Northrop Grumman 2012 Annual Report Download - page 26

NORTHROP GRUMMAN CORPORATION
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Our insurance coverage, customer indemnifications or other liability protections may be inadequate to cover all
of our significant risks or our insurers may deny coverage of or be unable to pay for material losses we incur,
which could adversely affect our profitability and overall financial position.
We endeavor to obtain insurance agreements from established markets to cover significant risks and liabilities
(including, for example, natural disasters and product liability). Not every risk or liability can be insured, and, for
risks that are insurable, the policy limits and terms of coverage reasonably obtainable in the market may not be
sufficient to cover all actual losses or liabilities incurred. Even if insurance coverage is available, we may not be
able to obtain it at a price or on terms acceptable to us.
Disputes with insurance carriers over policy terms or the insolvency of one or more of our insurers may significantly
affect the amount or timing of cash flows and, if litigation over coverage terms with the insurer becomes necessary,
an outcome unfavorable to us may have a material adverse effect on our financial position, results of operations, or
cash flows.
In some circumstances we may be entitled to certain legal protections or indemnifications from our customers
through contractual provisions, laws, regulations or otherwise. However, these protections are typically subject to
certain terms or limitations and may not be sufficient to cover all losses or liabilities incurred.
Anticipated benefits of mergers, acquisitions, joint ventures, spin-offs or strategic alliances may not be realized.
As part of our overall strategy, we may, from time to time, merge with or acquire businesses, dispose of or spin-off
businesses, form joint ventures or create strategic alliances. Whether we realize the anticipated benefits from these
transactions depends, in part, upon the integration between the businesses involved, the performance of the
underlying products, capabilities or technologies, the management of the operations and market conditions following
these transactions. Accordingly, our financial results could be adversely affected from unanticipated performance
issues, transaction-related charges, liabilities, amortization of expenses related to intangibles, charges for impairment
of long-term assets, guarantees, partner performance and indemnifications. Divestitures may result in continued
financial involvement in the divested business, such as through guarantees, indemnifications, or other financial
arrangements, following the transaction. Although we have established procedures and processes to mitigate these
risks, there is no assurance that these transactions will be successful.
Market volatility and adverse capital and credit market conditions may affect our suppliers' ability to access cost-
effective sources of funding and expose us to risks associated with the financial viability of suppliers.
A tightening of credit could 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 or the need for us to provide other supplemental means to support our existing
suppliers.
Pension and medical expenses associated with our retirement benefit plans may fluctuate significantly depending
upon changes in actuarial assumptions, future investment 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 other 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.
Additionally, due to government regulations, pension plan cost recoveries under our government contracts occur in
different periods from when those pension costs are recognized for financial statement purposes or when pension
funding is made. These timing differences could have a material adverse effect on our cash flow from operations. In
December 2011, the cost accounting rules were revised in order to partially harmonize the measurement and period
of assignment of defined benefit pension plan costs allocable to U.S. Government contracts and the minimum
required contribution under the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the
Pension Protection Act (PPA) of 2006. We anticipate that this rule will better align, but not eliminate, mismatches
between ERISA funding requirements and CAS pension costs for U.S. Government CAS covered contracts.