e10vq
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-16411
NORTHROP GRUMMAN
CORPORATION
(Exact name of registrant as
specified in its charter)
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DELAWARE
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95-4840775
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1840 Century Park East, Los Angeles, California 90067
www.northropgrumman.com
(Address of principal executive
offices and internet site)
(310) 553-6262
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer x
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
As of October 19, 2009, 313,751,726 shares of common
stock were outstanding.
NORTHROP
GRUMMAN CORPORATION
Table of
Contents
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Page
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Condensed Consolidated Statements of Operations
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1
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Condensed Consolidated Statements of Financial Position
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2
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Condensed Consolidated Statements of Cash Flows
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3
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Condensed Consolidated Statements of Changes in Shareholders Equity
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5
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Notes to Condensed Consolidated Financial Statements
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1. Basis of Presentation
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6
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2. Accounting Standards Updates
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7
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3. Fair Value of Financial Instruments
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8
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4. Common Stock Dividends and Conversion of Preferred Stock
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9
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5. Business Acquisitions and Dispositions
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9
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6. Segment Information
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10
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7. Earnings Per Share
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11
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8. Goodwill and Other Purchased Intangible Assets
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12
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9. Long-Term Debt
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13
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10. Litigation
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13
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11. Commitments and Contingencies
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15
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12. Retirement Benefits
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18
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13. Stock Compensation Plans
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19
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14. Income Taxes
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21
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Report of Independent Registered Public Accounting Firm
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22
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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Overview
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23
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Critical Accounting Policies, Estimates, and Judgments
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24
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Consolidated Operating Results
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25
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Segment Operating Results
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28
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Backlog
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34
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Liquidity and Capital Resources
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35
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Accounting Standards Updates
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37
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Forward-Looking Statements and Projections
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37
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Contractual Obligations
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38
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Glossary of Programs
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38
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Quantitative and Qualitative Disclosures About Market Risk
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43
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Controls and Procedures
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44
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45
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47
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47
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47
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47
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47
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47
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Signatures
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49
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EX-10.3 |
EX-12(a) |
EX-15 |
EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
EX-101 INSTANCE DOCUMENT |
EX-101 SCHEMA DOCUMENT |
EX-101 CALCULATION LINKBASE DOCUMENT |
EX-101 LABELS LINKBASE DOCUMENT |
EX-101 PRESENTATION LINKBASE DOCUMENT |
EX-101 DEFINITION LINKBASE DOCUMENT |
i
NORTHROP
GRUMMAN CORPORATION
PART I.
FINANCIAL INFORMATION
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Item 1. |
Financial Statements
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CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30
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September 30
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$ in millions, except per share
amounts
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2009
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2008
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2009
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2008
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Sales and Service Revenues
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Product sales
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$
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4,982
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$
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4,808
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$
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14,972
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$
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14,051
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Service revenues
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3,744
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3,573
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11,031
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10,682
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Total sales and service revenues
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8,726
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8,381
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26,003
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24,733
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Cost of Sales and Service Revenues
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Cost of product sales
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4,027
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3,682
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12,007
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11,204
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Cost of service revenues
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3,276
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3,143
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9,742
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9,168
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General and administrative expenses
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768
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785
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2,291
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2,320
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Operating income
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655
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771
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1,963
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2,041
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Other (expense) income
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Interest expense
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(76
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(74
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(219
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(223
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Other, net
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41
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45
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62
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72
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Earnings from continuing operations before income taxes
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620
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742
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1,806
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1,890
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Federal and foreign income taxes
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133
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233
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536
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635
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Earnings from continuing operations
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487
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509
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1,270
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1,255
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Earnings from discontinued operations, net of tax
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3
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3
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3
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16
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Net earnings
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$
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490
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$
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512
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$
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1,273
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$
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1,271
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Basic Earnings Per Share
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Continuing operations
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$
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1.54
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$
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1.52
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$
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3.94
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$
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3.72
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Discontinued operations
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.01
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.01
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.01
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.05
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Basic earnings per share
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$
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1.55
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$
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1.53
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$
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3.95
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$
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3.77
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Weighted-average common shares outstanding, in millions
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317.1
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334.2
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322.0
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337.1
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Diluted Earnings Per Share
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Continuing operations
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$
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1.52
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$
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1.50
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$
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3.89
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$
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3.65
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Discontinued operations
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.01
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.01
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.01
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.04
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Diluted earnings per share
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$
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1.53
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$
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1.51
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$
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3.90
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$
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3.69
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Weighted-average diluted shares outstanding, in millions
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320.6
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340.1
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326.1
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344.5
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Net earnings (from above)
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$
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490
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$
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512
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$
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1,273
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$
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1,271
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Other comprehensive income (loss)
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Change in cumulative translation adjustment
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20
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(2
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44
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6
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Net unrealized gain (loss) on marketable securities
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and cash flow hedges, net of tax
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35
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(3
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Change in unamortized benefit plan costs, net of tax
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53
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3
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159
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11
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Other comprehensive income, net of tax
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73
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1
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238
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14
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Comprehensive income
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$
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563
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$
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513
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$
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1,511
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$
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1,285
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The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
NORTHROP
GRUMMAN CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
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September 30,
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December 31,
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$ in millions
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2009
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2008
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Assets
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Cash and cash equivalents
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$
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1,924
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$
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1,504
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Accounts receivable, net of progress payments
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3,951
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3,904
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Inventoried costs, net of progress payments
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1,243
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1,003
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Deferred tax assets
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513
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549
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Prepaid expenses and other current assets
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453
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229
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Total current assets
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8,084
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7,189
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Property, plant, and equipment, net of accumulated depreciation
of $4,171 in 2009 and $3,803 in 2008
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4,775
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4,810
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Goodwill
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14,526
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14,518
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Other purchased intangibles, net of accumulated amortization of
$1,873 in 2009 and $1,795 in 2008
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899
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947
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Pension and post-retirement plan assets
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292
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290
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Long-term deferred tax assets
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1,281
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1,510
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Miscellaneous other assets
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988
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933
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Total assets
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$
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30,845
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$
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30,197
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Liabilities
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Notes payable to banks
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$
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28
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$
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24
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Current portion of long-term debt
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491
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477
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Trade accounts payable
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1,793
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1,943
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Accrued employees compensation
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1,419
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1,284
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Advance payments and billings in excess of costs incurred
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1,977
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2,036
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Other current liabilities
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1,562
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1,660
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Total current liabilities
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7,270
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7,424
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Long-term debt, net of current portion
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4,194
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3,443
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Pension and post-retirement plan liabilities
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5,349
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5,823
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Other long-term liabilities
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1,603
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1,587
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Total liabilities
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18,416
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18,277
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Commitments and Contingencies (Note 11)
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Shareholders Equity
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Common stock, $1 par value; 800,000,000 shares
authorized; issued and outstanding: 2009
314,716,763; 2008 327,012,663
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315
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327
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Paid-in capital
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9,061
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9,645
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Retained earnings
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6,457
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5,590
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Accumulated other comprehensive loss
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(3,404
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(3,642
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)
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Total shareholders equity
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12,429
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11,920
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Total liabilities and shareholders equity
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$
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30,845
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$
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30,197
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The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
NORTHROP
GRUMMAN CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30
|
$ in millions
|
|
2009
|
|
2008
|
Operating Activities
|
|
|
|
|
|
|
|
|
Sources of Cash Continuing Operations
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|
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|
|
|
|
Cash received from customers
|
|
|
|
|
|
|
|
|
Progress payments
|
|
$
|
5,472
|
|
|
$
|
5,465
|
|
Collections on billings
|
|
|
20,193
|
|
|
|
19,828
|
|
Other cash receipts
|
|
|
32
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
Total sources of cash continuing operations
|
|
|
25,697
|
|
|
|
25,380
|
|
|
|
|
|
|
|
|
|
|
Uses of Cash Continuing Operations
|
|
|
|
|
|
|
|
|
Cash paid to suppliers and employees
|
|
|
(22,717
|
)
|
|
|
(22,248
|
)
|
Pension contributions
|
|
|
(832
|
)
|
|
|
(86
|
)
|
Interest paid, net of interest received
|
|
|
(240
|
)
|
|
|
(251
|
)
|
Income taxes paid, net of refunds received
|
|
|
(675
|
)
|
|
|
(569
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
(2
|
)
|
|
|
(47
|
)
|
Other cash payments
|
|
|
(29
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Total uses of cash continuing operations
|
|
|
(24,495
|
)
|
|
|
(23,209
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by continuing operations
|
|
|
1,202
|
|
|
|
2,171
|
|
Cash provided by discontinued operations
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,202
|
|
|
|
2,174
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds from sale of business, net of cash divested
|
|
|
|
|
|
|
175
|
|
Payments for businesses purchased
|
|
|
(33
|
)
|
|
|
|
|
Additions to property, plant, and equipment
|
|
|
(436
|
)
|
|
|
(444
|
)
|
Payments for outsourcing contract costs and related software
costs
|
|
|
(58
|
)
|
|
|
(100
|
)
|
(Increase) decrease in restricted cash
|
|
|
(28
|
)
|
|
|
59
|
|
Other investing activities, net
|
|
|
16
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(539
|
)
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Net borrowings under lines of credit
|
|
|
4
|
|
|
|
3
|
|
Proceeds from issuance of long-term debt
|
|
|
850
|
|
|
|
|
|
Principal payments of long-term debt
|
|
|
(73
|
)
|
|
|
(110
|
)
|
Proceeds from exercises of stock options and issuances of common
stock
|
|
|
29
|
|
|
|
95
|
|
Dividends paid
|
|
|
(405
|
)
|
|
|
(395
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
2
|
|
|
|
47
|
|
Common stock repurchases
|
|
|
(650
|
)
|
|
|
(1,462
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(243
|
)
|
|
|
(1,822
|
)
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
420
|
|
|
|
53
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,504
|
|
|
|
963
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,924
|
|
|
$
|
1,016
|
|
|
|
|
|
|
|
|
|
|
3
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30
|
$ in millions
|
|
2009
|
|
2008
|
Reconciliation of Net Earnings to Net Cash Provided by
Operating Activities
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,273
|
|
|
$
|
1,271
|
|
Adjustments to reconcile to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
428
|
|
|
|
416
|
|
Amortization of assets
|
|
|
113
|
|
|
|
148
|
|
Stock-based compensation
|
|
|
83
|
|
|
|
126
|
|
Excess tax benefits from stock-based compensation
|
|
|
(2
|
)
|
|
|
(47
|
)
|
Pre-tax gain on sale of business
|
|
|
|
|
|
|
(58
|
)
|
Increase in
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,741
|
)
|
|
|
(4,845
|
)
|
Inventoried costs
|
|
|
(443
|
)
|
|
|
(531
|
)
|
Prepaid expenses and other current assets
|
|
|
(39
|
)
|
|
|
(43
|
)
|
Increase (decrease) in
|
|
|
|
|
|
|
|
|
Progress payments
|
|
|
4,888
|
|
|
|
5,062
|
|
Accounts payable and accruals
|
|
|
(120
|
)
|
|
|
313
|
|
Deferred income taxes
|
|
|
133
|
|
|
|
122
|
|
Income taxes payable
|
|
|
(158
|
)
|
|
|
130
|
|
Retiree benefits
|
|
|
(208
|
)
|
|
|
35
|
|
Other non-cash transactions, net
|
|
|
(5
|
)
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Cash provided by continuing operations
|
|
|
1,202
|
|
|
|
2,171
|
|
Cash provided by discontinued operations
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
1,202
|
|
|
$
|
2,174
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Sale of business
|
|
|
|
|
|
|
|
|
Liabilities assumed by purchaser
|
|
|
|
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable convertible preferred stock converted
into common stock
|
|
|
|
|
|
$
|
350
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
NORTHROP
GRUMMAN CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30
|
$ in millions, except per
share
|
|
2009
|
|
2008
|
Common Stock
|
|
|
|
|
|
|
|
|
At beginning of period
|
|
$
|
327
|
|
|
$
|
338
|
|
Common stock repurchased
|
|
|
(15
|
)
|
|
|
(21
|
)
|
Conversion of preferred stock
|
|
|
|
|
|
|
6
|
|
Employee stock awards and options
|
|
|
3
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
|
315
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
Paid-in Capital
|
|
|
|
|
|
|
|
|
At beginning of period
|
|
|
9,645
|
|
|
|
10,661
|
|
Common stock repurchased
|
|
|
(648
|
)
|
|
|
(1,516
|
)
|
Conversion of preferred stock
|
|
|
|
|
|
|
344
|
|
Employee stock awards and options
|
|
|
64
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
|
9,061
|
|
|
|
9,668
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
At beginning of period
|
|
|
5,590
|
|
|
|
7,387
|
|
Net earnings
|
|
|
1,273
|
|
|
|
1,271
|
|
Adoption of accounting standards updates
|
|
|
|
|
|
|
(3
|
)
|
Dividends declared
|
|
|
(406
|
)
|
|
|
(402
|
)
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
|
6,457
|
|
|
|
8,253
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
At beginning of period
|
|
|
(3,642
|
)
|
|
|
(699
|
)
|
Other comprehensive income, net of tax
|
|
|
238
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
|
(3,404
|
)
|
|
|
(685
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
12,429
|
|
|
$
|
17,563
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
1.26
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
NORTHROP
GRUMMAN CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Principles of Consolidation The unaudited
condensed consolidated financial statements include the accounts
of Northrop Grumman Corporation and its subsidiaries (the
company). All material intercompany accounts, transactions, and
profits are eliminated in consolidation.
The accompanying unaudited condensed consolidated financial
statements of the company have been prepared by management in
accordance with the instructions to
Form 10-Q
of the Securities and Exchange Commission (SEC). These
statements include all adjustments of normal recurring nature
considered necessary by management for a fair presentation of
the condensed consolidated financial position, results of
operations, and cash flows. The results reported in these
financial statements are not necessarily indicative of results
that may be expected for the entire year. These financial
statements should be read in conjunction with the audited
consolidated financial statements, including the notes thereto
contained in the companys 2008 Annual Report on
Form 10-K,
updated by the Current Report on
Form 8-K
filed on April 22, 2009 (2008
Form 10-K).
The quarterly information is labeled using a calendar
convention; that is, first quarter is consistently labeled as
ending on March 31, second quarter as ending on
June 30, and third quarter as ending on September 30.
It is managements long-standing practice to establish
actual interim closing dates using a fiscal
calendar, which requires the businesses to close their books on
a Friday near these quarter-end dates in order to normalize the
potentially disruptive effects of quarterly closings on business
processes. The effects of this practice only exist within a
reporting year.
Accounting Estimates The accompanying
unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America (U.S. GAAP). The
preparation thereof requires management to make estimates and
judgments that affect the reported amounts of assets and
liabilities and the disclosure of contingencies at the date of
the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Estimates
have been prepared on the basis of the most current and best
available information and actual results could differ materially
from those estimates.
Accumulated Other Comprehensive Loss The
components of accumulated other comprehensive loss are as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
$ in millions
|
|
2009
|
|
2008
|
Cumulative translation adjustment
|
|
$
|
54
|
|
|
$
|
10
|
|
Net unrealized gain (loss) on marketable securities and cash
flow hedges, net of tax (expense) benefit of $(3) as of
September 30, 2009, and $20 as of December 31, 2008
|
|
|
3
|
|
|
|
(32
|
)
|
Unamortized benefit plan costs, net of tax benefit of $2,251 as
of September 30, 2009, and $2,358 as of December 31,
2008
|
|
|
(3,461
|
)
|
|
|
(3,620
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
$
|
(3,404
|
)
|
|
$
|
(3,642
|
)
|
|
|
|
|
|
|
|
|
|
Subsequent Events Management has evaluated
subsequent events after the balance sheet date through
October 20, 2009, for appropriate accounting and disclosure.
Financial Statement Reclassifications Certain
amounts in the prior period notes to the condensed consolidated
financial statements have been reclassified to reflect the
business operations realignments effective in 2009 (see
Note 6).
6
NORTHROP
GRUMMAN CORPORATION
|
|
2.
|
ACCOUNTING
STANDARDS UPDATES
|
In June 2009, the Financial Accounting Standards Board (FASB)
issued its final Statement of Financial Accounting Standards
(SFAS) No. 168 The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement No. 162.
SFAS No. 168 made the FASB Accounting Standards
Codification (the Codification) the single source of
U.S. GAAP used by nongovernmental entities in the
preparation of financial statements, except for rules and
interpretive releases of the SEC under authority of federal
securities laws, which are sources of authoritative accounting
guidance for SEC registrants. The Codification is meant to
simplify user access to all authoritative accounting guidance by
reorganizing U.S. GAAP pronouncements into roughly 90
accounting topics within a consistent structure; its purpose is
not to create new accounting and reporting guidance. The
Codification supersedes all existing non-SEC accounting and
reporting standards and was effective for the company beginning
July 1, 2009. Following SFAS No. 168, the Board
will not issue new standards in the form of Statements, FASB
Staff Positions, or Emerging Issues Task Force Abstracts;
instead, it will issue Accounting Standards Updates. The FASB
will not consider Accounting Standards Updates as authoritative
in their own right; these updates will serve only to update the
Codification, provide background information about the guidance,
and provide the bases for conclusions on the change(s) in the
Codification. In the description of Accounting Standards Updates
that follows, references in italics relate to
Codification Topics and Subtopics, and their descriptive titles,
as appropriate.
Accounting
Standards Updates Not Yet Effective
In June 2009, an update was made to
Consolidation Consolidation of Variable
Interest Entities. Among other things, the update
replaces the calculation for determining which entities, if any,
have a controlling financial interest in a variable interest
entity (VIE) from a quantitative based risks and rewards
calculation, to a qualitative approach that focuses on
identifying which entities have the power to direct the
activities that most significantly impact the VIEs
economic performance and the obligation to absorb losses of the
VIE or the right to receive benefits from the VIE. The update
also requires ongoing assessments as to whether an entity is the
primary beneficiary of a VIE (previously, reconsideration was
only required upon the occurrence of specific events), modifies
the presentation of consolidated VIE assets and liabilities, and
requires additional disclosures about a companys
involvement in VIEs. This update will be effective for the
company beginning January 1, 2010. Management is currently
evaluating the effect that adoption of this update will have, if
any, on the companys consolidated financial position and
results of operations when it becomes effective in 2010.
