Good day, ladies and gentlemen, and welcome to Northrop Grumman's Fourth Quarter 2015 Conference Call. Today's call is being recorded. My name is Brent and I will be your operator today. At this time, all participants are in a 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 Brent, and welcome to Northrop Grumman's fourth quarter and year end 2015 conference call. We provided supplemental information in the form of a PowerPoint presentation, that you can access on our web site. First, a reminder that our 2015 financial results are reported in four sectors, our new three sector configuration is effective as of January 1, 2016. We will be filing an 8-K in April, which will present historical financial information in our new sector structure. Also, 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 might also include non-GAAP financial measures that are reconciled in the supplemental PowerPoint presentation. On the call today are Wes Bush, our Chairman, CEO and President; and Ken Bedingfield, our CFO. At this time, I'd like to turn the call over to Wes.

Thanks Steve. Hello everyone. Thanks for joining us today. Well I want to start by congratulating the entire Northrop Grumman team on another outstanding year. In addition to excellent financial results, we took some major steps to position the company for the future. We look forward to building on 2015 successes, as we continue our focus on performance, portfolio, and capital deployment, and as we take on new opportunities in 2016. Strong operational performance and effective cash deployment supported another year of value creation for shareholders, customers, and employees. Solid margin rates from all four of our businesses combined to generate a segment operating margin rate of 12.4% and earnings per share of $10.39, a 7% increase. Free cash flow before pension contributions was $2 billion, and we returned $3.8 billion to our shareholders. In total, we repurchased 19.3 million shares for $3.2 billion this year, reduced our weighted average share count by approximately 10%, and completed our goal of retiring 60 million shares by the end of 2015. At year end, $4.3 billion remained on our share repurchase authorization. Continued strong cash generation also supported our 12th consecutive annual dividend increase. We raise the quarterly dividend by 14% and paid shareholder $603 million in dividends in 2015. Total shareholder return for the year was slightly more than 30%. The first priority of our capital deployment strategy, is to invest in our businesses. 2015 capital spending totaled $471 million, and we increased our IRAD investment by 25% to $712 million, or 3% of sales, and we perceive significant opportunities ahead. In addition to strong financial results, we captured several important awards that position us well going forward. While LRSB was our most high profile competitive win in 2015, we had several other key strategic awards. Global Hawk solidified its position…

Thanks Wes and good afternoon everyone. I want to add my congratulations to our team for their continued outstanding work. Today, I will briefly review 2015 results, and then discuss our 2016 guidance. 2015 sales totaled $23.5 billion, slightly below our expectations, primarily due to reduction in lower margin material sales at Information Systems, some of which slipped into 2016. International sales increased to 14% of sales in 2015, an increase of approximately 10% over 2014, even with negative foreign exchange impacts. We expect stable international sales in 2016, as our NATO AGS program ramps down, and other international programs ramp-up. However, we expect international opportunities to be an important source of growth for the company over the next several years. Our businesses performed well and ended the year with a 12.4% segment operating margin rate. Operating performance this year is comparable to last year, considering that 2014 margin included $75 million legal settlement and about $45 million in non-recurring HAFTA benefit. The year-over-year trends reflect strong performance by all four sectors, with particularly strong performance by Information Systems, where margin rate increased 70 basis points over last year. Total operating margin rate for 2015 was 13.1% comparable to 2014. Higher net FAS/CAS adjustment was offset by an increase in unallocated corporate expenses. You will recall, that last quarter we mentioned fourth quarter unallocated corporate expenses would be higher than last year, due to the adoption of a tax method change and other state tax items. We have strong full year EPS of $10.39, which includes the benefit of a R&D credit. Turning to cash, 2015 was another good year, both in absolute dollar and on a per share basis. Free cash flow before discretionary pension contributions totaled $2 billion and we returned $3.8 billion or $19.75 per share to…

Thanks, Ken. Before we begin the Q&A, please note, as usual, no more than a single question per participant. Feel free to reenter the queue if you have additional questions. Brent, we're ready to start the Q&A.

