Newport News, Virginia 23607
(par value $1.00 per share)
Page | ||||
Summary | 1 | |||
Glossary of Programs | 15 | |||
Risk Factors | 19 | |||
Special Note About Forward-Looking Statements | 39 | |||
The Spin-Off | 40 | |||
Trading Market | 49 | |||
Dividend Policy | 51 | |||
Capitalization | 52 | |||
Selected Historical Consolidated Financial and Other Data | 53 | |||
Unaudited Pro Forma Condensed Consolidated Financial Statements | 54 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 59 | |||
Business | 78 | |||
Management | 98 | |||
Executive Compensation | 103 | |||
Certain Relationships and Related Party Transactions | 132 | |||
Description of Material Indebtedness | 137 | |||
Security Ownership of Certain Beneficial Owners and Management | 139 | |||
Description of Capital Stock | 141 | |||
Where You Can Find More Information | 146 | |||
Index to Financial Statements | F-1 |
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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. Navy’s current 286 ships, and the exclusive builders of 16 of the U.S. Navy’s 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. Navy’s 286 ships, representing seven of the U.S. Navy’s 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 |
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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 the surface ships of, and a provider of fleet support and maintenance services for, the U.S. Navy. | |||
• | We have long-term contracts with visible revenue streams and highly probable backlog based on the U.S. Navy’s 30-Year Plan. Most of our contracts are long-term in nature with visible revenue streams. Total backlog at September 30, 2010 was approximately $17 billion. At the end of 2009, total orders from the U.S. Government composed 99% 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. | ||
• | 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. Navy’s 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 66% of our revenues in 2008 and 2009. | ||
• | 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 ship’s 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. | ||
• | 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. | ||
• | We have a workforce of almost 40,000 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 June 1, 2010, we had 891 Master Shipbuilders, employees who have been with us or our predecessors for over 40 years. We provide ongoing training for all of our employees, providing over 60,000 individual training seats in 2009 and 64,000 in 2010 across our Newport News and Gulf Coast operations. |
• | Align our business to support the U.S. Navy’s 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. | ||
• | Ensure capabilities that support new U.S. Navy requirements.Through alignment with the U.S. Navy’s 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. Navy’s 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 agingOhio-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. |
• | 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.” | ||
• | 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. | ||
• | 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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Q: | What is the spin-off? | |
A: | The spin-off is the series of transactions by which HII will separate from Northrop Grumman. To complete the spin-off, Northrop Grumman will distribute to its stockholders all of the shares of HII common stock. We refer to this as the distribution. Following the spin-off, HII will be a separate company from Northrop Grumman, and Northrop Grumman will not retain any ownership interest in HII. The number of shares of Northrop Grumman common stock you own will not change as a result of the spin-off. | |
Q: | What will I receive in the spin-off? | |
A: | 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 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.” | |
Q: | What is HII? | |
A: | 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. | |
Q: | What are the reasons for and benefits of separating HII from Northrop Grumman? | |
A: | 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 management’s attention and investment resources to pursue opportunities in their respective markets and more actively manage their cost structures. | |
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. | ||
Additionally, the shipbuilding business is a mature business that is more capital-intensive than most of Northrop Grumman’s other businesses, with longer periods of performance. Northrop Grumman’s 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.” | ||
Q: | Why is the separation of HII structured as a spin-off as opposed to a sale? | |
A: | On October 15, 2010, Northrop Grumman announced that it was continuing to explore strategic alternatives, including a spin-off or a sale, for its shipbuilding business. 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 HII’s 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.” | |
Q: | What is being distributed in the spin-off? | |
A: | Approximately 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 |
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HII common stock to be distributed will be calculated on , 20 , the record date. The shares of HII common stock to be distributed by Northrop Grumman will constitute all of the issued and outstanding shares of HII common stock immediately prior to the distribution. For more information on the shares being distributed in the spin-off, see “Description of Our Capital Stock—Common Stock.” | ||
Q: | How will options and stock held by HII employees be affected as a result of the spin-off? | |
A: | 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 HII’s 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 such awards will be modified appropriately to reflect the spinoff. | |
Additionally, HII’s 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 shares of Northrop Grumman common stock held in such employee’s 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 HII’s 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 when directed by participants, and any such shares remaining as of , 20 [one year from the distribution date] will be automatically disposed of and the proceeds invested in another such investment alternative (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 shares of Northrop Grumman common stock held in the employee’s 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 when directed by participants, and any such shares remaining as of , 20 [one year from the distribution date] will be automatically disposed of and the proceeds invested in another such investment alternative (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). | ||
Q: | When is the record date for the distribution? | |
A: | The record date will be the close of business of the New York Stock Exchange (the “NYSE”) on , 20 . | |
Q: | When will the distribution occur? | |
A: | The distribution date of the spin-off is , 20 . 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. | |
Q: | What do I have to do to participate in the spin-off? | |
A: | You are not required to take any action, although you are urged to read this entire document carefully. No stockholder approval of the distribution is required or sought. You are not being asked for a proxy. No action is required on your part to receive your shares of HII common stock. You will neither be required to pay anything for the new shares nor to surrender any shares of Northrop Grumman common stock to participate in the spin-off. | |
Q: | How will fractional shares be treated in the spin-off? | |
A: | 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 stockholder’s particular circumstances. The tax |
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consequences of the distribution are described in more detail under “The Spin-Off—U.S. Federal Income Tax Consequences of the Spin-Off.” | ||
Q: | What are the U.S. Federal income tax consequences of the spin-off? | |
A: | The spin-off is conditioned on the receipt by Northrop Grumman of a ruling (“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 Grumman’s stockholders and HII under Section 355 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.” | |
Q: | Will the HII common stock be listed on a stock exchange? | |
A: | 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.” | |
Q: | Will my shares of Northrop Grumman common stock continue to trade? | |
A: | Yes. Northrop Grumman common stock will continue to be listed and trade on the NYSE under the symbol “NOC.” | |
Q: | 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? | |
A: | Beginning on or shortly before the record date and continuing through the distribution date for the spin-off, Northrop Grumman’s 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. | |
Q: | Will the spin-off affect the trading price of my Northrop Grumman stock? | |
A: | 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. | |
Q: | What is the Contribution? | |
A: | As part of the internal reorganization, we will transfer $ of the proceeds of the HII Debt to NGSC. | |
Q: | What indebtedness will HII have following the spin-off? | |
A: | It is anticipated that, prior to the completion of the spin-off, HII will (i) incur the HII Debt in an amount estimated at $ , the proceeds of which are expected to be used to fund the $ Contribution and for general corporate purposes in the amount of $ and (ii) enter into the HII Credit Facility in an amount estimated at $. 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 MBFC’s 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 MBFC’s issuance of $200 million of 4.55% Gulf Opportunity Zone Industrial Revenue Bonds (Northrop Grumman Ship Systems, Inc. Project) Series 2006 due 2028 (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 spin-off, Northrop Grumman Shipbuilding, Inc (“NGSB”) on November 1, |
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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”). | ||
Q: | What will the relationship be between Northrop Grumman and HII after the spin-off? | |
A: | 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 HII’s 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 HII’s business, and that Northrop Grumman will indemnify HII against any and all liabilities arising out of Northrop Grumman’s non-shipbuilding business. | |
Q: | What will HII’s dividend policy be after the spin-off? | |
A: | HII does not currently intend to pay a dividend. Going forward, HII’s dividend policy will be established by the HII board of directors based on HII’s financial condition, results of operations and capital requirements, as well as applicable law, regulatory constraints, industry practice and other business considerations that HII’s board of directors considers relevant. In addition, the terms of the agreements governing HII’s 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.” | |
Q: | What are the anti-takeover effects of the spin-off? | |
A: | 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 HII’s 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 HII’s 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 HII’s 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. | |
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 Transactions—Agreements with Northrop Grumman Related to the Spin-Off—Separation and Distribution Agreement.” | ||
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 NGSC’s 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 NGSC’s guarantee obligations, we will be required to cause credit support to be provided for NGSC’s 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 Transactions—Other Agreements.” | ||
As a result, HII’s obligations may discourage, delay or prevent a change of control of HII. |
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Q: | What are the risks associated with the spin-off? | |
A: | There are a number of risks associated with the spin-off and ownership of HII common stock. These risks are discussed under “Risk Factors” beginning on page 19. | |
Q: | How will the spin-off affect HII’s relationship with its customers? | |
A: | We believe we have well-established relationships with our principal customers. We believe the spin-off will enable us better to focus on those customers and to align our resources with their priorities. As we seek to enter into new contracts with our customers, we expect to continue to provide information to enable them to have ongoing confidence in our management, our workforce and our ability to perform, including our financial stability. | |
Under federal acquisition regulations, the government commonly makes affirmative responsibility determinations before entering into new contracts with a contractor. In so doing, the government considers various factors, including financial resources, performance record, technical skills and facilities. Our customers and prospective customers will consider whether our responsibility on a stand-alone basis satisfies their requirements for entering into new contracts with us. At present there are several contracts in the negotiation phase that may not be finalized and awarded until after the spin-off is concluded and the U.S. Navy makes a responsibility determination. This could cause the contracts to be delayed or not awarded. We believe we continue to be a responsible contractor. Nonetheless, if our customers or prospective customers are not satisfied with our responsibility, including our financial resources, it could likely affect our ability to bid for and obtain or retain projects, which, if unresolved, could have a material adverse effect on our business, financial condition or results of operations. See “Risk Factors—Risks 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.” | ||
Q: | Where can I get more information? | |
A. | If you have any questions relating to the mechanics of the distribution, you should contact the distribution agent at: |
Investor Relations
1840 Century Park East
Los Angeles, California 90067
Phone: (310) 201-1634
Email: investors@ngc.com
www.northropgrumman.com
Investor Relations
www. .com
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(simplified for illustrative purposes)
The diagram below shows the current structure of Northrop Grumman: | The diagram below shows the structure of Northrop Grumman after completion of the internal reorganization: | ||
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![(DIAGRAM)](https://capedge.com/proxy/10-12BA/0000950123-11-003504/a57513a4a5751322.gif)
• | 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. | ||
• | “NGSB” refers to Northrop Grumman Shipbuilding, Inc., which currently operates Northrop Grumman’s shipbuilding business. In connection with the spin-off, NGSB intends to change its name to “Huntington Ingalls Industries Company” | ||
• | “NGSC” refers to Northrop Grumman Systems Corporation, which operates Northrop Grumman’s non-shipbuilding businesses. | ||
• | “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. | ||
• | “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. | ||
• | “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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Distributing Company | Northrop Grumman Corporation, a Delaware corporation. After the distribution, Northrop Grumman will not own any shares of HII common stock. | |
Distributed Company | 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. | |
Distributed Securities | 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. | |
Record Date | The record date for the distribution is the close of business on , 20 . | |
Distribution Date | The distribution date is , 20 . | |
Internal Reorganization | 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: |
• | 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. | ||
• | New NGC changing its name to “Northrop Grumman Corporation.” | ||
• | HII becoming the parent company of the Northrop Grumman subsidiaries that currently operate the shipbuilding business. | ||
• | Current NGC becoming a direct, wholly owned subsidiary of HII and being renamed “Titan II Inc.” |
After completion of the spin-off: |
• | New NGC will own and operate the aerospace systems, electronic systems, information systems and technical services businesses. | ||
• | 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. |
For more information, see the description of this internal reorganization in “The Spin-Off—Manner of Effecting the Spin-Off—Internal Reorganization.” | ||
Incurrence of Debt | It is anticipated that, prior to completion of the spin-off, HII will (i) incur the HII Debt to fund the Contribution and for general corporate purposes and (ii) enter into the HII Credit Facility. | |
Distribution Ratio | Each holder of Northrop Grumman common stock will receive one share of HII common stock for every shares of Northrop Grumman common stock held on , 20 . | |
The Distribution | On the distribution date, Northrop Grumman will release the shares of HII common stock to the distribution agent to distribute to Northrop Grumman stockholders. The distribution of shares will be made in book-entry form, which means that no physical share certificates will be issued. It is expected that it will take the distribution agent up to two weeks to electronically issue shares of HII common stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. Trading of our shares will not be affected during that time. Following the spin-off, stockholders whose shares are held in book-entry form may request that their shares of HII common stock be transferred to a brokerage or other account at any time. You will not be required to make any payment, surrender or exchange your shares of Northrop Grumman common stock or take any other action to receive your shares of HII common stock. |
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Fractional Shares | 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 stockholder’s 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.” | |
