Northrop Grumman Reports Third Quarter 2013 Financial Results

• EPS Increase 18 Percent to $2.14
   
• Sales Total $6.1 Billion
   
• Free Cash Flow Totals $860 Million
   
• 8.1 Million Shares Repurchased in Q3; 20.6 Million Shares Repurchased Year-to-Date
   
• 2013 Guidance Raised for Sales, EPS, Cash from Operations and Free Cash Flow

FALLS CHURCH, Va. -- Oct. 23, 2013 -- Northrop Grumman Corporation (NYSE:NOC) third quarter 2013 net earnings increased 8 percent to $497 million, or $2.14 per diluted share, from $459 million, or $1.82 per diluted share, in the third quarter of 2012. Third quarter 2013 diluted earnings per share are based on 232.6 million weighted average shares outstanding compared with 252.1 million shares in the third quarter of 2012, an 8 percent decrease. The company repurchased 8.1 million shares of its common stock in the 2013 third quarter for $753 million and 20.6 million shares year-to-date for $1.7 billion.

"This quarter's results reflect our team's hard work and our focus on performance, affordability and innovation. During this difficult period for our government customers and our industry, our team has continued to demonstrate its commitment to the global security missions we support. We remain focused on superior program performance, effective cash deployment and portfolio alignment as we strive to continue creating value for our shareholders, customers and employees," said Wes Bush, chairman, chief executive officer and president.

Table 1 — Financial Highlights

Third quarter 2013 total operating income increased $54 million or 7 percent, and operating margin rate increased 120 basis points to 12.9 percent. Higher operating income includes a $33 million increase in segment operating income and a $27 million improvement in net FAS/CAS pension adjustment, partially offset by slightly higher corporate unallocated expenses. Third quarter 2013 segment operating income increased 5 percent due to improved performance, including a $22 million increase in net favorable adjustments. Segment operating margin rate improved 90 basis points to 12.5 percent. The change in net FAS/CAS pension adjustment from the prior year periods reflects an update for actual demographic experience as of Jan. 1, 2013, which resulted in an increase in the company's 2013 CAS pension recovery.

As of September 30, 2013, total backlog was $37.5 billion compared with $40.8 billion as of Dec. 31, 2012. Third quarter 2013 new awards totaled $5.9 billion and book-to-bill was 97 percent. The decline in backlog is primarily due to reduced and delayed customer awards resulting from the current U.S. government budget environment as well as Information Systems backlog adjustments of $1 billion primarily to reduce unfunded backlog for expired periods of performance on active contracts.

Table 2 — Cash Flow Highlights

Third quarter 2013 cash provided by operating activities totaled $950 million compared with $812 million in the prior year period. Third quarter 2013 free cash flow provided by operating activities totaled $860 million compared with $748 million in the prior year period.

Through the nine months ended Sept. 30, 2013, cash provided by operating activities before discretionary pension contributions totaled $1.6 billion and free cash flow before discretionary pension contributions totaled $1.5 billion. Changes in cash and cash equivalents include the following items for cash from operations, investing and financing through Sept. 30, 2013:

Operations

• $1.3 billion provided by operations

Investing

• $178 million for capital expenditures

Financing

• $1.7 billion for repurchases of common stock
• $2.8 billion net proceeds from issuance of long-term debt
• $877 million for redemption of long-term debt
• $411 million for dividends

2013 Guidance Updated

Table 3 — Business Results
Consolidated Sales & Segment Operating Income¹

Federal and foreign income tax expense totaled $223 million in the third quarter of 2013, compared with $236 million in the prior year period. The effective tax rate for the 2013 third quarter declined to 31.0 percent from 34.0 percent in the prior year period. The lower effective tax rate includes a $16 million benefit associated with the company's 2012 U.S. federal tax return and an additional $6 million benefit for the American Taxpayer Relief Act, which reinstated research tax credits for years 2012 and 2013.

