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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
January 25, 2018
Northrop Grumman Corporation
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
 
 
 
 
 
DELAWARE
(State or Other Jurisdiction
of Incorporation)
 
1-16411
(Commission
File Number)
 
80-0640649
(IRS Employer
Identification No.)

2980 Fairview Park Drive, Falls Church, VA 22042
(Address of principal executive offices)(Zip Code)
(703) 280-2900
Registrant’s telephone number, including area code

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
On January 25, 2018, Northrop Grumman Corporation issued an earnings release announcing its financial results for the quarter and year ended December 31, 2017, under the heading “Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results.” The earnings release is furnished as Exhibit 99.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(d)
 
Exhibits
 
 
 
 
 
 
 
Furnished
 
 
 
 
 
 
 
Exhibit 99 — Earnings Release dated January 25, 2018
 
 




Signature(s)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Northrop Grumman Corporation
                    (Registrant)
 
 
 
 
 
 
January 25, 2018
 
By:
 
/s/ Jennifer C. McGarey
 
 
(Date)
 
 
 
(Signature)
Jennifer C. McGarey
Corporate Vice President and Secretary




Exhibit Index
 
 
 
 
Exhibit No.
 



Exhibit
 
 
Exhibit 99
https://cdn.kscope.io/3aa3839c53c8481b4f4ed9f31d70864d-noclogoblue2015a01a02a01a21.jpg
 
 
 
 
News Release
 
 
 
 
 
 
 
Contact:
  
Tim Paynter (Media)
 
 
 
  
703-280-2720
 
 
 
  
timothy.paynter@ngc.com
 
 
 
  
 
 
 
 
  
Steve Movius (Investors)
 
 
 
  
703-280-4575
 
 
 
  
steve.movius@ngc.com
Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results
•
Q4 Sales Increase 4 percent to $6.6 Billion; 2017 Sales Increase 5 percent to $25.8 Billion
•
Q4 EPS of $1.01; 2017 EPS of $11.47
•
Q4 EPS of $2.82; 2017 EPS of $13.28, Each Excluding Tax Reform and Related Discretionary Pension Contribution Impacts1 
•
Company Made $500 Million Pre-tax Discretionary Pension Contribution in Q4 2017
•
2017 Cash from Operations of $2.6 Billion; 2017 Cash from Operations of $2.9 Billion Before After-tax Discretionary Pension Contribution1 
•
2017 Free Cash Flow1 of $1.7 Billion; 2017 Free Cash Flow of $2.0 Billion Before After-tax Discretionary Pension Contribution1 
•
Company Expects 2018 Sales of Approximately $27 Billion and 2018 EPS of $15.00 to $15.25

FALLS CHURCH, Va. – Jan. 25, 2018 – Northrop Grumman Corporation (NYSE: NOC) reported fourth quarter 2017 sales increased 4 percent to $6.6 billion from $6.4 billion in the fourth quarter of 2016. For 2017, sales increased 5 percent to $25.8 billion from $24.5 billion in 2016. Fourth quarter 2017 net earnings totaled $178 million, or $1.01 per share, compared with $525 million, or $2.96 per share, in the prior year period. For 2017, net earnings totaled $2.0 billion compared with $2.2 billion in 2016. Fourth quarter and full-year 2017 net earnings were reduced by higher tax expense resulting from the enactment of the Tax Cuts and Jobs Act (the "2017 Tax Act") and the company's related $500 million discretionary pre-tax pension contribution, which together reduced net earnings by $317 million, or $1.81 per share, in both periods, primarily related to the write-down of deferred tax assets.
“Our strong financial results reflect our continued focus on delivering top performance for our shareholders, customers and employees. All three of our businesses generated excellent results that contributed to this year's strong sales, operating profit and cash flow. Looking ahead, we continue to invest in our businesses and our employees, as we strengthen the foundation for long-term profitable growth," said Wes Bush, chairman and chief executive officer.
1 Non-GAAP metric - defined at the end of this earnings release.

Northrop Grumman Corporation
2980 Fairview Park Drive • Falls Church, VA 22042-4511
www.northropgrumman.com/media

Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results
2


Table 1 — Consolidated Operating Results Highlights
 
Fourth Quarter
 
Full Year
($ in millions, except per share amounts)
2017
 
2016
 
2017
 
2016
Sales
$
6,634

 
$
6,397

 
$
25,803

 
$
24,508

Segment operating income1
721

 
772

 
2,959

 
2,935

Segment operating margin rate1
10.9
%
 
12.1
%
 
11.5
%
 
12.0
%
Net FAS/CAS pension adjustment
149

 
82

 
594

 
316

Unallocated corporate expenses and other
(103
)
 
(23
)
 
(254
)
 
(58
)
Operating income
767

 
831

 
3,299

 
3,193

Operating margin rate
11.6
%
 
13.0
%
 
12.8
%
 
13.0
%
Interest expense
(136
)
 
(77
)
 
(360
)
 
(301
)
Other, net
53

 
(6
)
 
110

 
31

Earnings before income taxes
684

 
748

 
3,049

 
2,923

Federal and foreign income tax expense
(506
)
 
(223
)
 
(1,034
)
 
(723
)
Effective income tax rate
74.0
%
 
29.8
%
 
33.9
%
 
24.7
%
Net earnings
$
178

 
$
525

 
$
2,015

 
$
2,200

Diluted EPS
1.01

 
2.96

 
11.47

 
12.19

 


 


 
 
 
 
