Exhibit 10.1
EXECUTION COPY
SEPARATION AND DISTRIBUTION AGREEMENT
among
NORTHROP GRUMMAN CORPORATION,
NEW P, INC.,
HUNTINGTON INGALLS INDUSTRIES, INC.,
NORTHROP GRUMMAN SHIPBUILDING, INC.,
and
NORTHROP GRUMMAN SYSTEMS CORPORATION
Dated as of March 29, 2011
TABLE OF CONTENTS
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Page
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ARTICLE I DEFINITIONS
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2
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Section 1.1 Table of Definitions
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2
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Section 1.2 Certain Defined Terms
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3
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ARTICLE II THE SEPARATION
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19
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Section 2.1 Internal Reorganization; Transfer of Assets and Assumption of Liabilities
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19
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Section 2.2 Governmental Approvals and Consents; Transfers, Assignments and Assumptions Not Effected Prior to the Distribution
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20
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Section 2.3 Termination of Agreements
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21
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Section 2.4 Novation of Shipbuilding Liabilities
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22
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Section 2.5 Novation of Retained Liabilities
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23
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Section 2.6 Disclaimer of Representations and Warranties
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23
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Section 2.7 Treatment of Cash
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24
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Section 2.8 Replacement of Credit Support
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24
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ARTICLE III ACTIONS PENDING THE DISTRIBUTION
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25
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Section 3.1 Actions Prior to the Distribution
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25
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Section 3.2 Conditions to Distribution
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26
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ARTICLE IV THE DISTRIBUTION
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27
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Section 4.1 The Distribution
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27
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Section 4.2 Fractional Shares
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28
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Section 4.3 Sole Discretion of the Northrop Grumman Board and New NGC Board
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28
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ARTICLE V MUTUAL RELEASES; INDEMNIFICATION
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28
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Section 5.1 Release of Pre-Distribution Claims
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28
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Section 5.2 Indemnification by HII and NGSB
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30
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Section 5.3 Indemnification by New NGC and NGSC
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30
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Section 5.4 Indemnification Obligations Net of Insurance Proceeds and Other Amounts
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31
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Section 5.5 Third-Party Claims
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31
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Section 5.6 Additional Matters
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34
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Section 5.7 Remedies Cumulative
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34
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Section 5.8 Survival of Indemnities
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34
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Section 5.9 Limitation on Liability
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34
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Page
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ARTICLE VI SHARED GAINS AND SHARED LIABILITIES
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35
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Section 6.1 Managing Party
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35
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Section 6.2 Allocation Committee
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35
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Section 6.3 Shared Gains
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36
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Section 6.4 Shared Liabilities
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37
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Section 6.5 Payments
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37
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ARTICLE VII EXCHANGE OF INFORMATION; CONFIDENTIALITY
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38
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Section 7.1 Agreement for Exchange of Information
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38
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Section 7.2 Ownership of Information
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39
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Section 7.3 Compensation for Providing Information
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39
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Section 7.4 Record Retention
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39
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Section 7.5 Limitation of Liability
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39
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Section 7.6 Other Agreements Providing for Exchange of Information
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39
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Section 7.7 Cooperation
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39
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Section 7.8 Confidentiality
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40
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Section 7.9 Protective Arrangements
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41
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ARTICLE VIII FURTHER ASSURANCES AND ADDITIONAL COVENANTS
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41
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Section 8.1 Further Assurances
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41
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Section 8.2 Amendment to NGC Certificate of Incorporation
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42
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Section 8.3 Credit Support
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42
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Section 8.4 Non-Compete
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43
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Section 8.5 Intercompany Work Orders
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43
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Section 8.6 IDIQ Vehicles
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43
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Section 8.7 Government Contract Matters
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44
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Section 8.8 Software Licenses
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46
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Section 8.9 Use of Names, Logos and Information
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46
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ARTICLE IX TERMINATION
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47
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Section 9.1 Termination
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47
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Section 9.2 Effect of Termination
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47
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ARTICLE X DISPUTE RESOLUTION
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47
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Section 10.1 Negotiation
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47
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Section 10.2 Mediation
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48
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Section 10.3 Arbitration
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48
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Section 10.4 Confidentiality of Arbitral Award and Documents and Information Exchanged and Submitted in the Course of Arbitration
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49
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Section 10.5 Treatment of Negotiations and Mediation
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49
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ii
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Page
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Section 10.6 Continuity of Service and Performance
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49
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Section 10.7 Consolidation
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49
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Section 10.8 Submission to Jurisdiction
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50
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Section 10.9 Enforcement
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50
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ARTICLE XI MISCELLANEOUS
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51
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Section 11.1 Corporate Power
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51
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Section 11.2 Coordination with Certain Ancillary Agreements; Conflicts
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51
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Section 11.3 Expenses
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51
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Section 11.4 Amendment and Modification
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52
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Section 11.5 Waiver
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52
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Section 11.6 Notices
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52
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Section 11.7 Interpretation
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54
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Section 11.8 Entire Agreement
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54
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Section 11.9 No Third Party Beneficiaries
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54
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Section 11.10 Governing Law
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55
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Section 11.11 Assignment
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55
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Section 11.12 Severability
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55
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Section 11.13 Waiver of Jury Trial
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55
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Section 11.14 Counterparts
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55
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Section 11.15 Facsimile Signature
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55
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Section 11.16 Payment
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55
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Section 11.17 Parties Obligations
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56
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Annex I Internal Reorganization
iii
SEPARATION AND DISTRIBUTION AGREEMENT
SEPARATION AND DISTRIBUTION AGREEMENT, dated as of March 29, 2011 (this
Agreement
),
among Northrop Grumman Corporation, a Delaware corporation (
NGC
), New P, Inc., a Delaware
corporation (
New NGC
), Huntington Ingalls Industries, Inc., a Delaware corporation
(
HII
), Northrop Grumman Shipbuilding, Inc., a Virginia corporation (
NGSB
), and
Northrop Grumman Systems Corporation, a Delaware corporation (
NGSC
).
RECITALS
A. NGC, acting through itself and its direct and indirect Subsidiaries (as defined below),
currently conducts the Shipbuilding Business (as defined below) and the Retained Business (as
defined below).
B. The NGC Board (as defined below) has determined that it is appropriate, desirable and in
the best interests of NGC and its stockholders to separate NGC into two publicly traded companies:
(a) HII, which following the Distribution (as defined below) will own and conduct, directly and
indirectly, the Shipbuilding Business; and (b) New NGC, which following the Distribution will own
and conduct, directly and indirectly, the Retained Business.
C. Prior to the date of this Agreement, NGC formed New NGC as a wholly owned direct
Subsidiary, HII as a wholly owned direct subsidiary of New NGC, and Titan Merger Sub Inc., a
Delaware corporation and a wholly owned indirect Subsidiary of New
NGC
(
Merger Sub
).
D. Prior to the Distribution, Merger Sub will merge with and into NGC in a merger pursuant to
Section 251(g) of the Delaware General Corporation Law, with NGC as the surviving entity and
renamed Titan II Inc. and with New NGC renamed Northrop Grumman Corporation (the
Holding
Company Reorganization
).
E. After the Holding Company Reorganization and prior to the Distribution, the parties will
complete the Internal Reorganization (as defined below).
F. On the Distribution Date (as defined below) and subject to the terms and conditions of this
Agreement, New NGC shall distribute to the Record Holders (as defined below), on a
pro rata
basis,
all the outstanding shares of common stock, par value $.01 per share, of HII (
HII Common
Stock
) owned by New NGC on the Distribution Date (the
Distribution
).
G. The parties intend that, for U.S. federal income tax purposes, the Holding Company
Reorganization, the Internal Reorganization, and the Distribution shall qualify for Tax-Free Status
(as defined below) pursuant to Sections 351, 355, 361, 368(a) and related provisions of the Code
(as defined below).
AGREEMENT
In consideration of the foregoing and the mutual covenants and agreements herein contained,
and intending to be legally bound hereby, the parties agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1
Table of Definitions
. The following terms have the meanings set forth on
the pages referenced below:
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Definition
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Page
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AAA
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48
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Action
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3
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Affiliate
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4
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Agent
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4
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Agreement
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1
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Agreement Disputes
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48
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Allocation Committee
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4
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Allowable Cost Audit
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44
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Ancillary Agreements
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4
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Applicable HII Proportion
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4
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Applicable New NGC Proportion
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4
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Applicable Proportion
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4
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Assets
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4
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Assigned Action
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6
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Business
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8
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Business Day
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6
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Change of Control
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6
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Change of Control Triggering Event
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7
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Code
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7
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Consents
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7
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Continuing Director
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7
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Credit Support Instruments
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7
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Determination Request
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7
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Dispute Notice
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48
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Distribution
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1
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Distribution Date
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7
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Distribution Ratio
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7
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Employee Matters Agreement
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7
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Environmental Laws
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7
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Environmental Liabilities
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8
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Exchange Act
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8
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Excluded Disputes
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48
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Excluded Retained Assets
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8
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Excluded Shipbuilding Assets
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8
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Fitch
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8
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Form 10
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8
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Former Business
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8
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Governmental Approvals
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9
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Governmental Authority
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9
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GO-Zone Bonds
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9
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GO-Zone Bonds Guarantee
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I-1
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Group
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9
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Hazardous Substances
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9
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HII
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1
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HII Assigned Action
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9
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HII Balance Sheet
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9
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HII Common Stock
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1
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HII Contribution
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I-2
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HII Credit Facility
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9
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HII Credit Support Instruments
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25
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HII Debt
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9
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HII Entities
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9
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HII Group
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9
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HII Indemnitees
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30
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HII Transferred Assets
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10
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Holding Company Reorganization
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1
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Holdings LLC
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I-1
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Holdings LP
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I-1
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Holdings LP Distribution
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I-2
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Indemnifying Party
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31
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Indemnitee
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31
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Indemnity Payment
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31
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Information
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10
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Information Statement
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10
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Ingalls Indemnity Agreement
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10
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Insurance Matters Agreement
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10
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Insurance Policies
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10
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Insurance Proceeds
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10
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2
Table of Definitions (cont.)
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Definition
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Page
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Intercompany Debt Receivable
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I-1
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Internal Reorganization
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10
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IP License Agreement
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10
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IRS Ruling
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10
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IWOs
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43
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Law
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11
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Letter Subcontracts
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43
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Liabilities
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11
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Litigation Management Agreement
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11
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Managing Party
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35
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Merger Sub
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1
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Moodys
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11
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Navy Guarantees
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11
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New NGC
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1
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New NGC Assigned Action
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11
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New NGC Board
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11
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New NGC Common Stock
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12
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New NGC Credit Support Instruments
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24
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New NGC Entities
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12
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New NGC Group
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12
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New NGC Indemnitees
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30
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New NGC Transferred Assets
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12
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NGC
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1
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NGC Board
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12
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NGC Charter Amendment
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42
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NGC Charter Amendment Proposal
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42
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NGC Credit Agreement
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I-1
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NGC Distribution
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I-1
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NGSB
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1
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NGSC
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1
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NGTS
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12
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Non-Managing Party
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12
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Northrop Grumman
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12
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Northrop Grumman Board
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12
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Northrop Grumman Stockholders
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12
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NYSE
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12
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Opinion
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12
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P&I Agreements
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12
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Person
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13
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Rating Agencies
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13
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Rating Event
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13
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Record Date
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13
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Record Holders
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13
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Retained Assets
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13
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Retained Business
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14
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Retained Cash
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I-2
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Retained Liabilities
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14
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Rules
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48
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S&P
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15
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SEC
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15
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Security Interest
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15
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Separation
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15
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Settlement Asset
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44
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Settlement Liability
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44
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Shared Action
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15
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Shared Gain
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15
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Shared Liability
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15
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Shipbuilding Assets
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16
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Shipbuilding Business
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17
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Shipbuilding Liabilities
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17
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Solicitation
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43
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Subsidiary
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18
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Tax Matters Agreement
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19
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Taxes
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19
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Tax-Free Status
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19
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Team
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19
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Teaming Agreement
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19
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Third-Party Claim
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31
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Transferred Debt Proceeds
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I-2
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Transition Services Agreement
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19
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Section 1.2
Certain Defined Terms
. For the purposes of this Agreement:
Action
means any claim, demand, action, suit, countersuit, audit, arbitration,
inquiry, proceeding or investigation by or before any Governmental Authority or any United States
or non-United States federal, state, local or international arbitration or mediation tribunal.
3
Affiliate
of any Person means a Person that controls, is controlled by, or is under
common control with such Person;
provided
,
however
, that for purposes of this
Agreement and the Ancillary Agreements, none of the New NGC Entities shall be deemed to be an
Affiliate of any HII Entity and none of the HII Entities shall be deemed to be an Affiliate of any
New NGC Entity. As used herein, control means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such entity, whether
through ownership of voting securities or other interests, by contract or otherwise.
Agent
means the distribution agent to be appointed by the New NGC Board to
distribute to the Record Holders the shares of HII Common Stock pursuant to the Distribution.
Allocation Committee
means a committee composed of one representative designated
from time to time by each of New NGC and HII that shall be established in accordance with Section
6.2.
Ancillary Agreements
means the Employee Matters Agreement, the Ingalls Indemnity
Agreement, the Insurance Matters Agreement, the IP License Agreement, the Litigation Management
Agreement, the P&I Agreements, the Tax Matters Agreement, the Transition Services Agreement and any
other instruments, assignments, documents and agreements executed in connection with the
implementation of the transactions contemplated by this Agreement, including the Internal
Reorganization.
Applicable HII Proportion
means the proportion of a Shared Gain or a Shared
Liability, as applicable, that relates to the Shipbuilding Business. With respect to any Shared
Liability identified on
Schedule 1.1(a)(1)
or any Shared Gain identified on
Schedule
1.1(a)(2)
, the Applicable HII Proportion shall be as set forth under the heading Applicable
HII Proportion opposite such matter on such Schedule. With respect to any other Shared Liability
or Shared Gain, the Applicable HII Proportion shall be the extent to which such Shared Liability or
Shared Gain relates to the Shipbuilding Business and shall be determined in accordance with Section
6.2(b).
Applicable New NGC Proportion
means the proportion of a Shared Gain or a Shared
Liability, as applicable, that relates to the Retained Business. With respect to any Shared
Liability identified on
Schedule 1.1(a)(1)
or any Shared Gain identified on
Schedule
1.1(a)(2)
, the Applicable New NGC Proportion shall be as set forth under the heading
Applicable New NGC Proportion opposite such matter on such Schedule. With respect to any other
Shared Liability or Shared Gain, the Applicable New NGC Proportion shall be the extent to which
such Shared Liability or Shared Gain relates to the Retained Business and shall be determined in
accordance with Section 6.2(b).
Applicable Proportion
means (a) as to New NGC, the Applicable New NGC Proportion,
and (b) as to HII, the Applicable HII Proportion.
Assets
means all assets, properties and rights (including goodwill), wherever
located (including in the possession of vendors or other third parties or
4
elsewhere), whether real, personal or mixed, tangible, intangible, corporeal, incorporeal or
contingent, in each case whether or not recorded or reflected or required to be recorded or
reflected on the books and records or financial statements of any Person, including the following:
(a) all accounting and other books, records and files whether in paper, microfilm, microfiche,
computer tape or disc, magnetic tape or any other form;
(b) all apparatus, computers and other electronic data processing equipment, fixtures,
machinery, equipment, furniture, office equipment, automobiles, trucks, aircraft, motor vehicles
and other transportation equipment, special and general tools, test devices, prototypes and models
and other tangible personal property;
(c) all inventories of materials, parts, supplies, raw materials, work-in-process and finished
goods and products;
(d) all interests in real property of whatever nature, including easements and rights of way,
whether as owner, mortgagee or holder of a Security Interest in real property, lessor, sublessor,
lessee, sublessee or otherwise, and copies of all related documentation;
(e) all interests in any capital stock or other equity, partnership, membership, joint venture
or similar interests of any Subsidiary or any other Person, all bonds, notes, debentures or other
securities issued by any Subsidiary or any other Person, all loans, advances or other extensions of
credit or capital contributions to any Subsidiary or any other Person and all other investments in
securities of any Person;
(f) all license agreements, leases of personal property, open purchase orders for raw
materials, supplies, parts or services, unfilled orders for the manufacture and sale of products
and other contracts, agreements or commitments;
(g) all deposits, letters of credit, guarantees and performance and surety bonds;
(h) all recorded scientific and technical information, data, specifications, research and
development information, engineering drawings, operating and maintenance manuals, studies, reports,
discoveries, ideas, concepts, know-how, techniques, designs, blueprints, diagrams, models,
prototypes, samples, and materials and analyses regardless of the form or method of the recording
whether prepared by a partys employees or on behalf of a party by consultants and other third
parties;
(i) all domestic and foreign patents, copyrights, trade names, trademarks, service marks and
registrations and applications for any of the foregoing, mask works, trade secrets, inventions,
other proprietary information and licenses from third parties granting the right to use any of the
foregoing;
(j) all computer applications, programs and other software, including operating software,
network software, firmware, middleware, design software, design
5
tools, systems documentation, flow charts, instructions, source code, listings, object code
listings, design details, algorithms, processes, flow charts, formulae, and related material that
would enable the software to be reproduced, recreated or recompiled, and computer databases;
(k) all cost information, sales and pricing data, customer prospect lists, supplier records,
customer and supplier lists, records pertaining to customers and customer accounts, customer and
vendor data, correspondence and lists, product literature, artwork, design, development and
manufacturing files, vendor and customer drawings, formulations and specifications, quality records
and reports and other books, records, studies, surveys, reports, plans and documents, in whatever
form;
(l) all prepaid expenses, trade accounts and other accounts and notes receivable;
(m) all rights under contracts, options or agreements, all claims or rights against any Person
arising from the ownership of any Asset, all rights in connection with any bids or offers and all
claims, choses in action or similar rights, whether accrued or contingent;
(n) all insurance proceeds and rights under Insurance Policies and all rights in the nature of
insurance, indemnification or contribution;
(o) all licenses, permits, approvals and authorizations that have been issued by any
Governmental Authority and all pending applications therefor;
(p) all cash or cash equivalents, bank accounts, lock boxes and other deposit arrangements;
(q) copies of all documentation related to Insurance Policies;
(r) all interests in any public grants and subsidies of any kind received or applied for; and
(s) all interest rate, currency, commodity or other swap, collar, cap or other hedging or
similar agreements or arrangements.
Assigned Action
has the meaning set forth in the Litigation Management Agreement.
Business Day
means a day other than a Saturday, Sunday or other day on which
commercial banks in New York City are authorized or required by law to close.
Change of Control
means the occurrence of any of the following after the
Distribution: (a) the direct or indirect sale, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related transactions, of all or
substantially all of the properties or assets of HII and its Subsidiaries taken as a whole to any
person (as used in Section 13(d)(3) of the Exchange Act) or group of related persons
6
for purposes of Section 13(d) of the Exchange Act other than HII or one of its Subsidiaries;
(b) the approval by the holders of HIIs common stock of any plan or proposal for the liquidation
or dissolution of HII or HIIs approval or making of any bankruptcy filing; (c) the consummation of
any transaction (including any merger or consolidation) the result of which is that any person (as
used in Section 13(d)(3) of the Exchange Act) or group of related persons for purposes of Section
13(d) of the Exchange Act other than HII or one of its Subsidiaries becomes the beneficial owner,
directly or indirectly, of more than 50% of the then outstanding number of shares of HII voting
stock; or (d) the first day on which a majority of the members of HIIs board of directors are not
Continuing Directors.
Change of Control Triggering Event
means the occurrence of both a Change of Control
and a Rating Event.
Code
means the Internal Revenue Code of 1986, as amended and as in effect for the
relevant period in question.
Consents
means any consents, waivers or approvals from, or notification requirements
to, any Person other than a member of either Group.
Continuing Director
means, as of any date of determination, any member of the board
of directors of HII who (a) was a member of such board of directors as of the Distribution; or (b)
was nominated for election or elected to such board of directors with the approval of a majority of
the Continuing Directors who were members of such board of directors at the time of such nomination
or election (either by a specific vote or by approval of the proxy statement in which such member
was named as a nominee for election as a director, without objection to such nomination).
Credit Support Instruments
means surety bonds, covenants, indemnities, undertakings,
letters of credit or similar assurances or other credit support.
Determination Request
means a written request made to the Allocation Committee for a
determination as to whether a Third-Party Claim specified in such request constitutes a Shared
Liability or whether any potential gain or right specified in such request constitutes a Shared
Gain.
Distribution Date
means the date, determined by the Northrop Grumman Board, on which
the Distribution occurs.
Distribution Ratio
means the number of shares of HII Common Stock to be distributed
in respect of each share of New NGC Common Stock in the Distribution, which ratio shall be
determined by the New NGC Board prior to the Record Date.
Employee Matters Agreement
means the Employee Matters Agreement, dated as of the
date hereof, among NGC, New NGC and HII, as may be amended or modified from time to time.
Environmental Laws
means all federal, state, local and foreign Laws, including all
judicial and administrative orders, determinations, and consent agreements or
7
decrees, that relate, in whole or in part, to Hazardous Substances, pollution, contaminants,
harmful substances, protection of the environment or human health, including those that regulate
the use, manufacture, generation, handling, labeling, testing, transport, treatment, storage,
processing, discharge, disposal, release, threatened release, control, or cleanup of harmful
substances, pollutants, contaminants, Hazardous Substances or materials containing such substances,
regardless of when enacted or effective.
Environmental Liabilities
means any Liabilities arising out of or relating to the
environment, human health, any Environmental Law, Hazardous Substances or exposure to Hazardous
Substances, pollutants, contaminants or other harmful substances, including (a) fines, penalties,
judgments, awards, settlements, losses, damages (including consequential damages), costs, fees
(including attorneys and consultants fees), expenses and disbursements, (b) costs of defense and
other responses to any administrative or judicial action (including notices, claims, complaints,
suits and other assertions of liability), (c) responsibility for any investigation, remediation,
monitoring or cleanup costs, injunctive relief, tort claims, natural resource damages, and any
other environmental compliance or remedial measures, in each case known or unknown, foreseen or
unforeseen, and (d) any claims, suits or actions (whether third-party or otherwise) for any
Liability, including personal injury or property damage.
Exchange Act
means the Securities Exchange Act of 1934, as amended, together with
the rules and regulations promulgated thereunder.
Excluded Retained Assets
means the Assets listed or described on
Schedule
1.1(a)(3)
.
Excluded Shipbuilding Assets
means:
(a) the Assets listed or described on
Schedule 1.1(a)(4)
;
(b) the New NGC Transferred Assets; and
(c) the Transferred Debt Proceeds.
Fitch
means Fitch Ratings Ltd.
Form 10
means the registration statement on Form 10 filed by HII with the SEC to
effect the registration of HII Common Stock pursuant to the Exchange Act in connection with the
Distribution, as such registration statement may be amended or supplemented from time to time,
including any amendment or supplement thereto.
Former Business
means any corporation, partnership, entity, division, business unit
or business, including any business within the meaning of Rule 11-01(d) of Regulation S-X (in each
case, including any Assets and Liabilities comprising the same) (as used in this definition of
Former Business, a
Business
) that has been sold, conveyed, assigned, transferred or
otherwise disposed of or divested (in whole or in part) to a Person that is not a member of the New
NGC Group or the HII Group or the operations, activities or production of which has been
discontinued, abandoned, completed
8
or otherwise terminated (in whole or in part), in each case prior to the Distribution. For
the avoidance of doubt, any Business that has been sold, conveyed, assigned, transferred or
otherwise disposed of or divested (in whole or in part) by a member of one Group to a member of the
other Group shall not be deemed a Former Business of the first Group if such Business has
subsequently been sold, conveyed, assigned, transferred or otherwise disposed of or divested (in
whole or in part by a member of the second Group) to any Person that is not a member of the New NGC
Group or the HII Group.
GO-Zone Bonds
means the Gulf Opportunity Zone Industrial Development Revenue Bonds
(Northrop Grumman Ship Systems, Inc. Project) Series 2006 due 2028 issued by the Mississippi
Business Finance Corporation.
Governmental Approvals
means any notices, reports or other filings to be given to or
made with, or any releases, Consents, substitutions, approvals, amendments, registrations, permits
or authorizations to be obtained from, any Governmental Authority.
Governmental Authority
means any United States or non-United States federal, state,
local, territorial, tribal or international court, government, department, commission, board,
bureau, agency, official or other legislative, judicial, regulatory, administrative or governmental
authority.
Group
means the New NGC Group or the HII Group, as the context requires.
Hazardous Substances
means all materials, wastes or substances defined by, or
regulated under, any Environmental Laws now or in the future and any substance that can give rise
to any claim, suit or action (whether third-party or otherwise) for any Liabilities, including
personal injury or property damage.
HII Assigned Action
has the meaning set forth in the Litigation Management
Agreement.
HII Balance Sheet
means the audited pro forma consolidated balance sheet of HII,
including the notes thereto, as of December 31, 2010, included in the Information Statement.
HII Credit Facility
means the credit facility to be entered into prior to the
Distribution between HII, as borrower, and an agent or co-agents pursuant to which HII may borrow
funds.
HII Debt
means the debt issued by HII pursuant to a Rule 144A offering to be
completed prior to the Internal Reorganization and the term loan debt under the HII Credit
Facility.
HII Entities
means the members of the HII Group.
HII Group
means HII and each Person that will be a direct or indirect Subsidiary of
HII immediately prior to the Distribution (but after giving effect to the
9
Internal Reorganization) and each Person that is or becomes a member of the HII Group after
the Distribution, including in all circumstances the predecessor and successor entities of HII or
each such other Person. For the purposes of this Agreement and the Ancillary Agreements, New NGC
shall not be deemed to be a successor entity of NGC.
HII Transferred Assets
means those Assets of NGC (but not the Assets of any of its
Subsidiaries) that are listed on
Schedule 1.1(a)(5)
.
Information
means information, including books and records, whether or not
patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms,
stored in any medium, including studies, reports, records, books, contracts, instruments, surveys,
discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints,
diagrams, models, prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names, communications by or to
attorneys (including attorney-client privileged communications), memos and other materials prepared
by attorneys or under their direction (including attorney work product), and other technical,
financial, employee or business information or data.
Information Statement
means the Information Statement, attached as an exhibit to the
Form 10, to be sent to each holder of New NGC Common Stock in connection with the Distribution, as
such Information Statement may be amended from time to time, including any amendment or supplement
thereto.
Ingalls Indemnity Agreement
means the Ingalls Guaranty Performance, Indemnity and
Termination Agreement, dated as of the date hereof, among HII, NGSB and NGSC, as may be amended or
modified from time to time.
Insurance Matters Agreement
means the Insurance Matters Agreement, dated as of the
date hereof, among NGC, New NGC and HII, as may be amended or modified from time to time.
Insurance Policies
has the meaning set forth in the Insurance Matters Agreement.
Insurance Proceeds
means, with respect to any Liability to be reimbursed by an
Indemnifying Party that may be covered, in whole or in part, by Insurance Policies written by
third-party providers, the amount of insurance proceeds actually received in cash under such
Insurance Policy with respect to such Liability, net of any taxes and costs in seeking such
collection.
Internal Reorganization
means the transactions described in
Annex I
.
IP License Agreement
means the Intellectual Property License Agreement, dated as of
the date hereof, between NGSC and NGSB, as may be amended or modified from time to time.
IRS Ruling
has the meaning set forth in the Tax Matters Agreement.
10
Law
means any statute, law, regulation, ordinance, rule, judgment, rule of common
law, order, decree, government approval, concession, grant, franchise, license, agreement,
directive, guideline, policy, requirement or other governmental restriction or any similar form of
decision of, or determination by, or any interpretation or administration of any of the foregoing
by, any Governmental Authority, whether now or hereinafter in effect and, in each case, as amended.
Liabilities
means any and all losses, claims, charges, debts, demands, Actions,
damages, obligations, payments, costs and expenses, sums of money, bonds, indemnities and similar
obligations, penalties, covenants, contracts, controversies, agreements, promises, omissions,
guarantees, make whole agreements and similar obligations, and other liabilities, including all
contractual obligations, whether absolute or contingent, inchoate or otherwise, matured or
unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising,
and including those arising under any Law, Action, threatened or contemplated Action (including the
costs and expenses of demands, assessments, judgments, settlements and compromises relating thereto
and attorneys fees and any and all costs and expenses (including allocated costs of in-house
counsel and other personnel), whatsoever incurred in investigating, preparing or defending against
any such Actions or threatened or contemplated Actions), order or consent decree of any
Governmental Authority or any award of any arbitrator of any kind, and those arising under any
contract, commitment or undertaking, including those arising under this Agreement or any Ancillary
Agreement or incurred by a party hereto or thereto in connection with enforcing its rights to
indemnification hereunder or thereunder, in each case, whether or not recorded or reflected or
required to be recorded or reflected on the books and records or financial statements of any
Person.
Litigation Management Agreement
means the Litigation Management and Coordination
Agreement, dated as of the date hereof, among NGC, New NGC, HII, NGSB and NGSC, as may be amended
or modified from time to time.
Moodys
means Moodys Investors Service, Inc.
Navy Guarantees
means (a) the Performance Guaranty, dated as of April 11, 2002, by
NGC, as guarantor, to the United States of America, Naval Sea Systems Command as beneficiary, (b)
the Performance Guaranty, dated 2006, by NGC, as guarantor, to the United States of America, Naval
Sea Systems Command as beneficiary, (c) the Performance Guaranty, dated as of April 24, 2007, by
NGC, as guarantor, to the United States of America, Naval Sea Systems Command as beneficiary and
(d) any other similar guarantee pursuant to which NGC has guaranteed the performance of NGSB (or an
Affiliate) under shipbuilding construction contracts with the United States Department of the Navy
or a command or other division thereof.
New NGC Assigned Action
has the meaning set forth in the Litigation Management
Agreement.
New NGC Board
means the board of directors of New NGC or an authorized committee
thereof.
11
New NGC Common Stock
means the common stock, par value $1.00 per share, of New NGC.
New NGC Entities
means the members of the New NGC Group.
New NGC Group
means New NGC and each Person that will be a direct or indirect
Subsidiary of New NGC immediately after the Distribution and each Person that is or becomes a
member of the New NGC Group after the Distribution, including in all circumstances the predecessor
and successor entities of New NGC or each such other Person. For the purposes of this Agreement
and the Ancillary Agreements, NGC shall not be deemed to be a predecessor entity of New NGC.
New NGC Transferred Assets
means all of the Assets of NGC (but not the Assets of any
of its Subsidiaries) including those Assets listed or described on
Schedule 1.1(a)(6)
,
other than (a) the HII Transferred Assets and (b) the capital stock in NGSC and NGSB.
NGC Board
means the board of directors of NGC or an authorized committee thereof.
NGTS
means Northrop Grumman Technical Services, Inc., an Oklahoma corporation,
member of the New NGC Group and party to the Teaming Agreement.
Non-Managing Party
means, as between HII and New NGC, the party that is not the
Managing Party with respect to any Shared Gain or Shared Liability.
Northrop Grumman
means (a) at all times prior to the effectiveness of the Holding
Company Reorganization, NGC, and (b) at all times at or after the effectiveness of the Holding
Company Reorganization, New NGC.
Northrop Grumman Board
means (a) at all times prior to the effectiveness of the
Holding Company Reorganization, the NGC Board, and (b) at all times at or after the effectiveness
of the Holding Company Reorganization, the New NGC Board.
Northrop Grumman Stockholders
means (a) at all times prior to the effectiveness of
the Holding Company Reorganization, the stockholders of NGC, and (b) at all times at or after the
effectiveness of the Holding Company Reorganization, the stockholders of New NGC.
NYSE
means the New York Stock Exchange.
Opinion
has the meaning set forth in the Tax Matters Agreement.
P&I Agreements
means the Performance and Indemnity Agreements, to be executed and
delivered in connection with the Internal Reorganization, between HII and NGC, as may be amended or
modified from time to time.
12
Person
means an individual, corporation, partnership, limited liability company,
limited liability partnership, syndicate, person, trust, association, organization or other entity,
including any Governmental Authority, and including any successor, by merger or otherwise, of any
of the foregoing.
Rating Agencies
means (a) each of Fitch, Moodys and S&P and (b) if Fitch, Moodys
and S&P all cease to rate HII or all fail to make a rating of HII publicly available for reasons
outside of HIIs control, a nationally recognized statistical rating organization within the
meaning of Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act, selected by HII (as certified by a
resolution of the board of directors of HII) as a replacement agency.
Rating Event
means HIIs corporate rating is downgraded to B or B2 or below, as
applicable, by any of the Rating Agencies on any date from and after the date of the public notice
of an arrangement that could result in a Change of Control until the end of the 60-day period
following public notice of the consummation of the Change of Control (which 60-day period shall be
extended so long as the rating of HII is under publicly announced consideration for possible
downgrade by any of the Rating Agencies).
Record Date
means the close of business on the date determined by the New NGC Board
as the record date for determining the stockholders of New NGC entitled to receive shares of HII
Common Stock in the Distribution. The Record Date shall occur after completion of the Holding
Company Reorganization.
Record Holders
means the holders of New NGC Common Stock on the Record Date.
Retained Assets
means:
(a) the Assets listed or described on
Schedule 1.1(a)(7)
, the New NGC Transferred
Assets and all other Assets that are expressly and specifically provided in this Agreement or any
Ancillary Agreement as Assets to be transferred to New NGC or any other member of the New NGC
Group;
(b) all interests in the capital stock of, or any other equity, partnership, membership, joint
venture or similar interests in, the Subsidiaries of New NGC (other than any member of the HII
Group) immediately prior to the Distribution (after giving effect to the Internal Reorganization)
and any capital stock of, or equity, partnership, membership, joint venture or similar interests
in, any other Person (other than any member of the HII Group) owned by any member of the New NGC
Group immediately prior to the Distribution (after giving effect to the Internal Reorganization);
(c) any recovery or other Assets (net of any expenses) received by any member of either Group
with respect to any New NGC Assigned Action;
(d) the Applicable New NGC Proportion of any Shared Gain; and
13
(e) all other Assets owned or held immediately prior to the Distribution (after giving effect
to the Internal Reorganization) by New NGC or any of its Subsidiaries (including for the avoidance
of doubt, HII and its Subsidiaries) that are not Shipbuilding Assets, including the Transferred
Debt Proceeds.
