e10vk
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission file number
1-16411
NORTHROP GRUMMAN
CORPORATION
(Exact name of registrant as
specified in its charter)
|
|
|
DELAWARE
|
|
95-4840775
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification Number)
|
1840 Century Park East, Los Angeles, California 90067 (310)
553-6262
www.northropgrumman.com
(Address and telephone number of
principal executive offices and internet site)
Securities registered pursuant to section 12(b) of the Act:
|
|
|
Title of each class
|
|
Name of each exchange on which
registered
|
|
Common Stock, $1 par value
|
|
New York Stock Exchange
|
Series B Convertible Preferred
Stock
|
|
New York Stock Exchange
|
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in
Rule 12b-2
of the Exchange Act).
|
|
|
Large
accelerated filer þ
|
Accelerated
filer o
|
Non-accelerated
filer
o
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
As of June 30, 2006, the aggregate market value of the
common stock (based upon the closing price of the stock on the
New York Stock Exchange) of the registrant held by
non-affiliates was approximately $22,063 million.
As of February 16, 2007, 350,262,436 shares of common
stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of Northrop Grumman Corporations Proxy Statement
for the 2007 Annual Meeting of Stockholders are incorporated by
reference in Part III of this
Form 10-K.
NORTHROP
GRUMMAN CORPORATION
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
73
|
|
i
NORTHROP
GRUMMAN CORPORATION
PART I
HISTORY
AND ORGANIZATION
History
Northrop Grumman Corporation (Northrop Grumman or
the company) is an integrated enterprise consisting
of some 25 formerly separate businesses that cover the entire
defense spectrum, from undersea to outer space and into
cyberspace. The companies that have become part of todays
Northrop Grumman achieved historic accomplishments, from
transporting Charles Lindbergh across the Atlantic to carrying
astronauts to the moons surface and back.
From 1994 through 2002, the company entered a period of
significant expansion through acquisitions of other businesses,
most notably:
|
|
n
|
In 1994, Northrop Corporation acquired Grumman Corporation
(Grumman) and was renamed Northrop Grumman. Grumman was a
premier military aircraft systems integrator and builder of the
Lunar Module that first delivered men to the surface of the moon.
|
|
n
|
In 1996, the company acquired the defense and electronics
businesses of Westinghouse Electric Corporation, a world leader
in the development and production of sophisticated radar and
other electronic systems for the nations defense, civil
aviation, and other international and domestic applications.
|
|
n
|
In 1997, the company acquired Logicon, a provider of military
and commercial information systems and services that met the
needs of its national defense, civil and industrial customers.
|
|
n
|
In 1999, the company acquired Teledyne Ryan (Ryan), a world
leader in the design, development and manufacture of unmanned
airborne reconnaissance, surveillance, deception and target
systems. In 1927, Ryan produced the Spirit of
St. Louis, which Charles Lindbergh flew across the
Atlantic. Ryan was also a pioneer in the development of Unmanned
Aerial Vehicles (UAVs).
|
|
n
|
In 2001, the company acquired Litton Industries (Litton), a
global electronics and information technology enterprise, and
one of the nations leading full-service design,
engineering, construction, and life cycle supporters of major
surface ships for the United States (U.S.) Navy, U.S. Coast
Guard, and international navies.
|
|
n
|
Also in 2001, Newport News Shipbuilding (Newport News) was added
to the company. Newport News is the nations sole designer,
builder and refueler of nuclear-powered aircraft carriers and
one of only two companies capable of designing and building
nuclear-powered submarines.
|
|
n
|
In 2002, Northrop Grumman acquired the space and mission systems
businesses of TRW, a leading developer of military and civil
space systems and satellite payloads, as well as a leading
global integrator of complex, mission-enabling systems and
services.
|
The acquisition of these and other businesses have shaped the
company into its present position as a premier provider of
technologically advanced, innovative products, services and
solutions in information and services, aerospace, electronics
and shipbuilding. As prime contractor, principal subcontractor,
partner, or preferred supplier, Northrop Grumman participates in
many high-priority defense and non-defense technology programs
in the U.S. and abroad. The company conducts most of its
business with the U.S. Government, principally the
Department of Defense (DoD), and it also conducts business with
foreign governments as well as other domestic and international
customers.
Organization
The company is aligned into seven reportable segments
categorized into four primary businesses. The Mission Systems,
Information Technology, and Technical Services segments are
presented as Information & Services. The
-1-
NORTHROP
GRUMMAN CORPORATION
Technical Services segment was created on January 1, 2006,
from programs transferred from other segments. The Integrated
Systems and Space Technology segments are presented as
Aerospace. The Electronics and Ships segments are each presented
as separate businesses. Newport News and Ship Systems are
aggregated and reported as the Ships business in accordance with
the provisions of Statement of Financial Accounting Standards
No. 131 Disclosures about Segments of an
Enterprise and Related Information.
The company, from time to time, acquires or disposes of
businesses, and realigns contracts, programs or business areas
among its operating segments that possess similar customers,
expertise, and capabilities. These realignments are designed to
more fully leverage existing capabilities and enhance
development and delivery of products and services. The operating
results for all periods presented have been revised to reflect
these changes made through December 31, 2006.
INFORMATION &
SERVICES
Mission
Systems
The Mission Systems segment, headquartered in Reston, Virginia,
is a leading global systems integrator of complex,
mission-enabling systems. The segment consists of three areas of
business: Command, Control & Intelligence (C2I)
Systems; Missile Systems; and Technical & Management
Services.
C2I Systems C2I Systems provides a variety of
command, control, communications, computers, and intelligence
support to the various branches of the U.S. DoD and the
Intelligence Community. Offerings include signals intelligence
and exploitation systems, system engineering and integration,
data collection and operations and maintenance, modeling and
product generation, system simulation, integration and test,
spacecraft command and control (C2) systems, payload control and
terminal software, airborne reconnaissance, U.S. Army
tactical global combat service support, U.S. Army
management information systems, joint service nuclear,
biological and chemical reconnaissance systems, tactical
operation centers, interoperable C2 solutions, mission planning
applications, tactical data link products, global command and
control systems, interoperability engineering, intelligence
gathering, and naval systems engineering support and integration.
Missile Systems Missile Systems supports the
U.S. integrated Missile Defense system and the
Intercontinental Ballistic Missile (ICBM) Program. The
integrated Missile Defense system market includes shooters,
sensors, battle management, command, control, communications
(BMC3), modeling and simulation, and test and evaluation. The
business area provides BMC3 systems, war games, modeling and
simulation, system test and integration, and missile system
engineering to the Missile Defense Agency, Boeing, and Lockheed
Martin. As prime contractor for the Kinetic Energy Interceptor
(KEI) program, the company is leading development and test
activities focused on the boost, ascent and midcourse phases of
the Missile Defense Agencys global layered missile defense
system. As prime contractor for the ICBM Program Office, the
company offers ICBM domain knowledge, program management,
systems engineering and integration, and sustainment and
modernization services.
Technical & Management Services
Technical & Management Services primarily supports the
DoD. Products and services offered include information systems,
life cycle design, development, integration, and operations,
electromagnetic and infrared analysis, decision support with
modeling tools, systems effectiveness evaluation, sensor systems
integration, engineering prototypes and integration, joint
training mission rehearsals, and force modernization and
integration.
Information
Technology
The Information Technology segment, headquartered in McLean,
Virginia, consists of four areas of business: Intelligence;
Defense; Civilian Agencies; and Commercial, State &
Local.
Intelligence Intelligence provides
information technology (IT) systems, services and solutions
primarily to the U.S. Intelligence Community, which
includes customers in national agencies, defense, homeland
security, and other agencies at the federal, state and local
level. This business area also collaborates with other
Information Technology business areas by providing specialized
technology solutions in areas such as information security,
-2-
NORTHROP
GRUMMAN CORPORATION
secure wireless communications, secure cross agency
information-sharing and geospatial information systems. Services
and solutions span the entire mission life cycle from
requirements and technology development through processing and
data analysis to information delivery.
Defense Defense provides IT systems, services
and solutions to all elements of the DoD including the Air
Force, Navy, Army, Marines, the Office of the Secretary of
Defense, and the Unified Combatant Commands. Offerings include
business applications and systems integration related to human
capital and business management, logistics, transportation,
supply chain, and combat systems support. Other offerings
consist of information technology and network infrastructures,
including modernization, architecture, design and capacity
modeling. Defense also provides solutions and services for
defense technology laboratories and research and development
centers, system program offices, operational commands, education
and training commands, test centers, and other defense agencies.
Civilian Agencies Civilian Agencies provides
IT systems, services and solutions primarily for federal
civilian agencies, as well as government and commercial
healthcare customers. Civilian Agencies customers include the
departments of Homeland Security, Treasury, Justice,
Transportation, State, Interior, and the U.S. Postal
Service. Homeland Security offerings include secure networking,
criminal justice systems, and identity management. Healthcare
customers include the Department of Health and Human Services,
DoD Health Affairs, the Centers for Disease Control and
Prevention, the Food and Drug Administration, the Department of
Veterans Affairs, and a number of pharmaceutical manufacturers.
Healthcare offerings include enterprise architecture, systems
integration, infrastructure management, document management,
human capital management, case management, specialized health IT
solutions in electronic medical records, public health,
bio-surveillance, benefits, and clinical research.
Commercial, State & Local
Commercial, State & Local provides IT systems, services
and solutions primarily for state and local agencies and
commercial customers. The commercial business centers on managed
IT services both as a prime contractor and partner in addition
to specialized solutions that address specific business needs.
The state and local focus includes public safety, secure
wireless solutions, human services, and managed IT services.
This business area provides IT outsourcing services on a
service level agreement basis, where contractual
terms are based on infrastructure volume and service levels.
Services include management of data centers, networks, desktops,
storage, security, help desk, and applications. Specialized
state and local offerings include systems for
police/fire/medical emergency dispatch, public safety command
centers, biometric identification, and human services.
Technical
Services
The Technical Services segment, headquartered in Herndon,
Virginia, provides infrastructure management and maintenance,
training and preparedness, and logistics and life cycle
management in a wide array of operating environments. The
segment consists of three areas of business: Systems Support,
Training and Simulation, and Life Cycle Optimization and
Engineering.
Systems Support Systems Support provides
infrastructure and base operations management, including base
support and civil engineering work, military range work, support
functions which include construction, combat vehicle
maintenance, protective and emergency services, launch services,
and range-sensor-instrumentation operations. Primary customers
include the Department of Energy, the DoD, the National
Aeronautics and Space Administration (NASA), the Department of
Homeland Security, and the U.S. Intelligence Community, in
both domestic and international locations.
Training and Simulation Training and
Simulation provides realistic and comprehensive training to
senior military leaders and peacekeeping forces, designs and
develops future conflict training scenarios, and provides
U.S. warfighters and international allies with live,
virtual, and constructive training programs. This business area
also offers diverse training applications ranging from battle
command to professional military education.
-3-
NORTHROP
GRUMMAN CORPORATION
Life Cycle Optimization and Engineering Life
Cycle Optimization and Engineering provides complete life cycle
product and weapons system sustainment. This business area is
focused on providing direct support to warfighters with supply
chain management services, warehousing and inventory
transportation, field services and mobilization, sustaining
engineering, maintenance, repair and overhaul supplies, and
on-going weapon maintenance and technical assistance. The group
specializes in rebuilding essential parts and assemblies.
Customers include the U.S. military as well as commercial
and international customers.
AEROSPACE
Integrated
Systems
The Integrated Systems segment, headquartered in El Segundo,
California, designs, develops, produces, and supports fully
missionized integrated systems and subsystems in the areas of
battlespace awareness, command and control systems, integrated
combat systems, and airborne ground surveillance. The segment is
organized into the following areas of business: Integrated
Systems Western Region (ISWR); Airborne Early Warning &
Electronic Warfare (AEW/EW) Systems; and Airborne Ground
Surveillance & Battle Management (AGS/BM) Systems.
Integrated Systems Western Region The
principal manned programs in ISWR are subcontractor work on the
F/A-18 and
F-35 programs and prime contract work on the B-2 program and the
Multi-Platform Radar Technology Insertion Program (MP-RTIP). For
the F/A-18,
ISWR is responsible for the full integration of the center and
aft fuselage and vertical tail sections and associated
subsystems. For the F-35, ISWR is responsible for the detailed
design and integration of the center fuselage and weapons bay,
systems engineering, mission system software, ground and flight
test support, signature/low observables development, and support
of modeling and simulation activities. ISWR is the prime systems
integration contractor for the MP-RTIP, which will provide
advanced radar capabilities for both the Global Hawk UAV and the
latest U.S. Air Force Multi Sensor Command and Control
Aircraft
(E-10A).
ISWR is working on a radar and avionics upgrade program for the
B-2 bomber and is a prime integrator for all logistics support
activities including program depot maintenance.
The principal unmanned programs at ISWR are the Global Hawk, the
Naval Unmanned Combat Air System (N-UCAS), Aerial Targets, and
the Fire Scout. ISWR is the prime contractor for these product
lines with the exception of the Army version of Fire Scout for
Future Combat Systems (FCS). The Global Hawk is a high altitude
long endurance unmanned aerial reconnaissance system. N-UCAS is
a competitive development program designed to demonstrate the
technical feasibility, military utility, and operational value
for a networked system of high performance and weaponized UAVs
to effectively and affordably prosecute 21st century combat
missions. Aerial Targets has two primary models, the BQM-74 and
the BQM-34 and is the prime contractor on multiple domestic and
international contracts. Fire Scout is a vertical takeoff and
landing tactical UAV system in development and consists of two
versions the Vertical Takeoff and Landing Unmanned
Air Vehicle (VTUAV) for the U.S. Navy and the FCS
Class IV UAV for the U.S. Army.
Airborne Early Warning & Electronic Warfare
Systems AEW Systems principal products
include the
E-2C Hawkeye
and E-2D
Advanced Hawkeye aircraft (currently in the system development
and demonstration, or SDD, phase of development). The Hawkeye is
the U.S. Navys airborne battle management command and
control mission system providing airborne early warning
detection, identification, tracking, targeting, and
communication capabilities. The company has recently completed
delivering
E-2C
aircraft to the U.S. Navy and international customers under
the current multi-year contract, and is currently performing on
a follow-on multi-year contract for eight additional aircraft to
be delivered to the U.S. Navy through 2009 (2 aircraft
delivered in 2006). The company is developing the next
generation capability including radar, mission computer,
vehicle, and other system enhancements called the
E-2D
Advanced Hawkeye under an SDD contract with the U.S. Navy.
EW Systems principal products include the EA-6B (Prowler)
and EA-18G electronic attack aircraft. The Prowler is currently
the armed services only offensive tactical radar jamming
aircraft. EW Systems has developed the next generation mission
system for this aircraft under the Increased Capacity (ICAP) III
contract and has completed the final test and evaluation phase.
The company completed the low-rate initial production for
ICAP III Kits
-4-
NORTHROP
GRUMMAN CORPORATION
during 2006, and was awarded a follow-on contract for
ICAP III Kits & Spares, with deliveries commencing
in 2007. In addition, the company is performing on a contract to
incorporate the ICAP III mission system into an
F/A-18
platform, designated the EA-18G. Integrated Systems is the
principal subcontractor to Boeing for this program, which is
currently in the SDD phase.
Airborne Ground Surveillance & Battle Management
Systems AGS/BM Systems is the prime contractor
on the Joint Surveillance Target Attack Radar System (Joint
STARS) program. Joint STARS detects, locates, classifies,
tracks, and targets potentially hostile ground movement in all
weather conditions. It is designed to operate around the clock
in constant communication through secure data links with
U.S. Air Force command posts, U.S. Army mobile ground
stations, or centers for military analysis far from the point of
conflict. With all the production deliveries complete, Joint
STARS has shifted toward higher development upgrades, retrofits,
and support of the existing fleet. The Total Support Systems
Responsibility (TSSR) program provides management services and
sustains Joint STARS aircraft and associated systems. A
follow-on system, the
E-10A
Technology Demonstration Development Program is currently on
contract to modify a Boeing
767-400ER
Platform to demonstrate the MP-RTIP Radar and some Battle
Management Command & Control (BMC2) functionality via
selective test flights and demonstrations. AGS/BM Systems is
actively involved in the Mine Counter Measures
(MCM) technology with multiple customers and contracts that
focus on detecting and neutralizing
in-land,
coastal and water surface/subsurface mines. AGS/BM Systems is
aligned with five NATO partners in the Alliance Ground
Surveillance Joint Venture for the NATO Design and Development
phase of NATOs manned/unmanned ground surveillance
program. AGS/BM Systems is bidding on the KC-135 Tanker
Replacement program.
Space
Technology
The Space Technology segment, headquartered in Redondo Beach,
California, develops a broad range of systems at the leading
edge of space, defense, and electronics technology. The sector
provides products primarily for the U.S. Government that
contribute significantly to the nations security and
leadership in science and technology. Space Technology primarily
consists of the following areas of business: Intelligence,
Surveillance & Reconnaissance (ISR); Civil Space;
Software Defined Radios (which was transferred to the Mission
Systems segment effective January 1, 2007); Satellite
Communications (SatCom); Missile & Space Defense; and
Technology.
Intelligence, Surveillance &
Reconnaissance The ISR business area, gives the
nations monitoring systems a global reach and enhanced
national security. Addressing requirements in space-based
intelligence, surveillance, and reconnaissance systems, ISR
provides mission and system engineering, satellite systems, and
mission operations. Customers are predominantly restricted, as
are the major programs. The Defense Support Program (DSP) is
also part of this business area, and has been monitoring
ballistic missile launches for the U.S. Air Force for
decades.
Civil Space The Civil Space business area
produces and integrates space-based systems, instruments, and
services primarily for the NASA, the National Oceanic and
Atmospheric Administration, and other governmental agencies.
These systems are primarily used for space science, earth
observation and environmental monitoring, and exploration
missions. A variety of systems and services are provided,
including mission and system engineering services, spacecraft
and instrument systems, mission operations, and propulsion
systems. Major programs include National Polar-orbiting
Operational Environmental Satellite System (NPOESS), the James
Webb Space Telescope (JWST), Geostationary Operational
Environmental Satellite (GOES-R), and the legacy Chandra space
telescope and Earth Observing System programs.
Software Defined Radios Space
Technologys Software Defined Radios business area is at
the forefront of radio technology, and designs, develops, and
produces advanced integrated Communications, Navigation and
Identification (CNI) systems, radios, and avionics integration
software. The sectors avionics systems are integral
elements of the F-22A and F-35.
Satellite Communications The SatCom business
area includes complex satellite communication payloads. Key
customers are satellite prime contractors in support of the DoD
and other government agencies. Major programs
-5-
NORTHROP
GRUMMAN CORPORATION
include the Advanced Extremely High Frequency (AEHF) payload,
Transformational Satellite (TSAT) communications system, and the
communication payload for the legacy Milstar program, currently
in operation.
Missile & Space Defense The
Missile & Space Defense business area produces space,
air, and ground-based systems that detect, track, and destroy
missiles. Key capabilities and products include system
integration, spacecraft design and development, and high energy
laser systems and subsystems. Primary customers include the
Missile Defense Agency (MDA), the U.S. Air Force, the
U.S. Army, and other prime contractors. Major programs
include the Space Tracking and Surveillance System (STSS) and
Airborne Laser (ABL).
Technology The Technology business area
consists primarily of government funded research and development
contracts in support of the five business areas described above.
ELECTRONICS
The Electronics segment, headquartered in Linthicum, Maryland,
develops, produces, integrates and supports high performance
sensors, intelligence processing, and navigation systems
operating in all environments from undersea to outer space and
cyberspace. It also develops, produces, integrates and supports
power, power control, and ship controls for commercial and naval
ships. It provides systems direct to end user customers in
domestic and international markets. In select markets it
performs as a prime contractor, integrating multiple subsystems
to provide complete systems to meet customers solution
requirements. The segment is composed of five areas of business:
Aerospace Systems; Defensive Systems; Government Systems;
Naval & Marine Systems; and Navigation Systems.
Aerospace Systems Aerospace Systems provides
sensors, sensor processing, integrated sensor suites, and radar
countermeasure systems for military surveillance and
precision-strike; missile tracking and warning; space satellite
applications; and radio frequency electronic warfare. Fire
control radars include systems for the F-16, F-22A,
F-35 and
B-1B. Navigation radars include commercial and military systems
for cargo aircraft. Airborne surveillance systems include the
Airborne Warning and Control System (AWACS) radar, the 737
Multi-Role Electronically Scanned Array (MESA), the MP-RTIP and
Multi-mission Maritime Aircraft (MMA). Space satellite products
include the Space-Based Infrared Surveillance (SBIRS) program,
payloads for restricted programs, the Defense Meteorological
Satellite Program (DMSP), NPOESS, and the DSP. Radio frequency
electronic warfare products include radar warning receivers,
self-protection jammers, and integrated electronic warfare
systems for aircraft such as the Prowler, F-16 and F-15.
Defensive Systems Defensive Systems provides
systems that support combat aviation by protecting aircraft and
helicopters from attack, by providing capabilities for precise
targeting and tactical surveillance, by improving mission
availability through automated test systems and by improving
mission skills through advanced simulation systems. It also
provides systems that support land forces. Aircraft and
helicopter protection systems include infrared detection and
countermeasures systems to defeat shoulder-launched and
infrared-guided missiles. Targeting systems include lasers for
target designation and image processing and sensor applications,
and the LITENING pod system to detect and designate targets for
engagement by precision weapons in aircraft such as the F-16 and
F/A-18. Test
systems include systems to test electronic components of combat
aircraft on the flight line and in repair facilities. Land force
systems include precision guided munitions for artillery and UAV
delivery, night vision goggles, laser designators, weapon
sights, tactical radars for warning of missile and artillery
attack, and fire control radars for helicopters. Defensive
Systems also provides standard simulators for use on test ranges
and training facilities to emulate radars of potential
adversaries.
Government Systems Government Systems
provides products and services to meet the needs of governments
for improvements in the effectiveness of their civil and
military infrastructure and of their combat and
counter-terrorism operations. This includes systems and systems
integration of products and services for postal automation, for
the detection and alert of Chemical, Biological, Radiological,
Nuclear and Explosive (CBRNE) material, for homeland defense,
communications, and air traffic management, and for multi-sensor
processing and analysis for combat units and national agencies
of data from ISR systems. Key programs include: Advanced Flat
-6-
NORTHROP
GRUMMAN CORPORATION
Sorting Machines; International Sorting Centers; air to ground
radios, voice and data switches, ground movement and landing
systems; U.S. Postal Service bio-detection systems; robots
for bomb disposal; national level communications, information
processing and air defense systems for international customers;
unattended ground sensors; the ISR Distributed Common Ground
System for the U.S. military services and national
agencies; and deployed ISR and persistent surveillance
processing systems.
Naval & Marine Systems Naval and
Marine Systems provides major subsystems and subsystem
integration for sensors, sensor processing, missile launching,
ship controls and power generation. It provides systems to
military surface and subsurface platforms, and bridge and power
control systems for commercial maritime applications. Principal
programs include: radars for navigation; radars for aircraft and
cruise missile defense; bridge management and control systems;
power generation systems for aircraft carriers; propulsion
systems for the Virginia Class submarine; launch systems
for Trident submarines and the KEI program; the Advanced SEAL
Delivery System mini-submarine; and unmanned semi-autonomous
naval systems.
Navigation Systems Navigation Systems
provides navigation, identification and avionics systems for
military and commercial applications. Its products are used in
commercial space and aircraft; in military air, land, sea, and
space systems; and in both U.S. and international markets. Key
programs include: integrated avionics for the U.S. Marine
Corps attack and utility helicopters and U.S. Navy
E-2
aircraft; military navigation and positioning systems for the
F-16 fighter, F-22A fighter/attack aircraft, Eurofighter, and
U.S. Navy MH-60 helicopter; navigation systems for
commercial aircraft; navigation systems for military and civil
space satellites and deep space exploration;
friend-or-foe
transponders and interrogators; and systems for the C-17
aircraft, Eurofighter and MH-60 helicopter. Navigation Systems
also develops and produces fiber-optic acoustic systems for
underwater surveillance for Virginia Class submarines.
SHIPS
The Ships segment includes the following areas of business:
Aircraft Carriers; Expeditionary Warfare; Surface Combatants;
Submarines; Coast Guard & Coastal Defense; Services;
and Commercial & Other.
Aircraft Carriers Ships is the nations
sole industrial designer, builder, and refueler of
nuclear-powered aircraft carriers. The U.S. Navys
newest carrier, the USS Ronald Reagan, was delivered to
the fleet in May 2004. Construction on the last carrier in the
Nimitz class, the George H. W. Bush, continues. The
Bush christening occurred in the fall of 2006 and
delivery to the U.S. Navy is expected in 2008. Advanced
design and preparation continues for the new generation carrier,
CVN 21, which will incorporate transformational
technologies that will result in manning reductions, improved
war fighting capability, and a new nuclear propulsion plant
design. The construction award for the first ship of the CVN 21
program, the Gerald R. Ford, is expected in early 2008.
The company also provides ongoing maintenance for the
U.S. Navy aircraft carrier fleet through overhaul,
refueling, and repair work. Ships is currently performing the
refueling and complex overhaul of the USS Carl Vinson
with redelivery to the U.S. Navy anticipated in early 2009.
Planning for the USS Theodore Roosevelt refueling and
complex overhaul began in the fall of 2006. The ship is expected
to arrive at Newport News, Virginia in the fall of 2009.
Expeditionary Warfare Expeditionary Warfare
programs include the design and construction of amphibious
assault ships for the U.S. Navy, including the WASP LHD 1
class and the San Antonio LPD 17 class. Ships is the sole
provider for the LHD class of large-deck, 40,500-ton
multipurpose amphibious assault ships, which serve as the
centerpiece of an Amphibious Ready Group. Currently, the LHD 8
is under construction and is a significant upgrade from the
preceding seven ships of its class. The design and production of
the LHD 8 is a $1.8 billion program with delivery scheduled
for 2008. In 2006, design & long lead construction
funding was awarded for the LHA 6, the first in a new class
of enhanced amphibious assault ships, and the construction award
is anticipated in the first half of 2007. Ships is also the sole
provider of the LPD 17 class of ships, which function as
amphibious transports. The initial two ships were delivered in
2005 and 2006, and five LPD 17 ships are currently under
construction. Also, one additional ship is in backlog and long
lead funding has been received on the ninth ship.
-7-
NORTHROP
GRUMMAN CORPORATION
Surface Combatants Surface Combatants
includes the design and construction of the Arleigh Burke DDG 51
class Aegis guided missile destroyers, and the design of
DDG 1000 (previously DD(X)), the Navys future
transformational surface combatant class. Ships is one of two
prime contractors designing and building DDG 51 class
destroyers, which provide primary anti-aircraft and anti-missile
ship protection for the U.S. Navy fleet. Three Arleigh
Burke class destroyers are currently under construction with an
additional ship in backlog. In 2006, Ships was awarded
Phase IV detail design & long lead construction
funding for the initial DDG 1000. The contract calls for an
equal split of ship detail design efforts between the company
and Bath Iron Works, a wholly owned subsidiary of General
Dynamics Corporation. The construction award for the initial
ship is anticipated in the first half of 2007. The advanced
technologies developed on DD(X) Phase III are being
incorporated into DDG 1000 and are expected to be incorporated
into the next generation guided missile cruiser CG(X).
Submarines Northrop Grumman is one of only
two U.S. companies capable of designing and building
nuclear-powered submarines. In February 1997, the company and
Electric Boat, a wholly owned subsidiary of General Dynamics
Corporation, reached an agreement to cooperatively build
Virginia Class nuclear attack submarines. The lead ship,
USS Virginia, was delivered by Electric Boat to the
U.S. Navy and commissioned into the fleet in October 2004.
The USS Texas was delivered by Ships in the spring of
2006. The Hawaii was delivered in December 2006, and
progress continues on the North Carolina, the final block
one ship. Electric Boat and Ships were awarded a construction
contract in August 2003, which was subsequently modified in
January 2004, for the second block of six Virginia Class
submarines. Planning and long lead material procurement is
underway on all six boats of the second block; construction
has begun on the first four.
Coast Guard & Coastal Defense Ships
is a joint venture partner along with Lockheed Martin for the
Coast Guards Deepwater Modernization Program. Ships has
design and production responsibility for all surface ships,
including three new classes of cutters. The program is a
20-year
program with the surface ship content having an estimated
revenue value of over $8 billion. In 2006, the
Ships/Lockheed Martin joint venture was selected for a
43 month contract extension for the Deepwater program.
Services Ships provides after-market
services, including on-going maintenance and repair work, for a
wide array of naval and commercial vessels. The company has ship
repair facilities in the U.S. Navys largest homeports
of Norfolk, Virginia, and San Diego, California.
Commercial & Other Under the Polar
Tanker program, Ships was under contract to produce five
double-hulled tankers. These tankers each transport one million
barrels of crude oil from Alaska to west coast refineries and
are fully compliant with the Oil Pollution Act of 1990. The last
ship under this program was delivered in mid-2006.
Corporate
The companys principal executive offices are located at
1840 Century Park East, Los Angeles, California 90067. The
companys telephone number is
(310) 553-6262.
The companys home page on the Internet is
www.northropgrumman.com. The company makes web site content
available for informational purposes, and such content is not
incorporated by reference into this
Form 10-K,
unless so specified herein.
-8-
NORTHROP
GRUMMAN CORPORATION
SUMMARY
SEGMENT FINANCIAL DATA
In the following table, revenue from the U.S. Government
includes revenue from contracts for which Northrop Grumman is
the prime contractor, as well as those for which the company is
a subcontractor and the ultimate customer is the
U.S. Government. The companys discontinued operations
are excluded from all of the data elements in this table. For a
more complete understanding of the companys financial
information, see the Segment Operating Results in
Part II, Item 7, and the consolidated financial
statements in Part II, Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Sales and Service
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
$
|
4,612
|
|
|
$
|
4,575
|
|
|
$
|
4,251
|
|
Other customers
|
|
|
54
|
|
|
|
45
|
|
|
|
29
|
|
Intersegment sales
|
|
|
408
|
|
|
|
397
|
|
|
|
306
|
|
|
|
|
5,074
|
|
|
|
5,017
|
|
|
|
4,586
|
|
Information Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
3,063
|
|
|
|
2,921
|
|
|
|
2,714
|
|
Other customers
|
|
|
829
|
|
|
|
718
|
|
|
|
634
|
|
Intersegment sales
|
|
|
139
|
|
|
|
132
|
|
|
|
114
|
|
|
|
|
4,031
|
|
|
|
3,771
|
|
|
|
3,462
|
|
Technical Services
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
1,483
|
|
|
|
1,233
|
|
|
|
1,199
|
|
Other customers
|
|
|
34
|
|
|
|
45
|
|
|
|
52
|
|
Intersegment sales
|
|
|
272
|
|
|
|
255
|
|
|
|
241
|
|
|
|
|
1,789
|
|
|
|
1,533
|
|
|
|
1,492
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
5,277
|
|
|
|
5,272
|
|
|
|
4,370
|
|
Other customers
|
|
|
169
|
|
|
|
170
|
|
|
|
204
|
|
Intersegment sales
|
|
|
54
|
|
|
|
47
|
|
|
|
36
|
|
|
|
|
5,500
|
|
|
|
5,489
|
|
|
|
4,610
|
|
Space Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
3,209
|
|
|
|
3,278
|
|
|
|
3,148
|
|
Other customers
|
|
|
87
|
|
|
|
67
|
|
|
|
63
|
|
Intersegment sales
|
|
|
55
|
|
|
|
50
|
|
|
|
58
|
|
|
|
|
3,351
|
|
|
|
3,395
|
|
|
|
3,269
|
|
Electronics
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
4,112
|
|
|
|
4,015
|
|
|
|
3,701
|
|
Other customers
|
|
|
1,906
|
|
|
|
1,902
|
|
|
|
2,156
|
|
Intersegment sales
|
|
|
560
|
|
|
|
685
|
|
|
|
533
|
|
|
|
|
6,578
|
|
|
|
6,602
|
|
|
|
6,390
|
|
Ships
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
5,263
|
|
|
|
5,727
|
|
|
|
6,108
|
|
Other customers
|
|
|
48
|
|
|
|
57
|
|
|
|
142
|
|
Intersegment sales
|
|
|
10
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
5,321
|
|
|
|
5,786
|
|
|
|
6,252
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Other customers
|
|
|
|
|
|
|
42
|
|
|
|
227
|
|
Intersegment sales
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
42
|
|
|
|
230
|
|
Intersegment eliminations
|
|
|
(1,496
|
)
|
|
|
(1,568
|
)
|
|
|
(1,291
|
)
|
Total sales and service revenues
|
|
$
|
30,148
|
|
|
$
|
30,067
|
|
|
$
|
29,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-9-
NORTHROP
GRUMMAN CORPORATION
Foreign Sales Foreign sales amounted to
approximately $1.6 billion, $1.7 billion, and
$1.6 billion, or 5.2 percent, 5.5 percent, and
5.5 percent of total revenue for the years ended
December 31, 2006, 2005, and 2004, respectively. All of the
companys segments engage in international business, for
which the company retains a number of sales representatives and
consultants who are not employees of the company. See Risk
Factors in Part I, Item 1A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
471
|
|
|
$
|
374
|
|
|
$
|
314
|
|
Information Technology
|
|
|
352
|
|
|
|
328
|
|
|
|
246
|
|
Technical Services
|
|
|
110
|
|
|
|
89
|
|
|
|
71
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
551
|
|
|
|
499
|
|
|
|
431
|
|
Space Technology
|
|
|
293
|
|
|
|
274
|
|
|
|
236
|
|
Electronics
|
|
|
744
|
|
|
|
702
|
|
|
|
661
|
|
Ships
|
|
|
393
|
|
|
|
249
|
|
|
|
395
|
|
Other
|
|
|
|
|
|
|
(17
|
)
|
|
|
(3
|
)
|
Intersegment Eliminations
|
|
|
(117
|
)
|
|
|
(84
|
)
|
|
|
(59
|
)
|
Total Segment Operating Margin
|
|
|
2,797
|
|
|
|
2,414
|
|
|
|
2,292
|
|
Non-segment factors affecting
operating margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses
|
|
|
(287
|
)
|
|
|
(190
|
)
|
|
|
(282
|
)
|
Net pension expense adjustment
|
|
|
(37
|
)
|
|
|
(21
|
)
|
|
|
(12
|
)
|
Reversal of royalty income
included above
|
|
|
(19
|
)
|
|
|
(10
|
)
|
|
|
(12
|
)
|
Total operating margin
|
|
$
|
2,454
|
|
|
$
|
2,193
|
|
|
$
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Expenses The reconciling item
captioned Unallocated expenses includes the portion
of corporate expenses such as management and administration,
legal, environmental, certain compensation and retiree benefits,
and other expenses not considered allowable or allocable under
applicable U.S. Government Cost Accounting Standards (CAS)
regulations and the Federal Acquisition Regulation, and
therefore not allocated to the segments.
Net Pension Expense Adjustment The net
pension expense adjustment reflects the excess pension expense
determined in accordance with accounting principles generally
accepted in the United States of America (GAAP) over the pension
expense allocated to the operating segments under CAS.
Realignments
The company, from time to time, acquires or disposes of
businesses, and realigns contracts, programs or business areas
among its operating segments that possess similar customers,
expertise, and capabilities. These realignments are designed to
more fully leverage existing capabilities and enhance
development and delivery of products and services. The operating
results for all periods presented have been revised to reflect
these changes.
-10-
NORTHROP
GRUMMAN CORPORATION
Other
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Contract Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
5,717
|
|
|
$
|
4,442
|
|
|
$
|
4,846
|
|
Information Technology
|
|
|
4,617
|
|
|
|
3,962
|
|
|
|
3,680
|
|
Technical Services
|
|
|
2,288
|
|
|
|
1,368
|
|
|
|
1,464
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
6,107
|
|
|
|
4,544
|
|
|
|
5,042
|
|
Space Technology
|
|
|
4,314
|
|
|
|
2,643
|
|
|
|
3,455
|
|
Electronics
|
|
|
7,167
|
|
|
|
6,346
|
|
|
|
6,542
|
|
Ships
|
|
|
10,045
|
|
|
|
2,749
|
|
|
|
5,670
|
|
Other
|
|
|
|
|
|
|
19
|
|
|
|
217
|
|
Intersegment eliminations
|
|
|
(1,500
|
)
|
|
|
(1,565
|
)
|
|
|
(1,293
|
)
|
Total contract acquisitions
|
|
$
|
38,755
|
|
|
$
|
24,508
|
|
|
$
|
29,623
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
45
|
|
|
$
|
54
|
|
|
$
|
23
|
|
Information Technology
|
|
|
32
|
|
|
|
35
|
|
|
|
27
|
|
Technical Services
|
|
|
4
|
|
|
|
5
|
|
|
|
4
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
119
|
|
|
|
142
|
|
|
|
111
|
|
Space Technology
|
|
|
107
|
|
|
|
123
|
|
|
|
123
|
|
Electronics
|
|
|
130
|
|
|
|
166
|
|
|
|
146
|
|
Ships
|
|
|
287
|
|
|
|
266
|
|
|
|
220
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Corporate
|
|
|
13
|
|
|
|
33
|
|
|
|
15
|
|
Total capital expenditures
|
|
$
|
737
|
|
|
$
|
824
|
|
|
$
|
672
|
|
Depreciation and
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
30
|
|
|
$
|
57
|
|
|
$
|
55
|
|
Information Technology
|
|
|
46
|
|
|
|
49
|
|
|
|
48
|
|
Technical Services
|
|
|
7
|
|
|
|
8
|
|
|
|
8
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
110
|
|
|
|
102
|
|
|
|
90
|
|
Space Technology
|
|
|
136
|
|
|
|
142
|
|
|
|
132
|
|
Electronics
|
|
|
211
|
|
|
|
247
|
|
|
|
244
|
|
Ships
|
|
|
153
|
|
|
|
155
|
|
|
|
148
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Corporate
|
|
|
12
|
|
|
|
12
|
|
|
|
6
|
|
Total depreciation and amortization
|
|
$
|
705
|
|
|
$
|
772
|
|
|
$
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-11-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
4,701
|
|
|
$
|
4,750
|
|
Information Technology
|
|
|
3,305
|
|
|
|
3,319
|
|
Technical Services
|
|
|
1,092
|
|
|
|
993
|
|
Aerospace
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
2,202
|
|
|
|
2,271
|
|
Space Technology
|
|
|
4,541
|
|
|
|
4,615
|
|
Electronics
|
|
|
5,454
|
|
|
|
5,577
|
|
Ships
|
|
|
6,946
|
|
|
|
6,756
|
|
Other
|
|
|
|
|
|
|
14
|
|
Segment assets
|
|
|
28,241
|
|
|
|
28,295
|
|
Corporate
|
|
|
3,768
|
|
|
|
5,919
|
|
Total assets
|
|
$
|
32,009
|
|
|
$
|
34,214
|
|
Funded Backlog
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
2,952
|
|
|
$
|
2,309
|
|
Information Technology
|
|
|
2,830
|
|
|
|
2,244
|
|
Technical Services
|
|
|
1,066
|
|
|
|
567
|
|
Aerospace
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
4,285
|
|
|
|
3,678
|
|
Space Technology
|
|
|
1,936
|
|
|
|
972
|
|
Electronics
|
|
|
6,585
|
|
|
|
5,996
|
|
Ships
|
|
|
10,854
|
|
|
|
6,130
|
|
Other
|
|
|
|
|
|
|
5
|
|
Total funded backlog
|
|
$
|
30,508
|
|
|
$
|
21,901
|
|
|
|
|
|
|
|
|
|
|
Substantially all of the companys assets are located or
maintained in the United States. Backlog is converted into the
following years sales as costs are incurred or deliveries
are made. Approximately 65 percent of the
2006 year-end funded backlog is expected to be converted
into sales in 2007.
CUSTOMERS
AND REVENUE CONCENTRATION
The companys primary customer is the U.S. Government.
Revenue from the U.S. Government accounted for
approximately 90 percent, 90 percent, and
88 percent of total revenues in 2006, 2005, and 2004,
respectively. No other customer accounted for more than
10 percent of total revenue during any period presented. No
single product or service accounted for more than
10 percent of total revenue during any period presented.
-12-
NORTHROP
GRUMMAN CORPORATION
PATENTS
The following table summarizes the number of patents the company
owns or has pending as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
Pending
|
|
|
Total
|
|
U.S. patents
|
|
|
3,507
|
|
|
|
749
|
|
|
|
4,256
|
|
Foreign patents
|
|
|
2,515
|
|
|
|
1,977
|
|
|
|
4,492
|
|
Total
|
|
|
6,022
|
|
|
|
2,726
|
|
|
|
8,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents developed while under contract with the
U.S. Government may be subject to use by the
U.S. Government. In addition the company licenses
intellectual property to, and from, third parties. Management
believes the companys ability to conduct its operations
would not be materially affected by the loss of any particular
intellectual property right.
SEASONALITY
No material portion of the companys business is considered
to be seasonal. The timing of revenue recognition is determined
upon several factors including the timing of contract awards,
the incurrence of contract costs, cost estimation, and unit
deliveries. See Revenue Recognition in Part II,
Item 7.
RAW
MATERIALS
The most significant raw material required by the company is
steel, used primarily for ship building. The company has
mitigated supply risk by negotiating long-term agreements with a
number of steel suppliers. In addition, the company has
mitigated price risk related to its steel purchases through
certain contractual arrangements with the U.S. Government.
While the company has generally been able to obtain key raw
materials required in its production processes in a timely
manner, a significant delay in receipt of these supplies by the
company could have a material effect on the companys
results of operations. See Risk Factors in
Part I, Item 1A.
GOVERNMENT
REGULATION
The companys business is affected by numerous laws and
regulations relating to the award, administration and
performance of U.S. Government contracts. See Risk
Factors in Part I, Item 1A.
Certain programs with the U.S. Government that are
prohibited by the customer from being publicly discussed in
detail are referred to as restricted in this
Form 10-K.
The consolidated financial statements and financial information
contained within this
Form 10-K
reflect the operating results of restricted programs under GAAP.
See Risk Factors in Part I, Item 1A.
RESEARCH
AND DEVELOPMENT
Company-sponsored research and development activities primarily
include independent research and development (IR&D) efforts
related to government programs. IR&D expenses are included
in general and administrative expenses and are allocated to
U.S. Government contracts. Company-sponsored research and
development expenses totaled $574 million,
$538 million, and $504 million in 2006, 2005, and
2004, respectively. Expenses for research and development
sponsored by the customer are charged directly to the related
contracts.
