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Northrop Grumman Corporation (NYSE:NOC)

2013 Annual Shareholder Meeting

May 15, 2013 8:00 am ET

Executives

Wesley G. Bush - Chairman, Chief Executive Officer, President and Member of Corporate Policy Council

Jennifer C. McGarey - Corporate Vice President and Secretary

Wesley G. Bush

All right. I think we're right up on 8 o'clock. So good morning, ladies and gentlemen. I'm Wes Bush, Chairman, Chief Executive Officer and President of Northrop Grumman Corporation. It's my pleasure to welcome all of you here to our 2013 shareholders' meetings. So I'd like to go ahead and call the meeting to order.

First, I'd like to introduce the nominees for the Board of Directors. All of our nominees are currently members of the Board of Directors. They've consented to serve if elected and their names and short bios appear in the proxy statement for this meeting. So if I could ask all of our members of the Board to please stand. Thank you.

There's some recognition. Our Board of Directors picked March 19, 2013 as the record date for determining the shareholders of record who are entitled to receive notice of and who may vote at this meeting. Computershare Trust Company has been appointed the inspector of election for this meeting. Jennifer C. McGarey, Corporate Vice President and Secretary is the secretary for the meeting. And Jennifer, would you please give us the secretary's report.

Jennifer C. McGarey

Each shareholder of record, as of the record, date has been given proper notice of this meeting and has been furnished with a written copy of or was provided electronic access to the proxy statement dated April 5, 2013, a proxy card and the 2012 annual report. Affidavits relating to the mailing and electronic availability of the notice and report and proxy statements will be filed with the records of this meeting.

The holders of common stock have 1 vote per share. On the record date, there were 235,473,173 common shares outstanding. I'm able to report that the shares represented at this meeting in person or by proxy represent a majority of the shares entitled to vote, and that a quorum is present.

Wesley G. Bush

All right. Thank you, Jennifer.

Now, let me get started this morning with just a brief report on the company. Kevin, if you could give us the first slide there.

Let me start with a reminder that we may make forward-looking statements in our discussions today and that such statements involve risks and uncertainties and I would refer you to our SEC filings, which contain a full discussion of the risks and uncertainties.

So next chart. 2012 was really an outstanding year for our company. We continued our focus on performance, cash and portfolio. We demonstrated strong financial results by just about every measure. Earnings per share from continuing operations increased by 5% to $7.81. Our segment operating margin rate improved by 100 basis points to 12.6%. Cash from operations before discretionary pension contributions was $2.8 billion and free cash flow was about $2.5 billion before pension.

Our ending 2012 total backlog was over $40 billion with 105% book-to-bill ratio in 2012. Our team continues building a strong track record of execution.

As you can see on the chart in 2012, we repurchased 20.9 million shares of common stock for about $1.3 billion. We reduced the weighted average shares outstanding by 10%. We raised the dividend by 10%. So in aggregate, we returned more than $1.8 billion to our shareholders.

I'm also proud of our continued strong corporate citizenship with a focus on stem education, support to military and veterans and community-based health and human services programs.

Next chart. So we're off to a good start in 2013 and I want to express my appreciation for the outstanding efforts of our entire team in driving performance in a very challenging environment.

The first quarter demonstrated strong performance in all 4 of our businesses. Our earnings-per-share improved by 4% and we had very strong margin rates.

Our share repurchases continue with 6.5 million shares being repurchased in the first quarter. We also are focused on supporting our customers as they deal with the difficult budget environment. By driving affordability in our offerings we help our customers and we enhance our competitiveness.

Despite sequestration, we were able to confirm our 2013 financial guidance. We continue to expect sales of about $24 billion and earnings per share to range between $6.85 and $7.15. We also expect continued strong cash generation.

Today, we announced an increase in our quarterly dividend of 11% to $0.61 per share. Our annual dividend is now $2.44. This is our 10th consecutive annual dividend increase.

Our team's focus on performance is making a difference and our shareholders, customers and employees are benefiting from the results.

