Earnings per Share from Continuing Operations Increase 25 Percent to $1.26 Income from Continuing Operations Increases 20 Percent to $442 Million Earnings per Share Increase 23 Percent to $1.23 Net Income Increases 17 Percent to $430 Million Cash from Continuing Operations of $657 Million Contract Acquisitions Increase 52 Percent to $8.1 Billion 2006 Guidance for Sales Lowered to Approximately $30.5 Billion 2006 Guidance for Earnings per Share Increased to $4.35 to $4.45
LOS ANGELES -- July 27, 2006 -- Northrop Grumman Corporation (NYSE:NOC) reported second quarter 2006 income from continuing operations of $442 million, or $1.26 per diluted share, compared with $369 million, or $1.01 per diluted share, for the same period of 2005. Second quarter 2006 sales were $7.6 billion compared with $7.8 billion in the second quarter of 2005. Second quarter 2006 and second quarter 2005 operating results reflect the reclassification of certain operations from continuing to discontinued operations.
"With this quarter's solid results, including contract acquisition growth of more than 50 percent, we continue to expect double-digit growth in 2006 earnings per share driven by expanding operating margin and a lower share count," said Ronald D. Sugar, Northrop Grumman chairman and chief executive officer. "We are raising our 2006 earnings per share estimate to a range of $4.35 to $4.45, and we continue to expect cash from operations of $2.3 to $2.6 billion. Electronics maintained their strong operating margin rate, and Information & Services, Aerospace and Ships all posted double-digit growth in operating margins and substantially higher margin rates, reflecting our continued focus on operating performance."
The company's second quarter 2006 segment operating margin increased 12 percent to $742 million from $664 million in the second quarter of 2005. Operating margin increased 10 percent to $682 million from $621 million in the second quarter of 2005.
Net interest expense for the 2006 second quarter was $84 million compared with $69 million in the prior year period. Net interest expense in the second quarter of 2005 included interest income recognized for a state tax refund related to research and development tax credits.
Other income/expense for the 2006 second quarter was an expense of $9 million compared with income of $7 million in the prior year period. The change was primarily due to a $13 million write-down of marketable securities in the 2006 second quarter.
The effective tax rate applied to income from continuing operations for the 2006 second quarter was 25 percent compared with 34 percent in the 2005 second quarter. During the 2006 second quarter, the company received final approval for the agreement previously reached with the Internal Revenue Service regarding audits of the company's B-2 program in years 1997 through 2000. As a result, the company recognized tax benefits of $48 million in the 2006 second quarter due to the reversal of previously established expense provisions. The company now expects its 2006 tax rate to range between 31 and 32 percent, compared with its prior guidance of approximately 33 percent.
Net income for the 2006 second quarter increased 17 percent to $430 million, or $1.23 per diluted share, from $367 million, or $1.00 per diluted share, for the same period of 2005. Earnings per share are based on weighted average diluted shares outstanding of 350.1 million for the second quarter of 2006 and 365.2 million for the second quarter of 2005.
Contract acquisitions increased 52 percent to $8.1 billion in the second quarter of 2006 from $5.4 billion for the same period of 2005. Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, was $58.1 billion at June 30, 2006 compared with $56.9 billion at June 30, 2005.
Cash Measurements, Debt and Share Repurchases
Cash provided by continuing operations in the second quarter of 2006 totaled $657 million compared with cash provided by continuing operations of $823 million in the second quarter of 2005. Capital spending totaled $151 million in the 2006 second quarter, including $42 million for Hurricane Katrina capital expenditures at Ships, compared with total capital spending of $149 million in the 2005 second quarter. Since Aug. 29, 2005, hurricane-related insurance recoveries for damage, repair and restoration have totaled $233 million compared with total hurricane-related expenditures of $311 million.
Cash and cash equivalents were $751 million at June 30, 2006 compared with $1.6 billion at Dec. 31, 2005. During the first six months of the year the company reduced total debt by approximately $510 million and repurchased $825 million of its common stock (including approximately 11.6 million shares under an Accelerated Share Repurchase agreement).
Under the most recent $1.5 billion share repurchase authorization announced in October 2005, $176 million remains. The company expects to complete the repurchase of shares under the current authorization by the end of 2006. Common shares outstanding totaled 344.4 million at June 30, 2006.
Reclassification of Reseller Business to Discontinued Operations
In January 2006, the company announced its decision to exit the reseller business (previously reported under Information Technology as the Enterprise Information Technology business area). The shutdown of this business was completed in the 2006 second quarter, and the results of this business have been reclassified to discontinued operations.
