Northrop Grumman 2010 Annual Report Download - page 25

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Our costs may increase over the term of our contracts. Through cost escalation provisions contained in some
of our U.S. Government contracts, we may be protected from increases in material costs to the extent that
the increases in our costs are in line with industry indices. However, the difference in basis between our
actual material costs and these indices may expose us to cost uncertainty even with these provisions. A
significant delay in supply deliveries of our key raw materials required in our production processes could have
a material adverse effect on our financial position, results of operations, or cash flows.
In connection with our government contracts, we are required to procure certain materials, components and
parts from supply sources approved by the U.S. Government. There are currently several components for
which there may be only one supplier. The inability of a sole source supplier to meet our needs could have a
material adverse effect on our financial position, results of operations, or cash flows.
쐍Our business is subject to disruption caused by natural disasters, environmental disasters and other factors that
could adversely affect our profitability and our overall financial position.
We have significant operations located in regions of the U.S. that may be exposed to damaging storms and
other natural disasters, such as hurricanes or earthquakes, and environmental disasters, such as oil spills.
Although preventative measures may help to mitigate damage, the damage and disruption resulting from
natural and environmental disasters may be significant. Should insurance or other risk transfer mechanisms be
unavailable or insufficient to recover all costs, we could experience a material adverse effect on our financial
position, results of operations, or cash flows.
Our suppliers and subcontractors are also subject to natural disasters that could affect their ability to deliver or
perform under a contract. Performance failures by our subcontractors due to natural and environmental
disasters may adversely affect our ability to perform our obligations on the prime contract, which could
reduce our profitability due to damages or other costs that may not be fully recoverable from the
subcontractor or from the customer and could result in a termination of the prime contract and have an
adverse effect on our ability to compete for future contracts.
Natural disasters can also disrupt our workforce, electrical and other power distribution networks, including
computer and internet operation and accessibility, and the critical industrial infrastructure needed for normal
business operations. These disruptions could cause adverse effects on our profitability and performance.
Environmental disasters, particularly oil spills in waterways and bodies of water used for the transport and
testing of our ships, can disrupt the timing of our performance under our contracts with the U.S. Navy and
the U.S. Coast Guard.
쐍We use estimates when accounting for contracts. Changes in estimates could affect our profitability and our
overall financial position.
Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and
making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts,
the estimation of total revenues and costs at completion is complicated and subject to many variables. For
example, assumptions have to be made regarding the length of time to complete the contract because costs
also include expected increases in wages and prices for materials. Similarly, assumptions have to be made
regarding the future impact of our self-imposed efficiency initiatives and cost reduction efforts. Incentives,
awards or penalties related to performance on contracts are considered in estimating revenue and profit rates,
and are recorded when there is sufficient information to assess anticipated performance.
Because of the significance of the judgment and estimation processes described above, it is possible that
materially different amounts could be obtained if different assumptions were used or if the underlying
circumstances were to change. Changes in underlying assumptions, circumstances or estimates may have a
material adverse effect upon future period financial reporting and performance. See Critical Accounting
Policies, Estimates, and Judgments in Part II, Item 7.
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NORTHROP GRUMMAN CORPORATION