Aerospace Systems ($ millions)

Aerospace Systems third quarter 2013 sales decreased 4 percent due to lower volume for manned military aircraft and unmanned programs, partially offset by higher sales for space programs. The decrease in manned military aircraft programs is principally due to lower F-35 volume, and the decrease in unmanned programs is principally due to lower volume for the Global Hawk program. The increase in space programs reflects higher volume for the James Webb Space Telescope and Advanced Extremely High Frequency satellite programs, partially offset by lower volume for restricted programs.

Aerospace Systems third quarter 2013 operating income increased 15 percent and operating margin rate increased 220 basis points to 13.3 percent. Higher operating income and operating margin rate are due to a $44 million increase in net favorable adjustments, principally for space and manned military aircraft programs, which more than offset the decline in sales.

Electronic Systems ($ millions)

Electronic Systems third quarter 2013 sales increased 4 percent from the prior year period and include higher volume for international and combat avionics programs, which was partially offset by lower volume for navigation and maritime systems programs.

Electronic Systems third quarter 2013 operating income decreased 2 percent, and operating margin rate decreased 90 basis points to 15.4 percent. Electronic Systems third quarter 2013 operating income reflects a lower level of net favorable adjustments than in the prior year period, which more than offset higher sales.

Information Systems ($ millions)

Information Systems third quarter 2013 sales declined 9 percent. The transfer of intercompany efforts to the company's shared services organization and portfolio shaping accounted for $17 million of the decline. Excluding the transfer and portfolio shaping, third quarter sales declined 8 percent due to lower funding levels and contract completions across the portfolio, including programs impacted by in-theater force reductions and sequestration.

Information Systems third quarter 2013 operating income decreased 5 percent and operating margin rate increased 40 basis points to 10.0 percent. Third quarter 2013 operating income reflects lower sales, and the higher operating margin rate reflects improved performance.

Technical Services ($ millions)

Technical Services third quarter 2013 sales declined 5 percent, principally due to lower volume for integrated logistics and modernization programs and lower volume for the ICBM program.

Technical Services third quarter 2013 operating income increased 8 percent, and operating margin rate increased 110 basis points to 9.4 percent. The increase in operating income is primarily due to improved performance across several programs and higher net favorable adjustments than in the prior year period, which more than offset the decline in sales.

About Northrop Grumman

Northrop Grumman will webcast its earnings conference call at noon Eastern time on Oct. 23, 2013. 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.

This release and the attachments 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," "outlook," "anticipate," "trends," "guidance," "goal," and similar expressions generally identify these forward-looking statements. Forward-looking statements in this release and the attachments include, among other things, statements relating to our future financial condition and operating results. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made. 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, risks related to: the assumptions on which our guidance is based; our dependence on U.S. Government contracts; the effect of economic conditions in the United States and globally; changes in government and customer priorities and requirements; government budgetary constraints; shifts or reductions in defense spending resulting from sequestration under the Budget Control Act of 2011, a continuing resolution with limited new starts, the lack of annual appropriations legislation or otherwise; debt-ceiling limits and disruption to or shutdown of government operations; timing of payments; changes in import and export policies; changes in customer short-range and long-range plans; major program terminations; the acquisition, deferral, reduction or termination of contracts or programs; market conditions; our ability to access capital; interest and discount rates or other changes that may impact pension plan assumptions and actual returns on pension plan assets; the outcome of litigation, claims, audits, appeals, bid protests and investigations; the adequacy of our insurance coverage and recoveries; the costs of environmental remediation; our ability to attract and retain qualified personnel; changes in organizational structure and reporting segments; acquisitions, dispositions, spin-off transactions, joint ventures, strategic alliances and other business arrangements; possible impairments of goodwill or other intangible assets; the effects of legislation, regulations, and other changes in accounting, tax or defense procurement rules or practices; technical, operational or quality setbacks in contract performance; issues with, and financial viability of, key suppliers and subcontractors; availability of materials and supplies; controlling costs of fixed-price development programs; domestic and international competition; legal, financial and governmental risks related to international transactions; potential security threats, information technology attacks, natural disasters and other disruptions not under our control; and other risk factors and other important factors disclosed in our Form 10-K for the year ended December 31, 2012 and other filings with the Securities and Exchange Commission.

