Northrop Grumman Reports Strong Fourth Quarter and 2010 Financial Results

LOS ANGELES, Feb. 9, 2011 /PRNewswire-FirstCall/ -- Northrop Grumman Corporation (NYSE: NOC) reported that fourth quarter 2010 earnings from continuing operations totaled $376 million, or $1.27 per diluted share, compared with $375 million, or $1.19 per diluted share, in the fourth quarter of 2009.  Fourth quarter 2010 results included a previously announced one-time, pre-tax charge of $231 million, or $0.51 per diluted share, principally related to premiums paid to redeem $682 million in debt through the company's November 2010 tender offer.

Earnings from continuing operations increased to $2 billion in 2010, or $6.77 per diluted share, from $1.6 billion, or $4.87 per diluted share in 2009.  In addition to the fourth quarter charge related to the debt tender offer, 2010 results included a $113 million pre-tax charge related to the consolidation of the company's Gulf Coast facilities and a $296 million tax benefit related to 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.  These three items, all of which were previously announced, resulted in a net increase in 2010 earnings from continuing operations of $0.24 per share.

Fourth quarter 2010 sales totaled $8.6 billion compared with $8.9 billion in the prior year period.  The 2010 fourth quarter had fewer working days than the prior year period.  Sales increased 3 percent in 2010 to $34.8 billion from $33.8 billion in 2009.  New business awards for the 2010 fourth quarter totaled $9.2 billion, bringing total backlog to $64.2 billion as of Dec. 31, 2010.  New business awards totaled $30 billion in 2010.

Fourth quarter 2010 cash provided by operations increased to $1.4 billion from $931 million in the prior year period.  In the 2010 fourth quarter the company's discretionary pension contributions totaled $440 million, and in the fourth quarter of 2009 the company paid income taxes of $508 million on the sale of its Advisory Services business (TASC).   Cash provided by operations totaled $2.5 billion in 2010 compared with $2.1 billion in 2009.  Discretionary pension contributions totaled $830 million and $800 million for 2010 and 2009, respectively.  Cash provided by operations in 2009 also included $102 million from discontinued operations, as well as the income taxes paid on the sale of TASC.

"Northrop Grumman had a very good fourth quarter and a strong finish to 2010.  Operating income and cash generation exceeded our guidance for the year, demonstrating that across all our businesses, our employees are focusing on performance and building a track record of consistent execution.  Northrop Grumman is well positioned to continue creating value for our customers and shareholders," said Wes Bush, chief executive officer and president.

Table 1 - Financial Highlights

Fourth quarter 2010 operating income increased 25 percent to $788 million from $631 million in the prior year period, and as a percent of sales increased 210 basis points to 9.2 percent from 7.1 percent.  For 2010 operating income increased 24 percent to $3.1 billion from $2.5 billion in the prior year period, and as a percent of sales increased 140 basis points to 8.8 percent from 7.4 percent.  The improvement for both periods principally reflects higher segment operating income and lower net pension adjustment, partially offset by higher corporate unallocated expenses.

Fourth quarter 2010 segment operating income increased $143 million, or 19 percent, and 2010 segment operating income increased $397 million, or 14 percent.  As a percent of sales, fourth quarter 2010 segment operating income improved 200 basis points to 10.3 percent from 8.3 percent, and 2010 segment operating income improved by 90 basis points to 9.6 percent from 8.7 percent.  The improvement in segment operating income and margin rate for both periods primarily reflects improved program performance.

Net pension adjustment improved by $86 million in the 2010 fourth quarter and $286 million for the full year.  Unallocated corporate expenses totaled $95 million in the 2010 fourth quarter and $220 million for the full year, compared with $24 million and $111 million, respectively, for the prior year periods.  The increase in corporate unallocated expenses in the 2010 fourth quarter is principally due to additional deferred state taxes and higher other unallowable costs. In 2009 unallocated corporate expenses for the year were reduced by a $64 million pre-tax gain for the settlement of certain litigation matters.

