northrop grumman wes bush, president and chief financial officer (financial overview)

Copyright 2006 Northrop Grumman Corporation1

Northrop Grumman Financial Overview

November 9, 2006

Wes BushPresident and Chief Financial Officer


Certain statements and assumptions in these presentations and materials contain or are based on “forward-looking” information. Such “forward-looking” information includes, among other things, projected deliveries,expected funding for various programs, future effective income tax rates, financial guidance and estimated amounts regarding sales, segment operating margin, pension expense, employer contributions under pension plans and medical and life benefits plans, cash flow and earnings per share, and is subject to numerous assumptions and uncertainties, many of which are outside Northrop Grumman’s control. These include Northrop Grumman’s assumptions with respect to future revenues, expected program performance and cash flows, returns on pension plan assets and variability of pension actuarial and related assumptions, the outcome of litigation and appeals, environmental remediation, divestitures of businesses, successful reduction of debt, successful negotiation of contracts with labor unions, effective tax rates and timing and amounts of tax payments, and anticipated costs of capital investments, among other things. Northrop Grumman’s operations are subject to various additional risks and uncertainties resulting from its position as a supplier, either directly or as subcontractor or team member, to the U.S. Government and its agencies as well as to foreign governments and agencies; actual outcomes are dependent upon various factors, including, without limitation, Northrop Grumman’s successful performance of internal plans; government customers’ budgetary constraints; customer changes in short-range and long-range plans; domestic and international competition in both the defense and commercial areas; product performance; continued development and acceptance of new products and, in connection with any fixed price development programs, controlling cost growth in meeting production specifications and delivery rates; performance issues with key suppliers and subcontractors; government import and export policies; acquisition or termination of government contracts; the outcome of political and legal processes and of the assertion or prosecution of potential substantial claims by or on behalf of a U.S. government customer; natural disasters, and any associated amounts and timing of recoveries under insurance contracts, availability of materials and supplies, continuation of the supply chain, contractual performance relief and the application of cost sharing terms, impacts of timing of cash receipts and the availability of other mitigating elements; terrorist acts; legal, financial and governmental risks related to international transactions and global needs for military aircraft, military and civilian electronic systems and support, information technology, naval vessels, space systems, technical services and related technologies, as well as other economic, political and technological risks and uncertainties and other risk factors set out in Northrop Grumman’s filings from time to time with the Securities and Exchange Commission, including, without limitation, Northrop Grumman reports on Form 10-K and Form 10-Q.

Safe Harbor Statement


Presentation Format

GuidanceEffective 1/1/07 Radio Systems business will be transferred from Space Technology to Mission SystemsReported results for Q4 2006 & Full Year 2006 will not reflect the transferGuidance does not reflect the changeGuidance does not include Essex

Segment results 2003 - 2005Presented on a pro forma basis reflecting

Previously announced organizational realignmentsTransfer of Radio Systems businessAdoption of dual-margin recognition on inter-segment sales


Growth

Performance

Value-creating cash deployment

What You Should Expect From NOC


Outlook

1 Non-GAAP Metric - see reconciliation and definition on pages 25 & 262 Before Katrina-related capital expenditures

$650-700M$700-750M$744MCapital Expenditures2

$2.5-2.8B$1.5-1.8B$2.6BCash from Operations

$4.65-4.90$4.40-4.45$3.83EPS from Continuing Operations

High 8%Low 8%7.3%Operating Margin

Low 9%Low 9%8%Segment OM1

$31-32B$30.2B$30.1BRevenue

2007E2006E2005


Growth


Portfolio Actions to Drive Growth

Technical Services

Integrated Systems

Electronics

Space Technology

Mission Systems

Information Technology

Space Technology

Life Cycle Optimization

Network Comms

Technical ServicesAddresses ~$70 billion arena

Growing at 8-9%

Military CommunicationsAddresses ~$80B arena

Growing at 4-7%Mission Systems

Life CycleOptimization

Systems Support,

Training & Simulation

Systems Support

Life CycleOptimization

RadioSystems

Comms & Information

Space & Communications

Networks & Collaboration


Portfolio Supports Organic Sales Growth

Transfer of Radio Systems to Information & Services from Aerospace effective 1/1/07 not included

Ships

Aerospace

Electronics

21%

27%

16%I & S36%

$31-32~$30.2Total

~10%~$5Ships

~5%~$6.6Electronics

~(5)%~$9Aerospace

8-10%~$11I & S

2006E ($B) 2007EGrowth


Core Programs Provide Strong Base

Franchise programs provide reliable long-term revenue Core and adjacent opportunities support organic growth

