The record results, in large measure, reflect strong contributions by the company's two new segments, Mission Systems and Space Technology; double-digit growth in sales and operating margins at three other segments, Electronic Systems, Ships and Information Technology; and a lower effective tax rate.

Northrop Grumman reported income from continuing operations of $174 million, or $0.91 per share, compared with $149 million, or $1.27 per share, for the same period of 2002. First quarter 2003 earnings per share are based on weighted average diluted shares outstanding of 184.3 million versus 112.8 million for the first quarter of 2002.

The net pension adjustment in the 2003 first quarter was an expense of $69 million, compared with income of $50 million for the comparable period of

2002. Net pension adjustment is the difference between pension costs calculated and funded in accordance with the Federal Government's Cost Accounting Standards (CAS), which are reported in the segments' operating results, and pension expense or income determined in accordance with FAS 87.

During the 2003 first quarter the company recorded a $26 million tax credit for additional research tax credits covering the years 1981 through 1990. As a result, the company's overall effective tax rate for the quarter was 18 percent, which added $.14 per share to the company's 2003 first quarter earnings. The effective tax rate for the 2002 first quarter was 31 percent.

Consistent with previous guidance, the effective tax rate for 2003 is expected to be approximately 28 percent.

"By virtually every measure, Northrop Grumman's first quarter operating results were excellent," said Ronald D. Sugar, Northrop Grumman's chief executive officer and president.

"Importantly, we have met or exceeded every milestone to date with regard to the TRW integration. I wish to recognize our recently retired chief executive officer Kent Kresa for his remarkable stewardship and contribution to the strategic positioning of our company.

Looking ahead, we are focused on program execution excellence while we capitalize on our extraordinary portfolio of world-class defense technologies and capabilities," Sugar added. "Finally, I am extremely proud of the dedication of the 120,000 women and men of Northrop Grumman Corporation, whose many advanced products and systems contributed so significantly to the success of Operation Iraqi Freedom."

Sales for the 2003 first quarter increased 49 percent to $5.9 billion from the $3.9 billion reported for the first quarter of 2002, due to the contributions from Mission Systems and Space Technology and 10 percent organic growth in the legacy Northrop Grumman segments.

Northrop Grumman's segment operating margin for the first three months of 2003 increased 44 percent to $433 million from $300 million for the comparable 2002 period, due to the contributions from Mission Systems and Space Technology and 15 percent organic growth in the legacy Northrop Grumman segments.

Total operating margin for the 2003 first quarter increased five percent to $328 million from $313 million in the same period a year ago, reflecting the increased segment operating margin, offset by the net pension adjustment.

Net income for the 2003 quarter was $253 million, or $1.34 per share, compared with a loss of $283 million, or $2.56 per share, in the 2002 quarter.

Income from discontinued operations for the first quarter of 2003 was $80 million, and included the results of TRW Automotive, which was sold Feb. 28, 2003, and the company's Component Technologies businesses.

Results for the 2002 first quarter included a $432 million charge for the cumulative effect of an accounting change recorded upon adoption of SFAS No. 142 - Goodwill and Other Intangible Assets.

Companywide, contract acquisitions increased 26 percent to $7.1 billion for the first three months of 2003, from $5.6 billion reported for the same period a year ago, primarily due to contributions from Mission Systems, Space Technology and Integrated Systems segments. The company's business backlog at March 31, 2003, increased 24 percent to $27.3 billion from $22.1 billion reported a year earlier.

Northrop Grumman's total debt at March 31, 2003, declined to $6.9 billion from $9.6 billion at Dec. 31, 2002, primarily reflecting the successful execution of the company's plan to reduce the acquired fixed-rate TRW debt.

Also during the quarter, the company paid approximately $1.0 billion of income taxes due following the completion of the B-2 engineering and manufacturing development contract. Interest expense for the 2003 first quarter increased to $144 million from $109 million for the 2002 first quarter.

Net debt to total capital at March 31, 2003, decreased to 30 percent from 34 percent at the end of 2002. The company's net cash used in operations for the 2003 first quarter, excluding the B-2 tax payment, totaled $40 million. Net cash used in operations for the 2002 first quarter was $99 million.