Schedule 4 of this earnings release provides previously reported quarterly financial results and restated results reflecting the reclassification of the reseller business from continuing to discontinued operations.
2006 Guidance
For 2006, the company expects sales of approximately $30.5 billion, compared with prior guidance of approximately $31 billion. The company expects earnings per share from continuing operations of $4.35 to $4.45, versus prior guidance of $4.25 to $4.40 per share. The company continues to expect cash from operations of $2.3 billion to $2.6 billion.
Business Results
As was previously announced, beginning with the first quarter of 2006 the company has implemented enhancements in the reporting of its financial results. The company categorizes its seven reporting segments into four businesses. The results of the Mission Systems, Information Technology and Technical Services segments are aggregated as Information & Services. The results of the Integrated Systems and Space Technology segments are aggregated as Aerospace and the Electronic Systems segment is reported as Electronics. The Newport News and Ship Systems sectors are reported as Ships.
The company also revised its reporting of intercompany margin recognition and elimination for the company's operating segments. The operating information shown below includes intersegment sales and operating margin that eliminate in consolidation, as shown in Schedule 2.
Information & Services
Second Quarter ($ Millions)
2006 2005
Operating % of Operating % of
Sales Margin Sales Sales Margin Sales
Mission Systems $1,338 $132 9.9% $1,271 $99 7.8%
Information
Technology 993 86 8.7% 968 82 8.5%
Technical Services 300 16 5.3% 286 14 4.9%
$2,631 $234 8.9% $2,525 $195 7.7%
Information & Services sales increased $106 million, or 4 percent, during the second quarter of 2006 due to higher sales in all three of its operating segments. The sales increase at Mission Systems includes higher volume in Command, Control & Intelligence Systems, Technical & Management Services, and Missile Systems programs. Higher sales in Information Technology were due to increased activity on Defense and Intelligence programs, which were partially offset by lower sales in Civilian Agencies programs.
The 20 percent year-over-year increase in Information & Services operating margin includes higher operating margin from all three segments, but was primarily driven by a 33 percent increase in Mission Systems second quarter operating margin. The increase at Mission Systems reflects improved program performance and lower amortization expense for purchased intangibles than in the prior year period.
Aerospace
Second Quarter ($ Millions)
2006 2005
Operating % of Operating % of
Sales Margin Sales Sales Margin Sales
Integrated Systems $1,397 $142 10.2% $1,391 $117 8.4%
Space Technology 865 81 9.4% 875 74 8.5%
$2,262 $223 9.9% $2,266 $191 8.4%
Second quarter 2006 Aerospace sales were comparable to the second quarter of 2005. Sales at Integrated Systems increased $6 million due to higher volume on the F/A-18 and F-35 programs, substantially offset by lower volume on the E-2D Advanced Hawkeye, E-2C Multi-year and Joint STARS programs. Space Technology sales decreased 1 percent due to lower volume for restricted programs, which was partially offset by higher sales in Satellite Communications programs.
Aerospace second quarter 2006 operating margin increased 17 percent from the second quarter of 2005 and includes higher operating margin at both Integrated Systems and Space Technology. Integrated Systems operating margin increased 21 percent over the prior year period due to improved program performance. Space Technology operating margin increased 9 percent primarily due to performance improvements in Software Defined Radios.
Electronics
Second Quarter ($ Millions)
2006 2005
Operating % of Operating % of
Sales Margin Sales Sales Margin Sales
$1,635 $181 11.1% $1,769 $199 11.2%
Electronics second quarter 2006 sales decreased 8 percent from the second quarter of 2005 primarily due to lower production rates on several programs. Second quarter sales for the F-16 Block 60 and MESA radar programs declined as hardware production for these programs winds down. Longbow missile sales were also lower as this program nears completion. Second quarter 2006 sales also reflect the divestiture of Interconnect Technologies.
Electronics second quarter 2006 operating margin decreased 9 percent from the second quarter of 2005, corresponding to the decreased sales volume, with improved program performance in some areas and lower expense for amortization of purchased intangibles offsetting forward loss provisions on two fixed-price development programs.
Ships
Second Quarter ($ Millions)
2006 2005
Operating % of Operating % of
Sales Margin Sales Sales Margin Sales
$1,437 $129 9.0% $1,587 $102 6.4%
Ships second quarter 2006 sales decreased 9 percent from the second quarter of 2005 and included higher sales in submarine and carrier programs, which were offset by lower volume on the DDG 1000 program (formerly known as the DD(X) program) and hurricane-related work delays on the LPD, LHD and DDG programs.