In September 2009, an update was made to Fair Value
Measurements and Disclosures Investments in Certain
Entities that Calculate Net Asset Value per Share (or Its
Equivalent). This update permits entities to measure
the fair value of certain investments, including those with fair
values that are not readily determinable, on the basis of the
net asset value per share of the investment (or its equivalent)
if such net asset value is calculated in a manner consistent
with the measurement principles in Financial
Services-Investment Companies as of the reporting
entitys measurement date (measurement of all or
substantially all of the underlying investments of the investee
in accordance with the Fair Value Measurements and
Disclosures guidance). The update also requires
enhanced disclosures about the nature and risks of investments
within its scope that are measured at fair value on a recurring
or nonrecurring basis. This update will be effective for the
company beginning October 1, 2009. Management is currently
evaluating the effect that adoption of this update will have, if
any, on the companys consolidated financial position and
results of operations when it becomes effective.
In October 2009, an update was made to Revenue
Recognition Multiple Deliverable Revenue
Arrangements. This update removes the
objective-and-reliable-evidence-of-fair-value
criterion from the separation criteria used to determine whether
an arrangement involving multiple deliverables contains more
than one unit of accounting, replaces references to fair
value with selling price to distinguish from
the fair value measurements required under the Fair
Value Measurements and Disclosures guidance, provides
a hierarchy that entities must use to estimate the selling
price, eliminates the use of the residual method for allocation,
and expands the ongoing disclosure requirements. This update is
effective for the company beginning January 1, 2011 and can
be applied prospectively or retrospectively. Management is
currently evaluating the effect that adoption of this update
will
7
NORTHROP
GRUMMAN CORPORATION
have, if any, on the companys consolidated financial
position and results of operations when it becomes effective in
2011.
Other Accounting Standards Updates not effective until after
September 30, 2009, are not expected to have a significant
effect on the companys consolidated financial position or
results of operations.
|
|
3.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
Investments in Marketable Securities The
company holds a portfolio of marketable securities, primarily
consisting of equity securities that are classified as either
trading or
available-for-sale
and can be liquidated without restriction. These assets are
recorded at fair value, substantially all of which are based
upon quoted market prices for identical instruments in active
markets and thus considered Level 1 inputs. As of
September 30, 2009, and December 31, 2008,
respectively, there were marketable equity securities of
$54 million and $44 million included in prepaid
expenses and other current assets and $220 million and
$180 million of marketable equity securities included in
miscellaneous other assets.
Derivative Financial Instruments and Hedging
Activities The company utilizes derivative
financial instruments in order to manage exposure to interest
rate risk and foreign currency exchange rate risk. The company
does not use derivative financial instruments for trading or
speculative purposes, nor does it use leveraged financial
instruments. Interest rate swap agreements utilize floating
interest rates as an offset to the fixed-rate characteristics of
certain long-term debt instruments. Foreign currency forward
contracts are used to manage foreign currency exchange rate risk
related to receipts from customers and payments to suppliers
denominated in foreign currencies.
Derivative financial instruments are recognized as assets or
liabilities in the financial statements and measured at fair
value, substantially all of which are based on active or
inactive markets for identical or similar instruments or
model-derived valuations whose inputs are observable and thus
considered Level 2 inputs. Changes in the fair value of
derivative financial instruments that qualify and are designated
as fair value hedges are recorded in earnings from continuing
operations, while the effective portion of the changes in the
fair value of derivative financial instruments that qualify and
are designated as cash flow hedges are recorded in other
comprehensive income. Credit risk related to derivative
financial instruments is considered minimal and is managed by
requiring high credit standards for counterparties and periodic
settlements of the underlying transactions.
For derivative financial instruments not designated as hedging
instruments as well as the ineffective portion of cash flow
hedges, gains or losses resulting from changes in the fair value
are reported in Other, net in the condensed consolidated
statements of operations. Unrealized gains or losses on cash
flow hedges are reclassified from other comprehensive income to
earnings from continuing operations upon the recognition of the
underlying transactions.
As of September 30, 2009, interest rate swaps with notional
values totaling $400 million, and foreign currency purchase
and sale forward contract agreements with notional values of
$85 million and $164 million, respectively, were
designated as hedging instruments. The remaining notional values
outstanding at September 30, 2009, under foreign currency
purchase and sale forward contracts of $27 million and
$86 million, respectively, were not designated as hedging
instruments.
In October 2008, the company entered into two forward-starting
interest rate swaps with a notional value totaling
$400 million and designated these swaps as cash flow
hedges. The fair value of the forward-starting swap agreements
was a $58 million liability at December 31, 2008, and
was included in other current liabilities. These swaps were
settled as of June 8, 2009, and the related impact on the
condensed consolidated statements of operations was not material.
All other derivative fair values and related unrealized gains
and losses at September 30, 2009, and December 31,
2008, were not material.
8
NORTHROP
GRUMMAN CORPORATION
The carrying amounts of other financial instruments not listed
in the table below approximate fair value due to the short-term
nature of these items.
Carrying amounts and the related estimated fair values of the
companys financial instruments not recorded at fair value
in the financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
$ in millions
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Cash surrender value of life insurance policies
|
|
$
|
239
|
|
|
$
|
239
|
|
|
$
|
240
|
|
|
$
|
240
|
|
Long-term debt
|
|
|
(4,685
|
)
|
|
|
(5,383
|
)
|
|
|
(3,920
|
)
|
|
|
(4,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Surrender Value of Life Insurance Policies
The company maintains whole life insurance policies on a
group of executives which are recorded at their cash surrender
value as determined by the insurance carrier. Additionally, the
company has split-dollar life insurance policies on former
officers and executives from acquired businesses which are
recorded at the lesser of their cash surrender value or premiums
paid. The policies are utilized as a partial funding source for
deferred compensation and other non-qualified employee
retirement plans. Amounts associated with these policies are
recorded in miscellaneous other assets in the condensed
consolidated statements of financial position.
Long-Term Debt The fair value of the
long-term debt was calculated based on interest rates available
for debt with terms and maturities similar to the companys
existing debt arrangements.
|
|
4.
|
COMMON
STOCK DIVIDENDS AND CONVERSION OF PREFERRED STOCK
|
Dividends on Common Stock In May 2009, the
companys board of directors approved an increase to the
quarterly common stock dividend, from $.40 per share to $.43 per
share, for shareholders of record as of June 1, 2009.
In April 2008, the companys board of directors approved an
increase to the quarterly common stock dividend, from $.37 per
share to $.40 per share, for shareholders of record as of
June 2, 2008.
Conversion of Preferred Stock On
February 20, 2008, the companys board of directors
approved the redemption of the 3.5 million shares of
mandatorily redeemable convertible preferred stock on
April 4, 2008. Prior to the redemption date, substantially
all of the preferred shares were converted into common stock at
the election of shareholders. All remaining unconverted
preferred shares were redeemed by the company on the redemption
date. As a result of the conversion and redemption, the company
issued approximately 6.4 million shares of common stock.
|
|
5.
|
BUSINESS
ACQUISITIONS AND DISPOSITIONS
|
Acquisitions
In April 2009, the company acquired Sonoma Photonics, Inc., as
well as assets from Swift Engineerings Killer Bee Unmanned
Air Systems product line for an aggregate amount of
approximately $33 million. The operating results since
acquisition are reported in the Aerospace Systems segment. The
assets, liabilities, and results of operations of these two
acquisitions were not material to the companys
consolidated financial position or results of operations, and
thus pro-forma financial information is not presented.
In October 2008, the company acquired 3001 International, Inc.
(3001 Inc.) for approximately $92 million in cash. 3001
Inc. provides geospatial data production and analysis, including
airborne imaging, surveying, mapping and geographic information
systems for U.S. and international government intelligence,
defense and civilian customers. The operating results of 3001
Inc. are reported in the Information Systems segment. The
assets, liabilities, and results of operations of 3001 Inc. were
not material to the companys consolidated financial
position or results of operations.
9
NORTHROP
GRUMMAN CORPORATION
Dispositions
In April 2008, the company sold its Electro-Optical Systems
(EOS) business for $175 million in cash to L-3
Communications Corporation and recognized a gain of
$19 million, net of taxes of $39 million. EOS,
formerly a part of the Electronic Systems segment, produces
night vision and applied optics products and had sales of
approximately $53 million through April 2008. Operating
results of this business are reported as discontinued operations
in the condensed consolidated statements of operations for all
applicable periods presented.
In January 2009, the company streamlined its organizational
structure by reducing the number of operating segments from
seven to five. The five segments are Aerospace Systems, which
combines the former Integrated Systems and Space Technology
segments; Electronic Systems; Information Systems, which
combines the former Information Technology and Mission Systems
segments; Shipbuilding; and Technical Services. Creation of the
Aerospace Systems and Information Systems segments is intended
to strengthen alignment with customers, improve the
companys ability to execute on programs and win new
business, and enhance cost competitiveness. Product sales are
predominantly generated in the Aerospace Systems, Electronic
Systems and Shipbuilding segments, while the majority of the
companys service revenues are generated by the Information
Systems and Technical Services segments.
During the first quarter of 2009, the company realigned certain
logistics, services, and technical support programs and
transferred assets from the Information Systems and Electronic
Systems segments to the Technical Services segment. This
realignment is intended to strengthen the companys core
capability in aircraft and electronics maintenance, repair and
overhaul, life cycle optimization, and training and simulation
services.
Sales and segment operating income in the tables below have been
revised to reflect the above realignments for all periods
presented.
During the first quarter of 2009, the company transferred
certain optics and laser programs from the Information Systems
segment to the Aerospace Systems segment. As the operating
results of this business were not considered material, the prior
year sales and segment operating income in the following tables
were not reclassified to reflect this business transfer.
During the first quarter of 2008, the company recorded a pre-tax
charge of $272 million for cost growth on the LHD 8
contract and an additional $54 million primarily for
schedule impacts on other ships and impairment of purchased
intangibles at the Gulf Coast shipyards.
The following table presents segment sales and service revenues
for the three and nine months ended September 30, 2009, and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace Systems
|
|
$
|
2,527
|
|
|
$
|
2,417
|
|
|
$
|
7,656
|
|
|
$
|
7,250
|
|
Electronic Systems
|
|
|
1,839
|
|
|
|
1,808
|
|
|
|
5,594
|
|
|
|
5,018
|
|
Information Systems
|
|
|
2,513
|
|
|
|
2,410
|
|
|
|
7,589
|
|
|
|
7,220
|
|
Shipbuilding
|
|
|
1,650
|
|
|
|
1,451
|
|
|
|
4,549
|
|
|
|
4,403
|
|
Technical Services
|
|
|
692
|
|
|
|
665
|
|
|
|
2,026
|
|
|
|
1,857
|
|
Intersegment eliminations
|
|
|
(495
|
)
|
|
|
(370
|
)
|
|
|
(1,411
|
)
|
|
|
(1,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and service revenues
|
|
$
|
8,726
|
|
|
$
|
8,381
|
|
|
$
|
26,003
|
|
|
$
|
24,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
NORTHROP
GRUMMAN CORPORATION
The following table presents segment operating income reconciled
to total operating income for the three and nine months ended
September 30, 2009, and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace Systems
|
|
$
|
265
|
|
|
$
|
233
|
|
|
$
|
780
|
|
|
$
|
721
|
|
Electronic Systems
|
|
|
215
|
|
|
|
261
|
|
|
|
695
|
|
|
|
671
|
|
Information Systems
|
|
|
206
|
|
|
|
156
|
|
|
|
633
|
|
|
|
575
|
|
Shipbuilding
|
|
|
113
|
|
|
|
118
|
|
|
|
211
|
|
|
|
26
|
|
Technical Services
|
|
|
41
|
|
|
|
39
|
|
|
|
121
|
|
|
|
110
|
|
Intersegment eliminations
|
|
|
(54
|
)
|
|
|
(39
|
)
|
|
|
(144
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
786
|
|
|
|
768
|
|
|
|
2,296
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-segment factors affecting operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expense
|
|
|
(55
|
)
|
|
|
(20
|
)
|
|
|
(87
|
)
|
|
|
(95
|
)
|
Net pension adjustment
|
|
|
(72
|
)
|
|
|
64
|
|
|
|
(224
|
)
|
|
|
192
|
|
Royalty income adjustment
|
|
|
(4
|
)
|
|
|
(41
|
)
|
|
|
(22
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
655
|
|
|
$
|
771
|
|
|
$
|
1,963
|
|
|
$
|
2,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Expense Unallocated expense
generally includes the portion of corporate expenses not
considered allowable or allocable under applicable
U.S. Government Cost Accounting Standards (CAS) regulations
and the Federal Acquisition Regulation, and therefore not
allocated to the segments, for costs related to management and
administration, legal, environmental, certain compensation and
retiree benefits, and other expenses.
Net Pension Adjustment The net pension
adjustment reflects the difference between pension expense
determined in accordance with U.S. GAAP and pension expense
allocated to the operating segments determined in accordance
with CAS.
Royalty Income Adjustment Royalty income is
included in segment operating income and reclassified to other
income for financial reporting purposes.
Basic Earnings Per Share Basic earnings per
share from continuing operations are calculated by dividing
earnings from continuing operations available to common
shareholders by the weighted-average number of shares of common
stock outstanding during each period.
Diluted Earnings Per Share Diluted earnings
per share include the dilutive effect of stock options and other
stock awards granted to employees under stock-based compensation
plans. The dilutive effect of these securities totaled
3.5 million shares and 4.1 million shares for the
three and nine months ended September 30, 2009,
respectively. The dilutive effect of these securities totaled
5.9 million shares and 7.4 million shares for the
three and nine months ended September 30, 2008,
respectively (including 1.5 million shares in the nine
month period for the companys mandatorily redeemable
convertible preferred stock). For the nine months ended
September 30, 2008, the diluted earnings per share
calculation included $1 million of dividends added back to
earnings and the weighted-average diluted shares outstanding
included the companys mandatorily redeemable convertible
preferred stock (see Note 4).
The weighted-average diluted shares outstanding for the three
and nine months ended September 30, 2009, exclude stock
options to purchase approximately 8.2 million and
10.5 million shares, respectively, because such options
have exercise prices in excess of the average market price of
the companys common stock during the
11
NORTHROP
GRUMMAN CORPORATION
period. The weighted-average diluted shares outstanding for the
three and nine months ended September 30, 2008, exclude
stock options to purchase approximately 2.1 million and
1.4 million shares, respectively.
Share Repurchases The table below summarizes
the companys share repurchases beginning January 1,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Repurchased
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
Total Shares
|
|
Nine Months Ended
|
|
|
Amount Authorized
|
|
Average Price Per
|
|
Retired
|
|
September 30
|
Authorization Date
|
|
(in millions)
|
|
Share
|
|
(in millions)
|
|
2009
|
|
2008
|
December 19, 2007
|
|
$
|
2,500
|
|
|
$
|
61.38
|
|
|
|
36.1
|
|
|
|
14.7
|
|
|
|
21.2
|
|
Share repurchases take place at managements discretion or
under pre-established non-discretionary programs from time to
time, depending on market conditions, in the open market, and in
privately negotiated transactions. The company retires its
common stock upon repurchase and has not made any purchases of
common stock other than in connection with these publicly
announced repurchase programs. As of the end of the third
quarter 2009, the company has $282 million remaining under
this authorization for share repurchases.
|
|
8.
|
GOODWILL
AND OTHER PURCHASED INTANGIBLE ASSETS
|
Goodwill
The changes in the carrying amounts of goodwill for the nine
months ended September 30, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
|
|
Balance as of
|
$ in millions
|
|
December 31, 2008
|
|
Transfers
|
|
Acquisitions
|
|
Other
|
|
September 30,
2009
|
Aerospace Systems
|
|
$
|
3,748
|
|
|
$
|
41
|
|
|
$
|
5
|
|
|
$
|
7
|
|
|
$
|
3,801
|
|
Electronic Systems
|
|
|
2,428
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
2,402
|
|
Information Systems
|
|
|
6,399
|
|
|
|
(138
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
6,257
|
|
Shipbuilding
|
|
|
1,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,141
|
|
Technical Services
|
|
|
802
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,518
|
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
3
|
|
|
$
|
14,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers During the first quarter of 2009,
the company realigned certain logistics, services, and technical
support programs and transferred assets from the Information
Systems and Electronic Systems segments to the Technical
Services segment. As a result of this realignment, goodwill of
approximately $123 million was reallocated between these
segments. Additionally during the first quarter of 2009, the
company transferred certain optics and laser programs from the
Information Systems segment to the Aerospace Systems segment
resulting in the reallocation of goodwill of approximately
$41 million.
12
NORTHROP
GRUMMAN CORPORATION
Purchased
Intangible Assets
The table below summarizes the companys aggregate
purchased intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
Gross
|
|
|
|
Net
|
|
Gross
|
|
|
|
Net
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
$ in millions
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
Contract and program intangibles
|
|
$
|
2,672
|
|
|
$
|
(1,795
|
)
|
|
$
|
877
|
|
|
$
|
2,642
|
|
|
$
|
(1,720
|
)
|
|
$
|
922
|
|
Other purchased intangibles
|
|
|
100
|
|
|
|
(78
|
)
|
|
|
22
|
|
|
|
100
|
|
|
|
(75
|
)
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,772
|
|
|
$
|
(1,873
|
)
|
|
$
|
899
|
|
|
$
|
2,742
|
|
|
$
|
(1,795
|
)
|
|
$
|
947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The companys purchased intangible assets are subject to
amortization and are being amortized on a straight-line basis
over an aggregate weighted-average period of 21 years.
Aggregate amortization expense for the three and nine months
ended September 30, 2009, was $26 million and
$78 million, respectively.
The table below shows expected amortization for purchased
intangibles for the remainder of 2009 and for the next five
years:
|
|
|
|
|
$ in millions
|
|
|
Year ending December 31
|
|
|
|
|
2009 (October 1 - December 31)
|
|
$
|
25
|
|
2010
|
|
|
93
|
|
2011
|
|
|
56
|
|
2012
|
|
|
55
|
|
2013
|
|
|
45
|
|
2014
|
|
|
36
|
|
|
|
|
|
|
Debt Issuance On July 30, 2009, the
company issued $350 million of
5-year and
$500 million of
10-year
unsecured senior obligations. Interest on the notes is payable
semi-annually in arrears at fixed rates of 3.70 percent and
5.05 percent per annum, and the notes will mature on
August 1, 2014, and August 1, 2019, respectively.
