諾斯洛普·格拉曼 (NOC) 2002 Q4 法說會逐字稿

Ladies and gentlemen, welcome to your Northrop Grumman fourth quarter earnings conference call.

My name is Ron and I'll be the conference coordinator.

At this time, all lines are in listen-only mode with an opportunity to ask questions at the end of the presentation.

If you have a question, you may key star one on your tone dial phone at any time during the presentation to queue up your question.

Again, key star one for questions.

Should you require operator assistance while on this call, key star zero and we'll be happy to assist you.

As a reminder, this call is being recorded for replay purposes.

Now over to the Vice President of Investor Relations and host, Gaston Kent.

Welcome to Northrop Grumman's fourth quarter and year-end 2002 conference call.

I would remind the analysts that there may be press on the line and they are in a listen-only mode.

I'm sure you've all had time to review the release.

Our reported results included the impact of issuing approximately 70 million shares in the TRW acquisition.

Our previous 2002 guidance did not consider those shares.

I would note that although the additional shares are averaged into the results for the quarter and the year, our income statement does not include TRW's results for the last two weeks of 2002 as they were not material.

I also want to note we have changed our reporting format to exclude the effect of CAS add back, PRB and deferred state taxes from the operating sector margins.

They're now reported below the sector level along with FAS 87.

Our segment operating margins have been adjusted accordingly.

This will give you a clearer picture of operating performance and isolate the pension related cost items.

You will note we have included scheduled restating prior period data consistent with this format.

Dick will be providing a margin rate guidance that reflects this revised reporting format.

It should be noted that there is no change in the operating margin outlook that we presented for each sector during our recent road show.

And that he only adjustment to our sector guidance are the changes in reporting format.

During the call, we'll discuss fourth quarter and year-end results and guidance for 2003.

Going forward, our EPS guidance will be for GAAP earnings only.

We will not be using economic earnings in the future.

Recognizing that many of you use different metrics as valuation tools, we'll be providing management's guidance in sufficient detail for various income and expense elements to allow to you model your valuations as you may define them, including EBITDA or EBITDAP.

We'd like to you understand that some of the matters discussed on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements reflect the company's views with respect to future events and prospective financial performance.

Forward-looking statements involve risks and uncertainties.

The actual results may differ materially from the results expressed or implied by the forward looking statements.

A more complete expression of these risks and uncertainties is contained in the SEC filings, including the form 10-K and the forms 10-Q, among others.

On the call today are Kent Kresa, Chairman and CEO, Ron Sugar, President and COO and Dick Waugh, Chief Financial Officer.

At this time, I'd like to turn the call over to Kent.

Thanks, Gaston and thank you all for joining us.

When we had our year-end earnings call last year, I commented on what an extraordinary year 2001 had been and how excited I was about the future.

I hate to repeat myself, but I can't help saying the same thing this year.

Looking back, I'm again very proud of what the Northrop Grumman team has accomplished.

As we begin 2003, we are the second largest defense company, one of three major contractors in military space, the world's largest shipbuilder, the number one provider of Federal IT services, the premiere supplier of airborne radar and electronic warfare systems, a leading systems integrator and we, we believe, the best positioned defense company in our industry.

This has all been accomplished with our overriding mandate to create superior shareholder value.

One of our major accomplishments in 2002 was the TRW acquisition.

Bringing TRW's technology, Programs, and people into the Northrop Grumman family culminates nearly a decade of work in transforming Northrop Grumman.

It's truly the capstone.

I'd add that this challenging acquisition was accomplished while simultaneously negotiating the sale of TRW's auto business which we didn't get owned.

And putting the finishing touches on the Litton and Newport News integrations.

We can truly say it's all here now.

Undersea, sea, land, air, space and cyberspace.

Ready to fulfill the vision of 21st century network centric warfare.

When we met with TRW's employees on day one, they were very excited to be part of a company completely focused on developing cutting edge, next generation technologies.

Together, we will aggressively pursue the many opportunities available to the new Northrop Grumman.

We've moved out very quickly on the integration of mission systems and space technology sectors, which will be a much simpler integration than Litton.

Current with the acquisition of TRW, we also reached an agreement to sell the TRW auto business to the Blackstone group.

This transaction is on track to close this quarter.

Blackstone has HSR approval and it's awaiting EU approval.

Once the auto sale closes, we’ll have an outstanding balance sheet with [net debt to total capital] well below our target range of 30% to 40%.

And other than the divestiture of the discontinued component technologies operations, I expect any additional [MNA] activity to be a matter of portfolio shaping.

To date, we've reached an agreement to sell Beam to ITT which would close shortly and we're aggressively marketing the remaining business in order to complete the sales by the third quarter of this year.

Despite another year of tremendous integration and acquisition activity, we've delivered solid financial results.

I'm especially pleased with our cash generation.

And to my mind it's the most important measure of the company's performance and a good indicator of its ability to successfully integrate and manage acquisitions.

Throughout the year, we've increased our estimate of cash available to pay down debt.

It is a reflection of the outstanding cash management we have at the sectors.

And we've ended the year with nearly $1 billion in cash available to pay down debt.

2002 was also an outstanding year for program wins with DDX, Deep Water, Trailblazer, Immigration and Naturalization services, [enpose], space tracking and surveillance systems, and the web telescope, just to name a few.

All in all, it was another very productive year.

With more than $17 billion in sales, $23 billion in acquisitions and a $26 billion funded backlog.

Looking ahead, Northrop Grumman has assembled the core capabilities and technologies needed to compete for the highest priority 21st century national defense and homeland security needs.

We're confident that defense spending has begun a long run of sustainable growth.

We are also well positioned to grow at a faster pace than overall R&D and procurement increases.

We expect favorable funding for our many ship, space, electronics, aircraft, systems and Federal IT programs.