Ships operating margin increased 26 percent from the second quarter of 2005 primarily due to material incentives and improved performance for the Virginia-class Block II submarine program.
Second Quarter 2006 Highlights
* The U.S. Navy awarded Northrop Grumman a $2.49 billion shipbuilding
contract for the construction and further development of two San
Antonio (LPD 17)-class amphibious transport dock ships, LPD 22 and
LPD 23, as well as the purchase of long-lead materials and equipment
for a third ship, LPD 24.
* The U.S. Internal Revenue Service selected a team led by Northrop
Grumman as one of 21 companies to provide systems support, security
and business services for the U.S. Department of the Treasury and
other federal agencies. The indefinite delivery/indefinite quantity
contract is part of the Total Information Processing Support
Services-3 (TIPSS-3) program, funded at a maximum of $3 billion,
collectively.
* The U.S. Navy awarded Northrop Grumman a sole-source, indefinite
delivery/indefinite quantity contract for full-rate production
acquisition of new EA-6B Prowler Improved Capability (ICAP) III
systems. Under this contract, the Navy has made an initial $73
million purchase.
* The Federal Aviation Administration (FAA) selected Northrop
Grumman for a $40 million award to modify transmitters on 135
ASR-9 air traffic control radars. This is the latest in the
FAA's multi-phase, ASR-9 sustainment program, intended to extend
the service life of the ASR-9
through the year 2025.
* Northrop Grumman celebrated a significant chapter in its history
as it delivered its first submarine to the U.S. Navy in a decade,
the USS Texas, on June 20, 2006.
* Northrop Grumman delivered the sixth RQ-4 Global Hawk unmanned
aerial vehicle to the U.S. Air Force on April 5, increasing the
service's intelligence, surveillance and reconnaissance
capabilities.
* Northrop Grumman opened its Unmanned Systems Center production
facility in Moss Point, Miss., where the MQ-8B Fire Scout and
portions of the RQ-4B Global Hawk unmanned aerial vehicles will
be produced.
* Northrop Grumman's board of directors approved a 15 percent
increase of the common stock quarterly dividend to $0.30 per
share from $0.26 per share.
About Northrop Grumman
Northrop Grumman Corporation is a global defense company headquartered in Los Angeles, Calif. Northrop Grumman provides technologically advanced, innovative products, services and solutions in systems integration, defense electronics, information technology, advanced aircraft, shipbuilding and space technology. With more than 120,000 employees and operations in all 50 states and 25 countries, Northrop Grumman serves U.S. and international military, government and commercial customers.
Northrop Grumman will webcast its earnings conference call at 12 noon EDT on July 27, 2006. 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, and cash flow, 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 and appeals; hurricane recoveries; 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; 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, including recent hurricanes affecting the Company's Gulf Coast shipyards and the associated risks underlying the Company's assumptions regarding achieving expected learning-curve progress, 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, 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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NORTHROP GRUMMAN CORPORATION SCHEDULE 1
FINANCIAL HIGHLIGHTS
($ in millions, except per share)
(unaudited)
SECOND QUARTER FIRST SIX MONTHS
------------------ ------------------
2006 2005 (d) 2006 2005 (d)
-------- -------- -------- --------
OPERATING RESULTS HIGHLIGHTS
Total contract
acquisitions (a) $ 8,133 $ 5,368 $20,383 $13,075
Total sales 7,601 7,807 14,694 15,109
Total operating margin 682 621 1,286 1,216
Income from continuing
operations 442 369 804 767
Net income 430 367 787 776
Diluted earnings per share
from continuing
operations 1.26 1.01 2.29 2.10
Diluted earnings per share 1.23 1.00 2.24 2.12
Cash provided by
continuing operations 657 823 624 1,095
Net cash provided by operating
activities 638 813 523 1,076
---------------------------------------------------------------------
JUNE 30, DEC 31,
2006 2005 (d)
-------- --------
BALANCE SHEET HIGHLIGHTS
Cash and cash equivalents $ 751 $ 1,605
Accounts receivable, net 3,907 3,553
Inventoried costs, net 1,296 1,164
Property, plant, and
equipment, net 4,403 4,403
Total debt 4,635 5,145
Net debt (b) 3,884 3,540
Mandatorily redeemable
preferred stock 350 350
Shareholders' equity 17,046 16,828
Total assets 33,676 34,214
Net debt to capitalization
ratio (c) 18% 16%
---------------------------------------------------------------------
(a) Contract acquisitions represent orders received during the period
for which funding has been contractually obligated by the
customer.
