Good day, ladies and gentlemen, and welcome to Northrop Grumman's Third Quarter 2014 Conference Call. Today’s call is being recorded. My name is Katelyn and I will be your operator today. At this time, all participants are in listen-only mode. (Operator Instructions). I would now like to turn the call over to your host, Mr. Steve Movius, Treasurer and Vice President, Investor Relations. Mr. Movius, please proceed.

Thanks, Katelyn, and welcome to Northrop Grumman's third quarter 2014 conference call. Before we start, please understand that matters discussed on today's call constitute forward-looking statements pursuant to Safe Harbor Provisions of Federal Securities Laws. Forward-looking statements involve risks and uncertainty, which are detailed in today's press release and our SEC filings. These risk factors may cause actual company results to differ materially. Matters discussed on today's call may also include non-GAAP financial measures that are reconciled in today's earnings release. We will be posting an updated company overview that provides supplemental information on Northrop Grumman. You can access our updated company overview and our sector overviews on the Investor Relations page at www.northropgrumman.com. On the call today are Wes Bush, our Chairman, CEO and President; and Jim Palmer, our CFO. At this time, I'd like to turn the call over to Wes.

All right. Thanks, Steve. Good afternoon, everyone, and thanks for joining us. Our teams focus on execution continues to deliver strong performance as demonstrated by this quarter’s earnings, cash flows and backlog expansion. Earnings per share increased 6% to $2.26. In addition to strong operating performance, we have two items that affected results in the quarter. Third quarter EPS was reduced by $0.30 to reflect passage of the Highway and Transportation Funding Act of 2014. We also realized $75 million for settlements of certain legal claims, which increased EPS by $0.23. Jim will provide more detail on these items later in the call, but together they reduced third quarter earnings per share by $0.07. Based on our year-to-date results, we’re increasing our EPS guidance to a range of $9.40 to $9.50 from our prior range of $9.15 to $9.35. This is an increase of approximately 13% over 2013 EPS. We’re also increasing our 2014 sales guidance to approximately 23.8 billion, the high end of our prior range. Growth in our international business continues to partially offset the impact of domestic budget pressures. Cash from operations totaled 933 million for the quarter. Free cash flow totaled 824 million and we ended the quarter with a cash balance of approximately $3.4 billion. Based on these results, we remain comfortable with our free cash flow guidance of 1.7 billion to 2 billion for the year. As you’re aware, the fourth quarter is typically our strongest in terms of cash collections. We’re particularly pleased to report that total backlog increased 8% from 35.6 billion at the end of the second quarter to 38.5 billion. Book-to-bill for the quarter was 150% and book-to-bill for the nine months was 107%. Third quarter bookings included a $3.6 billion contract for 25 E-2D Advanced Hawkeye aircraft, which was…

Thanks, Wes, and good afternoon, ladies and gentlemen. My comments will cover this quarter’s results and I’ll also discuss our updated 2014 guidance and provide a first look at 2015 pension items. But first I want to begin by expressing my appreciation to our team for their continued focus on execution. As Wes mentioned, our third quarter EPS of $2.26 included two items that collectively reduced EPS by $0.07. Before these items, third quarter EPS would have been $2.33 or 9% higher than last year’s third quarter due to strong operating performance and share repurchases. But first on those two items was the passage of the Highway and Transportation Funding Act in August. The Act extended higher discount rates instituted when the prior bill known as MAP-21 was originally passed in 2012. The higher rates were retroactive to January 1 of this year and are a significant factor in determining CAS amortization pension expense. The MAP-21 extension impacted third quarter results in two ways. First, we recognized $132 million year-to-date reduction in expected 2014 CAS pension expense, which drove an $81 million decline in third quarter net FAS/CAS pension adjustment. This is a cumulative amount representing nine months reduction in expected CAS expense. The large change is driven by the improvement in the funding status of our pension plans on a CAS basis due to the higher discount rates. Our largest plan essentially became fully funded with no 2014 CAS costs as a result of MAP-21 extension. We don’t expect the situation will repeat itself in 2015 due to the expected increase in mortality assumptions. Secondly, the $132 million reduced CAS pension expenses charge to our contracts thereby increasing our segment operating margin rate by a rate of segment operating margin dollars by $37 million. Second operating margin didn’t increase…

Thanks, Jim. As a courtesy, we ask each participant to limit themselves to a single one-part question, so we can hopefully get through the queue. Katelyn, we’re ready for Q&A

(Operator Instructions). Your first question comes from the line of Robert Stallard with Royal Bank of Canada.