Notwithstanding the foregoing, the Retained Assets shall not include any items expressly
governed by the Tax Matters Agreement or the Excluded Retained Assets. In the event of any
inconsistency or conflict that may arise in the application or interpretation of any of the
foregoing provisions, for the purpose of determining what is and is not a Retained Asset, any item
explicitly included on a Schedule referred to in this definition of Retained Assets shall take
priority over any provision of the text hereof.
Retained Business
means:
(a) any businesses or operations conducted by any member of the New NGC Group (other than any
businesses or operations to the extent conducted through the ownership of, on behalf of or for the
benefit of any member of the HII Group prior to the Distribution), including any Former Business of
any member of the New NGC Group and any Former Business of NGC that is not also a Former Business
of any other member of the HII Group, in all cases including those businesses set forth on
Schedule 1.1(a)(8)
, but excluding those businesses set forth on
Schedule 1.1(a)(9)
;
(b) the businesses or operations, including Former Businesses, conducted by any member of the
HII Group (including NGC) prior to the Distribution to the extent that they do not relate to the
Shipbuilding Business; and
(c) any other businesses or operations conducted through the use of the Retained Assets to the
extent that they do not relate to the Shipbuilding Business.
Retained Liabilities
means:
(a) all of the following Liabilities:
(i) the Liabilities listed or described on
Schedule 1.1(a)(10)
;
(ii) all other Liabilities that are expressly and specifically provided by this Agreement as
Liabilities to be wholly assumed by New NGC or any member of the New NGC Group, and all obligations
of New NGC or any other member of the New NGC Group under this Agreement or any of the Ancillary
Agreements;
(iii) all other Liabilities that are both wholly unrelated to the Shipbuilding Business and
are not otherwise Shipbuilding Liabilities; and
(b) the Applicable New NGC Proportion of any Shared Liability.
Notwithstanding the foregoing, the Retained Liabilities shall not include any items expressly
governed by the Tax Matters Agreement or the Ingalls Indemnity Agreement.
14
In the event of any inconsistency or conflict that may arise in the application or
interpretation of any of the foregoing provisions, for the purpose of determining what is and is
not a Retained Liability, any item explicitly included on a Schedule referred to in this definition
of Retained Liabilities shall take priority over any provision of the text hereof.
S&P
means Standard & Poors Ratings Services, a division of The McGraw-Hill
Companies, Inc.
SEC
means the Securities and Exchange Commission.
Security Interest
means any mortgage, security interest, pledge, lien, charge,
claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition,
easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever.
Separation
means (a) the Internal Reorganization, (b) any other actions to be taken
pursuant to Article II and (c) any other transfers of Assets and assumptions of Liabilities, in
each case, between a member of one Group and a member of the other Group, provided for in this
Agreement or any Ancillary Agreement.
Shared Action
has the meaning set forth in the Litigation Management Agreement.
Shared Gain
means any claim or right of a member of the New NGC Group or the HII
Group, whenever discovered, against any Person (other than a member of the New NGC Group or the HII
Group) that relates to both the Retained Business and the Shipbuilding Business or is listed or
described on
Schedule 1.1(a)(11)
, other than any claim or right described on
Schedule
1.1(a)(12)
, in all cases to the extent that such claim or right accrued as of the Distribution
or relates to events or circumstances that occurred or existed prior to the Distribution.
Notwithstanding anything to the contrary in this definition of Shared Gain, Shared Gains shall
not include any Settlement Assets, which shall be governed by Section 8.7, or any claims or rights
related to, attributable to or arising in connection with Taxes or Tax Returns, which are expressly
governed by the Tax Matters Agreement.
Shared Liability
means any of the following:
(a) any Liability that relates to both the Shipbuilding Business and the Retained Business and
that is not listed in a subclause of clause (a) of the definition of Shipbuilding Liabilities;
and
(b) any Liability listed or described on
Schedule 1.1(a)(13)
.
Notwithstanding anything to the contrary in this definition of Shared Liability, Shared
Liabilities shall not include any Settlement Liabilities, which shall be governed by Section 8.7,
or any Liabilities related to, attributable to or arising in
15
connection with Taxes or Tax Returns, which are expressly governed by the Tax Matters
Agreement.
Shipbuilding Assets
means:
(a) the Assets listed or described on
Schedule 1.1(a)(14)
, the HII Transferred Assets
and all other Assets that are expressly and specifically provided in this Agreement or any
Ancillary Agreement as Assets to be transferred to HII or any other member of the HII Group;
(b) all interests in the capital stock of, or any other equity, partnership, membership, joint
venture or similar interests in, the Subsidiaries of HII immediately prior to the Distribution
(after giving effect to the Internal Reorganization) and any capital stock of, or equity,
partnership, membership, joint venture or similar interests in, any other Person owned by any
member of the HII Group immediately prior to the Distribution (after giving effect to the Internal
Reorganization);
(c) all Assets reflected as assets of HII and the other members of the HII Group on the HII
Balance Sheet and any Assets acquired by or for HII or any other member of the HII Group subsequent
to the date of the HII Balance Sheet that, had they been acquired on or before such date and owned
as of such date, would have been reflected on the HII Balance Sheet if prepared on a consistent
basis, subject to any dispositions of any such Assets subsequent to the date of the HII Balance
Sheet;
(d) any recovery or other Assets (net of any Taxes and expenses) received by any member of
either Group in any HII Assigned Action;
(e) all other Assets not expressly covered in clauses (a) through (d) of this definition of
Shipbuilding Assets that are wholly owned immediately prior to the Distribution (after giving
effect to the Internal Reorganization) by HII or any of its Subsidiaries;
(f) all patents, copyrights, trade secrets, know-how and other confidential and proprietary
information and all other intellectual property rights, whether arising under the laws of the
United States or the laws of any other jurisdiction, and all registrations and applications for
registration of any of the foregoing, that were created, devised or otherwise developed (i)
exclusively by the HII Employees and HII Retirees (each as defined in the Employee Matters
Agreement) (other than any of the foregoing that were developed specifically for the Retained
Business) or (ii) in whole or in part, by employees of any member of the New NGC Group or third
parties exclusively for the Shipbuilding Business, whether or not such intellectual property rights
had been assigned to NGC during its ownership of the Shipbuilding Business; and
(g) the Applicable HII Proportion of any Shared Gain.
Notwithstanding the foregoing, the Shipbuilding Assets shall not include any items expressly
governed by the Tax Matters Agreement or the Excluded Shipbuilding Assets. In the event of any
inconsistency or conflict that may arise in the application or
16
interpretation of any of the foregoing provisions, for the purpose of determining what is and
is not a Shipbuilding Asset, any item explicitly included on a Schedule referred to in this
definition of Shipbuilding Assets shall take priority over any provision of the text hereof.
Shipbuilding Business
means:
(a) any businesses or operations conducted by any member of the HII Group (other than any
businesses or operations to the extent conducted through the ownership of, on behalf of or for the
benefit of any member of the New NGC Group prior to the Distribution), including the businesses and
operations that are described in the Information Statement and any Former Business of any member of
the HII Group (other than NGC and not any other entity), in each case including those businesses
set forth on
Schedule 1.1(a)(9)
, but excluding those businesses set forth on
Schedule
1.1(a)(8)
;
(b) any other businesses or operations (including joint ventures) conducted through the use of
or with the Shipbuilding Assets;
(c) the HII Employees and HII Retirees and any other person employed by any member of the HII
Group after the Distribution; and
(d) the businesses or operations, including Former Businesses, conducted by NGC (but not any
other entity) or any member of the New NGC Group prior to the Distribution, in all cases to the
extent that they relate to the businesses or operations and Former Businesses described in clauses
(a) through (c) of this definition of Shipbuilding Business.
Shipbuilding Liabilities
means:
(a) all of the following Liabilities:
(i) the Liabilities listed or described on
Schedule 1.1(a)(15)
;
(ii) all other Liabilities that are expressly provided by this Agreement or any Ancillary
Agreement as Liabilities to be wholly assumed by HII or any other member of the HII Group, and all
obligations of HII or any other member of the HII Group under this Agreement or any of the
Ancillary Agreements;
(iii) all Liabilities reflected as liabilities or obligations on the HII Balance Sheet, and
all Liabilities arising or assumed after the date of the HII Balance Sheet that, had they arisen or
been assumed on or before such date and been existing obligations as of such date, would have been
reflected on the HII Balance Sheet if prepared on a consistent basis, subject to any discharge of
such Liabilities subsequent to the date of the HII Balance Sheet;
(iv) all Environmental Liabilities relating to (A) the use of any property by the Shipbuilding
Business at any time, regardless of whether such property is or is not owned or leased by HII or
any of its Subsidiaries or Affiliates (including any
17
properties set forth on
Schedule 1.1(a)(16)
), including any property where the
Shipbuilding Business contracted or arranged for disposal of wastes at any time whatsoever, or (B)
the operation or conduct of the Shipbuilding Business or activities related to the Shipbuilding
Business (including all Liabilities relating to any Shipbuilding Asset or any act or failure to act
by any director, officer, employee, agent or representative (whether or not such act or failure to
act is or was within such Persons authority) which act or failure to act relates to the
Shipbuilding Business);
(v) all Liabilities relating to the HII Employees and HII Retirees and any person employed by
any member of the HII Group after the Distribution, and the conduct of all such persons;
(vi) all Liabilities relating to the use of any property by the Shipbuilding Business at any
time, regardless of whether such property is or is not owned or leased by HII or any of its
Subsidiaries or Affiliates (including any properties set forth on
Schedule 1.1(a)(16)
),
including any property where the Shipbuilding Business contracted or arranged for disposal of
wastes at any time whatsoever;
(vii) all Liabilities relating to the Navy Guarantees, including all Liabilities that NGC or
any other party to this Agreement (including their Subsidiaries and Affiliates) has or may be found
to have under or in any way in connection with the Navy Guarantees;
(viii) all other Liabilities relating to the operation or conduct of the Shipbuilding Business
or activities related to the Shipbuilding Business (including all Liabilities relating to any
Shipbuilding Asset or any act or failure to act by any director, officer, employee, agent or
representative (whether or not such act or failure to act is or was within such Persons authority)
which act or failure to act relates to the Shipbuilding Business) that do not also relate to the
operation or conduct of the Retained Business; and
(ix) all other Liabilities that are wholly unrelated to the Retained Business and that are not
otherwise Retained Liabilities; and
(b) the Applicable HII Proportion of any Shared Liability.
Notwithstanding the foregoing, the Shipbuilding Liabilities shall not include any items
expressly governed by the Tax Matters Agreement or the Ingalls Indemnity Agreement.
In the event of any inconsistency or conflict that may arise in the application or
interpretation of any of the foregoing provisions, for the purpose of determining what is and is
not a Shipbuilding Liability, any item explicitly included on a Schedule referred to in this
definition of Shipbuilding Liabilities shall take priority over any provision of the text hereof.
Subsidiary
of any Person means any corporation or other organization, whether
incorporated or unincorporated, of which at least a majority of the securities or interests having
by the terms thereof ordinary voting power to elect at least a majority of
18
the board of directors or others performing similar functions with respect to such corporation
or other organization is directly or indirectly owned or controlled by such Person or by any one or
more of its Subsidiaries, or by such Person and one or more of its Subsidiaries;
provided
,
however
, that no Person that is not directly or indirectly wholly owned by any other Person
shall be a Subsidiary of such other Person unless such other Person controls, or has the right,
power or ability to control, that Person.
Tax-Free Status
has the meaning set forth in the Tax Matters Agreement.
Tax Matters Agreement
means the Tax Matters Agreement, dated as of the date hereof,
among New NGC, HII and NGC, as may be amended or modified from time to time.
Tax
has the meaning set forth in the Tax Matters Agreement.
Team
has the meaning set forth in the Teaming Agreement.
Teaming Agreement
means the teaming agreement listed on
Schedule 1.1(a)(17)
.
Transition Services Agreement
means the Transition Services Agreement, dated as of
the date hereof, among NGSC, NGSB, New NGC and HII, as may be amended or modified from time to
time.
ARTICLE II
THE SEPARATION
Section 2.1
Internal Reorganization; Transfer of Assets and Assumption of Liabilities
.
(a) Prior to the Distribution, the parties shall cause the Internal Reorganization to be
completed.
(b) Prior to the Distribution, the parties shall, and shall cause their respective
Subsidiaries to, (i) execute such instruments of assignment and transfer and take such other
corporate actions as are necessary to transfer to one or more members of the HII Group all of the
right, title and interest of the New NGC Group in and to all Shipbuilding Assets after giving
effect to the Internal Reorganization and (ii) take all actions necessary to cause one or more
members of the HII Group to assume all of the Shipbuilding Liabilities to the extent such
Shipbuilding Liabilities would otherwise remain obligations of any member of the New NGC Group
after giving effect to the Internal Reorganization.
(c) Prior to the Distribution, the parties shall, and shall cause their respective
Subsidiaries to, (i) execute such instruments of assignment and transfer and take such other
corporate actions as are necessary to transfer to one or more members of the New NGC Group all of
the right, title and interest of the HII Group in and to all Retained Assets after giving effect to
the Internal Reorganization and (ii) take all actions necessary to cause one or more members of the
New NGC Group to assume all of the Retained
19
Liabilities to the extent such Retained Liabilities would otherwise remain obligations of any
member of the HII Group after giving effect to the Internal Reorganization.
Section 2.2
Governmental Approvals and Consents; Transfers, Assignments and Assumptions
Not Effected Prior to the Distribution
.
(a) To the extent that any of the transactions contemplated by this Agreement or any Ancillary
Agreement requires any Governmental Approval or Consent, the parties will use their reasonable best
efforts to obtain such Governmental Approval or Consent.
(b) To the extent that any transfer or assignment of Assets or assumption of Liabilities
contemplated by this Agreement or any Ancillary Agreement shall not have been consummated prior to
the Distribution, the parties shall use reasonable best efforts to effect such transfers as
promptly following the Distribution as shall be practicable. Nothing herein shall be deemed to
require the transfer of any Assets or the assumption of any Liabilities that by their terms or
operation of law cannot or should not be transferred. In the event that any such transfer of
Assets or assumption of Liabilities has not been consummated, from and after the Distribution until
such time as such Asset is transferred or such Liability is assumed (i) the party retaining such
Asset shall thereafter hold such Asset for the use and benefit of the party entitled thereto (at
the expense of the party entitled thereto) and (ii) the party intended to assume such Liability
shall, or shall cause the applicable member of its Group to, pay or reimburse the party retaining
such Liability for all amounts paid or incurred in connection with the retention of such Liability.
In addition, the party retaining such Asset or Liability shall, insofar as reasonably practicable
and to the extent permitted by applicable Law, treat such Asset or Liability in the ordinary course
of business consistent with past practice and take such other actions as may be reasonably
requested by the party entitled to such Asset or by the party intended to assume such Liability in
order to place such party, insofar as reasonably practicable, in the same position as if such Asset
or Liability had been transferred or assumed as contemplated hereby and so that all the benefits
and burdens relating to such Asset or Liability, including possession, use, risk of loss, potential
for gain, and control over such Asset or Liability, are to inure from and after the Distribution to
the member or members of the New NGC Group or the HII Group entitled to such Asset or intended to
assume such Liability. In furtherance of the foregoing, the parties agree that, as of the
Distribution, each party shall be deemed to have acquired beneficial ownership over all of the
Assets, together with all rights and privileges incident thereto, and shall be deemed to have
assumed all of the Liabilities, and all duties, obligations and responsibilities incident thereto,
that such party is entitled to acquire or intended to assume pursuant to the terms of this
Agreement or the applicable Ancillary Agreement.
(c) If and when the Consents, Governmental Approvals and/or conditions, the absence or
non-satisfaction of which caused the deferral of transfer or assignment of any Asset or the
deferral of the assumption of any Liability pursuant to Section 2.2(b) are obtained or satisfied,
the transfer or assumption of the applicable Asset or Liability shall be effected in accordance
with and subject to the terms of this Agreement or the applicable Ancillary Agreement.
20
(d) The party retaining any Asset or Liability due to the deferral of the transfer of such
Asset or the deferral of the assumption of such Liability pursuant to Section 2.2(b) or otherwise
shall not be obligated, in connection with the foregoing, to expend any money unless the necessary
funds are advanced or agreed to be reimbursed by the party entitled to such Asset or the party
intended to assume such Liability. The party retaining such Asset or Liability shall use its
reasonable best efforts timely to notify the party entitled to such Asset or intended to assume
such Liability of the need for such expenditure.
(e) The parties agree to treat, for U.S. federal, state and local income tax purposes, any
Asset or Liability that is not transferred prior to the Distribution and is subject to the
provisions of Section 2.2(b) as owned by the member of the Group to which such Asset or Liability
was intended to be transferred from and after the Distribution, and shall not take any position
inconsistent therewith unless otherwise required by applicable Law.
Section 2.3
Termination of Agreements
.
(a) Except as set forth in Section 2.3(b), the HII Entities, on the one hand, and the New NGC
Entities, on the other hand, hereby terminate any and all agreements, arrangements, commitments or
understandings (including intercompany work orders), whether or not in writing, between or among
any HII Entity, on the one hand, and any New NGC Entity, on the other hand, effective as of the
Distribution. No such terminated agreement, arrangement, commitment or understanding (including
any provision thereof that purports to survive termination) shall be of any further force or effect
from and after the Distribution. Each party shall, at the reasonable request of any other party,
take, or cause to be taken, such other actions as may be necessary to effect the foregoing.
(b) The provisions of Section 2.3(a) shall not apply to any of the following agreements,
arrangements, commitments or understandings (or to any of the provisions thereof):
(i) this Agreement and the Ancillary Agreements (and each other agreement or instrument
expressly contemplated by this Agreement or any Ancillary Agreement to be entered into by any of
the parties or any HII Entities and New NGC Entities);
(ii) any agreements, arrangements, commitments or understandings to which any non-wholly owned
Subsidiary or non-wholly owned Affiliate of New NGC or HII, as the case may be, is a party (it
being understood that directors qualifying shares or similar interests will be disregarded for
purposes of determining whether a Subsidiary is wholly owned);
(iii) any other agreements, arrangements, commitments or understandings that this Agreement or
any Ancillary Agreement expressly contemplates will survive the Distribution;
21
(iv) any confidentiality or non-disclosure agreements among any members of either Group or
employees of any member of either Group, including any obligation not to disclose proprietary or
privileged information; and
(v) any agreements, arrangements, commitments or understandings listed or described on
Schedule 2.3(b)(v)
.
(c) Except as otherwise expressly and specifically provided in this Agreement or any Ancillary
Agreement, all intercompany receivables, payables, loans and other accounts between any New NGC
Entity, on the one hand, and any HII Entity, on the other hand, in existence as of immediately
prior to the Distribution and after giving effect to the Internal Reorganization shall be satisfied
and/or settled by the relevant members of the New NGC Group and the New HII Group no later than the
Distribution by (i) forgiveness by the relevant obligor or (ii) one or a related series of
repayments, distributions of and/or contributions to capital, in each case as determined by
Northrop Grumman.
Section 2.4
Novation of Shipbuilding Liabilities
.
(a) Each of New NGC and HII, at the written request of the other party, shall use its
reasonable best efforts to obtain, or to cause to be obtained, any release, Consent, substitution
or amendment required to novate or assign all rights and obligations under any agreements, leases,
licenses and other obligations or Liabilities of any nature whatsoever that constitute Shipbuilding
Liabilities, or to obtain in writing the unconditional release of all parties to such arrangements
other than any HII Entities, so that, in any such case, HII and the other HII Entities will be
solely responsible for such Shipbuilding Liabilities;
provided
,
however
, that none
of the New NGC Entities or the HII Entities shall be obligated to pay any significant (relative to
the underlying agreement, lease, license or obligation) consideration or surrender, release or
modify any material rights or material remedies therefor to any third party from whom such
releases, Consents, substitutions and amendments are requested except as expressly set forth in
this Agreement or any Ancillary Agreement.
(b) If New NGC or HII is unable to obtain, or to cause to be obtained, any required release,
Consent, substitution or amendment, the applicable New NGC Entity may continue to be bound by the
applicable underlying agreement, lease, license or other obligation or other Liabilities and,
unless not permitted by Law, HII shall, or shall cause another HII Entity to, as agent or
subcontractor for such New NGC Entity, pay, perform and discharge fully all the obligations or
other Liabilities of such New NGC Entity thereunder. HII shall indemnify each New NGC Indemnitee
and hold it harmless against any Liabilities arising in connection therewith. New NGC shall pay
and remit, or cause to be paid or remitted, to the applicable HII Entity, all money, rights and
other consideration received by any New NGC Entity (net of any applicable expenses) in respect of
such performance by such HII Entity (unless any such consideration is a Retained Asset). If and
when any such release, Consent, substitution or amendment shall be obtained or such agreement,
lease, license or other rights, obligations or other Liabilities shall otherwise become assignable
or able to be novated, New NGC shall thereafter assign, or cause to be
22
assigned, all the New NGC Entities rights, obligations and other Liabilities thereunder to
the applicable HII Entity without payment of any further consideration and the applicable HII
Entity shall, without the payment of any further consideration, assume such rights, obligations and
other Liabilities.
Section 2.5
Novation of Retained Liabilities
.
(a) Each of New NGC and HII, at the written request of the other party, shall use its
reasonable best efforts to obtain, or to cause to be obtained, any release, Consent, substitution
or amendment required to novate or assign all rights and obligations under any agreements, leases,
licenses and other obligations or Liabilities of any nature whatsoever that constitute Retained
Liabilities, or to obtain in writing the unconditional release of all parties to such arrangements
other than any New NGC Entities, so that, in any such case, New NGC and the other New NGC Entities
will be solely responsible for such Retained Liabilities;
provided
,
however
, that
none of the New NGC Entities or the HII Entities shall be obligated to pay any significant
(relative to the underlying agreement, lease, license or obligation) consideration or surrender,
release or modify any material rights or material remedies therefor to any third party from whom
such releases, Consents, substitutions and amendments are requested except as expressly set forth
in this Agreement or any Ancillary Agreement.
(b) If New NGC or HII is unable to obtain, or to cause to be obtained, any required release,
Consent, substitution or amendment, the applicable HII Entity may continue to be bound by the
applicable underlying agreement, lease, license or other obligation or other Liabilities and,
unless not permitted by Law or the terms thereof, New NGC shall, or shall cause another New NGC
Entity to, as agent or subcontractor for such HII Entity, pay, perform and discharge fully all the
obligations or other Liabilities of such HII Entity thereunder. New NGC shall indemnify each HII
Indemnitee and hold it harmless against any Liabilities arising in connection therewith. HII shall
pay and remit, or cause to be paid or remitted, to the applicable New NGC Entity, all money, rights
and other consideration received by any HII Entity (net of any applicable expenses) in respect of
such performance by such New NGC Entity (unless any such consideration is a Shipbuilding Asset).
If and when any such release, Consent, substitution, approval or amendment shall be obtained or
such agreement, lease, license or other rights, obligations or other Liabilities shall otherwise
become assignable or able to be novated, HII shall thereafter assign, or cause to be assigned, all
the HII Entities rights, obligations and other Liabilities thereunder to the applicable New NGC
Entity without payment of any further consideration and the applicable New NGC Entity shall,
without the payment of any further consideration, assume such rights, obligations and other
Liabilities.
Section 2.6
Disclaimer of Representations and Warranties
. Each of New NGC (on behalf
of itself and each other New NGC Entity) and HII (on behalf of itself and each other HII Entity)
understands and agrees that, except as expressly set forth herein or in any Ancillary Agreement, no
party (including its Affiliates) to this Agreement, any Ancillary Agreement or any other agreement
or document contemplated by this Agreement, any Ancillary Agreement or otherwise, is making any
representations or warranties relating in any way to the Assets, businesses or Liabilities
transferred or assumed as contemplated
23
hereby or thereby, to any Consent required in connection therewith, to the value or freedom
from any Security Interests of, or any other matter concerning, any Assets of such party, or to the
absence of any defenses or right of setoff or freedom from counterclaim with respect to any claim
or other Asset, including any accounts receivable, of any party, or to the legal sufficiency of any
assignment, document or instrument delivered hereunder to convey title to any Asset or thing of
value upon the execution, delivery and filing hereof or thereof. Except as may expressly be set
forth herein or in any Ancillary Agreement, (a) all such Assets are being transferred on an as
is, where is basis, (b) any implied warranty of merchantability, fitness for a specific purpose
or otherwise is hereby expressly disclaimed, (c) the respective transferees shall bear the economic
and legal risks that any conveyance shall prove to be insufficient to vest in the transferee good
and marketable title, free and clear of any Security Interest and (d) none of the New NGC Entities
or the HII Entities (including their Affiliates) or any other Person makes any representation or
warranty with respect to any information, documents or material made available in connection with
the Separation or the Distribution, or the entering into of this Agreement or any Ancillary
Agreement or the transactions contemplated hereby or thereby, except as expressly set forth in this
Agreement or any Ancillary Agreement.
Section 2.7
Treatment of Cash
.
(a) Prior to the Distribution, each of the HII Entities shall make capital and other
expenditures and operate its cash management, accounts payable and receivables collection systems
in the ordinary course consistent with prior practice.
(b) From the date of this Agreement until the HII Contribution, NGC (prior to the Holding
Company Reorganization) and New NGC (after the Holding Company Reorganization) shall be entitled to
use, retain or otherwise dispose of all cash generated by the Shipbuilding Business and the
Shipbuilding Assets in accordance with the ordinary course operation of NGCs and New NGCs
respective cash management systems. All such cash shall be a Retained Asset.
Section 2.8
Replacement of Credit Support
.
(a) New NGC shall use reasonable best efforts to arrange, at its cost and expense and
effective at or prior to the Distribution, the replacement of all Credit Support Instruments
relating exclusively to the Retained Business and provided by or through NGC or any other member of
the HII Group exclusively for the benefit of any member of the New NGC Group (the
New NGC
Credit Support Instruments
) with alternate arrangements that do not require any credit support
from NGC or any other member of the HII Group, and shall use reasonable best efforts to obtain from
the beneficiaries of such New NGC Credit Support Instruments written releases indicating that NGC
or such other member of the HII Group will, effective upon the Distribution, have no liability with
respect to such New NGC Credit Support Instruments. In the event that New NGC is unable to obtain
any such alternative arrangements for any New NGC Credit Support Instrument prior to the
Distribution, it shall have responsibility for the payment and performance of the obligations
underlying such New NGC Credit Support Instrument.
24
(b) HII shall use reasonable best efforts to arrange, at its cost and expense and effective at
or prior to the Distribution, the replacement of certain Credit Support Instruments identified on
Schedule 2.8(b)
relating to the Shipbuilding Business and provided by or through NGC or any
member of the New NGC Group for the benefit of any member of the HII Group (other than NGC) (the
HII Credit Support Instruments
) with alternate arrangements that do not require any
credit support from New NGC or any member of the New NGC Group, and shall use reasonable best
efforts to obtain from the beneficiaries of such HII Credit Support Instruments written releases
indicating that NGC or any member of the New NGC Group will, effective upon the Distribution, have
no liability with respect to such HII Credit Support Instruments. In the event that HII is unable
to obtain any such alternative arrangements for any HII Credit Support Instrument prior to the
Distribution, it shall have responsibility for the payment and performance of the obligations
underlying such HII Credit Support Instrument.
ARTICLE III
ACTIONS PENDING THE DISTRIBUTION
Section 3.1
Actions Prior to the Distribution
.
(a) Subject to the conditions specified in Section 3.2 and subject to Section 4.3, each of the
parties shall use its reasonable best efforts to consummate the Distribution. Such actions shall
include those specified in this Section 3.1.
(b) Prior to the Distribution, each of the parties will execute and deliver all Ancillary
Agreements to which it is a party, and will cause the other New NGC Entities and HII Entities, as
applicable, to execute and deliver any Ancillary Agreements to which such Persons are parties.
(c) Prior to the Distribution, HII shall mail the Information Statement to the Record Holders.
(d) HII shall prepare, file with the SEC and use its reasonable best efforts to cause to
become effective any registration statements or amendments thereto required to effect the
establishment of, or amendments to, any employee benefit and other plans necessary or appropriate
in connection with the transactions contemplated by this Agreement or any of the Ancillary
Agreements.
(e) Each of the parties shall take all such actions as may be necessary or appropriate under
the securities or blue sky Laws of the states or other political subdivisions of the United States
or of other foreign jurisdictions in connection with the Distribution.
(f) HII shall prepare and file, and shall use reasonable best efforts to have approved prior
to the Distribution, an application for the listing on the NYSE of the HII Common Stock to be
distributed in the Distribution, subject to official notice of listing.
(g) Prior to the Distribution, the existing directors of HII shall duly elect the individuals
listed as members of the HII board of directors in the Information
25
Statement, and such individuals shall become the members of the HII board of directors
effective as of no later than immediately prior to the Distribution.
(h) Prior to the Distribution, New NGC shall deliver or cause to be delivered to HII the
resignation from each applicable HII Entity, effective as of no later than immediately prior to the
Distribution, of each individual who will be an employee of any New NGC Entity after the
Distribution and who is an officer or director of any HII Entity immediately prior to the
Distribution.
(i) Immediately prior to the Distribution, the Restated Certificate of Incorporation and
Restated Bylaws of HII, each in substantially the form filed as an exhibit to the Form 10, shall be
in effect.
(j) The parties shall, subject to Section 4.3, take all reasonable steps necessary and
appropriate to cause the conditions set forth in Section 3.2 to be satisfied and to effect the
Distribution on the Distribution Date.
Section 3.2
Conditions to Distribution
. The obligations of the parties to consummate
the Distribution shall be conditioned on the satisfaction, or waiver by the Northrop Grumman Board,
of the following conditions:
(a) The Northrop Grumman Board shall, in its sole and absolute discretion, have authorized and
approved the Separation and the Distribution and not withdrawn such authorization and approval.
(b) The New NGC Board shall have declared the dividend of HII Common Stock to the Record
Holders.
(c) Each Ancillary Agreement shall have been executed by each party thereto.
(d) The SEC shall have declared the Form 10 effective, no stop order suspending the
effectiveness of the Form 10 shall be in effect, and no proceedings for such purpose shall be
pending before or threatened by the SEC.
(e) The HII Common Stock shall have been accepted for listing on the NYSE or another national
securities exchange approved by the Northrop Grumman Board, subject to official notice of issuance.
(f) The Internal Reorganization shall have been completed.
(g) New NGC shall have received the IRS Ruling and the Opinion, each of which shall remain in
full force and effect, that the Holding Company Reorganization, the Internal Reorganization, and
the Distribution will qualify for Tax-Free Status.
(h) HII shall have (i) entered into the HII Credit Facility, (ii) received the net proceeds
from the HII Debt and (iii) made the HII Contribution.
26
(i) 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, no other legal restraint or prohibition preventing the 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.
(j) No other events or developments shall have occurred prior to the Distribution that, in the
judgment of the Northrop Grumman Board, would result in the Distribution having a significant
adverse effect on Northrop Grumman or the Northrop Grumman Stockholders.
(k) The actions set forth in Sections 3.1(c), (h) and (i) shall have been completed.
(l) HII shall have delivered to New NGC a certificate signed by the chief financial officer of
HII, dated as of the Distribution Date, certifying that the HII Entities have complied with Section
2.7(a).
The foregoing conditions may only be waived by the Northrop Grumman Board, in its sole and
absolute discretion, are for the sole benefit of Northrop Grumman and shall not give rise to or
create any duty on the part of the Northrop Grumman Board to waive or not waive such conditions or
in any way limit the right of termination of this Agreement set forth in Article IX or alter the
consequences of any such termination from those specified in Article IX. Any determination made by
the Northrop Grumman Board prior to the Distribution concerning the satisfaction or waiver of any
or all of the conditions set forth in this Section 3.2 shall be conclusive.
ARTICLE IV
THE DISTRIBUTION
Section 4.1
The Distribution
.
(a) HII shall cooperate with Northrop Grumman to accomplish the Distribution and shall, at the
direction of Northrop Grumman, use its reasonable best efforts to promptly take any and all actions
necessary or desirable to effect the Distribution. Each of the parties will provide, or cause the
applicable member of its Group to provide, to the Agent all documents and information required to
complete the Distribution.
(b) Subject to the terms and conditions set forth in this Agreement, (i) on or prior to the
Distribution Date, for the benefit of and distribution to the Record Holders, New NGC will deliver
to the Agent all of the issued and outstanding shares of HII Common Stock then owned by New NGC or
any other New NGC Entity and book-entry authorizations for such shares and (ii) on the Distribution
Date, New NGC shall instruct the Agent to distribute, by means of a
pro rata
dividend, to each
Record Holder (or such Record Holders bank or brokerage firm on such Record Holders behalf)
electronically, by direct registration in book-entry form, the number of whole shares of HII Common
Stock
27
to which such Record Holder is entitled based on the Distribution Ratio. The Distribution
shall be effective at 12:01 a.m. Eastern time on the Distribution Date. On or as soon as
practicable after the Distribution Date, the Agent will mail an account statement indicating the
number of shares of HII Common Stock that have been registered in book-entry form in the name of
each Record Holder.
(c) With respect to the shares of HII Common Stock remaining with the Agent 180 days after the
Distribution Date, the Agent shall deliver any such shares as directed by HII, with the consent of
New NGC (which consent shall not be unreasonably withheld or delayed).
Section 4.2
Fractional Shares
. The Agent and New NGC shall, as soon as
practicable after the Distribution Date, (a) determine the number of whole shares and fractional
shares of HII Common Stock allocable to each Record Holder, (b) aggregate all such fractional
shares into whole shares and sell the whole shares obtained thereby in open market transactions at
then-prevailing trading prices on behalf of Record Holders that would otherwise be entitled to
fractional share interests and (c) distribute to each such Record Holder, or for the benefit of
each beneficial owner of fractional shares, such Record Holders or beneficial owners ratable
share of the net proceeds of such sales, based upon the average gross selling price per share of
HII Common Stock after making appropriate deductions for any amount required to be withheld under
applicable Tax Law and less any transfer Taxes. HII will be responsible for payment of any
brokerage fees associated with such sales. The Agent, in its sole discretion, will determine the
timing and method of selling such shares, the selling price of such shares and the broker-dealer to
which such shares will be sold;
provided
,
however
, that the designated
broker-dealer is not an Affiliate of New NGC or HII. Neither New NGC nor HII will pay any interest
on the proceeds from the sale of such shares.