Sales should range between $25 and $26 billion in '03 and between $28 and $29 billion in 2004.

We have an outstanding senior management team focused on performance, including the two new sector leaders we announced in December.

Don Winter of Mission Systems and Wes Bush of Space Technology.

I'm delighted to have Don and Wes join the Northrop Grumman management team.

Clearly we've done the right things to position the company for the future, while at the same time applying disciplined management.

Going forward, the mandate, as always, will be to manage the new Northrop Grumman to maximize share holder value.

Now I'd like to turn the call over to Ron.

Ron?

Thanks, Kent.

I want to echo Kent's remarks regarding the solid quarter.

I want to begin my remarks by saying that our management team fully understands that execution is key going forward.

We expect to be measured on our ability to successfully execute on mature programs such as LHD, DDG, B2, F-18, CVN and others, while successfully developing and transitioning our many early stage programs into production.

I assure you that we have not underestimated our task.

It is the major focus of management in 2003.

Last year's watch words were execute and integrate.

They apply more than ever this year.

Sales of electronic systems rose slightly in the fourth quarter to $1.5 billion.

ES ended the year with revenue of $5.3 billion, a little lower than expected due to delays in several international programs.

These programs were received in the third and fourth quarters rather than earlier in the year. 2002 revenue increased 16% over 2001.

Our sales outlook going forward hasn't changed.

Fourth quarter highlights include the start of Antenna No. 1 range testing on the Wedgetail (ph) program.

This testing will continue through May of 2003 and is proceeding on schedule.

This testing, along with successful delivery of Software Build No. 3 and completion of some pilot production enabled us to book profit on Wedgetail this quarter.

On F-16 Block 60, Falconedge (ph) successfully completed Critical Design Review No. 2 in November.

Initial line [replacement] unit deliveries will begin in the second quarter.

In December, we completed the first flight test of the Agile-B radar as planned achieving all primary goals.

Agile-B radar flight testing will continue in the first quarter.

Integrated Fleer Targeting System first flight test for software mode development will also take place in the first quarter.

We are aggressively working to continue to meet our scheduled commitments.

It's still a challenging program but I believe it is under control.

Moving on to Ships, sales increased to nearly $1.4 billion.

We had a full quarter of Newport News this year, versus only one month in 2001.

And both Ship Systems and Newport News had solid quarters.

The increase service combatants was due to DDX, which is off to a great start.

Higher amphibious ship sales came from the LHD and LPD programs.

The polar tank program productivity is tracking to the EAC we established in the third quarter.

As we said at that time, reduced vessel labor turnover, improved craft training and institution of a system that gives us improved management visibility are the three most important requirements to improving cost performance on this program.

Newport News had a very strong quarter due to increased aircraft carrier construction and refueling overhaul activity, as well as by modest gains in the submarine construction program.

Carra (ph) construction on the Reagan and the Bush were the primary drivers of the revenue increases beyond our original expectations.

The Reagan will have C Trials this quarter in preparation for delivery.

Submarine revenues were up modestly as construction ramps up on the Texas, Hawaii and North Carolina.

Also during the fourth quarter, Newport News ship, the final module of the first submarine of the class, Virginia, to its teaming partner.

Information technology sales rose $1.2 billion. 2002 sales increased 12% over 2001.

We're seeing double digit, strong double digit growth in the DOD and intelligence areas of government information technology as well as in technology services.

Offset somewhat by lower year-over-year sales and enterprise information technology and commercial information technology.

In EIT, our civil federal customers still don't have a fiscal 2003 budget, which slowed sales in Q4.

The decline in CIT was due primarily to a slowdown in the commercial marketplace for poor desk-side support along with the loss in late 2001 of GSA seat management contract which we inherited from Litton.

Integrated systems had another great quarter and an outstanding year.

Fourth quarter sales rose nearly 6% due to increases in unmanned vehicle and F-35 sales, which more than offset B-2, joint stars and E2C revenues.

For the year, sales increased 9%.

The F-35 is progressing well is a team earning 96% of the award fee available in 2002.

Globalhawk is also progressing with significant interest beyond the known Air Force requirements.

Advance Hawkeye development is under way.

This is a major new program with planned production of at least 75 aircraft.

Integrated systems is now on a firm growth projected with a ramp up of Globalhawk, advanced Hawkeye and F-35.

We will obviously include mission systems and space technology, the two new TRW sectors joining us, starting in the first quarter.

These are both strong, healthy businesses with outstanding technologies and backlog.

We are already well under way in the integration process.

Mission systems and Space Technology sectors should be completely stood up at Northrop Grumman's sectors by April.

With the remaining TRW corporate office functions transitioning by the end of the year.

I'd like to end by saying that our portfolio is very strong, operations are in very good shape and we have a great pipeline of business.

We are bidding on several multibillion dollar programs such as the advanced Hawkeye, a joint-star’s follow-on, targets payloads and countermeasures for Missile Defense, as well as the [Booth Phase Intercept] also for Missile Defense.

Double digit top line growth is firmly in our plans.

Now I'd like to turn it over to Dick Waugh.

Dick?

Thank you, Ron and good afternoon or good morning, as the case may be.

As you saw, we reported economic earnings of $6.13 per share.

The guidance we gave you in November for Northrop Grumman was $6.10 to $6.20 per share.

That was on a stand alone basis assuming 114.7 million shares outstanding, excluding the increment in shares for TRW.

Without the addition of these 2.9 million weighted average shares, our economic earnings per share would have been $6.29, above our guidance, due to the higher than expected revenues in ships in particular at Newport News.

I'll spend a little time this morning discussing segment operating margin, below the segment operating margin line items, cash flow and our expectations for 2003 and 2004.

