Good day, ladies and gentlemen, and welcome to Northrop Grumman's Fourth Quarter and Year End 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 fourth quarter and year end 2014 conference call. We’ve provided supplemental information in the form of a PowerPoint presentation that you can access at our website. 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 uncertainties, 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 the supplemental PowerPoint presentation. I would also like to note that in 2015, our earnings releases will be in the fourth week of the month following the quarter-end due to reporting conventions. On the call today are Wes Bush, our Chairman, CEO and President; Jim Palmer, our CFO; and Ken Bedingfield, our CFO Elect. At this time, I'd like to turn the call over to Wes.

Thanks Steve. Hello everyone and thanks for joining us. Before I begin my formal remarks today, I want to note that this is Jim Palmer’s last conference call as Northrop Grumman's CFO. On behalf of the Board; our leadership team and all of our employees, I want to thank Jim for his many contributions since joining Northrop Grumman in 2007. Jim has been an incredible partner in formulating our strategies; executing major strategic actions and driving the performance transformation. This created so much value for our shareholders; our customers and our employees. Jim has also ensured that we have the financial resources and flexibility to take advantage of our opportunities and on honor our commitments, which has been particularly important during the challenging budget environment of the last few years. But perhaps most importantly, Jim has been a steadfast advocate of ensuring we think about the long-term strength of our company and industry as he has a deep conviction about the importance of what we do. I want to personally thank Jim for his leadership; his dedication; and the energy and integrity he applies to everything he does. After we file our 2014 10-K, Ken Bedingfield will become Northrop Grumman’s CFO. And Jim and Ken are working to ensure we have seamless transition over the next few months. For those of you who haven’t met Ken, prior to joining Northrop Grumman, he spent 17 years at KPMG where he had roles of increasing responsibility. And just prior to joining our team, Ken was the national client leader of KPMG’s U.S. aerospace and defense audit practice. Here at Northrop Grumman, Ken led financial reporting and compliance as our Corporate Controller and Chief Accounting Officer. He also served as the Chief Financial Officer of Aerospace Systems, our largest sector. Most recently, Ken…

Good afternoon ladies and gentlemen. I want to add my congratulations to our team on their continued outstanding performance. And Wes, I want to personally thank you for your kind comments, I truly appreciate them. I certainly enjoyed being part of a company of outstanding people who are fulfilling missions of the highest importance to our nation and our allies. I feel proud to have been part of a team that’s accomplished so much. Today I’ll briefly just review 2014 results and then discuss 2015 guidance. Beginning with performance, 2014 segment operating margin rate improved 40 basis points to 12.9%. About 20 basis points of that improvement resulted from the $75 million in settlements at Aerospace Systems that we recorded in the third quarter. Excluding the settlements from both consolidated sales and segment operating income, our 2014 segment operating margin rate would have been 12.7% versus 12.5% in 2013. The year-over-year improvement reflects better operating margin performance at three of our four sectors. Aerospace Systems was the largest contributor to this year’s margin rate improvement where part of the improvement being the previously mentioned settlements. So, in adjusting AS sales and operating income for the settlements would give them a 12.5% operating margin rate for the year, still a 40 basis-point increase over 2013 due to improved performance. Information Systems and Technical Services continued the strong performance with margin rate improvements of 20 basis points and 10 basis points respectively. Electronic Systems, while down versus 2013, posted a very strong 16.5% margin rate. Total operating margin rate for 2014 13.3%, 60 basis points higher than last year, principally due to more favorable net FAS/CAS pension adjustment and higher segment operating income. These positive trends were partially offset by $15 million increase to a more normal level of unallocated corporate expenses.…

Thanks Jim and good afternoon everybody. I’d like to add my thanks to the team for another job well done. Over the last several months, I’ve had the opportunity to meet a number of you and I look forward to meeting more in the coming months. Wes, Jim and I share similar philosophies, particularly on sustainable performance and cash deployment. We have worked closely together over the last several years. I’m looking forward to assuming the CFO role after we file our 10-K, which should be next week. I’d like to thank Jim for his leadership and guidance. He’s been a great mentor. And I’m confident that our continued transition over the next few months will be seamless. I look forward to speaking with you again on our first quarter conference call. Let me turn it back to Steve.