These senior notes are subject to redemption at the
companys discretion at any time prior to maturity. The net
proceeds from these notes will be used for general corporate
purposes including debt repayment, acquisitions, share
repurchases, pension plan funding, and working capital. On
October 15, 2009, a portion of the net proceeds was used to
retire $400 million of 8 percent senior debt that had
matured.
U.S. Government Investigations and Claims
Departments and agencies of the U.S. Government have
the authority to investigate various transactions and operations
of the company, and the results of such investigations may lead
to administrative, civil or criminal proceedings, the ultimate
outcome of which could be fines, penalties, repayments or
compensatory or treble damages. U.S. Government regulations
provide that certain findings against a contractor may lead to
suspension or debarment from future U.S. Government
contracts or the loss of export privileges for a company or an
operating division or subdivision. Suspension or debarment could
have a material adverse effect on the company because of its
reliance on government contracts.
In the second quarter of 2007, the U.S. Coast Guard issued
a revocation of acceptance under the Deepwater Program for eight
converted 123-foot patrol boats (the vessels) based on alleged
hull buckling and shaft alignment problems and
alleged nonconforming topside equipment on the
vessels. The company submitted a written response that argued
that the revocation of acceptance was improper. The Coast Guard
advised
13
NORTHROP
GRUMMAN CORPORATION
Integrated Coast Guard Systems, LLC (ICGS), which was formed by
the contractors to perform the Deepwater Program, that it was
seeking $96.1 million from ICGS as a result of the
revocation of acceptance. The majority of the costs associated
with the 123-foot conversion effort are associated with the
alleged structural deficiencies of the vessels, which were
converted under contracts with the company and a subcontractor
to the company. In 2008, the Coast Guard advised ICGS that the
Coast Guard would support an investigation by the
U.S. Department of Justice of ICGS and its subcontractors
instead of pursuing its $96.1 million claim independently.
The Department of Justice conducted an investigation of ICGS
under a sealed False Claims Act complaint filed in the
U.S. District Court for the Northern District of Texas and
decided in early 2009 not to intervene at that time. On
February 12, 2009, the Court unsealed the complaint filed
by Michael J. DeKort, a former Lockheed Martin employee, against
ICGS, Lockheed Martin Corporation and the company, relating to
the 123-foot conversion effort. On July 22, 2009, the three
defendants moved to dismiss the complaint. On October 2,
2009, the Court denied a motion to dismiss by defendants as moot
because it granted leave for plaintiff to file an amended
complaint and set a trial date of November 1, 2010. Based
upon the information available to the company to date, the
company believes that it has substantive defenses to any
potential claims but can give no assurance that the company will
prevail in this litigation.
In August 2008, the company disclosed to the Antitrust Division
of the U.S. Department of Justice possible violations of
federal antitrust laws in connection with the bidding process
for certain maintenance contracts at a military installation in
California. In February 2009, the company and the Department of
Justice signed an agreement admitting the company into the
Corporate Leniency Program. As a result of the companys
acceptance into the Program, the company will be exempt from
federal criminal prosecution and criminal fines relating to the
matters the company reported to the Department of Justice if the
company complies with certain conditions, including its
continued cooperation with the governments investigation
and its agreement to make restitution if the government was
harmed by the violations.
Based upon the available information regarding matters that are
subject to U.S. Government investigations, the company
believes that the outcome of any such matters would not have a
material adverse effect on its consolidated financial position,
results of operations or cash flows.
Litigation Various claims and legal
proceedings arise in the ordinary course of business and are
pending against the company and its properties. Based upon the
information available, the company believes that the resolution
of any of these various claims and legal proceedings would not
have a material adverse effect on its consolidated financial
position, results of operations, or cash flows.
The company is one of several defendants in litigation brought
by the Orange County Water District in Orange County Superior
Court in California on December 17, 2004, for alleged
contribution to volatile organic chemical contamination of the
Countys shallow groundwater. The lawsuit includes counts
against the defendants for violation of the Orange County Water
District Act, the California Super Fund Act, negligence,
nuisance, trespass and declaratory relief. Among other things,
the lawsuit seeks unspecified damages for the cost of
remediation, payment of attorney fees and costs, and punitive
damages. The June 2009 trial date was vacated and a status
conference has been set for mid-November 2009.
The U.S. District Court for the Central District of
California consolidated two separately filed Employee Retirement
Income Security Act (ERISA) lawsuits, which the plaintiffs seek
to have certified as class actions, into the In Re Northrop
Grumman Corporation ERISA Litigation. On August 7,
2007, the District Court denied plaintiffs motion for
class certification, and the plaintiffs appealed the
Courts decision on class certification to the
U.S. Court of Appeals for the Ninth Circuit. On
September 8, 2009, the Ninth Circuit vacated the Order
denying class certification, remanded the issue to the District
Court for further consideration, and ordered that the case be
reassigned to a different judge. The company believes that the
outcome of these matters would not have a material adverse
effect on its consolidated financial position, results of
operations or cash flows.
On June 22, 2007, a putative class action was filed against
the Northrop Grumman Pension Plan and the Northrop Grumman
Retirement Plan B and their corresponding administrative
committees, styled as Skinner et
14
NORTHROP
GRUMMAN CORPORATION
al. v. Northrop Grumman Pension Plan, etc., et al.,
in the U.S. District Court for the Central District of
California. The putative class representatives alleged
violations of ERISA and breaches of fiduciary duty concerning a
2003 modification to the Northrop Grumman Retirement Plan B. The
modification relates to the employer funded portion of the
pension benefit available during a five-year transition period
that ended on June 30, 2008. The plaintiffs dismissed the
Northrop Grumman Pension Plan, and in 2008 the District Court
granted summary judgment in favor of all remaining defendants on
all claims. The plaintiffs appealed, and in May 2009, the Ninth
Circuit reversed the decision of the District Court and remanded
the matter back to the District Court for further proceedings,
finding that there was ambiguity in a 1998 summary plan
description related to the employer funded component of the
pension benefit.
Insurance Recovery The company is pursuing
legal action against an insurance provider arising out of a
disagreement concerning the coverage of certain losses related
to Hurricane Katrina (see Note 11). The company commenced
the action against Factory Mutual Insurance Company (FM Global)
on November 4, 2005, which is now pending in the
U.S. District Court for the Central District of California,
Western Division. In August 2007, the District Court issued an
order finding that the excess insurance policy provided coverage
for the companys Katrina-related loss. In November 2007,
FM Global filed a notice of appeal of the District Courts
order. On August 14, 2008, the U.S. Court of Appeals
for the Ninth Circuit reversed the earlier summary judgment
order in favor of the company, holding that the FM Global excess
policy unambiguously excludes damage from the storm surge caused
by Hurricane Katrina under its Flood exclusion. The
Ninth Circuit remanded the case to the District Court to
determine whether the California efficient proximate cause
doctrine affords the company coverage under the policy even if
the Flood exclusion of the policy is unambiguous. The company
filed a Petition for Rehearing En Banc, or in the Alternative,
For Panel Rehearing with the Ninth Circuit on August 27,
2008. On April 2, 2009, the Ninth Circuit denied the
companys Petition for Rehearing and remanded the case to
the District Court. On June 10, 2009, the company filed a
motion seeking leave of court to file a complaint adding AON
Risk Services, Inc. of Southern California as a defendant. On
July 1, 2009, FM Global filed a motion for partial summary
judgment seeking a determination that the California efficient
proximate cause doctrine is not applicable or that it affords no
coverage under the policy. Both motions have been fully briefed
and argued. Based on the current status of the litigation, no
assurances can be made as to the ultimate outcome of this matter.
During 2008, the company received notification from
Munich-American
Risk Partners (Munich Re), the only remaining insurer within the
primary layer of insurance coverage with which a resolution has
not been reached, that it will pursue arbitration proceedings
against the company related to approximately $19 million
owed by Munich Re to Northrop Grumman Risk Management Inc.
(NGRMI), a wholly-owned subsidiary of the company, for certain
losses related to Hurricane Katrina. The company was
subsequently notified that Munich Re also will seek
reimbursement of approximately $44 million of funds
previously advanced to NGRMI for payment of claim losses of
which Munich Re provided reinsurance protection to NGRMI
pursuant to an executed reinsurance contract, and
$6 million of adjustment expenses. The company believes
that NGRMI is entitled to full reimbursement of its covered
losses under the reinsurance contract and has substantive
defenses to the claim of Munich Re for return of the funds paid
to date.
Provisions for Legal & Investigative
Matters Litigation accruals are recorded as
charges to earnings when management, after taking into
consideration the facts and circumstances of each matter,
including any settlement offers, has determined that it is
probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. The ultimate resolution of
any exposure to the company may vary from earlier estimates as
further facts and circumstances become known.
|
|
11.
|
COMMITMENTS
AND CONTINGENCIES
|
Contract Performance Contingencies Contract
profit margins may include estimates of revenues not
contractually agreed to between the customer and the company for
matters such as contract changes, negotiated settlements, claims
and requests for equitable adjustment for previously
unanticipated contract costs. These estimates are based
15
NORTHROP
GRUMMAN CORPORATION
upon managements best assessment of the underlying causal
events and circumstances, and are included in determining
contract profit margins to the extent of expected recovery based
on contractual entitlements and the probability of successful
negotiation with the customer. As of September 30, 2009,
the recognized amounts related to the aforementioned items are
not material individually or in the aggregate.
In conjunction with its second quarter 2009 review of contract
cost estimates to reflect costs for improved design,
engineering, production and quality processes and the weld
inspections undertaken as a result of leaks discovered in the
USS San Antonios (LPD17) lube oil system, the
companys Gulf Coast Shipbuilding operations began
conducting an assessment of a quality issue relating to certain
pipe welds that could affect ships currently in production and
previously delivered. The company is currently working with its
customers to determine the extent of rework that will be
required to satisfactorily resolve this issue. Based on
information available to date, including ongoing technical
analysis of the issue, the company does not believe that this
matter will have a material adverse effect upon its consolidated
financial position, results of operations or cash flows.
Guarantees of Subsidiary Performance Obligations
From time to time in the ordinary course of business, the
company guarantees performance obligations of its subsidiaries
under certain contracts. In addition, the companys
subsidiaries may enter into joint ventures, teaming and other
business arrangements (Business Arrangements) to support the
companys products and services in domestic and
international markets. The company generally aims to limit its
exposure to its subsidiarys investment in the Business
Arrangement, or to the extent of such subsidiarys
obligations under the applicable contract. In some cases,
however, the company may be required to guarantee performance by
the Business Arrangement and, in such cases, the company
generally obtains cross-indemnification from the other members
of the Business Arrangement. At September 30, 2009, the
company is not aware of any existing event of default that would
require it to satisfy any of these guarantees.
Environmental Matters In accordance with
company policy on environmental remediation, the estimated cost
to complete remediation has been accrued where it is probable
that the company will incur such costs in the future to address
environmental impacts at currently or formerly owned or leased
operating facilities, or at sites where it has been named a
Potentially Responsible Party (PRP) by the Environmental
Protection Agency, or similarly designated by other
environmental agencies. These accruals do not include any
litigation costs related to environmental matters. To assess the
potential impact on the companys consolidated financial
statements, management estimates the total reasonably possible
remediation costs that could be incurred by the company, taking
into account currently available facts on each site as well as
the current state of technology and prior experience in
remediating contaminated sites. These estimates are reviewed
periodically and adjusted to reflect changes in facts and
technical and legal circumstances. Management estimates that as
of September 30, 2009, the range of reasonably possible
future costs for environmental remediation sites is
$242 million to $466 million, of which
$291 million is accrued in other current liabilities.
Factors that could result in changes to the companys
estimates include: modification of planned remedial actions,
increases or decreases in the estimated time required to
remediate, discovery of more extensive contamination than
anticipated, changes in laws and regulations affecting
remediation requirements, and improvements in remediation
technology. Should other PRPs not pay their allocable share of
remediation costs, the company may have to incur costs in
addition to those already estimated and accrued. Based upon the
available information, the company believes that the outcome of
these matters would not have a material adverse effect on its
consolidated financial position, results of operations or cash
flows.
Hurricane Impacts During the third quarter of
2008, the Gulf Coast shipyards were affected by Hurricane
Gustav. As a result of the storm, the Gulf Coast shipyards
experienced a shut-down for several days, and a resulting minor
delay in ship construction throughout the yards; however the
storm caused no significant physical damage to the yards.
Shipbuildings sales and operating income in 2008 were
reduced by approximately $100 million and $13 million,
respectively, during the second half of 2008 due to lost
production and additional costs resulting from the shut-down.
16
NORTHROP
GRUMMAN CORPORATION
Also during the third quarter of 2008, a subcontractors
operations in Texas were severely impacted by Hurricane Ike. The
subcontractor produces compartments for two of the LPD
amphibious transport dock ships under construction at the Gulf
Coast shipyards. As a result of the delays and cost growth
caused by the subcontractors resulting production impacts,
Shipbuildings 2008 operating income was reduced by
approximately $23 million during the second half of 2008.
In August 2005, the companys Gulf Coast operations were
significantly impacted by Hurricane Katrina and the
companys shipyards in Louisiana and Mississippi sustained
significant windstorm damage from the hurricane. As a result of
the storm, the company incurred costs to replace or repair
destroyed or damaged assets, suffered losses under its
contracts, and incurred substantial costs to clean up and
recover its operations. As of the date of the storm, the company
had a comprehensive insurance program that provided coverage
for, among other things, property damage, business interruption
impact on net profitability, and costs associated with
clean-up and
recovery. The company has recovered a portion of its Hurricane
Katrina claim and expects that its remaining claim will be
resolved separately with the two remaining insurers, including
FM Global and Munich Re (See Note 10).
The company has full entitlement to any insurance recoveries
related to business interruption impacts resulting from these
hurricanes. However, because of uncertainties concerning the
ultimate determination of recoveries related to business
interruption claims, in accordance with company policy, no such
amounts are recognized until they are resolved with the
insurers. Furthermore, due to the uncertainties with respect to
the companys disagreement with FM Global in relation to
the Hurricane Katrina claim, no receivables have been recognized
by the company in the accompanying condensed consolidated
financial statements for insurance recoveries from FM Global.
In accordance with U.S. Government cost accounting
regulations affecting the majority of the companys
contracts, the cost of insurance premiums for property damage
and business interruption coverage, other than coverage of
profit, is an allowable expense that may be charged to
contracts. Because a substantial portion of long-term contracts
at the shipyards are flexibly-priced, the government customer
would benefit from a portion of insurance recoveries in excess
of the net book value of damaged assets and
clean-up and
restoration costs paid by the company. When such insurance
recoveries occur, the company is obligated to return a portion
of these amounts to the government.
Co-Operative Agreements In 2003, Shipbuilding
executed agreements with the states of Mississippi and Louisiana
whereby Shipbuilding leases facility improvements and equipment
from Mississippi and from a non-profit economic development
corporation in Louisiana in exchange for certain commitments by
Shipbuilding to these states. As of September 30, 2009,
Shipbuilding has fully met its obligations under the Mississippi
agreement and has met all but one requirement under the
Louisiana agreement. Failure by Shipbuilding to meet the
remaining Louisiana commitment would result in reimbursement by
Shipbuilding to Louisiana in accordance with the agreement. As
of September 30, 2009, Shipbuilding expects that the
remaining commitment under the Louisiana agreement will be met
based on its most recent business plan.
Financial Arrangements In the ordinary course
of business, the company uses standby letters of credit and
guarantees issued by commercial banks and surety bonds issued
principally by insurance companies to guarantee the performance
on certain contracts and to support the companys
self-insured workers compensation plans. At
September 30, 2009, there were $532 million of unused
stand-by letters of credit, $133 million of bank
guarantees, and $451 million of surety bonds outstanding.
The company has also guaranteed a $200 million loan made to
Shipbuilding in connection with the Gulf Opportunity Zone
Industrial Revenue Bonds issued in December 2006. Under the loan
agreement, the company guaranteed repayment of the principal and
interest to the trustee and the underlying bondholders.
17
NORTHROP
GRUMMAN CORPORATION
Indemnifications The company has retained
certain warranty, environmental, income tax, and other potential
liabilities in connection with certain divestitures. The
settlement of these liabilities is not expected to have a
material adverse effect on the companys consolidated
financial position, results of operations, or cash flows.
U.S. Government Claims Annually, the
company files cost submissions to the U.S. Government to
support its claimed amounts of overhead, home office and other
indirect costs. On occasion, these cost submissions result in
questioned costs, claims and or penalty assertions by the
U.S. Government which give rise to dispute resolution in
various forms. The company believes it has adequately provided
for the ultimate outcome of any such matters based on, among
other considerations, its assessment of the relevant government
regulations. The company does not believe that the outcome of
any such matters would have a material adverse effect on its
consolidated financial position, results of operations, or cash
flows.
Operating Leases Rental expense for operating
leases, excluding discontinued operations and net of immaterial
amounts of sublease rental income, for the three and nine months
ended September 30, 2009, was $148 million and
$432 million, respectively, and $164 million and
$465 million, respectively, for the three and nine months
ended September 30, 2008.
Related Party Transactions For all periods
presented, the company had no material related party
transactions.
The cost of the companys pension plans and medical and
life benefits plans is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
|
Pension
|
|
Medical and
|
|
Pension
|
|
Medical and
|
|
|
Benefits
|
|
Life Benefit
|
|
Benefits
|
|
Life Benefits
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
166
|
|
|
$
|
181
|
|
|
$
|
13
|
|
|
$
|
14
|
|
|
$
|
495
|
|
|
$
|
542
|
|
|
$
|
37
|
|
|
$
|
41
|
|
Interest cost
|
|
|
336
|
|
|
|
334
|
|
|
|
40
|
|
|
|
41
|
|
|
|
1,010
|
|
|
|
1,002
|
|
|
|
122
|
|
|
|
124
|
|
Expected return on plan assets
|
|
|
(388
|
)
|
|
|
(474
|
)
|
|
|
(12
|
)
|
|
|
(16
|
)
|
|
|
(1,166
|
)
|
|
|
(1,423
|
)
|
|
|
(36
|
)
|
|
|
(48
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
|
|
11
|
|
|
|
10
|
|
|
|
(15
|
)
|
|
|
(17
|
)
|
|
|
35
|
|
|
|
30
|
|
|
|
(45
|
)
|
|
|
(49
|
)
|
Net loss from previous years
|
|
|
85
|
|
|
|
6
|
|
|
|
7
|
|
|
|
6
|
|
|
|
255
|
|
|
|
19
|
|
|
|
21
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
210
|
|
|
$
|
57
|
|
|
$
|
33
|
|
|
$
|
28
|
|
|
$
|
629
|
|
|
$
|
170
|
|
|
$
|
99
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined contribution plans cost
|
|
$
|
89
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
$
|
249
|
|
|
$
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer Contributions As of
September 30, 2009, contributions of $832 million and
$121 million have been made to the companys pension
plans and its medical and life benefit plans, respectively,
including voluntary pension contributions totaling
$800 million. The company does not expect to make any
additional voluntary contributions in 2009.
