諾斯洛普·格拉曼 (NOC) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Northrop Grumman first quarter earnings conference call.

My name is Francis and I will be your coordinator for today.

At this time, all participants are on a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator instructions).

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

I would now like to turn the presentation over to your host for today's call, Paul Gregory, Vice President of Investor Relations.

Please proceed.

Great.

Thank you, Francis.

Good morning and welcome to Northrop Grumman's first quarter 2009 conference call.

We have provided supplemental information in the form of a PowerPoint presentation that you can access at www.NorthropGrumman.com.

Before we start, please understand that matters discussed today and today's call constitute forward-looking statements pursuant to Safe Harbor Provisions of Federal Securities Law.

Forward-looking statement involve risks and uncertainties, which are detailed in today's press release and you are SEC filings.

It may cause actual Company results to differ materially.

During the call, we will discuss first quarter 2009 results and 2009 EPS guidance.

We will refer to non-GAAP measures, which are defined and reconciled in our earnings release and supporting materials which are posted on our web site.

On January 7th, we announced a realignment that impacted several of our businesses.

The realignment is reflected in our first quarter 2009 results, and we have provided a schedule in our press release that presents historical results in the new structure.

On the call today are our Chairman and CEO, Ron Sugar, our President and COO, Wes Bush and our Chief Financial Officer, Jim Palmer.

Please go to slide three.

At this time, I would like to turn the call over to Ron.

Thank you, Paul.

Hello, everyone and thanks for joining us this morning.

Northrop Grumman is off to a solid start in 2009.

Sales increased 8%, segment operating income is substantially higher and GAAP EPS for continuing operations increased by 54% to $1.17 per share.

For the first quarter, our pension adjusted EPS totaled $1.32 per share, versus $0.64 last year.

As I said on last quarter's call, for 2009 earnings, we think that pension adjusted EPS is a better measure of the operating measure of our five sectors.Therefore, we will be provided pension adjusted metrics throughout the year.

In addition to significant year-over-year improvement in shipbuilding due to last year's charge, all five of our businesses generated higher sales and operating income.

The major EPS drivers were sales, operating income, and reduced share count due to our continuing share repurchases.

Based on our outlook for the rest of the year, we are increasing our GAAP and pension-adjusted guidance for 2009 EPS.

We now expect GAAP EPS of $4.65 to $4.90, and pension adjusted EPS of $5.30 to $5.55.

Turning now to backlog, it was a solid quarter for new business awards.

Following the fourth quarter record in the awards, we captured more than $7 billion in new business awards first quarter of this year, and we maintained a very robust backlog of $77 billion.

We had many operational successes in the quarter, highlighted by LHD8, which we delivered to the Navy last Thursday, meeting the milestone schedule we laid out for you last year.

We also redelivered the USS Toledo submarine and accomplished the delivery of our 400 fuselage section for the FA18 Super Hornet for the Navy.

For the Army, we provided the 500 command post platform shelter system.

We also delivered the pay load for the third advanced extremely high frequency, AEHF satellite.

Shortly after the end of the quarter, we reached settlement on two significant legal matters.

This joint settlement insures the capture of present value on our long standing T-SAM claims against the United States Government and at the same time, removes the risk overhang on the Company from the government's microelectronics claim.

The values assigned to each claim offset each other.

Now, I would like to take a moment to comment on the new administration's stated budget priorities for 2010 and beyond.

We believe that Secretary Gates' 2010 budget proposal, represents a good starting point for this year's budget deliberations.

While we don't have clarity on many of the details, we believe that Northrop Grumman is very well aligned with priorities that Secretary Gates outlined on April 6th and that the administration had previously articulated.

First, no major prime Northrop Grumman programs were recommended for cancellation.

Just as important, there will be greater emphasis on areas where Northrop Grumman has extremely strong positions.

We're well positioned to support emerging initiatives in cyber security, intelligence, surveillance and recognizance, command, control and communications, and in unmanned air vehicles.

We also remain well positioned on F-35 and other key programs such as the Air Force's aerial refueling tanker.

We look forward to responding to the Air Force's refueling tanker RFP.

As we said before, we believe the most capable and best value tanker won the competition last year and we expect to win again.

Regarding shipbuilding, while there are a number of puts and takes, Secretary Gates clearly understands the need for industrial based stability.

We believe the swap of the DBG1000, is a good outcome for all parties.

We look forward to finalizing the contractual details this year.

We believe the swap supports our strategy to improve shipbuilding execution by allowing us and the Navy to capture the value of serial production of ships and economic quarter quantities.

-- for all DDG1000s and Northrop Grumman will continue to perform significant work share on the program.

We will provide the composite super structure, the composite hangar and the vertical launch.

The swap also supports stable continued construction of the LPD class.

We will have more details for you on budget implications for Northrop during our upcoming institutional investor conference to be held at our electronics systems facility in Baltimore on May 5th.

So in summary, we're off to a strong start.

Our focus continues to be on reducing risk, improving performance and positioning for growth.

And our strong financial position allows us to continue to execute our balanced cash deployment strategy.

Now, I will turn the call over to Wes for an additional discussion on Northrop Grumman's operations.

Wes?

Thanks, Ron.

Good morning, everyone.

Overall, the Company is performing well.

This quarter, we had strong performances from information systems, aerospace, electronics, and technical services.

And where we continue to have program risks, primarily in shipbuilding and information systems, management is keenly focused on retiring it.

