Northrop Grumman : Reports Second Quarter 2016 Financial Results

News Release‌‌‌‌

Contact: Randy Belote (Media)

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Steve Movius (Investors) 703-280-4575

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Northrop Grumman Reports Second Quarter 2016 Financial Results

• Q2 Sales Increase 2 Percent to $6.0 Billion

• Q2 EPS Increase 4 Percent to $2.85

• Q2 Cash from Operations of $604 Million; Q2 Free Cash Flow1 of $431 Million

• 2016 EPS Guidance Increased to $10.75 to $11.00

  FALLS CHURCH, Va. - July 27, 2016 - Northrop Grumman Corporation (NYSE: NOC) reported second quarter 2016 sales of $6.0 billion, a 2 percent increase over sales of $5.9 billion in the second quarter of 2015. Second quarter 2016 net earnings totaled $517 million, or $2.85 per diluted share, compared with $531 million, or $2.74 per diluted share, in the second quarter of 2015. Second quarter 2016 diluted earnings per share are based on 181.5 million weighted average diluted shares outstanding compared with 193.7 million in the prior year period, a 6 percent decline. The company repurchased 1.9 million shares of its common stock in the second quarter of 2016. As of June 30, 2016, approximately $3.6 billion remained on the company's share repurchase authorization.

  The company increased its guidance for 2016 diluted earnings per share to a range of $10.75 to $11.00 to reflect year-to-date financial performance as well as an approximately $40 million, or $0.20 per share, tax benefit to be recorded in the third quarter of 2016.

  "Solid operational execution and value-creating cash deployment continue to drive our strong financial results. Our entire team continues to be focused on operational excellence as we position the company for profitable long-term growth," said Wes Bush, chairman, chief executive officer and president.

  Second Quarter			Six Months
  ($ in millions, except per share amounts)	2016	2015	2016	2015
  Sales	$ 6,000	$ 5,896	$ 11,956	$ 11,853
  Segment operating income1	731	742	1,432	1,477
  Segment operating margin rate1	12.2%	12.6%	12.0%	12.5%
  Operating income	797	813	1,536	1,593
  Operating margin rate	13.3%	13.8%	12.8%	13.4%
  Net earnings	517	531	1,073	1,015
  Diluted EPS	2.85	2.74	5.88	5.15
  Net cash provided by (used in) operating activities	604	626	544	(28)
  Free cash flow1	431	511	73	(260)
  Pension-adjusted Operating Highlights
  Operating income	797	813	1,536	1,593
  Net FAS/CAS pension adjustment1	(69)	(81)	(143)	(164)
  Pension-adjusted operating income1	$ 728	$ 732	$ 1,393	$ 1,429
  Pension-adjusted operating margin rate1	12.1%	12.4%	11.7%	12.1%
  Pension-adjusted Per Share Data
  Diluted EPS	$ 2.85	$ 2.74	$ 5.88	$ 5.15
  Pre-tax net pension adjustment per share1	(0.38)	(0.42)	(0.78)	(0.83)
  Tax effect on net pension adjustment per share	0.13	0.15	0.27	0.29
  After-tax net pension adjustment per share1	(0.25)	(0.27)	(0.51)	(0.54)
  Pension-adjusted diluted EPS1	$ 2.60 180.1 1.4	$ 2.47 191.8 1.9	$ 5.37 180.7 1.7	$ 4.61 194.8 2.3
  Weighted average shares outstanding - Basic
  Dilutive effect of share-based awards
  Weighted average shares outstanding - Diluted	181.5	193.7	182.4	197.1

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

  Second quarter operating income declined 2 percent and operating margin rate decreased 50 basis points to 13.3 percent. Lower operating income reflects a decline in segment operating income and lower net FAS/CAS pension adjustment than in the prior year period. Second quarter 2016 segment operating income decreased to $731 million, and segment operating margin rate decreased 40 basis points to 12.2 percent.

  Second Quarter			Six Months
  ($ millions)	2016	2015	2016	2015
  Net cash provided by (used in) operating activities	$ 604	$ 626	$ 544	$ (28)
  Less: capital expenditures	(173)	(115)	(471)	(232)
  Free cash flow1	$ 431	$ 511	$ 73	$ (260)

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

  Second quarter 2016 cash provided by operating activities totaled $604 million compared to $626 million provided in the second quarter of 2015.

  Second quarter 2016 free cash flow totaled $431 million after capital expenditures of $173 million. Second quarter 2016 capital expenditures included $80 million for the purchase of facilities previously leased by Mission Systems.

  Year to date through June 30, 2016 cash provided by operations improved to $544 million from a use of $28 million in 2015, and free cash flow improved to $73 million from a use of $260 million in 2015. In the first quarter of 2015 the company made a $500 million discretionary pension contribution, which reduced cash from operations and free cash flow by $325 million on an after-tax basis.

  Year-to-date changes in cash and cash equivalents include the following for cash from operating, investing and financing activities through June 30, 2016:

  Operating

  • $544 million provided by operations

    Investing

  • $471 million for capital expenditures including $239 million for the purchase of facilities previously leased by Mission Systems

    Financing

  • $682 million for repurchase of common stock

  • $107 million for repayment of long-term debt

  • $322 million 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 to or cancellation of any of our significant programs and no disruption to 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.

2016 Guidance

($ in millions, except per share amounts) As of 4/27/16 As of 7/27/16

Sales 23,500 - 24,000 23,500 - 24,000

Segment operating margin %1 High 11% High 11%

Net FAS/CAS pension adjustment1 ~275 ~275

Operating margin % ~12% Low 12%

Effective tax rate % ~27% ~25.5%

Diluted EPS 10.40 - 10.70 10.75 - 11.00

Capital expenditures 700 - 1,000 800 - 1,000

Free cash flow1 1,500 - 1,800 1,500 - 1,800

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

In July 2016, the U.S. Congressional Joint Committee on Taxation approved a resolution of the IRS examination of the company's 2007-2011 tax returns. The resolution will reduce third quarter 2016 income tax expense by approximately $40 million or $0.20 per share. Guidance for the company's 2016 effective tax rate and diluted earnings per share reflect the third quarter 2016 tax benefit.

Estimated capital expenditures in 2016 reflect increased programmatic requirements and $239 million for the purchase of Mission Systems facilities. These investments support the company's continued focus on cost reduction, affordability and competitiveness.