Northrop Grumman Reports Second Quarter 2008 Results

LOS ANGELES , July 29 /PRNewswire-FirstCall/ -- Northrop Grumman Corporation (NYSE: NOC) reported that second quarter 2008 earnings from continuing operations increased to $483 million, or $1.40 per diluted share, from $472 million, or $1.35 per diluted share, in the second quarter of 2007. Earnings for the 2007 second quarter included tax benefits totaling $16 million, or $0.05 per share. Sales for the 2008 second quarter increased 10 percent to $8.6 billion from $7.9 billion in the 2007 second quarter. Cash provided by operations for the 2008 second quarter totaled $607 million compared with $741 million in the prior year period.

Operating Highlights Second Quarter Six Months ($ millions except per share data) 2008 2007 Change 2008 2007 Change Sales $8,628 $7,878 10% $16,352 $15,192 8% Operating income 806 763 6% 1,270 1,453 (13%) as a % of sales 9.3% 9.7% (40 bps) 7.8% 9.6% (180 bps) Earnings from continuing operations $483 $472 2% $746 $866 (14%) Diluted EPS from continuing operations 1.40 1.35 4% 2.15 2.46 (13%) Net earnings 495 460 8% 759 847 (10%) Diluted EPS 1.44 1.31 10% 2.19 2.41 (9%) Cash from operations 607 741 (18%) 801 1,141 (30%) Free cash flow(1) 431 551 (22%) 447 763 (41%) (1) Free cash flow is a non-GAAP measure defined as cash from operations less capital expenditures and outsourcing contract & related software costs. Management uses free cash flow as an internal measure of financial performance.

"Solid sales increases for all four businesses drove nearly double-digit sales growth for the quarter. Operating income and margin rates for all four businesses are in line with our expectations. Based on this quarter's solid performance and our $67 billion total backlog, we are on track to achieve our 2008 guidance. The long-term outlook for Northrop Grumman continues to be outstanding," said Ronald D. Sugar , Northrop Grumman chairman and chief executive officer.

Operating income for the 2008 second quarter increased 6 percent to $806 million from $763 million in the 2007 second quarter. The increase in operating income reflects higher sales volume, lower corporate unallocated expenses, and improved net pension expense, offset by lower segment operating income. Second quarter 2008 segment operating income declined by $14 million principally due to lower operating income and margin rates for the Shipbuilding and Information & Services businesses than in the prior year period.

Interest expense improved by $11 million compared with the prior year period and other income improved by $14 million.

Federal and foreign income taxes for the 2008 second quarter increased to $256 million from $199 million in the second quarter of 2007. The effective tax rate applied to income from continuing operations for the 2008 second quarter was 34.6 percent compared with 29.7 percent in the 2007 second quarter. In the 2007 second quarter the company recognized tax benefits totaling $16 million after reaching a favorable settlement with the Internal Revenue Service regarding a portion of its audit for the years 2001 through 2003.

Net earnings for the 2008 second quarter increased 8 percent to $495 million, or $1.44 per diluted share, from $460 million, or $1.31 per diluted share, for the same period of 2007. Second quarter 2008 net earnings include a small after-tax gain on the sale of the company's Electro-Optical Systems business. Earnings per share are based on weighted average diluted shares outstanding of 344.1 million for the second quarter of 2008 and 355.3 million for the second quarter of 2007. Weighted average shares outstanding for the 2007 second quarter include the dilutive effect of 6.4 million shares of the company's mandatorily redeemable convertible preferred stock. These shares were redeemed or converted to common shares on or before April 4, 2008 .

New business awards totaled $7.5 billion in the 2008 second quarter. Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, was $66.9 billion as of June 30, 2008 .

Cash Flow Highlights Second Quarter Six Months ($ millions) 2008 2007 Change 2008 2007 Change Cash from operations $607 $741 $(134) $801 $1,141 $(340) Less: Capital expenditures 134 140 6 277 298 21 Outsourcing contract & related software costs 42 50 8 77 80 3 Free cash flow(1) $431 $551 $(120) $447 $763 $(316) (1) Free cash flow is a non-GAAP measure defined as cash from operations less capital expenditures and outsourcing contract & related software costs. Management uses free cash flow as an internal measure of financial performance.

