Northrop Grumman Reports Q4 and 2015 Financial Results

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Financial Highlights:

• Q4 EPS of $2.49; 2015 EPS Increase 7 Percent to $10.39
• Q4 Sales Total $5.7 Billion; 2015 Sales Total $23.5 Billion
• Q4 Free Cash Flow1 of $1.5 Billion
• $2.0 Billion 2015 Free Cash Flow before After-tax Discretionary Pension Contributions1
• 1.6 Million Shares Repurchased for $283 Million in Q4; 19.3 Million Shares Repurchased in 2015 for $3.2 Billion
• 2016 EPS Guidance of $9.90 to $10.20

Northrop Grumman Corporation reported fourth quarter 2015 net earnings decreased to $459 million, or $2.49 per diluted share, from $506 million, or $2.48 per diluted share in the fourth quarter of 2014. Fourth quarter 2015 diluted earnings per share are based on 184.2 million weighted average shares outstanding compared with 204.2 million shares in the prior year period. The company repurchased 1.6 million shares of its common stock for $283 million in the fourth quarter of 2015. As a result of the passage of the Protecting Americans from Tax Hikes Act of 2015, which made permanent research and development tax credits, the company recognized a full year credit of $60 million, or $0.33 per diluted share, in the fourth quarter of 2015.

For 2015, net earnings totaled $2.0 billion, or $10.39 per diluted share, compared to $2.1 billion, or $9.75 per diluted share in 2014. Diluted earnings per share for 2015 increased 7 percent and are based on 191.6 million weighted average shares outstanding compared with 212.1 million shares in 2014. During 2015, the company repurchased 19.3 million shares of its common stock for $3.2 billion. As of Dec. 31, 2015, $4.3 billion remained on the company's share repurchase authorization.

"I want to congratulate our team on another outstanding year of strong performance. We look forward to building on this year's successes as we continue our focus on performance, portfolio and capital deployment and take on new opportunities in 2016," said Wes Bush, chairman, chief executive officer and president.

Fourth quarter 2015 segment operating income decreased to $717 million, and segment operating margin rate increased 20 basis points to 12.6 percent. Operating income decreased 10 percent and operating margin rate decreased 40 basis points to 12.1 percent.

For 2015, segment operating income decreased to $2.9 billion, principally due to lower sales and $75 million realized in 2014 for settlements of certain legal claims. Operating income for 2015 totaled $3.1 billion and operating margin rate was 13.1 percent.

Total backlog as of Dec. 31, 2015, was $35.9 billion compared with $38.2 billion as of Dec. 31, 2014. Fourth quarter 2015 new awards totaled $5.8 billion, and new awards for 2015 totaled $21.3 billion. On Oct. 27, 2015, the U.S. Air Force announced it was awarding the company a contract for engineering and manufacturing development and early production for the Long Range Strike Bomber (LRS-B). In Nov. 2015, the unsuccessful offeror filed a protest asking the U.S. Government Accountability Office to review the decision to award the company the LRS-B contract, triggering an automatic stay of performance of the contract. As a result, the LRS-B award is not included in 2015 new awards or backlog.

Fourth quarter 2015 cash provided by operating activities totaled $1.6 billion and free cash flow totaled $1.5 billion. The increases in cash from operations and free cash flow from the prior year period are principally due to lower cash taxes.

For 2015, cash provided by operating activities before after-tax discretionary pension contributions totaled $2.5 billion compared with $2.6 billion in 2014. Free cash flow before after-tax discretionary pension contributions totaled $2.0 billion. After-tax discretionary pension contributions totaled $325 million in 2015. Changes in cash and cash equivalents include the following for cash from operating, investing and financing activities through Dec. 31, 2015:

Operating

• $2.2 billion provided by operations after $500 million discretionary pension contribution

Investing

• $471 million used for capital expenditures

Financing

• $3.2 billion used for repurchase of common stock
• $600 million net proceeds from issuance of long-term debt
• $603 million used for dividends

2016 Guidance

The company's 2016 financial guidance is based on the spending levels provided for in the Bipartisan Budget Act of 2015 and the Consolidated Appropriations Act of 2016. The guidance assumes no disruption or cancellation of any of our significant programs and no disruption or shutdown of government operations. Guidance for 2016 also assumes adequate appropriations and funding for the company's programs in the first quarter of the U.S. government's fiscal year 2017.

Estimated capital expenditures in 2016 reflect increased programmatic requirements, including LRS-B, and approximately $300 million for the planned purchase of office buildings currently leased by the new Mission Systems sector. These investments support the company's continued focus on cost reduction, affordability and competitiveness.

Fourth quarter 2015 operating income decreased 10 percent due to lower segment operating income and higher unallocated corporate expense, which more than offset higher net FAS/CAS pension adjustment. Lower segment operating income reflects lower sales, partially offset by improved performance in Information Systems. Unallocated corporate expense increased $48 million. As previously announced, in the fourth quarter the Internal Revenue Service accepted the company's adoption of a tax method change. This and other state tax items increased fourth quarter 2015 unallocated corporate expense by $26 million. For 2015, operating income decreased 4 percent due to lower segment operating income, and higher corporate unallocated expenses, which more than offset higher net FAS/CAS pension adjustment. Segment operating income in 2014 benefited from $75 million in settlements and a benefit of approximately $45 million from lower CAS costs due to passage of the Highway and Transportation Funding Act of 2014.

For the fourth quarter of 2015, federal and foreign income tax expense declined to $162 million from $195 million in 2014, and the company's effective tax rate decreased to 26.1 percent from 27.8 percent in 2014. For 2015, federal and foreign income tax expense declined to $800 million from $868 million in 2014, and the company's effective tax rate declined to 28.7 percent from 29.6 percent. The company's lower effective tax rate for 2015 includes a $76 million increase in research credits primarily resulting from additional credits claimed on our prior year tax returns, partially offset by a $51 million benefit in 2014 for the partial resolution of the IRS examination of 2007-2009 tax returns.