Defined Contribution Plans The company also
sponsors 401(k) defined contribution plans in which most
employees are eligible to participate, including certain
bargaining unit employees. Company contributions for most plans
are based on a cash matching of employee contributions up to
4 percent of compensation. Certain hourly employees are
covered under a target benefit plan. The company also
participates in a multiemployer plan
18
NORTHROP
GRUMMAN CORPORATION
for certain of the companys union employees. In addition
to the 401(k) defined contribution benefit plan, non-represented
employees hired after June 30, 2008, are eligible to
participate in a defined contribution program in lieu of a
defined benefit pension plan.
|
|
13.
|
STOCK
COMPENSATION PLANS
|
At September 30, 2009, Northrop Grumman had stock-based
compensation awards outstanding under the following plans: the
2001 Long-Term Incentive Stock Plan, the 1993 Long-Term
Incentive Stock Plan, both applicable to employees, and the 1993
Stock Plan for Non-Employee Directors and 1995 Stock Plan for
Non-Employee Directors, as amended. All of these plans were
approved by the companys shareholders. Share-based awards
under the employee plans consist of stock option awards (Stock
Options) and restricted stock awards (Stock Awards).
Compensation
Expense
Total pre-tax stock-based compensation expense for the nine
months ended September 30, 2009, and 2008, was
$79 million, and $126 million, respectively, of which
$15 million and $12 million related to Stock Options
and $64 million and $114 million, related to Stock
Awards, respectively. Tax benefits recognized in the condensed
consolidated statements of operations for stock-based
compensation during the nine months ended September 30,
2009, and 2008, were $31 million and $49 million,
respectively. In addition, the company realized tax benefits of
$2 million and $25 million from the exercise of Stock
Options and $47 million and $99 million from the
issuance of Stock Awards in the nine months ended
September 30, 2009 and 2008, respectively.
At September 30, 2009, there was $187 million of
unrecognized compensation expense related to unvested awards
granted under the companys stock-based compensation plans,
of which $26 million relates to Stock Options and
$161 million relates to Stock Awards. These amounts are
expected to be charged to expense over a weighted-average period
of 1.5 years.
Stock
Options
The fair value of each of the companys Stock Option awards
is estimated on the date of grant using a Black-Scholes
option-pricing model that uses the assumptions noted in the
table below. The fair value of the companys Stock Option
awards is expensed on a straight-line basis over the vesting
period of the options, which is generally three to four years.
Expected volatility is based on an average of
(1) historical volatility of the companys stock and
(2) implied volatility from traded options on the
companys stock. The risk-free rate for periods within the
contractual life of the Stock Option award is based on the yield
curve of a zero-coupon U.S. Treasury bond on the date the
award is granted with a maturity equal to the expected term of
the award. The company uses historical data to estimate future
forfeitures. The expected term of awards granted is derived from
historical experience under the companys stock-based
compensation plans and represents the period of time that awards
granted are expected to be outstanding.
The significant weighted-average assumptions relating to the
valuation of the companys Stock Options for the nine
months ended September 30, 2009, and 2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
Dividend yield
|
|
|
3.6
|
%
|
|
|
1.8
|
%
|
Volatility rate
|
|
|
25
|
%
|
|
|
20
|
%
|
Risk-free interest rate
|
|
|
1.7
|
%
|
|
|
2.8
|
%
|
Expected option life (years)
|
|
|
6
|
|
|
|
6
|
|
The weighted-average grant date fair value of Stock Options
granted during the nine months ended September 30, 2009,
and 2008, was $7 and $15, per share, respectively.
19
NORTHROP
GRUMMAN CORPORATION
Stock Option activity for the nine months ended
September 30, 2009, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
|
|
Weighted-Average
|
|
Aggregate
|
|
|
Under Option
|
|
Average
|
|
Remaining
|
|
Intrinsic Value
|
|
|
(in thousands)
|
|
Exercise Price
|
|
Contractual Term
|
|
($ in millions)
|
Outstanding at January 1, 2009
|
|
|
13,481
|
|
|
$
|
54
|
|
|
|
4.2 years
|
|
|
$
|
18
|
|
Granted
|
|
|
2,711
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(739
|
)
|
|
|
41
|
|
|
|
|
|
|
|
|
|
Cancelled and forfeited
|
|
|
(482
|
)
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
|
14,971
|
|
|
$
|
53
|
|
|
|
4.0 years
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest in the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
future at September 30, 2009
|
|
|
14,780
|
|
|
$
|
53
|
|
|
|
4.0 years
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2009
|
|
|
11,151
|
|
|
$
|
53
|
|
|
|
3.2 years
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at September 30, 2009
|
|
|
8,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the nine
months ended September 30, 2009, and 2008, was
$6 million and $63 million, respectively. Intrinsic
value is measured as the excess of the fair market value at the
date of exercise (for options exercised) or at
September 30, 2009 (for outstanding options), over the
applicable exercise price.
Stock
Awards
Compensation expense for Stock Awards is measured at the grant
date based on fair value and recognized over the vesting period.
The fair value of Stock Awards is determined based on the
closing market price of the companys common stock on the
grant date. For purposes of measuring compensation expense, the
amount of shares ultimately expected to vest is estimated at
each reporting date based on managements expectations
regarding the relevant performance criteria. In the table below,
the share adjustment resulting from the final performance
measure is considered granted in the period that the related
grant is vested. During the nine months ended September 30,
2009, 2.5 million shares of common stock were issued to
employees in settlement of prior year stock awards that were
fully vested, with a total value upon issuance of
$111 million and a grant date fair value of
$161 million. During the nine months ended
September 30, 2008, 2.9 million shares of common stock
were issued to employees in settlement of prior year stock
awards that were fully vested, with a total value upon issuance
of $233 million and a grant date fair value of
$155 million. There were 1.6 million Stock Awards
granted in the nine months ended September 30, 2008, with a
weighted-average grant date fair value of $74 per share.
Stock Award activity for the nine months ended
September 30, 2009, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Weighted-Average
|
|
Weighted-Average
|
|
|
Awards
|
|
Grant Date
|
|
Remaining
|
|
|
(in thousands)
|
|
Fair Value
|
|
Contractual Term
|
Outstanding at January 1, 2009
|
|
|
3,276
|
|
|
$
|
75
|
|
|
|
1.4 years
|
|
Granted (including performance adjustment on shares vested)
|
|
|
2,356
|
|
|
|
45
|
|
|
|
|
|
Vested
|
|
|
(185
|
)
|
|
|
66
|
|
|
|
|
|
Forfeited
|
|
|
(259
|
)
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
|
5,188
|
|
|
$
|
62
|
|
|
|
1.4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at September 30, 2009
|
|
|
2,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
NORTHROP
GRUMMAN CORPORATION
The companys effective tax rates on income from continuing
operations were 21.5 percent and 29.7 percent for the
three and nine months ended September 30, 2009, and
31.4 percent and 33.6 percent for the same periods in
2008.
The company recognizes accrued interest and penalties related to
uncertain tax positions in federal and foreign income tax
expense. The company files income tax returns in the
U.S. federal jurisdiction, and various state and foreign
jurisdictions. The Internal Revenue Service (IRS) is currently
conducting an examination of the companys
2004-2006
tax returns. In addition, open tax years related to state and
foreign jurisdictions remain subject to examination, but are not
material.
In the third quarter of 2009, the company reached a final
settlement with the IRS Office of Appeals on all of the
remaining issues from the IRS examination of the
companys tax returns for the years ended
2001-2003.
Also during the quarter, the company recognized additional
provisions for uncertain tax positions relating to newly
identified issues for prior year tax returns still open for
examination. As a result of the settlement and the provisions,
the company recognized net tax benefits of approximately
$75 million during the quarter.
During the third quarter of 2008, the company recognized net tax
benefits of $21 million, which were primarily attributable
to a settlement reached with the IRS Joint Committee on
Taxation with respect to the audit of TRW 1999 2002
tax returns. As a result, the company reduced its liability for
uncertain tax positions by $126 million, including
$44 million of previously accrued interest,
$95 million of which was recorded as a reduction of
goodwill.
21
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Northrop Grumman
Corporation Los Angeles, California
We have reviewed the accompanying condensed consolidated
statement of financial position of Northrop Grumman
Corporation and subsidiaries as of September 30, 2009, and
the related condensed consolidated statements of operations for
the three-month and nine-month periods ended September 30,
2009, and 2008, and of cash flows and of changes in
shareholders equity for the nine-month periods ended
September 30, 2009, and 2008. These interim financial
statements are the responsibility of the Corporations
management.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to such condensed consolidated
interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated statement of financial position of Northrop
Grumman Corporation and subsidiaries as of December 31,
2008, and the related consolidated statements of operations and
comprehensive (loss) income, cash flows, and changes in
shareholders equity for the year then ended (not presented
herein); and in our report dated February 10, 2009
(April 21, 2009 as to the reclassification of segment
information described in notes 1, 7, and 11), we expressed
an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated statement of financial
position as of December 31, 2008 is fairly stated, in all
material respects, in relation to the consolidated statement of
financial position from which it has been derived.
|
|
/s/ |
Deloitte & Touche LLP
|
Los Angeles, California
October 20, 2009
22
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
The following discussion should be read along with the unaudited
condensed consolidated financial statements included in this
Form 10-Q,
as well as the companys 2008 Annual Report on
Form 10-K,
updated by the Current Report on
Form 8-K
filed on April 22, 2009 (2008
Form 10-K),
filed with the Securities and Exchange Commission, which
provides a more thorough discussion of the companys
products and services, industry outlook, and business trends.
See discussion of consolidated operating results starting on
page 25 and discussion of segment operating results
starting on page 28.
Northrop Grumman provides technologically advanced, innovative
products, services, and integrated solutions in information and
technical services, aerospace, electronics, and shipbuilding to
its global customers. As a prime contractor, principal
subcontractor, partner, or preferred supplier, Northrop Grumman
participates in many high-priority defense and commercial
technology programs in the U.S. and abroad. Northrop
Grumman conducts most of its business with the
U.S. Government, principally the Department of Defense
(DoD). The company also conducts business with local, state, and
foreign governments and has domestic and international
commercial sales.
Business Outlook and Operational Trends There
have been no material changes to the companys products and
services, industry outlook, or business trends from those
disclosed in the companys 2008
Form 10-K.
Economic Opportunities, Challenges, and Risks
Congress will soon be finalizing the fiscal year 2010 budgets
for the DoD and other federal agencies, providing
program-specific allocations and a blueprint for defense
spending in the coming years. Following an overhaul by the
Secretary of Defense of weapons priorities to reorient the
Pentagon toward winning unconventional conflicts, the fiscal
year 2010 defense budget that Congress ultimately produces will
likely reflect more investment in non-traditional, irregular
capabilities. The fiscal year 2011 defense budget, being
currently developed in concert with the 2010 Quadrennial Defense
Review, will provide additional guidance on longer-term
priorities and plans. Given the current focus on irregular
warfare, the company expects an increase in investments for
intelligence, surveillance and reconnaissance (ISR) platforms
and systems including unmanned, cyber-security, and
information collection, processing, and distribution to enable
the warfighter to make more accurate and timely decisions.
Battlefield lessons from Iraq and Afghanistan should influence
force structure and spending decisions as the DoD looks to
enhance current readiness. Many allied countries are focusing
their development and procurement efforts on advanced
electronics and information systems capabilities to enhance
their interoperability with U.S. forces. While this budget
will likely begin to slow the growth of military program
spending, the size of future U.S. and international defense
budgets is expected to remain responsive to the international
security environment. The fiscal year 2010 budget submitted by
the President of the United States requests $533.7 billion
in discretionary authority for the DoD base budget, representing
approximately a 4 percent increase over the fiscal 2009
appropriated level. The 2010 budget includes reductions in
certain programs in which the company participates or for which
the company expects to compete. However, the company believes
that spending on recapitalization and modernization of homeland
security and defense assets will continue to be a national
priority, with particular emphasis on areas involving
intelligence, persistent surveillance, directed energy systems,
cyber-security, energy-saving technologies and non-conventional
warfare capabilities.
Recent Developments in U.S. Cost Accounting Standards
(CAS) Pension Recovery Rules The CAS Board
published an Advance Notice of Proposed Rulemaking (ANPRM) on
September 2, 2008 and has indicated it will issue a Notice
of Proposed Rulemaking (NPRM), the last published proposed
version in the rulemaking process prior to the issuance of a
final CAS rule. The ANPRM described a framework which would
partially harmonize the CAS rules with the Pension Protection
Act of 2006 (PPA) requirements. The ANPRM included provisions
for a transition period from the existing CAS requirement to a
partially harmonized CAS requirement. After the PPA effective
date for eligible government contractors (including
Northrop Grumman), which were granted a delay in their PPA
effective date, the proposed rule would partially mitigate the
near-term mismatch between
PPA-amended
ERISA minimum contribution requirements which would not yet be
recoverable under CAS. However, unless provisions in the ANPRM
are revised in the final rule, government contractors
maintaining
23
defined benefit pension plans in general would still experience
a timing mismatch between required contributions and the CAS
recoverable pension costs. It is anticipated that contractors
will be entitled to seek an equitable adjustment to prices of
previously negotiated contracts subject to CAS for increased
contract costs which result from mandatory changes required by
the final rule.
Certain notable events or activities during 2009 included the
following:
Notable events for the three months ended September 30,
2009
|
|
|
|
n
|
Awarded a contract valued up to $2.4 billion contract for
USS Theodore Roosevelt refueling and complex
overhaul.
|
|
n
|
Launched two Space Tracking and Surveillance System (STSS)
Demonstrator satellites aboard a Delta II
rocket.
|
|
n
|
Delivered Dewey (DDG 105) and New York (LPD
21) to the
U.S. Navy.
|
|
n
|
Completed National Security Cutter Waesche builders
sea
trials.
|
|
n
|
Contributed voluntary pension pre-funding amounts totaling
$586 million.
|
|
n
|
Issued $850 million of unsecured senior
obligations see
page 36.
|
|
n
|
Reached final settlement with the Internal Revenue Service (IRS)
Office of Appeals on tax returns for the years ended
2001
2003.
|
Notable events for the nine months ended September 30,
2009
|
|
|
|
n
|
Delivered Makin Island (LHD 8) to the
U.S. Navy.
|
|
n
|
Completed New York (LPD 21) builders sea
trials.
|
|
n
|
Completed USS Carl Vinson (CVN 70) initial sea
trials and re-delivered to the
U.S. Navy.
|
|
n
|
Delivered USS George H. W. Bush (CVN 77) to the
U.S. Navy.
|
|
n
|
Contributed voluntary pension pre-funding amounts totaling
$800 million.
|
|
n
|
Repurchased 14.7 million common shares for
$663 million.
|
|
n
|
Jointly settled the Department of Justice microelectronics claim
and the companys claim against the U.S. Government
for the termination of the TSSAM program at no cost to the
company.
|
|
n
|
Reduced backlog by $5.1 billion due to termination for
convenience of the Kinetic Energy Interceptor
program see
page 34.
|
|
n
|
Increased quarterly common stock dividend from $.40 per share to
$.43 per
share.
|
|
n
|
Streamlined the companys organizational structure from
seven to five operating
segments.
|
|
n
|
Realigned certain logistics, services, and technical support
programs and assets from Information Systems and Electronic
Systems to Technical
Services.
|
CRITICAL
ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS
There have been no material changes to the companys
critical accounting policies, estimates, or judgments from those
discussed in the companys 2008
Form 10-K.
24
CONSOLIDATED
OPERATING RESULTS
Selected financial highlights are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
$ in millions, except per
share
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Sales and service revenues
|
|
$
|
8,726
|
|
|
$
|
8,381
|
|
|
$
|
26,003
|
|
|
$
|
24,733
|
|
Cost of sales and service revenues
|
|
|
7,303
|
|
|
|
6,825
|
|
|
|
21,749
|
|
|
|
20,372
|
|
General and administrative expenses
|
|
|
768
|
|
|
|
785
|
|
|
|
2,291
|
|
|
|
2,320
|
|
Operating income
|
|
|
655
|
|
|
|
771
|
|
|
|
1,963
|
|
|
|
2,041
|
|
Interest expense
|
|
|
(76
|
)
|
|
|
(74
|
)
|
|
|
(219
|
)
|
|
|
(223
|
)
|
Other, net
|
|
|
41
|
|
|
|
45
|
|
|
|
62
|
|
|
|
72
|
|
Federal and foreign income taxes
|
|
|
133
|
|
|
|
233
|
|
|
|
536
|
|
|
|
635
|
|
Diluted earnings per share from continuing operations
|
|
|
1.52
|
|
|
|
1.50
|
|
|
|
3.89
|
|
|
|
3.65
|
|
Net cash provided by operating activities
|
|
|
544
|
|
|
|
1,373
|
|
|
|
1,202
|
|
|
|
2,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and
Service Revenues
Sales and service revenues consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Product sales
|
|
$
|
4,982
|
|
|
$
|
4,808
|
|
|
$
|
14,972
|
|
|
$
|
14,051
|
|
Service revenues
|
|
|
3,744
|
|
|
|
3,573
|
|
|
|
11,031
|
|
|
|
10,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and service revenues
|
|
$
|
8,726
|
|
|
$
|
8,381
|
|
|
$
|
26,003
|
|
|
$
|
24,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and service revenues for the three and nine months ended
September 30, 2009, increased $345 million and
$1.3 billion, respectively, as compared with the same
periods in 2008, reflecting higher sales in all operating
segments. See the Segment Operating Results section below for
further information.
