Q4 Earnings Per Share from Continuing Operations Increase 24 Percent to $0.92 2005 Earnings Per Share from Continuing Operations Increase 27 Percent to $3.81 Q4 Sales of $7.9 Billion 2005 Sales Increase 3 Percent to Record $30.7 Billion Q4 Cash from Operations Increases to $678 Million 2005 Cash from Operations Increases to $2.6 Billion 2006 Financial Guidance Updated
LOS ANGELES, Jan. 24 -- Northrop Grumman Corporation (NYSE: NOC - News) reported that fourth quarter earnings per share from continuing operations increased 24 percent to $0.92 per diluted share and 2005 earnings per share from continuing operations increased 27 percent to $3.81 per diluted share. Sales for the 2005 fourth quarter were $7.9 billion and a record $30.7 billion for 2005. Net cash provided by operating activities for the 2005 fourth quarter more than doubled to $678 million and cash from operations for the year rose 37 percent to $2.6 billion.
"Our continued focus on performance drove higher sales, earnings and cash," said Ronald D. Sugar, Northrop Grumman chairman, chief executive officer and president. "Solid overall operating performance, monetization of non-core assets, and our action to reduce share count contributed to this year's excellent results.
"Our outstanding cash generation supported the repurchase of $1.2 billion of our stock, a 13 percent increase in our dividend, and the continued strengthening of our balance sheet. This year's strong financial results were achieved despite the charges associated with Hurricane Katrina and the F-16 Block 60 program.
"For 2006, we are raising our guidance for earnings per share and cash from operations. We expect double-digit growth in earnings per share to between $4.25 and $4.40 based on a sales base of approximately $31 billion, and we expect cash from operations to range between $2.3 and $2.6 billion. Based on the strength of this year and our outlook for 2006, we plan to continue executing our balanced cash deployment strategy aimed at increasing value for our shareholders and investing for the future," Sugar concluded.
Fourth Quarter 2005 Results
Fourth quarter 2005 income from continuing operations rose 21 percent to $331 million, or $0.92 per diluted share, from $273 million, or $0.74 per diluted share, for the same period of 2004.
Fourth quarter 2005 income from continuing operations includes higher total segment operating margin, a lower effective tax rate, and a $14 million pre-tax gain on the sale of 1.3 million shares of Endwave common stock, partially offset by a $65 million pre-tax charge for the company's F-16 Block 60 program. Fourth quarter 2004 income from continuing operations included a $42 million pre-tax charge for the Wedgetail program and a $35 million charge for a legal settlement. Sales for the fourth quarter of 2005 were essentially unchanged at $7.9 billion compared with the same period of 2004.
Operating margin for the 2005 fourth quarter was essentially unchanged at $534 million compared with $538 million for the same period of 2004.
Other income/expense for the 2005 fourth quarter increased to income of $16 million from an expense of $25 million for the same period of 2004. During the fourth quarter of 2005, the company sold 1.3 million shares of Endwave common stock, which generated a $14 million pre-tax gain. In the fourth quarter of 2004, the company recorded a $15 million foreign currency exchange loss on the liquidation of a subsidiary loan and a $13 million expense related to the early retirement of debt.
Federal and foreign income taxes for the 2005 fourth quarter declined to $128 million from $150 million in the fourth quarter of 2004. The fourth quarter of 2005 includes a $20 million net tax benefit related to the settlement of prior years IRS appeals cases. The effective tax rate applied to income from continuing operations for the 2005 fourth quarter was 27.9 percent compared with 35.5 percent in the 2004 fourth quarter.
Net income for the 2005 fourth quarter increased 22 percent to $331 million, or $0.92 per diluted share, from $272 million, or $0.74 per diluted share, for the same period of 2004. Earnings per share are based on weighted average diluted shares outstanding of 358.1 million for the fourth quarter of 2005 and 367.1 million for the fourth quarter of 2004.
Contract acquisitions for the 2005 fourth quarter declined to $6.6 billion from $11.9 billion for the same period of 2004. Fourth quarter 2005 contract acquisitions were impacted by the delay in the passage of the 2006 defense budget, which resulted in delayed contract awards. Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, was $56.3 billion at Dec. 31, 2005 compared with $58.1 billion at Dec. 31, 2004.
2005 Results
Income from continuing operations for 2005 rose 27 percent to $1.4 billion, or $3.81 per share, from $1.1 billion, or $2.99 per share, for 2004.
Sales for 2005 increased 3 percent to $30.7 billion from $29.9 billion in 2004 reflecting higher sales in every business but Ships. Operating margin for 2005 increased 9 percent to $2.2 billion from $2.0 billion for 2004, reflecting double-digit increases in operating margin in Integrated Systems, Mission Systems, Information Technology, and Space Technology, and a $92 million decline in unallocated expenses principally due to lower legal expenses.