Cash provided by operations in the 2008 second quarter totaled $607 million compared with $741 million in the prior year period. Second quarter 2007 included a $125 million insurance recovery.

Cash Measurements, Debt and Capital Deployment ($ millions) 6/30/2008 12/31/2007 Cash & cash equivalents $581 $963 Total debt 3,941 4,055 Net debt(1) 3,360 3,092 Mandatorily redeemable convertible preferred stock 0 350 Net debt to total capital ratio(2) 15% 14% (1) Total debt less cash and cash equivalents. (2) Net debt divided by the sum of shareholders' equity and total debt.

Cash and cash equivalents totaled $581 million at June 30, 2008 compared with $963 million at Dec. 31, 2007 , and total debt was $3.9 billion at June 30, 2008 . Changes in cash and cash equivalents and total debt include the following cash deployment, investing and financing actions during the first six months of 2008:

-- $805 million for share repurchases -- $277 million for capital expenditures and $77 million for outsourcing contract and related software costs -- $261 million for dividends -- $109 million principal payments of long-term debt -- $82 million proceeds from exercises of stock options and issuance of common stock -- $175 million proceeds from the sale of the company's Electro-Optical Systems business 2008 Guidance Confirmed Sales ~$33B Segment operating income(1) as % of sales mid to high 8% Operating income as % of sales high 8% Diluted EPS from continuing operations $4.90 - 5.15 Cash from operations(2) $2.6 - 2.9B Free cash flow(3) $1.7 - 2.1B (1) Segment operating income is a non-GAAP measure used as an internal measure of financial performance for the four businesses. (2) After required pension contributions of $120 million forecast for 2008. (3) Free cash flow is a non-GAAP measure defined as cash from operations less capital expenditures and outsourcing contract & related software costs. Management uses free cash flow as an internal measure of financial performance. Business Results CONSOLIDATED SALES & SEGMENT OPERATING INCOME (1) ($ millions except per share data) Second Quarter Six Months 2008 2007 Change 2008 2007 Change Sales Information & Services $3,175 $2,982 6% $6,063 $5,699 6% Aerospace 2,476 2,292 8% 4,838 4,563 6% Electronics 1,675 1,628 3% 3,230 3,156 2% Shipbuilding 1,688 1,359 24% 2,952 2,515 17% Intersegment eliminations (386) (383) (731) (741) Sales 8,628 7,878 10% 16,352 15,192 8% Segment operating income(1) Information & Services 251 264 (5%) 494 481 3% Aerospace 236 239 (1%) 488 472 3% Electronics 202 189 7% 411 381 8% Shipbuilding 126 134 (6%) (92) 213 (143%) Intersegment eliminations (31) (28) (59) (57) Segment operating income(1) 784 798 (2%) 1,242 1,490 (17%) as a % of sales 9.1% 10.1% (100 bps) 7.6% 9.8% (220 bps) Reconciliation to operating income: Unallocated expenses (43) (64) (75) (96) Net pension adjustment(2) 69 28 128 61 Royalty income adjustment (4) 1 (25) (2) Total operating income $806 $763 6% $1,270 $1,453 (13%) as a % of sales 9.3% 9.7% (40 bps) 7.8% 9.6% (180 bps) (1) Segment operating income is a non-GAAP measure used as an internal measure of financial performance for the four businesses. (2) Net pension adjustment includes pension expense determined in accordance with GAAP less pension expense allocated to the business segments under U.S. Government Cost Accounting Standards.

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 realigned results reflecting the transfer of these programs.

Information & Services Second Quarter ($ Millions) 2008 2007 Operating % of Operating % of Sales Income Sales Sales Income Sales Mission Systems $1,388 $133 9.6% $1,288 $142 11.0% Information Technology 1,215 82 6.7% 1,143 90 7.9% Technical Services 572 36 6.3% 551 32 5.8% $3,175 $251 7.9% $2,982 $264 8.9%

Information & Services second quarter 2008 sales increased 6 percent and include higher sales for all three business segments. Operating income for Information & Services declined 5 percent in the 2008 second quarter. As a percent of sales, operating income totaled 7.9 percent compared with 8.9 percent in the prior year period. The change in operating income and margin rate reflects lower performance for Mission Systems and Information Technology than in the prior year period.