Conditions to the Spin-Off | Completion of the spin-off is subject to the satisfaction or waiver by Northrop Grumman of the following conditions: |
• | 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; | ||
• | the Separation and Distribution Agreement and each ancillary agreement contemplated by the Separation and Distribution Agreement shall have been executed by each party thereto; | ||
• | the Securities and Exchange Commission (the “SEC”) shall have declared effective HII’s 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; | ||
• | 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; | ||
• | the internal reorganization (as described in “The Spin-Off—Background”) shall have been completed; | ||
• | Northrop Grumman shall have received the IRS Ruling and an opinion of its tax counsel, each of which shall remain in full force and effect, that the spin-off (including the internal reorganization) will not result in recognition, for U.S. Federal income tax purposes, of income, gain or loss to Northrop Grumman, or of income, gain or loss to its stockholders, except to the extent of cash received in lieu of fractional shares; | ||
• | HII shall have (i) entered into the HII Credit Facility, (ii) received the net proceeds from the HII Debt and (iii) made the Contribution; | ||
• | 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; | ||
• | 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; | ||
• | prior to the distribution, this information statement shall have been mailed to the holders of Northrop Grumman common stock as of the record date; | ||
• | HII’s current directors shall have duly elected the individuals listed as members of its post-distribution board of directors in this information |
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statement, and such individuals shall become the members of HII’s board of directors immediately prior to the distribution; | |||
• | 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 | ||
• | 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. |
The fulfillment of the foregoing conditions will not create any obligation on Northrop Grumman’s part to effect the spin-off. We are not aware of any material federal or state regulatory requirements that must be complied with or any material approvals that must be obtained, other than compliance with SEC rules and regulations and the declaration of effectiveness of the Registration Statement by the SEC, in connection with the distribution. Northrop Grumman has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Northrop Grumman determines, in its sole discretion, that the spin-off is not in the best interests of Northrop Grumman or its stockholders, that a sale or other alternative is in the best interests of Northrop Grumman or its stockholders or that it is not advisable for HII to separate from Northrop Grumman. For more information, see “The Spin-Off—Conditions to the Spin-Off.” | ||
Trading Market and Symbol | We intend to file 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.” | |
Tax Consequences | As a condition to the spin-off, Northrop Grumman has received an IRS Ruling and will receive an opinion of counsel stating that Northrop Grumman, Northrop Grumman’s 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 Grumman’s 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.” | |
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 | We will enter into a Separation and Distribution Agreement and other agreements with Northrop Grumman related to the spin-off. These agreements will govern the relationship between us and Northrop Grumman after completion of the spin-off and provide for the allocation between us and Northrop Grumman of various assets, liabilities and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities). The Separation and Distribution Agreement, in particular, will provide for the settlement or extinguishment of certain obligations between us and Northrop Grumman. We intend to enter into a Transition Services Agreement with Northrop Grumman pursuant to which certain services will be provided on an interim basis following the distribution. We also intend to enter into an Employee Matters Agreement that will set forth the agreements between Northrop Grumman and us concerning certain employee compensation and benefit matters. Further, we intend to enter into a Tax Matters Agreement with Northrop Grumman regarding the sharing of taxes incurred before and after completion of the spin-off, certain indemnification rights with respect to tax matters and certain restrictions to preserve the tax-free status of the spin-off. In addition, to facilitate the ongoing use of various intellectual property by each of us and Northrop Grumman, we intend to enter into an Intellectual Property License Agreement with Northrop Grumman that will provide for certain reciprocal licensing arrangements. We also intend to enter into an Insurance Matters Agreement with Northrop Grumman. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements with Northrop Grumman Related to the Spin-Off,” and describe some of the risks of these arrangements under “Risk Factors—Risks Relating to the Spin-Off.” | |
Dividend Policy | HII does not currently intend to pay a dividend. Going forward, HII’s 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 HII’s 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.” | |
Transfer Agent | ||
Risk Factors | We face both general and specific risks and uncertainties relating to our business, our relationship with Northrop Grumman and our being an independent, publicly owned company. We also are subject to risks relating to the spin-off. You should carefully read “Risk Factors” beginning on page 19 of this information statement. |
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(Nine months) ended September 30 | (Year ended) December 31 | |||||||||||||||||||||||||||
Pro Forma | Pro Forma | |||||||||||||||||||||||||||
(in millions) | 2010 | 2010 | 2009 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||||||||
Sales and service revenues | $ | $ | 4,987 | $ | 4,610 | $ | $ | 6,292 | $ | 6,189 | $ | 5,692 | ||||||||||||||||
Goodwill impairment | — | — | — | 2,490 | — | |||||||||||||||||||||||
Operating income (loss) | 144 | 146 | 211 | (2,354 | ) | 447 | ||||||||||||||||||||||
Net earnings (loss) | 72 | 81 | 124 | (2,420 | ) | 276 | ||||||||||||||||||||||
Total assets | 5,185 | 5,001 | 4,760 | 7,658 | ||||||||||||||||||||||||
Long-term debt | 283 | 283 | 283 | 283 | ||||||||||||||||||||||||
Total long-term obligations | 1,694 | 1,632 | 1,761 | 1,790 | ||||||||||||||||||||||||
Free cash flow(1) | 55 | (329 | ) | (269 | ) | 121 | 364 | |||||||||||||||||||||
(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 “Management’s 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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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, is constructing a production facility adjacent to the Newport News shipyard for the manufacture of heavy commercial nuclear power plant components, which is expected to be completed within the next four years. | |
CVN-65 USSEnterprise | Maintain and support the world’s first nuclear-powered aircraft carrier, the inactivation of which is expected to start in 2013. | |
CVN-68Nimitz-class aircraft carriers | Refuel, maintain and repair the CVN-68Nimitz-class aircraft carriers, which are the largest warships in the world. EachNimitz-class carrier is designed for an approximately 50-year service life, with one mid-life refueling. Aircraft carriers are the centerpiece of America’s 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 finalNimitz-class carrier constructed, CVN-77 USSGeorge H.W. Bush, was commissioned in 2009. | |
CVN-78Gerald R. Ford-class aircraft carriers | Design and construction for the CVN-21 program, which is the future aircraft carrier replacement program for CVN-65 USSEnterpriseand CVN-68Nimitz-class aircraft carriers. CVN-78Gerald 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-78Gerald R. Ford-class carriers are expected to be awarded every five years across the U.S. Navy’s 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-51Arleigh Burke-class destroyers | Build guided missile destroyers designed for conducting anti-air, anti-submarine, anti-surface and strike operations. The Aegis-equipped DDG-51Arleigh Burke-class destroyers are the U.S. Navy’s 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-1000Zumwalt-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-1000Zumwalt-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-1000Zumwaltand DDG-1001Michael Monsoorand have submitted a proposal to construct the DDG- | |
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Program Name | Program Description | |
1002 (unnamed) composite superstructure. | ||
DoE | Participate, as a minority member in two joint ventures, in the management and operation of the U.S. Department of Energy’s (“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 USSEnterprise. | |
LHA-6America-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-6America-class ships, together with the LHD-1Wasp-class ships, are the successors to the aging LHA-1Tarawa-class ships. Three of the original fiveTarawa-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-6America, was placed under contract with us in June 2007, and is scheduled for delivery in 2013. The LHA-6America-class ships optimize aviation operations and support capabilities. The key differences between LHA-6 and the LHD-1Wasp-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-1Wasp-class amphibious assault ships | Build the world’s largest class of amphibious assault ships, the LHD-1Wasp-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 USSMakin Island, commissioned in October 2009 and equipped with improved capabilities, is the last. | |
LPD-17San 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-17San Antonio-class is the newest addition to the U.S. Navy’s 21st century amphibious assault force, and these ships are a key element of the U.S. Navy’s 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 USSSan 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. 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 | |
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Program Name | Program Description | |
of some of the equipment. | ||
NSC-1Legend-class National Security Cutter | Design and build the U.S. Coast Guard’s 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 USCGCBertholfand NSC-2 USCGCWaesche, have been delivered and NSC-3Strattonis under construction. Long lead time and material procurement is underway for NSC-4Hamilton. | |
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 USSTheodore Rooseveltis currently undergoing RCOH, marking the fifth CVN RCOH in history. We have already successfully completed the RCOH process for CVN-65 USSEnterprise, CVN-68 USSNimitz, CVN-69 USSDwight D. Eisenhowerand CVN-70 USSCarl Vinson. | |
SSBN(X)Ohio-class Submarine Replacement Program | Act, through an agreement with Electric Boat, as design subcontractor for theOhio-class replacement boats. The U.S. Navy has committed to designing a replacement class for the agingOhio-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. TheOhio-class includes 14 ballistic missile submarines (SSBN) and four cruise missile submarines (SSGN). TheOhio-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 firstOhio-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 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-774Virginia-class fast attack submarines | Construct the newest attack submarine as the principal subcontractor to Electric Boat. The SSN-774Virginia-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-774Virginia-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-774Virginia-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-774Virginia-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 | |
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Program Name | Program Description | |
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-774Virginia-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-774Virginia-class submarines per year beginning in 2011. | ||
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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; | ||
• | unplanned expenditures relating to maintenance, operation, security and repair, including repairs required by the Nuclear Regulatory Commission; and | ||
• | potential liabilities arising out of a nuclear incident whether or not it is within our control. |
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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; | ||
• | success or failure of our business strategy; | ||
• | our quarterly or annual earnings, or those of other companies in our industry; | ||
• | our ability to obtain financing as needed; | ||
• | announcement by us or our competitors of significant new business awards; | ||
• | announcements by us or our competitors of significant acquisitions or dispositions; | ||
• | changes in accounting standards, policies, guidance, interpretations or principles; | ||
• | the failure of securities analysts to cover our common stock after the spin-off; | ||
• | changes in earnings estimates by securities analysts or our ability to meet those estimates; | ||
• | the operating and stock price performance of other comparable companies; | ||
• | investor perception of our company and the shipbuilding industry; | ||
• | natural or environmental disasters that investors believe may affect us; | ||
• | overall market fluctuations; | ||
• | fluctuations in the budget of the DoD; | ||
• | results from any material litigation or Government investigation; | ||
• | further reduction or rationalization by us or our competitors of the shipbuilding industrial base as a result of adverse changes to the DoD budget; | ||
• | changes in laws and regulations affecting our business; and | ||
• | general economic conditions and other external factors. |
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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; | ||
• | New NGC changing its name to “Northrop Grumman Corporation;” | ||
• | Our becoming the parent company of those Northrop Grumman subsidiaries that currently operate the shipbuilding business; and | ||
• | Current NGC becoming a direct, wholly owned non-operating subsidiary of HII and being renamed “Titan II Inc.” |
• | 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 | ||
• | 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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The diagram below shows the current structure of Northrop Grumman: | The diagram below shows the structure of Northrop Grumman after completion of the internal reorganization: | ||
![]() | ![]() |
![(DIAGRAM)](https://capedge.com/proxy/10-12BA/0000950123-11-003504/a57513a4a5751322.gif)
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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; | ||
• | 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 | ||
• | the holding period of New NGC common stock received in exchange for Current NGC stock in the holding company reorganization will include the period during which the stockholder held the Current NGC common |
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stock, provided the Current NGC common stock is held as a capital asset on the date of the merger in the holding company reorganization. |
• | 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; | ||
• | 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; | ||
• | 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; | ||
• | 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 | ||
• | no gain or loss will be recognized by Northrop Grumman upon the distribution of our common stock. |
• | a taxable dividend to the extent of the stockholder’s pro rata share of Northrop Grumman’s current and accumulated earnings and profits; | ||
• | a reduction in the stockholder’s basis in Northrop Grumman common stock to the extent the amount received exceeds such stockholder’s share of earnings and profits; | ||
• | taxable gain from the exchange of Northrop Grumman common stock to the extent the amount received exceeds both the stockholder’s share of earnings and profits and the stockholder’s basis in Northrop Grumman common stock; and | ||
• | basis in our stock equal to its fair market value on the date of the distribution. |
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• | the distribution does not qualify as tax-free under Section 355 of the Code; and | ||
• | 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. |
• | certain portions of the holding company reorganization or the internal reorganization do not qualify as a tax-free reorganization; and | ||
• | there are one or more acquisitions (including issuances and repurchases) of either our stock or the stock of NGSC, a subsidiary of Northrop Grumman, representing 50% or more, measured by vote or value, of the then-outstanding stock of either corporation, and the acquisition or acquisitions are deemed to be part of a plan or series of related transactions that include the internal reorganization. Any such acquisition of our stock within two years before or after the distribution (with exceptions, including public trading by less-than-5% stockholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless we can rebut that presumption. | ||
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• | the 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; | ||
• | the Separation and Distribution Agreement and each ancillary agreement contemplated by the Separation and Distribution Agreement shall have been executed by each party thereto; | ||
• | 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; | ||
