Northrop Grumman Reports First Quarter 2008 Financial Results, Updates Guidance And Raises Dividend
* Sales Increase 6 Percent to $7.7 Billion
* Backlog Reaches Record $68 Billion
* EPS of $0.76 Including $0.61 per Share Charge Related Primarily to the LHD-8 Program
* Cash from Operations Totals $194 Million
* 2008 Guidance - Sales of $33 Billion, EPS of $4.90 to $5.15, Cash from Operations of $2.6 to $2.9 Billion, and Free Cash Flow of $1.7 to $2.1 Billion
* Quarterly Dividend Increased to $0.40 per Share
* 7.6 Million Shares Repurchased During Q1 2008 for $600 Million
LOS ANGELES - April 24, 2008 - Northrop Grumman Corporation (NYSE:NOC) reported that first quarter 2008 earnings from continuing operations declined to $263 million, or $0.76 per diluted share, from $394 million, or $1.12 per diluted share, in the first quarter of 2007. First quarter 2008 earnings were reduced by a pre-tax charge of $326 million, or $0.61 per diluted share, primarily for cost growth and schedule extension in the company's LHD-8 amphibious assault ship program, as announced on April 15, 2008. Sales for the 2008 first quarter increased 6 percent to $7.7 billion from $7.3 billion in the 2007 first quarter. Cash provided by operations for the 2008 first quarter totaled $194 million compared with $400 million in the prior year period.
The company also announced that it is increasing its quarterly dividend to $0.40 per share from $0.37 per share. The company has increased its quarterly dividend in each of the last five years, and with the increase to $0.40 per share the company has doubled its quarterly common stock dividend since 2003.
Operating Highlights
--------------------
First Quarter
-------------------------------
($ millions except per share data) 2008 2007 Change
-------------------------------
Sales 7,724 7,314 6%
Operating income 464 690 -33%
as a % of sales 6.0% 9.4% (340) bps
Earnings from continuing operations 263 394 -33%
Diluted EPS from continuing
operations .76 1.12 -32%
Net earnings 264 387 -32%
Diluted EPS .76 1.10 -31%
Cash from operations 194 400 -52%
Free cash flow(1) 16 212 -92%
(1) Free cash flow is a non-GAAP measure defined as cash from
operations less capital expenditures and outsourcing contract &
related software costs. Management uses free cash flow as an
internal measure of financial performance.
"Although the LHD-8 charge is disappointing, the remainder of our first quarter performance was strong. Total backlog increased more than $4 billion to a record $68 billion. We demonstrated strong growth and performance in our Information & Services, Aerospace and Electronics businesses, and we won the KC-45 tanker program. These positives demonstrate the solid, underlying business trends we expect and reinforce our confidence in our long-term financial targets," said Ronald D. Sugar, Northrop Grumman chairman and chief executive officer.
"Based on the strength of that long-term outlook, we continue to execute our balanced cash deployment strategy. During the quarter we purchased $600 million of our shares, and today we announced an increase in our quarterly dividend. This is our fifth annual increase and represents a doubling of our dividend since the TRW acquisition."
Operating income for the 2008 first quarter decreased 33 percent to $464 million from $690 million for the 2007 first quarter. As a percent of sales, operating income decreased to 6 percent from 9.4 percent in the prior year period. The $326 million pre-tax charge in Shipbuilding caused the decline in operating income in the quarter and as a percent of sales, impacted operating income by approximately 400 basis points.
Federal and foreign income taxes for the 2008 first quarter declined to $146 million from $206 million in the first quarter of 2007. The effective tax rate applied to earnings from continuing operations for the 2008 first quarter was 35.7 percent compared with 34.3 percent in the 2007 first quarter.
Net earnings for the 2008 first quarter declined to $264 million, or $0.76 per diluted share, from $387 million, or $1.10 per diluted share, for the same period in 2007. Earnings per share are based on weighted average diluted shares outstanding of 349.3 million for the first quarter of 2008 and 358.3 million for the first quarter of 2007. Weighted average shares outstanding for both periods include the dilutive effects of the company's mandatorily redeemable Series B convertible preferred stock and the impact of share repurchases during the quarter.
New business awards totaled $12.1 billion in the first quarter. Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, increased to a record $68 billion as of March 31, 2008.
Cash Flow Highlights
--------------------
First Quarter
-------------------------------
($ millions) 2008 2007 Change
-------------------------------
Cash from operations 194 400 (206)
Less:
Capital expenditures 143 158 15
Outsourcing contract & related
software costs 35 30 (5)
-------------------------------
Free cash flow(1) 16 212 (196)
(1) Free cash flow is a non-GAAP measure defined as cash from
operations less capital expenditures and outsourcing contract &
related software costs. Management uses free cash flow as an
internal measure of financial performance.
Cash provided by operations in the 2008 first quarter totaled $194 million compared with $400 million in the prior year period. The decline in cash provided by operations reflects an increase in accounts receivable. The increase in receivables is due to timing of billing and collection resulting from the transition to a common internal accounting software system. The transition impacted working capital by approximately $200 million, which is largely expected to be recovered in the second quarter of 2008. First quarter 2008 capital spending totaled $143 million compared with capital spending of $158 million in the prior year period. First quarter 2008 free cash flow totaled $16 million compared with $212 million in the prior year period.
Cash Measurements, Debt and Capital Deployment
----------------------------------------------
($ millions) 3/31/2008 12/31/2007
---------------------------------------------------------------------
Cash & cash equivalents 429 963
Total debt 4,097 4,055
Net debt(1) 3,668 3,092
Mandatorily redeemable preferred stock 46 350
Net debt to total capital ratio(2) 17% 14%
(1) Total debt less cash and cash equivalents
(2) Net debt divided by the sum of shareholders' equity and total
debt.
Cash and cash equivalents totaled $429 million at March 31, 2008 compared with $963 million at Dec. 31, 2007, and total debt was $4.1 billion at March 31, 2008. Changes in cash and cash equivalents and total debt include the following cash deployment and financing actions during the quarter:
* $600 million for share repurchases
* $143 million for capital expenditures and $35 million for
outsourcing contract and related software costs
* $126 million for dividends
* $69 million proceeds from exercises of stock options and issuance
of common stock
During the first quarter of 2008 the company announced its intention to redeem its mandatorily redeemable Series B convertible preferred stock on April 4, 2008. The reduction in mandatorily redeemable preferred stock reflects the voluntary conversion by holders of approximately 3 million shares during the first quarter of 2008.
During the first quarter of 2008 the company also announced the sale of its Electro-Optical Systems business for $175 million in cash. This sale was completed on April 21, 2008, and a small after-tax gain is anticipated to be recognized in discontinued operations in the second quarter of 2008.
2008 Guidance
-------------
Prior Current
---------------------------------------------------------------------
Sales ~$33B ~$33B
Segment operating income(1)
as % of sales mid to high 9% mid to high 8%
Operating income as % of sales high 9% high 8%
Diluted EPS from continuing
operations $5.50 - 5.75 $4.90 - 5.15
Cash from operations $2.8 - 3.1B $2.6 - 2.9B
Free cash flow(2) $1.9 - 2.3B $1.7 - 2.1B
(1) Segment operating income is a non-GAAP measure used as an
internal measure of financial performance for the four businesses.
(2) Free cash flow is a non-GAAP measure defined as cash from
operations less capital expenditures and outsourcing contract &
related software costs. Management uses free cash flow as an
internal measure of financial performance.
The company continues to expect sales of approximately $33 billion in 2008. The company has revised its guidance for segment operating income, operating income, and earnings per share to reflect the impacts of the charge in Shipbuilding, $326 million or $0.61 per diluted share, respectively. Guidance for 2008 cash from operations and free cash flow has been revised to include a $200 million negative impact from the charge.
Business Results
----------------
Consolidated Sales & Segment Operating Income(1)
($ millions except per share data)
First Quarter
-------------------------------
2008 2007 Change
-------------------------------
Sales
Information & Services 3,135 2,953 6%
Aerospace 2,115 2,035 4%
Electronics 1,555 1,528 2%
Shipbuilding 1,264 1,156 9%
Intersegment eliminations (345) (358)
-------------------------------
7,724 7,314 6%
Segment operating income(1)
Information & Services 260 231 13%
Aerospace 235 219 7%
Electronics 209 192 9%
Shipbuilding (218) 79 NM
Intersegment eliminations (28) (29)
-------------------------------
Segment operating income(1) 458 692 (34%)
as a % of sales 5.9% 9.5% (460) bps
Reconciliation to operating
income:
Unallocated expenses (32) (32)
Net pension adjustment(2) 59 33
Reversal of royalty income
included above (21) (3)
-------------------------------
Operating income 464 690 -33%
as a % of sales 6.0% 9.4% (340) bps
---------------------------------------------------------------------
(1) Segment operating income is a non-GAAP measure used as an
internal measure of financial performance for the four businesses.
