Northrop Grumman Reports Fourth Quarter and 2008 Results

- Q4 Sales Increase 4 Percent to Record $9.2 Billion ; 2008 Sales Increase 6 Percent to Record $33.9 Billion - Record $78 Billion Total Backlog; New Business Awards Total Record $48.3 Billion in 2008 - Q4 Cash from Operations...

Goodwill Impairment Charge

Northrop Grumman reported fourth quarter and 2008 operating losses due to a non-cash, after-tax charge of $3.1 billion for impairment of goodwill. Testing of goodwill as of Nov. 30, 2008 , using discounted cash flow analysis supported by comparative market multiples to determine the fair values, indicated that the book values of Shipbuilding and Space Technology were impaired. To reflect the goodwill impairment, operating income for Shipbuilding was reduced by $2.5 billion and operating income for Space Technology was reduced by $570 million.

The goodwill impairment charges for these businesses are primarily driven by adverse equity market conditions that caused a decrease in current market multiples and the company's stock price as of Nov. 30, 2008 . The charge reduces goodwill recorded in connection with acquisitions made in 2001 and 2002 and does not impact the company's normal business operations.

Cash Flow Highlights

Cash provided by operations for both fourth quarter and total year improved by $303 million and $321 million, respectively, primarily due to strong fourth quarter cash collections that resulted in improved working capital. Fourth quarter and full year cash from operations were reduced by discretionary pension pre-funding of $200 million in 2008 and 2007.

Cash, Debt and Capital Deployment

Changes in cash and cash equivalents and total debt reflect the following cash deployment and financing actions during 2008:

Segment Operating Results

Beginning with 2008 second quarter results, the company transferred certain missile systems programs from Mission Systems to Space Technology. Schedule 6 provides previously reported quarterly financial results and the adjustments for first and second quarter 2008 realignments and the second quarter 2008 sale of Electro-Optical Systems.

Segment Operating Results Adjusted for Goodwill Impairment

Fourth quarter and 2008 operating income for Shipbuilding and Aerospace were dramatically reduced by the goodwill impairment charges recorded in the fourth quarter. Segment operating income and its trends adjusted for the goodwill impairment impacts are detailed below.

Information & Services fourth quarter 2008 sales increased 5 percent and 2008 sales increased 6 percent. Sales increases for both the quarter and year are due to higher sales for Mission Systems and Technical Services. Information & Services fourth quarter operating income declined 3 percent from the prior year period, and as a percent of sales declined to 7.4 percent from 8.1 percent. The decline from the 2007 fourth quarter is primarily due to lower operating income for Mission Systems. For 2008, operating income declined 2 percent, reflecting lower operating income for Information Technology. As a percent of sales, 2008 operating income declined to 7.5 percent from 8.2 percent primarily due to lower margin rates for Mission Systems and Information Technology.

Mission Systems fourth quarter and 2008 sales increased 11 percent. Higher sales for both the fourth quarter and 2008 are due to higher volume for intelligence, surveillance & reconnaissance programs and command, control & communication programs. Fourth quarter operating income declined 14 percent and 230 basis points as a percent of sales. For the fourth quarter, operating income from higher sales was offset by final allocation of current and prior year overhead items and higher planned internal investment for a new business opportunity. For 2008, operating income was unchanged from the prior year period and as a percent of sales declined to 9 percent from 10 percent, reflecting lower performance for command, control & communications programs, including higher planned internal investment, and final allocations described above.