Thanks Ken. As we open up the call for Q&A, I would ask each participant limit themselves to a single question. With that Katelyn, we are ready for questions.

[Operator Instructions]. Your first question comes from the line of Cai with Cowen & Company.

Yes. Thank you very much. And Jim, congratulations on a job well done.

Thank you, Kai.

Wes, you mentioned your R&D up 12% last year, where do you see it going in 2015? And if you could give us a little bit of color in terms of by divisions, where you’re spending it and what the net impact on your earnings might be? Thanks.

Thanks Cai, it’s really important question about how we are thinking about R&D. We don’t guide with specific numbers for each year on what they are, we do repeat them at the end of each year. But I will just say that as we think about our role in the broader global security community, our role is to bring technology for you and bring the types of solutions that are based on technological superiority that enables our nation and those of our allies to get the jobs done. So, technology has always been a core part of what we do. And through this downturn cycle, we’ve held our R&D as a percentage of sales up through the cycle. And I see us continuing to emphasize this and grow it over time. And this goes across all of our businesses by the way. As you might imagine, some of our businesses are little bit more technologically intensive than others and so it’s not exactly the same percentage in each year. Every single one of them has a strong technological underpinning. And that span of technology encompasses not only the things that we’re working on in terms of near term developments to bring in the products but also the very early stage technologies. Things that aren’t going to pay off for our company or for our customers for many, many years, we see that as just an absolutely integral and critical part of our R&D strategy. Not every one of those investments turns out that we can turn it into something but we believe that’s a key part of being in the technology space. We’re going to try some things that don’t always work out and some of them work out astoundingly well. So, we are going to continue that on our path forward. I’ve mentioned several times in past calls, about half of our population, about half of our 65,000 folks are degreed scientists, engineers, mathematicians, technologists of some kind. So, there is just an amazing amount of creative capacity in this organization. And our ability to get good returns on our technology investments is really because of the hard work and dedication and creativity of that great team.

Your next question comes from Joe with J.P. Morgan.

Thanks. Good afternoon. Congrats to Jim and Ken, both.

Thanks.

My question is just as we look at the margin guidance for Aerospace and for Electronic Systems and you guys have done a pretty good job over the last several years of guiding a lower and beating. I was just trying to get some context here on whether -- how much upside there might be if you’re able to maintain your -- to what degree you might be able to maintain the margins you’ve been running at the last couple of years. So, maybe the question would be how much of the margin degradation is due to mix and how much of the expected margin degradation is due to lower adjustments?

Joe, this is Jim. We don’t really plan for adjustments; we plan for marginal rates associated with each of our businesses looking at backlogs and margins inherent in the backlog as well as where we think the business will perform. When I think about our Electronic Systems business, 16.5% margin this year and guidance for next year still is very good performance. Relative to the industry peers, frankly we’ve had in Electronic Systems, a group of mature production programs that are nearing completion, being replaced by younger development programs and/or younger production programs. So, we’re going through a little bit of a shift from some mature programs to some less mature programs. But that’s kind of the normal cycle. At Aerospace, again, the $75 million benefit that’s in margins in Aerospace this year will not at least the -- reason why it’s going to be here next year. So, that’s a big part of a change in margins in Aerospace. But again, high 11% margin is really good performance. We had a little change over the last couple of years in our fixed price business mix change but it’s not been that significant, probably up a couple of percentage points on a year-over-year basis. So, we continue to have significant development activities in each of our businesses, which actually is life bud of our future.

Yes. And Jim, I’ll just add to that because Joe had good comment about mix. And I think that’s a really important perspective, just to reiterate something that we’ve all said a number of times over the past couple of years. As we go forward, we do expect there to be a number of good development activities. And I’m okay with our margin rates coming down a little bit based on our successful cascade of new development activities. I’m not okay with margin rates coming down. If there are performance issues, we went through an era as a company where we had a series of performance issues and worked hard and get passed that. So, our focus is go out, get those really good development opportunities that should create great value for our shareholders over time. If we need to have a little bit lower margin rate because of that mix shift over time, that’s fine but we’re going to keep performing. And that’s really going to be the focus across the enterprise is whatever go at and capture, we’re going to execute well.