As a further demonstration of performance, yesterday, the Navy launched Northrop Grumman's X-47B unmanned aircraft from the USS Bush aircraft carrier. This was really a milestone in aviation history and an accomplishment that we are proud to achieve in partnership with the United States Navy.

So Jennifer, let's proceed now with the transaction of business.

Jennifer C. McGarey

The meeting is now open for transaction of business. Before we proceed, there are a few ground rules I would like to mention.

First, according to the company's bylaws, any matters which were to be put to the vote of the shareholders have already been submitted according to the notice requirements and were set forth in the proxy statements. No other matters may be put to a vote at this meeting this May 15, 8:05 am, and the polls are currently open.

If there's any shareholder present, who has not already voted or holds a proxy that he or she would like to vote for another shareholder or who would like to do so at this time, please raise your hand and the ushers will pick up the card at this time, for voting.

Third, if any if you wish to vote by ballot after the proposed items of business are presented, you must use an official ballot. Anyone intending to vote in person who has not yet obtained a ballot may do so now.

Please raise your hand if you need a ballot to vote.

Wesley G. Bush

We have someone up here. Does anyone else need a ballot?

All right. So we will now vote on the items of business set forth in our proxy statement. Following the conclusion of the formal business, there will be a general question-and-answer period. Please hold all general questions for that time. Thereafter, we will receive the report of the inspector of election on the vote, followed by adjournment.

The first order of business is the election of the 12 directors of the company to hold office until the 2014 annual meeting of shareholders. The nominees and their bios were listed in the proxy statement. Is there any discussion?

Yes?

I would ask this morning, for comments -- if we could all limit our comments to 1 minute.

Valerie Heinonen

I'm not sure about the 1 minute, but my name is Sister Valerie Heinonen and I represent Mercy Investment Services. I want to ask a question with respect to policy. And it's not a criticism. We're having a very good engagement with Jennifer and others of your team and I would congratulate you on that because I think your the first company that I've dealt with in this industry that had already started working on in effect with this human rights policy. My question is would you say a little bit about how the Board of -- how you handled U.S. Executive Team and the Board handled these kinds of policy questions. How to respond or even how often the Board hears about this kind of an issue?

Wesley G. Bush

Thanks for the question. And just in terms of a broad perspective, our Board has a policy committee. That policy committee typically meets at each meeting of our Board of Directors and included in the charter of that policy committee is a broad review of the policies of the company, in particular as they relate to our social corporate responsibility agenda. We publish an annual report that delineates the primary decisions and outcomes that result from that policy agenda. And I would say that our Board is highly-engaged in that and actually reviews that report each year before it's published. Thank you.

Any other comments? Okay.

The second item on the agenda is the proposal to approve on an advisory basis the compensation of the named executive officers.

Is there any discussion on this topic? All right.

The third item on the agenda is the proposal to ratify the appointment of Deloitte & Touche as the independent auditor for the company for the year ending December 31, 2013. We have in attendance at this meeting, Nick Tommasino, Tim Bremer and Chris Allen of Deloitte & Touche. If the 3 of you would please stand?

They are available to answer any questions regarding the auditors during the question-and-answer period.

The fourth item on the agenda is the shareholder proposal regarding additional disclosure of lobbying activities. Mr. John Keenan is here to present that proposal. Mr. Keenan, would you please introduce yourself, and if you would, please also limit your comments this morning.

John Keenan

Yes, thank you. To all the shareholders and members of the board, my name is John Keenan and I'm representing the AFSCME Employees Pension Plan and co-filer Congregation of Sisters of Saint Agnes.

I hereby move proposal for asking our company to provide a report on the state and Federal lobbying expenditures, including indirect funding of lobbying through trade associations in support for tax [indiscernible] organizations that right model legislation.

I would like to note that we appreciate the dialogue we had with our company over the proposal and also noted a disappointment that we couldn't settle the proposal due to our company's inability to commit to a policy to fully disclose all of its trade association payments on an ongoing basis.

