Northrop Grumman 2012 Annual Report Download - page 27

NORTHROP GRUMMAN CORPORATION
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Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our
profitability and cash flow.
We are subject to income taxes in the 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. Furthermore, changes in applicable
domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income
tax rates assessed or changes in the taxability of certain sales or the deductibility of certain expenses, thereby
affecting our income tax expense and profitability. Deferred tax assets are required to be measured at the statutory
tax rate currently in effect, therefore a change in the U.S. corporate tax rate would result in a remeasurement of our
net deferred tax asset through the income tax provision. The final determination of any tax audits or related litigation
could be materially different from our historical income tax provisions and accruals. Additionally, changes in our tax
rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our
overall profitability, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities, changes
in differences between financial reporting income and taxable income, the results of audits and the examination of
previously filed tax returns by taxing authorities and continuing assessments of our tax exposures could impact our
tax liabilities and significantly affect our income tax expense, profitability and cash flow.
Our nuclear-related operations subject us to various environmental, regulatory, financial and other risks.
Our nuclear-related operations subject us to various risks, including potential liabilities relating to harmful effects on
the environment and human health that may result from nuclear-related operations and the storage, handling and
disposal of radioactive materials. We are also subject to reputational harm and potential liabilities arising out of a
nuclear incident, whether or not it is within our control. The U.S. Government and prime contractors provide certain
indemnity protection under certain of our contracts pursuant to, or in connection with, Public Law 85-804 and the
Price-Anderson Nuclear Industries Indemnity Act for certain nuclear-related risks. If there was a nuclear incident
and that indemnity protection was not available to cover our losses and liabilities, it could have a material adverse
effect on our financial position, results of operations, or cash flows.
If all or any portion of the spin-off of our former Shipbuilding business or certain internal transactions
undertaken in anticipation of the spin-off transaction are determined to be taxable for U.S. federal income tax
purposes, we and our shareholders that are subject to U.S. federal income tax may incur significant U.S. federal
income tax liabilities.
In connection with the spin-off of our former Shipbuilding business, we received a letter ruling from the IRS and an
opinion of counsel confirming that we and our shareholders would not recognize any taxable income, gain or loss
for U.S. federal income tax purposes as a result of the merger, the internal reorganization or the distribution, except
that our shareholders who receive cash in lieu of fractional shares would recognize gain or loss with respect to such
cash. The ruling and the opinion relied on certain facts, assumptions, representations and undertakings from us and
HII regarding the past and future conduct of the companies’ respective businesses and other matters.
We are not aware of any facts or circumstances that would cause any of the factual statements or representations in
the IRS ruling or the opinion to be incomplete or untrue at the time of the spin-off transaction. Nevertheless, if the
IRS determines that any of the factual statements or representations that the IRS ruling or the opinion was based on
were incomplete or untrue, or if certain facts or circumstances upon which the IRS ruling or the opinion was based
were materially different from those at the time of the spin-off, we and our shareholders may not be able to rely on
the IRS ruling or the opinion of counsel and could be subject to significant tax liabilities.
Even if the spin-off transaction otherwise qualifies as tax-free for U.S. federal income tax purposes, the internal
reorganization and distribution may be taxable to us (but not to our shareholders) if certain events occur, including,
if before March 31, 2013 there are one or more acquisitions (including issuances) of the stock of either us or HII,
representing 50% or more 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; we cease to engage
appropriately in the conduct of a substantial part of our existing business; or, we or HII repurchase shares in excess
of specified levels before March 31, 2013. If such tax were incurred, the tax liability would be substantial. HII has
agreed not to undertake transactions that would reasonably be expected to trigger such tax, and we intend to avoid
any such transactions.