As Gaston said, we removed the CAS add back from the sector operating margin.

It's now below the segment operating line, along with FAS 87.

So all of my comments will reflect this new format, as well as the FAS 142 adjustments.

Overall segment operating margin for the quarter was $388 million versus $321 million, up more than 20%.

The segment operating margin rate for the quarter was 8% versus 7.7% last year.

For the year, the segment operating margin rate was 7.7%.

About the same as in 2001.

Now, just to walk you through the reconciliation of our 2001 reported segment margin of $768 million, with our restated segment margin on schedule 6 (so if you could turn to schedule 6), add $29 million to last year's margin for discontinued operations, add $43 million for CAS and subtract $33 million for retiree benefit expense and you'll come to our restated number of $807 million.

We expect operating margin in the mid 7% range in 2003, but obviously on a significantly larger revenue base.

Moving on to the sectors, as I discussed earlier, each sector's performance are compared to the previous guidance during the third quarter and our road show.

You'll notice that the reclassification of CAS reduces some sector margin rates more than others, which is to be expected given the difference in funding levels in our various plans from sector to sector.

I want to reiterate that we have not made any adjustments to the 2003 expected operating margin rates that we discussed in our third quarter call and during our road show.

Electronics systems fourth quarter margin was $163 million or 10.7% versus $168 million or 11.2% last year, due to a significant volume driven reduction in higher margin rate sales, in the automation and information systems business and lower margin rates at our navigation business due to lower sales.

We ended the year at 8.1% versus 9.4% in 2001 and versus previous guidance of 8.2%.

For the year, exclusive of the F-16 Block 60 program adjustment, the ES margin rate would have been 9.4%.

For 2003, we expect double digit sales growth and a margin rate approaching 10%.

Ships margin for the quarter was $104 million or 7.6% versus $40 million or 5% in the fourth quarter of 2001.

Last year's fourth quarter included a polar tanker charge of $13 million and only one month of operating margin contribution from Newport News.

This year's fourth quarter includes a $11 million increase in the operating margin of the LPD program as a result of improved performance and completion of the assessment of the LPD/DDG swap agreement with Bath Ironworks.

We had expected end of the year revenue of between $4.2b and $4.4 billion, but the increases that Ron mentioned at Newport News moved us up about $200 to 300 million.

For the year, the ship's margin rate was 6.5% versus 2.7% in 2001 and versus our previous guidance of 7.5-8%.

Again, this reflects the removal of CAS reimbursement from sector operating margin.

For 2003, we expect sales to be $5 million plus and we're targeting a margin rate in the mid 6% range.

IT margin was $67 million or 5.7% versus $62 million or 5.5% last year.

For the year, IT operation margin rate was 5.9% versus 6.1% in 2001 and our previous guidance of 5.5-6%.

For 2003, we continue to target double digit sales growth with margin rates approaching 6%.

Integrated Systems fourth quarter margin was $54 million versus $51 million or 6.5% for both years.

For the year, the I.S. margin rate was 10.1% versus 9.9% in 2001, and our previous guidance of approximately 10%.

Looking ahead to next year, we are still targeting double digit sales growth through the ramp up on the development programs like F-35 and unmanned vehicles with the margin rate declining accordingly to 8-8.5% due to the mixed change between development and production.

Missions Systems 2003 sales are expected to be approximately $3.9 billion with margin rates of approximately 6%.

Space technology's 2003 sales are expected to be $2.5 billion with a margin rate of between 6.5 and 7%.

Keep in mind that without including CAS in their operating margin and with the additional expense of amortization of purchase intangibles and depreciation, Mission Systems and Space Technology margins are lower than their historical reported margins.

Amortization of purchase Intangibles expected to be $52 million, at both mission systems and space technology, and combined depreciation for the units is estimated at $125 million for 2003.

As I said, overall 2002 segment operating margin was 7.7%, approximately even with last year.

We are targeting the mid-7% range in 2003.

Looking at items below Sector Margin, corporate expense now includes some items reclassified from sector operating margin.

Under the prior reporting format we estimated corporate expense would be $70 million for the year.

And without the reclassifications, we would have come in slightly higher at $79 million.

We expect corporate expense to be approximately $98 million in 2003, which will include the pension retiree benefits and the deferred state taxes.

We broke those out this quarter but going forward, it will be reported as part of corporate expense.

Turning to pension related issues.

Funding for our pension plans is determined by ARISA (ph) guidelines, not FAS.

When we put money into our pension plans, this becomes an allowable cost under governemtn contracts, just like any other overhead item.

The amount that is allowable is shown in our new reporting format as CAS, or cost accounting standards, pension expense.

This amount differs from the non-cash FAS 87 expense because it's based on actual contributions, not the actuary methods used under FAS.

We moved the CAS reconciliation below the segment margin line so that the actual performance of the sectors is more clearly displayed.

This is the same method we used for many years.

We changed in 1996 to be consistent with other companies in our industry.

But now that the amount is becoming a more significant item it's appropriate to break it out for you.

Within the segment results, CAS expense is included within sales.

As this expense is generally fully recoverable and cost of sales, so they are essentially the same.

To complete with GAAP accounting, the CAS expense is then added back below the line.

This is a reconciliation to zero, so we can reflect the full FAS pension income or expense.

As we announced, FAS 87 expense for 2003 is expected to be approximately $600 million.

This is compared to FAS 87 income of $90 million in 2002.

There is a significant swing.

The reason for the large increases is in four pieces.

First, the actual performance of the funds was a negative 9%.

Significantly below the assumed 9.5% return.

This accounts for $424 million of the swing.

Secondly, we have lowered the expected return of the funds from 9.5% to 9%.

This drives approximately $58 million.

Third, we have lowered the discount rates to determine future obligations from 7% to 6.5%.

