10-QPeriod: Q1 FY2002

NORTHROP GRUMMAN CORP /DE/ Quarterly Report for Q1 Ended Mar 31, 2002

Filed May 10, 2002For Securities:NOC

Summary

Northrop Grumman Corporation reported strong first-quarter 2002 results, driven significantly by recent acquisitions including Litton Industries, Newport News Shipbuilding, and the Electronics and Information Systems Group of Aerojet-General. Total net sales more than doubled to $4.1 billion from $2.0 billion in the prior year's comparable quarter, reflecting the integration of these strategic acquisitions. Net income increased to $149 million ($1.27 per diluted share) from $103 million ($1.42 per diluted share) in Q1 2001, though a decline in diluted EPS was attributed to a substantial increase in the number of outstanding shares, higher interest expenses, and reduced pension income. The company adopted SFAS No. 142, eliminating goodwill amortization, which positively impacted reported earnings. The balance sheet shows significant increases in goodwill and other purchased intangibles due to the acquisitions. Despite a cash outflow from operations in the quarter, the company anticipates generating sufficient cash flow for debt servicing, capital expenditures, and dividends for the remainder of the year, with a significant tax payment related to the B-2 contract expected in March 2003. Management is also actively pursuing a potential combination with TRW, which could further reshape the company's portfolio.

Key Highlights

  • 1Total net sales for Q1 2002 surged to $4.1 billion, more than double the $2.0 billion reported in Q1 2001, primarily due to contributions from recent large acquisitions (Litton, Newport News, EIS).
  • 2Net income rose to $149 million in Q1 2002 from $103 million in Q1 2001, however, diluted earnings per share decreased to $1.27 from $1.42, largely due to an increased number of outstanding shares.
  • 3The company adopted SFAS No. 142, ceasing goodwill amortization. Pro forma adjustments for Q1 2001 show that without goodwill amortization, adjusted net income was $132 million and adjusted diluted EPS was $1.81.
  • 4Goodwill on the balance sheet increased significantly to $8.92 billion from $8.67 billion, with other purchased intangibles also rising to $1.58 billion from $1.14 billion, reflecting purchase accounting for acquisitions.
  • 5Funded order backlog more than doubled to $22.4 billion from $10.3 billion year-over-year, indicating a strong pipeline of future business.
  • 6The company is exploring a significant strategic move with a proposed acquisition of TRW, signaling active portfolio management and growth ambitions.
  • 7A jury verdict of approximately $31 million plus pre-judgment interest ($37 million) for cost overruns on an old aircraft prototype is under appeal.

Frequently Asked Questions

The primary driver for the substantial increase in sales to $4.1 billion from $2.0 billion was the full integration of recent acquisitions, including Litton Industries, Newport News Shipbuilding, and the Electronics and Information Systems Group of Aerojet-General Corporation. These acquisitions significantly expanded the company's operational scale and revenue base across multiple segments.

Effective January 1, 2002, Northrop Grumman adopted SFAS No. 142, which eliminates the amortization of goodwill. This accounting change positively impacts reported net income and earnings per share by removing a significant expense that was present in prior periods. For comparison, the company provided pro forma adjusted figures for Q1 2001, which exclude goodwill amortization to allow for a more like-for-like comparison.

Despite a cash outflow from operations in the first quarter of 2002, the company expects to generate sufficient cash flow from operations for the remainder of the year to service its debt, fund capital expenditures, and continue paying dividends. Additionally, the company plans to use operating cash flow, supplemented by borrowings or capital markets, to address a significant federal tax payment of approximately $1 billion expected in March 2003 related to the B-2 contract.

Northrop Grumman has made a proposal to TRW's board of directors to combine the companies. The company has incurred approximately $20 million in transaction costs related to this proposal. However, there is no certainty that the transaction will be completed, or on what terms. If acquired, TRW's automotive business would likely be separated through sale or spin-off.