-13-
NORTHROP
GRUMMAN CORPORATION
EMPLOYEE
RELATIONS
The company believes that it maintains good relations with its
122,200 employees, of which approximately 19 percent are
covered by 32 collective bargaining agreements. The company
expects to re-negotiate two of its larger collective bargaining
agreements and 15 of its smaller agreements in 2007. It is not
expected that these negotiations will, either individually or in
the aggregate, have a material adverse effect on the
companys results of operations. See Risk
Factors in Part I, Item 1A.
ENVIRONMENTAL
MATTERS
Federal, state, and local laws relating to the protection of the
environment affect the companys manufacturing operations.
The company has provided for the estimated cost to complete
environmental remediation where the company has determined it is
probable that the company will incur such costs in the future to
address environmental impacts at currently or formerly owned or
leased operating facilities, or at sites where it has been named
a Potentially Responsible Party (PRP) by the Environmental
Protection Agency or similarly designated by other environmental
agencies. These estimates may change given the inherent
difficulty in estimating environmental cleanup costs to be
incurred in the future due to the uncertainties regarding the
extent of the required cleanup, determination of legally
responsible parties, and the status of laws, regulations, and
their interpretations.
In order to assess the potential impact on the companys
financial statements, management estimates the possible
remediation costs that reasonably could be incurred by the
company on a
site-by-site
basis. Such estimates take into consideration the professional
judgment of the companys environmental engineers and, when
necessary, consultation with outside environmental specialists.
In most instances, only a range of reasonably possible costs can
be estimated. However, in the determination of accruals, the
most probable amount is used when determinable, and the minimum
is used when no single amount is more probable. The company
records accruals for environmental cleanup costs in the
accounting period in which the companys responsibility is
established and the costs can be reasonably estimated. The
company does not anticipate and record insurance recoveries
before it has determined that collection is probable.
Management estimates that at December 31, 2006, the range
of reasonably possible future costs for environmental
remediation sites is $224 million to $319 million, of
which $257 million is accrued in Other current
liabilities in the consolidated statements of financial
position. Environmental accruals are recorded on an undiscounted
basis. At sites involving multiple parties, the company provides
environmental accruals based upon its expected share of
liability, taking into account the financial viability of other
jointly liable parties. Environmental expenditures are expensed
or capitalized as appropriate. Capitalized expenditures relate
to long-lived improvements in currently operating facilities. In
addition, should other PRPs not pay their allocable share of
remediation costs, the company may have to incur costs in
addition to those already estimated and accrued, which could
have a material effect on the companys consolidated
financial position, results of operations, or cash flows. The
company has made the investments it believes necessary in order
to comply with environmental laws.
COMPETITIVE
CONDITION
Northrop Grumman, along with Lockheed Martin Corporation, The
Boeing Company, Raytheon Company, and General Dynamics
Corporation are among the largest companies in the
U.S. defense industry at this time. Northrop Grumman
competes against these and other companies for a number of
programs, both large and small. Intense competition and long
operating cycles are both key characteristics of Northrop
Grummans business and the defense industry. It is common
in this industry for work on major programs to be shared among a
number of companies. A company competing to be a prime
contractor may, upon ultimate award of the contract to another
party, turn out to be a subcontractor for the ultimate prime
contracting party. It is not uncommon to compete for a contract
award with a peer company and, simultaneously perform as a
supplier to or a customer of such competitor on other contracts.
The nature of major defense programs, conducted under
-14-
NORTHROP
GRUMMAN CORPORATION
binding contracts, allows companies that perform well to benefit
from a level of program continuity not common in many industries.
The companys success in the competitive defense industry
depends upon its ability to develop and market its products and
services, as well as its ability to provide the people,
technologies, facilities, equipment, and financial capacity
needed to deliver those products and services with maximum
efficiency. It is necessary to maintain, as the company has,
sources for raw materials, fabricated parts, electronic
components, and major subassemblies. In this manufacturing and
systems integration environment, effective oversight of
subcontractors and suppliers is as vital to success as managing
internal operations. See Risk Factors in
Part I, Item 1A.
EXECUTIVE
OFFICERS
See Part III, Item 10, for information about Executive
Officers of the company.
AVAILABLE
INFORMATION
Throughout this
Form 10-K,
the company incorporates by reference information from parts of
other documents filed with the Securities and Exchange
Commission (SEC). The SEC allows the company to disclose
important information by referring to it in this manner, and you
should review this information in addition to the information
contained herein.
The companys annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and proxy statement for the annual shareholders meeting,
as well as any amendments to those reports, are available free
of charge through the companys web site as soon as
reasonably practicable after electronic filing of such material
with the SEC. You can learn more about the company by reviewing
the companys SEC filings on the companys web site.
The companys SEC reports can be accessed through the
investor relations page of the companys web site at
www.northropgrumman.com.
The SEC also maintains a web site at www.sec.gov that contains
reports, proxy statements and other information regarding SEC
registrants, including Northrop Grumman. The public may read and
copy any materials filed by the company with the SEC at the
SECs Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC
at
1-800-SEC-0330.
|
|
|
The companys financial position, results of operations and
cash flows are subject to various risks, many of which are not
exclusively within the companys control that may cause
actual performance to differ materially from historical or
projected future performance. Information contained within this
Form 10-K
should be carefully considered by investors in light of the risk
factors described below.
|
|
|
n |
The Company Depends Heavily on a Single Customer, the
U.S. Government, for a Substantial Portion of the
Companys Business, Including Programs Subject to Security
Classification Restrictions on Information. Changes Affecting
this Customers Capacity to Do Business with the Company or
the Effects of Competition in the Defense Industry Could Have a
Material Adverse Effect On the Company or Its Prospects.
|
Approximately 90 percent of the companys revenues
during 2006 were derived from products and services ultimately
sold to the U.S. Government and are therefore affected by,
among other things, the federal budget process. The company is a
supplier, either directly or as a subcontractor or team member,
to the U.S. Government and its agencies as well as foreign
governments and agencies. These contracts are subject to the
respective customers political and budgetary constraints
and processes, changes in customers short-range and
long-range strategic plans, the timing of contract awards, and
in the case of contracts with the U.S. Government, the
congressional budget authorization and appropriation processes,
the Governments ability to terminate contracts for
convenience or for default, as well as other risks such as
contractor
-15-
NORTHROP
GRUMMAN CORPORATION
suspension or debarment in the event of certain violations of
legal and regulatory requirements. The termination or failure to
fund one or more significant contracts by the
U.S. Government could have a material adverse effect on the
companys results of operations or prospects.
In the event of termination for the governments
convenience, contractors are normally protected by provisions
covering reimbursement for costs incurred subsequent to
termination. The company is involved in a lawsuit concerning a
contract terminated for convenience. See Other
Matters in Part I, Item 3. Termination resulting
from the companys default could expose the company to
liability and have a material adverse effect on its ability to
compete for contracts.
In addition, a material amount of the companys revenues
and profits is derived from programs that are subject to
security classification restrictions (restricted business),
which could limit the companys ability to discuss details
about these programs, their risks or any disputes or claims
relating to such programs. As a result, investors might have
less insight into the companys restricted business than
other businesses of the company or could experience less ability
to evaluate fully the risks, disputes or claims associated with
restricted business.
The companys success in the competitive defense industry
depends upon its ability to develop and market its products and
services, as well as its ability to provide the people,
technologies, facilities, equipment, and financial capacity
needed to deliver those products and services with maximum
efficiency. A loss of business to our competitors could have a
material adverse affect on the companys ability to
generate favorable financial results and maintain market share.
|
|
n |
Many of The Companys Contracts Contain Performance
Obligations That Require Innovative Design Capabilities, Are
Technologically Complex, Require
State-Of-The-Art
Manufacturing Expertise or Are Dependent Upon Factors Not Wholly
Within The Companys Control. Failure to Meet These
Obligations Could Adversely Affect The Companys
Profitability and Future Prospects.
|
The company designs, develops and manufactures technologically
advanced and innovative products and services applied by our
customers in a variety of environments. Problems and delays in
development or delivery as a result of issues with respect to
design, technology, licensing and patent rights, labor, learning
curve assumptions, or materials and components could prevent the
company from achieving contractual requirements.
In addition, the companys products cannot be tested and
proven in all situations and are otherwise subject to unforeseen
problems. Examples of unforeseen problems which could negatively
affect revenue and profitability include loss on launch of
spacecraft, premature failure, problems with quality, country of
origin, delivery of subcontractor components or services, and
unplanned degradation of product performance. These failures
could result, either directly or indirectly, in loss of life or
property. Among the factors that may affect revenue and profits
could be unforeseen costs and expenses not covered by insurance
or indemnification from the customer, diversion of management
focus in responding to unforeseen liabilities, loss of follow-on
work, and, in the case of certain contracts, repayment to the
government customer of contract cost and fee payments previously
received by the company.
Certain contracts, primarily involving space satellite systems,
contain provisions that entitle the customer to recover fees in
the event of partial or complete failure of the system upon
launch or subsequent deployment for less than a specified period
of time. Under such terms, the company could be required to
forfeit fees previously recognized
and/or
collected. The company has not experienced any material losses
in the last decade in connection with contract performance
incentive provisions. However, if the company were to experience
launch failures or complete satellite system failures in the
future, such events could have a material adverse impact on the
companys financial position or results of operations.
-16-
NORTHROP
GRUMMAN CORPORATION
|
|
n |
Contract Cost Growth on Fixed-Price and Other Contracts
That Cannot Be Justified as an Increase In Contract Value Due
From Customers Exposes The Company to Reduced Profitability and
the Potential Loss of Future Business.
|
Operating margin is adversely affected when contract costs that
cannot be billed to customers are incurred. This cost growth can
occur if estimates to complete increase due to technical
challenges or if initial estimates used for calculating the
contract price were incorrect. The cost estimation process
requires significant judgment and expertise. Reasons for cost
growth may include unavailability and productivity of labor, the
nature and complexity of the work to be performed, the effect of
change orders, the availability of materials, the effect of any
delays in performance, availability and timing of funding from
the customer, natural disasters, and the inability to recover
any claims included in the estimates to complete. A significant
change in cost estimates on one or more programs could have a
material effect on the companys consolidated financial
position or results of operations.
Due to their nature, fixed-price contracts inherently have more
risk than flexibly priced contracts and therefore generally
carry higher profit margins. Approximately 34 percent of
the companys annual revenues are derived from fixed-price
contracts see Contracts in Part II,
Item 7. Flexibly priced contracts may carry risk to the
extent of their specific contract terms and conditions relating
to performance award fees and negative performance incentives.
The company typically enters into fixed-price contracts where
costs can be reasonably estimated based on experience. In
addition, certain contracts other than fixed-price contracts
have provisions relating to cost controls and audit rights.
Should the terms specified in those contracts not be met, then
profitability may be reduced.
Fixed-price development work comprises a small portion of the
companys fixed-price contracts and inherently has more
uncertainty as to future events than production contracts and
therefore more variability in estimates of the costs to complete
the development stage. As work progresses through the
development stage into production, the risks associated with
estimating the total costs of the contract are generally
reduced. In addition, successful performance of fixed-price
development contracts, which include production units, is
subject to the companys ability to control cost growth in
meeting production specifications and delivery rates. While
management uses its best judgment to estimate costs associated
with fixed-price development programs, future events could
result in either upward or downward adjustments to those
estimates. Examples of the companys significant
fixed-price development contracts include the F-16 Block 60
combat avionics program and the MESA radar system program for
the Wedgetail and Peace Eagle contracts, both of which are
performed by the Electronics segment. It is also not unusual in
the Ships business for the company to negotiate fixed-price
production follow-on contracts before the development effort has
been completed and learning curves fully realized on existing
flexibly priced development contracts.
|
|
n |
The Company Uses Estimates When Accounting for Contracts.
Changes In Estimates Could Affect The Companys
Profitability and Its Overall Financial Position.
|
Contract accounting requires judgment relative to assessing
risks, estimating contract revenues and costs, and making
assumptions for schedule and technical issues. Due to the size
and nature of many of the companys contracts, the
estimation of total revenues and costs at completion is
complicated and subject to many variables. For example,
assumptions have to be made regarding the length of time to
complete the contract because costs also include expected
increases in wages and prices for materials. Similarly,
assumptions have to be made regarding the future impact of
efficiency initiatives and cost reduction efforts. Incentives,
awards, or penalties related to performance on contracts are
considered in estimating revenue and profit rates, and are
recorded when there is sufficient information to assess
anticipated performance.
Because of the significance of the judgments and estimation
processes described above, it is possible that materially
different amounts could be obtained if different assumptions
were used or if the underlying circumstances were to change.
Changes in underlying assumptions, circumstances or estimates
may have a
-17-
NORTHROP
GRUMMAN CORPORATION
material adverse effect upon future period financial reporting
and performance. See Critical Accounting Policies,
Estimates, and Judgments in Part II, Item 7.
|
|
n |
The Companys Operations Are Subject to Numerous
Domestic and International Laws, Regulations and Restrictions,
and Noncompliance With These Laws, Regulations and Restrictions
Could Expose The Company to Fines, Penalties, Suspension or
Debarment, Which Could Have a Material Adverse Effect on The
Companys Profitability and Its Overall Financial
Position.
|
The company has thousands of contracts and operations in many
parts of the world subject to U.S. and foreign laws and
regulations. Prime contracts with various agencies of the
U.S. Government and subcontracts with other prime
contractors are subject to numerous procurement regulations,
including the False Claims Act and the International Traffic in
Arms Regulation promulgated under the Arms Export Control Act,
with noncompliance found by any one agency possibly resulting in
fines, penalties, debarment, or suspension from receiving
additional contracts with all U.S. Government agencies.
Given the companys dependence on U.S. Government
business, suspension or debarment could have a material adverse
effect on the company.
In addition, international business subjects the company to
numerous U.S. and foreign laws and regulations, including,
without limitation, regulations relating to import-export
control, technology transfer restrictions, repatriation of
earnings, exchange controls, the Foreign Corrupt Practices Act,
and the anti-boycott provisions of the U.S. Export
Administration Act. Failure by the company or its sales
representatives or consultants to comply with these laws and
regulations could result in administrative, civil, or criminal
liabilities and could, in the extreme case, result in suspension
or debarment from government contracts or suspension of the
companys export privileges, which could have a material
adverse effect on the company. Changes in regulation or
political environment may affect the companys ability to
conduct business in foreign markets including investment,
procurement, and repatriation of earnings.
The company operates in a highly regulated environment and is
routinely audited by the U.S. Government and others. On a
regular basis, the company monitors its policies and procedures
with respect to its contracts to ensure consistent application
under similar terms and conditions and to assess compliance with
all applicable government regulations. Negative audit findings
could result in termination of a contract, forfeiture of
profits, or suspension of payments. From time to time the
company is subject to U.S. Government investigations
relating to its operations. Government contractors that are
found to have violated the law such as the False Claims Act or
the Arms Export Control Act, or are indicted or convicted for
violations of other federal laws, or are found not to have acted
responsibly as defined by the law, may be subject to significant
fines. Such convictions could also result in suspension or
debarment from government contracting for some period of time.
Given the companys dependence on government contracting,
suspension or debarment could have a material adverse effect on
the company.
|
|
n |
The Companys Business Is Subject to Disruption
Caused By Issues With Its Suppliers, Subcontractors, Workforce,
Natural Disasters and Other Factors That Could Adversely Affect
the Companys Profitability and Its Overall Financial
Position.
|
The company may be affected by delivery or performance issues
with key suppliers and subcontractors, as well as other factors
that may cause operating results to be adversely affected.
Changes in inventory requirements or other production cost
increases may also have a negative effect on the companys
consolidated results of operations.
Performance failures by a subcontractor of the company or
difficulty in maintaining complete alignment of the
subcontractors obligations with the companys prime
contract obligations may adversely affect the companys
ability to perform its obligations on the prime contract, which
could reduce the companys profitability due to damages or
other costs that may not be fully recoverable from the
subcontractor or from the customer and could result in a
termination of the prime contract and have an adverse effect on
the companys ability to compete for future contracts.
-18-
NORTHROP
GRUMMAN CORPORATION
|
|
|
Operating results are heavily dependent upon the companys
ability to attract and retain sufficient personnel with
requisite skill sets
and/or
security clearances. The successful negotiation of collective
bargaining agreements and avoidance of organized work stoppages
are also critical to the ongoing operations of the company.
|
The company has significant operations located in regions of the
U.S. where damaging storms and other natural disasters are
somewhat common. While preventative measures typically help to
minimize harm to the company, the damage and disruption
resulting from certain storms or other natural disasters may be
significant. Although no assurances can be made, the company
believes it can recover costs associated with natural disasters
through insurance or its contracts.
Natural disasters such as storms and earthquakes can disrupt
electrical and other power distribution networks and cause
adverse effects on profitability and performance, including
computer and internet operation and accessibility. Computer
viruses and similar harmful software programs, as well as
network outages, disruptions and attacks also may have a
material adverse affect on the companys profitability and
performance unless quarantined or otherwise prevented.
|
|
n |
Changes In Future Business Conditions Could Cause Business
Investments
and/or
Recorded Goodwill to Become Impaired, Resulting In Substantial
Losses and Write-Downs That Would Reduce The Companys
Operating Income.
|
As part of its overall strategy, the company will, from time to
time, acquire a minority or majority interest in a business.
These investments are made upon careful target analysis and due
diligence procedures designed to achieve a desired return or
strategic objective. These procedures often involve certain
assumptions and judgment in determining acquisition price. After
acquisition, unforeseen issues could arise which adversely
affect the anticipated returns or which are otherwise not
recoverable as an adjustment to the purchased price. Even after
careful integration efforts, actual operating results may vary
significantly from initial estimates.
Goodwill accounts for approximately half of the companys
recorded total assets. The company evaluates the recoverability
of recorded goodwill amounts annually, or when evidence of
potential impairment exists. The annual impairment test is based
on several factors requiring judgment. Principally, a decrease
in expected reporting unit cash flows or changes in market
conditions may indicate potential impairment of recorded
goodwill. See Critical Accounting Policies, Estimates, and
Judgments in Part II, Item 7.
|
|
n |
The Company Is Subject to Various Claims and Litigation
That Could Ultimately Be Resolved Against The Company Requiring
Material Future Cash Payments
and/or
Future Material Charges Against The Companys Operating
Income and Materially Impairing The Companys Financial
Position.
|
The size and complexity of the companys business make it
highly susceptible to claims and litigation. The company is
subject to environmental claims, income tax matters and other
litigation, which, if not resolved within established accruals,
could have a material adverse effect on the companys
consolidated financial position, results of operations, or cash
flows. See Legal Proceedings in Part I,
Item 3, and Critical Accounting Policies, Estimates,
and Judgments in Part II, Item 7.
|
|
n |
Pension and Medical Expense Associated with the
Companys Retirement Benefit Plans May Fluctuate
Significantly Depending Upon Changes in Actuarial Assumptions
and Future Market Performance of Plan Assets.
|
A substantial portion of the companys current and retired
employee population is covered by pension and post-retirement
benefit plans, the costs of which are dependent upon the
companys various assumptions, including estimates of rates
of return on benefit related assets, discount rates for future
payment obligations, rates of future cost growth and trends for
future costs. Variances from these estimates could have a
material adverse affect on the companys consolidated
financial position, results of operations, and cash flows.
-19-
NORTHROP
GRUMMAN CORPORATION
|
|
n |
The Companys Insurance Coverage May Be Inadequate to
Cover All of Its Significant Risks or Its Insurers May Deny
Coverage of Material Losses Incurred By The Company, Which Could
Adversely Affect The Companys Profitability and Overall
Financial Position.
|
Primarily as a result of the major hurricanes in 2004 and 2005
(including Hurricanes Katrina and Rita), market conditions have
substantially changed, resulting in an overall reduced amount of
total available coverage. The company endeavors to identify and
obtain in established markets insurance agreements to cover
significant risks and liabilities (including, among others,
natural disasters, products liability and business
interruption). Not every risk or liability can be protected
against by insurance, and, for insurable risks, the limits of
coverage reasonably obtainable in the market may not be
sufficient to cover all actual losses or liabilities incurred.
In some, but not all, circumstances the company may receive
indemnification from the U.S. Government. Because of the
reduction in overall available coverage referred to above, the
company may have to bear substantial costs for uninsured losses
that could have an adverse effect upon its consolidated results
of operations and its overall consolidated financial position.
Additionally, disputes with insurance carriers over coverage may
affect the timing of cash flows and, where litigation with the
carrier becomes necessary, an outcome unfavorable to the company
may have a material adverse affect on the companys
consolidated results of operations. See Note 15 to the
consolidated financial statements in Part II, Item 8.
|
|
n |
Current Trends in U.S. Government Procurement May
Adversely Affect Cash Flows or Program Profitability.
|
The company, like others in the defense industry, is aware of a
potential problem presented by strict compliance with the
Defense Federal Acquisition Regulation Supplement
preference for enumerated specialty metals sourced domestically
or from certain foreign countries. Subcontractors and lower-tier
suppliers have made disclosures indicating inability to comply
with the rule as written, particularly for low-value parts such
as washers, screws, nuts, bolts, resistors and capacitors.
Subject to limitations, inability to certify that all enumerated
specialty metals in a product comply with sourcing requirements
can lead to U.S. Government customers withholding a portion
of a payment on delivery or may prevent delivery altogether of
materiel and products critical to national defense.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
The company has no unresolved comments from the SEC.
FORWARD-LOOKING
STATEMENTS AND PROJECTIONS
Statements in this
Form 10-K
that are in the future tense, and all statements accompanied by
terms such as believe, project,
expect, estimate, forecast,
assume, intend, plan,
guidance, anticipate,
outlook, and variations thereof and similar terms
are intended to be forward-looking statements as
defined by federal securities law. Forward-looking statements
are based upon assumptions, expectations, plans and projections
that are believed valid when made, but that are subject to the
risks and uncertainties identified under Risk
Factors in Part I, Item 1A, that may cause
actual results to differ materially from those expressed or
implied in the forward-looking statements.
The company intends that all forward-looking statements made
will be subject to safe harbor protection of the federal
securities laws pursuant to Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act
of 1934.
Forward-looking statements are based upon, among other things,
the companys assumptions with respect to:
|
|
n
|
future revenues;
|
|
n
|
expected program performance and cash flows;
|
|
n
|
returns on pension plan assets and variability of pension
actuarial and related assumptions;
|
-20-
NORTHROP
GRUMMAN CORPORATION
|
|
n
|
the outcome of litigation, claims and appeals;
|
|
n
|
hurricane-related insurance recoveries;
|
|
n
|
environmental remediation;
|
|
n
|
acquisitions and divestitures of businesses;
|
|
n
|
successful reduction of debt;
|
|
n
|
performance issues with key suppliers and subcontractors;
|
|
n
|
product performance and the successful execution of internal
plans;
|
|
n
|
successful negotiation of contracts with labor unions;
|
|
n
|
effective tax rates and timing and amounts of tax payments;
|
|
n
|
the results of any audit or appeal process with the Internal
Revenue Service; and
|
|
n
|
anticipated costs of capital investments.
|
You should consider the limitations on, and risks associated
with, forward-looking statements and not unduly rely on the
accuracy of predictions contained in such forward-looking
statements. As noted above, these forward-looking statements
speak only as of the date when they are made. The company does
not undertake any obligation to update forward-looking
statements to reflect events, circumstances, changes in
expectations, or the occurrence of unanticipated events after
the date of those statements. Moreover, in the future, the
company, through senior management, may make forward-looking
statements that involve the risk factors and other matters
described in this
Form 10-K
as well as other risk factors subsequently identified,
including, among others, those identified in the companys
filings with the SEC on
Form 10-Q
and
Form 8-K.
At December 31, 2006, the company had approximately
55 million square feet of floor space comprised of
approximately 2,164 buildings/structures and land at 504
separate locations, primarily in the U.S., for the purpose of
manufacturing, warehousing, research and testing, administration
and various other productive and facility uses. Of the total
square footage at December 31, 2006, 55 percent was
company-owned, 41 percent was leased and 4 percent was
government-owned or leased. At December 31, 2006, the
company leased to other third parties approximately
1,014,000 square feet of its owned and leased facilities,
and had vacant floor space of approximately 680,000 square
feet.
At December 31, 2006, our business operating segments had
major operations at the following locations:
Mission Systems Huntsville, AL; Carson,
Huntington Beach, McClellan, Redondo Beach, San Bernardino,
San Diego, San Jose, San Pedro, Van Nuys and West
Sacramento, CA; Aurora and Colorado Springs, CO; Washington, DC;
Columbia, Elkridge and Lanham, MD; Bellevue, NE; Fairborn and
Kettering, OH; Middletown, RI; Clearfield, UT; Arlington,
Chantilly, Chester, Dahlgren, Fairfax, Herndon, Newport News,
Reston, Stafford, Vienna and Virginia Beach, VA.
Information Technology Hawthorne, CA;
Colorado Springs and Lafayette, CO; Washington, DC; Atlanta, GA;
Andover, MA; Annapolis Junction and Rockville, MD; Bethpage and
Bohemia, NY; Fairborn, OH; Dallas and Irving, TX; Arlington,
Chantilly, Fairfax, Falls Church, Herndon, Lorton, McLean,
Reston, and Richmond, VA.
Technical Services Sierra Vista, AZ; Warner
Robins, GA; Lake Charles, LA; Albuquerque, NM; and Oklahoma
City, OK.
Integrated Systems Carson, El Segundo, Tejon,
Hawthorne, Palmdale, and San Diego, CA; Jacksonville,
Melbourne and St. Augustine, FL; Hollywood, MD; Moss Point, MS;
New Town, ND; and Bethpage, NY.
-21-
NORTHROP
GRUMMAN CORPORATION
Space Technology El Segundo, Manhattan Beach,
Rancho Carmel, Redondo Beach and San Diego, CA;
St. Charles, MO; and Charlotte, NC.
Electronics Huntsville, AL; Tempe, AZ; Azusa,
San Jose, Sunnyvale and Woodland Hills, CA; Boulder, CO;
Norwalk, CT; Apopka, FL; Rolling Meadows, IL; Westwood, MA;
Annapolis, Annapolis Junction, Baltimore, Belcamp, Elkridge,
Gaithersburg, Hagerstown, Linthicum and Sykesville, MD;
Springfield, MO; Ocean Springs, MS; Melville and Williamsville,
NY; Cincinnati, OH; Clinton, TN; Garland, TX; Salt Lake City,
UT; and Charlottesville, VA. Locations outside the U.S .include
France, Germany, Italy, Norway, and the United Kingdom.
Ships San Diego, CA; Avondale, Harahan,
Harvey, Tallulah and Waggaman, LA; Gautier, Gulfport, Moss Point
and Pascagoula, MS; and Newport News, VA.
Corporate and other locations Brea,
San Pedro, and Los Angeles, CA; Des Plaines, IL; Olathe,
KS; Englewood and Hanover Township, NJ; York, PA; Irving and
Marshall, TX; and Arlington, VA. Locations outside the
U.S. include Canada and the United Kingdom.
The following is a summary of the companys floor space at
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
|
|
|
Square feet
|
|
Owned
|
|
|
Leased
|
|
|
Owned/Leased
|
|
|
Total
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
|
374,154
|
|
|
|
5,033,520
|
|
|
|
|
|
|
|
5,407,674
|
|
Information Technology
|
|
|
32,673
|
|
|
|
4,424,765
|
|
|
|
|
|
|
|
4,457,438
|
|
Technical Services
|
|
|
117,793
|
|
|
|
1,211,591
|
|
|
|
61,575
|
|
|
|
1,390,959
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
3,817,905
|
|
|
|
2,975,040
|
|
|
|
1,993,605
|
|
|
|
8,786,550
|
|
Space Technology
|
|
|
3,234,846
|
|
|
|
2,277,989
|
|
|
|
4,656
|
|
|
|
5,517,491
|
|
Electronics
|
|
|
8,455,234
|
|
|
|
4,066,600
|
|
|
|
|
|
|
|
12,521,834
|
|
Ships
|
|
|
13,690,907
|
|
|
|
1,829,536
|
|
|
|
74,322
|
|
|
|
15,594,765
|
|
Corporate
|
|
|
813,067
|
|
|
|
675,804
|
|
|
|
|
|
|
|
1,488,871
|
|
Total
|
|
|
30,536,579
|
|
|
|
22,494,845
|
|
|
|
2,134,158
|
|
|
|
55,165,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The company believes its properties are well maintained and in
good operating condition and that the productive capacity of the
companys properties is adequate to meet current
contractual requirements and those for the foreseeable future.
|
|
Item 3.
|
Legal
Proceedings
|
U.S. Government Investigations and
Claims Departments and agencies of the
U.S. Government have the authority to investigate various
transactions and operations of the company, and the results of
such investigations may lead to administrative, civil, or
criminal proceedings, the ultimate outcome of which could be
fines, penalties, repayments or compensatory or treble damages.
U.S. Government regulations provide that certain findings
against a contractor may lead to suspension or debarment from
future U.S. Government contracts or the loss of export
privileges for a company or an operating division or
subdivision. Suspension or debarment could have a material
adverse effect on the company because of its reliance on
government contracts.
As previously disclosed, in October 2005, the
U.S. Department of Justice and a classified
U.S. Government customer apprised the company of potential
substantial claims relating to certain microelectronic parts
produced by the Space and Electronics Sector of former TRW Inc.,
now a component of the company. The relationship, if any,
between the potential claims and a civil False Claims Act case
that remains under seal in the U.S. District Court for the
Central District of California remains unclear to the company.
In the third quarter of 2006, the parties commenced settlement
discussions. While the company continues to believe that it did
not breach the
-22-
NORTHROP
GRUMMAN CORPORATION
contracts in question and that it acted appropriately in this
matter, the company proposed to settle the claims and any
associated matters and recognized a pre-tax charge of
$112.5 million in 2006 to cover the cost of the settlement
proposal and associated investigative costs. The charge has been
recorded within General and administrative expenses
in the consolidated statements of income in Part II,
Item 8. The company extended the offer in an effort to
avoid litigation and in recognition of the value of the
relationship with this customer. The U.S. Government has
advised the company that if settlement is not reached it will
pursue its claims through litigation. Because of the highly
technical nature of the issues involved and their classified
status and because of the significant disagreement between the
company and the U.S. Government as to the
U.S. Governments theories of liability and damages
(including a material difference between the
U.S. Governments damage theories and the
companys offer), final resolution of this matter could
take a considerable amount of time particularly if litigation
should ensue. If the U.S. Government were to pursue
litigation and were to be ultimately successful on its theories
of liability and damages, which could be trebled under the
Federal False Claims Act, the effect upon the companys
consolidated financial position, results of operations, and cash
flows would materially exceed the amount provided by the
company. Based upon the information available to the company to
date, the company believes that it has substantive defenses but
can give no assurance that its views will prevail. Accordingly,
the ultimate disposition of this matter cannot presently be
determined.
Based upon the available information regarding matters that are
subject to U.S. Government investigations, other than as
set out above, the company does not believe, but can give no
assurance, that the outcome of any such matters would have a
material adverse effect on its consolidated financial position,
results of operations, or cash flows.
Litigation Various claims and legal
proceedings arise in the ordinary course of business and are
pending against the company and its properties. Based upon the
information available, the company does not believe that the
resolution of any of these various claims and legal proceedings
will have a material adverse effect on its consolidated
financial position, results of operations, or cash flows.
The company is a defendant in litigation brought by Cogent
Systems, Inc. (Cogent) in Los Angeles Superior Court in
California on April 20, 2005, for unspecified damages for
alleged unauthorized use of Cogent technology relating to
fingerprint recognition. During discovery in the second quarter
of 2006, Cogent asserted entitlement to in excess of
$50 million for lost profits, in excess of
$100 million for loss of goodwill and business
opportunities, in excess of $6 million in royalties,
doubling of actual damages and other amounts, including, without
limitation, attorneys fees. The trial date has been set
for May 22, 2007. The company does not believe, but can
give no assurance, that the outcome of this matter would have a
material adverse effect on its consolidated financial position,
results of operations, or cash flows.
On September 28, 2006, various individual plaintiffs filed
a class action lawsuit in the U.S. District Court, Central
District of California, against the company, certain of its
administrative and Board committees, all members of the
companys Board of Directors, and certain company officers
and employees (Waldbuesser, et al. v. Northrop Grumman
Corporation, et al.). The lawsuit alleges two alternative
counts of fiduciary duty breaches under the Employee Retirement
Income Security Act of 1974 (ERISA) with respect to alleged
excessive, hidden
and/or
otherwise improper fee and expense charges to the Northrop
Grumman Savings Plan and the Northrop Grumman Financial Security
and Savings Plan (both of which are 401(k) plans). Among other
things, the lawsuit seeks unspecified damages, removal of
individuals acting as fiduciaries to such plans, payment of
attorney fees and costs, and an accounting. The company does not
believe, but can give no assurance, that the outcome of this
matter would have a material adverse effect on its consolidated
financial position, results of operations, or cash flows.
On January 3, 2007, a class action lawsuit was filed in the
U.S. District Court, Central District of California,
against the company, certain of its administrative and Board
committees, certain members of its Board of Directors, and
certain company officers and employees (Heidecker v.
Northrop Grumman Corporation, et al.). The lawsuit alleges
two alternative counts of fiduciary duty breaches under ERISA
with respect to the investment
-23-
NORTHROP
GRUMMAN CORPORATION
and administrative management of the Northrop Grumman Savings
Plan, including allegations of excessive, hidden
and/or
otherwise improper fee and expense charges. Among other things,
the lawsuit seeks unspecified damages, removal of individuals
acting as fiduciaries to such plans, payment of attorney fees
and costs, and an accounting. The company does not believe, but
can give no assurance, that the outcome of this matter would
have a material adverse effect on its consolidated financial
position, results of operations, or cash flows.
Other
Matters
In the event of contract termination for the governments
convenience, contractors are normally protected by provisions
covering reimbursement for costs incurred on the program. The
company received a termination for convenience notice on the
Tri-Service Standoff Attack Missile (TSSAM) program in 1995. In
December 1996, the company filed a lawsuit against the
U.S. Government in the U.S. Court of Federal Claims
seeking the recovery of approximately $750 million for
uncompensated performance costs, investments and a reasonable
profit on the program. Prior to 1996, the company had charged to
operations in excess of $600 million related to this
program. Northrop Grumman is unable to predict whether it will
realize some or all of its claims, none of which are recorded on
its balance sheet, from the U.S. Government related to the
TSSAM program.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No items were submitted to a vote of security holders during the
fourth quarter of 2006.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The companys common stock is listed on the New York Stock
Exchange.
The following table sets forth, for the periods indicated, the
high and low sale prices of the companys common stock as
reported in the consolidated reporting system for the New York
Stock Exchange Composite Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
January to March
|
|
$
|
69.83
|
|
|
|
to
|
|
|
$
|
59.63
|
|
|
$
|
54.95
|
|
|
|
to
|
|
|
$
|
51.25
|
|
April to June
|
|
$
|
71.23
|
|
|
|
to
|
|
|
$
|
62.17
|
|
|
$
|
56.77
|
|
|
|
to
|
|
|
$
|
53.50
|
|
July to September
|
|
$
|
68.88
|
|
|
|
to
|
|
|
$
|
63.05
|
|
|
$
|
57.87
|
|
|
|
to
|
|
|
$
|
53.67
|
|
October to December
|
|
$
|
69.71
|
|
|
|
to
|
|
|
$
|
64.59
|
|
|
$
|
60.11
|
|
|
|
to
|
|
|
$
|
52.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The approximate number of common shareholders was 37,467 as of
February 16, 2007.
Quarterly dividends per common share for the most recent two
years are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
January to March
|
|
$
|
0.26
|
|
|
$
|
0.23
|
|
April to June
|
|
|
0.30
|
|
|
|
0.26
|
|
July to September
|
|
|
0.30
|
|
|
|
0.26
|
|
October to December
|
|
|
0.30
|
|
|
|
0.26
|
|
|
|
$
|
1.16
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
-24-
NORTHROP
GRUMMAN CORPORATION
On February 21, 2007, the companys board of directors
approved a 23 percent increase to the quarterly common
stock dividend, from $.30 per share to $.37 per share,
effective with the first quarter 2007 dividend.
The quarterly dividend for the mandatorily redeemable preferred
shares was $1.75 for each quarter in 2006 and 2005.
Common Stock
The company has 800,000,000 shares authorized at a
$1 par value, of which 345,921,809 and
347,357,291 shares were outstanding as of December 31,
2006 and 2005, respectively.
Preferred Stock
The company has 10,000,000 shares authorized with a
liquidation value of $100 per share, of which
3,500,000 shares were outstanding as of December 31,
2006 and 2005.
|
|
(d)
|
Annual
Meeting of Stockholders.
|
The Annual Meeting of Stockholders of Northrop Grumman
Corporation will be held on May 16, 2007, at the Space
Technology Presentation Center, One Space Park, Redondo Beach,
California 90278.
|
|
(e)
|
Stock
Performance Graph.
|
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG NORTHROP GRUMMAN CORPORATION, S & P 500 INDEX
AND S & P AEROSPACE/DEFENSE INDEX
|
|
|
(1) |
|
Assumes $100 invested at the close of business on
December 31, 2001, in Northrop Grumman Corporation common
stock, Standard & Poors (S&P) 500 Index, and
the S&P Aerospace/Defense Index. |
|
(2) |
|
The cumulative total return assumes reinvestment of dividends. |
|
(3) |
|
The S&P Aerospace/Defense Index is comprised of The Boeing
Company, General Dynamics Corporation, Goodrich Corporation,
Honeywell International Inc., L-3 Communications, |
-25-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
Lockheed Martin Corporation, Northrop Grumman Corporation,
Raytheon Company, Rockwell Collins, Inc., and United
Technologies Corporation. |
|
(4) |
|
The total return is weighted according to market capitalization
of each company at the beginning of each year. |
|
(5) |
|
The Stock Performance Graph is furnished with this
Report and shall not be deemed to be filed. |
|
|
(f)
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers.
|
No repurchases of the companys equity securities were made
during the fourth quarter of 2006.
-26-
NORTHROP
GRUMMAN CORPORATION
|
|
Item 6.
|
Selected
Financial Data
|
The data presented in the following table has been adjusted to
reflect the current application of discontinued operations as
well as the two-for one stock split of the companys common
stock in 2004. See also Business Acquisitions and
Business Dispositions in Part II, Item 7.
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions except per
share
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
$
|
27,019
|
|
|
$
|
27,021
|
|
|
$
|
25,493
|
|
|
$
|
22,063
|
|
|
$
|
13,367
|
|
Other customers
|
|
|
3,129
|
|
|
|
3,046
|
|
|
|
3,507
|
|
|
|
3,485
|
|
|
|
3,089
|
|
Total revenues
|
|
$
|
30,148
|
|
|
$
|
30,067
|
|
|
$
|
29,000
|
|
|
$
|
25,548
|
|
|
$
|
16,456
|
|
Operating Margin
|
|
$
|
2,454
|
|
|
$
|
2,193
|
|
|
$
|
1,986
|
|
|
$
|
1,449
|
|
|
$
|
1,124
|
|
Income from continuing operations
|
|
|
1,567
|
|
|
|
1,392
|
|
|
|
1,080
|
|
|
|
745
|
|
|
|
458
|
*
|
Basic earnings per share, from
continuing operations
|
|
$
|
4.53
|
|
|
$
|
3.90
|
|
|
$
|
3.00
|
|
|
$
|
2.04
|
|
|
$
|
1.87
|
*
|
Diluted earnings per share, from
continuing operations
|
|
|
4.44
|
|
|
|
3.83
|
|
|
|
2.96
|
|
|
|
2.02
|
|
|
|
1.84
|
*
|
Cash dividends declared per common
share
|
|
|
1.16
|
|
|
|
1.01
|
|
|
|
.89
|
|
|
|
.80
|
|
|
|
.80
|
|
Year-End Financial
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
32,009
|
|
|
$
|
34,214
|
|
|
$
|
33,303
|
|
|
$
|
33,022
|
|
|
$
|
42,331
|
|
Net working capital (deficit)
|
|
|
(34
|
)
|
|
|
(423
|
)
|
|
|
688
|
|
|
|
(620
|
)
|
|
|
4,464
|
|
Notes payable to banks and
long-term debt
|
|
|
4,162
|
|
|
|
5,145
|
|
|
|
5,158
|
|
|
|
5,891
|
|
|
|
9,635
|
|
Total long-term obligations and
preferred stock
|
|
|
8,641
|
|
|
|
9,412
|
|
|
|
10,438
|
|
|
|
10,876
|
|
|
|
16,580
|
|
Financial Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin as a percentage of
total revenue
|
|
|
8.1
|
%
|
|
|
7.3
|
%
|
|
|
6.8
|
%
|
|
|
5.7
|
%
|
|
|
6.8
|
%
|
Income from continuing operations,
as a percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and service revenues
|
|
|
5.2
|
|
|
|
4.6
|
|
|
|
3.7
|
|
|
|
2.9
|
|
|
|
2.8
|
|
Average assets
|
|
|
4.7
|
|
|
|
4.1
|
|
|
|
3.3
|
|
|
|
2.0
|
|
|
|
1.4
|
|
Average shareholders equity
|
|
|
9.4
|
|
|
|
8.2
|
|
|
|
6.7
|
|
|
|
5.0
|
|
|
|
4.2
|
|
Current ratio
|
|
|
.99 to 1
|
|
|
|
.95 to 1
|
|
|
|
1.11 to 1
|
|
|
|
.90 to 1
|
|
|
|
1.39 to 1
|
|
Notes payable to banks and
long-term debt as a percentage of shareholders equity
|
|
|
25.0
|
%
|
|
|
30.6
|
%
|
|
|
30.9
|
%
|
|
|
37.3
|
%
|
|
|
67.3
|
%
|
Other Financial
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-sponsored research and
development expenses
|
|
$
|
574
|
|
|
$
|
538
|
|
|
$
|
504
|
|
|
$
|
429
|
|
|
$
|
283
|
|
Depreciation
|
|
|
569
|
|
|
|
556
|
|
|
|
507
|
|
|
|
454
|
|
|
|
346
|
|
Amortization of assets
|
|
|
136
|
|
|
|
216
|
|
|
|
226
|
|
|
|
227
|
|
|
|
170
|
|
Maintenance and repairs
|
|
|
362
|
|
|
|
431
|
|
|
|
398
|
|
|
|
244
|
|
|
|
153
|
|
Rent expense
|
|
|
548
|
|
|
|
512
|
|
|
|
454
|
|
|
|
469
|
|
|
|
304
|
|
Payroll and employee benefits
|
|
|
12,528
|
|
|
|
12,216
|
|
|
|
12,473
|
|
|
|
10,965
|
|
|
|
6,950
|
|
Other Non-Financial
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at year-end
|
|
|
122,200
|
|
|
|
123,600
|
|
|
|
125,400
|
|
|
|
123,400
|
|
|
|
118,100
|
|
Number of shareholders at year-end
|
|
|
37,621
|
|
|
|
39,025
|
|
|
|
40,158
|
|
|
|
39,345
|
|
|
|
28,212
|
|
Floor area at year-end (in
millions of square feet)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
30.5
|
|
|
|
30.0
|
|
|
|
30.2
|
|
|
|
31.6
|
|
|
|
32.4
|
|
Commercially leased
|
|
|
22.5
|
|
|
|
23.2
|
|
|
|
22.0
|
|
|
|
21.5
|
|
|
|
21.3
|
|
U.S. Government owned/leased
|
|
|
2.1
|
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Before cumulative effect of accounting change related to
SFAS No. 142 Goodwill and Other
Intangible Assets |
-27-
NORTHROP
GRUMMAN CORPORATION
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
Business
Northrop Grumman provides technologically advanced, innovative
products, services, and integrated solutions in information and
services, aerospace, electronics, and shipbuilding to its global
customers. As a system integrator, prime contractor, principal
subcontractor, partner, or preferred supplier, Northrop Grumman
participates in many high-priority defense and commercial
technology programs in the United States (U.S.) and abroad.
