e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
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 Number)
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1840 Century Park East, Los Angeles, California 90067 (310)
553-6262
www.northropgrumman.com
(Address and telephone number of
principal executive offices and internet site)
Securities registered pursuant to section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common Stock, $1 par value
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New York Stock Exchange
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Series B Convertible Preferred Stock
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act.
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 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definitions of accelerated filer and large
accelerated filer 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
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
As of June 30, 2007, the aggregate market value of the
common stock (based upon the closing price of the stock on the
New York Stock Exchange) of the registrant held by
non-affiliates was approximately $26,763 million.
As of February 19, 2008, 337,919,384 shares of common stock
were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of Northrop Grumman Corporations Proxy Statement
for the 2008 Annual Meeting of Stockholders are incorporated by
reference in Part III of this
Form 10-K.
NORTHROP
GRUMMAN CORPORATION
Table of Contents
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i
NORTHROP
GRUMMAN CORPORATION
PART I
HISTORY
AND ORGANIZATION
History
Northrop Grumman Corporation (Northrop Grumman or
the company) is an integrated enterprise consisting
of many formerly separate businesses that cover the entire
defense spectrum, from undersea to outer space and into
cyberspace. The companies that have become part of todays
Northrop Grumman achieved historic accomplishments, from
transporting Charles Lindbergh across the Atlantic to carrying
astronauts to the moons surface and back.
The company was originally formed in California in 1939 and was
reincorporated in Delaware in 1985. From 1994 through 2002, the
company entered a period of significant expansion through
acquisitions of other businesses, most notably:
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In 1994, Northrop Corporation acquired Grumman Corporation
(Grumman) and was renamed Northrop Grumman. Grumman was a
premier military aircraft systems integrator and builder of the
Lunar Module that first delivered men to the surface of the moon.
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n
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In 1996, the company acquired the defense and electronics
businesses of Westinghouse Electric Corporation, a world leader
in the development and production of sophisticated radar and
other electronic systems for the nations defense, civil
aviation, and other international and domestic applications.
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n
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In 1997, the company acquired Logicon, a provider of military
and commercial information systems and services that met the
needs of its national defense, civil and industrial customers.
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n
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In 1999, the company acquired Teledyne Ryan (Ryan), a business
unit of Allegheny-Teledyne, a world leader in the design,
development and manufacture of unmanned airborne reconnaissance,
surveillance, deception and target systems. In 1927, Ryan
produced the Spirit of St. Louis, which Charles
Lindbergh flew across the Atlantic. Ryan was also a pioneer in
the development of Unmanned Aerial Vehicles (UAVs).
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n
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In 2001, the company acquired Litton Industries (Litton), a
global electronics and information technology enterprise, and
one of the nations leading full-service design,
engineering, construction, and life cycle supporters of major
surface ships for the United States (U.S.) Navy, U.S. Coast
Guard, and international navies.
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n
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Also in 2001, Newport News Shipbuilding (Newport News) was added
to the company. Newport News is the nations sole designer,
builder and refueler of nuclear-powered aircraft carriers and
one of only two companies capable of designing and building
nuclear-powered submarines.
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In 2002, Northrop Grumman acquired the space and mission systems
businesses of TRW, a leading developer of military and civil
space systems and satellite payloads, as well as a leading
global integrator of complex, mission-enabling systems and
services.
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The acquisition of these and other businesses have shaped the
company into its present position as a premier provider of
technologically advanced, innovative products, services and
solutions in information and services, aerospace, electronics
and shipbuilding. As 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. The company 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 domestic and
international commercial customers. For a description of the
companys foreign operations, see Risk Factors in
Part I, Item 1A.
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NORTHROP
GRUMMAN CORPORATION
Organization
The company is aligned into seven reportable segments
categorized into four primary businesses. The Mission Systems,
Information Technology, and Technical Services segments are
presented as Information & Services. The Integrated
Systems and Space Technology segments are presented as
Aerospace. The Electronics and Ships segments are each presented
as separate businesses. Newport News and Ship Systems are
aggregated and reported as the Ships business in accordance with
the provisions of Statement of Financial Accounting Standards
No. 131 Disclosures about Segments of an
Enterprise and Related Information.
The company, from time to time, acquires or disposes of
businesses, and realigns contracts, programs or business areas
among and within its operating segments that possess similar
customers, expertise, and capabilities. These realignments are
designed to more fully leverage existing capabilities and
enhance development and delivery of products and services. For a
description of material business dispositions that occurred
during 2007, see Note 5 to the consolidated financial
statements in Part II, Item 8. In January 2007,
certain programs and business areas were transferred among
Information Technology, Mission Systems, Space Technology, and
Technical Services. The business descriptions below and
operating results for all periods presented have been revised to
reflect these changes made through December 31, 2007.
Subsequent Realignments In January 2008, the
Newport News and Ship Systems sectors were realigned into a
single segment called Northrop Grumman Shipbuilding to enable
the company to more effectively utilize its shipbuilding assets
and deploy its talented shipbuilders, processes, technologies,
production facilities and planned capital investment to meet
customer needs. This realignment had no impact on the
companys consolidated financial position, results of
operations, cash flows, or segment reporting.
Also in January 2008, the company announced the transfer of
certain programs and assets from the Mission Systems segment to
the Space Technology segment, effective July 1, 2008. This
transfer will allow Mission Systems to focus on the rapidly
growing command, control, communications, computers,
intelligence, surveillance, and reconnaissance (C4ISR) business,
and the missiles business will be an integrated element of the
companys Aerospace business growth strategy. In addition,
certain Electronics businesses were transferred to Mission
Systems effective January 2008. The transfer of these businesses
is not expected to have a material effect on the companys
consolidated financial position, results of operations, or cash
flows.
These subsequent realignments have not been reflected in any of
the accompanying financial information.
INFORMATION &
SERVICES
Mission
Systems
The Mission Systems segment, headquartered in Reston, Virginia,
is a leading global systems integrator of complex,
mission-enabling systems for government, military, and
commercial customers. The segment consists of three areas of
business: Command, Control and Communications (C3);
Intelligence, Surveillance, and Reconnaissance (ISR); and
Missile Systems.
Command, Control and Communications C3
supports the DoD, aerospace prime contractors, and other
customers. Offerings include operational and tactical command
and control systems; communications solutions and network
management; tactical data link communications products and
integration; network services; software defined radios; decision
support and management information systems; system engineering
and integration; land forces and global combat support;
intelligence support to operations, mission planning and
management applications; critical infrastructure security and
force protection; logistics automation; robotic systems;
homeland security solutions; naval systems engineering support
and integration; and command centers integration.
Intelligence, Surveillance and Reconnaissance
ISR supports the Intelligence Community, the DoD, and other
federal agencies. Offerings include large systems integration;
net-centric signals intelligence; airborne reconnaissance;
payload control; tasking and collection; satellite ground
stations; data collection and storage; information analysis and
knowledge integration; computer network operations; information
operations and information assurance; analysis and visualization
tools; environmental and weather systems; special intelligence;
and sustainment services.
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NORTHROP
GRUMMAN CORPORATION
Missile Systems Missile Systems supports the
Air Force Intercontinental Ballistic Missile (ICBM) Program, the
U.S. Ballistic Missile Defense System, the Missile Defense
Integration Operations Center, and the Kinetic Energy
Interceptors (KEI) program in support of the U.S. Air
Force, the U.S. Army, the Missile Defense Agency, and other
aerospace prime contractors. Offerings include battle
management, command, control, communications (BMC3) and fire
control systems; air and missile system engineering and
integration; modeling and simulation; program management; system
test and integration; development and deployment; missile system
sustainment and modernization services; warfighter operations;
and development and test activities for boost phase and
midcourse intercept for the global layered missile defense
system.
Information
Technology
The Information Technology segment, headquartered in McLean,
Virginia, consists of four areas of business: Intelligence;
Civilian Agencies; Commercial, State & Local; and
Defense.
Intelligence Intelligence provides
information technology (IT) systems, services and solutions
primarily to the U.S. Intelligence Community, which
includes customers in national agencies, defense, homeland
security, and other agencies at the federal, state and local
level. This business area also collaborates with other
Information Technology business areas by providing specialized
technology solutions in areas such as information security,
secure wireless communications, secure cross agency
information-sharing and geospatial information systems. Services
and solutions span the entire mission life cycle from
requirements and technology development through processing and
data analysis to information delivery.
Civilian Agencies Civilian Agencies provides
IT systems, services and solutions primarily for federal
civilian agencies, as well as government and commercial
healthcare customers. Civilian Agencies customers include the
departments of Homeland Security, Treasury, Justice,
Transportation, State, Interior, and the U.S. Postal
Service. Homeland Security offerings include secure networking,
criminal justice systems, and identity management. Healthcare
customers include the Department of Health and Human Services,
DoD Health Affairs, the Centers for Disease Control and
Prevention, the Food and Drug Administration, the Department of
Veterans Affairs, and a number of pharmaceutical manufacturers.
Healthcare offerings include enterprise architecture, systems
integration, infrastructure management, document management,
human capital management, case management, and specialized
health IT solutions in electronic medical records pertaining to
public health, life sciences, disease surveillance, benefits,
and clinical trials research.
Commercial, State & Local
Commercial, State & Local provides IT systems,
services and solutions primarily for state and local agencies
and commercial customers. The commercial business centers on
managed IT services both as a prime contractor and partner in
addition to specialized solutions that address specific business
needs. The state and local focus includes public safety, secure
wireless solutions, human services, and managed IT services.
This business area provides IT outsourcing services on a
service level agreement basis, where contractual
terms are based on infrastructure volume and service levels.
Services include management of data centers, networks, desktops,
storage, security, help desk, and applications. Specialized
state and local offerings include systems for
police/fire/medical emergency dispatch, public safety command
centers, biometric identification, and human services.
Defense Defense provides IT systems, services
and solutions to all elements of the DoD including the Air
Force, Navy, Army, Marines, the Office of the Secretary of
Defense, and the Unified Combatant Commands. Offerings include
business applications and systems integration related to human
capital and business management, logistics, transportation,
supply chain, and combat systems support. Other offerings
consist of information technology and network infrastructures,
including modernization, architecture, design and capacity
modeling. Defense also provides solutions and services for
defense technology laboratories and research and development
centers, system program offices, operational commands, education
and training commands, test centers, and other defense agencies.
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NORTHROP
GRUMMAN CORPORATION
Technical
Services
The Technical Services segment, headquartered in Herndon,
Virginia, provides infrastructure management and maintenance,
training and preparedness, and logistics and life cycle
management in a wide array of operating environments. The
segment consists of three areas of business: Systems Support;
Training and Simulation; and Life Cycle Optimization and
Engineering.
Systems Support Systems Support provides
infrastructure and base operations management, including base
support and civil engineering work, military aerial and ground
range operations, support functions which include space launch
services, construction, combat vehicle maintenance, protective
and emergency services, and range-sensor-instrumentation
operations. Primary customers include the Department of Energy,
the DoD, the National Aeronautics and Space Administration
(NASA), the Department of Homeland Security, and the
U.S. Intelligence community, in both domestic and
international locations.
Training and Simulation Training and
Simulation provides realistic and comprehensive training to
senior military leaders and peacekeeping forces, designs and
develops future conflict training scenarios, and provides
U.S. warfighters and international allies with live,
virtual, and constructive training programs. This business area
also offers diverse training applications ranging from battle
command to professional military education. Primary customers
include the DoD, Department of State and Department of Homeland
Security.
Life Cycle Optimization and Engineering Life
Cycle Optimization and Engineering provides complete life cycle
product support and weapons system sustainment. This business
area is focused on providing Performance Based Logistical
support to the warfighter including supply chain management
services, warehousing and inventory transportation, field
services and mobilization, sustaining engineering, maintenance,
repair and overhaul supplies, and on-going weapon maintenance
and technical assistance. The group specializes in rebuilding
essential parts and assemblies. Primary customers include the
DoD as well as international military and commercial customers.
AEROSPACE
Integrated
Systems
The Integrated Systems segment, headquartered in El Segundo,
California, designs, develops, produces, and supports fully
missionized integrated systems and subsystems in the areas of
battlespace awareness, command and control systems, integrated
combat systems, and airborne ground surveillance. The segment is
organized into the following areas of business: Integrated
Systems Western Region (ISWR) and Integrated Systems Eastern
Region (ISER).
Integrated Systems Western Region The
principal manned vehicle programs in ISWR are subcontractor work
on the
F/A-18 and
F-35 programs and prime contract work on the B-2 program and the
Multi-Platform Radar Technology Insertion Program (MP-RTIP). For
the F/A-18,
ISWR is responsible for the full integration of the center and
aft fuselage and vertical tail sections and associated
subsystems. For the F-35, ISWR is responsible for the detailed
design and integration and production of the center fuselage and
weapons bay, systems engineering, mission system software,
autonomic logistics and global sustainment, ground and flight
test support, signature/low observables development, and support
of modeling and simulation activities. ISWR is the prime systems
integration contractor for the MP-RTIP, which will provide
advanced radar capabilities for the Global Hawk UAV and
potential future Wide Area Surveillance (WAS) platform. ISWR is
working on a radar and avionics upgrade program for the B-2
bomber and is a prime integrator for all logistics support
activities including program depot maintenance.
The principal unmanned vehicle programs at ISWR are the Global
Hawk, the Naval Unmanned Combat Air System (N-UCAS), Aerial
Targets, and the Fire Scout. ISWR is the prime contractor for
these product lines with the exception of the Army version of
Fire Scout for Future Combat Systems (FCS). The Global Hawk is a
high altitude long endurance unmanned aerial reconnaissance
system. N-UCAS is a development/demonstration program that will
design, build and test two demonstration vehicles that will
conduct a carrier demonstration. The technology demonstrations
are to show carrier control area operations, catapult launch,
and an arrested
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NORTHROP
GRUMMAN CORPORATION
landing of a low observable unmanned aerial combat vehicle.
Aerial Targets has two primary models, the
BQM-74 and
the BQM-34
and is the prime contractor on multiple domestic and
international contracts. Fire Scout is a vertical takeoff and
landing tactical UAV system in development and consists of two
versions the Vertical Takeoff and Landing Unmanned
Air Vehicle (VTUAV) for the U.S. Navy and the FCS
Class IV UAV for the U.S. Army.
Integrated
Systems Eastern Region
Airborne Early Warning and Battle Management
Command & Control-Navy (AEW &
BMC2) AEW & BMC2s principal
products include the
E-2C Hawkeye
and E-2D
Advanced Hawkeye aircraft (currently in the system development
and demonstration (SDD) phase of development and Pilot
Production). The Hawkeye is 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 currently performing on a follow-on multi-year contract for
eight E-2C
aircraft to be delivered to the U.S. Navy through 2009 (two
aircraft delivered in 2006 and two aircraft delivered in 2007).
The company is developing the next generation capability
including radar, mission computer, vehicle, and other system
enhancements called the
E-2D
Advanced Hawkeye under an SDD contract with the U.S. Navy.
Pilot Production of three aircraft was authorized in 2007 and
long lead funding for the first lot of Low Rate Initial
Production (three aircraft) was received in December 2007.
Intelligence, Surveillance, Reconnaissance & Battle
Management Command & Control Air Force
(ISR & BMC2-AF) ISR &
BMC2-AF is the prime contractor on the Joint Surveillance Target
Attack Radar System (Joint STARS) program. Joint STARS detects,
locates, classifies, tracks, and targets potentially hostile
ground movement in all weather conditions. It is designed to
operate around the clock in constant communication through
secure data links with U.S. Air Force command posts,
U.S. Army mobile ground stations, or centers for military
analysis far from the point of conflict. The Joint STARS program
is currently developing performance upgrades and retrofits under
an ongoing Systems Improvement Program. Fleet sustainment is
performed through the Total Systems Support contract currently
in its eighth fiscal year. In February 2007, an initial
non-recurring contract was awarded to re-engine the fleet of
nineteen aircraft with modern, more reliable, powerful and fuel
efficient engines. Follow-on nonrecurring efforts and recurring
contract awards are expected in 2008. Following the
customers decision in 2007 not to fund the
E-10A
Technology Demonstration Development Program, a one-year Mission
Execution Program study contract was awarded that will leverage
the E-10A
analysis and design concepts for the Joint STARS platform.
Electronic Support & Attack Solutions
(ES & AS) ES & AS
principal products include the EA-6B (Prowler) and the
electronic attack system for the
EA-18G
aircraft. The Prowler is currently the armed services only
offensive tactical radar jamming aircraft. ES & AS has
developed the next generation mission system for this aircraft
under the Increased Capacity (ICAP) III contract and has
completed the final test and evaluation phase. The company
completed the low-rate initial production for ICAP III Kits
during 2006, and was awarded a follow-on contract for ICAP III
Kits & Spares, with deliveries commencing in 2007. In
addition, the company is performing on a contract to incorporate
the ICAP III mission system into an
F/A-18
platform, designated the
EA-18G.
Integrated Systems is the principal subcontractor to Boeing for
this program, which is currently in the SDD phase. Northrop
Grumman has been authorized to begin production of Low Rate
Initial Production units.
Maritime & Tactical Systems The
principal programs include the Littoral Combat Ship Mission
Package Integration contract and Mine Counter Measures contracts
with multiple customers that focus on detecting and neutralizing
in-land,
coastal and water surface/subsurface mines.
Space
Technology
The Space Technology segment, headquartered in Redondo Beach,
California, develops a broad range of systems at the leading
edge of space, defense, and electronics technology. The segment
provides products primarily to the U.S. Government that are
critical to the nations security and leadership in science
and technology. In October 2007, Space Technology realigned its
organizational structure to better position itself with its
customer base for
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NORTHROP
GRUMMAN CORPORATION
future growth. Products and services are grouped into the
following business areas: Civil Systems; Military Systems;
National Systems; and Technology & Emerging Systems.
Civil Systems The Civil Systems business area
produces and integrates space-based systems, instruments, and
services primarily for NASA, the National Oceanic and
Atmospheric Administration, and other governmental agencies.
These systems are primarily used for space science, earth
observation and environmental monitoring, and exploration
missions. A variety of systems and services are provided,
including mission and system engineering services, satellite and
instrument systems, mission operations, and propulsion systems.
Major programs include National Polar-orbiting Operational
Environmental Satellite System (NPOESS), the James Webb Space
Telescope (JWST), and the legacy Chandra space telescope and
Earth Observing System programs.
Military Systems Military Systems produces
and integrates spiral development programs and operational
programs associated with the U.S. Air Force, Missile
Defense Agency, and other military customers. Responsibilities
include study design, build integration, launch, and operations
of major U.S. military space systems. Programs include the
Advanced Extremely High Frequency (AEHF) payload,
Transformational Satellite (TSAT) communications system, Space
Tracking and Surveillance System (STSS), and the communication
payload for the legacy Milstar program, currently in operation.
The Defense Support Program (DSP) is also part of this business
area, and has been monitoring ballistic missile launches for the
U.S. Air Force for decades.
National Systems The National Systems
business area gives the nations monitoring systems a
global reach and enhanced national security. Addressing
requirements in space-based intelligence, surveillance, and
reconnaissance systems, National Systems provides mission and
system engineering, satellite systems, and mission operations.
Customers are predominantly restricted, as are the major
programs.
Technology & Emerging Systems
Technology & Emerging Systems consists of government
funded research and development contracts in support of the
three business areas above. In addition, it includes the
Airborne Laser (ABL), other directed energy programs and
advanced concepts programs.
ELECTRONICS
The Electronics segment, headquartered in Linthicum, Maryland,
designs, develops, produces, integrates, and supports high
performance sensors, intelligence processing, and navigation
systems operating in all environments from undersea to outer
space and cyberspace. It also develops, produces, integrates,
and supports power, power control, and ship control systems for
commercial and naval ships in domestic and international
markets. In select markets it performs as a prime contractor,
integrating multiple subsystems to provide complete systems to
meet customers solution requirements. The segment is
composed of five areas of business: Aerospace Systems; Defensive
Systems; Government Systems; Naval & Marine Systems;
and Navigation Systems.
Aerospace Systems Aerospace Systems provides
sensors, sensor processing, integrated sensor suites, and radar
countermeasure systems for military surveillance and
precision-strike; missile tracking and warning; space satellite
applications; and radio frequency electronic warfare. Fire
control radars include systems for the
F-16,
F-22,
F-35 and
B-1B.
Navigation radars include commercial and military systems for
transport and cargo aircraft. Surveillance products include the
Airborne Warning and Control System (AWACS) radar, the 737
Multi-Role Electronically Scanned Array (MESA) radar, the
Multi-Platform Radar Technology Insertion Program (MP-RTIP, the
ship-board Cobra Judy Replacement (CJR) radar, and multiple
payloads on the
P-8A. Space
satellite products include the Space-Based Infrared Surveillance
(SBIRS) program, payloads for restricted programs, the Defense
Meteorological Satellite Program (DMSP), NPOESS, and the DSP.
Radio frequency electronic warfare products include radar
warning receivers, self-protection jammers, and integrated
electronic warfare systems for aircraft such as the
EA-6B,
EA-18,
F-16 and
F-15.
Defensive Systems Defensive Systems provides
systems that support combat aviation by protecting aircraft and
helicopters from attack, by providing capabilities for precise
targeting and tactical surveillance, by improving mission
availability through automated test systems and by improving
mission skills through advanced simulation systems. It also
provides systems that support land forces. Aircraft and
helicopter protection systems include
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NORTHROP
GRUMMAN CORPORATION
infrared detection and countermeasures systems to defeat
shoulder-launched and infrared-guided missiles. Targeting
systems include lasers for target designation and image
processing and sensor applications, and the LITENING pod system
to detect and designate targets for engagement by precision
weapons in aircraft such as the F-16 and
F/A-18. Test
systems include systems to test electronic components of combat
aircraft on the flight line and in repair facilities. Land force
systems include precision guided munitions for artillery and UAV
delivery, night vision goggles, laser designators, weapon
sights, tactical radars for warning of missile and artillery
attack, and fire control radars for helicopters. Defensive
Systems also provides standard simulators for use on test ranges
and training facilities to emulate threats of potential
adversaries.
Government Systems Government Systems
provides products and services to meet the needs of governments
for improvements in the effectiveness of their civil and
military infrastructure and of their combat and
counter-terrorism operations. This includes systems and systems
integration of products and services for postal automation, for
the detection and alert of Chemical, Biological, Radiological,
Nuclear and Explosive (CBRNE) material, for homeland defense,
communications, and air traffic management, and for multi-sensor
processing and analysis for combat units and national agencies
of data from ISR systems. Key programs include: Advanced Flat
Sorting Machines; International Sorting Centers;
U.S. Postal Service bio-detection systems; national level
communications, information processing and air defense systems
for international customers; unattended ground sensors; the ISR
Distributed Common Ground System for the U.S. military
services and national agencies; and deployed ISR and persistent
surveillance processing systems.
Naval & Marine Systems Naval and
Marine Systems provides major subsystems and subsystem
integration for sensors, sensor processing, missile launching,
ship controls and power generation. It provides systems to
military surface and subsurface platforms, and bridge and
machinery control systems for commercial maritime applications.
Principal programs include: radars for navigation; radars for
gun fire control and cruise missile defense; bridge management
and control systems; power generation systems for aircraft
carriers; power and propulsion systems for the Virginia Class
submarine; launch systems for Trident submarines and the KEI
program; the Advanced SEAL Delivery System mini-submarine; and
unmanned semi-autonomous naval systems.
Navigation Systems Navigation Systems
provides advanced navigation, identification of friend or foe
and avionics systems for military and commercial applications.
Its products are used in commercial space and aircraft; in
military air, land, sea, and space systems; and in both
U.S. and international markets. Its subsidiaries, LITEF
Germany and Northrop Grumman Italia, are leading European
inertial sensors and systems suppliers. Key programs and
applications include: integrated avionics for the
U.S. Marine Corps attack and utility helicopters and
U.S. Navy
E-2
aircraft; military navigation and positioning systems for the
F-16 fighter, F-22A fighter/attack aircraft, Eurofighter, and
U.S. Navy MH-60 helicopter; navigation systems for
commercial aircraft; navigation systems for military and civil
space satellites and deep space exploration; identification of
friend-or-foe transponders and interrogators; and systems for
the C-17 aircraft, Eurofighter and MH-60 helicopter. Navigation
Systems also develops and produces fiber-optic acoustic systems
for underwater surveillance for Virginia Class submarines and
the AN/TYQ-23 multi-service mobile tactical command centers for
the U.S. Marine Corps and U.S. Air Force.
SHIPS
The Ships segment includes the following areas of business:
Aircraft Carriers; Expeditionary Warfare; Surface Combatants;
Submarines; Coast Guard & Coastal Defense; Fleet
Support; and Services, Commercial & Other.
Aircraft Carriers Ships is the nations
sole industrial designer, builder, and refueler of
nuclear-powered aircraft carriers. The U.S. Navys
newest carrier, the USS Ronald Reagan, was delivered to
the fleet in May 2004. Construction on the last carrier in the
Nimitz class, the George H. W. Bush, continues. The
Bush christening occurred in the fall of 2006 and
delivery to the U.S. Navy is expected in late 2008.
Advanced design and preparation continues for the new generation
carrier, Ford class, which will incorporate transformational
technologies that will result in manning reductions, improved
war fighting capability, and a new nuclear propulsion plant
design. The construction award for the first ship of the Ford
class, the Gerald R. Ford, is
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NORTHROP
GRUMMAN CORPORATION
expected in mid 2008. The company also provides ongoing
maintenance for the U.S. Navy aircraft carrier fleet
through overhaul, refueling, and repair work. Ships is currently
performing the refueling and complex overhaul of the USS Carl
Vinson with redelivery to the U.S. Navy anticipated in
early 2009. Planning for the USS Theodore Roosevelt
refueling and complex overhaul began in the fall of 2006 and
the ship is expected to arrive at Newport News, Virginia in the
fall of 2009.
Expeditionary Warfare Expeditionary Warfare
programs include the design and construction of amphibious
assault ships for the U.S. Navy, including the WASP LHD 1
class and the San Antonio LPD 17 class. Ships is the sole
provider for the LHD class of large-deck, 40,500-ton
multipurpose amphibious assault ships, which serve as the
centerpiece of an Amphibious Ready Group. Currently, the LHD 8
is under construction and is a significant upgrade from the
preceding seven ships of its class. The design and production of
the LHD 8 is a $1.9 billion program with delivery scheduled
for late 2008. In 2007, the construction contract for LHA 6, the
first in a new class of enhanced amphibious assault ships, was
awarded. The ship is scheduled for delivery in 2012. Ships is
also the sole provider of the LPD 17 class of ships, which
function as amphibious transports. The initial three ships were
delivered in 2005, 2006, and 2007, and five LPD 17 ships are
currently under construction. In December 2007, the construction
award for the ninth ship was received.
Surface Combatants Surface Combatants
includes the design and construction of the Arleigh Burke DDG 51
class Aegis guided missile destroyers, and the design of
DDG 1000 (previously DD(X)), the Navys future
transformational surface combatant class. Ships is one of two
prime contractors designing and building DDG 51 class
destroyers, which provide primary anti-aircraft and anti-missile
ship protection for the U.S. Navy fleet. Four Arleigh Burke
class destroyers are currently under construction. In 2006,
Ships was awarded Phase IV detail design & long
lead construction funding for the initial DDG 1000. The contract
calls for an equal split of ship detail design efforts between
the company and Bath Iron Works, a wholly owned subsidiary of
General Dynamics Corporation. The construction award for the
initial ship is anticipated in the first half of 2008. The
advanced technologies developed on DD(X) Phase III are
being incorporated into DDG 1000 and are anticipated to be
incorporated into the next generation guided missile cruiser
CG(X).
Submarines Northrop Grumman is one of only
two U.S. companies capable of designing and building
nuclear-powered submarines. In February 1997, the company and
Electric Boat, a wholly owned subsidiary of General Dynamics
Corporation, reached an agreement to cooperatively build
Virginia Class nuclear attack submarines. The lead ship,
USS Virginia, was delivered by Electric Boat to the
U.S. Navy and commissioned into the fleet in October 2004.
The USS Texas was delivered by Ships in the spring of
2006. The USS Hawaii was delivered by Electric Boat in
December 2006, and North Carolina, the final block one
ship, is expected to be delivered by Ships in early 2008.
Electric Boat and Ships were awarded a construction contract in
August 2003, which was subsequently modified in January 2004,
for the second block of six Virginia Class submarines.
Planning and long lead material procurement is underway on all
six boats of the second block; construction has begun on the
first four. The construction award for the third block is
expected in late 2008.
Coast Guard & Coastal Defense Ships
is a joint venture partner along with Lockheed Martin for the
Coast Guards Deepwater Modernization Program. Ships has
design and production responsibility for surface ships. In 2006,
the Ships/Lockheed Martin joint venture was awarded a
43 month contract extension for the Deepwater program.
Currently, the first three National Security Cutters (NSC) are
in construction. The initial NSC will be delivered in early 2008.
Fleet Support Ships provides after-market
services, including on-going maintenance and repair work, for a
wide array of naval and commercial vessels. The company has ship
repair facilities in the U.S. Navys largest homeports
of Norfolk, Virginia, and San Diego, California.
