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NORTHROP REPORTS 40% EARNINGS RISE

29 Jul 04. Northrop Grumman Corporation (NYSE: NOC – News) reported that second quarter 2004 income from continuing operations rose 40 percent to $289m, or $0.79 per diluted share, (2003: $207m, or $0.55). The increase reflects higher sales and operating margin, as well as a lower tax rate than in the second quarter of 2003. Sales for the second quarter of 2004 increased 11 percent to $7.4bn from $6.6bn for the same period of 2003.

“These results reinforce Northrop Grumman’s record of solid sales and earnings growth and demonstrate our ability to consistently deliver strong financial performance,” said Ronald D. Sugar, chairman, chief executive officer and president. “Based on the strength of year-to-date results, we now expect 2004 sales to increase to around $29 billion, earnings per share from continuing operations to grow to between $2.90 and $3.00, and net cash provided by operations to be about $1.7 billion.”

Operating margin for the 2004 second quarter increased 24 percent to $483m from (2003: $391m). Second quarter 2004 operating margin includes lower pension expense and higher unallocated corporate expenses than in the second quarter of 2003, as well as the effect of a $60m pre-tax charge for increased projected costs for the F-16 Block 60 fixed-price development combat avionics program reported in the Electronic Systems segment.

Second quarter 2004 pension expense, as determined in accordance with accounting principles generally accepted in the United States, declined to $86m, (2003: $140m). Pension expense allocated to contracts pursuant to U.S. Government Cost Accounting Standards (CAS) increased operating margin by $77m in the second quarter of 2004 and $66 million for the comparable 2003 period.

Unallocated corporate expenses were $53m, (2003: $22m. The $31m increase in unallocated corporate expenses was primarily due to higher mark-to-market stock compensation expense and deferred state income taxes.

The effective tax rate applied to income from continuing operations for the 2004 second quarter was 26 percent compared with 31 percent in the 2003 second quarter. During the second quarter of 2004, the company completed studies and recognized additional tax credits of $31m related to research and development and export sales activities for the years 1997 through 2003.

Net income for the 2004 second quarter was $295m, or $0.81 per diluted share, (2003: $205m, or $0.54).

Contract acquisitions were $5.3bn in the second quarter of 2004, (2003: $5.2bn). Total funded backlog was $26.2bn at June 30, 2004, (2003: $26.9bn). Total backlog, which includes funded backlog and firm orders for which funding is not currently contractually obligated by the customer, was $57.2bn at June 30, 2004, (2003: $58.2bn).

2004 Guidance

The company expects 2004 sales of approximately $29bn versus previous guidance of approximately $28bn. Earnings per share from continuing operations are now expected to range between $2.90 and $3.00 versus previous guidance of between $2.80 and $2.95. Net cash provided by operating activities is expected to be approximately $1.7bn in 2004, versus the prior estimate of approximately $1.5bn.

Segment Results

ELECTRONIC SYSTEMS

($ in millions)

SECOND QUARTER

2004 2003

Sales $1,591 $1,512

Operating Margin 138 148

% Operating margin to sales 8.7% 9.8%

Electronic Systems second quarter 2004 sales increased 5 percent from the second quarter of 2003 due to revenue increases in Government Systems and Defensive Systems. Sales in Government Systems rose 72 percent, primarily due to higher sales to the U.S. Postal Service. Defensive Systems revenue increased 39 percent reflecting increased sales of

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