Net interest expense for 2005 declined to $334 million from $373 million in 2004. The $39 million decrease reflects lower average debt in 2005.
During 2005, the company sold 7.25 million TRW Automotive shares and approximately 3.5 million Endwave shares, which generated pre-tax gains of $70 million and $95 million, respectively. These sales contributed to the increase in other income/expense for 2005 to income of $200 million from an expense of $18 million for 2004.
The effective tax rate applied to income from continuing operations for 2005 was 32.3 percent, unchanged from the previous year.
Net income for 2005 rose 29 percent to $1.4 billion, or $3.85 per diluted share, from $1.1 billion, or $2.97 per diluted share, in 2004. Earnings per share are based on weighted average diluted shares outstanding of 363.2 million for 2005 and 365 million for 2004.
Debt and Cash Measurements
Northrop Grumman's total debt was essentially unchanged at $5.1 billion at Dec. 31, 2005 compared with Dec. 31, 2004. Net debt declined to $3.5 billion at Dec. 31, 2005 compared with $3.9 billion at Dec. 31, 2004.
Net cash provided by operating activities for the fourth quarter of 2005 increased to $678 million from $324 million in the fourth quarter of 2004. Net cash provided by operating activities in 2005 increased to $2.6 billion from $1.9 billion in 2004. Net cash provided by operating activities in 2005 includes contributions to the company's pension plans totaling $415 million, of which $203 million was voluntarily pre-funded in the fourth quarter. Net cash provided by operating activities in 2004 included contributions to the company's pension plans totaling $623 million, of which $250 million was voluntarily pre-funded in the fourth quarter of 2004. Capital spending totaled $305 million for the fourth quarter of 2005 and $824 million for 2005.
2006 Guidance
The company now expects 2006 sales of approximately $31 billion versus its prior guidance of approximately $32 billion, which reflects the impact of the company's strategic decision in 2006 to exit the value-added reseller business (reported under Information Technology as the Enterprise Information Technology business area). The update to 2006 sales guidance also contemplates the completion of the sales of other small businesses.
Earnings per share from continuing operations are expected to range between $4.25 and $4.40, and include estimated pension expense as determined in accordance with accounting principles generally accepted in the United States of $450 million and CAS pension expense of $425 million. The company's estimated pension expense for 2006 is based on a composite discount rate of 5.75 percent and a long-term expected rate of return on plan assets of 8.5 percent. Net cash provided by operating activities is expected to be between $2.3 billion and $2.6 billion in 2006.
Share Repurchase Program
On Oct. 25, 2005, the company announced a new $1.5 billion share repurchase program to be completed over 12 to 18 months. On Nov. 4, 2005, as part of the new program, the company executed a $500 million accelerated share repurchase agreement that reduced its shares outstanding by approximately 9 million. During 2005, the company repurchased approximately 22 million shares of its common stock for $1.2 billion. Since the inception of its share repurchase programs in August 2003, the company has retired approximately 42 million shares of its common stock for $2.2 billion. The company had shares outstanding of 347.4 million as of Dec. 31, 2005.
Segment Results ELECTRONIC SYSTEMS ($ in millions) FOURTH QUARTER TOTAL YEAR 2005 2004 2005 2004 Sales $1,740 $1,730 $6,642 $6,417 Operating Margin 169 196 710 670 % Operating Margin to Sales 9.7% 11.3% 10.7% 10.4%
Electronic Systems fourth quarter 2005 sales were essentially unchanged from the fourth quarter of 2004 primarily due to increases in Defensive & Navigation Systems, Naval & Marine Systems, and Defense Other, which were partially offset by lower sales in Aerospace Systems. Defensive & Navigation Systems sales increased 13 percent; Naval & Marine and Defense Other sales each increased 8 percent.
Electronic Systems fourth quarter 2005 operating margin declined 14 percent from the fourth quarter of 2004 due to a $65 million pre-tax charge for the F-16 Block 60 fixed-price development program, which was partially offset by improved performance in Defensive & Navigation Systems. The charge reflects a higher estimate to complete the Falcon Edge electronic warfare suite. Fourth quarter 2004 operating margin included the impact of improved performance and contract close-outs for several programs, which was partially offset by a $42 million pre-tax charge for the Wedgetail fixed-price development program.
