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Copyright 2006 Northrop Grumman Corporation1
Northrop Grumman Financial Overview
November 9, 2006
Wes BushPresident and Chief Financial Officer
Copyright 2006 Northrop Grumman Corporation1
Certain statements and assumptions in these presentations and materials contain or are based on “forward-looking” information. Such “forward-looking” information includes, among other things, projected deliveries,expected funding for various programs, future effective income tax rates, financial guidance and estimated amounts regarding sales, segment operating margin, pension expense, employer contributions under pension plans and medical and life benefits plans, cash flow and earnings per share, and is subject to numerous assumptions and uncertainties, many of which are outside Northrop Grumman’s control. These include Northrop Grumman’s assumptions with respect to future revenues, expected program performance and cash flows, returns on pension plan assets and variability of pension actuarial and related assumptions, the outcome of litigation and appeals, environmental remediation, divestitures of businesses, successful reduction of debt, successful negotiation of contracts with labor unions, effective tax rates and timing and amounts of tax payments, and anticipated costs of capital investments, among other things. Northrop Grumman’s operations are subject to various additional risks and uncertainties resulting from its position as a supplier, either directly or as subcontractor or team member, to the U.S. Government and its agencies as well as to foreign governments and agencies; actual outcomes are dependent upon various factors, including, without limitation, Northrop Grumman’s successful performance of internal plans; government customers’ budgetary constraints; customer changes in short-range and long-range plans; domestic and international competition in both the defense and commercial areas; product performance; continued development and acceptance of new products and, in connection with any fixed price development programs, controlling cost growth in meeting production specifications and delivery rates; performance issues with key suppliers and subcontractors; government import and export policies; acquisition or termination of government contracts; the outcome of political and legal processes and of the assertion or prosecution of potential substantial claims by or on behalf of a U.S. government customer; natural disasters, and any associated amounts and timing of recoveries under insurance contracts, availability of materials and supplies, continuation of the supply chain, contractual performance relief and the application of cost sharing terms, impacts of timing of cash receipts and the availability of other mitigating elements; terrorist acts; legal, financial and governmental risks related to international transactions and global needs for military aircraft, military and civilian electronic systems and support, information technology, naval vessels, space systems, technical services and related technologies, as well as other economic, political and technological risks and uncertainties and other risk factors set out in Northrop Grumman’s filings from time to time with the Securities and Exchange Commission, including, without limitation, Northrop Grumman reports on Form 10-K and Form 10-Q.
Safe Harbor Statement
Copyright 2006 Northrop Grumman Corporation3
Presentation Format
GuidanceEffective 1/1/07 Radio Systems business will be transferred from Space Technology to Mission SystemsReported results for Q4 2006 & Full Year 2006 will not reflect the transferGuidance does not reflect the changeGuidance does not include Essex
Segment results 2003 - 2005Presented on a pro forma basis reflecting
Previously announced organizational realignmentsTransfer of Radio Systems businessAdoption of dual-margin recognition on inter-segment sales
Copyright 2006 Northrop Grumman Corporation2
Growth
Performance
Value-creating cash deployment
What You Should Expect From NOC
Copyright 2006 Northrop Grumman Corporation3
Outlook
1 Non-GAAP Metric - see reconciliation and definition on pages 25 & 262 Before Katrina-related capital expenditures
$650-700M$700-750M$744MCapital Expenditures2
$2.5-2.8B$1.5-1.8B$2.6BCash from Operations
$4.65-4.90$4.40-4.45$3.83EPS from Continuing Operations
High 8%Low 8%7.3%Operating Margin
Low 9%Low 9%8%Segment OM1
$31-32B$30.2B$30.1BRevenue
2007E2006E2005
Copyright 2006 Northrop Grumman Corporation4
Growth
Copyright 2006 Northrop Grumman Corporation5
Portfolio Actions to Drive Growth
Technical Services
Integrated Systems
Electronics
Space Technology
Mission Systems
Information Technology
Space Technology
Life Cycle Optimization
Network Comms
Technical ServicesAddresses ~$70 billion arena
Growing at 8-9%
Military CommunicationsAddresses ~$80B arena
Growing at 4-7%Mission Systems
Life CycleOptimization
Systems Support,
Training & Simulation
Systems Support
Life CycleOptimization
RadioSystems
Comms & Information
Space & Communications
Networks & Collaboration
Copyright 2006 Northrop Grumman Corporation6
Portfolio Supports Organic Sales Growth
Transfer of Radio Systems to Information & Services from Aerospace effective 1/1/07 not included
Ships
Aerospace
Electronics
21%
27%
16%I & S36%
$31-32~$30.2Total
~10%~$5Ships
~5%~$6.6Electronics
~(5)%~$9Aerospace
8-10%~$11I & S
2006E ($B) 2007EGrowth
Copyright 2006 Northrop Grumman Corporation7
Core Programs Provide Strong Base
Franchise programs provide reliable long-term revenue Core and adjacent opportunities support organic growth
Unfunded
Follow-on
New
New
0
20
40
60
80
100
2006E 2007E 2008E
% o
f Sal
es
Firm
Unfunded
Follow-on
New
Copyright 2006 Northrop Grumman Corporation8
Performance
Copyright 2006 Northrop Grumman Corporation9
Margin & Cash Performance Drivers
Competitive Excellence programsProgram performanceInfrastructure costsWorld-class processes
ACE ProgramScale leverage (Procurement, IT, Facilities)
~$150M cost reduction expected in 2006~$300M annual cost reduction targeted by 2008
Shared servicesFinancial systems, workforce administration~$100M cost reduction targeted by 2008
Cash initiativesBest practice adoption for contract terms & conditions, receivables/ payables management, working capital enhancements
Benefits programs modernizationPost retirement benefits plan change reflected in 2007 guidance
All data and alternatives in the ACE project are considered feasibility assessments. This information is not considered cost or pricing data under Public Law 87-653.