Section 4.3
Sole Discretion of the Northrop Grumman Board and New NGC Board
.
Subject to the last sentence of this Section 4.3, the Northrop Grumman Board shall, in its sole and
absolute discretion, determine the Distribution Date and all terms of the Distribution, including
the form, structure and terms of any transactions and/or offerings to effect the Distribution and
the timing of and conditions to the consummation thereof. In addition, and notwithstanding
anything to the contrary set forth below, the Northrop Grumman Board, in its sole and absolute
discretion, may at any time and from time to time until the Distribution decide to abandon the
Distribution or modify or change the terms of the Distribution, including by accelerating or
delaying the timing of the consummation of all or part of the Distribution. The New NGC Board
shall determine the Record Date.
ARTICLE V
MUTUAL RELEASES; INDEMNIFICATION
Section 5.1
Release of Pre-Distribution Claims
.
(a) Except (i) as provided in Section 5.1(c), (ii) as may be otherwise provided in this
Agreement or any Ancillary Agreement and (iii) for any matter for which
any HII Indemnitee is entitled to indemnification pursuant to this Article V, effective as of
28
the Distribution, HII does hereby, for itself and each other HII Entity and their respective
Affiliates, predecessors, successors and assigns, and, to the extent HII legally may, all Persons
that at any time prior or subsequent to the Distribution have been stockholders, directors,
officers, members, agents or employees of HII or any other HII Entity (in each case, in their
respective capacities as such), remise, release and forever discharge each New NGC Entity, their
respective Affiliates, successors and assigns, and all Persons that at any time prior to the
Distribution have been stockholders, directors, officers, members, agents or employees of New NGC
or any other New NGC Entity (in each case, in their respective capacities as such), and their
respective heirs, executors, administrators, successors and assigns, from any and all Liabilities
whatsoever, whether at law or in equity, whether arising under any contract or agreement, by
operation of law or otherwise, existing or arising from or relating to any acts or events occurring
or failing to occur or alleged to have occurred or to have failed to occur or any conditions
existing or alleged to have existed on or before the Distribution Date, whether or not known as of
the Distribution Date, including any claims with respect to the sufficiency or condition of the
Shipbuilding Assets or the allocation of Liabilities to the HII Group.
(b) Except (i) as provided in Section 5.1(c), (ii) as may be otherwise provided in this
Agreement or any Ancillary Agreement and (iii) for any matter for which any New NGC Indemnitee is
entitled to indemnification pursuant to this Article V, New NGC does hereby, for itself and each
other New NGC Entity and their respective Affiliates, successors and assigns, and, to the extent
New NGC legally may, all Persons that at any time prior to the Distribution have been stockholders,
directors, officers, members, agents or employees of New NGC or any other New NGC Entity (in each
case, in their respective capacities as such), remise, release and forever discharge each HII
Entity, their respective Affiliates, successors and assigns, and all Persons that at any time prior
to the Distribution have been stockholders, directors, officers, members, agents or employees of
HII or any other HII Entity (in each case, in their respective capacities as such), and their
respective heirs, executors, administrators, successors and assigns, from any and all Liabilities
whatsoever, whether at law or in equity, whether arising under any contract or agreement, by
operation of law or otherwise, existing or arising from any acts or events occurring or failing to
occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged
to have existed on or before the Distribution Date, whether or not known as of the Distribution
Date.
(c) Nothing contained in Section 5.1(a) or 5.1(b) shall impair any right of any Person to
enforce this Agreement, any Ancillary Agreement, including the applicable Schedules hereto and
thereto, or any arrangement that is not to terminate as of the Distribution, as specified in
Section 2.3(b). Nothing contained in Section 5.1(a) or 5.1(b) shall release any Person from:
(i) any Liability provided in or resulting from any agreement among any New NGC Entities and
any HII Entities that is not to terminate as of the Distribution, as specified in Section 2.3(b),
or any other Liability that is not to terminate as of the Distribution, as specified in Section
2.3(b);
29
(ii) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to
the Group of which such Person is a member in accordance with, or any other Liability of any member
of any Group under, this Agreement or any Ancillary Agreement; or
(iii) any Liability the release of which would result in the release of any Person other than
a Person released pursuant to this Section 5.1; provided that the parties agree not to bring suit
or permit any of their Subsidiaries to bring suit against any Person with respect to any Liability
to the extent that such Person would be released with respect to such Liability by this Section 5.1
but for the provisions of this clause (iii).
(d) HII shall not make, and shall not permit any other HII Entity to make, any claim or
demand, or commence any Action asserting any claim or demand, including any claim for
indemnification, against any New NGC Entity, or any other Person released pursuant to Section
5.1(a), with respect to any Liabilities released pursuant to Section 5.1(a). New NGC shall not,
and shall not permit any other New NGC Entity, to make any claim or demand, or commence any Action
asserting any claim or demand, including any claim for indemnification, against any HII Entity, or
any other Person released pursuant to Section 5.1(b), with respect to any Liabilities released
pursuant to Section 5.1(b).
(e) At any time, at the request of any other party, each party shall cause each member of its
respective Group to execute and deliver releases in form reasonably satisfactory to the other party
reflecting the provisions of this Section 5.1.
Section 5.2
Indemnification by HII and NGSB
. Subject to Section 5.4, following the
Distribution, HII and NGSB shall jointly and severally indemnify, defend and hold harmless New NGC,
each New NGC Entity and each of their respective current, former and future directors, officers and
employees, and each of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the
New NGC Indemnitees
), from and against any and all Liabilities of the
New NGC Indemnitees relating to, arising out of or resulting from any of the following items
(without duplication):
(a) the Shipbuilding Liabilities; and
(b) any breach by any HII Entity of this Agreement or any of the Ancillary Agreements (other
than the Tax Matters Agreement and the Ingalls Indemnity Agreement, which shall be subject to the
provisions contained therein).
Section 5.3
Indemnification by New NGC and NGSC
. Subject to Section 5.4, following
the Distribution, New NGC and NGSC shall jointly and severally indemnify, defend and hold harmless
HII, each HII Entity and each of their respective current, former and future directors, officers
and employees, and each of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the
HII Indemnitees
), from and against any and all Liabilities of the HII
Indemnitees relating to, arising out of or resulting from any of the following items (without
duplication):
(a) the Retained Liabilities; and
30
(b) any breach by any New NGC Entity of this Agreement or any of the Ancillary Agreements
(other than the Tax Matters Agreement and the Ingalls Indemnity Agreement, which shall be subject
to the provisions contained therein).
Section 5.4
Indemnification Obligations Net of Insurance Proceeds and Other Amounts
.
(a) The parties intend that any Liability subject to indemnification or reimbursement pursuant
to this Agreement will be net of Insurance Proceeds and other amounts received that actually reduce
the amount of the Liability for which indemnification is sought. Accordingly, the amount which any
party (an
Indemnifying Party
) is required to pay to any Person entitled to
indemnification or reimbursement under this Agreement (an
Indemnitee
) will be reduced by
any Insurance Proceeds and other amounts theretofore actually recovered by or on behalf of the
Indemnitee in reduction of the related Liability. If an Indemnitee receives a payment (an
Indemnity Payment
) required by this Agreement from an Indemnifying Party in respect of
any Liability and subsequently receives Insurance Proceeds or other amounts therefor, then the
Indemnitee will promptly pay to the Indemnifying Party an amount equal to the excess of the
Indemnity Payment received over the amount of the Indemnity Payment that would have been due if the
Insurance Proceeds or other amounts had been received, realized or recovered before the Indemnity
Payment was made.
(b) In the case of any Shared Liability, any Insurance Proceeds actually received, realized or
recovered by any party in respect of the Shared Liability will be shared between the New NGC Group
and the HII Group in accordance with their respective Applicable Proportions, regardless of which
Group may actually receive, realize or recover such Insurance Proceeds.
(c) An insurer that would otherwise be obligated to defend or make payment in response to any
claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of the
indemnification provisions hereof, have any subrogation rights with respect thereto, it being
expressly understood and agreed that no insurer or any other third party shall be entitled to a
windfall (i.e., a benefit it would not be entitled to receive in the absence of the
indemnification provisions of this Agreement) by virtue of the indemnification provisions hereof.
Section 5.5
Third-Party Claims
.
(a) If an Indemnitee shall receive notice or otherwise learn of the assertion by a Person
(including any Governmental Authority) that is not a New NGC Entity or a HII Entity of any claim
(including environmental claims and demands or requests for investigation or remediation of
contamination) or of the commencement by any such Person of any Action with respect to which an
Indemnifying Party may be obligated to provide indemnification to such Indemnitee pursuant to this
Agreement or any Ancillary Agreement (collectively, a
Third-Party Claim
), such Indemnitee
shall give such Indemnifying Party written notice thereof as soon as promptly practicable, but no
later than 20 days after becoming aware of such Third-Party Claim. Any such notice shall
31
describe the Third-Party Claim in reasonable detail and contain written correspondence
received from the third party that relates to the Third-Party Claim. Notwithstanding the
foregoing, the failure of any Indemnitee to give notice as provided in this Section 5.5(a) shall
not relieve the related Indemnifying Party of its obligations under this Article V, except to the
extent that such Indemnifying Party is prejudiced by such failure to give notice.
(b) With respect to any Third-Party Claim that is or may be a Shared Liability:
(i) If the Indemnifying Party receiving any notice pursuant to Section 5.5(a) or the
Indemnitee believes that the Third-Party Claim is or may be a Shared Liability, such Indemnifying
Party or Indemnitee may make a Determination Request within 30 days after the notice given by the
Indemnitee to the Indemnifying Party pursuant to Section 5.5(a). Upon the making of a
Determination Request, the applicable Indemnitee shall assume the defense of such Third-Party Claim
until a determination as to whether such Third-Party Claim is a Shared Liability. In the event of
such assumption of defense, such Indemnitee shall be entitled to reimbursement of all the costs and
expenses of such defense once a final determination or acknowledgement is made that such Indemnitee
is entitled to indemnification with respect to such Third-Party Claim;
provided
, that if
such Third-Party Claim is determined to be a Shared Liability, such costs and expenses shall be
shared as provided in Section 5.5(b)(ii). If it is determined by New NGC and HII or by the
Allocation Committee that the Third-Party Claim is a Shared Liability, the Managing Party (as
determined in accordance with Section 6.1(a)) shall assume the defense of such Third-Party Claim as
soon as reasonably practicable following such determination.
(ii) A partys costs and expenses of assuming the defense of (subject to Section 5.5(b)(i)),
and/or seeking to settle or compromise (subject to Section 5.5(b)(iv)), any Third-Party Claim that
is a Shared Liability shall be included in the calculation of the amount of the applicable Shared
Liability in determining the obligations of the parties with respect thereto pursuant to Section
6.4.
(iii) The Managing Party shall consult with the Non-Managing Party prior to taking any action
with respect to any Third-Party Claim that is a Shared Liability if the Managing Partys action
could reasonably be expected to have a significant adverse impact (financial or non-financial) on
the Non-Managing Party, including a significant adverse impact on the rights, obligations,
operations, standing or reputation of the Non-Managing Party (or its Subsidiaries or Affiliates),
and the Managing Party shall not take such action without the prior written consent of the
Non-Managing Party, which consent shall not be unreasonably withheld or delayed.
(iv) The Managing Party shall promptly give notice to the Non-Managing Party regarding the
substance of any settlement related discussions with respect to any Third-Party Claim that is a
Shared Liability if (A) the Non-Managing Party is required to share in any significant aspect of
the costs and expenses, proceeds or obligations resulting from such settlement or (B) the
settlement can reasonably be expected to have a significant impact (financial or nonfinancial) on
the Non-Managing Party. In
32
such instances, the Managing Party shall not settle such Third-Party Claim without the prior
written consent of the Non-Managing Party, which consent shall not be unreasonably withheld or
delayed.
(c) With respect to any Third-Party Claim that is not a Shared Liability:
(i) Unless the parties otherwise agree, within 30 days after the receipt of notice from an
Indemnitee in accordance with Section 5.5(a), an Indemnifying Party shall defend (and, unless the
Indemnifying Party has specified any reservations or exceptions, may seek to settle or compromise),
at such Indemnifying Partys own cost and expense and by such Indemnifying Partys own counsel, any
Third-Party Claim that is not a Shared Liability. The applicable Indemnitee shall have the right
to employ separate counsel and to participate in (but not control) the defense, compromise, or
settlement thereof, but the fees and expenses of such counsel shall be the expense of such
Indemnitee. Notwithstanding the foregoing, the Indemnifying Party shall be liable for the fees and
expenses of counsel employed by the Indemnitee (A) for any period during which the Indemnifying
Party has not assumed the defense of such Third-Party Claim (other than during any period in which
the Indemnitee shall have failed to give notice of the Third-Party Claim in accordance with Section
5.5(a)) or (B) to the extent that such engagement of counsel is as a result of a conflict of
interest, as reasonably determined by the Indemnitee acting in good faith.
(ii) No Indemnifying Party shall consent to entry of any judgment or enter into any settlement
of any Third-Party Claim that is not a Shared Liability without the consent of the applicable
Indemnitee;
provided
,
however
, that such Indemnitee shall be required to consent to
such entry of judgment or to such settlement that the Indemnifying Party may recommend if the
judgment or settlement (A) contains no finding or admission of any violation of Law or any
violation of the rights of any Person, (B) involves only monetary relief which the Indemnifying
Party has agreed to pay and could not reasonably be expected to have a significant adverse impact
(financial or non-financial) on the Indemnitee, including a significant adverse impact on the
rights, obligations, operations, standing or reputation of the Indemnitee (or any of its
Subsidiaries or Affiliates), and (C) includes a full and unconditional release of the Indemnitee.
Notwithstanding the foregoing, in no event shall an Indemnitee be required to consent to any entry
of judgment or settlement if the effect thereof is to permit any injunction, declaratory judgment,
other order or other nonmonetary relief to be entered, directly or indirectly, against any
Indemnitee.
(d) Whether or not the Indemnifying Party assumes the defense of a Third-Party Claim, no
Indemnitee shall admit any liability with respect to, or settle, compromise or discharge, such
Third-Party Claim without the Indemnifying Partys prior written consent, which consent shall not
be unreasonably withheld or delayed.
(e) Notwithstanding anything to the contrary in this Section 5.5 or in Article VI, the
additional provisions of the Litigation Management Agreement shall govern with respect to all
Third-Party Claims (including Shared Actions) specifically set forth therein or covered by the
terms thereof, and the Litigation Management Agreement shall
33
control over any inconsistent provisions of this Section 5.5 and Article VI as to such
Third-Party Claims.
Section 5.6
Additional Matters
.
(a) Any claim on account of a Liability that does not result from a Third-Party Claim shall be
timely asserted by written notice given by the Indemnitee to the related Indemnifying Party. Such
Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not respond within such 30-day period, such
Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If
such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole
or in part, such Indemnitee shall be free to pursue remedies as specified by this Agreement and the
Ancillary Agreements.
(b) In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in
connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall
stand in the place of such Indemnitee as to any events or circumstances in respect of which such
Indemnitee may have any right, defense or claim relating to such Third-Party Claim against any
claimant or plaintiff asserting such Third-Party Claim or against any other Person. Such
Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and
expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim.
(c) In the event of an Action in which the Indemnifying Party is not a named defendant, if
either the Indemnitee or the Indemnifying Party shall so request, the parties shall endeavor to
substitute the Indemnifying Party for the named defendant, if reasonably practicable. If such
substitution or addition cannot be achieved or is not requested, the named defendant shall allow
the Indemnifying Party to manage the Action as set forth in this Agreement and the Litigation
Management Agreement and the Indemnifying Party shall fully indemnify the named defendant against
all costs of defending the Action (including court costs, sanctions imposed by a court, attorneys
fees, experts fees and all other external expenses, and the allocated costs of in-house counsel
and other personnel), the costs of any judgment or settlement, and the cost of any interest or
penalties relating to any judgment or settlement.
Section 5.7
Remedies Cumulative
. The remedies provided in this Article V shall be
cumulative and shall not preclude assertion by any Indemnitee of any other rights or the seeking of
any and all other remedies against any Indemnifying Party.
Section 5.8
Survival of Indemnities
. The rights and obligations of each of New NGC,
NGSC, HII, NGSB and their respective Indemnitees under this Article V shall survive the sale or
other transfer by any party of any Assets or businesses or the assignment by it of any Liabilities.
Section 5.9
Limitation on Liability
. Except as may expressly be set forth in this
Agreement, none of New NGC, NGSC, HII, NGSB or any other member of either Group
34
shall in any event have any Liability to the other or to any other member of the others
Group, or to any other New NGC Indemnitee or HII Indemnitee, as applicable, under this Agreement
(a) to the extent that any such Liability resulted from any willful violation of Law or fraud by
the party seeking indemnification or (b) for any indirect, punitive or consequential damages.
Notwithstanding the foregoing, the provisions of this Section 5.9 shall not limit an Indemnifying
Partys indemnification obligations with respect to any Liability that any Indemnitee may have to
any third party not affiliated with any member of the New NGC Group or the HII Group.
ARTICLE VI
SHARED GAINS AND SHARED LIABILITIES
Section 6.1
Managing Party
.
(a) With respect to any Shared Gain or Shared Liability, either HII or New NGC shall be the
Managing Party
. With respect to any Shared Gain identified on
Schedule 1.1(a)(2)
or any Shared Liability identified on
Schedule 1.1(a)(1)
, the Managing Party shall be the
party with the higher Applicable Proportion as set forth on such Schedule, and, with respect to
specified Shared Actions under the Litigation Management Agreement, the Managing Party shall be as
set forth therein. In all other cases, the Managing Party shall be selected by the Allocation
Committee in accordance with Sections 6.1(b) and 6.2.
(b) In determining which party shall be the Managing Party, the Allocation Committee shall
consider as the primary factor in such a determination which party is subject to the greater
financial, operational and reputational risk or exposure in connection with such Shared Gain or
Shared Liability, including the relative Applicable Proportion of each Group with respect to such
Shared Gain or Shared Liability. The Allocation Committee shall also consider such other factors
as the Allocation Committee deems appropriate, including if applicable, which party has control
over the potentially relevant documentation and possible witnesses with respect to such Shared Gain
or Shared Liability.
Section 6.2
Allocation Committee
.
(a) New NGC and HII will form the Allocation Committee for the following purposes:
(i) resolving whether (A) any claim or right is a Shared Gain or (B) any Liability is a Shared
Liability, in each case if not otherwise agreed between New NGC and HII;
(ii) except with respect to the matters described on
Schedule 1.1(a)(1)
or
Schedule 1.1(a)(2)
, determining the Applicable New NGC Proportion and the Applicable HII
Proportion of any Shared Gains and Shared Liabilities; and
35
(iii) determining whether HII or New NGC shall be the Managing Party of any Shared Gain or
Shared Liability.
(b) New NGC and HII shall refer (i) any Shared Liability not identified on
Schedule
1.1(a)(1)
and any Shared Gain not identified on
Schedule 1.1(a)(2)
or in the Litigation
Management Agreement to the Allocation Committee to determine the Applicable New NGC Proportion and
the Applicable HII Proportion of such Shared Gain or Shared Liability, and the Managing Party of
such Shared Gain or Shared Liability, and (ii) any potential Shared Gains or Shared Liabilities
that New NGC and HII are not able to agree are Shared Gains or Shared Liabilities to the Allocation
Committee for resolution of the status thereof. If the Allocation Committee reaches a
determination (which shall be made within 30 days after such referral on a matter submitted to the
Allocation Committee by any of New NGC or HII), then that determination shall be binding on New NGC
and HII and their respective successors and assigns.
(c) In the event that the Allocation Committee cannot reach a determination within 30 days
after the referral pursuant to Section 6.2(b) as to (i) the appropriate allocation of Shared Gains
or Shared Liabilities between the New NGC Group and the HII Group, (ii) the nature or status of any
such Shared Liabilities or Shared Gains or (iii) the Managing Party of any such Shared Liabilities
or Shared Gains or any other matter under consideration by the Allocation Committee, then the
procedures set forth in Article X of this Agreement shall govern.
Section 6.3
Shared Gains
.
(a) If either HII or New NGC becomes aware of any claim or right that may reasonably be
expected to be a Shared Gain, it shall notify the other party in writing as soon as promptly
practicable, but no later than 20 days after becoming aware of such potential Shared Gain, which
notice shall describe the potential Shared Gain in reasonable detail. Such other party may make a
Determination Request within 30 days after receipt of such notice.
(b) Any benefit that may be received from any Shared Gain shall be shared between New NGC and
HII in proportion to the Applicable New NGC Proportion and the Applicable HII Proportion,
respectively, and shall be paid in accordance with Section 6.5. The Managing Party of any Shared
Gain shall have the authority to commence, prosecute, settle, manage, waive, release, discharge and
otherwise determine all matters with respect to such Shared Gain. The Non-Managing Party of such
Shared Gain shall not take, or permit any member of its Group to take, any action (including
commencing any claim) that would interfere with such rights and powers of the Managing Party,
except as required by applicable Law or contract (in which case the Non-Managing Party shall
provide advance notice of such action to the Managing Party and shall give the Managing Party the
opportunity to consult with respect to such action). The Managing Party of such Shared Gain shall
use its reasonable best efforts to notify the Non-Managing Party promptly in the event that it
commences an Action with respect to a Shared Gain. The Managing Party of any Shared Gain may elect
not to pursue such Shared Gain for any reason whatsoever (including a different assessment of the
merits of any Action, claim or
36
right than the other party or any business reasons that are in the
best interests of the Managing Party or a member of the Managing Partys Group, without regard to
the best interests of any member of the other Group) and no member of the Managing Partys
Group with a majority interest in such Shared Gain shall have any liability to any Person
(including any member of the other Group) as a result of any such determination. In the event that
the Managing Party of any Shared Gain elects not to pursue such Shared Gain, the Non-Managing Party
may request in writing to the Managing Party that the Non-Managing Party have the right to pursue
such Shared Gain on behalf of the Non-Managing Party and the Managing Party (in which case, the
Non-Managing Party shall be treated as the Managing Party for purposes of such Shared Gain);
provided
,
however
, that the Managing Party may refuse such request in its sole
discretion.
(c) Upon the making of a Determination Request, New NGC alone may, but shall not be obligated
to, commence prosecution or other assertion of the claim or right that is subject to such
Determination Request pending resolution of the status of such claim or right. In the event that
New NGC commences any such prosecution or assertion and, upon resolution of the Determination
Request, it is determined hereunder that any such claim or right of HII is not a Shared Gain or
that HII is the Managing Party of such Shared Gain, New NGC shall discontinue the prosecution or
assertion of such claim or right and transfer the control thereof to HII as soon as reasonably
practicable. In such event, if HII elects not to continue the prosecution of such claim or right,
HII will reimburse New NGC for all costs and expenses incurred prior to resolution of such dispute
in the prosecution or assertion of such claim or right.
Section 6.4
Shared Liabilities
. Each of New NGC and HII shall be responsible for its
Applicable Proportion of any Shared Liability. The Managing Party shall be responsible for
managing, and shall have the authority to manage, the defense or prosecution, as applicable, and
resolution of a Shared Liability. It shall not be a defense to any obligations by any party to pay
any amount in respect of any Shared Liability that such party was not consulted in the response to
or defense thereof (except to the extent such consultation was required under this Agreement or the
Litigation Management Agreement), that such partys views or opinions as to the conduct of such
response to or defense or the reasonableness of any settlement were not accepted or adopted, that
such party does not approve of the quality or manner of the response to or defense thereof or that
such Shared Liability was incurred by reason of a settlement rather than by a judgment or other
determination of liability (even if, subject to Section 5.5(b)(iv) and the applicable provisions of
the Litigation Management Agreement, such settlement was effected without the consent or over the
objection of such party).
Section 6.5
Payments
. Any amount owed in respect of (a) any Shared Liabilities
(including reimbursement for the cost or expense of defense of any Third-Party Claim that is a
Shared Liability) or (b) any Shared Gains (including reimbursement for the costs or expenses to
commence, prosecute or settle matters with respect to a Shared Gain), pursuant to this Article VI
shall be remitted within 30 days after the party entitled to such amount provides an invoice
(including reasonable supporting information with respect thereto) to the party owing such amount;
provided
,
however
, that the Applicable
37
Proportion of any amounts recovered with
respect to any Shared Gain or Shared Liability shall be payable within 30 days after receipt
thereof by the party recovering such amount.
ARTICLE VII
EXCHANGE OF INFORMATION; CONFIDENTIALITY
Section 7.1
Agreement for Exchange of Information
.
(a) Except in the case of an adversarial Action or threatened adversarial Action related to a
request hereunder by any member of either the New NGC Group or the HII Group against any member of
the other Group (which shall be governed by such discovery rules as may be applicable thereto), and
subject to Section 7.1(b), each of New NGC and HII, on behalf of the members of its respective
Group, shall use reasonable best efforts to provide (except as otherwise provided in this Agreement
or any Ancillary Agreement, at the sole cost and expense of the requesting party), or cause to be
provided, to the other Group, at any time before or after the Distribution, as soon as reasonably
practicable after written request therefor, any Information in the possession or under the control
of the members of such respective Group that the requesting party reasonably requests (i) in
connection with reporting, disclosure, filing or other requirements imposed on the requesting party
(including under applicable securities, defense contracting or Tax Laws) by a Governmental
Authority having jurisdiction over the requesting party, (ii) for use in any other judicial,
regulatory, administrative, Tax, insurance or other proceeding or in order to satisfy audit,
accounting, claims, regulatory, investigation, litigation, Tax or other similar requirements, or
(iii) to comply with its obligations under this Agreement or any Ancillary Agreement. The
receiving party shall use any Information received pursuant to this Section 7.1(a) solely to the
extent reasonably necessary to satisfy the applicable obligations or requirements described in the
immediately preceding sentence and shall otherwise take reasonable steps to protect such
Information. Nothing in this Section 7.1 shall be construed as obligating a party to create
Information not already in its possession or control.
(b) In the event that any party determines that the exchange of any Information pursuant to
Section 7.1(a) is reasonably likely to violate any Law or binding agreement, or waive or jeopardize
any attorney-client privilege, or attorney work product protection, such party shall not be
required to provide access to or furnish such Information to the other party;
provided
,
however
, that the parties shall take all reasonable measures to permit compliance with
Section 7.1(a) in a manner that avoids any such harm or consequence. New NGC and HII intend that
any provision of access to or the furnishing of Information that would otherwise be within the
ambit of any legal privilege shall not operate as a waiver of such privilege.
(c) After the Distribution, each of New NGC and HII shall maintain in effect systems and
controls reasonably intended to enable the members of the other Group to satisfy their respective
known reporting, accounting, disclosure, audit and other obligations.
38
Section 7.2
Ownership of Information
. Any Information owned by a member of one Group
that is provided to a requesting party pursuant to Section 7.1 shall be deemed to remain the
property of the providing party. Except as specifically set forth herein, nothing
contained in this Agreement shall be construed as granting or conferring rights of license or
otherwise in any such Information.
Section 7.3
Compensation for Providing Information
. The party requesting Information
pursuant to Section 7.1 agrees to reimburse the party providing such Information for the reasonable
costs, if any, of creating, gathering and copying such Information, to the extent that such costs
are incurred for the benefit of the requesting party. Except as may be otherwise specifically
provided elsewhere in this Agreement or in any other agreement between the parties, such costs
shall be computed in accordance with the providing partys standard methodology and procedures.
Section 7.4
Record Retention
. Except for the matters addressed specifically in
Section 8.7, to facilitate the possible exchange of Information pursuant to this Article VII and
other provisions of this Agreement from and after the Distribution, each of the parties agrees to
use reasonable best efforts to retain all Information in accordance with its record retention
policy as in effect immediately prior to the Distribution or as modified in good faith thereafter;
provided
,
however
, that to the extent any Ancillary Agreement provides for a longer
period of retention of certain Information, such longer period shall control. Each party agrees to
retain any Information that, prior to the Distribution, is subject to a subpoena or a do not
destroy notice issued by NGC or any of its Subsidiaries prior to the Distribution until such
subpoena or notice is no longer applicable to such Information.
Section 7.5
Limitation of Liability
. No party shall have any liability to any other
party in the event that any Information exchanged or provided pursuant to this Agreement that is an
opinion, estimate or forecast, or that is based on an opinion, estimate or forecast, is found to be
inaccurate, in the absence of willful misconduct by the party providing such Information. No party
shall have any liability to any other party if any Information is destroyed after reasonable best
efforts by such party to comply with the provisions of Section 7.4.
Section 7.6
Other Agreements Providing for Exchange of Information
. The rights and
obligations granted under this Article VII shall be subject to any specific limitations,
qualifications or additional provisions on the sharing, exchange or confidential treatment of
Information set forth in any Ancillary Agreement.
Section 7.7
Cooperation
.
(a) From and after the Distribution, except in the case of an adversarial Action or threatened
adversarial Action by any member of either the New NGC Group or the HII Group against any member of
the other Group (which shall be governed by such discovery rules as may be applicable thereto),
each party, upon reasonable written request of the other party, shall use reasonable efforts to
cooperate and consult in good faith with the other party to the extent such cooperation and
consultation is reasonably necessary with respect to (i) any Action, (ii) this Agreement or any of
the Ancillary Agreements or any of
39
the transactions contemplated hereby or thereby or (iii) any
audit, investigation or any other legal requirement, and, upon reasonable written request of the
other party, shall use reasonable efforts to make available to such other party the former, current
and future
directors, officers, employees, other personnel and agents of the members of its respective
Group (whether as witnesses or otherwise).
(b) Notwithstanding the foregoing, Section 7.7(a) shall not require a party to take any step
that would significantly interfere, or that such party reasonably determines could significantly
interfere, with its business.
(c) Except in the case of any Assigned Action or Shared Action, the requesting party shall
bear all costs and expenses in connection therewith.
(d) The obligations set forth in this Section 7.7 shall survive until the tenth anniversary
thereof, except in the case of any Assigned Action or Shared Action, in which case such obligations
shall survive until the final resolution of such Actions.
Section 7.8
Confidentiality
.
(a) Except as provided in Section 8.7 and subject to Section 7.9, each of New NGC and HII, on
behalf of itself and each member of its Group, shall hold, and shall cause its respective
directors, officers, employees, agents, accountants, counsel and other advisors and representatives
to hold, in strict confidence and not release or disclose, with at least the same degree of care,
but no less than a reasonable degree of care, that it applies to its own business sensitive and
proprietary information, all Information concerning the other Group or its business that is either
in its possession (including Information in its possession prior to the Distribution) or furnished
by any member of such other Group or its respective directors, officers, employees, agents,
accountants, counsel and other advisors and representatives at any time pursuant to this Agreement,
any Ancillary Agreement or otherwise, and shall not use any such Information other than for such
purposes as shall be expressly permitted hereunder or thereunder, except, in each case, to the
extent that such Information is (i) in the public domain through no fault of such party or any
member of such Group or any of their respective directors, officers, employees, agents,
accountants, counsel and other advisors and representatives, (ii) later lawfully acquired from
other sources by such party (or any member of such partys Group), which sources are not themselves
bound by a confidentiality obligation, or (iii) independently generated without reference to any
proprietary or confidential Information of the disclosing party or its Group.
(b) Except as provided in Section 8.7, no receiving party shall release or disclose, or permit
to be released or disclosed, any such Information concerning the other Group to any other Person,
except its directors, officers, employees, agents, accountants, counsel and other advisors and
representatives who need to know such Information (who shall be advised of their obligations
hereunder with respect to such Information), except in compliance with Section 7.9. Without
limiting the foregoing, when any Information concerning the other Group or its business is no
longer needed for the purposes contemplated by this Agreement or any Ancillary Agreement, each
disclosing party will,
40
promptly after the request of the receiving party, either return to the
disclosing party all Information in a tangible form (including all copies thereof and all notes,
extracts or
summaries based thereon) or certify to the disclosing party that it has destroyed such
Information (and such copies thereof and such notes, extracts or summaries based thereon).
Section 7.9
Protective Arrangements
. Except as provided in Section 8.7, in the event
that any party or any member of its Group either determines on the advice of its counsel that it
should disclose any Information pursuant to applicable Law or receives any demand under lawful
process or from any Governmental Authority or properly constituted arbitral authority to disclose
or provide Information of any other party (or any member of any other partys Group) that is
subject to the confidentiality provisions hereof, the Person required to disclose the Information
shall give the applicable Person prompt, and to the extent reasonably practicable, prior written
notice of such disclosure and an opportunity to contest such disclosure, and shall use reasonable
best efforts to cooperate, at the expense of the requesting Person, in seeking any reasonable
protective arrangements requested by such Person. In the event that such appropriate protective
arrangement or order or other remedy is not obtained, the Person that is required to disclose such
Information shall furnish, or cause to be furnished, only that portion of such Information that is
legally required to be disclosed and shall use reasonable best efforts to ensure that confidential
treatment is accorded such Information. This Section 7.9 shall not apply to the disclosure of any
Information to any Governmental Authority that is reasonably necessary to respond to any inquiry by
any Governmental Authority.
ARTICLE VIII
FURTHER ASSURANCES AND ADDITIONAL COVENANTS
Section 8.1
Further Assurances
.
(a) In addition to the actions specifically provided for elsewhere in this Agreement, each of
the parties shall use its reasonable best efforts, prior to, on and after the Distribution Date, to
take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably
necessary, proper or advisable under applicable Law, regulations and agreements to consummate and
make effective the transactions contemplated by this Agreement and the Ancillary Agreements.
(b) Without limiting the foregoing, prior to, on and after the Distribution Date, each party
shall cooperate with the other parties, and without any further consideration, but at the expense
of the requesting party, to (i) execute and deliver, or use its reasonable best efforts to cause to
be executed and delivered, all instruments, including any instruments of conveyance, assignment and
transfer as such party may be reasonably requested to execute and deliver to the other party, (ii)
make, or cause to be made, all filings with, and to obtain, or cause to be obtained, all consents,
approvals or authorizations of, any Governmental Authority or any other Person under any permit,
license, agreement, indenture or other instrument, (iii) seek, obtain, or cause to be obtained, any
Governmental Approvals or other Consents required to effect the Separation or the Distribution and
(iv) take all such other actions as such party may reasonably be requested to take by any other
party from time to time, consistent with the terms of this
41
Agreement and the Ancillary Agreements,
in order to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements
and the transfers of the
Shipbuilding Assets and the Retained Assets and the assignment and assumption of the
Shipbuilding Liabilities and the Retained Liabilities and the other transactions contemplated
hereby and thereby. Without limiting the foregoing, each party will, at the reasonable request,
cost and expense of any other party, take such other actions as may be reasonably necessary to vest
in such other party good and marketable title, if and to the extent it is practicable to do so.
