
|
$
|
G-18
SCHEDULE 5
to Compliance Certificate
Excess Cash Withheld Amount
[See attached]
G-19
EXHIBIT H
FORM OF CONFIDENTIALITY AGREEMENT
This Confidentiality Agreement, dated as of ________________, is executed by the undersigned in its
capacity as an actual or prospective assignee or participant under that certain Credit Agreement
dated as of March [ ], 2011 (as amended, restated, supplemented or otherwise modified from time to
time, the Credit Agreement) among Huntington Ingalls Industries, Inc., the Lenders from time to
time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, an Issuing Bank and a
Swingline Lender, and Credit Suisse AG, as Swingline Lender, or as an actual or prospective
counterparty (or an advisor thereto) to a swap or derivative transaction relating to the Borrower.
Terms used herein and not defined have the meanings assigned to them in the Credit Agreement.
The documents furnished to Recipient (as defined below)
MAY CONTAIN MATERIAL NON-PUBLIC INFORMATION
concerning the Borrower, its affiliates or any party related thereto (collectively, Borrower
Parties) or securities thereof.
By executing this Confidentiality Agreement
, you and your institution (collectively, you or the
Recipient) agree, for the benefit of the Borrower Parties and the Administrative Agent, to be
bound by the terms of this notice and the undertakings set forth herein.
I. Confidentiality
As used herein: (a) Information means the information that may be provided to you (whether
prepared or communicated by the Administrative Agent or the Loan Parties, their respective advisors
or otherwise) relating to the Loan Parties, any of their respective businesses or securities other
than any such information that is available on a nonconfidential basis prior to disclosure by the
Borrower and (b) Internal Evaluation Material means all memoranda, notes, and other documents and
analyses developed by the Recipient using any Information.
The Recipient agrees to use all Information in accordance with the Recipients compliance policies
and the terms of this Confidentiality Agreement.
The Recipient agrees that upon its becoming a Secured Party (as defined in the Credit Agreement),
the Administrative Agent and/or Borrower will provide syndicate-level information (which may
contain material non-public information) in connection with the Credit Agreement to the credit
contacts identified on your Administrative Questionnaire, which credit contacts shall be your
Representatives (as defined below) for purposes hereof. Such credit contacts shall be able to
receive and use syndicate-level information in accordance with your compliance policies and the
terms of this Confidentiality Agreement.
The Recipient acknowledges that the Borrower considers the Information to include confidential,
sensitive or proprietary information and agrees that it shall maintain the confidentiality of the
Information; provided that (i) it may disclose such information to which the Borrower gives its
prior written consent and (ii) such Information may be disclosed to it, its affiliates and their
respective partners, directors, officers, employees, agents, advisors and other representatives
H-1
(collectively, Representatives) (provided that such Representatives shall be informed by the
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). The Recipient agrees to
be responsible for any breach of this Confidentiality Agreement by its Representatives.
The foregoing confidentiality requirements do not apply to (i) any information that is or becomes
generally available to the public other than by a breach hereof, (ii) any information available to
Recipient on a nonconfidential basis from a source other than the Borrower, the other Loan Parties,
the Administrative Agent, the Lenders or their respective agents, or (iii) any disclosure required
by law, regulation or administrative or other legal process or requested by regulatory or
governmental authorities. The Recipient agrees that it will notify the Borrower and the
Administrative Agent as soon as practical in the event of any disclosure pursuant to the
aforementioned clause (iii) unless such notification shall be prohibited by applicable law or legal
process.
If the Recipient decides not to become an assignee or participant under the Credit Agreement or a
counterparty to any swap or derivative transaction relating to the Borrower, then upon request of
the Administrative Agent or the Borrower, the Recipient shall as soon as practicable return all
written Information (other than Internal Evaluation Material) to the Borrower or represent in
writing to the Borrower and the Administrative Agent that the Recipient has destroyed all copies of
the written Information (other than Internal Evaluation Material) unless prohibited from doing so
by law, regulation or the Recipients internal policies and procedures.
The terms and conditions of Part I of this Confidentiality Agreement shall apply until you become a
party to the Credit Agreement and thereafter the provisions relating to confidentiality contained
in such agreements shall supersede the provisions hereof. If you do not enter into the Credit
Agreement, this Confidentiality Agreement shall terminate on the date falling two years after the
date hereof.
II. Information
The Recipient acknowledges and agrees that (i) the Administrative Agent received the Information
(other than certain administrative materials provided by the Administrative Agent) from third party
sources (including the Borrower) and it is provided to the Recipient for informational purposes,
(ii) the Administrative Agent and its affiliates have no responsibility, and shall not be liable,
for the accuracy or completeness or lack thereof of the Information or any information contained
therein, (iii) no representation regarding the Information is made by the Administrative Agent or
its affiliates, (iv) neither the Administrative Agent nor their affiliates have made any
independent verification as to the accuracy or completeness of the Information and (v) the
Administrative Agent and their affiliates shall have no obligation to update or supplement any
Information or otherwise provide additional information.
The Information has been prepared to assist the Recipient in making its own evaluation of the
Borrower and the Credit Agreement and does not purport to be all-inclusive or to contain all of the
information that such Recipient may consider material or desirable with respect to the Borrower or
the Credit Agreement. Each Recipient of the information contained herein should take such steps as
it deems necessary to assure that it has the information it considers material or
H-2
desirable with respect to the Borrower or the Credit Agreement and should perform its own
independent investigation and analysis of the Credit Agreement or the transactions contemplated
thereby and the creditworthiness of the Borrower. The Recipient represents that it is
sophisticated and experienced in extending credit to entities similar to the Borrower. The
information contained herein are not a substitute for Recipients independent evaluation and
analysis and should not be considered as a recommendation by the Administrative Agent or any of its
affiliates that any Recipient become a lender, assignee or participant under the Credit Agreement
or a counterparty to any swap or derivative transaction relating to the Borrower or any of its
subsidiaries.
II. General
Recipient agrees that money damages would not be a sufficient remedy for breach of this
Confidentiality Agreement, and that in addition to all other remedies available at law or in
equity, Borrower and the Administrative Agent shall be entitled to equitable relief, including
injunction and specific performance, without proof of actual damages.
