Northrop Grumman Reports Second Quarter 2008 Results
- Earnings from Continuing Operations Increase to $1.40 per Share
- Net Earnings Increase to $1.44 per Share
- Sales Increase 10 Percent to $8.6 Billion
- Operating Income Increases 6 Percent
- Cash from Operations of $607 Million
- Free Cash Flow of $431 Million
LOS ANGELES, July 29 /PRNewswire-FirstCall/ -- Northrop Grumman Corporation (NYSE: NOC) reported that second quarter 2008 earnings from continuing operations increased to $483 million, or $1.40 per diluted share, from $472 million, or $1.35 per diluted share, in the second quarter of 2007. Earnings for the 2007 second quarter included tax benefits totaling $16 million, or $0.05 per share. Sales for the 2008 second quarter increased 10 percent to $8.6 billion from $7.9 billion in the 2007 second quarter. Cash provided by operations for the 2008 second quarter totaled $607 million compared with $741 million in the prior year period.
Operating Highlights
Second Quarter Six Months
($ millions except
per share data) 2008 2007 Change 2008 2007 Change
Sales $8,628 $7,878 10% $16,352 $15,192 8%
Operating income 806 763 6% 1,270 1,453 (13%)
as a % of sales 9.3% 9.7% (40 bps) 7.8% 9.6% (180 bps)
Earnings from continuing
operations $483 $472 2% $746 $866 (14%)
Diluted EPS from
continuing operations 1.40 1.35 4% 2.15 2.46 (13%)
Net earnings 495 460 8% 759 847 (10%)
Diluted EPS 1.44 1.31 10% 2.19 2.41 (9%)
Cash from operations 607 741 (18%) 801 1,141 (30%)
Free cash flow(1) 431 551 (22%) 447 763 (41%)
(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.
"Solid sales increases for all four businesses drove nearly double-digit sales growth for the quarter. Operating income and margin rates for all four businesses are in line with our expectations. Based on this quarter's solid performance and our $67 billion total backlog, we are on track to achieve our 2008 guidance. The long-term outlook for Northrop Grumman continues to be outstanding," said Ronald D. Sugar, Northrop Grumman chairman and chief executive officer.
Operating income for the 2008 second quarter increased 6 percent to $806 million from $763 million in the 2007 second quarter. The increase in operating income reflects higher sales volume, lower corporate unallocated expenses, and improved net pension expense, offset by lower segment operating income. Second quarter 2008 segment operating income declined by $14 million principally due to lower operating income and margin rates for the Shipbuilding and Information & Services businesses than in the prior year period.
Interest expense improved by $11 million compared with the prior year period and other income improved by $14 million.
Federal and foreign income taxes for the 2008 second quarter increased to $256 million from $199 million in the second quarter of 2007. The effective tax rate applied to income from continuing operations for the 2008 second quarter was 34.6 percent compared with 29.7 percent in the 2007 second quarter. In the 2007 second quarter the company recognized tax benefits totaling $16 million after reaching a favorable settlement with the Internal Revenue Service regarding a portion of its audit for the years 2001 through 2003.
Net earnings for the 2008 second quarter increased 8 percent to $495 million, or $1.44 per diluted share, from $460 million, or $1.31 per diluted share, for the same period of 2007. Second quarter 2008 net earnings include a small after-tax gain on the sale of the company's Electro-Optical Systems business. Earnings per share are based on weighted average diluted shares outstanding of 344.1 million for the second quarter of 2008 and 355.3 million for the second quarter of 2007. Weighted average shares outstanding for the 2007 second quarter include the dilutive effect of 6.4 million shares of the company's mandatorily redeemable convertible preferred stock. These shares were redeemed or converted to common shares on or before April 4, 2008.
New business awards totaled $7.5 billion in the 2008 second quarter. Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, was $66.9 billion as of June 30, 2008.