Northrop Grumman conducts most of its business with the
U.S. Government, principally the Department of Defense
(DoD). The company also conducts business with foreign
governments and makes domestic and international commercial
sales.
Outlook
U.S. defense contractors have benefited from the upward
trend in overall defense spending over recent years. Certain
programs in which the company participates may be subject to
potential reductions due to a slower rate of growth in the
U.S. Defense Budget forecasts and funds being diverted to
support the on-going Global War on Terrorism and the reordering
of priorities by the DOD. Despite this trend, the company
believes that its portfolio of technologically advanced,
innovative products, services, and integrated solutions in
systems integration, defense electronics, information
technology, advanced aircraft, shipbuilding, technical services
and space technology will generate revenue growth in 2007 and
beyond. In 2007, based on total backlog (funded and unfunded) of
approximately $61 billion as of December 31, 2006, the
company expects sales to range between $31 and $32 billion
and forecasts improvement in net income over 2006. The major
industry and economic factors that may affect the companys
future performance are described in the following paragraphs.
Industry
Factors
While Northrop Grumman is subject to the usual vagaries of the
defense marketplace, it is also affected by the unique
characteristics of the defense industry as a monopsony, and by
certain elements peculiar to its own business mix. Northrop
Grumman, along with Lockheed Martin Corporation, The Boeing
Company, Raytheon Company, and General Dynamics Corporation are
among the largest companies in the U.S. defense industry at
this time. Northrop Grumman competes against these and other
companies for a number of programs, both large and small.
Intense competition and long operating cycles are both key
characteristics of Northrop Grummans business and the
defense industry. It is common in this industry for work on
major programs to be shared among a number of companies. A
company competing to be a prime contractor may, upon ultimate
award of the contract to another party, turn out to be a
subcontractor for the ultimate prime contracting party. It is
not uncommon to compete for a contract award with a peer company
and simultaneously perform as a supplier to or a customer of
such competitor on other contracts. The nature of major defense
programs, conducted under binding contracts, allows companies
that perform well to benefit from a level of program continuity
not common in many industries.
The companys success in the competitive defense industry
depends upon its ability to develop and market its products and
services, as well as its ability to provide the people,
technologies, facilities, equipment, and financial capacity
needed to deliver those products and services with maximum
efficiency. It is necessary to maintain, as the company has,
sources for raw materials, fabricated parts, electronic
components, and major subassemblies. In this manufacturing and
systems integration environment, effective oversight of
subcontractors and suppliers is as vital to success as managing
internal operations.
Economic
Opportunities, Challenges, and Risks
The defense of the U.S. and its allies requires the ability to
respond to one or more regional conflicts, terrorist acts, or
threats to homeland security, and is increasingly dependent upon
early threat identification. National responses to those threats
may require unilateral or cooperative initiatives ranging from
dissuasion, deterrence, active defense, security and stability
operations, or peacekeeping. The U.S. government continues
to place a high priority on the protection of its engaged forces
and citizenry, and in minimizing collateral damage when force
-28-
NORTHROP
GRUMMAN CORPORATION
must be applied in pursuit of national objectives. As a result,
the U.S. and its military coalitions increasingly rely on
sophisticated systems providing long-range surveillance and
intelligence, battle management, and precision strike
capabilities combined with the ability to rapidly deploy
effective force to any region. Accordingly, defense procurement
spending is expected to be weighted toward the development and
procurement of military platforms and systems demonstrating the
stealth, long-range, survivability, persistence and standoff
capabilities that can overcome such obstacles to access.
Additionally, advanced electronics and software that enhance the
capabilities of individual systems and provide for the real-time
integration of individual surveillance, information management,
strike, and battle management platforms will also be required.
While the upward trend in overall defense spending may slow,
U.S. budgets are expected to continue to exhibit real
growth in the coming years. While defense spending in allied
countries may not match that growth, many of those allies are
focusing their development and procurement efforts on advanced
electronics and information systems capabilities to enhance
their interoperability with U.S. forces. Of note, the 2006
Quadrennial Defense Review increased the DoD focus on
intelligence, surveillance, and reconnaissance (ISR), and joint
command and control, in support of future budget submissions.
The size of future U.S. and international defense budgets is
expected to remain responsive to the international security
environment. The 2008 budget submitted by the President requests
$481.4 billion in discretionary authority for the DoD base
budget (including $141.7 billion to continue the fight in
the Global War on Terrorism), representing an 11.3 percent
increase over the projected enacted level for fiscal 2007. While
this budget includes proposed reductions in certain programs in
which the company participates or for which the company expects
to compete, the company believes that spending on
recapitalization and transformation of homeland security and
defense assets will continue to be a national priority, with
particular emphasis on areas involving intelligence and
non-conventional warfare capabilities.
U.S. Government programs in which Northrop Grumman either
participates, or strives to participate, must compete with other
programs for consideration during our nations budget
formulation and appropriation processes. Budget decisions made
in this environment will have long-term consequences for the
size and structure of Northrop Grumman and the entire defense
industry. Despite significant growth in the defense budget since
2001, the percent of Gross Domestic Product dedicated to the
nations defense has remained relatively constant.
Substantial new competitive opportunities for the company
include a new aerial refueling tanker, the next-generation
long-range bomber, space radar, unmanned vehicles,
transformational satellite communications systems, restricted
space-based programs, technical services and information
technology contracts, and several international and homeland
security programs. In pursuit of these opportunities, Northrop
Grumman continues to focus on operational and financial
performance for continued growth in 2007 and beyond.
Northrop Grumman has historically concentrated its efforts in
high technology areas such as stealth, airborne surveillance,
battle management, systems integration, defense electronics, and
information technology. The company has a significant presence
in federal and civil information systems; the manufacture of
combatant ships including aircraft carriers and submarines;
space technology; command, control, communications, computers,
intelligence, surveillance, and reconnaissance (C4ISR) and
missile systems. The company believes that its programs are a
high priority for national defense. Nevertheless, under
budgetary pressures and emphasis on capabilities to conduct
non-conventional warfare, there remains the possibility that one
or more of them may be reduced, extended, or terminated by our
U.S. Government customers.
The company provides certain product warranties that require
repair or replacement of non-conforming items for a specified
period of time. Most of the companys product warranties
are provided under government contracts, the costs of which are
generally incorporated into contract pricing.
Prime contracts with various agencies of the
U.S. Government and subcontracts with other prime
contractors are subject to numerous procurement regulations,
including the False Claims Act and The International Traffic in
Arms Regulations promulgated under the Arms Export Control Act,
with noncompliance found by any one agency possibly resulting in
fines, penalties, debarment, or suspension from receiving
additional contracts with all
-29-
NORTHROP
GRUMMAN CORPORATION
U.S. Government agencies. Given the companys
dependence on U.S. Government business, suspension or
debarment could have a material adverse effect on the company.
BUSINESS
ACQUISITIONS
2006 In October the company announced its
intent to acquire Essex Corporation (Essex). On January 25,
2007, the company completed its purchase of 100 percent of
the common stock of Essex, valued at approximately
$600 million, including the assumption of debt totaling
$23 million and estimated transaction costs of
$14 million. Essex provides signal processing services and
products, and advanced optoelectronic imaging for
U.S. government intelligence and defense customers. The
operating results of Essex will be included as part of the
Mission Systems segment from the date of acquisition. The
assets, liabilities, and results of operations of Essex were not
material.
2005 The company acquired Confluent RF
Systems Corporation (Confluent) for $42 million, which
included transaction costs of $2 million, and Integic
Corporation (Integic) for $319 million, which included
transaction costs of $6 million. The assets, liabilities,
and results of operations of these acquired businesses were not
material individually or in the aggregate, and thus pro-forma
information is not presented.
2004 There were no significant acquisitions
during 2004.
BUSINESS
DISPOSITIONS
2006 The company sold the assembly business
unit of Interconnect Technologies (Interconnect) and Winchester
Electronics (Winchester) for net cash proceeds of
$26 million and $17 million, respectively, and
recognized an after-tax gain of $4 million and
$3 million, respectively, in discontinued operations. The
results of operations of Interconnect and Winchester, reported
in the Electronics segment, were not material to any of the
periods presented and have therefore not been reclassified as
discontinued operations.
The Enterprise Information Technology (EIT) business, formerly
reported in the Information Technology segment, was shut down
and costs associated with the exit activities were not material.
The results of operations of this business are reported as
discontinued operations in the consolidated statements of
income, net of applicable income taxes, for all periods
presented.
2005 The company sold Teldix GmbH (Teldix)
for $57 million in cash and recognized an after-tax gain of
$14 million in discontinued operations. The results of
operations of Teldix, reported in the Electronics segment, were
not material to any of the periods presented and have therefore
not been reclassified as discontinued operations.
2004 The companys Canadian navigation
systems and space sensors systems business and Kester were sold
for cash of $65 million and $60 million, respectively,
and the company recorded an after-tax gain of $12 million
and $2 million, respectively, in discontinued operations.
The results of operations of these businesses were not material
to any of the periods presented and have therefore not been
reclassified as discontinued operations.
CONTRACTS
The majority of the companys business is generated from
long-term government contracts for development, production, and
service activities. Government contracts typically include the
following cost elements: direct material, labor and
subcontracting costs, and certain indirect costs including
allowable general and administrative costs. Unless otherwise
specified in a contract, costs billed to contracts with the
U.S. Government are determined under the requirements of
the Federal Acquisition Regulation (FAR) and Cost Accounting
Standards (CAS) regulations as allowable and allocable costs.
Examples of costs incurred by the company and not billed to the
U.S. Government in accordance with the requirements of the
FAR and CAS regulations include, but are not limited to, certain
legal costs, lobbying costs, charitable donations, and
advertising costs.
-30-
NORTHROP
GRUMMAN CORPORATION
The companys long-term contracts typically fall into one
of two broad categories:
Flexibly Priced Contracts Includes both
cost-type and fixed-price incentive contracts. Cost-type
contracts provide for reimbursement of the contractors
allowable costs incurred plus a fee that represents profit.
Cost-type contracts generally require that the contractor use
its best efforts to accomplish the scope of the work within some
specified time and some stated dollar limitation. Fixed-price
incentive contracts also provide for reimbursement of the
contractors allowable costs, but are subject to a
cost-share limit which affects profitability. Fixed-price
incentive contracts effectively become firm fixed-price
contracts once the cost-share limit is reached.
Firm Fixed-Price Contracts A firm fixed-price
contract is a contract in which the specified scope of work is
agreed to for a price that is a pre-determined, negotiated
amount and not generally subject to adjustment regardless of
costs incurred by the contractor.
The following table summarizes 2006 revenue recognized by
contract type and customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Other
|
|
|
|
|
|
Percent
|
|
($ in millions)
|
|
Government
|
|
|
Customers
|
|
|
Total
|
|
|
of Total
|
|
Flexibly priced
|
|
$
|
19,415
|
|
|
$
|
483
|
|
|
$
|
19,898
|
|
|
|
66
|
%
|
Firm fixed-price
|
|
|
7,604
|
|
|
|
2,646
|
|
|
|
10,250
|
|
|
|
34
|
|
Total
|
|
$
|
27,019
|
|
|
$
|
3,129
|
|
|
$
|
30,148
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Fees Negotiated contract fee
structures, for both flexibly priced and fixed-price contracts
may include, but are not limited to: fixed-fee amounts, cost
sharing arrangements to reward or penalize for either under or
over cost target performance, positive award fees, and negative
penalty arrangements. Profit margins may vary materially
depending on the negotiated contract fee arrangements,
percentage-of-completion
of the contract, the achievement of performance objectives, and
the stage of performance at which the right to receive fees,
particularly under incentive and award fee contracts, is finally
determined.
Positive Award Fees Certain contracts contain
provisions consisting of award fees based on performance
criteria such as: cost, schedule, quality, and technical
ingenuity. Award fees are determined and earned based on the
subjective evaluation by the customer of the companys
performance against such negotiated criteria. Award fee
contracts are widely used throughout the companys
operating segments. Examples of significant long-term contracts
with substantial negotiated award fee amounts are the Kinetic
Energy Interceptor (KEI), F-35 SDD,
E-2D SDD,
LPD, and DDG-1000 programs.
Compliance and Monitoring On a regular basis,
the company monitors its policies and procedures with respect to
its contracts to ensure consistent application under similar
terms and conditions as well as compliance with all applicable
government regulations. In addition, costs incurred and
allocated to contracts with the U.S. Government are
routinely audited by the Defense Contract Audit Agency.
CRITICAL
ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS
The companys significant accounting policies are outlined
in Note 1 to the consolidated financial statements (see in
Part II, Item 8 of this
Form 10-K).
The preparation of these financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue, and expenses,
as well as the disclosure of contingent assets and liabilities.
As part of its oversight responsibilities, management evaluates
the propriety of its estimates, judgments, and accounting
methods as new events occur. Management believes that its
policies, judgments, and assessments have been consistently
applied in a manner that provides the reader of the
companys consolidated financial statements with a fair
presentation of information, in all material respects, in
accordance with GAAP. Management periodically reviews the
companys critical accounting policies and estimates with
the audit committee of its board of directors. Principal
accounting practices that involve a higher degree of judgment or
complexity are outlined below.
-31-
NORTHROP
GRUMMAN CORPORATION
Revenue
Recognition
Overview The majority of the companys
business is derived from long-term contracts for the
construction of facilities, production of goods, and services
provided to the federal government, which are accounted for
under the provisions of Accounting Research
Bulletin No. 45 Accounting for
Long-Term Construction-Type Contracts, American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP)
No. 81-1
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, and the AICPA Audit and
Accounting Guide, Audits of Federal Government
Contractors. The Company classifies contract revenues as
product sales or service revenues depending on the predominant
attributes of the relevant underlying contracts.
The company also enters into contracts that are not associated
with the construction of facilities, production of goods, and
services provided to the federal government, such as contracts
to provide certain services to non-federal government customers.
The company accounts for those contracts in accordance with the
Securities and Exchange Commissions Staff Accounting
Bulletin No. 104, Revenue Recognition, and
other relevant revenue recognition accounting literature.
The company considers the nature of these contracts and the
types of products and services provided when it determines the
proper accounting method for a particular contract.
Percentage-of-Completion Accounting The
company generally recognizes revenue from its long-term
contracts under the cost-to-cost and the units-of-delivery
measures of the percentage-of-completion method of accounting.
The percentage-of-completion method recognizes income as work on
a contract progresses. For most contracts, sales are calculated
based on the percentage of total costs incurred in relation to
total estimated costs at completion of the contract. For certain
contracts with large up-front purchases of material, primarily
in the Ships segment, sales are generally calculated based on
the percentage that direct labor costs incurred bear to total
estimated direct labor costs. The units-of-delivery measure is a
modification of the percentage-of-completion method, which
recognizes revenues as deliveries are made to the customer
generally using unit sales value in accordance with the contract
terms. The company estimates profit as the difference between
total estimated revenue and total estimated cost of a contract
and recognizes that profit evenly over the life of the contract
based on deliveries.
The use of the
percentage-of-completion
method depends on the ability of the company to make reasonably
dependable cost estimates for the design, manufacture, and
delivery of its products and services. Such costs are typically
incurred over a period of several years, and estimation of these
costs requires the use of judgment. Sales under cost-type
contracts are recorded as costs are incurred.
Many contracts contain positive and negative profit incentives
based upon performance relative to predetermined targets that
may occur during or subsequent to delivery of the product. These
incentives take the form of potential additional fees to be
earned or penalties to be incurred. Incentives and award fees
that can be reasonably estimated are recorded over the
performance period of the contract. Incentives and award fees
that cannot be reasonably estimated are recorded when awarded or
at such time as a reasonable estimate can be made.
Other changes in estimates of contract sales, costs, and profits
are recognized using the cumulative
catch-up
method of accounting. This method recognizes in the current
period the cumulative effect of the changes on current and prior
periods. Hence, the effect of the changes on future periods of
contract performance is recognized as if the revised estimates
had been the original estimates. A significant change in an
estimate on one or more programs could have a material effect on
the companys financial position or results of operations.
Certain Service Contracts Revenue under
contracts to provide services to non-federal government
customers are generally recognized when services are performed.
Service contracts include operations and maintenance contracts,
and outsourcing-type arrangements, primarily in the Information
and Services business. Revenue under such contracts is generally
recognized on a straight-line basis over the period of contract
performance, unless evidence suggests that the revenue is earned
or the obligations are fulfilled in a different pattern. Costs
incurred under these service contracts are expensed as incurred,
except that direct and incremental
set-up costs
-32-
NORTHROP
GRUMMAN CORPORATION
are capitalized and amortized over the life of the agreement.
Operating profit related to such service contracts may fluctuate
from period to period, particularly in the earlier phases of the
contract.
Service contracts that include more than one type of product or
service are accounted for under the provisions of Emerging
Issues Task Force Issue
No. 00-21
Revenue Arrangements with Multiple Deliverables.
Accordingly, for applicable arrangements, revenue recognition
includes the proper identification of separate units of
accounting and the allocation of revenue across all elements
based on relative fair values.
Cost Estimation The cost estimation process
requires significant judgment and is based upon the professional
knowledge and experience of the companys engineers,
program managers, and financial professionals. Factors that are
considered in estimating the work to be completed and ultimate
contract recovery include the availability and productivity of
labor, the nature and complexity of the work to be performed,
the effect of change orders, the availability of materials, the
effect of any delays in performance, availability and timing of
funding from the customer, and the recoverability of any claims
included in the estimates to complete. A significant change in
an estimate on one or more programs could have a material effect
on the companys financial position or results of
operations. Contract cost estimates are updated at least
annually and more frequently as determined by events or
circumstances. Cost and revenue estimates for each significant
contract are generally reviewed and reassessed quarterly.
When estimates of total costs to be incurred on a contract
exceed estimates of total revenue to be earned, a provision for
the entire loss on the contract is recorded to cost of sales in
the period the loss is determined. Loss provisions are first
offset against costs that are included in inventoried assets,
with any remaining amount reflected in liabilities.
Purchase
Accounting and Goodwill
Overview The purchase price of an acquired
business is allocated to the underlying tangible and intangible
assets acquired and liabilities assumed based upon their
respective fair market values, with the excess recorded as
goodwill. Such fair market value assessments require judgments
and estimates that can be affected by contract performance and
other factors over time, which may cause final amounts to differ
materially from original estimates. Adjustments to fair value
assessments are recorded to goodwill over the purchase price
allocation period (typically not exceeding a twelve month
period) with the exception of certain adjustments related to
income tax uncertainties or restructuring activities, the
resolution of which may extend beyond the purchase price
allocation period.
Acquisition Accruals The company has
established certain accruals in connection with indemnities and
other contingencies from its acquisitions and divestitures.
These accruals and subsequent adjustments have been recorded
during the purchase price allocation period for acquisitions and
as events occur for divestitures. The accruals were determined
based upon the terms of the purchase or sales agreements and, in
most cases, involve a significant degree of judgment. Management
has recorded these accruals in accordance with its
interpretation of the terms of the purchase or sale agreements,
known facts, and an estimation of probable future events based
on managements experience and consultation with outside
valuation specialists.
Goodwill The company evaluates the
recoverability of recorded goodwill amounts annually in
November, or when evidence of potential impairment exists, in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and Other Intangible
Assets. In order to test for potential impairment, the
company uses a discounted cash flow analysis, corroborated by
comparative market multiples where appropriate.
The principal factors used in the discounted cash flow analysis
requiring judgment are the projected results of operations,
weighted average cost of capital (WACC), and terminal value
growth rate assumptions. The WACC takes into account the
relative weights of each component of the companys
consolidated capital structure (equity and debt) and represents
the expected cost of new capital adjusted as appropriate to
consider lower risk profiles associated with longer term
contracts and barriers to market entry. The terminal value
growth rates are applied to the final year of the discounted
cash flow model.
-33-
NORTHROP
GRUMMAN CORPORATION
Due to the many variables inherent in the estimation of a
reporting units fair value and the relative size of the
companys recorded goodwill, differences in assumptions may
have a material effect on the results of the companys
impairment analysis.
Litigation,
Commitments, and Contingencies
Overview The company is subject to a range of
claims, lawsuits, environmental and income tax matters, and
administrative proceedings that arise in the ordinary course of
business. Estimating liabilities and costs associated with these
matters requires judgment and assessment based upon professional
knowledge and experience of management and its internal and
external legal counsel. In accordance with SFAS No. 5,
Accounting for Contingencies, amounts are recorded as
charges to earnings when management, after taking into
consideration the facts and circumstances of each matter,
including any settlement offers, has determined that it is
probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. The ultimate resolution of
any such exposure to the company may vary from earlier estimates
as further facts and circumstances become known.
While the company cannot predict the ultimate outcome of these
matters, resolution of one or more of these matters, either
individually or in the aggregate, could have a material effect
on the companys financial position, results of operations,
or cash flows.
Environmental Accruals The company is subject
to the environmental laws and regulations of the jurisdictions
in which it conducts operations. The company records an accrual
to provide for the costs of expected environmental obligations
when management becomes aware that an expenditure will be
incurred and the amount of the liability can be reasonably
estimated. Factors which could result in changes to the
companys assessment of probability, range of loss, and
environmental accruals include: modification of planned remedial
actions, increase or decrease in the estimated time required to
remediate, discovery of more extensive contamination than
anticipated, results of efforts to determine legally responsible
parties, changes in laws and regulations affecting remediation
requirements, and improvements in remediation technology.
Litigation Accruals Litigation accruals are
recorded as charges to earnings when management, after taking
into consideration the facts and circumstances of each matter,
including any settlement offers, has determined that it is
probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. The ultimate resolution of
any exposure to the company may vary from earlier estimates as
further facts and circumstances become known.
Tax Contingency Accruals The company records
accruals for tax contingencies and related interest when it is
probable that a liability has been incurred and the amount of
the contingency can be reasonably estimated based on specific
events such as an audit or inquiry by a taxing authority.
Changes in accruals associated with uncertainties arising from
pre-acquisition years for acquired businesses are charged or
credited to goodwill. Adjustments to other tax accruals are
generally recorded in earnings in the period they are
determined. Effective January 1, 2007, the company will
measure and record tax contingency accruals in accordance with
Financial Accounting Standards Board Interpretation
No. 48 Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109. See Note 2 to the consolidated financial
statements in Part II, Item 8.
Retirement
Benefits
Overview Assumptions used in determining
projected benefit obligations and the fair values of plan assets
for the companys pension plans and other postretirement
benefits plans are evaluated annually by management in
consultation with its outside actuaries. In the event that the
company determines that plan amendments or changes in the
assumptions are warranted, future pension and postretirement
benefit expenses could increase or decrease.
Assumptions The principal assumptions that
have a significant effect on the companys financial
position and results of operations are the discount rate, the
expected long-term rate of return on plan assets, and the health
care cost trend rates.
-34-
NORTHROP
GRUMMAN CORPORATION
Discount Rate The discount rate represents
the interest rate that should be used to determine the present
value of future cash flows currently expected to be required to
settle the pension and postretirement benefit obligations. The
discount rate is generally based on the yield on high-quality
corporate fixed-income investments. At the end of each year, the
discount rate is primarily determined based on the results of a
hypothetical long-term bond portfolio matching the expected cash
inflows with the expected benefit payments for each benefit
plan. Taking into consideration the factors noted above, the
companys composite discount rate was 6 percent at
December 31, 2006, and 5.75 percent at
December 31, 2005.
Expected Long-Term Rate of Return The
expected long-term rate of return on plan assets represents the
average rate of earnings expected on the funds invested to
provide for anticipated future benefit payment obligations. For
2006 and 2005, the company assumed an expected long-term rate of
return on plan assets of 8.5 percent.
Changes in the discount rate and expected long-term rate of
return on plan assets within the range indicated below would
have had the following impacts on 2006 pension and other
postretirement benefits results:
|
|
|
|
|
|
|
|
|
|
|
.25 Percentage
|
|
|
.25 Percentage
|
|
$ in millions
|
|
Point Increase
|
|
|
Point Decrease
|
|
(Decrease) Increase Due To
Change In Assumptions Used To Determine
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Costs For
The Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
Discount rate
|
|
$
|
(57
|
)
|
|
$
|
86
|
|
Expected long-term rate of return
on plan assets
|
|
|
(48
|
)
|
|
|
48
|
|
(Decrease) Increase Due To
Change In Assumptions Used To Determine
|
|
|
|
|
|
|
|
|
Benefit Obligations For The
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
Discount rate
|
|
$
|
(731
|
)
|
|
$
|
763
|
|
|
|
|
|
|
|
|
|
|
Health Care Cost Trend Rates The health care
cost trend rates represent the annual rates of change in the
cost of health care benefits based on estimates of health care
inflation, changes in health care utilization or delivery
patterns, technological advances, and changes in the health
status of the plan participants. For 2006, the company assumed
an expected initial health care cost trend rate of
8.75 percent and an ultimate health care cost trend rate of
5 percent. In 2005, the company assumed an expected initial
health care cost trend rate of 10 percent and an ultimate
health care cost trend rate of 5 percent.
Differences in the initial through the ultimate health care cost
trend rates within the range indicated below would have had the
following impact on 2006 postretirement benefit results:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
|
|
|
1-Percentage-
|
|
$ in millions
|
|
Point Increase
|
|
|
Point Decrease
|
|
Increase (Decrease) From Change
In Health Care Cost Trend Rates
|
|
|
|
|
|
|
|
|
Postretirement benefit expense
|
|
$
|
32
|
|
|
$
|
(26
|
)
|
Postretirement benefit liability
|
|
|
101
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
MANAGEMENT
FINANCIAL MEASURES
The company manages and assesses the performance of its business
primarily through the following measures:
Contract Acquisitions Contract acquisitions
represent orders received during the period for which funding
has been contractually obligated by the customer. Contract
acquisitions tend to fluctuate from year to year and are
determined by the size and timing of new and follow-on orders.
In the year that a business is purchased, its existing funded
order backlog as of the purchase date is reported as contract
acquisitions. In the year that a business is sold, its existing
funded order backlog as of the divestiture date is deducted from
contract acquisitions.
Sales
Year-to-year
sales vary less than contract acquisitions and reflect
performance under new and ongoing contracts. For further
information related to revenue recognition, refer to the Revenue
Recognition discussion included in the Critical Accounting
Policies, Estimates, and Judgments section of this
Part II, Item 7.
-35-
NORTHROP
GRUMMAN CORPORATION
Segment Operating Margin Segment operating
margin reflects the performance of segment contracts and
programs. Excluded from this measure are certain costs not
directly associated with contract performance, including the
portion of corporate expenses such as management and
administration, legal, environmental, certain compensation and
retiree benefits, and other expenses not considered allowable or
allocable under applicable CAS regulations and the Federal
Acquisition Regulation, and therefore not allocated to the
segments.
Backlog Funded backlog represents unfilled
orders for which funding has been contractually obligated by the
customer. Unfunded backlog represents firm orders for which
funding is not contractually obligated by the customer. Unfunded
backlog excludes unexercised contract options and unfunded
Indefinite Delivery Indefinite Quantity (IDIQ) orders. For
multi-year services contracts with non-federal government
customers having no stated contract values, backlog includes
only the amounts committed by the customer.
CONSOLIDATED
OPERATING RESULTS
Selected financial highlights are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions, except per
share
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Sales and service revenues
|
|
$
|
30,148
|
|
|
$
|
30,067
|
|
|
$
|
29,000
|
|
Operating margin
|
|
|
2,454
|
|
|
|
2,193
|
|
|
|
1,986
|
|
Interest expense, net
|
|
|
303
|
|
|
|
334
|
|
|
|
373
|
|
Other, net
|
|
|
125
|
|
|
|
200
|
|
|
|
(18
|
)
|
Federal and foreign income taxes
|
|
|
709
|
|
|
|
667
|
|
|
|
515
|
|
(Loss) Gain from discontinued
operations
|
|
|
(25
|
)
|
|
|
8
|
|
|
|
4
|
|
Diluted earnings per share
|
|
|
4.37
|
|
|
|
3.85
|
|
|
|
2.97
|
|
Net cash provided by operating
activities
|
|
|
1,756
|
|
|
|
2,627
|
|
|
|
1,936
|
|
|
|
Sales and
Service Revenues
2006 Sales in 2006 increased $81 million
as compared with 2005. The increase was primarily due to
increased revenues in the Information Technology and Technical
Services segments, partially offset by decreased revenues at the
Ships segment. Information Technology segment sales increased
$260 million due to new business primarily from the
Virginia and San Diego County information technology
outsourcing contracts and higher sales volume in the United
Kingdom Whole Life Support Programme and the Systems and
Software Engineering Services program. Technical Services
segment revenues increased $256 million primarily due to
new business from the Nevada Test Site program. Ships segment
sales decreased $465 million due primarily to decreased
volume in the DDG 1000 program (formerly known as the DD(X)
program) and continued recovery from the impact of Hurricane
Katrina (See Note 17 to the consolidated financial
statements in Part II, Item 8).
2005 Sales in 2005 increased
$1.1 billion, or 4 percent, over 2004 due to increased
revenue in each of the companys operating segments except
Ships, including sales growth of 19 percent at Integrated
Systems. The increase at Integrated Systems was due primarily to
higher volume in the
E-2D
Advanced Hawkeye, EA-18G, Unmanned Systems, B-2, and
Multi-Platform Radar Technology Insertion Program (MP-RTIP)
programs, partially offset by lower volume in the
F/A-18 and
Joint STARS programs. Ships segment sales decreased
7 percent in 2005 due primarily to decreased volume in the
DDG 1000 and LHD programs and Hurricane Katrina-related work
delays.
-36-
NORTHROP
GRUMMAN CORPORATION
Operating
Margin
Operating Margin represents segment operating margin (see
section entitled Segment Operating Results) adjusted
for a number of factors that do not affect the segments as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Segment operating margin
|
|
$
|
2,797
|
|
|
$
|
2,414
|
|
|
$
|
2,292
|
|
Unallocated expenses
|
|
|
(287
|
)
|
|
|
(190
|
)
|
|
|
(282
|
)
|
Net pension expense adjustment
|
|
|
(37
|
)
|
|
|
(21
|
)
|
|
|
(12
|
)
|
Reversal of royalty income
|
|
|
(19
|
)
|
|
|
(10
|
)
|
|
|
(12
|
)
|
Total operating margin
|
|
$
|
2,454
|
|
|
$
|
2,193
|
|
|
$
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Expenses Unallocated expenses
increased $97 million, or 51 percent, in 2006 as
compared with 2005. The increase in unallocated expenses is
primarily due to a $112.5 million pre-tax legal provision
recorded in 2006 (see Note 15 to the consolidated financial
statements in Part II, Item 8). Unallocated expenses
decreased $92 million, or 33 percent, in 2005 as
compared with 2004. The decrease was primarily due to lower
legal costs in 2005, as the 2004 legal costs included provisions
related to the resolution of the Allison Gas Turbine and
Robinson litigations.
Also included in unallocated expenses is the cost of medical and
life benefits to the extent not currently recoverable under CAS.
In November 2006, the company adopted plan amendments and
communicated to plan participants that it would cap the amount
of its contributions to substantially all of its remaining post
retirement medical and life benefit plans that were previously
not subject to limits on the companys contributions. The
change in benefits announced in November 2006 reduced benefit
costs by approximately $17 million in 2006. In addition,
this change reduced the companys aggregate benefit
obligation by approximately $465 million at
December 31, 2006. Subsequent to January 1, 2005 (or
earlier at some sectors), newly hired employees are not eligible
for post employment medical and life benefits.
Net Pension Expense Adjustment The net
pension expense adjustment reflects the excess pension expense
determined in accordance with GAAP over the pension expense
allocated to the operating segments under CAS. The net pension
expense adjustment increased to $37 million in 2006, as
compared with $21 million in 2005, and increased
$9 million in 2005 as compared with 2004. Both increases
reflect the timing of cost recognition between GAAP and CAS.
For 2007, subject to refinements for participant census data and
pay-as-you-go plans, management expects the net pension expense
adjustment to total approximately $70 million in income
primarily due to an increase in the discount rate, voluntary
pre-funding during 2006, and higher than expected return on plan
assets during 2006. The 2007 pension plan assumptions include an
expected long-term rate of return on plan assets of
8.5 percent and a composite discount rate of 6 percent.
Reversal of Royalty Income Royalty income is
included in segment operating margin for internal reporting
purposes. This amount is reversed in the table above to arrive
at operating margin as determined in accordance with GAAP as
royalty income is included in the Other, net line
item discussed below.
Net
Interest Expense
2006 Net interest expense decreased
$31 million, or 9 percent, in 2006 as compared with
2005. The decrease was primarily due to a lower average debt
balance in 2006 resulting from debt maturities totaling
$1.2 billion in 2006.
2005 Net interest expense decreased
$39 million, or 10 percent, in 2005 as compared with
2004. The decrease was primarily due to a lower average debt
balance in 2005 resulting from a $600 million reduction in
debt in the fourth quarter of 2004.
-37-
NORTHROP
GRUMMAN CORPORATION
Other,
net
2006 Other, net decreased $75 million,
or 38 percent, from 2005 income of $200 million.
During 2006, the company sold its remaining 9.7 million TRW
Automotive (TRW Auto) shares, generating pre-tax gains of
$111 million, which were partially offset by losses on
other equity investments.
2005 Other, net increased $218 million
from 2004 expense of $18 million due primarily to the sale
of 7.3 million TRW Auto shares and approximately
3.4 million Endwave shares, which generated pre-tax gains
of $70 million and $95 million, respectively.
Federal
and Foreign Income Taxes
2006 The companys effective tax rate on
income from continuing operations for 2006 was 31 percent.
During 2006, the company received final approval from the
U.S. congress Joint Committee on Taxation for the agreement
previously reached with the Internal Revenue Service (IRS)
regarding its audits of the companys
B-2 program
for the years ended December 31, 1997 through
December 31, 2000. As a result of the agreement the company
recognized tax benefits of $48 million, due to the reversal
of previously established expense provisions. The company also
recognized a net tax benefit of $18 million in 2006 related
to tax credits associated with qualified wages paid to employees
affected by Hurricane Katrina. The effective tax rate for 2007
is expected to be between 33 and 34 percent.
2005 The companys effective tax rate on
income from continuing operations for 2005 and 2004 was
32 percent. During 2005, the company recognized a
$20 million net tax benefit primarily related to the
settlement of IRS appeals cases related to Alternative Minimum
Tax credits for tax years 1981 through 1996.
Discontinued
Operations
2006 Discontinued operations is primarily
comprised of a $19 million after-tax loss on the shutdown
of EIT.
2005 Discontinued operations is primarily
comprised of a $14 million after-tax gain on the
divestiture of Teldix, partially offset by a $9 million
after-tax operating loss of EIT.
Diluted
Earnings per Share
2006 Diluted earnings per share for 2006 was
$4.37 per share, an increase of 14 percent from
$3.85 per share in 2005. Earnings per share are based on
weighted average diluted shares outstanding of
358.6 million for 2006 and 363.2 million for 2005. For
2006, weighted average diluted shares outstanding used to
calculate earnings per share has been adjusted to reflect the
dilutive impact of the mandatorily redeemable preferred stock.
2005 Diluted earnings per share for 2005 was
$3.85 per share, an increase of 30 percent from
$2.97 per share in 2004. Earnings per share are based on
weighted average diluted shares outstanding of
363.2 million for 2005 and 365.0 million for 2004.
Net Cash
Provided by Operating Activities
2006 Net cash provided by operating
activities in 2006 decreased $871 million as compared with
2005, primarily due to contributions to the companys
pension plans. Pension plan contributions totaled
$1.2 billion in 2006, of which $800 million was
voluntarily pre-funded compared with contributions of
$415 million in 2005, of which $203 million was
voluntarily pre-funded. Cash collected from customers decreased
by $231 million, and cash paid to suppliers and employees
increased by $302 million in 2006 as compared with 2005.
Net cash provided by operating activities for 2006 included the
receipt of $100 million of insurance proceeds related to
Hurricane Katrina, $60 million of federal and state income
tax refunds, and $45 million of interest.
2005 Net cash provided by operating
activities in 2005 increased $691 million as compared with
2004, primarily due to the timing of cash receipts and payments.
Cash collected from customers increased by $1.5 billion,
and cash paid to suppliers and employees increased by
$1.2 billion. Net cash from operating activities for 2005
included the receipt of $89 million of insurance proceeds
related to Hurricane Katrina, $88 million of federal and
state income tax refunds, and $78 million of interest,
including interest on a state tax refund for research and
development credits for the years 1988 through 1990. These cash
inflows were offset by a
-38-
NORTHROP
GRUMMAN CORPORATION
payment of $99 million for a litigation settlement. Net
cash provided by operating activities in 2004 included the
receipt of $121 million of federal and state income tax
refunds, partially offset by payments of $86 million for
litigation settlements. Net cash provided by operating
activities in 2005 includes contributions to the companys
pension plans totaling $415 million, of which
$203 million was voluntarily pre-funded, as compared to
contributions of $624 million in 2004, of which
$250 million was voluntarily pre-funded.
SEGMENT
OPERATING RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Sales and Service
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
5,074
|
|
|
$
|
5,017
|
|
|
$
|
4,586
|
|
Information Technology
|
|
|
4,031
|
|
|
|
3,771
|
|
|
|
3,462
|
|
Technical Services
|
|
|
1,789
|
|
|
|
1,533
|
|
|
|
1,492
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
5,500
|
|
|
|
5,489
|
|
|
|
4,610
|
|
Space Technology
|
|
|
3,351
|
|
|
|
3,395
|
|
|
|
3,269
|
|
Electronics
|
|
|
6,578
|
|
|
|
6,602
|
|
|
|
6,390
|
|
Ships
|
|
|
5,321
|
|
|
|
5,786
|
|
|
|
6,252
|
|
Other
|
|
|
|
|
|
|
42
|
|
|
|
230
|
|
Intersegment eliminations
|
|
|
(1,496
|
)
|
|
|
(1,568
|
)
|
|
|
(1,291
|
)
|
Sales and service revenues
|
|
$
|
30,148
|
|
|
$
|
30,067
|
|
|
$
|
29,000
|
|
Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
471
|
|
|
$
|
374
|
|
|
$
|
314
|
|
Information Technology
|
|
|
352
|
|
|
|
328
|
|
|
|
246
|
|
Technical Services
|
|
|
110
|
|
|
|
89
|
|
|
|
71
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
551
|
|
|
|
499
|
|
|
|
431
|
|
Space Technology
|
|
|
293
|
|
|
|
274
|
|
|
|
236
|
|
Electronics
|
|
|
744
|
|
|
|
702
|
|
|
|
661
|
|
Ships
|
|
|
393
|
|
|
|
249
|
|
|
|
395
|
|
Other
|
|
|
|
|
|
|
(17
|
)
|
|
|
(3
|
)
|
Intersegment eliminations
|
|
|
(117
|
)
|
|
|
(84
|
)
|
|
|
(59
|
)
|
Segment operating margin
|
|
$
|
2,797
|
|
|
$
|
2,414
|
|
|
$
|
2,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realignments The company, from time to time,
will realign contracts, programs or business areas among its
operating segments that possess similar customers, expertise,
and capabilities. These realignments are designed to more fully
leverage existing capabilities and enhance development and
delivery of products and services. The operating results for all
periods presented have been revised to reflect these changes.
INFORMATION &
SERVICES
Mission
Systems
Mission Systems is a leading global system integrator of
complex, mission-enabling systems for government, military, and
business clients. Products and services are focused in the
fields of Command, Control, Communications, Computers and
Intelligence, surveillance and reconnaissance, strategic
missiles, missile and air defense, and decision support systems
and services.
-39-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Contract Acquisitions
|
|
$
|
5,717
|
|
|
$
|
4,442
|
|
|
$
|
4,846
|
|
Sales and Service Revenues
|
|
|
5,074
|
|
|
|
5,017
|
|
|
|
4,586
|
|
Segment Operating Margin
|
|
|
471
|
|
|
|
374
|
|
|
|
314
|
|
As a percentage of segment
sales
|
|
|
9.3
|
%
|
|
|
7.5
|
%
|
|
|
6.8
|
%
|
Contract
Acquisitions
2006 Mission Systems contract acquisitions
increased $1.3 billion, or 29 percent, in 2006 as
compared with 2005, partially due to the receipt of delayed
funding upon approval of the fiscal year 2006 federal defense
budget. Significant acquisitions in 2006 included
$1 billion for the Intercontinental Ballistic Missile
(ICBM) program, $213 million for the KEI program,
$155 million for the Space-Based Space Surveillance
program, $149 million for certain restricted programs, and
$118 million for the Command Post Platform program.
2005 Mission Systems contract acquisitions
decreased $404 million, or 8 percent, in 2005 as
compared with 2004, primarily due to fiscal year funding delays.
Significant acquisitions in 2005 included $513 million for
the ICBM program, $155 million for the Joint National
Integration Center program, $145 million for the
Ground-Based Midcourse Fire Control and Communications program,
and $135 million for the KEI program.
Sales and
Service Revenues
2006 Mission Systems revenue increased
$57 million, or 1 percent, in 2006 as compared with
2005. The increase was due to higher sales volume across
multiple programs including the Space-Based Space Surveillance,
Command Post Platform, Force XXI Battle Command Brigade and
Below, and Ground-Based Midcourse Fire Control and
Communications programs, partially offset by lower sales volume
in a restricted program and reduced production volume in the
ICBM program.
2005 Mission Systems revenue increased
$431 million, or 9 percent, in 2005 as compared with
2004. The increase was primarily due to higher sales volume
across multiple programs including the KEI, ICBM, Command Post
Platform, Integrated Base Defense Security Solutions,
Space-Based Space Surveillance, and certain restricted programs,
partially offset by lower volume in the Tactical Automated
Security Systems II program.