(2) Net pension adjustment includes pension expense determined in
accordance with GAAP less pension expense allocated to the
business segments under U.S. Government Cost Accounting Standards.
Operating results for all periods presented reflect the reclassification of Electro-Optical Systems (formerly reported in Electronics) from continuing to discontinued operations, as well as the transfer of the Park Air and Remotec businesses from Electronics to Mission Systems effective Jan. 1, 2008. Schedule 6 provides previously reported quarterly financial results revised to reflect discontinued operations.
Information & Services
---------------------------------------------------------------------
First Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
Mission Systems $1,545 $145 9.4% $1,395 $117 8.4%
Information
Technology 1,085 89 8.2% 1,038 86 8.3%
Technical Services 505 26 5.1% 520 28 5.4%
--------------------------------------------------
$3,135 $260 8.3% $2,953 $231 7.8%
--------------------------------------------------
Information & Services first quarter 2008 sales increased 6 percent from the prior year period due to higher sales for Mission Systems and Information Technology. Operating income for Information & Services rose 13 percent in the 2008 first quarter. As a percent of sales, operating income increased 50 basis points to 8.3 percent from 7.8 percent in the prior year period. The increase in operating income is due to higher volume, and the increase in operating income rate reflects improved program performance for Mission Systems.
Mission Systems sales increased 11 percent due to higher volume for intelligence, surveillance & reconnaissance programs, higher volume for command, control & communications programs and higher volume for the Kinetic Energy Interceptor program. Operating income rose 24 percent, and as a percent of sales, increased 100 basis points to 9.4 percent from 8.4 percent in the prior year period. The increase in operating income reflects higher volume and improved program performance.
Information Technology sales rose 5 percent due to higher volume for intelligence programs, the New York City Wireless program, the Virginia IT outsourcing program, and the Network Centric Solutions program. Operating income rose 3 percent, and as a percent of sales was comparable to the prior year period at 8.2 percent compared with 8.3 percent.
Technical Services sales declined 3 percent due to completion of the Western Range Operations program in 2007 and lower volume for the Joint Base Operations Support program than in the prior year period. Operating income decreased 7 percent, and as a percent of sales, declined to 5.1 percent from 5.4 percent in the prior year period. The comparison to first quarter 2007 reflects lower volume as well as contract mix.
Aerospace
---------------------------------------------------------------------
First Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
Integrated Systems $1,340 $170 12.7% $1,281 $160 12.5%
Space Technology 775 65 8.4% 754 59 7.8%
--------------------------------------------------
$2,115 $235 11.1% $2,035 $219 10.8%
--------------------------------------------------
Aerospace first quarter 2008 sales increased 4 percent from the prior year period and includes higher volume for both Integrated Systems and Space Technology. Aerospace first quarter 2008 operating income increased 7 percent, and as a percent of sales, increased to 11.1 percent from 10.8 percent in the prior year period.
Integrated Systems sales rose 5 percent. The increase includes higher volume for restricted, Global Hawk, Navy UCAS-D, and KC-45 air mobility tanker programs, which was partially offset by lower volume for the F-35, Multi-Platform Radar Technology Insertion program, and the E-10A. Integrated Systems operating income rose 6 percent, and as a percent of sales, increased to 12.7 percent from 12.5 percent in the prior year period. The increase in operating income and rate reflect higher volume and improved program performance.
Space Technology sales increased 3 percent, primarily due to higher volume for restricted and James Webb Space Telescope programs. Increases in these programs were partially offset by lower volume in the Advanced Extremely High Frequency, Space Tracking and Surveillance System, and Transformational Satellite Communications System programs. Space Technology operating income increased 10 percent, and as a percent of sales increased to 8.4 percent from 7.8 percent, reflecting improved program performance and higher sales volume.
Electronics
---------------------------------------------------------------------
First Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
$1,555 $209 13.4% $1,528 $192 12.6%
--------------------------------------------------
Electronics first quarter 2008 sales increased 2 percent from the prior year period principally due to higher sales for Army and navigation systems programs. These sales increases were partially offset by declining volume for naval and marine systems programs.
Electronics first quarter 2008 operating income rose 9 percent, and as a percent of sales, increased to 13.4 percent from 12.6 percent. Operating income primarily reflects improved program performance, higher volume, and higher royalty income than in the prior year period.
Shipbuilding
---------------------------------------------------------------------
First Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
$1,264 ($218) NM $1,156 $79 6.8%
--------------------------------------------------
Shipbuilding first quarter 2008 sales increased 9 percent from the prior year period primarily due to higher volume in surface combatants and fleet support. Higher surface combatant volume includes production ramp-up for the DDG 107 and the DDG 110. The increase in fleet support reflects revenue from the July 2007 reorganization of AMSEC. Shipbuilding revenue in the 2008 first quarter was reduced by $134 million due to the revision of the LHD-8 contract's estimate to complete (EAC).
Shipbuilding recorded a $218 million operating loss in the first quarter of 2008 compared with income of $79 million in the first quarter of 2007. During the quarter the company recorded a $326 million charge that reduced Shipbuilding income by the following:
* $272 million -- LHD-8 EAC adjustment for the additional time
and materials needed to complete ship rework and the six-month
delivery extension from the fourth quarter of 2008 to the second
quarter of 2009.
* $35 million -- EAC adjustments for other Gulf Coast programs
to reflect resource impacts caused by delay in the LHD-8 delivery,
as well as risk adjustments based on recently concluded EAC
evaluations.
* $19 million -- non-cash write-down of purchased intangibles to
reflect the impairment of purchased intangibles resulting from
the EAC adjustments described above.
First Quarter Highlights
* The U.S. Air Force selected Northrop Grumman to provide the KC-45
aerial refueling tanker for the KC-135 tanker replacement program.
The initial contract provides four System Design and Development
aircraft and is valued at $1.5 billion. The contract has a
potential value of $35 billion. The unsuccessful bidder has filed
an appeal of this award with the U.S. Government Accountability
Office.
* The U.S. Navy awarded Northrop Grumman a $1.4 billion cost plus
incentive fee contract by the U.S. Navy for the construction of a
Zumwalt-class destroyer, DDG 1001, as well as major components for
the DDG 1000.
* The U.S. Navy awarded Northrop Grumman a planning contract option
for the refueling and complex overhaul of the nuclear-powered
aircraft carrier USS Theodore Roosevelt (CVN 71). This option is
valued at $186.4 million and continues work awarded in 2006. The
total estimated value of the contract is $558 million.
* The U.S. Air Force awarded Northrop Grumman the Weather Agency
Systems Engineering, Management and Sustainment II contract to
increase effectiveness, reliability, and performance, while
reducing total cost of ownership for a variety of classified and
unclassified Air Force weather systems. The $239 million cost plus
award fee contract includes a one-year base and four option years.
* A large European postal customer awarded Solystic, a French
subsidiary of Northrop Grumman, a $100 million firm fixed price
contract to provide compact sequence sorters. The contract is for
an initial order of 400 letter sequencing machines with options
for an additional 400 machines.
* MBDA Italia selected Northrop Grumman to provide the navigation and
localization systems within the design and development phase for
NATO's Medium Extended Air Defense System (MEADS) program intended
to replace Hawk and Patriot systems worldwide.
* Northrop Grumman delivered the fourth submarine of the Virginia
class, North Carolina (SSN 777), to the Navy on Feb. 21.
* The Northrop Grumman-built National Security Cutter Bertholf (WMSL
750) successfully completed builder's trials in the Gulf of Mexico.
* Northrop Grumman delivered the payload module for the second
Advanced Extremely High Frequency military communications satellite
ahead of schedule to Lockheed Martin, prime contractor for the
program.
* The Northrop Grumman-built amphibious transport dock ship New York
(LPD 21) was christened in New Orleans on Feb. 29. The ship is
unique in that its bow stem contains seven-and-a-half tons of steel
recovered from the World Trade Center following the terrorist
attacks of Sept. 11, 2001.
* The Northrop Grumman-built guided missile destroyer Dewey (DDG 105)
was christened in Pascagoula, Mississippi, on Jan. 26.
* Northrop Grumman celebrated the 10th anniversary of the first
flight of the RQ-4 Global Hawk unmanned aerial system after
delivering a record five production aircraft to the U.S. Air Force
in 2007. In addition, the Global Hawk set an endurance record for
a full-scale, operational unmanned aircraft on March 22, 2008,
when it completed a flight of 33.1 hours at altitudes up to 60,000
feet over Edwards Air Force Base, Calif.
* Northrop Grumman and the University of Illinois at Urbana-Champaign
announced the creation of the first fully-functional, all-carbon
nanotube transistor radio, demonstrating that carbon nanotubes can
be used as high-speed transistors, while consuming only
one-thousandth the power required by current transistor technology.
* Northrop Grumman announced the sale of its Electro-Optical Systems
business for $175 million in cash to L-3 Communications. The
transaction was completed on April 21, 2008.