Services, Commercial & Other Under
the Polar Tanker program, Ships was under contract to produce
five double-hulled tankers. These tankers each transport one
million barrels of crude oil from Alaska to west coast
refineries and are fully compliant with the Oil Pollution Act of
1990. The last ship under this program was delivered in mid-2006.
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NORTHROP
GRUMMAN CORPORATION
Corporate
The companys principal executive offices are located at
1840 Century Park East, Los Angeles, California 90067. The
companys telephone number is
(310) 553-6262.
The companys home page on the Internet is
www.northropgrumman.com. The company makes web site content
available for informational purposes, and such content is not
incorporated by reference into this
Form 10-K,
unless so specified herein.
SUMMARY
SEGMENT FINANCIAL DATA
For a more complete understanding of the companys segment
financial information, see Segment Operating Results in
Part II, Item 7, and Note 6 to the consolidated
financial statements in Part II, Item 8.
CUSTOMERS
AND REVENUE CONCENTRATION
The companys primary customer is the U.S. Government.
Revenue from the U.S. Government accounted for
approximately 90 percent of total revenues in 2007, 2006,
and 2005. No other customer accounted for more than
10 percent of total revenue during any period presented. No
single product or service accounted for more than
10 percent of total revenue during any period presented.
See Risk Factors in Part I, Item 1A.
PATENTS
The following table summarizes the number of patents the company
owns or has pending as of December 31, 2007:
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Owned
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Pending
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Total
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U.S. patents
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3,572
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708
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4,280
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Foreign patents
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2,464
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1,767
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4,231
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Total
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6,036
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2,475
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8,511
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Patents developed while under contract with the
U.S. Government may be subject to use by the
U.S. Government. In addition the company licenses
intellectual property to, and from, third parties. Management
believes the companys ability to conduct its operations
would not be materially affected by the loss of any particular
intellectual property right.
SEASONALITY
No material portion of the companys business is considered
to be seasonal. The timing of revenue recognition is based on
several factors including the timing of contract awards, the
incurrence of contract costs, cost estimation, and unit
deliveries. See Revenue Recognition in Part II, Item 7.
RAW
MATERIALS
The most significant raw material required by the company is
steel, used primarily for shipbuilding. The company has
mitigated supply risk by negotiating long-term agreements with a
number of steel suppliers. In addition, the company has
mitigated price risk related to its steel purchases through
certain contractual arrangements with the U.S. Government.
While the company has generally been able to obtain key raw
materials required in its production processes in a timely
manner, a significant delay in receipt of these supplies by the
company could have a material effect on the companys
consolidated results of operations. See Risk Factors in
Part I, Item 1A.
GOVERNMENT
REGULATION
The companys business is affected by numerous laws and
regulations relating to the award, administration and
performance of U.S. Government contracts. See Risk Factors
in Part I, Item 1A.
Certain programs with the U.S. Government that are
prohibited by the customer from being publicly discussed in
detail are referred to as restricted in this
Form 10-K.
The consolidated financial statements and financial
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NORTHROP
GRUMMAN CORPORATION
information contained within this
Form 10-K
reflect the operating results of restricted programs under
accounting principles generally accepted in the United States of
America (GAAP). See Risk Factors in Part I, Item 1A.
RESEARCH
AND DEVELOPMENT
Company-sponsored research and development activities primarily
include independent research and development (IR&D) efforts
related to government programs. IR&D expenses are included
in general and administrative expenses and are allocated to
U.S. Government contracts. Company-sponsored research and
development expenses totaled $537 million,
$572 million, and $536 million in 2007, 2006, and
2005, respectively. Expenses for research and development
sponsored by the customer are charged directly to the related
contracts.
EMPLOYEE
RELATIONS
The company believes that it maintains good relations with its
122,600 employees, of which approximately 17 percent
are covered by 32 collective bargaining agreements. The company
expects to re-negotiate nine of its collective bargaining
agreements in 2008. It is not expected that the results of these
negotiations will, either individually or in the aggregate, have
a material adverse effect on the companys results of
operations. See Risk Factors in Part I, Item 1A.
ENVIRONMENTAL
MATTERS
Federal, state, and local laws relating to the protection of the
environment affect the companys manufacturing operations.
The company has provided for the estimated cost to complete
environmental remediation where the company has determined 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 estimates may change given the inherent
difficulty in estimating environmental cleanup costs to be
incurred in the future due to the uncertainties regarding the
extent of the required cleanup, determination of legally
responsible parties, and the status of laws, regulations, and
their interpretations.
In order to assess the potential impact on the companys
financial statements, management estimates the possible
remediation costs that reasonably could be incurred by the
company on a
site-by-site
basis. Such estimates take into consideration the professional
judgment of the companys environmental engineers and, when
necessary, consultation with outside environmental specialists.
In most instances, only a range of reasonably possible costs can
be estimated. However, in the determination of accruals, the
most probable amount is used when determinable, and the minimum
is used when no single amount is more probable. The company
records accruals for environmental cleanup costs in the
accounting period in which the companys responsibility is
established and the costs can be reasonably estimated. The
company does not anticipate and record insurance recoveries
before it has determined that collection is probable.
Management estimates that at December 31, 2007, the range
of reasonably possible future costs for environmental
remediation sites is $186 million to $285 million, of
which $223 million is accrued in other current liabilities
in the consolidated statements of financial position.
Environmental accruals are recorded on an undiscounted basis. At
sites involving multiple parties, the company provides
environmental accruals based upon its expected share of
liability, taking into account the financial viability of other
jointly liable parties. Environmental expenditures are expensed
or capitalized as appropriate. Capitalized expenditures relate
to long-lived improvements in currently operating facilities. In
addition, 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, which could
have a material effect on the companys consolidated
financial position, results of operations, or cash flows. The
company has made the investments it believes necessary in order
to comply with environmental laws.
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NORTHROP
GRUMMAN CORPORATION
COMPETITIVE
CONDITIONS
Northrop Grumman, along with Lockheed Martin Corporation, The
Boeing Company, Raytheon Company, and General Dynamics
Corporation are among the largest companies in the
U.S. defense industry at this time. Northrop Grumman
competes against these and other companies for a number of
programs, both large and small. Intense competition and long
operating cycles are both key characteristics of Northrop
Grummans business and the defense industry. It is common
in this industry for work on major programs to be shared among a
number of companies. A company competing to be a prime
contractor may, upon ultimate award of the contract to another
party, turn out to be a subcontractor for the ultimate prime
contracting party. It is not uncommon to compete for a contract
award with a peer company and, simultaneously, perform as a
supplier to or a customer of such competitor on other contracts.
The nature of major defense programs, conducted under binding
contracts, allows companies that perform well to benefit from a
level of program continuity not common in many industries.
The companys success in the competitive defense industry
depends upon its ability to develop and market its products and
services, as well as its ability to provide the people,
technologies, facilities, equipment, and financial capacity
needed to deliver those products and services with maximum
efficiency. It is necessary to maintain, as the company has,
sources for raw materials, fabricated parts, electronic
components, and major subassemblies. In this manufacturing and
systems integration environment, effective oversight of
subcontractors and suppliers is as vital to success as managing
internal operations.
Similarly, there is intense competition among many companies in
the information and services markets which is generally more
labor intensive with competitive margin rates over contract
periods of shorter duration. Competitors in the information and
services markets include the defense industry participants
mentioned above as well as many other large and small entities
with expertise in various specialized areas. The companys
ability to successfully compete in the information and services
markets depends on a number of factors; most important is the
capability to deploy skilled professionals, many requiring
security clearances, at competitive prices across the diverse
spectrum of these markets. Accordingly, various workforce
initiatives are in place to ensure the company is successful in
attracting, developing and retaining sufficient resources to
maintain or improve its competitive position within these
markets. See Risk Factors in Part I, Item 1A.
EXECUTIVE
OFFICERS
See Part III, Item 10, for information about executive
officers of the company.
AVAILABLE
INFORMATION
Throughout this
Form 10-K,
the company incorporates by reference information from parts of
other documents filed with the Securities and Exchange
Commission (SEC). The SEC allows the company to disclose
important information by referring to it in this manner, and you
should review this information in addition to the information
contained herein.
The companys annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and proxy statement for the annual shareholders meeting,
as well as any amendments to those reports, are available free
of charge through the companys web site as soon as
reasonably practicable after electronic filing of such material
with the SEC. You can learn more about the company by reviewing
the companys SEC filings on the companys web site.
The companys SEC reports can be accessed through the
investor relations page of the companys web site at
www.northropgrumman.com.
The SEC also maintains a web site at www.sec.gov that contains
reports, proxy statements and other information regarding SEC
registrants, including Northrop Grumman. The public may read and
copy any materials filed by the company with the SEC at the
SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
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NORTHROP
GRUMMAN CORPORATION
Item 1A. Risk Factors
The companys consolidated financial position, results of
operations and cash flows are subject to various risks, many of
which are not exclusively within the companys control,
that may cause actual performance to differ materially from
historical or projected future performance. Information
contained within this
Form 10-K
should be carefully considered by investors in light of the risk
factors described below.
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The Company Depends Heavily on a Single Customer, the
U.S. Government, for a Substantial Portion of the
Companys Business, Including Programs Subject to Security
Classification Restrictions on Information. Changes Affecting
this Customers Capacity to Do Business with the Company or
the Effects of Competition in the Defense Industry Could Have a
Material Adverse Effect On the Company or Its Prospects.
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Approximately 90 percent of the companys revenues
during 2007 were derived from products and services ultimately
sold to the U.S. Government and are therefore affected by,
among other things, the federal budget process. The company is a
supplier, either directly or as a subcontractor or team member,
to the U.S. Government and its agencies as well as foreign
governments and agencies. These contracts are subject to the
respective customers political and budgetary constraints
and processes, changes in customers short-range and
long-range strategic plans, the timing of contract awards, and
in the case of contracts with the U.S. Government, the
congressional budget authorization and appropriation processes,
the U.S. Governments ability to terminate contracts
for convenience or for default, as well as other risks such as
contractor suspension or debarment in the event of certain
violations of legal and regulatory requirements. The termination
or failure to fund one or more significant contracts by the
U.S. Government could have a material adverse effect on the
companys results of operations or prospects.
In the event of termination for the governments
convenience, contractors are normally protected by provisions
covering reimbursement for costs incurred. The company is
involved as a plaintiff in a lawsuit concerning a contract
terminated for convenience. See Other Matters in Part I,
Item 3. Termination resulting from the companys
default could expose the company to liability and have a
material adverse effect on its ability to compete for contracts.
In addition, a material amount of the companys revenues
and profits is derived from programs that are subject to
security classification restrictions (restricted business),
which could limit the companys ability to discuss details
about these programs, their risks or any disputes or claims
relating to such programs. As a result, investors might have
less insight into the companys restricted business than
other businesses of the company or could experience less ability
to evaluate fully the risks, disputes or claims associated with
restricted business.
The companys success in the competitive defense industry
depends upon its ability to develop and market its products and
services, as well as its ability to provide the people,
technologies, facilities, equipment, and financial capacity
needed to deliver those products and services with maximum
efficiency. A loss of business to the companys competitors
could have a material adverse affect on the companys
ability to generate favorable financial results and maintain
market share.
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Many of the Companys Contracts Contain Performance
Obligations That Require Innovative Design Capabilities, Are
Technologically Complex, Require State-Of-The-Art Manufacturing
Expertise or Are Dependent Upon Factors Not Wholly Within the
Companys Control. Failure to Meet These Obligations Could
Adversely Affect the Companys Profitability and Future
Prospects.
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The company designs, develops and manufactures technologically
advanced and innovative products and services applied by its
customers in a variety of environments. Problems and delays in
development or delivery as a result of issues with respect to
design, technology, licensing and patent rights, labor, learning
curve assumptions, or materials and components could prevent the
company from achieving contractual requirements.
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NORTHROP
GRUMMAN CORPORATION
In addition, the companys products cannot be tested and
proven in all situations and are otherwise subject to unforeseen
problems. Examples of unforeseen problems which could negatively
affect revenue and profitability include loss on launch of
spacecraft, premature failure, problems with quality, country of
origin, delivery of subcontractor components or services, and
unplanned degradation of product performance. These failures
could result, either directly or indirectly, in loss of life or
property. Among the factors that may affect revenue and profits
could be unforeseen costs and expenses not covered by insurance
or indemnification from the customer, diversion of management
focus in responding to unforeseen problems, loss of follow-on
work, and, in the case of certain contracts, repayment to the
government customer of contract cost and fee payments previously
received by the company.
Certain contracts, primarily involving space satellite systems,
contain provisions that entitle the customer to recover fees in
the event of partial or complete failure of the system upon
launch or subsequent deployment for less than a specified period
of time. Under such terms, the company could be required to
forfeit fees previously recognized
and/or
collected. The company has not experienced any material losses
in the last decade in connection with such contract performance
incentive provisions. However, if the company were to experience
launch failures or complete satellite system failures in the
future, such events could have a material adverse impact on the
companys consolidated financial position or results of
operations.
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Contract Cost Growth on Fixed-Price and Other Contracts
That Cannot Be Justified as an Increase In Contract Value Due
From Customers Exposes The Company to Reduced Profitability and
the Potential Loss of Future Business.
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Operating margin is adversely affected when contract costs that
cannot be billed to customers are incurred. This cost growth can
occur if estimates to complete increase due to technical
challenges or if initial estimates used for calculating the
contract price were incorrect. The cost estimation process
requires significant judgment and expertise. Reasons for cost
growth may include unavailability and productivity of labor, the
nature and complexity of the work to be performed, the effect of
change orders, the availability of materials, the effect of any
delays in performance, availability and timing of funding from
the customer, natural disasters, and the inability to recover
any claims included in the estimates to complete. A significant
change in cost estimates on one or more programs could have a
material effect on the companys consolidated financial
position or results of operations.
Due to their nature, fixed-price contracts inherently have more
risk than flexibly priced contracts and therefore generally
carry higher profit margins. Approximately 30 percent of
the companys annual revenues are derived from fixed-price
contracts see Contracts in Part II,
Item 7. Flexibly priced contracts may carry risk to the
extent of their specific contract terms and conditions relating
to performance award fees, including cost sharing agreements,
and negative performance incentives. The company typically
enters into fixed-price contracts where costs can be reasonably
estimated based on experience. In addition, certain contracts
other than fixed-price contracts have provisions relating to
cost controls and audit rights. Should the terms specified in
those contracts not be met, then profitability may be reduced.
Fixed-price development work comprises a small portion of the
companys fixed-price contracts and inherently has more
uncertainty as to future events than production contracts and
therefore more variability in estimates of the costs to complete
the development stage. As work progresses through the
development stage into production, the risks associated with
estimating the total costs of the contract are generally
reduced. In addition, successful performance of fixed-price
development contracts which include production units is subject
to the companys ability to control cost growth in meeting
production specifications and delivery rates. While management
uses its best judgment to estimate costs associated with
fixed-price development contracts, future events could result in
either upward or downward adjustments to those estimates.
Examples of the companys significant fixed-price
development contracts include the F-16 Block 60 combat
avionics program and the MESA radar system program for the
Wedgetail and Peace Eagle contracts, both of which are performed
by the Electronics segment. It is also not unusual in the Ships
business for the company to negotiate fixed-price
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NORTHROP
GRUMMAN CORPORATION
production follow-on contracts before the development effort has
been completed and learning curves fully realized on existing
flexibly priced development contracts.
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The Company Uses Estimates When Accounting for Contracts.
Changes In Estimates Could Affect The Companys
Profitability and Its Overall Financial Position.
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Contract accounting requires judgment relative to assessing
risks, estimating contract revenues and costs, and making
assumptions for schedule and technical issues. Due to the size
and nature of many of the companys contracts, the
estimation of total revenues and costs at completion is
complicated and subject to many variables. For example,
assumptions have to be made regarding the length of time to
complete the contract because costs also include expected
increases in wages and prices for materials. Similarly,
assumptions have to be made regarding the future impact of
efficiency initiatives and cost reduction efforts. Incentives,
awards, or penalties related to performance on contracts are
considered in estimating revenue and profit rates, and are
recorded when there is sufficient information to assess
anticipated performance.
Because of the significance of the judgments and estimation
processes described above, it is possible that materially
different amounts could be obtained if different assumptions
were used or if the underlying circumstances were to change.
Changes in underlying assumptions, circumstances or estimates
may have a material adverse effect upon future period financial
reporting and performance. See Critical Accounting Policies,
Estimates, and Judgments in Part II, Item 7.
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The Companys Operations Are Subject to Numerous
Domestic and International Laws, Regulations and Restrictions,
and Noncompliance With These Laws, Regulations and Restrictions
Could Expose the Company to Fines, Penalties, Suspension or
Debarment, Which Could Have a Material Adverse Effect on the
Companys Profitability and Its Overall Financial
Position.
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The company has thousands of contracts and operations in many
parts of the world subject to U.S. and foreign laws and
regulations. Prime contracts with various agencies of the
U.S. Government and subcontracts with other prime
contractors are subject to numerous procurement regulations,
including the False Claims Act and the International Traffic in
Arms Regulation promulgated under the Arms Export Control Act,
with noncompliance found by any one agency possibly resulting in
fines, penalties, debarment, or suspension from receiving
additional contracts with all U.S. Government agencies.
Given the companys dependence on U.S. Government
business, suspension or debarment could have a material adverse
effect on the company.
In addition, international business subjects the company to
numerous U.S. and foreign laws and regulations, including,
without limitation, regulations relating to import-export
control, technology transfer restrictions, repatriation of
earnings, exchange controls, the Foreign Corrupt Practices Act,
and the anti-boycott provisions of the U.S. Export
Administration Act. Failure by the company or its sales
representatives or consultants to comply with these laws and
regulations could result in administrative, civil, or criminal
liabilities and could, in the extreme case, result in suspension
or debarment from government contracts or suspension of the
companys export privileges, which could have a material
adverse effect on the company. Changes in regulation or
political environment may affect the companys ability to
conduct business in foreign markets including investment,
procurement, and repatriation of earnings.
The company operates in a highly regulated environment and is
routinely audited by the U.S. Government and others. On a
regular basis, the company monitors its policies and procedures
with respect to its contracts to ensure consistent application
under similar terms and conditions and to assess compliance with
all applicable government regulations. Negative audit findings
could result in termination of a contract, forfeiture of
profits, or suspension of payments. From time to time the
company is subject to U.S. Government investigations
relating to its operations. Government contractors that are
found to have violated the law such as the False Claims Act or
the Arms Export Control Act, or are indicted or convicted for
violations of other federal laws, or are found not to have acted
responsibly as defined by the law, may be subject to significant
fines. Such convictions could also result in suspension or
debarment from government
-14-
NORTHROP
GRUMMAN CORPORATION
contracting for some period of time. Given the companys
dependence on government contracting, suspension or debarment
could have a material adverse effect on the company.
|
|
n |
The Companys Business Is Subject to Disruption
Caused By Issues With Its Suppliers, Subcontractors, Workforce,
Natural Disasters and Other Factors That Could Adversely Affect
the Companys Profitability and Its Overall Financial
Position.
|
The company may be affected by delivery or performance issues
with key suppliers and subcontractors, as well as other factors
that may cause operating results to be adversely affected.
Changes in inventory requirements or other production cost
increases may also have a negative effect on the companys
consolidated financial position or results of operations.
Performance failures by a subcontractor of the company or
difficulty in maintaining complete alignment of the
subcontractors obligations with the companys prime
contract obligations may adversely affect the companys
ability to perform its obligations on the prime contract, which
could reduce the companys profitability due to damages or
other costs that may not be fully recoverable from the
subcontractor or from the customer and could result in a
termination of the prime contract and have an adverse effect on
the companys ability to compete for future contracts.
Operating results are heavily dependent upon the companys
ability to attract and retain sufficient personnel with
requisite skill sets
and/or
security clearances. The successful negotiation of collective
bargaining agreements and avoidance of organized work stoppages
are also critical to the ongoing operations of the company.
The company has significant operations located in regions of the
U.S. that may be exposed to damaging storms and other
natural disasters. While preventative measures typically help to
minimize harm to the company, the damage and disruption
resulting from certain storms or other natural disasters may be
significant. Although no assurances can be made, the company
believes it can recover costs associated with natural disasters
through insurance or its contracts.
Natural disasters such as storms and earthquakes can disrupt
electrical and other power distribution networks and cause
adverse effects on profitability and performance, including
computer and internet operation and accessibility. Computer
viruses and similar harmful software programs, as well as
network outages, disruptions and attacks also may have a
material adverse effect on the companys profitability and
performance unless quarantined or otherwise prevented.
|
|
n |
Changes In Future Business Conditions Could Cause Business
Investments
and/or
Recorded Goodwill to Become Impaired, Resulting In Substantial
Losses and Write-Downs That Would Reduce the Companys
Operating Income.
|
As part of its overall strategy, the company will, from time to
time, acquire a minority or majority interest in a business.
These investments are made upon careful target analysis and due
diligence procedures designed to achieve a desired return or
strategic objective. These procedures often involve certain
assumptions and judgment in determining acquisition price. After
acquisition, unforeseen issues could arise which adversely
affect the anticipated returns or which are otherwise not
recoverable as an adjustment to the purchase price. Even after
careful integration efforts, actual operating results may vary
significantly from initial estimates. Goodwill accounts for
approximately half of the companys recorded total assets.
The company evaluates goodwill amounts for impairment annually,
or when evidence of potential impairment exists. The annual
impairment test is based on several factors requiring judgment.
Principally, a significant decrease in expected reporting unit
cash flows or changes in market conditions may indicate
potential impairment of recorded goodwill. See Critical
Accounting Policies, Estimates, and Judgments in Part II,
Item 7.
-15-
NORTHROP
GRUMMAN CORPORATION
|
|
n |
The Company Is Subject to Various Claims and Litigation
That Could Ultimately Be Resolved Against The Company Requiring
Material Future Cash Payments
and/or
Future Material Charges Against the Companys Operating
Income and Materially Impairing the Companys Financial
Position.
|
The size and complexity of the companys business make it
highly susceptible to claims and litigation. The company is
subject to environmental claims, income tax matters and other
litigation, which, if not resolved within established accruals,
could have a material adverse effect on the companys
consolidated financial position, results of operations, or cash
flows. See Legal Proceedings in Part I, Item 3, and
Critical Accounting Policies, Estimates, and Judgments in
Part II, Item 7.
|
|
n |
Pension and Medical Expense Associated with the
Companys Retirement Benefit Plans May Fluctuate
Significantly Depending Upon Changes in Actuarial Assumptions
and Future Market Performance of Plan Assets.
|
A substantial portion of the companys current and retired
employee population is covered by pension and post-retirement
benefit plans, the costs of which are dependent upon the
companys various assumptions, including estimates of rates
of return on benefit related assets, discount rates for future
payment obligations, rates of future cost growth and trends for
future costs. Variances from these estimates could have a
material adverse effect on the companys consolidated
financial position, results of operations, and cash flows.
|
|
n |
The Companys Insurance Coverage May Be Inadequate to
Cover All of Its Significant Risks or Its Insurers May Deny
Coverage of Material Losses Incurred By the Company, Which Could
Adversely Affect The Companys Profitability and Overall
Financial Position.
|
The company endeavors to identify and obtain in established
markets insurance agreements to cover significant risks and
liabilities (including, among others, natural disasters, product
liability and business interruption). Not every risk or
liability can be protected against by insurance, and, for
insurable risks, the limits of coverage reasonably obtainable in
the market may not be sufficient to cover all actual losses or
liabilities incurred. In some, but not all, circumstances the
company may receive indemnification from the
U.S. Government. Because of the limitations in overall
available coverage referred to above, the company may have to
bear substantial costs for uninsured losses that could have an
adverse effect upon its consolidated results of operations and
its overall consolidated financial position. Additionally,
disputes with insurance carriers over coverage may affect the
timing of cash flows and, where litigation with the carrier
becomes necessary, an outcome unfavorable to the company may
have a material adverse effect on the companys
consolidated results of operations. See Note 15 to the
consolidated financial statements in Part II, Item 8.
|
|
n |
Current Trends in U.S. Government Procurement May
Adversely Affect Cash Flows or Program Profitability.
|
The company, like others in the defense industry, is aware of a
potential problem presented by strict compliance with the
Defense Federal Acquisition Regulation Supplement
preference for enumerated specialty metals sourced domestically
or from certain foreign countries. Subcontractors and lower-tier
suppliers have made disclosures indicating inability to comply
with the rule as written. Subject to limitations, inability to
certify that all enumerated specialty metals in a product comply
with sourcing requirements can lead to U.S. Government
customers withholding a portion of a payment on delivery or may
prevent delivery altogether of materiel and products critical to
national defense.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
-16-
NORTHROP
GRUMMAN CORPORATION
FORWARD-LOOKING
STATEMENTS AND PROJECTIONS
Statements in this
Form 10-K
that are in the future tense, and all statements accompanied by
terms such as believe, project,
expect, estimate, forecast,
assume, intend, plan,
anticipate, outlook, 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 Part I,
Item 1A, 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 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
|
future revenues;
|
|
n
|
expected program performance and cash flows;
|
|
n
|
returns on pension plan assets and variability of pension
actuarial and related assumptions;
|
|
n
|
the outcome of litigation, claims, appeals and investigations;
|
|
n
|
hurricane-related insurance recoveries;
|
|
n
|
environmental remediation;
|
|
n
|
acquisitions and divestitures of businesses;
|
|
n
|
joint ventures and other business arrangements;
|
|
n
|
access to capital;
|
|
n
|
performance issues with key suppliers and subcontractors;
|
|
n
|
product performance and the successful execution of internal
plans;
|
|
n
|
successful negotiation of contracts with labor unions;
|
|
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-K
as well as other risk factors subsequently identified,
including, among others, those identified in the companys
filings with the SEC on
Form 10-Q
and
Form 8-K.
At December 31, 2007, the company had approximately
57 million square feet of floor space at approximately 515
separate locations, primarily in the U.S., for manufacturing,
warehousing, research and testing, administration and various
other uses. At December 31, 2007, the company leased to
third parties approximately 948,000 square feet of its
owned and leased facilities, and had vacant floor space of
approximately 965,000 square feet.
At December 31, 2007, the Companys business operating
segments had major operations at the following locations:
Mission Systems Huntsville, AL; Carson,
Huntington Beach, McClellan, Oxnard, Rancho Carmel, Redondo
Beach, San Bernardino, San Diego, San Jose,
San Pedro, Van Nuys and Sacramento, CA; Aurora and Colorado
Springs, CO; East Hartford, CT; Washington, DC; Orlando, FL;
Cambridge, MA; Annapolis, Annapolis Junction, Columbia, Elkridge
and Lanham, MD; Bellevue, NE; Fairborn and Kettering, OH;
Middletown, RI;
-17-
NORTHROP
GRUMMAN CORPORATION
Clearfield, UT; and Arlington, Chantilly, Chester, Dahlgren,
Fairfax, Falls Church, Herndon, Newport News, Reston, Stafford,
Vienna and Virginia Beach, VA.
Information Technology El Segundo, Hawthorne,
and San Diego, CA; Colorado Springs and Lafayette, CO;
Washington, DC; Atlanta, GA; Andover, MA; Annapolis Junction and
Rockville, MD; Bethpage, Bohemia, and Queens, NY; Fairborn, OH;
Irving, TX; and Chantilly, Fairfax, Falls Church, Herndon,
Lorton, McLean, Reston, and Richmond, VA.
Technical Services Sierra Vista, AZ; Warner
Robins, GA; Lake Charles, LA; Albuquerque, NM; Oklahoma City,
OK; and Herndon, VA.
Integrated Systems Camarillo, Carson, El
Segundo, Fort Tejon, Goleta, Hawthorne, Mojave, Palmdale,
and San Diego, CA; Jacksonville, Melbourne and St.
Augustine, FL; Hollywood, MD; Moss Point, MS; New Town, ND;
Bethpage, NY; and Lexington, SC.
Space Technology El Segundo, Manhattan Beach,
and Redondo Beach, CA; Devens, MA; St. Charles, MO; and
Charlotte, NC.
Electronics Huntsville, AL; Tempe, AZ; Azusa,
Sunnyvale and Woodland Hills, CA; Boulder, CO; Norwalk, CT;
Apopka, FL; Rolling Meadows, IL; Annapolis, Annapolis Junction,
Baltimore, Belcamp, Elkridge, Gaithersburg, Hagerstown,
Linthicum and Sykesville, MD; Springfield, MO; Ocean Springs,
MS; Melville and Williamsville, NY; Cincinnati, OH; Garland, TX;
Salt Lake City, UT; and Charlottesville, VA. Locations outside
the U.S. include France, Germany, Italy, and the United
Kingdom.
Ships National City and San Diego, CA;
Avondale, Harahan, Harvey, Tallulah and Waggaman, LA; Gautier,
Gulfport, Moss Point and Pascagoula, MS; Chesapeake, Hampton,
Newport News, Suffolk, and Virginia Beach, VA; and Bremerton, WA.
Corporate and other locations Brea and Los
Angeles, CA; Des Plaines, IL; Olathe, KS; Hanover Township, NJ;
York, PA; Irving and Marshall, TX; and Arlington, VA. Locations
outside the U.S. include Canada and the United Kingdom.