(b) Total debt less cash and cash equivalents.
(c) Net debt divided by the sum of shareholders' equity and total
debt.
(d) Certain prior year amounts have been reclassified to conform to
the 2006 presentation.
NORTHROP GRUMMAN CORPORATION SCHEDULE 2
OPERATING RESULTS
($ in millions, except per share)
(unaudited)
SECOND QUARTER FIRST SIX MONTHS
------------------ ------------------
2006 2005 (a) 2006 2005 (a)
-------- -------- -------- --------
Sales and Service
Revenues
Information & Services
Mission Systems $ 1,338 $ 1,271 $ 2,602 $ 2,525
Information Technology 993 968 1,941 1,847
Technical Services 300 286 575 560
-------- -------- -------- --------
Total Information &
Services 2,631 2,525 5,118 4,932
Aerospace
Integrated Systems 1,397 1,391 2,834 2,678
Space Technology 865 875 1,720 1,738
-------- -------- -------- --------
Total Aerospace 2,262 2,266 4,554 4,416
Electronics 1,635 1,769 3,144 3,316
Ships 1,437 1,587 2,570 3,101
Other 11 22
Intersegment Eliminations (364) (351) (692) (678)
-------- -------- -------- --------
$ 7,601 $ 7,807 $ 14,694 $ 15,109
======== ======== ======== ========
Operating Margin and
Net Income
Information & Services
Mission Systems $ 132 $ 99 $ 249 $ 192
Information Technology 86 82 170 158
Technical Services 16 14 29 26
-------- -------- -------- --------
Total Information &
Services 234 195 448 376
Aerospace
Integrated Systems 142 117 291 259
Space Technology 81 74 152 141
-------- -------- -------- --------
Total Aerospace 223 191 443 400
Electronics 181 199 358 361
Ships 129 102 197 209
Other (5) (6)
Intersegment
Eliminations (25) (18) (51) (38)
-------- -------- -------- --------
Total segment
operating margin (b) 742 664 1,395 1,302
Reconciliation to
operating margin
Unallocated expenses (46) (42) (81) (69)
Net pension (expense)
income (c) (12) 2 (22) (9)
Reversal of royalty
income included above (2) (3) (6) (8)
-------- -------- -------- --------
Operating margin 682 621 1,286 1,216
Interest income 3 25 16 39
Interest expense (87) (94) (177) (189)
Other, net (9) 7 (10) 89
-------- -------- -------- --------
Income from continuing
operations before
income taxes 589 559 1,115 1,155
Federal and foreign
income taxes 147 190 311 388
-------- -------- -------- --------
Income from continuing
operations 442 369 804 767
Discontinued operations,
net of tax (12) (2) (17) 9
-------- -------- -------- --------
Net income $ 430 $ 367 $ 787 $ 776
======== ======== ======== ========
Weighted average diluted
shares outstanding, in
millions 350.1 365.2 351.8 365.7
Diluted Earnings (Loss)
Per Share
Continuing operations $ 1.26 $ 1.01 $ 2.29 $ 2.10
Discontinued
operations (.03) (.01) (.05) .02
-------- -------- -------- --------
Diluted earnings per
share $ 1.23 $ 1.00 $ 2.24 $ 2.12
======== ======== ======== ========
---------------------------------------------------------------------
(a) Certain prior year amounts have been reclassified to conform to
the 2006 presentation.
(b) Management uses segment operating margin as an internal measure of
financial performance for the individual business segments. This
measure is not in accordance with accounting principles generally
accepted in the United States of America (GAAP).
(c) Net pension (expense) income reflects pension expense determined
in accordance with GAAP less the pension expense included in the
segment cost of sales to the extent that these costs are currently
recognized under U.S. Government Cost Accounting Standards.
