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Northrop Grumman Reports Second Quarter 2013 Financial Results



        Northrop Grumman Reports Second Quarter 2013 Financial Results

- EPS Increase 9 Percent to $2.05

- Sales Total $6.3 Billion

- Free Cash Flow Before Voluntary Pension Contributions $692 Million

- 6.1 Million Shares Repurchased in Q2; 12.6 Million Shares Year-to-Date

- 2013 Sales Guidance Increased to Approximately $24.3 Billion

- 2013 EPS Guidance Increased to $7.60 to $7.80

PR Newswire

FALLS CHURCH, Va., July 24, 2013

FALLS CHURCH, Va., July 24, 2013 /PRNewswire-FirstCall/ -- Northrop Grumman
Corporation (NYSE: NOC) second quarter 2013 net earnings increased 2 percent
to $488 million, or $2.05 per diluted share, from $480 million, or $1.88 per
diluted share, in the second quarter of 2012. Second quarter 2013 earnings
include a $30 million pre-tax charge, or $0.08 per share, principally related
to "make-whole" premiums paid to redeem $850 million of senior notes on June
27, 2013. Second quarter 2013 diluted earnings per share are based on 237.5
million weighted average shares outstanding compared with 254.7 million shares
in the second quarter of 2012, a 7 percent decrease. The company repurchased
6.1 million shares of its common stock in the 2013 second quarter, and 12.6
million shares year-to-date, consistent with its previously announced goal of
repurchasing approximately 60 million shares of its common stock by the end of
2015, market conditions permitting.

"Second quarter and year-to-date financial results reflect the hard work and
dedication of the entire Northrop Grumman team. As a company, we remain
focused on program performance, effective cash deployment and portfolio
alignment as we continue to create value for our shareholders, customers and
employees," said Wes Bush, chairman, chief executive officer and president.

Table 1 — Financial Highlights
                                      Second Quarter      Six Months
($ in millions, except per share      2013      2012      2013       2012
amounts)
Sales                                 $ 6,294   $ 6,274   $ 12,398   $ 12,472
Segment operating income^1            797       782       1,545      1,571
Segment operating margin rate^1       12.7%     12.5%     12.5%      12.6%
Operating income                      806       774       1,565      1,570
Operating margin rate                 12.8%     12.3%     12.6%      12.6%
Net earnings                          488       480       977        986
Diluted EPS                           2.05      1.88      4.08       3.84
Cash provided by operations           328       876       329        771
Free cash flow^1                      280       825       241        639
Pension-adjusted Operating
Highlights
Operating income                      806       774       1,565      1,570
Net FAS/CAS pension adjustment^1      (31)      (35)      (64)       (67)
Pension-adjusted operating income^1   $ 775     $ 739     $ 1,501    $ 1,503
Pension-adjusted operating margin     12.3%     11.8%     12.1%      12.1%
rate^1
Pension-adjusted Per Share Data
Diluted EPS                           $ 2.05    $ 1.88    $ 4.08     $ 3.84
After-tax net pension adjustment per  (0.08)    (0.09)    (0.17)     (0.17)
share^1
Pension-adjusted diluted EPS^1        $ 1.97    $ 1.79    $ 3.91     $ 3.67
Weighted average shares outstanding   234.0     250.8     235.2      252.0
— Basic
Dilutive effect of stock options and  3.5       3.9       4.0        4.5
stock awards
Weighted average shares outstanding   237.5     254.7     239.2      256.5
— Diluted

^1 Non-GAAP metric — see definitions at the end of this press release.

Second quarter 2013 total operating income increased $32 million or 4 percent,
and operating margin rate increased 50 basis points to 12.8 percent. Higher
operating income reflects higher segment operating income and lower corporate
unallocated expenses than in the prior year period. Second quarter 2013
segment operating income increased 2 percent from the prior year period due to
a $20 million sales increase and a $25 million increase in net favorable
performance adjustments. Segment operating margin rate improved 20 basis
points to 12.7 percent.

