諾斯洛普·格拉曼 (NOC) 2003 Q1 法說會逐字稿

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Good day, ladies and gentlemen, and welcome to the Northrop Grumman first quarter earnings conference.

My name is Caitlin and I will be your coordinator today.

At this time you are all in listen only mode.

There will be a question and answer session to follow your presentation.

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

And at this time I would like to turn the program over to your host, the Vice President of Investor Relations, Mr. Gaston Kent.

Sir, please proceed.

Thank you, Caitlin.

And welcome , ladies and gentlemen, to the first quarter conference call.

During this call we will discuss first quarter results and the outlook for 2003 and beyond.

Before we start we would like you to 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 and the actual results of the company 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 company's SEC filings including the form 10 K and forms 10-Q among others.

On the call today are our C.E.O., Ron Sugar and our Chief Financial Officer, Dick Waugh.

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

Thank you, Gaston.

And good morning, everyone.

And thanks for joining us.

I want to begin by acknowledging Kent Kresa's contributions and paying tribute to his accomplishments during his tenure as C.E.O.

Kent led this company's incredible transformation.

He is truly a visionary and I feel privileged to have worked so closely with him.

I'm thrilled to be at the helm of Northrop Grumman Corporation at a time when our future is so bright.

I look forward to many more quarters like this one where we execute strategically and achieve outstanding operational and program performance across all our operating sectors.

On the strategic side we successfully executed our planned sale of TRW Automotive on February 28th and very soon thereafter announced the first phase of our debt reduction program.

By March 17th we had retired $2.8 billion in fixed rate debt to our announced tender offer.

We retired an additional $640 million in fixed rate debt during the first quarter through open market purchases.

This second phase in the debt reduction program continued into the second quarter with repurchase of another $120 million of fixed rate debt.

To date, we've retired approximately $3.6 billion of fixed rate debt.

By the end of the first quarter, Mission Systems and Space Technology have been stood up as full Northrop Grumman sectors ahead of schedule.

Both are now in conformance with Northrop Grumman policies and procedures including financial reporting, program oversight, risk management and human resources.

As advertised, the standup of these sectors was straight forward.

All that is left on the TRW integration is migrating a limited number of remaining corporate functions from Cleveland to Century City.

This will be completed by year end.

Both new sectors are reporting for the first time as a part of Northrop Grumman so the comparable sales numbers from last year don't appear on our financials.

These new sectors contributed to 49 percent overall sales growth for Northrop Grumman year-over-year.

For the legacy Northrop Grumman businesses on an organic basis we achieved double digit sales growth with strong performances from Electronic Systems, Ships, and Information Technology.

Earnings per share from continuing operations were solid at $.91 cents, including a one-time tax credit.

Results from discontinued operations include TRW Automotive for the two months we owned them.

I'm extremely pleased with operating and program performance across the company.

All seven of our sectors met or exceeded our expectations on nearly every measure, acquisitions, backlog, sales, operating margin, and cash.

Total acquisitions were outstanding at more than $7 billion.

We ended the quarter with a $27 billion firm funded backlog.

Segment operating margin was solid at 7.4 percent.

Excluding the $1 billion B-2 tax payment, cash from continuing operation was essentially break- even compared to a negative $100 million last year.

Among the many contract awards and other highlights during the quarter, we were selected as one of two competitors for the UK's Watch Keeper Program which has a potential value of $1.2 billion.

We are also one of two companies awarded an initial study contract for the Kinetic Energy Interceptor Study.

Northrop Grumman's official entry into the Missile Defense arena as a prime competitor.

We are teamed with Raytheon in this program which has a potential value of several billion dollars.

Looking at current programs, we are healthy across the board.

Electronics had very strong sales growth of 11 percent and even stronger margin growth.

And we continue to make good progress on our F-16 block 60 program achieving nine key technical and delivery milestones as scheduled.

Wedge Tail, our other fixed price development program, is also progressing well and we again reported a small profit during the quarter.

I.T. grew sales by more than 17 percent.

Every business area in I.T. achieved double digit growth and the reseller business grew by more than 30 percent.

I.T.'s major programs are all performing on or better than planned.

We were one of eight contractors awarded an $8 billion multi -- I'm sorry, 8 year multibillion dollar IDIQ contract for the Army C-Com's Rapid Response Program.

Iin Ships, sales growth was also strong at 12 percent.

We are underway and making excellent progress on both BDS and Deep Water.

Polar Tanker is holding to its learning curve estimate.

The third ship is scheduled for delivery this summer.

We continue to be pleased with the progress on the LPD program.

LPD-17 construction is more than 60 percent complete and this ship is scheduled for delivery in the fourth quarter of 2004.

The LPD 19 keel was laid in Pascagoula.

This is the first of the LPDs whose assembly will take place at the Pascagoula shipyard.

The Ronald Reagan, the nation's newest and most capable aircraft carrier will be delivered this summer and we continue to make excellent progress on the Virginia Class submarines.

Although first quarter sales in integrated systems were relatively flat we still expect double digit growth for the year driven by the air combat systems business aarea.

Our Pegasus X-47 unmanned combat air vehicle achieved its first flight milestone and our Firescout UAV completed its 35th and longest flight.

The F-35 program is well underway as is the transition and production on Global Hawk.

Mission Systems reported strong sales up 13 percent from last year's reported sales under TRW.

Likewise, all their major programs are very healthy and sales were strong in each of their business areas.

