Northrop Grumman Reports Third Quarter 2008 Results

Northrop Grumman Reports Third Quarter 2008 Results

* Earnings Per Share from Continuing Operations Increase 6 Percent to $1.50
* Guidance for 2008 Earnings from Continuing Operations Raised to $5.10 to $5.20 Per Share
* Sales Increase 6 Percent to $8.4 Billion
* Cash from Operations Increases to $1.4 Billion; Free Cash Flow Increases to $1.2 Billion
* New Business Awards Total $11.5 Billion; Record $70.1 Billion Backlog
* Stock Repurchases Total 10.8 Million Shares in Q3 2008; 21.2 Million Shares Year-to-Date

LOS ANGELES - Oct. 22, 2008 - Northrop Grumman Corporation (NYSE:NOC) reported that third quarter 2008 earnings from continuing operations increased to $509 million, or $1.50 per diluted share, compared with $489 million, or $1.41 per diluted share, in the third quarter of 2007. Third quarter 2007 earnings from continuing operations included an after-tax gain of $21 million, or $0.06 per share, for the reorganization of AMSEC LLC. Sales for the 2008 third quarter increased 6 percent to $8.4 billion from $7.9 billion in the 2007 third quarter. Cash provided by operations for the 2008 third quarter increased 35 percent to $1.4 billion compared with $1 billion in the prior year period.

Operating Highlights
-------------------------

($ millions Third Quarter Nine Months
except per -------------------------- --------------------------
share data) 2008 2007 Change 2008 2007 Change
-------------------------- --------------------------
Sales $8,381 $7,871 6% $24,733 $23,063 7%
Operating income 771 806 (4%) 2,041 2,259 (10%)
as a % of sales 9.2% 10.2% (100 bps) 8.3% 9.8% (150 bps)
Earnings from
continuing
operations $ 509 $ 489 4% $ 1,255 $ 1,355 (7%)
Diluted EPS from
continuing
operations 1.50 1.41 6% 3.65 3.86 (5%)
Net earnings 512 489 5% 1,271 1,336 (5%)
Diluted EPS 1.51 1.41 7% 3.69 3.81 (3%)
Cash from
operations 1,373 1,015 35% 2,174 2,156 1%
Free cash flow(1) 1,183 873 36% 1,630 1,636 (0%)

(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.
"This was a strong quarter for Northrop Grumman," said Ronald D. Sugar, Northrop Grumman chairman and chief executive officer. "We posted higher sales and earnings, and based on the strength of the quarter we are raising our guidance. New business awards were outstanding and drove our total backlog to a record of more than $70 billion. As expected, cash generation increased dramatically. Our strong cash flow, ample liquidity, and record backlog are a solid foundation for the future and reflect the hard work and dedication of our 120,000 employees."

Segment operating income for the 2008 third quarter totaled $768 million compared with $816 million in the prior year period. The decline is primarily due to lower operating income in Shipbuilding and Information Technology than in the prior year period. Third quarter 2007 Shipbuilding operating income included $45 million for favorable contract adjustments and $22 million for a pre-tax gain on the AMSEC reorganization. Third quarter 2008 segment operating income was impacted by a $57 million negative contract adjustment for Information Technology's New York City wireless program, which was partially offset by patent infringement settlements of $40 million in Electronics.

Operating income for the 2008 third quarter totaled $771 million compared with $806 million in the prior year period. The decrease is due to the decline in segment operating income and higher reversal of royalty income, which more than offset improvements in corporate unallocated expenses and net pension expense.

Interest expense improved by $10 million compared with the prior year period. Other income increased by $38 million due to higher royalty income than in the prior year period.

Federal and foreign income taxes for the 2008 third quarter totaled $233 million compared with $240 million in the third quarter of 2007. During the 2008 third quarter the company recognized net tax benefits totaling $21 million, primarily attributable to settlement of audits of TRW tax returns for the years 1999 through 2002. The effective tax rate applied to income from continuing operations for the 2008 third quarter was 31.4 percent compared with 32.9 percent in the 2007 third quarter.

Net earnings for the 2008 third quarter increased 5 percent to $512 million, or $1.51 per diluted share, from $489 million, or $1.41 per diluted share, for the same period of 2007. Earnings per share are based on weighted average diluted shares outstanding of 340.1 million for the third quarter of 2008 and 352.6 million for the third quarter of 2007. The weighted average share count reflects the net effect of share repurchases and the redemption or conversion of 6.4 million mandatorily redeemable convertible preferred shares into common shares on or before April 4, 2008. Weighted average shares outstanding for the 2007 third quarter include the dilutive effect of 6.4 million shares of the company's mandatorily redeemable convertible preferred stock.

