UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported)
July 24, 2007

Northrop Grumman Corporation

DELAWARE (State or Other Jurisdiction of Incorporation)		1-16411 (Commission File Number)		95-4840775 (IRS Employer Identification No.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨		Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

On July 24, 2007, Northrop Grumman Corporation issued a press release announcing its financial results for the quarter ended June 30, 2007, under the heading “Northrop Grumman Second Quarter 2007 Net Income Increases 7 Percent.” The press release is furnished as Exhibit 99.1.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.

(c)    Exhibits

		Furnished
		Exhibit 99.1 — Press Release dated July 24, 2007

Signature(s)

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

Exhibit Index

Exhibit No.
Exhibit 99.1		Furnished — Press Release dated July 24, 2007

		Contact:		Dan McClain (Media) (310) 201-3335
				Gaston Kent (Investors) (310) 201-3423

Northrop Grumman Second Quarter 2007 Net Income Increases 7 Percent

•		Diluted Earnings per Share from Continuing Operations Increase to $1.31
•		Operating Margin Increases 9 Percent to $744 Million or 9.4 Percent of Sales
•		Sales Increase 4 Percent to $7.9 Billion
•		Cash from Operations Increases to $741 Million from $638 Million
•		Total Backlog of $60.4 Billion
•		2007 Guidance Updated

     LOS ANGELES — July 24, 2007 — Northrop Grumman Corporation (NYSE: NOC) reported that second quarter 2007 income from continuing operations rose 4 percent to $460 million, or $1.31 per diluted share, from $442 million, or $1.26 per diluted share, in the second quarter of 2006. Sales for the 2007 second quarter increased 4 percent to $7.9 billion from $7.6 billion in the 2006 second quarter. Cash provided by operations for the 2007 second quarter increased to $741 million from $638 million in the prior year period.

Operating Highlights

		Second Quarter												Six Months
($ millions except per share data)		2007				2006				Change				2007				2006				Change
Sales			7,929				7,601				4	%			15,273				14,694				4	%
Operating margin			744				682				9	%			1,425				1,286				11	%
as a % of sales			9.4	%			9.0	%		40 bps					9.3	%			8.8	%		50 bps
Income from continuing operations			460				442				4	%			847				804				5	%
Diluted EPS from continuing operations			1.31				1.26				4	%			2.41				2.29				5	%
Net income			460				430				7	%			847				787				8	%
Diluted EPS			1.31				1.23				7	%			2.41				2.24				8	%
Cash from operations			741				638				16	%			1,141				523				118	%

     “Sales growth, higher segment operating margin, and lower corporate expenses drove this quarter’s earnings increase. Information & Services led the sales growth with a 15 percent increase, and all four of our businesses contributed to higher segment

 

Northrop Grumman Second Quarter 2007 Net Income Increases 7 Percent		2

operating margin. Cash from operations also improved substantially,” said Ronald D. Sugar, Northrop Grumman chairman and chief executive officer.

     “Year-to-date we are on track to generate higher sales, improved margin, and higher earnings. And based on year-to-date results, we expect both cash from operations and free cash flow to be in the upper end of our 2007 guidance range,” Sugar concluded.

     Operating margin for the 2007 second quarter increased 9 percent to $744 million from $682 million for the 2006 second quarter. As a percent of sales, operating margin increased 40 basis points to 9.4 percent from 9 percent in the prior year period. The increase includes higher segment operating margin, lower net pension expense and higher unallocated & other expenses. Second quarter 2007 segment operating margin increased 5 percent, and as a percent of sales, was comparable to the prior year period at 9.8 percent. Second quarter 2007 net pension expense declined $40 million. Unallocated & other expenses increased to $63 million and include lower post retirement benefit expenses, which were more than offset by a $50 million increase in provisions for various legal and investigative matters. Unusual items, summarized below, had a net negative effect of $4 million to segment operating margin (approximately 5 basis points to segment operating margin rate) and a negative net effect of $54 million to operating margin (approximately 70 basis points to operating margin rate). In the 2006 second quarter unusual items had a $51 million net negative impact to segment operating margin (approximately 70 basis points to segment operating margin rate).