Beginning with information systems on slide four, much of the heavy lifting associated with combining the former IT and the MS sectors is now complete, and Linda Mills and her team are moving out aggressively.

The combination of these businesses into one market-focused enterprise benefits us in many areas.

Particularly, in cyber security.

The majority of our cyber efforts are now centralized under one management umbrella, which will enhance our business capture efforts in this growing market.

Information systems had a strong quarter for both sales and margin, led by growth in the intelligence business, which was partially offset by lower state and local business.

As we mentioned in our fourth quarter call, we expect to see lower sales this year, in state and local, as we are now approaching this market on a much more selective basis.

Our state and local watch list programs continue to perform within their EACs and will continue to focus a great deal of management attention on them as we move forward.

Information systems continues to have a rich opportunity set, as our capabilities in this sector align particularly well with the emerging global security needs in both cyber security and C4ISR.

During the quarter, we received an increase to our contract feeling for the Blue Force Tracking System.

The Army increased the contract ceiling from $574 million to $908 million, a validation of the positive impact this product is having on the Army's efforts to address new, irregular warfare challenges.

Moving to Aerospace Systems on slide five.

We are also very pleased with the successful stand up of the Aerospace Systems sector.

The combination of the airborne and space capabilities is impressive, and it positions us well for integrated ISR activities across the aerospace continuum.

Sales growth continues to be driven by unmanned platforms, restricted programs and manned platforms like the F-35.

Operating income also remains strong.

There were several program highlights this quarter.

We delivered the third advanced DFH military satellite communications pay load.

This delivery was ahead of schedule and it marked the third consecutive early delivery of advanced DFH hardware and software.

I would add that we are expecting that two more payloads will be required for this program.

Shortly after the end of the first quarter, we accomplished a successful grounds system test for the KEI Program and we demonstrated the nations most powerful electric, directed energy laser.

On slide six, electronic systems also had an outstanding quarter, with double-digit sales growth and solid growth in operating income.

We continue to see strong demand across the board for our products, as demonstrated by this quarter's 16% sales growth.

The strong performance we are seeing is the result of focused efforts over the past two years on sharpening our business development, by extending our products on to new platform types, and moving our sensor technologies into adjacent markets.

We also continue to make good progress on watch list programs.

On Block 60, in the first quarter, we completed the flight testing of our most recent software delivery and we are working the updates generated during that flight testing.

We have one more key software delivery to complete the electronic warfare capability.

This team is focused on executing the program and developing a very capable weapon system.

Regarding Wedgetail, ground testing has been completed and range testing is approximately 60% complete.

Formal aircraft testing started in the first quarter and we had the first flight test on April 1st.

Looking at electronic systems overall.

As the sales growth and margin rate indicate, we are performing very well.

We look forward to seeing many of you at our Investor Conference in May, where we'll provide a more detailed look at this business.

Now, I would like to move to Shipbuilding on slide seven.

We achieved our first quarter LHD8 milestone with the completion of successful acceptance trials and the second milestone is now that the ship has been delivered, our second quarter milestone is also complete.

Based on the success of the first quarter acceptance trials, we were able to recover some of the previous provision for the ship.

Offsetting this, were EAC adjustments on the DDG51 program and the LPD22 expeditionary warfare ship.

The adjustments reflect cost growth due to substantial out of sequence work on these ships, as well as the transfer of craft personnel from these ships over to LHD8 and the DDG103 prior to its first quarter delivery.

We have learned a lot of lessons over the last 15 months from the LHD8 experience, and the consolidation of the shipyards.

Our Gulf Coast shipyards are most successful when we have serial, uninterrupted production.

Key to success in this environment is a class bill plan that's followed rigorously so that every ship in the class is built in the same manner, with disciplined completion of planning packages to minimize out of sequence work, and 100% quality inspection in critical areas such as pipe and electrical.

These are the actions that we are taking across all of the ships in process on the gulf.

The DDG swap is well aligned with these objectives and it facilitates what we are working to accomplish at the Gulf Coast.

We have more to do to improve our processes and results and until we see sustained improvements and efficiencies, we plan to take an approach to the Gulf Coast fee booking rates that more fully anticipates the risk profile.

Particularly, early in the design and build phase.

Moving to slide eight.

The first quarter performance in our technical services sector was very strong, with double digit growth in both sales and margin.

One of the primary drivers for sales growth was higher volume for Hunter Logistics, our program to operate, maintain, train, and sustain the multi mission hunter unmanned aerial system and to deploy Hunter support teams.

So in summary, as I said last quarter, my key operating priority is superior execution, across our 20,000 programs.

We continue to retire risk on our key watch list programs.

As this quarter demonstrates, our operating performance is on a path of improvement and with that, I will turn the call over to Jim.

Thanks, Wes.

And good morning, ladies and gentlemen.

My comments will focus on first quarter performance, and our updated earnings per share guidance for 2009.

As the press release mentioned, we will be providing additional guidance detail at our Investor Conference on May 5th.

Overall, it was a good, solid, quarter.

Our 8% sales growth is the highlight reflecting particularly strong sales results for our electronic systems, information systems and technical services.

However, the 8% growth needs to be put into a little bit of a perspective.

You may recall that sales in the first quarter of 2008 were reduced by $134 million due to the shipbuilding charge.

So adjusting the first quarter 2008 for that amount gives us sales growth of about 6%, which is really more representative of the trends during the quarter.

First quarter segment operating income was 9.5%, compared with 5.9% last year due to the $326 million shipbuilding charge, but I should also remind you that last year's first quarter benefited from patent infringement settlements of $19 million that increased royalty income in electronic systems.