Mission Systems sales increased 8 percent due to higher volume for intelligence, surveillance & reconnaissance programs and command, control & communications programs. Operating income declined 6 percent and as a percent of sales, totaled 9.6 percent compared with 11 percent in the prior year period. The change in operating income and in rate reflects a greater amount of favorable contract adjustments in the prior year period.

Information Technology sales rose 6 percent due to higher volume for intelligence programs, and the New York City Wireless and Network Centric Solutions programs. Operating income declined 9 percent, and as a percent of sales totaled 6.7 percent compared with 7.9 percent in the prior year period. The change in operating income and in rate reflects a reduction in the value of deferred costs for the County of San Diego IT outsourcing program.

Technical Services sales rose 4 percent due to higher volume for life cycle optimization and engineering programs. Operating income increased 13 percent from the prior year period, and as a percent of sales, increased to 6.3 percent from 5.8 percent in the prior year period. The improvement reflects higher volume and improved program performance.

Aerospace Second Quarter ($ Millions) 2008 2007 Operating % of Operating % of Sales Income Sales Sales Income Sales Integrated Systems $1,358 $143 10.5% $1,225 $149 12.2% Space Technology 1,118 93 8.3% 1,067 90 8.4% $2,476 $236 9.5% $2,292 $239 10.4%

Aerospace second quarter 2008 sales increased 8 percent from the prior year period and include higher volume for both Integrated Systems and Space Technology. Aerospace second quarter 2008 operating income was slightly lower than the prior year period, and as a percent of sales, totaled 9.5 percent compared with 10.4 percent in the prior year period.

Integrated Systems sales increased 11 percent primarily due to higher volume for the EA-6B, UCAS-D, B-2, Global Hawk and restricted programs, partially offset by lower volume for the F-35 program. Integrated Systems operating income declined 4 percent, and as a percent of sales totaled 10.5 percent compared with 12.2 percent in the prior year period. Second quarter 2007 operating income included a $27 million favorable adjustment related to the settlement of prior years overhead costs.

Space Technology sales increased 5 percent, primarily due to higher volume for restricted programs, and the James Webb Space Telescope and NPOESS programs. Higher volume for these programs was partially offset by lower volume for the Advanced Extremely High Frequency, Space Tracking and Surveillance System, Space Radar and Defense Support programs. Space Technology operating income increased 3 percent due to higher volume, and as a percent of sales was comparable to the prior year period.

Electronics Second Quarter ($ Millions) 2008 2007 Operating % of Operating % of Sales Income Sales Sales Income Sales $1,675 $202 12.1% $1,628 $189 11.6%

Electronics second quarter 2008 sales increased 3 percent from the prior year period principally due to higher sales for combat avionics, airborne surveillance, and inertial navigation programs. Higher volume for these programs was partially offset by lower volume for restricted programs and the Space-based Infrared System (SBIRS), as SBIRS transitions from development to production, than in the prior year period.

Electronics second quarter 2008 operating income increased 7 percent, and as a percent of sales, increased to 12.1 percent from 11.6 percent. Second quarter 2008 operating income reflects higher volume and includes a $20 million charge for the company's Wedgetail MESA radar program associated with the program risks arising from the prime contractor's announced schedule delay in completing the program. Operating income for the 2007 second quarter included a $27 million negative contract earnings adjustment for the F-16 Block 60 fixed price development program.

Shipbuilding Second Quarter ($ Millions) 2008 2007 Operating % of Operating % of Sales Income Sales Sales Income Sales $1,688 $126 7.5% $1,359 $134 9.9%

Shipbuilding second quarter 2008 sales increased 24 percent from the prior year due to higher volume for expeditionary warfare, surface combatant, aircraft carrier and fleet support programs, including the LPD, LHD, Ford-class aircraft carrier, and USS Enterprise programs. The increase in fleet support reflects revenue from the July 2007 reorganization of AMSEC. The increase also reflects lower volume in the 2007 second quarter due to a labor strike.