Unusual Items included in Q2 2007 Operating Margin ($ millions)

Aerospace		Prior years overhead cost settlement			27
Electronics		F-16 Block 60 contract earnings adjustment			(27	)
		Facility shutdown and closure costs			(11	)
					(38	)
Ships		Insurance recovery for lost profits			62
		LHD 8 contract earnings adjustment			(55	)
					7
Net effect to segment operating margin1					(4	)
Unallocated		Legal and investigative provisions			(50	)
Net effect to operating margin					(54	)

     Federal and foreign income taxes for the 2007 second quarter increased to $192 million from $147 million in the second quarter of 2006. The effective tax rate applied to income from continuing operations for the 2007 second quarter was 29.4 percent compared with 25 percent in the 2006 second quarter. In the 2007 second quarter the company reached a favorable settlement with the Internal Revenue Service regarding a portion of its audit for the years 2001 through 2003. As a result, the company recognized tax benefits totaling $16 million. In the second quarter of 2006 the company recognized

 

Northrop Grumman Second Quarter 2007 Net Income Increases 7 Percent		3

tax benefits totaling $48 million due to reversal of previously established expense provisions for audits of the B-2 program in years 1997 through 2000.

     Net income for the 2007 second quarter increased 7 percent to $460 million, or $1.31 per diluted share, from $430 million, or $1.23 per diluted share, for the same period of 2006. Earnings per share are based on weighted average diluted shares outstanding of 355.3 million for the second quarter of 2007 and 350.1 million for the second quarter of 2006. For both the second quarter and six months periods in 2007, weighted average shares outstanding include the dilutive impact of 6.4 million shares of the company’s Series B mandatorily redeemable preferred stock.

     Funded contract acquisitions for the 2007 second quarter totaled $6.6 billion compared with $8.1 billion for the same period of 2006. Funded contract acquisitions for the 2006 second quarter included a $2.3 billion contract for the LPD program in the Ships business. Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, was $60.4 billion at June 30, 2007.

Cash Flow Highlights

		Second Quarter												Six Months
($ millions)		2007				2006				Change				2007				2006				Change
Cash from operations			741				638				103				1,141				523				618
Less:
Capital expenditures			140				151				11				298				324				26
Outsourcing contract & related software costs			50								(50	)			80								(80	)
Free cash flow1			551				487				64				763				199				564

     Cash provided by operations in the 2007 second quarter totaled $741 million compared with $638 million in the prior year period. The year-over-year improvement is primarily driven by higher net income and also includes less cash expended for discontinued operations, partially offset by an increase in cash income taxes paid. Second quarter 2007 capital spending totaled $140 million and included $31 million for Hurricane Katrina, compared with capital spending of $151 million in the second quarter of 2006, which included $42 million for Hurricane Katrina. Second quarter 2007 free cash flow increased to $551 million from $487 million. Year-to-date free cash flow increased to $763 million from $199 million reflecting improved cash from operations and reductions in cash used in discontinued operations.

 

Northrop Grumman Second Quarter 2007 Net Income Increases 7 Percent		4

Cash Measurements, Debt and Capital Deployment

($ millions)		6/30/2007				12/31/2006
Cash & cash equivalents			521				1,015
Total debt			4,048				4,162
Net debt1			3,527				3,147
Mandatorily redeemable preferred stock			350				350
Net debt to total capital ratio2			17	%			15	%

     Cash and cash equivalents totaled $521 million at June 30, 2007 compared with $1 billion at Dec. 31, 2006, and total debt declined to $4 billion at June 30, 2007 from $4.2 billion at Dec. 31, 2006. Changes in cash and cash equivalents and total debt reflect the following cash deployment and financing actions during 2007:

•		$584 million acquisition of Essex Corporation in January 2007
•		$592 million accelerated share repurchase completed in June 2007
•		$298 million capital expenditures and $80 million for outsourcing contract and related software costs
•		$254 million dividends paid
•		$196 million proceeds from exercises of stock options and issuance of common stock

2007 Guidance Updated

($ billions except per share amounts)		Prior		Current
Sales		31 – 32		~31.5		± 250 Million
Segment OM %1		Low 9%		Mid 9%
OM %		Low 9%		Low 9%
Diluted EPS from continuing operations		4.80 – 5.05		4.90 – 5.05
Cash from operations		2.5 – 2.8		Upper end of Range
Free cash flow2		1.6 – 2.0		Upper end of Range