The following is a summary of the companys floor space at
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
|
|
|
Square feet (in
thousands)
|
|
Owned
|
|
|
Leased
|
|
|
Owned/Leased
|
|
|
Total
|
|
Information & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
|
652
|
|
|
|
5,768
|
|
|
|
|
|
|
|
6,420
|
|
Information Technology
|
|
|
33
|
|
|
|
4,239
|
|
|
|
|
|
|
|
4,272
|
|
Technical Services
|
|
|
156
|
|
|
|
1,365
|
|
|
|
62
|
|
|
|
1,583
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
3,974
|
|
|
|
3,021
|
|
|
|
2,023
|
|
|
|
9,018
|
|
Space Technology
|
|
|
2,912
|
|
|
|
2,108
|
|
|
|
|
|
|
|
5,020
|
|
Electronics
|
|
|
8,472
|
|
|
|
3,557
|
|
|
|
|
|
|
|
12,029
|
|
Ships
|
|
|
13,177
|
|
|
|
3,907
|
|
|
|
80
|
|
|
|
17,164
|
|
Corporate
|
|
|
809
|
|
|
|
622
|
|
|
|
|
|
|
|
1,431
|
|
|
Total
|
|
|
30,185
|
|
|
|
24,587
|
|
|
|
2,165
|
|
|
|
56,937
|
|
|
The company believes its properties are well maintained and in
good operating condition and that the productive capacity of the
companys properties is adequate to meet current
contractual requirements and those for the foreseeable future.
-18-
NORTHROP
GRUMMAN CORPORATION
|
|
Item 3.
|
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.
As previously disclosed, in October 2005, the
U.S. Department of Justice and a restricted
U.S. Government customer apprised the company of potential
substantial claims relating to certain microelectronic parts
produced by the Space and Electronics Sector of former TRW Inc.,
now a component of the company. The relationship, if any,
between the potential claims and a civil False Claims Act case
that remains under seal in the U.S. District Court for the
Central District of California remains unclear to the company.
In the third quarter of 2006, the parties commenced settlement
discussions. While the company continues to believe that it did
not breach the contracts in question and that it acted
appropriately in this matter, the company proposed to settle the
claims and any associated matters and recognized a pre-tax
charge of $112.5 million in the third quarter of 2006 to
cover the cost of the settlement proposal and associated
investigative costs. The company extended the offer in an effort
to avoid litigation and in recognition of the value of the
relationship with this customer. The U.S. Government has
not accepted the settlement offer and has advised the company
that if settlement is not reached it will pursue its claims
through litigation. Because of the highly technical nature of
the issues involved and their restricted status and because of
the significant disagreement between the company and the
U.S. Government as to the U.S. Governments
theories of liability and damages (including a material
difference between the U.S. Governments damage
theories and the companys offer), final resolution of this
matter could take a considerable amount of time, particularly if
litigation should ensue. If the U.S. Government were to
pursue litigation and were to be ultimately successful on its
theories of liability and damages, which could be trebled under
the Federal False Claims Act, the effect upon the companys
consolidated financial position, results of operations, and cash
flows would materially exceed the amount provided by the
company. Based upon the information available to the company to
date, the company believes that it has substantive defenses but
can give no assurance that its views will prevail. Accordingly,
the ultimate disposition of this matter cannot presently be
determined.
As previously disclosed, on May 17, 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. By letter dated June 5, 2007, the
Coast Guard stated that the revocation of acceptance also was
based on alleged nonconforming topside equipment on
the vessels. On August 13, 2007, the company submitted a
response to the Coast Guard, maintaining that the revocation of
acceptance was improper. In late December 2007, the Coast Guard
responded to the companys August submittal and advised
Integrated Coast Guard Systems (the contractors joint
venture for performing the Deepwater Program) that the Coast
Guard is seeking $96.1 million from the Joint Venture as a
result of the revocation of acceptance of the eight vessels
delivered under the 123-foot conversion program. 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 with a subcontractor to the company. The letter is not a
contracting officers final decision and the company and
its joint venture partner and subcontractor are preparing a
response. Based upon the information available to the company to
date, the company believes that it has substantive defenses but
can give no assurance that its views will prevail.
Based upon the available information regarding matters that are
subject to U.S. Government investigations, other than as
set out above, the company believes, but can give no assurance,
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.
-19-
NORTHROP
GRUMMAN CORPORATION
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.
As previously disclosed, the company was a defendant in
litigation brought by Cogent Systems, Inc. (Cogent) in Los
Angeles Superior Court in California on April 20, 2005, for
unspecified damages for alleged unauthorized use of Cogent
technology relating to fingerprint recognition. On
September 10, 2007, the company and Cogent announced that
they had reached an agreement to settle the litigation and the
settlement documents were executed in the fourth quarter of
2007. Under the terms of the agreement, the company agreed to
pay Cogent $25 million to settle the litigation and
$15 million for a non-exclusive license to use specified
Cogent state-of- the-art automated fingerprint identification
software in certain existing programs. Substantially all these
amounts were charged to expense in 2007. The company and Cogent
also agreed to enter into a five-year research and development,
service and products agreement, under which the company must
purchase from Cogent $20 million in new products and
services over the term of the agreement.
As previously disclosed, 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 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
October 11, 2007, the Ninth Circuit granted appellate
review, which delayed the commencement of trial previously
scheduled to begin January 22, 2008. The company believes,
but can give no assurance, that the outcome of these matters
would not have a material adverse effect on its consolidated
financial position, results of operations, or cash flows.
Other
Matters
In the event of contract termination for the governments
convenience, contractors are normally protected by provisions
covering reimbursement for costs incurred under the contract. As
previously disclosed, the company received a termination for
convenience notice on the Tri-Service Standoff Attack Missile
(TSSAM) program in 1995. In December 1996, the company filed a
lawsuit against the U.S. Government in the U.S. Court
of Federal Claims seeking the recovery of approximately
$750 million for uncompensated performance costs,
investments and a reasonable profit on the program. Prior to
1996, the company had charged to operations in excess of
$600 million related to this program. The company is unable
to predict whether it will realize some or all of its claims,
none of which are recorded on its consolidated statement of
financial position, from the U.S. Government related to the
TSSAM program.
As previously disclosed, 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 Notes 15 and 17 to the consolidated financial
statements in Part II, Item 8). 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. Based on the current status of the assessment and claim
process, no assurances can be made as to the ultimate outcome of
this matter.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No items were submitted to a vote of security holders during the
fourth quarter of 2007.
-20-
NORTHROP
GRUMMAN CORPORATION
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The companys common stock is listed on the New York Stock
Exchange.
The following table sets forth, for the periods indicated, the
high and low closing sale prices of the companys common
stock as reported in the consolidated reporting system for the
New York Stock Exchange Composite Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
January to March
|
|
$
|
75.72
|
|
|
|
to
|
|
|
$
|
66.95
|
|
|
$
|
69.83
|
|
|
|
to
|
|
|
$
|
59.63
|
|
April to June
|
|
$
|
77.87
|
|
|
|
to
|
|
|
$
|
72.68
|
|
|
$
|
71.23
|
|
|
|
to
|
|
|
$
|
62.17
|
|
July to September
|
|
$
|
79.86
|
|
|
|
to
|
|
|
$
|
74.67
|
|
|
$
|
68.88
|
|
|
|
to
|
|
|
$
|
63.05
|
|
October to December
|
|
$
|
84.48
|
|
|
|
to
|
|
|
$
|
77.09
|
|
|
$
|
69.71
|
|
|
|
to
|
|
|
$
|
64.59
|
|
|
The approximate number of common shareholders was 40,223 as of
February 19, 2008.
Quarterly dividends per common share for the most recent two
years are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
January to March
|
|
$
|
0.37
|
|
|
$
|
0.26
|
|
April to June
|
|
|
0.37
|
|
|
|
0.30
|
|
July to September
|
|
|
0.37
|
|
|
|
0.30
|
|
October to December
|
|
|
0.37
|
|
|
|
0.30
|
|
|
|
|
$
|
1.48
|
|
|
$
|
1.16
|
|
|
The quarterly dividend for the mandatorily redeemable preferred
shares was $1.75 per share for each quarter in 2007 and 2006.
Common
Stock
The company has 800,000,000 shares authorized at a
$1 par value per share, of which 337,834,561 and
345,921,809 shares were outstanding as of December 31,
2007 and 2006, respectively.
Preferred
Stock
The company has 10,000,000 shares authorized with a
liquidation value of $100 per share, of which
3,500,000 shares were designated as Series B and were
issued and outstanding as of December 31, 2007 and 2006.
Subsequent Event On February 20, 2008,
the companys Board of Directors approved the redemption of
the Series B convertible preferred stock on April 4,
2008.
|
|
(d)
|
Annual
Meeting of Stockholders.
|
The Annual Meeting of Stockholders of Northrop Grumman
Corporation will be held on May 21, 2008, at the Space
Technology Presentation Center, One Space Park, Redondo Beach,
California 90278.
-21-
NORTHROP
GRUMMAN CORPORATION
|
|
(e)
|
Stock
Performance Graph.
|
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG NORTHROP GRUMMAN CORPORATION, S & P 500 INDEX
AND S & P AEROSPACE/DEFENSE INDEX
|
|
|
(1) |
|
Assumes $100 invested at the close of business on
December 31, 2002, in Northrop Grumman Corporation common
stock, Standard & Poors (S&P) 500 Index,
and the S&P Aerospace/Defense Index. |
|
(2) |
|
The cumulative total return assumes reinvestment of dividends. |
|
(3) |
|
The S&P Aerospace/Defense Index is comprised of The Boeing
Company, General Dynamics Corporation, Goodrich Corporation,
Honeywell International Inc., L-3 Communications, Lockheed
Martin Corporation, Northrop Grumman Corporation, Precision
Castparts Corp., Raytheon Company, Rockwell Collins, Inc., and
United Technologies Corporation. |
|
(4) |
|
The total return is weighted according to market capitalization
of each company at the beginning of each year. |
|
(5) |
|
The Stock Performance Graph is not incorporated by
reference and shall not be deemed to be filed. |
-22-
NORTHROP
GRUMMAN CORPORATION
|
|
(f)
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers.
|
The table below summarizes the companys repurchases of
common stock during the three months ended December 31,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
Total Numbers of
|
|
Value of Shares that
|
|
|
|
|
|
|
Shares Purchased as of
|
|
May Yet Be
|
|
|
Total Number
|
|
|
|
Part of Publicly
|
|
Purchased Under
|
|
|
of Shares
|
|
Average Price
|
|
Announced Plans
|
|
the Plans or
|
Period
|
|
Purchased
|
|
Paid per Share
|
|
or Programs
|
|
Programs
|
October 1 through
October 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82 million
|
|
November 1 through
November 30, 2007
|
|
|
1,022,600
|
|
|
$
|
79.11
|
|
|
|
1,022,600
|
|
|
$
|
|
|
December 1 through
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.5 billion
|
(1)
|
|
Total
|
|
|
1,022,600
|
|
|
$
|
79.11
|
|
|
|
1,022,600
|
|
|
$
|
2.5 billion
|
|
|
|
|
|
(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 December 31, 2007,
the company has $2.5 billion authorized 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. |
|
|
(g)
|
Securities
Authorized for Issuance Under Equity Compensation
Plans.
|
For a description of securities authorized under the
companys equity compensation plans, see Note 19 of
the consolidated financial statements in Part II,
Item 8.
-23-
NORTHROP
GRUMMAN CORPORATION
|
|
Item 6.
|
Selected
Financial Data
|
The data presented in the following table are derived from the
audited financial statements and other company information
adjusted to reflect the current application of discontinued
operations as well as the two-for one stock split of the
companys common stock in 2004. See also Business
Acquisitions and Business Dispositions in Part II,
Item 7.
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions except per
share
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
$
|
28,700
|
|
|
$
|
27,019
|
|
|
$
|
27,021
|
|
|
$
|
25,491
|
|
|
$
|
22,063
|
|
Other customers
|
|
|
3,318
|
|
|
|
3,094
|
|
|
|
2,957
|
|
|
|
3,386
|
|
|
|
3,398
|
|
|
Total revenues
|
|
$
|
32,018
|
|
|
$
|
30,113
|
|
|
$
|
29,978
|
|
|
$
|
28,877
|
|
|
$
|
25,461
|
|
|
Operating margin
|
|
$
|
3,006
|
|
|
$
|
2,464
|
|
|
$
|
2,200
|
|
|
$
|
1,985
|
|
|
$
|
1,474
|
|
Income from continuing operations
|
|
|
1,803
|
|
|
|
1,573
|
|
|
|
1,396
|
|
|
|
1,079
|
|
|
|
771
|
|
|
Basic earnings per share, from continuing operations
|
|
$
|
5.28
|
|
|
$
|
4.55
|
|
|
$
|
3.92
|
|
|
$
|
3.00
|
|
|
$
|
2.11
|
|
Diluted earnings per share, from continuing operations
|
|
|
5.16
|
|
|
|
4.46
|
|
|
|
3.84
|
|
|
|
2.96
|
|
|
|
2.09
|
|
Cash dividends declared per common share
|
|
|
1.48
|
|
|
|
1.16
|
|
|
|
1.01
|
|
|
|
.89
|
|
|
|
.80
|
|
|
Year-End Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
33,373
|
|
|
$
|
32,009
|
|
|
$
|
34,214
|
|
|
$
|
33,303
|
|
|
$
|
33,022
|
|
Notes payable to banks and long-term debt
|
|
|
4,055
|
|
|
|
4,162
|
|
|
|
5,145
|
|
|
|
5,158
|
|
|
|
5,891
|
|
Total long-term obligations and preferred stock
|
|
|
9,254
|
|
|
|
8,641
|
|
|
|
9,412
|
|
|
|
10,438
|
|
|
|
10,876
|
|
|
Financial Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow from operations
|
|
$
|
2,068
|
|
|
$
|
942
|
|
|
$
|
1,804
|
|
|
$
|
1,264
|
|
|
$
|
161
|
|
Net working capital (deficit)
|
|
$
|
340
|
|
|
$
|
(28
|
)
|
|
$
|
(418
|
)
|
|
$
|
692
|
|
|
$
|
(595
|
)
|
Current ratio
|
|
|
1.05 to 1
|
|
|
|
1.00 to 1
|
|
|
|
.95 to 1
|
|
|
|
1.11 to 1
|
|
|
|
.91 to 1
|
|
Notes payable to banks and long-term debt as a percentage of
shareholders equity
|
|
|
22.9
|
%
|
|
|
25.0
|
%
|
|
|
30.6
|
%
|
|
|
30.9
|
%
|
|
|
37.3
|
%
|
|
Other Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-sponsored research and development expenses
|
|
$
|
537
|
|
|
$
|
572
|
|
|
$
|
536
|
|
|
$
|
502
|
|
|
$
|
429
|
|
Maintenance and repairs
|
|
|
337
|
|
|
|
360
|
|
|
|
430
|
|
|
|
396
|
|
|
|
242
|
|
Payroll and employee benefits
|
|
|
12,947
|
|
|
|
12,510
|
|
|
|
12,191
|
|
|
|
12,445
|
|
|
|
10,936
|
|
|
Number of employees at year-end
|
|
|
122,600
|
|
|
|
122,200
|
|
|
|
123,600
|
|
|
|
125,400
|
|
|
|
123,400
|
|
|
-24-
NORTHROP
GRUMMAN CORPORATION
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
Business
Northrop Grumman provides technologically advanced, innovative
products, services, and integrated solutions in information and
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 DoD. The
company also conducts business with local, state, and foreign
governments and has domestic and international commercial sales.
Notable
Events
Certain notable events or activity affecting the companys
2007 consolidated financial results included the following:
|
|
|
|
n
|
Sales increases 6 percent to record $32 billion.
|
|
n
|
Operating margin increase of 22 percent over 2006.
|
|
n
|
Cash from operations increases to record $2.9 billion after
$200 million pension pre-funding.
|
|
n
|
Diluted earnings per share from continuing operations of $5.16
per share.
|
|
n
|
Total backlog of $64.1 billion.
|
|
n
|
Share repurchases totaling $1.2 billion.
|
|
n
|
Business acquisitions totaling approximately
$690 million.
|
|
n
|
Partial insurance settlement with all but one of the primary
insurers and recognition of $62 million in business
interruption recovery related to Hurricane Katrina. See
Notes 15 and 17 to the consolidated financial statements in
Part II, Item 8.
|
|
n
|
Contract earnings rate charge on LHD 8 of approximately
$55 million following the strike at the Pascagoula
shipyard.
|
|
n
|
Adoption of a new tax accounting standard on accounting for
uncertain tax positions see Note 12 to the
consolidated financial statements in Part II, Item 8.
|
Outlook
U.S. defense contractors have benefited from the upward
trend in overall defense spending over recent years. Certain
programs in which the company participates may be subject to
potential reductions due to a slower rate of growth in the
U.S. Defense Budget forecasts and funds being utilized to
support the on-going Global War on Terrorism. Despite the trend
of slower growth rates in the U.S. defense budget, the
company believes that its portfolio of technologically advanced,
innovative products, services, and integrated solutions will
generate revenue growth in 2008 and beyond. Based on total
backlog (funded and unfunded) of approximately $64 billion
as of December 31, 2007, the company expects sales in 2008
of approximately $33 billion and forecasts improvement in
net income over 2007. The major industry and economic factors
that may affect the companys future performance are
described in the following paragraphs.
Industry
Factors
Northrop Grumman is subject to the unique characteristics of the
U.S. defense industry as a monopsony, and by certain
elements peculiar to its own business mix. Northrop Grumman,
along with Lockheed Martin Corporation, The Boeing Company,
Raytheon Company, and General Dynamics Corporation are among the
largest companies in the U.S. defense industry at this
time. Northrop Grumman competes against these and other
companies for a number of programs, both large and small.
Intense competition and long operating cycles are both key
characteristics of Northrop Grummans business and the
defense industry. It is common in this industry for work on
major programs to be shared among a number of companies. A
company competing to be a prime contractor may, upon ultimate
award of the contract to another party, turn out to be a
subcontractor for the ultimate prime contracting party. It is
not uncommon to compete for a contract award with a peer company
and simultaneously perform as a supplier to or a customer of
such competitor on other contracts. The nature of
-25-
NORTHROP
GRUMMAN CORPORATION
major defense programs, conducted under binding contracts,
allows companies that perform well to benefit from a level of
program continuity not common in many industries.
The companys success in the competitive defense industry
depends upon its ability to develop and market its products and
services, as well as its ability to provide the people,
technologies, facilities, equipment, and financial capacity
needed to deliver those products and services with maximum
efficiency. It is necessary to maintain, as the company has,
sources for raw materials, fabricated parts, electronic
components, and major subassemblies. In this manufacturing and
systems integration environment, effective oversight of
subcontractors and suppliers is as vital to success as managing
internal operations.
Similarly, there is intense competition among many companies in
the information and services markets which is generally more
labor intensive with competitive margin rates over contract
periods of shorter duration. Competitors in the information and
services markets include the defense industry participants
mentioned above as well as many other large and small entities
with expertise in various specialized areas. The companys
ability to successfully compete in the information and services
markets depends on a number of factors; most important is the
capability to deploy skilled professionals, many requiring
security clearances, at competitive prices across the diverse
spectrum of these markets. Accordingly, various workforce
initiatives are in place to ensure the company is successful in
attracting, developing and retaining sufficient resources to
maintain or improve its competitive position within these
markets.
Economic
Opportunities, Challenges, and Risks
The defense of the U.S. and its allies requires the ability
to respond to one or more regional conflicts, terrorist acts, or
threats to homeland security and is increasingly dependent upon
early threat identification. National responses to those threats
may require unilateral or cooperative initiatives ranging from
dissuasion, deterrence, active defense, security and stability
operations, or peacekeeping. The U.S. Government continues
to place a high priority on the protection of its engaged forces
and citizenry and in minimizing collateral damage when force
must be applied in pursuit of national objectives. As a result,
the U.S. and its military coalitions increasingly rely on
sophisticated systems providing long-range surveillance and
intelligence, battle management, and precision strike
capabilities combined with the ability to rapidly deploy
effective force to any region. Accordingly, defense procurement
spending is expected to be weighted toward the development and
procurement of military platforms and systems demonstrating the
stealth, long-range, survivability, persistence and standoff
capabilities that can overcome such obstacles to access.
Additionally, advanced electronics and software that enhance the
capabilities of individual systems and provide for the real-time
integration of individual surveillance, information management,
strike, and battle management platforms will also be required.
While the upward trend in overall defense spending may slow,
defense requirements are not expected to change significantly in
the foreseeable future. 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. The size of future
U.S. and international defense budgets is expected to
remain responsive to the international security environment. The
proposed 2009 budget provides $515.4 billion in
discretionary authority for the DoD base budget, representing a
$35.9 billion or 7.5 percent increase over the enacted
level for fiscal 2008. This proposed 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, cyber space and
non-conventional warfare capabilities.
U.S. Government programs in which the company either
participates, or strives to participate, must compete with other
programs for consideration during the U.S. budget
formulation and appropriation processes. Budget decisions made
in this environment will have long-term consequences for the
size and structure of the company and the entire defense
industry.
-26-
NORTHROP
GRUMMAN CORPORATION
Substantial new competitive opportunities for the company
include a new aerial refueling tanker, the next-generation
long-range bomber, space radar, unmanned vehicles, satellite
communications systems, restricted programs, technical services
and information technology contracts, and several international
and homeland security programs. In pursuit of these
opportunities, Northrop Grumman continues to focus on
operational and financial performance for continued growth in
2008 and beyond.
Northrop Grumman has historically concentrated its efforts in
high technology areas such as stealth, airborne and space
surveillance, battle management, systems integration, defense
electronics, and information technology. The company has a
significant presence in federal and civil information systems;
the manufacture of combatant ships including aircraft carriers
and submarines; space technology; command, control,
communications, computers, intelligence, surveillance, and
reconnaissance (C4ISR); and missile systems. The company
believes that its programs are a high priority for national
defense. Nevertheless, under budgetary pressures, there remains
the possibility that one or more of them may be reduced,
extended, or terminated by the companys
U.S. Government customers.
The company provides certain product warranties that require
repair or replacement of non-conforming items for a specified
period of time. Most of the companys product warranties
are provided under government contracts, the costs of which are
generally incorporated into contract pricing.
Prime contracts with various agencies of the
U.S. Government and subcontracts with other prime
contractors are subject to numerous procurement regulations,
including the False Claims Act and The International Traffic in
Arms Regulations promulgated under the Arms Export Control Act,
with noncompliance found by any one agency possibly resulting in
fines, penalties, debarment, or suspension from receiving
additional contracts with all U.S. Government agencies.
Given the companys dependence on U.S. Government
business, suspension or debarment could have a material adverse
effect on the company.
See Risk Factors located in Part I, Item 1A for a more
complete description of risks faced by the company and the
defense industry.
BUSINESS
ACQUISITIONS
2007 In January 2007, the company acquired
Essex Corporation (Essex) for approximately $590 million in
cash, including estimated transaction costs of $15 million,
and the assumption of debt totaling $23 million. Essex
provides signal processing services and products, and advanced
optoelectronic imaging for U.S. government intelligence and
defense customers. The operating results of Essex are reported
in the Mission Systems segment.
In July 2007, the company and Science Applications International
Corporation (SAIC) reorganized their joint venture AMSEC, LLC
(AMSEC), by dividing AMSEC along customer and product lines.
AMSEC is a full-service supplier that provides engineering,
logistics and technical support services primarily to Navy ship
and aviation programs. Under the reorganization plan, the
company retained the ship engineering, logistics and technical
service businesses under the AMSEC name (the AMSEC Businesses)
and, in exchange, SAIC received the aviation, combat systems and
strike force integration services businesses from AMSEC (the
Divested Businesses). This reorganization was treated as a step
acquisition for the acquisition of SAICs interests in the
AMSEC Businesses, with the company recognizing a pre-tax gain of
$23 million for the effective sale of its interests in the
Divested Businesses. The operating results of the AMSEC
Businesses and transaction gain have been reported in the Ships
segment. Prior to the reorganization, the company accounted for
AMSEC, LLC under the equity method. The consolidated financial
statements reflect preliminary estimates of the fair value of
the assets acquired and liabilities assumed and the related
allocation of the purchase price for the entities acquired.
Management does not expect adjustments to these estimates, if
any, to have a material effect on the companys
consolidated financial position or results of operations.
During the third quarter of 2007, the company acquired Xinetics
Inc., reported in the Space Technology segment, and the
remaining 61 percent of Scaled Composites, LLC, reported in
the Integrated Systems segment, for an aggregate amount of
approximately $100 million in cash. The consolidated
financial statements reflect
-27-
NORTHROP
GRUMMAN CORPORATION
preliminary estimates of the fair value of the assets acquired
and liabilities assumed and the related allocation of the
purchase price for the entities acquired. Management does not
expect adjustments to these estimates, if any, to have a
material effect on the companys consolidated financial
position or results of operations.
2006 There were no significant acquisitions
during 2006.
2005 The company acquired Confluent RF
Systems Corporation (Confluent), reported in the Integrated
Systems segment, for $42 million in cash, which included
transaction costs of $2 million, and Integic Corporation
(Integic), reported in the Information Technology segment, for
$319 million in cash, which included transaction costs of
$6 million.
BUSINESS
DISPOSITIONS
2007 During the second quarter of 2007,
management announced its decision to exit the remaining
Interconnect Technologies (ITD) business reported within the
Electronics segment. Sales for this business for the years ended
December 31, 2007, 2006, and 2005, were $14 million,
$35 million, and $89 million, respectively. The
shut-down was completed during the third quarter of 2007 and
costs associated with the shutdown were not material. The
results of this business are reported as discontinued operations
in the consolidated statements of income, net of applicable
income taxes, for all periods presented.
2006 The company sold the assembly business
unit of ITD during the first quarter of 2006 and Winchester
Electronics (Winchester) during the second quarter of 2006 for
net cash proceeds of $26 million and $17 million,
respectively, and recognized after-tax gains of $4 million
and $2 million, respectively, in discontinued operations.
The results of operations of the assembly business unit of ITD
are reported as discontinued operations in the consolidated
statements of income, net of applicable income taxes. The
results of operations of Winchester, reported in the Electronics
segment, were not material to any of the periods presented and
have therefore not been reclassified as discontinued operations.
During the second quarter of 2006, the Enterprise Information
Technology (EIT) business, formerly reported in the Information
Technology segment, was shut down and costs associated with the
exit activities were not material. The results of operations of
this business are reported as discontinued operations in the
consolidated statements of income, net of applicable income
taxes.
2005 The company sold Teldix GmbH (Teldix)
for $57 million in cash and recognized an after-tax gain of
$14 million in discontinued operations. The results of
operations of Teldix, reported in the Electronics segment, were
not material to any of the periods presented and have therefore
not been reclassified as discontinued operations.
CONTRACTS
The majority of the companys business is generated from
long-term government contracts for development, production, and
service activities. Government contracts typically include the
following cost elements: direct material, labor and
subcontracting costs, and certain indirect costs including
allowable general and administrative costs. Unless otherwise
specified in a contract, costs billed to contracts with the
U.S. Government are determined under the requirements of
the Federal Acquisition Regulation (FAR) and Cost Accounting
Standards (CAS) regulations as allowable and allocable costs.
Examples of costs incurred by the company and not billed to the
U.S. Government in accordance with the requirements of the
FAR and CAS regulations include, but are not limited to, certain
legal costs, lobbying costs, charitable donations, and
advertising costs.
The companys long-term contracts typically fall into one
of two broad categories:
Flexibly Priced Contracts Includes both
cost-type and fixed-price incentive contracts. Cost-type
contracts provide for reimbursement of the contractors
allowable costs incurred plus a fee that represents profit.
Cost-type contracts generally require that the contractor use
its best efforts to accomplish the scope of the work within some
specified time and some stated dollar limitation. Fixed-price
incentive contracts also provide for
-28-
NORTHROP
GRUMMAN CORPORATION
reimbursement of the contractors allowable costs, but are
subject to a cost-share limit which affects profitability.
Fixed-price incentive contracts effectively become firm
fixed-price contracts once the cost-share limit is reached.
Firm Fixed-Price Contracts A firm fixed-price
contract is a contract in which the specified scope of work is
agreed to for a price that is a pre-determined, negotiated
amount and not generally subject to adjustment regardless of
costs incurred by the contractor.
The following table summarizes 2007 revenue recognized by
contract type and customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Other
|
|
|
|
Percent
|
($ in millions)
|
|
Government
|
|
Customers
|
|
Total
|
|
of Total
|
Flexibly priced
|
|
$
|
21,554
|
|
|
$
|
746
|
|
|
$
|
22,300
|
|
|
|
70
|
%
|
Firm fixed-price
|
|
|
7,146
|
|
|
|
2,572
|
|
|
|
9,718
|
|
|
|
30
|
%
|
|
Total
|
|
$
|
28,700
|
|
|
$
|
3,318
|
|
|
$
|
32,018
|
|
|
|
100
|
%
|
|
Contract Fees Negotiated contract fee
structures, for both flexibly priced and fixed-price contracts
include, but are not limited to: fixed-fee amounts, cost sharing
arrangements to reward or penalize for either under or over cost
target performance, positive award fees, and negative penalty
arrangements. Profit margins may vary materially depending on
the negotiated contract fee arrangements,
percentage-of-completion of the contract, the achievement of
performance objectives, and the stage of performance at which
the right to receive fees, particularly under incentive and
award fee contracts, is finally determined.