• | 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; | ||
• | the internal reorganization (as described in “—Background”) shall have been completed; | ||
• | 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; | ||
• | HII shall have (i) entered into the HII Credit Facility, (ii) received the net proceeds from the HII Debt and (iii) made the Contribution; | ||
• | 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; | ||
• | 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; | ||
• | prior to the distribution, this information statement shall have been mailed to the holders of Northrop Grumman common stock as of the record date; | ||
• | 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; | ||
• | 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 | ||
• | 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. |
47
48
• | under a registration statement that the SEC has declared effective under the Securities Act; or | ||
• | under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144. |
• | 1.0% of our common stock then outstanding; or | ||
• | the average weekly trading volume of our common stock on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
49
50
51
September 30, 2010 | ||||||||||||||||||||
Adjustments for | Adjustments | |||||||||||||||||||
Historical | Tender | for Financing | Pro Forma | |||||||||||||||||
Cash and cash equivalents (1) | $ | $ | $ | $ | — | |||||||||||||||
Debt, including current and long-term | ||||||||||||||||||||
Long-term debt | $ | 283 | $ | $ | $ | 283 | ||||||||||||||
Notes payable to parent | 537 | 537 | ||||||||||||||||||
Accrued interest on notes payable to parent | 232 | 232 | ||||||||||||||||||
Total debt | 1,052 | 1,052 | ||||||||||||||||||
Equity | ||||||||||||||||||||
Parent’s equity in unit | 1,985 | 1,985 | ||||||||||||||||||
Accumulated other comprehensive loss | (498 | ) | (498 | ) | ||||||||||||||||
Common stock (par value $1.00) | — | |||||||||||||||||||
Additional paid in capital | — | |||||||||||||||||||
Total equity | 1,487 | 1,487 | ||||||||||||||||||
Total Capitalization | $ | 2,539 | $ | $ | $ | 2,539 | ||||||||||||||
(1) | Historically, cash received by us has been transferred to Northrop Grumman, and Northrop Grumman has funded our disbursement accounts on an as-needed basis. |
52
(Nine months ended) | (Year ended) | |||||||||||||||||||||||||||
September 30 | December 31 | |||||||||||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Sales and service revenues | $ | 4,987 | $ | 4,610 | $ | 6,292 | $ | 6,189 | $ | 5,692 | $ | 5,319 | $ | 5,761 | ||||||||||||||
Goodwill impairment | — | — | — | 2,490 | — | — | — | |||||||||||||||||||||
Operating income (loss) | 144 | 146 | 211 | (2,354 | ) | 447 | 331 | 231 | ||||||||||||||||||||
Net earnings (loss) | 72 | 81 | 124 | (2,420 | ) | 276 | 194 | 149 | ||||||||||||||||||||
Total assets | 5,185 | 5,001 | 4,760 | 7,658 | 7,644 | 7,750 | ||||||||||||||||||||||
Long-term debt | 283 | 283 | 283 | 283 | 283 | 83 | ||||||||||||||||||||||
Total long-term obligations | 1,694 | 1,632 | 1,761 | 1,790 | 1,784 | 1,223 | ||||||||||||||||||||||
Free cash flow(1) | 55 | (329 | ) | (269 | ) | 121 | 364 | 164 | 109 | |||||||||||||||||||
(1) | Free cash flow is a non-GAAP financial measure and represents cash from operating activities less capital expenditure. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Free Cash Flow” for more information on this measure. |
53
54
Year ended December 31, 2009 | ||||||||||||||||
Adjustments | Adjustments | |||||||||||||||
(in millions) | Historical | for Tender | for Financing | Pro Forma | ||||||||||||
Statement of Operations | ||||||||||||||||
Sales and service revenues | $ | 6,292 | $ | $ | $ | 6,292 | ||||||||||
Cost of sales and service revenues | 6,081 | 6,081 | ||||||||||||||
Operating income | 211 | 211 | ||||||||||||||
Other (expense) income | ||||||||||||||||
Interest expense | (36 | ) | (36 | ) | ||||||||||||
Other, net | 1 | 1 | ||||||||||||||
Earnings before income taxes | 176 | 176 | ||||||||||||||
Federal income taxes | 52 | 52 | ||||||||||||||
Net earnings | $ | 124 | $ | $ | $ | 124 | ||||||||||
Other comprehensive income, net of tax | 86 | 86 | ||||||||||||||
Comprehensive income | $ | 210 | $ | $ | $ | 210 | ||||||||||
55
Nine months ended September 30, 2010 | ||||||||||||||||
Adjustments | Adjustments | |||||||||||||||
(in millions) | Historical | for Tender | for Financing | Pro Forma | ||||||||||||
Statement of Operations | ||||||||||||||||
Sales and service revenues | $ | 4,987 | $ | $ | $ | 4,987 | ||||||||||
Cost of sales and service revenues | 4,843 | 4,843 | ||||||||||||||
Operating income | 144 | 144 | ||||||||||||||
Other (expense) income | ||||||||||||||||
Interest expense | (30 | ) | (30 | ) | ||||||||||||
Other, net | — | — | ||||||||||||||
Earnings before income taxes | 114 | 114 | ||||||||||||||
Federal income taxes | 42 | 42 | ||||||||||||||
Net earnings | $ | 72 | $ | $ | $ | 72 | ||||||||||
Other comprehensive income, net of tax | 33 | 33 | ||||||||||||||
Comprehensive income | $ | 105 | $ | $ | $ | 105 | ||||||||||
56
September 30, 2010 | ||||||||||||||||
Adjustments | Adjustments | |||||||||||||||
(in millions) | Historical | for Tender | for Financing | Pro Forma | ||||||||||||
Balance Sheet Data: | ||||||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | — | $ | — | ||||||||||||
Accounts receivable, net | 755 | 755 | ||||||||||||||
Inventoried costs, net | 295 | 295 | ||||||||||||||
Deferred income taxes | 293 | 293 | ||||||||||||||
Prepaid expenses and other current assets | 22 | 22 | ||||||||||||||
Total current assets | 1,365 | 1,365 | ||||||||||||||
Property, plant and equipment, net | 1,929 | 1,929 | ||||||||||||||
Other assets | ||||||||||||||||
Goodwill | 1,134 | 1,134 | ||||||||||||||
Other purchased intangibles, net | 591 | 591 | ||||||||||||||
Pension plan asset | 110 | 110 | ||||||||||||||
Miscellaneous other assets | 56 | $ | (2 | ) [A] | 54 | |||||||||||
Total other assets | 1,891 | (2 | ) | 1,889 | ||||||||||||
Total assets | $ | 5,185 | $ | (2 | ) | $ | 5,183 | |||||||||
Liabilities and equity | ||||||||||||||||
Current liabilities | ||||||||||||||||
Notes payable to parent | $ | 537 | $ | 178 | [A] | $ | 715 | |||||||||
Trade accounts payable | 218 | 218 | ||||||||||||||
Current portion of workers’ compensation liabilities | 256 | 256 | ||||||||||||||
Accrued interest on notes payable to parent | 232 | 232 | ||||||||||||||
Current portion of post-retirement plan liabilities | 175 | 175 | ||||||||||||||
Accrued employees’ compensation | 186 | 186 | ||||||||||||||
Provision for contract losses | 102 | 102 | ||||||||||||||
Advance payments and billings in excess of costs incurred | 80 | 80 | ||||||||||||||
Other current liabilities | 218 | 218 | ||||||||||||||
Total current liabilities | 2,004 | 178 | 2,182 | |||||||||||||
Long-term debt | 283 | (178 | ) [A] | 105 | ||||||||||||
Other post-retirement plan liabilities | 512 | 512 | ||||||||||||||
Pension plan liabilities | 406 | 406 | ||||||||||||||
Workers’ compensation liabilities | 267 | 267 | ||||||||||||||
Deferred tax liabilities | 152 | 152 | ||||||||||||||
Other long-term liabilities | 74 | 74 | ||||||||||||||
Total liabilities | 3,698 | — | 3,698 | |||||||||||||
Common stock (par value $1.00) | — | — | ||||||||||||||
Additional paid in capital | — | |||||||||||||||
Parent’s equity in unit | 1,985 | (2 | ) [A] | 1,983 | ||||||||||||
Accumulated other comprehensive loss | (498 | ) | (498 | ) | ||||||||||||
Total equity | $ | 1,487 | $ | (2 | ) | $ | 1,485 | |||||||||
Total liabilities and equity | $ | 5,185 | $ | (2 | ) | $ | 5,183 | |||||||||
57
[A] | On November 30, 2010, NGSB purchased $178.4 million of the outstanding principal amount of the GO Zone IRBs pursuant to a tender offer in anticipation of the spin-off. NGSB used cash provided by Northrop Grumman through an intercompany loan to purchase the GO Zone IRBs and submitted the purchased bonds to the trustee for cancellation. This intercompany loan has a principal balance of $178.4 million and carries the same 4.55% annual fixed interest rate as the GO Zone IRBs. In addition, $2 million of capitalized debt issuance cost, net of amortization, associated with the tendered principal amount, was expensed in the condensed consolidated statement of operations. The remaining $21.6 million of the GO Zone IRBs mature in 2028 and accrue interest annually at a fixed rate of 4.55% (payable semi-annually). |
58
AND RESULTS OF OPERATIONS
59
60
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
$ in millions | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Sales and service revenues | $ | 4,987 | $ | 4,610 | $ | 6,292 | $ | 6,189 | $ | 5,692 | ||||||||||
Cost of sales and service revenues | 4,370 | 4,018 | 5,442 | 5,489 | 4,604 | |||||||||||||||
Corporate home office and general and administrative expenses | 473 | 446 | 639 | 564 | 641 | |||||||||||||||
Goodwill impairment | — | — | — | 2,490 | — | |||||||||||||||
Operating income (loss) | 144 | 146 | 211 | (2,354 | ) | 447 | ||||||||||||||
Interest expense | 30 | 33 | 36 | 40 | 42 | |||||||||||||||
Other, net | — | — | 1 | — | 6 | |||||||||||||||
Federal income taxes | 42 | 32 | 52 | 26 | 135 | |||||||||||||||
Net earnings (loss) | 72 | 81 | 124 | (2,420 | ) | 276 | ||||||||||||||
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
$ in millions | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Product sales | $ | 4,327 | $ | 3,673 | $ | 5,046 | $ | 5,207 | $ | 4,910 | ||||||||||
Service revenues | 660 | 937 | 1,246 | 982 | 782 | |||||||||||||||
Total sales and service revenues | $ | 4,987 | $ | 4,610 | $ | 6,292 | $ | 6,189 | $ | 5,692 | ||||||||||
61
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
$ in millions | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Cost of product sales | $ | 3,842 | $ | 3,230 | $ | 4,415 | $ | 4,672 | $ | 3,992 | ||||||||||
% of product sales | 88.8 | % | 87.9 | % | 87.5 | % | 89.7 | % | 81.3 | % | ||||||||||
Cost of service revenues | 528 | 788 | 1,027 | 817 | 612 | |||||||||||||||
% of service revenues | 80.0 | % | 84.1 | % | 82.4 | % | 83.2 | % | 78.3 | % | ||||||||||
Corporate home office and general and administrative expenses | 473 | 446 | 639 | 564 | 641 | |||||||||||||||
% of total sales and service revenues | 9.5 | % | 9.7 | % | 10.2 | % | 9.1 | % | 11.3 | % | ||||||||||
Goodwill impairment | — | — | — | 2,490 | — | |||||||||||||||
Cost of sales and service revenues | $ | 4,843 | $ | 4,464 | $ | 6,081 | $ | 8,543 | $ | 5,245 | ||||||||||
62
63
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
$ in millions | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Segment operating income (loss) | $ | 178 | $ | 201 | $ | 284 | $ | (2,328 | ) | $ | 491 | |||||||||
Net pension and post-retirement benefits adjustment | (34 | ) | (66 | ) | (88 | ) | (25 | ) | (46 | ) | ||||||||||
Deferred state income taxes | — | 11 | 15 | (1 | ) | 2 | ||||||||||||||
Total operating income (loss) | $ | 144 | $ | 146 | $ | 211 | $ | (2,354 | ) | $ | 447 | |||||||||
64
65
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
$ in millions | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Sales and Service Revenues | ||||||||||||||||||||
Gulf Coast | $ | 2,300 | $ | 2,123 | $ | 2,865 | $ | 2,848 | $ | 2,681 | ||||||||||
Newport News | 2,748 | 2,563 | 3,534 | 3,427 | 3,044 | |||||||||||||||
Intersegment eliminations | (61 | ) | (76 | ) | (107 | ) | (86 | ) | (33 | ) | ||||||||||
Total sales and service revenues | $ | 4,987 | $ | 4,610 | $ | 6,292 | $ | 6,189 | $ | 5,692 | ||||||||||
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
$ in millions | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Operating Income (Loss) | ||||||||||||||||||||
Gulf Coast | $ | (71 | ) | $ | (18 | ) | $ | (29 | ) | $ | (1,433 | ) | $ | 201 | ||||||
Newport News | 249 | 219 | 313 | (895 | ) | 290 | ||||||||||||||
Total Segment Operating Income (Loss) | 178 | 201 | 284 | (2,328 | ) | 491 | ||||||||||||||
Non-segment factors affecting operating income (loss) | ||||||||||||||||||||
Net pension and post-retirement benefits adjustment | (34 | ) | (66 | ) | (88 | ) | (25 | ) | (46 | ) | ||||||||||
Deferred state income taxes | — | 11 | 15 | (1 | ) | 2 | ||||||||||||||
Total operating income (loss) | $ | 144 | $ | 146 | $ | 211 | $ | (2,354 | ) | $ | 447 | |||||||||
66
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
$ in millions | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Sales and service revenues | $ | 2,300 | $ | 2,123 | $ | 2,865 | $ | 2,848 | $ | 2,681 | ||||||||||
Segment operating (loss) income | (71 | ) | (18 | ) | (29 | ) | (1,433 | ) | 201 | |||||||||||
As a percentage of segment sales | (3.1 | )% | (0.8 | )% | (1.0 | )% | (50.3 | )% | 7.5 | % | ||||||||||
67
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
$ in millions | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Sales and service revenues | $ | 2,748 | $ | 2,563 | $ | 3,534 | $ | 3,427 | $ | 3,044 | ||||||||||
Segment operating income (loss) | 249 | 219 | 313 | (895 | ) | 290 | ||||||||||||||
As a percentage of segment sales | 9.1 | % | 8.5 | % | 8.9 | % | (26.1 | )% | 9.5 | % | ||||||||||
68
September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
$ in millions | Funded | Unfunded | Total | Funded | Unfunded | Total | ||||||||||||||||||
Gulf Coast | $ | 4,095 | $ | 671 | $ | 4,766 | $ | 6,070 | $ | 38 | $ | 6,108 | ||||||||||||
Newport News | 5,807 | 6,539 | 12,346 | 5,141 | 9,116 | 14,257 | ||||||||||||||||||
Total backlog | $ | 9,902 | $ | 7,210 | $ | 17,112 | $ | 11,211 | $ | 9,154 | $ | 20,365 | ||||||||||||
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
$ in millions | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Net earnings (loss) | $ | 72 | $ | 81 | $ | 124 | $ | (2,420 | ) | $ | 276 | |||||||||
Goodwill impairment | — | — | — | 2,490 | — | |||||||||||||||
Gain on AMSEC reorganization | — | — | — | — | (23 | ) | ||||||||||||||
Deferred income taxes | 24 | (65 | ) | (98 | ) | 10 | (6 | ) | ||||||||||||
Other non-cash items (1) | 143 | 136 | 186 | 193 | 170 | |||||||||||||||
Retiree benefit funding less than (in excess of) expense | 79 | (71 | ) | (28 | ) | (28 | ) | 49 | ||||||||||||
Trade working capital (increase) decrease | (167 | ) | (290 | ) | (272 | ) | 94 | 144 | ||||||||||||
Net cash (used in) provided by operating activities | $ | 151 | $ | (209 | ) | $ | (88 | ) | $ | 339 | $ | 610 | ||||||||
(1) | Includes depreciation and amortization. |
69
70
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
$ in millions | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Net cash (used in) provided by operating activities | $ | 151 | $ | (209 | ) | $ | (88 | ) | $ | 339 | $ | 610 | ||||||||
Less capital expenditures | (96 | ) | (120 | ) | (181 | ) | (218 | ) | (246 | ) | ||||||||||
Free cash flow from operations | $ | 55 | $ | (329 | ) | $ | (269 | ) | $ | 121 | $ | 364 | ||||||||
71
72
2011- | 2013- | 2015 and | ||||||||||||||||||
$ in millions | Total | 2010 | 2012 | 2014 | beyond | |||||||||||||||
Notes payable to parent (1) | $ | 537 | $ | 537 | $ | — | $ | — | $ | — | ||||||||||
Accrued interest on notes payable to parent (1) | 212 | 212 | — | — | — | |||||||||||||||
Long-term debt | 283 | — | — | — | 283 | |||||||||||||||
Interest payments on long-term debt | 268 | 16 | 32 | 32 | 188 | |||||||||||||||
Operating leases | 152 | 22 | 37 | 26 | 67 | |||||||||||||||
Purchase obligations (2) | 1,991 | 981 | 691 | 297 | 22 | |||||||||||||||
Other long-term liabilities (3) | 576 | 120 | 285 | 112 | 59 | |||||||||||||||
Total contractual obligations | $ | 4,019 | $ | 1,888 | $ | 1,045 | $ | 467 | $ | 619 | ||||||||||
Pro forma adjustments reflecting separation from parent | ||||||||||||||||||||
Notes payable to parent and accrued interest contributed by Northrop Grumman to the capital of HII | (749 | ) | (749 | ) | — | — | — | |||||||||||||
Portion of long-term debt retired through 2010 tender offer (4) | (178 | ) | — | — | — | (178 | ) | |||||||||||||
Interest payments on long-term debt retired through tender (4) | (148 | ) | (3 | ) | (16 | ) | (16 | ) | (113 | ) | ||||||||||
HII Debt issued in connection with spin-off | — | — | ||||||||||||||||||
Interest payments on HII Debt | ||||||||||||||||||||
Total contractual obligations with pro forma adjustments | $ | $ | $ | $ | $ | |||||||||||||||
(1) | While there is no contractual requirement to repay these amounts in 2010, the notes payable to parent and accrued interest are presented as due in 2010 because such notes are due on demand by our parent. Northrop Grumman will contribute the amount of the notes payable to the capital of HII, including accrued interest, prior to the distribution date. | |
(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 $255 million is the current portion of workers’ compensation liabilities. It excludes obligations for uncertain tax positions of $26 million, as the timing of the payments, if any, cannot be reasonably estimated. | |
(4) | In connection with the 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. In addition, $2 million of capitalized debt issuance costs associated with the tendered principal amount was written off in the condensed consolidated statement of operations. The remaining $21.6 million of GO Zone IRBs mature in 2028 and accrue interest at a fixed rate of 4.55% (paid semi-annually). |
73
• | Revenue recognition | ||
• | Purchase accounting and goodwill | ||
• | Litigation, commitments and contingencies | ||
• | Retirement benefits | ||
• | Workers’ compensation |
74
75
76
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 | 22 | (23 | ) |
77
78
Program | Program | Contract | Funding | |||||
Name | Description | Overview | Overview | |||||
![]() | Carrier New Construction CVN-78Gerald R. Ford-class | • 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 | • Cost plus incentive fee • Exclusive provider • Incentivized capital investment under the planning contract • 8-year design, 7.5-year construction | • New construction contract expected to be awarded approximately every 5 years | ||||
