Northrop Grumman
Corporation (NYSE: NOC) reported that second quarter 2004 income from
continuing operations rose 40 percent to $289 million, or $0.79 per diluted
share, compared with $207 million, or $0.55 per diluted share, for the same
period of 2003. The increase reflects higher sales and operating margin, as
well as a lower tax rate than in the second quarter of 2003. Sales for the
second quarter of 2004 increased 11 percent to $7.4 billion from $6.6 billion
for the same period of 2003.
“These results reinforce Northrop Grumman’s record of solid sales and
earnings growth and demonstrate our ability to consistently deliver strong
financial performance,” said Ronald D. Sugar, chairman, chief executive
officer and president. “Based on the strength of year-to-date results, we now
expect 2004 sales to increase to around $29 billion, earnings per share from
continuing operations to grow to between $2.90 and $3.00, and net cash
provided by operations to be about $1.7 billion.”
Operating margin for the 2004 second quarter increased 24 percent to
$483 million from $391 million in the same period a year ago. Second quarter
2004 operating margin includes lower pension expense and higher unallocated
corporate expenses than in the second quarter of 2003, as well as the effect
of a $60 million pre-tax charge for increased projected costs for the
F-16 Block 60 fixed-price development combat avionics program reported in the
Electronic Systems segment.
Second quarter 2004 pension expense, as determined in accordance with
accounting principles generally accepted in the United States, declined to
$86 million from $140 million in the second quarter of 2003. Pension expense
allocated to contracts pursuant to U.S. Government Cost Accounting Standards
(CAS) increased operating margin by $77 million in the second quarter of 2004
and $66 million for the comparable 2003 period.
Unallocated corporate expenses were $53 million in the second quarter of
2004 compared with $22 million in the second quarter of 2003. The $31 million
increase in unallocated corporate expenses was primarily due to higher
mark-to-market stock compensation expense and deferred state income taxes.
The effective tax rate applied to income from continuing operations for
the 2004 second quarter was 26 percent compared with 31 percent in the 2003
second quarter. During the second quarter of 2004, the company completed
studies and recognized additional tax credits of $31 million related to
research and development and export sales activities for the years 1997
through 2003.
Net income for the 2004 second quarter was $295 million, or $0.81 per
diluted share, compared with $205 million, or $0.54 per diluted share for the
same period of 2003.
Contract acquisitions were $5.3 billion in the second quarter of 2004
compared with $5.2 billion for the same period of 2003. Total funded backlog
was $26.2 billion at June 30, 2004, compared with $26.9 billion at
Dec. 31, 2003. Total backlog, which includes funded backlog and firm orders
for which funding is not currently contractually obligated by the customer,
was $57.2 billion at June 30, 2004, compared with $58.2 billion at
Dec. 31, 2003.
2004 Guidance
The company expects 2004 sales of approximately $29 billion versus
previous guidance of approximately $28 billion. Earnings per share from
continuing operations are now expected to range between $2.90 and $3.00 versus
previous guidance of between $2.80 and $2.95. Net cash provided by operating
activities is expected to be approximately $1.7 billion in 2004, versus the
prior estimate of approximately $1.5 billion.
Segment Results ELECTRONIC SYSTEMS ($ in millions) SECOND QUARTER 2004 2003 Sales $1,591 $1,512 Operating Margin 138 148 % Operating margin to sales 8.7% 9.8%
Electronic Systems second quarter 2004 sales increased 5 percent from the
second quarter of 2003 due to revenue increases in Government Systems and
Defensive Systems. Sales in Government Systems rose 72 percent, primarily due
to higher sales to the U.S. Postal Service. Defensive Systems revenue
increased 39 percent reflecting increased sales of infrared countermeasures
for military helicopters, LITENING targeting pods, and test equipment. These
sales increases were partially offset by lower sales in Aerospace Systems and
Space Systems. Second quarter 2004 operating margin declined 7 percent due to
a $60 million pre-tax charge for increased projected costs for the F-16 Block
60 fixed-price development combat avionics program. The principal portion of
the charge reflects a higher estimate to complete qualification and production
of the “Falcon Edge” electronic warfare suite. The impact of the charge was
partially offset by improved performance and contract close-outs for several
programs in the Navigation Systems, Defensive Systems, Aerospace Systems, and
Government Systems business areas.
