Northrop Grumman 2009 Annual Report Download - page 100

of insurance recoveries in excess of the net book value of damaged assets and clean-up and restoration costs paid
by the company. When such insurance recoveries occur, the company is obligated to return a portion of these
amounts to the government.
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 a quality issue relating to certain pipe welds on ships under
production as well as those that had previously been delivered. Since that discovery, the company has been
working with its customers to determine the nature and extent of the pipe weld issue and its possible impact on
the company’s products. 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 affected customers. The incremental costs associated with the
anticipated resolution of this matter 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 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 the
debris in the lubrication system, and will support the implementation of appropriate corrective actions consistent
with applicable contract and legal requirements. When the root cause analysis is complete, the company will
implement appropriate corrective actions in partnership with the customer to minimize the possibility of this
kind of occurrence in the future.
At December 31, 2009, the company does not believe that resolution of the quality matter relating to pipe welds
and the issues relating to bearing wear and lube oil debris on LPD 17 class ships will have a material adverse
effect upon the company’s consolidated financial position, results of operations or cash flows.
Co-Operative Agreements – In 2003, Shipbuilding executed agreements with the states of Mississippi and Louisiana
whereby Shipbuilding leases facility improvements and equipment from Mississippi and from a non-profit
economic development corporation in Louisiana in exchange for certain commitments by Shipbuilding to these
states. As of December 31, 2009, Shipbuilding has fully met its obligations under the Mississippi agreement and
has met all but one requirement under the Louisiana agreement. Failure by Shipbuilding to meet the remaining
Louisiana commitment would result in reimbursement by Shipbuilding to Louisiana in accordance with the
agreement. As of December 31, 2009, Shipbuilding expects that the remaining commitment under the Louisiana
agreement will be met based on its most recent business plan.
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 by insurance companies principally to guarantee
the performance on certain contracts and to support the company’s self-insured workers’ compensation plans. At
December 31, 2009, there were $531 million of unused stand-by letters of credit, $178 million of bank
guarantees, and $452 million of surety bonds outstanding.
The company has also guaranteed a $200 million loan made to Shipbuilding in connection with the Gulf
Opportunity Zone Industrial Revenue Bonds issued in December 2006. Under the loan agreement the company
guaranteed Shipbuilding’s repayment of the principal and interest to the Trustee. The company also guaranteed
payment of the principal and interest by the Trustee to the underlying bondholders (see Note 13).
Indemnifications – The company has retained certain warranty, environmental, income tax, and other potential
liabilities in connection with certain of its divestitures. The settlement of these liabilities is not expected to have a
material adverse effect on the company’s consolidated financial position, results of operations, or cash flows.
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