Northrop Grumman 2010 Annual Report Download - page 24

Download and view the complete annual report

Please find page 24 of the 2010 Northrop Grumman annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 132

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132

more programs could have a material adverse effect on our consolidated financial position, results of
operations or cash flows.
Most of our contracts are firm fixed-price contracts or flexibly priced contracts. Our risk varies with the type
of contract. Flexibly priced contracts include both cost-type and fixed-price incentive contracts. Due to their
nature, firm fixed-price contracts inherently have more risk than flexibly priced contracts. Approximately
33 percent of our annual revenues are derived from firm fixed-price contracts – see Contracts in Part II,
Item 7. We typically enter into firm fixed-price contracts where costs can be reasonably estimated based on
experience. In addition, our contracts contain provisions relating to cost controls and audit rights. Should the
terms specified in our contracts not be met, then profitability may be reduced. Fixed-price development
work comprises a small portion of our firm fixed-price contracts and inherently has more uncertainty as to
future events than production contracts and therefore more variability in estimates of the costs to complete
the development stage. As work progresses through the development stage into production, the risks
associated with estimating the total costs of the contract are generally reduced. In addition, successful
performance of firm fixed-price development contracts that include production units is subject to our ability
to control cost growth in meeting production specifications and delivery rates. While management uses its
best judgment to estimate costs associated with fixed-price development contracts, future events could result
in either upward or downward adjustments to those estimates.
Under a fixed-price incentive contract, the allowable costs incurred by the contractor are subject to
reimbursement, but are subject to a cost-share limit which affects profitability. Contracts in Shipbuilding are
often fixed-price incentive contracts for production of a first item without a separate development contract.
Accordingly, we face the additional difficulty of estimating production costs on a product that has not yet
been designed. Further, Shipbuilding sometimes enters into follow-on fixed-price contracts after a significant
delay from the first production request, and the passage of time makes it more difficult for us to accurately
estimate costs for renewed production.
Under a cost-type contract the allowable costs incurred by the contractor are also subject to reimbursement
plus a fee that represents profit. We enter into cost-type contracts for development programs with complex
design and technical challenges. These cost-type programs typically have award or incentive fees that are
subject to uncertainty and may be earned over extended periods. In these cases the associated financial risks
are primarily in lower profit rates or program cancellation if cost, schedule, or technical performance issues
arise.
쐍Our earnings and margins depend, in part, on our ability to perform under contracts.
When agreeing to contractual terms, our management makes assumptions and projections about future
conditions and events, many of which extend over long periods. These projections assess the productivity and
availability of labor, the complexity of the work to be performed, the cost and availability of materials, the
impact of delayed performance, and the timing of product deliveries. If there is a significant change in one or
more of these circumstances or estimates, or if we face unanticipated contract costs, the profitability of one or
more of these contracts may be adversely affected.
쐍Our 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 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.
-14-
NORTHROP GRUMMAN CORPORATION