As of June 30, 2013, total backlog was $37.7 billion compared with $40.8
billion as of Dec. 31, 2012. Second quarter 2013 new awards totaled $5.5
billion. The decline in backlog and new awards is primarily due to reduced
customer spending in response to the current U.S. government budget
environment.

Table 2 — Cash Flow Highlights
                                                Second Quarter  Six Months
($ millions)                                    2013    2012    2013    2012
Cash provided by operating activities before    $ 740   $ 876   $ 741   $ 771
discretionary pension contributions^1
After-tax discretionary pension pre-funding     (412)   —       (412)   —
impact
Net cash provided by operating activities       $ 328   $ 876   $ 329   $ 771
Less:
Capital expenditures                            (48)    (51)    (88)    (132)
Free cash flow^1                                $ 280   $ 825   $ 241   $ 639
After-tax discretionary pension pre-funding     412     —       412     —
impact
Free cash flow provided by operating
activities before discretionary pension         $ 692   $ 825   $ 653   $ 639
contributions^1

^1 Non-GAAP metric — see definitions at the end of this press release.

Second quarter 2013 cash provided by operating activities before discretionary
pension contributions was $740 million compared with $876 million in the prior
year period. Second quarter 2013 free cash flow provided by operating
activities before discretionary pension contributions was $692 million.

Changes in cash and cash equivalents include the following items for cash from
operations, investing and financing through June 30, 2013:

Operations

  o $329 million provided by operations

Investing

  o $88 million for capital expenditures

Financing

  o $921 million for repurchases of common stock
  o $2.84 billion net proceeds from issuance of long-term debt
  o $877 million for redemption of long-term debt
  o $272 million for dividends

 

2013 Guidance Updated
($ in millions, except per share amounts)   Prior                Current
Sales                                       ~24,000              ~24,300
Segment operating margin %^1                Low to mid 11%       ~12%
Operating margin %                          High 10% to Low 11%  ~12%
Diluted EPS                                 6.85     —   7.15    7.60  — 7.80
Cash provided by operations before
after-tax impact of discretionary pension   2,100    —   2,400   2,100 — 2,400
pre-funding contributions^1
Free cash flow before after-tax impact of
discretionary pension pre-funding           1,700    —   2,000   1,700 — 2,000
contributions^1
^1 Non-GAAP metric - see definitions at the end of this press release.

The company's updated 2013 financial guidance is based on the funding levels
provided for by the FY 2013 appropriations bill enacted on March 26, 2013, as
impacted by sequestration, and assumes that an appropriations bill or
continuing resolution for FY 2014 will be in effect beginning on Oct. 1, 2013,
in each case continuing to support and fund the company's programs. Guidance
for 2013 also assumes no disruption or shutdown of government operations
resulting from a federal government debt ceiling breach and no cancellation or
termination of any of our significant programs.

Table 3 — Business Results

Consolidated Sales & Segment Operating Income^1
                    Second Quarter               Six Months
($ millions)        2013      2012      Change   2013      2012      Change
Sales
Aerospace Systems   $ 2,613   $ 2,404   9%       $ 5,098   $ 4,787   6%
Electronic Systems  1,771     1,744     2%       3,492     3,468     1%
Information Systems 1,689     1,856     (9%)     3,363     3,700     (9%)
Technical Services  722       783       (8%)     1,439     1,533     (6%)
Intersegment        (501)     (513)              (994)     (1,016)
eliminations
                    6,294     6,274     —        12,398    12,472    (1%)
Segment operating
income^1
Aerospace Systems   336       292       15%      606       571       6%
Electronic Systems  322       276       17%      618       580       7%
Information Systems 141       202       (30%)    312       407       (23%)
Technical Services  69        74        (7%)     134       144       (7%)
Intersegment        (71)      (62)               (125)     (131)
eliminations
Segment operating   797       782       2%       1,545     1,571     (2%)
income^1
Segment operating   12.7%     12.5%     20 bps   12.5%     12.6%     (10) bps
margin rate^1
Reconciliation to
operating income
Net pension         31        35        (11%)    64        67        (4%)
adjustment^1
Unallocated         (21)      (39)      46%      (40)      (62)      35%
corporate expenses
Other               (1)       (4)       75%      (4)       (6)       33%
Operating income    806       774       4%       1,565     1,570     —
Operating margin    12.8%     12.3%     50 bps   12.6%     12.6%     —
rate
Interest expense    (60)      (52)      (15%)    (113)     (105)     (8%)
Other, net          (22)      5         (540%)   (16)      18        (189%)
Earnings before     724       727       —        1,436     1,483     (3%)
income taxes
Federal and foreign (236)     (247)     4%       (459)     (497)     8%
income tax expense
Net earnings        $ 488     $ 480     2%       $ 977     $ 986     (1%)