Other than in shipbuilding, margin rates for all sectors were in line or better than our guidance for the year.

EPS on a GAAP basis grew by 54% on a year-over-year basis, and on a pension-adjusted basis, EPS more than doubled from $0.64 to $1.32.

Turning to slide 10.

First quarter 2009 cash was the use of $172 million.

To compare the last year, though, I would adjust that use of cash for the $214 million discretionary pension prefunding this quarter.

This provides a more useful comparison of $42 million for the first quarter of 2009, versus $194 million in the first quarter of 2008.

As shown on the slide, the increase in trade working capital is the biggest driver of the year-over-year change.

The increase is due primarily to two factors.

First, last year's trade working capital was reduced by the accrual for the $326 million shipbuilding charge and also by $150 million of higher level advances in aerospace and electronics than we had this year.

Partially offsetting those items were billing delays experienced as we transferred to new systems.

So adjusting last year for all of these items, the increase in trade working capital and last year's first quarter would have been about $725 million rather than the $450 million shown on the chart.

The second factor in the working capital growth is the timing of cash collections.

Principally, between the fourth quarter of 2008 and the first quarter of this year.

Compared to our fourth quarter 2008 plans, we pulled forward approximately $200 million of collections into the fourth quarter.

This is one of the reasons that that quarter's cash from operations reached the $1 billion mark, a remarkable accomplishment that represented about a third of the $3.2 billion of cash from operations in 2008.

So as I analyze cash flow results for the quarter, there is nothing that particularly concerns me about those results and how they affect our cash from operations and free cash flow guidance for the year.

As I said last quarter, we anticipated that cash from operations in 2009 would once again be weighted towards the second half of the year.

And I would remind you that our 2009 cash flow guidance, as before, our discretionary prefunding of our pension plan.

Let's move now to earnings per share guidance on slide 11.

We are increasing our 2009 GAAP EPS guidance by $0.15 to a range of $4.65 to $4.90 from the prior guidance of $4.50 to $4.75.

We are also increasing our 2009 pension-adjusted EPS guidance by the same amount to a range of $5.30 to $5.55 from the prior guidance of $5.15 to $5.40.

The increase reflects our solid first quarter performance, as well as the expected net pretax gain of $60 million to $70 million resulting from the settlement of microelectronics and the TSAM litigation.

Our 2009 guidance reflects the learning that we are still experiencing at the Gulf Coast shipyards, as reflected in our updated DACs, the uncertainty around the timing of any potential program impacts related to Secretary Gates 2010 budget recommendations and the continued uncertainty in the capital markets, which could impact future pension costs.

During 2009, we do plan to continue our balance cash deployment strategy as demonstrated by our first quarter share repurchases of $150 million, and a discretionary pension prefunding of $214 million.

We have the financial strength and flexibility to do so, and as I said, I see nothing in the first quarter results that changes my outlook for Northrop Grumman's 2009 cash flows.

We have approximately $780 million remaining on our share repurchase authorization, and as I indicated in last quarter's call, we are contemplating discretionary pension prefunding of $500 million in 2009.

This is over and above our required 2009 pension contributions of $126 million.

So in summary, it was a very solid quarter.

One in which we continue to focus on risk, production, performance and growth.

Paul, with that, I think we are ready to turn it back over for our Q&A.

Okay, we are ready.

So Francis, we will begin the Q&A session.

Thank you.

(Operator instructions).

Our first question is from the line of Robert Stallard from Macquarie.

Please proceed.

Good morning.

Hi, Robert.

First of all, I would like to talk to you about what Secretary Gates said the other day about in-sourcing and the attempts by the administration to bring more work in-house.

As you look to the long term, what sort of impact do you think this would have on Northrop Grumman.

Well, Rob, this is Ron.

What he did say is he was looking at adding between 10 and 20,000 new positions in acquisition in the government.

To put that in perspective, probably eight or ten years ago, the government probably had a half a million acquisition folks.

Over the years they reduced that to 200,000 or so.

What he's talking about is adding 10 to 20,000 back to the 200,000.

Anything that strengthens the acquisition capabilities of Defense Department, we see as very positive for us, as well as for the government.

In terms of in-sourcing, there's a significant amount of work that we and others do.

Some of it may go back to the government and frankly, there's going to be an enormous need for the kind of capabilities that industry has, in addition to whatever is done there.

I don't particularly see that as a threat at this point in time.

Obviously, we will learn more details as the deal progresses.

As a quick follow up.

On the shipbuilding sites, we have seen General Dynamics and Lockheed Martin sign up to fixed price and (Inaudible) contracts on a couple of contracts in recent months.

Do you anticipate a future shipbuilding programs from Northrop Grumman following a similar trend?

Well, Rob, we do have fixed price contracts on ships that are in serial production where there's maturity in the learning curve and in fact, that's often where we can make very good margins.

I would expect that over time with the ships that are in serial production.

At the present time, we don't have any contractual agreements or relationships on the swap destroyer work and obviously through the course of the work, we will sit down and make sure that we work out business arrangements that make a great deal of sense for us, as well as the Navy and for our shareholders.

At this point in time, it's to be determined what form these contracts will take.

These contracts are in the relatively early stage of development.

Do you see that as a trend to look to in the future as well?

Well, obviously, it's a negotiation.

Our general view is that early ships are not appropriate for fixed price development, because of the uncertainty associated with them.

We think that that doesn't usually work to the advantage of the government as well.

