Income from Continuing Operations Increases 59 Percent Earnings per Share from Continuing Operations $1.21 Sales Increase 57 Percent to $6.6 Billion Cash From Operations Totals $400 Million 2003 EPS from Continuing Operations Guidance Raised to $4.20 - $4.30 2003 Guidance for Cash from Operations Raised
LOS ANGELES -- Oct. 29, 2003 -- Northrop Grumman Corporation (NYSE:NOC) reported income from continuing operations of $224 million, or $1.21 per share for the 2003 third quarter, compared with $141 million, or $1.17 per share, for the same period of 2002. Third quarter 2003 earnings per share are based on weighted average diluted shares outstanding of 184.5 million versus 115.2 million for the third quarter of 2002. Sales for the 2003 third quarter increased to $6.6 billion from $4.2 billion for the same period of 2002.
Ronald D. Sugar, Northrop Grumman's chairman, chief executive officer and president said, "Northrop Grumman's third quarter results were excellent from every perspective. The strong performance reflects 17 percent organic sales growth in our heritage businesses and solid contributions from our new operating segments. To date, we have accomplished all major 2003 business initiatives, while strengthening our balance sheet. With the TRW integration largely behind us, we are focused on delivering continued superior program performance and becoming the most trusted provider of systems and technologies for national security.
"We are optimistic about Northrop Grumman's future and have increased 2003 earnings per share and cash guidance while maintaining 2004 guidance for double-digit growth in earnings per share. We have won the major programs necessary to ensure continued growth, and we are currently competing for several multibillion dollar programs on the horizon," Sugar added.
Total operating margin for the 2003 third quarter increased 38 percent to $431 million from $313 million in the same period a year ago. Double-digit growth at Electronic Systems, Ships and Integrated Systems, and operating margin from the company's new Mission Systems and Space Technology segments, contributed to the year over year increase. Last year's third quarter results included an $87 million pre-tax charge on Ships Polar Tanker program and a $65 million pre-tax charge on Electronic Systems F-16 Block 60 contract. These third quarter 2002 charges were partially offset by positive pre-tax adjustments of $69 million on Ships cancelled commercial cruise ship program and $20 million on an Information Technology contract.
Total operating margin in the third quarter of 2003 included pension expense of $143 million compared with pension income of $22 million for the 2002 third quarter. The CAS pension expense increased to $64 million in the third quarter of 2003 from $25 million for the comparable 2002 period.
Third quarter total operating margin also includes a $17 million net gain in "Unallocated expenses" resulting from two legal settlements, the subsequent reversal of a previously established reserve, and the establishment of loss provisions for other legal matters. During the third quarter the company settled two civil False Claims Act cases, Newport News and Jordan, for $60 million and $20 million, respectively. As a result of the Newport News settlement, the company reversed a reserve, which, when established, had no effect on the company's net income as it was recorded as a liability on the balance sheet as part of the purchase accounting for the December 2001 acquisition of Newport News. The unused portion of the reserve, approximately $120 million, was reversed in the third quarter, and together with third quarter loss provisions recorded for other legal matters, resulted in the $17 million net gain.
The company also reported a loss from discontinued operations of $46 million, including a goodwill impairment charge of $47 million, in the third quarter of 2003 versus a loss of $178 million, including a goodwill impairment charge of $186 million, in the third quarter of 2002. Net income for the 2003 third quarter was $184 million, or $1.00 per diluted share, compared with a net loss of $59 million, or $.56 per diluted share for the same period of 2002.
Company wide, contract acquisitions increased 7 percent to $4.3 billion in the 2003 third quarter from $4.0 billion reported for the same period a year ago due to the contributions of the Mission Systems and Space Technology segments. The company also won several major contracts this quarter, including approximately $4 billion for Virginia-class submarines and $1.9 billion for the Advanced Hawkeye. Only a small portion of the total value of these contracts is included in third quarter contract acquisitions and funded backlog due to low initial incremental funding. The company's business backlog increased 10 percent to $23.6 billion at Sept. 30, 2003, from $21.5 billion reported a year earlier.
Guidance for 2003/2004
The company now expects 2003 sales to be between $25.5 and $26 billion and increased its 2003 guidance for earnings per share from continuing operations to $4.20 to $4.30 per share from the previous range of $4.00 to $4.25. The company also raised its estimate of 2003 cash from operations, before the March 2003 $1.0 billion B-2 tax payment, to approximately $1.5 billion from its previous range of $1.1 to $1.3 billion. For 2004, the company expects sales of approximately $28 billion and double-digit growth in earnings per share, assuming pension costs are the same as in 2003. Cash from operations for 2004 is expected to total approximately $1.5 billion.