And yesterday we announced a $350 million, seven-year contract to help modernize the FAA's air traffic control systems.

Space Technology also reported sprong growth with almost 20 percent year-over-year growth over TRW's reported numbers last year due to very significant wins they had last year.

The six North Star Satellite was recently launched is undergoing on-orbit check out.

All our operations on all sectors are hitting on all cylinders.

We were very pleased with these results.

I'm also proud of the fact that all seven Northrop Grumman segments have products and systems deployed in Operation Iraqi Freedom and that several hundred Northrop Grumman employees have been called to active duty and are serving in theater.

We express our gratitude to them and their families as we do to all the women and men of our armed forces who serve in this conflict.

Our products have been used extensively in the air campaign, the ground war, sea based operations and in space.

This was Global Hawk's second combat deployment and this was the first time the B-2 bomber has been deployed to and flown combat -- - a forward base of operation.

More Joystars aircraft were deployed than ever before and they provided excellent surveillance information in all weather, including sand storms.

Our lightening targeting pods were used extensively for precision strick on AV8Bs, F-15Es and for the first time on B-52s.

On the C-4 ISR side, our tactical exploitation system, TES, supported all four services in tracking enemy movements, providing time critical targets, locating, targeting, and verified destruction of targets, and providing instantaneous collaboration between Global Command Centers and Network C-4 ISR systems.

On the ground, according to one Brigade Commander, the FBCB2, provided, and I quote, "A level of situational awareness that is second to none."

Our global command and control system is Centcom's primary situation awareness display and decision making system.

At sea, six of the - - attack submarines and five of the seven carriers deployed were designed and constructed at Newport News.

As of April 17th the aircraft from these carriers had flown nearly 7500 sortese.

Our destroyers, cruisers and assault ships were utilized in carrier and amphibious battle groups and our cruisers served as Tomahawk missile shooters.

Six of our Bob Hope Class Sealift Ships delivered the tanks, fighting vehicles, and other rolling stock and supplies needed by the army.

In space, Mission Control Station processed mission data down linked from our DSP satellites and transmitted launch detection and tracking messages on all ballistic missile events.

Milstar sattelittes did all air tasking order communications and cruise missle targeting updated at EHF equipped launch platforms and was also involved in the rescue of Private Jessica Lynch by special operations forces.

There are many other examples, too many to name here, but from all customer and media reports, the performance has been outstanding and confirms the importance of Northrop Grumman as a provider of network centric system of systems capabilities and technologies.

We continue to belive we are at the beginning of a period of long term sustanable growth in defense spending.

Based on our National Defense and Homeland Security needs we believe that Operation Iraqi Freedom revalidates this outlook.

Northrop Grumman with its outstanding technolgies programs and management is superbly positioned to make the most of a very rich opportunity set and I'm pleased to have the opportunity to lead this fine company.

With that I'll turn the call over to Dick Waugh, our Chief Financial Officer for a more detailed discussion of the numbers.

Dick?

Thanks, Ron.

As Ron said, we had an excellent first quarter from the operating sectors.

Overall segment operating margin was 7.4 percent versus 7.6 percent in the same quarter last year.

This slightly lower margin rate reflects the addition of two new sectors from TRW, both of which produced margins lower than our average because of their contract mix and amortization.

Let's move into the individual segments.

Electronic Systems had a terrific quarter with operating margin growing 34 percent versus sales growth of 11 percent.

Their margin rate expanded from 7.5 percent last year to nine percent. 2002, the sector had restructuring costs and lower margin rate contracts acquired with Litton, which are now essentially complete.

We also had some small upward margin adjustments on a number of contracts.

Rate growth was most noteworthy in aerospace and defensive systems.

Sales for the year are expected to be $6 billion with operating margin approaching ten percent.

Ship margin rate held steady 6.2 percent on 12 percent sales growth with lower margin on carriers offset by a decrease in purchase and tangibles amortization.

The DDX and Deep Water programs are being booked at relatively low margins due to the early stage of their development.

For the year, sales are expected to be a little over $5 billion with operating margin of 6.5 to seven percent.

Information Technology operating margin grew 24 percent on revenue growth of 17.5 percent.

The reseller business area, Enterprise Information Technology, grew more than 30 percent.

Overall, the I.T. segment margin rate expanded to 5.7 percent from 5.4 percent last year, reflecting strong program performance, particularly in the government I.T. business area.

For all of 2003, IT sales are expected to be more than $4.5 billion, with with margin of about 6%.

Integrated Systems had relatively flat sales with operating margin of 10.7 percent versus 11.5 percent last year.

This reduction is as expected due to the upswing in cost reimbursable contracts for the F-35 and Global Hawk.

For the year, sales are expected to grow by over ten percent to about $3.7 billion with an operating margin of eight to 8.5 percent.

Let's move onto the two new sectors, Mission Systems, and Space Technology.

Mission Systems sales were just over $900 million, and they are on plan to achieve about $4 billion for the year.

Space Technology sales were about $650 million, and they are on plan to achieve sales of about $2.5 billion.

Mission Systems and Space Technology margin rates were six percent and five percent, respectively.

There have been margin refinements in both sectors as we make progress on purchase accounting valuations.

During the quarter, we completed the first phase of purchase accounting analysis, which included purchase and tangibles and fixed assets.

As a result for the year, amortization of purchased intangibles for each sector is estimated to be approximately $35 million down from the previous estimate of $52 million for each sector.