Copyright 2006 Northrop Grumman Corporation10
Program Risk Management Process
Pre-Contract PhaseTarget selection criteriaNon-advocate review (NAR)Independent cost evaluation (ICE)Rigorous corporate risk review process
Contract Performance PhaseRisk management baselineCompany-wide Earned Value Management SystemEnhanced transparency at all levelsProgram-focused sector reviewsWatch list review process
Strengthened corporate oversight of programsStrengthened corporate oversight of programs
Copyright 2006 Northrop Grumman Corporation11
Operating Margin Expansion
1 Non-GAAP Metric - see reconciliation and definition on pages 25 & 262 Dependent on long-term business mix
9+High 8Low 8Total Operating Margin
~10Low 9Low 9Segment OM1
9+Mid 8~7Ships
~12High 11Mid to High 11Electronics
9-10~9Low 9Aerospace
8-9~8Low 8Information & Services
Operating Margin %
Long-TermMargin
Opportunity2
2007E2006E
Copyright 2006 Northrop Grumman Corporation12
Reconciliation of Segment OM to OM
Unallocated
2006E of ~$250 million (~$140 million before Q3 legal provision)
2007E ~$90 million
Post retirement benefit plan changes result in substantial savings
Net Pension Expense
2006E of ~($25) million
2007E with 2006 assumptions, pre-funding and 2007 demographics is ~($15) million
Copyright 2006 Northrop Grumman Corporation13
EPS—Key Components
2006E 2007E
Sales $30.2B $31-32B
Segment OM1 Low 9% Low 9%
Unallocated Expenses ~$250M ~$90M
Net Pension Expense ~$25M ~$15M
Operating Margin Low 8% High 8%
Net Interest Expense ~$300M ~285M
Effective Tax Rate ~31% 33-34%
EPS Guidance $4.40-4.45 $4.65-4.90
1 Non-GAAP Metric - see reconciliation and definition on pages 25 & 26
Copyright 2006 Northrop Grumman Corporation14
Cash—Key Components
Depreciation & Amortization ~715 ~710
Pension/OPEB Funding ~(650) ~250*
Change in Working Capital Neutral Neutral - Improving
Cash Taxes (550) (1,000)
Stock-based Compensation ~200 ~220
Discontinued Operations (80) -
* Based on 2006 assumptions
2006E ($M) 2007E ($M)
1 Does not include Katrina-related related capital expenditures2 Non-GAAP Metric - see definition on page 27
Cash from Operations 1,500 – 1,800 2,500 – 2,800
Capital Expenditures1 700 – 750 650 - 700
Free Cash Flow2 750 – 1,100 1,800 – 2,150
Copyright 2006 Northrop Grumman Corporation15
$0
$1
$2
$3
$4
$5
$6
$7
2003* 2004 2005 2006E** 2007E
EPS Free Cash Flow per Share
EPS & Free Cash Flow Per Share
1 Non-GAAP Metric - see definition on page 27 – prior to Katrina related capital expenditure
* Includes $1 Billion B-2 Tax Payment
** Includes $800 Million discretionary pension pre-funding
1
EPS guidance rangeCash guidance range
Copyright 2006 Northrop Grumman Corporation16
Value-Creating Cash Deployment
Copyright 2006 Northrop Grumman Corporation17
Debt Reduction & Pension Pre-fundingDebt Reduction & Pension Pre-funding
DividendsDividendsShare RepurchasesShare Repurchases
Maintain strong credit profileEnsure flexibilityCapture economic benefits
Maintain strong credit profileEnsure flexibilityCapture economic benefits
Accelerate growth & shareholder returnsAcquisitions in strategically aligned businesses with profitable growth Divest to capture enhanced value
Accelerate growth & shareholder returnsAcquisitions in strategically aligned businesses with profitable growth Divest to capture enhanced value
Maintain competitive payout ratioReview regularly
Maintain competitive payout ratioReview regularly
Moderate share count reductionReview regularly
Moderate share count reductionReview regularly
17
Cash Deployment Strategy
Acquisitions & DivestituresAcquisitions & Divestitures
Copyright 2006 Northrop Grumman Corporation18
330
340
350
360
370
2002 2003 2004 2005 2006 YTD
Share RepurchasesShare Repurchases
Moderate net share count reductionReview regularly
Moderate net share count reductionReview regularly
Share Repurchases
$3.2 Billion authorized since 2004$3.2 Billion authorized since 2004$3 Billion completed$3 Billion completed
Shar
es O
utst
andi
ng
Copyright 2006 Northrop Grumman Corporation19
Dividends
DividendsDividends
Maintain competitive payout ratioReview regularly
Maintain competitive payout ratioReview regularly
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
2003 2004 2005 2006
Div
iden
ds p
er S
hare
DoubleDouble--digit increases in 2004, 2005 & 2006digit increases in 2004, 2005 & 200650% increase since 200350% increase since 2003
Copyright 2006 Northrop Grumman Corporation20
Acquisitions & Divestitures