![]() | Carrier RCOH | • Complex overhaul of the ship’s machinery and equipment • Refueling of both of the ship’s reactors • Significant renovation and modernization work | • Cost plus incentive fee • Exclusive provider • 3-year advanced planning • Approximately 3.5-year overhaul execution | • RCOH Execution contracts expected to be awarded approximately every 4 years | ||||
![]() | Submarine New Construction SSN-774Virginia-class and Fleet Support | • 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 forLos Angeles-class andSeawolf-class | • Fixed price incentive • Exclusive provider through joint production arrangement • Incentivized capital investment • Multi-ship buys • 5-year construction | • 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 | ||||
79
Program | ||||
Name | Program Description | |||
![]() | Aircraft Carrier Inactivation | • CVN-65 inactivation expected to begin in 2013 • End-of-life nuclear reactor defueling • Inactivation of ship systems, equipment and machinery • 4-year execution • Contracts forNimitz-class carriers expected to be awarded approximately every 4 years beginning in 2023 | ||
![]() | Ohio-class Replacement Program | • Anticipated to begin in 2019 • 30-Year Plan includes 12 SSBN(X) submarines • NGSB currently acting as subcontractor in design of SSBN(X) | ||
![]() | Energy | • AREVA Newport News: Manufacturing heavy reactor components • DoE: Site management and operations • Newport News Industrial | ||
80
Program | Program | Contract | Funding | ||||||
Name | Description | Overview | Overview | ||||||
![]() | DDG-51Arleigh Burke-class Destroyer | • Most advanced surface combatant in the fleet • 62-Ship Program/ 28 awarded to us | • Fixed price incentive • 4-year construction | • 32 additional DDG-51s/Future Surface Combatants expected for procurement by 2031 • Long lead time and material contract awarded for DDG-113 | |||||
![]() | LPD-17San Antonio-class Amphibious Transport Dock Ship | • Transport and land 700 to 800 Marines, their equipment and supplies • Supports amphibious assault, special operations | • Fixed price incentive • 4.5-year construction | • 5 delivered (LPD 17—21), 4 under construction (LPD 22—25) • Long lead time and material contract awarded for LPD-26 | |||||
81
Program | Program | Contract | Funding | |||||||||
Name | Description | Overview | Overview | |||||||||
![]() | LHA-6America-class Next Generation Amphibious Ship for Joint Operations | • Navy’s largest warfare ship for joint operations • Gas turbines • All electric auxiliaries | • Fixed price incentive • 5-year construction | • LHA-6 under construction • Long lead time and material contract awarded for LHA-7 | ||||||||
![]() | National Security Cutter (Legend Class) | • Largest/most capable of the U.S. Coast Guard’s new multi-mission cutters • Twin-screw propulsion • Two hangars/large flight deck | • Cost plus incentive fee (NSC 1—3) • 3-year construction | • Plan for a total of 8 ships • 2 delivered (NSC-1, 2), 1 under construction (NSC-3) • Long lead time and material contract awarded for NSC-4 | ||||||||
Program | ||||||
Name | Program Description | |||||
![]() | LSD(X) Amphibious Dock Landing Ship | • Expected to begin in 2017 • 30-Year Plan calls for 12 LSD(X) ships (one every other year) • 4-year construction | ||||
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• | Shifting the procurement of nuclear-powered aircraft carriers to five-year procurement centers, which will result in a steady-state aircraft carrier force of 11 CVNs throughout the 30 years; | ||
• | Truncating the DDG-1000Zumwalt-class destroyer program, restarting production of DDG-51Arleigh Burke-class destroyers and continuing the Advanced Missile Defense Radar (“AMDR”) development efforts; | ||
• | Shifting to a single sea frame for the Littoral Combat Ship (“LCS”) and splitting its production between two shipyards in an effort to reduce the ship’s overall cost; | ||
• | Maintaining an adaptable amphibious landing force of approximately 33 ships; | ||
• | Transitioning to a Combat Logistics force composed of just two types of ships and expanding the size of the Joint High Speed Vessel Fleet; | ||
• | Defining U.S. Navy requirements for 48 fast attack submarines and four guided missile submarines to sustain strike capacity and a robust capability to covertly deploy special operations force personnel. Procurement ofVirginia-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). |
• | Exploitation of advantages in subsurface operations; | ||
• | U.S. Air Force and U.S. Navy joint development of air-sea battle concepts to integrate air and naval force capabilities across all operational domains; | ||
• | Increased ballistic missile defense capabilities; | ||
• | Expanded future long-range strike capabilities; | ||
• | Expanded capacity ofVirginia-class fast attack nuclear submarines for long-range strike; and | ||
• | U.S. Navy and U.S. Air Force new joint cruise missile alternatives. |
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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. | ||
• | Phase commitment and “hot wash.”This is a process whereby cost, schedule and work completion goals for each 12-week phase are established prior to commencing work. These commitments are the baseline for performance measurement, providing improved visibility for each phase and monitoring actual versus committed performance on a weekly basis. This additional rigor around completing work in the scheduled phase allows for timely corrective actions within the phase if actual performance deviates from commitments and precludes additional cost associated with out-of-phase work. At the completion of the phase, a formal “hot wash” process occurs that documents actual performance versus commitments and enables adjustments to EACs and future phase plans. These EAC updates ensure timely adjustments are made and effectively reduce or eliminate surprises that traditionally accompany annual reviews of EAC. | ||
• | Performance measurement. Using standardized metrics, performance measurements have been institutionalized across the Gulf Coast to support the Operating System’s rhythm. The metrics include both lagging and leading indicators of performance. Each ship’s 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. | ||
• | Risk/opportunity management. This process links a ship’s total risk and opportunity to phases of construction. Risk mitigation and opportunity plans are developed by phase and monitored to assess progress. The ship’s Program Manager owns the risk/opportunity process, which is administered by a centralized organization that ensures consistency throughout the portfolio. | ||
• | Labor resource plan (“LRP”).The LRP establishes employment requirements by craft or organization over the ship’s 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- |
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wide labor resource plan enables an orderly proactive approach to hiring, overtime plans and movement of manning from ship to ship. | |||
• | 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 program’s EAC. Each ship must address favorable or unfavorable results within the quarter and adjust (if necessary) program plan, EACs, and the program’s financials. |
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Name | Age | Position(s) | ||||
C. Michael Petters | 50 | President and Chief Executive Officer | ||||
Barbara A. Niland | 52 | Vice President and Chief Financial Officer | ||||
Irwin Edenzon | 56 | Vice President and General Manager — Gulf Coast Operations | ||||
Matthew J. Mulherin | 50 | Vice President and General Manager — Newport News Operations | ||||
William R. Ermatinger | 46 | Vice President and Chief Human Resources Officer |
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Name | Age | Position(s) | ||||
Thomas B. Fargo | 62 | Chairman | ||||
C. Michael Petters | 50 | Director |
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• | A director who is an employee, or whose immediate family member (defined as a spouse, parent, child, sibling, father- and mother-in-law, son- and daughter-in-law, brother- and sister-in-law and anyone, other than a domestic employee, sharing the director’s 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. |
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• | A director who is a partner of or employed by, or whose immediate family member is a partner of or employed by and personally works on the company’s 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 company’s present executives serve on the other company’s compensation committee would not be independent until three years after the end of such service or employment relationship. | ||
• | 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 $1 million, or 2% of such other company’s consolidated gross revenues, would not be independent until three years after falling below such threshold. |
Fees Earned or | Stock | |||||||||||
Paid in Cash(1) | Awards(2) | Total | ||||||||||
Name | ($) | ($) | ($) | |||||||||
Thomas B. Fargo(3) | 115,000 | 120,000 | 235,000 |
(1) | In 2009, non-employee directors of Northrop Grumman earned an annual retainer of $220,000, $120,000 of which was required to be deferred into a stock unit account pursuant to the 1993 Stock Plan for Non-Employee Directors, as amended (the “1993 Directors Plan”). In addition, each director was permitted to defer payment of all or a portion of his or her remaining board retainer fee. The deferred compensation is placed in a stock unit account until the conclusion of the director’s board service and all deferral elections must be made prior to the beginning of the year for which the retainer and fees will be paid. Directors are credited with dividend equivalents in connection with the shares of Common Stock which are also paid out upon termination of board service. The other annual retainers were paid in cash as follows: |
Amount | ||||
Type of Retainer | ($) | |||
Audit Committee Retainer | 10,000 | |||
Audit Committee Chair Retainer | 20,000 | |||
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 |
(2) | Represents the target value of stock units awarded to each non-employee director of Northrop Grumman in 2009 under the 1993 Directors Plan. 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) | Mr. Fargo received an additional $5,000 for service on an Ad Hoc Committee of the Board during 2009. |
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Additional | ||||||||||||
Mandatory | Voluntary | |||||||||||
Name | Deferral | Deferral | Total | |||||||||
Thomas B. Fargo | 3,611 | 0 | 3,611 |
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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 Grumman’s values, behaviors, and leadership competencies. | ||
• | 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. | ||
• | 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. | ||
• | 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. | ||
• | 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 were the predominant factor. | ||
• | Successful accomplishment of business goals in both annual operating performance and the achievement of increased stockholder value was designed to produce significant individual rewards, and failure to attain business goals negatively affected the pay of our executives. | ||
• | 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. | ||
• | 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 2009, over 75% of our President’s pay, and over 70% of the other HII NEOs’ pay, was based on compensation at risk. |
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Target Industry Peer Group |
Alcoa, Inc. |
The Boeing Co. |
The Dow Chemical Co. |
E. I. du Pont de Nemours & Co. |
General Dynamics Corp. |
General Electric Co. |
Honeywell International, Inc. |
Johnson & Johnson |
Lockheed Martin Corp. |
Raytheon Co. |
United Technologies Corp. |
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General Industry Peer Group |
3M |
Abbott Laboratories |
The Boeing CO. |
Caterpillar, Inc. |
Chevron Corp. |
Comcast Corp. |
CVS Corp. |
Deere & Co. |
The Dow Chemical Co. |
Emerson Electric Co. |
FedEx Corp. |
General Dynamics Corp. |
General Electric Co. |
General Motors Corp. |
Honeywell International, Inc. |
Humana, Inc. |
IBM Corp. |
International Paper Co. |
Johnson & Johnson |
Johnson Controls, Inc. |
Kraft Foods, Inc. |
Lockheed Martin Corp. |
Lowe’s Companies, Inc. |
Macy’s, Inc. |
Medco Health Solutions, Inc. |
PepsiCo, Inc. |
Philip Morris International |
The Procter & Gamble Co. |
Sears Holding Corp. |
Target Corp. |
Time Warner, Inc. |
United Technologies Corp. |
Valero Energy Corp. |
The Walt Disney Co. |
Wellpoint, Inc. |
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• | the board and the Northrop Grumman Compensation Committee exercise close oversight over the performance measures utilized by the annual and long-term incentive plans, both of which serve to drive long-term performance and enhance stockholder value; | ||
• | 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 Grumman’s compensation programs such as holding-period requirements and stock ownership guidelines, 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. |
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Element of | If Variable, | Cash or | ||||
Compensation | Objectives | Performance Measured | Equity | |||
Salaries | • targeted at a competitive market median on a job-by-job basis • adjusted above or below median based on executive’s experience, skills and sustained performance • served to recruit and retain the talent necessary to run our businesses | Not variable | Cash | |||
Annual Incentive | • designed to motivate executives to attain vital short-term goals • intended to provide a | Variable, based on sector financial performance for all executives other than our President, which is based on Northrop Grumman financial performance, and adjusted for individual performance 2009 financial performance criteria were: | Cash | |||
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 | • new business awards • sales • pension-adjusted operating margin • free cash flow before discretionary pension funding | |||||
Long-Term Incentives | • for 2009, long-term incentives granted to our President in the form of Northrop Grumman stock options (60%) and Northrop Grumman Restricted Performance Stock Rights (40%); to two other HII NEOs who were general managers in the form of Northrop Grumman stock options (10%) and Northrop Grumman Restricted Performance Stock Rights (90%), and two HII NEOs in the form of Northrop Grumman Restricted Performance Stock Rights (100%) | See below | 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 Grumman’s sustained growth and prosperity | Variable, based on: • pension-adjusted operating margin • pension-adjusted return on net assets • Northrop Grumman stock price | Equity | |||
Other Benefits | • supplemental retirement, savings, medical, severance and change-in-control plans consistent with industry practice | Not variable | Cash |
Target | Payout Range | |||||||||
Name | Title | Payout% | % of Salary | |||||||
C. Michael Petters | President and Chief Executive Officer | 75 | % | 0% - 150 | % | |||||
Barbara A. Niland | Vice President and Chief Financial Officer | 40 | % | 0% - 80 | % | |||||
Irwin Edenzon | Vice President and General Manager – Gulf Coast Operations | 45 | % | 0% - 90 | % | |||||
Matthew Mulherin | Vice President and General Manager – Newport News Operations | 45 | % | 0% - 90 | % | |||||
William R. Ermatinger | Vice President and Chief Human Resources Officer | 40 | % | 0% - 80 | % |
• | Financial performance | ||
• | Strategic leadership and vision | ||
• | Program execution/performance | ||
• | Collaboration and integration across businesses | ||
• | Customer relationships |
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• | Operating (supplemental) objectives |
Threshold | Target | Maximum | 2009 Actual | |||||||||||||||||
Metric/Goal | Weighting | Performance | Performance | Performance | Performance | |||||||||||||||
New Awards Resulting in Increased Backlog | 15 | % | $ | 26.0 | $ | 29.0 | $ | 32.0 | $ | 33.99 | ||||||||||
Sales | 15 | % | $ | 33.5 | $ | 34.5 | $ | 35.5 | $ | 35.2 | ||||||||||
Pension-Adjusted Operating Margin* | 35 | % | $ | 2.68 | $ | 2.93 | $ | 3.195 | $ | 2.98 | ||||||||||
Free Cash Flow Before Discretionary Pension Funding | 35 | % | $ | 1.575 | $ | 2.075 | $ | 2.575 | $ | 2.38 |
* | This goal was based on achieving specific operating margin dollar amounts (adjusted for net FAS/CAS pension expense). |
Threshold | Target | 2009 Actual | ||||||||||||||
Metric/Goal | Weighting | Performance | Performance | Performance | ||||||||||||
New Awards Resulting in Increased Backlog | 15 | % | $ | 2,716 | $ | 3,016 | $ | 4,976 | ||||||||
Sales | 15 | % | $ | 5,687 | $ | 5,862 | $ | 6,213 | ||||||||
Operating Margin* | 35 | % | $ | 447 | $ | 472 | $ | 299 | ||||||||
Free Cash Flow | 35 | % | $ | 281 | $ | 321 | $ | 1 |
* | This goal was based on achieving specific operating margin dollar amounts. |
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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 | 93 | % | |||
Irwin Edenzon | Vice President and General Manager — Gulf Coast Operations | 115 | % | |||
Matthew Mulherin | Vice President and General Manager — Newport News Operations | 115 | % | |||
William R. Ermatinger | Vice President and Chief Human Resources Officer | 78 | % |
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• | Each elected officer’s 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 elected officer pension benefits is provided in the Pension Benefits Table. |
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• | Lump sum cash payment = 11/2 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 |
• | 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 | ||
• | Auto Allowance for one year in the amount of $13,000 |