Cash Flow Highlights
Second Quarter Six Months
($ millions) 2008 2007 Change 2008 2007 Change
Cash from operations $607 $741 $(134) $801 $1,141 $(340)
Less:
Capital expenditures 134 140 6 277 298 21
Outsourcing contract & related
software costs 42 50 8 77 80 3
Free cash flow(1) $431 $551 $(120) $447 $763 $(316)
(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 second quarter totaled $607 million compared with $741 million in the prior year period. Second quarter 2007 included a $125 million insurance recovery.
Cash Measurements, Debt and Capital Deployment
($ millions) 6/30/2008 12/31/2007
Cash & cash equivalents $581 $963
Total debt 3,941 4,055
Net debt(1) 3,360 3,092
Mandatorily redeemable convertible
preferred stock 0 350
Net debt to total capital ratio(2) 15% 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 $581 million at June 30, 2008 compared with $963 million at Dec. 31, 2007, and total debt was $3.9 billion at June 30, 2008. Changes in cash and cash equivalents and total debt include the following cash deployment, investing and financing actions during the first six months of 2008:
- $805 million for share repurchases
- $277 million for capital expenditures and $77 million for outsourcing contract and related software costs
- $261 million for dividends
- $109 million principal payments of long-term debt
- $82 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 Confirmed
Sales ~$33B
Segment operating income(1) as % of sales mid to high 8%
Operating income as % of sales high 8%
Diluted EPS from continuing operations $4.90 - 5.15
Cash from operations(2) $2.6 - 2.9B
Free cash flow(3) $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) After required pension contributions of $120 million forecast for
2008.
(3) Free cash flow is a non-GAAP measure defined as cash from operations
less capital expenditures and outsourcing contract & related software
costs. Management uses free cash flow as an internal measure of
financial performance.
Business Results
CONSOLIDATED SALES & SEGMENT OPERATING INCOME (1)
($ millions except per share
data)
Second Quarter Six Months
2008 2007 Change 2008 2007 Change
Sales
Information & Services $3,175 $2,982 6% $6,063 $5,699 6%
Aerospace 2,476 2,292 8% 4,838 4,563 6%
Electronics 1,675 1,628 3% 3,230 3,156 2%
Shipbuilding 1,688 1,359 24% 2,952 2,515 17%
Intersegment
eliminations (386) (383) (731) (741)
Sales 8,628 7,878 10% 16,352 15,192 8%
Segment operating income(1)
Information & Services 251 264 (5%) 494 481 3%
Aerospace 236 239 (1%) 488 472 3%
Electronics 202 189 7% 411 381 8%
Shipbuilding 126 134 (6%) (92) 213 (143%)
Intersegment eliminations (31) (28) (59) (57)
Segment operating income(1) 784 798 (2%) 1,242 1,490 (17%)
as a % of sales 9.1% 10.1% (100 bps) 7.6% 9.8% (220 bps)
Reconciliation to operating
income:
Unallocated expenses (43) (64) (75) (96)
Net pension
adjustment(2) 69 28 128 61
Royalty income adjustment (4) 1 (25) (2)
Total operating income $806 $763 6% $1,270 $1,453 (13%)
as a % of sales 9.3% 9.7% (40 bps) 7.8% 9.6% (180 bps)
(1) Segment operating income is a non-GAAP measure used as an internal
measure of financial performance for the four businesses.
(2) Net pension adjustment includes pension expense determined in
accordance with GAAP less pension expense allocated to the business
segments under U.S. Government Cost Accounting Standards.
Beginning with 2008 second quarter results, the company transferred certain missile systems programs from Mission Systems to Space Technology. Schedule 6 provides previously reported quarterly financial results and realigned results reflecting the transfer of these programs.
Information & Services
Second Quarter ($ Millions)
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
Mission Systems $1,388 $133 9.6% $1,288 $142 11.0%
Information
Technology 1,215 82 6.7% 1,143 90 7.9%
Technical Services 572 36 6.3% 551 32 5.8%
$3,175 $251 7.9% $2,982 $264 8.9%
Information & Services second quarter 2008 sales increased 6 percent and include higher sales for all three business segments. Operating income for Information & Services declined 5 percent in the 2008 second quarter. As a percent of sales, operating income totaled 7.9 percent compared with 8.9 percent in the prior year period. The change in operating income and margin rate reflects lower performance for Mission Systems and Information Technology than in the prior year period.