Weighted average shares outstanding — Basic
174.2

 
176.0

 
174.4

 
178.9

Dilutive effect of share-based awards
1.3

 
1.6

 
1.2

 
1.6

Weighted average shares outstanding — Diluted
175.5

 
177.6

 
175.6

 
180.5

1 

Non-GAAP measure — see definitions at the end of this earnings release.
Fourth quarter 2017 sales increased 4 percent, due to higher sales in Mission Systems and Aerospace Systems. Fourth quarter operating income and margin rate totaled $767 million and 11.6 percent, compared with $831 million and 13.0 percent in the prior year period. The decline in operating income is primarily due to higher unallocated corporate expenses and lower segment operating income, partially offset by higher net FAS/CAS pension adjustment. The $80 million increase in unallocated corporate expenses includes $20 million of transaction costs related to the pending acquisition of Orbital ATK, as well as $23 million of deferred state tax expense principally related to the company's discretionary pension contribution. Lower segment operating income and operating margin rate are primarily due to changes in contract mix at Aerospace Systems and Mission Systems.
For 2017, sales increased 5 percent due to higher sales in Aerospace Systems and Mission Systems, and operating income increased 3 percent. 2017 operating income reflects increases in sales, net FAS/CAS pension adjustment and segment operating income, partially offset by higher unallocated corporate expenses. Unallocated corporate expenses increased $197 million and include $47 million for transaction costs related to the pending Orbital ATK acquisition and $41 million of deferred state tax expense and state tax adjustments associated with the filing of the company's prior year federal tax return. In addition, the prior year included benefits totaling $60 million for state tax refunds and prior year overhead claim recoveries.
Fourth quarter and full year 2017 interest expense each increased by $59 million. In October 2017, the company issued $8.25 billion of debt to finance its pending acquisition of Orbital ATK. Fourth quarter Other, net increased $59 million due to a $24 million increase in interest income on short-term investments and a gain on the sale of an investment. For 2017, Other, net increased $79 million, due to gains on the sale of two investments and a $29 million increase in interest income on short-term investments.

Northrop Grumman Corporation
2980 Fairview Park Drive • Falls Church, VA 22042-4511
www.northropgrumman.com/media

Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results
3


The company's fourth quarter effective tax rate increased to 74.0 percent from 29.8 percent in the prior year period. For 2017, the company's effective tax rate increased to 33.9 percent from 24.7 percent in 2016. The higher effective tax rates for both periods reflect an additional $300 million of tax expense principally due to a write-down of net deferred tax assets related to the 2017 Tax Act, which, among other things, reduced the federal statutory tax rate to 21 percent from 35 percent beginning in 2018.
Table 2 — Cash Flow Highlights
 
Fourth Quarter
 
Full Year
($ millions)
2017
 
2016
 
2017
 
2016
Cash provided by operating activities before after-tax discretionary pension contribution1
$
1,932

 
$
1,531

 
$
2,938

 
$
2,813

After-tax discretionary pension contribution impact
(325
)
 
—

 
(325
)
 
—

Net cash provided by operating activities
$
1,607

 
$
1,531

 
$
2,613

 
$
2,813

Less: capital expenditures
(278
)
 
(312
)
 
(928
)
 
(920
)
Free cash flow1
$
1,329

 
$
1,219

 
$
1,685

 
$
1,893

After-tax discretionary pension contribution impact
325

 
—

 
325

 
—

Free cash flow before after-tax discretionary pension contribution1
$
1,654

 
$
1,219

 
$
2,010

 
$
1,893

1 

Non-GAAP measure — see definitions at the end of this earnings release.
Fourth quarter 2017 cash provided by operating activities totaled $1.6 billion compared with $1.5 billion in the prior year period. Fourth quarter cash provided by operating activities before after-tax discretionary pension contribution1 totaled $1.9 billion compared with $1.5 billion in the prior year period. Fourth quarter 2017 free cash flow1 totaled $1.3 billion after capital expenditures of $278 million. Fourth quarter free cash flow before after-tax discretionary pension contribution1 totaled $1.7 billion compared with $1.2 billion in the prior year period.
For 2017, cash provided by operating activities totaled $2.6 billion, and cash provided by operating activities before after-tax discretionary pension contribution was $2.9 billion. For 2017, free cash flow totaled $1.7 billion after capital expenditures of $928 million and free cash flow before after-tax discretionary pension contribution1 totaled $2.0 billion.
2017 investing and financing activities include the following:
Investing
•
$928 million for capital expenditures

Financing
•
$8.25 billion debt issued to finance the pending Orbital ATK acquisition
•
$689 million for dividends
•
$393 million for repurchase of common stock


Northrop Grumman Corporation
2980 Fairview Park Drive • Falls Church, VA 22042-4511
www.northropgrumman.com/media

Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results
4


Table 3 — Segment Operating Results
 
Fourth Quarter
 
 
 
Full Year



($ millions)
2017
 
2016
 
Change
 
2017

2016

Change
Sales
 
 
 
 
 
 






Aerospace Systems
$
3,005

 
$
2,872

 
5
%
 
$
11,955

 
$
10,828


10
%
Mission Systems
3,025

 
2,847

 
6
%
 
11,382

 
10,928


4
%
Technology Services
1,198

 
1,208

 
(1
%)
 
4,750

 
4,825


(2
%)
Intersegment eliminations
(594
)
 
(530
)
 
 
 
(2,284
)
 
(2,073
)



 
6,634

 
6,397

 
4
%
 
25,803

 
24,508


5
%
Segment operating income1
 
 
 
 
 
 

 




Aerospace Systems
298

 
327

 
(9
%)
 