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• | HII President: 3 x base salary | ||
• | Other HII NEOs: 11/2 x base salary |
• | Stock owned outright by an officer | ||
• | Restricted Stock Rights, whether or not vested | ||
• | Value of equivalent shares held in the Northrop Grumman Savings Plan or Northrop Grumman Financial Security and Savings Program |
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Change in | ||||||||||||||||||||||||||||||||||||
Pension Value | ||||||||||||||||||||||||||||||||||||
and Non- | ||||||||||||||||||||||||||||||||||||
Non-Equity | Qualified | |||||||||||||||||||||||||||||||||||
Option | Incentive Plan | Deferred | All Other | |||||||||||||||||||||||||||||||||
Salary | Stock | Awards | Compensation | Compensation | Compensation | |||||||||||||||||||||||||||||||
(1) | Bonus | Awards | (2) | (3) | Earnings (4) | (5) | Total | |||||||||||||||||||||||||||||
Name & Principal Position | Year | ($) | ($) | (2) ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
C. Michael Petters | 2009 | 572,788 | 0 | 1,490,069 | 861,877 | 350,000 | 593,065 | 76,789 | 3,944,588 | |||||||||||||||||||||||||||
President and Chief | 2008 | 566,827 | 0 | 2,169,476 | 946,494 | 603,750 | 490,672 | 73,803 | 4,851,002 | |||||||||||||||||||||||||||
Executive Officer | 2007 | 482,308 | 0 | 1,125,171 | 584,380 | 660,000 | 439,476 | 57,529 | 3,348,864 | |||||||||||||||||||||||||||
Barbara A. Niland | 2009 | 312,115 | 0 | 920,387 | 0 | 110,000 | 545,320 | 69,391 | 1,957,213 | |||||||||||||||||||||||||||
Vice President and Chief | 2008 | 297,019 | 0 | 552,348 | 0 | 174,300 | 376,568 | 76,442 | 1,476,677 | |||||||||||||||||||||||||||
Financial Officer | 2007 | 258,243 | 0 | 328,175 | 0 | 192,100 | 317,377 | 76,337 | 1,172,232 | |||||||||||||||||||||||||||
Irwin F. Edenzon | 2009 | 347,115 | 0 | 1,051,902 | 59,061 | 140,000 | 340,778 | 60,144 | 1,999,000 | |||||||||||||||||||||||||||
Vice President and General | 2008 | 322,231 | 0 | 512,947 | 0 | 199,200 | 266,050 | 101,649 | 1,402,077 | |||||||||||||||||||||||||||
Manager — Gulf Coast Operations | 2007 | 243,602 | 0 | 312,548 | 0 | 176,500 | 138,884 | 76,046 | 947,580 | |||||||||||||||||||||||||||
Matthew J. Mulherin | 2009 | 347,115 | 0 | 1,051,902 | 59,061 | 140,000 | 273,103 | 73,885 | 1,945,066 | |||||||||||||||||||||||||||
Vice President and | 2008 | 328,040 | 0 | 552,348 | 0 | 199,200 | 216,647 | 75,601 | 1,371,836 | |||||||||||||||||||||||||||
General Manager — Newport News Operations | 2007 | 273,413 | 0 | 437,567 | 0 | 219,500 | 197,672 | 73,094 | 1,201,246 | |||||||||||||||||||||||||||
William R. Ermatinger | 2009 | 267,471 | 0 | 670,603 | 0 | 90,000 | 309,530 | 75,247 | 1,412,851 | |||||||||||||||||||||||||||
Vice President and Chief | 2008 | 257,500 | 0 | 328,452 | 0 | 124,500 | 256,685 | 75,263 | 1,042,400 | |||||||||||||||||||||||||||
Human Resources Officer | 2007 | 220,833 | 0 | 250,038 | 0 | 158,800 | 193,120 | 74,974 | 897,765 |
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. The maximum grant date value of 2009 stock awards for each NEO is listed below: |
• | C. Michael Petters | $ | 1,862,586 | |||||
• | Barbara A. Niland | $ | 1,150,484 | |||||
• | Irwin F. Edenzon | $ | 1,314,878 | |||||
• | Matthew J. Mulherin | $ | 1,314,878 | |||||
• | William R. Ermatinger | $ | 838,254 |
(3) | The amounts in this column include amounts deferred under the savings and nonqualified deferred compensation plans. These amounts were paid under Northrop Grumman’s annual bonus plan during 2010, 2009 and 2008 based on performance achieved during the prior year, as described in the Compensation Discussion and Analysis. | |
(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 executive’s pension plan benefits (see the description of these plans under the Pension Benefits table). | |
(5) | The 2009 amount listed in this column for Mr. Petters includes medical, dental, life and disability premiums ($45,086), company contributions to Northrop Grumman defined contribution plans ($9,800), financial planning/income tax preparation ($10,075), personal liability insurance ($541) and personal and dependent travel including company aircraft ($11,287). Mr. Petters did not receive a car allowance. | |
The 2009 amount listed in this column for Ms.��Niland include medical, dental, life and disability premiums ($30,125), executive perquisite and car allowance ($20,000), company contributions to Northrop Grumman defined contribution plans ($18,451), personal liability insurance ($500) and financial planning/income tax preparation ($315). |
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The 2009 amount listed in this column for Mr. Edenzon includes medical, dental, life and disability premiums ($30,491), executive perquisite and car allowance ($20,000), company contributions to Northrop Grumman defined contribution plans ($8,940), personal liability insurance ($500) and personal and dependent travel including company aircraft ($2,396) and tax gross-up on dependent travel first quarter of 2009 ($213). | ||
The 2009 amount listed in this column for Mr. Mulherin includes medical, dental, life and disability premiums ($39,585), executive perquisite and car allowance ($20,000), company contributions to Northrop Grumman defined contribution plans ($9,800), financial planning/income tax preparation ($4,000) and personal liability insurance ($500). | ||
The 2009 amount listed in this column for Mr. Ermatinger includes medical, dental, life and disability premiums ($38,638), executive perquisite and car allowance ($20,000), company contributions to Northrop Grumman defined contribution plans ($15,679), financial planning/income tax preparation ($430) and personal liability insurance ($500). | ||
Method for Calculating Perquisite Value | ||
The following method was used to calculate the value of personal use of Northrop Grumman aircraft described in the paragraphs above. Northrop Grumman calculates the incremental cost of each element, which includes trip-related crew hotels and meals, in-flight food and beverages, landing and ground handling fees, hourly maintenance contract costs, hangar or aircraft parking costs, fuel costs based on the average annual cost of fuel per mile flown, and other smaller variable costs. Fixed costs that would be incurred in any event to operate Northrop Grumman aircraft (e.g., aircraft purchase costs, maintenance not related to personal trips, and flight crew salaries) are not included. The amount related to the loss of tax deduction to Northrop Grumman on account of personal use of corporate aircraft under the Internal Revenue Code is not included. |
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All | ||||||||||||||||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||||||||||||
Stock | All Other | |||||||||||||||||||||||||||||||||||||||||||||
Awards: | Option | Grant | ||||||||||||||||||||||||||||||||||||||||||||
Number | Awards: | Date Fair | ||||||||||||||||||||||||||||||||||||||||||||
Estimated Future Payouts Under | of | Number of | Exercise or | value of | ||||||||||||||||||||||||||||||||||||||||||
Non-Equity Incentive Plan Awards | Estimated Future Payouts Under | Shares | Securities | Base Price | Stock and | |||||||||||||||||||||||||||||||||||||||||
Name & | (1) | Equity Incentive Plan Awards (2) | of Stock | Underlying | of Option | Option | ||||||||||||||||||||||||||||||||||||||||
Principal | Grant | Grant | Threshold | Target | Maximum | Threshold | Target | Maximum | or Units | Options (3) | Awards | Awards | ||||||||||||||||||||||||||||||||||
Position | Type | Date | ($) | ($) | ($) | ($) | ($) | ($) | (#) | (#) | ($/Sh) | (4) | ||||||||||||||||||||||||||||||||||
C. Michael | Incentive | 0 | 431,250 | 862,500 | ||||||||||||||||||||||||||||||||||||||||||
Petters | Plan | |||||||||||||||||||||||||||||||||||||||||||||
President | RPSR | 2/17/09 | 0 | 20,700 | 41,400 | 1,490,069 | ||||||||||||||||||||||||||||||||||||||||
and Chief | Options | 2/17/09 | 119,050 | 44.99 | 861,877 | |||||||||||||||||||||||||||||||||||||||||
Executive | ||||||||||||||||||||||||||||||||||||||||||||||
Officer | ||||||||||||||||||||||||||||||||||||||||||||||
Barbara A. | Incentive | 0 | 130,000 | 260,000 | ||||||||||||||||||||||||||||||||||||||||||
Niland | Plan | 2/17/09 | 0 | 12,786 | 25,572 | 920,387 | ||||||||||||||||||||||||||||||||||||||||
Vice | RPSR | |||||||||||||||||||||||||||||||||||||||||||||
President | ||||||||||||||||||||||||||||||||||||||||||||||
and Chief | ||||||||||||||||||||||||||||||||||||||||||||||
Financial | ||||||||||||||||||||||||||||||||||||||||||||||
Officer | ||||||||||||||||||||||||||||||||||||||||||||||
Irwin F. | Incentive | 0 | 162,000 | 324,000 | ||||||||||||||||||||||||||||||||||||||||||
Edenzon | Plan | |||||||||||||||||||||||||||||||||||||||||||||
Vice | RPSR | 2/17/09 | 0 | 14,613 | 29,226 | 1,051,902 | ||||||||||||||||||||||||||||||||||||||||
President | Options | 2/17/09 | 7,469 | 44.99 | 59,061 | |||||||||||||||||||||||||||||||||||||||||
and General | ||||||||||||||||||||||||||||||||||||||||||||||
Manager — | ||||||||||||||||||||||||||||||||||||||||||||||
Gulf | ||||||||||||||||||||||||||||||||||||||||||||||
Coast | ||||||||||||||||||||||||||||||||||||||||||||||
Operations | ||||||||||||||||||||||||||||||||||||||||||||||
Matthew J. | Incentive | 0 | 162,000 | 324,000 | ||||||||||||||||||||||||||||||||||||||||||
Mulherin | Plan | |||||||||||||||||||||||||||||||||||||||||||||
Vice | RPSR | 2/17/09 | 0 | 14,613 | 29,226 | 1,051,902 | ||||||||||||||||||||||||||||||||||||||||
President | Options | 2/17/09 | 7,469 | 44.99 | 59,061 | |||||||||||||||||||||||||||||||||||||||||
and General | ||||||||||||||||||||||||||||||||||||||||||||||
Manager — | ||||||||||||||||||||||||||||||||||||||||||||||
Newport News | ||||||||||||||||||||||||||||||||||||||||||||||
Operations | ||||||||||||||||||||||||||||||||||||||||||||||
William R. | Incentive | 0 | 111,700 | 223,400 | ||||||||||||||||||||||||||||||||||||||||||
Ermatinger | Plan | |||||||||||||||||||||||||||||||||||||||||||||
Vice | RPSR | 2/17/09 | 0 | 9,316 | 18,632 | 670,603 | ||||||||||||||||||||||||||||||||||||||||
President | ||||||||||||||||||||||||||||||||||||||||||||||
And Chief | ||||||||||||||||||||||||||||||||||||||||||||||
Human | ||||||||||||||||||||||||||||||||||||||||||||||
Resources | ||||||||||||||||||||||||||||||||||||||||||||||
Officer |
Footnotes: | ||
(1) | Amounts in these columns show the range of payouts that was possible under Northrop Grumman’s annual bonus plan based on performance during 2009, as described in the Compensation Discussion and Analysis. The actual bonus amounts that were paid in 2010 based on 2009 performance are shown in the Summary Compensation Table above in the column titled “Non-Equity Incentive Plan Compensation.” | |
(2) | These amounts relate to RPSRs granted in 2009 under the 2001 Long-Term Incentive Stock Plan. Each RPSR represents the right to receive a share of Northrop Grumman’s common stock upon vesting of the RPSR. The RPSRs may be earned based on Northrop Grumman’s Operating Margin (“OM”) and RONA performance over a three-year performance period commencing January 1, 2009 and ending December 31, 2011. The payout will occur in early 2012 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 |
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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 2009 under the 2001 Long-Term Incentive Stock Plan. The exercise price for the options equals the closing price of Northrop Grumman’s 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 17 of Northrop Grumman’s 2009 Form 10-K for the fiscal year ended December 31, 2009, adjusted to exclude forfeitures. |
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||||||
Equity | Incentive Plan | |||||||||||||||||||||||||||||||||||||||
Equity | Incentive | Awards: | ||||||||||||||||||||||||||||||||||||||
Incentive Plan | Plan Awards: | Market or | ||||||||||||||||||||||||||||||||||||||
Awards: | Market | Number of | Payout Value | |||||||||||||||||||||||||||||||||||||
Number of | Number of | Number of | Number of | Value of | Unearned | of Unearned | ||||||||||||||||||||||||||||||||||
Securities | Securities | Securities | Shares or | Shares or | Shares, Units, | Shares, Units, | ||||||||||||||||||||||||||||||||||
Underlying | Underlying | Underlying | Units of | Units of | or Other | or Other | ||||||||||||||||||||||||||||||||||
Unexercised | Unexercised | Unexercised | Option | Stock that | Stock that | Rights that | Rights that | |||||||||||||||||||||||||||||||||
Options | Options | Unearned | Exercise | Option | Have Not | Have Not | Have Not | Have Not | ||||||||||||||||||||||||||||||||
Name & Principal | (#) | (#) | Options | Grant | Price | Expiration | Vested | Vested | Vested (2) | Vested (3) | ||||||||||||||||||||||||||||||
Position | Exercisable (1) | Unexercisable (1) | (#) | Date | ($) | Date | (#) | ($) | (#) | ($) | ||||||||||||||||||||||||||||||
C. Michael Petters | 0 | 119,050 | 0 | 2/17/09 | 44.99 | 2/17/16 | 0 | 0 | 20,700 | 1,156,095 | ||||||||||||||||||||||||||||||
President and Chief | 19,850 | 39,700 | 0 | 2/27/08 | 80.82 | 2/27/15 | 0 | 0 | 13,000 | 726,050 | ||||||||||||||||||||||||||||||
Executive Officer | 18,000 | 18,000 | 0 | 2/28/07 | 71.85 | 2/28/17 | 0 | 0 | 18,000 | 1,090,620 | ||||||||||||||||||||||||||||||
30,000 | 10,000 | 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 | 2/17/09 | 0 | 0 | 12,786 | 714,098 | ||||||||||||||||||||||||||||||||
Vice President and | 0 | 0 | 0 | 2/27/08 | 0 | 0 | 6,213 | 346,996 | ||||||||||||||||||||||||||||||||
Chief Financial Officer | 0 | 0 | 0 | 2/28/07 | 0 | 0 | 5,250 | 318,098 | ||||||||||||||||||||||||||||||||
Irwin F. Edenzon | 0 | 7,469 | 0 | 2/17/09 | 44.99 | 2/17/16 | 0 | 0 | 14,613 | 816,136 | ||||||||||||||||||||||||||||||
Vice President and General Manager — | 0 | 0 | 0 | 2/27/08 | 0 | 0 | 5,107 | 285,226 | ||||||||||||||||||||||||||||||||
Gulf Coast | 0 | 0 | 0 | 3/20/08 | 0 | 0 | 683 | 38,146 | ||||||||||||||||||||||||||||||||
Operations | 0 | 0 | 0 | 2/28/07 | 0 | 0 | 5,000 | 302,950 | ||||||||||||||||||||||||||||||||
Matthew J. Mulherin | 0 | 7,469 | 0 | 2/17/09 | 44.99 | 2/17/16 | 0 | 0 | 14,613 | 816,136 | ||||||||||||||||||||||||||||||
Vice President and | 0 | 0 | 0 | 2/27/08 | 0 | 0 | 6,213 | 346,996 | ||||||||||||||||||||||||||||||||
General Manager — | 0 | 0 | 0 | 2/28/07 | 0 | 0 | 7,000 | 424,130 | ||||||||||||||||||||||||||||||||
Newport News | 8,000 | 0 | 0 | 6/14/04 | 52.49 | 6/14/14 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
Operations | 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 | 2/17/09 | 0 | 0 | 9,316 | 520,299 | ||||||||||||||||||||||||||||||||
Vice President and | 0 | 0 | 0 | 3/20/08 | 0 | 0 | 455 | 25,412 | ||||||||||||||||||||||||||||||||
Chief Human | 0 | 0 | 0 | 2/27/08 | 0 | 0 | 3,253 | 181,680 | ||||||||||||||||||||||||||||||||
Resources Officer | 0 | 0 | 0 | 2/28/07 | 0 | 0 | 4,000 | 242,360 |
Footnotes: | ||
(1) | Options awarded in 2009 and 2008 vest at a rate of 33 1/3% per year on the grant’s 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 grant’s anniversary date over the first four years of the ten-year option term. | |
(2) | These are target numbers for RPSRs. The first RPSR for each NEO vests based on performance for the three-year cycle ending on December 31, 2011, the second (and third for Mr. Edenzon and Mr. Ermatinger), based on performance for the three-year cycle ending on December 31, 2010 and the last, based on performance for three-year cycle ending on December 31, 2009. |
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(3) | Based on closing price of Northrop Grumman’s stock on December 31, 2009 of $55.85 for target RPSRs plus unvested dividend equivalents on target RPSRs at such time (except that there are no dividend equivalents included for the performance periods ending December 31, 2010 and December 31, 2011). Northrop Grumman pays dividend equivalents on RPSRs that ultimately vest for the performance period ending December 31, 2009 based on actual dividends declared while the award is outstanding. The per-share dividend equivalent amounts based on dividends declared from the grant of an RPSR until the end of 2009 equal $4.74 for performance cycle ending December 31, 2009. |
Option Awards | Stock Awards | |||||||||||||||
Number of | ||||||||||||||||
Number of Shares | Shares | |||||||||||||||
Acquired on | Value Realized on | Acquired on | Value Realized on | |||||||||||||
Exercise | Exercise | Vesting (*) | Vesting | |||||||||||||
Name & Principal Position | (#) | ($) | (#) | ($) | ||||||||||||
C. Michael Petters President and Chief Executive Officer | 0 | 0 | 17,600 | 791,824 | ||||||||||||
Barbara A. Niland Vice President and Chief Financial Officer | 0 | 0 | 4,400 | 197,956 | ||||||||||||
Irwin F. Edenzon Vice President and General Manager — Gulf Coast Operations | 0 | 0 | 3,520 | 158,365 | ||||||||||||
Matthew J. Mulherin Vice President and General Manager — Newport News Organization | 0 | 0 | 5,720 | 257,343 | ||||||||||||
William R. Ermatinger Vice President and Chief Human Resources Officer | 0 | 0 | 3,036 | 136,590 |
Footnote: | ||
(*) | All shares in this column are RPSRs. |
Payments | ||||||||||||||
Number of | During | |||||||||||||
Years | Present Value | Last | ||||||||||||
Credited | of Accumulated | Fiscal | ||||||||||||
Service | Benefit (*) | Year | ||||||||||||
Name & Principal Position | Plan Name | (#) | ($) | ($) | ||||||||||
C. Michael Petters | CPC SERP | 5.17 | ** | 1,328,369 | 0 | |||||||||
President and Chief Executive Officer | NNS Restoration | 21.50 | 1,871,122 | 0 | ||||||||||
NNS Salaried Pension Plan | 21.50 | 426,153 | 0 | |||||||||||
Barbara A. Niland | OSERP | 31.00 | 1,608,056 | 0 | ||||||||||
Vice President and Chief Financial Officer | ERISA 2 | 6.50 | 239,594 | 0 | ||||||||||
ES Executive Pension Plan | 31.00 | 769,255 | 0 | |||||||||||
Northrop Grumman Pension Plan | 31.00 | 510,898 | 0 | |||||||||||