Transparency and accountability in corporate spending to influence public policy are in the best interest of Northrop Grumman shareholders. Oversight of lobbying and the Board responsibility under Sarbanes-Oxley. Without a clear system of -- without a clear system ensuring accountability, corporate assets can be used to promote public policy objectives, which may pose risk to Northrop Grumman and its shareholders. For example, we note that our company faced negative publicity for paying an employee lobby as to $500,000 bonus in 2011 right before the employee took a job working for the Chairman of the House Armed Services Committee.

Our company lobby is extensively at the Federal level, spending more than $30 million in 2011 and 2012 on Federal lobbying according to disclosure reports. And there is incomplete disclosure about spending at the state level where disclosure is not comprehensively required by law.

Through internal research, we found more than $396,000 in lobbying in 2012 in 5 states, but this disclosure was patchwork and only presents a partial picture.

Corporations can easily contribute corporate resources to trade associations or other organizations that lobby indirectly on their behalf without specific disclosure accountability.

Here we note ambiguity over our company's trade association disclosure commitment. On this website, our company states it will disclose trade associations who are paid $25,000 more dues, the total contribution and the amount of this contribution's used for nondeductible or lobbying purposes.

Disclosing total contributions to trade associations and all portions used for lobbying is good disclosure and we are ready to withdraw the proposal for this level of trade association disclosure going forward, but our company was unable to commit to this good disclosure going forward so we could not come to agreement.

In a statement of opposition, our company states its improved this disclosure by adding a list of trade associations to which it paid dues $25,000 more, including the portion of those dues used for lobbying. The disclosure of dues does not capture all payments to trade associations. So for example, if Northrop Grumman made a $1 million special payment to the business roundtable on top of its dues that was then used to lobby, a disclosure regime that only captures trade association dues would not capture this because the special payment would not qualify as dues.

At the end of day, our opposition statement, our company states that if it makes trade association payments beyond annual dues, that it intends to disclose these. But intending is not the same as a guarantee. We believe a written commitment to disclose all trade association payments would be better for shareholders than a statement of intention. That's why we recommend the Northrop Grumman adopt a written policy laying out exactly what it will disclose.

Support for lobbying disclosure is part of the emerging governance best practice. Publicly available data does not provided the picture of Northrop Grumman's lobbying expenditures. Northrop Grumman's Board and the shareholders need complete disclosure to be able to evaluate the use of corporate assets for direct aggressor's lobbying and the risk that spending can propose to shareholders. We urge shareholders to vote for this proposal. Thank you.

Wesley G. Bush

Thank you, Mr. Keenan. Is there any discussion?

Yes, Sister?

Valerie Heinonen

Sister Valerie Heinonen, Mercy Investment Services. Obviously, I second that political contributions resolution and it ties in also with my request for an explanation of how the Board handles policy because maybe 5 or 6 years ago, I was part of the negotiation with 2 companies that assured us that it was policy. I presumed that meant policy of the Board. And most recently, 2011 specifically, we had questions raised about $7 million, which is rather significant to 2 corporations and apparently, it was never disclosed or is accidentally disclosed by somebody who filled in one of the regulatory reports. But what happened, I guess, for some reason, there wasn't Board oversight in that and -- or there wasn't an appropriate category for putting this in, but it is a serious question if we believe as investors that we're dealing with companies that are -- where the Board approves the policy and oversees the policy, it can become a problem. I've spent hours this past spring working on the issues with 2 of those companies because I had been the primary filer, and that wasn't how I planned to spend my time. So thank you.

Wesley G. Bush

Thank you, Sister. Any other comments?

All right.

The fifth item on the agenda is the shareholder proposal regarding an independent Board Chairman. I understand Mr. Bart Naylor is here to present the proposal. Mr. Naylor, would you please introduce yourself and also limit your comments please.