Electronic Systems 2005 sales increased 4 percent from 2004 due to higher sales in Defensive & Navigation Systems and Government Systems, partially offset by lower sales in Defense Other and Aerospace Systems. Defensive & Navigation Systems sales increased 12 percent due to higher sales for the Large Aircraft Infrared Countermeasures (LAIRCM) and EA-18 programs. Government Systems sales increased 19 percent due to higher sales of bio- detection and communication systems. The decrease in Defense Other reflects the transfer of an airborne surveillance program to Aerospace Systems and lower international sales. The decrease in Aerospace Systems is primarily due to lower volume on the Longbow Missile and Fire Control Radar programs and to lower volume and a sales adjustment on the F-16 Block 60 program, which was partially offset by the airborne surveillance program transfer.
Electronic Systems 2005 operating margin increased 6 percent from 2004 primarily due to higher sales volume in Defensive & Navigation Systems and improved performance in Government Systems.
SHIPS ($ in millions) FOURTH QUARTER TOTAL YEAR 2005 2004 2005 2004 Sales $1,463 $1,714 $5,786 $6,252 Operating Margin 104 107 241 389 % Operating Margin to Sales 7.1% 6.2% 4.2% 6.2%
Ships fourth quarter 2005 sales, which include the financial results of the Newport News and Ship Systems sectors, declined 15 percent from the fourth quarter of 2004 and reflect lower sales at Ship Systems due to hurricane impacts and lower DD(X) sales. Surface Combatants sales declined 56 percent due to lower DD(X) sales and hurricane-related work delays. Expeditionary Warfare sales declined 14 percent due to hurricane-related work delays. Aircraft Carriers revenue increased 8 percent due to higher revenue from the USS George Washington and USS Carl Vinson programs. Ships fourth quarter 2005 operating margin declined 3 percent from the fourth quarter of 2004 reflecting lower volume on the DD(X) program, partially offset by higher operating margin in Aircraft Carriers and Submarines.
Ships 2005 sales declined 7 percent from 2004. Higher sales in Aircraft Carriers, Submarines, and Coast Guard & Coastal Defense were offset by sales declines in Surface Combatants, Commercial & Other, and Expeditionary Warfare. Surface Combatants sales declined 30 percent due to lower DD(X) sales and hurricane-related work delays. Commercial & Other declined 73 percent and Expeditionary Warfare sales declined 2 percent due to hurricane-related work delays on the LHD program.
Ships 2005 operating margin declined 38 percent from 2004, and includes higher operating margin in Aircraft Carriers and Submarines and a $150 million third quarter 2005 cumulative adjustment to operating margin to account for hurricane-related cost growth at the Ship Systems sector.
INTEGRATED SYSTEMS ($ in millions) FOURTH QUARTER TOTAL YEAR 2005 2004 2005 2004 Sales $1,483 $1,298 $5,612 $4,742 Operating Margin 118 101 474 412 % Operating Margin to Sales 8.0% 7.8% 8.4% 8.7%
Integrated Systems fourth quarter 2005 sales increased 14 percent from the fourth quarter of 2004 due to higher sales in all business areas. Integrated Systems Western Region sales rose 10 percent; Airborne Early Warning & Electronic Warfare Systems sales increased 20 percent due to higher volume from the E-2 Advanced Hawkeye and EA-6B programs; and Airborne Ground Surveillance & Battle Management Systems sales rose 23 percent primarily due to higher volume on the E-10A program. Integrated Systems fourth quarter 2005 operating margin increased 17 percent from the fourth quarter of 2004 due to higher sales volume and improved performance.
Integrated Systems 2005 sales increased 18 percent from 2004 due to higher sales in all business areas. Airborne Early Warning & Electronic Warfare Systems sales rose 33 percent due to higher volume from the E-2 Advanced Hawkeye and EA-18G programs, and Integrated Systems Western Region sales increased 15 percent due to higher sales in the Unmanned Systems, the Multi- Platform Radar Technology Insertion Program (MP-RTIP) and the B-2 program.
Integrated Systems 2005 operating margin increased 15 percent from 2004 due to higher sales volume. The change in operating margin rate was due to a greater proportion of lower margin development program revenue.
MISSION SYSTEMS ($ in millions) FOURTH QUARTER TOTAL YEAR 2005 2004 2005 2004 Sales $1,332 $1,200 $5,362 $4,947 Operating Margin 91 77 381 321 % Operating Margin to Sales 6.8% 6.4% 7.1% 6.5%
Mission Systems fourth quarter 2005 sales increased 11 percent from the fourth quarter of 2004 due to higher sales in all business areas. Command, Control & Intelligence Systems revenue increased 14 percent, Missile Systems sales increased 8 percent, and Technical & Management Services sales increased 10 percent. Mission Systems fourth quarter 2005 operating margin increased 18 percent from the fourth quarter of 2004 due to higher sales volume and improved performance in Command, Control & Intelligence Systems.