Irwin F. Edenzon | OSERP | 20.00 | 978,229 | 0 | ||||||||||
Vice President and General Manager | NNS Restoration | 12.17 | 351,210 | 0 | ||||||||||
— Gulf Coast Operations | NNS Salaried Pension Plan | 12.17 | 370,992 | 0 | ||||||||||
Matthew J. Mulherin | OSERP | 29.00 | 704,697 | 0 | ||||||||||
Vice President and General Manager | NNS Restoration | 27.50 | 760,464 | 0 | ||||||||||
— Newport News Operations | NNS Salaried Pension Plan | 27.50 | 472,804 | 0 | ||||||||||
William R. Ermatinger | OSERP | 22.58 | 772,555 | 0 | ||||||||||
Vice President and Chief | ERISA 2 | 6.50 | 87,505 | 0 | ||||||||||
Human Resources Officer | ES Executive Pension Plan | 22.55 | 248,885 | 0 | ||||||||||
Northrop Grumman Pension Plan | 22.55 | 293,505 | 0 |
Footnote: | ||
(*) | While benefits may be spread over different plans, it is Northrop Grumman’s policy that an executive’s total benefit under these plans is essentially limited to 60% of such executive’s 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. |
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• | an additional year of service from December 31, 2008 to December 31, 2009; | ||
• | changes in eligible pension pay; | ||
• | changes in applicable pay cap limits; and | ||
• | changes in actuarial assumptions. |
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Part B (5-Year Transition Benefit) Benefit based on a formula similar to the one under the historical plan formula during the transition period | ||||||||
Part A Benefit under the historical plan formula before the transition period | or + (if greater) + | Part D Benefit under the cash balance formula after the transition period | = | Pension Benefit | ||||
Part C (5-Year Transition Benefit) Benefit under the cash balance formula during the transition period |
• | Formulas Under Historical Plans: |
• | Northrop Grumman Electronic Systems Pension Plan (“NG ESPP”).The NG ESPP is a sub-plan of the NGPP and provides a benefit equal to 2% multiplied by the sum of all years of pensionable compensation (as limited by Code section 401(a)(17)) from January 1, 1995 plus a frozen benefit accrued under the prior Westinghouse Pension Plan, if any. 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. |
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Credit Amount | ||||||||
Points | Eligible Pay in Excess of Social Security | |||||||
(attained age and total service) | All Eligible Pay | Wage Base | ||||||
Under 25 | 6.0 | % | 6.0 | % | ||||
25 to 34 | 6.5 | % | 6.0 | % | ||||
35 to 44 | 7.0 | % | 6.0 | % | ||||
45 to 54 | 7.5 | % | 6.0 | % | ||||
55 to 64 | 8.0 | % | 6.0 | % | ||||
65 to 74 | 8.5 | % | 6.0 | % | ||||
75 to 84 | 9.0 | % | 6.0 | % | ||||
Over 84 | 9.5 | % | 6.0 | % |
Credit Amount | ||||||||
Points | Eligible Pay in Excess of Social Security | |||||||
(attained age and total service) | All Eligible Pay | Wage Base | ||||||
Under 25 | 3.5 | % | 4.0 | % | ||||
25 to 34 | 4.0 | % | 4.0 | % | ||||
35 to 44 | 4.5 | % | 4.0 | % | ||||
45 to 54 | 5.0 | % | 4.0 | % | ||||
55 to 64 | 5.5 | % | 4.0 | % | ||||
65 to 74 | 6.5 | % | 4.0 | % | ||||
75 to 84 | 7.5 | % | 4.0 | % | ||||
Over 84 | 9.0 | % | 4.0 | % |
• | Vesting.As of December 31, 2009, each NEO has a nonforfeitable right to receive retirement benefits, which are payable upon early (if eligible) or normal retirement, as elected by the NEO. | ||
• | Form of Benefit.The standard form of benefit is an annuity payable for the life of the participant. At normal retirement the annuity for the cash balance formula is equal to the accumulated account balance divided by 9. Other annuity options may be elected; however, each of them is actuarially equivalent in value to the standard form. The NG ESPP also allows a lump-sum form of distribution to be elected on a portion of the historical (Part A) benefit. | ||
• | Pay.Pay for purposes of the cash balance and the NG ESPP formulas is basically salary plus the annual cash bonus. Final average pay for the NNS Plan is determined using base salary only. | ||
• | Normal Retirement.Normal retirement means the benefit is not reduced for early commencement. It is generally specified in each formula: age 65 for the historical NG ESPP and NNS Plan formula and the later of age 65 and three years of vesting service for the cash balance formula. | ||
• | Early Retirement.Early retirement eligibility for the historical NNS Plan and for the cash balance formulas occurs when the participant attains both age 55 and completes 10 years of service. Early retirement for the NG ESPP can occur when the participant attains either age 58 and completes 30 years of service or attains age 60 and completes 10 years of service. Alternatively, an NG ESPP participant may elect to commence an actuarially reduced vested benefit at any time following termination. Early retirement benefits under both the historical and cash balance formulas may be reduced for commencement prior to normal retirement. This is to reflect the longer period of time over which the benefit will be paid. | ||
• | All NEOs have completed 10 or more years of service; hence, they are eligible for early retirement under the NNS Plan upon attainment of the early retirement age requirement. Early retirement benefits for each NEO cannot commence prior to termination of employment. |
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123
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2009 Nonqualified Deferred Compensation | ||||||||||||||||||||||||
Executive | Registrant | Aggregate | Aggregate | Aggregate | ||||||||||||||||||||
Contributions | Contributions | Earnings in | Withdrawals/ | Balance at | ||||||||||||||||||||
in Last FY (1) | in Last FY (2) | Last FY (3) | Distributions | Last FYE (4) | ||||||||||||||||||||
Name & Principal Position | Plan Name | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||
C. Michael Petters | Deferred | 0 | 0 | 390,087 | 0 | 2,289,621 | ||||||||||||||||||
President and Chief | Compensation | |||||||||||||||||||||||
Executive Officer | Savings Excess | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Barbara A. Niland | Deferred | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Vice President and Chief | Compensation | |||||||||||||||||||||||
Financial Officer | Savings Excess | 60,354 | 9,752 | 7,104 | 0 | 244,128 | ||||||||||||||||||
Irwin F. Edenzon | Deferred | 0 | 0 | 59,958 | 0 | 164,169 | ||||||||||||||||||
Vice President and General Manager — Gulf Coast | Compensation Savings Excess | |||||||||||||||||||||||
Operations | 0 | 0 | 19,171 | 0 | 100,096 | |||||||||||||||||||
Matthew J. Mulherin | Deferred | 100,390 | 0 | 387,212 | 0 | 1,320,098 | ||||||||||||||||||
Vice President and General Manager — Newport News | Compensation Savings Excess | 0 | 0 | 1,188 | 0 | 4,024 | ||||||||||||||||||
Operations | ||||||||||||||||||||||||
William R. Ermatinger | Deferred | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Vice President and Chief Human Resources Officer | Compensation Savings Excess | 20,576 | 5,879 | 15,536 | 0 | 95,147 |
(1) | Executive contributions in this column also are included in the salary and non-equity incentive plan columns of the 2009 Summary Compensation Table. | |
(2) | Northrop Grumman contributions in this column are included under the All Other Compensation column in the 2009 Summary Compensation Table. | |
(3) | Aggregate earnings in the last fiscal year are not included in the 2009 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. |
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Feature | Savings Excess Plan | Deferred Compensation Plan | ||
Compensation Eligible for Deferral | 1% to 75% of salary and ICP bonus above IRS limits | Up to 90% of salary and/or ICP bonus | ||
Company Allocation | Up to 4%, based on a contribution rate of 8% • First 2% is matched at 100% • Next 2% is matched at 50% • Next 4% is matched at 25% | None | ||
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 |
• | 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) |
126
• | 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 NEO’s business unit, election to terminate in lieu of accepting a relocation, or | ||
• | if the NEO’s position is affected by a divestiture, the NEO is not offered salary or bonus at a certain level. |
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C. Michael Petters
President and Chief Executive Officer
Post-CIC | ||||||||||||||||
Involuntary | Involuntary or Good | |||||||||||||||
Voluntary | Termination | Reason | Death or Disability | |||||||||||||
Executive Benefits | Termination | Not For Cause (2) | Termination | (3) | ||||||||||||
Salary | $ | 0 | $ | 862,500 | $ | 1,725,000 | $ | 0 | ||||||||
Short-term Incentives | $ | 0 | $ | 646,875 | $ | 1,293,750 | $ | 0 | ||||||||
Long-term Incentives (1) | $ | 0 | $ | 0 | $ | 2,860,406 | $ | 1,998,484 | ||||||||
Benefits and Perquisites | ||||||||||||||||
Incremental Pension | $ | 0 | $ | 0 | $ | 791,164 | $ | 0 | ||||||||
Retiree Medical and Life Insurance | $ | 397,506 | $ | 397,506 | $ | 397,506 | $ | 397,506 | ||||||||
Medical/Dental Continuation | $ | 0 | $ | 50,058 | $ | 100,116 | $ | 0 | ||||||||
Life Insurance Coverage | $ | 0 | $ | 0 | $ | 18,009 | $ | 0 | ||||||||
Financial Planning/Income Tax | $ | 0 | $ | 15,000 | $ | 0 | $ | 0 | ||||||||
Outplacement Services | $ | 0 | $ | 86,250 | $ | 86,250 | $ | 0 | ||||||||
280G Tax Gross-up | $ | 0 | $ | 0 | $ | 1,827,711 | $ | 0 |
(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. |
Barbara A. Niland
Vice President and Chief Financial Officer
Post-CIC | ||||||||||||||||
Involuntary | Involuntary or Good | |||||||||||||||
Executive | Voluntary | Termination | Reason | |||||||||||||
Benefits | Termination | Not For Cause (2) | Termination | Death or Disability | ||||||||||||
Salary | $ | 0 | $ | 325,000 | $ | 0 | $ | 0 | ||||||||
Short-term Incentives | $ | 0 | $ | 130,000 | $ | 0 | $ | 0 | ||||||||
Long-term Incentives (1) | $ | 0 | $ | 0 | $ | 469,363 | $ | 469,363 | ||||||||
Benefits and Perquisites | ||||||||||||||||
Incremental Pension | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Retiree Medical and Life Insurance | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Medical/Dental Continuation | $ | 0 | $ | 24,277 | $ | 0 | $ | 0 | ||||||||
Life Insurance Coverage | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Car Allowance | $ | 0 | $ | 13,000 | $ | 0 | $ | 0 | ||||||||
Financial Planning/Income Tax | $ | 0 | $ | 5,000 | $ | 0 | $ | 0 | ||||||||
Outplacement Services | $ | 0 | $ | 48,750 | $ | 0 | $ | 0 | ||||||||
280G Tax Gross-up | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
(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. |
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Irwin F. Edenzon
Vice President and General Manager — Gulf Coast Operations
Post-CIC | ||||||||||||||||
Involuntary | Involuntary or Good | |||||||||||||||
Executive | Voluntary | Termination | Reason | |||||||||||||
Benefits | Termination | Not For Cause (2) | Termination | Death or Disability | ||||||||||||
Salary | $ | 0 | $ | 360,000 | $ | 0 | $ | 0 | ||||||||
Short-term Incentives | $ | 0 | $ | 162,000 | $ | 0 | $ | 0 | ||||||||
Long-term Incentives (1) | $ | 514,664 | $ | 514,664 | $ | 568,740 | $ | 514,664 | ||||||||
Benefits and Perquisites | ||||||||||||||||
Incremental Pension | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Retiree Medical and Life Insurance | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Medical/Dental Continuation | $ | 0 | $ | 24,277 | $ | 0 | $ | 0 | ||||||||
Life Insurance Coverage | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Car Allowance | $ | 0 | $ | 13,000 | $ | 0 | $ | 0 | ||||||||
Financial Planning/Income Tax | $ | 0 | $ | 5,000 | $ | 0 | $ | 0 | ||||||||
Outplacement Services | $ | 0 | $ | 54,000 | $ | 0 | $ | 0 | ||||||||
280G Tax Gross-up | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
(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. |
Matthew J. Mulherin
Vice President and General Manager — Newport News Operations
Post-CIC | ||||||||||||||||
Involuntary | Involuntary or | |||||||||||||||
Executive | Voluntary | Termination | Good Reason | |||||||||||||
Benefits | Termination | Not For Cause (2) | Termination | Death or Disability | ||||||||||||
Salary | $ | 0 | $ | 360,000 | $ | 0 | $ | 0 | ||||||||
Short-term Incentives | $ | 0 | $ | 162,000 | $ | 0 | $ | 0 | ||||||||
Long-term Incentives (1) | $ | 0 | $ | 0 | $ | 584,489 | $ | 530,414 | ||||||||
Benefits and Perquisites | ||||||||||||||||
Incremental Pension | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Retiree Medical and Life Insurance | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Medical/Dental Continuation | $ | 0 | $ | 33,372 | $ | 0 | $ | 0 | ||||||||
Life Insurance Coverage | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Car Allowance | $ | 0 | $ | 13,000 | $ | 0 | $ | 0 | ||||||||
Financial Planning/Income Tax | $ | 0 | $ | 5,000 | $ | 0 | $ | 0 | ||||||||
Outplacement Services | $ | 0 | $ | 54,000 | $ | 0 | $ | 0 | ||||||||
280G Tax Gross-up | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
(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. |
129
William R. Ermatinger
Vice President and Chief Human Resources Officer
Post-CIC | ||||||||||||||||
Involuntary | Involuntary or Good | |||||||||||||||
Executive | Voluntary | Termination | Reason | |||||||||||||
Benefits | Termination | Not For Cause (2) | Termination | Death or Disability | ||||||||||||
Salary | $ | 0 | $ | 279,250 | $ | 0 | $ | 0 | ||||||||
Short-term Incentives | $ | 0 | $ | 111,700 | $ | 0 | $ | 0 | ||||||||
Long-term Incentives (1) | $ | 0 | $ | 0 | $ | 311,475 | $ | 311,475 | ||||||||
Benefits and Perquisites | ||||||||||||||||
Incremental Pension | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Retiree Medical and Life Insurance | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Medical/Dental Continuation | $ | 0 | $ | 33,372 | $ | 0 | $ | 0 | ||||||||
Life Insurance Coverage | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Car Allowance | $ | 0 | $ | 13,000 | $ | 0 | $ | 0 | ||||||||
Financial Planning/Income Tax | $ | 0 | $ | 5,000 | $ | 0 | $ | 0 | ||||||||
Outplacement Services | $ | 0 | $ | 41,888 | $ | 0 | $ | 0 | ||||||||
280G Tax Gross-up | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
(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. |
130
Stock Options | RSRs | |||||||||||||||
Acceleration of | Acceleration of | RPSRs | ||||||||||||||
Vesting | Vesting | Prorated Payment | Total | |||||||||||||
Name and Principal Position | ($) | ($) | ($) | ($) | ||||||||||||
C. Michael Petters | $ | 1,292,883 | $ | 698,125 | $ | 869,398 | $ | 2,860,406 | ||||||||
President and Chief Executive Officer | ||||||||||||||||
Barbara A. Niland | $ | 0 | $ | 0 | $ | 469,363 | $ | 469,363 | ||||||||
Vice President and Chief Financial Officer | ||||||||||||||||
Irwin F. Edenzon | $ | 81,113 | $ | 0 | $ | 487,627 | $ | 568,740 | ||||||||
Vice President and General Manager — Gulf Coast Operations | ||||||||||||||||
Matthew J. Mulherin | $ | 81,113 | $ | 0 | $ | 503,376 | $ | 568,740 | ||||||||
Vice President and General Manager — Newport News Operations | ||||||||||||||||
William R. Ermatinger | $ | 0 | $ | 0 | $ | 311,475 | $ | 311,475 | ||||||||
Vice President and Human Resources Officer |
131
132
133
134
135
136
137
138
• | each of our stockholders who we believe (based on the assumptions described below) will beneficially own more than 5% of HII’s outstanding common stock; | ||
• | each of our current directors and its directors following the spin-off; | ||
• | each officer named in the summary compensation table; and | ||
• | all of our directors and executive officers following the spin-off as a group. |
Amount and Nature | ||||||||
of Beneficial | Percent | |||||||
Name and Address of Beneficial Owner | Ownership | of Class | ||||||
(a | ) | % | ||||||
(b | ) | % | ||||||
(c | ) | % |
(a) | ||
(b) | ||
(c) |
139
Shares of Common | ||||||||
Stock | Shares Subject to | Share | ||||||
Beneficially Owned | Option(1) | Equivalents(2) | Total | |||||
Non-Employee Directors | ||||||||
Named Executive Officers | ||||||||
Directors and Executive Officers as a Group ( persons) | ||||||||
(1) | ||
(2) |
140
• | the number of shares constituting that series and the distinctive designation of that series; | ||
• | the price at which our preferred stock will be issued; | ||
• | the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation; | ||
• | the dividend rate on the shares of that series, whether dividends shall be cumulative and, if so, from which date or dates; | ||
• | whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; | ||
• | whether a sinking fund shall be provided for the redemption or purchase of shares of such series and, if so, the terms and the amount of such sinking fund; | ||
• | whether that series shall have conversion privileges and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events that our board of directors shall determine; | ||
• | whether that series shall have voting rights, in addition to the voting rights provided by law and, if so, the terms of such voting rights; and | ||
• | any other relative rights, preferences and limitations of that series. |
141
142
143
144
145
146
Page | ||
NORTHROP GRUMMAN SHIPBUILDING | ||
Condensed Consolidated Statements of Operations (Unaudited) | F-4 | |
Condensed Consolidated Statements of Financial Position (Unaudited) | F-5 | |
Condensed Consolidated Statements of Cash Flows (Unaudited) | F-6 | |
Condensed Consolidated Statements of Changes in Parent’s Equity in Unit (Unaudited) | F-7 | |
Notes to Condensed Consolidated Financial Statements (Unaudited) | F-8 | |
INDEX TO ANNUAL FINANCIAL STATEMENTS | ||
NORTHROP GRUMMAN SHIPBUILDING | ||
Report of Independent Registered Public Accounting Firm | F-22 | |
Consolidated Statements of Operations | F-23 | |
Consolidated Statements of Financial Position | F-24 | |
Consolidated Statements of Cash Flows | F-25 | |