New business awards totaled $11.5 billion, resulting in a record total backlog of $70.1 billion for the company as of Sept. 30, 2008. Total backlog includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer.


Cash Flow Highlights
--------------------
Third Quarter Nine Months
------------------------ ------------------------
($ millions) 2008 2007 Change 2008 2007 Change
------------------------ ------------------------
Cash from
operations $1,373 $1,015 $ 358 $2,174 $2,156 $ 18
Less:
Capital
expenditures 167 133 (34) 444 431 (13)
Outsourcing
contract &
related software
costs 23 9 (14) 100 89 (11)
---------------------------------------------------
Free cash flow(1) $1,183 $ 873 $ 310 $1,630 $1,636 $ (6)

(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 third quarter increased to $1.4 billion from $1 billion in the prior year period, and free cash flow increased to $1.2 billion. The increase reflects substantially improved working capital and lower cash taxes.


Cash Measurements, Debt and Capital Deployment
----------------------------------------------
($ millions) 9/30/2008 12/31/2007
---------------------------------------------------------------------
Cash & cash equivalents $1,016 $ 963
Total debt 3,944 4,055
Net debt(1) 2,928 3,092
Mandatorily redeemable convertible
preferred stock -- 350
Net debt to total capital ratio(2) 14% 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 $1 billion at Sept. 30, 2008 compared with $963 million at Dec. 31, 2007, and total debt was $3.9 billion at Sept. 30, 2008. Changes in cash and cash equivalents and total debt include the following cash deployment, investing and financing actions during the first nine months of 2008:


* $1.5 billion for share repurchases
* $444 million for capital expenditures and $100 million for
outsourcing contract and related software costs
* $395 million for dividends
* $110 million principal payments of long-term debt
* $95 million proceeds from exercises of stock options and issuance
of common stock
* $175 million proceeds from the sale of the company's
Electro-Optical Systems business


2008 Guidance Raised
--------------------
Prior Current
---------------------------------------------------------------------
Sales ~$33B ~$33.4B

Segment operating income(1)
as % of sales mid to high 8% mid 8%

Operating income as % of sales high 8% mid 8%

Diluted EPS from continuing
operations $4.90 - 5.15 $5.10 - $5.20

Cash from operations(2) $2.6 - 2.9B $2.6 - 2.9B

Free cash flow (2), (3) $1.7 - 2.1B $1.8 - 2.1B

(1) Segment operating income is a non-GAAP measure used as an
internal measure of financial performance for the four
businesses.

(2) After required pension contributions of $120 million forecast
for 2008 and before any additional discretionary pension
pre-funding contributions in 2008.

(3) 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.



Business Results
----------------
CONSOLIDATED SALES & SEGMENT OPERATING INCOME(1)
($ millions) Third Quarter Nine Months
----------------------- ------------------------
2008 2007 Change 2008 2007 Change
----------------------- ------------------------
Sales
Information &
Services $3,109 $2,929 6% $9,172 $8,628 6%
Aerospace 2,424 2,256 7% 7,262 6,819 6%
Electronics 1,814 1,577 15% 5,044 4,733 7%
Shipbuilding 1,451 1,469 (1%) 4,403 3,984 11%
Intersegment
eliminations (417) (360) (1,148) (1,101)
----------------------- ------------------------
Sales 8,381 7,871 6% 24,733 23,063 7%

Segment operating
income(1)
Information &
Services 196 225 (13%) 690 706 (2%)
Aerospace 234 224 4% 722 696 4%
Electronics 264 211 25% 675 592 14%
Shipbuilding 118 183 (36%) 26 396 (93%)
Intersegment
eliminations (44) (27) (103) (84)
----------------------- ------------------------
Segment operating
income(1) 768 816 (6%) 2,010 2,306 (13%)
as a % of sales 9.2% 10.4% (120 bps) 8.1% 10.0% (190 bps)

Reconciliation to
operating Income:
Unallocated
expenses (20) (34) (95) (130)
Net pension
adjustment(2) 64 31 192 92
Royalty income
adjustment (41) (7) (66) (9)
----------------------- ------------------------
Total operating
income $ 771 $ 806 (4%) $2,041 $2,259 (10%)
as a % of sales 9.2% 10.2% (100 bps) 8.3% 9.8% (150 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.
Beginning with 2008 second quarter results, the company transferred certain missile systems programs from Mission Systems to Space Technology. Schedule 6 provides previously reported quarterly financial results and the adjustments for first and second quarter 2008 realignments and the second quarter 2008 sale of Electro-Optical Systems.