Unfunded

Follow-on

New

New

0

20

40

60

80

100

2006E 2007E 2008E

% o

f Sal

es

Firm

Unfunded

Follow-on

New


Performance


Margin & Cash Performance Drivers

Competitive Excellence programsProgram performanceInfrastructure costsWorld-class processes

ACE ProgramScale leverage (Procurement, IT, Facilities)

~$150M cost reduction expected in 2006~$300M annual cost reduction targeted by 2008

Shared servicesFinancial systems, workforce administration~$100M cost reduction targeted by 2008

Cash initiativesBest practice adoption for contract terms & conditions, receivables/ payables management, working capital enhancements

Benefits programs modernizationPost retirement benefits plan change reflected in 2007 guidance

All data and alternatives in the ACE project are considered feasibility assessments. This information is not considered cost or pricing data under Public Law 87-653.


Program Risk Management Process

Pre-Contract PhaseTarget selection criteriaNon-advocate review (NAR)Independent cost evaluation (ICE)Rigorous corporate risk review process

Contract Performance PhaseRisk management baselineCompany-wide Earned Value Management SystemEnhanced transparency at all levelsProgram-focused sector reviewsWatch list review process

Strengthened corporate oversight of programsStrengthened corporate oversight of programs


Operating Margin Expansion

1 Non-GAAP Metric - see reconciliation and definition on pages 25 & 262 Dependent on long-term business mix

9+High 8Low 8Total Operating Margin

~10Low 9Low 9Segment OM1

9+Mid 8~7Ships

~12High 11Mid to High 11Electronics

9-10~9Low 9Aerospace

8-9~8Low 8Information & Services

Operating Margin %

Long-TermMargin

Opportunity2

2007E2006E


Reconciliation of Segment OM to OM

Unallocated

2006E of ~$250 million (~$140 million before Q3 legal provision)

2007E ~$90 million

Post retirement benefit plan changes result in substantial savings

Net Pension Expense

2006E of ~($25) million

2007E with 2006 assumptions, pre-funding and 2007 demographics is ~($15) million


EPS—Key Components

2006E 2007E

Sales $30.2B $31-32B

Segment OM1 Low 9% Low 9%

Unallocated Expenses ~$250M ~$90M

Net Pension Expense ~$25M ~$15M

Operating Margin Low 8% High 8%

Net Interest Expense ~$300M ~285M

Effective Tax Rate ~31% 33-34%

EPS Guidance $4.40-4.45 $4.65-4.90

1 Non-GAAP Metric - see reconciliation and definition on pages 25 & 26


Cash—Key Components

Depreciation & Amortization ~715 ~710

Pension/OPEB Funding ~(650) ~250*

Change in Working Capital Neutral Neutral - Improving

Cash Taxes (550) (1,000)

Stock-based Compensation ~200 ~220

Discontinued Operations (80) -

* Based on 2006 assumptions

2006E ($M) 2007E ($M)

1 Does not include Katrina-related related capital expenditures2 Non-GAAP Metric - see definition on page 27

Cash from Operations 1,500 – 1,800 2,500 – 2,800

Capital Expenditures1 700 – 750 650 - 700

Free Cash Flow2 750 – 1,100 1,800 – 2,150


$0

$1

$2

$3

$4

$5

$6

$7

2003* 2004 2005 2006E** 2007E

EPS Free Cash Flow per Share

EPS & Free Cash Flow Per Share

1 Non-GAAP Metric - see definition on page 27 – prior to Katrina related capital expenditure

* Includes $1 Billion B-2 Tax Payment

** Includes $800 Million discretionary pension pre-funding

1

EPS guidance rangeCash guidance range


Value-Creating Cash Deployment


Debt Reduction & Pension Pre-fundingDebt Reduction & Pension Pre-funding

DividendsDividendsShare RepurchasesShare Repurchases

Maintain strong credit profileEnsure flexibilityCapture economic benefits

Maintain strong credit profileEnsure flexibilityCapture economic benefits

Accelerate growth & shareholder returnsAcquisitions in strategically aligned businesses with profitable growth Divest to capture enhanced value

Accelerate growth & shareholder returnsAcquisitions in strategically aligned businesses with profitable growth Divest to capture enhanced value