Shipbuilding second quarter 2008 operating income declined 6 percent from the prior year period, and as a percent of sales, totaled 7.5 percent compared with 9.9 percent in the prior year period. The decline in operating income and margin rate reflects additional costs for schedule impacts to several shipbuilding programs as a result of resource constraints caused by the previously announced delay in production on the LHD 8. Second quarter 2007 operating income included a $62 million insurance recovery and a $55 million negative contract adjustment on the LHD 8 program.

Second Quarter Highlights -- The U.S. Navy awarded Northrop Grumman a $1.16 billion contract for System Development and Demonstration of the service's new Broad Area Maritime Surveillance Unmanned Aircraft System (BAMS UAS) program. BAMS UAS will provide the U.S. Navy with a persistent maritime intelligence, surveillance and reconnaissance system to protect the fleet and provide a capability to detect, track, classify and identify maritime and littoral targets. The award is being protested by one of the other competitors. -- The U.S. Navy awarded Northrop Grumman a contract for maintenance work on the USS Enterprise (CVN 65) valued at $453.3 million. Northrop Grumman is the prime contractor for the work, which includes overhaul, maintenance and repairs to the ship and the ship's systems. -- Northrop Grumman received a contract with a potential value of up to $240 million to provide critical technologies for the Airborne and Maritime/Fixed Station Joint Tactical Radio System program. An initial $186.7 million contract was awarded focused on the software-defined radio development for the program. -- The U.S. Air Force awarded Northrop Grumman two undefinitized contracts, worth $300 million collectively, to complete non-recurring engineering, flight test/certification and begin production of new engines for the service's E-8C Joint Surveillance Target Attack Radar System (Joint STARS) fleet. -- Northrop Grumman was awarded an indefinite delivery/indefinite quantity subcontract with potential value of approximately $135 million as part of the Global Linguist Solutions LLC team to provide management of translation and interpretation services for the U.S. Army Intelligence and Security Command in support of Operation Iraqi Freedom. -- The U.S. Navy awarded Northrop Grumman a $101.9 million firm, fixed-price contract for a third lot of Improved Capability III airborne electronic attack systems for its fleet of EA-6B Prowlers. The company will deliver seven complete systems, plus associated piece parts and spares. -- The U.S. Army selected Northrop Grumman to produce the new multi-function radar for the Extended Range/Multi-Purpose Unmanned Aerial Vehicle (UAV) Radar program. Under the terms of the initial $42 million contract Northrop Grumman will deliver 10 STARLiteTM Synthetic Aperture Radar (SAR)/Ground Moving Target Indication radars to the Army. -- Northrop Grumman received a $79.4 million contract for the Global Hawk Multi-Platform Radar Technology Insertion Program (MP-RTIP) sensors as the first element of the lot 7 production contract. The sensors will be carried on the RQ-4 Block 40 Global Hawk high-altitude long-endurance unmanned aerial system currently in production. The first flight with the MP-RTIP sensor is scheduled in early 2009. -- The U.S. Department of Defense awarded Northrop Grumman a five-year contract to support theoretical studies and engineering research for Army, Navy and Air Force research-and-development programs. The program has a ceiling of $100 million over a 10-year period. -- Northrop Grumman delivered the National Security Cutter Bertholf (WMSL 750) to the U.S. Coast Guard. The cutter is the most technologically advanced ship in U.S. Coast Guard history. -- Northrop Grumman completed thermal-vacuum testing, a critical spacecraft environmental test, on NASA's Lunar Crater Observation and Sensing Satellite (LCROSS) two months ahead of schedule. LCROSS is a NASA mission to impact the moon in the search for water ice and water-bearing compounds in lunar craters. -- Northrop Grumman completed the sale of its Electro-Optical Systems business for $175 million in cash to L-3 Communications. -- Northrop Grumman increased its quarterly dividend to $0.40 per share from $0.37 per share. -- Northrop Grumman completed the previously announced redemption of its Series B Convertible Preferred Stock.