 

Northrop Grumman Second Quarter 2007 Net Income Increases 7 Percent		5

Business Results

CONSOLIDATED SALES & SEGMENT OPERATING MARGIN¹

($ millions except per share data)		Second Quarter												Six Months
		2007				2006				Change				2007				2006				Change
Sales
Information & Services			3,236				2,814				15	%			6,156				5,466				13	%
Aerospace			1,994				2,121				(6	%)			4,029				4,270				(6	%)
Electronics			1,723				1,610				7	%			3,314				3,114				6	%
Ships			1,359				1,437				(5	%)			2,515				2,570				(2	%)
Intersegment eliminations			(383	)			(381	)			(1	%)			(741	)			(726	)			(2	%)
Sales			7,929				7,601				4	%			15,273				14,694				4	%
Segment Operating Margin1
Information & Services			282				266				6	%			515				495				4	%
Aerospace			218				201				8	%			437				407				7	%
Electronics			173				172				1	%			354				348				2	%
Ships			134				129				4	%			213				197				8	%
Intersegment eliminations			(28	)			(26	)			(8	%)			(57	)			(52	)			(10	%)
Segment Operating Margin1			779				742				5	%			1,462				1,395				5	%
as a % of sales			9.8	%			9.8	%							9.6	%			9.5	%		10 bps
Reconciliation to Operating Margin:
Unallocated & other expenses			(63	)			(48	)			(31	%)			(98	)			(87	)			(13	%)
Net pension adjustment2			28				(12	)			333	%			61				(22	)			377	%
Operating Margin			744				682				9	%			1,425				1,286				11	%
as a % of sales			9.4	%			9.0	%		40 bps					9.3	%			8.8	%		50 bps

     As previously announced, beginning in the 2007 first quarter, Radio Systems is reported as part of Mission Systems. Schedule 5 provides previously reported quarterly financial results and realigned results reflecting the transfer of Radio Systems.

Information & Services

		Second Quarter ($ Millions)
		2007													2006
						Operating				%										Operating				%
		Sales				Margin				of Sales					Sales				Margin				of Sales
Mission Systems		$	1,542			$	160				10.4	%			$	1,407			$	144				10.2	%
Information Technology			1,143				90				7.9	%				976				84				8.6	%
Technical Services			551				32				5.8	%				431				38				8.8	%
		$	3,236			$	282				8.7	%			$	2,814			$	266				9.5	%

 

Northrop Grumman Second Quarter 2007 Net Income Increases 7 Percent		6

     Information & Services second quarter 2007 sales increased 15 percent from the prior year period due to double-digit revenue increases for Information Technology and Technical Services. Operating margin for Information & Services rose 6 percent in the 2007 second quarter. As a percent of sales, operating margin declined to 8.7 percent from 9.5 percent in the prior year period. The increase in operating margin is due to higher volume, and the decline in operating margin rate reflects a higher percentage of lower margin state and local business for Information Technology and the impact of the lower margin Nevada Test Site program in Technical Services.

     Mission Systems sales increased nearly 10 percent due to the acquisition of Essex Corporation, higher volume for the Kinetic Energy Interceptor program, and higher volume for several command, control & communications programs. Operating margin rose 11 percent, and as a percent of sales, increased to 10.4 percent from 10.2 percent in the prior year period. The increases in operating margin and rate are due to higher volume, including the Essex acquisition, and improved program performance.

     Information Technology sales rose 17 percent due to newly commenced state and local programs, including Virginia IT and San Diego County outsourcing and New York City Wireless programs, as well as higher volume for Intelligence programs. Operating margin rose 7 percent. As a percent of sales, operating margin declined to 7.9 percent from 8.6 percent in the prior year period. The increase in operating margin and the lower rate reflect the impact of newly commenced state and local programs.

     Technical Services sales rose 28 percent due to the Nevada Test Site program. Operating margin decreased 16 percent from the prior year period, and as a percent of sales, declined to 5.8 percent from 8.8 percent in the prior year period. The comparison to prior year’s results reflect favorable performance adjustments on several programs in the 2006 second quarter as well as the impact of the lower margin Nevada Test Site program.