Consolidated Statements of Changes in Parent’s Equity in Unit | F-26 | |
Notes to Consolidated Financial Statements | F-27 | |
Schedule II — Valuation and Qualifying Accounts | F-52 | |
HUNTINGTON INGALLS INDUSTRIES, INC. | ||
Report of Independent Registered Public Accounting Firm | F-53 | |
Statement of Financial Position | F-54 | |
Note to Statement of Financial Position | F-55 |
F-1
Northrop Grumman Corporation)
September 30, 2010, and for the
Nine Month Periods ended
September 30, 2010 and 2009
F-2
TABLE OF CONTENTS
Page | ||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) | F-4 | |||
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited) | F-5 | |||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | F-6 | |||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARENT’S EQUITY IN UNIT (Unaudited) | F-7 | |||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) | F-8 | |||
1. BASIS OF PRESENTATION | F-8 | |||
2. SHIPBUILDING STRATEGIC ACTIONS | F-9 | |||
3. ACCOUNTING STANDARDS UPDATES | F-10 | |||
4. FAIR VALUE OF FINANCIAL INSTRUMENTS | F-10 | |||
5. SEGMENT INFORMATION | F-10 | |||
6. CONTRACT CHARGES | F-10 | |||
7. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS | F-11 | |||
8. INCOME TAXES | F-12 | |||
9. BUSINESS ARRANGEMENTS | F-12 | |||
10. INVESTIGATIONS, CLAIMS, AND LITIGATION | F-12 | |||
11. COMMITMENTS AND CONTINGENCIES | F-13 | |||
12. IMPACTS FROM HURRICANES | F-15 | |||
13. HURRICANE KATRINA INSURANCE RECOVERIES | F-15 | |||
14. RETIREMENT BENEFITS | F-16 | |||
15. STOCK COMPENSATION PLANS | F-17 | |||
16. RELATED PARTY TRANSACTIONS AND PARENT COMPANY EQUITY | F-18 |
F-3
(Unaudited)
Nine Months Ended September 30 | ||||||||
$ in millions | 2010 | 2009 | ||||||
Sales and Service Revenues | ||||||||
Product sales | $ | 4,327 | $ | 3,673 | ||||
Service revenues | 660 | 937 | ||||||
Total sales and service revenues | 4,987 | 4,610 | ||||||
Cost of Sales and Service Revenues | ||||||||
Cost of product sales | 3,842 | 3,230 | ||||||
Cost of service revenues | 528 | 788 | ||||||
Corporate home office and other general and administrative costs | 473 | 446 | ||||||
Operating income | 144 | 146 | ||||||
Other expense | ||||||||
Interest expense | (30 | ) | (33 | ) | ||||
Earnings before income taxes | 114 | 113 | ||||||
Federal income taxes | 42 | 32 | ||||||
Net earnings | $ | 72 | $ | 81 | ||||
Net earnings from above | $ | 72 | $ | 81 | ||||
Other comprehensive income | ||||||||
Change in unamortized benefit plan costs | 37 | 46 | ||||||
Tax expense on the change in unamortized benefit plan costs | (4 | ) | (18 | ) | ||||
Other comprehensive income, net of tax | 33 | 28 | ||||||
Comprehensive income | $ | 105 | $ | 109 | ||||
F-4
(Unaudited)
September 30 | December 31 | |||||||
$ in millions | 2010 | 2009 | ||||||
Assets | ||||||||
Current Assets | ||||||||
Accounts receivable, net | $ | 755 | $ | 537 | ||||
Inventoried costs, net | 295 | 298 | ||||||
Deferred income taxes | 293 | 291 | ||||||
Prepaid expenses and other current assets | 22 | 10 | ||||||
Total current assets | 1,365 | 1,136 | ||||||
Property, plant, and equipment, net | 1,929 | 1,977 | ||||||
Other Assets | ||||||||
Goodwill | 1,134 | 1,134 | ||||||
Other purchased intangibles, net of accumulated amortization of $348 in and $329 in 2009 | 591 | 610 | ||||||
Pension plan asset | 110 | 116 | ||||||
Miscellaneous other assets | 56 | 28 | ||||||
Total other assets | 1,891 | 1,888 | ||||||
Total assets | $ | 5,185 | $ | 5,001 | ||||
Liabilities and Parent’s Equity In Unit | ||||||||
Current Liabilities | ||||||||
Contribution payable to parent | ||||||||
Notes payable to parent | $ | 537 | $ | 537 | ||||
Trade accounts payable | 218 | 314 | ||||||
Current portion of workers’ compensation liabilities | 256 | 255 | ||||||
Accrued interest on notes payable to parent | 232 | 212 | ||||||
Current portion of post-retirement plan liabilities | 175 | 175 | ||||||
Accrued employees’ compensation | 186 | 173 | ||||||
Provision for contract losses | 102 | 53 | ||||||
Advance payments and billings in excess of costs incurred | 80 | 81 | ||||||
Other current liabilities | 218 | 132 | ||||||
Total current liabilities | 2,004 | 1,932 | ||||||
Long-term debt | 283 | 283 | ||||||
Other post-retirement plan liabilities | 512 | 502 | ||||||
Pension plan liabilities | 406 | 379 | ||||||
Workers’ compensation liabilities | 267 | 265 | ||||||
Deferred tax liabilities | 152 | 121 | ||||||
Other long-term liabilities | 74 | 82 | ||||||
Total liabilities | 3,698 | 3,564 | ||||||
Commitments and Contingencies (Note 11) | ||||||||
Equity | ||||||||
Common stock | ||||||||
Additional paid-in capital | ||||||||
Parent’s equity in unit | 1,985 | 1,968 | ||||||
Accumulated other comprehensive loss | (498 | ) | (531 | ) | ||||
Total parent’s equity in unit | 1,487 | 1,437 | ||||||
Total liabilities and parent’s equity in unit | $ | 5,185 | $ | 5,001 | ||||
F-5
(Unaudited)
Nine Months Ended September 30 | ||||||||||||||||
$ in millions | 2010 | 2009 | ||||||||||||||
Operating Activities | ||||||||||||||||
Net Earnings | $ | 72 | $ | 81 | ||||||||||||
Adjustments to reconcile to net cash provided by operating activities | ||||||||||||||||
Depreciation | 124 | 113 | ||||||||||||||
Amortization of purchased intangibles | 19 | 23 | ||||||||||||||
Loss on disposal of property, plant, and equipment | 3 | — | ||||||||||||||
Deferred income taxes | 24 | (65 | ) | |||||||||||||
Increase in | ||||||||||||||||
Accounts receivable | (218 | ) | (112 | ) | ||||||||||||
Inventoried costs | (10 | ) | (60 | ) | ||||||||||||
Prepaid expenses and other assets | 3 | (7 | ) | |||||||||||||
Increase (decrease) in | ||||||||||||||||
Accounts payable and accruals | 79 | (109 | ) | |||||||||||||
Retiree benefits | 79 | (71 | ) | |||||||||||||
Other non-cash transactions, net | (24 | ) | (2 | ) | ||||||||||||
Net cash provided by (used in) operations | 151 | (209 | ) | |||||||||||||
Investing Activities | ||||||||||||||||
Additions to property, plant, and equipment | (96 | ) | (120 | ) | ||||||||||||
Net cash used in investing activities | (96 | ) | (120 | ) | ||||||||||||
Financing Activities | ||||||||||||||||
Net transfers (to) from parent | (55 | ) | 329 | |||||||||||||
Net cash (used in) provided by financing activities | (55 | ) | 329 | |||||||||||||
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 | $ | 12 | $ | 12 | ||||||||||||
Non-Cash Investing and Financing Activities | ||||||||||||||||
Capital expenditures accrued in accounts payable | $ | 29 | $ | 21 | ||||||||||||
F-6
(Unaudited)
Nine Months Ended September 30 | ||||||||
$ in millions | 2010 | 2009 | ||||||
Parent’s Equity in Unit | ||||||||
At beginning of year | $ | 1,968 | $ | 1,578 | ||||
Net earnings | 72 | 81 | ||||||
Net transfers (to) from parent | (55 | ) | 329 | |||||
At end of period | 1,985 | 1,988 | ||||||
Accumulated Other Comprehensive Loss | ||||||||
At beginning of year | (531 | ) | (617 | ) | ||||
Other comprehensive income, net of tax | 33 | 28 | ||||||
At end of period | (498 | ) | (589 | ) | ||||
Total parent’s equity in unit | $ | 1,487 | $ | 1,399 | ||||
F-7
F-8
F-9
Nine Months Ended September 30 | ||||||||
$ in millions | 2010 | 2009 | ||||||
Sales and Service Revenues | ||||||||
Gulf Coast | 2,300 | 2,123 | ||||||
Newport News | 2,748 | 2,563 | ||||||
Intersegment eliminations | (61 | ) | (76 | ) | ||||
Total sales and service revenues | $ | 4,987 | 4,610 | |||||
Operating Income | ||||||||
Gulf Coast | (71 | ) | (18 | ) | ||||
Newport News | 250 | 219 | ||||||
Total Segment Operating Income | 178 | 201 | ||||||
Non-segment factors affecting operating income | ||||||||
Net pension and post-retirement benefits adjustment | (34 | ) | (66 | ) | ||||
Deferred State Income Taxes | — | 11 | ||||||
Total operating income | $ | 144 | $ | 146 | ||||
F-10
$ in millions | Gulf Coast | Newport News | Total | |||||||||
| | | | ||||||||||||
Goodwill | $ | 488 | $ | 646 | $ | 1,134 | ||||||
September 30 | December 31 | |||||||
$ in millions | 2010 | 2009 | ||||||
Gross carrying amount | $ | 939 | $ | 939 | ||||
Accumulated amortization | (348 | ) | (329 | ) | ||||
Net carrying amount | $ | 591 | $ | 610 | ||||
$ in millions | ||||
Year ending December 31 | ||||
2010 (October 1- December 31) | $ | 5 | ||
2011 | 20 | |||
2012 | 20 | |||
2013 | 20 | |||
2014 | 20 | |||
F-11
F-12
F-13
F-14
F-15
F-16
Nine Months Ended September 30 | ||||||||||||||||
Medical and | ||||||||||||||||
Pension Benefits | Life Benefits | |||||||||||||||
$ in millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Components of Net Periodic Benefit Cost | ||||||||||||||||
Service cost | $ | 95 | $ | 86 | $ | 11 | $ | 11 | ||||||||
Interest cost | 136 | 127 | 29 | 30 | ||||||||||||
Expected return on plan assets | (175 | ) | (145 | ) | ||||||||||||
Amortization of | ||||||||||||||||
Prior service cost (credit) | 10 | 10 | (7 | ) | (7 | ) | ||||||||||
Net loss from previous years | 28 | 36 | 6 | 7 | ||||||||||||
Net periodic benefit cost | $ | 94 | $ | 114 | $ | 39 | $ | 41 | ||||||||
F-17
2010 | 2009 | |||||||
Dividend yield | 2.9 | % | 3.6 | % | ||||
Volatility rate | 25 | % | 25 | % | ||||
Risk-free interest rate | 2.3 | % | 1.7 | % | ||||
Expected option life (years) | 6 | 5 & 6 |
F-18
F-19
Northrop Grumman Corporation)
December 31, 2009 and 2008, and for each of the
Three Years in the Period ended
December 31, 2009 and
Independent Auditors’ Report
F-20
TABLE OF CONTENTS
Page | ||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-22 | |||
CONSOLIDATED STATEMENTS OF OPERATIONS | F-23 | |||
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION | F-24 | |||
CONSOLIDATED STATEMENTS OF CASH FLOWS | F-25 | |||
CONSOLIDATED STATEMENTS OF CHANGES IN PARENT’S EQUITY IN UNIT | F-26 | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | F-27 | |||
1. DESCRIPTION OF BUSINESS | F-27 | |||
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | F-27 | |||
3. ACCOUNTING STANDARDS UPDATES | F-31 | |||
4. SEGMENT INFORMATION | F-32 | |||
5. CONTRACT CHARGES | F-33 | |||
6. ACCOUNTS RECEIVABLE, NET | F-33 | |||
7. INVENTORIED COSTS, NET | F-34 | |||
8. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS | F-34 | |||
9. INCOME TAXES | F-35 | |||
10. LONG-TERM DEBT | F-37 | |||
11. BUSINESS ARRANGEMENTS | F-37 | |||
12. LITIGATION | F-38 | |||
13. COMMITMENTS AND CONTINGENCIES | F-39 | |||
14. IMPACTS FROM HURRICANES | F-41 | |||
15. HURRICANE KATRINA INSURANCE RECOVERIES | F-41 | |||
16. RETIREMENT BENEFITS | F-42 | |||
17. STOCK COMPENSATION PLANS | F-47 | |||
18. RELATED PARTY TRANSACTIONS AND PARENT COMPANY EQUITY | F-49 | |||
19. UNAUDITED SELECTED QUARTERLY DATA | F-50 | |||
20. SUBSEQUENT EVENTS | F-50 |
F-21
Northrop Grumman Corporation
Los Angeles, California
F-22
Year ended December 31 | ||||||||||||
$ in millions | 2009 | 2008 | 2007 | |||||||||
Sales and Service Revenues | ||||||||||||
Product sales | $ | 5,046 | $ | 5,207 | $ | 4,910 | ||||||
Service revenues | 1,246 | 982 | 782 | |||||||||
Total sales and service revenues | 6,292 | 6,189 | 5,692 | |||||||||
Cost of Sales and Service Revenues | ||||||||||||
Cost of product sales | 4,415 | 4,672 | 3,992 | |||||||||
Cost of service revenues | 1,027 | 817 | 612 | |||||||||
Corporate home office and other general and administrative costs | 639 | 564 | 641 | |||||||||
Goodwill impairment | 2,490 | |||||||||||
Operating income (loss) | 211 | (2,354 | ) | 447 | ||||||||
Other (expense) income | ||||||||||||
Interest expense | (36 | ) | (40 | ) | (42 | ) | ||||||
Other, net | 1 | — | 6 | |||||||||
Earnings (loss) before income taxes | 176 | (2,394 | ) | 411 | ||||||||
Federal income taxes | 52 | 26 | 135 | |||||||||
Net earnings (loss) | $ | 124 | $ | (2,420 | ) | $ | 276 | |||||
Net earnings (loss) from above | $ | 124 | $ | (2,420 | ) | $ | 276 | |||||
Other comprehensive income (loss) | ||||||||||||
Change in unamortized benefit plan costs | 142 | (677 | ) | 201 | ||||||||
Tax (expense) benefit on change in unamortized benefit plan costs | (56 | ) | 264 | (78 | ) | |||||||
Other comprehensive income (loss), net of tax | 86 | (413 | ) | 123 | ||||||||
Comprehensive income (loss) | $ | 210 | $ | (2,833 | ) | $ | 399 | |||||
F-23
December 31 | December 31 | |||||||
$ in millions | 2009 | 2008 | ||||||
Assets | ||||||||
Current Assets | ||||||||
Accounts receivable, net | $ | 537 | $ | 481 | ||||
Inventoried costs, net | 298 | 197 | ||||||
Deferred income taxes | 291 | 208 | ||||||
Prepaid expenses and other current assets | 10 | 9 | ||||||
Total current assets | 1,136 | 895 | ||||||
Property, Plant, and Equipment | ||||||||
Land and land improvements | 287 | 264 | ||||||
Buildings and leasehold improvements | 1,296 | 1,219 | ||||||
Machinery and other equipment | 1,104 | 1,096 | ||||||
Capitalized software costs | 160 | 99 | ||||||
2,847 | 2,678 | |||||||
Accumulated depreciation and amortization | (870 | ) | (727 | ) | ||||
Property, plant, and equipment, net | 1,977 | 1,951 | ||||||
Other Assets | ||||||||
Goodwill | 1,134 | 1,134 | ||||||
Other purchased intangibles, net of accumulated amortization of $329 in 2009 and $299 in 2008 | 610 | 640 | ||||||
Pension plan asset | 116 | 119 | ||||||
Miscellaneous other assets | 28 | 21 | ||||||
Total other assets | 1,888 | 1,914 | ||||||
Total assets | $ | 5,001 | $ | 4,760 | ||||
Liabilities and Parent’s Equity In Unit | ||||||||
Current Liabilities | ||||||||
Notes payable to parent | $ | 537 | $ | 537 | ||||
Trade accounts payable | 314 | 321 | ||||||
Current portion of workers’ compensation liabilities | 255 | 248 | ||||||
Accrued interest on notes payable to parent | 212 | 185 | ||||||
Current portion of post-retirement plan liabilities | 175 | 176 | ||||||
Accrued employees’ compensation | 173 | 171 | ||||||
Advance payments and billings in excess of costs incurred | 81 | 258 | ||||||
Other current liabilities | 185 | 142 | ||||||
Total current liabilities | 1,932 | 2,038 | ||||||
Long-term debt | 283 | 283 | ||||||
Other post-retirement plan liabilities | 502 | 484 | ||||||
Pension plan liabilities | 379 | 570 | ||||||
Workers’ compensation liabilities | 265 | 270 | ||||||
Deferred tax liabilities | 121 | 81 | ||||||
Other long-term liabilities | 82 | 73 | ||||||
Total liabilities | 3,564 | 3,799 | ||||||
Commitments and Contingencies (Note 13) | ||||||||
Parent’s Equity in Unit | ||||||||
Parent’s equity in unit | 1,968 | 1,578 | ||||||
Accumulated other comprehensive loss | (531 | ) | (617 | ) | ||||
Total parent’s equity in unit | 1,437 | 961 | ||||||
Total liabilities and parent’s equity in unit | $ | 5,001 | $ | 4,760 | ||||
F-24
Year ended December 31 | ||||||||||||
$ in millions | 2009 | 2008 | 2007 | |||||||||
Operating Activities | ||||||||||||
Net Earnings (Loss) | $ | 124 | $ | (2,420 | ) | $ | 276 | |||||
Adjustments to reconcile to net cash provided by operating activities | ||||||||||||
Depreciation | 156 | 137 | 129 | |||||||||
Amortization of purchased intangibles | 30 | 56 | 41 | |||||||||
Impairment of goodwill | 2,490 | |||||||||||
Deferred income taxes | (98 | ) | 10 | (6 | ) | |||||||
Net gain on AMSEC reorganization | (23 | ) | ||||||||||
Decrease (increase) in | ||||||||||||
Accounts receivable | (56 | ) | (103 | ) | 86 | |||||||
Inventoried costs | (101 | ) | 52 | 74 | ||||||||
Prepaid expenses and other current assets | (1 | ) | 2 | 3 | ||||||||
Increase (decrease) in | ||||||||||||
Accounts payable and accruals | (111 | ) | 145 | (24 | ) | |||||||
Retiree benefits | (28 | ) | (28 | ) | 49 | |||||||
Other non-cash transactions, net | (3 | ) | (2 | ) | 5 | |||||||
Net cash (used in) provided by operations | (88 | ) | 339 | 610 | ||||||||
Investing Activities | ||||||||||||
Additions to property, plant, and equipment | (181 | ) | (218 | ) | (246 | ) | ||||||
Proceeds from insurance carriers related to capital expenditures | 4 | |||||||||||
Payment in conjunction with AMSEC reorganization | (8 | ) | ||||||||||
Decrease in restricted cash | 61 | 66 | ||||||||||
Other investing activities, net | 3 | 5 | (5 | ) | ||||||||
Net cash used in investing activities | (178 | ) | (152 | ) | (189 | ) | ||||||
Financing Activities | ||||||||||||
Net transfers from (to) parent | 266 | (187 | ) | (421 | ) | |||||||
Net cash provided by (used in) financing activities | 266 | (187 | ) | (421 | ) | |||||||
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 | ||||||||||||
Investment in AMSEC | $ | 30 | ||||||||||
Capital expenditures accrued in accounts payable | $ | 47 | $ | 42 | $ | 32 | ||||||
F-25
Year ended December 31 | ||||||||||||
$ in millions | 2009 | 2008 | 2007 | |||||||||
Parent’s Equity in Unit | ||||||||||||
At beginning of year | $ | 1,578 | $ | 4,185 | $ | 4,325 | ||||||
Net earnings (loss) | 124 | (2,420 | ) | 276 | ||||||||
Adoption of new GAAP accounting guidance | 5 | |||||||||||
Net transfers from (to) parent | 266 | (187 | ) | (421 | ) | |||||||
At end of year | 1,968 | 1,578 | 4,185 | |||||||||
Accumulated Other Comprehensive Loss | ||||||||||||
At beginning of year | (617 | ) | (204 | ) | (327 | ) | ||||||
Other comprehensive income (loss), net of tax | 86 | (413 | ) | 123 | ||||||||
At end of year | (531 | ) | (617 | ) | (204 | ) | ||||||
Total parent’s equity in unit | $ | 1,437 | $ | 961 | $ | 3,981 | ||||||
F-26
F-27
F-28
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. |
F-29
Years | ||||
Land improvements | 12 – 45 | |||
Buildings and improvements | 15 – 50 | |||
Capitalized software costs | 3 – 9 | |||
Machinery and other equipment | 3 – 45 | |||
F-30
168 —The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162. SFAS No. 168 made the FASB Accounting Standards Codification (the Codification) the single source of GAAP used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for the company beginning July 1, 2009. Following SFAS No. 168, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the basis for conclusions on the change(s) in the Codification. In the description of Accounting Standards Updates that follows, references in “italics” relate to Codification Topics and Subtopics, and their descriptive titles, as appropriate.