About Northrop Grumman

Northrop Grumman Corporation is a global defense and technology company whose 120,000 employees provide innovative systems, products, and solutions in information and services, electronics, aerospace and shipbuilding to government and commercial customers worldwide.

Northrop Grumman will webcast its earnings conference call at 12:00 p.m. EDT on July 29, 2008 . 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 Web site at http://www.northropgrumman.com.

Note: Certain statements and assumptions in this release contain or are based on "forward-looking" information that Northrop Grumman Corporation (the "Company") believes to be within the definition in the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties, and include, among others, statements in the future tense, and all statements accompanied by terms such as "project," "expect," "estimate," "assume," "believe," "plan," "forecast," "intend," "anticipate," "guidance," "outlook," "trends," "target" or variations thereof. This information reflects the Company's best estimates when made, but the Company expressly disclaims any duty to update this information if new data become available or estimates change after the date of this release.

Such "forward-looking" information includes, among other things, financial guidance regarding sales, segment operating income, 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 the Company's control. These include the Company'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, claims, appeals, bid protests, and investigations; hurricane-related insurance recoveries; environmental remediation; acquisitions and divestitures of businesses; joint ventures and other business arrangements; access to capital; performance issues with key suppliers and subcontractors; product performance and the successful execution of internal plans; successful negotiation of contracts with labor unions; allowability and allocability of costs under U.S. Government contracts; effective tax rates and timing and amounts of tax payments; the results of any audit or appeal process with the Internal Revenue Service; the availability and retention of skilled labor; and anticipated costs of capital investments, among other things.

The Company'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, the Company'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; technical, operational or quality setbacks that could adversely affect the profitability or cash flow of the company; 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, including 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, allowability and allocability of costs under U.S. Government contracts, 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 the Company's filings from time to time with the Securities and Exchange Commission, including, without limitation, Company reports on Form 10-K and Form 10-Q.