Thanks so much. Good afternoon.

Hi, Bob.

Thanks for the pension stuff, Jim. I know you love that.

All right.

On the cash front, this might be a question [Wes] (ph), do the changes in the CAS recovery have any implication for your cash deployment plans going forward, particularly on the buyback?

No, we don’t see any changes in our plans based on anything that we’re seeing in CAS at this point.

On the – sorry, continue.

I would just point out that the numbers I just gave you for CAS recoveries compared to our prior estimates are up a few $100 million over a three-year period, so not --

Yes, not a lot of impact.

Yes.

And just to follow up on the cash front, Wes, are you seeing any change out there in the M&A market given that we now have a bit of stability in the DoD base budget. Are you starting to see more interest in Defense acquisitions?

I would say that there continues to be a fair amount of interest in the technology side of the space, just everyone wanting to make sure that collectively we’re thinking ahead and highly engaged on the technology end of it. But do I see a big uptick relative to kind of where we’ve been for a bit of time? Not on the near horizon do I see that. As always, we continue to be active and taking a look at things that are out there. I haven’t of late seen very much that really triggered us to be that engaged in it, but we’re going to continue to look just as we always have. We think it’s an important part of our overall strategic management process to be engaged in that aspect of development.

Your next question comes from the line of Doug Harned with Sanford Bernstein. Douglas Harned - Sanford C. Bernstein & Co.: Good morning.

Hi, Doug.

Hi, Doug. Douglas Harned - Sanford C. Bernstein & Co.: Your Electronic Systems backlog has come up a lot, I mean you’re above $10 billion there and that’s the highest that you’ve seen in quite some time. Could you talk about what’s been driving that higher backlog and does that suggest to you some growth going forward over the next few years?

Yes, Doug, you’re right. I think we had an all-time high in our Electronic Systems backlog for our number of multiyear deals that affected the backlog as well as some of our marine programs. As you know, we had a multiyear deal on E-2D aerospace. Electronic Systems also has some activities on that program. So all of those are part of that impact to the backlog.

Doug, it’s Wes. I’d just add that across the board, the business continues to do well with Electronics. We have such a wider array of capability there that continues to be in demand both domestically and internationally. You may recall that Electronic Systems has our biggest fraction of international sales running around 25% or so this year. So it’s a fairly broad, just outstanding performance by the team at ES.

Your next question comes from the line of Noah Poponak with Goldman Sachs.

Hi. Good afternoon, everyone.

Hi, Noah.

Hi, Noah. How are you?

Good. How are you?

All right.

Terrific. Always good after you read off that much pension material.

Yes, I live for it.

Wes, you mentioned talking to those in Congress about the potential for more changes to sequestration. Just big picture on that, can you provide us a little bit more color on some of the conversations that are taking place on the hill and where do you see or how you see the actual likelihood of more changes to sequestration actually occurring? It seems like we kind of see in the press certain congressmen talking about the possibility of doing that, but it doesn’t seem like there is anything particularly serious or certainly eminent. Just wondering if you can give us a little more color on the latest there?

Noah, I sort of see both sides of it. I clearly see a much better informed discussion on the hill around both near-term and long-term jeopardy that our national security is being placed under with this continuing pressure downwards on the Department of Defense and quite frankly other federal agencies that are being asked to do a heck of a lot more to deal with the variety of threats around the globe that are being asked to do that greater amount of scope, if you will, at a much reduced budget. It simply doesn’t make any sense and I think there is a growing recognition of that dramatic imbalance that we have from a national security perspective. Now, whether or not that recognition translates into action depends on a lot of politics and I would not want to be in the mode of speculating on politics, but I am encouraged by the growing thoughtfulness of the discussion, the growing recognition and I think the genuine desire on the part of folks on both sides of the isle and both sides of Congress, both houses of Congress to kind of step back and rethink this. But again, there are so much political dynamics associated with the budget these days that it would be difficult to put a stake in the ground and say, yes, this is going to change. But I am encouraged by the improvement in the dialogue around this.

Your next question comes from the line of Jason Gursky with Citi.

Good afternoon, everyone.

Hi, Jason.

Wes, I was wondering if you could just spend a few minutes thinking about the operational tempo in the Middle East today. It’s obviously increased here of late and maybe just describe to everybody here on the call the types of products and solutions and services that Northrop has on offer that might eventually get used in this new operational tempo that we have over there just so that we can begin thinking about impacts that this may have on Northrop if this ends up getting sustained higher level of operations over there?