This Confidentiality Agreement shall be governed by and construed in accordance with the law of the
State of New York, without regard to principles of conflicts of law (except Section 5-1401 of the
New York General Obligation Law to the extent that it provides that the law of the State of New
York shall govern).
|
|
|
|
|
|
[RECIPIENT]
|
|
|
By:
|
|
|
|
|
Name:
|
|
|
|
|
Title:
|
|
|
|
H-3
EXHIBIT I
FORM OF U.S. TAX CERTIFICATE
EXHIBIT I-1
FORM OF U.S. TAX CERTIFICATE
(For Non-U.S. Lenders That Are Not Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Credit Agreement dated as of [ ] (as amended, supplemented or
otherwise modified from time to time, the Credit Agreement), among [ ], and each lender from time
to time party thereto.
Pursuant to the provisions of Section 2.18 of the Credit Agreement, the undersigned hereby
certifies that (i) it is the sole record and beneficial owner of the Loan(s) (as well as any
Note(s) evidencing such Loan(s)) in respect of which it is providing this certificate, (ii) it is
not a bank within the meaning of Section 881(c)(3)(A) of the Code, (iii) it is not a ten percent
shareholder of the Borrower within the meaning of Section 881(c)(3)(B) of the Code, (iv) it is not
a controlled
foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code and
(v) the interest payments in question are not effectively connected with the undersigneds conduct
of a U.S. trade or business.
The undersigned has furnished the Administrative Agent and the Borrower with a certificate of
its non-U.S. person status on IRS Form W-8BEN. By executing this certificate, the undersigned
agrees that (1) if the information provided on this certificate changes, the undersigned shall
promptly so inform the Borrower and the Administrative Agent and (2) the undersigned shall have at
all times furnished the Borrower and the Administrative Agent with a properly completed and
currently effective certificate in either the calendar year in which each payment is to be made to
the undersigned, or in either of the two calendar years preceding such payments.
Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall
have the meanings given to them in the Credit Agreement.
[NAME OF LENDER]
By:____________________________
Name:
Title:
Date: ________ __, 20[ ]
I-1
EXHIBIT I-2
FORM OF U.S. TAX CERTIFICATE
(For Non-U.S. Lenders That Are Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Credit Agreement dated as of [ ] (as amended, supplemented or
otherwise modified from time to time, the Credit Agreement), among [ ], and each lender from time
to time party thereto.
Pursuant to the provisions of Section 2.18 of the Credit Agreement, the undersigned hereby
certifies that (i) it is the sole record owner of the Loan(s) (as well as any Note(s) evidencing
such Loan(s)) in respect of which it is providing this certificate, (ii) its partners/members are
the sole beneficial owners of such Loan(s) (as well as any Note(s) evidencing such Loan(s)), (iii)
with respect to the extension of credit pursuant to this Credit Agreement, neither the undersigned
nor any of its partners/members is a bank extending credit pursuant to a loan agreement entered
into in the ordinary course of its trade or business within the meaning of Section 881(c)(3)(A) of
the Code, (iv) none of its partners/members is a ten percent shareholder of the Borrower within the
meaning of Section 881(c)(3)(B) of the Code, (v) none of its partners/members is a controlled
foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code, and
(vi) the interest payments in question are not effectively connected with the undersigneds or its
partners/members conduct of a U.S. trade or business.
The undersigned has furnished the Administrative Agent and the Borrower with IRS Form W-8IMY
accompanied by an IRS Form W-8BEN from each of its partners/members claiming the portfolio interest
exemption. By executing this certificate, the undersigned agrees that (1) if the information
provided on this certificate changes, the undersigned shall promptly so inform the Borrower and the
Administrative Agent and (2) the undersigned shall have at all times furnished the Borrower and the
Administrative Agent with a properly completed and currently effective certificate in either the
calendar year in which each payment is to be made to the undersigned, or in either of the two
calendar years preceding such payments.
Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall
have the meanings given to them in the Credit Agreement.
[NAME OF LENDER]
By:____________________________
Name:
Title:
Date: ________ __, 20[ ]
I-2
EXHIBIT I-3
FORM OF U.S. TAX CERTIFICATE
(For Non-U.S. Participants That Are Not Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Credit Agreement dated as of [ ] (as amended, supplemented or
otherwise modified from time to time, the Credit Agreement), among [ ], and each lender from time
to time party thereto.
Pursuant to the provisions of Section 2.18 of the Credit Agreement, the undersigned hereby
certifies that (i) it is the sole record and beneficial owner of the participation in respect of
which it is providing this certificate, (ii) it is not a bank within the meaning of Section
881(c)(3)(A) of the Code, (iii) it is not a ten percent shareholder of the Borrower within the
meaning of Section 881(c)(3)(B) of the Code, (iv) it is not a controlled foreign corporation
related to the Borrower as described in Section 881(c)(3)(C) of the Code, and (v) the interest
payments in question are not effectively connected with the undersigneds conduct of a U.S. trade
or business.
The undersigned has furnished its participating Lender with a certificate of its non- U.S.
person status on IRS Form W-8BEN. By executing this certificate, the undersigned agrees that (1) if
the information provided on this certificate changes, the undersigned shall promptly so inform
such Lender in writing and (2) the undersigned shall have at all times furnished such Lender with a
properly completed and currently effective certificate in either the calendar year in which each
payment is to be made to the undersigned, or in either of the two calendar years preceding such
payments.
Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall
have the meanings given to them in the Credit Agreement.
[NAME OF LENDER]
By:____________________________
Name:
Title:
Date: ________ __, 20[ ]
I-3
EXHIBIT I-4
FORM OF U.S. TAX CERTIFICATE
(For Non-U.S. Participants That Are Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Credit Agreement dated as of [ ] (as amended, supplemented or
otherwise modified from time to time, the Credit Agreement), among [ ], and each lender from time
to time party thereto.
Pursuant to the provisions of Section 2.18 of the Credit Agreement, the undersigned hereby
certifies that (i) it is the sole record owner of the participation in respect of which it is
providing this certificate, (ii) its partners/members are the sole beneficial owners of such
participation, (iii) with respect such participation, neither the undersigned nor any of its
partners/members is a bank extending credit pursuant to a loan agreement entered into in the
ordinary course of its trade or business within the meaning of Section 881(c)(3)(A) of the Code,
(iv) none of its partners/members is a ten percent shareholder of the Borrower within the meaning
of Section 881(c)(3)(B) of the Code, (v) none of its partners/members is a controlled foreign
corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code, and (vi) the
interest payments in question are not effectively connected with the undersigneds or its
partners/members conduct of a U.S. trade or business.