Information & Services
---------------------------------------------------------------------
Third Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
Mission Systems $1,417 $128 9.0% $1,249 $125 10.0%
Information
Technology 1,085 37 3.4% 1,107 72 6.5%
Technical Services 607 31 5.1% 573 28 4.9%
--------------------------------------------------
$3,109 $196 6.3% $2,929 $225 7.7%
--------------------------------------------------
Information & Services third quarter 2008 sales increased 6 percent, primarily due to a 13 percent increase in Mission Systems sales. Operating income declined 13 percent, and as a percent of sales, totaled 6.3 percent compared with 7.7 percent. Higher sales and operating margin in Mission Systems and Technical Services were offset by a negative contract adjustment in Information Technology.

Mission Systems sales increased 13 percent due to higher volume for intelligence, surveillance & reconnaissance programs and command, control & communications programs. Operating income increased 2 percent and as a percent of sales, totaled 9 percent compared with 10 percent in the prior year period. Higher operating income reflects higher volume than in the prior year period. The change in rate is attributable to fewer positive performance-related contract adjustments in this quarter than in the prior year period.

Information Technology sales declined 2 percent. Third quarter 2008 sales include higher volume for defense, intelligence and civilian agencies. Higher sales for these programs were offset by lower sales for commercial, state and local programs. Operating income declined 49 percent and as a percent of sales declined to 3.4 percent from 6.5 percent. The declines in sales, operating income and rate are due to a $57 million negative performance adjustment for the New York City Wireless program. The adjustment includes provisions related to a key supplier as well as a revised estimate of cost to complete the program. Third quarter 2007 operating income included negative adjustments for state and local IT outsourcing programs, including $22 million in increased amortization of deferred and other outsourcing costs.

Technical Services sales rose 6 percent due to higher volume for life cycle optimization and engineering programs. Operating income increased 11 percent, and as a percent of sales, increased to 5.1 percent from 4.9 percent in the prior year period. The improvement in operating income and rate reflects higher volume, a greater percentage of higher margin life cycle optimization and engineering programs than in the prior year, and improved performance for those programs.


Aerospace
---------------------------------------------------------------------
Third Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
Integrated Systems $1,345 $144 10.7% $1,255 $145 11.6%
Space Technology 1,079 90 8.3% 1,001 79 7.9%
--------------------------------------------------
$2,424 $234 9.7% $2,256 $224 9.9%
--------------------------------------------------
Aerospace third quarter 2008 sales increased 7 percent from the prior year period and include higher volume for both Integrated Systems and Space Technology. Aerospace third quarter 2008 operating income increased 4 percent, and as a percent of sales, totaled 9.7 percent compared with 9.9 percent in the prior year period.

Integrated Systems sales increased 7 percent due to higher volume for the UCAS-D, F/A-18, B-2, and restricted programs, partially offset by lower volume for the F-35 program. Operating income was comparable to the prior year period, and as a percent of sales totaled 10.7 percent compared with 11.6 percent in the prior year period. The decline in margin rate reflects initial lower margin on new programs and higher unallowable expenses than in the prior year period.

Space Technology sales increased 8 percent, primarily due to higher volume for restricted programs, and the Kinetic Energy Interceptor, NPOESS, and James Webb Space Telescope programs. Higher volume for these programs was partially offset by lower volume for the Advanced Extremely High Frequency and Space Radar programs. Operating income increased 14 percent, and as a percent of sales improved to 8.3 percent from 7.9 percent. The improvement in operating income and rate is due to higher volume as well as the achievement of technical performance milestones and risk reduction on several programs.


Electronics
---------------------------------------------------------------------
Third Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
$1,814 $264 14.6% $1,577 $211 13.4%
--------------------------------------------------
Electronics third quarter 2008 sales increased 15 percent from the prior year period principally due to higher unit deliveries of land forces products and combat avionics systems, as well as higher sales for surveillance systems and postal automation programs.

Electronics third quarter 2008 operating income increased 25 percent, and as a percent of sales, increased to 14.6 percent from 13.4 percent. Third quarter 2008 operating income includes $40 million of patent infringement settlements. Operating income for the 2007 third quarter included favorable performance adjustments on several programs.


Shipbuilding
---------------------------------------------------------------------
Third Quarter ($ millions)
--------------------------------------------------
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
--------------------------------------------------
$1,451 $118 8.1% $1,469 $183 12.5%
--------------------------------------------------
Shipbuilding third quarter 2008 sales declined 1 percent from the prior year due to lower volume for expeditionary warfare and U.S. Coast Guard programs than in the prior year period, primarily due to Gulf Coast shipyards work stoppages caused by Hurricane Gustav. Lower volume for these programs was partially offset by higher volume for aircraft carriers and surface combatants.