* The Northrop Grumman board of directors declared a quarterly
dividend of $0.37 per share on Northrop Grumman common stock.
* Northrop Grumman realigned its two shipbuilding sectors, Newport
News and Ship Systems, into Northrop Grumman Shipbuilding. It also
realigned the reporting of portions of its missiles business from
Mission Systems to Space Technology, effective July 1, 2008.
About Northrop Grumman
Northrop Grumman Corporation is a global defense and technology company whose 120,000 employees provide innovative systems, products, and solutions in information and services, electronics, aerospace and shipbuilding to government and commercial customers worldwide.
Northrop Grumman will webcast its earnings conference call at noon EDT on April 24, 2008. A live audio broadcast of the conference call along with a supplemental presentation will be available on the investor relations page of the company's Web site at http://www.northropgrumman.com.
Note: Certain statements and assumptions in this release contain or are based on "forward-looking" information that Northrop Grumman Corporation (the "Company") believes to be within the definition in the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties, and include, among others, statements in the future tense, and all statements accompanied by terms such as "project," "expect," "estimate," "assume," "believe," "plan," "guidance," "outlook," "trends," "target" or variations thereof. This information reflects the Company's best estimates when made, but the Company expressly disclaims any duty to update this information if new data become available or estimates change after the date of this release.
Such "forward-looking" information includes, among other things, financial guidance regarding sales, segment operating margin, pension expense, employer contributions under pension plans and medical and life benefits plans, cash flow, and earnings per share, and is subject to numerous assumptions and uncertainties, many of which are outside the Company's control. These include the Company's assumptions with respect to future revenues; expected program performance and cash flows; returns on pension plan assets and variability of pension actuarial and related assumptions; the outcome of litigation, claims, appeals, bid protests, and investigations; hurricane-related insurance recoveries; environmental remediation; acquisitions and divestitures of businesses; joint ventures and other business arrangements; access to capital; performance issues with key suppliers and subcontractors; product performance and the successful execution of internal plans; successful negotiation of contracts with labor unions; allowability and allocability of costs under U.S. Government contracts; effective tax rates and timing and amounts of tax payments; the results of any audit or appeal process with the Internal Revenue Service; and anticipated costs of capital investments, among other things.
The Company's operations are subject to various additional risks and uncertainties resulting from its position as a supplier, either directly or as subcontractor or team member, to the U.S. government and its agencies as well as to foreign governments and agencies; actual outcomes are dependent upon various factors, including, without limitation, the Company's successful performance of internal plans; government customers' budgetary constraints; customer changes in short-range and long-range plans; domestic and international competition in both the defense and commercial areas; technical, operational or quality setbacks, in development and production programs, that could adversely affect the profitability or cash flow of the company; product performance; continued development and acceptance of new products and, in connection with any fixed-price development programs, controlling cost growth in meeting production specifications and delivery rates; performance issues with key suppliers and subcontractors; government import and export policies; acquisition or termination of government contracts; the outcome of political and legal processes and of the assertion or prosecution of potential substantial claims by or on behalf of a U.S. government customer; natural disasters, including amounts and timing of recoveries under insurance contracts, availability of materials and supplies, continuation of the supply chain, contractual performance relief and the application of cost sharing terms, allowability and allocability of costs under U.S. Government contracts, impacts of timing of cash receipts and the availability of other mitigating elements; terrorist acts; legal, financial and governmental risks related to international transactions and global needs for military aircraft, military and civilian electronic systems and support, information technology, naval vessels, space systems, technical services and related technologies, as well as other economic, political and technological risks and uncertainties and other risk factors set out in the Company's filings from time to time with the Securities and Exchange Commission, including, without limitation, Company reports on Form 10-K and Form 10-Q.
Members of the news media may receive our releases via e-mail by registering at: http://www.northropgrumman.com/cgi-bin/regist_form.cgi
LEARN MORE ABOUT US: Northrop Grumman news releases, product information, photos and video clips are available on the Internet at: http://www.northropgrumman.com
NORTHROP GRUMMAN CORPORATION SCHEDULE 1
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three months ended
March 31
------------------
$ in millions, except per share 2008 2007
--------------------------------------------------------------------
Sales and Service Revenues
Product sales $ 4,394 $ 4,140
Service revenues 3,330 3,174
--------------------------------------------------------------------
Total sales and service revenues 7,724 7,314
--------------------------------------------------------------------
Cost of Sales and Service Revenues
Cost of product sales 3,729 3,168
Cost of service revenues 2,793 2,749
General and administrative expenses 738 707
--------------------------------------------------------------------
Operating income 464 690
Other Income (Expense)
Interest income 7 7
Interest expense (77) (89)
Other, net 15 (8)
--------------------------------------------------------------------
Earnings from continuing operations before
income taxes 409 600
Federal and foreign income taxes 146 206
--------------------------------------------------------------------
Earnings from continuing operations 263 394
Income (Loss) from discontinued operations,
net of tax 1 (7)
--------------------------------------------------------------------
Net earnings $ 264 $ 387
--------------------------------------------------------------------
Basic Earnings (Loss) Per Share
Continuing operations $ .78 $ 1.14
Discontinued operations (.02)
--------------------------------------------------------------------
Basic earnings per share $ .78 $ 1.12
--------------------------------------------------------------------
Weighted-average common shares outstanding,
in millions 338.8 345.3
--------------------------------------------------------------------
Diluted Earnings (Loss) Per Share
Continuing operations $ .76 $ 1.12
Discontinued operations (.02)
--------------------------------------------------------------------
Diluted earnings per share $ .76 $ 1.10
--------------------------------------------------------------------
Weighted-average diluted shares outstanding,
in millions 349.3 358.3
--------------------------------------------------------------------
NORTHROP GRUMMAN CORPORATION SCHEDULE 2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(unaudited)
March 31, Dec. 31,
$ in millions 2008 2007
--------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 429 $ 963
Accounts receivable, net of progress payments 4,358 3,790
Inventoried costs, net of progress payments 1,132 1,000
Deferred income taxes 529 542
Prepaid expenses and other current assets 501 502
--------------------------------------------------------------------
Total current assets 6,949 6,797
Property, plant, and equipment, net of
accumulated depreciation of $3,552 in 2008
and $3,424 in 2007 4,645 4,690
Goodwill 17,620 17,672
Other purchased intangibles, net of accumulated
amortization of $1,711 in 2008 and $1,687 in
2007 1,020 1,074
Pension and postretirement benefits asset 2,103 2,080
Other assets 1,038 1,060
--------------------------------------------------------------------
Total assets $33,375 $33,373
--------------------------------------------------------------------
Liabilities:
Notes payable to banks $ 59 $ 26
Current portion of long-term debt 110 111
Trade accounts payable 1,806 1,890
Accrued employees' compensation 1,248 1,175
Advance payments and billings in excess of
costs incurred 1,834 1,563
Other current liabilities 1,680 1,667
--------------------------------------------------------------------
Total current liabilities 6,737 6,432
Long-term debt, net of current portion 3,928 3,918
Mandatorily redeemable preferred stock 46 350
Pension and postretirement benefits liability 3,059 3,008
Other long-term liabilities 2,004 1,978
--------------------------------------------------------------------
Total liabilities 15,774 15,686
--------------------------------------------------------------------
Shareholders' Equity:
Common stock, $1 par value; 800,000,000 shares
authorized; issued and outstanding: 2008 --
339,155,655; 2007 -- 337,834,561 339 338
Paid-in capital 10,438 10,661
Retained earnings 7,518 7,387
Accumulated other comprehensive loss (694) (699)
--------------------------------------------------------------------
Total shareholders' equity 17,601 17,687
--------------------------------------------------------------------
Total liabilities and shareholders' equity $33,375 $33,373
--------------------------------------------------------------------
NORTHROP GRUMMAN CORPORATION SCHEDULE 3
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(unaudited)
Three months ended
March 31
------------------
$ in millions 2008 2007
--------------------------------------------------------------------
Operating Activities
Sources of Cash - Continuing Operations
Cash received from customers
Progress payments $ 1,608 $ 1,532
Collections on billings 5,950 5,745
Income tax refunds received 2 1
Interest received 7 7
Proceeds from insurance carriers related to
operations 5
Other cash receipts 28 15
--------------------------------------------------------------------
Total sources of cash-continuing operations 7,600 7,300