Mission Systems 2005 sales increased 8 percent from 2004 due to higher sales in Command, Control & Intelligence Systems and Missile Systems. Command, Control & Intelligence Systems sales increased 7 percent due to growth in several programs, and Missile Systems sales increased 18 percent due to revenue from the Kinetic Energy Interceptor and Intercontinental Ballistic Missile programs. Mission Systems 2005 operating margin increased 19 percent from 2004 due to higher sales volume and improved performance in Command, Control & Intelligence Systems and Missile Systems.
INFORMATION TECHNOLOGY ($ in millions) FOURTH QUARTER TOTAL YEAR 2005 2004 2005 2004 Sales $1,383 $1,335 $5,254 $5,051 Operating Margin 88 77 355 301 % Operating Margin to Sales 6.4% 5.8% 6.8% 6.0%
Information Technology fourth quarter 2005 sales increased 4 percent from the fourth quarter of 2004 due to higher sales in Government Information Technology and Commercial Information Technology, partially offset by lower Enterprise Information Technology sales. Government Information Technology sales rose 12 percent due to the Integic acquisition, higher volume in existing programs and new program awards. Information Technology fourth quarter 2005 operating margin increased 14 percent from the fourth quarter of 2004 due to higher sales volume and improved performance in Government Information Technology, partially offset by lower performance in Enterprise Information Technology.
Information Technology 2005 sales increased 4 percent from 2004 primarily due to higher revenue in Government Information Technology, Commercial Information Technology and Technology Services, partially offset by lower Enterprise Information Technology sales. Government Information Technology revenue increased 9 percent due to higher volume in existing programs, the acquisition of Integic and new business awards. Commercial Information Technology sales rose 8 percent due to new business awards. Information Technology 2005 operating margin increased 18 percent from 2004 due to higher sales volume and improved performance in Government Information Technology and Commercial Information Technology, partially offset by lower performance at Enterprise Information Technology.
SPACE TECHNOLOGY ($ in millions) FOURTH QUARTER TOTAL YEAR 2005 2004 2005 2004 Sales $815 $804 $3,395 $3,269 Operating Margin 57 53 255 222 % Operating Margin to Sales 7.0% 6.6% 7.5% 6.8%
Space Technology fourth quarter 2005 sales increased 1 percent from the fourth quarter of 2004 due to a 9 percent increase in Civil Space sales partially offset by lower sales in other business areas. Space Technology fourth quarter 2005 operating margin increased 8 percent from the fourth quarter of 2004 due to improved program performance at five of the six business areas, partially offset by lower program performance in Civil Space.
Space Technology sales increased 4 percent in 2005 compared with 2004 due to higher sales in Civil Space and Intelligence, Surveillance & Reconnaissance, partially offset by lower sales in Satellite Communications, Missile & Space Defense, and Software Defined Radios. Civil Space sales increased 23 percent due to higher revenue from NASA and NOAA programs. Intelligence, Surveillance & Reconnaissance sales increased 10 percent due to higher volume in restricted programs. Space Technology 2005 operating margin increased 15 percent due to higher sales volume and improved program performance in Intelligence, Surveillance & Reconnaissance.
Future Presentation Format
Beginning with the announcement of first quarter 2006 financial results, the company will adopt a new presentation format as depicted in Schedule 5 of this press release. The new presentation format includes the establishment of the Technical Services segment on Jan. 1, 2006. To enhance the company's presentation of its performance, the Mission Systems, Information Technology and Technical Services segment results will be collectively presented as Information & Services. The Integrated Systems and Space Technology segment results will be collectively presented as Aerospace. Electronic Systems will be presented as Electronics. Ships will continue to include the financial results of Ship Systems and Newport News. This new presentation format does not reflect a change to the company's organizational structure.
Schedule 5 provides the company's quarterly financial results under the new format for years 2003, 2004 and 2005 and includes a revision to intercompany margin recognition and elimination for the company's operating segments.