(c) On or prior to the Distribution Date, New NGC and HII in their respective capacities as
direct and indirect stockholders of their respective Subsidiaries, shall each ratify any actions
that are reasonably necessary or desirable to be taken by New NGC and HII or any other Subsidiary
of New NGC, as the case may be, to effectuate the transactions contemplated by this Agreement.
(d) The parties agree to cooperate, both prior to and after the Distribution, and use
reasonable best efforts to take all acts reasonably necessary to accomplish the registration and
transfer, to the extent transferable and to the extent that any registration or transfer is
required in connection with the Distribution, of any export or import license, permit, technical
assistance agreement, manufacturing license agreement and other authorization utilized by either
Group, including those granted under the U.S. International Traffic in Arms Regulations, the U.S.
Export Administration Regulations, the U.S. Customs and Border Protection Regulation and foreign
export/import Laws, as applicable.
Section 8.2
Amendment to NGC Certificate of Incorporation
. As promptly as practicable
(and in any event within five Business Days) after the Holding Company Reorganization, NGC shall
approve an amendment to its Certificate of Incorporation (as amended in the Holding Company
Reorganization) to eliminate the requirement for the Northrop Grumman Stockholders to approve
certain actions by or involving NGC as required by Section 251(g) of the Delaware General
Corporation Law (the
NGC Charter Amendment
) and obtain the approval of HII, as sole
stockholder of NGC, of the NGC Charter Amendment. New NGC shall use its reasonable best efforts to
(a) include in the proxy statement for the 2012 annual meeting of Northrop Grumman Stockholders (or
any earlier meeting of such stockholders as determined by the Northrop Grumman Board) a proposal to
approve the NGC Charter Amendment (the
NGC Charter Amendment Proposal
), along with a
recommendation of the Northrop Grumman Board that Northrop Grumman Stockholders approve the NGC
Charter Amendment Proposal, and (b) solicit the approval of the Northrop Grumman Stockholders of
the NGC Charter Amendment Proposal. In the event that the NGC Charter Amendment Proposal is not
approved at such annual meeting, New NGC shall use its reasonable best efforts to obtain the
approval of the NGC Charter Amendment Proposal at each subsequent annual meeting of Northrop
Grumman Stockholders until such approval is obtained.
Section 8.3
Credit Support
. Upon a Change of Control Triggering Event prior to the
fifth anniversary of the Distribution, HII promptly shall provide notice to New NGC describing in
reasonable detail the circumstances surrounding the Change of Control
42
Triggering Event.
Immediately after such Change of Control Triggering Event, HII shall provide credit support in the
form of one or more standby letters of credit in an amount
equal to $250 million (the other terms and provisions of which shall be reasonably
satisfactory to New NGC) to support HIIs obligations under Section 5.2.
Section 8.4
Non-Compete
.
(a) For a period of one year following the Distribution, HII shall not, and shall cause the
other members of the HII Group not to, directly or indirectly through any Person or contractual
arrangement, whether independently or as part of a team, compete in any way against any member of
the New NGC Group or the Team for any work covered by the solicitation described on
Schedule
8.4(a)
(the
Solicitation
) and shall not take any steps to join any team that is
competing or will compete against any member of the New NGC Group or the Team for any of the work
covered by the Solicitation.
(b) After the Distribution, New NGC shall cause NGTS to in good faith (i) endeavor to modify
the Teaming Agreement to make clear that, except with respect to the restrictions set forth in
Section 8.4(a), there are no restrictions on any member of the HII Group and (ii) consider NGSB and
its Subsidiaries as a potential subcontractor to the Team for work covered by the Solicitation.
Section 8.5
Intercompany Work Orders
.
Schedule 8.5
sets forth certain
intercompany work orders (
IWOs
) that will be terminated in accordance with Section 2.3.
Immediately after the Distribution, NGSB shall issue to NGSC, or such other member of the New NGC
Group designated on
Schedule 8.5
and NGSC shall issue to NGSB, or such other member of the
HII Group designated on
Schedule 8.5
, as applicable, letter subcontracts for the
performance of follow-on work to be performed for the applicable terminated IWOs, as each of the
parties shall then deem appropriate (such letter agreements,
Letter Subcontracts
). Each
Letter Subcontract shall contain sufficient terms, conditions and rights to permit the designated
member of the New NGC Group or the HII Group, as applicable, to perform and be compensated for work
performed pending the negotiation of definitive subcontract agreements between the parties with
what it concludes is appropriate protection. Following the Distribution, the parties shall
negotiate, in good faith, to reach agreement on final price, statement of work, schedule and terms
and conditions of definitive subcontracts for the terminated IWOs. The additional provisions set
forth on
Schedule 8.5
shall apply with respect to the Letter Subcontracts.
Section 8.6
IDIQ Vehicles
. The New NGC Group shall use reasonable efforts to continue
to make the IDIQ (Indefinite Delivery Indefinite Quantity) vehicles listed on
Schedule 8.6
available for the benefit of the HII Group on the terms set forth on
Schedule 8.6
, for the
period that begins on the date of the Distribution until the earlier of (a) the date that is 12
months after the date of the Distribution and (b) the date that the HII Group obtains its own such
vehicles. The additional provisions set forth on
Schedule 8.6
shall apply with respect to
such IDIQ vehicles.
43
Section 8.7
Government Contract Matters
.
(a) For the purposes of this Section 8.7 only, the following definitions apply:
(i)
Allowable Cost Audit
means any Defense Contract Audit Agency or other
Governmental Authority audit or other negotiations with contracting officers of any Governmental
Authority, with respect to any period (or portion thereof) ending at or prior to the Distribution.
(ii)
Settlement Asset
means a net increase in assets due to the final agreement of
claims or rights arising out of the settlement of an Allowable Cost Audit, including: (A) final
indirect cost and rates for government contracts; (B) Cost Accounting Standards (CAS) matters; (C)
defective pricing matters; or (D) advance agreements with the U.S. Government.
(iii)
Settlement Liability
means a net liability due to the final agreement of
claims or rights arising out of the settlement of an Allowable Cost Audit, including: (A) final
indirect cost and rates for government contracts; (B) Cost Accounting Standards (CAS) matters; (C)
defective pricing matters; or (D) advance agreements with the U.S. Government.
A Settlement Asset or Settlement Liability shall be computed as the total impact on the net amount
to be paid or received upon final contract settlement, including direct and indirect costs, fees
and profits. Where Settlement Assets and Settlement Liabilities arise from the settlement of an
Allowable Cost Audit, the baseline costs for calculating Settlement Assets and Settlement
Liabilities shall be the costs included in Inter-company Accounting Transfers (IATs) for periods
through the Distribution Date.
(b)
Shipbuilding Business Cost and Pricing Pre-Distribution
. HII is responsible for
the settlement of and the consequences of any Settlement Assets or Settlement Liabilities
associated with costs and pricing incurred prior to the Distribution by the Shipbuilding Business
for government contracts, including those arising from Allowable Cost Audits for work in support of
other NGC entities, but not including those Settlement Assets and Settlement Liabilities covered by
Section 8.7(c).
(c)
New NGC Cost and Pricing Pre-Distribution
. New NGC is responsible for the
settlement of and the consequences of any Settlement Assets and Settlement Liabilities relating to
NGC matters associated with and allocable to government contracts with any member of the HII Group
arising out of:
(i) the settlement of final direct and indirect cost rates for costs incurred by NGC prior to
the Distribution, including: corporate office expenses, group insurance, post-retirement benefits,
pensions, state taxes, insurance, deferred compensation, environmental costs, legal, internal
audit, enterprise shared services (ESS) costs, information technology services (ITS), and the
settlement of IWOs and other costs incurred by NGC prior to the Distribution;
44
(ii) Cost Accounting Standards (CAS) Settlement Assets or Settlement Liabilities for
allocations made by NGC prior to the Distribution, contracts priced or based upon projected NGC
incurred costs prior to the Distribution, or resulting from an Allowable Cost Audit;
(iii) defective pricing Settlement Liabilities for costs incurred by NGC resulting from an
Allowable Cost Audit; and
(iv) advance agreements with the U.S. Government.
(d)
Reimbursement of Settlement Assets and Settlement Liabilities
. New NGC will
reimburse HII for any Settlement Liabilities of NGC described in Section 8.7(c) and paid or to be
paid to any Governmental Authority by HII upon presentation of documentation deemed adequate by HII
and New NGC. HII shall reimburse New NGC for any Settlement Assets of NGC accruing to HII under
Section 8.7(c) upon presentation of documentation deemed adequate by HII and New NGC. HII will
reimburse New NGC for any Settlement Liabilities of HII under Section 8.7(b) and paid or to be paid
to any Governmental Authority by New NGC upon presentation of documentation deemed adequate by New
NGC and HII. New NGC shall reimburse HII for any Settlement Assets of HII accruing to New NGC
under Section 8.7(b) upon presentation of documentation deemed adequate by HII and New NGC.
(e)
Administration of Government Contract Matters
. The parties shall make available,
upon reasonable notice and at reasonable times during regular business hours, any of the parties
or their Affiliates personnel whose assistance or participation is reasonably required by either
New NGC or HII or their Affiliates in connection with any government audit or contract
administration activity, including matters involving either partys indirect cost proposals, the
Cost Accounting Standards (CAS) and defective pricing. New NGC and HII will each be responsible
for all of its own costs, both direct and indirect, including any required travel, associated with
(i) providing access to their respective records and making any reasonable number of copies
requested thereof and (ii) making the requested personnel reasonably available to support
government contract audits and administrative processes for cost negotiations with the government
or other matters, such as administration of Cost Accounting Standards (CAS). In addition, if a
Contract Disputes Act dispute concerning a Retained Liability or Retained Asset arises out of or
relates to a federal contract held by HII or its Affiliates, HII or its Affiliate, as applicable,
shall agree to sponsor a claim against the U.S. Government on behalf of New NGC. In such event,
New NGC shall have the right at its expense and in its sole discretion, acting in the name of HII
or its Affiliate, to (w) certify or submit any such claim to the appropriate U.S. Government
contracting officer; (x) appeal any adverse contracting officers final decision or deemed denial
of New NGCs claim to the appropriate agency board of contract appeals or U.S. Court of Federal
Claims; (y) control the litigation of any such appeal; and (z) pursue a further appeal to the U.S.
Court of Appeals for the Federal Circuit.
(f)
Pre-Distribution Cost and Pricing Data
. New NGC and HII shall provide each other
with updates of pre-Distribution cost and pricing data relevant to each
45
other, including (i)
revisions and updates to cost proposals and (ii) revisions and updates to pre-Distribution Billing
and Bidding Guidance, consistent with the practices of NGC and NGSB prior to the Distribution.
(g)
Release of Contract Audit and Contract Administration Information
. Disclosure of
cost, pricing and billing information to government auditors and contracting
officers in connection with final indirect costs and rates, administration of Cost Accounting
Standards (CAS) and advance agreements and other customary contract audit and administration
matters are exceptions to the requirements of Sections 7.8 and 7.9 of this Agreement. For
avoidance of doubt, disclosure of cost, pricing and billing information in connection with
customary contract audit and administration matters by HII or New NGC will not require prior
notification to each other.
(h)
Litigation Management Agreement
. Notwithstanding anything to the contrary in this
Agreement or the Litigation Management Agreement, in the event of any conflict or inconsistency
between this Section 8.7 and any provision of the Litigation Management Agreement, this Section 8.7
shall control over such inconsistent provision of the Litigation Management Agreement as to the
matters specifically addressed in this Section 8.7.
Section 8.8
Software Licenses
. From and after the Distribution, New NGC shall provide
reasonable cooperation and assistance to HII (and any member of its Group) in connection with the
provision of replacement licenses for third-party software licenses that were procured by NGC for
the benefit of the HII Group prior to the Distribution but that are included in the New NGC
Transferred Assets. Such cooperation shall be at the sole cost and expense of HII. The
cooperation and assistance provided for in this Section 8.8 shall not be required to the extent
such cooperation and assistance would result in an undue burden on New NGC or would unreasonably
interfere with any of its employees normal functions and duties.
Section 8.9
Use of Names, Logos and Information
.
(a) As soon as practicable (and in any event within five days) after the Distribution, HII
shall cause to be filed with the Secretary of State (or other appropriate Governmental Authority)
of the states in which its Subsidiaries are located or are doing business, an amendment to their
certificates of incorporation or similar governing documents or qualification to do business to
change the name of any Subsidiary with Northrop Grumman in its name to a new name not confusingly
similar to the current name.
(b) As soon as reasonably practicable (and in any event within 90 days) after the Distribution
(or such longer or shorter period with respect to each of the items identified on
Schedule
8.9(b)
), HII shall use reasonable best efforts to remove, and HII shall cause each member of
the HII Group to remove, from their websites, and any other publicly distributed material (other
than material required to be submitted for the purpose of regulatory filings and other similar
documentation), any reference to Northrop Grumman Corporation, and its business lines and plans and
any names, logos, or
46
trademarks associated therewith. HII and each other member of the HII Group
shall cease all use of the Northrop Grumman name (and any name confusingly similar thereto) and
all trademarks and service marks associated therewith as soon as practicable and in any event
within 90 days after the Distribution;
provided
that, if any member of the HII Group is
unable to comply with the foregoing requirements of this Section 8.9(b) for reasons outside of its
reasonable control, HII may request NGC to grant an extension of time
beyond such 90-day period within which to cease all use of the Northrop Grumman name, as
reasonably necessary for such member of the HII Group to cease all such use, and New NGC agrees not
to unreasonably withhold or delay the granting of any such requested extension. Nothing in this
Section 8.9(b) shall preclude HII or its Subsidiaries from using the Northrop Grumman name to
indicate that HII and members of the HII Group were formerly associated with Northrop Grumman
Corporation, or from referring to Northrop Grumman Corporation by its name for non-trademark and
non-branding purposes as is permitted by applicable Law.
(c) HII shall not, and shall cause each member of the HII Group not to, take any action,
purport to take any action or otherwise hold itself out as having any authority to act on behalf of
or represent in any way any member of the New NGC Group. HII shall indemnify, defend and hold
harmless each of the New NGC Indemnitees from and against any and all Liabilities of the New NGC
Indemnitees relating to, arising out of or resulting from a breach of this Section 8.9(c).
ARTICLE IX
TERMINATION
Section 9.1
Termination
. This Agreement may be terminated by the Northrop Grumman
Board at any time prior to the Distribution.
Section 9.2
Effect of Termination
. In the event of any termination of this Agreement
prior to the Distribution, no party (or any of its directors or officers) shall have any Liability
or further obligation to any other party with respect to this Agreement.
ARTICLE X
DISPUTE RESOLUTION
Section 10.1
Negotiation
. In the event of a controversy, dispute or claim arising out
of, in connection with, or in relation to the interpretation, performance, nonperformance, validity
or breach of this Agreement or any Ancillary Agreement or any other agreement entered into by any
New NGC Entity or HII Entity pursuant to this Agreement or any Ancillary Agreement or otherwise
arising out of, or in any way related to this Agreement or any Ancillary Agreement or any other
agreement entered into by any New NGC Entity or any HII Entity pursuant to this Agreement or any
Ancillary Agreement or the transactions contemplated hereby or thereby, including any claim based
on contract, tort, statute or constitution (but excluding (i) any controversy, dispute or claim
brought by or against a third party or involving a third party who would be subject to joinder as
described in Federal Rule of Civil Procedure 19 and arising out of any contract, including this
Agreement or any Ancillary Agreement, and/or relating to the use or lease of
47
real property if any
third party is a claimant or defendant in such controversy, dispute or claim and (ii) any dispute
under any of the IP License Agreement, the Tax Matters Agreement, the Letter Subcontracts and the
Ingalls Indemnity Agreement, which shall be subject to the provisions contained therein ((i) and
(ii) collectively,
Excluded Disputes
)) (collectively,
Agreement Disputes
), one
or more senior executive officers of New NGC and HII, with authority to settle, designated by each
of New NGC and HII, shall negotiate
to settle such Agreement Dispute. Unless otherwise agreed by the relevant parties in writing,
if within 45 days from the time of receipt by the New NGC Entity or the HII Entity of the written
notice of an Agreement Dispute (
Dispute Notice
), the Agreement Dispute has not been
resolved, the Agreement Dispute shall be resolved in accordance with Section 10.2. In the event of
any arbitration or litigation in accordance with this Article X, the relevant New NGC Entities and
HII Entities shall not assert any defenses of or similar to statute of limitations and laches that
arise after the date of receipt of the Dispute Notice if the Dispute Notice was served prior to the
expiration of the applicable limitations period and provided the prosecuting party complies with
the contractual time period or deadline under this Agreement or any Ancillary Agreement to which
such Agreement Dispute relates.
Section 10.2
Mediation
. If, within 45 days after delivery of a Dispute Notice, a
negotiated resolution of the Agreement Dispute under Section 10.1 has not been reached, New NGC and
HII agree to seek to settle the Agreement Dispute by mediation administered by the American
Arbitration Association (
AAA
) under its Commercial Mediation Procedures, and to bear
equally the costs of the mediation;
provided
,
however
, that each New NGC Entity and
HII Entity shall bear its own costs in connection with such mediation. If the Agreement Dispute
has not been resolved through mediation within 90 days after the date of service of the Dispute
Notice, or such longer period as the parties may mutually agree in writing, each party shall be
entitled to refer the dispute to arbitration in accordance with Section 10.3.
Section 10.3
Arbitration
. If the Agreement Dispute has not been resolved for any
reason within 90 days after the date of service of the Dispute Notice, such Agreement Dispute shall
be settled, at the request of any relevant party, by arbitration administered by the AAA under its
Commercial Arbitration Rules, conducted in New York City, except as modified herein (the
Rules
). There shall be three arbitrators. If there are only two parties to the
arbitration, each of New NGC and HII shall appoint one arbitrator within 20 days after receipt by
respondent of a copy of the demand. The two party-appointed arbitrators shall have 20 days from
the appointment of the second arbitrator to agree on a third arbitrator who shall chair the
arbitral tribunal. Any arbitrator not timely appointed by the parties under this Section 10.3
shall be appointed in accordance with AAA Rule R. 11, and in any such procedure, each party shall
be given four strikes, excluding strikes for cause. If there are multiple claimants and/or
multiple respondents to the effect that there are more than three parties to the arbitration, all
claimants and/or all respondents shall attempt to agree upon their respective appointments. If
such multiple parties fail to nominate an arbitrator within 30 days, the AAA shall appoint an
arbitrator on their behalf. In such circumstances, any existing nomination of the arbitrator
chosen by the party or parties on the other side of the proposed arbitration shall be unaffected,
and the remaining arbitrators shall be appointed in accordance with AAA Rules 12 and 13. Any
controversy
48
concerning whether an Agreement Dispute is an arbitrable Agreement Dispute, whether
arbitration has been waived, whether an assignee of this Agreement is bound to arbitrate, or as to
the interpretation or enforceability of this Article X shall be determined by the arbitrators. New
NGC and HII intend that the provisions to arbitrate set forth herein be valid, enforceable and
irrevocable, and any award rendered by the arbitrators shall be final and binding on the parties.
New NGC and HII agree to comply and cause the members of
their applicable Group to comply with any award made in any such arbitration proceedings and
agree to enforcement of or entry of judgment upon such award, in any court of competent
jurisdiction, including any New York State or federal court sitting in the Borough of Manhattan in
The City of New York. The arbitrators shall be entitled, if appropriate, to award monetary damages
and other remedies, subject to the provisions of Section 5.9. The parties shall use their
reasonable best efforts to encourage the arbitrators to resolve any arbitration related to any
Agreement Dispute as promptly as practicable.
Section 10.4
Confidentiality of Arbitral Award and Documents and Information Exchanged and
Submitted in the Course of Arbitration
. Subject to applicable Law, including disclosure or
reporting requirements, or the parties agreement, the parties shall maintain the confidentiality
of the arbitration. Unless agreed to by all the parties or required by applicable Law, including
disclosure or reporting requirements, the arbitrators and the parties shall maintain the
confidentiality of all information, records, reports, or other documents obtained in the course of
the arbitration, and of all awards, orders, or other arbitral decisions rendered by the
arbitrators.
Section 10.5
Treatment of Negotiations and Mediation
. Without limiting the provisions
of the Rules, unless otherwise agreed in writing or permitted by this Agreement, New NGC and HII
shall keep, and shall cause the members of their applicable Group to keep confidential all matters
relating to this Article X and any negotiation, mediation, conference, arbitration, or discussion
pursuant to this Article X shall be treated as compromise and settlement negotiations for purposes
of Rule 408 of the Federal Rules of Evidence and comparable state rules;
provided
, that
such matters may be disclosed (a) to the extent reasonably necessary in any proceeding brought to
enforce the award or for entry of a judgment upon the award and (b) to the extent otherwise
required by applicable Law, including disclosure or reporting requirements. Nothing said or
disclosed, nor any document produced, in the course of any negotiations, conferences and
discussions under Sections 10.1 and 10.2 that is not otherwise independently discoverable shall be
offered or received as evidence or used for impeachment or for any other purpose in any current or
future arbitration.
Section 10.6
Continuity of Service and Performance
. Unless otherwise agreed in
writing, New NGC and HII shall continue to provide service and honor all other commitments under
this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the
provisions of this Article X with respect to all matters not subject to such dispute resolution.
Section 10.7
Consolidation
. The arbitrators may consolidate an arbitration under this
Agreement with any arbitration arising under or relating to the Ancillary Agreements or any other
agreement between the parties entered into pursuant hereto or thereto, as the
49
case may be, if the
subject of the Agreement Disputes thereunder arise out of or relate essentially to the same set of
facts or transactions. Such consolidated arbitration shall be determined by the arbitrators
appointed for the arbitration proceeding that was commenced first in time.
Section 10.8
Submission to Jurisdiction
. Each of the parties to this Agreement
irrevocably agrees that any legal action or proceeding arising out of or relating to any Excluded
Dispute brought by any other party to this Agreement or its successors or assigns shall be brought
and determined in any federal court sitting in the Borough of Manhattan in The City of New York
(or, if such court lacks subject matter jurisdiction, in any appropriate New York State or federal
court), and each of the parties to this Agreement hereby irrevocably submits to the exclusive
jurisdiction of the aforesaid courts for itself and with respect to its property, generally and
unconditionally, with regard to any Excluded Dispute. Each of the parties to this Agreement agrees
not to commence any action, suit or proceeding relating thereto except in the courts described
above in New York, other than actions in any court of competent jurisdiction to enforce any
judgment, decree or award rendered by any such court in New York as described in this Section 10.8.
Each of the parties to this Agreement hereby irrevocably and unconditionally waives, and agrees
not to assert, by way of motion or as a defense, counterclaim or otherwise, in any action or
proceeding arising out of or relating to the Excluded Dispute, (a) any claim that it is not
personally subject to the jurisdiction of the courts in New York as described herein, (b) that it
or its property is exempt or immune from jurisdiction of any such court or from any legal process
commenced in such courts (whether through service of notice, attachment prior to judgment,
attachment in aid of execution of judgment, execution of judgment or otherwise) and (c) that (i)
the suit, action or proceeding in any such court is brought in an inconvenient forum, (ii) the
venue of such suit, action or proceeding is improper or (iii) the subject matter of the Excluded
Dispute, may not be enforced in or by such courts.
Section 10.9
Enforcement
. Solely with respect to the Excluded Disputes, the parties
agree that irreparable damage would occur in the event that any of the provisions of this Agreement
and the Ancillary Agreements were not performed in accordance with their specific terms or were
otherwise breached. Accordingly, each of the parties shall be entitled to specific performance of
the terms hereof and thereof, including an injunction or injunctions to prevent breaches of this
Agreement and the Ancillary Agreements and to enforce specifically the terms and provisions of this
Agreement and the Ancillary Agreements in any New York State or federal court sitting in
the Borough of Manhattan in The City of New York (or, if such court lacks subject matter
jurisdiction, in any appropriate New York State or federal court), this being in addition to any
other remedy to which such party is entitled at law or in equity. Each of the parties hereby
further waives (a) any defense in any action for specific performance that a remedy at law would be
adequate and (b) any requirement under any Law to post security as a prerequisite to obtaining
equitable relief.
50
ARTICLE XI
MISCELLANEOUS
Section 11.1
Corporate Power
. New NGC represents on behalf of itself and each other
New NGC Entity and HII represents on behalf of itself and each other HII Entity, and NGC represents
on behalf of itself, that:
(a) each such Person is a corporation or other entity duly incorporated or formed, validly
existing and in good standing under the Laws of the state or other jurisdiction of its
incorporation or formation, and has all material corporate or other similar powers required to
carry on its business as currently conducted;
(b) each such Person has the requisite corporate or other power and authority and has taken
all corporate or other action necessary in order to execute, deliver and perform this Agreement and
each other Ancillary Agreement to which it is a party and to consummate the transactions
contemplated hereby and thereby; and
(c) this Agreement and each Ancillary Agreement to which it is a party has been duly executed
and delivered by it and constitutes a valid and binding agreement of such Person enforceable in
accordance with the terms hereof and thereof.
Section 11.2
Coordination with Certain Ancillary Agreements; Conflicts
.
(a) Notwithstanding anything in this Agreement to the contrary, (i) the Ingalls Indemnity
Agreement shall be the exclusive agreement among the parties for the matters expressly set forth
therein following the Distribution and (ii) except for those Tax matters specifically addressed in
this Agreement or in any Ancillary Agreement, the Tax Matters Agreement shall be the exclusive
agreement among the parties with respect to all Tax matters, including dispute resolution and
indemnification and payments among the parties in respect of Tax matters.
(b) Except as provided in Section 8.7(h), in the event of any conflict or inconsistency
between any provision of any of the Ancillary Agreements and any provision of this Agreement, the
applicable Ancillary Agreement shall control over the inconsistent provisions of this Agreement as
to the matters specifically addressed in such Ancillary Agreement.
Section 11.3
Expenses
.
(a) Except as expressly set forth in this Agreement or in any Ancillary Agreement, all fees,
costs and expenses paid or incurred in connection with the Separation and the Distribution and the
performance of this Agreement and any Ancillary Agreement, whether performed by a third party or
internally, will be paid by the party incurring such fees or expenses, whether or not the
Distribution is consummated, or as otherwise agreed by the parties. For the avoidance of doubt,
(i) New NGC will be responsible for any transfer fees (including any pricing increases) related to
the transfer of any Retained Assets (including any transferred third-party software licenses) to
any member of the New NGC Group and the cost of any replacement for any Asset that is not a
Retained Asset
51
(including any replacement third-party software licenses), (ii) HII will be
responsible for any fees to the NYSE and any transfer fees (including any pricing increases)
related to the transfer of any Shipbuilding Assets (including any transferred third-party software
licenses) to any member of the HII Group and the cost of any replacement for any Asset that is not
a Shipbuilding Asset (including any replacement third-party software licenses) and (iii) New NGC
shall bear the costs and expenses directly related to the mailing of the
Information Statement to NGC stockholders and the fees and expenses of the Agent in connection
with the Distribution.
(b) Except where context otherwise requires, references in this Agreement and the Litigation
Management Agreement to costs and expenses include the relevant partys allocated costs of
employees (including in-house counsel and other personnel), fringe benefit costs, general and
administrative costs, overhead, document processing vendors, litigation support, including
e-discovery consultants, testifying and non-testifying experts, and other consultants.
Section 11.4
Amendment and Modification
. This Agreement and the Ancillary Agreements
may not be amended, modified or supplemented in any manner, whether by course of conduct or
otherwise, except by an instrument in writing specifically designated as an amendment hereto,
signed on behalf of each party.
Section 11.5
Waiver
. No failure or delay of any party in exercising any right or
remedy hereunder 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 right or power,
or any course of conduct, preclude any other or further exercise thereof or the exercise of any
other right or power. The rights and remedies of the parties hereunder are cumulative and are not
exclusive of any rights or remedies that they would otherwise have hereunder. Any agreement on the
part of any party to any such waiver shall be valid only if set forth in a written instrument
executed and delivered by a duly authorized officer on behalf of such party.
Section 11.6
Notices
. All notices and other communications hereunder shall be in
writing and shall be deemed duly given (a) on the date of delivery if delivered personally, or if
by facsimile, upon written confirmation of receipt by facsimile, e-mail or otherwise, (b) on the
first Business Day following the date of dispatch if delivered utilizing a next-day service by a
recognized next-day courier or (c) on the earlier of confirmed receipt or the fifth Business Day
following the date of mailing if delivered by registered or certified mail, return receipt
requested, postage prepaid. All notices hereunder shall be delivered to the addresses set forth
below, or pursuant to such other instructions as may be designated in writing by the party to
receive such notice:
52
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(i)
|
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if to New NGC or any other New NGC Entity prior to the date
on which New NGC relocates its corporate headquarters, to both:
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Northrop Grumman Corporation
1840 Century Park East
Los Angeles, CA 90067-2199
Attention: General Counsel
Facsimile: (310) 556-4910
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and:
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Northrop Grumman Corporation
1840 Century Park East
Los Angeles, CA 90067-2199
Attention: Treasurer
Facsimile: (310) 201-3088
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(ii)
|
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if to New NGC or any other New NGC Entity on or after the
date on which New NGC relocates its corporate headquarters, to both:
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Northrop Grumman Corporation
2980 Fairview Park Drive
Falls Church, VA 22042
Attention: General Counsel
Facsimile: (703) 875-1852
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and:
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Northrop Grumman Corporation
2980 Fairview Park Drive
Falls Church, VA 22042
Attention: Treasurer
Facsimile: to be provided at relevant time
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(iii)
|
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if to HII or any other HII Entity, to:
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Huntington Ingalls Industries, Inc.
4101 Washington Avenue
Newport News, VA 23607
Attention: Office of the General Counsel
Facsimile: (757) 688-1408
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with a copy (which shall not constitute notice) to:
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Huntington Ingalls Industries, Inc.
4101 Washington Avenue
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53
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Newport News, VA 23607
Attention: General Counsel
Facsimile: (757) 688-1408
|
Section 11.7
Interpretation
. When a reference is made in this Agreement to a Section,
Article or Exhibit such reference shall be to a Section, Article, Annex or Exhibit of this
Agreement unless otherwise indicated. The table of contents and headings contained in this
Agreement or in any Exhibit are for convenience of reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement. All words used in this Agreement will be
construed to be of such gender or number as the
circumstances require. Any capitalized terms used in any Schedule, Annex or Exhibit but not
otherwise defined therein shall have the meaning as defined in this Agreement or the Ancillary
Agreement to which such Schedule, Annex or Exhibit is attached, as applicable. All Schedules,
Annexes and Exhibits annexed hereto or referred to herein are hereby incorporated in and made a
part of this Agreement as if set forth herein. The word including and words of similar import
when used in this Agreement shall mean including, without limitation, unless otherwise specified.
The word day when used in this Agreement shall mean calendar day, unless otherwise specified.
Section 11.8
Entire Agreement
. This Agreement and the Ancillary Agreements and the
Annexes, Exhibits, Schedules and Appendices hereto and thereto constitute the entire agreement, and
supersede all prior written agreements, arrangements, communications and understandings and all
prior and contemporaneous oral agreements, arrangements, communications and understandings among
the parties with respect to the subject matter hereof. None of this Agreement or any of the
Ancillary Agreements shall be deemed to contain or imply any restriction, covenant, representation,
warranty, agreement or undertaking of any party with respect to the transactions contemplated
hereby and thereby other than those expressly set forth herein or therein or in any document
required to be delivered hereunder or thereunder. Notwithstanding any oral agreement or course of
action of the parties or their representatives to the contrary, no party to this Agreement shall be
under any legal obligation to enter into or complete the transactions contemplated hereby unless
and until this Agreement shall have been executed and delivered by each of the parties.
Section 11.9
No Third Party Beneficiaries
. Except for the indemnification rights
under this Agreement of any New NGC Indemnitee (other than any current, former or future employee
of any New NGC Entity that is not or was not, as of any relevant time of determination, also a
current or former officer of any New NGC Entity) or HII Indemnitee (other than any current, former
or future employee of any HII Entity that is not or was not, as of any relevant time of
determination, also a current or former officer of any HII Entity) in their respective capacities
as such, and except as specifically provided in the Employee Matters Agreement, nothing in this
Agreement or the Ancillary Agreements, express or implied, is intended to or shall confer upon any
Person other than the parties and their respective successors and permitted assigns any legal or
equitable right, benefit or remedy of any nature under or by reason of this Agreement or the
Ancillary Agreements.
54
Section 11.10
Governing Law
. This Agreement and all disputes or controversies arising
out of or relating to this Agreement or the transactions contemplated hereby shall be governed by,
and construed in accordance with, the internal Laws of the State of New York, without regard to the
Laws of any other jurisdiction that might be applied because of the conflicts of laws principles of
the State of New York (other than Section 5-1401 of the New York General Obligations Law).
Section 11.11
Assignment
. Except as specifically provided in any Ancillary Agreement,
none of this Agreement, any of the Ancillary Agreements or any of the rights, interests or
obligations hereunder or thereunder may be assigned or delegated, in whole or in part, by operation
of law or otherwise, by any party without the prior written consent of
the other parties, and any such assignment without such prior written consent shall be null
and void. If any party (or any of its successors or permitted assigns) (a) shall consolidate with
or merge into any other Person and shall not be the continuing or surviving corporation or entity
of such consolidation or merger or (b) shall transfer all or substantially all of its properties
and/or assets to any Person, then, and in each such case, the party (or its successors or permitted
assigns, as applicable) shall ensure that such Person assumes all of the obligations of such party
(or its successors or permitted assigns, as applicable) under this Agreement and all applicable
Ancillary Agreements.
Section 11.12
Severability
. Whenever possible, each provision or portion of any
provision of this Agreement and the Ancillary Agreements shall be interpreted in such manner as to
be effective and valid under applicable Law, but if any provision or portion of any provision of
this Agreement or the Ancillary Agreements is held to be invalid, illegal or unenforceable in any
respect under any applicable Law or rule in any jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provision or portion of any provision in such
jurisdiction, and this Agreement or the Ancillary Agreements shall be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of
any provision had never been contained herein.