Guidance for 2003/2004 The company said that 2003 earnings from continuing operations are now expected to range between $3.80 and $4.20 per share, up from prior guidance of $3.65 to $4.15 per share. Consistent with previous guidance, segment operating margin for 2003 is expected to be in the mid-7 percent range on estimated sales of $25 billion to $26 billion.

Before the B-2 tax payment, cash from operations for 2003 is expected to be between $1.1 billion and $1.3 billion, unchanged from the prior projection. Capital expenditures for 2003 are expected to be approximately $690 million, including approximately $60 million for capitalized software. The company said that FAS pension expense for 2003 is now expected to total approximately $560 million, down slightly from its prior estimate of $600 million, and the CAS pension expense for 2003 is expected to be $280 million, up from its prior estimate of $260 million.

Based on preliminary valuation studies, the company stated that 2003 amortization of purchased intangibles is expected to total $230 million and depreciation to total $540 million. Net interest expense for 2003 is expected to be approximately $470 million.

For 2004, sales are expected to range between $28 billion and $29 billion, with segment operating margin expected to continue in the mid-7 percent range.

Under current actuarial and asset return assumptions, the company expects 2004 expense for net pension adjustment to be approximately the same as 2003. This amount is subject to significant variation based on actual returns and future assumptions.

The company expects amortization of purchased intangibles to be approximately the same as the 2003 level, and depreciation to be slightly more than the 2003 level. Net interest expense for 2004 is expected to be approximately $375 million to $400 million.

The expected 2004 effective tax rate is in the range of 32 percent to 33 percent. Cash from operations for 2004 is expected to total approximately $1.5 billion. With these assumptions, the company would expect solid double-digit earnings per share growth in 2004.

The weighted average diluted shares outstanding are expected to be approximately 185 million for 2003 and 188 million for 2004.

Strong Segment Results Electronic Systems sales for the first quarter of 2003 increased 11 percent to $1.3 billion from $1.2 billion for the same period in 2002.

Operating margin for the quarter increased 34 percent to $121 million from $90 million for the 2002 period. First quarter 2003 results for sales and operating margin reflect the favorable impact of accelerated deliveries in Aerospace Electronic Systems, specifically in the Apache Longbow, F-16 and F/A-22 programs. The results also include strong sales performance in the C4ISR&N and Defensive Electronic Systems business areas.

Ships, which includes the financial results of the Newport News and Ship Systems sectors, generated a sales increase of 12 percent to $1.2 billion and operating margin of $75 million for the first quarter of 2003, compared to sales of $1.1 billion and operating margin of $67 million for the comparable 2002 period.

The sales growth reflects increased revenue in the Surface Combatant business area, specifically DD(X), the Navy's future transformational surface combatant program. Operating margin for the 2003 first quarter reflects lower purchased intangibles amortization expense.

Information Technology sales in the first quarter 2003 increased 18 percent to $1.1 billion compared with sales of $929 million for the same period of 2002, with strong growth in all business units.

For the quarter, the segment generated operating margin of $62 million compared to $50 million reported in the first quarter of 2002, reflecting increased revenues and a higher operating margin rate on the Government Information Technology business.

Sales for Integrated Systems were $816 million in the first quarter of 2003 compared with $807 million for the 2002 first quarter, reflecting increased F-35, Global Hawk and MP-RTIP sales, which were partially offset by lower Joint STARS and F/A-18E/F sales.

Operating margin for the 2003 first quarter declined to $87 million from $93 million in 2002, principally due to lower operating margin on Joint STARS and F/A-18E/F contracts, partially offset by increased margin on unmanned systems and E-2C contracts.

Mission Systems reported 2003 first quarter sales of $929 million, led by its Command, Control & Intelligence Systems and its Federal & Civil Information Systems business areas. The segment's 2003 first quarter operating margin of $56 million includes a $9 million preliminary estimate of purchased intangible amortization expense.

Sales for Space Technology for the 2003 first quarter totaled $648 million, led by revenues from its Intelligence, Surveillance and Reconnaissance and its Satellite Communications business areas. The sector's operating margin of $32 million included an $8 million preliminary estimate for purchased intangible amortization expense.

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