Aerospace

		Second Quarter ($ Millions)
		2007												2006
						Operating				%									Operating				%
		Sales				Margin				of Sales					Sales				Margin				of Sales
Integrated Systems		$	1,225			$	149				12.2	%			$	1,383			$	141				10.2	%
Space Technology			769				69				9.0	%				738				60				8.1	%
		$	1,994			$	218				10.9	%			$	2,121			$	201				9.5	%

     Aerospace second quarter 2007 sales declined 6 percent from the prior year period due to lower volume in Integrated Systems, partially offset by higher sales in Space Technology. Aerospace second quarter 2007 operating margin increased 8 percent from the prior year period, and as a percent of sales, increased to 10.9 percent from 9.5 percent in the prior year period.

 

Northrop Grumman Second Quarter 2007 Net Income Increases 7 Percent		7

     Integrated Systems sales declined 11 percent primarily due to lower volume for the E-2D Advanced Hawkeye, F-35 and EA-18G programs, as these programs transition from development to production, as well as lower volume for the J-UCAS program as it nears completion, and significant customer-directed scope reductions associated with the E-10A platform and related MP-RTIP efforts. Integrated Systems operating margin rose 6 percent, and as a percent of sales, increased to 12.2 percent from 10.2 percent in the prior year period. The operating margin increase includes a $27 million adjustment related to the settlement of prior years overhead costs, which more than offset the impact of lower sales volume.

     Space Technology sales increased 4 percent, primarily due to higher volume for restricted, James Webb Space Telescope, and Space Radar programs. Increases in these programs were partially offset by lower volume in the Advanced Extremely High Frequency and NPOESS programs. Space Technology operating margin increased 15 percent, and as a percent of sales increased to 9 percent from 8.1 percent, reflecting higher sales volume and improved program performance.

Electronics

		Second Quarter ($ Millions)
		2007												2006
						Operating				% of									Operating				% of
		Sales				Margin				Sales					Sales				Margin				Sales
		$	1,723			$	173				10.0	%			$	1,610			$	172				10.7	%

     Electronics second quarter 2007 sales increased 7 percent from the prior year period principally due to higher sales for Army programs and a restricted program. These sales increases were partially offset by declining volume on fixed price development programs.

     Electronics second quarter 2007 operating margin was comparable to the prior year period, and as a percent of sales, declined to 10 percent from 10.7 percent. Operating margin for the 2007 second quarter includes pre-tax facility shutdown and closure costs of $11 million and a $27 million negative pre-tax contract earnings adjustment for the F-16 Block 60 fixed price development program, which more than offset the impact of higher sales volume. Second quarter 2006 operating margin included pre-tax negative contract earnings adjustments of $28 million for the ASPIS II program and $23 million for the MESA radar program.

 

Northrop Grumman Second Quarter 2007 Net Income Increases 7 Percent		8

Ships

		Second Quarter ($ Millions)
		2007												2006
						Operating				% of									Operating				% of
		Sales				Margin				Sales					Sales				Margin				Sales
		$	1,359			$	134				9.9	%			$	1,437			$	129				9.0	%

     Ships second quarter 2007 sales declined 5 percent from the prior year period due to lower volume in the DDG 51 and LHD programs (due to a now-concluded labor strike at the company’s Pascagoula, Miss. shipyard), lower volume for aircraft carrier and submarine programs, and lower volume for the DDG 1000 program as it transitions from development to detail design and production.

     Ships second quarter 2007 operating margin increased 4 percent from the prior year period, and as a percent of sales, increased to 9.9 percent from 9 percent in the prior year period. Second quarter 2007 operating margin includes a $62 million pre-tax insurance recovery for losses under its contracts (“lost profits”) related to the impact of Hurricane Katrina on the company’s Gulf Coast shipyards and improved performance for the company’s LHA 6 program. These positive impacts to operating margin and rate were partially offset by a negative $55 million pre-tax contract adjustment on the LHD 8 program due to schedule extension and subsystems cost growth. Second quarter operating margin was also impacted by lower volume on the strike-impacted programs. The second quarter of 2006 included Virginia-class Block II material incentives and favorable performance adjustments.