Federal and foreign income taxes totaled $143 million compared with $196 million in the fourth quarter of 2009.  Fourth quarter 2010 included a $15 million credit for the extension of the Research and Development tax credit.  The effective tax rate for the 2010 fourth quarter was 27.6 percent compared with 34.3 percent in the 2009 fourth quarter.

Federal and foreign income taxes totaled $557 million in 2010, including the $296 million benefit from the IRS settlement, compared with $693 million in 2009, which included a net tax benefit of $75 million, primarily for final settlement of the IRS's examination of the company's 2001 through 2003 tax returns.  The effective tax rate for 2010 was 21.5 percent compared with 30.6 percent in 2009.

Fourth quarter 2010 diluted earnings per share are based on 296.9 million weighted average shares outstanding compared with 315.5 million in the fourth quarter of 2009.  Diluted earnings per share for 2010 are based on 301.1 million weighted average shares outstanding compared with 323.3 million in 2009.

Table 2 - Cash Flow Highlights

Table 3 - Cash Measurements, Debt and Capital Deployment

Changes in cash and cash equivalents include the following items for cash from operations, investing and financing in 2010:

Operations

• $830 million discretionary pension contributions
• $2.5 billion provided by operations after discretionary pension contributions

Investing

• $770 million for capital expenditures and $6 million for outsourcing contract and related software costs

Financing

• $1.5 billion proceeds from issuance of long-term debt
• $1.2 billion for repurchase of approximately 19.7 million shares of common stock
• $1.2 billion payments of long-term debt
• $545 million for dividends
• $142 million proceeds from exercises of stock options and issuance of common stock

Table 4 – 2011 Guidance - Excludes Shipbuilding

The company's 2011 guidance reflects the anticipated separation of the Shipbuilding business from Northrop Grumman in 2011.  The guidance provided above is based on operating results for the continuing operations: Aerospace Systems, Electronic Systems, Information Systems and Technical Services.

Table 5 - Business Results

Results for TASC, divested in December 2009, are reported as discontinued operations for all periods presented.

Aerospace Systems fourth quarter 2010 sales declined 4 percent, principally due to fewer working days in the 2010 fourth quarter than in the prior year period and lower volume for civil space and missile defense programs.  Aerospace Systems sales increased 5 percent in 2010 due to higher volume for manned and unmanned aircraft programs and restricted programs, which was partially offset by lower volume for missile defense programs.

Aerospace Systems fourth quarter 2010 operating income increased 11 percent, and as a percent of sales increased to 12.1 percent from 10.5 percent.  Higher operating income and margin rate for the fourth quarter reflect improved program performance and lower costs.  Aerospace Systems 2010 operating income increased 17 percent and as a percent of sales increased to 11.5 percent from 10.3 percent.  Higher operating income and margin rate for the year reflect higher volume, improved program performance and lower costs.

Electronic Systems fourth quarter 2010 sales declined 10 percent due to fewer working days in the 2010 fourth quarter than in the prior year period and lower volume for several programs nearing completion and contracts transitioning to their next phase, all of which were partially offset by higher volume for targeting systems programs.  Electronic Systems 2010 sales were comparable to 2009 sales.

Electronic Systems fourth quarter 2010 operating income was comparable to the prior year period, and as a percent of sales increased to 14.5 percent from 13.2 percent.  The higher margin rate for the fourth quarter reflects improved program performance for intelligence, surveillance and reconnaissance programs, including postal automation, and improved performance on land and self-protection systems programs.  Electronic Systems 2010 operating income increased 6 percent, and as a percent of sales increased to 13.4 percent from 12.6 percent.  Higher operating income and margin rate reflect higher volume for targeting systems and improved performance for land and self-protection systems programs.

Information Systems fourth quarter 2010 sales declined 4 percent primarily due to fewer working days in the 2010 fourth quarter than in the prior year period and lower volume for intelligence and defense programs, which was partially offset by higher volume for civil systems programs.  Information Systems sales declined 2 percent in 2010 principally due to lower volume for intelligence and civil systems programs, which was partially offset by higher volume for defense programs.