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SCHEDULE 1 NORTHROP GRUMMAN CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three months ended Six months ended June 30 June 30 $ in millions, except per share 2008 2007 2008 2007 Sales and Service Revenues Product sales $4,849 $4,460 $9,243 $8,646 Service revenues 3,779 3,418 7,109 6,546 Total sales and service revenues 8,628 7,878 16,352 15,192 Cost of Sales and Service Revenues Cost of product sales 3,793 3,486 7,522 6,696 Cost of service revenues 3,232 2,821 6,025 5,528 General and administrative expenses 797 808 1,535 1,515 Operating income 806 763 1,270 1,453 Other Income (Expense) Interest expense (72) (83) (149) (172) Other, net 5 (9) 27 (10) Earnings from continuing operations before income taxes 739 671 1,148 1,271 Federal and foreign income taxes 256 199 402 405 Earnings from continuing operations 483 472 746 866 Income (Loss) from discontinued operations, net of tax 12 (12) 13 (19) Net earnings $495 $460 $759 $847 Basic Earnings (Loss) Per Share Continuing operations $1.42 $1.37 $2.20 $2.52 Discontinued operations .04 (.03) .04 (.06) Basic earnings per share $1.46 $1.34 $2.24 $2.46 Weighted-average common shares outstanding, in millions 339.0 343.3 338.7 344.3 Diluted Earnings (Loss) Per Share Continuing operations $1.40 $1.35 $2.15 $2.46 Discontinued operations .04 (.04) .04 (.05) Diluted earnings per share $1.44 $1.31 $2.19 $2.41 Weighted-average diluted shares outstanding, in millions 344.1 355.3 346.7 356.8 SCHEDULE 2 NORTHROP GRUMMAN CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (unaudited) June 30, December 31, $ in millions 2008 2007 Assets: Cash and cash equivalents $581 $963 Accounts receivable, net of progress payments of $43,630 in 2008 and $40,475 in 2007 4,325 3,790 Inventoried costs, net of progress payments of $1,560 in 2008 and $1,345 in 2007 1,089 1,000 Deferred income taxes 503 542 Prepaid expenses and other current assets 596 502 Total current assets 7,094 6,797 Property, plant, and equipment, net of accumulated depreciation of $3,608 in 2008 and $3,424 in 2007 4,651 4,690 Goodwill 17,586 17,672 Other purchased intangibles, net of accumulated amortization of $1,739 in 2008 and $1,687 in 2007 992 1,074 Pension and postretirement benefits asset 2,125 2,080 Other assets 1,019 1,060 Total assets $33,467 $33,373 Liabilities: Notes payable to banks $23 $26 Current portion of long-term debt 74 111 Trade accounts payable 1,727 1,890 Accrued employees' compensation 1,283 1,175 Advance payments and billings in excess of costs incurred 1,825 1,563 Other current liabilities 1,659 1,667 Total current liabilities 6,591 6,432 Long-term debt, net of current portion 3,844 3,918 Mandatorily redeemable convertible preferred stock 350 Pension and postretirement benefits liability 3,093 3,008 Other long-term liabilities 2,076 1,978 Total liabilities 15,604 15,686 Commitments and Contingencies (Note 10) Shareholders' Equity: Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2008 -- 337,496,845; 2007 -- 337,834,561 337 338 Paid-in capital 10,335 10,661 Retained earnings 7,877 7,387 Accumulated other comprehensive loss (686) (699) Total shareholders' equity 17,863 17,687 Total liabilities and shareholders' equity $33,467 $33,373 SCHEDULE 3 NORTHROP GRUMMAN CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six months ended June 30 $ in millions 2008 2007 Operating Activities Sources of Cash - Continuing Operations Cash received from customers Progress payments $3,319 $3,261 Collections on billings 12,983 12,089 Proceeds from insurance carriers related to operations 5 125 Other cash receipts 32 12 Total sources of cash-continuing operations 16,339 15,487 Uses of Cash - Continuing Operations Cash paid to suppliers and employees (14,855) (13,619) Interest paid, net of interest received (153) (180) Income taxes paid, net of refunds received (482) (456) Excess tax benefits from stock-based compensation (45) (61) Other cash payments (7) (12) Total uses of cash-continuing operations (15,542) (14,328) Cash provided by continuing operations 797 1,159 Cash provided by (used in) discontinued operations 4 (18) Net cash provided by operating activities 801 1,141 Investing Activities Proceeds from sale of business, net of cash divested 175 Payment for business purchased, net of cash acquired (584) Proceeds from sale of property, plant, and equipment 9 10 Additions to property, plant, and equipment (277) (298) Payments for outsourcing contract and related software costs (77) (80) Proceeds from insurance carriers related to capital