Northrop Grumman 2011 Annual Report Download - page 24

NORTHROP GRUMMAN CORPORATION
circumstances were to change. Changes in underlying assumptions, circumstances or estimates may have a
material adverse effect upon the profitability of one or more of the affected contracts, future period financial
reporting and performance. See Critical Accounting Policies, Estimates, and Judgments in Part II, Item 7.
䡲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 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. Consistent with the industry’s efforts, our
procurement practices are intended to reduce the likelihood of our procurement of counterfeit parts or
materials. There are currently several components, for which there may only be one supplier. The inability of
a sole source supplier to meet our needs or the appearance of counterfeit parts could have a material adverse
effect on our financial position, results of operations, or cash flows.
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.
䡲Changes in future business conditions could cause business investments and/or recorded goodwill and other
intangible 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 evaluate goodwill amounts for
impairment at least annually or more often when we believe potential impairment exists. The annual
impairment test is based on several factors requiring judgment. A significant decrease in expected cash flows or
changes in market conditions may indicate potential impairment of recorded goodwill. 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 a minority or majority 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 intangible
assets.
䡲Our international business exposes us to additional risks.
While our international business is not substantial, it remains subject to numerous U.S. and foreign laws and
regulations, including, without limitation, regulations relating to import-export control, technology transfer
restrictions, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act and other anti-
corruption laws, and the anti-boycott provisions of the U.S. Export Administration Act. Failure by us, our
employees,or others working on our behalf to comply with these laws and regulations could result in
administrative, civil, or criminal liabilities, including suspension or debarment from government contracts or
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