Northrop Grumman 2014 Annual Report Download - page 21

NORTHROP GRUMMAN CORPORATION
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DoD, may turn to commercial contractors, rather than traditional defense contractors, for some products and
services, or may utilize small business contractors or determine to source work internally rather than hiring a
contractor.
We also are seeing an increasing number of bid protests from unsuccessful bidders on new program awards. Bid
protests could result in contract modifications or the award decision being reversed and loss of the contract award.
Even where a bid protest does not result in the loss of an award, the resolution can extend the time until the contract
activity can begin, and delay earnings.
If we are unable to continue to compete successfully against our current or future competitors, or prevail in a protest,
we may experience declines in future revenues and market share, which could, over time, have a material adverse
effect on our financial position, results of operations and/or cash flows.
As a U.S. Government contractor, we are subject to various procurement and other laws and regulations
applicable to our industry and we could be adversely affected by changes in such laws and regulations or any
negative findings by the U.S. Government as to our compliance with them.
U.S. Government contractors must comply with many significant procurement regulations and other specific legal
requirements. These regulations and other requirements, although customary in government contracts, increase our
performance and compliance costs and risks and are regularly evolving. New laws, regulations or procurement
requirements or changes to current ones (including, for example, regulations related to limits on recovery of
employee compensation costs, counterfeit parts, specialty metals and conflict minerals), can significantly increase
our costs and risks and reduce our profitability.
We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. Government and
its agencies, such as the Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA)
and the DoD Inspector General. These agencies review performance under our contracts, our cost structure and our
compliance with applicable laws, regulations and standards, as well as the adequacy of our systems and processes in
meeting government requirements. Costs ultimately found to be unallowable or improperly allocated to a specific
contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal
activities, we may be subject to civil and criminal penalties, sanctions, forfeiture of profits or suspension or
debarment. Whether or not illegal activities are alleged, the U.S. Government has the ability to decrease or withhold
certain payments when it deems systems subject to its review to be inadequate, with significant financial impact. In
addition, we could suffer serious reputational harm if allegations of impropriety were made against us.
Our industry has experienced, and we expect it will continue to experience, significant changes to business practices
as a result of an increased focus on affordability, efficiencies, recovery of costs and a reprioritization of available
defense funds to key areas for future defense spending. 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, all with
potentially significant financial costs to the company. 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.
We also are subject to and expected to perform in compliance with a vast array of federal laws, including but not
limited to the Truth in Negotiations Act, the False Claims Act, the Procurement Integrity Act, CAS, FAR, the
International Traffic in Arms Regulations promulgated under the Arms Export Control Act, the Close the Contractor
Fraud Loophole Act and the FCPA. If we are found to have violated the law, or are found not to have acted
responsibly as defined by the law, we may be subject to reductions of the value of contracts; contract modifications
or termination; the withholding of payments from our customer; the loss of export privileges; the assessment of
penalties, fines, or compensatory, treble or other damages; or suspension or debarment.
If we do not comply with the laws, regulations and processes to which we are subject or if business practices change
significantly, including with respect to the thresholds for allowable costs, it could have a material adverse effect on
our financial position, results of operations and/or cash flows.
Our business is subject to disruption caused by natural and/or environmental disasters that could adversely affect
our profitability and our overall financial position.
We have significant operations located in regions that may be exposed to earthquakes, damaging storms and other
natural disasters. Our business also may be subject to environmental disasters. Our subcontractors and suppliers are
also subject to natural and environmental disasters that could affect their ability to deliver or perform under a