(The following statement was released by the rating agency)NEW YORK, May 27 (Fitch) Fitch Ratings has affirmed Northrop Grumman Corporation's (NOC) 'BBB+' Issuer Default Rating (IDR) and debt ratings. The Rating Outlook is revised to Stable from Negative. The ratings also apply to NOC's subsidiary Northrop Grumman Systems Corporation (NGSC). Approximately $5.9 billion of outstanding debt is covered by these ratings. A complete list of ratings is provided at the end of this release.KEY RATING DRIVERSThe ratings reflect the company's competitive position within the defense industry, a highly diversified defense portfolio, strong margins, financial flexibility, solid cash generation, adequate metrics for the rating, and healthy pension position compared with many of its peers. These positive factors are somewhat offset by defense spending risks and uncertainties over the next several years. Fitch expects NOC's revenue will decline in 2014, driven by lower appropriations in 2013 and the company's sales growth opportunities could be limited in the following several years. NOC's operating execution and cash deployment will drive the company's credit quality.The revision of rating Outlook to Stable from Negative is supported by better than expected performance in the past year, a clearer near-term Department of Defense (DOD) spending outlook, and solid liquidity. NOC has adequate credit metrics and Fitch expects that the company's credit metrics will remain stable over the next several years driven by strong operating margins and solid cost management. The company reported stronger than expected operating performance in 2013, increasing its operating margins for the third consecutive year in an environment of declining revenues. NOC generated approximately $1.6 billion free cash flow (FCF) in 2013 despite revenue pressures. While Fitch expects NOC's FCF generation will be lower in the coming years primarily due to higher capital expenditures and higher cash interest, Fitch anticipates NOC's leverage (debt to EBITDA) will remain in the range of 1.6x-1.7x. The Stable Rating Outlook is also supported by a relative stabilization of the U.S. military spending in fiscal 2014 and fiscal 2015 due to the Bipartisan Budget Act. Fitch anticipates continued uncertainty in program specific allocations compared to the fiscal budget proposed by the DoD in March 2014, but overall spending levels are expected to remain unchanged from fiscal 2014. Additionally, the DoD's budget outlook is uncertain in fiscal 2016 with the potential return of sequestration cuts, but NOC demonstrated the ability to reduce costs and post strong margins while coping with the sequestration cuts during fiscal 2013. Fitch's expects NOC will be able to maintain stable financial metrics over the next several years despite some uncertainty in the U.S. military spending. Fitch's projections incorporate the impact of the sequestration cuts beginning fiscal 2016.Share repurchases became NOC's primary focus for cash deployment over the past two years. In 2013, the company announced plans to retire approximately 25% of its outstanding shares by the end of 2015, funding approximately $2 billion with incremental debt. Fitch expects NOC may utilize a significant portion of current cash balances for additional share repurchases to meets its share repurchase goals. Fitch anticipates NOC will deploy more than $3 billion towards shareholders (both dividends and share repurchases) in 2014, compared to approximately $2.7 billion deployed in 2013 (net of share issuances). NOC's aggressive cash deployment remains the main rating concern, however, Fitch believes the company will limit future cash distributions beginning 2015 to internally generated cash.Liquidity at March 31, 2014 was approximately $5.7 billion, consisting of $3.9 billion of cash and securities as well as full availability under its senior unsecured credit facility totaling $1.8 billion (expires in August 2018). Approximately $0.6 billion of NOC's cash was held overseas at the end of 2013, unchanged from 2012. NOC does not have a significant maturity until 2018 when a total of $1.1 billion senior unsecured notes become due. Fitch expects NOC's liquidity to decrease significantly in 2014 and 2015 as the company executes the previously announced share repurchase program. NOC's debt-to-operating EBITDA ratio for the latest 12 months (LTM) ending March 31, 2014 was approximately 1.54x, up from 1.0x from the prior year. Fitch expects NOC's leverage to fluctuate in the range of 1.55x-1.70x over the next several years. NOC's other leverage metrics also deteriorated over the past year. LTM ending March 31, 2014 funds from operations (FFO) adjusted leverage reached 2.75x, up from 2.0x from the prior year. Fitch expects FFO adjusted leverage will fluctuate in the range of 2.8x-3.0x in the near future. EBITDA for the LTM ended March 31, 2014 increased slightly to $3.84 billion from $3.76 billion as of Dec. 31, 2013 driven by strong operating performance. Fitch anticipates NOC's EBITDA will decline in 2014 due to the revenue declines, but EBITDA margins are expected to remain slightly above 15%.  Free cash flow (FCF; cash from operations less capital expenditures and dividends) was $1.1 billion as of LTM ended March 31, 2014, significantly down from $1.9 billion for the same period in 2013 driven by significant changes in net working capital and higher cash interest expenses. The company generated approximately $1.6 billion and $1.8 billion FCF in 2013 and in 2012, respectively. Fitch conservatively expects NOC will generate more than $1 billion FCF annually. NOC's pensions were 92.7% funded ($1.87 billion underfunded) on the GAAP basis at the end of 2013, a significant improvement over the 82.8% funded status ($4.78 billion underfunded) at the end of 2012.  