Segment
Operating Margin
2006 Mission Systems operating margin
increased $97 million, or 26 percent, in 2006 as
compared with 2005. The increase includes net performance
improvements totaling $62 million across multiple programs
including Ground-Based Midcourse Fire Control and Communications
and Global Combat Support System Army. The increase
also reflects $26 million lower amortization expense for
purchased intangibles. Volume changes contributed
$9 million to the 2006 operating margin increase, primarily
driven by higher sales volume across multiple programs.
2005 Mission Systems operating margin
increased $60 million, or 19 percent, in 2005 as
compared with 2004. The increase includes net performance
improvements totaling $34 million primarily from the
Tactical Automated Security Systems II Tactical Systems and
ICBM programs. Volume changes contributed $26 million to
the 2005 operating margin increase, primarily driven by higher
sales volume across multiple programs, including certain
restricted programs, KEI, and ICBM.
Information
Technology
Information Technology is a premier provider of advanced
information technology (IT) solutions, engineering, and business
services for government and commercial customers.
-40-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Contract Acquisitions
|
|
$
|
4,617
|
|
|
$
|
3,962
|
|
|
$
|
3,680
|
|
Sales and Service Revenues
|
|
|
4,031
|
|
|
|
3,771
|
|
|
|
3,462
|
|
Segment Operating Margin
|
|
|
352
|
|
|
|
328
|
|
|
|
246
|
|
As a percentage of segment
sales
|
|
|
8.7
|
%
|
|
|
8.7
|
%
|
|
|
7.1
|
%
|
Contract
Acquisitions
2006 Information Technology contract
acquisitions increased $655 million, or 17 percent, in
2006 as compared with 2005. Significant acquisitions in 2006
included $319 million for the New York City Broadband
Mobile Wireless program, $231 million for the National
Geospatial-Intelligence Agency Enterprise Engineering program,
$130 million for the Systems and Software Engineering
Services program, and $100 million for the Defense Threat
Reduction Agency program.
2005 Information Technology contract
acquisitions increased $282 million, or 8 percent, in
2005 as compared with 2004. Significant acquisitions in 2005
included $262 million for the United Kingdom Whole Life
Support Programme, $122 million for the Technology
Enterprise Automation Management Support program, and
$119 million for the National Geospatial-Intelligence
Agency Enterprise Engineering program.
Sales and
Service Revenues
2006 Information Technology revenue increased
$260 million, or 7 percent, in 2006 as compared with
2005. The increase was primarily due to sales volume from the
new Virginia Information Technology Outsourcing and
San Diego County Information Technology Outsourcing
programs, as well as higher sales volume in the United Kingdom
Whole Life Support Programme and the Systems and Software
Engineering Services program.
2005 Information Technology revenue increased
$309 million, or 9 percent, in 2005 as compared with
2004. The increase was primarily due to sales volume from
Integic, acquired in the first quarter of 2005, as well as
higher sales volume in the Identification 1 program, the United
Kingdom Whole Life Support Programme, the Systems and Software
Engineering Services program, and the National
Geospatial-Intelligence Agency Enterprise Engineering program.
Segment
Operating Margin
2006 Information Technology operating margin
increased $24 million, or 7 percent, in 2006 as
compared with 2005. The increase is driven by higher sales
volume, primarily from the Virginia Information Technology
Outsourcing program. The increase also reflects $5 million
lower amortization expense for purchased intangibles.
2005 Information Technology operating margin
increased $82 million, or 33 percent, in 2005 as
compared with 2004. The increase includes net performance
improvements totaling $55 million across numerous programs,
including the Technology Enterprise Automation Management
Support program and the Defense Threat Reduction Agency program.
Volume changes contributed $27 million to the 2005
operating margin increase, primarily driven by sales volume from
Integic as well as higher sales volume in the Identification 1
program, the United Kingdom Whole Life Support Programme, the
Systems and Software Engineering Services program, and the
National Geospatial-Intelligence Agency Enterprise Engineering
program.
Technical
Services
Technical Services is a leading provider of logistics,
infrastructure, and sustainment support, and also provides a
wide-array of technical services including training and
simulation. Services are grouped into the following business
areas: Systems Support, Training and Simulation, and Life Cycle
Optimization and Engineering.
-41-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Contract Acquisitions
|
|
$
|
2,288
|
|
|
$
|
1,368
|
|
|
$
|
1,464
|
|
Sales and Service Revenues
|
|
|
1,789
|
|
|
|
1,533
|
|
|
|
1,492
|
|
Segment Operating Margin
|
|
|
110
|
|
|
|
89
|
|
|
|
71
|
|
As a percentage of segment
sales
|
|
|
6.1
|
%
|
|
|
5.8
|
%
|
|
|
4.8
|
%
|
Contract
Acquisitions
2006 Technical Services contract acquisitions
increased $920 million, or 67 percent, in 2006 as
compared with 2005. Significant acquisitions in 2006 included
$462 million for the Nevada Test Site program,
$354 million in additional funding in the Space Gateway
Support program, and $297 million in additional funding in
the Saudi Arabian National Guard program.
2005 Technical Services contract acquisitions
decreased $96 million, or 7 percent, in 2005 as
compared with 2004. Significant acquisitions in 2005 included
$299 million for the Space Gateway Support program,
$79 million for the Citizens Immigration and Services (CIS)
program, $48 million for the Ft. Irwin program, and
$30 million for the Battle Command Training Program.
Sales and
Service Revenues
2006 Technical Services revenue increased
$256 million, or 17 percent, in 2006 as compared with
2005. The increase was primarily due to higher sales volume for
the Nevada Test Site, Combined Tactical Training Range and
Ft. Irwin programs, partially offset by lower volume in the
Space Gateway Support program.
2005 Technical Services revenue increased
$41 million, or 3 percent, in 2005 as compared with
2004. The increase was primarily driven by higher volume in the
Space Gateway Support, Africa Contingency Operations Training
Assistance (ACOTA), Combined Tactical Training Range, and
U.S. Army, European Command programs.
Segment
Operating Margin
2006 Technical Services operating margin
increased $21 million, or 24 percent, in 2006 as
compared with 2005. The increase includes net performance
improvements totaling $13 million primarily from the CIS,
Saudi Arabian National Guard, and APG-66 Japan programs. Volume
changes contributed $8 million to the 2006 operating margin
primarily driven by higher sales volume in the Nevada Test Site
program.
2005 Technical Services operating margin
increased $18 million, or 25 percent, in 2005 as
compared to 2004. The increase includes net performance
improvements totaling $4 million primarily from the Space
Gateway Support, B-2 Repairs, and NASA Sounding Rocket Operating
Contract programs. Volume increases contributed $14 million
to the 2005 operating margin increase, primarily driven by
higher sales volume in the Space Gateway Support and Combined
Tactical Training Range programs.
AEROSPACE
Integrated
Systems
Integrated Systems is a leader in the design, development, and
production of airborne early warning, electronic warfare and
surveillance, and battlefield management systems, as well as
manned and unmanned tactical and strike systems.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Contract Acquisitions
|
|
$
|
6,107
|
|
|
$
|
4,544
|
|
|
$
|
5,042
|
|
Sales and Service Revenues
|
|
|
5,500
|
|
|
|
5,489
|
|
|
|
4,610
|
|
Segment Operating Margin
|
|
|
551
|
|
|
|
499
|
|
|
|
431
|
|
As a percentage of segment
sales
|
|
|
10.0
|
%
|
|
|
9.1
|
%
|
|
|
9.3
|
%
|
-42-
NORTHROP
GRUMMAN CORPORATION
Contract
Acquisitions
2006 Integrated Systems contract acquisitions
increased $1.6 billion, or 34 percent, in 2006 as
compared with 2005. Significant acquisitions in 2006 included
$1.2 billion for the
E-2 program,
$978 million for the F-35 program, $767 million for
the F/A-18
program, and $718 million for the High Altitude Long
Endurance (HALE) Systems (Global Hawk) program.
2005 Integrated Systems contract acquisitions
decreased $498 million, or 10 percent, in 2005 as
compared with 2004, primarily due to fiscal year funding delays.
Significant acquisitions in 2005 included $789 million for
the F/A-18
program, $626 million for the
E-2 program,
$544 million for the HALE Systems program, and
$543 million for the F-35 program.
Sales and
Service Revenues
2006 Integrated Systems revenue increased
$11 million in 2006 as compared with 2005. The increase was
primarily due to higher sales volume in the F-35,
F/A-18, and
various restricted programs, partially offset by lower volume in
the E-2D
Advanced Hawkeye, Joint Surveillance Target Attack Systems
(Joint STARS), and EA-6B programs.
2005 Integrated Systems revenue increased
$879 million, or 19 percent, in 2005 as compared with
2004. The increase was primarily due to higher volume in the
E-2D
Advanced Hawkeye, EA-18G, Joint Unmanned Combat Air System
(J-UCAS), MP-RTIP, B-2, and various restricted programs,
partially offset by decreased volume in the
F/A-18 and
Joint STARS programs.
Segment
Operating Margin
2006 Integrated Systems operating margin
increased $52 million, or 10 percent, in 2006 as
compared with 2005. The increase includes net performance
improvements totaling $44 million primarily from the F-35,
EA-18G, and
F/A-18
programs. Volume changes contributed $8 million to the 2006
operating margin increase, primarily driven by higher sales
volume in the
F/A-18 and
F-35 programs.
2005 Integrated Systems operating margin
increased $68 million, or 16 percent, in 2005 as
compared with 2004. The increase includes net performance
improvements totaling $51 million primarily from the
F/A-18,
E-10A, F-35,
and various restricted programs, partially offset by lower
performance in the Joint STARS program. Volume changes
contributed $17 million to the 2005 operating margin
increase, primarily driven by higher sales volume in the
E-2D
Advanced Hawkeye and J-UCAS programs.
Space
Technology
Space Technology develops and integrates a broad range of
systems at the leading edge of space, defense, and electronics
technology. The segment supplies products primarily to the
U.S. Government that are critical to maintaining the
nations security and leadership in science and technology.
Space Technologys business areas focus on the design,
development, manufacture, and integration of spacecraft systems
and subsystems, electronic and communications payloads, advanced
avionics systems, and high energy laser systems and subsystems.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Contract Acquisitions
|
|
$
|
4,314
|
|
|
$
|
2,643
|
|
|
$
|
3,455
|
|
Sales and Service Revenues
|
|
|
3,351
|
|
|
|
3,395
|
|
|
|
3,269
|
|
Segment Operating Margin
|
|
|
293
|
|
|
|
274
|
|
|
|
236
|
|
As a percentage of segment
sales
|
|
|
8.7
|
%
|
|
|
8.1
|
%
|
|
|
7.2
|
%
|
Contract
Acquisitions
2006 Space Technology contract acquisitions
increased $1.7 billion, or 63 percent, as compared
with 2005. Significant acquisitions in 2006 included
$1.2 billion for restricted programs, $770 million for
the National Polar-orbiting Operational Environmental Satellite
System (NPOESS) program, and $611 million for the Advanced
Extreme High Frequency (AEHF) program.
-43-
NORTHROP
GRUMMAN CORPORATION
2005 Space Technology contract acquisitions
decreased $812 million, or 24 percent, in 2005 as
compared with 2004, primarily due to fiscal year funding delays.
Significant acquisitions in 2005 included $551 million for
restricted programs, $487 million for the NPOESS program,
$264 million for the AEHF program, and additional funding
of $257 million for the F-35 program.
Sales and
Service Revenues
2006 Space Technology revenues decreased
$44 million, or 1 percent, as compared with 2005. The
decrease was primarily due to lower volume in the NPOESS,
restricted, and F-35 programs, and the winding down of the
Mobile Tactical High Energy Laser (MTHEL) and NextGen programs
and partially offset by higher volume in the AEHF and Airborne
Laser (ABL) programs.
2005 Space Technology revenue increased
$126 million, or 4 percent, in 2005 as compared with
2004. The increase was primarily due to higher sales volume in
the NPOESS, James Webb Space Telescope (JWST), and restricted
programs, offset by lower AEHF sales.
Segment
Operating Margin
2006 Space Technology operating margin
increased $19 million, or 7 percent, as compared with
2005. The increase includes net performance improvements
totaling $23 million primarily from the F22-A and the Space
Tracking and Surveillance System programs. Volume changes
reduced the 2006 operating margin by $4 million, primarily
driven by the winding down of the MTHEL and NextGen programs.
2005 Space Technology operating margin
increased $38 million, or 16 percent, in 2005 as
compared with 2004. The increase includes net performance
improvements totaling $17 million, primarily from
restricted programs and Defense Support Programs. Volume changes
contributed $21 million to the 2005 operating margin
increase, primarily driven by higher sales volume in the NPOESS,
restricted, and Transformational Satellite programs.
ELECTRONICS
Electronics is a leading designer, developer, manufacturer and
integrator of a variety of advanced electronic and maritime
systems for national security and select non-defense
applications. Electronics provides systems to U.S. and
international customers for such applications as airborne
surveillance, aircraft fire control, precision targeting,
electronic warfare, automatic test equipment, inertial
navigation, integrated avionics, space sensing, intelligence
processing, air traffic control, air and missile defense,
homeland defense, communications, mail processing, biochemical
detection, ship bridge control, and shipboard components.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Contract Acquisitions
|
|
$
|
7,167
|
|
|
$
|
6,346
|
|
|
$
|
6,542
|
|
Sales and Service Revenues
|
|
|
6,578
|
|
|
|
6,602
|
|
|
|
6,390
|
|
Segment Operating Margin
|
|
|
744
|
|
|
|
702
|
|
|
|
661
|
|
As a percentage of segment
sales
|
|
|
11.3
|
%
|
|
|
10.6
|
%
|
|
|
10.3
|
%
|
Contract
Acquisitions
2006 Electronics contract acquisitions
increased $821 million, or 13 percent, in 2006 as
compared with 2005. Significant acquisitions in 2006 included
$270 million for the Vehicular Intercommunications program,
$261 million for the Space-Based Infrared System program,
$160 million for the F-22 program, $153 million for
the Lightweight Laser Designator Rangefinder program,
$150 million for the Bio-Detection program,
$148 million for the Mark VII program, and
$125 million for the AFSM-ai Follow On program.
2005 Electronics contract acquisitions
decreased $196 million, or 3 percent, in 2005 as
compared with 2004. This decrease is primarily due to a
$205 million backlog reduction resulting from the sale of
Teldix. Significant acquisitions in 2005 included
$202 million for the F-22 program and $186 million for
the Space-Based Infrared System program.
-44-
NORTHROP
GRUMMAN CORPORATION
Sales and
Service Revenues
2006 Electronics revenue decreased
$24 million, or less than 1 percent, in 2006 as
compared with 2005. The decrease was primarily due to lower
sales volume in the F-16 Block 60 and Longbow Missile
programs as these programs near completion, partially offset by
higher sales in automated flat sorting machines to the
U.S. Postal Service, vehicle intercommunications systems
and infrared countermeasures programs. Sales for 2006 also
included adjustments resulting from charges for the MESA
Wedgetail and Peace Eagle fixed-price development airborne
surveillance programs.
2005 Electronics revenue increased
$212 million, or 3 percent, in 2005 as compared with
2004. The increase was primarily due to revenue growth in
infrared countermeasure programs and bio-detection and vehicle
intercommunications systems.
Segment
Operating Margin
2006 Electronics operating margin increased
$42 million, or 6 percent, in 2006 as compared with
2005. The increase was primarily due to $55 million lower
amortization expense and includes net performance improvements
totaling $44 million on various programs. Operating margin
for 2006 included a $51 million
pre-tax
charge for the Wedgetail contract and a $42 million pre-tax
charge for the Peace Eagle contract (both under the MESA
program), and a $28 million pre-tax charge for the
ASPIS II program. These charges primarily reflect the
impact of development, test & evaluation schedule
extension, required hardware modifications and related
retrofits. Operating margin for 2005 included a $65 million
pre-tax charge for the F-16 Block 60 fixed-price
development combat avionics program. The charge reflected a
higher estimate of costs to complete the Falcon Edge electronic
warfare suite, including rework of the mission software.
2005 Electronics operating margin increased
$41 million, or 6 percent, in 2005 as compared with
2004. The increase includes net performance improvements
totaling $19 million primarily from Homeland Security
programs. Volume changes contributed $23 million to the
2005 operating margin increase, primarily driven by higher sales
volume in infrared countermeasure programs and bio-detection and
vehicle intercommunications systems. Operating margin for 2005
also included a $65 million pre-tax charge for the F-16
Block 60 fixed-price development combat avionics program.
Operating margin for 2004 included a $60 million pre-tax
charge for
F-16
Block 60 and a $52 million pre-tax charge for the
Wedgetail program. The F-16 Block 60 charge reflected a
higher estimate of costs to complete the Falcon Edge electronic
warfare suite, including the results of qualification testing
and the impact of delays in supplies of integrated
microelectronic assemblies. The Wedgetail charge reflected
increased projected costs due to analysis of technical issues
following systems engineering modeling and qualification testing
for the MESA program.
SHIPS
Ships is the nations sole industrial designer, builder,
and refueler of nuclear-powered aircraft carriers and one of
only two companies capable of designing and building
nuclear-powered submarines for the U.S. Navy. Ships is also
one of the nations leading full service systems providers
for the design, engineering, construction, and life cycle
support of major surface ships for the U.S. Navy,
U.S. Coast Guard, international navies, and for commercial
vessels. Ships also produces double-hulled crude oil tankers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Contract Acquisitions
|
|
$
|
10,045
|
|
|
$
|
2,749
|
|
|
$
|
5,670
|
|
Sales and Service Revenues
|
|
|
5,321
|
|
|
|
5,786
|
|
|
|
6,252
|
|
Segment Operating Margin
|
|
|
393
|
|
|
|
249
|
|
|
|
395
|
|
As a percentage of segment
sales
|
|
|
7.4
|
%
|
|
|
4.3
|
%
|
|
|
6.3
|
%
|
Contract
Acquisitions
2006 Ships contract acquisitions increased
$7.3 billion in 2006 as compared with 2005. Significant
acquisitions in 2006 included $3.9 billion for the LPD
program, $1.8 billion for the USS Carl Vinson
Refueling and
-45-
NORTHROP
GRUMMAN CORPORATION
Complex Overhaul (RCOH) program, $1.3 billion for the CVN
21 program, $814 million for the Virginia
Class Block II program, $479 million for
the George H. W. Bush program, $261 million for the
DDG 1000 program (formerly known as the DD(X) program),
$176 million for the Coast Guards Maritime Security
Large National Security Cutter (WMSL (NSC)) program,
$172 million for the Toledo Depot Modernization Period
program, $168 million for the LHD program, and
$116 million for the LHA program.
2005 Ships segment contract acquisitions
decreased $2.9 billion, or 52 percent, in 2005,
compared with 2004. The decrease was primarily due to fiscal
year funding delays impacting USS Carl Vinson RCOH and
CVN 21, as well as decreased funding for the Virginia
Class Block II program and the DDG 1000 program.
The principal acquisitions in 2005 included $535 million
for the LPD program, $469 million for the Virginia
class Block II program, $236 million for the
DDG 1000 program, $232 million for the USS George
Washington Docking Planned Incremental Availability (DPIA)
program, and $160 million for the Deepwater program.
Sales and
Service Revenues
2006 Ships revenue decreased
$465 million, or 8 percent, in 2006 as compared with
2005. The decrease was primarily due to lower sales volume in
the DDG 1000 program driven by the transition from
Phase III to Phase IV and changes in the Navy
acquisition strategy regarding major
sub-contractors,
as well as continued recovery from the impact of Hurricane
Katrina in the LPD program. The decrease was partially offset by
higher sales in the USS Carl Vinson, DDG 51, WMSL (NSC),
and LHA programs.
2005 Ships revenue decreased
$466 million, or 7 percent, in 2005, as compared with
2004, partially due to a $158 million reduction of sales
from Hurricane Katrina-related work delays, an $82 million
adjustment of prior sales to account for Hurricane
Katrina-related cost growth across several Ships programs, and a
slow build rate, as a result of property damage following
Hurricane Katrina. The decrease also included lower volume in
the DDG 1000 program. These decreases were partially offset by
increased sales volume in the Virginia
class Block II, USS George Washington
DPIA, CVN 21, and WMSL (NSC) programs.
Segment
Operating Margin
2006 Ships operating margin increased
$144 million, or 58 percent, in 2006 as compared with
2005. The increase was primarily due to a prior year charge of
$150 million to account for Hurricane Katrina-related cost
growth, as well as a $15 million impact from Hurricane
Katrina-related work delays (see Note 17 to the
consolidated financial statements in Part II, Item 8).
The 2006 operating margin includes a pension benefit resulting
from the Pension Protection Act of 2006. These increases were
partially offset by lower sales volume in the DDG 1000 program.
2005 Ships operating margin decreased
$146 million, or 37 percent, in 2005, as compared with
2004. The decrease included a $150 million charge to
account for Hurricane Katrina-related cost growth, as well as a
$15 million impact from Hurricane Katrina-related work
delays (see Note 17 to the consolidated financial
statements in Part II, Item 8). This decrease was
partially offset by performance improvement on the
USS Dwight D. Eisenhower program.
BACKLOG
Total backlog at December 31, 2006, was approximately
$61 billion. Total backlog includes both funded backlog
(unfilled orders for which funding is contractually obligated by
the customer) and unfunded backlog (firm orders for which
funding is not currently contractually obligated by the
customer). Unfunded backlog excludes unexercised contract
options and unfunded IDIQ orders. For multi-year services
contracts with non-federal government customers having no stated
contract values, backlog includes only the amounts committed by
the customer. Major components in unfunded backlog as of
December 31, 2006, included various restricted programs,
the Kinetic Energy Interceptors program in the Mission Systems
segment; the F-35,
F/A-18, and
E-2 Advanced
Hawkeye programs in the Integrated Systems segment; the NPOESS
program in the Space Technology segment; and Block II of
the Virginia Class submarines program and the Vinson
execution contract in the Ships segment.
-46-
NORTHROP
GRUMMAN CORPORATION
The following table presents funded and unfunded backlog by
segment at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
$ in millions
|
|
Funded
|
|
|
Unfunded
|
|
|
Backlog
|
|
|
Funded
|
|
|
Unfunded
|
|
|
Backlog
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
2,952
|
|
|
$
|
8,337
|
|
|
$
|
11,289
|
|
|
$
|
2,309
|
|
|
$
|
7,614
|
|
|
$
|
9,923
|
|
Information Technology
|
|
|
2,830
|
|
|
|
2,537
|
|
|
|
5,367
|
|
|
|
2,244
|
|
|
|
2,926
|
|
|
|
5,170
|
|
Technical Services
|
|
|
1,066
|
|
|
|
3,276
|
|
|
|
4,342
|
|
|
|
567
|
|
|
|
861
|
|
|
|
1,428
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
4,285
|
|
|
|
4,934
|
|
|
|
9,219
|
|
|
|
3,678
|
|
|
|
8,524
|
|
|
|
12,202
|
|
Space Technology
|
|
|
1,936
|
|
|
|
7,289
|
|
|
|
9,225
|
|
|
|
972
|
|
|
|
6,807
|
|
|
|
7,779
|
|
Electronics
|
|
|
6,585
|
|
|
|
1,583
|
|
|
|
8,168
|
|
|
|
5,996
|
|
|
|
1,971
|
|
|
|
7,967
|
|
Ships
|
|
|
10,854
|
|
|
|
2,566
|
|
|
|
13,420
|
|
|
|
6,130
|
|
|
|
5,379
|
|
|
|
11,509
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Total backlog
|
|
$
|
30,508
|
|
|
$
|
30,522
|
|
|
$
|
61,030
|
|
|
$
|
21,901
|
|
|
$
|
34,082
|
|
|
$
|
55,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog is converted into the following years sales as
costs are incurred or deliveries are made. Approximately
65 percent of the 2006 year-end funded backlog is
expected to be converted into sales in 2007. Total
U.S. Government orders, including those made on behalf of
foreign governments, comprised 90 percent, 83 percent,
and 86 percent of the funded backlog at the end of 2006,
2005, and 2004, respectively. Total foreign customer orders
accounted for 5 percent, 10 percent, and
9 percent of the funded backlog at the end of 2006, 2005,
and 2004, respectively. Domestic commercial backlog represented
5 percent, 7 percent, and 5 percent of funded
backlog at the end of 2006, 2005, and 2004, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Contractual
Obligations
The following table presents the companys contractual
obligations as of December 31, 2006, and the estimated
timing of future cash payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2010
|
|
|
2012 and
|
|
$ in millions
|
|
Total
|
|
|
2007
|
|
|
2009
|
|
|
2011
|
|
|
beyond
|
|
Long-term debt
|
|
$
|
4,016
|
|
|
$
|
75
|
|
|
$
|
575
|
|
|
$
|
855
|
|
|
$
|
2,511
|
|
Interest payments on long-term debt
|
|
|
4,068
|
|
|
|
293
|
|
|
|
570
|
|
|
|
460
|
|
|
|
2,745
|
|
Mandatorily redeemable convertible
preferred stock
|
|
|
699
|
|
|
|
24
|
|
|
|
49
|
|
|
|
49
|
|
|
|
577
|
|
Operating leases
|
|
|
1,920
|
|
|
|
420
|
|
|
|
600
|
|
|
|
357
|
|
|
|
543
|
|
Purchase obligations(1)
|
|
|
5,637
|
|
|
|
4,127
|
|
|
|
1,335
|
|
|
|
152
|
|
|
|
23
|
|
Other long-term liabilities(2)
|
|
|
997
|
|
|
|
185
|
|
|
|
231
|
|
|
|
150
|
|
|
|
431
|
|
Total contractual obligations
|
|
$
|
17,337
|
|
|
$
|
5,124
|
|
|
$
|
3,360
|
|
|
$
|
2,023
|
|
|
$
|
6,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A purchase obligation is defined as an agreement to
purchase goods or services that is enforceable and legally
binding on the company and that specifies all significant terms,
including: fixed or minimum quantities to be purchased; fixed,
minimum, or variable price provisions; and the approximate
timing of the transaction. These amounts are primarily comprised
of open purchase order commitments to vendors and subcontractors
pertaining to funded contracts. |
|
(2) |
|
Other long-term liabilities primarily consist of accrued
workers compensation, deferred compensation, and other
miscellaneous liabilities. |
The table above also excludes estimated minimum funding
requirements for retiree benefit plans as set forth by ERISA in
relation to the $3.4 billion pension and postretirement
benefit liability, totaling approximately
-47-
NORTHROP
GRUMMAN CORPORATION
$2.0 billion over the next five years: $372 million in
2007, $622 million in 2008 and 2009, and $991 million
in 2010 and 2011. The company also has payments due under plans
that are not required to be funded in advance, but are funded on
a pay-as-you-go basis. See Note 18 to the consolidated
financial statements in Part II, Item 8.
Further details regarding long-term debt and operating leases
can be found in Notes 13 and 16, respectively, to the
consolidated financial statements in Part II, Item 8.
Sources
and Uses of Cash
The following table provides an overview of the companys
sources and uses of cash. The amounts from which the percentages
are derived are reported in the consolidated statements of cash
flows as follows: cash from customers and cash to employees and
suppliers of services and materials are reported in
Operating Activities; cash from buyers of assets,
cash to sellers of assets, and cash to suppliers of facilities
are reported in Investing Activities; and cash from
and cash to lenders and shareholders are reported in
Financing Activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Cash came from
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers
|
|
|
96
|
%
|
|
|
97
|
%
|
|
|
94
|
%
|
Buyers of assets/other
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
Shareholders
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
Lenders
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cash went to
|
|
|
|
|
|
|
|
|
|
|
|
|
Suppliers and employees
|
|
|
86
|
%
|
|
|
88
|
%
|
|
|
87
|
%
|
Lenders
|
|
|
5
|
|
|
|
1
|
|
|
|
4
|
|
Shareholders
|
|
|
4
|
|
|
|
5
|
|
|
|
4
|
|
Sellers of assets
|
|
|
3
|
|
|
|
4
|
|
|
|
2
|
|
Suppliers of facilities/other
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
2006 In 2006, cash provided by operating
activities was $1.8 billion as compared with
$2.6 billion in 2005. The decrease was primarily due to
contributions to the companys pension plans totaling
$1.2 billion, of which $800 million was voluntarily
pre-funded in the fourth quarter, as compared to contributions
of $415 million in 2005, of which $203 million was
voluntarily pre-funded in the fourth quarter. In August 2006,
the Pension Protection Act of 2006 (the Act) was enacted into
law. While the impact of the Act is still being evaluated, the
company does not expect it to have any significant effect on its
current funding strategy for its U.S. pension plans.
Cash collected from customers decreased by $231 million,
and cash paid to suppliers and employees increased by
$302 million. Net cash from operating activities for 2006
included the receipt of $100 million of insurance proceeds
related to Hurricane Katrina, $60 million of federal and
state income tax refunds, and $45 million of interest.
At December 31, 2006, net working capital deficit (current
assets less current liabilities) was $34 million, primarily
reflecting a lower cash balance offset by a lower current
portion of long-term debt.
2005 In 2005, cash provided by operating
activities was $2.6 billion as compared with
$1.9 billion in 2004. The increase was primarily due to the
timing of cash receipts and payments. Cash collected from
customers increased by $1.5 billion, and cash paid to
suppliers and employees increased by $1.2 billion.
Net cash from operating activities for 2005 included the receipt
of $89 million of insurance proceeds related to Hurricane
Katrina, $88 million of federal and state income tax
refunds, and $78 million of interest, including
-48-
NORTHROP
GRUMMAN CORPORATION
interest on a state tax refund for research and development
credits for the years 1988 through 1990. These cash inflows were
offset by a payment of $99 million for a litigation
settlement.
Employer contributions to the companys pension plans were
$415 million in 2005 as compared with $624 million in
2004. The contributions include voluntary pre-funding payments
of $203 million and $250 million in 2005 and 2004,
respectively. Interest payments decreased $39 million in
2005 as compared with 2004, due to further reduction in
fixed-rate debt.
At December 31, 2005, net working capital deficit (current
assets less current liabilities) was $423 million,
primarily driven by an increased current portion of long-term
debt.
2004 In 2004, cash provided by operating
activities was $1.9 billion as compared with
$798 million in 2003. In 2003, cash used in operations
included $1 billion of taxes paid upon completion of the
B-2 EMD contract.
In 2004, the companys appeal to the Supreme Court of
Indiana in connection with the Allison Gas Turbine case was
denied and the company paid $81 million in settlement of
the judgment and interest.
In 2004, the company and Goodrich agreed to a settlement to
resolve certain post-closing liabilities that related to
warranty, customer claims, and certain other matters in exchange
for a payment to Goodrich of $99 million. The company also
resolved an indemnification of other post-employment benefits,
pursuant to the TRW Auto sale agreement, and paid an affiliate
of The Blackstone Group $52.5 million.
Employer contributions to the companys pension plans
increased $295 million from $329 million in 2003 to
$624 million in 2004. The increase reflects a voluntary
pre-funding of $250 million in the fourth quarter of 2004.
No such pre-funding payment was made in 2003. Interest payments
decreased $150 million in 2004 as compared with 2003,
primarily due to a reduction in fixed-rate debt.
Investing
Activities
2006 Cash used in investing activities was
$601 million in 2006. During 2006, the company received
$209 million from the sale of the remaining
9.7 million of its TRW Auto common shares. Also during
2006, Ship Systems received access to $200 million from the
issuance of Gulf Opportunity Zone Industrial Development Revenue
Bonds (see discussion in Financing Activities below)
of which $127 million remained restricted as of
December 31, 2006. In addition, the company received
$117 million of insurance proceeds related to Hurricane
Katrina, paid $77 million for
set-up costs
in relation to initiation of outsourcing contracts, and paid
$35 million for the purchase of an investment.
During 2006, the company also received $43 million from the
sales of Interconnect and Winchester.
Capital expenditures in 2006 were $737 million, including
$111 million to replace property damaged by Hurricane
Katrina and $36 million of capitalized software costs.
Capital expenditure commitments at December 31, 2006 were
approximately $443 million, which are expected to be paid
with cash on hand and restricted cash.
2005 Cash used in investing activities was
$855 million in 2005. During 2005, the company paid
$361 million to acquire two businesses. This includes the
acquisition of Confluent in September 2005 and Integic in March
2005. The company received $238 million from the sale of
investments, including $95 million for 3.4 million
common shares of Endwave and $143 million for
7.3 million common shares of TRW Auto. During 2005, the
company also received $57 million from the sale of Teldix.
The company received insurance proceeds of $38 million in
2005 to replace damaged property at the Ships segment as a
result of Hurricane Katrina.
Capital expenditures in 2005 were $824 million, including
$80 million to replace property damaged by Hurricane
Katrina and $41 million of capitalized software costs.
-49-
NORTHROP
GRUMMAN CORPORATION
2004 Cash provided by investing activities
was $9 million in 2004. On November 12, 2004, the
company received $493.5 million, from the repurchase of the
TRW Auto
payment-in-kind
note, which was net of $40.5 million for settlement of
certain contractual issues arising from the sale of TRW Auto.
During 2004, the company received $125 million from the
sale of businesses including Kester, one of the former
Components Technologies businesses, in February 2004 for
approximately $60 million, and Northrop Grumman Canada in
December 2004 for approximately $65 million.
Capital expenditures in 2004 were $672 million, including
$53 million for capitalized software costs.
Financing
Activities
2006 Cash used in financing activities in
2006 was $1.7 billion comprised primarily of
$1.2 billion in repayments of long-term debt,
$825 million in share repurchases, and $402 million of
dividends paid to shareholders, partially offset by
$393 million in proceeds from exercises of stock options
and $200 million of debt incurred in relation to the Gulf
Opportunity Zone Industrial Development Revenue Bonds.
In March 2006, the company repaid a $400 million
7.0 percent debenture at maturity and a $35 million
7.625 percent debenture at maturity. In May 2006, the
company repaid an $85 million 8.75 percent debenture
at maturity. In November 2006, the company repaid a
$690 million 4.08 percent senior note at maturity.
Gulf Opportunity Zone Industrial Development Revenue
Bonds In December 2006, Ship Systems entered
into a loan agreement with the Mississippi Business Finance
Corporation (MBFC) under which Ship Systems received access to
$200 million from the issuance of Gulf Opportunity Zone
Industrial Development Revenue Bonds by the MBFC. The loan
accrues interest payable semi-annually at a fixed rate of
4.55 percent per annum. The bonds are subject to redemption
at the companys discretion on or after December 1,
2016, and mature on December 1, 2028. The bonds will be
repaid by Ship Systems in accordance with the terms stipulated
in the loan agreement. The bond issuance proceeds must be used
to finance the construction, reconstruction, and renovation of
the companys interest in certain ship manufacturing and
repair facilities, or portions thereof, located in the state of
Mississippi. As of December 31, 2006, $73 million was
used by Ship Systems and the remaining $127 million was
recorded in miscellaneous other assets as restricted cash in the
consolidated statements of financial position in Part II,
Item 8. Repayment of the bonds is guaranteed by the company.
Share Repurchases On October 24, 2005,
the companys board of directors authorized a share
repurchase program of up to $1.5 billion of its outstanding
common stock, which commenced in November 2005 and under which
$176 million is remaining.
Under this program, the company entered into an initial
agreement with Credit Suisse, New York Branch (Credit Suisse) on
November 4, 2005, to repurchase approximately
9.1 million shares of common stock at an initial price of
$55.15 per share for a total of $500 million. Credit Suisse
immediately borrowed shares that were sold to and canceled by
the company. Subsequently, Credit Suisse purchased shares in the
open market to settle its share borrowings. On March 1,
2006, Credit Suisse completed its purchases under this
agreement, and the company paid $37 million for the final
price adjustment under the terms of the agreement. The final
average purchase price was $59.05 per share.
The company entered into a second agreement with Credit Suisse
on March 6, 2006, to repurchase approximately
11.6 million shares of common stock at an initial price of
$64.78 per share for a total of $750 million. Under
this agreement, Credit Suisse immediately borrowed shares that
were sold to and canceled by the company. Subsequently, Credit
Suisse purchased shares in the open market to settle its share
borrowings. On May 26, 2006, Credit Suisse completed its
purchases under this agreement, and the company paid
$37 million for the final price adjustment under the terms
of the agreement. The final average purchase price was
$68.01 per share.
On December 14, 2006, the companys board of directors
authorized a share repurchase program of up to $1.0 billion
of its outstanding common stock. This new authorization is in
addition to $176 million remaining
-50-
NORTHROP
GRUMMAN CORPORATION
on the companys previous share repurchase authorization
for a total of $1.176 billion authorized for share
repurchases.
Share repurchases take place at managements discretion and
under pre-established non-discretionary programs from time to
time, depending on market conditions, in the open market, and in
privately negotiated transactions. The company retires its
common stock upon repurchase and has not made any purchases of
common stock other than in connection with these publicly
announced repurchase programs.
2005 Cash used in financing activities in
2005 was $1.4 billion comprised primarily of
$1.2 billion in share repurchases and $359 million in
dividends paid to shareholders, partially offset by
$163 million in proceeds from exercises of stock options.
2004 Cash of $1 billion was used in
financing activities in 2004, comprised primarily of
$786 million in share repurchases, $725 million in
principal payments of long-term debt, and $322 million in
dividends paid to shareholders, partially offset by
$834 million in proceeds from exercises of stock options.
Debt Reduction On October 15, 2004, the
company redeemed all of its outstanding $250 million
9.375 percent debentures due 2024. The redemption price was
104.363 percent of the principal amount plus accrued and
unpaid interest through the redemption date. As a result of the
redemption, the company recorded a $13 million pre-tax
charge in 2004. Also, on October 15, 2004,
$350 million of 8.625 percent notes matured.
Equity Security Units In November 2001, the
company issued 6.9 million equity security units. Each
equity security unit, issued at $100 per unit, initially
consisted of a contract to purchase shares of Northrop Grumman
common stock on November 16, 2004, and a $100 senior note
due 2006. The senior notes due 2006 were reported as long-term
debt in 2005. The senior notes initially bore interest at
5.25 percent per annum, and each equity security unit paid
a contract adjustment payment of 2.0 percent per annum
through November 16, 2004, for a combined yield on the
equity security unit of 7.25 percent per annum through
November 16, 2004. On August 11, 2004, the company
remarketed the senior notes as required by the original terms of
the equity security units. As a result of this remarketing, the
interest rate on the senior notes was reset to 4.08 percent
per annum effective August 16, 2004. Proceeds from the
remarketed notes were used to purchase U.S. Treasury
securities that were pledged to secure the stock purchase
obligations of the unit holders and held with a collateral
agent. The notes were repaid on November 16, 2006. On
November 16, 2004, the company received $690 million
and issued 13.2 million shares of common stock in
settlement of the stock purchase contracts. The number of shares
issued was calculated using a conversion ratio of
1.9171 shares per each equity security unit, which was
determined in accordance with the original terms of the stock
purchase contracts.
Credit
Facility
On August 5, 2005, the company entered into a new credit
agreement which provides for a five-year revolving credit
facility in an aggregate principal amount of $2 billion.
The credit facility permits the company to request additional
lending commitments from the lenders under the agreement or
other eligible lenders under certain circumstances, and thereby
to increase the aggregate principal amount of the lending
commitments under the agreement by up to an additional
$500 million. The agreement provides for swingline loans
and letters of credit as
sub-facilities
for the credit facilities provided for in the agreement.
Borrowings under the credit facility bear interest at various
rates, including the London Interbank Offered Rate (LIBOR),
adjusted based on the companys credit rating, or an
alternate base rate plus an incremental margin. The credit
facility also requires a facility fee based on the daily
aggregate amount of commitments (whether or not utilized) and
the companys credit rating level. The companys
credit agreement contains certain financial covenants that are
less restrictive than those contained in the prior credit
agreement. At December 31, 2006, and 2005, there was no
balance outstanding under this facility and there were no
borrowings under this facility at any time during 2006 or 2005.
Concurrent with the effectiveness of the new credit agreement,
the 2001 credit agreement, for $2.5 billion, terminated on
August 5, 2005. No principal or interest was outstanding or
accrued and unpaid under the 2001
-51-
NORTHROP
GRUMMAN CORPORATION
credit agreement on that date. During 2004, the company borrowed
$100 million under this facility for a period of
27 days.
Mandatorily
Redeemable Series B Convertible Preferred Stock
In connection with the Litton acquisition, the company issued
3.5 million shares of mandatorily redeemable Series B
convertible preferred stock in April 2001. Each share of
Series B preferred stock has a liquidation value of $100
per share. The liquidation value, plus accrued but unpaid
dividends, is payable on April 4, 2021, the mandatory
redemption date. The company has the option to redeem all, but
not less than all, of the shares of Series B preferred
stock at any time after seven years from the date of issuance
for a number of shares of the companys common stock equal
to the liquidation value plus accrued and unpaid dividends
divided by the current market price of common stock determined
in relation to the date of redemption. Under this option, had
the redemption taken place at December 31, 2006, each share
would have been converted into 1.494 shares of common
stock. Each share of preferred stock is convertible, at any
time, at the option of the holder into the right to receive
shares of the companys common stock. Initially, each share
was convertible into .911 shares of common stock, subject
to adjustment in the event of certain dividends and
distributions, a stock split, a merger, consolidation or sale of
substantially all of the companys assets, a liquidation or
distribution, and certain other events. Had the conversion taken
place at December 31, 2006, each share would have been
converted into 1.822 shares of common stock. Holders of
preferred stock are entitled to cumulative annual cash dividends
of $7 per share, payable quarterly. In any liquidation of
the company, each share of preferred stock is entitled to a
liquidation preference before any distribution may be made on
the companys common stock or any series of capital stock
that is junior to the Series B preferred stock. In the
event of a change in control of the company, holders of
Series B preferred stock also have specified exchange
rights into common stock of the company or into specified
securities or property of another entity participating in the
change in control transaction. As of December 31, 2006,
10 million shares of preferred stock are authorized, of
which 3.5 million shares designated as Series B
preferred are issued and outstanding.
Other
Sources and Uses of Capital
Additional Capital To provide for long-term
liquidity, the company believes it can obtain additional
capital, if necessary, from such sources as the public or
private capital markets, the sale of assets, sale and leaseback
of operating assets, and leasing rather than purchasing new
assets. Cash on hand at the beginning of the year plus cash
generated from operations and cash available under credit lines
are expected to be sufficient in 2007 to service debt, finance
capital expansion projects, pay federal income taxes, and
continue paying dividends to shareholders. The company will
continue to provide the productive capacity to perform its
existing contracts, prepare for future contracts, and conduct
research and development in the pursuit of developing
opportunities. While these expenditures tend to limit short-term
liquidity, they are made with the intention of improving the
long-term growth and profitability of the company.