--------------------------------------------------------------------
Uses of Cash - Continuing Operations
Cash paid to suppliers and employees (7,189) (6,676)
Interest paid (113) (127)
Income taxes paid (54) (22)
Excess tax benefits from stock-based
compensation (44) (52)
Other cash payments (3) (9)
--------------------------------------------------------------------
Total uses of cash-continuing operations (7,403) (6,886)
--------------------------------------------------------------------
Cash provided by continuing operations 197 414
Cash used in discontinued operations (3) (14)
--------------------------------------------------------------------
Net cash provided by operating activities 194 400
--------------------------------------------------------------------
Investing Activities
Payment for businesses purchased, net of cash
acquired (578)
Additions to property, plant, and equipment (143) (158)
Payments for outsourcing contract and related
software costs (35) (30)
Proceeds from insurance carriers related to
capital expenditures 3
Proceeds from disposals of property, plant
and equipment 3
Decrease in restricted cash 26 15
Other investing activities, net 1 1
--------------------------------------------------------------------
Net cash used in investing activities (148) (747)
--------------------------------------------------------------------
Financing Activities
Net borrowings under lines of credit 33 230
Principal payments of long-term debt (23)
Proceeds from exercises of stock options and
issuance of common stock 69 156
Dividends paid (126) (121)
Excess tax benefits from stock-based
compensation 44 52
Common stock repurchases (600) (600)
--------------------------------------------------------------------
Net cash used in financing activities (580) (306)
--------------------------------------------------------------------
Decrease in cash and cash equivalents (534) (653)
Cash and cash equivalents, beginning of period 963 1,015
--------------------------------------------------------------------
Cash and cash equivalents, end of period $ 429 $ 362
--------------------------------------------------------------------
NORTHROP GRUMMAN CORPORATION SCHEDULE 4
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(unaudited)
Three months ended
March 31
------------------
$ in millions 2008 2007
--------------------------------------------------------------------
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities
Net Earnings $ 264 $ 387
Adjustments to reconcile to net cash provided
by operating activities
Depreciation 136 135
Amortization of assets 62 34
Stock-based compensation 44 38
Excess tax benefits from stock-based
compensation (44) (52)
Loss on disposals of property, plant, and
equipment 1
Amortization of long-term debt premium (3) (3)
Decrease (increase) in
Accounts receivable (2,080) (1,436)
Inventoried costs (266) (89)
Prepaid expenses and other current assets (15) 18
Increase (decrease) in
Progress payments 1,642 1,390
Accounts payable and accruals 254 (264)
Deferred income taxes 26 (4)
Income taxes payable 112 177
Retiree benefits 31 47
Other non-cash transactions, net 33 36
--------------------------------------------------------------------
Cash provided by continuing operations 197 414
Cash used in discontinued operations (3) (14)
--------------------------------------------------------------------
Net cash provided by operating activities $ 194 $ 400
--------------------------------------------------------------------
Non-Cash Investing and Financing Activities
Purchase of business
Fair value of assets acquired, including
goodwill $ 682
Cash paid for businesses purchased (578)
--------------------------------------------------------------------
Liabilities assumed $ 104
--------------------------------------------------------------------
Mandatorily redeemable preferred stock converted
into common stock $ 304
--------------------------------------------------------------------
Capital Leases $ 21
--------------------------------------------------------------------
NORTHROP GRUMMAN CORPORATION SCHEDULE 5
TOTAL BACKLOG AND CONTRACT AWARDS
($ in millions)
(unaudited)
TOTAL BACKLOG(3)
----------------------------------------------------
March 31, 2008 March 31, 2007
------------------------- -------------------------
FUNDED UNFUNDED TOTAL FUNDED UNFUNDED TOTAL
(1) (2) BACKLOG (1) (2) BACKLOG
----------------------------------------------------
Information &
Services
Mission
Systems $ 3,847 $ 8,751 $12,598 $ 3,674 $ 8,402 $12,076
Information
Technology 2,606 2,024 4,630 2,609 1,673 4,282
Technical
Services 1,655 2,898 4,553 1,317 3,667 4,984
------------------------- -------------------------
Total
Information &
Services 8,108 13,673 21,781 7,600 13,742 21,342
Aerospace
Integrated
Systems 5,342 6,603 11,945 4,749 4,100 8,849
Space
Technology 1,173 8,066 9,239 1,663 6,689 8,352
------------------------- -------------------------
Total Aerospace 6,515 14,669 21,184 6,412 10,789 17,201
Electronics 8,518 2,200 10,718 7,123 1,463 8,586
Shipbuilding 12,075 2,252 14,327 10,674 2,122 12,796
------------------------- -------------------------
Total $35,216 $32,794 $68,010 $31,809 $28,116 $59,925
------------------------- -------------------------
-------------------------
December 31, 2007
-------------------------
FUNDED UNFUNDED TOTAL
(1) (2) BACKLOG
-------------------------
Information & Services
Mission Systems $ 3,399 $ 8,985 $12,384
Information Technology 2,581 2,268 4,849
Technical Services 1,471 3,193 4,664
-------------------------
Total Information & Services 7,451 14,446 21,897
Aerospace
Integrated Systems 4,204 4,525 8,729
Space Technology 1,260 8,266 9,526
-------------------------
Total Aerospace 5,464 12,791 18,255
Electronics 7,887 2,047 9,934
Shipbuilding 10,348 3,230 13,578
-------------------------
Total $31,150 $32,514 $63,664
-------------------------
(1) Funded backlog represents unfilled orders for which funding has
been contractually obligated by the customer.
(2) Unfunded backlog represents firm orders for which funding is not
currently contractually obligated by the customer.
Unfunded backlog excludes unexercised contract options and
unfunded Indefinite Delivery Indefinite Quantity contract awards.
(3) Certain prior period amounts have been reclassified to conform
to the 2008 presentation.
---------------------------------------------------------------------
CONTRACT AWARDS
---------------
The estimated value of contract awards included in backlog during the
three months ended March 31, 2008, is approximately $12.1 billion.
Significant new awards during this period include $1.5 billion for the
Air Mobility tanker program, $1.4 billion for the Zumwalt-class
destroyer, $596 million for the CVN 78 bridge contract, $208 million
for the VIS IDIQ program, $195 million for the LAIRCM IDIQ program,
and $183 million for the ICBM program. In addition, the company was
awarded approximately $2.6 billion for restricted programs during this
period.
On February 29, 2008, the company was awarded a contract by the U.S.
Air Force to replace its aerial refueling tanker fleet. Included in
backlog is approximately $1.5 billion for this contract to provide
four System Design and Development aircraft of which $61 million has
been funded. The other bidder for the contract subsequently protested
the decision by the U.S. Air Force to award the contract to the
company. The U.S. Air Force issued a stop work order to the company
pending the resolution of this matter. The Government Accountability
Office is currently reviewing the protest and is expected to reach its
decision in June 2008.
The estimated value of contract awards during the three months ended
March 31, 2007, is approximately $7.3 billion. Significant new awards
during this period include $1 billion for LPD 25, $875 million for the
Flat Sequencing System program, $235 million for the Intercontinental
Ballistic Missile program, $133 million for the Euro Hawk program, and
$118 million for the Large Aircraft Infrared Counter-measures
Indefinite Delivery and Indefinite Quantity program. In addition, the
company was awarded approximately $688 million for restricted programs
during this period.
Northrop Grumman Corporation Schedule 6
Summary Operating Results
Discontinued Operations Reclassification
($ in millions)
(unaudited)
2006 2007
------- -------------------------------------------
Three Months Ended Total
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Year
------- -------------------------------------------
Sales and
Service
Revenues
As reported $30,113 $ 7,340 $ 7,926 $ 7,928 $ 8,824 $32,018
Electro-
Optical
Systems(1) (122) (26) (48) (57) (59) (190)
------- -------------------------------------------
Restated
sales and
service
revenues $29,991 $ 7,314 $ 7,878 $ 7,871 $ 8,765 $31,828
------- -------------------------------------------
Segment
Operating
Margin(2)
As reported $ 2,807 $ 687 $ 789 $ 817 $ 810 $ 3,103
Electro-
Optical
Systems(1) 30 5 9 (1) (1) 12
------- -------------------------------------------
Restated
segment
operating
margin $ 2,837 $ 692 $ 798 $ 816 $ 809 $ 3,115
------- -------------------------------------------
Income From
Continuing
Operations,
Net of Tax
As reported $ 1,573 $ 390 $ 466 $ 490 $ 457 $ 1,803
Electro-
Optical
Systems, net
of tax(1) 19 3 6 (2) -- 7
------- -------------------------------------------
Restated
income from
continuing
operations,
net of tax $ 1,592 $ 393 $ 472 $ 488 $ 457 $ 1,810
------- -------------------------------------------
Preferred
Dividends 24 6 6 6 6 24
------- -------------------------------------------
Income
available
to common
shareholders
from
continuing
operations $ 1,616 $ 399 $ 478 $ 494 $ 463 $ 1,834
------- -------------------------------------------
Diluted Earnings
Per Share from
Continuing
Operations
As reported $ 4.46 $ 1.11 $ 1.33 $ 1.41 $ 1.31 $ 5.16
Electro-
Optical
Systems, net
of tax(1) .05 .01 .02 (.01) .02
------- -------------------------------------------
Restated
diluted
earnings per
share from
continuing
operations $ 4.51 $ 1.12 $ 1.35 $ 1.40 $ 1.31 $ 5.18
------- -------------------------------------------
Weighted Average
Diluted Shares
Outstanding,
in millions 358.6 358.3 355.3 352.6 351.1 354.3
---------------------------------------------------------------------
(1) The adjustment reflects the reclassification of the operating
results of the Electro-Optical business area formerly reported
in the Electronics segment. The definitive sale agreement was
signed March 2008, and the company reclassified the first
quarter of 2008 and all prior financial information to reflect
the business as discontinued operations.