1,259

 
1,236


2
%
Mission Systems
363

 
390

 
(7
%)
 
1,453

 
1,445


1
%
Technology Services
126

 
125

 
1
%
 
524

 
512


2
%
Intersegment eliminations
(66
)
 
(70
)
 
 
 
(277
)
 
(258
)



Segment operating income1, 2
721

 
772

 
(7
%)
 
2,959

 
2,935


1
%
Segment operating margin rate1
10.9
%
 
12.1
%
 
(120) bps

 
11.5
%
 
12.0
%

(50) bps

1 

Non-GAAP measure — see definitions at the end of this earnings release.
2 

Refer to Table 1 for reconciliation to operating income.
Fourth quarter 2017 sales increased 4 percent, and 2017 sales increased 5 percent due to higher sales at Aerospace Systems and Mission Systems in both periods.
Fourth quarter 2017 segment operating income declined 7 percent, and segment operating margin rate declined to 10.9 percent, due to lower operating income at Aerospace Systems and Mission Systems. For 2017, segment operating income increased 1 percent, largely due to higher sales, and segment operating margin rate declined to 11.5 percent, primarily due to changing contract mix at Aerospace Systems and Mission Systems. In addition, for 2016, segment operating income in both periods benefited from a $45 million gain on a property sale.
Aerospace Systems ($ millions)
 
Fourth Quarter
 
 
 
Full Year
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Sales
$
3,005

 
$
2,872

 
4.6
%
 
$
11,955

 
$
10,828

 
10.4
%
Operating income
298

 
327

 
(8.9
%)
 
1,259

 
1,236

 
1.9
%
Operating margin rate
9.9
%
 
11.4
%
 
 
 
10.5
%
 
11.4
%
 
 
Aerospace Systems fourth quarter 2017 sales increased 5 percent, due to growth in Manned Aircraft and Autonomous Systems, partially offset by lower Space sales. The Manned Aircraft sales increase is primarily due to higher volume for restricted activities, as well as higher F/A-18 and F-35 sales, partially offset by lower E-2D volume. The Autonomous Systems sales increase includes higher volume for several programs, including Fire Scout and Triton, partially offset by lower volume on the Global Hawk program. Lower Space sales are primarily due to lower volume for the James Webb Space Telescope.
For 2017, sales increased 10 percent due to growth in Manned Aircraft, Autonomous Systems and Space. Higher Manned Aircraft sales were primarily due to an increase in restricted activities. Higher Autonomous Systems sales reflect higher volume for several programs, including Triton, partially offset by lower volume on NATO AGS. Higher Space sales were primarily due to increases in restricted activities, partially offset by declines in the James Webb Space Telescope and Advanced EHF programs.

Northrop Grumman Corporation
2980 Fairview Park Drive • Falls Church, VA 22042-4511
www.northropgrumman.com/media

Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results
5


Aerospace Systems fourth quarter 2017 operating income decreased 9 percent, and operating margin rate declined to 9.9 percent. Fourth quarter 2016 operating income benefited from a $45 million gain on a property sale. Excluding this gain, fourth quarter 2017 operating performance was comparable to the prior year period. For 2017, Aerospace Systems operating income increased 2 percent primarily due to higher sales. Operating margin rate declined to 10.5 percent principally due to changes in contract mix on Manned Aircraft programs as well as the prior year period's property sale gain.
Mission Systems ($ millions)
 
Fourth Quarter
 
 
 
Full Year
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Sales
$
3,025

 
$
2,847

 
6.3
%
 
$
11,382

 
$
10,928

 
4.2
%
Operating income
363

 
390

 
(6.9
%)
 
1,453

 
1,445

 
0.6
%
Operating margin rate
12.0
%
 
13.7
%
 
 
 
12.8
%
 
13.2
%
 
 
Mission Systems fourth quarter 2017 sales increased 6 percent primarily due to higher volume for Sensors and Processing and Advanced Capabilities programs, partially offset by lower Cyber and ISR volume. Sensors and Processing sales increased principally due to higher volume on F-35 sensors, electro-optical/infrared (EO/IR) self-protection and targeting programs, communications programs and the scalable agile beam radar (SABR) program. Advanced Capabilities sales increased primarily due to higher volume on air and missile defense programs. Cyber and ISR sales decreased primarily due to lower volume on ISR and restricted programs.
For 2017, sales increased 4 percent due to higher Sensors and Processing volume, partially offset by lower Cyber and ISR volume. Sensors and Processing sales increased principally due to higher volume on F-35 sensors, EO/IR self-protection and targeting programs, communications programs, and the SABR program. These increases were partially offset by lower volume on international ground-based radar programs. Cyber and ISR sales decreased due to lower volume on ISR and restricted programs.
Mission Systems fourth quarter 2017 operating income decreased 7 percent and operating margin rate decreased to 12.0 percent primarily due to contract mix changes and lower performance in Sensors and Processing and Cyber & ISR, partially offset by improved performance in Advanced Capabilities. For 2017, operating income increased 1 percent, primarily due to higher sales. Operating margin rate decreased to 12.8 percent from 13.2 percent primarily due to lower performance and changes in contract mix on Sensors and Processing and Cyber and ISR programs, partially offset by improved performance on Advanced Capabilities programs.
Technology Services ($ millions)
 
Fourth Quarter
 
 
 
Full Year
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Sales
$
1,198

 
$
1,208

 
(0.8
%)
 
$
4,750

 
$
4,825

 
(1.6
%)
Operating income
126

 
125

 
0.8
%
 
524

 
512

 
2.3
%
Operating margin rate
10.5
%
 
10.3
%
 
 
 