Segment Results
Electronic Systems sales for the third quarter of 2003 increased 16 percent to $1.5 billion from $1.3 billion for the third quarter of 2002. Operating margin for the third quarter of 2003 was $162 million compared with $73 million for the third quarter of 2002. Results for sales and operating margin in the 2003 period include increased volume in Aerospace Electronic Systems F-16 and F-35 programs and Defensive Electronic Systems ALQ-135 and MH-53 programs. Third quarter 2002 operating margin included a $65 million pre-tax charge for the F-16 Block 60 combat avionics program.
Ships sales, which include the financial results of the Newport News and Ship Systems sectors, increased 24 percent to $1.4 billion in the 2003 third quarter from $1.1 billion in the 2002 third quarter. The sales growth reflects increased revenue on the DD(X) program, included in the Surface Combatant business area; and on the LPD program, included in the Amphibious and Auxiliary business area. Operating margin for the third quarter of 2003 was $83 million compared with $50 million for the third quarter of 2002, which included an $87 million pre-tax charge to operating margin on the commercial Polar Tanker program partially offset by a $69 million positive pre-tax adjustment on the cancelled commercial cruise ship program.
Information Technology sales for the third quarter of 2003 increased 9 percent to $1.2 billion from $1.1 billion in the third quarter of 2002 primarily due to strong growth in the Government Information Technology and Enterprise Information Technology business areas. Operating margin for the third quarter of 2003 was $74 million compared with $91 million for the third quarter of 2002. Last year's results included a $20 million positive pre-tax adjustment resulting from the restructuring of a contract included in the Technology Services business area.
Mission Systems sales and operating margin for the third quarter of 2003 were $1.0 billion and $66 million, respectively, led by its Command, Control & Intelligence business area.
Integrated Systems sales rose 21 percent in the third quarter of 2003 to $974 million from $807 million for the third quarter of 2002, primarily reflecting increased F-35 and Global Hawk sales. Operating margin for the third quarter increased 10 percent to $92 million from $84 million for the third quarter of 2002, primarily due to increased E-2C and B-2 operating margin, partially offset by lower Joint STARS operating margin due to reduced volume.Space Technology sales and operating margin for the third quarter of 2003 were $742 million and $53 million, respectively.
Cash and Debt Measurements
Northrop Grumman's total debt at Sept. 30, 2003, declined to $6.4 billion from $9.6 billion at Dec. 31, 2002, primarily reflecting the successful execution of the company's plan to reduce acquired fixed-rate TRW debt. Interest expense for the third quarter of 2003 increased to $118 million from $106 million for the 2002 third quarter. Net debt to total capital at Sept. 30, 2003, decreased to 29 percent from 34 percent at the end of 2002. The company's cash provided by operations for the 2003 third quarter totaled $400 million. Cash provided by operations for the 2002 third quarter was $459 million. During the third quarter the company repurchased 550,000 shares of its common stock at an average price of approximately $86 per share.
About Northrop Grumman
Northrop Grumman Corporation is a $25 billion global defense company headquartered in Los Angeles, Calif. Northrop Grumman provides a broad array of technologically advanced, innovative products, services and solutions in systems integration, defense electronics, information technology, advanced aircraft, shipbuilding and space technology. The company employs approximately 120,000 employees and operates in all 50 states and 25 countries and serves U.S. and international military, government and commercial customers.
Note: Certain statements and assumptions in this release contain or are based on "forward-looking" information (that Northrop Grumman 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," "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 becomes available or estimates change after the date of this release.
Such "forward-looking" information is based on numerous assumptions and uncertainties, many of which are outside Northrop Grumman's control. These include Northrop Grumman's ability to successfully integrate its acquisitions including TRW, to realize the preliminary estimates for accounting conformance and purchase accounting valuations for TRW which will be finalized in the 2003 fourth quarter and which may materially vary from these estimates, 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 and appeals, environmental remediation, divestitures of businesses, successful reduction of debt, successful negotiation of contracts with labor unions, effective tax rates and timing and amounts of tax payments, and anticipated costs of capital investments, among other things. Northrop Grumman'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, Northrop Grumman'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; 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; 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 and related technologies, as well as other economic, political and technological risks and uncertainties and other risk factors set out in Northrop Grumman's filings from time to time with the Securities and Exchange Commission, including, without limitation, Northrop Grumman reports on Form 10-K and Form 10-Q.
Northrop Grumman will webcast its security analyst conference call at 2 p.m. EST Oct. 29, 2003. A live audio broadcast of the conference call will be available on the investor relations page of the company's Web site at http://www.northropgrumman.com.