(2) Non-GAAP measure. Management uses segment operating margin as an
internal measure of financial performance for the individual
business segments.
* Backlog Reaches Record $68 Billion
* EPS of $0.76 Including $0.61 per Share Charge Related Primarily to the LHD-8 Program
* Cash from Operations Totals $194 Million
* 2008 Guidance - Sales of $33 Billion, EPS of $4.90 to $5.15, Cash from Operations of $2.6 to $2.9 Billion, and Free Cash Flow of $1.7 to $2.1 Billion
* Quarterly Dividend Increased to $0.40 per Share
* 7.6 Million Shares Repurchased During Q1 2008 for $600 Million
LOS ANGELES - April 24, 2008 - Northrop Grumman Corporation (NYSE:NOC) reported that first quarter 2008 earnings from continuing operations declined to $263 million, or $0.76 per diluted share, from $394 million, or $1.12 per diluted share, in the first quarter of 2007. First quarter 2008 earnings were reduced by a pre-tax charge of $326 million, or $0.61 per diluted share, primarily for cost growth and schedule extension in the company's LHD-8 amphibious assault ship program, as announced on April 15, 2008. Sales for the 2008 first quarter increased 6 percent to $7.7 billion from $7.3 billion in the 2007 first quarter. Cash provided by operations for the 2008 first quarter totaled $194 million compared with $400 million in the prior year period.
The company also announced that it is increasing its quarterly dividend to $0.40 per share from $0.37 per share. The company has increased its quarterly dividend in each of the last five years, and with the increase to $0.40 per share the company has doubled its quarterly common stock dividend since 2003.
Operating Highlights
--------------------
First Quarter
-------------------------------
($ millions except per share data) 2008 2007 Change
-------------------------------
Sales 7,724 7,314 6%
Operating income 464 690 -33%
as a % of sales 6.0% 9.4% (340) bps
Earnings from continuing operations 263 394 -33%
Diluted EPS from continuing
operations .76 1.12 -32%
Net earnings 264 387 -32%
Diluted EPS .76 1.10 -31%
Cash from operations 194 400 -52%
Free cash flow(1) 16 212 -92%
(1) Free cash flow is a non-GAAP measure defined as cash from
operations less capital expenditures and outsourcing contract &
related software costs. Management uses free cash flow as an
internal measure of financial performance.
"Although the LHD-8 charge is disappointing, the remainder of our first quarter performance was strong. Total backlog increased more than $4 billion to a record $68 billion. We demonstrated strong growth and performance in our Information & Services, Aerospace and Electronics businesses, and we won the KC-45 tanker program. These positives demonstrate the solid, underlying business trends we expect and reinforce our confidence in our long-term financial targets," said Ronald D. Sugar, Northrop Grumman chairman and chief executive officer.
"Based on the strength of that long-term outlook, we continue to execute our balanced cash deployment strategy. During the quarter we purchased $600 million of our shares, and today we announced an increase in our quarterly dividend. This is our fifth annual increase and represents a doubling of our dividend since the TRW acquisition."
Operating income for the 2008 first quarter decreased 33 percent to $464 million from $690 million for the 2007 first quarter. As a percent of sales, operating income decreased to 6 percent from 9.4 percent in the prior year period. The $326 million pre-tax charge in Shipbuilding caused the decline in operating income in the quarter and as a percent of sales, impacted operating income by approximately 400 basis points.
Federal and foreign income taxes for the 2008 first quarter declined to $146 million from $206 million in the first quarter of 2007. The effective tax rate applied to earnings from continuing operations for the 2008 first quarter was 35.7 percent compared with 34.3 percent in the 2007 first quarter.
Net earnings for the 2008 first quarter declined to $264 million, or $0.76 per diluted share, from $387 million, or $1.10 per diluted share, for the same period in 2007. Earnings per share are based on weighted average diluted shares outstanding of 349.3 million for the first quarter of 2008 and 358.3 million for the first quarter of 2007. Weighted average shares outstanding for both periods include the dilutive effects of the company's mandatorily redeemable Series B convertible preferred stock and the impact of share repurchases during the quarter.
New business awards totaled $12.1 billion in the first quarter. Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, increased to a record $68 billion as of March 31, 2008.
Cash Flow Highlights
--------------------
First Quarter
-------------------------------
($ millions) 2008 2007 Change
-------------------------------
Cash from operations 194 400 (206)
Less:
Capital expenditures 143 158 15
Outsourcing contract & related
software costs 35 30 (5)
-------------------------------
Free cash flow(1) 16 212 (196)
(1) Free cash flow is a non-GAAP measure defined as cash from
operations less capital expenditures and outsourcing contract &
related software costs. Management uses free cash flow as an
internal measure of financial performance.
Cash provided by operations in the 2008 first quarter totaled $194 million compared with $400 million in the prior year period. The decline in cash provided by operations reflects an increase in accounts receivable. The increase in receivables is due to timing of billing and collection resulting from the transition to a common internal accounting software system. The transition impacted working capital by approximately $200 million, which is largely expected to be recovered in the second quarter of 2008. First quarter 2008 capital spending totaled $143 million compared with capital spending of $158 million in the prior year period. First quarter 2008 free cash flow totaled $16 million compared with $212 million in the prior year period.
Cash Measurements, Debt and Capital Deployment
----------------------------------------------
($ millions) 3/31/2008 12/31/2007
---------------------------------------------------------------------
Cash & cash equivalents 429 963
Total debt 4,097 4,055
Net debt(1) 3,668 3,092
Mandatorily redeemable preferred stock 46 350
Net debt to total capital ratio(2) 17% 14%
(1) Total debt less cash and cash equivalents
(2) Net debt divided by the sum of shareholders' equity and total
debt.
Cash and cash equivalents totaled $429 million at March 31, 2008 compared with $963 million at Dec. 31, 2007, and total debt was $4.1 billion at March 31, 2008. Changes in cash and cash equivalents and total debt include the following cash deployment and financing actions during the quarter:
* $600 million for share repurchases
* $143 million for capital expenditures and $35 million for
outsourcing contract and related software costs
* $126 million for dividends
* $69 million proceeds from exercises of stock options and issuance
of common stock
During the first quarter of 2008 the company announced its intention to redeem its mandatorily redeemable Series B convertible preferred stock on April 4, 2008. The reduction in mandatorily redeemable preferred stock reflects the voluntary conversion by holders of approximately 3 million shares during the first quarter of 2008.
During the first quarter of 2008 the company also announced the sale of its Electro-Optical Systems business for $175 million in cash. This sale was completed on April 21, 2008, and a small after-tax gain is anticipated to be recognized in discontinued operations in the second quarter of 2008.
2008 Guidance
-------------
Prior Current
---------------------------------------------------------------------
Sales ~$33B ~$33B
Segment operating income(1)
as % of sales mid to high 9% mid to high 8%
Operating income as % of sales high 9% high 8%
Diluted EPS from continuing
operations $5.50 - 5.75 $4.90 - 5.15
Cash from operations $2.8 - 3.1B $2.6 - 2.9B
Free cash flow(2) $1.9 - 2.3B $1.7 - 2.1B
(1) Segment operating income is a non-GAAP measure used as an
internal measure of financial performance for the four businesses.
(2) Free cash flow is a non-GAAP measure defined as cash from
operations less capital expenditures and outsourcing contract &
related software costs. Management uses free cash flow as an
internal measure of financial performance.
The company continues to expect sales of approximately $33 billion in 2008. The company has revised its guidance for segment operating income, operating income, and earnings per share to reflect the impacts of the charge in Shipbuilding, $326 million or $0.61 per diluted share, respectively. Guidance for 2008 cash from operations and free cash flow has been revised to include a $200 million negative impact from the charge.
Business Results
----------------
Consolidated Sales & Segment Operating Income(1)
($ millions except per share data)
First Quarter
-------------------------------
2008 2007 Change
-------------------------------
Sales
Information & Services 3,135 2,953 6%
Aerospace 2,115 2,035 4%
Electronics 1,555 1,528 2%
Shipbuilding 1,264 1,156 9%
Intersegment eliminations (345) (358)
-------------------------------
7,724 7,314 6%
Segment operating income(1)
Information & Services 260 231 13%
Aerospace 235 219 7%
Electronics 209 192 9%
Shipbuilding (218) 79 NM
Intersegment eliminations (28) (29)
-------------------------------
Segment operating income(1) 458 692 (34%)
as a % of sales 5.9% 9.5% (460) bps
Reconciliation to operating
income:
Unallocated expenses (32) (32)
Net pension adjustment(2) 59 33
Reversal of royalty income
included above (21) (3)
-------------------------------
Operating income 464 690 -33%
as a % of sales 6.0% 9.4% (340) bps
---------------------------------------------------------------------
(1) Segment operating income is a non-GAAP measure used as an
internal measure of financial performance for the four businesses.
