Northrop Grumman Q3 2009 Results

Wednesday, October 21, 2009

•    Sales Increase 4 Percent to $8.73 Billion- GAAP EPS from Continuing Operations Increase to $1.52
•    Pension-adjusted EPS Increase 22 Percent to $1.67
2009E GAAP EPS Guidance Raised to $5.00 to $5.15 from $4.65 to $4.90
•    Cash from Operations of $544 Million and Free Cash Flow of $384 Million Including $586 Million of Discretionary Pension Plan Contributions
•    4.7 Million Shares Repurchased
Northrop Grumman Corporation (NYSE: NOC) reported that third quarter 2009 earnings from continuing operations totaled $487 million, or $1.52 per diluted share, compared with $509 million, or $1.50 per diluted share, in the third quarter of 2008. Third quarter 2009 net pension adjustment (FAS/CAS) reduced earnings from continuing operations by $47 million, or $0.15 per diluted share, compared with an increase to earnings from continuing operations of $42 million, or $0.13 per diluted share, in the third quarter of 2008.

Third quarter 2009 earnings included a net tax benefit of $75 million, or $0.23 per share, primarily for final settlement of the Internal Revenue Service's (IRS) examination of the company's 2001, 2002 and 2003 tax returns. In the third quarter of 2008 the company recognized net tax benefits totaling $21 million, or $0.06 per share.

Sales for the 2009 third quarter increased 4 percent to $8.73 billion from $8.38 billion in the 2008 third quarter. In the 2009 third quarter, $544 million of cash was provided by operations, compared with $1.37 billion in the prior year period. The reduction is primarily driven by discretionary pension plan contributions totaling $586 million that the company made in the 2009 third quarter. The company did not make discretionary pension plan contributions in the 2008 third quarter.

"This was another solid quarter for Northrop Grumman, continuing our focus on managing risk, improving performance and driving growth. Based on this quarter's results we are raising our guidance for 2009 earnings per share to $5.00 to $5.15 per share," said Ronald D. Sugar, chairman and chief executive officer.

Operating income for the 2009 third quarter totaled $655 million compared with $771 million in the prior year period. As a percent of sales, operating income declined to 7.5 percent from 9.2 percent in the prior year period. The change includes a $136 million increase in net pension expense, which was partially offset by an $18 million improvement in segment operating income. As a percent of sales, segment operating income was 9 percent compared with 9.2 percent in the prior year period.

As reconciled in the Pension-adjusted Results table later in this press release, pension-adjusted operating income totaled 8.3 percent of sales for the third quarter of 2009 compared with 8.4 percent of sales for the third quarter of 2008. Third quarter 2009 pension-adjusted earnings per share from continuing operations increased 22 percent to $1.67 from $1.37 for the prior year period.

Federal and foreign income taxes for the 2009 third quarter declined to $133 million from $233 million in the third quarter of 2008. During the quarter the company recognized a net tax benefit of $75 million primarily for the final settlement of the IRS examination of the company's tax returns for years 2001, 2002 and 2003. In the third quarter of 2008 the company recognized net tax benefits totaling $21 million. The effective tax rate applied to earnings from continuing operations for the 2009 third quarter was 21.5 percent compared with 31.4 percent in the 2008 third quarter.

Earnings per share are based on weighted average diluted shares outstanding of 320.6 million for the third quarter of 2009 and 340.1 million for the third quarter of 2008. During the third quarter of 2009 the company repurchased approximately 4.7 million shares of its common stock, and year-to-date the company has repurchased 14.7 million shares of common stock.

New business awards totaled $10 billion in the 2009 third quarter. Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, was $71.5 billion as of Sept. 30, 2009, compared with $70.4 billion at June 30, 2009.

Cash provided by operations in the 2009 third quarter totaled $544 million compared with $1.37 billion in the prior year period, and free cash flow totaled $384 million in the 2009 third quarter compared with $1.18 billion in the prior year period. The change in cash provided by operations and free cash flow reflects $586 million of discretionary contributions to the company's pension plan assets and higher working capital than in the prior year period. For the first nine months of 2009, the company has made discretionary contributions of $800 million to its pension plans.

Changes in cash and cash equivalents include the following cash deployment and financing actions during the quarter:
•    $586 million discretionary pension plan contributions
•    $227 million for share repurchases
•    $139 million for capital expenditures and $21 million for outsourcing contract and related software costs
•    $136 million for dividends
•    $850 million proceeds from issuance of long term debt, a portion of which was used to retire $400 million of 8 percent senior notes that matured on Oct. 15, 2009

Beginning in the first quarter of 2009, operating results for all periods presented reflect the realignment of the former Mission Systems and Information Technology sectors into Information Systems and the realignment of the former Integrated Systems and Space Technology sectors into Aerospace Systems. In addition, the presentation reflects the transfer of certain businesses from Information Systems and Electronic Systems to Technical Services. Schedule 6 provides previously reported quarterly financial results revised to reflect the current reporting structure.

Aerospace Systems third quarter 2009 sales increased 5 percent, principally due to higher volume for unmanned aircraft programs such as Broad Area Maritime Surveillance Unmanned Aerial System (BAMS UAS), Global Hawk, and Navy Unmanned Combat Air System (N-UCAS); restricted programs, and manned aircraft programs such as E-2D Advanced Hawkeye, the B-2 and the EA-18G. Higher volume for these programs was partially offset by lower volume for the Kinetic Energy Interceptor (KEI), Intercontinental Ballistic Missile (ICBM), National Polar-orbiting Operational Environmental Satellite System (NPOESS) and Transformational Satellite Communications System (TSAT) programs.

Aerospace Systems operating income rose 14 percent, and as a percent of sales increased to 10.5 percent from 9.6 percent in the prior year period. The increase in operating income is due to higher volume and improved program performance.

Electronic Systems third quarter 2009 sales increased 2 percent. The increase reflects higher volume for the F-35 program, higher deliveries of Large Aircraft Infrared Countermeasures (LAIRCM) systems, higher volume for the Space Based Infrared System (SBIRS) follow-on program, and higher intercompany sales for aerospace programs.

Electronic Systems third quarter 2009 operating income declined 18 percent, and as a percent of sales was 11.7 percent compared with 14.4 percent in the prior year period. The difference in operating income and rate is due to a $40 million patent infringement settlement in the third quarter of 2008 and lower performance for government systems programs in the third quarter of 2009.

Information Systems third quarter 2009 sales increased 4 percent due to higher sales for intelligence and defense programs. Information Systems operating income increased 32 percent in the 2009 third quarter, and as a percent of sales increased to 8.2 percent from 6.5 percent in the prior year period, which included a $57 million negative performance adjustment for a state and local program.

Shipbuilding third quarter 2009 sales increased 14 percent primarily due to higher volume for the LPD, Virginia-class submarines, and DDG programs. Shipbuilding operating income for the 2009 third quarter declined 4 percent and as a percent of sales declined to 6.8 percent from 8.1 percent in the prior year period. The declines in operating income and rate primarily reflect previously announced adjustments to program margin rates to reflect higher production costs on expeditionary warfare and surface combatant programs.

Technical Services sales increased 4 percent due to higher volume for life cycle optimization & engineering, and training & simulation programs. Operating income increased 5 percent due to higher volume, and as a percent of sales, was comparable to the prior year period.

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