[Operator Instructions]. Your first question comes from the line of Carter Copeland with Barclays.

Good morning, gentlemen.

Hello, Carter. How are you?

Fantastic. Ken, could you help us maybe bridge what moved in and out of Aerospace? I know you added Asuza and took Electronic Attack out. But to go from 11 to low 10s, how should we think about the relative size of the pieces that move there? And then just to add on to that, the net margin impact of one versus the other, if there's anything of significance there to note.

So Carter, just to make sure we're on the same page with in and out, you're correct, Azusa and Bethpage out. Think of them as relatively even sized businesses. In terms of Aerospace, 2015 was just over $10 billion, $10.004 billion in sales. As we mentioned, we're projecting low 10s for sales in 2016, so low single digit growth at Aerospace. In terms of margin, I wouldn't think of those two businesses as significantly different in terms of margin rates.

Okay. Great. Thanks. And just a quick one on the CapEx on the office buildings, $300 million seems like a big amount. Is this Space Park or something that's high end real estate that we should be thinking that is there, or is it just the scale of a lot of buildings?

It's not Space Park, which is already, for the most part, owned. But it is a number of buildings. And it certainly is a large capital outlay, but we do believe over the long term, the benefits are such that we'll realize affordability, we'll have obviously avoided rent expense and those cash outflows down the road. So we think it's a good decision, buildings that are core to our new three sectors and particularly Mission Systems.

Okay. Great. I'll let someone else ask.

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

Thank you very much. Wes, you talked about a number of new wins during the course of the year, whether it's SEWIP or Kirkham or so on. If we were to look at old versus new, what do you figure the percentage of new business is for 2016 versus 2015?

So like most years, the challenge with new business, with the way the appropriations process works and the conversion into sales, it takes a little bit of time for the new wins to transition from the win, and then, of course, the appropriation, into the actual outlay and the contracting and then converting it into sales. So of all of those things that I just mentioned as we went through, none of them, or in aggregate, I would say, they do not represent a large fraction of our sales in 2016. Most of these things will manifest in the sales that we'll see in 2017 and beyond. So I wouldn't venture a guess, because it would only be that, in terms of the actual percentage. But I think to get to the general vector of your question, it takes a little bit of time to pull those things through, but we're pulling hard.

All right. Thanks very much.

Thanks, Howard.

Your next question comes from the line of Pete Skibitski with Drexel Hamilton.

Good morning, guys. Wes, I saw during the quarter some press about this new Northrop advanced design organization. And it sounds like a lot of pretty rapid aircraft prototyping efforts, stuff like that, like the old days. And I was wondering what's driving that. Is it connected to the third offense strategy or just what the strategy is there?

Yes, I appreciate the question. When we think about the pace of technology and also, quite frankly, the pace of the threats that our nation faces, we've all been frustrated over the last, it's more than a decade now, at the general slowing that we seem to see and the ability to take good ideas and turn them into reality. So part of our overall technology and development focus in the Company is focused around speed. Because speed does matter. Speed matters to support the war fighter. Obviously, it matters as we're addressing a lot of these emerging threats that we're seeing around the globe. And we don't have to wait for a procurement program to come out for us to jump into things and to demonstrate that we can move it along a bit more quickly. We can do it, oftentimes, ourselves through our internal investments. And as I noted in my prepared remarks, we've been increasing those internal investments. You pointed out the particular category of what we've been doing on the aircraft side and we are especially proud of that. We have the ability within the Company to quite rapidly go from conceptual thinking to prototyping and to flying those prototypes so that we can get good early engineering information and turn that around back into the design approach that we're utilizing to bring actual products to offer to our customer community. And our scale composites organization is a really important part of that process that we utilize in our Company, a really innovative and capable group at scale and have a long track record of demonstrating the speed to product, if you will, in terms of our ability to prototype. But that's one example of a broader perspective that we have in the Company that the work that we're doing to support our customers needs for the long term needs to not only be at the high end of technology, they need to be able to access it quickly and utilize it in a very effective manner.

Wes, has DoD given you an indication that they would provide production on ramps for you as part of such an endeavor?