Clearly, as we go forward, if about we restart the DDG51 destroyer line, that's a ship that we know how to build.

That may be a different situation than some of the initial work on the three new DDG1000s.

Okay.

Thanks very much.

Our next question comes from the line of Cai von Rumohr from Cowen & Company.

Could you give us better color on the reserves you took on the DDG51 and LPD22 in terms of the size of those and the size of the the reversal?

Yes, Cai, on the DDG51's, it was $38 million of P&L impact in the quarter and a similar amount on LPD22.

And then offsetting that.

We might as well get all the questions answered at the same time.

And then offsetting that was a total of $48 million on LHD8,$30 million from return of reserves, risk reserves and about $18 million from price escalation adjustments.

Okay.

Terrific.

And so could you go through a little more detail why we have an LPD -- excuse me, DDG51, which is mature program?

Cai, it's Wes.

There are several perspectives that would offer to help frame the action that you saw in the quarter on these ships.

First, all of our ships on the Gulf Coast, as you know, are long cycle programs.

It takes many years to build these ships and it takes time for improvements to show.

Particularly after we have gone through a period of substantial disruption.

We're very confident that we are making the right improvements across the board and the ship construction activities is taking some time for all of those things to pull through.

And if you reflect back to the first quarter of last year, we took a charge in the first quarter of 2008 that reflected our view of the impacts, the direct impacts on LHD8 for the additional cost that we would incur there as a result of many of the things that we found.

But it also reflected at the time our expectation of impacts on the other ships in process in the gulf.

As it has turned out, the impact on LHD8 was somewhat less, but the impact on the other ships was somewhat greater.

And Jim just went through with you kind of the numbers on how that looks to be balancing out.

The third perspective of it offered to put some color on the numbers in the quarter is, as I said in my remarks, we have decided to reflect in our fee booking rates a broader anticipation of the risk profile on these ships.

We will certainly be happy over time to increase the booking rates on those ships if we successfully mitigate this broader view of risk.

Particularly, as the ships mature over the phase of construction but we have taken a view here that, I think, is the right approach, given the lessons learned that we have had over the last year and a half.

Thank you very much.

Your next question is from the line of Myles Walton.

Please proceed.

Hello, Myles.

Myles, we can't hear you.

You must be on mute.

I apologize.

Can you hear me now?

Yes.

A question for you on shipbuilding again, and trying to interpret some remarks made by Secretary Young on the fixed price.

Both the 1,000 and the 51.

In his recent marks he talked about a $2 billion per hull number for the 51, which seemed a little high.

So I was trying to interpret that.

Is that a cost of restarting the line or is that in anticipation of adding capability to the 51 and if you are adding capability to the 51, is this really a serial production that you would sign up to a fixed price basis on?

Well, let me take that one, Myles.

First of all, I'm not quite sure what Secretary Young factored into his $2 billion hull.

My guess, it's not just the hull but the top side of the weapon system as well.

There will be some improvements in the 51.

Many will be in the forms of top side, which we are not directly involved.

Some are involved in the missiles and the communications electronics, the fundamental hull will probably be the same.

One of the plans that we have discussed with the Navy is that before actually constructing the next tranche of DDG51s, we will do a planning, a careful engineering planning activity, which will be funded to get us moving on that to make sure that we fully understand what changes will be made.

But incremental and evolutionary changes are very different from starting a brand new first of class ship.

So I think as we see, as we go through the year, we will see what the exact plan looks like and clearly we will enter into contract negotiations very prudently.

Okay.

And then with respect to the 1,000, I guess the US is looking to press GD into the fixed price for their portion of it, but obviously your portion would be GFEed, would you anticipate that you would -- they would be asking you to sign up for a fixed price as well on your top side portions.

Myles at this point in time, I have no idea.

Obviously, GD is having its own discussions with the Navy on its piece.

Our piece would be separate to the Navy.

Okay.

Fair enough.

Thanks.

Thank you, Myles.

Your next question is from the line of Ron Epstein.

Please proceed.

Good morning, guys.

Good morning.

Another ship question for you.

There's been some discussion that the catapult on CVN78 is having some issue.

The Navy has been talking about that for a while.

How should we think about that.

If there's a delay in that, the subcontractor is -- how does that impact the program?

How could that impact you guys?

Well, Ron, first of all, that contract is being run separately by the Navy with another contractor, General Atomics.

The current program of record is the EMUL, the electromagnetic catapults is based signed into the ship.

We are proceeding with that supplement.

We are working with the Navy and the General Atomics to have the catapults in the ship.

We will proceed with that plan.

Clearly, if there's an impact on our ship, we'll consider that and discuss with the Navy what that impact would be.

At this point in time, we are making every effort to barrel forward.

Now 78 is the Cost Plus ship.

So if there was some sort of delay or change, it would pass through.

That's right.

It's a Cost Plus ship and if there's any change in scope to the ship or impact as a result of government-furnished equipment, that would be contractually remedied.

Okay.

And then?

Secretary Gates' remarks a couple of weeks ago he did mention that he wanted to review the L series the landing ships.

What impact do you think that would have on your business?

Do you think they would pull back on the L series ships.

If so, what does that mean for the gulf coast shipyards.

I think in the near term, in the next couple of years I don't see much of any impact.

I think as part of the destroyer swap, one element is continuing with the serial production of LPDs, which are turning out to be a wonderful class of ship for the Navy.

When we talk about L series, you are thinking about all kinds of classes here of LPDs, LHD's, LHA, and also some of the LMSR, or potential future propositioning ships which are not currently in construction.