NORTHROP GRUMMAN CORPORATION SCHEDULE 1
FINANCIAL HIGHLIGHTS
($ in millions, except per share)
THIRD QUARTER FIRST NINE MONTHS
---------------- --------------------
2003 2002 2003 2002
------ ------ ------- -------
OPERATING RESULTS HIGHLIGHTS
Total acquisitions $ 4,291 $ 4,012 $ 16,621 $ 13,463
Total sales 6,619 4,214 19,112 12,376
Total operating margin 431 313 1,150 980
Income from continuing
operations before
cumulative effect
of accounting change 224 141 605 471
Net income (loss) 184 (59) 642 (160)
Diluted earnings per share
from continuing operations
before cumulative effect
of accounting change 1.21 1.17 3.21 3.96
Diluted earnings (loss) per
share 1.00 (.56) 3.41 (1.56)
Net cash provided by
operating activities 400 459 25 932
---------------------------------------------------------------------
SEP 30, DEC 31,
2003(1) 2002*
-------- ---------
BALANCE SHEET HIGHLIGHTS
Cash and cash equivalents $ 359 $ 1,412
Accounts receivable 2,987 2,949
Inventoried costs 1,125 1,091
Property, plant and
equipment, net 3,921 3,605
Total debt 6,413 9,623
Net debt (2) 6,054 8,211
Mandatorily redeemable
preferred stock 350 350
Shareholders' equity 14,763 14,322
Total assets 33,661 42,326
Net debt to capitalization
ratio(3) 29% 34%
---------------------------------------------------------------------
* Certain prior year amounts have been reclassified to conform to
the 2003 presentation.
(1) Includes preliminary estimates of the fair market value of the
assets acquired and liabilities assumed and the related
allocations of the purchase price related to the TRW
acquisition. Final valuations and allocations, which are
expected to be completed by December 31, 2003, may differ
from the amounts included herein.
(2) Total debt less cash and cash equivalents.
(3) Net debt divided by the sum of shareholders' equity and
total debt.
NORTHROP GRUMMAN CORPORATION SCHEDULE 2
OPERATING RESULTS
($ in millions, except per share)
CONTRACT FUNDED
ACQUISITIONS ORDER BACKLOG
------------------------------------ ---------------
THIRD QUARTER FIRST NINE MONTHS SEPTEMBER 30
--------------- ------------------- --------------
2003 2002 2003 2002 2003 2002
------ ------ ------ ------ ------ ------
Electronic
Systems $1,175 $1,862 $4,089 $4,451 $6,212 $6,536
Ships 625 752 2,350 3,806 8,765 10,243
Information
Technology 1,161 1,024 3,565 3,101 1,709 1,474
Mission
Systems 950 -- 2,955 -- 2,670 --
Integrated
Systems 314 484 2,821 2,374 3,781 3,454
Space
Technology 314 -- 1,724 -- 909 --
Intersegment
Eliminations (248) (110) (883) (269) (484) (219)
------ ------ ------ ------ ------ ------
Total
Segments $4,291 $4,012 $16,621 $13,463 $23,562 $21,488
====== ====== ======= ======= ======= =======
NET SALES OPERATING MARGIN
---------------------------- --------------------
THIRD FIRST NINE THIRD FIRST NINE
QUARTER MONTHS QUARTER MONTHS
------------ ------------ ---------- -----------
2003 2002 2003 2002 2003 2002* 2003 2002*
---- ---- ---- ---- ---- ---- ---- ----
Electronic
Systems $1,522 $1,311 $4,372 $3,811 $162 $73 $431 $272
Ships 1,366 1,101 3,946 3,335 83 50 181 202
Information
Technology 1,198 1,098 3,445 3,063 74 91 203 182
Mission
Systems 1,021 -- 3,033 -- 66 -- 196 --
Integrated
Systems 974 807 2,778 2,443 92 84 302 277
Space
Technology 742 -- 2,123 -- 53 -- 140 --
Intersegment
Eliminations (204) (103) (585) (276)
------ ------ ------- ------- ---- --- ---- ----
Total
Segments $6,619 $4,214 $19,112 $12,376 530 298 1,453 933
====== ====== ======= =======
Reconciliation to operating margin (1)
Unallocated expenses (17) (30) (69) (83)
Pension (expense) income (143) 22 (423) 68
Reversal of CAS pension
expense included above 64 25 201 74
Reversal of royalty income
included above (3) (2) (12) (12)
---- ---- ----- ---
Operating margin 431 313 1,150 980
Interest income 16 2 45 6
Interest expense (118) (106) (381) (320)
Other, net (5) (11) 23 9
---- ---- ---- ----
Income from continuing
operations before
income taxes and
cumulative effect of
accounting change 324 198 837 675
Federal and foreign income
taxes 100 57 232 204
---- ---- ---- -----
Income from continuing
operations before cumulative
effect of accounting change 224 141 605 471
(Loss) income from discontinued
operations, net of tax (46) (178) 36 (177)
Gain (loss) on disposal of
discontinued operations,
net of tax 6 (22) 1 (22)
----- ---- ---- ----
Income (loss) before cumulative
effect of accounting change 184 (59) 642 272
Cumulative effect of
accounting change -- -- -- (432)
---- ---- ---- ----
Net income (loss) $184 $(59) $642 $(160)
==== ==== ==== =====
Diluted earnings (loss) per share
From continuing operations
before cumulative effect of
accounting change $1.21 $1.17$ 3.21 $ 3.96
(Loss) income from discontinued
operations, net of tax (.24)(1.54) .20 (1.55)
Gain (loss) on disposal of
discontinued operations, net of tax .03 (.19) -- (.19)
---- ---- ---- ----
Before cumulative effect of
accounting change 1.00 (.56) 3.41 2.22
Cumulative effect of accounting change -- -- -- (3.78)
---- ---- ---- ----
Diluted earnings (loss) per share $1.00 $(.56)$3.41 $(1.56)
==== ==== ==== =====
----------------------------------------------------------------------
* Certain prior year amounts have been reclassified to conform to the
2003 presentation.