Section 11.13
Waiver of Jury Trial
. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT
OF OR RELATING TO THIS AGREEMENT, ANY OF THE ANCILLARY AGREEMENTS OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.
Section 11.14
Counterparts
. This Agreement and each Ancillary Agreement may be
executed in one or more counterparts, all of which shall be considered one and the same instrument
and shall become effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
Section 11.15
Facsimile Signature
. This Agreement may be executed by facsimile
signature and a facsimile signature shall constitute an original for all purposes.
Section 11.16
Payment
. Except as expressly provided in this Agreement or any
Ancillary Agreement, any amount payable pursuant to this Agreement or any Ancillary Agreement by
one party (or any member of such Partys Group) shall be paid within 30
55
days after presentation of
an invoice or a written demand by the party entitled to receive such payments. Such demand shall
include documentation setting forth the basis for the amount payable. Any payment not made within
30 days of the written demand for such payment shall accrue interest at a rate per annum equal to
the rate in effect for underpayments pursuant to Section 6621 of the Code from such date.
Section 11.17
Parties Obligations
. Except where specifically provided otherwise, a
partys obligations under this Agreement shall include obligations of its employees and
Subsidiaries. Each of NGSB and NGSC hereby agrees to take any actions, or refrain from taking any
actions, to the extent required pursuant to this Agreement or any of the Ancillary Agreements.
[The remainder of this page is intentionally left blank.]
56
IN WITNESS WHEREOF, the parties have caused this Separation and Distribution Agreement to be
executed by their duly authorized representatives.
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NORTHROP GRUMMAN CORPORATION
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By:
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/s/ Mark Rabinowitz
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Name:
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Mark Rabinowitz
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Title:
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Corporate Vice President & Treasurer
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NEW P, INC.
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By:
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/s/ Mark Rabinowitz
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Name:
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Mark Rabinowitz
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Title:
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President & Treasurer
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HUNTINGTON INGALLS INDUSTRIES, INC.
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By:
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/s/ C. Michael Petters
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Name:
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C. Michael Petters
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Title:
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President and Chief Executive Officer
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NORTHROP GRUMMAN SHIPBUILDING, INC.
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By:
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/s/ C. Michael Petters
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Name:
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C. Michael Petters
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Title:
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President and Chief Executive Officer
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NORTHROP GRUMMAN SYSTEMS CORPORATION
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By:
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/s/ Mark Rabinowitz
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Name:
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Mark Rabinowitz
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Title:
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President and Treasurer
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[Signature Page to Separation and Distribution Agreement]
Annex I Internal Reorganization
The Internal Reorganization will take place in the following steps, all of which have occurred
or will occur prior to the Distribution in the following order, unless otherwise determined by the
Northrop Grumman Board:
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Step 1:
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NGC has formed (a) New NGC, (b) HII, (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) Merger Sub. New NGC initially will own all the stock of
HII, 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.
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Step 2:
|
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Pursuant to that certain Transfer of Guarantees, dated as of March
28, 2011, between NGC and HII, NGC transferred to HII the Navy
Guarantees and HII assumed and agreed to perform all of the
obligations and liabilities of NGC under the Navy Guarantees.
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Step 3:
|
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NGC will contribute all of the HII Transferred Assets to NGSB (or
to one or more members of the HII Group other than HII) and all of
the New NGC Transferred Assets to NGSC (or to one or more members
of the New NGC Group other than New NGC). New NGC (or one or more
other members of the New NGC Group) will assume all of the
Retained Liabilities of NGC except for NGCs obligations under the
Amended and Restated Credit Agreement, dated as of August 10,
2007, between NGC, the lenders party thereto from time to time,
JPMorgan Chase Bank, N.A. and the other parties named therein (the
NGC Credit Agreement
),
and HII (or one or more other members of
the HII Group) will assume all of the Shipbuilding Liabilities of
NGC except NGCs obligations under the guarantee of the GO-Zone
Bonds (the
GO-Zone Bonds Guarantee
).
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Step 4:
|
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Each of NGSBs Subsidiaries will distribute to NGSB all of the
open account debt owed to it by NGSC, if any. NGSB will
distribute to NGC 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
).
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Step 5:
|
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The parties will consummate the Holding Company Reorganization.
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Step 6:
|
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New NGC will contribute its membership interest in Holdings LLC
and its partnership interest in Holdings LP to HII.
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Step 7:
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NGC will distribute (the
NGC Distribution
) to Holdings LP all of
NGCs Assets (including the stock of NGSC and NGSB), and Holdings
LP will assume all of NGCs Liabilities and other obligations
(including NGCs
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I-1
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obligations under the NGC Credit Agreement) except NGCs obligations under the
GO-Zone Bonds Guarantee.
|
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Step 8:
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Concurrent with the NGC Distribution, HII will enter
into the P&I Agreements pursuant to which HII will
agree to perform all of NGCs obligations under the
Navy Guarantees, if any, and the GO-Zone Bonds
Guarantee and indemnify NGC for any costs arising
from such obligations.
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Step 9:
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Holdings LP will distribute to Holdings LLC, its
limited partner, and HII, its general partner, all of
the stock of NGSB and NGC (the
Holdings LP
Distribution
).
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Step 10:
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Holdings LLC will distribute to HII the shares of NGC
and NGSB that it received in the Holdings LP
Distribution.
|
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Step 11:
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HII will receive the net cash proceeds from the HII
Debt. $300,000,000 of such net cash proceeds will be
retained by HII (the
Retained Cash
). Such cash
proceeds less the Retained Cash are referred to as
the
Transferred Debt Proceeds
.
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Step 12:
|
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HII will contribute (a) to Holdings LLC a portion of
the Transferred Debt Proceeds equal to Holdings LLCs
proportionate interest in Holdings LP (approximately
$714,500,000) and (b) to Holdings LP the remaining
amount of the Transferred Debt Proceeds
(approximately $714,500,000).
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Step 13:
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Holdings LLC will contribute to Holdings LP the
amount of the Transferred Debt Proceeds contributed
to it by HII, and Holdings LP will contribute to NGSC
the entire amount of the Transferred Debt Proceeds
and the Intercompany Debt Receivable (such
contributions, together with the contributions in
Step 12, the
HII Contribution
).
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Step 14:
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HII will distribute all of its membership interest in
Holdings LLC and all of its partnership interest in
Holdings LP to New NGC.
|
I-2
Exhibit 10.5
EXECUTION COPY
TAX MATTERS AGREEMENT
by and among
NEW P, INC.
(to be renamed NORTHROP GRUMMAN CORPORATION),
HUNTINGTON INGALLS INDUSTRIES, INC.
and
NORTHROP GRUMMAN CORPORATION
(to be renamed TITAN II INC.)
Dated as of March 29, 2011
TABLE OF CONTENTS
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ARTICLE 1 DEFINITIONS
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2
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Section 1.1 Definitions
|
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2
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Section 1.2 Table of Additional Defined Terms
|
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7
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ARTICLE 2 PREPARATION AND FILING OF TAX RETURNS, PAYMENT OF TAXES DUE AFTER THE DISTRIBUTION DATE, AND
ADJUSTMENT REQUESTS
|
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8
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Section 2.1 Current Tax Group Federal Consolidated Returns
|
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8
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Section 2.2 New NGC Non-Federal Tax Returns
|
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8
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Section 2.3 HII Tax Returns
|
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8
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Section 2.4 Adjustment Requests
|
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9
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Section 2.5 Procedures
|
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9
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ARTICLE 3 GENERAL INDEMNIFICATION FOR TAXES
|
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9
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Section 3.1 Indemnification by New NGC
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9
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Section 3.2 Indemnification by HII
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10
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ARTICLE 4 REFUNDS AND CARRYBACKS
|
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10
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Section 4.1 Refunds
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10
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Section 4.2 Carrybacks
|
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10
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ARTICLE 5 TAX PROCEEDINGS
|
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12
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Section 5.1 Control of Tax Proceedings
|
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12
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Section 5.2 Notices Relating to Tax Proceedings
|
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13
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Section 5.3 Statute of Limitations
|
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14
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ARTICLE 6 PAYMENTS BETWEEN HII AND NEW NGC FOR CERTAIN INCOME TAX ADJUSTMENTS
|
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14
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Section 6.1 Payments by HII to New NGC
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14
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Section 6.2 Payments by New NGC to HII
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15
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Section 6.3 Threshold Amount
|
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16
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Section 6.4 Separate Entity Provisions
|
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16
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Section 6.5 Acknowledgement
|
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17
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ARTICLE 7 ALLOCATION, CHARACTER, AND TREATMENT OF CERTAIN TAX ITEMS AND TRANSACTIONS
|
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17
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Section 7.1 Allocation of Certain Tax Items
|
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17
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Section 7.2 Tax Treatment of Payments between the Parties
|
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18
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Section 7.3 Tax Treatment of Novations of Shipbuilding Liabilities and Retained Liabilities
|
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18
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Section 7.4 Accounting Methods
|
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19
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Section 7.5 Indemnification for Taking Contrary Tax Treatment
|
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20
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Section 7.6 Tax Attributes
|
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21
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TABLE OF CONTENTS
(Continued)
|
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ARTICLE 8 TAX-FREE STATUS OF THE TRANSACTIONS
|
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21
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Section 8.1 Covenants, Undertakings, Agreements, Representations, and Warranties
|
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21
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Section 8.2 Restrictions Relating to the Distribution
|
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23
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Section 8.3 Procedures Regarding Rulings and Opinions
|
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26
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Section 8.4 Indemnification
|
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27
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ARTICLE 9 COOPERATION
|
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28
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Section 9.1 General Cooperation
|
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28
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Section 9.2 Retention of Records
|
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29
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Section 9.3 Confidentiality
|
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29
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ARTICLE 10 NGC AS CURRENT TAX GROUP AGENT
|
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29
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Section 10.1 Purpose
|
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29
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Section 10.2 NGC Tax Officer
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29
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Section 10.3 Payments of Tax and Receipt of Refunds
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31
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Section 10.4 Indemnification
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31
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Section 10.5 Designation of Substitute Current Tax Group Agent
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32
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ARTICLE 11 MISCELLANEOUS
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32
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Section 11.1 Timing of Payments; Interest
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32
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Section 11.2 Dispute Resolution
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32
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Section 11.3 Survival of Covenants
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34
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Section 11.4 Termination of Agreements, Arrangements and Policies
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34
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Section 11.5 Severability
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34
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Section 11.6 Entire Agreement
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35
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Section 11.7 Assignment
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35
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Section 11.8 No Third-Party Beneficiaries
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35
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Section 11.9 Specific Performance and Other Equitable Relief
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35
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Section 11.10 Waiver of Jury Trial
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35
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Section 11.11 Governing Law
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36
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Section 11.12 Amendment
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36
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Section 11.13 Rules of Construction
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36
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Section 11.14 Notices
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36
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Section 11.15 Counterparts
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39
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Section 11.16 Coordination with the Employee Matters Agreement
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39
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Section 11.17 Conflict or Inconsistency Between Agreements
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39
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Section 11.18 Termination of this Agreement
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EXHIBITS
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Exhibit A Form of Letter Waiving Conflict of Interest
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Exhibit B Form of Designation of Substitute Agent
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ii
TAX MATTERS AGREEMENT
THIS TAX MATTERS AGREEMENT, dated as of March 29, 2011 (this
Agreement
), is made by
and among NEW P, INC., a Delaware corporation (
New NGC
), HUNTINGTON INGALLS INDUSTRIES,
INC., a Delaware corporation (
HII
), and NORTHROP GRUMMAN CORPORATION, a Delaware
corporation (
NGC
). Each of New NGC, HII and NGC is sometimes referred to herein as a
Party
, and, collectively, New NGC, HII and NGC are referred to as the
Parties
.
RECITALS
A. NGC, acting through itself and its direct and indirect Subsidiaries, currently conducts the
Shipbuilding Business and the Retained Business.
B. The board of directors of NGC has determined that it is appropriate, desirable and in the
best interests of NGC and its stockholders to separate NGC into two publicly traded companies: (a)
HII, which following the Distribution, will own and conduct, directly and indirectly, the
Shipbuilding Business, and (b) New NGC, which, following the Distribution, will own and conduct,
directly and indirectly, the Retained Business.
C. The Parties have entered into the Separation and Distribution Agreement, dated as of March
24, 2011 (the
Separation and Distribution Agreement
), pursuant to which they will
undertake the Holding Company Reorganization, the Internal Reorganization, and the Distribution
(each as defined in the Separation and Distribution Agreement) (collectively, the
Transactions
).
D. The Parties have entered into the Ancillary Agreements (as defined in the Separation and
Distribution Agreement), pursuant to which they will undertake certain other transactions and
arrangements relating to the separation of the Shipbuilding Business from the Retained Business.
E. Prior to the Distribution, NGC will be renamed Titan II Inc. and New NGC will be renamed
Northrop Grumman Corporation.
F. NGC is the common parent of an affiliated group of corporations that files consolidated
U.S. federal Income Tax Returns (the
Current Federal Tax Group
) and consolidated and
combined Tax Returns in certain other jurisdictions (each a
Current Non-Federal Tax Group
and, collectively with the Current Federal Tax Group, the
Current Tax Group
), and NGC is
the Current Tax Group Agent for the Current Tax Group Members.
G. Following the Distribution, HII will be the common parent of an affiliated group of
corporations that files consolidated U.S. federal Income Tax Returns and consolidated or combined
Tax Returns in certain other jurisdictions (the
HII Tax Group
), and HII will be the agent
for the HII Tax Group Members.
H. Following the Distribution, the Current Federal Tax Group and certain Current Non-Federal
Tax Groups will remain in existence with all their respective previous Members other than the HII
Group Members.
1
I. Following the Distribution, (1) New NGC will be the common parent of the Current Tax Group
and will be the Current Tax Group Agent with respect to U.S. federal Income Tax matters for Taxable
Periods ending December 31, 2011 and thereafter; and (2) New NGC will be the common parent of
certain Current Non-Federal Tax Groups and will be the Current Tax Group Agent with respect to
certain Tax matters (other than U.S. federal Income Tax matters) for certain Post-Distribution
Taxable Periods.
J. Following the Distribution, and until NGCs corporate existence terminates (or until the
relevant Tax Authority consents to or requires the appointment of a substitute Current Tax Group
Agent), (1) NGC will continue to be the Current Tax Group Agent with respect to U.S. federal Income
Tax matters for Taxable Periods ending on or prior to December 31, 2010; and (2) NGC will continue
to be the Current Tax Group Agent with respect to certain Tax matters (other than U.S. federal
Income Tax matters) for certain Pre-Distribution Taxable Periods.
K. The Parties intend that, for U.S. federal Income Tax purposes, the Transactions shall
qualify for Tax-Free Status pursuant to Sections 351, 355, 361, 368(a) and related provisions of
the Code, and, in furtherance of such intent NGC has obtained the IRS Ruling and entered into the
IRS Closing Agreement.
L. The Parties wish to provide for the payment of Tax liabilities and entitlement to refunds
thereof, to allocate responsibility for, and cooperation in, the filing of Tax Returns, to set
forth covenants, undertakings, agreements, representations, warranties, and indemnities relating to
the Tax-Free Status of the Transactions, to provide for the exercise of NGCs functions as Current
Tax Group Agent, and to provide for certain other matters relating to Taxes.
AGREEMENT
In consideration of the foregoing and the mutual covenants and agreements herein contained,
and intending to be legally bound hereby, the Parties agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1
Definitions
.
For the purposes of this Agreement:
Accounting Method
means a method of accounting under Section 446 of the Code.
Adjustment Request
means any formal or informal written claim or request made to a
Tax Authority by an NGC Group Member, a New NGC Group Member, or an HII Group
Member for an adjustment to Taxes, whether such adjustment is positive or negative (by refund,
credit, offset, or otherwise), including (i) an amended Tax Return claiming an adjustment to Taxes
as reported on the originally filed Tax Return or, if applicable, as previously adjusted or (ii) a
self-initiated adjustment or similar claim made, during the course of a Tax Proceeding or
otherwise. Such term shall not include an adjustment to Tax initiated by a Tax Authority during a
Tax Proceeding.
2
Affiliate
has the meaning set forth in the Separation and Distribution Agreement.
Agency Regulations
means Treasury Regulations Section 1.1502-77 and any similar
regulation in another Tax jurisdiction.
Business Day
has the meaning set forth in the Separation and Distribution Agreement.
Code
means the Internal Revenue Code of 1986, as amended.
Current Tax Group Agent
means the sole agent authorized to act in its own name for
Members of the Current Tax Group with respect to matters relating to liability for U.S. federal
Income Taxes and any other Taxes to which such agency applies.
Current Tax Group Federal Consolidated Return
means a U.S. federal Income Tax Return
filed or required to be filed by NGC or New NGC as the common parent of the Current Tax Group.
Current Tax Group Member
means a member of a Current Tax Group for a relevant
Taxable Period (or portion of a Taxable Period).
Distribution
has the meaning set forth in the Separation and Distribution Agreement.
Distribution Date
has the meaning set forth in the Separation and Distribution
Agreement.
Employee Matters Agreement
has the meaning set forth in the Separation and
Distribution Agreement.
Final Determination
means the final resolution of liability for any Tax, for any
issue and for any Taxable Period, by or as a result of (i) IRS Form 870-AD (or any successor form)
or a comparable form under any state, local or foreign law on the date of acceptance by or on
behalf of the relevant Tax Authority, except that a Form 870-AD or comparable form that reserves
the right of the taxpayer to file a claim for refund and/or the right of the Tax Authority to
assert a further deficiency shall not constitute a Final Determination with respect to the item or
items so reserved, (ii) a final decision, judgment, decree or other order by any court of competent
jurisdiction that can no longer be appealed or reheard, (iii) a closing agreement or similar
agreement entered into with a Tax Authority in connection with an administrative or judicial
proceeding, (iv) an allowance of a refund or credit in respect of an overpayment of Tax, but only
after the expiration of all periods of limitations during which such refund or credit may be
recovered by the jurisdiction imposing the Tax, (v) any other final resolution, including by
reason of the expiration of the applicable period of limitations or the execution of a pre-filing
agreement with the applicable Tax Authority, or (vi) the occurrence of any event which the parties
agree in writing is a Final Determination.
HII Group
means, for any relevant time beginning immediately after the Distribution,
HII and each Subsidiary of HII at such time.
3
HII Group Member
means HII, each Person that is a Subsidiary of HII immediately
after the Distribution (including NGC), and each Person that becomes a Subsidiary of HII after the
Distribution.
HII Tax Group Member
means a member of the HII Tax Group for a relevant Taxable
Period (or portion of a Taxable Period).
HII Tax Return
means a Tax Return filed or required to be filed by an HII Group
Member after the Distribution Date (excluding a Tax Return filed or required to be filed by NGC for
a Pre-Distribution Taxable Period or a Straddle Taxable Period and, for avoidance of doubt,
excluding a New NGC Non-Federal Tax Return and a Current Tax Group Federal Consolidated Return).
Holding Company Reorganization
has the meaning set forth in the Separation and
Distribution Agreement.
Income Tax
means a Tax based upon, measured by, or calculated with respect to (i)
net income or profits or net receipts (including, but not limited to, any capital gains, minimum
Tax or any Tax on items of Tax preference, but not including sales, use, real or personal property,
or transfer or similar Taxes) or (ii) multiple bases (including corporate franchise, doing business
and occupation Taxes) if one or more bases upon which such Tax may be based, by which such Tax may
be measured, or with respect to which such Tax may be calculated, is described in clause (i).
Income Tax Adjustment
means any change in any Income Tax Item, whether resulting
from a Tax Proceeding or an Adjustment Request;
provided
,
however
, that a claim for
refund resulting from a carryback of a loss, credit or other Tax Attribute in a Post-Distribution
Taxable Period to a Pre-Distribution Taxable Period or a Straddle Taxable Period is not an Income
Tax Adjustment.
Income Tax Item
means any item of income, gain, loss, deduction, credit, recapture
of credit, or any other item (including the adjusted basis of property) relating to the
determination of Income Taxes payable in any Taxable Period.
Income Tax Return
means any Tax Return relating to Income Taxes.
Independent Firm
means a nationally recognized law firm or accounting firm which, at
the relevant time, does not provide, and within the preceding two years has not provided,
substantial services to any of the Parties.
Information
has the meaning set forth in the Separation and Distribution Agreement.
Internal Reorganization
has the meaning set forth in the Separation and Distribution
Agreement.
IRS
means the U.S. Internal Revenue Service or any successor thereto.
4
IRS Closing Agreement
means the closing agreement, effective February 14, 2011,
between NGC (as parent of the Current Federal Tax Group), HII (as the parent of the HII Tax Group)
and the IRS, entered into in connection with the Transactions and the IRS Ruling.
IRS Ruling
means the U.S. federal income tax private letter ruling, issued October
14, 2010, and the supplement thereto, issued February 14, 2011, by the IRS in connection with the
Transactions.
Law
has the meaning set forth in the Separation and Distribution Agreement.
Member
refers to an NGC Group Member, a Current Tax Group Member, an HII Group
Member, an HII Tax Group Member or a New NGC Group Member, as the case may be.
New NGC Group
means, for any relevant time beginning immediately after the
Distribution, New NGC and each Subsidiary of New NGC at such time.
New NGC Group Member
means New NGC, each Person that is a Subsidiary of New NGC
immediately after the Distribution, and each Person that becomes a Subsidiary of New NGC after the
Distribution.
New NGC Non-Federal Tax Return
means a Tax Return (other than a Current Tax Group
Federal Consolidated Return) (i) that is filed or required to be filed by a New NGC Group Member
after the Distribution Date or (ii) that is filed or required to be filed after the Distribution
Date and includes an Income Tax Item or an asset of a New NGC Group Member, or otherwise relates to
the Retained Business (which shall include a Tax Return that is required to be filed after the
Distribution Date that includes an Income Tax Item or an asset of a New NGC Group Member and an
Income Tax Item or an asset of an HII Group Member).
NGC Group
means, for any relevant time ending immediately before the Holding Company
Reorganization, NGC and each Subsidiary of NGC at such time.
NGC Group Member
means NGC and each Subsidiary of NGC at any time before the Holding
Company Reorganization.
NGC Non-Federal Tax Return
means a Tax Return, other than a Current Tax Group
Federal Consolidated Return, required to be filed by an NGC Group Member prior to or on the
Distribution Date.
NGC Tax Officer
means the officer of NGC with full authority with respect to Tax
matters.
Opinion
means the opinion of Tax Counsel, dated March 14, 2011, with respect to
certain Tax aspects of the Transactions.
Person
has the meaning set forth in the Separation and Distribution Agreement.
Post-Distribution Taxable Period
means any Taxable Period (or portion thereof)
beginning after the Distribution Date.
5
Pre-Distribution Taxable Period
means any Taxable Period (or portion thereof) ending
on or before the Distribution Date.
Refund
means any refund of Taxes (including any overpayment of Taxes that can be
refunded or, alternatively, applied to other Taxes payable), including any interest paid on or with
respect to such refund of Taxes.
Retained Business
has the meaning set forth in the Separation and Distribution
Agreement.
Retained Liabilities
has the meaning set forth in the Separation and Distribution
Agreement.
Shared Gain
has the meaning set forth in the Separation and Distribution Agreement.
Shared Liability
has the meaning set forth in the Separation and Distribution
Agreement.
Shipbuilding Business
has the meaning set forth in the Separation and Distribution
Agreement.
Shipbuilding Liabilities
has the meaning set forth in the Separation and
Distribution Agreement.
Straddle Taxable Period
means a Taxable Period that begins on or before and ends
after the Distribution Date.
Subsidiary
has the meaning set forth in the Separation and Distribution Agreement.
Tax
means (i) a tax, charge, fee, duty, levy, impost or other similar assessment,
imposed by any U.S. federal, state or local or foreign governmental authority, including, but not
limited to, income, gross receipts, excise, property, sales, use, license, stock, franchise,
payroll, employment, withholding, social security, transfer, value added and other taxes, (ii)
interest attributable thereto, (iii) a penalty or addition attributable thereto or to a failure to
file a Tax Return or a form, schedule or information properly includible thereon, and (iv) a
liability in respect of any item described in clause (i), (ii) or (iii), payable by reason of
assumption, transferee or successor liability, operation of Law or several liability pursuant to
Treasury Regulations Section 1.1502-6(a).
Tax Attribute
means a net operating loss, capital loss, earnings and profits,
overall foreign loss, previously taxed income, separate limitation loss, and any other Tax
attribute.
Tax Authority
means a governmental authority or subdivision, agency, commission or
entity thereof or a quasi-governmental or private body having jurisdiction over the assessment,
determination, collection or imposition of a Tax (including the IRS).
Tax Counsel
means Ivins, Phillips & Barker, Chartered.
6
Tax-Free Status
means the Tax treatment accorded to the Transactions as set forth in
the IRS Ruling and the Opinion.
Tax Group
means any U.S. federal, state, local or foreign affiliated, consolidated,
combined, unitary or similar group or fiscal unity that joins in the filing of a single Tax Return.
Tax Materials
means, collectively, (i) the IRS Ruling, (ii) the IRS Closing
Agreement, (iii) each submission to the IRS in connection with the IRS Ruling, (iv) the Opinion,
(v) the representation letters from NGC, New NGC and HII, addressed to Tax Counsel supporting the
Opinion, and (vi) any other materials delivered or deliverable by NGC, New NGC or HII in connection
with the issuance of the IRS Ruling, the negotiation, drafting, execution and approval of the IRS
Closing Agreement and the rendering of the Opinion.
Tax Matters Dispute
means a dispute arising in connection with this Agreement
between the Parties, other than a Tax Proceeding (except to the extent provided in Section 5.1) or
a Tax Agency Dispute.
Tax Proceeding
means any audit, examination, investigation, action, suit, claim,
assessment, appeal, Adjustment Request, or other administrative or judicial proceeding relating to
Taxes.
Tax Return
means (i) a return, report, certificate, form or similar statement or
document (including any related or supporting information or schedule attached thereto and any
information return, or declaration of estimated Tax) required to be supplied to, or filed with, a
Tax Authority in connection with the payment, determination, assessment or collection of a Tax or
the administration of a Law relating to a Tax or (ii) an amended Tax Return.
Taxable Period
means any period for which a liability for Tax is determined.
Transactions Tax
means a Tax imposed on the Holding Company Reorganization, the
Internal Reorganization, or the Distribution, or by reason of a failure of the Holding Company
Reorganization, the Internal Reorganization, or the Distribution to qualify for Tax-Free Status
(including an intercompany transaction triggered by reason of such failure).
Treasury Regulations
means the final and temporary (but not proposed) Income Tax
regulations promulgated under the Code, as in effect at the relevant time (including any successor
regulation or rule of law), and any similar regulation or rule of law promulgated by another
relevant jurisdiction.
Unqualified Tax Opinion
means a will opinion, without substantive qualification,
rendered by a nationally recognized law firm, which law firm is reasonably acceptable to New NGC,
to the effect that a transaction or event, or a series of transactions and/or events, will not
affect the Tax-Free Status of the Transactions.
Section 1.2
Table of Additional Defined Terms
.
The following terms have the meanings set forth in the Sections referenced below:
7
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|
|
Definition
|
|
Section
|
Agreement
|
|
Preamble
|
Carryback Election Request
|
|
Section 4.2(b)(i)
|
Current Federal Tax Group
|
|
Recital F
|
Current Non-Federal Tax Group
|
|
Recital F
|
Current Tax Group
|
|
Recital F
|
HII
|
|
Preamble
|
HII Restricted Action
|
|
Section 8.2(c)
|
HII Tax Group
|
|
Recital G
|
New NGC
|
|
Preamble
|
NGC
|
|
Preamble
|
Parties
|
|
Preamble
|
Party
|
|
Preamble
|
Payee Party
|
|
Section 6.3(a)
|
Payor Party
|
|
Section 6.3(a)
|
Restriction Period
|
|
Section 8.2(c)
|
Separation and Distribution Agreement
|
Recital C
|
Tax Arbitrator
|
|
Section 11.2(b)
|
Threshold Amount
|
|
Section 6.3(a)
|
Transactions
|
|
Recital C
|
ARTICLE 2
PREPARATION AND FILING OF TAX RETURNS,
PAYMENT OF TAXES DUE AFTER THE DISTRIBUTION DATE,
AND ADJUSTMENT REQUESTS
Section 2.1
Current Tax Group Federal Consolidated Returns
.
New NGC shall be responsible for preparing and filing all Current Tax Group Federal
Consolidated Returns filed or required to be filed after the Distribution Date and for paying all
Taxes shown payable on all such Tax Returns.
Section 2.2
New NGC Non-Federal Tax Returns
.
New NGC shall be responsible for preparing and filing, or causing the relevant New NGC Group
Member to prepare and file, all New NGC Non-Federal Tax Returns and for paying or causing such New
NGC Group Member to pay all Taxes shown as payable on all New NGC Non-Federal Tax Returns.
Section 2.3
HII Tax Returns
.
HII shall be responsible for preparing and filing, or causing the relevant HII Group Member to
prepare and file, all HII Tax Returns. HII shall pay or cause such HII Group Member to pay to the
appropriate Tax Authority all Taxes shown as payable on all HII Tax Returns.
8
Section 2.4
Adjustment Requests
.
(a)
New NGC Adjustment Requests
. New NGC shall, in its sole discretion, be permitted
to make, or to decline to make, an Adjustment Request relating to an NGC Non-Federal Tax Return, a
Current Tax Group Federal Consolidated Return or a New NGC Non-Federal Tax Return, subject, in each
case, to ARTICLE 5.
(b)
HII Adjustment Requests
. HII shall, in its sole discretion, be permitted to make,
or to decline to make, an Adjustment Request relating to any HII Tax Return.
Section 2.5
Procedures
.
(a) In connection with the preparation of any Current Tax Group Federal Consolidated Return
pursuant to Section 2.1, any New NGC Non-Federal Tax Return pursuant to Section 2.2, or any
Adjustment Request pursuant to Section 2.4, HII shall, at its own cost and expense, provide pro
forma Tax Returns or equivalent financial and other data relating to HII and any relevant HII Group
Member, to be used in the preparation of such Tax Return or Adjustment Request, in accordance with
past practices, procedures, Accounting Methods, elections, and conventions, and shall assist and
cooperate with New NGC in any other manner reasonably requested by New NGC.
(b) To the extent provided in ARTICLE 10, New NGC shall perform the actions described in
Section 2.1, Section 2.2, and Section 2.4(a) through NGC, the NGC Tax Officer and persons
designated by the NGC Tax Officer, at New NGCs sole cost and expense.
(c) In connection with the preparation of any HII Tax Return filed pursuant to Section 2.3,
New NGC shall, at its own cost and expense, assist and cooperate with HII in any manner reasonably
requested by HII.
(d) Except as otherwise provided in this Agreement, each Party shall bear its own costs and
expenses incurred in connection with this ARTICLE 2.
ARTICLE 3
GENERAL INDEMNIFICATION FOR TAXES
Section 3.1
Indemnification by New NGC
.
New NGC shall be responsible for paying, and shall indemnify and hold each HII Group Member
harmless from and against, (a) Taxes shown as payable on, and any increase in Taxes payable with
respect to, NGC Non-Federal Tax Returns, Current Tax Group Federal Consolidated Returns, and New
NGC Non-Federal Tax Returns, and (b) any other Taxes payable by New NGC Group Members or relating
to the Retained Business;
provided
,
however
, that New NGCs obligations pursuant to
this Section 3.1 shall be separate from New NGCs obligations to HII pursuant to Section 6.2,
Section 7.5, Section 8.4(b), and Section 10.4;
provided
further
, that New NGCs
obligations pursuant to this Section 3.1 shall not affect HIIs obligations to New NGC pursuant to
Section 6.1, Section 7.5, Section 8.4(a), and Section 10.4.
9
Section 3.2
Indemnification by HII
.
HII shall be responsible for paying, and shall indemnify and hold each New NGC Group Member
harmless from and against, (a) Taxes shown as payable on, and any increase in Taxes payable with
respect to, HII Tax Returns and (b) any other Taxes payable by HII Group Members or relating to the
Shipbuilding Business for any Post-Distribution Taxable Period;
provided
,
however
,
that HIIs obligations pursuant to this Section 3.2 shall be separate from HIIs obligations to New
NGC pursuant to Section 6.1, Section 7.5, Section 8.4(a), and Section 10.4(a);
provided
further
that HIIs obligations pursuant to this Section 3.2 shall not affect New NGCs
obligations to HII pursuant to Section 6.2, Section 7.5, Section 8.4(b), and Section 10.4.
ARTICLE 4
REFUNDS AND CARRYBACKS
Section 4.1
Refunds
.
(a) New NGC shall be entitled to any Refund due with respect to an NGC Non-Federal Tax Return,
a Current Tax Group Federal Consolidated Return, and a New NGC Non-Federal Tax Return;
provided
,
however
, that New NGCs receipt of a Refund with respect to any such Tax
Return shall not affect New NGCs obligations to HII pursuant to Section 6.2, Section
7.5, or Section 8.4(b) and shall not affect HIIs obligations to New NGC pursuant to Section
6.1, Section 7.5, or Section 8.4(a). If a Refund due with respect to an NGC Non-Federal Tax
Return, a Current Tax Group Federal Consolidated Return, or a New NGC Non-Federal Tax Return is
paid to an HII Group Member (including NGC) by a Tax Authority, such Member shall remit such Refund
to New NGC.
(b) HII shall be entitled to any Refund due with respect to an HII Tax Return;
provided
,
however
, that HIIs receipt of a Refund with respect to any such Tax
Return shall not affect HIIs obligations to New NGC pursuant to Section 6.1, Section 7.5, or
Section 8.4(a) and shall not affect New NGCs obligations to HII pursuant to Section 6.2, Section
7.5, or Section 8.4(b). Except as provided in Section 4.2(b), if a Refund due with respect to an
HII Tax Return is paid to a New NGC Group Member by a Tax Authority, such Member shall remit such
Refund to HII.
(c) To the extent provided in ARTICLE 10, New NGC shall perform the actions described in this
ARTICLE 4 through NGC, the NGC Tax Officer and persons designated by the NGC Tax Officer, at New
NGCs sole cost and expense.
Section 4.2
Carrybacks
.
(a)
New NGC Carrybacks
.