11.0
%
 
10.6
%
 
 
Technology Services fourth quarter 2017 sales decreased 1 percent primarily due to lower volume for System Modernization and Services and Advanced Defense Services, partially offset by higher volume for Global Logistics and Modernization. For 2017, Technology Services sales decreased 2 percent, primarily due to lower volume on System Modernization and Services programs, partially offset by higher volume on Global Logistics and Modernization programs. System Modernization and Services sales decreased principally due to the completion of several programs. Global Logistics and Modernization sales increased

Northrop Grumman Corporation
2980 Fairview Park Drive • Falls Church, VA 22042-4511
www.northropgrumman.com/media

Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results
6


primarily due to higher intercompany volume and increased volume on the UKAWACS and Hunter programs, partially offset by lower volume on the KC-10 program as that contract nears completion.
Technology Services fourth quarter 2017 operating income increased 1 percent and operating margin rate increased to 10.5 percent, primarily due to improved performance. For 2017, operating income increased 2 percent, and operating margin rate increased to 11.0 percent from 10.6 percent primarily due to improved performance across the sector.
2018 Guidance
2018 financial guidance reflects the company's judgment based on the information available to the company at the time of this release. The government budget and appropriations processes can impact our customers, programs and financial results. Extended continuing resolutions, a prolonged government shutdown and/or breach of the debt ceiling, as well as government budgets and appropriations, can impact the company's ability to achieve 2018 guidance. 
While the company currently expects its previously announced acquisition of Orbital ATK will close in the first half of this year, 2018 guidance does not reflect the pending acquisition. Additionally, 2018 guidance reflects only six months of interest on the $8.25 billion of debt issued in October 2017 to finance the acquisition. After the close of the acquisition, the company will update its financial guidance to reflect the acquisition.
Effective January 1, 2018, the company adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and Accounting Standards Update (ASU) No. 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, using the full retrospective method for each. The 2018 guidance in the table below reflects the adoption of both standards. Schedules 6 and 7 at the end of this release present comparable prior period consolidated and segment financial information recast to reflect the adoption of these standards.


Northrop Grumman Corporation
2980 Fairview Park Drive • Falls Church, VA 22042-4511
www.northropgrumman.com/media

Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results
7


2018 Guidance
($ in millions, except per share amounts)
 
As of 1/25/18
 
 
 
 
 
 
 
Sales
 
~27,000
 
 
 
 
 
 
 
Segment operating margin %1
 
Low - mid 11%
 
 
 
 
 
 
 
Total net FAS/CAS pension adjustment2
 
~940
 
 
 
 
 
 
 
Unallocated corporate expenses
 
 
 
~250
 
 
 
 
 
Operating margin %3
 
~12%
 
 
 
 
 
 
 
Net interest expense4
 
 
 
~390
 
 
 
 
 
Effective tax rate %
 
~19.5%
 
 
 
 
 
 
 
Diluted EPS
 
 
 
15.00
—
15.25
 
 
 
 
 
 
 
Capital expenditures
 
~1,000
 
 
 
 
 
 
 
Free cash flow1
 
 
 
2,000
—
2,300
 
 
 
 
 
 
 
1 Non-GAAP measure - see definitions at the end of this earnings release.                            
2 Total Net FAS/CAS pension adjustment is presented as a single amount consistent with our historical presentation, and includes expected 2018 CAS pension cost of $855 million and FAS pension income of $85 million. In accordance with ASU No. 2017-07, $400 million of FAS (service-related) pension cost is reflected in operating income and $485 million of FAS (non-service) pension income is reflected below operating income. CAS pension cost continues to be recorded in operating income. See Schedule 6 for further information.
3Adoption of ASU No. 2017-07, removes $485 of FAS (non-service) pension income from operating income, which reduces 2018 estimated operating margin rate by ~180 basis points. See Schedule 6 for further information.
4 Net Interest Expense (interest expense net of interest income) includes six months of net interest expense for $8.25 billion debt issued in October 2017 to finance the pending Orbital ATK acquisition, as well as a full year of estimated net interest expense for the company's remaining debt. Interest expense is presented as a single line item on the income statement and interest income is included in Other, net on the income statement.
Higher estimated capital expenditures in 2018 reflect the benefits of tax reform, which allow the company to increase investments in programmatic requirements and other capital projects in support of the company's continued focus on cost reduction, and affordability in support of the company's long-term growth strategy.


Northrop Grumman Corporation
2980 Fairview Park Drive • Falls Church, VA 22042-4511
www.northropgrumman.com/media

Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results
8


About Northrop Grumman
Northrop Grumman will webcast its earnings conference call at noon Eastern time on Jan. 25, 2018. 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 autonomous systems, cyber, C4ISR, strike, and logistics and modernization to customers worldwide. Please visit www.northropgrumman.com and follow us on twitter, @NGCNews, for more information.