Shipbuilding third quarter 2008 operating income declined 36 percent from the prior year period, and as a percent of sales, totaled 8.1 percent compared with 12.5 percent in the prior year period. Third quarter 2007 operating income and margin rate included $45 million for positive contract adjustments due to recognition of risk reduction upon completion of several contract actions, as well as a $22 million pre-tax gain resulting from the AMSEC reorganization. Third quarter 2008 operating income and rate also reflect the impact of lower volume and a $16 million negative contract adjustment for cost growth and schedule delays resulting from Hurricane Ike disruption to a major subcontractor on the LPD program.


Third Quarter Highlights
------------------------

* Northrop Grumman employees Thomas Howes, Marc Gonsalves and Keith
Stansell were safely freed in a bold rescue effort and returned to
their families in the U.S. after more than five years as captives
of the FARC in Colombia.

* The U.S. Navy awarded Northrop Grumman a $5.1 billion, 7-year cost
plus incentive fee contract award for detail design and
construction of the Gerald R. Ford (CVN 78) nuclear-powered
aircraft carrier.

* The U.S. Government Accountability Office denied a losing bidder's
protest of the U.S. Navy's Broad Area Maritime Surveillance (BAMS)
Unmanned Aircraft System award to Northrop Grumman, allowing the
Navy and Northrop Grumman to move forward on the program.

* Northrop Grumman was one of eight companies awarded an indefinite
delivery/indefinite quantity Contract Field Teams contract with a
potential collective value of up to $10.12 billion over seven
years to provide modification, maintenance and repair on U.S. Air
Force, Army and Navy weapons systems and support equipment at
operational installations in the United States and abroad.

* Northrop Grumman is one of 12 companies that received awards from
the U.S. Air Force under the Future Flexible Acquisition and
Sustainment Tool (F2AST) program, which has a ceiling value of
$6.9 billion over 10 years. The contract was to provide
development, modification and depot maintenance of any Air Force
system, including support systems, subsystems and components.

* The U.S. Air Force awarded Northrop Grumman a firm fixed-price
contract valued at more than $250 million over four years to
provide contractor logistics services to Air Force, Army, Navy and
Marine Corps C-20 aircraft.

* Northrop Grumman received a 56-month contract from Lockheed Martin
Corporation worth up to $240 million, if all options are
exercised, to provide critical technologies for the Airborne and
Maritime/Fixed Station Joint Tactical Radio System.

* The U.S. Navy ordered from Northrop Grumman a fourth lot of
Improved Capability (ICAP) III airborne electronic attack systems
for its fleet of EA-6B Prowlers under a firm, fixed-price,
31-month contract potentially valued at more than $125 million.

* The U.S. Air Force awarded a $120 million contract order to
Northrop Grumman for delivery of LITENING Gen 4 targeting and
sensor systems and related equipment to support the Air National
Guard, Air Force Reserve Command and the U.S. Marine Corps.

* The U.S. Coast Guard commissioned the Northrop Grumman-built
National Security Cutter USCGC Bertholf on August 4, the U.S.
Coast Guard's birthday. The Bertholf is the most capable and
technologically-advanced maritime asset in the service's 218-year
existence.

* The Northrop Grumman-built amphibious transport dock ship USS
Green Bay (LPD 20) was delivered to the U.S. Navy on Aug. 29, 2008.

* Northrop Grumman completed -- on budget and on schedule -- the
center fuselage for the first U.S. Navy F-35 Lightning II aircraft.

* The Northrop Grumman-led team on the U.S. Missile Defense Agency's
Kinetic Energy Interceptor successfully completed the third of
five planned static fire tests of the second stage motor.

* The Northrop Grumman-built high-energy laser installed on the U.S.
Missile Defense Agency's Airborne Laser (ABL) aircraft fired
successfully in a ground test at Edwards Air Force Base, Calif.
The ABL's megawatt-class laser is the most powerful directed
energy weapon ever developed for airborne use.

* Northrop Grumman and the Virginia Information Technologies Agency
were rated first in the nation for Enterprise Information
Technology Management Initiatives by the National Association of
Chief Information Officers.
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 12:30 p.m. EDT on Oct. 22, 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," "forecast," "intend," "anticipate," "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 income, 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 and regulatory requirements; 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; the availability and retention of skilled labor; 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 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 as updated by Form 8-K filed on July 29, 2008 and Form 10-Q.