Mission Systems sales increased 8 percent due to higher volume for intelligence, surveillance & reconnaissance programs and command, control & communications programs. Operating income declined 6 percent and as a percent of sales, totaled 9.6 percent compared with 11 percent in the prior year period. The change in operating income and in rate reflects a greater amount of favorable contract adjustments in the prior year period.
Information Technology sales rose 6 percent due to higher volume for intelligence programs, and the New York City Wireless and Network Centric Solutions programs. Operating income declined 9 percent, and as a percent of sales totaled 6.7 percent compared with 7.9 percent in the prior year period. The change in operating income and in rate reflects a reduction in the value of deferred costs for the County of San Diego IT outsourcing program.
Technical Services sales rose 4 percent due to higher volume for life cycle optimization and engineering programs. Operating income increased 13 percent from the prior year period, and as a percent of sales, increased to 6.3 percent from 5.8 percent in the prior year period. The improvement reflects higher volume and improved program performance.
Aerospace
Second Quarter ($ Millions)
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
Integrated
Systems $1,358 $143 10.5% $1,225 $149 12.2%
Space Technology 1,118 93 8.3% 1,067 90 8.4%
$2,476 $236 9.5% $2,292 $239 10.4%
Aerospace second quarter 2008 sales increased 8 percent from the prior year period and include higher volume for both Integrated Systems and Space Technology. Aerospace second quarter 2008 operating income was slightly lower than the prior year period, and as a percent of sales, totaled 9.5 percent compared with 10.4 percent in the prior year period.
Integrated Systems sales increased 11 percent primarily due to higher volume for the EA-6B, UCAS-D, B-2, Global Hawk and restricted programs, partially offset by lower volume for the F-35 program. Integrated Systems operating income declined 4 percent, and as a percent of sales totaled 10.5 percent compared with 12.2 percent in the prior year period. Second quarter 2007 operating income included a $27 million favorable adjustment related to the settlement of prior years overhead costs.
Space Technology sales increased 5 percent, primarily due to higher volume for restricted programs, and the James Webb Space Telescope and NPOESS programs. Higher volume for these programs was partially offset by lower volume for the Advanced Extremely High Frequency, Space Tracking and Surveillance System, Space Radar and Defense Support programs. Space Technology operating income increased 3 percent due to higher volume, and as a percent of sales was comparable to the prior year period.
Electronics
Second Quarter ($ Millions)
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
$1,675 $202 12.1% $1,628 $189 11.6%
Electronics second quarter 2008 sales increased 3 percent from the prior year period principally due to higher sales for combat avionics, airborne surveillance, and inertial navigation programs. Higher volume for these programs was partially offset by lower volume for restricted programs and the Space-based Infrared System (SBIRS), as SBIRS transitions from development to production, than in the prior year period.
Electronics second quarter 2008 operating income increased 7 percent, and as a percent of sales, increased to 12.1 percent from 11.6 percent. Second quarter 2008 operating income reflects higher volume and includes a $20 million charge for the company's Wedgetail MESA radar program associated with the program risks arising from the prime contractor's announced schedule delay in completing the program. Operating income for the 2007 second quarter included a $27 million negative contract earnings adjustment for the F-16 Block 60 fixed price development program.
Shipbuilding
Second Quarter ($ Millions)
2008 2007
Operating % of Operating % of
Sales Income Sales Sales Income Sales
$1,688 $126 7.5% $1,359 $134 9.9%
Shipbuilding second quarter 2008 sales increased 24 percent from the prior year due to higher volume for expeditionary warfare, surface combatant, aircraft carrier and fleet support programs, including the LPD, LHD, Ford-class aircraft carrier, and USS Enterprise programs. The increase in fleet support reflects revenue from the July 2007 reorganization of AMSEC. The increase also reflects lower volume in the 2007 second quarter due to a labor strike.