Thanks, Jason. Clearly, our capabilities get deployed around the globe and are addressing a whole set of issues that are evident not just in the Middle East as you’re well aware. But with respect to that particular theater, some of the things that we’re well known for and support our customers with a very focused approach are things such as intelligence, surveillance, reconnaissance. We deploy a wide variety of systems that help our customers understand what’s happening, where it’s happening, when it’s happening and do that with a very high degree of precision, so the ISR part of our business is really an important part whether we’re talking the platforms that provide the presence to do it, the sensors that provide the inherent system capacity on those platforms where they’re processing that sits behind the sensors, whether it’s on the platform or to ground processing and quite frankly the sustainment of those systems. So it’s a full company effort behind the ISR mission that’s so important to all of four structure to be able to have that perceptive understanding of what’s going on. The other place we play a big role is on the command and control side. Our work that we do both at our Information Systems business and in Aerospace Systems and in Electronic Systems plays an integral role in the command and control architectures that are deployed to help address this type of situations. So I wouldn’t say that what we’re seeing right now in the Middle East represents a big uptick in any way for us, I would not want to leave that impression. But I would point out that our systems and capabilities are integral to the nation’s ability to go and conduct these types of activities and again not just in the Middle East but around the globe.

Your next question comes from the line of Carter Copeland with Barclays.

Hi. Good morning, guys.

Hi, Carter. How are you?

Great. I just had a couple of questions around the margin. Obviously, the contract activity, the order activity around several of these new big awards imply your changeover on several of these big programs. I wonder if you could comment on the switchover to new contracts on some of those platform and what it might mean for the margin? And then just as a point of clarification, Jim, the CAS dynamics you outlined in the quarter related to the 37 million. Are those just cumulative catch-ups that are retroactive or are the pension changes going to have some sort of offsetting benefit in next year’s segment margin rates? Thanks.

Let me take the second piece of that first. The CAS benefit are essentially nine-month impact of lower CAS costs applied against the whole portfolio of contracts, some of those contracts being cost types, so the benefits flow entirely to the customer. Some of them being fixed price incentive, where we share in the benefits; others being fixed price where we capture the benefits. There will be some small benefit that continues but largely be realized I think basically this year. So there will be a small fourth quarter benefit as well that’s essentially covered in our guidance for the year.

But respect to the platform activities, I would just say that each time we start out on a new contract we have a risk profile in front of us on execution and we recognize the retirement of that risk as it occurs over time. So, nothing unusual about the new contracts that we have in that regard, but I think to the point, Carter, you were making because we have a number of these new activities and E-2D is a good example of that. As we retire the risk, either we succeed at retiring the risk or we fail to retire the risk over the course of the premium, that will be reflected in the way that we booked the margins on the program.

Your next question comes from the line of Myles Walton with Deutsche Bank.

Thanks. Good afternoon.

Hi, Myles.

Just following up on that line of questioning though, you’ve been running 12.3 here in the last couple of quarters. We’re going to touch higher than that. You’ve seen kind of a turn for the better in the backlog. And I think one of the things you’ve talked about is you’d love to see the backlog grow and the top line start to show some signs of life, but also be mindful that that might come with some margin pressure. So as you look at '15, I mean is that the point where some of the flow-throughs of the new wins are going to start to put downward pressure on these margins that you’ve been able to drive so well?

We won’t give any guidance, right, relating to '15 other than the pension outlook that Jim provided, so I wouldn’t venture into being prescriptive about '15. But I think the broader perspective is correct. As we bring on additional programs, there’s always a path, if you will, to the full margin opportunity. The commentary I’ve made in the past relates though a bit more to our capture of development work as I think everyone on the call understands, development programs generally carry a lower margin rate opportunity than do our production programs. So the extent that our backlog reflects the capture of development activities, that would tend to have more of a downward pressure on margin rates than when the backlog growth reflects the capture of additional production work.

Next question comes from the line of Joe Nadol with JPMorgan. Christopher Sands - JPMorgan Chase & Co.: Hi. Good afternoon, guys. It’s Chris on for Joe.

Hi, Chris. Christopher Sands - JPMorgan Chase & Co.: Hi, guys. Wanted to ask about the improvement in funded IS backlog. This has been one of the businesses that has been under some pressure, because of the short cycle. Does that improvement signal that things are improving or at least that the pressure will start to decelerate?

