Northrop Grumman Reports Second Quarter 2011 Financial Results

• Q2 EPS from Continuing Operations of $1.81
• 2011 Guidance for EPS from Continuing Operations Increased to $6.75 to $6.90 from $6.50 to $6.70
• Sales Total $6.56 Billion; Company Now Expects 2011 Sales of Approximately $27 Billion

LOS ANGELES, July 27, 2011 (GLOBE NEWSWIRE) -- Northrop Grumman Corporation (NYSE:NOC) reported that second quarter 2011 earnings from continuing operations totaled $520 million, or $1.81 per diluted share, compared with $740 million, or $2.44 per diluted share in the second quarter of 2010. The 2010 second quarter included a tax benefit of $298 million, or $0.98 per diluted share.

Second quarter 2011 sales totaled $6.56 billion compared with $7.26 billion in the prior year period. New business awards for the 2011 second quarter totaled $5.1 billion, and total backlog as of June 30, 2011, was $41.8 billion. Lower second quarter 2011 sales and the total backlog reflect the impact of lower U.S. Department of Defense investment outlays (including announced force reductions in overseas contingency operations), the company's reduced participation in the Nevada National Security Site joint venture (NSTec), and delayed awards for manned aircraft programs. Second quarter 2010 sales included NSTec revenue of $152 million, and total backlog reflects an adjustment of $2.2 billion, for the reduction in the company's NSTec joint venture participation and the restructuring of the National Polar-orbiting Operational Environmental Satellite System (NPOESS).

"Our focus on performance, our portfolio and effective cash deployment continues to generate value in a challenging budget environment. While sales for the quarter were impacted by several factors, the strong margin rates generated by our businesses largely offset the effects of lower sales. Based on our year-to-date results we are increasing our EPS guidance and maintaining our guidance for cash generation, despite a reduced top line outlook that reflects the realities of our current budget environment," said Wes Bush, chairman, chief executive officer and president.

Table 1 - Financial Highlights

Second quarter 2011 operating income increased $91 million or 12 percent, and as a percent of sales increased 250 basis points to 12.8 percent. The improvement over the prior year principally reflects a $98 million increase in net pension income. Second quarter 2011 segment operating income was comparable to the prior year period at $784 million and as a percent of sales improved 110 basis points to 12 percent. 

Interest expense for the 2011 second quarter declined to $53 million due to the issuance of $1.5 billion of lower coupon debt in the 2010 fourth quarter and the retirement of $1.4 billion of higher coupon debt. 

Federal and foreign income taxes totaled $268 million in the second quarter of 2011 compared to a benefit of $65 million in the prior year period. Second quarter 2010 income taxes included a $298 million benefit primarily related to final approval by the Internal Revenue Service (IRS) and the U.S. Congressional Joint Committee on Taxation of the IRS' examination of tax returns for the years 2004 through 2006. The effective tax rate for the 2011 second quarter was 34 percent, and adjusted for the $298 million settlement, the effective tax rate for the second quarter of 2010 would have been 34.5 percent. 

Second quarter 2011 net earnings totaled $520 million, or $1.81 per diluted share, compared with $711 million, or $2.34 per diluted share, in the second quarter of 2010. Results for both periods reflect the spin-off of Huntington Ingalls Industries, Inc. (HII), the company's former shipbuilding business, effective March 31, 2011; shipbuilding financial results are reported as discontinued operations for all periods presented. Second quarter 2011 diluted earnings per share are based on 287.2 million weighted average shares outstanding compared with 303.8 million shares in the second quarter of 2010.

Table 2 - Cash Flow Highlights 

Cash provided by continuing operations before discretionary pension contributions totaled $378 million in the 2011 second quarter compared with $828 million in the second quarter of 2010. Cash provided by continuing operations before discretionary pension contributions in the first six months of 2011 increased 21 percent to $490 million from $406 million in the first six months of 2010. 

Free cash flow used in continuing operations totaled $128 million in the 2011 second quarter compared with free cash flow of $476 million in the prior year period. The change in free cash flow in the second quarter of 2011 reflects higher working capital and a higher discretionary pension contribution than in the prior year period. Second quarter 2011 cash provided by continuing operations included a $500 million discretionary contribution to the company's pension plans compared with a $300 million in the prior year period. 

Table 3 – 2011 Guidance Updated

Based on year-to-date results, the company now expects 2011 sales of approximately $27 billion and earnings from continuing operations of $6.75 to $6.90 per diluted share. The increase in expected 2011 earnings per share reflects lower sales, a higher expected segment margin rate and net pension income of approximately $400 million. 