I think the real question will be how does the Navy think about its amphibious strategy going forward and what mix will it need?

At this point in time, we also know that there's a strong desire to have common hull forms, wherever possible.

It turns out that the LPD hull form is emerging as a very, very useful hull form, not only for the current amphibious ship but also for potentially other uses.

We will see how that all develops during the QDR process.

I think the near term impact in the next few years, it's not clear there's going to be any.

Okay.

Great.

Thank you.

Thank you.

Our next question is from the line of Joe Nadol with JPMorgan.

Please proceed.

Thanks.

Good afternoon now.

I hate to do this to you, but on shipbuilding again, I actually got punted off the call before and looking at the transcript here, I missed some of the numbers live, but at least what it shows in the transcript is that the reversals, the gains were larger than the P&L negative impact from the LPD and the DDG51, is that right?

That's not correct, Joe.

The negative -- the two negatives, DDG51, $38 million, LPD 22, another 38, total of 76.

Positives LPD, or LHD8, $48 million, net of $28 million negative.

Okay.

Okay.

So where I was going with it is what's the -- you know, you are going to book these ships more conservatively from here on out., What's the implication on the guidance for the year?

What's the normalized, you know, run rate at this point?

Joe, I was obviously anticipating this question and I'm really going to get into details at the Investor Conference, but I think on ships, it's important that we talk about the view for the rest of the year, and, frankly, from my perspective having the team down there focused on improving our processes, executing the plan that Wes outlined for you, and achieving a 7% margin for the year, that would be good performance.

That's what we will focus on for those guys.

Okay.

And then, just one more.

Ron, on the carrier, what exactly is your understanding of where the Secretary Gates is looking to go with the carrier build rate?

Going to ten but, you know, talking about 20/40 and what is the impact over the next, five, six, seven years.

We are trying to understand the details behind that.

Our current read is that for the next several years, there will be virtually no impact on our current plans and that's because the work in process.

There has been discussion of pushing CVN79 start -- hard start to the right by a year from 2012 to 2013, but the fact is we are already at work on CVN79, and there's no real magic event that occurs.

There's a moment of funding approval, but we are already under preconstruction work now.

I think that over time, we will see with the retirement of the enterprise, some pressure on the number of ships in the fleet.

I think the retirement of the enterprise will very likely involve significant work for our shipyard as we dismantle that ship.

It's a complex ship with eight nuclear reactors.

There is a lot of work to do there.

And frankly, a lot of additional work for the current carrier fleet on refueling and overhauls that will continue during that entire time frame.

As a stand back and look at the carrier, I don't see in the next couple of years a significant change to our plans or workload.

In the Ohio class replacement, is that an opportunity for you?

Yes, it is.

And we are already working with General Dynamics, our partner and the Navy on some advanced planning for that boat.

That would be a helpful upside opportunity.

And frankly, the two submarines per year in Virginia class is coming along.

I don't think there's anything that we heard in the secretary's comments that would say that's not going to happen.

I would point out that that shipbuilding program is probably about as well run as anything we have seen in the industry.

Both companies are making great progress.

We are profitable and the Navy is getting good ships for lower prices.

Okay, thanks.

Your next question is from the line of Doug Hornet with Bernstein.

Good morning.

Good morning, Doug.

On ships again, in the gulf, now that you have delivered the LHD8, how has that changed or has it changed on the ability to deliver the LPG, and the DDG51's.

Hi, Doug.

It is Wes.

It's a positive development.

The craft resources are largely free from the intense focus we've had on LHD8.

I think the important thing to pull the string on here is not so much the craft resources, but it's the learning that's occurred over the past 15 months or so.

As we have dug in on LHD8 to really understand that full set of issues, not just the immediacy of the issues but the longer term events and decisions that led to the issues, and as we're incorporating those lessons learned, into the LPD series and the DDG series, I think we are on the right track.

We are making some very good improvements in the way that not only we're performing the work but the way we are making decisions on how we perform the work.

So there are a variety of positives that come out of this, and as I said in my earlier remarks, it will take a little bit of time to see all of that manifest, but we are convinced we are on the right track with it.

And then separately on information technology, you mentioned that you have had a little bit of a hit on your margins due to the state and local activity.

Could you talk about what that is.

Because if I look at it, if you come down a little bit in revenue on those and you are still falling on the EAC.

How are those programs going.

I'm assuming, San Diego, Virginia, New York, I mean, how are those three playing out right now?

Yes, Doug.

All three are performing within their EACs.

So we are -- we are satisfied with where they are now.

We are watching them closely.

These programs have been areas that have cost us a little bit of ripple in the past, and so they are giving an extraordinary amount of management attention.

I did note in my remarks that we are seeing the sales in the state and local part of our business decline, because we are being much more selective about what we are going after in that area.

Jim, did you have any thoughts on that?

Yes, Doug, I would just point out that as you know, we took some adjustments in the latter half of 2008 on some of those state and local programs.

So if you look at margin rates today, EACs that Wes talked about, versus the first quarter, essentially there is a lower margin coming out of those programs quarter to quarter than it was last year.

And that accounts for roughly 30 basis points or so of the margin change.

Is there a milestone here where you think you will have retired a significant amount of risk such as the Virginia?

I mean, you've got a transition schedule coming up in Virginia, for example.

Right.

Yes.

We see a lot of that risk getting retired over the course of this year.

Okay.

Okay.

Thanks.

Thanks, Doug.