Financial Arrangements In the ordinary course
of business, the company uses standby letters of credit and
guarantees issued by commercial banks and surety bonds issued by
insurance companies principally to guarantee the performance on
certain contracts and to support the companys self-insured
workers compensation plans. At December 31, 2006,
there were $460 million of unused stand-by letters of
credit, $152 million of bank guarantees, and
$615 million of surety bonds outstanding.
Co-Operative Agreements In 2003, Ships
executed agreements with the states of Mississippi and Louisiana
whereby Ships leases facility improvements and equipment from
Mississippi and from a non-profit economic development
corporation in Louisiana in exchange for certain commitments by
Ships to these states.
As of December 31, 2006, Ships has met its obligations
under the Mississippi agreement and remains obligated under the
Louisiana agreement to maintain a minimum average of
5,200 full-time employees at the end of any four-year
period occurring between January 1, 2003, and
December 31, 2010, upon assembly and installation of
certain equipment.
-52-
NORTHROP
GRUMMAN CORPORATION
Failure by Ships to meet the Louisiana commitment would result
in reimbursement by Ships to Louisiana in accordance with the
agreement. As of December 31, 2006, Ships expects that all
future commitments under the Louisiana agreement will be met
based on its most recent business plan.
OTHER
MATTERS
New
Accounting Pronouncements
New accounting pronouncements have been issued by the Financial
Accounting Standards Board which are not effective until after
December 31, 2006. For further discussion of new accounting
standards, see Note 2 to the consolidated financial
statements in Part II, Item 8.
Off-Balance
Sheet Arrangements
As of December 31, 2006, the company had no significant
off-balance sheet arrangements.
Item 7A. Quantitative
and Qualitative Disclosures about Market Risk
Interest Rates The company is exposed to
market risk, primarily related to interest rates and foreign
currency exchange rates. Financial instruments subject to
interest rate risk include fixed-rate long-term debt
obligations, variable-rate short-term debt outstanding under the
credit agreement, short-term investments, and long-term notes
receivable. At December 31, 2006, substantially all
borrowings were fixed-rate long-term debt obligations of which a
significant portion are not callable until maturity. The
companys sensitivity to a 1 percent change in
interest rates is tied to its $2 billion credit agreement,
which had no balance outstanding at December 31, 2006, or
2005. See Note 13 to the consolidated financial statements
in Part II, Item 8.
Derivatives The company does not hold or
issue derivative financial instruments for trading purposes. The
company may enter into interest rate swap agreements to manage
its exposure to interest rate fluctuations. At December 31,
2006, and 2005, two interest rate swap agreements were in
effect. See Note 20 to the consolidated financial
statements in Part II, Item 8.
Foreign Currency The company enters into
foreign currency forward contracts to manage foreign currency
exchange rate risk related to receipts from customers and
payments to suppliers denominated in foreign currencies. At
December 31, 2006, and 2005, the amount of foreign currency
forward contracts outstanding was not material. The company does
not consider the market risk exposure relating to foreign
currency exchange to be material to the consolidated financial
statements.
-53-
NORTHROP
GRUMMAN CORPORATION
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE
CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Los Angeles, California
We have audited the accompanying consolidated statements of
financial position of Northrop Grumman Corporation and
subsidiaries (the Company) as of December 31,
2006 and 2005, and the related consolidated statements of
income, comprehensive income, changes in shareholders
equity, and cash flows for each of the three years in the period
ended December 31, 2006. Our audits also included the
financial statement schedule listed in the Index at
Item 15. These financial statements and the financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Northrop Grumman Corporation and subsidiaries at
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 18 to the consolidated financial
statements, the Company adopted, effective December 31,
2006, a new accounting standard for retirement benefits.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 20, 2007 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
/s/ Deloitte &
Touche LLP
Los Angeles, California
February 20, 2007
-54-
NORTHROP
GRUMMAN CORPORATION
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,015
|
|
|
$
|
1,605
|
|
Accounts receivable, net
|
|
|
3,566
|
|
|
|
3,553
|
|
Inventoried costs, net
|
|
|
1,178
|
|
|
|
1,164
|
|
Deferred income taxes
|
|
|
706
|
|
|
|
783
|
|
Prepaid expenses and other current
assets
|
|
|
254
|
|
|
|
446
|
|
Total current assets
|
|
|
6,719
|
|
|
|
7,551
|
|
Property, Plant, and
Equipment
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
588
|
|
|
|
546
|
|
Buildings
|
|
|
2,082
|
|
|
|
1,962
|
|
Machinery and other equipment
|
|
|
4,429
|
|
|
|
4,109
|
|
Leasehold improvements
|
|
|
447
|
|
|
|
381
|
|
|
|
|
7,546
|
|
|
|
6,998
|
|
Accumulated depreciation
|
|
|
(3,015
|
)
|
|
|
(2,595
|
)
|
Property, plant, and equipment, net
|
|
|
4,531
|
|
|
|
4,403
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
17,219
|
|
|
|
17,383
|
|
Other purchased intangible assets,
net of accumulated amortization of $1,555 in 2006 and $1,421 in
2005
|
|
|
1,139
|
|
|
|
1,273
|
|
Pension and postretirement
benefits asset
|
|
|
1,349
|
|
|
|
2,925
|
|
Miscellaneous other assets
|
|
|
1,052
|
|
|
|
679
|
|
Total other assets
|
|
|
20,759
|
|
|
|
22,260
|
|
Total assets
|
|
$
|
32,009
|
|
|
$
|
34,214
|
|
|
|
|
|
|
|
|
|
|
-55-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions, except per
share
|
|
2006
|
|
|
2005
|
|
Liabilities and
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Notes payable to banks
|
|
$
|
95
|
|
|
$
|
50
|
|
Current portion of long-term debt
|
|
|
75
|
|
|
|
1,214
|
|
Trade accounts payable
|
|
|
1,686
|
|
|
|
1,589
|
|
Accrued employees
compensation
|
|
|
1,177
|
|
|
|
1,105
|
|
Advance payments and billings in
excess of costs incurred
|
|
|
1,571
|
|
|
|
1,626
|
|
Income taxes payable
|
|
|
535
|
|
|
|
668
|
|
Other current liabilities
|
|
|
1,614
|
|
|
|
1,722
|
|
Total current liabilities
|
|
|
6,753
|
|
|
|
7,974
|
|
Long-term debt, net of current
portion
|
|
|
3,992
|
|
|
|
3,881
|
|
Mandatorily redeemable convertible
preferred stock
|
|
|
350
|
|
|
|
350
|
|
Pension and postretirement
benefits liability
|
|
|
3,302
|
|
|
|
3,701
|
|
Deferred income taxes
|
|
|
|
|
|
|
595
|
|
Other long-term liabilities
|
|
|
997
|
|
|
|
885
|
|
Total liabilities
|
|
|
15,394
|
|
|
|
17,386
|
|
Commitments and Contingencies
(Note 16)
|
|
|
|
|
|
|
|
|
Shareholders
Equity
|
|
|
|
|
|
|
|
|
Common stock, $1 par value;
800,000,000 shares authorized; issued and outstanding:
2006345,921,809; 2005347,357,291
|
|
|
346
|
|
|
|
347
|
|
Paid-in capital
|
|
|
11,346
|
|
|
|
11,571
|
|
Retained earnings
|
|
|
6,183
|
|
|
|
5,055
|
|
Accumulated other comprehensive
loss
|
|
|
(1,260
|
)
|
|
|
(145
|
)
|
Total shareholders equity
|
|
|
16,615
|
|
|
|
16,828
|
|
Total liabilities and
shareholders equity
|
|
$
|
32,009
|
|
|
$
|
34,214
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-56-
NORTHROP
GRUMMAN CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions, except per
share
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
18,429
|
|
|
$
|
19,560
|
|
|
$
|
19,339
|
|
Service revenues
|
|
|
11,719
|
|
|
|
10,507
|
|
|
|
9,661
|
|
Total sales and service revenues
|
|
|
30,148
|
|
|
|
30,067
|
|
|
|
29,000
|
|
Cost of Sales and Service Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
14,419
|
|
|
|
15,639
|
|
|
|
15,700
|
|
Cost of service revenues
|
|
|
10,241
|
|
|
|
9,355
|
|
|
|
8,671
|
|
General and administrative expenses
|
|
|
3,034
|
|
|
|
2,880
|
|
|
|
2,643
|
|
Operating margin
|
|
|
2,454
|
|
|
|
2,193
|
|
|
|
1,986
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
44
|
|
|
|
54
|
|
|
|
58
|
|
Interest expense
|
|
|
(347
|
)
|
|
|
(388
|
)
|
|
|
(431
|
)
|
Other, net
|
|
|
125
|
|
|
|
200
|
|
|
|
(18
|
)
|
Income from continuing operations
before income taxes
|
|
|
2,276
|
|
|
|
2,059
|
|
|
|
1,595
|
|
Federal and foreign income taxes
|
|
|
709
|
|
|
|
667
|
|
|
|
515
|
|
Income from continuing operations
|
|
|
1,567
|
|
|
|
1,392
|
|
|
|
1,080
|
|
(Loss) gain from discontinued
operations, net of tax
|
|
|
(25
|
)
|
|
|
8
|
|
|
|
4
|
|
Net income
|
|
$
|
1,542
|
|
|
$
|
1,400
|
|
|
$
|
1,084
|
|
Basic Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
4.53
|
|
|
$
|
3.90
|
|
|
$
|
3.00
|
|
Discontinued operations
|
|
|
(.07
|
)
|
|
|
.03
|
|
|
|
.01
|
|
Basic earnings per share
|
|
$
|
4.46
|
|
|
$
|
3.93
|
|
|
$
|
3.01
|
|
Weighted average common shares
outstanding, in millions
|
|
|
345.7
|
|
|
|
356.5
|
|
|
|
359.7
|
|
Diluted Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
4.44
|
|
|
$
|
3.83
|
|
|
$
|
2.96
|
|
Discontinued operations
|
|
|
(.07
|
)
|
|
|
.02
|
|
|
|
.01
|
|
Diluted earnings per share
|
|
$
|
4.37
|
|
|
$
|
3.85
|
|
|
$
|
2.97
|
|
Weighted average diluted shares
outstanding, in millions
|
|
|
358.6
|
|
|
|
363.2
|
|
|
|
365.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-57-
NORTHROP
GRUMMAN CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Net income
|
|
$
|
1,542
|
|
|
$
|
1,400
|
|
|
$
|
1,084
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation
adjustment
|
|
|
22
|
|
|
|
(14
|
)
|
|
|
11
|
|
Change in unrealized (loss) gain
on marketable securities, net of tax benefit (expense) of $2 in
2006, and ($15) in 2004
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
26
|
|
Reclassification adjustment on
write-down of marketable securities, net of tax of ($5)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment on
sale of marketable securities, net of tax of $19
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
Additional minimum pension
liability adjustment, net of tax of $32 in 2006, and $44 in
2004
|
|
|
40
|
|
|
|
|
|
|
|
(65
|
)
|
Other comprehensive income (loss),
net of tax
|
|
|
67
|
|
|
|
(44
|
)
|
|
|
(28
|
)
|
Comprehensive income
|
|
$
|
1,609
|
|
|
$
|
1,356
|
|
|
$
|
1,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-58-
NORTHROP
GRUMMAN CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Sources of CashContinuing
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Progress payments
|
|
$
|
6,819
|
|
|
$
|
6,731
|
|
|
$
|
6,733
|
|
Other collections
|
|
|
23,303
|
|
|
|
23,622
|
|
|
|
22,110
|
|
Insurance proceeds received
|
|
|
100
|
|
|
|
89
|
|
|
|
|
|
Income tax refunds received
|
|
|
60
|
|
|
|
88
|
|
|
|
121
|
|
Interest received
|
|
|
45
|
|
|
|
78
|
|
|
|
8
|
|
Other cash receipts
|
|
|
42
|
|
|
|
51
|
|
|
|
34
|
|
Total sources of
cashcontinuing operations
|
|
|
30,369
|
|
|
|
30,659
|
|
|
|
29,006
|
|
Uses of CashContinuing
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid to suppliers and
employees
|
|
|
(27,415
|
)
|
|
|
(27,113
|
)
|
|
|
(25,943
|
)
|
Interest paid
|
|
|
(366
|
)
|
|
|
(404
|
)
|
|
|
(443
|
)
|
Income taxes paid
|
|
|
(678
|
)
|
|
|
(419
|
)
|
|
|
(449
|
)
|
Excess tax benefits from
stock-based compensation
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
Payments for litigation settlements
|
|
|
(11
|
)
|
|
|
(99
|
)
|
|
|
(86
|
)
|
Other cash payments
|
|
|
(12
|
)
|
|
|
(31
|
)
|
|
|
(181
|
)
|
Total uses of cashcontinuing
operations
|
|
|
(28,539
|
)
|
|
|
(28,066
|
)
|
|
|
(27,102
|
)
|
Cash provided by continuing
operations
|
|
|
1,830
|
|
|
|
2,593
|
|
|
|
1,904
|
|
Cash (used in) provided by
discontinued operations
|
|
|
(74
|
)
|
|
|
34
|
|
|
|
32
|
|
Net cash provided by operating
activities
|
|
|
1,756
|
|
|
|
2,627
|
|
|
|
1,936
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of businesses,
net of cash divested
|
|
|
43
|
|
|
|
57
|
|
|
|
125
|
|
Collection of note receivable
|
|
|
|
|
|
|
|
|
|
|
494
|
|
Payments for businesses purchased,
net of cash acquired
|
|
|
|
|
|
|
(361
|
)
|
|
|
|
|
Proceeds from sale of property,
plant, and equipment
|
|
|
21
|
|
|
|
11
|
|
|
|
28
|
|
Additions to property, plant, and
equipment
|
|
|
(737
|
)
|
|
|
(824
|
)
|
|
|
(672
|
)
|
Proceeds from insurance carrier
|
|
|
117
|
|
|
|
38
|
|
|
|
|
|
Proceeds from sale of investments
|
|
|
209
|
|
|
|
238
|
|
|
|
23
|
|
Payment for purchase of investment
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
Restriction of cash, net of
restrictions released
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
Payments for outsourcing contract
costs
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
Other investing activities, net
|
|
|
(15
|
)
|
|
|
(14
|
)
|
|
|
11
|
|
Net cash (used in) provided by
investing activities
|
|
|
(601
|
)
|
|
|
(855
|
)
|
|
|
9
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under lines of credit
|
|
|
47
|
|
|
|
62
|
|
|
|
101
|
|
Repayment of borrowings under
lines of credit
|
|
|
(3
|
)
|
|
|
(21
|
)
|
|
|
(111
|
)
|
Proceeds from issuance of
long-term debt
|
|
|
200
|
|
|
|
|
|
|
|
|
|
Principal payments of long-term
debt
|
|
|
(1,212
|
)
|
|
|
(32
|
)
|
|
|
(725
|
)
|
Proceeds from exercises of stock
options and issuances of common stock
|
|
|
393
|
|
|
|
163
|
|
|
|
834
|
|
Dividends paid
|
|
|
(402
|
)
|
|
|
(359
|
)
|
|
|
(322
|
)
|
Excess tax benefits from
stock-based compensation
|
|
|
57
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
(825
|
)
|
|
|
(1,210
|
)
|
|
|
(786
|
)
|
Net cash used in financing
activities
|
|
|
(1,745
|
)
|
|
|
(1,397
|
)
|
|
|
(1,009
|
)
|
(Decrease) Increase in cash and
cash equivalents
|
|
|
(590
|
)
|
|
|
375
|
|
|
|
936
|
|
Cash and cash equivalents,
beginning of year
|
|
|
1,605
|
|
|
|
1,230
|
|
|
|
294
|
|
Cash and cash equivalents, end of
year
|
|
$
|
1,015
|
|
|
$
|
1,605
|
|
|
$
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-59-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Reconciliation of Net Income to
Net Cash Provided by Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,542
|
|
|
$
|
1,400
|
|
|
$
|
1,084
|
|
Adjustments to reconcile to net
cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
569
|
|
|
|
556
|
|
|
|
507
|
|
Amortization of assets
|
|
|
136
|
|
|
|
216
|
|
|
|
226
|
|
Stock-based compensation
|
|
|
184
|
|
|
|
172
|
|
|
|
154
|
|
Excess tax benefits from
stock-based compensation
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
Loss on disposals of property,
plant, and equipment
|
|
|
6
|
|
|
|
21
|
|
|
|
14
|
|
Impairment of property, plant, and
equipment damaged by Hurricane Katrina
|
|
|
37
|
|
|
|
61
|
|
|
|
|
|
Amortization of long-term debt
premium
|
|
|
(14
|
)
|
|
|
(18
|
)
|
|
|
(17
|
)
|
Net gain on investments
|
|
|
(96
|
)
|
|
|
(165
|
)
|
|
|
|
|
Decrease (increase) in
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,209
|
)
|
|
|
(5,315
|
)
|
|
|
(5,672
|
)
|
Inventoried costs
|
|
|
(73
|
)
|
|
|
(231
|
)
|
|
|
6
|
|
Prepaid expenses and other current
assets
|
|
|
(9
|
)
|
|
|
(85
|
)
|
|
|
1
|
|
Increase (decrease) in
|
|
|
|
|
|
|
|
|
|
|
|
|
Progress payments
|
|
|
2,261
|
|
|
|
5,249
|
|
|
|
5,400
|
|
Accounts payable and accruals
|
|
|
160
|
|
|
|
348
|
|
|
|
193
|
|
Deferred income taxes
|
|
|
183
|
|
|
|
105
|
|
|
|
91
|
|
Income taxes payable
|
|
|
(68
|
)
|
|
|
295
|
|
|
|
98
|
|
Retiree benefits
|
|
|
(772
|
)
|
|
|
(22
|
)
|
|
|
(192
|
)
|
Other non-cash transactions, net
|
|
|
50
|
|
|
|
6
|
|
|
|
11
|
|
Cash provided by continuing
operations
|
|
|
1,830
|
|
|
|
2,593
|
|
|
|
1,904
|
|
Cash (used in) provided by
discontinued operations
|
|
|
(74
|
)
|
|
|
34
|
|
|
|
32
|
|
Net cash provided by operating
activities
|
|
$
|
1,756
|
|
|
$
|
2,627
|
|
|
$
|
1,936
|
|
Non-Cash Investing and
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of note receivable in
lieu of payment
|
|
|
|
|
|
|
|
|
|
$
|
40
|
|
Sales of Businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed by purchaser
|
|
|
|
|
|
$
|
41
|
|
|
|
|
|
Purchase of businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired,
including goodwill
|
|
|
|
|
|
$
|
399
|
|
|
|
|
|
Consideration given for businesses
purchased
|
|
|
|
|
|
|
(361
|
)
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
|
$
|
38
|
|
|
|
|
|
Capital leases
|
|
|
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-60-
NORTHROP
GRUMMAN CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions, except per
share
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
$
|
347
|
|
|
$
|
364
|
|
|
$
|
362
|
|
Stock issued upon execution of
stock purchase contracts
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Common stock repurchased
|
|
|
(12
|
)
|
|
|
(22
|
)
|
|
|
(15
|
)
|
Employee stock awards and options
|
|
|
11
|
|
|
|
5
|
|
|
|
4
|
|
At end of year
|
|
|
346
|
|
|
|
347
|
|
|
|
364
|
|
Paid-in Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
|
11,571
|
|
|
|
12,426
|
|
|
|
12,071
|
|
Stock issued upon execution of
stock purchase contracts
|
|
|
|
|
|
|
|
|
|
|
677
|
|
Common stock repurchased
|
|
|
(813
|
)
|
|
|
(1,165
|
)
|
|
|
(794
|
)
|
Stock split
|
|
|
|
|
|
|
|
|
|
|
179
|
|
Employee stock awards and options
|
|
|
588
|
|
|
|
310
|
|
|
|
293
|
|
At end of year
|
|
|
11,346
|
|
|
|
11,571
|
|
|
|
12,426
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
|
5,055
|
|
|
|
4,014
|
|
|
|
3,431
|
|
Net income
|
|
|
1,542
|
|
|
|
1,400
|
|
|
|
1,084
|
|
Stock split
|
|
|
|
|
|
|
|
|
|
|
(179
|
)
|
Dividends
|
|
|
(414
|
)
|
|
|
(359
|
)
|
|
|
(322
|
)
|
At end of year
|
|
|
6,183
|
|
|
|
5,055
|
|
|
|
4,014
|
|
Unearned Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
|
|
|
|
|
(3
|
)
|
|
|
(6
|
)
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
At end of year
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Accumulated Other Comprehensive
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of year
|
|
|
(145
|
)
|
|
|
(101
|
)
|
|
|
(73
|
)
|
Other comprehensive income (loss)
|
|
|
67
|
|
|
|
(44
|
)
|
|
|
(28
|
)
|
Adjustment to initially apply
SFAS No. 158, net of tax of $838
|
|
|
(1,182
|
)
|
|
|
|
|
|
|
|
|
At end of year
|
|
|
(1,260
|
)
|
|
|
(145
|
)
|
|
|
(101
|
)
|
Total shareholders equity
|
|
$
|
16,615
|
|
|
$
|
16,828
|
|
|
$
|
16,700
|
|
Cash dividends declared per share
|
|
$
|
1.16
|
|
|
$
|
1.01
|
|
|
$
|
.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-61-
NORTHROP
GRUMMAN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations Northrop Grumman
Corporation and its subsidiaries (Northrop Grumman or the
company) provide technologically advanced, innovative products,
services, and solutions in information and services, aerospace,
electronics, and shipbuilding. As prime contractor, principal
subcontractor, partner, or preferred supplier, Northrop Grumman
participates in many high-priority defense and non-defense
technology programs in the United States (U.S.) and abroad.
Northrop Grumman conducts most of its business with the
U.S. Government, principally the Department of Defense. The
company is therefore affected by, among other things, the
federal budget process. The company also conducts business with
foreign governments and makes domestic and international
commercial sales.
Principles of Consolidation The consolidated
financial statements include the accounts of Northrop Grumman
Corporation and its subsidiaries. All intercompany accounts,
transactions, and profits among Northrop Grumman and its
subsidiaries are eliminated in consolidation.
Accounting Estimates The companys
financial statements are in conformity with accounting
principles generally accepted in the United States of America.
The preparation thereof requires management to make estimates
and judgments that affect the reported amounts of assets and
liabilities and the disclosure of contingencies at the date of
the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Estimates
have been prepared on the basis of the most current and best
available information and actual results could differ materially
from those estimates.
Revenue Recognition As a defense contractor
engaging in long-term contracts, the majority of the
companys business is derived from long-term contracts for
the construction of facilities, production of goods, and
services provided to the federal government. In accounting for
these contracts, the company extensively utilizes the
cost-to-cost
and the
units-of-delivery
measures of the
percentage-of-completion
method of accounting. Sales under cost-reimbursement contracts
and construction-type contracts that provide for delivery at a
low volume per year or a small number of units after a lengthy
period of time over which a significant amount of costs have
been incurred are accounted for using the
cost-to-cost
measure of the
percentage-of-completion
method of accounting. Under this method, sales, including
estimated earned fees or profits, are recorded as costs are
incurred. For most contracts, sales are calculated based on the
percentage that total costs incurred bear to total estimated
costs at completion. For certain contracts with large up-front
purchases of material, sales are calculated based on the
percentage that direct labor costs incurred bear to total
estimated direct labor costs. Sales under construction-type
contracts that provide for delivery at a high volume per year
are accounted for using the
units-of-delivery
measure of the
percentage-of-completion
method of accounting. Under this method, sales are recognized as
deliveries are made to the customer generally using unit sales
value in accordance with the contract terms. The company
estimates profit as the difference between total estimated
revenue and total estimated cost of a contract and recognizes
that profit evenly over the life of the contract based on
deliveries. The company classifies contract revenues as product
sales or service revenues depending upon the predominant
attributes of the relevant underlying contracts.
Certain contracts contain provisions for price redetermination
or for cost
and/or
performance incentives. Such redetermined amounts or incentives
are included in sales when the amounts can reasonably be
determined and estimated. Amounts representing contract change
orders, claims, requests for equitable adjustment, or
limitations in funding are included in sales only when they can
be reliably estimated and realization is probable. In the period
in which it is determined that a loss will result from the
performance of a contract, the entire amount of the estimated
ultimate loss is charged against income. Loss provisions are
first offset against costs that are included in inventories,
with any remaining amount reflected in liabilities. Changes in
estimates of contract sales, costs, and profits are recognized
using the cumulative
catch-up
method of accounting. This method recognizes in the current
period the cumulative effect of the changes on current and prior
periods. Hence, the effect of the changes on future periods of
contract performance is recognized as if the revised estimates
had been the original
-62-
NORTHROP
GRUMMAN CORPORATION
estimates. A significant change in an estimate on one or more
programs could have a material adverse effect on the
companys consolidated financial position or results of
operations.
Revenue under contracts to provide services to non-federal
government customers are generally recognized when services are
performed. Service contracts include operations and maintenance
contracts, and outsourcing-type arrangements, primarily in the
Information Technology segment. Revenue under such contracts is
generally recognized on a straight-line basis over the period of
contract performance, unless evidence suggests that the revenue
is earned or the obligations are fulfilled in a different
pattern. Costs incurred under these service contracts are
expensed as incurred, except that direct and incremental
set-up costs
are capitalized and amortized over the life of the agreement.
Operating profit related to such service contracts may fluctuate
from period to period, particularly in the earlier phases of the
contract.
Service contracts that include more than one type of product or
service are accounted for under the provisions of Emerging
Issues Task Force Issue
No. 00-21
Revenue Arrangements with Multiple Deliverables.
Accordingly, for applicable arrangements, revenue recognition
includes the proper identification of separate units of
accounting and the allocation of revenue across all elements
based on relative fair values.
Research and Development Company-sponsored
research and development activities primarily include
independent research and development (IR&D) efforts related
to government programs. IR&D expenses are included in
general and administrative expenses and are generally allocated
to U.S. Government contracts. Company-sponsored research
and development expenses totaled $574 million,
$538 million, and $504 million in 2006, 2005, and
2004, respectively. Expenses for research and development
sponsored by the customer are charged directly to the related
contracts.
Product Warranty Costs The company provides
certain product warranties that require repair or replacement of
non-conforming items for a specified period of time. Most of the
companys product warranties are provided under government
contracts, the costs of which are incorporated into contract
pricing. Accrued product warranty costs of $81 million and
$86 million were included in other current liabilities at
December 31, 2006, and 2005, respectively.
Environmental Costs Environmental liabilities
are accrued when the company determines it is responsible for
remediation costs and such amounts are reasonably estimable.
When only a range of amounts is established and no amount within
the range is more probable than another, the minimum amount in
the range is recorded. Environmental liabilities are recorded on
an undiscounted basis. At sites involving multiple parties, the
company accrues environmental liabilities based upon its
expected share of liability, taking into account the financial
viability of other jointly liable parties. Environmental
expenditures are expensed or capitalized as appropriate.
Capitalized expenditures relate to long-lived improvements in
currently operating facilities. The company does not anticipate
and record insurance recoveries before collection is probable.
At December 31, 2006, and 2005, the company did not accrue
any assets related to insurance reimbursements or recoveries for
environmental matters.
Foreign Currency Forward Contracts The
company enters into foreign currency forward contracts to manage
foreign currency exchange risk related to receipts from
customers and payments to suppliers denominated in foreign
currencies. Gains and losses from such transactions are included
as contract costs. At December 31, 2006 and 2005, the
amount of foreign currency forward contracts outstanding was not
material.
Interest Rate Swap Agreements The company may
enter into interest rate swap agreements to offset the
variable-rate characteristic of certain variable-rate term loans
which may be outstanding from time to time under the
companys credit facility (see Note 13). The company
may also enter into interest rate swap agreements to benefit
from floating interest rates as an offset to the fixed-rate
characteristic of certain of its long-term debt instruments. Two
interest rate swap agreements were entered into during 2004 and
are in effect as of December 31, 2006 (see Note 20).
-63-
NORTHROP
GRUMMAN CORPORATION
Other, net For 2006, Other, net primarily
consists of a pre-tax gain of $111 million income related
to the sale of the companys remaining 9.7 million TRW
Automotive (TRW Auto) shares. For 2005, Other, net primarily
consists of the sale of 7.3 million TRW Auto shares and
approximately 3.4 million Endwave shares, which generated
pre-tax gains of $70 million and $95 million,
respectively.
Income Taxes Provisions for federal, foreign,
state, and local income taxes are calculated on reported
financial statement pre-tax income based on current tax law and
also include the cumulative effect of any changes in tax rates
from those used previously in determining deferred tax assets
and liabilities. Such provisions differ from the amounts
currently payable because certain items of income and expense
are recognized in different time periods for financial reporting
purposes than for income tax purposes. State and local income
and franchise tax provisions are allocable to contracts in
process and, accordingly, are included in general and
administrative expenses.
Cash and Cash Equivalents Cash and cash
equivalents include interest-earning debt instruments that
mature in three months or less from the date purchased.
Marketable Securities At December 31,
2006, and 2005, substantially all of the companys
investments in marketable securities were classified as
available-for-sale
or trading. For
available-for-sale
securities, any unrealized gains and losses are reported as a
separate component of shareholders equity. Unrealized
gains and losses on trading securities are included in Other,
net in the consolidated statements of income and were not
material to any period presented. The fair values of these
marketable securities are determined based on prevailing market
prices.
Accounts Receivable Accounts receivable
include amounts billed and currently due from customers, amounts
currently due but unbilled (primarily related to contracts
accounted for under the
cost-to-cost
measure of the
percentage-of-completion
method of accounting), certain estimated contract changes,
claims or requests for equitable adjustment in negotiation that
are probable of recovery, and amounts retained by the customer
pending contract completion.
Inventoried Costs Inventoried costs primarily
relate to work in process under fixed-price contracts (excluding
those included in unbilled accounts receivable as previously
described). They represent accumulated contract costs less the
portion of such costs allocated to delivered items. Accumulated
contract costs include direct production costs, factory and
engineering overhead, production tooling costs, and, for
government contracts, allowable general and administrative
expenses. The ratio of inventoried general and administrative
expenses to total inventoried costs is estimated to be the same
as the ratio of total administrative and general expenses
incurred to total contract costs incurred. According to the
provisions of U.S. Government contracts, the customer
asserts title to, or a security interest in, inventories related
to such contracts as a result of contract advances,
performance-based payments, and progress payments. General
corporate expenses and IR&D allocable to commercial
contracts are expensed as incurred. Inventoried costs are
classified as a current asset and include amounts related to
contracts having production cycles longer than one year. Product
inventory primarily consists of raw materials and is stated at
the lower of cost or market, generally using the average cost
method.
Outsourcing Contract Costs Costs on
outsourcing contracts, including costs incurred for bid and
proposal activities, are generally expensed as incurred.
However, certain costs incurred upon initiation of an
outsourcing contract are deferred and expensed over the contract
life. These costs represent incremental external costs or
certain specific internal costs that are directly related to the
contract acquisition and transition/set-up. The primary types of
costs that may be capitalized include labor and related fringe
benefits, subcontractor costs, and travel costs.
Depreciable Properties Property, plant, and
equipment owned by the company are depreciated over the
estimated useful lives of individual assets. Costs incurred for
computer software developed or obtained for internal use are
capitalized and classified in machinery and other equipment.
Capitalized software costs are amortized over a
-64-
NORTHROP
GRUMMAN CORPORATION
period of three to five years. Most of these assets are
depreciated using declining-balance methods, with the remainder
using the straight-line method, with the following lives:
|
|
|
|
|
|
|
Years
|
|
Land improvements
|
|
|
2-45
|
|
Buildings
|
|
|
2-45
|
|
Machinery and other equipment
|
|
|
2-25
|
|
Leasehold improvements
|
|
|
Length of lease
|
|
|
|
|
|
|
Restricted Cash Access to proceeds from the
Gulf Opportunity Zone Industrial Development Revenue Bonds is
restricted to certain capital expenditures. As such, the amount
of unexpended proceeds available is recorded in miscellaneous
other assets as restricted cash in the consolidated statements
of financial position (see Note 13).
Leases The company uses its incremental
borrowing rate in the assessment of lease classification as
capital or operating and defines the initial lease term to
include renewal options determined to be reasonably assured.
The company conducts operations primarily under operating
leases. Most lease agreements contain incentives for tenant
improvements, rent holidays, or rent escalation clauses. For
incentives for tenant improvements, the company records a
deferred rent liability in other long-term liabilities in the
consolidated statements of financial position and amortizes the
deferred rent over the term of the lease as reductions to rent
expense. For rent holidays and rent escalation clauses during
the lease term, the company records minimum rental expenses on a
straight-line basis over the term of the lease.
For purposes of recognizing incentives for tenant improvements
and minimum rental expenses on a straight-line basis, the
company uses the date of initial possession to begin
amortization, which is generally when the company is given the
right of access to the space and begins to make improvements in
preparation of intended use.
Goodwill and Other Purchased Intangible
Assets The company performs impairment tests at
least annually for goodwill, and more often as circumstances
require. When it is determined that impairment has occurred, an
appropriate charge to operations is recorded. Goodwill and other
purchased intangible asset balances are included in the
identifiable assets of the business segment to which they have
been assigned. Any goodwill impairment, as well as the
amortization of other purchased intangible assets, is charged
against the respective business segments operating margin.
Purchased intangible assets are amortized on a straight-line
basis over their estimated useful lives.
Self-Insurance Accruals Included in other
long-term liabilities is approximately $485 million and
$464 million related to self-insured workers
compensation as of December 31, 2006, and 2005,
respectively. The company estimates the required liability of
such claims on a discounted basis utilizing actuarial methods
based on various assumptions, which include, but are not limited
to, the companys historical loss experience and projected
loss development factors.
Litigation, Commitments, and Contingencies
Amounts associated with litigation, commitments, and
contingencies are recorded as charges to earnings when
management, after taking into consideration the facts and
circumstances of each matter, including any settlement offers,
has determined that it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
Retirement Benefits The company sponsors
various pension plans covering substantially all employees. The
company also provides postretirement benefit plans other than
pensions, consisting principally of health care and life
insurance benefits, to eligible retirees and qualifying
dependents. The liabilities and annual income or expense of the
companys pension and other postretirement benefit plans
are determined using methodologies that involve several
actuarial assumptions, the most significant of which are the
discount rate, the long-term rate of asset return (based on the
market related value of assets), and medical trend (rate of
growth for medical costs). The fair values of plan assets are
determined based on prevailing market prices or estimated fair
value for investments with no available quoted prices. Not all
net periodic pension income or expense is recognized in net
earnings in the
-65-
NORTHROP
GRUMMAN CORPORATION
year incurred because it is allocated to production as product
costs, and a portion remains in inventory at the end of a
reporting period. The companys funding policy for pension
plans is to contribute, at a minimum, the statutorily required
amount to an irrevocable trust.
Foreign Currency Translation For operations
outside the U.S. that prepare financial statements in
currencies other than the U.S. dollar, results of
operations and cash flows are translated at average exchange
rates during the period, and assets and liabilities are
generally translated at
end-of-period
exchange rates. Translation adjustments are not material and are
included as a separate component of accumulated other
comprehensive loss in consolidated shareholders equity.
Accumulated Other Comprehensive Loss The
companys accumulated other comprehensive loss consists of
cumulative translation and minimum pension liability
adjustments, unrealized gains and losses on certain investments
in equity securities (including reclassification adjustments),
and effective in 2006, unamortized benefit plan costs resulting
from the adoption of Statement of Financial Accounting Standards
(SFAS) No. 158 Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans.
The components of accumulated other comprehensive loss at year
end were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Cumulative translation adjustment
|
|
$
|
22
|
|
|
|
|
|
Unrealized gain (loss) on
marketable securities, net of tax (expense) benefit of ($1) in
2006, and $1 in 2005
|
|
|
2
|
|
|
$
|
(3
|
)
|
Unamortized benefit plan costs,
net of tax benefit of $900
|
|
|
(1,284
|
)
|
|
|
|
|
Additional minimum pension
liability, net of tax benefit of $92
|
|
|
|
|
|
|
(142
|
)
|
Total accumulated other
comprehensive loss
|
|
$
|
(1,260
|
)
|
|
$
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
Financial Statement Reclassification Certain
amounts in the prior year financial statements and related notes
have been reclassified to conform to the 2006 presentation of
the Enterprise Information Technology (EIT) business, formerly
reported in the Information Technology segment, as discontinued
operations and the establishment of the Technical Services
segment on January 1, 2006 (see Note 6).
|
|
2.
|
NEW
ACCOUNTING STANDARDS
|
In February 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 159 The Fair
Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115. SFAS No. 159 permits
entities to choose to measure eligible items at fair value at
specified election dates and report unrealized gains and losses
on items for which the fair value option has been elected in
earnings at each subsequent reporting date.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. Management is currently evaluating
the effect that adoption of this statement will have on the
companys consolidated financial position and results of
operations.
In September 2006, the FASB issued
SFAS No. 157 Fair Value
Measurements, which defines fair value, establishes a
framework for consistently measuring fair value under generally
accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 is effective for
the company beginning January 1, 2008, and the provisions
of SFAS No. 157 will be applied prospectively as of
that date. Management is currently evaluating the effect that
adoption of this statement will have on the companys
consolidated financial position and results of operations when
it becomes effective in 2008.
In June 2006, the FASB issued FASB Interpretation No. (FIN)
48 Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109. FIN 48 prescribes a threshold for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Only tax
positions meeting the
-66-
NORTHROP
GRUMMAN CORPORATION
more-likely-than-not recognition threshold at the effective date
may be recognized or continue to be recognized upon adoption of
this Interpretation. FIN 48 also provides guidance on
accounting for derecognition, interest and penalties, and
classification and disclosure of matters related to uncertainty
in income taxes. FIN 48 will be effective for the company
January 1, 2007, and will require adjustment to the opening
balance of retained earnings (or other components of
shareholders equity in the statement of financial
position) for the cumulative effect of the difference in the net
amount of assets and liabilities for all open tax positions at
the effective date. Management expects that the effect of
adoption of this interpretation on the companys
consolidated financial position and results of operations will
not be material.
Common Stock Dividend On May 17, 2006,
the companys board of directors approved a 15 percent
increase to the quarterly common stock dividend, from
$.26 per share to $.30 per share, effective with the second
quarter 2006 dividend.
On March 23, 2005, the companys board of directors
approved a 13 percent increase to the quarterly common
stock dividend, from $.23 per share to $.26 per share,
effective with the second quarter 2005 dividend.
2006 In October the company announced its
intent to acquire Essex Corporation (Essex). On January 25,
2007, the company completed its purchase of 100 percent of
the common stock of Essex, valued at approximately
$600 million, including the assumption of debt totaling
$23 million and estimated transaction costs of
$14 million. Essex provides signal processing services and
products, and advanced optoelectronic imaging for
U.S. government intelligence and defense customers. The
operating results of Essex will be included as part of the
Mission Systems segment from the date of acquisition. The
assets, liabilities, and results of operations of Essex were not
material and thus pro-forma information is not presented.
2005 The company acquired Confluent RF
Systems Corporation (Confluent) for $42 million, which
included transaction costs of $2 million, and Integic
Corporation (Integic) for $319 million, which included
transaction costs of $6 million. The assets, liabilities,
and results of operations of these acquired businesses were not
material individually or in the aggregate, and thus pro-forma
information is not presented. The company completed its purchase
accounting activities for these businesses during 2005 and
recorded an aggregate increase to goodwill of $37 million
for Confluent and $254 million for Integic.
2004 There were no significant acquisitions
during 2004.
2006 The company sold the assembly business
unit of Interconnect Technologies (Interconnect) and Winchester
Electronics (Winchester) for net cash proceeds of
$26 million and $17 million, respectively, and
recognized an after-tax gain of $4 million and
$3 million, respectively, in discontinued operations. The
results of operations of Interconnect and Winchester, reported
in the Electronics segment, were not material to any of the
periods presented and have therefore not been reclassified as
discontinued operations.
The Enterprise Information Technology (EIT) business, formerly
reported in the Information Technology segment, was shut down
and costs associated with the exit activities were not material.
The results of operations of this business are reported as
discontinued operations in the consolidated statements of
income, net of applicable income taxes, for all periods
presented.
2005 The company sold Teldix GmbH (Teldix)
for $57 million in cash and recognized an after-tax gain of
$14 million in discontinued operations. The results of
operations of Teldix, reported in the Electronics segment, were
not material to any of the periods presented and have therefore
not been reclassified as discontinued operations.
-67-
NORTHROP
GRUMMAN CORPORATION
2004 The companys Canadian navigation
systems and space sensors systems business and Kester were sold
for cash of $65 million and $60 million, respectively,
and the company recorded an after-tax gain of $12 million
and $2 million, respectively, in discontinued operations.
The results of these businesses were not material to any of the
periods presented and have therefore not been reclassified as
discontinued operations.
Discontinued Operations Sales and operating
results of the businesses classified within discontinued
operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Sales
|
|
$
|
156
|
|
|
$
|
654
|
|
|
$
|
867
|
|
(Loss) gain from discontinued
operations
|
|
|
(29
|
)
|
|
|
(14
|
)
|
|
|
23
|
|
Income tax benefit (expense)
|
|
|
10
|
|
|
|
5
|
|
|
|
(7
|
)
|
(Loss) Income from discontinued
operations, net of tax
|
|
|
(19
|
)
|
|
|
(9
|
)
|
|
|
16
|
|
Gain (loss) from divestitures
|
|
|
11
|
|
|
|
24
|
|
|
|
(12
|
)
|
Income tax expense
|
|
|
(17
|
)
|
|
|
(7
|
)
|
|
|
|
|
(Loss) gain from discontinued
operations, net of tax
|
|
$
|
(25
|
)
|
|
$
|
8
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax rates on discontinued operations vary from the
companys effective tax rate due to the non-deductibility
of goodwill for tax purposes.
The assets and liabilities of the EIT business, as shown in the
table below, are not material and have been recorded in
Prepaid expenses and other current assets and
Other current liabilities, respectively, in the
accompanying consolidated statements of financial position.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Current assets
|
|
$
|
12
|
|
|
$
|
140
|
|
Property, plant, and equipment, net
|
|
|
|
|
|
|
1
|
|
Other assets
|
|
|
|
|
|
|
1
|
|
Total assets
|
|
$
|
12
|
|
|
$
|
142
|
|
Accounts payable and other current
liabilities
|
|
$
|
20
|
|
|
$
|
206
|
|
Total liabilities
|
|
$
|
20
|
|
|
$
|
206
|
|
|
|
|
|
|
|
|
|
|
Organization,
Products, and Services
Effective January 1, 2006, the company established a new
reportable segment, Technical Services, to leverage existing
business strengths and synergies in the rapidly expanding areas
of logistics support, sustainment and technical services. The
Technical Services segment was established through the
consolidation of multiple programs in logistics operations from
the Electronics, Integrated Systems, Mission Systems and
Information Technology segments. On July 1, 2006,
additional programs from Electronics, Integrated Systems,
Mission Systems, and Space Technology were transferred to
Technical Services. The sales and segment operating margin in
the following tables have been revised, where applicable, to
reflect these realignments for all periods presented.