Bart Naylor

Thank you, Mr. Chairman. My name is Bart Naylor. I'm here on behalf of John Chevedden, the proponent. I am a banking policy advocate for Public Citizen by day and I mentioned that because this resolution asked the company to have a chair who is not the CEO. It's been brought into high resolution in the last couple of weeks because JPMorgan has that same configuration, and of course, that bank is troubled by some apparent flaws and oversight. This resolution is simply premised on a principle that governs all of Northrop Grumman except for your configuration. Your Board is independent. Every Director here is not an employee, as it should be, as the Board is serving as our agent to oversee the company. The company is not run as a montessori school, with everybody responsible for doing their own job. There's quite a hierarchy at Northrop Grumman with a command structure. Many of your Board members are -- and employees are former military, where again, is not a montessori school, there's a clear command structure. And so there is an inherent conflict when the Chair is also the CEO. This isn't a panacea. This isn't going to ensure that Northrop Grumman sales double, but I like to think of it more like healthy food. It won't stop a gun shot, it won't stop congenital heart disease, but it's better for you than junk food. So I urge support for this common sense proposal.

Wesley G. Bush

Thank you, Mr. Naylor. Is there any further discussion? All right.

Well, this completes the formal of business that was scheduled to come before this meeting except for the voting.

So Jennifer, you've voted the chairs presented by the proxies that have been given to management before the meeting. These votes have been tallied by the inspectors of election. Any votes that were submitted at this meeting will be included in the final tally once the inspectors of election have had an opportunity to verify the shares.

So if anyone has ballots they wish to submit, please pass your ballots to the aisles to be collected. And that we have one over here. Are there any other ballots? No?

I see no additional ballots to be submitted. So the time is 8:16 a.m. and I declare that the polls are now closed.

So while we await the results of the voting, I'll now answer any further questions that you may have concerning our company. And so that everyone has an opportunity to be heard, each shareholder will be allowed one question at a time. After all those who wish to ask a question have had an opportunity to do so, if time permits, we'll return to those shareholders who have additional questions.

So again, I would ask each shareholder to be brief. Are there any questions this morning? Okay.

Unknown Attendee

Mr. Chairman, regarding the bonus payment that is referred with my colleague, Mr. Keenan's, resolution that was paid $500,000 or so. When did that money arrive into the bank account of that then government employee? Was it before or after this person became a government employee?

Wesley G. Bush

I don't know the details of that but the -- as we have disclosed I believe publicly, this is an employee who was -- with the company, was under our company policies for severance, received a standard severance payment. There was nothing unusual about that severance payment. I don't know the exact details of the timing.

Unknown Attendee

Well, it's pivotal because as you know, the government brought a case against 3 Boeing employees that received similar payments and the Supreme Court ruled in a split opinion that it all depended on when the money entered the person's pocket. So I would urge you to make sure that it entered his pocket before he became a government employee because otherwise, under 12 U.S.C. Section 209, that is a criminal offense punishable by 5 years in prison.

Wesley G. Bush

Thanks for your comments. Any other questions? All right.

Well, that concludes the question-and-answer period. So Jennifer, can you provide us the voting results this morning.

Jennifer C. McGarey

Based on the preliminary report of the inspector of election, each of the nominees for Director received at least 157,935,149 votes and has been elected Director of the company for one year or until his or her successor is elected.

The proposal to approve, on an advisory basis, the compensation of our named executive officers received 175,714,812 votes and has passed.

Proposal to ratify the appointment of Deloitte & Touche as the company's auditor for 2013 received 200,688,892 votes and has passed.

The shareholder proposal regarding additional lobbying disclosures received 13,978,300 votes and has not passed.

The shareholder proposal regarding independent Board Chairman received 54,656,537 votes and has not passed.

Wesley G. Bush

All right. Thank you, Jennifer. The Board of Directors will carefully consider all of the inputs that the shareholders provided in our discussions over the course of the coming year.

So we thank all of you for your attendance and your continued interest in our company. There being no further business to come before the meeting, I hereby declare this meeting adjourned.

Thank you, everyone.

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