Positive Award Fees Certain contracts contain
provisions consisting of award fees based on performance
criteria such as: cost, schedule, quality, and technical
performance. Award fees are determined and earned based on an
evaluation by the customer of the companys performance
against such negotiated criteria. Award fee contracts are widely
used throughout the companys operating segments. Examples
of significant long-term contracts with substantial negotiated
award fee amounts are the KEI, SDD,
E-2D SDD,
LPD, and DDG-1000 programs.
Compliance and Monitoring On a regular basis,
the company monitors its policies and procedures with respect to
its contracts to ensure consistent application under similar
terms and conditions as well as compliance with all applicable
government regulations. In addition, costs incurred and
allocated to contracts with the U.S. Government are
routinely audited by the Defense Contract Audit Agency.
CRITICAL
ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS
Revenue
Recognition
Overview The majority of the companys
business is derived from long-term contracts for the
construction of facilities, production of goods, and services
provided to the federal government, which are accounted for
under the provisions of Accounting Research
Bulletin No. 45 Accounting for
Long-Term Construction-Type Contracts, American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP)
No. 81-1
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, and the AICPA Audit and
Accounting Guide, Audits of Federal Government
Contractors. The company classifies contract revenues as
product sales or service revenues depending on the predominant
attributes of the relevant underlying contracts. The company
also enters into contracts that are not associated with the
federal government, such as contracts to provide certain
services to non-federal government customers. The company
accounts for those contracts in accordance with the Securities
and Exchange Commissions Staff Accounting
Bulletin No. 104, Revenue Recognition, and
other relevant revenue recognition accounting literature.
The company considers the nature of these contracts and the
types of products and services provided when it determines the
proper accounting method for a particular contract.
Percentage-of-Completion Accounting The
company generally recognizes revenues from its long-term
contracts under the cost-to-cost and the units-of-delivery
measures of the percentage-of-completion method of accounting.
The percentage-of-completion method recognizes income as work on
a contract progresses. For
-29-
NORTHROP
GRUMMAN CORPORATION
most contracts, sales are calculated based on the percentage of
total costs incurred in relation to total estimated costs at
completion of the contract. For certain contracts with large
up-front purchases of material, primarily in the Ships segment,
sales are generally calculated based on the percentage that
direct labor costs incurred bear to total estimated direct labor
costs. The units-of-delivery measure is a modification of the
percentage-of-completion method, which recognizes revenues as
deliveries are made to the customer generally using unit sales
values in accordance with the contract terms. The company
estimates profit as the difference between total estimated
revenue and total estimated cost of a contract and recognizes
that profit over the life of the contract based on deliveries.
The use of the percentage-of-completion method depends on the
ability of the company to make reasonably dependable cost
estimates for the design, manufacture, and delivery of its
products and services. Such costs are typically incurred over a
period of several years, and estimation of these costs requires
the use of judgment. Sales under cost-type contracts are
recorded as costs are incurred.
Many contracts contain positive and negative profit incentives
based upon performance relative to predetermined targets that
may occur during or subsequent to delivery of the product. These
incentives take the form of potential additional fees to be
earned or penalties to be incurred. Incentives and award fees
that can be reasonably assured and reasonably estimated are
recorded over the performance period of the contract. Incentives
and award fees that cannot be reasonably assured and reasonably
estimated are recorded when awarded or at such time as a
reasonable estimate can be made.
Other changes in estimates of contract sales, costs, and profits
are recognized using the cumulative
catch-up
method of accounting. This method recognizes in the current
period the cumulative effect of the changes on current and prior
periods. Hence, the effect of the changes on future periods of
contract performance is recognized as if the revised estimates
had been the original estimates. A significant change in an
estimate on one or more contracts could have a material effect
on the companys consolidated financial position or results
of operations.
Certain Service Contracts Revenue under
contracts to provide services to non-federal government
customers are generally recognized when services are performed.
Service contracts include operations and maintenance contracts,
and outsourcing-type arrangements, primarily in the Information
and Services business. Revenue under such contracts is generally
recognized on a straight-line basis over the period of contract
performance, unless evidence suggests that the revenue is earned
or the obligations are fulfilled in a different pattern. Costs
incurred under these service contracts are expensed as incurred,
except that direct and incremental
set-up costs
are capitalized and amortized over the life of the agreement.
Operating profit related to such service contracts may fluctuate
from period to period, particularly in the earlier phases of the
contract.
Service contracts that include more than one type of product or
service are accounted for under the provisions of Emerging
Issues Task Force Issue
No. 00-21
Revenue Arrangements with Multiple Deliverables.
Accordingly, for applicable arrangements, revenue recognition
includes the proper identification of separate units of
accounting and the allocation of revenue across all elements
based on relative fair values.
Cost Estimation The cost estimation process
requires significant judgment and is based upon the professional
knowledge and experience of the companys engineers,
program managers, and financial professionals. Factors that are
considered in estimating the work to be completed and ultimate
contract recovery include the availability and productivity of
labor, the nature and complexity of the work to be performed,
the effect of change orders, the availability of materials, the
effect of any delays in performance, availability and timing of
funding from the customer, and the recoverability of any claims
included in the estimates to complete. A significant change in
an estimate on one or more programs could have a material effect
on the companys consolidated financial position or results
of operations. Contract cost estimates are updated at least
annually and more frequently as determined by events or
circumstances. Cost and revenue estimates for each significant
contract are generally reviewed and reassessed quarterly.
-30-
NORTHROP
GRUMMAN CORPORATION
When estimates of total costs to be incurred on a contract
exceed estimates of total revenue to be earned, a provision for
the entire loss on the contract is recorded to cost of sales in
the period the loss is determined. Loss provisions are first
offset against costs that are included in inventoried assets,
with any remaining amount reflected in liabilities.
Purchase
Accounting and Goodwill
Overview The purchase price of an acquired
business is allocated to the underlying tangible and intangible
assets acquired and liabilities assumed based upon their
respective fair market values, with the excess recorded as
goodwill. Such fair market value assessments require judgments
and estimates that can be affected by contract performance and
other factors over time, which may cause final amounts to differ
materially from original estimates. Adjustments to fair value
assessments are recorded to goodwill over the purchase price
allocation period (typically not exceeding twelve months) with
the exception of certain adjustments related to income tax
uncertainties, the resolution of which may extend beyond the
purchase price allocation period.
Acquisition Accruals The company has
established certain accruals in connection with indemnities and
other contingencies from its acquisitions and divestitures.
These accruals and subsequent adjustments have been recorded
during the purchase price allocation period for acquisitions and
as events occur for divestitures. The accruals were determined
based upon the terms of the purchase or sales agreements and, in
most cases, involve a significant degree of judgment. Management
has recorded these accruals in accordance with its
interpretation of the terms of the purchase or sale agreements,
known facts, and an estimation of probable future events based
on managements experience.
Goodwill The company performs impairment
tests for goodwill as of November 30th of each year, or
when evidence of potential impairment exists. In order to test
for potential impairment, the company uses a discounted cash
flow analysis, corroborated by comparative market multiples
where appropriate.
The principal factors used in the discounted cash flow analysis
requiring judgment are the projected results of operations,
weighted average cost of capital (WACC), and terminal value
assumptions. The WACC takes into account the relative weights of
each component of the companys consolidated capital
structure (equity and debt) and represents the expected cost of
new capital adjusted as appropriate to consider lower risk
profiles associated with longer term contracts and barriers to
market entry. The terminal value assumptions are applied to the
final year of the discounted cash flow model.
Due to the many variables inherent in the estimation of a
reporting units fair value and the relative size of the
companys recorded goodwill, differences in assumptions may
have a material effect on the results of the companys
impairment analysis.
Litigation,
Commitments, and Contingencies
Overview The company is subject to a range of
claims, lawsuits, environmental and income tax matters, and
administrative proceedings that arise in the ordinary course of
business. Estimating liabilities and costs associated with these
matters requires judgment and assessment based upon professional
knowledge and experience of management and its internal and
external legal counsel. In accordance with SFAS No. 5,
Accounting for Contingencies, amounts 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 such exposure to the company may vary from earlier estimates
as further facts and circumstances become known.
Environmental Accruals The company is subject
to the environmental laws and regulations of the jurisdictions
in which it conducts operations. The company records an accrual
to provide for the costs of expected environmental obligations
when management becomes aware that an expenditure will be
incurred and the amount of the liability can be reasonably
estimated. Factors which could result in changes to the
companys assessment of probability, range of loss, and
environmental accruals include: modification of planned remedial
actions, increase or decrease in the estimated time required to
remediate, discovery of more extensive
-31-
NORTHROP
GRUMMAN CORPORATION
contamination than anticipated, results of efforts to determine
legally responsible parties, changes in laws and regulations or
contractual obligations affecting remediation requirements, and
improvements in remediation technology. Although management
cannot predict whether new information gained as projects
progress will materially affect the estimated liability accrued,
management does not anticipate that future remediation
expenditures will have a material adverse effect on the
companys financial position, results of operation, or cash
flows.
Litigation Accruals 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. 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.
Uncertain Tax Positions Effective
January 1, 2007, the company measures and records uncertain
tax positions in accordance with Financial Accounting Standards
Board (FASB) Interpretation No. (FIN) 48
Accounting for Uncertainty in income Taxes an
Interpretation of FASB Statement No. 109. FIN 48
prescribes a threshold for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. Only tax positions meeting the
more-likely-than-not recognition threshold may be recognized or
continue to be recognized in the financial statements. The
timing and amount of accrued interest is determined by the
applicable tax law associated with an underpayment of income
taxes. If a tax position does not meet the minimum statutory
threshold to avoid payment of penalties, the company recognizes
an expense for the amount of the penalty in the period the tax
position is claimed in the tax return of the company. The
company recognizes interest accrued related to unrecognized tax
benefits in income tax expense. Penalties, if probable and
reasonably estimable, are recognized as a component of income
tax expense. See Note 12 to the consolidated financial
statements in Part II, Item 8. Prior to 2007, the
company recorded accruals for tax contingencies and related
interest when it determined that it was probable that a
liability had been incurred and the amount of the contingency
could be reasonably estimated based on specific events such as
an audit or inquiry by a taxing authority. Under existing GAAP,
changes in accruals associated with uncertainties arising from
the resolution of pre-acquisition contingencies of acquired
businesses are charged or credited to goodwill. Adjustments to
other tax accruals are generally recorded in earnings in the
period they are determined.
Retirement
Benefits
Overview Assumptions used in determining
projected benefit obligations and the fair values of plan assets
for the companys pension plans and other postretirement
benefits plans are evaluated annually by management in
consultation with its outside actuaries. In the event that the
company determines that plan amendments or changes in the
assumptions are warranted, future pension and postretirement
benefit expenses could increase or decrease.
Assumptions The principal assumptions that
have a significant effect on the companys consolidated
financial position and results of operations are the discount
rate, the expected long-term rate of return on plan assets, and
the health care cost trend rates. For certain plan assets where
the fair market value is not readily determinable, such as real
estate, private equity investments and hedge funds, estimates of
fair value are determined using the best information available.
Discount Rate The discount rate represents
the interest rate that should be used to determine the present
value of future cash flows currently expected to be required to
settle the pension and postretirement benefit obligations. The
discount rate is generally based on the yield on high-quality
corporate fixed-income investments. At the end of each year, the
discount rate is primarily determined based on the results of a
hypothetical long-term bond portfolio matching the expected cash
inflows with the expected benefit payments
-32-
NORTHROP
GRUMMAN CORPORATION
for each benefit plan. Taking into consideration the factors
noted above, the companys weighted-average pension
composite discount rate was 6.22 percent at
December 31, 2007, and 5.97 percent at
December 31, 2006.
Expected Long-Term Rate of Return The
expected long-term rate of return on plan assets represents the
average rate of earnings expected on the funds invested to
provide for anticipated future benefit payment obligations. For
2007 and 2006, the company assumed an expected long-term rate of
return on plan assets of 8.5 percent.
Changes in the discount rate and expected long-term rate of
return on plan assets within the range indicated below would
have had the following impacts on 2007 pension and other
postretirement benefits results:
|
|
|
|
|
|
|
|
|
|
|
.25 Percentage
|
|
.25 Percentage
|
$ in millions
|
|
Point Increase
|
|
Point Decrease
|
(Decrease) Increase Due To Change In Assumptions Used To
Determine Net Periodic Benefit Costs For The Year Ended
December 31, 2007
|
|
|
|
|
|
|
|
|
Discount rate
|
|
$
|
(38
|
)
|
|
$
|
40
|
|
Expected long-term rate of return on plan assets
|
|
|
(54
|
)
|
|
|
54
|
|
(Decrease) Increase Due To Change In Assumptions Used To
Determine Benefit Obligations For The Year Ended
December 31, 2007
|
|
|
|
|
|
|
|
|
Discount rate
|
|
$
|
(741
|
)
|
|
$
|
774
|
|
|
Health Care Cost Trend Rates The health care
cost trend rates represent the annual rates of change in the
cost of health care benefits based on estimates of health care
inflation, changes in health care utilization or delivery
patterns, technological advances, and changes in the health
status of the plan participants. For 2007, the company assumed
an expected initial health care cost trend rate of
8 percent and an ultimate health care cost trend rate of
5 percent. In 2006, the company assumed an expected initial
health care cost trend rate of 8.75 percent and an ultimate
health care cost trend rate of 5 percent.
Differences in the initial through the ultimate health care cost
trend rates within the range indicated below would have had the
following impact on 2007 postretirement benefit results:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
|
|
1-Percentage-
|
$ in millions
|
|
Point Increase
|
|
Point Decrease
|
Increase (Decrease) From Change In Health Care Cost Trend
Rates To
|
|
|
|
|
|
|
|
|
Postretirement benefit expense
|
|
$
|
9
|
|
|
$
|
(9
|
)
|
Postretirement benefit liability
|
|
|
85
|
|
|
|
(91
|
)
|
|
CONSOLIDATED
OPERATING RESULTS
Selected financial highlights are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions, except per
share
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Sales and service revenues
|
|
$
|
32,018
|
|
|
$
|
30,113
|
|
|
$
|
29,978
|
|
Cost of sales and service revenues
|
|
|
29,012
|
|
|
|
27,649
|
|
|
|
27,778
|
|
Operating margin
|
|
|
3,006
|
|
|
|
2,464
|
|
|
|
2,200
|
|
Interest expense, net
|
|
|
308
|
|
|
|
303
|
|
|
|
334
|
|
Other, net
|
|
|
(12
|
)
|
|
|
125
|
|
|
|
199
|
|
Federal and foreign income taxes
|
|
|
883
|
|
|
|
713
|
|
|
|
669
|
|
Diluted earnings per share from continuing operations
|
|
|
5.16
|
|
|
|
4.46
|
|
|
|
3.84
|
|
Net cash provided by operating activities
|
|
|
2,890
|
|
|
|
1,756
|
|
|
|
2,627
|
|
|
|
-33-
NORTHROP
GRUMMAN CORPORATION
Sales and
Service Revenues
Sales and service revenues consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Product sales
|
|
$
|
18,730
|
|
|
$
|
18,394
|
|
|
$
|
19,471
|
|
Service revenues
|
|
|
13,288
|
|
|
|
11,719
|
|
|
|
10,507
|
|
|
|
Sales and service revenues
|
|
$
|
32,018
|
|
|
$
|
30,113
|
|
|
$
|
29,978
|
|
|
|
2007 Revenues for principal product
businesses in Aerospace, Electronics, and Ships during 2007 grew
at a combined rate of approximately 3 percent over 2006,
reflecting sales growth in Electronics and Ships, partially
offset by reduced sales in Aerospace. The sales growth at
Electronics and Ships was due to volume improvements across most
business areas, while the sales reduction in Aerospace was
anticipated as a number of contracts transitioned from
development to production in 2007. Revenue for principal
services businesses in Information & Services during
2007 grew approximately 11 percent over 2006 due largely to
double digit growth at Information Technology and Technical
Services segments, resulting from increased volume on contracts
that were newly awarded in 2006 and growth across the board on
other contracts.
2006 Revenues for the principal product
segments of Integrated Systems, Space Technology and Electronics
were relatively flat in 2006 as compared to 2005, and revenues
for the Ships segment declined approximately $500 million
due primarily to the effects of the damage to the Gulf Coast
shipyards caused by Hurricane Katrina in August 2005. Service
revenues for the principal services businesses grew principally
in the Information Technology and Technical Services segments,
which each had revenue increases in excess of $225 million
in 2006. Revenues for Mission Systems, the companys other
mainly services business, were relatively flat on a year over
year basis.
Cost of
Sales and General and Administrative Expenses
Cost of sales and general and administrative expenses are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cost of Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
$
|
14,474
|
|
|
$
|
14,380
|
|
|
$
|
15,543
|
|
% of product sales
|
|
|
77.3
|
%
|
|
|
78.2
|
%
|
|
|
79.8
|
%
|
Cost of service revenues
|
|
|
11,330
|
|
|
|
10,242
|
|
|
|
9,355
|
|
% of service revenues
|
|
|
85.3
|
%
|
|
|
87.4
|
%
|
|
|
89.0
|
%
|
General and administrative expenses
|
|
|
3,208
|
|
|
|
3,027
|
|
|
|
2,880
|
|
% of total sales and service revenues
|
|
|
10.0
|
%
|
|
|
10.1
|
%
|
|
|
9.6
|
%
|
|
|
Cost of Sales and Service Revenues
|
|
$
|
29,012
|
|
|
$
|
27,649
|
|
|
$
|
27,778
|
|
|
|
Cost of
Product Sales and Service Revenues
2007 Cost of product sales during 2007
increased $94 million, or 1 percent, over 2006 while
decreasing 90 basis points as a percentage of product sales
over the same period. Cost of service sales during 2007
increased $1.1 billion, or 11 percent, over 2006 while
decreasing 214 basis points as a percentage of service
sales over the same period. Cost of product sales in 2007
increased over 2006 due largely to the sales volume increase
described above, partially offset by improved program
performance at Integrated Systems, Space Technology and Ships.
Cost of service revenues in 2007 increased over 2006 due
primarily to higher sales volume at Information &
Services. The margin rate improvement was primarily driven by
improved margin rate performance on service revenues by segments
principally in the product businesses.
2006 Cost of product sales during 2006
decreased $1.2 billion, or 7 percent, over 2005 while
decreasing 160 basis points as a percentage of product
sales over the same period. Cost of service sales during 2006
increased
-34-
NORTHROP
GRUMMAN CORPORATION
$887 million, or 9 percent, over 2005 while decreasing
164 basis points as a percentage of service sales over the
same period. Cost of product sales in 2006 declined over 2005
due largely to the sales volume decreases described above,
improved program performance across all of the principal product
segments and the absence of contract charges from Hurricane
Katrina. Cost of product sales in 2005 included charges of
$165 million due to the impacts of Hurricane Katrina on
ship construction contracts in process when the hurricane
occurred in August 2005. Cost of service revenues increased in
2006 due to higher volume at Information Technology and
Technical Services, partially offset by improved cost
performance at Mission Systems & Technical Services.
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 and such costs, for most
components of the company, 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 remained at a constant rate
of approximately 10 percent of sales in 2007 and 2006.
General and administrative expenses as a percentage of sales
increased from 9.6 percent in 2005 to 10.1 percent in
2006. The increase in 2006 is due primarily to higher property
insurance, litigation, and bid and proposal costs, partially
offset by lower IR&D.
Operating
Margin
The company considers operating margin to be an important
measure for evaluating its operating performance and, as is
typical in the industry, defines operating margin as revenues
less the related cost of producing the revenues and general and
administrative expenses. Operating margin for the company is
further evaluated for each of the business segments in which the
company operates, and segment operating margin is
one of the key metrics used by management of the company to
internally manage its operations.
Operating margin represents segment operating margin (see
section entitled Segment Operating Results) adjusted for a
number of factors that do not affect the segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Segment operating margin
|
|
$
|
3,103
|
|
|
$
|
2,807
|
|
|
$
|
2,421
|
|
Unallocated expenses
|
|
|
(224
|
)
|
|
|
(306
|
)
|
|
|
(200
|
)
|
Net pension adjustment
|
|
|
127
|
|
|
|
(37
|
)
|
|
|
(21
|
)
|
|
Total operating margin
|
|
$
|
3,006
|
|
|
$
|
2,464
|
|
|
$
|
2,200
|
|
|
Segment
Operating Margin
2007 Segment operating margin for the year
ended December 31, 2007 increased $296 million, or
11 percent, as compared to the same period in 2006. Total
segment operating margin was 9.7 percent and
9.3 percent of total sales and service revenues for the
years ended December 31, 2007, and 2006, respectively. See
the Segment Operating Results section below for further
information.
2006 Segment operating margin for the year
ended December 31, 2006 increased $386 million, or
16 percent, as compared to the same period in 2005. Total
segment operating margin was 9.3 percent and
8.1 percent of total sales and service revenues for the
years ended December 31, 2006, and 2005, respectively. See
the Segment Operating Results section below for further
information.
Unallocated Expenses Unallocated expenses for
the year ended December 31, 2007 decreased
$82 million, or 27 percent, as compared with the same
period in 2006. The decrease was primarily due to
$98 million in lower post-retirement benefit costs
determined under GAAP as a result of a plan design change in
2006 and $36 million lower legal and investigative
provisions, partially offset by an increase in other costs
including $18 million in higher litigation expenses. During
the third quarter 2006, the company recorded a
$112.5 million pre-tax provision for its settlement offer
to the U.S. Department of Justice and a restricted customer.
-35-
NORTHROP
GRUMMAN CORPORATION
Net Pension Adjustment The net pension
adjustment reflects the excess pension expense determined in
accordance with GAAP over the pension expense allocated to the
operating segments under CAS. The net pension adjustment
increased income by $127 million in 2007, as compared with
an expense of $37 million and $21 million in 2006 and
2005, respectively. The reduction in 2007 GAAP pension cost
primarily results from higher returns on plan assets and a
voluntary pre-funding in the fourth quarter of 2006.
Interest
Expense, net
Interest expense, net for 2007 was comparable to 2006. Interest
expense, net for the year ended December 31, 2006, was
$303 million, a decrease of $31 million, or
9 percent, in 2006 as compared with 2005. The decrease was
primarily due to a lower average debt balance in 2006 resulting
from debt maturities totaling $1.2 billion in 2006.
Other,
net
2007 Other, net for the year ended
December 31, 2007 was $12 million expense, a decrease
of $137 million, as compared with 2006. During 2006, the
company sold its remaining 9.7 million TRW Automotive (TRW
Auto) shares, generating pre-tax gains of $111 million.
2006 Other, net for the year ended
December 31, 2006 was $125 million income, a decrease
of $74 million, or 37 percent, from 2005 income of
$199 million. During 2005, the company sold
7.3 million TRW Auto shares and approximately
3.4 million Endwave shares, which generated pre-tax gains
of $70 million and $95 million, respectively, as
compared to the $111 million pre-tax gain in 2006 resulting
from the sale of the remaining TRW Auto stock.
Federal
and Foreign Income Taxes
2007 The companys effective tax rate on
income from continuing operations for the year ended
December 31, 2007, was 33 percent compared with
31 percent in 2006. During 2007, the company reached a
partial settlement agreement with the U.S. Internal Revenue
Service (IRS) regarding its audit of the companys tax
years ended 2001 2003 resulting in a tax benefit of
$22 million.
2006 The companys effective tax rate on
income from continuing operations for 2006 and 2005 was
31 percent and 32 percent, respectively. During 2006,
the company received final approval from the U.S. Congress
Joint Committee on Taxation for the agreement previously reached
with the IRS regarding its audits of the companys B-2
program for the years ended December 31, 1997 through
December 31, 2000. As a result of the agreement the company
recognized tax benefits of $48 million, due to the reversal
of previously established expense provisions. The company also
recognized a net tax benefit of $18 million in 2006 related
to tax credits associated with qualified wages paid to employees
affected by Hurricane Katrina.
Diluted
Earnings Per Share from Continuing Operations
2007 Diluted earnings per share from
continuing operations for 2007 was $5.16 per share, an increase
of 16 percent from $4.46 per share in 2006. Earnings per
share are based on weighted-average diluted shares outstanding
of 354.3 million for 2007 and 358.6 million for 2006.
The weighted-average diluted shares outstanding used to
calculate earnings per share includes the dilutive impact of the
mandatorily redeemable preferred stock.
2006 Diluted earnings per share from
continuing operations for 2006 was $4.46 per share, an increase
of 16 percent from $3.84 per share in 2005. Earnings per
share are based on weighted-average diluted shares outstanding
of 358.6 million for 2006 and 363.2 million for 2005.
For 2006, weighted-average diluted shares outstanding used to
calculate earnings per share includes the dilutive impact of the
mandatorily redeemable preferred stock.
Net Cash
Provided by Operating Activities
2007 Net cash provided by operating
activities in 2007 increased $1.1 billion as compared with
2006, and reflects lower pension contributions, higher net
income, and continued trade working capital reductions. Pension
plan contributions totaled $342 million in 2007, of which
$200 million was voluntarily pre-funded compared
-36-
NORTHROP
GRUMMAN CORPORATION
with contributions of $1.2 billion in 2006, of which
$800 million was voluntarily pre-funded. Cash collected
from customers increased by $2 billion, and cash paid to
suppliers and employees increased by $635 million in 2007
as compared with 2006.
Net cash provided by operating activities for 2007 included the
receipt of $125 million of insurance proceeds related to
Hurricane Katrina, $52 million of federal and state income
tax refunds, and $21 million of interest.
2006 Net cash provided by operating
activities in 2006 decreased $871 million as compared with
2005, primarily due to contributions to the companys
pension plans. Cash collected from customers decreased by
$166 million, and cash paid to suppliers and employees
increased by $361 million in 2006 as compared with 2005.
Net cash provided by operating activities for 2006 included the
receipt of $100 million of insurance proceeds related to
Hurricane Katrina, $60 million of federal and state income
tax refunds, and $45 million of interest. Net cash provided
by operating activities in 2006 includes contributions to the
companys pension plans totaling $1.2 billion, of
which $800 million was voluntarily pre-funded as compared
to contributions of $415 million in 2005, of which
$203 million was voluntarily pre-funded.
SEGMENT
OPERATING RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Information & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
5,931
|
|
|
$
|
5,494
|
|
|
$
|
5,494
|
|
Information Technology
|
|
|
4,486
|
|
|
|
3,962
|
|
|
|
3,736
|
|
Technical Services
|
|
|
2,177
|
|
|
|
1,858
|
|
|
|
1,617
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
5,067
|
|
|
|
5,500
|
|
|
|
5,489
|
|
Space Technology
|
|
|
3,133
|
|
|
|
2,923
|
|
|
|
2,866
|
|
Electronics
|
|
|
6,906
|
|
|
|
6,543
|
|
|
|
6,513
|
|
Ships
|
|
|
5,788
|
|
|
|
5,321
|
|
|
|
5,786
|
|
Intersegment eliminations
|
|
|
(1,470
|
)
|
|
|
(1,488
|
)
|
|
|
(1,523
|
)
|
|
Sales and service revenues
|
|
$
|
32,018
|
|
|
$
|
30,113
|
|
|
$
|
29,978
|
|
|
Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Information & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
566
|
|
|
$
|
519
|
|
|
$
|
424
|
|
Information Technology
|
|
|
329
|
|
|
|
342
|
|
|
|
322
|
|
Technical Services
|
|
|
120
|
|
|
|
120
|
|
|
|
100
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
591
|
|
|
|
551
|
|
|
|
499
|
|
Space Technology
|
|
|
261
|
|
|
|
245
|
|
|
|
219
|
|
Electronics
|
|
|
813
|
|
|
|
754
|
|
|
|
709
|
|
Ships
|
|
|
538
|
|
|
|
393
|
|
|
|
249
|
|
Intersegment eliminations
|
|
|
(115
|
)
|
|
|
(117
|
)
|
|
|
(101
|
)
|
|
Segment operating margin
|
|
$
|
3,103
|
|
|
$
|
2,807
|
|
|
$
|
2,421
|
|
|
Realignments The company, from time to time,
will realign contracts, programs or business areas among or
within its operating segments that possess similar customers,
expertise, and capabilities. These realignments are designed to
more fully leverage existing capabilities and enhance
development and delivery of products and services. In January
2007, certain programs and business areas were transferred among
Information Technology, Mission Systems, Space Technology, and
Technical Services. The operating results for all periods
presented have been revised to reflect these changes. See a
description of the segment business areas and specific
realignments located in Part I, Item 1.
-37-
NORTHROP
GRUMMAN CORPORATION
Subsequent Realignments In January 2008, the
Newport News and Ship Systems sectors were realigned into a
single segment called Northrop Grumman Shipbuilding to enable
the company to more effectively utilize its shipbuilding assets
and deploy its talented shipbuilders, processes, technologies,
production facilities and planned capital investment to meet
customer needs. This realignment had no impact on the
companys consolidated financial position, results of
operations, cash flows, or segment reporting.