Shipbuilding second quarter 2008 operating income declined 6 percent from the prior year period, and as a percent of sales, totaled 7.5 percent compared with 9.9 percent in the prior year period. The decline in operating income and margin rate reflects additional costs for schedule impacts to several shipbuilding programs as a result of resource constraints caused by the previously announced delay in production on the LHD 8. Second quarter 2007 operating income included a $62 million insurance recovery and a $55 million negative contract adjustment on the LHD 8 program.
Second Quarter Highlights
-- The U.S. Navy awarded Northrop Grumman a $1.16 billion contract for
System Development and Demonstration of the service's new Broad Area
Maritime Surveillance Unmanned Aircraft System (BAMS UAS) program.
BAMS UAS will provide the U.S. Navy with a persistent maritime
intelligence, surveillance and reconnaissance system to protect the
fleet and provide a capability to detect, track, classify and identify
maritime and littoral targets. The award is being protested by one of
the other competitors.
-- The U.S. Navy awarded Northrop Grumman a contract for maintenance work
on the USS Enterprise (CVN 65) valued at $453.3 million. Northrop
Grumman is the prime contractor for the work, which includes overhaul,
maintenance and repairs to the ship and the ship's systems.
-- Northrop Grumman received a contract with a potential value of up to
$240 million to provide critical technologies for the Airborne and
Maritime/Fixed Station Joint Tactical Radio System program. An initial
$186.7 million contract was awarded focused on the software-defined
radio development for the program.
-- The U.S. Air Force awarded Northrop Grumman two undefinitized
contracts, worth $300 million collectively, to complete non-recurring
engineering, flight test/certification and begin production of new
engines for the service's E-8C Joint Surveillance Target Attack Radar
System (Joint STARS) fleet.
-- Northrop Grumman was awarded an indefinite delivery/indefinite
quantity subcontract with potential value of approximately $135
million as part of the Global Linguist Solutions LLC team to provide
management of translation and interpretation services for the U.S.
Army Intelligence and Security Command in support of Operation Iraqi
Freedom.
-- The U.S. Navy awarded Northrop Grumman a $101.9 million firm,
fixed-price contract for a third lot of Improved Capability III
airborne electronic attack systems for its fleet of EA-6B Prowlers.
The company will deliver seven complete systems, plus associated piece
parts and spares.
-- The U.S. Army selected Northrop Grumman to produce the new
multi-function radar for the Extended Range/Multi-Purpose Unmanned
Aerial Vehicle (UAV) Radar program. Under the terms of the initial
$42 million contract Northrop Grumman will deliver 10 STARLiteTM
Synthetic Aperture Radar (SAR)/Ground Moving Target Indication radars
to the Army.
-- Northrop Grumman received a $79.4 million contract for the Global Hawk
Multi-Platform Radar Technology Insertion Program (MP-RTIP) sensors as
the first element of the lot 7 production contract. The sensors will
be carried on the RQ-4 Block 40 Global Hawk high-altitude
long-endurance unmanned aerial system currently in production. The
first flight with the MP-RTIP sensor is scheduled in early 2009.
-- The U.S. Department of Defense awarded Northrop Grumman a five-year
contract to support theoretical studies and engineering research for
Army, Navy and Air Force research-and-development programs. The
program has a ceiling of $100 million over a 10-year period.
-- Northrop Grumman delivered the National Security Cutter Bertholf (WMSL
750) to the U.S. Coast Guard. The cutter is the most technologically
advanced ship in U.S. Coast Guard history.
-- Northrop Grumman completed thermal-vacuum testing, a critical
spacecraft environmental test, on NASA's Lunar Crater Observation and
Sensing Satellite (LCROSS) two months ahead of schedule. LCROSS is a
NASA mission to impact the moon in the search for water ice and
water-bearing compounds in lunar craters.
-- Northrop Grumman completed the sale of its Electro-Optical Systems
business for $175 million in cash to L-3 Communications.