Maintain competitive payout ratioReview regularly


Moderate share count reductionReview regularly

Moderate share count reductionReview regularly

17

Cash Deployment Strategy

Acquisitions & DivestituresAcquisitions & Divestitures


330

340

350

360

370

2002 2003 2004 2005 2006 YTD

Share RepurchasesShare Repurchases

Moderate net share count reductionReview regularly

Moderate net share count reductionReview regularly

Share Repurchases

$3.2 Billion authorized since 2004$3.2 Billion authorized since 2004$3 Billion completed$3 Billion completed

Shar

es O

utst

andi

ng


Dividends

DividendsDividends



$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

2003 2004 2005 2006

Div

iden

ds p

er S

hare

DoubleDouble--digit increases in 2004, 2005 & 2006digit increases in 2004, 2005 & 200650% increase since 200350% increase since 2003


Acquisitions & Divestitures

Accelerate growth & shareholder returnsAcquisitions in strategically aligned businesses with profitable growthDivest to capture enhanced value

Accelerate growth & shareholder returnsAcquisitions in strategically aligned businesses with profitable growthDivest to capture enhanced value

Acquisitions & DivestituresAcquisitions & Divestitures

Acquisition PrinciplesAlignment with portfolio strategyRapid synergy captureAccretive by year twoValuation based on robust DCF assessmentRigorous due diligence process, experienced teamComprehensive integration assessment and planSector execution commitmentAnnual reviews of performance to sector commitment


Debt Reduction & Pension Pre-fundingDebt Reduction & Pension Pre-funding

Maintain strong credit profileEnsure flexibilityCapture economic benefit

Maintain strong credit profileEnsure flexibilityCapture economic benefit

Debt Reduction & Pension Pre-funding

Highest credit rating in company’s history$1.2 billion debt reduction expected in 2006~$5.7B debt reduction from 2002 to YE 2006Net debt/total capital has declined from 34% to 14%$1.3 billion pension pre-funding in 2004, 2005 & 2006


What You Should Expect from NOC

Growth

Performance

Value-creating cash deployment


Institutional Investor Conference Q&A

November 9, 2006


Appendix


$ Millions 2005A 2006E 2007E

Sales $30,067 ~$30,200 $31,000-$32,000

Segment Operating Margin Rate* 8.0% Low 9% Low 9%

Operating Margin Rate 7.3% Low 8% High 8%

Segment Operating Margin* 2,414 ~2,750 2,860-2,940

Reconciliations:

Unallocated Expenses (190)

Pension (Expense) Income (410) ~(300) ~(120)

Reversal of CAS Pension Expense included above 389

Reversal of Royalty Income included above (10)

Operating Margin as Reported 2,193 ~2,450 2,740-2,820

Non-GAAP Measure Reconciliation

*Non-GAAP Measure


Non-GAAP Measures Definitions

Non-GAAP Financial Measures Disclosure

Today’s presentation and the accompanying web charts contain non-GAAP (Generally Accepted Accounting Principles) financial measures, as defined by SEC Regulation G and indicated by an asterisk *.While we believe that these non-GAAP financial measures may be useful in evaluating Northrop Grumman, this information 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 used in our presentation. Other companies may define the measures differently.

Segment Operating Margin

Segment Operating Margin is the total earnings from each of our six business segments including royalty income and pension expense to the extent that the cost is currently recognized under government Cost Accounting Standards (CAS). Segment Operating Margin excludes unallocated corporate expenses, GAAP pension expense and the reversal of CAS pension expense.

Reconciling items to total company Operating Margin are:— GAAP pension expense reported separately as a reconciling item under the caption "Pension expense." — Reversal of CAS pension expense included in Segment Operating Margin as a cost recognized under CAS. — Unallocated expenses which include unallocated corporate, legal, environmental, state income tax, and other

retiree benefits expenses.— Royalty Income reversed under the caption “Reversal of royalty income included above” and reported under the

caption “Other, net.”

Management uses segment operating margin as an internal measure of financial performance of our individual business segments. This measure also may be helpful to investors in understanding period-over-period operating results separate from items that may be influenced by external market fluctuations.


Net DebtNet Debt is calculated as short and long-term interest-bearing debt minus cash and cash equivalents..

Free Cash FlowFree Cash Flow (FCF) is the cash from operations less capital expenditures. Katrina related capital expenditures are excluded. Katrina related capital expenditures was approximately $80M in 2005, and it is projected to be approximately $200M in 2006 and approximately $100M in 2007.

Free Cash Flow Per ShareFree Cash Flow as defined above divided by weighted average diluted shares

Non-GAAP Measures Definitions

northrop grumman wes bush, president and chief financial officer (financial overview)

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