I would characterize it as good performance, good competitive performance by the IS team. I think it’s too early to call a turn in the shorter cycle side of the marketplace. I think we’re going to have to see how the budget environment shapes up over the course of this year before we’re positioned to call that. But we are very pleased with the backlog performance and capture performance of the IS team. They’ve continued to make sure that we’re focused on the parts of the portfolio where we think we can really create value and are very focused on the competitive side of that. So it’s good work by the IS team that you’re seeing here.

Your next question comes from the line of George Shapiro with Shapiro Research.

Good morning.

Hi, George.

Hi. How are you doing?

Good.

Good.

Jim, if I divide the 37 million by the 132 million, you get about 28%. So in a certain way does that give me some attempt at what your mix of business now is between fixed price, cost plus and FPI? And going forward into next year, would that mix substantially change much based on what you just said, Wes? It seems like there might be more development next year.

George, I remember back to the 10-K and I don’t think it’s the mix that’s changed much. We’re a little bit more than 50% cost type, maybe 52%, 53%; 47 fixed price. I don’t think it’s changed awful lot. The other factor as you appreciate in terms of the flow-through of the 132 million June catch-up reduction in CAS expenses just a percentage completion of the various contracts that it applies to. So I said to an earlier question, there will be some smaller fourth quarter benefit and maybe some that leads over into 2015 as well, but really not that significant in terms of the overall margin impact on a go-forward basis. And to your question basically around the overall mix, based on what I’ve seen so far in our planning process, I don’t see a lot of change in the overall mix between development contracts and production contracts as we look forward here.

In particular, I would just add because we see a good set of opportunities on both the production and on the development side, if I look at our national opportunities, many of those are more production-related if we’re selling a Global Hawk or a Triton or an E-2D overseas, those would be additions to our production line. Generally, our domestic targets, the new targets, tend to have more development opportunity and I mentioned both long-range strike and some of the other things that we’re pursuing domestically would tend to have more of a development mix. So in terms of the overall opportunity set, I would align with what Jim said that we really don’t see much of a change in the mix of opportunities. Of course, it will depend on which ones we actually capture and turn into the sales [engineer] (ph) in the company.

Your next question is from the line of David Strauss with UBS.

Good afternoon.

Good afternoon, David.

Hi, David.

Jim, can you talk about EACs in the quarter, what they look like overall? I know you had the settlement (indiscernible) factoring, but what do EACs look like in the quarter and maybe any color thinking about Q4 and into next year? Thanks.

Yes, I think you all know but I think you are making too much out of these EAC adjustments. The underlying margin rate is really the key factor here. EAC adjustments were down in the quarter, as I recall correctly from the Q that was filed this morning, upper 30s, low $40 million range on a year-over-year basis and quarter-over-quarter basis. And we basically look at the underlying fundamentals of our various contracts when we do our planning process and not so much how we expect to come from the underlying performance of the contracts versus EAC adjustments.

Your next question comes from the line of Robert Spingarn with Crédit Suisse. Robert Spingarn - Crédit Suisse AG: Good morning.

Hi, Rob. Robert Spingarn - Crédit Suisse AG: Good afternoon, I guess I should say. Hi, guys. I wanted to talk a little bit about an aspect of Better Buying Power and the sense that we’re getting the DoD is now perhaps taking a deeper look at major subcontracts in addition to the primary prime contractor contracts. And to what extent, if any, this has started to happen on F-35? My understanding is they’re really doing this with the largest programs, so clearly that would be F-35 in your position there. Are they getting involved in the negotiations and trying to help identify cost savings directly as you work with your customer?

This is Wes. I wouldn’t say that that was so much a reflection of what’s going on in Better Buying Power. I think historically we’ve seen on very, very large programs where there are subcontracts that are major fractions of the acquisition. We’ve seen the government have a strong interest in understanding what’s going on and frequently the subcontractor works through the prime to support what the prime needs to get done with the government customer to provide greater insight into that larger fraction of the cost. But all that said, ultimately, the subcontractor just that there are contractual agreements between the supplier and the prime and the government’s actions need to respect that and understand it. And ultimately, they are holding the prime contractor responsible for the outcomes. So we are an industry that works very closely together to get things done. It’s kind of one of – I think the very strong positive attributes of our industry that we’re able to partner so well while we also complete. And part of that partnering process is to support whoever happens to be the prime on an individual contract, support them enabling them to get done what they need to get done with the customer community. So I don’t know that I would characterize it as a big departure clearly on something, the size of F-35 where individual companies that are not the prime have a big role. The government needs to understand what’s going on in great detail and the subcontractors need to support the prime and providing that type of insight. But ultimately, the relationship is between the subcontractor and the contractor and that has to be maintained. Since you raised the question though about Better Buying Power, I thought it might be helpful just to give a…

(Operator Instructions). Your next question comes from the line of Hunter Keay with Wolfe Research.