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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
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

Three months ended Nine months ended
September 30 September 30
$ in millions, ------------------ ------------------
except per share 2008 2007 2008 2007
--------------------------------------------------------------------
Sales and Service Revenues
Product sales $ 4,808 $ 4,264 $14,051 $12,910
Service revenues 3,573 3,607 10,682 10,153
--------------------------------------------------------------------
Total sales and service
revenues 8,381 7,871 24,733 23,063
--------------------------------------------------------------------
Cost of Sales and Service
Revenues
Cost of product sales 3,682 3,198 11,204 9,894
Cost of service revenues 3,143 3,084 9,168 8,612
General and administrative
expenses 785 783 2,320 2,298
--------------------------------------------------------------------
Operating income 771 806 2,041 2,259
Interest expense (74) (84) (223) (256)
Other, net 45 7 72 (3)
--------------------------------------------------------------------
Earnings from continuing
operations before income
taxes 742 729 1,890 2,000
Federal and foreign income
taxes 233 240 635 645
--------------------------------------------------------------------
Earnings from continuing
operations 509 489 1,255 1,355
Income (Loss) from
discontinued operations,
net of tax 3 16 (19)
--------------------------------------------------------------------
Net earnings $ 512 $ 489 $ 1,271 $ 1,336
--------------------------------------------------------------------

Basic Earnings (Loss) Per
Share
Continuing operations $ 1.52 $ 1.44 $ 3.72 $ 3.95
Discontinued operations .01 .05 (.05)
--------------------------------------------------------------------
Basic earnings per share $ 1.53 $ 1.44 $ 3.77 $ 3.90
--------------------------------------------------------------------
Weighted-average common
shares outstanding, in
millions 334.2 340.2 337.1 342.9
--------------------------------------------------------------------
Diluted Earnings (Loss)
Per Share
Continuing operations $ 1.50 $ 1.41 $ 3.65 $ 3.86
Discontinued operations .01 .04 (.05)
--------------------------------------------------------------------
Diluted earnings per share $ 1.51 $ 1.41 $ 3.69 $ 3.81
--------------------------------------------------------------------
Weighted-average diluted
shares outstanding, in
millions 340.1 352.6 344.5 355.4
--------------------------------------------------------------------




NORTHROP GRUMMAN CORPORATION SCHEDULE 2
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited)

Sept. 30, Dec. 31,
$ in millions 2008 2007
--------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 1,016 $ 963
Accounts receivable, net of progress payments 3,957 3,790
Inventoried costs, net of progress payments 1,147 1,000
Deferred income taxes 481 542
Prepaid expenses and other current assets 408 502
--------------------------------------------------------------------
Total current assets 7,009 6,797
Property, plant, and equipment, net of
accumulated depreciation of $3,719 in 2008
and $3,424 in 2007 4,675 4,690
Goodwill 17,475 17,672
Other purchased intangibles, net of accumulated
amortization of $1,767 in 2008 and $1,687 in
2007 964 1,074
Pension and post-retirement benefits asset 2,148 2,080
Other assets 983 1,060
--------------------------------------------------------------------
Total assets $33,254 $33,373
--------------------------------------------------------------------

Liabilities:
Notes payable to banks $ 28 $ 26
Current portion of long-term debt 73 111
Trade accounts payable 1,820 1,890
Accrued employees' compensation 1,370 1,175
Advance payments and billings in excess of costs
incurred 1,889 1,563
Other current liabilities 1,632 1,667
--------------------------------------------------------------------
Total current liabilities 6,812 6,432
Long-term debt, net of current portion 3,843 3,918
Mandatorily redeemable convertible preferred stock 350
Pension and post-retirement benefits liability 3,102 3,008
Other long-term liabilities 1,934 1,978
--------------------------------------------------------------------
Total liabilities 15,691 15,686
--------------------------------------------------------------------

Shareholders' Equity:
Common stock, $1 par value; 800,000,000 shares
authorized; issued and outstanding: 2008 --
327,071,763; 2007 -- 337,834,561 327 338
Paid-in capital 9,668 10,661
Retained earnings 8,253 7,387
Accumulated other comprehensive loss (685) (699)
--------------------------------------------------------------------
Total shareholders' equity 17,563 17,687
--------------------------------------------------------------------
Total liabilities and shareholders' equity $33,254 $33,373
--------------------------------------------------------------------