-- Northrop Grumman increased its quarterly dividend to $0.40 per share
from $0.37 per share.
-- Northrop Grumman completed the previously announced redemption of its
Series B Convertible Preferred Stock.
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 12:00 p.m. EDT on July 29, 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; 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 and Form 10-Q.
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SCHEDULE 1
NORTHROP GRUMMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended Six months ended
June 30 June 30
$ in millions, except per share 2008 2007 2008 2007
Sales and Service Revenues
Product sales $4,849 $4,460 $9,243 $8,646
Service revenues 3,779 3,418 7,109 6,546
Total sales and service revenues 8,628 7,878 16,352 15,192
Cost of Sales and Service Revenues
Cost of product sales 3,793 3,486 7,522 6,696
Cost of service revenues 3,232 2,821 6,025 5,528
General and administrative
expenses 797 808 1,535 1,515
Operating income 806 763 1,270 1,453
Other Income (Expense)
Interest expense (72) (83) (149) (172)
Other, net 5 (9) 27 (10)
Earnings from continuing
operations before income taxes 739 671 1,148 1,271
Federal and foreign income
taxes 256 199 402 405
Earnings from continuing
operations 483 472 746 866
Income (Loss) from discontinued
operations, net of tax 12 (12) 13 (19)
Net earnings $495 $460 $759 $847
Basic Earnings (Loss) Per Share
Continuing operations $1.42 $1.37 $2.20 $2.52
Discontinued operations .04 (.03) .04 (.06)
Basic earnings per share $1.46 $1.34 $2.24 $2.46
Weighted-average common shares
outstanding, in millions 339.0 343.3 338.7 344.3
Diluted Earnings (Loss) Per
Share
Continuing operations $1.40 $1.35 $2.15 $2.46
Discontinued operations .04 (.04) .04 (.05)
Diluted earnings per share $1.44 $1.31 $2.19 $2.41
Weighted-average diluted shares
outstanding, in millions 344.1 355.3 346.7 356.8
SCHEDULE 2
NORTHROP GRUMMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited)
June 30, December 31,
$ in millions 2008 2007
Assets:
Cash and cash equivalents $581 $963
Accounts receivable, net of progress payments
of $43,630 in 2008 and $40,475 in 2007 4,325 3,790
Inventoried costs, net of progress payments of
$1,560 in 2008 and $1,345 in 2007 1,089 1,000
Deferred income taxes 503 542
Prepaid expenses and other current assets 596 502
Total current assets 7,094 6,797
Property, plant, and equipment, net of
accumulated depreciation of $3,608 in 2008
and $3,424 in 2007 4,651 4,690
Goodwill 17,586 17,672
Other purchased intangibles, net of accumulated
amortization of $1,739 in 2008 and $1,687 in 2007 992 1,074
Pension and postretirement benefits asset 2,125 2,080
Other assets 1,019 1,060
Total assets $33,467 $33,373
Liabilities:
Notes payable to banks $23 $26
Current portion of long-term debt 74 111
Trade accounts payable 1,727 1,890
Accrued employees' compensation 1,283 1,175
Advance payments and billings in excess of
costs incurred 1,825 1,563
Other current liabilities 1,659 1,667
Total current liabilities 6,591 6,432
Long-term debt, net of current portion 3,844 3,918
Mandatorily redeemable convertible preferred stock 350
Pension and postretirement benefits liability 3,093 3,008
Other long-term liabilities 2,076 1,978
Total liabilities 15,604 15,686
Commitments and Contingencies (Note 10)
Shareholders' Equity:
Common stock, $1 par value; 800,000,000
shares authorized; issued and
outstanding: 2008 -- 337,496,845;
2007 -- 337,834,561 337 338
Paid-in capital 10,335 10,661
Retained earnings 7,877 7,387
Accumulated other comprehensive loss (686) (699)
Total shareholders' equity 17,863 17,687
Total liabilities and shareholders' equity $33,467 $33,373
SCHEDULE 3
NORTHROP GRUMMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended
June 30
$ in millions 2008 2007
Operating Activities
Sources of Cash - Continuing Operations
Cash received from customers
Progress payments $3,319 $3,261
Collections on billings 12,983 12,089
Proceeds from insurance carriers related
to operations 5 125
Other cash receipts 32 12
Total sources of cash-continuing