And depreciation expense for Space Technology has increased by approximately $15 million.

In addition, in order to conform our reporting, both sectors operating margin now includes a post retirement benefit expense that was previously carried as a corporate expense under TRWs reporting.

In Mission Systems, the lower amortization and post retirement expense offset one another.

And we continue to expect an operating margin rate of approximately six percent In Space Technology, the lower amortization increased depreciation and the conformance adjustment for post retirement expense will result in reported margin rate of approximately six percent for the year versus our previous guidance of 6.5 to seven percent.

None of these adjustments reflect changes in program or contract performance at the sectors.

They are purchase accounting and conformance only.

Moving to corporate items, our estimation of FAS 87 pension expense will be lower than our previous estimate, reflecting an update of our demographic data and our CAS add back will be higher.

There is the possibility of additional adjustments within individual plans because of some term changes but they should not be material.

Other income is primarily income from the Eagle Alliance which is not expected to repeat during the year and royalty income.

Interest income is predominantly income from the note received in the TRW Automotive sale.

Interest expense will decline from this quarter's level because of the debt reduction program.

We still expect net interest expense to be around $470 million.

You will note a very low effective tax rate for the quarter, about 18 percent, reflecting a $26 million tax credit for additional research tax credits covering the years 1981 through 1990.

We still expect the tax rate for the entire year to be approximately 28 percent.

So the effective tax rate for the remaining three quarters will be higher.

Cash generation for the quarter was very strong, particularly in the light of the extraordinary cash generation in the fourth quarter of last year.

Taxes paid flow to cash from operations so the number from the quarter includes the B-2 tax payment.

We are maintaining our previous guidance of $1.1 to $1.3 billion for the year, excluding the B-2 tax payment.

For 2004, we continue to expect cash from operations of approximately $1.5 billion.

Now let's move to the balance sheet.

As previously announced, we completed the tender offer purchase of the debt reduction program.

Although not announced, open market purchases have been underway and we are now essentially complete.

In total, we have purchased in the marketplace $3.1 billion face value of TRW fixed rate debt that had been market- to-market at year end to approximately $3.6 billion.

Net debt at the end of the quarter was at about 30 percent, the bottom end of our desired range, and about where we would expect to be at year end.

We will be evaluating further strategic uses of cash as the year progresses.

However, as previously stated, we do not see any further large acquisitions in the near term.

TRW was the last major building block of our strategic transformation.

For 2003, sales are expected to range between 25 to $26 billion, growing to 28 to $29 billion in 2004, solid double digit growth.

The only change the sector margins from our previous guidance is for the purchase accounting and conformist issues discussed for MS and Space.

Overall, we still expect segment operating margin to be in the mid seven percent range in 2003 and 2004.

Net pension expense this year will be less than previously estimated offset somewhat by conformance and purchase accounting adjustments.

Under current actuarial and asset return assumptions we expect 2004 net pension adjustment to be to be about the same as this year. 2004 amortization to purchase intangibles is expected to be approximately the same as 2003.

Depreciation should be slightly higher in 2004.

Net interest expense is expected to range between 375 and $400 million, and our expected effective tax rate in 2004 should be between 32 and 33 percent.

For 2003, we have raised and narrowed the range of our GAAP earnings guidance from $3.80 to $4.20 per share.

To shape the quarters for you, we expect the second to be the low for EPS because of timing of award fees.

Under the 2004 assumptions we've outlined, we would expect a solid double digit increase in our 2004 GAAP earnings per share.

Now I will turn the call back to Gaston for questions.

Gaston?

Thanks, Dick.

Caitlin we are ready for Q and A.

If you wish to ask a question, key star 1 on your touch tone telephone.

If your question has been answered or you wish to withdraw it, please key star 2.

The questions will be answered in the order received.

Your first question comes from Steve Binder of CS Journs.

Touch on the Ship Margins of 6.5 to 7 percent and the previous guidance was in the mid six range.

What caused you to change that guidance?

And in the light of the guidance maybe you could address the GAAP EPS guidance going up a nickel on the high end, 15 cents on the low end.

And you've obviously lowered your pension costs by over 20 cents.

And you obviously lowered your intangibles you know compared to -- you uped depreciation but lowered intangibles more.

You seem conservative on the guidance.

First, address the Ship margins, and the upward flip there.

Let me say, Steve, it's -- I'm not aware of anything significant.

Let me say we are still comfortable with that forecast but I don't think there is -- I have to go back and look at our previous guidance but I think it's pretty much the same as your previous guidance.

Today you said 6.5 to 7 and it was in the mid six range.

It is a little --

Let me say there is a little bit of an upper because we think it may be doing a little bit better but again there is not that dramatic a change.

Okay.

Let me say with regards to your second question and that is with regards to our movement in our bands, let me just say we do have a number of conformance items that come into play there.

And quite frankly, we have some as you can well appreciate, some noise this year with regards to all the purchase accounting adjustments.

Quite frankly we are more comfortable in narrowing the range, but establishing that range at this point in time.

IS Margins were stronger.

Was there any CUM adjustments in the quarter?

We had some award fees.

Not significant enough to note them as material on any given program but overall yes they have had an excellent quarter.

And Ron, could you touch on tankers as far as where you stand on completion rates on the third, fourth and fifth boats and update on productivity there?

The third boat is obviously getting ready to be delivered.

We will except to see that delivered in the summer, Steve.

