Northrop Grumman (NYSE:NOC) has reached an agreement with the U.S. government to settle two legal matters. The settlement amounts for the two matters are equal and thereby offset each other.

The first matter involved a lawsuit filed by Northrop Grumman in December 1996 against the U.S. government for recovery of uncompensated costs, investments, and a reasonable profit related to the Tri-Service Standoff Attack Missile (TSSAM) program that the government cancelled for convenience in 1995. Under the terms of the agreement, the Department of Justice valued Northrop Grumman's TSSAM claims at $325 million.

The second matter involved a U.S. Department of Justice claim related to certain microelectronics parts produced by the former TRW Inc., prior to its acquisition by Northrop Grumman in 2002. Under the terms of the agreement, the Department of Justice valued its claims regarding the microelectronics matter at $325 million.

As previously reported, the government commenced an investigation in 2003 based on allegations contained in a False Claims Act case that was filed under seal in 2002. While the company believes it acted properly under its contracts and had substantive defenses to the claims, it also believes that settlement is in the best interest of all parties as it releases the company from the government's claims, avoids litigation, and preserves a valued customer relationship. The company is subject to various litigation and other contingencies, and management records and adjusts provisions and accruals for these contingencies from time to time as conditions require and in accordance with generally accepted accounting principles. In the third quarter of 2006, the company recorded a legal provision for settlement and legal expenses related to the microelectronics claim. The financial impact of this agreement, including its related cost, on the previously recorded accrual for the microelectronics claim and any other adjustments for legal matters is expected to result in a net gain to be reported in the company's second quarter 2009 results. This agreement will not have a significant impact on the company's cash from operations.

There is a very interesting report on the background for this settlement located at Space Mart, wherein the work of scientist Robert Ferro is revealed as he discovered, in 1995, that the heterojunction bipolar transistors (HBTs) from TRW were likely to fail in government satellites. Ferro joined Aerospace Corporation (a research firm) and that company was asked by the U.S. Air Force for a report on whether or not TRW should have known of this potential problem. The information as to this finding was cleansed by TRW from an Aerospace report and various inaccurate statements were made by TRW in subsequent documents to suppress and mislead government officials as to the 1995 findings. Ferro filed a whistleblower lawsuit in Los Angeles federal district court to request a proper and forthright investigation of his original disclosures with the end result being a winning settlement for the government and Ferro regarding the MILSATCOM parts.