Forward-Looking Statements
This earnings 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 “will,” “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/or 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 Annual Report on Form 10-K and other filings with the Securities and Exchange Commission (SEC). They include:
•
our dependence on the U.S. Government for a substantial portion of our business
•
significant delays or reductions in appropriations for our programs and U.S. Government funding more broadly
•
investigations, claims, disputes, enforcement actions and/or litigation
•
the use of estimates when accounting for our contracts and the effect of contract cost growth and/or changes in estimated contract revenues and costs
•
our exposure to additional risks as a result of our international business, including risks related to geopolitical and economic factors, laws and regulations
•
the improper conduct of employees, agents, subcontractors, suppliers, business partners or joint ventures in which we participate and the impact on our reputation, our ability to do business, and our financial position, results of operations and/or cash flows
•
cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners
•
the performance and financial viability of our subcontractors and suppliers and the availability and pricing of raw materials and components
•
changes in procurement and other laws, regulations and practices applicable to our industry, findings by the U.S. Government as to our compliance with such laws and regulations, and changes in our customers’ business practices globally
•
increased competition within our markets and bid protests

Northrop Grumman Corporation
2980 Fairview Park Drive • Falls Church, VA 22042-4511
www.northropgrumman.com/media

Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results
9


•
the ability to maintain a qualified workforce
•
our ability to meet performance obligations under our contracts, including obligations that are technologically complex, require certain manufacturing expertise or are dependent on factors not wholly within our control
•
environmental matters, including unforeseen environmental costs and government and third party claims
•
natural and/or environmental disasters
•
the adequacy and availability of our insurance coverage, customer indemnifications or other liability protections
•
products and services we provide related to hazardous and high risk operations, which subject us to various environmental, regulatory, financial, reputational and other risks
•
the future investment performance of plan assets, changes in actuarial assumptions associated with our pension and other post-retirement benefit plans and legislative or other regulatory actions impacting our pension, post-retirement and health and welfare plans
•
the satisfaction of conditions (including regulatory approvals) to and successful consummation of the pending acquisition of Orbital ATK; our ability successfully to integrate the Orbital ATK business and realize fully the anticipated benefits of the acquisition, without adverse consequences
•
our ability to exploit or protect intellectual property rights
•
our ability to develop new products and technologies and maintain technologies, facilities, and equipment to win new competitions and meet the needs of our customers
•
changes in business conditions that could impact business investments and/or recorded goodwill or the value of other long-lived assets
•
unanticipated changes in our tax provisions or exposure to additional tax liabilities
Additional information regarding these risks and other important factors can be found in the section entitled “Risk Factors” in our Annual Report on Form 10-K and as disclosed in this report and from time to time in our other filings with the SEC.
You are urged to consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of forward-looking statements. These forward-looking statements speak only as of the date this report is first filed or, in the case of any document incorporated by reference, the date of that document. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable 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.

Northrop Grumman Corporation
2980 Fairview Park Drive • Falls Church, VA 22042-4511
www.northropgrumman.com/media


SCHEDULE 1
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)


 
 
Year Ended December 31
$ in millions, except per share amounts
 
2017
 
2016
 
2015
Sales
 
 
 
 
 
 
Product
 
$
16,038

 
$
14,738

 
$
13,966

Service
 
9,765

 
9,770

 
9,560

Total sales
 
25,803

 
24,508

 
23,526

Operating costs and expenses
 
 
 
 
 
 
Product
 
12,271

 
11,002

 
10,333

Service
 
7,578

 
7,729

 
7,551

General and administrative expenses
 
2,655

 
2,584

 
2,566

Operating income
 
3,299

 
3,193

 
3,076

Other (expense) income
 
 
 
 
 
 
Interest expense
 
(360
)
 
(301
)
 
(301
)
Other, net
 
110

 
31

 
15

Earnings before income taxes
 
3,049

 
2,923

 
2,790

Federal and foreign income tax expense
 
1,034

 
723

 
800

Net earnings
 
$
2,015

 
$
2,200

 
$
1,990

 
 
 
 
 
 
 
Basic earnings per share
 
$
11.55

 
$
12.30

 
$
10.51

Weighted-average common shares outstanding, in millions
 
174.4

 
178.9

 
189.4

 
 
 
 
 
 
 
Diluted earnings per share
 
$
11.47

 
$
12.19

 
$
10.39

Weighted-average diluted shares outstanding, in millions
 
175.6

 
180.5

 
191.6

 
 
 
 
 
 
 
Net earnings (from above)
 
$
2,015

 
$
2,200

 
$
1,990

Other comprehensive income (loss)
 
 
 
 
 
 
Change in unamortized benefit plan costs, net of tax (expense) benefit of ($383) in 2017, $89 in 2016 and ($45) in 2015
 
830

 
(175
)
 
75

Change in cumulative translation adjustment
 
(4
)
 
(50
)
 
(41
)
Other, net
 
2

 
(1
)
 
2

Other comprehensive income (loss), net of tax
 
828

 
(226
)
 
36

Comprehensive income
 
$
2,843

 
$
1,974

 
$
2,026



SCHEDULE 2
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 
(Unaudited)


 
December 31,
2017
 
December 31,
2016
$ in millions
 
Assets
 
 
 
Cash and cash equivalents
$
11,225

 
$
2,541

Accounts receivable, net
3,976

 
3,299

Inventoried costs, net
780

 
816

Prepaid expenses and other current assets
368

 
200

Total current assets
16,349

 
6,856

Property, plant and equipment, net of accumulated depreciation of $5,066 for 2017 and $4,831 for 2016
4,225

 
3,588

Goodwill
12,455

 
12,450

Deferred tax assets
475

 
1,462

Other non-current assets
1,413

 
1,258

Total assets
$
34,917

 
$
25,614

 
 
 
 
Liabilities
 
 
 
Trade accounts payable
$
1,661

 
$
1,554

Accrued employee compensation
1,382

 
1,342

Advance payments and amounts in excess of costs incurred
1,617

 
1,471

Other current liabilities
2,305

 
1,263

Total current liabilities
6,965

 
5,630

Long-term debt, net of current portion of $867 for 2017 and $12 for 2016
14,399

 
7,058

Pension and other post-retirement benefit plan liabilities
5,511

 
6,818

Other non-current liabilities
994

 
849

Total liabilities
27,869

 
20,355

 
 