Thanks for getting me on, I appreciate it.

Hi, Hunter.

Hi. How are you? A little bit of a schematic follow up to an earlier question I think relates to assets deployed in the Middle East right now. I’m wondering if you can be a little more specific and tell us – you talked about ISR before about how Global Hawk is being utilized and whether or not DoD or Congress is taking note of its capabilities and whether or not you think this might provide a little bit of a catalyst to get some sensor work upgrades done on Block 30? And also maybe comment how the U-2 fits into this sort of puzzle that we have here? Thanks a lot.

Thanks, Hunter. I really can’t. It wouldn’t be appropriate for me to comment on how specific systems are being deployed in an operational context. I would just say broadly that as the world continues to get more challenging, we see a constant increase in deployment of assets like Global Hawk and Global Hawk specifically around the globe. The number of hours of operation continue to rise, the cost per hour continues to fall, the clarity that the commanders have around the benefits of that asset continues to improve. So we see all the things pointed in the right direction for the broad support that the DoD has been providing for Global Hawk. So we’re continuing to be very confident about its future and very supportive of what our customers are working to do to continue to enhance its operational utilizations. So, we see things as being on the right track there.

Your next question comes from the line of John Godyn with Morgan Stanley.

Hi. Thank you for taking my question. Wes and Jim, we’ve heard about international opportunities from both of you, but I was hoping that perhaps we could put some numbers around it. Could you just update us on where on an enterprise level basis international is as a percent of revenue now, what it looks like as a percentage of the backlog and is a big opportunity, if there’s anything you can tell us about where you think as a percent of revenue could go in the coming years as sort of a general trajectory, I think that would be very helpful?

John, this is Jim. As you know, international has gone to about 13% of sales for 2014, up from 10% in 2013. Backlog is about 14% at this point and obviously the backlog percentage is always influenced by the timing of these large international awards. Both Wes and I have said a number of times, we see some significant opportunities in the international marketplace for our capabilities. They always take a long time to bring to fruition. Projecting exactly when they’re going to occur is frapped with problem and I’m not going to get into that.

Jim, I listed a few earlier, maybe I can just reiterate some of that and perhaps add a little perspective. With respect to what we have underway at Aerospace Systems, as I mentioned in my earlier remarks, we see opportunities for our Global Hawk, Triton and E-2D and of course broadly around the company where we’re a participant on F-35, we see that growing. In Electronic Systems, we’ve been pleased to see how our SBIR radar program continues to perform well on schedule. We see that as a very, very competitive offering that we have in the marketplace and it’s generating a lot of interest around the globe. So the SBIR radar is I think going to be a nice opportunity for a number of countries that are looking to upgrade their F-16 capability. In Information Systems, we have an extensive capability in cyber that a number of our allies are quite interested in figuring out how they work with the U.S. and U.S. government in taking their steps forward where we can helpful. And I mentioned earlier the work that we do domestically in command and control out of Information Systems and there too we’re seeing an increasing interest around the globe in some of that capability to help deal with the growing complexity of the systems that many nations are acquiring now. You have to be able to network these systems together and manage them as a more integrated approach to dealing with the battle space and that’s a real expertise that we have at IS that I see a nice international opportunity. And with respect to TS, we do a fair amount of sustainment work around the globe today and we see sustainment as a growing international opportunity for TS. So every one of our four sectors has a set of meaningful opportunities as we look out over the next few years. We generally have not been in the mode of trying to set goals as a percent of revenue. I don’t see that as a necessarily productive thing to do. We are looking at each of these opportunities to see whether or not they are value creating and whether or not we’re the right company to be pursuing them, and we make our decisions on that basis. So as we go forward, given the breadth of opportunities, clearly we’re looking at a growing international business but we’re not setting specific percent of revenue targets to describe that growth.

This is Steve. I’d like to thank all of you for your interest. This concludes our Q&A session of the call and I would like to turn it over to Wes for final comments.

Thanks, Steve. I’ll just wrap up by reiterating how proud I am of the Northrop Grumman team’s continuing focus on driving performance for our customers and for our shareholders. This was another good quarter for us and that good quarter resulted from the commitment and hard work of the great team that we’re fortunate to have here in our company. So thanks again for joining us on the call today. We appreciate your continuing interest in Northrop Grumman.