NOC

Northrop Grumman Corp. Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Northrop Grumman Corporation is a global defense and technology company providing products and services primarily to the U.S. Government. In January 2009, the company streamlined its organizational structure, reducing operating segments from seven to five: Information Systems, Aerospace Systems, Electronic Systems, Shipbuilding, and Technical Services.

Key Financial Metrics

Note: Operating cash flow turned negative in Q1 2009 primarily due to discretionary pension pre-funding and working capital increases.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 8% ($596 million) year-over-year, driven by higher sales across all segments.
• Profitability Surge: Operating income increased 41% ($191 million). This improvement is largely attributable to a favorable comparison against Q1 2008, which included a $326 million pre-tax charge related to the LHD-8 shipbuilding program.
• Shipbuilding Segment Turnaround: Shipbuilding operating income swung from a loss of $218 million in Q1 2008 to a profit of $84 million in Q1 2009. This was aided by a $48 million favorable adjustment on the LHD-8 program due to early completion of sea trials.
• Segment Realignment: The company realigned logistics and technical support programs from Information Systems and Electronic Systems into the new Technical Services segment.
• Legal Settlement: In April 2009 (post-period), the company settled two legal matters (microelectronics claims and TSSAM program claims) where the amounts offset each other, resulting in no net cash impact but a projected net gain in Q2 2009.

Guidance, Outlook, and Risks

• Outlook: Management expects defense spending to remain responsive to the security environment, with emphasis on intelligence, surveillance, cyber security, and modernization. The FY2010 budget request suggests a ~4% increase in the DoD base budget.
• Pension Funding: The company made voluntary pension contributions of $214 million in Q1 2009 and expects to contribute approximately $500 million in voluntary contributions for the full year 2009.
• Capital Allocation: The company repurchased $150 million of common stock in Q1 2009. As of March 31, 2009, $780 million remained under the share repurchase authorization.
• Risks and Contingencies:
  • Government Investigations: Ongoing investigations regarding the Deepwater Program (Coast Guard patrol boats) and antitrust matters (maintenance contracts). The company entered the Corporate Leniency Program regarding the antitrust matter.
  • Insurance Disputes: Litigation continues regarding Hurricane Katrina insurance recoveries with FM Global; no receivables are recognized pending resolution.
  • Environmental: Estimated future remediation costs range from $191 million to $269 million, with $232 million currently accrued.

Investor Verification Checklist

• Working Capital Trends: Verify the sustainability of the $916 million increase in trade working capital that contributed to negative operating cash flow.
• Pension Obligations: Monitor the impact of negative returns on plan assets and the timing of mandatory vs. voluntary pension contributions on future cash flows.
• Shipbuilding Program Performance: Track the LHD-8 and DDG 51 programs for potential cost growth or schedule delays that could reverse recent favorable adjustments.
• Legal Resolution: Confirm the final accounting treatment of the April 2009 DOJ settlement and the status of the Deepwater Program litigation.
• Backlog Funding: Assess the ratio of funded vs. unfunded backlog ($37.7B funded vs. $39.2B unfunded) to gauge revenue visibility.