Second Quarter Highlights

•		The U.S. Navy awarded Northrop Grumman a $2.4 billion fixed-price incentive contract for the detail design and construction of the amphibious assault ship LHA 6.
•		The U.S. Navy awarded the company a $191 million contract modification for procurement of long-lead time material and production readiness for activities leading to the construction of Ships’ first Zumwalt-class destroyer, DDG 1000.
•		Northrop Grumman began work on a 62-month, $171 million system development and demonstration contract for the first increment of a new extremely high frequency satellite communications system for the U.S. Air Force’s B-2 stealth bomber.
•		Northrop Grumman announced a U.S. Naval Facilities Engineering Command contract potentially valued at $100 million to provide Anti-Terrorism Force Protection systems and capabilities to Navy installations around the world.
•		Northrop Grumman was selected to outfit U.S. Marine Corp CH-53E helicopters with the company’s Directional Infrared Countermeasures (DIRCM) systems. The $19.7 million inaugural contract with the U.S. Marine Corps represents the first application

 

Northrop Grumman Second Quarter 2007 Net Income Increases 7 Percent		9

		of Northrop Grumman’s DIRCM suite for protection of the Marines’ CH-53E helicopter.
•		The U.S. Army awarded Northrop Grumman one of 16 indefinite delivery/indefinite quantity (ID/IQ) contracts for the Information Technology Enterprise Solutions 2 Services (ITES-2S) program. ITES-2S is a nine-year, $20 billion, ID/IQ program that will provide the Army with a full range of information technology services and solutions to support enterprise infrastructure goals worldwide, including command, control, communications, computers, and information management.
•		Northrop Grumman will serve as a subcontractor to AT&T Government Solutions on the Networx Universal contract. AT&T was one of three companies selected by the General Services Administration for the Networx Universal indefinite delivery/indefinite quantity contract, which has a potential value of $20 billion, collectively, over the next ten years.
•		Northrop Grumman’s first KC-30 Tanker began final assembly, reflecting the industrial team’s commitment to the U.S. Air Force’s KC-135 replacement program.
•		The Navy christened the fourth submarine of the Virginia-class, North Carolina (SSN 777).
•		The Navy christened Northrop Grumman’s Aegis guided missile destroyer, Truxtun (DDG 103).
•		The Kinetic Energy Interceptor (KEI) program team fired a powerful Stage 1 rocket motor, marking the third consecutive successful ground-fire test leading up to the program’s first booster flight in 2008. Northrop Grumman is the KEI prime contractor.
•		The first Northrop Grumman E-2D Advanced Hawkeye, being built for the U.S. Navy by prime contractor Northrop Grumman, made its first public appearance at rollout ceremonies. Subsequent to the end of the second quarter, the company received a $408 million contract for three production E-2D Advanced Hawkeyes for the U.S. Navy.
•		Northrop Grumman delivered the center/aft fuselage section for the first production-configured development model of the EA-18G Growler, the U.S. Navy’s next-generation electronic attack aircraft.
•		Northrop Grumman achieved a key milestone with the delivery of the 100th active electronically scanned array production radar for the U.S. Air Force’s F-22 Raptor.

About Northrop Grumman

     Northrop Grumman Corporation is a $30 billion 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 Second Quarter 2007 Net Income Increases 7 Percent		10

     Northrop Grumman will webcast its earnings conference call at 12 p.m. EDT on July 24, 2007. 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,” “guidance” 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 margin, 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, appeals and investigations; hurricane-related insurance recoveries; environmental remediation; acquisitions and divestitures of businesses; successful reduction of debt; performance issues with key suppliers and subcontractors; product performance and the successful execution of internal plans; successful negotiation of contracts with labor unions; effective tax rates and timing and amounts of tax payments; the results of any audit or appeal process with the Internal Revenue Service; 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; 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, 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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0707-328

 

SCHEDULE 1

NORTHROP GRUMMAN CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)

