northrop grumman Wes Bush, President and Chief Financial Officer (Financial Overview)
1. Northrop
Grumman
Financial
Overview
November 9, 2006
Wes Bush
President and Chief Financial Officer
1 Copyright 2006 Northrop Grumman Corporation
2. Safe Harbor Statement
Certain statements and assumptions in these presentations and materials contain or are based on “forward-
looking” information. Such “forward-looking” information includes, among other things, projected deliveries,
expected funding for various programs, future effective income tax rates, financial guidance and estimated
amounts regarding sales, segment operating margin, pension expense, employer contributions under
pension plans and medical and life benefits plans, cash flow and earnings per share, and is subject to
numerous assumptions and uncertainties, many of which are outside Northrop Grumman’s control. These
include Northrop Grumman’s assumptions with respect to future revenues, expected program performance
and cash flows, returns on pension plan assets and variability of pension actuarial and related assumptions,
the outcome of litigation and appeals, environmental remediation, divestitures of businesses, successful
reduction of debt, successful negotiation of contracts with labor unions, effective tax rates and timing and
amounts of tax payments, and anticipated costs of capital investments, among other things. Northrop
Grumman’s operations are subject to various additional risks and uncertainties resulting from its position as
a supplier, either directly or as subcontractor or team member, to the U.S. Government and its agencies as
well as to foreign governments and agencies; actual outcomes are dependent upon various factors,
including, without limitation, Northrop Grumman’s successful performance of internal plans; government
customers’ budgetary constraints; customer changes in short-range and long-range plans; domestic and
international competition in both the defense and commercial areas; product performance; continued
development and acceptance of new products and, in connection with any fixed price development
programs, controlling cost growth in meeting production specifications and delivery rates; performance
issues with key suppliers and subcontractors; government import and export policies; acquisition or
termination of government contracts; the outcome of political and legal processes and of the assertion or
prosecution of potential substantial claims by or on behalf of a U.S. government customer; natural disasters,
and any associated amounts and timing of recoveries under insurance contracts, availability of materials
and supplies, continuation of the supply chain, contractual performance relief and the application of cost
sharing terms, impacts of timing of cash receipts and the availability of other mitigating elements; terrorist
acts; legal, financial and governmental risks related to international transactions and global needs for
military aircraft, military and civilian electronic systems and support, information technology, naval vessels,
space systems, technical services and related technologies, as well as other economic, political and
technological risks and uncertainties and other risk factors set out in Northrop Grumman’s filings from time
to time with the Securities and Exchange Commission, including, without limitation, Northrop Grumman
reports on Form 10-K and Form 10-Q.
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Copyright 2006 Northrop Grumman Corporation
3. Presentation Format
Guidance
Effective 1/1/07 Radio Systems business will be transferred from Space
Technology to Mission Systems
Reported results for Q4 2006 & Full Year 2006 will not reflect the transfer
Guidance does not reflect the change
Guidance does not include Essex
Segment results 2003 - 2005
Presented on a pro forma basis reflecting
Previously announced organizational realignments
Transfer of Radio Systems business
Adoption of dual-margin recognition on inter-segment sales
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Copyright 2006 Northrop Grumman Corporation
4. What You Should Expect From NOC
Growth
Performance
Value-creating cash
deployment
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5. Outlook
2005 2006E 2007E
Revenue $30.1B $30.2B $31-32B
Segment OM1 8% Low 9% Low 9%
Operating Margin 7.3% Low 8% High 8%
EPS from Continuing
$3.83 $4.40-4.45 $4.65-4.90
Operations
Cash from Operations $2.6B $1.5-1.8B $2.5-2.8B
Capital Expenditures2 $744M $700-750M $650-700M
1
Non-GAAP Metric - see reconciliation and definition on pages 25 & 26
2
Before Katrina-related capital expenditures
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7. Portfolio Actions to Drive Growth
Life Cycle
Systems
Integrated
Information Optimization
Support
Systems
Technology
Technical
Services
Systems
Mission
Life Cycle Electronics
Support,
Systems
Optimization
Training &
Simulation
Life Cycle Optimization
Technical Services
Space
Addresses ~$70 billion arena
Technology
Growing at 8-9%
Military Communications
Addresses ~$80B arena
Mission Systems
Radio
Growing at 4-7%
Systems
Space
Comms &
Technology Information
Network
Space &
Comms Communications
Networks &
Collaboration
5 Copyright 2006 Northrop Grumman Corporation
8. Portfolio Supports Organic Sales Growth
Electronics
21%
Aerospace 2007E
2006E ($B)
Growth
27%
I&S ~$11 8-10%
Aerospace ~$9 ~(5)%
Electronics ~$6.6 ~5%
Ships ~$5 ~10%
36%
I&S 16% Total ~$30.2 $31-32
Ships
Transfer of Radio Systems to Information & Services
from Aerospace effective 1/1/07 not included
6 Copyright 2006 Northrop Grumman Corporation
9. Core Programs Provide Strong Base
New
100
New
New
80
Follow-on
Follow-on
% of Sales
60 Unfunded
Unfunded
40 Firm
20
0
2006E 2007E 2008E
Franchise programs provide reliable long-term revenue
Core and adjacent opportunities support organic growth
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11. Margin & Cash Performance Drivers
Competitive Excellence programs
Program performance
Infrastructure costs
World-class processes
ACE Program
Scale leverage (Procurement, IT, Facilities)
~$150M cost reduction expected in 2006
~$300M annual cost reduction targeted by 2008
Shared services
Financial systems, workforce administration
~$100M cost reduction targeted by 2008
Cash initiatives
Best practice adoption for contract terms & conditions, receivables/
payables management, working capital enhancements
Benefits programs modernization
Post retirement benefits plan change reflected in 2007 guidance
All data and alternatives in the ACE project are considered feasibility assessments.