Effective January 1, 2006, in order to provide a more
relevant depiction of the management and performance of the
companys businesses, sales and segment operating margin in
the following tables were revised to include
-68-
NORTHROP
GRUMMAN CORPORATION
margin on intersegment sales for all periods presented.
Intersegment amounts are then eliminated upon consolidation of
the segments.
For presentation and discussion purposes, the companys
seven reportable segments are categorized into four primary
businesses. The Mission Systems, Information Technology and
Technical Services segments are presented as
Information & Services. The Integrated Systems and
Space Technology segments are presented as Aerospace. The
Electronics and Ships segments are each presented as separate
businesses. In accordance with the provisions of
SFAS No. 131 Disclosures about Segments
of an Enterprise and Related Information, Newport News and
Ship Systems results are aggregated and reported as the Ships
segment.
Information &
Services
Mission Systems Mission Systems is a leading
global systems integrator of complex, mission-enabling systems
for government, military, and business clients. Products and
services are focused on the fields of Command, Control,
Communications, Computers and Intelligence (C4I), strategic
missiles, missile and air defense, airborne reconnaissance,
intelligence management and processing, electro-magnetic and
infrared analysis, communications, and decision support systems.
Information Technology Information Technology
is a premier provider of advanced information technology (IT)
solutions, engineering, and business services for government and
commercial customers.
Technical Services Technical Services is a
leading provider of logistics, infrastructure, and sustainment
support, while also providing a wide array of technical services
including training and simulation.
Aerospace
Integrated Systems Integrated Systems is a
leader in the design, development, and production of airborne
early warning, electronic warfare and surveillance systems, and
battlefield management systems, as well as manned and unmanned
tactical and strike systems.
Space Technology Space Technology develops
and integrates a broad range of systems at the leading edge of
space, defense, and electronics technology. The sector supplies
products primarily to the U.S. Government that play an
important role in maintaining the nations security and
leadership in science and technology. Space Technologys
business areas focus on the design, development, manufacture,
and integration of spacecraft systems and subsystems, electronic
and communications payloads, advanced avionics systems, and high
energy laser systems and subsystems.
Electronics
Electronics is a leading designer, developer, manufacturer and
integrator of a variety of advanced electronic and maritime
systems for national security and select non-defense
applications. Electronics provides systems to U.S. and
international customers for such applications as airborne
surveillance, aircraft fire control, precision targeting,
electronic warfare, automatic test equipment, inertial
navigation, integrated avionics, space sensing, intelligence
processing, air traffic control, air and missile defense,
communications, mail processing, biochemical detection, ship
bridge control, and shipboard components.
Ships
Ships is the nations sole industrial designer, builder,
and refueler of nuclear-powered aircraft carriers and one of
only two companies capable of designing and building
nuclear-powered submarines for the U.S. Navy. Ships is also
one of the nations leading full service systems providers
for the design, engineering, construction, and life cycle
support of major surface ships for the U.S. Navy,
U.S. Coast Guard, international navies, and for commercial
vessels of all types. Ships also has produced double-hulled
crude oil tankers.
Summary
Segment Financial Information
In the following table of segment and major customer data,
revenue from the U.S. Government includes revenue from
contracts for which Northrop Grumman is the prime contractor as
well as those for which the company is
-69-
NORTHROP
GRUMMAN CORPORATION
a subcontractor and the ultimate customer is the
U.S. Government. The companys discontinued operations
are excluded from all of the data elements in this table, except
for assets by segment.
Adjustments to Reconcile to Total Operating
Margin Pension expense is included in the
segments cost of sales to the extent that these costs are
currently recognized under U.S. Government Cost Accounting
Standards (CAS). In order to reconcile from segment operating
margin to total company operating margin, these amounts are
reported under the caption Reversal of CAS pension expense
included above. Total pension expense accounted for under
accounting principles generally accepted in the United States of
America is reported separately as a reconciling item under the
caption Pension expense. The reconciling item
captioned Unallocated expenses includes the portion
of corporate expenses such as management and administration,
legal, environmental, certain compensation and retiree benefits,
and other expenses not considered allowable or allocable under
applicable CAS regulations and the Federal Acquisition
Regulation, and therefore not allocated to the segments.
Foreign Sales Foreign sales amounted to
approximately $1.6 billion, $1.7 billion, and
$1.6 billion during 2006, 2005, and 2004, respectively.
-70-
NORTHROP
GRUMMAN CORPORATION
Results
of Operations By Segment and Major Customer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Sales and Service
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
$
|
4,612
|
|
|
$
|
4,575
|
|
|
$
|
4,251
|
|
Other customers
|
|
|
54
|
|
|
|
45
|
|
|
|
29
|
|
Intersegment sales
|
|
|
408
|
|
|
|
397
|
|
|
|
306
|
|
|
|
|
5,074
|
|
|
|
5,017
|
|
|
|
4,586
|
|
Information
Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
3,063
|
|
|
|
2,921
|
|
|
|
2,714
|
|
Other customers
|
|
|
829
|
|
|
|
718
|
|
|
|
634
|
|
Intersegment sales
|
|
|
139
|
|
|
|
132
|
|
|
|
114
|
|
|
|
|
4,031
|
|
|
|
3,771
|
|
|
|
3,462
|
|
Technical Services
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
1,483
|
|
|
|
1,233
|
|
|
|
1,199
|
|
Other customers
|
|
|
34
|
|
|
|
45
|
|
|
|
52
|
|
Intersegment sales
|
|
|
272
|
|
|
|
255
|
|
|
|
241
|
|
|
|
|
1,789
|
|
|
|
1,533
|
|
|
|
1,492
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
5,277
|
|
|
|
5,272
|
|
|
|
4,370
|
|
Other customers
|
|
|
169
|
|
|
|
170
|
|
|
|
204
|
|
Intersegment sales
|
|
|
54
|
|
|
|
47
|
|
|
|
36
|
|
|
|
|
5,500
|
|
|
|
5,489
|
|
|
|
4,610
|
|
Space Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
3,209
|
|
|
|
3,278
|
|
|
|
3,148
|
|
Other customers
|
|
|
87
|
|
|
|
67
|
|
|
|
63
|
|
Intersegment sales
|
|
|
55
|
|
|
|
50
|
|
|
|
58
|
|
|
|
|
3,351
|
|
|
|
3,395
|
|
|
|
3,269
|
|
Electronics
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
4,112
|
|
|
|
4,015
|
|
|
|
3,701
|
|
Other customers
|
|
|
1,906
|
|
|
|
1,902
|
|
|
|
2,156
|
|
Intersegment sales
|
|
|
560
|
|
|
|
685
|
|
|
|
533
|
|
|
|
|
6,578
|
|
|
|
6,602
|
|
|
|
6,390
|
|
Ships
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
5,263
|
|
|
|
5,727
|
|
|
|
6,108
|
|
Other customers
|
|
|
48
|
|
|
|
57
|
|
|
|
142
|
|
Intersegment sales
|
|
|
10
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
5,321
|
|
|
|
5,786
|
|
|
|
6,252
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Other customers
|
|
|
|
|
|
|
42
|
|
|
|
227
|
|
Intersegment sales
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
42
|
|
|
|
230
|
|
Intersegment eliminations
|
|
|
(1,496
|
)
|
|
|
(1,568
|
)
|
|
|
(1,291
|
)
|
Total sales and service revenues
|
|
$
|
30,148
|
|
|
$
|
30,067
|
|
|
$
|
29,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-71-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
471
|
|
|
$
|
374
|
|
|
$
|
314
|
|
Information Technology
|
|
|
352
|
|
|
|
328
|
|
|
|
246
|
|
Technical Services
|
|
|
110
|
|
|
|
89
|
|
|
|
71
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
551
|
|
|
|
499
|
|
|
|
431
|
|
Space Technology
|
|
|
293
|
|
|
|
274
|
|
|
|
236
|
|
Electronics
|
|
|
744
|
|
|
|
702
|
|
|
|
661
|
|
Ships
|
|
|
393
|
|
|
|
249
|
|
|
|
395
|
|
Other
|
|
|
|
|
|
|
(17
|
)
|
|
|
(3
|
)
|
Intersegment eliminations
|
|
|
(117
|
)
|
|
|
(84
|
)
|
|
|
(59
|
)
|
Non-segment factors affecting
operating margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses
|
|
|
(287
|
)
|
|
|
(190
|
)
|
|
|
(282
|
)
|
Pension expense
|
|
|
(468
|
)
|
|
|
(410
|
)
|
|
|
(350
|
)
|
Reversal of CAS pension expense
included above
|
|
|
431
|
|
|
|
389
|
|
|
|
338
|
|
Reversal of royalty income
included above
|
|
|
(19
|
)
|
|
|
(10
|
)
|
|
|
(12
|
)
|
Total operating margin
|
|
$
|
2,454
|
|
|
$
|
2,193
|
|
|
$
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Financial Information
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
4,701
|
|
|
$
|
4,750
|
|
Information Technology
|
|
|
3,305
|
|
|
|
3,319
|
|
Technical Services
|
|
|
1,092
|
|
|
|
993
|
|
Aerospace
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
2,202
|
|
|
|
2,271
|
|
Space Technology
|
|
|
4,541
|
|
|
|
4,615
|
|
Electronics
|
|
|
5,454
|
|
|
|
5,577
|
|
Ships
|
|
|
6,946
|
|
|
|
6,756
|
|
Other
|
|
|
|
|
|
|
14
|
|
Segment assets
|
|
|
28,241
|
|
|
|
28,295
|
|
Corporate
|
|
|
3,768
|
|
|
|
5,919
|
|
Total assets
|
|
$
|
32,009
|
|
|
$
|
34,214
|
|
|
|
|
|
|
|
|
|
|
-72-
NORTHROP
GRUMMAN CORPORATION
Other
Financial Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
45
|
|
|
$
|
54
|
|
|
$
|
23
|
|
Information Technology
|
|
|
32
|
|
|
|
35
|
|
|
|
27
|
|
Technical Services
|
|
|
4
|
|
|
|
5
|
|
|
|
4
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
119
|
|
|
|
142
|
|
|
|
111
|
|
Space Technology
|
|
|
107
|
|
|
|
123
|
|
|
|
123
|
|
Electronics
|
|
|
130
|
|
|
|
166
|
|
|
|
146
|
|
Ships
|
|
|
287
|
|
|
|
266
|
|
|
|
220
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Corporate
|
|
|
13
|
|
|
|
33
|
|
|
|
15
|
|
Total capital expenditures
|
|
$
|
737
|
|
|
$
|
824
|
|
|
$
|
672
|
|
Depreciation and
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Information &
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Mission Systems
|
|
$
|
30
|
|
|
$
|
57
|
|
|
$
|
55
|
|
Information Technology
|
|
|
46
|
|
|
|
49
|
|
|
|
48
|
|
Technical Services
|
|
|
7
|
|
|
|
8
|
|
|
|
8
|
|
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Systems
|
|
|
110
|
|
|
|
102
|
|
|
|
90
|
|
Space Technology
|
|
|
136
|
|
|
|
142
|
|
|
|
132
|
|
Electronics
|
|
|
211
|
|
|
|
247
|
|
|
|
244
|
|
Ships
|
|
|
153
|
|
|
|
155
|
|
|
|
148
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Corporate
|
|
|
12
|
|
|
|
12
|
|
|
|
6
|
|
Total depreciation and amortization
|
|
$
|
705
|
|
|
$
|
772
|
|
|
$
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share Basic earnings per
share from continuing operations are calculated by dividing
income available to common shareholders from continuing
operations by the weighted-average number of shares of common
stock outstanding during each period.
Diluted Earnings Per Share Diluted earnings
per share include the dilutive effect of stock options and other
stock awards granted to employees under stock-based compensation
plans, equity security units outstanding, and the
3.5 million mandatorily redeemable preferred stock (see
Note 14), unless their inclusion is anti-dilutive for the
period presented. The dilutive effect of these potential common
stock instruments totaled 12.9 million (including
6.4 million shares from the mandatorily redeemable
convertible Series B preferred stock), 6.7 million,
and 5.3 million shares for the years ended
December 31, 2006, 2005, and 2004, respectively. For the
periods in which the mandatorily redeemable preferred stock are
dilutive, the related dividends are added back to the numerator
to arrive at income available to common shareholders from
continuing operations. The weighted-average diluted shares
outstanding for the years ended 2006, 2005, and 2004, exclude
stock options to purchase approximately 8 thousand shares,
4 million shares, and 12.6 million shares,
respectively, since such options have an exercise price in
excess of the average market price of the companys common
stock during the year.
-73-
NORTHROP
GRUMMAN CORPORATION
Diluted earnings per share from continuing operations are
calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
in millions, except per
share
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Basic Earnings per
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1,567
|
|
|
$
|
1,392
|
|
|
$
|
1,080
|
|
Add dividends on mandatorily
redeemable convertible preferred stock
|
|
|
24
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders from continuing operations
|
|
$
|
1,591
|
|
|
$
|
1,392
|
|
|
$
|
1,080
|
|
Weighted-average common shares
outstanding
|
|
|
345.7
|
|
|
|
356.5
|
|
|
|
359.7
|
|
Dilutive effect of stock options,
awards, equity security units, and mandatorily redeemable
convertible preferred stock
|
|
|
12.9
|
|
|
|
6.7
|
|
|
|
5.3
|
|
Weighted-average diluted shares
outstanding
|
|
|
358.6
|
|
|
|
363.2
|
|
|
|
365.0
|
|
Diluted earnings per share from
continuing operations
|
|
$
|
4.44
|
|
|
$
|
3.83
|
|
|
$
|
2.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases On October 26, 2004,
the companys board of directors authorized a share
repurchase program of up to $1.0 billion of its outstanding
common stock. This share repurchase program was completed in the
third quarter of 2005, and resulted in the retirement of
18.2 million shares of common stock.
On October 24, 2005, the companys board of directors
authorized a share repurchase program of up to $1.5 billion
of its outstanding common stock, which commenced in November
2005 and under which $176 million is remaining. Through
December 31, 2006, the company had repurchased and retired
20.6 million shares of common stock under this share
repurchase program.
The company entered into an initial agreement with Credit
Suisse, New York Branch (Credit Suisse) on November 4,
2005, to repurchase approximately 9.1 million shares of
common stock at an initial price of $55.15 per share for a
total of $500 million. Credit Suisse immediately borrowed
shares that were sold to and canceled by the company.
Subsequently, Credit Suisse purchased shares in the open market
to settle its share borrowings. On March 1, 2006, Credit
Suisse completed its purchases under this agreement, and the
company paid $37 million for the final price adjustment
under the terms of the agreement. The final average purchase
price was $59.05 per share.
The company entered into a second agreement with Credit Suisse
on March 6, 2006, to repurchase approximately
11.6 million shares of common stock at an initial price of
$64.78 per share for a total of $750 million. Credit
Suisse immediately borrowed shares that were sold to and
canceled by the company. Subsequently, Credit Suisse purchased
shares in the open market to settle its share borrowings. On
May 26, 2006, Credit Suisse completed its purchases under
this agreement, and the company paid $37 million for the
final price adjustment under the terms of the agreement. The
final average purchase price was $68.01 per share.
On December 14, 2006, the companys board of directors
authorized a share repurchase program of up to $1.0 billion
of its outstanding common stock. This new authorization is in
addition to $176 million remaining on the companys
previous share repurchase authorization. In total, the company
now has $1.176 billion authorized for share repurchases.
With the exception of the accelerated share repurchase
agreements with Credit Suisse noted above, share repurchases
take place at managements discretion and under
pre-established non-discretionary programs from time to time,
depending on market conditions, in the open market, and in
privately negotiated transactions. The company retires its
common stock upon repurchase and has not made any purchases of
common stock other than in connection with these publicly
announced repurchase programs.
-74-
NORTHROP
GRUMMAN CORPORATION
|
|
8.
|
ACCOUNTS
RECEIVABLE, NET
|
Unbilled amounts represent sales for which billings have not
been presented to customers at year-end, including amounts
representing differences between actual and estimated contract
cost elements. These amounts are usually billed and collected
within one year. Progress payments are received on a number of
fixed-price contracts.
Accounts receivable at December 31, 2006, are expected to
be collected in 2007 except for approximately $419 million
due in 2008 and $120 million due in 2009 and later.
Allowances for doubtful amounts mainly represent estimates of
overhead costs which may not be successfully negotiated and
collected.
Accounts receivable were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Due From U.S. Government,
Long-Term Contracts
|
|
|
|
|
|
|
|
|
Billed
|
|
$
|
1,054
|
|
|
$
|
1,290
|
|
Unbilled
|
|
|
33,004
|
|
|
|
30,768
|
|
Progress payments received
|
|
|
(31,637
|
)
|
|
|
(29,673
|
)
|
|
|
|
2,421
|
|
|
|
2,385
|
|
Due From Other Customers,
Long-Term Contracts
|
|
|
|
|
|
|
|
|
Billed
|
|
|
212
|
|
|
|
217
|
|
Unbilled
|
|
|
2,975
|
|
|
|
2,719
|
|
Progress payments received
|
|
|
(2,390
|
)
|
|
|
(2,197
|
)
|
|
|
|
797
|
|
|
|
739
|
|
Total due, long-term contracts
|
|
|
3,218
|
|
|
|
3,124
|
|
Trade And Other Accounts
Receivable
|
|
|
|
|
|
|
|
|
Due from U.S. Government
|
|
|
477
|
|
|
|
389
|
|
Due from other customers
|
|
|
237
|
|
|
|
282
|
|
Progress payments received
|
|
|
(58
|
)
|
|
|
(18
|
)
|
Total due, trade and other
|
|
|
656
|
|
|
|
653
|
|
|
|
|
3,874
|
|
|
|
3,777
|
|
Allowances for doubtful amounts
|
|
|
(308
|
)
|
|
|
(224
|
)
|
Total accounts receivable, net
|
|
$
|
3,566
|
|
|
$
|
3,553
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
INVENTORIED
COSTS, NET
|
Inventoried costs were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Production costs of contracts in
process
|
|
$
|
1,951
|
|
|
$
|
1,920
|
|
General and administrative expenses
|
|
|
184
|
|
|
|
129
|
|
|
|
|
2,135
|
|
|
|
2,049
|
|
Progress payments received
|
|
|
(1,226
|
)
|
|
|
(1,162
|
)
|
|
|
|
909
|
|
|
|
887
|
|
Product inventory
|
|
|
269
|
|
|
|
277
|
|
Total inventoried costs, net
|
|
$
|
1,178
|
|
|
$
|
1,164
|
|
|
|
|
|
|
|
|
|
|
-75-
NORTHROP
GRUMMAN CORPORATION
|
|
10.
|
GOODWILL
AND OTHER PURCHASED INTANGIBLE ASSETS
|
Goodwill
Goodwill and other purchased intangible assets are included in
the identifiable assets of the segment to which they have been
assigned. Impairment tests are performed at least annually and
more often as circumstances require. Any goodwill impairment, as
well as the amortization of other purchased intangible assets,
is charged against the respective segments operating
margin. The annual impairment test for all sectors was performed
as of November 30, 2006, with no indication of impairment.
In performing the goodwill impairment tests, the company uses a
discounted cash flow approach corroborated by comparative market
multiples, where appropriate, to determine the fair value of
reporting units.
The changes in the carrying amounts of goodwill during 2006 and
2005, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Missions
|
|
|
Information
|
|
|
Technical
|
|
|
Integrated
|
|
|
Space
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
Systems
|
|
|
Technology
|
|
|
Services
|
|
|
Systems
|
|
|
Technology
|
|
|
Electronics
|
|
|
Ships
|
|
|
Total
|
|
Balance as of January 1, 2005
|
|
$
|
4,265
|
|
|
$
|
2,398
|
|
|
|
|
|
|
$
|
955
|
|
|
$
|
3,337
|
|
|
$
|
2,597
|
|
|
$
|
3,630
|
|
|
$
|
17,182
|
|
Goodwill acquired
|
|
|
|
|
|
|
319
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361
|
|
Goodwill of business sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
(19
|
)
|
Fair value adjustments to net
assets acquired
|
|
|
(9
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
(42
|
)
|
|
|
(3
|
)
|
|
|
(14
|
)
|
|
|
(141
|
)
|
Balance as of December 31,
2005
|
|
|
4,256
|
|
|
|
2,649
|
|
|
|
|
|
|
|
992
|
|
|
|
3,295
|
|
|
|
2,575
|
|
|
|
3,616
|
|
|
|
17,383
|
|
Goodwill transferred due to
segment realignment
|
|
|
(336
|
)
|
|
|
(403
|
)
|
|
$
|
792
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
Fair value adjustments to net
assets acquired
|
|
|
(37
|
)
|
|
|
(27
|
)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(41
|
)
|
|
|
(19
|
)
|
|
|
(32
|
)
|
|
|
(164
|
)
|
Balance as of December 31,
2006
|
|
$
|
3,883
|
|
|
$
|
2,219
|
|
|
$
|
787
|
|
|
$
|
976
|
|
|
$
|
3,254
|
|
|
$
|
2,516
|
|
|
$
|
3,584
|
|
|
$
|
17,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Realignment Effective January 1,
2006, the company realigned businesses among four of its
operating segments to form a new segment. As a result of this
realignment, goodwill of approximately $792 million was
reallocated among these five segments.
Fair Value Adjustments to Net Assets Acquired
For 2005, the change in the Information Technology segment
primarily consisted of purchase price allocation to reflect
adjustments to the fair value of the assets acquired and
liabilities assumed in relation to the acquisition of Integic
(see Note 4). The remaining adjustments were primarily
related to the recognition of a portion of the capital loss
carryforward associated with the companys acquisition of
TRW Inc. (TRW). Due to the uncertainty related to the
companys ability to fully utilize the deferred tax asset
related to this capital loss carryforward as of the acquisition
date, a valuation allowance equal to the full amount of the
related tax benefit was recorded. Any subsequent realization of
this tax benefit was recorded as a reduction of goodwill. For
2006, the fair value adjustments were primarily due to the
resolution of pre-acquisition tax uncertainties resulting from
the completion of audits by the Internal Revenue Service and the
realization of additional capital loss carryforward tax assets.
-76-
NORTHROP
GRUMMAN CORPORATION
Purchased
Intangible Assets
The table below summarizes the companys aggregate
purchased intangible assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
$ in millions
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Contract and program intangibles
|
|
$
|
2,594
|
|
|
$
|
(1,487
|
)
|
|
$
|
1,107
|
|
|
$
|
2,594
|
|
|
$
|
(1,357
|
)
|
|
$
|
1,237
|
|
Other purchased intangibles
|
|
|
100
|
|
|
|
(68
|
)
|
|
|
32
|
|
|
|
100
|
|
|
|
(64
|
)
|
|
|
36
|
|
Total
|
|
$
|
2,694
|
|
|
$
|
(1,555
|
)
|
|
$
|
1,139
|
|
|
$
|
2,694
|
|
|
$
|
(1,421
|
)
|
|
$
|
1,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2005, approximately
$34 million of the Integic purchase price was allocated to
purchased intangible assets with a weighted average life of
5 years. Also, approximately $7 million of the
Confluent purchase price was allocated to purchased intangible
assets with a life of 8 years. The companys purchased
intangible assets are subject to amortization and are being
amortized on a straight-line basis over an aggregate
weighted-average period of 22 years. Aggregate amortization
expense for 2006, 2005, and 2004, was $134 million,
$216 million, and $226 million, respectively.
The table below shows expected amortization for purchased
intangibles as of December 31, 2006, for the next five
years:
|
|
|
|
|
$ in millions
|
|
|
|
Year ending December 31
|
|
|
|
|
2007
|
|
$
|
121
|
|
2008
|
|
|
111
|
|
2009
|
|
|
101
|
|
2010
|
|
|
81
|
|
2011
|
|
|
42
|
|
|
|
|
|
|
|
|
11.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
Carrying amounts and the related estimated fair values of the
companys financial instruments at December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
$ in millions
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Cash and cash equivalents
|
|
$
|
1,015
|
|
|
$
|
1,015
|
|
|
$
|
1,605
|
|
|
$
|
1,605
|
|
Investments in marketable
securities
|
|
|
208
|
|
|
|
208
|
|
|
|
180
|
|
|
|
180
|
|
Cash surrender value of life
insurance policies
|
|
|
290
|
|
|
|
290
|
|
|
|
256
|
|
|
|
256
|
|
Investment in TRW Auto
|
|
|
|
|
|
|
|
|
|
|
97
|
|
|
|
257
|
|
Short-term notes payable
|
|
|
(95
|
)
|
|
|
(95
|
)
|
|
|
(50
|
)
|
|
|
(50
|
)
|
Long-term debt
|
|
|
(4,067
|
)
|
|
|
(4,562
|
)
|
|
|
(5,095
|
)
|
|
|
(5,682
|
)
|
Mandatorily redeemable preferred
stock
|
|
|
(350
|
)
|
|
|
(459
|
)
|
|
|
(350
|
)
|
|
|
(445
|
)
|
Interest rate swaps
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Foreign currency forward contracts
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Instruments For cash and cash
equivalents and amounts borrowed under the companys
short-term credit lines, the carrying amounts approximate fair
value, due to the short-term nature of these items.
-77-
NORTHROP
GRUMMAN CORPORATION
Investments in Marketable Securities The
company holds a portfolio of securities, primarily consisting of
equity securities that are classified as trading.
Cash Surrender Value of Life Insurance The
company maintains whole life insurance policies on several of
our senior executives in connection with deferred compensation
arrangements. These policies are recorded at their cash
surrender value as determined by the insurance carrier. The
amounts associated with these policies are recorded in
Miscellaneous other assets in the consolidated
statements of financial position.
Investment in TRW Auto At December 31,
2005, the company owned 9.7 million common shares of TRW
Auto with a carrying value of $97 million. The investment
was carried at cost and included in Miscellaneous other
assets as of December 31, 2005, due to certain
restrictions on the sale of the companys investment.
During 2006, the company received a waiver of the restrictions
and sold all of its TRW Auto shares for $209 million,
resulting in an after-tax gain of $72 million.
Long-Term Debt The fair value of the
long-term debt was calculated based on interest rates available
for debt with terms and due dates similar to the companys
existing debt arrangements.
Mandatorily Redeemable Preferred Stock The
fair value of the mandatorily redeemable preferred stock was
calculated based on the closing market price quoted on the New
York Stock Exchange (trading symbol
NOC-pb) at
December 31, 2006, and 2005, respectively.
Interest Rate Swaps The company has from time
to time entered into interest rate swap agreements to mitigate
interest rate risk. As described in Note 20, two interest
rate swap agreements were in effect at December 31, 2006,
and 2005.
Foreign Currency The company enters into
foreign currency forward contracts to manage foreign currency
exchange risk related to receipts from customers and payments to
suppliers denominated in foreign currencies. Gains and losses
from such transactions are included as contract costs.
Income tax expense, both federal and foreign, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Income Taxes on Continuing
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes
|
|
$
|
524
|
|
|
$
|
501
|
|
|
$
|
468
|
|
Foreign income taxes
|
|
|
27
|
|
|
|
27
|
|
|
|
28
|
|
|
|
|
551
|
|
|
|
528
|
|
|
|
496
|
|
Change in deferred federal and
foreign income taxes
|
|
|
158
|
|
|
|
139
|
|
|
|
19
|
|
Total federal and foreign income
taxes
|
|
$
|
709
|
|
|
$
|
667
|
|
|
$
|
515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic source of income from continuing operations
before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Domestic income
|
|
$
|
2,204
|
|
|
$
|
1,984
|
|
|
$
|
1,525
|
|
Foreign income
|
|
|
72
|
|
|
|
75
|
|
|
|
70
|
|
Income from continuing operations
before income taxes
|
|
$
|
2,276
|
|
|
$
|
2,059
|
|
|
$
|
1,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-78-
NORTHROP
GRUMMAN CORPORATION
Income tax expense differs from the amount computed by
multiplying the statutory federal income tax rate times the
income from continuing operations before income taxes due to the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Income tax expense on continuing
operations at statutory rate
|
|
$
|
797
|
|
|
$
|
721
|
|
|
$
|
558
|
|
Extraterritorial income
exclusion/foreign sales corporation
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(28
|
)
|
Manufacturing deduction
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
Research tax credit
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(20
|
)
|
Wage credit
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
Settlement of IRS appeals cases
|
|
|
(55
|
)
|
|
|
(27
|
)
|
|
|
|
|
Other, net
|
|
|
3
|
|
|
|
(9
|
)
|
|
|
5
|
|
Total federal and foreign income
taxes
|
|
$
|
709
|
|
|
$
|
667
|
|
|
$
|
515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes Deferred income taxes
reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and tax purposes. Such amounts are classified
as current or noncurrent assets or liabilities based upon the
balance sheet classification of the related assets and
liabilities.
The tax effects of significant temporary differences and
carryforwards that gave rise to year-end deferred federal, state
and foreign tax balances, as presented in the consolidated
statements of financial position, are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Retirement benefit plan expense
|
|
$
|
1,067
|
|
|
$
|
428
|
|
Contract accounting differences
|
|
|
19
|
|
|
|
72
|
|
Provision for accrued liabilities
|
|
|
693
|
|
|
|
690
|
|
Tax credits and carryforwards
|
|
|
|
|
|
|
|
|
Capital loss
|
|
|
1,120
|
|
|
|
1,159
|
|
Foreign income tax credit
|
|
|
180
|
|
|
|
180
|
|
Other
|
|
|
396
|
|
|
|
251
|
|
Gross deferred tax assets
|
|
|
3,475
|
|
|
|
2,780
|
|
Less valuation allowance
|
|
|
(1,300
|
)
|
|
|
(1,339
|
)
|
Net deferred tax assets
|
|
|
2,175
|
|
|
|
1,441
|
|
Deferred Tax
Liabilities
|
|
|
|
|
|
|
|
|
Provision for accrued liabilities
|
|
|
37
|
|
|
|
35
|
|
Purchased intangibles
|
|
|
292
|
|
|
|
367
|
|
Depreciation and amortization
|
|
|
533
|
|
|
|
517
|
|
Goodwill amortization
|
|
|
444
|
|
|
|
322
|
|
Gross deferred tax liabilities
|
|
|
1,306
|
|
|
|
1,241
|
|
Total net deferred tax assets
|
|
$
|
869
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
-79-
NORTHROP
GRUMMAN CORPORATION
Net deferred tax assets (liabilities) as presented in the
consolidated statements of financial position are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Net current deferred tax assets
|
|
$
|
706
|
|
|
$
|
783
|
|
Net non-current deferred tax
assets (included in miscellaneous other assets)
|
|
|
165
|
|
|
|
12
|
|
Net current deferred tax
liabilities (included in other current liabilities)
|
|
|
(2
|
)
|
|
|
|
|
Net non-current deferred tax
liabilities
|
|
|
|
|
|
|
(595
|
)
|
Total net deferred tax assets
|
|
$
|
869
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
Foreign Income Deferred income taxes have not
been provided on accumulated undistributed earnings of foreign
subsidiaries of $259 million at December 31, 2006, as
the company intends to permanently reinvest these earnings,
thereby indefinitely postponing their remittance. Should these
earnings be distributed in the form of dividends or otherwise,
the distributions would be subject to U.S. federal income
tax at the statutory rate of 35 percent, less foreign tax
credits applicable to such distributions, if any. In addition,
such distributions would be subject to withholding taxes in the
various tax jurisdictions.
Tax Carryforwards The company has a capital
loss tax carryforward of $1.1 billion at December 31,
2006, against which a full valuation allowance of
$1.1 billion has been recorded. The majority of the capital
loss carryforward, which primarily arose from the sale of TRW
Auto, will expire in 2008. Future reductions to the valuation
allowance resulting from the recognition of tax benefits, if
any, will reduce goodwill. In addition, the company has foreign
income tax credit carryforward items of $180 million at
December 31, 2006, to offset future federal income tax
liabilities, against which a valuation allowance of
$180 million has been recorded. The $180 million
foreign income tax credit carryforward arose from the
acquisition of TRW, and from the sale of TRW Auto and other
discontinued operations, and will expire in 2009 through 2012.
In 2004, the company extended its foreign tax credit
carryforward period from five to ten years based on the American
Jobs Creation Act of 2004.
|
|
13.
|
NOTES PAYABLE
TO BANKS AND LONG-TERM DEBT
|
Credit Facility On August 5, 2005, the
company entered into a new credit agreement which provides for a
five-year revolving credit facility in an aggregate principal
amount of $2 billion. The credit facility permits the
company to request additional lending commitments from the
lenders under the agreement or other eligible lenders under
certain circumstances, and thereby to increase the aggregate
principal amount of the lending commitments under the agreement
by up to an additional $500 million. The agreement provides
for swingline loans and letters of credit as
sub-facilities
for the credit facilities provided for in the agreement.
Borrowings under the credit facility bear interest at various
rates, including the London Interbank Offered Rate (LIBOR),
adjusted based on the companys credit rating, or an
alternate base rate plus an incremental margin. The credit
facility also requires a facility fee based on the daily
aggregate amount of commitments (whether or not utilized) and
the companys credit rating level. The companys
credit agreement contains certain financial covenants that are
less restrictive than those contained in the prior credit
agreement. At December 31, 2006, and 2005, there was no
balance outstanding under this facility and there were no
borrowings under this facility at any time during 2006 or 2005.
Concurrent with the effectiveness of the new credit agreement,
the 2001 credit agreement, for $2.5 billion, terminated on
August 5, 2005. No principal or interest was outstanding or
accrued and unpaid under the 2001 credit agreement on that date.
During 2004, the company borrowed $100 million under this
facility for a period of 27 days.
Equity Security Units In November 2001, the
company issued 6.9 million equity security units. Each
equity security unit, issued at $100 per unit, initially
consisted of a contract to purchase shares of Northrop Grumman
common stock on November 16, 2004, and a $100 senior note
due 2006. The senior notes due 2006 were reported as long-term
debt in 2005. The senior notes initially bore interest at
5.25 percent per annum, and each
-80-
NORTHROP
GRUMMAN CORPORATION
equity security unit paid a contract adjustment payment of
2.0 percent per annum through November 16, 2004, for a
combined yield on the equity security unit of 7.25 percent
per annum through November 16, 2004.
On August 11, 2004, the company remarketed the senior notes
as required by the original terms of the equity security units.
As a result of this remarketing, the interest rate on the senior
notes was reset to 4.08 percent per annum effective
August 16, 2004. Proceeds from the remarketed notes were
used to purchase U.S. Treasury securities that were pledged
to secure the stock purchase obligations of the unit holders and
held with a collateral agent.
On November 16, 2004, the company received
$690 million and issued 13.2 million shares of common
stock in settlement of the stock purchase contracts. The number
of shares issued was calculated using a conversion ratio of
1.9171 shares per each equity security unit, which was
determined in accordance with the original terms of the stock
purchase contracts.
On November 16, 2006, the company repaid the
$690 million 4.08 percent senior note at maturity.
Debt Redemption On October 15, 2004, the
company redeemed all of its outstanding $250 million
9.375 percent debentures due 2024. The redemption price was
104.363 percent of the principal amount plus accrued and
unpaid interest through the redemption date. As a result of the
redemption, the company recorded a $13 million pre-tax
charge in 2004 included in Other, net in the
consolidated statements of income.
Gulf Opportunity Zone Industrial Development Revenue
Bonds In December 2006, Ship Systems entered
into a loan agreement with the Mississippi Business Finance
Corporation (MBFC) under which Ship Systems received access to
$200 million from the issuance of Gulf Opportunity Zone
Industrial Development Revenue Bonds by the MBFC. The loan
accrues interest payable semi-annually at a fixed rate of
4.55 percent per annum. The bonds are subject to redemption
at the companys discretion on or after December 1,
2016, and mature on December 1, 2028. The bonds will be
repaid by Ship Systems in accordance with the terms stipulated
in the loan agreement. The bond issuance proceeds must be used
to finance the construction, reconstruction, and renovation of
the companys interest in certain ship manufacturing and
repair facilities, or portions thereof, located in the state of
Mississippi. As of December 31, 2006, $73 million was
used by Ship Systems and the remaining $127 million was
recorded in miscellaneous other assets as restricted cash in the
consolidated statement of financial position. Repayment of the
bonds is guaranteed by the company.
Lines of Credit The company has available
short-term credit lines in the form of money market facilities
with several banks. The amount and conditions for borrowing
under these credit lines depend on the availability and terms
prevailing in the marketplace. No fees or compensating balances
are required for these credit facilities.
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Notes and debentures due 2007 to
2036, rates from 6.25% to 9.375%
|
|
$
|
3,777
|
|
|
$
|
5,002
|
|
Other indebtedness due 2007 to
2028, rates from 4.55% to 8.5%
|
|
|
290
|
|
|
|
93
|
|
Total long-term debt
|
|
|
4,067
|
|
|
|
5,095
|
|
Less current portion
|
|
|
75
|
|
|
|
1,214
|
|
Long-term debt, net of current
portion
|
|
$
|
3,992
|
|
|
$
|
3,881
|
|
|
|
|
|
|
|
|
|
|
Indentures underlying long-term debt issued by the company or
its subsidiaries contain various restrictions with respect to
the issuer, including one or more restrictions relating to
limitations on liens, sale and leaseback arrangements, and
funded debt of subsidiaries.
-81-
NORTHROP
GRUMMAN CORPORATION
Maturities of long-term debt as of December 31, 2006, are
as follows:
|
|
|
|
|
$ in millions
|
|
|
|
Year Ending December 31
|
|
|
|
|
2007
|
|
$
|
75
|
|
2008
|
|
|
109
|
|
2009
|
|
|
466
|
|
2010
|
|
|
89
|
|
2011
|
|
|
766
|
|
Thereafter
|
|
|
2,511
|
|
Total principal payments
|
|
|
4,016
|
|
Unamortized premium on long-term
debt, net of discount
|
|
|
51
|
|
Total long-term debt
|
|
$
|
4,067
|
|
|
|
|
|
|
The premium on long-term debt primarily represents non-cash fair
market value adjustments resulting from acquisitions, which are
amortized over the life of the related debt.
|
|
14.
|
MANDATORILY
REDEEMABLE SERIES B CONVERTIBLE PREFERRED STOCK
|
The company issued 3.5 million shares of mandatorily
redeemable Series B convertible preferred stock in April
2001. Each share of Series B preferred stock has a
liquidation value of $100 per share. The liquidation value,
plus accrued but unpaid dividends, is payable on April 4,
2021, the mandatory redemption date. The company has the option
to redeem all, but not less than all, of the shares of
Series B preferred stock at any time after seven years from
the date of issuance for a number of shares of the
companys common stock equal to the liquidation value plus
accrued and unpaid dividends divided by the current market price
of common stock determined in relation to the date of
redemption. Under this option, had the redemption taken place at
December 31, 2006, each share would have been converted
into 1.494 shares of common stock. Each share of preferred
stock is convertible, at any time, at the option of the holder
into the right to receive shares of the companys common
stock. Initially, each share was convertible into
.911 shares of common stock, subject to adjustment in the
event of certain dividends and distributions, a stock split, a
merger, consolidation or sale of substantially all of the
companys assets, a liquidation or distribution, and
certain other events. Had the conversion taken place at
December 31, 2006, each share would have been converted
into 1.822 shares of common stock. Holders of preferred
stock are entitled to cumulative annual cash dividends of
$7 per share, payable quarterly. In any liquidation of the
company, each share of preferred stock is entitled to a
liquidation preference before any distribution may be made on
the companys common stock or any series of capital stock
that is junior to the Series B preferred stock. In the
event of a change in control of the company, holders of
Series B preferred stock also have specified exchange
rights into common stock of the company or into specified
securities or property of another entity participating in the
change in control transaction.
As of December 31, 2006, 10 million shares of
preferred stock are authorized, of which 3.5 million shares
designated as Series B preferred are issued and outstanding.
U.S. Government Investigations and
Claims Departments and agencies of the
U.S. Government have the authority to investigate various
transactions and operations of the company, and the results of
such investigations may lead to administrative, civil, or
criminal proceedings, the ultimate outcome of which could be
fines, penalties, repayments or compensatory or treble damages.
U.S. Government regulations provide that certain findings
against a contractor may lead to suspension or debarment from
future U.S. Government contracts or the loss of export
privileges for a company or an operating division or
subdivision. Suspension or debarment could have a material
adverse effect on the company because of its reliance on
government contracts.
-82-
NORTHROP
GRUMMAN CORPORATION
As previously disclosed, in October 2005, the
U.S. Department of Justice and a classified
U.S. Government customer apprised the company of potential
substantial claims relating to certain microelectronic parts
produced by the Space and Electronics Sector of former TRW Inc.,
now a component of the company. The relationship, if any,
between the potential claims and a civil False Claims Act case
that remains under seal in the U.S. District Court for the
Central District of California remains unclear to the company.
In the third quarter of 2006, the parties commenced settlement
discussions. While the company continues to believe that it did
not breach the contracts in question and that it acted
appropriately in this matter, the company proposed to settle the
claims and any associated matters and recognized a pre-tax
charge of $112.5 million in 2006 to cover the cost of the
settlement proposal and associated investigative costs. The
charge has been recorded within General and administrative
expenses in the consolidated statements of income. The
company extended the offer in an effort to avoid litigation and
in recognition of the value of the relationship with this
customer. The U.S. Government has advised the company that
if settlement is not reached it will pursue its claims through
litigation. Because of the highly technical nature of the issues
involved and their classified status and because of the
significant disagreement between the company and the
U.S. Government as to the U.S. Governments
theories of liability and damages (including a material
difference between the U.S. Governments damage
theories and the companys offer), final resolution of this
matter could take a considerable amount of time, particularly if
litigation should ensue. If the U.S. Government were to
pursue litigation and were to be ultimately successful on its
theories of liability and damages, which could be trebled under
the Federal False Claims Act, the effect upon the companys
consolidated financial position, results of operations, and cash
flows would materially exceed the amount provided by the
company. Based upon the information available to the company to
date, the company believes that it has substantive defenses but
can give no assurance that its views will prevail. Accordingly,
the ultimate disposition of this matter cannot presently be
determined.
Based upon the available information regarding matters that are
subject to U.S. Government investigations, other than as
set out above, the company does not believe, but can give no
assurance, that the outcome of any such matters would have a
material adverse effect on its consolidated financial position,
results of operations, or cash flows.
Litigation Various claims and legal
proceedings arise in the ordinary course of business and are
pending against the company and its properties. Based upon the
information available, the company does not believe that the
resolution of any of these various claims and legal proceedings
will have a material adverse effect on its consolidated
financial position, results of operations, or cash flows.