expenditures 3 Decrease in restricted cash 37 34 Other investing activities, net 1 (2) Net cash used in investing activities (132) (917) Financing Activities Net payments under lines of credit (3) (63) Principal payments of long-term debt (109) (66) Proceeds from exercises of stock options and issuance of common stock 82 196 Dividends paid (261) (254) Excess tax benefits from stock-based compensation 45 61 Common stock repurchases (805) (592) Net cash used in financing activities (1,051) (718) Decrease in cash and cash equivalents (382) (494) Cash and cash equivalents, beginning of period 963 1,015 Cash and cash equivalents, end of period $581 $521 SCHEDULE 4 NORTHROP GRUMMAN CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six months ended June 30 $ in millions 2008 2007 Reconciliation of Net Earnings to Net Cash Provided by Operating Activities Net Earnings $759 $847 Adjustments to reconcile to net cash provided by operating activities Depreciation 276 276 Amortization of assets 109 69 Stock-based compensation 83 78 Excess tax benefits from stock-based compensation (45) (61) Loss on disposals of property, plant, and equipment 2 12 Amortization of long-term debt premium (5) (6) Pre-tax gain on sale of business (58) Decrease (increase) in Accounts receivable (3,691) (2,949) Inventoried costs (304) (97) Prepaid expenses and other current assets (40) 10 Increase (decrease) in Progress payments 3,370 3,020 Accounts payable and accruals 215 (152) Deferred income taxes 121 10 Income taxes payable (84) (20) Retiree benefits 46 98 Other non-cash transactions, net 43 24 Cash provided by continuing operations 797 1,159 Cash provided by (used in) discontinued operations 4 (18) Net cash provided by operating activities $801 $1,141 Non-Cash Investing and Financing Activities Sale of business Cash received for business sold $175 Pre-tax gain on sale of business (58) Fair value of assets sold, including goodwill (135) Liabilities assumed by purchaser $(18) Purchase of business Fair value of assets acquired, including goodwill $688 Cash paid for business purchased (584) Liabilities assumed $104 Mandatorily redeemable convertible preferred stock converted or redeemed into common stock $350 Capital leases $21 SCHEDULE 5 NORTHROP GRUMMAN CORPORATION TOTAL BACKLOG AND CONTRACT AWARDS ($ in millions) (unaudited) TOTAL BACKLOG June 30, 2008 December 31, 2007(3) FUNDED UNFUNDED TOTAL FUNDED UNFUNDED TOTAL (1) (2) BACKLOG (1) (2) BACKLOG Information & Services Mission Systems $2,526 $3,325 $5,851 $2,365 $3,288 $5,653 Information Technology 2,409 1,971 4,380 2,581 2,268 4,849 Technical Services 1,571 2,730 4,301 1,471 3,193 4,664 Total Information & Services 6,506 8,026 14,532 6,417 8,749 15,166 Aerospace Integrated Systems 5,021 7,571 12,592 4,204 4,525 8,729 Space Technology 2,080 13,374 15,454 2,295 13,963 16,258 Total Aerospace 7,101 20,945 28,046 6,499 18,488 24,987 Electronics 8,655 2,311 10,966 7,887 2,047 9,934 Shipbuilding 11,601 1,741 13,342 10,348 3,230 13,578 Total $33,863 $33,023 $66,886 $31,151 $32,514 $63,665 (1) Funded backlog represents firm orders for which funding has been contractually obligated by the customer. (2) Unfunded backlog represents firm orders for which funding is not currently contractually obligated by the customer. Unfunded backlog excludes unexercised contract options and unfunded Indefinite Delivery Indefinite Quantity orders. (3) Certain prior period amounts have been reclassified to conform to the 2008 presentation. CONTRACT AWARDS The estimated value of new contract awards during the six months ended June 30, 2008, is approximately $19.6 billion. Significant new awards during this period include $1.5 billion for the aerial refueling tanker replacement program (see below), $1.4 billion for the DDG 1000 Zumwalt-class destroyer, $1.2 billion for the Broad Area Maritime Surveillance Unmanned Aircraft System program (see below), $596 million for the CVN 78 Ford-class aircraft carrier, $241 million for the Intercontinental Ballistic Missile (ICBM) program, $227 million for the Vehicular Intercommunications Systems Indefinite Delivery and Indefinite Quantity program, and $195 million for the Large Aircraft Infrared Counter-measures Indefinite Delivery and Indefinite Quantity program. On February 29, 2008, the company won a $1.5 billion contract awarded by the U.S. Air Force as an initial step to replace its aerial refueling tanker fleet. The losing bidder for the contract protested the award decision by the U.S. Air Force. A review of the award process was conducted by the Government