Our next question is from the line of Howard Rubel with Jefferies & Company.

Please proceed.

Thank you very much.

On -- two things, first, Jim, when you down sized from seven -- excuse me, from seven business units to five, could you help us understand a little bit of what kind of cost savings you got and probably Ron or Wes talk a little bit about sort of, you know, how you have gotten maybe some benefits in terms of just other operating synergies?

Well, first of all, Howard, our focus was on creating business units which were more agile in the market place which allowed to us bring together capabilities to more aggressively compete, be more competitive.

Certainly there's a benefit of cost savings and that's proceeding.

We haven't been terribly public with that.

That comes along with it.

But our primary focus has been a market place competitiveness and, for example, if you take a look at areas like cyber security, where we had two fairly large sectors pursuing that market, we have now put that together and organized the pieces.

So that predominant portion of that market area is in one business unit within the new sector run by Linda Mills.

We are finding that there are significant benefits, synergies, and we are also seeing that we are able to apply bidding resources more aggressively on the major pursuits, which sometimes would not have been possible.

We had the smaller business units.

All in all, I think we are pretty pleased with the strategic value in putting these things together.

I would add that we do clearly have cost reduction targets for each of those consolidations.

They are executing on them.

The primarily focus, though, as Ron said is achieving those cost reductions objectives to enhance our competitiveness on a good forward basis.

There will be some cost to implement those to the extent that they are employee-related, but on a net/net basis we will be better off for all of those activities.

It's not wrong, though, to think that 700 people or more less that we are looking at it could be anywhere from 50 to a little over $100 million of which probably keep a reasonable amount of that, although some goes back to the customer.

Well, a lot goes back to the customer and you know, while we are taking out significant number of people in terms of announced reductions of overhead folks, we are hiring that many people and more.

Right.

As direct people on new contracts.

So you could also think of this, Howard, as stiffening up the mix of direct versus indirect labor, inside the businesses as well, putting more folks on direct work and less folks on overhead in the back office.

Yes, Howard, one thing I would add to your earlier -- this is Wes.

Yes.

Your question on the benefits.

You know, a lot of focus gets applied to the benefits that we're getting out of our information systems business, that's sort of an obvious view of cyber security, and many of the things that the two prior sectors had addressed.

Sometimes we get the question about the aerospace side of it, and one thing that I would address and the context of your question on benefits is the remarkable synergy that we are seeing and what I described before is the aerospace continuum.

If you think about a global hawk vehicle, this is a didn't an ISR, highly ISR capable platform, that's operating largely anonymously for well over a day all by itself, and you might think of that as a satellite unbound by Keppler.

It is a set of technologies and a set of mission capabilities that has a lot of alignment with what we have been doing historically in our space business.

And as we think about how we invest, and back to your question on cost, how we think about utilizing resources that we might make available in this process of integration, we see ourselves as being able to make very good investments with the synergy in these technology areas that continue to move us ahead in the areas Secretary Gates has identified as substantial investments going forward, ISR being chief among those.

So we see a lot of benefits both on the aerospace side and the information systems side resulting from this consolidation.

That's what I kind of was thinking.

And then while we're here, UAV, you are a leader in the unmanned vehicle market today and if we were to make a stab at sort of what your run rate is in this business, it's probably like a billion and a quarter to a billion and a half a year.

Is that fair or am I being a little conservative?

That's a little high, Howard, I would think, probably closer to the billion dollars level.

And then the last thing, and, you know, politics is always sort of, you know one fashion or another.

And the senators from Alabama appear to be trying to set the playing field so that there's no other choice other than Northrop to win this.

I mean, how do you react to this and, I mean it looks like it's a good thing but at the same time, there's a certain amount of tilting the game in an inappropriate manner.

Look, Howard, I can't comment what senators from Alabama may or may not be doing.

I will tell you that the competition that was run was from our judgment one of the most thorough we have ever seen in the history of the Defense Department acquisition.

The airplane that was selected had greater capability in fuel range, cargo and $3 billion less for the group of airplanes being purchased.

That was the acquisition process.

There was a political intrusion into that process, which stopped it.

That's life.

We have to deal with that.

All we can do is keep our head down and move forward.

We do have the most capable airplane, and we'll play the game again when the new rules are announced.

I think that's the right answer.

A appreciate that.

Thank you.

The next question is from the line of Joe Campbell with Barclays Capital.

Please proceed.

Hi, good morning.

Good morning, Joe.

I have a question not about ships but about airplanes and bombers.

I see the secretary deferred something that the Air Force was contemplating with regard to long range strike and you guys are the pros at this stuff.

How does this change?

I know it won't have any real EPS impact, but what -- you know, what were the kind of ways that you saw the Air Force heading and with the change that Secretary Gates has announced, how do you see it now heading and how will -- you know, I expect Northrop will play a role no matter what they do.

Joe, a good question.

I really can't offer too much more insight on the secretary's comments on that, but I would tell you that the most capable bomber in the fleet today is the B2.

We do a very substantial amount of work on maintenance and upgrade of the current B2.

My guess is that that workload is going to continue to perhaps increase, if there's a delay of bringing on a new fleet of bombers past 2018 or so.

Irrespective of how this would go, if there's a new bomber program, clearly, Northrop has interest and tremendous experience.

We built the last one.

If there is none for a while, Northrop Grumman is in the middle of upgrading and making available the current B2.

What were you up to prior to the announcement and how did you see that the Air Force was heading and, you know, it must be -- I mean, you were clearly in pursuit of it.

