Northrop Grumman 2010 Annual Report Download - page 21

reimbursement for costs incurred on the contracts and profit on those costs but not the anticipated profit that
would have been earned had the contract been completed. In the rare circumstance where a
U.S. government contract does not have such termination protection, we attempt to mitigate the termination
risk through other means. To the extent such means are unavailable or do not fully address the costs incurred
or profit on those costs, we could face significant losses from the termination for convenience of a contract
that lacks termination protection. Termination by the U.S. Government of a contract for convenience could
also result in the cancellation of future work on that program. Termination by the U.S. Government of a
contract due to our default could require us to pay for re-procurement costs in excess of the original contract
price, net of the value of work accepted from the original contract. Termination of a contract due to our
default may expose us to liability and could have a material adverse effect on our ability to compete for
contracts.
쐍As a U.S. Government contractor, we are subject to a number of procurement regulations and could be adversely
affected by changes in regulations or any negative findings from a U.S. Government audit or investigation.
U.S. Government contractors must comply with many significant procurement regulations and other
requirements. These regulations and requirements, although customary in government contracts, increase our
performance and compliance costs. If any such regulations or procurement requirements change, our costs of
complying with them could increase and reduce our margins.
We operate in a highly regulated environment and are routinely audited and reviewed by the
U.S. Government and its agencies such as the Defense Contract Audit Agency (DCAA) and Defense
Contract Management Agency (DCMA). These agencies review our performance under our contracts, our
cost structure and our compliance with applicable laws, regulations and standards, as well as the adequacy of,
and our compliance with, our internal control systems and policies. Systems that are subject to review
include, but are not limited to, our accounting systems, purchasing systems, billing systems, property
management and control systems, cost estimating systems, compensation systems and management
information systems. Any costs found to be unallowable or improperly allocated to a specific contract will
not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal
activities, we may be subject to civil and criminal penalties and administrative sanctions, which may include
termination of contracts, forfeiture of profits, suspension of payments, fines and suspension, or prohibition
from doing business with the U.S. Government. Whether or not illegal activities are alleged, the
U.S. Government also has the ability to decrease or withhold certain payments when it deems systems subject
to its review to be inadequate. In addition, we could suffer serious reputational harm if allegations of
impropriety were made against us.
The U.S. Government, from time to time, recommends to its contractors that certain contract prices be
reduced, or that costs allocated to certain contracts be disallowed. These recommendations can involve
substantial amounts. In the past, as a result of such audits and other investigations and inquiries, we have on
occasion made adjustments to our contract prices and the costs allocated to our government contracts.
We are also, from time to time, subject to U.S. Government investigations relating to our operations, and we
are subject to or expected to perform in compliance with a vast array of federal laws, including but not
limited to the Truth in Negotiations Act, the False Claims Act, the Procurement Integrity Act, Cost
Accounting Standards, the International Traffic in Arms Regulations promulgated under the Arms Export
Control Act, the Close the Contractor Fraud Loophole Act and the Foreign Corrupt Practices Act. If we are
convicted or otherwise found to have violated the law, or are found not to have acted responsibly as defined
by the law, we may be subject to reductions of the value of contracts, contract modifications or termination
and the assessment of penalties and fines, compensatory or treble damages, which could have a material
adverse effect on our financial position, results of operations, or cash flows. Such findings or convictions
could also result in suspension or debarment from government contracting. Given our dependence on
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NORTHROP GRUMMAN CORPORATION