The undersigned has furnished its participating Lender with IRS Form W-8IMY accompanied by an
IRS Form W-8BEN from each of its partners/members claiming the portfolio interest exemption. By
executing this certificate, the undersigned agrees that (1) if the information provided on this
certificate changes, the undersigned shall promptly so inform such Lender and (2) the undersigned
shall have at all times furnished such Lender with a properly completed and
currently effective certificate in either the calendar year in which each payment is to be made to
the undersigned, or in either of the two calendar years preceding such payments.
Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall
have the meanings given to them in the Credit Agreement.
[NAME OF PARTICIPANT]
By:____________________________
Name:
Title:
Date: ________ __, 20[ ]
I-4
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.
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SUBJECT TO COMPLETION, DATED
MARCH 16, 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 p.m., 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 22 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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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
1
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 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
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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 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 Business-Our Business-Gulf
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 Transactions-Agreements 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 issued but undrawn at
the time of the spin-off, and the remaining $513 million of
which will be unutilized at that time. See Description of
Material Indebtedness. The proceeds of the HII Debt and
the HII Credit Facility are to be 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-Off-Conditions 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.
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Q:
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What is the spin-off?
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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,
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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-Off-Reasons 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
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-Off-Reasons 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
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information on the shares being distributed in the spin-off, see
Description of Our Capital Stock-Common 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
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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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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-Off-Treatment 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-Off-U.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-Off-U.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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7
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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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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 issued but
undrawn at the time of the spin-off, and the remaining
$513 million of which will be unutilized at that time). 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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8
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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 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
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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. The U.S.
Navy has completed its determination of contractor
responsibility with respect to certain shipbuilding contracts
that are currently in negotiation and has found us to be a
responsible contractor for those contracts. We believe we are
and will continue to be a responsible contractor. Nonetheless,
if, in the future, 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:
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Computershare Trust Company, N.A.
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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:
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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:
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Huntington Ingalls Industries, Inc.
Investor Relations
4101 Washington Avenue
Newport News, Virginia 23607
Phone:
Email:
www. .com
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10
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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11
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
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12
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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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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 SpinOff-U.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
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13
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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
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
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14
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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-Off-U.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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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
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15
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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
Transactions-Agreements 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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16
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.
Earnings per share calculations are based on the pro forma
weighted average shares that would have been outstanding during
2010 (49.5 million shares) determined by applying the
one-for-six
exchange ratio to Northrop Grummans basic weighted average
shares outstanding for the year ended December 31, 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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(in millions)
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2010
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2010
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2009
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2008
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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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)
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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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17
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-1002 (unnamed)
composite superstructure.
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Program Name
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Program Description
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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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Program Name
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Program Description
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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 21st 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 21st 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 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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20
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Program Name
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Program Description
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SSBN(X)
Ohio
-class Submarine Replacement Program
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|
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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.
|
|
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 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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21
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.
22
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 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
23
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.
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)
24
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 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
25
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.
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.
26
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
27
where a bid protest 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.
28
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.
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.
29
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 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
30
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 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
31
Notes to Consolidated Financial
Statements-Note 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.
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.
32
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 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.
33
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
34
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.
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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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
35
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.
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.
36
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 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
37
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. 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
38
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 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 issued but undrawn at the time of the
spin-off, and the remaining $513 million of which will be
unutilized at that time). 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
39
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
.
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
40
counsel will satisfy a condition to completion of the spin-off.
See The Spin-Off-U.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 Transactions-Agreements with Northrop Grumman Related to
the Spin-Off-Tax 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
41
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 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. The
U.S. Navy has completed its determination of contractor
responsibility with respect to certain shipbuilding contracts
that are currently in negotiation and has found us to be a
responsible contractor for those contracts. We believe we are
and will continue to be a responsible contractor. Nonetheless,
if, in the future, 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
42
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.
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
43
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, orin the case of index
fundswe 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 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.
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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 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.
47
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
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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 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.
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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
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
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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:
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.
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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 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
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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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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
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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-Off-Employee 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, 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.
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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 401(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).
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.
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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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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.
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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.
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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
Factors-Risks 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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58
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:
|
|
|
|
|
1.0% of our common stock then outstanding; or
|
|
|
|
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.
|
Sales under Rule 144 are also subject to restrictions
relating to manner of sale and the availability of current
public information about us.
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.
59
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.
60
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
$ in millions
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
300
|
[A]
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, including current and long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
105
|
|
|
|
|
|
|
$
|
105
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
[A]
|
|
|
|
|
Term loan
|
|
|
|
|
|
$
|
575
|
[A]
|
|
|
575
|
|
Senior notes
|
|
|
|
|
|
|
1,200
|
[A]
|
|
|
1,200
|
|
Notes payable to parent
|
|
|
715
|
|
|
|
(715
|
)[B]
|
|
|
|
|
Accrued interest on notes payable to parent
|
|
|
239
|
|
|
|
(239
|
)[B]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,059
|
|
|
|
821
|
|
|
|
1,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
[B]
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
1,508
|
[B]
|
|
|
1,508
|
|
Parents equity in unit
|
|
|
1,933
|
|
|
|
(1,933
|
)[B]
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(515
|
)
|
|
|
|
|
|
|
(515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
1,418
|
|
|
|
(425
|
)
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
2,477
|
|
|
$
|
396
|
|
|
$
|
2,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[A]
|
|
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 issued
but undrawn at the time of the spin-off, and the remaining
$513 million of which will be unutilized at that time),
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%.
|
|
|
|
|
|
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
|
61
|
|
|
|
|
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.
|
|
|
|
[B]
|
|
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] 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 48,492,792
shares of HII common stock, calculated using the
one-for-six
exchange ratio for shares of HII common stock applied to 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.
|
62
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 Operations-Liquidity and Capital
Resources-Free Cash Flow for more information on this
measure.
|
63
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.