Yes, Joe, unfortunately I don't really have much to offer you to answer that question.

Is this just a classified thing or you just don't want to talk about it?

I just don't have any information I can provide on that.

All right.

Next question is from the line of Heidi Wood with Morgan Stanley.

Please proceed.

Good afternoon, guys.

Hi, Heidi.

A little bit more of a strategy question for you, if you don't mind.

You know, I agree with you that, you know, with your positioning of the portfolio, vis-a-vis Gates' priority, it's fairly attractive.

I'm wondering in addition to sort of organic opportunities, whether we should anticipate that you might step up activity on the M&A environment to fill out your position.

Maybe I will do a multi part.

That's first question.

Well, Heidi, obviously as we said with the balanced cash deployment strategy, we are always looking at M&A.

Valuations are more attractive than they have been in the past.

Clearly, if we were to do something, it would have to make strategic sense.

If we see something of that sort, we will obviously consider it.

We have done a number of small acquisitions over time and the track record over the last several years has been substantially strengthening our cyber and ISR capabilities with very valuable niche properties.

Nothing of huge scale, even Essex was not large but each one of these things did add to the capability.

So if there are opportunities going forward, we will keep our eyes open.

Meanwhile, our track record has been pretty solid about returning cash to shareholders in the forms of dividends, repurchases.

We have been prudently prepaying, our pension plan expenses, and we kept our debt under control.

We will look at all of these things.

If there's something attractive and fits with our strategy so be it.

As I mentioned, my comments, we do see some potential upside for the Northrop portfolio in areas involving cyber, C4ISR, unmanned platforms.

Also another area that was not mentioned heavily, but health information technology, we have done some work and continued to expand our work.

The department and other federal agencies will need help there.

So we see some opportunities here going forward.

Another area, Ron, that you didn't mention but I'm wondering about your position on is Smart Power.

I wonder if you could add fullness to that.

Gates is also on a cost reform war path.

There's a discussion about moving 85% capabilities with 65% of the costs and Global Hawk still carrying a fairly hefty price tag.

Do you see yourself expanding on the UAV more towards the lower end or can you drive down the cost of Global Hawk to keep it attractive within this administration?

Well, first of all, Heidi, every indication I have is that Global Hawk is an extraordinarily attractive system.

All the feedback we get from the operating commanders using this system, both the Air Force and the Navy folks using the demonstrators is they can't get enough of it.

They want more of them.

If you take a look at the plans for production and also the amount of money being put into Global Hawk versus all the other UAVs combined, it's pretty impressive.

So obviously, if you think about the fact that Global Hawk, bloc 10, bloc 20, and bloc 40 are underway with the Air Force.

We were selected to win bams.

Even though someone argued that it was a more expensive platform than the other two offerings.

I think underscores the fact that this is an extraordinarily capable asset.

So I don't have a concern about that.

We certainly do have offerings in in the lower end as well, the fire scout platform is something which is getting tremendous interest from the Navy.

We have demonstrated operations aboard ships at sea.

The United States Army is interested in fire scout and, of course, the Coast Guard is seriously considering it as well.

So we see a set of interesting opportunities across the space in unmanned vehicles.

And it is true this -- the concept of 85% of the capability for substantially less of the cost is important.

Certain assets just give you tremendous value for the money.

If you compare the government of the Global Hawk with other manned aircraft trying to do this mission or even certain satellite programs, it's a very cost effective proposition.

Thanks, Ron, that's helpful.

Can you finish up on the Smart Power dynamic.

Well, we are all for it.

Whatever it turns out to be.

One of the things that we have done in our technical services sector is provided specific support to the state department and other programs where we will be doing work with folks in country.

So wherever we can use all of the elements of Power, that's great, and we'll see how that translates into actual significant business opportunities for the Company.

Excellent.

Thanks very much, gentlemen.

Our next question is from the line of Sam Pearlstein with Wachovia.

Please proceed.

Hi, Sam.

My question is more philosophical, is that if I look at the litigation gain of the $60 to $70 million that you recognize, why not accelerate some of the facility consolidations or other cost reduction efforts to offset that so that you might be able to realize some of those savings sooner.

Well, we sale take the first cut and then have our expert Jim will add in there.

I think the accounting rules require that you basically take these charges as you incur them, particularly as you do consolidations and personnel reduction and they are separate things.

We see a gain returning -- we have other litigation expenses associated with that particular set of matters, as well as some other litigation we see coming.

We just basically show it to you as it comes.

I don't know that I can add a whole lot more.

You know, not to imply that we are not aggressively moving after the cost consolidation as I said both the information services and aerospace segment have targets that we are working to achieve, and -- and, you know, they are occurring at the same time, those costs would actually be reimbursable under our government contracts to the extent there are costs to implement them.

Any savings that we achieve there would be shared with our government customer as well.

Conversely, the litigation settlement is -- is, you know, is not a cost or a credit in this case that's shared with our government customer.

So they really don't -- you know, maybe from a financial accounting perspective, they could offset but from a government contract perspective, they don't.

Okay.

Thank you.

And then just separately, I know you wanted to get into the detail at your Analyst Day but you mentioned if ships got to 7%, that would be good performance and when you gave guidance a couple of months ago at the end of the fourth quarter, it seemed like it was higher.

I wonder if you could talk about some of the offset might be to still end up at the same place in terms of earnings for the year.

It's essentially the items that we talked about, the lower earnings on DDG51s and the LPDs going forward.

So, I mean, if that only does 7% this year and not the 8% that you originally said, what's happening in the other businesses to make up some of that shortfall.

