Northrop Grumman : Reports Third Quarter 2015 Financial Results

percent due to higher net FAS/CAS pension adjustment and lower unallocated corporate expenses. Last year's third quarter net FAS/CAS pension adjustment was an expense of $20 million due to a $132 million cumulative reduction in 2014 CAS pension expense resulting from the HATFA legislation.

Total backlog as of Sept. 30, 2015, was $35.9 billion compared with $38.2 billion as of Dec. 31, 2014. Third quarter 2015 new awards totaled $4.8 billion, and new awards for the first nine months totaled $15.5 billion.

1 Non-GAAP metric - see definitions at the end of this press release.

Third quarter 2015 cash provided by operating activities before after-tax discretionary pension contributions totaled $557 million and free cash flow totaled $455 million. The declines in cash from operations and free cash flow from the prior year period are principally due to changes in trade working capital.

Changes in cash and cash equivalents include the following for cash from operating, investing and financing activities through Sept. 30, 2015:

Operating

• $529 million provided by operations after $500 million discretionary pension contribution

  
  

  Investing

• $334 million used for capital expenditures

  
  

  Financing

• $2.9 billion used for repurchase of common stock

• $600 million net proceeds from issuance of long-term debt

• $458 million used for dividends

  2015 Guidance

  The company's 2015 financial guidance is based on the spending levels provided for in the Bipartisan Budget Act of 2013 and the Consolidated and Further Appropriations Act of 2015. The guidance assumes no disruption or cancellation of any of our significant programs and no disruption or shutdown of government operations resulting from expiration of a continuing resolution. Guidance for 2015 also assumes adequate appropriations, funding and payments for the company's programs in the first quarter of the U.S. government's fiscal year 2016 and no breach of the federal government's debt ceiling.

  
  

  2015 Guidance

  
  

  ($ in millions, except per share amounts) Sales	Prior - 7/29/15 23,400 - 23,800		Current 23,600 - 23,800
  Segment operating margin %1	~12%		~12%
  Net FAS/CAS pension adjustment1	~320		~335
  Unallocated corporate expense	~200
  Operating margin %	Mid-12%		Mid-12%
  Effective tax rate %	~32%		~31.5%
  Diluted EPS	9.55 - 9.70		9.70 - 9.80
  Cash provided by operating activities before after-
  tax discretionary pension contributions1	2,600 - 2,800		~2,600
  Free cash flow before after-tax discretionary
  pension contributions1	1,900	- 2,100	~2,000

  
  

  1 Non-GAAP metric - see definitions at the end of this press release.

  
  

  Guidance for 2015 incorporates year-to-date results and the outlook for the remainder of the year, including the effects of an anticipated change in tax methods. The company previously anticipated a tax methods change would impact third quarter 2015 results. The change was accepted by the Internal Revenue Service this month. This and other state tax items will increase fourth quarter 2015 unallocated corporate expense and effective federal tax rate. The company expects 2015 unallocated corporate expense of approximately $200 million and a 2015 effective tax rate of approximately 31.5 percent.

  Table 3 - Business Results

  Consolidated Sales & Segment Operating Income1

  
  

  ($ millions)	Third Quarter 2015 2014		Change	Nine Months 2015 2014		Change
  Sales
  Aerospace Systems	$ 2,563	$ 2,543	1%	$ 7,573	$ 7,465	1%
  Electronic Systems	1,767	1,733	2%	5,131	5,121	-
  Information Systems	1,472	1,511	(3%)	4,531	4,650	(3%)
  Technical Services	695	691	1%	2,185	2,120	3%
  Intersegment eliminations	(518)	(494)	(1,588)	(1,485)
  5,979	5,984	-	17,832	17,871	-
  Segment operating income1
  Aerospace Systems	303	402	(25%)	940	1,016	(7%)
  Electronic Systems	275	274	-	787	833	(6%)
  Information Systems	146	150	(3%)	462	465	(1%)
  Technical Services	64	66	(3%)	199	202	(1%)
  Intersegment eliminations	(62)	(52)	(185)	(177)
  Segment operating income1	726	840	(14%)	2,203	2,339	(6%)
  Segment operating margin rate1	12.1%	14.0%	(190) bps	12.4%	13.1%	(70) bps
  Reconciliation to operating income
  Net FAS/CAS pension adjustment1	97	(20)	585%	261	200	31%
  Unallocated corporate expenses	(29)	(50)	42%	(76)	(103)	26%
  Other	-	(1)	100%	(1)	(2)	50%
  Operating income	794	769	3%	2,387	2,434	(2%)
  Operating margin rate	13.3%	12.9%	40 bps	13.4%	13.6%	(20) bps
  Interest expense	(75)	(69)	(9%)	(226)	(208)	(9%)
  Other, net	10	(6)	267%	8	10	(20%)
  Earnings before income taxes	729	694	5%	2,169	2,236	(3%)
  Federal and foreign income tax expense	(213)	(221)	4%	(638)	(673)	5%
  Net earnings	$ 516	$ 473	9%	$ 1,531	$ 1,563	(2%)

  
  

  1 Non-GAAP metric - see definitions at the end of this press release.

  
  

  Third quarter 2015 operating income increased 3 percent due to a $117 million increase in net FAS/ CAS pension adjustment and a $21 million decrease in unallocated corporate expense, which more than offset lower segment operating income. Last year's third quarter net FAS/CAS pension adjustment was an expense of $20 million due to a $132 million cumulative reduction in 2014 CAS pension expense resulting from the HATFA legislation.

  For the third quarter of 2015, federal and foreign income tax expense declined to $213 million from

  $221 million in 2014, and the company's effective tax rate decreased to 29.2 percent from 31.8 percent in 2014. This quarter's lower effective tax rate reflects a $21 million benefit for additional research credits claimed on the company's prior year tax return.