Earnings per share calculations are based on the pro forma
weighted average shares that would have been outstanding during
2010 (49.5 million shares) determined by applying the
one-for-six
exchange ratio to Northrop Grummans basic weighted average
shares outstanding for the year ended December 31, 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.
64
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
|
|
|
|
|
|
|
|
|
|
|
49.5
|
[I]
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
$
|
1.60
|
|
Diluted weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
49.5
|
[I]
|
See Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.
65
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.
66
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 a $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 $100 million using the interest
rates and maturities for the $1,775 debt issuance described in
Note [E], plus $4 million in annual fees associated with
issued but undrawn letters of credit under the HII Credit
Facility, $3 million in annual commitment fees associated
with the unutilized balance of 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.
|
67
|
|
|
|
|
The $4 million interest adjustment for outstanding letters
of credit under the HII Credit Facility was determined by
applying the 2.75% annual fee rate to the expected
$137 million of letters of credit discussed in
Note [F]. The $3 million interest adjustment for the
unutilized HII Credit Facility was determined by applying the
0.5% annual commitment fee rate to the $513 million of
unutilized HII Credit Facility discussed in Note [F].
|
|
|
|
|
|
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 48,492,792 shares of HII common stock,
calculated using the
one-for-six
exchange ratio for shares of HII common stock applied to 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 for the year ended December 31, 2010 of
296.9 million shares 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.
|
68
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.
69
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 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;
70
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.
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
71
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
.
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
.
72
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.
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
73
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).
74
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.
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.
75
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.
76
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.
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).
77
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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
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 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.
79
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.
2009Net 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.
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.
80
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 on drawn borrowings 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%; and with a commitment fee rate on the unutilized
balance based on leverage ratio, which fee rate at the current
leverage ratio is 0.5% and which may vary between 0.35% and
0.5%), of which approximately $137 million of letters of credit
are expected to be issued but undrawn at the time of the
spin-off, and the remaining $513 million of which will be
unutilized at that time. 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.
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
81
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.
|
|
(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.
|
82
|
|
|
(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.
83
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
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
84
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.
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
85
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
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
86
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 $8 million.
Health Care Cost Trend Rates
The health care cost
trend rates represent the annual rates of change in the cost of
health care benefits based on external estimates of health care
inflation, changes in health care utilization or delivery
patterns, technological advances, and changes in the health
status of the plan participants. Using a combination of market
expectations and economic projections including the effect of
health care reform, we selected an expected initial health care
cost trend rate of 8.0% and an ultimate health care cost trend
rate of 5.0% reached in 2017. In 2009, we assumed an expected
initial health care cost trend rate of 7.0% for 2010 and an
ultimate health care cost trend rate of 5.0% reached in 2014.
Although our actual cost experience is much lower at this time,
market conditions and the potential effects of health care
reform are expected to increase medical cost trends in the next
one to three years thus our past experience may not reflect
future conditions.
Differences in the initial through the ultimate health care cost
trend rates within the range indicated below would have had the
following impact on 2010 post-retirement benefit results:
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1-Percentage
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1-Percentage
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$ in millions
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Point Increase
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Point Decrease
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Increase (Decrease) From Change in Health Care Cost Trend Rates
To:
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Post-retirement benefit expense
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$
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2
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$
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(2
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)
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Post-retirement benefit liability
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18
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(18
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)
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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 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.
87
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
88
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 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.
89
The table below sets forth the primary product lines in our
Newport News segment:
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Newport News Programs
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Program
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Program
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Contract
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Funding
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Name
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Description
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Overview
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Overview
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Carrier New Construction CVN-78
Gerald R. Ford
-class
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New aircraft carrier for the 21st
century
Increased warfighting capabilities
New propulsion plant
Reduced ship manning
Focused on operating cost reduction
Designed for modular construction
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Cost plus incentive fee
Exclusive provider
Incentivized capital investment under
the planning contract
8-year design, 7.5-year construction
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New construction contract expected to
be awarded approximately every 5 years
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Carrier RCOH
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Complex overhaul of the ships
machinery and equipment
Refueling of both of the ships
reactors
Significant renovation and
modernization work
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Cost plus incentive fee
Exclusive provider
3-year advanced planning
Approximately 3.5-year overhaul execution
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RCOH Execution contracts expected to be
awarded approximately every 4 years
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Submarine New Construction
SSN-774
Virginia
-class and Fleet Support
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Post-Cold War design focused on
maneuverability, stealth, warfighting capability and
affordability
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Fixed price incentive
Exclusive provider through joint
production arrangement
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Rate increasing from 1 to 2 annually in 2011
7 delivered, 11 additional in program backlog
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Designed for modular construction
Constructed under a teaming agreement with Electric Boat
Planning yard services for
Los Angeles
-class and
Seawolf
-class
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Incentivized capital investment
Multi-ship buys
5-year construction
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Block IV expected to include 9
submarines with anticipated award at the end of 2013
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90
The table below sets forth the potential future programs in our
Newport News segment:
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Newport News Potential Future Programs
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Program
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Name
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Program Description
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Aircraft Carrier Inactivation
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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
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Ohio
-class Replacement Program
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Anticipated to begin in 2019
30-Year Plan includes 12 SSBN(X) submarines
NGSB currently acting as subcontractor in design of SSBN(X)
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Energy
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AREVA Newport News: Manufacturing heavy
reactor components
DoE: Site management and operations
Newport News Industrial
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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.
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
91
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:
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Gulf Coast Programs
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Program
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Program
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Contract
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Funding
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Name
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Description
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Overview
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Overview
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DDG-51
Arleigh Burke
-class Destroyer
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Most advanced surface combatant in the
fleet
62-Ship Program/ 28 awarded to us
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Fixed price incentive
4-year construction
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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
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LPD-17
San Antonio
-class Amphibious Transport
Dock Ship
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Transport and land 700 to 800 Marines,
their equipment and supplies
Supports amphibious assault, special
operations
|
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Fixed price incentive
4.5-year construction
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5 delivered (LPD 1721), 4 under
construction (LPD 2225)
Long lead time and material contract
awarded for LPD-26 and LPD-27
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92
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Gulf Coast Programs
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Program
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Program
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Contract
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Funding
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Name
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Description
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Overview
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Overview
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LHA-6
America
-class Next Generation Amphibious Ship
for Joint Operations
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Navys largest warfare ship for joint operations
Gas turbines
All electric auxiliaries
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Fixed price incentive
5-year construction
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LHA-6 under construction
Long lead time and material contract
awarded for LHA-7
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National Security Cutter (Legend Class)
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Largest/most capable of the U.S. Coast Guards new multi-mission cutters
Twin-screw propulsion
Two hangars/large flight deck
|
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Cost plus incentive fee (NSC 1 3); fixed price incentive
(NSC-4)
3-year construction
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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
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The table below sets forth a potential future program in our
Gulf Coast segment:
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Gulf Coast Potential Future Program
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Program
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Name
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Program Description
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LSD(X) Amphibious Dock Landing Ship
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Expected to begin in 2017
30-Year Plan calls for 12 LSD(X) ships (one every other year)
4-year construction
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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.