NORTHROP GRUMMAN CORPORATION SCHEDULE 3
ADDITIONAL SEGMENT INFORMATION
($ in millions)
(unaudited)
CONTRACT FUNDED
ACQUISITIONS(a) BACKLOG(b)
----------------------------------- -----------------
SECOND QUARTER FIRST SIX MONTHS June 30,
----------------- ----------------- -----------------
2006 2005 (c) 2006 2005 (c) 2006 2005 (c)
-------- -------- -------- -------- -------- --------
Information &
Services
Mission
Systems $ 1,179 $ 1,133 $ 2,907 $ 2,363 $ 2,781 $ 2,896
Information
Technology 926 1,198 2,133 2,159 2,435 2,364
Technical
Services 511 175 962 444 763 374
-------- -------- -------- -------- -------- --------
Total Information
& Services 2,616 2,506 6,002 4,966 5,979 5,634
Aerospace
Integrated
Systems 869 662 3,604 2,587 4,515 4,585
Space
Technology 730 737 2,371 1,610 1,650 1,621
-------- -------- -------- -------- -------- --------
Total Aerospace 1,599 1,399 5,975 4,197 6,165 6,206
Electronics 1,612 1,389 3,458 3,059 6,671 6,528
Ships 2,740 321 5,794 1,487 9,353 7,551
Other 13 (5) 28 33
Intersegment
Eliminations (434) (260) (841) (662) (619) (583)
-------- -------- -------- -------- -------- --------
Total $ 8,133 $ 5,368 $ 20,383 $ 13,075 $ 27,549 $ 25,369
======== ======== ======== ======== ======== ========
TOTAL BACKLOG, June 30, 2006
------------------------------
TOTAL
FUNDED UNFUNDED(d) BACKLOG
-------- ---------- --------
Information &
Services
Mission
Systems $ 2,781 $ 7,505 $ 10,286
Information
Technology 2,435 2,357 4,792
Technical
Services 763 525 1,288
-------- -------- --------
Total Information
& Services 5,979 10,387 16,366
Aerospace
Integrated
Systems 4,515 6,255 10,770
Space
Technology 1,650 8,602 10,252
-------- -------- --------
Total Aerospace 6,165 14,857 21,022
Electronics 6,671 1,737 8,408
Ships 9,353 3,604 12,957
Intersegment
Eliminations (619) (619)
-------- -------- --------
Total $ 27,549 $ 30,585 $ 58,134
======== ======== ========
(a) Contract acquisitions represent orders received during the
period for which funding has been contractually obligated by the
customer.
(b) Funded backlog represents unfilled orders for which funding has
been contractually obligated by the customer.
(c) Certain prior year amounts have been reclassified to conform to
the 2006 presentation.
(d) 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 contract awards.
NORTHROP GRUMMAN CORPORATION SCHEDULE 4
SUMMARY OPERATING RESULTS
DISCONTINUED OPERATIONS RECLASSIFICATION
($ in millions, except per share)
(unaudited)
2005 2006
-----------------------------------------------------
Three
Months
Three Months Ended Total Ended
Mar 31 Jun 30 Sep 30 Dec 31 Year Mar 31
-----------------------------------------------------
Sales and
Service
Revenues
As reported $ 7,453 $ 7,962 $ 7,446 $ 7,860 $30,721 $7,184
EIT (a) (151) (155) (155) (193) (654) (91)
-----------------------------------------------------
Restated
sales and
service
revenues $ 7,302 $ 7,807 $ 7,291 $ 7,667 $30,067 $ 7,093
=====================================================
Segment
Operating
Margin (b)
As reported $ 638 $ 659 $ 481 $ 621 $ 2,399 $ 644
EIT (a) 5 5 5 15 9
-----------------------------------------------------
Restated
segment
operating
margin $ 638 $ 664 $ 486 $ 626 $ 2,414 $ 653
=====================================================
Income From
Continuing
Operations,
Net of Tax
As reported $ 398 $ 366 $ 288 $ 331 $ 1,383 $ 357
EIT, net of
tax (a) 3 3 3 9 5
-----------------------------------------------------
Restated
income from
continuing
operations,
net of tax $ 398 $ 369 $ 291 $ 334 $ 1,392 $ 362
=====================================================
Diluted
Earnings Per
Share from
Continuing
Operations
As reported $ 1.08 $ 1.00 $ .80 $ .92 $ 3.81 $ 1.02
EIT, net of
tax (a) .01 .01 .02 .01
-----------------------------------------------------
Restated
diluted
earnings
per share
from
continuing
operations $ 1.08 $ 1.01 $ .80 $ .93 $ 3.83 $ 1.03
=====================================================
Weighted
Average
Diluted
Shares
Outstanding,
in millions 367.0 365.2 362.2 358.1 363.2 350.8
---------------------------------------------------------------------
(a) The EIT adjustment reflects the reclassification of the
operating results of the Enterprise Information Technology
business area formerly reported in the Information Technology
segment. The business was shut down during the second quarter of
2006 and all prior financial information has been reclassified
to reflect the business as discontinued operations.
(b) Non-GAAP measure. Management uses segment operating margin as an
internal measure of financial performance for the individual
business segments.