 
 
Shareholders’ equity
 
 
 
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding
—

 
—

Common stock, $1 par value; 800,000,000 shares authorized; issued and outstanding: 2017—174,085,619 and 2016—175,068,263
174

 
175

Paid-in capital
44

 
—

Retained earnings
11,548

 
10,630

Accumulated other comprehensive loss
(4,718
)
 
(5,546
)
Total shareholders’ equity
7,048

 
5,259

Total liabilities and shareholders’ equity
$
34,917

 
$
25,614



SCHEDULE 3
NORTHROP GRUMMAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Unaudited)

 
 
Year Ended December 31
$ in millions
 
2017
 
2016
 
2015
Operating activities
 
 
 
 
 
 
Net earnings
 
$
2,015

 
$
2,200

 
$
1,990

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
475

 
456

 
467

Stock-based compensation
 
94

 
93

 
99

Excess tax benefits from stock-based compensation
 
—

 
—

 
(103
)
Deferred income taxes
 
603

 
36

 
572

Changes in assets and liabilities:
 
 
 
 
 
 
Accounts receivable, net
 
(677
)
 
(461
)
 
(30
)
Inventoried costs, net
 
36

 
(15
)
 
(80
)
Prepaid expenses and other assets
 
(81
)
 
(110
)
 
43

Accounts payable and other liabilities
 
539

 
198

 
(632
)
Income taxes payable, net
 
(157
)
 
148

 
135

Retiree benefits
 
(191
)
 
393

 
(263
)
Other, net
 
(43
)
 
(125
)
 
(36
)
Net cash provided by operating activities
 
2,613

 
2,813

 
2,162

 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
Capital expenditures
 
(928
)
 
(920
)
 
(471
)
Other, net
 
39

 
115

 
40

Net cash used in investing activities
 
(889
)
 
(805
)
 
(431
)
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
Common stock repurchases
 
(393
)
 
(1,547
)
 
(3,182
)
Net proceeds from issuance of long-term debt
 
8,245

 
749

 
600

Payments of long-term debt
 
—

 
(321
)
 
—

Net (payments to) proceeds from credit facilities
 
(13
)
 
135

 
—

Cash dividends paid
 
(689
)
 
(640
)
 
(603
)
Payments of employee taxes withheld from share-based awards
 
(92
)
 
(153
)
 
(186
)
Other, net
 
(98
)
 
(9
)
 
96

Net cash provided by (used in) financing activities
 
6,960

 
(1,786
)
 
(3,275
)
Increase (decrease) in cash and cash equivalents
 
8,684

 
222

 
(1,544
)
Cash and cash equivalents, beginning of year
 
2,541

 
2,319

 
3,863

Cash and cash equivalents, end of year
 
$
11,225

 
$
2,541

 
$
2,319



SCHEDULE 4
NORTHROP GRUMMAN CORPORATION
TOTAL BACKLOG
(Unaudited)


 
 
December 31, 2017
 
December 31, 2016
$ in millions
 
FUNDED 1
 
UNFUNDED 2
 
TOTAL BACKLOG
 
TOTAL  BACKLOG
Aerospace Systems
 
$
9,335

 
$
15,687

 
$
25,022

 
$
27,310

Mission Systems
 
10,241

 
3,790

 
14,031

 
13,715

Technology Services
 
2,797

 
1,028

 
3,825

 
4,314

Total
 
$
22,373

 
$
20,505

 
$
42,878

 
$
45,339


1 
Funded backlog represents firm orders for which funding is authorized and appropriated.
2 
Unfunded backlog represents firm orders for which as of the reporting date, funding is not authorized and appropriated. Unfunded backlog excludes unexercised contract options and indefinite delivery, indefinite quantity (IDIQ) contracts until the time the option or IDIQ task order is exercised or awarded.





SCHEDULE 5
NORTHROP GRUMMAN CORPORATION
IMPACT ON NET EARNINGS AND EARNINGS PER SHARE OF TAX REFORM AND RELATED DISCRETIONARY PENSION CONTRIBUTION
(Unaudited)

 
 
Fourth Quarter
 
Full Year
$ in millions, except per share amounts
 
2017
 
2017
Net earnings
 
$
178

 
$
2,015

 
 
 
 
 
Tax expense related to 2017 Tax Act
 
300

 
300

Tax expense related to discretionary pension contribution1
 
8

 
8

Operating income reduction related to discretionary pension contribution, net of tax2
 
9

 
9

Impact on net earnings of tax reform and related discretionary pension contribution
 
$
317

 
$
317

 
 
 
 
 
Net earnings excluding tax reform and related discretionary pension contribution impacts3
 
$
495


$
2,332

 
 
 
 
 
Earnings per share
 
$
1.01

 
$
11.47

 
 
 
 
 
Tax expense related to 2017 Tax Act
 
1.71

 
1.71

Tax expense related to discretionary pension contribution1
 
0.05

 
0.05

Operating income reduction related to discretionary pension contribution, net of tax2
 
0.05

 
0.05

Impact on earnings per share of tax reform and related discretionary pension contribution
 
$
1.81

 
$
1.81

 
 
 
 
 
Earnings per share excluding the impact of tax reform and related discretionary pension contribution impacts3
 
$
2.82


$
13.28

 
1 Reflects $8 million of additional income tax recorded due to lower manufacturing deductions available as a result of the $500 million voluntary pre-tax pension contribution.
 
