Northrop Grumman falls on cut to components unit guidance, TRW rejection

By Ronda Fears

Nashville, Tenn., April 17 - Defense contractor Northrop Grumman Corp. said it was on track to meet its 2002 sales target of $17.5 billion to $18 billion on strength in its military segments, but cut projections for its components technology group due to the slump in the telecom industry. That, along with TRW Inc. rejecting its sweetened merger bid, sent Northrop's securities lower.

The Northrop 7.25% mandatory convertible due 2004, which was issued at 100 in November, traded down 1.5 points to 124 but on thin volume, while the underlying common shares lost $2.86 to $113.88.

Kent Kresa, chief executive of Northrop, said it was not a surprise that TRW rejected even its boosted bid of $53 per share, versus the original $47 per share offer launched in February. But TRW did open the door to talks, which he said was an improvement.

"That's what we've been wanting," Kresa said in Northrop's earnings conference call.

"Even if they are prepared to begin a true negotiating process, we would not expect them to publicly accept the offer we have made."

TRW shareholders are scheduled to vote on the Northrop bid next Tuesday, but TRW said Wednesday it has received interest from other potential suitors that it also will explore.

With three major acquisitions under its belt in 2001, including Litton Industries and Newport News Shipbuilding, Northrop reported first quarter sales more than doubled to $4.1 billion from $2 billion.

Net income for first quarter was $149 million or $1.27 per diluted share from $132 million or $1.81 per diluted share in the first quarter of 2001.

While the components technology unit sales target was trimmed to $620 million from $700 million for 2002 due to weakness in the telecom market, Northrop said it still expects total sales of $17.5 billion to $18 billion.

Standard & Poor's said its rating and outlook for Northrop (BBB-/stable) were not affected by the earnings or TRW news.

Northrop's ratings reflect risks of an active acquisition program and management's commitment to maintaining investment-grade financial flexibility, S&P said. Financial flexibility is adequate, S&P added, with debt to total capital in the mid-40% area at March 31.

The S&P ratings factor in Northrop's bid for TRW (BBB/Watch Neg/A-2), which includes the assumption of $5 billion of TRW debt. If the acquisition closed in 2002, the combined Northrop and TRW defense and aerospace businesses would generate over $26 billion revenues in 2003, S&P said, and Northrop's debt to total capital would not rise above the mid-40% level.

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