So we try and align what we're doing with the vector that we see Do D on. We don't expect that we just walk in the door and we suddenly get a production turn on. We see these as very important parts of our ability to be competitive. And so we're not actually asking DoD for any assurances in turn ons. We're simply seeing this as the challenge that we collectively have across our industry to make sure that the most advanced technologies are ready quickly for our customers.

Very good. Thank you.

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

Good afternoon.

Hello, Jason.

I wanted to go back to Howard's question really quickly and see if I couldn't get you to talk a little bit more about the wins in 2015. Which ones do you think represent the biggest long-term strategic opportunity for the Company? And then maybe just comment on when you might expect some of this development work that you've been successful with over the list couple of years to lead to an inflection point in the growth rate overall for the Company?

I appreciate the question. Last year was phenomenal in terms of our positioning with some of these wins. And as I noted earlier, clearly LRS-B, which is currently under protest, so we're having to wait for that process to work its way through. But just in terms of the win itself, was a very nice win, one that we'd worked hard on for a number of years and we were delighted to see that outcome and to be ready to go and execute that when the time comes. That will represent a meaningful opportunity, a very meaningful opportunity for the Company over time. But I would not want to overlook many of the other things that happened last year that are so critically important for our long-term positioning in the enterprise. While Triton was not a win, if you will, last year, last year was such a notable year in terms of its programmatic progress that I think it's important to lay that out. It's a program that we've been in development on for a number of years. And the progress that we made last year with the articles that we have flying and the testing that was being done really puts that program in a good place as we move forward this year to be ready to enter into LRIP. I think that's a really important milestone as we think about these next steps in unmanned capability, Triton representing the natural evolution from Global Hawk. And we see that as an important capability not only for our Navy customer, our direct Navy customer on this, but I think it represents the high altitude long endurance solution that's going to be sought after by many customers, including many of our allies around the globe. So that is sort of in…

So the second part of the question was just the inflection point on the growth rate, and maybe your last statement there was the answer, but 2017 is the year that we begin to see the acceleration in the growth rate?

Well, we don't guide for 2017. We're guiding for 2016, so I don't want to get too far out in front of that. But I would go back to a point I made when Howard asked a similar question, which is if you look back over the history of the way that changes in defense spending translate into changes in the industry, I'll say it broadly, the industry's revenue cycle, there's generally a delay. If you look back at the downturn cycle, our most recent experience in that, I think the investment accounts peaked right around 2010 and you saw the related sales and industry peak a couple years later, and I think it's just that is just a reflection of a natural cycle. And if you look back in history at the up cycles, you'll see a similar situation, where it simply takes a little bit of time for the decisions that the Department makes on the new things that it needs to translate all the way from the appropriations cycle through to the outcome cycle. So I think this is just going to be another one of those situations. Everyone likes to talk about where are we in the trough. And I think it's important to remember that the trough has a part in the rear view mirror which was a steep down cycle, hopefully in the rear view mirror, and then it takes a little bit of time for that transition to come into effect as we climb out of that.

Perfect. Thanks.

Thank you.

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

Thanks. Good afternoon, guys.

Good afternoon, Myles.

The first one -- or the only one, Steve, that I have, in multiple parts -- is on the side with Aerospace and the growth, I think you implied a low single digit. And I think the only headwind I heard was the F-18 and the size of that I was thinking was a couple hundred million, and everything else it sounded like you rattled off, Ken, was growing, inclusive of the drop in of LRS-B. So I guess I'm just curious A, is the F-18 headwind bigger, or B, is everything else just in a growth mode, but it's a really, really low growth mode?

Thanks for the question, Myles. I would say F-18 is probably the largest of the declining piece of the business and certainly worth pointing out, as we've been successful on that program and have realized some nice margins out of that. But I think the other thing I would point out is we are seeing lower volume in 2016 in the unrestricted space business, particularly AHF and the James Webb Space Telescope, as those are moving into a more mature phase of their life cycle. The other piece of the decline that we pointed out was a bit in NATO AGS, as we've reached, again, a level of maturity on that program, as well. So a number of moving parts that go together to give us the low single digit 2016 sales increase.