operations 16,339 15,487
Uses of Cash - Continuing Operations
Cash paid to suppliers and employees (14,855) (13,619)
Interest paid, net of interest
received (153) (180)
Income taxes paid, net of refunds
received (482) (456)
Excess tax benefits from stock-based
compensation (45) (61)
Other cash payments (7) (12)
Total uses of cash-continuing
operations (15,542) (14,328)
Cash provided by continuing
operations 797 1,159
Cash provided by (used in)
discontinued operations 4 (18)
Net cash provided by operating
activities 801 1,141
Investing Activities
Proceeds from sale of business, net
of cash divested 175
Payment for business purchased, net
of cash acquired (584)
Proceeds from sale of property,
plant, and equipment 9 10
Additions to property, plant, and
equipment (277) (298)
Payments for outsourcing contract and
related software costs (77) (80)
Proceeds from insurance carriers
related to capital expenditures 3
Decrease in restricted cash 37 34
Other investing activities, net 1 (2)
Net cash used in investing activities (132) (917)
Financing Activities
Net payments under lines of credit (3) (63)
Principal payments of long-term debt (109) (66)
Proceeds from exercises of stock
options and issuance of common stock 82 196
Dividends paid (261) (254)
Excess tax benefits from stock-based
compensation 45 61
Common stock repurchases (805) (592)
Net cash used in financing activities (1,051) (718)
Decrease in cash and cash equivalents (382) (494)
Cash and cash equivalents, beginning of period 963 1,015
Cash and cash equivalents, end of period $581 $521
SCHEDULE 4
NORTHROP GRUMMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended
June 30
$ in millions 2008 2007
Reconciliation of Net Earnings to Net
Cash Provided by Operating Activities
Net Earnings $759 $847
Adjustments to reconcile to net cash
provided by operating activities
Depreciation 276 276
Amortization of assets 109 69
Stock-based compensation 83 78
Excess tax benefits from stock-based
compensation (45) (61)
Loss on disposals of property, plant,
and equipment 2 12
Amortization of long-term debt premium (5) (6)
Pre-tax gain on sale of business (58)
Decrease (increase) in
Accounts receivable (3,691) (2,949)
Inventoried costs (304) (97)
Prepaid expenses and other current
assets (40) 10
Increase (decrease) in
Progress payments 3,370 3,020
Accounts payable and accruals 215 (152)
Deferred income taxes 121 10
Income taxes payable (84) (20)
Retiree benefits 46 98
Other non-cash transactions, net 43 24
Cash provided by continuing
operations 797 1,159
Cash provided by (used in)
discontinued operations 4 (18)
Net cash provided by operating
activities $801 $1,141
Non-Cash Investing and Financing
Activities
Sale of business
Cash received for business sold $175
Pre-tax gain on sale of business (58)
Fair value of assets sold, including
goodwill (135)
Liabilities assumed by purchaser $(18)
Purchase of business
Fair value of assets acquired,
including goodwill $688
Cash paid for business purchased (584)
Liabilities assumed $104
Mandatorily redeemable convertible
preferred stock converted or
redeemed into common stock $350
Capital leases $21
SCHEDULE 5
NORTHROP GRUMMAN CORPORATION
TOTAL BACKLOG AND CONTRACT AWARDS
($ in millions)
(unaudited)
TOTAL BACKLOG
June 30, 2008 December 31, 2007(3)
FUNDED UNFUNDED TOTAL FUNDED UNFUNDED TOTAL
(1) (2) BACKLOG (1) (2) BACKLOG
Information &
Services
Mission Systems $2,526 $3,325 $5,851 $2,365 $3,288 $5,653
Information
Technology 2,409 1,971 4,380 2,581 2,268 4,849
Technical Services 1,571 2,730 4,301 1,471 3,193 4,664
Total Information &
Services 6,506 8,026 14,532 6,417 8,749 15,166
Aerospace
Integrated Systems 5,021 7,571 12,592 4,204 4,525 8,729
Space Technology 2,080 13,374 15,454 2,295 13,963 16,258
Total Aerospace 7,101 20,945 28,046 6,499 18,488 24,987
Electronics 8,655 2,311 10,966 7,887 2,047 9,934
Shipbuilding 11,601 1,741 13,342 10,348 3,230 13,578
Total $33,863 $33,023 $66,886 $31,151 $32,514 $63,665
(1) Funded backlog represents firm 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 orders.
