Northrop Grumman : Reports Fourth Quarter 2016 Financial Results

News Release‌‌‌‌

Contact: Randy Belote (Media)

703-280-2720

[e-mail]

Steve Movius (Investors) 703-280-4575

[e-mail]

Northrop Grumman Reports Fourth Quarter and Full-Year 2016 Financial Results

• Q4 Sales Increase 12 Percent to $6.4 Billion; 2016 Sales Increase 4 Percent to $24.5 Billion

• Total Backlog of $45.3 Billion

• Q4 EPS Increase 19 Percent to $2.96; 2016 EPS Increase 17 percent to $12.19

• Q4 Cash from Operations of $1.5 Billion; 2016 Cash from Operations of $2.8 Billion

• Q4 Free Cash Flow1 of $1.2 Billion; 2016 Free Cash Flow1 of $1.9 Billion

• 2017 EPS Guidance of $11.30 to $11.60

FALLS CHURCH, Va. - Jan. 26, 2017 - Northrop Grumman Corporation (NYSE: NOC) reported fourth quarter 2016 sales increased 12 percent to $6.4 billion from $5.7 billion in the fourth quarter of 2015. Fourth quarter 2016 net earnings increased 14 percent to $525 million, or $2.96 per diluted share, from $459 million, or $2.49 per diluted share, in the fourth quarter of 2015. Fourth quarter 2016 diluted earnings per share are based on 177.6 million weighted average diluted shares outstanding compared with

1. million in the prior year period, a 4 percent decrease. The company repurchased 1.7 million shares of its common stock in the fourth quarter of 2016.

   For 2016, net earnings increased 11 percent to $2.2 billion, or $12.19 per diluted share, from $2.0 billion, or $10.39 per diluted share in 2015. Diluted earnings per share for 2016 increased 17 percent and are based on 180.5 million weighted average shares outstanding compared with 191.6 million shares in 2015. During 2016, the company repurchased 7.3 million shares of its common stock for $1.5 billion. As of Dec. 31, 2016, $2.7 billion remained on the company's share repurchase authorization.

   "Congratulations to our entire team on a strong fourth quarter and excellent full-year 2016 results that included higher sales accompanied by strong performance and cash generation. For 2017, our outlook calls for continued investment to drive growth and performance, as we strengthen the foundation for long- term profitable growth," said Wes Bush, chairman, chief executive officer and president.

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

   Table 1 - Consolidated Operating Results Highlights

   Fourth Quarter			Full Year
   ($ in millions, except per share amounts)	2016	2015	2016	2015
   Sales	$ 6,397	$ 5,694	$ 24,508	$ 23,526
   Segment operating income1	772	717	2,935	2,920
   Segment operating margin rate1	12.1%	12.6%	12.0%	12.4%
   Net FAS/CAS pension adjustment1	82	87	316	348
   Unallocated corporate expenses	(22)	(114)	(53)	(190)
   Other	(1)	(1)	(5)	(2)
   Operating income	831	689	3,193	3,076
   Operating margin rate	13.0%	12.1%	13.0%	13.1%
   Interest expense	(77)	(75)	(301)	(301)
   Other, net	(6)	7	31	15
   Earnings before income taxes	748 (223) 29.8%	621 (162) 26.1%	2,923 (723) 24.7%	2,790 (800) 28.7%
   Federal and foreign income tax expense
   Effective income tax rate
   Net earnings	$ 525	$ 459	$ 2,200	$ 1,990
   Diluted EPS	2.96	2.49	12.19	10.39
   Weighted average shares outstanding - Basic	176.0	182.1	178.9	189.4
   Dilutive effect of share-based awards	1.6	2.1	1.6	2.2
   Weighted average shares outstanding - Diluted	177.6 831 (82)	184.2 689 (87)	180.5 3,193 (316)	191.6 3,076 (348)
   Pension-adjusted Operating Highlights
   Operating income
   Net FAS/CAS pension adjustment1
   Pension-adjusted operating income1	$ 749	$ 602	$ 2,877	$ 2,728
   Pension-adjusted operating margin rate1	11.7%	10.6%	11.7%	11.6%
   Pension-adjusted Per Share Data
   Diluted EPS	$ 2.96	$ 2.49	$ 12.19	$ 10.39
   Pre-tax net pension adjustment per share1	(0.46)	(0.47)	(1.75)	(1.82)
   Tax effect on net pension adjustment per share	0.16	0.16	0.61	0.64
   After-tax net pension adjustment per share1	(0.30)	(0.31)	(1.14)	(1.18)
   Pension-adjusted diluted EPS1	$ 2.66	$ 2.18	$ 11.05	$ 9.21

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

   Fourth quarter operating income increased 21 percent and operating margin rate increased 90 basis points to 13.0 percent, which includes higher segment operating income and a $92 million decline in unallocated corporate expense, principally due to lower deferred state tax expense than in the prior year period. Last year's fourth quarter deferred state tax expense was $76 million higher principally due to an accounting methods change adopted in that period. Fourth quarter 2016 segment operating income increased 8 percent to $772 million, due to higher sales volume, and segment operating margin rate decreased 50 basis points to 12.1 percent. For 2016, operating income increased 4 percent to $3.2 billion with an operating margin rate of 13.0 percent. The increase in 2016 operating income is due to lower unallocated corporate expense and higher sales volume, partially offset by lower net FAS/CAS pension adjustment.

