Northrop Grumman Q4 2009 Results

Northrop Grumman Corporation (NYSE: NOC) reported Q4 2009 net earnings of $413 million, or $1.31 per diluted share, and 2009 net earnings of $1.7 billion, or $5.21 per diluted share. In 2008, the company reported a fourth quarter net loss of $2.5 billion, or $7.75 per diluted share, and a net loss for the year of $1.3 billion, or $3.77 per diluted share. 2008 fourth quarter and full year results were significantly impacted by a goodwill impairment charge.

In December 2009, the company completed the sale of TASC, Inc. (TASC), its advisory services business, for $1.65 billion in cash and a net gain of $0.05 per share. TASC's operating results are accounted for as discontinued operations, and results for all periods presented in this release have been adjusted for the divestiture. Fourth quarter 2009 earnings from continuing operations totaled $375 million, or $1.19 per diluted share. For 2009, earnings from continuing operations totaled $1.6 billion, or $4.87 per diluted share.

Fourth quarter 2009 sales, restated for the TASC divestiture, increased 2 percent to $8.9 billion from $8.8 billion, and 2009 sales increased more than 4 percent to $33.8 billion from $32.3 billion. Reported sales for 2009 and 2008 exclude TASC sales of approximately $1.5 billion and $1.6 billion, respectively.

Cash provided by operations in the fourth quarter of 2009 totaled $931 million compared with $1 billion in the fourth quarter of 2008. Cash provided by operations totaled $2.1 billion in 2009 compared with $3.2 billion in 2008. The change was primarily driven by a $538 million increase in pension plan contributions and $508 million in taxes paid in the fourth quarter of 2009 on the gain on the sale of TASC. Cash proceeds of $1.65 billion from the sale of TASC are reported in investing activities.

"We're pleased to report strong 2009 results that demonstrate continued improvement in operating performance. Looking ahead, the focus of our leadership team and our 120,000 employees will be on driving performance improvements that create value for our shareholders and our customers," said Wes Bush, chief executive officer and president, "Our guidance for 2010 calls for EPS from continuing operations to grow by 17 to 22 percent and to be accompanied by continued strong cash generation."

Fourth quarter 2009 operating income increased to $631 million from a loss of $2.2 billion in the 2008 fourth quarter. For 2009, operating income increased to $2.5 billion from a loss of $263 million in 2008. In the fourth quarter of 2008 the company recorded a $3.1 billion goodwill impairment charge. Results for 2009 also include a $574 million change in net pension adjustment from income of $263 million in 2008 to an expense of $311 million in 2009. As a percent of sales, operating income totaled 7.1 percent in the 2009 fourth quarter and 7.4 percent for 2009. For purposes of comparison, Table 1 presents operating income adjusted for the goodwill impairment charge and the effect of net pension adjustments.

Federal and foreign income taxes totaled $195 million in the fourth quarter of 2009 compared with $264 million in the prior year. The effective tax rate for the 2009 fourth quarter was 34.2 percent and the federal tax rate applied to adjusted earnings in the fourth quarter of 2008 was 34.6 percent. For 2009, federal and foreign income taxes totaled $693 million compared with $859 million for 2008. The effective tax rate for 2009 was 30.6 percent and the effective tax rate applied to earnings adjusted for goodwill in 2008 was 33.8 percent. In 2009 federal and foreign income taxes included a net tax benefit of $75 million, primarily for final settlement of the Internal Revenue Service's (IRS) examination of the company's 2001, 2002 and 2003 tax returns.

Backlog and New Business Awards
Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, was $69.2 billion on Dec. 31, 2009, compared with $76.4 billion on Dec. 31, 2008. Total backlog for both periods has been adjusted by $1.6 billion for the divestiture of TASC Inc. The change in backlog reflects new business awards totaling $32.3 billion during the year as well as a decrease of $5.8 billion for the Kinetic Energy Interceptor program termination for convenience and the DDG 1000 program restructure.

Guidance for 2010 segment operating margin rate calls for margin rate expansion across the businesses. Operating margin rate guidance for 2010 includes improved segment performance, an expense of approximately $35 million for net pension adjustment, and some consideration for potential program performance risks and opportunities. Net pension adjustment represents the difference between pension expense determined in accordance with Generally Accepted Accounting Principles (GAAP) and pension expense allocated to the business segments under U.S. Government Cost Accounting Standards (CAS).

Guidance for 2010 earnings per share from continuing operations of $5.70 - $5.95 includes the operating margin rate improvements discussed above and assumes a lower share count consistent with the company's previously announced intention to repurchase enough shares to offset the loss of TASC's earnings. These items were partially offset by a higher effective tax rate assumption of approximately 34.5 percent.

Free cash flow totaled $703 million in the 2009 fourth quarter compared with $790 million in the prior year period. For 2009, free cash flow totaled $1.4 billion compared with $2.4 billion in 2008. The change in free cash flow in the 2009 periods reflects higher net pension plan contributions and taxes paid on the gain on the sale of TASC.

Changes in cash and cash equivalents include the following items for cash from operations, investing and financing during 2009:

Operations
•    $1.3 billion taxes paid, including $508 million for federal and state taxes for the gain on the sale of TASC
•    $858 million pension plan contributions

Investing
•    $1.65 billion proceeds from sale of TASC
•    $654 million for capital expenditures and $68 million for outsourcing contract and related software costs

Financing
•    $1.1 billion for repurchase of 23.1 million shares
•    $850 million proceeds from issuance of long term debt
•    $474 million principal payments of long-term debt
•    $539 million for dividends

Business Results
Shipbuilding fourth quarter 2009 sales decreased 4 percent primarily due to lower volume for the DDG and fleet support programs and delivery of the LHD 8 in 2009, which was partially offset by higher volume for aircraft carriers, submarines, LPD and LHA programs. 2009 sales were slightly higher than the prior year and included higher volume for submarine, LPD, and aircraft carrier refueling programs, partially offset by lower volume for DDG 51 and fleet support programs.

Shipbuilding fourth quarter 2009 operating income increased to $88 million from a loss of $2.3 billion in the fourth quarter of 2008, and 2009 operating income increased to $299 million from a loss of $2.3 billion for 2008. Prior year results included a goodwill impairment charge that reduced fourth quarter and 2008 results by $2.5 billion.

Adjusted for the goodwill impairment charge, as a percent of sales, Shipbuilding 2009 fourth quarter operating income totaled 5.3 percent compared with 9 percent for the 2008 fourth quarter. The change in rate for the quarter is primarily due to lower performance for the LPD program. Adjusted for the goodwill impairment charge, 2009 operating income improved to 4.8 percent of sales from 3 percent of sales in 2008.