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.
93
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:
|
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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;
|
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|
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;
|
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|
Maintaining an adaptable amphibious landing force of
approximately 33 ships;
|
94
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Transitioning to a Combat Logistics force composed of just two
types of ships and expanding the size of the Joint High Speed
Vessel Fleet;
|
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|
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
|
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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:
|
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|
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;
|
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|
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
|
|
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|
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
95
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
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.
96
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 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
97
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
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,
98
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, 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.
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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 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.
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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
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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 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
102
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
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.
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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 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
104
reprocurement costs, and could have a material adverse effect on
our ability to compete for contracts. See Risk
Factors Risks 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
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.
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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 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.
106
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.
107
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.
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.
108
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.
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-
109
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 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.
110
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 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.
111
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 ManagerGulf Coast Operations
|
Matthew J. Mulherin
|
|
|
51
|
|
|
Vice President and General ManagerNewport 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
ManagerGulf 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
ManagerNewport 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).
112
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.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
Thomas B. Fargo
|
|
|
62
|
|
|
Chairman
|
C. Michael Petters
|
|
|
51
|
|
|
Director
|
Robert Bruner
|
|
|
61
|
|
|
Director
|
Artur Davis
|
|
|
43
|
|
|
Director
|
Anastasia Kelly
|
|
|
61
|
|
|
Director
|
Paul D. Miller
|
|
|
69
|
|
|
Director
|
Tom Schievelbein
|
|
|
57
|
|
|
Director
|
Karl von der Heyden
|
|
|
74
|
|
|
Director
|
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/
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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
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
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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:
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
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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
elected officers. The Compensation Committee will also provide
strategic direction for our overall compensation structure,
policies and programs and will review top-management 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 board membership; identifying and reviewing the
qualifications of 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.
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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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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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 $1 million, or 2% of such other companys
consolidated gross revenues, would not be independent until
three years after falling below such threshold.
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Compensation
of Non-Employee Directors
Following the spin-off, director compensation will be determined
by our board of directors with the assistance of its
Compensation Committee. It is anticipated that such compensation
will consist of an annual retainer, an annual equity award,
annual fees for serving as a committee chair and other types of
compensation as determined by the board from time to time.
Director
Compensation Table
The following table sets forth information concerning the 2010
compensation awarded by Northrop Grumman to non-employee
directors of Northrop Grumman who are expected to be
non-employee directors of HII:
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Fees Earned or
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Stock
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All Other
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Paid in Cash(1)
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Awards(2)
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Compensation
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Total
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Name
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($)
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($)
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($)
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($)
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Thomas B. Fargo (3)(4)
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122,500
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120,000
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242,500
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Tom Schievelbein (5)
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60,000
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60,000
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Footnotes:
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(1)
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Effective October 1, 2008, non-employee directors of
Northrop Grumman earned an annual retainer of $220,000, $100,000
of which was paid in cash and the remainder of which was
required to be deferred into a stock unit account pursuant to
the 1993 Stock Plan for Non-Employee Directors, as amended (the
1993 Directors Plan). The other annual
retainers were paid in cash as follows:
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Amount
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Type of Retainer
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($)
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Audit Committee Retainer
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10,000
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Audit Committee Chair Retainer
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25,000
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Compensation Committee Chair Retainer
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10,000
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Governance Committee Chair Retainer
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10,000
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Policy Committee Chair Retainer
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7,500
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Non-executive Chairman of the Board
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250,000
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Matching Gifts for Education Program
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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)
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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
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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.
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(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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Mandatory
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Voluntary
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Name
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Deferral
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Deferral
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Total
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Thomas B. Fargo
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5,870
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0
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5,870
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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 IRoles 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 IIElements 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 IIIPolicies 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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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.
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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 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
121
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.*
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|
Johnson Controls, Inc.*
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The Boeing Co.
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|
L-3 Communications Holdings, Inc.*
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Caterpillar, Inc.*
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Lockheed Martin Corp.
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Emerson Electric Co.*
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Raytheon Co.
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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 25th, 50th, and
75th percentile information) and employed statistical analysis
to assess market pay on an adjusted basis, as determined by
revenue size.
122
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.
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PepsiCo, Inc.
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AT&T, Inc.
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Pfizer, Inc
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Caterpillar, Inc.
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Philip Morris International
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Chevron Corporation
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Procter & Gamble
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CHS, Inc.
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Raytheon Company
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Comcast Corporation
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Sunoco, Inc.
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CVS Corporation
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SUPERVALU INC.
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Delta Air Lines Inc.
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Target Corporation
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E. I. du Pont de Nemours and Company
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The Boeing Company
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FedEx Corporation
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The Coca-Cola Company
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Ford Motor Company
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The Dow Chemical Company
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General Dynamics Corporation
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The Home Depot, Inc.
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General Electric Company
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The Kroger Co.
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Honeywell International, Inc.
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The Walt Disney Company
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Humana, Inc.
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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
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Johnson & Johnson
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UnitedHealth Group
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Johnson Controls, Inc.
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Valero Energy Corporation
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Kraft Foods, Inc.
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Verizon Communications, Inc.
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Lockheed Martin Corporation
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Walgreen Co.
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Lowes Companies, Inc.
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Wellpoint, Inc.
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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.
123
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 25th, 50th, and 75th
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.