Got it. And then just one clarification, on the $300 million of CapEx for the buildings, we should think of this as a one-off and the underlying normalized level of CapEx is $300 million less of what you're telling us?

Good question, Myles. I think what I would say is, as we've discussed, we do expect CapEx to remain elevated for a couple more years. And that represents our investing in the business for a robust set of opportunities that we see ahead of us. And I wouldn't want to give CapEx guidance beyond 2016, but in terms of the level of elevation, certainly I wouldn't consider the $300 million in where you look at it. I do think those are more of a one-off in 2016. But certainly, we look really hard at every investment we make and we do believe firmly these are worthwhile investments.

Okay. Thanks.

And while we're transitioning to our next question, Steve is reminding me that I slipped a couple years in the timeline that I was giving Jason. It is about a two-year delay in the difference between the peaks of DoD budgeting and contractor revenues. I think I said it was 2010 to 2012. It was actually DoD peak in 2008 and contractor revenue is peaking in 2010. But the point is still the same. It's a couple year difference that we've historically seen.

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

Good afternoon. Ken, just wanted to touch on the balance sheet and cash flow. I see you put some additional cash on the balance sheet this past quarter. Can you talk about what you see as the right level of cash on the balance sheet and then also touch on what you've assumed in your operating cash or free cash flow guidance for working capital and cash taxes relative to 2015? Thanks.

Appreciate the question. I would say that we, in terms of managing cash on the balance sheet, we certainly prudently manage that to make sure that we have got sufficient cash and liquidity. We're north of $2 billion at the end of the year. We were north of $1 billion at the end of the third quarter. So I wouldn't necessarily want to put a target out there on where we are, but we certainly actively manage that. And in terms of cash guidance, I would say from a working capital perspective, I think we're looking at it as relatively stable, a lot of moving parts in working capital this year, particularly some changes in accruals and mostly timing type items. But cash taxes, I would say that we saw a really good year for cash taxes in 2015. Unfortunately, it doesn't look like we'll be able to repeat that in 2016. So I would say a relatively higher level of cash taxes in 2016, but I would say net working capital could be a bit better than it was in 2015.

Any way you could quantify the cash tax headwind, rough level?

I don't think I'd want to quantify that. I would say that the team, our tax team, actually working really closely with our sector teams, combined to have a great result in 2015. And I wouldn't want to put a number out there, because I suspect that our teams will continue to work hard and do better than what I currently think they could do. So appreciate the question.

Okay. Thank you.

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

Thank you.

Hello, Doug.

Hello. I wanted to talk a little bit about Information Systems in the last quarter and actually in 2015. The margins were good. And I know in the release, there was nothing that appeared there that indicated anything one-time, just all around good performance. So you have a good margin there and then you split Information Systems in two and lose some to Technical Services, the service portion, products over to Mission Systems. But when you look at the Technical Services side going forward, you're projecting 10% margins there. Can you talk about how I would expect the lower margin part of Information Systems would be moving into Tech Services, how do you get to that 10% and have you seen an upshift in the ability to perform on your Information Systems business overall?

So Doug, I would say that, and let me address first the 2015 piece and a number of parts there that drove the strong margin. First of all, a great performance by the team. We also saw some, as I mentioned, of the lower level of the material sales that have a lower than average margin in that business. So that certainly helped contribute. In terms of looking forward for the new Technology Services sector and its strong margin rate at 10%, it did pick up a number of services business from IS that have actually above margin rates as you look at the legacy IS business, particularly the civil and health businesses that were in IS. So as we look forward, we see technology Services as having a strong 10% margin rate.

This is Wes. I would add that we've worked hard over the last number of years to remove from our portfolio the lower margin parts of our service business. We've not seen that as really the best fit for the Company for the long term. So I think what you're seeing, in addition to sort of the layout of the components that Ken addressed, I do think you're seeing just a broader move forward in how we position the portfolio and the services part of our business. And it's reflected in the way that we're giving you a forecast for 2016.