		Three months ended								Six months ended
		June 30								June 30
$ in millions, except per share		2007				2006				2007				2006
Sales and Service Revenues
Product sales		$	4,638			$	4,772			$	8,778			$	9,169
Service revenues			3,291				2,829				6,495				5,525
Total sales and service revenues			7,929				7,601				15,273				14,694
Cost of Sales and Service Revenues
Cost of product sales			3,696				3,691				6,934				7,137
Cost of service revenues			2,665				2,464				5,375				4,830
General and administrative expenses			824				764				1,539				1,441
Operating margin			744				682				1,425				1,286
Other Income (Expense)
Interest income			6				3				13				16
Interest expense			(83	)			(87	)			(172	)			(177	)
Other, net			(15	)			(9	)			(24	)			(10	)
Income from continuing operations before income taxes			652				589				1,242				1,115
Federal and foreign income taxes			192				147				395				311
Income from continuing operations			460				442				847				804
Loss from discontinued operations, net of tax							(12	)							(17	)
Net income		$	460			$	430			$	847			$	787
Basic Earnings (Loss) Per Share
Continuing operations		$	1.34			$	1.28			$	2.46			$	2.33
Discontinued operations							(.03	)							(.05	)
Basic earnings per share		$	1.34			$	1.25			$	2.46			$	2.28
Weighted average common shares outstanding, in millions			343.3				344.0				344.3				345.6
Diluted Earnings (Loss) Per Share
Continuing operations		$	1.31			$	1.26			$	2.41			$	2.29
Discontinued operations							(.03	)							(.05	)
Diluted earnings per share		$	1.31			$	1.23			$	2.41			$	2.24
Weighted average diluted shares outstanding, in millions			355.3				350.1				356.8				351.8

SCHEDULE 2

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

		June 30,				December 31,
$ in millions		2007				2006
Assets:
Cash and cash equivalents		$	521			$	1,015
Accounts receivable, net of progress payments of $36,978 in 2007 and $34,085 in 2006			3,685				3,566
Inventoried costs, net of progress payments of $1,353 in 2007 and $1,226 in 2006			1,157				1,178
Deferred income taxes			654				706
Prepaid expenses and other current assets			244				254
Total current assets			6,261				6,719
Property, plant, and equipment, net of accumulated depreciation of $3,230 in 2007 and $3,015 in 2006			4,539				4,531
Goodwill			17,639				17,219
Other purchased intangibles, net of accumulated amortization of $1,621 in 2007 and $1,555 in 2006			1,139				1,139
Pension and postretirement benefits asset			1,298				1,349
Other assets			1,152				1,052
Total assets		$	32,028			$	32,009
Liabilities:
Notes payable to banks		$	32			$	95
Current portion of long-term debt			141				75
Trade accounts payable			1,506				1,686
Accrued employees’ compensation			1,160				1,177
Advance payments and billings in excess of costs incurred			1,583				1,571
Income taxes payable			45				535
Other current liabilities			1,655				1,614
Total current liabilities			6,122				6,753
Long-term debt, net of current portion			3,875				3,992
Mandatorily redeemable preferred stock			350				350
Pension and postretirement benefits liability			3,336				3,302
Other long-term liabilities			1,565				997
Total liabilities			15,248				15,394
Shareholders’ Equity:
Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2007 — 343,683,664; 2006 — 345,921,809			344				346
Paid-in capital			11,020				11,346
Retained earnings			6,703				6,183
Accumulated other comprehensive loss			(1,287	)			(1,260	)
Total shareholders’ equity			16,780				16,615
Total liabilities and shareholders’ equity		$	32,028			$	32,009