Cost of
Sales and Service Revenues
Cost of sales and service revenues is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Cost of Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
$
|
4,027
|
|
|
$
|
3,682
|
|
|
$
|
12,007
|
|
|
$
|
11,204
|
|
% of product sales
|
|
|
80.8
|
%
|
|
|
76.6
|
%
|
|
|
80.2
|
%
|
|
|
79.7
|
%
|
Cost of service revenues
|
|
|
3,276
|
|
|
|
3,143
|
|
|
|
9,742
|
|
|
|
9,168
|
|
% of service revenues
|
|
|
87.5
|
%
|
|
|
88.0
|
%
|
|
|
88.3
|
%
|
|
|
85.8
|
%
|
General and administrative expenses
|
|
|
768
|
|
|
|
785
|
|
|
|
2,291
|
|
|
|
2,320
|
|
% of total sales and service revenues
|
|
|
8.8
|
%
|
|
|
9.4
|
%
|
|
|
8.8
|
%
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and service revenues
|
|
$
|
8,071
|
|
|
$
|
7,610
|
|
|
$
|
24,040
|
|
|
$
|
22,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Product Sales and Service Revenues
The increase in cost of product sales as a percentage of product
sales for the three months ended September 30, 2009, as
compared with the same period in 2008, is primarily due to
higher pension costs and lower program performance at Electronic
Systems and Shipbuilding. The increase in cost of product sales
as a percentage of product sales for the nine months ended
September 30, 2009, as compared with the same period in
2008, is primarily due to higher pension costs, partially offset
by improved program performance at Shipbuilding.
25
The decrease in cost of service revenues as a percentage of
service revenues for the three months ended September 30,
2009, as compared with the same period in 2008, is primarily due
to higher program performance at Information Systems and
Technical Systems. The increase in cost of service revenue as a
percentage of service revenues for the nine months ended
September 30, 2009, as compared with the same period in
2008, is primarily due to higher pension costs, partially offset
by performance improvements at Information Systems and Technical
Services. See the Segment Operating Results section below for
further information.
General and Administrative Expenses In
accordance with industry practice and the regulations that
govern the cost accounting requirements for government
contracts, most general corporate expenses incurred at both the
segment and corporate locations are considered allowable and
allocable costs on government contracts. For most components of
the company, these costs are allocated to contracts in progress
on a systematic basis and contract performance factors include
this cost component as an element of cost. General and
administrative expenses primarily relate to segment operations.
General and administrative expenses as a percentage of total
sales and service revenues decreased from 9.4 percent for
the three and nine months ended September 30, 2008, to
8.8 percent for the comparable periods in 2009 primarily
due to lower corporate overhead costs and for the nine month
period, a gain resulting from a legal settlement.
Operating
Income
The company considers operating income to be an important
measure for evaluating its operating performance and, as is
typical in the industry, defines operating income as revenues
less the related cost of producing the revenues and general and
administrative expenses. Operating income for the company is
further evaluated for each of the business segments in which the
company operates.
Management of the company internally manages its operations by
reference to segment operating income. Segment
operating income is defined as operating income before
unallocated expenses and net pension adjustment, neither of
which affect the segments, and the reversal of royalty income,
which is classified as other income for financial reporting
purposes. Segment operating income is one of the key metrics
management uses to evaluate operating performance. Segment
operating income is not, however, a measure of financial
performance under U.S. generally accepted accounting
principles (U.S. GAAP), and may not be defined and
calculated by other companies in the same manner.
The table below reconciles segment operating income to total
operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Segment operating income
|
|
$
|
786
|
|
|
$
|
768
|
|
|
$
|
2,296
|
|
|
$
|
2,010
|
|
Unallocated expense
|
|
|
(55
|
)
|
|
|
(20
|
)
|
|
|
(87
|
)
|
|
|
(95
|
)
|
Net pension adjustment
|
|
|
(72
|
)
|
|
|
64
|
|
|
|
(224
|
)
|
|
|
192
|
|
Royalty income adjustment
|
|
|
(4
|
)
|
|
|
(41
|
)
|
|
|
(22
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
655
|
|
|
$
|
771
|
|
|
$
|
1,963
|
|
|
$
|
2,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income Segment operating
income for the three months ended September 30, 2009,
increased $18 million, or 2 percent, as compared with
the same period in 2008. Segment operating income was
9.0 percent and 9.2 percent of sales and service
revenues for the three months ended September 30, 2009, and
2008, respectively. The increase in segment operating income is
primarily due to higher operating income in Information Systems
and Aerospace Systems, partially offset by lower operating
income in Electronic Systems. See the Segment Operating Results
section below for further information.
Segment operating income for the nine months ended
September 30, 2009, increased $286 million, or
14 percent, as compared with the same period in 2008.
Segment operating income was 8.8 percent and
8.1 percent of sales and service revenues for the nine
months ended September 30, 2009, and 2008, respectively.
The increase in segment operating income is primarily due to
higher operating income in all operating segments. The 2008
operating income includes a $57 million negative
performance adjustment in Information Systems,
26
partially offset by $60 million royalty income from patent
infringement settlements in Electronic Systems. Operating income
also reflects lower negative performance adjustments in
Shipbuilding of $127 million in 2009 as compared with
$326 million in 2008. See the Segment Operating Results
section below for further information.
Unallocated Expense Unallocated expense
generally includes the portion of corporate expenses not
considered allowable or allocable under applicable CAS
regulations and the Federal Acquisition Regulation (FAR), and
therefore not allocated to the segments, such as management and
administration, legal, environmental, certain compensation and
retiree benefits, and other expenses. Unallocated expense for
the three months ended September 30, 2009, increased
$35 million from $20 million for the same period in
2008, primarily due to higher costs related to increased
environmental remediation accruals and post-retirement employee
benefits. Unallocated expenses for the nine months ended
September 30, 2009, decreased $8 million, or
8 percent, as compared with the same period in 2008,
primarily due to a gain resulting from a legal settlement, net
of legal provisions and related expenses, partially offset by
higher costs related to environmental remediation and
post-retirement employee benefits.
Net Pension Adjustment Net pension adjustment
reflects the difference between pension expense determined in
accordance with U.S. GAAP and pension expense allocated to
the operating segments determined in accordance with CAS. For
the three months ended September 30, 2009, and 2008,
pension expense determined in accordance with U.S. GAAP was
$210 million and $57 million, respectively, and
pension expense determined in accordance with CAS was
$138 million and $121 million, respectively. For the
nine months ended September 30, 2009, and 2008, pension
expense determined in accordance with U.S. GAAP was
$629 million and $170 million, respectively, and
pension expense determined in accordance with CAS was
$405 million and $362 million, respectively. The
increases in U.S. GAAP and CAS pension expense are
primarily the result of negative returns on plan assets in 2008.
Royalty Income Adjustment Royalty income is
included in segment operating income and reclassified to other
income for financial reporting purposes. See Other, net
below.
Interest
Expense
Interest expense for the three months ended September 30,
2009, increased $2 million as compared with the same period
in 2008, primarily due to interest related to $850 million
in unsecured senior notes issued in July 2009. Interest expense
for the nine months ended September 30, 2009, decreased
$4 million as compared with the same period in 2008. The
decrease is primarily due to lower interest rates from the
interest rate swaps and lower average debt balance.
Other,
net
Other, net for the three and nine months ended
September 30, 2009, decreased $4 million and
$10 million, respectively, as compared with the same
periods in 2008. The decreases are primarily due to 2008 royalty
income of $40 million and $60 million (for the three
and nine month periods, respectively) as a result of patent
infringement settlements, partially offset by positive
mark-to-market
adjustments on investments in marketable securities used as a
funding source for nonqualified employee benefit plans and a
gain for the recovery of a loan to an affiliate.
Federal
and Foreign Income Taxes
The companys effective tax rate on earnings from
continuing operations for the three months ended
September 30, 2009, was 21.5 percent compared with
31.4 percent for the same period in 2008. For the nine
months ended September 30, 2009, the companys
effective tax rate on earnings from continuing operations was
29.7 percent compared with 33.6 percent for the same
period in 2008. In the third quarter of 2009, the company
recognized net tax benefits of approximately $75 million
primarily as a result of a final settlement with the Internal
Revenue Service (IRS) Office of Appeals related to the
companys tax returns for the years ended
2001-2003.
In the third quarter of 2008, the company recognized net tax
benefits of $21 million, which were primarily attributable
to a settlement agreement with the IRS Joint Committee on
Taxation with respect to the audit of TRWs
1999 2002 tax returns.
27
Discontinued
Operations
Discontinued operations for the three and nine months ended
September 30, 2008, represents the net operating results of
the Electro-Optical Systems business formerly reported in the
Electronic Systems segment. See Note 5 to the condensed
consolidated financial statements in Part I, Item 1.
Diluted
Earnings Per Share
Diluted earnings per share from continuing operations for the
three months ended September 30, 2009, were $1.52 per
share, as compared with $1.50 per share in the same period in
2008. Earnings per share are based on weighted average diluted
shares outstanding of 320.6 million for the three months
ended September 30, 2009, and 340.1 million for the same
period in 2008.
Diluted earnings per share from continuing operations for the
nine months ended September 30, 2009, were $3.89 per share,
as compared with $3.65 per share in the same period in 2008.
Earnings per share are based on weighted average diluted shares
outstanding of 326.1 million for the nine months ended
September 30, 2009, and 344.5 million for the same
period in 2008. See Note 7 to the condensed consolidated
financial statements in Part I, Item 1.
Net Cash
Provided by Operating Activities
For the three months ended September 30, 2009, net cash
provided by operating activities was $544 million as
compared with $1.4 billion for the same period in 2008. The
decrease of $829 million was primarily due to voluntary
pension contributions of $586 million and higher trade
working capital requirements in the 2009 period.
For the nine months ended September 30, 2009, net cash
provided by operating activities was $1.2 billion as
compared with $2.2 billion for the same period in 2008. The
decrease of $972 million was primarily due to voluntary
pension contributions of $800 million and higher trade
working capital requirements in the 2009 period.
SEGMENT
OPERATING RESULTS
Basis of
Presentation
In January 2009, the company streamlined its organizational
structure by reducing the number of operating segments from
seven to five. The five segments are Aerospace Systems, which
combines the former Integrated Systems and Space Technology
segments; Electronic Systems; Information Systems, which
combines the former Information Technology and Mission Systems
segments; Shipbuilding; and Technical Services. Creation of the
Aerospace Systems and Information Systems segments is intended
to strengthen alignment with customers, improve the
companys ability to execute on programs and win new
business, and enhance cost competitiveness.
During the first quarter of 2009, the company realigned certain
logistics, services, and technical support programs and
transferred assets from the Information Systems and Electronic
Systems segments to the Technical Services segment. This
realignment is intended to strengthen the companys core
capability in aircraft and electronics maintenance, repair and
overhaul, life cycle optimization, and training and simulation
services.
The sales and segment operating income in the following tables
have been revised to reflect the above realignments for all
periods presented.
28
During the first quarter of 2009, the company transferred
certain optics and laser programs from the Information Systems
segment to the Aerospace Systems segment. As the operating
results of this business were not considered material, the prior
year sales and segment operating income in the following tables
were not reclassified to reflect this business transfer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace Systems
|
|
$
|
2,527
|
|
|
$
|
2,417
|
|
|
$
|
7,656
|
|
|
$
|
7,250
|
|
Electronic Systems
|
|
|
1,839
|
|
|
|
1,808
|
|
|
|
5,594
|
|
|
|
5,018
|
|
Information Systems
|
|
|
2,513
|
|
|
|
2,410
|
|
|
|
7,589
|
|
|
|
7,220
|
|
Shipbuilding
|
|
|
1,650
|
|
|
|
1,451
|
|
|
|
4,549
|
|
|
|
4,403
|
|
Technical Services
|
|
|
692
|
|
|
|
665
|
|
|
|
2,026
|
|
|
|
1,857
|
|
Intersegment eliminations
|
|
|
(495
|
)
|
|
|
(370
|
)
|
|
|
(1,411
|
)
|
|
|
(1,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and service revenues
|
|
$
|
8,726
|
|
|
$
|
8,381
|
|
|
$
|
26,003
|
|
|
$
|
24,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace Systems
|
|
$
|
265
|
|
|
$
|
233
|
|
|
$
|
780
|
|
|
$
|
721
|
|
Electronic Systems
|
|
|
215
|
|
|
|
261
|
|
|
|
695
|
|
|
|
671
|
|
Information Systems
|
|
|
206
|
|
|
|
156
|
|
|
|
633
|
|
|
|
575
|
|
Shipbuilding
|
|
|
113
|
|
|
|
118
|
|
|
|
211
|
|
|
|
26
|
|
Technical Services
|
|
|
41
|
|
|
|
39
|
|
|
|
121
|
|
|
|
110
|
|
Intersegment eliminations
|
|
|
(54
|
)
|
|
|
(39
|
)
|
|
|
(144
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
786
|
|
|
$
|
768
|
|
|
$
|
2,296
|
|
|
$
|
2,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Performance Assessment and
Reporting The company manages and assesses the
performance of its businesses based on its performance on
individual contracts and programs obtained generally from
government organizations using the financial measures referred
to below, with consideration given to the companys
critical accounting policies and estimation process. Based on
this approach and the nature of the companys operations,
the discussion of results of operations generally focuses around
the companys five segments versus distinguishing between
products and services. Product sales are predominantly generated
in the Aerospace Systems, Electronic Systems and Shipbuilding
segments, while the majority of the companys service
revenues are generated by the Information Systems and Technical
Services segments.
Sales and Service Revenues
Period-to-period
sales reflect performance under new and ongoing contracts.
Changes in sales and service revenues are typically expressed in
terms of volume. Unless otherwise described, volume generally
refers to increases (or decreases) in reported revenues incurred
due to varying production activity levels, delivery rates, or
service levels on individual contracts. Volume changes will
typically carry a corresponding operating income change based on
the margin rate for a particular contract.
Segment Operating Income Segment operating
income reflects the aggregate performance results of contracts
within a business area or segment. Excluded from this measure
are certain costs not directly associated with contract
performance, including the portion of corporate expenses such as
management and administration, legal, environmental, certain
compensation and other retiree benefits, and other expenses not
considered allowable or allocable under applicable CAS
regulations and the FAR, and therefore not allocated to the
segments. Changes in segment operating income are typically
expressed in terms of volume, as discussed above, or
performance. Performance refers to changes in contract margin
rates. These changes typically relate to profit recognition
associated with revisions to total estimated costs at completion
of the contract (EAC) that reflect improved (or deteriorated)
operating performance on a particular contract. Operating income
changes are accounted for on a cumulative to date basis at the
time an EAC change is recorded.
29
Operating income may also be affected by, among other things,
the effects of workforce stoppages, the effects of natural
disasters (such as hurricanes and earthquakes), the resolution
of disputed items with the customer, recovery of insurance
proceeds, and other discrete events. At the completion of a
long-term contract, any originally estimated costs not incurred
or reserves not fully utilized (such as warranty reserves) could
also impact contract earnings. Where such items have occurred,
and the effects are material, a separate description is provided.
Contract
Descriptions
For convenience, a brief description of certain programs
discussed in this
Form 10-Q
is included in the Glossary of Programs beginning on
page 38.
AEROSPACE
SYSTEMS
Business
Description
Aerospace Systems is a premier developer, integrator, producer
and supporter of manned and unmanned aircraft, spacecraft,
high-energy laser systems, microelectronics and other systems
and subsystems critical to maintaining the nations
security and leadership in aerospace science and technology.
These systems are used, primarily by government customers, in
many different mission areas including intelligence,
surveillance and reconnaissance; communications; battle
management; strike operations; electronic warfare; missile
defense; earth observation; space science; and space
exploration. The segment consists of four areas of business:
Strike and Surveillance Systems (S&SS); Space Systems (SS);
Battle Management and Engagement Systems (BM&ES); and
Advanced Programs and Technology (AP&T).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Sales and Service Revenues
|
|
$
|
2,527
|
|
|
$
|
2,417
|
|
|
$
|
7,656
|
|
|
$
|
7,250
|
|
Segment Operating Income
|
|
|
265
|
|
|
|
233
|
|
|
|
780
|
|
|
|
721
|
|
As a percentage of segment sales
|
|
|
10.5
|
%
|
|
|
9.6
|
%
|
|
|
10.2
|
%
|
|
|
9.9
|
%
|
Sales and
Service Revenues
Aerospace Systems revenue for the three months ended
September 30, 2009, increased $110 million, or
5 percent, as compared with the same period in 2008. The
increase is primarily due to $76 million higher sales in
BM&ES, $49 million higher sales in SS, and
$7 million higher sales in AP&T, partially offset by
$18 million lower sales in S&SS. The increase in
BM&ES is primarily due to higher sales volume on the Broad
Area Maritime Surveillance (BAMS) Unmanned Aircraft System, the
E-2D
Advanced Hawkeye, and the EA-18G programs, partially offset by
lower sales volume on the
E-2C as the
program is nearing completion. The increase in SS is primarily
due to the
ramp-up of
certain restricted programs awarded in 2008, partially offset by
decreased sales volume on the National Polar-orbiting
Operational Environmental Satellite System (NPOESS) and the
cancellation of the Transformational Satellite Communications
System (TSAT) program. The increase in AP&T is due to
higher sales volume associated with the Navy Unmanned Combat Air
System (N-UCAS) program, partially offset by lower sales volume
on restricted programs. The decrease in S&SS is due to
decreased activity on the Kinetic Energy Interceptor (KEI)
program, which was terminated for convenience, and the
Intercontinental Ballistic Missile (ICBM) program, partially
offset by higher sales volume on the Global Hawk High-Altitude
Long-Endurance (HALE) Systems and B-2 programs.
Aerospace Systems revenue for the nine months ended
September 30, 2009, increased $406 million, or
6 percent, as compared with the same period in 2008. The
increase is primarily due to $151 million higher sales in
SS, $147 million higher sales in S&SS,
$99 million higher sales in BM&ES, and
$22 million higher sales in AP&T. The increase in SS
is primarily due to the
ramp-up of
certain restricted programs awarded in 2008, partially offset by
lower volume on NPOESS and cancellation of the TSAT program. The
increase in S&SS is primarily due to higher sales volume
associated with increased deliveries and
ramp-up on
production of manned and unmanned aircraft programs, such as the
F-35 low rate initial production (LRIP), Global Hawk HALE
Systems,
F/A-18, and
B-2 programs, partially offset by decreased activity on the ICBM
program and termination
30
of the KEI program. The increase at BM&ES is due to higher
sales volume on the BAMS Unmanned Aircraft System, EA-18G, and
Joint Surveillance Target Attack Radar Ssystem (Joint STARS)
programs, partially offset by lower sales volume driven by the
completion of deliveries on the EA-6B and the winding down of
the E-2C
program. The increase in AP&T is due to higher sales volume
associated with the N-UCAS program, partially offset by the
termination of the Air Mobility Tanker program in the fourth
quarter of 2008 and lower sales volume on the Airborne Laser as
the program transitions from the hardware integration phase to
test phase.