Accountability Office (GAO), which issued its report on June 18, 2008 upholding the other bidder's protest. On July 9, 2008, the Secretary of Defense announced that the DoD intends to reopen the bidding for the contract to address certain findings identified by the GAO in its report. The company continues to carry the award in its backlog as of June 30, 2008. On April 22, 2008, the company was awarded a contract by the U.S. Navy for the Broad Area Maritime Surveillance Unmanned Aircraft System. One of the other bidders for the contract subsequently protested the decision by the U.S. Navy to award the contract to the company. The GAO is currently reviewing the protest and is expected to reach its decision in August 2008. The estimated value of new contract awards during the six months ended June 30, 2007, is approximately $14.4 billion. Significant new awards during this period include $2.2 billion for LHA-6, $875 million for the Flats Sequencing System program, $510 million for the DDG 1000 Zumwalt-class destroyer program, $270 million for the ICBM program, $223 million for the F-22 program, and $185 million for the Joint National Integration Center Research & Development program. SCHEDULE 6 NORTHROP GRUMMAN CORPORATION REALIGNED SEGMENT OPERATING RESULTS ($ in millions) (unaudited) AS REPORTED 2006 2007 2008 Three Months Total Three Months Ended Total Ended NET SALES Year Mar 31 Jun 30 Sep 30 Dec 31 Year Mar 31 Information & Services Mission Systems $5,651 $1,395 $1,586 $1,500 $1,639 $6,120 $1,545 Information Technology 3,962 1,038 1,143 1,107 1,198 4,486 1,085 Technical Services 1,858 520 551 573 533 2,177 505 Total Information & Services 11,471 2,953 3,280 3,180 3,370 12,783 3,135 Aerospace Integrated Systems 5,500 1,281 1,225 1,255 1,306 5,067 1,340 Space Technology 2,923 754 769 750 860 3,133 775 Total Aerospace 8,423 2,035 1,994 2,005 2,166 8,200 2,115 Electronics (2) 6,267 1,528 1,628 1,577 1,795 6,528 1,555 Ships 5,321 1,156 1,359 1,469 1,804 5,788 1,264 Intersegment Eliminations (1,491) (358) (383) (360) (370) (1,471) (345) Total Sales and Service Revenue $29,991 $7,314 $7,878 $7,871 $8,765 $31,828 $7,724 SEGMENT OPERATING INCOME Information & Services Mission Systems $517 $117 $163 $144 $152 $576 $145 Information Technology 342 86 90 72 81 329 89 Technical Services 120 28 32 28 32 120 26 Total Information & Services 979 231 285 244 265 1,025 260 Aerospace Integrated Systems 551 160 149 145 137 591 170 Space Technology 245 59 69 59 74 261 65 Total Aerospace 796 219 218 204 211 852 235 Electronics (2) 786 192 189 211 221 813 209 Ships 393 79 134 183 142 538 (218) Intersegment Eliminations (117) (29) (28) (26) (30) (113) (28) Total Segment Operating Income (1) $2,837 $692 $798 $816 $809 $3,115 $458 REALIGNED 2006 2007 2008 Three Months Total Three Months Ended Total Ended NET SALES Year Mar 31 Jun 30 Sep 30 Dec 31 Year Mar 31 Information & Services Mission Systems $4,704 $1,159 $1,288 $1,249 $1,381 $5,077 $1,298 Information Technology 3,962 1,038 1,143 1,107 1,198 4,486 1,085 Technical Services 1,858 520 551 573 533 2,177 505 Total Information & Services 10,524 2,717 2,982 2,929 3,112 11,740 2,888 Aerospace Integrated Systems 5,500 1,281 1,225 1,255 1,306 5,067 1,340 Space Technology 3,869 990 1,067 1,001 1,118 4,176 1,022 Total Aerospace 9,369 2,271 2,292 2,256 2,424 9,243 2,362 Electronics (2) 6,267 1,528 1,628 1,577 1,795 6,528 1,555 Ships 5,321 1,156 1,359 1,469 1,804 5,788 1,264 Intersegment Eliminations (1,490) (358) (383) (360) (370) (1,471) (345) Total Sales and Service Revenue $29,991 $7,314 $7,878 $7,871 $8,765 $31,828 $7,724 SEGMENT OPERATING INCOME Information & Services Mission Systems $451 $103 $142 $125 $138 $508 $128 Information Technology 342 86 90 72 81 329 89 Technical Services 120 28 32 28 32 120 26 Total Information & Services 913 217 264 225 251 957 243 Aerospace Integrated Systems 551 160 149 145 137 591 170 Space Technology 311 73 90 79 87 329 82 Total Aerospace 862 233 239 224 224 920 252 Electronics (2) 786 192 189 211 221 813 209 Ships 393 79 134 183 142 538 (218) Intersegment Eliminations (117) (29) (28) (27) (29) (113) (28) Total Segment Operating Income (1) $2,837 $692 $798 $816 $809 $3,115 $458 (1) Segment operating income is a non-GAAP measure used as an internal measure of financial performance for the individual business segments. (2) Reported amounts adjusted to reflect discontinued operations as previously reported in Schedule 6 of the First Quarter 2008 earnings release.

SOURCE Northrop Grumman Corporation

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