Northrop Grumman 2010 Annual Report Download - page 102

improvements in remediation technology. Should other PRPs not pay their allocable share of remediation costs,
the company may have to incur costs in addition to those already estimated and accrued. In addition, there are
some potential remediation sites where the costs of remediation cannot be reasonably estimated. Although
management cannot predict whether new information gained as projects progress will materially affect the
estimated liability accrued, management does not anticipate that future remediation expenditures will have a
material adverse effect on the company’s consolidated financial position, results of operations or cash flows.
Hurricane Impacts – In 2008, a subcontractor’s operations in Texas were severely impacted by Hurricane Ike. The
subcontractor produces compartments for two of the LPD amphibious transport dock ships under construction at
the Gulf Coast shipyards. In 2009, the company received $25 million of insurance proceeds representing interim
payments for property damages on the Hurricane Ike insurance claim. In 2010, the company received
$17 million in final settlement of its claim and recorded the insurance proceeds as operating income at the
Shipbuilding segment.
In August 2005, the company’s Gulf Coast operations were significantly impacted by Katrina and the company’s
shipyards in Louisiana and Mississippi sustained significant windstorm damage from the hurricane. As a result of
the storm, the company incurred costs to replace or repair destroyed or damaged assets, suffered losses under its
contracts, and incurred substantial costs to clean up and recover its operations. As of the date of the storm, the
company had a comprehensive insurance program that provided coverage for, among other things, property
damage, business interruption impact on net profitability, and costs associated with clean-up and recovery. The
company expects that its remaining claims will be resolved separately with the two remaining insurers, FM
Global and Munich Re (see Note 15).
The company has full entitlement to any insurance recoveries related to business interruption impacts on net
profitability resulting from these hurricanes. However, because of uncertainties concerning the ultimate
determination of recoveries related to business interruption claims, no such amounts are recognized until they are
resolved with the insurers. Furthermore, due to the uncertainties with respect to the company’s disagreement
with FM Global in relation to the Katrina claim, no receivables have been recognized by the company in the
accompanying consolidated financial statements for insurance recoveries from FM Global.
In accordance with U.S. Government cost accounting regulations affecting the majority of the company’s
contracts, the cost of insurance premiums for property damage and business interruption coverage, other than
“coverage of profit,” is an allowable expense that may be charged to contracts. Because a substantial portion of
long-term contracts at the shipyards are flexibly-priced, the government customer would benefit from a portion
of insurance recoveries in excess of the net book value of damaged assets. When such insurance recoveries occur,
the company is obligated to provide the benefit of a portion of these amounts to the government. In recent
discussions, the U.S. Navy has expressed its intention to challenge the allowability of certain post-Katrina
depreciation costs charged or expected to be charged on contracts under construction in the Gulf Coast
shipyards. It is premature to estimate the amount, if any, that the U.S. Navy will ultimately challenge. The
company believes all of the replacement costs should be recoverable under its insurance coverage and the
amounts that may be challenged are included in the insurance claim. However, if the company is unsuccessful in
its insurance recovery, the company believes there are specific rules in the CAS and FAR that should still render
the depreciation on those assets allowable and recoverable through its contracts with the U.S. Navy as these
replacement costs provide benefit to the government. The company believes that its depreciation practices are in
conformity with the FAR, and that, if the U.S. Navy were to challenge the allowability of such costs, the
company would be able to successfully resolve this matter with no material adverse impact to the company’s
consolidated financial position or results of operations.
Shipbuilding Quality Issues – In conjunction with a second quarter 2009 review of design, engineering and
production processes at Shipbuilding undertaken as a result of leaks discovered in the USS San Antonio’s
(LPD 17) lube oil system, the company became aware of quality issues relating to certain pipe welds on ships
under production in the Gulf Coast as well as those that had previously been delivered. Since that discovery, the
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NORTHROP GRUMMAN CORPORATION