Segment
Operating Income
Operating income at Aerospace Systems for the three months ended
September 30, 2009, increased $32 million, or
14 percent, as compared with the same period in 2008. The
increase was due to $20 million of improved program
performance, primarily in S&SS, and $12 million from
the higher sales volume discussed above.
Operating income at Aerospace Systems for the nine months ended
September 30, 2009, increased $59 million, or
8 percent, as compared with the same period in 2008. The
increase is primarily due to $41 million from the higher
sales volume discussed above and $18 million of improved
program performance primarily in S&SS.
ELECTRONIC
SYSTEMS
Business
Description
Electronic Systems is a leading designer, developer,
manufacturer and integrator of a variety of advanced electronic
and maritime systems for national security and select
non-defense applications. Electronic Systems provides systems to
U.S. and international customers for such applications as
airborne surveillance, aircraft fire control, precision
targeting, electronic warfare, automatic test equipment,
inertial navigation, integrated avionics, space sensing,
intelligence processing, air and missile defense,
communications, mail processing, biochemical detection, ship
bridge control and radar, ship machinery controls, and shipboard
components. The segment is composed of seven areas of business:
Aerospace Systems (AS); Defensive Systems (DS); Government
Systems (GS); Land Forces (LF); Naval & Marine Systems
(N&MS); Navigation Systems (NS); and Space &
Intelligence, Surveillance & Reconnaissance
(Space & ISR) Systems.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Sales and Service Revenues
|
|
$
|
1,839
|
|
|
$
|
1,808
|
|
|
$
|
5,594
|
|
|
$
|
5,018
|
|
Segment Operating Income
|
|
|
215
|
|
|
|
261
|
|
|
|
695
|
|
|
|
671
|
|
As a percentage of segment sales
|
|
|
11.7
|
%
|
|
|
14.4
|
%
|
|
|
12.4
|
%
|
|
|
13.4
|
%
|
Sales and
Service Revenues
Electronic Systems revenue for the three months ended
September 30, 2009, increased $31 million, or
2 percent, as compared with the same period in 2008. The
increase is primarily due to $80 million higher sales in
AS, $35 million higher sales in DS, and $11 million
higher sales in Space & ISR Systems, partially offset
by $41 million lower sales in GS. The increase in AS is due
to higher volume on the F-35 LRIP and intercompany programs. The
increase in DS is due to higher deliveries associated with the
Large Aircraft Infrared Countermeasures (LAIRCM) Indefinite
Delivery Indefinite Quality (IDIQ) program. The increase in
Space & ISR Systems is due to higher volume on the
Space Based Infrared System (SBIRS) follow-on program. The
decrease in GS is due to lower volume on postal automation
programs.
Electronic Systems revenue for the nine months ended
September 30, 2009, increased $576 million, or
11 percent, as compared with the same period in 2008. The
increase is primarily due to $176 million higher sales in
AS, $154 million higher sales in DS, $129 million
higher sales in Space & ISR Systems and
$63 million higher sales in N&MS. The increase in AS
is due to higher volume on the F-35 LRIP, B-52 Sustainment and
intercompany programs. The increase in DS is due to higher
deliveries associated with the LAIRCM IDIQ. The increase in
Space & ISR Systems is due to higher volume on the
SBIRS follow-on program. The increase in N&MS is due to
higher volume on power and propulsion systems for the
Virginia-class submarine program.
31
Segment
Operating Income
Operating income at Electronic Systems for the three months
ended September 30, 2009, decreased $46 million, or
18 percent, as compared with the same period in 2008, and
as a percentage of revenues decreased 270 basis points. The
decrease is primarily attributable to lower performance in GS,
principally due to the Flats Sequencing System (FSS) program,
partially offset by performance improvements on a number of AS
contracts. Operating income in 2008 includes royalty income of
$40 million from patent infringement settlements.
Operating income at Electronic Systems for the nine months ended
September 30, 2009, increased $24 million, or
4 percent, as compared with the same period in 2008, and as
a percentage of revenues decreased 100 basis points. The
increase is due to $72 million from the higher sales volume
discussed above, partially offset by $48 million lower net
performance results. The decrease in performance results is
primarily due to lower performance in GS, principally due to the
FSS program, partially offset by performance improvements on a
number of AS contracts. Operating income in 2008 includes
royalty income of $60 million from patent infringement
settlements and a $20 million charge for the companys
MESA Wedgetail radar program.
INFORMATION
SYSTEMS
Business
Description
Information Systems is a leading global provider of advanced
solutions for the DoD, national intelligence, federal, civilian,
state and local agencies, and commercial customers. Products and
services are focused on the fields of command, control,
communications, computers and intelligence, missile and air
defense, airborne reconnaissance, intelligence processing,
decision support systems, information technology systems
engineering and systems integration. The segment consists of
four areas of business: Defense Systems (DSD); Intelligence
Systems (ISD); Civil Systems (CSD); and Advisory Services (ASD).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Sales and Service Revenues
|
|
$
|
2,513
|
|
|
$
|
2,410
|
|
|
$
|
7,589
|
|
|
$
|
7,220
|
|
Segment Operating Income
|
|
|
206
|
|
|
|
156
|
|
|
|
633
|
|
|
|
575
|
|
As a percentage of segment sales
|
|
|
8.2
|
%
|
|
|
6.5
|
%
|
|
|
8.3
|
%
|
|
|
8.0
|
%
|
Sales and
Service Revenues
Information Systems revenue for the three months ended
September 30, 2009, increased $103 million, or
4 percent, as compared with the same period in 2008. The
increase is primarily due to $59 million higher sales in
DSD and $43 million higher sales in ISD, partially offset
by $23 million lower sales in ASD. The increase in DSD is
primarily driven by
ramp-up on
Battlefield Airborne Communications Node (BACN) program
activities and higher revenues on the Trailer Mounted Support
System (TMSS). The increase in ISD is primarily due to program
growth on the Counter Narco-Terrorism Program Office (CNTPO),
Electronic Intelligence Modernization (EMOD) Information
Management & Storage (IM&S), and restricted
programs, as well as additional revenues from 3001
International, Inc. (3001 Inc.), which was acquired in the
fourth quarter of 2008, partially offset by lower volume on the
Navstar Global Positioning System Operational Control Segment
(GPS OCX) program. The decrease in ASD is primarily driven by
lower volume on restricted programs.
Information Systems revenue for the nine months ended
September 30, 2009, increased $369 million, or
5 percent, as compared with the same period in 2008. The
increase is primarily due to $231 million higher sales in
ISD, and $223 million higher sales in DSD, partially offset
by $107 million lower sales in CSD. The increase in ISD is
primarily due to program growth on the CNTPO, Guardrail Common
Sensor System IDIQ, and restricted programs, as well as
additional revenues from 3001 Inc., which was acquired in the
fourth quarter of 2008, partially offset by lower volume on the
GPS OCX program. The increase in DSD is primarily driven by
higher revenues on the TMSS, Airborne and Maritime/Fixed
Stations Joint Tactical Radio Systems, BACN, and Integrated Base
Defense Security System programs. The decrease in CSD is
primarily due to lower volume on NYCWiN, as well as program
completions and lower volume for state and local programs.
32
Segment
Operating Income
Operating income at Information Systems for the three months
ended September 30, 2009, increased $50 million, or
32 percent, as compared with the same period in 2008, and
as a percentage of revenue increased 170 basis points. The
increase is primarily due to higher net performance results.
Operating income in 2008 includes a negative performance
adjustment of $57 million on the NYCWiN program.
Operating income at Information Systems for the nine months
ended September 30, 2009, increased $58 million, or
10 percent, as compared with the same period in 2008. The
increase is due to $31 million from the higher sales volume
discussed above and $27 million higher net performance
results. The increase in performance results is primarily due to
the 2008 negative performance adjustment on the NYCWiN program.
SHIPBUILDING
Business
Description
Shipbuilding is the nations sole industrial designer,
builder, and refueler of nuclear-powered aircraft carriers and
one of only two companies capable of designing and building
nuclear-powered submarines for the U.S. Navy. Shipbuilding
is also one of the nations leading full service systems
providers for the design, engineering, construction, and life
cycle support of major surface ships for the U.S. Navy,
U.S. Coast Guard, international navies, and for commercial
vessels of all types. The segment includes the following areas
of business: Aircraft Carriers; Expeditionary Warfare; Surface
Combatants; Submarines; Coast Guard & Coastal Defense;
Fleet Support; Commercial; and Services & Other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Sales and Service Revenues
|
|
$
|
1,650
|
|
|
$
|
1,451
|
|
|
$
|
4,549
|
|
|
$
|
4,403
|
|
Segment Operating Income
|
|
|
113
|
|
|
|
118
|
|
|
|
211
|
|
|
|
26
|
|
As a percentage of segment sales
|
|
|
6.8
|
%
|
|
|
8.1
|
%
|
|
|
4.6
|
%
|
|
|
0.6
|
%
|
Sales and
Service Revenues
Shipbuilding revenue for the three months ended
September 30, 2009, increased $199 million, or
14 percent, as compared with the same period in 2008. The
increase is primarily due to $124 million higher sales in
Expeditionary Warfare, $48 million higher sales in
Submarines, and $35 million higher sales in Surface
Combatants. The increase in Expeditionary Warfare is primarily
due to higher sales volume in the LPD program due to production
ramp-ups.
The increase in Submarines is primarily due to higher sales
volume on the construction of the Virginia-class
submarines. The increase in Surface combatants is primarily due
to higher sales volume on the DDG 51 and DDG 1000 programs.
Shipbuilding revenue for the nine months ended
September 30, 2009, increased $146 million, or
3 percent, as compared with the same period in 2008. The
increase is primarily due to $132 million higher sales in
Submarines and $70 million higher sales in Expeditionary
Warfare, partially offset by $41 million lower sales in
Surface Combatants. The increase in Submarines is primarily due
to higher sales volume on the construction of the
Virginia-class submarines. The increase in Expeditionary
Warfare is due to higher sales volume in the LPD program due to
production
ramp-ups and
the first quarter 2008 sales adjustment of $134 million on
the LHD 8 program, partially offset by the second quarter 2009
revenue reduction on the LPD-class ships and LHA 6 and delivery
of the LHD 8. The decrease in Surface Combatants is primarily
due to lower sales volume on the DDG 51 program.
Segment
Operating Income
Operating income at Shipbuilding for the three months ended
September 30, 2009, decreased $5 million, or
4 percent, as compared with the same period in 2008, and as
a percentage of revenues decreased 130 basis points. The
decrease is due to $19 million lower performance results,
partially offset by $14 million from the higher sales
volume discussed above. The decrease in performance results is
primarily due to third quarter 2008 net favorable
adjustments on various programs.
33
Operating income at Shipbuilding for the nine months ended
September 30, 2009, was $211 million as compared with
$26 million for the same period in 2008, and as a
percentage of revenues increased 400 basis points. The
$185 million increase is primarily due to lower negative
performance adjustments in Surface Combatants and Expeditionary
Warfare of $127 million in 2009 as compared with
$326 million in 2008.
TECHNICAL
SERVICES
Business
Description
Technical Services is a leading provider of logistics,
infrastructure, and sustainment support, while also providing a
wide array of technical services, including training and
simulation. The segment consists of three areas of business:
Systems Support (SSG); Training & Simulation (TSG);
and Life Cycle Optimization & Engineering (LCOE).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Sales and Service Revenues
|
|
$
|
692
|
|
|
$
|
665
|
|
|
$
|
2,026
|
|
|
$
|
1,857
|
|
Segment Operating Income
|
|
|
41
|
|
|
|
39
|
|
|
|
121
|
|
|
|
110
|
|
As a percentage of segment sales
|
|
|
5.9
|
%
|
|
|
5.9
|
%
|
|
|
6.0
|
%
|
|
|
5.9
|
%
|
Sales and
Service Revenues
Technical Services revenue for the three months ended
September 30, 2009, increased $27 million, or
4 percent, as compared with the same period in 2008. The
increase is primarily due to $51 million higher sales in
LCOE and $18 million higher sales in TSG, partially offset
by $41 million lower sales for SSG. The increase in LCOE is
due to increased task orders for the CNTPO program and higher
demand on the unmanned aerial systems Hunter Contractor
Logistics Support (CLS) program in support of the DoDs
surge in intelligence, surveillance and reconnaissance (ISR)
initiatives. The increase in TSG is due to higher volume on
various training and simulation programs including the Joint
Warfighting Center Support (JWFC), Global Linguistic Solutions
(GLS) and African Contingency Operations Training Assistance
(ACOTA) programs. The decrease in SSG is primarily due to the
completion of the Joint Base Operations Support (JBOSC) program
in 2008.
Technical Services revenue for the nine months ended
September 30, 2009, increased $169 million, or
9 percent, as compared with the same period in 2008. The
increase is primarily due to $170 million higher sales in
LCOE and $75 million higher sales in TSG, partially offset
by $71 million lower sales in SSG. The increase in LCOE is
due to increased task orders for CNTPO and higher demand on the
Hunter CLS programs in support of the DoDs ISR
initiatives. The increase in TSG is due to higher volume on
various training and simulation programs including the JWFC, GLS
and ACOTA programs. The decrease in SSG is primarily due to the
completion of the JBOSC program in 2008.
Segment
Operating Income
Operating income at Technical Services for the three months
ended September 30, 2009, increased $2 million, or
5 percent, as compared with the same period in 2008. The
increase is due to the higher sales volume discussed above.
Operating income at Technical Services for the nine months ended
September 30, 2009, increased $11 million, or
10 percent, as compared with the same period in 2008. The
increase is primarily due to the higher sales volume discussed
above.
BACKLOG
Definition
Total backlog at September 30, 2009, was approximately
$71.5 billion. Total backlog includes both funded backlog
(firm orders for which funding is contractually obligated by the
customer) and unfunded backlog (firm orders for which funding is
not currently contractually obligated by the customer). Unfunded
backlog excludes unexercised contract options and unfunded IDIQ
orders. For multi-year services contracts with non-federal
government customers having no stated contract values, backlog
includes only the amounts committed by the customer. Backlog is
converted into sales as work is performed or deliveries are made.
34
Backlog consisted of the following at September 30, 2009,
and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
$ in millions
|
|
Funded
|
|
Unfunded
|
|
Backlog
|
|
Funded
|
|
Unfunded
|
|
Backlog
|
Aerospace Systems
|
|
$
|
8,213
|
|
|
$
|
16,678
|
|
|
$
|
24,891
|
|
|
$
|
7,648
|
|
|
$
|
22,883
|
|
|
$
|
30,531
|
|
Electronic Systems
|
|
|
7,968
|
|
|
|
2,809
|
|
|
|
10,777
|
|
|
|
8,391
|
|
|
|
2,124
|
|
|
|
10,515
|
|
Information Systems
|
|
|
4,911
|
|
|
|
5,219
|
|
|
|
10,130
|
|
|
|
5,310
|
|
|
|
4,672
|
|
|
|
9,982
|
|
Shipbuilding
|
|
|
12,323
|
|
|
|
9,078
|
|
|
|
21,401
|
|
|
|
14,205
|
|
|
|
8,148
|
|
|
|
22,353
|
|
Technical Services
|
|
|
1,812
|
|
|
|
2 ,452
|
|
|
|
4,264
|
|
|
|
1,840
|
|
|
|
2,831
|
|
|
|
4,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total backlog
|
|
$
|
35,227
|
|
|
$
|
36,236
|
|
|
$
|
71,463
|
|
|
$
|
37,394
|
|
|
$
|
40,658
|
|
|
$
|
78,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
Awards
The estimated value of contract awards included in backlog
during the nine months ended September 30, 2009, was
$24.5 billion. Significant new awards during this period
include a contract valued up to $2.4 billion for the USS
Theodore Roosevelt refueling and complex overhaul,
$905 million for the F-35 LRIP program, $870 million
for the Global Hawk HALE program, $637 million for the
power and propulsion systems for the Virginia-class
submarine program, $477 million for the E2-D LRIP program,
$453 million for the B-2 program, $403 million for the
SBIRS follow on program, $377 million for construction
preparation of the Gerald R. Ford class aircraft carrier,
$360 million for the BACN program, $296 million to
finalize the development of the Distributed Common Ground
System-Army (DCGS-A) Mobile Basic system, $286 million for
LAIRCM IDIQ, and various restricted awards.
Backlog
Adjustment
In the second quarter of 2009, the company was notified that the
KEI program was terminated for convenience by the Missile
Defense Agency. The KEI termination was recorded as a reduction
to total backlog of $5.1 billion at Aerospace Systems.
LIQUIDITY
AND CAPITAL RESOURCES
The company endeavors to ensure the most efficient conversion of
operating results into cash for deployment in growing its
businesses and maximizing shareholder value. The company
actively manages its capital resources through working capital
improvements, capital expenditures, strategic business
acquisitions, investment in independent research and
development, debt repayments, voluntary pension contributions,
and returning cash to its shareholders through dividend payments
and repurchases of common stock.
Company management uses various financial measures to assist in
capital deployment decision making including net cash provided
by operations and free cash flow. Management believes these
measures are useful to investors in assessing the companys
financial performance.
The table below summarizes key components of cash flow provided
by operating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net earnings
|
|
$
|
490
|
|
|
$
|
512
|
|
|
$
|
1,273
|
|
|
$
|
1,271
|
|
Non-cash income and
expense(1)
|
|
|
284
|
|
|
|
221
|
|
|
|
755
|
|
|
|
762
|
|
Retiree benefit funding (in excess of) less than expense
|
|
|
(379
|
)
|
|
|
(11
|
)
|
|
|
(208
|
)
|
|
|
35
|
|
Trade working capital decrease (increase)
|
|
|
259
|
|
|
|
438
|
|
|
|
(460
|
)
|
|
|
31
|
|
Change in income taxes payable
|
|
|
(110
|
)
|
|
|
214
|
|
|
|
(158
|
)
|
|
|
130
|
|
Gain on sale of business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
Cash provided by discontinued operations
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
544
|
|
|
$
|
1,373
|
|
|
$
|
1,202
|
|
|
$
|
2,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes depreciation and amortization, stock-based
compensation expense, and deferred income taxes. |
35
Free Cash
Flow
Free cash flow represents cash from operating activities less
capital expenditures and outsourcing contract and related
software costs. The company believes free cash flow is a useful
measure for investors as it reflects the ability of the company
to grow by funding strategic business acquisitions and return
value to shareholders through repurchasing its shares and paying
dividends.