Your next question comes from the line of Howard with Jefferies.

Thank you very much. Mr. Palmer, you have set a high bar.

He has.

Now I’d add, it’s actually been a pleasure to work with you.

Thank you Howard, I really appreciate the comment.

You spent $700 million in capital which is large relative to normal standards. Could you elaborate a little bit on where it’s going and how fast you think you might be able to see some payoff from it, Wes?

Yes, hi. And I’ll ask Jim to give a little bit more of a color on it. But it goes actually back, Howard, to what we were just talking about as we have -- look at our future. We have made some decisions to structurally get aligned a bit better. And we announced a little bit of time ago, our focus on moving into centers of excellence. That requires a bit of capital to actually get those stood up and operating the right way. And as we get those facilities in place, we look forward to having a number of all of you from the investment community come and take a look at these new centers. So, that’s a part of it. Other parts of it go fundamentally to supporting the program opportunities that we’ve captured or that we see on the horizon. We’re investing in the company because we see a good opportunity for return here. Jim, is there any more detail on that?

Just echo your comments, centers of excellence and program opportunities are really the drivers of capital investment. And frankly, last year we said that capital expenditures were going to be high for a few years and we basically implemented what we said we were going to do.

Yes. And I’ll just point out as well that when we talk about centers of excellence sometimes that sounds like company consolidation. And yes, perhaps that 50,000 foot level, that’s where it is. But ultimately, it’s a key part of our strategy to drive both affordability and innovation in the organization. We’re finding that as we do a better job of integrating some of the activities that have been geographically separated that we’re getting a lot of very positive energy that is going not only into the programs but are being executed but also the development of new opportunities. So, that’s a big part on the innovation side. And of course on the affordability side, consolidating our footprint has been a process that we’ve been underway now for several years. And that’s already paying off of course. And we expect to see good returns on that as we go forward. So, overall, my point is that capital investment has a lot of different strands that run through affordability, innovation and supporting our programs across the board. And we’re delighted to be able to have those kind of opportunities to invest where we see those returns.

Your next question comes from the line of Doug with Sanford Bernstein.

Thank you.

Hey Doug.

Hey Jim. And really it’s been just great working with you. So, I wanted to wish you all the best going forward. It’s been great, great several years here.

That’s a mutual feeling that’s shared.

Yes. Anyway, so good luck.

Thanks. I need it.

I don’t think so. But I’ve got a question here nonetheless on the short cycle businesses, Information Systems and Tech Services. When you look at the backlogs, you’re looking at 10% decline in Information Systems backlog and even more in Tech Services, yet your guidance for revenues is down a little in each. And I’m assuming if that KC-10 and ICBM supported Tech Services. But it was surprising to me to see your revenue expectations hold up reasonably well considering what appears to be a lot of pressure on backlog here.

Doug, you hit on a couple of the items. Clearly right after the end of the year, we booked $900 million award in Technical Services piece of the business. And those touch and go whether that would have gone be in the end of the year, the first of 2015. And basically we didn’t rush the deal, we made sure that we got a deal that made sense and so that’s locked over in 2015, so be it. When we look at the shorter cycle business, Information Systems, it’s interesting that only about little over half of the revenues actually come out of funded backlog for the year. That is a shorter cycle business, a big part of the business moves from unfunded backlog to funded backlog as we go through the year. Said differently, the customer tends to fund this in a number of months increments rather than a full annual year basis. And so, we tend to see that kind of cycle move through there as well as just being a shorter cycle business. So, new awards have more of immediate impact on revenues in the current year. So, its’ a combination of all those kinds of things and frankly, some expectations for international opportunities as well that went into our revenue guidance for both of those businesses.

