Northrop will see gain over settlement

Northrop Grumman Corp., the warship builder that yesterday agreed to the largest settlement against a defense contractor in a whistleblower suit, will record a gain from the move this quarter because it can now partly reverse a three-year-old reserve it set up for the case.

Northrop said it won't need the full reserve because it was able to offset the $325 million settlement with the resolution of an equal value from its own lawsuit against the U.S. government to recover costs on a canceled missile program.

The Los Angeles-based company established a pretax reserve of $112.5 million in 2006 for the whistleblower case concerning satellite parts. Northrop said yesterday that "adjustments for legal matters" will result in a net gain to second quarter results, without specifying the amount. Reversal of the reserve may amount to after-tax profit of about $62 million or 19 cents a share, estimates Jim McAleese, a defense industry consultant.

"I would characterize it as a very pragmatic and shrewd settlement by both the government and Northrop because it essentially saved the government $325 million," said McAleese, of McAleese & Associates in McLean, Virginia. "Northrop can take the $112.5 million reserve back into profit right here, right now. The upside represents an amount equivalent to the profit on $1 billion dollars worth of work that's going to fall to Northrop's bottom line."

The whistleblower lawsuit concerned satellite parts billed to the National Reconnaissance Office by TRW Inc. from 1992 to 2002, before Northrop acquired the company in 2002. The government deemed the parts defective. Northrop said it "acted properly under its contracts."

Cruise Missile Suit

Northrop had sued the government in 1996 to recover costs, investments and "reasonable profit" on a cruise missile that the government canceled, called the Tri-Service Standoff Attack Missile. Settlement of the two matters "are equal and thereby offset each other," Northrop said in yesterday's statement.

Northrop spokesman Dan McClain today said he didn't immediately have more information on the potential gain from reversal of the reserve.

The $325 million settlement is the largest ever made by a defense contractor in a whistleblower case, said Eric Havian, a San Francisco-based attorney with Phillips & Cohen LLP who represented Robert Ferro in the case. Ferro is the researcher who discovered in 1995 that the parts produced by TRW were likely to fail under high electrical currents used in satellites.

The False Claims Act Legal Center of the Taxpayers Against Fraud maintains a list of the top 100 whistleblower cases in the U.S. That list shows 14 awards equal to or greater than the value of Northrop's, though none involved defense contractors. The organization is a nonprofit public interest group that promotes the use of whistleblower suits to combat fraud against the federal government.

Northrop fell $1.10, or 2.4 percent, to $44.56 at 12:17 p.m. in New York Stock Exchange composite trading.