Free cash flow is not a measure of financial performance under
U.S. GAAP, and may not be defined and calculated by other
companies in the same manner. This measure should not be
considered in isolation or as an alternative to operating
results presented in accordance with U.S. GAAP as
indicators of performance.
For 2009, cash generated from operations supplemented by
borrowings under credit facilities and in the capital markets,
as necessary, is expected to be sufficient to service debt and
contract obligations, finance capital expenditures, fund
required and voluntary benefits contributions, continue
acquisition of shares under the share repurchase program, and
continue paying dividends to the companys shareholders.
The table below reconciles net cash provided by operating
activities to free cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
$ in millions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net cash provided by operating activities
|
|
$
|
544
|
|
|
$
|
1,373
|
|
|
$
|
1,202
|
|
|
$
|
2,174
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(139
|
)
|
|
|
(167
|
)
|
|
|
(436
|
)
|
|
|
(444
|
)
|
Outsourcing contract and related software costs
|
|
|
(21
|
)
|
|
|
(23
|
)
|
|
|
(58
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
384
|
|
|
$
|
1,183
|
|
|
$
|
708
|
|
|
$
|
1,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows
The following is a discussion of the companys major
operating, investing and financing activities for the nine
months ended September 30, 2009, and 2008, respectively, as
classified on the condensed consolidated statements of cash
flows located in Part I, Item 1.
Operating Activities Cash flows from
operating activities for the nine months ended
September 30, 2009, decreased $972 million as compared
with the same period in 2008, primarily due to $800 million
in voluntary pension contributions and higher trade working
capital requirements in the 2009 period.
Investing Activities Net cash used in
investing activities for the nine months ended
September 30, 2009, was $539 million compared with
$299 million in the same period of 2008. The
$240 million increase is primarily due to the effects of
the 2008 sale of the Electro-Optical Systems business for
$175 million and the 2008 release of $59 million in
restricted cash related to the Gulf Opportunity Zone Industrial
Revenue Bonds, coupled with the 2009 acquisition of Sonoma
Photonics, Inc. and the assets from Swift Engineerings
Killer Bee Unmanned Air Systems product line for
$33 million, and the 2009 net restriction of
$28 million of cash to collateralize certain letters of
credit.
Financing Activities Net cash used in
financing activities for the nine months ended
September 30, 2009, was $243 million compared to
$1.8 billion in the same period of 2008. The
$1.6 billion decrease is primarily due to $850 million
of proceeds from the issuance of debt and $812 million in
lower share repurchases.
On July 30, 2009, the company issued $350 million of
5-year and
$500 million of
10-year
unsecured senior obligations. Interest on the notes is payable
semi-annually in arrears at fixed rates of 3.70 percent and
5.05 percent per annum, and the notes will mature on
August 1, 2014, and August 1, 2019, respectively.
These senior notes are subject to redemption at the
companys discretion at any time prior to maturity. The net
proceeds from these notes will be used for general corporate
purposes including debt repayment, acquisitions, share
repurchases, pension plan funding, and working capital. On
October 15, 2009, a portion of the net proceeds was used to
retire $400 million of 8 percent senior debt that had
matured.
36
ACCOUNTING
STANDARDS UPDATES
See Note 2 to the condensed consolidated financial
statements in Part I, Item 1 for information related
to accounting standards updates.
FORWARD-LOOKING
STATEMENTS AND PROJECTIONS
Statements in this
Form 10-Q
that are in the future tense, and all statements accompanied by
terms such as believe, project,
expect, trend, estimate,
forecast, assume, intend,
plan, guidance, anticipate,
outlook, preliminary, and variations
thereof and similar terms are intended to be
forward-looking statements as defined by federal
securities law. Forward-looking statements are based upon
assumptions, expectations, plans and projections that are
believed valid when made, but that are subject to the risks and
uncertainties identified under Risk Factors in the
companys 2008
Form 10-K,
as amended or supplemented by the information, if any, in
Part II, Item 1A below, that may cause actual results
to differ materially from those expressed or implied in the
forward-looking statements.
The company intends that all forward-looking statements made
will be subject to the safe harbor protection of the federal
securities laws pursuant to Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements are based upon, among other
things, the companys assumptions with respect to:
|
|
|
|
n
|
impact of domestic and global economic uncertainties on
financial markets, access to capital, value of goodwill or other
assets;
|
|
n
|
changes in government funding, including with respect to the
2010 budget of the
U.S. Government;
|
|
n
|
changes in statutes and regulations impacting the companys
eligibility to perform work that might give rise to
organizational conflicts of
interest;
|
|
n
|
future
revenues;
|
|
n
|
expected program performance and cash
flows;
|
|
n
|
compliance with regulatory, technical, operational, and quality
requirements;
|
|
n
|
returns or losses on pension plan assets and variability of
pension actuarial and related assumptions and regulatory
requirements;
|
|
n
|
the outcome of litigation, claims, appeals, bid protests, and
investigations;
|
|
n
|
hurricane-related insurance
recoveries;
|
|
n
|
environmental
remediation;
|
|
n
|
acquisitions and divestitures of
businesses;
|
|
n
|
performance issues with, and financial viability of, joint
ventures, and other business
arrangements;
|
|
n
|
performance issues with, and financial viability of, key
suppliers and
subcontractors;
|
|
n
|
product performance and the successful execution of internal
plans;
|
|
n
|
successful negotiation of contracts with labor
unions;
|
|
n
|
the availability and retention of skilled
labor;
|
|
n
|
allowability and allocability of costs under
U.S. Government
contracts;
|
|
n
|
effective tax rates and timing and amounts of tax
payments;
|
|
n
|
the results of any audit or appeal process with the Internal
Revenue
Service; and
|
|
n
|
anticipated costs of capital
investments.
|
You should consider the limitations on, and risks associated
with, forward-looking statements and not unduly rely on the
accuracy of predictions contained in such forward-looking
statements. As noted above, these forward-looking statements
speak only as of the date when they are made. The company does
not undertake any obligation to update forward-looking
statements to reflect events, circumstances, changes in
expectations, or the occurrence of unanticipated events after
the date of those statements. Moreover, in the future, the
company, through senior management, may make forward-looking
statements that involve the risk factors and other matters
described in this
Form 10-Q
as well as other risk factors subsequently identified,
including, among others, those identified in the companys
filings with the Securities and Exchange Commission on
Form 10-K,
Form 10-Q
and
Form 8-K.
37
CONTRACTUAL
OBLIGATIONS
There have been no material changes to the companys
contractual obligations from those discussed in the
companys 2008
Form 10-K.
GLOSSARY
OF PROGRAMS
Listed below are brief descriptions of the programs mentioned in
this
Form 10-Q.
|
|
|
Program Name
|
|
Program Description
|
|
African Contingency
Operations Training
Assistance (ACOTA)
|
|
Provide peacekeeping training to militaries in African nations
via the Department of State. The program is designed to improve
the ability of African governments to respond quickly to crises
by providing selected militaries with the training and equipment
required to execute humanitarian or peace support operations.
|
|
|
|
|
|
|
Airborne and
Maritime/Fixed Stations
Joint Tactical Radio
Systems (AMF JTRS)
|
|
AMF JTRS will develop a communications capability that includes
two software-defined, multifunction radio form factors for use
by the U.S. Department of Defense and potential use by the U.S.
Department of Homeland Security. Northrop Grumman has the
responsibility for leading the Joint Tactical Radio (JTR)
integrated product team and co-development of the JTR small
airborne (JTR-SA) hardware and software. The company will also
provide common JTR software for two JTR form factors, wideband
power amplifiers, and the use of Northrop Grummans
Advanced Communications Test Center in San Diego as the
integration and test site for the JTR-SA radio, waveforms and
ancillaries.
|
|
|
|
|
|
|
Airborne Laser (ABL)
|
|
Design and develop the systems Chemical Oxygen Iodine
Laser (COIL) and the Beacon Illuminator Laser (BILL) for the
Missile Defense Agencys Airborne Laser, providing a
capability to destroy boost-phase missiles at very long range.
|
|
|
|
|
|
|
Battlefield Airborne
Communications Node
(BACN)
|
|
Install the BACN system in three Bombardier BD-700 Global
Express aircraft for immediate fielding and install the BACN
system into two Global Hawk Block 20 unmanned aerial
vehicles.
|
|
|
|
|
|
|
B-2 Stealth Bomber
|
|
Maintain strategic, long-range multi-role bomber with
war-fighting capability that combines long range, large payload,
all-aspect stealth, and near-precision weapons in one aircraft.
|
|
|
|
|
|
|
B-52 Sustainment
|
|
B-52 ALQ-155, ALQ-122, ALT-16, ALT-32 and ALR-20 Power
Management Systems are legacy electronic countermeasures systems
protecting the B-52 over a wideband frequency range. The program
provides design and test products to resolve obsolescence and
maintainability issues using modern digital receiver/exciter
designs.
|
|
|
|
38
|
|
|
Program Name
|
|
Program Description
|
|
Broad Area Maritime
Surveillance (BAMS)
Unmanned Aircraft System
|
|
A maritime derivative of the Global Hawk that provides
persistent maritime Intelligence, Surveillance, and
Reconnaissance (ISR) data collection and dissemination
capability to the Maritime Patrol and Reconnaissance Force.
|
|
|
|
|
|
|
Counter Narco Terrorism
Program Office
(CNTPO)
|
|
Counter Narco Terrorism Program Office provide support to the
U.S. Government, coalition partners, and host nations in
Technology Development and Application Support; Training;
Operations and Logistics Support; and Professional and Executive
Support. The program provides equipment and services to
research, develop, upgrade, install, fabricate, test, deploy,
operate, train, maintain, and support new and existing federal
Government platforms, systems, subsystems, items, and
host-nation support initiatives.
|
|
|
|
|
|
|
DDG 51
|
|
Build Aegis guided missile destroyer, equipped for conducting
anti-air, anti-submarine, anti-surface and strike operations.
|
|
|
|
|
|
|
DDG 1000
Zumwalt-class Destroyer
|
|
Design the first in a class of the U.S. Navys
multi-mission surface combatants tailored for land attack and
littoral dominance.
|
|
|
|
|
|
|
Distributed Common
Ground System-Army
(DCGS-A) Mobile Basic
|
|
DCGS-A Mobile Basic is the Armys latest in a series of
DCGS-A systems designed to access and ingest multiple data types
from a wide variety of intelligence sensors, sources and
databases. This new system will also deliver greater operational
and logistical advantages over the currently-fielded DCGS-A
Version 3 and the nine ISR programs it replaces.
|
|
|
|
|
|
|
E-2 Hawkeye
|
|
The U.S. Navys airborne battle management command and
control mission system platform providing airborne early warning
detection, identification, tracking, targeting, and
communication capabilities. The company is developing the next
generation capability including radar, mission computer,
vehicle, and other system enhancements, to support the U.S Naval
Battle Groups and Joint Forces, called the E-2D. Recently the
USN approved Milestone C for Low Rate Initial Production.
|
|
|
|
39
|
|
|
Program Name
|
|
Program Description
|
|
EA-6B
|
|
The EA-6B (Prowler) primary mission is to jam enemy radar and
communications, thereby preventing them from directing hostile
surface-to-air missiles at assets the Prowler protects. When
equipped with the improved ALQ-218 receiver and the next
generation ICAP III (Increased Capability) Airborne Electronic
Attack (AEA) suite the Prowler is able to provide rapid
detection, precise classification, and highly accurate
geolocation of electronic emissions and counter modern,
frequency-hopping radars. A derivative/variant of the EA-6B
ICAP III mission system is also being incorporated into the
F/A-18 platform and designated the EA-18G.
|
|
|
|
|
|
|
EA-18G
|
|
The EA-18G is the replacement platform for the EA6B Prowler,
which is currently the armed services only offensive
tactical radar jamming aircraft. The Increased Capability (ICAP)
III mission system capability, developed for the EA-6B Prowler,
will be in incorporated into an F/A-18 platform (designated the
EA-18G).
|
|
|
|
|
|
|
Electronic Intelligence Modernization
(EMOD) and Information
Management & Storage (IM&S)
|
|
Design, development and deployment of a multi-Petabyte,
logically centralized, geographically distributed, secure
information management and storage system for Technical Signals
Intelligence data.
|
|
|
|
|
|
|
F/A-18
|
|
Produce the center and aft fuselage sections, twin vertical
stabilizers, and integrate all associated subsystems for the
F/A-18 Hornet strike fighters.
|
|
|
|
|
|
|
F-35 Development (Joint
Strike Fighter)
|
|
Design, integration, and/or development of the center fuselage
and weapons bay, communications, navigations, identification
subsystem, systems engineering, and mission systems software as
well as provide ground and flight test support, modeling,
simulation activities, and training courseware.
|
|
|
|
|
|
|
Flats Sequencing System (FSS)
|
|
Build systems for the U.S. Postal Service designed to further
automate the flats mail stream, which includes large envelopes,
catalogs and magazines.
|
|
|
|
|
|
|
Gerald R. Ford-class aircraft carrier
|
|
Design and construction for the new class of aircraft carriers.
|
|
|
|
|
|
|
Global Hawk
High-Altitude
Long-Endurance (HALE)
Systems
|
|
Provide the Global Hawk HALE unmanned aerial system for use in
the global war on terror and has a central role in Intelligence,
Reconnaissance, and Surveillance supporting operations in
Afghanistan and Iraq.
|
|
|
|
|
|
|
Global Linguists Solutions (GLS)
|
|
Provide interpretation, translation and linguist services in
support of Operation Iraqi Freedom.
|
|
|
|
|
|
|
Guardrail Common Sensor System
|
|
Sole source IDIQ contract which will encompass efforts for the
upgrade and modernization of the current field Guardrail systems.
|
|
|
|
40
|
|
|
Program Name
|
|
Program Description
|
|
Hunter Contractor
Logistics Support (CLS)
|
|
Operate, maintain, train and sustain the multi-mission Hunter
Unmanned Aerial System in addition to deploying Hunter support
teams.
|
|
|
|
|
|
|
Intercontinental Ballistic Missile (ICBM)
|
|
Maintain readiness of the nations ICBM weapon system.
|
|
|
|
|
|
|
Integrated Base Defense
Security System (IBDSS)
|
|
Integrated Based Defense Security System contract is an IDIQ
acquisition vehicle to provide the USAF and other DoD customers
with integrated base defense security solutions, utilizing
comprehensive and integrated technology to satisfy a wide array
of security concerns both within and outside the continental US.
|
|
|
|
|
|
|
Joint Base Operations Support (JBOSC)
|
|
Provides all infrastructure support needed for launch and base
operations at the NASA Spaceport.
|
|
|
|
|
|
|
Joint Surveillance
Target Attack Radar
System (Joint STARS)
|
|
Joint STARS detects, locates, classifies, tracks and targets
hostile ground movements, communicating real-time information
through secure data links with U.S. Air Force and army command
posts.
|
|
|
|
|
|
|
Joint Warfighting Center Support (JWFC)
|
|
Provide non-personal general and technical support to the
USJFCOM Joint Force Trainer / Joint Warfighting Center to ensure
the successful worldwide execution of the Joint Training and
Transformation missions.
|
|
|
|
|
|
|
Kinetic Energy Interceptor (KEI)
|
|
Develop mobile missile-defense system with the unique capability
to destroy a hostile missile during its boost, ascent or
midcourse phase of flight.
|
|
|
|
|
|
|
Large Aircraft Infrared
Counter- measures
Indefinite Delivery and
Indefinite Quantity (LAIRCM IDIQ)
|
|
Infrared countermeasures systems for C-17 and C-130 aircraft.
The IDIQ contract will further allow for the purchase of LAIRCM
hardware for foreign military sales and other government
agencies.
|
|
|
|
|
|
|
LHA
|
|
Amphibious assault ships that will provide forward presence and
power projection as an integral part of joint, interagency, and
multinational maritime expeditionary forces.
|
|
|
|
|
|
|
LHD
|
|
The multipurpose amphibious assault ship LHD is the centerpiece
of an Expeditionary Strike Group (ESG). In wartime, these ships
deploy very large numbers of troops and equipment to assault
enemy-held beaches. Like LPD, only larger, in times of peace,
these ships have ample space for non-combatant evacuations and
other humanitarian missions. The program of record is 8 ships of
which Makin Island (LHD 8) is the last.
|
|
|
|
41
|
|
|
Program Name
|
|
Program Description
|
|
LPD
|
|
The LPD 17 San Antonio Class is the newest addition to the
U.S. Navys 21st Century amphibious assault force. The
684-foot-long, 105-foot-wide ships have a crew of 360 and are
used to transport and land 700 to 800 Marines, their equipment,
and supplies by embarked air cushion or conventional landing
craft and assault vehicles, augmented by helicopters or other
rotary wing aircraft. The ships will support amphibious assault,
special operations, or expeditionary warfare & humanitarian
missions.
|
|
|
|
|
|
|
MESA Wedgetail
|
|
Subcontract with Boeing to supply Multi-role Electronically
Scanned Array (MESA) radar antenna for Airborne Early Warning
& Control (AEW&C) aircraft.
|
|
|
|
|
|
|
Navy Unmanned Combat
Air System Operational
Assessment (N-UCAS)
|
|
Navy development/demonstration contract that will design, build
and test two demonstration vehicles that will conduct a carrier
demonstration.
|
|
|
|
|
|
|
|
|
|
|
|
|
New York City Wireless
Network (NYCWiN)
|
|
Provide New York Citys broadband public-safety wireless
network.
|
|
|
|
|
|
|
National Polar-orbiting
Operational Environmental
Satellite System (NPOESS)
|
|
Design, develop, integrate, test, and operate an integrated
system comprised of two satellites with mission sensors and
associated ground elements for providing global and regional
weather and environmental data.
|
|
|
|
|
|
|
National Security Cutter (NSC)
|
|
Detail design and construct the U.S. Coast Guards National
Security Cutters equipped to carry out the core missions of
maritime security, maritime safety, protection of natural
resources, maritime mobility, and national defense.
|
|
|
|
|
|
|
Navstar Global
Positioning System (GPS)
Operational Control
Segment (OCX)
|
|
Navstar Global Positioning System (GPS) Operational Control
Segment (OCX) Operational control system for existing and future
GPS constellation. Includes all satellite C2, mission planning,
constellation management, external interfaces, monitoring
stations, and ground antennas. Phase A effort includes effort to
accomplish a System Requirements Review (SRR), System Design
Review (SDR), and development of a Mission Capabilities
Engineering Model (MCEM) prototype.
|
|
|
|
|
|
|
Space Tracking and Surveillance System (STSS)
|
|
Develop a critical system for the nations missile defense
architecture employing low-earth orbit satellites with onboard
sensors to provide target acquisition, tracking, and
discrimination of ballistic missile threats to the United States
and its deployed forces and allies. The program includes
delivery of two flight demonstration satellites and the ground
processing segment.
|
|
|
|
42
|
|
|
Program Name
|
|
Program Description
|
|
Space Based Infrared System (SBIRS)
|
|
Space-based surveillance systems for missile warning, missile
defense, battlespace characterization and technical
intelligence. SBIRS will meet United Stated infrared space
surveillance needs through the next 2-3 decades.
|
|
|
|
|
|
|
Trailer Mounted Support System (TMSS)
|
|
Trailer Mounted Support System is a key part of the Armys
Standardized Integrated Command Post System (SICPS) program
providing workspace, power distribution, lighting, environmental
conditioning (heating and cooling) tables and a common grounding
system for commanders and staff at all echelons.
|
|
|
|
|
|
|
Transformational Satellite
Communication System
(TSAT) Risk Reduction
and System Definition (RR&SD)
|
|
Design, develop, brassboard and demonstrate key technologies to
reduce risk in the TSAT space element and perform additional
risk mitigation activities.
|
|
|
|
|
|
|
USS Carl Vinson
|
|
Refueling and complex overhaul of the nuclear-powered aircraft
carrier USS Carl Vinson (CVN 70).
|
|
|
|
|
|
|
USS George H. W. Bush
|
|
The 10th and final Nimitz-class aircraft carrier that will
incorporate many new design features, commissioned in early 2009
(CVN 77).
|
|
|
|
|
|
|
USS Theodore Roosevelt
|
|
Refueling and complex overhaul of the nuclear-powered aircraft
carrier USS Theodore Roosevelt (CVN 71).
|
|
|
|
|
|
|
Virginia-class submarines
|
|
Construct the newest attack submarine in conjunction with
Electric Boat.