Fourth Quarter 2005 Highlights * Northrop Grumman was awarded an interim contract by the commonwealth of Virginia to help transform and improve its information technology infrastructure to ensure quality services are delivered to state agencies and the citizens they serve. The interim contract phase is funded at $3.5 million. Upon review by Virginia's General Assembly, the interim contract will transition to a 10-year contract valued at approximately $2 billion and will include cost reimbursable, fixed- priced and fixed-unit pricing contractual provisions. * The U.S. Navy awarded Northrop Grumman a contract valued at approximately $1.94 billion for the refueling and complex overhaul of the aircraft carrier USS Carl Vinson. * Northrop Grumman received a $558.6 million contract modification to exercise an option under a previously awarded contract for continuation of work on the new generation nuclear-powered aircraft carrier, CVN 21. * The U.S. Air Force awarded Northrop Grumman a five-year, $532 million contract for the Joint Surveillance Target Attack Radar System (Joint STARS) System Improvement Program to provide systems design and development improvements to the E-8C Joint STARS fleet. * Northrop Grumman was awarded a blanket purchase agreement for the installation, engineering and maintenance of the U.S. Social Security Administration's local area network. The network is critical to providing availability and security to Social Security customers. The blanket purchase agreement is valued at up to $153 million over five years. * Northrop Grumman delivered one of the most technologically advanced and sailor-friendly U.S. Navy warships ever built. The amphibious transport dock ship USS San Antonio (LPD 17) represents the first in a class that will form a solid foundation for the Navy's new expeditionary warfare strategy. * Northrop Grumman redelivered the USS George Washington to the U.S. Navy following a 10-and-a-half-month maintenance availability. * The U.S. Postal Service recognized Northrop Grumman performance on the Biohazard Detection System Program with two prestigious awards -- the Quality Supplier of the Year Award and the Engineering Excellence Award. * Northrop Grumman achieved its twenty-first CMMIÂŽ Level 5 rating, the highest possible for benchmarking commercial and defense industry best practices for management and engineering. * A high-energy, solid-state laser developed by Northrop Grumman for the U.S. military has fired one of the most powerful beams yet produced by an electric laser of more than 27 kW with a run time of 350 seconds.
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 more than 125,000 employees and operates in all 50 states and 25 countries and serves U.S. and international military, government and commercial customers.
Northrop Grumman will webcast its earnings conference call at 12 p.m. EST on Jan. 24, 2006. 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 .
Note: Certain statements and assumptions in this release contain or are based on "forward-looking" information that Northrop Grumman Corporation (the "Company") 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," "believe," "plan," "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, 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 the Company's control. These include the Company'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; hurricane recoveries; 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; the results of any audit or appeal process with the Internal Revenue Service; and anticipated costs of capital investments, among other things.
The Company'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, the Company'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 and of the assertion or prosecution of potential substantial claims by or on behalf of a U.S. government customer; natural disasters, including recent hurricanes affecting the Company's Gulf Coast shipyards and the associated risks underlying the Company's assumptions regarding achieving expected learning-curve progress, amounts and timing of recoveries under insurance contracts, availability of materials and supplies, continuation of the supply chain, contractual performance relief and the application of cost sharing terms, impacts of timing of cash receipts and the availability of other mitigating elements; 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 the Company's filings from time to time with the Securities and Exchange Commission, including, without limitation, Company reports on Form 10-K and Form 10-Q.
