NOC

Northrop Grumman Corp. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Northrop Grumman Corporation for the period ended June 30, 2008. The company is a large accelerated filer incorporated in Delaware. As of July 25, 2008, there were 337,531,256 shares of common stock outstanding. The company operates in four primary businesses: Information & Services, Aerospace, Electronics, and Shipbuilding.

Key Financial Metrics (Six Months Ended June 30, 2008)

Note: Operating income margin decreased to 7.8% in 2008 from 9.6% in 2007, primarily due to charges in the Shipbuilding segment.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 7.6% year-over-year, driven by higher sales across all segments, particularly in Shipbuilding (17% increase) and Information & Services (6.4% increase).
• Profitability Decline: Operating income decreased 12.6% year-over-year. This decline is largely attributable to a $326 million pre-tax charge recorded in the first quarter of 2008 within the Shipbuilding segment related to the LHD-8 contract (cost growth, schedule impacts, and impairment of intangibles).
• Segment Performance:
  • Shipbuilding: Reported an operating loss of $92 million for the six months ended June 30, 2008, compared to income of $213 million in the prior year, due to the LHD-8 charges.
  • Electronics: Operating income increased 8% to $411 million.
  • Information & Services: Operating income increased 3% to $494 million.
• Discontinued Operations: The company sold its Electro-Optical Systems business in April 2008 for $175 million, recognizing a net gain of $19 million. Results are reported as discontinued operations.

Guidance, Outlook, and Risks

• Backlog: Total backlog as of June 30, 2008, was approximately $67 billion ($33.9 billion funded, $33.0 billion unfunded), an increase from $63.7 billion at year-end 2007.
• Contract Awards: New awards totaled approximately $19.6 billion for the six months ended June 30, 2008. Notable awards include a $1.5 billion Air Force tanker replacement contract (currently under protest) and a $1.2 billion Navy Broad Area Maritime Surveillance contract (under protest).
• Capital Allocation: The company repurchased $805 million of common stock in the first six months of 2008. As of June 30, 2008, $1.7 billion remained authorized for repurchases. The quarterly dividend was increased to $0.40 per share in April 2008.
• Risks and Contingencies:
  • LHD-8 Program: Ongoing risks related to cost growth and schedule delays on the LHD-8 amphibious assault ship. Management believes current estimates are adequate but cannot provide absolute assurance.
  • Legal Proceedings: Ongoing U.S. Government investigations regarding microelectronic parts (TRW legacy) and the Deepwater Program (Coast Guard patrol boats). The company has accrued $112.5 million for the microelectronic matter but notes potential damages could be trebled under the False Claims Act.
  • Insurance Disputes: Litigation pending with FM Global regarding Hurricane Katrina insurance recoveries.

Investor Verification Checklist

• LHD-8 Cost Estimates: Verify the sufficiency of the $326 million charge and the likelihood of additional cost growth on the LHD-8 contract.
• Protested Awards: Monitor the status of the $1.5 billion Air Force tanker award and the $1.2 billion Navy BAMS award, both of which are under protest and subject to GAO review.
• Legal Exposure: Assess the potential financial impact of the unresolved U.S. Government investigations (microelectronic parts and Deepwater Program) beyond current accruals.
• Shipbuilding Margins: Evaluate the recovery trajectory of the Shipbuilding segment's operating margins absent the one-time charges.
• Insurance Recovery: Track the resolution of the Hurricane Katrina insurance claim against FM Global.