^1 Non-GAAP metric — see definitions at the end of this press release.

Other, net for the second quarter of 2013 was an expense of $22 million
compared with income of $5 million in the prior year period due to a $30
million pre-tax charge, principally for "make-whole" premiums paid to redeem
$850 million of long-term debt in June 2013.

Federal and foreign income tax expense totaled $236 million in the second
quarter of 2013, compared with $247 million in the prior year period. The
effective tax rate for the 2013 second quarter declined to 32.6 percent from
34.0 percent in the prior year period. The lower effective tax rate reflects
the benefit of the American Taxpayer Relief Act, which reinstated research tax
credits for years 2012 and 2013.

Aerospace Systems ($ millions)
                      Second Quarter              Six Months
                      2013      2012      Change  2013      2012      Change
Sales                 $ 2,613   $ 2,404   8.7%    $ 5,098   $ 4,787   6.5%
Operating income      336       292       15.1%   606       571       6.1%
Operating margin rate 12.9%     12.1%             11.9%     11.9%

Aerospace Systems second quarter 2013 sales increased 9 percent due to higher
volume for manned military aircraft, unmanned and space programs. The increase
in manned military aircraft is principally due to higher F-35 volume resulting
from the delivery of 11 units under low rate initial production lot 5 (LRIP
5), the first lot accounted for under the units-of-delivery method. There were
no deliveries under LRIP 5 in the second quarter of 2012. Higher unmanned
volume reflects the ramp-up of unmanned programs, principally NATO AGS and
Fire Scout, partially offset by lower Global Hawk volume. The increase in
space sales is due to higher volume for the AEHF and James Webb Space
Telescope programs, partially offset by lower volume for restricted programs.

Aerospace Systems second quarter 2013 operating income increased 15 percent
and operating margin rate increased 80 basis points to 12.9 percent. The
increase in operating income is due to higher sales volume described above as
well as higher net favorable adjustments than in the prior year period,
principally for improved performance on space programs.

Electronic Systems ($ millions)
                      Second Quarter              Six Months
                      2013      2012      Change  2013      2012      Change
Sales                 $ 1,771   $ 1,744   1.5%    $ 3,492   $ 3,468   0.7%
Operating income      322       276       16.7%   618       580       6.6%
Operating margin rate 18.2%     15.8%             17.7%     16.7%

Electronic Systems second quarter 2013 sales increased 2 percent from the
prior year period and include higher volume for international, tactical sensor
and space programs. Higher volume for these programs was partially offset by
lower volume for navigation, combat avionics and maritime systems due to
program completions, as well as lower volume for laser systems and infrared
countermeasures.

Electronic Systems second quarter 2013 operating income increased 17 percent,
and operating margin rate increased 240 basis points to 18.2 percent. Higher
2013 operating income and margin rate reflect improved performance and a
higher level of net favorable adjustments than in the prior year period due to
improved performance in marine and space programs.