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 50th 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.
|
124
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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Element of
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If Variable,
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Cash or
|
Compensation
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Objectives
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Performance Measured
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Equity
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|
Salaries
|
|
targeted at a competitive market median
on a job-by-job basis
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Not variable
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Cash
|
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|
adjusted above or below median based on
executives experience, skills and sustained performance
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|
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|
served to recruit and retain the talent
necessary to run our businesses
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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
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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
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|
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)%
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See below
|
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Equity
|
125
|
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If Variable,
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Cash or
|
Element of Compensation
|
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Objectives
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Performance Measured
|
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Equity
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|
Stock Options
|
|
provided direct alignment with
stockholder interest while serving as a retention tool
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|
Variable, based on Northrop Grumman stock price
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Equity
|
Restricted Performance Stock Rights
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|
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
|
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Not variable
|
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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.
126
The annual incentive targets below were established for the HII
NEOs:
2010
Annual Incentive Targets
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Target
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Payout Range
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Name
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Title
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Payout %
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% of Salary
|
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C. Michael Petters
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President and Chief Executive Officer
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75
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%
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0%150%
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Barbara A. Niland
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Vice President and Chief Financial Officer
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40
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%
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0%80%
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Irwin F. Edenzon
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Vice President and General ManagerGulf Coast Operations
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45
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%
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0%90%
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Matthew J. Mulherin
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Vice President and General ManagerNewport News Operations
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45
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%
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0%90%
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William R. Ermatinger
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Vice President and Chief Human Resources Officer
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40
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%
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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.
Annual
incentive formula for 2010:
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Base Salary
|
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x
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Target
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%
|
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=
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Target Bonus
|
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Target Bonus
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x
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CPF
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x
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IPF
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=
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Final Bonus Award*
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*
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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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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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Program execution and performance
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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
127
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.
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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.
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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.
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Environmental
measured in terms of the reduction, in
metric tons, of greenhouse gases emissions.
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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.
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|
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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Threshold
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Target
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Maximum
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Performance
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Metric/Goal
|
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Weighting
|
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Performance
|
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|
Performance
|
|
|
Performance
|
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(as adjusted)
|
|
|
New Business Awards (Amounts in Billions)
|
|
|
20
|
%
|
|
$
|
27.0
|
|
|
$
|
30.0
|
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|
$
|
37.0
|
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$
|
31.8
|
|
Pension-Adjusted Operating Margin Rate*
|
|
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40
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%
|
|
|
8.0
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%
|
|
|
9.0
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%
|
|
|
10.0
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%
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|
$
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9.3
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%
|
Free Cash Flow Conversion
|
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|
40
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%
|
|
|
80
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%
|
|
|
100
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%
|
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|
135
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%
|
|
|
119
|
%
|
|
|
|
*
|
|
This goal is adjusted for net FAS/CAS pension expense.
|
128
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
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|
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, 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.
129
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 ManagerGulf Coast Operations
|
|
|
122
|
%
|
|
|
|
|
Matthew J. Mulherin
|
|
Vice President and General ManagerNewport 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.
130
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.
131
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 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.
132
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:
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
133
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.
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.
134
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.
135
2010
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equitye
|
|
Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Plan
|
|
Compensation
|
|
All Other
|
|
|
|
|
|
|
Salary(1)
|
|
Bonus
|
|
Awards(2)
|
|
Awards(2)
|
|
Compensation(3)
|
|
Earnings(4)
|
|
Compensation
|
|
Total
|
Name & Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
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 Chief
|
|
|
2009
|
|
|
|
312,115
|
|
|
|
0
|
|
|
|
920,387
|
|
|
|
0
|
|
|
|
110,000
|
|
|
|
545,626
|
|
|
|
69,391
|
|
|
|
1,957,519
|
|
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 General
|
|
|
2009
|
|
|
|
347,115
|
|
|
|
0
|
|
|
|
1,051,902
|
|
|
|
51,959
|
|
|
|
140,000
|
|
|
|
340,778
|
|
|
|
60,144
|
|
|
|
1,991,898
|
|
ManagerGulf Coast
|
|
|
2008
|
|
|
|
322,231
|
|
|
|
0
|
|
|
|
606,210
|
|
|
|
0
|
|
|
|
199,200
|
|
|
|
266,050
|
|
|
|
101,649
|
|
|
|
1,495,340
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew J. Mulherin
|
|
|
2010
|
|
|
|
368,723
|
|
|
|
0
|
|
|
|
1,264,864
|
|
|
|
0
|
|
|
|
306,798
|
|
|
|
243,700
|
|
|
|
62,712
|
|
|
|
2,246,797
|
|
Vice President and General
|
|
|
2009
|
|
|
|
347,115
|
|
|
|
0
|
|
|
|
1,051,902
|
|
|
|
51,959
|
|
|
|
140,000
|
|
|
|
273,116
|
|
|
|
73,885
|
|
|
|
1,937,977
|
|
ManagerNewport News
|
|
|
2008
|
|
|
|
328,040
|
|
|
|
0
|
|
|
|
652,775
|
|
|
|
0
|
|
|
|
199,200
|
|
|
|
216,647
|
|
|
|
75,601
|
|
|
|
1,472,263
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Ermatinger
|
|
|
2010
|
|
|
|
286,017
|
|
|
|
0
|
|
|
|
664,874
|
|
|
|
0
|
|
|
|
207,088
|
|
|
|
256,136
|
|
|
|
57,304
|
|
|
|
1,471,419
|
|
Vice President and Chief
|
|
|
2009
|
|
|
|
267,471
|
|
|
|
0
|
|
|
|
670,603
|
|
|
|
0
|
|
|
|
90,000
|
|
|
|
309,709
|
|
|
|
75,247
|
|
|
|
1,413,030
|
|
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).
|
136
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).
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 ($500).
Method
for Calculating Perquisite Value
The following method was used to calculate the value of personal
use of Northrop Grumman aircraft described in the paragraphs
above. Northrop Grumman calculates the incremental cost of each
element, which includes trip-related crew hotels and meals,
in-flight food and beverages, landing and ground handling fees,
hourly maintenance contract costs, hangar or aircraft parking
costs, fuel costs based on the average annual cost of fuel per
mile flown, and other smaller variable costs. Fixed costs that
would be incurred in any event to operate Northrop Grumman
aircraft (e.g., aircraft purchase costs, maintenance not related
to personal trips, and flight crew salaries) are not included.