Okay. So that looks like, going forward, that looks like really a 10% type business now, which is great for a service business.

Well, we are in the process of benchmarking. As you know, we go through a process early each year to sort through what we think the right benchmarks are for our businesses. And of course, we incentivize our team to do better than those benchmarks. So we're not in a place where we're going to give you a forward look on what it should be. But in terms of our guidance for 2016, you can see the number and I think it's reflective of the great work the team's been doing.

Very good. Thank you.

Thanks, Doug.

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

Thanks so much. Good afternoon.

Hello, Rob.

Your colleagues over at Lockheed Martin put some details around their F-35 plan the other day and it's a pretty steep ramp up in 2018. As a major supplier, I was wondering if you're fully capitalized for that move up and whether that move up under your fixed price contract structure will also be helpful to margins? Thank you.

Well, we're all looking forward to F-35s making progress on the ramp. This was a ramp that we've all been preparing for many years, both in terms of our facilities, as well as making sure that we've got the supply chain capacity and the people capacity to effectively execute the ramp. We're ready and we've been ready. This was a program that, as I said, we've been preparing for quite some time. And I won't speak on behalf of Lockheed, but from a broader team perspective, this has been the topic of a lot of engagement and the assurance that we need to provide collectively to our customer community that we're all going to be able to get this job done. The nature of the contracting at the prime level I won't address. That's a very appropriate interaction with Lockheed. But moving us into a more normal process, both in the contracting side and on the ramp side of where we really should be on a program like this, we're all looking forward to that.

And Rob, if I could just add that if you think about F-35 for us, we do have four contracts for F-35, the center fuselage, the radar, the DAS and the C&I. And I will just point out that we are on units of delivery for each of those four contracts. So the timing of the ramp, as you see out of our business, could be a little bit different out of what you'll see out of Lockheed. So just want to make sure you keep that in mind as you look forward.

But presuming you'd be a little bit ahead of them, maybe six to nine months or something like that?

We would be ahead of them in the production cycle, but from a revenue recognition standpoint, not necessarily.

Right. Okay. Thank you.

Your next question comes from the line of Cai von Rumohr with Cowen and Company.

Yes. Thank you very much. So Ken, would it be possible to get the three new segment numbers for 2015 so that we can better gauge your guidance and what's getting us from one year to the other?

Thanks for the question, Cai. We are planning to file an 8-K that will present our realigned structure from the current four sectors at the end of 2015 to the new three sectors as we move forward in 2016. And that 8-K we expect to be filed in April before we file our first quarter 10-Q that will include three years of information on the three-sector format. And that's the earliest we'll be providing that information.

Can we just get a rough sense? You've told us we're looking at low single digit growth in Aerospace Systems. Because just having this guidance in the absence of knowing the baseline is a little bit difficult to make any kind of guess, even on a full-year basis.

I would say, Cai, that as we look at it, we provided the guidance on the prepared remarks in terms of the expected sales range and the whether it was growth or flat or slightly declining in terms of Technology Services. And at this point, I think that's the best we can do for you.

Okay. Thank you.

Your next question comes from the line of Sam Pearlstein with Wells Fargo.

Good afternoon.

Hello, Sam.

Can you talk a little bit about, if I look at your 2015, the cash from operations before the discretionary payment, looks like it's a little over $100 million less than what you projected, and that was coupled with a CapEx that came in lower. So what moved out of 2015?

You know, Sam, I would say that if I look at cash from operations, we were a little bit shy of last year. We had some just some timing of things, timing of cash collections on some fixed price contracts where we have performance based payment terms and some protected negotiations that have driven some delays there, a little bit on some payroll accrual items/ But overall, I think that it was a strong cash year, cash from ops before the pension prefunding of about $2.5 billion and free cash flow, again before the prefunding, of just north of $2 billion, so a lot of cash generation in the fourth quarter. Our profile has tended to be that way, but this year was a bit more even, for us heavily weighted into the fourth quarter. And we'll work hard to try to bring some of that forward as we look at 2016.