2 Reflects $9 million of lower operating income (net of tax) as follows: $18 million reduction in corporate operating income due to lower state deferred tax assets, partially offset by approximately $4.5 million of higher sector operating income as a result of lower state tax cost, each tax effected at 35 percent.
 
3 Non-GAAP measure — see definitions at the end of this earnings release.






SCHEDULE 6
NORTHROP GRUMMAN CORPORATION
PRELIMINARY PRO FORMA FINANCIAL INFORMATION
CONSOLIDATED OPERATING RESULTS HIGHLIGHTS 
(Unaudited)

Effective January 1, 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and Accounting Standards Update (ASU) No. 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, using the full retrospective method. The adoption of these standards is reflected in our recast consolidated operating results highlights for each of the periods presented below.
 
2016
 
2017
 
2017
 
Total
 
Three Months Ended
 
Total
$ in millions, except per share amounts
Year
 
Mar 31
 
Jun 30
 
Sep 30
 
Dec 31
 
Year
AS REPORTED
 
 
 
 
 
 
 
 
 
 
 
Sales
$
24,508

 
$
6,267

 
$
6,375

 
$
6,527

 
$
6,634

 
$
25,803

Segment operating income1
2,935

 
726

 
753

 
759

 
721

 
2,959

Segment operating margin rate1
12.0
%
 
11.6
%
 
11.8
%
 
11.6
%
 
10.9
%
 
11.5
%
Net FAS/CAS pension adjustment
316

 
136

 
137

 
172

 
149

 
594

Unallocated corporate expenses and other
(58
)
 
(30
)
 
(35
)
 
(86
)
 
(103
)
 
(254
)
Operating income
3,193

 
832

 
855

 
845

 
767

 
3,299

Operating margin rate
13.0
%
 
13.3
%
 
13.4
%
 
12.9
%
 
11.6
%
 
12.8
%
Interest expense
(301
)
 
(75
)
 
(76
)
 
(73
)
 
(136
)
 
(360
)
Other, net
31

 
16

 
28

 
13

 
53

 
110

Earnings before income taxes
2,923

 
773

 
807

 
785

 
684

 
3,049

Federal and foreign income tax expense
(723
)
 
(133
)
 
(255
)
 
(140
)
 
(506
)
 
(1,034
)
Effective income tax rate
24.7
%
 
17.2
%
 
31.6
%
 
17.8
%
 
74.0
%
 
33.9
%
Net earnings
$
2,200

 
$
640

 
$
552

 
$
645


$
178

 
$
2,015

Diluted EPS
12.19

 
3.63

 
3.15

 
3.68

 
1.01

 
11.47

Weighted average shares outstanding — Diluted
180.5

 
176.1

 
175.5

 
175.3

 
175.5

 
175.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AS RECAST TO REFLECT ASC TOPICS 606 AND 715
 
 
 
 
 
 
Sales
$
24,706

 
$
6,410

 
$
6,473

 
$
6,569

 
$
6,552

 
$
26,004

Segment operating income1
2,864

 
741

 
759

 
756

 
647

 
2,903

Segment operating margin rate1
11.6
%
 
11.6
%
 
11.7
%
 
11.5
%
 
9.9
%
 
11.2
%
  Net FAS (service)/CAS pension adjustment
457

 
154

 
154

 
170

 
160

 
638

  Unallocated corporate expenses and other
(52
)
 
(33
)
 
(40
)
 
(89
)
 
(103
)
 
(265
)
Operating income
3,269

 
862

 
873

 
837

 
704

 
3,276

Operating margin rate
13.2
%
 
13.4
%
 
13.5
%
 
12.7
%
 
10.7
%
 
12.6
%
Interest expense
(301
)
 
(75
)
 
(76
)
 
(73
)
 
(136
)
 
(360
)
  Net FAS (non-service) pension adjustment
(141
)
 
(18
)
 
(17
)
 
2

 
(11
)
 
(44
)
Other, net
28

 
19

 
32

 
16

 
57

 
124

Earnings before income taxes
2,855

 
788

 
812

 
782

 
614

 
2,996

Federal and foreign income tax expense
(699
)
 
(138
)
 
(257
)
 
(139
)
 
(467
)
 
(1,001
)
Effective income tax rate
24.5
%
 
17.5
%
 
31.7
%
 
17.8
%
 
76.1
%
 
33.4
%
Net earnings
$
2,156

 
$
650

 
$
555

 
$
643


$
147

 
$
1,995

Diluted EPS
11.94

 
3.69

 
3.16

 
3.67

 
0.84

 
11.36

Weighted average shares outstanding — Diluted
180.5

 
176.1

 
175.5

 
175.3

 
175.5

 
175.6

1 

Non-GAAP measure — see definitions at the end of this earnings release.


SCHEDULE 7
NORTHROP GRUMMAN CORPORATION
PRELIMINARY PRO FORMA FINANCIAL INFORMATION
SEGMENT OPERATING RESULTS
(Unaudited)

Effective January 1, 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, using the full retrospective method. The adoption of ASC 606 is reflected in our recast segment operating results for each of the periods presented below.
 