SHIPS ($ in millions) SECOND QUARTER 2004 2003 Sales $1,557 $1,368 Operating Margin 100 23 % Operating margin to sales 6.4% 1.7%
Ships 2004 second quarter sales, which include the financial results of
the Newport News and Ship Systems sectors, increased 14 percent compared with
the 2003 second quarter, driven by higher sales in Surface Combatants,
Amphibious & Auxiliary, and Submarines, which were partially offset by a
decline in revenue in Aircraft Carriers. Surface Combatants sales rose
38 percent, primarily due to higher DD(X) program revenue. Amphibious &
Auxiliary revenue rose 31 percent due to higher revenue in the LPD-17 and
LHD-8 programs. Operating margin for the 2004 second quarter increased more
than fourfold compared with the 2003 second quarter due to a $68 million
pre-tax charge for the commercial Polar Tanker program recorded in the second
quarter of 2003.
INFORMATION TECHNOLOGY ($ in millions) SECOND QUARTER 2004 2003 Sales $1,225 $1,123 Operating Margin 73 62 % Operating margin to sales 6.0% 5.5%
Information Technology second quarter 2004 sales increased 9 percent due
to higher revenue in Government Information Technology and Enterprise
Information Technology. Government Information Technology revenue increased
13 percent, primarily due to new business awards and organic sales growth in
existing programs. Enterprise Information Technology increased 12 percent,
primarily due to expanded opportunities for product and service sales with
civil agencies. Second quarter 2004 operating margin increased 18 percent, as
compared with the second quarter of 2003, primarily due to higher revenue in
Government Information Technology and Enterprise Information Technology and
improved program performance in Commercial Information Technology.
MISSION SYSTEMS ($ in millions) SECOND QUARTER 2004 2003 Sales $1,298 $1,100 Operating Margin 86 78 % Operating margin to sales 6.6% 7.1%
Mission Systems second quarter 2004 sales increased 18 percent, primarily
due to revenue increases in Command, Control & Intelligence Systems and
Missile Systems. Command, Control & Intelligence Systems revenue increased
26 percent, primarily due to higher revenue for the Tactical Automated
Security Systems II program. Missile Systems revenue increased 12 percent,
reflecting revenue from the new Kinetic Energy Interceptors program and the
XonTech acquisition, as well as increased revenue from existing programs.
Second quarter 2004 operating margin rose 10 percent due to higher volume
compared with second quarter 2003 results. Operating margin in the 2003
second quarter included the recognition of favorable performance on a
restricted program.
INTEGRATED SYSTEMS ($ in millions) SECOND QUARTER 2004 2003 Sales $1,133 $1,004 Operating Margin 90 124 % Operating margin to sales 7.9% 12.4%
Integrated Systems sales for the second quarter of 2004 increased
13 percent over the second quarter of 2003, primarily due to higher sales in
Airborne Early Warning/Electronic Warfare Systems and Air Combat Systems.
Airborne Early Warning/Electronic Warfare Systems revenue increased 28 percent
due to higher volume in the E-2 Advanced Hawkeye and EA-6B programs. Air
Combat Systems revenue increased 8 percent due to higher volume in the F-35,
Global Hawk, and Multi-Platform Radar Technology Insertion programs.
Operating margin for the second quarter of 2004 declined 27 percent reflecting
the segment’s changing business mix, which includes a greater proportion of
lower margin development programs, including F-35, Global Hawk, E-2 Advanced
Hawkeye, and the E-10A.
SPACE TECHNOLOGY ($ in millions) SECOND QUARTER 2004 2003 Sales $836 $733 Operating Margin 61 55 % Operating margin to sales 7.3% 7.5%
Space Technology second quarter 2004 sales rose 14 percent over second
quarter 2003 results, primarily due to higher sales in Software Defined
Radios, Civil Space, and Intelligence, Surveillance & Reconnaissance.
Software Defined Radios revenue increased 38 percent, primarily due to higher
volume in the F-35 and F/A-22 programs. Civil Space revenue increased
28 percent, primarily due to higher volume in the National Polar-Orbiting
Operational Environmental Satellite System and James Webb Space Telescope
programs. Intelligence, Surveillance & Reconnaissance revenue also rose more
than 18 percent. Second quarter 2004 operating margin rose 11 percent as
compared with the second quarter 2003, primarily due to higher sales volume.
Debt and Cash Measurements
Northrop Grumman’s total debt was $5.8 billion at June 30, 2004, compared
with $5.9 billion at Dec. 31, 2003. Interest expense for the second quarter
of 2004 declined to $112 million from $119 million for the 2003 second quarter
as a result of a reduction in fixed-rate debt acquired with the acquisition of
TRW Inc. Second quarter 2004 interest expense also includes the impact of the
adoption of Statement of Financial Accounting Standards No. 150 – Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, which was adopted on July 1, 2003, and required $6 million of
dividends payable on mandatorily redeemable preferred stock for the quarter to
be classified as interest expense.
Net cash provided by operating activities for the 2004 second quarter
decreased to $610 million versus net cash provided by operating activities of
$737 million for the second quarter of 2003. The decrease was primarily due
to higher tax payments in the second quarter of 2004 compared with the second
quarter of 2003.