Again, we're seeing strong performance out of electronics and aerospace in particular.

Okay.

Thank you.

Your next question is from the line of David Strauss with UBS.

Please proceed.

Thanks.

Just following up, I think where Sam is going, if you look, you know, on the revenue side, you did 6 or 8%, whatever did you in terms of revenue growth, there's no change in your revenue forecast for the year, because I guess at this point, it would imply, you know, flat revenues the rest of the year.

Actually, the revenues would be up a little bit in each of the quarters over the first quarter, and --

I guess year-over-year.

More flat on a year-over-year basis, small increases, I think, but I think Dave -- David, what's really important is, again, as the new administration has come into place, the Secretary Gates' comments around the 2010 budget and now the QDR, obviously we have a lot of new opportunities that we have been pursuing.

We have seen some delay many some of those opportunities and it's really hard to project whether or not they are going to occur yet this year or next.

So that's really the uncertainty, if you will, around the revenue forecast at this point in time.

And as those activities or opportunities are realized, we'll obviously update if need be, but at this point in time, I can't really tell when actually those RFPs are going to come out and the due dates for decisions are going to be made.

Okay.

And then Jim on FAS/CAS is that going to ramp during the course of the year, because it just kind of coming in at 30 or $40 million under what you had.

It will be fairly constant.

You are right, we are a few million, 10 or $30 million under what we thought we would be, as we firmed up the CAS numbers, the cost accounting numbers after year end.

Okay.

And, Ron, could you -- could you update us where we are on E2D?

I mean, there's been some swirl around the program from stuff coming out of Washington.

E2D for those not familiar is the advanced Hawk Eye.

It's a Navy carrier based airborne warning control aircraft.

It's a new aircraft development.

We have already built a couple of aircraft.

They are testing them.

The program is going extraordinarily well.

The Navy is extremely satisfied with the technical process and the radar and the system is fabulous.

There is a law involving breach and as a result, a variety of factors, almost none of which were related to the performance of program by our Company, there are some accounting issues that may push it close to that and there are some questions about what does that mean?

The best I can tell, this is a government process issue.

Our job is to keep the plane moving, keep the program going.

We are doing a great job on that.

We will work through it.

There's no doubt in my mind of the unwavering demand for the aircraft.

We will see how that plays out.

New aircraft developments are not easy.

I would say the E2 has gone about as well as any I have seen in the last 10 years.

Thanks, guys.

Our next question is from the line of Robert Spingarn with Credit Suisse.

Please proceed.

Hi, guys.

Good afternoon or good morning on the West Coast.

A couple of things, first of all, Jim, should we understand it that your revenue guidance from before is technically suspended or withdrawn or it's just not updated?

It's not updated.

Yes..

I thought what was most important is to talk about earnings per share and we'll go through all the details at the May meeting.

Okay.

And then switching more strategic back to the Secretary Gates discussion.

I don't know Ron or Wes if these are for you, but could you talk a little about upside, perhaps on the aircraft side of 35 and F18 and also classified space, which may be making a comeback and then on the offset, downside in missile defense.

Let me take a cut at that Robert.

F35, I was just at the Joint Strike Fighter CEO Conference.

I think we are pleased with the five-year plan.

It's what we had assumed and certainly Lockheed has assumed as well.

I see that as a very strong opportunity for the Company.

And as you know, we have a very substantial part of that aircraft and the electronics that are on it.

F18s, this will be continued production of F18s and we are in partnership there with Boeing.

And we see that as a positive and as you know, the F18 program is a very strong program for Northrop and very much in serious production there.

That's looking good.

With missile defense, it's less clear what the puts and takes will be.

Clearly, there's some talk about moving the airborne laser to an RD program, frankly that's what we expected anyway.

We do see an opportunity for some up side with the Kinetic Energy Interceptor because it's very clear to me and others that the nation does need a boost and assent phase capability and the KEI, as we move through our various test milestones is very likely the right system to fill that need.

And we did, in fact, have some successful test results as we moved towards a test tier in the next year or so.

So the missile defense side, I think there could be some up side.

We will see where that plays out.

With respect to restricted space, I really can't say a whole lot about that, except to say that our aerospace business forecast factors in all space programs and we see -- we see strength there.

From the programs where we discussed up side, could we see a material move from 2009 to 2010.

I think it's too early to say right now, Robert.

We don't know yet at this point in time.

We're not really even prepared to make any overall guidance recommendations on 2010.

I think we have to see how the legislative process moves forward.

Keep in mind that the secretary's proposal was a proposal.

The administration proposes the Congress disposes, as they say, and I think there will be a political process develops some puts and takes on his offerings.

We will see where all that comes up.

And to Jim's comments earlier, that's the reason why we want to be somewhat cautious as we look through the rest of the year on revenue.

Okay.

Thanks, Ron.

Okay.

I think that's it.

Okay.

Let me, if I could, just wrap up.

Final comments.

As you can see, we're off to a strong start in 2009.

We continue our focus on reducing risk in this portfolio, driving performance and positioning ourselves for growth.

We saw Secretary Gates' 2010 proposal in a positive light.

We think there's some good opportunities for Northrop going forward.

We will see how that plays out in the Congress process in the next six months or so.

We will have a lot more to say about these and other things when we see you in Baltimore in a couple of weeks.

Thank you all for joining us and we'll see you again.

Ladies and gentlemen, thank you all for your participation in today's conference call.

This concludes the presentation and you may now disconnect.