The fourth and fifth are proceeding.

Productivity rates are holding and we are not done yet.

We still have a ways to go on these ships over the next year or two.

But so far so good.

Okay, thank you.

Sir, your next question comes from KY Von Rumohr of SG Cowen Securities.

Your bookings look -- normally your backlog is down in the first quarter.

It was up a billion 3.

Could you comment, were bookings above planned?

Kinds of what do you see for the second quarter?

And do you feel there is any upside to the revenue guidance if not for this year then for next year?

Let me say, the bookings reflect funding under our current programs the biggest in the quarter being the F-18 EP.

So it's just funding of our current programs.

Nothing dramatic in terms of new awards.

And it is in line with our forecast for next year.

Okay.

And you mentioned the difference between, you know, book value and what you bought back the debt for.

Could you give us the exact number, that difference, you know, in terms of what it was in terms of cash flow in the quarter?

And secondly, you know, have you revised as a result of these changes in TRW and mission systems your estimate of the purchase accounting negative to cash flow for this year or next?

Let me -- let me say, Ky, that the premium is approximately $500 million -- pardon me.

When I say premium, I don't mean the premium we pay to the current trading value.

That's the mark to market and face value.

All these bonds have a higher value because they are at a higher are interest rate than the current interest rate, the current market rate.

It took us about $3.6 billion in cash to take up $3.1 billion in face value.

The difference is primarily the mark to market.

I mean, there is a little bit in there in terms -- a little bit of basis points to attract people to, in fact, tender.

But obviously, the predominance is the actual mark to market.

What was your other question?

The other question was purchase -- purchase accounting adjustments, the negative impact to cash flow, both this year and next year.

Has that come down at all?

Well, let me say with regards to our PACO in terms of cash we see a burndown this year of about 20 -- actually about 20 in this quarter, and about 160 for the year.

This is overall now, CAI, this is not just space and this is just not the TRW.

Okay.

And for '04 we see it around $70 million.

As you can see, it's dramatically reducing over time.

So this seems to be somewhat smaller than the number you gave us in February so that, in fact, the cash earnings flowthrough is a little bit better?

Is that a correct assessment or not?

Well, this is more or less in line at least of what we tried to express and what we were showing earlier.

Again, there is always rounding here.

I think we said 150 to 200, if I remember correctly for the year.

Great, I'll let someone else go.

Good quarter, guys.

Thanks.

your next question from George Japir of Solomon Smith Barney.

Good morning.

Very good numbers.

Dick, I was wondering on the interest expense guidance for next year it's down, you know, less than $100 million, and yet, you know, a couple of months ago you were saying that you would have an abnormally higher $100 million of interest expense this year because of the TRW auto sale.

Why won't interest expense next year be down even more than the $100 million because you would be generating some cash next year as well?

Well, let me say the -- our range is 375 to 400.

And if you go to 375, it is 100, George, unless I am not understanding your question.

Yeah, but I mean you should be generating some more cash next year as well, so one would think that the -- since I think that's a net number, one would think it would be lower.

I only wish we could get more on our overnight.

I mean, it would still strike me that your guidance next year is a conservative number, though, relative to $100 million plus to cash that you should generate next year.

Let me say our weighted cost to average debt on our fixed debt is about 7.5 percent in that area.

But again we are not signaling we are going to be taking any more dent out of the market.

Any cash generated is going to be revested.

Today's rates is 1.5 percent to overnight money.

It's not generating a lot of interest income, if you will.

Okay.

And then in integrated systems, the sales were about flat or you still projected double digit growth for the year.

What was lower in the quarter?

What do you expect to grow faster?

And then the margin guidance is so much lower for the year than what we got in the quarter.

If you could kind of reconcile a little bit about what's going on there.

On the sales level, George, it's timing.

It's really cost incurred on the new cost reimbursable contracts.

It's just a little less than you might have thought.

And the F-18 is essentially stepping down in revenues now even though it's flat production as the prices come down.

On the margin I think Dick's already said that we have got some award fees in the first quarter that don't repeat.

So that helped their first quarter.

And then it steps down in the remaining quarters.

Yeah we're going see -- this is Ron, George.

F-35 is going to kick in as we move through the next few quarters and that will be very important.

Okay.

Obviously, there is a mix change there.

And then just one last one, Dick, the interest expense level for the second quarter, I mean, I assume it's less than the first quarter, but it's probably higher than the, Dick, the interest expense level for the second quarter, I mean, I assume it's less than the first quarter, but higher than the third and the fourth because some of the debt you bought in the quarter?

Yeah.

Let me find the run rate here.

It's about 115 to 120 is the run rate going out, George.

Okay.

That's on a quarterly basis, obviously.

Okay.

Thanks very much.

Very good.

Thank you.

Sir, your next question comes from Joe Nadol of JP Morgan.

Good afternoon or good morning.

Hi, Joe.

Nice quarter.

Thank you.

My first question, Dick, is on your net debt balance at the end of the quarter.

I'm not quite getting to your number just running through the items.

Maybe if you could take us through some of the major items in the cash and investment activities.

You had $3.9 billion coming in, right?

Well, again, we had to re-revalue at 1231 the TRW debt.

So we had about $9.6 billion.

Uh-huh.

Okay?

And then the debt we took out through phase 1 and phase 2, if you will, we'll call it, was about 3.5.

And the reason for that is there is some debt that came out within TRW auto itself before we closed auto of about $350 million.

Okay.