Information Systems ($ millions)
                    Second Quarter                Six Months
                    2013      2012      Change    2013      2012      Change
Sales               $ 1,689   $ 1,856   (9.0%)    $ 3,363   $ 3,700   (9.1%)
Operating income    141       202       (30.2%)   312       407       (23.3%)
Operating margin    8.3%      10.9%               9.3%      11.0%
rate

Information Systems second quarter 2013 sales declined 9 percent. The transfer
of intercompany efforts to the company's shared services organization and
portfolio shaping accounted for $33 million of the decline. Excluding the
transfer and portfolio shaping, second quarter sales declined 7 percent due to
lower funding levels and contract completions across the portfolio, including
programs impacted by in-theater force reductions.

Information Systems second quarter 2013 operating income decreased 30 percent
and operating margin rate was 8.3 percent. Second quarter 2013 operating
income and margin rate reflect lower sales and a $27 million reduction in net
favorable adjustments from the prior year period.

Technical Services ($ millions)
                      Second Quarter           Six Months
                      2013    2012    Change   2013      2012      Change
Sales                 $ 722   $ 783   (7.8%)   $ 1,439   $ 1,533   (6.1%)
Operating income      69      74      (6.8%)   134       144       (6.9%)
Operating margin rate 9.6%    9.5%             9.3%      9.4%

Technical Services second quarter 2013 sales declined 8 percent, principally
due to lower volume for the KC-10 and ICBM programs as well as portfolio
shaping actions.

Technical Services second quarter 2013 operating income decreased 7 percent,
and operating margin rate totaled 9.6 percent. The decline in operating income
is primarily due to lower sales; operating margin rate is comparable to the
prior year period.

About Northrop Grumman

Northrop Grumman will webcast its earnings conference call at noon Eastern
time on July 24, 2013. A live audio broadcast of the conference call along
with a supplemental presentation will be available on the investor relations
page of the company's website at www.northropgrumman.com.

Northrop Grumman is a leading global security company providing innovative
systems, products and solutions in unmanned systems, cyber, C4ISR, and
logistics and modernization to government and commercial customers worldwide.
Please visit www.northropgrumman.com for more information.

This release and the attachments contain statements, other than statements of
historical fact, that constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Words such as
"expect," "intend," "may," "could," "plan," "project," "forecast," "believe,"
"estimate," "outlook," "anticipate," "trends," "guidance," "goal," and similar
expressions generally identify these forward-looking statements.
Forward-looking statements in this release and the attachments include, among
other things, statements relating to our future financial condition and
operating results. Forward-looking statements are based upon assumptions,
expectations, plans and projections that we believe to be reasonable when
made. These statements are not guarantees of future performance and inherently
involve a wide range of risks and uncertainties that are difficult to predict.
Specific risks that could cause actual results to differ materially from those
expressed or implied in these forward-looking statements include, but are not
limited to, risks related to: the assumptions on which our guidance is based;
our dependence on U.S. Government contracts; the effect of economic conditions
in the United States and globally; changes in government and customer
priorities and requirements; government budgetary constraints; shifts or
reductions in defense spending resulting from sequestration under the Budget
Control Act of 2011, a continuing resolution with limited new starts, the lack
of annual appropriations legislation or otherwise; debt-ceiling limits and
disruption to or shutdown of government operations; changes in import and
export policies; changes in customer short-range and long-range plans; major
program terminations; the acquisition, deferral, reduction or termination of
contracts or programs; market conditions; our ability to access capital;
interest and discount rates or other changes that may impact pension plan
assumptions and actual returns on pension plan assets; the outcome of
litigation, claims, audits, appeals, bid protests and investigations; the
adequacy of our insurance coverage and recoveries; the costs of environmental
remediation; our ability to attract and retain qualified personnel; changes in
organizational structure and reporting segments; acquisitions, dispositions,
spin-off transactions, joint ventures, strategic alliances and other business
arrangements; possible impairments of goodwill or other intangible assets; the
effects of legislation, regulations, and other changes in accounting, tax or
defense procurement rules or practices; technical, operational or quality
setbacks in contract performance; issues with, and financial viability of, key
suppliers and subcontractors; availability of materials and supplies;
controlling costs of fixed-price development programs; domestic and
international competition; legal, financial and governmental risks related to
international transactions; potential security threats, information technology
attacks, natural disasters and other disruptions not under our control; and
other risk factors and other important factors disclosed in our Form 10-K for
the year ended December 31, 2012 and other filings with the Securities and
Exchange Commission.