SCHEDULE 3

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

		Six months ended
		June 30
$ in millions		2007				2006
Operating Activities
Sources of Cash – Continuing Operations
Cash received from customers Progress payments		$	3,342			$	3,451
Collections on billings			12,089				10,961
Proceeds from insurance carriers related to operations			125				35
Other cash receipts			32				52
Total sources of cash-continuing operations			15,588				14,499
Uses of Cash – Continuing Operations
Cash paid to suppliers and employees			(13,718	)			(13,223	)
Interest paid			(190	)			(192	)
Income taxes paid			(466	)			(397	)
Excess tax benefits from stock-based compensation			(61	)			(47	)
Other cash payments			(12	)			(16	)
Total uses of cash-continuing operations			(14,447	)			(13,875	)
Cash provided by continuing operations			1,141				624
Cash used in discontinued operations							(101	)
Net cash provided by operating activities			1,141				523
Investing Activities
Proceeds from sale of businesses, net of cash divested							43
Payment for businesses purchased, net of cash acquired			(584	)
Proceeds from sale of property, plant, and equipment			10				10
Additions to property, plant, and equipment			(298	)			(324	)
Payments for outsourcing contract and related software costs			(80	)
Proceeds from insurance carriers related to capital expenditures			3				71
Payment for purchase of investment							(35	)
Decrease in restricted cash			34
Other investing activities, net			(2	)			(16	)
Net cash used in investing activities			(917	)			(251	)
Financing Activities
Net (payments) borrowings under lines of credit			(63	)			29
Principal payments of long-term debt			(66	)			(521	)
Proceeds from exercises of stock options and issuance of common stock			196				338
Dividends paid			(254	)			(194	)
Excess tax benefits from stock-based compensation			61				47
Common stock repurchases			(592	)			(825	)
Net cash used in financing activities			(718	)			(1,126	)
Decrease in cash and cash equivalents			(494	)			(854	)
Cash and cash equivalents, beginning of period			1,015				1,605
Cash and cash equivalents, end of period		$	521			$	751

SCHEDULE 4

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

		Six months ended
		June 30
$ in millions		2007				2006
Reconciliation of Net Income to Net Cash Provided by Operating Activities
Net Income		$	847			$	787
Adjustments to reconcile to net cash provided by operating activities
Depreciation			276				278
Amortization of assets			69				73
Stock-based compensation			78				107
Excess tax benefits from stock-based compensation			(61	)			(47	)
Loss on disposals of property, plant, and equipment			12				5
Amortization of long-term debt premium			(6	)			(8	)
Loss on investments							13
Decrease (increase) in
Accounts receivable			(2,949	)			(2,711	)
Inventoried costs			(106	)			(124	)
Prepaid expenses and other current assets			10				(32	)
Increase (decrease) in
Progress payments			3,020				2,354
Accounts payable and accruals			(161	)			(147	)
Deferred income taxes			10				31
Income taxes payable			(20	)			(96	)
Retiree benefits			98				114
Other non-cash transactions, net			24				27
Cash provided by continuing operations			1,141				624
Cash used in discontinued operations							(101	)
Net cash provided by operating activities		$	1,141			$	523
Non-Cash Investing and Financing Activities
Sale of businesses
Liabilities assumed by purchaser						$	18
Purchase of business
Fair value of assets acquired, including goodwill		$	688
Consideration given for businesses purchased			(584	)
Liabilities assumed		$	104

SCHEDULE 5

NORTHROP GRUMMAN CORPORATION
FUNDED CONTRACT ACQUISITIONS AND TOTAL BACKLOG
($ in millions)
(unaudited)

		FUNDED CONTRACT ACQUISITIONS(1)
		SECOND QUARTER								SIX MONTHS
		2007				2006 (4)				2007				2006 (4)
Information & Services
Mission Systems		$	1,205			$	1,217			$	2,901			$	3,042
Information Technology			979				924				1,959				2,132
Technical Services			575				631				1,037				1,176
Total Information & Services			2,759				2,772				5,897				6,350
Aerospace
Integrated Systems			702				848				2,447				3,555
Space Technology			396				617				1,190				2,126
Total Aerospace			1,098				1,465				3,637				5,681
Electronics			1,857				1,520				4,578				3,299
Ships			1,290				2,741				2,266				5,795
Intersegment Eliminations			(383	)			(382	)			(741	)			(734	)
Total		$	6,621			$	8,116			$	15,637			$	20,391

		TOTAL BACKLOG
		JUNE 30, 2007												December 31, 2006
										TOTAL												TOTAL
		FUNDED(2)				UNFUNDED(3)				BACKLOG				FUNDED(2)				UNFUNDED(3)				BACKLOG
Information & Services
Mission Systems		$	3,116			$	8,379			$	11,495			$	3,119			$	8,488			$	11,607
Information Technology			2,445				1,733				4,178				2,667				1,840				4,507
Technical Services			1,341				3,390				4,731				1,375				3,973				5,348
Total Information & Services			6,902				13,502				20,404				7,161				14,301				21,462
Aerospace
Integrated Systems			4,226				4,243				8,469				4,285				4,934				9,219
Space Technology			1,290				6,605				7,895				1,623				7,138				8,761
Total Aerospace			5,516				10,848				16,364				5,908				12,072				17,980
Electronics			7,849				1,655				9,504				6,585				1,583				8,168
Ships			10,605				3,473				14,078				10,854				2,566				13,420
Total		$	30,872			$	29,478			$	60,350			$	30,508			$	30,522			$	61,030