NORTHROP GRUMMAN CORPORATION SCHEDULE 1 FINANCIAL HIGHLIGHTS ($ in millions, except per share) (unaudited) FOURTH QUARTER TOTAL YEAR 2005 2004 2005 2004 OPERATING RESULTS HIGHLIGHTS Total contract acquisitions (1) $6,556 $11,892 $25,186 $30,487 Total sales 7,860 7,846 30,721 29,853 Total operating margin 534 538 2,178 2,006 Income from continuing operations 331 273 1,383 1,093 Net income 331 272 1,400 1,084 Diluted earnings per share from continuing operations .92 .74 3.81 2.99 Diluted earnings per share .92 .74 3.85 2.97 Net cash provided by operating activities 678 324 2,645 1,936 DEC 31, DEC 31, 2005 2004(4) BALANCE SHEET HIGHLIGHTS Cash and cash equivalents $1,605 $1,230 Accounts receivable, net 3,656 3,546 Inventoried costs, net 1,174 1,069 Property, plant, and equipment, net 4,404 4,210 Total debt 5,145 5,158 Net debt (2) 3,540 3,928 Mandatorily redeemable preferred stock 350 350 Shareholders' equity 16,824 16,700 Total assets 34,211 33,369 Net debt to capitalization ratio (3) 16% 18% (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 2005 presentation. NORTHROP GRUMMAN CORPORATION SCHEDULE 2 OPERATING RESULTS (in millions, except per share) (unaudited) FOURTH QUARTER TOTAL YEAR 2005 2004 2005 2004 Sales Electronic Systems $1,740 $1,730 $6,642 $6,417 Ships 1,463 1,714 5,786 6,252 Integrated Systems 1,483 1,298 5,612 4,742 Mission Systems 1,332 1,200 5,362 4,947 Information Technology 1,383 1,335 5,254 5,051 Space Technology 815 804 3,395 3,269 Other 11 52 42 230 Intersegment Eliminations (367) (287) (1,372) (1,055) $7,860 $7,846 $30,721 $29,853 Operating margin Electronic Systems $169 $196 $710 $670 Ships 104 107 241 389 Integrated Systems 118 101 474 412 Mission Systems 91 77 381 321 Information Technology 88 77 355 301 Space Technology 57 53 255 222 Other (6) (9) (17) (3) Total segment operating margin (1) 621 602 2,399 2,312 Reconciliation to operating margin Unallocated expenses (79) (66) (190) (282) Pension expense (102) (86) (410) (350) Reversal of CAS pension expense included above 94 91 389 338 Reversal of royalty income included above (3) (10) (12) Operating margin 534 538 2,178 2,006 Interest income 10 6 54 58 Interest expense (101) (96) (388) (431) Other, net 16 (25) 200 (18) Income from continuing operations before income taxes 459 423 2,044 1,615 Federal and foreign income taxes 128 150 661 522 Income from continuing operations 331 273 1,383 1,093 Income from discontinued operations, net of tax 1 3 (Loss) gain from disposal of discontinued operations, net of tax (2) 17 (12) Net income $331 $272 $1,400 $1,084 Weighted-average diluted shares outstanding 358.05 367.12 363.17 364.95 Diluted earnings per share Continuing operations $.92 $.74 $3.81 $2.99 Discontinued operations .01 Disposal of discontinued operations .04 (.03) Diluted earnings per share $.92 $.74 $3.85 $2.97 (1) Non-GAAP measure. Management uses segment operating margin as an internal measure of financial performance for the individual business segments. Pension expense is included in determining the segments' operating margin to the extent that the cost is currently recognized under U.S. Government Cost Accounting Standards (CAS). In order to reconcile from segment operating margin to total company operating margin, these amounts are reported under the caption "Reversal of CAS pension expense included above." Total pension expense or income determined in accordance with accounting principles generally accepted in the United States is reported separately as a reconciling item under the caption "Pension expense." The reconciling item captioned "Unallocated expenses" includes the portion of corporate, legal, environmental, other retiree benefits, stock compensation, and other expenses not allocated to the segments. NORTHROP GRUMMAN CORPORATION SCHEDULE 3 ADDITIONAL SEGMENT INFORMATION ($ in millions) (unaudited) CONTRACT FUNDED ACQUISITIONS(1) BACKLOG(2) FOURTH QUARTER TOTAL YEAR DECEMBER 31, 2005 2004 2005 2004 2005 2004 Electronic Systems $1,703 $2,157 $6,238 $6,706 $6,374 $6,757 Ships 818 2,944 2,750 5,668 6,129 9,165 Integrated Systems 1,262 2,127 4,669 5,135 3,748 4,691 Mission Systems 1,238 1,896 4,744 5,209 2,549 3,167 Information Technology 1,227 1,743 5,382 5,300 2,696 2,568 Space Technology 673 1,364 2,645 3,460 999 1,749 Other (22) 38 19 216 5 49 Intersegment Eliminations (343) (377) (1,261) (1,207) (473) (584) Total $6,556 $11,892 $25,186 $30,487 $22,027 $27,562 TOTAL BACKLOG, DECEMBER 31, 2005 TOTAL FUNDED UNFUNDED(3) BACKLOG Electronic Systems $6,374 $1,971 $8,345 Ships 6,129 5,383 11,512 Integrated Systems 3,748 8,543 12,291 Mission Systems 2,549 7,881 10,430 Information Technology 2,696 3,684 6,380 Space Technology 999 6,807 7,806 Other 5 - 5 Intersegment Eliminations (473) - (473) Total $22,027 $34,269 $56,296 (1) Contract acquisitions represent orders received during the period for which funding has been contractually obligated by the customer. (2) Funded backlog represents unfilled orders for which funding has been contractually obligated by the customer. (3) Unfunded backlog excludes unexercised contract options and unfunded Indefinite Delivery Indefinite Quantity (IDIQ). Unfunded backlog represents firm orders for which funding is not currently contractually obligated by the customer. NORTHROP GRUMMAN CORPORATION SCHEDULE 4 SALES BY BUSINESS AREA WITHIN SEGMENTS ($ in millions) (unaudited) FOURTH QUARTER TOTAL YEAR 2005 2004(1) 2005 2004(1) Electronic Systems Defensive & Navigation Systems $563 $497 $2,053 $1,835 Aerospace Systems 350 422 1,590 1,609 Naval & Marine Systems 259 240 887 857 Government Systems 216 223 823 689 C4ISR & Space Systems 159 169 641 652 Defense Other 193 179 648 775 1,740 1,730 6,642 6,417 Ships Aircraft Carriers 564 520 1,975 1,901 Expeditionary Warfare 378 440 1,411 1,436 Surface Combatants 213 487 1,345 1,921 Submarines 236 210 807 730 Coast Guard & Costal Defense 40 39 154 114 Services 31 26 99 99 Commercial & Other 5 23 38 142 Intrasegment Eliminations (4) (31) (43) (91) 1,463 1,714 5,786 6,252 Integrated Systems Integrated Systems Western Region 867 786 3,299 2,874 Airborne Early Warning & Electronic Warfare Systems 438 366 1,689 1,273 Airborne Ground Surveillance & Battle Management Systems 182 148 637 600 Intrasegment Eliminations (4) (2) (13) (5) 1,483 1,298 5,612 4,742 Mission Systems Command, Control & Intelligence Systems 810 708 3,218 3,014 Missile Systems 376 347 1,517 1,288 Technical & Management Services 170 154 679 699 Intrasegment Eliminations (24) (9) (52) (54) 1,332 1,200 5,362 4,947 Information Technology Government Information Technology 849 761 3,265 3,004 Enterprise Information Technology 222 269 728 867 Commercial Information Technology 183 164 711 656 Technology Services 169 174 694 650 Intrasegment Eliminations (40) (33) (144) (126) 1,383 1,335 5,254 5,051 Space Technology Intelligence, Surveillance & Reconnaissance 266 267 1,149 1,048 Civil Space 185 169 783 639 Software Defined Radios 121 123 529 546 Satellite Communications 117 113 449 509 Missile & Space Defense 104 109 425 477 Technology 33 28 121 102 Intrasegment Eliminations (11) (5) (61) (52) 815 804 3,395 3,269 Other 11 52 42 230 Intersegment Eliminations (367) (287) (1,372) (1,055) Total Sales $7,860 $7,846 $30,721 $29,853 (1) Where material, certain prior year amounts have been reclassified to conform to the 2005 presentation. NORTHROP GRUMMAN CORPORATION SCHEDULE 5.1 NORTHROP GRUMMAN TECHNICAL SERVICES REALIGNMENT SEGMENT OPERATING RESULTS ($ in millions) (unaudited) AS REPORTED 2005 Three Months Ended Total SALES Mar 31 Jun 30 Sep 30 Dec 31 Year Information & Services Mission Systems $1,305 $1,320 $1,405 $1,332 $5,362 Information Technology 1,229 1,331 1,311 1,383 5,254 Technical Services Total Information & Services 2,534 2,651 2,716 2,715 10,616 Aerospace Integrated Systems 1,299 1,404 1,426 1,483 5,612 Space Technology 863 875 842 815 3,395 Total Aerospace 2,162 2,279 2,268 2,298 9,007 Electronics 1,543 1,765 1,594 1,740 6,642 Ships 1,514 1,587 1,222 1,463 5,786 Other 11 11 9 11 42 Intersegment Eliminations (311) (331) (363) (367) (1,372) Total Sales $7,453 $7,962 $7,446 $7,860 $30,721 SEGMENT OPERATING MARGIN Information & Services Mission Systems $91 $99 $100 $91 $381 Information Technology 85 89 93 88 355 Technical Services Total Information & Services 176 188 193 179 736 Aerospace Integrated Systems 136 108 112 118 474 Space Technology 62 69 67 57 255 Total Aerospace 198 177 179 175 729 Electronics 161 198 182 169 710 Ships 104 101 (68) 104 241 Other (1) (5) (5) (6) (17) Intersegment Eliminations Total Segment Operating Margin(1) $638 $659 $481 $621 $2,399 (1) Non-GAAP measure. Management uses segment operating margin as an internal measure of financial performance for the individual business segments. NORTHROP GRUMMAN CORPORATION SCHEDULE 5.1 NORTHROP GRUMMAN TECHNICAL SERVICES REALIGNMENT SEGMENT OPERATING RESULTS ($ in millions) (unaudited) REALIGNED 