You should not put undue reliance on any forward-looking statements in this release. These forward-looking statements speak only as of the date of this release, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. This release and the attachments also contain non-GAAP financial measures. A reconciliation to the nearest GAAP measure and a discussion of the company's use of these measures are included in this release or the attachments.

New Awards — The estimated values of contract awards included in backlog during the three months and nine months ended September 30, 2013, were $5.9 billion and $16.2 billion, respectively. Net of the Information Systems backlog adjustments, contract awards for the nine months ended September 30, 2013, were $15.2 billion.

Non-GAAP Financial Measures Disclosure: Today's press release contains non-GAAP (accounting principles generally accepted in the United States of America) financial measures, as defined by SEC (Securities and Exchange Commission) Regulation G and indicated by a footnote in the text of the release. While we believe that these non-GAAP financial measures may be useful in evaluating our financial information, they should be considered as supplemental in nature and not as a substitute for financial information prepared in accordance with GAAP. Definitions are provided for the non-GAAP measures and reconciliations are provided in the body of the release. References to a "Table" in the definitions below relate to tables in the body of this press release. Other companies may define these measures differently or may utilize different non-GAAP measures.

Pension-adjusted diluted EPS: Diluted EPS excluding the after-tax net pension adjustment per share, as defined below. These per share amounts are provided for consistency and comparability of operating results. Management uses pension-adjusted diluted EPS, as reconciled in Table 1, as an internal measure of financial performance.

Cash provided by operating activities before discretionary pension contributions: Cash provided by operating activities before the after-tax impact of discretionary pension contributions. Cash provided by operating activities before discretionary pension contributions has been provided for consistency and comparability of 2013 and 2012 financial performance and is reconciled in Table 2.

Free cash flow: Cash provided by operating activities less capital expenditures (including outsourcing contract & related software costs). We use free cash flow as a key factor in our planning for, and consideration of, strategic acquisitions, stock repurchases and the payment of dividends. This measure should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating results presented in accordance with GAAP. Free cash flow is reconciled in Table 2.

Free cash flow provided by operating activities before discretionary pension contributions: Free cash flow provided by operating activities before the after-tax impact of discretionary pension contributions. We use free cash flow provided by operating activities before discretionary pension contributions as a key factor in our planning for, and consideration of, strategic acquisitions, stock repurchases and the payment of dividends. This measure should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating results presented in accordance with GAAP. Free cash flow provided by operating activities before discretionary pension contributions is reconciled in Table 2.

Net FAS/CAS pension adjustment: Pension expense determined in accordance with GAAP less pension expense allocated to the operating segments under U.S. Government Cost Accounting Standards (CAS). Net pension adjustment is presented in Table 1.

After-tax net pension adjustment per share: The per share impact of the net pension adjustment as defined above, after tax at the statutory rate of 35%, provided for consistency and comparability of 2013 and 2012 financial performance as presented in Table 1.

Pension-adjusted operating income: Operating income before net pension adjustment as reconciled in Table 1. Management uses pension-adjusted operating income as an internal measure of financial performance.

Pension-adjusted operating margin rate: Pension-adjusted operating income as defined above, divided by sales. Management uses pension-adjusted operating margin rate, as reconciled in Table 1, as an internal measure of financial performance.

Segment operating income: Total earnings from our four segments including allocated pension expense recognized under CAS. Reconciling items to operating income are unallocated corporate expenses, including unallowable or unallocable portions of management and administration, legal, environmental, certain compensation and retiree benefits, and other expenses; net pension adjustment; and reversal of royalty income included in segment operating income. Management uses segment operating income, as reconciled in Table 3, as an internal measure of financial performance of our individual operating segments.

Segment operating margin rate: Segment operating income as defined above, divided by sales. Management uses segment operating margin rate, as reconciled in Table 3, as an internal measure of financial performance.