This drives approximately $59 million of the swing.

And lastly, we have obviously added the TRW plans to the mix, which adds an expense of $145 million.

Also note that this number will not be finalized until the end of this quarter.

The $600 million is our best guess at this point in time.

Our preliminary estimate of CAS expense for 2003 is $260 million.

This is larger than in the past because of the funding status of several of our plans, included in the TRW plans.

For GAAP accounting, FAS and CAS offset one another.

So the estimate of net expense for GAAP accounting is $340 million, but remember, that FAS 87 is a noncash expense and the CAS expense is allowable under government contracts.

So this is essentially not a cash consideration.

On the balance sheet, we took a noncash $1.2 billion other comprehensive income charge to equity this quarter.

Based on plan asset values at the end of the year and the reduction on our discount rate.

This charge has no impact on our income statement or cash flow.

Other Income was $25 million for the quarter and $40 million for the year.

Net interest expense was $102 million, $422 million for the year, in line with our projection of $425 million.

We are targeting net interest expense of $370 million for 2003.

The effective tax rates for the quarter for economic and GAAP earnings were 34% and 32% respectively.

And 33% and 31% for the year, respectively.

We expect the effective tax rate in 2003 to be 28% for GAAP due to the incremental tax credits we expect to claim in 2003.

As Kent mentioned, fourth quarter cash from operations was outstanding at $748 million, well above planned, bringing 2002 cash from operations to nearly $1.7 billion, including the $220 million payment from Honeywell.

This does not include cash from operations at TRW.

After CAPEX, dividends and the net effect of various business sales and purchases, we ended the year with nearly $1 billion available to reduce debt.

As a result, we ended the year at 35% net debt to total capital.

Capital expenditures including capitalized software costs were [$247] million in the fourth quarter, $536 million for the year, versus our guidance of $500 million.

With the additional TRW, we expect capital spending in 2003 to be approximately $720 million.

Fourth quarter depreciation was $77 million, $322 million for the year.

We expect depreciation in 2003 to be approximately $520 million.

With the addition of TRW, we expect $25 to $26 billion in revenue in 2003.

We expect GAAP earnings per share to range between $4 and $4.50 per share, again, using preliminary estimates of FAS and CAS pension.

We will have a better feel for this range once we finish our analysis on our pension plans.

We provided a schedule in our press release which reconciles our previous economic earnings per share guidance with our GAAP guidance.

In 2003, with the purchase of TRW, we are assuming a preliminary estimate of amortization of purchase intangibles of $264 million.

We increasing our estimate of 2003 cash from operations to range from $1.1-1.3 billion before the B-2 tax payment.

Cash from operations is expected to increase to $1.5 billion in '04 and approximately $2 billion in '05.

As Kent mentioned, we expect the sale of TRW's auto business to close in the first quarter, with anticipated proceeds of approximately $3.9 billion.

We said we expect to use those proceeds to reduce debt, but at this point, I don't have anything more specific for you in terms of what debt will be retired.

We will obviously have a very strong balance sheet and we will then address this rich man's problem.

For 2004, we are expecting sales between $28 billion and $29 billion, with an operating margin rate in the mid 7% range.

All in all, it was a solid year and a quarter.

And as Ken and Ron have said, we are very excited about the future of Northrop Grumman.

I'll turn it over to Kent for closing comments before we begin q & a.

Thank you very much, Dick.

Let me close by reiterating that I think Northrop Grumman really had an outstanding 2002, both strategically and financially.

We acquired TRW to culminate our strategic direction of the last ten years, while at the same time, delivering solid financial results including sales growth, strong earnings, and outstanding cash generation, all major value drivers for this company.

Going forward, we are positioned to deliver growing top line, growing margins and continued strong cash flow.

I know that the GAAP earnings numbers will be affected by the status of our pension funds, which caused what was an income item to become a rather significant accounting expense.

However, I'm sure that the market now understands that this is not a value driver for us.

Or others in our industry, for that matter.

The pension expense is non cash and the CAS expense is essentially cash neutral since the contributions are recoverable.

We will continue providing you the data you need to value this company.

I'm convinced that we will be growing that value for the long haul.

And now, we'd all be happy to answer your questions.

If you have a question, key star one on your tone dial phone.

If you want to withdraw your question, key star two.

We have a question from Cai von Rumohr from SG Cowen.

Yes.

Good quarter.

You mentioned you had a delay on international programs in electronics.

Could you be more specific and do you expect those to build in 2003?

Cai, this is Ron.

I can't be more specific because of the sensitive nature of the programs, but we do expect them to build into the next year.

This is simply a timing issue.

I should point out, we already acquired these companies but we were expecting them earlier in the year.

They just affected sales this year, not acquisitions.

Contracts.

Contracts.

Can you give us a little more color on your margin target for shipbuilding?

It looks lighter for 2003.

Is that a function of mix or accounting conservatism?

Tell us about what's happening there.

Cai, it's basically the same number.

The reason -- we still have, obviously backlog to get through which is somewhat [profitless] backlog.

We obviously have a mix change going on.

All in all, with the growth in sales, I think it's looking very good.

A larger piece of that is add back because of the pension fund there's.

You see more reduced than what we've been talking about earlier.

Underlying numbers are the same as we talked before.

Last one and I'll let someone else go, could you tell us, how big were the purchase accounting adjustments in '02 and what do you look for in '03?

Well, we'll have to get back to you, Cai.

What do you mean?

You mean for all of the acquisitions we booked in '02?

Well, yes, for the acquisitions, for Litton, the flow-through of the polar tanker and all of that, the cash flow impact in '02 and expected in '03.

I think you said something like 250 was the target for '03.

Is that still the target?

Yes, that's approximately the same target we have going forward, Cai.

Thank you for giving me the number.