(1) Pension expense is included in determining the sectors' operating
margin to the extent that the cost is currently recognized under
government Cost Accounting Standards (CAS). In order to reconcile
from segment operating margin to total company operating margin,
these amounts are reported under the caption "Reversal of CAS
pension expense included above." Total GAAP pension income or
expense is reported separately as a reconciling item under the
caption "Pension (expense) income." The reconciling item captioned
"Unallocated expenses" includes unallocated corporate expenses,
state tax provisions, and other retiree benefit expenses.
NORTHROP GRUMMAN CORPORATION SCHEDULE 3
ADDITIONAL SEGMENT INFORMATION
($ in millions)
SALES BY BUSINESS AREA
WITHIN SEGMENTS THIRD QUARTER FIRST NINE MONTHS
-------------- -----------------
2003 2002* 2003 2002*
-------- -------- -------- --------
Electronic Systems
Aerospace Electronic
Systems $ 473 $ 371 $ 1,310 $ 1,080
C4ISR&N 311 321 904 842
Defensive Electronic
Systems 237 179 643 563
Navigation Systems 173 159 538 484
Space Systems 128 103 376 324
Other 200 178 601 518
-------- -------- -------- --------
1,522 1,311 4,372 3,811
-------- -------- -------- --------
Ships
Aircraft Carriers 462 518 1,460 1,488
Surface Combatants 405 216 1,097 596
Amphibious & Auxiliary 271 196 739 585
Submarines 157 130 449 415
Commercial & International 37 15 92 169
Services & Other 34 56 109 165
Intrasegment Eliminations -- (30) -- (83)
-------- -------- -------- --------
1,366 1,101 3,946 3,335
-------- -------- -------- --------
Information Technology
Government Information
Technology 759 696 2,226 1,972
Enterprise Information
Technology 225 195 587 500
Technology Services 175 172 517 486
Commercial Information
Technology 67 54 200 160
Intrasegment Eliminations (28) (19) (85) (55)
------- -------- -------- --------
1,198 1,098 3,445 3,063
-------- -------- -------- --------
Mission Systems
Command, Control &
Intelligence 383 1,150
Missile Systems 271 785
Federal & Civil
Information
Systems 198 606
Technical Services 179 521
Intrasegment Eliminations (10) (29)
------- --------
1,021 3,033
-------- --------
Integrated Systems
Air Combat Systems 644 465 1,754 1,422
Airborne Early Warning/
Electronic Warfare 202 200 629 555
Airborne Ground
Surveillance/
Battle Management 128 140 397 466
Intrasegment Eliminations -- 2 (2) --
-------- -------- -------- --------
974 807 2,778 2,443
-------- -------- -------- --------
Space Technology
Intelligence,
Surveillance,
& Reconnaissance 221 626
Civil Space 145 390
Satellite Communications 110 358
Missile Defense 100 287
Radio Systems 106 286
Technology 60 176
-------- --------
742 2,123
-------- --------
Intersegment Eliminations (204) (103) (585) (276)
-------- -------- -------- --------
Total Sales $ 6,619 $ 4,214 $ 19,112 $ 12,376
======== ======== ======== ========
* Certain prior year amounts have been reclassified to conform to
the 2003 presentation.
---------------------------------------------------------------------
AMORTIZATION OF PURCHASED INTANGIBLES
Electronic Systems $ 21 $ 21 $ 64 $ 64
Ships 10 11 31 33
Information Technology 5 5 15 15
Mission Systems 9 - 25 -
Integrated Systems 4 4 11 11
Space Technology 8 - 25 -
-------- -------- --------- ----------
$ 57 $ 41 $ 171 $ 123
======== ======== ========= ==========
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