Also in January 2008, the company announced the transfer of
certain programs and assets from the Mission Systems segment to
the Space Technology segment, effective July 1, 2008. This
transfer will allow Mission Systems to focus on the rapidly
growing command, control, communications, computers,
intelligence, surveillance, and reconnaissance business, and the
missiles business will be an integrated element of the
companys Aerospace business growth strategy. In addition,
certain Electronics businesses were transferred to Mission
Systems effective January 2008. The transfer of these businesses
is not expected to have a material effect on the companys
consolidated financial position, results of operations, or cash
flows.
These subsequent realignments have not been reflected in any of
the accompanying financial information.
KEY
SEGMENT FINANCIAL MEASURES
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 Critical Accounting Policies, Estimates and
Judgments described on page 29. Based on this approach and
the nature of the companys operations, the discussion of
consolidated results of operations generally focuses around the
companys seven reportable segments versus distinguishing
between products and services. Product sales are predominantly
generated in the Electronics, Integrated Systems, Space
Technology and Ships segments, while the majority of the
companys service revenues are generated by the Information
Technology, Mission Systems and Technical Services segments.
Funded
Contract Acquisitions
Funded contract acquisitions represent amounts funded during the
period on customer contractually obligated orders. Funded
contract acquisitions tend to fluctuate from period to period
and are determined by the size and timing of new and follow-on
orders and by obligations of funding on previously awarded
unfunded orders. In the period that a business is purchased, its
existing funded order backlog as of the date of purchase is
reported as funded contract acquisitions. In the period that a
business is sold, its existing funded order backlog as of the
divestiture date is deducted from funded contract acquisitions.
Sales and
Service Revenues
Period-to-period sales generally vary less than funded contract
acquisitions and 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 revenues
incurred due to varying production activity levels, delivery
rates, or service levels on individual contracts. Volume changes
will typically carry a corresponding margin change based on the
margin rate for a particular contract.
Segment
Operating Margin
Segment operating margin reflects the performance of segment
contracts. 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 margin 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 margin changes are accounted for on a
cumulative to date basis at the time an EAC change is recorded.
-38-
NORTHROP
GRUMMAN CORPORATION
Operating margin may also be affected by, among other things,
the effects of workforce stoppages, the effects of natural
disasters (such as hurricanes and earthquakes), 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.
Program
Descriptions
For convenience, a brief description of certain programs
discussed in this
Form 10-K
are included in the Glossary of Programs beginning
on page 54.
INFORMATION &
SERVICES
Mission
Systems
Mission Systems is a leading global system integrator of
complex, mission-enabling systems for military, government, and
other clients. Products and services are grouped into the
following business areas: Command, Control and Communications
(C3); Intelligence, Surveillance and Reconnaissance (ISR); and
Missile Systems.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Funded Contract Acquisitions
|
|
$
|
6,032
|
|
|
$
|
6,108
|
|
|
$
|
4,877
|
|
Sales and Service Revenues
|
|
|
5,931
|
|
|
|
5,494
|
|
|
|
5,494
|
|
Segment Operating Margin
|
|
|
566
|
|
|
|
519
|
|
|
|
424
|
|
As a percentage of segment sales
|
|
|
9.5
|
%
|
|
|
9.4
|
%
|
|
|
7.7
|
%
|
Funded
Contract Acquisitions
2007 Mission Systems funded contract
acquisitions decreased $76 million, or 1 percent, in
2007 as compared with 2006, primarily due to $626 million
lower funded contract acquisitions in Missile Systems, partially
offset by $401 million higher funded contract acquisitions
in ISR and $164 million higher funded contract acquisitions
in C3. The decrease in Missile Systems is due to timing of
funding on the Intercontinental Ballistic Missile (ICBM) and
Kinetic Energy Interceptors (KEI) programs and receipt of
delayed funding upon approval of the federal defense budget
during the first quarter of 2006. The increase in ISR is related
to the acquisition of Essex. The increase in C3 is due to higher
funding across various programs. Significant funded contract
acquisitions in 2007 included $603 million for the ICBM
program, $223 million for the Joint National Integration
Center Research and Development (JRDC) program,
$188 million for the
F-22
program, $169 million for the KEI program,
$137 million for the Ground-Based Midcourse Fire Control
and Communications (GFC/C) program and $118 million
for the Force XXI Battle Brigade and Below (FBCB2) Installation
Kits
(I-Kits)
program.
2006 Mission Systems funded contract
acquisitions increased $1.2 billion, or 25 percent, in
2006 as compared with 2005, primarily due to the receipt of
delayed funding upon approval of the fiscal year 2006 federal
defense budget, the timing of funding received in the KEI
program and the timing of a production award in the ICBM
program. Significant acquisitions in 2006 included
$1 billion for the ICBM program, $348 million for the
KEI program, $217 million for the JRDC program,
$176 million for the
F-22
program, $164 million for the
F-35
program, $155 million for the Space Based Space
Surveillance (SBSS) program, and $118 million for the
Command Post Platform (CPP) program.
Sales and
Service Revenues
2007 Mission Systems revenue increased
$437 million, or 8 percent, as compared with 2006. The
increase was due to $279 million in higher sales in ISR,
$131 million in higher sales in Missile Systems and
$52 million in higher sales in C3. The increase in ISR is
principally due to the acquisition of Essex. The increase in
Missile Systems is primarily due to increased scope and funding
levels in the KEI, JRDC, ICBM and National Team Battle
Management Command and Control (BMC2) programs. The increase in
C3 is due to higher volume in several programs, including the
FBCB2 I-Kits
program, partially offset by lower volume in the
F-35
development
-39-
NORTHROP
GRUMMAN CORPORATION
program as hardware development in 2006 winds down in 2007 and
reduced scope and deliveries accelerated into 2006 in the
F-22 program.
2006 Mission Systems revenue remained
unchanged in 2006 when compared with 2005. The higher sales
volume across multiple programs including SBSS, CPP, FBCB2
Systems Engineering and Integration (SE&I) and GFC/C were
offset by lower sales volume in a restricted program and reduced
production volume in the ICBM program.
Segment
Operating Margin
2007 Mission Systems operating margin
increased $47 million, or 9 percent, in 2007 as
compared with 2006. The increase includes net performance
improvements of $22 million driven by cost improvements
achieved based on increases in customer order quantities in the
FBCB2 I-Kits program, final negotiation of award fee earned on
the National Team BMC2 program, lower labor costs and favorable
pricing of supplier procured materials in the CPP program and
elimination of risk associated with hardware obsolescence in the
GFC/C program. Net performance improvements were partially
offset by $12 million in higher amortization of purchased
intangibles. Volume changes contributed to the 2007 operating
margin increase primarily due to the acquisition of Essex.
2006 Mission Systems operating margin
increased $95 million, or 22 percent, in 2006 as
compared with 2005. The increase includes net performance
improvements across multiple programs including a successful
flight test and favorable award fee scores on the GFC/C program,
successful cost and risk management in the fixed price
development portion of the Global Combat Support System
Army/Tactical program, continued success in fielding
Communication, Navigation and Identification (CNI) systems in
the F-22 production program and a decrease of $26 million
in amortization of purchased intangibles. The increase in
operating margin as a percentage of segment sales over 2005 is
due to the net performance improvements mentioned above.
Information
Technology
Information Technology is a premier provider of IT systems
engineering and systems integration for the DoD, national
intelligence, federal, civilian, state, and local agencies, and
commercial customers. Products and services are grouped into the
following business areas: Intelligence; Civilian Agencies;
Commercial, State & Local (CS&L); and Defense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Funded Contract Acquisitions
|
|
$
|
4,400
|
|
|
$
|
4,613
|
|
|
$
|
3,700
|
|
Sales and Service Revenues
|
|
|
4,486
|
|
|
|
3,962
|
|
|
|
3,736
|
|
Segment Operating Margin
|
|
|
329
|
|
|
|
342
|
|
|
|
322
|
|
As a percentage of segment sales
|
|
|
7.3
|
%
|
|
|
8.6
|
%
|
|
|
8.6
|
%
|
Funded
Contract Acquisitions
2007 Information Technology funded contract
acquisitions decreased $213 million, or 5 percent, in
2007 as compared to 2006, primarily reflecting decreases of
$203 million in Intelligence and $98 million in
CS&L, partially offset by an increase of $109 million
in Defense. A significant amount of the Intelligence funded
contract acquisitions decrease was related to the early funding
of contracts in 2006. Significant non-restricted funded
acquisitions in 2007 included $214 million for the Virginia
IT outsourcing program, $146 million for the Network
Centric Solutions program, $140 million for the Systems and
Software Engineering Services program, and $139 million for
the National Geospatial-Intelligence Agency Enterprise
Engineering program.
2006 Information Technology funded contract
acquisitions increased $913 million, or 25 percent, in
2006 as compared to 2005, primarily reflecting increases of
$527 million in Intelligence, $322 million in
CS&L, and $226 million in Defense, partially offset by
a decrease of $160 million in Civilian Agencies. The
increase in Intelligence was primarily related to the early
funding of contracts. Significant non-restricted funded contract
acquisitions in 2006 included $319 million for the New York
City Wireless program, $231 million for the
-40-
NORTHROP
GRUMMAN CORPORATION
National Geospatial-Intelligence Agency Enterprise Engineering
program, $130 million for the Systems and Software
Engineering Services program, and $100 million for the
Defense Threat Reduction Agency program.
Sales and
Service Revenues
2007 Information Technology revenue increased
$524 million, or 13 percent, in 2007 as compared with
2006. The increase was primarily due to $275 million in
higher sales volume in CS&L, $222 million in higher
sales in Intelligence, and $133 million in higher sales in
Defense, partially offset by $73 million in lower sales in
Civilian Agencies. The increase in CS&L is associated with
the effect of a full year of sales from new programs awarded in
2006, including the New York City Wireless, Virginia IT
outsourcing, and San Diego County IT outsourcing programs.
The increase in Intelligence is due to new restricted program
wins and higher volume on existing programs. The increase in
Defense is due to increased volume on various existing programs
and new business wins. The decrease in Civilian Agencies is
primarily due to customer program budget reductions, and program
completions.
2006 Information Technology revenue increased
$226 million, or 6 percent, in 2006 as compared with
2005. The increase was primarily due to $105 million in
higher sales volume in Intelligence, $101 million in higher
sales volume in Defense, and $57 million in higher sales
volume in CS&L, partially offset by $36 million in
lower sales in Civilian Agencies. The increase in Intelligence
is due to new restricted program wins and higher volume on
various existing programs. The increase in Defense is due to
increased volume on various existing programs. The increase in
CS&L is due to higher volume associated with new programs
awarded in 2006, including the Virginia IT outsourcing,
San Diego County IT outsourcing, and New York City Wireless
programs. The decrease in Civilian Agencies is primarily due to
customer program budget reductions and program completions.
Segment
Operating Margin
2007 Information Technology operating margin
decreased $13 million, or 4 percent, in 2007 as
compared to 2006. The decrease in operating margin was driven by
$28 million in increased amortization of deferred and other
outsourcing costs on large IT outsourcing programs compared to
the prior period, partially offset by margin on new business
wins and the effects of increased volume on several
Intelligence, CS&L, and Defense programs. The operating
margin decrease also reflects $22 million in discretionary
spending for internal information systems infrastructure
expected to yield future cost improvements. The decrease in
operating margin as a percentage of segment sales is primarily
due to the timing of service contract costs and amortization of
deferred and other outsourcing costs on large IT outsourcing
programs.
2006 Information Technology operating margin
increased $20 million, or 6 percent, in 2006 as
compared to 2005. The increase was driven by higher sales volume
in Intelligence, Defense, and CS&L, primarily on the
Virginia IT outsourcing program. The increase also reflects
$5 million lower amortization expense for purchased
intangibles.
Technical
Services
Technical Services is a leading provider of infrastructure,
base, range, logistical and sustainment support, and also
provides a wide-array of technical services including training
and simulation. Services are grouped into the following business
areas: Systems Support (SSG); Training and Simulation (TSG); and
Life Cycle Optimization and Engineering (LCOE).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Funded Contract Acquisitions
|
|
$
|
2,273
|
|
|
$
|
2,292
|
|
|
$
|
1,714
|
|
Sales and Service Revenues
|
|
|
2,177
|
|
|
|
1,858
|
|
|
|
1,617
|
|
Segment Operating Margin
|
|
|
120
|
|
|
|
120
|
|
|
|
100
|
|
As a percentage of segment sales
|
|
|
5.5
|
%
|
|
|
6.5
|
%
|
|
|
6.2
|
%
|
-41-
NORTHROP
GRUMMAN CORPORATION
Funded
Contract Acquisitions
2007 Technical Services funded contract
acquisitions decreased $19 million or 1 percent in
2007 as compared with 2006, primarily reflecting a decrease of
$355 million at TSG, partially offset by a
$327 million increase at LCOE. The decrease at TSG is
primarily due to accelerated funding received in 2006 for the
Saudi Arabian National Guard (SANG) program. The increase in the
LCOE group is due to additional tasking across various programs,
including the Hunter CLS program. Significant funded contract
acquisitions in 2007 included $417 million for the Nevada
Test Site (NTS) program, $310 million for the Joint Base
Operations Support (JBOS) program, $174 million for the
Sierra Vista Hunter program, $112 million for the Battle
Command Training program, $98 million for the
Ft. Irwin program, $75 million for the TSC program and
$75 million for F-15 repairs at the Warner Robins Regional
Repair Service Center (WRRSC).
2006 Technical Services funded contract
acquisitions increased $578 million, or 34 percent, in
2006 as compared with 2005. Significant funded contract
acquisitions in 2006 included $462 million for the Nevada
Test Site (NTS) program, $354 million in additional funding
in the JBOS program, and $297 million in additional funding
in the SANG program.
Sales and
Service Revenues
2007 Technical Services revenue increased
$319 million or 17 percent, in 2007 as compared with
2006, primarily due to increases of $248 million and
$66 million in SSG and LCOE, respectively. The increase in
SSG is primarily driven by $252 million from the effects of
a full year of sales for the NTS program in 2007 as compared to
six months of revenue in 2006. The increase in LCOE is due to
increased demand for F-15 repairs at WRRSC, increased demand on
the Sierra Vista Hunter program and increased work on the B2
programs.
2006 Technical Services revenue increased
$241 million, or 15 percent, in 2006 as compared with
2005. The increase was primarily due to higher sales volume for
the NTS, Combined Tactical Training Range and Ft. Irwin
programs, partially offset by lower volume in the JBOS program.
Segment
Operating Margin
2007 Technical Services operating margin
remained unchanged in 2007 when compared with 2006. The volume
increases associated with the NTS, F-15 repairs, Sierra Vista
Hunter and B2 programs were offset by the effects of performance
improvements taken in the prior year and favorable 2006 margin
adjustments to reflect risk reduction on contracts for spares
production on fixed price contracts. A lower margin mix from the
NTS program also contributed to offsetting the volume increase.
2006 Technical Services operating margin
increased $20 million, or 20 percent, in 2006 as
compared with 2005. The increase includes net performance
improvements from the U.S. Citizenship and Immigration
Services, SANG, and APG-66 Japan programs. Volume changes
contributed to the 2006 operating margin primarily driven by
higher sales volume in the NTS program.
AEROSPACE
Integrated
Systems
Integrated Systems is a leader in the design, development, and
production of airborne early warning, electronic warfare and
surveillance, and battlefield management systems, as well as
manned and unmanned tactical and strike systems. Products and
services are grouped into the following business areas:
Integrated Systems Western Region (ISWR) and Integrated Systems
Eastern Region (ISER).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Funded Contract Acquisitions
|
|
$
|
4,986
|
|
|
$
|
6,108
|
|
|
$
|
4,544
|
|
Sales and Service Revenues
|
|
|
5,067
|
|
|
|
5,500
|
|
|
|
5,489
|
|
Segment Operating Margin
|
|
|
591
|
|
|
|
551
|
|
|
|
499
|
|
As a percentage of segment sales
|
|
|
11.7
|
%
|
|
|
10.0
|
%
|
|
|
9.1
|
%
|
-42-
NORTHROP
GRUMMAN CORPORATION
Funded
Contract Acquisitions
2007 Integrated Systems funded contract
acquisitions decreased $1.1 billion, or 18 percent, as
compared with 2006, resulting from decreases of
$641 million and $653 million at ISWR and ISER,
respectively, partially offset by an increase of
$160 million on International Programs. The decrease is
primarily due to higher 2006 funded contract acquisitions as a
result of delayed funding upon approval of the fiscal year 2006
defense budget. Significant funded contract acquisitions
included $825 million for the
F/A-18
program, $816 million for the
E-2 program,
$579 million for the B-2 program, and $560 million for
the High Altitude Long Endurance (HALE) Systems (Global Hawk)
program.
2006 Integrated Systems funded contract
acquisitions increased $1.6 billion, or 34 percent, as
compared with the same period in 2005, resulting from increases
of $757 million and $826 million at ISWR and ISER,
respectively. The increase is primarily due to higher 2006
funded contract acquisitions as a result of delayed funding upon
approval of the fiscal year 2006 defense budget. Significant
funded contract acquisitions included $1.2 billion for the
E-2 program,
$978 million for the F-35 program, $767 million for
the F/A-18
program, and $718 million for the HALE Systems (Global
Hawk) program.
Sales and
Service Revenues
2007 Integrated Systems revenue decreased
$433 million, or 8 percent, as compared with 2006,
resulting from decreases of $105 million and
$369 million at ISWR and ISER, respectively. Approximately
$325 million of the decrease was a result of the transition
of the E-2D
Advanced Hawkeye, F-35 and EA-18G development programs to their
early production phases. Also contributing to the reduction in
revenue was approximately $160 million from the effects of
significant customer-directed scope reductions associated with
the E-10A
platform and related MP-RTIP efforts. These reductions were
partially offset by higher volume of $69 million for the
F/A-18
Multi-Year Procurement (MYP) and $77 million for the Global
Hawk programs.
2006 Integrated Systems revenue increased
$11 million as compared with 2005, resulting from an
increase of $239 million in ISWR, partially offset by a
decrease of $209 million in ISER. The increase in ISWR is
primarily due to higher sales volume for the F-35,
F/A-18, and
various restricted programs. The decrease in ISER is primarily
due to lower volume in the
E-2D
Advanced Hawkeye, Joint STARS, and EA-6B programs.
Segment
Operating Margin
2007 Integrated Systems operating margin
increased $40 million, or 7 percent, as compared with
the same period in 2006. The increase in operating margin
includes net margin improvements of $86 million primarily
due to risk reduction achieved on the Global Hawk and various
B-2 programs and favorable settlement of a prior years
overhead costs, partially offset by the margin effects of lower
sales volume described above. The increase in operating margin
as a percentage of segment sales is primarily due to risk
reduction on the
E-2 program,
improved performance on B-2 support programs, and the favorable
settlement of a prior years overhead costs described above.
2006 Integrated Systems operating margin
increased $52 million, or 10 percent, as compared with
2005. The increase in operating margin primarily reflects
improvements on the F-35, EA-18G, and
F/A-18
programs combined with higher sales volume in the
F/A-18 and
F-35 programs.
Space
Technology
Space Technology develops and integrates a broad range of
systems at the leading edge of space, defense, and electronics
technology. The segment supplies products primarily to the
U.S. Government that are critical to maintaining the
nations security and leadership in science and technology.
Space Technologys business areas focus on the design,
development, manufacture, and integration of spacecraft systems
and subsystems, electronic and communications payloads, and high
energy laser systems and subsystems. Products and services are
grouped into the following business areas: Civil Systems;
Military Systems; National Systems; and Technology &
Emerging Systems (Technology).
-43-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Funded Contract Acquisitions
|
|
$
|
2,770
|
|
|
$
|
3,916
|
|
|
$
|
2,121
|
|
Sales and Service Revenues
|
|
|
3,133
|
|
|
|
2,923
|
|
|
|
2,866
|
|
Segment Operating Margin
|
|
|
261
|
|
|
|
245
|
|
|
|
219
|
|
As a percentage of segment sales
|
|
|
8.3
|
%
|
|
|
8.4
|
%
|
|
|
7.6
|
%
|
Funded
Contract Acquisitions
2007 Space Technology funded contract
acquisitions decreased $1.1 billion, or 29 percent, in
2007 as compared with 2006, primarily representing a
$693 million decrease for Military Systems, a
$231 million decrease for National Systems, and a
$211 million decrease for Civil Systems. The decrease is
primarily due to higher 2006 funded contract acquisitions as a
result of delayed funding upon approval of the fiscal year 2006
defense budget. Significant funded contract acquisitions in 2007
included $1.1 billion for restricted programs,
$540 million for the NPOESS program, $239 million for
the STSS program, and additional funding of $216 million
for the JWST program.
2006 Space Technology funded contract
acquisitions increased $1.8 billion, or 85 percent, as
compared with 2005, due to increased funding in National
Systems, Military Systems, and Civil Systems. The increase is
primarily due to higher 2006 funded contract acquisitions as a
result of delayed funding upon approval of the fiscal year 2006
defense budget. Significant funded contract acquisitions in 2006
included $1.2 billion for restricted programs,
$770 million for the NPOESS program, and $611 million
for the AEHF program.
Sales and
Service Revenues
2007 Space Technology revenue increased
$210 million, or 7 percent, in 2007 as compared with
2006. The increase was primarily due to $187 million and
$49 million in higher sales on restricted contracts in
National Systems and Technology & Emerging Systems,
respectively.
2006 Space Technology revenues increased
$57 million, or 2 percent, as compared with 2005. The
increase was primarily due to higher sales in Military Systems
due to higher volume in the AEHF program and higher sales in
Technology & Emerging Systems due to the ABL program,
partially offset by lower sales in Civil Systems due to lower
volume for the NPOESS program.
Segment
Operating Margin
2007 Space Technology operating margin
increased $16 million, or 7 percent, in 2007 as
compared with 2006. The increase in operating margin was
primarily due to increased sales volume in 2007 across many
programs.
2006 Space Technology operating margin
increased $26 million, or 12 percent, as compared with
2005. The increase in operating margin and operating margin
percentage was primarily due to performance improvements in
2006, primarily from the ABL program.
ELECTRONICS
Electronics 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. Electronics 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 traffic control, air and missile defense,
homeland defense, communications, mail processing, biochemical
detection, ship bridge control, and shipboard components.
Products and services are grouped into the following business
areas: Aerospace Systems; Defensive Systems; Government Systems;
Naval & Marine Systems; and Navigation Systems.
-44-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Funded Contract Acquisitions
|
|
$
|
8,776
|
|
|
$
|
7,147
|
|
|
$
|
6,250
|
|
Sales and Service Revenues
|
|
|
6,906
|
|
|
|
6,543
|
|
|
|
6,513
|
|
Segment Operating Margin
|
|
|
813
|
|
|
|
754
|
|
|
|
709
|
|
As a percentage of segment sales
|
|
|
11.8
|
%
|
|
|
11.5
|
%
|
|
|
10.9
|
%
|
Funded
Contract Acquisitions
2007 Electronics funded contract acquisitions
increased $1.6 billion, or 23 percent, in 2007 as
compared with 2006, primarily representing increases of
$652 million, $560 million and $288 million for
Government Systems, Defensive Systems, and Aerospace Systems,
respectively. Significant funded contract acquisitions in 2007
included $875 million for the Flats Sequencing System (FSS)
program, $508 million for the Large Aircraft Infrared
Countermeasures (LAIRCM) Indefinite Deliver/Indefinite Quantity
(IDIQ) program, $252 million for the Vehicular
Intercommunications (VIS) program, $242 million for the
MESA Korea program, and $76 million for the Ground/Air Task
Oriented Radar (G/ATOR) program
2006 Electronics funded contract acquisitions
increased $897 million, or 14 percent, in 2006 as
compared with 2005, primarily representing increases of
$309 million, $284 million and $180 million at
Defensive Systems, Aerospace Systems, and Government Systems,
respectively. Significant funded contract acquisitions in 2006
included $270 million for the VIS program,
$261 million for the SBIRS program, $160 million for
the F-22 program, $153 million for the Lightweight Laser
Designator Rangefinder program, $150 million for the
Bio-Detection program, $148 million for the Mark VII
program, and $125 million for the Automated Flats Sorting
Machine program.
Sales and
Service Revenues
2007 Electronics revenue increased
$363 million, or 6 percent, in 2007 as compared with
2006, reflecting $178 million higher sales in Defensive
Systems, $116 million higher sales in the Government
Systems, and $97 million in Naval & Marine
Systems (NMS), partially offset by $100 million lower sales
in Aerospace Systems. The increase in Defensive Systems is
primarily due to higher deliveries on Land Forces and
Electro-Optical & Infrared Countermeasures programs.
The increase in Government Systems sales is primarily
attributable to increases in Communications and ISR programs.
The increase in NMS sales is primarily due to higher volume on a
restricted program. The lower Aerospace Systems sales are
primarily due to the effect of declining volume on fixed price
development programs.
2006 Electronics revenue increased
$30 million, or less than 1 percent, in 2006 as
compared with 2005. The increase was primarily due to higher
sales in automated flat sorting machines to the U.S. Postal
Service, vehicle intercommunications systems and infrared
countermeasures programs, partially offset by lower sales volume
in the F-16 Block 60 and Longbow Missile programs as these
programs near completion. Sales for 2006 also included
adjustments resulting from charges for the MESA Wedgetail and
Peace Eagle fixed-price development airborne surveillance
programs.
Segment
Operating Margin
2007 Electronics operating margin increased
$59 million, or 8 percent, in 2007 as compared with
2006. The increase in operating margin is largely attributable
to higher volume, primarily in Government Systems, Defensive
Systems, and Naval & Marine Systems. Operating margin
for 2007 included a $27 million pre-tax charge for the F-16
Block 60 fixed-price development combat avionics program.
The 2007 charge reflected a higher estimate of software
integration costs to complete the Falcon Edge electronic warfare
suite as compared to $121 million in pre-tax charges in
2006 for several programs mentioned below. The 2007 operating
margin also includes $14 million in consolidation costs
related to the closure of several facilities as a result of a
continuing focus on effective infrastructure management and
$26 million in provisions for settled and outstanding
matters.
-45-
NORTHROP
GRUMMAN CORPORATION
2006 Electronics operating margin increased
$45 million, or 6 percent, in 2006 as compared with
2005. The increase was primarily due to $55 million lower
amortization expense and includes net performance improvements
on various programs. Operating margin for 2006 included a
$51 million pre-tax charge for the Wedgetail contract and a
$42 million pre-tax charge for the Peace Eagle contract
(both under the MESA program), and a $28 million pre-tax
charge for the ASPIS II program. These charges primarily reflect
the impact of development, test & evaluation schedule
extension, required hardware modifications and related
retrofits. Operating margin for 2005 included a $65 million
pre-tax charge for the F-16 Block 60 fixed-price
development combat avionics program. The charge reflected a
higher estimate of costs to complete the Falcon Edge electronic
warfare suite, including rework of the mission software.
SHIPS
Ships 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. Ships 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. Products and services are grouped into the following
business areas: Aircraft Carriers; Expeditionary Warfare;
Surface Combatants; Submarines; Coast Guard & Coastal
Defense; Fleet Support; and Services, Commercial &
Other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Funded Contract Acquisitions
|
|
$
|
5,282
|
|
|
$
|
10,045
|
|
|
$
|
2,749
|
|
Sales and Service Revenues
|
|
|
5,788
|
|
|
|
5,321
|
|
|
|
5,786
|
|
Segment Operating Margin
|
|
|
538
|
|
|
|
393
|
|
|
|
249
|
|
As a percentage of segment sales
|
|
|
9.3
|
%
|
|
|
7.4
|
%
|
|
|
4.3
|
%
|
Funded
Contract Acquisitions
2007 Ships funded contract acquisitions for
the year ended December 31, 2007 decreased
$4.8 billion, or 47 percent as compared with 2006,
primarily representing decreases of $5.2 billion in
Aircraft Carriers and Expeditionary Warfare. The decrease is
partially due to higher 2006 funded contract acquisitions as a
result of delayed funding approval for the fiscal year 2006
defense budget as well as the funding received on the
George H.W. Bush, USS Carl Vinson and
Ford Class programs in 2006, originally expected in 2007.
Significant funded contract acquisitions during the year include
$1.4 billion for the LPD program, $1.1 billion for the
LHA program, $510 million for the Virginia-class
submarine program, $624 million for the DDG 1000 program,
$516 million for the Coast Guards NSC program,
$171 million from AMSEC reorganization, and an additional
funding of $108 million for the DDG program.
2006 Ships funded contract acquisitions for
the year ended December 31, 2006 increased
$7.3 billion as compared with the 2005, primarily
representing increases of $6.5 billion in Aircraft Carriers
and Expeditionary Warfare. Significant acquisitions in 2006
included $3.9 billion for the LPD program,
$1.8 billion for the USS Carl Vinson
Refueling and Complex Overhaul (RCOH) program,
$1.3 billion for the Ford Class program, $814 million
for the Virginia Class Block II program,
$479 million for the George H. W. Bush program,
$261 million for the DDG 1000 program (formerly known as
the DD(X) program), $176 million for the WMSL NSC program,
$172 million for the Toledo Depot Modernization Period
program, $168 million for the LHD program, and
$116 million for the LHA program.