Table 4 - Cash Measurements, Debt and Capital Deployment

Changes in cash and cash equivalents include the following items for cash from operations, investing and financing through June 30, 2011:

Operations

• $500 million discretionary pension contributions 
• $78 million provided by continuing operations after discretionary pension contributions noted above
• $613 million for taxes

Investing

• $216 million for capital expenditures

Financing

• $1 billion for repurchases of common stock   
• $86 million in proceeds from exercises of stock options and issuance of common stock 
• $750 million of principal payments of long term debt 
• $277 million for dividends

Table 5 - Business Results

Aerospace Systems second quarter 2011 sales declined 9 percent due to lower volume for manned aircraft programs and civil space programs. Lower volume for manned aircraft programs is principally due to timing of awards for the F-35 and E-2 programs, and lower civil space volume principally reflects the NPOESS restructuring. Aerospace Systems second quarter 2011 operating income declined slightly due to lower sales, but as a percent of sales increased to 12.8 percent from 11.8 percent due to improved performance.  

Electronic Systems second quarter 2011 sales declined 10 percent principally due to lower volume for land and self protection systems and targeting systems programs. Lower volume for land and self protection systems ID/IQ contracts, such as Large Aircraft Infrared Countermeasures (LAIRCM) and Vehicular Intercommunication Systems (VIS), is due to announced force reductions in overseas contingency operations.  Lower volume for targeting systems reflects lower volume for international F-16 activities. 

Electronic Systems second quarter 2011 operating income increased 8 percent, and as a percent of sales increased to 15.9 percent from 13.3 percent. Higher operating income and margin rate reflect improved performance on several land and self protection systems and targeting systems contracts nearing completion and performance improvement for intelligence, surveillance and reconnaissance programs. 

Information Systems second quarter 2011 sales declined 4 percent principally due to lower volume for defense systems programs. Second quarter 2011 operating income declined 8 percent and as a percent of sales totaled 9.3 percent compared with 9.7 percent in the prior year period.  The decline in operating income reflects lower volume and the change in rate is principally due to an $18 million benefit in the 2010 second quarter for risk retirement related to a subcontractor on the New York City Wireless program. 

Technical Services second quarter 2011 sales declined 18 percent due to the change in the NSTec joint venture, which more than offset higher volume for integrated logistics and modernization programs. As previously announced, effective Jan. 1, 2011, the company reduced its participation in the NSTec joint venture, and as a result did not record any sales for the joint venture in the 2011 second quarter. NSTec sales totaled $152 million in the second quarter of 2010. Second quarter 2011 operating income was comparable to the prior year, and as a percent of sales increased to 7.8 percent from 6.5 percent principally due to the change in revenue consolidation for the NSTec joint venture.    

About Northrop Grumman

Northrop Grumman will webcast its earnings conference call at 11:30 a.m. ET on July 27, 2011. 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.

Northrop Grumman is a leading global security company providing innovative systems, products and solutions in aerospace, electronics, information systems, and technical services to government and commercial customers worldwide.  Please visit www.northropgrumman.com for more information.

Statements in this release and the attachments, other than statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "anticipate," "expect," "intend," "plan," "believe," "estimate," "guidance," and similar expressions generally identify these forward-looking statements. Forward-looking statements in this release and the attachments include, among other things, financial guidance regarding future sales, segment operating income, pension expense, employer contributions under pension plans and medical and life benefits plans, cash flow and earnings. Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements due to factors such as: the effect of economic conditions in the United States and globally (including the impact of uncertainty regarding U.S. debt limits and actions taken related thereto); access to capital; future sales and cash flows; timing of cash receipts; effective tax rates and timing and amounts of tax payments; returns on pension plan assets, interest and discount rates and other changes that may impact pension plan assumptions; retiree medical expense; the outcome of litigation, claims, audits, appeals, bid protests and investigations; earthquake-related insurance coverage and recoveries; costs of environmental remediation; availability and retention of qualified personnel; costs of capital investments; changes in organizational structure and reporting segments; risks associated with acquisitions, dispositions, spin-off transactions, joint ventures, strategic alliances and other business arrangements; possible impairments of goodwill or other intangible assets; effects of legislation, rulemaking, and changes in accounting, tax or defense procurement; changes in government and customer priorities and requirements (including, government budgetary constraints, shifts in defense spending, changes in import and export policies, changes in customer short-range and long-range plans); acquisition or termination of contracts; technical, operational or quality setbacks in contract performance; protection of intellectual property rights; risks associated with our nuclear operations; issues with, and financial viability of, key suppliers and subcontractors; availability of materials and supplies; controlling costs of fixed-price development programs; contractual performance relief and the application of cost sharing terms; allowability and allocability of costs under U.S. Government contracts; progress and acceptance of new products and technology; domestic and international competition; legal, financial and governmental risks related to international transactions; potential security threats, natural disasters and other disruptions not under our control; and other risk factors disclosed in our filings with the Securities and Exchange Commission.

