Northrop Grumman 2010 Annual Report Download - page 30

쐍Market volatility and adverse capital and credit market conditions may affect our ability to access cost-effective
sources of funding and expose us to risks associated with the financial viability of suppliers and the ability of
counterparties to perform on financial instruments.
The financial and credit markets recently experienced high levels of volatility and disruption, reducing the
availability of credit for certain issuers. Historically, we have occasionally accessed these markets to support
certain business activities, including acquisitions, capital expansion projects, refinancing existing debt and
issuing letters of credit. In the future, we may not be able to obtain capital market financing or bank
financing when needed on favorable terms, or at all, which could have a material adverse effect on our
financial position, results of operations, or cash flows.
A tightening of credit could also adversely affect our suppliers’ ability to obtain financing. Delays in suppliers’
ability to obtain financing, or the unavailability of financing, could cause us to be unable to meet our
contract obligations and could adversely affect our financial position, results of operations, or cash flows. The
inability of our suppliers to obtain financing could also result in the need for us to transition to alternate
suppliers, which could result in significant incremental cost and delay.
We have executed transactions with counterparties in the financial services industry, including brokers and
dealers, commercial banks, investment banks and other institutional parties. These transactions expose us to
potential credit risk in the event of counterparty default.
쐍Pension and medical expenses associated with our retirement benefit plans may fluctuate significantly depending
upon changes in actuarial assumptions, future market performance of plan assets, future trends in health care
costs and legislative or other regulatory actions.
A substantial portion of our current and retired employee population is covered by pension and post-
retirement benefit plans, the costs of which are dependent upon our various assumptions, including estimates
of rates of return on benefit related assets, discount rates for future payment obligations, rates of future cost
growth and trends for future costs. In addition, funding requirements for benefit obligations of our pension
and post-retirement benefit plans are subject to legislative and other government regulatory actions.
Variances from these estimates could have a material adverse effect on our financial position, results of
operations, or cash flows. For example, the recent volatility in the financial markets resulted in lower than
expected returns on our pension plan assets in 2008, which resulted in higher pension costs in subsequent
years. See Note 17 to the consolidated financial statements in Part II, Item 8.
Additionally, due to government regulations, pension plan cost recoveries under our government contracts
may occur in different periods from when those pension costs are accrued for financial statement purposes or
when pension funding is made. Timing differences between pension costs accrued for financial statement
purposes or when pension funding occurs compared to when such costs are recoverable as allowable costs
under our government contracts could have a material adverse effect on our cash flow from operations. In
May 2010, the U.S. Cost Accounting Standards Board published a proposed rulemaking that, if adopted,
could provide a framework to partially harmonize these funding timing differences. See Overview – Industry
Factors, Recent Developments in U.S. Cost Accounting Standards (CAS) Pension Recovery Rules in Part II,
Item 7 for further discussion.
쐍Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our
profitability and cash flow.
We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required
in determining our worldwide provision for income taxes. In the ordinary course of business, there are many
transactions and calculations where the ultimate tax determination is uncertain. In addition, timing
differences in the recognition of income from contracts for financial statement purposes and for income tax
regulations can cause uncertainty with respect to the timing of income tax payments which can have a
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NORTHROP GRUMMAN CORPORATION