Was there negative cash flow in discontinued operations during the quarter is the way of putting it?

Yeah.

There is a $30 million use of cash.

I'm several hundred million off.

So I guess --

Well, we have -- well, to -- let me see here.

We've got borrowings -- we've got -- you know, again, we took out 341 in terms of the automotive.

And the cash we used to buy out phase 1 and phase 2 through the quarter was about 3.5.

That's the face value plus the, quote, unquote, premium or the mark to market.

So that's 3.8.

There was debt that went in included in the automotive sale of about 250.

So that lowers it.

So that gets us to about 4.

And then we have borrowers and on our line of credit of about 750.

And then we have amortization of our premium and other payments.

That's about 50.

And then we have an adjustment in our mark to market on our TRW debt in the quarter associated with the buyback of the debt and obviously getting a true fair market value associated with the buyback.

That was about another hundred.

I'm giving you round numbers.

And that brings us down to 6.9.

Okay.

Okay.

You mentioned that according to where the market is currently, your returns are currently, you expect a flat net pension impact in '04 from '03.

Could you break that down into FAS and CAS?

Because my numbers would have FAS flat but CAS actually growing.

Let me say, we kind of intentionally gave that information the way we did because we are uncomfortable giving actual FAS and CAS numbers because of the frailty of those numbers.

Our best estimate -- sometimes those things kind of move in tandem so we are more comfortable talking about it in combination than we are separately.

In the IS segment are you comfortable giving the programs on which you received award fees and were there specific rate adjustments on your booking rates?

On the B-2 and the F-18.

Those are the two major areas.

And no major booking changes.

Okay.

And finally, looking ahead at bookings the rest of the year and specifically I guess at major competitions, Ron, what do you see?

Well, there is a lot going on.

I think one of the big ones, and it may not actually hit this year, Joe, is the kinetic energy interceptor for the missile defense agency.

That could be in the billion dollar plus class.

The literally combat ship is going to down select here to three.

That will be a small award but it will be nonetheless important.

There is another big program out there called Targets Payloads and Counter Measures custom is an MDA, missile defense agency program, that's probably later in the year.

The joint S.A.R.S. fall along MC 2a is something we are keeping an eye on.

There may be an award of a Virginia class multiyear or at least an additional ship.

And a variety of things out there.

Watch Keeper might not hit this year.

Might be early next year.

Quite a few irons in the fire.

Anything from Taiwan over the next couple of quarters?

We have a significant bid outstanding on a program for the advanced tactical data link.

That's a billion dollar class program we are one of two bidders for that.

When does that come out?

It could be this year.

Later in the year.

The proposal has been submitted.

It is a foreign military sale and, of course, subject to Taiwanese funding.

One can never be too optimistic about the timing but that could be late they are year.

And the subs?

The subs could remain problematic as long as the German government is resistant to the idea of allowing of the German technology.

That could bounce around the various state departments and there is also the issue of the That could bounce around the various state departments and there is also the issue of the Taiwanese coming up with the full funding. coming up with the full funding.

I wouldn't think that's something we are likely to see this year.

Thank you.

Your next question comes from Byron Callan of Merrill Lynch.

Nice quarter, gentlemen.

Thanks.

Couple of things.

Dick, I think you mentioned the timing of the quarters how the second quarter is going to be weak because of the timing of award fees.

What segment are we talking about?

Is that a sure thing for the third quarter or a possibility for the fourth quarter?

We would expect the third quarter to recover and the fourth quarter being traditionally our best quarter so as to give us a sense of where things are.

Again we are never quite sure of the timing.

But I will say that it is really -- the award fee -- we had a very good quarter for award fees across several of our sectors so it's difficult to pinpoint any particular area.

I will say in terms of IS, as we said, they had very nice pickups and award fees during the quarter.

That's a piece of it.

Quite frankly, our other sectors enjoyed again no particular large item with any particular program but they all did very well and it just so happened the confluence of time or being, if you will, in term of the award fees made predominance in the first quarter as opposed to the second quarter leads to this kind of a results.

Ron or Dick, was there any discernible impact from Iraq in the first quarter, either accelerated equipment or maybe some things like ship repair that might get pushed out a bit because of the deployments?

Anything that you might put your finger on?

No, I don't think so, Byron.

Much of the surge of money there and potentially what we'll see is in the supplement is in -- is in the replenishments, bombs, bullets, beans, and blankets.

And we don't place well in that area.

I don't think there is any impact from the first quarter from that nor do we expect much this year.

What we do see is a revalidation of the types of programs we are sitting with in our portfolio and the fact that they were essential to the conduct in the conflict.

We're quite excited about the long range prospects for these programs.

Ron, there have been trade press reports about cost growth in some naval programs.

I guess Virginia class had been highlighted in that.

Can you address that issue?

Is it a funding shortfall?

Are you confident the navy will be able to close in the FY 05 plan?

The construction costs for those ships is really an open book.

We are in the process of contract negotiations so it probably wouldn't be appropriate for me to say much more.

And you know, the obviously the nation needs the submarines.

And you know, it is our job to build them as efficiently as we can.

That's what we are working with the navy to try and figure out how to do.

I don't see any interference with the production schedule for the submarines going forward.

Thanks.

Your next question from Eric Hugel from Stephenson Corporation.

Good afternoon, guys.

Good quarter.

My first question is with regards to the space technology segment Margins that were I guess obviously low because you had the impact of the pension and all the other stuff that you were talking about, is that sort of a one-time thing?