During the second quarter of 2004, the company repurchased approximately
2.4 million shares of its common stock at an average price of $49.92 per
share, after giving effect for the 2-for-1 stock split, in the form of a stock
dividend, effective June 21, 2004. Since the Aug. 20, 2003, announcement of a
plan to repurchase up to $700 million of Northrop Grumman common stock, the
company has repurchased approximately 10.4 million shares at an average price
of $47.50.
About Northrop Grumman
Northrop Grumman Corporation is a 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 has 125,000
employees and operates in all 50 states and 25 countries and serves U.S. and
international military, government and commercial customers.
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 includes, among other things, projected
deliveries, expected funding for various programs, future effective income tax
rates, 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 Northrop Grumman’s control. These
include Northrop Grumman’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, 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 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; natural disasters and 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 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
12 p.m. EDT on July 29, 2004. 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 CORPORATION FINANCIAL HIGHLIGHTS ($ In millions, except per share) (unaudited) SECOND QUARTER FIRST SIX MONTHS 2004 2003 2004 2003 OPERATING RESULTS HIGHLIGHTS Total contract acquisitions (1) $5,344 $5,240 $13,764 $12,330 Total sales 7,374 6,627 14,479 12,493 Total operating margin 483 391 917 719 Income from continuing operations 289 207 517 381 Net income 295 205 527 458 Diluted earnings per share from continuing operations .79 .55 1.42 1.00 Diluted earnings per share .81 .54 1.45 1.21 Net cash provided by (used in) operating activities 610 737 873 (375) JUNE 30, DECEMBER 31, 2004 2003 (4) BALANCE SHEET HIGHLIGHTS Cash and cash equivalents $559 $342 Accounts receivable, net 3,487 3,198 Inventoried costs, net 1,220 1,147 Property, plant, and equipment, net 4,033 4,036 Total debt 5,764 5,881 Net debt (2) 5,205 5,539 Mandatorily redeemable preferred stock 350 350 Shareholders' equity 16,012 15,785 Total assets 33,327 33,009 Net debt to capitalization ratio (3) 24% 26% (1) Contract acquisitions represent orders received during the period for which funding has been contractually obligated by the customer. (2) Total debt less cash and cash equivalents. (3) Net debt divided by the sum of shareholders' equity and total debt. (4) Certain prior year amounts have been reclassified to conform to the 2004 presentation. NORTHROP GRUMMAN CORPORATION OPERATING RESULTS ($ in millions, except per share) (unaudited) SECOND QUARTER FIRST SIX MONTHS 2004 2003 (1) 2004 2003 (1) Sales Electronic Systems $1,591 $1,512 $3,129 $2,850 Ships 1,557 1,368 3,001 2,563 Information Technology 1,225 1,123 2,455 2,214 Mission Systems 1,298 1,100 2,481 2,023 Integrated Systems 1,133 1,004 2,280 1,829 Space Technology 836 733 1,642 1,381 Intersegment Eliminations (266) (213) (509) (367) $7,374 $6,627 $14,479 $12,493 Operating margin Electronic Systems $138 $148 $296 $269 Ships 100 23 186 98 Information Technology 73 62 144 123 Mission Systems 86 78 162 134 Integrated Systems 90 124 206 212 Space Technology 61 55 112 87 Total segment operating margin 548 490 1,106 923 Reconciliation to operating margin (2) Unallocated expenses (53) (22) (163) (52) Pension expense (86) (140) (176) (280) Reversal of CAS pension expense included above 77 66 157 137 Reversal of royalty income included above (3) (3) (7) (9) Operating margin 483 391 917 719 Interest income 16 17 32 29 Interest expense (112) (119) (225) (263) Other, net 3 11 13 28 Income from continuing operations before income taxes 390 300 737 513 Federal and foreign income taxes 101 93 220 132 Income from continuing operations 289 207 517 381 Income from discontinued operations, net of tax 6 2 7 82 (Loss) gain from disposal of discontinued operations, net of tax (4) 3 (5) Net income $295 $205 $527 $458 Diluted earnings per share Continuing operations $.79 $.55 $1.42 $1.00 Discontinued operations .02 .02 .22 Disposal of discontinued operations (.01) .01 (.01) Diluted earnings per share $.81 $.54 $1.45 $1.21 (1) Certain prior year amounts have been reclassified to conform