Northrop Grumman 2012 Annual Report Download - page 22

NORTHROP GRUMMAN CORPORATION
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Our earnings and margins depend, in part, on subcontractor performance as well as raw material and component
availability and pricing.
We rely on other companies to provide raw materials and major components for our products and rely on
subcontractors to produce hardware elements and sub-assemblies and perform some of the services that we provide
to our customers. Disruptions or performance problems caused by our subcontractors and vendors could have an
adverse effect on our ability to meet our commitments to customers. Our ability to perform our obligations on time
as a prime contractor could be adversely affected if one or more of the vendors or subcontractors are unable to
provide the agreed-upon products or materials or perform the agreed-upon services in a timely and cost-effective
manner.
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 costs to the extent that the increases in our costs
are in line with industry indices. However, the difference in basis between our actual 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 or components 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
only be one supplier. If a sole source supplier cannot meet our needs, we may be unable to find a suitable alternative.
Consistent with the industry’s efforts, our procurement practices are intended to reduce the likelihood of our
procurement of counterfeit parts or materials. If we are unable to procure needed materials, components or parts, or
if the parts we procure are counterfeit, our financial position, results of operations, or cash flows could be materially
adversely affected.
Changes in economic conditions, as well as changes in the defense budget, can adversely affect the ability of our
subcontractors and suppliers to perform and further increase this risk.
Changes in future business conditions could cause business investments and/or recorded goodwill and other
long-lived assets to become impaired, resulting in substantial losses and write-downs that would reduce our
operating income.
Goodwill accounts for approximately half of our recorded total assets. We test goodwill amounts for impairment at
least annually and consider whether an interim test is required if we believe potential impairment exists. The annual
impairment test is based on several factors requiring judgment. We face continued uncertainty in our business
environment due to the substantial fiscal and economic challenges facing the U.S. Government, our primary
customer, including the potential for sequestration and issues surrounding the national debt ceiling. Potential
contract cancellations, modifications or terminations may arise from resolution of these issues and could cause our
revenues, profits and cash flows to be substantially lower than our current projections. In addition, market-based
inputs to the calculations in the impairment test, such as weighted average cost of capital and terminal value (based
on market comparisons) could also be negatively impacted. Such circumstances may result in an impairment of our
goodwill. Further, the carrying values of our reporting units are significantly influenced by a number of factors
including the discount rate used to determine our net pension liability. Therefore an increase in the discount rate on
our pension liability in 2013 or beyond could result in an impairment of goodwill absent any changes discussed
above. We continue to monitor the recoverability of the carrying value of our goodwill and other long-lived assets.
As part of our overall strategy, we may, from time to time, acquire an interest in a business. Even after careful
integration efforts, actual operating results may vary significantly from initial estimates and we may experience
unforeseen issues that adversely affect the value of our goodwill or other long-lived assets.