   For the fourth quarter of 2016, federal and foreign income tax expense increased to $223 million from

   $162 million in the prior year period; the company's effective tax rate increased to 29.8 percent from 26.1 percent. For 2016, federal and foreign income tax expense declined to $723 million from $800 million in 2015, and the company's effective tax rate declined to 24.7 percent from 28.7 percent. The company's lower effective tax rate for 2016 is principally due to $85 million of excess tax benefits related to adoption of an accounting standards update for stock-based compensation, a $40 million benefit recognized in connection with the resolution of the IRS examination of the company's 2007-2011 tax returns, and a $33 million benefit associated with the repatriation of earnings from certain foreign subsidiaries.

   Total backlog as of Dec. 31, 2016, was $45.3 billion compared with $35.9 billion as of Dec. 31, 2015.

   Table 2 - Cash Flow Highlights

   Fourth Quarter			Full Year
   ($ millions)	2016	2015	2016	2015
   Net cash provided by operating activities	$ 1,531	$ 1,633	$ 2,813	$ 2,162
   Less: capital expenditures	(312)	(137)	(920)	(471)
   Free cash flow1	$ 1,219	$ 1,496	$ 1,893	$ 1,691

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

   Fourth quarter 2016 cash provided by operating activities totaled $1.5 billion compared to $1.6 billion provided in the fourth quarter of 2015. Fourth quarter 2016 free cash flow totaled $1.2 billion after capital expenditures of $312 million.

   For the full year, cash provided by operations improved to $2.8 billion from $2.2 billion in 2015, and free cash flow improved to $1.9 billion from $1.7 billion in 2015. Higher cash provided by operations and free cash flow are due to prior year voluntary pension contributions, changes in trade working capital and higher net earnings than in 2015, partially offset by an increase in net income tax payments. Last year's cash results included a $500 million pre-tax voluntary pension contribution, which reduced cash results 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 Dec. 31, 2016:

   Operating

   • $2.8 billion provided by operations

     Investing

   • $920 million for capital expenditures

     Financing

   • $1.5 billion for repurchase of common stock

   • $749 million net proceeds from issuance of long-term debt

   • $640 million for dividends

   • $321 million for repayment of long-term debt

Table 3 - Segment Operating Results

Effective Jan. 1, 2016, the company realigned from four to three segments: Aerospace Systems, Mission Systems and Technology Services. Operating results for all periods presented have been recast to reflect this realignment.

($ millions)	Fourth Quarter 2016 2015		Change	Full Year 2016 2015		Change
Sales
Aerospace Systems	$ 2,872	$ 2,400	20%	$ 10,828	$ 9,940	9%
Mission Systems	2,847	2,612	9%	10,928	10,674	2%
Technology Services	1,208	1,121	8%	4,825	4,819	-
Intersegment eliminations	(530)	(439)	(2,073)	(1,907)
6,397	5,694	12%	24,508	23,526	4%
Segment operating income1
Aerospace Systems	327	276	18%	1,236	1,205	3%
Mission Systems	390	363	7%	1,445	1,410	2%
Technology Services	125	125	-	512	514	-
Intersegment eliminations	(70)	(47)	(258)	(209)
Segment operating income1,2	772	717	8%	2,935	2,920	1%
Segment operating margin rate1	12.1%	12.6%	(50) bps	12.0%	12.4%	(40) bps

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

2 Refer to Table 1 for reconciliation to operating income.

Fourth quarter 2016 segment operating income increased 8 percent due to higher operating income at Aerospace Systems and Mission Systems. For 2016, segment operating income increased 1 percent due to higher operating income at Aerospace Systems and Mission Systems. Fourth quarter 2016 and full year 2016 segment operating margin rate declined to 12.1 percent and 12.0 percent, respectively, primarily due to changes in contract mix and timing of risk retirements in Aerospace Systems.

Aerospace Systems ($ millions)

Fourth Quarter 2016 2015	Change	Full Year 2016 2015	Change
Sales	$ 2,872 $ 2,400	19.7%	$ 10,828 $ 9,940	8.9%
Operating income	327 276	18.5%	1,236 1,205	2.6%
Operating margin rate	11.4% 11.5%	11.4% 12.1%

Aerospace Systems fourth quarter 2016 sales increased 20 percent, and 2016 sales increased 9 percent.

Higher sales in both periods are principally due to higher volume for Manned Aircraft and Autonomous Systems programs. Manned Aircraft sales rose due to higher restricted and E-2D volume, as well as increased F-35 deliveries, partially offset by lower volume on the B-2 program. For 2016, the company also had lower F/A-18 deliveries than in 2015. Autonomous Systems sales for both periods rose due to higher volume on the Triton and Global Hawk programs, partially offset by the ramp-down of the NATO Alliance Ground Surveillance (AGS) program. Space sales were also higher for both periods due to higher restricted volume, which largely offset lower volume for the Advanced Extremely High Frequency and James Webb Space Telescope programs.

Aerospace Systems fourth quarter 2016 operating income increased 18 percent, and 2016 operating income increased 3 percent. Operating margin rate for both periods was 11.4 percent. Higher operating