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September 9, 2006

Northrop Grumman plans "phased resumption" of Gulf shipbuilding

Northrop Grumman Corporation (NYSE:NOC) yesterday said that the impact of Hurricane Katrina will affect the near-term operations and financial results of its Ship Systems sector, which is reported as part of the Ships segment in the company's financial reports.

Northrop Grumman said that while its facilities have incurred significant damage and operations have been impacted, it has adequate resources and liquidity to meet its current obligations and does not expect a material impact to its overall financial health.

The company presently expects that its 2006 financial guidance will be largely unaffected by the hurricane, as there are aggressive efforts underway to restore the shipyards to full operations.

Northrop Grumman expects to begin a phased resumption of shipbuilding activity at its Ship Systems operations in New Orleans, La., Pascagoula, Miss. and Gulfport, Miss. during the month of September.

Separately, in an employee advisory,Northrop Grumman said that "contrary to several media reports, the company is asking that only certain Gulf Coast employees, not all employees, report to work Monday, Sept. 12. While the company hopes to resume some levels of shipbuilding activities at its shipyards next week, for now all personnel should continue to monitor [its] daily advisories, which offer the most up-to-date employee information." In the same advisory, the company said that the correct toll-free number for the Northrop Grumman Employee Disaster Relief Fund is (888) 642-5645. A wrong number had been published by some Gulf coast media.

Despite extensive damage to the shipyard facilities, major shipyard assets, such as cranes, dry docks and most fabrication facilities, have survived the hurricane and are being brought back to an operational status.

Approximately 2,500 people are now working to clean up and help bring the shipyards back to production.

For 2005, Northrop Grumman expects its financial results to be affected by Katrina in three primary categories: cost of damage repair, delay of work and cost growth on contracts.

Northrop Grumman believes its insurance is adequate to cover the preponderance of any property damage costs.

Closure of the three operations as a result of the hurricane will significantly delay work in process at all sites.

In addition to the clean-up and repair required on site, basic infrastructure in the surrounding area has been severely damaged.

Many of the company's employees have also been individually impacted, causing delays in work proceeding. Northrop Grumman expects that contract work will resume in a phased approach at all three sites.

The company's previous financial guidance for 2005 included an expectation of approximately $950 million in revenue from the three operations for the remainder of the year. Northrop Grumman now expects revenues and operating margin to be lower due to work disruption and delay. As the shipyards are brought back into operation, the rate of business resumption will determine the impact on the 2005 results. The company's current expectation is that work delay will negatively impact its 2005 earnings by $.06 to $.12 per share.

Northrop Grumman also expects to encounter cost growth on Ship Systems contracts.

As a result of the delay and disruption associated with repairing the shipyards, the phased restart of work effort, the costs associated with the retention of employees and other ongoing expenses, it anticipates additional costs will be assigned to current contracts within Ship Systems.

These additional costs are generally allowable under government contracts, but margin under those contracts may be affected by varying cost-share arrangements.

Northrop Grumman says it "is working with its customers and underwriters to mitigate the potential impact of these cost effects." It says it "cannot presently estimate, but is working to assess, the degree to which the earnings impact of this cost growth will be recognized in current periods, the extent to which these impacts are recoverable and the degree to which such recovery may be reflected in subsequent period results."

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