You should not put undue reliance on any forward-looking statements in this
release. These forward-looking statements speak only as of the date of this
release, and we undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. This release and the
attachments also contain non-GAAP financial measures. A reconciliation to the
nearest GAAP measure and a discussion of the company's use of these measures
are included in this release or the attachments.

 

SCHEDULE 1
NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Unaudited)
                                        Three Months Ended  Six Months Ended
                                        June 30
                                                            June 30
$ in millions, except per share amounts 2013      2012      2013      2012
Sales
Product                                 $ 3,593   $ 3,399   $ 7,014   $ 6,740
Service                                 2,701     2,875     5,384     5,732
Total sales                             6,294     6,274     12,398    12,472
Operating costs and expenses
Product                                 2,703     2,604     5,334     5,131
Service                                 2,203     2,316     4,359     4,630
General and administrative expenses     582       580       1,140     1,141
Operating income                        806       774       1,565     1,570
Other (expense) income
Interest expense                        (60)      (52)      (113)     (105)
Other, net                              (22)      5         (16)      18
Earnings before income taxes            724       727       1,436     1,483
Federal and foreign income tax expense  236       247       459       497
Net earnings                            $ 488     $ 480     $ 977     $ 986
Basic earnings per share                $ 2.09    $ 1.91    $ 4.15    $ 3.91
Weighted-average common shares          234.0     250.8     235.2     252.0
outstanding, in millions
Diluted earnings per share              $ 2.05    $ 1.88    $ 4.08    $ 3.84
Weighted-average diluted shares         237.5     254.7     239.2     256.5
outstanding, in millions
Net earnings (from above)               $ 488     $ 480     $ 977     $ 986
Other comprehensive income
Change in unamortized benefit plan      79        54        159       104
costs, net of tax
Change in cumulative translation        9         (15)      (7)       (9)
adjustment
Other comprehensive income, net of tax  88        39        152       95
Comprehensive income                    $ 576     $ 519     $ 1,129   $ 1,081

 

 

SCHEDULE 2
NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)
                                                       June 30,   December 31,
$ in millions
                                                       2013       2012
Assets
Cash and cash equivalents                               $ 4,904     $ 3,862
Accounts receivable, net of progress payments          3,124      2,858
Inventoried costs, net of progress payments            745        798
Deferred tax assets                                    551        574
Prepaid expenses and other current assets              240        300
Total current assets                                   9,564      8,392
Property, plant and equipment, net of accumulated      2,783      2,887
depreciation of $4,283 in 2013 and $4,146 in 2012
Goodwill                                               12,437     12,431
Non-current deferred tax assets                        1,429      1,542
Other non-current assets                               1,295      1,291
Total assets                                            $27,508     $26,543
Liabilities
Trade accounts payable                                  $ 1,195     $ 1,392
Accrued employee compensation                          1,001      1,173
Advance payments and billings in excess of costs       1,802      1,759
incurred
Other current liabilities                              1,641      1,732
Total current liabilities                              5,639      6,056
Long-term debt, net of current portion                 5,929      3,930
Pension and post-retirement benefit plan liabilities   5,426      6,085
Other non-current liabilities                          956        958
Total liabilities                                      17,950     17,029
Shareholders' equity
Preferred stock, $1 par value; 10,000,000 shares       —          —
authorized; no shares issued and outstanding
Common stock, $1 par value; 800,000,000 shares
authorized; issued and outstanding: 2013—230,801,552   231        239
and 2012—239,209,812
Paid-in capital                                        2,124      2,924
Retained earnings                                      11,838     11,138
Accumulated other comprehensive loss                   (4,635)    (4,787)
Total shareholders' equity                             9,558      9,514
Total liabilities and shareholders' equity              $27,508     $26,543

