Northrop Grumman 2012 Annual Report Download - page 49

NORTHROP GRUMMAN CORPORATION
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respectively. Holding all other assumptions constant, an increase or decrease of 25 basis points in the expected long-
term rate of return assumption for 2012 would have the following estimated effect to:
$ in millions 25 Basis Point
Decrease 25 Basis Point Increase
Pension expense $52 ($52)
Post-retirement benefit expense 2 (2)
Health Care Cost Trend Rate – The health care cost trend rate represents the annual rate of change in the cost of
health care benefits based on external estimates of health care inflation, changes in health care utilization or delivery
patterns, technological advances, and changes in the health status of the plan participants. For the years ended
December 31, 2012 and December 31, 2011, we used a combination of market expectations and economic
projections, including the effect of health care reform, to select an expected initial health care cost trend rate of 7
percent for 2013 and 7.5 percent for 2012, respectively. Additionally, we expect an ultimate health care cost trend
rate of 5 percent to be reached in 2017 for both 2012 and 2011. Although our actual cost experience is much lower at
this time, market conditions and the potential effects of health care reform are expected to increase medical cost
trends in the next one to three years, thus our past experience may not reflect future conditions.
A one percentage-point change in the initial through the ultimate health care cost trend rates within the range would
have had the following estimated effect on 2012 post-retirement benefit results:
$ in millions
1-Percentage
Point
Decrease
1-Percentage
Point
Increase
Post-retirement benefit expense ($ 6) $ 5
Post-retirement benefit liability (88) 73
Estimated Fair Market Value of Plan Assets – For certain plan assets where the fair market value is not readily
determinable, such as real estate, private equity and hedge funds, estimates of fair value are determined using the
best information available.
Litigation, Commitments, and Contingencies
We are subject to a range of claims, investigations, lawsuits, environmental matters, income tax matters, and
administrative proceedings that arise in the ordinary course of business. Estimating liabilities and costs associated
with these matters requires judgment based upon the professional knowledge and experience of management and
counsel. We determine whether to record a charge to earnings and, if so, what amount based on consideration of the
facts and circumstances of each matter as then known to us, including any settlement offers, and our assessment of
the probability of the liabilities and whether the amount of the loss can be reasonably estimated. When we believe,
based on the facts available to us, that a liability is probable and the loss is reasonably estimable, we record our best
estimate of the amount of the ultimate loss. When a range of costs is reasonably estimable, but no amount within
that range is a better estimate than another, we record what we estimate as the lower end of the range.
Determinations whether to record a charge and, if so, of what amount, reflect management's assessment regarding
what is likely to occur; they do not necessarily reflect what management believes should occur. The ultimate
resolution of any such exposure to us may vary materially from earlier estimates as further facts and circumstances
develop or become known to us. For further information on the treatment of these contingencies, see Note 1, Note
11 and Note 12 to the consolidated financial statements in Part II, Item 8.
Environmental Accruals - We are subject to environmental laws and regulations in the jurisdictions in which we
conduct operations. Factors that could result in changes to the assessment of probability, range of estimated costs,
and environmental accruals include: modification of planned remedial actions, increase or decrease in the estimated
time required to remediate, discovery of more or less extensive contamination than anticipated, results of efforts to
involve other responsible parties, financial capabilities of other responsible parties, changes in laws and regulations
or contractual obligations affecting remediation requirements or other obligations, and improvements in remediation
technology.