Because if you go -- you were calling about for six percent margins, that would mean you would need just under 6.5 percent margins for the rest of the three quarters to get there.

Well, let me say, we see the -- we see Space obviously improving over the year.

And with regards to Missions, we see them also improving over the year.

But I will say with regards to the purchase accounting adjustments that we gave you, those adjustments will exist obviously until the useful life or the amortization period runs out.

And the conformance that we noted is obviously a permanent item also.

Then in the Space business can you sort of drill down and tell us what is driving the recovery in those Margins over the rest of the year?

Is it just mixed?

Certain programs?

I mean that's a significant jump in Margins from the first quarter to what it should be for the rest of the year if you are looking for six percent for the year.

Well, I will say it's -- you know, it is really mixed going forward.

And, obviously, award fees as we get into the outer quarters.

And let me say also in the first quarter we had some legal fees that we expended in space.

That's kind of a one-time event with regards to some heritage TRW litigation that we don't expect to have in the subsequent quarters.

Can you perhaps ballpark those for us, what the impact was?

All I can say is the legal fees were -- no, I prefer not to say what the legal fees were, but they were, you know, significant enough to note in terms of that profit normalization differential if I can put it that way.

All right.

Just also wanted to discuss with you if also you have had any I guess conversations with the Navy with regards to the -- I guess the sailing of the fleet, to bring all the stuff to Iraq and to fight in Iraq.

Considering the age of the fleet, and once it comes back, the need for overall, repair and maintenance and what kind of position you guys are in to take advantage of that?

If you could sort of go through that.

Yeah, Eric, we don't know yet, but we certainly know that the extended deployments of the carriers and almost all the combatants is going to require a lot of deferred -- deferred maintenance.

I think the Navy right now is trying to figure out how to allocate the various assignment of the ships to their various home ports.

And we have not only our private shipyards but also the navy shipyards involved.

We don't know yet.

We would expect some impact but I'm not sure it would change anything we have given you in terms of the forecasts for the year.

We'll see.

One of the issues that we have at Newport News is that we are very busy.

We've got a lot of work going on there and a lot of continued work for the rest this year and next.

We have got the Reagan we are getting out.

The Eisenhower, we have at submarines going.

We are not sitting with enormous -- capacity.

We have capacity in our other yards.

The Navy has to make the decision where it wants to put the ships.

Typically it likes to use the home ports.

My next question, recently there has been talk of acceleration of the Deep Water program.

Can you tell us where you stand on it?

Obviously, that makes a lot of sense.

The Coast Guard really needs to get on with the business of reconstituting its ships and planes particularly in ships.

We have I believe announced the initiation of a detailed design for the first national security cutter.

And that's a good sign.

We are obviously watching the Congress and working with them to make sure that if inside a possible acceleration that would be great.

We'll see how it plays out.

There are a lot of competing demands on the funds, as you know.

Gentleman, thanks a lot, guys.

Thank you, and your next question, sir, comes from David Grunnels of Thomas Easley Partners.

Thanks.

Hoping you can tell me a little bit with the other income line.

It was $17 million in quarter.

You talked about some contribution that sounded kind of one-time from Eagle Alliance.

Can you just talk about what's in there and where it goes for the full year?

I think we said for the full year you want to be looking primarily for the royalty income as the predominant amount in terms of the recurring amount.

In the quarter ended, we had, obviously, as we said, the Eagle Alliance.

And we had the -- oh, some other minor items.

It's primarily the royalty income and the Eagle Alliance: That's what I said, royalties and the Eagle Alliance are the two primary things.

And again, as you go out to the year it's more or less on the royalty side.

Just kinds of maintain that kind of -- it's about -- I would give it on the order of the magnitude of $10 million a quarter in that category as we go out.

Okay.

And just to confirm, that does not include minority interest at TRW auto?

That's right.

We are accounting for that at cost.

We have below a 20 percent equity investment.

So therefore we are just accounting for that at cost.

Okay.

And I wanted to ask about the CT sales.

The Component Technologies businesses.

Is there any progress toward the sales of some of those businesses?

It's difficult to speak to those in the context of giving a blow by blow.

We are actively engaged in that process.

And as we have noted, that we expect to be able to consummate those sales by the third quarter of this year.

And then the last question, there has been buzz in the trade press about rethinking of the STSS program, the Slivers Low program.

I was wondering if you could give your assessment of the program there?

I think the director of the missile defense agency indicated that he was looking at the full range of sensor possibilities, space based, ground based and whatever.

And that's normal.

At the current time we see no change in that program.

I mean, any program is subject to acceleration or reduction.

Right now, we see no change in course and we are proceeding on that program and making good progress.

So, I believe the program is going to be necessary to provide the right kind of sensing from space for missile launches.

Very good.

Thank you.

Your next question, sir, from Howard Rovel from Soundview Technology.

A couple questions.

Very nice numbers in the IT area.

Was there some big wins in terms of market share?

Could you talk about that, Ron, please?

Well, I think, you know, as you know, IT is a business with hundres, even thousands of programs. -- hundreds and even thousands of programs.

I think the tide really rose.

They hit on all cylinders across all their business areas.

They had some significant uppers in all the business areas.

But there are many, many programs.

I can't pick out a single one, Howard.

Just a great set of win ratios.

We had some resurgence in the reseller business.

Significant reseller business.

