Northrop Grumman 2010 Annual Report Download - page 39

over that period. Northrop Grumman is one of the largest subcontractors on the F-35 program, and if approved
by Congress, the reduction would impact our revenues.
Secretary Gates also outlined future opportunities for which we could compete, including a next generation
nuclear capable long-range bomber, additional F/A-18 E/F aircraft to offset the reduction in the F-35 aircraft, as
well as numerous opportunities to apply our unmanned airborne technologies and capabilities and our broad
sensor technologies to new products and to upgrade several existing platforms.
While the real rate of growth in the top line defense budget may be slowing for the first time since 9/11, the
U.S. Government’s budgetary process continues to give us good visibility regarding future spending and the
threat areas that it is addressing. We believe that our current contracts, and our strong backlog of previously
awarded contracts align well with our customer’s future needs, and this provides us with good insight regarding
future cash flows from our businesses. Nonetheless, we recognize that no business is immune to the current
economic situation and new policy initiatives could adversely affect future defense spending levels, which could
lower our expected future revenues. Certain programs in which we participate may be subject to potential
reductions due to this slower rate of growth in the U.S. defense budget and the utilization of funds to support
the ongoing conflicts in Iraq and Afghanistan.
Liquidity Trends – In light of the ongoing economic situation, we have evaluated our future liquidity needs, both
from a short-term and long-term perspective. We expect that cash on hand at the beginning of the year plus cash
generated from operations and cash available under credit lines will be sufficient in 2011 to service debt, finance
capital expansion projects, pay federal, foreign, and state income taxes, fund pension and other post-retirement
benefit plans, and continue paying dividends to shareholders. We have a committed $2 billion revolving credit
facility, with a maturity date of August 10, 2012, that can be accessed on a same-day basis.
We believe we can obtain additional capital to provide for long-term liquidity, if necessary, from such sources as
the public or private capital markets, the sale of assets, sale and leaseback of operating assets, and leasing rather
than purchasing new assets. We have an effective shelf registration statement on file with the SEC. See Liquidity
and Capital Resources below for further discussions about our financing activities.
Industry Factors
We are subject to the unique characteristics of the U.S. defense industry as a monopsony, whereby demand for
our products and services comes primarily from one customer, and by certain elements peculiar to our own
business mix.
Recent Developments in U.S. Cost Accounting Standards (CAS) Pension Recovery Rules – On May 10, 2010, the CAS
Board published a Notice of Proposed Rulemaking (NPRM) that if adopted would provide a framework to
partially harmonize the CAS rules with the Pension Protection Act of 2006 (PPA) funding requirements. The
NPRM would “harmonize” by mitigating the mismatch between CAS costs and PPA-amended Employee
Retirement Income Security Act (ERISA) minimum funding requirements. Until the final rule is published, and
to the extent that the final rule does not completely eliminate mismatches between ERISA funding requirements
and CAS pension costs, government contractors maintaining defined benefit pension plans will continue to
experience a timing mismatch between required contributions and pension expenses recoverable under CAS.
The final rule is expected to be issued in 2011 and to apply to contracts starting the year following the award of
the first CAS covered contract after the effective date of the new rule. This would mean the rule would apply to
our contracts in 2012. We anticipate that contractors will be entitled to an equitable adjustment for any
additional CAS contract costs resulting from the final rule.
Economic Opportunities, Challenges, and Risks
The United States continues to face a complex and rapidly changing national security environment, while
simultaneously addressing domestic economic challenges such as unemployment, federal budget deficits and the
growing national debt. The U.S. Government’s investment in capabilities that respond to constantly evolving
threats is increasingly being balanced against the need to address domestic economic challenges. We believe that
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NORTHROP GRUMMAN CORPORATION