Northrop Grumman 2010 Annual Report Download - page 101

For several years, the company has pursued recovery under its insurance policies for Katrina related property
damage and business interruption losses. One of the insurers involved in those actions has made allegations that
overlap significantly with certain of the issues raised in the complaint, including allegations that the company
used certain Katrina related funds for losses under the contracts unrelated to the hurricane. The company
believes that the insurer’s defenses, including those related to the use of Katrina funding, are without merit.
The company has agreed to cooperate with the government investigation relating to the False Claims Act
complaint. The company has been advised that the Department of Justice has not made a decision whether to
intervene. Based upon the information available to the company to date, the company believes it has substantive
defenses to the allegations in the complaint but can give no assurance that there will be no material adverse
impact on its financial position, results of operations or cash flows from this matter.
16. COMMITMENTS AND CONTINGENCIES
Contract Performance Contingencies – Contract profit margins may include estimates of revenues not contractually
agreed to between the customer and the company for matters such as settlements in the process of negotiation,
contract changes, claims and requests for equitable adjustment for previously unanticipated contract costs. These
estimates are based upon management’s best assessment of the underlying causal events and circumstances, and are
included in determining contract profit margins to the extent of expected recovery based on contractual
entitlements and the probability of successful negotiation with the customer. As of December 31, 2010, the
recognized amounts related to claims and requests for equitable adjustment are not material individually or in the
aggregate.
Guarantees of Subsidiary Performance Obligations – From time to time in the ordinary course of business, the
company guarantees performance obligations of its subsidiaries under certain contracts. In addition, the
company’s subsidiaries may enter into joint ventures, teaming and other business arrangements (collectively,
Business Arrangements) to support the company’s products and services in domestic and international markets.
The company generally strives to limit its exposure under these arrangements to its subsidiary’s investment in the
Business Arrangements, or to the extent of such subsidiary’s obligations under the applicable contract. In some
cases, however, the company may be required to guarantee performance by the Business Arrangements and, in
such cases, the company generally obtains cross-indemnification from the other members of the Business
Arrangements. At December 31, 2010, the company is not aware of any existing event of default that would
require it to satisfy any of these guarantees.
Environmental Matters – The estimated cost to complete remediation has been accrued where it is probable that
the company will incur such costs in the future to address environmental impacts at currently or formerly owned
or leased operating facilities, or at sites where it has been named a Potentially Responsible Party (PRP) by the
Environmental Protection Agency, or similarly designated by other environmental agencies. These accruals do not
include any litigation costs related to environmental matters, nor do they include amounts recorded as asset
retirement obligations. To assess the potential impact on the company’s consolidated financial statements,
management estimates the range of reasonably possible remediation costs that could be incurred by the company,
taking into account currently available facts on each site as well as the current state of technology and prior
experience in remediating contaminated sites. These estimates are reviewed periodically and adjusted to reflect
changes in facts and technical and legal circumstances. Management estimates that as of December 31, 2010, the
range of reasonably possible future costs for environmental remediation sites is $280 million to $674 million, of
which $109 million is accrued in other current liabilities and $207 million is accrued in other long-term
liabilities. A portion of the environmental remediation costs is expected to be recoverable through overhead
charges on government contracts and, accordingly, such amounts are deferred in inventoried costs (current
portion) and miscellaneous other assets (non-current portion). Factors that could result in changes to the
company’s estimates include: modification of planned remedial actions, increases or decreases in the estimated
time required to remediate, changes to the determination of legally responsible parties, discovery of more
extensive contamination than anticipated, changes in laws and regulations affecting remediation requirements, and
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NORTHROP GRUMMAN CORPORATION