I think that was a 30 percent upper from a year ago.

A year ago, remember, the business was a little depressed because in the aftermath of September 11th there was some sustainment or a suspension, rather, of funding.

So, no, we just see a lot of good things happening.

And maybe you could think of this in terms of maybe kinds of an unleashing of some of the monies that had been kinds of held up a year ago and so the year-over-year comparison is good.

These guys are good.

They are competing well and winning more than their fair share.

It definitely looks like versus some of the other resellers you did extremely well.

A year ago we were all concerned about the fact that we weren't seeing the growth out of that business that we wanted to see.

And now we are back on track.

Just to go back to an issue that you talked about a couple of times and one more cut at it.

What is the interest rate that you are going use for the debt on the TRW instrument that you will continue to hold?

I know part of it is going to be a coupon and then the rest of it is going to be a mark to market and an amortization.

If you wouldn't mind giving us that?

Howard, there is a number of bonds that we still hold.

I mean, are you interested in having a listing of all of them or --

Oh, no, of course, not.

I am a talking about a part of the junk bond that you are going to hold with respect to the Northrop instruments.

I'm sorry, Howard.

I wasn't listening to your question.

You are talking about in connection with the TRW auto?

That's correct.

With the TRW auto we have payment in kind note which is obviously noncash and we are accrue being 11 percent on that.

And so that's -- so we will see when we look at interest income going forward something in the range of $17 million or thereabouts -- concrete over time so the number will actually get a little bit higher; is that correct?

I think that's about 55 for the year.

So, you know, it's about -- whatever you divide that through, 13, 14 per quarter.

I understand.

That's fine.

And finally and finally the -- well, there was a mark to market that you talked about on the fixed income instruments of 5 or $600 million.

How long is that amortization to run?

Is it all over 40 years or is it part of good will?

Could you elaborate on that?

Howard, would you say that again for me?

The purchase price difference -- for the bond.

Right.

What they were on the books for and what you paid for them is what, 5 or $600 million difference.

How are you amortizing that?

Or is it all going to be good will going forward?

That will all go against the good will because that's going to be purchase accounted and it just gets into the, you know, the total price we paid.

So we won't see any amortization on that premium going forward; is that correct?

Correct because, you know, good -- we no longer amortize good will.

So that's exactly right.

It just adds to the incremental amount of good will we have on the books.

I understand.

And that relates to any future like in the -- so if we see a little bit of increase in good will in the second quarter that will be attributable again to the difference between the market price that you paid for those fixed instruments and what you had on the books?

Let me make a differentiation here.

Those that we, in fact, redeemed you won't see anything further on that because that's -- whatever we paid for them, there is no further accrual of interest on those bonds going forward.

Those that we have not redeemed, to the extent that we write them up to fair value where that is they have a -- if you will, you would be paying a higher interest rate today if you were to issue those bonds today, that differential we are amortizing in as interest expense.

But that's only on the bonds that we still hold and will hold until they mature.

Would you repeat that?

I just want to make sure I understand that.

On the bonds that we, in fact, hold.

Yes.

To the extent that we restate them, it's based on an interest rate differential.

That interest rate differential will be amortized going forward as an additional cost.

Over the life of those particular bonds.

Over the life of those bonds on a bond by bond analysis, yes.

So that's part of the reason why we will see lower interest expense next year as some of those bonds will have naturally matured.

Some of those, we will have -- it's not much, but we have $47 million of TRW bonds actually maturing before ends of this year.

And we have another oh, about $115 million next year maturing at different points in time, March and June.

I understand.

Thank you very much for your help.

Okay.

That's it.

Your next question, sir, from Nick -- of Bank of America.

Hello, gentleman.

Good afternoon from London.

A couple of quick questions.

Firstly, Ron, relating to Homeland Security and the spending plan and the allocation of Homeland Security, when do you think that's going to be announced?

And if it is, how much can that add to the plan in your infotech business?

Nick, this is Ron.

I think it's hard for us to say.

We have given you guidance which has all in effect.

Certainly our largest play at the moment is in the Deep Water program.

The Assistant Secretary of Homeland Security, Gordon England, is going to make a speech soon regarding his first 100 days.

And I think we will get a little more clarity of what they are looking for in terms of expenditures.

I don't see any significant Delta to what we've given new terms of guidance.

There is no huge program here that's hanging in the balance at the moment.

Sticking with the IT, the infotech business, could you give us a little bit of color as to why sticking with the IT, the infotech business, could you give us a little bit of color as to why resellers jumped 30 percent and is that kind of sustainable through the quarters? jumped 30 percent and is that kind of sustainable through the quarters?

No.

I think it was more of a recovery from the conditions that we saw a year ago in the aftermath of 9/11.

I think there was a general hiatus in purchasing by most government agencies and this is who they sell to, of course, of the standard products that the resellers do.

And I think we've seen a recovery of that to more normal levels.

I don't necessarily see a continuing growth rate like that.

Okay.

And then in -- generally across the group, are there production milestones in the delivery schedule that you have to meet?

And if you do meet those for various programs, you may then be allowed to allocate a little more outside on either revenue and or margin.

Are you being a little bit conservative on production milestone management?

Well, you know we've got hundreds of programs, Nick.

And I would certainly say that if we do better we will do better.

But I don't -- I think we have given you our best judgment of the way we think it's going to come out if we perform the way we think we should perform.

There is no specific big hitter out there that will have a material impact to the guidance.