You should not put undue reliance on any forward-looking statements in this release. These forward-looking statements speak only as of the date of this release and we undertake no obligation to update or revise any forward-looking statements after we distribute this release. This release and the attachments also contain non-GAAP financial measures. A reconciliation to the nearest GAAP measure and a discussion of the company's use of these measures are included in this release or the attachments.

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Non-GAAP Financial Measures Disclosure: Today's press release contains non-GAAP (accounting principles generally accepted in the United States of America) financial measures, as defined by SEC (Securities and Exchange Commission) Regulation G and indicated by a footnote in the text of the release. While we believe that these non-GAAP financial measures may be useful in evaluating Northrop Grumman's financial information, they should be considered as supplemental in nature and not as a substitute for financial information prepared in accordance with GAAP. Definitions are provided for the non-GAAP measures and reconciliations are provided in the body of the release.  References to a "Table" in the definitions below relate to tables in the body of this press release.  Other companies may define these measures differently or may utilize different non-GAAP measures.

Adjusted diluted EPS from continuing operations: Diluted EPS from continuing operations excluding the after-tax net pension adjustment per share, as defined below, and the per share tax benefit recorded in the 2010 second quarter. These per share amounts are provided for consistency and comparability of operating results. Management uses adjusted diluted EPS from continuing operations, as reconciled in Table 1, as an internal measure of financial performance.

Cash provided by continuing operations before discretionary pension contributions: Cash provided by operations before the after-tax impact of discretionary pension contributions. Cash provided by continuing operations before discretionary pension contributions has been provided for consistency and comparability of 2011 and 2010 financial performance and is reconciled on Table 2. 

Free cash flow from continuing operations: Cash provided by continuing operations less capital expenditures and outsourcing contract and related software costs. We use free cash flow from continuing operations as a key factor in our planning for and consideration of strategic acquisitions, stock repurchases and the payment of dividends. This measure should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating results presented in accordance with GAAP. Free cash flow from continuing operations is reconciled in Table 2.

Free cash flow from continuing operations before discretionary pension contributions: Free cash flow from continuing operations before the after-tax impact of discretionary pension contributions. We use free cash flow from continuing operations before discretionary pension contributions as a key factor in our planning for and consideration of strategic acquisitions, stock repurchases and the payment of dividends. This measure should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating results presented in accordance with GAAP. Free cash flow from continuing operations before discretionary pension contributions, also referred to as pension-adjusted free cash flow from continuing operations, is reconciled in Table 2.   

Net pension adjustment:  Pension expense determined in accordance with GAAP less pension expense allocated to the operating segments under U.S. Government Cost Accounting Standards (CAS). Net pension adjustment is presented in Table 1.

After-tax net pension adjustment per share: The per share impact of the net pension adjustment as defined above, after tax at the statutory rate of 35%, provided for consistency and comparability of 2011 and 2010 financial performance as presented in Table 1.   

Pension-adjusted operating income: Operating income before net pension adjustment as reconciled in Table 1. Management uses pension-adjusted operating income as an internal measure of financial performance. 

Pension-adjusted operating income as a % of sales: Pension-adjusted operating income as defined above, divided by sales. Management uses pension-adjusted operating income as a % of sales, as reconciled in Table 1, as an internal measure of financial performance. 

Segment operating income: Total earnings from our four segments including allocated pension expense recognized under CAS.  Reconciling items to operating income are unallocated corporate expenses, which include management and administration, legal, environmental, certain compensation and retiree benefits, and other expenses; net pension adjustment; and reversal of royalty income included in segment operating income. Management uses segment operating income, as reconciled in Table 5, as an internal measure of financial performance of our individual operating segments. 

Segment operating margin % / Segment operating income as a % of sales: Segment operating income as defined above, divided by sales. Management uses segment operating income as a % of sales, as reconciled in Table 5, as an internal measure of financial performance.