The amount related to the loss of tax deduction to Northrop
Grumman on account of personal use of corporate aircraft under
the Internal Revenue Code is not included.
137
2010
Grants of Plan-Based Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
Securities
|
|
|
Exercise or
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under Non-Equity Incentive Plan
Awards(1)
|
|
|
Estimated Future Payouts Under Equity Incentive Plan
Awards(2)
|
|
|
Stock or
|
|
|
Underlying
|
|
|
Base Price
|
|
|
Stock and
|
|
|
|
|
|
Grant
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Units
|
|
|
Options(3)
|
|
|
of Option
|
|
|
Option
|
|
Name & Principal Position
|
|
Grant Type
|
|
Date
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
Awards ($/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
|
|
ManagerGulf 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
|
|
ManagerNewport 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.
|
138
Outstanding
Equity Awards at 2010 Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Equity Incentive
|
|
|
Plan
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
|
Plan Awards:
|
|
|
Awards:
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Shares or
|
|
|
Number of
|
|
|
Market or Payout
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Units of
|
|
|
Unearned Shares,
|
|
|
Value of Unearned
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
|
|
|
Option
|
|
|
|
|
|
Units of Stock
|
|
|
Stock that
|
|
|
Units, or Other
|
|
|
Shares, Units, or
|
|
|
|
Options
|
|
|
Options
|
|
|
Unearned (#)
|
|
|
|
|
|
Exercise
|
|
|
Option
|
|
|
that Have Not
|
|
|
Have Not
|
|
|
Rights that Have
|
|
|
Other Rights that
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Options
|
|
|
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested(2)
|
|
|
Vested
|
|
|
Not Vested(3)
|
|
|
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 Officer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2/17/09
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
12,786
|
|
|
|
828,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
ManagerGulf 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
|
|
ManagerNewport 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 $64.78 for target RPSRs.
|
139
2010
Option Exercises and Stock Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of
|
|
|
|
Number of Shares
|
|
|
|
|
Shares Acquired
|
|
Value Realized on
|
|
Acquired on
|
|
Value Realized
|
|
|
on Exercise
|
|
Exercise
|
|
Vesting(*)
|
|
on Vesting
|
Name & Principal Position
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)
|
|
C. Michael Petters
|
|
|
0
|
|
|
|
0
|
|
|
|
15,660
|
|
|
|
932,710
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barbara A. Niland
|
|
|
0
|
|
|
|
0
|
|
|
|
4,567
|
|
|
|
272,011
|
|
Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irwin F. Edenzon
|
|
|
0
|
|
|
|
0
|
|
|
|
4,350
|
|
|
|
259,086
|
|
Vice President and General ManagerGulf Coast Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew J. Mulherin
|
|
|
0
|
|
|
|
0
|
|
|
|
6,090
|
|
|
|
362,720
|
|
Vice President and General ManagerNewport News Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Ermatinger
|
|
|
0
|
|
|
|
0
|
|
|
|
3,480
|
|
|
|
207,269
|
|
Vice President and Chief Human Resources Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footnote:
|
|
|
(*)
|
|
All shares in this column are RPSRs.
|
2010
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Years
|
|
Present Value of
|
|
Payments
|
|
|
|
|
Credited
|
|
Accumulated
|
|
During Last
|
|
|
|
|
Service
|
|
Benefit(*)
|
|
Fiscal Year
|
Name & Principal Position
|
|
Plan Name
|
|
(#)
|
|
($)
|
|
($)
|
|
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
|
|
ERISA 2
|
|
|
7.50
|
|
|
|
281,647
|
|
|
|
0
|
|
Chief Financial Officer
|
|
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
|
|
NNS Restoration
|
|
|
13.17
|
|
|
|
471,922
|
|
|
|
0
|
|
Manager Gulf Coast
|
|
NNS Salaried Pension Plan
|
|
|
13.17
|
|
|
|
437,970
|
|
|
|
0
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Officer
|
|
ERISA 2
|
|
|
7.50
|
|
|
|
106,145
|
|
|
|
0
|
|
Chief Human Resources
|
|
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.
|
140
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 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.
|
141
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
|
|
|
|
or
|
|
|
|
Part D
|
|
|
|
|
Benefit under the historical plan
formula before the
transition period
|
|
+
|
|
(if greater)
|
|
+
|
|
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
|
142
|
|
|
|
|
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 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
|
(attained age and total service)
|
|
All Eligible Pay
|
|
Social Security 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
|
(attained age and total service)
|
|
All Eligible Pay
|
|
Social Security 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.
|
143
|
|
|
|
|
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.
|
Description
of Nonqualified Plans
ERISA
2
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
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.
144
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.
OSERP
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.
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.
CPC
SERP
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.
145
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
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 $165,943.
146
2010
Nonqualified Deferred Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
Registrant
|
|
Aggregate
|
|
Aggregate
|
|
Aggregate
|
|
|
|
|
Contributions in
|
|
Contributions in
|
|
Earnings in Last
|
|
Withdrawals/
|
|
Balance
|
|
|
|
|
Last FY(1)
|
|
Last FY(2)
|
|
FY(3)
|
|
Distributions
|
|
at Last FYE(4)
|
Name & Principal Position
|
|
Plan Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
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 ManagerGulf Coast
|
|
Savings Excess
|
|
|
26,372
|
|
|
|
10,549
|
|
|
|
14,974
|
|
|
|
0
|
|
|
|
152,868
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew J. Mulherin
|
|
Deferred Compensation
|
|
|
84,418
|
|
|
|
0
|
|
|
|
215,114
|
|
|
|
0
|
|
|
|
1,619,631
|
|
Vice President and General ManagerNewport News
|
|
Savings Excess
|
|
|
5,420
|
|
|
|
4,516
|
|
|
|
1,601
|
|
|
|
0
|
|
|
|
15,561
|
|
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.
147
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%
|
|
None
|
|
|
First 2% is matched at 100%
|
|
|
|
|
Next 2% is matched at 50%
|
|
|
|
|
Next 4% is matched at 25%
|
|
|
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.
148
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
|
|
|
|
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.