 

 

SCHEDULE 3
NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
                                                    Six Months Ended June 30
$ in millions                                       2013           2012
Operating activities
 Sources of cash
    Cash received from customers
       Collections on billings                         $ 9,558      $ 9,911
       Progress payments                            2,554          2,553
    Other cash receipts                             32             38
    Total sources of cash                           12,144         12,502
Uses of cash
    Cash paid to suppliers and employees            (10,702)       (10,969)
    Pension contributions                           (543)          (33)
    Interest paid, net of interest received         (111)          (102)
    Income taxes paid, net of refunds received      (412)          (584)
    Other cash payments                             (47)           (43)
    Total uses of cash                              (11,815)       (11,731)
Net cash provided by operating activities           329            771
Investing activities
  Capital expenditures                              (88)           (132)
  Maturities of short-term investments              —              250
  Other investing activities, net                   6              44
Net cash (used in) provided by investing activities (82)           162
Financing activities
  Net proceeds from issuance of long-term debt      2,841          —
  Common stock repurchases                          (921)          (555)
  Payments of long-term debt                        (877)          —
  Cash dividends paid                               (272)          (265)
  Proceeds from exercises of stock options          110            67
  Other financing activities, net                   (86)           (34)
Net cash provided by (used in) financing activities 795            (787)
Increase in cash and cash equivalents               1,042          146
Cash and cash equivalents, beginning of year        3,862          3,002
Cash and cash equivalents, end of period               $ 4,904      $ 3,148

 

 

SCHEDULE 4
NORTHROP GRUMMAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
                                                      Six Months Ended June 30
$ in millions                                         2013           2012
Reconciliation of net earnings to net cash provided
by operating activities
Net earnings                                          $   977        $  986
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization                         225            243
Stock-based compensation                              71             76
Excess tax benefits from stock-based compensation     (27)           (29)
Deferred income taxes                                 33             (21)
(Increase) decrease in assets:
    Accounts receivable, net                          (268)          (175)
    Inventoried costs, net                            62             143
    Prepaid expenses and other assets                 6              (95)
Increase (decrease) in liabilities:
    Accounts payable and accruals                     (430)          (453)
    Income taxes payable                              60             (22)
    Retiree benefits                                  (397)          137
Other, net                                            17             (19)
Net cash provided by operating activities             $   329        $  771

 

 

SCHEDULE 5
NORTHROP GRUMMAN CORPORATION

TOTAL BACKLOG AND CONTRACT AWARDS

(Unaudited)
                         June 30, 2013                            December 31,
                                                                  2012
$ in millions            FUNDED ^ (1)  UNFUNDED ^ (2)  TOTAL      TOTAL
                                                       BACKLOG    BACKLOG
Aerospace Systems        $  10,437     $   8,376       $ 18,813   $  19,594
Electronic Systems       7,251         1,732           8,983      9,471
Information Systems^(3)  3,146         3,930           7,076      8,541
Technical Services       2,372         478             2,850      3,203
Total                    $  23,206     $   14,516      $ 37,722   $  40,809

^(1) Funded backlog represents firm orders for which funding is authorized and
     appropriated by the customer.
     Unfunded backlog represents firm orders for which as of
     the reporting date, funding is not authorized and
^(2) appropriated by the customer. Unfunded backlog excludes
     unexercised contract options and indefinite delivery,
     indefinite quantity (IDIQ) contracts until the time the
     option or IDIQ task order is exercised or awarded.
     Information Systems backlog as of June 30, 2013 includes
^(3) a $1.0 billion adjustment primarily to reduce unfunded
     backlog for expired periods of performance on active
     contracts, including task orders on IDIQ contracts.

New Awards

The estimated values of contract awards included in backlog during the three
months and six months ended June 30, 2013, were $5.5 billion and $10.3
billion, respectively. Net of the Information Systems backlog adjustments,
contract awards for the three months and six months ended June 30, 2013, were
$4.6 billion and $9.3 billion, respectively.