The company is a defendant in litigation brought by Cogent
Systems, Inc. (Cogent) in Los Angeles Superior Court in
California on April 20, 2005, for unspecified damages for
alleged unauthorized use of Cogent technology relating to
fingerprint recognition. During discovery in the second quarter
of 2006, Cogent asserted entitlement to in excess of
$50 million for lost profits, in excess of
$100 million for loss of goodwill and business
opportunities, in excess of $6 million in royalties,
doubling of actual damages and other amounts, including, without
limitation, attorneys fees. The trial date has been set
for May 22, 2007. The company does not believe, but can
give no assurance, that the outcome of this matter would have a
material adverse effect on its consolidated financial position,
results of operations, or cash flows.
On September 28, 2006, various individual plaintiffs filed
a class action lawsuit in the U.S. District Court, Central
District of California, against the company, certain of its
administrative and Board committees, all members of the
companys Board of Directors, and certain company officers
and employees (Waldbuesser, et al. v. Northrop Grumman
Corporation, et al.). The lawsuit alleges two alternative
counts of fiduciary duty breaches under the Employee Retirement
Income Security Act of 1974 (ERISA) with respect to alleged
excessive, hidden
and/or
otherwise improper fee and expense charges to the Northrop
Grumman Savings Plan and the Northrop Grumman Financial Security
and Savings Plan (both of which are 401(k) plans). Among other
things, the lawsuit seeks unspecified damages, removal of
individuals acting as fiduciaries to such plans, payment of
attorney fees and costs, and an accounting. The company does not
believe, but can give no assurance, that the outcome of this
-83-
NORTHROP
GRUMMAN CORPORATION
matter would have a material adverse effect on its consolidated
financial position, results of operations, or cash flows.
On January 3, 2007, a class action lawsuit was filed in the
U.S. District Court, Central District of California,
against the company, certain of its administrative and Board
committees, certain members of its Board of Directors, and
certain company officers and employees (Heidecker v.
Northrop Grumman Corporation, et al.). The lawsuit alleges
two alternative counts of fiduciary duty breaches under ERISA
with respect to the investment and administrative management of
the Northrop Grumman Savings Plan, including allegations of
excessive, hidden
and/or
otherwise improper fee and expense charges. Among other things,
the lawsuit seeks unspecified damages, removal of individuals
acting as fiduciaries to such plans, payment of attorney fees
and costs, and an accounting. The company does not believe, but
can give no assurance, that the outcome of this matter would
have a material adverse effect on its consolidated financial
position, results of operations, or cash flows.
Insurance Recovery Property damage from
Hurricane Katrina is covered by the companys comprehensive
property insurance program. The insurance provider for coverage
of property damage losses over $500 million has advised
management of a disagreement regarding coverage for certain
losses above $500 million. As a result, the company has
taken legal action against the insurance provider as the company
believes that its insurance policies are enforceable and intends
to pursue all of its available rights and remedies. However,
based on the current status of the assessment and claim process,
no assurances can be made as to the ultimate outcome of this
matter.
|
|
16.
|
COMMITMENTS
AND CONTINGENCIES
|
Contract Performance Contingencies Contract
profit margins may include estimates of costs not contractually
agreed to between the customer and the company for matters such
as contract changes, negotiated settlements, claims and requests
for equitable adjustment for previously unanticipated contract
costs. These estimates are based upon managements best
assessment of the underlying causal events and circumstances,
and are included in determining contract profit margins to the
extent of expected recovery based on contractual entitlements
and the probability of successful negotiation with the customer.
As of December 31, 2006, the amounts are not material
individually or in the aggregate.
Environmental Matters In accordance with
company policy on environmental remediation, the estimated cost
to complete remediation has been accrued where it is probable
that the company will incur such costs in the future to address
environmental impacts at currently or formerly owned or leased
operating facilities, or at sites where it has been named a
Potentially Responsible Party (PRP) by the Environmental
Protection Agency, or similarly designated by other
environmental agencies. To assess the potential impact on the
companys consolidated financial statements, management
estimates the total reasonably possible remediation costs that
could be incurred by the company, taking into account currently
available facts on each site as well as the current state of
technology and prior experience in remediating contaminated
sites. These estimates are reviewed periodically and adjusted to
reflect changes in facts and technical and legal circumstances.
Management estimates that at December 31, 2006, the range
of reasonably possible future costs for environmental
remediation sites is $224 million to $319 million, of
which $257 million is accrued in other current liabilities.
Factors that could result in changes to the companys
estimates include: modification of planned remedial actions,
increase or decrease in the estimated time required to
remediate, discovery of more extensive contamination than
anticipated, changes in laws and regulations affecting
remediation requirements, results of efforts to determine
legally responsible parties, and improvements in remediation
technology. Should other PRPs not pay their allocable share of
remediation costs, the company may have to incur costs in
addition to those already estimated and accrued. Although
management cannot predict whether new information gained as
projects progress will materially affect the estimated liability
accrued, management does not anticipate that future remediation
expenditures will have a material adverse effect on the
companys financial position, results of operations, or
cash flows.
-84-
NORTHROP
GRUMMAN CORPORATION
Income Tax Matters The company has exposure
related to income tax filings in the ordinary course of
business, including matters related to pre-acquisition periods
of acquired businesses. The company periodically assesses these
exposures for all tax years that are open under the applicable
statute of limitations and records a liability, including
related interest charges, where it has determined that a
liability has been incurred and the amount of the loss can be
reasonably estimated. Based upon the information available,
management does not believe that the resolution of any of these
income tax exposures will have a material adverse effect on the
companys consolidated financial position or results of
operations.
Co-Operative Agreements In 2003, Ships
executed agreements with the states of Mississippi and Louisiana
whereby Ships leases facility improvements and equipment from
Mississippi and from a non-profit economic development
corporation in Louisiana in exchange for certain commitments by
Ships to these states.
As of December 31, 2006, Ships has met its obligations
under the Mississippi agreement and remains obligated under the
Louisiana agreement to maintain a minimum average of
5,200 full-time employees at the end of any four-year
period occurring between January 1, 2003, and
December 31, 2010, upon assembly and installation of
certain equipment.
Failure by Ships to meet the Louisiana commitment would result
in reimbursement by Ships to Louisiana in accordance with the
agreement. As of December 31, 2006, Ships expects that all
future commitments under the Louisiana agreement will be met
based on its most recent Ships business plan.
Financial Arrangements In the ordinary course
of business, the company uses standby letters of credit and
guarantees issued by commercial banks and surety bonds issued by
insurance companies principally to guarantee the performance on
certain contracts and to support the companys self-insured
workers compensation plans. At December 31, 2006,
there were $460 million of unused stand-by letters of
credit, $152 million of bank guarantees, and
$615 million of surety bonds outstanding.
In December 2006, the company guaranteed a $200 million
loan made to Ship Systems in connection with the Gulf
Opportunity Zone Industrial Revenue Bonds. Under the loan
agreement the company guaranteed repayment by Ship Systems of
the principal and interest to the Trustee. The company also
guaranteed payment of the principal and interest by the Trustee
to the underlying bondholders. See Note 13.
Indemnifications The company has retained
certain warranty, environmental, income tax, and other
liabilities in connection with certain divestitures. Except as
discussed in the following paragraph, the settlement of these
liabilities is not expected to have a material effect on the
companys consolidated financial position, results of
operations, or cash flows.
In May 2006, Goodrich Corporation (Goodrich) notified the
company of its claims under indemnities assumed by the company
in its December 2002 acquisition of TRW that related to the sale
by TRW of its Aeronautical Systems business in October 2002.
Goodrich seeks relief from increased costs and other damages of
approximately $118 million. The parties are engaged in
discussions to enable the company to evaluate the merits of the
claims as well as to assess the amounts being claimed. If the
parties are unable to reach a negotiated resolution of the
claims, Goodrich will have the right to commence litigation and
may seek significant additional damages relating to allegations
of other incurred costs and lost profits. The ultimate
disposition of any litigation could take an extended period of
time due to the nature of the claims. The company does not have
sufficient information to assess the probable outcome of the
disposition of this matter. If Goodrich were to pursue
litigation and ultimately be successful on its claims, the
effect upon the companys consolidated financial position,
results of operations, and cash flows could be material.
U.S. Government Claims During the second
quarter of 2006, the U.S. Government advised the company of
claims and penalties concerning certain potential disallowed
costs. The parties are engaged in discussions to enable the
company to evaluate the merits of these claims as well as to
assess the amounts being claimed. The company does not believe,
but can give no assurance, that the outcome of any such matters
would have a material adverse effect on its consolidated
financial position, results of operations, or cash flows.
-85-
NORTHROP
GRUMMAN CORPORATION
Operating Leases Rental expense for operating
leases, excluding discontinued operations, was $549 million
in 2006, $512 million in 2005, and $454 million in
2004. These amounts are net of immaterial amounts of sublease
rental income. Minimum rental commitments under long-term
noncancellable operating leases as of December 31, 2006,
total approximately $1.9 billion, which are payable as
follows: 2007 $420 million; 2008
$337 million; 2009 $263 million;
2010 $208 million; 2011
$149 million; and thereafter $543 million.
Related Party Transactions For all periods
presented, the company had no material related party
transactions.
|
|
17.
|
IMPACT
FROM HURRICANE KATRINA
|
During the third quarter of 2005, the companys operations
in the Gulf Coast area of the U.S. were significantly
impacted by Hurricane Katrina. As a result of the hurricane, the
Ships segment suffered property damage, contract cost growth,
and work delays.
As of December 31, 2006, management estimates that the
costs to
clean-up and
restore its operations will total approximately
$850 million, which includes $590 million to repair or
replace assets damaged by the storm. Substantially all of the
estimated cost is expected to be recovered through the
companys comprehensive property damage insurance. As of
December 31, 2006, the company had received
$344 million in insurance proceeds.
Through December 31, 2006, the company has expended
$393 million in cash to
clean-up and
restore its facilities, including $192 million in capital
expenditures. During 2006 and 2005, the company incurred
clean-up and
restoration costs of $100 million and $101 million and
capital expenditures of $111 million and $81 million,
respectively. As of December 31, 2006, the company has
written off $98 million in assets that were completely
destroyed by the storm, of which $37 million was written
off during 2006. During 2005, the company recorded a pre-tax
adjustment to reduce the earned margin on its contracts in
process by $150 million ($98 million after-tax) to
recognize the effects of hurricane-related contract cost growth.
The company has submitted estimated expenditures for recovery to
its insurance carriers that are substantially in excess of the
insurance proceeds received to date, and is awaiting resolution
of its submissions. The company is continuing to assess its
damage estimates as the process of repairing its operations is
performed. The company estimates this process will continue
through 2008.
The companys comprehensive property insurance includes
coverage for business interruption effects caused by the storm,
however, the company is unable to currently estimate the amount
of any recovery or the period in which its claims related to
business interruption will be resolved. Accordingly, no such
amounts have been recognized by the company in the accompanying
consolidated financial statements.
In accordance with cost accounting regulations relating to
U.S. Government contractors, recovery of property damages
in excess of the net book value of the damaged assets as well as
losses on property damage that are not recovered through
insurance are required to be included in the companys
overhead pools and allocated to current contracts under a
systematic process. The company is currently in discussions with
its government customers regarding the allocation methodology to
be used to account for these differences. Depending upon the
outcome of these discussions and the ultimate resolution of the
companys damage claims with its insurance providers, the
company may be required to recognize additional cost growth on
its contracts and cumulative downward adjustment to its contract
profit rates at a future date.
The insurance provider for coverage of damages over
$500 million advised management of a disagreement regarding
coverage of losses in excess of $500 million, and this
matter is currently being litigated by the company as described
in Note 15. The company believes that its insurance
policies are enforceable and intends to pursue all of its
available rights and remedies. However, based on the current
status of the litigation between the company and its insurance
provider, no assurances can be made as to the ultimate outcome
of this matter. To the extent that its insurance recoveries are
inadequate to fund the repair and restoration costs that the
company deems necessary, the company will pursue other means for
funding the shortfall, including funding from its current
operations.
-86-
NORTHROP
GRUMMAN CORPORATION
Plan
Descriptions
Pension Benefits The company sponsors several
defined benefit pension plans in the U.S. covering
approximately 95 percent of its employees. Pension benefits
for most employees are based on the employees years of
service and compensation. It is the policy of the company to
fund at least the minimum amount required for all qualified
plans, using actuarial cost methods and assumptions acceptable
under U.S. Government regulations, by making payments into
benefit trusts separate from the company. The pension benefit
for most employees is based upon criteria whereby employees earn
age and service points over their employment period. Nine of the
companys 21 domestic qualified plans, which cover more
than 60 percent of all employees, were in a legally defined
full-funding limitation status at December 31, 2006.
Defined Contribution Plans The company also
sponsors 401(k) defined contribution plans in which most
employees are eligible to participate. Company contributions for
most plans are based on a cash matching of employee
contributions up to 4 percent of compensation. Certain
hourly employees are covered under a target benefit plan. The
company also participates in a multiemployer plan for certain of
the companys union employees. The companys
contributions to these plans for the years ended
December 31, 2006, 2005, and 2004, were $266 million,
$248 million and $219 million respectively.
Non-U.S. Benefit
Plans The company sponsors several benefit plans
for
non-U.S. employees.
These plans are designed to provide benefits appropriate to
local practice and in accordance with local regulations. Some of
these plans are funded using benefit trusts separate from the
company.
Medical and Life Benefits The company
provides a portion of the costs for certain health care and life
insurance benefits for a substantial number of its active and
retired employees. Covered employees achieve eligibility to
participate in these contributory plans upon retirement from
active service if they meet specified age and years of service
requirements. Qualifying dependents are also eligible for
medical coverage. Approximately 65 percent of the
companys current retirees participate in the medical
plans. The company reserves the right to amend or terminate the
plans at any time. In November 2006, the company adopted plan
amendments and communicated to plan participants that it would
cap the amount of its contributions to substantially all of its
remaining post retirement medical and life benefit plans that
were previously not subject to limits on the companys
contributions. Premiums charged for medical coverage are based
on age and years of service and are adjusted annually for
changes in the cost of the plans as determined by an independent
actuary.
In addition to this medical inflation cost-sharing feature, the
plans also have provisions for deductibles, co-payments,
coinsurance percentages,
out-of-pocket
limits, conformance to a schedule of reasonable fees, the use of
managed care providers, and maintenance of benefits with other
plans. The plans also provide for a Medicare carve-out, and a
maximum lifetime benefit of $2 million per covered
individual. It is the policy of the company to fund the maximum
amount deductible for income tax purposes utilizing Voluntary
Employees Beneficiary Association (VEBA) trusts for
payment of benefits. The change in benefits announced in
November 2006 reduced benefit costs by approximately
$17 million in 2006. In addition, this change reduced the
companys aggregate benefit obligation by approximately
$465 million at December 31, 2006. Subsequent to
January 1, 2005 (or earlier at some sectors), newly hired
employees are not eligible for post employment medical and life
benefits.
The Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (Act) introduced a prescription drug benefit under
Medicare Part D as well as a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is
at least actuarially equivalent to Medicare Part D. During
the third quarter of 2004, the company recorded the effects of
the Act retroactively to January 1, 2004, in accordance
with the guidelines of FSP
FAS 106-2
Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003. The effect of the Medicare prescription drug subsidy
on the companys net periodic postretirement benefit cost
for the years ended December 31, 2006, 2005 and 2004, was a
reduction of $26 million, $36 million and
$17 million, respectively. The reduction in the accumulated
postretirement benefit
-87-
NORTHROP
GRUMMAN CORPORATION
obligation as a result of the subsidy is $76 million as of
December 31, 2006, and $225 million as of
December 31, 2005, based on the impact of the subsidy on
the eligible plans.
Summary
Plan Results
The cost to the company of its retirement benefit plans in each
of the three years ended December 31 is shown in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical and
|
|
|
|
Pension Benefits
|
|
|
Life Benefits
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Components of Net Periodic
Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
755
|
|
|
$
|
675
|
|
|
$
|
564
|
|
|
$
|
69
|
|
|
$
|
66
|
|
|
$
|
56
|
|
Interest cost
|
|
|
1,159
|
|
|
|
1,091
|
|
|
|
1,050
|
|
|
|
183
|
|
|
|
183
|
|
|
|
175
|
|
Expected return on plan assets
|
|
|
(1,572
|
)
|
|
|
(1,468
|
)
|
|
|
(1,378
|
)
|
|
|
(52
|
)
|
|
|
(49
|
)
|
|
|
(46
|
)
|
Amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
35
|
|
|
|
53
|
|
|
|
51
|
|
|
|
(16
|
)
|
|
|
(1
|
)
|
|
|
|
|
Net loss from previous years
|
|
|
91
|
|
|
|
59
|
|
|
|
55
|
|
|
|
31
|
|
|
|
27
|
|
|
|
7
|
|
Curtailment gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
Special termination benefits cost
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
468
|
|
|
$
|
410
|
|
|
$
|
350
|
|
|
$
|
215
|
|
|
$
|
213
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth the funded status and amounts
recognized in the consolidated statements of financial position
for the companys defined-benefit pension and retiree
health care and life insurance benefit plans. Pension benefits
data include the qualified plans as well as 21 domestic unfunded
non-qualified plans for benefits provided to directors,
officers, and employees either beyond those provided by, or
payable under, the companys qualified plans. The company
uses a December 31 measurement date for all of its plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical and
|
|
|
|
Pension Benefits
|
|
|
Life Benefits
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Change in Benefit
Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
20,692
|
|
|
$
|
19,338
|
|
|
$
|
3,341
|
|
|
$
|
3,223
|
|
Service cost
|
|
|
755
|
|
|
|
675
|
|
|
|
69
|
|
|
|
66
|
|
Interest cost
|
|
|
1,159
|
|
|
|
1,091
|
|
|
|
183
|
|
|
|
183
|
|
Plan participants
contributions
|
|
|
29
|
|
|
|
18
|
|
|
|
88
|
|
|
|
86
|
|
Plan amendments
|
|
|
40
|
|
|
|
1
|
|
|
|
(464
|
)
|
|
|
(71
|
)
|
Actuarial (gain) loss
|
|
|
(119
|
)
|
|
|
676
|
|
|
|
(64
|
)
|
|
|
144
|
|
Benefits paid
|
|
|
(1,112
|
)
|
|
|
(1,055
|
)
|
|
|
(281
|
)
|
|
|
(290
|
)
|
Acquisitions, divestitures,
transfers and other
|
|
|
40
|
|
|
|
(52
|
)
|
|
|
(5
|
)
|
|
|
|
|
Benefit obligation at end of year
|
|
|
21,484
|
|
|
|
20,692
|
|
|
|
2,867
|
|
|
|
3,341
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
|
18,867
|
|
|
|
17,720
|
|
|
|
780
|
|
|
|
754
|
|
Gain on plan assets
|
|
|
2,444
|
|
|
|
1,758
|
|
|
|
95
|
|
|
|
39
|
|
Employer contributions
|
|
|
1,157
|
|
|
|
415
|
|
|
|
198
|
|
|
|
191
|
|
Plan participants
contributions
|
|
|
29
|
|
|
|
18
|
|
|
|
88
|
|
|
|
86
|
|
Benefits paid
|
|
|
(1,112
|
)
|
|
|
(1,055
|
)
|
|
|
(281
|
)
|
|
|
(290
|
)
|
Acquisitions, divestitures,
transfers and other
|
|
|
22
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
|
21,407
|
|
|
|
18,867
|
|
|
|
880
|
|
|
|
780
|
|
Funded status
|
|
$
|
(77
|
)
|
|
$
|
(1,825
|
)
|
|
$
|
(1,987
|
)
|
|
$
|
(2,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-88-
NORTHROP
GRUMMAN CORPORATION
Effective December 31, 2006, the company adopted
SFAS No. 158, which requires the recognition of the
funded status of a defined benefit pension or postretirement
plan in the consolidated statements of financial position. On
adoption, the companys net unamortized benefit plan costs
of $1.2 billion (net of tax of $838 million) was
recorded as an adjustment to shareholders equity in
accumulated other comprehensive loss. This amount represents
previously unrecorded items to be amortized in the future to net
periodic benefit cost, as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Medical and
|
|
$ in millions
|
|
Benefits
|
|
|
Life Benefits
|
|
Amounts Recorded in Accumulated
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
1,877
|
|
|
$
|
545
|
|
Prior service cost and net
transition obligation
|
|
|
277
|
|
|
|
(515
|
)
|
Income tax benefits related to
above items
|
|
|
(890
|
)
|
|
|
(10
|
)
|
Unamortized benefit plan costs
|
|
$
|
1,264
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
Unamortized amounts not yet recognized in accumulated other
comprehensive loss at December 31, 2005, and prior to the
adoption of SFAS No. 158, were net actuarial losses
and a transition obligation of $3.6 billion and prior
service costs of $203 million. Amounts recognized in the
statement of financial position at December 31, 2005,
included a pension and postretirement benefits asset (prepaid
benefit cost and intangible pension asset) of $2.9 billion,
a pension and postretirement benefits liability (accrued retiree
benefits) of $3.7 billion, and accumulated other
comprehensive loss of $142 million (net of income taxes of
$92 million).
The following table shows those amounts expected to be
recognized in net periodic benefit cost in 2007:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Medical and
|
|
$ in millions
|
|
Benefits
|
|
|
Life Benefits
|
|
Amounts Expected to be
Recognized in 2007 Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
49
|
|
|
$
|
25
|
|
Prior service cost
|
|
|
39
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
The following table shows the incremental effect of applying
SFAS No. 158 on individual line items in the
consolidated statement of financial position at
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
|
|
|
After
|
|
|
|
Application of
|
|
|
Adjustments
|
|
|
Application of
|
|
$ in millions
|
|
SFAS No. 158
|
|
|
Dr (Cr)
|
|
|
SFAS No. 158
|
|
Incremental Impact of Applying
SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement
benefits asset
|
|
$
|
2,911
|
|
|
$
|
(1,562
|
)
|
|
$
|
1,349
|
|
Other current liabilities
|
|
|
(1,505
|
)
|
|
|
(109
|
)
|
|
|
(1,614
|
)
|
Non-current deferred tax
(liabilities) assets
|
|
|
(673
|
)
|
|
|
838
|
|
|
|
165
|
|
Pension and postretirement
benefits liability
|
|
|
(2,953
|
)
|
|
|
(349
|
)
|
|
|
(3,302
|
)
|
Accumulated Other Comprehensive
Loss
Unamortized benefit plan costs, net of tax
|
|
|
|
|
|
|
1,284
|
|
|
|
1,284
|
|
Additional minimum pension
liability
|
|
|
102
|
|
|
|
(102
|
)
|
|
|
|
|
Other
|
|
|
(24
|
)
|
|
|
|
|
|
|
(24
|
)
|
Total
|
|
|
78
|
|
|
|
1,182
|
|
|
|
1,260
|
|
Total assets
|
|
|
32,733
|
|
|
|
(724
|
)
|
|
|
32,009
|
|
Total liabilities
|
|
|
(14,936
|
)
|
|
|
(458
|
)
|
|
|
(15,394
|
)
|
Total shareholders equity
|
|
|
(17,797
|
)
|
|
|
1,182
|
|
|
|
(16,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit
pension plans was $19.4 billion and $18.7 billion at
December 31, 2006 and 2005, respectively.
-89-
NORTHROP
GRUMMAN CORPORATION
Amounts for pension plans with accumulated benefit obligations
in excess of fair value of plan assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
$ in millions
|
|
2006
|
|
|
2005
|
|
Projected benefit obligation
|
|
$
|
768
|
|
|
$
|
6,524
|
|
Accumulated benefit obligation
|
|
|
639
|
|
|
|
5,286
|
|
Fair value of plan assets
|
|
|
115
|
|
|
|
3,970
|
|
|
|
|
|
|
|
|
|
|
Plan
Assumptions
On a weighted-average basis, the following assumptions were used
to determine the benefit obligations and the net periodic
benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical and
|
|
|
|
Pension Benefits
|
|
|
Life Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Assumptions Used to Determine
Benefit Obligation at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
Rate of compensation increase
|
|
|
4.25
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
Initial health care cost trend
rate assumed for the next year
|
|
|
|
|
|
|
|
|
|
|
8.75
|
%
|
|
|
10.00
|
%
|
Rate to which the cost trend rate
is assumed to decline (the ultimate trend rate)
|
|
|
|
|
|
|
|
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the
ultimate trend rate
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
2010
|
|
Assumptions Used to Determine
Benefit Cost for the Year Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Expected long-term return on plan
assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
6.75
|
%
|
|
|
6.75
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
Initial health care cost trend
rate assumed for the next year
|
|
|
|
|
|
|
|
|
|
|
10.00
|
%
|
|
|
10.00
|
%
|
Rate to which the cost trend rate
is assumed to decline (the ultimate trend rate)
|
|
|
|
|
|
|
|
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the
ultimate trend rate
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The discount rate is determined by calculating, for the most
significant plans, the weighted-average yield available on a
portfolio of appropriately-rated corporate bonds whose proceeds
match the expected benefit payment stream from the plan.
The assumptions used for pension benefits are consistent with
those used for retiree medical and life insurance benefits. The
long-term rate of return on plan assets used for the medical and
life benefits are reduced to allow for the impact of tax on
expected returns as, unlike the pension trust, the earnings of
certain VEBA trusts are taxable.
Through consultation with investment advisors, expected
long-term returns for each of the plans strategic asset
classes were developed. Several factors were considered,
including survey of investment managers expectations,
current market data such as yields/price-earnings ratios, and
historical market returns over long periods. Using policy target
allocation percentages and the asset class expected returns, a
weighted-average expected return was calculated.
-90-
NORTHROP
GRUMMAN CORPORATION
Assumed health care trend rates have a significant effect on the
amounts reported for the health care plans. A
one-percentage-point change in the initial through the ultimate
health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
|
|
|
1-Percentage-
|
|
$ in millions
|
|
Point Increase
|
|
|
Point Decrease
|
|
Increase (Decrease) From Change
In Health Care Cost Trend Rates
|
|
|
|
|
|
|
|
|
Postretirement benefit expense
|
|
$
|
32
|
|
|
$
|
(26
|
)
|
Postretirement benefit liability
|
|
|
101
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
Plan
Assets and Investment Policy
Weighted-average asset allocations at December 31 by asset
category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan Assets
|
|
|
Medical and Life Benefits Plan Assets
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Equity securities
|
|
|
57
|
%
|
|
|
59
|
%
|
|
|
74
|
%
|
|
|
73
|
%
|
Debt securities
|
|
|
31
|
|
|
|
32
|
|
|
|
22
|
|
|
|
24
|
|
Real estate
|
|
|
4
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
Other
|
|
|
8
|
|
|
|
7
|
|
|
|
3
|
|
|
|
3
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets are invested in various asset classes that are
expected to produce a sufficient level of diversification and
investment return over the long term. The investment goals are
(1) to exceed the assumed actuarial rate of return over the
long term within reasonable and prudent levels of risk, and
(2) to preserve the real purchasing power of assets to meet
future obligations. Liability studies are conducted on a regular
basis to provide guidance in setting investment goals with an
objective to balance risk. Risk targets are established and
monitored against acceptable ranges.
All investment policies and procedures are designed to ensure
that the plans investments are in compliance with ERISA.
Guidelines are established defining permitted investments within
each asset class. Derivatives are used for transitioning assets,
asset class rebalancing, managing currency risk, and for
management of fixed income and alternative investments. The
investment policies for most of the pension plans require that
the asset allocation be maintained within the following ranges:
|
|
|
|
|
Asset Allocation Ranges
|
U.S. equity securities
|
|
30 40%
|
International equity securities
|
|
15 25%
|
Debt securities
|
|
25 35%
|
Real estate and other
|
|
10 20%
|
|
|
|
Current policies of the plans target an asset mix of
70 percent in total equity securities and 30 percent
in debt securities.
At December 31, 2006, and 2005, plan assets included
investments with non-readily determinable fair values, comprised
primarily of real estate, private equity, and hedge funds,
totaling $2.7 billion and $2 billion, respectively. At
December 31, 2006, and 2005, the pension trust and VEBA
trusts did not hold any Northrop Grumman common stock.
In 2007, the company expects to contribute approximately
$155 million to its pension plans and approximately
$217 million to its other postretirement benefit plans.
-91-
NORTHROP
GRUMMAN CORPORATION
It is not expected that any assets will be returned to the
company from the benefit plans during 2007.
Benefit
Payments
The following table reflects estimated benefit payments, based
upon the same assumptions used to measure the benefit
obligation, and include expected future employee service, as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Medical and Life Plans
|
|
|
|
Benefit
|
|
|
Benefit
|
|
|
Subsidy
|
|
$ in millions
|
|
Payments
|
|
|
Payments
|
|
|
receipts
|
|
Year Ending December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
1,113
|
|
|
$
|
204
|
|
|
$
|
9
|
|
2008
|
|
|
1,155
|
|
|
|
211
|
|
|
|
10
|
|
2009
|
|
|
1,206
|
|
|
|
217
|
|
|
|
10
|
|
2010
|
|
|
1,262
|
|
|
|
223
|
|
|
|
10
|
|
2011
|
|
|
1,321
|
|
|
|
226
|
|
|
|
9
|
|
2012 through 2016
|
|
|
7,681
|
|
|
|
1,168
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.
|
STOCK
COMPENSATION PLANS
|
Plan
Descriptions
At December 31, 2006, Northrop Grumman had stock-based
compensation awards outstanding under the following plans: the
2001 Long-Term Incentive Stock Plan (2001 LTISP), the 1993
Long-Term Incentive Stock Plan (1993 LTISP), both applicable to
employees, and the 1993 Stock Plan for Non-Employee Directors
(1993 SPND) and 1995 Stock Option Plan for Non-Employee
Directors (1995 SOPND). All of these plans were approved by the
companys shareholders.
Employee Plans The 2001 LTISP and the
1993 LTISP permit grants to key employees of three general types
of stock incentive awards: Stock Options, Stock Appreciation
Rights (SARs), and Stock Awards. Each Stock Option grant is made
with an exercise price either at the closing price of the stock
on the date of grant (market options) or at a premium over the
closing price of the stock on the date of grant (premium
options). Stock Options generally vest in 25 percent
increments over four years from the grant date under the 2001
LTISP and in years two to five under the 1993 LTISP. Under both
plans, options expire ten years after the grant date. No SARs
have been granted under either of the LTISPs. Stock Awards, in
the form of restricted performance stock rights and restricted
stock rights, are granted to key employees without payment to
the company. Under the 2001 LTISP, recipients of restricted
performance stock rights earn shares of stock, based on
financial metrics determined by the board of directors in
accordance with the plan, over a three-year performance period
with distributions made entirely at the end of the third year.
If the objectives have not been met at the end of the applicable
performance period, up to 100 percent of the original grant
for the eight highest compensated employees and up to
70 percent of the original grant for all other recipients
will be forfeited. If the financial metrics are met or exceeded
during the performance period, all recipients can earn up to
150 percent of the original grant. Restricted stock rights
issued under either plan generally vest after three years.
Termination of employment can result in forfeiture of some or
all of the benefits extended under the plan. Of the
50 million shares approved for issuance under the 2001
LTISP, approximately 20 million shares were available for
future grants as of December 31, 2006.
Non-Employee Plans Under the 1993 SPND,
half of the retainer fee earned by each director is paid in
shares of common stock. In addition, directors may defer payment
of all or part of the remaining retainer fee, which is placed in
a stock unit account until the conclusion of board service. The
1995 SOPND provided for annual stock option grants. Effective
June 1, 2005, no new grants have been issued from this
plan. Each grant of stock options under the 1995 SOPND was made
at the closing market price on the date of the grant, was
immediately exercisable, and expires ten years after the grant
date. At December 31, 2006, approximately
318,000 shares were
-92-
NORTHROP
GRUMMAN CORPORATION
available for future grants under the 1995 SOPND and
45,920 shares were available for future use under the 1993
SPND.
Adoption
of New Standard
Prior to January 1, 2006, the company applied Accounting
Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees and related interpretations in
accounting for awards made under the companys stock-based
compensation plans. Stock Options granted under the plans had an
exercise price equal to or greater than the market value of the
common stock on the date of the grant, and accordingly, no
compensation expense was recognized. Stock Awards were valued at
their fair market value measured at the date of grant, updated
periodically using the
mark-to-market
method, and compensation expense was recognized over the vesting
period of the award.
Effective January 1, 2006, the company adopted the
provisions of SFAS No. 123R Share-Based
Payment (SFAS No. 123R), using the
modified-prospective transition method. Under this transition
method, compensation expense recognized during the year ended
December 31, 2006, included: (a) compensation expense
for all share-based awards granted prior to, but not yet vested
as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123 Accounting for Stock-Based
Compensation (SFAS No. 123), and
(b) compensation expense for all share-based awards granted
or modified on or after January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of
SFAS No. 123R. In accordance with the
modified-prospective transition method, results for prior
periods have not been restated. All of the companys stock
award plans are considered equity plans under
SFAS No. 123R, and compensation expense recognized as
previously described is net of estimated forfeitures of share
based awards over the vesting period. The effect of adopting
SFAS No. 123R was not material to the companys
income from continuing operations and net income for the year
ended December 31, 2006, and the cumulative effect of
adoption using the modified-prospective transition method was
similarly not material.
Compensation
Expense
Total stock-based compensation for the years ended
December 31, 2006, 2005, and 2004, was $202 million,
$180 million, and $178 million, respectively, of which
$11 million, $4 million, and $4 million related
to Stock Options and $191 million, $176 million, and
$174 million related to Stock Awards, respectively. Tax
benefits recognized in the consolidated statements of income for
stock-based compensation during the years ended
December 31, 2006, 2005, and 2004, were $71 million,
$63 million, and $62 million, respectively. In
addition, the company realized excess tax benefits of
$52 million from the exercise of Stock Options and
$5 million from the vesting of Stock Awards in 2006.
SFAS 123R requires that cash flows resulting from excess
tax benefits be classified as financing cash flows in the
accompanying consolidated statements of cash flows.
Effective January 1, 2006, compensation expense for
restricted performance stock rights is estimated based on the
grant date fair value and recognized over the vesting period.
The fixed 30 percent minimum distribution portion for all
but the eight highest compensated employees is measured at the
grant date fair value and the variable portion is adjusted to
the expected distribution at the end of each accounting period.
Compensation expense for restricted stock rights is measured at
the grant date fair value and recognized over the vesting period.
Accelerated Vesting On May 16, 2005, in
connection with an evaluation of the companys overall
incentive compensation strategy, the Compensation and Management
Development Committee of the companys board of directors
approved accelerating the vesting for all outstanding unvested
employee Stock Options (excluding options held by elected
officers), effective September 30, 2005. As part of its
evaluation, management considered the amount of compensation
expense that would otherwise have been recognized in the
companys results of operations upon the adoption of
SFAS No. 123R. The accelerated options had a weighted
average exercise price of $51 with original vesting dates
through April 2009. The charge associated with the acceleration
of vesting was not material.
-93-
NORTHROP
GRUMMAN CORPORATION
Stock
Options
The fair value of each of the companys Stock Option awards
is estimated on the date of grant using a Black-Scholes
option-pricing model that uses the assumptions noted in the
table below. The fair value of the companys Stock Option
awards is expensed on a straight-line basis over the vesting
period of the options, which is generally four years. Expected
volatility is based on an average of (1) historical
volatility of the companys stock and (2) implied
volatility from traded options on the companys stock. The
risk-free rate for periods within the contractual life of the
Stock Option award is based on the yield curve of a zero-coupon
U.S. Treasury bond on the date the award is granted with a
maturity equal to the expected term of the award. The company
uses historical data to estimate forfeitures. The expected term
of awards granted is derived from historical experience under
the companys stock-based compensation plans and represents
the period of time that awards granted are expected to be
outstanding.
The significant weighted average assumptions relating to the
valuation of the companys Stock Options for the years
ended December 31, 2006, 2005, and 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Dividend yield
|
|
|
1.6
|
%
|
|
|
1.8
|
%
|
|
|
1.5
|
%
|
Volatility rate
|
|
|
25
|
%
|
|
|
28
|
%
|
|
|
34
|
%
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
4.0
|
%
|
|
|
4.1
|
%
|
Expected option life (years)
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
The weighted average grant date fair value of Stock Options
granted during the years ended December 31, 2006, 2005, and
2004, was $17, $15, and $18 per share, respectively.
Stock Option activity for the year ended December 31, 2006,
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
($ in millions)
|
|
Under Option
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
Outstanding at January 1,
2006
|
|
|
27,817,816
|
|
|
$
|
48
|
|
|
|
5.5 years
|
|
|
$
|
329
|
|
Granted
|
|
|
833,080
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8,704,396
|
)
|
|
|
48
|
|
|
|
|
|
|
|
|
|
Cancelled and forfeited
|
|
|
(58,559
|
)
|
|
|
45
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2006
|
|
|
19,887,941
|
|
|
$
|
49
|
|
|
|
5.0 years
|
|
|
$
|
367
|
|
Vested and expected to vest in the
future at December 31, 2006
|
|
|
19,825,393
|
|
|
$
|
49
|
|
|
|
4.9 years
|
|
|
$
|
366
|
|
Exercisable at December 31,
2006
|
|
|
18,579,751
|
|
|
$
|
49
|
|
|
|
4.7 years
|
|
|
$
|
356
|
|
Available for grant at
December 31, 2006
|
|
|
12,669,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the years
ended December 31, 2006, 2005, and 2004, was
$149 million, $50 million, and $54 million,
respectively. Intrinsic value is measured using the fair market
value at the date of exercise (for options exercised) or at
December 31, 2006 (for outstanding options), less the
applicable exercise price.
Stock Awards The fair value of Stock Awards
is determined based on the closing market price of the
companys common stock on the grant date. Compensation
expense for Stock Awards is measured at the grant date and
recognized over the vesting period. For purposes of measuring
compensation expense, the amount of shares ultimately expected
to vest is estimated at each reporting date based on
managements expectations regarding the relevant
performance criteria. In the table below, the share adjustment
resulting from the final performance measure is considered
granted in the period that the related grant is vested. There
were 1.9 million and 1 million Stock Awards that
vested in the years ended December 31, 2005, and 2004,
respectively, with a total fair value of
-94-
NORTHROP
GRUMMAN CORPORATION
$104 million and $53 million, respectively. There were
2.3 million and 126,900 Stock Awards granted during the
years ended December 31, 2005, and 2004, respectively, with
a weighted average grant date fair value of $54 and $52 per
share, respectively.
Stock Award activity for the year ended December 31, 2006,
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
Stock
|
|
|
Grant Date
|
|
|
Remaining
|
|
|
|
Awards
|
|
|
Fair Value
|
|
|
Contractual Term
|
|
Outstanding at January 1,
2006
|
|
|
5,785,918
|
|
|
$
|
53
|
|
|
|
0.9 years
|
|
Granted (including performance
adjustment on shares vested)
|
|
|
4,245,079
|
|
|
|
63
|
|
|
|
|
|
Vested
|
|
|
(2,394,325
|
)
|
|
|
55
|
|
|
|
|
|
Forfeited
|
|
|
(272,445
|
)
|
|
|
55
|
|
|
|
|
|
Outstanding at
December 31, 2006
|
|
|
7,364,227
|
|
|
$
|
57
|
|
|
|
1.3 years
|
|
Available for grant at
December 31, 2006
|
|
|
7,137,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized Compensation Expense At
December 31, 2006, there was $239 million of
unrecognized compensation expense related to unvested awards
granted under the companys stock-based compensation plans,
of which $16 million relates to Stock Options and
$223 million relates to Stock Awards. These amounts are
expected to be charged to expense over a weighted-average period
of 2 years.
Pro-forma Compensation Expense Had
compensation expense for the years ended December 31, 2005,
and 2004, been determined based on the fair value at the grant
dates for Stock Awards and Stock Options, consistent with
SFAS No. 123, net income, basic earnings per share,
and diluted earnings per share would have been as shown in the
table below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$ in millions, except per
share
|
|
2005
|
|
|
2004
|
|
Net Income as
Reported
|
|
$
|
1,400
|
|
|
$
|
1,084
|
|
Stock-based compensation, net of
tax, included in net income as reported
|
|
|
117
|
|
|
|
115
|
|
Stock-based compensation, net of
tax, that would have been included in net income, if the fair
value method had been applied to all awards
|
|
|
(196
|
)
|
|
|
(140
|
)
|
Pro-forma net income using the
fair value method
|
|
$
|
1,321
|
|
|
$
|
1,059
|
|
Basic Earnings Per
Share
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
3.93
|
|
|
$
|
3.01
|
|
Pro-forma
|
|
$
|
3.71
|
|
|
$
|
2.94
|
|
Diluted Earnings Per
Share
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
3.85
|
|
|
$
|
2.97
|
|
Pro-forma
|
|
$
|
3.64
|
|
|
$
|
2.90
|
|
|
|
20.
|
DERIVATIVE
FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
|
All derivative financial instruments are recognized as assets or
liabilities in the financial statements and measured at fair
value. Changes in the fair value of derivative financial
instruments that qualify and are designated as fair value hedges
are required to be recorded in income from continuing
operations, while changes in the fair value of derivative
financial instruments that qualify and are designated as cash
flow hedges are recorded as other comprehensive income.
The company uses derivative financial instruments to manage its
exposure to interest rate risk and to balance its fixed and
variable rate long-term debt portfolio. The company does not use
derivative financial instruments for trading purposes, nor does
it use leveraged financial instruments. Credit risk related to
derivative financial
-95-
NORTHROP
GRUMMAN CORPORATION
instruments is considered minimal and is managed by requiring
high credit standards for its counterparties and periodic
settlements.
During 2004, the company entered into two interest rate swap
agreements designed to convert fixed rates associated with
long-term debt obligations to floating rates. These interest
rate swaps each hedge a $200 million notional amount of
U.S. dollar fixed rate debt, and mature on October 15,
2009, and February 15, 2011, respectively.
These swap agreements hedge the companys risk related to
changes in interest rates on the fair value of the
companys fixed rate debt. The critical terms of the
interest rate swaps are aligned with those of the hedged items
and the swaps are accounted for as fair value hedges. Any
changes in the fair value of the swaps are offset by an equal
and opposite change in the fair value of the hedged item,
therefore there is no net impact to the companys reported
results of operations. The aggregate net fair value of the swaps
at December 31, 2006, and 2005, was a liability of
approximately $8 million, and $7 million,
respectively, which were included in Other long-term
liabilities in the accompanying consolidated statements of
financial position.
|
|
21.
|
UNAUDITED
SELECTED QUARTERLY DATA
|
Unaudited quarterly financial results are set forth in the
following tables together with dividend and common stock price
data. The companys common stock is traded on the New York
Stock Exchange (trading symbol NOC). This unaudited quarterly
information is labeled using a calendar convention; that is,
first quarter is consistently labeled as ended on March 31,
second quarter as ended on June 30, and third quarter as
ended on September 30. It is our long-standing practice to
establish actual interim closing dates using a
fiscal calendar, which requires our businesses to
close their books on a Friday, in order to normalize the
potentially disruptive effects of quarterly closings on business
processes. The effects of this practice only exist within a
reporting year.
