Northrop Grumman 2011 Annual Report Download - page 22

NORTHROP GRUMMAN CORPORATION
defense industry depends upon our ability to develop and market our products and services, as well as our
ability to provide the people, technologies, facilities, equipment and financial capacity needed to deliver those
products and services with maximum efficiency. If we fail to maintain our competitive position, we could lose
a significant amount of future business to our competitors, which would have a material adverse effect on our
ability to generate favorable financial results and maintain market share.
Our operating results are heavily dependent upon our ability to attract and retain sufficient personnel with
requisite skills and/or security clearances. If qualified personnel become scarce, we could experience higher
labor, recruiting or training costs in order to attract and retain such employees. Failure to maintain a qualified
workforce could result in difficulty in performing under our contracts.
Approximately 3,400 of our 72,500 employees are covered by an aggregate of 17 collective bargaining
agreements, and we expect to negotiate or re-negotiate renewals for nine of our collective bargaining
agreements in 2012. Collective bargaining agreements generally expire after three to five years, and are subject
to renegotiation upon expiration. We may experience difficulties with renewals and renegotiations of existing
collective bargaining agreements. If we experience such difficulties, we could incur additional expenses and
may be subject to work stoppages. Any such expenses or delays could adversely affect programs served by
employees who are covered by collective bargaining agreements.
䡲Many 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, which
are 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, manufacturing materials or 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 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, for example, such events could have a material adverse effect on
our financial position, results of operations, or cash flows.
䡲Contract 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 a variety of reasons including: technical challenges; manufacturing difficulties or delays; or workforce-
related issues; and where initial estimates used for calculating the contract cost were incorrect. The cost
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