Northrop Grumman Avoids Shoals

As a lifelong registered Democrat who has only ever voted for Republican presidents, I have sympathies for both businesses and labor unions. So I was happy for both sides when on Saturday, United Steelworkers of America Local 8888 announced a tentative agreement on a new labor contract with Northrop Grumman's (NYSE: NOC  ) Newport News shipbuilding subsidiary, fixing the terms through Oct. 2008.

Considering that the 8,500-member steelworkers union was on the verge of a strike, this is wonderful news for the defense contractor. The last thing it wanted was a repeat of 1999, when workers at Newport News (not owned by Northrop at that time) went on strike for 17 straight weeks. A similar walkout today would look bad for Northrop, which is participating alongside General Dynamics (NYSE: GD  ) and British defense contractor BAE Systems (AMEX: BAE  ) in designing the Navy's new Littoral combat ship (LCS). On the other hand, if it secures union approval of the labor agreement in a vote to be held Wednesday, Northrop could bolster its group's bid to build the LCS, as it will be able to show it has a secure labor agreement all the way through the expected completion date of the prototype LCS.

For its part, the union won a large portion of the concessions it had requested. All that remains now is to vote to approve the terms won by the union negotiators. And considering the terms, approval should not be an issue. Over the next four years, union wages will increase nearly 4% per year. The average Newport News worker would see annual wages rise from about $35,000 to about $40,000 over the life of the contract. Moreover, the company agreed to immediately hike pension payouts to retiring workers with 30 years on the job by 22%. Considering the size of Northrop's current cash flows, and the company's expectations of continued strong sales and earnings growth, the defense giant can easily afford the wage increase.

The union did not get everything it wanted, of course. For instance, while it asked for a pension increase that would max out at $2,000 per month after 40 years of service, the service cap is going to remain at 30 years, but with a benefits increase to $1,100 a month. All in all, Northrop seems to be as satisfied with the results as the union negotiators were. And it reassured investors that, despite the concessions, Northrop "will maintain [its] ability to provide cost-effective products and services to [the Navy]."

In his youth, Fool contributor Rich Smith built toy aircraft carriers out of two-by-fours and plywood, and stocked them with airplanes made from modeling clay. He has no ownership interest in any of the companies mentioned in this article.