The improvement in the funded status of the qualified pension plans was mostly driven by the change in interest rates which increased to 4.99% from 4.12% and by strong performance of the U.S. equity markets. The pension benefit obligations totaled $26 billion, and assets were $24.1 billion as of Dec. 31, 2013. Required pension contributions in 2013 were approximately $79 million and the company projects $74 million of required funding in 2014. Even though discretionary pension contributions are typically an important part of NOC's cash deployment strategy, NOC does not plan to make discretionary pension contributions to its plans in 2014. In 2013, discretionary pension contributions totaled $500 million. NOC made approximately $3.4 billion of discretionary contributions over the past five years. Fitch does not expect pension contributions to be a large part of the company's cash deployment in the near future. NOC generated approximately 86% of its 2013 revenues from the U.S. government, primarily the DoD.  As a result, defense spending is a key driver of NOC's financial performance and credit quality. Fitch expects NOC's revenues will decline slightly in 2014 as lower appropriations in 2013 will moderately pressure sales. U.S. defense spending is projected to remain stable during fiscal 2014 and 2015 at the fiscal 2013 level driven by the Bipartisan Budget Act of 2013 that was signed into law by President Barack Obama on Dec. 26, 2013. The Bipartisan Act provided temporary relief for the U.S. defense contractors by stabilizing the budget and suspending sequestration cuts till fiscal 2016. Despite stabilization of the U.S. military spending budget, Fitch expects 2014 to be another challenging year for U.S. defense contractors. The sequestration cuts implemented in 2013 should have a negative effect on most defense contractors for the next several years because of the lag between appropriations and outlays and Fitch expects revenues of most defense companies will decline in fiscal 2014. The continued withdrawal of U.S. troops from Afghanistan may also have a negative impact on certain defense contractors. Fitch believes that the implementation of sequestration cuts in fiscal 2016 would not lead to negative rating actions given NOC's diversified portfolio, long lead times for program execution and solid backlog. Sequestration is expected to impact new awards and Fitch believes NOC will be able to adjust its cost structure to maintain profitability. The exposure to DoD spending is mitigated by strong margins, solid FCF, increasing international sales and NOC's good liquidity. As of March 31, 2013, approximately 74% of the company's consolidated debt was issued by the holding company (NOC), with the rest issued by NGSC. The holding company's bonds are structurally subordinated to NGSC's debt because there are no upstream guarantees from NGSC, the company's primary operating subsidiary after the Huntington Ingalls Industries (HII) spin off. For this reason, the holding company notes sit in a weaker credit position than NGSC's debt, but Fitch does not consider the difference to be great enough for the holdco's ratings to be lower than the operating subsidiary's ratings, for two reasons: the credit strength of the consolidated enterprise, and the holding company's 100% ownership and strong management control of the subsidiary. Unlike NOC's bonds, the bank facilities, which are located at NOC, benefit from upstream guarantees from NGSC. RATING SENSITIVITIESFitch may consider negative rating actions should NOC issue additional debt to fund share repurchases or acquisitions; the company experiences significant performance issues on large contracts; or if there are material unexpected changes in U.S. defense spending trends. Fitch will likely consider a negative rating action if NOC's leverage (debt to EBITDA) increases above 2.0x. Fitch does not anticipate positive ratings actions in the near term given current credit metrics, the uncertainty of DoD spending beginning in fiscal 2016 and the company's cash deployment strategies. Fitch affirms Northrop Grumman Corporation's ratings as follows:--Issuer Default Rating (IDR) at 'BBB+';--Senior unsecured debt at 'BBB+';--Bank facilities a 'BBB+'.Fitch affirms Northrop Grumman Systems Corporation's ratings as follows:-- IDR at 'BBB+';--Senior unsecured debt at 'BBB+'.The Rating Outlook is Stable.Contact: Primary AnalystDavid Petu, CFADirector+1-212-908-0280Fitch Ratings, Inc.33 Whitehall StreetNew York, NY 10004Secondary AnalystCraig D. FraserManaging Director+1-212-908-0310Committee ChairpersonRolando LarrondoSenior Director+1-212-908-9189Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com.Additional information is available at '
  www.fitchratings.com'.
 Applicable Criteria and Related Research--'Corporate Rating Methodology, Including Short-Term Ratings and Parent and Subsidiary Linkage', Aug. 5, 2013;--'2014 Outlook: Global Aerospace and Defense', Dec. 12, 2013.Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
 2014 Outlook: Global Aerospace and Defense (Commercial Aerospace Flies Higher, Defense in a Stalemate)
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726328
 Additional Disclosure Solicitation Status 
  http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831851
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