This information is not considered cost or pricing data under Public Law 87-653.
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12. Program Risk Management Process
Pre-Contract Phase
Target selection criteria
Non-advocate review (NAR)
Independent cost evaluation (ICE)
Rigorous corporate risk review process
Contract Performance Phase
Risk management baseline
Company-wide Earned Value Management System
Enhanced transparency at all levels
Program-focused sector reviews
Watch list review process
Strengthened corporate oversight of programs
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13. Operating Margin Expansion
2006E 2007E Long-Term
Margin
Operating Margin % Opportunity2
Information & Services Low 8 ~8 8-9
Aerospace Low 9 ~9 9-10
Mid to
Electronics High 11 ~12
High 11
Ships ~7 Mid 8 9+
Segment OM1 Low 9 Low 9 ~10
Total Operating Margin Low 8 High 8 9+
1
Non-GAAP Metric - see reconciliation and definition on pages 25 & 26
2
Dependent on long-term business mix
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14. Reconciliation of Segment OM to OM
Unallocated
2006E of ~$250 million (~$140 million before Q3 legal provision)
2007E ~$90 million
Post retirement benefit plan changes result in substantial
savings
Net Pension Expense
2006E of ~($25) million
2007E with 2006 assumptions, pre-funding and 2007
demographics is ~($15) million
12 Copyright 2006 Northrop Grumman Corporation
22. Acquisitions & Divestitures
Acquisition Principles
Alignment with portfolio strategy
Acquisitions Rapid synergy capture
& Divestitures
Accretive by year two
Accelerate growth &
Accelerate growth & Valuation based on robust DCF
shareholder returns assessment
Acquisitions in strategically Rigorous due diligence process,
aligned businesses with experienced team
profitable growth Comprehensive integration
assessment and plan
Divest to capture enhanced
value Sector execution commitment
Annual reviews of performance to
sector commitment
20 Copyright 2006 Northrop Grumman Corporation
23. Debt Reduction & Pension Pre-funding
Highest credit rating in
Debt Reduction
company’s history
& Pension Pre-funding
$1.2 billion debt reduction
expected in 2006 Maintain strong credit
profile
~$5.7B debt reduction from
2002 to YE 2006 Ensure flexibility
Net debt/total capital has Capture economic
declined from 34% to 14%
benefit
$1.3 billion pension pre-
funding in 2004, 2005 & 2006
21 Copyright 2006 Northrop Grumman Corporation
24. What You Should Expect from NOC
Growth
Performance
Value-creating cash
deployment
22 Copyright 2006 Northrop Grumman Corporation
27. Non-GAAP Measure Reconciliation
$ Millions 2005A 2006E 2007E
Sales $30,067 ~$30,200 $31,000-$32,000
Segment Operating Margin Rate* 8.0% Low 9% Low 9%
Operating Margin Rate 7.3% Low 8% High 8%
Segment Operating Margin* 2,414 ~2,750 2,860-2,940
Reconciliations:
Unallocated Expenses (190)
Pension (Expense) Income (410) ~(300) ~(120)
Reversal of CAS Pension Expense
included above 389
Reversal of Royalty Income included
above (10)
Operating Margin as Reported 2,193 ~2,450 2,740-2,820
*Non-GAAP Measure
25 Copyright 2006 Northrop Grumman Corporation
28. Non-GAAP Measures Definitions
Non-GAAP Financial Measures Disclosure
Today’s presentation and the accompanying web charts contain non-GAAP (Generally Accepted Accounting Principles) financial
measures, as defined by SEC Regulation G and indicated by an asterisk *.
While we believe that these non-GAAP financial measures may be useful in evaluating Northrop Grumman, this information should
be considered as supplemental in nature and not as a substitute for financial information prepared in accordance with GAAP.
Definitions are provided for the non-GAAP measures used in our presentation. Other companies may define the measures
differently.
Segment Operating Margin
Segment Operating Margin is the total earnings from each of our six business segments including royalty income and pension
expense to the extent that the cost is currently recognized under government Cost Accounting Standards (CAS). Segment
Operating Margin excludes unallocated corporate expenses, GAAP pension expense and the reversal of CAS pension expense.
Reconciling items to total company Operating Margin are:
— GAAP pension expense reported separately as a reconciling item under the caption quot;Pension expense.quot;
— Reversal of CAS pension expense included in Segment Operating Margin as a cost recognized under CAS.
— Unallocated expenses which include unallocated corporate, legal, environmental, state income tax, and other
retiree benefits expenses.
— Royalty Income reversed under the caption “Reversal of royalty income included above” and reported under the
caption “Other, net.”
Management uses segment operating margin as an internal measure of financial performance of our individual business
segments. This measure also may be helpful to investors in understanding period-over-period operating results separate from
items that may be influenced by external market fluctuations.
26 Copyright 2006 Northrop Grumman Corporation
29. Non-GAAP Measures Definitions
Net Debt
Net Debt is calculated as short and long-term interest-bearing debt minus cash and cash equivalents..
Free Cash Flow
Free Cash Flow (FCF) is the cash from operations less capital expenditures. Katrina related capital expenditures are
excluded. Katrina related capital expenditures was approximately $80M in 2005, and it is projected to be approximately
$200M in 2006 and approximately $100M in 2007.
Free Cash Flow Per Share
Free Cash Flow as defined above divided by weighted average diluted shares
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