Thank you.

The next question is from George Shapiro from Salomon Smith Barney.

Good afternoon.

Very good numbers.

Thank you, George.

The increased revenues at Newport News, is that a sustainable thing?

I mean, this year, the revenues are uping a little bit to over $5 billion, but is that just going to continue like that?

The numbers for '03 as far as sales are concerned, George, are exactly the same as we said before.

This is -- just had to do with the timing, but it did not affect '03.

So it was unique to Q4, is that it?

Yes.

There was some surge business that effectively came through in Q4, among other things.

But ’03 is intact.

Then in electronics, the area that dropped but has been up for the year, defensive electronic countermeasures, that's the area for which these international contracts have been delayed?

No, that's not correct.

That was in another area.

Okay.

So then, Ron, if you look at the defensive electronic countermeasures being down in the quarter, is that a timing issue or there's a program there that's winding down?

It's up for the year, but down a lot in the quarter.

Yeah, I think there is timing associated with the large aircraft infrared countermeasurers program.

Let me change that a little bit.

It's a swing from ECM to IRCM.

Okay, the ECM [pod] business is essence going down slightly, whereas the IRCM is building up.

And they’re recorded separately.

Then in auto, is the expectation still that at the time of closing your equity interest will be down to the 20%?

Well, you know, we don't know exactly where it's going to be, but it will be in our target range, in terms of what we say is our target range.

We'll see what the exact numbers are at that point in time, once we close out all costs associated with that transaction.

But yes, we will have an extremely solid balance sheet at that point.

Dick, I'm just wondering, I mean, you have 42% equity interest in auto right now.

And the goal is to get that down to 20%.

Let me say that goal is still on track of being achieved.

Okay, ne last one, it's small, the Other Income was $25 million in the quarter, that's somewhat higher than it usually is.

Anything unique in that number?

We had about 10 million in property sales.

You can you see the royalty income we had because it's thrown back in there three.

We had interest income of about 5 and interest on tax refunds of about two and there's some, , foreign currency gains and losses and a whole bunch of -- those are the big pieces of that number.

Okay, good.

Thank you very much.

Thanks, George.

Our next question is from Byron Callan from Merrill Lynch.

Congratulations on the quarter.

Just to follow-up on George’s question on the Other Income line, What's that look like for 2003, does that run about the same level given some of the divestitures you have in the pipeline?

I'm not sure they will be in that line, but in terms of the items that are in there, we would expect it to be about 30 for next year.

For '03 just to be clear here.

Yeah, okay.

And the cash flow, can you elaborate a little bit on -- you know, we've had a couple quarters when it's coming a little bit better.

Are we getting to the bottom of the well or where are you surprised relative to plan on cash flow?

The predominant amount that we're being surprised -- is our ability to collect cash early.

That's the predominant piece of why we're ahead, which means it's really timing.

The obvious question gets to be, how much of that timing can be carried forward at the end of this year?

Right.

There was a tremendous pull-forward, if you will, from '03 timing and '02 which can impact our cash for this year.

Okay.

The last question, this is more for Ken or Ron, but can you talk a lit about some of the opportunities coming up in 2003, new program starts?

The [Lataural] combat ship is probably the biggest.

Is there anything out there that we ought to keep an eye on that might eventually represent an upside to your expectations?

If you win the program.

Well, that is certainly one of them.

Another couple of big ones is [Booth Phase Intercept], which could be a very large program awarded by the end of the year.

And we had the MC-2A program which hopefully will get on track and we get an award midyear.

There's a targets program for missile defense, which is a couple of billion, maybe 3 billion there.

What am I missing?

Advanced Hawkeye.

Advanced Hawkeye, which we talked about is a multibillion dollar program.

There's quite a list of new programs in the multibillion class, that, of course, we're going for and, of course, has a 25 plus billion operation, good thing they are.

Good.

Thanks a lot.

The next question is from Chris Mecray from Deutsche Banc.

Thank you.

I was hoping for the cash flow in 2002.

You might help us by breaking out, now that we're sort of through the year, what the purchase accounting effect was as well as any Litton integration charges and the program charges just so we could try to identify kind of what some sort of net number might look like.

Chris, we're not prepared to do that at this moment, but we'll do it at our conference coming up in February.

Okay, great.

I presume you might do that for the '03 year as well?

Sure.

To show us that as well?

Sure.

On the wins that you were talking about, the [Booth Phase Intercept] and targets - are those missile targets, where you would be competing against Lockheed or are we talking about some of the targets that you currently build in that group?

They're not yet wins, but they are in our sight.

We would likely be competing against one or two of the other major contractors, depending on who's bidding.

I can't speak for them.

But in all likelihood, we'd see the usual suspects here.

On the TRW margin guidance, you mention the takeaway from intangibles and whatnot.

Is there a way you could give us the old way of looking at it just so we could see what the guidance would have been relative to TRW's performance last year?

Or what the total is of those items, maybe?

Yeah, Chris, there was an attachment in the road show that we did, an appendix to the charts that walked you through that to a certain extent to get to our format for reporting.

What it didn't necessarily include was the increased amortization and depreciation that will come about as we assess the acquisition, but it's pretty close.

Basically it's about 1 to 1.5% lower than you are accustomed to seeing it reported, just because of our format change.

And then the CAS add back is a further reduction to what you were accustomed to seeing.

And obviously the impact of purchase accounting and the amortization etc. associated with that.

We will definitely address this directly at the conference so you can have -- understand all the elements.

We'll have detailed charts for that.

Let me say there is nothing that would suggest that their basic operations are any different or any less efficient going forward than what they have been current had had they been in the past.

They're doing very well.

We don't do reconciliations because it's not that relevant to us going forward.

Okay.

Fine.

Great quarter.

