Northrop Grumman 2009 Annual Report Download - page 23

Approximately 20 percent of our 120,700 employees are covered by an aggregate of 32 collective bargaining
agreements. We expect to re-negotiate renewals of three of our collective bargaining agreements in 2010, and
we are continuing to negotiate an initial contract for a group of employees. 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. In the
recent past we have experienced work stoppages and other labor disruptions in Shipbuilding.
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, 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
consolidated financial position or results of operations.
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.
Operating income is adversely affected when we incur 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 more programs could have a material adverse effect on our consolidated
financial position or results of operations.
Most of our contracts are firm fixed-price contracts or flexibly priced contracts. Flexibly priced contracts
include both cost-type and fixed-price incentive contracts. Due to their nature, firm fixed-price contracts
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NORTHROP GRUMMAN CORPORATION
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