Northrop Grumman 1Q 2009 Results

•    Sales Increase to $8.3 Billion
•    GAAP EPS from Continuing Operations Increase to $1.17; Pension-adjusted EPS of $1.32
•    All Operating Sectors Generate Higher Sales and Operating Income
•    4.2 Million Shares Repurchased
•    2009 EPS Guidance Raised - GAAP EPS Increased to $4.65 to $4.90; Pension-adjusted EPS Increased to $5.30 to $5.55

Northrop Grumman Corporation (NYSE: NOC) reported that first quarter 2009 earnings from continuing operations increased 48 percent to $389 million, or $1.17 per diluted share, compared with $263 million, or $0.76 per diluted share, in the first quarter of 2008. First quarter 2008 earnings were reduced by a pre-tax charge of $326 million, or $0.61 per diluted share, in the company's Shipbuilding sector.

Sales for the 2009 first quarter increased 8 percent to $8.3 billion from $7.7 billion in the 2008 first quarter. First quarter 2008 sales were reduced by $134 million due to the $326 million charge in the Shipbuilding sector.

In the 2009 first quarter, $172 million of cash was used in operations, including discretionary pension pre-funding of $214 million, compared with $194 million of cash provided by operations in the prior year period.

"We're pleased with our first quarter financial results, and we're confident that our products and capabilities continue to be extremely well aligned with current and emerging national security priorities," said Ronald D. Sugar, chairman and chief executive officer.

Operating income for the 2009 first quarter increased 41 percent to $655 million from $464 million in the 2008 first quarter due to higher segment operating income, which was partially offset by a $135 million change in net pension adjustment and a $21 million increase in unallocated expense. The first quarter 2009 net pension adjustment is an expense of $76 million compared to income of $59 million in the first quarter of 2008. The increase in unallocated expenses is principally due to higher post-retirement benefit plan and litigation costs. As a percent of sales, operating income increased to 7.9 percent from 6 percent in the prior year period.

The higher segment operating income reflects higher sales and operating income for all five operating sectors. As a percent of sales, segment operating income increased to 9.5 percent from 5.9 percent in the prior year period. Segment operating income and margin rate for the 2008 first quarter were reduced by a $326 million charge in the Shipbuilding sector.

Federal and foreign income taxes for the 2009 first quarter increased to $201 million from $146 million in the first quarter of 2008. The effective tax rate applied to earnings from continuing operations for the 2009 first quarter was 34.1 percent compared with 35.7 percent in the 2008 first quarter.

Earnings per share are based on weighted average diluted shares outstanding of 332.1 million for the first quarter of 2009 and 349.3 million for the first quarter of 2008. Weighted average shares outstanding for the 2009 first quarter include share repurchases of approximately 4.2 million, and for the 2008 first quarter include the dilutive effect of approximately 4.5 million shares of preferred stock.

New business awards totaled $7.1 billion in the 2009 first quarter. Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, was $76.9 billion as of March 31, 2009.

As reconciled in the table above, first quarter 2009 operating income totaled 8.8 percent of sales when adjusted for the first quarter 2009 net pension adjustment of $76 million expense. First quarter 2008 operating income totaled 5.2 percent of sales when adjusted for the 2008 first quarter net pension adjustment of $59 million income. Pension-adjusted earnings per share from continuing operations increased to $1.32 for the first quarter of 2009 from $0.64 for the first quarter of 2008.

Cash used in operations in the 2009 first quarter totaled $172 million compared with $194 million provided by operations in the prior year period. The $366 million change includes the impact of $214 million of discretionary pension plan pre-funding as well as higher working capital than in the prior year period. First quarter 2009 free cash outflow totaled $352 million compared with free cash flow of $16 million in the prior year period.

As previously reported, on April 2 the company reached an agreement with the U.S. government to settle two legal matters: the Department of Justice's microelectronics claim and the company's claim against the U.S. government related to the award, performance and termination of the Tri-Service Standoff Attack Missile (TSSAM) program. While the settlement amounts for the two claims were equal and therefore offset each other, the company had previously recorded a provision for the microelectronics claim. The company expects that the final impact of the agreement, after other litigation matters and legal costs, will be a pre-tax gain of $60 to $70 million in its second quarter 2009 financial results, and is considered in the 2009 guidance provided below.

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

Information Systems first quarter 2009 sales increased 8 percent due to higher sales for command, control & communications, ISR, and intelligence programs. The higher volume for these programs was partially offset by lower volume for commercial, state & local programs.

Information Systems operating income rose 5 percent in the 2009 first quarter. As a percent of sales, operating income was 9 percent compared with 9.2 percent in the prior year period. The increase in operating income is due to higher volume. The slightly lower margin rate principally reflects lower performance for commercial, state and local programs.

Electronic Systems first quarter 2009 sales increased 16 percent from the prior year period and included higher deliveries for LAIRCM, and higher volume for aerospace systems and postal automation programs, the Space Based Infrared System (SBIRS) program, and intercompany programs.

Electronic Systems first quarter 2009 operating income rose 10 percent, and as a percent of sales was 12.8 percent compared with 13.5 percent in the prior year period. The increase in operating income is due to higher volume. The decline in margin rate reflects a net positive impact to royalty income of $15 million for patent infringement settlements in the 2008 first quarter compared to the 2009 first quarter.

Shipbuilding first quarter 2009 sales increased 9 percent, principally due to higher volume for the LHD 8 amphibious assault ship, Virginia-class submarine, and aircraft carrier programs. Higher volume for these programs was partially offset by lower volume on the DDG 51 program. 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.
Shipbuilding operating income for the 2009 first quarter totaled $84 million, or 6.1 percent of sales, compared to a loss of $218 million in the first quarter of 2008. First quarter 2009 operating income includes adjustments for cost growth on the DDG 51 program and LPD 22, as well as positive performance for risk retirement and escalation adjustments on the LHD 8 program. During the 2008 first quarter the company recorded a $326 million charge primarily related to the LHD 8 contract performance and operating impacts to other programs.

Technical Services sales increased 13 percent due to higher volume for life cycle optimization & engineering, and training & simulation programs. Operating income increased 28 percent, and as a percent of sales, increased to 5.9 percent from 5.2 percent in the prior year period. The comparison to first quarter 2008 reflects the higher volume as well as improved performance on several programs.

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