And if I can follow-up Ken, I think you had said the guidance assumes the share count is down 6%. Is that the share count or are we talking about the average shares? Because that obviously implies very different level of buyback.

Yes, it's the 6% reduction in the weighted average number of diluted shares.

Thank you.

Thank you.

Your next question comes from the line of Seth Seifman with JPMorgan.

Thanks very much and good morning. You mentioned in the Technology Service business the ramp down on work on ICBM. Wondering if you look out over a multi-year period, do you see modernization of nuclear forces as a key revenue driver?

This is Wes. I think there's going to be a lot of opportunity in that modernization wave. It's another one of these areas that, unfortunately, as a nation, we put off, I think, for probably too, long and so now we're going to have to deal with a significant amount of modernization. It is an area of deep expertise within our enterprise. Most of that expertise is within our Technology Services organization in terms of the historical programs like ICBM. But it's actually resident, we have significant capability in all three of our sectors. So as we look forward at this wave of modernization, it's an area that we do intend to participate in, I think we can bring a lot to the customer community in that regard, and we look forward to addressing those opportunities.

Thanks very much.

Thanks, Seth.

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

Yes, just wanted to go through earnings. At the beginning of last year, you said you'd earn $9.20 to $9.50. You made $10.39. So can you go through where the opportunities were last year and if this year would offer similar opportunities to the guidance that you just provided?

So George, the single largest driver to the guidance last year to the performance this year, the single largest driver would be the R&D credit, which was not in the guide last year, as it was not enacted, versus this year with the permanence of the R&D credit today, we see it as in our guidance. And other than that, it's really about performance. If there was a single program that was a material piece of our performance in 2015, we would have disclosed what that was. So it really was just strong performance by the team across the board, all four of the sectors in 2015 contributing to that performance. As we look forward at 2016, we think about the risks and the challenges that are ahead of us. We think about the opportunities and how we can manage those risks and how we can take the most advantage of those opportunities to drive continuing performance as we look forward. So I think that's really the name of the game.

The R&D credit is, what, maybe $0.20, $0.25, I don't know whether you specifically disclose it in the release or not. So you still had $0.75 of other items and you're saying those are all in aggregate $0.75, but isolated much less than the $0.25 one-time item?

Yes, I think that's fair. I would say the R&D credit is more like $0.30 and then the other items are, again, just an amalgamation of strong performance across the Company.

Okay. And if I might follow-up with a totally different question. You mentioned in the release that the unmanned business had less favorable performance. Could you specify maybe how much that actually was and what programs that it refers to?

I wouldn't want to refer to the programs or the specific amounts. I will just say again, if it was material on any particular program, we would have disclosed it, but we look forward to realizing opportunities in unmanned as we move forward.

Okay. Thanks very much.

Thanks, George.

Your next question comes from the line of Hunter Keay with Wolfe Research.

Hello. Thank you guys, appreciate it. Can you guys quantify the margin benefit you're going to get, the SG&A, from the $300 million CapEx spend both this year and then on an ongoing annual basis?

Hunter, appreciate the question, but I wouldn't want to quantify what that is. I will just say that we take really a disciplined approach to making these investments and we only make these investments when we see a reasonable return. But we do believe that this is significant to our businesses and will provide a long-term benefit in terms of affordability and competitiveness.

And I would just put a fine point on what Ken just said. It's often the thought to model it into rate structures and that perspective, from how does it drop down to the bottom line quickly. But many of the things that we do of that nature in our Company go precisely, as Ken said, to affordability, to our ability to compete effectively, capture new business, and to address our customers' continuing needs for more capability at lower cost. So when we have the opportunity to do this type of a transaction, if you will, that is clearly cost effective, it just makes a lot of sense for us to take that on. So we look at it, obviously, we demand a return on any type of capital deployment that we do, but it has multiple benefits that I think are important to recognize.

Okay. Thank you, Wes and Ken. And just a quick one. I'm sorry for the basic question here, but can you explain to me why F-18 is a headwind this year, given the recent adds we saw in the FY16 budget? Thanks for the time.