And I would just add a little bit. The science of backlog conversion to revenues in the following year is an interesting area of study. We all know that in our long cycle business, it often takes a while before that backlog converts to sales and that’s what we mean by long cycle. And obviously in short cycle, we know that there is a lot more volatility in that conversion. And I think if you think about these vectors backlog and revenue, it’s probably easy to conclude that the direction of the vectors is more often aligned than it is to conclude that the magnitude of the vectors is aligned and correlated. And if you look back over just the last few years, in IS we have seen some years of notable declines in backlog where the revenues in the following year were directionally the same, it was down but the magnitude was a lot different. And that goes back to what Jim was saying, it’s due to the nature of these short cycle businesses that sometimes we’re seeing more revenue from the awards that are captured in the year of performance. So, when we do our look forward and give our guidance, we really do look at the whole pipeline, it’s not just the back -- we just look at the backlog, it is a perspective that encompasses what we see in front of us in the current year and how we see that translating into revenue. So, of course our 2015 guidance does contemplate what that current backlog position looks like but I would say more importantly, it contemplates what we see from a pipeline perspective and a position perspective.

Your next question is from the line of Carter with Barclays.

Good morning guys or I guess I should say good afternoon. And again, let me add to the congratulations Jim on all of your success.

Thank you, Carter.

I want to go back to one of the earlier questions on research and development. And at least from a high level or just directional, I know you don’t disclose the number, Wes, as you said but several of your peers so far this quarter and this year have talked about greater amounts of internal research and development impacting their margin outlooks. And I wondered if you might speak at least directionally, is that something that’s influencing your P&L this year or potentially in future years or should we see a relatively stable amount of that investment?

It’s not a big factor this year. Clearly, it varies from year to year depending on the mix on fixed price cost plus and you can play the math through on that. But I don’t see it as a differentially big issue this year relative to prior years. I don’t want to put a stake in the sand on future years. Obviously we need a strategic flexibility to decide how we manage that based on the environment. But as I said earlier, it’s going to continue to be really, really importantly to us. It’s the life bud of our enterprise. So, we’re going to make sure we are managing it the right way. Jim, do you have any other to add to that?

I’d just add Wes that -- Carter, we manage all cost and that’s just one element of cost. And so, to the extent that we choose spend more money on R&D or IRAD, essentially we’re trying to find other ways that we can reduce other cost so that we keep our total cost structure in line with what was anticipated when we bid these contracts. So, it’s always a little bit of push and pull, between how much for this and how much for that. But then choosing to spend more on IRAD or research and development, we’re cautiously working to reduce other cost to give us the flexibility to absorb that increased IRAD investment within our total cost structure.

Yes. And that’s actually important point. If you look at how we’ve done that over the last few years, if you think about it, and Jim and Steve will correct me if I get these numbers slightly wrong. But over the last five years, our top-line is down around 13% but our headcount is down around 20% - 21%; our footprint is down around 10%.

Correct.

So, we’ve gone after a whole set of cost structure issues that have enabled us to maintain our R&D investment. And as we said earlier, we’ve done it because that’s what we do. That’s the essence of our enterprise to be able to bring technologically based solutions to our customer community. And I certainly anticipate we’ll be doing that on a go forward basis.

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

Hi. Good afternoon.

Hi Noah. How are you?

Good, good. How are you, Wes?

Good.

Jim, congratulations. That was a fairly impressive run you put up there. It sounded like you might have been tearing up a little on your prepared remarks actually.

Actually I have a pretty bad cough and I had cough drop in my mouth and…

It’s good that you had a planned excuse for windup.

I was tearing [ph] up Noah.

So, a little bit bigger picture question. If I look at the past many years, call it 20 years of the company, it’s grown double digits organically very few times. And it’s a mature steady business, so that makes sense. Looking forward, if you’re able to secure some of the larger wins you’re going after, and if the defense budget can actually grow a little for you, should it be in our collective scenario analysis that we could actually move into one of those periods where between now and the end of the decade you can actually put up one or two years where you actually grow double digits? And I’m not asking you to commit to that obviously but with that kind of the order of magnitude type of math we’re dealing with, given the size of some of the stuff you’re going after?