Thanks.

The next question comes from Joseph Campbell from Lehman Brothers.

Good afternoon.

I guess it's still morning.

Good morning and congratulations.

It’s not many years you'll have like this.

We're hoping we'll have a lot of years like this.

Well, you can't buy too many TRW's.

Regarding TRW, you said you anticipate that the audit divestiture would occur during the first quarter.

I wonder if you could step through some of the -- what's been done, what remains to be done?

I mean, if the buyer is going to go, you know, on a road show to raise money or whatever, maybe we would see more specificity with regard to when those things might happen.

Joe, we're not going to speak to that.

Obviously it's a sensitive thing.

The buyer has a lead on getting the transaction accomplished.

We are in the process of assisting them and obviously setting up a new company going forward.

We are doing those things that are necessary to be done in order to have that transition from us to them occur.

From all we can see in terms of our milestones, they are on track to be clipped off.

So I will just say generally we are on track to get this thing done by the end of the quarter.

Joe, this is going well.

And I really think we can do it this quarter.

There's a lot of work to do, but we're focused on getting it to happen and there's nothing that I see that says we won't.

Terrific.

You have a lot of ramping business this year in the fighter world as the F-22 moves from the PR TV planes to production planes, also as the F F-16 ramps up rather dramatically.

Could you outline for us what the electronic side of that is from a Northrop Grumman point of view?

We've heard sort of from Lockheed what's happening on their end.

What are all these things with regard to progress in the F-22 and the big ramp up in the F-16 mean to you guys.

We're basically providing the fire control radars for all those programs.

For the F-35, the progress is going very well.

We're actually building the F-35 radar utilizing a significant amount of war-to-modules that were already in development for the F-22.

There's a lot of reuse, which helps us in terms of cost and also frankly manage risk on the program.

On the F-22, we're proceeding with that.

The issue about how many F-22s there will be in the out years is not relevant for our guidance for '03.

And finally, on the F-16, in addition to the fire control radars for the Block 60, as you are probably aware, Poland recently selected the F-16 for its fleet, probably for NATO compatibility and we're providing radar for that.

That's all going well.

This is something we know how to do very well with a high level of commonality.

And designer changeability works for us here.

As Kent said earlier, we are the premiere airborne radar supplier and this is a true competitive advantage for us.

What I was asking on the F-22 was not about what the future quantities might be, but what precisely is happening to you guys this year?

Is there some production ramp that's equivalent for you or have you already done that?

And on the F-16, ditto, there’s big volume changes in the deliveries.

I'm wondering how that reflects itself down in your business.

These are volume and activity related during '03 questions.

First of all, there's no significant change in volume of work on F-22 this year and on F-16, we're not in volume production yet on UAE or on the Poland.

That will be in out years.

From a dollar volume standpoint, it's not a huge increase.

We're sort of staying where we are on the F-16.

It's all in the guidance in terms much the expected revenues in the sector.

Great.

Thank you very much.

The next question comes from Joe Nadol from JP Morgan.

Good afternoon, congratulations.

Thanks, Joe.

My first question is, Ron, you mentioned you hit a milestone on the Block 60.

Could you give us more detail as how things are going there and also touch on the polar tanker?

The Block 60, there's not much more to say.

It's a very carefully managed program.

There's a number of very specific milestones.

We've been clicking those off.

We've had good test results.

So the comments I had pretty much describe it.

This is not a sprint.

It's a marathon.

It will be the next year or so as we go through the program our as our confidence will increase.

At this point in time, we're very pleased with the progress, every single key milestone that we expected to accomplish we have and we're moving forward there.

With respect to the polar tanker we did tell you that we have migrated the Pascagoula workstation management system to New Orleans.

That’s taking place now, it’s in effect.

We're getting much greater visibility into schedule and cost.

As can you imagine, we have thousands of workers on these ships.

It's a complex matter to build these things.

The three remaining ships are moving along.

Tanker number three is 90% complete.

Tanker number four is about 60% and the fifth tanker is about 20% complete.

We are expecting delivery in the third quarter of 2003 for the third ship and we'll see deliveries in '04 and '05 for the next.

The actual delivery schedules will be optimized working with the customer.

The reason of doing that is to make sure we optimize the cost of completion.

These are not without risk going forward.

We think we've adequately reserved for them.

We're seeing significant focus on the operations there to deliver on the AC we have.

Another one for you, Ron, on the integration of TRW, it looks like you'll be still keeping these IT businesses separate.

I realize it's not a huge amount of overlap, but there's got to be some.

What are your thought there's, I guess, longer term?

We said we'd bring TRW in and we'd set the two units up as two distinctive units.

That's part of our strategy for operating performance for the year.

In the next three or four years, we're looking at areas where there may be overlap, not just between these businesses and TWR and our IT business, but between these businesses and other parts of Northrop Grumman.

And in a few months, we'll stand back and see if we want to make fine tuning adjustments to the portfolios of businesses in these sectors.

If we did, at some point in time we might move programs back and forth between them or move some small operations.

At this point in time, we're not contemplating any kind of big bang merger.

I would also point out, the character of Don Winters business Mission Systems is not identical to that of Herb Anderson’s IT sector.

Both do have some IT but Don has a variety of other things.

Don is running the nation's ICBM program, which is a $600-700 million a year of hardware development program.

The point here, is that we're managing the businesses for performance.

We're looking carefully at whether we might want to make adjustments and reporting and at the appropriate time we might make some changes.

At this point in time though, we're holding course.

A follow-up on the auto Divestiture.

I'm not sure if you can answer this or not.

Is it possible to run through what financing hurdles have to be achieved on the debt side for the deal to close?

Well, again, I'm going to say those are more for the buyer to speak to.

As far as we can ascertain, they are on track to accomplish the closing of this transaction on time.