Sales and
Service Revenues
2007 Ships revenues for the year ended
December 31, 2007 increased $467 million, or
9 percent as compared with 2006. The increase was primarily
due to $252 million in higher sales in Expeditionary
Warfare, $92 million in higher sales in Fleet Support,
$81 million in higher sales in Coast Guard and Coastal
Defense, $53 million in higher sales in Submarines,
$52 million in higher sales in Aircraft Carriers, partially
offset by $33 million in lower sales in Surface Combatants,
and $25 million in lower sales in Services,
Commercial & Other. The increase in
-46-
NORTHROP
GRUMMAN CORPORATION
Expeditionary Warfare was primarily due to higher sales volume
in the LPD and LHA programs due to production
ramp-ups,
partially offset by lower sales volume in the LHD program as a
result of a labor strike at the Pascagoula, Mississippi
shipyard. The increase in Fleet Support was due to the
reorganization of AMSEC. The increase in Coast Guard and Coastal
Defense was due to higher sales volume in the WMSL program. The
decrease in Surface Combatants was due to lower sales in the DDG
1000 program and the impacts of the labor strike.
2006 Ships revenues for the year ended
December 31, 2006 decreased $465 million, or
8 percent as compared with 2005. The decrease was primarily
due to lower sales volume in the DDG 1000 program driven by the
transition from Phase III to Phase IV and changes in
the Navy acquisition strategy regarding major sub-contractors,
as well as continued recovery from the impact of Hurricane
Katrina in the LPD program. The decrease was partially offset by
higher sales in the USS Carl Vinson, DDG 51, NSC, and LHA
programs.
Segment
Operating Margin
2007 Ships operating margin for the year
ended December 31, 2007 increased $145 million, or
37 percent, as compared with 2006, primarily consisting of
$62 million for recovery of lost profits due to having
reached an agreement on a portion of the Katrina insurance
claim, a $23 million pre-tax gain resulting from the
reorganization of AMSEC, and increased volume across multiple
programs, offset by $55 million resulting from a contract
earnings rate adjustment on LHD 8 primarily due to a schedule
extension resulting from manpower constraints in critical crafts
(electrical and pipefitting) following the strike at the
Pascagoula shipyard in 2007.
2006 Ships operating margin for the year
ended December 31, 2006 increased $144 million, or
58 percent as compared with 2005. The increase was
primarily due to a prior year charge of $150 million to
account for Hurricane Katrina-related cost growth, as well as a
$15 million impact from Hurricane Katrina-related work
delays (see Note 17 to the consolidated financial
statements in Part II, Item 8). The 2006 operating
margin includes a pension benefit resulting from the Pension
Protection Act of 2006. These increases were partially offset by
lower sales volume in the DDG 1000 program.
BACKLOG
Total backlog at December 31, 2007, was approximately
$64 billion. Total backlog includes both funded backlog
(unfilled 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. Major components in unfunded backlog as of
December 31, 2007, included various restricted programs and
the KEI program in the Mission Systems segment; the F-35 and
F/A-18
programs in the Integrated Systems segment; the NTS program in
the Technical Services segment; the NPOESS and restricted
programs in the Space Technology segment; Block II of the
Virginia class submarines program and the LHA program in
the Ships segment.
-47-
NORTHROP
GRUMMAN CORPORATION
The following table presents funded and unfunded backlog by
segment at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
$ in millions
|
|
Funded
|
|
|
Unfunded
|
|
|
Backlog
|
|
|
Funded
|
|
|
Unfunded
|
|
|
Backlog
|
|
Information & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
3,220
|
|
|
$
|
8,985
|
|
|
$
|
12,205
|
|
|
$
|
3,119
|
|
|
$
|
8,488
|
|
|
$
|
11,607
|
|
Information Technology
|
|
|
2,581
|
|
|
|
2,268
|
|
|
|
4,849
|
|
|
|
2,667
|
|
|
|
1,840
|
|
|
|
4,507
|
|
Technical Services
|
|
|
1,471
|
|
|
|
3,193
|
|
|
|
4,664
|
|
|
|
1,375
|
|
|
|
3,973
|
|
|
|
5,348
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
4,204
|
|
|
|
4,525
|
|
|
|
8,729
|
|
|
|
4,285
|
|
|
|
4,934
|
|
|
|
9,219
|
|
Space Technology
|
|
|
1,260
|
|
|
|
8,266
|
|
|
|
9,526
|
|
|
|
1,623
|
|
|
|
7,138
|
|
|
|
8,761
|
|
Electronics
|
|
|
8,446
|
|
|
|
2,062
|
|
|
|
10,508
|
|
|
|
6,576
|
|
|
|
1,583
|
|
|
|
8,159
|
|
Ships
|
|
|
10,348
|
|
|
|
3,230
|
|
|
|
13,578
|
|
|
|
10,854
|
|
|
|
2,566
|
|
|
|
13,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total backlog
|
|
$
|
31,530
|
|
|
$
|
32,529
|
|
|
$
|
64,059
|
|
|
$
|
30,499
|
|
|
$
|
30,522
|
|
|
$
|
61,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog is converted into the following years sales as
costs are incurred or deliveries are made. Approximately
66 percent of the 2007 year-end funded backlog is
expected to be converted into sales in 2008. Total
U.S. Government orders, including those made on behalf of
foreign governments, comprised 89 percent, 90 percent,
and 83 percent of the funded backlog at the end of 2007,
2006, and 2005, respectively. Total foreign customer orders
accounted for 6 percent, 5 percent, and
10 percent of the funded backlog at the end of 2007, 2006,
and 2005, respectively. Domestic commercial backlog represented
5 percent, 5 percent, and 7 percent of funded
backlog at the end of 2007, 2006, and 2005, respectively.
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, prudent capital expenditures, strategic business
acquisitions, investment in independent research and
development, debt repayments, required and voluntary pension
contributions, and returning cash to its shareholders through
increased 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, free cash flow, net debt-to-equity, and net
debt-to-capital. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net income
|
|
$
|
1,790
|
|
|
$
|
1,542
|
|
|
$
|
1,400
|
|
Non-cash income and
expense(1)
|
|
|
1,034
|
|
|
|
948
|
|
|
|
948
|
|
Retiree benefit funding in excess of expense
|
|
|
(50
|
)
|
|
|
(772
|
)
|
|
|
(22
|
)
|
Trade working capital reduction
|
|
|
142
|
|
|
|
144
|
|
|
|
49
|
|
Other
|
|
|
(12
|
)
|
|
|
(28
|
)
|
|
|
216
|
|
Cash used in discontinued operations
|
|
|
(14
|
)
|
|
|
(78
|
)
|
|
|
36
|
|
|
Cash provided by operating activities
|
|
$
|
2,890
|
|
|
$
|
1,756
|
|
|
$
|
2,627
|
|
|
|
|
|
(1) |
|
Includes depreciation & amortization, stock based
compensation expense and deferred taxes. |
-48-
NORTHROP
GRUMMAN CORPORATION
Free Cash
Flow
Free cash flow represents cash generated from operations
available for discretionary use after operational cash
requirements to improve or maintain levels of production have
been met. Free cash flow is a useful measure for investors as it
affects 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
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 GAAP as indicators of performance.
The table below reconciles cash provided by operations to free
cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash provided by operating activities
|
|
$
|
2,890
|
|
|
$
|
1,756
|
|
|
$
|
2,627
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(685
|
)
|
|
|
(737
|
)
|
|
|
(823
|
)
|
Outsourcing contract & related software costs
|
|
|
(137
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
Free cash flow from operations
|
|
$
|
2,068
|
|
|
$
|
942
|
|
|
$
|
1,804
|
|
|
Cash
Flows
The following is a discussion of the companys major
operating, investing and financing activities for each of the
three years in the period ended December 31, 2007, as
classified on the consolidated statements of cash flows located
in Part II, Item 8.
Operating
Activities
2007 Cash provided by operating activities in
2007 increased $1.1 billion as compared with 2006, and
reflects lower pension contributions, higher net income, and
continued trade working capital reductions. Pension plan
contributions totaled $342 million in 2007, of which
$200 million was voluntarily pre-funded compared with
contributions of $1.2 billion in 2006, of which
$800 million was voluntarily pre-funded.
Cash collected from customers increased by $2 billion, and
cash paid to suppliers and employees increased by
$635 million in 2007 as compared with 2006. Net cash
provided by operating activities for 2007 included the receipt
of $125 million of insurance proceeds related to Hurricane
Katrina, $52 million of federal and state income tax
refunds, and $21 million of interest income.
At December 31, 2007, net working capital (current assets
less current liabilities) was $340 million, as compared to
a working capital deficit of $28 million in 2006, primarily
due to a decrease in current income taxes payable as a result of
the adoption in 2007 of FIN 48.
2006 Cash provided by operating activities
was $1.8 billion as compared with $2.6 billion in
2005. The decrease was primarily due to contributions to the
companys pension plans totaling $1.2 billion, of
which $800 million was voluntarily pre-funded in the fourth
quarter, as compared to contributions of $415 million in
2005, of which $203 million was voluntarily pre-funded in
the fourth quarter.
Cash collected from customers decreased by $166 million,
and cash paid to suppliers and employees increased by
$361 million. Net cash from operating activities for 2006
included the receipt of $100 million of insurance proceeds
related to Hurricane Katrina, $60 million of federal and
state income tax refunds, and $45 million of interest
income.
At December 31, 2006, net working capital deficit (current
assets less current liabilities) was $28 million, primarily
reflecting a lower cash balance offset by a lower current
portion of long-term debt.
-49-
NORTHROP
GRUMMAN CORPORATION
2005 Cash provided by operating activities
was $2.6 billion. Net cash from operating activities for
2005 included the receipt of $89 million of insurance
proceeds related to Hurricane Katrina, $88 million of
federal and state income tax refunds, and $78 million of
interest, including interest on a state tax refund for research
and development credits for the years 1988 through 1990. These
cash inflows were partially offset by a payment of
$99 million for a litigation settlement.
Employer contributions to the companys pension plans were
$415 million in 2005, including voluntary pre-funding
payments of $203 million in 2005.
At December 31, 2005, net working capital deficit (current
assets less current liabilities) was $418 million.
Investing
Activities
2007 Cash used in investing activities was
$1.4 billion in 2007. During 2007, the company acquired
three businesses for $690 million (See Note 4 to the
consolidated financial statements in Part II, Item 8),
paid $137 million for outsourcing costs related to newly
acquired outsourcing services contracts, and released
$59 million of restricted cash related to the Gulf
Opportunity Zone Industrial Development Revenue Bonds (see
discussion in Financing Activities below) which was
partially offset by restrictions related to the Xinetics
purchase (see Note 4 to the consolidated financial
statements in Part II, Item 8).
Capital expenditures in 2007 were $685 million, including
$118 million to replace property damaged by Hurricane
Katrina and $47 million of capitalized software costs.
Capital expenditure commitments at December 31, 2007 were
approximately $668 million, which are expected to be paid
with cash on hand and restricted cash.
2006 Cash used in investing activities was
$601 million in 2006. During 2006, the company received
$209 million from the sale of the remaining
9.7 million of its TRW Auto common shares. Also during
2006, Ships received access to $200 million from the
issuance of Gulf Opportunity Zone Industrial Development Revenue
Bonds (see discussion in Financing Activities below) of which
$127 million remained restricted as of December 31,
2006. In addition, the company received $117 million of
insurance proceeds related to Hurricane Katrina, paid
$77 million for outsourcing costs related to newly acquired
outsourcing services contracts, and paid $35 million for
the purchase of an investment.
During 2006, the company also received $43 million from the
sales of the Interconnect Technologies assembly business unit
and Winchester.
Capital expenditures in 2006 were $737 million, including
$111 million to replace property damaged by Hurricane
Katrina and $36 million of capitalized software costs.
2005 Cash used in investing activities was
$855 million in 2005. During 2005, the company paid
$361 million to acquire two businesses. This includes the
acquisition of Confluent in September 2005 and Integic in March
2005. The company received $238 million from the sale of
investments, including $95 million for 3.4 million
common shares of Endwave and $143 million for
7.3 million common shares of TRW Auto. During 2005, the
company also received $57 million from the sale of Teldix.
The company received insurance proceeds of $38 million in
2005 to replace damaged property at the Ships segment as a
result of Hurricane Katrina.
Capital expenditures in 2005 were $823 million, including
$80 million to replace property damaged by Hurricane
Katrina and $41 million of capitalized software costs.
Financing
Activities
2007 Cash used in financing activities was
$1.5 billion comprised primarily of $1.2 billion in
share repurchases, $504 million of dividends paid to
shareholders, and $384 million in repayment of borrowings
under lines of credit (See Note 13 to the consolidated
financial statements in Part II, Item 8), partially
offset by $315 million in borrowings under lines of credit,
and $274 million in proceeds from exercises of stock
options.
-50-
NORTHROP
GRUMMAN CORPORATION
2006 Cash used in financing activities was
$1.7 billion comprised of $1.2 billion in repayments
of long-term debt, $825 million in share repurchases, and
$402 million of dividends paid to shareholders, partially
offset by $393 million in proceeds from exercises of stock
options and $200 million of debt incurred in relation to
the Gulf Opportunity Zone Industrial Development Revenue Bonds.
2005 Cash used in financing activities was
$1.4 billion comprised primarily of $1.2 billion in
share repurchases and $359 million in dividends paid to
shareholders, partially offset by $163 million in proceeds
from exercises of stock options.
Gulf Opportunity Zone Industrial Development Revenue
Bonds In December 2006, Ships entered into a
loan agreement with the Mississippi Business Finance Corporation
(MBFC) under which Ships received access to $200 million
from the issuance of Gulf Opportunity Zone Industrial
Development Revenue Bonds by the MBFC. The loan accrues interest
payable semi-annually at a fixed rate of 4.55 percent per
annum. The companys obligation related to these bonds is
recorded in long-term debt in the consolidated statements of
financial position in Part II, Item 8. The bonds are
subject to redemption at the companys discretion on or
after December 1, 2016, and will mature on December 1,
2028. The bond issuance proceeds must be used to finance the
construction, reconstruction, and renovation of the
companys interest in certain ship manufacturing and repair
facilities, or portions thereof, located in the state of
Mississippi. As of December 31, 2007 and 2006,
approximately $140 million and $73 million,
respectively, was used by Ships and the remaining
$60 million and $127 million, respectively, was
recorded in miscellaneous other assets as restricted cash in the
consolidated statements of financial position in Part II,
Item 8. Repayment of the bonds is guaranteed by the company.
Share Repurchases The table below summarizes
the companys share repurchases beginning January 1,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Repurchased
|
|
|
Amount
|
|
|
|
Total Shares
|
|
|
|
(in millions)
|
|
|
Authorized
|
|
Average Price
|
|
Retired
|
|
|
|
|
Authorization Date
|
|
(in billions)
|
|
Per Share
|
|
(in millions)
|
|
Date Completed
|
|
2007
|
|
2006
|
|
2005
|
October 26, 2004
|
|
$
|
1.0
|
|
|
$
|
54.83
|
|
|
|
18.2
|
|
|
September 2005
|
|
|
|
|
|
|
|
|
|
|
12.7
|
|
October 24, 2005
|
|
|
1.5
|
|
|
|
65.08
|
|
|
|
23.0
|
|
|
February 2007
|
|
|
2.3
|
|
|
|
11.6
|
|
|
|
9.1
|
|
December 14, 2006
|
|
|
1.0
|
|
|
|
75.96
|
|
|
|
13.1
|
|
|
November 2007
|
|
|
13.1
|
|
|
|
|
|
|
|
|
|
December 20, 2007
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.4
|
|
|
|
11.6
|
|
|
|
21.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As part of the share repurchase programs the company has entered
into four separate accelerated share repurchase agreements since
November 2005, with two different banks (the Banks) to
repurchase shares of common stock. In each case, shares were
immediately borrowed by the Banks that were then sold to and
canceled by the company. Subsequently, shares were purchased in
the open market by the Banks to settle their share borrowings.
The cost of the companys share repurchases was subject to
adjustment based on the actual cost of the shares subsequently
purchased by the Banks. If an additional amount is owed by the
company upon settlement, the price adjustment could have been
settled, at the companys option, in cash or in shares of
common stock.
The table below summarizes the accelerated share repurchase
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Amount
|
|
|
Shares
|
|
|
|
Final Average
|
|
of Shares
|
|
|
Repurchased
|
|
|
|
Purchase
|
|
Repurchased
|
Agreement Date
|
|
(in millions)
|
|
Completion Date
|
|
Price Per Share
|
|
(in millions)
|
November 4, 2005
|
|
|
9.1
|
|
|
March 1, 2006
|
|
$
|
59.05
|
|
|
$
|
537
|
|
March 6, 2006
|
|
|
11.6
|
|
|
May 26, 2006
|
|
|
68.01
|
|
|
|
788
|
|
February 21, 2007
|
|
|
8.0
|
|
|
June 7, 2007
|
|
|
73.86
|
|
|
|
592
|
|
July 30, 2007
|
|
|
6.5
|
|
|
September 17, 2007
|
|
|
77.27
|
|
|
|
502
|
|
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.
-51-
NORTHROP
GRUMMAN CORPORATION
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 December 31, 2007, the company has authorized
$2.5 billion for share repurchases.
Credit
Ratings
The companys credit ratings at December 31, 2007, are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard &
|
|
|
|
Fitch
|
|
|
Moodys
|
|
|
Poors
|
|
Long-term: Northrop Grumman
|
|
|
BBB+
|
|
|
|
Baa1
|
|
|
|
BBB+
|
|
In June 2007, Moodys Investors Service upgraded its
ratings on debt securities issued by the company. The long term
rating was changed to Baa1 from Baa2. In December 2007, Fitch
revised its outlook on the company to stable from positive.
Credit
Facility
In August of 2005, the company entered into a credit agreement
which provides for a five-year revolving credit facility in an
aggregate principal amount of $2 billion. The credit
facility permits the company to request additional lending
commitments from the lenders under the agreement or other
eligible lenders under certain circumstances, and thereby
increase the aggregate principal amount of the lending
commitments under the agreement by up to an additional
$500 million. The agreement provides for swingline loans
and letters of credit as sub-facilities for the credit
facilities provided for in the agreement. Borrowings under the
credit facility bear interest at various rates, including the
London Interbank Offered Rate (LIBOR), adjusted based on the
companys credit rating, or an alternate base rate plus an
incremental margin. The credit facility also requires a facility
fee based on the daily aggregate amount of commitments (whether
or not utilized) and the companys credit rating level. The
companys credit agreement contains certain financial
covenants relating to a maximum debt to capitalization ratio,
and certain restrictions on additional asset liens, unless
permitted by the agreement. As of December 31, 2007, the
company was in compliance with all covenants. In August of 2007,
the company entered into an amended and restated credit
agreement amending the companys 2005 credit agreement.
Concurrent with the effectiveness of the 2005 credit agreement,
the prior revolving credit agreement, for $2.5 billion, was
terminated. No principal or interest was outstanding or accrued
and unpaid under the prior agreement on its termination date.
In August of 2007, the company entered into an amended and
restated credit agreement amending the companys 2005
credit agreement. The agreement extends the maturity date of the
credit facility from August 5, 2010 to August 10, 2012
and provides improved pricing terms, reduced facility fees, and
full availability of the facility for letters of credit. At
December 31, 2007, and 2006, there was no balance
outstanding under this facility. There was a maximum of
$350 million borrowed under this facility during 2007 and
no borrowings during 2006.
Mandatorily
Redeemable Series B Convertible Preferred Stock
The company issued 3.5 million shares of mandatorily
redeemable Series B convertible preferred stock in April
2001. Each share of Series B preferred stock has a
liquidation value of $100 per share. The liquidation value, plus
accrued but unpaid dividends, is payable on April 4, 2021,
the mandatory redemption date. The company has the option to
redeem all, but not less than all, of the shares of
Series B preferred stock at any time after seven years from
the date of issuance for a number of shares of the
companys common stock equal to the liquidation value plus
accrued and unpaid dividends divided by the current market price
of common stock determined in relation to the date of
redemption. Under this option, had the redemption taken place at
December 31, 2007, each share would have been converted
into 1.261 shares of common stock. Each share of preferred
stock is convertible, at any time, at the option of the holder
into the right to receive shares of the companys common
stock. Initially, each share was convertible into
.911 shares of common stock, subject to adjustment in the
event of certain dividends and distributions, a stock split, a
merger, consolidation or sale of substantially all of the
-52-
NORTHROP
GRUMMAN CORPORATION
companys assets, a liquidation or distribution, and
certain other events. Had the conversion taken place at
December 31, 2007, each share would have been converted
into 1.822 shares of common stock. Holders of preferred
stock are entitled to cumulative annual cash dividends of $7 per
share, payable quarterly. Upon liquidation of the company, each
share of preferred stock is entitled to a liquidation preference
before any distribution may be made on the companys common
stock or any series of capital stock that is junior to the
Series B preferred stock. In the event of a change in
control of the company, holders of Series B preferred stock
also have specified exchange rights into common stock of the
company or into specified securities or property of another
entity participating in the change in control transaction. As of
December 31, 2007, 10 million shares of preferred
stock are authorized, of which 3.5 million shares
designated as Series B preferred are issued and
outstanding. No other shares of preferred stock are issued and
outstanding.
Subsequent Event On February 20, 2008,
the companys Board of Directors approved the redemption of
the Series B convertible preferred stock on April 4,
2008.
Other
Sources and Uses of Capital
Additional Capital To provide for long-term
liquidity, the company believes it can obtain additional
capital, if necessary, from such sources as the public or
private capital markets, the sale of assets, sale and leaseback
of operating assets, and leasing rather than purchasing new
assets. The company has an effective shelf registration on file
with the Securities and Exchange Commission to provide for the
issuance of up to $2 billion in debt and equity securities.
Cash on hand at the beginning of the year plus cash generated
from operations and cash available under credit lines are
expected to be sufficient in 2008 to service debt, finance
capital expansion projects, pay federal, foreign, and state
income taxes, and continue paying dividends to shareholders. The
company will continue to provide the productive capacity to
perform its existing contracts, prepare for future contracts,
and conduct research and development in the pursuit of
developing opportunities. While these expenditures tend to limit
short-term liquidity, they are made with the intention of
improving the long-term growth and profitability of the company.
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 by
insurance companies principally to guarantee the performance on
certain contracts and to support the companys self-insured
workers compensation plans. At December 31, 2007,
there were $439 million of unused stand-by letters of
credit, $148 million of bank guarantees, and
$538 million of surety bonds outstanding.
In December 2006, the company guaranteed a $200 million
loan made to Ships in connection with the Gulf Opportunity Zone
Industrial Revenue Bonds. Under the loan agreement the company
guaranteed repayment by Ships of the principal and interest to
the Trustee. The company also guaranteed payment of the
principal and interest by the Trustee to the underlying
bondholders.
Co-Operative Agreements In 2003, Ships
executed agreements with the states of Mississippi and Louisiana
whereby Ships leases facility improvements and equipment from
Mississippi and from a non-profit economic development
corporation in Louisiana in exchange for certain commitments by
Ships to these states. As of December 31, 2007, Ships has
fully met its obligations under the Mississippi agreement and
has met all but one requirement under the Louisiana agreement.
Failure by Ships to meet the remaining Louisiana commitment
would result in reimbursement by Ships to Louisiana in
accordance with the agreement. As of December 31, 2007,
Ships expects that the remaining commitment under the Louisiana
agreement will be met based on its most recent business plan.
-53-
NORTHROP
GRUMMAN CORPORATION
Contractual
Obligations
The following table presents the companys contractual
obligations as of December 31, 2007, and the estimated
timing of future cash payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 -
|
|
|
2011 -
|
|
|
2013 and
|
|
$ in millions
|
|
Total
|
|
|
2008
|
|
|
2010
|
|
|
2012
|
|
|
beyond
|
|
Long-term debt
|
|
$
|
3,989
|
|
|
$
|
111
|
|
|
$
|
564
|
|
|
$
|
776
|
|
|
$
|
2,538
|
|
Interest payments on long-term debt
|
|
|
3,793
|
|
|
|
290
|
|
|
|
530
|
|
|
|
406
|
|
|
|
2,567
|
|
Mandatorily redeemable convertible preferred stock
|
|
|
675
|
|
|
|
24
|
|
|
|
49
|
|
|
|
49
|
|
|
|
553
|
|
Operating leases
|
|
|
2,065
|
|
|
|
445
|
|
|
|
661
|
|
|
|
394
|
|
|
|
565
|
|
Purchase
obligations(1)
|
|
|
6,405
|
|
|
|
4,274
|
|
|
|
1,649
|
|
|
|
423
|
|
|
|
59
|
|
Other long-term
liabilities(2)
|
|
|
1,171
|
|
|
|
180
|
|
|
|
389
|
|
|
|
148
|
|
|
|
454
|
|
|
Total contractual obligations
|
|
$
|
18,098
|
|
|
$
|
5,324
|
|
|
$
|
3,842
|
|
|
$
|
2,196
|
|
|
$
|
6,736
|
|
|
|
|
|
|
|
|
(1) |
|
A purchase obligation is defined as an agreement to
purchase goods or services that is enforceable and legally
binding on the company and that specifies all significant terms,
including: fixed or minimum quantities to be purchased; fixed,
minimum, or variable price provisions; and the approximate
timing of the transaction. These amounts are primarily comprised
of open purchase order commitments to vendors and subcontractors
pertaining to funded contracts. |
|
(2) |
|
Other long-term liabilities primarily consist of accrued
workers compensation, deferred compensation, and other
miscellaneous liabilities, but excludes obligations for
uncertain tax positions of $477 million and long-term
deferred tax liabilities of $330 million, as the timing of
the payments cannot be reasonably estimated. |
The table above also excludes estimated minimum funding
requirements for retiree benefit plans as set forth by ERISA in
relation to the $3.4 billion pension and postretirement
benefit liability, totaling approximately $2.3 billion over
the next five years: $322 million in 2008,
$304 million in 2009, $307 million in 2010,
$499 million in 2011, and $844 million in 2012. The
company also has payments due under plans that are not required
to be funded in advance, but are funded on a pay-as-you-go
basis. See Note 18 to the consolidated financial statements
in Part II, Item 8.
Further details regarding long-term debt and operating leases
can be found in Notes 13 and 16, respectively, to the
consolidated financial statements in Part II, Item 8.
OTHER
MATTERS
New
Accounting Pronouncements
New accounting pronouncements have been issued by the FASB which
are not effective until after December 31, 2007. For
further discussion of new accounting standards, see Note 2
to the consolidated financial statements in Part II,
Item 8.
Off-Balance
Sheet Arrangements
As of December 31, 2007, the company had no significant
off-balance sheet arrangements other than operating leases. For
a description of the companys operating leases, see
Note 16 to the consolidated financial statements in
Part II, Item 8.