NORTHROP GRUMMAN CORPORATION SCHEDULE 3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Nine months ended
September 30
------------------
$ in millions 2008 2007
--------------------------------------------------------------------
Operating Activities
Sources of Cash - Continuing Operations
Cash received from customers
Progress payments $ 5,465 $ 5,260
Collections on billings 19,828 18,015
Proceeds from insurance carriers related to
operations 5 125
Other cash receipts 82 21
--------------------------------------------------------------------
Total sources of cash-continuing operations 25,380 23,421
--------------------------------------------------------------------
Uses of Cash - Continuing Operations
Cash paid to suppliers and employees (22,334) (20,215)
Interest paid, net of interest received (251) (285)
Income taxes paid, net of refunds received (569) (637)
Excess tax benefits from stock-based
compensation (47) (73)
Other cash payments (8) (22)
--------------------------------------------------------------------
Total uses of cash-continuing operations (23,209) (21,232)
--------------------------------------------------------------------
Cash provided by continuing operations 2,171 2,189
Cash provided by (used in) discontinued
operations 3 (33)
--------------------------------------------------------------------
Net cash provided by operating activities 2,174 2,156
--------------------------------------------------------------------
Investing Activities
Proceeds from sale of business, net of cash
divested 175
Payment for businesses purchased, net of cash
acquired (685)
Proceeds from sale of property, plant, and
equipment 10 16
Additions to property, plant, and equipment (444) (431)
Payments for outsourcing contract and related
software costs (100) (89)
Proceeds from insurance carriers related to
capital expenditures 3
Decrease in restricted cash 59 45
Other investing activities, net 1 (5)
--------------------------------------------------------------------
Net cash used in investing activities (299) (1,146)
--------------------------------------------------------------------
Financing Activities
Net borrowings (payments) under lines of credit 3 (63)
Principal payments of long-term debt (110) (96)
Proceeds from exercises of stock options and
issuance of common stock 95 246
Dividends paid (395) (378)
Excess tax benefits from stock-based
compensation 47 73
Common stock repurchases (1,462) (1,094)
--------------------------------------------------------------------
Net cash used in financing activities (1,822) (1,312)
--------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 53 (302)
Cash and cash equivalents, beginning of period 963 1,015
--------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,016 $ 713
--------------------------------------------------------------------




NORTHROP GRUMMAN CORPORATION SCHEDULE 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Nine months ended
September 30
------------------
$ in millions 2008 2007
--------------------------------------------------------------------
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities
Net Earnings $ 1,271 $ 1,336
Adjustments to reconcile to net cash provided
by operating activities
Depreciation 416 416
Amortization of assets 148 106
Stock-based compensation 126 135
Excess tax benefits from stock-based
compensation (47) (73)
Loss on disposals of property, plant, and
equipment 4 14
Amortization of long-term debt premium (7) (8)
Pre-tax gain on investments (22)
Pre-tax gain on sale of business (58)
Increase in
Accounts receivable (4,845) (4,493)
Inventoried costs (531) (90)
Prepaid expenses and other current assets (43) (17)
Increase (decrease) in
Progress payments 5,062 4,694
Accounts payable and accruals 313 (29)
Deferred income taxes 122 25
Income taxes payable 130 59
Retiree benefits 35 96
Other non-cash transactions, net 75 40
--------------------------------------------------------------------
Cash provided by continuing operations 2,171 2,189
Cash provided by (used in) discontinued
operations 3 (33)
--------------------------------------------------------------------
Net cash provided by operating activities $2,174 $ 2,156
--------------------------------------------------------------------
Non-Cash Investing and Financing Activities
Sale of business
Cash received for business sold $ 175
Pre-tax gain on sale of business (58)
Net book value value of assets sold,
including goodwill (135)
--------------------------------------------------------------------
Liabilities assumed by purchaser $ (18)
--------------------------------------------------------------------
Investment in unconsolidated affiliate $ 30
--------------------------------------------------------------------
Purchase of businesses
Fair value of assets acquired, including
goodwill $ 892
Cash paid for businesses purchased (685)
Non-cash consideration given for businesses
purchased (60)
--------------------------------------------------------------------
Liabilities assumed $ 147
--------------------------------------------------------------------
Mandatorily redeemable convertible preferred
stock converted or redeemed into common stock $ 350
--------------------------------------------------------------------
Capital leases $ 21
--------------------------------------------------------------------




NORTHROP GRUMMAN CORPORATION SCHEDULE 5
TOTAL BACKLOG AND CONTRACT AWARDS
($ in millions)
(unaudited)

TOTAL BACKLOG
----------------------------------------------------
September 30, 2008 December 31, 2007(3)
------------------------- -------------------------
FUNDED UNFUNDED TOTAL FUNDED UNFUNDED TOTAL
(1) (2) BACKLOG (2) BACKLOG
------------------------- -------------------------
Information &
Services
Mission
Systems $ 2,562 $ 3,128 $ 5,690 $ 2,365 $ 3,288 $ 5,653
Information
Technology 2,399 1,967 4,366 2,581 2,268 4,849
Technical
Services 1,452 2,690 4,142 1,471 3,193 4,664
------------------------- -------------------------
Total Information
& Services 6,413 7,785 14,198 6,417 8,749 15,166