2006
Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions, except per
share
|
|
1st Qtr
|
|
|
2nd Qtr
|
|
|
3rd Qtr
|
|
|
4th Qtr
|
|
Sales and service revenues
|
|
$
|
7,093
|
|
|
$
|
7,601
|
|
|
$
|
7,433
|
|
|
$
|
8,021
|
|
Operating margin
|
|
|
604
|
|
|
|
682
|
|
|
|
546
|
|
|
|
622
|
|
Income from continuing operations
|
|
|
362
|
|
|
|
442
|
|
|
|
306
|
|
|
|
457
|
|
Net income
|
|
|
358
|
|
|
|
430
|
|
|
|
302
|
|
|
|
453
|
|
Basic earnings per share from
continuing operations
|
|
|
1.05
|
|
|
|
1.28
|
|
|
|
.89
|
|
|
|
1.32
|
|
Basic earnings per share
|
|
|
1.04
|
|
|
|
1.25
|
|
|
|
.88
|
|
|
|
1.31
|
|
Diluted earnings per share from
continuing operations
|
|
|
1.03
|
|
|
|
1.26
|
|
|
|
.87
|
|
|
|
1.29
|
|
Diluted earnings per share
|
|
|
1.02
|
|
|
|
1.23
|
|
|
|
.86
|
|
|
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Events In the first quarter of
2006, the company repurchased 11.6 million shares of its
outstanding common stock under the share repurchase program.
Also in the quarter, the company sold Interconnect for net cash
proceeds of $26 million and announced the strategic
decision to shut down the Enterprise Information Technology
business, reported within the Information Technology segment.
In the second quarter of 2006, the companys board of
directors approved a 15 percent increase to the quarterly
common stock dividend, from $.26 per share to $.30 per
share, beginning with the second quarter 2006 dividend. The
company sold Winchester for net cash proceeds of
$17 million. Also in the quarter, the company received
final approval from the U.S. Congress Joint Committee on
Taxation for the agreement previously reached with the Internal
Revenue Service regarding its audit of the companys B-2
program. As a result, the company recognized tax benefits of
$48 million. In addition, the company recorded pre-tax
forward loss provisions of $28 million and
$23 million, respectively, for the Airborne Self Protection
Integrated Suite II (ASPIS II) and Peace Eagle
fixed-price development contracts in the Electronics segment.
-96-
NORTHROP
GRUMMAN CORPORATION
In the third quarter of 2006, the company proposed a settlement
to the claims relating to certain microelectronic parts produced
by the Space and Electronics sector of former TRW Inc. and
recognized a pre-tax charge of $112.5 million.
In the fourth quarter of 2006, the companys board of
directors authorized the repurchase of up to $1.0 billion
of its outstanding common stock. During the quarter, the company
made a voluntary pre-funding payment to the companys
pension plans of $800 million. The company recorded pre-tax
forward loss provisions of $42 million for the Wedgetail
contract and $19 million for the Peace Eagle contract (both
under the MESA program) in the Electronics segment. The company
also sold its remaining shares of TRW Auto for $209 million
for a pre-tax gain of $111 million and entered into a
definitive agreement to acquire Essex Corporation for
approximately $600 million, including the assumption of
debt totaling $23 million and estimated transaction costs
of $14 million. In November the company repaid its senior
notes, totaling $690 million. Also during the fourth
quarter the company incurred debt related to the Gulf
Opportunity Zone Industrial Revenue Bonds of $200 million,
bearing interest at 4.55%, due December 1, 2028, with early
redemption on or after December 1, 2016.
2005
Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions, except per
share
|
|
1st Qtr
|
|
|
2nd Qtr
|
|
|
3rd Qtr
|
|
|
4th Qtr
|
|
Sales and service revenues
|
|
$
|
7,302
|
|
|
$
|
7,807
|
|
|
$
|
7,291
|
|
|
$
|
7,667
|
|
Operating margin
|
|
|
595
|
|
|
|
621
|
|
|
|
438
|
|
|
|
539
|
|
Income from continuing operations
|
|
|
398
|
|
|
|
369
|
|
|
|
291
|
|
|
|
334
|
|
Net income
|
|
|
409
|
|
|
|
367
|
|
|
|
293
|
|
|
|
331
|
|
Basic earnings per share from
continuing operations
|
|
|
1.10
|
|
|
|
1.03
|
|
|
|
.81
|
|
|
|
.94
|
|
Basic earnings per share
|
|
|
1.13
|
|
|
|
1.02
|
|
|
|
.82
|
|
|
|
.93
|
|
Diluted earnings per share from
continuing operations
|
|
|
1.08
|
|
|
|
1.01
|
|
|
|
.80
|
|
|
|
.93
|
|
Diluted earnings per share
|
|
|
1.11
|
|
|
|
1.00
|
|
|
|
.81
|
|
|
|
.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Events In the first quarter of
2005, the companys board of directors approved a
13 percent increase to the quarterly common stock dividend,
from $.23 per share to $.26 per share, beginning with
the second quarter 2005 dividend. The company repurchased
6.4 million shares of its outstanding common stock under
the share repurchase program. Also in the quarter, the company
acquired privately held Integic Corporation for
$319 million, sold 7.3 million shares of common stock
in TRW Auto for cash of $143 million, and sold Teldix GmbH
for $56 million. The company also paid $99 million
related to the settlement of the Robinson litigation.
In the second quarter of 2005, the company repurchased
2.8 million shares of its outstanding common stock under
the share repurchase program. The Compensation and Management
Development Committee of the companys board of directors
approved accelerating the vesting for all outstanding unvested
employee stock options (excluding options held by elected
officers), effective September 30, 2005.
In the third quarter of 2005, the companys operations in
the Gulf Coast area of the U.S. were significantly impacted
by Hurricane Katrina. The companys Ship Systems facilities
incurred significant damage from Hurricane Katrina due to
property damage, contract cost growth, and work delays. The
company recorded a $150 million pre-tax charge to earnings
that reduced operating margin to account for hurricane-related
cost growth and a $15 million pre-tax impact from
hurricane-related work delays in the Ships segment. Also in the
quarter, the company acquired privately held Confluent RF
Systems Corporation for $42 million, sold 2.1 million
shares of Endwave for cash of $81 million, and repurchased
3.5 million shares of its outstanding common stock.
In the fourth quarter of 2005, the companys board of
directors authorized the repurchase of up to $1.5 billion
of its outstanding common stock. Under this program, the company
entered into an agreement with Credit Suisse on November 4,
2005, to repurchase approximately 9.1 million shares of
common stock at an initial price of $55.15 per share for a
total of $500 million. During the quarter, the company
received $127 million of insurance proceeds for property
damage and
clean-up and
recovery costs related to Hurricane Katrina and made a
-97-
NORTHROP
GRUMMAN CORPORATION
voluntary pre-funding payment to the companys pension
plans of $203 million. The company recorded a
$65 million pre-tax charge in the Electronics segment for
the F-16 Block 60 fixed-price development program, and
recognized a $20 million net tax benefit primarily related
to the settlement of IRS appeals cases related to Alternative
Minimum Tax credits for tax years 1981 through 1996. The company
also sold its remaining 1.3 million shares of Endwave
common stock for cash of $14 million.
-98-
NORTHROP
GRUMMAN CORPORATION
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
No information is required in response to this item.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
The companys principal executive officer (Chairman and
Chief Executive Officer) and principal financial officer
(President and Chief Financial Officer) have evaluated the
companys disclosure controls and procedures as of
December 31, 2006, and have concluded that these controls
and procedures are effective to ensure that information required
to be disclosed by the company in the reports that it files or
submits under the Securities Exchange Act of 1934 (15 USC
§ 78a et seq) is recorded, processed, summarized, and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms. These disclosure
controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to
be disclosed by the company in the reports that it files or
submits is accumulated and communicated to management, including
the principal executive officer and the principal financial
officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control Over Financial Reporting
During the fourth quarter of 2006, no change occurred in the
companys internal control over financial reporting that
materially affected, or is likely to materially affect, the
companys internal control over financial reporting.
-99-
NORTHROP
GRUMMAN CORPORATION
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Northrop Grumman Corporation (the company)
prepared and is responsible for the consolidated financial
statements and all related financial information contained in
this Annual Report. This responsibility includes establishing
and maintaining effective internal control over financial
reporting. The companys internal control over financial
reporting was designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America.
To comply with the requirements of Section 404 of the
Sarbanes Oxley Act of 2002, the company designed and
implemented a structured and comprehensive assessment process to
evaluate its internal control over financial reporting across
the enterprise. The assessment of the effectiveness of the
companys internal control over financial reporting was
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Because of its
inherent limitations, a system of internal control over
financial reporting can provide only reasonable assurance and
may not prevent or detect misstatements. Management regularly
monitors its internal control over financial reporting, and
actions are taken to correct any deficiencies as they are
identified. Based on its assessment, management has concluded
that the companys internal control over financial
reporting is effective as of December 31, 2006.
Deloitte & Touche LLP issued an audit report dated
February 20, 2007, concerning managements assessment
of the companys internal control over financial reporting,
which is contained in this Annual Report. The companys
consolidated financial statements as of and for the year ended
December 31, 2006, have been audited by the independent
registered public accounting firm of Deloitte & Touche
LLP in accordance with the standards of the Public Company
Accounting Oversight Board (United States).
Chairman and Chief Executive Officer
President and Chief Financial Officer
February 20, 2007
-100-
NORTHROP
GRUMMAN CORPORATION
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Shareholders of
Northrop Grumman Corporation
Los Angeles, California
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that Northrop Grumman Corporation and
subsidiaries (the Company) maintained effective
internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
-101-
NORTHROP
GRUMMAN CORPORATION
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2006 of
the Company and our report dated February 20, 2007
expressed an unqualified opinion on those financial statements
and the financial statement schedule and included an explanatory
paragraph regarding the companys adoption of a new
accounting standard.
/s/ Deloitte &
Touche LLP
Los Angeles, California
February 20, 2007
-102-
NORTHROP
GRUMMAN CORPORATION
|
|
Item 9B.
|
Other
Information
|
No information is required in response to this item.
PART III
|
|
Item 10.
|
Directors,
Executive Officers, and Corporate Governance
|
Directors
The information as to Directors will be incorporated herein by
reference to the Proxy Statement for the 2007 Annual Meeting of
Stockholders to be filed within 120 days after the end of
the companys fiscal year.
Executive
Officers
The following individuals were the executive officers of the
company as of February 20, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Office Held
|
|
Since
|
|
|
Business Experience Last Five
Years
|
|
Ronald D. Sugar
|
|
|
58
|
|
|
Chairman and Chief Executive
Officer
|
|
|
2006
|
|
|
Chairman, Chief Executive Officer
and President (2003-2006); Prior to April 2003, Chief Executive
Officer and President; President and Chief Operating Officer
(2001-2003)
|
Jerry B. Agee
|
|
|
63
|
|
|
Corporate Vice President and
President, Mission Systems Sector
|
|
|
2005
|
|
|
Vice President and Deputy Sector
President, Mission Systems Sector (2004-2005); Prior to June
2004, Vice President and General Manager, Systems-Missile
Defense, Mission Systems Sector (2002-2004); Vice President and
General Manager, Intelligence Systems, Mission Systems Sector
(2000-2001)
|
Wesley G. Bush
|
|
|
45
|
|
|
President and Chief Financial
Officer
|
|
|
2006
|
|
|
Corporate Vice President and Chief
Financial Officer (2005-2006); Prior to February 2005, Corporate
Vice President and President, Space Technology Sector
(2003-2005); Corporate Vice President of Northrop Grumman
Corporation (2002-2003); Executive Vice President of TRW Inc.
and President and Chief Executive Officer of TRW Aeronautical
Systems (2001-2002)
|
James L. Cameron
|
|
|
49
|
|
|
Corporate Vice President and
President, Technical Services Sector
|
|
|
2006
|
|
|
Vice President and General Manager
of Defensive and Navigation Systems Divisions, Electronic
Systems Sector (2005); Prior to February 2005, Vice President
and General Manager, Defensive Systems Division, Electronic
Systems Sector (2003-2005); President, ITT Systems Defense Group
(2000-2003)
|
Kenneth N. Heintz
|
|
|
60
|
|
|
Corporate Vice President,
Controller and Chief Accounting Officer
|
|
|
2005
|
|
|
Independent Financial Consultant
(2004-2005); Prior to June 2004, Corporate Vice President,
Hughes Electronics Corporation (now The DIRECTV Group, Inc.
(2000-2004))
|
-103-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Office Held
|
|
Since
|
|
|
Business Experience Last Five
Years
|
|
Robert W. Helm
|
|
|
55
|
|
|
Corporate Vice President, Business
Development and Government Relations
|
|
|
1994
|
|
|
|
Alexis C. Livanos
|
|
|
58
|
|
|
Corporate Vice President and
President, Space Technology Sector
|
|
|
2005
|
|
|
Vice President and General Manager
of Systems Development and Technology and Space Sensors
Divisions, and Vice President and General Manager of Navigation
and Space Sensors Division, Electronic Systems Sector
(2003-2005); Prior to February 2003, Executive Vice President,
Boeing Satellite Systems (2000-2003)
|
Rosanne P. OBrien
|
|
|
63
|
|
|
Corporate Vice President,
Communications
|
|
|
2000
|
|
|
|
James R. ONeill
|
|
|
53
|
|
|
Corporate Vice President and
President, Information Technology Sector
|
|
|
2004
|
|
|
President, TASC, Inc. (2002-2004);
Prior to 2002, Senior Vice President and General Manager, Oracle
Services Industries
(2000-2002)
|
C. Michael Petters
|
|
|
47
|
|
|
Corporate Vice President and
President, Newport News Sector
|
|
|
2004
|
|
|
Vice President, Human Resources,
Administration and Trades, Newport News Sector
|
James F. Pitts
|
|
|
55
|
|
|
Corporate Vice President and
President, Electronic Systems Sector
|
|
|
2005
|
|
|
Vice President and General Manager
of Aerospace Systems Division, Electronic Systems Sector
|
James L. Sanford
|
|
|
61
|
|
|
Corporate Vice President and
Treasurer
|
|
|
2003
|
|
|
Vice President, Corporate
Contracts and Pricing
|
Scott J. Seymour
|
|
|
56
|
|
|
Corporate Vice President and
President, Integrated Systems Sector
|
|
|
2002
|
|
|
Vice President, Integrated Systems
Sector
|
Philip A. Teel
|
|
|
58
|
|
|
Corporate Vice President and
President, Ship Systems Sector
|
|
|
2005
|
|
|
Vice President, Airborne Early
Warning & Electronic Warfare Systems, Integrated
Systems Sector
|
W. Burks Terry
|
|
|
56
|
|
|
Corporate Vice President and
General Counsel
|
|
|
2000
|
|
|
|
Ian V. Ziskin
|
|
|
48
|
|
|
Corporate Vice President and Chief
Human Resources and Administrative Officer
|
|
|
2006
|
|
|
Corporate Vice President, Human
Resources and Leadership Strategy (2003-2005); Prior to June
2003, President and Founder, Executive Excellence Group
(2002-2003); Executive Vice President and Chief Human Resources
Officer, Qwest Communications International Inc. (2000-2002)
|
-104-
NORTHROP
GRUMMAN CORPORATION
Audit
Committee Financial Expert
The information as to the Audit Committee and the Audit
Committee Financial Expert is incorporated herein by reference
to the Proxy Statement for the 2007 Annual Meeting of
Stockholders to be filed within 120 days after the end of
the companys fiscal year.
Code of
Ethics
The company has adopted Standards of Business Conduct for all of
its employees, including the principal executive officer,
principal financial officer and principal accounting officer.
The Standards of Business Conduct can be found on the
companys internet web site at
www.northropgrumman.com under Investor
Relations Corporate Governance
Overview.
The web site and information contained on it or incorporated in
it are not intended to be incorporated in this Annual Report on
Form 10-K
or other filings with the SEC.
|
|
Item 11.
|
Executive
Compensation
|
Information concerning Executive Compensation will be
incorporated herein by reference to the Proxy Statement for the
2007 Annual Meeting of Stockholders to be filed within
120 days after the end of the companys fiscal year.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information as to Securities Authorized for Issuance Under
Equity Compensation Plans and Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
will be incorporated herein by reference to the Proxy Statement
for the 2007 Annual Meeting of Stockholders to be filed within
120 days after the end of the companys fiscal year.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information as to Certain Relationships and Related
Transactions, and Director Independence will be incorporated
herein by reference to the Proxy Statement for the 2007 Annual
Meeting of Stockholders to be filed within 120 days after
the end of the companys fiscal year.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information as to Principal Accountant Fees and Services
will be incorporated herein by reference to the Proxy Statement
for the 2007 Annual Meeting of Shareholders to be filed within
120 days after the end of the companys fiscal year.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a)
1. Report of Independent Registered Public Accounting Firm
on the Consolidated Financial Statements
Financial Statements
Consolidated Statements of Financial Position
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
-105-
NORTHROP
GRUMMAN CORPORATION
Consolidated Statements of Changes in Shareholders Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted either because they are not
applicable or not required or because the required information
is included in the financial statements or notes thereto.
Exhibits
|
|
|
|
|
|
|
|
3
|
(a)
|
|
Restated Certificate of
Incorporation of Northrop Grumman Corporation effective
May 18, 2006 (incorporated by reference to Exhibit 3.1
to
Form 8-K
dated May 16, 2006 and filed May 19, 2006)
|
|
3
|
(b)
|
|
Bylaws of Northrop Grumman
Corporation, as amended February 9, 2007 (incorporated by
reference to Exhibit 3.1 to
Form 8-K
dated February 9, 2007 and filed February 13, 2007)
|
|
4
|
(a)
|
|
Registration Rights Agreement
dated as of January 23, 2001, by and among Northrop Grumman
Systems Corporation, Northrop Grumman Corporation and Unitrin,
Inc. (incorporated by reference to Exhibit (d)(6) to Amendment
No. 4 to Schedule TO filed January 31, 2001)
|
|
4
|
(b)
|
|
Certificate of Designations,
Preferences and Rights of Series B Preferred Stock of
Northrop Grumman Corporation (incorporated by reference to
Exhibit C to the Definitive Proxy Statement on Schedule 14A
filed April 13, 2001)
|
|
4
|
(c)
|
|
Indenture dated as of
October 15, 1994, between Northrop Grumman Systems
Corporation and JPMorgan Chase Bank (formerly The Chase
Manhattan Bank), as trustee (incorporated by reference to
Exhibit 4.1 to
Form 8-K
dated October 20, 1994, and filed October 25, 1994)
|
|
4
|
(d)
|
|
Form of Officers Certificate
(without exhibits) establishing the terms of Northrop Grumman
Systems Corporations 7.75 percent Debentures due 2016
and 7.875 percent Debentures due 2026 (incorporated by
reference to Exhibit 4-3 to
Form S-4
Registration Statement
No. 333-02653
filed April 19, 1996)
|
|
4
|
(e)
|
|
Form of Northrop Grumman Systems
Corporations 7.75 percent Debentures due 2016
(incorporated by reference to Exhibit 4-5 to
Form S-4
Registration Statement
No. 333-02653
filed April 19, 1996)
|
|
4
|
(f)
|
|
Form of Northrop Grumman Systems
Corporations 7.875 percent Debentures due 2026
(incorporated by reference to Exhibit 4-6 to
Form S-4
Registration Statement
No. 333-02653
filed April 19, 1996)
|
|
4
|
(g)
|
|
Form of Officers Certificate
establishing the terms of Northrop Grumman Systems
Corporations 7.125 percent Notes due 2011 and
7.75 percent Debentures due 2031 (incorporated by reference
to Exhibit 10.9 to
Form 8-K
dated and filed April 17, 2001)
|
|
4
|
(h)
|
|
Indenture dated as of
November 21, 2001, between Northrop Grumman Corporation and
JPMorgan Chase Bank, as trustee (incorporated by reference to
Exhibit 4.1 to
Form 8-K
dated and filed November 21, 2001)
|
|
4
|
(i)
|
|
Indenture dated as of
April 13, 1998, between Litton Industries, Inc.
(predecessor-in-interest
to Northrop Grumman Systems Corporation) and The Bank of New
York, as trustee, under which its 6.75 percent Senior
Debentures due 2018 were issued (incorporated by reference to
Exhibit 4.1 to the
Form 10-Q
of Litton Industries, Inc. for the quarter ended April 30,
1998, and filed June 15, 1998)
|
|
4
|
(j)
|
|
Supplemental Indenture with
respect to Indenture dated April 13, 1998, dated as of
April 3, 2001, among Litton Industries, Inc.
(predecessor-in-interest
to Northrop Grumman Systems Corporation), Northrop Grumman
Corporation, Northrop Grumman Systems Corporation and The Bank
of New York, as trustee (incorporated by reference to
Exhibit 4.5 to
Form 10-Q
for the quarter ended March 31, 2001, filed May 10,
2001)
|
-106-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
4
|
(k)
|
|
Supplemental Indenture with
respect to Indenture dated April 13, 1998, dated as of
December 20, 2002, among Litton Industries, Inc.
(predecessor-in-interest
to Northrop Grumman Systems Corporation), Northrop Grumman
Corporation, Northrop Grumman Systems Corporation and The Bank
of New York, as trustee (incorporated by reference to
Exhibit 4(q) to
Form 10-K
for the year ended December 31, 2002, filed March 24,
2003)
|
|
4
|
(l)
|
|
Senior Indenture dated as of
December 15, 1991, between Litton Industries, Inc.
(predecessor-in-interest
to Northrop Grumman Systems Corporation) and The Bank of New
York, as trustee, under which its 7.75 percent and
6.98 percent debentures due 2026 and 2036 were issued and
specimens of such debentures (incorporated by reference to
Exhibit 4.1 to the
Form 10-Q
of Litton Industries, Inc. for the quarter ended April 30,
1996, filed June 11, 1996)
|
|
4
|
(m)
|
|
Supplemental Indenture with
respect to Indenture dated December 15, 1991, dated as of
April 3, 2001, among Litton Industries, Inc.
(predecessor-in-interest
to Northrop Grumman Systems Corporation), Northrop Grumman
Corporation, Northrop Grumman Systems Corporation and The Bank
of New York, as trustee (incorporated by reference to
Exhibit 4.7 to
Form 10-Q
for the quarter ended March 31, 2001, filed May 10,
2001)
|
|
4
|
(n)
|
|
Supplemental Indenture with
respect to Indenture dated December 15, 1991, dated as of
December 20, 2002, among Litton Industries, Inc.
(predecessor-in-interest
to Northrop Grumman Systems Corporation), Northrop Grumman
Corporation, Northrop Grumman Systems Corporation and The Bank
of New York, as trustee (incorporated by reference to
Exhibit 4(t) to
Form 10-K
for the year ended December 31, 2002, filed March 24,
2003)
|
|
4
|
(o)
|
|
Form of Exchange Security for the
$400,000,000 8 percent senior notes due 2009 of Litton
Industries, Inc.
(predecessor-in-interest
to Northrop Grumman Systems Corporation) (incorporated by
reference to Exhibit 4.3 to the
Form 10-Q
of Litton Industries, Inc. for the quarter ended April 30,
2000, filed June 9, 2000)
|
|
4
|
(p)
|
|
Indenture between TRW Inc. (now
named Northrop Grumman Space & Mission Systems Corp.)
and The Chase Manhattan Bank, as successor Trustee, dated as of
May 1, 1986 (incorporated by reference to Exhibit 2 to
the
Form 8-A
Registration Statement of TRW Inc. dated July 3, 1986)
|
|
4
|
(q)
|
|
First Supplemental Indenture
between TRW Inc. (now named Northrop Grumman Space &
Mission Systems Corp.) and The Chase Manhattan Bank, as
successor Trustee, dated as of August 24, 1989
(incorporated by reference to Exhibit 4(b) to
Form S-3
Registration Statement
No. 33-30350
of TRW Inc.)
|
|
4
|
(r)
|
|
Fourth Supplemental Indenture
between TRW Inc. (now named Northrop Grumman Space &
Mission Systems Corp.) and The Chase Manhattan Bank, as
successor Trustee, dated as of June 2, 1999 (incorporated
by reference to Exhibit 4(e) to
Form S-4
Registration Statement No.
333-83227 of
TRW Inc. filed July 20, 1999)
|
|
4
|
(s)
|
|
Fifth Supplemental Indenture
between TRW Inc. (now named Northrop Grumman Space &
Mission Systems Corp.) and The Chase Manhattan Bank, as
successor Trustee, dated as of June 2, 1999 (incorporated
by reference to Exhibit 4(f) to
Form S-4
Registration Statement No.
333-83227 of
TRW Inc. filed July 20, 1999)
|
|
10
|
(a)
|
|
Form of Credit Agreement dated as
of August 5, 2005, among Northrop Grumman Corporation, as
Borrower; Northrop Grumman Systems Corporation and Northrop
Grumman Space & Mission Systems Corp., as Guarantors;
the Lenders party thereto; JPMorgan Chase Bank, N.A., as Payment
Agent, an Issuing Bank, Swingline Lender and Administrative
Agent; Credit Suisse, as Administrative Agent; Citicorp USA,
Inc., as Syndication Agent; Deutsche Bank Securities Inc. and
the Royal Bank of Scotland PLC, as Documentation Agents; and BNP
Paribas and Lloyds TSB Bank PLC, as Co-Documentation Agents
(incorporated by reference to Exhibit 10.1 to
Form 8-K
dated and filed August 5, 2005)
|
|
10
|
(b)
|
|
Form of Guarantee dated as of
April 3, 2001, by Northrop Grumman Corporation of the
indenture indebtedness issued by the former Litton Industries,
Inc. (incorporated by reference to Exhibit 10.10 to
Form 8-K
dated and filed April 17, 2001)
|
-107-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
10
|
(c)
|
|
Form of Guarantee dated as of
April 3, 2001, by Northrop Grumman Corporation of Northrop
Grumman Systems Corporation indenture indebtedness (incorporated
by reference to Exhibit 10.11 to
Form 8-K
dated and filed April 17, 2001)
|
|
10
|
(d)
|
|
Form of Guarantee dated as of
March 27, 2003, by Northrop Grumman Corporation, as
Guarantor, in favor of JP Morgan Chase Bank (formerly The Chase
Manhattan Bank), as trustee, of certain debt securities of
Northrop Grumman Space & Mission Systems Corp.
(formerly TRW Inc.) (incorporated by reference to
Exhibit 4.2 to
Form 10-Q
for the quarter ended March 31, 2003, filed May 14,
2003)
|
|
10
|
(e)
|
|
Form of Guarantee dated as of
January 9, 2003, by Northrop Grumman Space &
Mission Systems Corp. (formerly TRW Inc.) of Northrop Grumman
Systems Corporation indenture indebtedness (incorporated by
reference to Exhibit 10(qq) to
Form 10-K
for the year ended December 31, 2002, filed March 24,
2003)
|
|
10
|
(f)
|
|
Northrop Grumman 1993 Long-Term
Incentive Stock Plan, as amended and restated (incorporated by
reference to Exhibit 4.1 to
Form S-8
Registration Statement
No. 333-68003
filed November 25, 1998)
|
|
10
|
(g)
|
|
Northrop Grumman Corporation 1993
Stock Plan for Non-Employee Directors (as amended and restated
July 26, 2005) (incorporated by reference to
Exhibit 10.1 to
Form 10-Q
for the quarter ended June 30, 2005, filed July 28,
2005)
|
|
10
|
(h)
|
|
Northrop Grumman Corporation 1995
Stock Option Plan for Non-Employee Directors, as Amended as of
May 11, 2004 (incorporated by reference to
Exhibit 10.1 to
Form 10-Q
for the quarter ended June 30, 2004, filed July 29,
2004)
|
|
10
|
(i)
|
|
Northrop Grumman 2001 Long-Term
Incentive Stock Plan (As amended September 17, 2003)
(incorporated by reference to Exhibit 10.1 to
Form 10-Q
for the quarter ended September 30, 2003, filed
November 6, 2003)
|
|
|
|
|
(i)
|
|
Form of Notice of Non-Qualified
Grant of Stock Options and Option Agreement (incorporated by
reference to Exhibit 10.5 to
Form S-4
Registration Statement
No. 333-83672
filed March 4, 2002)
|
|
|
|
|
(ii)
|
|
Form of Restricted Performance
Stock Rights Agreement (officer), as amended May 16, 2005,
applicable to 2005 Restricted Performance Stock Rights
(incorporated by reference to Exhibit 10.3 to
Form 10-Q
for the quarter ended June 30, 2005, filed July 28,
2005)
|
|
|
|
|
(iii)
|
|
Form of Agreement for 2005 Stock
Options (officer) (incorporated by reference to
Exhibit 10(d)(v) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
|
|
|
(iv)
|
|
Form of letter from Northrop
Grumman Corporation regarding Stock Option and RPSR Retirement
Enhancement (incorporated by reference to Exhibit 10.2 to
Form 8-K
dated March 14, 2005 and filed March 15, 2005)
|
|
|
|
|
(v)
|
|
Form of Restricted Performance
Stock Rights Agreement (non-officer), as amended May 16,
2005, applicable to 2005 Restricted Performance Stock Rights
(incorporated by reference to Exhibit 10.4 to
Form 10-Q
for the quarter ended June 30, 2005, filed July 28,
2005)
|
|
|
|
|
(vi)
|
|
Form of Restricted Performance
Stock Rights Agreement applicable to 2006 Restricted Performance
Stock Rights (incorporated by reference to
Exhibit 10(d)(vii) to
Form 10-K
for the year ended December 31, 2005, filed
February 17, 2006)
|
|
|
|
|
(vii)
|
|
Form of Agreement for 2006 Stock
Options (officer) (incorporated by reference to
Exhibit 10(d)(viii) to
Form 10-K
for the year ended December 31, 2005, filed
February 17, 2006)
|
|
|
|
|
(viii)
|
|
Form of Restricted Stock Rights
Agreement applicable to 2006 Restricted Stock Rights
(incorporated by reference to Exhibit 10(d)(ix) to
Form 10-K
for the year ended December 31, 2005, filed
February 17, 2006)
|
-108-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
(ix)
|
|
2006 CPC Incentive Restricted
Stock Rights Agreement of Wesley G. Bush dated May 16, 2006
(incorporated by reference to Exhibit 10.4 to
Form 10-Q
for the quarter ended June 30, 2006, filed July 27,
2006)
|
|
|
|
|
(x)
|
|
2006 CPC Incentive Restricted
Stock Rights Agreement of Scott J. Seymour dated May 16,
2006 (incorporated by reference to Exhibit 10.5 to
Form 10-Q
for the quarter ended June 30, 2006, filed July 27,
2006)
|
|
10
|
(j)
|
|
Northrop Grumman Supplemental Plan
2 as amended and restated effective October 1, 2004
(incorporated by reference to Exhibit 10(j) of
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
|
|
|
(i)
|
|
Appendix A: Northrop Supplemental
Retirement Income Program for Senior Executives as amended and
restated effective October 1, 2004 (incorporated by
reference to Exhibit 10(j)(i) of
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
|
|
|
(ii)
|
|
Appendix B: ERISA Supplemental
Program 2 as amended and restated effective October 1, 2004
(incorporated by reference to Exhibit 10(j)(ii) of
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
|
|
|
(iii)
|
|
Appendix F: CPC Supplemental
Executive Retirement Program as amended and restated effective
October 1, 2004 (incorporated by reference to
Exhibit 10(j)(iii) of
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
|
|
|
(iv)
|
|
Appendix G: Officers Supplemental
Executive Retirement Program as amended and restated effective
October 1, 2004 (incorporated by reference to
Exhibit 10(j)(iv) of
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(k)
|
|
Northrop Grumman ERISA
Supplemental Plan as amended and restated effective
October 1, 2004 (incorporated by reference to Exhibit 10(k)
of
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(l)
|
|
Northrop Grumman Supplementary
Retirement Income Plan (formerly TRW Supplementary Retirement
Income Plan) amended and restated effective January 1, 2004
(incorporated by reference to Exhibit 10(u) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(m)
|
|
Northrop Grumman Electronic
Systems Executive Pension Plan as amended and restated effective
October 1, 2004 (incorporated by reference to
Exhibit 10(ff) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(n)
|
|
Northrop Grumman Corporation March
2004
Change-in-Control
Severance Plan (incorporated by reference to Exhibit 10.4
to
Form 10-Q
for the quarter ended September 30, 2003, filed
November 6, 2003)
|
|
10
|
(o)
|
|
Form of Northrop Grumman
Corporation March 2004 Special Agreement (relating to severance
program for change in control) (incorporated by reference to
Exhibit 10.5 to
Form 10-Q
for the quarter ended September 30, 2003, filed
November 6, 2003)
|
|
10
|
(p)
|
|
Severance Plan for Elected and
Appointed Officers of Northrop Grumman Corporation (As amended
and restated effective August 1, 2003) (incorporated by
reference to Exhibit 10.2 to
Form 10-Q
for the quarter ended September 30, 2003, filed
November 6, 2003)
|
|
10
|
(q)
|
|
Northrop Grumman Corporation
Non-Employee Directors Equity Participation Plan, as amended
December 18, 2002 (incorporated by reference to
Exhibit 10(ff) to
Form 10-K
for the year ended December 31, 2002, filed March 24,
2003) and as amended May 17, 2006 (incorporated by
reference to Exhibit 10.2 to
Form 10-Q
for the quarter ended June 30, 2006, filed July 27,
2006)
|
|
10
|
(r)
|
|
Non-Employee Director Compensation
Term Sheet, effective June 1, 2005 (incorporated by
reference to Exhibit 10.7 to
Form 10-Q
for the quarter ended June 30, 2005, filed July 28,
2005)
|
-109-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
10
|
(s)
|
|
Form of Indemnification Agreement
between Northrop Grumman Corporation and its directors and
executive officers (incorporated by reference to
Exhibit 10.39 to
Form S-4
Registration Statement
No. 333-83672
filed March 4, 2002)
|
|
10
|
(t)
|
|
Northrop Grumman Deferred
Compensation Plan as amended and restated effective
October 1, 2004 (incorporated by reference to Exhibit 10(o)
of
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(u)
|
|
The 2002 Incentive Compensation
Plan of Northrop Grumman Corporation (incorporated by reference
to Exhibit B to the Definitive Proxy Statement on Schedule
14A filed April 4, 2002)
|
|
10
|
(v)
|
|
Northrop Grumman 2006 Annual
Incentive Plan and Incentive Compensation Plan (for
Non-Section 162(m)
Officers) (incorporated by reference to Exhibit 10.3 to
Form 10-Q
for the quarter ended June 30, 2006, filed July 27,
2006)
|
|
10
|
(w)
|
|
Northrop Grumman Savings Excess
Plan as amended and restated effective October 1, 2004
(incorporated by reference to Exhibit 10(y) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005), as amended by First Amendment, effective as of
April 29, 2005 (incorporated by reference to
Exhibit 10.8 to
Form 10-Q
for the quarter ended June 30, 2005, filed July 28,
2005) and as amended by Second Amendment, effective as of
April 27, 2006 (incorporated by reference to
Exhibit 10.1 to
Form 10-Q
for the quarter ended June 30, 2006, filed July 27,
2006)
|
|
10
|
(x)
|
|
Employment Agreement dated
February 19, 2003, between Northrop Grumman Corporation and
Dr. Ronald D. Sugar (incorporated by reference to
Exhibit 10(nn) to
Form 10-K
for the year ended December 31, 2002, filed March 24,
2003)
|
|
10
|
(y)
|
|
Employment Agreement between
Dr. Ronald D. Sugar and Northrop Grumman Corporation dated
September 19, 2001 (incorporated by reference to
Exhibit 10.3 to
Form 10-Q
for the quarter ended September 30, 2001, filed
November 5, 2001)
|
|
10
|
(z)
|
|
Letter Agreement dated
June 21, 2000, between Litton Industries, Inc. and Ronald
D. Sugar (incorporated by reference to Exhibit 10.1 to
Form 8-K
of Litton Industries, Inc. (LII) dated and
filed June 22, 2000), and Letter Agreement dated
December 21, 2000, between Northrop Grumman Corporation and
Ronald D. Sugar (incorporated by reference to
Exhibit 99(e)(7) to Schedule 14D-9 of LII filed
January 5, 2001), as amended by Amendment dated
January 31, 2001, between Northrop Grumman Corporation and
Ronald D. Sugar (incorporated by reference to
Exhibit 99(e)(16) to Amendment No. 3 to Schedule 14D-9
of LII filed February 1, 2001)
|
|
10
|
(aa)
|
|
Litton Industries, Inc.
Restoration Plan 2 effective April 3, 2001 (incorporated by
reference to Exhibit 10(cc) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(bb)
|
|
Litton Industries, Inc.
Restoration Plan as amended and restated effective
October 1, 2004 (incorporated by reference to Exhibit
10(dd) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(cc)
|
|
Litton Industries, Inc.
Supplemental Executive Retirement Plan as amended and restated
effective October 1, 2004 (incorporated by reference to
Exhibit 10(ee) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(dd)
|
|
Employment Agreement between
Wesley G. Bush and Northrop Grumman Corporation dated
December 12, 2002 (incorporated by reference to
Exhibit 99.2 to
Form 8-K
dated January 14, 2005, and filed January 18, 2005)
|
|
10
|
(ee)
|
|
Special Officer Retiree Medical
Plan (As Amended and Restated Effective October 1, 2003)
(incorporated by reference to Exhibit 10.3 to
Form 10-Q
for the quarter ended September 30, 2003, filed
November 6, 2003)
|
|
10
|
(ff)
|
|
Executive Life Insurance Policy
(incorporated by reference to Exhibit 10(gg) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
-110-
NORTHROP
GRUMMAN CORPORATION
|
|
|
|
|
|
|
|
10
|
(gg)
|
|
Executive Accidental Death,
Dismemberment and Plegia Insurance Policy (incorporated by
reference to Exhibit 10(hh) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(hh)
|
|
Executive Long-Term Disability
Insurance Policy (incorporated by reference to
Exhibit 10(ii) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(ii)
|
|
Corporate Owned Life Insurance
Policy (provided for Dr. Ronald D. Sugar) (incorporated by
reference to Exhibit 10(jj) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(jj)
|
|
Executive Dental Insurance Policy
Group Numbers 5134 and 5135 (incorporated by reference to
Exhibit 10(m) to
Form 10-K
for the year ended December 31, 1995, filed
February 22, 1996)
|
|
10
|
(kk)
|
|
Group Personal Excess Liability
Policy (incorporated by reference to Exhibit 10(ll) to
Form 10-K
for the year ended December 31, 2004, filed March 4,
2005)
|
|
10
|
(ll)
|
|
Northrop Grumman Executive Medical
Plan Benefit Matrix effective July 1, 2006 (incorporated by
reference to Exhibit 10.6 to
Form 10-Q
for the quarter ended June 30, 2006, filed July 27,
2006)
|
|
21
|
|
|
Subsidiaries*
|
|
23
|
|
|
Consent of Independent Registered
Public Accounting Firm*
|
|
24
|
|
|
Power of Attorney*
|
|
31
|
.1
|
|
Rule 13a-15(e)/15d-15(e)
Certification of Ronald D. Sugar (Section 302 of the
Sarbanes-Oxley Act of 2002)*
|
|
31
|
.2
|
|
Rule 13a-15(e)/15d-15(e)
Certification of Wesley G. Bush (Section 302 of the
Sarbanes-Oxley Act of 2002)*
|
|
32
|
.1
|
|
Certification of Ronald D. Sugar
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
|
|
32
|
.2
|
|
Certification of Wesley G. Bush
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
|
|
|
|
* |
|
Filed with this Report |
|
** |
|
Furnished with this Report |
-111-
NORTHROP
GRUMMAN CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 21st day of February 2007.
NORTHROP GRUMMAN CORPORATION
|
|
|
|
By:
|
/s/ KENNETH
N. HEINTZ
|
Kenneth N. Heintz
Corporate Vice President, Controller, and
Chief Accounting Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on behalf of the registrant
this the 21st day of February 2007, by the following
persons and in the capacities indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Ronald D. Sugar*
|
|
Chairman and Chief Executive
Officer
(Principal Executive Officer), and Director
|
|
|
|
Wesley G. Bush*
|
|
President and Chief Financial
Officer
(Principal Financial Officer)
|
|
|
|
John T. Chain, Jr.*
|
|
Director
|
|
|
|
Lewis W. Coleman*
|
|
Director
|
|
|
|
Vic Fazio*
|
|
Director
|
|
|
|
Stephen Frank*
|
|
Director
|
|
|
|
Phillip Frost*
|
|
Director
|
|
|
|
Charles R. Larson*
|
|
Director
|
|
|
|
Phillip A. Odeen*
|
|
Director
|
|
|
|
Aulana L. Peters*
|
|
Director
|
|
|
|
Kevin W. Sharer*
|
|
Director
|
|
|
|
Richard B. Myers*
|
|
Director
|
|
|
|
|
|
*By:
|
|
/s/ STEPHEN
D. YSLAS
Stephen
D. Yslas
Corporate Vice President, Secretary,
and Deputy General Counsel
Attorney-in-Fact
pursuant to a power of attorney
|
|
|
-112-
NORTHROP
GRUMMAN CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Changes
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Additions
|
|
|
Add
|
|
|
End
|
|
Description
|
|
of Period
|
|
|
At Cost
|
|
|
(Deduct)(1)
|
|
|
of Period
|
|
Year ended December 31,
2004(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted
from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful amounts
|
|
$
|
248
|
|
|
$
|
106
|
|
|
$
|
(87
|
)
|
|
$
|
267
|
|
Valuation allowance on deferred
tax assets
|
|
|
1,407
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
1,375
|
|
Year ended December 31,
2005(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted
from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful amounts
|
|
$
|
267
|
|
|
$
|
57
|
|
|
$
|
(100
|
)
|
|
$
|
224
|
|
Valuation allowance on deferred
tax assets
|
|
|
1,375
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
1,339
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances deducted
from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful amounts
|
|
$
|
224
|
|
|
$
|
171
|
|
|
$
|
(87
|
)
|
|
$
|
308
|
|
Valuation allowance on deferred
tax assets
|
|
|
1,339
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
1,300
|
|
|
|
|
(1) |
|
Uncollectible amounts written off, net of recoveries. |
|
(2) |
|
Prior period amounts have been restated to reflect the
Enterprise Information Technology business as discontinued
operations. |
-113-