2016
 
2017
 
2017
 
Total
 
Three Months Ended
 
Total
$ in millions
Year
 
Mar 31
 
Jun 30
 
Sep 30
 
Dec 31
 
Year
AS REPORTED
 
 
 
 
 
 
 
 
 
 
 
Sales
 
 
 
 
 
 
 
 
 
 
 
Aerospace Systems
$
10,828

 
$
2,898

 
$
2,970

 
$
3,082

 
$
3,005

 
$
11,955

Mission Systems
10,928

 
2,739

 
2,781

 
2,837

 
3,025

 
11,382

Technology Services
4,825

 
1,194

 
1,175

 
1,183

 
1,198

 
4,750

Intersegment eliminations
(2,073
)
 
(564
)
 
(551
)
 
(575
)
 
(594
)
 
(2,284
)
  Total
24,508

 
6,267

 
6,375

 
6,527

 
6,634

 
25,803

 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income1
 
 
 
 
 
 
 
 
 
 
 
Aerospace Systems
1,236

 
312

 
315

 
334

 
298

 
1,259

Mission Systems
1,445

 
353

 
374

 
363

 
363

 
1,453

Technology Services
512

 
131

 
134

 
133

 
126

 
524

Intersegment eliminations
(258
)
 
(70
)
 
(70
)
 
(71
)
 
(66
)
 
(277
)
  Total
$
2,935

 
$
726

 
$
753

 
$
759

 
$
721

 
$
2,959

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AS RECAST TO REFLECT ASC TOPIC 606
 
 
 
 
 
 
 
 
 
 
 
Sales
 
 
 
 
 
 
 
 
 
 
 
Aerospace Systems
$
10,853

 
$
2,984

 
$
3,003

 
$
3,125

 
$
3,019

 
$
12,131

Mission Systems
11,161

 
2,800

 
2,859

 
2,836

 
2,975

 
11,470

Technology Services
4,765

 
1,190

 
1,162

 
1,183

 
1,152

 
4,687

Intersegment eliminations
(2,073
)
 
(564
)
 
(551
)
 
(575
)
 
(594
)
 
(2,284
)
  Total
24,706

 
6,410

 
6,473

 
6,569

 
6,552

 
26,004

 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income1
 
 
 
 
 
 
 
 
 
 
 
Aerospace Systems
1,198

 
323

 
320

 
344

 
302

 
1,289

Mission Systems
1,468

 
359

 
384

 
359

 
340

 
1,442

Technology Services
456

 
129

 
125

 
124

 
71

 
449

Intersegment eliminations
(258
)
 
(70
)
 
(70
)
 
(71
)
 
(66
)
 
(277
)
  Total
$
2,864

 
$
741

 
$
759

 
$
756

 
$
647

 
$
2,903

1 

Non-GAAP measure — see definitions at the end of this earnings release.


Northrop Grumman Reports Fourth Quarter and Full-Year 2017 Financial Results
17


Non-GAAP Financial Measures Disclosure: This earnings 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. Definitions for the non-GAAP measures are provided below and reconciliations are provided in the body of the release. References to a “Table” or “Schedule” in the definitions below relate to tables and schedules in the body of the release. Other companies may define these measures differently or may utilize different non-GAAP measures.
Net earnings excluding tax reform and related discretionary pension contribution impacts: Net earnings excluding the impacts of tax reform and related discretionary pension contribution. This measure may be useful to investors and other users of our financial statements in understanding the impact of these items to our financial results, but should not be considered in isolation or as an alternative to net earnings presented in accordance with GAAP. Net earnings excluding tax reform and related discretionary pension contribution impacts is reconciled in Schedule 5.
Earnings per share excluding tax reform and related discretionary pension contribution impacts: Net earnings excluding the impacts of tax reform and related discretionary pension contributions divided by weighted average shares outstanding. This measure may be useful to investors and other users of our financial statements in understanding the impact of these items to our financial results, but should not be considered in isolation or as an alternative to earnings per share presented in accordance with GAAP. Earnings per share excluding tax reform and related discretionary pension contribution impacts is reconciled in Schedule 5.
Segment operating income: Total earnings from our three segments, including allocated pension expense recognized under CAS, and excluding unallocated corporate items and FAS pension expense. This measure may be useful to investors and other users of our financial statements as a supplemental measure in evaluating the financial performance and operational trends of our sectors. This measure should not be considered in isolation or as an alternative to operating results presented in accordance with GAAP. Segment operating income is reconciled in Table 1.
Segment operating margin rate: Segment operating income as defined above, and reconciled in Table 1, divided by sales. This measure may be useful to investors and other users of our financial statements as a supplemental measure in evaluating the financial performance and operational trends of our sectors. This measure should not be considered in isolation or as an alternative to operating results presented in accordance with GAAP.
Cash provided by operating activities before after-tax discretionary pension contribution: Cash provided by operating activities before the after-tax impact of discretionary pension contribution. Cash provided by operating activities before after-tax discretionary pension contribution has been provided for consistency and comparability of financial performance and is reconciled in Table 2.
Free cash flow: Net cash provided by operating activities less capital expenditures. We use free cash flow as a key factor in our planning for, and consideration of, acquisitions, stock repurchases and the payment of dividends. This measure may be useful to investors and other users of our financial statements as a supplemental measure of our cash performance, but should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating cash flows presented in accordance with GAAP. Free cash flow is reconciled in Table 2.
Free cash flow before after-tax discretionary pension contribution: Free cash flow before the after-tax impact of discretionary pension contribution. We use free cash flow before after-tax discretionary pension contribution as a key factor in our planning for, and consideration of, acquisitions, stock repurchases and the payment of dividends. This measure may be useful to investors and other users of our financial statements as a supplemental measure of our cash performance, but should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes, or as an alternative to operating cash flows presented in accordance with GAAP. Free cash flow before after-tax discretionary pension contributions is reconciled in Table 2.
#


Northrop Grumman Corporation
2980 Fairview Park Drive • Falls Church, VA 22042-4511
www.northropgrumman.com/media