Northrop Grumman Corporation (NOC)

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Northrop Grumman Corp. (NOC)

Advisory Services Conference Call

November 09, 2009 11:30 a.m. ET

Executives

Paul Gregory - VP of IR

Jim Palmer - CFO

Analysts

Myles Walton - Oppenheimer & Company

Howard Rubel - Jefferies

Sam Pearlstein - Wells Fargo Securities

Carter Copeland - Barclays Capital

Cai von Rumohr - Cowen & Company

Finbar Sheehy - Sanford Bernstein

Joe Nadol - JPMorgan

Presentation

Operator

Good day ladies and gentlemen and welcome to the Advisory Services Agreement conference call. My name is Keisha and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the call over to your host for today, Mr. Paul Gregory, Vice President of Investor Relations. Please proceed.

Paul Gregory

Great. Thank you Keisha. Good morning and welcome to Northrop Grumman's conference call to discuss our announcement regarding the sale of our Advisory Services business, TASC. The primary purpose of today's call is to answer your questions regarding the announcement in a regulation FD compliant environment. We ask that you limit your questions to the announcement. In addition, our discussions today will be limited to the expected impact of the transaction on Northrop Grumman and we will not be discussing any of the specific contractual details of the transaction as such details are confidential.

Before we begin with some brief formal comments, please understand that matters discussed on today's call constitute forward-looking statements pursuant to Safe Harbor provisions of Federal Securities Laws. Forward-looking statements involve risks and uncertainties including timing of the close of the transaction and other factors that are detailed in today's press release and our SEC filings and may cause actual company results to differ materially.

On today's call is our Chief Financial Officer, Jim Palmer. At this time, I would like to turn the call over to Jim. Jim?

Jim Palmer

Thanks, Paul and good morning, ladies and gentlemen. As you know, over the weekend we announced the signing of a definitive agreement to sell our advisory services business, primarily comprising TASC to a partnership of General Atlantic, and KKR for $1.65 billion in cash. As Paul said, the primary purpose of our call today is to answer your questions regarding the transaction.

However, before we begin the Q&A, I'd like to provide a little background on how we came to this decision and why we believe this transaction is in the best interest of our national security, customers as well as TASC, its employees and Northrop Grumman's shareholders.

Most of you are aware of the government's efforts to reduce organizational conflicts of interest. This effort comminuted in the last May's passage of the Weapon Systems Reform Act of 2009. This act established new guidelines to eliminate conflicts of interest for companies that both advice the government on defense and intelligence technology systems and then for contracts to build them as well.

Based on our knowledge of customer's likely direction, we have been preparing for the possibility of a sale for over a year. That is why we chose to combine all of our advisory services business into one entity, when we created the Information Systems sector at the beginning of the year.

When the Weapon Systems Reform Act was passed, we determined it was important that we respond quickly and proactively to address the new OCI policies and to optimize the value of TASC for our customers, its employees and for Northrop Grumman's shareholders. TASC has a 43 year history of Advisory Services to our nation's National Security Communities.

It's not an overstatement to describe TASC as a unique national asset. In order to ensure that our National Security Communities would continue to benefit from its unique core systems engineering and analytical capabilities unencumbered by the implementation of the new policies it needed to become an independent organization separate from Northrop Grumman's other businesses. We also determined that the separation needed to happen expeditiously, in order to prevent any potential degradation of this valuable business.

When this transaction closes, Northrop Grumman will be fully aligned with the new OCI policy.

Once it was clear that we needed to separate the business we then determined that the way to move TASC into independent status was through a sale. We considered a number of alternatives but a clean sale was clearly the best option based on economic value, transaction certainty and timing. It could be accomplished quickly and would be beneficial to our shareholders.

As I said, TASC has been a very important and valuable asset for Northrop Grumman. Over the years, it's generated healthy, organic sales growth along with a good margin rate. In 2009, sales are expected to total about $1.6 billion with an accompanying operating rate in the low 9% range. Under current accounting rules, the 2009 operating results for Advisory Services will be reclassified as discontinued operations, and as we said in the press release, the company expects that the transaction will be neutral to 2009 bottom-line net income and diluted earnings per share.

I should point out though that there is a proposed accounting rule change for the treatment of discontinued operations that if adopted before we report our 2009 results would require the Advisory Services business to continue to be reported as a continuing operation as part of Information Systems. The buyers as you know are experienced investors who have a proven track record. We believe they fully understand the importance of TASC, its customer's missions, the sophistication of its employees and their unique expertise. The current management team of TASC will continue to lead the organization in partnership with the buyers.

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