  
  

  Aerospace Systems ($ millions)
  Third Quarter 2015 2014	Change	Nine Months 2015 2014	Change
  Sales	$ 2,563 $ 2,543	0.8%	$ 7,573 $ 7,465	1.4%
  Operating income	303 402	(24.6%)	940 1,016	(7.5%)
  Operating margin rate	11.8% 15.8%	12.4% 13.6%

  
  

  Aerospace Systems third quarter 2015 sales increased 1 percent due to higher volume for manned military aircraft and unmanned programs, which more than offset declines in other programs. Higher manned military aircraft sales include higher production volume for the F-35 and E-2D programs, partially offset by fewer F/A-18 deliveries. Higher unmanned sales reflect increased volume for a number of programs, including Triton and Global Hawk. Last year's third quarter also included the benefit of $75 million in settlements.

  Aerospace Systems third quarter 2015 operating income decreased 25 percent and operating margin rate decreased to 11.8 percent. Last year's third quarter operating income benefited from $75 million in settlements and lower CAS pension cost due to the HATFA legislation.

  Electronic Systems ($ millions)

  
  

  Third Quarter 2015 2014	Change	Nine Months 2015 2014	Change
  Sales	$ 1,767 $ 1,733	2.0%	$ 5,131 $ 5,121	0.2%
  Operating income	275 274	0.4%	787 833	(5.5%)
  Operating margin rate	15.6% 15.8%	15.3% 16.3%

  
  

  Electronic Systems third quarter 2015 sales increased 2 percent, primarily due to higher volume for navigation and maritime systems and space programs, partially offset by lower volume for land and self protection and airborne tactical sensor programs.

  Electronic Systems third quarter 2015 operating income was comparable to the prior year period.

  Operating margin rate declined slightly due to lower CAS pension cost in 2014 resulting from the HATFA legislation, which more than offset improved performance in 2015.

  
  

  2015	2014	Change	2015	2014	Change
  Sales	$ 1,472	$ 1,511	(2.6%)	$ 4,531	$ 4,650	(2.6%)
  Operating income	146	150	(2.7%)	462	465	(0.6%)
  Operating margin rate	9.9%	9.9%	10.2%	10.0%

  
  

  Information Systems third quarter 2015 sales decreased 3 percent, primarily due to lower volume for command and control (C2) programs, including the Consolidated Afloat Network and Enterprise Services program and the impact of in-theater force reductions.

  Information Systems third quarter 2015 operating income decreased 3 percent, and operating margin rate was unchanged. The decline in operating income was driven by lower sales volume.

  Technical Services ($ millions)

  
  

  Third Quarter 2015 2014	Change	Nine Months 2015 2014	Change
  Sales	$ 695 $ 691	0.6%	$ 2,185 $ 2,120	3.1%
  Operating income	64 66	(3.0%)	199 202	(1.5%)
  Operating margin rate	9.2% 9.6%	9.1% 9.5%

  
  

  Technical Services third quarter 2015 sales increased 1 percent primarily due to higher volume for mission solutions and readiness programs, partially offset by lower volume for integrated logistics and modernization programs, including the ICBM program.

  Technical Services third quarter 2015 operating income declined 3 percent and operating margin rate declined to 9.2 percent, due in part to lower income from an unconsolidated joint venture than in the prior year period.

  About Northrop Grumman

  Northrop Grumman will webcast its earnings conference call at noon Eastern time on Oct. 28, 2015. A live audio broadcast of the conference call will be available on the investor relations page of the company's website at www.northropgrumman.com.

  Northrop Grumman is a leading global security company providing innovative systems, products and solutions in unmanned systems, cyber, C4ISR, and logistics and modernization to government and commercial customers worldwide. Please visit www.northropgrumman.com for more information.

  
  

  Forward-Looking Statements

  This press release and the information we are incorporating by reference contain statements, other than statements of historical fact, that constitute 'forward-looking statements' within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as 'expect,' 'intend,' 'may,' 'could,' 'plan,' 'project,' 'forecast,' 'believe,' 'estimate,' 'guidance,' 'outlook,' 'anticipate,' 'trends,' 'goals,' and similar expressions generally identify these forward-looking statements.

  Forward-looking statements include, among other things, statements relating to our future financial condition, results of operations and cash flows. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made, but which may change over time. These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict. Specific risks that could cause actual results to differ materially from those expressed or implied in these forward-looking statements include, but are not limited to, those identified and discussed more fully in the section entitled 'Risk Factors' in our 2014 Annual Report on Form 10-K. They include:

• our dependence on a single customer, the U.S. Government

• delays or reductions in appropriations for our programs and U.S. Government funding

• investigations, claims and/or litigation

• our international business

• the improper conduct of employees, agents, business partners or joint ventures in which we participate

• the use of accounting estimates for our contracts

• cyber and other security threats or disruptions

• changes in actuarial assumptions associated with our pension and other post-retirement benefit plans

• the performance and financial viability of our suppliers and the availability and pricing of raw materials and components

• competition within our markets

• changes in procurement and other laws and regulations applicable to our industry

• natural and/or environmental disasters

• the adequacy of our insurance coverage, customer indemnifications or other liability protections

• the products and services we provide related to nuclear operations

• changes in business conditions that could impact recorded goodwill or the value of other long- lived assets

• our ability to develop new products and technologies and maintain technologies, facilities, equipment and a qualified workforce

• our ability to meet performance obligations under our contracts

• unforeseen environmental costs

• our ability to protect our intellectual property rights

• changes in our tax provisions or exposure to additional tax liabilities

• the spin-off of our former Shipbuilding business