Northrop Grumman 2010 Annual Report Download - page 103

company has been working with its customer to determine the nature and extent of the pipe weld issue and its
possible impact on related shipboard systems. This effort has resulted in the preparation of a technical analysis of
the problem, additional inspections on the ships, a rework plan for ships previously delivered and in various
stages of production, and modifications to the work plans for ships being placed into production, all of which has
been done with the knowledge and support of the U.S. Navy. Incremental costs associated with the anticipated
resolution of these matters, and determined to be Shipbuilding’s responsibility, have been reflected in the financial
performance analysis and contract booking rates beginning with the second quarter of 2009.
In the fourth quarter of 2009, certain bearing wear and debris were found in the lubrication system of the main
propulsion diesel engines (MPDE) installed on LPD 21. Shipbuilding is participating with the U.S. Navy and
other industry participants involved with the MPDEs in a review panel established by the U.S. Navy to examine
the MPDE lubrication system’s design, construction, operation and maintenance for the LPD 17 class of ships.
The team is focusing on identification and understanding of the root causes of the MPDE diesel bearing wear
and debris in the lubrication system and the potential future impacts on maintenance costs. To date the review
has identified several potential system improvements for increasing the system reliability. Certain changes are
being implemented on ships under construction at this time and the U.S. Navy is implementing some changes
on in-service ships in the class at the earliest opportunity. The U.S. Navy has requested a special MPDE flush
procedure be used on LPDs 22 through 25 under construction at the Gulf Coast shipyards. The company has
informed the U.S. Navy of its position that should the U.S. Navy direct use of this new flush procedure, the
company believes such direction would be a change to the contracts for all LPDs under construction, and that
such a change would entitle the company to an equitable adjustment to cover the cost and schedule impacts.
However, the company can give no assurance that the U.S. Navy will agree that any such direction would
constitute a contract change.
In July 2010, the Navy released its report documenting the results of a Judge Advocate General’s manual
(JAGMAN) investigation of the failure of MPDE bearings on LPD 17 subsequent to the Navy’s Planned
Maintenance Availability (PMA), which was completed in October 2009. During sea trials following the
completion of the Navy conducted PMA, one of the ship’s MPDEs suffered a casualty as the result of a bearing
failure. The JAGMAN investigation determined that the bearing failure could be attributed to a number of
possible factors, including deficiencies in the acquisition process, maintenance, training, and execution of
shipboard programs, as well as debris from the construction process. Shipbuilding’s technical personnel reviewed
the JAGMAN report and provided feedback to the Navy on the report, recommending that the company and
the Navy perform a comprehensive review of the LPD 17 Class propulsion system design and its associated
operation and maintenance procedure in order to enhance reliability. Discussions between the company and the
Navy on this recommendation are ongoing.
The company and the U.S. Navy continue to work in partnership to investigate and identify any additional
corrective actions to address quality issues associated with ships manufactured in the company’s Gulf Coast
shipyards, and the company will implement appropriate corrective actions. The company does not believe that
the ultimate resolution of the matters described above will have a material adverse effect upon its consolidated
financial position, results of operations or cash flows.
The company has also encountered various quality issues on its aircraft carrier construction and overhaul
programs and its Virginia-class submarine construction program at its Newport News shipyards. These primarily
involve matters related to filler metal used in pipe welds identified in 2007, and in 2009, issues associated with
non-nuclear weld inspection and the installation of weapons handling equipment on certain submarines, and
certain purchased material quality issues. The company does not believe that resolution of these issues will have a
material adverse effect upon its consolidated financial position, results of operations or cash flows.
Financial Arrangements – In the ordinary course of business, the company uses standby letters of credit and
guarantees issued by commercial banks and surety bonds issued principally by insurance companies to guarantee
the performance on certain contracts and to support the company’s self-insured workers’ compensation plans. At
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NORTHROP GRUMMAN CORPORATION