(2) Net pension adjustment includes pension expense determined in
accordance with GAAP less pension expense allocated to the
business segments under U.S. Government Cost Accounting Standards.
Operating results for all periods presented reflect the reclassification of Electro-Optical Systems (formerly reported in Electronics) from continuing to discontinued operations, as well as the transfer of the Park Air and Remotec businesses from Electronics to Mission Systems effective Jan. 1, 2008. Schedule 6 provides previously reported quarterly financial results revised to reflect discontinued operations.
Information & Services
---------------------------------------------------------------------
First Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
Mission Systems $1,545 $145 9.4% $1,395 $117 8.4%
Information
Technology 1,085 89 8.2% 1,038 86 8.3%
Technical Services 505 26 5.1% 520 28 5.4%
--------------------------------------------------
$3,135 $260 8.3% $2,953 $231 7.8%
--------------------------------------------------
Information & Services first quarter 2008 sales increased 6 percent from the prior year period due to higher sales for Mission Systems and Information Technology. Operating income for Information & Services rose 13 percent in the 2008 first quarter. As a percent of sales, operating income increased 50 basis points to 8.3 percent from 7.8 percent in the prior year period. The increase in operating income is due to higher volume, and the increase in operating income rate reflects improved program performance for Mission Systems.
Mission Systems sales increased 11 percent due to higher volume for intelligence, surveillance & reconnaissance programs, higher volume for command, control & communications programs and higher volume for the Kinetic Energy Interceptor program. Operating income rose 24 percent, and as a percent of sales, increased 100 basis points to 9.4 percent from 8.4 percent in the prior year period. The increase in operating income reflects higher volume and improved program performance.
Information Technology sales rose 5 percent due to higher volume for intelligence programs, the New York City Wireless program, the Virginia IT outsourcing program, and the Network Centric Solutions program. Operating income rose 3 percent, and as a percent of sales was comparable to the prior year period at 8.2 percent compared with 8.3 percent.
Technical Services sales declined 3 percent due to completion of the Western Range Operations program in 2007 and lower volume for the Joint Base Operations Support program than in the prior year period. Operating income decreased 7 percent, and as a percent of sales, declined to 5.1 percent from 5.4 percent in the prior year period. The comparison to first quarter 2007 reflects lower volume as well as contract mix.
Aerospace
---------------------------------------------------------------------
First Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
Integrated Systems $1,340 $170 12.7% $1,281 $160 12.5%
Space Technology 775 65 8.4% 754 59 7.8%
--------------------------------------------------
$2,115 $235 11.1% $2,035 $219 10.8%
--------------------------------------------------
Aerospace first quarter 2008 sales increased 4 percent from the prior year period and includes higher volume for both Integrated Systems and Space Technology. Aerospace first quarter 2008 operating income increased 7 percent, and as a percent of sales, increased to 11.1 percent from 10.8 percent in the prior year period.
Integrated Systems sales rose 5 percent. The increase includes higher volume for restricted, Global Hawk, Navy UCAS-D, and KC-45 air mobility tanker programs, which was partially offset by lower volume for the F-35, Multi-Platform Radar Technology Insertion program, and the E-10A. Integrated Systems operating income rose 6 percent, and as a percent of sales, increased to 12.7 percent from 12.5 percent in the prior year period. The increase in operating income and rate reflect higher volume and improved program performance.
Space Technology sales increased 3 percent, primarily due to higher volume for restricted and James Webb Space Telescope programs. Increases in these programs were partially offset by lower volume in the Advanced Extremely High Frequency, Space Tracking and Surveillance System, and Transformational Satellite Communications System programs. Space Technology operating income increased 10 percent, and as a percent of sales increased to 8.4 percent from 7.8 percent, reflecting improved program performance and higher sales volume.
Electronics
---------------------------------------------------------------------
First Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
$1,555 $209 13.4% $1,528 $192 12.6%
--------------------------------------------------
Electronics first quarter 2008 sales increased 2 percent from the prior year period principally due to higher sales for Army and navigation systems programs. These sales increases were partially offset by declining volume for naval and marine systems programs.
Electronics first quarter 2008 operating income rose 9 percent, and as a percent of sales, increased to 13.4 percent from 12.6 percent. Operating income primarily reflects improved program performance, higher volume, and higher royalty income than in the prior year period.
Shipbuilding
---------------------------------------------------------------------
First Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
$1,264 ($218) NM $1,156 $79 6.8%
--------------------------------------------------
Shipbuilding first quarter 2008 sales increased 9 percent from the prior year period primarily due to higher volume in surface combatants and fleet support. Higher surface combatant volume includes production ramp-up for the DDG 107 and the DDG 110. The increase in fleet support reflects revenue from the July 2007 reorganization of AMSEC. Shipbuilding revenue in the 2008 first quarter was reduced by $134 million due to the revision of the LHD-8 contract's estimate to complete (EAC).
Shipbuilding recorded a $218 million operating loss in the first quarter of 2008 compared with income of $79 million in the first quarter of 2007. During the quarter the company recorded a $326 million charge that reduced Shipbuilding income by the following:
* $272 million -- LHD-8 EAC adjustment for the additional time
and materials needed to complete ship rework and the six-month
delivery extension from the fourth quarter of 2008 to the second
quarter of 2009.
* $35 million -- EAC adjustments for other Gulf Coast programs
to reflect resource impacts caused by delay in the LHD-8 delivery,
as well as risk adjustments based on recently concluded EAC
evaluations.
* $19 million -- non-cash write-down of purchased intangibles to
reflect the impairment of purchased intangibles resulting from
the EAC adjustments described above.
First Quarter Highlights
* The U.S. Air Force selected Northrop Grumman to provide the KC-45
aerial refueling tanker for the KC-135 tanker replacement program.
The initial contract provides four System Design and Development
aircraft and is valued at $1.5 billion. The contract has a
potential value of $35 billion. The unsuccessful bidder has filed
an appeal of this award with the U.S. Government Accountability
Office.
* The U.S. Navy awarded Northrop Grumman a $1.4 billion cost plus
incentive fee contract by the U.S. Navy for the construction of a
Zumwalt-class destroyer, DDG 1001, as well as major components for
the DDG 1000.
* The U.S. Navy awarded Northrop Grumman a planning contract option
for the refueling and complex overhaul of the nuclear-powered
aircraft carrier USS Theodore Roosevelt (CVN 71). This option is
valued at $186.4 million and continues work awarded in 2006. The
total estimated value of the contract is $558 million.
* The U.S. Air Force awarded Northrop Grumman the Weather Agency
Systems Engineering, Management and Sustainment II contract to
increase effectiveness, reliability, and performance, while
reducing total cost of ownership for a variety of classified and
unclassified Air Force weather systems. The $239 million cost plus
award fee contract includes a one-year base and four option years.
* A large European postal customer awarded Solystic, a French
subsidiary of Northrop Grumman, a $100 million firm fixed price
contract to provide compact sequence sorters. The contract is for
an initial order of 400 letter sequencing machines with options
for an additional 400 machines.
* MBDA Italia selected Northrop Grumman to provide the navigation and
localization systems within the design and development phase for
NATO's Medium Extended Air Defense System (MEADS) program intended
to replace Hawk and Patriot systems worldwide.
* Northrop Grumman delivered the fourth submarine of the Virginia
class, North Carolina (SSN 777), to the Navy on Feb. 21.
* The Northrop Grumman-built National Security Cutter Bertholf (WMSL
750) successfully completed builder's trials in the Gulf of Mexico.
* Northrop Grumman delivered the payload module for the second
Advanced Extremely High Frequency military communications satellite
ahead of schedule to Lockheed Martin, prime contractor for the
program.
* The Northrop Grumman-built amphibious transport dock ship New York
(LPD 21) was christened in New Orleans on Feb. 29. The ship is
unique in that its bow stem contains seven-and-a-half tons of steel
recovered from the World Trade Center following the terrorist
attacks of Sept. 11, 2001.
* The Northrop Grumman-built guided missile destroyer Dewey (DDG 105)
was christened in Pascagoula, Mississippi, on Jan. 26.
* Northrop Grumman celebrated the 10th anniversary of the first
flight of the RQ-4 Global Hawk unmanned aerial system after
delivering a record five production aircraft to the U.S. Air Force
in 2007. In addition, the Global Hawk set an endurance record for
a full-scale, operational unmanned aircraft on March 22, 2008,
when it completed a flight of 33.1 hours at altitudes up to 60,000
feet over Edwards Air Force Base, Calif.