2005 Three Months Ended Total SALES Mar 31 Jun 30 Sep 30 Dec 31 Year Information & Services Mission Systems $1,254 $1,271 $1,356 $1,279 $5,160 Information Technology 1,034 1,127 1,110 1,194 4,465 Technical Services 274 286 276 267 1,103 Total Information & Services 2,562 2,684 2,742 2,740 10,728 Aerospace Integrated Systems 1,287 1,391 1,417 1,474 5,569 Space Technology 863 875 842 815 3,395 Total Aerospace 2,150 2,266 2,259 2,289 8,964 Electronics 1,547 1,769 1,595 1,743 6,654 Ships 1,514 1,587 1,222 1,463 5,786 Other 11 11 9 11 42 Intersegment Eliminations (331) (355) (381) (386) (1,453) Total Sales $7,453 $7,962 $7,446 $7,860 $30,721 SEGMENT OPERATING MARGIN Information & Services Mission Systems $93 $99 $101 $94 $387 Information Technology 76 77 81 79 313 Technical Services 12 14 17 17 60 Total Information & Services 181 190 199 190 760 Aerospace Integrated Systems 142 117 120 126 505 Space Technology 67 74 72 61 274 Total Aerospace 209 191 192 187 779 Electronics 162 199 182 169 712 Ships 107 102 (65) 105 249 Other (1) (5) (5) (6) (17) Intersegment Eliminations (20) (18) (22) (24) (84) Total Segment Operating Margin(1) $638 $659 $481 $621 $2,399 (1) Non-GAAP measure. Management uses segment operating margin as an internal measure of financial performance for the individual business segments. NORTHROP GRUMMAN CORPORATION SCHEDULE 5.2 NORTHROP GRUMMAN TECHNICAL SERVICES REALIGNMENT SEGMENT OPERATING RESULTS ($ in millions) (unaudited) AS REPORTED 2003 2004 Total Three Months Ended Total SALES Year Mar 31 Jun 30 Sep 30 Dec 31 Year Information & Services Mission Systems $4,172 $1,183 $1,298 $1,266 $1,200 $4,947 Information Technology 4,651 1,230 1,225 1,261 1,335 5,051 Technical Services Total Information & Services 8,823 2,413 2,523 2,527 2,535 9,998 Aerospace Integrated Systems 3,847 1,147 1,133 1,164 1,298 4,742 Space Technology 2,823 806 836 823 804 3,269 Total Aerospace 6,670 1,953 1,969 1,987 2,102 8,011 Electronics 6,039 1,538 1,591 1,558 1,730 6,417 Ships 5,451 1,444 1,557 1,537 1,714 6,252 Other 191 59 61 58 52 230 Intersegment Eliminations (778) (243) (266) (259) (287) (1,055) Total Sales $26,396 $7,164 $7,435 $7,408 $7,846 $29,853 SEGMENT OPERATING MARGIN Information & Services Mission Systems $266 $76 $86 $82 $77 $321 Information Technology 269 71 73 80 77 301 Technical Services Total Information & Services 535 147 159 162 154 622 Aerospace Integrated Systems 384 116 90 105 101 412 Space Technology 193 51 61 57 53 222 Total Aerospace 577 167 151 162 154 634 Electronics 590 158 138 178 196 670 Ships 295 86 100 96 107 389 Other (74) 2 3 1 (9) (3) Intersegment Eliminations Total Segment Operating Margin (1) $1,923 $560 $551 $599 $602 $2,312 (1) Non-GAAP measure. Management uses segment operating margin as an internal measure of financial performance for the individual business segments. NORTHROP GRUMMAN CORPORATION SCHEDULE 5.2 NORTHROP GRUMMAN TECHNICAL SERVICES REALIGNMENT SEGMENT OPERATING RESULTS ($ in millions) (unaudited) REALIGNED 2003 2004 Total Three Months Ended Total SALES Year Mar 31 Jun 30 Sep 30 Dec 31 Year Information & Services Mission Systems $3,913 $1,115 $1,233 $1,214 $1,159 $4,721 Information Technology 3,958 1,050 1,048 1,079 1,141 4,318 Technical Services 1,034 272 266 259 263 1,060 Total Information & Services 8,905 2,437 2,547 2,552 2,563 10,099 Aerospace Integrated Systems 3,808 1,134 1,120 1,153 1,286 4,693 Space Technology 2,823 806 836 823 804 3,269 Total Aerospace 6,631 1,940 1,956 1,976 2,090 7,962 Electronics 6,050 1,543 1,599 1,560 1,737 6,439 Ships 5,451 1,444 1,557 1,537 1,714 6,252 Other 191 59 61 58 52 230 Intersegment Eliminations (832) (259) (285) (275) (310) (1,129) Total Sales $26,396 $7,164 $7,435 $7,408 $7,846 $29,853 SEGMENT OPERATING MARGIN Information & Services Mission Systems $265 $78 $88 $84 $80 $330 Information Technology 241 60 64 72 70 266 Technical Services 39 12 10 9 9 40 Total Information & Services 545 150 162 165 159 636 Aerospace Integrated Systems 403 127 93 109 108 437 Space Technology 207 54 65 61 56 236 Total Aerospace 610 181 158 170 164 673 Electronics 591 158 139 177 196 670 Ships 297 88 101 98 108 395 Other (74) 2 3 1 (9) (3) Intersegment Eliminations (46) (19) (12) (12) (16) (59) Total Segment Operating Margin (1) $1,923 $560 $551 $599 $602 $2,312 (1) Non-GAAP measure. Management uses segment operating margin as an internal measure of financial performance for the individual business segments.
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