(i) If the Current Tax Group or a New NGC Group Member realizes a loss, credit, or other
Tax Attribute that may be carried back to a Pre-Distribution Taxable Period or a Straddle
Taxable Period (whether by (i) electing to carry back such loss, credit, or other Tax
Attribute to a Pre-Distribution Taxable Period or a Straddle Taxable Period, or (ii) not
electing to waive the carryback of such loss, credit, or other Tax Attribute to a
Pre-Distribution Taxable Period or a Straddle Taxable Period), the Current Tax Group or such
10
Member may, in its sole discretion, carry back such loss, credit, or other Tax Attribute to
such Pre-Distribution Taxable Period or a Straddle Taxable Period. HII shall cooperate with
New NGC in seeking any Refund resulting from such carryback, at New NGCs cost and expense.
New NGC shall be entitled to any Refund resulting from a carryback pursuant to this Section
4.2(a)(i). If any such Refund is paid to an HII Group Member (including NGC) by a Tax
Authority, such Member shall remit such Refund to New NGC.
(ii) Notwithstanding Section 4.2(a)(i), if by Law the New NGC Group or a New NGC Group
Member may utilize a loss, credit, or other Tax Attribute only by a carryback of such loss,
credit, or other Tax Attribute to a Pre-Distribution Taxable Period or a Straddle Taxable
Period, HII shall cooperate with New NGC in seeking any Refund resulting from such carryback,
at New NGCs cost and expense. New NGC shall be entitled to any Refund resulting from a
carryback pursuant to this Section 4.2(a)(ii).
(b)
HII Carrybacks
.
(i) If the HII Group or an HII Group Member realizes a loss, credit or other Tax
Attribute in a Post-Distribution Taxable Period that may be carried back to a Pre-Distribution
Taxable Period or a Straddle Taxable Period (whether by (i) electing to carry back such loss,
credit, or other Tax Attribute to a Pre-Distribution Taxable Period or a Straddle Taxable
Period, or (ii) not electing to waive the carryback of such loss, credit, or other Tax
Attribute to a Pre-Distribution Taxable Period or a Straddle Taxable Period), and HII wishes
to carry back such loss, credit, or other Tax Attribute to a Pre-Distribution Taxable Period
or a Straddle Taxable Period, HII shall notify New NGC in writing of HIIs wish to carry back
such loss, credit, or other Tax Attribute (a
Carryback Election Request
). A
Carryback Election Request shall include a computation of the amount of such loss, credit, or
other Tax Attribute, and a certification by an appropriate officer of HII setting forth HIIs
belief (together with supporting analysis) that the Tax treatment of such loss, credit, or
other Tax Attribute is more likely than not correct. New NGC shall have sole discretion to
deny a Carryback Election Request.
(ii) New NGC may consent to the carryback of a loss, credit, or other Tax Attribute set
forth in the Carryback Election Request upon New NGCs determination (in its sole discretion)
that the Parties have agreed to (A) the procedures for carrying back such loss, credit, or
other Tax Attribute (including by making an Adjustment Request, at HIIs cost and expense),
(B) the determination of the amount or portion of any Refund resulting from such carryback
that shall be paid to HII pursuant to this Section 4.2(b)(ii), and (C) the timing of any
payment to be made by New NGC to HII with respect to such carryback and any interest that
shall accrue on any late payment. To the extent any Refund subject to this Section 4.2(b)(ii)
is later reduced in a Final Determination, the Parties shall use their best efforts to agree
to the amount of such Refund that HII shall repay to New NGC, together with any interest,
fines, additions to Tax, penalties, or any additional amounts imposed by a Tax Authority
relating thereto.
(iii) Notwithstanding Section 4.2(b)(ii), if by Law the HII Group or an HII Group Member
may utilize a loss, credit, or other Tax Attribute only by a carryback of such loss, credit,
or other Tax Attribute from a Post-Distribution Taxable Period to a New NGC
11
Non-Federal Tax
Return or an NGC Non-Federal Tax Return for a Pre-Distribution Taxable Period or a Straddle
Taxable Period, New NGC shall cooperate with HII in carrying back such loss, credit, or other
Tax Attribute (including by filing of an amended Current Tax Group Federal Consolidated Tax
Return, NGC Non-Federal Tax Return, or New NGC Non-Federal Tax Return or making an Adjustment
Request with respect to any such Tax Return, which shall be at HIIs cost and expense). The
Parties shall use their best efforts to agree with respect to the matters set forth in clauses
(A), (B) and (C) of Section 4.2(b)(ii). To the extent any Refund subject to this Section
4.2(b)(iii) is later reduced in a Final Determination, the Parties shall use their best
efforts to agree to the amount of such Refund that HII shall repay to New NGC, together with
any interest, fines, additions to Tax, penalties, or any additional amounts imposed by a Tax
Authority relating thereto.
ARTICLE 5
TAX PROCEEDINGS
Section 5.1
Control of Tax Proceedings
.
(a)
Control by New NGC
.
(i) New NGC shall be entitled to control and settle any Tax Proceeding relating to (A)
an NGC Non-Federal Tax Return, (B) a Current Tax Group Federal Consolidated Return, or (C) a
New NGC Non-Federal Tax Return (including, in each case, any Tax Proceedings relating to a
Transactions Tax).
(ii) New NGC may take any and all actions necessary or incident to the control and
settlement of any Tax Proceeding relating to (A) an NGC Non-Federal Tax Return, (B) a
Current Tax Group Federal Consolidated Return (subject to the IRS Closing Agreement), or (C)
a New NGC Non-Federal Tax Return (including, in each case, any Tax Proceedings relating to a
Transactions Tax).
(iii) To the extent provided in ARTICLE 10, New NGC shall perform any actions under
this ARTICLE 5 through NGC, the NGC Tax Officer and persons designated by the NGC Tax
Officer.
(iv) If a settlement of a Tax Proceeding within the control of New NGC pursuant to this
ARTICLE 5 (or an action proposed to be taken with respect thereto) reasonably could be
expected to give rise to a payment by HII pursuant to Section 6.1, Section 7.5, or Section
8.4(a), or could be expected to give rise to a payment to HII pursuant to Section 6.2,
Section 7.5, or Section 8.4(b), then New NGC shall (and, if such Tax Proceeding is subject
to ARTICLE 10, shall cause NGC and the NGC Tax Officer to) provide copies of all
correspondence and all filings to be submitted to a Tax Authority or judicial authority in
connection with such Tax Proceeding for review by HII prior to submission to the Tax
Authority or judicial authority;
provided
,
however
, that failure by New NGC
to provide such correspondence to HII shall not relieve HII of any obligation pursuant to
Section 6.1, Section 7.5, or Section 8.4(a), except to the extent HII is actually prejudiced
by such failure.
12
(v) New NGC shall (and, if such Tax Proceeding is subject to ARTICLE 10, shall cause
NGC and the NGC Tax Officer to) provide written notice to HII of any settlement with a Tax
Authority that reasonably could be expected to give rise to a payment by HII pursuant to
Section 6.1, Section 7.5, or Section 8.4(a), or a payment to HII pursuant to Section 6.2,
Section 7.5, or Section 8.4(b). HII shall not have the right to prevent any such settlement
but shall have the right to contest the amount of its liability to New NGC pursuant to
Section 6.1, Section 7.5, or Section 8.4(a) or the amount of its payment from New NGC
pursuant to Section 6.2, Section 7.5, or Section 8.4(b) resulting from such settlement. HII
shall provide written notice to New NGC of its intention to contest the amount of its
obligation to New NGC pursuant to Section 6.1, Section 7.5, or
Section 8.4(a) or the amount of New NGCs obligation to HII pursuant to Section 6.2,
Section 7.5, or Section 8.4(b) prior to the time such settlement is entered into (but in any
event HII shall have no less than 10 days from the time it receives notice of such
settlement from New NGC to provide notice to New NGC of its intent to contest such
settlement). Any contest by HII pursuant to this Section 5.1(a)(v) shall be conducted as a
Tax Matters Dispute under the procedures set forth in Section 11.2. If the negotiations
required thereby are not successful, the Tax Arbitrator shall determine the amount of a
settlement with the relevant Tax Authority that would most accurately reflect the litigation
risk of the relevant issue. HII shall be liable to New NGC, or New NGC shall be liable to
HII, as the case may be, based solely on the determination of the Tax Arbitrator as if a
settlement implementing such determination had actually occurred, without regard to the
actual settlement with the Tax Authority. Neither HII nor New NGC shall be required to pay
any obligation arising from a contested settlement subject to this Section 5.1(a)(v) until
the contest is either decided by the Tax Arbitrator or resolved between the parties;
provided
,
however
, that, pursuant to Section 11.1 interest shall accrue
with respect to such obligation with the written notice pursuant to this Section 5.1(a)(v)
treated as a demand for such payment.
(b)
Control by HII
. HII shall be entitled to control, contest, compromise and settle
any adjustment proposed, asserted or assessed pursuant to any Tax Proceeding relating to any HII
Tax Return.
Section 5.2
Notices Relating to Tax Proceedings
.
(a) Except as otherwise provided in Section 5.2(b), if any Party becomes aware of the
commencement of a Tax Proceeding that may give rise to Taxes for which another Party is responsible
pursuant to ARTICLE 3 or which may give rise to a payment obligation under ARTICLE 6, Section 7.5,
or Section 8.4, the Party that so becomes aware shall notify such other Party of such Tax
Proceeding within 10 days after so becoming aware and thereafter shall promptly provide to such
other Party copies of notices and communications relating to such Tax Proceeding.
(b) If an HII Group Member (including NGC) receives a notice or correspondence relating to a
Tax Proceeding subject to Section 5.2(a), such HII Group Member shall promptly provide a copy of
such notice or correspondence to the NGC Tax Officer so as to allow New NGC to exercise the control
over such Tax Proceedings through NGC and the NGC Tax Officer, as provided in ARTICLE 10.
13
(c) A failure by a Party to notify the other Party of the commencement of any such Tax
Proceeding or to forward any notice or communication, in either case in a timely manner, shall not
relieve the other Party of any obligation it may have pursuant to this Agreement, except to the
extent such Party is actually prejudiced by such failure.
Section 5.3
Statute of Limitations
.
Any extension of the statute of limitations for any Taxes or a Tax Return for any
Pre-Distribution Taxable Period or a Straddle Taxable Period may be made only by the Party
responsible for the preparation and filing of such Tax Return pursuant to ARTICLE 2.
ARTICLE 6
PAYMENTS BETWEEN HII AND NEW NGC
FOR CERTAIN INCOME TAX ADJUSTMENTS
Section 6.1
Payments by HII to New NGC
.
(a)
General
. Except as otherwise provided in Section 7.5 and Section 8.4(a), upon a
Final Determination resulting in an Income Tax Adjustment to (i) a Current Tax Group Federal
Consolidated Return, (ii) an NGC Non-Federal Tax Return, or (iii) a New NGC Non-Federal Tax Return,
in each case for a Pre-Distribution Taxable Period or a Straddle Taxable Period, HII shall pay to
New NGC the amount set forth in Section 6.1(b) (subject to the limitations in Section 6.1(c) and
Section 6.2(d)).
(b)
Payment by HII to New NGC for Income Tax Adjustments to Current Tax Group Federal
Consolidated Returns
. In the event of an Income Tax Adjustment relating to an Income Tax Item
of an HII Group Member (except NGC) on a Current Tax Group Federal Consolidated Return for a
Pre-Distribution Taxable Period, the amount payable by HII to New NGC hereunder shall be 35 percent
of any increase, by reason of such Income Tax Adjustment, in (i) the taxable income of such Member
for such Pre-Distribution Taxable Period (as determined pursuant to Section 7.1(a)) or Straddle
Taxable Period (to the extent attributable to the portion of such Straddle Period ending on or
before the Distribution Date as determined pursuant to Section 7.1(b))
over
(ii) the
taxable income of such Member that was included in the determination of Tax shown as payable (or
the Refund shown as due) on such Tax Return, as last filed before the Distribution Date and
modified by any subsequent Adjustment Request made before the Distribution Date.
(c)
Limitation on Payment Obligation
. An Income Tax Adjustment resulting in an
increase in taxable income of an HII Group Member on a Current Tax Group Federal Consolidated
Return for a Pre-Distribution Taxable Period or a Straddle Taxable Period shall not result in a
payment obligation by HII pursuant to Section 6.1(b), unless such Income Tax Adjustment is of a
nature that could result in a correlative reduction in the taxable income of an HII Group Member
for a Post-Distribution Taxable Period (as determined pursuant to Section 7.1(a)) or a Straddle
Taxable Period (to the extent attributable to the portion of such Straddle Taxable Period beginning
on or after the Distribution Date as determined pursuant to Section 7.1(b)). In determining
whether such an increase in taxable income of an HII Group Member is of a nature that could result
in a reduction in taxable income of an HII Group Member for a Post-
14
Distribution Period or a
Straddle Period (to the extent attributable to the portion of the Straddle Period beginning on or
after the Distribution Date as determined pursuant to Section 7.1(b), the actual availability to
the HII Group or such Member of any Tax benefit attributable thereto
(whether due to losses incurred by the HII Group in a Post-Distribution Taxable Period or a
Straddle Period, Income Tax Adjustments relating to non-depreciable, non-amortizable assets, or
otherwise) shall not be taken into account. This Section 6.1(c) shall not apply to any payment due
under Section 7.5 or Section 8.4.
(d)
Tax Adjustments to NGC Non-Federal Tax Returns and New NGC Non-Federal Tax
Returns
. Payments relating to adjustments for non-federal Taxes on NGC Non-Federal Tax Returns
and New NGC Non-Federal Tax Returns shall be determined solely in accordance with Section 8.7 of
the Separation and Distribution Agreement (relating to Government Contract Matters).
Section 6.2
Payments by New NGC to HII
.
(a)
General
. Except as otherwise provided in Section 7.5 and Section 8.4(b), upon a
Final Determination resulting in an Income Tax Adjustment to (i) a Current Tax Group Federal
Consolidated Return, (ii) an NGC Non-Federal Tax Return, or (iii) a New NGC Non-Federal Tax Return,
in each case for a Pre-Distribution Taxable Period, New NGC shall pay to HII the amount set forth
in Section 6.2(b) (subject to the limitations in Section 6.2(c) and Section 6.2(d)).
(b)
Payment by New NGC to HII for Income Tax Adjustments to Current Tax Group Federal
Consolidated Returns
. In the event of an Income Tax Adjustment relating to an Income Tax Item
of an HII Group Member on a Current Tax Group Federal Consolidated Return for a Pre-Distribution
Taxable Period or a Straddle Taxable Period, the amount payable by New NGC to HII hereunder shall
be 35 percent of any decrease, by reason of such Income Tax Adjustment, in (i) the taxable income
of such Member for such Pre-Distribution Taxable Period (as determined pursuant to Section 7.1(a))
or a Straddle Taxable Period (to the extent attributable to the portion of such Straddle Period
ending on or before the Distribution Date as determined pursuant to Section 7.1(b))
from
(ii) the taxable income of such Member that was included in the determination of Tax shown as
payable (or the Refund shown as due) on such Tax Return, as last filed before the Distribution Date
and modified by any subsequent Adjustment Request made before the Distribution Date.
(c)
Limitation on Payment Obligations
. An Income Tax Adjustment resulting in a
decrease in taxable income of an HII Group Member on a Current Tax Group Federal Consolidated
Return for a Pre-Distribution Taxable Period or a Straddle Taxable Period shall not result in a
payment obligation by New NGC pursuant to Section 6.2(b), unless such Income Tax Adjustment is of a
nature that could result in a correlative increase in the taxable income of an HII Group Member for
a Post-Distribution Taxable Period (as determined pursuant to Section 7.1(a)) or a Straddle Taxable
Period (to the extent attributable to the portion of such Straddle Taxable Period beginning on or
after the Distribution Date as determined pursuant to Section 7.1(b). In determining whether such
a decrease in taxable income of an HII Group Member is of a nature that could result in an increase
in taxable income of an HII Group Member for a Post-Distribution Period or a Straddle Period, the
actual incurrence by the HII Group or such Member
15
of any Tax detriment attributable thereto shall not be taken into account. This Section
6.2(c) shall not apply to any payment due under Section 7.5, Section 8.4, or Section 10.4.
(d)
Tax Adjustments to NGC Non-Federal Tax Returns and New NGC Non-Federal Tax
Returns
. Payments relating to adjustments for non-federal Taxes on NGC Non-Federal Tax Returns
and New NGC Non-Federal Tax Returns shall be determined solely in accordance with Section 8.7 of
the Separation and Distribution Agreement (relating to Government Contract Matters).
Section 6.3
Threshold Amount
.
(a) HII shall not have an obligation to make a payment under Section 6.1(a), and New NGC shall
not have a payment obligation under Section 6.2(a), unless and until the aggregate amount of
payments otherwise due by such Party (the
Payor Party
) to the other Party (the
Payee
Party
) under Section 6.1(a) and Section 6.2(a) exceeds by more than $5,000,000 (the
Threshold Amount
) the aggregate amount of payments otherwise due by the Payee Party to
the Payor Party under Section 6.1(a) and Section 6.2(a).
(b) If the Threshold Amount is exceeded, the Payor Party shall be liable under Section 6.1(a)
and Section 6.2(a) only for a payment or payments in excess of the Threshold Amount.
(c) If, after a payment becomes due under Section 6.1(a) and Section 6.2(a), a subsequent
payment becomes due under Section 6.1(a) and Section 6.2(a) by either the Payor Party or the Payee
Party (not taking account the Threshold Amount in Section 6.3(a)), the amount of the subsequent
payment due between the Parties shall be adjusted to effectuate the aggregate nature of the
Parties payment obligations under Section 6.1(a) and Section 6.2(a), including the Threshold
Amount in Section 6.3(a).
(d) Section 6.3(a) shall not apply to any payment due under Section 7.5, Section 8.4, or
Section 10.4.
Section 6.4
Separate Entity Provisions
.
(a) For purposes of computing the taxable income of an HII Group Member in determining the
amount payable in Section 6.1 or Section 6.2:
(i) each HII Group Member shall be treated as a stand-alone corporation that filed a
separate Income Tax Return based solely on the Income Tax Items and apportionment factors of
such Member (but reflecting elections and Accounting Methods used by the NGC Group for the
relevant Current Tax Group Federal Consolidated Return, NGC Non-Federal Tax Return, or New
NGC Non-Federal Tax Return);
(ii) no net operating loss, net capital loss, or other loss carryover or carryback
deduction shall be taken into account; and
16
(iii) a decrease in an amount of net operating loss or capital loss shall be treated as
an increase in taxable income, and an increase in an amount of net operating loss or capital
loss shall be treated as a decrease in taxable income.
(b) This Section 6.4 shall not apply to any payment due under Section 7.5, Section 8.4, or
Section 10.4.
Section 6.5
Acknowledgement
.
New NGC and HII acknowledge and agree that the reason for the methodology for determining
payments as set forth in Section 6.1 or Section 6.2 is that the precise computation of actual Tax
detriment or Tax benefit resulting from an Income Tax Adjustment or combinations of Income Tax
Adjustments to taxable income may be difficult or impossible to determine and that the payments
provided for in Section 6.1 or Section 6.2 are in lieu of any payments or indemnities relating to
the actual amount of adjustment to Taxes.
ARTICLE 7
ALLOCATION, CHARACTER, AND TREATMENT
OF CERTAIN TAX ITEMS AND TRANSACTIONS
Section 7.1
Allocation of Certain Tax Items
.
(a)
Allocation Between Taxable Periods
. If applicable law requires the Taxable Period
of any HII Group Member that was a member of the Current Tax Group to end as of the close of the
Distribution Date, Income Tax Items shall be included in each Taxable Period in accordance with
Treasury Regulations Section 1.1502-76(b)(2)(i) with no election under Treasury Regulations Section
1.1502-76(b)(2)(ii) or (iii).
(b)
Allocation Within a Straddle Taxable Period
. If applicable law does not require
the Taxable Period of HII and each HII Group Member that was a member of the Current Tax Group to
end as of the close of the Distribution Date, then the amount of Income Tax Items attributable to
each portion of the Straddle Taxable Period shall be determined by means of a closing of the books
and records of such HII Group Member as of the close of the Distribution Date;
provided
,
however
, that exemptions, allowances or deductions that are calculated on an annual or
periodic basis shall be allocated between such portions in proportion to the number of days in each
such portion.
(c)
Extraordinary Transactions
. Notwithstanding anything to the contrary in this
Agreement, for all Tax purposes, New NGC and HII each shall report any transaction that is outside
the ordinary course of the normal day-to-day operations of the Shipbuilding Business that is
undertaken, caused, or permitted by any HII Group Member that occurs on the Distribution Date but
after the Distribution as occurring on the day after the Distribution Date pursuant to Treasury
Regulations Section 1.1502-76(b)(1)(ii)(B) or any similar or analogous provision of state, local or
foreign Law. New NGC shall not make a ratable allocation election
pursuant to Treasury Regulations Section 1.1502-76(b)(2)(ii)(D) or any similar or analogous
provision of state, local or foreign Law.
17
Section 7.2
Tax Treatment of Payments between the Parties
.
(a)
Payments Pursuant to this Agreement
. Each of New NGC and HII covenants and agrees
that it will, and will cause each of its respective Subsidiaries to, treat the payments described
below in the following manner for all Tax purposes:
(i) A payment by HII to New NGC under Section 6.1, Section 7.5, Section 8.4, or Section
10.4 and a payment by NGC to New NGC under Section 10.3(b) shall be treated as a
distribution by HII to New NGC immediately prior to the Distribution.
(ii) A payment by New NGC to HII under Section 6.2, Section 7.5, Section 8.4, or
Section 10.4 and a payment by New NGC to NGC under Section 10.3(a) shall be treated as a
contribution by New NGC to HII immediately prior to the Distribution.
(iii) A payment of interest under Section 11.1 shall be treated as taxable or
deductible, as the case may be, in either case except as otherwise required by applicable
Law.
(b)
Payments Pursuant to Separation and Distribution Agreement and Ancillary
Agreements
.
(i)
In General
. New NGC and HII each covenants and agrees that it will, and
will cause each of its respective Subsidiaries to, treat an indemnity payment pursuant to
the Separation and Distribution Agreement (other than payments made with respect to Shared
Gains or Shared Liabilities) or any Ancillary Agreement, to the extent attributable to a
Pre-Distribution Taxable Period or the portion of such Straddle Period ending on or before
the Distribution Date as determined pursuant to Section 7.1(b), as a contribution by New NGC
to HII or a distribution by HII to New NGC, as the case may be, immediately prior to the
Distribution.
(ii)
Shared Gains and Shared Liabilities
. Consistent with Section 9.1, the
Parties shall consult and negotiate in determining the tax treatment of Shared Gains and
Shared Liabilities, as allocated in the Separation and Distribution Agreement, and of any
indemnity payments between the Parties with respect thereto. In such consultations and
negotiations, the Parties shall seek to achieve consistency in their respective Tax
treatment and reporting of such matters and, to the extent allowed by Law, Tax treatment
that is consistent with the economic benefits and burdens of such allocations and
indemnities.
Section 7.3
Tax Treatment of Novations of Shipbuilding Liabilities and
Retained Liabilities
.
Each Party covenants and agrees that it will, and will cause each of its respective
Subsidiaries to, treat the novation of the Shipbuilding Liabilities and the Retained Liabilities
pursuant to Section 2.4 and 2.5 of the Separation and Distribution Agreement, respectively as (a) a
distribution by HII to New NGC immediately prior to the Distribution or (b) a contribution by New
NGC to HII immediately prior to the Distribution.
18
Section 7.4
Accounting Methods
.
(a) No HII Group Member shall take any action with the IRS (whether by making an Adjustment
Request, filing a request for a change in Accounting Method, or otherwise) that would adversely
affect the application of any Accounting Method for any HII Group Member for any Pre-Distribution
Taxable Period, unless such action is required by the IRS in a Final Determination.
(b) Each HII Group Member shall continue the use of any Accounting Method in effect
immediately prior to the Distribution Date for such Member (including the Accounting Methods
described in the IRS ruling letter dated February 26, 2010 relating to CVN 78), unless such Member
either (i) is required by the IRS to change such Accounting Method in a Post-Distribution Taxable
Period, or (ii) requests and receives consent from the IRS to change such Accounting Method in a
Post-Distribution Taxable Period.
(c) Each HII Group Member shall continue the use of any Accounting Method agreed to by NGC or
New NGC and the IRS for such HII Group Member as a result of any Final Determination with respect
to Current Tax Group Federal Consolidated Returns for a Pre-Distribution Taxable Period or a
Straddle Taxable Period, unless such HII Group Member Group receives consent from, or is required
by, the IRS to change such Accounting Method in a Post-Distribution Taxable Period;
provided
,
however
, that if such consent reasonably would be expected to have
material adverse impact on New NGC (including through an increase in Taxes or a reduction of a Tax
Attribute, regardless of whether or when such Tax Attribute otherwise would have been used), the
HII Tax Group (or such Member) shall not seek such consent.
(d) Each HII Group Member that was granted permission by IRS to implement a change in
Accounting Method prior to the Distribution Date (including changes pursuant to IRS automatic
consent procedures) shall comply with all terms of the Accounting Method change consent agreement
or the terms imposed by the automatic consent procedure, including (i) the accounting method change
request relating to long-term contract accounting methods filed on behalf Northrop Grumman
Shipbuilding, Inc. on December 22, 2009 and for which consent was granted by the IRS in a ruling
letter dated July 19, 2010, and (ii) the automatic accounting method change, relating to contracts
with the Navy pursuant to Section 2203 of the Emergency Supplemental Appropriations Act for
Defense, the Global War on Terror, and Hurricane Recovery, 2006, Pub. L. No. 109-234, filed on
behalf of Northrop Grumman Shipbuilding, Inc. on January 27, 2010.
(e) The Parties acknowledge and agree that any long-term contract (within the meaning of
Section 460(f) of the Code) being performed by any HII Group Member on the Distribution Date is
subject to Treasury Regulations Section 1.460-4(k)(3), relating to step-in-the-shoes transactions.
(f) The Parties acknowledge and agree that any interest any HII Group Member owes to IRS, or
is owed by IRS, in a Post-Distribution Taxable Period under the look-back rules of Section
460(b)(2), (i) is payable by, or shall be payable to, respectively, such HII Group Member, and (ii)
shall not result in any payment obligation by any Party under ARTICLE 6,
19
notwithstanding the fact
that some period of contract performance covered by the look-back calculation occurred during a
Pre-Distribution Taxable Period or a Straddle Taxable Period.
(g) The Parties acknowledge and agree that any adjustment to taxable income of any HII Group
Member in a Post-Distribution Taxable Period resulting from an adjustment under Section 481 of the
Code relating to an Accounting Method change effective as of a date prior to the Distribution Date
shall not result in any payment obligation by any Party under ARTICLE 6, notwithstanding the fact
that the adjustment period may have commenced in a Pre-Distribution Taxable Period or Straddle
Taxable Period.
(h) The Parties acknowledge and agree that any adjustment to taxable income of any HII Group
Member in a Post-Distribution Taxable Period resulting from an adjustment under Section 481 of the
Code relating to an Accounting Method change effective as of a date subsequent to the Distribution
Date shall not result in any payment obligation by any Party under ARTICLE 6, notwithstanding the
fact that the adjustment may take into account the taxable income reported on an Accounting Method
in a Pre-Distribution Taxable Period or a Straddle Taxable Period.
(i) The Parties acknowledge and agree that any increase in the tax liability of any HII Group
Member in a Post-Distribution Taxable Period resulting from the recapture of any tax benefit under
Section 708(b) of the American Jobs Creation Act of 2004, Pub. L. No. 108357 shall not result in
any payment obligation by New NGC under Section 6.2, notwithstanding the fact that such recapture
may relate to taxable income of qualified naval ship contracts that would have been recognized by
such Member during a Pre-Distribution Taxable Period but for the application of Section 708(a)
thereof.
Section 7.5
Indemnification for Taking Contrary Tax Treatment
.
(a) If either New NGC or HII or any of its Subsidiaries fails to comply with any covenant,
agreement, or undertaking in this ARTICLE 7, such Party shall indemnify and hold harmless the other
Party and each of its Subsidiaries from and against any (i) increase in Taxes resulting from a
Final Determination that the treatment of a Income Tax Item differs from the treatment of such
Income Tax Item described in this ARTICLE 7 and (ii) legal, accounting, or other fees and expenses
incurred in connection with a Tax Proceeding relating to the treatment of such Income Tax Item.
(b) A Partys obligation under this ARTICLE 7 to treat a receipt, payment or item of income,
gain, loss, deduction or credit in a prescribed manner (including timing) shall be satisfied if
such Party files all relevant Tax Returns and Adjustment Requests in a manner consistent with such
prescribed treatment.
(c) For the purposes of this Section 7.5, any increase in Taxes shall be determined in
accordance with the methodology set forth in Section 6.1(b) and Section 6.1(d), on the one hand, or
Section 6.2(b) and Section 6.2(d), on the other;
provided
,
however
, that the
limitations under Section 6.1(c), Section 6.2(c), and Section 6.3 shall not apply to the
indemnities under this Section 7.5, it being the intention of the parties that any indemnity under
this Section 7.5 shall be determined without any minimum amount and without regard to the presence
or absence of any
20
possible future Tax benefit or Tax detriment to any member of the HII Group or
any member of the New NGC Group.
(d) Any obligations of a Party pursuant to this Section 7.5 shall be separate from and shall
not affect the obligations of any Party to another Party pursuant to Section 6.1, Section 6.2,
Section 8.4(b), or Section 10.4.
Section 7.6
Tax Attributes
.
(a) New NGC shall cooperate with HII, each at its own cost and expense, in determining the
allocation of Tax Attributes between the Current Tax Group and the HII Tax Group arising in
Pre-Distribution Taxable Periods or Straddle Taxable Periods in accordance with the Code and
Treasury Regulations (and any applicable state, local, and foreign Laws). New NGC and HII hereby
agree to compute all Taxes for Post-Distribution Taxable Periods and Straddle Taxable Periods
consistently with that determination unless otherwise required by a Final Determination.
(b) To the extent that the amount of any Tax Attribute is later reduced or increased by a Tax
Authority, Tax Proceeding, or carrybacks of Tax Attributes from Post-Distribution Taxable Periods
of either the Current Tax Group or the HII Group, such reduction or increase shall be allocated to
the Party to which such Tax Attribute was allocated pursuant to Section 7.6(a).
ARTICLE 8
TAX-FREE STATUS OF THE TRANSACTIONS
Section 8.1
Covenants, Undertakings, Agreements, Representations, and
Warranties
.
(a)
HII Covenants, Undertakings, Agreements, Representations, and Warranties
.
(i) HII represents and warrants as follows:
(A) All the facts presented and representations made in the Tax Materials
(singly and in combination), to the extent descriptive of the HII Group,
any HII Group Member, or the actions or intentions of any of them, at all times
have been, and as of the date of this Agreement are, true, correct, fairly presented
and complete in all respects and are not misleading in any respect.
(B) No HII Group Member is aware of any respect in which any fact presented or
representation made in the Tax Materials (singly or in combination) is misleading in
any respect or is other than true, correct, fairly presented and complete in all
respects.
(ii) HII covenants, undertakes and agrees as follows:
(A) Each HII Group Member shall use its best efforts to ensure that the facts
presented and representations made in the Tax Materials (singly and in
21
combination)
will be true, correct, fairly presented and complete in all respects, and not
misleading in any respect, through and including the Distribution Date and
thereafter as relevant.
(B) If an HII Group Member becomes aware that any fact presented or
representation made in the Tax Materials (singly or in combination) is, may be, or
may become misleading or other than true, correct, fairly presented and complete in
all respects, HII shall promptly notify the appropriate management personnel of NGC
(before the Distribution Date) or New NGC (after the Distribution Date) of the
situation in writing, and shall use its best efforts and fully cooperate in any
efforts by NGC and/or New NGC to correct the situation, all at its own expense.
(C) No HII Group Member will take a position on a Tax Return (including on
Schedule UTP or any similar schedule or form) that could be reasonably likely to be
inconsistent in any respect with the rulings set forth in the IRS Ruling, the rights
and obligations set forth in the IRS Closing Agreement, the conclusions set forth in
the Opinion, or the Tax-Free Status of the Transactions.
(b)
New NGC Covenants, Undertakings, Agreements, Representations,
and Warranties
.
(i) New NGC represents and warrants as follows:
(A) It has delivered complete and accurate copies of the Tax Materials to HII.
(B) All the facts presented and representations made in the Tax Materials
(singly and in combination) at all times have been, and are as of the date of this
Agreement, true, correct, fairly presented and complete in all respects, and are not
misleading in any respect.
(C) No New NGC Group Member is aware of any respect in which any fact presented
or representation made in the Tax Materials (singly or in
combination) is misleading in any respect or is other than true, correct,
fairly presented and complete in all respects.
(ii) New NGC covenants, undertakes and agrees as follows:
(A) Each New NGC Group Member shall use its best efforts to ensure that the
facts presented and representations made in the Tax Materials (singly and in
combination) will be true, correct, fairly presented and complete in all respects,
and will not be misleading in any respect, through and including the Distribution,
and thereafter as relevant.
(B) If a New NGC Group Member becomes aware that any fact presented or
representation made in the Tax Materials (singly or in combination) is, may be, or
may become misleading in any respect or other than true, correct, fairly presented
and complete in all respects, New NGC shall promptly inform the
22
appropriate
management personnel of HII of the situation in writing, shall use its best efforts,
and shall fully cooperate in any efforts by HII, to correct the situation, all at
its own cost and expense.
(C) No New NGC Group Member will take a position on a Tax Return (including on
Schedule UTP or any similar schedule or form) that could be reasonably likely to be
inconsistent in any respect with the rulings set forth in the IRS Ruling, the rights
and obligations set forth in the IRS Closing Agreement, the conclusions set forth in
the Opinion, or the Tax-Free Status of the Transactions.
(c)
No Contrary Knowledge
. Each of New NGC and HII represents and warrants that it
knows of no fact (after due inquiry) that could be reasonably likely to cause the Tax treatment of
the Transactions to be other than the Tax-Free Status of the Transactions.
(d)
No Contrary Plan
. Each of New NGC and HII represents and warrants that neither it
nor any of its Affiliates has any plan or intent to take any action that could be reasonably likely
to be inconsistent with any statement or representation in the Tax Materials.
Section 8.2
Restrictions Relating to the Distribution
.
(a)
General
. Neither New NGC nor HII shall take, or permit any New NGC Group Member
or HII Group Member to take, any action that could be reasonably likely to be inconsistent with any
of the Tax Materials or to jeopardize all or any part of the Tax-Free Status of the Transactions.