Noah, I would say that there are some factors that drive that probably well beyond our control. Clearly the global security environment is the most prominent driver of how that works out. And we all know we’re dealing with a road us today that has so much volatility in that regard that any one thing in that basket of volatility could push our nation and our allies into a very different place of security spending. So, trying to predict that and get out ahead of that is difficult but we want to make sure we’re always ready in the event that we’re called upon to respond to that sort of outcome that we’re ready to do it. So, that’s one aspect of it. The other aspect of it, I just want to be very clear about because I know many folks listen to these call, including some of our employees. And we are not an enterprise that’s being driven by visions of the top-line. We drive our enterprise based on value creation. And if we put our head stood and said [indiscernible] we’re going to figure out one way or another to get a double-digit and top-line, yes, we could probably go figure how to do it and then perhaps regret it a few years later. We’re going to continue to drive this enterprise on value creation. So, even in a case where there maybe extraordinary opportunities in front of us, we’re not going to get mesmerized top-line mathematics. We’re going to continue to make case by case decisions on what makes sense and how we create value. So, those two things I think are important to have in your mind if you think about our company. We’re going to be value driven and we’re going to be ready to support our customer community, no matter what they face.

Your next question comes from the line of Robert with RBC Capital.

Thanks so much. Good morning.

Good morning, Robert.

Good afternoon. Jim, I’d add my congratulations and thanks for your help with pension over the years.

I’ve often said, Jim is able to provide a PhD thesis on pensionology.

I’ll avoid that topic this time. You mentioned that if everything goes to plan that your share buyback plan should be concluded this year. And I was wondering what we could expect after that because you made several comments this morning and this afternoon about more internal investment, so really that alters your capital deployment program for the longer term.

Well, I would say Rob, we’re first and foremost focused on achieving the objective that we laid out for ourselves when we announced our plan in the middle of 2013, the retirement of 60 million shares. So, we’ve got a full year ahead of us. And that’s really our focus to make sure that we do that in a way that’s thoughtful and in a way that creates good value for our shareholders. Beyond that, I really can’t say anything that would provide too much commitment but what I can say is if you look back at what we’ve been doing for a long time, we’re fairly predictable crowd. We obviously prefer to put every dollar we can inside the business to generate long-term returns. And you’re seeing us do a bit of an increase in that regard because we see opportunities against which we can match those investments. But in aggregate, we’ve been a very healthy returner of cash to shareholders. And we think that strategy has worked well for us. We of course always continue to evaluate that to make sure that we’re making the best decisions on behalf of our shareholders for how we deploy that cash. But as I said earlier, you can tell how we think by looking at our track record.

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

Good afternoon. And Jim, Congratulations. I hope you could take more time often the CFO your place when you showed up back in 2007.

He was certainly a better CFO than the one he replaced in 2007.

The question I had was on international sales and obviously great growth you’re having. And then just to turn the question around the domestic sales slide to 4% or 5% is really an opportunity once that bottoms out. Do we have at this point enough kind of ground truth to say ‘15 likes the bottom for your domestic sales?

Myles, I hate to try and call the bottom of a trough and the analogy I keep giving is it’s hard to tell if the trough is going to be V shaped or if one of these troughs has a long flat center to it. And if you just look at the math and I’m sure everybody’s done the math, the math of the sequester budget actually on a pure dollar number basis looks a little better than where we are in ‘15. So, you could say actually even if had sequester, it might be little better. But I would caution folks not to be too excited about that. If we have the sequester, what we really have is a horrible mechanism that goes with the sequester that has this mindless approach to cutting everything equally. So, how that lands in terms of individual companies, what impact that would have on our customer community just even to thinking of the customer community and how they will go about getting things under contract and making decisions. I think the sequester if not fixed is a disaster. So, I’m very focused as I know our customer community is. And quite honestly, I know many thoughtful members in congress are as well focused on being clear that this sequester is something that has to get fixed. So, I’m personally a little bit concerned about this image that somehow just because the number looks a little better in a sequester budget next year that means this year is the trough. If we don’t get this thing fixed, it could be ugly. And we got to get it fixed. Now, as I said on our last earnings call I’m seeing a lot of more sand at the end of discussing that is underway up on the hill around these issues. And I really applaud what the department is doing in terms of providing clarity to both the hill and the American people about the necessity of getting this thing fixed. But it’s not fixed yet, and until it is, I think we all need to be a little bit careful in terms of how we think about this.