149
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
|
150
Termination Payments
C. Michael Petters
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-CIC
|
|
|
|
|
|
|
Involuntary
|
|
Involuntary
|
|
|
|
|
Voluntary
|
|
Termination
|
|
or Good Reason
|
|
Death or
|
Executive Benefits
|
|
Termination
|
|
Not For Cause (2)
|
|
Termination
|
|
Disability (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.
|
151
Termination Payments
Barbara A. Niland
Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-CIC
|
|
|
|
|
|
|
Involuntary
|
|
Involuntary
|
|
|
|
|
Voluntary
|
|
Termination
|
|
or Good Reason
|
|
Death or
|
Executive Benefits
|
|
Termination
|
|
Not For Cause (2)
|
|
Termination
|
|
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.
|
152
Termination Payments
Irwin F. Edenzon
Vice President and General ManagerGulf Coast Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-CIC
|
|
|
|
|
|
|
Involuntary
|
|
Involuntary or
|
|
|
|
|
Voluntary
|
|
Termination
|
|
Good Reason
|
|
Death or
|
Executive Benefits
|
|
Termination
|
|
Not For Cause (2)
|
|
Termination
|
|
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.
|
153
Termination Payments
Matthew J. Mulherin
Vice President and General ManagerNewport News Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-CIC
|
|
|
|
|
|
|
Involuntary
|
|
Involuntary
|
|
|
|
|
Voluntary
|
|
Termination
|
|
or Good Reason
|
|
Death or
|
Executive Benefits
|
|
Termination
|
|
Not For Cause (2)
|
|
Termination
|
|
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.
|
154
Termination Payments
William R. Ermatinger
Vice President and Chief Human Resources Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-CIC
|
|
|
|
|
|
|
Involuntary
|
|
Involuntary
|
|
|
|
|
Voluntary
|
|
Termination
|
|
or Good Reason
|
|
Death or
|
Executive Benefits
|
|
Termination
|
|
Not For Cause (2)
|
|
Termination
|
|
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
|
|
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.
|
155
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 $64.78.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
RSRs
|
|
RPSRs
|
|
|
|
|
Acceleration
|
|
Acceleration of
|
|
Prorated
|
|
|
|
|
of Vesting
|
|
Vesting
|
|
Payment
|
|
Total
|
Name and Principal Position
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
C. Michael Petters
|
|
$
|
2,211,167
|
|
|
$
|
809,750
|
|
|
$
|
1,520,171
|
|
|
$
|
4,541,088
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barbara A. Niland
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
843,112
|
|
|
$
|
843,112
|
|
Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irwin F. Edenzon
|
|
$
|
98,554
|
|
|
$
|
0
|
|
|
$
|
983,814
|
|
|
$
|
1,082,368
|
|
Vice President and General ManagerGulf Coast Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew J. Mulherin
|
|
$
|
98,554
|
|
|
$
|
0
|
|
|
$
|
983,814
|
|
|
$
|
1,082,368
|
|
Vice President and General ManagerNewport News Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William R. Ermatinger
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
587,684
|
|
|
$
|
587,684
|
|
Vice President and Chief Human Resources Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
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
157
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.
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
158
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 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
|
159
|
|
|
|
|
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:
|
|
|
|
|
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.
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We will not repurchase more than 20% of our stock.
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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).
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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.
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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
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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 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
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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 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.
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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.
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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 holders of 25% or
more in aggregate principal amount of notes of such series, to
make an Offer to Purchase, or to thereafter accept 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 on drawn borrowings 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%,
and a commitment fee rate on the unutilized balance based on
leverage ratio, which fee rate at the current leverage ratio is
0.5% and which may vary between 0.35% and 0.5%. At the time of
the spin-off, approximately $137 million of letters of credit
are expected to be issued but undrawn, and the remaining
$513 million will be unutilized.
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
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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) 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.
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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 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.
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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
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5,489,233 shares
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11.30
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%(a)
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One Lincoln Street, Boston, MA 02111
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Capital World Investors
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3,906,291 shares
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8.00
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%(b)
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333 South Hope Street, Los Angeles, CA 90071
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BlackRock Inc.
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3,324,427 shares
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7.94
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%(c)
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40 East 52nd Street, New York, NY 10022
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AllianceBernstein LP
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3,864,638 shares
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6.80
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%(d)
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1245 Avenue of the Americas, New York, NY 10105
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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
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167
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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 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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Stock
Ownership of Officers and Directors
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Shares of Common 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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978
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978
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Thomas B. Fargo
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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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|
|
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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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|
|
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|
|
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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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168
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
169
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.
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).
170
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 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
171
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 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
172
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.
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.
173
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.
174
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.
175
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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.
F-7
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
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
F-8
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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
F-9
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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
F-10
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
F-11
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
basis over the term of the lease. For purposes of recognizing
lease incentives, the 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
F-12
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
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
F-13
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
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 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.
F-14
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-16
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
completedunbilled
|
|
|
524
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
718
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
Due From Other Customers
|
|
|
|
|
|
|
|
|
Amounts billed
|
|
|
9
|
|
|
|
11
|
|
Recoverable costs and accrued profit on progress
completedunbilled
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
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
F-17
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
The companys earnings are entirely domestic and its
effective tax rate for the year ended December 31, 2010,
was 34.5 percent as 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.
F-18
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
F-19
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
administrative expenses. The changes in unrecognized tax
benefits (exclusive of interest) during 2010, 2009 and 2008 are
summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
F-20
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
|
|
|
|
|
|
|
|
|
|
|
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
F-21
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
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 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.
F-22
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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
F-23
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
F-24
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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.
F-25
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
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.
F-26
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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.
F-27
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
F-28
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 costs2008
|
|
|
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 costs2009
|
|
|
(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 costs2010
|
|
$
|
(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
F-29
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
F-30
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
F-31
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
F-32
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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
F-33
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
which the funds are not valued on a quoted market basis, and
fixed income securities that are valued using model based
pricing services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 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
|
|
Corp orate 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-34
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 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
|
|
Corp orate 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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.
F-36
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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.
F-37
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 $15,
per share, respectively.
Stock option activity for the year ended December 31, 2010,
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
Under Option
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic Value
|
|
|
|
(in thousands)
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
($ 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.
F-38
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
F-39
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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-40
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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-41
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-42
HUNTINGTON
INGALLS INDUSTRIES, INC.
|
|
|
|
|
|
|
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-43
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-44