(b)
IRS Closing Agreement
. Neither New NGC nor HII shall take, or permit any New NGC
Group Member or HII Group Member to take, any action that could be reasonably likely to be
inconsistent with any provision of the IRS Closing Agreement.
(c)
HII Restricted Actions
. HII shall not take, and shall not permit any HII Group
Member to take, any action described in paragraphs (i) through (vi) (each a
HII Restricted
Action
) prior to the first day following the second anniversary of the Distribution
(the
Restriction Period
).
(i)
No Liquidation or Dissolution
. HII shall not take, and shall not permit
any HII Group Member to take, any action that reasonably could be expected to result in a
dissolution or liquidation (including any action that is a liquidation for federal Income
Tax purposes, whether or not as part of a reorganization within the meaning of Section
368(a) of the Code) of any HII Group Member, except NGC, or a merger in which any HII Group
Member, except NGC, is a party but not the surviving corporation.
(ii)
Continuation of Shipbuilding Business
. HII shall not, and shall not
permit any HII Group Member to, take any action that could be reasonably likely to be
inconsistent with the continuation of the Shipbuilding Business as described in the Tax
Materials;
provided
,
however
, that the winding down or cessation of the HII
Groups shipbuilding facilities in Avondale, Louisiana shall not be considered inconsistent
with the continuation of the Shipbuilding Business.
23
(iii)
Dispositions of Assets
. HII shall not, and shall not permit any
HII Group Member to, sell, transfer, or otherwise dispose of or agree to, sell, transfer or
otherwise dispose (including in any transaction treated for federal Income Tax purposes as a
sale, exchange, transfer or disposition) of assets (including shares of stock of any HII
Group Member) in one or more transactions that, in the aggregate, could be reasonably likely
to constitute more than 30 percent of the consolidated gross assets of the HII Group. The
percentage of the consolidated gross assets of the HII Group sold, transferred or otherwise
disposed of shall be based on the fair market value of all relevant assets as of the
Distribution Date, or, if fair market value of any asset or group of assets is not readily
determinable, based on the net book value of such asset or group of assets under Generally
Accepted Accounting Principles, as of such date. The restrictions in this paragraph shall
not apply to (A) sales, transfers, or dispositions of assets for cash or cash equivalents in
the ordinary course of normal day-to-day operations of the Shipbuilding Business, (B)
acquisitions of assets from unrelated Persons in arms-length transactions, (C) transfers of
assets to Persons that are disregarded as entities separate from the transferors for federal
Income Tax purposes, (D) mandatory or optional payments (including pre-payments) of interest
or principal with respect to indebtedness of an HII Group Member, (E) redemptions or
repurchases of HII stock or rights to acquire stock for cash or cash equivalents within the
restrictions set forth in Section 8.2(c)(iv), (F) normal quarterly dividends, or (G) sales
of assets in connection with the winding down and cessation of the HII Groups shipbuilding
facilities in Avondale, Louisiana.
(iv)
Redemptions and Other Acquisitions of HII Stock
. HII shall not redeem or
otherwise acquire (directly or through an Affiliate) any HII stock or rights to acquire
stock of HII, except to the extent that such acquisitions (separately and together with any
other such acquisitions) are within the limitations described in the IRS Ruling;
provided
,
however
, that an acquisition of a right to acquire stock in a
transaction subject to Safe Harbor VIII of Treasury Regulations Section 1.355-7(d) shall not
constitute an HII Restricted Action.
(v)
Transactions Implicating Section 355(e) of the Code
.
(A) HII shall not enter into a transaction described in Section 8.2(c)(v)(B)
(and, to the extent any HII Group Member has the right or authority to prevent any
such transaction, shall not permit any such transaction to occur), if in the
aggregate such transactions could be reasonably likely to cause or permit one or
more Persons (whether or not acting in concert) to acquire, directly or indirectly,
a number of shares of HII stock that would, when combined with any other changes in
ownership of HII stock, comprise 40 percent or more of either (I) the value of all
outstanding shares of stock of HII as of the date of such transaction, or in the
case of a series of transactions, the date of the last transaction of such series,
or (II) the total combined voting power of all outstanding shares of voting stock of
HII as of the date of such transaction, or in the case of a series of transactions,
the date of the last transaction of such series. For purposes of this Section
8.2(c)(v), a reference to an acquisition of stock and any similar term or variation
thereof includes an agreement, understanding or arrangement or substantial
negotiations, within the meaning of Treasury
24
Regulations Section 1.355-7 regarding any such transaction or series of
transactions or any similar transaction or series of transactions.
(B) Subject to Section 8.2(c)(v)(C) and Section 8.2(c)(v)(D), a transaction
described in this Section 8.2(c)(v)(B) includes a transaction or part of a series of
transactions as a result of which (I) HII or any HII Group Member would merge or
consolidate with any other Person (except a merger or consolidation of two HII Group
Members), or (II) one or more Persons would (directly or indirectly) acquire, or
have the right to acquire, shares of HII stock from HII and/or one or more holders
of outstanding shares of HII stock. Such a transaction constitutes an HII
Restricted Action regardless of whether it is supported by HIIs board of directors,
management or shareholders, is a hostile acquisition, or otherwise.
(C) For purposes of Section 8.2(c)(v)(B), (I) a recapitalization, amendment to
a certificate of incorporation (or other organizational documents), or any other
action, whether through a stockholder vote or otherwise, affecting the relative
voting rights of stock (including through conversion of any stock into another class
of stock) shall be treated as an acquisition of stock, and (II) a redemption of
stock (directly or, as appropriate, indirectly through Affiliates) shall be treated
as an indirect acquisition of stock by the non-redeeming shareholders.
(D) A transaction described in Section 8.2(c)(v)(B) shall not include (I) an
adoption by HII of a shareholder rights or poison pill plan (of the type described
in Revenue Ruling 90-11), (II) an acquisition of HII stock that satisfies Safe
Harbor VII of Treasury Regulations Section 1.355-7(d) or (III) an issuance of stock
or a grant of an option to acquire stock by HII that satisfies Safe Harbor VIII or
Safe Harbor IX of such regulation.
(vi)
Section 355(a)(1)(B) of the Code
. HII shall not take any action or
actions and, to the extent any HII Group Member has the right or authority to prevent such
action, shall not permit any action (in either case, whether or not inconsistent with any of
the Tax Materials), if, in the aggregate, such actions could be reasonably likely to cause
or permit one or more Persons (whether or not acting in concert) to dispose, directly or
indirectly, of a number of shares of HII stock that, when combined with any other changes in
ownership of HII stock pertinent for purposes of Section 355(a)(1)(B) of the Code, could be
reasonably likely to comprise 20 percent or more of the value of all of the outstanding
shares of stock of HII as of the date of such transaction, or in the case of a series of
transactions, the date of the last transaction of such series.
(d)
Permitted Actions
. Notwithstanding Section 8.2(c), during the Restriction Period
HII may take an HII Restricted Action, if the conditions set forth in Section 8.2(d)(i), Section
8.2(d)(ii), or Section 8.2(d)(iii) are satisfied. For purposes of such provisions, in determining
whether a ruling or opinion is satisfactory, New NGC may consider, among other factors, the
appropriateness of any underlying assumptions or representations used as a basis for the ruling or
25
opinion and the views of New NGCs outside tax advisors on the substantive merits of the
matters addressed in such ruling or opinion.
(i) The conditions set forth in this Section 8.2(d)(i) shall be satisfied if HII shall
have requested New NGC to obtain a supplemental ruling in accordance with Section 8.3 to the
effect that such action or transaction will not affect the Tax-Free Status of the
Transactions, and New NGC shall have received such a supplemental ruling in form and
substance satisfactory to New NGC.
(ii) The conditions set forth in this Section 8.2(d)(ii) shall be satisfied if HII
shall have provided to New NGC an Unqualified Tax Opinion in form and substance satisfactory
to New NGC.
(iii) Solely with respect to the Restricted Actions described in Section 8.2(c)(i), the
conditions of this Section 8.2(d)(iii) shall be satisfied if HII notifies New NGC in writing
of the proposed dissolution, liquidation, or merger involving the relevant HII Group Member,
and New NGC consents, in writing, to such dissolution, liquidation, or merger, which consent
shall not be unreasonably withheld, conditioned or delayed;
provided
,
however
, that this Section 8.2(d)(iii) shall not apply to a dissolution or
liquidation of HII or to a merger to which HII is a party.
(e)
Restrictions Relating to NGC
. HII shall not, and shall not permit any HII Group
Member to, (i) sell, convey, assign or otherwise transfer any shares of capital stock of NGC, (ii)
transfer any asset to NGC, or (iii) take any action that could be reasonably likely to cause NGC to
engage in any business activity or otherwise to be inconsistent with the liquidation of NGC in the
Transactions for federal Income Tax purposes;
provided
,
however
, that nothing in
this Section 8.2(e) shall prevent HII or NGC from taking any action pursuant to ARTICLE 10 of this
Agreement or from approving the amendment to NGCs Certificate of Incorporation as contemplated by
Section 8.2 of the Separation and Distribution Agreement.
Section 8.3
Procedures Regarding Rulings and Opinions
.
(a) If HII notifies New NGC that it desires to undertake, or to cause an HII Group Member to
undertake, an HII Restricted Action, New NGC shall cooperate with HII and use its reasonable best
efforts to seek to obtain, as expeditiously as possible, at New NGCs election, either a
supplemental ruling from the IRS or an Unqualified Tax Opinion for the purpose of permitting HII to
take such Restricted Action. HII shall bear its own costs and expenses and shall reimburse New NGC
for all reasonable costs and expenses incurred by the Current Tax Group in attempting to obtain a
supplemental ruling or an Unqualified Tax Opinion requested by HII.
(b) Notwithstanding Section 8.3(a), New NGC shall have no obligation (i) to request a
supplemental or other ruling if, upon consultation with appropriate IRS personnel, New NGC
reasonably determines that IRS likely would not issue such ruling or (ii) to take any action to
obtain a supplemental or other ruling or an Unqualified Tax Opinion with respect to any HII
Restricted Action, if New NGC reasonably determines that such HII Restricted Action or the
26
process to attempt to obtain such ruling or opinion reasonably could be expected to have a
significant adverse effect on any New NGC Group Member.
(c) Except in accordance with Section 8.3(a), no HII Group Member shall contact or seek any
guidance from the IRS or any other Tax Authority (whether written, verbal or otherwise) at any time
concerning the Transactions (including guidance as to the impact of any other transaction on the
Transactions).
(d) New NGC shall have the right to obtain a ruling, determination or other guidance from any
Tax Authority (including a supplemental IRS Ruling) or an opinion, including an Unqualified Tax
Opinion, in its sole and absolute discretion and at any time. If New NGC decides to obtain such
guidance or opinion, HII shall, and shall cause the HII Group Members to, cooperate with New NGC
and take any and all actions reasonably requested by New NGC in connection with obtaining such
guidance or opinion. Such cooperation shall include the making of any reasonable representation,
warranty, undertaking or covenant, or the providing of any materials requested by the Tax Authority
or the law firm issuing such opinion; provided, that HII shall not be required to make (or cause an
Affiliate to make) any representation, warranty, undertaking or covenant that is inconsistent with
historical facts or as to future matters or events over which it has no control. In connection
with obtaining a ruling or determination from a Tax Authority, New NGC shall apply for such ruling
or determination and shall have sole and exclusive control over the process of obtaining such
ruling or determination, including the right to modify or withdraw such request at any time. New
NGC and HII each shall bear its own costs and expenses in obtaining a ruling, determination or Tax
Opinion requested by New NGC;
provided
,
however
, that, if HII incurs reasonable
legal or accounting fees in excess of $50,000, with prior consent of New NGC (which shall not be
unreasonably withheld, conditioned or delayed), in connection with a request by New NGC for
guidance or an opinion subject to this Section 8.1(d), and if such guidance or opinion does not
relate to an HII Restricted Action, New NGC shall reimburse HII for such excess amount.
Section 8.4
Indemnification
.
(a)
Indemnification by HII
. HII shall indemnify and hold each New NGC Group Member
harmless from and against any loss, cost or expense (including Transactions Taxes and legal,
accounting and other fees and other expenses incurred in connection with any Tax Proceeding)
resulting from (1) a failure by any HII Group Member to comply with any covenant, agreement,
undertaking, representation or warranty made by HII in Section 8.1 or Section 8.2; or (2) the
taking of any HII Restricted Action during the Restriction Period (whether or not HII shall have
received a ruling or Unqualified Tax Opinion pursuant to Section 8.2(d) and Section 8.3).
(b)
Indemnification by New NGC
. New NGC shall indemnify and hold each HII Group
Member harmless from and against any loss, cost or expense (including Transactions Taxes and legal,
accounting and other fees and other expenses incurred in connection with any Tax Proceeding)
resulting from a failure by any New NGC Group Member to comply with any covenant, agreement,
undertaking, representation or warranty made by New NGC in Section 8.1 or Section 8.2.
27
(c)
Interaction with ARTICLE 6
. Transaction Taxes shall be determined without
reference to the methodology or limitations set forth in ARTICLE 6.
(d)
Interaction with Other Indemnities
. Any obligations of a Party pursuant to this
Section 8.4 shall be separate from and shall not affect the obligations of any Party to another
Party pursuant to Section 6.1, Section 6.2, Section 7.5, or Section 10.4.
ARTICLE 9
COOPERATION
Section 9.1
General Cooperation
.
Each of the Parties shall cooperate fully (and each shall cause its respective Subsidiaries to
cooperate fully) with all reasonable requests in writing from another Party, or from a
representative or advisor to such Party, in connection with the preparation and filing of Tax
Returns, Adjustment Requests, claims for Refund, Tax Proceedings and calculations of amounts
required to be paid pursuant to this Agreement, in each case, related or attributable to or arising
in connection with Taxes of any of the Parties or their respective Subsidiaries covered by this
Agreement and the establishment of any reserve required in connection with any financial reporting.
The Parties shall continue to cooperate with one another with respect to such matters without
regard to the time limitation set forth in Section 7.7(d) of the Separation and Distribution
Agreement. Except as provided in Section 7.3 of the Separation and Distribution Agreement, each
Party shall make its employees, advisors and facilities available, without charge, on a reasonable
and mutually convenient basis in connection with the foregoing matters, and the cooperation
required by this Section 9.1 shall include the providing of any information reasonably necessary or
helpful in connection with such matters and shall include, without limitation, at such Partys own
cost and expense:
(a) the providing of Tax Returns of the Parties and their respective Subsidiaries, books,
records (including information regarding ownership and Tax basis of property), documentation and
other information relating to such Tax Returns, including accompanying schedules, related work
papers, and documents relating to rulings or other determinations by Tax Authorities;
(b) the execution of documents (including powers of attorney) in connection with any Tax
Proceedings of any of the Parties or their respective Subsidiaries, or the filing of Tax Returns or
a Refund claims of the Parties or their respective Subsidiaries;
(c) the use of the Partys reasonable best efforts to obtain any documentation in connection
with a Tax Matter; and
(d) the use of the Partys reasonable best efforts to obtain any Tax Returns (including
accompanying schedules, related work papers, and documents), documents, books, records or other
information in connection with the filing of any Tax Returns of any of the Parties or their
Subsidiaries.
28
Section 9.2
Retention of Records
.
In addition to complying with their respective obligations as set forth in Article VII of the
Separation and Distribution Agreement, (a) each of the Parties shall retain or cause to be retained
all Tax Returns, schedules and workpapers, and all material records or other documents relating
thereto in their possession, until sixty (60) days after the expiration of the applicable statute
of limitations (including any waivers or extensions thereof) of the Taxable Periods to which such
Tax Returns and other documents relate or until the expiration of any additional period that any
Party reasonably requests, in writing, with respect to specific material records or documents; (b)
a Party intending to destroy any material records or documents shall provide the other Parties with
reasonable advance notice and the opportunity to copy or take possession of such records and
documents; and (c) each of the Parties shall notify the other Parties in writing of any waivers or
extensions of the applicable statute of limitations that may affect the Taxable Period for which
the foregoing records or other documents must be retained.
Section 9.3
Confidentiality
.
Section 7.8 and Section 7.9 of the Separation and Distribution Agreement shall apply to all
Information provided by the Parties to one another pursuant to this Agreement.
Provided,
however
, that, if a Party receiving such Information reasonably determines that any such
Information will be helpful in the resolution of a Tax Proceeding if disclosed to a Tax Authority,
then, upon request of such Party, the Party providing such Information shall promptly permit such
disclosure unless such Party reasonably determines that such disclosure is likely to have a
significant adverse effect on such Party or any of its Affiliates.
ARTICLE 10
NGC AS CURRENT TAX GROUP AGENT
Section 10.1
Purpose
.
The purpose of this ARTICLE 10 is to ensure that matters relating to the Current Tax Groups
U.S. federal Income Taxes and other Taxes for Pre-Distribution Taxable Periods with respect to
which NGC is, and after the Distribution will remain, the Current Tax Group Agent are managed and
administered, and Tax Proceedings with respect to such Tax matters are conducted, in an efficient
and orderly manner and in the interest of the New NGC Group, notwithstanding the fact that NGC will
be a Subsidiary of HII after the Distribution but will continue to be the Current Tax Group Agent
for the Current Tax Groups U.S. federal Income Taxes and certain other Taxes for Pre-Distribution
Taxable Periods. It is the Parties intent that no Party shall obtain any advantage or sustain any
disadvantage vis-à-vis any other Party as a result of NGC, instead of a New NGC Group Member, being
the Current Tax Group Agent.
Section 10.2
NGC Tax Officer
.
(a) NGC shall appoint and retain as the NGC Tax Officer the individual designated by New NGC
from time to time. It is expected but not required that New NGC shall designate its Vice President
Tax as the NGC Tax Officer. HII shall cause the NGC Tax Officer to be appointed as Vice
President Tax of NGC.
29
(b) The NGC Tax Officer shall have sole authority and responsibility to manage, administer,
make decisions for and bind NGC with respect to all matters within the scope of NGCs authority and
responsibility as Current Tax Group Agent. Such matters shall include the matters listed in the
Agency Regulations as subject to agency and all similar matters, including the following:
(i) Preparation, signing and filing of Tax Returns for NGC as the Current Tax Group
Agent,
(ii) Making payments to Tax Authorities on behalf of NGC as the Current Tax Group
Agent,
(iii) Conducting Tax Proceedings and agreeing to settlements thereof on behalf of NGC
as the Current Tax Group Agent,
(iv) Obtaining the services of other officers and employees of New NGC Group Members on
behalf of NGC as the Current Tax Group Agent, and
(v) Retaining and granting powers of attorney to professional advisers,
representatives, experts and other individuals or professional service firms on behalf of
NGC as the Current Tax Group Agent.
(c) The authority, responsibility and duties of the NGC Tax Officer shall be limited to
matters described in Section 10.2(b). The NGC Tax Officer shall have no authority with respect to
Tax matters of the HII Tax Group or any member of the HII Group other than NGC. With respect to
NGC, the authority, responsibility and duties of the NGC Tax Officer shall be limited to matters
relating to Tax Returns and Taxable Periods as to which NGC is the Current Tax Group Agent.
(d) HII shall, and shall cause the other HII Group Members (including NGC) to, cooperate with
the NGC Tax Officer in the performance of his or her responsibilities as described in Section
10.2(b). Upon request of the NGC Tax Officer, the board of directors and the officers of NGC shall
promptly take any action and execute any documents as reasonably requested by the NGC Tax Officer
for the purpose of conducting or settling a Tax Proceeding within the scope of this ARTICLE 10
(including documents in connection with settlement of a Tax Proceeding, even if HII may demand
arbitration under Section 5.1(a)(v) with respect to such settlement).
(e) The NGC Tax Officer shall act in the interest of the New NGC Group regarding all Tax
matters, even if any such action is or may be contrary to the interest of the HII Group or its
Members, under this Agreement or otherwise. Each of the HII Group Members hereby waives any
conflict of interest that may arise from the activities and responsibilities of the NGC Tax
Officer, and HII and NGC each has executed a letter to such effect in the form attached as Exhibit
A. Upon request of New NGC, HII shall execute, or cause any HII Group Member (including NGC) to
execute, a letter to similar effect in form or substance requested by a Tax Authority.
30
(f) New NGC shall employ and be solely responsible for paying the costs and expenses incurred
in connection with the employment of the NGC Tax Officer and his or her activities, including cost
of compensation paid and benefits accorded to the Tax Officer, liability insurance coverage and all
costs associated with the use of services provided by other officers or employees of New NGC and
other Current Group Members and by outside advisers, representatives or experts.
Section 10.3
Payments of Tax and Receipt of Refunds
.
(a) In accordance with Section 2.1 and Section 2.2, New NGC shall pay all Tax liabilities
incurred by NGC as Current Tax Group Agent (including any liability for Tax attributable to the
activities of NGC during a Pre-Distribution Taxable Period).
(b) In accordance with Section 4.1(a) and Section 4.2, promptly upon receipt by NGC of a
Refund from a Tax Authority relating to a Tax Return for which NGC is the Current Tax Group Agent,
NGC shall (and HII shall cause NGC to) remit the full amount of such Refund to New NGC.
Section 10.4
Indemnification
.
(a) HII shall indemnify and hold harmless all New NGC Group Members from and against any loss,
cost or expense (including Taxes and professional fees) resulting from a breach by NGC or any other
HII Group Member of an obligation under this ARTICLE 10.
(b) New NGC shall indemnify and hold harmless all HII Group Members from and against any loss,
cost or expense (including Taxes and professional fees) resulting from
(i) any breach (including a delay in taking any action) by New NGC or any other New NGC
Group Member of an obligation under this ARTICLE 10, and
(ii) any act or omission (including a delay in taking an action) by the NGC Tax Officer
(or by any person acting under direction of the NGC Tax Officer), arising out of or related
to this ARTICLE 10;
provided
,
however
, that this Section 10.4(b)(ii) shall
have no effect on any indemnity or payment obligation under ARTICLE 3, ARTICLE 4, ARTICLE 6,
ARTICLE 7, or ARTICLE 8.
(c) No act or omission (including a delay in taking an action) by the NGC Tax Officer within
the scope of his or her authority and responsibility, under Section 10.2, shall result in any
indemnity under Section 10.4(b) due to such act or omission being contrary to the interest of the
HII Group or its Members, under this Agreement or otherwise.
(d) Except as otherwise provided in ARTICLE 3, ARTICLE 4, ARTICLE 6, ARTICLE 7, and ARTICLE 8,
New NGC shall indemnify and hold harmless all HII Group Members from and against any Taxes for
which NGC is or becomes liable with respect to any Pre-Distribution Taxable Period and any Straddle
Taxable Period (and from and against any costs or expenses, including professional fees,
attributable to the determination of any such liability for Taxes).
31
(e) Any indemnity obligation under this ARTICLE 10 shall be separate from and in addition to
the indemnities and other payment obligations between the Parties under ARTICLE 3, ARTICLE 4,
ARTICLE 6, ARTICLE 7, and ARTICLE 8. None of the limitations or methodologies for computing any
such obligations in any of such Articles shall apply to the indemnities under this ARTICLE 10.
Section 10.5
Designation of Substitute Current Tax Group Agent
.
(a) NGC hereby designates Northrop Grumman Systems Corporation, a Delaware corporation, as
successor Current Tax Group Agent in the form attached hereto as Exhibit B of even date herewith.
Such designation shall become effective immediately upon the termination of NGCs corporate
existence (or, if sooner, upon the relevant Tax Authoritys consenting to or requiring such
designation). Within a reasonable time after the Distribution, the NGC Tax Officer shall execute a
designation in a form substantially identical to the form in Exhibit B and shall file such
designation with the IRS. If the IRS does not accept such filing at such time, the NGC Tax Officer
shall use his or her reasonable best efforts to file such designation at the earliest opportunity.
The NGC Tax Officer shall provide HII with a copy of the designation and any related correspondence
with the IRS.
(b) Upon request of New NGC, HII shall cause NGC or any other HII Group Member to execute any
additional document or documents to effect or facilitate the designation of a substitute Current
Tax Group Agent selected by New NGC prior to the termination of NGCs corporate existence. The NGC
Tax Officer shall be responsible for filing any such document with the IRS in a manner consistent
with Section 10.5(a).
(c) HII agrees to cause the termination of NGCs corporate existence, within the meaning of
Treasury Regulations Section 1.1502-77(e), so as to facilitate the designation pursuant to Section
10.5(a), as soon as such termination can be accomplished with no significant adverse effect with
respect to any contract between any HII Group Member and the United States Navy, and so long as the
IRS accepts a substitute designee. HII agrees to keep New NGC informed of the status of these
matters.
ARTICLE 11
MISCELLANEOUS
Section 11.1
Timing of Payments; Interest
.
Amounts payable pursuant to this Agreement shall be paid within 30 days of the written demand
by the Party entitled to receive such payments. Such demand shall include documentation setting
forth the basis for the amount payable. Any payment not made within 30 days of the written demand
for such payment shall accrue interest at a rate per annum equal to the rate in effect for
underpayments pursuant to Section 6621(a)(2) of the Code (without taking into account increased
rates under Section 6621(c)) from such date, compounded annually.
Section 11.2
Dispute Resolution
.
(a)
Negotiations
. New NGC and HII each shall endeavor, and shall cause their
respective Affiliates to endeavor, to resolve any Tax Matters Dispute in an amicable manner
32
through negotiations in good faith for not less than 21 days involving senior executives of
the Parties who have authority resolve the matter.
(b)
Appointment of Tax Arbitrator by the Parties
. Upon written notice by New NGC to
HII, or by HII to New NGC, after 21-day period provided in Section 11.2(a), such Parties shall
jointly select, retain and appoint one individual to resolve the Tax Matters Dispute (the
Tax
Arbitrator
). The Tax Arbitrator shall be a nationally-recognized tax attorney and shall be
either a current or retired member of an Independent Firm or a former or retired judge or
government official. In choosing a Tax Arbitrator, such Parties may consider, among other matters,
the professional expertise of each prospective Tax Arbitrator, such individuals independence from
the Parties, the cost of retaining such individual and the availability of such individual to
perform the services of Tax Arbitrator on a timely basis. Neither of such Parties will
unreasonably withhold or delay giving consent to the appointment of any qualified individual as Tax
Arbitrator.
(c)
Appointment of Tax Arbitrator by Individuals Selected by the Parties
. If, having
determined that the Tax Matters Dispute must be referred to a Tax Arbitrator, the Parties cannot,
after 21 days, retain a Tax Arbitrator who is acceptable to the Parties in good faith, then, upon
written notice by New NGC to HII, or by HII to New NGC, each such Party shall, within seven days
thereafter, designate and retain at its own expense an individual who shall have the qualifications
described in Section 11.2(b). Such individuals shall agree upon and appoint as the Tax Arbitrator
an individual (not either of such individuals or any member of a firm of which either of such
individuals is a member or a retired member) who shall have such qualifications and who shall have
agreed to serve as Tax Arbitrator at a cost no greater than the normal and customary charges for
tax services imposed by such individual (or the Independent Firm of which he or she is a member or
a retied member). Such individuals shall use reasonable best efforts to select the Tax Arbitrator
within 14 days of their being selected by the Parties and shall not consult with either of the
Parties prior to agreeing upon and appointing the Tax Arbitrator. The appointment of the Tax
Arbitrator by such individuals shall be final and binding on the Parties, except if they agree
otherwise.
(d)
Appointment of Tax Arbitrator by Tax Section Chair
. If, having determined that
the Tax Matters Dispute must be referred to a Tax Arbitrator, (i) the Parties cannot appoint a Tax
Arbitrator pursuant to Section 11.2(b), and (ii) the individuals selected by the Parties pursuant
to Section 11.2(c) are unwilling or unable to agree upon and appoint a Tax Arbitrator in a timely
manner, then the Parties shall jointly request that the individual then serving as Chair of the New
York State Bar Association Tax Section appoint the Tax Arbitrator. If such individual is unable or
unwilling to appoint the Tax Arbitrator, then the Parties shall jointly request that the individual
then serving as Chair of the American Bar Association Tax Section appoint the Tax Arbitrator. Each
such individual, as the case may be, shall use reasonable best efforts to select the Tax Arbitrator
within 14 days and shall not consult with either of the Parties prior to appointing the Tax
Arbitrator. The appointment of the Tax Arbitrator by either such individual, as the case may be,
shall be final and binding on the Parties, except if they agree otherwise.
(e)
Proceedings Before Tax Arbitrator
. The Tax Arbitrator shall decide all points
relating to the Tax Matters Dispute. Except to the extent jointly determined by agreement of the
Parties, the Tax Arbitrator shall conduct proceedings necessary to reach a decision, as he or she
33
reasonably determines, and may, in his or her reasonable discretion, obtain the services of
any individual (including other members or employees of an Independent Firm of which the Tax
Arbitrator is a current or retired member) to assist in deciding the Tax Matters Dispute. The Tax
Arbitrator shall use his or her best efforts to resolve the dispute as quickly as is reasonably
possible, and the Parties shall cooperate in efforts to do so. In the case of a dispute relating
to NGCs role as the Current Tax Group Agent, the powers of the NGC Tax Officer, or otherwise
relating to any provision of ARTICLE 10, the Tax Arbitrator shall use his or her best efforts to
resolve all matters within 60 days after his or her appointment. All fees and expenses of the Tax
Arbitrator shall be shared equally by New NGC and HII.
(f)
Tax Arbitrators Written Decision
. As soon as practicable after proceedings are
complete, the Tax Arbitrator shall furnish a written decision to the Parties. Such decision shall
set forth the decision of the Tax Matters Dispute but shall not include any rationale therefor,
discussion thereof or citations of legal authority, except to the extent necessary to make the
terms of the decision clear to the Parties. The decision of the Tax Arbitrator shall be final and
binding on the Parties, and the Parties shall take, or cause to be taken, any action necessary to
implement the decision.
Section 11.3
Survival of Covenants
.
Except as otherwise contemplated by this Agreement, all covenants and agreements of the
Parties contained in this Agreement shall survive the Distribution and remain in full force and
effect in accordance with their applicable terms,
provided
,
however
, that the
representations and warranties and all indemnification for Taxes shall survive until 60 days
following the expiration of the applicable limitations period (taking into account all extensions
thereof), if any, for the Tax that gave rise to the indemnification,
provided,
further
, that, in the event that notice for indemnification has been given within the
applicable survival period, such indemnification shall survive until such time as such claim is
finally resolved.
Section 11.4
Termination of Agreements, Arrangements and Policies
.
Except for this Agreement and except as otherwise provided herein, all tax allocation
agreements, arrangements or policies in effect between or among NGC Members shall be terminated
effective as of the Distribution Date, and thereafter no party (or any of its directors or
officers) shall have any liability or further obligation to any other party with respect to any
such agreement, arrangement or policy.
Section 11.5
Severability
.
If any term or other provision of this Agreement is invalid, illegal or incapable of being
enforced pursuant to any Law or as a matter of public policy, all other conditions and provisions
of this Agreement shall remain in full force and effect. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the Parties to this Agreement
shall negotiate in good faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible in a mutually acceptable manner.
34
Section 11.6
Entire Agreement
.
Except as otherwise expressly provided in this Agreement, this Agreement constitutes the
entire agreement of the Parties hereto with respect to the subject matter of this Agreement and
supersedes all prior agreements and undertakings, both written and oral, between or on behalf of
the Parties hereto with respect to the subject matter of this Agreement.
Section 11.7
Assignment
.
This Agreement shall not be assigned by either New NGC or HII without the prior written
consent of the other such Party hereto, except that New NGC and HII each may assign (i) any or all
of its rights and obligations pursuant to this Agreement to another New NGC Group Member or HII
Group Member, as the case may be, and (ii) any or all of its rights and obligations pursuant to
this Agreement in connection with a sale or disposition of any assets or entities or lines of
business;
provided
,
however
, that no such assignment shall release the assigning
Party from any liability or obligation pursuant to this Agreement.
Section 11.8
No Third-Party Beneficiaries
.
This Agreement is for the sole benefit of the Parties, their respective Subsidiaries and the
permitted successors and assigns. Nothing in this Agreement, express or implied, is intended to or
shall confer upon any other Person any legal or equitable right, benefit or remedy of any nature
whatsoever pursuant to or by reason of this Agreement, provided, however, that the NGC Tax Officer
shall be a third-party beneficiary with respect to his or her rights under ARTICLE 10.
Section 11.9
Specific Performance and Other Equitable Relief
.
In the event of any actual or threatened default in, or breach of, any of the terms,
conditions and provisions of this Agreement, the Party who is or is to be thereby aggrieved shall
have the right to specific performance and injunctive or other equitable relief of its rights
pursuant to this Agreement (whether relating to a Tax Matters Dispute subject to arbitration under
Section 11.2), in its sole discretion, in addition to any and all other rights and remedies at law
or in equity, and all such rights and remedies shall be cumulative. The Parties agree that the
remedies at law for any breach or threatened breach, including monetary damages, may be inadequate
compensation for any loss and that any defense in any action for specific performance that a remedy
at law would be adequate is waived. Any requirements for the securing or posting of any bond with
such remedy are waived by the Parties to this Agreement.
Section 11.10
Waiver of Jury Trial
.
EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT.
35
Section 11.11
Governing Law
.
This Agreement and all disputes or controversies arising out of or relating to this Agreement
or the transactions contemplated hereby shall be governed by, and construed in accordance with, the
internal Laws of the State of New York, without regard to the Laws of any other jurisdiction that
might be applied because of the conflicts of laws principles of the State of New York (other than
Section 5-1401 of the New York General Obligations Law).
Section 11.12
Amendment
.
No provision of this Agreement may be amended or modified except by a written instrument
signed by the Parties to this Agreement. No waiver by any Party of any provision of this Agreement
shall be effective unless explicitly set forth in writing and executed by the Party so waiving. The
waiver by any Party of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any other subsequent breach.
Section 11.13
Rules of Construction
.
