Northrop Grumman 2010 Annual Report Download - page 23

labor, recruiting or training costs in order to attract and retain such employees or could experience difficulty
in performing under our contracts if the needs for such employees are unmet.
Approximately 20 percent of our 117,100 employees are covered by an aggregate of 32 collective bargaining
agreements. We expect to re-negotiate renewals of four of our collective bargaining agreements in 2011.
Collective bargaining agreements generally expire after three to five years and are subject to renegotiation at
that time. We may experience difficulties with renewals and renegotiations of existing collective bargaining
agreements. If we experience such difficulties, we could incur additional expenses and work stoppages. Any
such expenses or delays could adversely affect programs served by employees who are covered by collective
bargaining agreements.
쐍Many of our contracts contain performance obligations that require innovative design capabilities, are
technologically complex, require state-of-the-art manufacturing expertise or are dependent upon factors not
wholly within our control. Failure to meet these obligations could adversely affect our profitability and future
prospects.
We design, develop and manufacture technologically advanced and innovative products and services applied
by our customers in a variety of environments. Problems and delays in development or delivery as a result of
issues with respect to design, technology, licensing and patent rights, labor, learning curve assumptions or
materials and components could prevent us from achieving contractual requirements.
In addition, our products cannot be tested and proven in all situations and are otherwise subject to
unforeseen problems. Examples of unforeseen problems that could negatively affect revenue and profitability
include loss on launch of spacecraft, premature failure of products that cannot be accessed for repair or
replacement, problems with quality and workmanship, country of origin, delivery of subcontractor
components or services and unplanned degradation of product performance. These failures could result,
either directly or indirectly, in loss of life or property. Among the factors that may affect revenue and profits
could be unforeseen costs and expenses not covered by insurance or indemnification from the customer,
diversion of management focus in responding to unforeseen problems, loss of follow-on work, and, in the
case of certain contracts, repayment to the government customer of contract cost and fee payments we
previously received.
Certain contracts, primarily involving space satellite systems, contain provisions that entitle the customer to
recover fees in the event of partial or complete failure of the system upon launch or subsequent deployment
for less than a specified period of time. Under such terms, we could be required to forfeit fees previously
recognized and/or collected. We have not experienced any material losses in the last decade in connection
with such contract performance incentive provisions. However, if we were to experience launch failures or
complete satellite system failures in the future, such events could have a material adverse effect on our
financial position, results of operations, or cash flows.
쐍Contract cost growth on fixed-price and other contracts that cannot be justified as an increase in contract value
due from customers exposes us to reduced profitability and the potential loss of future business.
Our operating income is adversely affected when we incur certain contract costs or certain increases in
contract costs that cannot be billed to customers. This cost growth can occur if estimates to complete
increase due to technical challenges, manufacturing difficulties or delays, or workforce-related issues, or if
initial estimates used for calculating the contract cost were incorrect. The cost estimation process requires
significant judgment and expertise. Reasons for cost growth may include unavailability or reduced
productivity of labor, the nature and complexity of the work to be performed, the timelines and availability
of materials, major subcontractor performance and quality of their products, the effect of any delays in
performance, availability and timing of funding from the customer, natural disasters and the inability to
recover any claims included in the estimates to complete. A significant change in cost estimates on one or
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NORTHROP GRUMMAN CORPORATION