Northrop Grumman 2012 Annual Report Download - page 72

NORTHROP GRUMMAN CORPORATION
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Derivative Financial Instruments and Hedging Activities
The company's derivative portfolio consists primarily of foreign currency forward contracts. Foreign currency
forward contracts are used to manage foreign currency exchange rate risk related to receipts from customers and
payments to suppliers denominated in foreign currencies. Derivative financial instruments are recognized as assets
or liabilities in the financial statements and measured at fair value, and substantially all of these instruments are
valued using Level 2 inputs. Where model-derived valuations are appropriate, the company utilizes the income
approach to determine the fair value and uses the applicable London Interbank Offered Rate (LIBOR) swap rate as
the discount rate.
The notional values for the company's derivative portfolio at December 31, 2012 and 2011, were $164 million and
$233 million, respectively. The portion of the notional values designated as cash flow hedges at December 31, 2012
and 2011, were $110 million and $145 million, respectively.
Unrealized gains or losses on the effective portion of cash flow hedges are reclassified from other comprehensive
income to earnings from continuing operations upon the settlement of the underlying transactions. The derivative
fair values and related unrealized gains/losses at December 31, 2012 and 2011, were not material. Hedge contracts
not designated for hedge accounting and the ineffective portion of cash flow hedges are recorded in other income.
Long-Term Debt
The fair value of long-term debt was calculated using Level 2 inputs based on interest rates available for debt with
terms and maturities similar to the company’s existing debt arrangements.
10. LONG-TERM DEBT
Lines of Credit
The company has available uncommitted short term credit lines in the form of money market facilities with several
banks. The amount and conditions for borrowing under these credit lines depend on the availability and terms
prevailing in the marketplace. No fees or compensating balances are required for these credit facilities.
Credit Facility
In September 2012, the company entered into a 364-day revolving credit facility in an aggregate principal amount of
$500 million (the "2012 Credit Agreement") replacing the company's 364-day revolving credit facility entered into
in September 2011 (the "2011 Credit Agreement"). The terms and conditions of the 2012 Credit Agreement are
substantially the same as the terms and conditions in the 2011 Credit Agreement, which restrict the company’s
ability to sell all or substantially all of its assets, merge or consolidate with another entity or undertake other
fundamental changes and incur liens. The company also cannot permit the ratio of its consolidated debt to
capitalization (as set forth in the Credit Agreement) to exceed 65 percent. The company is in compliance with all
covenants under the Credit Agreement. There were no borrowings under the credit facility for the year ended
December 31, 2012, and no balance outstanding under the credit facility at December 31, 2012.
In September 2011, the Company entered into two senior unsecured credit facilities (the Credit Agreements) in an
aggregate principal amount of $2 billion. The first Credit Agreement amended the company’s $2 billion five-year
credit facility dated August 10, 2007, by reducing the aggregate principal amount available under the facility by
$500 million to $1.5 billion and extending the maturity date to September 2016. The second Credit Agreement is a
364-day revolving credit facility in an aggregate principal amount of $500 million which ended in September 2012.
The credit facilities permit the company to request additional lending commitments of up to $500 million from the
lenders under the agreement or through other eligible lenders under certain circumstances. Borrowings under the
credit facilities bear interest at various rates, including LIBOR (or an alternate base rate), plus an incremental margin
based on the company’s credit ratings and credit default swap spread. The credit facilities also require a commitment
fee based on the daily aggregate unused amount of commitments and the company’s credit ratings, and contain a
financial covenant relating to a maximum debt to capitalization ratio, and certain restrictions on additional asset
liens. There were no borrowings under the credit facilities in the years ended December 31, 2012, and 2011, and no
balances outstanding under the credit facilities at December 31, 2012 and 2011. As of December 31, 2012, the
company was in compliance with all covenants under these Credit Agreements.
Debt Tender Offer
In November 2010, the company made a tender offer for $1.9 billion of debt securities issued by its subsidiary,
Northrop Grumman Systems Corporation, maturing in 2016 to 2036 with interest rates ranging from 6.98 percent to
7.875 percent. Approximately $682 million in aggregate principal amount was purchased for a total price of $919
million (including accrued and unpaid interest on the securities). The company recorded a pre-tax charge of $229
million principally related to the premiums paid on the debt tendered.