* Northrop Grumman and the University of Illinois at Urbana-Champaign
announced the creation of the first fully-functional, all-carbon
nanotube transistor radio, demonstrating that carbon nanotubes can
be used as high-speed transistors, while consuming only
one-thousandth the power required by current transistor technology.
* Northrop Grumman announced the sale of its Electro-Optical Systems
business for $175 million in cash to L-3 Communications. The
transaction was completed on April 21, 2008.
* The Northrop Grumman board of directors declared a quarterly
dividend of $0.37 per share on Northrop Grumman common stock.
* Northrop Grumman realigned its two shipbuilding sectors, Newport
News and Ship Systems, into Northrop Grumman Shipbuilding. It also
realigned the reporting of portions of its missiles business from
Mission Systems to Space Technology, effective July 1, 2008.
About Northrop Grumman
Northrop Grumman Corporation is a global defense and technology company whose 120,000 employees provide innovative systems, products, and solutions in information and services, electronics, aerospace and shipbuilding to government and commercial customers worldwide.
Northrop Grumman will webcast its earnings conference call at noon EDT on April 24, 2008. A live audio broadcast of the conference call along with a supplemental presentation will be available on the investor relations page of the company's Web site at http://www.northropgrumman.com.
Note: Certain statements and assumptions in this release contain or are based on "forward-looking" information that Northrop Grumman Corporation (the "Company") believes to be within the definition in the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties, and include, among others, statements in the future tense, and all statements accompanied by terms such as "project," "expect," "estimate," "assume," "believe," "plan," "guidance," "outlook," "trends," "target" or variations thereof. This information reflects the Company's best estimates when made, but the Company expressly disclaims any duty to update this information if new data become available or estimates change after the date of this release.
Such "forward-looking" information includes, among other things, financial guidance regarding sales, segment operating margin, pension expense, employer contributions under pension plans and medical and life benefits plans, cash flow, and earnings per share, and is subject to numerous assumptions and uncertainties, many of which are outside the Company's control. These include the Company's assumptions with respect to future revenues; expected program performance and cash flows; returns on pension plan assets and variability of pension actuarial and related assumptions; the outcome of litigation, claims, appeals, bid protests, and investigations; hurricane-related insurance recoveries; environmental remediation; acquisitions and divestitures of businesses; joint ventures and other business arrangements; access to capital; performance issues with key suppliers and subcontractors; product performance and the successful execution of internal plans; successful negotiation of contracts with labor unions; allowability and allocability of costs under U.S. Government contracts; effective tax rates and timing and amounts of tax payments; the results of any audit or appeal process with the Internal Revenue Service; and anticipated costs of capital investments, among other things.
The Company's operations are subject to various additional risks and uncertainties resulting from its position as a supplier, either directly or as subcontractor or team member, to the U.S. government and its agencies as well as to foreign governments and agencies; actual outcomes are dependent upon various factors, including, without limitation, the Company's successful performance of internal plans; government customers' budgetary constraints; customer changes in short-range and long-range plans; domestic and international competition in both the defense and commercial areas; technical, operational or quality setbacks, in development and production programs, that could adversely affect the profitability or cash flow of the company; product performance; continued development and acceptance of new products and, in connection with any fixed-price development programs, controlling cost growth in meeting production specifications and delivery rates; performance issues with key suppliers and subcontractors; government import and export policies; acquisition or termination of government contracts; the outcome of political and legal processes and of the assertion or prosecution of potential substantial claims by or on behalf of a U.S. government customer; natural disasters, including amounts and timing of recoveries under insurance contracts, availability of materials and supplies, continuation of the supply chain, contractual performance relief and the application of cost sharing terms, allowability and allocability of costs under U.S. Government contracts, impacts of timing of cash receipts and the availability of other mitigating elements; terrorist acts; legal, financial and governmental risks related to international transactions and global needs for military aircraft, military and civilian electronic systems and support, information technology, naval vessels, space systems, technical services and related technologies, as well as other economic, political and technological risks and uncertainties and other risk factors set out in the Company's filings from time to time with the Securities and Exchange Commission, including, without limitation, Company reports on Form 10-K and Form 10-Q.
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NORTHROP GRUMMAN CORPORATION SCHEDULE 1
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three months ended
March 31
------------------
$ in millions, except per share 2008 2007
--------------------------------------------------------------------
Sales and Service Revenues
Product sales $ 4,394 $ 4,140
Service revenues 3,330 3,174
--------------------------------------------------------------------
Total sales and service revenues 7,724 7,314
--------------------------------------------------------------------
Cost of Sales and Service Revenues
Cost of product sales 3,729 3,168
Cost of service revenues 2,793 2,749
General and administrative expenses 738 707
--------------------------------------------------------------------
Operating income 464 690
Other Income (Expense)
Interest income 7 7
Interest expense (77) (89)
Other, net 15 (8)
--------------------------------------------------------------------
Earnings from continuing operations before
income taxes 409 600
Federal and foreign income taxes 146 206
--------------------------------------------------------------------
Earnings from continuing operations 263 394
Income (Loss) from discontinued operations,
net of tax 1 (7)
--------------------------------------------------------------------
Net earnings $ 264 $ 387
--------------------------------------------------------------------
Basic Earnings (Loss) Per Share
Continuing operations $ .78 $ 1.14
Discontinued operations (.02)
--------------------------------------------------------------------
Basic earnings per share $ .78 $ 1.12
--------------------------------------------------------------------
Weighted-average common shares outstanding,
in millions 338.8 345.3
--------------------------------------------------------------------
Diluted Earnings (Loss) Per Share
Continuing operations $ .76 $ 1.12
Discontinued operations (.02)
--------------------------------------------------------------------
Diluted earnings per share $ .76 $ 1.10
--------------------------------------------------------------------
Weighted-average diluted shares outstanding,
in millions 349.3 358.3
--------------------------------------------------------------------
NORTHROP GRUMMAN CORPORATION SCHEDULE 2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(unaudited)
March 31, Dec. 31,
$ in millions 2008 2007
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Assets:
Cash and cash equivalents $ 429 $ 963
Accounts receivable, net of progress payments 4,358 3,790
Inventoried costs, net of progress payments 1,132 1,000
Deferred income taxes 529 542
Prepaid expenses and other current assets 501 502
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Total current assets 6,949 6,797
Property, plant, and equipment, net of
accumulated depreciation of $3,552 in 2008
and $3,424 in 2007 4,645 4,690
Goodwill 17,620 17,672
Other purchased intangibles, net of accumulated
amortization of $1,711 in 2008 and $1,687 in
2007 1,020 1,074
Pension and postretirement benefits asset 2,103 2,080
Other assets 1,038 1,060
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Total assets $33,375 $33,373
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Liabilities:
Notes payable to banks $ 59 $ 26
Current portion of long-term debt 110 111
Trade accounts payable 1,806 1,890
Accrued employees' compensation 1,248 1,175
Advance payments and billings in excess of
costs incurred 1,834 1,563
Other current liabilities 1,680 1,667
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Total current liabilities 6,737 6,432
Long-term debt, net of current portion 3,928 3,918
Mandatorily redeemable preferred stock 46 350
Pension and postretirement benefits liability 3,059 3,008
Other long-term liabilities 2,004 1,978
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Total liabilities 15,774 15,686
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Shareholders' Equity:
Common stock, $1 par value; 800,000,000 shares
authorized; issued and outstanding: 2008 --
339,155,655; 2007 -- 337,834,561 339 338
Paid-in capital 10,438 10,661
Retained earnings 7,518 7,387
Accumulated other comprehensive loss (694) (699)
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Total shareholders' equity 17,601 17,687
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Total liabilities and shareholders' equity $33,375 $33,373
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NORTHROP GRUMMAN CORPORATION SCHEDULE 3
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(unaudited)
Three months ended
March 31
------------------
$ in millions 2008 2007
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Operating Activities
Sources of Cash - Continuing Operations
Cash received from customers
Progress payments $ 1,608 $ 1,532
Collections on billings 5,950 5,745
Income tax refunds received 2 1
Interest received 7 7
Proceeds from insurance carriers related to
operations 5
Other cash receipts 28 15