Your next question comes from the line of Robert with Crédit Suisse.

Good afternoon.

Hey, Rob.

Congrats Jim and Ken. I’ll add and Jim, I knew that was a cough drop, so you had more than you can. Wes, what you just said; want a quick question on that and then a follow up. But with regard to sequester and the fact that we’ve been living with it for a while and the budget has essentially -- it’s quiet if you will and even if we keep the budget caps, we’re kind of flattish to slight up from here. So, is it the behavioral side that you’re most concerned about because I wouldn’t expect to see sales continue to decline? And then I have a follow-up on Aerospace.

Well, why don’t throw in follow-up as well; we can keep both of them for you.

Okay. So on Aerospace, sort of the opposite of Noah’s question which is we know that you’re going after some very important premier programs here and they’re significant. And I think there is a general feeling that they’re additive to the aerospace business. And I apologize for asking another long-term top-line question but I do think it’s important. Could you talk about whether or not that assumption on additive is fair given your core aerospace business and how that trends over, let’s the next four or five years?

Sure, okay. Well, let me take on these one at a time, first on the sequester. The point I think is really important to understand is the sequester mechanism that’s embedded in the law requires that the budget cuts that come with it are across the board and apply on a percentage the same to each of these line items, if you will. And that removes the flexibility of the department to manage the core structure, to manage its operations, to manage all of the things that has to mange in a rational way. No reasonable person managing a budget having to take money out of the budget would say we cut everything the same. That’s a disabling approach to managing things. And as a result of that the department would be put into disarray because the mission hasn’t changed. No one has said gee, we’re going to cut everything the same but let’s cut down our focus on ISIS, by the same we cut down our focus on Russia, by the same we cut down our focus on emerging threats or the same we cut down our focus on cyber security. You have to make sure that you’re managing how we deploy our capability to address the threat. [ph] So, it’s this mechanism that cuts equally across all programs, projects and activities is absolutely nonsense and that will impact behavior. If you were the recipient of that type of force guidance; it’s more than guidance, it’s the law, if you were the recipient of that requirement that you manage things in that manner, yes, it would create some behaviors that you otherwise would not exhibit because you’re trying to manage to something that doesn’t make any sense. So, as I said earlier, we’ve got to get it fixed for…

Katelyn, we’ve got time for one more.

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

Hey, good afternoon. Jim, congrats and best of luck. I just had a quick question on the F-35. I was hoping you could, either Wes or Jim, kind of the tail end of a year here updated so on the F-35 program. What I’m looking for is what is your revenue exposure on the program today, either as a percentage of total ASP or average selling price of that aircraft or however it is that you give it in dollar terms? And then talk a little bit about the split amongst all of your business, how much of it goes into Aerospace, Electronic Systems other areas within the company. And then just kind of lastly whether the margins that you’re recognizing on F-35 program earning to those segments is above or below segment operating margins and whether that margin will grow to be in line segment operating margin over time? Just kind of holistic update on the F-35 would be great.

Sure. F-35 is one of our largest programs across the company in the aggregate; it’s roughly about 5% of sales. The mix is heavier towards AS space maybe 70% of the total; Electronic Systems a little bit -- the 30% is roughly evenly split between ES and IS, but maybe a little bit heavier at ES. Probably up about a $150 million in revenue on a total company basis this year, ‘15 versus ‘14. Margin rate is probably little bit less than each of the sectors’ overall margin rate, younger program but making progress, it’s how we look at it. And over a long period of time, should perform like a mature production program.

Great. Well, thank you. This concludes the Q&A portion of the call. And at this point in time, I’d like to turn it over to Wes for final comments.

Well, obviously I’ll stop with the brief summary of what I said at the start of the call. 2014 was another year of solid performance by the Northrop Grumman team. And we remain focused on our strategy that is creating long-term value for our shareholders, our customers and our employees. Thanks everyone for joining us today and thanks for your continuing interest in our company.