Accelerate growth & shareholder returnsAcquisitions in strategically aligned businesses with profitable growthDivest to capture enhanced value
Accelerate growth & shareholder returnsAcquisitions in strategically aligned businesses with profitable growthDivest to capture enhanced value
Acquisitions & DivestituresAcquisitions & Divestitures
Acquisition PrinciplesAlignment with portfolio strategyRapid synergy captureAccretive by year twoValuation based on robust DCF assessmentRigorous due diligence process, experienced teamComprehensive integration assessment and planSector execution commitmentAnnual reviews of performance to sector commitment
Copyright 2006 Northrop Grumman Corporation21
Debt Reduction & Pension Pre-fundingDebt Reduction & Pension Pre-funding
Maintain strong credit profileEnsure flexibilityCapture economic benefit
Maintain strong credit profileEnsure flexibilityCapture economic benefit
Debt Reduction & Pension Pre-funding
Highest credit rating in company’s history$1.2 billion debt reduction expected in 2006~$5.7B debt reduction from 2002 to YE 2006Net debt/total capital has declined from 34% to 14%$1.3 billion pension pre-funding in 2004, 2005 & 2006
Copyright 2006 Northrop Grumman Corporation22
What You Should Expect from NOC
Growth
Performance
Value-creating cash deployment
Copyright 2006 Northrop Grumman Corporation23
Institutional Investor Conference Q&A
November 9, 2006
Copyright 2006 Northrop Grumman Corporation24
Appendix
Copyright 2006 Northrop Grumman Corporation25
$ Millions 2005A 2006E 2007E
Sales $30,067 ~$30,200 $31,000-$32,000
Segment Operating Margin Rate* 8.0% Low 9% Low 9%
Operating Margin Rate 7.3% Low 8% High 8%
Segment Operating Margin* 2,414 ~2,750 2,860-2,940
Reconciliations:
Unallocated Expenses (190)
Pension (Expense) Income (410) ~(300) ~(120)
Reversal of CAS Pension Expense included above 389
Reversal of Royalty Income included above (10)
Operating Margin as Reported 2,193 ~2,450 2,740-2,820
Non-GAAP Measure Reconciliation
*Non-GAAP Measure
Copyright 2006 Northrop Grumman Corporation26
Non-GAAP Measures Definitions
Non-GAAP Financial Measures Disclosure
Today’s presentation and the accompanying web charts contain non-GAAP (Generally Accepted Accounting Principles) financial measures, as defined by SEC Regulation G and indicated by an asterisk *.While we believe that these non-GAAP financial measures may be useful in evaluating Northrop Grumman, this information should be considered as supplemental in nature and not as a substitute for financial information prepared in accordance with GAAP.Definitions are provided for the non-GAAP measures used in our presentation. Other companies may define the measures differently.
Segment Operating Margin
Segment Operating Margin is the total earnings from each of our six business segments including royalty income and pension expense to the extent that the cost is currently recognized under government Cost Accounting Standards (CAS). Segment Operating Margin excludes unallocated corporate expenses, GAAP pension expense and the reversal of CAS pension expense.
Reconciling items to total company Operating Margin are:— GAAP pension expense reported separately as a reconciling item under the caption "Pension expense." — Reversal of CAS pension expense included in Segment Operating Margin as a cost recognized under CAS. — Unallocated expenses which include unallocated corporate, legal, environmental, state income tax, and other
retiree benefits expenses.— Royalty Income reversed under the caption “Reversal of royalty income included above” and reported under the
caption “Other, net.”
Management uses segment operating margin as an internal measure of financial performance of our individual business segments. This measure also may be helpful to investors in understanding period-over-period operating results separate from items that may be influenced by external market fluctuations.
Copyright 2006 Northrop Grumman Corporation27
Net DebtNet Debt is calculated as short and long-term interest-bearing debt minus cash and cash equivalents..
Free Cash FlowFree Cash Flow (FCF) is the cash from operations less capital expenditures. Katrina related capital expenditures are excluded. Katrina related capital expenditures was approximately $80M in 2005, and it is projected to be approximately $200M in 2006 and approximately $100M in 2007.
Free Cash Flow Per ShareFree Cash Flow as defined above divided by weighted average diluted shares
Non-GAAP Measures Definitions