Northrop Grumman 2011 Annual Report Download - page 43

NORTHROP GRUMMAN CORPORATION
Goodwill and Other Intangible Assets
We perform an annual impairment test of our goodwill and intangible assets with indefinite lives as of
November 30th, or between annual tests if events occur or circumstances change which suggest that the goodwill
or indefinite-lived intangible assets should be evaluated. Intangible assets with finite lives are tested for impairment,
whenever events or circumstances indicate that the carrying value may not be recoverable. When testing goodwill,
we compare the fair value of the reporting unit to its carrying value.
To determine the fair value of our reporting units, we primarily use the income approach based on the cash flows
that the reporting unit expects to generate in the future. This income valuation method requires management to
project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting
units over a multi-year period, as well as determine the weighted-average cost of capital (WACC) used as a
discount rate and the terminal value assumptions. The WACC takes into account the relative weights of each
component of our consolidated capital structure (equity and debt) and represents the expected cost of new capital
adjusted as appropriate to consider lower risk profiles associated with longer-term contracts and barriers to market
entry. The terminal value assumptions are applied to the final year of the discounted cash flow model. Impairment
assessment inherently involves management judgments as to assumptions about expected future cash flows and the
impact of market conditions on those assumptions. Due to the many variables inherent in the estimation of a
business’s fair value and the relative size of our recorded goodwill, differences in assumptions may have a material
effect on the results of our impairment analysis. We also corroborate the fair values determined under the income
approach using the market valuation method to estimate the fair value of our reporting units by utilizing industry
multiples (including relevant control premiums) of operating earnings. When calculating impairment for intangible
assets with indefinite lives, we compare the fair value of these assets, as determined based on the income and
market valuation methods, to the carrying value. If the carrying value exceeds the fair value, we determine the fair
value of the reporting unit’s individual assets and liabilities and calculate the implied fair value of goodwill.
In the fourth quarter of 2011, we performed our annual goodwill impairment evaluation. The results of our
annual goodwill impairment test as of November 30, 2011, indicated that the estimated fair value of each
reporting unit exceeds its carrying value. There were no impairment charges recorded in the years ended
December 31, 2011, 2010 and 2009.
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 professional knowledge and experience of management and our
internal and external legal counsel. In accordance with our practices relating to accounting for contingencies, 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. 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. 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. For further information on the treatment of these contingencies, see
Note 1, Note 14 and Note 15 to the consolidated financial statements in Part II, Item 8.
U.S. Government Cost Claims
From time to time, our customers advise us of ordinary course claims and penalties concerning certain potential
disallowed costs. When such findings are presented, we engage U.S. Government representatives in discussions to
enable us to evaluate the merits of these claims, as well as to assess the amounts being claimed. Where appropriate,
provisions are made to reflect our expected exposure to matters raised by the U.S. Government representatives.
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