SCHEDULE 6

NORTHROP GRUMMAN CORPORATION
REALIGNED SEGMENT OPERATING RESULTS
($ in millions)
(unaudited)

		AS REPORTED																												REALIGNED
										2006																												2006
		Year Ended								Three Months Ended																Total				Year Ended								Three Months Ended																Total
NET SALES		2004				2005				Mar 31				Jun 30				Sep 30				Dec 31				Year				2004				2005				Mar 31				Jun 30				Sep 30				Dec 31				Year
Information & Services
Mission Systems		$	4,586			$	5,017			$	1,232			$	1,295			$	1,234			$	1,313			$	5,074			$	5,087			$	5,494			$	1,340			$	1,407			$	1,340			$	1,407			$	5,494
Information Technology			3,462				3,771				948				993				1,039				1,051				4,031				3,462				3,736				929				976				1,023				1,034				3,962
Technical Services			1,492				1,533				351				402				535				501				1,789				1,534				1,617				383				431				526				518				1,858
Total Information & Services			9,540				10,321				2,531				2,690				2,808				2,865				10,894				10,083				10,847				2,652				2,814				2,889				2,959				11,314
Aerospace
Integrated Systems			4,610				5,489				1,416				1,383				1,317				1,384				5,500				4,610				5,489				1,416				1,383				1,317				1,384				5,500
Space Technology			3,269				3,395				855				865				782				849				3,351				2,723				2,866				733				738				699				753				2,923
Total Aerospace			7,879				8,884				2,271				2,248				2,099				2,233				8,851				7,333				8,355				2,149				2,121				2,016				2,137				8,423
Electronics			6,390				6,602				1,504				1,610				1,669				1,795				6,578				6,390				6,602				1,504				1,610				1,669				1,795				6,578
Ships			6,252				5,786				1,133				1,437				1,238				1,513				5,321				6,252				5,786				1,133				1,437				1,238				1,513				5,321
Other			230				42																								230				42
Intersegment Eliminations			(1,291	)			(1,568	)			(346	)			(384	)			(381	)			(385	)			(1,496	)			(1,288	)			(1,565	)			(345	)			(381	)			(379	)			(383	)			(1,488	)
Total Sales and Service Revenue		$	29,000			$	30,067			$	7,093			$	7,601			$	7,433			$	8,021			$	30,148			$	29,000			$	30,067			$	7,093			$	7,601			$	7,433			$	8,021			$	30,148
SEGMENT OPERATING MARGIN
Information & Services
Mission Systems		$	314			$	374			$	113			$	125			$	119			$	113			$	471			$	364			$	424			$	125			$	144			$	131			$	119			$	519
Information Technology			246				328				84				86				95				87				352				246				322				80				84				92				86				342
Technical Services			71				89				19				33				35				22				110				75				100				24				38				34				24				120
Total Information & Services			631				791				216				244				249				222				933				685				846				229				266				257				229				981
Aerospace
Integrated Systems			431				499				148				141				137				125				551				431				499				148				141				137				125				551
Space Technology			236				274				71				81				73				68				293				182				219				58				60				66				61				245
Total Aerospace			667				773				219				222				210				193				844				613				718				206				201				203				186				796
Electronics			661				702				176				172				195				201				744				661				702				176				172				195				201				744
Ships			395				249				68				129				76				120				393				395				249				68				129				76				120				393
Other			(3	)			(17	)																							(3	)			(17	)
Intersegment Eliminations			(59	)			(84	)			(26	)			(25	)			(34	)			(30	)			(117	)			(59	)			(84	)			(26	)			(26	)			(35	)			(30	)			(117	)
Total Segment Operating Margin (1)		$	2,292			$	2,414			$	653			$	742			$	696			$	706			$	2,797			$	2,292			$	2,414			$	653			$	742			$	696			$	706			$	2,797