Interpretation of this Agreement shall be governed by the following rules of construction: (i)
words in the singular shall be held to include the plural and vice versa; (ii) words of one gender
shall be held to include the other gender as the context requires; (iii) references to the terms
Article, Section, paragraph, or clause, are references to the Articles, Sections, paragraphs, or
clauses of this Agreement unless otherwise specified; (iv) the terms hereof, herein, hereby,
hereto, and derivative or similar words refer to this entire Agreement; (v) the word including
and words of similar import shall mean including without limitation, unless otherwise specified;
(vi) references to written or in writing include in electronic form; (vii) the table of
contents and headings contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement; (viii) a reference to any Person
includes such Persons successors and permitted assigns; (ix) a reference to a provision of the
Code, Treasury Regulations or any other Law mean the provision, or the successor provision thereto,
as in effect for the relevant period or periods; and (x) a reference to a Partys taking an action
shall include the Partys failure to take an action having the same result as the action referred
to.
Section 11.14
Notices
.
All notices, notifications, requests, and other communications hereunder shall be in writing
and shall be deemed duly given (a) on the date of delivery if delivered personally, or if by
facsimile, upon written confirmation of receipt by facsimile, e-mail or otherwise, (b) on the first
Business Day following the date of dispatch if delivered utilizing a next-day service by a
recognized next-day courier or (c) on the earlier of confirmed receipt or the fifth Business Day
following the date of mailing if delivered by registered or certified mail, return receipt
requested, postage prepaid. All such notices, notifications, requests, and other communications
shall be delivered to the addresses set forth below, or pursuant to such other instructions as may
be designated in writing by the party to receive such communication:
36
(a) if to New NGC or to any other New NGC Group Member, before the date New NGC
relocates its corporate headquarters, to:
Northrop Grumman Corporation
1840 Century Park East
Los Angeles CA 90067-2199
Attention: Vice President Tax
Facsimile: (310) 556-4546
with a copy (which shall not constitute notice) to:
Northrop Grumman Corporation
1840 Century Park East
Los Angeles CA 90067-2199
Attention: General Counsel
Facsimile: (310) 556-4910
(b) if to New NGC or any other New NGC Group Member on or after the date New NGC
relocates its corporate headquarters, to:
Northrop Grumman Corporation
2980 Fairview Park Drive
Falls Church VA 22042
Attention: Vice President Tax
Facsimile: To be provided at relevant time
with a copy (which shall not constitute notice) to:
Northrop Grumman Corporation
2980 Fairview Park Drive
Falls Church VA 22042
Attention: General Counsel
Facsimile: (703) 875-1852
(c) if to HII or any HII Group Member (other than NGC), to:
Huntington Ingalls Industries, Inc.
4101 Washington Avenue
Newport News VA 23607
Attention: Chief Financial Officer
Facsimile: (757) 688-0350
37
with a copy (which shall not constitute notice) to:
Huntington Ingalls Industries, Inc.
4101 Washington Avenue
Newport News VA 23607
Attention: General Counsel
Facsimile: (757) 688-1408
(d) if by HII to NGC, before the date New NGC relocates its corporate headquarters,
to:
Titan II Inc.
c/o Northrop Grumman Corporation
1840 Century Park East
Los Angeles CA 90067-2199
Attention: Vice President Tax
Facsimile: (310) 556-4546
with a copy (which shall not constitute notice) to:
Northrop Grumman Corporation
1840 Century Park East
Los Angeles CA 90067-2199
Attention: General Counsel
Facsimile: 310) 556-4910
(e) if by HII to NGC, on or after the date New NGC relocates its corporate
headquarters, to:
Titan II Inc.
c/o Northrop Grumman Corporation
2980 Fairview Park Drive
Falls Church VA 22042
Attention: Vice President Tax
Facsimile: To be provided at relevant time
with a copy (which shall not constitute notice) to:
Northrop Grumman Corporation
2980 Fairview Park Drive
Falls Church VA 22042
Attention: General Counsel
Facsimile: (703) 875-1852
38
(f) if by New NGC to NGC, to:
Titan II Inc.
4101 Washington Avenue
Newport News VA 23607
Attention: Chief Financial Officer
Facsimile: (757) 688-0350
with a copy (which shall not constitute notice) to:
Huntington Ingalls Industries, Inc.
4101 Washington Avenue
Newport News VA 23607
Attention: General Counsel
Facsimile: (757) 688-1408
Section 11.15
Counterparts.
This Agreement may be executed in one or more counterparts each of which when executed shall
be deemed to be an original but all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this Agreement by facsimile
or portable document format (PDF) shall be as effective as delivery of a manually executed
counterpart of any such Agreement.
Section 11.16
Coordination with the Employee Matters Agreement.
To the extent any covenants or agreements between the Parties with respect to employment Taxes
are set forth in the Employee Matters Agreement, such matters shall be governed exclusively by the
Employee Matters Agreement and not by this Agreement.
Section 11.17
Conflict or Inconsistency Between Agreements.
In the event of any conflict or inconsistency between any provision of this Agreement and any
provision of either the Separation and Distribution Agreement or any of the other Ancillary
Agreements, the applicable provision of this Agreement shall prevail.
Section 11.18
Termination of this Agreement.
This Agreement may be terminated by NGC at any time prior to the effectiveness of the Holding
Company Reorganization or by New NGC at any time at or after the effectiveness of the Holding
Company Reorganization and prior to the Distribution. In the event of termination of this
Agreement prior to the Distribution, no party (or any of its directors or officers) shall have any
Liability or further obligation to any other party with respect to this Agreement.
[The remainder of this page is intentionally left blank.]
39
IN WITNESS WHEREOF, the Parties have caused this Tax Matters Agreement to be duly executed by
their duly authorized representatives as of the day and year first above written.
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NEW P, INC.
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By:
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/s/ Mark Rabinowitz
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Name:
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Mark Rabinowitz
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Title:
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President & Treasurer
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HUNTINGTON INGALLS INDUSTRIES, INC.
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By:
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/s/ C. Michael Petters
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Name:
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C. Michael Petters
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Title:
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President and Chief Executive Officer
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NORTHROP GRUMMAN CORPORATION
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By:
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/s/ Mark Rabinowitz
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Name:
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Mark Rabinowitz
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Title:
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Corporate Vice President & Treasurer
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[Signature Page to Tax Matters Agreement]
Exhibit 99.1
March 21, 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 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
March 21, 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 design, build
and maintain nuclear and non-nuclear ships for the U.S. Navy and
Coast Guard, and provide aftermarket services for military ships
around the globe. For more than a century, we have been building
more ships, in more ship classes, than any other U.S. naval
shipbuilder.
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
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 March 18, 2011.
This Information Statement was first mailed to Northrop Grumman
stockholders on or about March 21, 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 22 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 18.
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 22.
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.huntingtoningalls.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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A:
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The spin-off is the series of transactions by which HII will
separate from Northrop Grumman. To complete the spin-off,
Northrop Grumman will distribute to its stockholders all of the
shares of HII common stock. We refer to this as the
distribution. Following the spin-off, HII will be a separate
company from Northrop Grumman,
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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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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 22.
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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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9
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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.
250 Royall Street
Canton, Massachusetts 02021
Phone:
(877) 498-8861
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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:
(757) 688-5572
Email: andy.green@hii-co.com
www.huntingtoningalls.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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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
|
|
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 22 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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$
|
6,723
|
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$
|
6,723
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$
|
6,292
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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
|
|
|
|
211
|
|
|
|
(2,354
|
)
|
Net earnings (loss)
|
|
|
79
|
|
|
|
135
|
|
|
|
124
|
|
|
|
(2,420
|
)
|
Total assets
|
|
|
5,560
|
|
|
|
5,203
|
|
|
|
5,036
|
|
|
|
4,760
|
|
Long-term debt
|
|
|
1,851
|
|
|
|
105
|
|
|
|
283
|
|
|
|
283
|
|
Total long-term obligations
|
|
|
3,294
|
|
|
|
1,559
|
|
|
|
1,645
|
|
|
|
1,761
|
|
Free cash flow (1)
|
|
|
98
|
|
|
|
168
|
|
|
|
(269
|
)
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
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.
|
17
GLOSSARY
OF PROGRAMS
Listed below are brief descriptions of the programs mentioned in
this information statement.
|
|
|
|
Program Name
|
|
|
Program Description
|
AREVA Newport News
|
|
|
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.
|
|
CVN-65 USS
Enterprise
|
|
|
Maintain and support the worlds first nuclear-powered
aircraft carrier, the inactivation of which is expected to start
in 2013.
|
|
CVN-68
Nimitz
-class aircraft carriers
|
|
|
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.
|
|
CVN-78
Gerald R. Ford
-class aircraft carriers
|
|
|
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.
|
|
DDG-51
Arleigh Burke
-class destroyers
|
|
|
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.
|
|
DDG-1000
Zumwalt
-class destroyers
|
|
|
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.
|
|
18
|
|
|
|
Program Name
|
|
|
Program Description
|
DoE
|
|
|
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.
|
|
Inactivation
|
|
|
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
.
|
|
LHA-6
America-
class
amphibious assault ships
|
|
|
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.
|
|
LHD-1
Wasp
-class
amphibious assault ships
|
|
|
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.
|
|
19
|
|
|
|
Program Name
|
|
|
Program Description
|
LPD-17
San Antonio-
class
|
|
|
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.
|
|
NSC-1
Legend-
class
National Security Cutter
|
|
|
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).
|
|
Refueling and Complex Overhaul (RCOH)
|
|
|
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
.
|
|
20
|
|
|
|
Program Name
|
|
|
Program Description
|
SSBN(X)
Ohio
-class Submarine Replacement Program
|
|
|
Act, through an agreement with Electric Boat, as design
subcontractor for the
Ohio
-class replacement boats. The
U.S. Navy has committed to designing a replacement class for the
aging
Ohio
-class nuclear ballistic submarines, which were
first introduced into service in 1981. The SSBN(X)
Ohio
-class Submarine Replacement Program represents a new
program opportunity for us. Electric Boat is expected to lead
the program. Although the contract is not yet negotiated, we
expect to share in the design effort and our experience and
well-qualified workforce position us for a potential role in the
construction effort. The
Ohio
-class includes 14 ballistic
missile submarines (SSBN) and four cruise missile submarines
(SSGN). The
Ohio
-class Submarine Replacement Program
currently calls for 12 new ballistic missile submarines over a
15-year period for approximately $4 to $7 billion each. The
first
Ohio
-class ballistic submarine is expected to be
retired in 2029, meaning that the first replacement platform
should be in commission by that time. The U.S. Navy has
initiated the design process for this class of submarine, and we
have begun design work as a subcontractor to Electric Boat. We
cannot guarantee that we will continue to work on the SSBN(X)
design with Electric Boat, and we can give no assurance
regarding the final design concept chosen by the U.S. Navy or
the amount of funding made available by Congress for the SSBN(X)
Ohio-class Submarine Replacement Program. Construction is
expected to begin in 2019 with the procurement of long-lead time
materials in 2015.
|
|
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.
|
|
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.
45
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.
46
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
48
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.
49
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.
51
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.
54
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.
55
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.
56
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.
57
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:
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1.0% of our common stock then outstanding; or
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the average weekly trading volume of our common stock on the
NYSE during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
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Sales under Rule 144 are also subject to restrictions
relating to manner of sale and the availability of current
public information about us.
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.
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December 31, 2010
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Pro Forma
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$ in millions
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Historical
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Adjustments
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Pro Forma
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Cash and cash equivalents
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$
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$
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300
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[A]
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$
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300
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Debt, including current and long-term:
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Long-term debt
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$
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105
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$
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105
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Revolving credit facility
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[A]
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Term loan
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$
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575
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[A]
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575
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Senior notes
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1,200
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[A]
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1,200
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Notes payable to parent
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715
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(715
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)[B]
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Accrued interest on notes payable to parent
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239
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(239
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)[B]
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Total debt
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1,059
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821
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1,880
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Equity:
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Common stock
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[B]
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Additional paid-in capital
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1,508
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[B]
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1,508
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Parents equity in unit
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1,933
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(1,933
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)[B]
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Accumulated other comprehensive loss
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(515
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)
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(515
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)
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Total equity
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1,418
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(425
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)
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993
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Total capitalization
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$
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2,477
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$
|
396
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$
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2,873
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[A]
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Historically, cash received by us has been transferred to
Northrop Grumman, and Northrop Grumman has funded our
disbursement accounts on an as-needed basis. The pro forma cash
and cash equivalents balance reflects proceeds, net of fees, of
$1,729 million from the incurrence of the HII Debt
(consisting of $1,200 million in notes) and the HII Credit
Facility (which includes a $575 million term loan and a
revolving facility of $650 million, of which approximately
$137 million of letters of credit are expected to be 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%.
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After giving effect to the capitalization transactions,
$513 million of borrowing capacity would have been
available under our new $650 million revolving credit
facility. See Description of Material Indebtedness
for
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61
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further information on the HII Credit Facility. We expect that
we will obtain approximately $137 million of letters of
credit under this facility upon closing to support various
performance obligations.
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[B]
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In connection with our recapitalization, we intend to retire the
notes payable to parent of $715 million and accrued
interest thereon of $239 million, eliminate the
parents equity in unit of $1,933 million, eliminate
the $50 million of pro forma adjustments described below,
establish the capital structure ($0 million of common stock
and $1,508 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.
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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.
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(Year Ended) December 31
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(in millions)
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2010
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2009
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2008
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2007
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|
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2006
|
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Sales and service revenues
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|
$
|
6,723
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|
|
$
|
6,292
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|
|
$
|
6,189
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|
|
$
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5,692
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|
|
$
|
5,319
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Goodwill impairment
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|
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|
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2,490
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|
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|
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Operating income (loss)
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|
|
248
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|
|
|
211
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|
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|
(2,354
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)
|
|
|
447
|
|
|
|
331
|
|
Net earnings (loss)
|
|
|
135
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|
|
|
124
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|
|
|
(2,420
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)
|
|
|
276
|
|
|
|
194
|
|
Total assets
|
|
|
5,203
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|
|
|
5,036
|
|
|
|
4,760
|
|
|
|
7,658
|
|
|
|
7,644
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|
Long-term debt
|
|
|
105
|
|
|
|
283
|
|
|
|
283
|
|
|
|
283
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|
|
|
283
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|
Total long-term obligations
|
|
|
1,559
|
|
|
|
1,645
|
|
|
|
1,761
|
|
|
|
1,790
|
|
|
|
1,784
|
|
Free cash flow (1)
|
|
|
168
|
|
|
|
(269
|
)
|
|
|
121
|
|
|
|
364
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(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.
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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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 18.
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:
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|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage
|
|
|
1-Percentage
|
|
$ in millions
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
Increase (Decrease) From Change in Health Care Cost Trend Rates
To:
|
|
|
|
|
|
|
|
|
Post-retirement benefit expense
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
Post-retirement benefit liability
|
|
|
18
|
|
|
|
(18
|
)
|
Workers
Compensation
Our operations are subject to federal and state workers
compensation laws. We maintain self-insured workers
compensation plans, in addition to participating in federal
administered second injury workers compensation funds. We
estimate the required liability for such claims and state
funding requirements on a discounted basis utilizing actuarial
methods based on various assumptions, which include, but are not
limited to, our historical loss experience and projected loss
development factors as compiled in an annual actuarial study.
Related self-insurance accruals include amounts related 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
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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Fixed price incentive
Exclusive provider through joint production arrangement
Incentivized capital investment
Multi-ship buys
5-year construction
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Rate increasing from 1 to 2 annually in 2011
7 delivered, 11 additional in program backlog
Block IV expected to include 9 submarines with anticipated award at the end of 2013
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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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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;
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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;
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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).
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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;
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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;
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Expanded future long-range strike capabilities;
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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.
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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.
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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.
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
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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,
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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
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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.
103
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.
105
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.
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|
|
|
|
|
|
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/
113
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
114
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
115
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.huntingtoningalls.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.huntingtoningalls.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.huntingtoningalls.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:
|
|
|
|
|
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.
|
|
|
|
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.
|
116
|
|
|
|
|
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.
|
|
|
|
A director who is employed, or whose immediate family member is
employed, as an executive officer of another company where any
of the companys present executives serve on the other
companys compensation committee would not be independent
until three years after the end of such service or employment
relationship.
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|
|
|
A director who is an employee, or whose immediate family member
is an executive officer, of a company that makes payments to, or
receives payments from, the company for property or services in
an amount which, in any single fiscal year, exceeds the greater
of $1 million, or 2% of such other companys
consolidated gross revenues, would not be independent until
three years after falling below such threshold.
|
Compensation
of Non-Employee Directors
Following the spin-off, director compensation will be determined
by our board of directors with the assistance of its
Compensation Committee. It is anticipated that such compensation
will consist of an annual retainer, an annual equity award,
annual fees for serving as a committee chair and other types of
compensation as determined by the board from time to time.
Director
Compensation Table
The following table sets forth information concerning the 2010
compensation awarded by Northrop Grumman to non-employee
directors of Northrop Grumman who are expected to be
non-employee directors of HII:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
Stock
|
|
All Other
|
|
|
|
|
Paid in Cash(1)
|
|
Awards(2)
|
|
Compensation
|
|
Total
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Thomas B. Fargo (3)(4)
|
|
|
122,500
|
|
|
|
120,000
|
|
|
|
|
|
|
|
242,500
|
|
Tom Schievelbein (5)
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
60,000
|
|
Footnotes:
|
|
|
(1)
|
|
Effective October 1, 2008, non-employee directors of
Northrop Grumman earned an annual retainer of $220,000, $100,000
of which was paid in cash and the remainder of which was
required to be deferred into a stock unit account pursuant to
the 1993 Stock Plan for Non-Employee Directors, as amended (the
1993 Directors Plan). The other annual
retainers were paid in cash as follows:
|
|
|
|
|
|
Amount
|
Type of Retainer
|
|
($)
|
|
Audit Committee Retainer
|
|
10,000
|
Audit Committee Chair Retainer
|
|
25,000
|
Compensation Committee Chair Retainer
|
|
10,000
|
Governance Committee Chair Retainer
|
|
10,000
|
Policy Committee Chair Retainer
|
|
7,500
|
Non-executive Chairman of the Board
|
|
250,000
|
Matching Gifts for Education Program
|
|
Match of $1 per $1 of director contributions, up to $10,000 per
director, to eligible educational programs in accordance with
the rules of the program
|
|
|
|
(2)
|
|
Represents the target value of stock units awarded to each
non-employee director of Northrop Grumman in 2010 under the
1993 Directors Plan. Of the $220,000 annual retainer earned
by non-employee directors of Northrop Grumman, $120,000 was
required to be deferred into a stock unit account (Automatic
Stock Units) pursuant to the 1993 Directors Plan. Effective
January 1, 2010, the amended 1993 Directors Plan
provides that the Automatic Stock Units be paid at the
conclusion of board service or earlier, as specified by the
director, if he or she has more than five years of service. In
addition, each director may defer payment of all or a portion of
|
117
|
|
|
|
|
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.
|
|
(3)
|
|
In 2010, a matching contribution was made by the companys
Matching Gifts for Education Program on behalf of Admiral Fargo
in the amount of $2,500.
|
|
(4)
|
|
Admiral Fargo received an additional $10,000 for service on an
Ad Hoc Committee of the Northrop Grumman board during 2010.
|
|
(5)
|
|
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.
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
Mandatory
|
|
Voluntary
|
|
|
Name
|
|
Deferral
|
|
Deferral
|
|
Total
|
|
Thomas B. Fargo
|
|
|
5,870
|
|
|
|
0
|
|
|
|
5,870
|
|
118
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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|
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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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|
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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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|
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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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|
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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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119
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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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|
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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.
|
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.
120
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:
|
|
|
2010 Target Industry Peer Group (current)
|
|
|
|
3M Co.*
|
|
Johnson Controls, Inc.*
|
The Boeing Co.
|
|
L-3 Communications Holdings, Inc.*
|
Caterpillar, Inc.*
|
|
Lockheed Martin Corp.
|
Emerson Electric Co.*
|
|
Raytheon Co.
|
General Dynamics Corp.
|
|
SAIC, Inc.*
|
Goodrich Corp.*
|
|
Textron, Inc.*
|
Honeywell International, Inc.
|
|
United Technologies Corp.
|
ITT Corp.*
|
|
|
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:
|
|
|
2010 General Industry Peer Group
|
|
|
|
Abbott Laboratories
|
|
Merck & Co., Inc.
|
Aetna, Inc.
|
|
PepsiCo, Inc.
|
AT&T, Inc.
|
|
Pfizer, Inc
|
Caterpillar, Inc.
|
|
Philip Morris International
|
Chevron Corporation
|
|
Procter & Gamble
|
CHS, Inc.
|
|
Raytheon Company
|
Comcast Corporation
|
|
Sunoco, Inc.
|
CVS Corporation
|
|
SUPERVALU INC.
|
Delta Air Lines Inc.
|
|
Target Corporation
|
E. I. du Pont de Nemours and Company
|
|
The Boeing Company
|
FedEx Corporation
|
|
The Coca-Cola Company
|
Ford Motor Company
|
|
The Dow Chemical Company
|
General Dynamics Corporation
|
|
The Home Depot, Inc.
|
General Electric Company
|
|
The Kroger Co.
|
Honeywell International, Inc.
|
|
The Walt Disney Company
|
Humana, Inc.
|
|
Tyson Foods Incorporated
|
IBM Corporation
|
|
United Parcel Service
|
Ingram Micro, Inc.
|
|
United Technologies Corporation
|
Johnson & Johnson
|
|
UnitedHealth Group
|
Johnson Controls, Inc.
|
|
Valero Energy Corporation
|
Kraft Foods, Inc.
|
|
Verizon Communications, Inc.
|
Lockheed Martin Corporation
|
|
Walgreen Co.
|
Lowes Companies, Inc.
|
|
Wellpoint, Inc.
|
Medco Health Solutions, Inc.
|
|
|
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:
|
|
|
|
|
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;
|
|
|
|
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
|
|
|
|
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.
|
|
|
|
|
|
|
Element of
|
|
|
|
If Variable,
|
|
Cash or
|
Compensation
|
|
Objectives
|
|
Performance Measured
|
|
Equity
|
|
Salaries
|
|
targeted at a competitive market median
on a job-by-job basis
|
|
Not variable
|
|
Cash
|
|
|
adjusted above or below median based on
executives experience, skills and sustained performance
|
|
|
|
|
|
|
served to recruit and retain the talent
necessary to run our businesses
|
|
|
|
|
Annual Incentive
|
|
designed to motivate executives to
attain vital short-term goals
intended to provide a competitive level
of compensation when the individual and the company achieve the
approved performance objectives
tying the annual incentive directly to
financial performance provided the most effective alignment with
stockholder interests
|
|
Variable, based on our and Northrop Grummans performance
for all executives other than our President, which is based
solely on Northrop Grumman performance, and adjusted for
individual performance 2010 performance criteria were the
following:
new business awards
pension-adjusted operating margin
free cash flow conversion before
discretionary pension funding
non-financial performance goals
|
|
Cash
|
Long-Term Incentives
|
|
for 2010, long-term incentives granted
to our President in the form of Northrop Grumman stock options
(50%) and Northrop Grumman Restricted Performance Stock Rights
(50%); to the other HII NEOs in the form of Northrop Grumman
Restricted Performance Stock Rights (100)%
|
|
See below
|
|
Equity
|
125
|
|
|
|
|
|
|
|
|
|
|
If Variable,
|
|
Cash or
|
Element of Compensation
|
|
Objectives
|
|
Performance Measured
|
|
Equity
|
|
Stock Options
|
|
provided direct alignment with
stockholder interest while serving as a retention tool
|
|
Variable, based on Northrop Grumman stock price
|
|
Equity
|
Restricted Performance Stock Rights
|
|
designed to establish a long-term
performance perspective for the executives
stock-based arrangement to create
stockholder-managers interested in Northrop Grummans
sustained growth and prosperity
|
|
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)
|
|
Equity
|
Other Benefits
|
|
supplemental retirement, savings,
medical and severance plans consistent with industry practice
|
|
Not variable
|
|
Cash
|
Salaries
Base salaries of the HII NEOs were targeted at a competitive
market median on a
job-by-job
basis with individual variations explained by differences in
each incumbents experience, skills, and sustained
performance. Internal pay relationships and equitability were
also considered. The Northrop Grumman Compensation Committee
reviewed and approved our Presidents salary and the
Northrop Grumman CEO reviewed and approved the other HII
NEOs salaries, based on recommendations from our
President, on an annual basis, or at the time of promotion or a
substantial change in responsibilities, and made adjustments as
needed based on the Compensation Philosophy described above.
In February 2010, the Northrop Grumman Compensation Committee
approved base salary increases for certain sector presidents,
including Mr. Petters, whose base salary was raised from
$575,000 to $750,000. This action was taken to more closely
align the sector presidents in terms of internal equity since
the scope of job responsibilities is very similar.
Annual
Incentives
Under the Northrop Grumman Annual Incentive Plan, the Northrop
Grumman Compensation Committee approved annual incentive
compensation targets for our President and the Northrop Grumman
CEO approved the annual incentive compensation targets for the
other HII NEOs. The incentive compensation targets were
determined for each position based on market prevalence,
individual job level, scope and overall influence on the
business results. The Northrop Grumman Compensation Committee
and the Northrop Grumman CEO considered both the recommendations
of consultants and those of Northrop Grumman Management and our
senior management in determining appropriate annual incentive
target levels. The target incentive award (Target
Bonus) represented a percentage of each executives
base salary and, after the year ended, provided a basis upon
which a final award amount was determined by the Northrop
Grumman Compensation Committee and the Northrop Grumman CEO
based on an assessment of the financial performance against
pre-determined performance criteria and individual performance.
126
The annual incentive targets below were established for the HII
NEOs:
2010
Annual Incentive Targets
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|
|
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|
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|
|
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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
|
|
C. Michael Petters
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President and Chief Executive Officer
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75
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%
|
|
0%150%
|
Barbara A. Niland
|
|
Vice President and Chief Financial Officer
|
|
|
40
|
%
|
|
0%80%
|
Irwin F. Edenzon
|
|
Vice President and General ManagerGulf Coast Operations
|
|
|
45
|
%
|
|
0%90%
|
Matthew J. Mulherin
|
|
Vice President and General ManagerNewport News Operations
|
|
|
45
|
%
|
|
0%90%
|
William R. Ermatinger
|
|
Vice President and Chief Human Resources Officer
|
|
|
40
|
%
|
|
0%80%
|
For 2010, our Presidents bonus was evaluated based on the
Northrop Grumman Company Performance Factor (CPF)
and an Individual Performance Factor (IPF). For the
remaining HII NEOs, bonuses were evaluated based on the Northrop
Grumman Company Performance Factor, our Sector Performance
Factor (SPF), and an IPF. Within the annual
incentive formula described below, the CPF and SPF were weighted
equally (50% each) and could range from 0% to 200%. The IPF
could range 0-125%. Final bonus award payments were capped at
200% of an individuals target bonus.
Annual
incentive formula for 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
x
|
|
Target
|
|
%
|
|
=
|
|
Target Bonus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Bonus
|
|
x
|
|
CPF
|
|
x
|
|
IPF
|
|
=
|
|
Final Bonus Award*
|
|
|
|
*
|
|
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:
|
|
|
|
|
Financial performance
|
|
|
|
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
|
|
|
|
Customer relationships
|
|
|
|
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:
|
|
|
|
|
Customer Satisfaction
measured in terms of feedback
received from customers including customer generated performance
scores, award fees, as well as verbal and written feedback. For
example, Department of Defense contracts that meet certain
thresholds are required to provide feedback through the
Contractor Performance Assessment Reporting System.
|
|
|
|
Diversity
measured in terms of improving
representation of females and people of color in mid-level and
senior-level management positions with respect to peer
benchmarks.
|
|
|
|
Engagement (attrition)
measured in terms of
voluntary attrition, which is an indicator of engagement levels
within an organization as companies with high employee
engagement retain a more motivated and productive workforce.
|
|
|
|
Environmental
measured in terms of the reduction, in
metric tons, of greenhouse gases emissions.
|
|
|
|
Quality
measured using program-specific objectives
available within each of Northrop Grummans sectors. This
metric integrates available measures of quality including defect
rates, process quality, supplier quality, planning quality and
other appropriate criteria for program type and phase.
|
|
|
|
Safety
measured by Total Case Rate, and defined as
the number of OSHA recordable injuries (any medical treatment
requiring more than first aid) per 100 full-time employees.
|
The score for operating margin is adjusted based upon the amount
of earnings charges recorded for the year. The adjustment can
increase the score by a maximum of five percentage points if the
actual operating margin rate is equal to or above target and
minimal charges are recorded or decrease the score by up to five
percentage points if significant charges are recorded and the
target operating margin rate is not achieved. Each financial
metric/goal is described below and shown with its relative
weighting.
Northrop
Grumman Financial Goals that were Applicable to our
President
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Actual
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Performance
|
|
Metric/Goal
|
|
Weighting
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
(as adjusted)
|
|
|
New Business Awards (Amounts in Billions)
|
|
|
20
|
%
|
|
$
|
27.0
|
|
|
$
|
30.0
|
|
|
$
|
37.0
|
|
|
$
|
31.8
|
|
Pension-Adjusted Operating Margin Rate*
|
|
|
40
|
%
|
|
|
8.0
|
%
|
|
|
9.0
|
%
|
|
|
10.0
|
%
|
|
$
|
9.3
|
%
|
Free Cash Flow Conversion
|
|
|
40
|
%
|
|
|
80
|
%
|
|
|
100
|
%
|
|
|
135
|
%
|
|
|
119
|
%
|
|
|
|
*
|
|
This goal is adjusted for net FAS/CAS pension expense.
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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|
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|
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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
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|
|
|
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
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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
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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:
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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
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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.
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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.
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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.
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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.
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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:
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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.
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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.
165
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.
166
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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2,221
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Irwin F. Edenzon
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1,171
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1,245
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213
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2,630
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Matthew J. Mulherin
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3,419
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4,078
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85
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7,582
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William R. Ermatinger
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772
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439
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1,211
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Directors and Executive Officers as a Group (12 persons)
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20,134
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76,540
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1,836
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98,510
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(1)
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These shares subject to option are either currently exercisable
or exercisable within 60 days as of March 11, 2011.
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(2)
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Share equivalents for directors represent non-voting deferred
stock units acquired under the 1993 Directors Plan some of which
are paid out in shares of common stock at the conclusion of a
director-specified deferral period, and others are paid out upon
termination of the directors service on the Board of
Directors. The HII NEOs hold share equivalents with pass-through
voting rights in the Northrop Grumman Savings Plan.
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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 will maintain an Internet site at www.huntingtoningalls.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.
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14.
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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.
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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.
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16.
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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:
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|
|
|
|
|
|
|
|
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 $15,
per share, respectively.
Stock option activity for the year ended December 31, 2010,
was as follows:
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Shares
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Weighted-
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Weighted-Average
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Aggregate
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Under Option
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Average
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Remaining
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Intrinsic Value
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(in thousands)
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Exercise Price
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Contractual Term
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($ in millions)
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Outstanding at January 1, 2010
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1,139
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$
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53
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4 years
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$
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6
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Granted
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123
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60
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Exercised
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(91
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)
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46
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Cancelled and forfeited
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(10
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)
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42
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Outstanding at December 31, 2010
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1,161
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$
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54
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3.5 years
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$
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14
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Vested and expected to vest in the future at December 31,
2010
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1,148
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$
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54
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3.5 years
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$
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13
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Exercisable at December 31, 2010
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891
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$
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54
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2.9 years
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$
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11
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The intrinsic value of options exercised during the years ended
December 31, 2010, 2009, and 2008, was $2 million,
zero, and $2 million, respectively. Intrinsic value is
measured using the fair market value at the date of exercise
(for options exercised) or at December 31 for the applicable
year (for outstanding options), less the applicable exercise
price.
Stock
Awards
The fair value of stock awards is determined based on the
closing market price of Northrop Grummans common stock on
the grant date. Compensation expense for stock awards is
measured at the grant date based on fair value and recognized
over the vesting period. For purposes of measuring compensation
expense, the amount of shares ultimately expected to vest is
estimated at each reporting date based on managements
expectations regarding the relevant performance criteria.
Stock award activity for the year ended December 31, 2010,
is presented in the table below. Vested awards include stock
awards fully vested during the year and net adjustments to
reflect the final performance measure for issued shares.
F-38
NORTHROP
GRUMMAN SHIPBUILDING
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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Stock
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Weighted-Average
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Weighted-Average
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Awards
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Grant Date
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Remaining
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(in thousands)
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Fair Value
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Contractual Term
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Outstanding at December 31, 2009
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436
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$
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58
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1.6 years
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Granted
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272
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60
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Vested
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(142
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)
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82
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Forfeited
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(11
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)
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52
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Outstanding at December 31, 2010
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555
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$
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53
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1.5 years
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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.
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19.
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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
$27 million for each of the years ended December 31,
2010, 2009, and 2008 is included in interest expense in the
consolidated statements of operations.
Parents
Equity in Unit
Intercompany transactions between NGSB and Northrop Grumman have
been included in these consolidated financial statements and are
considered to be effectively settled for cash at the time the
transaction is recorded. The net effect of the settlement of
these transactions is reflected as parents equity in unit
in the consolidated statements of financial position.
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20.
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UNAUDITED
SELECTED QUARTERLY DATA
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Unaudited quarterly financial results are set forth in the
following tables.
2010
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$ in millions
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1st Qtr
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2nd Qtr
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3rd Qtr
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4th Qtr
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Sales and service revenues
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$
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1,712
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$
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1,610
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$
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1,665
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$
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1,736
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Operating income (loss)
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87
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(20
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)
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77
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104
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Earnings (loss) before income taxes
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77
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(30
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)
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67
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92
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Net earnings (loss)
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41
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(11
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)
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42
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63
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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 $31 million in milestone incentives on
the total LPD-22 through LPD-25 contract.
2009
|
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$ in millions
|
|
1st Qtr
|
|
2nd Qtr
|
|
3rd Qtr
|
|
4th Qtr
|
|
Sales and service revenues
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$
|
1,410
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$
|
1,544
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$
|
1,656
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$
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1,682
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|
Operating income (loss)
|
|
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68
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|
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(4
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)
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|
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82
|
|
|
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65
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|
Earnings (loss) before income taxes
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|
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57
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(15
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)
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71
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|
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63
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|
Net earnings (loss)
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|
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39
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(10
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)
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52
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43
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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.
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December 31,
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in whole dollars
|
|
2010
|
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
100
|
|
|
|
|
|
|
Total assets
|
|
$
|
100
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
Common stock, $1 par value; 100 shares authorized,
issued and outstanding at December 31, 2010
|
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$
|
100
|
|
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|
|
Total shareholders equity
|
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$
|
100
|
|
|
|
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|
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