F-31
Year Ended December 31 | ||||||||||||
$ in millions | 2009 | 2008 | 2007 | |||||||||
Sales and Service Revenues | ||||||||||||
Gulf Coast | 2,865 | 2,848 | 2,681 | |||||||||
Newport News | 3,534 | 3,427 | 3,044 | |||||||||
Intersegment eliminations | (107 | ) | (86 | ) | (33 | ) | ||||||
Total sales and service revenues | 6,292 | 6,189 | 5,692 | |||||||||
Operating Income (Loss) | ||||||||||||
Gulf Coast | (29 | ) | (1,433 | ) | 201 | |||||||
Newport News | 313 | (895 | ) | 290 | ||||||||
Total Segment Operating Income (Loss) | 284 | (2,328 | ) | 491 | ||||||||
Non-segment factors affecting operating income (loss) | ||||||||||||
Net pension and post-retirement benefits adjustment | (88 | ) | (25 | ) | (46 | ) | ||||||
Deferred State Income Taxes | 15 | (1 | ) | 2 | ||||||||
Total operating income (loss) | $ | 211 | $ | (2,354 | ) | $ | 447 | |||||
December 31 | ||||||||
$ in millions | 2009 | 2008 | ||||||
Assets | ||||||||
Gulf Coast | 1,922 | 1,817 | ||||||
Newport News | 2,672 | 2,616 | ||||||
Corporate | 407 | 327 | ||||||
Total assets | $ | 5,001 | $ | 4,760 | ||||
F-32
Year ended December 31 | ||||||||||||
$ in millions | 2009 | 2008 | 2007 | |||||||||
Capital Expenditures | ||||||||||||
Gulf Coast | 102 | 153 | 181 | |||||||||
Newport News | 79 | 65 | 65 | |||||||||
Total capital expenditures | $ | 181 | $ | 218 | $ | 246 | ||||||
Year ended December 31 | ||||||||||||
$ in millions | 2009 | 2008 | 2007 | |||||||||
Depreciation and Amortization | ||||||||||||
Gulf Coast | 101 | 110 | 88 | |||||||||
Newport News | 85 | 83 | 82 | |||||||||
Total depreciation and amortization | $ | 186 | $ | 193 | $ | 170 | ||||||
F-33
December 31 | ||||||||
$ in millions | 2009 | 2008 | ||||||
Due From U.S. Government | ||||||||
Amounts billed | $ | 240 | $ | 149 | ||||
Recoverable costs and accrued profit on progress completed — unbilled | 288 | 328 | ||||||
528 | 477 | |||||||
Due From Other Customers | ||||||||
Amounts billed | 11 | 5 | ||||||
Recoverable costs and accrued profit on progress completed — unbilled | 1 | 3 | ||||||
12 | 8 | |||||||
Total accounts receivable | 540 | 485 | ||||||
Allowances for doubtful amounts | (3 | ) | (4 | ) | ||||
Total accounts receivable, net | $ | 537 | $ | 481 | ||||
December 31 | ||||||||
$ in millions | 2009 | 2008 | ||||||
Production costs of contracts in process | $ | 1,009 | $ | 1,040 | ||||
General and administrative expenses | 14 | 4 | ||||||
1,023 | 1,044 | |||||||
Progress payments received | (811 | ) | (931 | ) | ||||
212 | 113 | |||||||
Raw material inventory | 86 | 84 | ||||||
Total inventoried costs, net | $ | 298 | $ | 197 | ||||
$ in millions | Gulf Coast | Newport News | Total | |||||||||
Balance as of January 1, 2008 | $ | 1,766 | $ | 1,858 | $ | 3,624 | ||||||
Goodwill Impairment | (1,278 | ) | (1,212 | ) | (2,490 | ) | ||||||
Balance as of December 31, 2008 | 488 | 646 | 1,134 | |||||||||
Balance as of December 31, 2009 | $ | 488 | $ | 646 | $ | 1,134 | ||||||
F-34
December 31 | ||||||||
$ in millions | 2009 | 2008 | ||||||
Gross carrying amount | $ | 939 | $ | 939 | ||||
Accumulated amortization | (329 | ) | (299 | ) | ||||
Net carrying amount | $ | 610 | $ | 640 | ||||
$ in millions | |||
Year ending December 31 | |||
2010 | $ | 23 | |
2011 | 20 | ||
2012 | 20 | ||
2013 | 20 | ||
2014 | 20 | ||
Year ended December 31 | ||||||||||||
$ in millions | 2009 | 2008 | 2007 | |||||||||
Income Taxes on Operations | ||||||||||||
Federal income taxes currently payable | $ | 135 | $ | 22 | $ | 139 | ||||||
Change in deferred federal income taxes | (83 | ) | 4 | (4 | ) | |||||||
Total federal income taxes | $ | 52 | $ | 26 | $ | 135 | ||||||
Year ended December 31 | ||||||||||||
$ in millions | 2009 | 2008 | 2007 | |||||||||
Income tax expense (benefit) on operations at statutory rate | $ | 61 | $ | (838 | ) | $ | 144 | |||||
Goodwill impairment | 872 | |||||||||||
Manufacturing deduction | (6 | ) | (2 | ) | (2 | ) | ||||||
Research tax credit | (1 | ) | (1 | ) | (1 | ) | ||||||
Wage credit | (2 | ) | (2 | ) | ||||||||
Non taxable gain on AM SEC reorgaznization | (7 | ) | ||||||||||
Other, net | (3 | ) | 1 | |||||||||
Total federal income taxes | $ | 52 | $ | 26 | $ | 135 | ||||||
F-35
F-36
December 31 | ||||||||
$ in millions | 2009 | 2008 | ||||||
Deferred Tax Assets | ||||||||
Retirement benefit plan expense | $ | 544 | $ | 604 | ||||
Provision for accrued liabilities | 154 | 158 | ||||||
Contract accounting differences | 79 | — | ||||||
Other | 6 | |||||||
Gross deferred tax assets | 783 | 762 | ||||||
Less valuation allowance | ||||||||
Net deferred tax assets | 783 | 762 | ||||||
Deferred Tax Liabilities | ||||||||
Depreciation and amortization | 363 | 363 | ||||||
Contract accounting differences | — | 11 | ||||||
Purchased intangibles | 250 | 262 | ||||||
Other | (1 | ) | ||||||
Gross deferred tax liabilities | 613 | 635 | ||||||
Total net deferred tax assets | $ | 170 | $ | 127 | ||||
December 31 | ||||||||
$ in millions | 2009 | 2008 | ||||||
Net current deferred tax assets | $ | 291 | $ | 208 | ||||
Net non-current deferred tax liabilities | (121 | ) | (81 | ) | ||||
Total net deferred tax assets | $ | 170 | $ | 127 | ||||
2009 | 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
$ in millions | Amount | Value | Amount | Value | ||||||||||||
Long-term debt | 283 | 285 | 283 | 240 | ||||||||||||
F-37
F-38
F-39
F-40
F-41
Medical and | ||||||||||||||||||||||||
Pension Benefits | Life Benefits | |||||||||||||||||||||||
$ in millions | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
Components of Net Periodic Benefit Cost | ||||||||||||||||||||||||
Service cost | $ | 114 | $ | 130 | $ | 128 | $ | 15 | $ | 14 | $ | 14 | ||||||||||||
Interest cost | 169 | 156 | 144 | 40 | 39 | 39 | ||||||||||||||||||
Expected return on plan assets | (193 | ) | (231 | ) | (210 | ) | ||||||||||||||||||
Amortization of | ||||||||||||||||||||||||
Prior service cost (credit) | 13 | 7 | 7 | (9 | ) | (14 | ) | (14 | ) | |||||||||||||||
Net loss from previous years | 48 | 2 | 10 | 9 | 15 | 18 | ||||||||||||||||||
Net periodic benefit cost | $ | 151 | $ | 64 | $ | 79 | $ | 55 | $ | 54 | $ | 57 | ||||||||||||
F-42
Pension | Medical and | |||||||||||
$ in millions | Benefits | Life Benefits | Total | |||||||||
Changes in Unrecognized Benefit Plan Costs | ||||||||||||
Net actuarial gain | $ | (138 | ) | $ | (55 | ) | $ | (193 | ) | |||
Prior service cost (credit) | 15 | (2 | ) | 13 | ||||||||
Amortization of | ||||||||||||
Prior service (cost) credit | (7 | ) | 14 | 7 | ||||||||
Net loss from previous years | (10 | ) | (18 | ) | (28 | ) | ||||||
Tax benefits related to above items | 54 | 24 | 78 | |||||||||
Changes in unrecognized benefit plan costs — 2007 | (86 | ) | (37 | ) | (123 | ) | ||||||
Net actuarial loss (gain) | $ | 640 | $ | (41 | ) | $ | 599 | |||||
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 unrecognized benefit plan costs — 2008 | 420 | (7 | ) | 413 | ||||||||
Net actuarial gain | (76 | ) | (5 | ) | (81 | ) | ||||||
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 unrecognized benefit plan costs — 2009 | $ | (82 | ) | $ | (4 | ) | $ | (86 | ) | |||
F-43
Medical and | ||||||||||||||||
Pension Benefits | Life Benefits | |||||||||||||||
$ in millions | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Change in Benefit Obligation | ||||||||||||||||
Benefit obligation at beginning of year | $ | 2,756 | $ | 2,555 | $ | 660 | $ | 650 | ||||||||
Service cost | 114 | 130 | 15 | 14 | ||||||||||||
Interest cost | 169 | 156 | 40 | 39 | ||||||||||||
Plan participants’ contributions | 5 | 5 | 15 | 12 | ||||||||||||
Plan amendments | 2 | 57 | 30 | |||||||||||||
Actuarial loss (gain) | 114 | (54 | ) | (5 | ) | (41 | ) | |||||||||
Benefits paid | (98 | ) | (93 | ) | (51 | ) | (46 | ) | ||||||||
Other | 3 | 2 | ||||||||||||||
Benefit obligation at end of year | 3,062 | 2,756 | 677 | 660 | ||||||||||||
Change in Plan Assets | ||||||||||||||||
Fair value of plan assets at beginning of year | 2,297 | 2,735 | ||||||||||||||
Gain / (Loss) on plan assets | 384 | (464 | ) | |||||||||||||
Employer contributions | 201 | 114 | 33 | 32 | ||||||||||||
Plan participants’ contributions | 5 | 5 | 15 | 12 | ||||||||||||
Benefits paid | (98 | ) | (93 | ) | (51 | ) | (46 | ) | ||||||||
Other | 3 | 2 | ||||||||||||||
Fair value of plan assets at end of year | 2,789 | 2,297 | — | — | ||||||||||||
Funded status | $ | (273 | ) | $ | (459 | ) | $ | (677 | ) | $ | (660 | ) | ||||
Amounts Recognized in the Consolidated Statements of Financial Position | ||||||||||||||||
Non-current assets | $ | 116 | $ | 119 | ||||||||||||
Current liability | (10 | ) | (8 | ) | $ | (175 | ) | $ | (176 | ) | ||||||
Non-current liability | (379 | ) | (570 | ) | (502 | ) | (484 | ) | ||||||||
Pension | Medical and | |||||||
$ in millions | Benefits | Life Benefits | ||||||
Amounts Expected to be Recognized in 2010 Net Periodic Benefit Cost | ||||||||
Net loss | $ | 38 | $ | 8 | ||||
Prior service cost (credit) | 13 | (9 | ) | |||||
Pension Benefits | Medical and Life Benefits | |||||||||||||||
$ in millions | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Amounts Recorded in Accumulated Other Comprehensive Loss | ||||||||||||||||
Net actuarial loss | $ | 654 | $ | 778 | $ | 150 | $ | 164 | ||||||||
Prior service cost and net transition obligation | 111 | 123 | (46 | ) | (55 | ) | ||||||||||
Income tax benefits related to above items | (298 | ) | (351 | ) | (40 | ) | (42 | ) | ||||||||
Unamortized benefit plan costs | $ | 467 | $ | 550 | $ | 64 | $ | 67 | ||||||||
F-44
December 31 | ||||||||
$ in millions | 2009 | 2008 | ||||||
Projected benefit obligation | $ | 2,050 | $ | 1,874 | ||||
Accumulated benefit obligation | 1,823 | 1,628 | ||||||
Fair value of plan assets | 1,696 | 1,315 | ||||||
Medical and | ||||||||||||||||
Pension Benefits | Life Benefits | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Assumptions Used to Determine Benefit Obligation at December 31 | ||||||||||||||||
Discount rate | 6.04 | % | 6.25 | % | 5.84 | % | 6.25 | % | ||||||||
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 | ||||||||||||||
Assumptions Used to Determine Benefit Cost for the Year Ended December 31 | ||||||||||||||||
Discount rate | 6.25 | % | 6.25 | % | 6.25 | % | 6.14 | % | ||||||||
Expected long-term return on plan assets | 8.50 | % | 8.50 | % | ||||||||||||
Rate of compensation increase | 3.77 | % | 4.25 | % | ||||||||||||
Initial health care cost trend rate assumed for the next year | 7.50 | % | 8.00 | % | ||||||||||||
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 | 2014 | 2012 | ||||||||||||||
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 | 22 | (23 | ) | |||||
F-45
Asset Allocation Ranges | ||
U.S. equity | 10 – 30% | |
International equity | 5 – 25% | |
Long bonds | 35 – 50% | |
Real estate and other | 20 – 30% | |
$ in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Asset Category | ||||||||||||||||
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 at end of year | $ | 736 | $ | 1,488 | $ | 565 | $ | 2,789 | ||||||||
(1) | Cash & cash equivalents are p redominantly held in money market funds | |
(2) | Other includes futures, swap s, op tions, swap tions, insurance contracts and net p ay able for unsettled trades at year end. | |
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 | ||||||||||
F-46
Pension | Medical and | |||||||
$ in millions | Plans | Life Plans | ||||||
Year Ending December 31 | ||||||||
2010 | $ | 105 | $ | 37 | ||||
2011 | 114 | 38 | ||||||
2012 | 124 | 39 | ||||||
2013 | 137 | 42 | ||||||
2014 | 151 | 45 | ||||||
2015 through 2019 | 990 | 284 | ||||||
F-47
2009 | 2008 | 2007 | ||||||||||
Dividend yield | 3.6 | % | 1.8 | % | 2.0 | % | ||||||
Volatility rate | 25 | % | 20 | % | 20 | % | ||||||
Risk-free interest rate | 1.7 | % | 2.8 | % | 4.6 | % | ||||||
Expected option life (years) | 5 & 6 | 6 | 6 |
F-48
F-49
$ in millions | 1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | ||||||||||||
Sales and service revenues | $ | 1,410 | $ | 1,544 | $ | 1,656 | $ | 1,682 | ||||||||
Operating income (loss) | 68 | (4 | ) | 82 | 65 | |||||||||||
Earnings (loss) before income taxes | 57 | (15 | ) | 71 | 63 | |||||||||||
Net earnings (loss) | 39 | (10 | ) | 52 | 43 |
$ in millions | 1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | ||||||||||||
Sales and service revenues | $ | 1,279 | $ | 1,702 | $ | 1,466 | $ | 1,742 | ||||||||
Operating income (loss) | (226 | ) | 108 | 110 | (2,346 | ) | ||||||||||
Earnings (loss) before income taxes | (236 | ) | 99 | 99 | (2,356 | ) | ||||||||||
Net earnings (loss) | (162 | ) | 66 | 72 | (2,396 | ) |
F-50
F-51
($ in thousands)
Balance at | Balance at | |||||||||||||||
Beginning | Additions at | Changes | End of | |||||||||||||
Description | of Period | Cost | Add (Deduct) | Period | ||||||||||||
Year End December 31, 2009 | ||||||||||||||||
Reserves and allowances deducted from asset accounts - | ||||||||||||||||
Allowances for doubtful amounts(1) | $ | 3,571 | $ | 1 | $ | (131 | ) | $ | 3,440 | |||||||
Year End December 31, 2008 | ||||||||||||||||
Reserves and allowances deducted from asset accounts - | ||||||||||||||||
Allowances for doubtful amounts(1) | 3,731 | 1 | (161 | ) | 3,571 | |||||||||||
Year End December 31, 2007 | ||||||||||||||||
Reserves and allowances deducted from asset accounts - | ||||||||||||||||
Allowances for doubtful amounts(1) | 4,006 | 77 | (353 | ) | 3,731 |
(1) | Uncollectible amounts written off, net of recoveries. | |
F-52
Northrop Grumman Corporation
Los Angeles, California
F-53
September 30, | ||||
in whole dollars | 2010 | |||
Assets | ||||
Cash and cash equivalents | $ | 100 | ||
Total assets | $ | 100 | ||
Shareholder’s Equity | ||||
Common stock, $1 par value; 100 shares authorized, issued and outstanding at September 30, 2010 | $ | 100 | ||
Total shareholder’s equity | $ | 100 | ||
F-54
F-55