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Total sources of cash-continuing operations 7,600 7,300
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Uses of Cash - Continuing Operations
Cash paid to suppliers and employees (7,189) (6,676)
Interest paid (113) (127)
Income taxes paid (54) (22)
Excess tax benefits from stock-based
compensation (44) (52)
Other cash payments (3) (9)
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Total uses of cash-continuing operations (7,403) (6,886)
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Cash provided by continuing operations 197 414
Cash used in discontinued operations (3) (14)
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Net cash provided by operating activities 194 400
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Investing Activities
Payment for businesses purchased, net of cash
acquired (578)
Additions to property, plant, and equipment (143) (158)
Payments for outsourcing contract and related
software costs (35) (30)
Proceeds from insurance carriers related to
capital expenditures 3
Proceeds from disposals of property, plant
and equipment 3
Decrease in restricted cash 26 15
Other investing activities, net 1 1
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Net cash used in investing activities (148) (747)
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Financing Activities
Net borrowings under lines of credit 33 230
Principal payments of long-term debt (23)
Proceeds from exercises of stock options and
issuance of common stock 69 156
Dividends paid (126) (121)
Excess tax benefits from stock-based
compensation 44 52
Common stock repurchases (600) (600)
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Net cash used in financing activities (580) (306)
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Decrease in cash and cash equivalents (534) (653)
Cash and cash equivalents, beginning of period 963 1,015
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Cash and cash equivalents, end of period $ 429 $ 362
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NORTHROP GRUMMAN CORPORATION SCHEDULE 4
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(unaudited)
Three months ended
March 31
------------------
$ in millions 2008 2007
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Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities
Net Earnings $ 264 $ 387
Adjustments to reconcile to net cash provided
by operating activities
Depreciation 136 135
Amortization of assets 62 34
Stock-based compensation 44 38
Excess tax benefits from stock-based
compensation (44) (52)
Loss on disposals of property, plant, and
equipment 1
Amortization of long-term debt premium (3) (3)
Decrease (increase) in
Accounts receivable (2,080) (1,436)
Inventoried costs (266) (89)
Prepaid expenses and other current assets (15) 18
Increase (decrease) in
Progress payments 1,642 1,390
Accounts payable and accruals 254 (264)
Deferred income taxes 26 (4)
Income taxes payable 112 177
Retiree benefits 31 47
Other non-cash transactions, net 33 36
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Cash provided by continuing operations 197 414
Cash used in discontinued operations (3) (14)
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Net cash provided by operating activities $ 194 $ 400
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Non-Cash Investing and Financing Activities
Purchase of business
Fair value of assets acquired, including
goodwill $ 682
Cash paid for businesses purchased (578)
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Liabilities assumed $ 104
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Mandatorily redeemable preferred stock converted
into common stock $ 304
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Capital Leases $ 21
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NORTHROP GRUMMAN CORPORATION SCHEDULE 5
TOTAL BACKLOG AND CONTRACT AWARDS
($ in millions)
(unaudited)
TOTAL BACKLOG(3)
----------------------------------------------------
March 31, 2008 March 31, 2007
------------------------- -------------------------
FUNDED UNFUNDED TOTAL FUNDED UNFUNDED TOTAL
(1) (2) BACKLOG (1) (2) BACKLOG
----------------------------------------------------
Information &
Services
Mission
Systems $ 3,847 $ 8,751 $12,598 $ 3,674 $ 8,402 $12,076
Information
Technology 2,606 2,024 4,630 2,609 1,673 4,282
Technical
Services 1,655 2,898 4,553 1,317 3,667 4,984
------------------------- -------------------------
Total
Information &
Services 8,108 13,673 21,781 7,600 13,742 21,342
Aerospace
Integrated
Systems 5,342 6,603 11,945 4,749 4,100 8,849
Space
Technology 1,173 8,066 9,239 1,663 6,689 8,352
------------------------- -------------------------
Total Aerospace 6,515 14,669 21,184 6,412 10,789 17,201
Electronics 8,518 2,200 10,718 7,123 1,463 8,586
Shipbuilding 12,075 2,252 14,327 10,674 2,122 12,796
------------------------- -------------------------
Total $35,216 $32,794 $68,010 $31,809 $28,116 $59,925
------------------------- -------------------------
-------------------------
December 31, 2007
-------------------------
FUNDED UNFUNDED TOTAL
(1) (2) BACKLOG
-------------------------
Information & Services
Mission Systems $ 3,399 $ 8,985 $12,384
Information Technology 2,581 2,268 4,849
Technical Services 1,471 3,193 4,664
-------------------------
Total Information & Services 7,451 14,446 21,897
Aerospace
Integrated Systems 4,204 4,525 8,729
Space Technology 1,260 8,266 9,526
-------------------------
Total Aerospace 5,464 12,791 18,255
Electronics 7,887 2,047 9,934
Shipbuilding 10,348 3,230 13,578
-------------------------
Total $31,150 $32,514 $63,664
-------------------------
(1) Funded backlog represents unfilled orders for which funding has
been contractually obligated by the customer.
(2) Unfunded backlog represents firm orders for which funding is not
currently contractually obligated by the customer.
Unfunded backlog excludes unexercised contract options and
unfunded Indefinite Delivery Indefinite Quantity contract awards.
(3) Certain prior period amounts have been reclassified to conform
to the 2008 presentation.
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CONTRACT AWARDS
---------------
The estimated value of contract awards included in backlog during the
three months ended March 31, 2008, is approximately $12.1 billion.
Significant new awards during this period include $1.5 billion for the
Air Mobility tanker program, $1.4 billion for the Zumwalt-class
destroyer, $596 million for the CVN 78 bridge contract, $208 million
for the VIS IDIQ program, $195 million for the LAIRCM IDIQ program,
and $183 million for the ICBM program. In addition, the company was
awarded approximately $2.6 billion for restricted programs during this
period.
On February 29, 2008, the company was awarded a contract by the U.S.
Air Force to replace its aerial refueling tanker fleet. Included in
backlog is approximately $1.5 billion for this contract to provide
four System Design and Development aircraft of which $61 million has
been funded. The other bidder for the contract subsequently protested
the decision by the U.S. Air Force to award the contract to the
company. The U.S. Air Force issued a stop work order to the company
pending the resolution of this matter. The Government Accountability
Office is currently reviewing the protest and is expected to reach its
decision in June 2008.
The estimated value of contract awards during the three months ended
March 31, 2007, is approximately $7.3 billion. Significant new awards
during this period include $1 billion for LPD 25, $875 million for the
Flat Sequencing System program, $235 million for the Intercontinental
Ballistic Missile program, $133 million for the Euro Hawk program, and
$118 million for the Large Aircraft Infrared Counter-measures
Indefinite Delivery and Indefinite Quantity program. In addition, the
company was awarded approximately $688 million for restricted programs
during this period.
Northrop Grumman Corporation Schedule 6
Summary Operating Results
Discontinued Operations Reclassification
($ in millions)
(unaudited)
2006 2007
------- -------------------------------------------
Three Months Ended Total
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Year
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Sales and
Service
Revenues
As reported $30,113 $ 7,340 $ 7,926 $ 7,928 $ 8,824 $32,018
Electro-
Optical
Systems(1) (122) (26) (48) (57) (59) (190)
------- -------------------------------------------
Restated
sales and
service
revenues $29,991 $ 7,314 $ 7,878 $ 7,871 $ 8,765 $31,828
------- -------------------------------------------
Segment
Operating
Margin(2)
As reported $ 2,807 $ 687 $ 789 $ 817 $ 810 $ 3,103
Electro-
Optical
Systems(1) 30 5 9 (1) (1) 12
------- -------------------------------------------
Restated
segment
operating
margin $ 2,837 $ 692 $ 798 $ 816 $ 809 $ 3,115
------- -------------------------------------------
Income From
Continuing
Operations,
Net of Tax
As reported $ 1,573 $ 390 $ 466 $ 490 $ 457 $ 1,803
Electro-
Optical
Systems, net
of tax(1) 19 3 6 (2) -- 7
------- -------------------------------------------
Restated
income from
continuing
operations,
net of tax $ 1,592 $ 393 $ 472 $ 488 $ 457 $ 1,810
------- -------------------------------------------
Preferred
Dividends 24 6 6 6 6 24
------- -------------------------------------------
Income
available
to common
shareholders
from
continuing
operations $ 1,616 $ 399 $ 478 $ 494 $ 463 $ 1,834
------- -------------------------------------------
Diluted Earnings
Per Share from
Continuing
Operations
As reported $ 4.46 $ 1.11 $ 1.33 $ 1.41 $ 1.31 $ 5.16
Electro-
Optical
Systems, net
of tax(1) .05 .01 .02 (.01) .02
------- -------------------------------------------
Restated
diluted
earnings per
share from
continuing
operations $ 4.51 $ 1.12 $ 1.35 $ 1.40 $ 1.31 $ 5.18
------- -------------------------------------------
Weighted Average
Diluted Shares
Outstanding,
in millions 358.6 358.3 355.3 352.6 351.1 354.3
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(1) The adjustment reflects the reclassification of the operating
results of the Electro-Optical business area formerly reported
in the Electronics segment. The definitive sale agreement was
signed March 2008, and the company reclassified the first
quarter of 2008 and all prior financial information to reflect
the business as discontinued operations.
(2) Non-GAAP measure. Management uses segment operating margin as an
internal measure of financial performance for the individual
business segments.
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