If you recall, we had a very strong commitment from them in terms of closing on this transaction.

And we don't see any financing issue at this point in time in terms of closing the transaction.

Okay.

Just one more for you, Dick.

I guess the share count was material, but the net income from TRW was not in Q4.

Were there any contract adjustments on the negative side for the TRW business?

No.

It's not that it wasn't material because they had losses because the short time period.

And quite frankly having to better understand what the purchase accounting impact would be on whatever numbers would come out of that time period, which would obviously be an offset.

We just ascertained that it wasn't significant enough to try to capture at this point in time.

By the way, it's almost impossible to carve out that 12-day period in the time period we have to do this.

Yeah.

Fortunately, everybody agrees it's not material.

Unfortunately, we couldn't ignore the shares.

Okay.

Thank you very much.

Thank you.

The next question is from Brian Jellot (ph) from Jenison (ph).

Hi, a question for Dick or Gaston.

For just this one time to help reconcile previous segment assumptions and to help track performance going forward, can you give the CAS pension expense by division, breaking down that $260 million by division?

Do it by segment?

By segment.

The CAS by segment.

The 260 by segment, not only just for mulling purposes, but to help track the performance going forward.

Obviously you wouldn’t do that on a quarter by quarter basis going forward, but a one time to help us change the --?

Let me say, -- let me say, we're not going to give that on a go-forward basis because it is part of our rates analysis.

I will say you can figure it out if you kind of compare what we show in the past to what we're know showing in our restated format.

It's not going to be helpful going forward.

We're not going to tell you what it is going forward.

I understand going forward.

I thought Gaston could help out to break down the 260 as a one-time adjustment.

We may have different margin assumptions on our side .

I can walk you through reported versus this reconciliation.

Separately just in terms of the cash word that you have, could you talk about the possible role of share repurchases going forward?

Well, I really can't speak to any specific thing, obviously this is an area that Dick mentioned we're getting into a rich man's situation where we're going to have a debt-to-cap, which is actually better than we generally feel we need comfortably to run the business.

Clearly, we're going to be looking at this over the next months and so forth.

I'm certainly not at a position to discuss any specifics, only to say that we need to manage our balance sheet in a way we think is appropriate for our shareholders and we will do so.

Okay.

Thanks.

The next question is from Sam Pearlstein from Wachovia Securities.

Good Afternoon.

I wanted to follow up on one of the questions before about the 12 day period for Q1W.

I guess at some point doesn't that income have to be recognized?

At some point do we see a direct impact to the equity account on the balance sheet?

No, we'll never see it.

Okay.

All right.

That's fair.

And then in terms of your guidance for 2003, I had written down something more on the order of 31% or 32% tax rate and you said 28% because there were tax benefits you were getting.

Can you elaborate on that and is there an offset to that 11 cents or is that simply carried within your guidance range.

Let me talk to the tax element of that.

I don't particularly want to get into -- let me say, that's our expectation with regard to certain credits we believe we'll be able to claim this year, which means it's not in the bank as yet.

There's some further effort to accomplish that, but we're confident we will.

It's a one-time increment and credits which will not impact any year beyond this year.

So as a consequence, it does have an impact on this year's effective tax rate.

The second question was what?

Offsetting, if you notice back in the reconciliation table Sam, on schedule 7, there's in addition to that 11 cents up, there's 9 cents down, because our estimate for CAS expense went down for about 9 cents.

Those virtually offset one another.

I see.

Okay.

And then just on another case, you at one point talked about booking a profit on the Wedgetail program in this quarter and I was wondering if you did that, how significant that would have been to the segment results.

Yes, we did effect that.

It's very small.

It's not really material to the results, but the good news is it's positive.

Sam Pearlstein The last question is on the automotive -- TRW automotive, what are your assumptions in the 2003 guidance with respect to equity income assuming you get your ownership down to 20%.

You still have some level of equity income on the P & L.

Right now we have zero in there.

Our drive is to try to get to 19.9.

Sam Pearlstein Why would it be zero if it's a profitable operation?

I'm saying we don't have anything in there at this point with regard to estimates.

Again, they have to go through their purchase accounting analysis and we will have -- if we had to have an equity flow-through, it would be based on their restated book values and so forth and right now we don't have a number.

We're not trying to estimate.

They are a profitable operation.

I'm not suggesting differently there, but I will say we are more likely than not to get ownership hopefully below 20% so we won't be dealing with an equity accounting issue.

Sam Pearlstein Thank you very much.

The next question is from Nick Blodale of Banc of America Securities.

Hello, good evening from London.

Very good call, sir.

Thank you.

Just a couple of questions on the TRW.

Further from what Joe was asking Ron talked in the release about quickly integrating TRW's defense operations.

Are you able now to identify real cost saving synergies between old north rop and TRW's businesses?

As we said all along, this is not an acquisition centering around cost synergy.

Yes, there will be cost synergy as we eliminate the headquarters of TRW, and that will happen over the korgs of the year, but we're not looking to putting together defense element with ours with the purpose of reducing cost.

Our purpose is to allow the various elements to pursue larger program opportunities that neither of us could have pursued separately, therefore, creating revenue synergy.

Following on from that, in mission systems and space, what kind of revenue growth opportunities might you see there?

Also, as you are now a new parent in this area and you've obviously got a lot of missile defense competition or bids going on, you talked about the target missile defense programs.

What kind of feedback are you getting from the department?

Are you a welcome to the other two or three businesses in that area?

Fisrt of all, let me say that the growth expectations we laid out on the road show we showed you, there's absolutely no question as we spend time in the missile defense agency at all levels that they're very excited about the new Northrop Grumman and the capabilities.

It's not an adversary.