Aerospace
Integrated
Systems 5,221 7,417 12,638 4,204 4,525 8,729
Space
Technology 1,608 13,112 14,720 2,295 13,963 16,258
------------------------- -------------------------
Total Aerospace 6,829 20,529 27,358 6,499 18,488 24,987

Electronics 8,687 2,453 11,140 7,887 2,047 9,934
Shipbuilding 12,374 5,031 17,405 10,348 3,230 13,578
------------------------- -------------------------
Total $34,303 $35,798 $70,101 $31,151 $32,514 $63,665
------------------------- -------------------------

(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 value of new contract awards during the nine months ended
September 30, 2008, is approximately $31.1 billion. Significant new
awards during this period include $5.1 billion for CVN 78 Gerald R.
Ford aircraft carrier, $1.5 billion for the aerial refueling tanker
replacement program (see below), $1.4 billion for the DDG 1000
Zumwalt-class destroyer, $1.2 billion for the Broad Area Maritime
Surveillance (BAMS) Unmanned Aircraft System program (see below),
$389 million for the Vehicular Intercommunications Systems IDIQ,
$356 million for the Intercontinental Ballistic Missile (ICBM)
program, and $267 million for the F-35.

On February 29, 2008, the company won a $1.5 billion contract awarded
by the U.S. Air Force as an initial step to replace its aerial
refueling tanker fleet. The losing bidder for the contract protested
the award decision by the U.S. Air Force. A review of the award
process was conducted by the Government Accountability Office (GAO),
which issued its report on June 18, 2008 upholding the other
bidder's protest. On September 10, 2008, the Secretary of Defense
announced that the competition was cancelled pending the
determination for a new competitive proposal and evaluation process.
The company continues to carry the award in its backlog as of
September 30, 2008.

On April 22, 2008, the company was awarded a contract by the U.S.
Navy for the BAMS Unmanned Aircraft System. One of the other
bidders for the contract subsequently protested the decision by the
U.S. Navy to award the contract to the company. The GAO denied the
protest on August 12, 2008, the company re-started work on the
contract.

The value of new contract awards during the nine months ended
September 30, 2007, is approximately $26.2 billion. Significant new
awards during this period include $2.2 billion for LHA-6,
$875 million for the Flats Sequencing Systems/ Postal Automation
program, $623 million for the Unmanned Combat Air System Carrier
Demonstration, $510 million for the DDG 1000 Zumwalt-class destroyer
program, $270 million for the ICBM program, $227 million for the
F-22 program, and $185 million for the Joint National Integration
Center Research & Development program.




NORTHROP GRUMMAN CORPORATION SCHEDULE 6
REALIGNED SELECTED OPERATING RESULTS
($ in millions, except per share)
(preliminary and unaudited)

AS REPORTED(2)
---------------------------------------------------------
2006 2007 2008
------- ---------------------------------------- ------
Three
Three Months Ended Months
Total ------------------------------- Total Ended
NET SALES Year Mar 31 Jun 30 Sep 30 Dec 31 Year Mar 31
------- ---------------------------------------- ------
Information
& Services
Mission
Systems $ 5,494 $ 1,362 $1,542 $1,459 $1,568 $ 5,931 $1,545
Information
Technology 3,962 1,038 1,143 1,107 1,198 4,486 1,085
Technical
Services 1,858 520 551 573 533 2,177 505
------------------------------------------------- ------
Total
Information
& Services 11,314 2,920 3,236 3,139 3,299 12,594 3,135

Aerospace
Integrated
Systems 5,500 1,281 1,225 1,255 1,306 5,067 1,340
Space
Technology 2,923 754 769 750 860 3,133 775
------------------------------------------------- ------
Total
Aerospace 8,423 2,035 1,994 2,005 2,166 8,200 2,115

Electronics 6,543 1,587 1,720 1,673 1,926 6,906 1,555

Ships 5,321 1,156 1,359 1,469 1,804 5,788 1,264

Intersegment
Elimina-
tions (1,488) (358) (383) (358) (371) (1,470) (345)
------------------------------------------------- ------

Total Sales
and Service
Revenue $30,113 $ 7,340 $7,926 $7,928 $8,824 $32,018 $7,724
------------------------------------------------- ------


SEGMENT
OPERATING
MARGIN

Information
& Services
Mission
Systems $ 519 $ 119 $ 160 $ 144 $ 143 $ 566 $ 145
Information
Technology 342 86 90 72 81 329 89
Technical
Services 120 28 32 28 32 120 26
------------------------------------------------- ------
Total
Information
& Services 981 233 282 244 256 1,015 260