Information Systems fourth quarter 2010 operating income increased 66 percent and as a percent of sales increased to 8.5 percent from 4.9 percent.  Information Systems operating income increased 21 percent in 2010 and as a percent of sales increased to 9 percent from 7.3 percent.  Higher operating income and rate in the fourth quarter and the year reflect improved program performance for civil systems programs, as well as the absence of expenses incurred in the fourth quarter of 2009 associated with the divestiture of TASC.

Shipbuilding fourth quarter 2010 sales increased 4 percent due to higher volume for submarine and expeditionary warfare programs, which more than offset the impact of fewer working days in the 2010 fourth quarter and lower volume for aircraft carrier and surface combatant programs. Shipbuilding sales increased 8 percent in 2010 due to higher volume for expeditionary warfare, aircraft carrier and submarine programs, partially offset by lower volume for surface combatant programs.

Fourth quarter 2010 operating income increased 52 percent, and as a percent of sales increased to 7.7 percent from 5.3 percent.  Higher operating income and rate reflect higher volume and improved program performance for expeditionary warfare, aircraft carrier and submarine programs.  Operating income increased 9 percent in 2010, consistent with the increase in sales, and as a percent of sales was unchanged at 4.8 percent.

Technical Services fourth quarter 2010 sales increased 6 percent primarily due to higher volume for integrated logistics and modernization programs, which more than offset the impact of fewer working days in the 2010 fourth quarter than the prior year period. Technical Services sales increased 16 percent in 2010, principally due to higher volume for integrated logistics and modernization programs.

Technical Services fourth quarter 2010 operating income increased 23 percent, and as a percent of sales increased to 6.2 percent from 5.3 percent.  Operating income increased 28 percent in 2010 and as a percent of sales improved to 6.4 percent from 5.8 percent.  The improvements in operating income and rate are due to higher volume, improved business mix and improved performance.

About Northrop Grumman

Northrop Grumman will webcast its earnings conference call at 10:30 a.m. ET on Feb. 9, 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 website at http://www.northropgrumman.com.

Northrop Grumman Corporation is a leading global security company whose 120,000 employees provide innovative systems, products, and solutions in aerospace, electronics, information systems, shipbuilding 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," "assume," "expect," "intend," "plan," "potential," "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. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions.  Actual results could differ materially due to factors such as: the effect of the government's newly announced plans to change its current procurement practices; 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); timing and execution of consolidation of Shipbuilding's Gulf Coast facilities; execution of any strategic alternative for the Shipbuilding business, including an anticipated spin-off; the effects of changes to capital structure; the effect of economic conditions in the United States and globally; 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; hurricane and earthquake-related insurance coverage and recoveries; costs of environmental remediation; our relationships with labor unions; availability and retention of qualified personnel; costs of capital investments; changes in organizational structure and reporting segments; risks associated with acquisitions, dispositions, 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; acquisition or termination of contracts; technical, operation 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.

These forward-looking statements speak only as of the date of this release and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

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 and in attached schedules.  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.

Cash provided by operations before discretionary pension contributions: Cash provided by operations before the after-tax impact of discretionary pension contributions.  Cash provided by operations before discretionary pension contributions has been provided for consistency and comparability of 2010 and 2009 financial performance and is reconciled on Table 2.  

Cash provided by continuing operations before discretionary pension contributions: Cash provided by continuing 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.  

Free cash flow:  Cash provided by operations less capital expenditures and outsourcing contract and related software costs. We use free cash flow 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 is reconciled in Table 2.

Free cash flow from continuing operations before discretionary pension contributions:  Cash provided by continuing operations before the after-tax impact of discretionary pension contributions less capital expenditures and outsourcing contract and related software costs.  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.

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 2010 and 2009 financial performance and reconciled on Table 1.    

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

Pension-adjusted operating income:  Operating income before net pension adjustment as reconciled in Table 1 and used 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 (loss):  Total earnings from our five 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.

SOURCE Northrop Grumman Corporation