Non-GAAP Financial Measures Disclosure:

Today's press release contains non-GAAP (accounting principles generally
accepted in the United States of America) financial measures, as defined by
SEC (Securities and Exchange Commission) Regulation G and indicated by a
footnote in the text of the release. While we believe that these non-GAAP
financial measures may be useful in evaluating our financial information, they
should be considered as supplemental in nature and not as a substitute for
financial information prepared in accordance with GAAP. Definitions are
provided for the non-GAAP measures and reconciliations are provided in the
body of the release. References to a "Table" in the definitions below relate
to tables in the body of this press release. Other companies may define these
measures differently or may utilize different non-GAAP measures.

Pension-adjusted diluted EPS: Diluted EPS excluding the after-tax net pension
adjustment per share, as defined below. These per share amounts are provided
for consistency and comparability of operating results. Management uses
pension-adjusted diluted EPS, as reconciled in Table 1, as an internal measure
of financial performance.

Cash provided by operating activities before discretionary pension
contributions: Cash provided by operating activities before the after-tax
impact of discretionary pension contributions. Cash provided by operating
activities before discretionary pension contributions has been provided for
consistency and comparability of 2013 and 2012 financial performance and is
reconciled in Table 2.

Free cash flow: Cash provided by operating activities less capital
expenditures (including outsourcing contract & related software costs). We use
free cash flow as a key factor in our planning for, and consideration of,
strategic acquisitions, stock repurchases and the payment of dividends. This
measure should not be considered in isolation, as a measure of residual cash
flow available for discretionary purposes, or as an alternative to operating
results presented in accordance with GAAP. Free cash flow is reconciled in
Table 2.

Free cash flow provided by operating activities before discretionary pension
contributions: Free cash flow provided by operating activities before the
after-tax impact of discretionary pension contributions. We use free cash flow
provided by operating activities before discretionary pension contributions as
a key factor in our planning for, and consideration of, strategic
acquisitions, stock repurchases and the payment of dividends. This measure
should not be considered in isolation, as a measure of residual cash flow
available for discretionary purposes, or as an alternative to operating
results presented in accordance with GAAP. Free cash flow provided by
operating activities before discretionary pension contributions is reconciled
in Table 2.

Net FAS/CAS pension adjustment: Pension expense determined in accordance with
GAAP less pension expense allocated to the operating segments under U.S.
Government Cost Accounting Standards (CAS). Net pension adjustment is
presented in Table 1.

After-tax net pension adjustment per share: The per share impact of the net
pension adjustment as defined above, after tax at the statutory rate of 35%,
provided for consistency and comparability of 2013 and 2012 financial
performance as presented in Table 1.

Pension-adjusted operating income: Operating income before net pension
adjustment as reconciled in Table 1. Management uses pension-adjusted
operating income as an internal measure of financial performance.

Pension-adjusted operating margin rate: Pension-adjusted operating income as
defined above, divided by sales. Management uses pension-adjusted operating
margin rate, as reconciled in Table 1, as an internal measure of financial
performance.

Segment operating income: Total earnings from our four segments including
allocated pension expense recognized under CAS. Reconciling items to operating
income are unallocated corporate expenses, including unallowable or
unallocable portions of management and administration, legal, environmental,
certain compensation and retiree benefits, and other expenses; net pension
adjustment; and reversal of royalty income included in segment operating
income. Management uses segment operating income, as reconciled in Table 3, as
an internal measure of financial performance of our individual operating
segments.

Segment operating margin rate: Segment operating income as defined above,
divided by sales. Management uses segment operating margin rate, as reconciled
in Table 3, as an internal measure of financial performance.

SOURCE Northrop Grumman Corporation

Website: http://www.northropgrumman.com
Contact: Randy Belote (Media), 703-280-2720, randy.belote@ngc.com or Steve
Movius (Investors), 703-280-4575, steve.movius@ngc.com
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