 |
 |
| Management’s Discussion and
Analysis |
|
|
|
|
|
| Contingent Items |
| Various legal proceedings, claims and investigations
related to products, contracts and other matters are pending
against the Company. Most significant legal proceedings
are related to matters covered by insurance. Major
contingencies are discussed below. |
| The Company is subject to federal and state requirements
for protection of the environment, including those for
discharge of hazardous materials and remediation of contaminated
sites. Due in part to their complexity and
pervasiveness, such requirements have resulted in the
Company being involved with related legal proceedings,
claims and remediation obligations since the 1980s. |
| The Company routinely assesses, based on in-depth studies,
expert analyses and legal reviews, its contingencies,
obligations and commitments for remediation of contaminated
sites, including assessments of ranges and
probabilities of recoveries from other responsible parties
who have and have not agreed to a settlement and of
recoveries from insurance carriers. The Company’s
policy is to immediately accrue and charge to current
expense identified exposures related to environmental
remediation sites based on estimates of investigation,
cleanup and monitoring costs to be incurred. |
| The costs incurred and expected to be incurred in connection
with such activities have not had, and are not expected
to have, a material impact to the Company’s financial
position. With respect to results of operations, related
charges have averaged less than 2% of annual net earnings.
Such accruals as of December 31, 2001, without
consideration for the related contingent recoveries from
insurance carriers, are less than 2% of total liabilities. |
| Because of the regulatory complexities and risk of unidentified
contaminated sites and circumstances, the
potential exists for environmental remediation costs to
be materially different from the estimated costs accrued
for identified contaminated sites. However, based on all
known facts and expert analyses, the Company believes
it is not reasonably likely that identified environmental
contingencies will result in additional costs that would
have
a material adverse impact to the Company’s financial
position or operating results and cash flow trends. |
| The Company is subject to U.S. Government investigations
from which civil, criminal or administrative proceedings
could result. Such proceedings could involve claims by
the Government for fines, penalties, compensatory
and treble damages, restitution and/or forfeitures. Under
government regulations, a company, or one or more of
its operating divisions or subdivisions, can also be suspended
or debarred from government contracts, or lose
its export privileges, based on the results of investigations.
The Company believes, based upon all available
information, that the outcome of any such government disputes
and investigations will not have a material
adverse effect on its financial position or continuing
operations. |
| In 1991, the U.S. Navy notified McDonnell Douglas (now
a subsidiary of the Company) and General Dynamics
Corporation (the “Team”) that it was terminating
for default the Team’s contract for development and
initial production
of the A-12 aircraft. The Team filed a legal action to
contest the Navy’s default termination, to assert
its
rights to convert the termination to one for “the
convenience of the Government,” and to obtain payment
for
work done and costs incurred on the A-12 contract but
not paid to date. As of December 31, 2001, inventories
included approximately $583 million of recorded costs
on the A-12 contract, against which the Company has
established a loss provision of $350 million. The amount
of the provision, which was established in 1990, was
based on McDonnell Douglas’s belief, supported by
an opinion of outside counsel, that the termination for
default
would be converted to a termination for convenience, and
that the upper range of possible loss on termination
for convenience was $350 million. |
| On August 31, 2001, the U.S. Court of Federal Claims
issued a decision after trial upholding the Government’s
default termination of the A-12 contract on the ground
that the Team could not meet the revised contract schedule
unilaterally imposed by the Government after the Government
had waived the original schedule. The court
did not, however, enter a judgment for the Government
on its claim that the Team be required, as a consequence
of the alleged default, to repay progress payments that
had not been formally liquidated by deliveries at the
time
of termination. These unliquidated progress payments total
$1,350 million. On October 4, 2001, the court confirmed
that it would not be entering judgment in favor of the
Government in the amount of these unliquidated
progress payments. This is the latest decision relating
to long-running litigation resulting from the A-12 contract
termination in 1991, and follows an earlier trial court
decision in favor of the contractors and reversal of that
initial
decision on appeal. |
| The Company believes, supported by an opinion of outside
counsel, that the trial court’s rulings with respect
to
the enforceability of the unilateral schedule and the
termination for default are contrary to law and fact.
The
Company believes the decision raises valid issues for
appeal and is pursuing its appeal. |
|
|
|