No single ship or plane or radar that I am aware of.

Great.

And one last one.

You gave a list of programs to Joe Nadol earlier on that showed -- can you give a little bit more of what the scale of those programs are financially and when they may be announced.?

And what I noticed -- I didn't hear you talk about was advanced Hawk Eye.

I should have mentioned advanced Hawk Eye.

That's moving along.

That's a program that's north of a billion dollars.

I guess I'm not quite sure when the official milestone will be for production.

Does anyone -- It's actually under underway.

So there is no one big thing coming in the near term.

It will come in increments.

It's moving forward.

That's extremely high priority on the list of Naval Operations.

And the program is proceeding.

Kinetic Energy Interceptor in the 1 to $2 billion range.

It's hard to tell.

I am being approximate here because even the customer isn't sure.

Literally combat ship is lower. 100,000 for range.

And targets pay loads and counter measures is a billion dollar class program.

MC 2a several hundred million I think is an initial opportunity later in the year.

Watch Keeper, I think we said could be a billion plus.

And, again, either later in the year or early next year.

Virginia Class, if in fact, all the submarines are bought, is multiple billions.

The Navy has to make a decision whether they go to multiyear, whether they buy individual ships.

The production schedules will be the same, I would think, in any case.

The advanced tactical data link is a billion dollar class program.

There are a number of classified space programs and information worker programs that we don't delineate in any specificity and they range from hundreds of millions to billion dollar class.

So there is a lot going on out there.

And that's pretty much what we see.

Great.

Last one.

In the Virginia Class, when do you expect the multiyear decision to be made?

And also is there a chance they could go from one to two boats earlier?

Right now I think that's scheduled a few years from now in the Navy's shipbuilding plan.

There is always a chance of bringing it up.

Our current plans don't account for that.

If it happens, that would be terrific.

I think the pace of negotiations will proceed and I imagine it will be another quarter or two before we get some resolution.

Great.

Thank you very much.

Your next question, sir, from Brent Rice of Prudential Financial.

Gentlemen, are you at liberty to give us a status report on the Postal Service contract to protect the Postal System from Anthrax?

And as a follow-up to that, if we are successful in getting that kind of business, do you see this type of business growing to become a material business segment to Northrop Grumman?

Well, let me say with regards to the current contract we are proceeding.

We are working on the -- in the indemnification.

We think we are going to be able to have appropriate wording to -- for that type of contract.

And we would expect that we would be hearing -- or get into a possible contract phase by the end of the second quarter.

So, yes, we are proceeding with that contract, and our expectations are that we do have the kind of wording that is necessary to proceed with this kind of a product.

Let me also say that as far as the expansion into other market areas, yes, let me say it certainly could, but we don't have that kind of a significant growth in our plan at this point in time.

Thank you.

Your next question from Joseph Campbell of Lehman Brothers.

This is actually Andrew Kaplowitz.

I wanted to ask you if you had more visibility on how you would deploy cash in the future?

I know you mentioned no more big acquisitions but you know, share buybacks or dividends or higher dividends?

Right.

Obviously, debt reduction today is the most acreasive use of our cash.

And this has been our first priority and that's what we've been focusing on.

As we've said, we are seriously evaluating all the options as our net debt to total capital drops to around 30 percent.

It's around 30 percent right now.

We don't have a set timetable for an active decision.

It's something we are looking at.

As we play through the year we will be making some decisions.

At this point in time that's all I'm prepared to say.

And you mentioned revenue synergies between -- and can you give examples of that going forward or maybe an example of what we saw in the quarter?

We did not predict revenue synergy for '03 and when we did the road show.

We predicted a modest amount for '04 and more in '05.

The most important is the significant bid we have is for energy interceptors.

We now have a bid on the table.

We are one of the two people in the horse race for what will hopefully be a 1 to $2 billion program next year.

If we pull that one off, we'll blow through our synergy numbers.

I would also mention that five of the seven Northrop Grumman sectors are engaged in this bid very indepth.

So --

Thank you.

And your final question, sir, from Robert Friedman of Standard & Poor's Equity.

First question is, were there any restructuring charge reversals in the quarter?

No.

Okay.

And were there any gains from the repurchase of debt -- gains from the repurchase of debt in the net interest expense numbers?

No.

Okay.

And what percentage of your backlog is cost plus contracts?

Boy, 60 to 70.

It's probably roughly what we have in terms of our run rate.

Yeah.

Exactly.

Okay.

That's probably what, about mid -- high single digit margin rate?

No.

Typically you are more in the mid.

Mid.

Mid or little above mid single digit for cost type contracts.

Okay.

And, yeah, I calculate based upon '03 EPS estimates your returns on equity are going to be about five percent.

Do you have any comments about that?

Well, I haven't seen your calculation, but let me say we aren't -- we don't necessarily follow return on equity as being a material metric for us.

So, I mean, I understand what you are saying, but you know, the kind of models that we follow, we believe that we are doing very well in terms of creating value.

And we are earning our cost to capital.

Okay.

Thank you.

Thanks.

Okay, well, look, I really appreciate your interest and your questions.

Let me just wrap this up.

We are very pleased with the quarter.

And with the outlook for the remainder of '03 and beyond.

We are hitting on all cylinders in the company.

And we have outstanding opportunities ahead of us.

I thank awful you for being with us this morning.

And we look forward to talking to you next time.

Ladies and gentlemen, that concludes your program for today.

You may now disconnect.