(3) Certain prior period amounts have been reclassified to conform to the
2008 presentation.
CONTRACT AWARDS
The estimated value of new contract awards during the six months ended
June 30, 2008, is approximately $19.6 billion. Significant new awards
during this period include $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 Unmanned Aircraft System program (see below), $596 million
for the CVN 78 Ford-class aircraft carrier, $241 million for the
Intercontinental Ballistic Missile (ICBM) program, $227 million for the
Vehicular Intercommunications Systems Indefinite Delivery and Indefinite
Quantity program, and $195 million for the Large Aircraft Infrared
Counter-measures Indefinite Delivery and Indefinite Quantity program.
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 July 9,
2008, the Secretary of Defense announced that the DoD intends to reopen
the bidding for the contract to address certain findings identified by the
GAO in its report. The company continues to carry the award in its backlog
as of June 30, 2008.
On April 22, 2008, the company was awarded a contract by the U.S. Navy for
the Broad Area Maritime Surveillance 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 is currently
reviewing the protest and is expected to reach its decision in August
2008.
The estimated value of new contract awards during the six months ended
June 30, 2007, is approximately $14.4 billion. Significant new awards
during this period include $2.2 billion for LHA-6, $875 million for the
Flats Sequencing System program, $510 million for the DDG 1000
Zumwalt-class destroyer program, $270 million for the ICBM program, $223
million for the F-22 program, and $185 million for the Joint National
Integration Center Research & Development program.
SCHEDULE 6
NORTHROP GRUMMAN CORPORATION
REALIGNED SEGMENT OPERATING RESULTS
($ in millions)
(unaudited)
AS REPORTED
2006 2007 2008
Three
Months
Total Three Months Ended Total Ended
NET SALES Year Mar 31 Jun 30 Sep 30 Dec 31 Year Mar 31
Information
& Services
Mission
Systems $5,651 $1,395 $1,586 $1,500 $1,639 $6,120 $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 11,471 2,953 3,280 3,180 3,370 12,783 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 (2) 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
Eliminations (1,491) (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 INCOME
Information
& Services
Mission Systems $517 $117 $163 $144 $152 $576 $145
Information
Technology 342 86 90 72 81 329 89
Technical
Services 120 28 32 28 32 120 26
Total
Information
& Services 979 231 285 244 265 1,025 260
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 (2) 786 192 189 211 221 813 209
Ships 393 79 134 183 142 538 (218)
Intersegment
Eliminations (117) (29) (28) (26) (30) (113) (28)
Total Segment
Operating
Income (1) $2,837 $692 $798 $816 $809 $3,115 $458
REALIGNED
2006 2007 2008
Three
Months
Total Three Months Ended 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 (2) 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
Eliminations (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 INCOME
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 (2) 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
Income (1) $2,837 $692 $798 $816 $809 $3,115 $458
(1) Segment operating income is a non-GAAP measure used as an internal
measure of financial performance for the individual business
segments.
(2) Reported amounts adjusted to reflect discontinued operations as
previously reported in Schedule 6 of the First Quarter 2008 earnings
release.
SOURCE Northrop Grumman Corporation
CONTACT: media, Dan McClain, +1-310-201-3335; or investors, Gaston Kent,
+1-310-201-3423, both of Northrop Grumman Corporation
Web site: http://www.northropgrumman.com