Northrop Grumman 2013 Annual Report Download - page 24

NORTHROP GRUMMAN CORPORATION
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services may themselves be subject to cybersecurity threats and/or they may not be able to detect or deter such
threats to our customers, or effectively to mitigate resulting losses. These losses could adversely affect our
customers and our company. They could result in damage to our reputation, loss of business and potential liability,
any one of which could have a material adverse effect on our financial position, results of operations and/or cash
flows.
Changes to business practices for U.S. Government contractors could have a significant adverse effect on current
programs, potential new awards and the processes by which procurements are awarded and managed.
Our industry has experienced, and we expect it will continue to experience, significant changes to business practices
as a result of, among other items, an increased focus on affordability, efficiencies, recovery of costs and a
reprioritization of available defense funds to key areas for future defense spending. The DoD continues to adjust its
procurement practices, requirements criteria and source selection methodology in its ongoing efforts to reduce costs,
gain efficiencies and enhance program management and control. Further, the DCMA/DCAA have implemented cost
recovery/cost savings initiatives designed to prioritize efforts to recover costs. As a result of certain of these
initiatives, we have experienced and may continue to experience an increased number of audits and/or a lengthened
period of time required to close open audits. More recently, the thresholds for certain allowable costs, including
compensation costs, have been significantly reduced; others are being challenged, debated and, in certain cases,
modified. Significant changes to the thresholds for allowable costs could adversely affect our financial position,
results of operations and/or cash flows.
These efforts have had, and we expect them to continue to have, a significant impact on the contracting environment
in which we do business. In connection with these cost reduction initiatives, the U.S. Government is also pursuing
alternatives to shift additional responsibility and performance risks to the contractor. While the impact to our
business as a result of these changes remains uncertain, our business and industry could be materially adversely
affected.
Our earnings and profitability depend, in part, on subcontractor performance as well as raw material and
component availability and pricing. Adverse capital and credit market conditions may affect our suppliers' ability
to perform.
We rely on other companies to provide raw materials and major components and subsystems for our products and to
produce hardware elements and sub-assemblies, provide intellectual property, and perform some of the services we
provide to our customers. Disruptions or performance problems caused by our subcontractors and suppliers 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
our subcontractors or suppliers were unable to provide the agreed-upon products or materials or perform the agreed-
upon services in a timely and cost-effective manner. Changes in economic conditions, including changes in defense
budgets or credit availability, could adversely affect the financial stability of our subcontractors and suppliers and/or
their ability to perform. The inability of our suppliers to perform could also result in the need for us to transition to
alternate suppliers, which could result in significant incremental cost and delay or the need for us to provide other
supplemental means to support our existing suppliers.
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 certain costs to the extent the increases in our
costs are in line with the escalation provisions in those contracts. However, the difference in basis between our
actual costs and these escalation provisions may expose us to cost growth even with these provisions. A significant
delay in supply deliveries of our key raw materials, components or intellectual property required in our production
processes could have a material adverse effect on our financial position, results of operations and/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 customer. 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 conflict materials or counterfeit or unauthorized parts or materials. In some circumstances, we must
rely on certifications from our subcontractors and suppliers regarding their compliance with applicable laws and
regulations regarding the parts or materials we procure. If certifications received from our subcontractors or
suppliers are inaccurate, if we are unable to procure needed materials, components or parts, or if the parts we
procure are counterfeit or not authorized, it could have a material adverse effect on our financial position, results of
operations and/or cash flows.