GLOSSARY
OF PROGRAMS
Listed below are brief descriptions of the programs mentioned in
this
Form 10-K.
|
|
|
Program Name
|
|
Program Description
|
Airborne Laser (ABL)
|
|
Design and develop the systems Chemical Oxygen Iodine
Laser (COIL) and the Beacon Illuminator Laser (BILL) for Missile
Defense Agencys Airborne Laser, providing a capability to
destroy boost-phase missiles at very long range.
|
-54-
NORTHROP
GRUMMAN CORPORATION
|
|
|
Program Name
|
|
Program Description
|
|
|
|
Advanced Extremely High Frequency (AEHF)
|
|
Provide the communication payload for the nations next
generation military strategic and tactical relay systems that
will deliver survivable, protected communications to U.S. forces
and selected allies worldwide.
|
|
|
|
Automated Flats Sorting Machine (AFSM) automated
induction (ai) Follow-On
|
|
Automated induction hardware deliveries to the U.S. Postal
Service. Ai allows for the automated prep of flat mail into
automation compatible trays and conveyed to the
AFSM-100
in-feed line
for sorting.
|
|
|
|
APG-66
|
|
Provide engineering services, technical support, spares and
repairs for the
AN/APG-66
fire control radar that is utilized for the
F-16 and
other military aircraft.
|
|
|
|
Advanced Self Protection Integrated Suite (ASPIS) II
|
|
Subcontract to Raytheon to design, develop, fabricate, test,
qualify, deliver and support the
AN/ALR-93(V)
Radar Warning Receiver/Electronic Warfare Suite Controller
(RWR/EWSC) Systems.
|
|
|
|
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.
|
|
|
|
Battle Command Training
|
|
Operates the computer-based simulations, models and automated
tools used for the collection and analysis of information used
by U.S. Army Battle Command Training Program.
|
|
|
|
Biohazard Detection System (BDS )
|
|
BDS flat mail screening to rapidly analyze and detect potential
biological threats at postal service mail-sorting facilities.
|
|
|
|
National Team Battle Management Command and Control (BMC2)
|
|
Provide technical talent and corporate reach back to the
industry team tasked to develop, field, and sustain a global
C2BM system for ballistic missile defense.
|
|
|
|
U.S. Citizenship and Immigration Services
|
|
Operate and maintain the Application Support Center facilities
for the U.S. Citizenship and Immigration Services, including
biometric capture, background check, application scheduling, and
facility leasing and maintenance.
|
|
|
|
Coast Guards Deepwater Program
|
|
Design, develop, construct and deploy surface assets to
recapitalize the Coast Guard.
|
|
|
|
Command Post Platform (CPP)
|
|
Provide a family of vehicles that host multiple battle command
and support software suites as well as communications equipment
that interface with digitized vehicles.
|
|
|
|
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.
|
|
|
|
E-2D Advanced Hawkeye
|
|
The E-2D
builds upon the Hawkeye 2000 configuration with significant
radar improvement performance. The
E-2D
provides over the horizon
|
-55-
NORTHROP
GRUMMAN CORPORATION
|
|
|
Program Name
|
|
Program Description
|
|
|
|
|
|
airborne early warning (AEW), surveillance, tracking, and
command and control capability to the U.S. Naval Battle Groups
and Joint Forces.
|
|
|
|
E-10A
|
|
Mission Execution Program (MEP) to continue to mature the
technologies of the
E-10A Battle
Management/Command and Control capabilities.
|
|
|
|
E/A-18G
|
|
Provide the Airborne Electronic Attack suite to Boeing which
includes the
ALQ-218 (V2)
receiving system, the
ALQ-227
communications countermeasures system and the Electronic Attack
Unit that interfaces with the legacy
F/A-18 air
vehicle.
|
|
|
|
Electro Optical & Infrared Countermeasures
|
|
Provides protection against the ground launched man portable
(MANPAD) infrared missile threat by automatically detecting
missile launch and jamming the missiles guidance system
with a laser beam, causing a miss. The
AAQ-24 is a
stand-alone electronic warfare system installed on over
380 USAF and international transport aircraft and
helicopters, is fully operational with the USAF and Royal Air
Force (RAF), and is the only laser DIRCM system available in the
world.
|
|
|
|
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-15 Repairs at Warner Robins
|
|
Avionics component repair, modifications, build to print, DMS
resolution, ATE builds, engineering services, and personnel
augmentation for the
F-15.
|
|
|
|
F-16 Block 60
|
|
Direct commercial firm fixed-price program with Lockheed Martin
Aeronautics Company to develop and produce 80 Lot systems for
aircraft delivery to the United Arab Emirates Air Force as well
as test equipment and spares to be used to support in- country
repairs of sensors.
|
|
|
|
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.
|
|
|
|
F-22
|
|
Joint venture with Raytheon to design, develop and produce the
F-22 radar
system. Northrop Grumman is responsible for the overall design
of the
AN/APG-77
and
AN/APG-77(V)
1 radar systems, including the control and signal
processing software and responsibility for the AESA radar
systems integration and test activities. In addition, Northrop
Grumman is responsible for overall design and integration of the
F- 22
Communication, Navigation, and Identification (CNI) system.
|
|
|
|
Falcon Edge
|
|
Provide an integrated Electronic Warfare suite that leverages
the latest radio frequency (RF) and digital technologies for air
warfare.
|
|
|
|
Force XXI Battle Brigade and Below (FBCB2)
|
|
Install in Army vehicles a system of computer hardware and
software that forms a wireless, tactical Internet for near-real-
time situational awareness and command and control on the
battlefield.
|
|
|
|
Ford Class
|
|
Design and construction for the new class of Aircraft Carriers.
|
-56-
NORTHROP
GRUMMAN CORPORATION
|
|
|
Program Name
|
|
Program Description
|
|
|
|
Flats Sequencing System/Postal Automation
|
|
Build systems for the U.S. Postal Service designed to further
automate the flats mail stream, which includes large envelopes,
catalogs and magazines.
|
|
|
|
Ft. Irwin Logistics Support Services (LSS)
|
|
Operate and manage a large-scale maintenance and repair program
involving tracked and wheeled vehicles, basic issue items,
communications equipment, and weapons needed for desert
training.
|
|
|
|
Ground/Air Task Oriented Radar (G/ATOR)
|
|
A development program to provide the next generation ground
based multi-mission radar for the USMC. Provides Short Range Air
Defense, Air Defense Surveillance, Ground Weapon Location and
Air Traffic Control. Replaces five existing USMC single-mission
radars.
|
|
|
|
George H. W. Bush (CVN 77)
|
|
The 10th
and final Nimitz-class aircraft carrier that
will incorporate many new design features, with expected
delivery to the Navy in late 2008.
|
|
|
|
Ground-Based Midcourse Defense Fire Control and Communications
(GFC/C)
|
|
Develop software to coordinate sensor and interceptor operations
during missile flight.
|
|
|
|
Hunter CLS
|
|
Operate, maintain, train and sustain the multi-mission Hunter
Unmanned Aerial System in addition to deploying Hunter support
teams.
|
|
|
|
Global Hawk High-Altitude, Long-Endurance Systems (HALE)
|
|
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.
|
|
|
|
Intercontinental Ballistic Missile (ICBM)
|
|
ICBM weapon systems by ensuring the systems total
performance.
|
|
|
|
Joint National Integration Center Research & Development
(JRDC)
|
|
Support the development and application of modeling and
simulation, wargaming, test and analytic tools for air and
missile defense.
|
|
|
|
Joint Base Operations Support
|
|
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.
|
|
|
|
James Webb Space Telescope (JWST)
|
|
Design, develop, integrate and test a space-based infrared
telescope satellite to observe the formation of the first stars
and galaxies in the universe.
|
|
|
|
Kinetic Energy Interceptor
|
|
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.
|
-57-
NORTHROP
GRUMMAN CORPORATION
|
|
|
Program Name
|
|
Program Description
|
|
|
|
LHA
|
|
Detail design and construct amphibious assault ships for use as
an integral part of joint, interagency, and multinational
maritime forces.
|
|
|
|
LHD
|
|
Build multipurpose amphibious assault ships.
|
|
|
|
Lightweight Laser Designator Rangefinder (LLDR)
|
|
Provide LLDRs to the U.S. Army for use in targeting enemy
positions in day/night/obscurant conditions which, in turn,
provides information to other members on the battlefield.
|
|
|
|
Longbow Missile
|
|
All-weather fire and forget precision strike weapon that uses a
millimeter-wave radar. The Longbow Missile is launched from the
Apache AH-64 helicopter. To date over 13,000 missiles have been
built for the U.S. Army and several international customers.
|
|
|
|
LPD
|
|
Build amphibious transport dock ships.
|
|
|
|
Mark VIIE
|
|
The next generation electro-optical day/night hand held target
location system used by Ground Forces.
|
|
|
|
MESA Korea
|
|
Consists of a 4 lot Multirole Electronically Scanned Array
(MESA) radar/Identification Friend or Foe subsystem delivery
with limited non-recurring engineering. The program also
includes associated spares, support equipment and installation
& check out activities, with direct and indirect offset
projects. Northrop Grummans customer is the Boeing
Company, with ultimate product delivery to the Republic of Korea
Air Force.
|
|
|
|
Multi-Platform Radar Technology Insertion Program
(MP-RTIP)
|
|
Design, develop, fabricate and test modular, scalable
2-dimensional
active electronically scanned array
(2D- AESA)
radars for integration on the
E-10A and
Global Hawk Airborne platforms. Also provides enhanced Wide Area
Surveillance system capabilities.
|
|
|
|
New York City Wireless
|
|
Provide New York Citys broadband public- safety wireless
network.
|
|
|
|
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.
|
|
|
|
National Geospatial- Intelligence Agency Enterprise Engineering
(NGA EE)
|
|
Deliver engineering services necessary to direct the planning,
development and implementation of all NGAs activities and
systems comprising the National System for Geospatial
Intelligence.
|
|
|
|
Network Centric Solution
|
|
Provide Network-Centric Information Technology, Networking,
Telephony and Security, Voice, Video and Data Communications
Commercial-off-the-Shelf products, system solutions, hardware
and software.
|
|
|
|
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.
|
-58-
NORTHROP
GRUMMAN CORPORATION
|
|
|
Program Name
|
|
Program Description
|
|
|
|
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.
|
|
|
|
Nevada Test Site (NTS)
|
|
Manage and operate the Nevada Test Site facility and provide
infrastructure support, including management of the nuclear
explosives safety team, support of hazardous chemical spill
testing, emergency response training and conventional weapons
testing.
|
|
|
|
Peace Eagle
|
|
Joint program with Boeing to supply MESA radar antenna for
Turkeys Peace Eagle 737 airborne early warning and
control aircraft.
|
|
|
|
San Diego County IT Outsourcing
|
|
Provide high-level IT consulting and services to San Diego
County including data center, help desk, desktop, network,
applications and cross-functional services.
|
|
|
|
Saudi Arabian National Guard (SANG)
|
|
Provides military training, logistics and support services to
modernize the Saudi Arabian National Guards capabilities
to unilaterally execute and sustain military operations.
|
|
|
|
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.
|
|
|
|
Space Based Space Surveillance (SBSS)
|
|
Develop initial capability for space-based surveillance of
resident space objects for missions such as deep space and near
earth object detection and tracking, deep space search, space
object identification, and monitoring of satellites.
|
|
|
|
Space Tracking and Surveillance System (STSS)
|
|
Develop a critical system for the nations missile defense
architecture employing low-earth orbit satellites with onboard
infrared sensors to detect, track and discriminate ballistic
missiles. The program includes two flight demonstration
satellites with subsequent development and production blocks of
satellites.
|
|
|
|
Treasury Communication System (TCS)
|
|
Provide telecommunications infrastructure for collaboration,
communication and computing as required by the U.S. Department
of Treasury.
|
|
|
|
USS Carl Vinson
|
|
Refueling and complex overhaul of the nuclear-powered aircraft
carrier USS Carl Vinson (CVN 70).
|
|
|
|
USS Toledo
|
|
Depot Modernization Period (DMP) being performed at Newport News
for this
688-class
submarine. A DMP is a midlife availability for extensive
modernization to improve war fighting capabilities and
maintenance to ensure the ship remains certified for
unrestricted operations to design test depth.
|
|
|
|
UK AWACS
|
|
Provide aircraft-maintenance and design-engineering support
services.
|
|
|
|
Virginia IT outsourcing
|
|
Provide high-level IT consulting and services to Virginia state
and local agencies including data center, help desk, desktop,
network, applications and cross-functional services.
|
-59-
NORTHROP
GRUMMAN CORPORATION
|
|
|
Program Name
|
|
Program Description
|
|
|
|
Vehicular Intercommunications Systems (VIS)
|
|
Provide clear and noise-free communications between crew members
inside combat vehicles and externally over as many as six combat
net radios for the U.S. Army. The active noise- reduction
features of VIS provide significant improvement in speech
intelligibility, hearing protection, and vehicle crew
performance.
|
|
|
|
Virginia-class Submarines
|
|
Construct the newest attack submarine in conjunction with
Electric Boat.
|
|
|
|
Warner Robins Fleet Sustainment Engineering
|
|
Sustains legacy weapons systems through the application of
engineering capabilities, including systems engineering,
hardware design, software development and maintenance,
logistics, electronic warfare, automated test equipment, and
avionics engineering.
|
|
|
|
Wedgetail
|
|
Joint program with Boeing to supply MESA radar antenna for
AEW&C aircraft.
|
|
|
Item 7A.
|
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 fixed-rate long-term debt
obligations, variable-rate short-term borrowings under the
credit agreement, short-term investments, and long-term notes
receivable. At December 31, 2007, substantially all
outstanding borrowings were fixed-rate long-term debt
obligations of which a significant portion are not callable
until maturity. The company has a modest exposure to interest
rate risk resulting from two interest rate swap agreements
described in Note 1 to the consolidated financial
statements in Part II, Item 8. 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 December 31, 2007 or 2006, and the
aforementioned interest rate swap agreements. See Note 13
to the consolidated financial statements in Part II,
Item 8.
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 December 31,
2007, and 2006, two interest rate swap agreements were in
effect. See Note 1 to the consolidated financial statements
in Part II, Item 8.
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
December 31, 2007, and 2006, the amount of foreign currency
forward contracts outstanding was not material. The company does
not consider the market risk exposure relating to foreign
currency exchange to be material to the consolidated financial
statements. See Note 1 to the consolidated financial
statements in Part II, Item 8.
-60-
NORTHROP
GRUMMAN CORPORATION
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE
CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Los Angeles, California
We have audited the accompanying consolidated statements of
financial position of Northrop Grumman Corporation and
subsidiaries (the Company) as of December 31,
2007 and 2006, and the related consolidated statements of
income, comprehensive income, changes in shareholders
equity, and cash flows for each of the three years in the period
ended December 31, 2007. Our audits also included the
financial statement schedule listed in the Index at
Item 15. These financial statements and the financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Northrop Grumman Corporation and subsidiaries at
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 12 to the consolidated financial
statements, the Company adopted, effective January 1, 2007,
a new accounting standard for income taxes. As discussed in
Note 18 to the consolidated financial statements, the
Company adopted, effective December 31, 2006, a new
accounting standard for retirement benefits.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2007, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 20, 2008 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
|
|
/s/ |
Deloitte & Touche LLP
|
Los Angeles, California
February 20, 2008
-61-
NORTHROP
GRUMMAN CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
$ in millions, except per
share
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
18,730
|
|
|
$
|
18,394
|
|
|
$
|
19,471
|
|
Service revenues
|
|
|
13,288
|
|
|
|
11,719
|
|
|
|
10,507
|
|
|
Total sales and service revenues
|
|
|
32,018
|
|
|
|
30,113
|
|
|
|
29,978
|
|
|
Cost of Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
14,474
|
|
|
|
14,380
|
|
|
|
15,543
|
|
Cost of service revenues
|
|
|
11,330
|
|
|
|
10,242
|
|
|
|
9,355
|
|
General and administrative expenses
|
|
|
3,208
|
|
|
|
3,027
|
|
|
|
2,880
|
|
|
Operating margin
|
|
|
3,006
|
|
|
|
2,464
|
|
|
|
2,200
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
28
|
|
|
|
44
|
|
|
|
54
|
|
Interest expense
|
|
|
(336
|
)
|
|
|
(347
|
)
|
|
|
(388
|
)
|
Other, net
|
|
|
(12
|
)
|
|
|
125
|
|
|
|
199
|
|
|
Income from continuing operations before income taxes
|
|
|
2,686
|
|
|
|
2,286
|
|
|
|
2,065
|
|
Federal and foreign income taxes
|
|
|
883
|
|
|
|
713
|
|
|
|
669
|
|
|
Income from continuing operations
|
|
|
1,803
|
|
|
|
1,573
|
|
|
|
1,396
|
|
(Loss) gain from discontinued operations, net of tax
|
|
|
(13
|
)
|
|
|
(31
|
)
|
|
|
4
|
|
|
Net income
|
|
$
|
1,790
|
|
|
$
|
1,542
|
|
|
$
|
1,400
|
|
|
Basic Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
5.28
|
|
|
$
|
4.55
|
|
|
$
|
3.92
|
|
Discontinued operations
|
|
|
(.04
|
)
|
|
|
(.09
|
)
|
|
|
.01
|
|
|
Basic earnings per share
|
|
$
|
5.24
|
|
|
$
|
4.46
|
|
|
$
|
3.93
|
|
|
Weighted-average common shares outstanding, in millions
|
|
|
341.7
|
|
|
|
345.7
|
|
|
|
356.5
|
|
|
Diluted Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
5.16
|
|
|
$
|
4.46
|
|
|
$
|
3.84
|
|
Discontinued operations
|
|
|
(.04
|
)
|
|
|
(.09
|
)
|
|
|
.01
|
|
|
Diluted earnings per share
|
|
$
|
5.12
|
|
|
$
|
4.37
|
|
|
$
|
3.85
|
|
|
Weighted-average diluted shares outstanding, in millions
|
|
|
354.3
|
|
|
|
358.6
|
|
|
|
363.2
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-62-
NORTHROP
GRUMMAN CORPORATION
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
963
|
|
|
$
|
1,015
|
|
Accounts receivable, net
|
|
|
3,813
|
|
|
|
3,562
|
|
Inventoried costs, net
|
|
|
1,045
|
|
|
|
1,176
|
|
Deferred income taxes
|
|
|
542
|
|
|
|
706
|
|
Prepaid expenses and other current assets
|
|
|
409
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,772
|
|
|
|
6,725
|
|
|
|
|
|
|
|
|
|
|
Property, Plant, and Equipment
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
605
|
|
|
|
588
|
|
Buildings
|
|
|
2,249
|
|
|
|
2,079
|
|
Machinery and other equipment
|
|
|
4,775
|
|
|
|
4,415
|
|
Leasehold improvements
|
|
|
526
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,155
|
|
|
|
7,529
|
|
Accumulated depreciation
|
|
|
(3,440
|
)
|
|
|
(3,004
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
4,715
|
|
|
|
4,525
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
17,672
|
|
|
|
17,219
|
|
Other purchased intangibles, net of accumulated amortization of
$1,687 in 2007 and $1,555 in 2006
|
|
|
1,074
|
|
|
|
1,139
|
|
Pension and postretirement benefits asset
|
|
|
2,080
|
|
|
|
1,349
|
|
Miscellaneous other assets
|
|
|
1,060
|
|
|
|
1,052
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
21,886
|
|
|
|
20,759
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
33,373
|
|
|
$
|
32,009
|
|
|
|
|
|
|
|
|
|
|
-63-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Notes payable to banks
|
|
$
|
26
|
|
|
$
|
95
|
|
Current portion of long-term debt
|
|
|
111
|
|
|
|
75
|
|
Trade accounts payable
|
|
|
1,901
|
|
|
|
1,682
|
|
Accrued employees compensation
|
|
|
1,180
|
|
|
|
1,176
|
|
Advance payments and billings in excess of costs incurred
|
|
|
1,563
|
|
|
|
1,571
|
|
Income tax payable
|
|
|
|
|
|
|
535
|
|
Other current liabilities
|
|
|
1,651
|
|
|
|
1,619
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,432
|
|
|
|
6,753
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
3,918
|
|
|
|
3,992
|
|
Mandatorily redeemable preferred stock
|
|
|
350
|
|
|
|
350
|
|
Pension and postretirement benefits liability
|
|
|
3,008
|
|
|
|
3,302
|
|
Other long-term liabilities
|
|
|
1,978
|
|
|
|
997
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,686
|
|
|
|
15,394
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 16)
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock, $1 par value; 800,000,000 shares
authorized; issued and outstanding: 2007337,834,561;
2006345,921,809
|
|
|
338
|
|
|
|
346
|
|
Paid-in capital
|
|
|
10,661
|
|
|
|
11,346
|
|
Retained earnings
|
|
|
7,387
|
|
|
|
6,183
|
|
Accumulated other comprehensive loss
|
|
|
(699
|
)
|
|
|
(1,260
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
17,687
|
|
|
|
16,615
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
33,373
|
|
|
$
|
32,009
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-64-
NORTHROP
GRUMMAN CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net income
|
|
$
|
1,790
|
|
|
$
|
1,542
|
|
|
$
|
1,400
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation adjustment
|
|
|
12
|
|
|
|
22
|
|
|
|
(14
|
)
|
Change in unrealized gain (loss) on marketable securities, net
of tax (expense) benefit of ($1) in 2007 and $2 in 2006
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
(1
|
)
|
Reclassification adjustment on write-down of marketable
securities, net of tax of ($5)
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Reclassification adjustment on sale of marketable securities,
net of tax of $19
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
Additional minimum pension liability adjustment, net of tax of
($32)
|
|
|
|
|
|
|
40
|
|
|
|
|
|
Change in unamortized benefit plan costs, net of tax of ($384)
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
607
|
|
|
|
67
|
|
|
|
(44
|
)
|
|
Comprehensive income
|
|
$
|
2,397
|
|
|
$
|
1,609
|
|
|
$
|
1,356
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-65-
NORTHROP
GRUMMAN CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Sources of CashContinuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Progress payments
|
|
$
|
7,490
|
|
|
$
|
6,797
|
|
|
$
|
6,644
|
|
Other collections
|
|
|
24,570
|
|
|
|
23,303
|
|
|
|
23,622
|
|
Insurance proceeds received
|
|
|
125
|
|
|
|
100
|
|
|
|
89
|
|
Income tax refunds received
|
|
|
52
|
|
|
|
60
|
|
|
|
88
|
|
Interest received
|
|
|
21
|
|
|
|
45
|
|
|
|
78
|
|
Other cash receipts
|
|
|
34
|
|
|
|
42
|
|
|
|
51
|
|
|
Total sources of cashcontinuing operations
|
|
|
32,292
|
|
|
|
30,347
|
|
|
|
30,572
|
|
|
Uses of CashContinuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid to suppliers and employees
|
|
|
(28,024
|
)
|
|
|
(27,389
|
)
|
|
|
(27,028
|
)
|
Interest paid
|
|
|
(355
|
)
|
|
|
(366
|
)
|
|
|
(404
|
)
|
Income taxes paid
|
|
|
(905
|
)
|
|
|
(678
|
)
|
|
|
(419
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
(52
|
)
|
|
|
(57
|
)
|
|
|
|
|
Payments for litigation settlements
|
|
|
(33
|
)
|
|
|
(11
|
)
|
|
|
(99
|
)
|
Other cash payments
|
|
|
(19
|
)
|
|
|
(12
|
)
|
|
|
(31
|
)
|
|
Total uses of cashcontinuing operations
|
|
|
(29,388
|
)
|
|
|
(28,513
|
)
|
|
|
(27,981
|
)
|
|
Cash provided by continuing operations
|
|
|
2,904
|
|
|
|
1,834
|
|
|
|
2,591
|
|
Cash (used in) provided by discontinued operations
|
|
|
(14
|
)
|
|
|
(78
|
)
|
|
|
36
|
|
|
Net cash provided by operating activities
|
|
|
2,890
|
|
|
|
1,756
|
|
|
|
2,627
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of businesses, net of cash divested
|
|
|
|
|
|
|
43
|
|
|
|
57
|
|
Payments for businesses purchased, net of cash acquired
|
|
|
(690
|
)
|
|
|
|
|
|
|
(361
|
)
|
Proceeds from sale of property, plant, and equipment
|
|
|
22
|
|
|
|
21
|
|
|
|
11
|
|
Additions to property, plant, and equipment
|
|
|
(685
|
)
|
|
|
(737
|
)
|
|
|
(823
|
)
|
Proceeds from insurance carrier
|
|
|
4
|
|
|
|
117
|
|
|
|
38
|
|
Proceeds from sale of investments
|
|
|
|
|
|
|
209
|
|
|
|
238
|
|
Payment for purchase of investment
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
Restriction of cash, net of restrictions released
|
|
|
59
|
|
|
|
(127
|
)
|
|
|
|
|
Payments for outsourcing contract costs
|
|
|
(137
|
)
|
|
|
(77
|
)
|
|
|
|
|
Other investing activities, net
|
|
|
(3
|
)
|
|
|
(15
|
)
|
|
|
(15
|
)
|
|
Net cash used in investing activities
|
|
|
(1,430
|
)
|
|
|
(601
|
)
|
|
|
(855
|
)
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under lines of credit
|
|
|
315
|
|
|
|
47
|
|
|
|
62
|
|
Repayment of borrowings under lines of credit
|
|
|
(384
|
)
|
|
|
(3
|
)
|
|
|
(21
|
)
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
200
|
|
|
|
|
|
Principal payments of long-term debt
|
|
|
(90
|
)
|
|
|
(1,212
|
)
|
|
|
(32
|
)
|
Proceeds from exercises of stock options and issuances of common
stock
|
|
|
274
|
|
|
|
393
|
|
|
|
163
|
|
Dividends paid
|
|
|
(504
|
)
|
|
|
(402
|
)
|
|
|
(359
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
52
|
|
|
|
57
|
|
|
|
|
|
Common stock repurchases
|
|
|
(1,175
|
)
|
|
|
(825
|
)
|
|
|
(1,210
|
)
|
|
Net cash used in financing activities
|
|
|
(1,512
|
)
|
|
|
(1,745
|
)
|
|
|
(1,397
|
)
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(52
|
)
|
|
|
(590
|
)
|
|
|
375
|
|
Cash and cash equivalents, beginning of year
|
|
|
1,015
|
|
|
|
1,605
|
|
|
|
1,230
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
963
|
|
|
$
|
1,015
|
|
|
$
|
1,605
|
|
|
-66-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Reconciliation of Net Income to Net Cash Provided by
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,790
|
|
|
$
|
1,542
|
|
|
$
|
1,400
|
|
Adjustments to reconcile to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
578
|
|
|
|
569
|
|
|
|
556
|
|
Amortization of assets
|
|
|
152
|
|
|
|
136
|
|
|
|
216
|
|
Stock-based compensation
|
|
|
196
|
|
|
|
184
|
|
|
|
172
|
|
Excess tax benefits from stock-based compensation
|
|
|
(52
|
)
|
|
|
(57
|
)
|
|
|
|
|
Loss on disposals of property, plant, and equipment
|
|
|
19
|
|
|
|
6
|
|
|
|
21
|
|
Impairment of property, plant, and equipment damaged by
Hurricane Katrina
|
|
|
|
|
|
|
37
|
|
|
|
61
|
|
Amortization of long-term debt premium
|
|
|
(11
|
)
|
|
|
(14
|
)
|
|
|
(18
|
)
|
Net gain on investments
|
|
|
(23
|
)
|
|
|
(96
|
)
|
|
|
(165
|
)
|
Decrease (increase) in
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,487
|
)
|
|
|
(2,222
|
)
|
|
|
(5,314
|
)
|
Inventoried costs
|
|
|
8
|
|
|
|
(76
|
)
|
|
|
(234
|
)
|
Prepaid expenses and other current assets
|
|
|
9
|
|
|
|
(10
|
)
|
|
|
(85
|
)
|
Increase (decrease) in
|
|
|
|
|
|
|
|
|
|
|
|
|
Progress payments
|
|
|
6,513
|
|
|
|
2,261
|
|
|
|
5,249
|
|
Accounts payable and accruals
|
|
|
108
|
|
|
|
181
|
|
|
|
348
|
|
Deferred income taxes
|
|
|
175
|
|
|
|
183
|
|
|
|
105
|
|
Income taxes payable
|
|
|
(59
|
)
|
|
|
(68
|
)
|
|
|
295
|
|
Retiree benefits
|
|
|
(50
|
)
|
|
|
(772
|
)
|
|
|
(22
|
)
|
Other non-cash transactions, net
|
|
|
38
|
|
|
|
50
|
|
|
|
6
|
|
|
Cash provided by continuing operations
|
|
|
2,904
|
|
|
|
1,834
|
|
|
|
2,591
|
|
Cash (used in) provided by discontinued operations
|
|
|
(14
|
)
|
|
|
(78
|
)
|
|
|
36
|
|
|
Net cash provided by operating activities
|
|
$
|
2,890
|
|
|
$
|
1,756
|
|
|
$
|
2,627
|
|
|
Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated affiliate
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
Sales of businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed by purchaser
|
|
|
|
|
|
|
|
|
|
$
|
41
|
|
|
Purchase of businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired, including goodwill
|
|
$
|
879
|
|
|
|
|
|
|
$
|
399
|
|
Cash paid for businesses purchased
|
|
|
(690
|
)
|
|
|
|
|
|
|
(361
|
)
|
Non-cash consideration given for businesses purchased
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
$
|
136
|
|
|
|
|
|
|
$
|
38
|
|
|
Capital leases
|
|
$
|
35
|
|
|
|
|
|
|
$
|
9
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-67-
NORTHROP
GRUMMAN CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
$ in millions, except per
share
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
$
|
346
|
|
|
$
|
347
|
|
|
$
|
364
|
|
Common stock repurchased
|
|
|
(15
|
)
|
|
|
(12
|
)
|
|
|
(22
|
)
|
Employee stock awards and options
|
|
|
7
|
|
|
|
11
|
|
|
|
5
|
|
|
At end of year
|
|
|
338
|
|
|
|
346
|
|
|
|
347
|
|
|
Paid-in Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
|
11,346
|
|
|
|
11,571
|
|
|
|
12,426
|
|
Common stock repurchased
|
|
|
(1,160
|
)
|
|
|
(813
|
)
|
|
|
(1,165
|
)
|
Employee stock awards and options
|
|
|
475
|
|
|
|
588
|
|
|
|
310
|
|
|
At end of year
|
|
|
10,661
|
|
|
|
11,346
|
|
|
|
11,571
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
|
6,183
|
|
|
|
5,055
|
|
|
|
4,014
|
|
Net income
|
|
|
1,790
|
|
|
|
1,542
|
|
|
|
1,400
|
|
Adjustment to initially apply FIN 48
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
(520
|
)
|
|
|
(414
|
)
|
|
|
(359
|
)
|
|
At end of year
|
|
|
7,387
|
|
|
|
6,183
|
|
|
|
5,055
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
|
(1,260
|
)
|
|
|
(145
|
)
|
|
|
(101
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
607
|
|
|
|
67
|
|
|
|
(44
|
)
|
Adjustment to initially apply SFAS No. 158, net of tax
of $838
|
|
|
|
|
|
|
(1,182
|
)
|
|
|
|
|
Adjustment to deferred tax benefit recorded on adoption of
SFAS No. 158
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
At end of year
|
|
|
(699
|
)
|
|
|
(1,260
|
)
|
|
|
(145
|
)
|
|
Total shareholders equity
|
|
$
|
17,687
|
|
|
$
|
16,615
|
|
|
$
|
16,828
|
|
|
Cash dividends declared per share
|
|
$
|
1.48
|
|
|
$
|
1.16
|
|
|
$
|
1.01
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-68-
NORTHROP
GRUMMAN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations Northrop Grumman
Corporation and its subsidiaries (Northrop Grumman or the
company) provide technologically advanced, innovative products,
services, and solutions in information and services, aerospace,
electronics, and shipbuilding. As prime contractor, principal
subcontractor, partner, or preferred supplier, Northrop Grumman
participates in many high-priority defense and non-defense
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 is therefore affected by, among other things,
the federal budget process. The company also conducts business
with local, state, and foreign governments and makes domestic
and international commercial sales.