to the 2004 presentation. (2) Pension expense is included in determining the segments' operating margin to the extent that the cost is currently recognized under U.S. Government Cost Accounting Standards (CAS). In order to reconcile from segment operating margin to total company operating margin, these amounts are reported under the caption "Reversal of CAS pension expense included above."Total pension expense or income determined in accordance with accounting principles generally accepted in the United States is reported separately as a reconciling item under the caption "Pension expense."The reconciling item captioned "Unallocated expenses" includes the portion of corporate, legal, environmental, other retiree benefits, stock compensation, and other expenses not allocated to the segments. NORTHROP GRUMMAN CORPORATION ADDITIONAL SEGMENT INFORMATION ($ in millions) (unaudited) CONTRACT FUNDED ACQUISITIONS(1) BACKLOG(2) SECOND QUARTER FIRST SIX MONTHS JUNE 30, 2004 2003 (4) 2004 2003 (4) 2004 2003 (4) Electronic Systems $1,489 $1,336 $3,261 $2,914 $6,600 $6,559 Ships 592 782 2,110 1,632 8,858 9,430 Information Technology 1,207 930 2,401 2,256 2,265 2,151 Mission Systems 990 893 2,326 2,105 2,750 2,283 Integrated Systems 820 893 2,588 2,558 4,606 4,494 Space Technology 552 643 1,685 1,410 1,601 1,337 Intersegment Eliminations (306) (237) (607) (545) (529) (364) Total $5,344 $5,240 $13,764 $12,330 $26,151 $25,890 TOTAL BACKLOG, JUNE 30, 2004 TOTAL FUNDED UNFUNDED(3) BACKLOG Electronic Systems $6,600 $2,239 $8,839 Ships 8,858 4,926 13,784 Information Technology 2,265 2,043 4,308 Mission Systems 2,750 7,248 9,998 Integrated Systems 4,606 6,018 10,624 Space Technology 1,601 8,590 10,191 Intersegment Eliminations (529) (529) Total $26,151 $31,064 $57,215 (1) Contract acquisitions represent orders received during the period for which funding has been contractually obligated by the customer. (2) Funded backlog represents unfilled orders for which funding has been contractually obligated by the customer. (3) 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 (IDIQ) orders. (4) Certain prior year amounts have been reclassified to conform to the 2004 presentation. AMORTIZATION OF PURCHASED INTANGIBLES SECOND QUARTER FIRST SIX MONTHS 2004 2003 2004 2003 Electronic Systems $22 $22 $43 $43 Ships 11 11 21 21 Information Technology 4 5 9 10 Mission Systems 8 7 16 16 Integrated Systems 3 3 7 7 Space Technology 9 9 17 17 $57 $57 $113 $114 NORTHROP GRUMMAN CORPORATION SALES BY BUSINESS AREA WITHIN SEGMENTS ($ in millions) (unaudited) SECOND QUARTER FIRST SIX MONTHS 2004 2003 (1) 2004 2003 (1) Electronic Systems Aerospace Systems $362 $429 $754 $785 C4ISR & Naval Systems 327 327 659 606 Defensive Systems 267 192 522 406 Navigation Systems 199 191 383 365 Government Systems 177 103 301 189 Space Systems 116 138 227 248 Other 143 132 283 251 1,591 1,512 3,129 2,850 Ships Surface Combatants 511 371 981 692 Aircraft Carriers 475 528 915 998 Amphibious & Auxiliary 346 265 652 468 Submarines 178 160 340 292 Commercial & International 34 19 72 55 Services & Other 35 36 76 75 Intrasegment Eliminations (22) (11) (35) (17) 1,557 1,368 3,001 2,563 Information Technology Government Information Technology 740 654 1,493 1,278 Enterprise Information Technology 202 180 378 362 Commercial Information Technology 157 169 332 326 Technology Services 154 152 313 305 Intrasegment Eliminations (28) (32) (61) (57) 1,225 1,123 2,455 2,214 Mission Systems Command, Control & Intelligence Systems 791 630 1,514 1,187 Missile Systems 337 302 622 514 Technical & Management Services 185 177 373 342 Intrasegment Eliminations (15) (9) (28) (20) 1,298 1,100 2,481 2,023 Integrated Systems Air Combat Systems 670 619 1,382 1,135 Airborne Early Warning/Electronic Warfare Systems 318 248 598 427 Airborne Ground Surveillance/Battle Management 147 139 303 269 Intrasegment Eliminations (2) (2) (3) (2) 1,133 1,004 2,280 1,829 Space Technology Intelligence, Surveillance & Reconnaissance 263 223 500 425 Civil Space 164 128 319 246 Software Defined Radios 142 103 285 188 Satellite Communications 126 131 258 250 Missile & Space Defense 102 106 201 195 Technology 63 55 115 100 Intrasegment Eliminations (24) (13) (36) (23) 836 733 1,642 1,381 Intersegment Eliminations (266) (213) (509) (367) Total Sales $7,374 $6,627 $14,479 $12,493 (1) Certain prior year amounts have been reclassified to conform to the 2004 presentation.