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest Rates The company is exposed to
market risk, primarily related to interest rates and foreign
currency exchange rates. Financial instruments subject to
interest rate risk include variable-rate short-term borrowings
under the credit agreement and short-term investments. At
September 30, 2009, substantially all outstanding
borrowings were fixed-rate long-term debt obligations. The
company has a modest exposure to interest rate risk resulting
from two interest rate swap agreements. The companys
sensitivity to a 1 percent change in interest rates is tied
to its $2 billion credit agreement, which had no balance
outstanding at September 30, 2009, or December 31,
2008, and the aforementioned interest rate swap agreements. See
Note 3 to the condensed consolidated financial statements
in Part I, Item 1.
Derivatives The company does not hold or
issue derivative financial instruments for trading purposes. The
company may enter into interest rate swap agreements to manage
its exposure to interest rate fluctuations. At
September 30, 2009, and December 31, 2008, two and four
interest rate swap agreements were in effect, respectively. See
Note 3 to the condensed consolidated financial statements
in Part I, Item 1.
Foreign Currency The company enters into
foreign currency forward contracts to manage foreign currency
exchange rate risk related to receipts from customers and
payments to suppliers denominated in foreign currencies. At
September 30, 2009 and December 31, 2008, the amount
of foreign currency forward contracts outstanding was not
material. The company does not consider the market risk exposure
related to foreign currency exchange to be material to the
condensed consolidated financial statements. See Note 3 to
the condensed consolidated financial statements in Part I,
Item 1.
43
|
|
Item 4.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
The companys principal executive officer (Chairman and
Chief Executive Officer) and principal financial officer
(Corporate Vice President and Chief Financial Officer) have
evaluated the companys disclosure controls and procedures
as of September 30, 2009, and have concluded that these
controls and procedures are effective to ensure that information
required to be disclosed by the company in the reports that it
files or submits under the Securities Exchange Act of 1934
(15 USC § 78a et seq) is recorded, processed,
summarized, and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms.
These disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed by the company in the
reports that it files or submits is accumulated and communicated
to management, including the principal executive officer and the
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes
in Internal Controls over Financial Reporting
During the nine months ended September 30, 2009, no change
occurred in the companys internal controls over financial
reporting that materially affected, or is likely to materially
affect, the companys internal controls over financial
reporting.
44
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
U.S. Government Investigations and
Claims Departments and agencies of the
U.S. Government have the authority to investigate various
transactions and operations of the company, and the results of
such investigations may lead to administrative, civil or
criminal proceedings, the ultimate outcome of which could be
fines, penalties, repayments or compensatory or treble damages.
U.S. Government regulations provide that certain findings
against a contractor may lead to suspension or debarment from
future U.S. Government contracts or the loss of export
privileges for a company or an operating division or
subdivision. Suspension or debarment could have a material
adverse effect on the company because of its reliance on
government contracts.
In the second quarter of 2007, the U.S. Coast Guard issued
a revocation of acceptance under the Deepwater Program for eight
converted 123-foot patrol boats (the vessels) based on alleged
hull buckling and shaft alignment problems and
alleged nonconforming topside equipment on the
vessels. The company submitted a written response that argued
that the revocation of acceptance was improper. The Coast Guard
advised Integrated Coast Guard Systems, LLC (ICGS), which was
formed by the contractors to perform the Deepwater Program, that
it was seeking $96.1 million from ICGS as a result of the
revocation of acceptance. The majority of the costs associated
with the 123-foot conversion effort are associated with the
alleged structural deficiencies of the vessels, which were
converted under contracts with the company and a subcontractor
to the company. In 2008, the Coast Guard advised ICGS that the
Coast Guard would support an investigation by the
U.S. Department of Justice of ICGS and its subcontractors
instead of pursuing its $96.1 million claim independently.
The Department of Justice conducted an investigation of ICGS
under a sealed False Claims Act complaint filed in the
U.S. District Court for the Northern District of Texas and
decided in early 2009 not to intervene at that time. On
February 12, 2009, the Court unsealed the complaint filed
by Michael J. DeKort, a former Lockheed Martin employee, against
ICGS, Lockheed Martin Corporation and the company, relating to
the 123-foot conversion effort. On July 22, 2009, the three
defendants moved to dismiss the complaint. On October 2,
2009, the Court denied a motion to dismiss by defendants as moot
because it granted leave for plaintiff to file an amended
complaint and set a trial date of November 1, 2010. Based
upon the information available to the company to date, the
company believes that it has substantive defenses to any
potential claims but can give no assurance that the company will
prevail in this litigation.
In August 2008, the company disclosed to the Antitrust Division
of the U.S. Department of Justice possible violations of
federal antitrust laws in connection with the bidding process
for certain maintenance contracts at a military installation in
California. In February 2009, the company and the Department of
Justice signed an agreement admitting the company into the
Corporate Leniency Program. As a result of the companys
acceptance into the Program, the company will be exempt from
federal criminal prosecution and criminal fines relating to the
matters the company reported to the Department of Justice if the
company complies with certain conditions, including its
continued cooperation with the governments investigation
and its agreement to make restitution if the government was
harmed by the violations.
Based upon the available information regarding matters that are
subject to U.S. Government investigations, the company
believes that the outcome of any such matters would not have a
material adverse effect on its consolidated financial position,
results of operations or cash flows.
Litigation Various claims and legal
proceedings arise in the ordinary course of business and are
pending against the company and its properties. Based upon the
information available, the company believes that the resolution
of any of these various claims and legal proceedings would not
have a material adverse effect on its consolidated financial
position, results of operations, or cash flows.
The company is one of several defendants in litigation brought
by the Orange County Water District in Orange County Superior
Court in California on December 17, 2004, for alleged
contribution to volatile organic chemical contamination of the
Countys shallow groundwater. The lawsuit includes counts
against the defendants for violation of the Orange County Water
District Act, the California Super Fund Act, negligence,
nuisance, trespass and declaratory relief. Among other things,
the lawsuit seeks unspecified damages for the cost of
45
remediation, payment of attorney fees and costs, and punitive
damages. The June 2009 trial date was vacated and a status
conference has been set for mid-November 2009.
The U.S. District Court for the Central District of
California consolidated two separately filed Employee Retirement
Income Security Act (ERISA) lawsuits, which the plaintiffs seek
to have certified as class actions, into the In Re Northrop
Grumman Corporation ERISA Litigation. On August 7,
2007, the District Court denied plaintiffs motion for
class certification, and the plaintiffs appealed the
Courts decision on class certification to the
U.S. Court of Appeals for the Ninth Circuit. On
September 8, 2009, the Ninth Circuit vacated the Order
denying class certification, remanded the issue to the District
Court for further consideration, and ordered that the case be
reassigned to a different judge. The company believes that the
outcome of these matters would not have a material adverse
effect on its consolidated financial position, results of
operations or cash flows.
On June 22, 2007, a putative class action was filed against
the Northrop Grumman Pension Plan and the Northrop Grumman
Retirement Plan B and their corresponding administrative
committees, styled as Skinner et al. v. Northrop
Grumman Pension Plan, etc., et al., in the
U.S. District Court for the Central District of California.
The putative class representatives alleged violations of ERISA
and breaches of fiduciary duty concerning a 2003 modification to
the Northrop Grumman Retirement Plan B. The modification relates
to the employer funded portion of the pension benefit available
during a five-year transition period that ended on June 30,
2008. The plaintiffs dismissed the Northrop Grumman Pension
Plan, and in 2008 the District Court granted summary judgment in
favor of all remaining defendants on all claims. The plaintiffs
appealed, and in May 2009, the Ninth Circuit reversed the
decision of the District Court and remanded the matter back to
the District Court for further proceedings, finding that there
was ambiguity in a 1998 summary plan description related to the
employer funded component of the pension benefit.
Other
Matters
The company is pursuing legal action against an insurance
provider arising out of a disagreement concerning the coverage
of certain losses related to Hurricane Katrina (see Note 11
to the condensed consolidated financial statements in
Part I, Item 1). The company commenced the action
against Factory Mutual Insurance Company (FM Global) on
November 4, 2005, which is now pending in the
U.S. District Court for the Central District of California,
Western Division. In August 2007, the District Court issued an
order finding that the excess insurance policy provided coverage
for the companys Katrina-related loss. In November 2007,
FM Global filed a notice of appeal of the District Courts
order. On August 14, 2008, the U.S. Court of Appeals
for the Ninth Circuit reversed the earlier summary judgment
order in favor of the company, holding that the FM Global excess
policy unambiguously excludes damage from the storm surge caused
by Hurricane Katrina under its Flood exclusion. The
Ninth Circuit remanded the case to the District Court to
determine whether the California efficient proximate cause
doctrine affords the company coverage under the policy even if
the Flood exclusion of the policy is unambiguous. The company
filed a Petition for Rehearing En Banc, or in the Alternative,
For Panel Rehearing with the Ninth Circuit on August 27,
2008. On April 2, 2009, the Ninth Circuit denied the
companys Petition for Rehearing and remanded the case to
the District Court. On June 10, 2009, the company filed a
motion seeking leave of court to file a complaint adding AON
Risk Services, Inc. of Southern California as a defendant. On
July 1, 2009, FM Global filed a motion for partial summary
judgment seeking a determination that the California efficient
proximate cause doctrine is not applicable or that it affords no
coverage under the policy. Both motions have been fully briefed
and argued. Based on the current status of the litigation, no
assurances can be made as to the ultimate outcome of this matter.
During 2008, the company received notification from
Munich-American
Risk Partners (Munich Re), the only remaining insurer within the
primary layer of insurance coverage with which a resolution has
not been reached, that it will pursue arbitration proceedings
against the company related to approximately $19 million
owed by Munich Re to Northrop Grumman Risk Management Inc.
(NGRMI), a wholly-owned subsidiary of the company, for certain
losses related to Hurricane Katrina. The company was
subsequently notified that Munich Re also will seek
reimbursement of approximately $44 million of funds
previously advanced to NGRMI for payment of claim losses of
which Munich Re provided reinsurance protection to NGRMI
pursuant to an executed reinsurance contract, and
$6 million of adjustment expenses. The company believes
that NGRMI is
46
entitled to full reimbursement of its covered losses under the
reinsurance contract and has substantive defenses to the claim
of Munich Re for return of the funds paid to date.
There are no material changes to the risk factors previously
disclosed in the companys 2008 Annual Report on
Form 10-K,
updated by the Current Report on
Form 8-K
filed on April 22, 2009.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
Purchases of Equity Securities The table
below summarizes the companys repurchases of common stock
during the three months ended September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Numbers of
|
|
Approximate Dollar Value
|
|
|
|
|
|
|
Shares Purchased as
|
|
of Shares that May Yet
|
|
|
Total Number
|
|
|
|
Part of Publicly
|
|
Be Purchased Under the
|
|
|
of Shares
|
|
Average Price
|
|
Announced Plans or
|
|
Plans or
|
Period
|
|
Purchased(1)
|
|
Paid per
Share(2)
|
|
Programs
|
|
Programs
|
July 1 through
July 31, 2009
|
|
|
1,048,500
|
|
|
$
|
44.56
|
|
|
|
1,048,500
|
|
|
$
|
461
|
million
|
August 1 through August 31, 2009
|
|
|
1,980,200
|
|
|
|
47.78
|
|
|
|
1,980,200
|
|
|
|
366
|
million
|
September 1 through
September 30, 2009
|
|
|
1,707,500
|
|
|
|
49.55
|
|
|
|
1,707,500
|
|
|
|
282
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,736,200
|
|
|
$
|
47.71
|
|
|
|
4,736,200
|
|
|
$
|
282
|
million(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On December 19, 2007, the companys board of directors
authorized a share repurchase program of up to $2.5 billion
of its outstanding common stock. As of the end of the third
quarter 2009, the company has $282 million remaining on
this authorization for share repurchases. |
|
|
|
Share repurchases take place at managements discretion or
under pre-established, non-discretionary programs from time to
time, depending on market conditions, in the open market, and in
privately negotiated transactions. The company retires its
common stock upon repurchase and has not made any purchases of
common stock other than in connection with these publicly
announced repurchase programs. |
|
(2) |
|
Includes commissions paid. |
|
|
Item 3.
|
Defaults
upon Senior Securities
|
No information is required in response to this item.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No information is required in response to this item.
|
|
Item 5.
|
Other
Information
|
No information is required in response to this item.
|
|
|
|
|
|
4
|
.1
|
|
Indenture dated as of November 21, 2001, between Northrop
Grumman Corporation and The Bank of New York Mellon (successor
in interest to JPMorgan Chase Bank), as trustee (incorporated by
reference to Exhibit 4.1 to
Form 8-K
dated and filed November 21, 2001)
|
|
4
|
.2
|
|
First Supplemental Indenture, dated as of July 30, 2009,
between Northrop Grumman Corporation and The Bank of New York
Mellon (successor in interest to JPMorgan Chase Bank), as
trustee, to Indenture dated as of November 21, 2001
(incorporated by reference to Exhibit 4(a) to
Form 8-K
dated and filed July 30, 2009)
|
47
|
|
|
|
|
|
4
|
.3
|
|
Form of Northrop Grumman Corporations
3.70 percent Senior Note due 2014 (incorporated by
reference to Exhibit 4(b) to
Form 8-K
dated and filed July 30, 2009)
|
|
4
|
.4
|
|
Form of Northrop Grumman Corporations
5.05 percent Senior Note due 2019 (incorporated by
reference to Exhibit 4(c) to
Form 8-K
dated and filed July 30, 2009)
|
|
4
|
.5
|
|
Fifth Supplemental Indenture between TRW Inc. (now named
Northrop Grumman Space & Mission Systems Corp.) and
The Chase Manhattan Bank, as successor Trustee, dated as of
June 2, 1999 (incorporated by reference to
Exhibit 4(f) to
Form S-4
Registration Statement
No. 333-83227
of TRW Inc. filed July 20, 1999)
|
|
10
|
.1
|
|
Letter dated September 16, 2009 from Northrop Grumman
Corporation to Dr. Ronald D. Sugar regarding Retirement and
Transition (incorporated by reference to Exhibit 99.1 to
Form 8-K
dated September 16, 2009, and filed September 17, 2009)
|
|
10
|
.2
|
|
Form of Northrop Grumman Corporation January 2010 Special
Agreement (relating to severance program for
change-in-control)
(incorporated by reference to Exhibit 10.1 to
Form 8-K
dated and filed October 8, 2009)
|
|
*10
|
.3
|
|
Severance Plan for Elected and Appointed Officers of Northrop
Grumman Corporation as amended and restated effective
October 1, 2009
|
|
*12
|
(a)
|
|
Computation of Ratios of Earnings to Fixed Charges
|
|
*15
|
|
|
Letter from Independent Registered Public Accounting Firm
|
|
*31
|
.1
|
|
Rule 13a-15(e)/15d-15(e)
Certification of Ronald D. Sugar (Section 302 of the
Sarbanes-Oxley Act of 2002)
|
|
*31
|
.2
|
|
Rule 13a-15(e)/15d-15(e)
Certification of James F. Palmer (Section 302 of the
Sarbanes-Oxley Act of 2002)
|
|
**32
|
.1
|
|
Certification of Ronald D. Sugar pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
**32
|
.2
|
|
Certification of James F. Palmer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
**101
|
|
|
Northrop Grumman Corporation Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2009, formatted in XBRL
(Extensible Business Reporting Language); (i) the Condensed
Consolidated Statements of Operations, (ii) Condensed
Consolidated Statements of Financial Position,
(iii) Condensed Consolidated Statements of Cash Flows,
(iv) Condensed Consolidated Statements of Changes in
Shareholders Equity, and (v) Notes to Condensed
Consolidated Financial Statements, tagged as blocks of text
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
Filed with this Report
|
|
**
|
|
|
Furnished with this Report
|
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NORTHROP GRUMMAN CORPORATION
(Registrant)
|
|
|
|
By:
|
/s/ Kenneth
N. Heintz
|
Kenneth N. Heintz
Corporate Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
Date: October 21, 2009
49