Principles of Consolidation The consolidated
financial statements include the accounts of Northrop Grumman
and its subsidiaries. All intercompany accounts, transactions,
and profits among Northrop Grumman and its subsidiaries are
eliminated in consolidation.
Accounting Estimates The companys
financial statements are in conformity with accounting
principles generally accepted in the United States of America.
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.
Revenue Recognition As a defense contractor
engaging in long-term contracts, the majority of the
companys business is derived from long-term contracts for
the construction of facilities, production of goods, and
services provided to the federal government. In accounting for
these contracts, the company extensively utilizes the
cost-to-cost and the units-of-delivery measures of the
percentage-of-completion method of accounting. Sales under
cost-reimbursement contracts and construction-type contracts
that provide for delivery at a low volume per year or a small
number of units after a lengthy period of time over which a
significant amount of costs have been incurred are accounted for
using the cost-to-cost measure of the percentage-of-completion
method of accounting. Under this method, sales, including
estimated earned fees or profits, are recorded as costs are
incurred. For most contracts, sales are calculated based on the
percentage that total costs incurred bear to total estimated
costs at completion. For certain contracts with large up-front
purchases of material, sales are calculated based on the
percentage that direct labor costs incurred bear to total
estimated direct labor costs. Sales under construction-type
contracts that provide for delivery at a high volume per year
are accounted for using the units-of-delivery measure of the
percentage-of-completion method of accounting. Under this
method, sales are recognized as deliveries are made to the
customer generally using unit sales values in accordance with
the contract terms. The company estimates profit as the
difference between total estimated revenue and total estimated
cost of a contract and recognizes that profit over the life of
the contract based on deliveries. The company classifies
contract revenues as product sales or service revenues depending
upon the predominant attributes of the relevant underlying
contracts.
Certain contracts contain provisions for price redetermination
or for cost
and/or
performance incentives. Such redetermined amounts or incentives
are included in sales when the amounts can reasonably be
determined and estimated. Amounts representing contract change
orders, claims, requests for equitable adjustment, or
limitations in funding are included in sales only when they can
be reliably estimated and realization is probable. In the period
in which it is determined that a loss will result from the
performance of a contract, the entire amount of the estimated
ultimate loss is charged against income. Loss provisions are
first offset against costs that are included in inventories,
with any remaining amount reflected in liabilities. Changes in
estimates of contract sales, costs, and profits are recognized
using the cumulative
catch-up
method of accounting. This method recognizes in the current
period the cumulative effect of the changes on current and prior
periods. Hence, the effect of the changes on future periods of
contract performance is recognized as if the revised estimates
had been the original
-69-
NORTHROP
GRUMMAN CORPORATION
estimates. A significant change in an estimate on one or more
contracts could have a material adverse effect on the
companys consolidated financial position or results of
operations.
Revenue under contracts to provide services to non-federal
government customers are generally recognized when services are
performed. Service contracts include operations and maintenance
contracts, and outsourcing-type arrangements, primarily in the
Information Technology segment. Revenue under such contracts is
generally recognized on a straight-line basis over the period of
contract performance, unless evidence suggests that the revenue
is earned or the obligations are fulfilled in a different
pattern. Costs incurred under these service contracts are
expensed as incurred, except that direct and incremental
set-up costs
are capitalized and amortized over the life of the agreement.
Operating profit related to such service contracts may fluctuate
from period to period, particularly in the earlier phases of the
contract.
Service contracts that include more than one type of product or
service are accounted for under the provisions of Emerging
Issues Task Force (EITF) Issue
No. 00-21
Revenue Arrangements with Multiple Deliverables.
Accordingly, for applicable arrangements, revenue
recognition includes the proper identification of separate units
of accounting and the allocation of revenue across all elements
based on relative fair values.
Research and Development Company-sponsored
research and development activities primarily include
independent research and development (IR&D) efforts related
to government programs. IR&D expenses are included in
general and administrative expenses and are generally allocated
to U.S. Government contracts. Company-sponsored research
and development expenses totaled $537 million,
$572 million, and $536 million in 2007, 2006, and
2005, respectively. Expenses for research and development
sponsored by the customer are charged directly to the related
contracts.
Product Warranty Costs The company provides
certain product warranties that require repair or replacement of
non-conforming items for a specified period of time. Most of the
companys product warranties are provided under government
contracts, the costs of which are incorporated into contract
pricing. Accrued product warranty costs of $80 million and
$81 million were included in other current liabilities at
December 31, 2007, and 2006, respectively.
Environmental Costs Environmental liabilities
are accrued when the company determines it is responsible for
remediation costs and such amounts are reasonably estimable.
When only a range of amounts is established and no amount within
the range is more probable than another, the minimum amount in
the range is recorded. Environmental liabilities are recorded on
an undiscounted basis. At sites involving multiple parties, the
company accrues environmental liabilities based upon its
expected share of liability, taking into account the financial
viability of other jointly liable parties. Environmental
expenditures are expensed or capitalized as appropriate.
Capitalized expenditures relate to long-lived improvements in
currently operating facilities. The company does not anticipate
and record insurance recoveries before collection is probable.
At December 31, 2007, and 2006, the company did not have
any accrued receivables related to insurance reimbursements or
recoveries for environmental matters.
Derivative Financial Instruments Derivative
financial instruments are recognized as assets or liabilities in
the financial statements and measured at fair value. Changes in
the fair value of derivative financial instruments that qualify
and are designated as fair value hedges are required to be
recorded in income from continuing operations, while changes in
the fair value of derivative financial instruments that qualify
and are designated as cash flow hedges are recorded in other
comprehensive income. The company may use derivative financial
instruments to manage its exposure to interest rate risk and to
balance its fixed and variable rate long-term debt portfolio.
The company does not use derivative financial instruments for
trading purposes, nor does it use leveraged financial
instruments. Credit risk related to derivative financial
instruments is considered minimal and is managed by requiring
high credit standards for its counterparties and periodic
settlements.
The company enters into foreign currency forward contracts to
manage foreign currency exchange risk related to receipts from
customers and payments to suppliers denominated in foreign
currencies. Gains and losses from such
-70-
NORTHROP
GRUMMAN CORPORATION
transactions are included as contract costs. At
December 31, 2007 and 2006, the amount of foreign currency
forward contracts outstanding was not material.
The company enters into interest rate swap agreements to benefit
from floating interest rates as an offset to the fixed-rate
characteristic of certain of its long-term debt instruments. At
December 31, 2007, two interest rate swap agreements were
in effect and accounted for as fair value hedges designed to
convert fixed rates to floating rates. These interest rate swaps
each hedge a $200 million notional amount of
U.S. dollar fixed-rate debt, and mature on October 15,
2009, and February 15, 2011, respectively. Any changes in
the fair value of the swaps are offset by an equal and opposite
change in the fair value of the hedged item; therefore, there is
no net impact to the companys reported consolidated
results of operations. At December 31, 2007 and 2006, the
aggregate net fair value of the swaps was not material. The
company may also enter into interest rate swap agreements to
offset the variable-rate characteristics of certain
variable-rate term loans which may be outstanding from time to
time under the companys credit facility (see Note 13).
Other, net For 2006, Other, net primarily
consisted of a pre-tax gain of $111 million related to the
sale of the companys remaining 9.7 million TRW
Automotive (TRW Auto) shares. For 2005, Other, net primarily
consisted of the sale of 7.3 million TRW Auto shares and
approximately 3.4 million Endwave shares, which generated
pre-tax gains of $70 million and $95 million,
respectively.
Income Taxes Provisions for federal, foreign,
state, and local income taxes are calculated on reported
financial statement pre-tax income based on current tax law and
include the cumulative effect of any changes in tax rates from
those used previously in determining deferred tax assets and
liabilities. Such provisions differ from the amounts currently
payable because certain items of income and expense are
recognized in different time periods for financial reporting
purposes than for income tax purposes. If a tax position does
not meet the minimum statutory threshold to avoid payment of
penalties, the company recognizes an expense for the amount of
the penalty in the period the tax position is claimed in the tax
return of the company. The company recognizes interest accrued
related to unrecognized tax benefits in income tax expense.
Penalties, if probable and reasonably estimable, are recognized
as a component of income tax expense. State and local income and
franchise tax provisions are allocable to contracts in process
and, accordingly, are included in general and administrative
expenses.
In accordance with the recognition standards established by
Financial Accounting Standards Board (FASB) Interpretation No.
(FIN) 48 Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement 109,
the company makes a comprehensive review of its portfolio of
uncertain tax positions regularly. In this regard, an uncertain
tax position represents the companys expected treatment of
a tax position taken in a filed tax return, or planned to be
taken in a future tax return or claim, that has not been
reflected in measuring income tax expense for financial
reporting purposes. Until these positions are sustained by the
taxing authorities, the company has not recognized the tax
benefits resulting from such positions and reports the tax
effects as a liability for uncertain tax positions in its
consolidated statements of financial position.
Cash and Cash Equivalents Cash and cash
equivalents include interest-earning debt instruments that
mature in three months or less from the date purchased.
Marketable Securities At December 31,
2007, and 2006, substantially all of the companys
investments in marketable securities were classified as
available-for-sale or trading. For available-for-sale
securities, any unrealized gains and losses are reported as a
separate component of shareholders equity. Unrealized
gains and losses on trading securities are included in Other,
net in the consolidated statements of income and were not
material to any period presented. The fair values of these
marketable securities are determined based on prevailing market
prices.
Accounts Receivable Accounts receivable
include amounts billed and currently due from customers, amounts
currently due but unbilled (primarily related to contracts
accounted for under the cost-to-cost measure of the
percentage-of-completion method of accounting), certain
estimated contract changes, claims or requests for
-71-
NORTHROP
GRUMMAN CORPORATION
equitable adjustment in negotiation that are probable of
recovery, and amounts retained by the customer pending contract
completion.
Inventoried Costs Inventoried costs primarily
relate to work in process under fixed-price, units-of-delivery
contracts. These costs represent accumulated contract costs less
the portion of such costs allocated to delivered items.
Accumulated contract costs include direct production costs,
factory and engineering overhead, production tooling costs, and,
for government contracts, allowable general and administrative
expenses. The ratio of inventoried general and administrative
expenses to total inventoried costs is estimated to be the same
as the ratio of total general and administrative expenses
incurred to total contract costs incurred. According to the
provisions of U.S. Government contracts, the customer
asserts title to, or a security interest in, inventories related
to such contracts as a result of contract advances,
performance-based payments, and progress payments. General
corporate expenses and IR&D allocable to commercial
contracts are expensed as incurred. In accordance with industry
practice, inventoried costs are classified as a current asset
and include amounts related to contracts having production
cycles longer than one year. Product inventory primarily
consists of raw materials and is stated at the lower of cost or
market, generally using the average cost method.
Outsourcing Contract Costs Costs on
outsourcing contracts, including costs incurred for bid and
proposal activities, are generally expensed as incurred.
However, certain costs incurred upon initiation of an
outsourcing contract are deferred and expensed over the contract
life. These costs represent incremental external costs or
certain specific internal costs that are directly related to the
contract acquisition and transition/set-up. The primary types of
costs that may be capitalized include labor and related fringe
benefits, subcontractor costs, and travel costs.
Depreciable Properties Property, plant, and
equipment owned by the company are depreciated over the
estimated useful lives of individual assets. Costs incurred for
computer software developed or obtained for internal use are
capitalized and classified in machinery and other equipment.
Most of these assets are depreciated using declining-balance
methods, with the remainder using the straight-line method, with
the following lives:
|
|
|
|
|
|
|
Years
|
|
Land improvements
|
|
|
2-45
|
|
Buildings and improvements
|
|
|
2-45
|
|
Machinery and other equipment
|
|
|
2-25
|
|
Capitalized software costs
|
|
|
3-5
|
|
Leasehold improvements
|
|
|
Length of lease
|
|
|
Restricted Cash Access to proceeds from the
Gulf Opportunity Zone Industrial Development Revenue Bonds (see
Note 13) is restricted to certain capital
expenditures. As such, the amount of unexpended proceeds
available is recorded in miscellaneous other assets as
restricted cash in the consolidated statements of financial
position.
Leases The company uses its incremental
borrowing rate in the assessment of lease classification as
capital or operating and defines the initial lease term to
include renewal options determined to be reasonably assured. The
company conducts operations primarily under operating leases.
Most lease agreements contain incentives for tenant
improvements, rent holidays, or rent escalation clauses. For
incentives for tenant improvements, the company records a
deferred rent liability and amortizes the deferred rent over the
term of the lease as a reduction to rent expense. For rent
holidays and rent escalation clauses during the lease term, the
company records minimum rental expenses on a straight-line basis
over the term of the lease. For purposes of recognizing lease
incentives, the company uses the date of initial possession as
the commencement date, which is generally when the company is
given the right of access to the space and begins to make
improvements in preparation of intended use.
Goodwill and Other Purchased Intangible
Assets The company performs impairment tests for
goodwill as of November 30th of each year, or when
evidence of potential impairment exists. When it is determined
that
-72-
NORTHROP
GRUMMAN CORPORATION
impairment has occurred, a charge to operations is recorded.
Goodwill and other purchased intangible asset balances are
included in the identifiable assets of the business segment to
which they have been assigned. Any goodwill impairment, as well
as the amortization of other purchased intangible assets, is
charged against the respective business segments operating
margin. Purchased intangible assets are amortized on a
straight-line basis over their estimated useful lives.
Self-Insurance Accruals Included in other
long-term liabilities is approximately $519 million and
$485 million related to self-insured workers
compensation as of December 31, 2007, and 2006,
respectively. The company estimates the required liability of
such claims on a discounted basis utilizing actuarial methods
based on various assumptions, which include, but are not limited
to, the companys historical loss experience and projected
loss development factors.
Litigation, Commitments, and Contingencies
Amounts associated with litigation, commitments, and
contingencies 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.
Retirement Benefits The company sponsors
various pension plans covering substantially all employees. The
company also provides postretirement benefit plans other than
pensions, consisting principally of health care and life
insurance benefits, to eligible retirees and qualifying
dependents. The liabilities and annual income or expense of the
companys pension and other postretirement benefit plans
are determined using methodologies that involve several
actuarial assumptions, the most significant of which are the
discount rate, the long-term rate of asset return (based on the
market-related value of assets), and medical trend (rate of
growth for medical costs). The fair values of plan assets are
determined based on prevailing market prices or estimated fair
value for investments with no available quoted prices. Not all
net periodic pension income or expense is recognized in net
earnings in the year incurred because it is allocated to
production as product costs, and a portion remains in inventory
at the end of a reporting period. The companys funding
policy for pension plans is to contribute, at a minimum, the
statutorily required amount to an irrevocable trust.
Foreign Currency Translation For operations
outside the U.S. that prepare financial statements in
currencies other than the U.S. dollar, results of
operations and cash flows are translated at average exchange
rates during the period, and assets and liabilities are
generally translated at end-of-period exchange rates.
Translation adjustments are not material and are included as a
separate component of accumulated other comprehensive loss in
consolidated shareholders equity.
Accumulated Other Comprehensive Loss The
components of accumulated other comprehensive loss are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
Cumulative translation adjustment
|
|
$
|
34
|
|
|
$
|
22
|
|
Unrealized gain on marketable securities, net of tax expense of
($2) in 2007, and ($1) in 2006
|
|
|
3
|
|
|
|
2
|
|
Unamortized benefit plan costs, net of tax benefit of $470 as of
December 31, 2007 and $900 at December 31, 2006
|
|
|
(736
|
)
|
|
|
(1,284
|
)
|
|
Total accumulated other comprehensive loss
|
|
$
|
(699
|
)
|
|
$
|
(1,260
|
)
|
|
Financial Statement Reclassification Certain
amounts in the prior year financial statements and related notes
have been reclassified to conform to the 2007 presentation of
the Interconnect Technologies (ITD) businesses, formerly
reported in the Electronics segment, as discontinued operations
(see Note 5) and the business operation realignments
as of January 1, 2007 (see Note 6).
-73-
NORTHROP
GRUMMAN CORPORATION
|
|
2.
|
NEW
ACCOUNTING STANDARDS
|
There have been no changes in the companys critical
accounting policies during 2007, except for a change in the
measurement and recording of uncertain tax positions in
accordance with FIN 48. The expanded disclosure
requirements of FIN 48 are presented in Note 12 to the
consolidated financial statements.
In January 2008, the FASB issued Statement 133 Implementation
Issue No. E23 Issues Involving the
Application of the Shortcut Method under Paragraph 68.
This implementation issue amends the accounting and reporting
standards of paragraph 68 of Statement of Financial
Accounting Standards (SFAS) No. 133
Accounting for Derivative Instruments and Hedging Activities
to permit use of the shortcut method for (1) swaps that
have a nonzero fair value at inception, provided that the
nonzero fair value at inception is attributable solely to a
bid-ask spread; and (2) hedged items that have a settlement
date after the swap trade date. This implementation issue is
effective for hedging relationships designated on or after
January 1, 2008, although adoption requires reconsideration
of existing fair value hedges accounted for using the short-cut
method at the date of adoption. Management is currently
evaluating the effect that adoption of this implementation issue
will have on the companys consolidated financial position
and results of operations upon adoption in 2008.
In December 2007, the FASB issued
SFAS No. 141(R) Business
Combinations. SFAS No. 141(R) expands the
definition of a business, thus increasing the number of
transactions that will qualify as business combinations.
SFAS No. 141(R) requires the acquirer to recognize
100 percent of an acquired business assets and
liabilities, including goodwill and certain contingent assets
and liabilities, at their fair values at the acquisition date.
Contingent consideration will be recognized at fair value on the
acquisition date, with changes in fair value recognized in
earnings until settled. Likewise, changes in acquired tax
contingencies, including those existing at the date of adoption,
will be recognized in earnings if outside the maximum allocation
period (generally one year). Transaction-related expenses and
restructuring costs will be expensed as incurred, and any
adjustments to finalize the purchase accounting allocations,
even within the allocation period, will be shown as revised in
the future financial statements to reflect the adjustments as if
they had been recorded on the acquisition date. Finally, a gain
could result in the event of a bargain purchase (acquisition of
a business below the fair market value of the assets and
liabilities), or a gain or loss in the case of a change in the
control of an existing investment. SFAS No. 141(R)
will be applied prospectively to business combinations with
acquisition dates on or after January 1, 2009. Adoption is
not expected to materially impact the companys
consolidated financial position or results of operations
directly when it becomes effective in 2009, as the only impact
that the standard will have on recorded amounts at that time is
that related to disposition of uncertain tax positions related
to prior acquisitions. Following the date of adoption of the
standard, the resolution of such items at values that differ
from recorded amounts will be adjusted through earnings, rather
than through goodwill. Adoption of this statement is, however,
expected to have a significant effect on how acquisition
transactions subsequent to January 1, 2009 are reflected in
the financial statements.
In December 2007, the FASB issued
SFAS No. 160 Noncontrolling Interests
in Consolidated Financial Statements an
amendment of Accounting Research Bulletin (ARB) No. 51.
SFAS No. 160 requires (1) presentation of
ownership interests in subsidiaries held by parties other than
the parent within equity in the consolidated statements of
financial position, but separately from the parents
equity; (2) separate presentation of the consolidated net
income attributable to the parent and to the minority interest
on the face of the consolidated statements of income;
(3) accounting for changes in a parents ownership
interest where the parent retains its controlling financial
interest in its subsidiary as equity transactions;
(4) initial measurement of the noncontrolling interest
retained for any deconsolidated subsidiaries at fair value with
recognition of any resulting gains or losses through earnings;
and (5) additional disclosures that identify and
distinguish between the interests of the parent and
noncontrolling owners. SFAS No. 160 is effective for
the company beginning January 1, 2009. Adoption of this
statement is not expected to have a material impact on the
companys consolidated financial position and results of
operations when it becomes effective in 2009, but will
significantly affect the accounting for noncontrolling (or
minority) interests from that date forward.
-74-
NORTHROP
GRUMMAN CORPORATION
In December 2007, the EITF issued EITF Issue
No. 07-1
Accounting for Collaborative Arrangements. Issue
No. 07-1
defines collaborative arrangements and establishes reporting and
disclosure requirements for transactions between participants in
a collaborative arrangement and between participants in the
arrangement and third parties. EITF Issue
No. 07-1
is effective for the company beginning January 1, 2009.
Management is currently evaluating the effect that adoption of
this issue will have on the companys consolidated
financial position and results of operations when it becomes
effective in 2009.
In September 2006, the FASB issued
SFAS No. 157 Fair Value
Measurements, which defines fair value, establishes a
framework for consistently measuring fair value under generally
accepted accounting principles, and expands disclosures about
fair value measurements. In February 2008, the FASB issued Staff
Position (FSP)
FAS 157-2,
Effective Date of FASB Statement No. 157, which
defers the implementation for the non-recurring nonfinancial
assets and liabilities from fiscal years beginning after
November 15 , 2007 to fiscal years beginning after
November 15, 2008. The provisions of SFAS No. 157
will be applied prospectively. The statement provisions
effective as of January 1, 2008, do not have a material
effect on the companys consolidated financial position and
results of operations. Management does not believe that the
remaining provisions will have a material effect on the
companys consolidated financial position and results of
operations when they become effective on January 1,
2009.
|
|
3.
|
COMMON
STOCK DIVIDENDS
|
On February 21, 2007, the companys Board of Directors
approved a 23 percent increase to the quarterly common
stock dividends, from $.30 per share to $.37 per share,
effective with the first quarter 2007 dividends.
On May 17, 2006, the companys Board of Directors
approved a 15 percent increase to the quarterly common
stock dividends, from $.26 per share to $.30 per share,
effective with the second quarter 2006 dividends.
On March 23, 2005, the companys Board of Directors
approved a 13 percent increase to the quarterly common
stock dividends, from $.23 per share to $.26 per share,
effective with the second quarter 2005 dividends.
2007 In January 2007, the company acquired
Essex Corporation (Essex) for approximately $590 million in
cash, including estimated transaction costs of $15 million,
and the assumption of debt totaling $23 million. Essex
provides signal processing services and products, and advanced
optoelectronic imaging for U.S. government intelligence and
defense customers. The operating results of Essex are reported
in the Mission Systems segment. The assets, liabilities, and
results of operations of Essex were not material to the
companys consolidated financial position or results of
operations, and thus pro-forma information is not presented.
In July 2007, the company and Science Applications International
Corporation (SAIC) reorganized their joint venture AMSEC, LLC
(AMSEC), by dividing AMSEC along customer and product lines.
AMSEC is a full-service supplier that provides engineering,
logistics and technical support services primarily to Navy ship
and aviation programs. Under the reorganization plan, the
company retained the ship engineering, logistics and technical
service businesses under the AMSEC name (the AMSEC Businesses)
and, in exchange, SAIC received the aviation, combat systems and
strike force integration services businesses from AMSEC (the
Divested Businesses). This reorganization was treated as a step
acquisition for the acquisition of SAICs interests in the
AMSEC Businesses, with the company recognizing a pre-tax gain of
$23 million for the effective sale of its interests in the
Divested Businesses. The operating results of the AMSEC
Businesses and transaction gain have been reported in the Ships
segment. Prior to the reorganization, the company accounted for
AMSEC, LLC under the equity method. The assets, liabilities, and
results of operations of the AMSEC Businesses were not material
to the companys consolidated financial position or results
of operations, and thus pro-forma information is not presented.
The consolidated financial statements reflect preliminary
estimates of the fair value of the assets acquired and
liabilities assumed and the related allocation of the purchase
price for the entities acquired. Management does not expect
adjustments to these estimates, if any, to have a material
effect on the companys consolidated financial position or
results of operations.
-75-
NORTHROP
GRUMMAN CORPORATION
During the third quarter of 2007, the company acquired Xinetics
Inc., reported in the Space Technology segment, and the
remaining 61 percent of Scaled Composites, LLC, reported in
the Integrated Systems segment, for an aggregate amount of
approximately $100 million in cash. The assets,
liabilities, and results of operations of these entities were
not material to the companys consolidated financial
position or results of operations, and thus pro-forma
information is not presented. The consolidated financial
statements reflect preliminary estimates of the fair value of
the assets acquired and liabilities assumed and the related
allocation of the purchase price for the entities acquired.
Management does not expect adjustments to these estimates, if
any, to have a material effect on the companys
consolidated financial position or results of operations.
2006 There were no significant acquisitions
during 2006.
2005 The company acquired Confluent RF
Systems Corporation, reported in the Integrated Systems segment,
for $42 million in cash, which included transaction costs
of $2 million, and Integic Corporation, reported in the
Information Technology segment, for $319 million in cash,
which included transaction costs of $6 million.
2007 During the second quarter, management
announced its decision to exit the remaining ITD business
reported within the Electronics segment. Sales for this business
for the years ended December 31, 2007, 2006, and 2005, were
$14 million, $35 million, and $89 million,
respectively. The shut-down was completed during the third
quarter of 2007 and costs associated with the shutdown were not
material. The results of this business are reported as
discontinued operations in the consolidated statements of
income, net of applicable income taxes, for all periods
presented.
2006 The company sold the assembly business
unit of ITD during the first quarter of 2006 and Winchester
Electronics (Winchester) during the second quarter of 2006 for
net cash proceeds of $26 million and $17 million,
respectively, and recognized after-tax gains of $4 million
and $2 million, respectively, in discontinued operations.
The results of operations of the assembly business unit of ITD
are reported as discontinued operations in the consolidated
statements of income, net of applicable income taxes. The
results of operations of Winchester, reported in the Electronics
segment, were not material to any of the periods presented and
have therefore not been reclassified as discontinued operations.
During the second quarter of 2006, the Enterprise Information
Technology business, formerly reported in the Information
Technology segment, was shut down and costs associated with the
exit activities were not material. The results of operations of
this business are reported as discontinued operations in the
consolidated statements of income, net of applicable income
taxes.
2005 The company sold Teldix GmbH (Teldix)
for $57 million in cash and recognized an after-tax gain of
$14 million in discontinued operations. The results of
operations of Teldix, reported in the Electronics segment, were
not material to any of the periods presented and have therefore
not been reclassified as discontinued operations.
-76-
NORTHROP
GRUMMAN CORPORATION
Discontinued Operations Sales and operating
results of the businesses classified within discontinued
operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
$ in millions
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Sales and service revenues
|
|
$
|
14
|
|
|
$
|
191
|
|
|
$
|
743
|
|
|
Loss from discontinued operations
|
|
|
(20
|
)
|
|
|
(39
|
)
|
|
|
(21
|
)
|
Income tax benefit
|
|
|
7
|
|
|
|
14
|
|
|
|
8
|
|
|
Loss from discontinued operations, net of tax
|
|
|
(13
|
)
|
|
|
(25
|
)
|
|
|
(13
|
)
|
(Loss) gain from divestitures
|
|
|
|
|
|
|
11
|
|
|
|
24
|
|
Income tax expense
|
|
|
|
|
|
|
(17
|
)
|
|
|
(7
|
)
|
|
(Loss) gain from discontinued operations, net of tax
|
|
$
|
(13
|
)
|
|
$
|
(31
|
)
|
|
$
|
4
|
|
|
Tax rates on discontinued operations vary from the
companys effective tax rate due to the non-deductibility
of goodwill for tax purposes. The amounts associated with
discontinued operations on the consolidated statements of
financial position are not material as of December 31, 2007
and 2006, and have been included in other assets.
The company is aligned into seven reportable segments
categorized into four primary businesses. The Mission Systems,
Information Technology, and Technical Services segments are
presented as Information & Services. The Integrated
Systems and Space Technology segments are presented as
Aerospace. The Electronics and Ships segments are each presented
as separate businesses. Newport News and Ship Systems are
aggregated and reported as the Ships business in accordance with
the provisions of SFAS No. 131
Disclosures about Segments of an Enterprise and Related
Information.
Information &
Services
Mission Systems Mission Systems is a leading
global systems integrator of complex, mission-enabling systems
for government, military, and business clients. Products and
services are focused on the fields of Command, Control,
Communications, Computers and Intelligence (C4I), strategic
missiles, missile and air defense, airborne reconnaissance,
intelligence management and processing, and decision support
systems.
Information Technology Information Technology
is a premier provider of IT systems engineering and systems
integration for the DoD, national intelligence, federal,
civilian, state and local agencies, and commercial customers.
Technical Services 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.
Aerospace
Integrated Systems Integrated Systems is a
leader in the design, development, and production of airborne
early warning, electronic warfare and surveillance systems, and
battlefield management systems, as well as manned and unmanned
tactical and strike systems.
Space Technology Space Technology develops
and integrates a broad range of systems at the leading edge of
space, defense, and electronics technology. The segment supplies
products primarily to the U.S. Government that play an
important role in maintaining the nations security and
leadership in science and technology. Space Technologys
business areas focus on the design, development, manufacture,
and integration of satellite systems and subsystems, electronic
and communications payloads, and high energy laser systems and
subsystems.
Electronics
Electronics 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. Electronics provides systems to
-77-