It had been at a much higher rate of production. And so what we're seeing is just the slow, gentle ramp down on the program. We're delight to see some of these additional opportunities on F-18, because it continues to be just a great aircraft and is, I think, performing well for all of its users around the globe. So it's nice to see that, but it's just a cycle down.

Okay. Thank you very much.

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

Good afternoon.

Hello, Rob.

Hello, guys. I wanted to follow-up on Sam's question, Ken, on the cash. And so I guess if you back out the prefunding in 2015, you're at about, I think you said 2.5 on the OCF. And it looks like it's about the same in 2016 when you adjust, based on the guidance you gave us on free cash flow and CapEx. But with the flattish sales, FAS/CAS a little lower, margins lower, and cash taxes higher, is there anything else that we should be thinking about there that offsets to the positive?

No, I think you're thinking about it right, Rob. I would say that if you think about FAS/CAS, the impact is more higher FAS than it is on the CAS side, so I'd factor that into it. The only other item I would mention is timing of international awards. We had gotten some international advances and been burning those down in 2015. I think I mentioned some of the accrual items, and then again really comes back to continuing to focus on working capital and improve our working capital position from here.

Okay. And then just, you mentioned international, just brings up one more thing. Wes, in the Mid East, are you seeing pressure there, anything new lately?

Well, clearly the governments are collectively economically having to deal with the situation in oil. But at the same time, they're having to deal with the threat environment that's all around them. So we continue to see robust demand. We continue to see a very high degree of engagement with our allies in the region. And I suspect that's the way it's going to be for awhile, because of just the reality of the security situation throughout the region. So from our more narrow optic than the broader economic optic, we've not really seen any backing off from the needs for support on the security front and, if anything, in some areas, it's growing.

Okay. Thank you.

Brent, I think we'll do one more question.

Your final question comes from the line of Ron Epstein with Bank of America Merrill Lynch.

Hello. Good morning.

Hello, Ron.

I have maybe a big picture question for you, Wes. Because I think this has worked out well for you guys, but I just want to get your opinion on it. Today, do you think that the DoD is rewarding companies for making their own investments in R&D? I mean, you mentioned on the call you're spending 3% of sales on R&D. Do you think there's a bias today towards contractors that are willing to put more skin in the game than in previous years?

So the way I would frame that is if you're investing smart in R&D, you're going to be more competitive on what the Department wants to acquire, so the reward comes when you win. And that's really the way we think about this equation, that by investing smartly for R&D, we're going to have the products and capabilities in place that our customers need over time. This is, in many respects, this is the story of our industry over a decade of cycles, that we have to be engaging with our customer community in a way that we can have insight into what their future needs are going to be. Because you can't just wake up one morning and say, I need a different class of performance than I had yesterday. It takes time to get those capabilities in place and we do rely on the DoD having follow through from the stated needs to actually acquiring things, because that's how we get a return on those investments. We go and we compete and when successful, we win and we perform on those programs. So I don't think there's any significant difference that I would cite in terms of the way that the overall model is working. I think there has been a lot more attention of late, from a DoD perspective, into where are all of the sources of the R&D investment that they can tap into. Because quite frankly, the amount of R&D appropriations that the Department has had available to it to go and make its own investments has declined over the last number of years, and in many respects is declining at exactly the wrong time, while our potential adversaries around the globe are investing much more aggressively in R&D. So DoD very appropriately looks to the broader ecosystem that supports it and is in need of those investments being made for the long term, and I do think that it pays off if you do it smart. If you're applying that investment in areas that turn out to be the right ones for our customers and if can convert those investments and capabilities into competitive offerings that really meet the customers needs. So I think the model makes sense, but it requires that very high degree of engagement with our customer community to make sure we keep that alignment.

Great. Thank you.

Thank you.

At this point in time, I'd like to turn the call over to you, Wes, for final comments.

Thank, Steve. Well, as I said at the beginning of the call, 2015 was an outstanding year for our Company and I'm really proud of what our team accomplished last year. And I have to say, I'm looking forward to what this team can accomplish in 2016. So thanks, everyone, for joining us on our call today and really appreciate your continuing interest in our Company.