The nation has a substantial challenge to feel as quickly as possible the whole set of missile defense technologies and they need to pull resources.

So seeing this has come together and stepping up as a major problem is something we have a tremendous encouragement from.

Can you remind me what the revenue growth opportunities are in these two areas?

10% to 11%.

Thank you.

The last question is, group margins as a whole, you identified staying around mid 7% in '03 and '04.

I guess this is a function of a mixture of pension and a mixture of income in R & D in the mix.

In '04, is there any upside to this as you may be going through a higher fixed price reduction/delivery ramp?

Or is this something that will be held back by more R & D coming in?

I would say we certainly look forward to the opportunity to have more.

This is our best guess, best estimate that we have right now.

The really good news is that we have the top line growth we really see and we're going to maintain, we think right now maintain those rates.

Generally the new things we're going tobe acquiring come in at lower margin rates.

We're doing very well.

But clearly if there's greater productions on some elements, then we're projecting, than clearly this could be higher.

We certainly don't want to say it's in the bag, but we're comfortable we can maintain it.

Let me also point out that the that margin rate takes into account the increase and amortization and depreciation that we have on the purchase accounting associated with TRW, yes, it impacts our margin rate, but don't forget, you need to reverse that out when you come back to cash.

Great.

Very last question, back to Kent really.

I remember talking to you at the end of the year.

And adding more caution, if you like, coming from you as to the outlook.

This is obviously changed since we spoke.

Is there something coming out in the '04 budget that's allowing you to be a little bit more confident in this area?

I would say I haven't really changed very much.

I would say the thing that's changed in a positive way is that the kinds of opportunities that we now see in this larger Northrop Grumman corporation, the ability to bid some of the very large programs that are on the horizon, we feel a lot more comfortable about.

We see our top line growth in this environment is actually better than we did a year or so ago.

As we really understand who we are.

I'm very bullish about the future for us.

As I made my comments earlier, I think we will have growth at a greater rate than the growth of the budget.

Great.

Thank you very much indeed.

Thank you.

The next question comes from David Andrews from UBS Warburg.

Yes.

On the fixed income side, I had a question regarding your debt structure, particularly, how you think you may look after whatever debt repayment that you achieve once the TRW auto deal is completed.

I mean, for example, before TRW you had a skewing in your debt structure towards the long end, maybe 45% of your total debt was in long end and the rest are split between short and intermediate.

With the addition of the TRW debt, that is probably skewed back towards the short and the intermediate side being higher than what you've had historically.

Would it be logical or reasonable to assume that you'd be looking to get that debt structure back to where you were before the TRW acquisition.

That's a very good question and I'm not sure I followed all of it.

Let me say we obviously will be looking at the various trenches.

That's part of how we want to program our debt, if I can phrase it that way.

In terms what have we're going to select and what we're not going to select.

And absent that, there obviously will be a significant reduction in debt because we're not going to keep this cash on our books.

And as a consequence, we will get to a very below our target range for our net debt to cap.

I hope that answered your question.

If not, say it again.

You are looking at your peer group, many other defense companies tend to have a higher waiting in the long term end of your debt structure and what I'm trying to get a sense for, you, of course had that before the TRW acquisition.

And are trying to get a sense as you weigh those various issues, would it be reasonable to expect that you'd probably want to head back to the way you were before the acquisition.

Let me say, I actually -- prior to the acquisition, we were almost 100% long term in terms of fixed debt.

Years ago we would -- we were comfortable having our debt being 50% floating and 50% fixed.

If anything, our preference would be to get more flowing debt on our balance sheet so we can hedge what the interest -- what the rates are going to do in the market.

I'm not being clear.

If you looked at your debt structure in three buckets, short term being say zero to five years, intermediate being seven to ten years and long term being over ten years, that's what it's getting at.

You're really at 45 plus percent in that long-term bucket, ten years plus.

And that's what I'm trying to get at.

With TRW, more of it gets into the short term and not necessarily floating rate or fixed, but in terms of tenor.

I can't speak to it, because we have to examine that.

I will also say in terms of tenor, I'll say we've been more comfortable in the past with floating rate.

That doesn't come into the analysis.

I really can't speak to it.

We are cognizant of terms and tenor in terms of long and short.

We will structure ourselves in such a way to have an even payout.

In my mind, we need to get back to more floating debt.

Floating debt, I'm surprised --

Short term.

You mentioned in the going that you had a billion of cash to repay debt.

And of the billion, say, four, on your balance sheet, I would presume that means you think you need on an ongoing operating basis 400 million, maybe 500 million, even with the increase of TRW, because that's about what you've been running historically.

That's the amount of cash you think you need on an ongoing basis and in the excess that could’ve been used for debt reduction.

Did I interpret that correctly.

We haven't given that analysis out, so I won't speak to that.

That will be part of the analysis in regard to debt restructuring.

Last question, any debt -- TRW debt that doesn't end up as part of the debt reduction plan, I would assume that that would continue to get the full faith and backing of Northrop Grumman, guaranteed the way other debt obligations of other acquisitions that you've acquire in the past?

We have not spoken about that either.

Again, that will be part of -- when we fully ascertain what we're going to do, we'll make that announce announcement.

We're not in a place to make comments about Northrop Grumman or TRW debt, what we'll do with either.

It won't be until the TRW acquisition closes.

We shouldn't expect much many in the New York meeting?

That would be reasonable to assume.

Okay, this is Gaston.

We're going to have to cut this off.

We have interviews coming up very shortly.

Any closing thoughts?

Well, thank you very much for your comments about the good quarter.

We've certainly agree with you.

We think it was a great quarter. s a great team has done a terrific job on all f strically, tactically, financially.

We're committed to keep on going it.

Thanks for your attention and glad you could join us.

Thank you very much, ladies and gentlemen.--- 0