Aerospace
Integrated
Systems 551 160 149 145 137 591 170
Space
Technology 245 59 69 59 74 261 65
------------------------------------------------- ------
Total
Aerospace 796 219 218 204 211 852 235

Electronics 754 185 183 211 234 813 209

Ships 393 79 134 183 142 538 (218)

Intersegment
Eliminations (117) (29) (28) (25) (33) (115) (28)
------------------------------------------------- ------

Total
Segment
Operating
Margin(1) $ 2,807 $ 687 $ 789 $ 817 $ 810 $ 3,103 $ 458
------------------------------------------------- ------


CONSOLIDATED
HIGHLIGHTS

Income From
Continuing
Operations $ 1,573 $ 390 $ 466 $ 490 $ 457 $ 1,803 $ 263

Diluted
Earnings
per Share
from
Continuing
Operations $ 4.46 $ 1.11 $ 1.33 $ 1.41 $ 1.31 $ 5.16 $ .76

Weighted
Average
Diluted
Shares
Outstanding,
in millions 358.6 358.3 355.3 352.6 351.1 354.3 349.3


REALIGNED (3)
---------------------------------------------------------
2006 2007 2008
------- ---------------------------------------- ------
Three
Three Months Ended Months
Total ------------------------------- Total Ended
NET SALES Year Mar 31 Jun 30 Sep 30 Dec 31 Year Mar 31
------- ---------------------------------------- ------
Information
& Services
Mission
Systems $ 4,704 $ 1,159 $1,288 $1,249 $1,381 $ 5,077 $1,298
Information
Technology 3,962 1,038 1,143 1,107 1,198 4,486 1,085
Technical
Services 1,858 520 551 573 533 2,177 505
------------------------------------------------- ------
Total
Information
& Services 10,524 2,717 2,982 2,929 3,112 11,740 2,888

Aerospace
Integrated
Systems 5,500 1,281 1,225 1,255 1,306 5,067 1,340
Space
Technology 3,869 990 1,067 1,001 1,118 4,176 1,022
------------------------------------------------- ------
Total
Aerospace 9,369 2,271 2,292 2,256 2,424 9,243 2,362

Electronics 6,267 1,528 1,628 1,577 1,795 6,528 1,555

Ships 5,321 1,156 1,359 1,469 1,804 5,788 1,264

Intersegment
Elimina-
tions (1,490) (358) (383) (360) (370) (1,471) (345)
------------------------------------------------- ------

Total Sales
and Service
Revenue $29,991 $ 7,314 $7,878 $7,871 $8,765 $31,828 $7,724
------------------------------------------------- ------


SEGMENT
OPERATING
MARGIN

Information
& Services
Mission
Systems $ 451 $ 103 $ 142 $ 125 $ 138 $ 508 $ 128
Information
Technology 342 86 90 72 81 329 89
Technical
Services 120 28 32 28 32 120 26
------------------------------------------------- ------
Total
Information
& Services 913 217 264 225 251 957 243

Aerospace
Integrated
Systems 551 160 149 145 137 591 170
Space
Technology 311 73 90 79 87 329 82
------------------------------------------------- ------
Total
Aerospace 862 233 239 224 224 920 252

Electronics 786 192 189 211 221 813 209

Ships 393 79 134 183 142 538 (218)

Intersegment
Eliminations (117) (29) (28) (27) (29) (113) (28)
------------------------------------------------- ------

Total
Segment
Operating
Margin(1) $ 2,837 $ 692 $ 798 $ 816 $ 809 $ 3,115 $ 458
------------------------------------------------- ------


CONSOLIDATED
HIGHLIGHTS

Income From
Continuing
Operations $ 1,593 $ 394 $ 472 $ 489 $ 456 $ 1,811 $ 263

Diluted
Earnings
per Share
from
Continuing
Operations $ 4.51 $ 1.12 $ 1.35 $ 1.41 $ 1.31 $ 5.18 $ .76

Weighted
Average
Diluted
Shares
Outstanding,
in millions 358.6 358.3 355.3 352.6 351.1 354.3 349.3

(1) Non-GAAP measure. Management uses segment operating margin as an internal measure of financial performance for the individual business segments.
(2) "As Reported" amounts are as of December 31, 2007, which reflect the results of Interconnect Technologies as a discontinued operation.
(3) Reported amounts adjusted to reflect the Park Air / Remotec realignment, Missile Systems realignment, and the presentation of Electro-Optical Systems as a discontinued operation. These events were previously reported in Schedule 6 of the Fourth Quarter and Year End December 2007, First Quarter 2008, and Second Quarter 2008 earnings releases.

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