Northrop Grumman 2011 Annual Report Download - page 95

NORTHROP GRUMMAN CORPORATION
The company is a party to various other investigations, lawsuits, claims and other legal proceedings, including
government investigations and claims, that arise in the ordinary course of our business. Based on information
available to the company to date, the company does not believe that the outcome of any matter pending against
the company, including the matters specifically identified above, is likely to have a material adverse effect on the
company’s consolidated financial position as of December 31, 2011 or its annual results of operations or cash flows.
15. 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, 2011, the
recognized amounts related to claims and requests for equitable adjustment are not material individually or in the
aggregate.
Contract Terminations – The company's U. S. Government contracts generally contain provisions that enable the
customer to terminate a contract for default, or for the convenience of the government. In general, a partial or
complete termination for default can result from a contractor's actual or anticipated failure to perform its
contractual obligations. In most instances, the government is required to provide written notice to the contractor
of the performance deficiency and allow the contractor a specified period of time to cure the deficiency or explain
why the contract should not be terminated. If the contract is terminated for default, the contractor may not be
entitled to recover any of its costs on partially completed work and may be liable to the government for any excess
re-procurement costs of acquiring similar products or services from another contractor, and for certain other
damages.
Termination of a contract for the convenience of the government may occur when the government concludes it is
in the best interests of the U. S. Government that the contract be terminated. Under a termination for
convenience, the contractor is typically paid in accordance with the contract's terms for costs incurred under the
contract prior to the effective date of termination, plus a reasonable profit or fee and settlement expenses.
In either termination event, the amount the contractor ultimately receives in settlement on the contract is subject
to negotiation and agreement with the U. S. Government. If the parties are unable to reach a settlement, the
amount may be unilaterally determined by the government, subject to judicial review. If the contractor incurs
costs in excess of the amount of funds obligated on the contract, it is at risk for reimbursement of those costs unless
additional appropriated funds are available. Most, but not all, of the company's U. S. Government contracts
provide funding for the customer's contract termination liabilities such that the company is not at risk for recovery
of its properly determined contract termination claims. At December 31, 2011, the company had no substantial
contract terminations in process for which the customer had insufficient termination funding.
Guarantees of Subsidiary Performance Obligations – From time to time in the ordinary course of business, the company
guarantees obligations of its subsidiaries under certain contracts. Generally, the company is liable under such an
arrangement only if its subsidiary is unable to perform under its contract. Historically, the company has not
incurred any substantial liabilities resulting from these guarantees.
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.
-85-